Pentagon takes a harder line with Lockheed Martin over F-35

It's about time to end the long con game of under-estimating to get contracts and then demanding more money! ---BBB

Pentagon takes a harder line with Lockheed Martin over F-35
Oct. 26, 2011
By Bob Cox
[email protected]

After 10 years of paying for huge cost increases on the F-35 joint strike fighter, the Defense Department is taking a tougher line with Lockheed Martin, and company officials aren't happy about it.

Lockheed CEO Robert Stevens expressed consternation Wednesday over what he called the government's insistence on a "new and unprecedented contract condition."

Top defense officials are insisting that Lockheed and its partners share in the cost of fixing new problems that may arise in the development and testing of the jet.

The Pentagon is refusing to advance additional funds for work on the next batch of F-35s beyond the $500 million already spent unless Lockheed agrees to a "concurrency clause." Such a provision would provide for cost-sharing after the discovery of problems that require fixes to aircraft already built or in production.

Lockheed and Pentagon officials have been in discussions about the issue, but Pentagon spokeswoman Cheryl Irwin said that until a contract containing such a clause is signed, "the department is assuming no financial obligation" for aircraft work not already under contract.

Lockheed has spent or is obligated to pay for $750 million in costs incurred since February, Stevens said in a conference call with financial analysts. That total could swell to $1.2 billion by year's end as Lockheed buys parts and materials for 30 jets that the Pentagon is expected to order in the fifth lot of "low-rate, initial production" aircraft.

Stevens said the government expects Lockheed and other defense contractors "to stretch technological boundaries" to provide U.S. forces with superior weapons, but those expectations come with difficulties and costs that can't accurately be predicted.

"It's broadly recognized that neither industry nor government has the capability of evaluating how complex systems will perform," Stevens said.

Concurrency describes the common practice of building significant numbers of new aircraft or other weapons long before thorough testing is completed. As problems arise in testing, aircraft that are already built or in production have to be modified at considerable additional expense.

Already on the F-35, the need for some major structural design changes has been discovered, requiring the redesign and manufacturing of new parts. In some cases, installing those parts will require major disassembly of completed or nearly complete aircraft.

Many critics of the F-35 and other defense programs have long warned of the dangers and costs associated with concurrent design and production, but even as problems with the F-35 have cropped up, Lockheed has pressed the Pentagon not to reduce orders of production airplanes.

With the Pentagon facing long-term funding reductions of $450 billion and perhaps up to $1 trillion (from previously anticipated levels) over the next decade, the pressure is on to hold down costs of weapons acquisition and development. The F-35 program is a big target. By the most recent estimates, it will likely cost U.S. taxpayers at least $382 billion for development and production of the 2,400-plus planes the military plans to buy.

Lockheed and the government have not begun formal negotiations on a contract for the Lot 5 aircraft as the Pentagon works on its review of what it believes the jets should cost.

The Pentagon needs to provide funding "without delays" to continue the work already under way, Stevens said, "and that funding should not be conditioned on a concurrency clause."

Lockheed and its F-35 partners will have to study the government's demand for a concurrency clause and determine how much financial risk they are willing to carry, Stevens said, but they won't risk the financial well-being of the businesses or their stockholders.

Lockheed reported a 25 percent increase in third-quarter profits Wednesday, with a slightly larger gain on a per-share basis, but said defense and other government budget reductions will likely result in "flattish" sales and profit margins next year.

The company said it earned $700 million, or $2.10 a share, including results of businesses it has since sold. Those figures are up from $560 million and $1.54 a share in the same period last year. Third-quarter sales were $12.1 billion, compared with $11.3 billion in 2010.

Sales for the Fort Worth-based aeronautics segment increased 21 percent to $4 billion during the quarter. Operating profit for aeronautics increased 15 percent to $447 million.

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