The Pentagon is withholding $46.5 million from Lockheed Martin Corp (LMT:US), its biggest contractor, because of continued flaws with a business system used to track costs and schedules for the F-35 fighter.
The money held back was assessed against two F-35 production contracts and a smaller development agreement with the Israeli Air Force that’s managed by the U.S. The funds equal 5 percent of periodic billings against the contracts for reimbursement of money spent by the company performing the work.
The F-35 has been criticized by Pentagon officials and lawmakers for test-performance failings, delays and its ballooning cost. At an estimated $395.7 billion for eventual production of 2,443 planes, the cost is up 70 percent, adjusted for inflation, from the $233 billion projected when Lockheed Martin won the program from Boeing Co. (BA:US) in late 2001.
The funds being withheld won’t be released until all the deficiencies in the system used by Lockheed Martin’s Fort Worth, Texas-based Aeronautics unit “are corrected and the system regains approval status” from the Defense Contract Management Agency, Pentagon spokeswoman Cheryl Irwin said in an e-mailed statement.
Chris Kubasik, Lockheed Martin’s president and chief operating officer, told reporters on a conference call Oct. 24 that the Bethesda, Maryland-based company is making progress correcting deficiencies with the system.
The Pentagon agency first raised concerns in 2007 about the internal company data generated for Lockheed Martin’s fighter programs -- the F-35, F-22 and F-16 jets. The contract management agency decertified the Pentagon-mandated Earned Value Management system for Lockheed Martin’s aircraft operations in October 2010.
A Pentagon rule that took effect in August 2011 requires all new contracts to include language spelling out the potential for withholding payments because of deficiencies such as those in the management system.
The maximum the Pentagon can withhold from the billings under the regulation is 5 percent.
The requirement, intended to protect taxpayers from overbilling, 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.
The provision was included in all F-35 contracts negotiated after the fourth production pact. The largest payment being held back is $45 million on the fifth production contract, final details of which remain in negotiation.
Kubasik said he reviews the Earned Value Management system and progress toward complying with Pentagon requirements daily.
“We have a corrective action plan that has been approved, and we are executing to that,” Kubasik told reporters during the conference call on Lockheed’s third-quarter earnings.
“We are having status checks monthly, and by all accounts everybody is satisfied with the progress that we are making,” he said. “So we expect to have a certified” system “in due course and possibly have the withhold reduced here as we make progress.”
The Aeronautics unit’s sales in the third quarter fell 6.7 percent to $3.7 billion, and profit fell 6.5 percent to $415 million from the year-ago quarter, the company said in an earnings statement on Oct. 24.
Initial production orders of F-35 jets during the quarter valued at about $300 million partially offset lower sales volumes from C-130 transports and F-16 fighters in the Aeronautics unit, Lockheed said.
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