___________________________________ GRANTED IN PART: September 11, 1995 ___________________________________ GSBCA 13054-IBWC MARATHON CONSTRUCTION CORPORATION, Appellant, v. INTERNATIONAL BOUNDARY AND WATER COMMISSION, Respondent. Joseph J. Ellis, Project Manager, Marathon Construction Corporation, San Diego, CA, appearing for Appellant. Randall A. McMains, International Boundary and Water Commission, United States Section, El Paso, TX, counsel for Respondent. Before Board Judges WILLIAMS, VERGILIO, and DeGRAFF. VERGILIO, Board Judge. On October 24, 1994, the Board received this appeal from Marathon Construction Corporation. The respondent, the International Boundary and Water Commission, terminated for its convenience a contract with Marathon which required revegetation of a given area. What remains in dispute are four items (relating to plants, profit, consultant charges and interest) raised by the subcontractor under termination settlement proposals. The parties have agreed to amounts for other items, such as direct labor, plant maintenance, and settlement expenses. Plants were required to be delivered under the contract. The subcontractor had contracted with and paid a nursery to grow and deliver the plants. At the time of the termination, the plants were undelivered. The contractor was to continue maintaining, and was to deliver, as termination inventory, all plants required under the contract, unless the plants were sold in mitigation of the termination. The subcontractor delivered fewer than all of the contracted-for plants. The subcontractor can not account for every plant for which it seeks compensation-- that is, it seeks compensation for plants which were neither delivered to the agency nor permitted to be destroyed. The record does not demonstrate that the subcontractor is entitled to payment for such plants. Profit is in dispute as to both the scope of its application and the percentage rate. The subcontractor maintains that it is entitled to profit on its cost for the plants. The agency would disallow profit because the plants were not delivered until after the termination. The contract and regulations do not make unrecoverable subcontractor profit on termination inventory, such that the Board finds entitlement to profit on the plants for which reimbursement is awarded. The record does not demonstrate that the subcontractor is entitled to a greater rate of profit than the agency has allowed. The subcontractor seeks to recover its costs for a consultant hired in the course of this appeal. The Board disallows these costs, because the record does not substantiate the costs or distinguish the efforts between costs related to the preparation of the settlement proposals and costs of litigation. The subcontractor also disputes the agency's methodology for calculating interest--the subcontractor would compound interest at a greater rate than that proposed by the agency. Appropriately, the agency proposes to follow the method dictated by the contract. Findings of Fact 1. With an award date of April 20, 1992, Marathon obtained a contract to revegetate (among other tasks) a given area for a fixed price. Exhibit 3.[foot #] 1 The contract contains the clause from the Federal Acquisition Regulation (FAR), 52.249-2, Termination for Convenience of the Government (Fixed-Price) Alternate I (APR 1984). Id. at I-4 ( I.77). 2. Marathon's subcontractor contracted with a nursery to provide plants necessary for the revegetation project; the approximate delivery date was November 1992. Exhibit 25, Letter from Nursery to Subcontractor (June 2, 1992). The amount of the order, for sixteen varieties of plants of various sizes, is $18,388.24, plus sales tax of 7.75%, for a total of $19,813.33. Id. The agreement between the nursery and the subcontractor provides, in part: the customer agrees to promptly notify [the nursery] of any project delays or cancellation. Because of the perishable nature of nursery stock, delays beyond the estimated delivery date are critical. In the event the ----------- FOOTNOTE BEGINS --------- [foot #] 1 All exhibits are from the appeal file. ----------- FOOTNOTE ENDS ----------- project is delayed excessively, [the nursery] will require one of the following alternatives: a) In case of delay, maintain all or a portion of the plants in specified container size for a maintenance fee of up to $.045/plant/month, depending on container size. b) In case of delay, transplant all or a portion of the plants to larger containers, resulting in additional deposits of progress payments and higher priced plants. Note: An excessive delay which would make the maintenance and transplanting alternatives described above impractical will be considered a cancellation. c) In case of cancellation, whether executed by your direct advice or by excessive delay in taking delivery, all or a portion of the deposit received will be completely forfeited. In the event of deposit forfeiture, [the nursery] will require subsequent fair compensation for all materials and work performed up to date of cancellation. Consideration will be given to plant material that can be reasonably marketed elsewhere. Id. The record does not indicate how much the subcontractor would be reimbursed by the contractor for delivery of the plants; i.e., the record does not establish the subcontractor's rate of profit under its agreement with the contractor. 