Forum: F-35 Lightning II

Lockheed, Pentagon in talks on delayed fighter deal Tue Aug 24, 2010

http://uk.reuters.com/article/idUKTRE67M5JK20100823

WASHINGTON (Reuters) - Senior Lockheed Martin Corp (LMT.N) executives and Pentagon officials met on Monday to continue protracted negotiations about a fourth batch of 32 F-35 fighter jets that company executives had expected to wrap up over a month ago, according to sources following the talks.

The talks, held in Washington, are critical to the Pentagon's drive to rein in costs on the world's largest weapons program, now projected to cost over $380 billion over the next decades.

Failure to reach a deal before the end of summer could raise questions about the Defense Department's management of the program and could further pressure Lockheed's stock, which has already dropped more than 16 percent since March, analysts say.

Lockheed's F-35 program manager, Tom Burbage, had predicted at the Farnborough Airshow outside London in July that an agreement would be reached "any day now." The company had initially expected to reach a deal by the end of May.

Lockheed spokesman Joe LaMarca said negotiations were still under way, but the company expected to reach a settlement soon.

The contract has taken longer to negotiate, in part, because it is structured as a fixed-price deal rather than the cost-plus contracts usually signed for development aircraft, Burbage told reporters in July.

"The program has agreed to transition to a fixed-price contract two years ahead of the acquisition plan to dispel many of the escalating cost assertions that have been prevalent recently," LaMarca said.

"This is the first of many fixed-price contracts and it is critical for both parties to get a full understanding of the terms and conditions as it will be the benchmark for all future contracts. We anticipate a fair settlement soon," he said.

The Pentagon office overseeing the program is reviewing the overall development plan for the fighter. It includes a technical baseline review aimed at ensuring the rest of the development program stays on budget, an effort that is due to wrap up in November, said Pentagon spokeswoman Cheryl Irwin.

Irwin said the current contract discussions were not dependent on the technical baseline review, and were "proceeding upon a basis of examining sound data in support of program affordability."

Sources following the discussions said most significant issues had been addressed, and a contract deal could be in sight before the September 6 Labor Day holiday, which marks the unofficial end of summer in the United States....

...The involvement of senior Lockheed executives in the negotiations meant either that the two sides had narrowed their differences to one or two key issues that the previous negotiating team did not have the authority to decide, or that previous negotiations had proven unsuccessful in breaking the stalemate, McAleese said.

In either event, both sides were under mounting pressure to reach a deal by the end of September, when the government's 2010 fiscal year ends, and before Lockheed reports third-quarter earnings in late October, he said.

"If this issue is not resolved soon, this could have the potential to create a crisis in confidence about both the Defense Department's ability to achieve an affordable unit price for the fighter as well as Lockheed's valuation," he said.

LaMarca declined comment, saying: "We're negotiating in good faith. It would be inappropriate and premature for me to speculate or comment on anything until the negotiations are complete."

Richard Aboulafia, senior analyst with the Virginia-based Teal Group, said the negotiations were clearly taking longer than expected, but that was understandable given the shift to fixed-price contract terms.

"You've got to make sure that your costs are in line with the price before you commit to a fixed-price contract," Aboulafia said, noting that under fixed-price terms the company would be responsible for any increase in costs beyond the agreed price.

That meant that if costs rose beyond what Lockheed negotiated with the government now, it would have "negative margins" on its biggest program, he said.

(Reporting by Andrea Shalal-Esa; Editing by Gary Hill)"

F-16.net Sponsor

When they finally strike this deal they REALLY need to communicate to the public VERY CLEARLY the various layers of cost for these aircraft. Most of the bad press the F-35 gets is because people think the urf is $120,000+.

They need to squash all of the incorrect claims of unit prices once and for all. It should be LM's TOP priority once the deal is signed.

Also the prices should be compared with similar era aircraft such as the typhoon.

Contractor: F-35 LRIP 4 Deal Days Away From Closing Sep 13, 2010 By Amy Butler -
Washington

http://www.aviationweek.com/aw/generic/ ... ontractor: F-35 LRIP 4 Deal Days Away From Closing

"Negotiations on the long-awaited deal for the Pentagon to order its next lot of F-35 aircraft are nearly complete, according to Tom Burbage, executive vice president for Joint Strike Fighter program integration at Lockheed Martin.

The company submitted its most recent offer for the 32-aircraft lot about three weeks ago, Burbage tells Aviation Week. Another offer was submitted in July before the Farnborough Air Show, and negotiations started in October. Burbage says he thinks the talks are days from concluding. “We keep thinking we are very close to having this thing closed.”

