Defense Department Willing To Do KC-X With Only Boeing Bid

Last Updated Feb 4, 2010 5:58 AM EST

The Secretary of Defense Robert Gates in testimony to the House Armed Services Committee made it clear that the Defense Department and U.S. Air Force will release the Request for Proposal (RFP) for the new KC-X tanker and award a contract even if only Boeing (BA) submits a proposal. The Department hopes that the Northrop Grumman (NOC) and EADS (EADS:P) will submit a bid but will go forward with the planned contract even if they don't.

In early December Northrop Grumman's CEO sent a letter to the Air Force stating that due to the terms of the draft RFP they felt that it so favored Boeing that they and their partner EADS, parent of Airbus, would not submit a proposal. Northrop had won the contract in 2008 only to lose it on protest by Boeing with the Government Accountability Office (GAO) saying that the Air Force changed the requirements and was not completely fair to Boeing. An earlier attempt to award Boeing a lease for KC-767 aircraft collapsed amid scandals and Congressional desire to have contest.

The company along with Boeing has also expressed concerns with the idea of using a fixed price development contract for the aircraft. As the A400M program indicates this is not always the best path as any problems with schedule or technical challenges could lead to delays and greater cost. Under the fixed price concept these costs would have to be borne by the contractor unless some equitable adjustment could be worked out with the Government. That is what the EADS and its European customers are currently negotiating. Fixed price contracts are normally reserved for production when costs are stable and understood.

Moving out with only one bid is tricky as that means there will be no competition. Not that there aren't many who would like Boeing to be awarded the contract for a variety of political reasons. The Congressional delegations from Washington and Kansas where most of the tanker work would be done by Boeing have certainly tried to push that company's case using complaints of cost, capability and unfair subsidiaries to Airbus. Supporters in Alabama where EADS plans to build an assembly facility have counter argued that the KC-330 offers more capability at a better price. Any decision by DoD and the Air Force will face Congressional complaints and opposition.

It is certainly possible to proceed with only one proposal but it won't be much of a competition. A further, although remote, issue would be if the Boeing proposal doesn't meet the requirements. Then there would be no qualified offer and the KC-X source selection would have to start over again in some shape or form.

There are reports that Northrop Grumman will not participate and that may have already been conveyed to Gates. This would explain his testimony.

The idea of having this third contest without competitors was one that nobody really believed could happen. The contract is worth $35 billion to start and there are further buys planned of aircraft that could be worth tens of billions more. The support contracts also will provide billions of business for the next few decades. That is a lot of money to pass up especially when the KC-X funding should be stable even if the defense budget declines as it is a key modernization effort for the U.S. military.

If Northrop and EADS do not participate it will be an interesting dilemma for Boeing and the Defense Department. The source selection would only have to verify the costs presented by Boeing to make sure they are affordable and executable. Then the contract would just be given to them. A path that started this whole problem at the beginning of the Century.
  • Matthew Potter

    Matthew Potter is a resident of Huntsville, Ala., where he works supporting U.S. Army aviation programs. After serving in the U.S. Navy, he began work as a defense contractor in Washington D.C. specializing in program management and budget development and execution. In the last 15 years Matthew has worked for several companies, large and small, involved in all aspects of government contracting and procurement. He holds two degrees in history as well as studying at the Defense Acquisition University. He has written for Seeking Alpha and at his own website, DefenseProcurementNews.com.

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