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14 Aug 03. The U.S. Navy awarded General Dynamics Corp. (NYSE:GD – News) an $8.7bn contract for the construction of six Virginia-class submarines.

General Dynamics said Thursday the contract authorizes its Electric Boat unit, the lead shipyard, and its partner, Northrop Grumman Corp.’s Newport News Shipbuilding, to proceed with the construction of one ship per year from fiscal 2003 through fiscal 2006, and two ships in fiscal 2007. Electric Boat will christen the lead ship of the class, Virginia, Aug. 16 and deliver it to the Navy in 2004. Three other ships are currently under construction.

The contract could be changed to a multiyear agreement for seven ships from fiscal 2004 through fiscal 2008 including two submarines in 2008, depending on congressional approval of the multiyear approach. Altogether, up to eight submarines could be procured through 2008. But the U.S. House of Representatives has so far been reluctant to authorize multiyear contract authority sought by the Navy, citing large cost overruns.

DoD News Briefing

John J. Young, Jr., Assistant Secretary of the Navy for Research, Development and Acquisition, briefing on the Virginia class submarine contract award on Thursday, August 14, 2003. (extracts)

Participating were John J. Young, Jr., assistant secretary of the Navy for research, development and acquisition; and Navy Rear Adm. John D. Butler, program executive officer (submarines).

Young: I’m here today to announce, as you know, the signing of a block buy contract with General Dynamics and Northrop Grumman for six submarines over the fiscal year 2003 to 2007 time period. The contract really commits us to the ’03 submarine and creates a process or expectation that we will buy additional subs in ’04 and out.

The contract is truly a unique step forward in our partnership with industry. It sets realistic target prices, consistent with the base line that was reported earlier this year. It increases — within those targets, it increases industry’s profitability below the target price, incentivizing them to control and underrun the target. It shares the cost above the target, with industry taking a greater share of those costs and in many of our other shipbuilding contracts, thereby discouraging overruns to costs.

Around the target, there are steps in the profit that focus management attention on trying to come in at that target. There’s a step process where they can lose 1 percent of their fee when they go over the target, and then again when they go over 102 percent of the target.

Furthermore, workload, health care and pension costs will be on the share line,
providing a strong incentive for us to work with industry and industry to work with us as partners to control those costs.

Next we have a portion of the profit in fee form as discrete incentives for key
milestone events. These provide excellent management tools for Admiral Butler and Captain Heffron to manage the program. There’s roughly $45 million per submarine, one of the largest incentive pools on a ship construction contract, allocated to these discrete incentives.

Incentives are tied to achieving the learning curve projection for labor costs on the submarine, controlling and delivering material to the budget at cost, the schedule performance, achieving the target costs of the submarine, achieving the outfitting levels and the schedule projection for the modules, enhancing the use of small business, and also there are additional production and delivery-related incentives.

The government can even pull back some of the earned near-term incentives if progress is not maintained and the submarine completed at the estimate at completion. I believe it represents a fair balance between risk, performance, and the profit and the cash flow needs of industry.

The Congress — that addresses, if you will, the block buy contract and the terms we’ve tried to crea

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