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KC-X - Boeing Protest Factor 4 - Cost

The RFP made clear that the Most Probable Life Cycle Cost (MPLCC) was the key Cost/Price metric for source selection. The MPLCC not only includes the cost of acquisition; it includes the cost of operation and maintenance. The Air Force described the cost visibility information Boeing provided as "unprecedented" and rated Boeing's MPLCC cost "Reasonable," "Balanced," and meeting "Realism" criteria -- all the highest ratings a competitor can receive. In its evaluation, the Air Force discounted the weight of the MPLCC and inflated Boeing's costs by billions of dollars, even though Boeing's proposed cost data was in full compliance with the Federal Acquisition Regulation. Because of the way the Air Force treated Boeing's cost/price data, Boeing believed that the company was effectively denied its right to compete with a commercial-derivative product, contrary not only to the RFP but also to federal statute and regulation. The Air Force refused to accept Boeing's Federal Acquisition Regulation-compliant cost/price information, developed over 50 years of building commercial aircraft, and instead treated the company's airframe cost/price information as if it were a military-defense product. Boeing stated that this flawed decision deny the government the manufacturing benefits of Boeing's unique in-line production capability, subjecting the Air Force to higher risk, and also resulted in a distortion of the price at which Boeing actually offered to produce tankers.

Boeing contended that the U.S. government piled on $5.2 billion in added costs to our KC-X tanker proposal but only boosted the Northrop-Airbus proposal $772 million. The company said that this example of disparate treatment was about as good as any to explain why we're protesting the $35 billion air tanker contract. Reuters reporter Andrea Shalal-Esa fleshed out the differences between the two competing proposals. As Shalal-Esa observed: "The Air Force's evaluation and adjustments to the two bids.are at the heart of Boeing's contract protest filed March 11 with the nonpartisan Government Accountability Office."

In protest documents Boeing filed with the GAO, Boeing said the government unfairly increased the cost of the 767-based tanker. The government cited higher risk associated with the development and production of the Boeing tanker, as well as a disagreement about anticipated repair costs, which all led to evaluators unfairly assigning us a much higher cost than we could ever have imagined. The same evaluators, on the other hand lowered Northrop-Airbus estimated operation and support costs by $1.4 billion. They lowered the operational costs of an airplane that is larger than our 767, burns 24% more fuel, requires more support and parking space and proposes a high-risk, itinerant and intercontinental production plan. In total, Boeing contends that the the Northrop-Airbus tanker life-cycle costs will cost the U.S. government $49 billion more than the more efficient Boeing tanker over 40 years.

Boeing believed that the evaluation clearly favored Northrop and was "plagued by unreasonable cost assessments, disparate treatment, misleading discussions, and a fundamental failure to follow the evaluation criteria." According to Shalal-Esa, among costs added to the Northrop bid included $333 million to beef up defensive equipment and the projected life cycle cost of Northrop's proposal to $108.01 billion. That figure includes $68.3 billion to operate and support the new flying fuel stations over the next few decades. But it keeps the "most probable life-cycle cost" for Northrop's bid ever so slightly below our $108.04 billion bid. Loren Thompson, a defense analyst at the Lexington Institute, said "It appears that the Air Force's pricing methodology was stacked fairly heavily against Boeing's bid."

As recognized by the Air Force itself in 2002, the significantly bigger A-330 would demand a greater infrastructure investment with dramatically lower operational effectiveness. Because of its more efficient size, the KC-767 is deployable to more airfields around the globe without the costly infrastructure upgrades the KC-30 would require.

On 17 March 2008 Boeing reported that the U.S. Air Force likely would pay up to $30 billion more in fuel bills over 40 years to operate a fleet of 179 Airbus A330-200 aerial refueling tankers, compared to a similar number of tankers based on the Boeing 767-200ER. This assessment was based on a Conklin & de Decker Aviation Information study, funded by Boeing, that calculated the Air Force's cost with oil at $100 per barrel and $125 per barrel. Oil prices hit a record high in early March 2008 above $110 a barrel, and many analysts expect prices to continue climbing. Conklin & de Decker, an independent aviation research company, recently recalculated fuel price costs for the Boeing 767-200ER and the Airbus A330-200, popular commercial twin-aisle aircraft that are being converted to military aerial refueling tankers. They fly about the same distance, but the larger, heavier A330 is less fuel efficient than the 767-200ER. As a result, the A330-200 consumes 24 percent more fuel per trip than the 767-200ER. The study also factored in estimated costs of refining, transportation, storage, handling and fueling the aircraft. It concluded the estimated price per gallon at $3.11 with oil costing $100 per barrel would cost the Air Force about $25 billion dollar more over the 40-year service life of 179 Airbus A330-200 tankers, and $29.8 billion more with oil at $125 a barrel.

The Air Force conceded that Boeing's KC-767 had the lowest Most Probable Life Cycle Cost (MLPCC); a revelation that contradicts initial statements that the Northrop/EADS aircraft "offered great advantage to the Government in cost price." With respect to the Cost/Price evaluation, as an initial matter, the Air Force later conceded that Boeing's most probable life cycle cost (MPLCC) is lower than NG/EADS'.. This rendered incorrect the SSA's initial public assertions that NG/EADS "offered great advantage to the Government in cost price." The Air Force's concession, however, addressed only a fraction of the errors in the Cost/Price evaluation confirmed in the Government Accountability Office report. The conceded change resulted from both an erroneous spreadsheet cell reference, as well as a flawed and incomplete MILCON Site Survey conducted by the Air Force.

The Air Force conceded that, contrary to the dictates of the Solicitation, they did not attempt to estimate all of the most probable life cycle costs implicated by the specific aircraft proposed. Instead they (1) ignored some military construction (MILCON) costs because they would come from a different funding source, (2) unreasonably assumed major MILCON costs for both aircraft will be identical; and (3) failed to consider other MILCON costs simply because they were never quantified.

In its MILCON analysis, the Air Force claimed that the factor applied to aircraft to determine the amount of hangar space required "corresponds to aircraft reliability," not size.. It thus assigned precisely the same .15 factor to both aircraft, even though it had evaluated the KC-767 as offering a "significant benefit" over the KC-30 in terms of reliability. The Air Force's admission that it assigned identical factors to both aircraft despite clear findings of differences in evaluated reliability is an admission of improper normalization.

Despite the fact that the Air Force ultimately found that the baseline aircraft to be procured from Boeing Commercial Airplanes (the 767-200LRXF) was in fact a commercial item, the GAO Report revealed that the evaluators never accepted the legal import of such a finding (i.e., the commercial pricing paradigm established by the FAR) in its cost/price evaluation. This resulted in improper and arbitrary upward cost and risk adjustments to Boeing's SDD, P&D, and repair costs.

The Air Force failed to resolve significant inconsistencies presented in NG/EADS' cost and technical proposals, particularly with respect to NG/EADS' plan to transition its manufacturing approach to an "in-line" modification approach identical to Boeing's at LRIP. The Air Force failed to address technical and schedule risk, failed to capture costs associated with this substantive change in NG/EADS' MPLCC, and did not treat Boeing and NG/EADS evenhandedly in this regard.



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