U.S. law would require fixed-price F-35 contracts

WASHINGTON Tue Dec 13, 2011 12:04am EST

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WASHINGTON Dec 12 (Reuters) - 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.

Senator Carl Levin, Democratic chairman of the Senate Armed Services Committee, said he and the panel's top Republican, Senator John McCain, were upset that the Pentagon had acted even though it knew lawmakers were looking at the contract language.

McCain and Levin have expressed discontent with previous "cost-plus" contracts that paid Lockheed's costs for producing the aircraft plus a profit margin on top of that.

They believe the contracts have enabled the cost of the F-35 program, the Pentagon's most expensive procurement program, to balloon over the years.

"We take umbrage at the idea that they would proceed on Lot 5 while we are negotiating whether or not there should be a prohibition on a cost-plus contract on Lot 5. So what we did is we said no cost-plus starting on Lot 6," Levin said.

"The House (of Representatives) had not acted nor had the Congress acted, so technically they could do it," he said. "But frankly I'll be calling in these acquisition folks."

McCain criticized Pentagon acquisition practices.

"One would assume that a fixed-cost contract means that it wouldn't allow any additional cost to the taxpayers," he said.

"Not true any more. Now it has to be called a firm fixed cost contract. And maybe next year it'll be a firm fixed cost maybe-this-time-we-really-mean-it ... contract by golly. I mean it's insane, it's become insane."

The Senate and House earlier approved different versions of the authorization bill, which sets policy and authorizes military expenditures, but does not actually appropriate funds.

The reconciled bill approved by the conference committee goes back to both chambers for final approval, expected this week, before it is sent to the president for his signature.

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