Boeing contract "messed up," Gates says

Boeing's contract to develop the Army's most expensive weapons system is "messed up" because it fails to provide enough incentive to encourage exceptional performance, Defense Secretary Robert Gates said.

"The contract was all messed up," Gates told the Senate Armed Services Committee on Thursday in discussing the military's fiscal 2010 budget that includes what the Pentagon calls a "significant" restructuring of the Future Combat Systems weapons program.

The program's 12-year development phase is projected to cost $20.2 billion. Boeing's base fee is $1.1 billion and there is $1.1 billion in performance fees.

"Ninety percent of the performance fee is guaranteed" by December 2011, when the system's design is reviewed, "so there's little performance incentive left for the rest of the program, including prototyping and so on," Gates said.

William Graveline, who follows the Future Combat Systems program for the U.S. Government Accountability Office, a watchdog agency of Congress, said the work after the review is difficult and complex.

Boeing and the Army "will face the challenge of completing the design of the complicated system of systems, additional engineering work, and developing and integrating millions of lines of software code, new radios and other elements," he said.

Congress has pressed the Pentagon to tie contractors' pay more closely to performance and to tighten criteria for paying bonuses. Gates' comments Thursday signal he agrees and will emphasize this in his effort to reform the weapons-acquisition process.

The Future Combat Systems — manned and unmanned vehicles joined by a wireless network — is managed jointly by Boeing and Science Applications International. Its current overall cost — $159 billion — is exceeded among all Pentagon weapons programs only by Lockheed Martin's F-35 Joint Strike Fighter.

Gates discussed the Boeing program during a broader presentation of the Pentagon's proposed $533 billion base budget for fiscal 2010.

The budget would eliminate the system's manned vehicles, a project valued at $87 billion, because they aren't suited for conflicts like those in Afghanistan and Iraq, Gates said. A separate program will be started to produce a vehicle that reflects the lessons learned from these wars, he said.

This restructuring offers an opportunity to revise the contract to tie Boeing's profit more closely to performance, Shay Assad, the Pentagon's director of procurement, said last month. Boeing's fixed profit should be cut and its potential bonus increased, Assad said.

Gates said Thursday the Future Combat System's network of wireless, on-the-move communications, drones and sensors will be developed as planned and should be given to the entire Army, not just 15 of the 45 brigades as is now planned.