By Giovanni de Briganti
PARIS --- As audit agencies continue to predict substantial increases in the cost of the F-35 Joint Strike Fighter (JSF) program, the Pentagon pulled off a remarkable accounting coup by claiming, in its latest Selected Acquisition Report, that the program’s costs in fact declined during the second half of 2007.
In its April 7 report, the Pentagon said JSF costs dropped by $981.3 million (-0.3 percent), from $299,824.1 million to $298,842.8 million, during the six months ending December 2007. During this same period outside observers, including the Government Accountability Office, expected JSF costs to rise and breach Nunn-McCurdy unit cost ceilings, thereby triggering an automatic report to Congress and a temporary funding freeze, and requiring certification by the Secretary of Defense.
The Pentagon acknowledged that some costs had increased because of “higher estimates for elements of procurement nonrecurring costs (+$4,369.0 million), an adjustment to reflect manufacturing actuals for the System Demonstration and Development (SDD) flight test articles (+$3,849.9 million), a revised propulsion estimate to include additional hardware and increased lift fan cost (+$2,769.1 million),” for a total of $10.9 billion.
This would have pushed total program cost to over $310 billion – an increase of over 3% in six months – had the Pentagon not miraculously generated savings of $11.9 billion by revising downwards its own estimates for several other cost categories. These include lower escalation indices (-$1,955.8 million), lower material estimates because of prime contractor’s material agreements (-$1,650.6 million), incorporation of revised prime/subcontractor labor rates (-$879.4 million), and “revised estimate of support costs” (-$7,445.0 million).
As these $11.9 billion “savings” exceed the $10.9 billion in cost increases, the Pentagon was able to claim that the overall program cost decreased by $981 million. And, in case anyone missed the point, the Pentagon remarked that “overall, it should be noted that the Nunn-McCurdy unit costs are stable relative to the current and original baseline estimates.”
It is certainly a bad idea for a major program to breach its Nunn-McCurdy unit cost ceiling. But avoiding a breach by conjuring savings of $11.9 billion out of thin air is not only creative bookkeeping of the highest order; it is also an cynical challenge to the financial watchdogs which have long tracked the JSF’s rising costs and, ultimately, an insult to the taxpayers who will ultimately have to pay for the program.
Skepticism about the Pentagon’s JSF cost estimates is already widespread. In its latest annual report on the program, released March 11, the Government Accountability Office (GAO) concluded that “on the basis of the evidence we do have and our analysis, we fully expect future cost estimates to be substantially higher than the program estimates in this report.” By claiming to have discovered new savings at the 11th hour, the Pentagon has not improved its credibility.
There are many other reasons for doubting the Pentagon’s figures. In its report, GAO noted that the JSF Program Office itself admits that costs have increased by $23 billion in the past year, while three other DoD agencies also predict much higher costs than admitted by the SAR:
-- DoD’s Cost Analysis Improvement Group (CAIG) estimates $5.1 billion more for development, over $33 billion more for procurement;
-- the US Naval Air Systems Command (Navair) estimates an additional $8 billion to $13 billion additional development costs or trade-offs adding to procurement costs; and
-- The Defense Contract Management Agency estimates $4.9 billion in additional cost to complete the Lockheed Martin development contract alone.
This, and its other findings, led GAO to conclude that “we believe that the current JSF cost and schedule reported to Congress are not reliable for decision making,” an understatement of generous proportions.
The JSF’s financial shipwreck could get even worse because of the US dollar’s devaluation. On average, since 2006, the dollar’s value has declined by 10% to 20% compared to the currencies of the partner countries where JSF part production is to be outsourced. This means, perforce, that the cost to Lockheed Martin of JSF parts produced overseas will increase by a similar margin, leading to further increases in unit prices. And, if prices do not increase because of stringent contractual terms, it is questionable whether foreign suppliers will be able or willing to lose 10-20% of their own money on their JSF production contracts.
Whichever way one looks at the problem, it is clear that the JSF’s costs will inevitably rise substantially over current levels. This will lead to a blow-out in unit costs, which (based on December 2006 cost data) GAO already estimates at between $104 million (average procurement cost) and $122 million (program acquisition cost), well over twice as much as the $47 million unit cost that Lockheed continues to quote to foreign governments.
Unsurprisingly, Lockheed hailed the SAR’s findings, and issued a press release claiming that “these numbers demonstrate that hard work on the part of government and contractor teams is achieving the desired result."
Given the parlous financial situation of the JSF program, it is understandable that the Pentagon was desperate to find some good news to include in its SAR. Not even the most hardened of Pentagon critics, however, could have anticipated such a transparently inventive maneuver.