Bloomberg News

Pentagon Holds Back $231 Million From Lockheed for F-35 Fixes

March 19, 2014

The Pentagon is withholding as much as $231 million from Lockheed Martin Corp. (LMT:US) until it completes modifications to F-35 aircraft already delivered, including improved protection against lightning strikes.

The money is being held back until Lockheed, the largest U.S. contractor, corrects “major variances” in at least five areas in which changes were deemed necessary after the fighters were handed over to the military, according to the Defense Contract Management Agency.

The agency said the major fixes include modifying an on-board safety system that’s intended to prevent explosions after a fuel tank is hit by a bullet or fragment and to minimize fires caused by lightning strikes.

Other fixes include modifying electrical components to protect against lightning and electromagnetic interference and completing the redesign, testing and installation of the auxiliary air inlet door of the propulsion system on the Marine Corps version.

The modifications, which weren’t caused by defective parts, were identified during the F-35’s simultaneous development and production, a Defense Department approach that Frank Kendall, the under secretary for acquisition, in 2012 called “acquisition malpractice.”

The defense contracting agency is withholding $129 million, the largest amount, for modifications to 16 Marine Corps F-35Bs that were assembled under the fourth production contract, awarded in 2010.

Bellwether Model

The B model is considered a bellwether for the $391.2 billion F-35 program, the Pentagon’s costliest. The Marine Corps plans to buy about 340 of the aircraft, which can take off like a conventional fighter and land like a helicopter.

An additional $83 million under the same contract is being withheld on 11 Air Force models, as is $17 million for four of the Navy version, according to Pentagon data. The remaining $2 million is being held back under the fifth F-35 contract.

“As we test the aircraft, we knew we’d find items to modify or fix for the fleet,” Michael Rein, a spokesman for Bethesda, Maryland-based Lockheed, said in an e-mailed statement. “The money was set aside for this. The good news is the amount of money needed has been significantly reduced from the original projection.”

The Pentagon initially withheld $9 million per plane, and that’s declined to about $7.1 million since September as the F-35 program office reevaluates the expense of the simultaneous development and production known as concurrency, Rein said.

Fewer Variances

The previously undisclosed amount being withheld has dropped from $255 million last year, in part because “the total number of major variances is decreasing as we progress through” the fifth contract, contracts agency spokesman Billy Ray Brown said in an e-mailed statement.

The Pentagon has revised its estimates, and Lockheed has received about $8.8 million after improvements were made on aircraft from the first three production contracts.

Vice Admiral David Venlet, who was the manager of the F-35 program at the time, said in 2012 that the program’s parallel development and production resulted in aircraft retrofits that “are very real and affect schedule and cost in hardware, software, test and production.”

Lockheed agreed that year to pay for an increased share of these “concurrency costs,” and the money being held back is part of that approach.

The projected $391.2 billion for an eventual fleet of 2,443 F-35s for the Air Force, Navy and Marines is a 68 percent increase from the estimate in 2001, measured in current dollars. The number of aircraft is 409 fewer than called for in the original program.

Complex Model

The Marines’ F-35B is the most complex model because of its specialized propulsion system for hovering and landing. The U.K. and Italy also plan to buy it.

Italy may cut its F-35 order to 45 planes from 90 as part of a plan to reduce defense spending, the newspaper Corriere della Sera reported yesterday, without citing any source.

The Defense Department projected in a June 2013 report that the costs to retrofit F-35 jets already built or to be delivered under the first five contracts for 90 aircraft had dropped by at least $500 million to about $1.2 billion.

The $231 million being withheld is based on this projection.

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

To contact the editors responsible for this story: John Walcott at jwalcott9@bloomberg.net Larry Liebert, Terry Atlas


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