KC-46 EMD contract 101

The US Government Accountability Office (GAO) has recently published a report about the KC-46 Tanker Aircraft [PDF, 1.2 MB]. In it the GAO reviews the situation of the program, measures introduced, costs, technology development, etc. In the first page it summarizes:

“The KC-46 program 2012 estimates for cost, schedule, and performance are virtually the same as last year’s, with the contractor running very close to the planned budget and schedule”.

On the technical side it points to several challenges: flight test plan, completion of engineering drawings, relocation of personnel and facilities related to defense equipment, etc.

However, in this post I wanted to focus only on the costs and contractual sides of the program, given the amount of articles that we could read about it during the past year. Several news have reported about the cost overruns in the program and about how these were to be born by Boeing.

The last time I read about the topic, the reported overrun was of about 1.2bn$ on a 4.4bn$ contract, out of which ~500M$ would be born by USAF and the remaining 700 M$ by Boeing (see articles from Bloomberg, Aviation Week, The Seattle Times…).

But, where do these figures come from?

One of the many things I like of the USA is the transparency in making lots of information and data available to the public, for example, budgeting information of the Air Force, GAO’s assessments, hearings at the Senate and House of Representatives Committees, etc. Thus, you can find:

Contractual framework

From the USAF budgeting material, page 675, under the paragraph “E. Acquisition Strategy“, the explanation of the different contracts structure for the KC-X program (the name of the program prior to the contract award) can be found:

“The KC-46 program released a final Request for Proposal (RFP) on 24 Feb 2010, and entered source selection on 9 Jul 2010. The KC-46 program held a Milestone B Defense Acquisition Board (DAB) on 23 Feb 2011, received approval to enter EMD from OSD AT&L on 24 Feb 2011, and awarded the KC-46 contract to Boeing on 24 Feb 2011 to develop and procure 179 KC-46 aircraft. The KC-46 contract procurement was conducted via a full and open competition per Federal Acquisition Regulation (FAR) Part 15, and resulted in a FY 2011 EMD Fixed Price Incentive Firm (FPIF) contract. The EMD phase will develop, build, and test four KC-46 aircraft, and will qualify receiver aircraft.

Production will begin in FY 2015 with two Low-Rate Initial Production (LRIP) lots (Firm Fixed Priced (FFP)) and then Full-Rate Production (FRP) options (FFP with Not to Exceed (NTE) + Economic Price Adjustment (EPA)). The LRIP and FRP options will be exercised following successful completion of Operational Assessments (OAs) for the LRIP decisions, and a successful completion of Initial Operational Test and Evaluation (IOT&E) for the FRP decision.”

Thus, so far only the Engineering Manufacturing and Development (EMD) contract  phase has been contracted, on February 24th Feb 2011 (you can see Boeing and DoD press releases).

Cost Assessment by GAO:

From the Government Accountability Office (GAO) assessment of the program, referred above:

“The current development cost estimate of $7.2 billion as reported in October 2012 includes $4.9 billion for the aircraft development contract and 4 test aircraft, $0.3 billion for the aircrew and maintenance training systems, and $2 billion for other government costs to include program office support, government test and evaluation support, contract performance risk, and other development risks associated with the aircraft and training systems. […]

Through December 2012, Boeing has accomplished approximately $1.4 billion (28 percent) in development work and has more than $3.5 billion (72 percent) in estimated work to go over the next 5 years. […]

Barring any changes to KC-46 requirements by the Air Force, the contract specifies a target price of $4.4 billion and a ceiling price of $4.9 billion at which point Boeing must assume responsibility for all additional costs. […]”

See the table below showing Air Force and Boeing contract amounts and estimates:

KC-46 EMD Contract & Estimates.

KC-46 EMD Contract & Estimates (Source: GAO).

The report from GAO offers the following graphic referring to what they call “management reserves“:

KC-46 EMD Management Reserves (Source: GAO)

KC-46 EMD Management Reserves (Source: GAO)

This graphic shows well the rate at which Boeing has been supposedly burning its margins. However, it does not reflect at all the nature of the issue, related to the type of contract this “Engineering Manufacturing and Development” (EMD) contract: a Fixed Price plus Incentive Firm type of contract (FPIF).

