Appealed from:Armed Services Board of Contract Appeals
Before Rich, Lourie, and Bryson, Circuit Judges.
The opinion of the court was delivered by: Lourie, Circuit Judge.
Northrop Grumman Corporation appeals from the decision of the Armed Services Board of Contract Appeals denying its claim under a cost-plus-award-fee contract for payment from funds allocated to a "separate award fee pool." Grumman Space Station Integration Div., 97-1 BCA ¶ 28,843, ASBCA No. 48,719 (Mar. 3, 1997). The Board held that since NASA terminated the contract early, Northrop was not entitled to certain funds remaining in the "separate award fee pool." Because the Board erred in construing the contract to preclude payment from the separate award fee pool in the event of an early termination, we reverse.
Northrop contracted with NASA to render services for NASA's space station program on a cost-plus-award-fee basis. Under such a contract, a contractor is reimbursed for its costs and receives a profit, or fee, equal to a percentage of its costs. Under the original contract, Northrop and NASA estimated on an annual basis the costs expected to be incurred over the following year, called a performance period. NASA allocated an amount equal to 9% of the estimated costs for the performance period to an award fee pool. This pool represented the maximum fee available to Northrop for the year. Each performance period was divided into two 6-month evaluation periods, and the funds in the award fee pool were divided equally between each evaluation period. After each evaluation period, NASA evaluated Northrop's performance during the preceding 6 months and awarded Northrop a percentage of the funds from the award fee pool allocated to that evaluation period. Funds in the award fee pool did not accumulate from one evaluation period to the next; any funds not paid to Northrop at the end of an evaluation period were lost.
As a result of a contract modification, the contract was restructured to provide, among other things, a maximum award fee of 8.5% of the expected costs. In addition, the award fee pool was split into two pools: 7.5% was allocated to the basic award fee pool and 1.0% was allocated to a separate award fee pool. Funds in the basic pool, like the original pool, were distributed based on NASA's evaluation of Northrop's performance at the Conclusion of each evaluation period. The basic pool, like the original pool, was emptied at the end of each evaluation period. If Northrop performed poorly during an evaluation period, earning, for example, a rating of 10%, Northrop could not apply the undistributed 90% portion to the next evaluation period. The unearned funds would be lost.
Funds in the separate pool, however, were not awarded at the end of each evaluation period. Rather, they accumulated over successive evaluation periods and were awarded after Northrop reached milestones designated at the discretion of NASA. When a milestone was designated, NASA was to assign a portion of the funds in the separate pool to that milestone. After the milestone was reached, Northrop's performance was to be evaluated and a percentage of the designated funds awarded. The remaining percentage of the designated funds was to be lost. Those funds not assigned to a milestone, the undesignated funds, remained in the separate pool, available for future designation.
Because NASA had discretion in designating milestones and in awarding dollar values to those milestones, it was possible that little or no money would be designated from the separate pool. As a result, Northrop would not have had an opportunity to earn through milestone achievements all or most of the funds in the separate pool. In order to prevent excessive accumulation of funds in the separate pool, the contract accordingly provided Northrop with an opportunity to earn at least 50% of the funds in the separate pool every four consecutive evaluation periods. If less than 50% of the funds were designated during four consecutive evaluation periods, 50% of the separate pool would be shifted into the basic pool. Finally, the contract provided that any funds left in the separate pool at the end of the final performance period would be shifted to the basic pool. At the contemplated Conclusion of the contract, Northrop would thus earn a percentage of all remaining undesignated funds in the separate pool based on NASA's evaluation of Northrop's performance during the last two evaluation periods.
The pertinent provisions of the contract modification that established the separate award fee pool read as follows:
B. This pool is intended to be evaluated and made available for award to the Contractor as a function of the Contractor's performance contributing to achievement of significant or major Space Station Freedom Program milestones, critical events, and/ or major program initiatives.
C. When one or more milestones are selected by NASA, the milestone(s) will be specified by the NASA Contracting Officer in writing to the Contractor at the beginning of an evaluation period along with the award fee value assigned. The Contractor may also suggest specific milestones for possible evaluation. The evaluation procedure is the same as that used for the regular award fee determination . . . .
D. One or more milestones will be designated for evaluation at least once every four consecutive evaluation periods. At least 50% of the cumulative available award fee must have been designated for use within the same time span. If no milestones or events have been identified for evaluation within this timespan, 50% of the balance in this separate fee pool will be assigned to the basic award fee pool for the corresponding evaluation period.
F. Unearned fee from the separate award fee pool will not be made available for use in future evaluation periods.
G. Any undesignated amounts in the separate award fee pool not evaluated will be assigned to the basic award fee pool for the final performance period of the ...