Troubles for Top Defense Vendors Deepen

The US Coast Guard has dropped Lockheed Martin and Northrop Grumman as the prime contractors for its $24 billion Deepwater modernization program. This follows upon the news that the US Navy has canceled the third Littoral Combat Ship, to have been built by Lockheed, and is considering dumping LCS-4, to have been built by Northrop.

Lockheed and Northrop reportedly will be allowed to compete for individual program contracts, but their original joint contract responsibilities will be assumed by the Coast Guard.

Deep Water has been in, well, deep water since 2002. It was to have quickly ramped-up USCG capabilities in the face of suddenly greater tasking and seriously deteriorating ships and airplanes. Lockheed was to have managed the building of 91 cutters, more than 100 smaller ships, and 244 new or rebuilt aircraft. The 2002 program cost estimate was $17 billion over 20 years. This was revised in 2005 to $24 billion over 25 years.

Right off the bat, the first major shipbuilding effort foundered in a plan to convert 49 existing 110-foot cutters into 123-foot cutters. Crews found the new hulls were buckling and leaking so badly that the ships were deemed unseaworthy and useless. As the hulls warped, the decks and bulkheads also cracked, weakening the entire ship while tearing electrical wiring and fluid and air piping systems. The new COMM and ECM suites also failed to pass muster. The conversion was canceled after eight ships had been completed. This leaves the Coast Guard down eight ships from an already aged inventory (in February, USCGC Storis [WMEC-38] was decommissioned after 65 years of service).

The Coast Guard has spent $2.3 billion to date on Deep Water.

Meanwhile, repercussions of the Navy’s anguished decision to cancel construction of Lockheed Martin’s LCS-3 are soon to be felt. LCS-1, USS Freedom, was launched in September, 2006, and is still under construction despite its price rising from $220 million to perhaps $400 million by the time it is commissioned. Northrop’s LCS-2 – a distinctly different design from that of Lockheed -- is also under construction and is having similar cost overrun problems. The LCS fleet is to provide 55 ships to meet the needs of littoral and asymmetric warfare, neither of which have been strengths of the US Navy since the War of 1812.

For their part, Lockheed and Northrop are blaming Navy mismanagement and interference for the greatest part of cost overruns. They claim that ever-changing Navy requirements make it impossible to meet budget targets. The Navy’s decision to pull the plug came after more than a month of press releases and negotiations in which the government sought to change the contract for LCS-3 from a cost-plus to a fixed-cost-plus-incentive model. In March, Navy Secretary Winter announced that the Navy would cancel further construction unless both the Navy and the vendors could agree on a new contract with strict cost controls. In March, Winter announced that more than $400 million authorized for the fifth and sixth ships would, instead, be used to cover cost overruns on the first four. In January, Winter had stunned the industry by issuing a 90-day stop-work order on LCS-3.

The Navy’s goal of a 313-ship fleet – up from 273 at the moment -- is looking increasingly unreachable. Add to that the concurrent problems with replacing the P-3 fleet with the P-8, building DDG-1000 and CG(X), and building the SSN-774 class, and the outlook for the fleet remains cloudy.

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