BOARD OF CONTRACT APPEALS U.S. GOVERNMENT PRINTING OFFICE WASHINGTON, DC 20401 In the Matter of ) ) the Appeal of ) ) KPT, INC. ) Docket No. GPOBCA 14-97 Program D632-S ) Purchase Order 95847 ) For the Appellant: KPT, Inc., Dallas, Texas, by Anthony W. Hawks, Esq., Alexandria, Virginia. For the Respondent: Roy E. Potter, Esq., Assistant General Counsel, U.S. Government Printing Office. Before BERGER, Ad Hoc Chairman. DECISION AND ORDER KPT, Inc. (Appellant), 11262 Indian Trail, Dallas, Texas, appeals the July 16, 1997, final decision of U.S. Government Printing Office (GPO or Respondent) Contracting Officer Jack Scott denying KPT's request for an equitable adjustment under its requirements contract (Program D632-S, Purchase Order 95847) for Direct Deposit Notices used by the Social Security Administration (SSA). The equitable adjustment claim arises out of the Government's ordering substantially less than the contract's estimated quantities. For the reasons which follow, the Contracting Officer's decision is AFFIRMED and the appeal is DENIED. I. BACKGROUND 1. On February 22, 1996, the Appellant was awarded a term contract for the period March 1, 1996 to April 30, 1998. Rule 4 File, Tab H.1 The contract called for the production of Direct Deposit Notices in both English and Spanish versions,2 as well as a brochure in English and Spanish versions, which encouraged the use of direct deposit and were to be sent to Social Security beneficiaries receiving checks sent through the mail. Rule 4 File, Tab A. 2. The contract set forth estimated quantities for the first year's production. For example, the contract set forth an estimated quantity of 1,728,000 English language brochures and an estimated quantity of 72,000 Spanish language brochures. The contract provided for the issuance of monthly print orders specifying the quantities of forms and brochures needed. The contract further provided that the contractor was to complete all production and mailing within 6 workdays of the availability of a print order and Government-furnished material. Rule 4 File, Tab A. 3. By letters of June 23 and July 14, 1997, the Appellant requested financial relief for an inventory of 485,000 brochures that were about to become obsolete. Rule 4 File, Tabs I , K. The Appellant explained that it had had the brochures printed in reliance on the estimated quantities in the contract, but that the average monthly order for the first year had been 85,000 rather than the estimated quantity of 150,000 (1.8 million brochures divided by 12 months), and now it was about to be left with 485,000 brochures that could no longer be used because SSA was changing the text of the brochures, as it had the right to do. The Appellant requested reimbursement in the amount of $16.33 per thousand (it had bid $ .50 per hundred), or a total of $7,920.05. The Contracting Officer denied the request, Rule 4 File, Tabs J, L, and KPT appealed. II. DISCUSSION The Appellant, asserting that it would not have been left with any obsolete brochures had the monthly orders placed under the contract matched the estimates contained in the contract, focuses its arguments on the validity of those estimates. It argues that the estimates "cannot be considered reasonable"3 and that the Government has failed to produce satisfactory evidence of using due care in preparing the estimates. It therefore believes it is entitled to an equitable adjustment to reimburse it for the cost of the 485,000 brochures it could not use. The contract contained GPO's standard requirements contract language, specifying that "... the Government shall order from the contractor all the items set forth which are required to be purchased by the Government activity identified on page 1." The contract also included the following: "This is a requirements contract .... The quantities of items specified herein are estimates only, and are not purchased hereby. Except as may be otherwise provided in this contract, if the Government's requirements for the items set forth herein do not result in orders in the amounts or quantities described as 'estimated', it shall not constitute the basis for an equitable price adjustment under this contract." Rule 4 File, Tab A. This language has been recognized as giving rise to "an exclusive relationship between the Government and the contractor," but not to a guarantee that any particular work will be ordered. The Government's obligations in connection with this type of contract "are merely to exercise due care in preparing the estimates" and to order from the contractor, "and no one else," the supplies or services needed by the ordering activity. McDonald & Eudy Printers, Inc., GPOBCA 40-92 (January 31, 1994), slip op. at 14, 1994 WL 275096, quoting Shepard Printing, GPOBCA 37-92 (January 28, 1994), slip op. at 23-24, 1994 WL 275077. (Emphasis in original.) Thus, there is no entitlement to an equitable adjustment simply because the contract estimates were not borne out by the actual orders placed under the contract; such entitlement arises only from a showing that the Government failed to use due care, i.e., was negligent, in preparing the estimates. McDonald & Eudy Printers, Inc., supra, at 19. It is the Appellant's burden to show, by a preponderance of the evidence, that the estimates were not prepared with due care.4 Crown Laundry & Dry