Center for Arms Control and Non-Proliferation

GAO Review of the Air Force Tanker Contract Award to Northrop-Grumman

by Christopher Hellman [contact information]

June 18, 2008

Rendering of a KC-30 tanker refueling a B-2 bomber (Northrop Grumman).

On February 29, 2008, the U.S. Air Force awarded a contract to Northrop-Grumman Corporation for the production of the new KC-45 airborne tanker aircraft. The value of the contract, which covers 179 aircraft, is roughly $40 billion, with the total value of the program estimated at $100 billion. On March 11, the Boeing Company filed a protest with the Government Accountability Office (GAO) challenging the contract award.

On June 18, GAO backed Boeing's protest and said that the Air Force made errors during the contract award process. GAO recommended that the Air Force reopen the bidding and obtain revised proposals.

BACKGROUND

In February 2001, Boeing submitted an unsolicited proposal to lease to the Air Force 36 modified tankers based on its 767 aircraft. After the terrorist attacks of September 11, 2001, the proposal grew to 100 aircraft. In May 2003, the Pentagon announced that it had reached an agreement to lease 100 tanker aircraft from Boeing for six years for roughly $16 billion, with an option to buy the aircraft at that time for an additional $4 billion. During the next year, the deal began to unravel under congressional pressure led by Sen. John McCain (R-AZ) over the cost of the lease agreement and a scandal involving Boeing and Air Force officials involved in negotiating the leasing agreement.

In May 2004, Defense Secretary Donald Rumsfeld suspended the agreement pending two new studies on the Air Force's tanker requirements and the costs and benefits of leasing rather than buying tanker aircraft, effectively scrapping the leasing deal. In September 2005, Northrop Grumman announced that it was teaming up with European Aeronautical Defence & Space Company (EADS), the parent company of Airbus, to bid on any future tanker contract. The Air Force formally reopened the tanker program for bids in April 2006.

VALUE OF THE CONTRACT

The initial phase of the contact award for four test aircraft and production of up to 64 additional aircraft is worth $12.1 billion, produced in five lots. The full contract for 179 aircraft, produced in 13 lots, is estimated by the Air Force at $40 billion. Eventually the Air Force is expected to replace its entire tanker fleet (approximately 535 aircraft) at a total cost that analysts put at $100 billion.

GAO'S REVIEW PROCESS

In cases where a dispute arises over the award of a federal contract, U.S. law allows "interested parties" to file an appeal with GAO. In the case of such an appeal, "interested party" is an "actual or prospective bidder or offeror with a direct economic interest in the procurement."

1) Filing a Bid Protest with GAO -- Protests must be filed with GAO within ten days "after the protester knew or should have known the basis of protest." In this case, the protest came after the Air Force's announcement of the contract award on February 29.

2) Decision Timetable -- The decision will be issued no later than 100 days after the protest is filed.

3) Possible Results of GAO Review –- After its investigation, GAO can:

• sustain the protest (i.e. find that the federal agency in question violated a procurement statute or regulation, and that this violation had a prejudicial impact on the plaintiff), and recommend corrective action;
• deny the protest; or
• dismiss the protest without review.

FAQ

Q: Given Boeing's experience, both with the failed lease program and with production and maintenance of the current KC-135 tanker fleet, how did Northrop Grumman outbid them?

A: During the February 29 Pentagon briefing announcing the Air Force's selection of Northrop Grumman, Assistant Secretary of Defense Sue Payton stated that Northrop "clearly provided the best value to the government" on each of the five requirements considered in awarding the tanker contract -- mission capability, proposal risk, past performance, cost, and the "integrated fleet aerial refueling rating."

Q: To win the contract, Northrop Grumman teamed with EADS/Airbus, a foreign firm. What impact will this have on American jobs?

A: When asked this question at the February 29 briefing, Payton responded that warfighter needs and value to the U.S. taxpayer, not jobs, were the issue. Ronald Sugar, Northrop Grumman's chief executive, told the Wall Street Journal that 60 percent of the new tanker would come from the United States, and that it would create 2,000 jobs in Mobile, Alabama -- where final assembly of the aircraft will take place -- and 25,000 jobs nationwide.

Q: How often does GAO support a protester in a contract award dispute?

A: Not very often. According to GAO's most recent annual report to Congress on federal contract decision appeals, over the previous five years (FY2003-07), GAO has received an average of 1,386 protests per year. Of these, only 309 were found to have merit, of which 23 percent were sustained (i.e. ruled in favor of the protester). But 23 percent represents only five percent of the total 1,386 protests filed on average annually. A slightly higher rate -- 36 percent of appeals with merit, or eight percent of the total -- receive a recommendation for some sort of relief, either fully or partially in favor of the protester.

FOR MORE INFORMATION

Department of Defense, Air Force Tanker Contract Award (February 29, 2008).

Department of Defense, Air Force Briefing on Tanker Contract Award (February 29, 2008).

U.S. Government Accountability Office, "Bid Protests at GAO: A Descriptive Guide," (2006).

U.S. Government Accountability Office, "Bid Protest Statistics for Fiscal Years 2003-2007," (December 10, 2007).