(photo: U.S. Navy/Lockheed Martin/Getty Images)
By Don Bacon
You walk into the auto showroom, tell the guy who greets you that you want to buy a certain car. You have the cash and want the car at X dollars, a price which you have researched. The salesman says wait, we have a new plan based upon us sending you bills and you paying them. First we bill you for the items which take a long time, then the tooling, then you will receive a series of bills for manufacturing and parts which you must pay. Would you like to buy under the new plan? If you were the F-35 project office you'd go for, not the price plan, but the new cost plan. (What the heck, it's not your money.)
The F-35 price is high because it's not really a price, like it's supposed to be, it's a cost. The F-35 project office doesn't pay a final price for each plane manufactured, as it claims. It is getting a series of bills from the prime contractor Lockheed-Martin and also engine contractor Pratt & Whitney. Bills for tooling, parts, technical support, this cost and that cost, and the F-35 project office pays every one of them which causes the plane to be much more expensive than it should be. There are also other awards to the two contractors for R&D etc., and who knows where the money ends up. The Pentagon doesn't, that's for sure.
The Pentagon has claimed otherwise. Three years ago Frank Kendall, the Pentagon acquisition chief, testified to the Senate appropriations committee: "To ensure Lockheed Martin shared equitably in program risks and to incentivize cost reduction, we began the transition from cost-plus production contracts to fixed price-type contracts beginning with a fixed-price incentive-fee contract for Lot 4. In Lot 5, the 2011 Lot, we continued this process. . ." Now they are up to Lot 9 and the "transition" is still "processing." But there are not really any meaningful such contracts on the airframe (Lockheed) nor on the engine (Pratt).
From the DOD Acquisition Glossary: Fixed-price types of contracts provide for a firm price or, in appropriate cases, an adjustable price. Fixed-price contracts providing for an adjustable price may include a ceiling price, a target price (including target cost), or both. Unless otherwise specified in the contract, the ceiling price or target price is subject to adjustment only by operation of contract clauses providing for equitable adjustment or other revision of the contract price under stated circumstances.
https://www.acquisition.gov/far/html/Subpart%2016_2.html
Fixed-price contracting would include one contract for each type of item being purchased. There are three F-35 variants, plus foreign planes which are different, so we could expect one contract for each type. But in Lot 8, now ending up, there have been 30 contracts awarded not for each plane model but in response to Lockheed's and Pratt's cost bills. The contracts through Dec 10 2015 totaled $5,864,376,316 -- $5.8 billion -- for 43 aircraft, or about $136m per aircraft produced. That's based on what we know, it is not an audited figure. The Pentagon doesn't do audits.
Let's look at the first 15 manufacturing contracts (of 30) issued for Lot 8 (43 jets).
2013
Feb 28 $333,786,000 fixed-price-incentive -- parts
Mar 25 $40,200,000 fixed-price-incentive -- parts
May 2 $20,100,000 fixed-price-incentive -- parts
Jul 18 $70,358,000 modification to previous contract-- parts
Sep 18 $99,010,000 modification
Oct 18 $30,000,000 fixed-price-incentive modification
2014
Mar 18 $65,280,712 modification to cost-plus
Mar 26 $10,242,104 modification - engine [ERROR NOTE: There was no previous contract to modify.]
May 13 $101,900,000 modification
Jun 6 $122,099,075 cost-plus modification -- parts
Aug 11 $46,197,710 cost-plus modification -- tech assist
Sep 11 $65,566,174 modification - engine parts
Sep 25 $331,408,457 cost-plus modification -- tooling
Oct 30 $793,051,336 modification to fixed-price -- engine
Nov 21 $4,123,746,486 [$4B] modification -- primary
[NOTE: Finally 21 months after the first Lot 8 contract they specify how many planes are being bought.]
