Filed under: K-CX News, KC-X, KC-X Tanker News, Lockheed Martin, Syndicated Industry News
At a recent public event the Undersecretary of Defense for Acquisition, Logistics & Technology, Ashton Carter, was asked about the projected cost increases for the KC-46A development. His response was that he, and OSD, are not really that worked up about the fact that Boeing (BA) may exceed the projected ceiling price of the contract.
In his eyes the U.S.’s liability is based on the $4.9 billion price. Boeing’s bid of $3.6 was a conscious business decision on their part. Some members of Congress, led by Senator John McCain (R-AZ), have raised concerns about the increase and the fact that the cost share structure of the contract obligates the U.S. to pay 60% of the first billion in increases.
There is also the idea that this situation would encourage contractors to submit low estimates for development contracts, or buy-in, with the goal of making up the difference in their production or by having the U.S. pay some of the overruns. McCain and the Senate Armed Services Committee (SASC) are also investigating the large cost increases in F-35 production that are requiring the U.S. to pay over $700 million as part of their cost share.
The idea that the Defense Department would accept this kind of business model is interesting. One of the criticisms of defense acquisition is this very point. In the late Sixties when Lockheed, now Lockheed Martin (LMT), did the same with the C-5 transport, although perhaps not deliberately, it is considered one of the examples of acquisition abuse and the program was almost cancelled. Now Carter is saying that as long as it involves a Firm Fixed Price Contract it is an acceptable practice.
This is just the beginning of the situation and Boeing certainly has the ability to not charge more then the ceiling price as they work the KC-46A development. Their current estimate of about $5.2 billion may be conservative and costs for the first 18 aircraft could be under $4.9 billion.
Filed under: BAE Systems, Boeing, Business Line, Companies, Congress, Department of Defense, development program, EADS, Events, Federal Budget Process, General Dynamics, Lockheed Martin, logistics, Military Aviation, northrop grumman, Northrop Grumman Corp., production program, Proposal, Raytheon, Restructuring, S&T, Services, space, U.S. Air Force, U.S. Army, U.S. Marine Corps, U.S. Navy
At a speech yesterday the Undersecretary of Defense for Acquisition Ashton Carter discussed the potential for shrinkage in the U.S. industrial base due to declines or flat spending by the Government on defense. He made it rather clear that while mergers and acquisitions would not be discouraged the Obama Administration is concerned about consolidation among the biggest defense contractors.
After the decline in spending in the Nineties caused by the collapse of the Soviet Union and the “Peace Dividend” the U.S. defense contracting world ended up with five big companies. These were Boeing (BA), which absorbed McDonnell Douglas; Lockheed Martin (LMT), which merged Lockheed and Martin Marietta; Northrop Grumman (NOC); which combined Northrop and Grumman; Raytheon (RTN) and General Dynamics (GD).
These companies became the major developers of systems and suppliers of large aircraft, ship, space and missile programs. The U.S. defense budget is very diverse and allows many other companies to participate including those that primarily provide services and consumable items such as fuel, ammunition and food to the military. The fighting in Iraq and Afghanistan has also allowed innovative systems like Unmanned Aerial Vehicles (UAV) to become important and a company like General Atomics can do very well through there product line.
The Nineties also led to penetration of the U.S. market by the large European defense contractors like BAE Systems (BAE:LSE) and EADS (EADS:P) necessitated by the need for competition and their acquisition of U.S. companies that provided or maintained systems like the M2 Bradley Infantry Fighting Vehicle (IFV).
Carter made it clear that the desire to maintain competition for future contracts and projects will outweigh thoughts on future efficiencies caused by the lack of work for many different contractors. He was asked point blank about Northrop’s plans to either sell or spin off their ship building division due to concerns about the amount of work available for it in the future. Carter expressed concerns that if Northrop did separate this part it had to be a viable stand alone company able to support the U.S. military.
As the fighting in Iraq and Afghanistan winds down and the continued pressure to reduce overall government spending rises the defense budget will see reductions. This will most likely affect new, future programs as the budget for their development and production will take the biggest hit. The Defense Department is committed to the Joint Strike Fighter as the biggest item in future spending. That program alone may eat up most of the available investment funds in the near term.
The government may be faced with problems as it tries to maintain a competitive industrial base while reducing the amount of spending to a point where they might not be enough work to go around.
Photo from Kevin Burkett’s flickr photostream.
Filed under: Business Line, Companies, Contract Awards, Countries, Events, Finland, production program, Protest, Services, Sweden
The U.S. Government has seen an increase in contract protests over the last ten years. This has been especially true with defense contracts. The situation reached a point that late last year the Defense Department’s Undersecretary of Defense for Acquisition, Logistics and Technology, Ashton Carter, actually complained about the problem they had become. Protests of awards while perfectly legal lead to delays in the start of work by the winner and in the case of the KC-X aerial tanker program cause the contest to start over causing major delays to the fielding of a new aircraft.
One of the major reasons for the amount of protests is the small number of large contracts available to be won. This means that each and every win is more important to a company’s bottom line. It is not even with just hardware contracts that you see protests but also with service ones. The last round of TRICARE health care management contracts led to protests some of which were upheld. These contracts were worth billions and the competition was pretty fierce. Now it has become almost expected that the loser of a contract will protest the decision.
It is not only in America though that the problem of protests exists. Sweden had awarded a contract earlier this month to Finnish company Patria Land and Armament Oyj for over a hundred new armored vehicles. The contract has a total value of over $300 million. Now an unidentified Swedish company is protesting the award.
