In late August, with little fanfare, an obscure Army buying command awarded a five-year contract to Oshkosh Corp. to build up to 23,000 trucks under a program called the Family of Medium Tactical Vehicles (FMTV). It was a very big win for Oshkosh, which had never seen annual revenues exceed $3 billion before it bought a construction-equipment manufacturer in 2006. That acquisition went sour with the sub-prime mortgage meltdown, leaving Oshkosh with mountainous debt and weak demand for its commercial products. So the August truck award was a godsend, coming as it did on the heels of another Army award in June to build thousands of mine-resistant armored vehicles for Afghanistan. The company’s stock price shot up 24% even before the truck award was disclosed.
But there is something awfully odd about the truck award. Even though it was teetering on the edge of bankruptcy, Oshkosh beat out incumbent BAE Systems by bidding 30% lower than the price BAE is currently charging the government for very similar vehicles. BAE bid lower than its current asking price too, but it had the advantage of having already built 45,000 FMTV vehicles, established supplier relationships, and a strong balance sheet. Yet it only bid 21% below its current asking price, despite a fierce competitive environment. Since Oshkosh has already indicated that it plans to use the same suppliers used by BAE — who contribute much of the value of the finished vehicles — how is it possible for a relatively untested challenger to substantially underbid a company that has been building medium trucks for the Army for two decades?
The explanation for this improbable outcome lies in the decision of an anonymous source-selection authority at the Army Tank and Automotive Command’s Life Cycle Management Command to treat all three competing teams as equally capable, low-risk offerors, so that price became the sole discriminator in deciding who should win. To quote that official, “I find all three offeror’s ratings equal in both the Capability Factor and the Past Performance/Small Business Participation Factor, and … I must therefore rely on the Total Evaluated Price as the determining Factor in my decision.” However, it is abundantly obvious that the teams did not have equal capabilities or present equal risks. One was teetering on the edge of bankruptcy and had minimal relevant experience. Another was financially strong and had two decades of directly relevant experience. So leveling the capability ratings and basing the outcome solely on price rewarded Oshkosh for aggressive — meaning unrealistic — cost estimates, a practice that is at the root of many acquisition disasters.
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