By Emelie Rutherford
A key lawmaker encouraged the Pentagon yesterday to continue punishing companies for producing poor-quality missile-defense products, suggesting “warranties” be added to contracts to prevent the government from paying for defective systems.
Missile Defense Agency (MDA) Director Army Lt. Gen. Patrick O’Reilly has been decrying poor quality control of missile-defense products by industry and withholding funding for current contracts (Defense Daily, March 23). The MDA recently halted work with Coleman Aerospace after one of the company’s target missiles malfunctioned and fell into the Pacific Ocean last December during a failed test of the Terminal High Altitude Area Defense (THAAD) system.
That thwarted test “required hundreds of hours to coordinate and over $50 million to field,” Senate Armed Services Committee (SASC) Ranking Member John McCain (R-Ariz.) lamented yesterday during a MDA budget hearing.
SASC Chairman Carl Levin (D-Mich.) told O’Reilly he is concerned about cost-plus contracts MDA has with defense firms “and some of the losses that we’ve suffered as a result of not being able to go after a contractor for defects.”
“We’re going to need to have some kind of warranties against defects,” Levin said. “Right now we’ve lost…hundreds of millions of dollars based on small defects.”
O’Reilly said the MDA is reviewing over $37 billion worth of contracts with industry, and plans to make changes including changing cost-plus deals to fixed-price arrangements and opening up some contracts for competition.
Levin encouraged the general, during that review, “in addition to looking for greater opportunities for competition to reduce the cost” also consider a contractual setup “which is not as much based on cost-plus (contracts) but is based on warranties, and defects would have to be paid for by the contractors.”
O’Reilly said the MDA’s review will weigh adding “defect clauses” to contracts.
“The problem that I have right now is with a lot of these contracts, on the developmental side, there was an intent for the government and industry to share risk, but that risk we were talking about was a developmental risk and risk of technology and new manufacturing processes,” O’Reilly said. “Unfortunately, that cost-plus coverage to handle those risks limits our ability to enforce the fact when defects occur, and the contractor is still not liable for those defects because of the way the contracts were constructed.”
Levin, in turn, said he is concerned about manufacturing defects companies make in systems after their development stages, when the risk of making the products has decreased.
“That’s not supposed to be a shared risk; that’s a failure of manufacturing,” the senator said.
McCain said he is “encouraged” by the MDA’s move to withhold profits from contractors responsible for inadequate performance.
“For far too long, contractors have attempted to cut corners on quality control, at an increased cost to the taxpayer; this is simply unacceptable,” McCain said, calling for the MDA to “ensure that all future contracts are structured to demand both accountability and performance.”
The Pentagon is struggling to garner enough reliable target missiles from industry to conduct missile-defense tests, Pentagon Director of Operational Test and Evaluation Michael Gilmore said.
O’Reilly said the two greatest challenges MDA faces in developing missile defense is “acquiring cost-effective reliable targets and improving quality control of all products.”
The MDA initiated a target-acquisition strategy over the past year that is intended to increase competition, improve quality control, reduce costs, and provide backup targets starting in 2012.
O’Reilly said his agency will continue its get-tough approach to industry, in an attempt to improve manufacturing standards.
“Until we complete planned competitions, including the greater use of firm-fixed-price contracts and defect clauses, we will have to motivate some senior industry management through intensive inspections, low award fees, issuing cure notices, stopping the funding of new contract scope, and documenting inadequate quality control performance to influence future contract awards,” he said.