Contractors Reaping Big Award Fees Despite Struggles

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  Space News Business

Contractors Reaping Big Award Fees Despite Struggles

By JEREMY SINGER
Space News Staff Writer
posted: 23 January 2006
11:22 am ET


Despite being unable to deliver two of the U.S. Defense Department’s highest-priority satellite programs at the advertised prices, Lockheed Martin Corp. has received the majority of the award fees on both contracts, according to U.S. Air Force officials.

Lockheed Martin Space Systems of Sunnyvale, Calif., has received 74 percent of the award fees available thus far on the Space Based Infrared System (SBIRS) High missile warning system , even though the cost of that effort has grown to at least five times the originally projected price tag of about $2 billion. The company has received 94 percent of the award fees on the Advanced Extremely High Frequency (EHF) satellite communications program, another effort that has seen significant cost growth.

Technical difficulty that leads to cost growth on military space programs is not an issue limited to Lockheed Martin.

Boeing Integrated Defense Systems of St. Louis has run into significant problems with the Air Force’s Wideband Gapfiller satellite communications effort, but those satellites are being purchased under a fixed-price contract that includes no award fees, meaning the company foots the bill for cost growth.

Boeing also has struggled with the Future Imagery Architecture spy satellites being developed for the U.S. National Reconnaissance Office — difficulty that recently prompted the agency to cancel a portion of the contract — but the details of that program are classified.

And space programs are not the only ones in which contractors have been earning most of the award fees despite significant cost growth .

The Government Accountability Office, the investigative arm of the U.S. Congress, released a report in December that found the Pentagon has spent billions of dollars on award fees on programs despite cost growth. Examples included the Boeing-Sikorsky Comanche helicopter, which was canceled due to cost growth but not before the Pentagon paid out 85 percent of available award fees, according to the report.

“Despite paying billions [of dollars] in fees, [the Defense Department] has little evidence to support its belief that these fees improve contractor performance and acquisition outcomes,” the report charges .

In the case of SBIRS High , Lockheed Martin has earned $171.4 million in award fees since winning the contract in 1996. Over the course of that period, the first launch of those satellites has been delayed from 2002 to no earlier than 2009, and the cost has risen from about $2 billion to more than $10 billion. Some of that delay and cost growth was due to Air Force decisions beyond the company’s control.

In a written response to questions provided by Joseph Davidson, a spokesman for the Air Force Space and Missile Systems Center in Los Angeles, service officials said the award fees on SBIRS are tied to “cost, schedule and performance.” The company earned most of those award fees in the early stages of the program, before it ran into significant technical difficulty, according to the statement.

On Advanced EHF, Lockheed Martin has earned $186.9 million in award fees since winning the contract in 2001, according to Randall Bradford, another spokesman for Space and Missile Systems Center, which buys military space hardware.

The first three Advanced EHF satellites were expected to cost about $3.2 billion when the Air Force awarded Lockheed Martin the system prime contract in late 2001. By early 2004, the cost estimate had risen to $5 billion, and an internal Pentagon estimate completed later in the year indicated that technical issues could push cost up by an additional 50 percent.

Some of that cost growth has been attributed to delays associated with Advanced EHF encryption equipment that is being provided to Lockheed Martin by the government.

Despite receiving most of its award fees on the SBIRS and Advanced EHF programs, Lockheed Martin faces negative consequences for the cost growth down the road, according to the statement provided by Davidson. Government program officials feed ratings from annual performance reviews into databases that can affect how a company is judged in future procurement competitions , the statement said.

However, Beth Daley, a spokeswoman for the Project on Government Oversight, a watchdog group based in Washington, said that by paying the bulk of the award fees on a program that has gone well beyond its budget, the Air Force is demonstrating that it is “standard operating procedure to allow the cost of contracts to spiral out of control.”

Steve Tatum, a spokesman for Lockheed Martin Space Systems, said the company believes that award fees are flexible enough to allow the government to recognize “superior or inefficient performance.”

“These are not considered a ‘bonus,’ but represent the only means of earning a profit of any kind,” Tatum said in a written statement. “Lockheed Martin never strays from a path of striving for mission success and exemplary execution on our programs.”

Comments: jsinger@space.com