Monday, March 13, 2017

F-35 Lot 9/10 Prices

There are all kinds of wild claims being made about the affordability of the F-35 based on the Lot 9/10 LRIP (Low Rate Initial Production) contracts.  Let’s attempt to sort out the fact from fiction.


Lot 9

As you undoubtedly know, the government forced Lockheed to accept a unilateral contract price for the F-35 Lot 9 LRIP.

“After 14 months of intense negotiations, the Pentagon moved forward on its own with the LRIP 9 contract. Under the $6.1 billion award, Lockheed will deliver 57 F-35 airframes. Including engines, the mandated pricing per aircraft amounted to $102.1 million for each F-35A, $131.6 for each F-35B and $132.2 million for each F-35C.” (3)

I still don’t understand how a company can be forced to accept a unilateral contract but that’s not the main point of this post.

Here are the imposed prices of the individual aircraft types which includes the engine, according to Business Insider website (4).

  • 42 F-35A - $102.1M per
  • 13 F-35B - $131.6M per
  •   2 F-35C - $132.2M per



Lot 10

Lot 10 price negotiations were overshadowed by the threat of an additional unilateral price imposition by the government.

“During a speech in Washington earlier that day, US Air Force Secretary Deborah Lee James also hinted at the possibility of a unilateral contract for LRIP 10.” (3)

Here’s some Lot 10 cost figures.

“The Department of Defense awarded Lockheed Martin a contract for Lot 10 of F-35 production, not including engines, on Nov. 23. The “undefinitized contract” is for a total of 90 aircraft and has a ceiling of $7.2 billion.” (5)

Alternatively, another announcement cites a somewhat different price.

“The Department of Defense and Lockheed Martin announced on Friday an agreement worth about $8.5 billion for 90 F-35 jets …” (7)


In any event, note that the Lot 10 contract does not include engines.

“… Pentagon estimates the contract — which includes 90 F-35 airframes but no engines …” (2)

With the engine cost included, here are the prices for the individual aircraft types (1).

  • F-35A - $  94.6M per
  • F-35B - $122.8M per
  • F-35C - $121.8M per

Overall, these prices reflect around a 7% decrease from Lot 9 prices (1).



Engines

Here is some cost data on the F-35 engines. 

For Lot 9 F-35s,

In April, Pratt & Whitney signed a contract with the Pentagon to produce the ninth lot of F-135 engines that will power the F-35. The contract, worth $1.4 billion, will cover 66 engines.” (6)

That’s $21.2M per engine.


For Lot 10 F-35s,

“…$1.5 billion contract for the 10th lot of F-135s, a total of 99 engines.” (6)

That’s $15.2M per engine.


So, what does any of this tell us about the F-35 cost?  Nothing.  If the government can unilaterally dictate a price to the manufacturer, what’s to stop them from dictating a price of $50M per aircraft or $1M or any other number they want to use?  The fact that the contract was unilateral means that Lockheed clearly believes that the actual price was higher. 

So, what is the actual price of the F-35?  Well, Lockheed knows but they aren’t saying and the government knows but they don’t care.  The actual price is higher than the imposed contract price but we have no idea how much higher.

Imposing a unilateral price is the worst way to do business.  While it may make the General in charge of the F-35 program look good in the very short term, it will have far reaching negative consequences.  Manufacturers may opt not to bid on future projects out of fear of losing money due to imposed prices that are unrealistic.  Alternatively, they may bid but bid enormously higher than normal in an attempt to compensate for the threat of unilateral cost impositions.  Do you really think any aircraft manufacturer will ever again bid realistic prices (to the extent that they were doing so before which is a dubious proposition, to be sure)?  Of course not.  They now know that the government can impose a price so they will compensate and compensate enormously.  Do you think any aircraft manufacturer will ever share true cost data with government again, knowing that it can be used against them?  The only data the government will ever see from now on is hugely padded figures.  This can only hurt the country in the long run – yet another debacle brought to you courtesy of the F-35 program.

Do you think there are some ship builders who are scared to death that the government is going to impose below cost prices on them, too?  Those follow on Ford carriers are awfully expensive.  Maybe the government will unilaterally lower the price?  Ship builders are going to significantly pad up their numbers from now on to compensate for the possibility of imposed prices.  We’re going to see ridiculously large claims for added work, change orders, concurrency fixes, repairs (since there are no warranties), etc.  Builders are going to grab for as much money as they can as a hedge against unilateral price fixing by the government.

