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  Table of Contents IntroductionCongress and Lockheed Create a Need for the C-130J Commercial Procurement Failure Failing Performance Holding the Contractor Accountable Recommendations Appendices Endnotes PDF Version of Report for Printing Introduction The Pentagon called for the cancellation of the U.S. Air Force’s C-130J transport aircraft procurement contract in a December 23, 2004, internal memo signed by Deputy Secretary of Defense Paul Wolfowitz. (Appendix A) This move by the Pentagon to cut its losses on the overpriced, unneeded, and problem-plagued C-130J, would allow nearly $5 billion in funding to be directed to other program areas, such as properly equipping the nation’s fighting men and women.Unfortunately, the C-130J supporters almost immediately began a disinformation campaign in response to the Wolfowitz memo. A group of U.S. Senators, motivated by parochial interests and those of a powerful defense contractor, (Appendix B) rushed off a letter to President Bush asking that he overrule the Secretary of Defense and put the money for the C-130J back in the 2006 fiscal year budget. (Appendix C) Desperate supporters of the C-130J have been claiming it will cost the taxpayers up to $2 billion1 to terminate the contract “at the convenience” of the government, when in fact, the cancellation cost ceiling specified in the contract is less than half than one quarter of that amount. (Appendix D) Lockheed Martin wants all the benefits of both commercial and traditional procurement with none of the risk. They want the benefits of commercial acquisition by keeping government auditors at arm’s length, and the benefits of traditional contracting by coming hat-in-hand when the customer, in this case the government, walks away. Due to the deficiencies in the design and procurement of the aircraft, the government would be justified in cancelling the program for cause, avoiding paying any cancellation fee. In their letter to the president, the Senators lumped the “J” model with the older tried-and-true versions of the C-130. The older models of the C-130 Hercules enjoy an excellent reputation as dependable workhorses, but the new “J” has instead become a legend in the acquisition community as an example of bad weapons development and procurement contracting. These two aircraft, sharing the same name, could hardly be more different. The “J” model may look like its predecessor, but is actually a different aircraft – with 70 percent of its features being unique. In fact, the old C-130s and the newer C-130Js are so different “pilots cannot be qualified on both aircraft, which causes additional financial and personnel burden on units that must operate both aircraft.”2 The Air Force has fueled the debate by temporarily grounding 30 of its older C-130 “E” models and restricting the flights of 60 other C-130s, claiming they had developed cracks near their wings.3 The fact that this development came at the same time the “J” model was being threatened with cancellation is highly suspect, reminiscent of an eleventh-hour claim last year that the Air Force’s existing tanker fleet had serious corrosion problems as a ploy to lease 100 new tankers. That claim was later refuted as an exaggeration in a Defense Science Board task force study that concluded the corrosion of the current tanker fleet was manageable and that the Air Force has a “robust” control program in place.4 The C-130J contract cancellation has even resulted in the aircraft’s manufacturer, Lockheed Martin, creating new restrictions on its employees’ communication with the Pentagon’s C-130J program office, following what it called “a recent flurry” of requests from the program office. (Appendix E) In a February 7, 2005, internal e-mail, Lockheed’s chief C-130J systems engineer, Michael A. Reed, suggested that future communications between Lockheed and the program office be limited to only those required by contract, and that “all recently requested non-contractual data” be removed from Lockheed’s computer system which communicates with the program office. “Until further notice, there will be but one channel for information requests on the C-130J program, and that will be by Contracts letter,” Reed wrote. Now a high-stakes dogfight is shaping up between Defense Secretary Donald Rumsfeld and the Air Force and some Members of Congress. The facts are on Rumsfeld’s side: Since its inception in the mid-1990s, the C-130J transport aircraft program has proven itself a disaster for both the U.S. taxpayers and the military. The aircraft, a so-called modernized version of the legendary 1950s-era C-130 Hercules cargo and troop airlifter, was developed and purchased using a misguided and highly suspect “commercial” acquisition strategy that essentially doubled the cost of the aircraft and left government auditors powerless to do anything about it. From a technical standpoint, too, the aircraft has a checkered history. None of the first group of 50 “J” models delivered between 1999 and 2003 have yet been declared fully ready for combat.5 A 2004 Rand study for the Air Force called the C-130J a “contractor-initiated” idea that was at first supposed to be a simple and routine upgrade, but in the end was far from simple or routine.6 In fact, the Department of Defense’s Office of Inspector General found that, rather than being available for combat, the C-130J should only be used in a “permissive,” non-hostile environment. “The evaluation did not include aircraft survivability equipment; therefore, the aircraft should only be employed in a permissive threat environment until aircraft survivability equipment testing is completed,” the report said. The Inspector General report said the DoD defines a permissive threat environment “as an operational environment in which the host country’s military and law enforcement agencies have control as well as the intent and capability to assist operations that a unit intends to conduct.”7 POGO’s report supports the decision to cut the program. Attempts to reinstate funding for the C-130J program are nothing more than another scheme to keep on the table a plate of