The Most Expensive Military Project So Far
Posted on InsideDefense.com: April 17, 2014
The latest Selected Acquisition Report for the Joint Strike Fighter program shows marginal cost growth for F-35 procurement and reductions in cost estimates for life-cycle sustainment, lowering the total projected cost by 2 percent over last year's data -- but still estimating a price tag of $921 billion in fiscal year 2012 dollars.
FY-12 dollar figures are used because the F-35 program was re-baselined in that year. In total, and using figures determined both by the JSF joint program office and the Pentagon's cost assessment and program evaluation (CAPE) office, F-35 acquisition, operations and sustainment cost estimates fell from $936.4 billion in 2012 to $921.3 billion in 2013. If adjusted for inflation over the 50-year life of the program, acquisition costs are estimated at $399 billion, sustainment either $917 billion or $1 trillion depending on two available projections, and total program cost comes to either $1.3 trillion or $1.4 trillion.
The estimate in the 2013 SAR is higher than what JSF Program Executive Officer Lt. Gen. Christopher Bogdan has said he expected; the general in recent months stated a cost projection of around $850 billion. Bogdan told reporters at an April 17 media roundtable on the SAR estimates that the difference is largely due to changes in inflation indicators.
Guesses at the inflation rate have a huge impact on long-term cost estimates because the F-35 SAR projects sustainment costs out five decades, to 2065.
Breaking down those total figures in greater detail, the Defense Department now expects F-35 acquisition -- including research and development, procurement and military construction -- to cost around $323 billion in FY-12 dollars, or $399 billion in then-year dollars. Research, development, test and evaluation funding remained steady and construction cost estimates fell slightly, but the program reported a $4.5 billion price increase in procurement estimates, again in FY-12 dollars.
Bogdan attributed that increase almost entirely to decisions by JSF operators to delay or defer some aircraft purchases, which raises the cost of all other airplanes bought in the short term -- thus increasing total program cost. Lockheed Martin and Pratt & Whitney are the prime contractors for the jet and engine, respectively, and BAE Systems and Northrop Grumman are Lockheed's two primary subcontractors on the aircraft.
"The two primary drivers that caused that procurement dollar amount to go up were labor rates for our prime contractors and for their major subs -- so I'm talking about Lockheed, Pratt, BAE and Northrop Grumman -- and the fact that the services and some of the partners moved the buy of their airplanes out to the right," Bogdan said. "When you do that, the curve for the cost of the airplane doesn't come down as fast as it would have. That's reflected in the total procurement cost."
Bogdan also expressed displeasure with Pratt & Whitney for cost increases in the company's production of F135 engines. Those increases are at least partly due to the company's spreading overhead costs among a shrinking amount of military programs, which has concentrated more cost on the F-35 motor, he said, stressing that the slower growth rate in aircraft buys is similarly felt in engine procurement.
The SAR projects expenses only for aircraft slated to be bought for the Air Force, Navy and Marine Corps. But because of the integrated, joint-service, international partner and foreign military sale nature of the program, decisions by one buyer to change procurement quantities and time lines affects all other buyers. Bogdan and his staff have estimated that recent decisions by the Navy, Turkey, Italy and others to reduce near-term procurement will raise the cost of all other aircraft by around 3 percent, although orders from Japan and Israel are helping offset that somewhat. He added that this cost estimate does not factor in the aircraft South Korea or other nations might purchase.
According to a SAR fact sheet provided by the program office, the average cost of an Air Force conventional-takeoff-and-landing F-35A over the life of the program is now expected to be $105 million if the service buys its total planned quantity of 1,763 aircraft. That figure, known as a unit recurring flyaway cost, covers only procurement and not developmental expenses. It does take into account the more expensive aircraft bought early in the program and the less costly jets that air forces around the world will buy over the next 25 years or so. The $105 million figure is a weighted average, with more weight given to the cost point at which the most aircraft will be acquired -- a point the program has yet to reach.
The F-35A, which will make up the bulk of the global JSF fleet, will be flown by the Air Force, most international partners and all of the foreign military sales customers that have committed to buy the jet so far.
According to the fact sheet, the unit recurring flyaway cost of the Marine Corps' short-takeoff-vertical landing F-35B is pegged at $127.8 million at the programmed quantity of 340 aircraft. The Navy is looking at a flyaway price tag of $116.4 million.
Each of those figures increase if development and military construction costs are factored in. Including those costs, and measured in then-year dollars, the program projects an average acquisition unit price tag of $162 million. That statistic is not broken down among the three F-35 variants.
O&S Cost Debate
The larger share of the SAR's cost projection for the F-35 program is in operations and sustainment rather than acquisition, and there remains a disagreement between the program office and CAPE about the size of that figure. The fact sheet shows that, in FY-12 terms, CAPE believes sustainment will cost about $598 billion, while the program projects $541 billion. Adjusted for inflation over the life of the program, CAPE's number remains slightly above $1 trillion, and Bogdan's office's is $917 billion. Both are lower than CAPE's previous estimate of $1.1 trillion.
Until those estimates are reconciled, the differences are meaningful. The JSF program's $921.3 billion total cost estimate is made up of the base-year acquisition cost projection that is common to both estimates -- $323 billion -- and CAPE's sustainment estimate, $598 billion. Had Bogdan's preferred sustainment figure been applied, the SAR would list the F-35's total program cost at $864 billion instead. Adjusting all of those figures for inflation, the CAPE cost estimate would be $1.41 trillion, and the program office estimate, $1.31 trillion
The general listed four factors contributing to that discrepancy of about $100 billion, and each involve different statistical measurement approaches. According to Bogdan, CAPE and the program office track depot-level maintenance costs differently; CAPE compiles the sum of the cost of every individual piece of work done at the depot, whereas the program office takes into account the aircraft users' attempts at efficiencies, including multiple modifications in a single depot induction. Second, the two cost estimates use different fuel-burn rates for the Air Force. Bogdan suggested CAPE's fuel-burn factor is based on accurate historical data, not on current Air Force strategic thinking about F-35 employment.
Third, CAPE chose to measure expected reliability and maintainability trends based on last year's report by the Pentagon director of operational test and evaluation. That report was put together when the JSF fleet had flown about 8,500 hours. The fleet has now surpassed 15,000 flying hours, giving the program office more up-to-date statistics than what CAPE was able to use at the time it had to submit its cost projection to DOD leaders.
The fourth difference will be critical in the future, although it remains a rough estimate today: the mix of contractor and organic personnel involved in F-35 sustainment. Bogdan and F-35 Director of Logistics Todd Mellon said CAPE used the program's traditional placeholder figure of 80 percent contractor and 20 percent organic sustainment, whereas the program now intends to shift more work to government personnel.
"That's reflected in our number, not reflected in their number," Bogdan said about the contractor-organic blend -- though is is applicable to all of the distinctions between CAPE and the joint program office. "At some point in time, we will come to agreement in the future on what that mix should be, and then we'll go forward."