Opinion ID: 208635
Heading Depth: 1
Heading Rank: 5

Heading: Default termination of the A-12 contract

Text: It is true that the A-12 contract, as modified by P00046, lacks a definite contract completion date. However, this single factor, even though important, is insufficient to support the contractors' contention that the government cannot sustain the default termination. A court must also take into account other relevant facts and testimony in deciding whether the default termination was justified. In Lisbon, we held that the government bears the burden of justifying the propriety of a default termination. 828 F.2d at 765. We also stated that the contracting officer's termination decision [must] be based on tangible, direct evidence reflecting the impairment of timely completion. McDonnell Douglas XII, 323 F.3d at 1016 (citing Lisbon, 828 F.2d at 766). The direct evidence includes the contractors' statements that they could not meet the contract specifications, the contract delivery schedule, nor complete performance at the specified contract price. Id. at 1013 (quoting McDonnell Douglas X, 182 F.3d at 1332). The direct evidence also includes the contracting officer's testimony and contemporaneous documents. Id. at 1016. The Court of Federal Claims made detailed factual findings based on the evidence. McDonnell Douglas XIII, 76 Fed.Cl. at 422-30. After reviewing the record, we see no clear error. Therefore, we only highlight a few important aspects here. a. Contractors' performance history and failure to meet progress milestones The contractors missed several milestones under the original contract, the most significant of which, of course, is the June 1990 first flight date. They also missed the July 1990 delivery date for the second prototype airplane. More tellingly, after the government unilaterally modified the contract through P00046, and in fact, in their response to the cure notice, the contractors unequivocally stated that they would not meet the revised delivery schedule for the eight prototype airplanes. Instead, they projected that the first flight date would be in March 1992, three months after the date imposed in P00046. By December 1990, the contractors were only 50% confident in this date, believing it was achievable only after significant changes. The contractors and the amicus curiae argue that if we uphold the default termination here, the government may terminate for failure to make progress a contract for any minor slippage in meeting any insignificant interim milestone. This is an exaggeration. First of all, due to the sequential building block structure of the A-12 contract, delivery of the prototype airplanes is not just any milestone. It is certainly not an insignificant milestone. Quite to the contrary, it is clearly one of the most important milestones in the entire contract. This is because, as the contractors admit, one cannot test an aircraft before it has been built, nor build a production airplane before developing its prototype. Second, the delay in the delivery schedule is hardly just a minor slippage. The A-12 contract provided the June 1990 first flight date. In other words, it provided the contractors thirty months from the contract award time (January 1988) to deliver the first prototype plane. P00046, in extending the first flight date to December 1991, gave the contractors 60 percent more time to reach this significant milestone. Yet, the contractors, even though at first predicting that they would, concluded that they could not meet this schedule. In fact, they were not even sure if they could deliver in March 1992. According to the contractors' own estimate, even assuming they could meet the March 1992 first flight date, they would not complete the design, manufacturing, and testing of the aircraft until July 1995, two years and three months after the April 1993 TCHEVAL deadline specified in the original contract. More importantly, we are not upholding the default termination based solely on a contractor's concerns about meeting a contractual schedule milestone. McDonnell Douglas XII, 323 F.3d at 1015 (citing Lisbon, 828 F.2d at 765). As we explained above, the contractors' failure to meet progress milestones is one factor to be considered in the totality-of-the-circumstances analysis. In this respect, we agree with the trial court that [m]issed milestones indicate a pattern of nonperformance and delay which should not be ignored. Although not justifications for default in themselves, they provide a context for understanding and evaluating plaintiff's continued problems. Such information should be relevant if we consider whether a reasonable contracting officer might reasonably have been concerned about [the contractors'] ability to complete the contract on time. McDonnell Douglas XIII, 76 Fed.Cl. at 426 (quoting Universal Fiberglass, 537 F.2d at 397). b. Contractors' financial situation Another piece of relevant information we consider when