Wednesday, October 19, 2016

What Kind Of Contract Is That?

Here’s an Oct-17 contract announcement from the defense.gov website.

“Lockheed Martin Corp., Lockheed Martin Aeronautics Co., Fort Worth, Texas, is being awarded a $743,169,377 fixed-price-incentive, firm target and cost-plus-fixed-fee modification to the previously awarded low-rate initial production Lot 9 F-35 Lightening II Joint Strike Fighter advance acquisition contract (N00019-14-C-0002).  This modification provides additional funding and will establish not-to-exceed (NTE) prices for diminishing manufacturing and material shortages redesign and development, estimated post production concurrency changes and country unique requirements.  In addition, this modification will establish NTE prices for one F-35A aircraft and one F-35B aircraft for a non-U.S. Department of Defense (DoD) participant in the F-35 program. 

There’s a couple of interesting points here.  First is the absolutely baffling contract type description:  “fixed-price-incentive, firm target and cost-plus-fixed-fee modification to the previously awarded low-rate initial production Lot 9 F-35 Lightening II Joint Strike Fighter advance acquisition contract”.  Huh????  Be honest, do any of you understand exactly what that means?  Isn’t “cost-plus-fixed-fee an oxymoron?

Second, is the not-to-exceed (NTE) prices.  I understand what the phrase “not-to-exceed” means but how does it apply here?  There is no actual Lot 9 purchase contract in effect, yet, so how can not-to-exceed prices be established?

Why are the Lot 9 contract negotiations continuing to drag on?  Probably because no one understands what the contract says!

All this tells me is that there are way too many lawyers in the world!

21 comments:

  1. I believe they are listing the major Contract Mod Line items in the award. There is probably one that is FPI, one that is CPFF, and one NTE, etc. Not that uncommon, although mixing all of those CLINs on one award is a pain.

    CPFF is done all of the time. The rationale is that the fixed dollar amount incentivizes the Contractor to keep cost down otherwise his percentage of fee for that CLIN drops and ticks off the Street. I have seen it done for Services more than development work, but if the Org doesn't have more money they want to cap the cost because they can always say stop on the Cost Plus work because Cost Plus only means best effort on the part of the Contractor.

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    1. Do you actually understand what a "fixed-price-incentive, firm target and cost-plus-fixed-fee" contract is? I understand each individual portion but how they can be combined into one contract type is beyond me.

      You realize that all this is set against the backdrop of NO ACTUAL LOT 9 PRODUCTION CONTRACT IN EFFECT? There's a lot of money (a couple billion so far, in the form of various types of advance payments) being paid to LM without a contract in place. The entire contracting process has run amok.

      Without a contract, LM shouldn't be producing and the govt shouldn't be paying. That's what provides incentive to negotiate. Right now, LM has no incentive to negotiate a lower price because they're getting paid anyway!

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    2. My best guess is that the agreement will set a maximum price for producing the lot according to design, and that the company will earn costs plus a fee if the lot comes in under the maximum price.

      In any case, it is a very bad sign that procurement has become so convoluted that the government is not clearly articulating what we are agreeing to.

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    3. CNO

      The quote you cited states there is a previously award contract.

      "... to the previously awarded low-rate initial production Lot 9 F-35 Lightening II Joint Strike Fighter advance acquisition contract (N00019-14-C-0002)"

      So this is mod to that existing LRIP contract with a number of CLINs. I don't know where you are getting the idea that there is no Lot 9 Production Contract. It is LRIP, true, but LRIP is a form of Production.

      As to the overall F-35 Acquisition/Contracting Strategy I am not gonna try to explain or defend that. The only goal is to keep the money flowing so complex contract structure keep people for looking too hard.

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    4. "I don't know where you are getting the idea that there is no Lot 9 Production Contract."

      There is no Lot 9 production contract. LM and the govt are still negotiating that. Check anywhere on the Internet and you'll see that. Read carefully what you quoted. The contract you cite is an "advance acquisition contract" which I take to mean long lead items.

      There is no Lot 9 production contract yet.

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    5. OK let me try this again.

      The statement says clearly the previously award contract. That means a contract exits period. It even gives you the contract number. The term advance acquisition contract is just another way of saying LRIP plus other stuff.

      The website below has a PDF of some of the contract body and on the cover page it clearly states "LRIP 9 F-35/JSF Production".
      http://www.lockheedmartin.com/content/dam/lockheed/data/aero/documents/scm/terms/f35/N00019-14-C-0002/N00019-14-C-0002_PSFD_Rev1.pdf

      Furthermore this DoD website FROM 7/14/2015:
      http://www.defense.gov/News/Contracts/Contract-View/Article/612890

      States that a mod was issued under the LRIP Contract for helmet displays and obligation of aircraft procurement dollars (i.e. LRIP Aircraft).

