Cost Growth Leads to Stop-Work on Team Lockheed LCS-3 Construction (updated)
In its November 2006 briefing “Modularity, the Littoral Combat Ship and the Future of The United States Navy” [PDF format]. Washington think-tank The Lexington Institute offered an in-depth look at the LCS as the Navy’s most transformational program, and the key challenges that must be overcome in order to make the LCS program successful.
One challenge was cost-growth, and it has now come firmly home to roost for Team Lockheed. DID reported the January 12, 2007 stop-work order on LCS 3, and we will continue to update this article as new developments arise. In the latest development, the Navy and Lockheed could not come to agreement – and so the contract for LCS 3 has been terminated part-way through construction. The General Dynamics/Austal team will continue with construction of LCS 2 & 4, but a warning has been issued in that direction as well…
A January 14, 2007 Navy release says the contract for LCS-3 was awarded June 26, 2006, for $197.6 million, and the ship is being constructed at Bollinger Shipyard in Lockport, LA. Current cost projections for the LCS-1 are over $300 million.
The US Navy says they are “working closely with the contractor to identify the root cause of the costs growth… [and] reviewing the overall acquisition strategy for the LCS program…”
DID has also updated our FOCUS Article concerning the Littoral Combat Ship program. The General Dynamics/Austal team’s trimaran design, currently under construction as LCS 2 Independence and LCS 4, is unaffected by this order.
Key Events & Updates:
April 13/06: It was definitely Friday 13th for Lockheed Martin, as the US Navy announces that further work on LCS-3 will be canceled:
“The Navy announced in March that it would consider lifting the stop-work order on LCS 3 if the Navy and Lockheed Martin could agree on the terms for a fixed price incentive agreement by mid-April. The Navy worked closely with Lockheed Martin to try to restructure the agreement for LCS 3 to more equitably balance cost and risk, but could not come to terms and conditions that were acceptable to both parties.
The Navy remains committed to completing construction on LCS 1 under the current contract with Lockheed Martin… General Dynamics’ ships [LCS 2 & LCS 4] will continue on a cost-plus basis as long as its costs remain defined and manageable. If the cost performance becomes unacceptable, then General Dynamics will be subject to similar restructuring requirements.”
April 12/07: Lockheed Martin Expresses Disappointment Over U.S. Navy Termination Of Littoral Combat Ship Contract. Lockheed Martin Chairman, President and Chief Executive Officer Bob Stevens:
“We committed to a course of action that was intended to break the long-standing cycle of first-in-class ship cost growth and, while achieving several important program objectives, did not meet that goal. Although we successfully maintained the ship’s schedule and improved on its design, cost growth also occurred. Our team is understandably frustrated that, having invested nearly three years of dedicated effort and significant corporate resources to bring LCS 1 to within 20 percent of completion, we will not have the opportunity to apply lessons learned to a second ship, see this program through to conclusion…”
Stevens said a Lockheed Martin team worked diligently over the past month to develop a proposal that responded to the Navy’s request to restructure the contact for the second LCS ship. “We believe that our proposal was fully consistent with the Secretary’s stated desire to bring the benefits of increased competition to shipbuilding while holding the Navy’s industrial partners accountable for cost performance within their control,” he stated.”
Note the addition of “within their control.” DID has discussed design modifications during construction and their effects on cost, and revised US Navy standards played a role in the LCS’ build cost escalation.
March 14/07: Mach 14/07: Navy revises LCS program plan. Based on a comprehensive two-month review of the Littoral Combat Ship (LCS) acquisition program, Secretary of the Navy Donald C. Winter announced that he is prepared to lift a previously issued stop work order for construction of Lockheed Martin’s LCS 3 – under a renegotiated contract.
The new decision will also affect the General Dynamics/ Austal team as the US Navy unveils its revised plan for the LCS program – but as the ship’s cost rise toward the price tag for other navies’ major vessels, the LCS’ one area of inflexibility could be its downfall. See full DID coverage.
March 8/07: According to a MarineLink report, US Navy Chief of Naval Operations Adm. Michael Mullen said that Lockheed Martin Corp. could lose part of its Littoral Combat Ship contract, depending on the results of a pending review:
“The Navy is on course to decide in the next few weeks whether to move to termination or to continue the program for LCS 3 according to reports… The service hasn’t yet decided whether it wants to settle on just one design or keep competition through the life of the program.”
Thanks to reader Lee Wahler for the tip.
Jan 30/07: DefenseTech reports that Capt. Donald Babcock, the Navy’s LCS program manager, was relieved of his duties Jan. 29th by Rear Adm. Charles Hamilton – who is also being reassigned.
“The Navy issued a stop work order Jan. 12 to Lockheed Martin Corp. Maritime Systems & Sensors unit, Moorestown, N.J., for the construction of the third Littoral Combat Ship (LCS). This stop work order will take effect immediately, and is for a period of 90 days. The stop work order was issued because of significant cost increases currently being experienced with the construction of LCS-1 and LCS-3, under construction by Lockheed Martin. “I determined that at this point in time it was critical to stop work on LCS-3 to assess the LCS program and ensure we understand the program’s cost and management processes before we move forward. It is essential that we complete LCS 1 and get it to sea so we can evaluate this new ship design” said Secretary of the Navy Donald Winter [note DID's coverage of his key 2005 speech].”
(Originally published January 16, 2007)