LAS Controversies Continue

In this time of Continuing Resolution the U.S. Air Force’s Light Air Support (LAS) contract is one of the few major new programs to begin in FY13. The second attempt to conduct the contest led to same result as the first. Sierra Nevada (SNC) using a airframe from Brazil’s Embraer was selected and Beechcraft’s T-6 based proposal was rejected. As with the first attempt Beechcraft has filed a GAO protest.

The Air Force has announced that using available policy they will override the stop work that normally happens for 100 days while the GAO works out the protest. This has been done in the “best interests of the United States or unusual and compelling circumstances.” Due to the first protest and the do over on the contest it is already a year behind schedule. This new one could also cause several months delay.

The protest and the award remained tied up in politics and concerns about loss of work to a U.S. company. Sierra Nevada had originally planned to have a facility in Florida to do some of the work finishing the aircraft but they would be assembled in Brazil. The company is now looking at ways to increase the amount of jobs created by the contract through “in-sourcing” the work.

The loss of the contract to the U.S. company has been a further blow to the Kansas military aviation industry. Boeing (BA) has moved their work from the Wichita facility to Washington for the new KC-46A tanker. Beechcraft had planned to build their AT-6 in the state. As such it is attracting the interest of Kansas’ Congressional delegation.

With so few major programs and contracts predicted for the near future fights like this over awards will continue. Each company has a lot to gain by winning the work and as the defense budget declines there will be less contracts available.

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Beechcraft to Protest U.S. Air Force Decision — Press Release

WICHITA, Kan., March 8, 2013 /PRNewswire-USNewswire/ — Beechcraft Corporation today announced that it will formally protest to the U.S. Government Accountability Office (GAO) the U.S. Air Force’s (USAF) recent award of the Light Air Support contract to its Brazilian competitor, Embraer. An estimated 1400 jobs in Kansas and other states are in jeopardy as a result of the Air Force decision.

“Following our debrief with the Air Force earlier this week, we are very perplexed by this decision,” said Bill Boisture, CEO, Beechcraft. “Our belief that we have the best aircraft was confirmed by the Air Force rating our aircraft ‘exceptional’ and the fact that we are the lower cost solution was confirmed by the USAF’s public award announcement.”

Last year, an Air Force investigation found evidence of bias toward Brazil-based Embraer and its Nevada-based partner, Sierra Nevada (SNC), which led to the decision to restart the competition. Although SNC later sued the Air Force attempting to enforce the biased decision, U.S. Court of Federal Claims Judge Christine O.C. Miller wrote in her Nov. 1, 2012, opinion that based on the investigation’s evidence of bias “the Air Force’s decision to cancel the contract award to SNC and re-solicit proposals was reasonable and rational and should stand.”

“We simply don’t understand how the Air Force can justify spending over 40 percent more – over $125 million more – for what we consider to be less capable aircraft,” Boisture said. “Given our experience of last year and our continued strong concern that there are again significant errors in the process and evaluation in this competition, we are left with no recourse other than to file a protest with the GAO. The Air Force needs to make the right decision for the nation and our future allies.”

About Beechcraft Corporation

Beechcraft Corporation designs, builds and supports versatile and globally renowned aircraft, including the King Air turboprops, piston-engine Baron and Bonanza, and the T-6 trainer and AT-6 light attack military aircraft. Its 5,400 highly skilled employees are focused on continuously improving the company’s products and services which are sold to individuals, businesses and governments worldwide. In business since 1932, Beechcraft has built more than 54,000 aircraft and more than 36,000 continue flying today. It leads the industry with a global network of more than 90 factory-owned and authorized service centers. The company’s headquarters and major manufacturing facilities are located in Wichita, Kan. For more information, visit beechcraft.com or follow us on Twitter @Beechcraft.

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Air Force to Try Again with LAS Contract and Sierra Nevada

In a blow to the newly reorganized Hawker Beechcraft the U.S. Air Force after conducting a second source selection due to that company’s protest again selected Sierra Nevada for the Light Air Support (LAS) contract. That U.S. company will team with Brazil’s Embraer to provide the Afghan Air Force several modified turboprop aircraft. The initial contract is worth $950 million.

If all goes well there may be other customers for the system optimized for use in counter insurgency and non-conventional warfare. There were only two bidders with Hawker utilizing a version of their T-6 trainer already in use by the U.S. military.

An earlier attempt to award the contract late last year to Sierra Nevada was halted on Hawker’s protest which was upheld by the General Accountability Office (GAO). This led to a re-evaluation of the proposals submitted with Sierra Nevada being selected a second time.

As with the first attempt there is nothing to stop Hawker from protesting if they believe the source selection was conducted unfairly.

The selection of a non-U.S. aircraft has already received some criticism from Congress.

The Air Force has struggled the last decade to conduct these large aircraft source selections. The KC-X new aerial tanker program took 3 tries before Boeing (BA) won with a version of their 767 airliner. The CSAR-X combat rescue helicopter was ended after 2 rounds of bids and protests and the Air Force is yet to buy a replacement for their current fleet of MH-60 aircraft.

If Hawker does not protest this will actually be a victory for recent Air Force acquisitions as it only took 2 tries and was awarded fairly quickly. Deliver of the first aircraft, though, is reportedly delayed a full year.

