Lockheed Martin - Federal Contracting Activities and Contract Types - Case Study Example

Lockheed Martin HISTORY Lockheed Martin is one of the leading American based security and Aeronautics Company in the world. Glenn L. Martin, the founder of the company first established Glenn L. Martin company in Los Angeles, California on August 16, 1912 which is exactly hundred years ago. He designed and built his first plane in a rented church. There was a great risk involved in building a new aircraft in a rented place but the faith of Glenn L. Martin in himself made him able to build a new unique and innovative aircraft. After successful building of this aircraft, he then started his Glenn L. Martin Company (Lockheed Martin). On December 1912, right after four months, Alco Hydro-Aeroplane Company was formed by two partners Allan and Malcolm Lockheed. This company was also involved in designing and building aircrafts. Later the company was renamed into Lockheed Aircraft Company. After some time the company renamed as Martin Marietta (Lockheed Martin). Lockheed Martin was formed by the merger of Lockheed Martin and Martin Marietta in 1995. The companies merge by announcing $10 billion. Both companies shared their important products and technologies for the new portfolio of Lockheed Martin Corporation. Lockheed Martina acquired defense electronics and system integration businesses of Loral Corporation for $9.1 billion in 1996 (Lockheed Martin). BACKGROUND Lockheed Martin is a global leader in proving aeronautics and defense security services. The company has presence in more than 75 countries. Headquarter of the company is situated in Bethesda, Maryland in Washington Metropolitan Area. The company has partnership with more than 300 industry players all around the world. It employs around 120,000 people worldwide including 80,000 scientists, engineers and IT professionals (Lockheed Martin). The company engaged in providing superior services to their customers. They provide a diverse range of services according to their customers’ requirement. The company involved in the businesses of building aircraft and missiles for defense, commercial satellites and IT solutions. According to the list of federal contract, Lockheed Martin placed first among the hundred top most government contractors in 2010 (Washington Technology). It is also one of the largest defense contractors. Its revenue was 74% from military sales in 2009. The net sales of corporation were $46.5 billion in 2011. In 2009, corporation total sales was $45.2 billion which is generated from 27% of Aeronautics, 27% from electronic system, 27% from IT & GS and 19% from space technology (Lockheed Martin). FEDERAL CONTRACT OF LOCKHEED Lockheed Martin was recently awarded one of the major projects from U.S Navy. The contract was awarded on July, 2012 and the amount of the contract is $27 million (The Military-Industrial Complex). It is a firm fixed price contract in which Lockheed Martin has to develop parts of 22 units for additional Vertical Launch-submarine (VLA) missiles (Lockheed Martin, 2012). The VLA missile is a supersonic missile and has the ability to attack targeted submarine quickly. The missiles make U.S. Navy safer. The missile will be launched from Lockheed Martin’s personal Launching system MK41. Lockheed Martin uses lightweight torpedo to a targeted area in this missile system. Lockheed Martin is a major partner of U.S. Navy. U.S. Navy has already given a five year contract to them worth $1.05 billion to produce 200 digital cockpits to IMS and sensors for MH-60S “sierra” and MH-60R “Romeo” Helicopters (Aviation Today, 2012). Lockheed Martin has produced more than 1,000 missiles over 20 years but the VLA missiles are unique among them. It can be fired even in a worst whether condition without changing the position of submarine. Navies of other countries are also interested in VLA missiles due to the advance technology using in it which made it threat for anti-submarine (Lockheed Martin, 2012). Lockheed Martin announced that the parts of VLA missiles will be manufactured at Akron, Ohio facility of Lockheed Martin. FIRM-FIXED PRICE CONTRACT The firm-Fixed Price Contract is a type of contract which provides a price which is not adjusted by contracting parties on the basis of contractor’s experience in accomplishment of contract. This contract obligates contractors to provide predetermined services with predetermined rate. In this type of contract the contractor is solely responsible for the risk associated in getting profit or loss. The contracting parties bear minimum administrative burden and the whole burden shifted to contractors (Stamburgh, 2012). In this contract, the contracting parties evaluate the total cost of the contact by determining all direct and indirect cost associated to the project. The cost price is then communicated to the contractors. The process of bids start here i.e. cost plus amount. The contractor with minimum bid and high company’s past performance and market value was given priority for the contract. This type of contract always allows contractors to remain in a track by controlling costs and perform efficiently and effectively. However, the contracting parties may create this contract with an award fee-incentive or delivery incentives. The fixed price contracts are always beneficial for the contractor when they acquire supplies and services on detailed specifications and reasonable function. The importance of fixed price contracts increase when the following conditions are involved (Stamburgh, 2012): 1. When there is enough price competition among contractors 2. When there are enough price comparisons of the past supplies and services and the valid data of price and cost available. 