federal pork cooked up by a defense contractor and force-fed to the Pentagon by Congress. Congress and Lockheed Create a Need for the C-130JThe C-130J was first introduced in the mid-1990s as an improvement to earlier C-130 models – not by the Pentagon, but by defense contractor Lockheed Martin Aeronautics Company.8 Until it faced the recent threat of program cancellation, the Air Force had never really expressed an overwhelming need for more, or upgraded, versions of the C-130 transport aircraft. A 1998 Government Accountability Office (GAO) report suggested that Congress was calling the shots when it came to buying new C-130s. “For the past 21 years, with the exception of five aircraft, Congress has directed the procurement of C-130s for the Air National Guard and Air Force Reserve units.”9 As of December 31, 2004, 180 “J” models had been ordered and 120 delivered worldwide to the U.S. and other countries’ air forces, including the U.K. Royal Air Force, Royal Australian Air Force, Italian Air Force, and the Royal Danish Air Force.10 Lockheed ordained the “J” model as its transport aircraft of the future by closing the production line for its predecessor, the C-130H model.11 Now the Pentagon has a chance to stand up to Congressional pressure and save the taxpayers $5 billion by cutting Air Force procurement of the “J” model. History would support such an action. In 1998, the GAO concluded that Congress was giving the Air Force more C-130s than it needed:
So even if the Air Force could justify a need for additional C-130 aircraft, any future needs could be filled by taking those older retired C-130 aircraft out of mothballs and putting them back into service, rather than buying the expensive and problem-plagued C-130Js. The Air Force could also do a Service Life Extension Program (SLEP) on the C-130E, C-130H, and possibly C-130F models, which involves adding new skin panels and other structures to extend the life of the aircraft. This will put people to work, continue C-130 E&H (possibly F) versions’ serviceable life for several years and will save millions, possibly billions, of dollars. This will eliminate any argument that the C-130J is needed to replace older versions of the C-130 with wing cracking problems. Commercial Procurement FailureAt the heart of the C-130J debacle is the contracting scheme used to acquire it. A July 2004 Department of Defense Office of Inspector General (OIG) report was highly critical of the Air Force’s decision to designate the C-130J a “commercial item.” Declaring an item “commercial” is a contracting strategy that absolves the defense contractor of responsibility for providing detailed and important cost data, and restricts the government’s ability to audit the contractor’s books. The use of the commercial acquisition strategy, never before used to purchase a military aircraft, was so out of bounds that the OIG recommended that “civilian and military managers” involved in managing acquisition programs read its audit to learn the do’s and don’ts of commercial acquisition. It told managers that the audit “discusses an unjustified decision to use a commercial item acquisition strategy and other problems that occurred because of poor management.” The OIG flatly stated that the Air Force did not properly justify the use of a commercial acquisition strategy, did not properly manage the program, and did not provide the contractor with an incentive to deliver aircraft that worked properly. The audit also criticized the Office of the Secretary of Defense for not providing effective oversight of the program to correct C-130J deficiencies. The OIG recommended that the Air Force immediately stop the system program office from “contracting for additional block upgrades until a contract-compliant aircraft is designed, developed, and delivered.” It also strongly encouraged the Air Force to modify any future contracts to employ a more traditional procurement method, increase the amount of money withheld from contractors when the government accepts “noncompliant aircraft,” and develop a schedule for fixing problems with the “J” models already in the fleet. The report also stated: “The Air Force bought the C-130J as a commercial item needing minor modification, but in the 8 years since the Air Force began contracting for the C-130J, Lockheed Martin has been unable to design, develop, or produce a C-130J aircraft that meets contract specification.”15 The C-130J is the only historical example of a military aircraft being declared a “commercial item.” Its flawed history serves as a textbook case of the perils of employing a commercial acquisition strategy for acquiring a major military weapons system. Normally, a commercial acquisition designation is used to obtain any item that the public can purchase such as computers, office equipment, and automobiles. But in the case of the C-130J, Lockheed Martin was permitted to circumvent laws that protect the taxpayer, such as the Federal Acquisition Regulation, the Truth in Negotiations Act, and Cost Accounting Standards. These laws require transparency in cost or pricing data so that government purchasers know what they are getting for the government’s money. The result has been a doubling of the per aircraft cost – the “H” model cost $33.9 million when it went out of production in 1997, while the “J” model has an estimated price tag today of $66.5 million. With oversight regulations waived, the cost of wiring harnesses on the C-130J increased by five times their original price after the aircraft was designated “commercial,” going from $91 to $453. The GAO offered this spare part price-hike as a real-world example of the difficulty involved in making the transition from pricing goods and services based on costs incurred to an ineffective commercial model in which factors other than cost are the principal means used to establish price.16 The trouble is no one, other than Lockheed Martin, seems to be really sure just how much the C-130J should rightfully cost – not even the government. For example, the Rand study noted that it could not do a cost analysis of the “J” model because, “According to the program office, contractor