Tony Capaccio of Bloomberg Business News reported last week that Boeing may end up spending $300 million more than is budgeted under its contract to develop a new Air Force aerial-refueling tanker.
Bad news for taxpayers, right?
Wrong -- because the company will have to eat every cent of expenses above the ceiling on the development contract, which means if there actually is an "overrun," taxpayers will be getting extra value at Boeing's expense.
The story could be bad news for Boeing shareholders, but something tells me when the contract is completed Boeing will come in right at the ceiling.
Of course, that still could mean a zero rate of return, but the development contract leads to production of 179 planes, where the big aerospace company is likely to do just fine.
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| Thompson: Obama's new acquisition practices "reward honesty and realism." |
What some observers don't seem to get about the Bloomberg story is that the Obama administration really has tightened up on contracting practices, so if companies don't stay within budgets, they lose money.
That's a powerful incentive not to run up costs, and helps explain why the administration pushed for an early transition from cost-plus contracts to fixed-price arrangements on the F-35 fighter too.
In both cases, contractors will get the best results if they stay within budgets, which is exactly what policymakers were aiming to achieve.
There's no advantage in bidding low to win and then trying to raise prices, because contract terms are too tight to allow recovery. So the new acquisition practices reward honesty and realism.
