Pentagon Plans Cost-Plus Deal for New Bomber--Update

By Doug Cameron 

The Pentagon has delayed awarding a closely watched deal to build a new long-range bomber until the summer, and plans to retain much of the risk in the $90 billion program in a move that surprised many industry analysts.

Northrop Grumman Corp. is vying with a joint venture between Boeing Co. and Lockheed Martin Corp. to build between 80 and 100 planes to start replacing aging B-52 and B-1 bombers from the mid-2020s, a key priority at a time when officials and lawmakers are increasingly vexed about smarter weapons being deployed by China, Russia and others.

The Pentagon had intended to award a contract to develop the Long-Range Strike Bomber this spring, but senior officials said Wednesday a decision would be made in the summer using an acquisition strategy that has been associated with some of the department's biggest headaches, such as the F-35 fighter jet.

The Pentagon has released few details of the highly classified bomber program, but Air Force procurement chief William LaPlante told a congressional hearing that it would retain the requirements laid out in 2010, including a cap on the cost of each plane.

Mr. LaPlante also surprised many industry observers by stating that the bomber deal was likely to be a cost-plus contract, a structure where the Pentagon pays the winning contractor's expenses, alongside other fees for incentives.

"The bomber is the premier aerospace initiative of the Obama years," said Loren Thompson at the Lexington Institute, a defense think tank that is partly funded by contractors. "It seems out of sync with their acquisition strategy,"

The Pentagon has shifted in recent years toward more fixed-price deals, where it pays contractors a set fee and leaves industry more liable for cost overruns.

"Cost-plus contracts are an inherently more risky contract vehicle that require particularly diligent management to ensure that the costs being charged to the government are fair and reasonable, and could make it more difficult to stay under the cap," said Mandy Smithberger at the watchdog Project on Government Oversight.

The department said the average price of each bomber would be capped at $550 million in 2010 dollars--equivalent to around $575 million in current-year spending--excluding development expenses that some analysts estimate could reach at least $24 billion. It has also pledged to use mature technology to keep the planes affordable, which together with the price cap led many to believe it would opt for a fixed-price deal.

The Pentagon is seeking $1.2 billion in development spending for the bomber in its fiscal 2016 budget request, and lawmakers expressed concern the department was departing from its stated goals.

"Little by little, the Pentagon is breaking its promise to cap costs at $550 million per plane and build a bomber using proven technology," said Rep. Jackie Speier (D., Calif.) in a statement. "The American people can't afford to foot the bill for another multibillion-dollar albatross."

The Pentagon has been pushing more work toward fixed-price deals as part of a broader efficiency drive for big military programs, and it is being used on the development of the new KC-46A aerial refueling tanker being built by Boeing.

However, senior officials have said there is little difference between the performance of contracts awarded on a cost-plus or fixed-price basis, with a key factor being the type of incentives given to defense companies.

The Air Force confirmed Mr. LaPlante's remarks and declined further comment.

Write to Doug Cameron at [e-mail]

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