Review of F-14 Aircraft Costs

Published by the Government Accountability Office on 1971-09-03.

Below is a raw (and likely hideous) rendition of the original report. (PDF)


    Review Of F-14
    Aircraft Costs      8-168664

    Department   of the Navy

        Dear Mr. Chairman:
             this is our response to your letters of July 6 and hgust 9,
      1 1971, on the subject of the problems being encountered on the Navy's            1
        F-14 aircraft    program,
      G'4     ----
             Before   discussing the F-14 specifically, we would like to offer
: q, .' a few observations about the various estimates involved in acquiring
   /    weapons system that apply in varying degrees to them all.
               In the beginning of any new weapon system development there
        tends to be a certain amount of bias on the part of both the military
        service that wants to deploy the new system and the contractors that
        want to manufacture and sell that system. This bias may result in
        unrealistically       low estimates of the cost to acquire the system,
        optimistic      estimates of the time it will take to develop and produce
        the system and optimistic        estimates of the performance that will be
        provided to the operating forces.          !Phere are two mental    factors
        contributing      to this situation.
              First, there is the competition for the limited Department of
        Defense funds among the various service advocates of military     weapon
        systems. In order to win this competition the advocate attempts to
        demonstrate that its proposed weapon system will be the most effec-
        tive from the standpoint of costs, schedule, and performance.       In
        demonstrating this, the advocate is optimistic   in its predictions    of
        what it will cost, how long it will take, and the performance that
        will be achieved.    To do otherwise might je   rdize approval of the
        program funding.   The resulting funding levels that are approved
        tend to ipore unforeseen technical as well as economic contingencies.
              Second, when tne contractors compete for the resulting weapon
        system contractg they are placed in a position of having to propose
        a cost that is within the already optimistically        low funding level.
        Therefore, the contractors,   like the military     advocates, are motivated
        to a high degree of optimism in predicting      solutions to development
        problems, performance and schedule guarantees, and the costs.           To do
        otherwise could mean the loss of a multi-billion        dollar contract.
              It seems to us that these factors could well have been present
        in the F-14 program although their very nature makes it impossible
        to determine to what extent, if any, they were influential.

                             50 TH AP+dtWERSARY %941- 1971
      We have prepared o&r response in a format to cover the specific
points outlined in your August gth,letter.

     What are the factors attributed   to a ceiling
     price reduction of more than $400 million
     during final contract negotiations?
        At the request of a Navy review team in &xrch 1971, Grumman
calculated its reduction as $474 million.      This figure takes into
consideration the fact that the original proposal and the prices
finally    negotiated are based on somewhat different   work statements.
Grummananalyzed the $474 million as follows:
          Elimination of general and administrative
          expenses applied to Government-furnished
          equipment                                              $112
          Reduction of procurement cost estimate                   197
           Reduction of ceiling   margins on
           Grumman's cost                                         165
      In relating this reduction to Grumman's projected loss on the
F-14 program, it should be borne in mLnd that the loss estimate of
$367.4 million is based on a 313-aircraft   buy whereas the reduction
of $474 million was based on a 469-aircpaf‘t buy. Grummanest%mates
a loss of $556 million if it were to produce 469 aircraft   under the
present contract terms.
     Did Grummanfail to tie up airframe
     subcontractors with firm contracts until
     well after.award of the F-14 prime contract?
     We reviewed 11 of the larger subcontracts included in the current
estimate because their prices were significantly      higher than the prices
estLmated for tha in Grumman's proposal.       Their current total price>
based on 313 aircraft,  is about $464 million.      This represents about
67 percent of Grumman's present estimate for subcontracted material.
Grummanprocurement personnel issued invitations       to quote to prospec-
tive suppliers within an average of 11 calendar days after documents,
needed by the subcontractors in order to prepare their proposals, had
been prepared by other Gnammandepartments.

