Cost Goals for U.S. Navy’s Littoral Combat Ship Overly Optimistic
National Defence magazine reports that U.S. Navy Secretary Ray Mabus raised doubts in recent weeks that the Navy can meet a $460 million cost cap for the Littoral Combat Ship. Mabus told lawmakers that he expects to know the answer by early fall.
But LCS’s short and troubled history suggests that Mabus’ prediction may reflect more hope than reality. The LCS has been under fire for its rising costs — from an initial estimate of $220 million per ship to price tags that nearly triple that amount.
Out of frustration with the process, members of Congress called for a $460 million cost limit and demanded that the Navy only buy these ships under fixed-priced contracts. Three congressional defense committees will be debating this issue in the coming weeks. Particularly contentious will be the determination of what portions of the shipbuilding contracts will be treated as fixed costs, and which ones will be given allowances for inflation or raw materials price increases.
Regardless of how these issues are settled between Congress and the U.S. Navy, it is clear that shipbuilders themselves have a tough time estimating precisely how much a ship will cost because the industry has not in the past worked under such strict price controls. Also complicating matters is that the LCS is a new ship, and the contractors are still trying to figure out how to build it more efficiently.
“There’s a learning curve,” said Lockheed Martin Maritime Systems & Sensors President Fred Moosally. He oversees one of the two competing teams that are vying for LCS production contracts in fiscal year 2010. Both Lockheed and General Dynamics are bidding for a three-ship contract under which the Navy will acquire the vessels for a pre-arranged fixed price. During a June 23 meeting with reporters, Moosally said that there are many variables that could affect the cost of LCS, such as securing a vendor base, work force stability, manufacturing processes, materials, and the company’s ability to procure components in advance of construction.
Moosally declined to specify how much savings Lockheed’s team could achieve because the program is still in a competition. But he said that the most important factor in lowering costs is having steady orders for multiple ships and multiyear contracts. The Navy’s budget troubles and chronic shortfalls in its shipbuilding accounts put into question if and when it will be in a position to afford large orders of LCS.
“We’re going to continue to monitor the budget process,” said Moosally. “If we can get a line up and running, stabilize the vendor base, then you accrue savings through multiyear procurements and a stabilized work force.” To do that, however, “We need to build more than one ship a year.”
Lockheed’s team was awarded a fixed price incentive fee contract in March for the Navy’s third LCS, which was named Fort Worth. The team includes naval architect Gibbs & Cox, ship builders Marinette Marine Corp. and Bollinger Shipyards.
“In shipbuilding, it’s important to have stable production runs,” said Byron Callan, a defense industry analyst at Perella Weinberg. Ship programs require a stable work force to be cost-competitive, he said. This should be a major concern for U.S. shipbuilders because it takes four to nine years for entry-level yard workers to build basic competency.
Any major defense program seeking long-term stability is in trouble right now because of the fiscal uncertainty in the Defense Department, Callan said at a recent panel discussion in Washington, D.C. “Stability and predictability in design seem to be ill suited in a world that’s anything but stable or predictable.”
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