## Facts

- The Air Force awarded AVCO (later Textron Defense Systems) a cost-plus-award-fee (CPAF) R&D contract to develop an excimer laser device for missile defense.
- The contract provided no base fee and contemplated seven award-fee performance periods, with award fees determined at the government’s discretion.
- The contract incorporated, among other clauses, a Limitation of Funds (LOF) clause and a Termination clause.
- Contract funding was structured with separate allocations for (1) reimbursable allowable costs and (2) potential award fees.
- The contract’s termination provisions stated that the contractor would not be entitled to future award fees upon termination.
- The government increased the contract’s estimated cost by modification during performance and later terminated the contract after approximately 77.4% completion, as work on the fifth performance period had just begun.
- Textron received substantial cost reimbursement and award fees for the first four performance periods, but less than half of the award fees potentially available for those completed periods.
- After termination, Textron submitted a termination settlement proposal seeking (1) additional reimbursement for cost overruns by treating award-fee funds as available under the LOF clause and (2) a pro rata share of award fees allocated to unperformed future periods based on the 77.4% completion figure.
- The Armed Services Board of Contract Appeals denied Textron’s claims, and Textron appealed.

## Issues

1. Whether a CPAF contractor is entitled, after termination, to a pro rata share of award fees allocated to future, unperformed performance periods based on percentage completion.
2. Whether the LOF clause and the contract’s funding structure permit or require reallocation of funds set aside for potential award fees to reimburse the contractor’s cost overruns.

## Decision

- The Federal Circuit affirmed the Board’s decision denying Textron’s claims.
- The court held Textron had no contractual right to award fees for unperformed performance periods after termination.
- The court held the LOF clause did not permit converting unearned, discretionary award-fee funds into additional cost-reimbursement funds to cover overruns beyond the amount allotted for costs.

## Legal Principles

- Under a CPAF contract, award fees are discretionary and performance-based; absent clear contractual language, they do not accrue automatically by percentage completion.
- A termination provision that excludes entitlement to future award fees bars recovery of award fees tied to unperformed periods, even where the contractor substantially completed the overall effort.
- The LOF clause limits the government’s obligation to reimburse costs to the amount allotted; the contractor bears the risk of costs incurred above the funded amount if additional funds are not allotted.
- Where a contract establishes separate funding pools for costs and award fees, courts will generally respect that separation and will not treat potential award-fee funds as a reserve for cost overruns without express contractual authorization.

## Conclusion

The Federal Circuit concluded that Textron’s CPAF contract did not allow recovery of pro rata award fees for unperformed periods after termination and did not allow award-fee funds to be reclassified to reimburse cost overruns beyond the funds allotted for costs.


Textron Def. Sys. v. Widnall, 143 F.3d 1465 (Fed. Cir. 1998)