KC-X: GAO Sustains Boeing ProtestJun 25, 2008 20:10 UTC by Defense Industry Daily staff
The USA’s aerial tanker fleet is the backbone of American global air power, but its youngest KC-135 planes were built over 40 years ago. Replacing them is the USAF’s #1 priority, and the initial KC-X phase of 175 operational aircraft amounts to a $35 billion buy. When EADS Airbus and Northrop Grumman’s A330 MRTT was picked over Boeing’s KC-767 on Feb 29/08, therefore, the shockwaves were felt around the world.
The most recent event has sent shockwaves of its own, however, and deserves its own depth coverage. As everyone predicted, the losing firm immediately launched a protest with the Congressional Government Accountability Office. The GAO has no power to compel the Air Force, but the US military usually works to comply with GAO decisions in order to minimize political difficulties. Those difficulties have just increased significantly, however, as the GAO sustains Boeing’s protest and pours fuel on the smoldering discontent among many Congressional representatives. The implications extend beyond the USA’s borders, and into the global defense industry as a whole. Now, the full decision has been released – and the Air Force may be about to try to bull its way through to an award by the end of the year, using the same playbook it tried the CSAR-X helicopter contract…
- The Summary
- The GAO Release
- The Full Decision [NEW]
- The Way Ahead: Analysis [updated]
- Additional Readings & Sources
On June 18/08, the GAO issued its ruling, and sustained Boeing’s protest. The money paragraph in the GAO’s release [PDF]:
“The GAO recommended that the Air Force reopen discussions with the offerors, obtain revised proposals, re-evaluate the revised proposals, and make a new source selection decision, consistent with the GAO’s decision. The agency also made a number of other recommendations including that, if the Air Force believed that the solicitation, as reasonably interpreted, does not adequately state its needs, the Air Force should amend the solicitation prior to conducting further discussions with the offerors; that if Boeing’s proposal is ultimately selected for award, the Air Force should terminate the contract awarded to Northrop Grumman; and that the Air Force reimburse Boeing the costs of filing and pursuing the protest, including reasonable attorneys’ fees.”
Michael R. Golden, the GAO’s managing associate general counsel for procurement law:
“Our review of the record led us to conclude that the Air Force had made a number of significant errors that could have affected the outcome of what was a close competition between Boeing and Northrop Grumman. We therefore sustained Boeing’s protest… We also denied a number of Boeing’s challenges… because we found that the record did not provide us with a basis to conclude that the agency had violated the legal requirements with respect to those challenges.”
The GAO Release
From the official June 18/08 release:
“The GAO decision should not be read to reflect a view as to the merits of the firms’ respective aircraft. Judgments about which offeror will most successfully meet governmental needs are largely reserved for the procuring agencies, subject only to such statutory and regulatory requirements as full and open competition and fairness to potential offerors. The GAO bid protest process examines whether procuring agencies have complied with those requirements. Specifically, GAO sustained the protest for the following reasons:
1. The Air Force, in making the award decision, did not assess the relative merits of the proposals in accordance with the evaluation criteria identified in the solicitation, which provided for a relative order of importance for the various technical requirements. The agency also did not take into account the fact that Boeing offered to satisfy more non-mandatory technical “requirements” than Northrop Grumman, even though the solicitation expressly requested offerors to satisfy as many of these technical “requirements” as possible.
2. The Air Force’s use as a key discriminator that Northrop Grumman proposed to exceed a key performance parameter objective relating to aerial refueling to a greater degree than Boeing violated the solicitation’s evaluation provision that “no consideration will be provided for exceeding [key performance parameter] objectives.”
3. The protest record did not demonstrate the reasonableness of the Air Force’s determination that Northrop Grumman’s proposed aerial refueling tanker could refuel all current Air Force fixed-wing tanker-compatible receiver aircraft in accordance with current Air Force procedures, as required by the solicitation.
4. The Air Force conducted misleading and unequal discussions with Boeing, by informing Boeing that it had fully satisfied a key performance parameter objective relating to operational utility, but later determined that Boeing had only partially met this objective, without advising Boeing of this change in the agency’s assessment and while continuing to conduct discussions with Northrop Grumman relating to its satisfaction of the same key performance parameter objective.
5. The Air Force unreasonably determined that Northrop Grumman’s refusal to agree to a specific solicitation requirement that it plan and support the agency to achieve initial organic depot-level maintenance within two years after delivery of the first full-rate production aircraft was an “administrative oversight,” and improperly made award, despite this clear exception to a material solicitation requirement.
6. The Air Force’s evaluation of military construction costs in calculating the offerors’ most probable life cycle costs for their proposed aircraft was unreasonable, where the agency during the protest conceded that it made a number of errors in evaluation that, when corrected, result in Boeing displacing Northrop Grumman as the offeror with the lowest most probable life cycle cost; where the evaluation did not account for the offerors’ specific proposals; and where the calculation of military construction costs based on a notional (hypothetical) plan was not reasonably supported.
