Boeing may exceed aerial tanker cost ceiling by $500 Million


The Boeing 767-based NewGen Tanker is pictured in this undated photo illustration, obtained in February. (HO/REUTERS)
November 27, 2011

Boeing is projected to exceed by as much as $500 million the cost ceiling on its contract to develop new refueling tankers for the U.S. Air Force, or about $200 million more than previous estimates, according to the Defense Department.

Chicago-based Boeing, which is developing the KC-46A tanker from its 767 airliner, absorbs 100 percent of any dollars over the contract’s $4.8 billion ceiling.

Government officials in June told Bloomberg News that Boeing was projected to exceed the ceiling by $300 million.

A senior official told reporters July 27 the estimate had dropped “a little bit.’’

The new, higher estimate is disclosed in a 37-page Selected Acquisition Report, the Pentagon’s first official cost review for what is planned as a 179-aircraft, $51.7 billion program that includes research, production and aircraft support.

The estimate comes as engineering, manufacturing and development are “progressing well with no significant technical issues,’’ the report said. A major review that ended in mid-August resulted in a well-understood and approved contract, technical, cost and schedule baseline’’ that the government will use to “measure and closely manage Boeing’s progress.’’

“The program manager’s most likely estimated price at completion is $5.3 billion and the contractor’s most likely is $5.1 billion,’’ according to the document obtained by Bloomberg News.

“The government’s estimate is higher than the contractor’s due to the inclusion of schedule risk associated with the remainder of development,’’ it said. “The government’s liability is limited to $4.8 billion.’’

Zero profit?

Program manager Brig. Gen. Christopher Bogdan said of Boeing in July that “if they get to $4.9 billion, they get zero profit.’’

Boeing spokesman Jerry Drelling said he had no immediate comment but planned to provide a statement.

The estimated value for buying four development and 175 production tankers includes $40.2 billion for procurement. A full-rate production decision is scheduled for June 2017.

Procurement spending is scheduled to start in 2015 with $1.6 billion, increasing to $2.6 billion in 2016 and $3.2 billion in 2016 when measured in “then-year’’ current dollars. The production schedule calls for building the first seven aircrafts in 2015, 12 in 2016 and 15 a year annually through 2026, with the final six of 175 in 2027.

Most of $7.1 billion in development funds will be spent through 2016.

The cost per tanker jet in current dollars is estimated at $288.8 million, the report said.

— Bloomberg Government

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