Firm Fixed Price

Posted By lex, on December 13th, 2011

Congress attempts to clap a stopper over the ballooning acquisition costs of the F-35 Joint Strike Fighter:

Future Pentagon purchases of the F-35 Joint Strike Fighter from Lockheed Martin will have to be based on fixed-price contracts under a defense authorization measure approved on Monday by a joint congressional panel.

The provision, part of the National Defense Authorization Act, would require fixed-price contracts beginning with the sixth low-rate production batch of fighters from Lockheed Martin Corp .

The Pentagon is currently trying to finalize a contract for 30 fighters – its fifth lot of aircraft being produced even as final testing of the radar-evading jet fighter continues.

The Pentagon entered into an initial contract with Lockheed on Friday for production of Lot 5 aircraft. The agreement established an initial price ceiling of $4 billion for the planes, but a final contract will not be concluded until sometime in 2012.

Lawmakers inserted the fixed-price language into the bill after learning about Lot 5 contract, angered that the decision had been taken even as the Senate was debating whether or not to require the deal to be a fixed-cost contract.

The advantage to the taxpayer of a firm fixed price contract vehicle is that all of the risk is shouldered by the vendor. It’s generally suitable for commercial off-the-shelf equipment with casual value added, but for bleeding edge technologies, that risk can become unbearable. Should the vendor find a way to reduce per unit cost of manufacture, whether through efficiencies in time or by cycles of learning, the “extra” cash goes straight to the corporate vault and thence to stockholders.

On the other hand, a “cost plus fixed fee” contract places the risk on the government, as the vendor may – within the constraints of the total contract value – charge for whatever additional labor, manufacturing and non-recurring engineering work is required, while being guaranteed a profit.

If the F-35 is as mature as its proponents profess, this could be a good deal for Lockheed Martin. If it’s not, well: It’ll be a dog’s breakfast.

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Filed under Carroll "Lex" LeFon, Headlines, Military

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