3. With a reference to the suspension of work clause of the contract, and with an effective date of January 19, 1993, a contract modification suspended all work under the contract for a period not to exceed thirty days. Exhibit 3, Modification 2. 4. With an invoice for final payment, the nursery informed the subcontractor by letter dated January 27, 1993, that the plants "have been ready for delivery since November, 199[2]." Also, If the job site is not ready and time is needed to prepare an alternative site for holding these plants, it would be possible for [the nursery] to continue maintaining your plants here until April 30, 1993. A labor charge of $551.65 per month would be required if you choose this option. Exhibit 25, Letter from Nursery to Subcontractor (Jan. 27, 1993). By check dated February 9, 1993, to the nursery, the subcontractor paid in full (i.e., the balance remaining after having paid a deposit) for the entire order of plants.[foot #] 2 Id. Thereafter, the nursery refunded to the subcontractor $1,264.66, for one variety of plant which had failed to propagate. Affidavit of Subcontractor President at 2 ( 11). 5. According to the agency, during a tour of the nursery on February 17, in which the contractor, subcontractor, and agency participated, the "nursery staff projected survival of most of the plants if transplanting at the site were undertaken by April 1, 1993." Exhibit 18, Memorandum for the Record (Apr. 27, 1993) at 1 ( 2). As of February 17, the nursery possessed the plants which were to be delivered (with the exception of the variety which had failed to propagate). Exhibits 18, 19. The nursery continued to maintain the plants during the delay. 6. The president of the subcontractor avers: "On or about February 17, 1993, [the subcontractor] and [the nursery] agreed that the Plant Materials were to be delivered to the Project site no later than April 1, 1993." Affidavit of Subcontractor President at 2 ( 9). The record does not suggest or demonstrate that this information was conveyed to the agency or contractor prior to April 21, at the earliest. Rather, because the agency and contractor discussed the possible sale of plants through mid- April, Exhibits 9, 10, 11, 18, the record suggests that the agency and contractor were unaware of any such subcontractor- nursery arrangement. 7. With a reference to the suspension of work clause of the contract, and with an effective date of February 19, 1993, a contract modification suspended, for a period not to exceed thirty days, all work under the contract, "except the Contractor shall continue maintenance of all plant material in accordance with terms of the contract. However, the plants shall not be repotted." Exhibit 3, Modification 5. 8. With an effective date of March 19, 1993, another modification to the contract specifies that as of that date the contract is terminated for the Government's convenience under the ----------- FOOTNOTE BEGINS --------- [foot #] 2 At odds with this finding, as well as checks and invoices in the record, is a paragraph in a sworn statement of the president of the subcontractor, which states: "On or about February 22, 1993, the [agency] instructed Marathon to instruct [the subcontractor] to pay for the Plant Materials on the Project. Marathon did so instruct [the subcontractor], and thereafter [the subcontractor] pre-paid for the Plant Materials." Affidavit of Subcontractor President at 2 ( 10). Apart from this affidavit, nothing in the record ties a check (dated February 22) from the subcontractor to the nursery to the underlying contract; however, the earlier-dated invoice and check are expressly tied to this contract. Exhibit 25. ----------- FOOTNOTE ENDS ----------- termination for convenience clause, Finding 1. Exhibit 3, Modification 6. Regarding the cessation of work and notification to immediate subcontractors, the notice specifies that Marathon is to take particular steps, including the following: [(b)](1) Stop all work and place no further orders relating to the contract, except for: . . . . (ii) Contractor shall use its best efforts to sell, as directed or authorized by the Contracting Officer the plant material currently located at the [nursery]; provided however, that the Contractor (1) is not required to extend credit to any purchaser and (2) may acquire the property under the conditions prescribed by, and at prices approved by, the Contracting Officer. The proceeds of any transfer or disposition will be applied to reduce any payments to be made by the Government under this contract, credited to the price or cost of the work, or paid in any manner directed by the Contracting Officer. The Contractor shall also undertake efforts to maintain the plants at the nursery; however, the transplanting of this material is not authorized by the [agency]; . . . . (2) Keep adequate records of your compliance with subparagraph (1) above showing the: (i) Date you received the Notice of Termination; (ii) Effective date of the termination; and (iii) Extent of completion of performance on the effective date. (3) Furnish notice of termination to each immediate subcontractor and supplier that will be affected by this termination. In the notice . . . . (iii) Provide instructions to stop all work, place no further orders, and terminate all subcontracts under the contract, subject to the exceptions in subparagraph (1) above. (iv) Provide instructions to submit any settlement proposal promptly; and (v) Request that similar notices and instructions be given to its immediate subcontractors. . . . . (c) Termination inventory. (1) As instructed by the Contracting Officer, transfer title and deliver to the Government all termination inventory the Contractor was unable to sell as instructed in (b)(1)(ii) above of the following types or classes, including subcontractor termination inventory that you have the right to take: Plant Material[.] (2) To settle your proposal, it will be necessary to establish that all prime and subcontractor termination inventory has been properly accounted for. (d) Settlements with subcontractors. You remain liable to your subcontractors and suppliers for proposals arising because of the termination of their subcontracts or orders. You are expected to settle these settlement proposals as promptly as possible. Id. 9. As of the date of the termination for convenience, it appears to be undisputed that the nursery had all of the plants available for delivery with the exception of the one variety which had failed to propagate. Exhibits 18 and 25, Letter of Nursery to Subcontractor (Apr. 27, 1993). 10. On or shortly after April 1, the nursery destroyed or rotated into its general inventory some of the plants it had grown under contract with the subcontractor. The nursery explains its actions in a letter dated April 27, 1993, to the subcontractor: By not taking delivery in a timely fashion (before April 1, 1993) and by informing me by phone (personal communication on or about April 1, 1993) that you would not be taking delivery at all because the project was canceled, you waived ownership rights to the plants. Since that time, a portion of the order was destroyed, as the plants became overgrown and unmarketable due to the extensive delays experienced to April 1, 1993. Exhibit 25. In a memorandum for the record dated April 27, 1993, the agency summarizes what it learned from the nursery during a visit on April 21: [The nursery] explained to the [agency] that the Nursery submitted a letter to [the subcontractor] to take delivery of the plants by April 1, 1993 or else the plants would be sold or discarded. She noted that [two varieties of] plants were in fact sold and/or discarded. However after April 1, 1993, all of the plants became part of general inventory and records were not kept as to the fate of any of the "former" [agency] plants. Exhibit 18. The record does not demonstrate that prior to April 21 the agency was aware that plants could be destroyed after April 1; to the contrary, because the agency and contractor discussed the sale of the plants to others after April 1, Finding 6, the record suggests that the agency was not aware of any subcontractor-nursery arrangements. 11. On April 21, the agency, contractor, and subcontractor participated in a tour of the nursery. A list reveals the varieties and quantities of the contracted-for plants observed at the nursery. Exhibit 13. Some varieties of contracted-for plants are not listed in the inventory; the quantities of other varieties are less than those required under the contract. Exhibits 13, 25. 12. In a letter dated April 22, to the agency, the contractor identifies the quantities and varieties of plants on- hand at the nursery, states that it has been unable to find an alternate market for the plants, and requests direction on how to proceed. Exhibit 13. 13. In a letter dated April 23, the contracting officer directs Marathon to instruct [the subcontractor] to proceed immediately to dispose of [three named varieties of plants, each with an associated quantity]. The remaining plants, which consist of the following species and quantities, shall be delivered immediately to the [agency's] Office: [There follows a listing by plant name and quantity.] Exhibit 17. 14. The subcontractor delivered the identified plants, although two varieties were delivered in lesser quantities than those identified during the tour. Exhibits 13, 21. Plants 15. The contractor presented to the contracting officer for a decision the subcontractor termination settlement proposal in which the subcontractor sought compensation for the entire order of plants, including the plants for which the subcontractor had received a rebate. Exhibit 33. In its complaint, the contractor subtracts the rebated amount. Complaint, Attachment II.