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Air Force Cost Goals Restrict Competition for New Rescue Helicopter

The U.S. Air Force is once again trying to attempt to buy a new aircraft to replace their MH-60 rescue helicopter fleet from the Eighties. The original CSAR-X program faltered twice earlier this century due to protests. Boeing (BA) had one the last contest with a version of the CH-47 but after protests from the losing bidders it was decided to start over.

The current Combat Rescue Helicopter program had put out a RFP for new proposals due in January. The goal is to buy just over 100 aircraft at a cost of $6.4 billion.

Unfortunately it was announced this past week that the only company interested in bidding on the contract is Sikosrky, part of United Technologies (UTX), teamed with Lockheed Martin (LMT). Sikorsky made the current HH-60 fleet. Other potential bidders including Augusta Westland, Eurocopter, Bell and Boeing believe that the cost goals will be too hard to meet for their products. Some have basically said the contract requirements were written in such as way so only a version of the UH-60 Black Hawk could meet them.

The Pentagon is obviously trying to reduce cost but at also at the same time promoting competition. Sometimes, as here, the two things don’t always work together as to attract bidders there must be some profit in it for them.

The Air Force has struggled with large acquisitions for a few years now. The new aerial tanker, KC-X, took 3 tries before Boeing won. The CSAR-X has already been discussed. They are currently redoing the Light Air Support aircraft contest after Embraer and Sierra Nevada’s win of the original contract was overturned on protest.

Whether they want to continue the current contest with limited bidders or try to re-do the requirements to attract more will be the next decision. They could just wait and see if more then one bid in January as originally intended.

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Navistar Decides Not To Go Ahead with JLTV Protest

It is now being reported that Navistar (NAV) will not pursue its protest of the JLTV EMD contracts awarded almost two weeks ago. They did this after Labor Day.

The three Engineering, Manufacturing and Development (EMD) contracts were awarded three weeks ago. They were given to AM General, Lockheed Martin (LMT) and Oshkosh. The Navistar and General Dynamics (GD) proposals did not win.

Navistar had protested right at the end of the window to do so and after receiving their debrief from the Army. By doing this it placed the execution of the contracts on hold until the protest was resolved.

It looks like Navistar filed the protest to make sure they hit the window. After reviewing more information they decided to withdraw it. There has still been no indications that GD will go ahead with one.

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Navistar Reportedly Files Protest of JLTV EMD Contract Awards

Two weeks ago the Army awarded 3 contracts for further efforts on the HUMVEE replacement, the Joint Light Tactical Vehicle (JLTV). The proposals from Lockheed Martin (LMT), Oshkosh (OSK) and AM General were selected. The Navistar and General Dynamic (GD) ones were not. The value of these contracts were between $55-65 million and are for the first year of a two to three year process to build and test prototypes. At the end of this one will be chosen to go into production.

The JLTV program has the potential to be quite large as the estimated quantities are in the tens of thousands. The current cost estimate for production is about $13 billion. This does not take into account future support and parts contracts as well as the potential for foreign and direct military sales to U.S. allies.

It has now come out that Navistar filed a protest late Friday near the end of the ten day period. The losers were supposedly briefed on Thursday as to why their proposals were not chosen.

The filing of the protest means the contracts cannot be executed until it is resolved. The General Accountability Office (GAO) has 100 days to do this. The result could be an overturning of the awards and direction to do a new contest or directing the Army to review its selection process. In some cases the GAO has awarded the protester the contract over the winner.

As the defense budget shrinks and contracts become more valuable to the different defense contractors protests should increase. This was the trend in the Nineties when there was the last major contraction in U.S. spending.

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Army’s M4 Follies Continue

The United States military has over the last decade become to rely on the M4 carbine model of the standard M16 rifle. This is basically a M16 with a shorter barrel that was found more useful in the close combat fighting in Iraq and Afghanistan. The M4 originally was intended to supplement the M16 as a vehicle crew weapon. Since 2001 the U.S. Army has bought thousands of M4 from privately owned Colt.

The M4 has had a mixed combat record with complaints about range, jamming and stopping power. The Army has since 1990 tried multiple times to build a new replacement rifle for the M16 most recently with the cancelled XM-8 system. This does live on in the form of the XM-25 Punisher version which is a squad level weapon that fires 25mm airburst rounds. This is manufactured by Alliant Techsystems (ATK) and is seeing trials in Afghanistan.

Like a great deal of weapons the Army has relied on a sole source for the M4. They do own the technical data and in April awarded a production contract to rival Remington. Colt protested that decision.

Now the Government Accountability Office (GAO) has ruled on the protest upholding Colt’s claim. The GAO based their decision on a review of how the Army applied their source selection criteria and found it wanting. This means that in their view Colt’s proposal was not evaluated fairly against Remington’s. The GAO denied all other claims by COlt.

After the protest is upheld the selecting Agency will go back and review the decision. They may decide that it was done properly and maintain the contract with Remington, agree to a new contest, or in very rare cases throw out the original award and give it to the challenger. There is now no timeline when this decision will be made and Remington will have to stop work on their M4 contract.

