Lockheed, Pratt to Pay $283 Million in F-35 Cost Overruns

Lockheed Martin Corp. (LMT) and United Technologies Corp. (UTX) will pay as much as $283 million to defray about one-third of a $918 million cost overrun on the first 28 U.S. F-35 fighters, the Pentagon’s program office said today.

The government will cover the remaining $635 million, Vice Admiral David Venlet, the program manager, said in an e-mailed statement. In addition, the Pentagon needs to spend $136 million to make improvements to the aircraft that are not considered part of the contract overrun, he said.

“The F-35 Program Office is working with the services to make necessary adjustments to pay the bills,” Venlet said. “Going forward, controlling costs is an absolute must.”

Venlet told Bloomberg News in April that in the worst-case scenario, the three initial production contracts were projected to exceed target costs by 11 to 15 percent, or by as much $964 million. The figure was calculated based on $6.43 billion in aircraft and engine costs for 28 planes, according to F-35 program data.

“Delivering specified capabilities at target cost is required for success,” Venlet said. “The F-35 cost growth experienced on early production contracts is an extreme and problematic burden to the U.S. Air Force, Navy and Marine Corps. Costs must come down significantly to make this aircraft one we can afford.”

Photographer: U.S. Navy/Lockheed Martin/AP

Lockheed Martin Corp. and United Technologies Corp. will pay as much as $283 million to defray about one-third of a $918 million cost overrun on the first 28 U.S. F-35 fighters, the Pentagon’s program office said today. Close

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Photographer: U.S. Navy/Lockheed Martin/AP

Lockheed Martin Corp. and United Technologies Corp. will pay as much as $283 million to defray about one-third of a $918 million cost overrun on the first 28 U.S. F-35 fighters, the Pentagon’s program office said today.

‘Learning Curve’

Still, Venlet said “we are pleased with signs of emerging stability in the manufacturing flow at Lockheed Martin, Pratt & Whitney and in their supplier teams.” Pratt & Whitney, a unit of United Technologies, supplies engines for the jet.

“Early production aircraft always have higher costs that come down a learning curve,” he said.

“The number you are seeing is still being scrubbed and is worst case scenario,” said Lockheed Martin spokesman Mike Rein.

“On the Lockheed side, we are working hard to lower it,” he said in an e-mailed statement. “That said, whatever the final total is we will pay approximately 30 percent of the overrun.”

Pratt & Whitney spokeswoman Stephanie Duvall said in an e- mail that the company’s “costs to the government for the propulsion content of the LRIP 1-3 contracts is approximately 6% above contract value, which is approximately $1 billion.”

The figures include development and production “concurrency pressures,” costs related to Rolls-Royce Plc’s components for the Marine Corps’ vertical-lift version of the jet, and the impact of foreign exchange rate changes, she said.

Shift of Funds

The Pentagon is seeking congressional approval to reallocate, or shift from other accounts, $264 million in fiscal year 2011 funds to cover part of the F-35 overrun.

The funding shift, or “reprogramming,” must be approved by the four congressional defense committees.

The Senate Armed Services Committee chairman, Democrat Carl Levin of Michigan, and the panel’s top Republican, John McCain of Arizona, told Defense Secretary Leon Panetta in a July 14 letter that they needed more information before approving the shift.

Among six questions they put to Panetta: What is the Pentagon’s legal obligation to pay these increases, and what would be the effect if the funding shift was denied?

Levin and McCain also requested the Pentagon’s cost to terminate the entire program.

To contact the reporters on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net;

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net.

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