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IN THE COMMONWEALTH COURT OF PENNSYLVANIA Department of Transportation, Petitioner v. Pennsylvania Industries for the Blind and Handicapped, Respondent BEFORE: : : : : : : : :

No. 1006 C.D. 2005 Argued: September 15, 2005

HONORABLE DORIS A. SMITH-RIBNER, Judge HONORABLE DAN PELLEGRINI, Judge (P.) HONORABLE MARY HANNAH LEAVITT, Judge

OPINION BY JUDGE LEAVITT

FILED: October 26, 2005

The Pennsylvania Department of Transportation (Department) petitions for review of an adjudication of the Board of Claims (Board) finding the Department in breach of its contract with the Pennsylvania Industries for the Blind and Handicapped (PIBH). By this contract, PIBH agreed to operate the Department's photo licensing centers under a "cost-plus" system of compensation. The Board held that the Department was obligated to reimburse PIBH for bonus and severance payments made to employees because they were valid "costs" within the meaning of the contract. BACKGROUND The facts are not in dispute. Since 1984, PIBH has operated the Department's photo licensing centers under a series of contracts whereby the Department has compensated PIBH on a per license basis. Effective December 31,

1996, the parties departed from their prior practice to adopt a "cost plus system" of compensation. Under this new system, the Department agreed to reimburse PIBH for its costs for operating the centers, with the proviso that reimbursement would not exceed $10,806,058 in any one year and that aggregate maximum reimbursement for the five-year term of the contract would not exceed $55 million. The contractual relationship between the Department and PIBH was set forth in several writings. Agreement No. 72099, "Photographic Driver's License/Identification Card Service and Location Agreement," is the basic contract document. It incorporates two other essential documents. "Exhibit A," "Photo License Service Specifications," contains the details of PIBH's performance on matters that range from facility layout (1.3.1), furnishings (1.6.1) and employee job description (3.3) and training (4.2) to metal reflective signs (6.1) and type of electrical outlets (1.4.1). "Exhibit B," "Contract Specification Budget Proposal," is a four-page document prepared by PIBH that identifies fourteen categories of expenses and PIBH's projected costs for each category. In terms of dollar amounts, rent and labor costs are the largest expense categories in the Budget. "Direct Labor," i.e., labor provided by the photo license technicians, is projected to cost $4,213,684 each year, and "Indirect labor," i.e., labor provided by the program managers, is projected to cost $831,673. "Occupancy" is expected to cost $4,247,010 each year. In addition to estimating an annual amount for each of the fourteen expense categories, the Budget specifies a "burden" consisting of 15% to

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be added to each expense category to cover PIBH's overhead costs for such items as personnel administration and central computer maintenance.1 PIBH compensates its employees in salary and benefits, including vacation time, pension, health insurance, life and disability insurance. Reproduced Record at 178a (R.R. ___). In addition, PIBH pays employees who retire, or resign, their accrued but not used vacation time. Finally, PIBH pays employees performance bonuses if certain targets are met. These compensation practices antedate the inception of the relationship instituted by Agreement No. 720999, the Specifications and the Budget (collectively Agreement). On August 21, 1998, PIBH submitted Invoice No. 10011872 to the Department that requested reimbursement for costs incurred in July 1998, including, inter alia, $77,294.61 for the category "indirect labor." Of that amount invoiced, the Department approved $72,726.65. The Department's discrepancy report noted a deduction of $4,567.96 for severance pay, which it refused to pay as outside the terms of the Agreement. On December 16, 1998, PIBH submitted Invoice No. 10014358 requesting reimbursement for costs incurred in November 1998. Of the $69,027.01 invoiced for "direct labor," the Department approved $56,596.58. The Department's discrepancy report explained the reason for the reduction as "no provision ... in the contract for employee-bonus payments." at 29a. (R.R. ___). Reproduced Record

PIBH was also required to abide by the standard Commonwealth contractor integrity, nondiscrimination and contractor responsibility rules that were attached to Agreement No. 720999 as Exhibits "C," "D" and "E."

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In January 1999, PIBH initiated an attempt to resolve the matter, but when it was unsuccessful, PIBH filed a complaint with the Board. The complaint specified that the Department was in breach of contract with respect to four invoices submitted between July 1998 and February 1999, including Invoice Nos. 10011872 and 10014358, described above. Additionally, the complaint alleged that as "of the date of this Claim, [Department] has continued to refuse to pay PIBH's invoices and it is believed and therefore averred that [Department] will continue to refuse to pay such invoices as well as the invoice[s] set forth in the preceding paragraph." Complaint,

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