GRANTED IN PART: November 6, 2013

GRANTED IN PART: November 6, 2013

CBCA 2235

RUSSELL SAND & GRAVEL COMPANY, INC.,

Appellant,

v.

INTERNATIONAL BOUNDARY AND WATER COMMISSION,

Respondent.

Mickey Beisman of Law Offices of Mickey Beisman, Albuquerque, NM, counsel for

Appellant.

Steven M. Fitten and Eric C. Meza, Office of the Legal Advisor, United States

Section, International Boundary and Water Commission, El Paso, TX, counsel for

Respondent.

Before Board Judges DANIELS (Chairman), GOODMAN, and DRUMMOND.

DANIELS, Board Judge.

The International Boundary and Water Commission (IBWC) terminated for the

convenience of the Government a delivery order it had issued to Russell Sand & Gravel

Company, Inc. (RS&G) under a contract for the supply and delivery of embankment material.

RS&G then submitted a claim to the IBWC for termination settlement costs. The agency’s

contracting officer denied the claim, and RS&G appealed her decision to the Board.

We conclude that the contracting officer had no valid basis for denying the claim, but

that RS&G has overstated the amount it is due. The appeal is granted in part.

CBCA 2235

2

Findings of Fact

The IBWC determined that it needed to reconstruct levees in the Mesilla Valley area

of Doña Ana County, New Mexico, along the Rio Grande River, to provide flood protection.

In May 2008, the agency sought price quotations for various materials to be used in this work

– embankment material, flex base, coarse aggregate, concrete sand, and miscellaneous

embankment. RS&G was the low bidder for embankment material.

The contracting officer for this procurement, Patricia S. Singer, made inquiries of

RS&G concerning its responsibility for performing the work. The company informed her,

“We are capable of supplying this project using our own resources.” Ms. Singer determined

that the company was responsible: “Russell Sand & Gravel Co. Inc. [has] adequate financial

resources to perform the contract [and] the necessary production, technical equipment and

facilities, or the ability to obtain them, to perform the required services.” Although the

agency suggests that RS&G’s statement was not accurate and misled Ms. Singer into an

incorrect determination, we find that the opposite is true. As explained at hearing by Russell

Casados, RS&G’s president:

We had some heavy equipment, trucks. We had a pit that was leased from the

New Mexico State Land Office that contained the material and the borrow pit

that met the specifications of the embankment material. We had a finance

company in place so that we were able to purchase equipment whenever

necessary. We had accounts with different rental companies so we had the

availability of being able to lease whatever equipment or rent whatever

equipment we might need for the project.

On June 25, 2008, the parties entered into a contract for supply and delivery of the

embankment material. The contract provided that the IBWC would purchase material

delivered by RS&G at the price of $7.49 per ton. If the number of tons estimated in the

solicitation (2,705,755) had been purchased, the contract would have been worth

$20,266,104.95.

The contract stated, “THIS IS A FIRM FIXED PRICE REQUIREMENTS

CONTRACT” and included Federal Acquisition Regulation (FAR) clause 52.216-21,

“Requirements (Oct 1995).” The instrument provided more specifically:

Any supplies and services to be furnished under this contract shall be ordered

by issuance of delivery orders or task orders by the individuals or activities

designated in the Schedule. Such orders may be issued from CONTRACT

AWARD through EIGHTEEN (18) MONTH [sic] OF CONTRACT AWARD

CBCA 2235

3

DATE. . . . Any order issued during the effective period of this contract and

not completed within that period shall be completed by the Contractor within

the time specified in the order . . . provided, that the Contractor shall not be

required to make any deliveries under this contract after AFTER [sic] 24

HOURS FOLLOWING THE EXPIRATION OF THE CONTRACT PERIOD

OF EIGHTEEN (18) MONTHS FROM CONTRACT AWARD DATE.

The contract contained some language about minimums and maximums. In FAR

clause 52.216-19, “Order Limitations (Oct 1995),” it said, under the heading “Minimum

order,” that whenever the Government required less than eighteen tons of embankment

material, “the Government is not obligated to purchase, nor is the Contractor obligated to

furnish, those supplies . . . under the contract.” The clause also said that if the Government

ordered more than the estimated amount of 2,705,755 tons, the contractor would not be

obligated to honor the order, as long as the contractor returned the order within seven

calendar days after it was issued. The contract provided as well that the “contractor shall

guarantee that a maximum daily delivery rate of 18 tons of requested materials can be met.”1

The contract incorporated by reference FAR clause 52.212-4, “Contract Terms and

Conditions – Commercial Items (Feb 2007).” This clause includes the following

Termination clause:

Termination for the Government’s convenience. The Government reserves the

right to terminate this contract, or any part hereof, for its sole convenience. In

the event of such termination, the Contractor shall immediately stop all work

hereunder and shall immediately cause any and all of its suppliers and

subcontractors to cease work. Subject to the terms of this contract, the

Contractor shall be paid a percentage of the contract price reflecting the

percentage of the work performed prior to the notice of termination, plus

reasonable charges the Contractor can demonstrate to the satisfaction of the

Government using its standard record keeping system, have resulted from the

termination. The Contractor shall not be required to comply with the cost

accounting standards or contract cost principles for this purpose. This

paragraph does not give the Government any right to audit the contractor’s

records. The Contractor shall not be paid for any work performed or costs

incurred which reasonably could have been avoided.