As part of the contract Patria offered to offset the cost of the contract with one hundred percent investment in Sweden’s economy including using Swedish sub-contractors for major components.
The AMV vehicle has been in production for several years and over 1,000 have been ordered since 2004. Interestingly Patria won this contract in 2009 but a protest by BAE Systems Hagglunds, a component of Great Britain’s defense giant, BAE Systems (BAE:LSE), caused a recompete won again by Patria.
In the worst case this protest could lead to another competition delaying the start of the program by another year. Certainly competitors have the right to protest especially if they feel the award was not conducted properly but it does in the end delay the delivery of the hardware which in some cases is necessary for the modern battlefield.
Photo from hr.icio’s flickr photostream.
Filed under: BAE Systems, Boeing, Business Line, Companies, Congress, Contract Awards, Department of Defense, development program, EADS, Events, Federal Budget Process, General Dynamics, Lockheed Martin, logistics, Military Aviation, Northrop Grumman Corp., production program, Raytheon, Services, U.S. Air Force, U.S. Army, U.S. Navy
Since early this month the Secretary of Defense Robert Gates and other officials have been making speeches about the need to reign in defense spending. This is especially true for money not supporting current fighting in Afghanistan and Iraq. This “war on spending” is either an attempt to redirect funding to what Gates’ believes are higher priorities or laying the ground work for major cuts to the defense budget in the next few years.
Gates’ in a speech to the Navy League stressed that the United States can no longer afford to invest in multi-billion dollar aircraft carriers and their supporting ships. This questions the whole organization and focus of the U.S. Navy. He stressed development and procurement of cheaper solutions to the Navy’s potential missions which included a new emphasis on submarines
Ashton Carter, the Undersecretary of Defense for Acquisition at one of his presentations mad clear that the current Administration did not believe it could afford the second engine for the F-35 Joint Strike Fighter (JSF). In fact he said that the whole program must become affordable to be successful. The second engine has been promoted as risk reduction by Congress in case the main engine made by Pratt & Whitney, a part of United Technologies Corporation (UT) is not ready in time or cannot be made in enough quantities. There are criticisms that the project amounts to pork for General Electric (GE) and Rolls-Royce (RR:LSE) and Gates has tried not to fund it in his 2010 and 2011 budgets.
At the very least the budget will stay flat and if it is reduced these proposals will set up a battle between the Administration, Congress, industry and their supporters as they struggle to find the right mix of investment, weapon systems and deficit spending reductions. These reasons include:
- Continuing budget pressure from operations in Afghanistan and Iraq the Navy and Air Force especially are seeing their budgets reduced. The Army and Marine Corps does the lions share of the work in South West Asia and they need more money. Reducing large ship building and aircraft modernization programs is one easy way to get it.
- Potential cuts to the defense budget. If it is heavily reduced then aircraft carriers and their escorts which are costly to build and run would be a prime area to reduce. The Navy had sixteen in 1988 at the end of the Cold War now they are down to eleven. Losing one aircraft carrier battle group, its associated air wing, personnel and other supporting assets will cut a big chunk out of the Navy’s total budget and is a discrete way to do that.
- F-35 costs have increased dramatically over the last five years as the schedule continues to get later and later. Eliminating the second engine would save $400 to $500 million a year. Last year Congress funded despite the request not to by “finding” money and not using core JSF dollars for it. That solution may be offered again this year but it still ultimately takes money from other priorities in the defense budget.
The U.S. cannot keep on its path of trillion dollar deficits. The largest piece of discretionary funding is the defense budget and while in the recent long term plan produced by the Senate there were no reductions in spending it was a flat budget with no planned growth. The Administration will say that it has to cut defense spending in areas that do not seem to contribute directly to the fight against terrorism. The use of affordability and efficiency will maintain core capabilities while lowering total spending.
What does this all mean to the world of defense contracting? Not anything good to say the least. The big contractors make their money on ships, aircraft and army vehicle systems. Many other companies of all sizes make parts and provide support to these programs. If they start ending or being severely reduced in size then these companies will see major effects to their bottom lines. As in the Nineties when the last significant reduction in defense spending occurred there may be a wave of M&A activity or companies just leaving the defense business.
One of the two major ship builders for the Navy, Bath Iron Works, (BIW), said that they agrees with Gate that ships must be cheaper. Why wouldn’t they? They will need to accommodate the Navy and DoD wishes. Without those contracts the company will have no work. Look for contractors to begin saying their proposals are more affordable and efficient then the competition.
Of course there is already starting to be push back to these comments. Senator Jim Webb (D-VA) who is a former Navy Secretary and Naval Academy graduate has already openly criticized Gates’ statements. Webb has said the Navy needs eleven aircraft carriers and was backed up by the Navy leadership. Virginia is one of the major bases for these ships as well as where they are made and receives a major economic impact from them.
The problem with these types of plans is that affordable contracts often turn out to have problems and end up costing a lot more then planned. In the past this has happened because often the lowest bid may be from a company with less experience and there cost estimate was not as good. That does not mean big companies like Lockheed or Boeing (BA) can’t make the same mistakes but it is hoped that there experience and capabilities minimize the chances.
Affordable and efficient may end up being the synonyms for not enough needed capability.
Filed under: Department of Defense, Syndicated Industry News
March 28, 2010
Secretary of Defense Robert M. Gates and Deputy Secretary of Defense William J. Lynn have no public or media events on their schedules.
