When Boeing won the long-fought contest to develop the KC-46 tanker for the U.S. Air Force, the service was determined to shift as much of the risk to the supplier as possible: The pair settled on a fixed-price contract worth up to $4.9 billion. The government's strategy was based on experience in which industry too often failed to deliver what it promised on time and on budget.

Twenty-one months into the program, Boeing plans to deliver the first 18 combat-ready KC-46s to replace KC-135s in mid-2017. In the meantime, the government estimates that Boeing will spend $400 million of its own money to design the tanker. While it is too early to tell whether Boeing's business decision will pay off, it appears that the structure of the contract is inducing the kind of behavior the Air Force hoped for.

Boeing's strategy is to eliminate as much of the development risk as early as possible. Buttressing this approach is substantial upfront investment from the government and, possibly, from the contractor, if the auditors are right and Boeing overruns the contract ceiling.

Early in the program, the company began using management reserve (MR) funds (monies set aside for unplanned activities) at a high rate, as noted this fall by program director Maj. Gen. J.T. Thompson. MR funds are provided in a program to be used at the manager's discretion. But several major programs, including the F-35 and Lockheed Martin's Space-Based Infrared System missile warning satellite, burned through MR funds repeatedly, forcing the Air Force to ask Congress again and again for billions of unexpected dollars.

Boeing, however, is not tapping MR to solve design problems—as was the case in those programs. Rather, the company is hoping to prevent problems by investing in systems integration laboratories (SIL) early in development, according to Maureen Dougherty, Boeing's KC-46 vice president.

The MR burn rate was 8% of the cost of budgeted work remaining on the program, according to Laura McGowan, Air Force spokeswoman. It has since decreased to 3%. This tracks with Boeing's plans, according to Dougherty: “I have invested MR upfront to accelerate risk-reduction and make sure we are driving every issue we can possibly think of out early.” Discovering design issues as early as possible will provide “headroom for something we might learn along the way” that could retire rework, she says.

Already two of five SILs are up and running. The first, known as SIL 0, will be used to test the software designed for the 767-2C, the commercial aircraft configuration on which the KC-46 is based. This SIL began operations Sept. 12.

The -2C differs from the baseline 767-200ER with the addition of Boeing 787 cockpit displays, cargo door and floor, auxiliary fuel tanks and plumbing and wiring that will support the mission systems of the aircraft. It will roll off Boeing's Everett, Wash., 767 line and be shuttled to a finishing center here for installation of the military-specific hardware (including the boom and defensive systems).

In mid-November, Boeing officials conducted the first simulated 767-2C flight, using actual displays and flight controls in SIL 0, says Ann Berner, KC-46 mission control test and integration leader. It is only one of many tests to come, but it is an incremental step forward for the program, she notes.

Boeing has also made headway on its SIL 2 E Cab, a mock-up of a KC-46 cockpit that will be used for testing human factors for the crew. The -2C software will begin operation in the E Cab in April, says Paul Lambertson, who handles flight deck crew operations for test and evaluation.

The remaining SIL will be used to test KC-46-specific avionics and software. Boeing is also building a wet-fuels lab, which will include the aircraft's actual fuel system hardware (including a boom). A separate lab will demonstrate the covert lighting needed to support special-mission aircraft.

Meanwhile, boom assembly began here in October. Boeing plans to take a year or more to construct the first KC-46 boom, a fly-by-wire version of the KC-10 boom design, to allow overseers to perfect the fabrication process, says Rick Miller, boom assembly facility leader. This unit will eventually be used in the wet-fuels lab for testing late next year and will be a Boeing-owned asset. Modern manufacturing techniques to improve parts availability are being added to the line.

KC-46s will eventually be built at a rate of 12-15 per year.

The first 767-2C flight is planned for mid-2014, with the maiden KC-46 flight to follow in early 2015.

Boeing officials say they are confident they can meet the aggressive schedule because of the unprecedented integration of development and testing work between its military and civil aviation divisions. This marriage was most recently tested in developing the 737-based U.S. Navy P-8 maritime patrol aircraft.

The KC-46 program is expanding on lessons from the P-8, whose development program is 97% complete. One is to certify as many parts as possible as compliant with International Traffic in Arms Regulations (ITAR) as early as possible to avoid the trouble and cost of restricted items. This was done later in the P-8 effort, forcing officials to needlessly oversee parts that were not out of compliance, says Carl Lang, a P-8 program official. ITAR-restricted parts require special handling and are accessible only to approved personnel.

Air Force officials are refining a new cost estimate in accordance with Pentagon regulations for annual updates; a new figure was not provided.

Though the contract structure appears to be driving a hearty and potentially fruitful risk-reduction effort by Boeing, it could unravel if Congress does not strike a budget deal to head off severe mandated cuts to the defense budget by Jan. 1. If the so-called sequestration process is not avoided with a debt-reduction plan, the Pentagon will have to break many of its contracts. In the case of the KC-46, the government could lose its favorable contract conditions because it would have to renegotiate terms with Boeing.

Neither Boeing nor Air Force officials would speculate about the impact on the KC-46 contract if this takes place.