Appeal of Edwards & Broughton, Co. Panel 84-6 March 8, 1985 THOMAS O. MAGNETTI, Chairman JAMES K. MEHAN JEFFREY L. BOWMAN Members PRELIMINARY STATEMENT Edwards & Broughton Company (hereafter the contractor) has appealed a 25% reduction in the contract price the contractor received for 11,000 books which it had supplied to the Government under a contract identified as Purchase Order E-2758. The price reduction was ordered by a Contracting Officer of the U.S. Government Printing Office (hereafter the GPO), ostensibly because the contractor failed to produce books which were in accordance with the standard of quality required by the contract. The contractor appealed the price reduction in a timely fashion and in accordance with the "Disputes" clause of the contract. See Article 2-3, Contract Terms No. 1, GPO Publication 310.2, revised October 1, 1980. The contractor requested a hearing which was held on July 23, 1984. At this hearing, the contractor maintained that the price reduction was improper as the contractor complied with the level of quality required by the contract specifications. In accordance with Contract Terms No. 1 and GPO Instruction 110.10B, entitled "Board of Contract Appeals Rules of Practice and Procedure," the GPO Contract Appeals Board has jurisdiction over this matter. The decision of the Board is based solely on the record of this appeal. The record consists of an appeal file containing 42 exhibits. 1/ The record also includes the testimony of witnesses given at the hearing on this appeal. No transcript of this testimony was taken. FINDINGS OF FACT 1. By Purchase Order E-2758 dated August 23, 1983, the GPO awarded a contract to the contractor to produce 17,420 copies of a perfect bound magazine entitled "Records of Achievements" for the National Air and Space Agency (NASA). The product was to be delivered by September 16, 1983. 2. The specifications for this contract required that the contractor reproduce a silhouette across pages viii and ix of the magazine. The illustration was to "align at the bind." See Exhibit A. The specifications incorporated by reference the Quality Assurance Through Attributes Program (hereafter QATAP), stating that the specifications would be subject to the terms and conditions of the QATAP. The product quality level for this product as established under QATAP was Level II. 3. On September 13, 1983, Harold Orr, Foreman of the NASA printing plant at Langley Research Center, Hampton, Virginia, conducted a press inspection of the contractor's plant. He discussed the alignment of the silhouette and was informed that the contractor would "do what was necessary to make it work." See Exhibit B. 4. The contractor shipped 11,000 of the books to the Government. A sample of 50 copies from this shipment was inspected. The inspection report, dated September 21, 1983, indicated that there were two defects present in the books; the illustration position of the silhouette on pages viii and ix did not align across the spine of the binding, and the trim size. Based upon these defects, the inspector recommended a 25% discount of the price for these books. 2/ 5. Because of the need for the books, NASA agreed to accept the first shipment of books with an appropriate discount. However, the contractor was informed that the remainder of the contracted-for books would not be accepted with the two defects. 6. Dan Sever, the Quality Assurance and Compliance Officer for the GPO Hampton Regional Printing Procurement Office, as a witness for the Contracting Officer, testified that after demerits were assessed for the alignment defect, the contract price was reduced based solely on the table of discounts in the QATAP. 7. By contract modification dated October 13, 1983, the Contracting Officer accepted the shipment of 11,000 books but reduced the contract price for those books by 25%. The basis for this modification was the failure of the contractor to align the illustration of the globe that was printed across pages viii and ix of the magazine. 3/ The price reduction amounted to $4,259.90, a 63% price reduction in the overall contract price. In addition, the contractor was notified that the remainder of the contract (6,420 books) had to be reprinted in order to comply with the contract specifications. 8. The remainder of the contract was shipped by December 20, 1983. Before binding the reprinted books, the contractor separated the images on the two pages by 3/8". The record indicates that in the reprinted books the image printed across pages viii and ix did align and was found to be acceptable to the Government. 4/ 9. By letter dated January 11, 1984, the contractor appealed the contract modification which reduced the contract price. In its appeal, the contractor asserted that it was impossible to make a round object look round as it crosses the spine in a perfect bound book. . DECISION At the hearing, Mr. Phelps, the representative of the contractor contended that the first shipment of 11,000 books did comply with the contract specifications because the standard for industry practice was to place 1/4" of space between the two portions of the image. Regardless of the visual appearance of the globe, since the contractor had placed this amount of space between the two parts of the globe, it had complied with the specifications. According to the contractor, it was not required to vary this space in order to produce an object with a round appearance. Using samples of other magazines which it introduced into evidence, the contractor attempted to prove that round images do not appear to align at the bind and that it is impossible to make a perfect bound book reveal a round image. The contractor also claimed that the GPO had provided camera ready copy which misled the contractor as to how to align the silhouette for a perfect bound book. According to the contractor, the camera ready copy was designed for a saddle stitched book not a perfect bound book. Mr. Sever stated that there was no standard for the width of "gutter space" to be placed between parts of images in order to obtain alignment across a bind. According to this witness, because there are so many variables in aligning a round object across a spine, there can be no industry practice for the width of the "gutter space". In order to get a round object which would align across.a bind and appear round, the "gutter space" between parts of a round image on separate pages had to be varied. If a certain amount of space between the parts of the image on separate pages did not produce a round object when the pages were bound together, more space would have to be inserted to compensate for the perfect bind. Based upon the evidence of record, the Board finds that the contractor was required by the contract specifications to produce a globe whose parts were printed on pages viii and ix and which had to align at the bind. 5/ The contractor was aware of this requirement at the press inspection on