Defense Contract Audit Agency Director Patrick Fitzgerald testifies at a hearing of the Commission on Wartime Contracting on contractor workforce in Iraq following the drawdown at 9:30 a.m. EDT in room 106, Dirksen Senate Office Building.
Under Secretary of Defense for Acquisition, Technology and Logistics Ashton Carter delivers remarks at noon to the National Aeronautics Association luncheon in the Crystal Gateway Marriott, Arlington, Va. Media interested in attending should contact Nancy Sack at 703-415-4888 x100.
A senior U.S. military official will provide a background briefing to the media at 10 a.m. EDT, regarding U.S. security assistance programs to Pakistan, in the DoD Press Briefing Room, 2E973. Journalists without a Pentagon building pass will be picked up at the River Entrance only. Plan to arrive no later than 45 minutes prior to the event; have proof of affiliation and two forms of photo identification. Please call 703-697-5131 for escort into the building.
Filed under: Department of Defense, Syndicated Industry News
March 12, 2010
STAFF: Ladies and gentlemen, thank you for joining us again this afternoon. It's my pleasure to introduce to you the undersecretary of Defense for Acquisition, Technology and Logistics, Dr. Ash Carter, who will spend a little bit of time this afternoon talking to you about the F-35 Joint Strike Fighter program.
MR. CARTER: Very good. Thank you. And delighted that you're all here. I do apologize for the delay in this. Something came up at whatever it was, 11:00, when this was scheduled, and I know some of you got yo-yod back and forth, and I do apologize for that, because I know it's Friday.
The purpose of this is to revisit some of the points that I made yesterday before the Senate Armed Services Committee regarding the restructuring of the Joint Strike Fighter program that Secretary Gates directed on the basis of the various estimates and analyses that were done in the fall and the department-wide review which I led over the last few months and which led to the decisions that he made and that he announced in connection with the FY '11 budget decision.
So in that sense, yesterday there was nothing new relative to that. But that was our first opportunity to appear before the Congress and kind of lay it out in detail. So let me kind of revisit some of the main points of the restructuring. And then I'll take questions.
And I'll do that as I did yesterday in the hearing, by addressing the three phases of the program: namely the development phase, the ramp-up to the transition from development to production and the ramp- up to full production and then full production, and the actions taken in each of those three phases.
For the development phase, the secretary directed three actions to reduce the overall duration of the development program. That duration had been lengthening with time, for reasons I'll go into in a moment. And in order to reduce that span of time, he directed three actions.
The first was the procurement of another aircraft, a carrier variant aircraft, to add to the test program.
That's another resource to get through the various test points that constitute the flight-test program. So it's not hard to understand that if you have more aircraft to do a certain number of tests, you'll get through them faster. That's an investment worth making, because you -- (pause) -- bring back the program's schedule, and you keep a lot of people doing flight testing for a shorter period of time.
Secondly, he directed the loan of three aircraft that would be in the operational test program to the developmental test program for the same reason: to hasten developmental tests.
And finally, he directed the creation of another software integration capability, which was intended to forestall the possibility that if you -- if you -- as we intend to do with the first two actions -- compress the developmental flight-test program, then you -- and you -- that is, bring back the schedule -- then you have to say, well, by the time you're done, you've finished up your testing there, is the software going to be done? We wanted to make sure the answer to that was yes.
And so those are the three actions that Secretary Gates directed to correct the schedule of the development program, and that's not to say that we were able to restore it to what it had been projected to be by the program office and the contractor, but we got some of the way back. And that's where the famous 30 months and 13 months comes in.
The secretary believed -- and this is a principle that's important -- that the investments needed to get back the development schedule oughtn't to be made solely by the taxpayer; that the responsibility for that should be shared -- and it is being shared -- with the contractor.
That's where the $614 million withheld fee comes in.
So with those actions, the -- we have restored some of the schedule erosion that was occurring the development program and reduced the risk in the development program, and saved the taxpayer money that they shouldn't have to spend and get to the next phase, and that's the transition to production, which is always a difficult -- historically difficult transition to make for aircraft programs.
And there we had another independent review done. That's the so- called independent manufacturing review team report. That report was commissioned by my office. And they just looked at the workings of the assembly line in Fort Worth, and they identified a number of steps that would be needed in order to guarantee that that assembly line could ramp up its production in the way that was originally planned.
So we identified those steps that needed to be taken to make sure we could ramp up production as quickly as possible. The secretary judged that the independent estimate of the ramp rate was the realistic one, and therefore we should plan for a later -- because the development program was a little bit later -- and a flatter, just -- that is, less risky -- ramp.
That means fewer jets produced in the early years, in the interests of a more predictable and more stable achievement of full rate production. So there will be fewer aircraft produced over the FYDP [future years defense program].
But the objective there is to reach full rate production in a predictable, stable way, and that was the secretary's decision in that regard, and additionally to require that in the contracts that cover that ramp that we transition from a cost-plus structure to a fixed- price structure.
He directed that also, that in order to ensure discipline in the transition, from development to production. Then we get out to full rate production itself, where we're going to buy a large number of aircraft for the -- our three services. And we have a number of international partners who are also counting upon this important aircraft.
And for the production phase, the secretary viewed the independent cost estimate as realistic. And that estimate projects a breach of the Nunn-McCurdy threshold for the entire buy of Joint Strike -- Joint Strike Fighter aircraft.
As I said yesterday, that is a disappointing fact, but it is a fact that is a fact of life at this point.
