[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


                        [H.A.S.C. No. 110-14] 
 
    ACQUISITION OVERSIGHT OF THE U.S. NAVY'S LITTORAL COMBAT SYSTEM 

                               __________

                                HEARING

                               BEFORE THE

             SEAPOWER AND EXPEDITIONARY FORCES SUBCOMMITTEE

                                 OF THE

                      COMMITTEE ON ARMED SERVICES

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD

                            FEBRUARY 8, 2007

                                     
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             SEAPOWER AND EXPEDITIONARY FORCES SUBCOMMITTEE

                   GENE TAYLOR, Mississippi, Chairman
NEIL ABERCROMBIE, Hawaii             ROSCOE G. BARTLETT, Maryland
JAMES R. LANGEVIN, Rhode Island      KEN CALVERT, California
RICK LARSEN, Washington              TERRY EVERETT, Alabama
MADELEINE Z. BORDALLO, Guam          JO ANN DAVIS, Virginia
BRAD ELLSWORTH, Indiana              J. RANDY FORBES, Virginia
JOE COURTNEY, Connecticut            JOE WILSON, South Carolina
JOE SESTAK, Pennsylvania
                  Will Ebbs, Professional Staff Member
               Jenness Simler, Professional Staff Member
                    Jason Hagadorn, Staff Assistant

























                            C O N T E N T S

                              ----------                              

                     CHRONOLOGICAL LIST OF HEARINGS
                                  2007

                                                                   Page

Hearing:

Thursday, February 8, 2007, Acquisition Oversight of the U.S. 
  Navy's Littoral Combat System..................................     1

Appendix:

Thursday, February 8, 2007.......................................    43
                              ----------                              

                       THURSDAY, FEBRUARY 8, 2007
    ACQUISITION OVERSIGHT OF THE U.S. NAVY'S LITTORAL COMBAT SYSTEM
              STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

Bartlett, Hon. Roscoe G., a Representative from Maryland, Ranking 
  Member, Seapower and Expeditionary Forces Subcommittee.........     3
Taylor, Hon. Gene, a Representative from Mississippi, Chairman, 
  Seapower and Expeditionary Forces Subcommittee.................     1

                               WITNESSES

Ellis, Mike, Executive Vice President and Chief Operating 
  Officer, Bollinger Shipyards, Inc..............................    39
Etter, Hon. Dr. Delores M., Assistant Secretary of the Navy for 
  Research, Development and Acquisition; Vice Adm. Paul E. 
  Sullivan, Commander, Naval Sea Systems Command, U.S. Navy; Rear 
  Adm. Charles S. Hamilton, II, Program Executive Officer for 
  Ships, U.S. Navy; Rear Adm. Barry J. McCullough, Director of 
  Surface Warfare, U.S. Navy, beginning on page..................     5
McCreary, Richard, Vice President and Gen. Manager, Marinette 
  Marine Corp....................................................    36
Moak, Kevin, Chairman and Persident, Gibbs & Cox.................    30
Moosally, Fred P., President, Lockheed Martin MS2................    26

                                APPENDIX

Prepared Statements:

    Etter, Dr. Delores M. joint with Vice Adm. Paul E. Sullivan, 
      Rear Adm. Charles S. Hamilton, II, and Rear Adm. Barry J. 
      McCullough.................................................    47
    Moosally, Fred P. joint with Kevin Moak, Richard McCreary, 
      and Mike Ellis.............................................    76

Documents Submitted for the Record:
    [There were no Documents submitted.]

Questions and Answers Submitted for the Record:

    Mr. Taylor...................................................   107
    ACQUISITION OVERSIGHT OF THE U.S. NAVY'S LITTORAL COMBAT SYSTEM

                              ----------                              

                  House of Representatives,
                       Committee on Armed Services,
            Seapower and Expeditionary Forces Subcommittee,
                        Washington, DC, Thursday, February 8, 2007.
    The subcommittee met, pursuant to call, at 3:10 p.m., in 
room 2212, Rayburn House Office Building, Hon. Gene Taylor 
(chairman of the subcommittee) presiding.

 OPENING STATEMENT OF HON. GENE TAYLOR, A REPRESENTATIVE FROM 
   MISSISSIPPI, CHAIRMAN, SEAPOWER AND EXPEDITIONARY FORCES 
                          SUBCOMMITTEE

    Mr. Taylor. The committee will come to order. On January 12 
of this year the Secretary of the Navy issued a stop work order 
for the construction of the third vessel of the Navy's Littoral 
Combat Ships (LCS). At that time the Secretary's explanation to 
the committee cited escalating costs in the LCS program. He 
indicated he needed to verify that the correct oversight 
systems were in place and that the reason behind the price 
escalation for the first ship was completely understood in 
order to control cost of future ships. The Secretary 
acknowledged that the stop work order would further escalate 
costs associated with the LCS program, specifically in 
planning; however, he was convinced that he needed to fully 
comprehend the faults within the program execution before 
continuing.
    As many of you are aware, the Navy currently uses large 
combatants to accomplish missions much more suitable to a fleet 
of smaller and faster ships. It is a waste of resources to have 
a modern Aegis class destroyer conducting board and search 
operations. In order to remedy this misallocation of assets the 
Navy advocated for a smaller, faster and cheaper ship with 
reconfigurable warfighting capability, the ability to operate 
in a Littoral Combat environment. In a world of asymmetrical 
threats, this new ship would be capable of both protecting the 
main naval force anti-submarine and anti-mine capability, 
taking the fight to the enemy with a wide array of installed 
weapons systems.
    This committee is supportive of that vision, which is now 
known as the Littoral Combat Ship. One of the key selling 
points of the development, design and construction of the LCS 
was affordability. The Navy has routinely advised this 
committee that costs were being closely watched and that the 
original estimates for affordability would be realized. In 
fiscal year 2006 National Defense Authorization Act, this 
subcommittee, led by my friend Representative Roscoe Bartlett, 
directed the Secretary of the Navy to meet the cost target of 
$220 million for the fifth ship of this class. The committee 
was told that the cost target was achievable. Now it appears 
this is not the case. I have been informed that Lockheed's 
first ship, the Freedom, is 50 percent above the baseline at 
about $270 million. We are looking at a ship that is going to 
cost the American taxpayers almost $400 million.
    I wish I could say that the cost overruns on defense 
programs were an exception. Unfortunately, in recent years cost 
overruns seem to be the rule. The American Congress has an 
inherent responsibility to the American taxpayer. We are 
expected and entrusted to account for how our tax dollars are 
spent. I have never taken this responsibility lightly, and I am 
going to make sure that this committee does due diligence on 
behalf of our citizens.
    If this Nation is to maintain undisputed dominance of the 
oceans of the world, we need to come to terms with out-of-
control cost growth of major shipbuilding programs. Congress 
will not continue to throw money away at programs that exceed 
their cost projections. On behalf of the American taxpayers, 
this committee will demand accountability and transparency, not 
only in the case of LCS, but across the range of acquisition 
programs. The bottom line is this, the Navy needs to start 
budgeting with cost margins to deliver ships at a price they 
promise the American people. Industry needs to understand that 
a government contract does not equal a blank check from the 
people of the United States. If industry can't execute a 
contract at an agreed upon cost, then there will be 
repercussions.
    To that end this committee will endeavor to determine the 
root causes of the staggering cost increases of the LCS 
program. Let me acknowledge that this committee is fully aware 
that the first ship of every class has learning curves in 
construction. The cost differential for first ships and follow-
on ships is well documented. In the specific case of the LCS, 
the committee is aware that the changes of design requirements 
to the vessel were implemented a week before the contract was 
awarded. However, Lockheed Martin began construction of the 
Freedom nine months after the award of that contract. The 
committee is also aware of construction delays caused by the 
late delivery of a key piece of the propulsion machinery. While 
Lockheed Martin fined its subcontractor for the late delivery, 
the cost of the delay is being paid out of the pockets of the 
American taxpayer.
    Today's hearing will focus on the LCS contract award 
method, the accelerated procurement plan, and the rationale 
behind using a system integrator as a prime contractor. At an 
absolute minimum, the committee expects that the two panels of 
witnesses today will address the following issues: What were 
the actual effects of the design change and late arrival of the 
reduction gears? Were these effects accurately understood by 
the contractor and by the Navy program office? Why or why not? 
How did the schedule of the program affect the decision making 
process of both the Navy and the contractor? Was there an 
unneeded rush to complete this that is now costing the taxpayer 
significantly more money? Have lessons learned been captured? 
And is there a mitigation plan to assure that these problems 
will not occur in follow-on ships? Does the current Navy 
oversight structure need to be modified? Does the Navy have the 
correct personnel in place as program managers and supervisors 
of shipbuilding with skills necessary to identify potential 
problems with construction?
    The first panel we will hear from today is comprised of 
representatives of the Department of the Navy. Testifying for 
the Navy we have Dr. Delores Etter, Assistant Secretary of the 
Navy for Research, Development, and Acquisition. Dr. Etter is 
the senior acquisition official for the United States Navy. 
Vice Admiral Paul Sullivan, the Commander of the Navy Sea 
Systems Command, who issues technical authority on building 
naval ships and supervises their construction. Rear Admiral 
Charles Hamilton, the Program Executive Officer for Ship 
Construction, who is charged with oversight for all surface 
ship construction programs. Rear Admiral Barry McCullough, 
Director of Surface Warfare Requirements for the Chief of Naval 
Operations.
    Second panel includes the following representatives of 
prime contractors and major subcontractors. Mr. Fred Moosally, 
President of Marine Systems at Lockheed Martin, prime 
contractor and the system integrator for the LCS program. Mr. 
Richard McCreary, Vice President and General Manager of 
Marinette Marine Shipyard, the construction yard for the first 
LCS. Mr. Mike Ellis, Vice President and Chief Operating Officer 
for Bollinger Shipyards, slated to build LCS 3. Mr. Kevin Moak, 
Chairman, Gibbs & Cox, Inc., the naval architecture firm that 
designed the LCS built by the Lockheed Martin team.
    I would now like to recognize our panel's ranking member, 
Roscoe Bartlett.

  STATEMENT OF HON. ROSCOE G. BARTLETT, A REPRESENTATIVE FROM 
  MARYLAND, RANKING MEMBER, SEAPOWER AND EXPEDITIONARY FORCES 
                          SUBCOMMITTEE

    Mr. Bartlett. Thank you, Mr. Chairman. Mr. Chairman, I 
would like to thank the witnesses for being with us today. Dr. 
Etter, on January 11 you announced publicly that the Navy was 
aware of significant cost growth on LCS 1 and that the Navy 
will be taking prompt action to investigate the matter further 
to determine the exact amount of cost growth as well as root 
causes. The following day Secretary Winter delivered a stop 
work order to Lockheed Martin, the lead systems integrator for 
LCS 3, which had not yet begun construction.
    While I applaud your efforts and the efforts of your staff 
to keep Members of Congress apprised of the steps being taken 
by the Navy over the last four weeks, I have also expressed my 
concern to you regarding our apparent inability to learn from 
past lessons. Today will be the first opportunity for this 
subcommittee to receive testimony on the Navy and Lockheed 
Martin's preliminary findings regarding root causes of cost 
growth, the LCS acquisitions strategy which was widely heralded 
as a paradigm ship for shipbuilding which may have 
inadvertently created challenges for the Navy and industry 
team. The Navy and Lockheed Martin program management 
structures for LCS, how well did these structures perform their 
duties and what lessons have we learned to mitigate further 
cost growth on follow-on ships and other shipbuilding programs? 
The reporting mechanisms and the incentives in place to 
minimize cost schedule and requirements growth, particularly 
within a cost-plus contract and using a lead system integrator.
    I cannot overemphasize the importance of your testimony in 
this regard. This subcommittee has been committed to ensuring 
that the Navy and Marine Corps receive the necessary resources 
to maintain sufficient force structure to meet current and 
future operational requirements. However, if LCS costs cannot 
be controlled, we will meet neither the operational 
requirements of our Navy nor the needs of our industrial base. 
I consider this a serious threat to our national security.
    In the near term, the President submitted his budget 
request this week. The request includes funding for an 
additional three LCS sea frames which would provide authority 
for hull 7, 8, and 9. It is critical for this subcommittee to 
understand what measures the Navy proposes to take and the 
point at which LCS design stabilizes in order to adequately 
evaluate the budget request and to make appropriate decisions.
    I would ask all of our witnesses to maintain an open 
dialogue with this subcommittee even after this hearing to 
ensure a sensible outcome for the fiscal year 2008. Last, I 
would like to remind members that while the Navy has awarded 
contracts to both Lockheed Martin and General Dynamics for 
Flight Zero of LCS, both contractors remain in a competitive 
environment. As a result, some of the information relevant to 
this hearing, such as exact cost and man-hour estimates or 
engineering data that may provide a competitive advantage is 
considered business sensitive. We should all respect the 
proprietary nature of such information and the laws which 
govern the witnesses' testimony. Both the Navy and Lockheed 
Martin have done an extraordinary job of sharing such 
information as may be necessary for this subcommittee to 
perform its oversight function. As a result, much of that data 
has been provided to committee staff and is available to 
members upon request.
    Again, I want to thank all of you for your distinguished 
service to our country and for participating in today's 
hearing. Thank you, Mr. Chairman.
    Mr. Taylor. Thank you, Mr. Bartlett. I would like to ask at 
this time unanimous consent that our colleague from New Jersey 
be allowed to participate in the hearing. Without objection. Do 
any other members wish to make an opening statement? We have 
unfortunately been called to a 15-minute vote followed by five 
5-minute votes. We have about seven minutes. What I would 
recommend is that we go ahead and break, go ahead and make 
those votes and give our witnesses--because I really--number 
one, we are on a day of such a distinguished group here, and I 
want this panel, those that are here, to give you our undivided 
attention, to not be interrupted by votes. So if you do not 
mind, we will break. Hopefully we will be back, I regret to 
say, in a half-hour or so. Then we just plan to proceed until 
we finish. Okay? All right.
    [Recess.]
    Mr. Taylor. I very much apologize for the delay. The House 
has adjourned for the day so we will not anticipate--we had 
tried to see if tomorrow was available but several of the 
members have conflicts. So if you don't mind, we are going to 
go through. I guess the good news is you probably won't be 
getting as many questions as you would have. But with that, I 
want to thank you again, our distinguished guests.
    I guess we will begin with you, Madam Secretary.

