Lowball Bid Casts Further Doubt On Army Truck Award

The story of how Oshkosh Corporation beat out incumbent BAE Systems to win an Army contract for 23,000 trucks and trailers just keeps getting worse and worse. First the Government Accountability Office found that the Army overrated the production capabilities that Oshkosh brought to the table, saying they were equal to those of BAE when in fact they were inferior. Now it turns out that Oshkosh bid a mere 1% profit margin on the $3.5 billion contract, leaving no room for error in what was already a very aggressive proposal. At 1%, the total profit booked on the work would have been less than the $51 million in state and local aid Oshkosh was counting on to cover some of its costs — even though the aid was not in hand when it made the bid.

The 1% figure was reported by Oshkosh’s hometown newspaper, The Northwestern, on January 17 in an article describing how company officials are pleading with local officials to come through on their commitments of financial aid. It isn’t hard to see why the company might be concerned: before it won two Army vehicle awards last year, analysts said it was facing a bleak outlook due to a collapse in demand for its commercial construction equipment. That’s probably why it bid so aggressively in the first place. The Government Accountability Office declined to rule in favor of protesters on whether the price Oshkosh bid should have been scrutinized more closely by the Army, because there is no requirement for tests of cost realism in bids on fixed-price contracts since the contractor is supposed to absorb any excess costs. But when a company is already in dire straits and as a result bids too aggressively, the question arises as to whether it would even be capable of absorbing sizable losses without faltering in its commitments.

That’s a serious issue the Army should have considered, because the armored trucks that Oshkosh would build under the Family of Medium Tactical Vehicles (FMTV) program are destined for duty in places like Afghanistan. Instead, what the Army did was incorrectly rate all the offerors as equal in capability and past performance, and then proceed to award the contract to Oshkosh because the price it bid was 30% below what BAE Systems is charging for the same trucks today (BAE offered a 21% price cut on the next lot). Under the terms of competition, price was 40% of the basis for selecting the winner, capability was 40%, and past performance was 20%. So let’s review the bidding and consider what it says about the Army’s approach to this acquisition:

Past performance. BAE Systems had built the FMTV trucks for 17 years and Oshkosh had never built them. The Army rated the two companies equal.

Production capabilities. BAE Systems had all the necessary plant and tooling, a workforce already building the trucks, and a validated design for the armored cab. Oshkosh lacked essential facilities, its workers had never built the trucks, and it had no cab design. The Army rated the two companies equal.

Cost. BAE bid 21% below the price it is currently charging for the trucks, based mainly on the expectation it could apply lessons learned in previous work on the latest version of the trucks. Oshkosh bid 30% below what BAE is currently charging, although it was unable to document its pricing on approximately a quarter of the production inputs. The Army rated the Oshkosh price as superior.

On the basis of these evaluations, the Army decided Oshkosh was the winner. In other words, Oshkosh won because it submitted the lowest price — even though it was markedly inferior to incumbent BAE by most measures, and even though the price it proposed was grounded in a series of very optimistic assumptions (for example, Oshkosh will have to go to many of the same suppliers as BAE for material inputs representing 70-80% of the total production cost). Does this sound like a professional approach to contracting? Is it consistent with the standards established in recent acquisition-reform legislation? If the answers to those questions are “no,” then maybe the Army should take a closer look rather than trying to do a quick fix and re-award the contract to Oshkosh.