Not Your Father’s War: Challenges of 21st Century Warfare
The November 9, 2009 edition of Aviation Week & Space Technology magazine featured a wide-ranging story on some of the challenges facing U.S. and allied forces in Southwest Asia and elsewhere. Ostensibly based on interviews and presentations from a recent meeting of the Association of Old Crows (a not-for-profit group claiming a membership of more than 13,500 individuals and more than 100 companies, focused on “the science and practice of Electronic Warfare, Information Operations, and related disciplines”), the article is essentially a litany of the threats and challenges facing U.S. and allied troops as they adapt to warfare in the new century.
The article quotes SecDef Gates as saying the future of warfare “will be more complex—where conflict will range across a broad spectrum of operations and lethality. We have to realize that the black-and-white distinction between conventional ware and irregular war is an outdated model.” The theories don’t match the reality of modern warfare.
For example, the article quotes Col. (ret.) Maxie McFarland, Deputy Chief of Staff for Intelligence at the Army’s Training and Doctrine Command (TRADOC) as saying, “We [started out] talking about knowledge-centric operations … and being able to act with precise force and accurate weapons within a framework that would allow us to know pretty much everything. What we’ve discovered … is that is just not so. That framework of knowledge and information doesn’t exist. You [still] have to fight for information.” Although new Intelligence, Surveillance, and Reconnaissance (ISR) technology and assets are being introduced into Afghanistan so fast as to constitute a “bow-wave”—in fact ISR analysis is still problematic because of various reasons. There is a lot of information, but the information is not always available to the warfighter.
Army Col. William Davis is quoted as saying, “Our Achilles’ heel is communications. Right now there are over 200 [coalition] systems at Bagram AB, Kandahar, and other places that don’t talk to each other. That’s not the basis for success.” The article notes that one industry official “had been asked to devise a communications algorithm that would allow seven types of intelligence gathering aircraft to exchange data.” Adding to the communication challenge (according to the AW&ST article) is the need to translate directives into as many as 20 different languages, as well as the “difficulty of sharing multilayered intelligence and a shortage of trained [analyst] manpower.” The article asserts that the coalition forces lack “automated intelligence tools, managing petabytes of data, frequency deconfliction, information sharing and collaborative operations.”
Efficient utilization of intelligence and reconnaissance information may be bogging down in a sort of “electronic soup” that actually hampers warfighting efforts instead of acting as a force multiplier. The article reports that “some warfighters are switching off technology because it is too complicated, distracting or interference-prone to be effective.” On the other hand, as we have previously noted, the installation of real-time ISR assets such as the Rapid Aerostat Initial Deployment (RAID) as part of the persistent surveillance and dissemination system (PSDS) provides enhanced situational awareness and improved security.
The AW&ST article also discusses other challenges of the 21st century battlefield, which extends well behind the front lines and, indeed, into cyberspace. The article reports that “during the past year, ever-mutating opponents have produced surprises for military organizations around the world.” The article notes that French Rafale aircraft were grounded when the “Conficker” worm invaded the French Navy’s mission planning system. The virus also was introduced into the French Navy’s computer network, the Villacoublay air base, and the 8th Transmissions Regiment when “someone in the navy had used an infected thumb drive.” In January 2009, “the British Defense Ministry was attacked by a virus that also infected computers at Royal Air Force bases and Royal Navy ships, including the aircraft carrier Ark Royal.” In November 2008, Pentagon computers were infected by a “cyber-worm” that caused 1,500 computers to be taken off-line, and led to a ban on the use of thumb drives.
In April 2009, hackers reportedly stole “terabytes of data” related to the design of the F-35 Joint Strike Fighter. As the article notes, “The hackers apparently used some vulnerabilities they encountered on the websites of some contractors that were helping with the construction of the $300-billion project. They employed a tool that encrypted data as it was being stolen, so officials couldn't immediately realize what was being defrauded.”
As the article notes, the attack on the French Navy planes “was a classic cyber-operation.” It quotes a source as saying, “That’s a perfect objective—to make sure they can’t update their folders. That’s the kind of effect that [senior planners] would like to see from cyber. It has nothing to do with whether I interdicted cyber-infrastructure. I figure out what processes I want to hit, what systems supported those processes, and then I find seams and vulnerabilities. It’s a fallacy that a cyber-attack can be dealt with by a cyber-defense. It’s not about IT; it’s about operations.”
