WASHINGTON (AP) – The Navy has canceled plans to buy a third new combat ship this year from either Lockheed Martin Corp. or Bath Iron Works’ parent company, General Dynamics, citing budget shortfalls.

Both companies have been waiting since April for a decision from the Navy on that deal and another order for two more ships. The service last year canceled deals with both Lockheed and General Dynamics for second ships from each due to cost overruns. The Navy’s latest cost estimate for the current ships being built is $550 million per vessel.

But with a decision by Congress to cut funding for a third planned ship in fiscal 2008, the Navy is trying to stabilize the program while maintaining affordable pricing through competition.

The littoral combat ship is smaller than the Navy’s next-generation surface combat ship and capable of operating in shallow, coastal waters and moving at “sprint speed” to get Marines safely out of enemy territory. The LCS can travel at 57.5 miles per hour – compared with the average speed of 34.5 mph for other combat ships.

The Navy now plans to award one ship to each contractor under the fiscal 2009 budget, and hold a competition for another three vessels with funding in fiscal 2010 to keep competitive pressure between the two companies. Each of the 2009 contracts will come with options for future ships.

However, the Navy said it will evaluate pricing of the fiscal 2010 ships before making a decision, and envisions awarding two ships to a winning contractor and one ship to a losing bidder, the same as its original plan.

A contract for the next set of ships is expected to be awarded early next year.

While the $460 million per vessel cost cap will no longer apply to the fiscal 2009 ships, industry’s challenge will be to give the Navy the same ship at a much lower price.

The benefit of such a move, says Ronald O’Rourke, a naval analyst with the Congressional Research Service, is “the Navy will be able to learn much sooner whether the bid prices for those ships will pose an issue … (and) be able to take it to Congress sooner.”

In order to alleviate some of the work force pressure at the shipyards, the Navy also will provide advanced funding to both contractors. That funding will be awarded in a few days, after negotiations are completed.

The service’s decision to keep both companies’ shipyards running as it finalizes plans is good news, especially with concerns about layoffs, said Robert Work, vice president for the Center for Strategic and Budgetary Assessments. “The Navy is aware of the problems in the yards, and is trying to get this going as soon as they can,” he said.

Falls Church, Va.-based General Dynamics declined to comment. General Dynmaics’ lead contractor is Bath Iron Works in Maine, which is overseeing the contract. Its first littoral combat ship was christened on Oct. 4 at a partner’s shipyard in Mobile, Ala.

Diana Massing, a spokeswoman for Bethesda, Md.-based Lockheed, said the company was evaluating the Navy’s latest plan.

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