Chair Force Engineer

Wednesday, February 10, 2010

Contract for America's Tanker

Northrop-Grumman is crying "foul" with the Air Force's plans for putting "KC-X," its new tanker aircraft, on contract. The tanker waters have been muddied for years; a deal to lease Boeing 767's was scuttled in 2003 after the Air Force's top procurement official, Darleen Druyun, was caught negotiating for an executive position at Boeing (in blatant defiance of Federal Acquisition Regulations.) Two years ago, the Air Force announced that the Airbus / Northrop-Grumman A330 would become the KC-45 tanker; the plan was dropped again after a successful protest by Boeing.

The seeds of doubt have already been planted about the legitimacy of the third attempt at buying new Air Force tanker planes. For starters, Northrop-Grumman objects to the use of a fixed-cost contract for the aircraft's development. Under the fixed-cost contract, the contractor promises that their development budget will come in at a certain cost. If the contractor exceeds the promised amount, they eat the difference. Fixed-cost contracts are great for the taxpayer, but they put the contractor at great risk. They are largely worthless for major development programs, because it's so difficult to accurately predict the costs for a system that's never been built before. They are best suited for buying additional lots of systems that have already been developed, like munitions and existing fighter jets.

Northrop-Grumman has some history on their side regarding fixed-cost contracts. In 1988, Northrop objected to the fixed-cost contract for developing the stealthy A-12 attack plane. The company withdrew from the contest, and the contract was awarded to the less-experienced team from General Dynamics. GD couldn't meet the plane's ambitious weight and schedule goals, and the contract was terminated in 1991. (Personally, I blame the Navy rather than GD for the program's termination. Between the contractual problems and the Navy's extremely aggressive schedule, it was impossible to see the program succeeding unless the Navy relaxed its requirements.)

DoD also uses "cost plus fixed fee" contracts, which usually guarantee that the contractor will be reimbursed for all work and still make a profit. Unfortauntely, these contracts also enable contractors to game the system. They often propose nonviable but inexpensive solutions so they can win the contract. After the program is secure, the contractor replaces the nonviable systems with more expensive (albeit viable ones) at expense to the taxpayer. There is little incentive for cost control, and contractors who give honest estimates of cost at the onset of the program are usually downselected.

The last type of contract is the award-fee contract, where a percentage of the contract value is awarded based on the government's subjective assessment of the contractor's performance. Of the three contract types, this is usually my favorite for covering development contracts. Yet the award fee is also far from perfect. The government rarely gives the contractors serious penalties for delays or hardware that fails to meet specifications. Awarding less than 95% of an award fee is seen as an insult by the contractors, even if they earned their low scores through poor performance. The award fee contract has merit, but only if the government people are willing to give it teeth.

As far as the KC-X contract is concerned, I am not losing any sleep over the use of a fixed-cost development contract. The tanker variants of both the Boeing 767 and Airbus A330 have already been developed in variants for allied air forces. They are a well-defined quantity. The biggest unknown is the difficulties of the politically-motivated transition of Airbus production from Toulouse, France to Alabama.

Northrop-Grumman does have a legitimate concern that the tanker contract will be awarded based on lowest cost per plane, rather than best value to the taxpayer. The Boeing 767's advantage is that it's not too much bigger than the KC-135's that are being replaced. The A330 is a much bigger airplane that is closer in size to a KC-10. It's also a more expensive airplane to build. I am more sympathetic than many of my peers to the A330 because of my affection for the KC-10 (a very reliable airplane that offloads a lot of fuel to many thirsty jets per mission.) A sound economic argument could be made for buying the A330 on the basis of its cost to refuel a given number of airplanes (using fewer A330's than 767's to refuel the same-sized fighter formation.)

It sometimes seems like the best (and most politically-sound) solution would be a split buy between the two airplanes (at added cost to the logistics chain, which would need to maintain two types of aircraft.) I just hope the Air Force gets it right this time. They can't afford another expensive mistake like the last two attempts at a tanker contract.