Programs on Fire
Fresh off the heels of the B-21 Raider’s first flight, the Pentagon announced it had awarded Northrop Grumman a low-rate production contract.
Then Northrop Grumman revealed it would lose over $1.5B executing this contract.
This is the result of using a fixed-price development contract, where the price is set in stone at the beginning—before any work is done. This contract type places all the program risk on the developer as they assume full responsibility for all costs (and resulting profit or loss) to deliver the capability, along with its associated specifications and requirements.
While the B-21 used a hybrid contract strategy (cost-plus for engineering and design / fixed-price production), the fact remains that the B-21 program set a cost ceiling at $550m per plane, based on buying 100 bombers using FY2010 dollars, and to win the bid the proposal had to hit all the metrics under that price—before any work had begun.
Northrop Grumman won this contract in 2015, which was the last time they bid on a fixed-price production contract for a new program.
String of Ls
Despite the allure to the government, this is the latest of a string of fixed-price contracts that have burned the defense industry. Starliner (lost $1B), KC-46 (lost $7B), MQ-25 (lost $500m), T-7A (lost $1B), and the new VC-25 Air Force one (lost $2.4B).
Yes, those callouts are all Boeing programs, and the company has stated they are done with fixed-price contracts for new programs, but they aren’t alone.
Lockheed is done with them too. So is L3Harris. Northrop Grumman’s B-21’s financial loss announcement was accompanied by a similar resentment: “We have, to my knowledge, not done that again.” RTX (the artist formerly known as Raytheon) is taking a bearish but not absolute position—yet.
Northrop may/will (probably) eventually make money on building B-21 bombers, but the point remains. Despite generations of efforts to find the holy grail, the perfect contract structure has yet to be found.
That said, the latest news does show some patterns: Large incumbents are all struggling to hit fixed-price targets.
Is this because they were all largely built around cost-plus programs that obscures efficiency? Is it because performing cost analysis for things that don’t yet exist is a guessing game?
One thing’s for sure, there hasn’t been this much frank commentary from industry leaders in a long time.
L3Harris CEO Chris Kubasik sums up the situation nicely: “I appreciate the DoD’s occasional attempt to get industry to bid and use the wrong contracting vehicle, and we will continue to pass on those opportunities. I think the industry as a whole is going to continue to no-bid these contracts until they use the right vehicles.”
In That Number
75 to 110
Lockheed Martin expects to deliver between 75 and 110 F-35s this year, down from the 150-jet target.
The reason: a key upgrade, known as Tech Refresh 3, is behind schedule. More specifically, the software upgrade that is part of TR-3 is behind schedule.
TR-3 was supposed to be ready in April 2023, with jets timed to roll off the line in July. But, since TR-3 is behind, and the customer wants TR-3 F-35s, there is a parking lot of brand-new F-35s sitting in Texas. By the time TR-3 gets resolved, this parking lot will total 100+ F-35s—enough fighter jets to equip a nation with the 25th largest fighter force in the world.
On this day in 1942, the US Army Air Force activated the VIII Bomber Command. This unit would assemble the largest air armada in the world and, combined with the Royal Air Force, launch attacks across northern Europe during World War II. Which of these is not true about this unit?
A) earned 17 Medals of Honor
B) incurred more casualties than the entire Marine Corps during World War II
C) produced 566 aces (5 or more air-to-air victories)
D) could send 1,500 bombers and 800 fighters—on a single mission
E) crews who survived 25 missions were allowed to go home
On the Radar
The US out of money for Ukraine. The US stopped providing munitions because the money for replenishing stockpiles has run out and Congress has yet to approve more. The US has provided Ukraine $44B in security assistance since Russia invaded in February 2022. A $100B package that combines Ukraine + Israel aid is stalled over political disagreements, though a $61B Ukraine-specific package is in the works from the Senate.
The Merge’s Take: ‘To fund or not to fund’ is the wrong question; it should be ‘what is the strategy, what is the alliance’s proportional cost-sharing, how much do you need, when do you need it.’ Besides helping Ukraine defend itself, there are massive second and third-order domestic benefits in the US that are often left out of this conversation. Don’t worry, we’re going to unpack that in a podcast soon…
The White House announced plans to expand small business access to federal contracts. Details include more participation in multiple award contracts (where a majority of spending occurs), expanding its lending program for the first time in 40 years, and updates to its technical assistance program, now known as Empower to Grow (E2G). Inside this is a continuation of a multi-year string of efforts to see 15% of federal contract dollars going to small disadvantaged businesses (SDBs) by 2025. For context, it was ~8% in 2021, 11% in 2022, and 12% in 2023. The Congressional goal in statute is 5%.
The Merge’s Take: It will be interesting to see the unintended competitive consequences this focus may have on regular small businesses—those that are not disadvantaged (SDBs), not women-owned (WOSBs), and not service-disabled veteran-owned (SDVOSBs).
The Army issued a solicitation for ideas on the next air defense missile for the IFPC program, a ground-based short range air defense initiative.
The Air Force Special Operations Command’s Adaptive Airborne Enterprise (A2E) initiative completed a capability demo. The 5-phase program demo program hit the phase 2 milestone, using a single crew to fly 3 MQ-9 Reapers using a government-owned control interface.
The Merge’s Take: The story buried the lede—the demo also comprised air-launching 2 smaller drones from an MQ-9 and controlling them with an additional crew member, a step towards phase 3 of A2E (single crew operating several types of UAS at once, with MQ-9s deploying smaller drones).
The Merge’s Spicy Take: Demos are cool, but time will tell if A2E turns into something real or if it’s just a series of demos to appease senior leadership during their limited tenure.
They Said It
“Nobody wants, you know, systems that increase the risk of miscalculation or that behave in ways that you can't predict.”
— Michael Horowitz, deputy assistant defense secretary for force development and emerging capabilities, on US efforts to set international norms for the responsible military development of AI
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