Court Opinion

ID: 4102703
Source: CourtListenerOpinion
Date Created: 2016-11-28 22:00:10.692832+00
Date Added: 2024-06-11T14:32:08.993949
License: Public Domain

ARMED SERVICES BOARD OF CONTRACT APPEALS

Appeal of--                                     )
                                                )
Missouri Department of Social Services          )       ASBCA No. 59191
                                                )
Under Contract No. W911S7-09-D-0029             )

APPEARANCE FOR THE APPELLANT:                           Keith L. Baker, Esq.
                                                         Baker, Cronogue, Tolle & Werfel, LLP
                                                         McLean, VA

APPEARANCES FOR THE GOVERNMENT:                         Raymond M. Saunders, Esq.
                                                         Army Chief Trial Attorney
                                                        MAJ Travis P. Sommer, JA
                                                        CPT Harry M. Parent III, JA
                                                         Trial Attorneys

                OPINION BY ADMINISTRATIVE JUDGE MCILMAIL

                                     INTRODUCTION

       On 6 July 2016, we severed this appeal, for purposes of decision, from ASBCA
No. 58944, with which it was consolidated for hearing, and stayed that appeal pending a
decision in this one. Only the issue of entitlement is before the Board (tr. 1/7). Appellant
seeks an equitable adjustment of contract prices, or, in the alternative, a "termination
settlement," following the government's partial termination for convenience of a
requirements contract. 1

1
    Although the conclusion of appellant's 3 June 2015 post-hearing briefing states that
        it is entitled to termination costs and an adjustment of contract prices, its
        briefing elsewhere indicates that it seeks those forms of relief only in the
        alternative (app. br. at 1, 15, 26). In addition, on 5 July 2016, appellant sent a
        letter to the Board, referring at page 3 to its "alternative claim for a termination
        settlement." We find that appellant seeks termination costs and an adjustment
        of contract prices only in the alternative, consistent with the approach in its
        claim to the contracting officer (R4, tab 76 at 5).
                                   FINDINGS OF FACT

       1. On 25 September 2009, the Mission and Installation Contracting Command-Fort
Leonard Wood (government) awarded the contract referenced above to appellant,
Missouri Department of Social Services, for the provision of food service operations at
18 dining facilities at Fort Leonard Wood, Missouri (R4, tab 1at1). 2 The contract was for
a base year, with three option years, for services at 18 facilities, designated in the contract
as DFACs 630, 653, 657, 735, 739, 754, 820, 821, 836, 930, 1010, 1011, 1740, 2105,
3223, 1268, 1231, and 5073 (id. at 3-11, 13, 23, 33). On 25 September 2009, the
government issued Delivery Order No. 1, for services during the base year; that is,
26 September 2009 through 31 August 2010 (R4, tab 5). The government subsequently
issued contract modifications that exercised the three option years; that is, through
31 August 2013 (R4, tabs 17, 26, 66). Appellant contracted with EDP Services, Inc.
(EDP), pursuant to the Randolph-Sheppard Act, to submit a proposal for the contract and
to perform the food services required under the contract (tr. 1/77-78).

        2. In developing its proposed pricing for the contract, EDP relied on Technical
Exhibits (TE-2s) supplied by the government for each dining facility (DFAC). The
TE-2s specified for each DFAC information such as the operating schedule, serving
hours, seating capacity, number of diners to be served per meal, and other relevant
information that EDP relied on in coming up with a price (tr. 1142-43; app. supp. R4,
tab 5 at 19-22 (representative example)). Based on that information, EDP built estimates
of total costs per contract year to provide the required services at all 18 DF A Cs. Each of
these total cost estimates contained both variable and fixed costs and profit at a rate of
3 percent. For instance, EDP estimated, for Option Year 2, total cost and profit of
$30,457,068.71. 3 (App. supp. R4, tab 3 at 6). Variable costs within this amount
consisted primarily of "production labor" (cooks, attendants, cashiers, etc.) that could be
expected to vary in direct proportion to the volume of business in a DFAC (tr. 1/32-34;
app. supp. R4, tab 3 at 5-6). Fixed costs included the salaries of the overall project
manager, building managers, maintenance workers, and van operators; costs of the job
site office at Fort Leonard Wood; and costs associated with the home office, which were
unlikely to vary with volume of business (tr. 1134-36; app. supp. R4, tab 3 at 5-6).

