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First Production Batches of F-35 Showing Higher Prices

by: Matthew Potter
May 11, 2011

Category: Business Line, Companies, Congress, Contract Additions, Department of Defense, development program, Events, Federal Budget Process, Lockheed Martin, Military Aviation, production program, Restructuring, Services | RSS 2.0

The Department of Defense reported that the first three production contracts for the new F-35 Joint Strike Fighter (JSF) may end up costing more then originally planned. Depending on the scenario and the estimates they could be up to 15 percent higher.

Because of the agreements negotiated with the prime contractor, Lockheed Martin (LMT), these cost increases will be shared between the company and government. Lockheed, though, will still earn some of their fee on the production.

The Joint Strike Fighter program has seen steady delays and cost increases over the last several years. This led to last year the Defense Department withholding several hundred million in fee to Lockheed as well as restructuring the contracts to transfer more risk to the contractor. This is why some of the cost overruns will have to be absorbed by them rather then just the government.

The first production batches are normally higher then when steady state production is reached as they have to reflect higher amounts of non-recurring engineering as well as the production ramp up. They also have to adjust to potential delays due to issues identified in testing. Ideally once these years are completed the costs level off and the larger scale production saves the government money in the long run.

The problem faced by the JSF program and its customers is that as these costs increase they may cause reduction in the buy numbers each year and increase the schedule for the program. This means the aircraft may enter service later originally planned.

Because the JSF is now the key program for the United States the cost increases will be absorbed throughout the budget. The schedule slip may be difficult but will have to be accepted. There really is no alternative.

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