Shipbuilders may decline to bid on next LCSs

[CommunityEditor]

The Navy may find itself alone at the altar if the stringent contract conditions it’s demanding for the next Littoral Combat Ships put off the two competing shipbuilders.

Sources at Lockheed Martin and General Dynamics confirm that officials are hard at work preparing responses to the Navy’s March 31 Request for Proposal (RfP). But they say the Navy’s desire to transfer risk to the contractors may abolish any incentive to respond.

“‘No bid’ is always an option,” said one industry source.

“It is our intention to submit a proposal to the Navy that is both compliant with the government’s requirements and makes good business sense,” said Craig Quigley, a spokesman for Lockheed Martin.

General Dynamics spokesman Kendell Pease declined to comment on the negotiations, other than to say, “We’re busy reviewing the RfP.”

May 30 is the deadline for responses to the RfP, which has not been made public and which was offered only to Lockheed Martin and General Dynamics.

Each of the shipbuilders is working on their first LCS vessels, which are to compete at sea beginning next year for the bulk of a planned total buy of 55 of the small, 2,800-ton warships. The RfP seeks bids to build the next three ships: one already authorized in fiscal 2008, and the other two included in the 2009 budget request.

Navy Secretary Donald Winter has insisted that further LCS vessels be built for a fixed price, rather than the cost-plus contracts normally used for early ships in a class.

After the original contract awards, the shipbuilders expected to build their second ships under a cost-plus arrangement. But last year, Winter launched negotiations with each company, seeking to change to a fixed price. Those talks failed, and the Navy cancelled Lockheed’s LCS 3 and GD’s LCS 4.

Congress also has imposed a cost cap of $460 million on the ships, although current estimates are that the first ships might cost around $500 million.

Both designs are still evolving, and both contractors are reluctant to commit to fixed prices without a final design in hand.

“It’s pretty clear that with the continued engineering change proposals [ECPs], the design is anything but stable,” said Bob Work, a naval analyst for the Center for Strategic and Budgetary Analysis with long experience studying the LCS program. “The whole reason the Navy and industry went to cost-plus contracts was they didn’t want to be left holding the bag if the Navy continued with ECPs. They could accept more risk with the cost-plus.

“But going to a fixed-price contract with the second ship of a production run as challenging as this is a particular stretch. They’re moving to a fixed-price contract a little prematurely,” Work said.

“I think both builders are carefully weighing the risk to their shareholders,” he said. “If they believe the company could be left with a large cost overrun, they may decide to no-bid.”

The Navy declined to comment on the LCS RfP.

“It would be inappropriate to comment on ongoing negotiations between the Navy and the contractors during the RfP process,” said a Navy spokesman, Lt. Cmdr. John Schofield.

But an industry source acknowledged the possibility exists that one or either of the shipbuilders would decline to bid for the new ships.

“This is a case where there are so many unknowns, so much risk,” the source said. “Losing money is not tolerable. We have a very high bar against that.”

Since the LCS program remains an active competition, Lockheed Martin and GD are keeping their opinions very closely held and trying to outguess the other.

“You can imagine the dance that’s going on between the two companies trying to figure out the rumors,” the industry source said.

Since taking office in early 2006, Winter has constantly harped on the need for the shipbuilding industry to become more efficient and cut costs.

“It is certainly understandable where the Navy wants to go,” the industry source said of Winter and his efforts to hold shipbuilders more accountable. “But to say the companies have to be taught a lesson, that they need cost gaps — it’s almost insulting. These are real people in these yards, and they have pride in their work. We would carry that into any product we made.”

A no-bid response from the shipbuilders might also be a way to wait out Winter’s term and deal next year with a new administration and a new service secretary.

“Maybe the best strategy,” the industry source said, “is to cool your heels, let the election clean these dudes out and deal with a new group.”


Article: http://www.navytimes.com/news/2008/0...se_lcs_050608/

[dsueii]

This "feet to the fire" notion on accepting risk is pure rehtoric and will remain so until the Navy becomes prepared to exercise enough discipline in acquisition to control or freeze designs. The Navy must itself accept or share the risk of not getting everything it fails to anticipate or contract for up front. Industry is correct in not wanting to contract on an FFP basis given its history in all services.

The problems with cost plus efforts are legion and can't be discussed properly in a blog. Waiting may be the best strategy should McCain prevail in November but Obama has vowed he'll cut future weapons programs substantially amd LCS may be on his list. Mick Jagger's famous song line may not apply here.

[CDE]

This is all a debate about cost-plus versus fix price contracts. There's plenty of blame to go around with respect to the LCS program. Cost-plus has historically been the sneaky way to initiate programs with an advertised price tag that is politically acceptable to both the legislative and executive branches. Any one with any experience and common sense at all knew that the initial appropriations were only the beginning and that more money would be forthcoming until it became politically unpalatable - which is what is happening with LCS.

Fixed price contracts are not an inherent assumption of risk. Contracts do not necessarily get awarded to the lower bidder - contrary to popular belief. If the award criteria is "best value" it changes the proposal and bidding dynamics. Fixed price contracts are only good if the navy has clearly and sufficiently defined the requirements in the requests for proposal. With that, it is then incumbent upon the contractors to make realistic proposals and not just bid low and expect more money later when they get behind schedule and over budget. If the navy decides to change requirements then a contract mod is required and that will require more money from some source or it doesn't get done.