Pentagon, Boeing say $3.9B never was the price target for tanker aircraft

The first phase of the Air Force’s aerial tanker program is likely to cost around $4.9 billion, the Pentagon and Boeing said Thursday.

And if Boeing and Air Force program managers are able to complete the engineering- and design-focused initial phase of the KC-46 program under that amount, Pentagon officials will tell Congress the program is under budget.

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The Defense Department and the Chicago-based firm told The Hill that, despite recent allegations of cost spikes higher than a “target price” of $3.9 billion, neither side ever expected the development phase could be accomplished at a price that low.

“Boeing never intended to be at $3.9 billion,” a Boeing official said. “We always knew we’d go over that.”

Pentagon spokeswoman Cheryl Irwin said Defense Department and Air Force officials are expecting the engineering and manufacturing design (EMD) portion of the program to come in around the contract’s “ceiling price” of $4.9 billion.

“It is better to focus on ceiling price, because that is what we told both Boeing and EADS we would evaluate the program to cost,” Irwin said. “This is what we budgeted [and] what the baseline is set at.

“We were very explicit over a very long time that on this contract what we expected to pay was the ceiling price — that is what was in the [request for proposals] and that is what we briefed to [Congress] and that is what we have said we expect. That is what the contract says.”

Boeing won the 179-plane, $35 billion contract earlier this year after a bitter, decade-long fight with its European rival Airbus, the parent company of EADS.

Several media reports this month stated Boeing had informed the Pentagon the EMD phase would overrun the target cost of $3.9 billion. Sen. John McCain (R-Ariz.), ranking member on the Senate Armed Services Committee, ripped Boeing and the Pentagon for forcing taxpayers to help subsidize that overrun.

During the months-long competition, government and industry officials talked often about the target cost, apparently making that figure look to be the expected price of the EMD phase.

“The Air Force structured the contract this way because they expected a very aggressive bid from either contractor,” Teal Group aviation analyst Richard Aboulafia said Thursday by email. “As a compromise between a traditional cost-plus and a riskier fixed-price-development contract, there’s some leeway for jointly funded overruns, followed by a complete burden shift to the contractor. Anybody professing outrage has maintained a complete ignorance of this process.”

Boeing and the Pentagon have confirmed that if the cost of the first phase, which includes four flying gas stations, falls between the $3.9 billion “target” and the $4.9 billion “ceiling,” DOD would pay 60 percent and Boeing 40 percent of the in-between amount.

“It is true about the share arrangement between target and ceiling,” Irwin said. “Our point is that our expected cost is ceiling.”

In a twist, Pentagon officials said they’re ready to declare the tanker program under budget if the EMD phase is conducted in that “share line” area, meaning for less than $4.9 billion.

“If we get into the ‘share line,’ we will be operating at a level below our budgeted level,” Irwin said. “We will be in a position to report to Congress that the program is under budget, rather than over budget.”

Boeing contends it is on track at this point to hit the ceiling price bull’s-eye.

“There are no overruns. … We remain on cost, on schedule,” Boeing executive Chris Chadwick told The Hill on Wednesday. “Our bid has not changed since the Air Force accepted it. Our expectation of cost has not changed since the Air Force selected the Boeing plane.

“Nothing’s changed from the day we signed on the dotted line to today,” said Chadwick, president of Boeing Military Aircraft. “No cost increases, no overruns. No nothing.”

Amid the confusion about just which price the government and the KC-46 prime contractor anticipated, it first appeared Chadwick meant Boeing expected no cost growth higher than $3.9 billion. But the other Boeing official stressed on Thursday that Chadwick was saying, because $4.9 billion has always been the agreed-upon price, the firm expects to come in around that amount.

Irwin and the Boeing official also reiterated that the defense firm would pay every cent above $4.9 billion, meaning the government would not be on the hook for any cost overruns above the contract’s ceiling amount.

“Every dollar over the ceiling price, we don’t pay,” DOD’s Irwin said.

The Boeing official said agreeing to the limited cost-sharing plan and taking responsibility for any overruns above $4.9 billion was a “strategic pricing decision going in.”