From Defense Aerospace

 

U.S. Government Report Shows Decreased Costs for F-35 Program

(Source: Lockheed Martin Aeronautics Company; issued April 8, 2008)

 

FORT WORTH, Texas --- A newly released report from the U.S. Department of Defense shows that estimated acquisition costs dropped by nearly $1 billion from 2006 to 2007 for the Lockheed Martin F-35 Lightning II program.

 

The Selected Acquisition Reports estimate that F-35 program costs over the aircraft's three-decade production run decreased by $981 million (-0.3 percent), from $299.8 billion to $298.8 billion. The F-35 cost reduction was attributed in part to lower material costs related to agreements made by Lockheed Martin and its subcontractors, and revised estimates of support costs.

 

"The F-35 program is intensely focused on affordability, and these numbers demonstrate that hard work on the part of government and contractor teams is achieving the desired result," said Dan Crowley, Lockheed Martin executive vice president and F-35 program general manager.

 

"The F-35 team is committed to protecting the program's affordability," said Maj. Gen. C.R. Davis, F-35 Program Executive Officer. "The team has placed the highest priority on cost management while building the world's most advanced multi-role fighter."

 

Selected Acquisition Reports summarize the latest estimates of cost, schedule and technical status. The reports are prepared annually in conjunction with the president's budget. The total program cost estimates provided in the SARs include research and development, procurement, military construction and acquisition-related operation and maintenance. Total program costs reflect actual costs to date as well as future anticipated costs. All estimates include anticipated inflation allowances.

 

The F-35 program is on schedule to deliver aircraft to the U.S. military services beginning in 2010. The first test aircraft has completed 40 flights and has exceeded performance and reliability expectations. The inaugural flight of the first short takeoff/vertical landing F-35B is on schedule for mid-2008. All 19 test aircraft are in production flow or on the flightline, and assembly has begun on the first two production F-35s.

 

The F-35 is a supersonic, multi-role, 5th generation stealth fighter. Three F-35 variants derived from a common design, developed together and using the same sustainment infrastructure worldwide will replace at least 13 types of aircraft for 11 nations initially, making the Lightning II the most economical fighter program in history.

 

Lockheed Martin is developing the F-35 with its principal industrial partners, Northrop Grumman and BAE Systems. Two separate, interchangeable F-35 engines are under development: the Pratt & Whitney F135 and the GE Rolls-Royce Fighter Engine Team F136.

 

Headquartered in Bethesda, Md., Lockheed Martin employs about 140,000 people worldwide and is principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. The Corporation reported 2007 sales of $41.9 billion. (ends)

 

(EDITOR’S NOTE: Also read “Pentagon Plays Fast and Loose with JSF Costs,” posted today in our Feature Stories section.)

 

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Buuuuuuuttttt ....

 

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Analysis: Pentagon Plays Fast and Loose with JSF Costs

(Source: defense-aerospace.com; published April 9, 2008)

By Giovanni de Briganti

 

PARIS --- As audit agencies continue to predict substantial increases in the cost of the F-35 Joint Strike Fighter (JSF) program, the Pentagon pulled off a remarkable accounting coup by claiming, in its latest Selected Acquisition Report, that the program’s costs in fact declined during the second half of 2007.

 

In its April 7 report, the Pentagon said JSF costs dropped by $981.3 million (-0.3 percent), from $299,824.1 million to $298,842.8 million, during the six months ending December 2007. During this same period outside observers, including the Government Accountability Office, expected JSF costs to rise and breach Nunn-McCurdy unit cost ceilings, thereby triggering an automatic report to Congress and a temporary funding freeze, and requiring certification by the Secretary of Defense.

 

The Pentagon acknowledged that some costs had increased because of “higher estimates for elements of procurement nonrecurring costs (+$4,369.0 million), an adjustment to reflect manufacturing actuals for the System Demonstration and Development (SDD) flight test articles (+$3,849.9 million), a revised propulsion estimate to include additional hardware and increased lift fan cost (+$2,769.1 million),” for a total of $10.9 billion.

 

This would have pushed total program cost to over $310 billion – an increase of over 3% in six months – had the Pentagon not miraculously generated savings of $11.9 billion by revising downwards its own estimates for several other cost categories. These include lower escalation indices (-$1,955.8 million), lower material estimates because of prime contractor’s material agreements (-$1,650.6 million), incorporation of revised prime/subcontractor labor rates (-$879.4 million), and “revised estimate of support costs” (-$7,445.0 million).

 

As these $11.9 billion “savings” exceed the $10.9 billion in cost increases, the Pentagon was able to claim that the overall program cost decreased by $981 million. And, in case anyone missed the point, the Pentagon remarked that “overall, it should be noted that the Nunn-McCurdy unit costs are stable relative to the current and original baseline estimates.”

 

It is certainly a bad idea for a major program to breach its Nunn-McCurdy unit cost ceiling. But avoiding a breach by conjuring savings of $11.9 billion out of thin air is not only creative bookkeeping of the highest order; it is also an cynical challenge to the financial watchdogs which have long tracked the JSF’s rising costs and, ultimately, an insult to the taxpayers who will ultimately have to pay for the program.

 

Skepticism about the Pentagon’s JSF cost estimates is already widespread. In its latest annual report on the program, released March 11, the Government Accountability Office (GAO) concluded that “on the basis of the evidence we do have and our analysis, we fully expect future cost estimates to be substantially higher than the program estimates in this report.” By claiming to have discovered new savings at the 11th hour, the Pentagon has not improved its credibility.