And he recognized that and put in place a number of measures to try to cap and control that cost, which include the fixed-price contracting that I described, a "should cost" effort, which is an analysis independently by us of what the Joint Strike Fighter should cost so that we have our own estimate of that and not just the contractor's estimate of that, and the -- and the implementation of the steps we are taking, which have -- we've identified also through the so-called Joint Assessment Team to control and reduce the costs of the engine, which were one of the things that was increasing the cost of the overall aircraft.
So just to take it from the top -- but I know some of that's technical, and Friday afternoon, I hope your eyes aren't glazing over, but this is the stuff of aircraft programs. And in the development phase, in the ramp-up to production and in full-rate production, in each of those areas we have done an assessment of where the program stood. We wanted to be realistic and candid but also managerially smart about how we address each of those three phases.
The secretary took actions in each of those phases and on the basis of that -- what we judge now to be a realistic, not optimistic, not pessimistic, realistic program, plan and schedule to plan on that basis and to put the management mechanisms in place that he had defined to ensure that, going forward, the program performs better than it's been performing over the last couple of years.
So that in a nutshell is what Secretary Gates directed back as part of the budget process.
Yesterday was our first chance to get in front of our committees and explain that. It was not new news to us. It wasn't -- it's not good news to explain a Nunn-McCurdy breach. It was not new news to us; it was the news that we first began to confront back in November and we began to do -- to act as though we were already in a Nunn- McCurdy breach -- which we weren't -- but to identify and take the managerial steps that you would need to take if you were in a Nunn- McCurdy breach. So that kind of in a nutshell is what I said yesterday.
And now I'm available for questions.
Q I'm wondering if you could just -- to take a step back and look at this -- try to explain it to the average taxpayer. You have a program that in 2001 was estimated to cost about $50 million a jet; now it's at as much as 113 million (dollars) per jet. You can account for inflation in there, but that's an astronomical increase. How do you explain that to just, you know, the average person without an acquisition background or legal background? How does that happen, and how do you keep it from happening again?
MR. CARTER: First of all, just to get the numbers straight, you do need to take account of inflation there. So I -- the -- what Christine Fox said yesterday was that the -- what was a $50 million aircraft, integrated over the entire buy in 2002, had grown to an 80 (million dollars) to $95 million aircraft in those year dollars of -- I didn't mean to correct you. I'm just saying that's what the facts are.
How do you justify that? Nobody wants to pay more than they were told they should have to pay, so that's poor performance.
And what -- and Secretary Gates has, I think, made it pretty clear how he feels about poor performance in acquisition systems. That's why he took the steps that he did that I'm describing to you.
They don't make that any better. They try to get it under control, and get back to a(n) affordable aircraft and to a story that we can tell that won't be different five years and 10 years from now.
So we are trying to be realistic now. Obviously, a realistic story has not been in people's minds for the last couple of years because this is a -- the picture that we came to see in November we had some indication of last year, but then it persisted for another year. And we had to say, hey, wait a minute, this -- there's a real issue here.
So that's an explanation. It's not -- I'm sorry?
Q I mean, is this wishful thinking that people think that it would cost less? Is it blatant lying? Is it entirely the contractors? Or, I mean, what's the Defense Department's role in this?
MR. CARTER: No, I think it's -- I think some of it is it's fact of life in terms of things are more complicated than people imagined they were going to be, and an unwillingness to recognize that things were getting more expensive and slipping behind uncontrollably. You can't control costs, you can't control schedule if you're being unrealistic about costs and schedule. And now, we're trying to be realistic about the cost and schedule. That puts us in a better position to manage.
Q There was some bipartisan anger about that yesterday. If Congress comes back and decides it doesn't want to fund the full -- the 2,100 planes and cuts back to, say, 1,5(00) or some other smaller number, that's going to increase the cost per plane, is it not? And is it -- is it possible, even with cutbacks, to truly reduce the total amount of the program?
MR. CARTER: There are -- there are more aircraft, by the way, than 2,100, just -- we'll get you the specific numbers. And I know we'll get this checked for you afterwards, but the number is 2,443 for the United States and 730 for the international partners over the entire lifetime of the buy.
I think that most of the customers are going to recognize that the -- a slip in time and a slower ramp up to full-rate production is -- doesn't mean that their aircraft aren't going to be there when they need them. And so I think most of the customers are going to stay with the Joint Strike Fighter program because of its capabilities.
And I don't think that -- our services are clear about what their requirements are. And I think that when we have the program on a realistic plan that everybody can see going forward, then Congress, as well as the military departments here and the international partners, will stay with their plan, which is to equip their fleets with this aircraft.
Q Mr. Secretary, you just said you think that most are going to stay with the Joint Strike Fighter program because of its capabilities. Do you understand that some are reviewing and reconsidering their plans to purchase?
MR. CARTER: The international partners have been reconsidering their plans for the Joint Strike Fighter right along. All of them have a dynamic situation budgetarily, strategically and so forth. And so that is a -- they're all have been reassessing their needs right along.
But I think that, as I said, that the capability of the aircraft is there, and it will be the best fifth-generation aircraft. We will emphasize its affordability, which was a critical feature for all those partners when they first decided to buy the Joint Strike Fighter. And we'll try to deliver to them what they wanted.
Q Now, Israel's not coming along as quickly as the United States had expected based on Israel's --
MR. CARTER: I don't know that it's not as quickly as the United States has expected. I mean, that's -- again, that's -- this is their decision-making, and their decision-making will evolve as they look at their needs and -- and we -- they are -- I can't tell you what the Israelis are thinking about it. They are obviously interested in the Joint Strike Fighter. I think that's a good thing for them. But we don't have any particular expectations of them.
