Mis­sile bonuses boost Boe­ing

The com­pany col­lects nearly $2 bil­lion in an­timis­sile de­fense bonuses de­spite the fact that only five of 11 tests hit their tar­gets.

The Daily Herald - - HERALD BUSINESS JOURNAL - By David Will­man Tri­bune Wash­ing­ton Bu­reau

WASH­ING­TON — From 2002 through early last year, the Pen­tagon con­ducted 11 flight tests of the na­tion’s home­land mis­sile de­fense sys­tem.

In the care­fully scripted ex­er­cises, in­ter­cep­tors of the Ground-based Mid­course De­fense sys­tem, or GMD, were launched from un­der­ground si­los to pur­sue mock en­emy war­heads high above the Pa­cific.

The in­ter­cep­tors failed to de­stroy their tar­gets in six of the 11 tests — a record that has prompted in­de­pen­dent ex­perts to con­clude the sys­tem can­not be re­lied on to foil a nu­clear strike by North Korea or Iran.

Yet over that same times­pan, the Boe­ing Co., the Pen­tagon’s prime con­trac­tor for GMD, col­lected nearly $2 bil­lion in per­for­mance bonuses for a job well done.

$21 bil­lion pric­etag

The Pen­tagon paid Boe­ing more than $21 bil­lion to­tal for man­ag­ing the sys­tem dur­ing that pe­riod.

A Los Angeles Times in­ves­ti­ga­tion also found that the cri­te­ria for the yearly bonuses were changed at some point to de-em­pha­size the im­por­tance of test re­sults that demon­strate the sys­tem’s abil­ity to in­ter­cept and de­stroy in­com­ing war­heads.

Early on, Boe­ing’s con­tract spec­i­fied that bonuses would be based pri­mar­ily on “hit to kill suc­cess” in flight tests. In later years, the words “hit to kill” were re­moved in fa­vor of more gen­er­ally phrased bench­marks, con­tract doc­u­ments show.

David Mon­tague, co-chair­man of a Na­tional Academy of Sciences panel that doc­u­mented short­com­ings with GMD, called the $2 bil­lion in bonuses “mind­bog­gling,” given the sys­tem’s per­for­mance.

Mon­tague, a for­mer pres­i­dent of mis­sile sys­tems for Lock­heed Corp., said the bonuses sug­gest that the Mis­sile De­fense Agency, the arm of the Pen­tagon that over­sees GMD, is a “rogue or­ga­ni­za­tion” in need of strict su­per­vi­sion.

The cu­mu­la­tive to­tal of bonuses paid to Boe­ing has not been made pub­lic be­fore. The Times ob­tained de­tails about the pay­ments through a law­suit it filed against the De­fense De­part­ment un­der the Free­dom of In­for­ma­tion Act.

The news­pa­per also re­viewed Boe­ing-re­lated con­tract doc­u­ments ob­tained in­de­pen­dently of the law­suit.

Bonuses ‘earned’

A spokesman for the mis­sile agency, Chris John­son, said that de­spite the GMD sys­tem’s record in flight tests, Boe­ing had “earned” its bonuses “based on the cri­te­ria spec­i­fied in the con­tract.” He said the pay­ments “com­plied with all ap­pro­pri­ate ac­qui­si­tion reg­u­la­tions.”

“These types of con­tracts al­low reg­u­lar and con­sis­tent eval­u­a­tion by the gov­ern­ment, and fees are paid only when com­pa­nies meet clearly de­fined tar­gets,” John­son said.

A spokesman for Boe­ing, Dex­ter Henson, re­ferred ques­tions about the bonuses to the mis­sile agency while de­fend­ing the com­pany’s work on GMD. Boe­ing “has met con­trac­tual re­quire­ments and a va­ri­ety of in­cen­tives across a wide range of pro­gram ob­jec­tives,” Henson said.

“As the lead con­trac­tor, we have part­nered with the Mis­sile De­fense Agency in the de­vel­op­ment and op­er­a­tion of the only home­land de­fense sys­tem that can de­feat long range mis­sile at­tacks,” he said.

