Lockheed Loses Defense Approval of F-35 Cost-Tracking

The system used by No. 1 defense contractor Lockheed Martin Corp.’s aircraft unit to track aircraft costs and schedules has lost its Pentagon certification because of persistent deficiencies, a Defense Department spokeswoman said.

De-certification of the Fort Worth, Texas-based unit’s so- called “earned value management system” was intended to “help ensure Lockheed Martin devotes the needed attention to complete” corrective actions “in a timely manner,” Pentagon spokeswoman Cheryl Irwin said in an e-mailed statement today.

Major U.S. military suppliers are required to use earned value systems to track spending, comparing actual costs and performance against projections so the Pentagon and companies can spot looming overruns. Lockheed Martin’s system is used to track cost and schedules of the $382 billion F-35 fighter, the Pentagon’s most expensive weapons program.

Lockheed Martin spokesman John Kent said in an e-mail the company was notified yesterday of the de-certification.

“This action does not affect our ongoing work” on a plan to take corrective action “and does not reflect any new findings,” Kent said.

One measure for awarding future contracts is the reliability of a company’s system for keeping track of government funds.

Reinforcing Accountability

The Pentagon action reinforces Lockheed Martin’s responsibility “to deliver what it agreed to under the terms of the contract, and reinforces that accountability,” Irwin said.

The company’s system was deficient in 19 of 32 areas, Irwin said. The Fort Worth unit estimates it will take until November 2011 to complete its corrections, she said in the statement.

“The government is evaluating its options with regard to any further courses of action it may wish to take,” Irwin said without elaborating.

Pentagon procurement director Shay Assad in a June 16 interview said the Pentagon would start withholding payments from Lockheed Martin if its corrective action plan was deemed unacceptable. Assad was traveling today and couldn’t be reached for comment.

The action against Bethesda, Maryland-based Lockheed Martin comes as Defense Secretary Robert Gates is seeking to improve contract efficiency, reduce overhead and lower costs of weapons programs.

The cost-tracking systems range from measuring the amount of work performed against available dollars to monitoring the purchase of goods and services from subcontractors.

Withholding Funds

A pending revision to the Pentagon’s acquisition regulations would give contracting officers authority to withhold funds for deficient business systems.

The final regulation should be published within two months, Irwin said. “The new rule will provide an effective tool to hold contractors accountable to correct deficiencies,” Irwin said.

Lockheed’s system has been under review since the Pentagon in November 2007 audited its performance at a Fort Worth plant where the F-35 is built.

The Pentagon’s latest evaluation found that most of Lockheed Martin’s business units “have made good progress in addressing deficiencies” with their systems, Irwin said.

Still, “the Fort Worth unit continues to make inadequate progress,” Irwin said.

Completing Corrections

“The need for this action is warranted given the magnitude of the issues, the length of time -- three years -- that the issues have persisted” and the projected November 2011 date for completing corrections, Irwin said.

Assad said in the June interview that he has cautioned senior Lockheed contracting officials that the Pentagon might withhold fees.

Lockheed’s Aeronautics unit, which includes its plant in Fort Worth, had $12.2 billion in 2009 net sales, or about 27 percent of the company’s $45.1 billion total. The unit also accounted for 34 percent of Lockheed’s 2009 operating profit.

Lockheed rose $1.25 today, or 1.8 percent, to $70.60.

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

To contact the editor responsible for this story: Mark Silva at msilva@bloomberg.net

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