McCain Pushes For Fixed-price Contracts
John McCain is promising to slash government spending if elected president, and one of the few targets he’s named is a combat ship program designed to fend off mines and small craft favored by terrorists.
But a closer examination of the Littoral Combat Ship program and McCain’s pledge raises questions about whether the Republican senator from Arizona could install the changes he seeks and whether they’d produce the economic dividends he promises.
In just about any election, candidates promise to save money by cutting waste. It’s a pledge line in a speech that draws cheers from conservatives, but can become white noise to voters who’ve seen too many elected officials pledge fiscal responsibility, only to fail to deliver. Indeed, the path is so strewn with broken promises, there is little risk for candidates making the pledge because expectations are so low that they’ll make good on it.
But the stakes could be higher for McCain this cycle. He has undercut his own credibility on economic issues by admitting that it’s not his strong suit.
Then he released an economic policy plan that included both a pledge to balance the budget and push through huge tax cuts — as well as protecting President Bush's tax breaks.
The only way to accomplish those goals would be to cut hundreds of billions of dollars in government spending. Democrat Barack Obama already is attacking the plan as unworkable. Now the pressure is on McCain to convince voters fraught with anxiety over the condition of today’s economy that he can and will deliver on his promise.
Many hurdles stand in his way, not the least of which is the Byzantine nature of the federal government itself.
McCain isn’t promising to cut Pentagon funding, per se, but he cites the oversized defense budget as prime hunting ground for savings.
In a speech about government reform last year, McCain charged that “too often, contractors underbid to 'buy into' a market with little expectation of delivering on schedule and within budget. At the same time, the government's cost estimates are often unrealistic.”
The Littoral Combat Ship “was supposed to be a model program,” he said. “In the end, it cost twice its projected price, and the Navy had to cancel purchase of third ship because of the cost overruns.”
The ship, originally projected to cost $180 million apiece, now costs $460 million. It’s designed to patrol the waters near shore to ward off swarming small boats, submarines and mines.
McCain argues that such cost overruns could be avoided if the Pentagon issued “fixed-price contracts” that would prohibit a company from raising its bid price unless it could prove that cost overruns were caused by the government or other unforeseen circumstances.
“Our defense industries make the finest weapons in the world but are not incentivized enough to keep costs down. That must change,” McCain told Oklahoma lawmakers in May 2007. “When a company delivers the promised products and controls costs, it should be rewarded. When it doesn't, it must pay the price in its bottom line.”
“We must set clear expectations and requirements at the outset of an acquisition program,” he added, “and stick to the plan throughout the life of the program.”
It’s a system that worked well during development of F-18 naval fighter jets in the 1980s, which experts say saved the government billions of dollars. But it has significant downsides, too.
For instance, fixed-cost contracts work best when the government knows exactly what it wants. Under those circumstances, the blueprints are drawn, the systems are proven effective and the unknowns consist largely of the cost of parts and labor.
The combat ship program may be close to that point, but it’s not there yet.
John Lehman, a Navy secretary in the Reagan administration ad a McCain campaign adviser, was a big proponent of fixed-price contracting and used the technique successfully on the F-18 fighter jet and shipbuilding programs.
But even he says it’s probably not a good match for this combat ship program today, because there are still too many design changes, which he said “have been coming in at the rate of 75 per week from many directions.”
Another problem with fixed-price contracting is that it has a history of provoking expensive lawsuits that undercut savings to the taxpayers.
One of the most notorious cases involved the A-12 Navy stealth fighter jet, started in the mid-1980s on Lehman’s watch.
Contractors McDonnell Douglas and General Dynamics were accused of hiding enormous cost overruns from the government until then-Defense Secretary Dick Cheney canceled the program in 1991.
From Lehman’s perspective, the contract type was working, and the contract was only $2 billion over cost when Cheney canceled it.
Lehman disagreed with the decision, arguing that the $2 billion cost overrun wasn’t excessive, especially compared to the F-22 program, which started around the same time and was supposed to cost about the same amount of money. The F-22 Air Force fighter jet isn’t on a fixed-price contract and is now more than $30 billion over budget, Lehman said.
When the A-12 contract was canceled, the firms fought back in court in a case that dragged on for more than a decade, costing taxpayers more than $5 billion and prompting Congress to outlaw fixed-price contracting for research and development efforts, said Ralph C. Nash, professor emeritus of law at George Washington University and an author of textbooks on government contracting.
Nash argued that improving Pentagon weapons programs in the future will require more fundamental changes, such as stronger program management and the use of competitive prototyping — where two contractors build early versions of their product for side-by-side comparisons.
The fundamental problem, he says, is not wasteful spending by contractors. Rather, it’s the system itself, one that carries inherent risks and requires companies to speculate on how much it would cost to develop new systems and weapons.
The result often is that firms promise to develop technologies they can’t deliver for prices they can’t meet.
That system has been a frustration for years and is unlikely to change even with a new president, Nash said. “We’ve had a lot of new presidents over the last 50 years, new congressmen, new secretaries of defense,” who all vowed to fix the problem, Nash said.
McCain’s campaign, though, is confident that the senator’s insistence on high-quality contracts will alleviate the problem. “Low-quality, ambiguous contracts are the source of legal disputes, whether they are fixed price or any other type,” said campaign spokesman Brian Rogers.
In the case of the Littoral Combat Ship, time may be the real solution.
The first ship in a series is typically the most difficult and expensive to produce, with the cost of subsequent ships leveling off.
Now that General Dynamics and Lockheed Martin are nearly finished with their first competing versions of the ship, additional price increases should not be as dramatic as those that have already been seen. The Navy is forging ahead with negotiations on fixed-price contracts for follow-on ships — potentially with both contractors.
But supporters of the ship contend that regardless of the overruns, the Littoral Combat Ship remains affordable.
Rep. Rob Wittman (R-Va.) was on hand earlier this month to watch a Pentagon demonstration of a gun for the combat ship firing into the Potomac River near the Dahlgren Surface Warfare Center in his rural Virginia congressional district.
“When you roll out a new class of ships, it’s a learning process,” he said. “This littora component of our fleet is absolutely necessary.”
Beneath the hum of fluorescent lights inside the warfare center, Vice Adm. Paul E. Sullivan, the commander of Naval Sea Systems Command, clenched his chiseled jaw and chalked up the ship’s price increase to an overly ambitious schedule.
“We took a lot of risk in schedule and cost on the two lead ships,” Sullivan told reporters after the gun shoot. “When you take risk, then sometimes those risk equations don’t turn out the way you want them.”