1

The parties seem to agree that the contract’s reference to a “maximum daily

delivery rate of 18 tons” was in error and should have read, “1800 tons,” but the contract was

never modified to make this change.

CBCA 2235

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48 CFR 52.212-4(l) (2007).

The IBWC issued two delivery orders under this contract. On June 30, 2008, it issued

an order for 213,351 tons of embankment material, at a price of $1,597,998.99. On July 25,

2008, the agency issued an order for 600,000 tons, at a price of $4,494,000. Throughout

contract performance, the parties did not distinguish between the delivery orders; the two

were treated as, in effect, a single order for 813,351 tons of material.

The IBWC established the rate at which the material was delivered to the job site, for

placement by agency personnel. Although the rate varied over time, Robert Ramzy, the

agency’s onsite supervisor for the levee project, testified that 1800 tons per day “was pretty

much our norm.” Mr. Ramzy said that the material RS&G delivered met all specifications

and that no issues were ever raised about its quality.

By mid-2009, RS&G was concerned that because the agency had set production rates

so low, delivery of all 813,351 tons ordered could not be completed by the date eighteen

months after contract award (December 25, 2009). A meeting was arranged in the office of

Congressman Harry Teague of New Mexico to discuss the situation. According to RS&G

President Casados, the IBWC assured him at this August meeting that the orders could be

completed as much as a year after the scheduled contract closing date. We accept this

testimony, which was unchallenged at hearing. The IBWC included on its witness list the

agency’s representative at the meeting, acquisition chief Hugo White, but chose not to

present him as a witness.2

On September 25, 2009, however, Contracting Officer Singer sent an e-mail message

to RS&G stating, “[D]elivery of material reference subject contract is temporarily suspended

until further notice.” Three days later, Acquisition Chief White told the contractor:

S&B Infrastructure, LTD is designing various reaches along the Upper Rio

Grande on behalf of the USIBWC [United States Section, International

Boundary and Water Commission]. These reaches will be designed and

2

Mr. White did send Mr. Casados a letter allegedly summarizing their

understanding. The letter makes no sense, however. It says that “Delivery Orders issued todate are expected to be fulfilled within twelve (12) months of issuance . . . and will remain

open until fulfilled within the twelve (12) month period.” By the time of the meeting, more

than twelve months had passed since each of the delivery orders had been issued, so if the

sentence in the letter were to be honored, RS&G would have been precluded from making

any additional deliveries.

CBCA 2235

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packaged for national competition among interested sources. The USIBWC

in-house operation which required your material was negatively impacting the

A/E’s [architect/engineer’s] ability to proceed with the design, therefore a

temporary suspension was put in effect on those contracts providing

embankment material along affected reaches. The length of this suspension

depends on the A/E’s ability to expeditiously complete various analyses.

The following month, on October 23, Ms. Singer told Mr. Casados that “modification

to terminate for convenience for [sic] subject DO [delivery order] will be forthcoming by

early next week.” On October 27, she sent RS&G a contract modification terminating the

second delivery order for the convenience of the Government. (By this time, the first

delivery order had been completed.)

Mr. Casados then laid off the majority of the company’s workers on the project,

returned equipment he had rented for the job, and began to pursue other work for the

company’s own equipment which had been devoted to the contract. During the following

year, RS&G bid on forty-five to fifty projects and tried to get work as a subcontractor or

materials supplier on other projects for which the equipment could be used. The company

was unsuccessful in these efforts. It was the low bidder for two contracts, but one of the jobs

was put out for re-bid and the other was awarded to another firm after a bid protest. Due to

a downturn in the economy, Mr. Casados testified, little work was available and his

competitors were bidding so aggressively that he was unable to find other work for the

equipment. With few exceptions, the vehicles the company had used on the IBWC project

remained idle.

On September 16, 2010, Mary Casados – Mr. Casados’ wife, as well as the

secretary/treasurer and co-owner of RS&G – sent the following e-mail message to Ms. Singer

and Mr. White:

While preparing to submit our settlement proposal for the subject Termination

of contract IBM08D0005[,] Russell Sand & Gravel has determined that under

our accounting system, unit costs for work in process and finished products

cannot readily be established prior to completion of all the work initially

ordered . . . . Therefore, as required under [FAR] section 49.206-2, bases for

settlement proposals of the FAR, we request your approval to submit our

proposal under the total cost basis.

Ms. Singer responded on September 23:

CBCA 2235

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This is your written notification of the Contracting Officer’s decision on your

request to submit your termination settlement proposal as a ‘total cost basis’

in accordance with Federal Acquisition Regulation (FAR) part 49.206-2. Your

request for a settlement is denied based upon the terms of the contract as stated

herein.

....

This is a ‘requirements’ type contract, reference contract FAR clause 52.21621. The quantities specified in the schedule of the contract are estimates only

and are not purchased by the contract. If the Government’s requirements do

not result in ordering the quantities described in the schedule as estimated or

maximum, that fact shall not constitute the basis for an equitable price

adjustment. Further, the minimum order quantities specified in accordance

with the ‘Order Limitation’ FAR clause 52.216-19 of the contract was [sic]

satisfied.

. . . This is the final decision of the Contracting Officer. You may appeal this

decision to the Civilian Board of Contract Appeals.

