Appeal of

SKE INTERNATIONAL, INC.

Under Contract No. 362575-08-B-0439

PSBCA No. 6315

APPEARANCE FOR APPELLANT
Frank J. Borgia

APPEARANCE FOR RESPONDENT
Alfred J. Zwettler, Esq.

OPINION OF THE BOARD

            Respondent, United States Postal Service, awarded Appellant, SKE International, Inc., an indefinite quantity, one-year contract for renovation and alteration projects at postal facilities.  The contract provided that the parties could renew the contract by mutual agreement and included a formula to increase the price for renewal periods.  Near the end of the base year, Respondent asked Appellant to forgo the price increase for the additional term.  When Appellant refused, Respondent chose not to renew the contract.  Respondent ordered no work during the one year base term.  Appellant filed a claim for damages, which the contracting officer denied, and Appellant appealed.

            At the election of the parties, the appeal is being decided on the record without an oral hearing in accordance with 39 C.F.R. §955.12.  Appellant elected application of the Board’s Small Claims (Expedited) procedures, 39 C.F.R. §955.13.  Only entitlement will be addressed (April 27, 2010 Order).

FINDINGS OF FACT

            1.  On July 14, 2008, Appellant was awarded an Indefinite Quantity Job Order Contract (“IQC/JOC”) for repair and alteration projects at postal facilities within three geographical areas: Central Maryland and parts of West Virginia; Washington DC; and Northern Virginia and parts of West Virginia (Appeal File, tabs (“AF”) 1-4, 6; Stipulation (“Stip.”) 3).  Similar contracts were awarded under the same solicitation to seven other construction companies (Complaint ¶3; Answer ¶3; AF 27, p. 11 and Exhibit 1).

            2.  The contract contemplated that Appellant would be assigned a series of individual projects at postal facilities within the specified areas.  The solicitation contained a Unit Price Schedule, which described construction tasks with pre-set unit prices.  Offers by potential contractors consisted of “multipliers” for each geographical area to be applied to the unit price schedule to determine the price of individual projects.  For example, the multiplier Appellant offered for projects below $25,000 in the District of Columbia area was 1.1690.  (AF 1, p. 3; AF 4; Stip. 7; AF 27, p. 12 and Exhibit 2; Declaration of D. Mackey (“Mackey Decl.”), ¶3).

            3.  The contract’s term was as follows: “The contract period for this contract will be for a 1-year base period and up to four (4) 1-year renewal periods as agreed to by both parties.”  Additional contract language provided, “This contract is renewable by issuance of a bilateral contract modification.  If the renewal option is not agreed to and signed prior to the expiration date, this contract is expired.”  (AF 4, Contract Clauses B.302, Option to Renew (with Preliminary Notice) (Clause 2-20) (July 2006) and B.310, Contract Terms (Clause F-303) (March 2006), subsection a; Stip. 5, 6, 7).

            4.  The contract included a formula for calculating an increase to Appellant’s multiplier for the renewal period based on increases in certain published construction cost indices.  It also provided that a new Department of Labor Wage Decision would be furnished and applicable for each renewal.  (AF 4, Contract Clause B.302, Option to Renew (with Preliminary Notice) (Clause 2-20) (July 2006)).

            5.  The contract provided, “Minimum Work Ordered – The minimum work ordered during the total contract period, including any renewal options, will not be less than $10,000.”  (AF 4, Contract Clause B.310, Contract Terms (Clause F-303) (March 2006), subsection d).

            6.  Respondent required Appellant to submit performance and payment bonds, each in the penal amount of $750,000 (AF 4, Contract Clause A.105, Performance and Payment Bond Requirements (Provision 7-1) (March 2006) Modified, subsection a; AF 5).

