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  • Dueling Analyses
    Posted by David A. Fulghum 4:21 PM on Apr 09, 2008

    Warning lights are flashing all over Washington as analysts and military officials point to a determination in the 2007 Selected Acquisition Report’s estimate that top defense programs have gone down in cost. Critics contend that “up front spending increases” are real, but estimates of decreasing inflation and production costs are little more than guesses and not inspired ones at that.

    Details about changes in these programs since Sept. 2007 actually point to some significant cost rises. Reshuffling of expenses has offset those increases and helped avoid high-profile breaches of the Nunn-McCurdy 15% cost overrun tripwire. The Selected Acquisition Reports are prepared annually in conjunction with the President’s budget and are formulated by mixing actual spending to date, estimated future costs and anticipated inflation.

    Lockheed Martin’s F-35 program is drawing attention because the tri-service, Joint Strike Fighter was reported with a cost decrease of $981 million, bringing its new total to $298.8 billion. Underlying the relatively small cost change, however, is a 15% increase in systems development and demonstration (SDD) cost.

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    Right now, the average, estimated cost of all models at the mid point of the 2,443-aircraft program is at $69.3 million per unit in 2002 dollars, up from the initial estimate of $50.2 million, says program executive officer, Maj. Gen. C.R. Davis. About 92% of the cost growth is attributed to cancelled aircraft, the increased cost of titanium, inflation and the cost of building the aircraft, he says.

    SAR reports don’t reflect any foreign purchases. But Davis contends that by itself, Israel’s purchase of 25 F-35s in 2011-12 will reduce the cost of the F-35 to the U.S. services by $500 million. Among undeclared purchasers of the F-35 is likely to be Japan. A 30 person group has just visited Lockheed Martin’s Fort Worth facility.

    “We’ve had [USAF] folks briefing the Japanese in country, and the Japanese have clearly stated again that their requirement is for a 5th generation airplane,” Davis says. “And everybody understands where the [unexportable] F-22 is in that discussion.”

    But the JSF SAR does include substantial increases in SDD costs, some of them associated with difficulties encountered in tests of the Pratt & Whitney F135 engine, some associated with changes to the lift fan systems and others due to previously reported difficulties in manufacturing the development aircraft.

    The engine problems and changes are expected to add $2.77 billion to SDD, and the added costs of completing the test aircraft come to $3.85 billion – a total increase of $6.62 billion, or in the range that a number of agencies – including Navair and the Defense Contract Management Agency – had projected in support of the March GAO report. The previous estimate of SDD costs, in Dec. 2006, was $45.8 billion in Fiscal 2008 dollars.

    The SAR numbers nevertheless added up to a net program savings because of the countervailing cuts in projected procurement costs.

    The biggest single reported change in the JSF SAR is a $7.45 billion savings due to a “revised estimate of support costs.” However, this is not what it seems because – within the JSF budget – the Defense Dept. has moved $9.15 billion from support to non-recurring procurement costs. The underlying costs of activities that are still classified as support has therefore increased by $1.7 billion. This is consistent with the GAO reports statement that F-35A operations and support costs are expected to be on a par with those of the F-16, rather than being lower as was previously claimed.


    Tags: JSF, acquisition, real costs vs. projected savings

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