Given that Boeing‘s [BA] fixed-price contract for the KC-46A Pegasus tanker is more than a decade-old, the U.S. Air Force will almost assuredly not alter the arrangement to cost-plus, but the service is looking to apply lessons learned from the contract to future ones.
Last month, Boeing said that it had delivered its 50th KC-46 to the Air Force–a delivery which comes as Boeing and the Air Force work to fix the plane’s Category I deficiencies, including those involving a boom telescope actuator to connect the refueling boom to slower aircraft and faulty aircrew depth perception in connecting the boom to other aircraft via the cabin-installed Remote Vision System (Defense Daily, Nov. 12).
Under the terms of the February 2011 contract, Boeing has been responsible for picking up development costs exceeding $4.9 billion for the first four planes and any overruns thereafter in production lots. Boeing has paid more than $5 billion for such overruns on the KC-46.
Before his nomination as Air Force secretary in April and his confirmation in July, Frank Kendall favored considering changing the KC-46 contract from fixed-price to cost-plus.
“On its surface, designing and building a tanker variant of a commercial transport would not seem to be all that high risk,” Kendall wrote in a column for Forbes in March last year. “Boeing started with a proven commercial design and had built tankers before, although not recently. From the outset, however, the program has encountered problems. It may be time to reconsider fixed-price development, even in cases like this.”
“In the early ‘90s, I had the job of helping my boss at the time, Under Secretary of Defense for Acquisition Don Yockey, clean up the messes that the fixed-price development acquisition fad had created,” Kendall wrote. “It was intended to put pressure on industry to perform by forcing industry to absorb the costs of any overruns. The problem with these contracts was that they transferred more risk to industry than industry could realistically absorb, and they took away the government’s freedom to supervise the contractor or intervene. They were also based on the false assumption that lack of motivation was the principal reason for cost overruns. If only it were that simple.”
While serving as former President Obama’s DoD acquisition chief, Kendall said that he had five guidelines for establishing fixed-price development contracts–low technical risk, firm requirements, “experienced and well qualified bidders, contractor capacity to absorb potential losses and contractor business case to absorb potential losses.”
“The KC-46 tanker has always seemed like a poster child for implementing this guidance and adopting fixed-price development when those conditions are met,” Kendall wrote in Forbes last year. “At first blush, my original views would seem to still be correct. Boeing has continued to perform and has accepted very high losses. The question that I think is worth asking now, however, is: Did the fixed-price approach actually cause some of the problems that are still emerging? If this was the case the next question to ask is: Was this in the interest of the government?”
The onus was on the contractor to get it right of course, but the human tendency is to err on the side of hoping for the best and gambling that things will work out. Extra cost and time for risk reduction are not attractive when any costs will come out of the company’s profit margin and corporate management is heavily focused on schedule performance. I can’t say for certain that this happened with the KC-46, but I do know that some of the errors – wiring harnesses of the wrong length, using the wrong fluid in a crucial test, acuity and depth plane compression problems with the refueling operators remote vision system, and now fuel leaks – might have been avoided with the willingness to spend a little more time and money during development. The old adage; “no time or money to get it right the first time, but plenty to fix it later” might just apply.
In Kendall’s view, a cost-plus arrangement would have allowed DoD to exercise better program oversight, direct contractor risk reduction efforts, “and potentially avoid costly mistakes.”
“So far Boeing has absorbed all of the cost overruns on the KC-46,” per Kendall. “Any contractor in another similar situation might not be this cooperative. The other two options a contractor facing huge overruns could chose would be to file claims against the government, seek a bailout, or to simply stop performance and try to negotiate or litigate any compensation due the government. In the A-12 case the first two options were invoked, leading to over 20 years of litigation.”
The federal government will be unable to perform a “constructive role” on DoD contracts “unless it has the technical expertise and strong leadership needed to provide sound direction to the contractor,” Kendall wrote. “I have always believed that strong government program managers and program offices are in everybody’s interest and are the key to successful development programs, along with support from the chain of command. Would this approach have led to better results on the KC-46? There is no way to be certain, but it is worth considering and analyzing the possibility before embarking on another major fixed-price development program.”
The 50th KC-46 that Boeing delivered last month to the Air Force is the first for New Jersey’s Joint Base McGuire-Dix-Lakehurst (JB MDL), which is to replace its KC-10s with KC-46s by 2024.
In October, Air Force Gen. Mike Minihan, the commander of Air Mobility Command, approved a third Interim Capability Release (ICR) for the KC-46—a release that allows the KC-46 to refuel all variants of the F-15 and F-16 during U.S. Transportation Command (TRANSCOM)-tasked missions (Defense Daily, Nov. 1). The move is to free up KC-135s and KC-10s to focus on forward deployed refueling missions, rather than training ones. Air Force Brig. Gen. Ryan Samuelson, AMC deputy director of strategy, plans, requirements and programs and KC-46 cross functional team lead, has said that the KC-46 “can now support 62 percent of all receiver aircraft that request air refueling support from TRANSCOM.”
In July, AMC approved the first ICR to allow the KC-46 to refuel aircraft using the KC-46’s centerline drogue system, while AMC approved the second ICR a month later to permit the KC-46 to refuel the B-52, C-17 and other KC-46s using the boom.
AMC has said that it expects the KC-46 to receive limited certifications and operational test clearances soon to allow the aircraft to refuel the CV-22 and MV-22 tiltrotors and the B-2A stealth bomber.