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Saturday, May 7, 2011

USAF Eyes Overhead In EELV Cost Reviews

After months of studying reasons for the growing cost of the United Launch Alliance’s (ULA) Evolved Expendable Launch Vehicles (EELV), Air Force officials are focusing on how to reduce – or at least better account for – overhead rates and indirect costs on the program, according to senior service officials.
Late last year, David Van Buren, the top procurement official in the Air Force, wrapped up a “should-cost” review for EELV. Should-cost reviews are prevalent at the Pentagon since the passage of the Weapon Systems Acquisition Reform Act of 2009, which directs the department to budget to independent cost estimates. These are provided by the Cost Analysis and Program Evaluation office and are generally the highest estimates in the Pentagon, forcing the department to identify larger sums of money for various programs than planned prior to passage of the law.
“We are required to fund our programs to the independent cost estimate. That does a negative thing from a business perspective to the United States Air Force. It basically shows our hand to the contractor … The contractor knows what we have budgeted before we sit down to negotiate,” says Air Force Maj. Gen. John Hyten, who oversees space program procurement for the Air Force’s acquisition office. “The ‘should cost’ is what we want to pay and what we think that satellite or end item should cost.”
About three-quarters of the 84 recommendations in the EELV should-cost review are associated with overhead and indirect costs, Hyten says. And, this is one area in which Air Force officials hope to trim pricing.
Van Buren led the high-profile should-cost review of the Joint Strike Fighter program, which is credited with helping the Pentagon negotiate the first fixed-price contract for the stealthy fighter, built by Lockheed Martin.
'Blue ribbon' review
Van Buren is also leading a detailed “Blue Ribbon” review of the ULA’s cost structure, including the overhead rates and indirect costs. This is likely to be similar to the Blue Ribbon review conducted last year on the Global Hawk unmanned aerial system; Van Buren said in March he found at least $39 million in savings for the UAS program.
“We are going to budget to the will cost and we are going to manage to the should cost,” Air Force Under Secretary Erin Conaton tells Aviation Week.
The opportunities for savings in EELV are likely to be on a larger scale than Global Hawk, given that each booster alone costs roughly $200 million or more.
Questions have arisen about how ULA is charging various functions to the two EELV contracts, Conaton says.One contract, the EELV Launch Capabilities contract, which covers the EELV infrastructure (including personnel) is a cost-plus deal, meaning the government pays for the cost of the services no matter the price. By contrast, the EELV Services contract, which pays for the actual rockets, is fixed price. Conaton says that, “I don’t think we have a very good understanding of the cost,” and notes that there are questions about what costs should be allocated to the cost-plus contract versus those on the fixed-price structure.
“We need to make sure that we have correctly and adequately allocated the cost of building the rocket on the [launch services] side, on the rocket contract. Right now with the way the contracts are structured, it’s not clear,” Hyten adds. “We want to make sure we have the contract structure correct so that we know exactly what we’re paying for that rocket.”
He emphasizes that visibility on cost is crucial as the service proceeds with efforts to qualify new competitors in the launch market. “We want to make sure we have a level playing field across the industry so that we know what we’re paying for a rocket and that if we ask somebody else to build it we can compare apples to apples and not apples to oranges,” he says.
Industry observers suggest the cost trend for EELV is spiraling, perhaps to the extreme levels of the Titan IV heavy launcher. But Hyten disagrees, noting that EELV prices vary depending on the size of the vehicle. He acknowledges, however, that EELV costs needs to be stabilized.
Major first step
A decision to buy eight EELV cores annually, as proposed in the fiscal 2012 budget plan, is a major first step, according to Conaton. The goal is to buy a stable number of boosters – providing assurance to ULA and, in particular, its second- and third-tier suppliers that buys are on the horizon.
In the buy, so-called white tail boosters will be purchased independent of specific satellites and will be matched with the spacecraft for missions late in their production cycles. This, Air Force officials hope, will provide flexibility in planning the launch manifest even if satellites encounter schedule slips.
This recommendation came out of a massive Broad Area Review (BAR) Plus 10 study, so dubbed because it is 10 years removed from the seminal launch BAR conducted after a series of major launch mishaps. Air Force officials decline to release the study or summarize its findings, citing concerns about proprietary information.
Meanwhile, the Air Force has created a new senior post to oversee launch procurement. Previously, a single program executive officer managed the EELV contracts as well as major satellite procurements. But, with major renegotiations upcoming on key satellite efforts and new launch competitions expected, Hyten said the service opted to create a program executive officer who will now oversee launch separately.

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