I have read what James Hasik has written about the defence industry for a number of years and thought it was worth posting his comments about T-X and the contract award here. I tend to agree with the BZ he gives the USAF on running the contract and not only extracting the best price but incentivising the bidders to improve. It would be good to see this type of contract used more frequently within the US procurement structure.
“How do you set-up a fair competition between existing and clean-sheet aircraft?” That was the question that Steve Trimble of Aviation Week & Space Technology asked last week in his article about “With USAF T-X Award, Boeing Seizes a Trio of Contracts” (27 September 2018). Boeing and Saab won the T-X trainer jet competition with their clean-sheet design; two other teams—Lockheed Martin and Korean Aerospace Industries, and Leonardo and CAE—had missed with already-proven aircraft. Fairness, however, is not my foremost concern with this award of competition, and it’s not even what I think that Steve meant. What interests me in his story is that the Air Force Department may have shaken off its attachment to the inappropriate simplicity of Lowest-Price, Technically Acceptable (LPTA) contracting. Whatever the fairness, what the Air Force sought first was value.
Fairness is an oft-cited objective in public procurement, but I find it a word of subjective and even questionable meaning. I covered this once before, in April 2015. As I wrote back then, in a course at the University of Chicago in 1998, I heard Toby Stuart (now of the Haas School at the University of California at Berkeley) propound that issue of subjectivity. After years of reflection, he had come conclude that the best definition of fair was “I like it”. People will agree that something is fair is it’s good for them. Thus, prospective contractors frequently differ in their views of how fair competitions might be structured.
Of far more interest to me is whether the US Air Force, and the US taxpayers, are getting the best deal they can. A recent low point in this regard may have been the competition for new aerial refueling tankers (the KC-X), an issue that I first started covering in January 2010. As part of a series of long essays, I wrote of how applying an LPTA approach would naturally produce a low price, but perhaps not the optimal result. In the third of those arguments, I lamented that the USAF had not written a true request for proposals (RFP), but “just a monstrous RFQ”—a request for quotes. This is because the Air Force ultimately gave no extra credit for exceeding performance parameters in a competition between two seriously dissimilar, off-the-shelf products. In that situation, one can almost assuredly pick the winner before the bids are in. Just ask yourself—which has the lower cost of inputs?
Six years later, I wrote of how the outcome was even further sealed by Boeing’s strategic—though perhaps strategically inappropriate—behavior:
As an Airbus strategist told me over lunch last week, “we’ve brought competition, and that’s good for the customer.” In the US Air Force's recent contest for the KC-X tanker project, Boeing basically bought the business with a low bid because it was terrified that Airbus would get the chance to build a factory in the US, putting an end to its protectionist arguments. Airbus lost, and the USAF got a great price, but Airbus then decided to build the factory anyway. That’s because in spite of the high corporate taxes... the United States is a remarkably good place for building aircraft. So now Airbus is not just a European company, but an American company too, already delivering A320 commercial airliners from Alabama.
The taxes are coming down, of course, and for all the Trump Administration's protectionism, the obsession seems to focus on jobs (in an already tight job market!), and not some goofy sense of anti-Franco-German techno-nationalism. We wish that were all over, but the narrower KC-X drama continues. While Boeing’s KC-46 tanker—based on the off-the-shelf 767—is still having developmental problems, Airbus’s KC-330 MRTT is flying for the air forces of four countries— Australia, the United Kingdom, the United Arab Emirates, and Saudi Arabia—with several more to follow.
But enough beating on Boeing. Those folks had a deservedly banner month in September. Most notable was how Boeing and Saab won the bid for "up to 475 aircraft and 120 simulators” (as Sydney Freedberg retold the details at Breaking Defense) at an all-in price of $9.2 billion. Only winning bids are public, so unless the other bidders reveal their numbers, we will not know whether the USAF took the lowest, middle, or highest bid. We only know that the service’s representatives concluded that Boeing and Saab were offering the best value.
To win the T-X competition, as with any competition for a complex military product, prospective bidders needed to meet a long list of requirements. But unlike the KC-X competition, the scoring would not stop there, with their bids evaluated on an LPTA basis. Instead, the Air Force would assign extra credit, up to certain limits, for proposals whose aircraft offered to exceed requirements in operationally useful ways.
The first example in the list that the Air Force provided was high-g maneuvering. The minimum requirement the department sought was 6.5g, because aspiring fighter pilots need to understand how to operate, well, like fighter pilots. The Air Force would then award $13.2 million off the evaluated price for every additional 0.1g from 6.5 to 7.0. Fighter pilots who can learn to turn harder and sharper will presumably learn more, because it’s possible that air combat maneuvering is still a thing. Bidders would get another $4.4 million off their bids for every additional 0.1g from that point, up to a maximum of 7.5g. At a certain point, after all, even the instructor pilots will pass out. This meant that the bidders could earn a deduction from their evaluated prices of up to $88 million for proposing an airplane that could turn at 7.5g.
By maximizing every criterion, bidders could earn deductions of $338 million in the scoring. That’s only a 3.7 percent premium to pay for valuable performance, so it’s fair to ask whether the team at the Air Force Department could have acted more aggressively. For now, I won’t. I’ll just observe that the Air Force’s procurement people could have taken the easy way out. They could have sought the lowest bid bar none, and gone home early every day. Instead, they worked hard (quite some time back) to devise an economic case for each adjustable criterion. Last month, they got a best-value result, and they should be pleased with their work. The rest of us who care about defense-industrial matters can simply be relieved that the worst excesses of LPTA may be behind us.