Before Michel, Circuit Judge, Archer, Senior Circuit Judge, and Gajarsa, Circuit Judge.
The opinion of the court was delivered by: Michel, Circuit Judge.
Appealed from: Armed Services Board of Contract Appeals United States Court of Appeals for the Federal Circuit
Lockheed Martin Corporation ("Lockheed") appeals the decision of the Armed Services Board of Contract Appeals (the "Board") dated March 28, 1997. Loral Fairchild Corp., No. 45719 (ASBCA Mar. 28, 1997). The Board sustained-in-part and denied-in-part Lockheed's appeal of the contracting officer's (the "CO's") final decision rejecting Lockheed's claim for $4,391,809 in equitable adjustments under its fixed price contract to supply missile fuses to the federal government. Although we do not disturb the Board's finding that the government-prepared technical data package was defective, we hold that, because, contrary to the terms of the contract, the government exercised its option out of sequence, the Board erred by determining that the option exercise was valid. Furthermore, we hold that the Board erred by denying Lockheed a total cost recovery at a stage in the proceeding in which only entitlement was at issue. Accordingly, we reverse-in-part, vacate-in-part, and remand.
Lockheed (formerly known as Loral Fairchild Corporation) entered into a fixed price contract with the government on May 4, 1989 (the "Contract"), for the sale of target detection devices (the "fuses"), which are proximity fuses for use in Chaparral anti-aircraft missiles. The fuses were to be manufactured according to a technical data package of drawings and specifications (the "TDP") prepared by the government. The Contract required the government to purchase a base quantity of fuses. In addition, the Contract provided the government with options to purchase additional fuses. Specifically, Sections F.3.1 through F.3.3 of Part 1 of the Contract state:
F.3.1 If the Government chooses to exercise the options contained in CLINS [Contract Line Item Numbers] 0004-00010, it will do so in accordance with the following schedule:
CLIN WITHIN MONTHS AFTER AWARD 0005 8 0006 8-18 0007 18-30 0008 30-42 0009 42-54 0010 as required IAW para. H.11
F.3.2. The Government reserves the right to exercise the same option more than once, up to, but not to exceed the full range of that specific Line Item, and within the specified period, e.g., Line Item 0005 may be exercised twice for a quantity of 600 units each time, or three times for a quantity of 400 each time, within the eight (8) month period. F.3.3. The intention of the Government is to exercise the options in such a manner that the production line will be operating on a continuing basis (i.e., no production breaks long enough to require a new first article test).
On April 3, 1990, the government exercised an option for 1653 fuses under CLIN 0006 and pursuant to Modification P00003, even though it had not exercised the CLIN 0005 option. Lockheed produced the option quantity but reserved its right to file a claim for equitable adjustment on the ground that all of the government's options had lapsed as a result of the government's failure to exercise the prior option in CLIN 0005 within the requisite time set forth in the Contract. Lockheed appealed to the CO on this basis. Lockheed also alleged before the CO that the TDP prepared by the government was defective, thereby causing extensive, unexpected, and costly engineering and design changes, entitling it to an equitable adjustment independent of that associated with the out of sequence option.
Lockheed initially filed a claim with the CO on December 4, 1990, for $4,391,809. This claim was dismissed without prejudice and later resubmitted by Lockheed on April 21, 1992. On December 9, 1992, the CO denied Lockheed's claim. Lockheed appealed this decision to the Board as to both grounds.
In its March 28, 1997 decision, the Board first determined that the government had validly exercised its option to purchase the fuses. See Loral, slip op. at 20. The Board reasoned that, although the options were priced according to a learning curve, the contractual phrase "in accordance with the following schedule" permitted the government to exercise the options within the specified time periods regardless of whether prior options had been exercised. See id. at 19. Furthermore, the Board determined that the use of options in the Contract was not in violation of FAR 17.202(c)(2)'s prohibition on using options where "[t]he contractor will incur undue risks" because it found the technical, cost, and schedule risks inherent in the Contract were not such undue risks "but rather were the risks of initial commercial production of a newly developed item which [Lockheed] indeed foresaw in proposing to identify, research and analyze potential [fuse] design problems and shortcomings." Id. Finally, the Board ruled that Lockheed was entitled to compensation for certain technical deficiencies in the TDP. See id. at 21. While the Board did not adjudicate the actual quantum of Lockheed's equitable adjustment recovery on this second ground, it did issue a determination that Lockheed was not entitled to a recovery measured by actual costs plus a reasonable profit (a "total cost recovery"). See id. at 20-21. Lockheed timely appealed to this court as to both grounds.
On appeal, Lockheed argues first that the Board erred at law by determining that the government had validly exercised its option because (1) the option was improperly exercised out of sequence in violation of the terms of the Contract; and (2) including the option as a term of the Contract violated FAR 17.202 due to the defective TDP causing Lockheed "undue risks." In addition, Lockheed argues that the Board erred by denying Lockheed a total cost recovery both on the substantive ground that it was entitled to such a recovery and the procedural ground that the Board should not have reached the issue in the context of a proceeding that was expressly limited to the issue of entitlement.