Most of the time God,Pratt & Whitney or General Electric, will give you another turn in the Barrel.

These are my opinions and my opinions only they do not reflect the opinions of any of my family members or their employer. Note we NOW have NO employers.

Back from a 5.5 Year PCS from the confines of the far Southwest corner of Bundesrepublik Deutschland. The Federal Republic of Germany and Retired.

Friday, November 30, 2012

How to waste an afternoon looking at the Deal of the Century

This afternoon I started a journey down the rabbit hole, this journey stated after a conversation with an individual who had a past association with several DOD program management offices and hearing some of the stories associated with these programs they were the managers, I sat on the other side of the table as a contractor.  The question came up as to just how much a F-35 the new hope for manned combat aircraft for the United States Air Force, the United States Navy, and the United States Marine Corp airframe cost the Department of Defense.

This individual was quick to quote the latest flyaway cost, the actual cost to build that airframe.  I asked is that really how you should calculate the cost?  I asked what about all of the R&D cost associated with the program that had been accumulated and still are accumulating?  Their response was to forget about it after all they were sunk cost, which sent a chill through me.  My experience in developing commercial products where the cost of development for my company came from cash flow and loans told me a different story.  These “sunk” development cost are typically quite sizeable in comparison to the actual production cost of the individual item, and that they have to be accounted for and eventually recovered through the sale of the end product, after all we hopefully are a profit making enterprise.  I foolish asked that since they had been associated with this program (for abet a short period) did they have an idea of amount of these costs?  Their response was that it was unknown to them.
This was quite a shock, and if this individual mindset were anywhere typical of the personnel in the program management office, then that would go a long way to explain the predicament of the project.  Note this is not to be critical of any individuals they have to operate and advance within the rules of the system that is the Department of Defense.  It is more of an indictment of the United States Congress for allowing it and the Department of Defense for perpetuating it, because in the end it is after all OPM (Other Peoples Money).
Military personnel are transient in their career ladders, never allowed to sit in any one billet for any extended period, never really allowed to master any single program or task.  The continuity is typically provided by the DOD civil service employee, however typically the ones that stay for any extended period in a program office have little if any real authority to effect change in a program, and those civil service employee that do have any real authority are typically quickly moving on to other slots.
My First step into the Abyss was a staggering in that it took at least an hour to find reliable detailed sources of data, and that is a story for another day.  But once the sources were found (typically Volume 2 RDT&E), one might expect that everything would be easy after that point, boy was that was a mistake.
The next step trying to make headway into the data was worse than the first step.  The data had to be extracted from various DOD budget documents (in this case USAF since they are the lead agency for the program), and various locations in these documents, along with several format changes, and in many cases the grand totals of actual expenditures for a given year had to calculate since they were not presented in the documents.   Additionally the various actual expenditures had to be computed several times in that next year budget document would provide revised actual expenditure from previous years.  For some unexplained reason the Department of Air Force could not added up expenditures, especially if they contain expenditures by other services or countries.
Due to my eyes glazing over and the headache that was building I decided not to aggregate cost of the F-35 program that exist in other parts of the Department of the Air Force budgets, like the Operations and Maintenance Budget, and Military Construction Budget, and in other weapon development program budgets (for example the Small Diameter Munitions program, but there are F-35 program cost in other program budgets)
If I did not know better I might suspect that some elements in the DOD, the Congress, and the contractors might be trying to hide something, but that could not be true, not in our Democracy.  Our elected representative and the individual that are appointed to positions in the Department of Defense both civilian and military are all honorable individual with no hidden private agendas or vested personal interests in these programs.
Well here are the results of one afternoon of scrounging around the DOD Budgets and it is not pretty.  First the data, for the full effect I decided to presented the data with all of the associated with digits, that way one can see just how large the numbers are.
The DOD repots typically record the numbers either in terms of Thousands or Millions of Dollars.  I think that it is done in an attempt to keep the appearance of the numbers small that way individuals who are just casually looking will not realize just how large they are and continue on their merry way none the wiser.
Before I get to the numbers that I could find, as a side note the cumulative spending (actual and planned) on the F-35 program if it were a nation would place it number 55 on the IMF nominal GDP list of 184 countries, and number 51 on the World Banks nominal GDP list of 190 countries, and finally number 51 on the United Nations List of nominal GDP list of 193 countries.
F-35 program actual and projected expenditures to date would exceed the nominal GDP of some 70 percent of the nations of the world.  We, and our allies have either spent or plan to spend a great deal of money on this weapon system that at the end of the day become one hell of a revenue stream and profit center for the Lockheed Martin Company.
Incremental Spend
Cumulative Spend
Table 1
These numbers are astonishing in their size.  The sheer magnitude should be mind-boggling.  For those who are more visually inclined is a graph of the data in table 1.
The DOD is big on talking about flyaway costs, partly I suspect is that sticker shock might kill if not maim members of the Congress and more importantly the taxpayers of the United States.  Theoretically flyaway cost are the costs associated with actually building the airframe, and just forgetting any other accumulated program cost, after all those costs are sunk.  As of this writing the DOD is estimating that the flyaway cost for an airframe at 150 Million Dollars, and is estimated to fall to 100 Million Dollars (assuming 2443 airframes).  Just a side note in 1996 DOD projected the flyaway cost at 35 Million Dollars per airframe.  F-22A flyaway costs have been reported at 142.7 Million Dollars per airframe based 187 airframes.  Flyaway cost is a red herring it is designed to keep your eye off the true cost of airframe.
You and I paid those cost and they do matter.  Projected airframe cost for 215 airframes that the DOD is anticipating to have built by 2016 would bring the average cost per airframe to $671,779,893.02 Dollars each, 672 Million Dollars each.  That is a great deal of money to spend for an airframe, especially one that is expected to go into harms way.  Table 2 displays the cost of airframes based on cumulative program costs.
The first F-35’s (all two of them) cost the United States Government and the other participants at least $14,723,459,000.00 each for the first two airframes, for those who do not like to count up all the digits that is 14.7 Billion Dollars.  This is just an estimate in that I could not easily find program expenditures prior 1997.
Table 2

Below is a graph of the data in Table 2.  It would take the production of a great many airframes to get the cost down to point where the average cost of an airframe get under 500 Billion Dollars per airframe, and it is very likely that the cost of the airframe would never get below 250 Billion Dollars per airframe, given that there is current projected fly away cost for airframes are being advertised as 150 to 167 Million Dollars.

Well so much for this installment of the deal of the century.  The funds that we have spent to date on this program are lost.  But the funds that are currently planned to be spent can be saved and might actually make a small dent in our ever-expanding national debt.

This just in the JSF/F-35 Program office announced late in the afternoon 30 November that they have just reached an agreement with Lockheed Martin on the "Flyaway Cost" for the next batch of airframes (32) and will sign the contract modification for some $4,400,000,000.00 Dollars also know as 4.4 Billion Dollars sometime in the next few weeks. This is part of the allocated 12.8 Billion for FY 2013.  Why the big hurry, committed funds via contract or contract mod are not subject to sequestration.  We are taking care of the elephants, they will have enough food and water to weather the coming  storm, and the ever-expanding national debt just keeps rolling on to the sea.

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