July 14 (Bloomberg) -- Boeing Co.’s projected cost growth on its aerial tanker contract, which may force it to absorb $700 million and U.S. taxpayers $600 million, is “completely unacceptable,” Senator John McCain told the Pentagon in a letter today.
Under the terms of the $4.9 billion fixed-price contract ceiling that calls for a sharing of cost increases, the Air Force and Boeing split 60/40 any increase between the target cost of $3.9 billion to the contract ceiling -- a $600 million share for the service and $400 million for Boeing.
Boeing also faces absorbing another $300 million because it is projected to exceed the $4.9 billion ceiling by that amount, McCain wrote. Boeing alerted the Air Force in April it would exceed the ceiling by $300 million.
“This is gravely wrong and creates an incentive, particularly on very large programs, for contractors to low-ball a contract knowing that the taxpayers will subsidize at least some of the overruns that will be needed to actually complete the work,” wrote McCain to Pentagon weapons buyer Ashton Carter.
Boeing in February won the competition to replace the Air Force tanker fleet over European Aeronautic, Defence & Space Co. EADS North America Chairman Ralph D. Crosby in March said, “What determined the outcome here was price,” calling Boeing’s bid “an extremely low-ball offer.” EADS didn’t contest the award.
The $4.9 billion contract covers development and the first four tankers.
McCain is the ranking Republican on the Senate Armed Services Committee. He is also the most persistent congressional critic and watchdog of almost a 10-year-old Air Force effort to buy new tankers, which he said in the letter are needed.
McCain released in September 2003 hundreds of internal Boeing e-mails on what was then a deal to lease and buy Boeing tankers. The documents triggered hearings and official reviews that eventually killed the proposal.
McCain wrote today, “I can assure you that Congress and taxpayers will find a $600 million subsidy of a low-ball bid by Boeing is something they feel they should not have to pay.”
“Boeing fully understood that up to 60 percent of any cost overrun up to $1 billion over the target cost” of $3.9 billion “would be borne by the taxpayer,” McCain wrote.
“On a program that you found to be low-to-moderate risk, the extent of exposure to the taxpayer here appears excessive,” McCain wrote.
Defense Department spokeswoman Cheryl Irwin said Carter “has answers to all of Senator McCain’s questions and will share those answers with Senator McCain.”
Bloomberg provided the letter to Boeing spokesman Conrad Chun, who declined to comment. He previously said, “We made an aggressive yet responsible bid to win the contract. This is a win for the Air Force and a win for the taxpayer in that they will receive the best tanker at the best price.”
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