Cleaners, Inc. v. United States, 29 Fed. Cl. 506 (1993); RIM Advertising, GPOBCA 38-94 (September 24, 1997), slip op. at 18, 1997 WL 742429; GraphicData, Inc., GPOBCA 35-94 (June 14, 1996), slip op. at 61, 1996 WL 812875. The only evidence of record regarding the formulation of the estimates is a Declaration from SSA Printing Officer Nicholas E. Tagliareni dated October 7, 1998. Mr. Tagliareni states that the estimates were prepared by an individual under his supervision who is now retired and unavailable and that no work papers were retained. He therefore "reconstructed the preparation of the estimates" by comparing the estimates with those of the preceding Program D632-S contract (for which the Appellant was the contractor) and noting that the prior total estimate of approximately 2.4 million was reduced to 1.8 million to reflect actual orders under the prior contract (approximately 1.3 million) along with an expected increase in new Social Security beneficiaries. Mr. Tagliareni further states that the 1.8 million figure was subsequently not realized because there was an unexpected significant increase in the number of beneficiaries receiving direct deposit and therefore a corresponding decrease in those receiving checks by mail. He attributes this increase in direct deposits to unanticipated legislation enacted in August 1996, pursuant to which SSA "required recipients with bank accounts to accept direct deposit of funds ...." The Appellant has introduced no evidence of its own. Instead, it argues that in a case such as this one, where there is a "great disparity" between the estimates and what was actually ordered, it is the Government's burden to produce evidence establishing that it prepared the estimates with reasonable care and diligence. The Appellant asserts that the Respondent's "paltry evidence and anemic explanation" of how the estimates were prepared fall short of meeting that burden. Appellant's Supplemental Brief (hereafter App. S. Brf.) at 4. The Respondent's burden is not what the Appellant makes it out to be. The Appellant's argument is rooted in Viktoria Fit Int'l Spedition, ASBCA 39703, 92-2 BCA ¶ 24,968 and Huff's Janitorial Service, ASBCA 26860, 83-1 BCA ¶ 16,518, in which it was held that an appellant's burden of production to establish a lack of due care was satisfied solely by evidence of a very large disparity between the estimates and the actual quantities ordered and that the burden to show reasonable care in formulating the estimates then shifted to the Government. Subsequently, however, the Court of Appeals for the Federal Circuit stated that this burden-shifting approach was "not well taken," Medart v. Austin, 967 F.2d 579 (1992), leading the Armed Services Board of Contract Appeals to declare that the reasoning of its Viktoria/Huff's line of cases (which it now described as having shifted the burden of persuasion) "was effectively overruled" by Medart v. Austin. Apex Int'l Management Servs., Inc., ASBCA 37813, 94-1 BCA ¶ 26,299. Thus, the burden simply remains with the Appellant to show, by a preponderance of the evidence, that the Government failed to exercise due care. Medart v. Austin, supra, at 581. The Appellant seeks to do that here by denigrating Mr. Tagliareni's explanation of how the estimates were derived. The Board certainly agrees that the explanation is not the strongest evidence that could be presented in a case such as this-it is somewhat sketchy and does not reflect either the recollection of the individual who prepared the estimates or any contemporary documentation bearing on the matter. It also does not directly reflect the Contracting Officer's position with respect to the estimates, a matter of controlling importance since SSA, as the customer agency, is not a party to the contract and ultimately what is at issue here is not whether SSA's actions were reasonable but whether the Contracting Officer acted reasonably and with due care in accepting the estimates. RIM Advertising, supra, at 17-19, 24; GraphicData, Inc., supra, at 60-62. On the other hand, since the estimates were formulated by an individual who worked for Mr. Tagliareni and was under his supervision, and since Mr. Tagliareni presumably was aware of the elements appropriate for consideration in formulating the estimates, his "reconstruction" of what occurred, to reflect both the prior year's experience and his agency's expectation regarding new beneficiaries, is not implausible and is facially reasonable under the circumstances. Thus, for the Appellant to prevail, it must show that the estimates prepared as described by Mr. Tagliareni reflect a lack of due care and that the Contracting Officer knew or should have known that the estimates were suspect. The Appellant has not done so. It has complained about the disparity between the estimates and what actually happened during performance and about the "paltry" evidence offered by the Government, but it has not produced any evidence that would enable the Board to conclude that the estimates were negligently prepared or that the Contracting Officer did not exercise due care in accepting them. Compare Crown Laundry & Dry Cleaners, Inc. v. United States, supra (while it is reasonable for a contracting officer to rely on estimate of needs provided by user activities, contracting officer does not exercise due care when he accepts