Tuesday, June 28, 2011

F-35 and 'Misleading' Cost Estimates

And I'd describe the term 'misleading' as "generous"...

Loren Thompson, the Lexington Institute founder, and policy wonk the Non-State Actors and Opposing Ax-Grinder types love to hate has a 'pretty good' column up at Forbes titled "Massive Cost Estimate For Fighter Program Is Misleading" where he bemoans the curious external cost estimate 'inflation' that is all the rage and afflicting the F-35 program these days.

I'm not a huge fan of Thompson (or of his lead Defense Policy Wonk Dr. Goure) but then again I'm not a fan of pure defence 'policy' experts in general. The mere need to attach 'policy' to the moniker usually screams a certain 'political' and not 'technical' expertise. The 'big picture' view of 'policy' types often leads them to not pay close enough attention to the hard details --and then they falter in reinforcing their points by using flawed anecdotes or examples.This penchant, I believe, detracts from their ability to get their message across and can harm their credibility in the eyes of those they seek to influence the most: marginally involved and undecided politicos (directly)... and (indirectly) a large part of the interested public.

But after the early missteps in the piece (which I will discuss shortly), Thompson lays out a very good review of what is actually going on with all the 'funny' numbers  being thrown around concerning the F-35 program.

Read it ALL.

Missteps and Gems

The Missteps:
My comments in [brackets]
1."The F-35 Joint Strike Fighter is the most expensive weapons program the U.S. Department of Defense is currently funding. The reason it’s [the program] so costly is that the Clinton Administration decided in 1993 to replace a slew of cold-war combat aircraft operated by three different military services with a single family of planes.
[This is an oversimplification to say the least. As I've posted before, the reasons are more accurately :
a. The simultaneous procurement of the AF’s High-Low mix (F-15 & F-16) in the 70s-80s. It should surprise no one that concurrent acquisition increases probability of concurrent obsolescence. The F-16s are in a little better shape wear-and-tear-wise than the F-15, but the Stealth Revolution and advances in near-peer fighter and air defense technology is bringing obsolescence to both fighters at about the same rate.
b. The failure of the Navy to execute the A-12 program. A large gaping hole was created in Naval Strike when that program failed and after the A-6s were retired.
c. An earlier Congress pressing on combining Air Force and Navy needs, then requiring the absorption of the Marine Harrier replacement effort. This forced three efforts that could have been developed at their own pace which would have spread out the costs and risks to be rolled into one schedule and one set of budget line items paid for at the same time. Combining three efforts into one creates program complexity that should be avoided if it can be avoided, but given a. and b. above, this arrangement became unavoidable. You can argue the ‘unavoidable’ part only if you are willing to assume a completely different set of risks as acceptable. The DoD doesn’t believe it was/is avoidable and I don’t either]

2. Cost is crucial for two reasons. First, if the price of each plane rises too far, potential users will start dropping out of the program. Fewer users means lower production rates, so economies of scale are lost — leading to further price increases. This dynamic is referred to in the aerospace industry as the budgetary “death spiral,” a process that did in the Air Force’s last new bomber and fighter before production numbers got anywhere near what the service needed.
[The B-2 numbers were capped under the guise of gaining a perceived “peace dividend” after the design was highly developed and the production capability was already sunk cost. The B-2's were (wrongly) perceived as only useful for a Cold War gone hot in a 'Nuke' weapons employment scenario]

The Gems:

"However, what got lost in the exchange was the distinction between estimates and actual costs. The more you examine the program’s track record to date and the methods utilized to calculate future costs, the less clear the program’s real price-tag becomes. In terms of the track record so far, the contractor has repeatedly delivered early production planes for less than the Pentagon estimated they would cost, and its internal projection is that it will be able to market the most common version of the plane at about the same price that its F-16 fighter currently sells for overseas — about $65 million each."

The most important thing to understand about the estimated support costs for the F-35 is that they are projected over a 50-year period, through 2065. That inevitably creates misconceptions about costs for two reasons. First, the cumulative cost of any ongoing item is going to look huge if it is projected out over a half-century. For instance, the 50-year cost of the various music bands the military sustains is around $50 billion, if you assume present funding levels persist and inflation continues at its current pace. [I've heard/read this 'band' analogy before, but it is still a good one]

....With regard to the price of alternative modernization strategies, it already costs more each year to sustain the legacy fleet of tactical aircraft the F-35 will replace than the highest official projection of F-35 annual support costs. In fact, if the same assumptions used to project F-35 support costs are applied to legacy aircraft, it would cost four times as much — $4 trillion — in “then-year” dollars to maintain the current fleet rather than transitioning to F-35...
[ Also, how 'good' are the numbers? I made the following comment once at Strategy Page in a discussion  about O&S costs covering 65 years: “whataya' reckon the accuracy of costs projected 65 years in the future are BTW? Hint: think of how you would estimate the costs of operating a plane in 2010 that was first fielded in 1945”]

[I like the whole section on this topic] A further degree of confusion is fostered by failing to distinguish between actual cost growth and changes in the counting rules used by government estimators. Three-quarters of the increases in F-35 support costs reported by the Pentagon have resulted from changes in the scope of work being analyzed or changes in the methodology for how costs should be calculated, rather than rising costs in the program. With regard to changing scope, the government has increased the number of years estimates cover since its initial cost projections from 30 to 50; it has increased the number of bases where F-35s will be stationed from 33 to 49; and it has doubled the amount of support equipment it plans to use in sustaining the aircraft. With regard to changing methodology, the government revised its formula for projecting support-cost growth (adding $50 billion to estimates); switched from industry to in-house metrics (adding $33 billion to estimates); and included capability upgrades previously excluded from support-cost models (adding $28 billion to estimates). All told, government adjustments unrelated to contractor performance have more than doubled F-35 support-cost estimates since the program began.

... They also failed to note that the F-35 management system was designed to track all costs associated with operations and support, whereas legacy aircraft lacked comprehensive accounting systems. This point has been noted repeatedly by the Government Accountability Office, a watchdog agency, and explains why items like aircraft modifications, pilot training and information systems are captured in the F-35 cost estimates but not in the support-cost estimates for previous planes. When comparisons are adjusted to remove [just] this disparity, the cost per flight hour of the F-35 is only about ten percent higher than that of legacy planes for a fighter that is far more survivable and effective.

I can hardly wait for the 'Nattering Nabobs of Negativity' to latch on to this one...

Added 29Jun11: Solomon over at SNAFU has a good post up on F-35 shipboard integration where they talk about the F-35 program paying for the cost. Some integration and alot of other costs for legacy programs have not always been booked against the airplane program proper. the F-35 has the most inclusive cost numbers I've ever seen. This [is the] kind of cost accounting disparity between F-35 and legacy programs that Loren Thompson refers to above. 


Earlydawn said...

Why are the F-16s in better shape? More airframes compared to the Eagles to soak up tasking?

SMSgt Mac said...

Good question with a multi-facet answer.
The average age of the currently fielded fleet of F-16s is quite a bit younger than the F-15s (see http://photos1.blogger.com/blogger/2509/643/1600/age-type.jpg) and just as importantly the F-16's either have or are undergoing a service life extending mod program, whereas the F-15s do not have a one size fits all program for their much smaller numbers than the F-16. Good (Frb 2011) Air Force Magazine article here: http://www.airforce-magazine.com/MagazineArchive/Documents/2011/February%202011/0211fighters.pdf

Solomon said...

hey can you send me a private e-mail.