The ripple effect of the unilateral contract imposition is going to be felt throughout the military industry for decades to come.



________________________________

(1)Defense News website, “Pentagon, Lockheed Reach Agreement on F-35 Contract For 90 Jets”, Aaron Mehta, 3-Feb-2017,

(2)Defense News website, “Lockheed Martin Gets $1B F-35 Sustainment Contract”, Valerie Insinna, 1-Mar-2017,

(3)Flight Global website, “Unilateral negotiations still in play for F-35 contract”, Leigh Giangreco, 19-Dec-2016,

(4)Business Insider website, “Here’s the price tag for the latest batch of F35s”, Amanda Macias, 20-Dec-2016,

(5)Air Force Magazine website, “Lockheed Martin Receives $7.2 Billion Contract for F-35 Lot 10”, Wilson Brissett, 29-Nov-2016,

(6)The Ct Mirror website, “Pentagon-Lockheed fight over F-35 price doesn’t extend to Pratt”, Ana Radelat, 4-Nov-2016,

(7)CNBC website, “Lockheed, Pentagon announce $8.5 billion F-35 order”, 3 Feb 2017,

10 comments:

  1. I just don't believe anything coming out of any acquisition program at this point. Our cost numbers are nearly as opaque as China.

    We are well into the military/industrial complex time; and we are building outrageously inadequate designs for outrageously expensive sums.

    Yes, I agree that unilateral prices are a bad idea. (After the fact. I have no problem with Congress saying 'We want a fighter with X specs for $80 million a plane and then letting companies compete for that. But Congress would have to make that a reliable $80 million and the companies would have to know that if their plane comes in at $81 million they'll get $80...) Congress will either get the plane or an answer that 'we can't do it' from every manufacturer.

    But it's my understanding that a unilateral contract isn't enforceable to the extent that the other guy can walk without legal consequences. I.E. I contract with you to build my deck. We do phase one, and its 10% over budget. I then issue a unilateral contract to you saying you'll build phase II for a price that is 10% lower. At that point, you can choose to deliver (and then you're bound) or you can walk way.

    My point with this is that with all of its lobbying and all of the padding done, I have zero doubt that Lockheed Martin will make bank on this somehow. They'll either make the planes at a loss, then make up the difference in costly retrofits after the fact; or they'll have padded the numbers from the get go already so that they just make less profit on each unit. Or both. I'm guessing its the former; that makes Congress look good (We cut costs! Yay us!) while keeping money coming to their district; and it lets Lockheed stay happy, which keeps its lobbyists pumping money into Congress.

    I'm very pro military. I'd love for them to have great equipment. But I'm so embittered by the acquisition process the next thing I think the military needs is a raft of brave, non corrupt auditors (if you can find them) who can sort out the stink (if possible) in both Congress and the corporations.

    Does DOT&E have a finance arm to look at contracts?

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    1. You are correct that Lockheed had the option to walk away from the contract. As I recall, they had 90 days, or some such, to make a decision. I think that time has passed and they've opted to proceed.

      Now, it's not quite as straightforward as accepting the imposed price or not. Lockheed had already invested heavily of their own money IN ANTICIPATION of getting a negotiated price they could live with. The imposed price had to rattle them.

      Here's a ludicrous analogy. I ask you to fix my car. IN ANTICIPATION of a hefty price for the repair, you build a garage, outfit it with tools and diagnostic computers, and hire mechanics. Then, at the last moment, as I pull up to the newly built garage, I tell you that we won't negotiate a price. Instead, I'll tell you what I'm willing to pay and you can take it or leave it. Well, after all the money you invested, IN ANTICIPATION, do you really have a realistic option of walking away? No, probably not. Instead, you angrily accept the imposed price and vow to yourself to make me pay in other ways, as you suggest in your comment.

      Don't get me wrong. I have little sympathy for Lockheed. They've manipulated the system and made very poor business decisions (for example, don't spend your own money IN ANTICIPATION beyond the point that you're willing to lose). Still, the precedent of unilateral contracts is chilling and, as I said in the post, will have ramifications for decades to come. This was possibly the ultimate example of 'penny wise, pound foolish' in history.