Fixed Price Incentive Firm contracts

It is not easy to find good literature online about these types of contracts. The Wikipedia for instance does not have yet an article on FPIF contracts, but only on the calculation of the Point of Total Assumption. However, you can find a couple of good sites with explanations and examples of FPIF contracts here and here [PDF from the US Army].

Some concepts that we need to bear in mind are (definitions from the link above):

Target Cost (TC): The initially negotiated figure for estimated contract costs and the point at which profit pivots.
Target Profit (TP): The initially negotiated profit at the target cos
Target Price: Target cost-plus the target profit.
Ceiling Price (CP): Stated as a percent of the target cost, this is the maximum price the government expects to pay. Once this amount is reached, the contractor pays all remaining costs for the original work.
Share Ratio (SR): The government/contractor sharing ratio for cost savings or cost overruns that will increase or decrease the actual profit. The government percentage is listed first and the terms used are “government share” and “contractor share.” For example, on an 80/20 share ratio, the government’s share is 80 percent and the contractor’s share is 20 percent.
Point of Total Assumption (PTA): The point where cost increases that exceed the target cost are no longer shared by the government according to the share ratio. At this point, the contractor’s profit is reduced one dollar for every additional dollar of cost. The PTA is calculated with the following formula. [thus, PTA = (Ceiling Price – Target Price)/Government Share + Target Cost]

Where can we get these figures for the KC-46 EMD contract? Some of them are referred to in the different reports and budgeting materials (explicitly or implicitly) and others can be found in the following letter from US Senator John McCain to the DoD from July, 15 2011 [PDF, 400 KB].

Thus for the KC-46 EMD contract we have:

  • Target Cost: 3.9 bn$.
  • Target Profit: 500 M$.
  • Target Price: 4.4 bn$
  • Ceiling Price: 4.9 bn$
  • Share Ratio: 60% / 40% (Government / Boeing).
  • Point of Total Assumption (calculated): ~4.73 bn$.

With this information we can produce the typical FPIF contract curve, which is the only thing which is missing in ALL the news, budgeting materials, GAO reports, etc., that I have read and is the most illustrative graphic to understand what is going to happen if the cost overruns keep piling and who is going to bear which amount of the cost from which point:

KC-46 EMD FPIF Contract.

KC-46 EMD FPIF Contract.

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3 Comments

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3 responses to “KC-46 EMD contract 101

  1. Pingback: Odds and Ends: Refusing to fly 787; 787 AD was wrong; KC-46A cost analysis; Battery fix certification? | Leeham News and Comment

  2. thomas

    Boeing must provide its self on the first 18 kc-46 before can assembly the rest of the 161 kc-46 on time and on budget
    Is Boeing’s KC-46 tanker program in trouble and overweight? By Michelle Dunlop, Herald Writer
    http://www.heraldnet.com/article/20120918/BLOG01/120919810
    Boeing awaits Air Force OK to build tanker
    http://www.heraldnet.com/article/20130718/BIZ/707199951/1010/BIZ01#Boeing-awaits-Air-Force-OK-to-build-tanker
    Boeing KC-46 tanker may be delayed -GAO report
    March 26 (Reuters) – One year into its development, the Air Force’s new KC-46 refueling tanker being developed by Boeing Co faces “significant schedule risks” and technical challenges, and is already $900 million over budget, a congressional report found.
    http://www.reuters.com/article/2012/03/27/boeing-tanker-idUSL2E8EQJ1720120327
    Budget cuts could hit Boeing KC-46 tanker
    Threatened federal budget cuts next year could mean a 57 percent cut to Boeing’s KC-46 tanker program.
    http://www.bizjournals.com/stlouis/morning_call/2012/07/budget-cuts-could-hit-boeing-kc-46.html

    • Japan rejects 767 tanker | HeraldNet.com – Local news
    http://www.heraldnet.com/article/20070519/NEWS01/705190744
    Boeing Fixes Italian Tanker
    http://www.militaryphotos.net/forums/…124285-Boeing-Fixes-Italian-Tanker

