Accounting alert: Overhead fee change could clobber F-35′s finances

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.


Accountant.jpg

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”.



Subscribe

Subscribe to our e-mail newsletter to receive updates.

, , , , ,

4 Responses to Accounting alert: Overhead fee change could clobber F-35′s finances

  1. eg 1 August, 2008 at 2:42 pm #

    “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.”

    Ok, is this simply a pass through fee? Or, does this fee account for liabilities that Lockheed might incur as prime contractor if the subcontractors fail to meet some portion of the SOW?

  2. Stephen Trimble 1 August, 2008 at 2:44 pm #

    Great question! But beyond my simple understanding of the situation.

  3. eg 4 August, 2008 at 3:28 pm #

    Overhead,
    The problem is that prime contractors are often on the hook for the performance and warranty work of their subs. One way to mitigate potential costs is to add a pass through cost to the customer that provides for unanticipated rework. I am not endorsing the practice with this note. I am only noting the practice.

  4. Rico Fleckenstein 27 May, 2010 at 10:26 pm #

    Maybe you’ll tell me where the source of your post is from? I am inquisitive about learning a lot of about it.

Leave a Reply