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Pentagon Clarifies Cost Increases on the JSF Production

A few weeks ago when a funding reprogramming from the Defense Department was submitted to the Congress for their consideration it caused Senator John McCain (R-AZ) and the Senate Armed Services Committee (SASC) to question the program’s status. As part of the request it was asked by the Air Force to move over $240 million to pay cost increases on the F-35 Joint Strike Fighter (JSF) first production contracts. The total bill was actually closer to $750 million as the plan was to move internal JSF funding to make up the difference. Needless to say given the history of the program the SASC was not happy to see the further increases.

As part of their response McCain and Senator Levin (D-MI), the Chair, sent the Defense Department six questions about the reprogramming and the program’s funding status. One of the questions asked the Government to state how much of the cost increase is recoverable and most interestingly the cost to terminate the program.

The Pentagon has now responded to parts of the letter. They revealed that Lockheed Martin (LMT), the prime contractor, and Pratt & Whitney, part of United Technologies (UTX), will pay $283 million of the increase based on the cost sharing provisions of the production contracts.

One could assume this means the total bill to the Government now is below $500 million once this figure is subtracted. Unfortunately that is wrong. The total increase may ultimately be closer to $1 billion and the $283 million is the contractor share with the Pentagon picking up the rest, or just over $700 million. Pratt & Whitney estimates that their portion of the increase is about 6% of the total cost of the contracts.

The F-35 has suffered a series of production delays and cost increases due to testing issues and changes in the design of the aircraft. It had long been expected that there would be cost increases with the first three production batches. The Senate, though, has been trying to draw a hard line on future cost increases and have written into their version of the 2012 Authorization Act a requirement that Lockheed pick up all cost overruns beyond the target price and that the contract be a fixed price one. Normally at this stage in the program where much development and testing remains the contract would be cost plus and there would be some risk sharing as on the current ones.

There are many who are starting to get tired of the JSF status. The program has been re-baselined and repriced but it is not near its original schedule and cost. That is why the SASC raised the idea of terminating the program at its current state. This would be expensive, although no official estimate has been made, and would still leave the requirement for a new aircraft that would either require a new development program or a decision to buy an existing U.S. or foreign aircraft.

As with most things about the JSF there will be more to come in the near future on these latest rounds of cost increases and their ultimate effect on the program.

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Department of Defense Not Really That Concerned with Boeing’s Costs for Tanker

At a recent public event the Undersecretary of Defense for Acquisition, Logistics & Technology, Ashton Carter, was asked about the projected cost increases for the KC-46A development. His response was that he, and OSD, are not really that worked up about the fact that Boeing (BA) may exceed the projected ceiling price of the contract.

In his eyes the U.S.’s liability is based on the $4.9 billion price. Boeing’s bid of $3.6 was a conscious business decision on their part. Some members of Congress, led by Senator John McCain (R-AZ), have raised concerns about the increase and the fact that the cost share structure of the contract obligates the U.S. to pay 60% of the first billion in increases.

There is also the idea that this situation would encourage contractors to submit low estimates for development contracts, or buy-in, with the goal of making up the difference in their production or by having the U.S. pay some of the overruns. McCain and the Senate Armed Services Committee (SASC) are also investigating the large cost increases in F-35 production that are requiring the U.S. to pay over $700 million as part of their cost share.

The idea that the Defense Department would accept this kind of business model is interesting. One of the criticisms of defense acquisition is this very point. In the late Sixties when Lockheed, now Lockheed Martin (LMT), did the same with the C-5 transport, although perhaps not deliberately, it is considered one of the examples of acquisition abuse and the program was almost cancelled. Now Carter is saying that as long as it involves a Firm Fixed Price Contract it is an acceptable practice.

This is just the beginning of the situation and Boeing certainly has the ability to not charge more then the ceiling price as they work the KC-46A development. Their current estimate of about $5.2 billion may be conservative and costs for the first 18 aircraft could be under $4.9 billion.

Senators Levin and McCain Send Questions on F-35 Reprogramming

Earlier this week it was reported, and tweeted, by Senator John McCain (R-AZ) that the Department of Defense as part of a reprogramming request needed $264 million to cover cost increases on the first three Low Rate Initial Production (LRIP) contracts for the F-35 Joint Strike Fighter (JSF). Now Senator Levin (D-MI) the Chairman of the Senate Armed Services Committee (SASC) and McCain, the Ranking Member, have sent a letter with a series of questions to OSD about the reprogramming and the Government’s obligations to lead contractor Lockheed Martin (LMT).