    Northrop Grumman E-10 MC2A base on the Boeing 767 has been cancel
    http://en.wikipedia.org/wiki/E-10_MC2A
    Jon Ostrower of flight blogger once did a story about 767 tanker and the kc-46 need to be a 767-400 to do the job
    Its will take two Kc-46 to do the same job as one KC-10a or one Kc-45
    “Frankentanker”
    http://seattletimes.com/html/sundaybuzz/2004147565_sundaybuzz27.html
    The KC-747-100 lost to the KC-10A in 1972, the 747 RA 1 was used a test bed and a Sr-71 but the 747 has too much Air turbulence
    Iran has three 747 that where modify into tanker
    http://boeing-747.com/special_boeing_747s/boeing_kc-33a.php
    The 777 freighter did not exist at the time of RFP and the 777frighter is 253 million before modification
    The kc-10a was only 88 millions
    The Northrop Kc-46 would have been assembly in Mobil Alabama the 767 was design in 1972 and build in Japan and Italy and assemble in Everett
    Where is the Seattle times stories on how Boeing won the tanker contactor that make the news and all government reports and lawsuits and the time of Boeing giving its self a bailout aka the 767 tanker note Douglas won the 1972 tanker contacts with the Kc-10a vs Boeing Kc-747-100
    http://www.govexec.com/pdfs/druyunpostpleaadmission.pdf
    http://www.govexec.com/defense/2004/10/ex-pentagon-procurement-executive-gets-jail-time/17737/
    MAY 20, 2002 Boeing’s Secret
    Boeing’s Secret, Did the aircraft giant exploit accounting rules to conceal a huge factory snafu?
    http://www.businessweek.com/stories/2002-05-19/boeings-secret
    Taxpayers for Common Sense commends the Inspector General for this comprehensive study of the K-767 Tanker deal, the billion dollar Boeing bailout that has become the biggest military procurement scandal in decades. The 256-page report chronicles how senior Pentagon officials let Boeing play by a different set of procurement rules in attempting to award them this unprecedented sweetheart deal. The report also implicates numerous other military officials and throws cold water on the lone gunman theory that Darleen Druyun is entirely to blame for this mess. If that were true, we could close this case once and for all, but the report suggests that the deal had far deeper roots, and we are now left with more questions than answers.
    http://www.taxpayer.net/library/article/tcs-statement-on-inspector-general-tanker-report
    In 1997 Boeing won several contactors to rebuild the existing fleet of Kc-135 E, R, T see Boeing .com
    Alabama Aircraft Industries sues, says Boeing Co. stole secrets …
    blog.al.com/businessnews/2011/09/alabama_aircraft_industries_su.html
    In 1997 Boeing has been rebuilds the fleets of USAF Kc135 E, R & T, by replace and installing new aircraft skins, replace all wiring and BAE installed two crews cockpit with Pacer-CRAG systems.
    The fleet of kc-135 only has 1400-1800 hours on their airframe and good for 3900 hours or the years 2040, the fleet of tankers only fly 370 hours per years per aircrafts
    Since Strategic Air Command was disbanded in 1992 the United Stated no longer kept fleet of aircrafts airborne 24/7 requiring in-flight-refueling
    The rebuild Kc-135 with only 1400-1800 has been since to the Davis–Monthan Air Force Base in Arizona the Air Force Bone yards
    Boeing was wining contacts by rewriter the RFP and paying off Darleen Druyun a former United States Air Force civilian official Principal Deputy Undersecretary of the Air Force for Acquisition) and Boeing executive
    USAF lease and cancellation In November 2003
    CBO Slams Boeing Tanker Lease
    http://www.taxpayer.net/library/article/cbo-slams-boeing-tanker-lease
    For its Commercial Derivative Air Refueling Aircraft program, the U.S. Air Force decided to lease around 100 KC-767 tankers from Boeing after it was selected.[4] Despite other nations engaging in leasing of military aircraft, there was some criticism. U.S. Senator John McCain questioned whether it is really cost-effective for the USAF to lease aircraft at all, particularly as the aircraft would probably not have many, if any, buyers when their military service was concluded. This was derided as an uninformed criticism, as there were many U.S. allies in need of tanker aircraft. The Congressional Budget Office has also criticized the draft leasing agreement as fiscally irresponsible. In November 2003, a compromise was struck where the Air Force would purchase 80 KC-767 aircraft and lease 20 more.[5][6]
    Air Force’s KC-767A contract was officially canceled by the DoD in January 2006
    In December 2003, the Pentagon announced the project was to be frozen while an investigation of allegations of corruption by one if its former procurement staffers, Darleen Druyun (who had moved to Boeing in January) was begun. Reporter Joseph Galloway wrote that some documents found in congressional investigation indicated the A330-based tanker met more of the USAF specifications than the Boeing tanker and had a lower proposed cost.[7][8] Druyun pleaded guilty and was sentenced to nine months in jail for “negotiating a job with Boeing at the same time she was involved in contracts with the company”.[9] Additional fallout included the termination of CFO Michael M. Sears, who was sentenced to four months in prison in 2005, and the resignation of Boeing CEO Philip M. Condit.[10] The Air Force’s KC-767A contract was officially canceled by the DoD in January 2006 alone with other government workers
    The Northrop won the contact with the Kc-46 which had more capably then the kc-45 base on the A330F was would be assembly in Mobile, Alabama USA.
    Two Northrop Kc-45 tankers where completed on time and Budget when Boeing got the contact cancel
    The 767, kc-767 export tanker and the Kc-46 are build in Japan mate together In Evert and flow to Italy to be completed as tankers that creative 3900 (Americans ) jobs
    The Kc-46 and kc-767 carry no fuel under the floor like the Kc-135 and Kc-10A does and is more Cargo then tanker the GOA has stated the Kc-46 as tanker offer no improved over the existing kc-135R the 767-400 was not offer as a tanker, the 777F did not exist at the time of RFP and list price was 300 million before modification into a tanker (KC-10A sold for 88 millions)
    What does the USFA need with 179 cargo tanker aircraft, that more cargo then tanker!
    The USAF has C-40 (737), C130, C-17 and C-5 A,B,M
    The C-130 E, H, J is offer as a tanker alone with Northrop F/A-18 equipped with tanker pod and external fuel tanks replacing the KA-6 tankers
    The C-17 was design to be a tanker (and AWACS and weapons delivers) by installing two wing pods and refueling boom per drawing 93K004848
    The Air Force bomber fleets only has only 98 B-52H, 19 B-2A , 68 B-1b bomber ( 33 B-1B out service for the lack of spare parts and Budget) note most military aircrafts does have In-Flight-Refueling capitally

