Home » Air » Report: Boeing projects $300M overrun on tankers

Report: Boeing projects $300M overrun on tankers

By Philip Ewing Monday, June 27th, 2011 11:00 am
Posted in Air

In case you missed it Friday, Bloomberg’s Tony Capaccio reports that Boeing believes it could encounter as much as a $300 million cost overrun on its KC-46A tankers, but everyone involved — the company and the Air Force — understand the company will bear that and any other extra costs.

Wrote Capaccio:

After the contract was awarded, Boeing revealed “that it proposed a ceiling price that is less than its actual projected cost to execute the contract,” according to an Air Force statement from spokesman Lt. Col. Jack Miller. “There is no legal barrier that prohibits pursuing a below-cost proposal strategy, and Boeing’s met all rules.”

“Boeing is responsible for all costs over the $4.9 billion ceiling price,” according to the Air Force statement.
Boeing spokesman Bill Barksdale confirmed the company projects it will exceed the $4.9 billion ceiling and is prepared to absorb the extra costs.
“We are not there yet. It’s a projection,” he said in a telephone interview. Barksdale declined to comment on the $300 million figure or outline when the company concluded it would exceed the ceiling.

Boeing’s rival, EADS, and its allies wasted no time saying I Told You So. As George Talbot reports in the Mobile Press-Register — down in the heart of what would’ve been EADS Tanker Country — the locals have been saying all along that Big B couldn’t deliver:

U.S. Rep. Jo Bonner, R-Mobile, told the Press-Register that lawmakers are keeping close watch on the tanker contract.
“I remain convinced that Boeing bought the tanker contract and I am certainly not surprised that costs are already growing,” Bonner said. “I and others in Congress remain committed to holding Boeing accountable to the terms of their fixed price contract agreement.”

There’s not much anyone can do at this point, although as you’ll recall from last week, this sort of thing is why Boeing officials say their number one job now is to focus on “executing” the tanker deal, so stories like this don’t derail the program after all the energy it took to get it.

