A Mission to Rebuild Reputations
Upcoming Deals to Test Reforms at Air Force, Boeing

By Dana Hedgpeth
Washington Post Staff Writer
Thursday, January 17, 2008

The pledges made by the military and one of its biggest contractors were unusually earnest. The Air Force and Boeing would be open about their relationships, overhaul their ethics reviews and tighten their internal controls. And they promised to give taxpayers the best deals possible.

It was the summer of 2006, and they were still feeling the effects of one of the biggest government procurement scandals of recent times.

Boeing had just agreed with the Justice Department to pay $615 million -- the biggest penalty paid by a defense contractor -- to settle allegations of misconduct, including assertions that its chief financial officer had conspired with a senior Air Force official to win work; and it had lost a contract worth about $20 billion to lease refueling tanker planes to the Air Force. The service's former top procurement official and Boeing's former chief financial officer went to prison. Confidence in the Air Force's procurement system was at a low. The promises were meant to signal a new beginning.

Now those promises -- and the public's perception of the Air Force's ability to spend its money prudently -- are being tested by new contracting and public relations challenges. The Air Force is about to award two key contracts worth a total of about $55 billion, and Boeing is in the running for both deals.

One is a $40 billion plan to build the refueling tankers, a second run at the deal that was canceled after former Air Force procurement chief Darleen Druyun admitted to negotiating for a job with Boeing while representing the Air Force. The other is a $15 billion contract for search-and-rescue helicopters. Boeing had won that contract, but it was suspended when two competitors protested.

The contracts are the two biggest for the Air Force since the Druyun scandal, and the service has identified them as its top acquisition priorities and crucial to maintaining its fleets. In both competitions, Boeing's bids have come under particular scrutiny, not only because the company's awards were earlier nullified, but because some of its competitors are again raising protests.

"Boeing and the Air Force are both certainly coming under the microscope," said James McAleese, an adviser to government contractors. "The American people, Congress and the Pentagon have high expectations now that they say they've cleaned up their act."

The Pressure's On

Boeing officials said they were anxious to win because so few big deals are up for grabs these days.

"The pressure is becoming more intense to win," said Chris Raymond, Boeing's vice president of business development for integrated defense systems.

"We want to win ethically. We want to win the right way," said Bill Barksdale, a Boeing spokesman for the tanker program.

The tanker contract will help the Air Force replace its fleet of KC-135 refueling planes, which have been in service for almost 50 years. The tankers enable U.S. military planes to refuel in the air, giving them vastly more range than if they had to land at refueling bases. The Air Force expects to award the contract in February.

Boeing has proposed building a new tanker from parts of its 767 commercial planes. Boeing is competing with a team of Northrop Grumman and European Aeronautic Defence and Space, parent company of Airbus, Boeing's rival in the commercial aviation market. Their proposed tanker is based on the Airbus A330 passenger jet.

The Air Force said it was trying to make the tanker competition a model for acquisitions by having more back and forth between the service and each bidding team, so they clearly understand what the Air Force sought and the degree to which their proposals met the requirements.

Ken Miller, a former top Navy official hired by the secretary of the Air Force two years ago to improve the transparency of its acquisition process, said he's had more than 100 meetings in the past year with congressional leaders to update them on the process. A winner was expected to be chosen in October, but the Air Force postponed the decision until early this year.

"We've had a lot of people interested in the tanker," Miller said. "It's been a perception issue to deal with. We've been much more cautious and deliberate in everything we do."

The Air Force has had a bumpier road finding a new search-and-rescue helicopter. Its acquisition process has come under scrutiny at three congressional hearings.

It awarded the contract, known as CSAR-X, to Boeing in November 2006. But two competitors -- Lockheed Martin and Sikorsky, a unit of United Technologies -- filed two rounds of protests with the Government Accountability Office, alleging in one that the Air Force improperly evaluated the costs of maintaining the helicopters. The GAO sustained the protests both times -- a rarity, experts say -- and in October the Air Force asked the teams for new bids on the deal. A winner is expected to be chosen this summer.

