July 11, 2005

Pentagon to switch Lockheed C-130 contract by Nov.

WASHINGTON (Reuters) - 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

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.