Q Sir, Dr. Carter, you talk about the slower, flatter ramp up, but the aircraft will be there when people need them. What, at this point, is -- you know, how long does it take to get to maximum sustained rate of production, and what is that rate?
MR. CARTER: I tried to -- I gave that yesterday in terms of both -- and you have to be very specific about what exactly the -- what the question is. I gave the dates of first delivery of aircraft to our services yesterday and I gave the projected IOCs [initial operating capability]. It's in my written statement. And those are our projected dates on the basis of the restructured program that I've described and the actions that Secretary Gates has taken. So it's all laid out there.
Q To deal with the enormous number of fighters that are aging out, we have to get to a sufficiently high sustained rate over the 30- year life of the program. Does that rate come down? We get to it later, but is that --
MR. CARTER: No, it ramps up to the -- to exactly the same rate. It's just a little bit slower in getting up to that, just to be a little more careful.
And by the way, we hope to get to the original ramp rate, just we're being -- trying to be very realistic and we're projecting the -- if you like, the mid range of the estimates. This is an estimate about the future. And we'd like to do better than that. So we may be able to climb up that ramp faster. Obviously, we'd like to climb up it as fast as we can, but that depends on the stability of the assembly line, and that's something that we're working on making happen as fast as possible.
Q We don't reach that max rate, sir, in the current FYDP, do we? We do -- it's up somewhere in --
MR. CARTER: No, we don't. No, we don't.
Q Do you know what year that is, sir?
MR. CARTER: I can get that for you. It's a little bit outside of the FYDP. It's not that long in the future, but if you ramp up -- and that plateau has not changed at all. It's just the rate at which we get there.
Q I'm curious about fixed-price contracting. That's been a real push of yours. Going to fixed price potentially in LRIP [low rate initial production] 5 --
MR. CARTER: Mm-hmm.
Q -- what leads you to believe that Lockheed's operation will be stable enough to go fixed price? And what will protect the government from a potential change that might come from the government that would renegotiate the entire contract, thus nullifying the fixed- price leverage?
MR. CARTER: This is -- as always true in a fixed-price, there's a challenge for the contractor, which is to get control over the line and the stability of the line so that they can price its performance, recognizing that if they price it too low they will pay the extra, and the government to know what it wants. We know that. We're in a position to be specific about the configurations of the aircraft that we want in LRIP 5, to take your question.
So we're prepared on our side to be specific, and we're not going to change that. And I explained yesterday we haven't changed the combat capabilities of this airplane or not. There were not technological issues that caused us to believe we couldn't have all the military capability.
So the configuration of the airplane isn't changed -- hasn't changed, and we can specify exactly what we want in LRIP 5. And then it'll be up to the -- our industrial partner, as is always in a fixed- price environment, to specify the -- specify the price.
Q So the --
MR. CARTER: It's a good discipline to have to specify a price.
Q Okay. And so the changes up to now -- like, for example, the -- I think it was like a 50 percent overage in labor rates, the issue with the part fitting that you discussed, were those the kinds of things that would be on the contractor to pay for under a fixed- price situation?
MR. CARTER: Yes.
Q Okay. So the government would not have had to pick up the tab for those?
MR. CARTER: No. No.
MR. CARTER: But that was done in the early stage of the program in a cost type of contract, in which all of those -- the cost of making those adjustments -- which are perfectly understandable, but cost money -- fell to the government --
Q And then finally, on --
MR. CARTER: -- except for that part of it which is now in the withheld fee.
Q Okay. And then finally, on fixed price, when you, Secretary Donley and Secretary Lynn spoke to us about the tanker, there was a discussion about going fixed price and what would happen if there was only one contractor, which seems now to be more then hypothetical; it may very well be a reality. There were some options that you gentlemen alluded to, but you didn't want to discuss it because it was hypothetical at the time.
MR. CARTER: Still don't. I don't have anymore to add on that -- on that -- on that today.
MR. CARTER: Yeah.
Q Mr. Secretary, producibility has been a big part of Lockheed's selling point on the JSF.
You talked a lot about basic problems with parts, quality control. Are you concerned that, as has happened with a lot of space programs and some of our others in the last few years, that Lockheed may not have a good grasp on its suppliers -- good enough to ensure that producibility?
MR. CARTER: That has not been a major problem recently. That's always a problem, and was early on in the airframe.
Remember, there's more than one airframe contractor, by the way. You keep singling out Lockheed Martin, but BAE and Northrop Grumman are an important part of the airframe. So it's a team.
Early on there were late-to-need parts issues, which is not uncommon, but not something you want to have a lot of. I think that particular problem has been dealt with very aggressively by the contractor team down in Fort Worth, and is in a much better place than it was, say, a couple of years ago.
In the F-135 engine, the supply chain has been an issue as well, another thing being worked on.
Q So at this point you're confident that the contractors have --
MR. CARTER: Yeah, I think that particular problem has been worked very aggressively and is in a much better place than it was, say, a couple years ago.
Q A couple questions.
One, out of the $614 million, you keep bringing this up that it's sharing the risk, accountability. How is it sharing the risk if they are having the opportunity to win it all back down the line?
MR. CARTER: Win some of it back. Well, that's an incentive for them to meet all of the targets, and so that's perfectly appropriate. It's reasonable for us to withhold that part of the fee which will be used for the remedial measures that I described: the new aircraft and the software integration line.
