Wednesday, November 2, 2016

You'll Do It Because We Said So

Well, this is just fascinating.  We’ve seen how many different types of procurement contracts there are (it’s mind boggling) and that none of them really mean what they seem to say but here’s yet another new one I had no idea existed – a unilateral contract whereby the government simply dictates the price. Yeah, we’re talking about the F-35 program.  The government apparently got tired of negotiating with Lockheed and has simply issued a contract with the price they want (1).

“In an extraordinary action, the F-35 Joint Program Office decided 14 or 18 months of negotiations was enough and has issued a “unilateral contract” for the latest Low Rate Initial Production contract to defense giant Lockheed Martin.

In simple terms, the Pentagon got sick and tired of talking with Lockheed and told them, here’s how much we’re willing to pay you. Take it or leave it. All terms had been agreed to by both sides except one — the price.”

So what does Lockheed think of the imposed contract?

“The definitized contract for LRIP 9 announced today was not a mutually agreed upon contract, it was a unilateral contract action, which obligates us to perform under standard terms and conditions, and previously agreed-to items,” Lockheed’s F-35 spokesman Mike Rein said in an emailed statement. “We are disappointed with the decision by the Government to issue a unilateral contract action on the F-35 LRIP 9 contract.”

Does Lockheed have any recourse?  Apparently, little.

“…Lockheed either accepts the government contract for 57 F-35s for roughly $6.1 billion or it goes to court to protest the government’s action.”

I am not a lawyer but how on Earth is this legal?  An imposed contract?  Wow. 

We all scoffed at the government’s claim that the price of the F-35 would be $80M but I guess if you can just dictate the price then $80M is perfectly doable.  Why not $70M or $10M or simply force the manufacturer to build them for free?  Wait, I know – charge the manufacturer for the privilege of building them and the F-35 program can be a profit maker for the government!

If Lockheed is forced to accept this, it can’t bode well for their quality control enthusiasm!  I wouldn’t want to be a pilot in one of these disgruntled builds.



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(1)Breaking Defense website, “JPO To Lockheed: No More Talkie, Here’s LRIP 9 Deal”, Colin Clark, 2-Nov-2016,


12 comments:

  1. Apart from WWII, when I vaguely recall the USGovt. sometimes deciding the price of some weapons, has this ever happened before?!?

    Are we lead to believe that someone at DoD suddenly grew a pair and told LMT, this is the price tag or we walk away from JSF program?!? How does this work?

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    1. You realize the risk, here, right? If Lockheed feels they aren't getting the profit they need to make it worthwhile, the next time we go looking for a manufacturer for an aircraft or ship, Lockheed may decline to bid - and we don't have that many suppliers as it is.

      Also, you can bet that every other manufacturer is watching this very carefully. If the government is going to dictate prices, they may find that no one wants to build anything. No profit, no build.

      This may produce a short term "win" for the government but a long term disaster. What if we put out a request for bids for the next generation fighter and no one bids?

      This is also going to encourage manufacturers to pad everything they can against the possibility that the government decides to dictate a price.

      I still can't believe this is legal.

      This is an extremely slippery slope.

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    2. Lockheed or any industry for that matter will continue to bid on defense contracts until they can't turn a profit making the products. I personally agree with the Pentagons decision to try to limit run away costs of this program. Its a shame that this wasn't done in the beginning when the contract was still being debated or at the first cost over-run.

      Delete
  2. we weren't privy to the negotiations, as such, having an opinion one way or the other is slightly irrelevant.
    The one detail we are privy to is the fact that they were bashing away at it for 18 months... And that they agreed on everything but the price.
    Well, the buyer said this is what we're paying, and the seller didn't throw a tantrum and say no, they're just bitching about it.
    Besides, its LockMart, yes, they're the worlds largest weapons manufacturer. Don't forget, the buyer is US gov. Its not like they can find another customer that accounts for 50% of the worlds weapons procurements budget.
    This sounds like a case of soldier, shut up and soldier.

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  3. It will cost whatever LM wants it to cost.

    It is a make work program.

