Govt. Negotiators Seek Price On Next Lot Of F-35s Far Below Official Cost Estimates

Government representatives negotiating terms for a fourth production lot of F-35 joint strike fighters are pressing prime contractor Lockheed Martin to deliver the most common variant of the plane at a price far below the level predicted in official cost estimates recently provided to Congress. Lockheed’s initial proposal was substantially below the amount predicted by those estimates, but the response of the government was to request a price well below even the contractor’s proposal. Contract negotiations are still under way, but it is increasingly clear that the price charged to the government for what is called Low Rate Initial Production Lot 4 will be far, far below the official cost estimates sent to Congress.

The low price for the next lot fits a pattern seen in all three previous production contracts: the contractor has consistently charged the government much less per plane than Pentagon estimates said it would. In fact, the prices charged weren’t just below the projections contained in the recent 2009 Selected Acquisition Report, they were below the more modest estimates contained in a previous 2007 Pentagon report. The reason for the disparity between what the government predicted and what it was actually charged is that contractor prices are derived from real F-35 program costs, whereas government estimates are extrapolated from the records of other fighter development programs (mainly the F-22 Raptor and F/A-18 Super Hornet).

Based on actual program performance to date, Lockheed Martin anticipates that the “unit recurring flyaway price” for an Air Force version of the F-35 will be $60 million in 2010 dollars — about what the latest versions of the F-16 and F/A-18 are selling for. That is a price-point that the company must meet if it is to successfully market the stealthy, single-engine fighter to dozens of prospective overseas customers. The unit recurring flyaway cost is the price that would be charged to customers without including sunk development costs or future service-life expenditures for items like spare parts. The $60 million price-tag for the Air Force version is below that for the Marine and Navy versions, which will be bought in much smaller numbers both domestically and overseas. Over 80% of the F-35s likely to be sold will be the Air Force version.

The decision of government negotiators to seek a price for the next production lot far below the Pentagon’s official cost estimates suggests that policymakers have little faith in the methodology used to generate those estimates. Pentagon estimators say that the cost of each F-35 has risen 60-90% since the program began, but the price being sought by government negotiators tracks more closely to the 34% cost growth claimed by the contractor. The 2009 Selected Acquisition Report stated that the program is meeting all of its performance goals without incurring significant engineering or quality problems, so there is no obvious reason why costs would be rising rapidly. But with program performance and price negotiations unfolding at cost levels so much lower than official estimates, it isn’t so clear what constructive purpose those estimates are serving.

An addendum: InsideDefense.com reporter Jason Sherman has requested a correction to my assertion in a recent issue brief that his information on F-35 cost estimates came from an “anonymous government official.” Sherman is right — his reporting reflected the actual content of the 2009 Selected Acquisition Report. Given what I report above, though, I still say that he presented his story in a sensational and unbalanced fashion.