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Boeing Protests Northrop's Long Range Strike-Bomber Contract

November 6, 2015 (Photo Credit: Northrop Grumman)

Originally published at 9:01 a.m.

WASHINGTON — Boeing, which along with partner Lockheed Martin submitted the losing bid in the competition to build the US Air Force's new Long Range Strike-Bomber, filed a protest Friday with the Government Accountability Office over the Defense Department awarding the contract to Northrop Grumman on Oct. 27.

The GAO now has 100 days to review the protest and issue a ruling.

Boeing and Lockheed Martin called the selection process for the LRS-B "fundamentally flawed" in a joint statement. Specifically, they take issue with the cost evaluation performed by the government, saying it did not properly reward the team's proposals to break the upward-spiraling historical cost curves of defense acquisitions, and did not properly evaluate the relative or comparative risk of Northrop Grumman's ability to perform, as required by the solicitation.

Northrop Grumman, maker of the stealth B-2 bomber, won the award in part because of a projected cost per plane of $511 million in 2010 dollars, well below the Pentagon's cost cap of $550 million in 2010 dollars. In fiscal 2016 dollars, those figures translate into $563 million and $606 million, respectively.

Randy Belote, Northrop Grumman's vice president of strategic communications, said in a statement that the company is disappointed" by the protest. The Air Force's "thorough and disciplined process" took into full account the bids' abilities to execute the program on schedule and on budget, he said.

"Northrop Grumman offered an approach that is inherently more affordable and based on demonstrated performance and capabilities. Our record stands in contrast to that of other manufacturers' large aircraft programs of the last decade," Belote said. "As the only company to ever design and build a stealth bomber, we offered the best solution for our nation's security. We look forward to the GAO reaffirming the Defense Department's decision so we can continue work on this critically vital program."

US Air Force spokesman Maj. Robert Leese said in a prepared statement that the service looks forward to proceeding with the development and fielding of the LRS-B once the protest is resolved.

"Although it is every competitor's right to file a protest, the Air Force is confident that the source selection team followed a deliberate, disciplined and impartial process to determine the best value for the warfighter and taxpayer," he said. "The Air Force will fully support the GAO's independent process."

Byron Callan, an analyst with Capital Alpha Partners, wrote in a note to investors that the protest did not come as a surprise, and he would have expected Northrop to protest if it had lost the competition.

Callan estimated a 15 percent probability that the protest would be successful.

"We absolutely believe that the Air Force assumed there would have been a protest on the LRS-B contract award," he wrote. "While there is the precedent of Boeing successfully protesting the tanker program to EADS and then winning the re-compete, this is a different acquisition team at the Air Force."

Loren Thompson, a defense industry consultant and an analyst with the Lexington Institute with strong ties to Boeing and Lockheed, said the protesters feel that the US Air Force misapplied its selection criteria.

The price and the risk associated with the competing proposals was not adequately assessed," he said. The Air Force's solicitation asked for innovations that would break the cost curve, but did not correctly give the Boeing team credit for the savings that would follow its numerous innovations, he said.

"The Air Force didn't take into account the great disparity in capabilities between the two teams. Cost was so decisive here that all of the superior capabilities that the Boeing team brought to the table resulted in no net improvement in the team score," he said.

In order to enforce cost realism, the Air Force looked at the history of the B-2 program, the last bomber platform developed by the US, which was built by Northrop, he said.

"The Air Force based its 'should cost,' its estimate of the costs of the development program, on historical data that predated most of the innovations they brought to the competition," effectively excluding any cost savings from any technological advances since the end of the B-2's production run in 2000, he said.

The Boeing/Lockheed team bid $11 billion for engineering and manufacturing development (EMD), but the Air Force calculated EMD at $21.4 billion, which shifts the risk from the contractor to the government, Thompson said.

Boeing has little to lose and much to gain from a protest. The LRS-B award could top $100 billion over the life of the contract and will mean decades of revenue for the winning contractor. Without LRS-B, Boeing's military aircraft facility in St. Louis, Missouri, could face extinction.

But Boeing faces long odds of a successful protest. As a recent annual report on the defense acquisition system noted, only around 2 percent of defense protests were actually upheld in 2013, the last year data was available. This rate is lower than the overall federal rate for that year, which was just under 4 percent.

Additionally, the Air Force, clearly eager to avoid a repeat of the decade-long tanker saga when a Boeing protest eventually reversed the original award to Airbus, has taken great pains to insulate the LRS-B award.

Service leadership tasked not one but two independent cost estimators to evaluate the program, officials revealed last week. Experts also point to a recent Pentagon Inspector General audit of the LRS-B acquisition process as evidence the contract award is air tight.

In making the announcement, Secretary Deborah Lee James stressed that the selection process was "deliberate and disciplined."

"Award of this contract followed a deliberate and disciplined process, our team of professionals carefully considered the offerers' proposals in accordance with the source selection criteria," James told reporters during the award announcement. "The entire process was carried out with a high level of transparency with our industry partners and was scrutinized via DOD peer reviews."

But despite the Air Force's best efforts, a protest could delay the program and spark an ugly public relations battle, particularly given Boeing's clout on Capitol Hill.

Boeing and Lockheed will likely wage intense lobbying campaigns. Boeing is expected to tap the Missouri delegation, including influential Democratic Sen. Claire McCaskill and Republican Sen. Roy Blunt, while Lockheed will look to the Texas delegation, particularly Fort Worth's Republican Rep. Kay Granger and House Armed Services Committee Chairman Rep. William "Mac" Thornberry, also a Republican.

Before the announcement last week and after a hearing on streamlining defense acquisitions, Thornberry acknowledged concerns over a possible LSR-B protest and the litigious nature of acquisitions in general.

"It's part of the way acquisition culture has developed that every bid award has protests, and you're expected to protest — basically with no penalty," he told reporters. "So, a number of members have had ideas about improving that situation, and it's something that we will continue to discuss."

Email: aclevenger@defensenews.com and lseligman@defensenews.com.

Twitter: @andclev and @laraseligman

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