At the same time the Army continues another attempt to get a new combat rifle. Various bidders have prototypes in test that could then lead to a formal solicitation. That program though is in its early days and it will be a few more years before a decision is made on production of a new system. The winner of that will see a huge amount of work as often the standard U.S. weapon is adopted by many different countries across the globe.

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TRICARE West Contract Finally Settled in UnitedHealth’s Favor

In 2009 the Department of Defense attempted to award new contracts to administer their primary healthcare program, TRICARE. These are regional contracts with the country divided up in groups of states as well as a contract to provide overseas services. The Western and Southern regions due to the density of military bases were the two largest and amount to several billion a year. As to be expected competition was fierce for these by different health insurance companies. It is just now, over three years later, that the government is finally resolving these contracts due to the amount of protests and reviews required.

The Western Region contract is worth about $21 billion over its predicted five year life. After a final round of awards and protests the Government Accountability Office (GAO) has upheld the award earlier this year to UnitedHealth (UNH). The GAO ruled in a protest by the incumbent, TriWest to the award in 2012.

TriWest has had the contract since 2003 and won the original re-compete in 2009. This decision was protested by UnitedHealth. In the last three years there have been new competitions, awards and protests. This final decision should stand and UnitedHealth will become the provider.

This is unfortunate for TriWest as their primary business is the TRICARE contract and the company may have to fold without it. There is a good chance that many of their employees could be absorbed by UnitedHealth as is often the case when a new company takes over an existing contract but that is not guaranteed.

The Defense Department faces growing pressure on their health spending which has increased dramatically over the last ten years due to the fighting in Iraq and Afghanistan. Not only has the size of the military grown with more dependents there are also more retirees and severely injured that require health care. TRICARE is the primary mechanism for this.

The Obama Administration has proposed raising the co-pays and annual payments that the military and retirees make but that was struck out of the 2013 defense budget by Congress loathe to pass those costs onto the military. Obama has threatened to veto the bill as it stands due to that provision but many times once the bill is complete it will be signed.

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Lockheed Martin (LMT) Wins GIG Contracts, SAIC (SAIC) Protests

The U.S. Department of Defense operates the Global Information Grid (GIG) as a way to link its various communications and sensor systems together to ensure that information is processed and distributed as necessary. Most of the different systems the Services buy interface with the GIG one way or another either through radios, data links or networks. The goal of the GIG is to get the right information to the right person in order to support decision making and actions.

The GIG is managed by DoD and relies on a large contract to carry out these functions. Recently Lockheed Martin (LMT) was awarded this contract. It has an initial value of about $1.9 billion but the potential to grow to $4.6 billion if all options are exercised over its seven year life. The contract is an Indefinite Delivery/Indefinite Quantity (ID/IQ) type which means that the government places orders for products as needed. Normally ID/IQ contracts do not necessarily guarantee any work will be done but it can be expected with the size and importance of this contract Lockheed will get a great deal of orders from it.

SAIC (SAIC) was the losing bidder and they have moved to protest the award to Lockheed. SAIC is the incumbent for the contract and the loss of a contract this size is an issue for the company especially considering the potential budgetary issues facing the Defense Department next year.

If budget cuts do materialize and companies see much less contracts protests based on history will only increase. The different defense contractors will be fighting over a smaller pool of work so competition will be even more contentious. Normally protests have to be resolved in 100 days and contracts are placed on hold while this is being done. This means that SAIC will keep their current contract until the protest is over. Potential results could be a new competition, a reaffirmation of Lockheed or on rare cases a decision to award the contract to the protester.

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Air Force Will Attempt Second Contest for Light Air Support Aircraft

Following up on its decision to cancel the initial contract to Sierra Nevada and Brazil’s Embraer for the initial order of Light Air Support (LAS) aircraft for use by the Afghan military the U.S. Air Force now plans a new contest. The contract was protested by Hawker Beechcraft whose T-6 based proposal was removed from the competition. After the start of an investigation into the source selection which continues the service’s leadership decided to end the first attempt and begin again.

The Air Force investigation found that there was not sufficient justification for the decisions to remove Hawker and award the $300 million contract to Sierra Nevada. This company teamed with Embraer which would see their Tucano based system assembled in Florida.

Now it is expected that an amended Request for Proposals will be issued in the near future allowing the two companies to compete again.

If the program goes as planned it could be worth up to $1 billion in orders.

With the new proposal process it is hoped that a decision will be made next year.

Hawker is struggling and may face bankruptcy in the near future and the LAS win would be a major boon for the company. Brazil is looking at buying a new fighter and Boeing’s (BA) F/A-18 is one of the major contenders and a win for Embraer is believed to be helpful for that contest.

The Air Force has struggled over the last decade with awarding new contracts. There was the long running KC-X tanker program which took three attempts to award finally to Boeing. The new combat rescue helicopter, CSAR-X, went through two iterations but is now currently on hold. The cornerstone of the new Air Force, Lockheed’s (LMT) Joint Strike Fighter, is facing cost and schedule problems. The Light Air Support program seems to continue that trend.

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New Light Air Support Contest for Sierra Nevada and Hawker Beechcraft?

Late last year the U.S. Air Force awarded a contract to a team of Sierra Nevada and Brazil’s Embraer to provide light attack aircraft for use by the Afghan military. The contract also had the potential for further orders to support the U.S. military and other potential foreign customers. The only other company to submit a bid was Hawker Beechcraft.