[foot #] 3 16. The agency proposed and proposes reimbursement for the plants actually delivered (and those permitted to be destroyed) at the rates (including taxes) in the contract between the nursery and subcontractor. This amount is $4,466.24. The agency has disallowed reimbursement for the remainder of the contracted-for plants--those which had failed to propagate ($1,264.66), those which had been identified but not delivered ($109.91), and those which were not identified in the inventory during the tour of the nursery on April 21 ($13,972.52). Exhibit 33; Agency Answer. 17. At this time, the subcontractor seeks to recover $16,315 for plants.[foot #] 4 The subcontractor explains its rationale: [The] position is based on the [agency]'s letter dated 23 April 93, which identified certain plants to be disposed of and certain plants to be delivered to their facility, totaling $3,912. The [agency]'s letter did not address [three varieties] which had become root bound during the delay period, and had been uprooted and placed into a pile in the nursery's yard. The pile of uprooted dead plants was not viewed or inventoried by either the [agency], the subcontractor . . . or the nursery. The total value of the said plants at the time of the purchase was $11,230. The plants died as a result of delays in the project, which ultimately caused the contract's termination, therefore, [this amount is] compensable. Numerous letters and conversations pointed out that the plants were becoming root bound, and would eventually die if they were not transferred or repotted, the cost of which was prohibitive, as confirmed by [agency]'s direction. The plants were prepaid by [the subcontractor] prior to the termination. Compensation in the amount of $15,142, plus applicable sales tax of 7.75% is due and owing. The amount of $3,246.24 plus sales tax represents the value of the plants that were rotated into general ----------- FOOTNOTE BEGINS --------- [foot #] 3 In attempting to resolve the settlement proposals of the subcontractor prior to this litigation and during this proceeding, the agency pointed out to the subcontractor what information was necessary to substantiate the underlying monetary claims. The agency noted that it would not authorize reimbursement for inadequately substantiated requests. [foot #] 4 However, in an affidavit, the president of the subcontractor seeks to recover $18,548.67--the total purchase price less the rebated amount. Affidavit of Subcontractor President ( 8, 11, 27). ----------- FOOTNOTE ENDS ----------- inventory of the [nursery], for which there are no records. Marathon's Submission (Mar. 17, 1995), Attachment A, Note 1. The evidentiary record does not support the contentions that the specified plants not inventoried died as a result of delays or that $3,246.24 represents the value of plants rotated into the general inventory of the nursery. The record does not distinguish between quantities of plants which became part of the general inventory of the nursery, were destroyed, or failed to survive the delay.[foot #] 5 Profit 18. The subcontractor seeks to recover profit at a rate of 15% of its costs. The agency proposes reimbursement at a rate of 8%, but would disallow profit on the cost of the plants. 19. Although it had sought profit of 30%, based upon the unexplained and unsworn conclusions of a senior manager (not identified as an accountant in the record) at a firm of certified public accountants, Complaint, Attachment IV, the subcontractor now seeks profit of 15%. It explains the rationale underlying its requests for profit of $3,755.40: The 8% profit offered by the [agency] pursuant to the weighted guidelines established by the Federal Acquisition Regulation does not consider the risk imposed on [the subcontractor] for the responsibility of maintaining the plants, and ultimate responsibility for same. As evidenced by both the [agency]'s position to reimburse [the subcontractor] for $4,466.24 of the $19,986.19 ($18,548.67 + 7.75% tax) expended by [the subcontractor] to purchase the plants, and [the subcontractor]'s position to be reimbursed $16,315 of the $19,986.19 expended, indicated [the subcontractor] had a major risk in handling the plants. Therefore, the profit should be 15% as allowed by the FAR, not 8%. Neither profit percentages will cover the losses sustained by [the subcontractor] regardless of which position is ruled correct by the Board. Marathon's Submission (Mar. 17, 1995), Attachment A, Note 2. The factual record does not support the subcontractor's conclusion that it assumed a "major risk" by contracting with the nursery, or its assertion that profit in excess of the agency-approved 8% is appropriate. ----------- FOOTNOTE BEGINS --------- [foot #] 5 The record contains references to potential, but unconsummated, sales of some of the plants; the agency is not seeking to reduce the reimbursement because of a failure to mitigate. Exhibit 18. ----------- FOOTNOTE ENDS ----------- 20. The agency has concluded that the contractor (and subcontractor) have provided no evidence regarding the subcontractor's profit on this contract: Respondent has performed a weighted guideline analysis of [the subcontractor's] profit for this contract (see Exhibit C to Respondent's Exhibit I), which resulted in a profit rate of 8%. Respondent contends that this is a more fair representation of profit for the subject contract. Since [the subcontractor] has failed to provide any other information from which to establish an appropriate rate, [the agency] contends that profit should be paid at this rate of 8%. Agency Answer at 7. 