Monday, January 29, 2024

Stupidity Abounds!

The Boeing KC-46 tanker woes and resultant financial devastation should have been a cautionary tale for defense industries.  The lessons are myriad and obvious.
 
Now, we learn that Northrop Grumman (NG) has crafted its own aircraft production debacle with the B-21 bomber.  Grumman has officially taken a $1.6B loss and the production is just barely beginning! 
For several quarters, the defense contractor has disclosed in earnings reports that due to a fixed-price contract for the B-21 Raider’s low-rate initial production (LRIP) phase that was signed in 2015, a loss of up to $1.2 billion could be possible amid high inflation and workforce disruptions. That loss is now realized in a pre-tax charge of $1.56 billion, or $1.17 billion post taxes, according to the company’s 2023 year-end earnings report.[1]
Before you weep for Grumman and begin sending them donations, note that the fixed price contract isn’t actually fixed. 
The Pentagon so far has provided $60 million to offset some inflationary impacts for the B-21 program … discussions are ongoing for more …[1]
Sure, $60M is a drop compared to a $1.6B loss but I’m sure this is only the beginning of the financial assistance from the government.
 
Can Northrop Grumman learn any lessons from this stupidity-birthed disaster? 
As Northrop Grumman absorbs the losses associated with B-21, the aerospace giant is heeding lessons learned by other contractors about the pitfalls of fixed-price contracts. Since bidding on B-21 in 2015, “we certainly have changed our view on bidding of contracts where we did not have a mature design at the point of bid and yet we committed to fixed-price options into the future,” Warden said. “And we have, to my knowledge, not done that again.”
 
Northrop Grumman has “passed on high-profile programs” due to its apprehension around fixed-price contracts, according to Warden, and been more cautious in its bids.[1] [emphasis added]
So, by their own admission, NG knew what they were doing was stupid and yet they did it anyway.  In essence, they offered a fixed price bid on a fantasy wish list of a product.  A junior high school student would know not to offer a fixed price on an undefined product.
 
At least they now seem to realize that fixed price bids on immature product designs are stupid.  Of course, that’s closing the barn door after the $1.6B horse is out.
 
The military, of course, loves the idea of fixed price contracts on ill-defined products!  What they fail to realize is that, ultimately, they’re hurting themselves because it causes companies to refrain from bidding or to bid exceedingly high to cover anticipated cost overruns.  What the military should be doing is finalizing product designs before requesting bids.  That way, the companies know exactly what they’re bidding on and can make realistic cost estimates and bids.  In the end, both the manufacturers and the military win from that approach.  Unfortunately, that would require intelligence from the military and, like so many shortages today, there seems to be a severe shortage of intelligence in the military.
 
 
 
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[1]Breaking Defense, “Northrop Grumman logs billion-dollar charge on B-21 stealth bomber”, Michael Marrow, 25-Jan-2023,
https://breakingdefense.com/2024/01/northrop-grumman-logs-billion-dollar-charge-on-b-21-stealth-bomber/
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25 comments:

  1. JNX75January 29, 2024 at 5:13 AM

    I can not even begin to grasp how you can procure a non-defined product with a fixed price, and really hope that the author of this blog has misunderstood something :)

    More seriously, I am not shocked by the offsetting of inflation by the Govt. Please note that a good practice could be to engage on risk sharing with a partial offsett (ie: GOVT take x %, contractor retains 1 - x% of inflation). Inflation has to be measured precisely by a third party (not general inflation, you want to focus on inflation of goods and labor on the specific field of the said-product).

    I know nothing about defense contract. I know a few things about public infrastructure contract. My take :
    - you want to avoid the "COST +" approach, it ends as a bloodbath for public finance (even if shareholders are happy);
    - on the contrary you also want to avoid "fixed-price" UNLESS, the product is very well defined, very usual/common (and again, I advise an inflation clause)
    - you may offer "Quantity contract" if the nature of the works is well known (ie : cut trees) but the quantity is not very well defined (maybe 1500 trees.. maybe 1600);
    -in most of the case the best is to ask for a "lump-sum" = a price against well defined set of requirements. You want the price to be detailed (an hour of engineer cost x... a bolt costs y...), so both parties have a common ground to deal with changes of requirements or claim from the contractors arising due to unpredictable events.

