WASHINGTON — Boeing will have to pay $168 million out of pocket to cover increased costs on the VC-25B Air Force One replacement program, the company said Wednesday.

Boeing attributed the overrun to “engineering inefficiencies” caused by the impact of COVID-19, but Chief Financial Officer Greg Smith said the program remains on schedule with a projected delivery of the first VC-25B in 2024.

However, Boeing’s quarterly report to the Security and Exchange Commission noted future risk to the program’s cost and schedule as a result of the engineering challenges. “We believe these inefficiencies will result in staffing challenges, schedule inefficiencies and higher costs in the upcoming phases of the program,” the company stated in the report.

It was not immediately clear how work on the VC-25B program had been disrupted.

“That charge was really associated with COVID-19,” Smith told reporters in an April 29 phone call. “As we have folks working virtually — particularly on the engineering side — as well as that’s gone, we certainly experienced some inefficiencies that has caused us to re-evaluate our estimates to complete those efforts. And that’s essentially what you saw today in our results and the charge associated with that.”

Smith added that although the program team has done a “good job” of managing the program in the face of changes caused by the novel coronavirus pandemic and is “executing very well on many fronts,” Boeing could not mitigate the added cost to the program this financial quarter.

Air Force acquisition executive Will Roper said he spoke with Boeing Defense CEO Leanne Caret last night about the problem, but because the issue was “late breaking,” he referred detailed questions to the program office.

On Wednesday night, the Air Force released a statement that — like Boeing — attributed the cost increase to “engineering inefficiencies.”

Just two weeks ago, Roper praised the progress of the program, which used virtual tools to complete its critical design review in March and wrap up a modification readiness review in April. At the time, the program was on schedule with no disruptions due to COVID-19, he said then.

The Air Force One replacement drew considerable attention in 2016 after then-President-elect Donald Trump tweeted that the program was too expensive and should be cancelled unless the cost—then projected as more than $4 billion—came down. In 2018, the Air Force awarded Boeing a $3.9 billion fixed-price contract to modify two 747s into the VC-25B configuration.

" There has not been an increase to the $3.90B firm-fixed price contract with Boeing or the $5.3B VC-25B total acquisition cost," said Air Force spokeswoman Ann Stefanek.

Although the total price of the program is estimated to hit $5.3 billion once ancillary costs such as new hangars and revised technical manuals are included, the fixed-price ceiling on the $3.9 billion deal ensures that Boeing will have to pay for any cost growth incurred while building the two new Air Force Ones.

In February, Boeing began making structural changes to two Boeing 747s at its facility in San Antonio, Texas — paving the way for those jets to become VC-25Bs. The jets will also receive upgrades including enhanced electrical power, specialized communication systems, a medical facility, a customized executive interior and autonomous ground operations capabilities.

“As planned in the baseline schedule, the next phase of modification is on course to begin in June 2020,” Stefanek said.

Valerie Insinna is Defense News' air warfare reporter. She previously worked the Navy/congressional beats for Defense Daily, which followed almost three years as a staff writer for National Defense Magazine. Prior to that, she worked as an editorial assistant for the Tokyo Shimbun’s Washington bureau.

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