Lockheed: Pentagon Negotiators Are Becoming More Unpredictable

Pentagon negotiators have in recent months become more unpredictable and willing to ignore precedent, Lockheed Martin’s CFO said Monday. The seemingly new approach has slowed down talks on the latest batch of F-35 fighter jets and even on other weapons and gear that the U.S. Defense Department has been buying for decades, Bruce Tanner said.

“It’s not like negotiations were always easy, but I’ll say they were more predictable than they are today,” Tanner said in an interview Monday. “There’s just more things that are being changed or things that you thought were sort of foundational elements of negotiation that maybe weren’t up for negotiation that now seem to be up for negotiation.”

For example, he said, the government now wants companies to eat various costs they once would have been reimbursed for.

“Everyone should be interested in cost reduction, not simply not reimbursing elements of cost that you historically reimbursed,” Tanner said. “That’s a strange way to get cost reduction and, I would argue, a very short-sighted, not helpful, not healthy for the industry and ultimately not healthy for the folks in the Pentagon buying under that strategy to use that approach.”

Tanner’s comments come days after Vice Adm. Mat Winter, who leads the $400 billion F-35 program, said he was “not as satisfied with the collaboration and that cooperation by Lockheed Martin.”

The current round of negotiations began in spring 2016, when Lockheed submitted its first proposal for a batch of 130 F-35s. Based on the February 2017 purchase of 90 F-35s for $8.5 billion, the new deal could ultimately top $10 billion — and be one of the largest contracts ever inked by the Pentagon, Tanner noted.

The Lockheed CFO said the company is working to trim the plane’s price tag, but it cannot happen overnight.

Almost every batch of F-35s — there have been 10 — has cost less than its predecessor. The price of the A variant — the version flown by the U.S. Air Force and most allies — has dropped from more than $270 million in the first batch to about $94.3 million in the most recent one.

“If I could snap my finger and sell an F-35 tomorrow for $75 million, I would,” Tanner said. “Because I think that would be helpful for everyone involved. As a taxpayer, internationally we’d sell more, etc. But wanting that cost to be that is interesting, actually being able to do it is a whole different discussion.”

Earlier on Monday, Lockheed CEO Marillyn Hewson told reporters during her annual state-of-the-company address that F-35 negotiations are always complex.

“It’s a very large program…and it’s a very important program for our customers,” Hewson said. “Our goal is to work directly with our customer and provide the information they need and have the appropriate looked at what the cost is for the aircraft so that we can get to closure on that negotiation. I’m optimistic that we’ll get to closure on that negotiation in the near term.”

Tanner said Lockheed has seen the shift in the government’s negotiating tactics beyond the F-35 talks. For example, there have been hiccups while negotiating a new deal for the C-130 cargo planes, an aircraft the U.S military has been buying since the 1950s.

“We’ve negotiated thousands of C-130 deals for…at least 60 years,” Tanner said. “It seems like we” — meaning the government — “are making things harder than it has to be…by nature of how we’re negotiating.”

Last month, Lockheed challenged a U.S. Air Force request for intellectual property request about its Black Hawk helicopter.

“Profit was always the hard thing to negotiate,” Tanner said. “Every single contract I’ve done in my history, profit was always the tough negotiation. It seems like there’s just a little bit of a different flavor now though.”

Federal acquisition rules contain guidelines for acceptable profit levels, depending on the type of contract and other factors. Tanner said those benchmarks are being “tossed aside to a certain extent,” thus delaying negotiations.

“Not that everyone has to follow a routine, but it surely makes it easier to negotiate when every single negotiation is not a new dawn,” he said. “And It seems like we’re facing a lot of new dawns in the negotiating process.”

Tanner said the shift could prevent the Pentagon from getting the most technologically advanced weapons.

“If it’s a choice to us, we want to have a technological advantage; we’ve had that now since World War II,” Tanner said. “But if you continue to sort of…nickel and dime elements…I worry that long-term some of our technological advantage — people just won’t be incentivized to come forward with those sorts of ideas because they’re not getting reimbursed for them.”