Plans Include Fixed-Price Contract And Internal Analysis Of Productions Costs

The Defense Department will require a shift to a fixed-price contract in its negotiations with Lockheed Martin for the initial production phase of the F-35 Lightning II joint strike fighter, a defense official said Friday in a briefing at the Pentagon.

The department also will conduct an internal analysis of what the full production cost should be to better negotiate with the contractor, said Ashton B. Carter, undersecretary of defense for acquisition, technology, and logistics.

Taken together, Carter said, these measures will reduce costs of a program that has met with significant production delays and cost overruns since its inception in October 2001. "It did not seem reasonable that the taxpayer should bear the entire cost of this failure of the program to meet expectations," Carter said.

The joint strike fighter-- the most expensive acquisition in U.S. military history -- will replace a wide range of aging fighter and strike aircraft for the Air Force, Navy, Marine Corps and eight international partners. The F-35 is the "heart of the future of our tactical combat aviation," Defense Secretary Robert M. Gates said in a visit to a Lockheed factory in August. "The importance of this aircraft cannot be overstated."

The U.S. military ordered a total of 2,443 jets, with an additional 730 purchased by the eight other countries. Initially projected to cost around $50 million per aircraft, the current estimate is about $80 million to $95 million each, in inflation-adjusted dollars.

These two new initiatives come on top of Gates' announcement last month that he was withholding $614 million in performance fees from the contractor due to the program's setbacks.

With the announcements, the department is moving away from a cost-plus arrangement, which reimburses companies for their expenses in addition to providing an extra payment to guarantee them a profit. Instead, in switching to a fixed-price structure, the department and the contractor will set the price beforehand, and the final payment will not depend on the total amount of time or resources expended to complete the project. "[The secretary] directed that in order to ensure discipline in the transition from development to production," Carter (pictured) said.

The director of defense procurement and acquisition policy will conduct the "should-cost" analysis for the final production rollout of the F-35 aircraft. Carter stressed that it's important for the department to have its own estimate of what the program's cost should be to better determine a negotiated price, rather than relying solely on the contractor's figures. "We will be looking at the cost structure of [the joint strike fighter] in all its aspects; assembly, parts supplies, staffing, overheads and indirect costs, cash flows, contract structures, fees, and lifecycle costs," Carter said in a prepared statement before the Senate Armed Services committee yesterday.

Taking immediate steps to save costs is particularly necessary, not only to benefit the taxpayer, but also because the program is in jeopardy of crossing the Nunn-McCurdy threshold, a law that requires that Congress be notified of a cost growth of more than 15 percent in a program. Nunn-McCurdy also calls for cancellation of programs for which total cost grew by more than 25 percent over the original estimate.

Rather than wait for the program to cross the Nunn-McCurdy line, the defense officials began to review and restructure it as though it was already in Nunn-McCurdy breach, Carter explained.

Carter said he understands that these new initiatives will not be easy for Lockheed and its subcontractors to accommodate, but he underscored that these decisions are crucial to moving the program forward in a way that is acceptable to the military and the American public.

"The emphasis must be on restoring a key aspect of this airplane when the JSF program was first launched: affordability," he told Congress.

FMI: www.defense.gov