            7.  The contract required Appellant to obtain licenses necessary to perform construction work in the areas covered by the contract (AF 4, Contract Clause B.410, Permits and Responsibilities (Clause B-47) (March 2006); AF 1, p. 8).  Contractor’s licenses were not required for Maryland and the District of Columbia, and in its offer, Appellant reported that it had applied for but not received general contractor’s licenses for Virginia and West Virginia (AF 2, p. 2-2).  In the contracting officer’s July 1, 2008 Notice of Intent to Award, he advised that the contract was being awarded

contingent on receipt of the required general contractor’s license in Virginia and West Virginia.  No work will be issued to you in these areas until the licenses are received.  If the required licenses are not received by the end of the base year of this contract, the first renewal option will not be exercised and the contract will expire.

(AF 5).

            8.  By letter dated March 31, 2009, the contracting officer asked Appellant to forgo the increase to its multiplier that would have been warranted by the contract formula upon renewal of the contract for another year.  He wrote,

Recent and reliable construction market data indicates that prices of building materials, components, and labor have fallen in recent months and the expectation is that these lower prices will remain lower for the foreseeable future.  The JOC contracts currently provide for an annual increase in the multiplier that is based on the Construction Cost Index (CCI).

We are requesting that you consider maintaining the current multipliers for the subject contract through the end of the first option (July 2010).  The annual CCI adjustment to your contract would be utilized during the remaining three options.

All other terms and conditions of your contract will remain unchanged.

Your consideration of this proposal is greatly appreciated.  If accepted, your contract would be modified accordingly.

(AF 8; Stip. 8).

            9.  This request was part of a nationwide program whereby Respondent sought to reduce its contracting costs by, among other things, asking all IQC/JOC contractors whether they would be willing to forgo increases to their multipliers for renewal periods (Declaration of S. Weber (“Weber Decl.”), ¶¶6, 7; Mackey Decl., ¶7 ).

            10.  By email dated April 24, 2009, Respondent’s contract specialist reminded Appellant that it had not submitted copies of its Virginia and West Virginia contractor’s licenses.  The email quoted the language from the contracting officer’s July 1, 2008 letter (Finding 7) pointing out that “the first renewal option will not be exercised and the contract will expire if the contractor’s licenses are not received by the end of the base year.”  (AF 9).  Appellant sent its Virginia and West Virginia contractor’s licenses to Respondent on that date, and Respondent received them on April 27, 2009 (AF 10, 22; Stip. 9).

            11.  By email to the contracting officer on May 9, 2009, Appellant responded to his March 31 letter (Finding 8), expressing its willingness to “maintain its current multiplier for the above subject contract through the first option period (i.e. July 14, 2010).  If you require a formal letter confirming this agreement, please advise.”  (AF 11; Stip. 10).

            12.  On June 1, 2009, Respondent’s contract specialist sent Appellant proposed Modification M01 to the contract that would (1) renew the contract for an additional year (through July 14, 2010) with no increase to the multiplier and (2) incorporate new Davis-Bacon wage rate decisions applicable to the renewal period (AF 12; Stip. 11).

            13.  By letter dated June 22, 2009, Appellant declined to execute the proposed modification.  In the letter, Appellant asserted that construction cost indices, in fact, had “risen approximately 5% over the past twelve months, and the wage decisions you forwarded with Modification M01 have risen by the same amount, on average.”  Appellant requested that Respondent revise the modification to grant it the price increases contemplated by the contract and renew the contract for an additional year at the increased multipliers.  (AF 13; Stip. 12).

            14.  Respondent elected not to renew the contract because Appellant declined to keep its multipliers unchanged through the first renewal period (AF 14; Stip. 13, 14; Weber Decl., ¶12).

            15.  Respondent’s Eastern Facilities Service Office, which was responsible for Appellant’s contract, sent letters asking IQC/JOC contractors to forgo multiplier increases to all of the approximately 49 such contracts within its area.  All of the contractors except two, Appellant and one other, agreed to the request to hold multipliers unchanged.  Respondent did not renew with Appellant or with the other contractor that would not agree to an unchanged multiplier.  (Weber Decl., ¶14; AF 17).  The contracting officer feared that renewing with Appellant notwithstanding its refusal to hold its multiplier firm would be inconsistent with Respondent’s cost cutting initiative and would jeopardize relations with contractors who agreed to his request (Mackey Decl., ¶¶12, 13).

