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Big Rewards for Defense Firms

Industry officials say that award fees are not simply bonuses and that the question of how and when they should be given is complicated.

John W. Douglass, president of the Aerospace Industries Association, whose members include the large defense contractors, said award fees may look "almost automatic" to the outside world, but actually are the result of complex negotiations.

In the case of the Comanche, for example, an Army spokesman said, "The fact that the Army was considering termination and did terminate would not relieve the government in any way of paying the contractor the fee he earned." The program was killed to allow the Army to pay for many other priorities, the spokesman said.

Joseph LaMarca Jr., a spokesman for Boeing, said in a statement that Boeing-Sikorsky received the final award fee for work completed prior to the termination. The decision to cancel the contract "was based on changing requirements and not due to technical costs or schedule issues," he said.

Thomas J. Jurkowsky, a Lockheed Martin spokesman, said in a written statement that large, complex development programs like the three the report cited for Lockheed "have cost, technical and schedule issues in their early stages because of the unpredictability of the technology."

The Pentagon has approved full-rate production of the F-22, "a decision that reflects the government's confidence in the aircraft," while the strike fighter is on schedule for a first flight this fall, Jurkowsky said. And though the satellite project "has faced technical challenges because of its sophisticated design," it has met some significant milestones and the government says "the program has turned the corner," he said.

Richard L. Aboulafia, an investment analyst with the Teal Group Corp., said award fees have become more important to the defense industry in recent years as the size of lucrative production contracts have been cut. As companies must invest relatively more in research, award fees became a way to boost earnings.

The difficulty in being more strict about award fees, Aboulafia said, is determining "who is at fault for mission creep and changing requirements," the usual reasons for programs escalating in cost while falling behind schedules.

Lt. Gen. Donald J. Hoffman, the military deputy for Air Force acquisition, said Friday that his service was following "the spirit" of Sambur's initiatives but has not formally adopted a new award fee policy. He said, for example, that Air Force headquarters now reviews the findings of award-fee panels and at times has cut fees it found excessive.

Sambur left the Air Force early last year.

Some Defense Department agencies have done better than others in connecting fees to performance, the GAO said. The Missile Defense Agency, for example, restructured Boeing's airborne laser contract in 2002. In the process it changed the award-fee plan to focus on a successful demonstration of the system by the end of 2004.

Until that restructuring the contractor received 95 percent of the available fees, even with cost increases and schedule delays, the GAO report said. But because it didn't meet the 2004 test deadline, Boeing received none of the $73.5 million award fee available under the revised plan.

Rick Lehner, a spokesman for the Missile Defense Agency, said Boeing also lost $107 million in fees last year for not meeting goals in the Ground-Based Midcourse Defense System, which is based in Alaska and California and is supposed to shoot down long-range ballistic missiles.

"We have a policy of rewards for good performance and penalizing for bad performance," Lehner said.

Maria McCullough, spokeswoman for Boeing's missile defense programs, said it was not surprising that fees were reduced because they were tied to performance in particular flight tests. More recent successful tests show both programs are "absolutely on track," she said.

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