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


                                     

                         [H.A.S.C. No. 110-76]
 
                 SURFACE COMBATANT CONSTRUCTION UPDATE

                               __________

                                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

                             JULY 24, 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
                 Heath Bope, 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:

Tuesday, July 24, 2007, Surface Combatant Construction Update....     1

Appendix:

Tuesday, July 24, 2007...........................................    47
                              ----------                              

                         TUESDAY, JULY 24, 2007
                 SURFACE COMBATANT CONSTRUCTION UPDATE
              STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

Bartlett, Hon. Roscoe G., a Representative from Maryland, Ranking 
  Member, Seapower and Expeditionary Forces Subcommittee.........     2
Taylor, Hon. Gene, a Representative From Mississippi, Chairman, 
  Seapower and Expeditionary Forces Subcommittee.................     1

                               WITNESSES

Francis, Paul L., Director, Acquisition and Sourcing Management 
  Team, Government Accountability Office.........................     9
Gilmore, Dr. J. Michael, Assistant Director for National 
  Security, Congressional Budget Office..........................     5
Labs, Dr. Eric J., Senior Analyst, Congressional Budget Office...     7
O'Rourke, Ronald, National Defense Specialist, Congressional 
  Research Service...............................................     4
Stiller, Allison, Deputy Assistant Secretary of the Navy for 
  Shipbuilding; Vice Adm. Paul Sullivan, Commander, Naval Sea 
  Systems Command, U.S. Navy; Rear Adm. Barry McCullough, 
  Director, Warfare Integration; Dub Summerall, Executive 
  Director for Surface Combatants, Program Executive Officer, 
  Ships beginning on.............................................    27

                                APPENDIX

Prepared Statements:

    Francis, Paul L..............................................    90
    Gilmore, Dr. J. Michael joint with Dr. Eric J. Labs..........    67
    O'Rourke, Ronald.............................................    51
    Stiller, Allison, joint with Vice Adm. Paul Sullivan, Rear 
      Adm. Barry McCullough, and Dub Summerall...................   116

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

Questions and Answers Submitted for the Record:

    Mr. Bartlett.................................................   137
    Mr. Forbes...................................................   139
    Mr. Sestak...................................................   138
    Mr. Taylor...................................................   137
                 SURFACE COMBATANT CONSTRUCTION UPDATE

                              ----------                              

                  House of Representatives,
                       Committee on Armed Services,
            Seapower and Expeditionary Forces Subcommittee,
                            Washington, DC, Tuesday, July 24, 2007.
    The subcommittee met, pursuant to call, at 2:06 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.
    I want to apologize to all of our witnesses. It is not that 
what you are doing is not important. They have, unfortunately, 
called a caucus meeting of the Democrat Party, and so that 
explains these guys. Now, Roscoe will have to tell you where 
those guys are.
    But anyway, the committee will come to order.
    The purpose of this afternoon's hearing is to receive 
testimony on the progress of the construction of the Navy's 
surface combatant fleet. Testifying today are representatives 
of the Department of the Navy, along with independent experts 
from the Congressional Research Service (CRS), Congressional 
Budget Office (CBO), and the Government Accountability Office 
(GAO).
    On behalf of the entire subcommittee, I welcome the 
witnesses and look forward to their testimony.
    Today's first panel is composed of our independent experts 
in ship operation and construction. They are Mr. Ronald 
O'Rourke, a Specialist in National Defense from the 
Congressional Research Service; Mr. Michael Gilmore, Assistant 
Director for National Security Research; Dr. Eric Labs, Naval 
Analysis, Congressional Budget Office; and Mr. Paul Francis 
from the Government Accountability Office.
    The second panel is composed of representatives from the 
Department of the Navy: Vice Admiral Paul Sullivan, Commander, 
Naval Sea Systems Command; Mrs. Allison Stiller, Deputy 
Assistant Secretary of the Navy for Ships; Rear Admiral Barry 
McCullough, Director of Warfare Integration on the staff of the 
Chief of Naval Operations; and Mr. Dub Summerall, Executive 
Director for Surface Combatants Office and the Program 
Executive Officer (PEO).
    Again, I thank the witnesses and welcome them here today.
    The subcommittee has asked the witnesses to give an update 
on the construction status of four of our major shipbuilding 
programs for the Littoral Combat Ship (LCS), the San Antonio 
class amphibious assault ship, the Arleigh Burke class 
destroyer, and the Gerald Ford class aircraft carrier.
    This subcommittee, and I believe this Congress, is 
committed to restoring the nation's fleet and preserving the 
strike and expeditionary warfare capability of the Navy and 
Marine Corps. This is vitally important for the long-term 
security of our nation. Decisions we make concerning the status 
of the fleet will have effects for decades to come. We need to 
get this right, and we need to do it now.
    Only the Navy and the Marine Corps embarked with the 
expeditionary strike groups have the ability to respond to 
crises anywhere in the world on short notice with overwhelming 
force in the face of an enemy or significant humanitarian aide 
in the event of a natural disaster. Our nation must maintain 
this capability.
    However, cost and schedule overruns on virtually every Navy 
shipbuilding program threaten to sabotage the goal of a 313-
ship Navy envisioned by the chief of naval operations.
    This year we have seen a total restructuring of the 
Littoral Combat Ship program caused by over-optimistic 
predictions of cost and scheduling. The Marine Corps 
Expeditionary Fighting Vehicle (EFV) has likewise suffered 
optimistic cost and schedule performance. The Coast Guard 
Deepwater program has been beset by technical and performance 
issues.
    Everywhere this Congress turns, there is another major 
program suffering from either poor management, technical 
challenges or both. There is not an unlimited supply of funding 
for these programs, and right now the Mine Resistant Ambush 
Protected (MRAP) vehicle program must have Congress's and the 
Department's top priority, because these vehicles can save 
lives today.
    This hearing is important. We need to understand all the 
challenges facing the ship construction program so that we can 
make informed decisions for the future force.
    I again thank our witnesses and look forward to your 
insights on these important matters.
    I now recognize my partner and former chairman of this 
committee, the Honorable Roscoe Bartlett of Maryland.

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

    Mr. Bartlett. Thank you, Mr. Chairman. Mr. Taylor, I want 
to thank both panels of witnesses for being with us today. I 
understand that many of my colleagues have a hard stop at 4 
p.m. this afternoon, so I will keep my remarks brief in the 
interest of getting to our witnesses' statements.
    I would really like to thank the chairman, as well as the 
witnesses from the Navy, for today's format. So often we have 
non-DOD witnesses testifying in the second panel. These 
witnesses often have very perceptive insights, but when they 
testify last, it does not allow the members to follow up with 
questions for the DOD. Today we have a chance to hear from 
these witnesses and then immediately discuss some of the 
oversight issues they have raised with the subject matter 
experts from the Navy.
    Although I expect that much of today's hearing will focus 
on the persistent challenges at LCS and LPD-17 programs, I am 
glad we will be getting an update on DDG-1000 and CVN-21. I 
understand that, as these programs come closer to completion 
design and the start of construction, they, too, are facing 
serious schedule costs and weight challenges.
    I am especially interested in how the Navy is applying 
lessons learned from LCS and LPD-17 to these shipbuilding 
programs to avoid similar pitfalls as detailed design concludes 
and construction begins.
    With respect to LCS, I was dismayed to learn of additional 
schedule slippage on LCS-1 and the further potential impact of 
workforce challenges at Marinette Marine. I would like the Navy 
to provide us with a detailed update on the construction phase 
to both LCS-1 and LCS-2.
    I would also like the Navy to address the status of LCS-4. 
What are the cost trends for this platform? What actions is the 
Navy taking to ensure equitable treatment between the two 
contractors?
    As well, we have heard a number of disturbing stories in 
the press recently regarding LPD-17. I would like to understand 
what risks remain in the completion of construction and 
performance of LPD-17, 18, and 19 in particular.
    What lessons has the Navy learned about accepting delivery 
of ships prior to the completion of construction? Has the Navy 
ever done this before? Does the Navy believe it may have to do 
it again? What types of contractual remedies could have 
prevented such a situation?
    Finally, I am concerned about the impact that a potential 
shortage of steel may have on our shipbuilding programs. It is 
my understanding that the Defense Contract Management Agency 
(DCMA) recently conducted an industrial capabilities assessment 
for the MRAP program. According to this assessment, the 
limiting factor for producing large quantities of MRAP vehicles 
is material constraint, and not the production capacity of the 
prime contractors.
    Tires and specialty mil-spec thin-gauge armor plate are the 
two primary material constraints limiting production. It is 
imperative we understand how the consumption of these materials 
for MRAP will impact other DOD programs, particularly the 
shipbuilding programs this subcommittee oversees.
    There is no reason why we should learn six months from now 
that another critical platform cannot be delivered or has 
experienced excessive cost growth because all the steel has 
gone to MRAP. It is incumbent upon the Department to do a 
thorough evaluation of these impacts now and for members to 
fully understand the hard choices that will have to be made.
    All of our witnesses, DOD and non-DOD, are performing an 
important job for our warfighting. Again, thank you for being 
here, and I look forward to your testimony.
    Thank you, Mr. Chairman.
    Mr. Taylor. I thank the gentleman.
    Sheriff Ellsworth, do you have an opening statement?
    Mr. Ellsworth. No, sir.
    Mr. Taylor. Okay.
    With that, the chair would now recognize, I would hope, in 
this order. We will start with Mr. O'Rourke.

