Under Fire From Sen. McCain, Air Force Defends Bomber Contract

Top Air Force leaders will be on Capitol Hill in the coming days trying to quench the latest firestorm over one of the service’s most expensive and technologically advanced weapon systems.

Air Force and defense industry officials were blindsided Feb. 25 by comments made by Senate Armed Services Committee Chairman Sen. John McCain on the long-range strike bomber contract that was awarded last fall to Northrop Grumman Corp. McCain suggested the $23.5 billion development contract should be reexamined because it exposes the government to additional costs that may not have been estimated at the outset of the program.

The projected $55 billion bomber program — which the Air Force designated as the B-21 bomber — has been under scrutiny for years, and just recently got a positive jolt after the Government Accountability Office rejected a protest by a rival contractor team.

McCain’s beef is with the contracting method the Air Force used, called “cost plus” or “cost reimbursable.” These require the government to reimburse the contractor for agreed-upon costs, and typically are used when the work cannot be predicted with sufficient confidence to support a “fixed price” arrangement.

Under a cost-plus contract, the contractor would stop work when the funds are exhausted, or the government can decide to fund the overruns. Financial penalties can be incurred by the contractor for not meeting cost goals, but in general the government bears most of the risk. The alternative is a fixed-price contract, where a company is paid a negotiated amount regardless of incurred expenses.

“The mindset in the Pentagon that somehow these [contracts] are still acceptable is infuriating,” McCain said. “Cost-plus contracts are an evil that have grown and grown and grown over the years. I will not stand for it on any weapon system.” He hinted he might take legislative action to halt the bomber program, even if the contract has been signed. “We can disapprove it,” he said. “Congress authorizes procurements.”

Air Force Secretary Deborah Lee James said she plans to sit down with the Senate Armed Services Committee's air land subcommittee March 1 to discuss the issue.

“I’m hoping with additional information we’ll be able to get our point across more effectively,” James told reporters Feb. 26 at an Air Force Association conference in Orlando, Florida.

“The whole acquisition strategy has been briefed since about the spring of 2014 timeframe,” she said. “And this being a classified program, of course it hasn’t been advertised to the world, but the key people in Congress, particularly the professional staff members who have a need to know and of course keep their bosses informed appropriately, they certainly have known about it.”

James said the LRS-B contract is a “hybrid,” with a “cost plus incentive” for the engineering and development portion but then it transitions to a fixed-priced contract for the first two production lots. “As someone who’s served both in industry as well as in government … one size doesn’t fill all when it comes to contract vehicles,” James said.

These decisions are made based on the level of technical risks involved, she said. “It depends on whether or not there are commercial alternatives, whether there’s an FMS [foreign military sales] possibility down the road for the company. All of these things were taken into account and so we do feel that this was the right approach,” James said. “We will continue to work with the Congress to fully explain it.”

The dustup over the bomber contract is reminiscent of past Pentagon programs that came under political fire for using cost-reimbursable deals. In recent years, the Defense Department has sought to increase use of fixed-price contracting but in the case of the bomber, the Air Force said a cost-plus arrangement would be more appropriate because it is a complex system that is charting unknown territory.

Contracting experts point to the Air Force C-5A cargo aircraft and the Navy’s A-12 bomber as examples of failed fixed-price programs. Conversely, the Air Force purchased its new refueling tankers from Boeing on a fixed-price basis, and the company so far has absorbed nearly a billion-dollar overrun.

“The Air Force is aware of the concerns that Sen. McCain has with regards to the contract type for the LRS-B,” said an Air Force statement. “In developing the acquisition strategy and contract type for the LRS-B program, the program built upon lessons learned from previous acquisition programs.” The contract has been set up to be cost-plus with incentives for the engineering and manufacturing development phase, but the second part of the contract is for the initial production of the first five lots, which are usually the most expensive aircraft, and will be firm fixed price. “The Air Force values the oversight role that Sen. McCain has and looks forward to continuing to work with him and the committee on moving forward with this critical capability for the department and the nation.”

Industry analysts said do not expect this issue will derail the bomber program. “The Senate can’t re-write the Air Force contract,” wrote Alpha Capital Partners analyst Byron Callan. “Also, if the Democrats regain a Senate majority in the 2016 election, McCain will not be chairman of the Senate Armed Services Committee in 2017.”

Topics: Armaments, Aviation, Defense Contracting, Defense Department