Nov 2014- Dec 2015 -- fifteen more F-35 "modification" contracts
http://www.defense.gov/News/Contracts
Note that there were three relatively small (for the Pentagon) fixed-price contracts for parts followed by "modifications," then much later on Nov 21 by the $4 billion primary contract, and then by more "modifications." There are thirty (30) contracts to pay all the contractor costs, at least what they say are costs, despite poor contractor performance, and provide them a sweet profit as well. What a deal! Thirty rich contracts for forty-three planes!
Lot 9 is worse. It is currently deep into production having contracted with Lockheed and Pratt for over $9 billion but without any primary contract. Again we don't even know how many planes are being manufactured! It's a stealth program for sure.
The project admits what it is doing in variance to what was testified to the Senate, in the most recent project report. This is from the Selected Acquisition Report (SAR): "As a whole, the CLIN (contract line item number) consist of multiple contract types including Fixed Price Incentive Fee as well as Cost Plus Incentive Fee and Cost Plus Fixed-Fee. For this reason, the overall contract type is mixed and there is not a true contract ceiling."
https://app.box.com/s/z3hibrvjcro1rff2i2ezm2vbwm3umtpe
"There is not a true contract ceiling" or in plain English, the project office doesn't do fixed-price contracts as testified, it just gets the bills from Lockheed and Pratt and pays them.
"There is not a true contract ceiling" explains why the F-35 system costs are so high (along with ever-increasing Lockheed earnings despite many system shortcomings). Exceeding appropriations is no problem, there's always the Pentagon OCO "slush fund" money to be obtained either overtly or covertly. Recently the House Armed Services Committee earmarked $1.5 billion for eleven F-35s that were cut from the 2017 military budget proposal (NDAA), shifting their cost to the Overseas Contingency Operations (OCO) account). The Pentagon could do that on its own. There are no audits of any military programs even though the Congress ordered it years ago.
http://www.reuters.com/investigates/special-report/usa-marines-audit/
The project SAR does include low unit F-35 costs but Chris Bogdan, the project manager, admits that they are not worth a hoot. "We put out a SAR every year and in the SAR we’ve got a PUC and an APUC, which if you’re not an acquisition guy, that is just a crazy way of measuring things. You can look at unit fly-away cost, you can add the STD program into that. There are so many different ways. " All these acronym costs Bogdan is referring to are expressly called "estimates" which can't be compared to the actual high costs that buyers must pony up for these low-performing jet fighters. The latter are based on actual expenditures, whereas there is no clear basis for the low project estimates. Of course we shouldn't assume that the project office somehow has access to Lockheed (and Pratt) internal cost audits, if in fact they even exist.
The Government Accountability Office (GAO) has recently reported that the F-35 “still faces significant affordability challenges." That's for sure, looking at actual F-35 costs.
F-35 prices from recent activity:
* Selected Acquisition Report: Korea $157m, Japan $226m, Israel $138m
* Lot 8 contracts: F-35A $120m, F-35B/C $151m
* Congress FY2017 budget markup: F-35A $138m, F-35B/C $190m
* GAO: F-35 $167m
http://www.gao.gov/assets/680/676584.pdf
The high costs for F-35 engines which are separately contracted with Pratt & Whitney (included in the above figures) are also increasing. Engine unit costs have increased from $19,536,980 in Lot 7 to $28,969,006 in Lot 9, considering all contracts issued to date under those lots. These are engines which are less than half as reliable than they should be, according to GAO. Neither Lockheed nor Pratt has ever said what their production items really cost.
