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GAO Backs Boeing in Protest of $35 Billion Tanker Contract

June 18, 2008

CHICAGO _ The Government Accountability Office on Wednesday called on the Air Force to reopen the bidding process on a $35 billion contract to overhaul the service’s Eisenhower-era aerial refueling tankers.

The GAO decision represents a stunning victory for Chicago-based Boeing Co. which lost out on one of the richest contracts in Pentagon history to a partnership of the Los Angeles-based Northrop Grumman and European Aeronautic, Defence & Space Co.

A contract to lease new tankers was originally awarded to Boeing but was annulled in 2004 after an ethics scandal led to jail time for two Boeing executives. One of the jailed officials had worked as a procurement officer for the Air Force and was specifically involved with the annulled deal before joining Boeing. The Northrop-EADS team won the rebid of the contract, which was announced in late February.

“Our review of the record led us to conclude that the Air Force had made a number of significant errors that could have affected the outcome of what was a close competition between Boeing and Northrop Grumman,” said Michael Gordon, the GAO’s managing associate general counsel for procurement law. “We also denied a number of Boeing’s challenges to the award to Northrop Grumman, because we found that the record did not provide us with a basis to conclude that the agency had violated legal requirements with respect to those challenges.”

Wednesday’s decision was the latest surprise in lengthy process that has been studded with twists and turns. Boeing, considered the overwhelming favorite to win the $35-billion contract, was given little chance of overturning the Pentagon’s decision after it lost to the rival bid.

But that is exactly what could happen if government officials follow the GAO’s recommendations. The Congressional agency said that the Air Force should reopen its discussions with Boeing and Northrop, obtain revised proposals and make a new contract decision.

The Air Force has 60 days to respond.

The GAO found that the Air Force didn’t follow its own evaluation guidelines in reviewing the competing bids that pitted tankers based on Boeing’s 767 commercial airplane against the larger Airbus A330.

For example, the Air Force contract language stated that no extra credit would be granted if one of the parties exceeded key performance measures. But the government then awarded a higher score to Northrop for exceeding objectives in aerial refueling.

The Air Force also “conducted misleading and unequal discussions with Boeing” by informing the Chicago-based aerospace company that it had “fully satisfied” a key performance measure, but then failing to let Boeing know that it had later changed its assessment and determined that Boeing only partially met the requirements, according to the GAO.

The GAO said the Air Force committed errors in its evaluation of the likely costs of operating the aircraft over their life cycle that, if corrected, would have shown the Boeing offer to have lower costs.

The 69-page decision was issued under a protective order because it contains proprietary information. But the GAO has asked the parties involved to identify sensitive material so that it can quickly release a public version of its decision.

The GAO, the investigative arm of Congress, doesn’t have the legal authority to overturn the decision to award the tanker contract to Northrop Grumman and EADS, the corporate parent of France-based planemaker Airbus SAS.But it could force the Air Force to review its decision, or even open the contract to be rebid, if it finds the process was deeply flawed, analysts said.

Defense analyst Loren Thompson of the Lexington Institute, said he expected GAO investigators to find problems with the contracting process, which took place over two years and amid intense scrutiny. The question is whether they were sufficient to have affected the outcome of the contract decision.

“Boeing’s view is that this was a very close decision and a few small things would have changed the outcome,” Thompson said. “Northrop thinks the contest was not close.”

Regardless of the GAO’s ruling, Thompson expects the rancorous debate to continue.

“I don’t think this controversy is expected to go away,” he said. “If the U.S. Air Force could get it wrong, so could the GAO.”

On Tuesday, the Pentagon defended the Air Force’s decision, the top spokesman said Tuesday.

“There has been absolutely no change in this building’s position on that,” Pentagon spokesman Geoff Morrell told reporters during a news conference.

“The contracting process that eventually produced Northrop Grumman and EADS as the winner of this deal was a fair and transparent one, very deliberate, and we believe it provided our warfighters with the most capable aircraft and taxpayer the most cost-effective solution,” Morrell said.

The Northrop victory elicited complaints from congress focused on EADS’ European roots and the potential impact of of the contract on jobs in the U.S.

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