    For anyone interested , the FIDIC set of contracts propose a well-balanced approach that illustrate all of this.

    Cheers

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    Replies
    1. ComNavOpsJanuary 29, 2024 at 5:28 AM

      "really hope that the author of this blog has misunderstood something"

      I never have yet! That aside, there's nothing to misunderstand as the QUOTES demonstrate. It's not my opinion, Grumman is saying what they did. Reread the post more carefully this time.

      Delete
    2. AnonymousJanuary 29, 2024 at 5:36 AM

      Sorry I meant this a a joke, hence the ":)" at the end of the sentence. I wanted to say that It seems so unbelievable that it looks like a misunderstanding. Thank you for the article

      Delete
    3. ComNavOpsJanuary 29, 2024 at 5:43 AM

      "meant this a a joke"

      Fair enough.

      "My take"

      While there's nothing wrong with any of the contract variations you mention, they ignore the biggest factor which is the Navy's inability/refusal to establish a finalized design before requesting bids. No amount of contract gymnastics can compensate for the failure to simply have a finished design. I'm hard pressed to think of an example in any other industry where bids are requested for an undefined product. JUST FINISH THE DAMNED DESIGN! Why the Navy steadfastly refuses to do the obvious right thing is beyond me.

      Delete
    4. AnonymousJanuary 29, 2024 at 6:32 AM

      Indeed one shall not put the cart before the horse.

      In this example, before the LRIP phase, Grumman was awarded a development contract in 2015. It seems rather strange indeed to have chosen a fixed price per aircraft for the LRIP phase in 2015, so early in the process.

      Another choice would have been to renegotiate the price during the design phase BUT, as the price rarely goes down, it is not ideal for the parties. The customer can feel pressured by the contractor, and play hard in return (see the cancellation of french designed Barracuda sub for the Australian Navy at the end of the design phase, even if this move by Australia was maybe more a political gesture with the US in AUKUS than a failure of the previous design phase).

      A third solution for complex products - which is the best in my mind - is to launch in parrallel several design phase with several contractors and to chose the winning contractor at the end of the design. So if you have 3 contractors you basically pays the design 3 times (...) but in the end you are sure to have the best Quality/Cost/Schedule offer, with a fixed set of requirements, a balanced rosk-sharing and already maturing technical solutions.
      My company helped a customer doing just that for a 8 billion € contract, and it went just fine : healthy competition, balanced contract. The downsided, as said, is that this process is time consuming and costly in design phase.

      But - I agree completely with you - before asking contractors for bid and solutions you shall precisely write your requirements..

      Delete
    5. ComNavOpsJanuary 29, 2024 at 7:04 AM

      "A third solution for complex products - which is the best in my mind - is to launch in parrallel several design phase with several contractors"

      Of course, the Navy attempted that with the LCS and still managed to screw it up. They wound up selecting BOTH designs and, as it turned out, neither was a good design (neither company had built a warship before!) and, more importantly, neither produced a finalized design. Construction began with the designs only half or so completed. They designed as they built. The Navy then screwed it up further by making constant design changes during construction. This was sort of the coming out party for concurrency and it was an unmitigated disaster and yet concurrency, despite repeated failures, remains the Navy's default - and preferred - acquisition approach for reasons neither the Government Accounting Office, DOT&E, or I can understand.

      This merely demonstrates, as I said, that no amount of contract gymnastics or variations can compensate for an unfinished design. Every contract variation is just an attempt at rationalizing the fatal mistake of trying to contract without a complete design.

