UPDATE 1-"No more money" for F-35 cost overruns - Pentagon
* Additional cost growth would cut Pentagon's F-35 buy
* Air Force says production slowdown will likely raise cost
* GAO says first four production contracts are $1 billion over budget
* Watchdog sees significant cost risks ahead
WASHINGTON, March 20 (Reuters) - Future cost overruns on the stealthy new F-35 Joint Strike Fighter built by Lockheed Martin Corp will reduce how many planes the U.S. military will ultimately buy, Air Force Secretary Michael Donley told a Senate committee on Tuesday.
Donley said the latest restructuring of the $382 billion program should allow the program to proceed with the "least risk," a message repeated by the Pentagon's F-35 program manager, chief weapons buyer and the Air Force acquisition chief at a separate U.S. House of Representatives subcommittee hearing.
"There is much work still ahead of us, but through the multiple reviews and adjustments in the past year we believe we have put the program on sound footing for the future," the officials said in a joint statement prepared for Congress.
Lockheed is building three variants of the radar-evading supersonic warplane for the U.S. military and eight countries that are helping to fund its development -- Britain, Australia, Canada, Turkey, Italy, Denmark, Norway and the Netherlands. Israel and Japan also plan to buy the new fighter.
Navy Admiral David Venlet, program manager for the F-35, told reporters after the House hearing that he was in close touch with the eight partner countries, plus Israel and Japan, and while some might scale back or delay their purchase of planes, none had said anything about withdrawing from the program completely.
He said the issues with the plane were normal for any aircraft development program and the revamped plan had margins in time and financial reserves to deal with other issues if they arose during the remainder of testing in coming years.
"NO MORE MONEY"
Donley told the Senate Armed Services Committee that the F-35 program office and Lockheed had been told there was "no more money to put against contract overruns or problems."
Any further cost growth would cut the total number of planes bought, he said, "because no more money is going to be migrating into this program," he said.
The Pentagon insists it is not scaling back plans to buy a total of 2,443 F-35s, but Donley's comments indicate the target may not hold indefinitely if additional issues arise. Any cut in that number would drive up the cost per plane, eroding its selling point as an affordable new fighter.
The Pentagon's fiscal 2013 budget proposed postponing production of 179 F-35 planes to save $15.1 billion over the next five years, as the U.S. military begins to implement $487 billion in spending cuts over the next decade.
Donley said the decision to slow down production would probably add some cost to the program, but he said it would also save money if additional problems came up during testing, necessitating retrofits of planes already produced.
Michael Sullivan, director of acquisition analysis at the Government Accountability Office, told House lawmakers the F-35 program had probably survived most of the "really tough" technical challenges it faced, but costs could still rise.
He said the first four procurement contracts were more than $1 billion over budget combined, with the government to cover about $672 billion of the cost and Lockheed to cover the rest. The government also faced $373 million in retrofit costs to fix deficiencies discovered in testing on planes already produced.
He said moves to slow production had trimmed procurement quantities by three-fourths since 2002, with 365 planes now slated to be built by 2017 instead of nearly 1,600.
NEW PROCUREMENT APPROACH PEGGED TO PERFORMANCE
Acting Pentagon acquisition chief Frank Kendall told the House Armed Services Committee's subcommittee on tactical air and land forces that the department was limiting its cost risk for the next batch of planes since Lockheed would cover half the $150 million in estimated costs for retrofits.
Negotiations with Lockheed about that fifth batch of planes should conclude in late spring, the prepared testimony said. It noted that Lockheed was making good progress on fixing the cost-tracking system known as "earned valued management system," and should regain certification within the next few months.
David Van Buren, the top Air Force acquisition official, told the House hearing that the department would link negotiations for the sixth and seventh batches of planes more closely to Lockheed's performance on software development, durability testing of the plane, and flight tests.
He said Lockheed had agreed to submit a consolidated proposal for the next two sets of planes, with the government planning to buy just 25 of 31 planes authorized in fiscal year 2012, but then add some or all of the remaining six planes to its next order in 2013, depending on progress made this year.
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