This risk story involves a major subcontract that went awry impacting the program and one of my company’s growth goals.  The goal was to become the sole provider to the Navy for a mine killing system comprising two major components. One is an underwater kill vehicle and the second one is a launcher (from a helicopter).

To accomplish this goal, we landed a contract with the Navy to design, build and perform tests of a small quantity of units (called first article units). If the tests were successful, then the Navy would establish my company as the sole supplier of this mine killing system. The foreign subcontractor selected had a kill vehicle under development.

As part of the Navy contract and as a subcontractor to us, they would complete development of the kill vehicle, manufacture the first article units and perform tests.  We would design the launcher and the subcontractor would manufacture the it to our design. My company, as the lead, would conduct system tests for the Navy with the subcontractor in support.  This was my company’s plan to become the sole supplier of the mine killing system to the Navy.  Nice plan but bad decisions were made by management leading to a missed opportunity for the company as discussed below.

Background

Management established a win strategy to become the sole provider to the Navy for a new mine killing system.  They decided to give a major subcontract to a foreign company that was in the process of developing a small light weight underwater mine killing vehicle.  This foreign company could not sell directly to the Navy and needed my company to do so.  Their strategy was to work with my company to sell their kill vehicle to the Navy. So, it was a win-win situation for both companies.

The subcontractor scope comprised: complete development of the kill vehicle; build 2 first article units and perform testing on them; manufacture the launcher to our design and support system qualification tests for the Navy. Our scope included: design the launcher; write the system test procedures; conduct the system acceptance tests for the Navy; and provide the program management effort for the program.

During negotiations of the contract, the subcontractor insisted on using their own funds to perform the development of the kill vehicle because they planned to apply it to other markets beyond the DOD (department of defense).  My company accepted this arrangement which proved to be poor judgment on their part as it  became painfully apparent as the project progressed.  Per the contract, the subcontractor controlled the design requirements and schedule for the kill vehicle which would turn out to adversely impact our contract schedule with the Navy.

Early in the program, and in accordance with the terms and conditions of the contract, the subcontractor put in a claim against my company which delayed the program until it was resolved. The basis of the claim was withheld progress payments that my company felt were justified because of the inability of the subcontractor to maintain their schedule.  After several months of delay, the claim was settled and progress on the project started moving forward.

First Bad Decision

During the long and intense negotiations for the claim resolution, both sides agreed to put the subcontractor schedule on the back burner and come back to it later. As a result, the schedule was not defined as part of the claim resolution.  The program re-started and the subcontractor established a new schedule they could commit to. The problem was, they continued to miss their own schedule each month creating a serious schedule issue with our contract with the Navy. Very quickly management recognized the problem and insisted the subcontract recover their schedule and make it part of the subcontract.  The subcontractor insisted 2 additional months be added to their schedule before they would accept a contract change.  Finally, my company agreed and 2 months were added to their contract.  We ended up updating our contract with the Navy to include the schedule growth after a very painful negotiation. Since our contract with the Navy was firm fixed price, my company incurred significant cost growth (loss).

Second Bad Decision

Basing the success on our contract with the Navy on a subcontractor controlled design for the killer vehicle (the most important component of the system) was a big mistake.  Unknown to us initially, the subcontractor was redesigning part of their vehicle to include new requirements for their other customers resulting in delays to our schedule which in turn were reflected in our schedule with the Navy.  Once this situation became apparent to us, upper management came down on the subcontractor like a ton of bricks but to no avail since they were protected by the subcontract.  Our only recourse was to micro-manage their schedule which we did to moderate success.  Eventually, the development of the vehicle was completed and past al of their tests.

Third Bad Decision

During the course of the contract, my company reached out to the subcontractor for a teaming agreement. This was before the critical Navy qualification tests were performed.  At this point, the subcontractor upper management told our upper management they wanted a teaming agreement and were excited about the prospects of finally selling their product to the US Navy. However, the president of the business unit in our company did not want to risk a teaming agreement because he felt they may fail the Navy qualification tests. He decided to wait until the tests were completed.  Several members on his staff tried to get him to change his decision but failed.  The subcontractor passed the Navy qualification tests. The Navy established their kill vehicle as sole source for the Navy’s air and sea platforms. The subcontractor designed and manufactured their own launcher.  My company was completely left out. In hindsight, it should have been apparent to the president of our business unit that we had zero leverage with zero subcontractor once they passed the qualification tests.

Lesson Learned

1. Do not award a subcontract where the subcontractor has control over the requirements, design and schedule of any component. Maintain control over the entire subcontract.
2. In any negotiation, do not leave the contract schedule to be decided and agreed upon after contract award. If it is not in the contract upon reward, then you do not have a schedule.
3. Establish a teaming agreement with another company before critical deciding events. Failure to do so, runs the risk of succeeding.

Risk Analysis

It seems obvious that a risk analysis was not done in this case.  What would have been the risks?

1. Settling a disputed painful claim with out the schedule definition is a program risk that is high with a high impact if realized.
2. Awarding a subcontract where contractual control of the key component is the responsibility of the subcontractor is another program risk with high schedule and cost probability of occurrence and adverse impact.
3. Awarding a subcontract to a foreign company can be risky to the program because: the geographical distance separation may cause travel costs to grow out of control to monitor the subcontractor especially if they have problems; and more difficult and costly to provide onsite support as required to ensure progress is being made to the schedule. This is a program risk.
4. Teaming agreements can be risky to the program and enterprise if not structured properly and executed in a timely fashion.