U. S. Government Printing Office
Office of the General Counsel
Contract Appeals Board

Appeal of Prince Lithograph Co., Inc.
Program 319-S
December 15, 1977

Vincent T. McCarthy, Chairman
Jay E. Eisen, Member
Drew Spalding, Member
Panel 76-8

This is an appeal filed on September 7, 1976, by Prince
Lithograph Co., Inc., 8900 Lee Highway, Fairfax, Va. 22030
(hereinafter referred to as the Contractor), under the
''Disputes'' clause of a Government Printing Office (hereinafter
GPO) Contract, Program 319-S, for the printing and binding of
posters for the Department of Interior for the term beginning
with the date of award (February 27, 1975) and ending January 31,
1976.  The Office of the General Counsel is the Public Printer's
designated representative for deciding appeals under the
"Disputes" clause, Article 29, U.S. Government Printing Office
Contract Terms No. 1, revised July 15, 1970.

SUMMARY OF ISSUES:

Contract Program 319-S was awarded to the contractor to obtain
the production of posters as required by the Department of
Interior.  The contract specifications called for posters which
would contain one illustration, and this illustration would
account for all or most of the printed surface area.  The
contract's schedule of prices provided one price for the
negatives and proofs for the illustration.  The contract
permitted direct dealing regarding certain details of the work
with the Department of Interior, although it expressly cautioned
the contractor not to perform any work not provided for in the
specifications without previous authorization in writing from the
GPO.  After award, the contractor dealt with the Department of
Interior directly, and in doing so, was required by the
Department to perform numerous color illustrations requiring many
color separations and considerable camera work for which there
was no price provided in the contract. The contractor billed for
this additional work and included a 30 percent markup over the
costs to it from its subcontractor.  The Contractor claimed it
used the same markup in formulating its original bid on the
contract specifications.  In a final decision of the Contracting
Officer dated August 3, 1976, payment was authorized to the
Contractor for the amount invoiced to the contractor from its
subcontractor but the Contracting Officer did not approve the
request for the 30 percent markup over these invoices.  It is
this failure to provide for payment of a markup that the
Contractor has appealed in its letter dated September 7, 1976, as
supplemented by its letter dated May 31, 1977.  The amount in
question is $8,077.79.  As the Board perceives the appeal before
it, it is not to decide whether the Contracting Officer was
correct in approving payment for the additional work, but rather
it must decide whether the denial of a mark up was proper.

2

FINDINGS OF FACT:

1. On February 27, 1975, U.S. GPO Program 319-S for the printing
and binding of posters as requisitioned by the Department of
Interior beginning with the date of award and ending January 31,
1976, was awarded to the appellant, Prince Lithograph Co., Inc.
The specifications required the production, packing and shipment
of unmounted posters in two sizes, printed from furnished camera
copy, negatives or full color transparencies, and further
required operations such as color separations, making of films
and printing plates, and quality press work.  The contract
indicated that approximately 14 percent of orders placed would
print in three colors, with the remaining 86 percent in four
color process.  The specifications stated further:

"Each poster will contain one illustration, which will account
for all or most of the printed surface area. . . ."

The contract's schedule of prices provided for payment of a
complete set of one color keys from furnished copy, or two
progressive proofs from furnished copy for both sizes of posters
(28 x 42" or 29 x 39'').

2. The contract's Authorization for Additional Performance reads
as follows:

"When so directed, the contractor will work in conjunction with
the representatives of the agency other than the Government
Printing Office, named above, in matters relating to proofs,
arranging details of schedule, etc., provided that any
instructions received or arrangements made do not conflict with
or tend to alter or amend the terms of this contract in
particular.  The contractor is therefore cautioned not to perform
any work not provided for in the specifications without previous
authorization in writing from the Government Printing Office."

3. After award of the contract, GPO issued a number of print
orders and at issue herein are Print Order No. 1, dated July 3,
1975; No. 5, dated December 5, 1975; No. 6, dated December 8,
1975; No. 7, dated January 27, 1976; and No. 8, dated January 27,
1976.  In connection with each of these Print Orders, the
Contractor submitted invoices to it from its subcontractor and
requested payment for the amount invoiced to it plus a 30 percent
markup.  Prior to completion of the work and the submission of
vouchers by the contractor, GPO was unaware that the Department
of Interior had requested and the contractor had performed work
which did not conform to the specifications.