The award was controversial as the Air Force eliminated Hawker’s bid for not being in the competitive range as well as denied their attempts to protest the decision. Hawker sued in Federal Court and it came out that the contract had already been awarded to Sierra Nevada. After reviewing the process the decision was made four weeks ago to cancel the contract and begin an investigation into the contracting process.

The Air Force has stated that the investigation will conclude next week and that it focused on documentation of the decision and not the actions of either contractor. Based on the data gathered so far the Air Force has decided to reinstate Hawker, allow new proposals and may conduct another evaluation. The service also may reserve the right to conduct a whole new competition with a new request for proposals and new bids.

At the same time there are reports that Hawker may have to file for bankruptcy due to its current debt load. If that is true then the Light Air Support contract may be key to keeping the company viable.

The Air Force has struggled over the last decade with evaluating bids and awarding contracts for new aircraft. The KC-X aerial tanker took three tries before Boeing (BA) won it with a version of their 767 airliner over Europe’s EADS. The CSAR-X rescue helicopter had two different competitions with no satisfactory result and the program ended up being cancelled. This contract follows in a similar vein.

The review seems to indicate that the Air Force found enough issues with the source selection process to warrant a new competition. Hopefully this one when it is completed will be conducted in such a way to avoid protest and strife and the service can move out with buying the aircraft.

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TRICARE Disputes to Continue as TriWest to Protest UnitedHealth’s Win

Earlier this month the U.S. Department of Defense decided to award the TRICARE West management contract to UnitedHealth Group (UNH). This was the culmination of almost two years of effort to award this very large contract. Previous attempts to award the nearly $20 billion contract were protested by the loser as TriWest Health Alliance the incumbent and UnitedHealth attempted to win the contract.

TRICARE is the main medical insurance program for the U.S. military. It covers active duty members, their dependents, retirees and some Reservists and National Guard members. Under TRICARE personnel utilize civil providers as well as military medical facilities and the companies with the contracts manage the execution of their benefits. The U.S. is divided into regions and different contracts are awarded to various contractors to operate them. TriWest had been formed to do the West contract and has had it until the latest round of contracts in 2009.

Now only ten days after the announcement of the award to UnitedHealth after two rounds of protest TriWest is saying it will file a protest against this latest decision. In their press release the company states that this is due to concerns that the “contract is the result of a flawed and unfair process.” Specifically they believe that due to their lower price the contest should be re-evaluated.

The normal process for the protest is that it will be reviewed by the Service awarding, then may go to the Government Accountability Organization (GAO) and ultimately to the Federal Courts if a party is not satisfied. The result of the review could be denying the protest allowing UnitedHealth to keep the contract, a direction to redo the source selection, a new contest or in rare cases the award is overturned and given to the protester. Protests normally are allowed 100 days. During the protest the new contract cannot be executed so UnitedHealth’s effort will be placed on hold.

The contract is the majority of TriWest’s business. The near term health of the company requires them to keep it. They have little to lose by protesting this award.

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UnitedHealth Is Final Choice for Tricare West Contract

Almost two weeks ago it came out that the Department of Defense had made a final decision in to whom to award the TRICARE West management contract to. The rumors were that UnitedHealth (UNH) would be the winner and that was confirmed at the end of last week.

UnitedHealth won the over $20 billion, 5 year contract after a series of competitions, awards and protests that have taken almost three years to resolve. The losing company, TriWest Healthcare Alliance, had been formed to just manage the contract.

One of the issues facing TriWest was the fact that they had paid a fine of $10 million to the U.S. Government after a whistleblower lawsuit about pricing. How much this affected the source selection is of course impossible to know.

There are reports that UnitedHealth will most likely absorb some of the jobs that TriWest will lose to help it manage the contract.

TRICARE is the U.S. military’s primary medical provider. It is used to cover active duty members, their dependents, retirees and selected Reserve and National Guard personnel. In 2008-2009 new five year contracts to manage the different regions were awarded but several faced protests and took some years to work out.

Defense Department medical costs have increased greatly over the last ten years as the military has fought in Iraq and Afghanistan, grown in size and also gained more retirees. This has caused the TRICARE, Veterans and other health care programs to grow significantly. The recent Obama budget proposal hopes to begin reining in this cost growth by in some ways requiring members to pay more in co-pays and fees. Whether that is politically acceptable remains to be seen. Certainly TRICARE will be a big part of that budget discussion.

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Long Running Saga of TRICARE Management Contracts Coming to an End?

Updated – To make clear this was an Agency level protest and not a GAO one.

TRICARE is the primary medical insurance program for the United States’ military. It covers those personnel, their dependents and retirees along with selected Reservists and National Guardsmen. It functions like a HMO for its members. The Defense Department divides up the country into regions and awards large contracts to individual health insurers to manage these. In 2009 new contracts were awarded but three of them were protested by different losers. Since then the Department of Defense has been working through the protests and getting new contracts in place.

The contracts are awarded regionally to provide management of care and providers. The West contract was originally won by the incumbent, TriWest, but UnitedHealth Group (UNH) protested. The Department of Defense upheld the protest and the contract was put up for bid again. Again TriWest and UnitedHealth bid on the contract. Now it is expected that a decision on the winner will be made in the near future.