September 13, 1983, when the NASA representative drew the contractor's attention to nonalignment of the separate parts of the image. See Exhibit B. The illustration in the books which the contractor provided in September 1983 failed to align at the bind. Therefore, the contractor did not comply with the contract specifications. In answer to the contractor's arguments that it was impossible to produce a round object in a perfect bound book, the Board notes that the contractor did produce, in the books which it delivered in December 1983, an illustration of a globe which appeared to be round and aligned at the bind. 6/ Furthermore, the Board finds that the contractor has failed to prove that there was an industry practice which would allow a printer to insert a particular amount of space between the parts of a round image and that as long as that particular space was inserted the contractor did not have to provide an image which accurately aligned across the spine of the book. It is more reasonable to accept the testimony of the Government's witness that a contractor must vary the space between parts of an image in order to obtain an image which aligns across the spine of the book. Having found that the contractor failed to produce a product in accordance with the contract specifications, the Board must turn to the issue of the reasonableness of the reduction of 25% in the contract price. According to the Government's witness, the price reduction was taken in accordance with the formula set out in discount tables found in the QATAP. This Board has ruled that this method of adjusting the contract price using the QATAP operates as a liquidated damage clause. Appeal of Edward Brothers, Inc., GPO CAB 3-83, May 3, 1984. In order to have an enforceable liquidated damage clause, the clause must fix damages that are reasonable compensation for the harm caused by the contractor's failure to perform. Priebe & Sons v. United States, 332 U.S. 407 (1947). As the Board stated in Edward Brothers, the discount tables cannot be applied mechanically. Rather, they must be utilized on a case-by-case basis. Although liquidated damage clauses are used where damages are difficult to estimate at the time the contract is awarded, the liquidated damages assessed must bear some rational relation to the actual damages suffered by the Government. Graybar Electric Company, Inc., ICBA No. 773-4-69, 70-1 BCA ¶ 8121. In the instant case, the nonalignment of the globe caused no information loss and NASA did use the magazine. Moreover, there was no testimony that indicated that the contractor's noncompliance caused any appreciable damage to the Government. Mr. Sever testified that he arrived at the price reduction by consulting the QATAP discount table. See Finding of Fact No. 6. The testimony of this witness indicates that the discount table was used mechanically. There was no indication that the 25% price reduction was a reasonable forecast of just compensation for the harm caused by the contractor's noncompliance. In fact, there .was no indication that the GPO employee who assessed the price reduction even considered the matter. The QATAP discount table is only intended to be used as a guide. See QATAP, p. 42. The tables are not mandatory. A contracting officer must exercise discretion in using the table. To use the discount table in a mechanical fashion strips a contracting officer of the discretion which he or she must exercise in making decisions in the administration of the contract. Although the Board does not condone this contractor's failure to produce a properly aligned image, it believes that the assessment of a price reduction of 25% in the contract price for this particular defect is clearly excessive and operates as an unenforceable penalty. Accordingly, the Board remands the assessment of a price reduction to the Contracting Officer and directs him to reduce the price of the contract by an amount less than 25% which represents a more reasonable measure of the damage suffered by the Government. In the event that the contractor is dissatisfied with the reassessment of the contract price reduction, it has the right to appeal the matter to this Board in accordance with the "Disputes" clause of the contract. 7/ _______________ 1/ The 23 exhibits submitted by the Contracting Officer are identified as Exhibits A through V (copies of the National Geographic magazine were not accepted into the record as part of Exhibit Pl). The 18 exhibits submitted by the contractor are identified as Exhibits 1 through 16, 19,and 20 (exhibits identified as Exhibits 17, 18, 21 and 22 were not accepted into.the record). In addition, the Board has entered into the record a copy of the Quality Assurance Through Attributes Program, GPO Publication 310.1, revised June 1981. 3/ According to the report of inspection, the contractor failed to trim the books within a tolerance acceptable for Level II printing under the GPO's QATAP. See Exhibit D. However, in a meeting which occurred on September 23, 1983, the GPO notified the contractor that it would not be penalized for the defect in trim size. Exhibit H. 4/ A visual inspection of the globe printed across pages viii and ix in copies of magazine which were provided in the contractor's December shipment reveals that the illustration aligns more accurately across the binding of the book than the globe produced in the contractor's first shipment. See.Exhibit R. 5/ The contractor's allegation that it was misled by the Government furnished camera copy has no validity. The specifications clearly indicated that the contractor had to produce perfect bound books and that the silhouette that stretched across pages viii and ix had to align at the bind. Regardless of the condition of the camera copy furnished by the GPO, the contractor knew or should have known that it was expected under the contract to produce a perfect bound book with a globe which stretched across two pages and which had to align. 6/ The Board placed little probative weight on the magazine samples which both parties entered into the record to prove or disprove the proposition that a round object printed across a spine could be made to appear round. Since there was no evidence introduced establishing the contract specifications under which these magazines were produced, these exhibits had little bearing on what the contractor had to provide under this contract. 6/ A visual inspection of the globe printed across pages viii and ix in copies of magazine which were provided in the contractor's first shipment clearly reveals that the illustration does not align at the binding of the book. See Exhibit Q. 7/ This further right to appeal is limited to an appeal of the particular amount of the contract price reduction. The Board has ruled in this decision that a reduction in the contract price is proper because of the contractor's failure to provide a product which complied with the contract specifications.