7. The Air Force improperly increased Boeing’s estimated non-recurring engineering costs in calculating that firm’s most probable life cycle costs to account for risk associated with Boeing’s failure to satisfactorily explain the basis for how it priced this cost element, where the agency had not found that the proposed costs for that element were unrealistically low. In addition, the Air Force’s use of a simulation model to determine Boeing’s probable non-recurring engineering costs was unreasonable, because the Air Force used as data inputs in the model the percentage of cost growth associated with weapons systems at an overall program level and there was no indication that these inputs would be a reliable predictor of anticipated growth in Boeing’s non-recurring engineering costs.
The 69-page decision was issued under a protective order, because it contains proprietary and source selection sensitive information. The GAO directed counsel for the parties to promptly identify information that cannot be publicly released so that GAO can expeditiously prepare and release, as soon as possible, a public version of the decision.”
The Full Decision
On June 25/08, the redacted decision was made available to the public [see also PDF format].
The full decision could also be read as vindication by people on either side who wish to believe that this is so. A more sober reading offers strong cautions to both sides.
For Boeing, the GAO found that the USAF’s evaluations of the Airbus/Northrop Grumman in a number of key areas was reasonable. Those areas include some major elements of the bid, such as:
- Relative evaluations of past performance on similar programs, in which Boeing’s programs were assigned “moderate” risk vs. Northrop Grumman/Airbus’ “low” risk.
- The USAF’s decision that Northrop Grumman’s proposed setup of an entirely new production line in the USA, and associated new production arrangements, nonetheless represented a “low” risk due to proposed risk mitigation measures.
- The use of the IFARA model to evaluate the overall effectiveness of each aircraft. The existing KC-135 fleet is the baseline at 1.00; Boeing’s KC-767AT received a 1.79, while Airbus/Northrop Grumman’s A330-200 MRTT received a 1.90.
Given these 3 items alone, one might conclude that even if all of Boeing’s other protests were upheld, it might be possible to re-compete the contract by acknowledging Boeing’s points and still giving the contract to Airbus and Northrop Grumman. Indeed, Defense Tech reports on June 25/08 that:
“John Young, the Pentagon’s acquisition czar, has reportedly drafted a letter for the four congressional committees that oversee defense spending and policy informing them of the Pentagon’s decision to go ahead and award the contract to Northrop Grumman… “Their finding is that the full document is quite different from the summary,” issued last Wednesday, said a source familiar with the issue. The source said Air Force leaders believe much of what was challenged is “procedural” and can be resolved without rebidding the deal.”
This was more or less the approach taken with respect to the CSAR-X protest of the USAF’s $10-15 billion contract award to Boeing in 2006, for its HH-47 Chinook combat search and rescue helicopter. That contract has become a Washington watch-word for acquisition failure, and has now been through 2 successful GAO protests and a forced full rebid – with no guarantee that further protests and delays won’t accompany the next award, now expected toward the end of 2008.
The tanker deal is already a far more political exercise than CSAR-X, however, and the GAO’s decisions in several areas point to very serious flaws that cannot reasonably be described as merely procedural. Instead, they go to the heart of Boeing’s costs and performance evaluations.
For instance, the GAO found that awards of equal ratings to Boeing and Northrop Grumman were not supported by the facts of the bids, and should have gone to Boeing under the terms set out in the RFP. Some of those parameters were performance-related, and some related to overall costs. On the other side of the competition, Airbus and Northrop Grumman’s key advantages in cargo capacity and range were disallowed given the RFP’s terms, and serious questions were raised concerning compliance with key requirements, including the airspeed required to refuel all fixed-wing aircraft in the USAF’s inventory, and the requirement to have full depot-level maintenance operational within 2 years.
Finally, several of the GAO’s findings also make it clear that key parameters were not adequately communicated to Boeing, in ways that affected their choice of platform. See especially item #2 above, from the GAO’s June 18/08 release, which is described in more detail in the full decision and explicitly flagged as a factor that influenced Boeing’s choice of platform in an unfair way.
The Way Ahead: Analysis
The GAO does not have the power to make the USAF comply with this recommendation. If the service wished, it could submit a written response within 60 days saying that it was going ahead as planned, and ignoring the ruling.
This deal’s size and stakes, however, ensured that any adverse ruling from the GAO would touch off a Congressional firestorm. It is that Congressional pressure, expressed bluntly via appropriations bills and program funding control, that is likely to decide the fate of the USA’s future aerial tanker fleet.
A GAO ruling that the process had been conducted to spec would have made Congressional opposition to the USAF’s choice very difficult. Difficult for domestic reasons, because there are large constituencies on each side, and interference with a certified process would be seen as blatant corruption. Difficult, too, because of the international response if American politicians worked to overturn a huge decision that benefited a European firm, even though it was certified as fair by an independent party. Retaliation has already been threatened in Europe, leading Lockheed Martin’s CEO to make a speech recently that offered support for the Airbus win.
The USAF had hoped to structure their RFP process in order to achieve that outcome, and worked hard toward that goal. The June 18/08 ruling indicates that they failed. That failure gives Boeing’s backers, which include home state senator and presidential candidate Barack Obama, a lot of ammunition. The full decision, released on June 25/08, offers even more ammunition. It is possible that the USAF will attempt a ‘narrow’ approach that re-evaluates the same proposals according to the GAO’s objections, but the terms of the GAO’s ruling would make any approach short of a full re-compete with a new RFP and new bids a political disaster.