      For these 11 subcontracts, an average of 2.8 months elapsed     from
the date o$' the F-14 contract to the dates of the invitations   to   quote;
1.4 months elapsed from the dates of the invitations   to quote to    their
closing dates as amended; and 1.9 months elapsed between closing      dates
of the invitations  to quote to the award dates. Thus, in total,      there
was an average of 6.1 months time between the award of the prime      con-
tract to the award of the subcontracts.
     The F-14 Project Manager indicated that he did not view as
exceptional Grumman‘s failure to have had definitive subcontracts      prior   '
to the date of prime contract awzzd.
      Grummanfurnished letters from several subcontractors     which
indicate these subcontractors desire relief or upward price     sdjust-
merits caused by spiraling inflation  and reduced business.    Therefore,
the possibility  of further subcontract cost increases still    exists.
        Currently, estimated subcontract costs are higher than indicated
in G-n's          proposal primarily for three reasons: (i) the effects of
inflation    and reduced business base on the subcontractors,  (2) under-
estimating of subcontract costs by Grumman, and (3) changes in the
scope of work required of the subcontractors.
     What are the factors attributed       to
     extraordinary    inflation    and a decline
     in the originally      forecast business
     base at Grumman?
       Grumamtn'sanalysis of inflation   and reduced business base for
lots IV through VII, the annual options scheduled to be exercised
this October and every October thereafter until 1974, reflects an
estimated increase of $234 million.      This is composed of $103 million
attributed  to inflation  plus $13 million attributed     to a reduced
business base. Enclosure II shows the prtiry       reasons for Grumman's
business base reduction.     Enclosure III gives an indication   of the
extent of this reduction.
      !Phe figure of $234 million does not take into account the effects
of inflation    and reduced business base as it concerns subcontractors.
Grummanhas performed a study with its major subcontractors which indi-
cates that inflation    and reduced business at subcontractors will in-
crease Grumman's material costs by about $282 million for lots IV
through VII.
      The total increase of $516 million ($282 million plus $234 mil-
lion) constitutes about '95 percent of the overall cost estimate increase
of $692 million shown for lots I?? through VII.
      What is the General      Accounting    Office's   analysis    of the

      of the work done by GAO and the Navy to validate              those
      projections, together with the results thereof?

       The cost projections        prepared by Grumman are premised on judgmental
estimates   and predictions        of future   economic and business conditions
which understandably         can be subject to significant     change.  The projec-
tions envision      significant     reductions   in future Grumman business and
continued   inflation.         The recent go-day wage and price freeze and some
type of further       controls    may have an impact on inflation.

       At the time of the F-14 proposal., Gx-umrtan expected          overall business
to remain constant throughout     the life of the contract.            It now expects
its overall   business to decline    sharply.  Such forecasts          can change
drastically   in the volatile   aerospace industry.

      Grumman's projection   of a $367 million   loss        was made in arch     1971
and was based on a quantity    of 313 F-14A aircraft.           It was predicated
on the following   basic assumptions:                                  ..

      - that there will be continuous  production.             Any stretch   or gap
        in the production schedule will necessitate             new estimates.

      - that no significant   changes as a result of the flight test
        program will occur.    According to the Navy, changes generally
        result  from flight test programs and due to the complexity     of
        the F-14, they could be major.

      - that $40 million      is sufficient  to cover any demands by sub-
        contractors     for upward adjustments     to their  option ceiling
        prices due to loss of business base or other problems.              As
        indicated    elsewhere in this letter,       certain subcontractors
        have written      Grumman requesting   price adjustments.

        We are attempting     to verify    the Grumman cost projections.           Our
initial    efforts   have been concerned with ascertaining            the reasons for
growth in costs of major subcontracted              items.    We are tracing    the
costs of selected       items from amounts included for them in Grumman's
proposal,     through the initial       subcontract     prices negotiated,    to the
current    prices,   then to estimated ultimate          prices.    This work is still
in its early stages.

      In Harch and    April  1971, a special Navy team reviewed the cost
status of the F-14     program at Grumman. It concluded that Grumman
could remain in a     viable position  on the F-14 program through calendar
year 1973 despite     an expected loss on lot 37 aircraft   unless' certain

adierse eanditions occurred. It concluded the company was financrzLnly
able to produce 48 aircraft under lot XU in any case.

        The Navy is now conducting     a "SHOULD COST" study at Grumman to
assist    in pointing out areas of     cost reduction   not only on the F-14
program, but on all other Navy        programs.    The "SHOULD COST" study
results    will not be knoTzh until    later this year.

      What is Grummm's present position   with
      respect to its willingness to incur and
      ability to absorb a loss on the F-14 program?

      Grumman officials     declined to estimate     the amount of loss the
company could bear on the F-14 program.          They contend that they and
their subcontractors     have made substantial     investments  in the F-14
program and expect to make a fair return on producing an aircraft           which
can meet contractually      specified  performance milestones.     Gzmmmaa of'fi-
cials indicated     to us that the company would not cozrLinue prtiuction
of the F-14 aircraft     at a loss; however, by let,ter dated July 27, 1971,
we understand    that the compauy advised the Department of Defense that
it would accept an order for 48 aircraft         under option lot IV as provided
by the contract.

      In testimony    to the House kmed Services Comittee
      the Navy indicated     that Grumman could offset     much
      of its projected     $363 million airframe    loss for
      lots III-VII    with $58 million  of profits     on spres
      and support items and $176 million       of profltt  on
      other business.      What is the source of this data?