21. The agency has proposed to pay profit on the subcontractor's costs, with the exception of profit on the cost of the plants. In denying profit on the plants, the agency relies upon language in FAR 49.202(a), "Profit shall not be allowed the contractor for material or services that, as of the effective date of termination, have not been delivered by a subcontractor, regardless of the percentage of completion." Agency Answer, Exhibit I at 3. Consultant 22. In seeking to recover $1,350 for consultant costs, the subcontractor represents that it hired the consultant "to review the [agency]'s settlement offer and the merits of [the subcontractor's] claim, which has resulted in this revised proposal. The cost of the consultant is reimbursable and totals $1,350." Marathon's Submission (Mar. 17, 1995), Attachment A, Note 3. These costs were incurred subsequent to the filing of this appeal, and arose in the course of this litigation. The record is silent as to the work actually performed by the consultant, and fails to distinguish, if such was the case, between efforts in preparing the on-going settlement proposals and in preparing material for this litigation. Interest 23. The agency proposes paying simple interest at the rates established by the Secretary of the United States Department of the Treasury, in accordance with the terms of the contract, Exhibit 3 at I-3 ( I.56). Agency Answer at 6. Although it had sought annual interest at 18%, the subcontractor now seeks compound, as opposed to simple, interest at the established rates. Complaint, Attachments II, III, VI; Marathon's Submission (Mar. 17, 1995), Attachment A, Note 4. Discussion What remains in dispute regarding the termination settlement proposals of the subcontractor are four particular items: payment for plants, subcontractor profits, costs for a consultant utilized in the course of this litigation and interest rates. The parties have agreed to the reimbursement on other items. Plants The subcontractor seeks to recover $16,315 for all plants it paid for under its contract with the nursery and which it does not attribute to being rotated into the general inventory of the nursery. Finding 17. Factually, the record does not support the request beyond the amount the agency proposes to pay, $4,466.24. The termination for convenience clause provides, in paragraph (f), that the contracting officer shall pay for the cost of contract work performed before the effective date of termination, and: (g) Except for normal spoilage, and except to the extent that the Government expressly assumed the risk of loss, the Contracting Officer shall exclude from the amounts payable to the Contractor under paragraph (f) above, the fair value, as determined by the Contracting Officer, of property that is destroyed, lost, stolen, or damaged so as to become undeliverable to the Government or to a buyer. Finding 1 (FAR 52.249-2). The termination for convenience required the contractor to "undertake efforts to maintain the plants at the nursery; however, the transplanting of this material is not authorized by the [agency]." Finding 8. Additionally, the contractor was to "transfer title and deliver to the Government all termination inventory the Contractor was unable to sell . . . including subcontractor termination inventory that you have the right to take: Plant Material[.]" Id. Approximately two weeks after the contract was terminated for convenience, the nursery destroyed or rotated into its general inventory some of the plants grown for the underlying contract.[foot #] 6 Finding 10. Such actions were inconsistent with the direction to undertake efforts to maintain the plants, and were taken without the knowledge of the agency. Id. As a result of the nursery's actions, the quantity of plants available for delivery was diminished; the quantity of plants delivered (or destroyed under the agency's direction) represents less than the subcontractor's order. Findings 11-14. The action of destroying or rotating into ----------- FOOTNOTE BEGINS --------- [foot #] 6 In January, the nursery had indicated to the subcontractor that it would be possible to continue maintaining the plants until April 30, Finding 4; the record does not reveal why April 1 became a critical date. ----------- FOOTNOTE ENDS ----------- general inventory, and not maintaining, the plants, deprived the agency of the opportunity to accept delivery or permit the destruction of the plants in dispute. The record does not establish that the plants in dispute were of no value to the agency or were otherwise undeliverable prior to their destruction or placement in general inventory. The record does not demonstrate that the plants in dispute became unavailable