General Dynamics Gets a Multibillion-Dollar Navy Sub Deal

(Bloomberg) -- The U.S. Navy has reached an agreement with General Dynamics Corp. on a multibillion-dollar deal to buy the next batch of Virginia-class attack submarines, according to the service.

After protracted negotiations, the deal was cut from 11 submarines to 9, with options to buy a 10th and 11th vessel by 2023, because funding was running more than $1 billion short, according to service documents and congressional correspondence. The value of the resulting agreement wasn't immediately disclosed but it's expected to be about $20 billion, according to a person familiar with Navy budget documents.

“We have reached a multiyear” agreement “and are working to announce a contract” by Dec. 31, Navy spokesman Captain Danny Hernandez said in a statement. It “will achieve significant savings, will include important lethality enhancements,” and “provide critical stability to the industrial base. Further information will be available upon contract award,” he said.

Elizabeth Power, a spokeswoman with General Dynamics' Electric Boat unit, which makes the Virginia-class sub with Huntington Ingalls Industries Inc., said “we have been working closely with the Navy and stand ready to support their needs. The contract being contemplated allows us to maintain a stable Virginia-class build rate.”

Documenting Savings

By law, the Pentagon must submit a detailed justification for proceeding with a multiyear contract, including outlining “significant savings” that would be realized over annual purchases that give Congress more oversight. Last week, the Defense Department submitted to congressional defense committees a proposal certifying savings of 6.8%, or $1.8 billion, from a nine-ship contract.

Ellen Lord, the Pentagon's acquisitions chief, said in letters to the four defense committees that “while there are sufficient funds” to execute the program through 2024, “there are shortfalls” in fiscal 2022 and 2023 that the Navy has committed to address in its next proposed budget.

Representative Joe Courtney of Connecticut and Rob Wittman of Virginia, the Democratic chairman and ranking Republican on the House Armed Services seapower panel, wrote Defense Secretary Mark Esper in September to “express our very serious concern” over the “reduced scope for the contract due to funding shortfalls.” They represent districts where the subs are built or workers live.

Courtney said in a statement Monday that the Navy's announcement “shows real progress in terms of getting a stable workload for this critical program.”

Navy Secretary Richard Spencer acknowledged, in a Sept. 27 reply to lawmakers, the reduction to nine submarines with an option to add at least one. He said the Navy “has been in negotiations” to “achieve a balanced approach with full considerations of technical risk, the industrial base capability and fleet requirements.”

“There seem to be two issues at work here,” said Ron O'Rourke, naval analyst for the nonpartisan Congressional Research Service. “The first are the concerns about the capacity of the industrial base,” and the other is a funding shortfall, “the origin of which is unclear,” he said. “So it seems that something has happened on the Navy's side regarding the cost of these submarines. It would be helpful for the Navy to explain what that is.”

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

To contact the editors responsible for this story: Bill Faries at wfaries@bloomberg.net, Larry Liebert

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