In 2015, the United States and partner governments in the F-35 program began considering the use of a three-year block buy (BB) contract for procurement of F-35 aircraft during fiscal years 2018–2020.
A BB contract (which is similar to a multiyear procurement contract) can save money by providing prime contractors and their suppliers the incentive and ability to leverage quantity and schedule certainty and economies of scale, thus generating savings that would not be available under three annual single-lot contracts.
This report presents an assessment of potential cost savings available through a BB contract for F-35 procurement.
The research independently assessed savings for the aircraft's air vehicle and engine, consistent with the way contracting is handled in the program, and focused on recurring flyaway costs.
For the air vehicle, the estimated savings is $1.8 billion, or 5.2 percent of the cost of contracting annually for three lots. For the engine, the estimated savings is $280 million, or 3.8 percent of the cost of contracting annually.
Thus, the combined BB savings is approximately $2.1 billion, or 4.9 percent of the cost of annual contracting.
These savings are estimated relative to an annual contracting baseline computed by RAND and are roughly comparable to those estimated for historical multiyear contracts for other fighter aircraft.
-- Block Buy Contracts Present Potential Savings but Some Risk
* Potential savings from a BB contract for F-35 lots 12–14 (during fiscal years 2018–2020) are approximately $2.1 billion for the air vehicle and engine combined, 4.9 percent of the cost of annual contracting for these lots.
* This estimate is in the range of savings estimated for historical fighter programs that employed multiyear contracts.
* Using alternative "hybrid" BB constructs, the estimated savings for these constructs is reduced by approximately 10 to 20 percent, compared with the full BB approach.
* This analysis focuses on potential cost savings from an F-35 BB contract and does not include a formal risk assessment, but it provides bounding estimates that will inform relevant business decisions going forward.
* Potential areas of risk may include the availability of early economic order quantity funding, configuration changes, and aircraft quantity reductions.
Click here for the full report (110 PDF pages) on the Rand Corp. website.
(EDITOR’S NOTE: Lockheed Martin and the F-35 Joint Program Office want Congress to authorize a ‘Block Buy’ of 442 F-35 aircraft to gain what they say are significant savings.
Rand found that the most favourable outcome is that it could reduce total airframe cost by $1.8 billion, and total engine cost by $280 million, but with an element of risk.
This means, at best, that the Block Buy would reduce the cost of each airframe by $4.07 million, and for each engine by $663,000, for a total of $4.7 million for each complete aircraft.
Rand estimates the possible total savings at “4.9 percent of the cost of annual contracting for these lots.”
However, the Government Accountability Office in June estimated the F-35 price at $143.84 million, the potential savings are of about 3%.
While not insignificant, these possible savings – they are far from assured, as Rand notes -- will not change the economics of the F-35 program.
In fact, they will at best pay for the post-delivery fixes, upgrades and repairs that all F-35s coming off the production line require.
This confirmed that the true purpose of the Block Buy initiative is not, as Lockheed and JPO claim, to reduce unit costs, but to make as big a financial commitment to the program to ensure that it is, finally, “too big to kill.”)