      This data was prepared by a Naval Air Systems Command cost team
that reviewed applicable    records reflecting     the overall status of Navy
programs and corporate   posture at Cm          during .@mch and April 1971.
      What profit  rate does this assume on smres
      and support and how, if at all, does this
      _Mtte differ from both the rate provided
      for under the Grumman-Navy contract      and
      the rate assumed in previous F-14 SAR's?

       Uo precise profit       rates on spares and support were used.           The
Navy cost team estimated          that Grumman ?s loss on the F-14 contract         for
301 production     aircraft3      including    profits from support work, would
be $308.7 million.         Profit    from other Grumman corporate     programs over
the period of F-14 production            was estimated   at $176.4 million.      The
net loss of $132.3 million           would be about $66 million    after    taxes. These
estimates   assume a pessimistic          outlook on Grumnnan's business base,
with little    improvement in its sales position.            The Navy feels Grumman
could bear this loss, if necessary.

        We discussed these estimates      tith members of the Navy team who
participated      in their preparation.       They advised that in estimating
the $176.4 million        profit on other corporate     programs they had relied
heavily     on their   judgment concerning     future  Navy work at:Grumman.
The Navy has traditionally        been a primary Grummancustomer.         The offi-
cials we talked with emphasized that all the figures cited in the
preceding paragraphs are merely broad estimsrtes.             They stated that no
detailed     breakdown exists.

       What are the    different   sources of the
       $176 million    in profit   on other business,
       and how much    of the other business is
       firmly  under   contract  at the present time?

        The members of the Kavy cost review team advised us that their
basis for $176 million      profit    in other business was highly judmental
and used what they termed "backlog analysis"of          other Navy programs at
Grumman. The team did not use precise evaluation methods and they
did not attempt to quantify        the risks.   The above estimate of future
profits    might be high because potential      overruns on other programs were
not a factor     in the estimate.

       What is Grumman's‘own position      on the
       accuracy of this IIavy data?

        7Je were advised that it is Grum~~'s firm corporate $olicy to
refrain     from prepar%ng or releasing     any projections of sales and in-
come because it believes      the very nature of defense business makes
such projections      hrghly hypothetical..

       In light of Grummants overall  financial condition
       what is the maximum loss the company could. expect
       to bear tithout filing  for bankruptcy?

      I&nkruptcy    is a statutory     prbceeding    (Title 11 U.S.C.) which may
occur, subject to approval of a Federal District              Court, when a debtor
is no longer able to pay its debts.            Xn order to pay its debts, Grumman
could take a variety       of actions3    such as the borrowLng of additional
funds, sale of assets,       reductioa    of personnel,    and/or discontinuing
unproductive     operatLons.     Therefore,    it is impossible     for the General
Accounting    Office to predict      what actions Grumman might take, if neces-
sary, in order to continue the F-14 program and avoid insolvency.                 For
this reason we are unable to say at what point,             in terms of a dollar
loss on the F-14 contract,         Grumman would be forced to enter into bank-
ruptcy proceedings.

       What are the assumptions underlying
       present Navy estimates  of unit airframe

       As shown in enclosure V, the Navy estZmates a $5.1 million           airframe
unit   flyaway cost for a 302 airframe production  program.  This          estirf&e

 &sumes that ceiling prices under the existing contract      will not be
 broken and that abnormal inflation of $151 mi,llion will    occur.

      The Navy has now indicated that it is presently
      @.anning on an F-14 program which does not Include
      the use of "B" engines for the foreseeable fiture.
      Row firm is the Navy's decision to abandon the "B"
      engines, at least for the first 301 production
       The Navy advised us that it has, for the time being, cancelled plans
 for a "B" version of the F-14 aircraft    in the current program of 301
 production aircraft;   therefore,  no production units of the advanced
 technology engine, which would have been used in the "B" version, will
 be purchased by the Navy in the near future.     This means that the
 options under the Navy's production contract for this engine will not
 be exercised.   P'uture Navy planning estimates, including those con-
 tained in the Selected Acquisition Report (SAR), will'be based on
 buying F-14A aircraft    only.
         The Navy is continuing its participation    with the Air Force in
  developing the new engine. The Navy advised us that it wanted time
  to accomplish more testing of the new engine before it commItted itself
  to production.     It advised us that when the "B" engine has been sub-
   jected to sufficient   additional  testing to satisfy the Navy as to its
  readiness for use, plans may be changed again to provide for its use
  in a "B" version aircraft.      A production contract for the new engine
' could be awarded as early as 1974, we were told.
       Work 5s also continuing at Grau~ on changes to the airframe
 desig necessary to accomodate the "B" engine. This work, priced at
 about $30 million,  was provided for under a change to the Grummancon-
 tract ordered prior to the decision to delete firm plans for the P-&B.
 We were advised that this work was allowed to continue since the costs
 involved had been largely incurred by the time the decision was made.
       The greater thrust of the kdvanced technology engine would give
 the F-14B significantly  more "dogfight" capability  than the F-l&A;
 however, the Xavy takes the position that the F-l&A will be superior
 to any potential enemy fighter aircraft  in a dogfight.   The F-14 Project
 Manager advised that actual performance of the "A" engine is about 12
 to 3.5 percent better in all performance areas than called for in the
 design specifications.
      Ras use of the P-100 engine as a substitute
      been completely ruled out?
       The Navy advised us that there are no plans to replace the advanced
 technology engine with another engine. We were told that consideration