Of course with the history of these contracts there is no guarantee that the loser may protest this decision. With the Southern contract Humana (HUM) and UnitedHealth went trough several iterations as the awards and protests followed each other. The last decision was by a Federal court in October that sided with Humana. This contract was in protest and litigation for over two years.

If the government can make a decision with this contract that sticks it should close out this saga. TRICARE contracts are usually only for five years so the next round should be coming up in 2014-2015. Expect competition to be just as fierce with that round.

Military health care is in transition as the Department of Defense looks for ways to reduce costs. These have increased greatly over the last decade due to the commitments to Iraq and Afghanistan and the larger size of the military. There are also now much more retirees and veterans who need care. In the next budget there is a proposal to increase the co-pays and fees paid by members for their TRICARE. There will also be pressure to reduce payments to service providers.

Even so expect the large health insurance companies compete for these contracts just like the last round.

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Sierra Nevada and Embraer’s Light Attack Contract Canceled by Air Force

Late yesterday the U.S. Air Force announced that it had canceled the contract signed in December with Sierra Nevada and Embraer to provide Light Attack aircraft for use by the Afghan military. The contract was in dispute by Hawker Beechcraft whose own proposal had been eliminated by the Air Force prior to source selection even taking place and no work was being done by the winners.

Hawker was in the process of suing in Federal court to get the decision to award to the winning team overturned. Earlier it had been denied a chance to protest as the Government Accountability Office (GAO) ruled it did not file in time. During one of the first court hearings about the case the Air Force admitted that they had gone ahead and given the contract to Sierra Nevada who was going to use aircraft manufactured by Brazil’s Embraer SA. Sierra Nevada had established a plant in Jacksonville for this effort.

Not only did the Air Force cancel the existing contract they announced that they will conduct an investigation of the process used to select the winners. There was no discussion of whether there would be a new requirement and contest.

Hawker had bid a version of their T-6 trainer used by the Air Force and Navy currently while Sierra Nevada was going to use a variant of Embraer’s Tucano aircraft which is in use by several countries. The initial contract would provide systems for use by the Afghans with the potential for further sales to the U.S. or other customers.

This is the third major acquisition in the last ten years that the Air Force has struggled to award. The KC-X tanker took three tries before Boeing (BA) won it. The CSAR-X new rescue helicopter never was completed despite two tries and multiple protests. This means that the LAS contract will have to be begun again or a new requirement created.

Hawker Beechcraft has had its struggles over the recent years due to the general downturn in aviation. Facing a rougher future with the proposed cuts in the U.S. defense budget it had been reported that the company had recently engaged a law firm known for its work in bankruptcy or restructuring. The decision by the Air Force will only be good if a decision is made to have another contest which there is no guarantee that Hawker will win.

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Lockheed Martin (LMT) Protests Award of Navy Contract to Northrop Grumman (NOC)

At the beginning of the month the U.S. Navy awarded the first in a series of contracts to begin installing consistent networks on ships. The initial value of this contract is for $36 million and would be for installations on 3 ships.

The Consolidated Afloat Networks Enterprise Services (CANES) program is to undergo testing this year and have a Milestone C Low Rate Initial Production Decision to support completion of the first install by the end of the year.

Northrop Grumman (NOC) beat out Lockheed Martin (LMT) for the production contract. Both had been awarded development contracts a few years ago. If all options on the contract are exercised it could be worth over $600 million and be installed on 54 ships. Next year after more testing there will be a Full Rate Production Decision leading to the award of a much larger contract.

Yesterday though Lockheed formally protested the award citing a belief in flaws with the Navy’s evaluation of the two proposals. The protest will be reviewed by the Government Accountability Office (GAO) who have one hundred days to come to a decision. Normally the protested contract is placed on hold while the GAO conducts its review. If Lockheed disagrees with the result then they may appeal to the Federal courts.

Protests have been rising consistently over the last two decades as the Pentagon issues fewer contracts and company’s fight harder for market share. They are disruptive but Federal law allows almost any decision to be protested although the GAO often denies them. The biggest factor for now is that it delays the start of work by Northrop and disrupts the program’s schedule.

Unfortunately for the Services and the Defense Department many cases are decided in favor of the company protesting which continues to highlight the need for the process as some selection decisions have proved flawed for many reasons. The KC-X tanker contract originally awarded to Northrop was successfully protested by Boeing (BA) who won the contract upon a new competition was ordered.

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Alliant Techsystems Faces Double Dose of Bad News

24 January – Updated to reflect the loss of the Lake City contract would be a blow to the company instead of “will be”.

Over the last ten years the U.S. military has consumed large amounts of ammunition. This includes not only small arms and support weapons like machine guns and mortars but also larger and more sophisticated weapons such as tank rounds, artillery shells, aerial bombs and guided missiles. Alliant Techsystems (ATK) has become one of the largest suppliers of ammunition and other pyrotechnics to the U.S. military during this time.

Up to last year they had contracts to run two of the largest government owned plants involved in this process — the one in Radford, VA that manufactures nitrocellulose used as the basis for ammunition as well as the one in Lake City, MO which makes small arms ammunition.

