Lockheed Martin recently won a settlement worth more than $130 million in a protest with the Air Force. The company completed a contract to update the big C5 transport places with new engines. But it also had to do thousands of repairs outside the scope of the contract, and that’s where the disagreements started. The Federal Drive with Tom Temin  got details from Haynes Boone procurement attorney Dan Ramish.

Interview transcript: 

Tom Temin  Apparently, the planes arrived to Lockheed from the Air Force in such neglected condition that Lockheed had to do a lot more than they originally contracted in order to get the things flyable and to meet the Air Force requirement that the planes come back out like new. Is that the gist of it?

Dan Ramish  Well, Tom, part of the issue was that the planes weren’t required to come back like new. So, the contract wasn’t really repair contract, the contract was intended to modernize the C5 transport aircraft and to kind of get them online a greater percentage of the time and have them be more reliable. But, as part of this, there was a line item that provided for Lockheed to provide repair services to fix legacy issues that were either necessary for them to be able to make the upgrades or that affected the safety of flight for the aircraft. So, pretty limited types of repairs that were expected under the contract, but that wasn’t the way it played out in principle. Now, there’s always going to be some amount of additional legacy repairs of issues. It’s hard to predict exactly what types of repairs, what’s going to wear out on different aircraft. And there was testimony in this case about that issue, that aircraft fly different and unique missions in different environments. And, so, you never know exactly what’s going to wear out when. So, there’s a built-in flexibility for what the contract called “over and above work.” The problem was that there was so much over and above work, that it kind of affected the overall performance of the contract. And the work that Lockheed was really supposed to be doing, modernizing the aircraft.

Tom Temin  Right. So, the over and above was provided for, but maybe the Air Force vastly underestimated how much beyond the scope repairs would need to be made, in other words.

Dan Ramish  I think that was part of it, Tom. The other part of it was that DCMA imposed a higher standard than was supposed to be applicable under the contract. DCMA required a like-new standard. After a few aircraft had been modernized, they started having a more zealous inspection routine that looked at things that didn’t go to whether the modernization could be performed on the aircraft or whether it was safe to fly. So they were looking at things like foreign object debris, and requiring all of that to be removed, which didn’t affect the safety or the ability to make the upgrades and they’re requiring Lockheed to fix other technical issues that weren’t really necessary.

Tom Temin  If say, the engines were put in and the thing flew safely, they might have complained to the Air Force, well, you didn’t reupholster the copilot seat, which was split. I’m making that one up.

Dan Ramish  Yes, issues that would be extraneous. Yes, things like that, that were not really essential. And the contract only expected there would be essential repairs. So, the interesting thing about this, and this comes up a lot in government contract disputes, is that Lockheed was actually paid for the extra repairs that it performed under the contract. There was a mechanism in the contract for them to be paid the direct cost of performing the repairs. The problem was that it wasn’t just that they had to perform these repairs, but that there were so many legacy repair issues that they had to re-sequence the actual work that they were supposed to be doing and move personnel around. Some of the legacy repair issues were difficult to perform, and so they took some of their best mechanics who should have been working on the upgrade to the aircraft to have them instead deal with the legacy repair issues. And they changed the sequence of performing the repair work so that they could deal with all the extra repairs that DCMA was requiring.

Tom Temin  We’re speaking with Dan Ramish, a procurement attorney with Haynes Boone. Probably some of the mechanics might have encountered parts of their grandfathers had installed on this plane, because I think the first one was delivered, like, in 1969, you know, during the Nixon administration to the to the Air Force, and they’re still flying.

Dan Ramish  Well, yes.

Tom Temin  So, the dispute then arose in what Lockheed felt it had to lay out for allowable repairs, but it was just more than the Air Force felt it should pay and so Lockheed sued for that money.

Dan Ramish  Yes, Lockheed brought a claim for the loss of productivity and disruption caused by having so, so many extra repairs that DCMA was requiring. And during the performance of the contract, Lockheed and the Air Force tried to address these issues. You know, they brought in an Air Force onsite representative who was helpful in speeding up decisions, whether repairs needed to be made, and they introduced a new government advisory team that reviewed the repairs to make sure that they were really essential. And those measures helped, but there was still a significant volume of repairs above what should have been expected under the contract.