STATEMENT OF HON. DR. DELORES M. ETTER, ASSISTANT SECRETARY OF 
 THE NAVY FOR RESEARCH, DEVELOPMENT AND ACQUISITION; VICE ADM. 
 PAUL E. SULLIVAN, COMMANDER, NAVAL SEA SYSTEMS COMMAND, U.S. 
  NAVY; REAR ADM. CHARLES S. HAMILTON, II, PROGRAM EXECUTIVE 
 OFFICER FOR SHIPS, U.S. NAVY; REAR ADM. BARRY J. MCCULLOUGH, 
             DIRECTOR OF SURFACE WARFARE, U.S. NAVY

             STATEMENT OF HON. DR. DELORES M. ETTER

    Secretary Etter. Thank you. Chairman Taylor, Mr. Bartlett, 
members of the subcommittee, thank you for the opportunity to 
appear before you to discuss the cost and schedule challenges 
associated with the Navy's Littoral Combat Ship program, or 
LCS. On behalf of myself and the others who join me I would 
like to submit our written testimony for the record. As 
Assistant Secretary of the Navy for Research, Development and 
Acquisition, I serve as the Navy's acquisition executive. The 
authority, responsibility and accountability for all Navy and 
Marine Corps acquisition functions and programs rest with me. I 
assure you that we moved quickly to determine the root causes 
of this cost growth and we are taking corrective actions.
    The Chief of Naval Operations (CNO) has reaffirmed the LCS 
requirement to defeat asymmetric anti-access threats generated 
by diesel submarines, mines and swarming boats. LCS is also a 
key element of the Navy's requirement of 313 naval vessels. It 
comprises 55 of the 313 ships in the long-range shipbuilding 
plan. Because LCS is so critical to our national security, I 
want to share with you some of the program challenges and the 
corresponding actions that we are taking to ensure that the LCS 
program is successful.
    New ship designs historically face cost and schedule 
pressures. LCS also incorporated many additional new 
approaches. LCS has a rapid 24-month build cycle instead of 5 
or more years. Naval Vessel Rules (NVR) were used for LCS for 
the first time as a building code for warships, and this is the 
first construction of combatants at mid-tier shipyards. The 
result was an aggressive focus on schedule which increased 
concurrency between design and production. Unexpected vendor 
issues and design changes due to NVR were also more difficult 
to accommodate. In addition, the Navy did not properly adjust 
its management to accommodate for all of these first and thus 
lacked sufficient oversight. Finally, there was not as much 
transparency as was needed into management and cost matters.
    Lockheed Martin also experienced some challenges. They did 
not fully understand the impact of NVR on the design, resulting 
in more design and production concurrency. They faced increased 
cost of materials such as steel. Manufacturing failures on the 
main reduction gears on the lead ship created a total schedule 
impact of 27 weeks, and there was also not as much transparency 
as was needed into management and cost issues.
    You requested a timeline for the identification of the cost 
overrun. Deteriorating cost performance on LCS 1 was observed 
in late summer 2006. However, cost performance did not improve 
as expected following the September 23, 2006 launch. In early 
November I was briefed on the negative cost trends. Following 
that meeting the Program Executive Office (PEO) and the 
contractor commenced in-depth cost reviews. Lockheed Martin 
briefed me and the PEO team on their cost review on December 
18, confirming significant LCS 1 overruns. I alerted Navy and 
Office of the Secretary of Defense (OSD) leadership and 
directed a Navy team to conduct a detailed analysis of the 
overrun. On January 12, 2007, the Navy issued a 90-day stop 
work order for LCS 3. Work on the other Lockheed Martin ship 
and on the two G.D. ships have not been affected. This stop 
work order was issued because the contractors' estimates of 
cost to complete exceeded our budgets on LCS 1 and LCS 3. I 
initiated a number of reviews to determine the root causes for 
the cost overrun on LCS 1 and to determine the appropriate 
courses of action. I briefed the initial results of the 
independent program managers assist team, PMAT, including our 
detailed actions during the 90-day stop work period to your 
professional staff yesterday.
    Rear Admiral Chuck Goddard is conducting a review of all 
four ships currently under contract. The Navy Inspector General 
is performing a review and Lockheed Martin also performed a 
review of the root causes and actions to correct declining 
contractor performance. Our initial assessment revealed the 
following root causes: An overconstrained program. We specified 
cost, schedule, and performance that together gave little room 
for design trades. A design and build schedule concurrency that 
was made worse by the parallel ship bid and development of NVR. 
The competitive environment resulted in contractor disincentive 
to raise concerns. Insufficient metrics and tools to seek 
trends early and inadequate oversight of design and 
construction by both the contractor and the Navy.
    Our initial recommendations for actions include improving 
the timing and staffing levels of onsite government oversight, 
examining the ability of the program office staff to keep pace 
with acquisition, matching the most experienced people to the 
programs with the highest risk, and ensuring that earned value 
metrics are correctly reported by shipyard. These enhancements 
will help us identify and resolve program issues earlier before 
they become larger problems. We are also aggressively applying 
the lessons from LCS 1 across all our ship programs.
    In closing, LCS will bring a critical capability to our 
Nation. The Navy continues to remain committed to cost control. 
Cost overruns on Navy shipbuilding programs cannot be 
tolerated, and the Navy intends to remain transparent as LCS 
decisions are implemented.
    Thank you for this opportunity to appear before this 
subcommittee to discuss the Navy's commitment to LCS and to 
correcting the issues that have arisen. We look forward to 
responding to your questions.
    [The joint prepared statement of Secretary Etter, Admiral 
Sullivan, Admiral Hamilton and Admiral McCullough can be found 
in the Appendix on page 47.]
    Mr. Taylor. Madam Secretary, again I do want to apologize 
for keeping you and your distinguished group late. Do any of 
the admirals wish to speak?
    Admiral Sullivan. No, sir.
    Mr. Taylor. The impression I get from your testimony and 
from what I have read is that in order to build this ship, and 
I believe the term that CNO used was ``with the speed of 
light.'' In order to build this ship and deploy this ship at 
the speed of light, it certainly appears that a lot of costly 
mistakes were made that did not result in building the ship any 
faster, but certainly resulted in the citizens paying well over 
$100 million more for the ship than they should have. The other 
thing that troubles me is, quite frankly, I am disturbed by the 
whole thought of training young people at our academies, having 
them spend a life at sea, having them get the knowledge of that 
life at sea, and traditionally it would be those senior level 
captains and admirals who would draw the specs to a ship, put 
it out to industry, say give us a price on it. I am really 
troubled with the whole design/build concept, not just this 
program but with two Coast Guard programs that are equally 
screwed up.
    I would like to hear your thoughts on whether or not your 
department is rethinking the entire design/build concept 
because in my book, it is zero for three right now.
    Secretary Etter. Congressman Taylor, we are looking closely 
at all of the things that went on in the design of this program 
so that we can learn lessons from the mistakes that we made 
here. We are finding a number of things, as I outlined in my 
initial statement, and I do think that we are learning lessons 
that will apply to other ships. I do believe we have the right 
processes. We understand how to do this. But we have challenges 
when we try to address taking risk and getting things done 
quickly. It is a balancing thing that we have to do, and that 
is the challenge of making things happen quickly so that we can 
get ships to the warfighter.
    Mr. Taylor. In trying to work with--and believe me I want 
this ship to be built. I want us to get to even better than a 
313-ship Navy and this is certainly slowing things down, but I 
have to tell you there will be some skepticism within the halls 
of Congress and in the other body when there are other pressing 
defense needs. Two screwed up Coast Guard programs. This thing, 
quite frankly--I have said it, I will say it again--the 
spokesperson for this program at the moment ought to be Michael 
Brown. That is how disappointed I am in the program. It has got 
to get better and we will never get better unless we identify 
these problems, and I have word from someone in the Department 
of the Navy this is not going to happen again.
    Traditionally some of the people who visited me say, well, 
we always have first-ship problems. When we are only going to 
build seven of a kind of the DDG 1000, we can't afford to throw 
away one of seven. We can't afford these kind of problems, and 
what I would like to hear from you and from the admirals is 
what sort of structural changes are going to take place so that 
this doesn't become a habit?
    I happen to have been in south Mississippi in the wake of 
Hurricane Katrina. I saw an enormous amount of waste on cost-
plus contracts. I never want to see another cost-plus contract 
come out of this Department as long as I live because I think 
someone at a business school somewhere is telling defense 
contractors if you get a cost-plus contract and if you don't 
take advantage of the government you are a fool. We are not 
going to have that anymore. And I want to hear from you and I 
want to hear from these admirals this is never going to happen 
on their watch.
    I am saying this in the form of a question, Ms. Etter. 
There are other pressing defense needs. There are airplanes 
that need to be bought. There are other pressing defense needs. 
There are a whole lot of vehicles that this committee is going 
to try to get built to make this more mine resistant. There are 
a lot of ways that we can pay the taxpayers' defense dollar on 
programs that work.
    Secretary Etter. At this point in our analysis we are 
finding this ship meets all the capability requirements that we 
wanted in it. So the problem is not with the ship. The 
capabilities are there. The challenges are that we tried to do 
it too fast. There are a number of things that we are learning 
from that we are applying as we look at other ship programs. 
Certainly we are all concerned about DDG 1000 being very 
successful. So the things we are seeing here we are fixing not 
only for LCS, but the other ships in terms of, as I mentioned, 
oversight.
    One of the things we have learned is that we need to have 
more people, the Superintendent of Ships people that are on the 
ground at the shipyards. So we are working to make sure as just 
one example that we do that in a way that takes into account 
the more priority programs.
    Mr. Taylor. Secretary Etter, is that going to be a 
structural change within the Navy to where this doesn't occur 
again or is this a one-time fix and then we turn around and 
find ourselves in the same boat in a couple years on the DDG 
1000? Within the Navy what is going to change so that Naval Sea 
Systems Command (NAVSEA) ships don't do this again, so within 
the Navy the right people and the right number of people are 
assigned to catch problems early on before they lead to other 
problems, just as the reduction gear led to an enormous cost of 
escalation on this program?
    Secretary Etter. I would like to ask Admiral Sullivan to 
talk to the Naval Vessel Rules because that is one of the 
significant reasons for the cost growth on this ship, and this 
was something that was very important to do for the ship and 
something that is important for us to do for these follow-on 
ships. Admiral Sullivan?
    Admiral Sullivan. Yes, ma'am. Let me talk about Naval 
Vessel Rules first and why we had to do them and why it was so 
concurrent. We had a set of--I will call them builders' codes, 
like you would do for builders' codes for the warships of the 
Navy, called GENSPECS, general specifications. Those are out of 
date because they hadn't been funded for a long time and the 
folks that we had in house in the Navy technical authority to 
write and keep those rules up to date had been cut severely. So 
budget cuts to both the rules development and the people that 
did them put us in a situation in 1998 that we had to cancel 
those rules. With the DDG 1000 and the LCS coming down the road 
quickly at us, we had to do something. So we started our 
partnership with American Bureau of Shipping (ABS) in 2003 to 
write a new set of rules to take the best of the old and some 
of the good commercial practice from ABS and blend them 
together in a set of Naval Vessel Rules for the ship. A problem 
is that we did that throughout--concurrently throughout the 
time when the bidders were bidding on the ship and the ship 
that we bid and the ship that we costed out is not the same 
ship that we are buying today because of the parallel 
development of those rules, which are good rules, they are 
going to keep our sailors safe. It would have been much better 
had we had those rules complete, well understood before the 
ship was designed, costed and tried to be built.
    Mr. Taylor. Admiral, the whole concept, and again my memory 
is so far from perfect, but I do remember someone appearing 
before this committee and proposing that they go to ABS rules 
like somehow that that was absolutely the only course to take. 
And what troubles me in retrospect is I am not a professional 
sailor, you are. And what troubles me is that why no one in 
your profession was raising the question that ABS is fine for a 
commercial vessel. It is not intended to go in harm's way. It 
is not going to be sent out in the worst weather. People aren't 
going to intensely try to sink it. And why the whole delay in 
deciding well, we are not going to go to ABS. We are going to 
go back to a naval vessel somewhere in between. But even with 
that decision being made, there was still seven months before 
the Navy said this is what we are going to and the contractor 
beginning their work. I would think that is a heck of a lot of 
time for those people to have implemented those plans without 
using incredibly expensive cost delays.
    Admiral Sullivan. Well, let me say first about using ABS 
rules. The Naval Vessel Rules are our rules and I mean they are 
the Navy's rules. The ABS rules that are used for commercial 
ships would not in any way, shape or fashion be used to build a 
United States warship. I am talking about a combatant ship. The 
Naval Vessel Rules are designed for combatant ships. They 
include the best of the Navy technical authority in every 
single section of the rules. Again, the concurrency of the 
design work and the build spec gave--we in the Navy had, and I 
will say an impression that the ship design and construction 
teams. Because they worked with us on the Naval Vessel Rules 
and because we had several rounds of discussion of those rules 
and several rounds of publication of those rules, we felt that 
their design reflected the rules. It was only in that seven-
month period that you are talking about that we discovered we 
were--the ship that was bid did not include many of the 
provisions of the Naval Vessel Rules because it was based on a 
commercial design and in getting the ship design from the 
commercial design to meet the rules that we need to keep our 
sailors safe, that is what took those seven months, and again, 
because of the highly pressurized schedule, the ship 
construction started before the design was complete.
    Mr. Taylor. Admiral, I would think common sense would beg 
that someone in the senior leadership with the Navy would have 
said, this doesn't make sense. Let's don't start cutting steel, 
let's not start putting the ship together until we know what 
the final product will look like, where we want the stranglers 
to be, where we want the pipe hangers to be, where the wiring 
and the plumbing have to be, and what is particularly troubling 
is not only is the ship delayed but the taxpayers are out over 
a $100 million. That is a heck of a lot of money.
    Admiral Sullivan. Yes, sir. The need to go stand up and say 
this isn't going to make sense was not particularly visible to 
Navy leadership, partly because of the cause that Dr. Etter 
mentioned, which was it was a lack of transparency in the 
program and also there were not enough Navy supervisors, 
shipbuilding people on site early in the process. We ramped 
those people up and we will be ramping them up to about double 
today very shortly, but the time to catch all this was early in 
the program, and we did not have eyeballs on site enough to do 
that.
    Mr. Taylor. Admiral, another thing that troubles me, and I 
would welcome your thoughts or any member of the panel's 
thoughts, and I will correct a mistake that I made. I made the 
mistake of saying that the taxpayers are going to pay twice for 
that reduction gear when it turns out that the contractor, even 
though it was a cost-plus contract, all he billed was once and 
apparently they paid a penalty for that. But the delay in that 
reduction gear did throw the building of the ship out of 
sequence, and it did cause the citizens to pay a heck of a lot 
more for that ship because of throwing it clear out of 
sequence.
    This is water under the bridge. What I don't want to see is 
this become the norm in shipbuilding in our country, where a 
mistake of that magnitude has occurred and the only person who 
pays a penalty is the taxpayer. How are we going to address 
that? What would be your recommendations to address that so it 
does not happen again?
    Admiral Sullivan. For that specific----
    Mr. Taylor. Or anything similar to that. The propulsor does 
not show up, the generator, anything that has got to be there 
first does not show up and causes sequential problems in the 
construction.
    Admiral Sullivan. The best remedy for all of those sorts of 
problems are to not concurrently design and build the ship. The 
schedule should not be constructed so that you are building the 
ship when you don't have the design complete, and I would also 
suggest that some of these major components that are arriving 
late should be the source of an advanced procurement.
    Now I am off my territory here because that works on the 
acquisition side. Maybe Admiral Hamilton can comment. Should 
there be an advanced procurement for these ships to buy water 
jets, diesel engines, reduction gears, et cetera?
    Mr. Taylor. All right. Seeing as how the DDG 1000 is coming 
down the pike, is that advanced procurement money there? And 
has the appropriate amount of advanced procurement been 
requested so this does not happen on the DDX 1000?
    Admiral Sullivan. I will have to pass that one down to 
Admiral Hamilton.

         STATEMENT OF REAR ADM. CHARLES S. HAMILTON, II

    Admiral Hamilton. Chairman Taylor, good afternoon. It is 
great to be with you again.
    Mr. Taylor. Thank you for being here this evening. You are 
quite a gentleman for sticking around this long.
    Admiral Hamilton. On DDG 1000 the analogies to the LCS 
program are pretty sparse in my opinion. In DDG 1000----
    Mr. Taylor. Admiral Hamilton, if you could get a little bit 
closer to the mic.
    Admiral Hamilton. The analogies between LCS and DDG 1000 
are fairly sparse. In DDG 1000 we spent a three-year period 
developing engineering development models to do risk mitigation 
of the technologies we were working on. In DDG 1000 we have two 
and a half years of detailed design with teams that have been 
in place with a design tool that has been in use for five years 
with both teams. We have metrics in place that track those 
design artifacts and products on DDG 1000 and those have been 
reported on a quarterly basis to our leadership and the Navy 
and OSD. We have those ships and DDG 1000 built in our new 
construction shipyards at Bath Ironworks and North Montgomery 
Ship Systems, Pascagoula, where there is a large footprint of 
supervisor over ships personnel to maintain both earned value 
management tracking as well as ship performance during the 
production process. The program office for DDG 1000 in 
headquarters is staffed at a level of about five times that of 
the LCS program. The design concurrency that was deliberately 
built into the LCS program because Admiral Vern Clark requested 
we get this at the speed of heat is not resident in the DDG 
1000 program. We invested significantly in budgetary terms for 
both design and production, to include advanced procurement 
money for those materials that would allow us to get those 
materials and your need date satisfied to a sequence that 
construction over those ships in a way that would give us 
production efficiencies. Those conditions did not exist on LCS 
based on our stated Navy need to get this ship in the water as 
fast as possible, to respond to the global war on terror 
threat. And so in that process, we elected to invoke Naval 
Vessel Rules as part of both a preliminary design process, the 
final systems design process, and the detailed design and 
construction process. We teamed with our industry partners to 
help write those rules in realtime. They participated in that 
rule set in the technical committee, they were advised of their 
requirement to deal with that in source selection. They 
testified in both writing and in orals and source selection 
that they understood those rules and were executing to those 
rules. Following publication of those rules in May of 2004, the 
companies had the opportunity to come back to us through the 
engineering change proposal (ECP) process to deal with the NVR 
changes that were required. That did occur. We did negotiate 
those ECPs with the two companies and proceeded along our 
production dilemmas with the reduction gear and steel frankly 
followed the mitigation of the ECPs for Naval Vessel Rules and 
Naval Vessel Rules is clouding this conversation.
    Mr. Taylor. Now I will yield to my ranking member, Mr. 
Bartlett.
    Mr. Bartlett. Thank you very much. I had the privilege of 
spending many hours with three of our witnesses on 
Congressional Delegations (CODELs) and on each of those our 
chairman was with us when we visited the shipyards in Europe 
and Asia and in this country. I was impressed that the 
taxpayers were getting a really good value for the salaries 
that we paid you. I never traveled with people that I thought 
were harder working or more knowledgeable, and I am surprised 
that we are here today because you are really very bright 
people and we shouldn't be here today talking about this, and 
so I have been asking myself, how in the heck did we get here? 
If design/build could work anywhere, it ought to have worked 
for this ship. This is not rocket science. This is a sea frame 
with, I presume, relatively defined interfaces with the 
modules. If design/build, Mr. Chairman, would ever work, Mr. 
Chairman, it ought to have worked here because this is probably 
the least complicated package that we--you know, it has got--it 
is just the sea frame. It has got only interfaces for the 
modules that are going to go on it. So we really need to take 
another look at the design. I am not ready yet to admit that 
the design/build will not work. It clearly didn't work here. I 
am not sure that the reason that we are here today is because 
of design, of design/build.
    Dr. Etter briefed me on this program when we were on one of 
the CODELs and there were several of what looked like modest 
overruns, but every one of them were explainable. One of them 
was I understand that somehow we got caught up with $220 
million and never put in the program office cost. So we should 
have been talking about $220 million plus whatever the program 
office costs were. The second was that there was some inflation 
that had gone about, and that is a usual thing. And always 
there is inflation, unfortunately. Because we spend too darn 
much money in Washington, and the input I got then was that 
considering these things, we were okay, we were on schedule, 
and the hull minus inflation and minus the program office was 
still at $220 million. That is what I was told on that CODEL. I 
have really thought about this and why we are here with such 
confident, knowledgeable people running this program. Who 
imposed the schedule? Because I look back on it, every one of 
the cost overruns except for whatever cost increase there would 
have been, a result of the Naval Vessel Rules, all the other 
costs were because we were trying to build to a schedule that 
was totally unrealistic.
    When the reduction gears didn't get there, we started 
building other modules on the ship, and that greatly increased 
the cost, I understand, the final integration of those modules, 
and we were doing that simply because there was a schedule that 
we were trying to adhere to. Instead of taking a meaningful 
pause to look at what the Naval Vessel Rules would cost us in 
terms of schedule and time, we had a relatively modest increase 
in schedule and a relatively modest increase in cost, both 
which turned out to be very unrealistic.
    Who imposed the schedule on us? Because Mr. Chairman, as I 
look back at this program, I think that we can attribute almost 
all of the costs except those attributable to Naval Vessel 
Rules, almost all of the costs to trying to adhere to a 
schedule which was just very unrealistic. Who imposed this 
schedule on us? I think that was probably above your pay grade, 
wasn't it?
    Secretary Etter. I would like to ask Admiral McCullough to 
address this in representing the requirements part of the 
program.

