Bill’s provision may cost Boeing millions

Lawmakers are trying to limit Boeing Corp.’s tenure managing the Army’s biggest modernization program, and that could cost the Chicago-based defense contractor millions of dollars in profit down the road.

A provision in the 2009 defense authorization bill would prevent Boeing from overseeing the project once it moved from the research and development phase to mass production.

{mosads}Boeing is playing a large role in the management and integration of the various technologies developed by scores of other contractors that will make up the Future Combat Systems (FCS).

The program is designed to make the Army lighter and more agile through an intricate web of manned and unmanned ground and aerial vehicles all linked together by a digital network. At a price tag of at least $160 billion, it is the Army’s most expensive weapons program ever.

While Boeing is raking in lucrative profits from overseeing the development and technology demonstration phase of the program, the provision House and Senate authorizers agreed on this week would likely preclude Boeing from continuing to reap the financial benefits it currently enjoys when the Pentagon determines the weapon systems in the program are ready for so-called “full-rate production.”

Rather than allowing Boeing to continue overseeing a vast array of subcontractors, lawmakers essentially want to cut out the middleman and force the Army to deal directly with the individual manufacturers.

Boeing’s role in the program is known as “lead systems integrator,” or LSI, which in this particular case goes beyond the traditional role of a prime contractor. It also includes some elements of a partner to the government in ensuring the design, development and implementation of the technologies and the digital network.

Boeing was awarded the broad contract in 2003 and picked Science Applications International Corp. (SAIC) to assist in performing the managerial functions. SAIC, as a partner to Boeing, also stands to lose from the authorization provision. The two companies now are responsible for selecting and overseeing scores of subcontractors who work on the various technologies that will make up FCS.

Boeing and SAIC also are developing part of the communications network and software integration. The companies are going to keep that part of the work once the program is ready for mass production and for equipping the Army brigades.

The provision states that no company — Boeing or anyone else — can take on the broad role of managing the production of various components.

The Army told Congress it was not planning to do that, but lawmakers put it in writing, making it final.

“The Boeing-SAIC team is proud to support the Army … for the Future Combat Systems program,” said Boeing spokesman John Morrocco in an e-mailed statement. “We look forward to continuing to support our Army customer in delivering these critical capabilities to our nation’s soldiers in whatever manner the Army and the Congress deem most appropriate during full-rate production.”

{mospagebreak}Congress has been having serious concerns about the LSI concept in general after some contracts failed amid skyrocketing costs under the LSI’s control. One example that lawmakers always use is the Coast Guard modernization program known as “Deepwater.”

In a report published last year, the Government Accountability Office said that the Army’s relationship with Boeing and SAIC poses risks “for the Army’s ability to provide oversight over the long term.”

The provision in the defense authorization bill seeks to potentially save the government hundreds of millions of dollars under the assumption that a contractor who serves as an LSI would make a premium off that contract. Even if that premium is as low as 1 percent, it can still amount to millions of dollars because of the size of the program, said a congressional source.

{mosads}The Army is planning to outfit 15 combat brigades with the FCS, at a cost that is projected at $10 billion per brigade. That could be at least $100 million in premiums per brigade for Boeing and SAIC, for total of $1.5 billion. The provision will not take effect until, at the earliest, 2017, when the program is expected to enter full-rate production.

Because the technology would be completely developed with all the kinks worked out, the government could buy directly from the contractors who make those vehicles or robots, for example, without going through an intermediary, supporters of the provision argued.

Currently, Boeing collects a fee of 15 percent of the yearly research and development contract for FCS. Its fee for fiscal 2009 would be $325.4 million. Half of that is fixed; half comes as an “incentive” fee, and so far the Army has paid out the incentive fee every year. The yearly budget for the FCS hovers around the $3 billion mark.

Detractors of the provision argue that the government could face serious problems and lack of specialized acquisition officers to deal with such a large program. Hiring dedicated personnel for the management of the program could drive up the cost even more than having a contractor helping with the management. The Army would have to handle many separate contracts, rather than one larger contract, as it does now with the LSI.

Boeing and its supporters have fought to eliminate the provision from the bill. Boeing would like to keep a hand in the management of FCS and is likely to try, in the coming years, to work out a scenario under which it can do so, according to industry and congressional sources.

Because of language in the 2008 defense authorization bill, the secretary of Defense could ask for a waiver of the provision if the LSI is the only way to proceed.