By Andrea Shalal
WASHINGTON (Reuters) - The U.S. unit of Britain's BAE Systems Plc on Tuesday said the U.S. Air Force has halted some of the company's initial work on a project to upgrade South Korea's F-16 fighter jets amid ongoing talks about the second phase of the project.
“We remain concerned about the lack of progress in the negotiations between the Republic of Korea and the U.S. Air Force on the KF-16 upgrade program that has now resulted in a partial stop work order," said BAE spokesman Brian Roehrkasse.
South Korea last week said it could cancel the overall project to upgrade 134 F-16 fighter jets and seek a different contractor, after the U.S. Air Force told Seoul the projected cost of 1.75 trillion won ($1.7 billion) could rise by 800 billion won.
The U.S. unit of BAE Systems beat out Lockheed Martin Corp, which built the jets, to win the South Korean upgrade contract in 2012, the first non-original equipment maker to win a competition for F-16 upgrades.
The company has several hundred employees working on an initial $140 million development contract for the upgrades, and had hoped that U.S. and South Korean officials would reach agreement about the second phase of the work by year end.
But the deal ran into trouble after the U.S. Air Force, which is managing the arms sale for the U.S. government, added significant "risk reserves" to proposed costs, according to sources familiar with the matter.
Roehrkasse said BAE remained committed to the terms of the firm fixed-price contract initially discussed despite the dispute between the Air Force and South Korea over the cost.
"We have made it clear throughout this process that we remain committed to the firm-fixed price contract for the scope of work defined by the U.S. government and the Republic of Korea last year,” Roehrkasse said in a statement to Reuters.
Vice Admiral Joe Rixey, who heads the Pentagon's Defense Security Cooperation Agency, which oversees foreign arms sales, met with South Korean officials last week to discuss the issue.
South Korea must cancel the contract that BAE is working on before it can sign a contract with Lockheed to do the work, according to U.S. industry and government officials.
South Korean officials requested the partial stop-work order, and are expected to formally cancel the contract soon, according to sources familiar with the issue.
Pentagon and Air Force officials had no immediate comment on the stop work order or reports in the Korean press that South Korea could sue BAE to recover funds already spent.
"BAE Systems doesn’t believe that it would be financially liable in any circumstances regarding this contracting disagreement," said one company official, who asked not to be named since the issue had not yet been resolved.
The official said BAE had not laid off any employees working on the contract as a result of the stop-work order.
(Reporting by Andrea Shalal; Editing by Lisa Shumaker)