Updated on 6/8/2021 at 9:30 a.m. with a statement from Virginia Rep. Rob Wittman.
WASHINGTON — The U.S. Air Force recently awarded Boeing an $88 million contract for spare parts for Japan’s KC-46 tankers, but service officials confirmed to Defense News on Monday the deal included about $10 million in costs that Air Force leaders investigated and could not determine if they were fair or reasonable.
That finding has led to concerns from Capitol Hill that Boeing is artificially inflating prices to help recoup financial losses incurred during the program’s development stage. Thus far, the company has paid more than $5 billion in cost overruns after winning a fixed-price contract in 2011 worth $4.9 billion.
“They’re trying to recover some of their costs on the back end, and they’re starting to recover their costs basically on some of these spares,” said one government official with knowledge of the contract discussions.
One part in particular now costs 15 times what the Air Force previously paid for it, the official said.
Virginia Rep. Rob Wittman — the top Republican on the House Armed Service’s Committee’s seapower and projection forces subcommittee — is expected to raise the issue during a HASC hearing on the Air Force budget scheduled for June 8.
“We need to change course on this troubled contract by pursuing one of two options,” Wittman said in a statement to Defense News.
“The Air Force could either change the contract incentive structure and actively manage the KC-46A development; or, seek a new path and pursue a non-developmental recompete of the tanker effort,” he said. “Without pursuing one of these paths, at this point, I am confident that we will continue to see poor performance and an increasingly negative impact as tanker capacity is diminished.”
Boeing denied bolstering the price of spares to recoup costs and in a statement to Defense News said that the $10 million discrepancy “is due to significant shifts in prices for aerospace spare parts over the last year, driven by unprecedented challenges to the commercial aerospace market.”
The dispute centers on contract negotiations for KC-46 spares for both the U.S. Air Force and Japan. The Air Force ultimately awarded Boeing a contract for Japan’s parts on April 16, but negotiations for the U.S. spares are still ongoing.
The KC-46 refueling tanker is a militarized derivative of Boeing’s 767 airliner. Much of its spare parts and components are the same as the ones used on the commercial jet, which are typically cheaper to acquire.
However, that benefit comes with a key drawback.
Defense contractors are exempt from having to provide certified cost or pricing data for commercial parts to the Pentagon, allowing companies to preserve their edge in the free market. But when the COVID-19 pandemic decimated commercial aerospace sales, it left the Defense Department without a clear view into how much parts cost.
Between November 2019 and March 2021, the U.S. Air Force made multiple requests to Boeing seeking out additional cost information for a total of 29 KC-46 parts, Air Force spokeswoman Ann Stefanek said in a statement.
Boeing declined to provide price data for 28 of those parts, stating that commercial pricing was “not available,” Stefanek said. That left the Air Force unable to validate whether about $10 million of the total $88 million contract price for Japan was fair and reasonable.
One of the most controversial items on that list was a navigation light produced by Honeywell — which the Air Force purchases directly from Boeing — that Boeing quoted as costing 15 times what the Air Force had previously paid for it, said one source with knowledge of the discussions. (The source declined to provide the price of the navigation light citing the proprietary nature of the product.)
Boeing contends that the company had provided incorrect prices for the Honeywell navigation light in its previous contracts with the U.S. Air Force and ended up taking a loss for the sale of those products.
During negotiations with the Air Force about those lights, Boeing was not able to provide Honeywell’s proprietary cost information to the service, but ultimately offered to remove the navigation light from the scope of the KC-46 spares contract — which would have allowed the Air Force to negotiate directly with Honeywell for that part, the company said in a statement. However, the Air Force decided to buy the item through Boeing.
With Japan set to receive its first KC-46 this year, the U.S. Air Force believed it needed to ensure the Japanese Air Self Defense Force had spare parts available to support tanker operations. So Maj. Gen. Cameron Holt, the service’s top contracting officer, ultimately approved the $88 million spares contract for Japan.
“The Air Force has notified Japan of this determination and our inability to determine fair and reasonable pricing, although the total proposed contract price is below the range authorized by Japan for the spares contract,” Stefanek said in a statement.
Meanwhile, U.S. Air Force negotiations for its own KC-46 spare parts are still ongoing.
“The Air Force is expediting a multiple award Indefinite Delivery Indefinite Quantity contract vehicle to compete future KC-46 spares to the maximum extent available in order to improve future contract pricing through competition,” Stefanek said.
The U.S. Air Force plans on buying 179 KC-46s over the life of the program, while Japan is on contract for four tankers.
The first Japanese KC-46 made its inaugural flight on Feb. 8 at Boeing’s facility in Everett, Wash.