The Department of Defense announced yesterday that the government and prime contractor Lockheed Martin have signed a long-awaited contract for the fourth production lot of F-35 joint strike fighters. According to Andrea Shalal-Esa of Reuters, the fixed-price contract for multiple variants of the F-35 is worth over $5 billion, and delivers the next-generation fighter at a cost well below government estimates. Lockheed Martin officials have stated that the most common variant of the F-35 must sell for about the same price as the latest Air Force F-16s and Navy F/A-18s in order to realize its full overseas sales potential, and they currently project the price-tag for each plane at $65 million in today’s dollars once full-rate production is under way.
The latest production agreement represents an auspicious start to the Pentagon’s big efficiency push, because the aircraft will be built for about 20 percent less than government estimators had expected under a fixed-price contract in which any cost overruns will have to be partly covered by the contractor. Government plans had called for commencing fixed-rate pricing later in the program, but the government elected to transfer risk to the contractor earlier in the production cycle, in return for which Lockheed Martin received incentives to surpass the performance to which it had committed. The company apparently felt confident it could meet or exceed government goals, based in part on the very positive test results being recorded for the Air Force variant of the plane in California.
The defense department expects to buy 2,443 F-35s in three different variants for the Air Force, the Navy and the Marine Corps. The sea-service versions will cost more than the Air Force variant because they are being bought in smaller numbers and incorporate special features such as the ability to take off and land vertically. Recent testing successes on the Air Force version are crucial to the program’s success, since it represents over two-thirds of the planned domestic buy and is the main export variant. The Pentagon’s Cost Assessment and Program Evaluation office stated earlier this year that all three variants of the plane were meeting key performance requirements and appeared to face no significant design challenges.
There has been considerable controversy surrounding the future price of the F-35, with Lockheed Martin officials complaining that the government’s method for calculating costs depended too much on data from other, unrelated programs. This criticism appears to be at least partly valid, since the company has now beaten government cost estimates in all four production lots, with the gap between estimates and actual cost appearing to grow over time. However, the government seems to have done a skillful job of negotiating the latest production agreement, getting a good price on terms that require the contractor to bear significant risks for any mistakes it may make. So far those mistakes have been few and far between, which is why the company stepped up to the challenge of a fixed-price contract earlier than expected. While the new agreement was negotiated well before Pentagon acquisition chief Ashton Carter released his guidance for enforcing more rigorous purchasing practices, it reflects many of the values Carter seeks to apply across the military acquisition system.
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