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Block Buy Contracts Present Potential Savings but Some Risk

• Potential savings from a BB contract for F-35 lots 12–14 (during fiscal years 2018–2020) are approximately $2.1 billion for the air vehicle and engine combined, 4.9 percent of the cost of annual contracting for these lots.
• This estimate is in the range of savings estimated for historical fighter programs that employed multiyear contracts.
• Using alternative "hybrid" BB constructs, the estimated savings for these constructs is reduced by approximately 10 to 20 percent, compared with the full BB approach.
• This analysis focuses on potential cost savings from an F-35 BB contract and does not include a formal risk assessment, but it provides bounding estimates that will inform relevant business decisions going forward.
• Potential areas of risk may include the availability of early economic order quantity funding, configuration changes, and aircraft quantity reductions.

In 2015, the United States and partner governments in the F-35 program began considering the use of a three-year block buy (BB) contract for procurement of F-35 aircraft during fiscal years 2018–2020. A BB contract (which is similar to a multiyear procurement contract) can save money by providing prime contractors and their suppliers the incentive and ability to leverage quantity and schedule certainty and economies of scale, thus generating savings that would not be available under three annual single-lot contracts. This report presents an assessment of potential cost savings available through a BB contract for F-35 procurement. The research independently assessed savings for the aircraft's air vehicle and engine, consistent with the way contracting is handled in the program, and focused on recurring flyaway costs. For the air vehicle, the estimated savings is $1.8 billion, or 5.2 percent of the cost of contracting annually for three lots. For the engine, the estimated savings is $280 million, or 3.8 percent of the cost of contracting annually. Thus, the combined BB savings is approximately $2.1 billion, or 4.9 percent of the cost of annual contracting. These savings are estimated relative to an annual contracting baseline computed by RAND and are roughly comparable to those estimated for historical multiyear contracts for other fighter aircraft.

• Chapter One

  Introduction

• Chapter Two

  Estimating the Annual Contracting Cost Baseline

• Chapter Three

  Assessing Potential BB Savings

• Chapter Four

  BB Savings Estimates

• Chapter Five

  Hybrid BB: An Analytic Excursion

• Chapter Six

  Conclusions

• Appendix

  BB and MYP Contracting