Lockheed Martin Corp. (LMT:US) will lose its entire fee of about $70 million to defray an 18 percent cost overrun on the first Global Positioning System satellites of a new design, according to the Air Force.
The Air Force estimates the first two GPS-III satellites will cost $1.62 billion, spokeswoman Vicki Stein said in an e- mailed statement. Lockheed Martin, the biggest U.S. defense contractor, had estimated the cost for development, testing and building at $1.5 billion as of Feb. 29.
The Global Positioning System, operated by the Air Force, provides navigation for national security as well as civilian uses from traffic-mapping devices in cars to tracking systems for freight. The new GPS-III satellites are designed to deliver more accuracy, an anti-jamming capability and a civilian signal that can operate with Europe’s Galileo system, the company says.
Lockheed Martin’s fee is 5 percent of the target cost that includes one-time engineering tasks, test equipment and satellite assembly, the Air Force said.
“Cost incentives on the contract” caused the Bethesda, Maryland-based company to lose the fee although the government continues to bear the “cost-risk” for development and production of the first two satellites, Stein said.
The Pentagon has been withholding fees for deficient performance on such “cost-plus” contracts after congressional auditors in December 2005 said companies received billions of dollars in bonuses between 1999 and 2004 on systems with major cost, schedule and performance problems.
On the F-35 Joint Strike Fighter, Lockheed is absorbing $328 million of $1 billion in overruns on contracts for the first 63 aircraft.
The first GPS III satellite remains on schedule to be available for launch in 2014, Lockheed Martin spokesman Michael Friedman said in an e-mailed statement.
“While we have encountered challenges associated with higher standards for parts testing and first-time technical issues, the program is on firm footing and our cost estimate remains within the original Air Force budget,” said Friedman. He said the company doesn’t discuss specifics of fees.
Lockheed Martin beat Boeing Co. (BA:US) in May 2008 for the opportunity to build the first of as many as 12 GPS III satellites. The Air Force may eventually buy as many as 32 satellites.
The company rose 32 cents to $89.62 at 10:32 a.m. in New York trading after a 14 percent increase in the year ended April 13.
Lockheed Martin is using a full-sized prototype to identify and solve many assembly issues “that would have cost more and presented more risk if they had been discovered later in production,” Friedman said.
“We have identified tens of millions of dollars in cost savings for the production satellites and in some cases we are seeing 50 to 80 percent reductions in labor costs,” he said.
The U.S. Government Accountability Office said in written Senate testimony on March 21 that the Air Force has cited multiple reasons for the overrun, including test-equipment delays and development “inefficiencies.”
Lockheed “is also behind in completing some tasks on schedule, but the program does not expect these delays to affect launch of the first satellite,” Cristina Chaplain, GAO director of acquisition management, said in the testimony.
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