General Dynamics LCS-2 Costs Go Up... Again

Tony Capaccio has a story in Bloomberg today with bad news for the General Dynamics Littoral Combat Ship. Only about 2 months after the FY09 budget figures priced LCS-2 at $636 million total, there is news the price has jumped again. The article is not online yet, but is included in today CHINFO news clips.

General Dynamics Corp.'s new warship designed to operate close to shore will cost an estimated 9.3 percent more to build this fiscal year, according to Navy figures.

The cost for the year ending Sept. 30 will rise $41 million to $481 million for the first ship, according to a defense official with knowledge of the increase. That follows a 72 percent jump last year that boosted the cost from $256 million.

The math gets confusing, so Defense Industry Daily will help us out with the numbers.

The base cost as of the FY09 budget for the GD LCS was offered as $440 million. DID notes the total end cost includes $20M in change orders, $7M in government-furnished equipment (GFE) that’s bought separately and then integrated, and $40M for “other.” You then add $75 million final outfitting & post-delivery changes and $54 million final system design. This put the FY09 cost of LCS-2 at $636 million.

Bloomberg is saying the base ship cost of $440 million has risen $41 million, and is now $481 million. This brings the total end cost, including the $20M in change orders, $7M in government-furnished equipment (GFE) costs, and $40M for “other” costs to $548 million. When we add the $75 million final outfitting & post-delivery changes and $54 million final system design the total cost of LCS-2 is now up to $677 million.

For comparison purposes, the total end cost of LCS-1 (Lockheed Martin) is still listed as $631 million.

A few things to consider here. First, this comes as the newly Austal built Hawaii superferry Alakai remains laid up in dry-dock, where it has been since Feb 13th. The date the ferry will come out of dry-dock was recently pushed back from March 25th to April 22nd. While the claim is the damage that keeps it in dry-dock was suffered in dry-dock, there are questions as to whether it was a design issue that put the new ferry in dry-dock in the first place. The General Dynamics LCS-2 is very similar in design to the Alakai.

Second, this may be a sign that the Navy still does not have shipbuilding costs under control. It will be understandable if that is how Congress sees this cost increase, as just 2 weeks ago the Navy sat in front of the House and stated they did not expect more cost increases for the Littoral Combat Ships under construction. That type of testimony only makes the Navy look bad.

First-in-class ships are prototypes, cost increases should come to no surprise and due to the low cost of the LCS, the total cost increase for both LCS-1 and LCS-2 won't add up to the total cost increase of LPD-17 for example, so while there are serious concerns the amount of money being talked about with the LCS is low compared to when larger ships have problems. This is why we see red flags with the DDG-1000. It is unclear if this changes the cost cap for the Littoral Combat Ship at $460 million. We believe that is the critical question, because at $460 million + module costs the LCS is still a cost effective program. As the price rises over $460 million (in FY09 dollars), not so much.

Also we need to keep perspective. DDG-51 cost almost the same as DDG-54 and DDG-55 combined. We may be at the point where LCS-1 and LCS-2 cost as much as the next 3 ships combined. The LCS as a program has basically gone from design to water in about 4-5 years, lightning speed for a Navy shipbuilding program, the intention being to put hulls in the water faster, but at a higher cost. In that regard, higher costs for the first two Littoral Combat Ships were not only expected, they were predetermined. It will be interesting to see how this news effects an unpopular program, where the conversation has mostly shifted from the constant drumbeat of cost problems to the question of many analysts regarding whether the platform is in line with strategy to begin with.