 

There are many other reasons for doubting the Pentagon’s figures. In its report, GAO noted that the JSF Program Office itself admits that costs have increased by $23 billion in the past year, while three other DoD agencies also predict much higher costs than admitted by the SAR:

 

-- DoD’s Cost Analysis Improvement Group (CAIG) estimates $5.1 billion more for development, over $33 billion more for procurement;

-- the US Naval Air Systems Command (Navair) estimates an additional $8 billion to $13 billion additional development costs or trade-offs adding to procurement costs; and

-- The Defense Contract Management Agency estimates $4.9 billion in additional cost to complete the Lockheed Martin development contract alone.

 

This, and its other findings, led GAO to conclude that “we believe that the current JSF cost and schedule reported to Congress are not reliable for decision making,” an understatement of generous proportions.

 

The JSF’s financial shipwreck could get even worse because of the US dollar’s devaluation. On average, since 2006, the dollar’s value has declined by 10% to 20% compared to the currencies of the partner countries where JSF part production is to be outsourced. This means, perforce, that the cost to Lockheed Martin of JSF parts produced overseas will increase by a similar margin, leading to further increases in unit prices. And, if prices do not increase because of stringent contractual terms, it is questionable whether foreign suppliers will be able or willing to lose 10-20% of their own money on their JSF production contracts.

 

Whichever way one looks at the problem, it is clear that the JSF’s costs will inevitably rise substantially over current levels. This will lead to a blow-out in unit costs, which (based on December 2006 cost data) GAO already estimates at between $104 million (average procurement cost) and $122 million (program acquisition cost), well over twice as much as the $47 million unit cost that Lockheed continues to quote to foreign governments.

 

Unsurprisingly, Lockheed hailed the SAR’s findings, and issued a press release claiming that “these numbers demonstrate that hard work on the part of government and contractor teams is achieving the desired result."

 

Given the parlous financial situation of the JSF program, it is understandable that the Pentagon was desperate to find some good news to include in its SAR. Not even the most hardened of Pentagon critics, however, could have anticipated such a transparently inventive maneuver.

From Aviation Week's ARES Blog

 

Annual Expenditure Nineteen Nineteen Six, Result Happiness

Posted by Bill Sweetman at 4/9/2008 7:01 AM CDT

 

Lockheed Martin and the Pentagon had been mulling the latest Selected Acquisition Report numbers in advance of their public release late Monday afternoon, and responded Tuesday with a press conference and news release.

 

For JSF, the big good news was that there was no big bad news. The fighter dodged the incoming Nunn-McCurdy missile that everyone had predicted, and in fact the overall program cost declined by $981 million, which is a lot of money even though it is only 0.3 per cent of the total.

 

The program managers took the opportunity to slap the Government Accountability Office around a bit, since the GAO's last report on JSF had projected big cost overruns and delays.

 

Now, let's take our eyes off the top line for a moment and look at the first level of detail in the SAR. This, as Ian Dury and the Blockheads would put it, is what we find:

 

The small relative shift in the total cost is the sum of two larger changes: $11 billion in increases, more than offset by $12 billion in savings. But there is a difference between the two numbers. The savings are mostly in the medium-to-far future while the increases are here and now.

 

About $6.6 billion in overrun is in system development and demonstration (SDD) cost. $2.8 billion is attributable to added costs in propulsion, due to the problems with the F135 engine and increased cost with the lift fan. Another $3.8 billion goes to "SDD flight article costs" - that is, building the prototypes. (Program boss Maj, Gen. C.R. Davis alluded to this in February.) These two alone add up to a 15 per cent jump in SDD, based on the $45.9 billion SDD bill (in 2008 dollars) quoted by the GAO.

 

In fact, those increases are not far off what the much maligned GAO predicted in March. So there.

 

(But wait, there's more! The SAR numbers, based on the 2008 budget, take credit for the cancellation of the F136 engine, which Pentagon acquisition chief John Young said in March would cost another $3.5 billion in SDD and procurement. That would make SDD 20 per cent up.)

 

The savings as listed by the SAR are in procurement and support. They include $7.5 billion in support costs and lowered estimates for labor rates, materials and escalation. Some of these represent the clawing-back of increases in prior-year SARs, and some are attributable to good management, for which congratulations are in order if they are achieved.

 

However, there is a big wrinkle in a small footnote, which notes that $9.15 billion in JSF money has been shifted from support to non-recurring procurement costs. (Most of this has to do with bringing low rate initial production airplanes to the initial service standard, and installing state-of-the-art electronic components to replace pieces which, by then, will be obsolete.) Without that switch, support costs would have been up and non-recurring procurement would have been down. What emerges, therefore, is that savings in procurement are projected to offset the increases in SDD.

 

If the savings are realized it is important news for non-US customers. They have typically planned to take all their aircraft in a few years. They want to know that the JSF unit cost is under control, because it would otherwise blow out their national budgets in those years. These numbers say that is the case: and actually that's more important for the JSF than the top-line number.

 

But there's a big difference between SDD dollars and procurement dollars. If the schedule holds we are more than half-way through SDD (started November 2001, with operational testing of Block 3 due to end in late 2013).

 

Procurement started in May 2006 with the award of the first long-lead contract for low-rate initial production (LRIP) aircraft: we're two years into a 30-year effort. The crunch for procurement is ahead of us, where the A380 and 787 ran into trouble: as LRIP rates accelerate rapidly year to year while adapting to lessons learned from SDD.

 

So the picture is not as simple as the press release suggests and (like the title) reflects the sunny optimism of Mr Wilkins Micawber. But it also brings to mind the observations of Mr Dury, a Londoner like Dickens, on the hope that springs eternal, and where it springs next.