Air Force Budget Ax Aimed at Big-Ticket Satellites

By Sandra I. Erwin

The U.S. Air Force is hoping to save hundreds of millions of dollars by converting three of its costliest satellite programs into fixed-price contracts.

The three programs that currently are being considered for conversion are the Global Positioning System III, the Space Based Infrared and the Advanced Extremely High Frequency satellites.

The satellites’ manufacturer, Lockheed Martin Corp., is in discussions with Air Force procurement officials and expects that the next eight spacecraft — four GPS, two SBIRS and two AEHF — will be fixed-price deals. Thus far, all satellites under these three projects have been built under “cost-plus” agreements where the government reimburses all contractor expenses.

Shifting cost-plus to fixed-price procurement is one of several directives by the Defense Department’s top acquisitions official Frank Kendall that seek to contain rising costs in major weapon systems. Congress passed legislation that prohibits cost-plus production contracts for major procurements.

Kendall’s predecessor, Deputy Defense Secretary Ashton Carter, has chided the Air Force and its suppliers for the rising cost of satellites and launch vehicles. When former Defense Secretary Robert Gates terminated a multibillion-dollar “transformational satellite,” or TSAT, program three years ago, the decision was viewed as a tipping point for out-of-control space programs that were chronically behind schedule and always seemed to need additional billions of dollars to finish development.

GPS III, SBIRS and AEHF are timely candidates for fixed-price contracts because they are transitioning from low- to high-rate to production, said Mark Valerio, vice president and general manager of surveillance and navigation at Lockheed Martin Space Systems, in Littleton, Colo.

After assembling four GPS III satellites under cost-plus contracts, Lockheed is projecting that the next four will be fixed-price, Valerio said in an interview at Lockheed’s Arlington, Va., offices.

“We expect to be under contract before year’s end,” he said. The fifth and sixth satellites in the AEHF and SBIRS constellations might be purchased under fixed-price contracts.

But Valerio cautioned that fixed price does not guarantee savings, although it does help to restrain overruns and schedule delays. “Fixed price is not necessarily a money saver. It’s about predictability and managing risk,” he said.

Programs such as AEHF, SBIRS and GPS, after years or decades in development, now have “stable requirements,” he said. That means the Air Force is satisfied with the current designs and does not plan to request substantial, and usually costly, modifications. “It’s the perfect time to transition” to fixed-price purchases, he added.

All three have seen their share of trouble.

The SBIRS geosynchronous satellites, which were designed to detect missile launches anywhere in the world, have been in development since 1996. Estimated costs for six satellites have soared from $4.6 billion to $18 billion, according to the Government Accountability Office. The per-satellite price tag jumped from $919 million to $3 billion.

The first SBIRS spacecraft was launched in May 2011 — roughly nine years later than planned, GAO said. Production of the third and fourth satellites may experience significant cost growth and schedule delays, GAO auditors wrote in a March 2012 report. “The Air Force is projecting a cost overrun of $438 million and one-year delay for these two satellites.” The third and fourth SBIRS spacecraft currently are in development. Negotiations are under way for satellites five and six.

AEHF also has been problematic. The first of the planned constellation of six classified-communications satellites reached orbit in 2011, almost a year behind schedule. Estimated program costs — including the expansion of the AEHF constellation from five to six spacecraft — climbed from $6.3 billion in 2001 to $13 billion in 2009. The acquisition cycle time jumped from 111 to 170 months.

The GPS III program, too, has seen cost growth, GAO said. In November 2011, the contractor’s estimated price tag for the first two satellites was more than $1.4 billion or 18 percent greater than originally estimated.

Lockheed and Air Force officials recently completed extensive audits — known as “should-cost” reviews — of the company’s satellite programs. The reviews resulted in sweeping changes in the way programs are managed, Valerio said. The commander of Air Force Space and Missile Systems Center, Lt. Gen. Ellen M. Pawlikowski, directed a series of reforms across the three programs to drive down expenses, Valerio said.

Programs that are considered technologically “mature” — including SBIRS, AEHF and GPS — do not need as much oversight, testing or detailed reporting, he said. Downsizing both government and industry bureaucracy can result in significant savings, Valerio said. In the GPS program, for instance, “contract deliverable requirements” (reports and documents) were cut from 126 to 26. Similar efficiencies are being sought for AEHF and SBIRS, he said.

“We have less meetings,” and government managers do not ask for the same report multiple times. “You have less people to generate paperwork,” which saves money and time, Valerio said. Cutting back on “design verification testing” also helps keep programs on schedule, he added.

Lockheed has built a “virtual prototyping laboratory” in Colorado Springs where engineers can build a satellite in 3D modeling before any actual metal is bent. “The Air Force wants to identify issues in prototype vehicles sooner rather than later” when satellites are in advanced development or production, said Michael Friedman, spokesman for Lockheed Martin Space Systems.

Still to be determined is how much money the Air Force will actually save from its latest wave of procurement reforms and from fixed-price contracting.

Valerio said Lockheed estimated that it could trim $600 million from AEHF and SBIRS vehicles five and six, over the life of the contract.

An Air Force spokeswoman said program officials could not comment on the accuracy of those estimates.

The $600 million number appears to have been “taken out of context,” said Christina P. Greer, a public affairs officer at the Space and Missile Systems Center. She said updated cost estimates for these satellites are a “work in progress” and precise savings have not yet been calculated by the Air Force. “We don’t know what methods Lockheed used,” said Greer.

Analysts have cautioned that the Pentagon might be overestimating the economies to be gained from fixed-price contracting.

Richard Bergmann, Accenture managing director for defense and aerospace, said he expects the vast majority of Pentagon procurement contracts from now on to be fixed price. “It’s about putting a harness around these dramatic cost overruns and escalations that have been plaguing so many programs that it creates uncertainty for the customer and for vendors,” he said. Overruns are not just bad for the government, he said. Even if the contractor gets to recoup its costs, if the program is over budget, under the Pentagon’s stricter new “better buying power” rules, it is at risk of being terminated.

Fixed-price contracting is one of those fads that come and go, said David Fitzpatrick, managing director at AlixPartners aerospace and defense practice. “It’s as old as the hills, twice as dusty, and has been tried before,” he said. “It can work,” he said, but only when the government agrees to multiyear deals that give contractors time to become leaner and more efficient, he said. Contractors also have to worry that if they end up making too much profit, the government will want to renegotiate the price.

The Defense Department has a “very poor record of following through on that,” he said. “It’s a great idea, but doesn’t often get applied properly.”        

Topics: Space

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