Tuesday, April 27, 2010

Déjà Vu All Over Again

During a Senate Armed Services Committee hearing earlier this month, U.S. Air Force Lt. Gen. Mark Shackelford, Military Deputy, Office of the Assistant Secretary of the Air Force for Acquisition, was questioned by Sen. Joe Lieberman about the notion of a fixed price for the F-35 powerplants. As his colleagues have done in the past, Gen. Shackelford confirmed that no such arrangement has been agreed upon or accepted by the DoD. He confirmed that no firm fixed price offer would be accepted until such time “As we have confidence in the design baseline and the ‘producibility’ of the engines.”

The reason is simple: at this stage of a new and complex program, a traditional “cost-plus” contract provides the federal government with complete transparency and oversight into the program including cost, schedule, performance and more. If any issues arise, the customer is made aware of them and can clearly see the price and process of amelioration.

A firm, fixed price arrangement, whether offered for single or multiple lots, might sound attractive in an uncertain economic environment. But when applied prematurely, it incentivizes the contractor to estimate and then add the cost of potential test failures, production changes and just about any other variable to ensure an eventual profit. So, either the government pays an inflated bill if development goes better than expected, or it can’t see how and to what extent any problems are being addressed. Either way, the taxpayer stands to lose rather than win, especially when the engine in question is the still developmental F136, which like any new engine, has faced, and will continue to face, numerous development challenges that will result in design changes.

Yet, those of you who have followed this discussion will remember that we’ve been here before. Last September and again more recently, the alternate engine team presented the government with an unsolicited firm, fixed price “concept” for their first four deliveries, ironically minus an actual price. The September offer was not deemed by the government to be worthy of evaluation and therefore no negotiations took place. Another recent offer was for the same four engines, now delayed from Low-Rate Initial Production (LRIP) Lot 5 to LRIP-6 due to well-known problems encountered throughout their protracted System Development and Demonstration phase.

Based on past government actions and Gen. Shakelford’s recent testimony, it’s hard to believe that the outcome of this latest offer by the makers of the back-up engine for the F-35 will be any different than those that have been announced before, simply because far too much about a production F136 is still unknown and unproven, not to mention strongly opposed by the White House and Pentagon on the grounds of cost, logistics and shear wasteful duplicity.

By contrast, Pratt & Whitney has transitioned confidently from development to production. Every F135 ground and flight test engine has been delivered to the customer, as have the first three production engines. And, in the interest of full disclosure, Pratt & Whitney also offered a fixed price arrangement. In fact, we originally did so prior to the F136 team and it would have applied to LRIP-4 engines at the current capped “cost-plus” price point. But even this offer, which was based on a far more mature engine, was declined by the customer.

Therefore, one can conclude that for the short term, the most pressing issue is not about pricing, but performance and accountability.


-- Eagleblogger

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