The AW&ST article reports that the U.S. is under such constant cyber-attack that “the definition of ‘success’ has shifted to containing intrusions instead of eliminating them. As SecDef Gates noted in a June 2009 memo, “our increasing dependency on cyberspace, alongside a growing array of cyber threats and vulnerabilities, adds a new element of risk to our national security.” This article reports that the Pentagon has spent more than $100 million in the past six years, “not on new technology or weapon systems, but on repairing the damage done [to] its computers from cyber attacks that occur almost every day.” To address this pervasive threat, in that same June 2009 memo, the Pentagon established a “cyber command” (USCYBERCOM) as a subordinate unified command under the U.S. Strategic Command. SecDef Gates directed that the new command was to reach initial operating capability by October 2009 and full operating capability by October 2010.
We frequently report on advances in aerospace and defense technology. As the AW&ST article reminds us, our adversaries are making advances as well, perhaps in areas in which we are vulnerable to exploitation. In 21st century warfare, securing the lines of command, control, communications, and computers (C4) and making effective use of ISR informationi may be more important than securing the lines of supply.
Allocability Bites Contractor’s GAAP-Compliant Accounting Practices
The concept of “allocability” is a tough and counter-intuitive government contract cost accounting concept. The FAR discusses the concept of allocability at § 31.201-4.
A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship. Subject to the foregoing, a cost is allocable to a Government contract if it—
(a) Is incurred specifically for the contract;
(b) Benefits both the contract and other work, and can be distributed to them in reasonable proportion to the benefits received; or
(c) Is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown.
Government accountants talk about “full absorption cost accounting,” where both fixed and variable costs are allocated to contracts to arrive at total contract costs. However, case law is clear that certain costs are not allocable to government contacts. As the Court of Appeals, Federal Circuit, has noted, “The test for allocability is whether a sufficient ‘nexus’ exists between the cost and a government contract.” (Boeing N. Am., Inc. v. Roche, 298 F.3d 1274, 1280 (Fed. Cir. 2002), citing Lockheed Aircraft Corp. v. United States, 375 F.2d 786, 794 (Ct. Cl. 1967)).
Teknowledge Corporation ran into this conundrum in the development of its TekPortal software program. Even though it adhered to SFAS No. 86 (“Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”), the costs it attempted to allocate to its government contracts via its indirect costs were disallowed by the DCMA Contracting Officer. The U.S. Court of Federal Claims (COFC) and the Court of Appeals upheld that disallowance because the software development costs were deemed “not allocable” to Teknowledge’s government contracts.
According to the COFC decision, Teknowledge had two segments: one for its government contracts (consisting primarily of R&D contracts for the U.S. Navy) and one for its commercial work. The commercial segment oversaw development of the TekPortal software; however, the company intended that the government would use the software and, indeed, proposed that software on three proposals to the government over a four-year period. In 2001, the company amortized $885,430 in development costs and prorated that amount between the two segments, with 31 percent ($285,656) of that amount being recorded in the overhead pool of its government segment. Teknowledge was unclear on how it arrived at that percentage, telling the court that the company “arrived at these percentages based on either the historical division of revenue generated by the Commercial and Government segments or by headcount hours worked by employees in the two segments.” Regardless of the methodology used, the DCMA Contracting Officer disallowed the costs because there was no discernable benefit to Teknowledge’s existing government contracts.
Teknowledge argued before the COFC that the costs were allocable because they: (1) benefited the government and could be distributed to the government in reasonable proportion to the benefit received; or (2) were necessary to the overall operation of its business. Citing prior cases (e.g., KMS Fusion, Inc. v. United States, 24 Cl. Ct. 582, 589, 591 (1991)), Teknowledge argued that a potential increase in business or the reduction of indirect costs to a contractor qualify as benefits to the government. The Court was not impressed, stating that “[t]he word ‘benefit’ as defined in the allocability test requires some showing that the cost relates to a government contract, not that it promotes the Government’s public policy interests.” The Court cited FMC Corp. v. United States (853 F.2d 882, 886 (Fed. Cir. 1988) for the proposition that remote and insubstantial benefits to the government do not meet the requirement of a benefit. The Court found that any benefit to the government resulting from the TekPortal development costs would be too remote and insubstantial to deem them allocable. Because the costs were not allocable, the Court found that they were not allowable.