Sue C. Payton, assistant secretary of the Air Force for acquisition, said the Air Force "could have done better" in the helicopter acquisition by having more debriefings earlier in the process to explain to bidders where they stood "relative to their cost and relative to their strengths and weaknesses." In current competitions, she said, "we will make sure that we're communicating exactly why someone loses, so they don't ever get up and walk away from a table and not know why there weren't selected as the winner."

Under Close Scrutiny

Competitors and analysts have sharply criticized the Air Force for making what they say are changes in the requirements to favor Boeing, a claim the Air Force denies. The Project on Government Oversight, a government watchdog group, said that by changing a requirement that the helicopter be judged partly on the basis of how quickly it could be ready to go on a mission, the Air Force "weakened one of the most important requirements" of the contract "to allow Boeing to compete."

Miller, who is special assistant to the secretary of the Air Force for acquisition governance and transparency, said no changes have been made to the Air Force's requirements on the helicopter to benefit Boeing.

Observers say the Air Force is trying to avoid any actions that would prompt protests on both deals. "They know their relationship with Boeing is hypersensitive," said Phil Finnegan, a defense analyst at the Teal Group in Fairfax. "The Air Force is going to do everything to make sure it doesn't look like anything is tilted in the least toward Boeing."

Boeing says it has made improvements to strengthen the ethics and integrity in its policies and procedures. It combined three divisions to create the Office of Internal Governance, which employs 600 people and helps ensure that all employees get ethics training and that deals are executed fairly.

The Air Force shifted its selection process from one person with virtually absolute power, as Druyun had, to decisions made by the top acquisition official who gets input from advisers.

"We want to be more transparent, have more communication, more checks and balances to improve our process and credibility," Miller said.

Another, smaller contract that arose from the Druyun controversy was settled in a way that illustrates the Air Force's new approach to procurement.

When Druyun admitted in 2004 that she favored Boeing in awarding it a deal worth up to $4 billion, with options, to design, build and install new electronics kits for Lockheed Martin C-130 cargo planes, Lockheed, L-3 Communications and BAE Systems protested. The GAO sustained their protests. The Air Force said it would be too costly to reopen the entire contract, but it agreed to hold a full and open competition for production and installation of the kits.

The Air Force is planning to award a sole-source contract to Boeing to build a small fraction of the 222 kits it needs. Boeing, two Air Force depots, and two yet-to-be-named commercial competitors will install those kits on C-130 aircraft to ensure the Boeing design is accurate, according to the service.

It is a move Boeing's competitors and watchdog groups say shows that the Air Force is likely to choose Boeing to produce the remaining kits, even though Boeing is nearly $1 billion over budget and 18 months late on the design and development part of the deal. An Air Force official denies the allegations, saying there will be a full and open competition to build the remaining kits and install them on C-130 aircraft.

New Set of Allegations

On another deal, Sen. John McCain (R-Ariz.) has also questioned the Air Force's procurement process. He led the effort to shelve the tanker deal and later praised Boeing's internal changes and its decision to not write off its $615 million settlement two years ago, saying it "conveys to me how serious the company is to truly reforming and starting fresh."

But last fall McCain asked the Pentagon's inspector general to investigate whether the Air Force had improper communication with Boeing about a multibillion-dollar purchase of its C-17 transport planes. The president didn't support buying more planes in his budget request to Congress and the Pentagon said it neither needed nor could afford the planes.

In a December letter, McCain said he had "uncovered compelling evidence of possible wrongdoing in the Air Force's interaction with the contractor on the C17 matter." McCain also said that "in its rank aggressiveness, the evidence I found . . . is not unlike some of what I observed in the Boeing tanker lease scandal."

Boeing and the Air Force deny the allegations. Boeing says it decided independently of any knowledge from the Air Force to keep its C-17 line open in case the service decides to fund the planes. Rick Sanford, a Boeing spokesman, said there has "absolutely not" been any ethical breaches between the service and Boeing.

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