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14 Sep 05. JONATHAN KARP, Staff Reporter of THE WALL STREET JOURNAL, reported that the Army served notice that it could cancel a multibillion-dollar spy-plane contract, giving Lockheed Martin Corp. 60 days to prove it can deliver a product that works.

Yesterday’s so-called stop-work order is a step short of terminating the program and deals a public blow to the country’s biggest defense contractor, which has been scrambling quietly for months to salvage the Aerial Common Sensor surveillance-plane program (ACS). The Army’s move came the same day that Robert Stevens, Lockheed chairman and chief executive, acknowledged that the Bethesda, Md., company is at least partly responsible for the problems.

“Program execution is one of the cornerstones of the company. I’ve been dissatisfied with our performance on the Aerial Common Sensor program,” Mr. Stevens told an investor conference in Phoenix before the Army’s
announcement. Despite the complexity of the program, he said, “I believe in this case, we did not do a sufficiently good job.”

He said Lockheed didn’t correctly project weight, power and technical issues for its proposed plane, which proved too small for the array of electronic sensors and personnel the military wanted for battlefield surveillance missions.

Lockheed won an $879 million initial development contract last year by proposing a modified version of a 50-seat passenger jet made by Empresa Brasileira de Aeronáutica SA, or Embraer. Lockheed recently recommended switching to a much larger Embraer model without reopening the contract to bidding. But Army skepticism of that recommendation has prompted the company in recent days to intensify the search for alternate planes, placing in doubt the Brazilian aircraft maker’s debut in the U.S. defense market. This was confirmed by

Edward Bair, the Army’s senior official for intelligence, electronic warfare and sensors, said in a statement that the stop-work order doesn’t terminate the contract “at this time.” He added, however, that Lockheed’s “current contract performance is not supporting critical program milestones and [its] design does not fully support key performance requirements.” Mr. Bair projected a two-year delay in the program and “significant cost growth” to resolve the problems.

Some senior Army officials had favored canceling Lockheed’s contract, according to people familiar with the matter. The decision to stop short of termination reflects political pressure, and gives a respite to Lockheed, the country’s biggest defense contractor by sales. The Army faces risks canceling a contract at a time of extreme budget pressures: Congress could decide to allocate those funds to other, more urgent needs.

The spy-plane program isn’t the only Army weapons system to be halted this year. Some months ago, it stopped work on a Boeing Co. contract to develop next-generation battlefield radios. Boeing refined its work plan and retained the contract.

Potential solutions for the spy-plane program include termination, canceling the contract and reopening it for bids, placing Lockheed’s sensor suite on a different aircraft, or as some Pentagon officials are considering, parceling out the mission to a variety of existing aircraft. In response to the Army’s decision, Lockheed spokeswoman Judy Gan said, “We will be working with our customer to address the current issues and to determine the most achievable and affordable path forward for the program.”

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