Pentagon faults Lockheed's tracking of big programs

By Andrea Shalal-Esa

WASHINGTON (Reuters) - The largest U.S. defense contractor, Lockheed Martin Corp <LMT.N>, did not follow required guidelines to track and manage costs on major weapons programs, according to an internal Pentagon report released on Tuesday by the nonprofit Project on Government Oversight.

Lockheed did not comply with 19 of 32 industry guidelines, resulting in a lack of control over big-ticket programs such as the F-35 Joint Strike Fighter, the F-22 fighter jet, and its older F-16 fighter program, the Defense Contract Management Agency concluded in its November 2007 report.

It said Lockheed's use of the guidelines, or "Earned Value Management System," was below standard and did "not provide the requisite definition and discipline to properly plan and control complex, multibillion-dollar weapons systems acquisition programs."

John Young, the Pentagon's top arms buyer, is due to testify about problems with major weapons programs before the Senate Armed Services Committee on Tuesday.

In April, the congressional Government Accountability Office reported that 95 major weapons systems were $295 billion over budget, bringing their total cost to $1.6 trillion.

The Earned Value Management System guidelines, developed by the aerospace industry, help contractors and the government spot potential cost problems before they balloon out of control, said the Project on Government Oversight, a nonpartisan government watchdog group, which said it obtained a copy of the report.

"We can't continue to trust Lockheed with billions of taxpayer dollars or we'll end up with less bang for more bucks," said Nick Schwellenbach, the oversight group's national security investigator. "Affecting Lockheed's bottom line is the only thing that can cause them to clean up their act."

A large number of managers at Lockheed's military aircraft division, in Fort Worth, Texas, did not understand or properly apply the guidelines, the Defense Contract Management Agency (DCMA) said in an executive summary.

For instance, the agency said Lockheed was using management reserve funds to alter internal and subcontract performance levels and overruns, which made the accuracy and validity of its data suspect and made it difficult for the Pentagon to estimate program costs.

"This undisciplined approached to program management and towards the maintenance of the (guidelines), will ultimately jeopardize the long-term stability of Lockheed Martin Aero programs at Fort Worth, Texas and diminishes the buying power of the Department" of Defense, it said.

The agency said the Pentagon's chief arms buyer should take immediate "significant corrective actions" to ensure Lockheed's compliance with the rules, policies and procedures.

It also urged the Pentagon to adopt new rules for future contracts that would allow the withholding of five to 10 percent of contractor payments if companies did not follow the guidelines.

It said program award fees could be modified in existing contracts to address the issue.

The report also recommended that Lockheed examine its use of the Earned Value Management System guidelines at other facilities, and that the company and the Pentagon should develop a corrective plan to ensure the company's future compliance.

Lockheed Martin said it was already working hard to improve performance on its programs.

"We have worked closely with the DCMA team since November, resulting in an approved corrective action plan," the company said in a statement in response to the report. "We've addressed every recommendation and are putting improvements in place that both Lockheed Martin and the USG Earned Value Management Center believe will be effective in achieving full integration of cost and schedule."

(Reporting by Andrea Shalal-Esa; editing by Carol Bishopric and John Wallace)