The GMD sys­tem, which be­came op­er­a­tional in 2004, is in­tended to thwart a “lim­ited” nu­clear strike by a

non-su­per­power. It has cost tax­pay­ers more than $40 bil­lion to date.

In the event of an at­tack, in­ter­cep­tors at Van­den­berg Air Force Base in Santa Bar­bara County, Cal­i­for­nia, and Fort Greely, Alaska, would burst from their si­los and be­gin a fiery as­cent to­ward the up­per at­mos­phere.

The in­ter­cep­tors are mul­ti­stage rock­ets, each with a 5-foot-long “kill ve­hi­cle” at the tip. The kill ve­hi­cle is de­signed to sep­a­rate from its rocket in space, fly in­de­pen­dently at 4 miles per sec­ond and crash into an en­emy war­head.

Ge­orge W. Bush project

GMD’s roots go back to the Clin­ton ad­min­is­tra­tion, when con­cern be­gan to mount over the spread of bal­lis­tic mis­sile technology. In 2002, Pres­i­dent Ge­orge W. Bush or­dered “an ini­tial set of mis­sile de­fense ca­pa­bil­i­ties” to be put in place within two years.

To ac­cel­er­ate de­ploy­ment, then-De­fense Sec­re­tary Don­ald Rums­feld ex­empted the mis­sile agency from the Pen­tagon’s stan­dard pro­cure­ment rules and test­ing stan­dards.

The Pen­tagon’s own Op­er­a­tional Test and Eval­u­a­tion of­fice has doc­u­mented se­ri­ous de­fi­cien­cies in the sys­tem. So have other gov­ern­ment agen­cies and in­de­pen­dent ex­perts.

In a re­port in Fe­bru­ary, the Gov­ern­ment Ac­count­abil­ity Of­fice, a non­par­ti­san in­ves­tiga­tive arm of Congress, said the sys­tem’s per­for­mance in tests has been “in­suf­fi­cient to demon­strate that an op­er­a­tionally use­ful de­fense ca­pa­bil­ity ex­ists.”

The test fail­ures are unset­tling given that the ex­er­cises are metic­u­lously or­ches­trated. Per­son­nel op­er­at­ing the GMD sys­tem know ahead of time ap­prox­i­mately when the tar­gets will be launched and from where, as well their ex­pected speed and tra­jec­tory — in­for­ma­tion they would not have in an ac­tual at­tack.

Given the sys­tem’s weak­nesses, four or five in­ter­cep­tors would have to be launched for each in­com­ing en­emy war­head, ac­cord­ing to cur­rent and for­mer of­fi­cials fa­mil­iar with the mis­sile agency’s pro­jec­tions.

As a re­sult, the sys­tem’s arse­nal of 30 op­er­a­tional in­ter­cep­tors — four at Van­den­berg and 26 at Fort Greely — could be quickly de­pleted by an at­tack with mul­ti­ple missiles.

A study by three physi­cists with ex­per­tise in mis­sile de­fense, re­leased in July by the Union of Con­cerned Sci­en­tists, con­cluded that “the GMD sys­tem is sim­ply un­able to pro­tect the U.S. pub­lic.”

The Times asked the Mis­sile De­fense Agency in March 2014 for in­for­ma­tion on bonuses paid to GMD con­trac­tors. Boe­ing

ob­jected to re­lease of the data, and the agency de­nied the news­pa­per’s re­quest, say­ing dis­clo­sure might re­veal “trade se­crets and com­mer­cial or fi­nan­cial data.”

The Times then sued in fed­eral court last year, asserting that the pub­lic had a right to know about the pay­ments. The gov­ern­ment’s lawyers later agreed to re­lease the in­for­ma­tion if Boe­ing would not in­ter­vene in the lit­i­ga­tion “or oth­er­wise take steps to pre­vent dis­clo­sure.”

Boe­ing even­tu­ally ac­qui­esced, and the De­fense De­part­ment set­tled the suit with a sin­glepage let­ter list­ing the sum to­tal of bonuses paid to Boe­ing from Dec. 31, 2001, to March 1, 2015. The fig­ure: $1,959,072,946. The gov­ern­ment also agreed to pay $15,000 to cover the Times’ le­gal costs.