Last year the Army awarded the contract for Radford to BAE Systems (BAE:LSE) in the spring. Alliant protested that decision and the Army agreed to revise the competition and conduct another source selection. In October the new contract bids were received and again BAE won. Alliant protested that decision too.

Unfortunately the Government Accountability Office (GAO) announced today that it had denied that protest upholding the award to BAE. Alliant will lose a key contract that it had had since 1995. BAE’s 10 year initial contract also has multiple five year options that could make the contract last until 2036. The value could be well over a billion dollars if all options are exercised and production at Radford remains fairly steady.

Alliant will also face a challenge this year for the Lake City contract as BAE announced it will team with ammunition manufacturer Olin (OLN) to form a team to bid on that one. The Lake City contract could be worth up to $200 million a year to the winner. With the knowledge used for their successful Radford contract proposal BAE and Olin should have a good chance of winning the Lake City one as well.

The loss of these two contracts would be a hard blow to Alliant as they form a decent portion of their revenue each year. They have already seen declines in revenues the last few quarters and this would continue that negative trend. In 2011 their total sales to the U.S. Government, primarily ammunition and explosives, was about $3.3 billion. In their annual report the company stated that they “derived approximately 15% of our total fiscal
sales from the military small-caliber ammunition contract at Lake City”. The loss could be made up if their were other contracts to win or demand for their other products would increase. Unfortunately with the fighting winding down in Afghanistan and budget cuts predicted this might be hard.

Alliant may have recognized that the future might get tough as they moved their headquarters from Minnesota to the Washington D.C. area. In this they followed Northrop Grumman (NOC) which left California. It places them nearer Congress and the Pentagon and will facilitate engagement. This should aid them in keeping work and perhaps gaining new efforts.

All defense contractors no matter what the size are facing the same problems that Alliant is. Cost pressure on the Defense Department will make them look at new providers who may offer the best price meaning contracts will be harder to keep. There will also be less contracts due to the retrenchment from the recent fighting and budget cuts. If the 1990’s when a similar decline in defense spending is a guide then some contractors will have to adjust or face converting to new markets or just merging with other companies.

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Air Force Places Light Air Support Program On Hold Due to Protests

The U.S. Air Force had recently awarded their Light Air Support (LAS) contract to a team of Sierra Nevada and Brazil’s Embraer. This over $300 million contract was to buy turboprop aircraft initially for Afghanistan but potentially for use by the U.S. and other countries in a counter insurgency role.

Hawker Beechcraft who had also bid but were eliminated from consideration have sued the Air Force to have the decision reviewed and to get a full explanation as to why they were eliminated. As part of this yesterday the Air Force placed a stop work order on the current contract. Sierra Nevada released a press release about this decision yesterday that is as follows:

“Sierra Nevada Corporation Statement: U.S. Air Force Stop Work Order on Light Air Support Award

SPARKS, Nev., Jan. 4, 2012 /PRNewswire/ — Sierra Nevada Corporation issued the following statement in response to a stop work order received today from the U.S. Air Force on the recently issued Light Air Support (LAS) contract:

Our team is excited to have been awarded the LAS contract by the U.S. Air Force as a result of a fair and open competition and after a favorable review by the Government Accountability Office.

We remain confident that the issue will resolved expeditiously. These critical LAS capabilities need to be made available soon in order to support our men and women in uniform and our partners in Afghanistan. The A-29 Super Tucano, built in America, is the right solution for the LAS mission.

Sierra Nevada Corporation, a woman owned company, and all our numerous partners across the U.S. who will contribute to this contract stand ready to continue work and to serve our nation by providing the most proven capable light air support aircraft that meets the U.S Air Force’s requirements.”

During a normal protest period the contract is usually placed on hold and the Air Force most likely did this as they expected the Judge in the case to issue such an order momentarily.

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Air Force Light Attack Contract Gets More Curious

Update – Last night Embraer confirmed receipt of the $355 million contract for twenty aircraft and their support.

It came out today as part of Hawker Beechcraft’s suit against the U.S. Air Force over their denied protest about their exclusion from the Light Attack aircraft competition that the contract has been awarded to the team of Sierra Nevada and Brazil’s Embraer. Hawker had submitted a version of their T-6 trainer for an aircraft initially to potentially be used by Afghanistan and the U.S.

The Air Force eliminated the proposal from consideration as not being technically responsive. Hawker protested to the Government Accountability Office ( GAO) but was denied by that agency. Hawker then sued as the next step in the protest process. That case is being expedited by the Federal Court responsible for these cases.

The notice of the award tothe only remaining bidder came without seemingly either public notice by the Defense Department or Congressional notification. This latest move will only further raise questions especially of those in Congress who support Hawker.

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Reports SAIC and Boeing Protest Recent GCV Contract Awards

Less then two weeks ago the U.S. Army awarded two contracts for the next phase of development for their new Ground Combat Vehicle (GCV) system. This will be a replacement for the current M2 Bradley Infantry Fighting Vehicle (IFV) family of vehicles originally developed in the Eighties. GCV is also the program created after the Army cancelled the Future Combat System (FCS) family of vehicles which was going to replace the M1 Abrams / M2 in service.