Tom Temin  Got it. So, for example, if putting in a new engine, and you found that the part that the engine hangs on was cracked? Well, that’s something you could reasonably expect Lockheed to say, yep, this has got to be fixed. But sounds like there were things inside and away from the modernizing parts that they fixed at the Air Force’s urging, that then didn’t get paid fully for the, as you say, the inconvenience and the out of sequencing that it caused, which is a real cost in a production situation.

Dan Ramish  Absolutely. So, to give you a sense, in the decision, they noted that Lockheed expected over and above work to be 3% of the initial production unit, and they experienced two and a half times that amount. So we’re talking about massive excessive increases in the amount of legacy repairs. So, they did bring this claim. They filed the claim with the contracting officer and then appealed to the Armed Services Board of contract appeals. And what did that board of appeals find? The Armed Services Board ruled in favor of Lockheed on its disruption claim and sustained the appeal and awarded the $131 million that Lockheed was seeking. And the board looked at the disruption claims. So, Lockheed, as I said, was paid for the direct repairs. And it was arguing that its fixed price work to modernize the aircraft cost more because of legacy repairs. And Lockheed brought out an expert. What they argued was that the first few aircraft didn’t involve that much over and above work. But then DCMA started using this heightened standard of like new, and that really kicked up the number of legacy repairs. And so what they did was they used a methodology that’s referred to as the measured mile approach, and said, listen, we can’t prove the amount of extra cost with each individual repair that the government ordered here. We need to look at all of the costs, and we’re going to use as a baseline, the first few aircraft where the government was being reasonable, and the repairs were kind of in line with what they’d experienced on other contracts. And they compared that against later aircraft, where DCMA was applying this higher standard and said, well, the reason these other aircraft cost so much more was because the additional legacy repairs were being required and affected the sequence of the work.

Tom Temin  It’s almost a case of if you have a kitchen done by a contractor, it’s while you’re here, can you add this and that effect that the Air Force was imposing?

Dan Ramish  Yes, historically, this is a challenging kind of claim to prove. As you can imagine, because there’s a preference if you can to identify the specific costs that increases rather than looking at the total cost, a version of a modified total cost claim. But Lockheed was able to do it here. And their expert actually compared the learning curve for the first few aircraft to the learning curve to the later aircraft that were affected, and kind of had an unusual approach to proving those damages. But ultimately, the Board found that methodology to be appropriate and was persuaded by Lockheed’s case.

Tom Temin  So, in other words, the later planes of the 49 that were fixed are actually nicer than the first ones that are fixed. But the Air Force had to pay for the difference.

Dan Ramish  Yes, they involved fixing a bunch of additional auxiliary issues that weren’t really necessary under the contract. Because of the volume of those extra repairs to those legacy issues that weren’t needed, the board was persuaded that that caused Lockheed to incur all these extra costs.

Tom Temin  Right. So, the lesson for the government here is keep your requirements straight and stick to them, and don’t have this kind of creep in scope while you’re underway, because you’ll end up paying for it.

Dan Ramish  That’s right. Ultimately, the government and the taxpayer had to pay for the extra work. And if they had stuck with the repairs that were actually essential, that, of course, would have saved money. There are also litigation lessons for the government here. The government’s defenses really were technical defenses. Many of them had been raised earlier in the litigation. They argued again that Lockheed’s claim was subject to the statute of limitations and that Lockheed had released its claims in a previous modification. And the board said, we’ve already ruled on these issues, you haven’t raised any new arguments, but the government seemed to really be counting on that in order to win and didn’t put on its own expert or its own evidence to refute Lockheed’s account of the extra costs that it incurred.

Tom Temin  And by the way, the project was completed several years ago, like 2018, actually, and so it shows that it’s never too late to try to recover your costs.

Dan Ramish  That’s right. Ultimately, it’s a difficult burden for the contractor to prove damages in these kinds of scenarios. And Lockheed here provides an example of how you can do it with an appropriate expert. And another thing that they did that was helpful to them here was that their expert backed out offs that were unrelated to the legacy repair issues, and that really helps the credibility of a contractor’s claim to show the board affirmatively that you’re pulling out things that the contractor could have been responsible for and are overclaiming.

Tom Temin  Dan Ramish is a procurement attorney with Haynes Boone. Thanks for that update.

Dan Ramish  Thanks, Tom.

Tom Temin  And we’ll post this interview at federalnewsnetwork.com/federaldrive. Hear the Federal Drive on your schedule, subscribe wherever you get your podcasts.

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