Undaunted, RS&G submitted a termination settlement proposal to Ms. Singer on

September 28. The proposal was prepared by Mr. Casados in conjunction with Gene

Beisman, a highly experienced construction engineer who had a long history of costing

projects and had been involved in roughly a dozen convenience terminations. The two men

took all of their figures from RS&G’s cost records. The proposal was submitted on a

government Standard Form 1435, “Settlement Proposal – Inventory Basis,” and included a

certification which was pre-printed on the form and signed by Mr. Casados. The proposal

requested payment of $945,644.31, which was the difference between the asserted costs

incurred on the project and the payments RS&G had received from the IBWC. The asserted

costs included those for equipment between the date of termination of the delivery order and

October 2010, which is when the company calculated it would have completed its material

deliveries had the production rate been the 1800 tons per day which had predominated during

the life of the orders. RS&G included with its proposal a cover letter which stated, “In an

undated letter recently, you denied this proposal without ever having seen it. Therefore,

[RS&G] asks that you review its enclosed Convenience Termination Settlement Proposal and

issue a decision based on your review.”

Ms. Singer wrote a “determination and findings” on October 1, concluding that “the

claim . . . is not valid and shall not be paid.” She explained, “Russell has not demonstrated

to the satisfaction of the government using standard record keeping system, resulting from

CBCA 2235

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the T4C [termination for convenience].” She then sent RS&G a letter dated October 14,

stating, “This . . . is to advise you that the Contracting Officer stands by its [sic] decision

delivered to you via certified mail on September 28, 2010. Your request for a settlement is

denied.”

RS&G appealed from both of Contracting Officer Singer’s decisions on December 9,

2010.

After the appeal was filed, the IBWC finally began to consider RS&G’s termination

settlement proposal critically. On January 11, 2011, Mr. White, who was by then the

contracting officer for this contract, prepared what he called “Contracting Officer Statement

of Facts and Analysis of Termination Proposal.” In this document, he concluded that the

contractor was entitled to $226,518. Mr. White also prepared questions about the proposal

and its supporting documentation, and he sent those questions to RS&G on February 7.

RS&G responded to the questions and submitted an amended settlement proposal on

March 3, 2011. This proposal was submitted on a government Standard Form 1436,

“Settlement Proposal (Total Cost Basis).” Like the September 28, 2010, proposal, this one

included a certification which was pre-printed on the form and signed by Mr. Casados. The

certification on this Standard Form 1436 is identical to the certification on the Standard Form

1435, which had been submitted earlier. The amended proposal sought payment of

$758,039. It differed from the original proposal only in that it eliminated two items –

depreciation for vehicles more than five years old and an inadvertent double-counting of

some equipment ownership costs – and added one item, facilities capital cost of money

(FCCM).

Because this proposal forms the basis of RS&G’s claim as presented at hearing and

in the briefs, we set it forth here in detail:

Labor

Equipment

Ownership costs

Registration and insurance $ 317,187.65

FCCM

85,351.96

Depreciation

536,668.22

Rent

Major repairs

3

$ 928,711.88

1,761,817.06

$ 939,207.823

52,285.43

310,316.30

We note this total is one cent less than the sum of its three components.

CBCA 2235

Maintenance and fuel

Material

Project overhead

Total project direct costs

8

460,007.51

124,339.11

129,510.56

$2,944,378.61

Project general & administrative

expenses

Subtotal

109,074.82

$3,053,453.42

Profit (12%)

Settlement expenses

Total project value

366,414.41

35,000.00

$3,454,867.83

Less: payments received

( 2,696,829.47)

Total claimed

$ 758,038.36

After receiving this proposal, on March 10, 2011, Mr. White wrote a second

“Contracting Officer Statement of Facts and Analysis of Termination Proposal.” In this

document, he concluded that RS&G was entitled to $297,747.25. Mr. Casados rejected this

offer as insufficient reimbursement for the costs RS&G had incurred, and the parties

proceeded to litigate the case.

At some point during 2011, IBWC counsel asked the agency’s internal audit program

manager, Christopher Parker, to review the proposal. On January 5, 2012, Mr. Parker

produced a position paper on the matter. He concluded, after taking what he called an

“enterprise level approach,” “It is my opinion that none of the settlement proposal should be

allowed – primarily because RS&G already made a profit in 2008 and 2009.” Under Mr.

Parker’s approach, the “contract termination expenses are to be portrayed as a representative

and proportional estimate of the entity’s operations for 2008 and 2009.” At hearing, Mr.

Parker explained, “This is a simple matter of allocating expenses. The RS&G settlement

proposal over-allocates expenses to the IBWC.” Mr. Parker believed that RS&G “underbid

this contract by 36 percent. . . . So it was evident to me that perhaps they underbid too low

on this contract, and yet the figures showed they still made money.” The IBWC characterizes

Mr. Parker as an expert, but it did not attempt to qualify him as an expert at hearing. Mr.

Parker acknowledged that he has no experience whatsoever with bidding construction jobs

or analyzing convenience termination settlements. We find that whatever expertise he may

have is not applicable to analyzing RS&G’s settlement proposal/claim. Nevertheless, we

discuss his analysis below because the IBWC relies heavily upon it.

CBCA 2235

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After Mr. Parker’s paper was issued, on February 23, 2012, Mr. White penned his

third analysis of the proposal. This time, he concluded, “The net result of the Government

review and analysis reflects Russell did not have any excess total project costs (utilizing the

Cost Method approach) and therefore the Government is not obligated to pay any amount to

[RS&G].” On April 24, 2012, Mr. White wrote a fourth analysis of the proposal. His

conclusion this time was identical to the one he reached in the third analysis.

