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High Costs Lead Navy to Cancel Lockheed Coastal Vessel

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By Renae Merle
Washington Post Staff Writer
Friday, April 13, 2007

The Navy cancelled the second of two ships to be built by Lockheed Martin yesterday, ending intense negotiations over the vessels' growing price tags and continuing efforts to keep the cost of weapons programs under control.

The decision comes three months after the Navy ordered the Bethesda defense contractor to stop work on the second coastal combat ship after finding that the first would cost $350 million to $375 million, more than 50 percent over its original price. Last month the Navy said Lockheed could save the ship from cancellation by agreeing to take on more of the financial risk, including picking up the tab for future cost overruns.

But after about four weeks of negotiations, which didn't end until yesterday morning, the two sides remained far apart.

"The price they were offering us was unaffordable to the Navy," said Adm. Charles Goddard, head of the Navy's ship programs. "The Navy remains committed to cost control."

The decision comes as the Pentagon is facing increasing pressure from Congress about chronic cost overruns in weapons programs. The Navy, struggling to pay for the 313-ship fleet it wants, is pursuing a tougher strategy that holds contractors responsible more often for increased costs.

"While this is a difficult decision, we recognize that active oversight and strict cost controls in the early years are necessary to ensuring we can deliver these ships to the fleet over the long term," Navy Secretary Donald C. Winter said in a statement.

In a statement, Lockheed chief executive Bob Stevens said the company was disappointed by the cost increases and with the breakdown in negotiations.

"Our team is understandably frustrated that, having invested nearly three years of dedicated effort and significant corporate resources to bring [the first ship] to within 20 percent of completion, we will not have the opportunity to apply lessons learned to a second ship [and] see this program through to conclusion," Stevens said.

The contract cancellation also reflects an environment of budget tightening as the cost of wars in Iraq and Afghanistan continues to rise, industry analysts said. Over the last few years, "it's been such a permissive budget environment, programs got away with failures for longer than they should have," said Brett Lambert, a defense industry consultant. "That is changing. The realities are coming home."

Lockheed and General Dynamics of Falls Church were chosen three years ago to build what would be the first four of 55 littoral combat ships -- small, fast-moving craft that would operate close to shore, hunting submarines and destroying underwater mines. A key element of the plan was turning a commercial ship design into a relatively cheap combat vessel.

But Navy officials have acknowledged that the program suffered from excessive optimism and a contract structure that did not encourage Navy or company officials to determine the real cost of the ships. The cost of the first ships from Lockheed and General Dynamics is now expected to exceed initial estimates by 50 to 75 percent. So far, General Dynamics' version is still cheaper than Lockheed's, Navy officials have said, but if it breaches that threshold, General Dynamics could also be required to pick up some cost overruns.

Lockheed will finish building the first ship, which is 78 percent complete, and will have the opportunity to compete for future contracts under the program, Navy officials said. Yesterday's cancellation was for the "convenience of the government," which gives the company the opportunity to recoup what it has already spent on the ship.

Several programs at Lockheed, the Pentagon's largest contractor, have been criticized recently. A Coast Guard program known as Deepwater that Lockheed is managing with Northrop Grumman has faced intense congressional pressure because of design flaws in some ships. Last year, the Army cancelled Lockheed's contract for a new spy plane that developed technical problems military officials determined were too expensive to fix.


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