Pentagon May Be On Hook For $147 Million... But Good Luck Collecting

If you're a US defense contractor, it probably doesn't pay to tick off Uncle Sam. Then again... where else is he gonna shop?

Lockheed Martin is the world's largest defense contractor, but its F-22 Raptor program is caught in a political squeeze among the US Air Force, which started in 1994 with plans to buy 750 of the stealthy aircraft; Pentagon brass, which says only 183 of the planes are justified; and an incoming Obama administration based on pledges to cut defense spending.

During the transition period, the Air Force has committed to buy only four planes in fiscal 2009, while its contract requires the purchase of at least 20.

Now, Bloomberg reports that if less than 20 planes are ordered in the current fiscal year, it will invoke a penalty clause in the current procurement contract which obligates the Air Force to pay $147 million to terminate production.

John Young, undersecretary for acquisition at the Air Force, says he's "surprised and dismayed" that Lockheed would try to enforce the fine print in the 2006 contract.

In a simile which sounds ironic coming from a military guy, he says, "It's kinda, sorta holding a small gun to somebody's head saying if you don't buy more you have to pay us extra, and that is inconsistent with best business practices."

The $147 million would be little more than a nuisance for the Air Force, in the overall scheme of things. If only four Raptors are ordered, dropping the remaining 16 on the contract saves the Pentagon budget over $2 billion. There's also the matter of collection costs.

Young predicts the company will probably file a request for adjustment, "...saying you owe us $147 million, and the government will say we do not owe you anything."

Lockheed declined comment on Young's remarks.

FMI: www.lockheedmartin.com, www.defenselink.mil