On appeal, the Appellate Court (Federal Circuit) agreed with the Court of Federal Claims. According to the case—
Teknowledge argues it has satisfied the allocation requirement by its distribution of the developmental costs to various government contracts based upon potential future sales. According to Teknowledge, the fact that such sales never came to fruition is not relevant to the allocation. Similarly, Teknowledge argues that potential benefits to the government from the TekPortal software are sufficient to satisfy FAR § 31.201-4(c). The potential benefits that Teknowledge points to include its ability to execute its business plan and remain viable by performing government contracts and developing software.
Although (as the Appellate Court noted) “CAS does not require that a cost directly benefit the government’s interests for the cost to be allocable,” it found that “Teknowledge has failed to demonstrate a nexus between its software development costs and any government work that it has contracted to do.”
As the Court found—
Given that Teknowledge’s costs resulted from work done in anticipation of acquiring government purchase orders and contracts, the Claims Court properly found that any benefit from the development of the TekPortal software to any government work would be remote and insubstantial. … We also reject Teknowledge’s argument that a sufficient nexus exists between the costs and its government work because its software development costs are indirect, not pertaining to a specific contract, but are allocable under various CAS provisions to the different contracts that it has with the government. As the government points out, there are no underlying government contracts that are in any way related to the TekPortal software that would allow Teknowledge to properly allocate these indirect costs under any accounting standard. Moreover, the Claims Court found that Teknowledge has proffered no evidence to show how TekPortal keeps Teknowledge afloat or will bring in new business in the future. The Claims Court therefore did not err in concluding that Teknowledge had failed to show any nexus between the TekPortal development costs and any government contract. Our decision in Boeing does not mandate a different result.
Commenters have expressed concern with this result. As one knowledgeable law partner wrote—
The court’s analysis under FAR 31.201-4(b) does not bode well for Government contractors. IR&D ought not need to succeed in the actual delivery of a Government contract in order for it to benefit the Government or any individual Government contract. If that is the rule, IR&D becomes a literal game of chance in which downstream, after-the-fact success becomes determinative of allocability. This can most assuredly have a chilling effect on the willingness of companies to invest in ‘dual use’ technologies for which success in the Government marketplace is less than assured.
We are not as worried. As the Appellate Court noted, Teknowledge failed to show how its TekPortal software “would bring in new business in the future”—leaving the door open for another contractor to make that demonstration. Moreover, Teknowledge didn’t accumulate the costs in its government segment, nor did it offer a compelling rationale for its allocation of 31 percent of the amortization to the government segment. It didn’t demonstrate compliance with Cost Accounting Standard (CAS) 420 (48 C.F.R. § 9904.420). Finally, it didn’t demonstrate any relationship between performance of its current Navy contracts and the TekPortal software, nor did it demonstrate how the TekPortal software reasonably related to the Navy’s current or future mission requirements. In sum, although the Court’s continued insistence on a “bright line” allocability “test” should concern all government contract cost accountants, another contractor with a stronger fact pattern might well prevail.
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KC-X Tanker RFP in Jeopardy?
 The U.S. Air Force’s attempt to develop a replacement for its KC-135 “Stratotanker” refueling planes is a poster child for what’s wrong with the modern Defense acquisition system. The original plan (announced in 2003) was to provide 100 Boeing K-767 tankers under a 10-year lease to the Air Force, with an option to purchase the planes at the end of the lease term. Critics immediately pointed out that the lease/purchase plan was much more expensive than an outright purchase. The Air Force subsequently announced it would purchase 80 planes and lease 20 of them, which did nothing to placate the critics. It was reported at the time that the planes would cost $150 million each if purchased, while the cost of the lease/purchase contract would be $216 million per aircraft. Senator McCain called the planned acquisition a “sweet deal” for Boeing.
In November 2003 the Air Force announced that it had “frozen” its acquisition plans while it investigated a senior Air Force acquisition officer, Ms. Darlene Druyun, who had left her government position to join Boeing in January 2003 at an annual salary of US $250,000.
The Druyun scandal was later called the “biggest Pentagon scandal in 20 years” and led to her pleading guilty to providing Boeing with sensitive bid information about its competitor (Airbus) and to inflating the contract price to favor Boeing (her future employer). Ms. Druyun was sentenced in 2004 to nine months in jail, fined $50,000 and given 150 hours of community service. According to this Wikipedia entry, “The ramifications extended to Boeing CFO Michael M. Sears, who was fired from Boeing, and Boeing CEO Phil Condit, who resigned. On February 18, 2005, Sears was sentenced to four months in prison. Boeing ended up paying a $615 million fine for [its] involvement.”
