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Pentagon Won't Let Boeing or Lockheed Martin Push It Around

By Rich Smith – Feb 27, 2016 at 10:13AM

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It's not always sunshine and roses when it comes to government defense contracts

It's a new day at the Pentagon -- and taxpayers have found a new hope.

The Pentagon. Image source: Master Sgt. Ken Hammond, U.S. Air Force.

In rapid-fire succession, the federal government rejected two appeals by major defense contractors protesting big-ticket defense contracts awarded to their rivals. The decisions supported Pentagon policy expressly disapproving of "frivolous" challenges to contract awards by the losers.

On Tuesday, Feb. 16, the U.S. Government Accountability Office rejected a protest filed by Boeing (NYSE: BA) over the Air Force awarding a $90 billion-plus Long Range Strike Bomber contract to Northrop Grumman (NYSE: NOC). Boeing argued the Pentagon should instead have chosen an aircraft jointly designed by itself and partner Lockheed Martin (NYSE: LMT). The GAO rejected that argument, finding that the Pentagon made a "reasonable" choice, "consistent with the terms of the solicitation, and in accordance with procurement laws and regulations."

This decision came just five days after the U.S. Court of Federal Claims denied an appeal by Lockheed Martin on a separate matter -- a $30 billion contract to build Joint Light Tactical Vehicles. There, the Army had gone with Oshkosh (OSK -1.33%) for its contractor. Lockheed had previously protested this award before the GAO, lost its appeal, and gone to court for a second bite at the apple -- now rejected.

So the score stands at Northrop -- 1 : Oshkosh -- 1 : Boeing and Lockheed Martin -- 0.

The real winners
Now, $90 billion for Northrop Grumman, and $30 billion for Oshkosh -- these are not small numbers. In winning, both companies (and their shareholders) have reason to rejoice. But so, too, do the Pentagon, the troops -- and the taxpayers.

Let's start with the Pentagon. Six years ago, faced with a similar spate of defense contractors behaving badly by protesting contract losses, then-Pentagon acquisitions chief Ashton Carter expressed frustration "about protests becoming common or routine." Said Carter: "We expect [contract protests] to be rare. We expect it not to be used frivolously."

Fast forward six years, and Ashton Carter is no longer just the Pentagon's acquisitions chief, but the actual Secretary of Defense. Yet despite the Pentagon's head honcho having a well-known dislike of award protests, the big defense contractors continue to fight their battles in court -- and deprive U.S. troops of the equipment they need to fight on the front.

Take the JLTV contract, for example. The Pentagon has been trying to acquire a new armored car for the Army -- one mobile as a Humvee, yet capable of taking hits from IEDs like an MRAP -- for nearly a decade. It finally got the contract bid, and awarded to the company that offered the best design at the best price. Yet Oshkosh had to delay production, and troops in the field have been forced to wait an unnecessary six extra months, while Lockheed Martin dragged out the process in the courts.

Adding insult to financial injury, Lockheed Martin's arguments against Oshkosh winning the contract were so weak that they got rejected -- twice.

Sore losers won't give up
Judging from GAO's rejection of Boeing's (and by association, Lockheed's) appeal of the LRS-B award, that protest appears just as groundless. Yet there's every chance Boeing will delay production of the Air Force's new bomber as well. Says Boeing: "We continue to believe that our offering represents the best solution", and "we will carefully review the GAO's decision and decide upon our next steps."

You don't have to be fluent in military-industrial-complex-ese to translate that: Boeing is considering a lawsuit over the GAO's decision, to try to swipe the LRS-B contract away from Northrop.

The upshot for the Pentagon
Until there's some clear downside to filing frivolous protests of contract awards, there's no reason to expect Boeing and its peers to act differently. To the contrary, when it comes to profits on the line, you could argue companies even have a fiduciary duty to toss legal monkey wrenches at their rivals, no matter how great the cost to taxpayers and to soldiers.

So long as that remains true, Carter can shout "Frivolity!" all he wants. It will have no effect. Maybe what he really needs to do is talk softer, and wave a bigger stick. Carter might, for example, make it official Pentagon policy that if a company protests one award, that will be weighed against it when considering bids on future contract awards. Such a policy, clearly stated, could force companies to think twice before filing frivolous protests.

That would be a win for the Pentagon, and for the taxpayers who fund it -- a win-win all around.

And if it puts a few trial lawyers out of work in the process?


Fool contributor Rich Smith owns shares of Oshkosh. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 260 out of more than 75,000 rated members.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Boeing Company Stock Quote
The Boeing Company
$132.20 (0.07%) $0.09
Lockheed Martin Stock Quote
Lockheed Martin
$399.61 (-0.72%) $-2.90
Northrop Grumman Stock Quote
Northrop Grumman
$485.23 (0.16%) $0.78
Oshkosh Corporation Stock Quote
Oshkosh Corporation
$76.38 (-1.33%) $-1.03

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