Thursday, June 28, 2012

Government Withholding Payments for Inadequate Business System

Aviation Week and Space Technology reported this week that the Defense Contract Management Agency (DCMA) has increased the amount being withheld from Lockheed Martin on the F-35 program from two to five percent because the company has not made satisfactory progress in correcting deficiencies in its EVM (Earned Value Management) system.

EVMS is one of the six business systems that must be adequate or contractors face potential withholds on their billings to the Government. The other five are accounting, estimating, purchasing, MMAS and Government property (in the hands of contractors).

Lockheed was awarded a $4 billion LRIP (low rate initial production) contract for 30 F-35 aircraft last December. The contract included the EVMS clause which requires compliance with 32 different EVM guidelines. The Government's review of Lockheed's compliance with those guidelines disclosed significant deficiencies in 19 of them. Lockheed had promised to have them corrected by June. In June however, the Government found that Lockheed had not made sufficient progress in correcting the deficiencies which led to the 5 percent withhold.

Five percent is a significant withhold. One estimate we read stated it would cost Lockheed $2 million per month. That might be underestimating the amount since the contract is $4 billion. Regardless, it represents a significant amount and is sure to affect the company's bottom line.

This incident is evidence that the Government is serious about enforcing the business system requirements laid out in the DoD FAR Supplement and is willing to invoke the withhold provisions when significant deficiencies go uncorrected.

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