MR. CARTER: But beyond that, they will have an opportunity to win back parts of that fee if, but only if, a very specific set of milestones are hit on schedule.
And that's the way fees are supposed to be awarded. They're not supposed to be awarded willy nilly. They're supposed to be awarded in return for specific performance. And that is not -- just not in -- just in this program, but in other programs, always been the case. And it is something we're going to insist upon.
Q That's fair. That's a fair -- a good point. But how much of that 614 (million dollars) will be --
MR. CARTER: I can't tell you that now because that's part of contract issues.
Q One of the big issues yesterday was trying to get a baseline on which to judge the delays. Going back to the way we were in October 2001, can you, as clearly as -- when was SDD [system development and demonstration] supposed to end? What were the IOC dates? When was milestone 3, uh C supposed to --
MR. CARTER: I'm going to refer you to CAPE [Cost Analysis and Program Evaluation office] for that, for the specific programmatic history, which they have. And they can lay out all of that for you: what was said and thought at every moment going back to the birth of the program, which actually goes back to 1995, what actually happened, and then we are projecting now --
MR. CARTER: -- which we believe to be realistic.
Again, I hope -- we hope to do better than that plan, but that's a realistic plan. They can take you through all that.
Q Did you authorize them to create -- (inaudible)?
MR. CARTER: Yeah, I don't think there's any problem. They are the keepers of all that data. It's perfectly realistic; they prepared -- (inaudible).
Q One final -- on cost, the current SAR [selection acquisition reports] has it, the whole program, at $298 billion in then-year dollars. What is the current estimate today going forward?
MR. CARTER: Again, I'm going to -- I'm going to ask CAPE to answer that question, just to make sure that all the numbers are internally consistent.
Q Okay. It would be useful to get that early next week if you can.
MR. CARTER: I think -- I think there's no problem doing that.
But again, they have all these numbers. I just don't want to mislead you. They are the keepers of those numbers. And it's all complicated; it depends on what year dollars you're using.
Q I know. Thank you.
MR. CARTER: And so I don't want to confuse you.
Q Yeah, but, I mean, they were asked that question yesterday about the overall cost of the program and didn't have the figures then. Why is it so difficult to come up with --
MR. CARTER: Well, let me say, the one -- the number that was asked about was not the production of the aircraft. It was something called total ownership cost, the lifecycle cost, decades in the future, to own the aircraft, okay?
That assessment is being done. It's perfectly reasonable that it's not done yet. This is something -- this is a number that doesn't become operational for -- until the aircraft becomes operational. So we -- that is, the cost estimators -- have been focusing on the development program, the ramp to production and full-rate production.
So it's hardly surprising that that analysis hadn't been completed -- hasn't been completed yet. It's not germane to decisions -- managerial decisions we're taking now. This is something in the future. CAPE is doing that analysis, and that'll be part of the overall Nunn-McCurdy process.
We try to do total ownership costs for all our programs. Obviously, there's a certain amount of -- that's a(n) art of estimation because you're looking at the distant future.
Obviously, there's a certain amount -- that's an art, an estimation, because you're looking at the distant future. But those numbers will be -- will be provided.
Q And just -- I know we're talking about Joint Strike Fighter here, but I just was hoping to ask one about the tanker program to see, you know, what your plans are for possibly accelerating an --
MR. CARTER: I really don't have -- say the same answer before -- I don't have anything new to -- new to tell you on that. We will tell you as we proceed with the tanker solicitation, but that's not -- I don't have anything new for you today.
Q Dr. Carter, this is a -- you know, a fifth-generation fighter, a lot of new capabilities. It's not just airframe, engine, but there are a lot of avionics, sensors, the EW [electronic warfare] systems. How much of the problem so far is strictly -- I mean, is this problem strictly the aircraft and the airframe development so far? What about these sensors or the EW systems? Is that part of the delay, or is -- has that not developed yet?
MR. CARTER: It's a -- some of everything. Most of the drivers of the schedule issues that we've been discussing and that are so central, the SDD schedule issues, have been associated with the airframe assembly. But in the overall cost, for example, as I mentioned earlier, the engine has been an issue.
Q Speaking of the engine, yesterday Christine Fox [director, CAPE] told the Senate Armed Services Committee that the latest analysis showed that the second engine would -- there was a business case that showed that it would break even for taxpayers. And Chairman Levin said he was more convinced than ever of the wisdom of going ahead with a second engine.
What's your latest thinking on the pros and cons?
MR. CARTER: Well, first of all, I encourage you to read that business case.
Q Yeah, they told us that it was not available because it includes proprietary information --
MR. CARTER: I don't believe that's the case, so we will get you -- there -- I'm sure there are versions of it that do contain proprietary information, but I believe that the business case -- the essential case, which has certainly been made available to Congress -- can be made available to you as well.
I'll tell you what -- kind of what the essence of it is. I don't do these estimates -- Ms. Fox's office does these estimates -- but I -- I'm a consumer of them, as is the secretary. And the comparison you need to make in your mind is of a -- the program -- the F135 program to a hypothetical program in which you pay the up-front cost to develop an additional engine, to create the manufacturing capability for a second engine, to create the sustainment base for a second engine, to nurse that second engine along so that it catches up with the first engine and competes, and then you have a -- from that point on, a hypothesized competition between those two engines: Which competition -- question -- will it pay back all the money of buying two of everything?