           STATEMENT OF REAR ADM. BARRY J. MCCULLOUGH

    Admiral McCullough. Yes, ma'am. Chairman Taylor, Ranking 
Member Bartlett, it is a pleasure to be here with you this 
evening. To answer the senior member's question, the global war 
games hosted by the Naval War College in both 2000 and 2001 
identified a critical warfighting gap in the Littoral with 
respect to quiet diesel submarines, submerged mines and small 
swarming boats with anti-ship cruise missiles, specifically 
directing us to build a capability to punch through and support 
joint forcible entry operations. As such, the then CNO Admiral 
Vernon Clark in his posture hearing for the 2004 budget in 
February of 2003 said, we will capitalize on DOD initiatives, 
spiral development and new acquisition methods to streamline 
the acquisition process and begin construction of the first LCS 
in 2005. The CNO believed this was a critical warfighting gap 
and we needed this capability to the fleet soonest and we were 
going to take advantage of revisions to the DOD 5000 manual 
that occurred in May of 2003. Additionally, then Assistant 
Secretary of the Navy for Research, Development and Acquisition 
John Young directed that this be a fast track acquisition 
program similar to what the U.S. Air Force does with 
Pathfinder, and he said we would take this ship from 
conceptualization to initial operational capability (IOC) in 
five years and directed that the IOC date be 2007. That is what 
drove the schedule. We had a critical warfighting gap and the 
Navy leadership believed we needed to fill it.
    Mr. Bartlett. Yeah, this whole thing reminds me a little 
bit of General Shinseki and his berets. He wanted them by a 
certain date and somehow nobody in his chain of command had the 
courage to tell him the only way we are going to get those is 
to have the Chinese build them, make them. And I was at the 
hearing when he first learned that and I suggested that maybe 
he should put an anonymous suggestion box out in front of his 
office because certainly someone in that chain of command knew 
he would be embarrassed when he learned that the berets that he 
wanted were being made in China. And there had to be somebody 
in your organization and in Lockheed Martin that realized that 
this was an unrealistic schedule, that if we tried to adhere to 
the schedule we were simply going to increase cost, and it just 
seems to me that is very unfortunate because I think the 
design/build can work. It clearly didn't work here but I am not 
willing to blame design/build because if ever it could work it 
should work on a ship like this probably, being a sea frame one 
of the most simplest predictable things we have built in a long 
time, isn't it?
    Secretary Etter. Yes. Admiral Sullivan.
    Mr. Bartlett. That was supposed to be the genius of this, 
that it is a sea frame. And we define interfaces that interface 
with the modules.
    Admiral Sullivan. Yes, sir. That was our impression at the 
very start of this project where we were adopting commercial 
high speed ferry designs, and that was the intent when we 
marched off on this project. However, when you take a design 
that is for limited service, close to shore, that doesn't have 
to fight wars, and translate that basic design into a ship that 
has to go forward, fight wars, get out of harm's way, get hit, 
have a combat system, have guns, have missiles, have Navy 
computers on it, and also perform in high sea states where the 
parent craft, the ferry, would come in and just not--was just 
not--we don't have that choice. A myriad of changes in hull 
structure, auxiliary systems and electronics take place and we 
were all caught, I would say, by the increasing complexity.
    Mr. Bartlett. Would you agree though if we hadn't been 
constrained by a schedule that we probably could have 
ultimately built it a lot cheaper with fewer false starts? My 
understanding is that a lot of modules that were built before 
we had final design trying to adhere to the schedule, we had a 
lot of rework on those.
    Admiral Sullivan. That is right.
    Mr. Bartlett. Because we wanted to reach--to meet a launch 
date, we didn't keep the modules in the yard upside down as 
long as we could, we didn't keep them in the yard as long as we 
could, we put them in the ship, hoping that we could catch up 
in the most inefficient mode for building, which is once it is 
in the water, as I understand, and so we kind of abbreviated 
what we could have done upside down. What we could have done 
when it was modules in the yard and because we wanted to meet a 
launch date, we rushed these things to weld them together for 
launching, we would fix it once it was in the water. Am I wrong 
that that is what happened?
    Secretary Etter. There were aspects of that that were true 
about this problem, but what we are trying to do at this point 
is understand what really occurred in the difference in price. 
We have roughly $100 million that is different in the price 
that we anticipated. So we are trying to understand, what part 
of that really was caused by doing the concurrent design and 
build? Because if it is attributable to that, then we won't see 
that expense as we go on to the next ships. So that was the 
reason for the stop work, so we could look at things precisely 
as you are describing and understand whether it was attributed 
to, for example, the Naval Vessel Rules being invoked in 
parallel with this or whether it was due to the reduction gear 
or whether it was due to materials or whatever. So that is the 
reason for the stop work, to understand that difference in 
price.
    Mr. Bartlett. But doesn't this all get back to schedule? I 
would think that you wouldn't build a module where you didn't 
have the specifications, and apparently we went ahead and built 
a lot that we had to redo, is that correct?
    Secretary Etter. That is correct. Admiral Hamilton----
    Mr. Bartlett. And that is because we were trying to adhere 
to a schedule? And nobody waved a red flag and said, hey, you 
know, you might adhere to that schedule but it is really going 
to cost a lot more money.
    Admiral Hamilton. Congressman Bartlett, we did several 
things on the time frame based on the urgency of the need. As 
we provided the drawings for ABS for certification, we triaged 
and prioritized the drawings to help follow the erection 
sequence of the modules for the ship, and so the modules that 
were first under construction were sequenced first and the 
majority of the drawing packages to support that were completed 
in a timely way to execute that construction sequence.
    Mr. Bartlett. How come there is so much rework then?
    Admiral Hamilton. A specific piece of the rework was vendor 
furnished information provided to the client by their 
subcontractors which inaccurately reflected foundation points, 
connections, fittings and some of that was impacted by design 
and some of that was impacted by bad material ordering and 
procurement.
    Mr. Bartlett. We were told there was $26 million increased 
cost because of the reduction gear, of course reduction gear 
cost us no more. We understand now that was a fixed price item 
from General Electric and they ate the extra expense of cutting 
the gear wrong the first time. Isn't it true that there would 
have been no increased cost from that except for trying to 
adhere to a schedule and build modules out of sequence?
    Admiral Hamilton. It is true we elected to build modules 
out of sequence, again to meet the schedule and the urgency of 
the need. At the disclosure of the reduction gear problem we 
were not presented with--here is a 27-week delay in one 
discrete bite which would have allowed decision making to 
perhaps proceed in a different way. We were given in fact six 
different disclosures over a seven-month period, the 
aggregation of those disclosures got us the 27-week schedule 
delay. When we started, we thought we had about a two and a 
half-month schedule and thought that we could resequence around 
that initially without fundamental disruption to the ship 
construction.
    Mr. Bartlett. If we could roll back the hands of ship and 
be as smart then as we are now, what would you do differently?
    Admiral Hamilton. From my perspective, I would have done 
several things. I would have said to my design community, both 
in the Navy and in Lockheed, the design products are not 
maturing on a timeline that we really need to do, let us slow 
down and get that right. Separately, I would have relooked at 
the decision making we executed on the reduction gear 
resequencing to see if we had enough of the requisite 
information in hand to make the correct decisions about that 
sequencing, but I will tell you in both cases that both the 
industry team and the government were motivated by the belief 
that this need was now and we needed to satisfy it it as 
quickly as we could, and we tried very hard within the 
constraints of the program to satisfy that need.
    Mr. Bartlett. So a lot of these overruns were schedule 
driven, that is what you are saying?
    Admiral Hamilton. Yes, sir.
    Mr. Bartlett. Which was my assessment when I looked at it. 
Organizations looking over your shoulder like Congressional 
Research Service (CRS), did they do some assessments of this 
during this process? And if so, what did they tell you or tell 
us? Because they report to us, not you.
    Admiral Hamilton. CRS has examined our cost estimating 
procedures and are designed in a macro sense as part of their 
analysis. To the best of my knowledge, CRS has not specifically 
looked at either the design/build NVR concurrency question or 
the reduction gear question to date.
    Mr. Bartlett. Admiral Sullivan says that there weren't 
enough Navy personnel on site. How many were there? We 
understand that there were 13, and now it is going up to 14. 
That doesn't look like much of a ramp-up.
    Admiral Sullivan. At the start of construction there was 
nobody there, at the start of the contract there was nobody 
there because the ship was getting built in Marinette, which is 
a place we don't have a supervisor presence. So we had to 
develop a plan to ramp up those--that the people onsite from 
Supervisor of Shipbuilding (SUPSHIP) Gulf Coast. SUPSHIP Gulf 
Coast, as you know, is in an area that just had finished a 
hurricane and a third of the people who worked there lost 
everything. So that office had to get stood up in stages. We 
started with about three or four people. Then we ramped up to 
nine. We are ramping up to this month to about 14, 15. We will 
be up to over 20 in the next couple of months. So we are taking 
action right now, but we should have done this months ago.
    I have to say that SUPSHIP Gulf Coast is about half the 
size it was about 15 years ago with a higher workload and that 
has been challenging. There are other high risk programs that 
are going on at SUPSHIP Gulf Coast with the small ship builders 
on the Gulf Coast, the LPD 17 program, recovering the DDG that 
was damaged by the storm and trying to get LHD 8 and LHA 6 on 
track whilst also trying to deal with work on the DDG 1000 
program. We are still working on the design piece so they are 
stressed, they are half the size they used to be, and we did 
not allocate enough people up to Marinette quickly enough 
because of the overall picture down there.
    Mr. Bartlett. Just one last question. We have to move on. 
We have another whole panel. What confidence do you have that 
our whole estimated completion cost will be any better than our 
estimation before?
    Secretary Etter. We have had a number of people looking at 
our cost estimates over the past few weeks. We feel that we 
have a pretty good estimate of what it will cost to complete 
the ship. We are continually improving our cost-estimating 
capabilities, but it is a challenge because it is forecasting 
when you don't have a lot of data for similar ships. We do 
believe at this point with the analysis going on now we will be 
able to predict the cost of the follow-on ship for LCS.
    Mr. Bartlett. Thank you very much. I hope we are not back 
here with a similar hearing after the ship is finally 
delivered.
    Thank you, Mr. Chairman.
    Mr. Taylor. The Chair now recognizes the gentleman from 
Pennsylvania, Joe Sestak.
    Mr. Sestak. Thanks for your time.
    I am sorry, I probably missed some of what was already 
said.
    I want to ask a couple of questions of process because I 
think the idea of LCS still is pretty darn good, the seaframe, 
get it out there, modules in and out. And Admiral Clark had a 
great idea. Admiral Clark really wanted to move this along but, 
like with anything else, victory has a thousand fathers and 
defeat is an orphan.
    My question I think has to do with process. You have the 
performance of the shipyard. You have the vendors' costs and 
the construction standards. My understanding is that by and 
large, the vendor issues and the construction costs were all 
taken care of in October of 2005, so they were within the 
fiscal year 2007 budget baseline, so to speak, and those were 
counted right; is that right?
    Secretary Etter. Yes. That is true. We did a rebaseline in 
which we accounted for the Naval Vessel Rules and the reduction 
gear and then some ship performance issues.
    Mr. Sestak. So is it the Navy's view the shipyard 
performance is causing the recent growth of the LCS?
    Secretary Etter. The recent growth is partly due to 
shipyard performance, but we also are concerned about 
understanding that in more detail.
    Mr. Sestak. Is there anything else--yards, shipyard 
growth--since you rebaselined those other vendor costs and the 
ABS, you know, the standards--is there anything else that 
causes a recent growth, in your view, not just understanding 
it, but anything else?
    Secretary Etter. We know that there were some materials 
cost. We know that there is performance cost, and I think that 
there is also still some impact of Naval Vessel Rules that were 
not completed earlier. So we think those are the three key 
categories, probably.
    Mr. Sestak. It was said in the papers that Lockheed Martin 
had come forward as early as March 2006 and let the Navy know 
about these concerns. Is that the case?
    Secretary Etter. There were constant discussions with the 
contractor, as we saw the performance, such that the cost was 
growing and the performance was deteriorating. So there were 
constant dialogues, and it was at different points in this 
process where different people began to recognize that there 
was something here more than just the lead cost issues.
    Mr. Sestak. But should it have taken--I think it was 
November that you were apprised of it.
    Secretary Etter. I was aware of increasing costs, but to 
point out at what time did I begin to recognize that, it was 
something more than the lead ship costs for me that really 
occurred into the fall.
    As we look back on the data now and you pull all the pieces 
together so you have it at one time, I think clearly we should 
have recognized it earlier. But we did not have people that had 
all the data together at one time, and that is part of what we 
have to change as we look at going forward.
    We also found that some of the metrics we were using were 
not correctly computed and so that also caused some problems. 
But I would like to also offer that question to Admiral 
Hamilton, if I could.
    Mr. Sestak. If I could, could I ask Admiral McCullough a 
follow-up.
    I am not that smart, but I never really understood quite 
the relationship between NAVSEA PEO and the Secretary's Office. 
Does the PEO report to you, or do you write its fitness report?
    Admiral Sullivan. The PEO reports to Dr. Etter, as do I.
    Mr. Sestak. And who writes the fitness report?
    Admiral Sullivan. Dr. Etter.
    Mr. Sestak. So you have an an-hoc relationship with PEO?
    Admiral Sullivan. No. For in-service ships, if a PEO runs 
in-service ships, delivered ships, not acquisition ships, he 
reports to the CNO VME, because I am responsible and 
accountable for delivered ships, maintenance and modernization 
to the CNO VME. But in my acquisition role, it is--if you are 
familiar with the support and reporting commander, the PEO is 
the supported commander and the NAVSEA is the reporting 
commander.
    Mr. Sestak. So the three-star is supporting the one- or 
two-star. Is that the best way to have this done, oversight set 
up by the Navy?
    Admiral Sullivan. It is the way the Navy executed 
Goldwater-Nichols.
    Mr. Sestak. Watching how the Chief of Materiel came into 
the NAVSEA and other things, is it the best--in view of what 
has happened here and other things, is it the best way to have 
this oversight? I mean, you have SUBSHIPs reporting to you, 
correct?
    Admiral Sullivan. Yes, sir.
    Mr. Sestak. And there were, according to how you talked to 
the Chairman, not enough people and yet the response is giving 
you an alarm about the acquisition sites, so to speak?
    Admiral Sullivan. Right.
    Mr. Sestak. And yet you are not really responsible. You are 
supporting someone for it. And yet you strip people on the 
deckplate kind of reporting it. Is this the best way for the 
Navy to have set up this system?
    Admiral Sullivan. You can always do better. When the 
program offices worked for the systems commands, it didn't give 
us overruns. It gave us the A-12s.
    Mr. Sestak. When they reported to you?
    Admiral Sullivan. Yes, sir. So I could see it either way, 
but fundamentally this is a pretty good organization. The 
reason it was stood up this way is so that the PEO had a direct 
line of accountability to the service acquisition executive, 
and that is a very clear line of distinction. So me, as the 
supporting guy, independent technical authority, independent 
head of contracting agency, independent head of budget office, 
and independent cost surveillance, we did not adequately do our 
job for the PEO and in my reporting relationship to Dr. Etter.
    Mr. Sestak. I am sorry. Admiral, you wanted to say 
something?
    Admiral Hamilton. Yes, sir, Congressman. We saw rising 
costs over the summer time frame. We tracked that in the July 
through September time frame. We specifically expected to see 
some disruption of the earned value management metrics as a 
subset of the execution of the run-up to the launching of the 
ship in September. We also expected in September after the ship 
was in the water that those metrics would stabilize and that 
the performance would be significantly higher than the 
disrupted metrics in the July-August time frame. We were 
disappointed to find a fundamental drop-off in performance 
after the ship was in the water.
    Mr. Sestak. Were you aware of the increased costs during 
the summertime? Is that when you first got notice?
    Admiral Hamilton. We have been tracking estimated 
completion for this ship since the inception of the ship.
    Mr. Sestak. I mean, since--this particular cost group, I 
thought, came to attention only by newspapers' reports, and I 
know those aren't always reliable in March.
    Admiral Hamilton. As we worked on the ship together and 
tracked costs, the costs of the ship and our budget were 
aligned through the end of September. They started to diverge 
at that point based on bad reporting and the earned value 
management system (EVMS) at the shipyard. We dove into that and 
attempted to correct it and understand it. As we continued to 
work through that and reported to our leadership, it became 
increasingly clear that there was some fundamental dilemma in 
the execution of the workforce and the tracking of that in the 
October-November time frame.
    Mr. Sestak. So up until September, what Lockheed Martin was 
telling you was everything seemed to be on track?
    Admiral Hamilton. We were within our budget and executing 
to that budget.
    Mr. Sestak. And that was about the time when you heard 
about it, Admiral?
    Admiral Sullivan. Well, first off, the discussions between 
Lockheed Martin and the program office were ongoing. There are 
plenty of numbers that have been thrown around but the 
fundamental ground truth, as you know well, is EVMS system. 
There were problems with that earned value management system. 
My supervisor recognized them, as did the program office, and 
in I would say late Spring of 2006, worked hard over the summer 
with the program office and the contractor to get the 
management reporting system to get good numbers. And as Admiral 