  STATEMENT OF RONALD O'ROURKE, NATIONAL DEFENSE SPECIALIST, 
                 CONGRESSIONAL RESEARCH SERVICE

    Mr. O'Rourke. Chairman Taylor, Ranking Member Bartlett, 
distinguished members of the subcommittee, thank you for the 
opportunity to testify today on these programs.
    With your permission, I would like to submit my statement 
for the record and summarize it for you briefly.
    Mr. Taylor. Without objection.
    Mr. O'Rourke. Concurrency between design and construction 
was a significant cause of cost growth on the LCS. Avoiding 
such concurrency is an old lesson in defense acquisition. In 
this sense, the LCS program is not so much an instance of new 
lessons learned as of old lessons that were forgotten.
    Over the last several months, the Navy has maintained its 
support for procuring 55 LCSs. Continued stability in plan 
numbers can help control costs. At the same time, however, 
there is a risk of industry receiving an implicit message from 
the Navy that for the LCS substantial cost growth does not pose 
a significant threat to planned numbers. Such a message might 
not be conducive to rigorous cost control.
    As the cost of the LCS increases, it puts added pressure on 
the shipbuilding budget. But the more pressure there is on the 
shipbuilding budget, the more Navy officials might believe they 
need to keep the relatively inexpensive LCS in the mix of ships 
being procured. Such a paradoxical situation might not be 
helpful to rigorous cost control in the program.
    The Navy testified that it was overly optimistic on the LCS 
program. It also testified that compared to CBO, the Navy 
budgets do a much more aggressive number on its shipbuilding 
programs. This raises a question regarding what the difference 
is between ``overly optimistic'' and ``much more aggressive.''
    A potential issue for the subcommittee is whether the 
Navy's requested figure of $460 million would be too high to 
use in amending the LCS cost cap. If $460 million is more than 
what these ships are expected to cost, then amending the cost 
cap to that figure might encourage someone to believe that 
additional growth up to $460 million would be acceptable, which 
again would not be conducive to rigorous cost control.
    Of the $160 million implicit delivery work performed on 
LPD-17, a substantial part was for construction work that was 
remaining to be done on the ship when the Navy took delivery. 
This post-delivery work was funded through a line item that is 
not included in ship-end cost, so the ship's reported end cost 
will understate its actual construction cost.
    The Navy acquisition executive is now planning quarterly 
reviews of Northrop Grumman ship systems and the ships under 
contract there. A potential question for the subcommittee is 
why such reviews are only now being planned, given the history 
of the LPD program, and why they aren't being planned for all 
shipyards and all shipbuilding programs, given cost growth on 
other ships?
    Despite putting an additional LPD at the top of its fiscal 
year 2008 unfunded priorities list, the Navy has expressed 
caution about this option, in part, because it believes the 
shipyard would not be able to start work on an additional LPD 
right away. Although that might be the case, Congress could 
still decide to procure the ship in fiscal year 2008, 
particularly if it decides that it has the funding this year, 
but perhaps not in a future year, to do so.
    Funding two LPDs in fiscal year 2008, with the knowledge 
that the second one might not be started right away, could be 
viewed as somewhat analogous to Congress's decisions in fiscal 
year 1983 and fiscal year 1988 to fund the procurement of two 
aircraft carriers in a single year, with the knowledge each 
time that the second ship would be started sometime after the 
first.
    As DDG-1000 technologies mature, technical risk in the 
program will shift to the task of system integration. Since the 
Navy is acting as the program system integrator, the program 
will be an early test of DOD's ability to perform the system 
integration function following the downsizing of DOD's 
technical and acquisition workforce.
    On DDG-1000 work-share agreement, the Navy might have the 
option of having the two yards compete for the role of final-
assembly yard for the third and subsequent ships. A potential 
question for the subcommittee is whether such a competition, 
particularly if done on a one-time basis, would be consistent 
with the intent of vital legislation prohibiting the Navy from 
a winner-take-all acquisition strategy for the program.
    The Navy might find it difficult to fund both the fifth DDG 
and the lead CGX in fiscal year 2011. One option for addressing 
this would be to accelerate the procurement of that DDG to 
fiscal year 2009 or fiscal year 2010. Another possible option 
for the program would be to authorize the Navy to use a block 
buy for procuring several of the DDGs. This could reduce the 
cost by a few percent--enough, for example, to procure an 
additional LCS.
    Information provided by the Navy suggests that the Navy's 
estimate for CVN-78 may be optimistic. The Navy interprets the 
cost cap on the CVN program as being expressed in fiscal year 
2006 then-year dollars. A potential question for the 
subcommittee is whether this interpretation is correct. If it 
is, then CVN-78 and 79 could each experience millions of 
dollars of cost growth without exceeding their caps. This 
situation might not be conducive to rigorous cost control.
    A potential option for the Congress would be to authorize a 
block buy for CVN-78 and 79 or for CVN-79 and 80. The potential 
savings from such a block buy could be enough, for example, to 
procure an additional Navy auxiliary ship or two LCSs.
    Mr. Chairman, this concludes my statement, and I will be 
happy to respond to any questions the subcommittee may have.
    [The prepared statement of Mr. O'Rourke can be found in the 
Appendix on page 51.]
    Mr. Taylor. Thank you, Mr. O'Rourke.
    The chair now recognizes Dr. Gilmore.

  STATEMENT OF DR. J. MICHAEL GILMORE, ASSISTANT DIRECTOR FOR 
         NATIONAL SECURITY, CONGRESSIONAL BUDGET OFFICE

    Dr. Gilmore. Mr. Chairman, Congressman Bartlett and members 
of the subcommittee, my colleague Eric Labs and I appreciate 
the opportunity to appear here today to discuss the Navy's 
shipbuilding program.
    CBO's analysis indicates a couple of things. First of all, 
executing the Navy's most recent 30-year shipbuilding plan will 
cost an average of about $23 billion a year in 2008 dollars, or 
about 30 percent more than the Navy has projected.
    And historical experience, including very recent experience 
that Ron has discussed, suggests that a number of the Navy's 
shipbuilding programs, particularly the DDG-1000 guided missile 
destroyer and the CGX future cruiser, continue to face 
considerable risk of cost growth relative to the Navy's current 
projections for the cost of those ships.
    Eric will discuss some of the details underpinning those 
conclusions, but before he does that, I would like to provide 
the subcommittee a little bit of context that I hope it will 
find useful as it considers the Navy's current shipbuilding 
program and plans.
    Regarding the Navy's past and planned shipbuilding 
purchases, assuming that the notional service life of a fleet 
is 35 years, the Navy would need to buy an average of 8.9 or 
about nine ships per year to sustain a 313-ship fleet. During 
the 16 years of the Clinton and Bush Administrations, however, 
the Navy has acquired ships at a rate of about seven per year. 
Thus, above average purchases will be necessary over the next 
30 years to meet the Navy's goal for fleet size.
    During the 8 years of the Reagan Administration, the Navy 
spent $138 billion--all these costs are in 2008 dollars--to buy 
147 ships at an average cost of about $.9 billion apiece--$900 
million apiece--and, of course, that was to support a much 
larger fleet, almost twice the size of the one we have today.
    In the 8 years of the Clinton Administration, the Navy 
spent $62 billion to buy 54 ships at an average cost of $1.2 
billion a ship. In the 8 years of the Bush Administration, the 
Navy will spend, according to most recent plans, about $98 
billion to purchase 53 ships at an average cost of $1.9 billion 
per ship--so 54 ships during the Clinton Administration, 53 
ships during the Bush Administration, and an increase in cost 
per ship of about 50 percent.
    During the 8-year period spanning 2009 to 2016, the Navy 
plans to spend $158 billion to purchase 91 ships at an average 
cost of $1.7 billion per ship, CBO estimates. Thus, 
notwithstanding large purchase of what are called inexpensive 
Littoral Combat Ships during the next 8 years, the Navy plans 
for 2009 through 2016 indicate it will spend about 15 percent 
more than during the Reagan years, in total, while purchasing 
about 40 percent fewer ships.
    Now, these ships will be more capable, perhaps, than the 
ships that were purchased during the Reagan Administration, but 
numbers also matter, and the numbers are going to be smaller, 
while the costs will be higher.
    Regarding CBO's estimates for the costs of the Navy ships, 
CBO considers the relationship between cost and weight, 
specifically the cost-per-thousand-tons of light ship 
displacement, as one of the key factors determining its 
projections for the prices of future naval vessels. That method 
assumes, broadly speaking, that what has happened in the past 
will happen again.
    CBO takes account of changes in productivity improvements 
in shipbuilding practices and procedures, but such changes are 
frequently offset by, for example, cost increases for labor and 
materials, unexpected production problems, increased 
requirements, or new technologies.
    In testimony before this subcommittee, some Navy officials 
have characterized our methodology for estimating costs as 
worst-case analysis or extremely conservative estimating 
techniques that seek to include all possible sources of cost 
risk. In that regard I note that our method would have 
understated the actual cost of Littoral Combat Ship, the LPD-17 
amphibious warfare ship, and the CVN-76 and CVN-77 aircraft 
carriers, and it would have closely approximated the cost of a 
lead Virginia class attack submarine.
    Now, I will turn to Eric for some additional details.
    Mr. Taylor. The chair recognizes Dr. Labs.

