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Missile Defense Agency Will Fight Parts Defects

U.S. missile defense contractors for the first time will be held financially responsible for poor- quality parts, such as those that have caused failures and delays to multimillion-dollar tests, according to documents and congressional testimony.

A new “Contractor Accountability For Quality” clause will be included in the Missile Defense Agency’s contract for ground- based missile defense development and sustainment. Boeing Co. (BA) of Chicago is pitted against Lockheed Martin Corp. (LMT) of Bethesda, Maryland, for the potential $600 million-a-year contract.

The contract may be awarded as soon as tomorrow or next week. It will be the first to include the provision, the Missile Defense Agency told the Senate Armed Services Committee in correspondence that was not publicly released.

The provision allows the agency to reduce or even eliminate performance fees “when our prime and subcontractors fail to follow their own best practices, internal processes or accepted industry standards that result in quality problems,” the agency told the committee in a statement.

Penalties would apply to “quality escapes” in building missiles, radar and other sensors that make up the U.S. missile defense system, it said.

The provision is not meant to penalize a contractor for all failures. In advancing state-of-the-art technology, “we should expect such failures from time to time,” the agency said.

Separately, the agency will announce as soon as next week that Lockheed Martin will receive an initial contract valued at as much as $1.96 billion to sell Thaad missile interceptors, launchers and radar to the United Arab Emirates, a U.S. official said.

Threat of Penalties

The threat of penalties is necessary because the missile defense program has been hit with repeated quality shortfalls, said Christina Chaplain, an associate director at the U.S. Government Accountability Office who follows the agency.

The Missile Defense Agency “has been taking a stronger stand with provisions like this and with increased attention to quality,” she said in an e-mail. “Until the space and missile defense sector gets a better handle on quality, provisions like this are probably the best tool around to incentivize and hold contractors accountable.”

Parts defects have affected nearly every major space and missile defense program, causing millions of dollars in cost overruns and many months of schedule delays, she said.

‘Botched Tests’

For the MDA in particular, quality issues “have led to botched tests, which take many months to plan and are very expensive,” Chaplain said. “Often the quality problems we see are the result of contractors not following basic procedures or policies.”

In February 2010, David Altwegg, then the MDA’s executive director, told reporters that the agency is “very, very disappointed” with “quality design issues, but more with products delivered, which results in rework.”

“It costs the taxpayer more,” he said.

Yet in most cases, because of the contract structures, the government is limited in “its ability to hold contractors responsible for sloppy work or inattention to procedures already on the books,” Chaplain said.

Test Failures

A $100 million missile interceptor test failed in January 2010 when a Raytheon Co. (RTN) warhead thruster malfunctioned because of a missing “lockwire,” the agency said.

A separate $41 million test of Lockheed Martin’s Thaad interceptor failed in December 2009 when an aerial target provided by an L-3 Communications Holdings Inc. (LLL) unit had an incorrectly rigged connector.

In a third instance, a $100 million missile defense test was delayed at least eight months in 2008 because of a component failure in a data transmission device made by another L-3 unit.

Until now, many missile defense contracts have been cost- plus types that require the U.S. to pay for cost overruns and missile failures. The MDA has the recourse to dock contractors some award or all of their incentive fee.

Still, the agency is “evaluating our ability to go beyond the scope we currently have and extending it to a much greater pool of fee, to include even past awarded money,” Army Lieutenant General Patrick O’Reilly, the agency’s director, told U.S. Representative Michael Turner in a written statement.

‘Egregious Errors’

“This will enable the government to be compensated for egregious errors in quality control,” O’Reilly said in his statement to Turner, an Ohio Republican who is chairman of the House Armed Services subcommittee on missile defense.

Raytheon is teamed with Lockheed on the competition, and Northrop Grumman Corp. is with Boeing.

Asked to comment on the new provision, Lockheed Martin spokeswoman Lynn Fisher wrote in an e-mail that the company is “committed to providing quality products to our customers. Given that we are in a competition, we defer questions related to contractual terms to the Missile Defense Agency.”

Boeing spokesman Scott Day said, “Boeing places the highest priority on quality, authenticity and the reliability of every component the company utilizes in our systems.

‘‘There have been, and continue to be extensive and broad- based reviews -- all across our supplier base -- aimed at enhancing our processes and procedures to prevent problems and support our customers with the highest level of mission assurance,’’ he said.

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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