It addition, the procurement scandal significantly undercut the credibility of so-called “commercial item pricing” because Boeing allegedly claimed its 767 aircraft were commercial items, which exempted the company from having to disclose its “cost or pricing data” to Pentagon negotiators. This situation led to the Federal Acquisition Regulation (FAR) being revised, and to suspicion about the bona fides of commercial item acquisitions that is still being felt years later.
In early 2007 the Air Force attempted another procurement for its much-needed tanker fleet. There were two competing teams: Boeing and a joint venture between Northrop Grumman and EADS. (EADS stands for European Aeronautic Defense and Space Company and is now the world’s largest aerospace/defense company. It is the parent of Airbus, Boeing’s biggest competitor.) Boeing proposed (once again) a version of its 767 aircraft, while the EADS/Northrop Grumman team proposed a version of the Airbus 330 aircraft.
To prepare for a “rigorous” evaluation of the competing bids, the Air Force announced that had assigned more than 150 experts in order to make sure that every step of the process was done “by the book.” As this story reports, “’The program office is being extra cautious in ensuring that each step of the source selection process is thoroughly documented,’ said Joe Leising, contracts chief for the 653rd Aeronautical Systems Squadron at  Wright-Patterson Air Force Base in Ohio, where the evaluation team is sequestered.” The story continued—
Terry Kasten, director of the 653rd Aeronautical Systems Squadron, said in a statement that his team was keen to avoid any problems with the tanker competition. "When the dust settles, we'll have spent many tens of thousands of man-hours scrubbing the content of these proposals, conducting a legal review and preparing summary information for both an independent advisory council assessment and ... a source selection authority decision," he said.
Kasten said senior Air Force legal and contracting advisers were standing by to "answer questions, capture lessons from other programs, including the recent experience with the CSAR-X (helicopter) source selection, and ensure we do everything by the book."
*****
Lt. Gen. Jack Hudson, the Air Force Program Executive Officer for Aircraft at Wright-Patterson air base, said senior Pentagon officials had carefully monitored the tanker program. "Our leadership is very aware of our efforts and they have ensured we proceed in a deliberate and transparent manner, every step of the way, so that at the end of the day we have a program in which we all have high confidence that we can execute successfully," he said.
The proposals were submitted in April, 2007 and in February, 2008 the Air Force announced that the EADS/Northrop Grumman team had won the competition—to the consternation of Congress and others who were concerned about a “foreign” manufacturer building planes for the Air Force. Published reports stated that Northrop Grumman spent $100 million on its bid for the $40 billion program.
Boeing protested the award decision before the Government Accountability Office (GAO) and its protest was sustained; GAO recommended that the tanker award be recompeted based on a number of fundamental flaws in the Air Force’s bid evaluation. The protest effort involved 15 lawyers on Boeing’s side, nine lawyers on Northrop’s side, and 19 lawyers from the Air Force. According to the GAO, the Air Force’s bid evaluation (1) did not credit Boeing with satisfying more technical requirements than the EADS team, even though the RFP called for satisfying as many as possible; (2) the Air Force credited EADS with exceeding a key performance parameter (KPP), even though the RFP said that the KPP would not be treated that way; (3) the Air Force conducted “misleading and unequal” discussions with Boeing—among other fundamental “blocking and tackling” errors.
In mid 2008, Secretary of Defense Gates put the KC-X competition into an “expedited recompetition” with DOD Under Secretary of Defense John Young put in charge of the evaluation. In essence, the Air Force was stripped of its authority and responsibility to choose its aerial tanker. Selection of the new winner would be made by the end of 2008. However, in September 2008 SecDef Gates cancelled the new RFP, calling for a “cooling-off” period and essentially punting the competition to the incoming Obama administration. According to one report, the Air Force was forced to pay the EADS/Northrop Grumman team “tens of millions of dollars” in termination fees.
 One year later, in September 2009, SecDef Gates announced a new restart to the tanker competition, with source selection authority being returned to the Air Force. However, the Office of the Secretary of Defense would maintain a “robust oversight role.”