estimates he believes to be exaggerated) with RIM Advertising, supra, and GraphicData, supra (contracting officer had no reason to know customer agency did not provide most current information). Indeed, the Appellant makes no reference at all to the Contracting Officer. In short, the Appellant has not sustained its burden of proof.5 Moreover, the Board is not convinced that the Appellant would be entitled to relief even if there were evidence of a lack of due care. Relief in these cases generally has been predicated on the contractor's reliance on the estimates in formulating its bid or offer. See RIM Advertising, supra, at 19; GraphicData, supra, at 62. Thus, contractors have received equitable adjustments to compensate them for bidding lower prices than they would have had they been furnished proper estimates, thereby enabling them to recoup higher operational expenses or start-up costs and unabsorbed overhead, Crown Laundry and Dry Cleaners, Inc. v. United States, supra; Fa. Kammerdiener GmbH & Co., KG, supra; Ambulance Service & Transport of Marlin, supra, and for incurring extra costs resulting from significantly more work than anticipated. Womack v. United States, supra; see also GraphicData, supra (higher performance costs). Here, however, the Appellant's claim is not predicated on its reliance on the estimates to formulate its bid prices, but on its post-award approach to performing the contract, i.e., ordering a large quantity of brochures in advance of receiving the monthly print orders. The Appellant took this approach even though the contract provided that the Government could "require the contractor to make changes to the format(s)/text, of any of the items, at any time during the term of the contract. Therefore, preprinting or stock-piling of any of the components is at the contractor's own risk." Rule 4 File, Tab A at 10. This provision made clear that SSA could make text changes at any time and in connection with any print order, and clearly placed the risk of preprinting the brochures on the Appellant. Thus, had SSA changed the text shortly after the Appellant had the brochures printed, the Appellant would have had no valid claim for the cost of those brochures even though it would have been left with a significantly higher quantity than 485,000. In other words, regardless of the accuracy of the estimates, preprinting the brochures carried with it the risk that all or some of the brochures would not be usable and that the Appellant would be stuck with the printing cost. In light of the contract warning about preprinting or stockpiling, the Appellant simply took a business risk6 when it chose to have a large quantity of brochures printed in advance of receiving print orders, see McDonald & Eudy Printers, Inc., supra, at 19-20; the Board does not believe that this risk, clearly placed on the contractor, somehow shifted to the Government by virtue of any negligently prepared estimates. The Appellant also raises another basis for relief. It asserts that the normal rule imposing the risk of a quantity shortfall on the contractor does not apply to this situation because "the Government's own actions have resulted in a change of requirements." App. S. Brf. at 5. Referring to Mr. Tagliareni's statement that the passage of legislation caused the increase in beneficiaries receiving direct deposit and the decrease in the need for the notices and brochures, the Appellant states that it was this legislative enactment, "an action ... wholly within the Government's control," that "constitutes a change in requirements." App. S. Brf. at 6. In support of its position the Appellant relies on Maya Transit Co., ASBCA 20186, 75-2 BCA ¶ 11,552, and Desco Services Contractors, ASBCA 21856, 77-2 BCA ¶ 12,752. In Maya Transit Co., the Government eliminated a school bus run for budgetary reasons rather than because the need for the run did not materialize. The Armed Services Board of Contract Appeals held that internal budget limitations were not among the risks assumed by the contractor and found entitlement to an equitable adjustment. In Desco, a technical order, which was contractually tied to the contract's "Changes" clause, was revised to change certain vehicle maintenance service intervals from 4,000 to 6,000 miles, which led to a decrease in work for the contractor. Again the contractor was found entitled to an equitable adjustment because while the "contractor takes the risk of the requirements falling short of the estimates ... he does not assume the risk that the Government may change requirements." These cases do not help the Appellant. First, the continuing validity of the change in requirements language of Desco is questionable. In a subsequent decision denying relief to a vehicle maintenance contractor after the vehicle fleet to be maintained was relocated, the Armed Services Board noted that "[a]lthough the [Desco] opinion contained some broad language that the contractor does not assume the risk that the Government may change the requirements, it is clear that the decision to allow relief was based on the particular text of the technical order." East Bay Auto Supply, Inc., ASBCA 25542, 81-2 BCA ¶ 15,204. Second, the Government didn't change any requirements here as that term was used in Maya and Desco. The statutory enactment itself-which did no more than encourage the