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.
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 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. 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," added Young.
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.