These are the most protracted low-rate initial production (LRIP) negotiations for F-35s to date because of a shift from the cost-plus, award-fee plan to a fixed-price, incentive-fee deal, he says.

Though both Lockheed and the Pentagon are eager to sign the LRIP 4 contract, the Air Force (which is leading the negotiations) will not be rushed into unfavorable terms even with the fiscal year closing at the end of this month. “It just needs to be done when the time is right,” says Lt. Gen. Mark Shackelford, military deputy to the Air Force’s acquisition office. “Negotiating the right thing is more important than meeting some timeline.”

Contractors have in the past stalled on negotiations in hopes that the threat of losing funding at the end of a fiscal year for lack of a contract would compel a service into agreeing to terms more favorable to a manufacturer.

By shifting to a fixed-price deal for LRIP 4, the Pentagon hopes to decrease risk to the government of further cost overruns in the program, which includes the design of three variants for at least nine allies. These negotiations are very different from those with Lockheed leadership in buying the F-22, which has been criticized for its high price.

“F-22 is a different story. It was a different era. We had different priorities. We had a different leadership approach to negotiating with industry,” Shackelford says. “We are in a different environment right now based on [top Defense Department acquisition official] Dr. [Ashton] Carter’s desires to find improved ways of contradicting for acquisition.”

At issue in the JSF negotiations are two major points: per-unit price and terms of the incentive structure. Lockheed officials have been hesitant to enter into a fixed-price agreement due to potential uncertainties in the program moving forward. However, the company has renegotiated arrangements with suppliers to make it happen. The incentive fee structure will lay out liability to both parties should overruns occur and, conversely, awards should the company come in under price.

Shackelford says the use of a fixed-price, incentive-fee contract provides the government with more leverage than the cost-plus, award-fee deals used so commonly during the past decade. Those arrangements were highly subjective. Though it would seem the subjectivity gives the government leverage in awarding contractors for good performance or docking them for underperforming, it actually was a hindrance. “An award fee, by nature, is a subjective measure of performance. As such, it is very hard to tie it directly to something that is accountable,” Shackelford says. “Award fee becomes profit to the contractors at a fairly high level,” he says. Even if the Air Force tried to deviate because it was not happy with the contractor’s performance and tried to lower the fee percentage, it was difficult to justify because the fee was subjective.

Low award fees often triggered “interesting dialogue” with contractors or, even at times, Pentagon leadership, he says. “The subjectivity rendered it difficult to tie it to anything other than: ‘I just don’t like your performance. Therefore, I’m going to give you this percentage.’”

Earlier this year, Defense Secretary Robert Gates announced that $614 million in potential award fee was being withheld from Lockheed as a result of poor performance in the past on the F-35 program. Some of that money has now been set aside against performance on specific milestones. “The money in the award-fee pool has been allocated in some cases to specific events -- for instance, [to] deliver all of the developmental test airplanes to the test centers by the end of 2010,” Shackelford says. “That is a schedule incentive and to some extent it is a performance incentive.”

The use of this type of contracting structure will remove uncertainty on the part of the contractor regarding performance, he says. “Incentivize industry in a way that is objective,” he says.

“Now in our interaction with industry [officials], they know exactly how they are doing … There is no wiggle room [on] do I think you are performing or not.”

Last edited by geogen on Sep 14, 2010 - 05:52 AM; edited 1 time in total

I'm curious if the soon to be finalized contracted 'unit price' will be tied to let's say; any FIXED, longer term MYB rates as assurance for the contractor? And if so, are relevant Congressional members being updated on any longer term requirements/commitments? (in the loop in any way?).

The incentive structure will indeed be interesting to see, likewise. Good luck to all parties, but unfortunately I'm still in the camp having to say it's just too premature (5 yrs from SDD maturity) to nail down a Fixed Program anything. So much should be evaluated and assessed by Air Force if they are truly concerned about what Govt is getting for the price, etc. That's just my blunt, dissenting opinion, that's all.

Edit:

Thanks for that input and point, Cy, but while I concur in general, it (the total Program) is part of the very complexity which needs to be critically assessed and not just written off as simply part of a pre-conceived, indefinitely acceptable Program. That is my critical opinion, unfortunately.

Geo,

This is not just an Air Force program. Most cost problems are Marine (STOVL) issues. This is why these forums get skewed. Paradigm assumes USAF, but that will not do here.All assumptions going forward must include the STOVL variant.