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    2. Jim, agree completely! I think this last LOT 9/10 has completely perverted and/or killed the entire process. Why would anyone believe any of these numbers,except Wall Street so they can pump up the stock? or the general media,so they can say the jet price is going down?

      I don't have the time since it's not very practical to go thru all the contracts awarded to F35 program but when you look at some of the numerous FOLLOW ON contracts, for tools, parts, support, training, etc,etc,etc, that I don't think are included in the LOTS for the actual delivery of the F35, how much of that CRAP isn't just padding?!?!? So LMT says to DOD, sure, lets say the F35 is only $90 million dollars a copy and when we ask for $500 million for "support", DOD says yes, no one cares and bothers to look for that contract and we call it even for this FY.....

      I believe that is what is happening...

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    3. "Still, the precedent of unilateral contracts is chilling and, as I said in the post, will have ramifications for decades to come."

      Good point. I think between that and the lack of competition we're in deep trouble in terms of developing new aircraft. We're on the wrong side of the economic curve for a successful defense policy, and it looks to only get worse.

      A National Review article has an argument for cancelling the F-35 and replacing it with a 'Boyd' type aircraft. I'm not sold on alot of the things they suggest, I think they're too zealous and pie in the sky in their own way, but one thing that would tempt me a great deal if I was the person making the buy is a cheap price and low flight hour cost.

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  2. 1st, the unilateral contract may actually benefit the contractor since they get the PR benefit of low price now (keep program sold and make it look more affordable than it is) and get the money back later. See AvWeek article "Lockheed Could Sue Pentagon Over F-35" http://awin.aviationweek.com/ArticlesStory.aspx?id=8cdc3057-3af4-4ac4-af7e-4a56c65d67eb. So the imposed price is still something that is not a done deal and I would expect that the contractor will get a big windfall at a date when it is less contentious. "If Lockheed chooses to go to federal court, it has until its JSF production contracts end to make its case before filing limitations foreclose the option. That means years or decades, considering the 16-year-old program is just hundreds of airplanes into a manufacturing run that is forecast to last thousands of fighters."

    "“We’re not in any hurry. We’re not under any pressure to resolve this thing right now,” Tanner (LM) said."


    But the prices still don't reflect the cost to fix the concurrency problems and may also skip the many other payments made on the contract that are actually part of the costs but are not counted in the production contract numbers. Here's an old article that is given only to illustrate the point: http://www.defense-aerospace.com/article-view/feature/141238/**f_35-lot-5-unit-costs-exceed-$223m.html .

    Even with all that, one needs to remember that only about 1/3 of the total program costs are acquisition costs. With every flight hour costing 2X-3X what a legacy platform costs, the program costs are still out of control even if unit prices get down to $90M.

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    1. The Aviation Week article appears to be behind a paywall so I can't view it. While I don't doubt you, the indefinite time frame for litigation does not agree with the short time frame I've read. Perhaps they refer to two different deadlines for two different legal processes. That would be quite plausible. The problem for Lockheed is, if they go ahead and complete the Lot 9 production run, they lose any leverage they have.

      You're quite correct in your comments about additional costs for concurrency, operating costs, etc. This is one hideously expensive program no matter how you look at it. Unless this aircraft performs at twice the level even its most ardent supporters claim, it will fail to provide sufficient value for the dollar.

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  3. "This is one hideously expensive program no matter how you look at it. Unless this aircraft performs at twice the level even its most ardent supporters claim, it will fail to provide sufficient value for the dollar."

    I want to like the F-35 and believe Lockheed Martin is acting in good faith. I just can't help gritting my teeth every time I read about this, the Zumwalt, or to a lesser extent the LCS. There's always a 'gotcha' in the works.

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  4. Lockheed is still running under the terms and conditions of the initial SDD contract, thats where they would have signed up to the unilateral pricing , so its not a stand alone contract unilaterally forced on them.

    "The definitized contract for LRIP 9 announced today was not a mutually agreed upon contract, it was a unilateral contract action, which obligates us to perform under standard terms and conditions, and previously agreed-to items,” said Lockheed spokesman Mike Rein
    http://contractingacademy.gatech.edu/tag/f-35-lockheed/

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  5. This program is like most of the gold plated programs run out of the Pentagon now. Everything is so expensive that we will never risks losing it with a near Peer enemy

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