Currently, Contractor and the Pentagon’s F-35 program office negotiate new deals every year to maintain the hundreds of F-35s flown by U.S. and partners. The negotiations often take most of the year and by the time a contract is signed, it’s time to begin negotiating the next one.
“It’s a commitment on the company’s part to a five-year deal and it would bring along the partners as well as the supply chain and allow us all to establish long-term arrangements with our vendor base.
The contractor says “If we had a five-year deal where folks could bank on having a certain level of money coming into their activities and be able to work long-term arrangements with the vendor base, everybody benefits from that.”
The Pentagon currently pays contractor more than $2 billion per year to sustain about 400 jets, or roughly $5 million per jet per year. But within four years, the global fleet is expected to reach nearly 1,200 aircraft as production ramps up.
Contractor estimates that the tab for the five-year arrangement could come to $15 billion, and that it would save the Pentagon a total of $1 billion.
Company officials figure that both sides will do better with the half-decade-long deal, which will allow the aircraft maker to lock in longer-lead parts contracts and assure its suppliers of steady work at known prices.
Contractor also says that if the Pentagon signs the deal, the company will immediately invest $1.5 billion to buy parts, sign long-lead contracts, and improve the F-35’s ALIS logistics/maintenance software.
And contractor says the arrangement would require the company to make sure 80 percent of the fleet is always mission-ready.
Finally, contractors proposal includes commitment to reduce the cost per flying hour from the current $44,000 — for an Air Force F-35A in 2018 — to about $25,000. Company officials say they would absorb the risk.
“We are accepting a lot of the risk in the deal,” says the contractor.
The number of F-35 flown by the U.S. and partners is projected to triple in the next four years, from roughly 400 to nearly 1,200 jets. “That growth is going to lead to a step function in flying hours and we’ve got to be prepared for that.”
Sustainment costs consume about 70 percent of Pentagon weapons spending. “This is our opportunity to stand behind our product from the sustainment perspective.”
Fewer than half of the Air Force F-35s were deemed mission-ready in 2018. Those numbers have improved this year, particularly for jets deployed overseas. Last year, SECDEF ordered the military services to boost fighter readiness to 80 percent.
Contractor has proposed to assume most of the risk for keeping the plane in a high state of readiness. The company would guarantee a fixed price to reach and exceed 80% fleet readiness by 2025, higher than most U.S. combat aircraft achieve today.
The cost of building each aircraft has been declining steadily, with the latest agreement aiming to produce the most common variant for less than it costs to manufacture last-generation fighters that the F-35 will replace.
However, most of the life-cycle cost for modern weapons is incurred after production, in the form of what is called “sustainment”—maintenance, spare parts and other items necessary to keep weapons in a high state of readiness. It is the cumulative cost of sustainment during a service life stretching to 2070 that has earned F-35 the reputation for being the military’s first trillion-dollar program.
What contractor is proposing is that DoD transition F-35 to a performance-based logistics approach in which contractors are incentivized to reduce costs. Traditional sustainment concepts measure inputs, whereas performance-based logistics measures success in terms of outputs—in this case, readiness and affordability.
Under the terms of the contractor offer, DoD would be guaranteed that the F-35 fleet is over 80% mission-capable by 2025, meeting a goal set by SECDEF. Less than 10% of the fleet could be non-mission-capable due to supply shortages, and less than 10% could be non-mission-capable due to maintenance issues. That is significantly better readiness than is currently achieved by most military aircraft.
The most unusual feature of contractors offer, though, is the proposal to deliver high readiness levels at a fixed price below what current sustainment practices would permit. The company estimates that $18 billion would be saved over a 15-year period, with savings averaging about $1 billion per year after initial startup of the performance-based approach.
What makes the offer of a fixed price unusual is that contractor doesn’t actually control most of the costs driving F-35 sustainment outlays. The company says it accounts for roughly 40% of sustainment costs, with the engine maker accounting for 10% and DoD generating the remainder.
Contractor needs to negotiate ground rules governing how performance-based logistics would be implemented for F-35. Following the pattern used in other performance-based arrangements, including those contractor has with its own suppliers, the company wants sustainment to be negotiated in five-year increments, giving it sufficient time to earn back its up-front investment.