And that's the analysis that Ms. Fox referred to. And if the -- and what she was saying was that if you do that analysis, you can -- you can hypothesize a competition out in the future in which some of the savings, even all of those expenditures, are recouped in the future.
But we judge that that -- that that analysis, that competitive analysis, is based on some very optimistic assumptions, optimistic assumptions that we don't think it is reasonable to accept -- for example, the assumption that -- just to take one very important one -- that the buyers of the engines would accept, in any given lot, whatever engine won.
Well, the Navy's -- well, you have two engines, so -- and you're competing them against each other. And so the economic theory is that whichever engine wins in a given year -- is doing better, is being more economically produced -- that's the one you'll buy.
Now -- but the Navy, just to take one example of a customer, doesn't want to buy this engine that year and that engine the next year. They want to have one engine. Certain of our international partners would not -- would probably have an engine that they wanted. So that's not a free and open competition. That's a series of directed buys.
And that's not what economic theory is all about. And so you look at the economic theory that is reflected in that hypothesized competition, and it -- it looks like, guess what, the facts aren't going to fit the theory.
Q But has this latest analysis changed the calculation that led the department --
MR. CARTER: No, none of the things -- none of the numbers have changed. People have been confused about the numbers. That's why I encourage you to get the business case. It's -- what is it, is it 2.5 billion (dollars) or 2.9 billion (dollars)?
And the reason people have trouble with those numbers is that they're doing apples and oranges. The number that -- one of the numbers that you'll find in that analysis is the $2.9 billion over the FYDP. And some people say, "Well, wait a minute, I remember some other number from some other time." Well, they were probably thinking of another kind of number, which is the number for just the development of the engine. Some people have been confused by that. But the development of the engine is not the only expense of having a second engine, as I explained. There are four elements to it.
So, you know, this isn't something to guess about. And it -- you have to do an apples-to-apples comparison. The business case does an apples-to-apples comparison. And it's not a good apple to only look at the development program when you're assessing the process.
Q I take your point. But the bottom line here is the question whether the department will continue to recommend a presidential veto of any defense spending bill that includes funding for a second engine.
MR. CARTER: That's what the secretary of Defense has said.
Q But the latest analysis suggests that it's not as open-and- shut a case as the department had presented previously.
MR. CARTER: Well, the latest analysis is as I described, and as you can read when you obtain it, which is that the hypothesized competition, the case for a second engine, hypothesizes or makes such optimistic assumptions about a theoretical working of competition. Then we give the reasons why we don't actually think that's what would happen. That's not our experience in these situations. It's not our historical experience.
MR. CARTER: And so you'd be paying a great deal of real money, that you can really see, up front, for a hypothesized savings in the past. We owe it to the taxpayer to take a hard look at how hypothetical are those hypothesized savings.
We have, and we've judged that they are hypothetical. And therefore we owe it to the taxpayer not to fall into the trap of spending real money up front for hypothesized savings in the past. It's an analytical judgment. It's analytical judgment. But to have a point of view on it, you have to have done the analysis, and we have, and that's available for people to look at and assess.
Q When can we get that? How can we get that?
MR. CARTER: I'll -- immediately after this meeting -- and it's -- again, I repeat, it's been provided to the Congress in some detail. And it is what it is. It's an analytical case. It's all there is to it, how it's the best way to spend the taxpayers' money to get engines for the Joint Strike Fighter. And you have to do the work to have an opinion.
Q Secretary Carter, the topic of lowballing or buying in came up yesterday during the hearing. And I think you said something to the effect -- when asked if Lockheed had bought in -- something to the effect of this is a pattern that would match that, which indicated that there might be some indication that Lockheed then lowballed.
MR. CARTER: I don't have any indication that anybody bought in 10, 15 years ago. The point is there that -- isn't to write history. The point is that one of the things we know we need to guard against in defense programs is -- and it's not contractors; it's everybody -- is kidding ourselves about what something's going to cost, because it's easier to believe that it'll be cheap, for all of us, not just for contractors, but for the government side as well.
We have to have the discipline not to fall into that trap.
That's what independent cost estimation is about. That's why the process that led the secretary to the restructuring he directed was important. It's an independent set of eyes, independent of those involved in the program, looking at it and saying, "Hey, wait a minute. What is this really going to cost? Let's look at how it's actually been going over the last two years, not how we said it was going to go. Let's look at how much things are actually costing, not what we thought they might cost."
Because things change, and -- (inaudible) -- but you have to be honest and realistic as you go along. And I -- it's a very healthy process, and it -- obviously, it is painful, but it's a healthy process and it is the one that led -- let him take the managerial steps he did, which will do the program good in the end.
Q I realize the $614 million withhold was a punishment -- (inaudible) -- to Lockheed, but the way that performance is tracked through the CPAR [contractor performance assessment report] for future work. Has their CPAR been dinged appropriately?
MR. CARTER: It's not -- it's not -- it's not -- it's not punishment. It's sharing the consequences of a failure to perform.
Q Okay. Well, but moving forward, how is their performance rating going to be affected by this situation that we're in today with the JSF? It potentially could affect, you know, future UAV work, future bomber work, that sort of thing.
MR. CARTER: The actions that we take with respect to the fee on this particular contract do not contractually spill over onto any other contracts.
I will say that we do -- we also look at -- in general, at overhead rates and that sort of thing, but it -- that doesn't spill over from one contract to another.
STAFF: We have time for one more.