 STATEMENT OF DR. ERIC J. LABS, SENIOR ANALYST, CONGRESSIONAL 
                         BUDGET OFFICE

    Dr. Labs. Mr. Chairman, Congressman Bartlett, members of 
the subcommittee, I want to thank you for the opportunity to be 
here today to discuss the Navy's ship programs. I will focus my 
remarks on the DDG-1000, CVN-78, and the LCS programs.
    In CBO's view the Navy's cost estimate for the DDG-1000 is 
optimistic. Using the DDG-51 destroyer and the CG-47 class 
cruiser as analogies, CBO estimates the two lead DDG-1000 will 
cost about $4.8 billion each, while the Navy's estimate is 
about $3 billion each.
    The Navy has argued that comparing the DDG-1000 with the 
DDG-51 may not be valid, because the design of the DDG-51 was 
disrupted and incomplete when construction began. In 
comparison, the design of the DDG-1000 is going more smoothly, 
and the Navy expects to have the design largely settled when 
construction begins.
    Also, the Navy says the DDG-51 was a smaller, more densely 
built ship, and thus on a ton-for-ton basis was more difficult 
and more expensive to construct than the DDG-1000 cost will be.
    Several factors offset those arguments. First, as Navy 
officials will state, lead ships are difficult to build and 
encounter unexpected problems during construction. The first 
two Littoral Combat Ships and the LPD-17, both of which are 
much less complex technologically than the DDG-1000, illustrate 
that point. The lead DDG-1000 may not have the same 
difficulties as the DDG-51, but it will have problems of its 
own.
    Second, the DDG-1000 program is incorporating 10 new 
technologies that are not found in current destroyers. In the 
past the Navy has typically introduced just three or four 
technologies in new class of service combatants. Integrating 
them may prove more challenging than the Navy anticipates.
    Finally, a comparison of the Navy's cost estimates for two 
more DDG-51s and for the seventh DDG-1000 to be purchased in 
2013, illustrates the risk for cost growth. The Navy stated to 
this subcommittee that two additional DDG-51s authorized in 
2008 would cost $1.5 billion to $1.6 billion each. At the same 
time, the Navy expects the seventh DDG-1000 purchased in 2013 
to cost about $2.1 billion in 2013 dollars.
    Deflated to 2008 dollars, using the Navy's inflation index, 
that equals $1.6 billion, or the same as an additional DDG-51 
that benefits from efficiencies and learning of 62 prior ships. 
The light ship displacement of the DDG-1000 is 5,000 tons more 
than the DDG-51. In effect, the Navy's numbers imply that those 
5,000 extra tons and the 10 new technologies will be free.
    CBO also believes that the Navy's cost estimate for the 
CVN-78 is optimistic. The Navy estimates that the ship will 
cost $10 billion in 2008 dollars, including $2.2 billion for 
non-recurring engineering and design. The Navy argues that 
construction time and cost for the CVN-78 will be less than for 
the CVN-77.
    In contrast, CBO estimates that CVN-78 will cost about $11 
billion, including cost growth that has affected past 
shipbuilding programs at the same stage of construction. And if 
the CVN-78 experience has cost growth similar to other lead 
ships, then the cost could even be higher.
    The LCS was supposed to be simple to design and build and 
cost about $250 million in 2008 dollars per sea frame. The 
reported cost growth, especially the Navy's need to raise the 
cost caps for the fifth and sixth ships to $460 million, 
implies that the Navy's estimate for the total acquisition cost 
for the first two LCSs will be around $600 million each.
    Historical experience had suggested that cost growth would 
occur in the LCS program. Historical cost-weight relationships 
using the lead ship of the FFG-7 class of frigates as an 
analogy indicated that the Navy's original cost target for the 
LCS was highly optimistic.
    The first FFG-7, including its combat systems, cost a total 
of about $650 million in 2008 dollars. That suggests that the 
lead LCSs would cost about $575 million to $600 million apiece. 
In short, cost-to-weight relationships produced an estimate 
less than the cost of the first LCSs, but substantially greater 
than the Navy's original estimate.
    Incorporating the most recent cost growth, CBO estimates 
that the first two LCSs would cost about $630 million each as a 
total acquisition cost. As the program advances with a settled 
design and high rates of production, the average cost-per-ship 
is likely to decline to about $450 million each, excluding 
mission modules.
    A quick note on the LPD-17--on a per-time basis, the LPD-17 
is the most expensive amphibious war ship ever built, and while 
the Navy's cost of follow-on ships has come down, they are 
still far above the Navy's original estimates.
    In closing, Mr.Chairman, I would like to add that CBO uses 
what I would call a realistic approach to estimating the cost 
of ships. In my ten years as a naval analyst, CBO has yet to 
overprice a ship.
    Thank you, Mr.Chairman, and I would be happy to answer any 
questions that you might have.
    [The joint prepared statement of Dr. Gilmore and Dr. Labs 
can be found in the Appendix on page 67.]
    Mr. Taylor. Thank you, sir.
    The chair now recognizes Mr. Francis.