Transitioning to five-year increments would eliminate the current practice of annual negotiations for sustainment, a process that results in considerable price variability from year to year. By migrating to a system of only one negotiation every five years, DoD would get a more predictable outcome in terms of cost and performance. It would also shift most of the execution risk to industry, which is a common feature of all performance-based logistics contracts.
Capability and affordability are usually traded off against each other in Pentagon arrangements for supporting combat systems, so it is not a sure thing the contractor can simultaneously increase readiness and decrease costs. The short answer is that it has analyzed processes surrounding the sustainment function and has identified numerous ways in which money can be saved without sacrificing readiness. These include reducing manpower and material costs, improving inventory control, automating tasks and predicting with greater accuracy when maintenance actions will be required.
Many of these enhancements can be implemented whether they are carried out by DoD or industry. The fact that contractor is willing to risk its own funds up front signals that the F-35 has reached a level of maturity where sustainment processes are well understood and thus ready for refinement. This approach would implement recognized best practices across the F-35 support enterprise, but would require significant adjustments on the part of all parties involved.
Fashioning an optimized sustainment process for the world’s biggest weapons program “is a strategic inflection point—maybe the last.” In other words, with the battle over reducing production costs now largely won, DoD and industry need to agree on how best to support the F-35 fighter through the coming half-century of operations. If they get it right, F-35 will be the dominant tactical aircraft in the world for two generations. If they get it wrong, the aircraft won’t live up to its full potential.
Congress Cooling on F-35 Multi-Year Production Contracts
Some lawmakers have signalled they’re unlikely to authorize the Pentagon to award a multi-year contract to build F-35 Lightning II Joint Strike Fighters unless the program solves such problems as chronic shortages of spare parts that often wear out quicker than anticipated.
The F-35 program is still plagued by high operating costs, inadequate repair capacity, spare part shortages and poor replacement part reliabilities. Ongoing challenges running the Autonomic Logistics Information System ALIS, which was created to deliver parts to aircraft maintainers, are compounding the spare parts problems.
Timely delivery of spare F-35 parts to maintainers is at the heart of high maintenance costs. ALIS was described by Pentagon officials as hard to use, especially at remote locations and by Navy personnel on large deck amphibious warships.
The Pentagon is in the process of revamping the system’s underlying architecture, which is now pushing 20 years old.
“ALIS is a key enabler for tactical and operational availability and as presently constituted, ALIS is not delivering the capabilities the warfighter needs,” DoD is progressing towards a future ALIS developed and sustained utilizing agile software development techniques designed to rapidly deliver flexible applications on a modern secure architecture.”
Congress has said they don’t see a multi-year contract going forward until the fundamental questions that have been asked thus far, and several that have not yet been put on the table have been resolved.”
1. What are the basics of performance-based logistics?
Performance-based logistics is an outcome based support strategy that delivers an integrated, affordable product support solution that satisfies Warfighter requirements while reducing Operating and Support O&S costs. When dealing with industry, product support outcomes are acquired through performance based arrangements that deliver Warfighter requirements and incentivize product support providers to reduce costs through innovation.
2. At what point is it appropriate to engage the original equipment manufacturer in the performance-based logistics initiative?
The appropriate time to engage the original equipment manufacturer within a performance-based logistics initiative varies. When trying to evaluate the correct time to involve an original equipment manufacturer, it is important to consider the various inputs that may be required from the provider and at what stage such inputs will need to be available for review. Additionally, depending on the acquisition environment-- competitive vs. sole source there will be certain limitations to the scope/context of allowable discussions in which the parties are expected to operate. For example, when trying to use will be necessary to solicit feedback from the original equipment manufacturer as early as possible to determine if this data is available or needs to be licensed. Regardless, establishing a collaborative communication flow with all involved parties is important to the successful implementation of any strategy.
