Fuzzy Math: Sticker Shock At The Pentagon Leaves Taxpayer On The Hook

On 9/10/2001, Donald Rumsfeld announced there was $2.3 trillion in Pentagon contracts that
they were unable to track. http://www.defense.gov/speeches/speech.aspx?speechid=430

In a particularly good week for Boeing in late September, they locked up a potential $17.197
billion in 2 long-term contracts: a $5.297 billion 5 year deal1 for another 102 F-18 fighters for the
Navy http://www.defense.gov/contracts/contract.aspx?contractid=4376 and the next day a hefty
$11.9 billion for an 8 year deal2 to update the B-52 bombers for the Air Force.
http://www.defense.gov/contracts/contract.aspx?contractid=4377

Reading and studying defense contract announcements, it is easy to get lost in the volume of
unclassified public information. For example, one might marvel at the amounts greater than
national GDP for most countries, or the awards for continued reliance on old systems to hold us
over until the commanders get the toys they really want (F-35s). But like shopping for an
automobile, the reality always comes home with the payments, which come for most of us in
April.

Closer scrutiny finds the Department of the Navy estimates the unit cost of the F-18s in their
2011 budget estimates http://www.finance.hq.navy.mil/FMB/11pres/APN_BA1-4_BOOK.pdf at
several different prices. This document is used by the President to help with his budget, and by
congress, to help with their budget. Depending upon where you read figures from these
estimates, an executive or legislator might estimate the cost of one of these Hornets to be
anywhere from $60.3-91.4 million. The “Flyaway” cost is a mere $60.3 million. Wait, 124
planes, $5.3 billion; that should only be $42.7 million each you say. That’s amazingly close to
the Navy’s estimate of $42.157 million estimate, only 1.3% more expensive when the deal was
signed. But “Flyaway” requires an engine. The contract is only for airframes. Things like engines
and weapons add to the cost, bringing the “unit cost” low estimate of $60.3 million each. Of
course, non-recurring costs and ancillary equipment associated with the contract add another
7.7% mark up, making the “total Flyaway” unit cost $65 million each (not broken out, but you
can follow along on page 27), and then of course there are support systems, (hangers, ships,
parts, personnel, maintenance, etc.) make them a little more costly in reality, so the Navy
estimates the costs of past contract fulfillments, and future contract procurement advances, and
tries to annualize the overall cost on a per unit basis, and acknowledges a cost estimate of
$1,828,354,000 to procure 22 of these hornets in 2011, a mere $83 million each. That is, on page
27. Somehow when this number is moved to the actual request on page 9, the number inflates to
$1,838,058,000, an additional $9.7 million*, but you probably wouldn’t notice, because the navy
reduces the request by the amount of money shelled out in advance on prior contracts, and makes
the actual request for $1.78 billion for procuring 22 more Hornets for the year, making their
actual cost appear to be only $81.1 million each.

*The ‘misplaced $9.7 million, for those of you unfamiliar with federal government budgets, is
part of the mysterious “intelligence” budgets not itemized in the public record for reasons of
national security, but easily calculable to those caring to watch closely (foreign intelligence).
These little discrepancies occur in all departmental budgets from Defense to Department of
Education.

I’m unable to fathom page 26. It estimates the unit cost for these Hornets anywhere between
$82.6 – 83.1 million each, but in attempts to annualize, show that despite unit costs of $86.9
million each this year, dropping miraculously next year, but shooting up again in two years to
$91.4 million each. Is this beginning to sound like the hidden costs of service contracts on a new
car? Am I skeptical of the Navy’s fuzzy math? You bet.