    STATEMENT OF PAUL L. FRANCIS, DIRECTOR, ACQUISITION AND 
   SOURCING MANAGEMENT TEAM, GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Francis. Thank you, Mr. Chairman, Mr. Bartlett, Mr. 
Ellsworth, for involving me in a discussion of shipbuilding 
issues today.
    I will echo what Mr. O'Rourke said. The problems in 
shipbuilding today I do not think are new to shipbuilding, nor 
are they unique to shipbuilding. As, Mr. Chairman, you noticed, 
the Expeditionary Fighting Vehicles have those problems. We see 
those across the board in weapons systems. I think what is 
different today is it is our turn to wrestle with the problem 
and make headway on it, and I really think we can.
    The first thing I would like to talk about is cost growth 
in shipbuilding. And suffice it to say that the patient does 
have a fever. In the over 40 ships that are in construction 
today, they have overrun by a total of about $5 billion, so 
far. Most of that you have paid for, but some is coming.
    If you look at cost growth, you will see that lead ships 
are the long pole in the tent. They typically overrun by about 
30 percent. That is going to be a real challenge for us, 
because in the Navy shipbuilding plan there are about nine 
classes of new ships. So we really have to get those right.
    One of the things that you realize when you look at cost 
growth is in construction you have to get about 60 percent into 
the construction of the ship before you actually start to 
recognize real cost. That means there is a time lag of several 
years between when you authorize money for construction and 
when you get real data on what it is really costing, and then 
you get the overruns.
    And that is what we have seen, I think, recently on the LPD 
and the LCS. And for that reason, you need to put the DDG-1000 
and the CVN-78 on your watch list, because they are just going 
into that phase. And in particular, we have to watch the 
margins for error on these programs, because even with LCS, a 
100 percent overrun is $200 million. A 10 percent overrun on 
DDG is $300 million. Ten percent on the carrier will be a 
billion. So margins for error will be much smaller there, I 
hope.
    That puts a lot of pressure, I think, on the committee and 
what it does in the 2008 and 2009 budget deliberations, because 
the moneys that you authorize there are going to be a factor in 
whether and how large the overruns will be in 2010, 2011, 2012, 
and 2013.
    So you ask yourself what can we do about this structural 
problem? And I think what we really need is a new paradigm for 
establishing programs and overseeing them. And I would say that 
would consist of three things. One is a better business case, a 
real solid business case up front for programs, a good plan for 
making business arrangements and contracting on programs, and a 
good plan for execution.
    And I think to curb the optimism of what we have seen in 
programs today, we really do need that solid business case up 
front, which I would describe as firm requirements, mature 
technologies, a knowledge-based lay down of all the key events 
in design and construction, coupled with metrics for goodness. 
It is one thing to lay the events down; it is another to have a 
set of metrics or criteria to know whether they make sense or 
not.
    Now, with that you would have to put good resources: time, 
money, and people. I think time, schedule, will be derived from 
a good knowledge-based lay-down of a program. And I think cost 
will come from that as well, but I think there are other things 
we could do with cost estimating, such as confidence levels.
    In terms of business arrangements, it just means what we 
are doing with competition and what we are doing with 
contracting strategies. And on contracting strategies, it is 
the type of contract, how we are going to scope work on the 
contract, and the government's roles there.
    And there are a couple of lessons learned in contracting. 
One is it makes sense to separate detailed design from 
construction, as the committee has stated this year, and it 
makes sense to separate lead ships from follow-on ships.
    And finally, in the area of execution, basically we are 
talking about two things there. One is the shipyard's ability 
to design and construct the ship that they have at hand, and 
the government's ability to provide what I would call agile 
oversight--that is, the ability to detect and react to 
variances before they become big problems.
    And if you took a lens like that and applied it to a couple 
of programs, like LCSs, I think that is one where you would 
say, ``Gee, the cost estimate was no good. The schedule 
estimate was no good. The requirements were in flux.''
    We tried to do detail design, system design, and 
construction at the same time. When we signed up for 
construction, we did not understand the design. We went with 
the shipyard that was not very experienced with designing naval 
surface combatants, and the government was, I think, too 
focused on schedule, and not the whole program.
    Take the same lens and put it on CVN-78, which, for what it 
is worth, I happen to think is a pretty well-laid-out program, 
pretty well-managed, but nonetheless you see risks. You see 
very demanding requirements, high technical content with, I 
think, several breakthrough technologies that are not mature 
yet, a schedule that is bounded by the retirement of the 
Enterprise, and a cost estimate that is optimistic. And the 
budget is set at the target right now, and we have never 
delivered a lead ship in target.
    So that is a very pressurized business case for the CVN. In 
the business arrangements, I think they are doing pretty well. 
We gave them an extra year, and that construction preparation 
contract allowed them to really pursue a robust process, and I 
think we will have 75 percent of their design before they go 
into construction. They separated detail design from 
construction, so that is good.
    We have seen some risks in execution, which I would 
describe as the technologies. There are three really key 
technologies that have had problems. Their schedules have 
slipped to the right. They have used up all their margin. If 
they have more problems, they are going to interrupt the ship's 
construction schedule.
    So if you are just using that lens, you would come back and 
say, ``Well, why can't we do that more on other programs?'' And 
I would say, I think there is a language barrier. When we look 
at programs, it seems like each program uses a different 
language to describe its key events, the criteria it is using 
for judging the completeness of those events, and the programs 
are scheduling milestone decisions at a different point 
relative to those at hand.
    So it is hard to get a common language, and I will just use 
LCS as an example. I think everyone would agree that the launch 
of the first ship was premature, with only 63 percent of 
construction done. I can see that.
    Well, what should it have been? What are the standards for 
launch? What are the things that should have happened 
beforehand, and can't we see that in a proposal for a ship? And 
if it is true for launch, isn't it true for keel way? Isn't it 
true for fabrication, detail, design systems, and so on?
    Those are the types of things I think are not knowable when 
a program is presented for approval. So, again, I would just 
sum up by saying we really need a knowledge-based foundation 
for solid, executable business cases on these programs that 
does provide transparency for oversight.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Francis can be found in the 
Appendix on page 90.]
    Mr. Taylor. Thank you, sir.
    The chair now recognizes the gentleman from Maryland, Mr. 
Bartlett.
    Mr. Bartlett. Thank you very much.
    Mr. O'Rourke, you testified about the Navy's proposed 
change to the cost cap for LCS. Do you or any of the other 
witnesses have any thoughts about how Congress might more 
effectively implement cost caps? For example, would it be 
feasible to establish caps on labor hours or material cost by 
imposing a cost reduction or laborsaving scale similar to a 
learning curve?
    Mr. O'Rourke. That is a possibility. My own sense is that 
there might be an advantage in keeping the cost cap as 
legislated simpler, rather than more complex, so as to preserve 
the Navy's ability to manage the program under that cap in the 
best way that it can find how.
    In terms of options for amending the cost cap, I mentioned 
in my opening remarks one issue about the $460 million figure 
possibly being a little too high. Now, if it is actually higher 
than what the Navy might expect those ships to cost, then you 
are actually providing some room for extra cost growth on those 
ships. And so one potential issue for the subcommittee to 
explore would be whether the $460 million figure is perhaps too 
high, and if so, what a lower figure should be.
    The second thing in terms of how else you might think about 
amending the cost cap would be to apply the cost cap not to 
simply ships five and six in the program, but to some or all of 
the follow ships in the program. Some of the other cost caps 
that the subcommittee has implemented on Navy shipbuilding 
programs have applied to a larger number of ships in the 
program in question, and the subcommittee can look to those 
examples as potential models for how they might want to go 
about amending the cost cap on the LCS program.
    Mr. Bartlett. Thank you.
    Dr. Gilmore, you mentioned that recent ship procurements 
are costing us roughly 50 percent more than the prior 
generation. I assume that those are in constant dollars, so 
that we can compare dollar to dollar?
    Dr. Gilmore. Yes, the numbers I cited were in 2008 dollars.
    Mr. Bartlett. Okay.
    Dr. Gilmore. They were averages over all the ships that 
were bought during certain periods.
    Mr. Bartlett. Clearly, these newer ships have more 
capabilities, but in the commercial world, each new generation 
of sophisticated, complex equipment has increased capabilities 
over the last generation, and they are costing less. Why are 
our ships costing more?
    Dr. Gilmore. I do not have an answer for you that would 
satisfy you. I like to base my answers on the results of 
analysis. We have not done any analysis that would shed light 
on that. I can only observe that this is the trend not just for 
shipbuilding, as Mr. Francis mentioned and Mr. O'Rourke 
mentioned.
    This is the trend not just for shipbuilding, but it has 
been a long-established trend for all DOD weapons systems, 
which are built only for the government, for which the 
government assumes all the risks of development. It pays all 
the costs of development. Those are not recouped later on.
    And so there are just a lot of unique aspects to these 
programs in terms of requirements, which are usually aggressive 
in terms of what the new capabilities are that are wanted, in 
terms of who bears the risk--which is the government--and who 
the prime customer is--which is the government--and it is a 
customer for a relatively small number of items, although they 
are obviously very expensive items, that are at variance with 
what happens in the commercial world.
    And so, not having done the analysis, I cannot tell you 
exactly which of those factors are most important or quantify 
how they are important. I can just observe that there are all 
these differences, and that is probably a large part of the 
story.
    Mr. Bartlett. Clearly, there is an apparent disconnect. The 
