UPDATE 2-Lockheed F-35 cost now projected at $382 bln

* Working toward fixed-price contract

* Carrier variant to make first flight soon

* 93 test flights done so far this year (Recasts with fresh Pentagon estimate of overall cost)

WASHINGTON, June 1 (Reuters) - Lockheed Martin Corp LMT.N said a fourth batch of F-35 fighter planes will beat Pentagon cost estimates by more than 20 percent, even as new U.S. data pegged the overall program tab at $382 billion.

The U.S. Defense Department on Tuesday told Congress that the multinational fighter was vital to national security and it should not be terminated despite the sharp cost increases.

Senior officials at the Pentagon and at Lockheed acknowledged the new cost target was 65 percent higher than the $232 billion initially set for the program, but said they were working hard to drive down costs.

“I hope that the taxpayer never has to pay this bill. It should come down,” one senior defense official told reporters at the Pentagon.

The official declined to give specific targets for how much lower the cost could wind up being, but said “every column of cost in this program” was being scrubbed for possible savings.

Lockheed and eight overseas countries are developing the F-35 fighter in three variants as an affordable replacement for current F-16, Harrier and A-10 warplanes flown by the U.S. Air Force, Navy and Marines, and many foreign countries.

Affordability was supposed to be a hallmark of the F-35, which began in 2001, but costs have soared due to a four-year delay in development, design and technical issues, testing problems and slow supplier deliveries.

The Pentagon restructured the F-35 program earlier this year and fired the Marine Corps general who was running it, adding 13 months and $2.8 billion to the plane’s development phase and slowing the timetable for full production.

It also withheld up to $614 million in performance fees from Lockheed, saying its performance undercut expectations.

A senior Lockheed official on Tuesday cited successes in recent months, including progress on an accelerated flight test schedule, and said the carrier variant, the last of the three versions, was due to make its first flight in coming days.


Lockheed was making good progress in negotiations with the Pentagon on a fourth batch of 32 F-35s, and expected to beat cost targets for the planes by over 20 percent, he said. “There is still a lot of hard work to do.”

He said the company was working toward a fixed-price contract with an incentive fee that would kick in two years ahead of when this type of contact is scheduled, the official said. The next contract would move to firm, fixed-price terms.

The company’s willingness to move away from the cost-plus contract often used in early production underscored its confidence in the program, said the official, who was not authorized to speak publicly and asked not to be identified.

The company had also completed 93 test flights of the new fighter so far this year, beating its target for the period, and bringing the overall number of test flights to over 230.

Defense officials told lawmakers in April a restructuring of the F-35 would result in a sharp increase in unit costs, driving the overall cost of the program to $328 billion. However, new cost estimates prepared by the Pentagon’s Cost Assessment and Program Evaluation office have driven the cost even higher to $382 billion, according to a senior defense official.

The production cost of each aircraft rose from $50 million in fiscal 2002 dollars to $92.4 million, reflecting a four-year delay in the development program, the Navy’s decision to buy 409 less airplanes, and significant increases in actual and forecast labor and overhead costs and fees.

Those cost estimates included military construction costs, spares and other equipment, said the Lockheed official.

Excluding those costs, the average unit recurring flyaway cost of the F-35 would be around $60 million in 2010 dollars, about the same as the U.S. military paid for its fleet of F-16 fighters, also built by Lockheed, said the official.

That figure paid for a combat-ready aircraft, equipped with radars, targeting sensors and electronic warfare equipment.

Sources close to the process said the Pentagon has spent the past few weeks trying to whittle down the price per plane by about $20 million and was also seeking some additional equipment for the next batch of airplanes.

The two sides have since narrowed their differences, said one source briefed on the negotiations, and were now “very close” to a deal. “How far apart we are is not that much,” said the source, who was not authorized to speak on the record.

Reporting by Andrea Shalal-Esa; Editing by Ted Kerr and Richard Chang