F-35 Cost Up $7.8B, Bogdan Fires on Pratt

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Performance continues to fall short of projections for two major reasons: cost from the prime contractors and major subcontractors – including labor rates and overhead -- and delayed purchases by Joint Strike Fighter customers.

These are realities behind adjustments in the long-term pricing estimates for the multinational F-35 included in the 2013 selected acquisition report, a document required annually by Congress on major weapon systems. The F-35 program office shared this fact sheet with reporters to provide context for the report. 

Total program cost -- including development, procurement and 55 years of sustainment -- is estimated to cost $398.6 billion, over last year’s estimate of $391.2 billion. Of that, $4.5 billion is in the procurement portion of the program.

Bodgan says that in the context of program cost, this increase is negligible. But, he is no less frustrated with contractors’ pricing issues. After years of pushing Lockheed Martin, aircraft prime, to attack its production pricing cost, prime engine manufacturer Pratt & Whitney is now in Bogdan’s crosshairs.

“We had a price curve for these engines. We thought we knew how much it was going to cost … Pratt is not meeting their commitment. It is as simple as that … It is not good. Not good at all,” Bogdan told reporters April 17. “Some of their business base has dried up on other programs and projects … and what they are doing is they are spreading their overhead costs and they are spreading them right where they can. I don’t like that. [They] need to get back to the promise they originally made to us.”

Pratt & Whitney spokesman Matthew Bates says the company has decreased its pricing 40% since the first production lot, but the company is claiming competitive privilege in its sole-source deal for F-35 engines in not releasing its actual numbers [read Pratt Claims Competitive Privilege in Concealing F135 Prices]. Negotiations for low-rate, initial production lots 7-8 are under way and slated for completion in the summer, he says.

Bogdan seems frustrated by the lack of leverage he has in dealing with a monopoly engine provider. “There is only one engine on the F-35. Period,” he said. “When you are in a sole source environment it is difficult to find the right leverage and motivation and drive the cost out of a program.”

The total average unit cost of an F-35 is $130 million, including the amortized cost of the total program (development, procurement, sustainment and the undisclosed cost of Pratt’s F135 for all variants) assuming a buy of 2,443 U.S. fighters as planned. The flyaway cost (price of the total buy divided by the 2,443 fighters planned for Washington) is $104.8 million. These prices reflect the anticipated U.S. buy, including the president’s fiscal 2015 budget request (pushed 33 F-35Cs and 4 F-35As beyond the future years defense plan). He referred to this dynamic simply as “acquisition physics.”

These prices should be lower if anticipated purchases from South Korea, Singapore and Israel (which is expected to exercise options on top of its buy of 19 aircraft) are realized. However, Canada, Turkey and the Netherlands have held off on buys, driving the near term cost of the aircraft up. Bogdan says adjustments between these two forces would essentially break even.

While anticipating more commitments, Bogdan says he is encouraging Lockheed and Pratt to begin buying in bulk from their suppliers to achieve better economies of scale and avoid waiting for the government’s lead in an annual procurement number. “Two or three years ago the business risk was very different than it is today,” Bogdan says. “We went through two years of sequestration, and this program basically came out unscathed.” Pratt is ahead of Lockheed in this process owing to common parts among other programs – including its commercial business – and the F135 program. “They had a lot of that in place,” he said.  

Another factor contributing to the $7.8 billion total program cost increase are adjustments in the exchange ranges and inflation indices. Roughly 30% of the aircraft is sourced outside the U.S. – primarily from BAE Systems in the UK and Alenia in Italy. Thus, the dollar’s weakening status against the British pound and Euro are a factor. Additionally, some of the change is reflective of inflation rates.

Though program officials had anticipated full-rate production in 2018, it could slip into 2019. Bogdan says he still expects the total flyaway cost for the F-35A to be under $85 million at full-rate production.

Discuss this Blog Entry 1

on Apr 28, 2014

Acquisition Physics?! It's called competition. Bring back the F136 engine.

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