Q You've used the word "realistic" several times in this briefing. Can you realistically -- the Department of Defense, can it realistically promise the taxpayers that the price increases for this program have stopped, barring inflation?
MR. CARTER: That's what realism is supposed to be. It's not a guarantee of -- that the estimate is correct. The estimate has -- is a projection. That is what we believe we can tell you is our most realistic estimate we have.
We'd like to do better than the estimate. We'd like to do better than the estimate. So realism means, I'm going to try to tell you as best I can what I think will happen. Would I like to do better than the estimate? Of course, I would. Will we be managing to do better? Yes.
I don't project -- I don't do a realistic projection and then say, I'll live that no matter what -- that future. I'd like to live a better future. That's what management is all about.
So we hope to do better than the CAPE estimate.
Q Speaking of realism, you talked about IOCs slipping yesterday. And each service has their own definition. The Marine Corps IOC hasn't changed. It's still 2012.
Yet the end of initial operational test and evaluation has slipped like four years. That's the test phase that says what --
MR. CARTER: There are different variants of the different aircraft. So as you follow IOCs, you have to dig into each one. The Marine Corps variant is different from the Air Force and Navy variants.
What they're looking for in the capabilities of the aircraft -- this is not new. This has been true right along. Each service has its own definition of IOC.
Q Right. You don't think the Marine Corps IOC should change, given that the main testing is going to --
MR. CARTER: It's not the matter that I think the Marine Corps IOC ought to change. The Marine Corps assessed on the basis of the restructured program --
Q They did.
MR. CARTER: Absolutely.
Their IOC, and they're in very different circumstances than the other two services.
And you -- we can go into that detail. You're welcome to go into it with the Marine Corps. But there's no disconnect there. They have their definition of IOC, and the other services have their -- and they're all based upon the restructured program.
Q (inaudible) -- how capable would the plane be --
MR. CARTER: The variant that the Marine Corps are starting with is less capable; has always been. That's what they want.
Q One last point --
MR. CARTER: It's not -- it's not a one-size-fits-all --
Q Sir, one compelling thing that is out there. Are you --
STAFF: Wait one second. We're going to take one more question --
Q Have the services changed their definition of IOC?
MR. CARTER: I'm sorry?
Q Like, has the Marine Corps then changed its definition of IOC?
MR. CARTER: No, I don't think the Marine Corps has changed their definition of IOC at all. They clarify things from time to time. Now, the Marine Corps have been very steady in the kind of aircraft they want. And we can provide you with that information about how the various services define their IOCs. There's no mystery there. But they are all different.
Q But are they different now than they were before the restructure?
MR. CARTER: No, some of them have clarified. I say "clarified," but not in any way related to the restructuring. But as the program goes on and it comes -- kind of comes more to the date at which you're actually going to deploy, you think about exactly what you -- how you want to stand it up, and so -- so they clarify their definition. And I'm sure they probably will continue to do so as they get closer to IOC.
They're the user of the airplane; they get to decide how they want to field the airplane. What we are trying to do is deliver them the airplane. So we show them when we will deliver them airplanes, when we can deliver them airplanes, and then they decide, on the basis of that, how they want to operate the airplanes, how they want to begin operating their airplane. So there are two parts to this IOC equation.
Q Sir, a lot of anger coming from Europe over what some European leaders have portrayed as a contest that was skewed from the start against the Northrop EADS variant.
MR. CARTER: I think Secretary Lynn addressed this point.
MR. CARTER: I've read those press --
MR. CARTER: I've read those press -- well, let me tell you what I'm going to say first, and then you can ask the question -- the press reports. And I just want to reiterate what he said, which is that we value the contribution of European industry to the choices we can make as a department. We welcome that. There is no protectionism going on and so forth. It's important to us. It's -- the wider technology base and the wider industrial base is good for the Department of Defense. Our position on that is completely clear.
Q And having said that, are you considering possible extension of the bidding deadline to allow EADS to put together a new team, if necessary, if it wanted to bid now that Northrop has pulled out?
MR. CARTER: We don't have a(n) indication of any additional bidders for the tanker. We're happy to have competition. We've said that right along, that we welcome competition in the tanker solicitation. And the deputy made it very clear the other day that no one should interpret this as having -- as a statement about the -- how welcome European industry is in our competition.
Q But will you extend the deadline to allow them to bid?
STAFF: Thank you.
Filed under: Department of Defense, Syndicated Industry News
March 11, 2010
Secretary of Defense Robert M. Gates and Deputy Secretary of Defense William J. Lynn have no public or media events on their schedules.
Under Secretary of Defense for Acquisition, Technology and Logistics Ashton Carter will conduct a press briefing at 11 a.m. EST in the DoD Briefing Room.
A National Capital Region flyover of Arlington National Cemetery occurs at 3:05 p.m. EST with four A-10s.
Department of Defense (DoD)
Filed under: Boeing, Congress, EADS, KC-X, KC-X Tanker News, logistics, Syndicated Industry News
Ashton Carter the Undersecretary of Defense for Acquisition, Technology and Logistics (USD (AT&L), who is the head “weapons buyer” at the Pentagon had a press availability recently. At this he stated he is committed to the current plan for the KC-X program with a final RFP coming out by the end of the year. The draft RFP in his eyes was less subjective then past ones and the questions from industry are being used to shape the final RFP. He is confident that the Air Force will get it right on their third try. It will have to be seen if this is true.
At a recent press availability Ashton Carter the Defense Department’s lead acquisition official stated he did not want to see “frivolous” protests…