Defense Secretary Robert Gates on Wednesday ordered a complete review of the bidding process that gave a $40 billion contract to build Air Force refueling tankers to a team led by Northrop Grumman Corp. and the European company Airbus instead of Boeing.
"I've concluded that the contract cannot be awarded at present because of significant issues pointed out by the Government Accountability Office," Gates told reporters at the Pentagon.
The GAO sharply criticized the Air Force for what it called "significant errors" in awarding the February contract. Gates is bringing in John Young, his top procurement official, to oversee the new effort and taking the review away from the Air Force.
But Gates pointed out that the GAO found that much of the contract was properly handled. And he said he was not ready to remove Air Force officials over those failures.
"Yes, I have confidence in the acquisitions team," he said. "There are some areas where there needs to be improvement."
Seven Major Contract Errors
The GAO found that the Air Force made seven major errors in the tanker contract, such as improperly increasing Boeing's engineering costs, telling Boeing it met performance goals, then deciding the company had not — without informing Boeing.
Gates said each claim would be answered, but he made it clear he didn't want the effort to drag on.
"It is important to remember that this decision does not represent a return to the first step of a process that has already gone on far too long," he said. "On the contrary, given the amount of work that has been done, we believe that we can complete all of this and award a contract by December."
This air tanker contract is worth tens of billions of dollars for what is essentially a flying gas station for military planes. The current tanker fleet is more than 30 years old. Acting Air Force Secretary Michael Donley says it's urgent to find a new tanker.
"The Joint Forces supported by the Air Force need a modern tanker as soon as we can field it," Donley said.
He said both Boeing and the Northrop Grumman-Airbus team may be asked to amend or clarify their proposals based on the concerns by government auditors. Contract bids in those areas will be reopened.
A Troubled Project
The Air Force's search for a new tanker has been fraught with setbacks and blunders. In 2003, the Air Force considered leasing 100 tankers from Boeing.
But that dissolved into a scandal, with a Boeing executive and an Air Force official being convicted of corruption and serving time in jail.
So the Air Force decided to purchase tankers. Boeing was heavily favored. The U.S. company and its supporters on Capitol Hill were stunned when the contract went to Northrop and its European partner. Boeing mounted a protest.
Boeing's workers welcome Gates' decision to review the contract. Alan Rice, a veteran technical designer, was sitting at his desk inside the Everett, Wash., factory where the company planned to build the tanker.
"I turned to my co-workers and gave the old fist pump and [we] high-fived each other and immediately started talking about what this meant. It's going to give a level playing field for us to bid based on exactly what the requirements are. Changing the game in the middle was something we all shook our heads at and couldn't understand."
But defense analysts wonder if the playing field set up by the Pentagon will pass muster: a narrow review based on just the government auditors' report and a tight timeline of less than six months to find a new contractor.
Those analysts already are predicting a protest from whichever company loses this latest round.