The Air Force could be on the hook for increased costs in the KC-46 aerial refueling tanker program if it has to re-open its contract with prime contractor Boeing [BA] due to sequestration-related budget caps, a top Air Force contracting officer warned Wednesday
The Defense Department said Tuesday in its “Estimated Impacts of Sequestration-Level Funding” report it would purchase five fewer KC-46s over the next five fiscal years, known as the Future Years Defense Plan (FYDP), if sequestration caps were not lifted by Congress. Deputy Assistant Secretary of the Air Force for Contracting Maj. Gen. Wendy Masiello said stretching out those tanker deliveries would break up the fixed price incentive (firm target) structure of the contract, putting the Air Force at risk.
“If you break open the deal, then that puts us at risk of putting more money on the program than what the fixed price caps us at,” Masiello told reporters Wednesday after an Air Force Association (AFA) event in Arlington, Va.
A fixed price incentive (firm target) contract offers contractors a significant incentive to control costs, but is one of the most complex contract types to negotiate and execute. It specifies a target cost, a target profit and a target price, which is the sum of the target cost and target profit. The contract also specifies a price ceiling (or celling price), but not a profit ceiling or floor, which is the maximum amount that may be paid to the contractor, except for any adjustment under other contract clauses.
Breaking up the KC-46 contract would certainly be bad news for the program as it has successfully controlled acquisition costs. The Government Accountability Office (GAO) said in an April report that estimated acquisition costs (in 2011 dollars) have declined about $323 million from its initial estimate. These costs include development, production and military construction costs.
“You don’t want to break anything up right now because, right now, it’s moving exactly as we wanted to,” Masiello said. “If we mess up that arrangement, it puts us at a financial risk.”
Though Masiello described the KC-46 program as a “great program right now,” it also has a challenging 12 months ahead of it. The program must complete software development, verify that the software works as intended, finalize developmental flight test planning and begin developmental flights. GAO said software problem reports are increasing and Boeing could have difficulty completing all testing if more retests are needed than expected (Defense Daily, April 10).
Masiello told the audience that programs are at risk of being cut if they start falling behind on schedule or costs start to overrun. Masiello said in today’s era of declining budgets, Air Force leadership is focused on major priorities like the KC-46, the F-35 and the Long Range Strike Bomber (LRSB), and that there may be times when lower-priority programs may have to be sacrificed. Masiello called in industry to help Air Force programs stay on budget and on track. He is responsible for all aspects of contracting relating to the acquisition of weapon systems, logistics, operational and contingency support for the Air Force,
“There’s very little room for mistakes in today’s environment,” Masiello said. “If we’re not keeping programs going where they need to be, they’re at risk, it’s as simple as that.”
Masiello has been selected for promotion to lieutenant general and reassignment as director of the Defense Contract Management Agency (DCMA), which is the Defense Department component that works directly with suppliers to ensure DoD, federal and allied government supplies and services are delivered on time, at cost and that they meet all performance requirements. Masiello’s reassignment is subject to Senate confirmation.