South Korea may cancel a contract with BAE Systems for modernisation of the national air force's KF-16C/D Block 52 fighter aircraft fleet.
BAE received a foreign military sales contract from the US in 2013 to upgrade the Republic of Korea Air Force's ageing fleet of 134 KF-16 fighters in two phases at a cost of KRW1.75tn ($1.7bn), according to Airforce Technology.
According to local reports, the US Air Force added on significant risk 'reserves' to proposed costs.
The cost increase could force South Korea to reopen the competition as the existing rules allow for only a 20% cost rise in weapons programmes, the source added.
South Korean Defense Acquisition Program Administration spokesman Baek Youn-hyeong said: "We are currently in official talks with BAE.
"If the negotiations proceed smoothly, we will go ahead as planned. If they break down, we will consider changing the contractor for the upgrades.
BAE spokesman Brian Roehrkasse said the company is committed to the terms of the firm-fixed price contract initially negotiated, despite disagreements between the USAF and South Korea about the overall cost.
"Negotiations continue on the overall programme, and we are hopeful that a resolution will soon be reached," Roeherkasse said.