            16.  Respondent ordered no work from Appellant over the base year of the contract (Complaint ¶7; Answer ¶7; Weber Decl., ¶13).  The other awardees of similar contracts received project awards during that period (AF 27, p. 12 and Exhibit 2).

            17.  In early September 2009, Respondent’s contract specialist called Appellant’s bonding company, advised that Respondent had issued no work orders under the contract, and requested that the bonding company refund to Appellant the amounts it had paid for the bonds.  In similar situations this action had resulted in refunds of bond payments.  The bonding company representative called back to verify that Respondent was asking that the refund be paid directly to Appellant, which the specialist confirmed.  (Weber Decl., ¶13).

            18.  On November 5, 2009, Appellant submitted a claim to the contracting officer, seeking $31,408 “for compensation due SKE for damages that resulted from breach of [the contract] by the USPS.”  It summarized its claim as follows:

Labor:                                     $25,287.00

Travel:                         $  1,267.00

Bonding:                                 $  3,750.00

Books and Literature:           $     820.00

(For Licensing)

Licenses:                               $     284.00

Total                                        $31,408.00

Appellant did not include detailed support for its claim, advising, “Such costs will be made available for audit at the discretion and convenience of the USPS.”  As an alternative basis for recovery, Appellant wrote, “In any event, SKE clearly is entitled, as a minimum, to profit and overhead on the $10,000 guaranteed award, plus bonding costs.”  (AF 15; Stip. 15).

            19.  On January 7, 2010, the contracting officer addressed Appellant’s claim in a final decision.  He noted the absence of supporting documentation, but, nevertheless, he allowed Appellant $1,000 as the profit Appellant would have earned had Respondent ordered the minimum $10,000 of work required by the contract.  He denied the remainder of the claim.  Appellant appealed.  (AF 16; Stip. 15).

DECISION

Respondent’s Failure to Renew the Contract

            Appellant argues that Respondent’s failure to renew the contract for an additional year because Appellant would not forgo the increase to its multiplier breached Respondent’s duty under the contract to deal fairly and in good faith with Appellant.  Respondent argues that its conduct violated no contractual duty.

            Under the contract, renewal required the agreement of both parties and execution of a bilateral contract modification (Finding 3).  There was nothing in the contract that prevented Respondent from conditioning its agreement to renew upon Appellant’s agreement to forgo the multiplier increase, and exercising its business judgment in this fashion did not violate the implied duty of good faith and fair dealing under the contract.  See Gary W. Noble, PSBCA No. 4094, 99-2 BCA ¶ 30,413; Fax-Photo-Shipping, Etc., PSBCA Nos. 3916, 3970, 98-2 BCA ¶ 29,998; Marvin Watson, PSBCA No. 3716, 96-2 BCA ¶ 28,365.

            Given the mutual right of both parties not to renew the contract, the contracting officer's election not to renew does not entitle Appellant to contractual relief absent a showing that the decision resulted from Respondent's bad faith or abuse of discretion.  See James Hovanec, PSBCA No. 4767, 04-2 BCA ¶ 32,805, at 162,262, aff’d, Hovanec v. Potter, 170 Fed. Appx. 129 (Fed.Cir. 2006) (unpublished); Plum Run, Inc., ASBCA Nos. 46091, 49203, 49207, 97-2 BCA ¶ 29,193, at 145,230.  Appellant has not met its burden to show by clear and convincing evidence that Respondent’s failure to renew resulted from malice on the part of Respondent’s employees or some specific intent to harm Appellant, a showing that is necessary to demonstrate bad faith.  See Am-Pro Protective Agency, Inc. v. United States, 281 F.3d 1234, 1240 (Fed. Cir. 2002).

