How We Tamed the F-35’s Spiraling Costs — and Created a Model for Controlling Waste

My late friend Sen. John McCain once called me to complain about an inexcusably large cost overrun on an aircraft carrier. “Ash,” he said, “how am I supposed to support the DOD budget the way you want when the voters are reading about this kind of thing?”

McCain’s words stung, but he had a fair point. The Department of Defense asks for and receives nearly three quarters of a trillion dollars every year to defend America. Contending with multiple threats from China, Russia, Iran, North Korea, and terrorists can’t be done on the cheap. But it’s unreasonable to expect taxpayers to fork over that amount of money unless it’s managed responsibly.

As someone who served in the Pentagon’s top three jobs – as the Under Secretary for Acquisition, Technology, and Logistics, the official responsible for buying weapons and sealing contracts; and later as the Deputy Secretary and finally as Secretary of Defense – I’ve seen the good, bad, and ugly of defense program management. The good news is that, contrary to old tales of $640 toilet seats and $435 hammers, discipline in the DoD’s spending and procurement has come to be the rule and not the exception. How America’s largest bureaucracy got there is a story of tough accountability, right incentives, and tenacious focus on the needs of troops themselves.

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The poster child for poor program management in recent Pentagon history was the F-35 joint strike fighter (JSF). In 2009, when I became the “acquisition czar,” development of the plane was taking twice as long, and costing twice as much, as it was supposed to. The entire effort – and thus America’s air superiority for decades to come – was in jeopardy.

Righting the jet fighter began with a frank conversation. I called the contractor into my office to discuss the program on a Saturday morning – a clear signal of my annoyance. Seeing his nonchalance about cost and schedule overruns, I walked out of the meeting. I quickly fired the Pentagon program manager and revoked $416 million of the contractor’s fee. I then removed the more complex Marine Corps version of JSF from the critical path so the easier Air Force and Navy versions could go forward.

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But the critical step was not to confront but to align the Pentagon’s incentives with those of industry to control costs in production. Nearly 2,500 of these planes were to be built for the U.S. military and more than 1,000 for allies, so costs had to be controlled. To do that, we developed a contract in which the company could keep half of every million dollars saved under the agreed target cost; the other half was returned to the Treasury. On the other hand, for every $1 million over cost, the contractor was responsible for half – and the full amount for any overrun exceeding 20 percent.

This structure got taxpayers and contractors working toward the same purposes. The result? JSF production costs at last began to level off and then decrease. Our military got game-changing technology and our economy got critical exports. The JSF may well be the last manned fighter jet ever built. But it will dominate the U.S. arsenal and the global marketplace for several decades.