Discussion

The IBWC terminated for the convenience of the Government a delivery order it had

issued to RS&G under a contract for the supply and delivery of embankment material.4

Under the terms of the contract, when the contract (or in this case, a delivery order) is

terminated for the convenience of the Government, the agency is required to make two

varieties of payment to the contractor. The first is “a percentage of the contract price

reflecting the percentage of the work performed prior to the notice of termination.” There

is no doubt that the agency paid this amount. The second is “reasonable charges the

Contractor can demonstrate to the satisfaction of the Government using its standard record

keeping system, have resulted from the termination.” (These charges do not include, the

contract says, “costs incurred which reasonably could have been avoided.”) Because the

parties have not been able to agree on the reasonable charges that resulted from the

termination, we must determine that amount here.

We must keep in mind a couple of basic principles when making the determination.

First, as enunciated in the FAR, “A settlement should compensate the contractor fairly for

the work done and the preparations made for the terminated portions of the contract,

4

The parties have devoted excessive attention to whether the contract is a

requirements contract (RS&G’s position) or an indefinite delivery/indefinite quantity contract

(the IBWC’s). The contract plainly states that it is a requirements contract, and agency

counsel is incorrect in asserting that the agency ordered a contractually-required minimum

amount of embankment material. (The only minimum in the contract is an amount of

material less than which the agency need not order from the contractor and which, if ordered,

the contractor may refuse to supply.) The nature of the contract is unimportant to the

resolution of this case, however. The agency issued two delivery orders under the contract,

and each of those delivery orders, standing alone, constituted a fixed-price contract. The

contractor has never contended that the agency improperly diverted to other vendors orders

which should have been given to it under the contract, and it has not sought any costs which

resulted from anything other than the delivery orders.

CBCA 2235

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including a reasonable allowance for profit.” 48 CFR 49.201(a). Thus, as the Court of

Appeals for the Federal Circuit has said –

A contractor is not supposed to suffer as the result of a termination for

convenience of the Government, nor to underwrite the Government’s decision

to terminate. If he has actually incurred costs . . . , it is proper that he be

reimbursed those costs when the Government terminates for convenience and

thereby [cuts] off his ability to amortize those costs completely.

Jacobs Engineering Group, Inc. v. United States, 434 F.3d 1378, 1381 (Fed. Cir. 2006)

(quoting Kasler Electric Co., DOT CAB 1425, 84-2 BCA ¶ 17,374, at 86,566-67).

Second, to effectuate this purpose, the Government’s decision to terminate a contract

for convenience essentially acts to convert a fixed-price contract into a cost reimbursement

contract. Divecon Services, LP v. Department of Commerce, GSBCA 15997-COM, et al.,

04-2 BCA ¶ 32,656, at 161,636; Airo Services, Inc. v. General Services Administration,

GSBCA 14301, 98-2 BCA ¶ 29,909, at 148,071; Richerson Construction, Inc. v. General

Services Administration, GSBCA 11161, et al., 93-1 BCA ¶ 25,239, at 125,704 (1992);

Praecomm, Inc. v. United States, 78 Fed. Cl. 5, 12 (2007), aff’d, 296 F. App’x 929 (Fed. Cir.

2008) (citing White Buffalo Construction, Inc. v. United States, 52 Fed. Cl. 1, 4 (2002), and

Best Foam Fabricators, Inc. v. United States, 38 Fed. Cl. 627, 638 (1997)). The

Government’s Standard Forms 1435 and 1436 for convenience termination settlement

proposals recognize this principle by directing a contractor to make its proposal on a total

cost basis, showing its costs and profit, plus settlement expenses, less payments received, to

arrive at an amount requested. The IBWC’s reliance on Servidone Construction Corp. v.

United States, 931 F.2d 860 (Fed. Cir. 1991), and Trafalgar House Construction, Inc. v.

United States, 73 Fed. Cl. 675 (2006), for the proposition that the total cost method of

calculating claims is disfavored is misplaced. The courts in those cases were addressing

claims for equitable adjustments under fixed-price contracts, not claims for termination costs

under what have essentially been converted into cost reimbursement contracts.

To determine the proper amount of recovery, we review each of the elements of

RS&G’s claim, using the headings established by the contractor. We use precise numbers,

as the contractor did in its proposal. We hasten to add, however, that this should not have

been necessary. As the FAR explains –

Fair compensation is a matter of judgment and cannot be measured exactly. . . .

The use of business judgment, as distinguished from strict accounting

principles, is the heart of a settlement.

CBCA 2235

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....

Cost and accounting data may provide guides, but are not rigid measures, for

ascertaining fair compensation. In appropriate cases, costs may be estimated,

differences compromised, and doubtful questions settled by agreement. Other

types of data, criteria, or standards may furnish equally reliable guides to fair

compensation. The amount of recordkeeping, reporting, and accounting

related to the settlement of terminated contracts should be kept to a minimum

compatible with the reasonable protection of the public interest.

48 CFR 49.201(a), (c). Because the parties resist settlement so strenuously, however, we

believe that we must proceed as we do.

Labor. The contractor’s records include a lengthy and detailed document showing

“IBWC Payroll by Week” for the duration of its work under the delivery orders issued by the

agency. The document shows wages for each of the contractor’s employees on a weekly

basis. The total payroll, less payments to Mr. and Mrs. Casados, is $920,564.73. RS&G

acknowledges that $29,964.07 of the total payroll was for labor involved in other projects,

so only $890,600.66 was for labor under the delivery orders issued by the IBWC. To this

amount, the contractor adds $38,111.22 in costs for worker’s compensation insurance and

drug testing of its truck drivers. The total noted for labor is $928,711.88.

