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Department of Defense Briefing Transcript

Location: Pentagon Briefing Room 2E579

SEC. GATES: Good afternoon. We're here this afternoon to announce the department's
path forward on the KC-X tanker contract. I'll have a short statement. Then Acting
Secretary Donley will have a short statement.
We'll take one or two questions on the tankers. Then if there are questions on other
issues, I'll take three or four of those. And then we'll bring the undersecretary for
Acquisition, Technology and Logistics to the podium, to answer your more detailed
questions about the tanker matter.
Following the review of the GAO decision on the initial award of this contract, I've
concluded that the contract cannot be awarded at present because of significant issues
pointed out by the Government Accountability Office.
I have with me today the acting secretary of the Air Force, Mike Donley, and the
undersecretary of Defense for Acquisition, Technology and Logistics, John Young. Mr.
Young will brief you more fully on the details, but I want to say a few words first.
In summary, the GAO sustained eight of slightly more than a hundred issues protested
with this contract. We will address all of these in the new solicitation. And we will
request revised proposals from industry.
I have also, with the full support of the Air Force, directed Undersecretary Young to
serve as the new source selection authority as well as appoint a new source selection
advisory committee.
It is important to remember that this decision does not represent a return to the first step
of a process that has already gone on far too long. On the contrary, given the amount of
work that has been done, we believe that we can complete all of this and award a contract
by December.
In short, all GAO findings will be addressed. The source selection authority will be
changed. New personnel will be assigned to the advisory committee. And we expect to
complete the revised process by year's end.
We realize there's a tremendous amount of interest and concern by the Congress,
industrial partners and foreign governments in how we proceed on this matter. We have
been in touch with the leadership of the congressional defense committees this morning
to explain this decision.
While we want to be forthcoming in answering questions, we are also mindful that with
this decision, the KC-X tanker program will remain in open competition status, a status
that imposes restrictions on what we can openly discuss without jeopardizing the integrity
of the decision process.
Industry, the Congress and the American people all must have confidence in the integrity
of this acquisitions process. I believe the revised process will result in the best tanker for
the Air Force at the best price for the American taxpayer.
Secretary Donley.

MR. DONLEY: Thank you, sir. Having been in office for less than three weeks, I had no
role in the tanker source selection. I have however been briefed on the Air Force's and
OSD's analysis of the GAO decisions and engaged with the secretary and with
Undersecretary Young in discussions on the way forward.

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I'd like to take a few moments to address how and why I support the actions just
announced by the secretary.
First, we need immediately to help rebuild confidence in DOD's ability to successfully
manage this competition to completion. The Joint Forces supported by the Air Force need
a modern tanker as soon as we can field it.
During the recent protest, the Air Force successfully defended itself against over a
hundred protest allegations, some of which were overlapping. And based on this overall
performance and my understanding of the transparent and collaborative way in which this
process was conducted, I would not conclude that the underlying Air Force acquisition
system is somehow fatally flawed. However, the GAO did sustain the protest in eight
areas, and this has been sufficient to cast doubt on the Air Force's management of the
overall process.
In my view, having a senior DOD official lead the next phase of this source selection is
an appropriate and necessary step to ensure congressional and public confidence that
DOD can and will successfully manage to completion a large, complex procurement such
as KC-X.
This is no small matter, and it's not just an Air Force issue. In an environment of fewer
contractors and fewer but larger contracts, we can expect protests like these. It is essential
for the department, working with Congress, to maintain both internal and public
confidence in our acquisition process. Air Force and DOD officials are ready to brief
appropriate congressional committees on additional details of the KC-X competition,
which still includes protected source selection-sensitive information, and we will protect
the integrity of this process going forward.
Second, the secretary's decisions directly address the concerns raised by GAO. Among
the options available, amending and clarifying their requests for proposal and reopening
the competition in these areas, while adding several months to process, offers the most
direct route to complete the competition, achieve a final decision and field the tanker that
represents the best value for the warfighter and the taxpayer.
Finally, the Air Force needs to rapidly apply the lessons learned from this experience and
move forward. Other Air Force acquisition decisions are on the horizon. GAO's
conclusions show that even in a large, complex procurement with considerable staff
resources and oversight, work accomplished by our contracting personnel, our
warfighters and our engineers is not always adequately prepared to withstand the detailed
audits and the legal challenges that we can now expect. I've asked Sue Payton, the Air
Force's assistant secretary for Acquisition, and her team to ensure that GAO's findings are
fully understood and accounted for in preparation for other pending program decisions.
In sum, restoring confidence in our acquisition process, addressing the GAO's concerns
in the source selection directly to get the best value for the warfighter and the taxpayer
and rebuilding the Air Force's internal capabilities and credibility going forward look like
the right priorities to me.

