Northrop's submarine work draws criticism from Navy

Letter says company's performance deteriorating on newest nuclear vessels

September 16, 2004|By BLOOMBERG NEWS

Northrop Grumman Corp., the world's largest builder of warships, has had "significant cost growth" and schedule delays in building its share of the Navy's newest nuclear submarines, the service's top acquisition official said yesterday.

There has been "rapid deterioration" in the company's performance since January, Assistant Secretary for Acquisition John J. Young wrote Northrop Chairman Ronald Sugar in an Aug. 6 letter obtained by Bloomberg News. The cost to build the first four submarines has risen by $419.4 million, or 3.8 percent of the estimated $10.9 billion, according to the Navy.

"While some of the lead ship problems were expected and planned, the progress has been well short of even adjusted schedules," Young wrote Sugar.

The Navy told Congress a year ago that it had measures in place to control costs in what is now an overall $83 billion program to build as many as 30 Virginia-class submarines, the Pentagon's third-most-costly weapons program. The service, in an e-mailed response to Bloomberg News, attributed the program's cost growth largely to "poorer than expected" contractor performance.

Northrop and General Dynamics Corp., the second-largest naval shipbuilder, share production of the vessel body and systems and alternate final assembly at their respective shipyards in Newport News, Va., and Groton, Conn.

"The data suggests that the majority of the new cost increase is a result of performance issues at Newport News," Young wrote.

Shares of Northrop rose 10 cents to $51.80 in New York Stock Exchange composite trading. They have climbed 10 percent in the past year.

Northrop, the third-largest U.S. defense contractor, is working to get growing costs for building the submarines under control, Sugar said yesterday at a Morgan Stanley investor conference in Phoenix, which was broadcast over the Internet.

The budget for the Virginia-class submarines has proved "challenging," Sugar said. The cost performance on the Virginia class is "better than any sub program in memory" and better even than development programs for some surface ships, he said. He gave no details on cost growth for the program.

"We are making solid progress in identifying and implementing corrective actions in problem areas," Northrop spokesman Randy Belote said in an e-mailed statement. General Dynamics spokesman Kendell Pease declined to comment on Young's letter.

The total Northrop cost growth is about $298 million, with the remaining $122 million attributed to construction and design issues at General Dynamics' Electric Boat yard, according to Navy briefing charts obtained separately from Young's letter.

The Navy e-mail said the contractors "are actively working on these issues. The Navy will assess their proposals when received."

Northrop's ship unit had sales of $5.5 billion last year, or 21 percent of the Los Angeles-based company's total. Northrop, maker of the B-2 stealth bomber, became the largest builder of warships after buying Newport News Shipbuilding Inc. in 2002 for $2.6 billion and Litton Industries Inc. for $5.2 billion in 2001.

"The Navy has paid a heavy price, in multiple programs and in Congress' confidence, for the deteriorating execution of the Virginia-class program," Young wrote. "I remain extremely concerned with the progress of construction on the first four submarines and the potential ramifications for the later submarines."

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