On April Fool's Day, the Defense Department submitted its annual Selected Acquisition Report (SAR) report to Congress. This details the cost and schedule estimates for 98 of the largest and most important acquisition programs, with a combined price tag of more than $100 billion. Despite the timing, no one was laughing.
Seven out of the 98 programs had sustained major cost and schedule changes; a more typical figure is two or three. The Lockheed Martin (LMT) Joint Strike Fighter (JSF) reported a 57 percent increase in the price of each aircraft. This had been expected with the major delay to the program's schedule and addition of several years worth of production. The JSF will have to continue or the U.S. will face a potential gap where no new aircraft will be fielded. The Navy is already making plans to buy more of the existing F/A-18 fighters to prevent this gap from occurring.
The program with the biggest increase -- 290 percent -- is the Advanced Threat Infrared Countermeasures (ATIRCM)/Common Missile Warning System (CMWS). These systems will be installed on aircraft and helicopters to provide missile detection and defense. The program, led by Europe's BAE Systems (BAE:L) after it acquired the part of Lockheed that started the program, had been restructured into three component parts. Early testing of the ATIRCM showed poor reliability. Due to this, 80 percent of the planned procurement was cut, driving up the price of the 208 remaining ones. Now it's decision time -- either to improve the system or start again.
Some other programs experienced cost growth due to the decision to buy more. These include the Boeing (BA)-made C-17 transport; Congress added 33 more to the Pentagon's original order and the Raytheon (RTN) produced AIM-120 AMRAAM air-to-air missile which had almost 4,000 units added to its production. This is partly due to increased foriegn sales as well as the replacement of older missiles. The cost increase is more then just the money to buy the new units but also support costs that include storage, maintenance and overhaul.
The Obama Administration has also restructured parts of the budget over the last two years. This included ending the F-22 advanced fighter production at 188 aircraft. The program had to account for $423 million to shut down the production line. The new Navy ship, DDG-1000, was ended at three ships rather then the initial ten. This caused a significant increase in the cost per ship (almost 87 percent) as there are fewer ships to spread the cost of development over.
The SAR reports reflects the turmoil in defense acquisition planning. Some programs are being increased, others cut and some restructured.
Congress will be faced with a series of justifications and decisions as to whether it is worth keeping some of these programs going, particularly the JSF, in the face of the cost and schedule increases. With the federal budget stretched, troubled programs will likely get increased Congressional scrutiny. That, in turn, could spell bad news for contractors.