Lockheed Martin Corp. (LMT) and the Pentagon have reached an “agreement in principle” to complete a contract valued at as much as $4 billion for the fifth production batch of F-35 fighters, according to the Pentagon’s spokesman.
An accord has been reached to buy 32 fighters in addition to the 63 already on contract, Pentagon spokesman George Little told reporters today.
The Pentagon said in December that it would spend a maximum of about $4 billion on the production lot. Dollar figures for the contract won’t be available for about a week, according to officials who spoke about the negotiations on condition of anonymity. The contract is the second consecutive one to involve the purchase of 32 aircraft, an indication the Pentagon assesses the program’s manufacturing processes are on solid enough footing to sustain that rate.
“It was a tough negotiation and we are pleased that we’ve reached an agreement,” Little said. “It ends the year on a positive note and sets the program to move forward.”
Signing the contract before year-end means that the dollars obligated won’t be subject to reduction if the Pentagon is forced to make $52.3 billion in additional cuts during the current fiscal year under the process called sequestration. Those cuts would begin in January unless President Barack Obama and Congress reach agreement to avert the spending reductions and tax increases known as the fiscal cliff.
Lockheed rose 28 cents to $93.30 at the close in New York trading after touching $94.10, a 1.1 percent increase, during intraday trading.
“We remain committed to working with our government and international customers, and we continue to see excellent production performance,” Orlando Carvalho, Lockheed Martin’s F-35 program general manager, said in a statement to be released today. “Our top priority is to deliver the F-35’s 5th generation capability to our U.S. and partner national warfighters.”
Vice Admiral David Venlet, the Pentagon’s F-35 program manager, said in the statement that the agreement is “beneficial to the government and Lockheed Martin.” He said “production costs are decreasing.”
Negotiations for the fifth production contract have been under way since last year. The terms may change when a so-called definitized contract is signed.
Defense Secretary Leon Panetta “has been tracking these negotiations very closely,” Little said.
Under the new contract, Lockheed Martin will build 22 conventional-flight versions of the fighter for the Air Force, seven aircraft carrier versions or the Navy and three short takeoff-vertical landing models for the Marine Corps. The F-35 Joint Strike Fighter is the Pentagon’s costliest program.
Pentagon officials have promised Congress to get tougher in negotiations with Bethesda, Maryland-based Lockheed Martin, the world’s largest defense contractor. The first four contracts for 63 jets are exceeding their combined target cost by $1 billion, according to congressional auditors.
The Government Accountability Office said in its annual report this year that the estimated average procurement cost of each jet had risen to $137 million from the initial estimate of $69 million in October 2001.
Negotiations involved the Pentagon’s first extensive use of a “should-cost” analysis. It involves a detailed review of prior F-35 contract data, historical cost data and “reasonable extrapolations” of what the next aircraft cost should be, Frank Kendall, the Pentagon’s chief weapons buyer, told reporters in July.
“We started the negotiations on the government side with a very well-documented set of costs and then we were able to compare it to the bid we received, item-by-item, line by line,” Kendall said. “Going through and trying to resolve the differences has been the process that has taken so long.”
“Once we get through that we’ll be in a very good place for negotiating future lots,” he said. “That’s what the time has been all about. We have more information.”
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