Hamilton had said, had a couple of months of good numbers, 
September, October; and again, that is what showed the dramatic 
increase in price or in costs to the government that was going 
to exceed the budget.
    Mr. Sestak. So it is about the same time as Admiral 
Hamilton found out that you found out?
    Admiral Sullivan. Yes.
    Mr. Sestak. And the other question I think I didn't pick 
up, and I am sure it is in the testimony, is what is the cost 
now expected to be of the fall 1-LCS, your best estimate at 
this time?
    Secretary Etter. At this point, it is somewhere in the 
range of 350 to 375 million. We are still evaluating cost 
estimates on the other ships.
    Mr. Sestak. So the following ships, I guess the last time 
it came across, there were roughly about 300 million, the LCS 
and fiscal year 2007 when the budget was submitted----
    Secretary Etter. The budget right now for the ships, the 
Lockheed Martin ships in June 2006, the contract was signed for 
203 million.
    Mr. Sestak. I am sorry. I meant for number 5, 6, 7, and 8, 
when you start laying the speculated costs for them it is still 
about 300 million for them?
    Secretary Etter. We don't have an estimate for that. The 
original estimate had been 220. And our goal had been to get to 
220 by the fifth ship. But we are now doing analysis to really 
understand what is----
    Mr. Sestak. So the fiscal year 2007 still had the 220 
number in it?
    Admiral McCullough. The 2007 budget has the ships priced at 
$260 million apiece for $720 million in 2007.
    Mr. Sestak. How much?
    Admiral McCullough. 260 apiece for 521. I am sorry. In the 
2008 budget the ships were priced at about $303.5 million. 
There is $911 million in the budget, as is currently written, 
for three ships in fiscal year 2008.
    Mr. Sestak. The 220 ship is now about 300.
    Mr. Mwangi-Kioi. Well, the 220 was unit cost, which 
includes the basic construction cost that Dr. Etter says that 
we now estimated at between 350 and $375 million plus the 
government-furnished equipment. It wasn't the end cost of the 
ship--change proposals, program management costs, and 
oversight. So we had a unit cost and then we had an end cost, 
and 220 was the end cost.
    Mr. Sestak. Don't you include all of those costs normally 
in the budget? You failed to do so in 2006.
    Mr. Mwangi-Kioi. Yes. That is correct.
    Mr. Sestak. So really, the original cost you just didn't 
accurately depict what you should have in the 2006 budget, 
correct?
    Admiral McCullough. That is correct. We incorrectly priced 
the ships, as we understood the program then. Yes, sir.
    Mr. Sestak. Because government costs and overhead are 
normally included?
    Admiral McCullough. Correct.
    Mr. Sestak. So when you correctly included them, it was 
about 300?
    Admiral McCullough. That was what we knew, when we 
submitted the budget. The average cost of the modules is about 
55 modules, the surface module being the cheapest--and I don't 
want to give you numbers because I don't have them in front of 
me--but the most expensive one is the mine module and that is 
more than the $55 million average.
    Mr. Sestak. So if you are buying two modules per ship, it 
is about 100 million?
    Admiral McCullough. If you took the average, yes, sir. It 
would be about $110 million. But in the 2008 budget as we 
submitted it, we have rephased the modules to support more 
advanced warfighting campaign analysis so there won't be two 
modules per ship.
    Mr. Taylor. We have a new rule in the subcommittee. Anybody 
who works past 6 o'clock can ask as many questions as they 
want.
    Mr. Sestak. Only changed when I got here, those working 
hours.
    The Navy said it is going to have 313 ships. And I gather 
some of that number is based upon the Navy not anticipating any 
bigger piece of the pie, kind of somewhat of a continuing line 
of what it has, Operation and Maintenance (O&M) and Military 
Personnel (MILPERS) kind of remaining flat and at least not 
increasing, and Research and Development (R&D) going down 
somewhat, maybe even staying down. But the real key of that 
313, my understanding is that all ships will come in at 
estimated prices.
    What does something like LCS do to that number of 313 
ships? I mean, if those are really what undergirds the 
assumptions of 313?
    Admiral McCullough. What we have looked at, Congressman, is 
we have increased the shipbuilding budget from $11 billion to 
about $14 billion over the past year in the 313 balance risk, 
affordability, industrial-based concerns, in the 20--15 to 20--
20 time frame in accordance with the Quadrennial Defense Review 
(QDR) direction to support the warfighter, and there is risk in 
budget when we laid it out on a $13.4 billion 2005 dollar-
escalated line.
    Mr. Sestak. On what line?
    Admiral McCullough. 13.4, 2005----
    Mr. Sestak. Procurement?
    Admiral McCullough. Supply Chain Management (SCM) budget. 
Only ship procurement. Not only the things that we use in the 
SCM budget. And we understand there is risk in that, but we 
believe we can make the 313 plan.
    Mr. Sestak. What does something like that, when the cost of 
the ship has increased so much, do to that estimate?
    Admiral McCullough. I will tell you, sir, that that is 
currently under review, and when we get that information, we 
will gladly provide it to the committee.
    Mr. Sestak. LCS cost overrun. This isn't the first time 
though, right, where initial estimates have been much lower 
than what finally came out on whether it is DDX or DDG 1000 or 
whether it is LPD, or whatever; is that correct?
    Admiral Sullivan. We typically have, if you look at the 
history, lead ship costs we underestimated by an average of 
about 20 percent. We try to put in the adders for all of the 
first-time costs and sometimes we get it. Most of the time we 
don't.
    Mr. Sestak. And then the average cost of the follow-on 
ships, they are usually how much above?
    Admiral Sullivan. We are usually very close on follow-on 
ships within 5 percent either way.
    Mr. Sestak. Thanks very much.
    Mr. Taylor. Last year in this bill, then-Chairman Bartlett 
included very strong language that the price cap for this ship 
was going to be 220 million. What I have failed to have heard 
is a proper explanation of--and I will give the panel an 
opportunity to address--is that as the reduction gear is late, 
someone had to make the decision to continue construction of 
the ship, knowing that the cost of that ship was going to rise 
dramatically because of the rework that would take place when 
that gear shows up later; it has to be installed.
    Someone had to know it was going to cost a lot more than 
$220 million. Who is the someone? Who did they seek the 
approval of and at what point did they intend on notifying 
Congress of those additional costs? Because the alternative is 
for someone to have said to Congress, knowing the Chairman's 
interest in controlling the cost of this ship, ``Mr. Chairman, 
we are at a crossroads. We've got a former CNO who wants the 
ship built quickly. We have got you, that told us that the cost 
of this is going to be 220 million. What is it that you want? 
Do you want it done quickly, or do you want it done 
expensively?'' and we didn't hear that. I don't believe the 
Chairman heard that on his watch. I know that no one from your 
office contacted me.
    I think it is a very fair question. When was that decision 
made, and at the time what did you anticipate the costs to be 
and how close was that anticipated cost to the real cost that 
we incurred?
    Secretary Etter. Mr. Taylor, we had in our budget during 
the summer approximately $270 million to cover this ship, and 
that was to cover the increases in the Naval Vessel Rules, the 
gear issues, and ship performance. So up through the summer, 
the anticipation was that we had enough dollars to cover this. 
It was only as we began to understand that from the various 
estimates we were getting and the errors we were finding in the 
earned value metrics that we were starting to have problems. 
And as those problems began to become more clear, we became 
more concerned.
    I agree with you, there was not sufficient transparency in 
the organization. That is one of the things that we must change 
and we are already in the process of doing that. But we did not 
have a process that allowed the individual pieces of the 
problem that people were seeing to come together and then, by 
coming together, be able to bring that information up through 
the organization so that we could identify the problem and go 
to our leadership and go to you to explain the issues.
    Mr. Taylor. Have you had a chance to look at the prepared 
testimony from the Lockheed Martin team?
    Secretary Etter. I have seen some of the text they have 
written, yes.
    Mr. Taylor. Do you agree with their statements? If there is 
any point of disagreement that you have, I would like to hear 
it now, because you won't have an opportunity to respond, since 
they will be coming after you.
    Secretary Etter. I do not agree with some of the ways in 
which they explain the Naval Vessel Rules, and I think I would 
offer this to Admiral Sullivan to discuss.
    Admiral Sullivan. Yes, sir. As we discussed before, the 
rules were, in fact, developed in parallel with the bid process 
and the source selection process. Lockheed Martin was good 
enough to provide me a copy of their independent analysis of 
what has gone wrong here, and we agree with most of it.
    I just wanted to put the point in that that analysis will 
tell you there are 14,000 changes from the February version of 
the rules to the May version of the rules which were invoked in 
the contract. And, yes, if you do a word search of the document 
by a ``shall,'' ``will,'' ``is to be,'' you get 14,000 
instances of that. Again, remember it said the rules apply to 
all surface combatants. If you take out the rules sections that 
don't apply to LCS because they are for acoustics or shock or 
something, you get--that takes out about 5,000 of those ``as to 
be,'' ``will,'' ``shall'' references. And then if you take the 
sections of the Naval Vessel Rules where we had a previous 
document such as our old general specs or an IEEE spec, that 
gets out another 8,000. And I will sign up to not 14,000 
changes in the rules, I will sign up to 14,000 word changes in 
the rules. But you get down to a number that is around 800 to 
1,000 real changes. And that is a big number anyway. But it 
isn't 14,000.
    I wanted to make that clear.
    Mr. Taylor. Admiral McCullough, anything to add to that?
    Admiral McCullough. I reviewed portions of the testimony 
that affect the requirements, and I have no disagreements with 
the testimony with respect to requirements and the ship. The 
operational requirements have not changed since the inception 
of the LCS concept.
    Mr. Taylor. How about any other part of that document? Do 
you have any disagreements with----
    Admiral McCullough. I concur with what Admiral Sullivan 
said.
    Admiral Hamilton. I believe the characterization of the 
Naval Vessel Rules changes, as stated by Admiral Sullivan, as a 
better characterization than that in the Lockheed Martin 
prepared testimony.
    Mr. Taylor. Any follow-up questions?
    Mr. Sestak. When will you have the estimate of what the new 
costs will be for the following LCSs based on what you heard?
    Secretary Etter. At this point, I would not be able to give 
you a specific date, but we are certainly working very hard to 
get that because as you know, in order to look at whether or 
not we--what we do with--to the stop work. That was a 90-day 
stop work, so that is part of the motivation to getting to that 
point to work with that.
    We also need to look at what our acquisition strategy is 
going to be for follow-on ships. That is another very important 
piece of this.
    So both of those things rely on getting a cost estimate for 
the next ship. So this is very high priority for us.
    Mr. Sestak. Before the budget is approved or anything, will 
you have the information over here? Is it a matter of weeks or 
months? This springtime?
    Secretary Etter. It is a matter of weeks that we will have 
this information.
    Mr. Sestak. And one last question, just because I think 
process is so important. How many direct reports do you have? 
How many direct reports do you have?
    Secretary Etter. I have 12 PEOs I have within my 
organization in the Pentagon. I believe it is like 10 to 12 
deputies that cover various areas.
    Mr. Sestak. And they all report directly to you?
    Secretary Etter. They report to me and then the Naval 
Systems Command (SYSCOM) commands, such as Admiral Sullivan, 
for the things that support the PEOs.
    Mr. Sestak. And then there are three?
    Admiral Sullivan. Five.
    Mr. Sestak. So about 30 direct reports?
    Secretary Etter. Yes.
    Mr. Sestak. Thank you very much.
    Mr. Taylor. Is that it?
    The Chair recognizes the Ranking Member.
    Mr. Bartlett. I didn't hear a crisp answer to our 
Chairman's question. Who finally imposed this unrealistic 
delivery schedule on you? I think that was your question, sir. 
I didn't hear a crisp answer to it.
    Secretary Etter. I believe at the time that the program was 
started, it was the senior leadership of the Navy agreed that 
it was important to do this to meet the threat.
    Mr. Bartlett. And nobody told you, that you know of, this 
is probably going to run costs up, that this isn't a realistic 
schedule?
    Secretary Etter. Not that I am aware of.
    Mr. Sestak. If I may.
    Mr. Taylor. Absolutely.
    Mr. Sestak. Is it true, though, that this rapid acquisition 
strategy was something--would it be wrong to say that the Navy 
leadership, Admiral Clark in particular, was interested in, but 
the Navy bought off on it. I mean, slides were being shown for 
how long it took to build a ship in World War II and remember 
all of those slides?
    Admiral Sullivan. Given that we thought we were working 
with a commercial derivative that would not take the complexity 
and the rework needed to turn it into a military ship, and 
given the fact that the entire team was leaning very far 
forward to try to get this ship to the fleet as soon as 
possible, yes, we were optimistic.
    Mr. Sestak. So it was something where everyone seemed as 
though it was going to work? I mean, I think somebody was 
looking for an individual, but is it fair to say that the 
individual organization as a whole was buying off on this and 
it wasn't imposed? Or am I wrong?
    Secretary Etter. We all thought we could do it, the Navy 
and the contractors.
    Mr. Sestak. Then it really comes back to how do you have a 
process where someone does put up their hand and say this isn't 
working?
    Secretary Etter. Well, we have to have that process. And 
that is a part of what we are looking to change right now 
within the organization. We had a long list of things that we 
are changing, and we are going to learn from these lessons. 
Just one example of that is I have already scheduled 
essentially acquisition standdowns, and we are going to have 
meetings in three different locations to get our program 
managers together and to use that time to help share with them 
what we are learning from this program.
    We have an E-MAG review that is being done. And the admiral 
that is chairing that is going to be presenting the lessons 
learned and the things that should have been flags to us about 
this problem. We will be presenting that in three locations 
where most of our program managers are: In San Diego, Pax 
River, and then here in the Washington area.
    Mr. Sestak. The PEO of the ship was an 06 not of ships. Of 
the LCS program, program manager.
    Admiral Sullivan. An 06?
    Mr. Sestak. That is why they kept me in requirement.
    Was he given an undue task when he had really two different 
class ships here? He is not here today. I gather he is not on 
the job any longer. An 06. And yet he had two very different 
class ships, but he doesn't have a job anymore. Is that the 
right way to approach it?
    Secretary Etter. He did not have sufficient support that he 
needed for this program.
    Mr. Sestak. But he doesn't have his job anymore; is that 
correct?
    Secretary Etter. That is correct.
    Mr. Sestak. He is the accountability?
    Secretary Etter. I am not sure what you are implying.
    Mr. Sestak. He was removed because of performance.
    Secretary Etter. He was put on administrative leave. The 
PEO recommended to me that he be put on administrative leave 
and that is what we have done. We are in the process of----
    Mr. Sestak. So he was held accountable. Would you, looking 
back on it, do you think it was fair to him to have two very 
different class ships that he was responsible for?
    Admiral Hamilton. There are several program offices that 
work for me and PEO SHIP, and several of those program managers 
have a multitude of ship classes that they are producing within 
their program offices. The complexity of those tasks are 
different, program office to program office.
    The challenge in the LCS program office was to manage to a 
common interface. Inspire two different designs and production 
teams to conduct their work in a constrained timeline with a 
constrained budget and very constrained supporting resources. 
And that program office team moved heaven and earth to try to 
make this happen on the timeline it was given. And in large 
part I believe they did very well.
    Mr. Sestak. I would agree. I mean no one--Admiral 
Sullivan--well, nobody, as Mr. Bartlett said, who works harder 
or anything. I was curious that something happened in the 
process that wasn't accountable this time. I didn't know if it 
all came to this 06 or not. One guy.
    Thank you very much. I hope it doesn't.
    Mr. Taylor. Again, I want to thank our panel. There are a 
number of members who have submitted questions for the record. 
I have a very long number of questions for the record, but 
given that the hour is late and we still have another panel.
    Last, I want to say starting with our uniformed personnel 
how grateful we are for your government service, and I know 
tonight hasn't been pleasant for anyone, starting with myself. 
But the bottom line is we have some fundamental changes that 
have to take place. We have other naval weapons programs coming 
down the pike. This cannot be the norm. And if you thought 
tonight was unpleasant, this is nothing if we see this type of 
behavior with the DDX program or any other program, now that we 
see these sorts of changes.
    The other part is, in fairness, we are going to write a 
defense authorization bill over the next 90 days. If there are 
portions of your budget that are inadequate to do the duties 
that are required of you, we need to know about it. If there 
aren't enough people at the academy or anywhere else in the 
Navy to properly supervise programs like this, now is the time 
to tell us. We welcome that testimony.
    But the bottom line is what would happen with this program 
cannot become the norm. And when I look at the two Coast Guard 
programs that are simultaneously going on in some of the same 
yards, or some of the same contractors, it sure looks like it 
is the norm to me. And we have got to put a stop to it.
    So thank you collectively for years of service, for 
military personnel; Secretary Etter, for putting your life on 
hold for choosing to serve our Nation. But we want to fix this.
    And I want to tell you, just a few minutes ago on the House 
floor, Congressman Murtha, Chairman of Defense Appropriations, 
stopped me. It is fully his intention and my intention to try 
to fund two ships this year. We want to reverse that trend, and 
we want to reverse that trend this year. But without the 
cooperation of the uniformed personnel and without your 
cooperation, without solving these problems, we are not going 
to get this. And I want to let you know I want to get there. I 
hope you do as well.
    So thank you very much.
    The Chair now welcomes our second panel: Mr. Fred Moosally, 
the President of Marine Systems Division in the Lockheed Martin 
Company; Mr. Richard McCreary, the Vice President and General 
Manager of the Marinette Marine Corporation; Mr. Mike Ellis, 
Executive Vice President and Chief Operating Officer of 
Bollinger Shipyards; Mr. Kevin Moak, the Chairman of Gibbs & 
Cox, Incorporated, naval architects.
    Thank you, gentlemen. You may proceed.

