Homework

What he’s doing when he’s not doing this. I’ll clean it up tomorrow, maybe. Tired.

The A-12 Morass

Background

The A-12 Avenger II, envisioned as a long range, stealthy, medium attack bomber, was intended as the replacement airframe for the aging A-6E Intruder aboard US Navy aircraft carrier flight decks. Almost from its inception in 1984, it was naval aviation’s top acquisition priority – right up until the moment that Secretary of Defense personally intervened to kill the program in early 1991.

The story of how such a high priority acquisition program foundered on the rocks of project mismanagement is very nearly a Greek tragedy: No one is a hero, everybody suffers, and the tale never quite seems to end.

Characterizations and Disputes

J. Ronald Fox takes up the tale in 2003, well after the last throat has been cut, but while the blood debt is still being weighed. Writing for the National Defense Magazine in January of 2003 ‚Äì twelve years after the Navy terminated the program for default ‚Äì Fox, who in the interest of full disclosure reveals that he was a consultant to the contractors during litigation, argues that the Navy should have categorized the termination for the convenience of the government, rather than due to a default, or lack of performance on the part of the vendors.¹ This not only harmed the contractors, who had invested significant organic sums in research and development costs under the terms of a fixed-price contract, it was harmful to the industry at large. One supposes that Mr. Fox‚Äôs conclusions are broadly representative of those within his selected industry forum.

Broadly, Fox raises three objections to the OSD’s characterization of the program’s termination by contractor default:

1) That the fixed-price contract was inappropriate to the program risk, and never should have been negotiated in that way, given the risks.

2) That the Navy’s uniformed program managers bear most of the blame for the cost and schedule shocks delivered to the Secretary of Defense, shortly after he had testified to Congress on the

program’s good progress.3) That those shocking scheduled milestone failures and cost overruns were characteristic, and should not therefore be held against the companies.

Analysis

It is certainly true, as Fox asserts, that using a fixed-price contract vehicle for what was in many ways “push” technology was probably a mistake. He points out, “(A) fixed-price contract makes sense for government and industry only under two conditions: (1) The risks or uncertainties in the work to be performed can be so reduced that the contractors can reasonably estimate schedule, cost and technical performance, and (2) the military sponsor will be able to control the innovation tendencies of its scientists and engineers.” (Fox, 2003).

The first condition was certainly not true. Not only were the selected contractors feeling their way along a darkened technological corridor -

‚ÄúThe technology for manufacturing composites, especially for the complex shapes of an airplane, was state-of-the-art. General Dynamics and McDonnell Douglas had to develop the technology during full-scale development because they had limited experience in building large structures using composites. The program also experienced problems with its complex Inverse Synthetic Aperture Radar system, as well as delays in its advanced avionics components.‚Äù²

They also were in competition between one another for another acquisition program, the Advanced Tactical Fighter, reducing the requisite amount of information sharing ‚Äì and trust ‚Äì required for program success.³

Although no direct evidence of ‚Äúrequirements creep‚Äù was found, the aircraft design did suffer from the classic aviation program challenges, weight gain and schedule slip: By the time it was cancelled, the design was nearly 8,000 pounds overweight, and a year overdue. Worse, firm evidence of the program‚Äôs difficulties only came to light shortly after the completion of a Major Aircraft Review, whose optimistic results had just been briefed to Congress by then-Secretary of Defense Dick Cheney⁴, embarrassing the SECDEF in front of his erstwhile colleagues in the House of Representatives.

Fox has a good point on the threats represented by fixed-price contracts, but it is not quite so dispositive as an industry advocate might hope: For one thing, there are two parties to any contract, and the General Dynamics and McDonnell Douglas team signed up to the fixed-price regime willingly, having posted the winning bid. Their entrepreneurial eyes should have been wide open to both risks and rewards. In fact, their apparent insouciance after receiving what ought to have been a heart-stopping, 17 December, 1991 ‚Äúshow cause‚Äù letter from the Navy‚Äôs Assistant Commander for Contracts was attributed to a complacent expectation of a government bailout⁵ ‚Äì a bailout whose prospects should have seemed more objectively doubtful, given the politics of post-Cold War budget pressures on a $5billion acquisition project in a presidential election year. And, although it is true that the program‚Äôs complexity unfolded over time, neither the contractor, nor the uniformed Navy program manager were forthcoming about the nature and scope of the program‚Äôs challenges until far too late in the process.

