Lockheed Martin and Pratt & Whitney to pay US$283 million in F-35 cost overruns

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Lockheed Martin and United Technologies (parent company of Pratt & Whitney) will pay up to US$283 million to cover some of the US$918 million cost overrun on the first 28 F-35 Joint Strike Fighters.

The Pentagon’s programme office made the announcement yesterday. Programme manager Vice Admiral David Venlet said the government will cover the remaining US$635 million. However, the Pentagon needs to spend another US$136 million in order to make improvements to the aircraft. The improvements are not considered to be part of the contract overrun, Venlet said.
“The F-35 Programme Office is working with the services to make necessary adjustments to pay the bills,” Venlet said. “Going forward, controlling costs is an absolute must.”

On July 3, Senator John McCain said Lockheed’s cost overrun on the first 28 aircraft amounted to US$771 million, which was “Outrageous!” He added that the Pentagon was seeking US$264 million in reprogrammed funding as a kind of downpayment on the “disgraceful” overrun.

The F-35 it is the most expensive ever US arms purchase, with 2,443 aircraft over the next two decades costing more than US$382 billion.

The Pentagon’s F-35 Joint Programme Office previously had said total costs on the first three production batches overshot their contractual targets by 11 to 15%. These “cost-plus” deals required the government to pay most of an overrun.
“Delivering specified capabilities at target cost is required for success,” Venlet said in an April interview with Bloomberg. “The F-35 cost growth experienced on early production contracts is an extreme and problematic burden to the US Air Force, Navy and Marine Corps. Costs must come down significantly to make this aircraft one we can afford.”
“The number you are seeing is still being scrubbed and is worst case scenario,” said Lockheed Martin spokesman Mike Rein.
“On the Lockheed side, we are working hard to lower it,” he said in an e-mailed statement. “That said, whatever the final total is we will pay approximately 30 percent of the overrun.”

Pratt & Whitney spokeswoman Stephanie Duvall said her company had exceeded costs for the first 28 aircraft by 6%.

The fourth production contract calls for Lockheed and the government to share equally any cost overrun up to 120 percent of the negotiated price. Lockheed would be responsible for any overruns beyond that. If costs are below the target, the government and Lockheed would share the savings equally.

McCain, the top Republican on the Senate Armed Services Committee, has long argued that the radar-evading F-35 cannot be allowed to drain resources from other Pentagon modernisation projects over the next 25 years. He failed last month in a push to put the programme on “probation” at the end of this year if the 32 aircraft being built in the fourth, low-rate production lot tops target costs by 10 percent or more.

In a July 14 letter to Defence Secretary Leon Panetta, McCain and Senate Armed Services Committee chairman Carl Levin asked what would happen if the Pentagon did not pay its share of the cost overruns. They also asked how much it would cost the Pentagon to terminate the entire programme.