 STATEMENT OF FRED P. MOOSALLY, PRESIDENT, LOCKHEED MARTIN MS2

    Mr. Moosally. Thank you for the invitation to appear here 
today. We have submitted a formal and detailed written 
statement for the record, and I have a brief remark to move 
along here because of the time.
    You have introduced our partners here on the Lockheed 
Martin LCS team. I think what we have covered a lot here in the 
previous panel was part of my remarks about senior leaders in 
the Navy, senior leaders in the Navy commenting on the LCS. So 
I won't discuss that further.
    As I mentioned earlier, Lockheed Martin's team includes 
Naval architects Gibbs & Cox, shipbuilders Marinette Marine and 
Bollinger, and we are the prime contractor for this program, 
with the overall responsibility for program performance, and it 
is a responsibility that we take very seriously. We have made 
significant financial investments and used the talent of our 
team to build the first in this class of revolutionary warship. 
It has not been without challenges, as you have pointed out, 
and as typical in first-of-class warship construction.
    FREEDOM is a prototype vessel set in a new acquisition 
paradigm using R&D funding, as you point out, in a cost-plus 
contract structure. LCS has gone from concept to first ship in 
the water in just over 4 years, 60 percent faster than 
historical shipbuilding norms.
    In addition, LCS 1 is the first combatant designed to the 
Navy's new Naval Vessel Rules and the first surface combatant 
classified by the American Bureau of Shipping.
    As such, we are paving the way in learning countless 
lessons for the design of future U.S. Navy surface combatants 
such as DDG 1000 that are also being designed to the same 
standards. Once industry has removed the unique challenges of 
early learning, we are confident of achieving a smooth 
production process at both of our builders' yards and providing 
the U.S. Navy with its most affordable surface combatant ever.
    We have faced four major challenges in building FREEDOM. 
First, a desire by the Navy to get this ship to the fleet 
yesterday, allowing the warfighter to use its capabilities as 
quickly as possible. While completely understandable, this 
aggressive schedule contained risk, some of which is now 
clearly seen as causing cost growth.
    Second, there was significant design changes within the 
implementation of the Naval Vessel Rules shortly after our 
contract was awarded in 2004, which caused significant overlap 
between design and construction and resulted in a high degree 
of risk and cost challenges.
    There were over 14,000 new technical requirements, and I 
heard what Admiral Sullivan said. We have translated those 
14,000 into about 12,690 of the LCS 1 that we are building. 
These changes require significant review and adjudication to 
determine which of these rules apply to Lockheed Martin LCS 
design.
    This in turn drove many of our over 600 engineering change 
proposals on the lead ship. Make no mistake about it, FREEDOM 
and her sister ships will be better warships because of this 
change, to the great advantage of the sailors who will sail her 
into harm's way, and the ship is being built to tougher 
standards than originally required and bid by industry.
    These improvements came with a major impact on cost and 
schedule. There were a variety of external factors: the 
availability of the right steel at the right time; the 
miscutting of the ship's reduction gears that affected FREEDOM 
in unique ways. Fourth, there were first-of-class discovery 
issues associated with the process of transitioning a new ship 
design into production.
    Collectively, these four issues forced a less-than-
efficient construction sequence, adding risk and cost to the 
effort. These first-of-class issues are regrettable. However, 
the U.S. Navy and the Lockheed Martin team thoroughly 
understand these issues and have procedures and suppliers in 
place so that future ships will not face these same challenges.
    FREEDOM is a warship, not a commercial ship. She is the 
first surface combatant designed to meet the rigors of high 
speed, extreme ocean conditions, and extended service life. The 
whole structure is built of high-strength steel that provides 
resistance to fatigue and weapons effects and will exceed a 30-
year service life. By way of comparison FREEDOM's structural 
scattlings in many cases exceed that of the FFG-7 class which 
are of similar size and displacement, and are battle-proven in 
terms of survivability. She also has the survivability and 
damage control that will enable the ship and crew to survive 
battle damage and return safely to port.
    We have learned much in building FREEDOM, and we will 
undoubtedly learn other lessons when we build our first LCS in 
Bollinger shipyards, but we have done our best to flatten the 
learning curve by having Bollinger people present at Marinette 
at every phase of construction, observing and assisting with 
the process and taking those lessons learned toward our second 
ship.
    Indeed, Bollinger has built the largest and one of the most 
complex modules for FREEDOM. So there is the beginning of LCS 
building experience at our second shipyard.
    Mr. Chairman, FREEDOM and her sister ships will be superior 
warships. Sailors will take them to sea, will be proud to sail 
them, and pleased with their capabilities. The Lockheed Martin 
LCS team will take lessons learned from building FREEDOM and 
apply them in an efficient and rapid way to our future vessels 
in this class, to the standard our sailors deserve and our 
taxpayers expect. As a former sailor myself, you have my word 
on that.
    Thank you again for this opportunity, Mr. Chairman. I look 
forward to your questions.
    Mr. Taylor. Thank you.
    [The joint prepared statement of Mr. Moosally, Mr. Moak, 
Mr. McCreary and Mr. Ellis can be found in the Appendix on page 
76.]
    Mr. Taylor. Anyone else on the panel wish to speak?
    Mr. Ranking Member.
    Mr. Bartlett. Thank you very much for being here. Clearly, 
in hindsight, you all were complicit in agreeing to the 
schedule which was almost certain to increase costs. Do you 
have any documentation that you told the Navy that if they 
insisted on the schedule that we were going to monstrously 
overrun the budget?
    Mr. Moosally. No, we do not. And I don't think we ever 
believed that--you know, this is hindsight--when we look back 
on what the effect of the Naval Vessel Rules--and we certainly 
at the time didn't know it when we learned of the reduction 
gears. As he said, I will say there was a sequence of 
disclosures on the reduction gears that went from 2 months and 
we thought we could work around the 2 months' delay that ended 
up being 6 months. So there was a series of three delays on the 
reduction gear.
    I must say we thought we understood the Naval Vessel Rule 
impacts and when you give, as Admiral Sullivan indicated, when 
you are handed the Naval Vessel Rules--we are given that 2 days 
after contract award--the Naval Vessel Rules require 
interpretation to each class of ship, and that took a period of 
time. I have heard 9 months. You have got a contract and start 
building a ship 9 months later.
    During that time, we were involved in taking the Naval 
Vessel Rules, seeing how they applied to our ship, an 
interpretation of how they applied to our ship, working with 
the Navy technical authority and ABS. That took a period of 
time to see how that was applied, and we thought we had 
characterized that. But in fact, as we went through that 
process--and it took longer than we thought--we didn't capture 
all of the costs within the ECPs that we had submitted with 
regard to NVR.
    And I think you have characterized that very well, 
Congressman Bartlett, that we didn't capture that. And in 
hindsight, we could say, well, maybe we should have said hey, 
let's stop. Let's make sure we have complete understanding 
between ourselves and ABM technical authority and the program 
manager of how do we, in fact, interpret the Naval Vessel 
Rules, and have mature drawings that we would have to build 
this ship.
    But we were kind of looking, just like I said here, we 
were--we had the task of trying to get this program out on a 
schedule, because it was needed by the warfighter, and that is 
how we behaved.
    Mr. Bartlett. There was a rebaselining dialogue, was there 
not? How long were you engaged in that before you agreed with 
the Navy that this was a realistic schedule?
    Mr. Moosally. We had a rebaselining of the schedule in 
September in 2005. The original delivery of the ship was 
December 2006. We had an overtarget baseline discussion with 
the Navy in September of 2005, and in fact, got the schedule 
rebaselined to June of 2007. We did not rebaseline the cost at 
that time. And we are still working with the Navy to rebaseline 
the cost of the ship, but we rebaselined the schedule in 
September or October of 2006.
    Mr. Bartlett. It seems fairly apparent from everybody's 
answers that the primary problem for the overrun here was an 
unrealistic schedule. I am just amazed that there was nobody 
that waved a red flag and said hey, this is not going to work. 
We had three different organizations involved here. We had the 
shipyards who were building them, who have experience in 
building ships of this size; we had the prime contractor, 
Lockheed Martin, watching; and we had the Navy people. And 
nobody apparently waved a red flag.
    Do we have a mechanism for people to anonymously tell us 
that what we are doing is probably not going to work? I 
understand the chain of command, and I understand whistle-
blowers which--and what happens to whistle-blowers discourages 
people from being whistle-blowers. But it is inconceivable to 
me, Mr. Chairman, that somebody in one of these three 
organizations didn't understand this wasn't going to work.
    What I would like to see as a result of this is some kind 
of thing here: We sit, everything is going just fine, and 
nobody is coming and whispering in our ear, hey, you better 
take a look at that. This all comes pretty much as a big 
surprise to us. I would like to have some mechanism for us, Mr. 
Chairman, that, you know, some e-mail address or something with 
an e-mail traffic that is untraceable, that you know, gee, you 
better look at this because all is not going well. Every one of 
your workers are taxpayers and their dollars could have bought 
more ships if this hadn't----
    Mr. Taylor. Will the gentleman yield?
    Mr. Bartlett. Yes, sir.
    Mr. Taylor. Captain Ebbs is going to make that happen.
    Mr. Bartlett. I appreciate that very much.
    Last question. What questions should have been asked by us 
of the former panel that we didn't ask, that we would be wiser 
having asked them?
    Mr. Moosally. I can't think of any. I think that, you know, 
in my view, the Navy was pretty straightforward on what 
happened on this program, why we were focused on schedule. 
We're a ``can do'' outfit. We tend to think ``can do.'' we tend 
to think we can overcome obstacles that were thrown at us. This 
didn't happen all at one time. It was sequential over a period 
of time, going from two months to six months.
    And you know, a lot of the stuff, if you look in 20/20 
hindsight, yes, if we had done something different to slow the 
thing down, to readdress the schedule, till we had all of the 
drawings, I would say yes. But our mentality, the way we 
thought was hey, the Navy needs this ship, schedule is king, 
and we are going to work to get this workaround here, start out 
with steel, get in the right steel--because the steel, as it 
turns out, there is only one manufacturer of the kind of steel 
in the country, and that is going to Humvee.
    So we worked very hard to workaround so we could get steel 
from everywhere we could to build this ship. And then we had 
the reduction gear problem. We were told initially that the 
gear was cut wrong. It would be about a two-month delay. Then 
the tooling broke down and that extended it again.
    But it is all sequential. And as we look back, had we known 
a lot of the stuff was going to happen, would we have behaved 
differently? Yes, probably. I think you framed that very well 
when you were talking about schedule. And I think the Navy, we 
would agree with the Navy. We were all focused on we have got 
to get the ship out here, the fleet needs this ship. It is a 
new paradigm. We were kind of breaking ground here. We are the 
first ship to go through the NVR rules and clearly it is not a 
fact of well, here is the NVR rules, go put this disk in a 
computer and fix your drawing. It requires months of 
interpretation and discussion with the Navy authorities to 
understand how those rules apply to the ship that we were 
building.
    And then I could ask Mr. Moak at Gibbs & Cox how that 
affects the drawing approval process.

