Editorial: Becoming a Smarter Buyer

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The sky-high price tag for the fourth satellite in the U.S. Air Force’s Advanced Extremely High Frequency (AEHF) series of secure communications satellites underscores the need for better planning in the procurement of operational space systems, especially with the Pentagon under tremendous pressure to trim costs.

In December, the Air Force modified Lockheed Martin’s AEHF contract to cover full-scale production of the fourth satellite. The $1.3 billion modification, combined with the cost of ordering long-lead components and other work, brought the total contract value for the fourth satellite to $1.7 billion. By comparison, the incremental contract value for satellite No. 3, which was an option under Lockheed Martin’s original AEHF contract and which followed closely on the heels of the first two satellites, was about $684 billion, the company said.

Granted, the circumstances surrounding the fourth satellite were unusual. The Air Force had planned to buy just three AEHF satellites before moving on to the futuristic Transformational Satellite (T-Sat) Communications System. But Congress, concerned that the Air Force’s T-Sat development schedule was overly optimistic, wisely directed the service to buy a fourth AEHF satellite. The T-Sat development effort was later canceled, which also was a prudent decision: The program by that time had the look, feel and smell of a procurement fiasco. But for the AEHF program, the result was having to restart production after a four-year break.

According to Lockheed Martin officials, there is only about 70 percent component commonality between the third and fourth AEHF satellites largely due to obsolescence issues. For AEHF-unique parts, new production lines had to be started, often involving new manufacturing processes, and this hardware then had to be flight qualified. This, along with the unique systems engineering requirements generated by the new components, and the manufacturing inefficiencies associated with not only the production break but also the inability to amortize fixed overhead costs across multiple satellites, drove the price tag for the fourth AEHF platform through the roof.

With no new next-generation fleet recapitalization programs on the horizon — in all but perhaps one of the Air Force’s unclassified space mission areas, new satellite systems are either in production or well into development — the circumstances that led to the AEHF production break shouldn’t be repeated on other programs anytime soon. The possible exception is space surveillance, where the Air Force intends to hold a competition for the second of two satellites; the first was launched in September. As its space procurement portfolio becomes more heavily weighted toward production programs, with capability improvements likely to come incrementally through block upgrades rather than next-generation systems, the Pentagon has the opportunity to do things much more efficiently.

Given that the Air Force is planning to buy at least two more AEHF satellites, for example, there is no reason not to buy them together. The Air Force and Congress should authorize Lockheed to order long-lead components for both AEHF satellites 5 and 6, and might even want to consider adding options for additional satellites. By doing so, the Air Force would save money through bulk discounts and by avoiding the costs associated with restarting cold production lines and qualifying new parts. At the same time, Lockheed Martin would be able to spread its program management and other overhead costs across multiple satellite platforms, further reducing unit costs.

The same principle holds true for the Wideband Global Satcom program, on which Boeing is prime contractor. The Air Force sought to double Wideband Global Satcom funding in its 2011 budget request in order to procure a seventh satellite and order long-lead components for an eighth. Congress’ failure to pass a 2011 spending bill — like the rest of the government, the Pentagon is operating at 2010 funding levels under a continuing resolution — has left that plan in limbo. Hopefully lawmakers will pass a 2011 defense appropriations bill so the Air Force can get these two satellites in the pipeline sooner rather than later.

The more predictability the Pentagon can bring to its production programs, the more efficient industry can be; companies might even be able to achieve economies of scale across different programs. For example, at least four U.S. military space programs — AEHF, the Space Based Infrared System for missile warning, the U.S. Navy’s Mobile User Objective System for communications, and GPS 3 for navigation — utilize Lockheed Martin’s A2100 satellite platform. With some confidence in the Pentagon’s demand for each system, Lockheed Martin could pool its procurement of hardware common to all A2100 platforms accordingly.

Air Force officials have indicated that the 2012 budget request will in fact include plans for bulk purchases of satellites now in production, beginning with AEHF 5 and 6. This is encouraging, even if bulk in many instances means buying only two satellites at a time. That alone should save significant sums of money.

The Pentagon has made huge expenditures over the last 15 years on the development phase of its new-generation satellite systems. The time has come to take full advantage of that investment by managing what look to be extended production runs for these programs as efficiently as possible.