Pentagon Gives First Peek Into KC-46A Details

Discussion in 'Americas' started by Neil, Apr 9, 2011.

  1. Neil

    Neil Senior Member Senior Member

    Jun 23, 2010
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    The Pentagon is quite confident Boeing can execute the notional plan for its long-fought, $4.4 billion KC-46A tanker development contract, but the company is working to iron out a detailed schedule of work by the end of the summer.

    Risk in Boeing’s winning KC-X proposal “wasn’t low. It is probably closer to the moderate side, but it is manageable,” says Shay Assad, director of procurement and acquisition policy at the Pentagon, in an exclusive interview with Aviation Week.

    An integrated baseline review (IBR), which will outline the entire program’s master plan, is expected six months from contract award, which was Feb. 24. The IBR will sort out how that risk is managed and all major milestones, including flight testing.

    The company signed up to a fixed-price incentive deal to design the KC-135 refueler replacements. Solid execution on the contract could exonerate Boeing for poor performance delivering 767-based tankers for Japan and Italy, and for losing its first KC-X attempt to a Northrop Grumman/EADS team in 2008.

    Perhaps more importantly, though, progress on the KC-46A contract will be a reflection of the Air Force’s ability to manage a major program after a decade of sordid procurement foul-ups, including the repeated restarts of the KC-X duel. “The Air Force and the department basically put its very best people on this source selection,” Assad says.

    The proposed price for Boeing’s 767-based KC-46A program — $21.4 billion — beat that from EADS by about 10%, according to EADS Chairman Ralph Crosby. Boeing’s price, including inflation and in today’s dollars, is about $31.5 billion, EADS officials say. The Air Force plans to buy 179 tankers, four of which will be used for testing.

    Pentagon and Boeing officials will not release the target per-unit price of the aircraft in early lots, though the numbers have been negotiated. Until the roughly five-year development program is complete and the Air Force exercises an option for production, the figure is proprietary, Assad says.

    However, based on the aforementioned figures, it averages to about $154.9 million for the 175 production aircraft.

    The fixed-price arrangement is designed to limit the government’s financial exposure to delays or a cost overrun, and Pentagon acquisition czar Ashton Carter says he plans to use more of these fixed-price contracts to insulate the government from the seemingly rampant cost overages that have taken place in recent years. On the KC-46A, the government agrees to pay 60% of any cost overrun up to 125% of the negotiated target cost (which does not include the company’s profit, included in the target price). If the overrun reaches the 125% ceiling, then profit begins to erode.

    “If they overrun their target, they will lose a portion of their profit until it actually goes to zero. And, at that point, the contract effectively is at ceiling,” Assad says. “Once they hit ceiling, they start to lose money.”

    By contrast, the fixed-price contract for low-rate, initial production of the Lockheed Martin F-35 Joint Strike Fighter, which is not commercially derived, is 50/50, with the ceiling at 120%.

    Another financial protection for the Pentagon built into the KC-46A tanker deal is the requirement that each lot’s renegotiation produce a target price lower than the previous lot. “Every price is downward-negotiable,” Assad says.

    Preliminary design review is expected around mid-2012, with critical design review to follow about one year later, he adds. The first 18 aircraft, including the four developmental aircraft, must be delivered in 2017. Gives First Peek Into KC-46A Details

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