Wednesday, June 12, 2013

F-35 Cost Analysis

Before you read any further, do yourself a favor and go get some aspirin.  If you don’t have a headache now, you will.  Time website has a 5-part article (1) analyzing the cost of the F-35 program.  It’s not pretty!  Here’s some notable points from the article:

-Costs are reported various ways which can make the costs seem higher or lower.  The article does a nice job of describing the reporting methods.  The most relevant seems to be the Average Procurement Unit Cost (APUC) which considers only the actual purchase costs over the entire buy.  R&D costs are omitted. 

-The article points out that the Selected Acquisition Report (SAR) and other documents which are the best source of information are only reporting the cost of the plane without an engine.  The engine costs were broken out as a separate program with separate costs.

-APUC costs for an F-35 with an engine are $104.8M per plane in base year (2012) costs and $135.7M per plane in current year costs.  These are average costs over the entire buy and do break out the various models.

-The author points out that the costs are obtained by dividing the costs by the number of airframes.  However, the number of airframes has been decreased almost every year and will undoubtedly be reduced further, probably significantly.  This will push the average cost figures higher.

-The article debunks the myth of serial production savings resulting in any significant lowering of costs.

-Unit Recurring Flyaway (URF) costs are also debunked with the article pointing out that the plane can’t actually fly, let alone engage in combat, with the limitations imposed by the URF method of accounting.  The URF excludes support, training, spare parts, fuel, technical documents, or the inevitable upgrades and fixes that will ultimately be applied to make the plane flyable.

-Actual appropriated procurement costs rather than estimated APUCs show an average procurement cost from 2008 through 2014 of around $210M per plane with the 2014 production run costing $219M each.  Yikes!!!!  Also, that figure is rising for last several years, not falling as serial production efficiencies should be kicking in.

-The true cost impact of the F-35 program must include the large sums paid to upgrade various legacy aircraft due to the F-35’s excessive delays.  Those costs are not accounted for in conventional analysis.

These costs are eye opening to say the least.  The most important point is that all the estimates depend on the current planned number of aircraft actually being built and that is 100% certain not to happen.  The total buy will be significantly reduced as costs continue to rise and as the buy is reduced the costs will further increase.  That’s the definition of a vicious circle.

For the F-35 fanboys among you, if you’d like to dispute the costs you’d better back it up with some pretty accurate and specific data.  This is the most comprehensive and best cost analysis I’ve seen of the program.  If you want to dispute it, do so with facts!

Also, bear in mind that I'm reporting on the article.  If you want to argue, you'll be arguing with the author of the article, not me.  Personally, I see nothing in the analysis that I greatly disagree with but I have not checked out the numbers for myself.

This program is killing the military and the Navy in particular.  The Navy is going to be saddled with a generation of aircraft it doesn't really want and that offers little improvement over existing Super Hornets.  Very disappointing.



8 comments:

  1. This comment seem to me false:

    -The true cost impact of the F-35 program must include the large sums paid to upgrade various legacy aircraft due to the F-35’s excessive delays. Those costs are not accounted for in conventional analysis.

    If we did this we would be force to make two other changes to F-35 program.
    1) increase salvage value of F-35 fights as they have less fight hours on them.
    2)Or lengthen the time the program, at no cost, as you assume the F-35 would be worthless.
    Either way it becomes an accounting nightmare, so we are better off not playing the front in addition for no function.

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    1. The point is completely true. If you went to pick up a new car you ordered because your existing car was broken and were told that the car wouldn't be ready for three more years you'd have three more years of repairs, rentals, or other interim transportation costs to pay that you wouldn't have if the new car had been ready on time. Likewise, the Navy is having to buy additional Super Hornets and pay for upgrades to existing aircraft that they hadn't planned on. The delays of the F-35 are costing the Navy in the form of unplanned maintenance and upgrades to cover the gap until the F-35 is ready.

      The Navy is paying more and more developmental costs for the F-35 that were not planned for and paying for legacy upgrade costs that were not planned for. So, yes, the F-35 does have a "cost of delay" and it's significant.

      The author is not attempting to include those costs in his numbers. He simply points out that the true cost impact is greater than just the purchase price of the F-35.

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    2. This is one of the reasons why I scream at the IDIOTS who only look at the short-term costs savings of delaying the LRIP ramp up of the build rate while ignoring the long-term costs like:

      1. The aforementioned increased cost to keep legacy jets in the air. Included in this cost is the additional assets required to help legacy assets do their mission (IFR, ISR, Escorts, Jammers, Decoys, etc).

