As the only firm offering a clean-sheet design [for the T-X trainer aircraft], with no track record and presumably a whole lot of development and manufacturing costs ahead of it, a lot of people I spoke to saw Boeing as a long shot.
And yet the company won the $9.2 billion contract to produce 351 jets. Moreover, they won on price. And it’s not the only thing Boeing won: the $2.4 billion UH-1N Huey replacement, and the Navy’s $805 million MQ-25 aerial fueling drone contract.
That was from DefenseNews. Here is more info on the contractual terms.
It’s hard to believe that Boeing was a long-shot to win an aircraft program, but it appears that there were 6 other competitors at some level. What I find interesting is the coincidence of Boeing having both the lowest price and the only clean-sheet design. Optimism, perhaps?
But more likely, they’re willing to take some losses to earn backend profits in upgrades and O&S. Because the contract includes the development and production of the trainers, this won’t be as fruitful a tactic as they have used on the KC-46 Tanker. For the KC-46, Boeing bought-in on the development contract only. As of last year, they were expected to make $1.9 billion in losses on that fixed-price development contract. But the production and O&S will be a far larger slice of the pie where they can earn that back.
Now, Boeing prototyped a couple copies in 2016, and they’re trainers, so it should be a lower risk program.
However, for the T-X trainer, Boeing will have to make their money back on O&S alone, with possibly some upgrades thrown in. It is likely that the $9.2 billion for the trainers will grow for upgrades, cost growth, and other reasons. The contract type is indefinite-quantity indefinite-quantity. In other words, when delivery orders are put on, they may be of fixed price or cost plus variety. Their feet are not “held to the fire” in the same way as if the 351 aircraft contract were fixed price.
But maybe Boeing’s Swedish teammate taught them a thing or two in design austerity, meaning there might not be so many engineering changes in the production model. That might not matter, however, if the Air Force changes requirements.
Here is DefenseNews on profit expectations:
Chances are that Boeing knows full well that it will see losses. It already has — announcing $691 million of new third-quarter charges for winning the contracts. But even billions in charges is palatable for a company that last quarter alone saw free cash flow surge 37 percent to $4.1 billion, and that number is expected to climb to $13 billion or more for the year.What’s harder to believe is that those three programs it won, the T-X, UH-1N, and MQ-25, cost $691 million in bid & proposal costs in the third quarter of 2018 alone. [Emphasis added.]
These competitions have been going on for years. And in one quarter, new work on three proposals cost Boeing $691 million? I guess that’s on top of what they were already spending for those proposals.
Not only will contract prices be much higher so that companies can be reimbursed on these pre-contract expenses, such as Independent Research & Development (IRAD) or Bid & Proposal (B&P) costs, but any new or small firm would not likely be able to carry that overhead for so long. They won’t have $13 billion in profits to draw from. They are out of the running before it even starts.
The total sum spent on marketing and bidding on defense projects is astronomical, and that’s before significant funding comes through those contracts. But I don’t think these pre-contract costs eats into profitability as the reporter implies.
First, Boeing separates its commercial and defense businesses. And then within the defense business, big primes can get those big proposal expenses reimbursed sooner under current contracts. Pre-contract costs will show up as allowable expenses in their next audit and rate negotiation. All cost-plus* contracts will be reimbursed at a higher overhead (G&A) rate in the relatively near term.
New firms don’t have the luxury of reimbursement of future business costs on existing contracts. They are trying to win contracts, and that cost cannot be pushed onto a huge pool of contracts they are currently performing on, which can get reimbursed at higher rates.
The name of the game is win the development contract at all costs. Then, recoup your money in higher production and O&S costs, because you got a several decade long monopoly on that system.
[*Note, fixed price contracts are fixed, so yesterday’s fixed-price contracts won’t get reimbursed for today’s higher-than-expected overhead charges. The supposed downside is that higher overhead rates make your bid cost less competitive. Well, simultaneously shift overhead costs, such as foremen, to direct charging where possible and that’ll offset the problem.]
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