LRIP6 speculation starts already:

http://www.flightglobal.com/blogs/the-d ... -f-35.html

Key statement re LRIP6

Quote:

or other such quantities as may be authorized and appropriated by Congress or authorized by the respective Ministries of Defence

They can always order more. Maybe this is just Long Lead purchases for the first 6 months of LRIP6 jets.

I found that the Long Lead buy of LRIP4 was 32 F135s and made last Sept.
https://www.fbo.gov/index?s=opportunity ... p;_cview=0

and LRIP5 Long Lead buys have not happened yet. My guess is that in order to get the large number of F135s needed for LRIP6, they needed to start a year early with the long lead buys.

---update
Here is the Long Lead buy of the F-35s themselves. They are also 53 in number.
https://www.fbo.gov/?s=opportunity& ... p;_cview=0

DoD, Lockheed Finally Finish JSF LRIP 4 Talks Posted by Amy Butler at 9/22/2010 2:33 PM CDT

http://www.aviationweek.com/aw/blogs/de ... d=blogDest

"Pentagon and Lockheed Martin officials finally concluded negotiations that took more than a year for low-rate, initial production Lot 4 of the Joint Strike Fighter.

This is the first time the Pentagon is using a fixed-price incentive fee contract for the F-35, which has fallen under unprecedented scrutiny in the past year for extreme cost growth.

However, the agreed upon fixed price and incentive fee structure haven't yet been disclosed. Negotiations closed yesterday (Sept. 21) and a contract will likely take weeks to draw up and sign.

What will be key is how much risk the government and Lockheed Martin are each willing to take. This will eventually be visible in both the agreed upon per-unit price as well as the incentive fee structure. Through this structure, the Pentagon lays out how much both it and the company will pay in the event of a future cost overrun. Similarly, it outlines the financial incentive for the company for performing beyond expectation -- which Lockheed Martin officials say they fully expect to be able to do.

The terms "drive everything,” according to one government official. “You can turn a fixed-price, incentive-fee contract into something that becomes a cost-plus contract” based on the terms. Lt. Gen. Mark Shackelford, military deputy to the Air Force acquisition secretary's office, said this month that earlier cost type contracts did not provide a useful mechanism for government overseers to penalize contractors for poor performance.

The LRIP 4 deal will include purchase of 30 F-35s for the U.S., as well as one for the U.K., according to Pentagon officials. An option also is included for one of the single-engine stealthy strike fighters for the Netherlands. The lot was expected to include all 32 aircraft.

Total contract value is expected to reach more than $5 billion, including production and sustainment elements, according to a Lockheed executive.

Negotiations have been ongoing since October 2009.

“We remain confident that this agreement keeps us on track to reach our long-term price projections for the F-35 at full-rate production,” according to Lockheed’s statement. “We know we have to adapt to the new reality that we face, with more demanding affordability goals that place an even greater premium on program execution, and we are committed to meeting that challenge.”

“The department believes this contract is a fair and reasonable basis for LRIP 4 and sets the appropriate foundation for future production lots,” the Pentagon says in a statement. “The negotiated price is below the independent cost estimate prepared earlier this year and reflects the contract type deemed most efficient by the department.”

The path to get to this point is worth recounting.

Company officials said earlier this year they wanted to wait for a fixed-price deal until LRIP 5. Clearly, the Pentagon felt otherwise, and the Pentagon's statement says the contract includes a fixed price.

During the spring, Lockheed officials went on the offensive, claiming that the Pentagon's JSF cost estimates were bloated and didn't take into account the "actuals" experienced in LRIPs 1-3 on the production line in Fort Worth. Pentagon acquisition chief Ashton Carter and David Van Buren, the senior-most USAF procurement executive and chief negotiator on the deal, said they encourage over performance and that any under runs could translate to additional aircraft purchases.

Lockheed Martin officials have been walking a tightrope with their low-cost message. While some company officials were pushing for another cost type contract for LRIP 4 (which reduces the company's financial risk the event of an overrun or delay), citing potential uncertainties early in production, others have been saying that the per-unit cost will be stable and comparable to F-16s and F/A-18s rolling off the line today. So, one could surmise the company wanted to advertise a low cost, especially to international buyers that are so critical to ramping up the production rate and stabilizing it at a high number, but was shy about backing it by fixing the cost contractually in the near term.

Steve O'Bryan, VP of F-35 business development, said in June that the company projects a unit recurring flyaway of about $60 million for a conventional takeoff and landing F-35A.