What is interesting about the latest round of competition is that the draft Request for Proposal (RFP) reportedly has led to “grumbles” by both teams. According to an article in the November 9, 2009 edition of Aviation Week & Space Technology magazine, more than 200 questions were submitted to the Air Force by the bidders. In addition, Northrop Grumman has complained that its prior bid prices were released to the Boeing team during the 2008 protest process, jeopardizing its competitive position. Moreover, the EADS/Northrop Grumman team was unhappy with the 373 pass/fail attributes described in the draft RFP; reportedly, each of the attributes was equally weighted vice the prior competition, in which requirements were individually weighted. For example, water flow in the sink and toilet were just as important as fuel offload rate. In the words of the Northrop spokesperson, “If everything is important, is anything important?”
Notably, the draft RFP calls for fixed-price development efforts, vice the prior contract which was cost-reimbursable. We have previously discussed this recent trend in Defense contracting. The AW&ST article quoted Air Force Secretary Michael Donley as saying, “As we go forward, I think we’ll try to put more pressure on our suppliers to keep cost down. There are cases out there, and I think tanker is one of them, where the technology should be pretty mature.” Our position on this has been consistent: fixed-price contracts don’t control cost growth unless the customer controls requirements growth and other contract changes. Believing that developing new defense technology can be done on a fixed-price basis ignores the past 50 years of U.S. acquisition history. It is naïve at best and negligent at worst.
If the Air Force significantly revises the draft RFP, it may lead to an additional delay in developing, testing, and fielding the replacement tankers. Moreover, it is possible that one of the bidders could pull out of the competition if it believes the playing field is not level. If that happens, it will be less than surprising and entirely consistent with the history of this troubled acquisition.
Meanwhile, the Air Force continues to fly its 52 year-old KC-135 planes. Although it has been reported that the planes can continue flying until 2040 (albeit with increased maintenance costs), the KC-135 fleet is currently flying double its planned yearly flying hour program to meet airborne refueling requirements, which has resulted in higher than forecasted usage and sustainment costs. A 2007 Los Angeles Times story quoted Su Payton (then the Air Force’s chief acquisition officer): "There is a saying out there that 'you can't kick ass without tanker gas,’ [but] we have tankers that should be flying around with an AARP card."
South Africa Cancels A400M Order
In a move termed a “complete surprise” to Airbus, South Africa’s government announced on November 5, 2009 that it had cancelled its multi-billion dollar contract to purchase eight Airbus A400M military transport aircraft. Readers of this website might be less surprised, as we have been reporting on allegations of procurement “irregularities” in connection with the acquisition, as well as the recent emphasis on cost containment by aerospace/defense programs. The South African government’s announcement involved both of those matters.
In our prior report (link above), we noted that allegations had surfaced in South Africa regarding potential “irregular expenditures” in connection with the A400M “tender process”. According to this report, the current armscor contract “threatened to blow up into another arms deal saga” because of the lack of “due tender processes.” But that is not the official reason for the cancellation.
The official reason for the cancellation is a schedule delay of four to five years, coupled with a forecasted cost growth of at least 25 percent, according to the official statement of South African Minister of Defence and Military Veterans Lindiwe Sisulu.
According to various sources, the original contract called for delivery of 8 aircraft between 2010 and 2012 for a cost of approximately 17.65 billion rand (roughly US $2.5 billion, or US $308 million per plane). The South African government stated that the current cost estimate was now 47 billion rand (US $6.1 billion, $763 million per plane).
South African industries had a piece of the A400M action, with Denel Saab Aerostructures in particular expecting future revenues of 13 billion rand over the next 15 years, according to Defense Industry Daily. However, the same article stated that “Denel Saab Aerostructures doesn’t see the cancellation having much effect on their business in the short term.”
The official South African announcement stated that it has been withholding progress payments to Airbus because of missed contract milestones, and further noted that it expects a 2.9 billion rand refund of payments previously made.
It is not clear what effect, if any, the cancellation will have on the overall A400M program, which has reported 186 international orders. Certainly, it cannot be seen as inspiring confidence in countries currently “on the bubble” with respect to A400M orders. For instance, Chile has expressed previous interest in acquiring three aircraft, but has yet to execute a contract. One wonders if they will, given the current status of the program.
Meanwhile, one report quotes an “industry source” as saying that “a Lockheed Martin sales team was recently in SA [South Africa] and was overheard to say there was a local requirement for five of the latest C130J variant of the aircraft. SA currently operate eight of the early B-models.”
Program execution is never easy. Poor program execution is unacceptable, however, and companies that fail to achieve operational excellence will pay a steep price.
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