The biggest threat to the stealthy, fighter program is not just the technical challenge of crafting three variants for three different purposes. It is not the engineering challenges—such as excessive weight, helmet integration problems or even software development. Nor the complexity of nine nations cooperating on the roughly $400 billion program. It is not even the financial limitations, the serious squeezes on defense budgets and growing concern among customers about rising unit cost.
Those problems are daunting enough. But the man the Pentagon has tapped to direct the program has identified yet another. In a high-profile speech last week, U.S. Air Force Maj. Gen. Christopher Bogdan dropped a bombshell, saying the dismal relationship among stakeholders, the Pentagon's joint program office and prime contractor, is the biggest threat to its success. His remarks visibly disturbed senior Lockheed Martin officials sitting in the front row of the audience at the Air Force Association conference.
In a career of managing complex Pentagon programs, Bogdan says, “it is the worst I have ever seen.” In some cases, the industry team takes seven months to respond to a request for data from the program office, he says.
Multiple current and former senior Air Force and Pentagon officials say the approach taken by Lockheed Martin leadership in contract negotiations for thehas carried into the company's practices for the F-35. Both programs are managed out of the company's aeronautics sector headquartered in Fort Worth. One official suggests that the company would intentionally stall the Air Force procurement staff in F-22 negotiations in order to protract talks dangerously close to the end of the fiscal year, when Pentagon comptrollers would reclaim unused funding from a program. This would force service officials to quickly conclude deals that were less beneficial to the taxpayer, the official says. That strategy worked for years, the official says, adding that contract terms were often disproportionately favorable to Lockheed on the F-22.
“These assertions are incorrect,” Lockheed Martin spokesman Joe Lamarca says. “We negotiate all of our contracts with transparency and respect for our customers and suppliers.”
But the Pentagon and Air Force officials maintain that this culture is permeating the F-35. Low-rate, initial production (LRIP) Lot 4 negotiations for the first fixed-price, incentive-fee production contract on the program took more than a year to conclude. In their midst last November, Lockheed Martin CEO Robert Stevens said in an earnings call that Lockheed was exposed to “unprecedented” financial liability because the Pentagon was not paying $1.2 billion in bills associated with advanced work on Lot 5 aircraft.
Vice Adm. David Venlet, F-35 director until Bogdan is approved for the post, refused to pay the bill until Lockheed agreed to a “concurrency clause.” He wanted to share the cost of potential aircraft retrofits that would be required if deficiencies were found in the aircraft during development, which should wrap up around 2018. At the time of the negotiations, the company was exceeding target cost on earlier production lots by at least 15% and software delivery was lagging behind (a problem that persists). A month later, an agreement on cost sharing was reached, and the funding was delivered to Lockheed.
Now, however, LRIP 5 talks are dragging on. “It should not take more than a year to negotiate a contract, when you have been doing business together for 11 years,” Bogdan says. Lockheed beat outfor the F-35 development contract in 2001, and performance since has been plagued by overruns, design problems and delivery delays.
“We continue to work with our government customer to finalize an LRIP 5 contract that is mutually beneficial to the government, our international partners and the numerous suppliers and stakeholders to the F-35 program,” Lamarca says.
Lockheed officials believe they have time on their side in these contract talks. Knowing the Pentagon has been adamant about keeping the unit cost of the aircraft down—under pressure from Congress—they argue that speed and momentum in the program are needed to quickly ramp up production and reduce unit price through high order quantities. Though previous program managers backed that position, Venlet and Bogdan are taking a different tack. Bogdan is happy to allow talks to drag out. “We can slow down,” he says. With this approach, Lockheed loses an advantage it had enjoyed for years.
Bogdan became deputy director of the F-35 five weeks ago; he must be confirmed by the Senate before ascending to the top program post, and his comments may have been aimed as much at skeptical Senators as at Lockheed.
But he did not speak without backing. Sept. 19, Deputy Defense Secretary Ashton Carter said, “We need a government-industry team that works together,” adding that he is “with” Bogdan “100 percent.”
A top priority is to “shed our baggage,” Bogdan told reporters Sept. 18, noting that program officials on both the government and industry sides who are not willing to cooperate will be let go.
This is not the first public admonition of the F-35 contractor; the relationship has clearly been strained for years. In January 2010, then-Defense Secretary Robert Gates announced a major F-35 restructuring, withheld $614 million from Lockheed and fired the F-35 director at the time,Maj. Gen. David Heinz. A month later, then-Air Force Chief of Staff Gen. Norton Schwartz called out Lockheed Martin when asked if any officials on the industry team should be fired. “Dan Crowley [then-Lockheed F-35 program director] doesn't work for the Secretary of Defense” he said, indicating that the decision was under Lockheed's purview.
It took three months for the company to move Crowley to a corporate post in May 2010, installing the former F-22 program director, Larry Lawson, in the top F-35 job. Crowley now works for. In April of this year, Lawson became executive vice president of the aeronautics sector, handing management of the F-35 over to Orlando Carvalho.
Despite the leadership changes, problems continue. One senior Air Force official says, “it is unfortunate that there are stressors and tensions that obviously bubbled up to the top,” prompting Bogdan's comments.
The young F-35 production program has been characterized by contentious and protracted contract negotiations. Bogdan says it is unacceptable that the LRIP Lot 4 talks took more than a year, given that the partners have worked together for 11 years.
LRIP 5 negotiations are still ongoing after months, even though there is more actual cost data from previous lots to help with pricing. Though per-unit prices are coming down, they are still too expensive and Lockheed continues to exceed targets.
Bogdan could be considering an approach similar to the one he used with thecontract. After Boeing was selected over to build the new aerial refueler, Bogdan negotiated a fixed-price contract that has been hailed by Pentagon leaders as an example of good acquisition practices. Boeing is taking a loss in the development effort on the assumption that it will make up the revenue later in production. The F-35 is the linchpin of Lockheed Martin's future aircraft manufacturing revenue stream.
In his remarks last week, Bogdan also signaled that Lockheed must be more attentive to the fighter's maintenance plan; some estimates peg the Pentagon's total ownership cost for 50 years at more than $1 trillion, a staggering figure in this fiscal environment. Bogdan, however, says that Lockheed's position as prime contractor does not entitle it to control the life-cycle program. He opened the door to competing all or part of the life-cycle management of the massive aircraft program in the hopes of introducing innovation and affordability. “The basic strategy on the way we are going to sustain this program has got to change,” he says, adding that government depots will also be considered for work.
Poor industry relations have nagged the Air Force for years, partly because of mistakes in its procurement of a combat rescue helicopter in 2006, a KC-135 replacement and, most recently, a light attack aircraft for use in Afghanistan. Confidence in the service has also eroded among lawmakers.
The protracted tanker competition marred the Air Force's relationship with Boeing. One senior Air Force official believes the service was stung by what officers saw as constant “end runs” by the company going to Congress for help.
Since then, however, Boeing and Air Force officials have “lowered their guard,” to allow for a better relationship, says the senior Air Force official. Now, senior officials on both sides of the team meet routinely, and not simply when a problem crops up, the official says. The mistrust was fostered by overly complex protocols on both sides, the official adds, processes that have since been dismantled.
Maj. Gen. Steven Kwast, who heads requirements for Air Combat Command, called for “humility” on the part of industry and the Air Force in a speech at the conference. The parties need to “let go of our sense of control, and we need to collaborate to do the right thing,” he says.