12 Apr 07. Secretary of the Navy Donald C. Winter announced today that the Department of the Navy is terminating construction of the third Littoral Combat Ship (LCS 3) for convenience under the Termination clause of the contract because the Navy and Lockheed Martin could not reach agreement on the terms of a modified contract.

This follows news reported in Defense News that the U.S. Navy has decided to forego funding the procurement of the planned Littoral Combat Ships (LCS) for fiscal year 2007, said Allison Stiller, deputy assistant secretary for shipbuilding. The service had planned to provide funding to build two LCS ships. Instead, money from those planned FY ’07 LCS builds will go to cover higher costs for other initial ships, Stiller said April 4 at the Navy League Sea Air Space 2007 conference. Stiller spoke during the panel discussion “The Future of U.S. Shipbuilding.” The planned FY ’07 money was for the fifth and sixth ships of the planned 55-ship LCS fleet, Congressional Research Service analyst Ronald O’Rourke said during the same panel discussion. (Source: Aviation Week)

The Navy issued a stop-work order on construction on LCS 3 in January following a series of cost overruns on LCS 1 and projection of cost increases on LCS 3, which are being built by Lockheed Martin under a cost-plus contract. 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. LCS 2 and 4 are under contract with General Dynamics, and the Navy will monitor their cost performance closely. The Navy intends to continue with the plan to assess costs and capabilities of LCS 1 and LCS 2 and transition to a single seaframe configuration in fiscal year 10 after an operational assessment and considering all relevant factors. General Dynamics’ ships 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.

“LCS continues to be a critical warfighting requirement for our Navy to maintain dominance in the littorals and strategic choke points around the world,” said Winter. “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.”

This decision is a blow to Lockheed Martin which has been transferring its excellent work practices on systems integration techniques used on fighter aircraft and helicopters to ships and vehicles. The vehicle operation headed by Kathryn Hasse has been expanding at a rapid pace since the acquisition of HMT Vehicles Ltd and is now poised to offer its latest variant for the JLTV HMMV Replacement contract after winning a seat as a contender in the FTTS Requirement with International Trucks.