4. A letter dated July 1, 1976, from the Department of Interior
to the GPO Contracting Officer indicates that with regard to
Print Order No. 1, "The [Department of Interior] Division of
Publications should have informed GPO about these developments as
they took place, not after the fact." In relation to Print Order
Nos. 6, 7, and 8 the letter indicates "where we made a mistake
was in not formally announcing to GPO in writing that trouble
existed.'' The GPO requested the Contractor to support its claim
for additional payment and the Contractor produced invoices from
its subcontractor who performed the color separation and film
work.  GPO reviewed the Contractor's claims for payment covering
the additional separation work, and found that the price was fair
and reasonable with the exception of the 30 percent markup over
the subcontractor's invoice.

5. By letter to the Contractor dated July 12, 1976, the
Contracting Officer proposed to settle the claim for additional
payment by permitting payment for the direct billed costs for the
additional separation work in 1, 6, and 7 but denied the 30
percent markup over the subcontractor's invoices.  The
Contractor, in a letter dated July 21, 1976, declined the offer
made by the Contracting Officer and supported its claim with the
following reasons:

1. It bore the costs of air freight and necessary insurance
charges for shipping the product to the subcontractor.

2. It was responsible for the various jobs.

3. It bore the costs of regular office overhead including phone
calls, meetings and time in plant with the representatives of the
Department of Interior.

4. It was their normal business practice to include a 30 percent
markup to cover its overhead cost and profit.

5. In a letter dated August 3, 1976, the Contracting Officer
indicated that his Final Decision concerning Print Order Nos. 1,
6 and 7 was the same as was in the proposed adjustment described
in the July 12 letter and included his Final Decision on Print
Order No. 5.  The Final Decision letter states in pertinent part:

"We [GPO] have tried to reach an equitable settlement for the
unauthorized work requested by the ordering agency.  Your
original quotation included a 30 percent.markup to cover your
overhead and profit.  By increasing the number of color
separations and camera work to be performed by your subcontractor
cannot be construed as increasing your overhead by an additional
30 percent for the extra work he performed.  You were paid full
price for all work performed under the terms of the contract.
The need for air freight and insurance was due to the fact that
you used a subcontractor outside the production area specified in
the contract without approval from this Office.  Therefore we
must deny your request for a 30 percent markup over your
subcontractor's invoice for extra work he performed.  We will
write change orders for the amount of money we can approve."

6. On August 16, 1976, a change order was issued to the
contractor authorizing payment in the amount of $19,879.59.  This
change order reads in part as follows:

"Change is hereby made in Purchase Order 50158, Program 319-S,
Print Orders 1, 5, 6 and 7, to the effect you are to provide
additional color separation work requested by the government."

7. By letter dated September 7, 1976, the contractor appealed the
Final Decision of the Contracting Officer.  This letter reads in
part:

"The Contracting Officer is not disallowing our 30 percent mark-
up because of any violation in the contract, however he admits in
paragraph III of his letter that our original quotation included
a 30 percent mark-up to cover overhead and profit, but contents
[sic] 'By increasing the number of color separations and camera
work to be performed by our subcontractor cannot be construed as
increasing our overhead by an additional 30 percent.for the extra
work he performed.  We disagree on the basis that this is and was
our normal business practice when we submitted our original bid
on the Contract.  On any subsequent change orders we would
continue to mark-up by 30 percent. . . ."

8. The Contractor supplemented his appeal, by letter dated May
31, 1977, in which he claimed an additional $2,113.70 for Print
Order No. 8 and reiterated his argument that "Our normal business
practice is to markup labor and materials 30 percent to cover
operational expenses."  The Contractor also included a claim for
$201.71 on Print Order No. 5 of Jacket 587-200 but this is not a
matter covered by the subject appeal, and hence will not be
considered herein.

DISCUSSION AND CONCLUSIONS

The facts in this case are not in dispute.  Despite the clear
warning contained in the contract the Contractor performed work
not called for by the specifications without first obtaining
prior written approval from the Contracting Officer.  The
Contractor did the work based on requests made of it by personnel
of the Department of Interior, who exceeded their authority to
authorize changes and who also did not consult with the
Contracting Officer.

As a result, the Contracting Officer was unaware of the
additional performance until the Contractor submitted invoices
covering its expenses, overhead and profit.  Once apprised of the
extra work, the Contracting Officer sought to ascertain what
charges were fair and reasonable.  The Contracting Officer asked
to see copies of the invoices of the appellant's subcontractor,
who had actually performed the additional work.  After reviewing
these invoices, the Contracting Officer determined that he would
permit payment for the costs to the Contractor as indicated by
these invoices, however, he could find no justification for
payment of a 30 percent markup on these amounts for the
Contractor's overhead and profit.  The Contracting Officer
effected this decision by issuing a change order.