SEC. GATES: One or two –

Q (Off mike) -- criteria taken into consideration in this process, for instance, defense
industrial base considerations or WTO dispute considerations?

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SEC. GATES: I will defer to Undersecretary Young on that, but to the best of my
knowledge such criteria will not be involved.
Q Sir, I want to you ask you, what steps to you think you can take to mitigate another
protest by the losing competitor come December? There could be a problem with this
becoming the A-12 of tankers and just being -- round and round in protests for years and
years. Is there anything you think you can do to mitigate that?

SEC. GATES: Well, I hope that by running a process that is transparent to the
competing companies, by complete communication with those companies so that there
are no surprises, no considerations that have not been discussed, no criteria that have not
been discussed, nothing done that was unfair. My hope would be that when we reach the
end of this process we will have a solution, will be able to reward a contract and get
moving with the contract. There are few programs, particularly long-term procurement
programs in the Department of Defense that are more time-critical than this tanker.

Q (Inaudible) -- of restoring confidence in the Air Force acquisitions, why is Sue Payton
staying on with her job?

SEC. GATES: Well, I think that the key here, as Secretary Donley said, GAO sustained
significant elements of this contract process.
And I -- it just seemed to me that it was important -- it will be important for the Congress
to have confidence in this process. This is the third time we've gone at this. And under
those circumstances, it seemed to me that we were most likely most quickly to gain the
confidence of Congress in the way forward by having the undersecretary oversee this
particular contract.
One more on this tanker –

Q (Off mike) -- confidence in her?

SEC. GATES: Yes, I have confidence in the acquisitions team. I think that Secretary
Donley has indicated that there are some areas where there needs to be improvement. But
I think we will go forward with that.
Last question.

[Tanker War Blog note: Several questions not about the tanker contract were asked and
answered but have been omitted from this transcript for the sake of brevity.]

SEC. GATES: …Let me bring Undersecretary Young to the podium now.

MR. YOUNG: Hello everyone. I didn't intend to make a statement. The secretary made
the statement effectively outlining the broad picture of how we will move forward with
the tanker.

Q (Off mike) -- how this expedited process will work in terms of what steps will be cut
out to get this done by December?

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MR. YOUNG: What we are seeking to do is expedite the decision to purchase a tanker.
We will not expedite steps in the process. We have to do this methodically, fairly, and
without bias in any way. So we will follow a normal acquisition process, we will issue a
draft request for proposals, it will be amended to reflect the GAO findings, we will ask
the company -- the bidders to provide modified proposals in response to that amended
RFP, and then we will allot evaluation time for those -- conduct a new source selection
process for those proposals.
Yes, sir?

Q Mr. Young, once the selection is made, will the Air Force get acquisition authority
back or will it continue to reside in your office?

MR. YOUNG: Well, I fully expect the Air Force to manage the contract and execute the
program once we make a source selection decision.
Yes, ma'am? I'm sorry.

Q You're not completely reopening the competition. I'm just trying to clarify that you're
just amending the original RFP.

MR. YOUNG: That's correct. As the secretary indicated, there is a substantial foundation
and a great deal of review and scrutiny that's been applied to the requirements, the final
RFP as well as the proposals, both within the government, by the industry and by the
GAO.
That foundation, I think, is beneficial to build upon, making the corrections that are
necessary to move forward. And we can leverage that. We're still going to allot time for
industry to modify their proposals as they see fit, once we give them the amended request
for proposals.

Q Is it a certainty that Northrop no longer will have the contract, then?

MR. YOUNG: That's correct. There is no contract award right now. And there won't be a
contract award.
Yes, ma'am.

Q Just two questions. One, you're only focusing, then, on the seven or eight concerns
raised by GAO, exclusively, in the three competitions?

MR. YOUNG: Yeah. As I understand it, our eight specific findings -- we've analyzed
those pretty thoroughly and we believe that we can ask both bidders to modify their
proposals to address those concerns based on how we will implement those findings in
that amended request for proposals and move forward. I don't -- I think we would like to
err on the side of changing the minimum amount. We have a valid requirements
document that has not been called into question.
And, you know, as the secretary said, a great deal of scrutiny and a lot of attention's been
paid to all of the pieces of this process. We have to fix certain detailed areas, but I think
we would like to err on the side of changing fewer things rather than more things, so that

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everyone feels they have a fair chance. They understand the process. And the things we
would change would be things we can explain. We can explain we changed some because
the GAO found a factual issue that we needed to address. We made an adjustment which
grounded in the requirements document, or we made any adjustment necessary to the
benefit of the taxpayer. I mean, we obviously want to pay careful attention to what this
program will cost the taxpayer.
One arm, I see -- I'm sorry. I'm not order here.