The Pentagon doesn't typically use unit recurring flyaway cost in its planning. Instead, it uses the APUC -- average procurement unit cost -- and PAUC -- the program acquisition unit cost. PAUC includes the total program cost divided by the number bought, while APUC is a smaller number that doesn't include the price of development. While this figure may quell concerns of would-be international buyers who will purchase their aircraft in later lots, the issue in Washington is the price of a JSF today or next year. Israel's recent deal (subscription only) includes a per-unit price of about $144 million.

The Pentagon's projections as of June for JSF in Fiscal 2010 dollars are the following:
APUC -- $108.7 million (up 84% from $59.1 million in 2001)
PAUC -- $132 million (up 82% from $72.7 million in 2001)

Still Trimbling with Anticipation & Trepidation: Very Happy

Still wondering how much an F-35 costs? By Stephen Trimble on September 23, 2010

"So am I!

Lockheed Martin and the Department of Defense have reached an agreement -- but not signed a contract -- on the fourth lot of low rate initial production for up to 32 jets (including one option reserved for the currently deadlocked Dutch government).

What does it mean to reach an agreement without signing a contract? Who knows! Maybe they agreed on the font size for the letterhead on the cover sheet.

Lockheed, meanwhile, says the value of the contract could be more than $5 billion. But that doesn't mean the cost of each jet is at least $156 million, which is the mean. That number also includes production costs not associated with the flyaway price of the aircraft, such as extra tooling.

Why would the new contract include extra production costs even though the Department of Defense already gave Lockheed a $819 million contract two months ago to buy special tools and testing equipment for LRIP-4? Again, we don't know the answer.

Here's what we do know: LRIP-4 negotiators will have to work hard to keep the average price per aircraft on a downward trajectory.

In May 2008, Lockheed received a $2.2 billion contract to build 12 F-35s in LRIP-2, which averaged $183 million per jet excluding the engine and long-lead acquisition costs.

Fourteen months later, Lockheed received a $2.1 billion contract to build 17 F-35s in LRIP-3, or $123 million per jet with the same exclusions as above.

Now we're waiting to see the value of the LRIP-4 order for 31 or 32 aircraft. If it's anything like the $5 billion figure cited above, this blogger will need to see a lot more details to understand why the aircraft is getting cheaper."

And then you have to add in the 'Adv Proc' cost line for the LRIP IV jets, which were paid for in FY09.. i.e., $215m for the 20x USN/STOVL jets and $171.5m for 10x USAF CTOL jets. Hence... potentially adding $386m on top of this reported $819m, on top of the agreed upon awarded LRIP IV contract of > $5 billion.

So all in all, we're still talking about more than $200m per unit for 30x USAF/USN LRIP IV jets. If this is the case then, it would unfortunately imply that the unfortunate reality of the Program is requiring 'creative financing' and contracting in order to make the jets look cheap for Congress and foreign govts going forward.. imho.

Will have to stay tuned..

Um, no.

Look at any FY20xx budget doc and the advanced proc costs are calculated in the APUC. Let's take it line by line (and for the sake of simplicity, let's keep this about the F-35A only.

1. The total cost of the system (including all recurring, non-recurring, support costs, etc) is called the "Gross P-1 Cost". For LRIP4 (FY2010) that was $2248.182 mil for 10 F-35As (That's $224.8 mil ea)

2. Then we subtract previous year's Adv Proc Credit ($171.437 mil from FY2009 budget). This then gives us the "Net P-1 Cost" which is what is actually spent from the FY2010 budget. In the FY2010 case this is $2076.745 mil.

3. Then we add the FY2010 Adv Proc Funds (for FY2011 LRIP5) which are $278.600 mil. Add #2 & 3 together and you end up with the Weapon System Cost for LRIP4 which is $2355.345 mil (or $235.5 mil).

As you can see the Adv Proc Funds are NOT in addition to the system costs for any given LRIP.

Think of it this way. You go down to a Ferrari dealer and want to buy a 2011 model. The dealer wants 10% on the spot (Adv Proc Funds) to start building it. Next year you come to pick it up and the dealer says that it will cost $1 mil (Gross P-1 Cost), but since you already payed 10%, all you owe (out the door costs) is $900k (Net P-1 Cost).

As far as the $819 mil, it's not ADDED to LRIP4, it's (the F-35A's $294 mil) covered under the almost $880 mil non-recurring & support costs associated with LRIP4 F-35As.

Here are the details on the $819 mil.