had been given some the ago to using the TF-3Q-P100 engine for this
purpose but that the decision had been made against it.   The P-100
engine was developed originally for 'xe on the F-111 program.
     What part did each of the following factors play
     in the decision to drop the "B" engines:   schedule
     slippage and cost growth in the development program;
     expectation of an interface problem with the airframe;
     and the Government's negotiating position with Grumman?
     Except for the schedule slippages caused by the Navy's decision
to perform more testing, the records at Pratt and Whitney's Florida
Research and Development Center show that the "B" engine developlnent
progm is generally on schedule. All major contractual milestones,
as of June 1971, have been met. However, cost growth has been experienced.
        The development contract has three 1Lne items:     (1) the development
itself,    (2) fabrication  of prototypes and support of flight tests, and
(3) initial    production quantities   of the Air Force ver,gions of the engine.
In July 1971, agreement was reached to increase the estimated cost of
the development line item from $271*5 million to $393.7 million,        an
increase of $122.2 million.       The Wavy and Air Force will bear $110 mil-
lion of this increase and the contractor will bear the remainder under
the cost-plus-incentive-fee     arrangement applicable to this portion of
the contract.
       Development covered under the contract carries the program from
its inception in March 1970 through qualification    testing scheduled
for completion in June 1973. Contractor officials      advised us that
experience on prior programs indicated that component improvement costs
in the I.2 months following qualification   testing may be as great as
cost experienced in the 12 months before.     The component improvement
program is a contract option which has not yet been exercised.
       We have not determined whether or not there would be a serious
interface problem in mating the "B" engine to the F-14 airframe.       Bow-
ever, the present Gxnmmxncontract is based on F-14A's only and there
would be a contract change to cover the added production costs of the
F-l&B. This would be a change in the scope of work and would require
price adjustments.
     How legitimate were   the three "B" engine-related  cost
     problems I referred   to in my speech, and would their
     likely effect be as   I indicate if a decision were made
     later to equip F-14   aircraft  with "B" engines?
     This problem relates to your estimate of an $800,000 F-14 unit
cost increase over past Navy projections  if "B" engines are costed at

- ceiling rather than target.    The average target price and ceiling price
  for each engine over the first thre, p optional lots are about $800,000
  and $l,lOO,OOO respectively,   or a dffference of $300,000 per engine.
  This would amount to a difference of $600,000 per aircraft   (2 X $300,000)
  rather than the $800,000 you suggest.         ' .
       What additional costs would be incurred at that time
       because a restructured  '!B" engirae production contract
       would have to be negotiated?
       We do not know the answer to this     question.
       What are the costs, contractual     and reprogramming
       amects of the F-14A ermines?
       The initial    quantity of engines for use in production units of
 the F-l&A was procured under a fixed-price-Fncent%ve-successive-targets
 contract awarded in February 1970. This contract covered the Navy's
 calendar year 1971 buy of "A" engines (37 engines) as well as of several
 other types of Pratt & Whitney engines. The initIa1 unit target price
 for the "A" engines was about $715,500. This contract has been negated
 because the Navy subsequently decided to buy fewer than the minimmu
 quantities   specified in the contract.    New prices for this buy must
 therefore be negotiated.
        In June 1971 the contractor proposed aunit price of approximately
  $977,000 for the 1971 buy of "A" engines. We were provided with cost
  Fnfomation showing that the average unit cost of this buy was about
  $1,000,000.   The contractor attributes the cost growth to a change in
  accounting, to a reduced business base and to a rise in material costs.
  The accounting change and reduced business base are discussed further
       The 1972 buy of 67 engines w+asincluded in a contract awarded in
  January 1971. Again, the contract type is fixed-price-incentive-
  successive-targets.   Initial target prices have not been established.
  The contract provides, however, for provisional billing    prices of
  $1,150,000 per engine.
        In June 197lthe Navy reprogrammed funds (subject to congressional
  veto) amounting to $39 million from other programs to cover cost growth
  on "A" engines. Approximately $7 million of this amount is related to
  research and developonent. The remaining $32 million is applicable to
  production, including over $5 million for smres.    The same reprogreming
  action included amounts for other Pratt & Whitney engines.
       About 63 percent of the cost growth at Pratt 8 Whitney was
 described in the reprogramG.ng document as being applicable to decreased
 engine production levels and to unanticipated  inflation.  The remaining

