Controversy Over Latest F-35 Contract Exposes Rift Over ‘Fair’ Prices

By Sandra I. Erwin

Shockwaves rippled across the defense industry following the news that Lockheed Martin is challenging the Pentagon over a $6.1 billion “unilateral” contract awarded to the company to continue building F-35 joint strike fighters for the U.S. military.

The low-rate initial production contract announced Nov. 2 would fund 57 F-35s aircraft. “The LRIP 9 contract represents a fair and reasonable deal for the U.S. government, the international partnership and industry,” said Lt. Gen. Chris Bogdan, F-35 program executive officer.

The manufacturer disagrees. Lockheed spokesman Michael J. Rein said in a statement that company was “disappointed with the decision by the government to issue a unilateral contract action.”

Officials declined to comment further as the company considers taking legal action. The parties are said to be wide apart on program cost estimates and the contractor fee — which partly is derived from program costs.

Industry sources said this is possibly the largest unilateral contract ever awarded by the Defense Department. The estimated $400 billion F-35 program is the Pentagon’s largest weapons acquisition.

How did it get to this point? Lockheed and the F-35 program office have been negotiating for 18 months over the terms of the LRIP 9 and 10 deals. Under national security provisions in the federal acquisition regulations, the government can at any point stop negotiations and issue a contract. The JPO can assert that these airplanes are urgently needed by the armed forces and that the contractor has to keep producing them even if they haven’t reached an agreement on the price.

Lockheed is obligated to continue the work, but faces the choice of either accepting the terms or appealing the decision — either to the Armed Services Board of Contract Appeals, or to the Court of Federal Claims. The company has 90 days to decide.

What led to a collapse in the negotiations was the JPO rejecting Lockheed’s accounting of what it costs to build these airplanes. One industry source said the government did not believe the cost data submitted, which was based on the previous eight LRIP contracts, was reasonable. The JPO also challenged Lockheed’s claims that its fee should recognize capital outlays the company made to pay for parts, factory upgrades and other program-related expenses.

This strikes at the core of the defense industry’s business model, in which a company assumes risks upfront but expects to be rewarded later. The dispute also speaks to brewing disagreements in Defense Department programs between what contractors assert something costs, versus what the government believes it “should cost.” (end of excerpt)

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