Since 04-28-03

By Robert A. Hamilton

New London Day

Groton - The Navy is monitoring growth in the cost of the Virginia-class submarine program at Electric Boat, which is edging perilously close to the point where it would require the Navy to justify the continuation of the program to Congress.

A service spokeswoman acknowledged that much of the increase is beyond the control of the shipbuilder, including escalating pension and healthcare costs.

"We're also finding labor and material costs are higher than expected, because we had projected inflation rates of 1-2 percent, and they have actually been running at 4-4.5 percent," said Lt. Brauna Carl of the Navy News Desk. "We're taking steps now to keep those costs under control."

In response to the Navy statements, EB released a letter from Vice President Frederick J. Harris that said in part, "Increased cost for Virginia is more a function of the unprecedented low building rates for nuclear submarines and Navy contracting constraints than shipyard performance."

He said the shipyards only exercise direct control over labor and overhead costs, which represent a small fraction of the total cost of the ship and are up less than 3 percent since the base year.

Whatever the cause, the federal Nunn-McCurdy Act requires that if the cost of the Virginia program increases more than 25 percent beyond its baseline of $65.7 million for 30 ships, established in 2000, the Navy must either cancel the program or certify it as meeting one of four criteria: it is essential for national security; cannot be replaced with a less-costly alternative; its cost is under control; or management is in place to keep the cost under control.

As of the latest Selected Acquisition Report, or SAR, out this month, the Navy now estimates the cost of the 30 Virginias to be $81.8 billion, or 24.5 percent higher than the baseline. That boosts the price of each ship by $500 million, to $2.7 billion.

Nunn-McCurdy was the legislation that prompted the cancellation of one of the candidates for a missile defense system two years ago. In just the most recent three-month period covered by the SAR, the program costs have increased $8.4 billion or 11.4 percent, driven largely by the new inflation rate predictions for labor and materials, which accounted for about $4.1 billion of the total.

Additional costs for hull treatment and a re-evaluation of pricing based on experience from the first four submarines of the class that are under construction accounted for another $3.6 billion of the total.

Increases in the cost of government-purchased equipment to put on the boat, change orders, and the cost of stretching out the purchase period for the 30 submarines by two more years, to the 2017 fiscal year, added the rest of the cost increase for the quarter.

The Navy's current plan is to purchase one submarine per year through 2006, then two per year after that. EB and Newport News (Va.) Shipbuilding each produce half of each submarine, and then alternate the final assembly. Some top defense officials, including Navy acquisition chief John Young, have said the Pentagon might have to look at restoring competition to submarine contracts, or giving all the submarine work to one yard, to bring down the cost.

"What Secretary Young was saying is, he's looking at all the options, and not taking anything off the table," Carl said. "His philosophy on Virginia and all programs has been to look at every possible way to meet Navy requirements at a minimal cost to the taxpayer."

Privately, industry and military officials concede either route is unlikely, because the shipyards have developed only the skills they need for their share of the boat, and the cost to reconstitute the ability to build an entire boat at either yard would be prohibitive.

In December, EB submitted a five-volume, 1,700-page proposal to the Navy that called for the shipyard to build five Virginia-class submarines over the next five years, with options for up to two additional boats, in a multi-year contract. That would not commit the Navy to build all the submarines, but the service would incur penalties if it did not.

"This is the largest dollar-value proposal we have ever submitted, as well as the largest in terms of information," EB spokesman Neil D. Ruenzel said at the time. The company did not provide a specific cost for the proposal.

But the Navy has not yet signed a contract for a submarine in the current fiscal year, which is more than half finished, because negotiations on the cost have dragged on so long. Harris' letter said the slow rate of submarine orders has been the biggest contributor to the cost.

"Many suppliers have left the submarine industry, and those that remain incur high unit cost," Harris wrote. "The active supplier base has been reduced by 40 percent over the last 10 years. Shipbuilders and suppliers are working aggressively to control material costs, but the long-term solution is dependent on increased volume and procurement strategies that provide a stable and predictable market."

Carl said the Navy is also seeking authority from Congress for a "block buy" of five submarines over the next four fiscal years, which is anticipated will yield additional savings over a multi-year contract, since it would represent a firm commitment to the purchases.