T&E [Test and Evaluation] cost data were not available to them because of the nature of the contractor-initiated development effort.”17 Such commercial agreements also restrict the government’s powers to “routinely” inspect and audit a contractor’s activities. For instance, the 2003 C-130J contract with Lockheed allows the government to inspect and test all supplies, but says that “the Government agrees, consistent with the commercial nature of the C-130J program that such inspections should not be performed on a routine basis, but only where the Government determines in its judgment that inspections are required.” One Department of Defense auditor-turned-whistleblower who worked at the C-130J plant in Marietta, Georgia, spent months researching the cost of the “J” model, but was frustrated by his attempts to determine an actual, and fair, price for the aircraft. The auditor, Ken Pedeleose, said in a report to Congress that in June 1995 when the government designated the C-130J a “Regulatory Pilot Program,” it “lost all insight into the C-130 operations.” (Appendix F) In technical reviews for Italy and Norway in late 1996 to early 1997, Pedeleose, an employee of the Defense Contract Management Agency (DCMA), essentially concluded that the prices Lockheed was charging the two governments could not be justified. “In short, the LMAC (Lockheed Martin) proposed price could not be substantiated based on historical factors and the limited information LMAC provided,” Pedeleose wrote. “Thus the final DCMA evaluation was forced to question the excessive cost and submit the report to the Italian Government for use in negotiations.” That caused negotiations to stall, and afterward Lockheed complained that DCMA was “interfering” with the company’s negotiations with Italy. After a similar experience with a cost analysis for Norway, Pedeleose concluded that the two projects “verified that LMAC could not support C-130J cost in a commercial marketplace.” He also concluded: “The attitude of LMAC in negotiations and the strenuous nature to which they protect their ‘proprietary’ data for an unjustifiable price is a contributing factor to the poor sales of the C-130J.” Norway never did purchase any C-130Js. Pedeleose said the history of the C-130J has been one of a “continued trend of excluding technical and financial experts from the process thus allowing further unbridled cost increases, among other issues.” This became clear by 1998 when Lockheed and the Air Force agreed to keep financial experts in the dark about the program’s costs. For example, in an October 21, 1998, memo about an impending C-130J program review meeting, Lockheed vice president Gene Elmore told an Air Force Colonel on the acquisition team that the discussions could not include any government auditors. “As I am sure you understand, we are not trying to hide anything, merely attempting to preserve the commerciality of the program,” Elmore wrote. The letter also prohibited Air Force acquisition team members from sharing any cost data with auditors. (Appendix G) One Senator who questioned the “commercial item” designation for the C-130J was Tom Harkin (D-IA). In 1997, Harkin fired off a letter of protest to then-Secretary of Defense William Cohen:
Real commercial items are acquired where a real market with competition exists, giving an assurance of fair and reasonable prices. For non-commercial items, contractors are required to submit cost or pricing data for negotiated procurement. However, in the case of the C-130J, there was no competition to set the price. Failing PerformanceThe C-130J’s history of problems has kept it from getting a passing grade from the Pentagon’s independent weapons tester, the Director of Operational Test and Evaluation (DOT&E). In the first phase of testing, DOT&E declared the C-130J as not operationally “effective” or “suitable,” and has yet to change that designation.20 Not one C-130J was delivered to the Air Force meeting program requirements and, eight years into the program, the aircraft still has not been fully tested by DOT&E. When the Department of Defense Office of Inspector General graded the C-130J’s performance, the report card was clearly less than satisfactory. In uncharacteristically stinging language, the OIG’s July 2004 audit flatly concluded that Lockheed was not meeting its contract specifications and, therefore, that the C-130J was unable to perform its mission of transporting and dropping troops and equipment in combat zones. Specifically, the OIG report said the Air Force unwisely paid 99 percent of the $2.6 billion contract price for the first 50 defective aircraft, leaving the contractor little incentive to correct the problems on its own dime. “As a result, the government fielded C-130J aircraft that cannot perform their intended mission, which forces the users to incur additional operations and maintenance costs to operate and maintain older C-130 mission-capable aircraft because the C-130J aircraft can be used only for training,” the audit said. The OIG said the transport aircraft has been unable to perform such basic and critical missions that include night vision goggle operations, combat search and rescue, visual formation, global air traffic management, and air-dropping paratroopers and containers. In addition, the hurricane hunter versions of the C-130J have experienced radar problems and the aircraft’s six-blade propellers have become dangerously pitted in bad weather. The Inspector General audit also noted:
Lockheed and the Air Force often try to deflect the critics of the C-130J by pointing to the experience of several other countries who purchased C-130Js prior to the U.S. contract. But nearly all of those foreign military buyers have had their share of problems with the aircraft: the British had difficulties dropping paratroopers; the Italians had windshield and horizontal stabilizer cracks; the Australians complained that the powerful engines were creating a dangerous vibration; and the Norwegians unsuccessfully jockeyed behind the scenes to determine if the price they were paying for the aircraft was fair.
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