The Program Manager, Navy Captain Elberfeld, contributed directly to the program‚Äôs demise, probably out of a characteristically cheerful military optimism, so useful when motivating subordinates to Herculean efforts, but so harmful if actually internalized by a manager supervising contracts. He routinely reported to his up-echelon command that the program was ‚Äúon track,‚Äù even as weight blossomed and milestones were irretrievably missed.⁶ He cannot shoulder the blame alone, however as the contractors also had apparently irresistible contractual incentives to report progress they had not actually achieved:

‚ÄúMoreover, the aerospace contractors, who had sustained financial setbacks because of government defense cuts, were under pressure from upper management to maximize cash flow. They relied heavily on progress payments given at various points in the development process, (Navy counsel) Beach said. “Such pressure would create an incentive to be optimistic,” since progress payments would be reduced if the contractor or the government estimated an overrun, said the Navy lawyer. Beach also said that the progress payments were poorly scrutinized by the government. In one instance, the Navy signed off on three contract line items, even though work on each was not yet complete. Payments were also approved for work that was substantially below requirements, Beach said.‚Äù Consequently, the contractors, with approval by the Navy, “fostered the illusion that internal program milestones had been successfully passed” when critical elements of the contract “had, in fact, only been pushed downstream.”⁷

Putting aside the issues of schedule slip and weight growth, Fox also attempts to puncture DOD’s expressed concerns about cost overrun – the program was already $1bil over the fixed price ceiling before the first aircraft broke traction with the earth. Fox avers that the program’s cost growth was in line with other programs:

‚ÄúThe General Accounting Office has found that ‚Äòaccording to cost and schedule data from 93 major acquisitions started since 1975, the acquisitions overran original schedule estimates by an average of 24 percent.‚Äô Defense Department studies have concluded that ‚Äòweapon system development projects typically overrun costs by 20 to 40 percent.‚Äù⁸

While painting in vivid strokes the rational behind the government‚Äôs perennially doomed preference for fixed-price contracts, this does not conceal the fact that while it is technically true that the program was ‚Äúonly‚Äù a billion dollars over its fixed price ceiling of roughly $4bil – a 25% overrun – it is also true that, as late as January of 1991, no one could tell Secretary Cheney how much more the program would eventually cost. The contractor had in fact insisted upon renegotiating the terms of the contract during the previous month, when the scope and scale of the program‚Äôs difficulties became manifestly obvious, saying that ‚Äúunder the terms of the existing contractual arrangement is not possible, or equitable, or authorized by law.‚Äù⁹

OSD‚Äôs decision to terminate by default was immediately contested by the contractors, who initially received some support from the courts. In 1996, a federal court ruled that OSD had improperly terminated the contract for default, and converted the decision into one for the convenience of the government ‚Äì a classification that would enable the industry team to recoup most if not all of their lost investments, plus, in a later, related decision, interest on amounts owed.¹⁰ Later appeals courts reversed that decision upon government appeal, remanding the case back to lower jurisdiction. In 2001, the Court of Federal Claims upheld the government‚Äôs characterization of defaulted performance due to the contractor‚Äôs schedule failures.¹¹ As Mr. Fox‚Äôs 2003 article demonstrates, legal maneuvering continues.

Summary

The only winners in this tale are those that may profit from the wisdom gained through other people’s misfortunes. It is probably true that the contractor team had a comfortable, Reagan-era expectation of being bailed out of their budgetary difficulties – after all, this was the Navy’s number one aviation acquisition program – where else was the service to go? And it is certainly true that the Navy’s acquisition professionals failed in their task of 1) ensuring that the program was efficiently executed or, 2) failing that, notifying senior civilian leadership in time to make educated and deliberate decisions.

It is probably also true that OSD, recognizing a sharply reduced threat environment in the post-Cold War world, while also facing sharply increased budgetary pressures and looking under the cushions for money, seized on the chance to kill a floundering program that had fallen well behind schedule and come in well above cost in a manner calculated to minimize further expenditures of good money after bad.

Given all this, the fact remains that the industry team pitched the lowest bid, and having won the competition based on price, willingly entered into a fixed-price contract, set schedule milestones and failed to achieve them. While Mr. Fox may have a point that industry has a right to expect better management from the Navy’s uniformed representatives, it is certainly true that the taxpayer has a right to expect a better return on investment after $5bil than a cardboard mockup and pleasant promises of future performance.

The Navy’s opportunistic characterization that the contractors were in default may well have had the unfortunate effect of increasing fear and distrust throughout the defense industry . The reverse course, wherein a contractor may bid at whatever cost he thinks will win the award, certain that the taxpayer will bail him out later if he falls behind, cannot be considered an improvement over that decision, however.

[1] Fox, J.R (2003). A-12 Termination Sets Harmful Precedent for Defense Programs, National Defense Magazine, pdf, found at http://www.nationaldefensemagazine.org/issues/2003/Jan/a-12.htm

[2]A-12 Avenger II Advanced Tactical Aircraft (ATA) – 1983-1991, Global Security.org (2005), from http://www.globalsecurity.org/military/systems/aircraft/a-12.htm

[3] Montgomery, D (1991, April), How the A-12 Went Down, Air Force Magazine Online, Vol. 74, No. 4, from http://www.afa.org/magazine/1991/0491down.asp

[4] Ibid

[5] >(Montgomery, 1991)

[6] (Ibid)

[7] > (Montgomery, 1991)

[8] (Fox, 2003)

[9] (GlobalSecurity.org, 2005)

[10] McDonnell Douglass and General Dynamics Corporations v United States of America, US Court of Federal Claims No. 91-1204C, filed 20 February 1998, found at http://www.fas.org/man/dod-101/sys/ac/docs/91-1204C.html

[11]Fried Frank (September 2001), Government Contracts Alert – Flash Alert, found at http://www.ffhsj.com/govtcon/ffgalert/gcarch/fa010901.htm