F-35 upgrades to cost $920 million less, U.S. estimates

Washington • The projected cost to upgrade F-35 jets built by Lockheed Martin Corp. has declined by about $920 million, or 36 percent, in less than two years, according to the Pentagon's latest analysis.

The estimate for improvements and corrections for aircraft already built or planned in the first 10 contracts to be awarded through 2016 has dropped to about $1.65 billion from a $2.57 billion estimate in September 2012, the Pentagon said in an annual assessment to Congress. The projection is $100 million less than the one made last year.

Hill Air Force Base in Utah is to receive a squadron of 72 F-35s in 2015.

The need to retrofit the planes stems from the Defense Department's decision to produce the F-35, the costliest weapons system, even as it's still being developed. The Pentagon's chief weapons buyer has criticized that approach, known as concurrency.

"Putting the F-35 into production years before the first flight test was acquisition malpractice," Frank Kendall, undersecretary of defense for acquisition, said in a 2012 industry presentation. "It should not have been done. But we did it."

Kendall signed the latest report showing success in reducing the projected cost of upgrades.

That's good news for Lockheed, the world's largest defense contractor. Since the fifth of seven contracts signed so far, the Pentagon has required the contractor to pay an increasing share of the costs for retrofitting the planes. Beginning with the sixth contract, Lockheed has had to absorb half the costs.

"This cost-sharing approach is intended to motivate Lockheed Martin to incorporate concurrency changes as quickly as possible on the production line," according to the previously undisclosed report obtained by Bloomberg News and dated May 1.

The projected $398.6 billion acquisition cost for the F-35 has climbed 71 percent in inflation-adjusted dollars since the Pentagon signed its initial contract with Bethesda, Maryland- based Lockheed in 2001, even as plans were adjusted to buy 409 fewer aircraft. The estimated cost to operate and support the plane over a 55-year service life has declined to $1.02 trillion from $1.11 trillion.

The revised estimate for upgrades bolsters findings by Government Accountability Office analysts and Pentagon program officials that Lockheed is making progress in managing the jet's simultaneous development and production at this point, before the most difficult combat testing begins.

"This is the result of improved efficiencies and total commitment to driving costs out of the program," Lockheed spokesman Michael Rein said in an emailed statement. "We will continue" to "implement further cost savings measures," he said.

Concurrency has the benefit of producing aircraft faster on the premise that advanced computer modeling and simulation can reduce the risk of error. The danger is that costly changes will be needed to planes already built because of flaws discovered in flight and ground testing or in engineering analysis.

The reduction in projected costs stems in part from fewer anticipated technical flaws and from Lockheed working collaboratively with the Pentagon to manage the process and reduce time on the assembly line to retrofit planes, the report said.

The latest estimates also are based less on computer models using historical data and more on actual costs of implementing approved changes.

The estimate for upgrades under the fifth contract of 32 jets has dropped to $270 million from $450 million, according to the report. Estimates for the sixth lot of 36 F-35s dropped to $190 million from $350 million. Projections for the seventh batch of 35 jets have dropped to $140 million from $230 million, the report said.

The retrofit cost for 43 jets in the eighth contract that's now under negotiation is estimated at $100 million, down from an initial $120 million.

"Estimates will be reviewed and updated on an annual basis" and "these will contain adjustments as a result of retiring, realizing, re-scheduling or adding changes as the program progresses," according to the report.

Among the forecast issues that could require retrofits are those "that may occur" based on historical qualification and flight and ground test data from the F-35's predecessors - the F-16, F-15, F-22 and F/A-18E/F fighters, the report said.