Lockheed Martin [LMT] and the F-35 Joint Program Office have reverted to the “elemental level” in negotiations over the cost of the 10th lot of aircraft to avoid deadlock and the government repeating a unilateral contract action as it did with the previous deal.
After more than a year the JPO in early November felt further negotiations with Lockheed Martin would be futile and unilaterally pulled the trigger on the unsettled contract for the ninth lot of low-rate initial production (LRIP) aircraft.
Lockheed Martin and the government are negotiating the contract value of LRIP Lot 10, and although JPO Chief Air Force Lt. Gen. Christopher Bogdan believes it will not have to jump the gun on that deal, it has the option to do so.
“After 14 months of negotiating and each side trying to convince the other about how much the airplane does cost and how much it should cost and how much risk there is in that cost and how much fee on top of that risk ought to be fair and reasonable, we just got to a point where neither side was going to convince the other side,” Bogdan said. “We hope not to be there on LRIP 10 and that’s why we’ve decided to start back at the elemental level to make sure that we both have the same kinds of assumptions about how much it does cost to build the airplane and how much it should cost to build the airplane and work from there.”
Low Rate Initial Production Lot 9 came in at $6.1 billion for 57 aircraft, a 3.7 percent reduction from the previous LRIP 8 contract signed in December 2014, according to the JPO. The lot price of the aircraft has fallen 58 percent from LRIP 1. Lockheed Martin is reportedly considering legal action over the contract it was forced to accept, but Bogdan would not comment on that issue.
“There’s no secret that the government and Lockheed had some tough negotiations there,” Bogdan said. “We were negotiating that contract for well over 14 months at the time at which the government decided that further negotiations would not be fruitful. That is why we made the decision to unilaterally complete that contract.”
The only contract element that was unilaterally decided was the unit cost of the aircraft and associated fees, Bogdan said. The contract was for 57 airplanes at a total $6.1 billion. The average unit cost of the F-35A dropped from $108 million in LRIP Lot 8 to $102 million in Lot 9. The F-35B likewise dropped from $134 million apiece in Lot 8 to $131 million in Lot 9.
Because the Navy bought half as many F-35Cs in Lot 9 as in Lot 8, the price for that variant rose from $129 million each for eight jets to $132 million per jet for four.
“They cut their production in half and as a result of that, when you do economies of scale in one direction, it hurts you in the other direction,” Bogdan said.
“Having said that, I fully anticipate that when we do settle LRIP 10, you will see all three variants – the A, B and the C – come down in price significantly,” he added.
The government has the option to force a contract completion only after Lockheed Martin is awarded an undefinitized contract for that lot of aircraft, Bogdan said. Because Lockheed Martin holds such a contract for Lot 10, the government will have the option to force Lockheed Martin to accept its price on Lot 10 if it chooses.
Lockheed Martin already holds an undefinitized contract for Lot 10 with a value not to exceed $8 billion. The government has already paid out about $2.1 billion–$1.2 billion for progress completed and the remainder for advanced procurement of materials.
Lockheed Martin and JPO officials are expected to begin “elemental negotiations’ on LRIP Lot 10 in mid-January, so there is little likelihood of a handshake deal before Jan. 20 and the transition to a new administration, Bogdan said.
“We continue to negotiate with Lockheed Martin at this point in time and it is the government’s desire to come to a bilateral handshake agreement on Lot 10,” Bogdan said. “We will continue the negotiations into January, though. We will not be done with those negotiations before the end of the year.”