Monday, May 3, 2010

USAF, Lockheed Wrangle Over JSF LRIP 4 Price

FORT WORTH — The U.S. Air Force and Lockheed Martin—prime contractor for the single-engine, stealthy F-35—are in the midst of negotiations for low-rate initial production (LRIP) Lot 4, with price a key sticking point in the negotiations.
Pentagon acquisition chief Ashton Carter last month declared a 57% cost overrun to the per-unit price of an F-35, triggering a Nunn-McCurdy review of the program. Though it is expected to be recertified to continue development by early June, Lockheed Martin is in a peculiar situation. The company is battling the perception of a major cost spike brought on by the adjusted baseline figure from the Cost Analysis and Program Evaluation (CAPE) group at the Pentagon. But at the same time, company officials are trying to keep the price as high as possible in LRIP 4 negotiations with the Air Force.
David Van Buren, acting assistant secretary of the Air Force for acquisition, is handling contract negotiations for the government. The Air Force is asking for 20% below the pricing projected by Lockheed Martin, according to Tom Burbage, executive vice president of F-35 program integration, who spoke last week with AVIATION WEEK here. And that figure is 20% lower than the CAPE pricing predictions, he adds.
Burbage says that in October, the company (in the midst of the restructuring announced last month) proposed pricing based on the 2007 program office estimate; officials declined to specify the figure. They say they expect an average per-unit price (without engines) for the conventional takeoff and landing (CTOL) variant at high production rates to be about $49.5 million in LRIP 8 or beyond. LRIP 4, however, will carry a significantly higher per-unit price because these are early model production aircraft.
In accordance with the push by Carter to lock in fixed-price contracts as early as possible in a program’s cycle, Air Force officials are exploring whether any fixed-price elements can be included in the forthcoming LRIP 4 contract. Options range from a full firm fixed-price deal to locking in a fixed price for the CTOL variant (which accounts for the lion’s share of the buy) or agreeing upon a fixed-price, incentive-fee structure. This would set a price, but allow for a government/contractor risk-sharing model if overages occur. Lockheed Martin officials are not interested yet in going to a firm fixed-price contract for LRIP 4, but concede it is likely to be unavoidable for LRIP 5.
Van Buren’s office declined to discuss the negotiations in detail, but said “the government is seeking a fair and reasonable price.”
Still, the company’s unwillingness to commit to a firm, fixed price for LRIP 4 has gotten the attention of some in Congress. As Lockheed officials brief staffers on Capitol Hill, some remain skeptical of the contractor’s low pricing estimates. “Prove it. Sign up to a lower cost on a fixed-price contract,” one Hill aide says. “Given their track record, they don’t have much leverage to make these claims.”
Ultimately, it could be skepticism in Congress that could prove most perilous to the program. If Congress reduces the buy in Fiscal 2011 from 43 by 10 or more, as some House defense authorizers are considering, the lower quantity will again push the per-unit price up. This could be the program’s entry into the acquisition “death spiral,” where repeatedly reduced production quantities beget higher pricing.
Credit: Lockheed Martin

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