Pentagon concludes "should cost" review of F-35

WASHINGTON Mon Oct 31, 2011 9:11pm EDT

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WASHINGTON (Reuters) - The Defense Department on Monday said it had finished an initial review of what the next batch of F-35 fighter jets should cost, and would brief the manufacturer, Lockheed Martin Corp, shortly.

Completion of the so-called "should cost" review will pave the way for the start of formal negotiations about a fifth batch of 30 F-35 or Joint Strike Fighter warplanes.

The F-35 program remains under tough scrutiny. It is the largest U.S. weapons program and has already seen costs rise sharply over the past 10 years -- making it a prime target for future cuts as defense officials brace for up to $1 trillion in defense spending cuts over the next decade.

Officials estimate it will cost $382 billion to develop and build 2,447 of the radar-evading fighter jets for the U.S. military, but Pentagon officials have said they intend cut that projected cost sharply through tough cost-cutting measures.

Shay Assad, the Pentagon's new director of defense pricing, was due to brief F-35 program officials on Monday about his lengthy review of overhead and other manufacturing costs, followed by a meeting with Lockheed on Tuesday, according to sources familiar with the Joint Strike Fighter program.

Lockheed spokesman Michael Rein said the company did not publicly discuss details of contract negotiations. Lockheed submitted its proposal for pricing to build 32 to 35 low-rate initial production (LRIP) aircraft in April, Rein said.

The Pentagon's F-35 program office last week said that four airplanes had been cut from the proposed purchase to cover some of the $771 million in cost overruns on the first three batches of planes, reducing the planned purchase to 30 airplanes.

Rein said the final number of aircraft and their price would be determined as part of LRIP 5 negotiations.

F-35 program spokesman Joe DellaVedova said cost overruns ranged from 11 percent to 15 percent on the first three production contracts. The fourth production contract has fixed-price terms, which means that the Pentagon and Lockheed share cost overruns equally, up to a certain ceiling amount. Beyond the ceiling, Lockheed pays all the extra costs.

"Controlling costs is an absolute must," said DellaVedova, adding that the Pentagon saw "signs of emerging stability in the manufacturing flow" at Lockheed and key suppliers.

Lockheed, the Pentagon's biggest supplier, used its quarterly earnings report last week to criticize what it called an "unprecedented" move by Pentagon to make the company pay for design changes that arise during developmental testing of the new warplane, which has already begun low-rate production.

Lockheed said it was willing to pay for some design changes, but could not accept "unbounded" risk.

Pentagon spokeswoman Cheryl Irwin said the department was seeking "an equitable sharing arrangement on concurrency risk" with Lockheed, and negotiations were continuing.

Separately, the Pentagon's testing director told the department's chief weapons buyer in a October 21 memorandum that he had serious concerns about plans to begin pilot training on F-35 warplanes at Eglin Air Force Base in Florida next month.

Director of Operational Test and Evaluation Michael Gilmore, citing the risk of catastrophic failures, recommended the Air Force delay training for up to 10 months until 1,500 more hours of flight testing had been completed on top of 1,000 hours already done at Edwards Air Force Base in California.

In a joint memo, the Air Force's top aeronautical commander and F-35 program director Vice Admiral David Venlet disagreed and said that changing plans for training and evaluating the plane's operational utility would drive up the program's cost.

Acting Pentagon acquisition chief Frank Kendall asked Air Force Secretary Michael Donley and his chief of staff, General Norton Schwartz in a memo dated October 25 to weigh the conflicting views and decide what to do about flight training.

The correspondence was posted online Monday by the Project on Government Oversight, a nonprofit watchdog group.

Gilmore last week also sent his memo to Defense Secretary Leon Panetta, who returned from a trip to Asia on Friday.

"The Air Force is reviewing these concerns and will ensure flight safety is adequately addressed," Irwin said, noting a final decision on when to start training had not been made.

Lockheed on Monday said the F-35 flight test program was more than 9 percent ahead of schedule, as of October 29.

From the start of flight testing in December 2006 through October 29, it said F-35s flew 1,412 times, including flights by production-model planes and AA-1, a flight test aircraft.

It said the F-35A conventional takeoff and landing (CTOL) jets being built for the Air Force had flown 398 times in 2011, while the F-35B short takeoff, vertical landing plane had completed 290 flights and 265 vertical landings. The F-35C or carrier variant had flown 131 times in 2011, it said. (Reporting by Andrea Shalal-Esa; Editing by Gary Hill)

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