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	AF Acquisition Nerd June 27th, 2011 at 11:25 am @James: US Taxpayers will pay dearly for Boeing’s projected cost overrun. How? FFP Contract with no basis for an equitable adjustment from a contractor that is has a strong record with their AF customer. I think we’ll be ok.
	jakemono June 27th, 2011 at 11:45 am Boeing exceeding their cost ceiling is not the same as Boeing losing money on the deal. They just won’t make as much of a profit and wanted the contract for prestige and strategic reasons as much as the income.
	DEWright_CA June 27th, 2011 at 12:33 pm @James; you miss the point in the proposal debrief that EADS did not meet all of the factors to win the contract. This was not the standard lowest bidder wins; but the companies had to meet specific performance benchmarks. In the end even EADS has to admit that being better in some areas but much worse in others doesn’t always win. Yes, Boeing will make up for the costs; but this is the pioneer of that business; and regardless of anyone elses opinions; this was solidly won by them by performance not just cost.
	Thinking_ExUSAF June 27th, 2011 at 2:24 pm Only the winner of a competition has to actually stand behind its cost or schedule estimates with more than lip service! If Boeing “bought into” the contract with a known $300M shortfall, I can only hope that their 787 line makes a LOT of money! LOL! I have a sneaking suspicion that should EADS have won the competition, there would have been a very similar cry of anquish when the hard numbers started showing up, but that is the environment in which we have put the contractors. No matter what, they can not “loose” on the one hard number that everyone sees (i.e. cost). Are they honest in the proposal or do they win the contract? If we went back to the old fashioned, hard number proposal, with all of the unclassified numbers right out for everyone to see, it might still be easy to “scrub the numbers”, but at least the customer would be clean on the selection, and you could just prosecute the liars for fraud! :-)
	Thinking_ExUSAF June 27th, 2011 at 2:32 pm I can hope that $300M of prestige and straegic image turns out to be worth it! LOL! And as for ‘equitable adjustment’, that might need to be carefully scruitinized to make sure that the equitable adjustments are in fact to cover new customer requirements (where the AF takes the heat) or just to insure an executable, and profitable, price replaces the bid price. Its sort of like offering up a ten pound bag of potatoes for a buck fifty and then charge three dollars at the checkout counter? If I changed my mind and wanted 20 lbs, no problem except for my indecision. If you doubled the price of my ten pound bag on the way to the checkout… shame on you. :-) If you just cavalierly tossed out a price to get me to put that bag of tatters in my grocery cart, without you even knowing what the price should be. . … Hmmmmmmm.
	Elaborate June 27th, 2011 at 2:39 pm @DE Wright — You’re missing the point and incorrect in your statement. the KC-X Tanker proposal a compliance proposal. There were 372 mandatory requirements that were like a lght switch (on/off). All 372 had to be met otherwise the supplier was eliminated from the competition. Next came priceing. If either vendors final pricing was greater than 1% under their competitor, they won. If the pricing of both were within 1%, the evaluation of 155 non-mandatory requirements decided the award. Both vendors were notifed that there were complaint in meeting the 372 mandatory’s. When both comply, it comes down to price. The big question is does that $300M take them to less than 1% of EADS-NA?
	Cynic June 27th, 2011 at 4:01 pm What everyone seems to be ignoring is that this initial EMD contract is not for the entire buy. The original RFP &lt ;https://www.fbo.gov/index?s=opportunity&mode=form&id=e65e1ab7f225d6454f5fa8a10556cbfa&tab=core&_cview=1&gt; was for EMD and four (4) developmental aicraft. The award &lt ;https://www.fbo.gov/index?s=opportunity&mode=form&tab=core&id=b0305f7a7e5d6958dc613bf08c4c3151&_cview=0&gt; at $4.4B was for EMD only with no options. Presumably the additional $0.5B was to purchase the four airframes. So, Boeing looses $300M on the first four aircraft. How do you think they are going to bid their next 175 in this lot buy, as they have eliminated their competition? How do you think they plan to price their next tranche to replace the 415 KC-135s currently in the inventory?
	VF 143 Pucken Dog 01 June 27th, 2011 at 7:40 pm Here we GO AGAIN!!!!!!!!!!!!!!!!! Fucking Integrators Wasting more money and Funds.
	DanS June 27th, 2011 at 8:20 pm Ding, Ding, Ding, we have a winner. The difference will be in the amount of profit, not whether or not money will be lost. One firm I used to work for used to mark-up its services (remodeling) by 53%. Most of the time we’d end up around 48%. Its like the old trope about price increases being passed on directly to consumers. It happens sometimes, but more often the added cost comes out of profits.
	Oblat June 27th, 2011 at 10:51 pm The objective is to establish a ‘real price’ for the first 4 aircraft way above what they bid. So that the contract for the following 176 can be renegotiated.