newer generations of similar kinds of complex integrated 
systems in the commercial world are actually decreasing in 
price, so it is not a given that because you have more 
capability, the cost has to go up. And it would be very 
interesting for us to see what the differences are between our 
world and the commercial world. The commercial world costs are 
going down with increased complexity. Our costs are going up.
    Mr. Francis, your written testimony references challenges 
integrating mission packages with LCS. Would you please 
elaborate on the weight and personnel issues that may impact 
the mission package integration? To your knowledge, what steps 
is the Navy taking to manage these issues?
    Mr. Francis. Mr. Bartlett, as you know, the mission 
packages are not included in the ship itself, and I think a 
rough order of magnitude to get the mission packages on the LCS 
is going to add about $100 million to the cost per ship. So the 
costs we have been talking about have been sea frame so far. So 
we add the mission packages--that is a separate development 
effort, as you know, and separately funded.
    What we are seeing on that so far is the Navy has allotted 
about 180 tons on the ship for the mission packages. Right now, 
it looks like they are overrunning about 13 tons right now in 
development. And similarly, I think there are about 35 people 
allotted to man those mission packages, and we understand right 
now that they are roughly about seven people over that that 
were currently in development.
    Some of the challenges associated with that is the number 
of the mission packages have been reduced in size so that the 
redundancy you might have, or if one component goes out, you 
would have another one there--that is gone. And a lot of the 
organic maintenance that would be on the ship right now is 
gone. So I think the Navy is working very hard to try to manage 
the weight and the people, but they are having to make trade-
offs in potential capability.
    Mr. Bartlett. Thank you. The cost growth on LCS-1 was 
really quite perplexing, because, as you mentioned, it was 
essentially a sea frame, and one would have suspected that the 
major uncertainties would have been in the packages.
    Mr. O'Rourke, I am sorry that I didn't get your gesture. 
You had a comment on a prior question?
    Mr. O'Rourke. Just a quick addendum, which is the question 
you asked about why the cost of ships is going up the way that 
it has is a question that the previous CNO asked during his 
time in office, and he went off and asked the RAND Corporation 
to study that question. RAND did look into it in a formal 
analysis. They reported out the results last year, and I will 
make a copy of that analysis available to your office.
    Mr. Bartlett. Thank you.
    And one last quick question for any of the witnesses. Have 
you seen any changes in the Navy's program management, ship 
construction supervision, contracting or cost estimation 
procedures since the stop work and termination of LCS-3, which 
would indicate a change to best practices incorporating lessons 
learned?
    Mr. O'Rourke. Just to start, I have seen things that I can 
point to. One is a beefing up of the oversight staff for the 
program, both on the private sector and on the Navy side. And 
just to cite one other example, there has been a change in the 
cost-estimating standard that is being applied to the program.
    Mr. Bartlett. So you would anticipate from that that we 
would not have this spread in the next----
    Mr. O'Rourke. I think both of these things are helpful, but 
in terms of lessons, as I said earlier, I think this is not so 
much a case of new lessons to learn as it is to apply old 
lessons that were learned long ago.
    Mr. Francis. Mr. Bartlett, we have seen, I think, the Navy 
is moving more toward putting confidence levels in their 
estimates. There is a debate as to what level that should be. 
The Defense Acquisition Performance Assessment (DAPA) panel 
says 80 percent. I think the CAIG would say it needs to be less 
than that. But the fact that they are starting to do that is a 
step in the right direction.
    By the same token, we do see some, I would say, shortfalls 
in the ability of SUPSHIP to oversee some of the construction 
contracts and to get the kind of cost data they need to react 
quickly to problems. So I think the picture is mixed.
    If I could offer a comment, Mr. Bartlett, on cost caps. I 
just wanted to say I think once we get to the point where we 
are considering cost caps, I think the battle may be lost 
already.
    Really, your point of leverage is early when you are 
setting requirements and doing design, and I think one of the 
things we would have to do up front better is to identify what 
trade space we are going to have maybe within the ship or other 
ships, so that if cost becomes a problem, you can make trades, 
because once the design is set and the strategy is set, I think 
the cost cap, really, is going to be a victim of what happens 
on the program. So it is, I think, a measure that probably 
comes too late.
    Dr. Labs. Mr. Bartlett, I guess the only thing I would add 
to that--because I would echo some of the things Mr. O'Rourke 
said--is that a lot of these issues come up because I am not 
convinced the Navy has realistic cost estimates for their ship 
programs to start with.
    If the Navy had come to the Hill, for example, and said 
they thought the LCS was going to cost $450 million, it would 
not have come as a shock as much to see some cost growth with 
that type of a number as opposed to $220 million to start with. 
So a lot of it is sort of in the setting of expectations and 
what your baseline is to start with.
    Dr. Gilmore. I would say that looking at the issue of cost 
growth and realistic costing from the perspective of the 
overall shipbuilding program, we will have to wait to see 
whether the improvements that Mr. O'Rourke mentioned and Mr. 
Francis mentioned translate into the Navy's programming 
process, because right now, the Navy is basing its future-year 
ship program under unrealistic estimates. They are top-down-
driven estimates.
    When they derive the costs of several of the classes of new 
ships, they have done that by allocating budget shares and 
dividing the number of ships that they want to buy into a 
budget share. That is what they have done in generating their 
30-year shipbuilding plan. So those do not generate realistic 
estimates, and I do not think they generate for either the 
department or the Congress a realistic appraisal of the number 
of ships that are going to be bought.
    So if these improvements in pricing-out the individual 
ships and pricing them at something a little bit higher than 
the 50th percentile level of confidence translates into more 
realism in the shipbuilding program, that would be a good 
thing. But we have not seen the next 30-year shipbuilding 
program yet, so we will have to wait.
    Mr. Bartlett. Mr. Chairman, one quick last comment which 
may or may not need some observations by the panel. Clearly, we 
want our new ships to be as good and capable as they can be, 
but very frequently, getting that very last five percent 
improvement in capability may double the cost.
    Is there somebody sitting at the table that is challenging 
these requirements as the contractor gets them, and they would 
say, ``Do you really need that? That will cost you twice as 
much as if you only asked for 95 percent of that capability.'' 
Do we have those discussions?
    Dr. Gilmore. Well, they are supposed to occur. When I 
worked in the department, I worked for the Office of Program 
Analysis and Evaluation, which provides the guidance and 
oversees the conduct of what are now called analyses of 
alternatives which, if done correctly, are done before a 
program's requirements are set and explore exactly the issues 
that you described.
    What do you have to pay realistically to get a certain 
level of requirements? And if you are willing to back-off that 
level of requirements, how much might that cost be, and would 
that still produce an article that was useful, that could do 
what people think needs to be done--perhaps not as much as 
people would like, but still make a useful contribution to the 
missions the Navy is pursuing?
    And those kinds of analyses are supposed to be done, but my 
experience is that often they are done in a way that adopts 
assumptions that drive the analysis to support conclusions on 
what the capabilities should be that have already been reached 
before the analysis explores those issues.
    Mr. Bartlett. Mr. O'Rourke.
    Mr. O'Rourke. Just as, again, a quick adjunct, there used 
to be an organization at one time in the Navy for many, many 
years that performed the function of being the ``requirements 
police,'' if you will, to add some discipline into the 
requirement-setting process, and that was the Ship 
Characteristics Board or the Ship Characteristics Improvement 
Board.
    Now, that board was disestablished some number of years 
ago, and we went through a period of time when the Navy was 
looking at some ship designs when that board was not in place. 
Now, the Navy has now reestablished this organization under a 
new name, and so they do now once again have in place an 
organization that can act as the ``requirements police,'' if 
you will, to help separate requirements from desirements.
    And the proof will be in the pudding. We will have to wait 
and see just how tough this board acts in terms of actually 
policing requirements and making sure that the Navy does not 
let its requirements get away from them. But the Navy has once 
again reestablished that organization.
    Mr. Bartlett. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Taylor. The chair thanks the gentleman from Maryland.
    The chair now recognizes the gentleman from Indiana, Mr. 
Ellsworth.
    Mr. Ellsworth. Thank you, Mr. Chairman.
    Gentlemen, I have to admit that my past dealings with 
government contracts have been more in the tens of millions and 
not these numbers that you have been talking about today.
    And I am even more proud now, Mr. Chairman, that the last 
jail that I built, we came in half-a-million dollars under 
budget. And that makes me more proud now when I hear about 
these government projects.
    There are a few things we have talked about today that 
concern me. My first question is that on the change orders that 
you all see, who is more responsible? When we are in this 
shipbuilding project, is it the Navy comes in and says--the 
hull is there; they start putting the guts in this thing and 
they say--``No, we would like this switched over here. We want 
to do this with our left hand instead of our right.'' Or, ``We 
would like this window to be here, or this'' whatever it might 
be?
    Who does more of that? The shipbuilder saying, ``Oh, here 
we have our schematic design on the table, but now it is like 
we have got steel hung. We cannot do that; we have got to 
change it.'' Is there a feel for that? Who has more of that--
the Navy or the shipbuilder themselves--that would naturally 
add to that cost when we switch this over here? Does that make 
any sense at all?
    Dr. Labs. CBO does not have any data as to who is the 
initiator of a lot of those changes, whether it is the 
contractor or the Navy. But I can say at sort of a general 
level that a lot of times those change orders are at the 
instigation of either the contractor or the Navy, because maybe 
they just want something different than what was originally 
there.
    But in many instances, when you translate a design that is 