        3. The total number of "production hours" estimated by EDP for each year of the
contract, including Option Year 2, for all 18 DFACs was 1,279,423 (tr. 1137; app. supp.
R4, tab 3 at 5). To price the services to be provided at each DF AC, EDP calculated a
"retail rate" by taking the total estimated cost and profit for the year (minus direct costs
that do not bear overhead or profit) and dividing it by the total number of estimated

2
    Although the contract lists the name of the contractor as "Social Services Missouri
         Dept" (R4, tab I at I), we understand that to be a reference to appellant.
3
    This figure does not include additional direct costs that do not bear overhead or profit.

                                              2
production hours for the year. For Option Year 2, this arithmetic resulted in a "retail
rate" of 23.8053 ($30,457,068.71 + 1,279,423 = 23.8053) (tr. 1137-39). EDP then
multiplied the retail rate for the contract year times the number of production hours per
day for each DFAC to come up with a daily unit price for each DFAC (tr. 1/38). For
instance, for DFAC 630 in Option Year 2, the daily unit price was $6,046.55 for
weekdays and $5,260.97 for weekend days (app. supp. R4, tab 2 at 7). The daily price
was invoiced by EDP for each day of operation for each DF AC.

        4. On 4 August 2011, the government issued Modification No. P00005,
exercising Option Year 2 (R4, tab 26 at 1). On 6 October 2011, the government issued
a partial contract termination for convenience, which removed six DFACs (735, 821,
1010, 1268, 1231, and 5073) from the contract (R4, tab 38).

        5. The contract includes FAR 52.216-21, REQUIREMENTS (OCT 1995)-ALTERNATE I
(APR 1984), providing at paragraph (c) that "the Government shall order from the
Contractor all of that activity's requirements for supplies and services specified in the
Schedule that are required to be purchased by the Government activity or activities specified
in the Schedule that exceed the quantities that the activity may itself furnish within its own
capabilities" (R4, tab 1 at 136-37). The contract also incorporates by reference
FAR 52.249-2, TERMINATION FOR CONVENIENCE OF THE GOVERNMENT (FIXED-PRICE)
(MAY 2004 ), which provides, at paragraph (g), that:

                  If the Contractor and the Contracting Officer fail to
              agree on the whole amount to be paid because of the
              termination of work, the Contracting Officer shall pay the
              Contractor the amounts determined by the Contracting
              Officer as follows, but without duplication of any amounts
              agreed on under paragraph (t) of this clause:

                 ( 1) The contract price for completed supplies or
                 services accepted by the Government (or sold or
                 acquired under subparagraph (b)(9) of this clause) not
                 previously paid for, adjusted for any saving of freight
                 and other charges.

                 (2) The total of-

                        (i) The costs incurred in the performance of the
                        work terminated, including initial costs and
                        preparatory expense allocable thereto, but
                        excluding any costs attributable to supplies or

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                        services paid or to be paid under subparagraph
                        (g)( I) of this clause;

                        (ii) The cost of settling and paying termination
                        settlement proposals under terminated
                        subcontracts that are properly chargeable to the
                        terminated portion of the contract if not
                        included in subdivision (g)(2)(i) of this clause;
                        and

                        (iii) A sum, as profit on subdivision (g)(2)(i) of
                        this clause, determined by the Contracting
                        Officer under 49.202 of the Federal Acquisition
                        Regulation, in effect on the date of this contract,
                        to be fair and reasonable; however, if it appears
                        that the Contractor would have sustained a loss
                        on the entire contract had it been completed, the
                        Contracting Officer shall allow no profit under
                        this subdivision (iii) and shall reduce the
                        settlement to reflect the indicated rate of loss.

                 (3) The reasonable costs of settlement of the work
                 terminated, including-

                     (i) Accounting, legal, clerical, and other expenses
                     reasonably necessary for the preparation of
                     termination settlement proposals and supporting data;

                     (ii) The termination and settlement of subcontracts
                     (excluding the amounts of such settlements); and

                     (iii) Storage, transportation, and other costs incurred,
                     reasonably necessary for the preservation, protection,
                     or disposition of the termination inventory.

