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KC-46A Selected Acquisition Report (SAR) Indicates Higher Costs

The Department of Defense is required to submit Selected Acquisition Reports (SAR) annually for Major Defense Acquisition Programs. A SAR is also submitted at the beginning of the program and if a change to the baseline is approved. The KC-46A new aerial tanker program submitted a SAR dated 30 September to Congress and it shows that the current Estimate for Completions (EAC) for the current contract are above the ceiling.

This would mean that Boeing (BA) would make no profit on the initial contract for 17 aircraft as it is responsible for all costs above it.

The Washington Post reports that Boeing’s EAC is a $5.1 billion and the Government’s $5.3 billion. The ceiling is $4.8 billion.

Estimated costs for this initial development of the program have been up-and-down over the last six months but last reports had Boeing still under the ceiling.

The SAR also shows that the Air Force plans to spend $40 billion on procurement for the 179 tankers with the last order placed in 2027.

KC-46A Selected Acquisition Report (SAR) Indicates Higher Costs

The Department of Defense is required to submit Selected Acquisition Reports (SAR) annually for Major Defense Acquisition Programs. A SAR is also submitted at the beginning of the program and if a change to the baseline is approved. The KC-46A new aerial tanker program submitted a SAR dated 30 September to Congress and it shows that the current Estimate for Completions (EAC) for the current contract are above the ceiling.

This would mean that Boeing (BA) would make no profit on the initial contract for 17 aircraft as it is responsible for all costs above it.

The Washington Post reports that Boeing’s EAC is a $5.1 billion and the Government’s $5.3 billion. The ceiling is $4.8 billion.

Estimated costs for this initial development of the program have been up-and-down over the last six months but last reports had Boeing still under the ceiling.

The SAR also shows that the Air Force plans to spend $40 billion on procurement for the 179 tankers with the last order placed in 2027.

Despite Record Defense Spending Layoffs Starting to Mount

The Obama Administration submitted its 2012 budget to Congress yesterday and it contains a record request for defense funding. This includes over a $100 billion to conduct operations in Afghanistan and Iraq while continuing the investment in new equipment to improve capabilities against other threats. Despite this and due to the cyclical nature of defense programs and spending several companies, large and small, announced recently a restructuring of their workforces.  As the U.S. defense budget adjusts to fiscal reality and requirement changes more companies may be in this situation.

Defense acquisition programs tend to be built in large quantities over a span of several years as the military attempts to field its needs quickly. This can lead to a requirement for a contractor to ramp up facilities, staff and production very quickly and then just as quickly cut it back as the U.S. military meets its requirements. It behooves a contractor to identify other customers or programs that it may support to try and maintain a steady production line and workforce. This is not always possible and the history of the Mine Resistant Ambush Protected (MRAP) vehicle production in America illustrates this as several companies invested in large plants that are now running at a much lower capacity as the U.S. has met its needs for the MRAP.

Recent layoff announcements include:

Stories like this may accelerate in the near future as companies figure out what will be needed by the Defense Department in a time of reducing budgets.  At the same time there are other defense contractors who need to hire people to support their new work or programs.  Many times, though, the new company is not located near places where the layoffs are happening so that transferring people may not be so easy.

The history of the U.S. defense budget has been cycles of rapid, large expenditures followed by years of smaller budgets.  The U.S. may be entering a period of extended decline in defense spending with a negative effect on the defense contracting industry.

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Time for Congress to Face Defense Acquisition Problems

April 7, 2010 by · Comment
Filed under: BNET 

Each year the Defense Department submits reports to Congress on how well the major defense acquisition programs are doing. This year several have…

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South Africa May Be The First A400M Casualty

The A400M is one of EADS most ambitious military programs. The new tactical transport would be developed and built in Europe for several different nations and provide a possible counterweight to the C-130 for overseas sales. The aircraft has faced development struggles that has led to a two year delay in the delivery of the test vehicles and caused the customers to rethink whether to continue. This would have been harsh for EADS as they would have to pay penalties to the countries that invested in them.

In July it was decided to renegotiate the contract to allow EADS time to restructure it and meet its obligations. The A400M has also attracted some foriegn customers and now South Africa is considering canceling their order for eight aircraft due to a price increase of over 150 percent. If the contract was not canceled by the end of the month the nation must continue on with the program and pay the new price. This would be about $6.4 billion compared to the original estimate of $2.6 billion in current exchange rates.

Defense acquisition programs that run late or over budget are nothing new. Normally when an overseas sale occurs of this kind of system it is after it has been in production for a few years and the price stablized. In this case South Africa gambled that the A400M would be completed on time and cost without any serious issues. This has turned out not to be true and they are facing a price increase of starting over. The aircraft are considered key to their peace keeping capability.

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If Defense Acquistion Was Perfect

August 11, 2009 by · Comment
Filed under: BNET 

J. David Patterson formerly Comptroller for the Defense Department and the head of one of many past commissions looking at ways to improve defense acquisition programs with an idea of saving money in the defense budget. It was published in the Federal Times yesterday. In this article he makes the good point that […]

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