UPDATE 2-Lockheed overruns on early F-35s put at $771 mln

Tue Jul 12, 2011 5:20pm EDT

* McCain tweets figure, calls it "outrageous"

* Aide: figure given to Armed Services panel on Monday

* McCain has sought to put F-35 program on "probation" (Adds details on McCain effort to put F-35 on probation, adds stock price)

By Jim Wolf

WASHINGTON, July 12 (Reuters) - Lockheed Martin Corp's (LMT.N) F-35 Joint Strike Fighter early-production models overshot their cost targets by a combined total of $771 million, U.S. Senator John McCain said on Tuesday.

"Outrageous!" the top Republican on the Senate Armed Services Committee said in a tweet. The Pentagon is seeking $264 million in reprogrammed funding as a kind of downpayment on the overrun, he wrote, adding: "Disgraceful."

Lockheed is developing three F-35 versions for the United States and eight international partners at a projected cost of more than $382 billion for 2,443 aircraft over the next two decades. It is the most expensive U.S. arms purchase.

The Pentagon's F-35 Joint Program Office previously had said total costs on the first three production batches overshot their contractual targets by 11 to 15 percent. These "cost-plus" deals required the government to pay most of an overrun.

The tweet from McCain, who has spearheaded opposition to what he regards as wasteful arms programs, was the first public disclosure of the overrun's dollar figure. The program office reported the sum to the Senate Armed Services Committee staff on Monday, a McCain aide said. He said it applied to the first 28 jets.

Lockheed Martin, the Pentagon's No. 1 supplier by sales, and the program office had no immediate comment on McCain's tweet.

McCain has argued that the radar-evading F-35 cannot be allowed to drain resources from other Pentagon modernization over the next 25 years. He failed last month in a push to put the program on "probation" at the end of this year if the aircraft being built in the fourth, low-rate production lot tops target costs by 10 percent or more.

McCain's amendment to the fiscal 2012 defense authorization bill called for ending the program a year later, at the end of 2012, if costs were not contained.

The amendment failed on a 13-13 committee vote. But McCain, who lost the 2008 White House race to President Barack Obama, told Reuters last month that he planned to revive it on the Senate floor when the bill comes to a vote.

"By rejecting my amendment, I believe we lost an opportunity to tell the Pentagon and the prime contractor (Lockheed Martin) that increased cost on the F-35 cannot and will not be tolerated," McCain wrote in the panel's report on its version of the defense policy bill.

The fourth production contract calls for Lockheed and the government to share equally any cost overrun up to 120 percent of the negotiated price. Lockheed would be responsible for any overruns beyond that. If costs are below the target, the government and Lockheed would share the savings equally.

Lockheed shares dipped 0.3 percent to close at $79.71 on Tuesday. (Additional reporting by Susan Cornwell, David Alexander; Editing by Tim Dobbyn and Matthew Lewis)

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