reviewing a default termination is the contractors' financial situation. The cost to complete a contract more particularly, the inability of a contractor to perform a contract at the specified contract price ... [is a] fundamental element[] of government contracts and [is] related to contract performance; as such, [it is] highly relevant to the question of default. McDonnell Douglas X, 182 F.3d at 1328. The A-12 contract as initially awarded had a target contract price of $ 4,379,219,436 and a ceiling price of $ 4,777,330,294. In June 1990, the contractors proposed that the fixed-price contract be modified because the cost of completing the contract would exceed the ceiling price so substantially that it would be unacceptable to the contractors. The contractors repeatedly insisted on restructuring the contract from a fixed-price contract to a cost-reimbursement type contract. Even during the high-level negotiation meetings following the government's issuance of the cure notice, Mr. John McDonnell, the CEO of MDC, asserted that the contractors can't get there if we don't change the contract, and that the contract has got to get reformed to a cost type contract or we cannot do it. In their January 2, 1991, written response to the cure notice, the contractors again submitted their proposal to restructure the contract to a cost reimbursement contract. In exchange for that restructuring, the contractors would absorb a $1.5 billion fixed loss and would waive their claims for equitable adjustment. The sizeable concession the contractors were willing to make further illustrates the grave inadequacy of the contract price. Of course, the difficulty in the contractors' financial situation, in and of itself, may not be sufficient to justify the default termination. See McDonnell Douglas XI, 50 Fed.Cl. at 320-21 (ruling that the contractors' financial condition was not endangering performance of the A-12 contract). However, in this case, inadequate financing is not collateral [because] it pervades the entire contract. Universal Fiberglass, 210 Ct.Cl. at 216, 537 F.2d 393. Indeed, in the months leading to the termination, the contractors were spending $120-150 million of their own money every month. McDonnell Douglas XIII, 76 Fed.Cl. at 427. Captain Lawrence Elberfeld, the Navy's A-12 Program Manager, testified that the cost to complete the A-12 contract would be so unthinkably over the fixed-price ceiling that the contractors' internal worst case estimate could bankrupt both corporations. Id. at 429. More importantly, Captain Elberfeld testified that the cost overruns jeopardized the contractors' performance because the contractor engaged in cost cutting efforts like reducing staff, eliminating overtime, quick fixes that address and would remedy a cash flow situation. Id. at 428. For example, around the time when the contractors missed the original first flight date, they removed 110 people from the A-12 program. Id. Captain Elberfeld concluded that the contractors' cost cutting efforts to avoid bankruptcy led to more corner-cutting and more incomplete effort and basically a longer process to get a product that may not be the product that we desire or need for the Navy. Id. at 429. c. Conclusion In summary, the government offered the contracting officer's testimony, the contractors' statements, and contemporary documents as direct evidence. The evidence, such as the contractors' performance history (e.g., the failure to meet several milestones, including the significant first flight), coupled with the contractors' dire financial difficulty, which negatively impacted their performance under the contract, shows that the contracting officer was reasonably justified in feeling insecure about the contractors' rate of progress. Therefore, the government has satisfied its burden to justify the default termination. [4] Once the government has met this burden of proving that timely performance is beyond the contractors' reach, the contractors have the burden of going forward to prove either that they were making progress such that timely completion of the contract was not endangered or that there was excusable delay. See Appeal of Mich. Joint Sealing, Inc., ASBCA No. 41477, 93-3 BCA 26,011 (Apr. 26, 1993). On appeal, the contractors assert no affirmative defense. They proffer no record evidence to show, without contract restructuring, that they could have completed the contract on any date. Certain arguments, such as waiver, are presented to support their proposition that, at termination, the A-12 contract lacked an enforceable completion date. Even if these arguments could be interpreted as the contractors' defenses, we have already addressed them elsewhere in this opinion. In conclusion, because the government was justifiably insecure about the contract's timely completion and the contractors do not argue that their failure to make progress could be excused, we sustain the default termination of the A-12 contract.