The IBWC challenges this figure on three grounds. First, the actual payroll devoted

to the IBWC work must have been less than alleged because it constitutes 74.69% of the

company’s wage costs for 2008 and 2009, but the IBWC work constituted only 28.15% of

the company’s sales in 2008 and 37.93% of its sales in 2009. Second, the records include

wages for employees who are not listed on a foreman’s notes for particular days. Third, the

records include wages for some employees who have addresses in Los Ojos, New Mexico,

which is four hundred miles north of the job site, and therefore could not have been working

on this project.

None of these assertions is a valid reason for questioning RS&G’s labor costs. As to

the first, as pointed out by the company’s accountant, Dean Willingham, the wage payments

and sales receipts are not directly comparable because the records of the former are on a cash

basis and the reports for the latter were prepared on an accrual basis. We do not know

whether the numbers cited by the agency are correct because the record contains no

foundation for them, other than bald statements in Mr. Parker’s report. Even if the wages

and sales could be compared, we have no idea of the extent to which any of RS&G’s projects

involved labor costs or capital costs, or the profit margins of any of the projects. The IBWC

did not bother to engage in discovery about these matters, and it did not present any evidence

CBCA 2235

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about them. Further, if the agency is correct in its surmise that only 62 to 72% of the wages

(and other costs claimed) were actually spent for work under the contract, the company’s

profit on the job would have been enormous. We will discuss this further below, under the

heading “Profit.” For the moment, it is sufficient to say that the wages claimed are

proportionate to a reasonable profit on the job, and this factor helps to persuade us that those

wages are reasonably stated.

As to the agency’s second assertion, the IBWC did not bother to call the foreman as

a witness to ask about the discrepancies. RS&G says, plausibly, that the foreman’s notes list

people at the site where he was working (the IBWC levees), but other employees were

working at another site (the pit from which the embankment material was taken). The

contractor’s rejoinder to the third assertion is simple and makes sense: some employees lived

permanently in Los Ojos, where the company is headquartered, but while they were working

on the project, they were lodged temporarily near the job site.

We do make two minor modifications to RS&G’s charges for labor. (1) Mr. Beisman,

the very knowledgeable individual who assisted in preparation of the settlement

proposal/claim, noted in his expert report that after further review of the company’s records,

he determined that $8358.63 in labor costs included in the claim should actually have been

charged to other customers’ orders. We accept this amendment, decreasing the payroll

amount devoted to the IBWC work to $882,242.03. (2) With this change, the percentage of

labor costs listed in the payroll records, but associated with other jobs, becomes 4.163%. The

parties agree that charges incurred for many items, listed below, should be reduced by the

proportion attributable to other jobs. RS&G has used, as a proxy for that proportion, the

percentage of labor costs which were attributable to other jobs. (The contractor

miscalculated that percentage as 3.259%, using an incorrect number for the wages paid to

Mr. and Mrs. Casados; the percentage should have been 3.255%.) Having no other guide

rationally suggested, we use the one suggested, modified to include the number we find

appropriate. In our judgment, the practice of allocating 4.163% of costs claimed to other jobs

should be applied to charges for worker’s compensation insurance and drug testing of drivers

as well. We reduce those charges by that percentage. The charges therefore become

$36,524.65. The total labor charge for the IBWC delivery orders was $882,242.03 (wages)

plus $36,524.65 (insurance and drug testing), or $918,766.68.

Equipment – ownership. Under this heading, RS&G lists three subcategories,

registration and insurance, facilities capital cost of money (FCCM), and depreciation. For

each of these categories, the contractor shows its costs for the period of time from July 2008,

when it began work under the IBWC’s delivery orders, until October 2010, when it would

have completed work if the second delivery order had not been terminated for convenience

and the production rate had remained the predominant 1800 tons per day during the period

CBCA 2235

13

after termination. As to FCCM and depreciation, RS&G includes analyses, prepared by Mr.

Beisman, on a vehicle-by-vehicle basis. The FCCM figures are, for each vehicle, for the

period from the time the vehicle was brought to the job until October 2010 or the earlier date

on which the vehicle was taken off the job and used for other purposes. The depreciation

figures are shown in similar fashion; they are also divided between the time when the job was

ongoing and the time after termination occurred. The charges claimed and documented are

$317,187.65 for registration and insurance, $85,351.96 for FCCM, and $536,668.22 for

depreciation of vehicles.

The IBWC’s objection to including these costs in the claim is diffuse. The agency

does not complain about any of Mr. Beisman’s calculations. In its posthearing brief,

however, the agency maintains that depreciation is claimed for some vehicles which had been

fully depreciated before contract performance began, and that FCCM should not be allowed

because the contractor did not allocate those costs among different projects. Earlier, in Mr.

White’s analyses, none of the costs were allowed for the period after termination occurred.

Mr. White also testified at deposition that ownership costs should not be allowed because the

contractor’s vehicles were being used on other projects. When he was asked, however, if

there was “documentary . . . evidence that they were used on other projects than the IBWC

project?”, he responded, “I did not see any documentation.” Instead, he said, he relied solely

on the word of Mr. Parker and agency counsel. Neither Mr. Parker nor counsel directed us

to such evidence, and there is none in the record.

