Pentagon to Lockheed: Take It or Leave It

Lockheed Martin Corp. (NYSE: LMT) and the U.S. Department of Defense have been negotiating a contract for the F-35 Joint Strike Fighter program for more than a year. The two sides had agreed on all but one contract detail: the price the Pentagon would pay for the new planes under a low-rate initial production contract (LRIP).

The Defense Department apparently got tired of getting nowhere and on Tuesday the generals made an offer to Lockheed that the company essentially cannot refuse: $6.1 billion for 57 planes, take it or leave it.

A Lockheed spokesman told Breaking Defense:

The definitized contract for LRIP 9 announced today was not a mutually agreed upon contract, it was a unilateral contract action, which obligates us to perform under standard terms and conditions, and previously agreed-to items. We are disappointed with the decision by the Government to issue a unilateral contract action on the F-35 LRIP 9 contract.

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Lockheed and the Pentagon couldn’t even agree on how long contract negotiations had been going on. Lockheed said 14 months, while the Pentagon said 18 months. Either way, the Pentagon believes it’s been long enough.

The Pentagon’s price works out to about $107 million per plane and likely includes an unspecified amount for further development, a decrease of 3.7% compared with the previous contract, LRIP 8, that was 3.5% lower than the LRIP 7 contract signed in 2013. LRIP 8 represented a price that was 57% lower than the first LRIP. LRIP 8 was worth $4.7 billion to Lockheed.

Lockheed warned in a regulatory filing last month that it faces a “potential cash exposure” of about $950 million and a $2.3 billion termination liability exposure” for the LRIP 9 and 10 contracts.

The company can protest the Pentagon decision to the U.S. Court of Federal Claims. Lockheed filed a protest with the court when it lost the joint light tactical vehicle (JLTV) contract to Oshkosh, but it later withdrew its protest.

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