Pentagon To Re-Bid Air Force Tanker Contract
July 10, 2008: The Pentagon has spiked a controversial $35 billion contract for a new Air Force refueling tanker and will reopen the competition, Defense Secretary Robert Gates said July 9.
In addition, Gates has taken the source selection process for the KC-X tanker out of the Air Force's hands and directed John Young, undersecretary of defense for acquisition, technology and logistics, to serve as the new source selection authority and to appoint a new source selection committee.
Gates said that was done "with the full support of the Air Force."
Young said the cancellation was in the form of a stop-work order on the contract the Pentagon had signed with Northrop Grumman and EADS. The cancellation opens the door for rival Boeing to get its losing bid reevaluated.
The Pentagon acted after the Government Accountability Office last month upheld Boeing's protest of the award to build 179 tanker aircraft, sustaining what Gates said were eight of more than 100 issues raised by Boeing.
The issues included the Air Force's failure to acknowledge that Boeing's proposal provided more optional systems than Northrop's; "misleading and unequal discussions" with Boeing; and the service's inaccurate estimate of both tankers' life-cycle costs.
All of the GAO findings will be addressed, Gates said.
At a Pentagon news conference, Gates said that while the KC-X process has gone on "far too long," he believes the new competition can be completed, and a contract awarded, by December.
That can be accomplished, he said, "by running a process that is transparent to the competing companies, by complete communication with those companies so that there are no surprises, no considerations that have not been discussed, no criteria that have not been discussed, nothing done that is unfair."
But Young later said that December is "a goal" and that the Pentagon has called for "modified proposals," meaning that Boeing, for instance, could submit a completely different airframe for consideration. Young said the Pentagon would be following a "normal acquisition process," including a draft for proposals amended by the GAO's findings.
But he and Gates both said they do not anticipate issuing new evaluation criteria. Young said the Pentagon believes it has a valid requirements document.
"We believe that we can ask both bidders to modify their proposals to address those concerns based on how we will implement those findings in that amended request for proposals and move forward," he said.
Acting Air Force Secretary Michael Donley, in office just 2 1/2 weeks, acknowledged that GAO's decision on the KC-X award "has been sufficient to cast doubt on the Air Force's management of the overall process."
But Gates and Young denied that GAO's conclusions - coming 1 1/2 years after it canceled the Air Force's November 2006 contract award to Boeing for a combat search-and-rescue helicopter - mean that the Air Force's acquisition process is broken.
"I have confidence in the acquisitions team," Gates said. "I think that Secretary Donley has indicated that there are some areas where there needs to be improvement, but I think we will go forward with that."
That confidence extends to Sue Payton, the Air Force assistant secretary in charge of acquisition, Gates said.
But he added that placing his top acquisitions chief in charge of the selection process "is an appropriate and necessary step to ensure congressional and public confidence that DoD can and will successfully manage to completion a large, complex procurement such as the KC-X. It is essential for the department, working with Congress, to maintain both internal and public confidence in our acquisition process.
"This is the third time we've gone at this," Gates said. "And under those circumstances, it seemed to me that we were most likely most quickly to gain the confidence of Congress in the way forward by having the undersecretary oversee this particular contract."
Once the contract is awarded, the Air Force will manage it and execute the program, Young said.
Young said officials decided not to do a competitive "fly-off" because both aircraft are essentially commercial models being modified with booms and probes, and there's "not as much technical risk" as with a program being built from scratch, such as the Joint Lightweight Tactical Vehicle.
"We're already getting the benefit in this program of a commercial marketplace that delivered something like 400 aircraft in each company last year," Young said. "We're going to buy 12 to 15 aircraft per year. We're getting huge benefit from getting commercial market pricing and riding on that commercial industrial base.
"So it's not clear to me that competition at the prototyping or production level will pay us great dividends," Young said. "It will add significant costs for us in terms of training, that development money, the testing money, the training money, the additional spares, and a long-term lifecycle of two aircraft."
Splitting the buy between the two groups also was ruled out because of the potential costs.
"We would have to spend the development money and the testing money to develop and test two tankers," Young said.
Subsequently, he said, "We would probably have to cut the buy to six, seven, eight aircraft a year between two companies. That would drive the price up further even yet. Then I would have to train people in two different aircraft.
"And, frankly, if I spent the money to develop both tankers, you'd have to ask yourself, well, would you really have another competition at KC-Y?" he said, referring to this first phase of a three-phase acquisition process for the tanker.
Congressional leaders were briefed earlier July 9, Gates said. Rep. Duncan Hunter, R-Calif., the top Republican on the House Armed Services Committee, said Gates' decision "is a win for America's workers and taxpayers, as well as our war fighters deployed around the world."
Northrop partner EADS - the European Aeronautic Defence and Space Company - is the parent company of Boeing rival Airbus.
The House Armed Services Committee will hold a hearing on the tanker debacle Thursday at 2 p.m. Young will testify, along with two GAO investigators