      CNO don't get hung up on the words. If you want to complain about the contracting strategy I agree with you. LRIP is a way to just keep the money flowing before the testing and evaluation is done. It would be better to let a purely production contract, but I am just trying to get you to realize there is a LRIP contract that has been around for at least several years.

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    6. OK let me try this again.

      Here's a quote from a 12-Aug-2016 Defense News website article,

      "With F-35 contract negotiations stretching on, the US Defense Department in August approved about $1 billion in additional funding to reimburse joint strike fighter manufacturer Lockheed Martin for costs incurred on the ninth batch of aircraft, sources with knowledge of the program said Thursday.

      The move provides some financial relief to the company, which had been paying out of pocket for expenses associated with low-rate initial production (LRIP) lots 9 and 10. Last month, Lockheed’s chief financial officer, Bruce Tanner, said the company had spent nearly $1 billion of its own funds to compensate suppliers."

      This is one example of hundreds of similar statements on the Internet. I can't say it any simpler. There is no LRIP Lot 9/10 production contract. There are, apparently some contracts for peripheral aspects like long lead items BUT THERE IS NO PRODUCTION CONTRACT. Every government and Lockheed spokesman say the same thing. You're seeing peripheral contracts.

      I WILL NOT SAY THIS AGAIN.

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  2. Defense Industry Daily explained it this way, "Contracts have been awarded to Lockheed Martin for the provision of the ninth batch F-35 Joint Strike Fighter totalling $743 million. The DoD allocation comes as negotiations for Lots 9 & 10 continue. One contract sets not-to-exceed prices for up to $385 million on a range of services for the US military’s F-35 customers, including redesign and development of components with diminishing manufacturing and material services while another $333 million is being allotted to set not-to-exceed prices for one F-35A and one F-35B on behalf of a non-US participant in the program. Another $25.4 million of the award comes from the Foreign Military Sales (FMS) programme to pay for “country unique requirements.”"

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    1. DID took that from the govt contract announcement and you've repeated it, here. Do you actually have any understanding of what any of that means? If so, please explain it!

      Someone needs to explain how we can be doing all this transfer of money WHEN THERE IS NO LOT 9 PRODUCTION CONTRACT IN EFFECT. There is some sort of advance acquisition contract, whatever that is, but there is not production contract.

      LM is being given money for Lot 9 production without a contract in place. That's just plain wrong. It removes the incentive for LM to negotiate and it removes the incentive for the govt to negotiate. In addition, it's just fundamentally poor business.

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    2. I was simply trying to explain that this contract has several different line items with different pricing mechanisms based on the type of work to be performed.

      My take is this is work that has been agreed to prior to formalizing the contract(s) for Lots 9 and 10. I don't have a problem with this so long as we got the best deal with LM.

      In my experience in aerospace, it's not uncommon to get a preliminary or seed contract to get work started, followed by contract extensions or another contract. This contract seems to be in that vein.

      You're right to question if this is the right negotiation tactic given the contracts for Lots 9 and 10 are not formalized. But, this contract seems to lay the foundation for Lots 9 and 10 and service some ongoing issues with the program related to parts obsolescence (i.e., redesign and development of components with diminishing manufacturing and material services).

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  3. The contract is simple - to give money away to Lockheed.

    Not much else about it. The people who wrote the contract may someday enjoy high paying jobs at LM.

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  4. I'll put my conspiracy theory hat on and say this is just another gimmick from DoD to transfer a bunch of money to LMT without making too many waves. There's still no LRIP 9 and 10 and this is the second contract that has been awarded even though there's no final contract. Maybe it's just me but I expect to see a contract on a Friday, bad news is always put out on a Friday and DoD we never mention these 2 contracts and everybody will swallow that LMT is on time and budget for these LRIPS, they will conveniently forget to add them to the price tag of LRIP 9 and 10.....just my 2 cents.

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  5. CNO;

    2 piece of free and friendly advice - before you delete this reply.

    1. take a DoD Contracting course - There you will find that a C is put in the number ONLY after there is a contract awarded. That contract may have all or some undefinitized CLINs in it. BUT THERE IS A CONTRACT. Be precise in your use of terms.

    If you say the LOT 9 LRIP CLIN is not definitized, you are correct. Then feel free to comment about how that is a dumb contracting action/approach. You CANNOT say there is no contract.

    2. Re-Read your recent post about Comments. You are being corrected about misusing terminology.

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    1. I'm completely open to learning something about contracts (not too much, though! no sane person wants to understand govt contracts). However, in order to persuade me that you are correct, you'll have to explain to me how/why every LM and govt spokesman are consistently saying that there is no contract and that contract negotiations are continuing to drag on. Absent that, I take all the spokesmen at face value and accept that there is no contract. As further evidence, the General running the military's F-35 program has consistently said that they are unable to put a price on the Lot 9 aircraft because they have no contract and negotiations are still ongoing.

      More evidence is that LM is paying for costs out of there own pocket because there is no contract. Further, the govt has begun providing some money to LM in other forms to help cover the Lot 9 preparation costs due to the lack of a contract.