Q Sir, could I just go back to Secretary Donley's contention that the system -- the Air
Force system's not fatally broken, I think is how he put it. Do you have -- this is not,
obviously, the first competition in recent months that has been reopened. We have the
CSAR-X, that also is reopened. Also, some of the GAO's findings were a little disturbing,
particularly one where we had face-to-face conversation going on with Boeing where
they were told one thing. Then they go back behind closed doors and decide another.
I mean, there is some evidence here, it seems to me, that the Air Force is a bit broken in
the way they do these things. I mean, is there any effort to -- (inaudible word) --
personnel, structure, the way the Air Force conducts these competitions?

MR. YOUNG: Well, we implemented a positive step in asking an OSD team to observe
that source-selection process. And actually, they found things. My regret is we didn't start
sooner. We really started that in December and, as you know, the final proposals were
requested, I think, in February or March. And so -- from the beginning, we will start
earlier. I think as Secretary Donley said, he's asking the Air Force to make sure they learn
all the lessons from this competition. We will learn those lessons at the OSD level and
apply them across the services. I mean, we have to work very hard to successfully
conduct competitions.
But as was also said by the secretary, competitions these days are very complicated. They
are significant dollar contracts and there are fewer new contracts.
And so I think the intensity of industry interest is greater, and we have to deal with all
those processes.
I mean, I would tell you in some areas one of the ways that we need to do that is deal less
with paper and more with prototype. Some of you are familiar with the fact that I am
strongly advocating that we do more competitive prototyping and then we make source
selection decisions based on hardware and more knowledge. I'm not advocating it in this
particular area, but these are going to be heavily scrutinized activities and we're going to
try to learn the lessons here and do the best possible job we can going forward.
Yes?

Q Is Boeing welcome to submit a different aircraft? It has said that it was not fully aware
that the Air Force wanted an aircraft that was perhaps larger than the 767 that it bid. If it
does, will you still be able to meet your December goal for source selection?

MR. YOUNG: I want to be clear. You know, the December time frame is a goal, and it's
-- we have a timeline that would have us take a number of steps to try to do that,
including independently looking at the RFP, independently looking at -- you know,

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another oversight team observing the source selection evaluation process. So I think we
have measured time to do it.
If significant things change -- for example, if there is a lot of dialogue about the RFP --
the schedule will gradually slip. I mean, it's a day-for-day schedule. That is the best case,
to make the source selection decision by the end of the year.
You know, I'm using the acquisition term of art, and that is, they get to submit modified
proposals. But legally, modified proposals mean they can totally change their proposal,
and that would include features of what they originally proposed or features -- or a totally
new product, if you will. So I believe they will have full license to totally change their
proposals in the modification process.

Q Because Secretary Gates threw it back to you, the question of whether there would be
any new evaluation criteria. Will the defense industrial base implications be taken into
account in any way, or the WTO dispute?

MR. YOUNG: I don't expect to do that. This was one of the issues, I think, discussed
with the Government Accountability Office.
And we put in provisions and required both bidders to state that they understood that no -
- the WTO, World Trade Organization process -- if they were fined, none of those fines
and none of those costs are allowable charges to the Department of Defense. As I
understand it, the GAO understood this to be a fair mechanism to deal with the subsidy
process.
Beyond that, government procurement regulations and laws don't give us mechanisms
nor do they seek for us to evaluate a range of factors that are outside of the primary
factor. And that is, take the military's requirement; ask for proposals that meet those
requirements and try to get a best-value solution using the taxpayers' dollars. That's what
we're going to do.

Q You said there was no contract. That's contrary to what Northrop Grumman had been
saying: It's under contract.

MR. YOUNG: As I understand it, both companies, in submitting their final proposals,
were required to submit contracts they have signed, which the government could sign. I
need to understand the last piece of detail there but I do not –

Q Is it possible that you –

MR. YOUNG: Yeah, we can get you that for the record.

Q (Off mike.)

