This post was written by Erin Felix.
On December 3, 2013, the Armed Services Board of Contract Appeals (“ASBCA”) issued its decision in Case No. 57409, a termination for convenience settlement appeal by the Boeing Company. The ASBCA held that Boeing’s financial recovery from the U.S. Air Force was capped by the presence of FAR 52.232-22, the Limitation of Funds (“LOF”) clause, in Boeing’s contract. At a macro level, this holding is not surprising since the language of the LOF clause expressly limits the government’s liability to the funded value of the contract. However, the facts of the case suggest that multiple, compounding factors – which are often present in dynamic program environments – ultimately led to Boeing exceeding the funding limit. In reviewing this dispute, contractors should take away the following three key lessons as they navigate the day-to-day performance of their programs.
Lesson #1: You are Only Entitled to What the Actual Contract Provides. The government issued its termination for convenience approximately four years into Boeing’s period of performance. At the time of termination, Boeing had almost two years of performance remaining under its partially funded contract. Boeing and the government had previously “agreed in principle” that a new program estimate to complete (“EAC”) was required, and the parties were actively working to develop a new, increased budget. Despite this informal agreement, the ASBCA held that the government was only obligated to reimburse Boeing up to the funded limit stated in the contract. This dispute should serve as a warning to not rely on understandings or “agreements in principle” that contractors believe they have with the government, when the clear language of the contract states otherwise.
Lesson #2: Manage Your Prime/ Subcontractor Relationships Carefully. Multiple subcontractors, including Honeywell, performed large portions of Boeing’s contract. As part of the termination proceedings, Honeywell provided Boeing with a combined termination settlement and request for equitable adjustment (“REA”) proposal. The value of Honeywell’s proposal alone exceeded the value of remaining funds on Boeing’s contract. Since many critical details surrounding Honeywell’s subcontract and proposal were not discussed in the case, Boeing and Honeywell will likely be stuck negotiating a settlement in which one or both parties will not be made financially whole as a result of this decision. Contractors wishing to avoid similar situations should be hyper-aware of their subcontractors’ funding forecasts, and take proactive measures to manage their subcontractor agreements.
Lesson #3: Include Sufficient Termination Liability Funding Requirements in Your Program Funding Profile. Contractors are generally required to submit and maintain financial profiles that forecast funding needs over the life of incrementally funded contracts. These funding profiles should include a time-phased forecast of potential expenses in the event of contract termination. Such termination liability expenses include cancellation costs for supplier purchase orders, settlement expenses, and employee severance pay resulting from the termination. Accounting for termination liability costs does not increase the total value of the program. Rather, it shifts more funding to the front end of the contract, which decreases over time as the impact of a potential termination wanes. In Boeing’s case, the inclusion of sufficient termination liability funding may not have fully prevented Boeing’s funding shortfall because of the added EAC and REA circumstances. However, actively managing your funding profile to account for changing contractual and programmatic realities is a legitimate and critical way for contractors to protect themselves from adverse LOF impacts.
Contractors should view the Boeing decision as an opportunity to examine their current contracts for potential termination funding issues. In addition, contractors should consider the takeaways from this dispute when entering into contracts with the government and subcontractors in the future.