  STATEMENT OF KEVIN MOAK, CHAIRMAN AND PRESIDENT, GIBBS & COX

    Mr. Moak. Thank you for allowing us to be here tonight.
    We did work closely with ABS early on to develop a 
schedule. As these changes came in, we actually had to take 
products that we had previously developed and sent to ABS for 
approval, and withdraw them in some cases and redo them as a 
result of the rules changes. We did not understand as well as 
we probably should have--I am not sure anyone could have--but 
we did not understand all of the downstream impacts until we 
got further and further into it. In fact, it took a process of 
over 3 months of working directly with the United States Navy 
and ABS in development of the build spec based on the NVR 
rules. During that time, there was a lot of discovery on all 
parties' parts on things that we are going to need to change. 
And all of those impacted the schedule of delivery of product, 
not only to ABS for approval, but also to the shipyard to start 
construction.
    Mr. Bartlett. Thank you.
    That is all the questions I have right now, Mr. Chairman.
    Mr. Taylor. Admiral Sestak.
    Mr. Sestak. Thank you, sir.
    Hi, sirs. Good to see you.
    One thing I may have just missed. When they did what they 
call the rebaselining in September-October time frame, that was 
not all-inclusive of the moneys that were discussed on the 
vendor issues and the construction standards?
    Mr. Moosally. Well, you are talking about the NVR.
    Mr. Sestak. Yes, the NVR.
    Mr. Moosally. We were on a fast timeline, so one of the 
things that we obviously did not do correctly was to estimate 
the impact of the NVR rules when we put the ECPs together, the 
600 ECPs together for more money as a result of the NVR 
invocation on this ship. So we didn't estimate that properly.
    Mr. Sestak. I didn't mean that. I am sorry. What I was 
trying to get to is you did come together with the Navy and 
what you knew at that time for NVR, what you knew at that time 
for the reduction in gear, all that was, by and large, 
accounted for what you knew at the time.
    Mr. Moosally. What we knew at the time, I would say not all 
the reduction because the reduction gear, like I said, was 
sequence. I would say about a third of what we believed the 
impact--what ended up being the total impact on reduction gears 
was in the October 2005 rebaseline. The rest of it flowed to 
later on.
    Mr. Sestak. So that gets to the Secretary's point, is I had 
a thought from listening to everything and some reading that, 
by and large, the Navy felt that since that period of time, the 
primary cause of the increasing cost had been shipyard 
performance. They then came back and said no, there was some 
other NVRs, some other costs. But it still left in the 
impression that she discussed it that in the Navy's mind, the 
continuing increase in cost was shipyard performance. Do you 
agree with that?
    Mr. Moosally. I think if you relate shipyard performance to 
production efficiency, then it has been affected by, you know, 
further disclosure of the impact or ripple effect of the NVR 
rules. And I am not going to sit up here and say we have done 
things 100 percent correct. We haven't. We have learned a lot 
on this program ourselves, and we have made some mistakes. But 
we didn't understand. And I would say a lot of the inefficiency 
is the fact that we are still, in some cases, going through 
rework, because we either discovered a first-of-class ship 
where the drawings don't exactly match when you get down there 
and physically put something together, or the ripple effect of 
NVR rules.
    For example, I will just give an example. If there is a 
pump that has to be turned around because the vendor 
furnished--the material was different and we got a new pump 
because of an NVR change, then that affects understanding how 
that affects a piping or piping hangers or so forth, then we 
didn't take all of that into account into some cases. So there 
is this ripple effect that was not accounted for, and Dr. Etter 
said is still having an effect somewhat, although that is 
leveling out and we are getting it behind us as we continue to 
build the ship and we are 75 percent complete now.
    Mr. Sestak. What does that say about the rapid acquisition 
strategy that the Navy was trying to undertake in view that the 
next rapid acquisition strategy would be for a new class of 
ships or would be for a new type of platform?
    Mr. Moosally. I would say that the big lesson learned here 
is, stay out of overlap in design and build, especially when 
you have a two-year build cycle. This ship was going to be 
built in no two years, but four, because of the issues. I think 
we could build it in two years but you have to have a mature 
design package. You can't be changing drawings on the run.
    And unfortunately, we bid, as Admiral Sullivan said, a 
commercial ship. ABS class ship was our bid. The Navy decided, 
for good reasons, to make this ship a surface combatant which 
would be very survivable, which it is. And that caused a lot of 
change.
    And I would say, looking back on this stuff, that if you 
are going to have a two-year shipbuilding cycle, then you have 
to have a mature design that we all agree on. We all sit in the 
room: This is the ship we are going to build. This is the 
characteristics of the ship. And I believe if you give that--
and this is one of the reasons we went with our mid-tier 
shipyards--if you give them a design that is mature, that they 
can get the job done,and they can do it cheaper, I believe, 
than anybody else.
    And one of the reasons we went with the yard is because 
they do a lot of commercial work. And a good example is during 
the stop-work order where Bollinger didn't have the ship down 
there to do work on, they were able to bring in a commercial 
job so they wouldn't have to lay off their workforce. This is 
the beauty of mid-tier yards who have commercial work as well 
as government work, so they are not totally relying on a 
government contract.
    Mr. Sestak. Admiral Sullivan said that normally the cost 
for the initial ship of a class is about 20 percent more and 
the cost of classes of ship after that are about 5 percent. I 
was surprised at those figures. I thought they were much more 
than that and I think----
    Mr. Moosally. Some are. I think some are. If you look at 
the data, I think there are first-in-class ships that are much 
more than 20 percent.
    Mr. Sestak. If you look at DDG 1000 or SEAWOLF or a number 
of others, or LOS ANGELES or others, and I will ask--I will go 
back to that.
    My question has to do with the Navy, understandably, 
wanting 313 ships, but historically these costs keep coming up. 
What is the right industrial base strategy that has to be 
undertaken and how can it be undertaken? You have talked about 
competition, you know, by the mid-tiers. We have watched this 
time and again. I mean, there is really nothing new here. What 
is it that we can try to arrest this cost growth to get the 
Navy to the requisite number of ships?
    Mr. Moosally. I think what we have to do is all sit down in 
a room together--and I am talking about the decision-makers in 
the Navy, the requirements section, the technical authority, 
the acquisition authority, and the contractor--and decide, once 
you have a contractor, or even before you get a contractor, put 
up for bid and decide what we are going to build. What are the 
requirements both from an operational standpoint and a 
technical standpoint? And then draw the line in the sand and 
say we are not going to change any requirements unless we all 
sit in a room and decide we are going to do that together. And 
therefore you don't have the last-minute requirements that come 
in that now you have got to deal with that are going to raise 
costs.
    And there has got to be a way to get--I will call it a 
cosigned check--where everybody is in a room saying what are we 
going to build.
    Mr. Sestak. Of those thousands of changes that came across 
in requirements--they were all requirements, right, sir?
    Mr. Moosally. They are technical requirements, not 
operational requirements.
    Mr. Sestak. Were they all born in the PEO shop?
    Mr. Moosally. No. I think they were, the Navy--when they 
looked--when I talked about the NVR rules the Navy decided--I 
think Admiral Sullivan said they were going to make this a 
tough warship, not a commercially based, ABS-based ship. So 
when that happens, then the NVR rules became the replacement, I 
will call it, for Gen Specs or Mil Specs.
    Mr. Sestak. So that was unique to this case?
    Mr. Moosally. This was the first ship that those NVR rules 
have been invoked. And then what happened is you have to sit 
down out of all of those changes and decide which ones are 
going to be applicable to this ship, and that takes time. That 
takes----
    Mr. Sestak. To go back to your case of how to address 
shipbuilding at large, let us throw away the NVR because it was 
a unique situation here. Do these changes still come about at 
all times--because that seemed to be what you focused most on, 
is that everyone in a room so the requirement doesn't change.
    Mr. Moosally. Right. We all have to understand--we all have 
the same----
    Mr. Sestak. So the cost that really comes out is on the 
Navy side that they keep changing requirements. Is that what 
you are saying?
    Mr. Moosally. I don't want to say that. Obviously, there 
are costs that would happen on things like the reduction gear 
that we are responsible for.
    Mr. Sestak. Not in this case. But the value of getting 
everybody in a room to sit around, I mean, it sounds good, but 
is the only purpose of that to keep requirements suppressed?
    Mr. Moosally. I think to understand--we have to obviously--
I think there has to be. And we have control boards that are 
set up, the Navy does. We have as industry to make sure that 
we, in fact, when you have a requirement----
    And if you look at this, the ship class was based on the 
$22 million K process. So what you have to do if you are going 
to keep it--if you are going to have a cost gap, then you have 
to do trades. If you are going to add things, then okay, am I 
going to take something off? If you are going to be trading 
cost and requirements, then you have to do that across the 
board.
    Mr. Sestak. The only reason I am asking is that it just 
seems that almost every class I can think of with the exception 
of one, the cost has been significantly different than what was 
the initial estimate. And if you get everybody in a room and if 
it is just the requirement suppression, then that means the 
industrial base is fine, correct?
    Mr. Moosally. Well, you are going to have--as I said, you 
are going to have--any first of class ship you are going to 
have discovery because of, you know, when you start building a 
ship--and I think all ships are complex to some degree, you are 
going to have first the class discovery and it is going to be 
probably more than you had budgeted for.
    Mr. Sestak. All right. Thanks very much.
    Mr. Taylor. Mr. Moosally, in listening to your description 
of some of the troubles, it really does cause me to ask the 
question, is the person responsible for that contract or for 
building the ship? What would be your personal professional 
preference? Would you prefer to have the United States Navy or 
the United States Coast Guard put a set of specifications out 
for bid and bid on their thoughts? Or would you prefer the 
design/build concept? Speaking from the industrial side.
    Mr. Moosally. Yes, sir. I understand. I think that either 
one can build. I think the design/build concept can work, as I 
said, if we do that in such a way that there is not huge 
overlap and if we all decide--and in this case NVR rules--that 
we are going to interpret the NVR rules together and come to a 
common understanding of the technical implications and the 
technical requirements that the NVR rules give us, and I think 
if we have a common understanding and adjudication of that up 
front and then have that design, mature design to go forward 
with, I think that would do it. We would be able then to 
together decide this is what we are going to build, this is the 
schedule to build what we are going to--what we have decided to 
build, and I think it will work. I think that what--the model 
that we set up on LCS can work going forward with a mature 
design, and the problem that we have had, as everybody points 
out, we had a lot of churn, design churn caused by the NVR 
rules coming to us basically almost simultaneously with us 
getting a contract, and that caused a lot of churn on the 
program as we went on to decide, okay, here is the NVR rules, 
how do we interpret all this change and lay that out in our 
design and get approval on it. So that is kind of what 
happened. So if you are going to go that route, there has to be 
some sequencing here that you don't have a lot of, I will say, 
overlap between design and construction.
    Mr. Taylor. Going to the National Security Cutter, which 
your company has also.
    Mr. Moosally. Well, sir, I would have to take a little 
exception. We are not the prime contractor on the National 
Security Cutter.
    Mr. Taylor. Okay. Your company is involved in.
    Mr. Moosally. We are providing the C4ISR system on the 
National Security Cutter.
    Mr. Taylor. One of the things that came out in the Coast 
Guard hearing was a very senior admiral, I want to say he is 
the deputy commandant, looked at the design and said, if we 
build a ship like this, and it was just way down in the build, 
just the most difficult place to get to after the fact, if we 
build a ship like this, we will be back in within two to three 
years fixing things, and we have significantly shortened the 
life of this ship as far as its durability. I am using that as 
a for instance because my question is, when your folks looked 
at the changes that were made because the reduction gear got 
there late, things being built out of sequence, things having 
to be torn apart and rewelded, replaced, is there anyone in 
your organization who is saying we are creating a problem that 
this ship's life expectancy is going to be less than it should 
have been, that this ship is on track to fail in two or three 
years and we will be right back in here fixing something?
    Mr. Moosally. Yes, sir. I would like to answer a little bit 
of that and I would like to turn it over to Gibbs & Cox, who is 
a naval architect, who has had a lot of experience starting 
with DDG-51s and FFG-7. We believe we have a very tough ship 
here with a 30-year life and don't believe that what we have 
done in terms of out of sequence work has affected that. And 
all the model testing done independently by Carderock has shown 
that even in hurricane winds this ship really rides well, is 
very survivable. So I don't feel that is the case Mr. Chairman, 
but would you like to comment on that?
    Mr. Moak. Sure. I would be happy to. In terms of the types 
of things you are talking about that would affect the service 
life of the ship, sir, I believe primarily we would be 
interested in talking about the structural adequacy of the 
ship. The fact that the shipbuilder had to build out of 
sequence did not affect in any way, shape, or form the actual 
service life effectiveness of the ship. That is based on the 
actual structural design. The design itself did not change 
based on out-of-sequence work. The problem was that there 
were--it was never the structure that was causing the problems, 
it was quite frankly the distributive systems that caused them 
difficulty in the out-of-sequence work because we were unable 
to provide that information to them once we went out of 
sequence in as rapid a fashion as we had hoped, and therefore 
there were situations where they did, in fact, as they built 
out of sequence, they had problems where they--we didn't give 
them enough information early enough based on all sorts of 
reasons, which I am happy to go into, that caused them in many 
cases to have to go in later and change things that were 
already there, but that did not affect the basic structure of 
the ship. So the sequencing of the build doesn't affect the 
service life of the ship.
    Mr. Taylor. So if frames were cut and rewelded, if plates 
were cut and rewelded, if piping had to be cut and rewelded, 
that none of those things in your professional opinion would 
lead to a situation where in 5 years someone coming before this 
committee and says----
    Mr. Moak. That is correct, sir. I do not believe in my 
professional opinion that that is going to happen.
    Mr. Taylor. Okay. Mr. Moosally, and again we are trying to 
do two things. This committee wants to deliver the message that 
the sort of mistakes that were made on the LCS are not 
acceptable to the American taxpayer and not acceptable to this 
committee. The second thing, we are trying to prevent it from 
happening again. Part of trying to prevent it from happening 
again is to understand how it happened. And what continues to 
trouble me, as the gears were delivered late, as the ship is 
being built out of sequence, as timelines keep getting 
extended, trying to walk through the construction of this 
vessel in my mind, I can see that some things could happen 
early on and some would say, not that big a deal, not that 
expensive. But as the gear takes longer and longer to be 
delivered you are getting farther and farther into the ship and 
someone has to be saying, this is getting serious, this is 
getting expensive. And at what point did someone in your 
organization or at what point did someone in the Navy say, we 
would save a lot of money, we would actually save time if we 
just stopped where we are?
    Mr. Moosally. Well, I will say in working with the Navy, 
and we have obviously kept them informed what was going on, we 
talked to the Navy about how we were going to do that, that we 
are on a can-do mission that we are going to deliver the ship 
as soon as we could because the requirement was, it was a 
schedule-driven requirement, schedule is king, and we worked 
very hard. Like I said, we look back on this now with hindsight 
and I can tell you, our team worked very hard to overcome every 
obstacle, the steel, the reduction gears the bad vendor 
furnished information (VFI), the workarounds to do our very 
best to deliver this ship as fast as we could. In hindsight, 
was that a mistake? I guess maybe we could say--we could have 
slowed down and stopped work. We would have had to lay off a 
lot of people up at Marinette because of the kind of work they 
were doing and there certainly would have been a cost 
associated with that, like there would be with any stop work 
order. So there was a trade. In hindsight, we may want to look 
at it. We didn't do it. I will be very honest with you, Mr. 
Chairman. We didn't do it. We had the mindset and the mentality 
that we can do and we are going to build this ship for the U.S. 
Navy as fast as we can, and we are going to work obstacles like 
gears and steel and out-of-sequence work.
    Mr. Taylor. So you never at any time raised in effect the 
red flag to the Navy of saying, we are going to be way over 
budget?
    Mr. Moosally. We by contract are required to give the Navy 
a cost report every month. So this is not like we didn't--we 
have to do that every month, okay, so they--it is not--we 
didn't hide any costs or schedule--and plus, we supplemented 
that with a number of meetings that took place with the program 
manager and the PEO. So we were there hand in glove, teammates 
and partners with the Navy all the way on this. And there was 
constant transparency or continuous transparency between our 
cost and our schedule, performance entities.
    Mr. Taylor. If there is constant transparency, why is it in 
the past three weeks I get a call saying a certain naval 
officer is being transferred from his job but it has nothing to 
do with LCS. A day later I get a call, another naval officer 
has been relieved of his position overseeing LCS. Two days 
later I get a call from Under Secretary of Defense saying I am 
putting a stop work order on. Obviously there wasn't 
transparency. For that scenario to have occurred, something is 
wrong, sir.
    Mr. Moosally. I can't answer that question. As I said 
earlier, we are required by contract to send a cost performance 
report to the Navy every month and we certainly did that, and I 
have no idea why those things happened.
    Mr. Taylor. I have a question Mr. O'Rourke would like to 
know, how do you feel like your shipyard is performing now?
    Mr. Moosally. I think they have worked very hard. They have 
overcome a lot of, I will say, overlap between design and build 
here. I think we have worked very hard to overcome a lot of 
obstacles. I think they are performing well. We haven't been 
rebaselined with our new costs we are projecting. We are on a 
path. We have laid out a plan to have our cost performance 
index approved on a curve and I think we are kind of working on 
that, but if you want to comment.

STATEMENT OF RICHARD MCCREARY, VICE PRESIDENT AND GEN. MANAGER, 
                     MARINETTE MARINE CORP.

