Pentagon, Lockheed Target 4% Drop in F-35 Price

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After more than a year of prickly contract talks between the Pentagon and its F-35 prime contractor, Lockheed Martin, the two have finally reached an agreement of terms for the $3.8 billion deal. 

The goal is to lower the price of each of the three variants by 4%, according to Joe Dellavedova, F-35 spokesman for the Pentagon. 

Target per-unit airframe costs are as follows for the three variants of the Joint Strike Fighter (JSF): $105 million for the conventional-takeoff-and-landing F-35A; $113 million for the short-takeoff-and-vertical-landing F-35B and $125 million for the carrier suitable F-35C, Dellavedova says. Low-rate, initial production (LRIP) lot 5 includes 32 aircraft -- 22 F-35As, three F-35Bs and seven F-35Cs, all for the United States.

Pricing for the F135 propulsion systems for the single-engine fighter has not yet been established as negotiations are underway between the Pentagon and Pratt&Whitney.

Perhaps more important to both parties is that the deal increases Lockheed Martin’s exposure to risk for cost overruns if they occur in building the aircraft. The company must pay 55% of any overruns up to a ceiling of 112 of the target cost, with the government picking up the remainder, Dellavedova says. The low-rate, initial production (LRIP) 4 contract evenly split the cost of overruns.

The Pentagon has paid $136 million in concurrency costs for LRIPs1-3, or about $4.86 million per aircraft.

The unlikely benefits of cost underruns are equally shared between the Pentagon and Lockheed Martin.

Also notable are the teams reached last year on the so-called "concurrency costs" of these 32 F-35s. This refers to the price of retrofits to already produced aircraft that would be needed as a result of discoveries made during the ongoing F-35 testing program. The parties will equally share in these costs.

In LRIP 4, the Pentagon took any concurrency cost over $52 million out of the company's award fee. The LRIP 5 deal includes a 50/50 split on costs associated with concurrency, Dellavedova says.

The Pentagon embraced the concept of concurrently developing and producing the F-35 when it signed the contract with Lockheed Martin in 2001 but has since worked to shift the financial risk for the strategy to the contractor as a result of ongoing cost overruns, earlier testing delays and missed delivery deadlines.

The contract also includes a payment schedule based on each aircraft’s journey through the production process until the jet is accepted by the Pentagon.

Prior to LRIP 4, the Pentagon bore the burden of overruns to producing the aircraft. Last year, the Pentagon said that totaled $771 million for those lots, averaging at $27.5 million per aircraft (including the concurrency costs).

LRIP 5 deliveries are slated to last from August 2013-May 2014, Dellavedova says. Lockheed Martin has delivered 20 airframes in 2012; its goal is 30. A spokesman says the final 10 are off the production line and awaiting paperwork for the formal delivery.

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