Chances Northrup Grumman’s Long Range Bomber Contract is Overturned

The biggest new defense project contract, the next generation long-range bomber, was awarded to Northrup Grumman (NOC). NOC beat out the combined bid by Boeing (BA) and Lockheed Martin (LMT). Upon losing the bid, Boeing and Lockheed Martin have formally challenged Northrup’s winning bid.

Why are they fighting the bid? Because according to The Economist, the new bomber contract has the ability to reshape the entire combat aircraft market.

Northrup Grumman like most defense companies pays a good and growing dividend and the new bomber contract will spur further growth. Losing the contract will hurt and if The Economist article is correct then Northrup may even have to get out of the combat aircraft business altogether.

The question then becomes what are the chances that Northrup Grumman’s winning bid is overturned?

With any forecast, we need to know the base rate. On average, how often are winning bids for defense contracts overturned?

To start, I found this 2010 article from the Georgia Tech Procurement Assistance Center.

Whether the protests are successful depends on how you look at the results. The percentage of cases in which the GAO overturned a decision fell to 18 percent in 2009, down from a recent high of 29 percent in 2006. But the government often doesn’t want to leave a contract’s fate in the hands of the GAO, so it takes steps to address the concerns of the protesting company. In fact, the number of cases in which the protester received some relief swelled to 45 percent in 2009, and 140 cases were resolved through alternative dispute resolution.

It’s been a few years since this report came out, but a range of 18-29% is a good start for estimating the chances that Northrup’s winning long-range bomber bid gets completely overturned. It’s a higher probability that Boeing and Lockheed Martin will get some financial relief and recompensation from their protest. In both outcomes Northrup has the better odds at retaining its contract.