Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Thursday, March 06, 2008

The Dirty Little Secret

This week there has been a huge flap over the Air Force's decision to award a $40 bil contract to EADS-Northrop team to build a refueling tankers.

Everyone is enraged that not only did a foreign company get the contract, but a FRENCH one! Congress called Northrop a cover for the French. They claim that the air force should have awarded the contract to Boeing to create jobs here at home at a time when manufacturing jobs are disappearing. Well sorry, but the law does not allow the Air force to base its purchasing decision on protectionist job creation measures. I have no doubt that the Air Force was ready for this uproar and I am sure they will be able to defend their decision.

All of that aside, I find this controversy very interesting and I hope it will encourage the media to dig deeper into how government agencies have their hands tied by contracting rules. Here are a couple of dirty little secrets.

For starters, did you know that when selecting a contractor in a competitive bidding process, the government is NOT allowed to use past performance (or the lack thereof) as criteria? This was meant, I am sure, to prevent favoritism and corruption in the bidding process. The idea is that you re-invent the wheel each time a contract expires. No automatic renewal. However, as a rule it fails miserably because it cuts both ways. It prevents government agencies from getting rid of a contractor who has failed to deliver on the contract. When a contract expires, the government has to put out a competitive bid. If the same lousy company bids, their bid must be considered alongside new bidders and past performance cannot be considered. And if the lousy bidder has the lower price, then there isn't much the government agency can do.

The other evil is that a contractor will be able to underbid competitors by cutting labor costs. One example is that my agency contracts out gate security. We have federal police that handle the real security, but the gate monitoring is contracted out. The previous contractor did a good job, but paid workers $25 an hour. The new contractor pays them $13 an hour and as a result, has ex-cons with expunged recordings monitoring the gates. But the new contractor had a lower bid. End of story.

I could give you several examples of contractors who fail to deliver, but are re-signed over an over because they underbid. Shame on Congress for getting angry at the Air Force. They out to be looking at the contracting rules.


The Law Talking Guy said...

Unfortunately, the Bush solution is to authorize no-bid contracts, using the procurement issues as an excuse to favor cronies. A simple fix would allow negative past performance to disqualify, without allowing a plus for positive past performance.

Dr. Strangelove said...

It is my understanding that the Air Force did use past performance as one of the four major criteria in evaluating the refueling tanker proposals. That was one reason Northrop/EADS won. Problems with recent Boeing contracts weighed heavily against them.

There is relevance to the November election in all this, since Senator McCain personally led the fight to derail a previous proposal to lease tankers from Boeing. The Air Force official in charge of the procurement decision, Darleen Druyun, used her power as an opportunity to negotiate with Boeing (secretly) for a job. Boeing of course also used the job as an inducement for her to favor their proposals. She ended up in prison for that stunt, as did Boeing's CFO. The Air Force claims this particular history was not part of their "past performance" review. I suspect they are being honest about that.

It is interesting that the Air Force went with a clean victory for one team rather than a split buy, as they have done in some cases. From what I have heard, the winner was clear and the competition was, "not even close."

USwest said...

That's interesting Dr. S. I didn't realize that they had used past performance as a criteria because I am told that in my agency, we are not allowed to do so. So they have to play games, like never officially recognizing past performance, but by rigging the committee's votes through an informal agreement among the voters.

NPR took a different angle. Apparently, contracting rules require US bidders to get favor. However, the rules were changed recently to allow companies based in allied nations to get the same status. Humm . . .

Just a note, EADS isn't French. It is a European consortium formed in 2000 with a merger of DaimlerChrysler Aerospace AG of Germany, Aérospatiale-Matra of France, and Construcciones Aeronáuticas SA of Spain.

Anonymous said...

Given the history of this air-to-air refueller contracting debacle I would imagine the Air Force wanted this particular project selection to be squeaky clean. One thing they couldn't consider was job creation from what I've read.

Dr S.: was a split buy on the cards? I thought it was an all or nothing contract. (Note this is just the first buy of 179 aircraft, beginning the replacement of some 500.) Also is there any indication yet on what the main criteria were?

Spotted Handfish

Dr. Strangelove said...

Handfish: a split buy was not in the cards. It was all or nothing. I was just curious why they chose to work it that way. Maybe it was required.

They had four criteria initially, but NG/EADS objected to the program and they ended up adding the fifth one.

1. Capability. Technical performance requirements, life-cycle support for the aircraft, strength of the contractor's management team, etc. The teams tied in most measures, but NG got the edge in terms of greater airlift capability in the 1000 - 2000 mile range.

2. Risk. Apparently, Boeing's initial offer seemed too good to be true, and they were asked to revise it. They came back with a higher cost schedule and longer development time. The final result was in this category was deemed a tie.

3. Past Performance. NG won this one. (See previous discussion.)

4. Cost. There was lower confidence in Boeing's cost projections, even after the resubmission (see Risk). NG won this one.

5. Integrated Assessment. (The extra criterion.) The first criterion measured the performance of a single aircraft; this assessed the performance of a fleet of refueling tankers working under realistic operating conditions to fulfill a wartime mission. By modeling and simulation, NG showed they could fulfill the same missions with about 20 or so fewer aircraft than Boeing could.

Dr. Strangelove said...

This one-page flyer gives an excellent comparison of the two proposals.