Clarification: This article has been updated to further clarify Thompson's remarks.
WASHINGTON – The prominent Washington defense analyst who accused the US Air Force of fouling up its cost estimates in picking Northrop Grumman to build its new multibillion-dollar bomber concedes the service was right on at least one point.
Loren Thompson of the Lexington Institute think tank acknowledged in a Dec. 11 email to Defense News that the Air Force is "correct" that there is a better way to assess the proposals of the teams competing for the Long Range Strike Bomber contract than the approach he laid out in a Nov. 6 Forbes commentary.
However, since the service hasn't released the value of the bids or the government's cost estimate to build the bomber, "it is a meaningless point to anybody trying to understand the selection process," he said.
"I am confident that when the facts eventually become known to Congress, it will be apparent that the winning team bid an unrealistic price at a negative rate of return, setting the bomber program up for failure," added Thompson, a Lockheed consultant whose think tank is funded by Lockheed and Boeing.
In his commentary, Thompson laid out Boeing's argument that the Defense Department's October decision to award the LRS-B contract to Northrop Grumman over a team composed of Boeing and Lockheed was "fundamentally flawed" for using unreliable historical data in picking the winner.
"Boeing team-mate Lockheed Martin has delivered each successive lot of F-35 fighters for less than historical data would have predicted," he wrote, "and relying on dated cost data effectively excludes from the calculus numerous advances in aircraft development and production technology that have been made during intervening years."
Thompson's article appeared the same day the losing team formally announced its protest of the decision, which triggered a review by the Government Accountability Office. The GAO is expected to issue a ruling in February. Meanwhile, some work on the project has been halted.
The stakes couldn't be higher for the three defense giants. LRS-B is the largest military aircraft program since Lockheed won the F-35 joint strike fighter more than a decade ago. But despite the program's massive scope, DoD has guarded details about the classified program so closely that we still don't even know if the stealthy new plane will be designated the B-3, or something else.
The last time Boeing protested a Pentagon contract, the award of the KC-X tanker to Northrop, the company pulled out all the stops, sparking a heated and politicized debate in Washington that eventually forced the Air Force to re-bid the program. Boeing ultimately won that second round, and its KC-46 recently completed its first flight.
But in the case of LRS-B. the Air Force claimed Thompson mixed up his numbers.
"The service stated in its October 27 press conference unveiling the award that it will cost $21.4 billion to develop the bomber, but that figure is roughly twice the amount that the competing industry teams bid," Thompson wrote.
The Air Force is looking into how Thompson gained access to those figures, Reuters reported recently. Although top officials would not confirm a formal investigation, Air Force Chief of Staff Gen. Mark Welsh earlier this month acknowledged the service's "concern" that the pricing data should not have been released.
Thompson's commentary accused the government of using bad historical data during the source-selection process, artificially inflating LRS-B's development cost and effectively eliminating the winner's risk in developing the plane.
To make his point, Thompson wrote that each competing proposal to develop the new bomber was roughly $10 billion, information the Pentagon has neither confirmed nor released publicly, but was known to the competitors. He compared this figure to the Air Force's legally mandated Independent Cost Estimate (ICE) – required of all acquisition programs since 2009 – which projected that development costs would be more than twice what the companies bid – $21.4 billion in 2010 dollars.
The discrepancy between the contractors' bids and the government's cost estimate indicates the historical data used to evaluate the proposals is unreliable, Thompson claimed. That cushion, he argued, means the winner has no incentive to keep costs down.
"By dictating such a high cost to industry, the Air Force eliminated any financial risk to industry in developing the bomber," Thompson wrote. "This is the precise opposite of the way acquisition reform is supposed to operate."
But Air Force officials – who are often reluctant to comment on classified programs – went as far as saying that Thompson's claim about historical data was misleading.
Outgoing Air Force acquisition chief William LaPlante stressed recently that the $21.4 billion figure released during the contract announcement was not part of the source-selection process.
A better figure to compare to the contractors' proposals is the Most Probable Cost (MPC), a separate estimate developed by the source-selection team, Air Force spokesman Maj. Rob Leese told Defense News last week. In an effort to control costs, the government is required by the Federal Acquisition Regulation (FAR) to develop an MPC on cost-reimbursable contracts – like LRS-B – where the government covers cost overruns incurred by the contractor, LaPlante said.
One source with knowledge of the program said the Air Force's MPC for LRS-B was very close to the pricing proposed by the contractors (roughly $10 billion) – and much lower than the ICE of $21.4 billion.
"The FAR and the [Defense] FAR require for good reason that a Most Probable Cost Estimate is done . . . That is totally different than since 2009 it has been law that an Independent Cost Estimate has to be done," LaPlante said during a Nov. 24 media roundtable at the Pentagon. "Guess what? Acquisition 101 – those independent cost estimates were not part of the source selection."
Northrop and Boeing declined to comment for this article.
"The Air Force is correct that the government evaluated Most Probable Cost is a better basis for assessing the bids of the bomber teams than the Independent Cost Estimate," Thompson told Defense News Dec. 11. "However, since the Air Force hasn't disclosed either what the bids were or what the most probable cost was, it is a meaningless point to anybody trying to understand the selection process."
Air Force officials have expressed confidence the LRS-B contract award can survive the protest. The service used two independent agencies to come up with the ICE, officials stressed: the Air Force Cost Analysis Agency and the Pentagon's Cost Assessment and Program Evaluation.
The high margin does give the Pentagon and industry a lot of wiggle room in terms of budgeting. But one analyst sees the gap between the reported proposals and the ICE as a sign the Air Force is making progress on cost control.
"So what if the proposals were less? The Air Force is ready to pony up to this point – that's fantastic. I think that's progress from some programs in the past," Mark Gunzinger, a senior fellow with the Center for Strategic and Budgetary Assessments, told Defense News. "Is it conservative? Oh yeah, it's pretty darn conservative. So you have this tension: To what level do you fund?"
Email: lseligman@defensenews.com
Twitter: @laraseligman
