Budget Breaking

The Navy has terminated its contract with Lockheed Martin for the third littoral combat ship (LCS-3).

In a series of events, the Navy ordered work stopped on LCS-3 in January after it understood that the first in the class, LCS-1, was running tens of millions of dollars over budget, due in great part to design changes requested by the Navy. According to a source close to the program, Lockheed specifically explained the cost reality to its client, though those financial facts had been reported to the Navy in the mandated, monthly contract performance reports, according to a source familiar with the reports. As work continued on LCS-1 and General Dynamics (GD) continued on LCS-2 (a source familiar with the controversy has suggested GD is experiencing similar cost overruns on that project), the Navy gave Lockheed Martin 90 days to present a fixed-price incentive alternative to the current cost-plus contract for LCS-3.

As has been widely reported, the two sides could not come to an agreement on new contract terms — but this was following the Navy’s added requirement of a fixed-price alternative to the LCS-1 contract as well. This presented an untenable situation for Lockheed, according to a source familiar with the details. Lockheed presented its fix-price incentive alternative to the Navy for LCS-3 but declined on LCS-1, leading to the Navy secretary’s April cancellation of LCS-3. When queried for clarification on the LCS-1 requirement, the Navy responded, “The specifics of contract negotiations are considered proprietary and business-sensitive.”

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