because of "normal spoilage" or the extended delay in delivery. Rather, whatever the condition of the plants- -even if root bound and overgrown or otherwise unmarketable--the agency directed that maintenance continue. The agency did not alter this directive or authorize the destruction of plants prior to April 23. By that time, the plants in dispute were undeliverable because of actions of the subcontractor and nursery, not because of any agency actions or inactions. The termination for convenience clause and the contract modification with the notice of termination, Finding 8, do not obligate the agency to pay for contracted-for plants which were not available for delivery unless they succumbed to "normal spoilage." Because, based upon the existing record, the plants in dispute were indistinguishably destroyed or rotated into the nursery's general inventory, and not maintained and available for delivery to the agency, the agency is not obligated to reimburse for those plants. Accordingly, the Board denies the request for reimbursement for the direct cost of plants in excess of $4,466.24, and grants reimbursement in that amount. Profit The subcontractor seeks to recover profit on the plants (as well as on other items the agency has agreed to pay profit)-- profit the agency has disallowed. The agency has denied profit on the plants, relying upon a regulation, Finding 21 (FAR 49.202(a) (Additional Principles for Fixed-Price Contracts Terminated for Convenience, Profit)), which specifies that the termination contracting officer "shall allow profit on preparations made and work done by the contractor for the terminated portion of the contract but not on the settlement expenses. . . . Profit shall not be allowed the contractor for material or service that, as of the effective date of termination, have not been delivered by a subcontractor, regardless of the percentage of completion." 48 CFR 49.202(a) (1994) (emphasis added). The clause addresses the recovery of profit by a contractor, not a subcontractor. The restrictions are inapplicable to this situation, where the subcontractor, not the contractor, seeks to recover profit on plants grown and paid for prior to the termination and deliverable as termination inventory thereafter. Under the termination clause, the amount to be paid "may include a reasonable allowance for profit on work done." FAR 52.249- 2(e). Either prior to or after the termination, had the subcontractor presented the contractor with a bill (including an amount for profit) for the plants, and the contractor paid the bill, that cost to the contractor would appear to be properly reimbursable. The agency has not demonstrated that the lack of a termination settlement agreement between the contractor and subcontractor should preclude the subcontractor from recovering profit on the termination inventory. The Board finds this subcontractor entitled to profit on its costs of the plants ultimately available for delivery to the agency as termination inventory. The subcontractor seeks profit at a rate greater than the 8% calculated by the agency. The record does not demonstrate entitlement to an amount greater than 8%. Findings 19, 20. The Board grants the claim to the extent that profit should be calculated on the value of the reimbursed plants ($4,466.24), and denies the claim for profit at a rate greater than 8%. Consultant The subcontractor has added as a settlement expense the charges of a consultant utilized in the course of this appeal. The agency views this as an expense arising in the course of litigation, and not supported as an allowable settlement expense. The record does not support the claim for consultant costs. The record is silent as to the work actually performed by the consultant, and fails to distinguish, if such was the case, between efforts in preparing materials relating to the on-going settlement proposals and for this litigation. Finding 22. Unable to determine that the costs are reasonable costs of settlement of the work terminated, Finding 1 (FAR 52.249-2(f)(2) (Alternate I)), the Board denies this aspect of the claim. Interest The agency proposes paying simple interest at the rates established by the Secretary of the United States Department of the Treasury; the subcontractor seeks compound, as opposed to simple, interest at the established rates. Finding 23. Regulation directs that simple interest shall be paid. 48 CFR 52.233-1(h) (1994). Therefore, the Board denies this aspect of the claim. Decision The Board GRANTS IN PART the appeal. Of the items in dispute, recovery for the cost of plants in the amount of $4,466.24, as proposed by the agency, is granted, and for an amount in excess is denied; profit on the plants is recoverable at the rate of 8%; the appropriate rate of profit is 8%; consultant costs are disallowed; and simple, not compound, interest is recoverable at the appropriate rates. ______________________________ JOSEPH A. VERGILIO Board Judge We concur: ______________________________ ______________________________ MARY ELLEN COSTER WILLIAMS MARTHA H. DeGRAFF Board Judge Board Judge