Boeing Lowers KC-46 Cost Estimate

source info-aviation.com

27 Jul 2011 By MARCUS WEISGERBER DefenseNews

Boeing says it will cost the company less than it previously projected to build the first batch of U.S. Air Force aerial refueling tankers, the Pentagon's director of defense pricing said.

Earlier, the Chicago-based company had estimated that it would spend about $300 million more on production than the contract's $4.9 billion ceiling.

"Based on the latest information that we have, that estimate has been reduced by Boeing," Shay Assad told reporters July 27.

However, the company is still above the contract's ceiling, meaning it will have to pay for any overruns.

"They think they're going to execute above ceiling," Assad said.

He declined to provide the company's latest bid projections.

A Boeing spokesman was not immediately available to comment.

The KC-46A contract includes a target cost of $3.9 billion and a ceiling of $4.9 billion. For every dollar spent between those numbers, the Air Force pays 60 percent and Boeing 40 percent. Anything above $4.9 billion is solely Boeing's responsibility.

Assad defended the contract structure used by the Pentagon during the so-called engineering and manufacturing development phase of the program.

"In the past when you don't have a ceiling price established, you could be in a situation where a contractor could propose a price, or propose a cost, you'd evaluate that cost, given the best knowledge that you had ... only to find out years later that it was significantly overrun," he said.

"Neither [bidder in the tanker competition] had the ability to game the system because they knew, ultimately, that was the price they were going to be evaluated at," Assad said.

Sen. John McCain, R-Ariz, the ranking member of the Senate Armed Services Committee, has questioned the contract structure, which calls for the 60-40 government-contractor split between the target price and ceiling.

In a July 15 letter to Pentagon acquisition executive Ashton Carter, McCain said taxpayers should not be responsible for anything above the target cost.