US: Pentagon to Amend Controversial Commercial Structure of Lockheed C-130 Contract

WASHINGTON -- The Pentagon expects to complete the conversion of Lockheed Martin Corp.'s $4.1 billion C-130J cargo aircraft contract into a more highly regulated defense contract by Nov. 15, new chief weapons buyer Kenneth Krieg said in a letter obtained by Reuters on Monday.

In the letter dated June 28, Krieg told Arizona Republican Sen. John McCain that negotiations on converting the terms of the contract were due to be completed in time for the Air Force to include the new contract in the next budget.

He said the talks would be finalized after the Pentagon reviewed a "comprehensive audit of Lockheed's C-130J accounting records" by the Defense Contract Audit Agency, requested by the Air Force on June 24. The audit is due to be done by Aug. 30.

The C-130J program has been in turmoil for months, with the Pentagon first proposing to cut the program, then changing its mind in May after concluding early termination penalties would total $1.6 billion. It also said canceling the C-130J could raise overhead costs by $175 million for Lockheed's F/A-22 fighter jet, which is built at the same Lockheed plant in Georgia.

The Air Force in April agreed to restructure the terms of the contract after McCain and other lawmakers raised questions about the lack of transparency and oversight under its current commercial structure.

Krieg told McCain the goal of converting the contract was to "establish greater transparency in prime contractor's cost structure while minimizing additional costs to government."

He said the government had "learned several lessons" from its pilot program to use commercial procurement strategies, but denied that the terms of the commercial contract ever limited the Pentagon's ability to oversee Lockheed overhead costs.

McCain, who heads the airland subcommittee of the Senate Armed Services Committee, is pressuring Lockheed to provide cost and pricing data to improve oversight of the program, and met with Lockheed President Bob Stevens in February.

In April, he threatened to subpoena Lockheed for the data, perplexed why the cost of each new Hercules plane had risen to $67 million from a 1995 estimate of $33 million.

McCain sent Stevens a letter last month, saying Lockheed still had not produced cost and pricing data that would allow him to "determine whether the contractor costs and the prices negotiated and eventually paid are fair and reasonable."

An aide to McCain said his office was currently reviewing several pages of data provided by Lockheed late on Friday.

"We have had an open dialogue with the senator and his staff and will continue to work and have that dialogue," said Lockheed spokesman Tom Jurkowsky, adding, "the C-130J continues to perform extremely well in two combat theaters."

McCain's subcommittee plans an oversight hearing on the C-130J program later this month.

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