Lockheed Paid Another $60M to Reduce F-35 Costs
(Source: Defense-Aerospace.com; posted Sept. 26, 2017)
PARIS --- For the second time this year, the Pentagon has awarded Lockheed Martin a contract to reduce the cost of the F-35 fighters that it is delivering to the Pentagon.

An earlier contract, awarded on May 19, was worth $137.8 million, and added to the $60 million value of the contract awarded Sept 25 brings the total paid to Lockheed to reduce its own costs to nearly $198 million. (see below)

These payments are very peculiar, as at the same time both the Pentagon and the company continue to insist that F-35 costs are dropping with each successive production batch.

Any normal person would question why, if costs are dropping, Lockheed needs to be paid more to achieve the same result, but again this is apparently not an issue for the F-35 enterprise.

We recently revealed how Lockheed Martin and the Joint Program Office was manipulating F-35 costs to demonstrate that they were dropping, even going as far as to change previously-released press statements.

The Pentagon and Lockheed cannot have it both ways. Either costs are dropping, and no additional money needs to be paid to Lockheed, or costs are not dropping, and the Pentagon must explain why Lockheed is being paid additional money to lower them.

Such a dubious arrangement, in which the contractor gets paid for delivering airplanes that cost too much, and then paid again to reduce costs, would reek of insalubrious business practices if those involved were not a government department and its biggest contractor.

Cost plus incentive fee contracts

The logic behind these payments is not clear, especially as both are “cost-plus-incentive fee” contracts: Lockheed is paid the indicated amounts, plus an undisclosed “incentive fee” if it can reduce the cost of the F-35 it is delivering. If it cannot, it keeps the principal but foregoes the incentive fee.

To clarify the process:
1. Lockheed is paid to deliver the F-35 at a given cost;
2. It cannot, and delivers them at a higher cost, which the Pentagon pays.
3. The Pentagon pays Lockheed $198 million to reduce the cost of the F-35, as well as an additional fee if Lockheed can actually reduce that cost.

In other words, Lockheed could be paid three times (original delivery + cost reduction + incentive fee if successful) for the same aircraft if it reduces costs.

Any normal customer would refuse to pay a higher cost in the first place, but obviously little is normal in the relationship that Lockheed Martin and the F-35 Joint Program Office have built during the 16 years of F-35 development and low-rate production.

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Pentagon Contract Announcement
(Source: US Department of Defense; issued Sept 25, 2017)
Lockheed Martin Corp., Lockheed Martin Aeronautics Co., Fort Worth, Texas, is being awarded a $60,000,000 modification to a previously awarded cost-plus-incentive fee contract (N00019-17-C-0001) for the identification and execution of cost savings projects to reduce the cost of the F-35 joint strike fighter air system.

Work will be performed in Fort Worth, Texas (63 percent); El Segundo, California (34 percent); and Samlesbury, United Kingdom (3 percent), and is expected to be completed in July 2020.

Fiscal 2017 aircraft procurement (Air Force, Navy and Marine Corps) funds in the amount of $60,000,000 will be obligated at time of award, none of which will expire at the end of the current fiscal year.

The Naval Air Systems Command, Patuxent River, Maryland, is the contracting activity.

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Pentagon Contract Announcement
(Source: US Department of Defense; issued May 19, 2017)
Lockheed Martin Corp., Lockheed Martin Aeronautics Co., Fort Worth, Texas, is being awarded a $137,834,819 modification to a previously awarded cost-plus-incentive-fee contract (N00019-14-C-0002)

Work will be performed in Fort Worth, Texas (30 percent); El Segundo, California (25 percent); Warton, United Kingdom (20 percent); Orlando, Florida (10 percent); Nashua, New Hampshire (5 percent); Nagoya, Japan (5 percent); and Baltimore, Maryland (5 percent), and is expected to be completed in December 2020.

Fiscal 2016 aircraft procurement (Air Force, Marine Corps, and Navy) funds in the amount of $137,834,819 are being obligated on this award, none of which will expire at the end of the current fiscal year.

This modification combines purchases for the Air Force ($110,267,856; 80 percent); Marine Corps ($22,554,788; 16.4 percent); and the Navy ($5,012,175 (3.6 percent).

The Naval Air Systems Command, Patuxent River, Maryland, is the contracting activity.


(EDITOR’S NOTE: Given that delivery of Lot 9 aircraft began during the first half of 2017, and that they should be completed by year-end, it is hard to imagine how their cost can be reduced at this late stage.)

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