                                                                      - 9-
37 percent was attributed    to the accounting change previously mentioned.
Details concerning the reduced business base and increased inflation
are not provided in the reprogreaming document. The accounting change
is said to result in a more precise identi,ficatfon      of costs by engine
type-   Under  the old  system certain direct   labor and  material costs
tended to be averaged over all types of engines produced by Pratt &
Whitney. Under the new system relatively       new engties such as the "A"
engine till   bear a larger share of costs.     ThIsaccounting    changewas
described as being at the instigation     of the Government.
        Since "A" engines are being procured on an annual basis,as is
custonaary   for aircraft   engines, the reduced business base and high
inflation    rates are likely to have a continuing effect on prices.    IIn
view of the $977,000 unit price proposed for the 197% buy and of the
indicated unit price of $1.15 million for the 1972 buy, the $1.9 tilliOn
included in the current Navy estimate for two engines for each airframe
will not be sufficient.       (See enclosure V.T
      To what extent are avionics costs firmly      tied
      down under existing contracts?
      Most production avionics for the complete F-14 program are not
covered by definitized    contractual agreements. However AWG-9weapon
control system production is covered by not-to-exceed ceiling price
options in a definitized    prototype production contract.     The AWG-9
accounts for about 85 percent of the total F-14 av%onics flyaway unit
cost. Practically     all of the other avionics are "off-the-shelf"   items
which are used on various other Navy aircraft.
      The contractual arrangements for the AWG-9are similar to those
for the airframe in that ceiling priced multi-year production lot
oqtions have been provided.     The prototype production contract for the
AWG-9provides for seven annual lot options beginning with fiscal year
1971. Like the airframe contract the AWG-9 option provision specifies
maximum and mininaun quantities   for each year and provides a formula
for determining the applicable ceiling price for any selected option
      You lndicated that the AWG-9contract is a fixed-price   incentive
contract with successive reset provisions.   The prototype production
contract provided for a single target price reset.    Only the prototype
effort target price was to be reset, and the production lot options,
provided for in the same contract, were not subject to the reset
      Is the Navy making a should-cost   study of
      the AWG-g?
     The Navy advised us that it is not making a should-cost,study
with respect to the AWG-9.

                                                                      - 10 -
     What are the increases in AWG-9 ceiling prices
     per unit as a result of reduchng the quantity
     for a 301 aircraft  purckase?

      Under'the option provision, the average AWG-9unit ceiling price
could range from $1.597 million to $2.511 million based on maximum
versus minimum quantity seven year programs (889 and 285 systems
respectively).   Program periods of different        lengths and quantities
could have substantially     different    average unit ceiling prices.      For
example, the AWG-9 program to correspond with the 301 F-14 program
which you mentioned, would extend through only ffve option periods
under the AWG-9 contract and would have an average unft ceiling price
of $2.1milbion.     The differences between the above unit prices are
the effect of quantity variations        and do not constitute cost growth.
The Navy's estimate for the average AWG-9unit target price, based on
301 F-14 systems, is $2 million of the $2.3 million avionics estimatep
and based on current agreements and projections,          this estimated unit
price appears to be realistic.         (See enclosure V.)
      The unit prices above are the average flyaway prices and include
hardware production, engineering-type   services, and allowances for
engtieering change proposals and expected zMIat%on.      Not included in
this price are spares, provisioning   services, support services and
      Cknmnencingwith the fiscal year 1973 (third option) procurement,
adjustments to ceiling prices may be applied for prospective options
if the actual inflation  exceeds the rates provided for in the contract.
Determinations of abnormal inflation  are to be based on da;ta published
by the Department of Labor2 Bureau of Labor Statistics,   and till  occur
if the labor index increases at other than 5 percent a year, plus or
minus 4 cents, and the material index increases at other than 2 percent
a year, plus or minus one point.'-
       The Navy exercised the first AWG-9 production option in October
1970, for a quantity of 38 systems. In exercising the option the con-
tractor was authorized to proceed with production under the option
ceiling price limitation.    As of August 1, 1971, a definitive target
price for the first option lot had not been negotiated.
      The Navy has also notified the contractor that it intends to
exercise the second production option, as scheduled, in October 197l
for a quantity of 50 AWG-9*s (above the minimum option quantity).
     For both of these options the contractor has submitted price
proposals for target prices below the option ceiling @rices. The pro-
posed unit target price for the first option was $2.79 million.    The
unit ceiling price for the quantity purchased under that opt%on was
$3.04 million.   Relative to the second option the proposed unit target
price was $2.10 million whereas the ceiling price was $2.36 million.

