Wednesday, July 21, 2010

More F-35: Lockheed Martin arm twisting?

Bill Sweetman at Defense Technology International writes:

Lockheed Martin and the US government are getting ready to send a "strong message" to international partners on the F-35 program, warning them of sharply increased costs if they delay placing firm orders for the fighter, according to F-35 Executive Vice President Tom Burbage.

"We will be looking for reaffirmations over the next few months," Burbage said. "It's very important that partners keep to the program of record. They need to understand that a large movement of quantities can have a big effect on the total cost of the buy."
By 'partners' here, 'sales associate' Burbage means national governments and thus the tens and hundreds of million people who elect them. I've blogged before about how the marketing ploy used by Lockheed Martin might eventually pressure potential customers to conform to LM's time table, and not their own. And something like this would do much to explain the opacity around the government's announcement to go with the F35.

The Cons aren't really going to come out and say "we signed on because Lockheed Martin said if we didn't take advantage of their super-awesome early-bird one time only offer, it might cost us." It makes them look incompetent and weak. It would also explain the apparent lack of any sort of pretense at a public bidding process if the government weighed the risk of getting a competitive offer they might have to pay attention to (even if the F35 is objectively the desired machine per Canadian needs), against the political risk of a higher price should that eat into Lockheed Martin's sales timelines.

Further, Sweetman notes that even that apparent early-bird low cost contains plenty o' risks. On the Fixed Price Incentive that seems to account for much of the apparently relative bargain for such a premium 5th generation aircraft:

Lockheed Martin has cited its bid prices as proof that the aircraft is on track to a $60 million unit recurring flyaway cost, comparable to an F/A-18 and much less than the numbers produced by the Pentagon's Cost Analysis and Program Evaluation (CAPE) group.

As detailed today, though, the company's numbers are "target" prices. The FPI includes both a target price and a ceiling price, which historically has been as much as 30 percent above the target. Typically, under a formula called the "incentive ratio", the government picks up the greater part of the difference between the target and the ceiling, and the contractor retains a positive margin until the ceiling price is reached.

Burbage declined to disclose the price-to-ceiling ratio or the incentive ratio, but said that those numbers would be revealed when the contract was signed.

The FPI also limits the contractor's risk in the event that test flights reveal problems that have to be fixed, expensively, on the production line. The contract includes a certain allowance for these "engineering change orders", he said, but if that allowance is exceeded the changes would be paid for separately as an engineering change proposal or ECP.
Oh look, there's also that unproven aircraft risk in there too. Seems, without seeing the firm details of the purchase, that the initial $9 billion for the planes alone, might wind up a hell of a lot higher. Especially since we haven't, to my knowledge, signed yet but made big sue-able (ahem EH101 ahem) noises that we will.

I'm probably not the best person to ask about the vagaries of replacing large fleets of advanced military hardware, and how those contracts are negotiated, but I can't help thinking that Lockheed Martin is playing us for suckers. They offer the only 5th generation a/c on the market right now and now that we've decided that we need a 5th generation fighter, we'll end up paying what they want or need us to pay. It's basic monopoly in Econ 101.

Who's really calling the shots on this deal?

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