    Mr. McCreary. Mr. Chairman, members of the committee, thank 
you for the opportunity to give you testimony today. From the 
aspect of cost preformance index (CPI) performance on the ship, 
at this point in time in Marinette we are by no means satisfied 
with the performance, but the big cost drivers in that CPI 
performance are out-of-sequence work, which costs a multiple of 
what it costs to do it in the right sequence and new work; that 
is, discovered work that is unbudgeted, that has been driven by 
the Naval Vessel Rules and other issues that we are still 
uncovering on the ship. And it is those kinds of drivers that 
have created such a large problem for us. From a productivity 
standpoint we believe overall we have done reasonably well 
despite all of these things and have done a root cause analysis 
on the productivity, and our overall root cause analysis would 
indicate that our own productivity problems--and by no means do 
I take pleasure in telling you this--are around an eight 
percent problem, and we have been taking steps to address that. 
Some of that has been because of the churn, but nonetheless, 
the other portions of this are really very much attributable to 
the other aspects that I gave you.
    Mr. Taylor. If you were asked or directed by the Navy to 
build a second vessel starting tomorrow, do you feel like you 
have a clear understanding now of the Naval Vessel Rules or are 
there still some things in your mind where you are not 
completely sure whether you are building it according to the 
regulations as far as the Navy is concerned?
    Mr. McCreary. We are still on FREEDOM because the drawing 
package is not fully developed as far as the change paper 
getting incorporated into the drawing package. Still finding 
some things in distributive systems where we are making changes 
to make the systems work properly. We believe that we are very 
near to the tail end of that because we are almost to the point 
where distributive systems are largely completed. Once we get 
to that point, the only real risk factor going forward for 
FREEDOM in our eye is in the whole test and trials mode because 
it is a prototype and very complex propulsion system. So that 
is the one other factor as we go forward, but that has nothing 
to do with a build process per se. That has to do with working 
out whatever the issues might be in the propulsion train.
    Mr. Taylor. Mr. Moosally, last question. And again I 
appreciate you staying so late.
    Mr. Moosally. Yes, sir.
    Mr. Taylor. We as a Congress are simultaneously--well, I 
think it is fair to say that my ranking member, every member of 
this committee very much wants to reverse the downward trend in 
shipbuilding. None of us are happy that in the past six years 
the fleet has shrunk by approximately 60 ships. The only way we 
are ever going to turn this around is by putting more ships in 
the budget, but also for those ships to operate for 30 years. 
One of the things that has come off in many of the 
conversations that I have had regarding this problem is a sort 
of acceptance that the first ship of every class, you make your 
mistakes and I think some people--I am not faulting anyone. 
Well, your first ship is a throwaway ship. I don't think we can 
afford a throwaway ship, not at these kinds of prices. We 
certainly can't on DDX or anything. What assurances can you 
give this committee that when the Navy approaches us for a 
ship, it is going to be a viable weapon in the inventory for 30 
years?
    Mr. Moosally. Well, Mr. Chairman, I will say this, I have 
been retired from the Navy now for about 16 years but I still 
have blue and gold running through my veins and I want to make 
sure--because I love the Navy and I still feel like a big part 
of it, and I certainly personally and I know our company and my 
teammates want to deliver the best ship possible and we believe 
today that this is a 30-year ship, and we hope that that is 
proved out. I mean, we have--as Mr. McCreary said, we have 
testing evaluation to go through, but we feel very strongly 
about the survivability, the toughness of the ship. We have 
seen the model testing we have done at Carderock, the ship 
looks superb in hurricane winds. We certainly want to make sure 
that those sailors, the men and women who man that ship are 
safe, and hopefully as comfortable as they can be in rough 
seas. So I feel comfortable that we will have a 30-year ship on 
this first ship.
    Mr. Taylor. And you know--and again not to belabor the 
point but to make a point, you know the first five of the AEGIS 
cruisers were retired at 20 years old. An incredible waste of 
taxpayers money, an incredible waste of their capability. Do 
you see anything in this ship, either in the modular concept, 
in the drive train, in the hull design, anything in this ship 
where five years later someone is going to be coming before 
this committee and say, we saw that coming, we didn't address 
it because there was a need to get this ship built on time?
    Mr. Moosally. I believe that--and my experience in the Navy 
and in ships is there is always, just like your home, there is 
room for improvement, and we have--I believe the Navy probably 
still has a ship alteration (SHIPALT) program. We go and look 
at things. Things when you run the ship that probably ought to 
be changed for more efficiency, better maintenance, and so 
forth. I am sure there will be changes on this ship but I think 
the beauty of these ships in particular, you have this modular 
concept and a lot of volume there that is not basically taken 
up with permanent installations of weapons, and the whole idea 
of LCS is you can change out modules and reconfigure the ship 
for whatever threat you are facing with Littorals. I also 
believe because the work we are doing in the area for a lot of 
people, foreign nations are interested in this ship, the work 
we have done to look at how you could adapt this ship to the 
needs of other countries, there is a lot of volume in this ship 
that allows you to do that. So I think there is a lot of room 
for spiraling this ship up as the Navy gets out there and 
operates a number of these LCSs, and through operations finds 
out that they want to change things, either through things like 
maintenance, the whole maintenance philosophy that we can build 
into the ship or new flights of the ship or how you operate the 
ship.
    Mr. Taylor. Mr. Bartlett.
    Mr. Bartlett. Thank you very much. You now have had a lot 
of experience with these new Naval Vessel Rules and you are now 
very much wiser for the experience of this program. Are you now 
ready with this increased wisdom and knowledge to enter into 
a--well, let me ask it this way. At what ship are you able--are 
you willing to enter into a fixed price contract that is not 
going to blow up? That you are going to deliver on time and if 
you can't do that, at least at the cost that you--how soon will 
you be ready? This, sir, is not rocket science, as I said 
before. This is a sea frame. It is, you know, it is a 
battleworthy fast ferry. At what point will you be able to 
enter into a fixed price contract and we would be comfortable 
that you are going to perform?
    Mr. Moosally. Well, let me say that I understand the 
complexity issue. I believe that this--first of all, I know it 
is not complex from a combat system standpoint compared to the 
Aegis system we built for the Navy, but I would say the 
engineering propulsion system on this ship is very complex in 
comparison with the ships that are out there today and we think 
that is the long pole in the tent as far as the technical 
complexity of the ship. So I would agree with the rest of the 
ship--the combat system isn't as complex certainly as a lot of 
other ships we have out there. We are under contract for cost-
plus contracts on the first ship. The first ship is an 
Research, Development, Test and Evaluation (RDT&E) ship, the 
second ship is Shipbuilding Conversion (SCN). And certainly we 
would feel comfortable in talking to the Navy about fixed price 
after we get through the testing evaluation phase on the first 
ship. As part of the stop work order we are relooking at the 
pricing of the ship with the Navy, the first ship, the second 
ship, and I am sure we will be talking to the Navy after the 
first ship just the answer to the very question you asked of 
what kind of contract terms and conditions would we accept on 
the--I would say on the third ship going forward, and I am sure 
we are going to be asked on the second ship that we haven't 
started building yet. We will be answering those questions with 
the Navy and certainly we have to feel comfortable that I would 
say, first of all, we are not going to start a second ship 
without a complete drawing package because we are not going to 
go through the concurrent overlap, concurrent design/build 
overlap we have had here on the first ship. And at some point 
when we get those mature drawings and have that experience 
behind us I am sure we will be talking to the Navy about some 
fixed price contract of some kind.
    Mr. Bartlett. Mr. Moak, are we not going to have mature 
drawings when we accept delivery of this first ship?
    Mr. Moak. I am sorry. Accept delivery of which one?
    Mr. Bartlett. Will we not have mature drawings?
    Mr. Moak. Of LCS 1, you are asking?
    Mr. Bartlett. Yes, sir.
    Mr. Moak. Yes, I believe we will. In fact, that is the 
process which will be in place.
    Mr. Bartlett. So they will certainly be mature. Are you 
readier when you build the third one?
    Mr. Moosally. Ready or not, I think that is what we will be 
looking at is a fixed price contract.
    Mr. Bartlett. Let me ask the representative from Bollinger, 
are you comfortable, sir, that from the experience of the other 
yard and information that is now available to you that you are 
going to be comfortable with the delivery date and the cost 
that you are going to be agreeing to?

  STATEMENT OF MIKE ELLIS, EXECUTIVE VICE PRESIDENT AND CHIEF 
          OPERATING OFFICER, BOLLINGER SHIPYARDS, INC.

    Mr. Ellis. Mr. Chairman, members of the committee, thank 
you for allowing us to testify. To answer your question, 
Congressman, we are comfortable with the schedule. We are 
comfortable with the delivery date and the cost that we have 
submitted to the Navy at this point. As Mr. Moosally said, we 
have a design that is scheduled to mature as we build this, our 
second vessel, and we are comfortable with that. Our engineers 
working with Gibbs & Cox have met all their timelines to date 
on this schedule. So materials, schedule, those are the things 
that we look forward to being able to answer your questions and 
based on what we have seen so far, the answer to your question 
is yes.
    Mr. Bartlett. So the next time you appear before this 
subcommittee there will be a celebration, you delivered the 
ship on time and on budget rather than another hearing like 
this?
    Mr. Ellis. We certainly hope so, sir. Yes, sir.
    Mr. Bartlett. Thank you. I certainly hope so, too. Thank 
you, Mr. Chairman.
    Mr. Sestak. Thank you, Mr. Chairman. Just two comments. 
Admiral Hamilton said it was about September that they began to 
hear about the--he used some technical term or acquisition term 
where it appeared as though the budget was differing from 
schedule or whatever.
    Mr. Moosally. I think he used the word ``separate.''
    Mr. Sestak. When did you, Lockheed Martin, first tell the 
Navy that these are some real issues we have here, something 
the papers said it was about March or so.
    Mr. Moosally. Like I said, every month. If you got a copy--
--
    Mr. Sestak. When did that begin?
    Mr. Moosally. Cost performance report, it is a monthly 
report, you give the most likely, best case, worst case, there 
are three columns on it.
    Mr. Sestak. Yes, sir, I know that. But when did you see at 
Lockheed Martin the cost going awry?
    Mr. Moosally. It was on a monthly basis.
    Mr. Sestak. When did that month begin? What month was that?
    Mr. Moosally. It was probably somewhere in the summer of 
2005.
    Mr. Sestak. Summer of 2005. You said it was September of 
2006--I meant after the 2005.
    Mr. Moosally. Summer of 2006, yeah. I am sorry.
    Mr. Sestak. I guess my only comment is I guess--there is 
two things as I look at it all, not just LCS, but because I 
think this really is--this has happened before. I find on the 
one hand there is a conspiracy of optimism where we have this 
overconfidence in our ability to produce on the industrial 
side, and on the uniform side we believe, and we believe at 
times because it fits, and it makes the budget come out. The 
problem is the second point is, is what are the consequences? I 
mean, is it an O-16 removed? I don't think that is it. I don't 
think it is the people. They are trying their best. But in this 
conspiracy of optimism, the programs--despite this annual 
perennial cost growth, the programs continue. There really 
aren't consequences, and I just don't know as we go into the 
future and as the Navy is trying to get the requisite number of 
ships with the war at $14 billion a year, the Expeditionary 
Fighting Vehicle, as you saw on the front page of The 
Washington Post, Coast Guard cutter, of course that is not in 
the Defense Department although Navy does pay portions of what 
goes on it, Army modernization program, 92,000 more troops that 
we need they say, GPS, you know, I am concerned. It gets back 
to my question about how do you approach this so it doesn't 
happen? Because the consequences may not be where Congress 
stops it and says, maybe it should have at other times, you 
know, this is unacceptable. We don't want this national 
treasure--you know, this positive degree of optimism just keeps 
rolling on but truly it becomes that--boy, there are all these 
other competitions, these other issues that are competing for 
the marginal dollar, and the Navy doesn't get its requisite 
number of ships. What is the process again? To somehow come to 
grips with, is there a better way when you look at shipyards 
around the world and other places, is there a better way to 
bring the parties together to somehow in addition to 
requirements, suppression once they are stated, to truly bring 
it in on what they are saying they are going to bring it in 
upon? Is there anything else to be done?
    Mr. Moosally. I think there is always room for improvement. 
You know, we talk about a lot of Lean 6 Sigma things and I 
think there is a lot of things we can learn how we are going to 
do things differently. The full circle is government and 
industry working together.
    Mr. Sestak. Lean 6 was throughout the Navy, as you know, 
the last sigma was the last few years. I mean is there any 
process?
    Mr. Moosally. I think there is a way to improve process but 
as I say, you have to look at the entire process from beginning 
to end and it just can't be the government or just can't be 
industry. It has to be us working together to improve the way 
we do things and I think there is certainly an opportunity to 
do that.
    Just the two things that I learned in the Navy is invest 
correctly in people and in systems, but be accountable. It just 
seems as though this conspiracy of optimism, somehow we have to 
come to grips with it because it isn't permitting us to plan 
well in what I think 77 million baby boomers retired and all 
that, it is not going to permit us to get the kind of 
capability we want out there in the future. And somehow some 
accountability in this process isn't brought out, and it is 
just not relenting in 2006.
    Mr. Sestak. Thank you.
    Mr. Moosally. Thank you.
    Mr. Taylor. Last question for Mr. McCreary. When did the 
CPI decrease to an unacceptable level? And did you work with 
the Navy immediately to correct that? What was the timeline?
    Mr. McCreary. In general, sir, I would tell you our CPI was 
never acceptable to us virtually from the beginning as we 
started dealing with a lot of the change, and that was probably 
after--that was probably after the first quarter of 2005, and I 
mean, compared to our usual experience on other government and 
commercial programs, because of the rate of change and so on, 
we never were at a point where we thought that we were 
performing overall in the program the way we would want to. And 
the real issue there was we were trying every work-around and 
every strategy to try and improve that at a time when we were 
finding more and more and more new work and change work. And 
unfortunately we never caught up, and never--I don't honestly 
believe had any real way to catch up because it was a constant 
process of discovery.
    Mr. Taylor. So if it was never acceptable, when did it get 
so bad that an Under Secretary of Defense had to stop the 
program?
    Mr. McCreary. Well, I believe that it was a steady decline 
in the summer of 2006 prior to launch, and you heard, I believe 
the Navy testified that the expectation was that post-launch we 
would start to see an improving CPI, and in fact I believe that 
we will start to see an improving CPI as we get through the 
majority of this change, and the rate of change has been 
decreasing, but it was not immediately upon launch, and we 
still are dealing with a lot of that change. But as I say, the 
change--the rate of change is decreasing, and we are--because 
of the maturity as far as the percentage of completion, roughly 
75 percent complete, getting to the time when distributive 
systems will be complete, and once we get there, we then move 
into the phase of doing work on the ship that we originally had 
intended to do on the ship.
    Mr. Moosally. In the water?
    Mr. McCreary. In the water, correct, as opposed to in the 
module stage or in the erection stage. And those have been the 
effects that have just compounded the problem.
    Mr. Taylor. How many of these problems were you aware of 
when you were gracious to host the committee to your shipyard 
in late August, early September? Because my recollection is 
everything was fine, everything was on budget. I don't recall 
the presentation made by your yard as being anywhere near----
    Mr. Moosally. I don't believe we would have covered that. 
We would not--certainly would not have provided information 
that wasn't accurate. And I don't believe that we discussed CPI 
during that tour, but like I said, the Navy has been aware, we 
have worked with the Navy and I believe the Navy testified that 
they have insight into our CPI every month.
    Mr. Taylor. Well, we will have some additional questions 
for the record. And again I very much appreciate you being 
here. Mr. Ranking Member, do you have any questions?
    Mr. Bartlett. Thank you all very much for your service and 
apologies that it took so long. Thank you for being so patient. 
If questions come to you that we should have asked the prior 
panel, we have several days in which we can submit questions 
for the record to them. Would you please indicate to us 
questions that you think you and us would be the wiser for 
having asked them? If you will do that, we will ask those 
questions for the record.
    Mr. Moosally. Yes, sir.
    Mr. Bartlett. Thank you very much.
    Mr. Taylor. Committee stands adjourned.
    [Whereupon, at 8 p.m., the subcommittee was adjourned.]


