UPDATE 1-U.S. lawmakers warn Navy on ship costs

* Lawmakers warn shore-hugging ships may be in jeopardy

* Navy says ships are needed, reforms being implemented

* Panel chairman frustrated by Navy response (Recasts first paragraph, adds lawmakers)

By Andrea Shalal-Esa

WASHINGTON, March 10 U.S. lawmakers grilled Navy officials on Tuesday about massive cost growth and delivery delays in a new coastal warship program, but Navy officials said they remained committed to buying 55 of the ships and cutting future costs.

"Everyone should understand that the current situation of these vessels costing in excess of a half billion dollars cannot continue," Representative Gene Taylor, the Democratic chairman of the seapower subcommittee of the House Armed Services Committee, said at a hearing on the new warship.

The littoral combat ships (LCS) were initially projected to cost $220 million a copy, but the first ship built by Lockheed Martin Corp (LMT.N) is now expected to cost $550 million.

The General Dynamics Corp (GD.N) ship, about 70 percent completed, is approaching $600 million, according to a source briefed on its progress, who said the details were sensitive given ongoing contract negotiations for the next ship.

The new ships were supposed to help the Navy affordably boost its fleet to 313 ships, but cost overruns and schedule delays have left lawmakers skeptical about whether the Navy will be able to afford all 55 of the ships it wants to buy.

Rear Admiral William Landay, Navy program executive officer for the ships, told the hearing there was no chance the cost would ever come down to $220 million each, but said the cost would come down from that of the first ships.

Navy officials remain in tough talks with the companies to ensure that next two ships, to be funded with fiscal 2009 money, are on a path toward meeting a $460 million cost cap that takes effect in 2010. The 2009 contracts will include options for more ships in 2010, which must meet the cost cap.

Taylor warned that efforts by the Obama administration to terminate wasteful Pentagon spending could put the LCS program in real jeopardy. "You do not want to be the program that is breaking the bank," Taylor said during the hearing.

Afterward, he told reporters that he was "not satisfied with the oversight" of the program, and the Navy needed to show that it was getting costs under control before his panel began weighing the Navy's budget requests in 2010.

The subcommittee could put a hold on LCS funding in 2010 if it was not satisfied with the Navy's efforts, said one congressional aide, who asked not to be named.

Representative Todd Akin, the top Republican on the panel, said he supported the program, but the Navy needed to stop changing its acquisition strategy.

"We cannot reasonably expect the industry teams to make the investments in facilities and designs for affordability we demand, if we cannot articulate what we want to buy," he said. "This thing looks like the rudder's been shot out of it."

Taylor said investments could help lower costs, noting that automated cutting and welding equipment was common at overseas shipyards. Hand-welding necessarily added cost, he said.

Rear Admiral Victor Guillory, director of surface warfare, said the Navy still needed the ships, and was "aggressively pursuing cost reduction measures to ensure delivery of future ships on a schedule that affordably paces evolving threats," including adding more Navy personnel to oversee the program.

Guillory and Landay insisted the Navy had learned from past problems with the program and would apply lessons learned to cut future costs.

The Navy officials acknowledged that requirements changes were largely responsible for the cost overruns and schedule delays on the first ships, but said no changes were planned for the 2009 and 2010 ships, which should help stabilize costs.

Landay said the Navy was reviewing ways to cut the long term cost of operating the ships, and would revisit the issue of shifting to a common combat system, a step strongly backed by Taylor.

Taylor also backs opening the program to competition from other shipbuilders, since the Navy holds the rights to the seaframe designs of both LCS variants. Landay said that was still a possibility, but it would cost about $60 million per variant to prepare the designs for use by other companies.

Lockheed delivered the first LCS ship last September and it went into service in November. General Dynamics is due to deliver its first ship in September, far later than expected. (Reporting by Andrea Shalal-Esa; Editing by Tim Dobbyn)