Wednesday, October 17, 2012

Some perspective on F-35 costs

One of the more aggravating things about discussing the cost of the F-35 program is the misinformation that frequently gets published as fact.  Dr. Loren Thompson takes a swing at that in a Forbes article he's written.

Have there been cost increases to the program?  Yes.  But the conventional wisdom is they're all driven by the contractor - Lockheed Martin.  In reality, that's not true:
So let’s analyze where the cost estimates came from, starting with the acquisition cost — the cost to design, develop, test and produce 2,443 planes in multiple variants for three different military services.

It’s true that the defense department’s official estimate of what the price-tag will be to acquire the F-35 program of record has risen from an original baseline of $177 billion to $331 billion in fiscal 2012 dollars, but it isn’t true that most of the increase is due to screw-ups by the prime contractor.  The contractor is responsible for about 40% of the increase, resulting mainly from the need to change the original design in response to excessive weight and other problems encountered in development.
But 25% of the increase is traceable to changes in the way the government projects future costs in a program where the vast preponderance of acquisition costs still lie in the future.  Even though prime contractor Lockheed Martin has delivered each production lot to date at a lower unit cost than the government predicted, the official “parametric cost estimates” are grounded in experience from legacy programs that does not match up well with the actual F-35 experience.

Another 22% of the cost increase has resulted from delays in development of the F135 engine that will power the fighter.   The engine is provided to the prime contractor as “government-furnished equipment” and thus its part of the cost increases can’t be blamed on Lockheed Martin.  And then there are the spare parts and so-called non-recurring items the government simply forgot to include in its original cost estimates; those account for 7% of the increased costs.  An added 4% of cost increases result from growth in the scope of the development program at the behest of the government, and additional costs for war reserve spare parts.

In other words, most of the increases in the acquisition cost of the F-35 have nothing to do with the performance of the prime contractor.  And at least a third of the increases were caused by choices the government made in calculating the cost — estimating methodology, overlooked items, increases in scope, etc.  Lockheed Martin certainly made its contribution to the increases, but the reflex of politicians and pundits to blame the prime contractor for rising costs misses most of what is going on in terms of the acquisition price-tag.
The point, of course, is accurate reporting concerning the program and its costs, none of which has been particularly good in either area, is missing in most discussions.

Thompson makes another valid point about a number thrown out there that has been used repeatedly to bash the program with little context since it was first published:
As for the trillion-dollar estimate for operating the F-35 during its years of active service, that number is ridiculously misleading.  For starters, the government decided to provide a “then-year” estimate, which means it had to undertake the heroic task of estimating what the inflation rate would be for every year between now and 2065.  Most of the trillion-dollar support bill is nothing more than imaginary inflation estimates that are unprovable and tell us nothing about the program’s claim on military buying power.
Drop the inflation estimates and the number drops to $417 billion dollars - over 50 years.  Quite a difference.  And Thompson argues, and supports his argument, that even that number should be lower.

Finally, the cost per copy:
[T]he plane is meeting all of its key performance criteria in tests, and the government’s own cost projections indicate that by the time it reaches full-rate production at the end of the decade, it will cost about what current fighters do — while delivering big gains in survivability, range, payload and other measures.

There’s good reason to think this will happen, because the average cost of each plane in the first four production lots has been below what the government predicted.  As the program has progressed rapidly down the learning curve, the “unit recurring flyaway” cost — the production cost — of the most common variant has been cut in half, from $200 million to $100 million.  The main reason the contractor and customer are still wrangling over terms for the next lot is that the government wanted to reduce the unit cost again to below $90 million by demanding an improbable decrease in labor costs.
If someone isn't talking about "unit recurring flyaway cost", then they're not talking apples to apples when they try to compare F-35 costs to 4th generation fighter costs.  And a $90 million a copy URF would indeed put the F-35 comfortably in the cost range of current 4th generation fighters.  In fact, in some cases it may end up being slightly less costly than a 4th generation fighter.  Why?  Because that 90 million a copy price buys a combat ready fighter, day one.  When it rolls out of the production plant it is ready to go to war.  Not so with the 4th gen fighters which have a base price and then an additional price to add those items to the aircraft to make it mission capable.

Keep all of this in mind next time you see someone talking costs on the F-35.


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