	pfcem June 27th, 2011 at 11:21 pm The ‘adjusted cost” of the Boeing bid was 10% lower than the ‘adjusted cost” of the EADS bid. And both bids were >$20 billion. Adding $300 million to Boeing’s bid still puts it 8.25% lower than EADS.
	pfcem June 27th, 2011 at 11:23 pm Could you be any more pathetic. The KC-X contract IS for 179 tankers, not 4.
	pfcem June 27th, 2011 at 11:24 pm You really are good at making up BS conspiracies contradictory to reality.
	DensityDuck June 28th, 2011 at 1:16 am Yeah, right. When Boeing says “we need $300 million or else we go out of business” you can be damn sure that $300 million will suddenly be available, along with a stern talking-to about how this is the LAST TIME this will happen, until the next time.
	Oblat June 28th, 2011 at 1:57 am “this was solidly won by them by performance not just cost.” Not even Boeing believes this. It was clearly lower performance for lower price they even had to change the performance criteria to make sure. Now we will be getting lower performance at higher price. If we had gone with Airbus we would have told them we can always go to Boeing if you don’t perform. Now all we can say to Boeing is we can always give you more money if you don’t perform.
	Digger June 28th, 2011 at 2:00 am Australia went down the EADS path and only now after considerable delay the first airframe has been delivered to the RAAF. The initial US decision helped influence Australia and the fact that we need to refuel hose and drogue aircraft. The UK, Saudi etc have since gone down what we call the A330/KC-30A MRTT Multi Role Tanker Transport. My critercism of the project apart from the late delivery has been that as launch customer Australia’s aircraft do not have the larger side doors and strengthened floors to assist with the heavy cargo carrying which the UK etc have. In the past Australia would use its ancient B707 refuelers to escort F-111s to Red Flag in the US. The B707 would aerial refuel the F-111s, carry the support ground crew and spare parts for the pigs. The KC-30A versions Australia has was rushed and missed out on the wider cargo doors and strengthened floor. The RAAF KC-30A will also work as a communication node for aerial, land, sea based coms and UAVs etc
	Oblat June 28th, 2011 at 2:01 am Pfcem is the sort of loser that Boeing prefers — $300m is for only the first 4 tankers.
	Oblat June 28th, 2011 at 2:03 am Says the guy who claims he has secret JSF costing that not even Lockheed is aware of. :-)
	William C. June 28th, 2011 at 3:03 am If Boeing wants to win KC-Y, and they do, they won’t jack up prices. The $4.9 billion is for EMD and the first 18 aircraft. A $300 million overrun at this stage doesn’t mean Boeing won’t sort this out by the next batch.
	Tanker June 28th, 2011 at 5:22 am Makes up for the hosing the U.S. Taxpayer took when Boeing was running the Future Combat System program as LSI. Shed no tears, they’re still billions ahead.
	freefallingbomb June 28th, 2011 at 6:57 am To the poster “Oblat” —————————- You wrote: “Now we will be getting lower performance at higher price.” EXCELLENT SYNTHESIS !!! —————————- You wrote: “If we had gone with Airbus we would have told them we can always go to Boeing if you don’t perform. Now all we can say to Boeing is we can always give you more money if you don’t perform.” Getting better all the time. My sincere congratulations!
	freefallingbomb June 28th, 2011 at 7:11 am Text excerpt: “Boeing revealed ‘that it proposed a ceiling price that is less than its actual projected cost to execute the contract’, I don’t know if “actual projected cost” already includes the profit margin, or only the production costs (this “actual” = ?). Because if “actual projected cost” O-N-L-Y includes the production costs, and Boeing agrees to deliver the tankers for LESS than they “actually” cost to build, then we’re looking at a a clear case of “dumping”. Here in Europe this constitutes an economic crime, especially during estatal acquisitions, but apparently in the U.S.A. (quote) “There is no legal barrier that prohibits pursuing a below-cost proposal strategy, and Boeing’s met all rules”…
	Dee June 28th, 2011 at 9:35 am The logistics for maintenance is where the real money starts coming in. Smart move Boeing.
	Jimmie June 28th, 2011 at 9:39 am Amen James. EADS and NG have a tanker that’s ‘already flying’. Boeings is still only on paper. When are these idiots on capitol hill going to wake up!
	787fan June 28th, 2011 at 1:28 pm All programs encounter engineering and R&D cost (up front) and then hope the sales make up for the cost. Look that 787, A380, F-35, A400M and others..but who cares.…Boeing will get an upgrade support contract that will make up for it.…That’s better than an Airbus factory in N.C. that is dumping the A330 on our front door designed to put all American Aerospace workers out of business.…Goooooo Boeing…
	Brad June 28th, 2011 at 1:51 pm Yeah bc Boeing will be going out of business soon… I don’t think so.
	pfcem June 28th, 2011 at 8:03 pm Wrong. Boeing has severa KC-767s IN SERVICE, EADS has ONE KC-30 in LIMITED service. And the Australian KC-30 is NOT the same exact tanker as was proposed for KC-X.