Again, the agency’s concerns are misplaced. RS&G has explicitly removed from its

claim all depreciation for vehicles which were fully depreciated before contract performance

began. Allocating FCCM among different projects is inappropriate because, with a small

exception noted below, every vehicle for which those costs are noted was devoted solely to

this project during the relevant time period.

The FAR contains a specific cost principle for costs continuing after termination:

Despite all reasonable efforts by the contractor, costs which cannot be

discontinued immediately after the effective date of termination are generally

allowable. However, any costs continuing after the effective date of the

termination due to the negligent or willful failure of the contractor to

discontinue the costs shall be unallowable.

48 CFR 31.205-42(b). We find that RS&G’s thesis that but for the termination, work would

have continued for another year is valid. Mr. Casados testified convincingly that RS&G

tried hard but failed, during this year after termination, to get work for which the vehicles

could be used. The costs associated with the vehicles could not be discontinued during the

CBCA 2235

14

time when contract performance would have continued, but for the termination. These costs

are consequently allowable.

We do make some modifications to the claimed amounts. First, because the vehicles

were used for other small projects as well as IBWC work, we deduct the proportion of the

work on those other projects, 4.163%, from the amount in each of the three categories.

Second, to assist in the determination of an appropriate profit on this contract, we divide the

costs between those incurred during contract performance and those incurred during the

following year, when performance would have continued but for the termination. For

registration and insurance, and FCCM, the division is proportionate; for depreciation, it is

as per Mr. Beisman’s calculations. With these two changes, we find that the costs were as

follows:

July 2008 to October 2009 October 2009 to October 2010

Registration and insurance

FCCM

Depreciation

$173,704.64

46,742.15

293,916.96

$130,278.48

35,056.61

220,409.77

We note that these three categories and project general and administrative expenses

(discussed below) are the only ones for which RS&G seeks reimbursement for posttermination costs.

Our third modification involves FCCM. FCCM “is an imputed cost designed to

compensate a contractor for the opportunity and inflationary costs of holding fixed assets

used to perform a contract.” AT&T v. General Services Administration, GSBCA 11730, 95-2

BCA ¶ 27,869, at 138,969. This cost is generally applicable to cost-reimbursement contracts,

where it must be identified in the proposal in order to be claimed. 48 CFR 31-205.10(b)(3).

When a fixed-price contract is terminated for the convenience of the Government, it

essentially becomes a cost-reimbursement contract, so FCCM may be claimed there even

though it was not identified in the proposal. AT&T, 95-2 BCA at 138,970; Fiesta Leasing

& Sales, Inc., ASBCA 29311, 87-1 BCA ¶ 19,622, at 99,287-88, 292; (decision holding that

commercial vehicles – buses, in that case – are eligible for application of FCCM). Because

FCCM is an accounting concept which is an offset against profit, however, see Office of

Federal Procurement Policy Policy Letter 80-7, 45 Fed. Reg. 82,594 (Dec. 15, 1980), we

remove it from the costs on the basis of which profit may be calculated. This is the practice

followed by Mr. Beisman, as well, in the expert report he submitted, correcting what he

properly perceived as an error in the development of the settlement proposal/claim.

CBCA 2235

15

Equipment – rent. RS&G spent $52,285.43 to rent equipment which it used in

performance of the IBWC delivery orders. Allocating 4.163% of this amount to the other

small jobs the contractor took on with this equipment, we determine that $50,108.79 should

be charged to the project in question.

Equipment – major repairs. RS&G spent $320,770.20 to repair equipment used on

the project. (Only $310,316.30 is claimed, since the contractor deducted 3.259% for nonIBWC work done using the equipment.) All the repairs took place during contract

performance. The agency, following Mr. Parker’s lead, is concerned that this amount is more

than the company’s financial statements show it spent for repairs in 2008 and 2009. This

concern is allayed by Mr. Willingham’s testimony that many of the repair costs are included

on the statements among “equipment expenses.” Those expenses are considerably greater

than the amounts claimed for repairs of equipment used on the IBWC project. We allocate

4.163% of the repair costs to other projects, leaving $307,416.54 attributable to the work for

the IBWC.

Equipment – maintenance and fuel. RS&G spent $475,504.19 for maintenance and

fuel for vehicles used on the project. (Only $460,007.51 is claimed, since the contractor

deducted 3.259% for non-IBWC work.) We allocate 4.163% of these costs to other jobs,

leaving $455,708.95 attributable to the IBWC work.

Material. RS&G spent $124,339.11 for material used on the project – primarily

royalties to the New Mexico Land Office, from whose pit the company secured embankment

material, and also lesser costs for material testing. We allocate 4.163% of these costs to other

jobs, leaving $119,162.87 attributable to the IBWC work.

In the agency’s posthearing brief, under the heading “Direct Material,” the IBWC

discusses royalty payments made by the company to Mr. and Mrs. Casados. These payments

have nothing whatsoever to do with the IBWC contract or this case. Mr. and Mrs. Casados

own a gravel pit in Los Ojos, in northern New Mexico, and when RS&G extracts material

from that pit, it pays royalties to Mr. and Mrs. Casados. The company did not extract any

material from the Los Ojos pit for this project.

Project overhead. RS&G spent $133,873.50 on direct project overhead, including

items such as rent for office space and living quarters for employees, fencing, and utilities,

during contract performance. (Only $129,510.56 is claimed, since the contractor deducted

3.259% for non-IBWC work.) We allocate 4.163% of these costs to other jobs, leaving

$128,300.35 attributable to IBWC work.