Quote:

Lockheed Martin Corp., Lockheed Martin Aeronautics Co., Fort Worth, Texas, is being awarded an $819,647,920 cost-plus-incentive-fee modification to a previously awarded advance acquisition contract (N00019-09-C-0010) for special tools/test equipment required in support of the F-35 Joint Strike Fighter (JSF) air system low-rate initial production Lot IV production. Work will be performed in El Segundo, Calif. (25.2 percent); Fort Worth, Texas (21.6 percent); Rochester, United Kingdom (21.5 percent); Rolling Meadows, Ill. (9.5 percent); Baltimore, Md. (2.2 percent); Boulder, Colo. (2.1 percent); various locations outside contiguous U.S. (9.2 percent); and locations within the contiguous U.S. (8.7 percent). Work is expected to be completed in January 2013. This modification combines purchases for the U.S. Navy ($352,473,960; 43 percent); the U.S. Air Force ($294,473,960; 36 percent); and international partners ($172,700,000; 21 percent). Contract funds will not expire at the end of the current fiscal year. The Naval Air Systems Command, Patuxent River, Md., is the contracting activity.

Well hate to say it but...

We also must add the initial spares to that FY10 weapon sys cost you've noted for the total FY10 bill listed... so the full total with spares, comes to a per unit of about $13m extra per jet over the weapon system, but that's really besides the point here.

What Spaz was posting on Stephen Trimble's blog and I was lumping additional thoughts onto, was only to hold tight and wait and see the details because we truly don't know the exact details.. e.g., Does this $295m for USAF's portion of the FY10 'modification' award in fact include extra tooling and test equipment for LRIP IV? Is that in addition to the anticipated $5billion contract to be signed?

And as far as LM claiming the value of the newly negotiated contract potentially being more than $5b... does that include the $171.5m already paid in FY09 for FY10's (LRIP IV's) adv proc, or does it exclude it? So no, that detail as to whether the $5b contract to possibly be signed includes an Adv Proc credit of the 171.5m, or not include it will have to be seen. While I concede I am expecting surprises in the final costs to the upside (and will eat my words if I'm wrong when it all comes out), in fairness to my post above in balance, I did very carefully choose my words accordingly to include: "potentially..." and "If this is the case then..."

Your making the mistake of adding the adv proc and normal production contracts to what you think the total will be. LM does not quote a price IN ADDITION to what has already been paid.

Lets let history be our guide.

Take a look at LRIP 3. Here is a search for all contracts related to LRIP3 (N00019-08-C-0028).
http://search.dma.mil/search?proxyreloa ... D%3AS%3Ad1

If you open each of those and add them up, it comes to $3,563,821,171, vs a total of $3,409,093,000 for the FY2011 budget docs. What is obvious is that all those "Advanced Proc" contract awards were just part of the normal contract and did not cause the LRIP3 contract to balloon billions over what was budgeted. In fact, LM was able to come under budget (they contracted for $3.56 bil yet only charged $3.41 bil)

Seriously, we'll have to wait on the detailed price itemization once (hopefully) released, Spud, sorry. Between the two of us, we'll have to go over every line, e.g., the modifications, etc and filter out what the final PUC is vs a confusing Cost given in a company Press release.

And as for History being the guide to JSF's actual pricing, well, in the very example you noted for LRIP 3's 'advertised vs final charge' cost coming UNDER budget... there's where History can be twisted and interpreted as one wishes.

For example let's note:

the original advertised, budgeted Unit Procurement Cost for USAF's LRIP 3 aircraft estimated back in Feb of 2008 came out to about $237m per unit. Final cost, per FY11's revised 'charge' for USAF's LRIP 3 aircraft... about $246m per unit!

For USAF CTOL buys, the final PUC was in fact >$9million OVER originally estimated budget. Not under. Sure, once they chopped one jet off the original estimate for 8 jets, the 7 jets were then priced higher accordingly, but that's not an excuse and still needs to be factored in when talking actual APUC thus far compared to estimates. And there will unfortunately be many more of these revised orders to downside, below current estimates... which I take you are expecting now too (?) .

When that 8th jet was chopped, all the non-recurring costs had to be spread to the other 7. Do you think that the incease should be blamed on LM?

My point is that the 'mysterious' $819 mil contract was just a normal part of the production process and looked just like contracts awarded for LRIP3 ($320 mil), and LRIP2 ($190 mil).

These contracts are NORMAL and if you check outside the sky is not falling Wink

Forum: F-35 Lightning II

LRIP 4 Price Negotiation Ongoing...