Navy cancels Lockheed combat-ship contract

WASHINGTON - The U.S. Navy said yesterday that it was canceling a widely criticized Lockheed Martin Corp. contract to build a next-generation combat ship after negotiations to control cost overruns failed.

"We're disappointed, but we have to have it at a price we can afford," Navy Adm. Charles Goddard said at a Pentagon press briefing to discuss the unusual decision.

Lockheed Martin, which is based in Bethesda, Md., expressed disappointment over the Navy's decision, and accepted blame for cost overruns on the first LCS ship it has nearly completed.

After nearly a month of extensive negotiations, the Navy and the company could not agree on a restructured contract that controlled costs on the Littoral Combat Ship program.

In a statement, Bob Stevens, Lockheed's president and chief executive officer, said: "We believe that our proposal was fully consistent with the secretary's stated desire to bring the benefits of increased competition to shipbuilding while holding the Navy's industrial partners accountable for cost performance within their control."

The defense contractor had submitted a final proposal to the Navy late Monday in hopes of salvaging the deal.

"Lockheed's best offer is considered unaffordable by the department," Goddard added.

The Navy ordered work halted on the start of the second Lockheed ship in January after cost estimates on the first ship, which is 75 percent completed, soared to at least $350 million from an initial price of $270 million.

Until now, Lockheed had blamed cost overruns on revised Navy requirements and material delays from subcontractors.

Negotiations will now be held on what happens to, and who pays for, materials already ordered for the second ship. Lockheed likely will be paid for termination and stop-work-order costs it incurred.

The Navy had initially awarded contracts for four LCS ships, two to Lockheed and two to General Dynamics Corp. of Falls Church, Va. The General Dynamics contract remains under close review but is expected to proceed, the Navy said. Goddard warned that any unexpected cost overruns could result in the Navy restructuring the contract.

The Navy has also decided to put out bids for five more LCS ships, three in fiscal 2008 and two in fiscal 2009.

Lockheed spokesman Craig Quigley said it was soon to tell whether Lockheed would compete for those contracts.

Shares of Lockheed Martin were down 7 cents to $96.10 at one point in aftermarket trading after ending the day down 45 cents at $96.16 on the New York Stock Exchange. Shares of General Dynamics rose 2 cents to $77.36 at one point in aftermarket trading after closing up 62 cents to $77.34, also on the NYSE.