Data was with­held

The mis­sile agency’s chief of staff, David Bag­nati, made the ini­tial de­ci­sion to with­hold the bonus data, ac­cord­ing to a 2014 email from the Pen­tagon’s Free­dom of In­for­ma­tion of­fice.

John­son, the agency spokesman, said this week that Bag­nati “made the de­ter­mi­na­tion on the ad­vice of agency le­gal coun­sel” and would have no fur­ther com­ment.

Boe­ing holds two con­tracts to man­age GMD. Un­der their terms, the com­pany is re­im­bursed for its di­rect costs in over­see­ing the sys­tem and for some of its in­di­rect costs, such as ex­ec­u­tive salaries and other over­head.

The bonuses come on top of that and can ac­count for all or a sig­nif­i­cant part of a con­trac­tor’s profit.

One of Boe­ing’s GMD con­tracts also pro­vides a 3 per­cent base fee, in­de­pen­dent of any bonuses, for some as­pects of the work, ac­cord­ing to the mis­sile agency.

Un­der the con­tracts, bonuses are awarded an­nu­ally and can be up to 100 per­cent of spec­i­fied pools of money.

The De­fense De­part­ment let­ter that set­tled the Times’ law­suit said the Boe­ing bonuses fell into three cat­e­gories. Ninety-five per­cent of the to­tal sum was des­ig­nated as “award fees.” The rest was de­scribed as “in­cen­tive cost” fees and “in­cen­tive per­for­mance” fees.

The pre­cise cri­te­ria for bonuses could not be ob­tained for each of the rel­e­vant years. How­ever, doc­u­ments on file with the De­fense and Trea­sury de­part­ments show that the mis­sile agency at some point al­tered a cen­tral cri­te­rion.

At is­sue was what would make a flight test count as suc­cess­ful for bonus pur­poses. Boe­ing’s prime con­tract dated Jan. 1, 2001, states that “the pri­mary per­for­mance cri­te­ria” were whether the in­ter­cep­tor de­stroyed its tar­get dur­ing

the test — an out­come de­scribed as “HTK suc­cess.” (HTK is short for “hit to kill.”)

The max­i­mum “award fee” for a given year was 15 per­cent of the con­tract value. Dur­ing the first phase of the con­tract, up to 60 per­cent of the award fee pool was based on “HTK suc­cess cri­te­ria.”

Later con­tract doc­u­ments, dated Au­gust 2011, list var­i­ous bonus cri­te­ria re­lated to pre­par­ing for and car­ry­ing out the next sched­uled flight test. Suc­cess­ful “mis­sion ex­e­cu­tion” was worth 30 per­cent of the award fee pool. But ac­tu­ally de­stroy­ing the tar­get — “hit to kill” —was no longer spec­i­fied.

Asked for an ex­pla­na­tion, John­son, the agency spokesman, said:

“In re­cent con­tract terms, the words ‘hit-to-kill’ have been changed to sup­port the more de­tailed doc­u­mented ob­jec­tives of each re­spec­tive flight test. For in­ter­cept flight tests con­ducted un­der the cur­rent de­sign and sus­tain­ment con­tract, a suc­cess­ful in­ter­cept re­mains a key per­for­mance ob­jec­tive.”

In 2010, the mis­sile agency granted Boe­ing a con­tract ex­ten­sion worth more than $1 bil­lion.

Au­dit re­quested

The De­fense De­part­ment’s in­spec­tor gen­eral later raised ques­tions about the ex­ten­sion — in­clud­ing bonus pay­ments — say­ing that agency of­fi­cials lost an op­por­tu­nity to save mil­lions of dol­lars by fail­ing to wait for an au­dit they had re­quested.

The con­tro­versy cen­tered on the GMD “Core Com­ple­tion” con­tract. (The in­spec­tor gen­eral’s re­port, re­leased in 2014, did not name Boe­ing, but other records show that the com­pany held this con­tract.)

Ac­cord­ing to the re­port, the mis­sile agency asked the De­fense Con­tract Au­dit Agency to scru­ti­nize the con­trac­tor’s pro­posed costs and other terms. The au­dit was due Feb. 15, 2010, but the au­di­tors asked for an ad­di­tional month, the re­port said.