      2. Reduction in LRIP buys caused the cost of late LRIP & early FRP jets to go up significantly.

      3. The rise in LRIP costs have caused many partners to delay their orders, further exacerbating the problem.

      4. The rise in LRIP costs has cause at least one Partner to restart the evaluation (Canada).

      5. The rise in LRIP costs may cause our only FMS customer so far to delay orders past the initial buy (Japan).

      6. The rise in LRIP costs may be the linchpin item that causes LM to loose the South Korean contest.

      7. Any lost order will cause the lifetime costs of every F-35 to go up since less F-35s means parts cost more.

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    3. SpudmanWP, while all of your points are valid, you do understand that you're arguing for entering into production of a technologically immature aircraft that, after being produced, will have to undergo significant rework as modifications are implemented to correct design deficiencies? These aren't minor tweaks but structural reworks. Various reports have already identified concurrency costs as a major factor in cost growth and you're suggesting the program do more of that? Further, the aircraft isn't even combat capable, at the moment. For example, the software and helmet required for combat aren't even available. There remain some doubts that the -C version (Navy) will even be feasible due to the arresting hook issue among other problems.

      Entering LRIP at this point is going to raise final costs 20%-50% due to concurrency while producing a non-operational aircraft.

      Your points are valid from a short-term accounting perspective but not from a technology, combat, operational, or long-term cost perspective.

      Are you really willing to accept a 20%-50% cost increase on an already massively over-budget program that has yet to meet its operational specifications?

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    4. LM and P&W are taking more and more of the risks for concurrency costs so raising the LRIP rates is of very little cost risk for the DoD. Starting in LRIP 5, LM will assume 50% of the Pre-start Concurrency.

      Overall the Concurrency projections look a lot better than they did last year. Here is the May 2013 report to Congress.

      Software plays very little in the cost projections for concurrency as it takes just a few hours and little or no hardware to change. Same goes for the helmet.

      The biggest concurrency risk is structural and those days are behind the program for the most part. IIRC all three versions have gone through 1 lifetime of stress tests and are working on the second.


      Have you been reading the same reports I have?? Because the new hook has been performing wonderfully as has the new helmet. As far as combat software goes, 2B goes into testing this year.

      Remember that without concurrency they would have had to extend the life of every F-16/15/18/ etc for 10+ years assuming they would not start production until after SDD.

      The points that I laid out are specifically addressing LONG-TERM issues. I don't know where you think they are short-term in nature.

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    5. SpudmanWP, it's great that concurrency costs are coming down, however, we're still paying for concurrency. Setting aside the issue of inflation, it costs more to buy an aircraft and then retrofit changes than to wait and buy the corrected aircraft. Retrofitting costs more than production. That's a simple fact. Whether we buy a $10 plane with a combat helmet or buy a $9 plane without a helmet and then pay $1 later to get the helmet, the final plane costs the same. If LRIP costs seem lower it's because it's for an incomplete aircraft!

      I respectfully disagree (or misunderstand) with your comment about software costs. I work with large industrial projects and software always makes up 50% or more of the total cost and is always the largest chunk of time.

      I agree that we're not reading the same reports. The 2012 DOT&E report states that the hook test failed 3 of 8 landings and that inordinate stresses have been discovered on the upper portion of the assembly. The Jun '13 Proceedings, p.56, has an article which describes the hook improvements as inadequate. What reports have you seen that document a fully functional hook?

      You understand that the current LRIP airframes are not combat capable, right?

      Setting all the above aside, what do you think of the author's documentation of $200M+ costs per plane?

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  2. "The point is completely true. If you went to pick up a new car you ordered because your existing car was broken and were told that the car wouldn't be ready for three more years you'd have three more years of repairs, rentals, or other interim transportation costs to pay that you wouldn't have if the new car had been ready on time."

    However you would have three years of more use out of your new car before it needed to be replaced at the end.
    Its not good, but its not that bad, ok it is, but theres a silver lining.

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  3. The bulk of software costs are developmental, which has nothing to do with concurrency. These developmental costs would occure regardless of concurrency.

    When it comes time to do the actual software upgrade to the jet, the cost is minimal. On the issue of upgrade cost, the recent budget docs put the cost to upgrade a pre Block-3F F-35 and bring it up to IOC 3F standards is only $4 mil. Yes, I know this does not address "concurrency issues" and only talks about hardware & software upgrades.

    Those $200 mil projections I will have to look into, but seem way out of whack as it would be cheaper to park the LRIP jet and buy two FRP F-35s instead.

    On the hook, did you miss the interviews where it was stated that the 3 out of 8 failures were due to pilot error, ie he missed the wire completely? Did you also notice that the 8 tests were done with the new hook but still had the old damper? Or that there was only one wire involved?

    As far as the Proceedings goes, pointing to a pay-to-read article is not the way to convince anyone...

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