    Air Force Allowed Boeing to Rewrite Terms of Tanker Contract, Documents Show
    by Joseph L. Galloway Published on Sunday, March 28, 2004 by Knight-Ridder

    WASHINGTON – The Air Force gave the Boeing Co. five months to rewrite the official specifications for 100 aerial refueling tankers so that the company’s 767 aircraft would win a $23.5 billion deal, according to e-mails and documents obtained by Knight Ridder.
    But the e-mails and other documents show just how intent the Air Force was on steering the deal to Boeing, even though Airbus’ tankers were more capable and cost less.
    In the process, Boeing eliminated 19 of the 26 capabilities the Air Force originally wanted, and the Air Force acquiesced in order to keep the price down.
    The Kc-46 is 900 million over budget base on the 767 that design in 1972
    Boeing build 9 767 tanker, 8 for export for Japan ( that parts for Boeing) and 4 for Italy
    The 9th 767 tanker site at pain field has gone on sold and Boeing never used the Aircraft as a sell demos righter
    The Airbus has sold over 30 Kc-30 A330 MRTT is aircrafts to dated
    The kc-46 is not a replacement for the Kc-10A and the GOA report stated the 767 tanker offer NO improver as a TANKER over the existing Kc-135R that have service life of 3900 hour or still the years 2040
    • Kc-46 Fuel Capacity: 212,299 lb (Maximum Transfer Fuel Load: 207,672 lb
    • Kc-767 Maximum Fuel Load: 160,660 lb
    • Kc-135R Useful load: 200,000 lb
    • Kc-10A Maximum fuel capacity: 356,000 lb
    • Airbus A330 (MRTT) Useful load: 240,000 lb
    See http://www.globalsecurity.org/military/systems/aircraft/kc-135e.htm
    Its will take two kc-46 to do the job of one KC-10a or kc-45
    By VAGO MURADIAN And TOM KINGTON
    DUBAI and ROME — After two years of costly engineering and testing, Boeing has fixed the aerodynamic problems that limited the top speed of its KC-767 aerial tankers for the Italian Air Force, but officials in Rome are skeptical the company will deliver on time after repeatedly missing past deadlines
    The Japan and Italy export port tanker that where years late and did meet FAA requirement, had a under design wing for the wing refueling pods
    —————————————————-
    Given Boeing track record on government and commercial contact Boeing should be ban from military contact!
    The Boeing F-15SE Silent Eagle is a proposed upgrade of the F-15E by Boeing using stealth features, such as internal weapons carriage and radar-absorbent material.
    Boeing Anticipates Approval To Export F-15 Silent Eagle | …
    http://www.defensenews.com/…/7070306/Boeing-Anticipates…F-15-Silent-Eagle