                                                                          - 11 -
        Documentation which we examined indicates that the contractor is
generally meeting cost objectives on the AWG-9 prototype production
effort.     Data also showed that deliveries  of these units are being
made on schedule. The regular production unPts also appear to be on
schedule and to be EeetIng cost objectives.
     What are the increases in other
     The carrier aircraft  inertial navig,ation   system (CALMS) is the
second most costly aviontcs subsystem.
       CAIN3 production is under fixed-price  options to the development
contkt     (options for ffscal years 1971. and 1972). We understand the
contractor has overrun the target cost for the development effort and
has experienced costs in excess of the option prices on the two produc-
tion lots, which together provide for 37 CAIN3 sets. The average con-
tact price of these sets is $53>477 each.
      The Navy is currently evaluating the con-i$ctorts   response to a
request for quotation for follow-on production.     We were informed that
the price proposed for mInUum quantities WBS$86,121 per set. We were
advised by a Government official   at the supplierss plant that although
lower costs per set could be expected for higher quantities,     the price
would not be as low as the current prices.
      The text of your speech contains the comment that internal Navy
cost projections  for the total avionics pa&age have jumped from
$2.6 million to $4.3 million per plane during the last year. The P-14
Project Manager denies this.    Ee states further that all svionics
equipment is on target and is projected to remain so.

     for spares and support it-s?
      The SAR estimate for spares based on 463 production units shows
$82Q million.    (See enclosure V.) This was a very early estimate pre-
pared in 1968 before the prime contract wss awarded. The March 1971
estimate based on 710 productfon units shows $833 million for spares.
We inquired as to why there was not a greater difference between these
two cost figures since they were predicated on substantially   different
planned aircraft   buys. The individuals we discussed this matter with
indicated that they were unable to discuss the early estimate since
they no longer had the necessary domentstion.      We were told that the
F-14 spares and support estimates had been subjected to "special analyseljl'
which resulted %Bdownward adjustments.     In the case of smres the
adjustment GELSapparently substantial.    The Navy termed this s "scrubbing"

                                                                     - 12 -
process.  This event occurred in mid-1969, and was performed, we under-
stand, at the instigation  of the Deputy Chief of Naval Operations (Air).
The Harch 1971 estimate based on 71.0 aircraft  and the current estimate
based on 301 production units reflect these-adjustments.
       The scrubbed estimates were predicated on the elimination  of two
Havy installations   as base support sites for the F-E4 aircraft.   In
addition, the level of planned base support at two other sites was
reduced. Also, a reduced unit flying-hours-per-month     factor was used
in the calculations.
     The estimate for spares based on a 301 aircraft  buy is $514 million.
This figure appears to be reasonable in comparison with the estimate
of $833 million based on 710 aircraft.
     The history of estimates for the support item titled   "Training
Equipment and Other" is similar to that described for initial    spares.
      The other support item is ground support equipment. As can be
seen by reviewing enclosure V, the amount estimated for this item seems
to bear a logical relationship  to aircraft flyaway costs; that is, the
amount estimated for ground support equipment has gone up as a per-
centage of flyaway costs as the planned number of aircraft   has gone
down. Because of this fact we did not review the estimate for ground
support equipment further.
     What is the extent to which prices for
     established under existing contracts?
      The estimates for spares and support items are not based on firmly
established contract prices.   The F-14 program has not reached the
point when such contracts would be placed. The pricing of these esti-
mates is based, to a considerable extent, on experience gained on prior
similar Navy aircraft  programs and on aircraft flyaway costs.  The F-4
program is considered the most similar to the F-14.

      The Navy plans to exercise option lot IV as scheduled in the
contract and, as mentioned previously,  Grummanhas advised the Depart-
ment of Defense that it will accept an order for 48 aircraft  under
lot Iv. This is the minimum quantity permitted under this option.
Grummanearlier prepared cost 'estimates of various stretchouts for

