Development Cost Target Raised But Inflation May Push JSF's Total Price Tag $1 Billion Higher

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Development Cost Target Raised
But Inflation May Push JSF's Total Price Tag $1 Billion Higher

MICHAEL FABEY, Defense News, 31/10/05

Barely a week after the Pentagon upped the value of its F-35 Joint Strike Fighter (JSF) development contract by about 25 percent, the JSF program office acknowledged that inflation could add yet another billion dollars to the cost of the work for the Pentagon's costliest program.

On Oct. 6, program officials officially "rebaselined" the plane's development contract with prime contractor Lockheed Martin to $40.5 billion, up from the original figure of $33 billion set in 2001. The contract covers development costs for the plane and its engine through 2013, when the F-35 is slated to enter low-rate production.

In rebaselining a program, the Pentagon and contractors agree to change the initial funding benchmark for how much they estimate the work will cost. Lockheed had been working with the Defense Department on the details since last year.

But when the White House submitted its 2006 budget request to Congress last February, the JSF's development cost was put at $41.5 billion. This was "primarily due to the [Defense Department's] annual revision of inflation assumptions," JSF program officials said in an Oct. 13 e-mailed response to questions.

The officials said the extra billion dollars is "for budgetary purposes only to better reflect future budget requirements. There is no additional 'charge' that needed to be worked in to the replan baseline."

The rebaselining arrived amid technology transfer issues that have caused problems in the international development effort, and reports that the U.S. military could slash its planned purchase of 2,500 JSFs and potentially bump up the price tag on the F-35's export variant.

John Smith, spokesman for JSF prime contractor Lockheed Martin, said that along with the rebaselining, the firm received a stiff warning: This is the one and only time the Defense Department will raise the development cost ceiling.

"They wouldn't have done this if they didn't have the confidence that we'd bring it in now at this price," Smith said. But analysts and other industry experts wonder whether even the higher number is realistic.

As of Oct. 28, the JSF program office had signed contracts for nearly $38 billion in development work, according to a Defense News computer analysis of contracts and contract modifications provided by the Pentagon and identified as JSF jobs. About one-third of the work � some $13 billion worth � has been completed, say officials with the Pentagon and Lockheed.

That leaves a slim margin for developmental hiccups. Any unforeseen costs that can't be financed through a management cash reserve likely would require additional development money, analysts say.

Teal Group Vice President Richard Aboulafia predicted that development costs would exceed $40 billion, "but only by about $7 billion or $8 billion." Michael Vickers of the Center for Strategic and Budgetary Assessments was more pessimistic. "The JSF development is going to track that of a Raptor," Vickers said.

The price of the F-35's bigger and older cousin, the F/A-22 Raptor stealth fighter, has risen from $35 million apiece almost 25 years ago to $130 million to $250 million, depending on how the price is calculated.

A major price increase would concern Congress, which would be unlikely to approve more development funds, said Christopher Bolkcom, an analyst for the Congressional Research Service. That could force the Pentagon to draw money from its procurement budget or from the program's non-U.S. partners. So far, foreign partners have contributed $1.7 billion, the JSF program office reported.

Prices of Each Variant

Initially, the U.S. Air Force was to get each plane for roughly $30 million in 1994 dollars, the U.S. Marine Corps for about $35 million, and the U.S. Navy, $31 million to $38 million.
The announcement of rebaselining efforts in 2004 upped the per-plane cost estimates to $45 million for the Air Force and $55 million to $60 million for the Marines and Navy. Another Lockheed spokesman, John Kent, said the increases were due largely to inflation and added requirements.

Lockheed's Smith said there should be no reason for congressional concern or action, noting that the JSF program includes some of the cost-and-schedule safeguards praised by an Oct. 10 Rand study that compared the development of the Raptor with the F/A-18EF Super Hornet. Lockheed is building the Raptor for the Air Force, while Boeing builds the Super Hornet for the Navy.

The Rand study said Boeing's Super Hornet program managers set aside 10 percent of the program's money in reserve to cover unanticipated costs, which helped head off major problems, something the Raptor program could not do with its pool of funds, which totaled 2 percent of the program's costs. Smith was unable to say how much was being set aside in the JSF program.

He said the JSF program also is saving "hundreds of millions of dollars" by harvesting new technology from the Raptor program, although he acknowledged that designers did not anticipate how difficult it would be to fit advanced avionics designed for the twin-engine F/A-22 into the smaller JSF.

Meanwhile, the number of JSF planes to be purchased has slipped. In June, the Pentagon's quarterly Selected Acquisition Report (SAR) detailed plans to buy 2,458 JSFs. But in September, JSF program officials acknowledged that the Air Force will buy fewer than its planned 1,760. The Navy cut its planned purchase about two years ago from 548 planes to about 480.

These cuts have boosted each plane's estimated price tag between $5 million and $10 million, analysts say.

Kent said that planned purchases by U.S. and U.K. forces now total 2,593: 1,763 for the U.S. Air Force, 680 for the U.S. Navy and Marines, 90 for the Royal Air Force and 60 for the Royal Navy.

The JSF program office said the difference between the Lockheed and SAR numbers is because the SAR excludes the U.K. service planes and includes 15 research and development JSFs, which are not included in the contractor's figure.

Kent said even a 1,000-plane cut in the Pentagon order would not drastically boost the price per plane, because most of the cuts would take place around the time export orders kick in toward the end of the decade. He also did not anticipate any other developmental problems that have led to earlier cost increases. "We don't start low-rate [production] until 2007, and then we'll be slowly ramping up," Kent said. "We don't start deliveries until 2009. The numbers won't be reaching the thousands until much later."

The export numbers would drive down the plane's cost and help ensure its success, because current price tags do not account for orders outside the United States and Britain, Kent said.

Everyone agrees that affordability is key.

"If it costs too much, it doesn't go on," Rear Adm. Steven Enewold, the U.S. Navy's JSF program executive officer, said during a briefing at September's Air Force Association conference.

Even the upcoming choice of jet engine will depend more on affordability than thrust, Enewold said.

The Teal Group's Aboulafia said the export JSF's flyaway price tag needs to be about $45 million to be competitive.

Warning Signs?

The Rand study flagged weight issues, stealth features and advanced avionics as strong predictors of cost and schedule problems. Another potential warning sign: In highly integrated aircraft such as the Raptor and the JSF, a bug in one system can hold up development of the whole project.

And another: Aircraft development programs that split the contracts and work among different contractors, instead of funneling most through one company, are likely to have problems, the study found.

JSF program officials boast about Lockheed's partnership with Britain's BAE SYSTEMS and Northrop Grumman, Los Angeles. "It's not the usual contractor-subcontractor relationship," Smith said. "They are developers as well as builders."

The companies say this arrangement can cut costs. Northrop brought the cost of the plane's radar down by one-fifth from initial estimates, while BAE spent its own money to flight-test the plane's electronic warfare system.
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