The Milwaukee Journal Sentinel reported on Monday that the United Auto Workers local representing 2,750 employees at Oshkosh Corporation has voted unanimously to reject a one-year contract extension proposed by management. The company offered workers a generous package — stable healthcare premiums, pay increases above inflation, ratification bonuses — but the UAW local’s president described his members as “very angry” about workplace issues and job security.
Apparently workers have forgotten that Oshkosh was skirting insolvency two years ago after it made an ill-timed decision to buy crane-maker JLG at the top of the sub-prime boom and then saw its construction-vehicle business collapse along with the real-estate market. If the U.S. Army hadn’t awarded Oshkosh two big truck contracts in 2009, the company might have gone bankrupt. The second contract, for a program called the Family of Medium Tactical Vehicles (FMTV), resulted in 19-year incumbent BAE Systems Inc. being deprived of the last big production run for a rugged truck it built at Seely, Texas.
Oshkosk is a well-run company that builds world-class products. But with its back to the wall after the sub-prime meltdown, it bid very aggressively to win Army business. In the case of FMTV, it offered a unit price 30 percent below what the incumbent was charging on a build-to-print contract, even though it had never built the vehicles before and lacked intellectual property necessary to meet Army force-protection requirements. According to a local newspaper, the company’s bid only envisioned a one-percent profit margin, and even that depended on state and local aid required to build necessary production facilities.
I warned at the time that the Army was taking big risks in accepting such an aggressive proposal, because it wasn’t clear Oshkosh had the financial resources to cope with potential setbacks. But the service went ahead with the award even after the Government Accountability Office upheld a protest from BAE Systems. Oshkosh subsequently reported record profits for 2009 — profits derived mainly from its Army contracts. That shows how important Pentagon contracts can be to even the best commercial manufacturers, lifting a nearly insolvent enterprise into the upper stratosphere of profitability in only a few quarters.
But now the workers want their share of the windfall, which once again raises the question of just how dependable companies like Oshkosh can be if something goes wrong with the business assumptions supporting their aggressive contract proposals. It doesn’t take much to wipe out a one-percent profit margin, and the first big Army contract Oshkosh received — to build armored trucks for Afghanistan — will soon end. So what happens once that lucrative undertaking goes away, and Oshkosh has to make good on the very optimistic terms it accepted for FMTV? If the United Auto Workers goes out on strike for even a few weeks, the business plan could unravel.
That’s the risk the government faces when it awards big military contracts to thinly capitalized companies with limited financial resources. It runs the same danger every time it tries to open up contracting opportunities to non-traditional suppliers, because the most desperate companies typically bid most aggressively and government evaluators seldom look closely at the financial strength of offerors. A case in point is the Navy’s Littoral Combat Ship program, where one of the two finalists for a multi-billion-dollar award is a modest enterprise called Austal that might not be able to cope with the Navy’s costly demands once construction commences.
If the Pentagon is going to continue looking outside the ranks of traditional contractors for new suppliers, then it really needs to do a better job of assessing financial strength. When you’re used to dealing with companies like Lockheed Martin and Boeing, the concern that a supplier might be unable to cope with adversity seldom arises. But in the commercial world companies default and fail all the time — which could have lethal consequences for the joint force if they are the sole source of critical equipment.
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