Defense remains concerned C-5 aircraft costs may still rise

The Defense Department is reviewing an offer from Lockheed Martin Corp. to keep the price tag for the Air Force's C-5 Galaxy aircraft modernization program under control, but the Pentagon's No. 2 official has expressed concern that the proposal would not avert future cost increases.

In an Oct. 25 letter to several key senators, Deputy Defense Secretary Gordon England assured lawmakers that the department is pursuing an extensive review of the troubled program to improve the cargo plane's reliability and replace its engines.

Also under review, he said, is Lockheed Martin's offer to sign a firm-fixed-price contract for the 108 aircraft awaiting upgrades.

But England cautioned that the offer was not necessarily a panacea for the program, whose costs have increased 50 percent over original projections made in November 2001, according to the Air Force.

That put the program in violation of the Nunn-McCurdy cost control law, triggering a review of the modernization program last month.

"The contractor is offering to mitigate the price increases through specific procurement quantities, but the proposal also includes provisions that would allow price adjustments," England said.

In May, Lockheed officials offered a firm-fixed-price contract that would set the base price for the final 108 aircraft at $83 million, not including what the company believes is between $25 million and $35 million needed per aircraft to pay for training, spare parts and other costs.

Supporters of C-5 modernization on Capitol Hill have praised the contractor's offer, saying that it would keep escalating costs at bay. But the Air Force has not endorsed the Lockheed Martin offer, raising concerns about unanticipated costs that would not be covered under the company's fixed-price proposal.

Indeed, Air Force officials have said the C-5 program could cost $4.2 billion more than the amount that would be covered under Lockheed Martin's proposed contract -- an amount disputed by C-5 supporters, who suspect the Air Force's figures are inflated.

"Part of the disagreement here is that Lockheed is unwilling to take a fixed price with an unknown fix on an airplane," Air Force Chief of Staff Michael Moseley told the House Armed Services Committee last week. "And part of the problem is, the [planes], they're old, and I kind of agree with them that that's a very tough thing to do."

In his letter, England noted the C-5 "industry team" has acknowledged not providing "adequate pricing data" to comply with federal law requiring contractors to fully disclose and certify costs to the government.

"The department needs and is working with industry to obtain this information to begin negotiations," England said. "The industry proposal merits careful and detailed consideration, and I assure you that it will be fully evaluated."

England's letter came in response to an Oct. 17 letter to Defense Secretary Robert Gates urging the department to review Lockheed Martin's proposal. That letter was signed by Senate Armed Services Chairman Carl Levin, D-Mich., and ranking member John McCain, R-Ariz., as well as C-5 advocate Sen. Thomas Carper, D-Del., and Sen. Tom Coburn, R-Okla., a budget hawk.

In a written statement Monday, Carper said their letter "helps ensure the appropriate officials outside the Air Force are looking at the data and proposal to provide an objective view of the best alternative to modernize our aircraft capabilities."

"Secretary England has made a commitment to conduct a thorough and comprehensive evaluation of all program costs, including a full evaluation of the prime contractor's fixed price offer, with the intent of finding the most cost-effective airlift program to meet our current and future military needs," Carper added.

A Lockheed Martin spokesman said the company was aware of the letters, but added that it would be "inappropriate" to comment on correspondence between senators and the Defense Department.