      The most recent LM shareholder's meeting noted the lack of a Lot 9 contract, LM's use of their own money to pay for costs due to lack of a contract, LM's inability to indefinitely sustain their internal costs without govt payments, and the need for the govt and LM to negotiate a contract or find alternative interim funding methods or risk having to shut down production.

      So, if you can reconcile that every spokesman says there is no contract with your claim that there is, explain away.

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  6. I couldn't find anything with a closer date wise but this says:"During a quarterly earnings call in July, Lockheed executives said the company could not sustain paying the costs of the F-35 program with its own funds. Either a final deal on LRIP 9 and 10 — which the Pentagon has said is worth approximately $14 billion for more than 140 aircraft — or a UCA would be necessary to provide relief.

    “If we don't either get funding through a funding mechanism such as a UCA funding item or we definitize the contracts, we will not be able to continue and have that level of cash outflow as a corporation,” Tanner said then. “We simply don't have that capacity. The Pentagon clearly knows that situation, and I'm optimistic that we're going to get cash soon.”"


    http://www.defensenews.com/story/breaking-news/2016/08/12/f-35-jpo-lockheed-martin-undefinitized-contract-action/88600730/

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  7. I don't know the particulars of the LM contract but here is how the comments can be reconciled.

    Often a large contract is let with multiple CLINs. All are planned to be executed but the later ones are not funded or even definitized at the beginning. At least one CLIN is definitized at contract award. It is funded and work starts immediately. Otherwise you don't have a contract.

    So CLIN 001 might be for Program Support and be a CPFF for $10M. CLIN 002 is slated to be for LRIP Lot 9 but was not even asked to be bid at the time of contract award, maybe because the number of aircraft to be authorized and appropriated had not been approved yet (by Congress).

    So a little later after they the auth and appro, the Gov requests a proposal for CLIN 2. LM started generating it and submits it. It is complex and more than the Gov wants/can pay. So negotiations start. The Contracting Officer and some of the PMO realizes the spotlight that this program is under so they are trying to make sure they get the best deal.

    However, the PM wants his planes built so they tell LM you can proceed at risk we are okay with general outlines of your proposal and we plan to pay you eventually. LM can decide to spend their money and start work.

    Why do they do this? Because it gets everybody a little pregnant. The Gov can't not pay for good faith work, the Contractor (unless he is fraudulent) knows he will get paid. LM gets to keep his workforce on the program and the Gov PM gets to see his airplanes being built.

    SO several months go by and now the LM Board and Shareholders are saying why are we paying for this? It is affecting our bonus performance, and is just bad Corporate Governance. So they misuse words to say we are paying out of our pocket and we don't have a Contract.

    They are wrong, they have a contract, they have an CLIN of that contract that is undefinitized and THEY agreed to work on their own risk. They got benefit from it (not shuffling their workforce) and now they get to badger the Gov to agree to a price NOW so they don't look bad.

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  8. Hitting text limit above.

    So this reconciles the statements and the contract structure and state.

    Letting CLIN work to be started before it is definitized can be good or bad.

    It can save the Government money by not causing disruptions in the workflow or workforce. This can help a PMO deal with budget approval delays (which unfortunately is the norm nowadays).

    But if the delays go for very long the moral high ground shifts to the Contractor who is doing work on his own dime and even if his costs are covered, he has to pay the interest (or lost investment cost) on the money he essentially loaned to the government.

    Big Defense Contractors know this leverage can really help them in the realm of public opinion and with the DoD & Congressional bureaucracy. I believe that some even live for this as part of their negotiating strategy (I have unfortunately had to deal with a few such real dirt bags - fortunately only a few).

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    1. Well, that certainly seems like a plausible situation. It makes the "we haven't got a contract" statements by spokesmen true while allowing for the technical existence of a contract. The problem with it is that I have been unable to find a basic contract with line items.

      From a practical point of view, there appears to be no document (contract) with a stated number of products and stated quantity of money to be paid. Thus .... no contract. At this point the discussion becomes the equivalent of a semantics debate.

      Returning to the point of the post, the incomprehensibility of modern contracts and the lack of wisdom in a manf pursuing work that is not under contract and a govt paying for work that is not under contract are the key points.

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    2. Glad it helped and I agree with you completely it is out of hand and one can only wonder why the Gov PM let it get this far out of whack.

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    3. dont know if this sheds any light on the matter,

      http://www.defensenews.com/articles/lockheed-cfo-no-agreement-yet-on-price-profit-margin-for-f-35-lots-9-and-10

      if anything, it only bodes ill for all coming contracts...

      Delete
  9. See the Defense Federal Acquisition Regulation Supplement (DFARS) 217.74 on UNDEFINITIZED CONTRACT ACTIONS 10 U.S.C. 2326

    An “Undefinitized contract action,” or UCA is a contract action for which the contract terms, specifications, or price are not agreed upon before performance is begun under the action.

    GAB

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