      Delete
    6. Austin VernonJanuary 29, 2024 at 7:27 AM

      NASA has had good luck with their commercial resupply and commercial crew programs using this template. There are several design stages and in the early stages each company bids for how much development money they need to create the design. Then they do it again for detailed design. Then again for actual production/commercial launch.

      You might see this as either a feature or a bug, but it has basically killed traditional contractors like Boeing because they are so incompetent. And the success has ridden mostly on one vendor, SpaceX, who the program helped elevate. There have been other vendors with commercial resupply that had reasonable programs.

      If I had to summarize I'd say the lower stakes the program, the better it works. And it can elevate new companies to handle bigger contracts, but that isn't a fast process (SpaceX is almost 25 years old). Doing it right out of the gate for the highest complexity programs is probably a mistake. But that gets back to the question of are we building too complex of products, anyway? I think for the Navy the case is clear. It is less clear for aircraft where even a substandard fighter jet is hard to build and combat tends to be extremely lopsided.

      Delete
    7. ComNavOpsJanuary 29, 2024 at 11:47 AM

      " even a substandard fighter jet is hard to build"

      Hard to build compared to a toaster, perhaps, but not hard relative to the aircraft we build today.

      Consider the case of a long range, air superiority fighter that the Navy desperately needs. Take the conceptual F-22/F-15 and remove any hardware AND SOFTWARE (which is where so much of our cost and scedule overruns originate) that isn't directly air-to-air combat related. That means eliminating all the hardware and software related to trying to remote control weapons some other platform launched. Use the SIMPLEST, PROVEN engine that exists. Use proven sensors. Forget 360 degree 'see through' sensor fusion crap. Forget complex, full color, 3D, holographic, glass displays and go back to the barest basic displays that a pilot would actually use in the heat of combat. Forget the ALIS-type fleet diagnostics, inventory management, flight logging, predictive maintenance, global supply chain crap that requires ground crew to implement workarounds just to get the aircraft off the ground. Forget air-to-ground software and hardware. Forget drone wingman software and comm controls.

      What's left? A basic, lethal, air superiority fighter that is affordable and easy to build.

      Delete
    8. Austin VernonJanuary 29, 2024 at 12:13 PM

      Yes, I agree. The Air Force tends to have more specialized aircraft so they haven't fallen as deep into the multi-role trap as the Navy. The Navy would greatly benefit from going to back to multiple airframes, as you've pointed out in many posts. And the Air Force would still do well to simplify some of their programs.

      One reason why the B-21 isn't $10 billion in the hole is they did use off-the-shelf engines and sensors for a lot of things.

      Delete
    9. ComNavOpsJanuary 29, 2024 at 12:51 PM

      "One reason why the B-21 isn't $10 billion in the hole"

      Well ... as noted, it IS $1.6B in the hole and that's just for the first few airframes. If they lose $1.6B for every few airframes, that's going to add up!

      Delete
  2. AnonymousJanuary 29, 2024 at 5:14 AM

    To precise something : "COST +" is an approach where you basically reimburse the contractor for any incured cost , with an agreed % of margin on the top of that. I don't know how you call it in the US. We don't do that where I'm from (France) because we are not so naive about the way contractors behave.

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  3. AnonymousJanuary 29, 2024 at 9:50 AM

    The Pentagon as a whole needs reform ! in the Navy's case there is a need to prioritize : 1) repair & sustainment infrastructure, 2)ship building, 3) setting a goal to use CONOPS for ship & weapons design,4) & getting a handle on cost overruns . 5) prioritize the above rather than R&D projects like unmanned ships & submersibles like the ORCA project.
    Then we have this reported : For six years the Pentagon has failed audits.
    What CNO has reported above is very concerning !

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    Replies
    1. ComNavOpsJanuary 29, 2024 at 11:35 AM

      "setting a goal to use CONOPS for ship & weapons design"

      That's not a goal; that's a mandate ... an absolute, non-negotiable requirement to begin any acquisition program. It's also priority number one.

