Oshkosh Protest Of Joint Light Tactical Vehicle Award Focuses On Price Realism And Risk

On February 9, the Army surprised many observers by awarding a sizable contract to AM General for production of the Joint Light Tactical Vehicle (JLTV), an armored truck designed to serve as successor to the Humvee.

Incumbent manufacturer Oshkosh Corporation, which has built 20,000 JLTVs, was widely expected to win based on a track record of reliable performance and affordable pricing.

After receiving a debrief from the Army explaining why its proposal did not prevail, Oshkosh filed an 87-page protest of the award with the Government Accountability Office alleging errors in the way the competing proposals were evaluated.

The protest, which is not currently available to the public, contends that AM General bid an unrealistic price, and that the company probably is not capable of executing the contract on the terms offered.

Oshkosh argues that by accepting the AM General proposal, the Army injected substantial risk into what had been a model acquisition program.

Given its track record for reliability and price discipline, Oshkosh (a contributor to my think tank) may have a point. Even though it leaned out its production processes in anticipation of the pending recompete, it figured that it would lose a substantial amount of money if it bid the price that AM General did.

That is an unusual finding, given that Oshkosh has (1) a warm production line, (2) an established supply chain, (3) an experienced workforce, (4) relevant intellectual property, and (5) a moderate 7% operating margin.

Oshkosh should have been the low bidder. It alleges the main reason it wasn’t is that the Army accepted an unrealistic bid from a rival that does not have a warm production line or a supply chain or a workforce in place, and will have to build a new plant capable of turning out JLTVs within 17 months.

It should be noted that the vehicles in question will not be significantly different from those that Oshkosh has been turning out for the better part of a decade. The Army wants extensive commonality between existing JLTVs and those to be produced in the future for both operational and logistical reasons.

Oshkosh further notes that its credit rating is significantly superior to that of AM General’s private-equity owner—investment grade versus below investment grade.

These ratings have significant implications for the JLTV program because Oshkosh believes the price that AM General bid will lead inexorably to the loss of hundreds of millions of dollars. It is not clear whether AM General’s parent could or would cover such losses.

In other words, there are multiple dimensions of risk associated with the AM General proposal. In addition to the uncertainties involved in standing up a new factory, fashioning a supply chain, and finding skilled workers, there is the overall financial stability of the enterprise.

Oshkosh isn’t asking the Government Accountability Office to second-guess the Army’s source selection authority as to the merits of the vehicle, but rather to determine whether the assessment of price realism and risk were adequate.

The Army has stated since the beginning of the recompete that pricing—affordability—would be an important criterion in reviewing proposals. However, if the price is too aggressive, it raises doubts about whether the contract can be successfully executed.

The phrase used in the defense industry when companies deliberately underprice a proposal to win an award is “buying in.” That approach to bidding is often accompanied by a belief that the company can get the terms of the contract adjusted after it is won, and thus avoid losses.

It is possible that AM General sincerely believes the assumptions underpinning its proposal are reasonable. Oshkosh wants the Government Accountability Office to assess whether they are.

The Army insists that its comparison of proposals was conducted in “a fair and competitive environment” aimed at securing “the highest quality, most capable, and affordable tactical vehicle in the world” from “a premier manufacturer.”

Since Oshkosh is well established as a premier manufacturer that produces high quality and capable vehicles, the implication is that affordability, meaning pricing, was the main differentiator in Army comparisons. After all, we’re talking about nearly identical vehicles here.

As seasoned analyst Byron Callan of Capital Alpha Partners observed after Oshkosh filed its protest, “the award to AM General was most likely made on price.” Callan went on to note, “there is risk is any production ramp-up and rate these days due to labor and material cost assumptions. The Army may well have been willing to take those risks for a lower-priced vehicle.”

Indeed, the source-selection authority may have been placed in a procedural straitjacket concerning price by the language in the original solicitation.

GAO will look first and foremost to that language in determining whether the competition was fair. If the terms set forth in the request for proposals were scrupulously adhered to, then the scope is limited for a successful protest.

Oshkosh knows this. The fact it went forward with its protest implies the company believes the Army overlooked material deficiencies in the AM General proposal—deficiencies sufficient for GAO to recommend the program evaluation be conducted more rigorously.

As noted above, Oshkosh Corporation contributes to my think tank. AM General is a past contributor.