             Appellant has also not shown that the contracting officer abused his discretion.  The contracting officer had wide discretion in deciding whether to renew, see Government Sys. Advisors, Inc. v. United States, 847 F.2d 811, 813 (Fed. Cir. 1988); Nova Express, PSBCA Nos. 5102, 5204, 5206, 08-1 BCA ¶ 33,763; James Hovanec, PSBCA No. 4767, 04-2 BCA ¶ 32,805, aff’d, Hovanec v. Potter, 170 Fed. Appx. 129 (Fed.Cir. 2006) (unpublished), and Respondent has demonstrated a reasonable ground for asking its contractors to maintain their previous year’s multipliers:  Respondent’s desire to control its construction costs (Finding 9).  No violation of law or regulation has been alleged, and accordingly, Appellant has not shown that the contracting officer abused his discretion.

            Appellant complains that Respondent unfairly couched the request that Appellant hold its multiplier unchanged as a matter for Appellant’s consideration, when, according to Appellant, it should have been directly told that if it did not agree, the contract would not be renewed.  However, it does not argue that it would have held its multipliers unchanged had Respondent made it plain that doing so was a condition of renewal.  Rather, it argues that if it had known of the alternatives it would have discussed the matter with Respondent and possibly convinced Respondent to renew at the higher multiplier.  This is speculative and does not provide a basis for relief.

            Appellant argues that Respondent’s nonrenewal decision was based on faulty business judgment.  First, it argues that the contracting officer’s representation in his March 31, 2009 letter that prices for materials and labor were expected to remain lower for the foreseeable future (Finding 8) was incorrect.  However, Appellant disputed the information, and there is no evidence that Appellant relied to its detriment on the information Respondent provided.[1]  Second, Appellant argues that even with the upward adjustment contemplated by the contract, its multipliers would have remained competitive with those of other IQC/JOC contractors in the region and its contract, therefore, should have been renewed.  Respondent asserts that renewing Appellant’s contract would have undermined the purpose of the renegotiation initiative and would have been detrimental to its relations with the contractors (47 out of 49) who did agree to hold their multipliers unchanged (Finding 15).  Where, as here, Respondent had broad discretion to decline renewal of Appellant’s contract and Appellant was treated no differently from other contractors, we will not second guess Respondent’s business judgment in deciding not to renew.  See Fax-Photo-Shipping, Etc., PSBCA Nos. 3916, 3970, 98-2 BCA ¶ 29,998; TMI Mgt. Sys., Inc. v. United States, 78 Fed. Cl. 445, 449 (2007) (“Thus, even if it is determined that exercising the option is advantageous to the Government after considering price and other factors, . . . the Government is still free to decline to exercise its option.”).

            Appellant argues that by requiring it to obtain the West Virginia and Virginia contractor’s licenses before the end of the base year or risk nonrenewal (Findings 7, 10), Respondent committed to renew the contract if Appellant provided the licenses.  Because it provided the licenses, Appellant argues that Respondent is estopped to decline to renew the contract.  Appellant has made no showing that it provided the Virginia and West Virginia licenses in reliance on any expression by Respondent that it would renew the contract if it did so, and without a showing of detrimental reliance, Appellant’s estoppel argument fails.  See P.J. Dick Contracting Co., PSBCA No. 992, 84-1 BCA ¶ 17,218, at 85,733.  Obtaining the contractor’s licenses was a requirement of the contract (Finding 7), and neither the contracting officer’s communication regarding licenses at the time of award (Finding 7) nor the contract specialist’s reminder (Finding 10) added to Appellant’s obligations under the contract.  Moreover, the admonition was cast in the negative: the contract would not be renewed if the licenses were not provided.  It did not assure Appellant that if it provided the licenses the contract would be renewed.