3. When the contractors can compare and evaluate the cost with the contracting parties and performance uncertainties which might happen in the future. The contractor is also able to analyze the risk associated in the contract. There are many reasons why fixed price contract is chosen over other types of contract. Most of the federal agencies use this type of contract as the administrative burden in this contract is less on contracting parties like federal agencies. The American Recovery and Reinvestment Act also states that “to the possible extent, fixed price contracts should be adopted” (Govwin, 2012). Fixed price contract has many benefits not for the contracting parties but also for the contractors. For contracting parties, this contract create less administrative burden to manage the contract work. The major burden of the contract is shifted to contractors. Further the contracting parties know the actual cost of the contract before the contract completed (Stamburgh, 2012). From contractors’ point of view, this type of contract always beneficial for them as it allows contractors to work efficiently and effectively by giving more output in less amount of input. Thus the contract made them able to manage and reduce cost. The contract also increases the efficiency of the contractors and their workers as they have align themselves in a given timeline, performance and cost. Another important benefit of fixed price cost contract is consensus between contractor and contracting party as both already know the cost of the contract and they are agreed on the contract. This creates the strong relationship between them and eliminates potential disagreement between them during and after the work done (Govwin, 2012). DIRECT AND INDIRECT COST OF THE CONTRACT The contract specifies that Lockheed Martin has to produce components for 22 Vertical Launch-submarine (VLA) missiles. This project includes both direct and indirect cost. Direct cost is the cost which can directly be traceable from the product or which is the major part of the product while indirect cost cannot be traceable directly or which is not the major part of the product. The major components of VLA missiles include Gyro Stabilized Platform, RFI shield, Rocket motor, optical Alignment window, umbilical connection, body section, Liquid coolant passages, R/V connector, Battery, Missile Guidance set control and some other components. The manufacture of some or all of the components requires direct material, direct labors and other materials. Direct costs include the direct materials of manufacturing the above components. It requires the iron, copper and silver sheets in order to manufacture the outer core of the missile. Chemicals, gases and explosive, supplies are also the direct material cost of various parts of missile as these are major components. Direct labor includes the workforce directly involved in manufacturing the parts of the missile. Lockheed uses the hourly paid method for direct labor. The number of hours workers worked into their hourly rate bring the value of direct labor. It includes all the labors in the factory working for the VLA missile contract. The indirect cost for manufacturing the components of VLA missile includes indirect material other chemicals which are not directly associated with products, battery charger, salaries of accounting staff and research administrator, depreciation of machines, factory utilities charges etc. Factory overhead cost is applied on direct labors hours worked. References Lockheed Martin. 100 Years of accelerating tomorrow. Retrieved August 29, 2012, from The Military-Industrial Complex. United States Navy Defense Contracts since 10/31/2006. Retrieved August 28, 2012, from Washington Technology. 2010 Washington technology top 100 government contractors. Retrieved August 28, 2012, from Aviation Today. (2012). Lockheed Martin awarded $1 Billion Navy helicopter cockpit upgrade. Retrieved August 28, 2012, from Lockheed Martin. (July, 2012). U.S. Navy Awards Lockheed Martin $27 Million Contract for Additional VLA Missiles. Retrieved August 29, 2012, from < http://www.lockheedmartin.com/us/news/press-releases/2012/july/us-navy-awards-lockheed-martin-27-million-vla-contract.html> Govwin. (2012). Fixed price contract. Retrieved August 29, 2012, from Stamburgh, T. (2012). Fixed price contract. Retrieved August 29, 2012, from Read More