Ashton Carter: Cost Overruns in Air Force Tanker 'Not Our Problem'

7/15/2011
By Sandra I. Erwin
Projections that the U.S. Air Force’s new refueling tanker will be more expensive than originally estimated proves that the Pentagon made a smart move by awarding the contract to The Boeing Co. on a fixed-price basis, said Ashton B. Carter, the Defense Department’s top procurement official.
“It’s not our problem” that Boeing is forecasting that the development phase of the KC-46 tanker will cost more than the $4.9 billion “ceiling” that was stipulated in the February 2011 contract, Carter said July 15 at a Brookings forum in Washington, D.C.
“The fixed price contract was written with protections for the taxpayer,” said Carter. “That is how we crafted the RFP [request for proposals].”
The Pentagon’s decision to structure the tanker procurement as a fixed-price contract initially was criticized by industry advocates for shifting too much risk to the contractor. Companies had become accustomed to “cost-plus” deals in which the government has to cover cost overruns, regardless of who is responsible for driving up the price tag. Recent reports that Boeing projects to exceed the $4.9 billion cap only confirms that the Pentagon is regaining the upper hand in holding contractors accountable for rising costs, Carter suggested.
The fact is that “Boeing decided it would lose money in the development phase, presumably in the hopes of making money in the production phase,” he said. The Air Force intends to buy 179 aircraft. The entire program could be worth $40 billion over the next three decades.
“The decision they made [to underestimate cost] is not a problem from the department’s point of view, and not particularly surprising,” said Carter.
The good news for the American taxpayer is that a defense contractor “underestimated the cost of development [but] does not leave us open-endedly liable,” he said. “That is what happens in a cost-plus type contract. That is a form of overrun that we have been vulnerable to way too much for a long time. ... That’s what we didn’t want in the case of tanker and that’s what we don’t have in the case of the tanker.”
What this means, he added, is that Boeing will have “every incentive to control costs so those estimates don’t come true ... or they will lose money.”
Boeing spokesman William Barksdale told National Defense that the company already has acknowledged that it expects to exceed the $4.9 billion cap, but would not specify by what amount. He would not confirm or deny reports by various news organizations that the company might have to absorb anywhere between $300 million to a billion dollars.
The Defense Department still could be penalized, however. The development contract that Boeing received is for $4.4 billion, so the government might have to pick up 60 percent of the $500 million gap between the contract amount and the $4.9 billion ceiling.
Barksdale said Boeing leaders are comfortable that this is a manageable situation. “It was an intentional bidding strategy,” he said. “This is not a surprise.” As the “clear winner” of the KC-X competition, he said, “Our aggressive but responsible winning bid (which included [engineering manufacturing development] EMD, production of 179 tankers and support) provides the most advanced tanker ever produced for the war fighter at the lowest cost for the taxpayer, while also returning value to Boeing shareholders. … We intend to continue meeting all of our commitments.”

Topics: Business Trends, Doing Business with the Government, Procurement

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