Lockheed Asked to Fund Cost Overruns
Fixed-Price Contract With Navy Would Salvage Program for Coastal Combat Ships

By Renae Merle
Washington Post Staff Writer
Friday, March 16, 2007

A Lockheed Martin ship program will escape cancellation if the Bethesda contractor takes on more of the financial risk, the Navy said yesterday, pressuring the company to pick up the tab for future cost overruns.

Two months ago, the Navy ordered Lockheed to stop working on the second of two coastal water combat ships after finding that the vessel would cost $350 million to $375 million, instead of $260 million. Navy officials said the company must sign a new fixed-price contract by next month and agree to pay for any future cost overruns, an unusual provision for such programs. The stop-work order would be lifted after the contract is signed.

"If we're unable to reach a meeting of the minds, we have no choice but to terminate" the deal for the second ship, Navy Secretary Donald C. Winter said.

The Navy's ultimatum comes as cost overruns in weapons programs and this program in particular have attracted the attention of Congress. Lockheed and General Dynamics of Falls Church were tapped three years ago to build what would be the first of 55 small, fast-moving ships that would operate close to shore, in littoral waters, hunting submarines and destroying underwater mines. General Dynamics has said its first ship is about half finished. A key part of the program was turning a commercial ship design into a relatively cheap $220 million combat vessel.

But the program suffered from "excess optimism" and a contract structure that did not encourage Navy or Lockheed officials to determine the realistic cost of the ships, Winter said. Both companies are now expected to report cost increases of 50 to 75 percent above initial estimates, Navy officials said.

"If General Dynamics experiences comparable growth [to Lockheed's], we will follow a similar path," Winter said. "We will be watching General Dynamics very closely."

The Navy has developed a new plan for the program that includes more oversight and cost-control measures, Navy officials said. The procurement of more ships would be delayed as the Navy shifts money to finishing those already in production, officials said. The restructuring plan also includes choosing a single ship design by 2010, which could lead to one of the companies eventually being eliminated from the program.

Lockheed plans discussions with the Navy about the deal, said Craig R. Quigley, a Lockheed Martin spokesman. Those discussions would also help the company to "better understand their proposal and to identify a solution that best meets the interests of all parties," he said.

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