Back in August the U.S. Army awarded a contract to Oshkosh Corporation (OSK) of Wisconsin to build trucks. The company was going to continue production of an existing cargo truck called the Family of Medium Tactical Vehicles (FMTV). These trucks had been built for the Army for about twenty years at a plant in Texas. Due to the use of them in Iraq and Afghanistan the Army was planning a major replacement of the ubiquitous vehicles. The contract had a maximum value of over two billion dollars but the initial buy was worth about $281 million.
BAE Systems (BAE.L) who had acquired Armor Holdings that had the contract to build the trucks originally protested the award to Oshkosh. The loss of this contract significantly would effect future earnings for the British company at a time when defense contractors in the U.S. and Europe were preparing for cutbacks in defense spending. Navistar (NAV) another unsuccessful bidder also protested. The protests were on two basic grounds. First that Oshkosh had deliberately bid low on the contract with BAE saying that they could not effectively make money on the price bid. Secondly that the evaluation did not apply the source selection criteria properly.
Yesterday the Government Accountability Office (GAO) announced that they have sustained BAE Systems' protest. No word yet on the Navistar protest but since the GAO said the Army did not properly evaluate Oshkosh's capability to rapidly ramp up to manufacture the FMTV as well as Navistar's past performance that one should also be upheld. The GAO did say that the cost issue was not a factor.
The Army must now decide how to respond. They may have to conduct the source selection again or even put the whole contract out for re-bid. Oshkosh's reaction is that after all is done the contract will remain with them.
The award to Oshkosh had been controversial due to the history of producing the FMTV in Sealy, Texas. The move to produce the vehicles in Wisconsin will shut down the plant and layoff thousands of workers. This will devastate the town. This meant that the protest had the support of the Texas Congressional delegation as well as those in other states where BAE has a presence. Oshkosh is well supported by their local Congressman and Senators.
The current situation means that BAE will continue to build the FMTV in Sealy while the Army decides what to do. Ultimately they may be able to justify the selection of Oshkosh and production will transition to its facilities. There might be a new competition which will keep the hopes of Navistar and BAE alive. One of the things that is affecting this contract is that Oshkosh was able to win one hundred percent of the new MRAP-ATV contract. This is a newer, lighter and more maneuverable Mine Resistant Ambush Protected (MRAP) vehicle for use in Afghanistan. It had been thought that multiple contracts would be awarded but so far all have gone to Oshkosh. BAE and Navistar were losing bidders on this contract.
BAE's protest of this contract had seemed to spur comments a month ago from the Department of Defense of there being too many protests. Protests do lead to delays in executing contracts and receiving the products and can add cost to the whole contracting process. At the same time the Government must make sure that it is acquiring items legally and at the best value. The number of protests has been increasing due to the fact that there are fewer large contracts and a desire of the the Government to have only one source for many items. This means that each contract is more important to companies.
This contract was only harder because it was taking away an existing product from a manufacturer and moving it to another. BAE was almost obliged to protest to try and protect their long term revenue stream. The Army made a tough, risky decision on this because they believe that Oshkosh can deliver the FMTV at a better price then BAE would do. This may take several more months to play out.