Let’s check the reality of the last contract awarded for the same product, the good ol’ N00019-
04-C-0014, now renewed as N00019-09-C-0019. Thanks to the folks at Defense Industry Daily
for the following analysis. Check it out yourself at http://www.defenseindustrydaily.com/the-
usas-2005-2009-multi-year-hornet-procurement-contract-03882/ . The December 2003 contract
for $8.56 billion to provide 210 airframes over 5 years
http://www.defense.gov/contracts/contract.aspx?contractid=2666 was a little less costly, working
out to only $40.8 million each before engines and other necessaries to actually “flyaway”. In fact
the cost escalation over these 7 years is only 4.7%. But when reality sets in (“”No Payments
Until April 15!”), and we use the numbers provided by the Comptroller of the Pentagon, the 174
Hornets delivered between 2005 and 2009 cost $81.2 million each, somewhere near the price of
the budget request for 2011. But herein lies the rub: Is it $81.2? The actual requested $83
million? Or the apparently requested $81.1? It all depends on how overruns and reality impinge
upon the budget request versus the Comptrollers’ checks.

This puny program (F-18 Hornets) amounts to about 0.3% of the Pentagons’ $600 billion plus
budget. I have not delved into the B-52 program, but some others who have share their analysis
http://www.defenseindustrydaily.com/Up-to-119B-for-B-52H-Maintenenace-Modernization-
06583/ and many citizens also have weighed in with pithy comments of their own
http://www.dodbuzz.com/2010/10/07/why-the-b-52-got-11-9-billion/ . However you cut it,
Boeing had a very good week.

Imagine multiplying this fuzzy math across all programs. Ask your elected official what they
think the cost of an F-18 Hornet is. You might be surprised. My guess is that they’ll ask their
staff and most likely quote the $60 million price tag. Donald Rumsfeld was on to something (and
so were others the next year, when independent auditors uncovered an additional (maybe some
crossover?) missing $1.1 trillion http://www.dodig.mil/audit/reports/fy02/02-055.pdf (see page 6
of the pdf). The comptroller on duty was William Lynn from November 19, 1997 – January 20,
2001. He left, and after a year held the title of Senior Vice President of Government Operations
and Strategy for Raytheon. He came back through the revolving door as one of Obama’s first
appointments in January 2009, as Deputy Secretary of Defense. But I’m confident current
comptroller Robert Hale will be able to sort it all out. Heck, the numbers pale in comparison to
the terror released the day following Rumsfelds’ announcement.
1 FOR RELEASE AT 5 p.m. ET No. 883-10 September 28, 2010
CONTRACTS
NAVY
The Boeing Co., St. Louis, Mo., is being awarded a $5,297,000,000 modification to convert
the previously awarded advance acquisition contract (N00019-09-C-0019) to a fixed-price-incentive-
fee multi-year contract. In addition, this modification provides for the procurement of 46 F/A-18E, 20
F/A-18F, and 58 EA-18G airframes for the Navy. Work will be performed in St. Louis, Mo. (45.2
percent); El Segundo, Calif. (44.6 percent); Hazelwood, Mo. (3.4 percent); Cleveland, Ohio (1.7
percent); Torrance, Calif. (1.4 percent); Vandalia, Ohio (1 percent); Ajax, Canada (1 percent); Irvine,
Calif. (0.7 percent); Johnson City, N.Y. (0.5 percent); and Grand Rapids, Mich. (0.5 percent). Work is
expected to be completed in May 2015. Contract funds will not expire at the end of the current fiscal
year. The Naval Air Systems Command, Patuxent River, Md., is the contracting activity.

2 FOR RELEASE AT 5 p.m. ET No. 885-10 September 29, 2010

CONTRACTS
AIR FORCE
The Boeing Co., Wichita, Kan., was awarded a sole-source $11,900,000,000 indefinite-
delivery/indefinite-quantity contract over an eight-year period. The contract provides for the
acquisition and sustainment activities needed to support B-52 weapon system modernization. At this
time, no funds have been obligated. ASC/WWVK, Wright Patterson Air Force Base, Ohio, is the
contracting activity. Individual delivery orders will be issued through three contracting activities
(FA8628-10-D-1000).