MR. YOUNG: I don't think the government signed its contract. If we did, we still -- I
don't think executed that contract. So we're reviewing that right now. I'll have additional.
I'll give you some information. I'll make an additional comment tomorrow. There will be
a hearing with the Congress, as you understand.

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Q If I could just follow up on that, how important is the size of the refueling tanker? Is
that a big issue?

MR. YOUNG: How important is the –

Q -- size of the refueling tanker? Should it be larger?

MR. YOUNG: Well, there was an analysis of alternatives conducted for the program, as
with other DOD acquisition programs. And the analysis of alternatives, bin aircraft, the
aircraft that were bid to us were both characterized as medium-class tankers.
We have some 808 requirements. That's one thing that, I think, GAO suggested we did
not communicate as well to industry, is how we would prioritize or bin or group those
requirements and evaluate them. We need to do that better and we will in the new source
selection.
I think the size of the aircraft is less of an issue than it is how you meet our specific
requirements. One of those requirements is to carry fuel. It's a tanker. But there are many,
many other requirements, from survivability to maintainability to ground handling.

Q To clarify that point, are you -- is this new contract going to be looking at just the eight
shortfalls that the GAO pointed out? Or are you going to be once again looking at all of
the hundreds of requirements for, and when awarding a contract?

MR. YOUNG: Again we would seek to change the minimum amount of things. We
believe there is a valid requirements document. That's not been disputed. It's really not
part of the findings. And so we are not going to seek to change a broad range of things.
We want to change -- we want to address the GAO findings, ground ourselves in the
warfighters' requirements, and then to the extent we saw anything that addresses the
taxpayers' equities, those are the things that we would discuss. Industry will have a
chance to comment on any of the changes we make, because they'll be manifested in that
amended request for proposals.

Q A quick question, sir. The IOC for this notion that it's going to be 2013 when the Air
Force announced it on February 29th -- is that realistic? Can we assume you can still
make it under this timetable?

MR. YOUNG: I think I'd rather -- we'll see what industry bids for the new proposals.

Q And a follow-up question. Among the taxpayer equities are increased fuel costs. To
what extent will your 25-year life cycle model accommodate your projections for
increased fuel prices? And might that be a handicap to a larger aircraft?

MR. YOUNG: I think we -- the GAO included, as I understand it, a footnote saying we
should review that. And I think we constantly review life cycle costs. And so we will do
that as part of this process going forward, and we will consider reasonable estimates
about the price of fuel. I mean, all of these get to be complicating issues.

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And so one place where we're -- you know, continue to discuss and review is, we have
some confidence in what the bidders propose for the cost to develop and build the
aircraft. Many of our systems, from fighter aircraft to ships to weapons, are over their 15-
, 20-, 25-year life used in ways we didn't anticipate. We still have to consider life cycle
costs in developing a weapons system, because that is roughly a third of the Defense
budget. But we don't want to overweigh -- you know, we want to balance the known cost
to develop and build the tanker with the estimated life cycle cost, and we will do our very
best in that to estimate that life cycle cost and include the realistic price of fuel, although
it's very difficult to understand, you know, how fuel may vary from here going forward.

Q Final question. Do you think in the next week or two you'll have some notion of when
you're going to issue the -- (inaudible) -- revised RFP, and when they would have come
back with just kind of a rough schedule?

MR. YOUNG: Right. I mean, in the past I've spoken from this podium and been anxious
about that. We have a notional schedule. That schedule may change, because it is not a
schedule-driven program. It will be, to some degree, event-driven. But it -- we will --
every day is critical going forward in making both -- from Secretary Gates and Secretary
Donley's point of view, in making the decision and getting about the business of buying a
new tanker for the Air Force, and every day it's critical to try to make this decision in a
timely manner.
We hope to issue the draft request for proposals in late July or early August. We would
hope to make the source-selection decision by the end of the year.

Q Okay. Thank you.

STAFF: We'll take one or two more.

Q Mr. Young, since your future tanker is so important to force projection, and since it's
such a high-visibility program and such a high dollar value program, why not do a
competitive flyoff? Why have you decided against that competitive flyoff moving ahead?

