Pentagon is reviewing Pratt & Whitney's F-35 engine program on amount of savings from subcontractors
By TONY CAPACCIO | Bloomberg | Published: January 10, 2020
The Pentagon's audit agency is digging into cost and pricing data for F-35 engines to determine why United Technology Corp.'s Pratt & Whitney unit isn't extracting more savings from subcontractors on their share of the biggest U.S. weapons program.
As the sole provider of engines for the F-35, the company and its subcontractors are in line to collect as much as $66 billion of a projected $428 billion in acquisition costs for more than 3,000 of the fighter jets being built for the U.S. and its allies.
The agency's review was initiated after Pratt & Whitney claimed cost savings of about 3% in its prices for the 12th through 14th F-35 contracts — the largest to date — over the prior contract. By contrast, Lockheed Martin Corp., which builds the rest of the plane, is projecting savings of as much as 15.3%. The Pentagon program office is wondering about the big difference.
"That the engine price is not coming down as fast as the air vehicle is a concern," Greg Kuntz, spokesman for the Defense Department's F-35 program office, said in a statement. "We are using all the tools available to us to get the best price for the taxpayer."
As the F-35 program approaches a likely full-rate production decision this year, the Pentagon is under increasing pressure to wring costs from all areas. Congress has approved about $27 billion to date for F-35 engines. Two House Armed Services subcommittees are digging into long-term maintenance costs for the plane.
Fifteen 15 to 20 suppliers are included in the review by the Defense Contract Audit Agency, covering many parts including castings and forgings, Kuntz said. That's out of about 280 U.S. and foreign suppliers, according to Pratt & Whitney data.
"These types of supplier audits are common and include information from subcontractors" that will allow the program office "to more accurately determine pricing ahead of our next production negotiations" — for the 15th through 17th contracts — and "establish a fair and reasonable price for the propulsion system," Kuntz said.
Matthew Bromberg, Pratt & Whitney's president for military engines, said in an interview that "they should challenge us," but "you need to look at cost reductions over time." He said that from the beginning of production to the end of Lot 14, the company achieved more than 55% in cost reductions per engine.
Bromberg said "I'm not satisfied either" with the 3% the program office is questioning, "but that's what we could work out of our supply base and our cost structure."
Pratt & Whitney's goal over the next two years is to "lock down on a more aggressive cost-reduction strategy that we'll then negotiate" with the Pentagon, he said. Data from the audit agency will help, he said, so "if they find opportunities for cost reductions that we're not leveraging, I embrace it 100%."