Boeing Exec Says Sequestration May Force Contract Changes

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WASHINGTON — The across-the-board budget cuts known as sequestration could force the U.S. Air Force to renegotiate some of its fixed-price satellite manufacturing contracts unless the service can find a way to restore the funding, according to a senior industry official.

Roger A. Krone, president of Boeing Network and Space Systems of Seal Beach, Calif., emphasized that his company has received no direction from the Air Force and that his preference is to not have to reopen existing contracts. But it might nonetheless be necessary if programs being managed under fixed-price contracts are forced to absorb an 8 percent budget cut, which is roughly their proportionate share of sequestration’s 2013 bite out of Pentagon spending.

Because of their complexity, government satellite programs typically are managed under so-called cost-plus contracts, whereby the customer bears most of the risk of cost growth. But when a program moves into a repetitive production phase, the government often moves to fixed-price arrangements that are typical of commercial satellite contracts, whereby the manufacturer is responsible for covering any cost overruns.

Krone said cost-plus arrangements provide the customer with more flexibility to change various contract terms, such as stretching out the production schedule, which drives up costs. Fixed-price contracts offer less flexibility in this regard, he said.

Boeing, which is very active in the commercial satellite sector, is prime contractor on a number of government programs that are under fixed-price arrangements. These include the Air Force’s Wideband Global Satcom (WGS) communications satellite system, the GPS 2F navigation constellation, and some classified programs, Krone said in an interview.

“We came to agreement on these fixed-price contracts and that was a mutual agreement — we came to the table, we negotiated, we got to an agreement that we like and the customer likes,” Krone said. “We would prefer to continue with the fixed-price contracts as they stand. If they slow down production of WGS, our costs will go up. It’s inevitable.”

Krone was wary of prescribing measures the Pentagon might take to avoid having to reopen contracts, but he acknowledged that a reprogramming of funds is a likely option. A reprogramming — drawing funds appropriated for one program in a given year and applying them to another — of the scale required to shore up a major satellite production program likely would require congressional approval.

“It’s a very complicated budget process,” Krone said. “The bigger muscle movement you have, the more discussion you’re going to have to have with Congress.”

Krone nonetheless expressed confidence that the Pentagon will find a way to offset sequestration’s cuts on Boeing’s fixed-price space contracts.

“We are not looking to reopen the fixed-price contracts,” Krone said. “We are hopeful and optimistic that the customer will find a way to maintain funding on those contracts so that they don’t have to be reopened.”

The WGS program has five satellites in various stages of construction but a 2013 budget of only $37 million, which may be related to the fact that the program has a number of international partners who are contributing roughly $1 billion combined in exchange for access to the 10-satellite constellation. If that is the case, sequestration’s cut to the Air Force portion of the funding, about $3.3 million, would be substantially less than actual contract outlays in 2013.

Lorenzo R. Cortes, a spokesman for Boeing, referred questions regarding the status of the WGS program to the Air Force.

The Air Force Space and Missile Systems Center in Los Angeles, which buys satellites and rockets on behalf of the service, did not respond by press time to a request for clarification of WGS.

In a separate interview, Richard F. Ambrose, executive vice president of Denver-based Lockheed Martin Space Systems, said his company, like Boeing, has yet to receive any guidance from the Pentagon on sequestration impacts. Lockheed Martin is the Air Force’s biggest space contractor, and most its contracts are cost-plus arrangements.

Among Lockheed Martin’s big Air Force space programs are the Advanced Extremely High Frequency secure communications satellites, the Space Based Infrared System for missile warning, and the next-generation GPS 3 satellite navigation system.

Ambrose said sequestration’s cuts could potentially force the Air Force to stretch out some programs.