US Navy's new warship contract delayed until fall

Fri Aug 20, 2010 1:57pm EDT

* High-level Pentagon meeting postponed

* Fresh questions may be effort to avert successful protest

* Companies to meet with Navy next week

By Andrea Shalal-Esa

WASHINGTON, Aug 20 (Reuters) - The U.S. Navy is expected to miss its target this summer for awarding a multibillion contract for new warships after reopening discussions with the two bidders, Austal USA, a unit of Australia's Austal Ltd (ASB.AX) and Lockheed Martin Corp (LMT.N), sources following the issue say.

A contract award for the Navy's Littoral Combat Ship program is not likely now until this fall, several months later than expected, according to the sources who were not authorized to speak on the record.

Dub Summerall, executive director of combatants for the U.S. Navy's program executive office in charge of ships, told a conference in June a contract award should come in late July or early August after both bidding teams submitted "very competitive" offers in April.

The new class of warships are designed for emerging missions such as fighting pirates, chasing drug-runners and sweeping for mines in shallow coastal waters. The Navy plans to buy 55 of the ships overall, a key part of its plan to increase the number of ships in the fleet to 313 over time.

The companies submitted their final proposal revisions to the Navy on July 12 after answering several questions, according to documents that were tens of thousands of pages long.

But the Navy has now reopened the process and posed further questions about cost and technical matters, delaying a possible contract for some time, the sources said.

The Navy had no immediate comment.

The Navy's decision to ask more questions so late in the procurement process was "highly unusual" and was probably aimed at ensuring it would prevail if the losing bidder filed a contract protest, as is widely expected, said Jay Korman, an analyst with the Washington-based research group Avascent.

"They want to make sure this is a bulletproof acquisition," Korman said, adding Navy officials were determined to avoid the long, drawn-out saga surrounding the Air Force's attempts to buy new refueling tankers.

In that case, the Pentagon canceled the whole competition and started from scratch after government auditors faulted the Air Force's handling of the procurement process and upheld a Boeing Co (BA.N) protest.

Both companies must submit answers to the Navy's questions this week, followed by separate discussions between the Navy and each company on Aug. 23, according to the sources.

Under federal procurement law, the companies must then have the opportunity to submit new final proposal revisions.

A high-level Pentagon meeting to review the Littoral Combat Ship program, initially scheduled for Aug. 4, has also been delayed, the source said.

The Pentagon had no immediate comment on the new date for that meeting, where a team of senior defense officials are due to review the Navy's revamped acquisition strategy for the new smaller fleet of warships.

Lockheed and Austal, teamed with General Dynamics Corp (GD.N), are bidding to build 10 warships and combat systems for five more under a contract valued at well over $5 billion.

The Navy has said the cost of the ships will be the key factor in picking the winning design.

The program has been plagued with cost overruns and other problems since it was first conceived a decade ago. Congress has already twice increased the initial $220 million cost cap.

The Navy is now bound to pay no more than $480 million per ship, although analysts remain skeptical whether that threshold will hold over time.

A spokeswoman for Lockheed confirmed the company had answered additional questions about the final proposal revision of its bid, which was submitted last month, but referred further questions about issue to the Navy.

Spokeswoman Kim Martinez said the company's first LCS ship, based on a steel-hull design built in Wisconsin by Marinette Marine, a unit of Italy's Fincantieri, had performed "extremely well" during its first deployment, beginning in February.

The company's second ship was more than 50 percent complete, and remained on schedule and on cost, she said.

Austal spokesman Bill Pfister declined comment on the status of the procurement program. The Mobile, Alabama-based U.S. unit is offering the Navy an aluminum trimaran design. (Reporting by Andrea Shalal-Esa; editing by Andre Grenon)

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