RPT-U.S. chief critical of fees in Army contract

* Competition key to next ground vehicle program

* Fee structure of Army modernization contract faulted

* Boeing confident concerns can be resolved (Adds quotes from Young, Boeing reaction)

By Andrea Shalal-Esa

WASHINGTON, April 27 (Reuters) - The Pentagon's outgoing arms buyer John Young on Monday said the fee structure of the U.S. Army's modernization program was flawed and competition should play a bigger role in a future ground vehicle program.

Defense Secretary Robert Gates recommended cancelling the current $87 billion ground vehicle part of the Future Combat Systems modernization effort, but later told reporters he would seek substantial funding to develop a revamped vehicle plan.

Young said the contractors leading the FCS program, Boeing Co (BA.N) and Science Applications International Corp [SAICI.UL], could have a role in systems engineering for any future vehicle program because it would still be critical to network other Army weapons together with the ground vehicles.

The current contract allocated ground vehicles to two producers without competition, but any future program should include more competition to get the best vehicle designs, Young told reporters shortly before his successor, Ashton Carter, was sworn into office.

Gates scrapped the ground vehicle part of the huge Army modernization program, saying its designs were conceived nine years ago before the close-quarters combat, urban warfare and increasingly lethal ambushes seen in Iraq.

He said the new vehicle program should draw on the lessons learned from wars in Iraq and Afghanistan, including the rapid development and fielding of Mine Resistant Ambush Protected vehicles with V-shaped hulls to guard against roadside bombs.

Young said one of his few regrets upon leaving office was he did not do more to address a flawed fee structure in the overall FCS program or work harder to segregate programs out of the overall lead systems integrator contract.

"I don't know that more could have been done, but I can't let myself off the hook for not having tried to do it," Young told reporters.

He said the structure of the FCS contract with Boeing and SAIC guaranteed the lead system integrator a "very high" fixed fee of 7.5 percent, as well as fees earned on specific programs as they approached a critical design review.

Because those fees added up early, the LSI had earned about 90 percent had been earned by the time a program got to a critical design review, giving the Pentagon leverage of only 10 percent to ensure that a program successfully navigated the difficult work to be done after such a review, Young said.

Setting up the fee that way was "a flawed contract strategy," Young said. He said he wished he had tackled the issue while still in office, but conceded it was very difficult to change contracts once signed.

Boeing spokesman Dan Beck said his company was meeting all milestones established for the FCS program and remained focused on continuing to execute to the Army's plan.

"We look forward to building on the substantial investments and progress made to date on the program," Beck said. "Our commitment is to provide best value to our soldiers and the taxpayers and we are confident we can resolve any concerns raised."

Young said he told the FCS program manager and contractors at a meeting last year that he would only approve detailed plans for individual programs, not the overall program. But he stopped short of breaking up the huge overall contracts into more traditional smaller pieces.

If he had, Young said that might have gotten a jump start on the "migration" outside the FCS contract that Gates outlined when he unveiled his fiscal 2010 budget recommendations. (Reporting by Andrea Shalal-Esa; and Andre Grenon)