Paragraph (1) of FAR 52.249-2 further provides that "[if] the termination is partial, the
Contractor may file a proposal with the Contracting Officer for an equitable adjustment
of the price(s) of the continued portion of the contract." (Id. at 133)

        6. On 24 June 2013, following unsuccessful attempts to negotiate a price increase
for the remaining contract work, appellant submitted a certified claim for the increased

                                            4
costs of performing the remaining contract work (R4, tab 76). 4 The contracting officer, in
a final decision dated 5 December 2013 (misdated 5 December 2012) denied appellant's
claim and stated, inter alia:

                      The remainder of the proposal addresses
               adjustments to contractual costs after the date of the
               termination notice. These issues should properly be
               addressed in a request for equitable adjustment separate
               and independent of the termination settlement proposal in
               accordance with FAR Part 49.208.

                       This determination does not preclude filing a
               request for equitable adjustment for the continued portion
               of the contract. Any request for equitable adjustment shall
               be in the format prescribed in FAR 49.208(a) which may
               be found in FAR Part 15.408 Table 15-2.

(R4, tab 79 at 1-2) At trial, the contracting officer testified that he had reviewed the
request for equitable adjustment contained in appellant's 24 June 2013 claim but had
made no determination regarding it (tr. 2/32). He stated that although FAR 49.208 does
not require that a request for equitable adjustment be deferred until after agreement is
reached on termination costs, it was his right to insist that it be deferred so as to ensure
that there was no duplication of costs between an equitable adjustment and a
termination settlement (tr. 2/32-34).

        7. Appellant timely appealed from the final decision on 28 February 2014.

        8. The record in this appeal contains evidence that the reduction in production
hours caused by the termination of six facilities increased appellant's cost of
performing the remaining work. Its original pricing proposal estimated 1,279,423
production hours for all 18 facilities per year, but after the elimination of six facilities
the revised estimate of total production hours per year was 980,682 (tr. 1146; app.
supp. R4, tab 54 at 17). This would indicate that without an upward revision to the
"retail rate" for Option Years 2 and 3, appellant would not recover all of its fixed
costs. This is because when contract pricing is calculated using the same arithmetic

4
    Although entitled "Revised Partial Termination Settlement Proposal," the
        submission requests a contracting officer's final decision and includes the
        certification required by the Contract Disputes Act for claims in excess of
        $100,000 (R4, tab 76 at 7-8).

                                              5
as used in the original pricing proposal; the fixed costs have not changed but the
number of production hours has gone down, increasing the price per hour. The record
indicates that the retail rate would have to increase from 23.8053 to 25.2242 for
Option Year 2 and from 24.6301to26.4137 for Option Year 3 in order for appellant
to recover its fixed costs to the extent provided for in its original proposal (tr. 1/46-48;
app. supp. R4, tab 3 at 5-8, tab 54 at 17-19). In addition, appellant's expert testified,
using a different methodology, that appellant had approximately $717,000 of
unrecovered fixed costs in Option Year 2 and $805,054 of unrecovered fixed costs in
Option Year 3 (tr. 11130-33; app. supp. R4, tab 53 at 7). 5

                                        DECISION

        As indicated by the inclusion of the requirements clause, which provides that
"the Government shall order from the Contractor all of that activity's requirements for
supplies and services specified in the Schedule that exceed the quantities that the
activity may itself furnish within its own capabilities," the contract is of the
requirements type, meaning that the government promised not to purchase the contract
subject matter from other sources. See Modern Systems Technology Corp. v. United
States, 979 F.2d 200, 205 (Fed. Cir. 1992). Appellant claims entitlement to an
equitable adjustment of the prices of the continued portion of the contract (app. hr. at
13 ). Pursuant to FAR 52.249-2(1), where the government terminates a portion of a
requirements contract with the type of termination clause at issue here, the contractor
is entitled to an equitable adjustment of the prices of the continued portion of the
contract for any increased cost of the remaining or unchanged work incurred as a result
of the discontinuance of the terminated work. See Wackenhut Services, Inc., ASBCA
No. 55691, 08-1BCA~33,831at167,436. In Wackenhut, the government contracted
for base operating support services to be provided at two facilities. The Board found
the contractor entitled to an increase in contract prices after the government terminated
the work at one of the facilities, because the terminated facility provided a substantial
part of the allocation base for the contractor's indirect facility management and
administration cost pool, increasing the indirect cost of continuing to perform the work
at the remaining facility. Id.

