F-35 cost overruns threaten Lockheed program

Design and manufacturing problems with the fighter jets jeopardize the Pentagon's largest contract.

By Trefis Mar 23, 2012 2:43PM
Lockheed Martin (LMT) has run into serious cost overruns in its quest to deliver the first 63 F-35 fighter jets under its flagship program with the Pentagon. 

There have been cost excesses from the Pentagon's side, as well, resulting in combined overruns of more than $1 billion in the Defense Department's costliest program to date. 

Lockheed Martin is the largest defense contractor in the U.S., competing with companies such as Boeing (BA) and Raytheon (RTN).

Lockheed Martin Stock Break-Up

The cost overruns have raised questions about the effectiveness of the program. The Pentagon and Lockheed Martin had earlier claimed that the Joint Fighter Jet is an "affordable, higher common fifth generation" aircraft that can be purchased in large quantities due to its cost effectiveness. But these claims seem to be losing ground, even before the first four congressional contracts are complete. 

Independent U.S. congressional auditors have claimed that the program lacks reliable design and efficient manufacturing. Lockheed Martin is absorbing $328 million of the overrun costs while the Pentagon is absorbing $672 million.

This outcome has the potential to create many problems for Lockheed Martin. While on one hand, its profitability has been hit, on the other hand, future contracts from the Pentagon are on the line. The Government Accountability Office (GAO) has stated that far too many engineering changes are taking place at high costs and more changes will be required, going forward. It is also doubtful about the manufacturing processes and performance indicators. While the indicators have shown some progress, the performance of the first low-initial production contracts has not been good.

The past and current performance by software in the industry has not always been up to the mark, and it is important that Lockheed Martin demonstrates that the F-35 is a creditable and stable platform. Nonetheless, the GAO has given Lockheed Martin and the program some credit for testing and manufacturing process improvements in 2011.

Lockheed US Aeronautics Share of Total DoD NASA and HS Contracts

The cost overruns have put the Pentagon's entire program, which calls for the purchase of 365 aircraft by 2017 with an estimated cost of $69 billion, into the spotlight.

The program initially incurred a loss worth $373 million due to deficiencies discovered in flight testing. Now, with an additional $1 billion for the first 63 aircraft, the Pentagon and Lockheed Martin will have to deliver solid results to allay Congress' fears and instill confidence to go ahead with the contract.

Mar 24, 2012 1:56PM
Low bid the contract to get the job and then up the charges as the job goes on. Isn't that how things work with government contracts now days? Screw the tax payers. They are dumb and just put up with it.
Mar 24, 2012 1:23AM
Too bad Boeing didn't win the Joint Strike Fighter competition instead of Lockheed. At least Boeing got the tanker contract despite John McCain's attempts to give it to the Europeans instead.
Mar 25, 2012 4:37PM
Despite the high cost, we need this to keep ahead of the Taliban's fighter jet program
Mar 23, 2012 7:18PM
What's the problem? Roll the presses!!!
Mar 25, 2012 4:50AM
1 billion for our future defense or billions for Obama's personal gain....Which is more imoprtant? .I will take the F35 any day
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