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Press Release

Pentagon: Lockheed Cannot Properly Manage Billion-Dollar Programs; Many Defense Contractors Have Not Adequately Tracked Costs

Lockheed Martin, the world’s largest defense contractor, does “not provide the requisite definition and discipline to properly plan and control complex, multibillion dollar weapon systems acquisition programs,” states the executive summary of a November 2007 Pentagon report obtained by the Project On Government Oversight. Questions about this report are likely to be raised this morning at a Senate Armed Service Committee hearing on weapons acquisition.

The report by the Defense Contract Management Agency found that Lockheed Martin’s military aircraft division based in Fort Worth , Texas , is not compliant with contractually-required industry guidelines for tracking and managing costs called the “Earned Value Management System.” EVMS helps contractors and the government spot potential cost problems before they balloon out of control. This April the GAO reported $295 billion in cost growth for the 95 major weapons systems it reviewed bringing their estimated total price tag to $1.6 trillion.

If Lockheed cannot resolve its EVMS deficiencies, this can affect Lockheed’s ability to win and receive full payment for government contracts.

“We can’t continue to trust Lockheed with billions of taxpayer dollars or we’ll end up with less bang for more bucks,” stated Nick Schwellenbach, POGO’s national security investigator. “Affecting Lockheed's bottom-line is the only thing that can cause them to clean up their act.”

The DCMA primarily looked at how Lockheed was managing the F-35 Joint Strike Fighter, F-22 Raptor and F-16 programs, according to a DCMA letter accompanying the report. The Joint Strike Fighter program alone is the most expensive weapon system in history at an estimated $300 billion. It is also critical to the modernization of the U.S. military and many of the U.S. ’s closest allies.

The DCMA overall found Lockheed to be “non-compliant in 19 of 32 industry guidelines.” Among these, Lockheed inappropriately used its “management reserve to alter internal and subcontract performance levels and overruns.” Management reserves are meant to be used to address unexpected issues, not to alter subcontractor cost overruns.

This failure to properly manage costs has had consequences. Improper use of the management reserve ultimately led to a reduction in test planes and test flights in the Joint Strike Fighter program. According to the GAO in a March report, “Late in 2007, DOD officials approved a risky and controversial plan that replenishes management reserves by reducing development test aircraft and test flights in order to stay within current cost and schedule estimates.”

“As has been shown time after time, inadequate testing early on leads to spiraling costs down the road,” said Schwellenbach. “Do we want a repeat of the F-22? The cut in testing simply compounds Lockheed’s mismanagement and puts the entire Joint Strike Fighter program at risk.”

During the August 2007 review by the DCMA which led to the November report, the government team found that over five years, due to Lockheed’s weak internal accounting, Lockheed over-billed the government about $267 million in award fees wrongly paid to Lockheed’s subcontractors. After the discovery by the DCMA review team, Lockheed reimbursed the government.

In response to the DCMA, Lockheed has instituted a plan to become compliant, though as the case of Bell Helicopter shows, it can take a long time to actually get there. For two years, Bell ’s systems have been unable to pass a review, and the Pentagon has withheld $27.9 million from Bell as a result.

Lockheed and Bell are not the only contractors with these serious problems which have, until recently, been largely ignored. The House Committee on Oversight and Government Reform revealed that the DCMA reached similar conclusions when it examined General Dynamic’s management of the Expeditionary Fighting Vehicles contract.

The decline of Pentagon and contractor emphasis on EVMS was “an unintended consequence of 1990s acquisition reform,” Dr. James I. Finley, the Deputy Under Secretary of Defense for Acquisition and Technology, told POGO. “EVM is getting more attention throughout industry now that the DoD is stressing compliance.”

A Freedom of Information Act request for the full DCMA report on Lockheed has been filed by POGO.

The House Armed Services Committee has language in its version of the 2009 defense authorization bill directing the Pentagon to study weaknesses in the implementation of EVMS.