3. What constitutes a properly structured and executed performance-based logistics arrangement?
Successful performance-based logistics arrangements have the following attributes: Objective, measurable work description that achieves a product support outcome Appropriate contract length, terms, and funding strategies that encourage delivery of the required outcome. A manageable number of metrics linked to desired Warfighter outcomes and cost reduction goals/Incentives to achieve required outcomes and cost reduction initiatives Risks and rewards shared between DoD and commercial product support integrators and providers. Active management by the Product Support Manager, Integrator and provider with frequent, transparent interaction between the performance-based logistics
4. What are best practices for managing performance-based logistics arrangements?
Tracking performance is a critical part of performance-based logistics arrangement management so performance-based logistics arrangements cannot be a “fire and forget” endeavor. Routine reviews and performance monitoring, and close collaboration between stakeholders will help drive successful performance-based logistics arrangement outcomes. The Support Manager, must have a relationship built on trust with their industry counterparts and maintain open and honest lines of communication. Fixed-price contract variants are the preferred type because they provide the greatest incentive to the product support Integrator and provider to improve their products and processes and reduce their cost to perform. When the providers cost to deliver or the risk is difficult to determine, then a Fixed Price Incentive Firm target contract with a ceiling price and a profit-sharing formula is appropriate.
5. What is the difference between multiyear and multiple-year contracts?
The primary characteristics of each contract type are included below. Multi year Buys more than one year’s requirement without having to exercise options Beyond one-year investments can be recovered if contract is terminated Multiple Years: Contract written for multiple years Only first year is ‘guaranteed’ No recovery of investments if contract is terminated
6. How are organic performance-based logistics Product Support provider incentivized to perform and improve its productivity to satisfy program metrics and receive more work?
The product Support provider organization is motivated by improving its capability and capacity and ensuring a stable or increasing workload. Establishing public-private partnerships with industry and aligning the organic product Support provider metrics with those of the program has resulted in improved processes and additional capabilities in organic facilities. There are different challenges and constraints when incentivizing DoD product Support provider , compared to their commercial counterparts. Regulations preclude commercial product support integrator from giving bonuses for exceptional performance to the DoD product Support provider they may have under contract. Any bonuses or awards given to the members of the organic product Support provider must come from the Command’s authorized and often limited funds.
7. What should be considered when selecting performance incentives?
Considerations for selecting performance incentives include: Ensuring incentives are built upon performance objectives/standards and are realistic, measurable, and attainable. Aligning incentives with the effort and contract value is key. Structuring incentives for largest overall impact and avoiding any unintended consequences, while providing value for achieving mission Being careful what you ask for, as you will likely get it and may not be able to afford it – or may not have really needed or wanted it.
8. What about “funding appropriating types.” What does this term mean?
There are different types of funding appropriations. A summary of the primary categories with their overall scope/statutory time limits is included below. Research, Development, Test, and Evaluation RDT&E – Covers RDT&E activities and expenses. Policy allows incremental funding, and the funds are available for two years. Procurement – For procurement of end items all centrally managed items, initial spares and labor for certain production-related functions e.g., item assembly, quality assurance. Operations and Maintenance O&M – For replenishment spares, fuel, construction projects. Another type of fund is the Working Capital Fund, which is a non-expiring, revolving fund that allows for contracts with multiple-year performance periods. Congressional multiyear contract authority is not required for these contracts, greatly simplifying contract execution. Funding is applied to long-term contracts in annual increments, reducing the amount of funding that must be obligated at any given time.
9. How does using appropriated versus revolving funds affect performance-based logistics contracts?
Services fund performance-based logistics contracts with either Working Capital Funds or direct appropriations. Working capital funds are appropriate funding sources for performance-based logistics-related supply, depot maintenance, and transportation activities. Working Capital-funded performance-based logistics arrangements may also enable the award of long-term contracts and leverage existing supply chain procedures. As such, Working Capital-funded performance-based logistics are transparent to customers interacting through supply and financial systems. Direct appropriations may be the most appropriate funding source for performance-based logistics arrangements that operate outside the existing Service supply chain and the normal requirements generation process or cover a full system beyond supply, maintenance, and transportation activities. The type of appropriation depends upon the phase of the life cycle typically procurement and RDT&E during development and O&M during sustainment.
10. What are good examples of potential measurement units for performance metrics?
Each program must decide the appropriate metric for their specific system requirements. However, generally programs will include one or more of the following: Time: Delivery time, schedule adherence, Cost Per Flight Hour Accuracy Rates: Most often stated in percentages Error Rates: Number of mistakes/errors allowed in meeting performance standard Milestones: Percentage complete by target date.