      Once you have the CONOPS, the rest falls into place. The CONOPS dictates the design with absolutely no ambiguity. It eliminates all the design changes and concurrency that currently plague our acquisition programs. Because all the uncertainty and ambiguity is eliminated, it also has the cascading effect of eliminating cost uncertainty and overruns.

      Everything flows from the CONOPS!

      Delete
    2. JjabatieJanuary 29, 2024 at 11:58 AM

      Have to agree... As a blue collar, works with my hands kinda guy- the sheer idiocy of contracting, bidding, and building of things that don't have complete designs and blueprints is staggering. I can understand some small adjustments that may occur, especially in a prototype or first of class. But to begin construction of, and set a price, on somthing that's not even completely designed, just seems to defy common sense. I do some fabrication at work and even the simplest things get at least a white board doodle and examination/analysis before any steel gets cut!! I cant even imagine laying a keel or beginning an airframe without having a full blueprint!!!

      Delete
  4. LonfoJanuary 29, 2024 at 4:22 PM

    More concurrency? The definition of insanity is...

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  5. Admiral ObviousJanuary 30, 2024 at 6:45 AM

    This is once again the disconnect between corporate overlords and their engineers. My father worked on the floor at McDonnel Douglas back in the hey dey of the F-4 and the early F-15 production. He saw the company leadership-all engineers-on the production floor regularly, talking shop to engineers and even the production workers. Over time, the next generation took over who were all from business backgrounds. Never saw them and they sold the company to Boeing who by that time was also just another business to it's leadership.
    The old guard would already be talking about tooling when they bid on a contract.

    I get a strong whiff of the same problems as the F-35. The F-35 was supposed to be a single engine F-22 that was cheaper like the F-16 was to the F-15. The B-21 is a scaled down B-2.
    The F-35 scaled down alright--half the armament and half the speed of a F22. The B21 is a smaller B2-Why? Both the B52 and the B1b always needed more bombs not less. The B2 has been handicapped because it was designed with a short bomb bay since it was ostensibly just carrying nukes. Now they are making a smaller one?
    If it ain't broke, and you don't have a functional replacement keep making it. The F22 could have kept on in slower production to reduce costs and by today have been an F22E with greater capability instead of wasting time and tech on the F-35. The B2 could be a B2c with a larger bomb bay and better ECM.

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    Replies
    1. Austin VernonJanuary 30, 2024 at 12:19 PM

      Buying McDonald Douglass was the worst thing that ever happened to Boeing, that culture infected them and the current culture is the source of their troubles today.

      Also there are many things to criticize about the F-35 but the marginal cost of a new one is $80 million and a new F-16 is $60 million so it mostly lived up to the cost billing after many years of pain.

      I agree F-22 should have stayed in production longer.

      The B-2 spiraled out of control because they made a last minute change to make a low level bomber. As far as B-21 payload, it is the same as the ships where you might have $50 million in missiles on board that we have limited inventories of. Why spend more on a bomber to fly empty? The overarching goals of the program were modern stealth, absurd unrefueled range since regional bases are threatened, and better reliability than the B-2. We will find out someday if they succeeded in that but there were good reasons for having less payload than the B-2, which is a failure of a program.

      Delete
    2. ComNavOpsJanuary 30, 2024 at 2:12 PM

      "McDonald Douglass"

      On a light-hearted note, Boeing merged with MCDONNELL-Douglas. However, given your culture reference, perhaps you were referring to Ronald McDonald, the McDonald's clown, who would fit into the culture?

      "many things to criticize about the F-35 but the marginal cost of a new one is $80 million"

      Not really. In its June 2023 annual report, GAO cites a unit cost of $177M. That's not the current incremental cost, of course. However, the incremental cost is not quite real, either. It's an imposed cost by the government (still don't know how that's legal but, apparently, it is) rather than a true cost. Further, it's not a combat-ready cost. NONE of the aircraft produced so far meet the original Block 4 full combat capability requirements. Still further, all aircraft are being forced to undergo immediate additional hardware and software upgrade costs due to concurrency. Yet still further, the ALIS controlling software has been an utter, abject failure and has yet to be replaced with anything functional. So, the incremental cost, even fraudulent as it is, does not produce a product that meets the contract specifications!