The decision to deny a markup has been appealed to this Board
under the "Disputes'' clause, Article 29, U.S. Government
Printing Office Contract Terms No..l (1970), incorporated by
reference in the contract.

The Board views the actions taken by the Contracting Officer, in
accepting and paying for the additional work, as a ratification
of a constructive change to the original contract specifications.
The Contracting Officer acted no doubt with the best of motives,
to make the Contractor whole for work performed which benefited
the Government.  Since the precise contractual basis for the
Contracting Officer's decision is not clear from the record, we
have looked to GPO Contract Terms No. 1, for the appropriate
contract provisions governing the rights and obligations of the
parties.

At the time the change order was written, the issue which is the
subject of this appeal was in dispute between the.parties.  The
Contracting Officer had issued a decision pursuant to the
''Disputes'' Clause disallowing the 30 percent markup, but since
the 30-day period had not run, the decision had not become final
and conclusive.

While the Contracting Officer may have acted prematurely in
issuing the change order, there is no evidence of bad faith or
attempt to arbitrarily impose a unilateral price for the
additional work.  Instead, it seems reasonable to conclude that
the prices shown on the change order represented only those
portions of appellant's claim considered by the Contracting
Officer to be valid and for which payment could immediately be
made.

There is no doubt that the appellant is entitled to an equitable
adjustment compensating it for the additional work performed.
The contract also contemplates that the amount of the equitable
adjustment be mutually agreed upon, and, if not agreed upon, that
it be subject to the "Disputes" clause.

The Court of Claims has held that an Appellant is entitled to
recover the increased indirect costs (overhead) it can prove it
incurred as a result of performing the additional work.  The
purpose of an equitable adjustment is "to keep a contractor whole
when the Government modifies a contract" Bruce Construction
Company v. U.S., 163 Ct. Cl. 97, 100, 324 F.2d 516, 518 (1963).

Board and Court of Claims rulings have held that where a
Contractor is entitled to an equitable adjustment, he is also
entitled to recover a profit on changes under the contract.  U.S.
v. Callahan Walker Constr. Co., 317 U.S. 56 (1942).

An equitable adjustment requires the allowance of that which is
fair and reasonable under the circumstances of the particular
case.  Conway Electric Co., ASBCA 5223, 59-2 BCA   2315.  As a
general rule, it includes the actual, additional direct costs,
applicable overhead or indirect charges, and a fair profit.

While we must conclude on the basis of the record before us that
there is insufficient evidence for us to determine a fair and
reasonable allowance, we believe that it must include both direct
and indirect costs (overhead) to the extent they are reasonable
and allocable to the work accomplished, and a fair profit.

We cannot accept appellant's contention that it is entitled to a
flat 30 percent markup on its direct costs.  The mere assertion
that it used this percentage in arriving at its original bid or
that this technique has been recognized in pricing out other
changes is not sufficient to establish its reasonableness.  See
Reliance Enterprises, ASBCA 13403, 12 G.C. 8.  It would be pure
conjecture for us to conclude that this markup would result in a
fair and reasonable allowance for the work performed.

Since the contract contained a restriction on production
facilities to a 60-mile radius of Washington, D.C., we can find
no basis for reimbursing the Contractor for any expenses involved
in shipping the product to its subcontractor outside the
production area, including air freight and insurance.

Since we do not have before us sufficient data to make a final
disposition of this matter, we believe it is appropriate to
remand this case to the Contracting Officer for negotiation of an
equitable adjustment to include indirect costs (overhead), to the
extent they are reasonable and allocable to the work
accomplished, and a fair profit.  Obviously, this requires a good
faith effort by both parties to arrive at an amount which is fair
and reasonable under the circumstances.

Since the Contractor has already been paid the direct costs
incurred, we believe and hereby direct, that the Contractor
should develop and submit to the Contracting Officer in a format
acceptable to him a detailed proposal setting forth the indirect
costs (overhead) claimed by individual line item supported by
accounting and other data sufficient for adequate audit by the
Government.  The proposal should also contain the rate of profit
the Contractor considers fair and just.

Should the parties fail to agree on an equitable adjustment
including the factors set forth above, further action may be
taken pursuant to the "Disputes'' clause.

The appeal is sustained to the extent indicated above.