                                                                    - 13 -
 lot III.    For a 12-nconth lot IX1 stretch and a zero aircra?t lot IV
 buy, G-          estimated a lot III cost increase of $77.4 million.  This
 did not include the cost impact of a similar stretchout of the aircraft
 engines and avionics and was premised on the purchase of 60 aircraft
 under lot V. Other estimates prepared by'Grumman showed costs ranging
 forrrm $20 million to $107 million   for a stretchout of lot III for 6 or
  18 months.
       It should be recognized 33x3, any change which results in a buy of
 less than 48 aircraft   for lot IV would negate present contractual ceiling
 prices for that and all subsequent optional lots and would thus require
 new pricing arrangements.
      How do these estimates compare with the estimated increase
      which the GAO, on the basis of its experience with other
      aircraft programs, might expect to find?
       We do not have the information needed to make meaningful comparisons
 of the estimates to stretch the F-14 schedule with the costs to stretch
 prior aircraft  programs. However, it is reasonable 4x5assume that costs
 will increase whenever there is a schedule stretchout or other delay.
               )E               *               ++              *

      As you recognized in your Augxt 9th letter,    it is not possible
 to predict with any degree of certainty the ultimate production unit
 cost of the F-14. There are too many variables and too many unknowns.
       Our comments with respect to the cost elements comprising your
 estimate of $18 to $20 million for 301 aircraft  are presented in enclo-
 sure I. Enclosures Iv and V show current Navy estimetes of production
 unit cost.
       Enclosures II and III to th&s letter contain information which
. the contractor considers to be confidenrtial, the disclosure of which
  may be in violation  of 18 U.S.C. 1904.
      Given the tine constraints of a September 1, 1971 deadline and
 the complexity of the F-14 program, we have tried to provide you as
 much data as possible.
       We plan to make no further distribution of this letter unless
 copies are specifically  requested, and then copies will be distributed

                                                                      - 14 -
only after your agreement has been obtained or public announcement
has been m&e by you concerni.ng the contents of the report.
                                             Sincerely   yours,

                                             of the United States

The Honorable William Proxmire,   Chairman
Joint Economic Committee
Congress of the United States

                                                                    - 15-
                                     k'JALPSIS'OF PF0DUCTIONUNIT COST
                                     PBOJECTIONBASEDON 301 AIRCRAFT
                                           (Millions of Dollars)
Increased              Amount
 * cost                  of          Ciuntulative                               GAO
Factors                Increase        Total                                  Comments

Base estimate                          w.2.3        This figure is in agreement with information    provided by the
                                                    Navy when reduced by l'B1' engine related costs. See footnote
                                                    1 of enclosure IV.
Costs above ceiling      $ 1.7          U-0         About $. 5 million of this smount can be assigned to abnormal
                                                    economic escalation which will be picked up by the Government
                                                    under the contract.      The remaining $1.2 million is based on
                                                    the assumption that the Government will bear the cost of the
                                                    Grummanoverrun0      This may or may not happen, We have no
                                                    specific information    which would indicate that the Government
                                                    will assume this cost. As mentioned on page 5 of the letter,
                                                    Grummanhas advised the Department of Defense that it will
                                                    accept an order for lot IV as provided by the contract.
Airframe cost of
   the IIBrl engine             .2      u.2         The F-L@ program has been canceled, however, the Navy esti-
                                                    mated the recurring airframe costs brought about by the new
                                                    engine would have been $.l million.   In addition to this re-
                                                    curring cost there would have been about 15 million in non-
                                                    recurring production costs.  See footnote 2 on enclosure IV.
                                                    Grummanestimated a recurring cost of g-126 million.
Cost spread between
  contract target and
  6eiling for IIBtl                                 As indicated on page 9 of our letter,      this     figure   would     $
  engine                    .8          15.0        have been about $ .6 million.                                        .m
Cost to retrofit    F-L&Ats
  with l'Bl* engines        .3          15.3        The Navy estimated   roughly   the same unit      amount.    See      ii
                                                    enclosure IV.                                                         H
Cost growth on avionics      1.7   17.0   lshis amount is cited a.8 comfng from a Navy estimate.    The F-14'
                                          Pro,ject Manager denied the validity  of this figure.    He stated ,
                                          that there is no cost growth on avionics items.      On the AWG-9
                                          fire control system there has been an increase in the estimate,
                                          however, th5s increase is due to a decrease in the quantity
                                          planned for purchase (see page 11 of the letter).      In any
                                          event the increase is taken fnto consideration    in the $12.2
                                          Navy base esttite.
Additional  costs due to
schedule slippage            1.0   18.0   The Navy plans to exercise option lot IV as scheduled in the
                                          contract.    As mentioned in the letter Grummanhas agreed to
                                          accept an order under lot IV, thus, there should be no
                                          schedule slippage.     Grumman estimated a 12-month stretchout
                                          under lot III and a zero buy for lot IV would be about
                                          $77.4 million.    !lM.s is applicable to the airframe only.
Contingencies:               2.0   2cLo   We recognize that there are contingencies in the F-14 program
  Concurrency, YB" engine                 which could result in substantial    additional costs, however,
  contract default,                       we are unable to estimate the amount of such costs or to
  GFE contract defaults,                  evaluate validity  of the $2.0 million cited.
 Grumman subcontractor
   defaults                 $7.7
      Enclosures II andZII have been omitted from
this copy since they contain information       which
the contractor     considers confidential  business
data.    The public disclosure    of such data may be
in violation    of 18 U.S.C. 1905.
                                                                                                                      .   . .

