Navy Cancels Lockheed Ship Contract After Failure To Agree On Costs

After not being able to reach an agreement on ballooning ship costs, the Navy has canceled a contract with Lockheed Martin to build a second prototype of a new, small, high tech warship, the Littoral Combat Ship, or LCS. The nation's largest defense contractor by sales, the cancellation is not expected to have much of a financial effect on Lockheed. The cancellation came after more than a month of negotiations in which Navy Secretary Donald Winter demanded Lockheed accept a fixed-price contract, part of the Navy's attempt to stem chronic cost overruns. According to Adm. Charles Goddard, the Navy's top program officer for ships, "We would like to have had this ship, but we have to have it at a price we can afford." From an initial cost of $220, the first LCS prototype has ballooned to between $350 million and $375 million, leading to the cancellation of a second prototype. Lockheed is still completing the first LCS prototype and will be allowed to compete for future naval contracts.

Sources: Press Release, Wall Street Journal, Reuters, AP
Commentary: DoD's FY-08 Budget: The Largest in US History • War, War, What Is It Good For? Defense Industry Stocks • Lockheed Martin: Earnings May Hit Record High
Stocks/ETFs to watch: Lockheed Martin Corporation (LMT). Competitors: Boeing (BA), United Technologies Corp. (UTX), Northrop Grumman Corporation (NOC), Raytheon Company (RTN). ETFs: PowerShares Aerospace & Defense (PPA), iShares Dow Jones US Aerospace & Defense (ITA)

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