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.