	pfcem June 28th, 2011 at 8:16 pm Based on the results of the 1st two competitions (the 3rd was simple pass/fail — it is not worth the debate wheither the KC-30 finally meet all the criteria this time) the KC-767 is clearly superior. Critera DID have to be changed in order for the KC-30 to ‘compete’ but I challenge you to cite ANY performance criteria that was lowered for the KC-767 (sorry but the tanker lease fuel offload vs range does not count as it was only meant for the 1st 100 tankers, later PROCUERED KC-767s were to have fully meet ALL USAF/AMC medium tanker requirement and the 2nd & 3rd competitions had a higher fuel offload vs range requirement).
	pfcem June 28th, 2011 at 8:30 pm No, the bid was for 4 SDD + 175 production tankers.
	pfcem June 28th, 2011 at 8:33 pm The two contracts were not bid separately.
	pfcem June 28th, 2011 at 8:33 pm I have never made any such claim.
	pfcem June 28th, 2011 at 8:35 pm The PROJECTED overruns is only $300 million, that is <1.5% of the $20.6 billion bid.
	pfcem June 28th, 2011 at 8:36 pm Yes “actual projected cost” include profit margin.
	Diceman June 28th, 2011 at 8:56 pm its not airbus’ fault that boing can’t get their planes to be what they hope for. I mean lets face it clearly airbus was the better choice
	Victorinox June 29th, 2011 at 11:38 am Yes, that is exactly right.… Once you have their aircraft, they will charge you big time for spare parts.… http://www.pogo.org/pogo-files/alerts/national-se…
	Digger June 30th, 2011 at 1:23 am The US airframe was to be called KC-30A and Australia’s the KC-30B with the US not taking the EADS option the Australian RAAF version is now called the KC-30A. Australia tends to acquire as close as possible to what the US operates for interoperability and technical support however because a small military it often has several systems/capabilies more than the US packed into one platform because it cannot afford to layer or operate several other platforms to do the job as the US would. The second airframe of 5 has now been delivered to the RAAF wth airframe conversions undertaken in Brisbane, Queensland Australia by QANTAS Defence Services
	Old 391 June 30th, 2011 at 10:07 am But it is still a COST OVERRUN next will be schedule creep like they did with the tankers for Japan and Italy
	Lou June 30th, 2011 at 10:41 am All BOEING will do is add that cost to something and pass it right back to the customer. They are not going to take that loss, trust me.
	51WINGNUT June 30th, 2011 at 10:58 am Part 2 — In my opinion, the American aerospace worker was never in jeopardy, because the American aerospace worker would not have been out of business, but simply would be working out of the Deep South instead of the Pacific Northwest. Keep in mind that EADS developed its own proprietary design (sure, it must have looked to existing Boing Boing boom technology for inspiration) but did so at its own expense since it did not have one at the time. The EADS proposal actually exceed the specs called out in the RFP, which Boing Boing vehemently objected to as its proposal was inferior to that of EADS. And, as much as I dislike flying by Airbus, EADS provided a better design for less money.
	51WINGNUT June 30th, 2011 at 10:59 am Part 3 — @787fan: I would just say this. If your concern is so abiding for the American worker, then you must surely have ONLY “Made in America” schtuff, i.e., car, TV, clothing, etc…you get my drift? Let’s can the hollow rhetoric and parabola about protecting the American worker and the American economy when Walmart (AKA Beijing Annex) is where so many Americans shop. EADS and Alabama should be building the next generation USAF tanker, in my opinion, and Boing Boing should be attending business ethics management training with the folks at EMRON, the guys from Wall Street and some of those bums from Countrywide (now owned by BoA).
	51WINGNUT June 30th, 2011 at 11:00 am Part 4 — As I said at the outset of this mini-rant, I’m working from memory here and admittedly, it gets shorter and shorter as the minutes pass by…however, Boing Boing pulled a fast one (knowing from jump that it would underbid) and was allowed to get away with it…and this from a company that for years was on the DoS’s “dookie list” FOR YEARS.…that’s all for now.
	Gerald Hartley June 30th, 2011 at 12:59 pm Government approved contract changes will take care of the overruns. Does this surprise anyone?
	KYnAL June 30th, 2011 at 1:01 pm look fo cost cutting SOMEWHEREat Boeing. I’d be going over the plans with a microscope. They’ve proven they’re not to be trusted. Again.
	JSFMIKE June 30th, 2011 at 1:42 pm The goal was to win the first contract for the first batch of jets. Then negotiate all other contracts to the benefit of the Board of Directors, CEO, CFO, COO, etc and stockholders.
	JSFMIKE June 30th, 2011 at 1:55 pm The KC will go the way the C-17 did and still does. Ever increasing price per jet. Lowering of requirements and range. Many mods in work while the first jet is being built. The cost of spares, Tech manuals, field reps, etc going up faster than unit cost and fly away cost. Then of course, the first $40 million will be spent on Public Relations, flyers, patches, glossy art that looks like a photo of the plane flying, and celebrations for every trivial event (first wire to be cut, first forging out of the furnace, first wing tip delivered, etc) Oh wait, this is the samething done on the F-18, 767, 737, and all the other pieces of tin.
