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TechnicallyAcceptable

"Excess Profit" on FFP Contracts? (C5 Transport Plane)

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Good afternoon,

I'm curious to know if anyone on the forum has any further insight on this Washington Post article from 1984 about "excess profit" on a Firm-Fixed Price contract between the U.S. Air Force and Lockheed Martin Corporation?
 

Quote

Lockheed Corp. will make "nearly twice" the profit the government intended on the first five of 50 modernized C5 transport planes to be bought under one of President Reagan's most controversial procurement decisions, the Air Force auditor general has concluded.

In a memorandum obtained by The Washington Post, Auditor General Jerome H. Stolarow said Lockheed could make almost $500 million more than intended on the rest of the planes unless the Pentagon can lower prices written into pending contract options.

The C5 findings are the latest in a string of procurement embarrassments for the Pentagon, whose rising budget has brought increasing complaints in this election year about loose contracting practices, excessive costs and shoddy products.

Gen. Lawrence A. Skantze, commander of the Air Force Systems Command, which oversees major procurement programs, said "we will not pay other than a fair and reasonable price" for the remaining 45 planes in the $7.8 billion deal.

 

Specifically, what was the outcome?

I have heard the outcome was that LMC had to negotiate a lower profit margin or something to that effect, and the it may have ended up at the CoFC, but have not found anything to support that claim.

Also for reference it appears this contract (or contracts) was pre-FAR, as FAR was effective April 1, 1984. 

Thank you.

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On ‎9‎/‎21‎/‎2019 at 3:45 PM, TechnicallyAcceptable said:

Specifically, what was the outcome?

There is a long history of this.  The C-5 program was the program on which Earnest Fitzgerald blew the whistle on the AF.  He essentially was fired by President Nixon and Fitzgerald sued Nixon and ultimately prevailed at the Supreme Court.  The contract was a cost reimbursement contract to begin with.  Congress got into the act and passed a law calling for the AF to renegotiate the contract into what the law called a firm fixed loss contract.  I suspect that what this article is referring to is a later contract for a different lot of aircraft.  At one time, there was a body within DoD known as the Renegotiation Board.  It was created during WWII and had the statutory duty to renegotiate contracts on which the contractor was making an excess profit (war profiteering).   However, I believe the Board had gone out of existence by 1984, so there was no longer any authority to renegotiate FFP contracts to prevent contractors from receiving "excess profits".

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Don,

The Renegotiation Board functioned in a unique situation.  Starting in WWII and continuing through the Korean War through Viet Nam, many contracts were awarded using other than full and open competition.  For example I saw a copy of a class D&F to restrict competition of 1665 contract actions in FY 69 to the existing mobilization base.  The D&F had a value of $4.9 billion in 1969 money!  The D&F covered limiting competition to producers that maintained a production line intact during peaceful and wartime conditions.  So at times companies passed up normal commercial profits of maybe 20% to keep idle capacity for the government.  Then when government demand increased, the base capacity often got stressed to unreal levels.  In short they were the only game in town.  Companies wanted more money and at times, they got big rewards.  

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