                                                                  PROBUCTION UNIT COST
                                                                    COMPARISON WART
                                                                  @illions  of Dollars)

                                          Senator Proxmirels                                 Navy's                                        Navy's
                                              Estimate                                     Estimate                                       Current
                                          (54 A's,     247 B's)                        (54 A's,      247 B's)                             (301 A's)

         301 A/C                    cost              Unit   Price                                    Unit    Price                            Unit     Price

 Bose Estimate                     $3705.0           912:y                                                                                     $12.2&f
*Abn. Escl. GAC                      151.0                                                                                                        .5
*GM! cost                              363.9
    Subtotal                       T                                                                                                            12,7
  "B" Esngine Interface
 Engine Cost                           240:8
 Retrofit    "A" to "B"                                                                 76.0
    Subtotal                       ---Gd%                                           --zt@xT --z$s
 Avionics    Growth                    511.7
 No FY 72 Buy
 Contingency                           E?:.
      '"B!' Engine Contract     default
     *GFE Contract    defaults
     *GAC! Subcontractor     defaults


 24    The $ .I million   difference between Senator                 Proxmire's      base estimate     and the Navy's is attributed     by
       the Navy to the fact that the $12.3 million                    figure    reflects   amounts     included for the F-14B.      Part of
       the difference   is due to rounding.

 9     About $15 million    of this amount is nonrecurring     production                 costs.       The remainder            is recurring    costs
       of about $.l million    per aircraft  for 247 aircraft.

 * Grumman Aerospace          Corporation      (GA@) and Government-furnished             Equipment          (GFE)

                                               TO NAVY F-14 COS!T!EST!-
     u The January 1969 estimate was premised on buying all          F-l&A models.
     g The March lgl      estimate was premised on buying 66 F-14Als and 656 F-&B's*
     a/ The July lgl   estimate was premised on buying all        F&A    models.
     g &es not include     a $39 million   reprogremming action      for F&A    engines.
     g Does not include    amounts to be negotiated    for stretch-out     of F-14B engine development schedule.
     q The original estimates were higher,      but Navy offIciala       ltscrubbedw those estImatea down to
       the smount shown, $833 tillion,
     fl This amount ($1545 million) assumes the original ceiling          prices established   with Grwman
        Aerospace Carp, in February 1969 will not be renogitated          upward.
     8f This amount ($702 million) protides for the AWG-9 system at or near target price while prior
        estimates were at or near ceiling price.  !Che AWG-9 accounts for about 85 percent of the
        electronics cost in the F-14,
 y This amount ($5212 million)  inclxdes a protision  for abnormal economic inflation               while prior
   estimates do not provide fctr abnormal economic inflation.
ld      This amount ($357 million)   provzkdes for higher than anticipated support costs for the special
        ground support equiment for the AWG-9, !Ihe special grwnd support equiwent for the AWG-9
        accounts for about $l6C million.
                                           TO NAVY F-14 $XSTESTIMATES
 g The January 1969 estimate was premised on buying all           F-14A models.
 d The March 1971 estimate was premised on buying 66 F-l&A's           and 656 F-14B's.
 9 The July 1971 e&mate       was premised on buying all      F-&A models.
 g lSoes not include   a $39 tillion   reprogrsmming action      for F-14A engines.
 y   &es not include   amouuts to be negotiated    for stretch-out     of F-14B engine development schedule.
 g !i!he original estimates were Mgher,     but Navy officials       "scrUbbed" those estimates    down to
   the amount shown, $833 million.
 u This amount ($1545 million) assumes the original ceiling           prices established   with Grmnman
   Aerospace Corp. in February 19% will not be renogitated            upward.
 g This amount ($702 million) provides for the AWG-9 system at or near target price while prior
   estimates were at or near ceiling pr%ce, The AWG-9 accounts for &out 85 percent of the
   electronics cost in the F-14,
 g This mount ($5212 million)  includes a protision  for abnormal economic inflation              wh$le prior
   estimates do not provide for abnormal economic jtnflationo
1OJ ThAs amount ($357 million)   protides for h3gher than anticipated support costs for the special
    ground support equipment for the AWG-9. The special ground support equiment for the AWG-9
    accounts for about $l60 million.