Monday, December 14, 2009

How defense contractors are like the contractor that remodeled your kitchen

Anyone who has ever done even moderately complicated home improvements has likely suffered the indignity of getting a lowball bid from their contractor, only to find at the end of the process that "I didn't know it would be so complicated! This is going to cost 150% of what I quoted you." Well, you're not alone: that happens to the Defense Department, too.

When seven countries from the North Atlantic Treaty Organization ordered the four-engine A400M from Airbus in 2003, its parent company, European Aeronautic Defence & Space Co., agreed to build 180 of them for €20 billion ($29 billion). EADS promised to swallow any cost overruns.

The project has since blown its budget by several billion euros and EADS wants the seven governments to share the burden that it had promised to shoulder. EADS officials say that would be fair because the extra expense comes partly from changes in contract terms and designs forced on it by the governments. The governments, whose individual positions vary, say they want to reach an agreement with EADS. The two sides are locked in heated negotiations and hope to strike a deal before year-end that keeps the project alive.

"The aircraft is much more complex and expensive than expected," said Domingo Urena-Raso, Chief Executive of Airbus' military division, in a recent interview. "Industry cannot bear the full burden of the project alone."

Really? Well maybe you should've thought of that BEFORE YOU GUARANTEED TO BUILD A CERTAIN NUMBER OF THEM FOR A CERTAIN PRICE AND EAT ANY ADDITIONAL COSTS!

A former Airbus board member is quoted later in the article, saying "we would have preferred it was not a fixed-price contract. But then we thought about how government business enables us to make spectacular fortunes at the expense of the taxpayer and without the threat of open-market competition because of the over-consolidation of the defense industry, so we thought we'd better play by the government's rules. After all, if we lost the contract, we could always protest!"

Ok, he didn't actually say all that -- just the first sentence. But how can you come along years later and say "whoops, our math was bad!" and expect recompense?! The gall of these people is just awe-inspiring.

In a sort of related story, 25 members of the Texas congressional delegation have signed on to a letter from Republican Michael McCaul to Secretary Gates protesting yet another contract award. McCaul represents Sealy, Texas, host to a BAE plant that used to build the Family of Medium Tactical Vehicles until losing the contract to Oshkosh Corporation earlier this year. One major point of contention is the fact that Oshkosh underbid all other competitors by 10% for the fixed-price contract; the losers argue that Oshkosh won't be able to produce at the price they bid. (BAE lost despite dropping their bid 20% from the existing deal.)

My favorite part of this episode? Congressman Ralph Hall, paragon of virtue and exemplar of inspired leadership in a representative republic, signed on to the letter and gave a quote to the Washington Times after his in-depth examination of the technical, financial, and operational aspects of the deal led him to reject the Department's contract award.
Mr. Hall said he signs just about any letter presented at the delegation meetings. "If it is a pro-Texas letter, I sign it," he said.
Oh. Well, that's cool too.

0 comments:

Post a Comment