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Air Force Exaggerated Boeing Costs, GAO Finds

POSTED: 06:48 PM ET, 06/25/2008 by Derek Kravitz

In February, the Air Force based much of its decision to give defense contractor Northrop Grumman a multi-billion contract to build tankers because it was the low bidder.

But it turns out that Northrop Grumman's "low bid" was only .03 percent off the price of its nearest competitor, Chicago-based aerospace company Boeing, according to a Government Accountability Office report released today. And Boeing's costs were exaggerated, auditors said.

The GAO decided last week to side with Boeing over a $40 billion contract with rival Northrop Grumman to build new aerial refueling tankers for the Air Force.

The watchdog agency released its 67-page report this afternoon, explaining that while the Air Force said it choose Northrop's proposal because it was the "best value" for the government, the decision "was undermined by a number of prejudicial errors that call into question the Air Force's decision that Northrop Grumman's proposal was technically acceptable," The Post's Dana Hedgpeth reports.

One of the key components of the protest was the idea that the Air Force miscalculated Northrop Grumman as the low bidder for the contract: Government officials calculated Boeing's estimated costs at $108.044 billion and Northrop Grumman's costs at $108.010 billion -- a difference of $34 million, "which reflected Boeing's more complex design, development and integration activities," according to the report.

But audit investigators concluded that the Air Force incorrectly added on costs to Boeing's proposal, in which the government said it did not accept the company's "estimating methodology."

Boeing, the biggest U.S. manufacturer of airplanes, had originally been awarded the contract, but the bid was withdrawn in 2004 over a procurement scandal that resulted in Boeing and Air Force officers being sent to prison.

After Boeing lost the contract to Northrop Grumman in February, it filed a protest, saying it had been treated unfairly in the acquisition process. The GAO said it found that the Air Force "had made a number of significant errors that could have affected the outcome of what was a close competition between Boeing and Northrop."

Top Air Force acquisition officials were expected to meet with Defense Secretary Robert M. Gates today to discuss how the service will deal with the GAO's recommendations.

By Derek Kravitz |  June 25, 2008; 6:48 PM ET
Previous: Abramoff Ex-Partner Gets Sentence Reduced | Next: A Decade Later, Details On Campaign Ethics Case

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Setting The Record Straight On Northrop Grumman's Tanker

Numerous media reports, today, focus on a single sentence in the 67-page GAO analysis reached yesterday supporting its decision to sustain the Boeing tanker protest. "But for these errors," the GAO stated, "we believe Boeing would have had a substantial chance of being selected for award." What readers should note is that the suggestion that the procedural errors it found might have led to a different result is the standard language included in any sustained protest.

The GAO also said its analysis does not "reflect a view as to the merits of the firm's respective aircraft." And, on the merits, the data provided in the GAO report clearly shows that the KC-45, which has been built, flown and tested, is superior to the Boeing airplane which, at this time, is only a design on paper.

As important as it is to understand the procedural flaws that led the GAO to sustain the protest, it is just as important to consider what the GAO analysis did not find. Out of 111 separate Boeing complaints, the GAO accepted only 8. The GAO found nothing that contradicts the initial Air Force conclusion - that the Northrop Grumman KC-45 was the winner in four out of the five major selection criteria established by the Air Force, and tied on the fifth.

In Mission Capability, the GAO did not say the Air Force was wrong. The GAO criticized the wording of the RFP but did not object to the Air Force's conclusion that the KC-45 outperformed the KC-767 in almost all areas.

In Proposal Risk, the GAO did not dispute the Air Force finding that both offerings had equal risk.

In Past Performance, the GAO took no issue with the Air Force finding that Northrop Grumman had better past performance. Note that while much of the GAO report on this point is redacted, there is no question about Boeing's delivery record. Its Japanese tanker - delivered one year late - is still not ready for service. Its tanker for Italy - now three years late - has not even been delivered.

In Cost/Price, the GAO stated that greater specificity was needed in some areas, but "Most Probable Life Cycle Cost" remains a dead heat. Further, the underpinning of the Air Force decision on cost was risk, and the GAO had no objection to the Air Force conclusion that the KC-767 remains a higher risk.

Finally, in its Integrated Fleet Aerial Refueling Assessment (IFARA), a real world simulation of how the competing tankers would operate in a combat situation, the GAO had no objection to the manner in which the Air Force conducted the simulation and the Air Force conclusion that the KC-45 provided better combat capability.

The Air Force needs a new tanker now and with a plane and a boom that have been built, flown and tested, the Northrop Grumman KC-45 is ready now to fulfill the Air Force need.

Posted by: RD | June 26, 2008 11:25 AM

This fiasco only reflects the need for the FTC, SEC, and other agencies to step in to break up these defense contracting oligopolies. It's a shame that DoD has been sleeping with these chumps. Only the deaf, dumb, and blind can't see or won't admit the truth. These corporations, instead of developing their own technology or expertise have bought up all the smaller companies that were able to deliver products at a more reasonable cost. Ever since Reagan, the DoD has gutted it's own career subject matter experts who were able to challenge the B.S. these oligopolies presented as 'proposals'. Now representatives from these same companies work along side those in the contracting departments or those within DoD developing the requirements. Read the RFP's for yourselves. They are written very broadly, vaguely, obscurely, and then there are always those few lines of text that ensure only the "pre-selected" contractor gets the job. Organizations and conferences where DoD personnel mix with contractors should also be shunned. They only serve to weaken the knees and the spines. Let's clean up this mess once and for all.

Posted by: Frank | June 27, 2008 7:26 AM

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