Pentagon to Withold Lockheed F-35 Payments Over Tracking

Lockheed Martin Corp. (LMT), the No. 1 U.S. defense contractor, is the first company to have payments withheld under a new Pentagon rule intended to correct deficiencies with internal systems that track cost, schedules, accounting and purchases, according to the Defense Department.

The Pentagon will withhold about $1 million a month in billings from Lockheed’s aeronautics division until the unit fixes longstanding shortcomings with its cost and schedule tracking system, Shay Assad, the Pentagon’s director of pricing, said today in an interview.

The money will be paid once the deficiencies are fixed, he said. The Pentagon today informed Lockheed’s Fort Worth, Texas- based aircraft unit that the withholding will start in March with billings made under a new production contract of about $4 billion for as many as 30 F-35 fighters, Assad said. The funds held back will amount to 2 percent of billings instead of the maximum 5 percent, he said.

That’s because Lockheed was deemed to have submitted an adequate corrective action plan, which is now under review by the Pentagon’s Defense Contract Management Agency, Assad said. The agency manages the new rule for Pentagon contracts.

“This is a step that’s available to the customer under the terms of the contract,” Joe Stout, a spokesman for Bethesda, Maryland-based Lockheed, said in an e-mailed statement.

The Pentagon rule was imposed “to ensure we had an enforcement mechanism when necessary” so that “we can rely on the business systems that companies are using,” Shay Assad, the Pentagon’s director of pricing, said. Photo: Rich Clement/Bloomberg Close

The Pentagon rule was imposed “to ensure we had an enforcement mechanism when... Read More

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The Pentagon rule was imposed “to ensure we had an enforcement mechanism when necessary” so that “we can rely on the business systems that companies are using,” Shay Assad, the Pentagon’s director of pricing, said. Photo: Rich Clement/Bloomberg

Lockheed increased 29 cents to $88.70 at the close of New York trading and rose 12 percent in the past year.

Pentagon’s Rule

The Pentagon rule, which took effect Aug. 16, requires all new contracts to include language spelling out the potential for withholding payments due to deficiencies, such as those involving the standard “Earned Value Management” system used to determine whether companies are meeting cost and schedule goals.

The requirement, intended to protect taxpayers from overbilling, focuses on systems that companies use to estimate costs for bids; purchase goods from subcontractors; manage government property and materials; and track costs and schedule progress.

The contract management agency decertified the Lockheed aircraft unit’s Earned Value system in October 2010. The company’s system was deficient in 19 of 32 areas, a Pentagon spokeswoman said at the time.

“We are working closely” with Pentagon contracting officials “to review and approve” the system, Stout said.

Lockheed ‘Making Progress’

Charlie Williams, director of the contract management agency, said in a interview “we believe Lockheed is making progress and has made progress.” Williams said he’s “optimistic about the results of the review, but we are not going to make any judgment until we go through it.”

Williams said his agency is reviewing other Lockheed units. “There are challenges in some places, but we are going through that deliberately with the company,” he said.

The rule resulted from an August 2009 hearing of the congressionally mandated Commission on Wartime Contracting where major business-system deficiencies were described in companies working in Iraq and Afghanistan.

About 20,000 contractors under the Defense Contract Management Agency’s jurisdiction can be subject to withheld payments provided the requirement is in their contracts and a determination has been made that a system is disapproved.

Williams said his agency is reviewing the systems of many contractors. “We are starting with the big guys,” he said. “Our goal is to have sound business practices.”

Assad said the rule was imposed “to ensure we had an enforcement mechanism when necessary” so that “we can rely on the business systems that companies are using.”

“We do have some companies with a companywide problem but it’s usually not that,” Assad said. “It’s usually particular divisions of companies.”

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

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net

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