      
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                            A P P E N D I X

                            February 8, 2007

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              PREPARED STATEMENTS SUBMITTED FOR THE RECORD

                            February 8, 2007

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             QUESTIONS AND ANSWERS SUBMITTED FOR THE RECORD

                            February 8, 2007

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                   QUESTIONS SUBMITTED BY MR. TAYLOR

    Mr. Taylor. Were Navy Acquisition personnel receptive to your 
concerns, did they provide the necessary resources and guidance to 
overcome the challenges, and were you ever disconcerted about the way 
the Navy Acquisition personnel were addressing your concerns?
    Mr. Moosally, Mr. Moak, Mr. McCreary and Mr. Ellis. The Lockheed 
Martin Team maintained constant dialogue with the LCS Program Office 
and the Navy's program manager listened to our program concerns. Early 
in the program, we established bi-weekly Program Manager-to-Program 
Manager meetings to discuss key issues and identify solutions to 
problems as they arose. Each issue was thoroughly vetted and decisions 
were made to accept or reject each potential solution. In addition, 
Lockheed Martin provided the Navy LCS Program Office regular production 
status and cost data including Contract Performance Reports (CPR) which 
have been submitted monthly since the program began. As design changes 
were made and costs continued to grow we moved to weekly status 
meetings where we discussed cost reduction opportunities. When the 
Lockheed Martin Team presented alternatives to reduce costs the Navy 
Program Manager provided guidance on whether these alternatives could 
be implemented.
    Mr. Taylor. Did anyone on the Lockheed Martin team make a request 
to PEO Ships, Admiral Hamilton, or the LCS Program Manager, Captain 
Babcock, to convey cost growth concerns to Dr. Etter prior to December 
18, 2006?
    Mr. Moosally, Mr. Moak, Mr. McCreary and Mr. Ellis. The monthly 
Contract Performance Reports that Lockheed Martin submitted since the 
start of the program highlighted the Best Case, Worst Case, and Most 
Likely cost estimates based on actual costs experienced and estimates 
to complete construction. In addition to these mandatory, regular cost 
reports, our team provided multiple in-depth presentations that 
included cost updates to the program office and also briefed PEO Ships 
on LCS costs on 15 September 2005, 25 April 2006, 16 August 2006, 31 
October 2006, 29 November 2006, and 18 December 2006. Our expectation 
was that the data would be reviewed at the appropriate Government 
levels. We were surprised to learn, in December 2006, that senior Navy 
leaders were surprised by cost growth on LCS given all the 
communication we had with the Program Office and PEO.
    Mr. Taylor. Was construction ever conducted on LCS 1 using designs 
that were not approved?
    Mr. Moosally, Mr. Moak, Mr. McCreary and Mr. Ellis. No, the entire 
functional design was approved at the December 2005 Final Critical 
Design Review (FCDR) and the Build Specification was approved in 
January 2006 prior to construction start in February 2006. 
Subsequently, ongoing interpretation of sub-tier specification 
references and ABS analysis and modeling resulted in changes to these 
designs. Final adjudication of the Build Specification with Naval 
Vessel Rule (NVR) implementation also caused changes to designs that 
impacted construction by creating significant design-construction 
overlap.
    Mr. Taylor. If so, who was the approval authority within Industry 
and the Navy to proceed with Construction, and what consequences did 
you experience by using unapproved designs?
    Mr. Moosally, Mr. Moak, Mr. McCreary and Mr. Ellis. N/A
    Mr. Taylor. Did you fully understand the design approval process 
and the identity of all approval authorities? Did this process or those 
individuals change due to the incorporation of NVR?
    Mr. Moosally, Mr. Moak, Mr. McCreary and Mr. Ellis. The design 
approval authorities were identified from the beginning as the American 
Bureau of Shipping (ABS), Naval Technical Authority (NTA), and the 
Navy's Supervisor of Shipbuilding (SUPSHIPS). However, the approval 
processes, roles, and responsibilities were not clear. LCS 1 is the 
first warship designed to NVR and classed by ABS and, as a result, this 
was the first time that all three of these organizations were required 
to coordinate design review and approval.
    Mr. Taylor. What incentives do you have, under a cost-plus 
contract, to minimize costs to the taxpayers?
    Mr. Moosally, Mr. Moak, Mr. McCreary and Mr. Ellis. Cost plus 
contracts are appropriate for the LCS lead ship as it is an RDT&E 
funded ``prototype'' vessel with significant development risk. Cost 
plus vehicles are an effective way of balancing the significant risk 
between Industry and Government when there is no effective way to 
accurately estimate costs due to the uncertainty of contract 
performance.
    A number of factors motivate the Lockheed Martin Team to minimize 
costs on LCS. First, the LCS acquisition plan placed a $220M (FY05 
dollars) cost cap on ship price. Failure to meet this price in the 
initial proposal submission would prevent award and this cap is still 
in place for follow-on LCS ships. Second, the LCS program has remained 
competitive with two primary suppliers, Lockheed Martin and General 
Dynamics, working to provide the best LCS solution at the minimum price 
to maximize the number of ships awarded to their teams. Third, the 
current LCS contracts are Cost-Plus Incentive/Award Fee (CPIF/AF) 
structures. There are two components of the fee available for 
contractors to earn. The incentive fees are earned only if the contract 
cost does not exceed a certain threshold. The award fees are earned 
through the Government's evaluation of the contractor's ability to 
control, adjust, and accurately project costs using the award fee 
criteria stated in the contract. The evaluation results in an award fee 
payment if the contractor has met the minimum criteria. Lockheed 
Martin's Incentive/Award Fee has been significantly impacted as a 
result of the cost growth on LCS 1.
    Evidence of Lockheed Martin's commitment to minimizing the cost and 
risk in the program includes our corporate investment to mature the 
ship design prior to contract award to ensure we could meet production 
schedules with minimum risk. We have continued to make significant 
investments in the program to help offset cost increases and to ensure 
we can produce affordable LCS platforms.
    Mr. Taylor. In what ways was it communicated to you that schedule 
was the primary priority for the LCS program?
    Mr. Moosally, Mr. Moak, Mr. McCreary and Mr. Ellis. From the 
beginning of the program the emphasis was placed on producing LCS ``at 
the speed of heat'' in accordance with direction by the CNO Admiral 
Clark. In fact, the FY03 President's Budget identified a seven month 
Final Design Phase and 24 month Build Cycle, unprecedented in Naval 
surface combatant programs. Senior Navy leadership continued to 
emphasize an accelerated schedule to meet urgent fleet needs. Lockheed 
Martin's LCS contract award fee criteria also reflected the schedule 
priority with the majority of the criteria emphasizing meeting program 
schedules and timely milestone completion. The priority for this event 
driven criteria was:

       Schedule
       Technical
       Cost

    Examples of schedule driven milestones tied to award fee include 
start construction, keel laying, landing of gas turbines, water jet 
installation, and launch.
    Mr. Taylor. Lockheed testified that it sends monthly reports with 
LCS cost information to the Navy. In which of these monthly reports did 
Lockheed first attempt to alert the Navy regarding the potential for 
significant cost growth on LCS-1?
    Mr. Moosally, Mr. Moak, Mr. McCreary and Mr. Ellis. The Contract 
Performance Report (CPR) is a mandatory management report submitted 
monthly starting from contract award. Each report shows Best Case, 
Worst Case, and Most Likely cost estimates and describes the risk 
associated with each number. Specific cost drivers were highlighted and 
discussed in each report. We began to recognize and report cost 
increases as early as September 2005 and costs increased steadily 
throughout 2006. As challenges such as material delays continued to 
impact cost we continued to report growing cost estimates in the 
monthly reports.
    Mr. Taylor. Does Lockheed believe that its representations to Navy 
officials in 2006 about cost growth on LCS-1 were being transmitted to 
senior Navy leadership-meaning the Secretary of the Navy, the Chief of 
Naval Operations, and the Navy Acquisition executive-in a sufficiently 
full and timely manner?
    Mr. Moosally, Mr. Moak, Mr. McCreary and Mr. Ellis. Lockheed Martin 
is not aware of who or when ``senior Navy leadership'' was notified. 
However, we were surprised to learn in December 2006 that senior Navy 
leaders were surprised by cost growth on LCS.
    Mr. Taylor. How would you characterize the performance of the 
shipyard in building LCS-1 in the months since that ship was launched?
    Mr. Moosally, Mr. Moak, Mr. McCreary and Mr. Ellis. Neither 
Lockheed Martin nor Marinette Marine Corporation (shipyard) is 
satisfied with the performance since the LCS-1 launch; however, there 
are many factors driving this performance including.

       High degree of out of sequence work
        Significant Navy directed design changes which are 
driving higher than expected rework on the ship

    Two primary drivers are negatively impacting performance. The first 
is the amount and type of work that is being done post-launch, pier-
side, that was originally planned to be completed more efficiently 
within the construction/erection facilities pre-launch. This work was 
delayed until after launch in order to meet the launch schedule as 
agreed to between the U.S. Navy and Lockheed Martin. The second is the 
unanticipated amount of re-work we are still experiencing as a result 
of NVR-related design changes. While not as rapid as we had predicted, 
the performance trend has been positive for four of the last five 
months.
    Mr. Taylor. Is there any concurrency in design and construction on 
LCS-3? If so, how much of an adjustment in the construction schedule 
for this ship would be needed to eliminate this concurrency? If this 
adjustment is made, how would it affect Lockheed's ability to execute 
in a timely way any additional LCSs that are authorized for FY 2008?
    Mr. Moosally, Mr. Moak, Mr. McCreary and Mr. Ellis. No, as a result 
of lessons learned on LCS-1, we have developed a plan to complete the 
LCS-3 design updates and changes prior to the start of construction of 
the associated item. This effort was on schedule before the stop work 
order was issued. Given this plan to eliminate concurrency, Lockheed 
Martin expects to be able to execute any ships awarded in FY 2008 on 
schedule.
    Mr. Taylor. Do the estimated costs of LCS-1 or LCS-3 reflect 
systems, components, or materials provided by vendors at reduced 
prices, as part of an effort by those vendors to secure a role in the 
55-ship LCS program? If so, how much more expensive might these 
systems, components or materials become on later LCSs? Is this a source 
of concern regarding the potential for cost growth on follow-on LCSs?
    Mr. Moosally, Mr. Moak, Mr. McCreary and Mr. Ellis. Lockheed 
Martin's sub-contractors do not disclose this information. However, the 
sub-contractor cost increases we have experienced from LCS-1 to LCS-3, 
appear to be primarily due to economic inflation.
    Mr. Taylor. If one of the two yards building Lockheed's version of 
the LCS proves to be consistently superior to the other in building 
LCSs, is Lockheed prepared to consolidate production of its LCSs at the 
superior yard?
    Mr. Moosally, Mr. Moak, Mr. McCreary and Mr. Ellis. The Lockheed 
Martin team has two shipyards to ensure that we can meet the U.S. 
Navy's maximum production rate planned for LCS. These two shipyards 
provide the added benefit of being able to share design, material 
procurement, and production resources as necessary to ensure each ship 
is delivered on schedule and within budget. Lockheed Martin 
continuously evaluates the performance of all subcontractors, including 
the shipyards. We will consider all alternatives and take appropriate 
action in the event a subcontractor is not performing in accordance 
with expectations. Our objective is to provide the most cost effective, 
highly capable LCS platforms to the U.S. Navy and the taxpayers.
    Mr. Taylor. What added value do you believe Lockheed Martin 
provides as the lead systems integrator?
    Mr. Moosally. Lockheed Martin is not a lead Systems Integrator on 
the LCS program. Our role on LCS is the prime contractor and Mission 
System provider. As the prime contractor we are establishing a new 
shipbuilding paradigm by enabling cost efficient mid-tier shipyards 
like Marinette Marine and Bollinger Shipyards to participate in a 
complex shipbuilding program like LCS. Lockheed Martin brings 
significant experience in managing large, complex defense programs. Our 
shipbuilding experience includes the design and prime contract 
management of the Sea Shadow, SLICE, AGOR 26, and E-Craft vessels. We 
have over 30 years of combat system integration experience on 7 ship 
classes for 6 different navies. We designed numerous electronics spaces 
on DDG-51 Class ships as well as the entire topside spaces on CG-47, 
DDG-51, the Spanish F100 Class Aegis Frigate, and the Norwegian F 310 
Class Aegis Frigates. This experience includes the detailed design and 
integration of all combat system related ship compartments. Lockheed 
Martin also brings the ability to surge capabilities only when needed, 
so the Customer does not have to pay for significant management 
overhead when the specific capability is no longer needed. On LCS-1 we 
have provided significant program management, master planning, material 
procurement and quality assurance personnel to augment the shipyard's 
indigenous resources. As the Mission System provider, we are 
responsible for the design, development, production and support of the 
LCS Core Mission System including command & control, sensors, weapons, 
communications, etc.
    Mr. Taylor. When you submitted your proposal in response to the 
Request for Proposal for Preliminary Design, you were aware that the 
Navy had established an objective and threshold cost targets. At any 
time, did you believe that Lockheed Martin could not deliver LCS 
Seaframes that could not meet the threshold target?
    Mr. Moosally. No, when we submitted our proposal we showed that we 
could meet the $220M cost cap. After contract award, the Navy directed 
the implementation of the Naval Vessel Rules (NVR) which resulted in 
significant design changes and greater than planned design-build 
concurrency. Coupled with material delays for steel and reduction 
gears, these issues caused cost growth resulting in a price above 
$220M. As stated by VADM Sullivan during his testimony to the HASC on 8 
February 2008 ``. . . the ship that we bid and the ship that we costed 
out is not the same ship that we're buying today . . .''
    Mr. Taylor. Which cost drivers do you believe will result in re-
occurring cost for LCS?
    Mr. Moosally. Inflation as well as additional labor and material 
costs associated with engineering changes implemented on LCS-1.
    Mr. Taylor. You have built many other ships for the government, 
Coast Guard Ice-Breakers, Barges, Tug Boats; did you ever start those 
ships without final design plans?
    Mr. McCreary. Yes. MMC has constructed ships for commercial and 
government customers and has started construction without some of the 
final (detail) design plans being completed. MMC's process is a modular 
construction process. The Detail Design is partitioned by zone and 
completed in support of the zone construction schedule. Our approach 
includes the following prior to construction start:

       a. The Functional Design (diagrams, calculations, scantlings) is 
complete and submitted to ABS for approval
       b. Long Lead Equipment specifications are complete and equipment 
is placed on order
       c. Detail Design is started and completed for each construction 
zone 2 to 4 months prior to the construction start for that zone.

    Mr. Taylor. Did you ever ``push back'' to the Lead System 
Integrator when you were directed to proceed with construction even 
though the final plans were not available?

    Mr. McCreary. Our team planned to construct the LCS vessels in a 
manner similar to MMC's and Bollinger's experience utilizing the 
modular construction process. In using that process, Functional Design 
as well as the Detail Design for the Zone under construction is 
completed 2 to 4 months prior to construction start. On the LCS, our 
team completed the Preliminary Design and had ``invested'' in 
furthering that design prior to contract award in order to mitigate the 
risk associated with developing the Detail Design. Upon contract award, 
design specifications were changed due to Naval Vessel Rule 
implementation. After construction start, when many design plans were 
arriving incomplete, MMC, on multiple occasions, made the Prime 
Contractor (Lockheed Martin) aware of that fact and the resulting 
impact it was having, and was going to have, on construction cost and 
schedule. MMC and the Prime Contractor made the customer aware of the 
situation and worked to minimize the impact.
    Mr. Taylor. What steps have you taken to transfer learning curve 
efficiencies to Bollinger shipyards?
    Mr. Ellis. Bollinger engineers and production supervisors were 
involved with Marinette Marine in major construction planning decisions 
on LCS-1 and established a formal lessons learned capture process at 
the beginning of the LCS program to accelerate Bollinger's learning.
    Our Team is executing LCS-3 in an environment unlike that of LCS-1. 
LCS-3 has a more mature design, with 80% of detailed design unchanged 
from LCS-1 and 70% of LCS-3 design already approved by ABS. In 
addition, we are utilizing the existing vendor base to stabilize Vendor 
Furnished Information (VFI). Our Team conducted a comprehensive 
assessment of risks from LCS-1 for applicability on LCS-3 and is 
proactively putting in place corrective actions on LCS-3. The following 
are factors that are mitigating risks experienced on LCS-1:

        All purchase orders have been placed for LCS-3 material 
in advance of the required dates and 63% of all required material is 
already on order, all with delivery commitments in advance of in yard 
need dates.
        A dedicated LM LCS-3 Team was established five months 
in advance of contract award, containing key personnel with extensive 
program management experience on U.S. Navy ACAT I programs.
        A comprehensive set of metrics has been established to 
track performance on LCS-3. The metrics are reviewed on a weekly basis, 
at the performing area level and with executive management.
        A path finder approach has been implemented for LCS-3 
to closely watch and measure performance the first time a process is 
executed (e.g. design release process). This vigorous process allows us 
to identify issues and take corrective actions before repeating the 
same mistake numerous times. The approach has yielded a 48% reduction 
in the average time for review of drawings.
        A negotiated Memorandum of Understanding with ABS that 
establishes timelines for ABS review and approval of design changes.
        The work performed by Bollinger on LCS-1 to construct 
the largest and one of the most complex ship modules has given our 
production staff first hand experience in building from LCS design 
products in advance of construction start on LCS-3. This early exposure 
has allowed the Team to accelerate the LCS-3 production learning curve 
and demonstrate design producibility at both shipyards

    Mr. Taylor. At which of your shipyards, do you plan to build LCS?
    Mr. Ellis. LCS-3 will be constructed at our Lockport, LA facility. 
We will draw upon the resources of over 3000 employees from 14 
Bollinger shipyards to ensure the success of LCS-3.
    Mr. Taylor. As Lockheed Martin became aware of the implications of 
NVR and the delay in delivery of the reduction gear, did you keep the 
Navy fully informed of all these issues?
    Mr. Ellis. Yes, as we assessed the impact of NVR and the 
significant number of resulting design changes, and experienced issues 
such as the material delays, we communicated with the Navy through 
numerous methods including day-to-day programmatic communications, our 
bi-weekly Program Manager-to-Program Manager meetings, monthly Contract 
Performance Reports (CPR), and periodic briefings and site visits with 
PEO Ships throughout 2005 and 2006.
    Mr. Taylor. What process does Lockheed Martin have in place to 
ensure that if additional specifications and/or requirements were added 
to the program from this point forward they would be thoroughly 
reviewed to ensure we understand the full cost and schedule impact 
BEFORE we move forward?
    Mr. Ellis. Now that the LCS ship design is nearing completion and 
LCS-1 is over 75% constructed we have a true baseline from which we can 
assess material and labor changes with much greater accuracy. Together 
with the Navy as we move to LCS-3, we have implemented changes in the 
Configuration Management (CM) process to better track design changes 
and effectively asses change impact to cost and schedule. Specifically:

        LCS Team made the decision that no change will be 
implemented until all design impacts are thoroughly reviewed and 
approved by ABS and the Navy Technical Authority and cost and schedule 
impacts have been assessed and agreed with Lockheed Martin Team and the 
Navy.
        Established strict schedules with ABS and Naval 
Technical Authority to ensure potential changes and issues are 
highlighted early.

                                  
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