Getting back to the project "estimates," on April 8, 2014 as reported by Reuters, General Bogdan told senators the cost of the Air Force model of the jet stands now at around $112 million, including the engine, but the program office and industry expected to drive that cost down to between $80 million and $85 million per plane by 2019. Unbelievable. It's the comedy hour when Bogdan presents his fabricated low-ball estimates without any basis.
http://www.reuters.com/article/usa-defense-f-idUSL2N0N01ZP20140409
How does Bogdan get his $112 million estimate? The project office: "Defense contracts include the price for more items than just the cost of the aircraft. These items may include costs such as spare parts, flight simulators, tooling, support equipment, and manpower to maintain the aircraft. To derive the accurate cost of the aircraft, it is necessary to remove those additional items from the total and divide the recurring aircraft costs by the quantity in each lot." This "removing additional items" is exactly the low-balling definition of cost that Bogdan has called "just a crazy way of measuring things." He was correct, it's crazy and unacceptable. The procurement cost according to the DOD Acquisition Glossary: "Equal to the sum of the procurement cost for prime mission equipment, the procurement cost for support items, and the procurement cost for initial spares." F-35s need these items (which include fuel) to operate.
https://dap.dau.mil/glossary/pages/2417.aspx
The project has never done a should-cost analysis of the F-35 but the Pentagon has said they ought to: "If we are ready to ask for bids and negotiate low rate initial production (LRIP) prices, we need a should-cost estimate to inform negotiations." --Memo for Acquisition Professionals, signed by Ashton Carter (now SecDef) Aug 24, 2011. Right now the Pentagon has uninformed negotiations, or no negotiations. There is no should-cost on F-35, only will-pay.
http://www.acq.osd.mil/fo/docs/Should-cost%20and%20Affordability.pdf
The cornerstone of the Joint Strike Fighter program is affordability. The program was sold using affordability as its battle cry. The program promised to "affordably develop the next generation strike fighter weapons system to meet an advanced threat (2010 and beyond), while improving lethality, survivability, and supportability." The affordability was addressed by combining multiple programs into one that would use commonality to combat costs. It didn't work, especially with poor project management.
http://www.jsf.mil/history/his_f35.htm
The F-35 is not affordable. Along with the high unit procurement cost of the F-35 jet fighters, because of simply paying what Lockheed demands, there is the high sustainment cost which is two-thirds of total lifetime cost. GAO has reported that the annual F-35 operating and support (O&S) costs are estimated to be considerably higher than the combined annual costs of several legacy aircraft First the sustainment cost of JSF, with its main selling point being affordability, was one-third more than the planes it would replace, then sixty percent more, and now it's eighty percent more. The actual future costs of sustainment aren't known but they are bound to be high because the costs will be directly passed on to the Pentagon by Lockheed which owns the F-35 logistics system (ALIS). As with the plane, the government will get bills which must be paid, cost-plus. Lockheed was allowed to own all the F-35 data rights, for one thing, plus it owns the ALIS main-frame computer in Ft. Worth. More project office negligence.
https://pbs.twimg.com/media/ByO9gr-IMAA-QHc.png:large
The GAO says the F-35 program has affordability problems, RAND has reported "In dollar terms, cost growth in the Air Force portion of the F-35 program (F-35A) is by far the largest of all programs." The reasons are obvious and a remedy is imperative because the F-35 "sound of freedom" comes at too high a price. The F-35 project office should start with the obvious and implement what was claimed three years ago -- fixed-price incentive-fee contracts for each manufactured product along with should-cost analyses. Whoever pays the piper should call the tune, the saying goes. It's about time, or past time, that the F-35 project office took control of F-35 project costs.
http://www.gao.gov/assets/670/669619.pdf
http://www.rand.org/pubs/research_reports/RR477.html
Don Bacon, LtCol (ret), B.S.and M.S. in Mechanical Engineering, Army veteran, is a graduate of the DOD project management school with multiple project manager office assignments.
To Learn More:
Obama Administration Backs Lockheed Sale of F-35 Fighter Jets in Violation of Contract with Partner Nations (by Donald Bacon)
U.S. Foreign Arms Sales Skyrocket by 35% (by Steve Straehley, AllGov)
More Problems for the Trillion-Dollar F-35: It’s not Good at Close Combat (by Noel Brinkerhoff and Steve Straehley, AllGov)
How Much do F-35s Cost? Beware of Answers from Lockheed-Martin (by Noel Brinkerhoff, AllGov)
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