    Boeing is not the only aircraft company in the world
    Boeing has 31 violation and has pay 31 billion in fine
    Ex-Boeing CFO pleads guilty in tanker deal scandal
    Darleen A. Druyun is a former United States Air Force civilian official (Principal Deputy Undersecretary of the Air Force for Acquisition) and Boeing executive
    http://www.dtic.mil/cgi-bin/GetTRDoc?AD=ADA437374
    http://en.wikipedia.org/wiki/Frank_Shrontz
    http://www.pogoarchives.org/m/cp/cp-boeing767c.pdf
    http://www.contractormisconduct.org/index.cfm/1,73,221,html?ContractorID=13&ranking=2
    http://www.nytimes.com/2007/10/15/us/15cnd-contract.html
    http://atwonline.com/zh-hans/comment/reply/168831/28551
    C:\Users\Thomas\letter to the newspaper 2011\boeing welfare\TCS Statement on Inspector General Tanker Report.mht
    Feds scrapping Boeing ‘virtual’ border fence work
    http://www.seattlepi.com/business/article/Feds-scrapping-Boeing-virtual-border-fence-work-739992.php
    http://www.seattleweekly.com/2001-04-18/news/high-flying-crime/
    Boeing MILITARY SCANDALS
    http://www.endgame.org/boeing.html
    http://www.contractormisconduct.org/index.cfm/1,73,221,html?ContractorID=13&ranking=2
    http://www.nytimes.com/2011/02/26/business/global/26tanker.html
    Japan rejects 767 tanker
    http://www.heraldnet.com/article/20070519/NEWS01/705190744
    Boeing Fixes Italian Tanker
    http://www.militaryphotos.net/forums/showthread.php?124285-Boeing-Fixes-Italian-Tanker
    Boeing Penalized for Poor Performance on Tanker Contracts
    http://gflorencescott.wordpress.com/2008/08/18/boeing-penalized-for-poor-performance-on-tanker-contract/
    737 Wedgetail Project (Arms Export Control Act Violation)
    http://www.contractormisconduct.org/index.cfm/1,73,222,html?CaseID=40
    P-8:110 ITAR violations
    http://www.seattleweekly.com/2001-04-18/news/high-flying-crime.php
    Boeing border virtual fence: $30 billion failure
    http://www.zdnet.com/blog/projectfailures/boeing-virtual-fence-30-billion-failure/362
    Boeing Sea Launch filed for Chapter 11 bankruptcy in June 2009, citing cost overruns,
    http://www.reuters.com/article/idUSN1112244720100511
    kc-10: Boeing to pay $2 million over whistleblower
    http://www.cbs42.com/business/story/Boeing-to-pay-2-million-over-whistleblower-claims/QwvGTFFJ2US_nfcaaVBqmQ.cspx
    B-1B: Boeing Sued for $7.5 Million Contract Fraud
    http://whistleblowersupporter.typepad.com/my_weblog/2008/09/boeing-sued-for-75-million-contract-fraud.html
    CH-47D: Boeing to pay up to $54 million
    http://www.helis.com/news/2000/h47pay.htm
    Kc-10 The Boeing Co. has agreed to pay $2 million to the Justice Department
    http://www.mysanantonio.com/news/52918362.html
    Boeing 767 Tanker CEO resign qty 2,CFO when to jail , Alan Mulally went Ford Boeing paid a $266 million http://www.nlpc.org/pdfs/Druyun10-1-04.PDF http://www.businessweek.com/magazine/content/02_20/b3783002.htm
    http://www.businessweek.com/magazine/content/02_20/b3783001.htm
    http://www.businessweek.com/magazine/content/02_23/c3786017.htm
    Boeing MILITARY SCANDALS
    http://www.endgame.org/boeing.html
    http://www.contractormisconduct.org/index.cfm/1,73,221,html?ContractorID=13&ranking=2

  3. Pingback: KC-46 EMD contract (update March 2015) | The Blog by Javier

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