By Andrea Shalal-Esa
WASHINGTON (Reuters) - The U.S. Navy on Monday awarded a $14 billion contract to General Dynamics Corp and Northrop Grumman Corp for eight Virginia-class submarines, saying it had met a "nearly impossible" target of cutting the cost of each ship by $400 million.
The five-year contract calls for production of one submarine in 2009, one in 2010 and two submarines in each of the following three years, the Navy said, noting it would cut acquisition costs of the 2012 ships by about 20 percent.
General Dynamics, based in Falls Church, Virginia, is the lead contractor for the nuclear-powered submarines, but shares construction equally with Los Angeles-based Northrop.
The Navy said it invested $600 million in more than 100 design changes to make the ship more efficient to produce and cut its build time to 60 months from 84 months. Overall, the effort will cut $4 billion from the overall submarine program.
Rear Adm. William Hilarides, program executive officer for submarines, said the Navy had met a target set by then Chief of Naval Operations Adm. Mike Mullen, who said the Navy could order two submarines a year if it knocked the price of each by $400 million to $2 billion, in fiscal 2005 dollars. Mullen is now chairman of the Joint Chiefs of Staff.
The fixed-price contract signed by the Navy and the contractors achieved both goals, which had seemed "nearly impossible" at the time, Hilarides said.
"It brings stability to the submarine program, to our work force and to the shipbuilding supplier industrial base for the next decade," Matt Mulherin, general manager of Northrop Grumman's shipyard in Newport News, Virginia, said in a statement.
The vessels are designed for a range of missions such as anti-submarine and surface ship warfare, delivering special operation forces, intelligence and surveillance.
"By providing money over a period of several years, it becomes easier for the contractor to plan ahead and cut the cost of each vessel," said Loren Thompson, defense analyst with the Lexington Institute in Virginia.
He said the multiyear contract would help reassure shipyard workers "that their jobs will exist five years from today."
Hilarides said the contract affected 12,000 companies in 48 states, and would provide five years of stable work for tens of thousands of workers around the country.
General Dynamics does its submarine work at its Electric Boat shipyard in Groton, Connecticut, while Northrop does its submarine work at the Newport News shipyard in Virginia.
John Casey, president of Electric Boat, said the contract would provide good jobs around the country, while ensuring the Navy had the capabilities it needed to maintain U.S. "undersea superiority" into the century.
Politicians in affected states welcomed the contract. Virginia Gov. Tim Kaine said Northrop would invest $250 million in new production facility and projected adding more than 2,000 new jobs as a result of the order.
The Navy contract covers the construction cost of each submarines, or around $1.75 billion, but each ship also has about $850 million in additional weapons and materials that the government buys separately. Overall, the submarines are slated to cost around $2.6 billion each by 2012.
Hilarides said the Navy had also been able to pare down the cost of the government-furnished equipment, including the main engine reduction gear, sonar, combat systems and periscopes. Major contractors included Northrop, General Dynamics, Raytheon Co and Lockheed Martin Corp , he said.
The Navy already has 10 of the new attack submarines in service or under construction, and the new orders bring the total to 18. Overall, the Navy plans to build about 30 or more of the Virginia-class submarines.
Hilarides said the key to cutting costs in shipbuilding -- a sector that has seen massive overruns elsewhere -- was keeping a tight lid on military requirements and ensuring stable funding for the program.
He said building two ships at a time and being able to order parts and supplies well in advanced accounted for roughly half the savings.
If the Navy had not undertaken the cost-cutting measures, the price of each submarine probably would have risen to around $3.1 billion, analysts said.
(Reporting by Andrea Shalal-Esa; Editing by Tim Dobbyn, Toni Reinhold, Richard Chang)