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  4. "The $6.1 billion covers the structure and missions systems of the F-35 but excludes the cost of the Pratt & Whitney F135 engines, which were agreed under a separate contract awarded in April. The Department of Defense awarded P&W a $1.4 billion deal for 66 engines, which includes several spares." FlightGlobal

    LM can accept the $6.1 billion contract or appeal to the Armed Services Board of Contracts Appeals.

    LRIP 9 is for 57 a/c, 42 A, 13 B & 2 C, with deliveries starting in early 2017.
    Represents a 3.7% reduction in price of $4.1 billion price of LRIP 8 for 42 a/c, A = $95M, B = $102M, C = $116M

    https://www.flightglobal.com/news/articles/lockheed-awarded-61-billion-deal-for-57-f-35-airfr-431101/
    http://www.defensenews.com/articles/pentagon-moves-forward-unilaterally-on-61b-contract-for-ninth-f-35-lot
    http://breakingdefense.com/2014/11/new-f-35-prices-a-95m-b-116m-c-102m/

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  5. Red below, this is a perfectly acceptable form of contract in both Gov and Civilian practice. LockMart can walk and they are under no obligation to perform under the contract.

    What is a 'Unilateral Contract'

    A unilateral contract is a legally enforceable promise - between legally competent parties - to do or refrain from doing a specified, legal act or acts. In a unilateral contract, one party pays the other party to perform a certain duty. If the duty is fulfilled, the party on the other side of the contract is obligated to transfer the specified funds. Only this party is under obligation of the contract, whereas the acting party is not legally obliged to perform the duty.


    Read more: Unilateral Contract Definition | Investopedia http://www.investopedia.com/terms/u/unilateral-contract.asp#ixzz4OwVvOzri
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    This situation is a sorry statement on the state of Gov Acquisition between the biggest Contractor and their biggest Customer. If LockMart walks from $6B (on just the Lot 9 build) their stock will drop big time and the execs will loose bonuses and/or jobs.

    The question will be: You really couldn't make a deal on price for 57 Aircraft? With more production lots coming afterwards?

    And on the Gov side the question will be: After 9 build lots you can't figure out how much one of these Aircraft cost? With all of the cost data you get?

    Good news is maybe we won't get F-35s and maybe this will be the start of a new reform movement where we get knowledgeable acquisition professionals in the Gov and break up these monster DoD contractors.

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    1. LM are the lead contractor arent they. If they want to walk away, the government could appoint another lead ? That could obviously be Boeing who would then coordinate all the other sub contractors, and take over. Is the Ft Worth plant still government owned ?
      Yes it is
      en.wikipedia.org/wiki/United_States_Air_Force_Plant_4

      I think LM only produce the front fuselage, all other sections are made by others, some dual source.
      It would be great news if LM were left only as a major subcontractor

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    2. Heres the list of major) airframe contractors ( details require subscription)
      http://www.airframer.com/aircraft_detail.html?model=F-35_JSF#Airframe Assemblies

      Delete
  6. Have the costs per aircraft declined through all the production contracts?

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  7. In order to win a contract with the USG you have to give away and unbelievable amount of internal company information- actual proprietary labor rates, material costs, etc. In your Statement of Work you tell them how many man hours, GFE requests and the time to perform, etc. ect, ad naseum. Anything above that is the profit for the company shareholders.

    Let's say a 10% profit rate (notional) is acceptable to the USG (I have zero knowledge and never participated, it seems to vary according to the dictates of each administration). It's Contracts job (USG business people-oxymoronic sometimes) to extract the most value for the taxpayer. Sounds good doesn't it?

    At this stage if Lockmart decided to play hard ball and walk away (zero chance)the USG would sue them, in effect shut them down.

    What the USG giveth (basically jobs programs really for a 50 state, global acquisition like this) it can taketh away. The only party really affected is that nebulous entity who needs the product to complete their mission and that is the US military. Of course we all know THAT can't stand in the way of government business or of following all the contracting processes of the FAR. The process is at the altar first.

    b2

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  8. I wonder how much of this is a bit of grandstanding after LM said it requires another 1/2 billion to finish development.

    Still, its a sad state of affairs, as stated above. I think its also yet another problem with having so few suppliers and such a complex weapons system.

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