The Lockheed Martin industry team, including major subcontractors BAE Systems and Northrop Grumman, has avoided official cost overruns for the F-35 program since a $5 billion meltdown in 2004.
But Heidi Wood, a aerospace and defense industry analyst for Morgan Stanley, warns that a fundamental accounting change proposed by Lockheed during recent contract negotiations could start putting a huge dent in the program’s finances.
The change involves how the big companies in the F-35 industry team charge the government for acceptable overhead costs. Right now, all three companies each submit their own bills for services rendered to the F-35 joint programme office for payment. Each company tacks on an overhead fee for each bill.
According to Wood, Lockheed’s proposal would change this process. Rather than submit their bills directly to the JPO, BAE and Northrop would submit their bills to Lockheed, the prime contractor. Lockheed would then submit an aggregated, single bill to the JPO.
The problem is, BAE and Northrop would continue to add the overhead fee for their portion of the work. Then, under Lockheed’s proposal, Lockheed would add a fee on top of that for the aggregated amount, significantly increasing the size of its own overhead fee.
Wood also points out that we’re not talking about chump change here. She’s been told by a senior JPO official that the current structure has saved the program $850 million so far. By changing the structure before the start of full rate production in 2012, the overall cost increase could be enormous.
When asked to comment, Lockheed didn’t deny any of Wood’s statements, but expects
“feestructures to be comparable regardless of whatever the structure of thecontract”.