Bloomberg News

Navy Discloses $811 Million Overrun on Gerald Ford Carrier

February 21, 2012

(For more information on the budget, see BUDG <GO>.)

Feb. 13 (Bloomberg) -- The cost of the aircraft carrier Gerald R. Ford has increased by $811 million, or about 16 percent, over its $5.16 billion target price, the Navy said.

The overrun, up from the $650 million acknowledged in April, was disclosed today in a Navy document highlighting the service’s share of the Defense Department’s fiscal 2013 plan. The Navy documents indicate the service estimates a worst-case overrun of as much as $1.1 billion.

“To address fact-of-life cost increases as well as the government’s share of the ship construction variance to date, the Department added $811 million to the Gerald R. Ford budget,” through 2017, according to the document.

The carrier is being built by Huntington Ingalls Industries Inc. under a “cost-plus, incentive-fee” contract in which the Navy pays for most of the overruns. Even so, the service’s efforts to control costs are putting the company’s $579.2 million profit at risk, according to the Navy.

The Navy said last month that Huntington Ingalls of Newport News, Virginia, is being docked millions of dollars in profit because of the cost overrun. It didn’t disclose the overrun amount or Huntington’s share.

The company didn’t immediately respond to an e-mail today seeking comment.

Huntington Ingalls is continuing “to see improvements in our performance” on the carrier, Beci Brenton, a spokeswoman for the company, said in an e-mail last month.

‘Unique Challenges’

“Although this is a first-in-class ship with the unique challenges that come with that, we anticipate we will further increase efficiencies and continue to retire risk associated in the four years that remain until delivery,” Brenton said.

The Navy said it has begun periodically withholding some of the shipbuilder’s $579 million profit that is set out in the contract as the service adds money to cover the increasing costs on its design and construction contract.

The completed initial vessel, the first of three in the $40.2 billion program, is projected to cost at least $11.5 billion.

The $11.5 billion includes $2.9 billion in detailed design and $8.6 billion for construction and government-furnished equipment, such as its nuclear reactor. An additional $3.7 billion is for research that applies to all three vessels in the class, the Navy said.

The Congressional Budget Office wrote in a June report that cost growth typically occurs when a ship is more than half- finished. The Ford design contract is about 42 percent complete.

Huntington, which had 2010 sales of $6.7 billion, became a separate company in March when Northrop Grumman Corp. spun off its shipbuilding unit.

The Navy budget released today indicates it plans to provide $608 million in fiscal 2013 for CVN-79, the second carrier, to initiate the design and construction contract similar to Huntington’s contract for the Ford.

--Editors: Larry Liebert, Terry Atlas

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net


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