Boeing [BA] has submitted its proposal to the government for a second five-year production contract for CH-47F Chinook heavy lift helicopters that would attain the Army’s planned 464-ship fleet, a program official said.
“This second multiyear contract proposal will provide not only the vertical lift capability that warfighters use and need every day, but also will generate hundreds of millions of dollars in savings for taxpayers and the U.S. government,” said Leanne Caret, Boeing vice president, H-47 programs.
Patrick Donnelly, CH-47 Domestic Programs manager at Boeing Military Aircraft’s Mobility division, said: “The proposal is for 155 aircraft, 121 renew aircraft and only 34 new build, but this will bring the total up to the program of record for the Chinook.”
The company also offered a proposal for a single year of production, he said.
The H-47 program is half way through the execution of the first multiyear contract awarded in 2008 for 191 F-model aircraft, valued at $4.3 billion. An award for the second multiyear contract could be in January 2013.
The proposal reflects Boeing’s success with the program, Donnelly said in an interview, leading to the company investing $130 million in the factory to modernize and improve efficiency.
“We believe we are going to see over $500 million dollars of savings going to a multiyear vice a single year, but that really is up to the government auditors to make that decision,” Donnelly said.
The Defense Departments’ Cost Assessment and Program Evaluation (CAPE) organization is actively reviewing the proposal, and has been talking to company officials since July so it can independently validate that the company is seeing the savings that they are projecting, which would allow the Defense Department to decide to go to a multiyear contract, he said.
Boeing projected an approximately $400 million in savings on the first multiyear contract, Donnelly said.
The projected savings come in by comparing a five-year multiyear contract versus five single-year awards.
However, there are risks, such as priority changes leading to different procurement decisions, and the fact that budgeteers don’t care for multiyear contracts because it ties up money.
For Boeing, a multiyear contract provides stability so the company and its suppliers can employ efficiencies and make financial decisions knowing there will be five years to recover any investment.
Caret said, “With this contract Boeing, and its partners in more than 45 states, will be able to negotiate longer-term agreements with suppliers, make necessary investments in production tooling and processes, and more effectively plan for capital expenditures.”
A second multiyear contract would provide Boeing with the assurance that the production line would continue until 2019.
“While it was not in the RFP, we do expect we will negotiate a quantity of options which the U.S. Army will use primarily to satisfy (foreign military sales) FMS requests,” Donnelly said. By the government negotiating an option price at the same time as the main contract, the government gains a financial benefit by locking in a price.
This means as foreign countries say they want to buy aircraft, the government could exercise an option and come in with efficiency as the price is already set. From the Boeing perspective, “it gives us a projection that there’s some number of aircraft above the 155 that it could sell,” he said.
A multiyear also allows the government to allocate some hardware to a foreign military sale, knowing it will be building more aircraft the next year.
As does the first multi-year contract, the proposal for a second multi-year includes some limited support such as upfront engineering, reliability calculating and spares allocation.
Right now, the newly refurbished factory is producing four aircraft per month for the U.S. Army. That will accelerate to five per month next year, with the capability to move to six aircraft per month, based on demand.
The new factory floor is more efficient, Donnelly said, not only energy efficient, but there has been reorganization and rearrangement so things are “at the fingertips” of those building the aircraft. Also, there are two production lines, one solely for the F model and one for uniquely configured variants such as international aircraft.