Ship competition may offer Navy a buying model for the future

Tuesday - 4/3/2012, 6:01pm EDT

Kevin Brancato, defense analyst, Bloomberg Government

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Lockheed Martin and Austal are currently building 55 Littoral Combat Ships for the Navy. The $37.4 billion program pits the contractors against each other in a competition, of sorts, designed to help with costs and preserving quality.

Bloomberg Government analyzed the Navy's buying strategy in its report, "'Real Competition' for The Littoral Combat Ship." The author of that report, Kevin Brancato, a defense analyst for BGov, discussed the report's findings on the Federal Drive with Tom Temin and Emily Kopp. Listen to the interview by clicking the link above.

Report Executive Summary: (Written by BGov)

"We must stop deluding ourselves that 'directed buys' from two designated suppliers represents real competition," said Ashton Carter, then the Pentagon's chief weapons buyer, in Sept. 29, 2010 testimony before the House Armed Services Committee.

The Pentagon finally may have ushered in real competition with the Littoral Combat Ship, a $37.4 billion program to build 55 small and fast ships that can ply shallow coastlines or the open seas. Under the program, two sets of contractors are competing to build similar vessels, an approach designed to raise quality and lower prices.

This study analyzes the Navy's buying strategy for the LCS and the competition between the two makers: Lockheed Martin and Austal. This type of "real competition" may be a model for the future and could affect builders of small ships, vehicles, and other military systems with thriving commercial markets.

In 2010, Lockheed and Austal were each given six-year option contracts for 10 littoral combat ships. Lockheed's contract is valued at about $4.1 billion, while Austal's is about $3.8 billion. The competition between them is fierce because their distinct ship designs are substitutes for each other at sea. They will use the same equipment to detect submarines, destroy mines, and counter small-boat threats.

The LCS is small enough, about 400 feet long, and inexpensive enough, at a little over $430 million each, that at least half a dozen U.S. shipyards could have built a version of it.

The initial LCS buying strategy used standard military weapon system buying practices that don't take advantage of competitive dynamics. Only in 2008 did the government begin to bargain hard. The new strategy stabilized LCS prices and rewarded contractors for controlling quality and delivering on time, while maintaining a credible threat that the Navy could cancel one or both variants at any time.

The new approach, direct head-to-head competition, isn't feasible for most large Navy ships, such as destroyers, amphibious ships, submarines, and aircraft carriers. Only two large military-ship producers, General Dynamics and Huntington Ingalls, still exist in the U.S. They have little commercial business, and their programs are protected from budget reductions rather than competed.

That means the Navy must go small to find real competition. The Navy already seems to be mimicking the LCS approach in buying a new ship-to-shore landing craft. The sea service now plans to have one or more contractors improve on a Navy design with changes as needed to lower the cost of production. A shift to competing contractor designs based on the Navy's core framework hasn't been proposed but appears feasible.

This Bloomberg Government Study analyzes the stark shift in the Navy's buying strategy for the LCS. The real competition between Lockheed Martin's LCS-1 Freedom and General Dynamics and Austal's LCS-2 Independence may be a model for other programs to follow in the future.

(Read the full Bloomberg Government study, "'Real Competition' for The Littoral Combat Ship." BGov.com is a paid site and requires a subscription for access.)

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