Sometimes saving money costs as much as spending it, a lesson the Pentagon is in the process of learning.
The Navy, citing budget cutbacks, plans to cancel an order for 29 helicopters with Sikorsky Aircraft and Lockheed Martin, the Pentagon’s biggest supplier. Because the service wants to take another cost-saving measure, they’re retiring an aircraft carrier in 2016. One less carrier means less of a need for the helicopters.
However, the Defense Department inked a multiyear deal with Lockheed Martin and Sikorsky back in 2012, so production is already underway. That means the termination fees would be hefty, perhaps costing as much as finishing the now-unwanted helicopters.
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“This action would result in the government having to pay termination charges of at least $250 million but get nothing in return,” Sen. Carl Levin (D-MI), chairman of the Senate Armed Services Committee, said last month at a congressional hearing. “And that action would result in increased cost to the Army as well.”
The agreement included Army orders for Black Hawk helicopters, and the irony is that multiyear contracts are designed to save money compared with annual renewals.
Scott Starrett, vice president of government business development for Sikorsky Aircraft, one of the other defense contractors in the multiyear helicopter agreement, said altering the existing deal would be unprecedented. “This would be the first multiyear in the history of the U.S. government to be broken,” he told Defense News.
The Pentagon announced the $1.05 billion, multiyear deal in April 2012 and specified that procurement funding would be provided from fiscal years 2012 through 2016.
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“This contract represents the Navy’s commitment to build and field the most technologically advanced maritime helicopter fleet in the world,” Rear Adm. Paul Grosklags, U.S. Naval Air Systems vice commander, said in an April 5, 2012, news release.
The Defense Department says it’s still trying to honor that commitment; it just doesn’t know how to.
“We obviously don’t want to break the multiyear, so we’re going to look at options to try not to,” Frank Kendall, the Pentagon’s undersecretary for acquisition, technology and logistics, said last week, according to Defense News. The MH-60 helicopters are used to hunt enemy submarines and warships.
An executive for Bethesda, Maryland-based Lockheed Martin, which makes the cockpits for the helicopters in question, said that given how far along production is, it would cost about the same to finish making the helicopters as it would for the Pentagon to pay the termination fees. After that, he said, they could be sold to U.S. allies.
“That would probably be a better deal for the taxpayer than paying close to 100 percent and not getting anything for it,” Chief Financial Officer Bruce Tanner told reporters this week. “The cost to terminate partially built helicopters is pretty significant relative to the cost to actually finish those helicopters.”
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