Censure for poor accounting standards is the latest blow dealt by the Pentagon to Lockheed Martin, its top defense contractor.
This week, the Defense Contract Management Agency yanked Lockheed’s certification for the Earned Value Management System (EVMS) at the company’s Fort Worth facility, the premier factory for F-35 and F-16 assembly as well as F-22 mid-fuselage manufacture.
EVMS is, at best, an accounting wonk’s tool. But it shouldn’t be ignored. The bottom line is that DoD uses this to track a contractor’s progress on contracts. The Navy pulled Bell’s certification a few years ago, affecting its standing in the Cobra/Huey program. The company was eventually recertified, but only after great effort and expense.
As with all things JSF, the scope – and therefore the stakes – are much larger. David Berteau, a senior advisor at the Center for Strategic and International Studies, says the estimated lifecycle cost for F-35 is equal to or slightly greater than the total price of the next 24 of the Pentagon’s top procurement programs. So, the need for oversight is far more urgent in F-35.
The timing of the decision is interesting, though, and deserves some discussion. According to Lockheed Martin, the DCMA audited Ft. Worth’s EVMS processes and determined that only half of the guidelines were being followed in 2007. The Pentagon says that 11 Lockheed sites have been surveyed and informed of their deficiencies. “Most LM sites have made good progress in addressing the EVMS system deficiencies. However, LM, Ft. Worth continues to make inadequate progress against its [corrective action plan],” says Cheryl Irwin, a spokesman for the Pentagon. “Withdrawal of compliance of EVMS at Fort Worth is necessary due to lack of progress [and] will help ensure that LM devotes the needed attention to complete the [corrective action plan] actions in a timely manner. It also reinforces the responsibility the company has to deliver to the government what it agreed to under the terms of the contract.”
Furthermore, Irwin notes that “accountability for the health of the contractor’s EVMS business system rests firmly with the contractor.”
This is some particularly pointed language from DoD, and it implies that the company wasn't dedicating the needed resources to correcting the problem. Lockheed issued a statement indicating the company was caught off guard. “We were surprised by this action,” said Joe Stout, a company spokesman. “We have a corrective action plan in place that the DCMA accepted on June 30 and we have been executing tasks on schedule in accordance with the plan.” About 200 people in Fort Worth are dedicated to EVMS.
Lockheed says that DCMA did not conduct a re-audit of EVMS last year because after the company conducted its own review, it was deemed unlikely it could pass muster. Timing for a re-audit, which will determine whether Lockheed is back in compliance, will be included in a JSF technical baseline review that is due to the Defense Acquisition Board by Nov. 23. But, it is unlikely to take place this year.
Aside from being embarrassing for the company, this chain of events begs some questions about practices at the company and how seriously it takes government oversight. The initial red flag came three years ago, and this multi-billion corporation hasn’t managed to get the facility that will eventually earn the lion’s share of its revenue back in line with accounting standards for its top customer.
Three years ago, the F-35 program was just shifting into production and coming off of an intense weight-reduction effort for the short-takeoff and vertical landing (Stovl) version. This prompted the first major cost overrun since the development contract was won in 2001. Fast forward to now and Lockheed and the Pentagon have their first fixed-price handshake agreement for LRIP lot 4 only months after a second major cost overrun. Though it will have an incentive fee structure that has yet to be disclosed, this pricing will set the bar for performance on cost against which all future lots are measured. So, it is reasonable to believe that accounting will matter.
Even with a DCMA approved action plan in June, that is still roughly three years after the initial signs of trouble. And, it seems that the company felt that approval of a plan in June (which is what its spokesmen keep pointing to) meant that noncompliance would be OK because of its statement of “surprise.” Clearly, the Pentagon felt otherwise when it pulled certification.
This reminds me of the problem in earning flight qualification for a part on the Terminal High-Altitude Air Defense (Thaad) interceptor. The company knew for at least a year that a single part – the optical block that prevents unplanned launch – was not suitable for production. And, it took multiple tries and back and forth with Missile Defense Agency to redesign the optical block, made by Moog, before the program could proceed. In the interim, deliveries were delayed for about one year and interceptors were stacking up awaiting this part. Lt. Gen. Patrick O’Reilly, MDA director, very publicly withheld the production contract until the company had proven the fix.That was recently remedied with the release of the procurement funds.
Lockheed insists the company is focused on customer needs.
"Throughout Lockheed Martin, we take all matters of compliance and performance seriously. Regarding EVMS, we have been working on a corrective action plan that the government accepted in June, and we were surprised and disappointed with the certification was withdrawn," says Jeff Adams, a Lockheed Martin spokesman. He points out that the company has a an "overall culture of continuous improvement" and problem solving [and] is focused on delivering affordable solutions that meet or exceed customer requirements and expectations.
One executive from another company who works with Lockheed told me he wasn’t surprised by the Pentagon’s decision on EVSM. He says that Lockheed is known for having lax adherence to that standard.
But, this begs a question. If this is the case, how did this happen and is this problem unique to Lockheed Ft. Worth? How important is EVMS to industry? And are other companies likely to run into a similar problem?