WASHINGTON — A report released Monday by the U.S. Government Accountability Office warns lawmakers against authorizing the F-35 joint program office to procure bulk quantities of parts — a tool the Joint Program Office sees as critical for driving down the unit costs of the aircraft.
According to the GAO, the JPO could request more than $650 million in the fiscal 2018 budget to procure "economic order quantities," allowing it to buy a larger number of parts at a time in order to drive down the price per unit as much as possible. Making an EOQ order requires permission from Congress, and the GAO has advised lawmakers to hold off on authorizing such a purchase until the Department of Defense finalizes its plan.
In order to facilitate an EOQ buy, F-35 prime contractor Lockheed Martin and engine manufacturer Pratt & Whitney would have to make an upfront investment in lieu of the Pentagon's. The department would eventually pay back that money, but the GAO noted that terms were not set in stone as of January 2017, making it unclear how much the JPO stands to save from an EOQ order.
"Given the uncertainties around the level of contractor investment, it is not clear whether an investment of more than $650 million, if that is the final amount DOD requests in fiscal year 2018, will be enough to yield significant savings," the report states.
"Regardless, with cost growth and schedule delays facing the F-35 baseline development program, it is unclear whether DOD can afford to fund this effort at this time."
Economic order quantity and block buy purchases are seen as key by Lockheed officials for bringing down the cost of a conventional F-35A model from $94.6 million during the 10th production batch to $80 million by 2020. The JPO is currently pursuing block buy purchases for F-35 international customers in production lots running from fiscal 2018 to 2020.
"We’re continuing to work on taking costs out," Lockheed’s CEO Marillyn Hewson said in March. "We will, through volume, get reduced costs, and if we do smart buying — combining lots, multiyear buying or economic order quantity — we’ll get a better deal throughout our supply chain because people can plan and invest if they have more volume to work from."
EOQ orders, block buys and multiyear purchases also were included in the menu of options provided by the JPO to Defense Secretary James Mattis as part of an affordability review ordered earlier this year, F-35 JPO head Lt. Gen. Christopher Bogdan said last month.
As President Donald Trump continues his public fight to lower F-35 unit costs, lawmakers could encounter pressure from his administration to push forward with an EOQ buy, despite concerns from government oversight agencies. In an interview with The Associated Presson April 21, the president claimed his intervention in F-35 Lot 10 negotiations helped save about $725 million.
In actuality, unit costs went down by $728 million between lots 9 and 10 due to a confluence of factors, including a spike in production and increased pressure from the JPO. About $455 million of those savings were for U.S. planes, while the remainder was spread between international customers.
That hasn’t stopped Trump from taking credit for the cost savings or using his standing as president to push for additional reductions.
"We went from a company that wanted more money for the planes to a company that cut. And the reason they cut — same planes, same everything — was because of me. I mean, because that's what I do," Trump told AP.
"I'm gonna get more than that. This was a thing that was out of control and now it's great," he added. "And the woman that runs Lockheed, Marillyn [Hewson], she was great. But all of a sudden it was a different kind of a thing."
In its response to the GAO report, the Defense Department stated that it had cemented its EOQ plan, including investor details, since the writing of the report. It intends to submit a legislative proposal and brief Congress on the details, "including the costs and benefits of the finalized EOQ approach, as requested."
Bogdan, in an additional statement, said the block buy/EOQ strategy would allow customers to save approximately $2 billion over 440 aircraft compared to estimated Lot 11 unit prices.
Valerie Insinna is Defense News' air warfare reporter. She previously worked the Navy/congressional beats for Defense Daily, which followed almost three years as a staff writer for National Defense Magazine. Prior to that, she worked as an editorial assistant for the Tokyo Shimbun’s Washington bureau.
