Air Force drafts new plane contract to meet Hill demands

Ten months after pledging to overhaul its controversial $2.3 billion contract for the C-130J cargo plane, the Air Force said Monday it has drafted a new agreement that would make the program's costs more transparent to lawmakers.

But the Air Force and Lockheed Martin Corp., maker of the aircraft, may need several more months to finalize the agreement, which converts an existing commercial contract into a traditional contract that requires the military to report cost and price information to Congress.

The service plans to complete the agreement -- which would affect all 39 planes the Air Force and Marine Corps plans to buy between fiscal 2006 and fiscal 2008 -- by September, an Air Force spokesman said Monday.

The need to rewrite the C-130J contract came to light nearly a year ago, when Senate Armed Services Airland Subcommittee Chairman John McCain, R-Ariz., criticized the Air Force and the Army, which used a similar commercial agreement for its $168 billion Future Combat Systems project, for using an inappropriate type of contracting for procuring a major weapons system.

After McCain made his concerns public, the Air Force issued a press release April 13 saying it had already had begun to change the contract.

McCain succeeded in inserting a provision in the fiscal 2006 defense authorization bill that required the Air Force to alter its contract upon enactment of the legislation, which President Bush signed Dec. 30.

Pentagon acquisition chief Kenneth Krieg had assured lawmakers Nov. 2 that the Air Force would wrap up the new contract "within two weeks."

But an initial draft ran into problems in November, when Capitol Hill aides spotted language in the 539-page document that essentially would have undermined the McCain provision. The draft contract, a Senate aide recalled, was "not materially different from the commercial contract."

The draft applied the increased reporting standards demanded by Congress only to C-130Js bought after fiscal 2008. But the Air Force has planned to buy 62 C-130Js by fiscal 2008 -- and no more after that.

Air Force leaders later acknowledged the assessment was correct, and vowed to launch an Air Force inspector general investigation to determine who was responsible for inserting the line in the draft contract.

The Pentagon typically uses commercial contracts to buy products that are widely available for commercial sale as a way to eliminate unnecessary bureaucracy. It also allows nontraditional contractors, unfamiliar with the Defense Department's arcane acquisition system, to offer their wares.

But contracts for major weapons systems, which typically are awarded to a handful of well-known defense firms, are usually subject to far more rigorous oversight standards.

Without cost and pricing standards, Congress has no immediate way to tell if the military is paying too much for an airplane or vehicle. Indeed, initial estimates indicate that Lockheed Martin is making a 25 percent profit on the C-130J program -- roughly double the profit margin on a typical acquisition program.

"You don't know if you're being had or not. We'll sell you this KC-130 [tanker] for $X million. Trust us, it's a good deal," said Christopher Bolkcom, an Air Force analyst at the Congressional Research Service. "Are you making a killing, or making 3 percent? If it's under a commercial acquisition contract, I'm not sure that I know."

Many Pentagon reviews, including one by the Defense Department's inspector general, have concluded that the commercial contract for the C-130 was inappropriate. The Defense Contract Management Agency, meanwhile, concluded in a Sept. 15 report that the contract's cost and pricing data was "neither objective nor verifiable."

Officials plan to wrap up the C-130J contract by September and would receive a credit if they overpaid for planes purchased before the new pact is finalized, three months before the service will make its first aircraft purchase for fiscal 2006, an Air Force spokesman said. The Air Force has not revised per-plane cost estimates, but the planes "will not be more than the current price of $66.5 million per aircraft," he added.

As for the Army, the service converted its Future Combat Systems contract in September -- just months after McCain began his full-court press to change the contracts and well before the authorization bill became law.