Quote:
Originally Posted by Jeff Higgins
Geez Mike, what an embarrassing cluster fark. Not surprising, though. It always seemed to me that Boeing sent all of their real "winners" to the government programs. Veritable "island of misfit toys (engineers)". I think that was driven by the nature of the way in which they were compensated by the customer - all government contracts were "guaranteed", also known as "cost plus". In other words, it didn't really matter how much was spent, compensation was a guaranteed amount above whatever that was. The commercial side, of course, didn't have that luxury. The commercial side very much had to perform, in a very competitive market, and against a competitor - Airbus - who had the luxury of significant backing from member nation's governments.
The management practices developed under this "cost plus" model eventually crept into the commercial side at MD. They were firmly entrenched, and had caused MD to fail by the time of the merger. Post merger, those practices replaced the decades old, tried and true (although not very profitable for the "stakeholders") practices employed by Boeing.
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While I have never worked a contract with Boeing I have negotiated Research and Development, Low Rate Initial and Full Rate Production contracts with Bell, LMCO and Sikorsky. I am not a contracting officer and was either the PM or Lead of the negotiation team.
Some of what you wrote above is accurate while other sections, not so much in my experience. I am not arguing that this did not happen at Boeing, it would just not have followed the FAR guidance on contract types.
"Cost Plus" contracts are typically used in R&D contracts and LRIP contracts. Profit on those contracts is capped, generally around 8 to 10%. This is because the government is willing to accept the risk in R&D and LRIP. The reason for that is often the requirements are not well understood by the government, especially in sensors and avionics, and many companies will not accept the risk of a firm fixed price contract in the early stages of development.
I am working through this right now with a contract to design ork on fuel cells in UAS: The government wants FFP, we need cost plus because they have no idea what they really want.
FRP contracts are mostly Firm Fixed Price for what is known as the "Fly Away Price"...also commonly refered to as the "above the Line Price".
FFP contracts are also capped on profit. Where companies make money is in the "below the line" items (the list is long), in G&A and government directed engineering change proposals. Also, constructive changes to the contract are huge profit centers.
I could go on about "forward pricing rate agreements", contract incentives, etc...if any anyone suffers from insomnia, PM me and I will continue. You'll be asleep in minutes
Again, great thread. I had no idea.