JSF - Buy Now Or Else (Reprise)
12:50 PM on Jul 19, 2010
Lockheed Martin and the US government are getting ready to send a "strong message" to international partners on the F-35 program, warning them of sharply increased costs if they delay placing firm orders for the fighter, according to F-35 Executive Vice President Tom Burbage.
"We will be looking for reaffirmations over the next few months," Burbage said. "It's very important that partners keep to the program of record. They need to understand that a large movement of quantities can have a big effect on the total cost of the buy."
Eight international partners are expected to account for more than a third of F-35 orders between 2011 and 2015 and some (like Denmark) have delayed their commitment to the project.
This is the second time that the JSF office has played this card, having made similar comments in 2008.
It has also emerged that the under-negotiation contract for the fourth F-35 production batch will be a fixed-price incentive (FPI) contract, and Lockheed Martin could still make a profit even if the ultimate cost is closer to what government auditors estimate, as Burbage confirmed here today.
Lockheed Martin has cited its bid prices as proof that the aircraft is on track to a $60 million unit recurring flyaway cost, comparable to an F/A-18 and much less than the numbers produced by the Pentagon's Cost Analysis and Program Evaluation (CAPE) group.
As detailed today, though, the company's numbers are "target" prices. The FPI includes both a target price and a ceiling price, which historically has been as much as 30 percent above the target. Typically, under a formula called the "incentive ratio", the government picks up the greater part of the difference between the target and the ceiling, and the contractor retains a positive margin until the ceiling price is reached.
Burbage declined to disclose the price-to-ceiling ratio or the incentive ratio, but said that those numbers would be revealed when the contract was signed.
The FPI also limits the contractor's risk in the event that test flights reveal problems that have to be fixed, expensively, on the production line. The contract includes a certain allowance for these "engineering change orders", he said, but if that allowance is exceeded the changes would be paid for separately as an engineering change proposal or ECP.
Risk on both sides is a big factor in the long contract negotiations surrounding the fourth low-rate initial production (LRIP-4) batch, Burbage said. "We want to make sure that we don't assume a contract that we can't execute."