Pentagon Withholding From Lockheed Grows Over Management

The Pentagon’s withholding of payments from Lockheed Martin Corp. (LMT) over flaws in a business system used to track costs and schedules for its F-35 fighter has increased to $130 million.

The amount held back, equal to 5 percent of periodic billings by the Bethesda, Maryland-based company, has climbed from $47 million in October.

The Defense Contract Management Agency first raised concerns in 2007 about internal company data generated for Lockheed’s fighter programs -- the F-35, F-22 and F-16 jets. The agency decertified the Pentagon-mandated Earned Value Management System for the contractor’s aircraft operations in October 2010.

Withholding will continue until the agency determines Lockheed’s aeronautics unit “has made significant progress to successfully completing” a corrective action plan that the agency approved on March 20, agency spokeswoman Jacqueline Noble said today in an e-mailed statement.

Investors and analysts who follow the company have asked Lockheed officials about the status of the Earned Value Management System during quarterly conference calls on earnings. Lockheed, the world’s largest defense contractor, is due to report first-quarter earnings tomorrow.

The topic also may come up the next day, during an F-35 hearing by a Senate Armed Services Committee panel convened by Democratic Senator Joe Manchin of West Virginia.

Source: Lockheed Martin Corp. via Bloomberg

An undated handout photograph shows Lockheed Martin Corp.'s F-35 fighter jet. Close

An undated handout photograph shows Lockheed Martin Corp.'s F-35 fighter jet.

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Open
Source: Lockheed Martin Corp. via Bloomberg

An undated handout photograph shows Lockheed Martin Corp.'s F-35 fighter jet.

The F-35’s estimated cost for a fleet of 2,443 aircraft has soared to $395.7 billion, up 70 percent from $233 billion in 2001 in current dollars, according to the Pentagon. It’s the most expensive U.S. weapons system.

Continued Withholding

The withholding will continue until at least December, when the company anticipates completing all its corrective actions, Noble said. The agency will conduct a formal review after Lockheed validates that its corrections have worked, she said. Once the Pentagon approves the changes, the money that’s been held back will be paid.

Lockheed Martin spokesman Ken Ross said in an e-mailed statement today that the corrective action plan “details the solutions and success criteria for remedying DCMA concerns.”

The agency’s acceptance of the plan “means we reached agreement with our customer on a defined path to recertification and sustainable earned value management practices,” Ross said.

A Pentagon rule that took effect in August 2011 requires all new contracts to include language spelling out the potential for withholding payments if deficiencies persist with five primary business systems.

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 maximum the Pentagon can withhold from the billings under the regulation is 5 percent, the amount being applied to Lockheed.

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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