Prolonged delays in development of the F-35 Joint Strike Fighter are coming home to roost for Lockheed Martin, as the Defense Department moves to force the manufacturer to bear the cost of any changes to production aircraft that could result from the thousands of hours of flight testing that still lie ahead.

Even as development has fallen behind schedule, Lockheed has continued to produce aircraft and the resulting overlap, or concurrency, has driven up the cost of the initial batches of F-35s, forcing the cutback on procurement to cover the overruns.

Crying foul 10 years after his company signed the F-35 development contract, CEO Bob Stevens revealed last month that the government has failed to reimburse Lockheed Martin for up to $1.2 billion in costs associated with low-rate initial production (LRIP) Lot 5. And those bills may not be paid until the company agrees to negotiate what Stevens says is an “unprecedented” contract provision, called a concurrency clause, for the next production lot of aircraft.

Such a clause would place the burden of financial liability on the contractor team for design changes to the LRIP 5 jets that result from discoveries made during the ongoing flight-test program. Stevens declined to outline how much liability the government is intending to place on the contractors.

“As we requested funding to cover our termination liability and fund our supplier base on Lot 5, we were advised by the government [in October] that funding for Lot 5 appropriated by the Congress in April would now be contingent on our company assuming a new and unprecedented contract provision called a concurrency clause” for the Lot 5 jets, Stevens said.

Although Congress approved about $500 million for long-lead funding in July 2010, this was expended by February. But the bills have continued to accrue without government payment, putting the onus on Lockheed to cover the costs. “We requested additional funding from the government, which has not yet been provided,” Stevens told investors during the third-quarter earnings call Oct. 26.

The termination liability at the end of the third quarter was $750 million, a figure that would grow to $1.2 billion by year-end without government payment, he said. This would mean $150 million in cash exposure by the end of the year, said CFO Bruce Tanner. This exposure is likely temporary as it would only become an actual bill if the F-35 program was terminated. But for now the company is floating the cost of these bills.

To get the additional money, however, the Pentagon would need to use an “undefinitized contract action” (UCA), which allows program managers to quickly allocate funding at their discretion. UCAs have been heavily employed to ramp up support for war needs but their perceived overuse, particularly by the Air Force, has irked Congress. At issue is that, while this approach allows a contractor to begin work quickly, the negotiations come after work has started, leading to uncertainty as to actual costs. Last year, the Air Force made a concerted effort to cut down on UCAs in response to congressional inquiries.

Even so, Lockheed is pushing for a UCA to help pay its JSF bills. “The expectation is that the government will recognize and respect the effort we have undertaken in their interest and they will provide the funding that we have requested . . . in an undefinitized contract action . . . and then we together can . . . negotiate the Lot 5 contract in total, including a provision for concurrency,” Stevens said.

Though not balking entirely at the clause, Stevens decries what he sees as an undue burden from the financial liability of incorporating fixes from testing on the production line. “It is distinctly argued that a discovery in the program is not a deficiency or a fault of the contractor. . . . These discoveries are not defects. They are a part of a learning process that is a well-established facet of an engineering system like this.”

The F-35 Joint Program Office (JPO), however, is sticking to its position that concurrency costs must be shared with industry and that terms must be agreed to before launching into a larger LRIP 5 negotiation. “In the previous four LRIP contracts, all concurrency-related recurring costs have been borne 100% by the government,” says Joe Dellavedova, spokesman for the JPO, adding that the shift for Lot 5 was directed in August by Pentagon acquisition czar Ashton Carter, now undersecretary of defense.

Stevens avers that the company has shown its commitment to controlling F-35 costs by agreeing one year early to move to a fixed-price incentive fee contract from a cost-reimbursible agreement for LRIP Lot 4, negotiated late last year. “We understand the realities our customers are facing,” he said.

But the government is not happy with cost performance on LRIPs 1-3. As a result of overruns up to 15% above target cost, the Pentagon is cutting LRIP 5 procurement by five aircraft, from 35. The Air Force and Navy have agreed to reduce their quantities to “pay for the bills,” Dellavedova says. “Controlling costs is an absolute must.”

The government is responsible for paying $771 million in overruns for the 28 aircraft in Lots 1-3. Of that, roughly $136 million is labeled “concurrency cost.” The overruns amount to roughly $27.5 million per aircraft, $4.86 million of which is associated solely with concurrency. Lockheed Martin and Pratt & Whitney will have their award fees reduced by $283 million to pay their portion of the overruns.

The Lot 5 procurement cuts come on the heels of seemingly successful first sea trials of the short-takeoff-and-vertical-landing F-35B variant, which fell significantly behind schedule last year due to reliability problems. Stevens said two F-35Bs completed 72 vertical landings on the USS Wasp.

But while progress is being made, an October memo signed by the Pentagon's chief tester has added to cost anxieties, indicating it could require an additional 10 months to begin F-35 pilot training, which was expected to start in the fall. It is now more likely to begin next spring, at the earliest. Further delays in pilot training could increase costs for customers who will be required to operate older fleets for a longer time until F-35s can be accepted into service. The memo adds to concerns that testing on the aircraft is too immature to proceed with pilot training and operational use.

On the investor call, Stevens acknowledged the program is about two months behind in software development, an issue senior program officials red flagged earlier this year. While the Block 1B software is flying, release of the more-capable Block 2 for flight testing is behind schedule. Stevens said Lockheed is working to recover the lost time.