Competition is a deeply ingrained aspect of our public procurement process.  As Marshall J. Doke, Jr. recently testified before the Senate’s Committee on Homeland Security and Governmental Affairs (Subcommittee on Contracting Oversight)—

Competition requirements in government contracts in this country go back over 200 years and now exist in all 50 states. Competition is required not only to obtain lower prices but also to prevent unjust favoritism, collusion, or fraud. I emphasize this last purpose because of what one federal judge called a growing culture of corruption in Washington. … I believe the deficiencies in our competition process have given such enormous discretion to contracting officials that, together with a lack of transparency, they have created an environment and circumstances that have contributed significantly to [an] increase in fraud. … The fact that you ‘call’ something competition does not make it real competition. Who thinks professional wrestling is real competition? What if, in football, the players are not told how many points they will get for kicking a field goal? … The significance of this ‘competition’ process is that agencies can, pretty much, award a contract to whichever competitor it wants. Not just ‘agencies,’ but also contracting officers or other source selection officials, can make such decisions. It is this broad discretion, lack of transparency, and bullet proof award decisions that, I submit, create circumstances and an environment that can result in fraudulent activity. There is, I believe, a direct correlation between discretion and fraud. That is the reason the Government has competition requirements in government contracts in the first place. That is why sealed bidding actually is the favored method of contracting if the Government can describe its requirements adequately. [Emphasis in original.]

The House Armed Services Committee’s Panel on Defense Acquisition Reform recently wrote in its interim report—

The effects of the current approach to weapon systems acquisition on the defense industry also are significant. The length and scope of weapon system programs has accelerated defense industry’s consolidation around a handful of aerospace firms that now control large amounts of production capacity across the entire span of the defense acquisition system. Only the largest firms have access to the resources and expertise to bid on the most complex programs, and it is difficult for firms of all but the largest size to survive losing them. As a result, competition is reduced at the front end of programs, and all but eliminated in the sustainment phase (often as a result of poor planning for sustainment). Small businesses are largely locked out of the process or accorded contracts only on the goodwill of one of the larger firms. Mid-tier companies are either absorbed or decide to abandon defense acquisition for the more competitive commercial sphere, especially after a large weapon system competition loss. Winning or losing individual contracts becomes such a critical matter that the incentives to protest contract awards are overwhelming. The Panel is concerned that the end result of this process is the gradual erosion of competition and innovation in the defense industrial base.

Keep the foregoing in mind as we discuss the recent news that the EADS/Northrop Grumman team has decided not to submit a proposal for the KC-X Aerial Tanker, leaving Boeing’s “NexGen” Tanker as the only remaining option for the U.S. Air Force.  We’ve discussed this “poster child” for inept major defense acquisition program before, notably here.  Click the link for some background, some opinions, and some predictions.

On March 8, 2010, Northrop Grumman issued a press release in which it announced it would not be submitting a bid.  The press release quoted NOC CEO Wes Bush as saying, “We reached this conclusion based on the structure of the source selection methodology defined in the RFP, which clearly favors Boeing's smaller refueling tanker and does not provide adequate value recognition of the added capability of a larger tanker, precluding us from any competitive opportunity.”  Moreover, the public statement includes a promise not to submit a protest on the allegedly biased evaluation methodology.  The EADS press release included similar wording. 

The situation leaves Boeing as the sole remaining bidder and apparent winner-by-default.  The question now is whether this situation will give Boeing control of the tanker’s pricing.  Without competition, there is little incentive for Boeing to slash its costs.  And as this New York Times article notes, every single change made by the Air Force after contract award will tend to drive up the price.  (We note that there is nothing wrong with that; it’s a normal part of fixed-price contracting.)

Predictably, European leaders were less than restrained in calling-out the political implications of the evaluation methodology.  Even U.S. leaders noted that the EADS/NOC team had little to be optimistic about in the new RFP.  The New York Times article linked to above reports that Congressman Norm Dicks (D-WA, Chair, House Appropriations Committee’s Defense Appropriations Subcommittee) said “that he insisted the Pentagon consider how much the smaller Boeing plane would save in fuel and other costs over 40 years, rather than just over 25 years, as in the earlier competition. Referring to Northrop and EADS, he added, ‘I think those factors alone made it almost impossible for them to win.’”

