April 23, 2014
New F-35 Claim: Lower O&S Estimate More than Offsets Higher Acquisition Cost
|U.S. Air Force Photo|
Last week the Defense Department released its new Selected Acquisition Reports (SARs) on its major weapon programs. These annual reports are the Pentagon’s effort at definitive cost analysis; they come in two forms: the summary data on all 77 of DOD’s Major Defense Acquisition Programs (MDAPs) and separate reports on individual programs, such as the F-35—the latter put on-line without a pay wall by Breaking Defense.
As in recent years, the release of new data on the F-35 provoked press coverage, some of it quite thorough in summarizing much the new data and what the top F-35 defender, F-35 program manager Lt. Gen. Christopher Bogdan, had to say about it all. However, there are some important points that did not get the attention they perhaps deserve, and one key point seems to have been generally missed.
As the SARs and DOD’s summary of them made clear, the cost to acquire the F-35 has gone up compared to last year’s estimate. Page 6 of DOD’s summary of its SAR states that F-35 airframe “costs increased +$3.1 billion (+1.0%) from $326.9 billion to $330.0 billion” and costs for the separately accounted engine “increased +$4.3 billion (+6.7%) from $64.3 billion to $68.6 billion.”
The $7.4 billion cost increase comes in the face of promises, made by F-35 program manager Lt. Gen Christopher Bogdan and DOD acquisition czar Frank Kendall to Congress, that costs are coming down and will do so in the future. Bogdan describes the new increases as due to higher than predicted actual labor costs and the decision of some buyers, including the US Navy, to delay their purchases—thereby delaying the onset of cost reductions from the so-called learning curve and economies of scale. Those developments should hardly have been a surprise, especially for someone as involved in the F-35 program as Lt. Gen. Bogdan.
But all that now should be seen as stale history as Bogdan re-assures the press that new cost reductions will occur as soon as new buyers commit to the program—assuming they all do and that existing F-35 buyers do not balk even more than some have already.
In truth, the future of the F-35 program remains clouded, and most cloudy of all is the ultimate unit cost of the aircraft and the impact of that cost, as its reality unfolds, on existing and future buyers. As previously argued, there is good reason to think the real-world unit cost of F-35s, on average, will stay much closer to the $200 million level than it does to the dubious predictions of Lockheed and Lt. Gen. Bogdan, such as $75 million each.
Second, the F-35 acquisition cost increases revealed by the new SARs come as a major embarrassment to the Government Accountability Office that pronounced in a report released just last month that DOD SAR data showed F-35 acquisition costs coming down, not going up. As previously explained, GAO’s report used two year old data, thanks to the agency’s ponderous report writing process and the fact that the analysts and manager assigned to the report used a stunningly superficial analytical methodology. Not a single news article I read on the new SAR data recalled GAO’s miss-call of the acquisition cost vector.
Instead, the headline on many of the news articles on the new F-35 SAR data pushed the fact that DOD is now estimating the cost to operate and support the F-35 (O&S costs, which are quite separate from acquisition costs) to be going down. Beyond the increasing acquisition (research and production) expense, DOD announced that F-35 “operating and support costs decreased $96.8 billion (-8.7%) from $1,113.3 billion to $1,016.5 billion.”
Thus, there was a net “life cycle” (acquisition plus O&S) reduction in F-35 costs of $89.4 billion. The net figure gave Bogdan and Lockheed the pretext to say that, overall, F-35 costs were indeed coming down. However, that is not the acquisition price promise they have been making, and closer inspection of the reasons for the lower O&S cost estimate show that it too is a concocted estimate.
DOD’s summary explanation says the lower O&S estimate is “due primarily to cost data updates including the application of historical cost escalation and an update to the Spare Parts Unit Database, revised labor rates, and updated technical inputs to include increased fuel efficiency.” But if you read the material buried at the end of DOD’s 97 page system-specific SAR on the F-35, some better insight creeps in.
Page 95 explains that “for the first time” the DOD cost estimators have “actual information on component reliabilities obtained from ongoing F-35 flight operations” including “actual reliability information on many F-35 components based on data collected during approximately 8,500 hours of flight operations.” Based on that empirical data, the DOD cost estimators at the Cost Assessment and Performance Evaluation (CAPE) office are saying the costs to maintain and repair the F-35 are going up, not down, by $15 billion. This is “because component reliability information obtained from actual flight operations data is not consistent with expectations.” (Bogdan tried to discount this information by saying his office’s even lower O&S estimate uses more recent, more extensive flying hour data, but he also let slip that his office also adjusted the data with more of those unrealized future “expectations” that his office insists on projecting.)
The empirical—real world—cost increase that CAPE found to mean a small increase in F-35 O&S was declared to be offset by four factors cited in the SAR by CAPE:
- The military services will achieve savings by flying the F-35 less, which on page 96, and elsewhere, is declared to be “fuel efficiency.”
- An update to the “Spare Parts Unit Database” predicts fewer, not more, future spare parts and/or lower, not higher, costs for them but without any explanation.
- Inflation during the projected 30 year service life of F-35s—out to the year 2065—is declared to be lower, and
- the cost for labor by military, civilian and contractor personnel—also out to the year 2065—is “updated” to lesser numbers.
Thus, the cost increases from empirically demonstrated maintenance and support data from recent history are more than offset by future prognostications out to 2065. It is precisely matters like fuel costs, inflation and labor rates that can be unpredictable just for months ahead, let alone years—to say nothing of decades. Estimating them with such precision out to 2065 is an easy plaything for manipulation.
We already know DOD manipulates its own inflation prognostications for both its own budget history and for short term future predictions in the five-year Future Year Defense Program (FYDP). It stretches credulity past the breaking point to assert that the cost of a weapon program will be some precise lesser amount 30 years from now because someone has readjusted inflation and labor cost predictions.
In fact, in past inflation predictions for specific on-coming fiscal years (those just months ahead) DOD has proven inaccurate not just in the amount inflation has grown or declined but whether it has grown or declined. If they cannot even get the vector right a few months ahead, what business do they have asserting they can know it precisely 30 years from now? It is quite preposterous.
And yet, here we are, asked to believe that the cost of F-35 O&S will be, as DOD tells us, “decreased $96.8 billion (-8.7%) from $1,113.3 billion to $1,016.5 billion” by the time the program is done in 2065.
What they are saying is that data from the immediate past—based on known production costs, actual orders from buyers, and real world maintenance expenses—are more than offset by future—unsecured—purchase decisions and unknowable inflation and labor costs out to the year 2065.
How do you write “bridge for sale” in a Brooklyn accent?
Director, Straus Military Reform Project, CDI at POGO, POGO
Mr. Wheeler's areas of expertise include Congress, the Defense Budget, National Security, Pentagon Reform and Weapons Systems
The goal of the Straus Military Reform Project is to secure far more effective military forces and much more ethical and professional military and civilian leadership at significantly lower budget levels.
We would like to thank Philip A. Straus Jr. and family for their generous support.