The world has changed, and major Defense Department funds are being spent with subcontractors such as on the Lockheed Martin [LMT] Joint Strike Fighter program, which is important when considering what a program should cost, according to a top Pentagon official.
“We’re in process right now of evaluating the Lockheed Martin proposal as well as all the subcontractor proposals and we expect that sometime in the fall we’ll commence negotiations and if it goes according to plan, we should have a deal by the end of the year,” said Shay Assad, director of Defense Pricing.
“What we’re learned is that a lot of the money we’re spending is at the subcontract level and so we’re following the money,” Assad said. “We want to make sure we have a complete understanding of what we think a fair and reasonable subcontract price would be.”
Assad said he is “intimately” involved in the program and in assisting Vice Adm. David Venlet, F-35 Program Executive Officer on the program, come up with what they think it should cost, he said at a Defense Writers Group breakfast recently.
“We do expect Lockheed Martin to develop their own position, but we want to make sure they understand where we’re coming from in terms of what we think is reasonable.”
“The world has changed in terms of the composition of the cost of the products that we buy,” Assad said.
Twenty-five years ago, a contractor would likely perform 60 percent to 70 percent of the program work at its own facilities. That’s not so anymore. These days, the major primes for the most part do final assembly. Lockheed Martin does the wing, Northrop Grumman [NOC] does the central fuselage, BAE Systems performs a lot of key services, he said.
“We are getting a much clearer view every day and the reality is that the [warning] flags have been up for a while and it was just a question of kind of honing in on what it is that we thought the final estimate would be, for that particular cost.
“I think Admiral Venlet has done a good job of understanding what it is that’s left to be done in the program,” Assad said. “I do believe that he’s the right guy at the right time to be managing this thing.”
He did note that to some degree JSF cost changes are a product of the concurrency of the program and the discovery learning during developmental test and evaluation and the initial operational test and evaluation. “So it’s not a surprise that unknown unknowns occur during testing,” he said.
“But I will tell you we’re all over Lockheed in terms of their Earned Value Management system and right now it has not been approved, so they are fully aware now, they’ve got a path and we’re satisfied if they stay on the path they’ll be okay,” Assad said.
One of the program problems is just the ability to accurately forecast their work, he said, and that was reflected in the fact that the Defense Contract Management Agency disapproved Lockheed Martin’s Earned Value Management system.
“They’ve been at it for a while now, frankly a little bit longer than we thought, but I think by the end of this year they’ll be in pretty good shape in terms of having reliable projections and forecasting the work,” he said. I will tell you, we believe that given everything we know that we think with the exception of unknown unknowns that occur in testing, in concurrency changes, I’m not sure anyone can accurately predict that one.
DoD’s top acquisition official Ashton Carter moved Assad at the end of May to the pricing position, to enable him to assist in the implementation of better buying power initiatives across the department and “in particular participating in particular major programs and assisting the PEOS in getting those programs on track in terms of what they do cost, what they should cost and what it is we’re paying for example, Joint Strike Fighter.”