Yet the mis­sile agency signed the con­tract ex­ten­sion March 10, 2010 — five days be­fore the au­di­tors were to de­liver their find­ings.

The in­spec­tor gen­eral con­cluded that if agency of­fi­cials had waited to see the au­dit, they “could have ne­go­ti­ated a sig­nif­i­cantly lower con­tract value and saved the gov­ern­ment mil­lions of dol­lars in re­duced fees” — a ref­er­ence to bonuses, which are based on the to­tal con­tract value.

John­son said of­fi­cials chose not to wait “be­cause we had suf­fi­cient data to reach a de­ter­mi­na­tion of a fair and rea­son­able price for the con­tract.”

He added that his agency “has in­cor­po­rated sev­eral sub­stan­tial changes to our pro­ce­dures” to make bet­ter use of fu­ture au­dits.

The mis­sile agency and its lead con­trac­tors have sought to put a pos­i­tive spin on the sys­tem’s per­for­mance. This year, af­ter a flight test on Jan. 28, the agency and sev­eral con­trac­tors, in­clud­ing Boe­ing, is­sued news re­leases declar­ing the test a suc­cess.

Thruster mal­func­tion

In fact, as the Times re­ported July 6, a thruster stopped work­ing dur­ing the ex­er­cise, caus­ing the kill ve­hi­cle to fly far off its in­tended course.

The thrusters, which help steer the kill ve­hi­cle, have a his­tory of per­for­mance prob­lems. In the Jan. 28 ex­er­cise, a kill ve­hi­cle equipped with a new thruster model was sup­posed to make a close fly-by of a tar­get.

None of the press re­leases ac­knowl­edged the mal­func­tion — nor did the mis­sile agency’s di­rec­tor, Vice Adm. James Syring, in three sub­se­quent ap­pear­ances be­fore con­gres­sional pan­els.

Nei­ther Syring nor the con­trac­tors have said pub­licly why they stayed silent.

What­ever their ra­tio­nale, by char­ac­ter­iz­ing the test as a suc­cess, the agency and the con­trac­tors may have bol­stered the prospects for per­for­mance bonuses, ac­cord­ing to mis­sile de­fense spe­cial­ists.

Boe­ing, in its most re­cent an­nual re­port, un­der­scored the sig­nif­i­cance of GMD to its finances. The com­pany could face “re­duced fees, lower profit rates or pro­gram can­cel­la­tion if cost, sched­ule or tech­ni­cal per­for­mance is­sues arise,” the re­port said.

Ti­mothy Sul­li­van, a for­mer fed­eral con­tract­ing of­fi­cer who ex­am­ined GMD fi­nan­cial doc­u­ments at the re­quest of the Times, said the bonus pro­vi­sions were ex­traor­di­nar­ily com­plex.

“How you ad­min­is­trate some­thing like this is mind­bog­gling to me. … It is an ad­min­is­tra­tive nightmare,” said Sul­li­van, an at­tor­ney who rep­re­sents de­fense com­pa­nies and other gov­ern­ment con­trac­tors in Wash­ing­ton for the law firm Thomp­son Coburn LLP.

Mon­tague, the for­mer Lock­heed Corp. ex­ec­u­tive, said the in­tri­cate bonus sys­tem re­flected the mis­sile agency’s lack of rigor in en­gi­neer­ing and con­tract­ing. If the goals for man­ag­ing GMD had been ad­e­quately de­fined at the be­gin­ning and spelled out in con­tracts, there would be lit­tle need for lu­cra­tive in­cen­tives, he said.

By re­ly­ing on bonuses, Mon­tague said, the mis­sile agency has ef­fec­tively told Boe­ing: “We don’t know what we’re do­ing, but we’ll de­cide it to­gether and then you’ve got to work to­ward max­i­miz­ing your fee by con­cen­trat­ing on those ar­eas.”

GENE BLEVINS / ZUMA PRESS

The launch of a U.S. Mis­sile De­fense Agency flight test of a ground-based in­ter­cep­tor takes place at Van­den­berg Air Force Base on Jan. 28.

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