	pfcem July 1st, 2011 at 9:19 pm You are a EADS/KC-30 Kool-Aid drinker. It was BOEING which discovered the Sears & Druyun misconduct. It was BOEING which made it public, fired them BOTH & cooperated fully with the criminal investigation & prosecution. And Condit stepped down for failing to properly vet the hiring of Druyun. There was no collusion to win the tanker least contract, what Sears & Druyun did wrong was negotiate a position at Boeing for Druyun while working on the tanker lease. Due to pressure for McCain & others the entire contract was redone after Druyun had left the USAF as 20 lease tankers & 80 purchased tankers.
	pfcem July 1st, 2011 at 9:26 pm You ‘opinion’ in contradictory to reality. It takes quite a large number of worker sto manufacture an airliner. With the KC-30, 95+% of that work would have been done overseas. There is simply no way to get around the >27% larger US workshare with the KC-767 vs the KC-30. The Boeing proposal exceeded the specs called for in the RFP. Boeing did not reject to the RFP, it was clear to anyone with any knowledge of US tanker operation that the KC-767 was clearly a better match to the RFP & what the USAF/DOD has stated it wanted all along. Boeing provided a better design for less money.
	pfcem July 1st, 2011 at 9:31 pm Boeing did not pull a fast one & was not “allowed” to get away with anything. Underbidding is a NORMAL part of defense contracting. Airbus does it ALL THE TIME. Good God, $300 million is LESS THAN 1.5% of Boeing’s $20.6 billion bid!
	Falcon July 2nd, 2011 at 9:36 am At this time the projected overrun is 800 MUSD. The original price for the this phase was 4.4 BUSD. Then the contract says the government will pay 60% of any overrun up to 125% of the original price and Boeing the other 40%. 60% of 800 is 480 MUSD for the government and 40% of 800 is 320 MUSD for Boeing. And 800 overrun on 4400 is just over 18%. So they can go over a bit more and only risk 60% on that part.
	Falcon July 2nd, 2011 at 9:48 am Ahhh, how you change your opinion depending on the name on the product. What happened to your statements at the defunct fleetbuzz about if Airbus goes one Dollar over the contract price? How about your statements that Airbus is not allowed to bid under cost? How about your statements that Boeing will never bid so they make less than 10% profit? Here Boeing is now more than 18% over on the first phase and government must pay 60% of that. That is almost 2 Dollars for every person in this country and they are still working on finalizing the design. Apparently that is a slow news day when it happens to a Boeing product. Had it been Airbus you would have posted about it left and right.
	Old 391 July 5th, 2011 at 8:00 am True but they showed they can not estimate their cost CORRECTLY, that is the whole point
	Old 391 July 5th, 2011 at 8:03 am Better match to what “The Dick” and other members from Boeings home state wanted for the contract
	winthjo July 12th, 2011 at 9:34 am They never should have upheld that protest that Boeing had against Northrop Grumman. Northrop Grumman already had a working, flying model for the tanker and Boeing had nothing ready and probably still don’t. This is another case where the best on didn’t win. Boeing low balled their bid on purpose.
	Guest July 12th, 2011 at 7:55 pm Can you spell “Dumping” , boys and girls ??
	Old 391 July 13th, 2011 at 6:11 am Have you seen the story titled “Boeing tanker strategy shifts $600 million to taxpayer” Boeing Co’s winning bid for the U.S. Air Force’s fiercely contested tanker development deal means it likely will show no profit in the program’s first phase and shift $600 million in development costs to taxpayers, new government figures showed. Now waiting to see how much of a schedule slippage Boeing will come up with, I say at least a year Anothe other takers on that?????
	winthjo July 13th, 2011 at 2:32 pm I would agree with you. Another scam by Boeing. Wave the patriotic flag, get the local politicians involved and then stab them in the back when they ship the jobs elsewhere besides Washington State.
	JSFMIKE July 14th, 2011 at 12:08 pm Only one year of slippage? That also sounds like a low ball, Old 391! It’s amazing how fast Boeing came up with the figure, after being announced as the winner of the (competition?). And to have the guts to announce it so soon. Where is Senator McCain’s outrage at this? I haven’t seen any comments yet from him. Why is that?
	jeffrey July 14th, 2011 at 5:48 pm It’s all political. Boeing is a super power in the Aerospace world, and they get what they want. they’ve overrun every project they’ve ever had because they underbid them to start with knowing they could recoup in the end. NorthtropGrumman already had their tanker flying, but were contested. Again political. They new they would’nt win, so they gave up.
	Falcon July 14th, 2011 at 8:19 pm Can be found at the link below. Amazing it has already gone worse than this article. http://mccain.senate.gov/public/index.cfm?FuseAct…

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Report: Boeing projects $300M overrun on tankers

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