Boeing is exhausting its management reserve on the U.S. Air Force KC-46A aerial refueler program faster than expected, and the program management team is investigating the cause as it assembles a revised cost estimate for Congress, a senior Air Force official says.

Boeing officials say the accelerated burn rate is a result of expedited risk-reduction efforts on the program. “We have brought forward the allocation of management reserve largely in order to expedite risk mitigation opportunities, such as system integration laboratories,” says Boeing spokesman Damien Mills. “However, the total management reserve budget remains unchanged.”

Boeing won the fixed-price, incentive-fee contract 18 months ago after a protracted and contentious competition against EADS for the sale of 179 767-2C-based aerial tankers. Government auditors have previously estimated the cost for development completion to be $5.3 billion, over the government’s negotiated ceiling price of $4.9 billion (which includes the Pentagon’s share of a projected overrun of the contract ceiling).

These auditors had expected that Boeing would have to pay for up to $400 million worth of the development. The strategy assumes the company will begin making money once enough units are sold at sufficient rates during production. Thus, a management reserve burn rate poses a problem for Boeing, which would have to pay the bill, rather than the Pentagon, if these funds run out entirely and the program encounters a problem.

Foreign sales could help the company recover its losses sooner; Singapore is the first country to request information on the KC-46A for a potential buy, says Maj. Gen. J.T. Thompson. However, the country also is likely to consider the A330-based tanker being sold by Airbus Military.

Management reserve funding is used by program overseers to solve problems that typically crop up during development. The accelerated burn rate came to light in a recent schedule risk assessment on the program, this source says.

Despite this recent issue, Thompson says overall the team is “currently in a good place from a cost, schedule and tech performance standpoint” in designing the KC-46.

Boeing recently began operating the first of three major system integration laboratories (SILs) designed to support risk reduction for the development program one month early, Thompson told a group at the annual Air Force Assn. conference here this week. This SIL is designed to validate systems associated with the 767-2C commercial baseline platform. Two other SILs are expected soon — one for the military subsystems for the refueler and one integrated hardware-in-the-loop lab for pilots and remote refueling boom operators.

Meanwhile, Thompson says the post-contract award decision by Boeing to shut down its Wichita boom fabrication facility and shift the operations to the Everett, Wash., area “is a risk to the program, but something that we feel is manageable at this point.” The relocation should be complete in January, he says.

Meanwhile, in another sign of progress, program officials have already begun live-fire testing on some systems of the 767 airframe, Thompson says. Additionally, Spirit AeroSystems, a subcontractor to Boeing, has begun fabricating the first KC-46A boom.

Thompson warned that this progress and the “good deal” negotiated by the government on the contract would be wasted if the sequestration process takes effect in January; this process calls for across-the-board cuts to the defense budget if lawmakers do not agree to a federal debt reduction deal.

The KC-46A program would be particularly harmed if this process takes effect, Thompson says, because a failure of the government to fund the project to its fixed-price obligations would trigger a full contract renegotiation, potentially including major changes to terms and conditions.

“If I break that fixed-price contact, I stand the potential to lose out on some of the great things that we put in this vehicle,” Thompson says.