Editorial: Block Buy Strategy Needs Helping Hand from the U.S. Senate

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The defense authorization bill approved May 26 by the U.S. House of Representatives is a less than auspicious indicator of the reception the Pentagon’s space procurement efficiency initiative is in for on Capitol Hill. A key feature of the so-called Evolutionary Acquisition for Space Efficiency (EASE) initiative is satellite block buys that would enable manufacturers to order components in bulk and avoid the production fits and starts that send costs skyrocketing.

U.S. Air Force officials estimate that block buys could shave 10 percent off unit costs in production-phase satellite programs — those for which the nonrecurring investment in research and development has already been sunk. Typically the production phase begins with the third satellite in a series; the vast majority of operational Pentagon satellites to be built in the next five to 10 years fall into this category.

The Air Force has made the Advanced Extremely High Frequency (AEHF) series of secure communications satellites an early test of the block buy strategy; the service’s 2012 spending request asks Congress for a multiyear authorization of all the funding needed to purchase the program’s fifth and sixth satellites. This so-called authorization of advance appropriations in theory would lock in annual funding for the program at a fairly steady level over the next several years. The idea is to impose budgetary discipline — on both Air Force programmers and congressional appropriators — over the course of a multiyear procurement.

The House Armed Services Committee, in its version of the National Defense Authorization Act for 2012, endorsed the block buy concept in principle, including bulk component orders to reduce costs when possible. The bill also directs the Air Force to use fixed-price contracts to buy the satellites, which makes sense for production-phase programs and should help keep a lid on costs.

But the committee balked at authorizing advance appropriations, recommending instead that program funding be set by Congress on an annual basis. In other words, the AEHF block buy would be subject to the vagaries of a process where Air Force officials and lawmakers frequently siphon funds from one program to another. What’s more, the annual appropriations process occasionally doesn’t yield a bill until well into the budget year being addressed.

This undermines a key objective of the block buy strategy: funding stability and predictability. If AEHF prime contractor Lockheed Martin can predict with some certainty the annual funding over several years, it can structure its component orders and manufacturing and testing processes in the most cost effective way possible. Ordering components for two satellites at once, for example, not only provides quantity discounts but also reduces the amount of costly testing required for quality assurance. If, on the other hand, the company must hedge against uncertainty by ordering components only after it is sure the funding will be available — in other words, after a given annual defense appropriations has been signed — the result is likely to be lower-volume orders with higher unit costs. Further, Lockheed would have to order components in multiple production lots, each of which would have to undergo quality control screening.

Obsolescence also becomes an issue when component orders are staggered based on annual appropriations. Faced with a gap between orders of a certain part, a supplier might shut down that production line or retool to build something else. When the time comes to order another batch, satellite makers are then forced to invest in new production lines, perhaps involving new suppliers, and the resulting components must undergo an expensive qualification process.

The AEHF program has been through this sort of thing before. Air Force plans at one time called for ordering just three satellites before moving on to the futuristic Transformational Satellite Communications system. Congress, concerned about delays to the follow-on system — the program ultimately was canceled — wisely ordered the Air Force to procure a fourth AEHF craft. But there was a four-year production gap, resulting in a $2 billion-plus price tag for that satellite, more than double the cost of the third.

Block buys are possible without multiyear authorizations of advance appropriations, but would require the Air Force and Congress to fully fund the purchase in a single budget year. Given the cost of complex military satellites like AEHF, fully funding multisatellite purchases in a single budget year is probably untenable in the current budgetary environment, particularly with so many competing priorities on the Air Force’s plate.

U.S. military space budgets are unlikely to increase anytime soon — continued strong demand for satellite-based capabilities notwithstanding — making it imperative that the Air Force make the best use of the resources it has available. Moreover, with most of the Pentagon’s satellite programs moving into production, erosion of the research and development industrial base is a major concern. Saving on procurement means more money can be plowed into research and development that yields capability improvements on existing production programs while keeping the nation on the cutting edge of space technology.

To its credit, the White House formally signaled its heartburn with the authorization bill’s failure to approve advance appropriations for AEHF satellites five and six. “Providing the full procurement costs in advance appropriations before proceeding with the acquisition is central to the Administration’s new acquisition strategy and cost discipline approach,” says a statement of administration policy that addresses various aspects of the legislation.

Hopefully the Senate Armed Services Committee, which has yet to draft its version of the bill, will heed this statement and give the White House the authorization it seeks on AEHF. Authorizing advance appropriations might go against the instincts of lawmakers, who prefer to control spending on a year-by-year basis, but with so many U.S. military satellites moving into production now and in the coming years, the block buy approach must be put to the test with AEHF as soon as possible.