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Northrop Gouging Navy, Official Says

Pentagon's acquisition chief accuses the firm and General Dynamics of raising prices on new subs by more than 17%.

March 13, 2003|Peter Pae | Times Staff Writer

A top Pentagon official has accused Northrop Grumman Corp. and General Dynamics Corp. of gouging the Navy on a massive program to build a new generation of nuclear attack submarines.

The accusation -- one of the harshest against a defense contractor in recent years -- came as the Pentagon and the two companies negotiated the cost of a second batch of the submarines being built jointly by Northrop and General Dynamics. The Navy's apparent concern: The program's total price tag could grow by more than 17% to $83 billion, according to a Navy study that is to be submitted to Congress this month.

The Virginia-class submarines are designed to be less-costly replacements for the 1970s-era Los Angeles-class attack subs. The new subs, which would be able to fire cruise missiles, attack ships and conduct reconnaissance, represent a hallmark of the Navy's efforts to replenish its aging sub fleet. They cost more than $1.5 billion each.

In an unusual joint venture between the nation's only two submarine makers, Northrop builds half of each submarine at its Newport News shipyard in Virginia, then ships it to General Dynamics' Groton, Conn., facility for completion. The first of the new subs is about 80% completed and will be delivered in May 2004.

The Navy wants to build 30 Virginia-class subs over the next 20 years and has been looking for ways to accelerate production.

"We want twice as many so we need to build two a year," the Pentagon's acquisition chief, Edward "Pete" Aldridge, told Bloomberg News. "We are not going to get there if the contractor is going to keep gouging us."

A General Dynamics spokesman said it would be inappropriate for either company to discuss Aldridge's comments because negotiations are continuing.

And industry and Navy sources Wednesday tried to downplay Aldridge's remarks, saying they appeared to be his way of posturing for a better deal from Northrop and General Dynamics. The submarine program is one of the Pentagon's largest and represents a key contract for both Northrop, headquartered in Century City, and Falls Church, Va.-based General Dynamics.

A Navy spokeswoman declined to comment on the study.

Sources close to the negotiations said the Navy's latest estimates are based on the Pentagon purchasing only one submarine each year, which boosts the overall cost because the shipbuilders are not allowed to buy materials for more than one year at a time.

They noted that a proposal in the Bush administration's 2004 budget would allow the Navy to negotiate a multiyear submarine contract, which could significantly reduce the projected cost increases. The Navy wants to enter into a multiyear contract to purchase five submarines, with an option for two more, built over five years. The second batch of submarines would be on top of the four the Pentagon already has ordered.

"There are significant opportunities" to lower costs "if Congress goes to buying two of these a year and does multiyear procurement," said Northrop President Ronald Sugar at an investment conference Wednesday in New York.

Under the multiyear plan, the cost per submarine probably would still be higher than the original forecast in 1992, when the program began, mainly because of increasing material and labor costs.

Last year, the United States Naval Institute said that the submarine program was running 14% over budget. But it also said the "controllable cost," or the amount that the contractors could control through cost-cutting measures, is "within 1% of the original budget."

Shares of Northrop and General Dynamics hit 52-week lows Wednesday, before recovering slightly. Northrop closed at $79.71, up 71 cents, while General Dynamics' stock fell 93 cents to close at $52.37. Both trade on the New York Stock Exchange.

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Bloomberg News was used in compiling this report.

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