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Lockheed, U.S. Air Force near $2.2 billion satellites deal

By Andrea Shalal-Esa

WASHINGTON (Reuters) - The U.S. Air Force expects to finalize a $2.2 billion contract with Lockheed Martin Corp for two more advanced military communications satellites in coming weeks, a top Air Force general told Reuters on Wednesday.

The Air Force awarded Lockheed a preliminary contract worth $1.9 billion in December for the fifth and sixth Advanced Extremely High Frequency (AEHF) satellites, which allowed the company to begin work on the new spacecraft.

This new contract will finalize the terms of that agreement, which is costing the government $1 billion less than initially projected, said Lieutenant General Ellen Pawlikowski, commander of Space and Missile Systems Center at Air Force Space Command.

Pawlikowski and other Air Force officials have pushed aggressively to drive down the cost of building government satellites and the rockets used to launch them into space. Space programs have historically been one of the costliest parts of the Pentagon's procurement budget, racking up huge cost overruns and lengthy schedule delays until recently.

Pawlikowski said the two sides reached a handshake agreement on the terms of the deal in mid-September. Air Force officials said they hope to sign the finalized deal by the end of October, although the government shutdown has slowed those efforts.

"Overall, from the beginning estimate to where we are today, we're saving over $1 billion," Pawlikowski said.

Mark Calassa, vice president of Protected Communication Systems at Lockheed, said the new contract would reduce costs by at least 35 percent compared to the previous satellite.

"We did this by transitioning to fixed price, locking in savings with a dual buy and combining similar teams across our military space line of business," he said in a statement.

Initial Pentagon cost estimates forecast the cost of those two satellites at $3.7 billion, although the projected cost had already dropped to nearly $3.1 billion after the Air Force decided to buy two satellites at the same time.

Pawlikowski said the Air Force worked closely with Lockheed to cut the cost of the advanced communications satellites, and hoped to trim the cost of the next two missile-warning satellites to be built by Lockheed by about $450 million.

The Air Force will negotiate an agreement for the fifth and sixth Space Based Infrared System satellites within the next six months, Pawlikowski said.

On the AEHF satellites, Pawlikowski said Lockheed and the government set up three joint teams to study ways to lower the technical, management and contract costs associated with building the huge spacecraft.

For instance, by changing the order of work on the satellite, Lockheed was able to save significant costs associated with repeatedly standing up and laying down the satellites while they were under construction, she said.

Industry and government officials also decided to reduce the number of in-person meetings required on the program, cut back the number of government inspectors, and streamline the terms of the actual contract.

(Editing by Eric Walsh)

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