LRSB: (Yet Another) Tale of Two Protests

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Not surprisingly, the Long-Range Strike Bomber protest is on. Boeing and Lockheed Martin claim the Air Force’s selection of Northrop Grumman for the development and early production work – worth $23.5 billion – was bungled. The service failed to conduct a proper assessment of the risk for both teams to execute the work and neglected to account for modern advances in manufacturing and life-cycle maintenance, all of which would reduce the cost of such a program, according to Loren Thompson, a Washington DC-based analyst. Thompson’s think-tank receives funding from both Boeing and Lockheed Martin, and the latter employs him as a consultant; he publicly endorsed the Boeing/Lockheed Martin bid despite the requirements and source-selection criteria being classified. Thompson receives no funding from Northrop Grumman.

The losers filed their protest with the Government Accountability Office Nov. 6 after receiving their debrief Oct. 30 from the Air Force.

And, not surprisingly, the other protest is on. You see, in Washington, there’s the protest – filed with GAO and subject to a 100-day audit – and there’s the Protest – the political campaign to disparage the agency that made the alleged flawed choice and its entire strategy. The latter is designed as an end run to whatever the GAO may rule. By undercutting the agency and its strategy at the knees in Congress, pressure can force an agency into submission regardless of a GAO ruling.

These are two parallel but separate avenues in any defense contractor’s red book for major programs; all the contractors keep war plans for protests alongside the process of bidding for programs these days. I’ll outline the two strategies below.

But, before I get into that, it is worth noting the ink on the protest isn’t even dry and we are already learning more about this secretive program, likely to the chagrin of an Air Force claiming details equate security violations and jeopardize the capabilities of the bomber before it even gets built. It is worth noting one PA officer told me when I asked what the actual contract value was (only the independent cost estimate of $23.5 billion has been released, not the actual money to be paid to Northrop), that sharing the actual value could allow adversaries to forensically decipher what the bomber looks like. I found that to be a bit of an overstatement, at the least.

One new data point: The estimated price of the bids! Ta-da! Thompson said in his Nov. 6 Forbes piece that the Air Force unfairly doubled the estimate at completion for the work of both contractors. He later told me that each bidder was in the $10-$11 billion range, far below that $23.5 billion independent cost estimate, with Northrop coming in at a lower cost. He did not, however, have the cost of the actual contract.

If this is true, and the Air Force padded both contractors’ bids by 100%, this would certainly be unusual and worth a second look.

This leads to another new data point: Boeing objected to this because these price adjustments relied upon historical data from legacy programs – such as the botched B-2 development – for ground truth, not proposals from both teams on how to incorporate modern manufacturing and maintenance techniques. If Boeing’s claims are right, then the Air Force wasn’t sure enough of its own “bending the cost curve” initiative and ability to rely on innovations to reduce cost to put its money where its mouth is.

You see, the service has to budget – or earmark money -- to the official independent cost estimate – in this case that $23.5 billion figure. If it budgeted to the far less $10-$11 billion range cited by Thompson as realistic, there’d be a whole lot less wiggle room for overruns and margin. And, it would be a whole lot more painful to address overruns because the service would have to go to the Office of the Secretary of Defense and Congress, which, at best, is not pleasant. At worst, it tanks programs.

It seemed evident from the outset of the source selection announcement Oct. 27 that the cost estimates would raise eyebrows. The Air Force’s own fact sheet notes that a program requirement since fiscal year 2010 was to produce the units for under $550 million apiece in those dollars (that’s $606 million in today’s money). But, its independent cost estimate cites a target of $564 million in today’s dollars. That is a huge difference of $42 million, roughly the cost of some Pentagon helicopters. Those numbers prompted me to wonder just why the independent cost estimate was so “low” in comparison. But, what Thompson is saying is that the bidders’ proposals were even lower.

This begs the question: Is the Air Force’s high cost estimate a brilliant sleight of hand that could keep detractors off its back by providing an overrun shelter (this is a cost reimbursable contract) and, possibly, set the stage for a “low(er than estimated)-cost bomber” story at the end of the day? Or, could this be a colossal political misstep that will actually draw fire by giving the losing bidder grounds to raise the question early in the program’s progress, when it is most vulnerable to a kill?

Which brings me back to the two protest campaigns. On the latter point above, Boeing and Lockheed are already on the advance by way of Thompson. He unabashedly acknowledges this is the way things are done in DC. His piece not only outlines the basic protest claims of the losing team. He seeks to elevate the discussion beyond the strict avenue outlined for a GAO protest review. He is questioning he entire procurement system and if it was used to get a truly good deal for the taxpayer. In doing so, he also casts doubt on whether the Air Force is capable of making good on its bending the cost curve initiatives, as LRS-B has been cited as a poster child program for it.

This is a noble, valid and reasonable question to ask. And, it picks at an Achilles heel for the Pentagon. Its procurement system is known as inefficient and slow. And, recent missteps for the Air Force – including the repeated problems leading to a KC-46 source selection and similar problems attempting to buy an HH-60G replacement – have already eroded its credibility in Congress. It’s not hard to capitalize on mistrust for the system in Congress; it’s almost like fishing from a barrel! Keep in mind Boeing successfully overturned its last major protest against Northrop. When the latter won the first KC-135 replacement competition, protests eventually led to a full recompete. Despite years of delay, Boeing eventually won the program. Granted, the GAO upheld the protest, but the company also pilloried the Air Force’s process publicly, sparking congressional ire and reviews.

So, Thompson and Boeing are working off of that sentiment to attempt to turn the entire procurement on its head. But, this is not a surefire way to turn the selection decision around.

A negative GAO ruling would, however, do just that. The auditors have 100 days to review the very specific claims that the Air Force unfairly scored risk in the source selection. GAO’s remit is to rule on whether an agency clearly and fairly articulated its source selection rules and whether that agency followed its own rules. It cannot touch on the savvy of an agency in pursuing a buy. While narrow in its focus, its impact can be vast. An adverse GAO ruling could send the Air Force back to the drawing board for a competition, costing years of delay toward the bomber’s entry into service.

On this point, Boeing and Lockheed Martin could have an uphill battle. Aside from the obvious avenue ahead for the GAO review, questions I have are:

*Did the Air Force articulate that it would use these legacy program models to assess risk?

*If so, did Boeing and Lockheed Martin raise objections about those models throughout the procurement?

*If so, did the Air Force try to address them?

Bottom line, If Boeing and Lockheed Martin failed early in the program to understand how the use of legacy program models could impact their bid, it could very well be a chink in the team’s protest.

So, happy holidays, folks. We are in for another protest season.

 

 

 

 

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What's Ares?

Aviation Week editors blog their personal views on the defense industry.

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