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Pentagon Completing Lockheed Talks on Next F-35 Contract

July 17 (Bloomberg) -- The Pentagon’s long-running negotiations with Lockheed Martin Corp. over the next F-35 production contract may wrap up soon, the military’s top weapons buyer said.

“We’ve gotten a lot closer, and I’m hopeful we’ll have a settlement before too much time goes by,” Undersecretary for Acquisition Frank Kendall told reporters yesterday at the Pentagon.

Negotiations for the fifth production contract of as many as 30 of the Joint Strike Fighters have been under way since last year. The Pentagon said in December that it reached agreement with Lockheed to spend a maximum of about $4 billion on the production lot. The terms may change when a final contract is signed.

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 U.S. Government Accountability Office said in a review released on June 14 that the F-35 will require $12.7 billion a year on average through 2037. That’s up from $9.1 billion requested for fiscal 2013.

The final negotiations on the next production contract involve 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, Kendall said.

Well-Documented Costs

“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.”

Kendall outlined his goals as chief weapons buyer in the session with reporters, including making systems more affordable, protecting the U.S. industrial base and providing industry with sufficient financial incentives to reduce costs.

Kendall called himself a believer in “evolutionary” thinking when it comes to weapons acquisitions instead of a “transformational thinker,” a term made popular by former Defense Secretary Donald Rumsfeld.

Protecting the health of the industrial base is becoming a greater priority as defense budgets decline, Kendall said. “Healthy means profitable, but it also means lean and productive,” he said.

The Pentagon’s view of mergers and acquisition hasn’t changed, he said. While he said officials would oppose mergers among the biggest defense companies, “‘we are certainly open to some moves” among second- and third-tier companies.

To contact the reporter on this story: Tony Capaccio in Washington at

To contact the editor responsible for this story: John Walcott at

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