Virginia revises troublesome Northrop contract

Virginia Gov. Robert McDonnell said the agreement was better than trying to end the contract.
Virginia Gov. Robert McDonnell said the agreement was better than trying to end the contract. (Bob Brown/Associated Press)
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By Rosalind S. Helderman
Washington Post Staff Writer
Wednesday, April 7, 2010

RICHMOND -- Virginia has reworked its massive $2.4 billion computer services contract with defense contractor Northrop Grumman, extending the life of the 10-year contract by three years and agreeing to pay the company over $100 million more than originally envisioned.

Gov. Robert F. McDonnell (R) hailed the agreement as a way to clarify the responsibilities of the company and better track its performance, as well as resolve an ongoing dispute that had bedeviled former governor Timothy M. Kaine (D) in the months before he left office.

Reaching an agreement with the company, McDonnell said, was also preferable to attempting to end the contract, which state officials estimated would cost at least $350 million.

"What we wanted was dramatically improved performance, dramatically better contract terms, and reducing the amount of money that the commonwealth would have to pay," he said. "This gives us hundreds of millions of dollars of value at a discounted rate."

Virginia contracted with Northrop in 2003 to overhaul the state's computer networks after reviews found the technology was out of date and expensive to maintain, agreeing to pay the company up to $236 million a year for its services.

But the company has missed several deadlines to complete its work and state agencies have repeatedly complained of poor computer service. At the same time, Northrop has maintained that Virginia owes the company money for performing services not envisioned in the original contract, which is the largest in state history.

McDonnell said he set out to fix problems with the contract as soon as he assumed office in January.

The General Assembly approved legislative changes to allow the Virginia Information Technologies Agency, which oversees the contract, to answer directly to the governor, instead of to an independent board. McDonnell also installed new leadership at the agency.

Under the new agreement, Virginia this year will pay the company $15 million that it had been withholding because of the dispute.

It will also pay Northrop $105 million over the next nine years to settle past claims and $47 million over the same time frame for new security features not envisioned in the contract.

The state also has agreed to extend the 10-year contract by three years, allowing annual payments to rise to $247 in the 10th year of the contract. But the new contract also will increase penalties against the company for poor service and will give the state a three-month review window to test the new contract and governance structure.

A spokesman for the company called the contract revision "an important step" in Northrop's relationship with the state.

"There are a number of milestones in front of us to demonstrate continued progress in transforming the IT environment for the commonwealth of Virginia," said J. Michael Landrum, director of public affairs for Northrop.

The agreement comes as the company has been conducting a highly public search for a new home for its California headquarters, considering sites in Maryland and Virginia. McDonnell said it is "probably helpful" that the two sides came to terms before the company makes it final choice, likely this month. But he said the state has been conducting the two conversations separately.

"I said very clearly that we intended to hold the vendor responsible for their performance and to have a good deal for the taxpayers," he said.

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