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Explaining the LCS Multi-ship Buy

Lockheed Martin Corp. and Austal USA each received a fixed-price incentive contract for the design and construction of a 10 ship block-buy, for a total of 20 littoral combat ships from fiscal 2010 through fiscal 2015, the Navy announced on Dec. 29, 2010. This was a departure from the previously announced plan to select just one of the two competing variants to be the Navy’s choice for LCS.

Cost overruns on the two lead ships and rising costs, which caused the cancellation of the second pair ships in the program, threatened cancellation of the program itself. Then the Navy said it would “down-select” to a single variant. This most recent competition, for which the winner was expected to build 10 ships – and ultimately the opportunity to build more of that design, up to the total sought by the Navy of 55 ships – drove market improvements to every aspect of industry’s proposals and performance on this program to such an extent that the Navy sought and received congressional approval to award two 10-ship contracts, Navy officials said.

“The Navy has awarded Lockheed Martin Corporation and Austal USA each a fixed price incentive contract for the design and construction of a 10-ship block buy for a total of 20 LCS ships from FY10 through FY15,” said Assistant Secretary of the Navy for Research, Development and Acquisition Sean Stackley in meeting with reporters to discuss the Dec. 29 contract award. “Specifically each contractor is being awarded one fiscal year 2010 ship; one fiscal year 2011 ship; and two ships in each of fiscal years 2012 through 2015.”

The littoral combat ship Independence (LCS 2) under way during builder’s trials. The Navy awarded contracts for 10 ships of each class of LCS. Photo courtesy Dennis Griggs General Dynamics

Stackley said Lockheed Martin Corporation was awarded a $437 million contract for the FY10 LCS ship, and $432 million was awarded to Austal USA for its FY10 LCS ship. “With this award we also intend to procure from each contractor their ship’s technical data package, and the award will further include additional line items for core class services, non-recurring engineering and provisioning items. When these items are added, the FY10 amount for Lockheed Martin is $491 million; and the FY10 amount for Austal USA is $465 million.”

“With this award Lockheed Martin and Austal USA will be able to begin work on LCS-5 and LCS-6,” Stackley said. “Funding for the nine additional ships for each contract will be subject to the annual budgeting and congressional appropriation.”

That’s the first ship award, Stackley said.

“The average ship target-price across the entire dual-block buy for the Lockheed Martin LCS variant is $362 million; and the average ship target-price for the Austal USA LCS variant is $352 million. These prices are in what is referred to as then-year dollars, which means they include escalation. To compare these figures against the congressional cost cap we would need to include the price of government furnished equipment, which is about $25 million per ship, for a total of about $380 to $390 million per ship at award,” he said.

“The Navy also holds a margin within our budget for government change orders, about $20 million per ship and management reserve for any other cause for cost growth over and above the target price, resulting in an average budgeted cost of about $450 million per ship across the 20 ships for these awards. By comparison, the congressional cost cap of $480 million when escalated over the period of this contract averages to about $538 million per ship. Under all circumstances the pricing for these ships falls well below the cost cap and well below the fiscal year 2011 budgeted amount, Stackley said.

The littoral combat ship USS Freedom (LCS 1) under way in the Pacific Ocean. Freedom was conducting counter-illicit trafficking operations. U.S. Navy photo by Mass Communication Specialist 2nd Class Michael C. Barton

“The total dollar value that you see in the contract announcements, excluding any option items related to second source combat systems adds up to as much as $4.07 billion for Lockheed Martin and $3.79 billion for Austal USA. It includes funding for construction of all 10 sea frames, which is part of the cost cap calculation; purchase, integration and test of selected ship systems equipment, which is also part of the cost cap calculation; class services, design services, which is not part of the cost cap calculation but provides long term engineering configuration management services, program support and technical support required in support of all ships of the LCS class. Then there are other elements not covered on the cost cap calculation, including the technical data package in a not-to-exceed amount for changes,” said Stackley.

“In total these awards represent a savings of about $2.9 billion in procurement as compared to the department’s fiscal year 2011 Future Years Defense Program budget through FY16. The savings have been reapplied to other major ship-building programs as in the Navy’s 2012 budget submission, providing significant benefit to the Navy’s efforts to increase our rate of construction and reduce costs on these other programs,” he said. “Our ability to move forward with this dual award culminates more than a year of dedicated effort on behalf of the Navy and industry, close consultation with the Office of the Secretary of Defense to stabilize and solidify the LCS program. Our ability to earn Congress’ support reflects the result of a highly effective competition between the bidders, underpinned by improved performance reflecting maturity of the designs as demonstrated in performance thus far on their follow ships, effective employment of lessons learned, effective negotiations for long term vendor agreements, needed investments to improve construction efficiency, and continuous labor learning coupled with stable production at the respective shipyards,” Stackley said.

“The rigor and diligence of the source selection process is a result of fair prices all wrapped within fixed price contracts,” he said.

The littoral combat ship USS Independence (LCS 2) approaches Mayport, Fla. Independence was in the Atlantic Ocean on her maiden underway. U.S. Navy photo by Mass Communication Specialist 2nd Class Justan Williams

Stackley added that the dual award strategy “exemplifies the Navy’s compliance with Secretary Gates’ and Under Secretary Carter’s direction to improve the buying power of the Department of Defense.”

LCS will replace the multi-mission frigates in the U.S. fleet, but are considered focused-mission combatants in that they will be configured to address one threat at a time. “They’re designed specifically to focus on threats in the littoral area – submarines, mines, and small craft,” said Rear Adm. Frank Pandolfe, the director of the Surface Warfare Division on the Navy Staff. “However they are capable of open ocean operations, and we envision them operating both in the littoral and in the open ocean as part of strike groups in the future.”

Stackley described the significance of the LCS contract award. “Today the Navy has 247 battle force ships in its inventory. That’s measured against a requirement for 313 ships. So our ability to build back up to a 313 ship Navy, which the CNO has clearly stated with every opportunity he’s had to do so, that 313 ships is the floor. Our ability to build up to that number relies entirely on our ability to significantly improve upon the affordability of our shipbuilding programs. The 55 ships of the LCS program are central to that effort.”

“The awards represent a unique and valuable opportunity to lock in the benefits of competition and provide needed ships to our fleet in a timely and extraordinarily cost-effective manner,” said Secretary of the Navy Ray Mabus.

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Capt. Edward H. Lundquist, U.S. Navy (Ret.) is a senior-level communications professional with more than...