RALEIGH, N.C. — The North Carolina Department of Health and Human Services has formally terminated a massive $171 million, five-year contract with Affiliated Computer Services (ACS) Healthcare under which the Texas-based company was supposed to develop a new Medicaid payment system for the state.

ACS will fight the decision, a lawyer representing the firm, said in an interview Monday afternoon.

“The Department is absolutely wrong,” said Renee Montgomery, an attorney with the law firm Parker, Poe, Adams and Bernstein, which represents ACS. “There is no basis for doing it. They are doing this to hide their own problems.”

Montgomery called the decision “an irresponsible decision”.

The NCDHHS sent a letter ending the contract, which had been awarded in 2004, on July 14.

In the letter, NCDHHS Carmen Hooker Odom said ACS had failed to meet certain contractual obligations that were supposed to have been rectified by July 13. The deadline for ACS to satisfy certain complaints such as delivery of “contractual deliverables” and filling of vacant ACS positions had already been extended from June 16 by mutual agreement.

Odom notified ACS of her intention to terminate the deal on June 6.

In the letter, Odom informed ACS to “immediately terminate work” on the project.

Mark Van Sciver, a spokesman for the NCDHHS, said he would have no additional comments about the letter.

“The letter speaks for itself,” Van Sciver said. “That’s it.”

In a letter sent to Odom on July 12, ACS Executive Vice President Tom Burlin wrote that termination of the contract “cannot be justified”. He noted that the project was 60 percent complete.

He warned that a “costly lawsuit” would result if the contract was terminated. Burlin also said ending of the contract would lead to “damage to the reputations of Department personnel at all levels”.

“Since the beginning of the contract, the Department has acted as though it has no contract obligations and that it an impose requirements upon ACS that are both unreasonable and unsupported by the contract,” Burlin said.

Electronic Data Systems, which lost the contract to ACS in 2004, has continued to handle Medicaid claims while ACS was building the new system.

Montgomery, the attorney, said ACS was “absolutely” in compliance with the contract.

“By their own figures, this is going to cost the state of North Carolina a lot of money,” she said, noting that NCDHHS has already estimated it will cost $130 million to re-bid and re-launch the project.

ACS will fight the decision, first by presenting claims to NCDHHS and then pursuing court action, Montgomery added.