use of electronic benefit transfer systems7-did not change any contract requirement, and whatever SSA did after enactment to obtain a higher number of new direct deposit beneficiaries was consistent with the program underlying the Appellant's contract-fostering the use of direct deposit. Moreover, while the Appellant certainly experienced a shortfall under the contract, the most significant quantity decline started near the end of the first year of the contract and for the most part occurred during the second year of the contract. Tagliareni Declaration, Exh. B.8 Not only did the contract not contain any estimates whatsoever for the second contract year, but this means that regardless of the effect of SSA's post-enactment actions, the Appellant would still have had a very significant portion of the 485,000 preprinted brochures on hand at the time of the text change. In short, the Board finds no merit to this argument. III. ORDER On the record before it, the Board can only conclude that the Appellant has not shown that it is entitled to an equitable adjustment. Accordingly, the Contracting Officer's final decision is AFFIRMED and the appeal is DENIED. It is so Ordered. November 30, 1998 Ronald Berger Ad Hoc Chairman GPO Board of Contract Appeals _______________ 1 The Contracting Officer's appeal file, assembled pursuant to Rule 4 of the Board's Rules of Practice and Procedure, was delivered to the Board on November 26, 1997. It is referred to as the Rule 4 File, with an appropriate Tab letter also indicated. The Rule 4 File consists of 12 tabs identified as Tab A through Tab L. 2 Two sets of Direct Deposit Notices were to be produced. One set was for new Social Security beneficiaries; the other was for use in connection with claims from beneficiaries that mailed checks had not been received. The notices encouraged the use of direct deposit for receipt of Social Security benefits instead of mailed checks. 3 The Board has previously ruled that this was sufficient to arguably raise the question of "whether the estimates were prepared with due care." KPT, Inc., GPOBCA 14-97 (September 16, 1998) (Decision and Order on Appellant's Motion to Conduct Discovery and File Supplemental Brief), slip op. at 4, 1998 WL 750872. 4 The requirement that the Government exercise due care stems from Womack v. United States, 389 F.2d 793 (Ct. Cl. 1968), the seminal case in this area. The court stated that bidders are "entitled to rely on Government estimates as representing honest and informed conclusions" and that the Government, while "not required to be clairvoyant," must base its estimates "on all relevant information that is reasonably available to it." 389 F.2d at 800-801. See also Chemical Technology, Inc. v. United States, 645 F.2d 934 (Ct. Cl. 1981); Fa. Kammerdiener GmbH & Co., KG, ASBCA 45248, 94-3 BCA ¶ 27,197; Ambulance Service & Transport of Marlin, VABCA 3485, 94-2 BCA ¶ 26,729. 5 The Board recognizes that an appellant can prevail on the issue presented here without furnishing any direct evidence of negligent preparation of estimates if the estimates on their face are so grossly erroneous as to indicate a failure to exercise reasonable care. Emerald Maintenance, Inc., ASBCA 42908, 94-2 BCA ¶ 26,904. The Board cannot conclude, however, that such is the situation in this case, particularly in light of Mr. Tagliareni's statement that the estimates, while higher than the actual quantities ordered under the prior year's contract, reflect an anticipated increase in new beneficiaries who would receive their checks by mail. The Board has no information suggesting that there was no basis for this anticipated increase. 6 The Appellant says the contract's 6-day delivery requirement compelled it to maintain an inventory of preprinted brochures. The Contracting Officer points out that the Appellant was in that position only because it elected to subcontract for the printing of the brochures and not because of any contract requirement. While the Board sees no need to deal with this assertion under the facts and circumstances of this case, the Board observes that the quantity of brochures the Appellant had preprinted far exceeded any quantity needed to ensure meeting the monthly delivery requirements. 7 The statute referred to apparently is Public Law 104-193, the Personal Responsibility and Work Opportunity Reconciliation Act of 1996. See 15 U.S.C. § 1693b(d) (Supp. II 1996). Even if the law had the effect of requiring use of direct deposit, under the circumstances it appears that the Government would be insulated from liability by the sovereign acts doctrine. See United States v. Winstar Corp., 518 U.S. 839 (1996) (affirming Government liability under the particular circumstances of that case). 8 The Exhibit shows that for 9 of the first 10 months the total quantities ordered were in the 50,000-90,000 range, with the number of English language notices for new beneficiaries ranging from 51,714 to 69,016. (For July 1996 the numbers were approximately double what they were for the other 9 months.) For the eleventh month, the order number for that notice dropped to 42,275; for the twelfth month the number declined to 38,660. During the second year the orders for that notice ranged from 17,852 to 33,864. The monthly average for that form was 62,763 for the first year, but only 21,932 for the second year.