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Sen. John McCain, Part II
Continuing with Senator John McCain’s (R-Az.) 12/15/11 speech on the military-industrial-congressional complex, playing off President Dwight D. Eisenhower’s Farewell Address of over 50 years ago, I thought I’d cite an example of the Senator’s concerns on the cost overrun front.
The F-35 ‘Lightning II’ Joint Strike Fighter (JSF) program
Currently, the F-35 is the Pentagon’s largest weapons procurement program. It was originally intended as a revolutionary, affordable solution to the Navy’s, Marine Corps’ and Air Force’s tactical aviation needs for the future. With three different versions of the aircraft for each Service and commonality in design among those versions, the Pentagon sold this program as a fifth-generation strike-fighter that would, more so than any other major defense procurement program, be cost-effectively developed, procured, operated and supported. According to the Pentagon, the program ‘was structured from the beginning to be a model of acquisition reform.’
When the program was first launched, the Pentagon planned to buy over 3,000 Joint Strike Fighters, but the development effort has performed so poorly that we can now only afford to buy 2,457 of them. And, given recent delays and restructuring moves, that number could go down further. To date, the total cost to buy all of the aircraft as intended has grown by about $150 billion to $385 billion. The cost of each Joint Strike Fighter is now 80% over the original (2001) baseline estimate and that is expected to increase. It would be hard to buy a car at 80% over the original sticker price without looking for major tradeoffs. Currently, the Joint Strike Fighter costs on average about $133 million each, and that is without an engine. We have invested about $56 billion in R&D costs in this project through fiscal year 2010.
Over the nearly 10-year life of the F-35 program, Congress has authorized and appropriated funds for 113 of these jets, but as of today the program has delivered just 20 flying aircraft – with most of them being used for testing. Early production aircraft just started to be delivered a few months ago – three years late.
The main problem with the program has been this: before the Pentagon went ‘all in’ on the F-35 program, it never really understood the risks associated with developing and integrating the F-35’s critical technologies and manufacturing each version of the plane, much less how much money and time would be needed to overcome these risks. So, ever since the Pentagon awarded Lockheed Martin a contract to develop the Joint Strike Fighter contract in 2001 and despite having signed several follow-on contracts with it for blocks of ‘production’ aircraft, the program has effectively been stuck in development. Experts call what the Pentagon has been trying to do here ‘concurrent development.’
I call it a mess. Using a ‘concurrent development’ strategy to procure high-risk weapon systems that promise generational leaps in capability when (1) their underlying design is unstable; (2) the risks associated with developing their critical technologies and integration are not fully known; and (3) their manufacturing processes are immature, is a very bad idea. And, trying to do this under ‘cost-plus’ contracts is a recipe for disaster.
In July 2011, the Department revealed that the cost for the first three lots of early-production aircraft, amounting to twenty-eight jets bought under cost-plus contracts, exceeded by about $1 billion the original estimate of about $7 billion. The Department also indicated that taxpayers’ share of this overrun amounted to about $771 million. The program’s prime contractor would absorb approximately $283 million.
Moreover, just a few days ago, the Department indicated that the costs of the fourth lot of early-production aircraft, bought for the first time in the program’s history under a fixed-price-type contract, may be as high as 10 percent over that contract’s $3.46 billion target cost. This is a $350 million overrun, with only about 40% of that work completed to date. This suggests that the costs of the program have still not been contained, despite two years of concentrated effort by the Pentagon to bring costs under control.
Just last week, the program executive officer of the Joint Strike Fighter program indicated in a media interview that the JSF program needs to slow down production and deliveries of the aircraft. He attributed this to the need to open up the aircraft and install fixes to numerous structural cracks and ‘hot spots’ that the program has discovered in the plane over the last year or so. He estimated that the work needed to remedy these cracks could add an additional $3 to $5 million per jet.
From these comments, I understand that the overlap between development and production, called ‘concurrency,’ that persists in the program is still too great to assure taxpayers that they will not have to continue paying for costly redesigns or retrofits due to discoveries late in production.
My frustration and, more importantly, the taxpayers’ frustration, with the chronic failure of this program to deliver required combat capability on time and on schedule cannot be overstated. This frustration is conveyed well in a provision in the Conference Report accompanying the Fiscal Year 2012 National Defense Authorization Act that would require that the sixth lot of early-production aircraft be procured on a firm fixed-price basis. Apparently, the fixed-price contract used for the fourth lot, which provides that overruns between a ‘target cost’ and ‘ceiling price’ be shared between the government and prime contractor, is failing to incentivize the contractor to control its costs. So, tougher measures are warranted. We should all hope that they work.