Analyst: JSF overhead costs may jump with Lockheed contract proposal

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Lockheed Martin is proposing to modify the financial structure of the F-35 Joint Strike Fighter industry team in a way that could add billions of dollars to the cost of the overall programme, according to a key Wall Street analyst.

The proposed change could allow Lockheed to charge the F-35 joint programme office (JPO) a much higher fee to pay for overhead costs, says Heidi Wood, aerospace and defence industry analyst for Morgan Stanley.

It would also reverse one of the key cost-saving features of a unique contract structure employed during the system development and demonstration phase, she says.

In response, Lockheed says the industry team expects "fee structures to be comparable regardless of whatever the structure of the contract".

Lockheed adds that the F-35 industry team, which includes BAE Systems and Northrop Grumman, has met funding targets for the first two annual lots of the low-rate initial production (LRIP) phase. The team is now developing its proposal for the LRIP-3 contract.

Wood says her information about Lockheed's new financial proposal comes from a senior JPO official.

The JPO currently bills each of the three major F-35 contractors separately. This unique arrangement is designed partly to limit the amount of overhead feeds charged by each of the contractors, which can amount to hundreds of millions of dollars over time.

Lockheed's proposal, however, would bundle all of the industry team's charges into a single billing process for submitting to the JPO for payment.

Each charge submitted by BAE and Northrop would include a discrete fee to cover their own overhead costs. Lockheed would then add its own overhead for the aggregated bill. Since Lockheed would be charging an overhead fee on top of fees already charged by BAE and Northrop, the JPO would be paying a "fee on a fee", Wood says.

She adds that the JPO estimates the current structure has saved $850 million already, so making a change for the full-rate production phase could dramatically increase the programme's overall costs.

Separately, the JPO has released $1 billion to buy six F-35B short take-off and vertical landing aircraft under the LRIP-2 contract. Funds to buy six F-35As for the US Air Force have already been released.

The funding for buying the F-35Bs was withheld until Lockheed completed the first flight of a prototype STOVL aircraft, which happened on 11 June. Lockheed was also required to brief US Department of Defense acquisition officials on the status of a engine blade fatigue problem that slightly delayed the first flight.

Lockheed says the US Marine Corps is expected to operate 340 F-35Bs.