Lockheed, based in Bethesda, will continue to provide and install electronics, which account for about 55 percent of the missile launcher’s production cost, said Toan Nguyen, the Navy’s program manager for the system. BAE’s portion accounts for the other 45 percent.
“We are the system integrator now,” Nguyen said in an interview Sept. 12. “All the work done before by the contractor, now the Navy team will have to do it.’ ”
The Navy has spent about $1.5 billion on the system’s production contracts since 2004, Stephanie Collins, a Navy spokeswoman, said in a Sept. 15 e-mail. The system has been ordered for 112 U.S. Navy ships to launch missiles including Tomahawks and Evolved Sea Sparrows, both made by Waltham, Mass.-based Raytheon, she said.
The shift to in-house integration will result in significant savings because the Navy will avoid fees Lockheed charged to acquire equipment and labor costs it billed for overseeing BAE’s work, Capt. Timothy Batzler, the Navy’s major program manager for surface ship weapons, said in a Sept. 12 interview.
The Navy estimates it will save more than $1 million per launch module, Collins said in an e-mail. The Navy has ordered 1,336 shipboard modules since the system was deployed in 1986, she said.
Part of a trend
The new acquisition strategy follows principles for achieving “better buying power” outlined in a memo to acquisition officers last year from Ashton Carter, at the time the Pentagon’s top weapons buyer, Nguyen said.
Program managers “should be scrutinizing every element of program cost” and “dissecting overheads and indirect costs” to find ways to improve affordability, according to the September 2010 memo from Carter, who was confirmed Sept. 23 as the deputy secretary of defense.
Other military acquisition programs could see similar changes as contracting officers respond to Carter’s directives, said Loren Thompson, a defense analyst at the Arlington-based Lexington Institute, in a Sept. 19 interview.
“All the services are under pressure to reduce overhead by removing fee-on-fee arrangements. The question is whether the government understands all the skills and costs associated with taking over the task,” he said. “You can’t simply assume they will understand all the technical issues that come with being a systems integrator.’’
If the Navy’s procurement strategy for the missile launcher becomes a trend throughout the Defense Department, “it will reduce the profitability of major defense contractors who counted on systems integration to be one of their core competencies,” he said.
A shift toward government-led systems integration could create opportunities for smaller contractors that focus on services, said Todd Harrison, a defense analyst at the Washington-based Center for Strategic and Budgetary Assessments.