WASHINGTON – A senior Navy official is warning that rising costs in key programs such as Lockheed Martin and General Dynamics’ next-generation surface combat ships could derail efforts by the department to modernize its fleet and aircraft.

“We can’t let costs continue to grow, or quite frankly, we won’t have a Navy and the Navy won’t have work to do,” said Adm. Michael Mullen, chief of naval operations, during a panel discussion this week at the Navy League Sea-Air-Space Exposition.

The Navy has awarded contracts for four ships that initially were estimated to cost $270 million each under the Littoral Combat Ship (LCS) program, two to Bethesda, Md.-based Lockheed Martin Corp. and two to Falls Church, Va.-based General Dynamics Corp. But the cost of Lockheed’s first ship – which is roughly 73 percent completed – has already soared to roughly $350 million, according to the Navy.

The Navy ordered a halt to work on Lockheed’s second ship in January while it conducted a program review. Last month, Navy Secretary Donald Winter said he would allow Lockheed to resume work on the ship at its Wisconsin shipyard if the company agreed by mid-April to switch to a fixed-price contract.

Lockheed hasn’t yet agreed to do so and is currently in negotiations with the Navy to restructure its contract for both ships. The first ship had been scheduled to be delivered to the Navy this summer and work on the second was to have started last month.

Spokesman Craig Quigley said Lockheed’s aim in the talks is to “craft a way that we can proceed in a manner that makes sense to our company, to our shareholders, as well as meet the needs of the Navy.”

General Dynamics’ shipbuilding unit in Mobile, Ala., is on track to deliver on schedule its first ship, which is roughly 40 percent complete, by spring 2008, said spokesman Kendell Pease. The company has been put on close watch by the Navy to track costs, but has not been asked to restructure its contracts, he said.

Lockheed has said cost overruns were due to revised Navy requirements. However, Adm. Mullen said a compressed schedule and the lack of greater oversight were additional factors leading to significant cost increases. “If this were easy, then we wouldn’t have had any problems,” he said.

The LCS ships, longer than a football field and carrying up to 75 crew members, have relatively flat hulls that will make them the only large ships in the Navy’s fleet able to operate in waters as shallow as 16 feet. They are designed to carry three H-60 helo helicopters and three unmanned drone aircraft, and are planned for multiple types of missions including anti-submarine, mine and surface warfare.

Since the Navy’s March 15 announcement that it is seeking a fixed-price contract for the LCS program, shares of Lockheed have flattened out.

The Navy has acknowledged missteps in gearing up after a “procurement holiday” following the end of the Cold War – and at a time when war operations in Iraq and Afghanistan have sent operational costs soaring.

“We didn’t think very strategically in the last 20 years,” said William Balderson, deputy assistant-secretary of the Navy-Air program, at a defense conference in Washington earlier this year.

Mullen characterized the Navy as being “at a time of change” as it seeks to replace ships and submarines from the 1980s with Northrop Grumman Corp.’s CVN-21 aircraft carrier, General Dynamics and Northrop’s Virginia-class attack submarine, and the DDG-1000 Zumwalt class destroyer built by General Dynamics and Northrop, among other programs.

Maine’s Bath Iron Works, a General Dynamics subsidiary, is a key player in the DDG-1000 program and the lead contractor on one version of the LCS.

Today, the 276 ships in the Navy’s battle force fleet are well below the roughly 600 ships during the Reagan years and short of the department’s goal of 313 ships. Attack submarines, not including ones with nuclear warheads, have also shrunk by nearly half to 55 from nearly 100 at the time of the Cold War. Large deck aircraft – which are being built at a rate of one new carrier ever five years – could fall to 10 if there is a potential deficit in funds.