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US: C-130’s Costs Soar Despite Reforms

The Pentagon had high hopes it could keep costs low on a new model of the C-130 transport by treating it like any other commercial purchase, but despite the publicly intended purpose, the airlifter’s price nearly doubled.

by David PhinneyDefense News
April 12th, 2004

The Pentagon had high hopes it could keep costs low on a new model of the C-130 transport by treating it like any other commercial purchase, but despite the publicly intended purpose, the airlifter’s price nearly doubled.

Armed with new authorities provided by the 1994 Federal Acquisition Streamlining Act, Pentagon officials announced in 1995 that the C-130J procurement would be purchased as an off-the-shelf “commercial item” for an acquisition-reform pilot program.

“It has evolved,” wrote contracting officer Kenneth Taylor in the 1995 determination. “It will be available in the commercial marketplace by the time of delivery.”

This meant the Pentagon would exempt the program from military-unique specifications that often drive up prices on weapon systems. Also, the contractor would not have to submit nearly as much data to auditors as usual to justify the program’s prices. Less paperwork and oversight, along with the competitive pressures of the commercial marketplace, officials reasoned, should keep a lid on the plane’s cost.

That reasoning is the whole intent behind commercial-based acquisition, said Steve Kelman, chief architect of many commercial acquisition reforms during the 1990s as procurement policy administrator with the Office of Management and Budget.

“The whole idea is there are many ways for the government to get a good deal without the auditors getting involved,” Kelman said. “Auditors may save money when a semiconductor has to be built to government specs, but a commercial chip can cost a third of the price and you don’t need auditors for that.”

But what may work for computer chips appears to have failed spectacularly with the C-130J.

In 1994, a single C-130H was fetching $37.4 million. The unit cost of the first C-130J models, announced by the Pentagon in 1996, was nearly double: $66.4 million. By 2003 the price had soared to $81 million. This year, the Air Force estimates the unit price of the planes will drop considerably — to about $66.5 million — because it plans to buy them in a large multiyear procurement.

A stretch version of the C-130J that is 15 feet longer sells for almost $100 million a copy. The Air Force ordered 40 of those last March.

Lockheed Martin spokesman Peter Simmons declined to confirm these prices, but said the C-130J represents $1 billion in research and development paid for by the company. That research enabled Lockheed to modernize the aircraft with heads-up digital displays for easier piloting and a more powerful engine for shorter takeoffs, faster climbs and greater speed.

“We don’t disclose our prices because it is sold on a commercial basis,” Simmons said. “The ballpark figure is in the 60s [of millions of dollars].”

In fact, after nine years of being deemed a commercial aircraft, no commercial sales of the plane have been made by Lockheed.

Some critics find little justification for the escalating price of a plane fondly viewed as a military workhorse, and they doubt the benefits from the $1 billion in research and development claimed by Lockheed.

“There’s no way a trash hauler should cost that much,” said Ernest Fitzgerald, management systems deputy for the assistant secretary of the Air Force responsible for financial management and cost savings.

If anything, the C-130J should be cheaper, not more expensive, he said. “I bought a computer in 1986 for about $3,600 that now has the memory of a child’s toy. It should be the same way with an airplane — simpler and cheaper.”

Champions of acquisition reform at the time predicted that “simpler and cheaper” would be found through the commercial practices that were used in the C-130J contract: reductions in costly oversight and price analysis, cuts in program office staff, fewer contract data requirements.

But while Pentagon buyers have never taken a comprehensive look at certified cost and pricing on the plane because of its commercial protections, Dave Bily, a contracting officer with the Defense Contract Management Agency (DCMA) in Marietta, Ga., researched the plane’s cost for military buyers.

What Bily initially found was that costs should be reduced on the C-130J because assembly time would be less than what had been required for previous models — and Lockheed was using off-the-shelf commercial technology.

Then, under an international treaty, Italy hired the DCMA in 1996 to take a long look under the hood of the C-130J as part of its deliberations to buy 18 planes.

Bily was assigned in 1996 to provide independent cost documentation for the Italians and their $1 billion contract. His request for cost and pricing data based on Lockheed’s administrative agreement with the Air Force was denied, but after digging for available records he judged the cost per plane to be around $48 million, a finding that could have weakened Lockheed’s floor for off-the-shelf pricing at the Pentagon.

Bily again performed the task in 1997 for Norway, which was considering buying six stretch C-130s. On both international contracts, Lockheed declined to provide pricing data on why it was seeking as much as $61.2 million, but Bily estimated the price tag at $53.6 million.

DCMA’s commanders chose not to heed Bily’s pricing work, and he claims they later pumped up figures to be closer to Lockheed’s asking price.

DCMA officials declined to be interviewed on the C-130 price estimates.

“I had no problem with Lockheed; they are supposed to make money,” said Bily, who retired last year. “It’s the action the military took to support Lockheed and set a commercial price that we’re now paying for.”

 





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