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Pentagon sees progress on cost of F-35, long way to go

By Andrea Shalal-Esa

WASHINGTON (Reuters) - The Pentagon's recent focus on pricing has led to "remarkable progress" in cutting the cost of the Lockheed Martin Corp F-35 fighter program, but the plane still costs more than it should to build and operate, Director of Defense Pricing Shay Assad said.

"We're making progress. We're doing OK, but we have a long way to go to get to what a Joint Strike Fighter (JSF) should cost," Assad said in an interview last week.

The Pentagon expects to spend $392 billion to develop and build 2,443 F-35 jets for the Air Force, Marine Corps and Navy, 70 percent more than initial projections. But the projected cost has begun coming down, dropping $4 billion from 2012 to 2013, and further reductions are expected next year.

Assad said the cost analysis initiative had saved taxpayers hundreds of millions of dollars on some contracts.

"Compared to where we were ... we've made remarkable progress in understanding the costs associated with the JSF. And just as importantly, understanding what it should cost, and what it's going to take to get to that point," he said.

The Pentagon in September finalized two agreements with Lockheed valued at $7.8 billion for work on 71 more jets. It said the average cost of the planes in a sixth batch was down 2.5 percent from the previous one. Lockheed said it expects a further reduction in the next contract to be signed next year.

Assad was named to the newly created job of director of defense pricing in June 2011, part of a larger drive by chief weapons buyer Frank Kendall, and his predecessor Ashton Carter, to reverse years of cost overruns on weapons like the F-35 Joint Strike Fighter, the Pentagon's most expensive program.

Since then, Assad's office has developed a database on specific weapons programs and companies, allowing contract officers from across the military to compare notes on overhead and material costs, pricing data, and contractor performance.

He said acquisition officials now have nearly instant access to data that would have taken months to research in the past.

"You get a complete snapshot of what kind of contractor am I dealing with. Can I rely on the quality of the proposals they're giving me," he said.

As part of the effort, contracting officers must explain their negotiations with the companies in detailed reports, Assad said, citing a recent 500-page report on the F-35.

The Pentagon's Defense Contract Management Agency also set up 15- to 30-member teams of engineers and other experts at nearly a dozen of the biggest defense contractors, including Lockheed, Boeing Co, Raytheon Co, and Sikorsky Aircraft, a unit of United Technologies Corp.

One of those "integrated cost analysis teams" or ICATs is at the Fort Worth, Texas plant where Lockheed builds the F-35.

Dave Hess, president of engine maker Pratt & Whitney, another United Technologies unit, told Reuters last week that his company and other F-35 contractors were developing a plan with the Pentagon that would encourage companies to invest their own funds to lower production costs. He said details of that plan would be released next month.

Assad said Air Force Lieutenant General Chris Bogdan, who runs the F-35 program for the Pentagon, was exploring how to inject more competition into the longer-term cost of operating and maintaining the new jets, but it was a complex issue that involved everything from training to simulators to logistics.

He said Kendall was keeping close tabs on the longer-term cost of operating the F-35, a bill the Pentagon previously projected at around $1.1 trillion over the next 55 years. The Pentagon is expected to lower that estimate next year.

"Mr. Kendall expects us to be unrelenting in trying to find a way to reduce that nut," Assad said.

(Reporting by Andrea Shalal-Esa; Editing by Richard Chang)

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