      In summary, the claimed incremental cost is not real and the delivered capabilities do not meet the original specs.

      Delete
    3. Austin VernonJanuary 30, 2024 at 3:52 PM

      Right, but the point was to compare the F-16 and F-35. If I look at foreign military sales then they also look to be in the same ballpark.

      Delete
    4. ComNavOpsJanuary 30, 2024 at 4:03 PM

      Ahh ... ... ... you lost me.

      Are you trying to compare a fully mature, fully capable, settled cost, previous era aircraft with an immature, not-combat-ready, fake cost, doesn't meet specs, 5th gen aircraft?

      Help me out. I'm really missing whatever point you're trying to make.

      Delete
    5. Austin VernonJanuary 30, 2024 at 6:28 PM

      Just making the very narrow point that people aren't paying that much more for F-35s than F-16s today. Whether that is a good value is another question.

      Delete
    6. John GaltJanuary 31, 2024 at 5:52 AM

      The wost thing to happen to Boeing culture was the hiring of former GE executives. They only care about profitability with no accountability. They moved away from the engineering center into a bubble. They moved 787 manufacturing to SC with no trained workforce and look at the resulting quality issues. Look at the current CEO, an accounting degree and 29 years at GE. An accountant trying to deal with quality escapes? Give me a break. I am sure the GE bean counters looked only at the production sales and believed the rationales for an optimistic FFP bid, BECAUSE they are not engineers and haven't built anything in their lives. Notice they are not putting in claims for change orders on the FFP. That means for once the Gov did not change the specs. Either that or Boeing is inept at contract management. Time to start driving rather than fly.

      Delete
    7. NICOJanuary 31, 2024 at 7:32 AM

      Little understood fact: yes BA bought MDD BUT almost all top. BA management was replaced by MDD managers and some GE guys! It really was MDD buying BA with BA money. They were raised by Jack Welch which was a Wall Street hero for longest time....we see today the consequences of Wall Street style "need to make the quarter" and damn the rest. Now, the problem is its extremely difficult to unwind the damage with the supply chain which is now across the world. It sure helps with sales, just look at all the countries involved with 787, almost all their carriers have bought 787s so bringing back work probably isn't much of an option but how does BA take back control and supervision of its supply chain? This is problem that won't go away for plenty of US companies which we think as "American" but as CoVID supply chain rupture has shown, really are international companies based in the USA.....

      Delete
    8. ComNavOpsJanuary 31, 2024 at 8:40 AM

      "Just making the very narrow point that people aren't paying that much more for F-35s than F-16s today."

      Except that the F-35 is an incomplete product. It's like paying just a bit more for a Ferrari than a Volkswagen Beetle but then having to replace the tires, put in a new transmission, change the controlling software, and living with the car only being able to turn left and not right. Yes, on the surface you only paid a bit more but the true cost was quite a bit higher and you still wound up with a vehicle that had severe limitations.

      It's just like the Navy paying whatever amount for a ship and then having to pay more to actually complete it and install the combat systems. The so-called purchase contract had a lower amount but the true cost to make it a complete, functional, combat-capable ship was much higher. The PR of the lower contract price looks good but the real price is quite a bit higher.

      Technically, the Ford only cost $12B but the real cost is somewhere around $18B and still climbing.

      Delete
  6. AnonymousJanuary 31, 2024 at 11:56 AM

    I do wonder if the loss is an accounting gimmick to offset profits elsewhere within the corporation. I’m not a shareholder so I’m not going to dig into it. The fact they declared the loss the same time that they announced low rate initial production makes me think they want to separate the development costs from the production run.

    ReplyDelete

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