Teams led by General Dynamics (GD) and BAE Systems (BAE:LSE) were selected to begin production of prototype vehicles in order to have a contest between them to see who would go on to final Engineering, Manufacturing, & Development (EMD) and then into full scale production. Each team received a contract worth a little over $400 million for this phase.

The GCV program could ultimately be worth billions over the next thirty years through production, sustainment and modification and is now one of the largest new programs the U.S. Defense Department is considering.

It is now being reported that SAIC and Boeing are protesting the decision to not award them one of the contracts. They are supposedly claiming that the Army did not apply their evaluation criteria correctly and possibly had a bias against the proposed solution as it utilizes a German vehicle as it basis.

The Government Accountability Office (GAO) will consider the protest and usually rules within 100 days. While the protest is being decided the Army must stop work on the awarded contracts. The GAO may find that the protest is unsubstantiated or uphold it. In that case the Army may have to review its source selection process, conduct a new contest or even release a new Request for Proposals (RFP) and start over.

Based on the last time the U.S. defense industry faced cuts in the Nineties more protests may be expected as the available contractors fight over fewer contractors. Each contract becomes more important and it can be expected that there will be more pressure to win them. The number of large programs, too, is going to decline as the U.S. invests less in new systems and focuses on production of existing ones.

The lead contractors on FCS, Boeing (BA) and SAIC (SAIC), also submitted a proposal but were not selected.

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Raytheon Sues Great Britain for Funds over Terminated Contract

In 2010 Raytheon’s (RTN) earnings were reduced due to the decision by the British Government to cancel a border security database program that the Massachusetts based company had been contracted to build for the European country. The contract had been awarded by the previous Labour government and had a goal of keeping track of everyone entering or leaving the country. In the first quarter of this year Raytheon took a charge of about $80 million due to winding down of this contract.

The contract was not a small one valued at over $1 billion and its cancellation was not only a blow to Raytheon’s bottom line but also to there ability to grow this area of their business. It was not a traditional area for the company and success here potentially would have led to much greater opportunities with other governments interested in investing in the same capability.

Now Raytheon has announced that they are suing the U.K. for over $750 million due to unlawful termination and for damages. If they are successful they will recover most of the money they were due to gain by carrying out the contract.

In the United States contracts may be terminated for two reasons: cause and needs of the government. If for cause which is usually non-performance then the contractor is not guaranteed any money related to the termination but these are negotiated. If for needs of the government then termination costs must be paid. Normally these are identified up front so the government will know what they are and usually are based on buying material, paying for work not billed yet and for shutting down facilities.

In this case Raytheon is claiming unlawful termination and is due damages. The company’s believes that there product met the U.K.’s requirements as they were aware of them and thus they were performing. They said the customer was not clear on the requirements and it would be hard to claim they were non-performing when they had not metrics to measure against.

If Raytheon wins some or all of this money it will clearly help there future revenue in the short term. Obviously the suit will be first cleared by a Court or arbitrator and then the damages calculated. It could still be zero if the ruling body agrees with the U.K. government or it could be some amount up to $750 million.

No company likes to lose a contract especially if they feel they lost it for the wrong reasons. This is why there is a protest process and suits like this. The end result will most likely be a negotiated settlement unless the U.K. can prove that Raytheon clearly understood the contract’s requirements and metrics.

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Army Decides to Recompete Radford Contract

In June the U.S. Army announced that it had awarded a contract with BAE Systems (BAE:LSE) to run the U.S. explosives production facility at the Radford, VA Army Ammunition Plant. The losing company, ATK (ATK), who had had contracts to run the facility for several years protested the award. Under normal processes the Government Accountability Office (GAO) which is responsible for deciding these matters would have made a decision no later then September.

The protest though is now not necessary as the Army has decided to recompete the contract which led to the GAO dismissing the protest. After a review by the GAO the Army will change some parts of the Request for Proposals (RFP) and allow bidders to submit new ones. This is good news for ATK as the Radford contract had a value of over $800 million over its ten year duration.

Because of this decision ATK, the incumbent, will continue to operate the plant and be paid by the Army until a new contract is awarded. Both BAE and ATK have indicated they will submit new proposals and there is always a potential for other companies to also try to win the work.

If the U.S. defense budget does decline for any company the key will be keeping their existing contracts and then attempting to win new ones. Having a core of existing work will cushion any lack of new work caused by the reduced opportunities available in the next decade or so as the U.S. reduces its investment in Iraq and Afghanistan as well as new development programs or building up stockpiles of weapons and munitions.

ATK recently had a rough quarter with sales down which led to a drop of about 4% in profits when compared to the similar quarter last year. One areas where revenue was down was sales of ammunition to U.S. allies like Afghanistan. The loss of the Radford contract would have reduced annual revenue $80 million or so or about 2%. A chance to win the work back will only help the company in the future.

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General Dynamics Wins DHS IT Contract

After a lengthy protest and a new contest General Dynamics (GD) was able to win an IT support contract with the Department of Homeland Security (DHS). The company will support the building of the agency’s new headquarters and the move and integration of its employees into the facility.

Total value of the award could be up to $876 million as it also covers some time of dedicated support to the DHS. The original contract, though, won by Northrop Grumman (NOC) was much larger, lasting ten years and potentially worth over $2 billion.

