Is LCS Split Buy A Harbinger Of A New Acquisition Model?

The U.S. defense industry was waiting with bated breath for the outcome of the competition to build the Littoral Combat Ship (LCS). The original Navy plan had been to build a squadron or more of each of the two designs, one by a Lockheed Martin-led team and the other by a General Dynamics-led team. Then, looking at escalating costs and declining shipbuilding funds, the Navy decided to scotch its plan and to go for a winner-take-all approach. The new contract mechanism would allow companies to compete for production contracts. As a result, General Dynamics split from its smaller teammate, Austal, which bid independently for production so that the larger company could pursue future production possibilities.

In a stunning turnaround, the Navy announced last week that it was returning to a version of its original plan. Instead of winner-take-all the Navy proposed that the existing contract and funding stream be modified to allow it to buy ten ships of each type. Faced with rising costs for the first two LCS, Congress set a cap on the cost of the LCS hull at $480 million. Although the Navy has not released details of either bid, the assumption is that the price offered by both competitors was so low that the Navy could consider the idea of carrying both designs forward.

The pressure on defense contractors to lower their prices has been growing for several years beginning with Secretary of Defense Robert Gates’ April 2009 massacre that restructured or killed outright nearly a dozen programs that were over cost and/or behind schedule. Recent requests for proposal such as that for a replacement aerial refueling tanker have been structured so as to make cost perhaps the most significant competitive variable. Looking forward to flat or declining defense budgets, the need to lower costs and find efficiencies in the defense budget has become of paramount importance.

The turnaround on the LCS may be a sign that the defense industry has gotten the message and is finding ways of developing platforms that meet essential operational requirements while not breaking the bank. Both Lockheed Martin and Austal/General Dynamics are to be commended for pulling off the rare feat of making their bids so attractive that the customer wants more of what they are offering and, if Congress acts in time, can afford to buy more.

Carrying forward the two LCS designs will give the Navy expanded options for configuring the future fleet. Each design has unique features that can be exploited for planned and future missions. There are also tremendous opportunities for foreign sales of the two designs in the Middle East and Asia.