The F-35 manufacturer hopes to "buy back" up to 90 stealthy fighters that were lost in the recent program restructuring, but a likely cost-overrun declaration this month will be a major hurdle for the company to surmount.

Senior Pentagon officials seem to be shifting their rhetoric toward acknowledging a cost breach. In a stunning reversal, Gen. Norton Schwartz, U.S. Air Force chief of staff, told an Air Force Assn. conference here on Feb. 18 that exceeding the Nunn-McCurdy law cost threshold is "possible, maybe even likely" for the Lockheed Martin F-35 Joint Strike Fighter.

A so-called critical overrun would trigger a rigorous review of the program, and certification by Defense Secretary Robert Gates that the program is critical for national security, no alternatives exist, updated cost estimates are sound and management is adequate to control future costs. A Nunn-McCurdy review takes time to execute and, perhaps in the case of JSF, often demands the full attention of program leadership.

In January, Schwartz indicated a lesser likelihood of a Nunn-McCurdy breach. "I know more now than I did then," he says. The Pentagon is sending a selected acquisition report (SAR) to Congress this month, which is the likely venue for the declaration of a cost overrun for the single-engine fighter.

Lockheed Martin officials noted during a Feb. 19 press conference that of 11 weapon systems restructured in 2006 when the Nunn-McCurdy law was revamped, F-35 is the only one not to have gone "critical." This is a 50% overrun to the original estimated baseline for either the program acquisition unit cost (PAUC) -- which is the total development, procurement and construction cost divided by the number of airframes -- or the average per-unit cost (APUC) -- which is the total procurement cost divided by the number of airframes. In 2006, JSF breached the 30% limit, which was dubbed "significant," but it did not prompt a major review. Much of the overage then was owing to the weight-reduction measures on the short-takeoff/vertical-landing (Stovl) variant.

"Further cost increases on the F-35 in a unit-cost basis are written in the wind," says Winslow Wheeler, director of the Straus Military Reform Project at the Center for Defense Information. "I will consider Gates to be a genuine reformer when he coverts the F-35 to a fly-before-you-buy program."

As of December 2009, the Congressional Research Service estimated JSF development to cost about $47.1 billion. In the Fiscal 2011 budget, the Pentagon is adding another $2.8 billion to it.

The recent restructuring cut 122 aircraft in the five-year defense spending plan, 30 of which are "lost" because money was pulled from procurement and added to development, according to a Lockheed Martin official.

"That $2.8 billion that they are putting back into the program, that is going to be paid for by jets," the company official says. "We may be able to recover 90 of the jets, or maybe 88" within the existing budget. Lockheed Martin officials say they expect to produce the aircraft at a lower cost than anticipated, allowing the Pentagon to dedicate excess funds to buying more aircraft annually.

However, an acquisition regulation limits the number of weapon systems that can be acquired through such a "buy to budget" strategy to not more than 10% of the approved quantity by the Defense Dept. This raises the question of whether the Pentagon would need to request a waiver if more airframes can be bought through this strategy.

Lockheed Martin officials note that 90 would be the outer limit of what is possible to squeeze out of the five-year funding profile.

They say that aircraft in low-rate initial production Lots 1-3 were priced below estimated SAR values, based on the APUC numbers. The issue for JSF is to stay below a 50% breach in the PAUC, which adds the average cost of development -- which is growing -- across the buy. Another question is whether the number of aircraft procured will shrink; this would also prompt a spike in the PAUC and APUC.

Lockheed Martin officials recently said, "We are holding the cost of our piece tight," and the air vehicle price is off by about 0.5% of estimates, they noted. "The government is going to determine what [it believes] is an appropriate level of conservatism for the purposes of planning and budgeting."

The Joint Program Office separately contracts with Lockheed Martin for the air vehicle and with Pratt & Whitney for the F135 engine.

However, cost has been creeping upward across the program since 2006. One official close to the effort says the focus last year on problems with the engine -- while valid to ensure the engine works as advertised -- distracted senior program officials from managing other parts of the program. "The program was not focused on the right thing," this official says. "Last spring and summer was focused on engine problems that frankly didn't exist. . . . Meanwhile, the [independent Joint Estimating Team (JET) II] on the airplane side is very critical, and they weren't focused on that."

William Begert, vice president of military business development for Pratt & Whitney, says that by Engine 250, the company plans to be on the cost target established by a Joint Assessment Team (a separate entity from the program's JET); this is a contractual requirement. "Both with F-22 and F-35 at the beginning of the programs, we weren't quite on the [cost] model curve -- the predictive curves -- and that is what came into question. That is what you strive to do, you close that gap," he says, adding that the engine price is within a fraction of a percent off. It is "really small. Now, a fraction of a big number is a big number, but we are really close."

Although the JET expected about 30 months of delay in the development program, Pentagon officials say it is about 13 months late. Flight testing is now expected to finish in late 2014, with a full test report expected up to one year later.

Six months of that delay already occurred, with late delivery of test aircraft from the production line, says Steve O'Bryan, Lockheed Martin's F-35 business development vice president. Another seven-month delay is expected, owing to test-asset availability and the extra time needed to develop and evaluate software. (Part of the additional development funding is paying for a second ground-based software line.)

O'Bryan is adamant that production of operational aircraft hardware is on time. However, the airframes will be delivered without software that has been tested and validated. This situation is creating doubt about whether the program will be able to meet the initial operational capability schedule. (An IOC is declared when a unit is first capable of deploying and fighting as needed for the military service.) Marine Corps IOC with Block II JSF software is slated for 2012, with the Air Force following in 2013 and the Navy in 2014.

"When I say we are going to make the IOCs, you are really going back to production. Production is on time. As all of this is going on, jets are rolling out. They are rolling out with all of the hardware," O'Bryan says. "They are waiting for software to arrive and software to be tested, and that is where we are taking action."

The head of Air Combat Command, Gen. William Fraser, says he is "reevaluating" the IOC date for the Air Force F-35. Fraser maintains that the service still plans to buy 1,763 conventional-­takeoff-and-landing aircraft, and intends to declare IOC with Block III of the JSF software. "I have seen nothing that would change what we view as the requirement."

Among the issues included in his reevaluation is how to operate if the F-35 IOC is delayed, and a question is whether he can extend the life of F-16s to 8,000 hr. from 6,000. The Air Force is still not considering the purchase of any late-model F-16 or F-15 aircraft as a mitigating strategy, Fraser says.

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