on paper into actual construction, things do not necessarily--
through no fault of anyone, really--work out in reality the way 
they seem on paper. So it looks like a certain pipe can be hung 
in a certain way, and when you actually start building the 
thing, ``Oh, that isn't going to work,'' for whatever reason, 
and so that becomes a change and a change order under that 
category.
    But we do not have data that can break out as to levels of 
responsibility or attribution.
    Mr. O'Rourke. You can take those change orders and divide 
them, if you will, into two basic groups. One is those that 
arise as a function of the construction process of the ship--
the errors you just talked about. And the others are those that 
have to do with the fact that the Navy has reconsidered what it 
wants the ship to be or what it wants the ship to do.
    Ultimately, final responsibility for those change orders 
happening and being put into place resides with the Navy. And 
it is especially that second category that I think people are 
concerned about, because those are the ones that are more 
likely to be initiated by the Navy and might be initiated by 
the Navy in part because the Navy had not completely thought 
through ahead of time what they wanted that ship to be and what 
they wanted that ship to do.
    I think the Navy recognizes that, and they are trying to 
move back to a greater sense of self-discipline on requirements 
so that they do not come back later with this second group of 
change orders that gets added to the first that are going to 
arise as a result of the construction process.
    Mr. Francis. Mr. Ellsworth, I will say change orders are 
expected, and they build in a number in all the cost estimates 
and the contracts for change orders. So I do not know the 
answer to this question, but it is a good one to see how are we 
doing that? Are those budgets anywhere close to reality? 
Because there is an expectation of a fairly significant level 
of change order traffic.
    Mr. Ellsworth. And they are certainly not making up the 
kind of dollars we are talking about--the increase to the total 
price of the ship I would hope they are changing.
    Mr. Francis. Right.
    Mr. Ellsworth. Or the person who draws the ship needs to go 
back to Drafting 101, I would say. That kind of leads me to the 
next question.
    It sounds like at the very end of y'all's presentation and 
Mr. Bartlett's questioning that maybe Congress and the Navy--
prior past Congresses--haven't really demanded very accurate 
figures. Is that fair to say, that we are talking about so many 
dollars that the old saying about ``a billion here or a few 
hundred million here,'' we kind of expect that?
    Maybe we have not had that construction manager in there, 
that person that is watching that cost, and as it gets away 
from us, it is like ``Well, it is going to be $100 million 
here.'' Has Congress been doing our job to watch and really put 
the thumb down, saying this needs to come in maybe not on 
budget or under budget, but at least some kind of reasonable 
figure?
    Mr. Francis. I think that is an astute observation, Mr. 
Ellsworth, and I think it transcends the acquisition role--not 
just shipbuilding. There are those who would say the 
acquisition process is broken, and it needs to be fixed. I 
would offer a different explanation.
    I think the acquisition process is in equilibrium, and part 
of the rules of the game is, as we were talking earlier, 
performance sells. So higher requirements are going to allow 
your alternative--whether it is a ship, an aircraft, a missile, 
a tank--to defeat any other alternative. So you have that high 
performance, but you also have to have low cost. Your cost has 
to fit in the budget.
    And I am not trying to be glib about this, but that is sort 
of the rules of the game to get a program into the budget where 
you can actually start to attract funds to do something. There 
are conventions that you build around that, and we kind of all 
participate in that.
    So if the Navy, for example, were to come here and say, 
``The cost of the LCS is actually going to be $500 million, not 
$200 million,'' then the budget would accommodate maybe 20 
ships, and not 55. So you might say, ``No,'' and nobody wants 
to get a ``no'' answer. So it is easy for you if the budget 
proposal when it first comes in is low, because then you don't 
have to make trade-offs. And our system kind of works that way.
    Mr. Ellsworth. It is just like it is heading that way, I 
know, with the MRAPs. We have been having a lot of discussion 
about that. We went from--was it $6 million to $16 million 
apiece--because that was my recollection on the cost of the--
oh, I am sorry. No, I am thinking about the----
    Mr. Francis. EFV?
    Mr. Ellsworth. The other boat.
    Mr. O'Rourke. I have got a couple of things to that. In 
addition to the sort of the sociology of the situation that can 
drive people to price things to sell and price things to get 
programs started, there are a couple of other things, which is 
Congress can demand realistic estimates, but once it gets 
estimates, it may not always have enough information to 
evaluate independently whether in fact that estimate is 
realistic.
    I remember a hearing that Chairman Taylor held a year or 2 
ago where the DDG-1000 was discussed, and as I recall, he asked 
Admiral Hamilton, ``Will you wager 1 or 2 months of your pay to 
make sure that the DDG-1000 is going to come in at cost?'' And 
Admiral Hamilton said, ``Yes.''
    And so we have that commitment there, but once the Navy 
says that, what position is Congress in to evaluate that number 
and say, ``Well, okay, he said it was.'' But now how do you 
parse that number apart and say, ``Was Admiral Hamilton right 
about that or not?''
    The other issue that the evidence for these numbers being 
wrong, as was mentioned earlier, always comes years later, so 
by the time it comes in, it is a different cast of characters, 
and the people who talked to you at the time about whether a 
number was supposedly realistic or not--they are gone by that 
time. And I have seen this. I think we have all witnessed this 
on a number of systems over the years.
    So there is the issue of consequences and accountability in 
a system where people only have limited tenures in office. By 
the time some of the different numbers start to become 
available to Congress, we are dealing not with the people who 
originally spoke to those numbers, but with their successors or 
even their successors' successors.
    Mr. Ellsworth. Thank you, Mr. O'Rourke.
    Mr. Chairman, if I could have one more question.
    Mr. Taylor. Certainly.
    Mr. Ellsworth. One of you--and I cannot remember which 
one--were talking about the 60 percent point of construction 
where we really start projecting those costs. I don not 
remember which one of you was talking about that.
    Mr. Francis. I did.
    Mr. Ellsworth. Mr. Francis, could you just go and kind of 
elaborate on that just a little bit, why that is that we get to 
60 and then we start knowing the price of steel, the price of 
technology; we think we have all those bugs worked out, those 
change orders--is that when we----
    Mr. Francis. Yes. The 60 percent is a number that we have 
observed in looking at actual construction of ships. I would 
not say it has scientific precision, but back of the envelope 
precision.
    But basically, the main thing we see is that when labor 
hours really start to come in, and you can start then measuring 
how many labor hours we are associating with work packages, 
because once you get into construction, your packages of work 
are pretty discreet. And you know whether or not you are 
starting to construct in a certain sequence, because you plan 
to do things in a certain order.
    When you get past the halfway mark, around 60 percent, you 
start to realize, one, what actual labor is taking and, two, 
the things that did not get delivered to the yard in time are 
starting now to disrupt the construction sequence.
    And that is the point maybe of reckoning where you have to 
admit, ``Gee, the schedule is not going to go the way we want 
it.'' And we either have to add more calendar time, which is 
labor and overhead, or we have to put more labor on it and 
drive the cost up.
    In some cases, too--and ships are unique in this respect--
because of the long construction time, the cost of materials 
does change, even though we put in economic adjust clauses. 
Price of steel in a number of the ships that we have looked at 
has gone up when they are in that stage of construction.
    Mr. Ellsworth. Thank you.
    Thank you, gentlemen, for your testimony.
    I yield back.
    Mr. Taylor. The chair thanks the gentleman.
    Gentlemen, I want to thank all of you for being here.
    And given our desire to not be surprised with an LCS-type 
scenario again or a Deepwater-type scenario, both of which are 
regrettable--they happened, and we hope they are being fixed, 
and what we do not want to see is this become a reoccurring 
problem--I am curious to hear your thoughts if there is an 
institutional problem within the Navy to where there is no one 
person who is responsible for our shipbuilding programs for a 
long enough period of time--given how long it takes to go from 
development to R&D to actual construction to delivery--where 
there is one person who, in effect, is not going to let this 
happen on their watch.
    Is this something this committee ought to be looking into?
    It is strange that you should mention Admiral Hamilton. 
Heck of a nice guy. Bottom line is, I am told he is going to 
retire in September. So he is not going to be around in 
position to make good on that bet, one way or the other. And 
that would be an example of this.
    But I would like to hear your thoughts on it. Again, the 
Navy guys are going to be--I have great respect for them--kind 
of restrained by the uniform they wear to actually what they 
can say. So what are your thoughts?
    Mr. O'Rourke. Just one thought to start the answer, which 
is that within the Navy there already is a model of a person 
who has a much longer tenure in office, and that tenure was 
designed specifically because it was felt that it would be 
beneficial for someone to be around long enough to live through 
the consequences of actions or decisions that were made earlier 
in that person's tenure, and that is the director of Naval 
Reactors.
    Mr. Taylor. Admiral Donald.
    Mr. O'Rourke. Currently, Admiral Donald--that is right--who 
is the fifth person to hold that office in about 50 years. Now, 
that term of office is 8 years, and there are very few other 
parallels in the Federal Government for that.
    That long term of office reflected a sense many years ago 
when Naval Reactors was being set up that this was a very 
special, very important technology, and therefore, a person of 
that tenure would be beneficial in helping to bring to come to 
pass and to make sure that it was done right.
    But if we decide now that shipbuilding--because of the very 
long time spans, because of the large amount of dollars 
involved and because of consistent congressional concern over 
the issue over the years--has now become an issue like that, or 
sort of like that, then one possible model would be to look to 
what we have with Naval Reactors and not necessarily copy it 
verbatim, but look at it as a rough model for doing something 
within the shipbuilding arena that is maybe a little bit like 
that.
    Mr. Taylor. Is there value to that, in your opinion?
