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AF Balancing Fixed-Price Deals Amid Uncertainty

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This article first appeared in AWIN First.

The U.S. Air Force is considering seeking more flexibility in payment schedules on future fixed-price development contracts, to mitigate the growing risk that budget uncertainty could force the government to default on such deals and lose their favorable terms.

What was a low risk early in fixed-price development programs such as the U.S. Air Force’s KC-46A refueling tanker is now becoming more and more possible as Congress appears paralyzed in either passing a fiscal 2013 budget or addressing the cuts being dealt through sequestration. Though Air Force officials say they think they will be able to make their KC-46A payments to Boeing in fiscal 2013, there is no certainty at the moment.

U.S. Air Force Maj. Gen. Wendy Masiello, deputy assistant secretary for contracting, says that in light of the fact that funding instability can jeopardize a program just as much as poor management, the Air Force is exploring whether some flexibility on payment schedules could be introduced into future fixed-price contracts.

"We are stepping back to make sure we know what we are getting into," she says.

Another issue being examined is long-term obligations through multiyear procurements. Though they offer price reductions, multiyear deals also require funding stability, and if the government cannot guarantee it will be able to make the payments, the benefits cannot be reaped.

Introducing any such flexibility into the tanker or weapon contracts would require a bilateral agreement on the part of both the contractor and the government, as those deals have been signed. But Masiello says the service is exploring options.

And, she says, the service will look for opportunities to make future fixed-price contracts allow for more flexible funding so the government can reap the benefits and absorb some of the external turbulence in funding.

"We are seeing what we were hoping to see" from contractors working under fixed-price contracts, Masiello says. These fixed-price contracts don’t just drive different behaviors by contractors. In the case of Boeing’s KC-46 contract, company officials say they are very aggressively tackling risk early in the program. Though this has consumed management reserve faster than planned, they say that addressing issues earlier is better than saving them until later in the development.

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