February 28, 2007 / 3:28 PM / 13 years ago

RPT-UPDATE 2-US Navy sees cost overrun on General Dynamics ship

(Repeats without changes to story to identify as UPDATE 2 in headline) (Recasts with Navy statement, adds General Dynamics comment)

By Andrea Shalal-Esa

WASHINGTON, Feb 28 (Reuters) - The shore-hugging littoral combat ship (LCS) being built by General Dynamics Corp. (GD.N) is expected to face cost overruns, although the scope of the increases is not yet clear, the U.S. Navy said on Wednesday.

In January, the Navy took the unusual step of ordering Lockheed Martin Corp. (LMT.N) to halt work for 90 days on an LCS ship because of soaring costs, but this was the first time the Navy acknowledged General Dynamics also faced cost increases.

The new class of ships are designed to operate in shallow waters to hunt for submarines and destroy underwater mines.

Navy acquisition chief Delores Etter on Wednesday said the first General Dynamics LCS ship would cost $350 million or more, far above initial estimates of $220 million for each of the new ships.

She told a group of defense writers the first Lockheed LCS ship would cost more than $400 million.

But the Navy later issued a statement saying Etter “mistakenly characterized” the cost of both ships.

“Although we anticipate some cost growth, it is premature to discuss specific numbers as they are unavailable at this time,” the Navy said of the General Dynamics ship. The first Lockheed LCS ship would cost $350 million to $375 million.

Lockheed, the No. 1 U.S. defense contractor, is building the first and third of the new ships, while General Dynamics, the No. 4 contractor, is building the second and fourth.

General Dynamics spokesman Rob Doolittle said increased requirements could drive up the cost of the first ship, but it was premature to speculate about its final cost since the ship was only 40 percent complete.

The company was focused on delivering “the most-capable, most-affordable” littoral ship to the U.S. Navy, he said.

Etter said the Navy had not yet decided whether to extend the Lockheed stop-work order beyond the 90 days or whether to impose a similar order on General Dynamics.

She blamed the higher costs on several factors, including an aggressive schedule adopted after the Sept. 11, 2001, attacks; efforts to design and build the ships simultaneously; and lack of adequate oversight.

“We just tried to do too much on this ship,” she said, adding that the Navy and the two defense contractors had not done a good job estimating the costs.

The Navy eventually wants to buy about 55 of the ships in a program that had been slated to cost $1.3 billion.

It was not immediately clear how much the cost increases in the first LCS ships would raise the total program cost.

The first ship of a new class always has a “significant learning curve,” Doolittle said, adding, “We expect the second ship of the class to cost much less than the first.”

Despite the cost overruns, Etter said the LCS program was still on track for a two-year “build cycle,” a much faster schedule than usually seen on new warships. She said she was confident the Navy had “the right ship to go in harm’s way.”

Etter said about a third of the cost overruns stemmed from increased material costs. Other extra costs were linked to new Navy rules aimed at ensuring the survivability of the new warships, and other factors that were still being studied.

Two separate reviews of the program had already resulted in 10 different directives aimed at curbing cost increases.

She said more oversight at the shipyards and closer monitoring of progress on the ships was needed. Extra Navy personnel had already been sent to monitor Lockheed’s work and more staff were being sent to the General Dynamics site.

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