MR. YOUNG: Hm. It's a good question. Let me try to answer it reasonably succinctly.
You know, one thing -- I need to be sure and comment about how we move forward. In
many places with weapons systems, there's significant technical risk and development
risk, and there's great benefit for prototyping. You know, in one particular case, we want
to develop a replacement for the humvee, the High Mobility Multipurpose Wheeled
Vehicle, called the Joint Lightweight Tactical Vehicle. We want that vehicle to be able to
survive the threats that are out there today. So to get a light vehicle (and afford a ?)
vehicle, it's probably going to use some exotic materials and designs. That's complicated,
and it's worth prototyping.
These are commercial aircraft being modified to -- with booms and probes and drobes to
refuel. There's not as much technical risk, I think, there. To see those prototypes, we
would have to spend a lot of research and development money to -- on both programs,
and that would not be the best use of taxpayer money. I believe it is -- this -- in this case,
it's possible to make a source-selection decision of a commercial-like aircraft and

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understand the risks and the steps that have to be taken to modify to make it be a tanker
and make that decision and be efficient with the taxpayers' money, not spending extra
money for development.
I think that continues into the secretary's decision -- he's reviewed this, he's asked me to
review it -- that we believe it is the best use of taxpayers' money to pick one aircraft for
the nation. The alternatives would have significant complications.
We're already getting the benefit in this program of a commercial marketplace that
delivers something like 400 aircraft in each company last year. We're going to buy 12 to
15 aircraft per year. We're getting huge benefit from getting commercial market pricing
and riding on that commercial industrial base.
While not -- it's not clear to me that competition at the prototyping or production level
will pay us great dividends, it will add significant costs for us in terms of training -- that
development money, the testing money, the training money, additional spares, and a
long-term life cycle of two aircraft. There's some benefit to the strategy that was laid out
that we would pick an aircraft in the KC-X process, and then in the next phase there was
a KC-Y and a KC-Z. The government will have a great opportunity to compete again at
those future stages. Those are the most efficient ways to spend taxpayer money.
I was going to answer -- the were able to tell me that the contract was signed, as a result
of the source-selection process, but there is a stop work order that remains in place, at
present.
And I'm reviewing how we will proceed from that basis.

Q Can you the address the split buy issue -- (off mike) -- that's one a lot of -- some --
(inaudible word) -- types have said why don't they just split the buy? Can you –

MR. YOUNG: Well, that's what I think I was trying to do. I mean, in a business that
delivers 400 -- I think both companies delivered on the order of 400 aircraft last year.
We're buying 12 to 15. We do not have the resources in the department to double the
amount of money we invest in the department. So not only would it -- we would have to
spend the development money and the testing money to develop and test two tankers that
split the buy. We would probably have to cut the buy to six, seven, eight aircraft a year
between two companies. That would drive the price up further even yet. Then I would
have to train people on two different aircraft. And frankly, if I spent the money to
develop both tankers, you'd have to ask yourself, well, would you really have another
competition at KC-Y?
There's a great benefit to us for competition. The companies turned in great proposals.
We got aggressive pricing. In fact, I would suggest to you, one down side is a split buy
would guarantee both companies aircraft. I'm not sure that that will yield the pricing
benefits we'd like to have going forward, not nearly as aggressively as selecting one
bidder and then saying, "We're going to have another competition at KC-Y. You don't
own this marketplace. We will have another competition for KC-Y and yet again get
aggressive pricing and try to get the best capability for a warfighter and the best bang for
the taxpayer's dollar."

Q Since you say the contract was signed -- can I -- if I swapped with someone else -- I'm
willing for Bryan to hook me here, too. (Laughter.)

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MR. YOUNG: I've given you a chance, and I want to be fair. Could I catch –

Q Yeah, I just wanted to see -- given the delay to the program because of the protest, is
there going to be any change in the cost of the contract?

MR. YOUNG: Well, again, we'll see what the industry teams propose. I think that would
probably be the only silver lining in this, is the possibility that both teams decide to
sharpen their pencils and offer the taxpayer and the warfighter an even better deal.

MR. YOUNG: Yes, sir.

Q Does your statement today constitute the Air Force's required response to GAO --
GAO's finding that the contract -- (off mike) -- does this constitute the Air Force's
required response in 60 days?

MR. YOUNG: Well, we do not -- we're actually not required to respond, I think, to -- we
have 60 days, I understand it, legally to say we disagree and ask the GAO to reconsider
their findings. As the secretary indicated to you, you know, we've reviewed the findings.
We think there are legal aspects to them that are correct. They did an amazing amount of
work and a very detailed amount of work. We're going to go and address those findings.
We have, I think, he indicated, you know, in analyzing that, we have prepared some
material, that we're going to talk to the Congress about, on how we understand those
findings. And that will go forward in the future.
(Cross talk.)

Q Am I right? You would be on the hook for some kind of penalties.

MR. YOUNG: Can I do that tomorrow?

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