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05 Apr 04. The total cost of Lockheed Martin Corp.’s (NYSE:LMT – News) Joint Strike Fighter program will surge $45 billion, or 22.6 percent, to $245 billion, the Pentagon said on Monday, citing rising labor costs and program delays.

The U.S. Defense Department has recently signaled rising costs for the new jet, also known as the F-35, which is designed to be the main U.S. fighter in coming decades. But the extent of the increase caught even Lockheed and program critics by surprise and could prompt tough scrutiny by Congress, which is worried about rising federal deficits.

“I’m totally shocked. To us this is the height of fiscal
irresponsibility,” said Eric Miller, defense analyst with the government watchdog group, Project on Government Oversight.

“The JSF is barely a gleam in the Pentagon’s eyes and it’s already well on its way to becoming the biggest defense boondoggle of all time,” he said. Citing cost overruns and tight budgets, critics have begun to question whether the military really needs so many F/A-22 fighter jets, also built by Lockheed, and nearly 2,500 F-35s. In a report to Congress, the Pentagon said JSF costs were rising due to increasing contractor labor and overhead costs and a delay in the start of procurement from 2006 to 2007, as well as the addition of a new optical tracking system.

Lockheed, prime contractor for the family of modular fighters being developed for the Air Force, Navy, Marine Corps and U.S. allies, was stunned by the news and insisted it had won praise for its management of the program.

Spokesman Tom Jurkowsky said the report was intended to help map out costs over the next 40 years. He said thus far Lockheed had only won an $18.9billion development contract for the program, with no production contracts signed. Lockheed beat Boeing Co. (NYSE:BA – News) to win the lead on the JSF in 2001.

The United States has agreed to jointly develop the F-35 with Britain, Italy, the Netherlands and five other countries. They are paying over $4.5billion toward development costs.

The Pentagon said “revised contractor direct labor and overhead rates” alone would raise the price by $13.7 billion.

Outgoing Pentagon Comptroller Dov Zakheim acknowledged in an interview on Monday that JSF program costs were rising. He blamed the increased weight of the plane, adding that such problems were common for new aircraft. He said the Pentagon wanted to stick to the basic design and get through development and testing before making any decisions on cutting back the number of planes to be built.

Currently, the U.S. Air Force, Navy and Marines are slated to buy 2,457 F-35s, with the foreign partners to buy 700.

“If you do start playing around with development and trying to ‘cut costs,’ you’re really just cutting off your nose to spite your face,” Zakheim said. “If you tolerate some increase now, you’ll have less of an increase later,” he said.

The General Accounting Office last summer said the cost of developing the F-35 was already $11.9 billion over budget since the program began in 1996, and further overruns were likely as the program moved toward production. In January, industry and defense sources forecast an increase of $5 billion.

GAO has warned lawmakers and the Pentagon that the United States could get stuck paying for any cost increases, since the terms of U.S. agreements with its foreign JSF partners do not require them to pay for cost overruns.

Comment: Trumpeted as the contract requiring ‘Affordability’ and a single specification, JSF appears to have run into the usual contractual cost problems. Seen by some as a means of undercutting Typhoon and Rafale and to obtain US dominance in jet fighter production, JSF may now be running down the same road as its European counterparts, leaving performance not price as the main selling criteria, which may favour the purchase of advanced systems developed on existing plat

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