Huntington Ingalls Industries Inc. (HII:US) and the Navy must show “significant improvement” in containing costs for the USS Gerald R. Ford aircraft carrier before its 2015 delivery date, according to U.S. Navy Secretary Ray Mabus.
“The Navy is conducting a line-by-line review” of all remaining anticipated expenditures “to identify further opportunity to reduce cost and to mitigate risk,” Mabus wrote in a letter dated yesterday to Senator John McCain, the senior Republican on the Senate Armed Services Committee.
Mabus outlined steps the service and its largest shipbuilder are taking to stem costs that McCain says have increased at least 18 percent to $12.3 billion. The estimate includes the construction contract held by Huntington Ingalls, new designs for a nuclear reactor to power the ship and an electromagnetic aircraft-catapult system as well as an upgraded radar and survivability features.
The carrier, which is almost 40 percent complete, is the first ship in a $40 billion carrier program calling for an almost complete redesign from the Nimitz class it is replacing.
McCain has begun to question the carrier program, and Huntington Ingalls’s performance, much as he has Lockheed Martin Corp. (LMT:US)’s F-35 Joint Strike Fighter, the Pentagon’s costliest defense program.
McCain has said he wants the Senate committee to review the Navy’s initial construction-funding request for the second carrier in the class, the CVN-79. McCain also has requested a U.S. Government Accountability Office review of plans to build three Ford-class carriers.
“It appears that you do not now have a plan to prevent future increases,” McCain said in a letter to Mabus on March 22.
Huntington Ingalls spokeswoman Beci Brenton said in an e- mailed statement that “we continue to see improvements in our performance on the carrier.
‘‘Although this is a first-in-class ship with the unique challenges, we anticipate we will increase efficiencies and continue to retire risk in the three years that remain until delivery,’’ Brenton said.
Huntington Ingalls of Newport News, Virginia, is scheduled to report tomorrow its first full-year earnings after its spinoff from Northrop Grumman Corp. (NOC:US) Analysts on a conference call for investors may question the company’s cost-control steps and impact that overruns have had in reducing fees to the company.
Mabus wrote McCain that an unspecified amount of fees have already have been retracted ‘‘consistent with contractor performance.’’
The single biggest contributor to cost increases ‘‘has been contractor and government procurement material cost overruns,’’ Mabus said. ‘‘These issues trace to lead-ship complexity’’ and the overlap of construction with the development of key systems, he said.
There was ‘‘inadequate accountability,’’ primarily during the advance procurement period in 2002 to 2008, he said.
The ‘‘systemic material procurement deficiencies’’ must be corrected for the CVN-79, Mabus said.
Mabus indicated much of the vessel’s complexity and associated cost increases stemmed from a 2002 Pentagon decision to introduce on one carrier all of the technology that was to be spread over three vessels -- from a new reactor and propulsion system to the electromagnetic aircraft-launching system and radar.
‘‘Today we are confronting the cost impacts of these decisions made more than a decade ago,’’ Mabus said.
Defense Secretary Donald Rumsfeld decided to accelerate the technologies in 2002 as part of his agenda to ‘‘transform’’ the military.
Huntington Ingalls fell 20 cents to $37.90 at the close in New York trading and declined 3.4 percent in the past year.
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