If senior government officials get their way, fixed-price contracts will be the way of the future, with the NASA chief even calling cost-plus contracts “a plague.” But one of the government’s top suppliers is pushing back, arguing that the government’s win is proving to be a big loss for industry.
Lockheed ($LMT) CEO and Chair Jim Taiclet said Wednesday that the government—responsible for about 70% of his firm’s revenue—is squeezing defense contractors a bit too hard, and he has some ideas for how to change that. Yes, that’s right—we’re talking procurement reform.
30,000 feet: The massive aerospace contractor had a decent year, beating expectations with an EPS of $27.55, according to its earnings report. The company’s space segment was its lowest-earning but fastest growing, thanks to US investment in missile defense.
Notably, its joint venture with Boeing, United Launch Alliance, reported negligible profits, likely due to the work required getting its brand-new Vulcan rocket flying. That should change next year—if Lockheed still owns the rocket-maker.
What about the margins? An analyst asked Taiclet on an earnings call why Lockheed’s profit margins seem to have fallen by about 200 basis points in the last decade. He had a ready answer: the customer is to blame.
“The government has been taking advantage of that monopsony power over the industry,” as the primary purchaser of military and space tech. Taiclet said too many of his competitors were taking risk on cost and pricing while bidding on contracts, even fixed-price offerings, leading to delays and cost-overages.
Taiclet argued that federal contract rules (and the cost transparency beloved by government auditors) are getting in the way of delivering the best technology, including that delivered by commercial tech firms who spend more on R&D than defense contractors.
“We want to move as briskly as we can as an industry with our commercial partners to their kind of pricing,” he told analysts, acknowledging that it would take time and probably an act of Congress to abandon set fees in favor of value-based pricing.
Test flight: Lockheed is already experimenting with service-based pricing in space with Crescent, a new subsidiary it stood up last year to offer lunar infrastructure services to the government.
