Senate Tries to Negotiate Next JSF Contract with Lockheed Martin

by: Matthew Potter
June 20, 2011

Category: Business Line, Companies, Congress, Contract Additions, Contract Awards, Department of Defense, development program, Events, Federal Budget Process, Lockheed Martin, Military Aviation, production program, Restructuring, Services, U.S. Air Force, U.S. Marine Corps, U.S. Navy | RSS 2.0

When a company signs any contract they spend a great deal of time negotiating it with the other party. This is true not only of defense contractors and the government but in any contract. The decision on terms and conditions as well as price may take several months. Now Lockheed Martin (LMT) may be forced to sign a contract for the Joint Strike Fighter (JSF) where the terms and conditions will be dictated by the U.S. Senate.

In the recent Defense Authorization bill passed out of the Senate Armed Services Committee (SASC) for the consideration of the full Senate specific conditions were levied on the JSF program’s next contract. This is fairly unprecedented but indicates how high the level of concern there is with the performance of the program for this new combat aircraft program led by Lockheed.

The Joint Strike Fighter is the largest defense acquisition program in the history of the world. It will buy thousands of modern, stealthy aircraft to replace the aging Eighties fleet of F-16, F/A-18 and A/V-8 aircraft used by the Air Force, Navy and Marine Corps. Many allied nations will also purchase it to replace their F-16 aircraft. The F-35 Lightning II JSF will be made in three variants and ultimately cost the U.S. billions to produce and sustain over the next forty years.

The program has a history of sustained cost and schedule increases as development and testing has turned out to be longer and more complicated then originally thought. Over the last three years the program has been re-baselined and redesigned to account for some of problems but still faces many challenges to achieve its scheduled timeline. Many in Congress, the media and the aviation community have become increasingly concerned about this cost growth and how it will ultimately affect the production and delivery of the aircraft.

Due to these concerns the SASC added two very specific provisions to the 2012 defense authorization bill relative to the JSF. The authorization bill combined with the appropriations bill from the Senate Appropriations Committee tell the Pentagon how much money they have to spend and how it should be spent. Once the bills are approved by the Senate they go to a conference committee with the House to produce the final bills.

These provisions require the next annual production contract for the F-35 to be a fixed priced one with Lockheed absorbing any cost increases over the contracted amount. (;%20budget;%20policy&s=TOP) This is rather unique contracting decision because at this stage in the life of a defense program there remains enough uncertainty that fixed prices are hard to define and agree on. That type of contract is more commonly used when the production line is fairly stable and little or no development effort remains. Lockheed is currently under a fixed price contract but it will received fees for good performance. The contract also has a provision that the maximum the government will pay is 120 percent of the target price.

The second requirement that Lockheed will have to absorb cost overruns is something that will be hard for the company to accept at this time. When a program is in the testing and development stage the Government and the contractor make an effort to share the risk. This means that cost increases due to delays or technical issues are spread between the two parties. In the current contract any cost over the 20% increase would be covered by Lockheed with the Government accepting the cost growth risk to that point. The Senate is proposing that the contractor accept all of the risk meaning Lockheed would begin losing profit immediately.

The JSF is entering into dangerous territory. There is beginning to be extreme concerns about the cost of the program especially when the U.S. budget is facing such pressure due to the needs to reduce the annual deficits. The 2012 budget will include almost $7 billion to buy 28 aircraft for the U.S. military. Some in Congress are now discussing alternatives to the program which would require a different aircraft or approach. Ending or scaling back the program would be huge blow to the U.S. military who are counting on the JSF to provide a major technical upgrade as well as replace many aging systems. The U.S. ended production of the F-22 their last most recent tactical aircraft program in 2009. If there is no JSF they would have to consider re-starting that production, upgrading existing aircraft or looking overseas for a new fighter.

At the same time it is unprecedented for Congress to wade into the minutiae of details in contract negotiation like this. Lockheed and the Defense Department must decide on the best contract vehicle to achieve the goals of the program. The program has issues but dictating to Lockheed a situation where there ability to make money which is their goal will make it difficult to award the contract. These provisions will make it more difficult to negotiate the next production contract potentially stretching out the program even more as well as setting a precedent that will make other companies think twice about beginning programs. There is a chance that competition will be reduced causing further price problems for the Pentagon.

Article first published as Lockheed Martin Now Negotiating Contracts with the United States Senate on Technorati.

Photo from ngotoh’s flickr photostream

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