NGC KC-45: Why We Won - Development Cost

Highlighting Reasons the U.S. Air Force Selected the KC-45 Tanker as Best for Our Men and Women in Uniform

(Washington, May 12, 2008) -- The U.S. Air Force found Northrop Grumman Corporation's (NYSE:NOC) bid to build the next generation of aerial refueling tankers superior to Boeing's in four of the five most important selection criteria. Despite this fact, the losing bidder wants the Government Accountability Office to overturn the Air Force decision to award the contract to Northrop Grumman even though the Air Force conducted what even Boeing described as a fair, open and transparent bidding process. Here is another reason Northrop Grumman won, drawn from a list of facts included in a redacted version of a protected Air Force selection document.

Development and Production Costs

When the Pentagon considers proposals from defense contractors, one of the key elements of its decision is whether the project can come in on time and on budget. Acquisition planners will frequently take cost estimates provided by the prospective contractor and either raise or lower them, based on the U.S. Defense Department's assessment of whether those cost predictions are likely to be accurate.

For the system development and demonstration portion of the program, the Air Force concluded that Northrop Grumman was at "low risk" of coming in over budget or not meeting its production timetable, while Boeing was rated "moderate risk." Many of the reasons Boeing was rated a higher risk than Northrop Grumman are redacted for business competition reasons, but Air Force guidelines state that a "moderate risk" rating would occur if "Some difference exists between the offeror's proposed cost/price and the government's probable cost/price that is not reasonably explained."

A key reason why the Air Force could assign lower development risk to Northrop Grumman is that Northrop Grumman has already built, flown and tested a prototype refueling tanker. In all, the Northrop Grumman tanker has flown 73 flights and spent more than 200 hours airborne. The KC-45 team has also conducted a successful fuel transfer test from its boom to an F-16.

By contrast, Boeing's aircraft hasn't been built, and exists only in its design phase. The proposed new boom also has not been built, tested or certified. Boeing is also late on delivering a different version of the KC-767 tanker to both Italy and Japan.

For the production portion of the contract, the Air Force noted that, for the Northrop Grumman offer, "Substantially less funds required to develop and buy the first 68 in support of Air Force tanker recapitalization efforts."

The Air Force also said it "Estimated Northrop Grumman as ... less than Boeing in out-year production," meaning that it believes Northrop Grumman's production costs would remain lower than Boeing's for the life of the contract.

In the document explaining its decision, the Air Force noted that "Northrop Grumman's more advantageous cost/price proposal was a discriminator" in picking Northrop Grumman. The KC-45 offered more capability at a lower unit cost than the KC-767 to provide the Air Force with the best value.

Source : Northrop Grumman Corporation

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