Northrop Grumman and its supporters will not be idle during this time, of course. They have their own industrial beneficiaries scattered throughout the country, and political supporters at the state level have shown themselves to be very effective and well organized. Now that the initial win has created strong expectations in all of these communities, a reversal of the award decision would come with real political costs.
Which is why the most likely political decision remains a split of the KC-X order between the 2 manufacturers:
“A split-buy is the most likely proposal in the political arena, given… past tendencies in Congress and the political leanings of the states most affected, which tend to lean more toward the Democratic Party in Boeing’s case, and more toward the Republican Party in EADS/Northrop’s case. On the other hand, the USAF strenuously opposes a split buy, both for reasons of delay (estimated at 18-24 months) and of future operations and maintenance inefficiencies.”
This gives everybody something – except the US Air Force. They may end up having to decide whether the delays and issues created by a split buy would be less difficult than the delays and issues created by a bruising battle with large swathes of the US Congress, and strained relations with key USAF contractors, no matter what it decides.
The terms and changes in the revised RFP will offer an early indication of the USAF’s choice. Those choices will, in turn, have consequences.
Depending on the USAF’s alterations to the RFP, Boeing may choose to make changes of its own. One can be sure that Boeing will pay far closer attention to platform selection in a re-compete, after the rude awakening in the first round that their assumptions about their customer were dead wrong. Several options are open, including using the stretched 767-300 as their base platform. Boeing could also use their 777 if it appears that additional range, fuel, and capacity will receive enough weighting in the re-compete. This would give it a contender that can out-range and out-carry the A330, though the proposal’s design risk would rise because the KC-767 is now a delivered product, while a KC-777 would truly be a “paper airplane.”
Regardless of Boeing’s platform decisions, however, a full court press can be expected on the political front, to keep the pressure on.
Leaving the US Air Force caught between a political rock, and a hard place.
Additional Readings & Sources
- GAO (June 25/08) – The full, but redacted, decision. See also PDF format for “B-311344; B-311344.3; B-311344.4; B-311344.6; B-311344.7; B-311344.8; B-311344.10; B-311344.11, The Boeing Company, June 18, 2008″
- GAO (June 18/08) – Boeing Bid Protest Press Release [PDF]
- Defense Tech (June 25/08) – Top OSD Officials Think Tanker Deal Can Go Ahead
- Boeing (June 25/06) – Boeing Statement on Government Accountability Office Tanker Protest Report.
- Northrop Grumman (June 25/08) – Northrop Grumman Stands Ready to Support Air Force Tanker Decision; GAO Analysis Does Not Alter the Air Force Finding that the KC-45 is the Superior Tanker
- USAF (June 19/08) – UPDATED — AF officials comment on GAO tanker bid decision. Which amounts to “we’re reviewing it.”
- Pentagon DefenseLINK (June 18/08) – Accountability Office Urges Air Force to Re-Bid Tanker Contract
- Boeing (June 18/08) – Boeing Statement on Tanker Protest Ruling
- Northrop Grumman (June 18/08) – A statement on the firm’s home page says: “We respect the GAO’s work in analyzing the Air Force’s tanker acquisition process. We continue to believe that Northrop Grumman offered the most modern and capable tanker for our men and women in uniform. We will review the GAO findings before commenting further.”
- WKRG News 5, Alabama (June 18/08) – Tanker Dispute: GAO Favors Boeing. Includes a series of links to official statements by various parties in Alabama and beyond. Note that Mobile would be the prime location for assembling the Airbus A330F and tanker.
- Birmingham News (June 18/08) – Update: Riley, Alabama lawmakers surprised by GAO decision on tanker
- Seattle Times (June 18/08) – Boeing wins tanker protest, but drama is far from over
- NY Times International Herald Tribune (June 18/08) – Boeing wins another shot at U.S. tanker contract
- Col. Ken Allard (June 16/08) – Air Force Tanker Contract Will Test Alabama Legal Infrastructure. An under-appreciated element. “If Boeing Co. had won the tanker contract, most of the manufacturing work would have been done in the Seattle area. EADS proposes building the aircraft at a new plant in Mobile, Ala. But are the supporting legal infrastructures in Seattle and Mobile roughly equal? Such concerns are vital, given the usual propensities for fraud and malfeasance in any $50 billion contract…”
- Seattle Times (June 12/08) – Boeing’s dilemma: If company loses tanker appeal, should it throw in the towel? “Boeing Chief Executive Jim McNerney faces a tough dilemma if a federal review due next week doesn’t back Boeing’s claim… Should he back away from a confrontation with the U.S. Air Force or elevate it into a nasty political fight? McNerney recently told Lehman Brothers analyst Joe Campbell that it will be his “most important decision this year.”
- Lockheed Martin (June 3/08) – Lockheed Martin Chairman Says Protectionism No Substitute For Competitive Strength
- DID Spotlight – GAO re: CSAR-X… Re-Compete the Contract! The fate of CSAR-X offers a cautionary note.