The Unconsidered Option: How performance bonds could change the way we buy weapons (excerpt)
(Source: Project On Government Oversight; issued Aug 22, 2016)

By Dan Grazier
The United Arab Emirates demanded that Lockheed Martin post a $2 billion performance bond to develop the F-16E fighters they ordered, ensuring the aircraft performed as specified. (LM photo)
“Military Reform” in Washington usually means “Acquisition Reform.” There is a lot of talk about it on Capitol Hill and in the Pentagon. Enough think-tank papers have been written on the subject to clear whole forests. But of the myriad options out there, one has escaped notice.

Performance bonds—money put up by a contractor as insurance to the buyer to make sure the job is done on time and to specifications—are already required for federal building projects under the Miller Act.

Prime construction contractors have to furnish a surety to the government to ensure their work is completed properly and to guarantee all subcontractors get paid should the firm go out of business. And they’ve been used with some success in overseas defense procurement contracts.

Using performance bonds is one way the government protects its interests without having to resort to judicial proceedings. In fact, the Congressional Research Service recently noted that performance bond money can be used to “offset the costs of contract completion, which can include delays and finding a new contractor.”

The same idea could potentially be applied to a weapons acquisition project to protect the government’s (and the taxpayer’s) interests. But it has so far been overlooked during the sometimes desperate search for solutions to the Pentagon’s dysfunctional buying process. One key selling point for this idea is that provisions for using performance bonds for DoD acquisition already exist.

As is usually the case, improving discipline in weapons spending doesn’t require new rules but using the rules that already exist to better effect.

The UAE and Performance Bonds

The collapse of the Soviet Union and the end of the Cold War put defense contractors across the world in a tight spot. The two greatest superpowers were no longer casting nervous glances at each other across the Fulda Gap. For a time in the 1990s, there seemed to be little interest among most nations to arm themselves to the teeth. Weapons manufacturers found themselves with plenty of products to sell, but with very few people interested in buying.

Those nations that were still in the market for high-end military equipment were in an excellent position to extract the best terms possible. Officials from the United Arab Emirates understood this and encouraged a rigorous competition between the world’s defense contractors when they said they wanted to purchase new fighter planes. In doing so, they were able to acquire the planes they wanted—world-class fighters with cutting edge offensive and defensive electronic systems—at the price quoted to them and on the challenging delivery time line specified when the contract was signed.

Contractors were also able to assure them that the plane's stressing performance requirements would be met and that the Emirates wouldn't have to pay for any promised capabilities that went undelivered.

When the UAE began shopping in earnest in the early 1990s, several international firms offered designs including the Eurofighter Typhoon, the French Rafale, and the Boeing F-15E. But the Emirates liked one design in particular, Lockheed Martin’s F-16. They first sought to purchase them in 1981.

In the end, the intense international competition forced each of the competitors, including Lockheed Martin, to offer new, more advanced versions of what they already had in production for domestic or export use, tailored to a demanding set of requirements.

U.S. officials were eager to ensure an American firm received the $6.4 billion contract. Lockheed Martin had plans at the time to lay off 1,000 employees from its fighter plane assembly plant in Fort Worth, Texas, incentivizing the Texas Congressional delegation to make sure nothing interfered with the deal. Then-Senator Kay Bailey Hutchison (R-TX) and current Fort Worth Representative Kay Granger (R-TX) promoted the deal. Vice President Al Gore was part of a White House team that actively encouraged the UAE to select the F-16. According to The Wall Street Journal:

“Two decades after President Carter ordered U.S. embassies not to assist defense contractors, the U.S. ambassador in Abu Dhabi was telling his staff that closing the F-16 deal was ‘priorities one, two and three.’ In the last three years, Defense Secretary William Cohen made five trips to the Emirates. President Clinton intervened at least twice, phoning UAE president Sheik Zayed bin Sultan al Nahyan.”

The UAE, like defense contractors and military services here, certainly understands how influential political engineering is in the United States. Everyone can now visit the UAE embassy website to see an interactive map showing the number of jobs the UAE claims their investments create, as well as the dollar figure of exports from each state. It even provides downloadable reports for each state giving detailed information for the economic impact the UAE has had on that state. It should hardly surprise anyone to see such information helpfully broken down by Congressional district. (end of excerpt)


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(EDITOR’S NOTE: One can only imagine how troubled acquisition programs, such as the F-35 fighter or the Littoral Combat Ship, would have performed had their contractors had to post performance bonds.
Instead, the Pentagon routinely breaks its own acquisition regulations, for example by awarding low-rate initial production contracts for the F-35 fighter before the Milestone C decision, or by making advance cash payments to Lockheed Martin for the same notoriously underperforming program.
It is worth noting that performance bonds are used routinely for international defense arms contracts that are not covered by government-to-government guarantees.)


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