    Mr. O'Rourke. I think that there is merit enough that it 
may be worth investigating. There are always downsides to these 
options as well, and there are differences between shipbuilding 
in general and the responsibilities of Naval Reactors in 
particular, but what I want to get across is that we do have 
this model over here which does seem to have worked well for 
this one function of bringing nuclear power to the Navy.
    And so if we have that model, and if it is a model also 
that Sean O'Keefe, after leaving the Navy, felt that NASA could 
benefit from, then maybe it can be something that a part of the 
Navy elsewhere can also benefit from.
    Again, I cannot make a recommendation on the issue one way 
or the other, but I do think it is a model that there has been 
enough evidence accumulating on for at least people to look at 
that and come to a decision about whether they think that would 
make sense or not.
    Mr. Taylor. Would any of the other gentlemen like to weigh 
in?
    And I very much appreciate your answer, Mr. O'Rourke.
    Dr. Gilmore. If you do not have a realistic cost estimate 
to begin with, it does not matter how long the person is there. 
They are not going to be able to manage the program to achieve 
an unrealistic target.
    Now, to the extent that longer tenure would mean that might 
translate into the person being responsible at the initial 
stages of the program where the first cost estimates are 
generated generating more realistic ones, that might help.
    But there are still all these incentives in the system to 
generate estimates that are optimistic. And estimates that are 
a little bit low are probably good, because they help you 
manage the program and control costs, as Mr. O'Rourke has 
mentioned.
    But estimates like the ones that existed for LCS and that 
exist for DDG-1000 probably are not helpful, because they are 
too low initially. The initial estimates for DDG-1000 for the 
fifth ship were about $1.1 billion, and the Navy is now 
admitting that in its estimates the cost will be maybe two or 
three times that, and our estimates would be a little bit 
higher.
    So the initial estimates for that program were extremely 
optimistic, and I disagree a little bit with my colleague, Mr. 
O'Rourke. There were plenty of people inside the Pentagon at 
the time those estimates were generated that knew there was no 
way in the world that those ships were going to be built for 
that cost. Sometimes that is known very early on, and if you 
try to manage the program to those targets, you just cannot do 
it.
    Mr. O'Rourke. Just one quick additional comment, and not to 
disagree with what was just said, but we have had a number of 
hearings this year, as you are aware, on the Deepwater program, 
and at one of those hearings--it was one of those on the House 
side--the commandant was asked, ``Well, who is responsible for 
this situation?''
    And I thought his answer to that question was fairly 
powerful. He said, in essence--and I am paraphrasing here a 
little bit--``Well, the program manager and the chief engineer 
of the Coast Guard and the vice commandant of the Coast Guard 
and the commandant of the Coast Guard at the time are all no 
longer here.'' And I think that gets to the crux of your 
question.
    Mr. Francis. Mr. Chairman, my boss, David Walker, has 
recommended that type of position for the Department of 
Defense, a chief management officer who would have a tenure 
long enough that they could, let us say, last through the ups 
and downs of individual decisions. So I think conceptually 
something like that in the Navy is something worth considering.
    I would have to add that that person would have to be 
empowered to make decisions, and he would have to be supported 
by the kind of systems like Dr. Gilmore just said--cost 
estimating, good trade-offs. In other words, they need a 
support system to generate business cases that they could make 
good decisions about.
    And one of the things I worry about is what is going on in 
the program offices and the PEOs, because I think there are 
really exceptional people there. But I think when they get 
unexecutable programs, we are grinding them up. So we have to 
find some way to allow the PM to weigh in and be able to say 
when something is not doable or unexecutable. And that type of 
information would have to get to that level.
    Mr. O'Rourke. One more quick comment?
    Mr. Taylor. Sure.
    Mr. O'Rourke. Which is that, although I have mentioned the 
fact that there are a lot of old lessons that can be brought 
back in and reinforced, there are, I think, some new ideas out 
there.
    And one of those that I think has particular promise is the 
concept that Admiral Sullivan has promoted for reducing the 
Navy over the longer run to a smaller number of common hull 
designs so as to recover some of the lost economies of scale 
that were suffered by the Navy when the shipbuilding rates went 
down.
    That idea, I think, has a lot of promise for being a 
powerful engine for reducing ship costs and for allowing the 
country to support a larger Navy for a given amount of dollars.
    But it is also a vision that would take a long time to 
implement over time, and if you have an idea like that that 
requires somebody to be behind it consistently over time, then 
having someone in the Navy who has a long tenure in office to 
pursue that idea and to make the decisions at the critical 
points along time to help make that vision come about can be 
potentially beneficial for doing that.
    So if you have an idea for reducing ship costs, that is 
inherently one that would take a long time to implement--which 
strikes me that is what you have, in the case of what Admiral 
Sullivan is proposing--then that might lead you to think, 
``Well, maybe the person in charge of implementing it should 
have a longer term of office.''
    Mr. Taylor. We will see.
    Gentlemen, it seems like within days of the change with 
last November's elections, we had the secretary of Navy come 
see me and say, ``We have got a big problem with LCS.'' The 
commandant of the Coast Guard shows up: ``We have a big problem 
with home porting.''
    Let us just say both of them kind of took me by surprise 
and--water under the bridge--my point being, do you see 
anything we are missing, any problems that we can prevent by 
actions this summer or this fall that are coming down the line 
anywhere near those problems that probably could have been 
avoided or certainly mitigated?
    In the case of the Coast Guard, apparently the deputy 
commandant had raised concerns about premature failure of the 
hull. In the case of LCS, someone had to see that there was a 
problem last summer and would not tell. So is there anything 
that you see that we should be addressing now?
    Mr. Francis. Mr. Chairman, if I can start, I would say you 
really need to be looking at the DDG-1000 and the CVN-78, 
because again, the moneys that you are going to authorize in 
2008 and 2009 are going to form part of their business case.
    Mr. Taylor. And your specific concerns with those two hulls 
are what?
    Mr. Francis. On the DDG-1000, when we convened here last 
year, I think the cost estimate at the time was $3.3 billion 
per ship, and the Navy then went through a cost reduction on 
the ship and got it down to $3 billion, and the idea was to 
keep the $.3 billion in there as a hedge against future cost 
growth. My understanding is that money has been scrubbed out of 
the program, so we have, I think, a very tight cost estimate on 
that program.
    And the other things we need to be looking at are what is 
happening with the key technologies on that, and are we holding 
schedule? So that is my concern there. On the CVN-78----
    Mr. Taylor. Do you know of any specific instances that you 
can name as a for-instance?
    Mr. Francis. Two for-instances. One is the dual band radar, 
which affects both the CVN and the DDG-1000. They have had 
trouble generating the power out of the transmit-receive units 
that they need for that radar, and it does not look like they 
are going to be able to generate that power until they get that 
system into production.
    If the dual band radar does slip, the current construction 
sequence is to install the radar into the composite deckhouse 
and deliver that as a unit. That is going to be the 
construction sequence. If the dual band radar gets delayed much 
further, they are going to have to install the deckhouse first 
and then put the radar in afterwards. That is going to be a 
cost issue.
    The other thing on the DDG-1000 is the software--the total 
ship computing environment. That was to be released in six 
stages. The first three went okay, but a lot of work now in the 
last three has been deferred, basically reflecting late 
delivery of information like vendor-furnished information where 
the software has to wait. So there is going to be more software 
work on the tail of the program on that.
    Mr. Taylor. Mr. Francis, I very much appreciate that. If 
you have that or any other concerns, I know this committee 
would welcome hearing them up-front, so, hopefully, we can 
address them before the Nation has a needless delay or a 
needless expenditure of funds.
    Mr. O'Rourke. Mr. Chairman, just to add two quick things, 
things that the committee might consider doing this summer as 
it looks forward into the shipbuilding program.
    One would be to look for instances of where a cost-plus 
type contract is being combined with a schedule driven program, 
because that was one of the other lessons that were forgotten 
that came out of LCS. That has been commented by others as a 
recipe for cost growth, and so you would look to see if there 
were other instances in the Navy shipbuilding program that 
combined those two things together.
    And the second thing I think that----
    Mr. Taylor. Again, do you have any specific examples of 
where you see a----
    Mr. O'Rourke. I would have to go actually survey the 
programs to see which programs would meet both of those 
conditions, but that definitely is something the committee may 
want to consider doing on its own and then arrive at their own 
judgments about which programs may satisfy both of those 
conditions.
    And the other thing that the subcommittee, I think, may 
wish to do this summer is gain a better understanding of the 
risk balance of the cost estimates that are the cost estimating 
standards that were used to estimate the cost for each of the 
Navy's shipbuilding programs so that you at least have that 
baseline data to then evaluate what the Navy is really telling 
you when they give you an estimate for each of these programs.
    Mr. Taylor. Anyone else?
    If not, the chair is going to recognize--I am trying to 
remember who got here first. Admiral Sestak?
    Mr. Sestak. I think it was Mr. Courtney.
    Mr. Courtney. I pass. I pass.
    Mr. Taylor. Okay. Mr. Courtney was here first but has no 
questions.
    Admiral Sestak.
    Mr. Sestak. Thanks, Mr. Chairman.
    If I could follow up on the question, Mr. Francis, that you 
asked. When the funding went from $3.3 billion to $3 billion, 
did requirements fall out?
    Mr. Francis. Some ship content was taken out. So I think a 
magazine was taken out and some of, I think, the content of the 
advanced gun systems. So some specific things were taken off. I 
would not describe them as a complete capability like, ``Gee, 
we lost the gun; we lost the radar,'' but a less capacity, if 
you will.
    Mr. Sestak. Then the tail, all that--whatever is going to 