             Appellant complains that other IQC/JOC contractors received work during the base period of Appellant’s contract while Appellant did not.  It argues that if it had received work during the base period, it would have had experience on which to base its decision whether to hold its multiplier firm for the renewal.  However, Respondent’s commitment in the contract was to provide $10,000 of work over the entire period of performance, including any renewal periods (Finding 5).  There was no assurance in the contract that Appellant would receive a minimum amount of work before the end of the base period such that it would have a better ability to judge whether it should hold its multiplier unchanged.

            In conclusion, Appellant has not demonstrated that Respondent’s failure to renew the contract breached its duty of good faith and fair dealing, constituted bad faith, or was an abuse of discretion.  Appellant has not demonstrated that it was deprived of any contractual rights by Respondent’s determination to renew only on condition that Appellant hold its multiplier unchanged, because Appellant was not entitled to renewal under the contract in the first place.  See Rough and Ready Timber Co. v. United States, 707 F.2d 1353, 1355 (Fed. Cir. 1983).

Respondent’s Failure to Order Minimum Work

            By failing to award Appellant the contractually-required minimum work of $10,000 (Finding 5), Respondent breached the contract, and Appellant’s relief is to be put into as good a position as it would have been in had Respondent ordered the required work.  See AFTT, Inc., PSBCA No. 3717, 97-2 BCA ¶ 29,057; Golden West Builders, PSBCA No. 3378, 93-3 BCA ¶ 26,195.  Accordingly, Appellant is entitled to recover the profit, if any, it would have made on the minimum order of work, plus a proportionate share ($10,000/$750,000) of its bond costs.  Id.

            Respondent argues that Appellant should be denied this recovery because it did not obtain the licenses necessary to allow it to be assigned work in Virginia and West Virginia until late in the base term (Finding 10).  However, this does not excuse Respondent from ordering the minimum work because Appellant could have performed work in Maryland and the District of Columbia.

            Respondent also argues that it had no obligation to order the minimum amount of work because Appellant never asked to have work assigned to it.  The contract did not require Appellant to specifically ask for work assignments as a prerequisite to Respondent’s commitment to provide the minimum work, so this circumstance does not excuse Respondent from doing so.

            Finally, Respondent argues that because Appellant first said it would renew at the same multiplier (Finding 11) Respondent might have thought it had more time (i.e., the rest of the base term plus the one-year renewal) to order the minimum amount of work.  Respondent’s argument that this circumstance excused it from ordering $10,000 worth of work is completely speculative, and does not excuse its failure to order the minimum work.  Respondent’s failure to assign work was a breach of the minimum order requirement and entitles Appellant to the damages discussed above.

            As we address entitlement only in this proceeding, we remand to the parties for determination of the rate of profit Appellant would have enjoyed and to determine the amount of bond costs it incurred (and which were not refunded by the bonding company (Finding 17)).[2]  To the extent discussed above, the appeal is granted but is otherwise denied.

Norman D. Menegat
Administrative Judge
Board Member

[1] Appellant’s argument that by providing what it contends was inaccurate information Respondent breached its duty to share superior knowledge is unhelpful.  The superior knowledge doctrine refers to information that is vital to Appellant’s performance and “only to the time the contract was made.” J. A. Jones Constr. Co., ASBCA No. 43344, 96-2 BCA ¶ 28,517, at 142,419.  Additionally, the doctrine imposes no duty upon Respondent to provide information if Appellant could be reasonably expected to obtain the information on its own, H. N. Bailey and Assocs. v. United States, 449 F.2d 376, 382 -383 (Ct. Cl. 1971).  Published information about trends in construction costs was not vital to Appellant’s performance, was not an issue at contract formation, and was equally available to Appellant. 

[2] Appellant also asked for overhead in its claim (Finding 18), but the parties have not addressed it.  That issue is remanded to the parties as a quantum matter.  See AFTT, Inc., PSBCA No. 3717, 97-2 BCA ¶ 29,057.