The Omnibus Reprogramming request which is often annually submitted to Congress by OSD allows the move of large amount of funds from different appropriations and services to pay higher priority bills. Often during the years of heaviest engagement in Iraq and Afghanistan it converted Research & Development (RDT&E) and Procurement funds to those used to pay for Operations and Maintenance (O&M). In this years’ it asked for the $264 million to be reprogrammed to pay for “cost growth on the first three F-35 low rate initial production lots (LRIPs 1-3).” It also informed the Congress that there would be a requirement for a further $496.2 million found within JSF’s funding to pay for the rest of the cost increases coming to a grand total of $760.2 million.

The letter asks the Department to answer a series of questions and says the reprogramming won’t be considered until they are answered. These include whether the Government is legally obligated to pay the cost increases, what would be the effect if the request for reprogramming was denied, what other alternatives are there, are the cost increases recoverable, what would be the termination costs for the F-35 program, and how Defense intends to prevent these types of overruns in the first place.

This is the second time in recent months that McCain has raised the specter of cancelling the F-35 contract. Earlier he had tried to have an amendment added to the Authorization Bill requiring termination if cost growth was above a certain point. That failed in Committee by one vote. Now it is clear that Levin, the senior Democrat on the Committee and Chair, is willing to at least put the question out there.

Termination costs for a contract like the F-35 development and production would most likely be in the billions. While McCain has led discussion of this idea it will be hard for the Government to end the program. There is still a requirement for a new aircraft to replace the aging F-16, F/A-18 and AV-8A systems in current inventory. The U.S. has finished buying F-22 and the production line will be shutting down. The F/A-18 is available but any other exiting aircraft that might be considered is non-U.S. A new development program could be started but that would probably end up being more expensive then the current F-35.

Even so the continued cost growth in the program is leading many in Congress to reconsider the future investment in the F-35 in this time of budgetary pressures. McCain especially seems likely to keep up the pressure on the program and Lockheed.

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Reports that Initial F-35 Production Batch Costs Over Target Costs

Yesterday Senator John McCain (R-AZ) caused a stir by tweeting that the Pentagon had requested $264 million as part of a reprogramming as a “downpayment” on the cost overruns for the the first three production batches of the F-35 Joint Strike Fighter.

He also said that the total cost would be closer to $800 million. As with a many programs at the stage of the acquisition cycle Lockheed Martin’s (LMT) F-35 is in the government and contractor share cost increases beyond the target or ceiling price. Reportedly this cost increase applies to the first 28 aircraft ordered by the Defense Department.

The Defense Department and Joint Project Office have yet to confirm McCain’s information.

The F-35 is an advanced tactical aircraft being developed to replace F-16, F/A-18 and A/V-8A aircraft currently in service with the U.S. Air Force, Navy and Marine Corps as well as for many U.S. Allied nations. It is the largest defense acquisition program ever planned to date and has suffered from cost and schedule growth due to testing and development issues.

The production buy currently being planned will be the fourth batch and the largest. There has been frustration over the cost increases with the program by many in Congress and especially McCain. The Senate Armed Services Committee recently added to the 2012 Defense Authorization Bill specific language for the F-35 limiting the government’s exposure to cost overruns. The bill if it becomes law after conference with the House would require Lockheed to be responsible for all cost increases past the target price rather then the Government and it sharing in them.

McCain also attempted in Committee to add language that would have allowed the Government to terminate the program if cost increases for the next production lot exceeded ten percent. That vote failed in committee but by only one vote. This illustrates the concern many have for the increased costs the program is facing.

If the contract was cancelled the U.S. would be faced with buying more Boeing (BA) F/A-18 or non-U.S. aircraft or even re-starting the F-22 production line to meet the requirement while a new fighter program was started.

The chances of terminating the contract are low due to the amount of money already invested in it. A more likely scenario is reduced quantities or a longer production run due to cost and funding limitations.

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John McCain Inserts Himself Into KC-X Competition

October 23, 2009 by · Comment
Filed under: KC-X, KC-X Tanker News, Syndicated Industry News 

Senator John McCain (R-AZ) whose efforts frustrated the Air Force’s attempts to award Boeing a lease deal for the new tanker back in 2001 – 2004 started the whole competition now says that he wants an independent “watchdog” as part of this source selection. He was not clear as to who he would want to do this but hopes to have an unbiased source selection.

If there is a protest over the latest attempt the GAO will be the “independent” agency tasked with sorting that out. If they fail there is always the U.S. Court of Appeals. Those should be independent enough for Senator McCain.

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