CBCA 2235

16

Total project direct costs. The sum of the above figures (excluding FCCM) is

$2,797,774.03: $2,447,085.78 during contract performance and $350,688.25 in continuing

costs which could not be discontinued (despite the contractor’s best efforts) after termination.

Project general and administrative expenses. RS&G attributes to this category

$60,597.12 in pay and vehicle expenses for Mr. and Mrs. Casados in working on the IBWC

delivery orders during contract performance, and $4039.81 per month (or $48,477.70 for

twelve months5) as continuing costs for the following year. As the contractor explains, these

were costs charged directly to the project. Following our practice as to other items, we

attribute 4.163% of these costs to other work, allocating $104,534.03 to IBWC work:

$58,074.46 during contract performance and $46,459.57 in continuing costs which could not

be discontinued after termination.

Subtotal. The total of project direct costs (excluding FCCM) and project general and

administrative expenses is $2,902,308.06: $2,505160.24 during performance and

$397,147.82 in continuing costs.

Payments received. RS&G says that it received $2,696,829.47 in payments from the

IBWC on the delivery orders. Mr. Parker’s analysis states that the contractor received only

$2,651,279. We have examined the records presented by the two parties as to this matter and

reach the following conclusions: With a very few small exceptions, the records show

identical amounts paid at virtually identical times. Two of the three instances of difference

may well be attributable to the IBWC’s mischaracterizing, as payments for embankment

material, reimbursements for gross receipts tax to be paid by the contractor to the State of

New Mexico. Even with regard to the information in the agency’s records, Mr. Parker’s

statement is incorrect; he included tax reimbursements among the payments for material, and

the contractor’s claim excludes all such reimbursements. The principal difference between

the contractor’s total payments number and the agency’s is that the agency’s records are

incomplete; they do not include the final payment to the contractor, which was in the amount

of $198,031.93. It is inconceivable that RS&G would not have billed after September 11,

2009, for material it had delivered as late as September 25. The contractor’s number for total

payments received is correct.

Profit. RS&G’s termination settlement proposal/claim includes a 12% profit on costs

incurred. The contractor explains that it generally makes a profit of between 10 and 15% on

jobs like this one, and to be conservative, it picked 12% as a reasonable profit.

5

The total is two cents shy of twelve times the monthly figure.

CBCA 2235

17

The IBWC notes, with regard to profit, Mr. Parker’s conclusion that the contractor

“underbid this project by 36%.” By this statement, Mr. Parker evidently meant that RS&G’s

bid was 36% lower than the next lowest bid for the job. (His math is wrong: RS&G’s bid of

$7.49 per ton is actually 38.85% lower than the next lowest bid of $10.40 per ton.) We do

not understand how the relationship between the two bids has anything to do with costs

incurred or a reasonable profit. We do not understand, as well, Mr. Parker’s testimony that

“to evaluate their profit on the IBWC contract, I would have to use something like the

Eichleay formula that takes a pro rata share and allocates it to just the IBWC.” “The

Eichleay formula is used to ‘equitably determine allocation of unabsorbed overhead to allow

fair compensation of a contractor for government delay.’” Nicon, Inc. v. United States, 331

F.3d 878, 882 (Fed. Cir. 2003) (quoting Wickham Contracting Co. v. Fischer, 12 F.3d 1574,

1578 (Fed. Cir 1994)). The claim we analyze here does not involve unabsorbed overhead or

government delay. The formula has nothing to do with the situation here.

We do believe, however, that 12% is not an appropriate figure for profit in this

situation. Under our analysis, RS&G incurred costs of $2,505,160.24 in performing under

the IBWC contract, and it received $2,696,829.47 in payments for the material it delivered.

The difference between these two figures, $191,669.23, represents a profit of 7.65% on its

costs. Applying a 7.65% profit to the continuing costs which could not be discontinued after

termination ($397,147.82, excluding FCCM), we find that an additional $30,381.81 in profit

is appropriate. The total amount for profit on this job is $222,051.04.

Suppose we had allocated only 67% of each of RS&G’s expenses to the IBWC

project, as suggested by the agency. (Sixty-seven percent is the mid-point of the range urged

by the agency, 62 to 72%.) If we had done so, using the methodology above, we would have

concluded that the total costs incurred during contract performance were only $1,725,690.19.

The contractor’s profit would have been $971,139.21, or 56.28% of its costs. This unlikely

scenario serves only to reinforce our belief that the costs claimed are reasonable.

Settlement expenses. RS&G contends that it incurred $35,000 in expenses to prepare

its settlement proposal. The IBWC says that these expenses are unallowable because “RS&G

never earnestly participated in negotiations. They did not seek to arbitrate or mediate.” This

statement is not true; the contractor did respond to the agency’s requests for information, and

it did modify its proposal upon further review. Even if the statement were true, however, it

would not be cause for denying reimbursement for preparation of the proposal. Whether a

contractor accepts an agency offer in response to a proposal does not affect the validity of

a contention that the contractor spent money to prepare the proposal. We allow the $35,000

claimed for settlement expenses.

CBCA 2235

18

Total project value. This entry consists of the sum of total project direct costs

($2,797,774.03), project general and administrative expenses ($104,534.04), profit

($222,051.04), settlement expenses ($35,000), and FCCM ($81,798.76). That sum is

$3,241,157.87.

