Pentagon Moves Forward — Unilaterally — on $6.1B Contract for Ninth F-35 Lot

By: Valerie Insinna

WASHINGTON — The Pentagon on Wednesday evening announced a $6.1 billion contract with Lockheed Martin for the ninth lot of joint strike fighter aircraft, but the F-35 manufacturer is not happy with the terms of the arrangement, which was not mutually agreed upon, according to a company spokesman.

The contract covers 57 low rate initial production (LRIP) aircraft, which will be procured for 3.7 percent less than the LRIP 8 batch of jet, the F-35 joint program office stated.

The joint program office initially intended to broker a deal for LRIP 9 and 10 together, a contract F-35 program executive officer Lt. Gen. Christopher Bogdan had said would procure about 150 aircraft for a total contract value of about $14 billion. Lockheed and the government intended to finalize an agreement in the early months of this year, but as negotiations pressed on into the fourth quarter, the government opted to award a unilateral contract action — a decision Lockheed disputes.

“The definitized contract for LRIP 9 announced today was not a mutually agreed upon contract, it was a unilateral contract action, which obligates us to perform under standard terms and conditions, and previously agreed-to items,” said Lockheed spokesman Mike Rein. “We are disappointed with the decision by the government to issue a unilateral contract action on the F-35 LRIP 9 contract. For the past 18 months, Lockheed Martin has negotiated in good faith consistent with our commitment to reach a fair and reasonable agreement on this critical program. We will continue to execute on the F-35 program and we will evaluate our options and path forward.”

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According to F-35 spokesman Joe DellaVedova, the government and Lockheed already agreed on the number of planes for LRIP 9, their configuration, the scope of work, and the terms and conditions for the contract. What could not be settled after more than a year was the total price of the contract, including the price per plane and the fee that Lockheed would receive.

“After 14 months of good faith negotiations, the government believed that further negotiations would not result on Lockheed and the government coming to an agreement on the total price of F-35 lot 9,” he told Defense News.

The LRIP 9 contract would represent the largest single unilateral contract action in the history of the Defense Department, an industry source close to the negotiations said.

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Like DellaVedova, the source suggested that Lockheed believed that the government’s contract position did not adequately address a realistic cost per plane or a fee that recognized Lockheed’s investments and the requirements for meeting the delivery schedule.

“While the cost difference was small, the issues were fundamental,” he said.

According to the source, Lockheed leadership can either accept the terms of the contract or appeal it with the Armed Services Board of Contracts Appeals, but a decision has not yet been reached.

The LRIP 9 contract includes 42 F-35As, 13 F-35Bs and 2 F-35Cs, which will begin delivery in the first quarter of 2017. The industry source suggested that perhaps the government had moved forward with a unilateral contract because the Lockheed was nearing delivery of the first LRIP 9 F-35s, while the parties still have time to agree on a deal for the tenth batch.

In a statement by the JPO sent to reporters, Bogdan alluded to his desire to work with Lockheed on future contracts.

“The LRIP 9 contract represents a fair and reasonable deal for the U.S. Government, the international partnership and industry,” he said.  “We will continue to negotiate in good faith with industry to keep the F-35 affordable and provide the best possible value for our customers.”

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Lockheed’s Cash Flow Hurt by Stalled F-35 Negotiations

Although JPO and Lockheed officials repeatedly told reporters that negotiations were progressing and not emblematic of a larger dispute, the inability to come together and cement a deal for F-35 LRIP 9 and 10 generated a number of financial headaches for Lockheed and the government over the latter half of 2016.

In July, the company’s chief financial officer, Bruce Tanner disclosed that it had spent nearly a billion dollars to compensate suppliers for expenses incurred on LRIP 9 and 10. A month later, Defense News learned that the F-35 joint program executive office had allocated about $1 billion in advance funding to help tide Lockheed over until a contract was reached.

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Pentagon Grants Lockheed About $1B To Stem F-35 Lot 9 Production Costs

In September, Bogdan said he believed he could reach a deal with Lockheed over LRIP 9 and 10 by the end of the year. He attributed the duration of negotiations to the size of the contract, which was much larger than previous lots such as the $4.7 billion LRIP 8 contract for 43 F-35s.

But Tanner, in an October earnings call, struck a more pessimistic note on the state of negotiations. The JPO and company still had not yet come to an agreement on the cost of performing the contract, the terms and conditions associated with the deal, and the profit level for the contractor, he said then.

Now, even with a contract definitized, it appears as though at least two of those elements continues to be a source of disagreement.

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