Let’s ignore the politics and focus on the government contracting.  Vern Edwards, doyen of government acquisition, was kind enough to post the actual Section M evaluation criteria from the Tanker RFP on the internet.  Following is a cut-n-paste of his post—

In accordance with FAR 15.304(e), all evaluation factors other than cost or price, when combined, are approximately equal to cost or price.

* * *

1.1.1 The Government will evaluate the Mission Capabilities Factor (Factor 1) to determine technical acceptability. The Mission Capability subfactors (Key Systems Requirements, Systems Engineering, Product Support, Program Management, Technology Maturity, and Past Performance) will not be weighted and each subfactor will be evaluated as acceptable or unacceptable. Any subfactor that is evaluated as unacceptable will render the entire proposal unacceptable and ineligible for award.

1.1.2 The Government will evaluate the 93 non-mandatory technical requirements (Factor 3). Each of these requirements will be evaluated as having been met or not met. For those non-mandatory requirements proposed by the offeror which are deemed to have been met, a point value for that requirement will be awarded as described in paragraph 2.4.2 below. The Government will calculate a total point score for Factor 2 by adding together all points awarded for each non-mandatory requirement that the offeror fully meets, except as otherwise indicated.

1.1.3 The Government will evaluate each offeror's Total Proposed Price (TPP) in accordance with Section M, paragraphs 2.3.1, 2.3.1.1, 2.3.2.2, and 2.3.2.3. The Government will evaluate Total Proposed Price in discounted present value dollars, defined as TPP (PV), Integrated Fleet Aerial Refueling Assessment (IFARA), Fuel Usage Rate Assessment (FURA), and Military Construction (MILCON) in accordance with Section M, paragraphs 2.3.2, 2.3.2.1, 2.3.2.2, and 2.3.2.3. The Government will calculate a present value total evaluated price (TEP) [Factor 3] for each acceptable offeror by applying their IFARA, FURA, and MILCON adjustments to their respective TPP (PV).

1.1.4 The Government will then compare the resulting TEPs for all acceptable proposals to determine the lowest TEP. If there are no acceptable proposals with a TEP [total evaluated price] that is less than or equal to 101% of the lowest acceptable proposal TEP, the Government will award a contract to that acceptable offeror with the lowest TEP without consideration of the Factor 3 score.

1.1.5 If one or more acceptable proposals have a TEP that is less than or equal to 101% of the lowest acceptable proposal TEP, the Government will then compare the scores obtained in the Factor 3 evaluation for only these proposals, according to the criteria in paragraph 2.4.4.

What can we conclude from our evaluation of the RFP’s evaluation methodology?  We can conclude that the EADS/NOC assessment was correct.  The evaluation methodology clearly favored Boeing’s smaller plane and there was almost zero chance that the larger EADS/NOC aircraft would be evaluated as the better choice. 

What leads us to that conclusion.  Consider the following:

1.      Price is the most important factor; equal to the aggregation of all other factors.

2.      The Mission Capabilities Factor (Factor 1) is simply pass or fail.  There is no weighting for more capability.

3.      Factor 3 includes 93 “non-mandatory technical requirements” that could tilt the evaluation in favor of the more capably aircraft—but only if the proposed prices are within one percent of each other.  In all other circumstances, Factor 3 will not be evaluated.

4.      Once an offeror passes Factor 1, then the lowest “Total Evaluated Price” (TEP) wins.

Fact:  smaller planes are always cheaper than larger planes.  In fact, Boeing estimators can provide a rough order-of-magnitude (ROM) cost estimate if you tell them the weight of a plane and how many engines it has.  Once the Air Force decided to move the evaluation methodology from a “best value” trade-off (price vs. capability) to a “lowest-price-technically acceptable” (LPTA) methodology, the larger plane had almost zero chance of winning the competition.

A while ago, we posted an article inquiring whether the evaluation methodology might be found to be illegal, because it failed to comply with the Weapon Systems Acquisition Reform Act (WSARA).  We thought there was a fairly decent argument that the RFP needed to conform to the statutory requirements, though (as noted) Northrop has declined to pursue a course of action that would test this argument.  Regardless, the fact that this huge MDAP is being awarded without effective competition is—or should be—embarrassing to the Obama Administration, which has publicly committed to reduce “the combined share of dollars obligated through new contracts in FY 2010 that are: … awarded non-competitively and/or receive only one bid in response to a solicitation or a request for quote ….”