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.