By Andrea Shalal-Esa
WASHINGTON (Reuters) - The Pentagon on Tuesday told Lockheed Martin Corp, the No. 1 U.S. defense contractor, that it would withhold about $1 million a month in billings on the latest F-35 fighter contract until the company fixes a complex system that tracks the program's cost.
In a letter dated February 28, the Pentagon's Defense Contract Management Agency told Lockheed it was withholding just 2 percent of billings, instead of the 5 percent possible, because Lockheed had submitted a plan that was "reasonably expected to correct the remaining deficiencies" on the system.
Lockheed spokesman Joe Stout said the company was working closely with the Pentagon agency to regain approval of the cost-tracking system known as EVMS, or "earned value management system," at its plant in Fort Worth, Texas.
The Pentagon's Defense Contract Management Agency first flagged problems with the Lockheed cost-tracking system in 2007 and formally de-certified it in October 2010.
Lockheed is the first company to be hit by a new Pentagon rule that took effect this year allowing payments to be docked to contractors with deficient cost-tracking systems.
The money is being withheld only on Lockheed's most recent contract with the Pentagon, a deal worth up to $4 billion for early work on a fifth batch of F-35 fighter jets. Lockheed can get the money back once its cost-tracking system is recertified.
This is the latest in a string of negative news items about Lockheed's leadership of the F-35 Joint Strike Fighter, which is slated to cost $382 billion over the next decades, making it the Pentagon's costliest weapons program.
The Defense Contract Management Agency launched a follow-up audit of the Fort Worth facility, headquarters of Lockheed's aeronautics division, last month, said Pentagon spokeswoman Lieutenant Colonel Melinda Morgan.
Over the next few months, agency officials would evaluate data from all of Lockheed Martin's aeronuatics programs, with an eye to completing their work in the summer, Morgan said.
Morgan said the audit could to lead to recertification of Lockheed's EVMS system "if the DCMA review finds LM Aero has demonstrated compliance" with 32 guidelines set by the American National Standards Institute.
Lockheed mentioned the fresh Defense Contract Management Agency audit in its annual report to the Securities and Exchange Commission last week, but gave no details. It said the DCMA's withdrawal of certification had no impact on its internal controls over financial reporting.
Lockheed had made progress correcting problems with similar systems at other company sites in recent years, but continued problems with the Fort Worth system prompted the Pentagon to take the unusual move of withdrawing its certification in 2010.
At the time, defense officials said they wanted to focus the contractor's attention on making improvements to the system at the Fort Worth site, the headquarters of Lockheed's aeronautics division and the F-35, the Pentagon's costliest arms program.
Every bit of bad news fuels criticism of the F-35 program, which is already a key target of budget-cutters trying to find $487 billion in defense savings over the next decade.
The Pentagon this month announced a third restructuring of the $382 billion F-35 program, delaying orders for 179 planes to save $15 billion and allowing more time for testing.
Last week, senior officials got word that the Pentagon still estimates that it will cost about $1 trillion to operate a fleet of 2,443 F-35 fighter jets over the next 50 years, a staggering sum that Lockheed and the F-35 program office have been trying to whittle down for about a year.
Earned value management systems, or EVMS, are used by companies to plan, control and analyze the cost performance of programs and identify potential overruns.
(Reporting By Andrea Shalal-Esa; Editing by Gary Hill)