Long Range Strike Bomber Driven by Industrial Concerns

The Pentagon is seeking to add a new bomber to the current fleet consisting of B-52, B-1, and B-2 aircraft. This "Long Range Strike Bomber," or LRSB, will be the next big Air Force acquisition after the Lockheed's F-35 Joint Strike Fighter and Boeing's KC-46A Air Refueling Tanker. The future of the U.S.A.F. is increasingly being dominated by these three manned aircraft, and these aircraft alone.

The initial price-tag for the LRSB is expected to be $550M per copy. As Mark Thompson writes, that doesn't provide the whole story:

"Like any bureaucracy dedicated to expansion, the $550 million sum is the lowest figure the Air Force number can say with a straight face [and] represents what is known inside the military as the “APUC,” or average procurement unit cost. What’s important about that figure isn’t what it includes, but what it leaves out.

Northrop Grumman LRSB Concept Drawing

First of all, the $550 million price tag is based on buying between 80 and 100 of the bombers. Driving the price per plane down to $550 million requires economies of scale that only come over such long production runs. Early aircraft off the assembly line are very expensive, as the radar-eluding B-2 “stealth” bomber made clear. “Cost of Stealth Bombers Soars to $450 Million Each,” the Washington Post reported breathlessly on its front page nearly 30 years ago, in May 1988. Few believed at the time that a bomber could cost so much. But that was for a planned buy of 132 planes. The Air Force ended up buying only 21. The B-2’s ultimate price: $2.1 billion each.

Second, the $550 million doesn’t include the research and development needed to actually build the plane. Without the R&D, the plane would truly be stealthy—because it wouldn’t exist. Experts inside and outside the Pentagon estimate the new bomber’s development will add between $20 billion and $25 billion to the Pentagon’s projected $55 billion procurement price tag for 100 planes.

Third, the $550 million price is based on the value of a 2010 dollar. That’s 12 years before the first pair of bombers is slated to be delivered. Accounting for inflation since has already driven the cost per plane close to $600 million, and that number will keep rising in the future. Delays in the plane’s production schedule will push it even higher.
Finally, the $550 million estimate doesn’t include anything for the all-but-certain cost overruns a weapons program like this will experience. No one can say how much unanticipated costs will add to the bomber’s ultimate price, but one can declare with certainty that it won’t be zero.

Todd Harrison of the independent Center for Strategic and Budgetary Assessments think tank estimates the bomber program’s true cost—assuming 100 planes and no cost overruns—at $90 billion. That’s $900 million a copy."

That is all certainly correct and truly astonishing. I will not debate the utility of the LRSB, though I am a skeptic of its strategic importance. Rather, I will rather talk to the industrial concerns.

The competition for the LRSB contract is between Northrop Grumman (who went so far as to advertise during the Super Bowl where 99.9999% of viewers held no sway at all) and a teaming between Lockheed Martin and Boeing.

Let's consider who will win.

As stated earlier, Lockheed has the F-35 which will assure hundreds of billions in revenue over the next several decades. After heated competition and scandles, Boeing won the KC-46, which, despite being more than $1B over budget in R&D, kept the 767 line in production and assures a significant business base. Northrop produced the B-2, but currently has no new manned aircraft contracts (though they are a big player in unmanned aerial systems, or UASs).

So, an unavoidable consideration is whether the government wants to keep Northrop in the airframing business or not. Does the U.S. need three attack aircraft manufacturers, or just two?

If Northrop loses, they're pretty much out. If Lockheed/Boeing loses, then Boeing could also be out of that space. Boeing only has some light production in the F/A-18 left, but there's no chance they are out of airframing all-together.

Lot's of speculation surround the outcome. Here's my take:

There are a lot of moving parts, but the result probably depends on how Pentagon leadership "feels." If they are highly uncertain about future budgets, they will probably assume that everyone will benefit from further consolidation and economies of scale by awarding Lockheed the contract. If they are unhappy with the F-35 and seek to curtail the program, Lockheed will also win the LRSB as payoff. If they believe there is enough dough to spread around for all, then Northrop will win.

Defense market competition is really nothing of the sort, more of a trading of contracts to keep the status quo. Despite past experience with the B-2, and unsavory recent performance from Lockheed, Northrop will probably lose. The consolation prize will be assured massive subcontracts to Northrop in their core competencies (C4ISR and cyber). Northrop's website doesn't even include aerospace as a major business unit!

What other major considerations are there? One would hope engineering design and production feasibility would be the overriding concern...

The Cost Estimator's Problem: Network Effects

This will provide a brief introduction to defense cost estimating and the broader economic problem of production networks that is not often addressed. 

The government, of course, is not a vertically integrated supplier of defense. It procures weapon and information systems almost exclusively from the private sector creating a relatively thin market. Government agents want to attain advanced capabilities from at a “fair” price. Thus, while expecting efficient and innovative production, they prefer suppliers to earn low and stable economic profits. Due to the scale and complexity of many defense acquisitions, government agents also prefer transparent program oversight because the direction of resources cannot often be precisely specified during contract negotiations.

The DOD’s problems are then two-fold: 1) monitoring performance on long and variable contracts; and 2) return value to the taxpayer by alleviating the asymmetric information problem for future procurement decisions. EVM reporting intends to address the former issue while CSDRs the latter. When considering the second case, it is clear that the government requires insight into both the intensity and mix of resources used to develop certain system functionality (i.e. WBS element). An important concern to the estimator, regardless of data quality or accessibility, is that future cost outcomes are contingent on the performing contractor’s current and future workflows. This is caused by joint production of multiple goods with large common costs, making it difficult to forecast the marginal cost of any one good because prices depend on production across all goods.

Industrial Base Considerations in a Defense System Cost Estimate

Since a firm will seek maximize efficiency at the level of the business unit, it is difficult to understand their net position by observing indirect rates for any given contract. Figure 1 below depicts some business base considerations in an estimate. The total facility workflow has been between theoretical thresholds represented by two horizontal dash lines. The top line represents the amount of workflow which necessitates a scaling up through major fixed investments. A workflow closer to, but not exceeding, this top line represent lower indirect rates because many of the same indirect costs are spread among more direct work. The bottom line represents the point which a downsizing of fixed investments is required, and workflows closer to this threshold represent higher rates as the same indirect costs are spread across less direct work. It would be difficult to say what “fair” indirect rates would be when observing Program A and historical analogies in a vacuum. Luckily, DCMA does much of this analysis and cost estimators often strip the historical indirect costs to apply their approved rates.

More on this later as there is much to unpack and extend.