Total claimed. This is the difference between the total project value ($3,241,157.87)

and the payments received for delivery of embankment material ($2,696,829.47). This

amount, which we consider an equitable termination settlement award, is $544,328.40.

Before closing, we mention two other subjects. The first is interest. Under the

Contract Disputes Act, “[i]nterest on an amount found due a contractor on a claim shall be

paid to the contractor for the period beginning with the date the contracting officer receives

the contractor’s claim . . . until the date of payment of the claim.” 41 U.S.C. § 7109(a)(1)

(Supp. IV 2011). A contractor claim of more than $100,000 may be considered by a

contracting officer, however, only if it is accompanied by a certification as to specified

matters. Id. § 7103(b).

RS&G’s president signed a certification on a Standard Form 1435 when he submitted

the company’s initial termination settlement proposal. By asking for a contracting officer’s

decision, he also effectively designated the proposal a claim. This was reasonable, since the

contracting officer had already made clear (by denying the claim before it was made) that the

parties were at an impasse regarding the proposal. The president also signed a certification

on a Standard Form 1436 when he submitted the company’s revised proposal/claim. In

James M. Ellett Construction Co. v. United States, 93 F.3d 1537, 1545 (Fed. Cir. 1996), the

Court of Appeals for the Federal Circuit noted that the Government had accepted a

certification on a Standard Form 1436 as containing language similar to the certification

language of the Contract Disputes Act. Since then, courts and boards of contract appeals

have held that such a certification is not deficient for Contract Disputes Act purposes. E.g.,

Scan-Tech Security, L.P. v. United States, 46 Fed. Cl. 326, 336 (2000); Medina Construction,

Ltd. v. United States, 43 Fed. Cl. 537, 547-48 (1999); Walashek Industrial & Marine, Inc.,

ASBCA 52166, 00-1 BCA ¶ 30,728, at 151,791; Metric Constructors, Inc., ASBCA 50843,

98-2 BCA ¶ 30,088, at 148,940. We follow this practice by holding that RS&G’s claim was

properly certified at the outset. Interest shall run from the date the contracting officer

received the claim (no later than October 1, 2010, since on that date she wrote an analysis of

it) until the date of payment.6

6

Had we not agreed with the other courts and boards that the Standard Form

1435/1436 certification meets Contract Disputes Act standards, the result would be the same.

(continued...)

CBCA 2235

19

The final subject on which we comment is something that has consumed a great deal

of the IBWC’s attention: the New Mexico gross receipts tax (GRT). The contract

incorporated by reference FAR clause 52.212-4. Paragraph (k) of that clause, entitled

“Taxes,” states, “The contract price includes all applicable Federal, State, and local taxes and

duties.” Notwithstanding this provision, from the very beginning of the contract, RS&G

billed, and the IBWC paid, the New Mexico GRT on invoices for delivery of embankment

material. In April 2009, the contracting officer told the contractor that she had “made a

determination to allow payment of taxes not initially included in your price,” but that under

pressure from her finance office, she would have to modify the contract to continue the

practice. On May 13, 2009, the parties agreed to a modification which states that it is “to

provide provision for taxes are applicable against this contract due to the location of the

merchant’s business is in a state that does not afford the federal government a tax-exempt

status under its state and local laws.”

This modification was in keeping with the general practice, as explained by RS&G

President Casados, that “in New Mexico, you don’t include GRT with your unit bid prices.

It’s almost impossible to figure out what the rate’s going to be because the rate changes every

six months.” Mr. Casados testified that RS&G did not include GRT in its unit pricing for the

contract, and the contractor presented evidence of bids from other companies on IBWC

solicitations for levee-building materials which do not include New Mexico GRT in unit

pricing.

The contractor’s termination settlement proposal/claim makes no mention of GRT as

a cost or receipt, which is appropriate since the company in effect did nothing more than

collect from the agency and pass through to the State all charges for GRT. Nevertheless, the

IBWC thinks that RS&G engaged in some sort of shenanigans with regard to this tax. Mr.

Parker thinks that the company sometimes delayed, after receiving money from the agency

to pay GRT, in making payments to the State. Ultimately, however, he testified that the

company has paid to the State all GRT that it owed on the project.

6

(...continued)

Under the Act, a defective certification may be corrected at any time before a board of

contract appeals enters its judgment on the claim. 41 U.S.C. § 7103(b)(3). If the

certification is corrected, any interest found due runs from the date on which the contracting

officer received the claim. Id. § 7109(a)(2). To be safe, RS&G submitted a certification

signed by its president, with the precise language specified in the Act, in September 2012.

CBCA 2235

20

If RS&G made late payments to the State of New Mexico – and Mrs. Casados, the

company secretary/treasurer who made the payments, strenuously denies that it did – that is

a matter for the State to raise with the company. It has nothing to do with this case.

Decision

The appeal is GRANTED IN PART. The International Boundary and Water

Commission shall pay to Russell Sand & Gravel Company, Inc., as a consequence of the

agency’s termination for convenience of a delivery order it issued under a contract with the

company, the sum of $544,328.40. The agency shall also pay to the contractor interest on

this amount, at the rates prescribed under the Contract Disputes Act, 41 U.S.C. § 7109(b),

from the date on which the contracting officer received the company’s September 28, 2010,

claim until the date of payment.

_________________________

STEPHEN M. DANIELS

Board Judge

We concur:

_________________________

ALLAN H. GOODMAN

Board Judge

_________________________

JEROME M. DRUMMOND

Board Judge