OPINION: Contractors must recognise new US procurement rules
Nothing illuminates the essential characteristics of this new era better than the Government Accountability Office’s stinging and even humiliating rejection of Boeing’s protest at the US Air Force’s decision to award the long range strike-bomber (LRS-B) contract to Northrop Grumman a year ago; the GAO’s newly-released decision offers valuable instruction for competing in this new era.Game Over: GAO Protest Reveals Cost Was Deciding Factor in B-21 Contest
The most surprising revelation in the report is how the USAF structured the LRS-B competition. It may be the first time it has acquired a combat aircraft based on a lowest-cost, technically compliant bid. Northrop heavily invested corporate funds in classified risk-reduction efforts, a fact the GAO says played a key role in reducing the USAF’s estimated price for its proposal. As bidders line up for a host of new USAF contracts, upfront investments by contractors are essential.
It is fair to say that Boeing did not like how the USAF evaluated both proposals on cost. Boeing quibbled over which historic programmes should be used as the baseline to forecast production costs on LRS-B. According to the GAO, Boeing submitted cost data based on derivative programmes, but the USAF preferred clean-sheet aircraft developments. Boeing sent the USAF a rebuttal, but apparently used inaccurate labour cost data, which, the GAO passive-aggressively notes, “did not enhance the credibility of Boeing’s estimate”.
Despite Boeing’s multiple objections, the GAO laid out a clear case that the USAF stuck to the letter and spirit of the evaluation procedures.
The Air Force in October 2015 awarded Northrop the contract to develop and produce its newest bomber, now designated the B-21 Raider. Northrop beat out a Boeing-Lockheed Martin team for the two-pronged contract that covers the engineering, manufacturing and development phase of the program as well as the first five low-rate initial production lots.How the Air Force's $55B bomber contract became an LPTA competition
According to the GAO decision, Boeing argued that the Air Force did not effectively measure the risk of Northrop’s bomber. The company contended that if the service had followed definitions set in the request for proposals, Northrop would not have met four out of seven unnamed technical capability subfactors. Boeing also stated that Northrop’s proposal was “inherently high risk” with regard to certain requirements in a way that should have rendered its offering unacceptable.
GAO shot down those claims, saying its review found the Air Force evaluated Northrop’s bid in a way that was “reasonable and consistent” with the RFP.
Boeing also alleged that the service overestimated the price of its own offering and relied too heavily on independent government estimates. Again, the GAO disagreed.
“We see no error in the Air Force’s rejection of supporting cost data presented in Boeing’s proposal, or its upward adjustment to Boeing’s proposed EMD costs,” it wrote.
The office noted that both Northrop’s total weighted price and total estimated price were lower than Boeing’s. Although Boeing calculated that its proposal price had been overestimated, the decision noted, even if Boeing’s proposal was adjusted by that figure, it would have not been enough to topple Northrop, which would have nabbed the contract on the basis of its lower total weighted price. Thus, GAO said Boeing could not demonstrate that the Air Force had demonstrated competitive prejudice — a situation where the company would have won the contract if not for the government mismanagement or wrongdoing.
the decision sheds light on many interesting aspects of the competition. After the companies submitted their proposals to the Air Force in 2014, the service found both offerings technically unacceptable and held eight rounds of discussions where the competitors worked through deficiencies, although the GAO noted that some risk still remained with each proposal.
Those discussions failed to resolve questions about both Boeing and Northrop’s cost estimates for the EMD phase of the program, which Air Force found to be overly optimistic when compared with its own independent government estimates. Even after eight rounds of talks, neither company was able to put forward a proposal that could be considered realistic with respect to the majority of the cost categories.
But while Northrop increased its own estimates, Boeing kept its own cost data at the same level, the GAO said. And, partially because Northrop offered to pay for certain expenses internally on its own dime, the company was able to keep EMD costs below Boeing’s throughout the duration of the discussion process.
Information on the bomber program is apparently a touchy subject for the Air Force, which has steadfastly refused to release the value of Northrop Grumman’s bid. The $55 billion price is based on price estimates prior to the competition.
U.S. Sen. John McCain, chairman of the Senate Armed Services Committee, has been especially vocal with his criticism that the contract is a cost-plus contract and subject to overruns that the government will be on the hook for. He has threatened to withhold funding for the bomber.
To be fair to the Air Force, initial development of the first 21 planes is cost-plus, but once the craft moves into full production of up to 100 planes the contract switches to fixed price.
In a footnote, GAO describes how Northrop’s engineering and manufacturing development costs were significantly lower than the Boeing-Lockheed proposal because of investments Northrop had made but did not pass on to the government. What those investments were is redacted from the decision and Northrop declined to comment.
Northrop also had lower labor rates and labor escalation rates. Northrop also declined to comment on how they made their labor rates lower.
Because of Northrop’s investments and lower labor rates, the independent government estimates of costs for Northrop’s proposal was lower than the Boeing-Lockheed proposal.
This is significant because both teams were deemed to be technically acceptable.
The solicitation’s selection criteria stipulated that if the higher bid was greater than 103 percent of the lower bid than the lower bid would be deemed best value. The bid by the Boeing-Lockheed team was more than 103 percent so the Air Force picked Northrop.
The argument is that this is best value because why should the Air Force pay a higher price if both proposals were found technically acceptable?
As GAO said, Northrop’s price “created a near-insurmountable obstacle to Boeing’s proposal achieving best value.”