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Fixed-price tanker contract at risk

Air Force acquisition leaders worked hard to land a fixed-price contract for the KC-46 refueling tankers. The defense spending cuts dictated by sequestration could put that contract in jeopardy, said Maj. Gen. John Thompson, the tanker program executive officer.

If enough money was cut and the tanker contract is scuttled, the Air Force would have to renegotiate the contract without any certainty it could keep its fixed-price status, said Thompson, who took over the tanker acquisition program five weeks ago.

"Depending on how sequestration is implemented, I might have to break my fixed price contract that I got such a good deal on," Thompson said. "I don't want to break my contract and I'm fearful that sequestration may force me to do that."

The fixed price contract protects the Air Force from spiraling costs. Thompson warned in his speech Tuesday at the Air Force Association's annual conference that sequestration would result in "catastrophic" effects for the tanker program scheduled to replace the aging KC-135 Stratotanker.

Air Force acquisition officials signed a $4.9 billion engineering, manufacturing and development contract with Boeing in Februarary 2011. The Air Force plans to buy 179 tankers to bolster their fleet.

Thompson said in his speech that the Air Force must not get complacent and simply hand the program off to Boeing. A senior Air Force official explained after Thompson's speech that when the tanker program office tried to hire new people, leaders there were told: "You have a fixed price contract, so you have nothing to manage."

"That couldn't be farther from the truth," the senior official said. "We're in a good place right now, but we're in a good place because of a lot of really hard work."

Although Thompson confirmed the tanker program is "in a good place from a cost, schedule and tech performance standpoint," an early warning sign of trouble was uncovered Tuesday. Boeing is burning through its management reserve for the KC-46 program faster than expected.

A management reserve is an extra fund set aside if problems that occur early in development. Boeing said this has occurred to pay for expedited risk-reduction efforts on the program.

"“We have brought forward the allocation of management reserve largely in order to expedite risk mitigation opportunities, such as system integration laboratories,” said Damien Mills, a Boeing spokesman. “However, the total management reserve budget remains unchanged.”

There was good news for Boeing Tuesday. Thompson said his program office was contacted by Singapore leaders with interest in buying their own fleet of KC-46 tankers. The Singapore air force also flies the KC-135 Stratotanker.

International sales could stem any losses Boeing absorbs early in development with its fixed price contract.

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