       Similarly, here, the record is sufficient to establish that the partial termination
increased the cost of the remaining work, demonstrating entitlement to an equitable
adjustment in contract prices for that work. See Wackenhut, 08-1 BCA ~ 33,831 at
167,436. Appellant showed that its original proposal priced the contract to recover its
fixed costs through a retail base rate based on 1,279,423 production hours annually,

5
    Because we are to decide entitlement only in this appeal, we make no finding
        regarding quantum. The evidence cited is relevant to whether appellant has
        shown any damage resulting from the government's partial termination.

                                             6
and that the reduced production hours following the removal of six facilities left it with
unrecovered fixed costs in the absence of an increase in that rate (findings 2, 3, 8).
Appellant is entitled to an equitable adjustment of the prices of the portion of the
contract continued after 6 October 2011. The amount of the adjustment to which
appellant is entitled is not currently before us.

        The government does not address FAR 52.249-2(1) or dispute appellant's
evidence of harm. Rather, it says that just because the government's requirements did
not meet its estimated requirements does not mean that appellant is entitled to an
equitable adjustment, and that there are no allegations that the government acted in bad
faith or prepared a negligent estimate (gov't br. at 23). But that misses the point.
Appellant and the government entered into a different contract than existed after
6 October 2011-one that included 50% more dining facilities and 298,741 more
production hours than did the contract after partial termination. Presumably, addressing
such a change in the parties' expectations is the purpose of FAR 52.249-2(1). Indeed,
we have indicated elsewhere that a partial termination of a requirements contract that
includes language similar to FAR 52.249-2(1) alone entitles the contractor to an
equitable adjustment of the prices of the continued portion of the contract. See Viktoria
Transport GmbH & Co., KG, ASBCA No. 30371, 88-3 BCA ~ 20,921 at 105,738
(applying DAR 7-103.21(OCT1974) in the context of diversion of requirements to
another contractor); R.G. Robbins, Co., ASBCA No. 26521, 82-1BCA~15,643
at 77,270 (quoting DAR 7-103.21(i) (OCT 1974), with language substantially identical
to FAR 52.249-2(1)).

        The contracting officer in his final decision declined to decide appellant's
equitable adjustment claim on the basis that FAR 49 .208 requires a "separate and
independent" request for equitable adjustment after termination costs have been settled
(finding 6). At trial he conceded that the FAR did not require a "separate and
independent" request for equitable adjustment. Moreover, the government does not
advance that argument; accordingly, we consider it abandoned. In any event,
appellant's claim to entitlement to a "termination settlement" under FAR 52.249-2(g)
is in the alternative to its claim to an adjustment of contract prices (app. br. at 15). In
view of our decision finding appellant entitled to an adjustment of contract prices
under FAR 52.249-2(1), appellant's alternative claim to relief under FAR 52.249-2(g)
is moot, and we need not address it further.

                                             7
                                    CONCLUSION

      For the foregoing reasons, the appeal is sustained as to entitlement, and is
remanded to the parties for the prompt negotiation of quantum.

      Dated: 15 November 2016

                                               ~~ Administrative Judge
                                                  Armed Services Board
                                                  of Contract Appeals

 I concur                                         I concur

~~Af:/,
    ~
MARK N. STEMPLER                                  ificHARDSHACKLEFORD
Administrative Judge                              Administrative Judge
Acting Chairman                                   Vice Chairman
Armed Services Board                              Armed Services Board
of Contract Appeals                               of Contract Appeals

 I concur

                                           8
      I certify that the foregoing is a true copy of the Opinion and Decision of the
Armed Services Board of Contract Appeals in ASBCA No. 59191, Appeal of Missouri
Department of Social Services, rendered in conformance with the Board's Charter.

      Dated:

                                               JEFFREY D. GARDIN
                                               Recorder, Armed Services
                                               Board of Contract Appeals

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