August 15, 2003

Navy announces $8.7 billion Virginia-class contract

General Dynamics Electric Boat Corp., in partnership with Northrop Grumman's Newport News Shipbuilding, is being awarded a block-buy contract worth up to $8.7 billion for construction of six Virginia Class submarines. Upon Congressional authorization and appropriation, the contract will award one submarine per year from 2003 through 2006 and two submarines in 2007.

The contract includes a provision to transition to a multiyear contract in the event that Congress provides multiyear approval.

The multiyear procurement would incorporate the fiscal year 2004 through fiscal year 2007 submarines and up to two Virginia Class submarines in fiscal year 2008. This would revise the total contract amount to $10,872,003,696.

The FY 03 submarine would not be included in the multiyear contract. Altogether, up to eight submarines could be procured from FY 03 through FY 08.

Speaking about the agreement, Assistant Secretary of the Navy for Research, Development and Acquisition John J. Young, Jr., said, "The Navy and industry negotiating teams have done an exceptional job. They have produced an affordable agreement that sets a realistic, achievable target price and provides fair profits for our industry."

"The contract represents a step forward for shipbuilding contracts," said Young, "because it provides positive incentives to underrun the target price, ties a portion of the fees to specific performance objectives, and reduces the profitability if the target is exceeded."

"The agreement also allows us to transition to a multi-year contract, should Congress approve that authority," Young continued. "The multi-year agreement is truly unique in providing the flexibility to adjust the quantity, but allowing that decision to be held until January of 2006, when the outyear budget picture is clear. Multi-year will reduce the overall cost of each submarine compared to annual or block buys. Conversion of this contract to a multi-year is critical to the taxpayer because it will reduce the overall cost of each submarine compared to annual or block buys. Executing the full multi-year can provide savings of up to $1 billion."

The terms of the contract allow for the transition to multi-year procurement beginning in 2004. The multi-year would apply to as many as seven submarines to be authorized from 2004 through 2008. Should Congress approve a multi-year procurement strategy, the Navy can unilaterally execute that contract option.

The major difference between the block-buy and the multi-year is that the multi-year includes funding for economic order quantity purchases that would allow the Navy to realize savings by buying submarine components in bulk.

Both the block-buy and multi-year contract conditions provide significant incentives for the contractor to deliver the submarines for less than the target price. Both also include a first-of-its-kind incentive targeted at expanding the submarine industrial base by encouraging the participation of small businesses. The contract authorizes Electric Boat, the lead shipyard, and its teammate, Northrop Grumman Newport News, to proceed with the construction of one ship per year from FY 03 through FY 06, and two ships in FY 07.

"This is an extremely significant contract award," said Michael W. Toner, president of Electric Boat and executive vice president of General Dynamics Marine Systems group. "The two shipyards now will have the stable workload required for increased production efficiencies, which will benefit the Navy, the Department of Defense and the U.S. taxpayer. We'll also be providing the Navy a class of nuclear submarines with the capabilities to guarantee our nation's undersea superiority well into the 21st century."

"The positive impact to the industrial base and to our ability to provide the Navy with the most capable and cost efficient platform is significant," said Tom Schievelbein, president, Northrop Grumman Newport News. "Stability is key to reducing costs and this contract award will greatly enhance the stability of the Virginia-class program."

Electric Boat will christen the lead ship of the class, Virginia (SSN-774), Aug. 16 and deliver it to the Navy in 2004. Three other ships are currently under construction.

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