Bloomberg News

Pentagon to Withhold 5% From Lockheed Aircraft Contracts

June 26, 2012

Pentagon to Withhold 5% From Lockheed Martin Aircraft Contracts

The Pentagon agency first raised concerns in 2007 about the internal company data generated for Lockheed Martin’s top fighter programs - the F-35, seen here, F-22 and F-16 jets. Source: Lockheed Martin Corp. via Bloomberg

The Pentagon’s contracts management agency has increased to 5 percent from 2 percent the funding it is temporarily withholding from Lockheed Martin Corp. (LMT:US)’s aircraft unit, according to a Defense Department document.

The money is being held back because of flaws in internal systems, the Defense Contract Management Agency said in a letter dated June 22 and obtained yesterday. Lockheed will seek approval for its systems as soon as possible, company spokesman Joe Stout said in an e-mailed statement.

A Pentagon rule that took effect Aug. 16 requires all new contracts to include language spelling out the potential for withholding payments due to deficiencies, such as those involving the “Earned Value Management” system used to determine whether companies are meeting cost and schedule goals. Five percent is the maximum the Pentagon can withhold from the billings under the regulation.

The requirement, intended to protect taxpayers from over- billing, focuses on systems that companies use to estimate costs for bids; purchase goods from subcontractors; manage government property and materials; and track costs and schedule progress.

Lockheed Martin fell 1 percent to $83.27 at 11:25 a.m. in New York trading after gaining 4.1 percent this year.

The Pentagon agency first raised concerns in 2007 about the internal company data generated for Lockheed Martin’s top fighter programs -- the F-35, F-22 and F-16 jets.

The agency uncovered deficiencies in 19 of 32 areas, the U.S. Government Accountability Office said in a June 14 report on the F-35, the Pentagon’s costliest program.

$395 Billion

The deficiencies called into question Lockheed Martin’s “ability to manage the escalating costs and complex scheduling” of what’s now a $395 billion program, the GAO found.

The contract management agency decertified the Earned Value Management system for Lockheed Martin’s aircraft operations in October 2010. The agency began a review in March after the unit of the Bethesda, Maryland-based company submitted a plan to correct deficiencies.

That review is suspended until “Lockheed Aeronautics has successfully completed all corrective actions and verified through internal testing that it has achieved its objectives to bring” its system into compliance, the agency wrote Thomas Bradley, vice president for finance and program management.

“While progress had been made on correcting deficiencies,” the agency told Bradley “significant issues remain with compliance on numerous guidelines.”

Data Reliability

The review that began in March had been delayed by a year “to allow sufficient time for Lockheed to fully execute” the plan, the agency said. Lockheed, the world’s largest defense contractor, said it was 99 percent finished implementing improvements before the review began, according to the contract agency.

Even so, the agency said in its letter that it found recurring concerns about “data reliability” in the office overseeing the F-35, documented in 107 individual “discrepancies.”

Among the deficiencies were “poor quality,” unreliable estimates about how much contracts will cost on completion, “inadequate recording” of direct costs and “data inconsistencies,” according to the letter. Pentagon spokesman George Little declined to discuss specifics of the funds withheld from Lockheed.

“We have been working closely with our industry partners to try and drive down costs and to share risk,” Little told reporters today. “Anything we can do to work with industry to shave pennies, dimes, nickels, quarters, higher levels of currency, is something we need to take a look at.”

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net


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Companies Mentioned

  • LMT
    (Lockheed Martin Corp)
    • $175.53 USD
    • -0.71
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