Boeing Company is the largest aerospace company across the globe and the leading manufacturer of commercial defense and jetliners, space and security systems. In addition to being a top exporter in America, the Boeing Company supports airlines and the United States and allied customers in 150 nations worldwide. The company's position in the aerospace industry originates from its long tradition of aerospace innovation and leadership. Boeing continues to expand its product line and services in order to meet the emerging needs of its customers. Boeing's broad range of capabilities include developing new and more efficient members of its commercial airline family, developing advanced technology solutions, integrating military platforms, and organizing innovative customer-financing options.
History of Boeing Company:
Boeing Company has a history that stretches back to 1916 when the United States timber merchant, William E. Boeing, founded the aero products firm after he and the American Navy officer, Conrad Westervelt had successful developed a single-engine two-seat seaplane. The Aero Products Company was later renamed Boeing Airplane Company in 1917 and developed flying boats for the U.S. Navy during the First World War. In the period between 1920 and 1930, Boeing Company successfully sold its pursuit planes, patrol bombers, trainers, torpedo planes, and observation craft to the United States military. This was also coupled by its expansion into airmail services, which resulted in their launch of the first international postal line between Seattle and Victoria in British Columbia in 1919.
Throughout its history, the firm has continued to develop new aircrafts from time to an extent that it has been the premier manufacturer of commercial jetliners for over four decades ("About Us," 2012). Currently, the company is organized into two major business units i.e. Boeing Commercial Airplanes and Boeing Defense, Space & Security. The two business units are supported by Boeing Capital Corporation, the Shared Services Group, and Boeing Engineering, Operations & Technology. These supports segments help in providing financing solutions, provision of a wide range of services to Boeing worldwide, and developing, acquiring, applying and protecting innovative processes and technologies respectively.
Recent Major Contract Awarded to Boeing Company:
After making false starts at the beginning of the decade, Boeing Company won the $35 billion federal contract to develop a fleet of Air Force aerial refueling tankers. Boeing heralded the contract as an economic boom of 50,000 jobs for the state of Washington and other parts of the country. The deal was announced by Deputy Defense Secretary, William Lynn and the Pentagon's acquisition chief and the top executives of the Air Force. These officials stated that the firm's third attempt to buy tankers was based on several criteria with the major one being costs (Dimascio, 2011).
Following a bitter back-and-forth advertising, lobbying, and scandal, the decision to award the contract to Boeing Company the contract was 10 years in the making. As the Pentagon considered the cost of the planes over 40 years instead of 25 years, the life cycle cost was crucial and decisive in awarding the contract. Boeing won the contract because its NewGen Tanker will burn 24% less fuel as compared to the EADS A330 plane.
Boeing Company had made two previous attempts that foundered, with one resulting in the termination of careers of various Air Force officials and landed one of the firm's executive in jail. Furthermore, one of the previous contracts was awarded to the European Aeronautic Defense and Space Co while the 2008 award to Northrop Grumman was overturned following protests by Boeing Company.
Boeing's victory of the Tanker Contract over the consortium led by European Aeronautic Defense and Space Co. (EADS) shocked many experts in the industry who believed that EADS had an edge over Boeing Company. The consortium had used a powerful Alabama delegation that included the republican Senate who fought so hard for it. Actually, Dick Shelby put on hold every Obama nomination in the federal government in February 2011 in attempts to make the White House promise EADS what he regarded as a fair consideration. During that Spring, President Obama promised to offer such fairness in reaction to requests by European leaders.
Type of Contract:
Federal procurement contracts are usually divided into two major types i.e. fixed-price and cost reimbursement contracts that basically differ based on whether the contractor or the government assumes risks associated with increases in performance costs. Some of the most common risks that contribute to increases in the costs of performance are associated with wages and materials. In a fixed-price contract, the contractor basically agrees to provide certain goods and services to the government at a pre-determined price. With the absence of a pride adjustment clause in the contract, the contractor basically assumes the risk that costs of performance will be more than the contract price.
On the contrary, a cost-reimbursement contract is a deal in which the government agrees to cater for certain costs that the contractor will incur in offering the goods or services. Even though payment may only be made for costs allowed under the contract up to the overall cost specified in the contract, the government assumes the risk that costs of performance will increase during the contract term. In awarding contracts, the Federal Acquisition Regulation directs the contracting officers to use contract types that contribute to reasonable contractor risks (Manuel, 2010).
The Boeing $35 billion Tanker Contract can be regarded as a cost-reimbursement contract in which the United States government agreed to pay for certain costs that the company will incur while developing the tanker. In this case, the U.S. government assumes the risk that performance costs would increase during the term of the contract. In deliberations regarding awarding the contract, the federal government considered the life cycle cost as a decisive factor in its decision since fuel prices were projected and expected to increase.
The cost-reimbursement contract was chosen over other types of contracts primarily because of the nature of the contract. Since the project's life cycle cost was the major decisive factor in awarding the contract, the cost reimbursement contract was suitable because of the projected increase of fuel prices. The federal government and the contractor needed a deal that result in reasonable contractor risk in the replacement of Air Force's fleet of aging mid-air refueling tankers. In this case, the Boeing Company would assume or absorb extra costs that exceed the $4.9 billion ceiling (Capaccio, 2011).
Direct and Indirect Costs Incurred by the Contractor:
Similar to every other contract, the Boeing Tanker Contract consisted of certain direct and indirect costs that the contractor would incur. Boeing Company will incur at least three direct costs and three indirect costs in providing the next-generation aerial refueling tanker aircraft that will replace the older Boeing KC-135 Stratotankers. One of the major direct costs to be incurred by the firm involves the cost of producing 179 new tankers. The development of these new tankers is based on the company's 767 commercial aircrafts that will give new life to a program that has dwindled in the past few years. The huge cost of producing the tanker also emanate from the Air Force's requirements of greater fuel offload and range, airlift capability, multi-point refueling capability, and ability to take fuel while on flight.
The second direct costs to be incurred by the contractor are costs that are associated with procurement of items and services from its suppliers. During the development of the new tanker, Boeing Company will use 80 suppliers from 40 states in order to build an airplane that will serve the country for decades to come. As a result, the company will cater for the supplier costs in the procurement services, which is one of the major direct costs of Boeing Company. The supplier costs can also be regarded as the direct cost the firm incurs in…