After the award to Northrop late last year several of the losing bidders protested. The Government Accountability Office (GAO) upheld the protests and decided that a new contract should be awarded. This led to a new source selection process this spring with Northrop being the winner.

The new contract is much smaller as it was decided to de-scope the work and also eliminate many of the years of support after completion of the move. This means that in a few years there will be another contest to do that work and offers hope to Northrop that they can win that to counter the loss of the original contract.

The Federal Government stills has a hard time doing major IT work in-house and relies on large contracts such as this to carry out that work. There has been much discussion of the best way to move this work within the civil service but it has often foundered on how to integrate IT pay scales into the more rigid GS pay system. IT as illustrated does remain a significant contract cost for all parts of the Federal government as no matter what work they do from buying weapons to processing taxes they need IT support.

This area will remain a major market for the near future.

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Companies Continue Fights for U.S. Military Health Care Contracts

The United States’ Department of Defense spends a great deal of money on health care. They are responsible for not only the active duty members but also their dependents, retirees as well as National Guardsmen and Reservists. The fighting since 9/11 has seen the expansion of the size of the military. Many personnel have families. There has also been an increase in the number of wounded and those needing long term car. The sustained fighting and activity also caused more retirees. Combined these pressures have required that total spending dramatically increase. In 2010 it was almost $50 billion or roughly 8 percent of the defense budget.

This has been recognized by leadership such as departing Secretary of Defense Robert Gates and some moves have been proposed to reduce spending or slow the rate of growth. If changes are not made then more-and-more of available funding will go for personnel related matters leaving less for investment in new weapons and technology. At the same time the growth has made this an attractive area for large U.S. health insurance companies and they are currently fighting over the contracts to manage the health care program.

The basic program used to do this is called TRICARE. It is like a large HMO that requires the military participants to pay a small upfront fee and then co-pays for visits and services. Because the military is so large and geographically diverse the Department of Defense centrally manages the program and divides the U.S. into regions with a contract for each. There are also omnibus contracts for overseas and dental care. The contracts average values of $4-5 billion a year.

In 2009 the Department went ahead and awarded the next set of five year contracts for the different regions. These were bid on by familiar insurance companies such as Aetna (AET), Humana (HUM) and UnitedHealth. In the late summer the winners were announced and often the incumbent did not retain the contract. Immediately several protests were filed by the losers.

Incredibly two of these protests remain unsettled today almost two years later. That indicates the importance of these contracts to the providers. In a time when the entire health care market in the U.S. is about to see radical change TRICARE does offer some stability at least for the next several years and may provide a decent source of revenues and income for these companies to offset future changes in the civilian market.

UnitedHealthCare is pursuing protests for the South and West contracts. The South has now gone through two source selection cycles with UnitedHealth winning the first one over Humana who protested which led to a new competition. This was awarded to Humana in March and that was protested by UnitedHealth. The Government Accountability Office (GAO) upheld the award and UnitedHealth has now sued in Federal Court which is the final step in the protest process. UnitedHealth believes that Humana in order to minimize costs has reduced the proposed payments to providers to such an extent that few if any will accept TRICARE patients leading to poorer choice for military members. The GAO did not sustain that argument.

UnitedHealth and Humana have also been fighting over the West contract. Here UnitedHealth was the incumbent and Humana won the new contract. That protest has also led to a decision to have a new contest that is yet to occur.

The size of the TRICARE management contracts and their value has caused those companies involved in them to try to win and keep them. Despite pressure by the Defense Department to reduce costs they are expected to remain sizable for a variety of reasons. They offer some stability as the U.S. moves to reform the civilian market. It can be expected that these protests will continue for the next few months as the contract awards are worked through.

Article first published as Companies Continue Fights for U.S. Military Health Care Contracts on Technorati.

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UnitedHealthCare Takes Next Step in TRICARE Protest

As we had written last week the Government Accountability Office (GAO) had ruled against UnitedHealthcare’s protest of the award of the Southern Region TRICARE contract. This meant that the contract would go to Humana (HUM) who had actually been the incumbent back in 2009 when the government tried to award the latest group of TRICARE medical management contracts.

TRICARE is the medical insurance program offered by the Pentagon to its active duty members, their dependents, retirees and selected Reservists and National Guardsmen. The country is divided into regions and one insurance company is awarded a contract to manage it. These contracts are quite large in the region of $4-5 billion a year.

In 2009 the government attempted to award new five year contracts for the different regions. Three of the contracts were protested for various reasons but normally because the source selection criteria were not followed correctly. Two of the three have been resolved but the Southern one still remains in a legal battle. Originally Humana lost the contract to UnitedHealthcare but protested. That led to a decision to have a new contest which Humana then one. UnitedHealthcare then protested that decision. The GAO denied the protest and let the award to Humana stand.

Now Unitedhealthcare has decided to sue in the U.S. District Court of Federal Claims which is the next step in the protest process. In their press release from Tuesday the company states: “The Pentagon disregarded its own stated goals for this contract, and military families’ access to quality health care in the South will be put at risk as a result.” The company continues to believe that the decision by the government to choose companies for the TRICARE offering low reimbursement rates limits care and choice for the military.

The lawsuit should take a few months to decide and the current TRICARE contract should continue with Humana

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