Air Force Playing Hardball With Space Industry

By Sandra I. Erwin

Over the past decade, the Air Force has poured more than $80 billion into space technologies, including new satellites, launch services and information systems.
The plan for the coming years is to spend considerably less as pressure grows to reduce the U.S. defense budget. The Air Force still intends to modernize key satellite constellations and provide space-based communications and surveillance services for the military and intelligence community. But program costs are going to be scrutinized at an unprecedented level of detail, Air Force officials said.
Every major space program is now the subject of “should-cost” reviews, which is the Pentagon’s new catchphrase for how it will fight contractors over every expense that is being charged to the government.
Ongoing reviews of space systems include the Air Force’s top space contractors Lockheed Martin Corp., The Boeing Co., and the United Launch Alliance — a joint venture that is owned by both firms. The largest programs that are targeted for cost reductions are the Evolved Expendable Launch Vehicles, the Advanced Extremely High Frequency communications spacecraft and the Space Based Infrared surveillance satellites.
In the EELV program, for which the Air Force has requested $1.6 billion in 2013, the goal is not to buy any new hardware but to secure launch services. The AEFH and SBIRS constellations have been in development for more than a decade, and have been periodically on the verge of being terminated because of cost overruns. But they have survived and are now entering production. Air Force procurement managers are digging deep into the programs' vaults in search of bloated expenses that could be eliminated.
The Air Force has requested nearly $1.8 billion to procure two AEFH and two SBIRS satellites in fiscal year 2013.
“We look at everything, from the length of time they have to do tests, to overhead rates and their [the contractors’] business structure,” said Maj. Gen. John Hyten, director of space programs at the office of the assistant secretary of the Air Force for acquisition.
On the government side, savings also can be achieved by scaling back paperwork demands, Hyten said during a meeting with reporters at the Pentagon. “Do we still need all the documentation we’ve been obtaining? The answer is no,” he said.
Based on recent should-cost reviews, Hyten said his office already has estimated potential savings, but does not want to tip off the contractor. “We want to be in a strong negotiating position as we go in,” he said.
The amount of money requested in the budget is based on estimates by the Pentagon’s cost assessment and program evaluation office, Hyten said. But that number represents a high-water mark. “As we try to drive down cost, we’ll have our own number in mind as we go into negotiations,” he said. “That will be an internal government number.”
The pricing methods for ULA’s launch services also are being probed. “We’ll have a complete negotiating position on the government side before we sit down with ULA for negotiations,” said Hyten. The contractor already provides “certified cost and pricing data” that are audited by government officials. The contractor’s data is a “key piece of the puzzle, but that’s their starting negotiating position,” Hyten said. “Our starting negotiating position is based on our own analysis.”
The Air Force’s take-no-prisoners stance comes as the service tries to make up for lost time and money. Not only have there been huge cost overruns in satellite programs, but also in the Boeing-made terminals that connect ground troops and aircraft with AEHF spacecraft. On January 4, the Air Force informed Boeing that it intended to terminate the Family of Advanced Beyond Line of Sight Terminals, or FAB-T, after a decade and more than a billion dollars spent on development.
“As we entered the year, we were not happy with [Boeing’s] performance,” Hyten said. But Boeing’s counteroffer was too good to pass up and the Air Force is reconsidering the decision, he said. On January 9, Boeing submitted a firm fixed price “letter of commitment” to the Air Force to complete development of FAB-T and start production. “These offers were attractive enough to the department that Mr. Kendall [Undersecretary of Defense for Acquisition Frank Kendall] decided it would be bad business to not fully evaluate those proposals,” Hyten said.
“Boeing continues to work on the program while we study how to turn the cost-plus contract into a fixed-price deal,” he said. The Air Force requested $108 million for the program in fiscal year 2013. In the meantime, said Hyten, the Air Force will be seeking an alternate supplier in case Boeing’s proposal falls through.”

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

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