happen to that, none of that--the consequence of trying to 
squeeze down to $3 billion is just the ship's contents?
    Mr. Francis. To my knowledge, yes, sir.
    Mr. O'Rourke. Some of it was content. Some of it was things 
like documentation for the program that was judged to be no 
longer necessary.
    If I remember right, at the time the Navy testified that 
the actions it took--we are talking about things that were in 
the spring and summer of last year; at least that is when we 
talked about it--had the effect of reducing the lead ship cost 
by $250-something million and having the effect of reducing the 
follow-on ships' cost on a recurring basis by $215 million, 
something like that.
    So there was content taken out of the design, but there 
were other things as well in terms of documentation.
    Mr. Sestak. Mr. O'Rourke, your question on Admiral 
Sullivan's proposals for three or four common hulls. If one of 
those hulls--the cruiser, let's say--that idea you have of DDG-
1000 becoming a CG, if it is to be nuclear-powered, does that 
have implications for that?
    Mr. O'Rourke. It does, because for one thing the nuclear 
power plant that the Navy is considering might not be easily 
fittable into the DDG-1000 hull, in which case that might tend 
to argue in favor of going to a different hull design for a 
nuclear-powered version of the ship.
    That is not clear at this point, but what I do want to 
emphasize is that Admiral Sullivan is talking along these 
lines, and if you had one person in office over a longer span 
of time to make decisions about implementing that, then you 
could maintain that momentum of vision to help bring it about.
    But yes, the nuclear power issue is one that could become a 
hard choice for the Navy in terms of whether to stick with hull 
commonality or not within the DDG-1000 and CGX efforts.
    Mr. Sestak. Just one last one. You had mentioned--I think 
it was you, Mr. Francis--I am trying to read my notes that I 
wrote as you were talking--even though you did not say it, this 
is really a software-controlled ship. Even the engineering 
software is all automatic, and it fits into--and I forgot what 
you call it--a tactical ship control system.
    Mr. Francis. Total ship computing environment.
    Mr. Sestak. Computing system.
    So your comment about vendors--there was a delay because of 
vendors--I assume these vendors are probably software vendors 
that did not potentially have the engineering code done so that 
the combat systems over all ships could be done.
    My question is how we fund these ships. I cannot remember 
the terms--partial funding, incremental funding. There have 
been some reports that that has an impact upon the sub-prime 
contractors, that way down at the tail, these vendors are not 
able to get the money to start the engineering code which 
impacts the overall thing on such a ship that is built upon 
software.
    Is that part of the reason for some of the delays--how we 
do the process of funding?
    Mr. Francis. Well, on the vendor furnished information, 
what I was referring to is not so much the software vendors, 
but for the people doing the software for the ship, they need 
specific information coming from the detailed design of 
specific subsystems that a vendor may be supplying. That could 
be a fire control system. It could be a missile, and so forth, 
but they need the specific specifications from that system to 
build that into the code for the entire ship. So it may not 
necessarily be software vendors in this case.
    Mr. Sestak. The over-arching question of the process--is 
the way we fund an issue in this?
    Mr. Francis. In this case I do not see--and I would be 
interested in what my colleagues have to say--where split 
funding or incremental funding would have a direct impact on 
the ability to get money to the key vendors when they need it. 
It is a way to fit in the Navy's budget, but for the DDG-1000, 
for example, we do have roughly $2.7 billion in each year's 
budget. It would seem to be that that would be enough money to 
get the front-end-loaded work done to the vendors.
    Dr. Labs. I would agree with that, Congressman, because the 
way the Navy sort of handles when they do split funding--at 
least, the way it should be done--is that when they do get 
priority to do split funding or incremental funding, they are 
funding the things that they need to have done to support their 
vendors to get the ship constructed on time. And that is the 
way they sort of allocate the funding.
    So if there is a problem there that is a result that money 
is not getting to the vendors that need to get the money in the 
proper amount of time, I would suggest that that is probably 
more of a management issue than it is a funding issue.
    Mr. O'Rourke. It is not technically funding, but one 
difference in an acquisition arrangement that can affect the 
lives of the vendors is whether or not you use something like 
multi-year procurement. That is a contracting arrangement, not 
a difference in how you fund the program.
    But if you were to go to multi-year procurement on a 
shipbuilding program, then both the shipyards and the vendors 
would have confidence in the future business that would come 
from the procurement of those downstream end-items, and they 
could therefore take steps to optimize their workforce in their 
production plant to build what they build at the lowest 
possible cost.
    In my earlier testimony, I talked about the option not of 
an official multi-year, but of the alternative of a block buy. 
And I raised that alternative, because in the case of the two 
programs I mentioned, which were the destroyer and the aircraft 
carrier, we will not be able to use a multi-year for some 
number of years until that lead ship is delivered.
    But in the meantime, you could use a block buy. That would 
at least allow the shipyards to optimize their workforce and 
their productive plan and get some savings.
    But one difference between a block buy and a multi-year is 
that it does not include the authority to bring long lead items 
forward and fund them all at once. So the vendors would not 
benefit from that. They would, however, still benefit from the 
confidence in future business that you would get from the block 
buy.
    Mr. Sestak. A very last question, if I might, just one last 
one?
    Mr. Taylor. Sure.
    Mr. Sestak. Did you all read the article by Secretary 
Winters in proceedings last month?
    Mr. O'Rourke. The one based on his speech.
    Mr. Sestak. I do not know if you addressed--it laid out his 
new approach. It was titled, ``Tough Love.''
    Mr. O'Rourke. The ``Tough Love'' speech.
    Mr. Sestak. Did you all talk about that and the value, if 
you saw, of his seven or eight points? Have you talked on that?
    Mr. O'Rourke. I think Eric and I probably have talked about 
it together at the time that it came out.
    Mr. Sestak. Is there value in those various points he 
brought out?
    Mr. O'Rourke. I think there is potential value in some of 
the things he talked about, at least, if not all of them. There 
are probably points in there that would need to be debated. I 
think it reflected a recognition on the part of the Secretary 
of the Navy that shipbuilding is central to the future of the 
Navy, and that it therefore deserves oversight attention at the 
highest levels.
    Dr. Labs. I would agree with Mr. O'Rourke on that. There 
are certainly things in there that are worth exploring and 
doing. Other things you are going to have to sort of think 
about and explore in a little bit more detail, but he has got 
his eyes apparently focused on the problem, and I think that 
certainly deserves some recognition.
    Mr. Sestak. I thought the most salient point he made, 
though, was this charity of optimism that you probably spoke 
of, meaning that the service can lose, and is losing, 
credibility by this effort to try to fit--to use your words--
the split-funding things in, and over the longer term that can 
stand us not in good stead.
    Would you agree with that, Dr. Gilmore?
    Dr. Gilmore. Yes. Well, as I said before, though, these 
problems are not unique to shipbuilding. When you look at what 
has happened with the F-22 program, for example--and of course, 
that got caught up in the end of the Cold War, but nonetheless, 
there were plenty of problems that occurred with the program 
after that.
    And the Air Force spent $5 billion or $6 billion a year 
developing that program for 10 or 15 years, and it is now going 
to get about 180 planes out of it, which is, what, 10 percent 
or less of the overall inventory of planes that they would like 
to maintain right now?
    Now, this situation with shipbuilding is not nearly as 
dire, but the reason that I provided some of the numbers at the 
outset of my testimony on what we spent during the Cold War and 
the number of ships we bought and how the price per ship has 
escalated quite a bit--along with the capabilities of the 
ships, no doubt--was to point out that the shipbuilding program 
is facing a similar situation, not as stark in terms of numbers 
and budgets, but still, a similar situation to the situation 
that the Air Force is facing in terms of modernizing its fleets 
of tactical aircraft and, for example, the situation that the 
Army is facing with the Future Combat System.
    So, as you know, these problems have existed for a long 
time. Some of them are now becoming more apparent in terms of 
what is actually happening versus what the predictions were of 
some people several years ago.
    And I would say whatever actions you take, if you do not 
have realistic estimates at the beginning of the program of 
what the program will cost, you will run into trouble.
    And to say that we should manage these programs to cost 
really is not addressing the problem, because if the initial 
cost estimates are very unrealistic, no manager, no matter how 
intelligent or how heroic, is going to be able to manage a 
program to hit a cost estimate that is completely unrealistic.
    Mr. Sestak. Thank you.
    Mr. Francis. Mr. Sestak, I have Dr. Winters' points right 
here, and I know when I went through them, I think the first 
one he makes about who is going to be the integrator--that is a 
sophisticated discussion I think that needs to be had.
    And I think Mr. Taylor brought up the issue of Deepwater. 
We have had issues with the contractors' integrator there. We 
have it on Future Combat Systems. So I think that is a rich 
debate that needs to be had--not an easy one.
    But the other points are in principle hard to argue with. 
The Navy must define design constraints to optimize the 
capability of the fleet. Contractors must design for production 
and sustainment. The Navy needs to use independent cost 
estimates for trade-offs. Detailed design constructions must be 
supported by mature specifications. And the Navy needs to 
provide knowledgeable program oversight. These seem like almost 
unarguable principles, I would say.
    Dr. Gilmore. Let me just comment with regard to independent 
cost estimating. The Navy eliminated its capability to do 
independent cost estimating. Its only independent cost-
estimating office was essentially eliminated. Now it has been 
rebuilt a little bit, but it is nothing like it was in terms of 
capability previously.
    Again, as Mr. Francis pointed out, I cannot argue and would 
not argue with the need for independent cost estimating, but 
the Navy does not have much capability there now.
    Mr. Sestak. That was 1996?
    Dr. Gilmore. Yes, well, I was thinking of--what was it?--
well, it was the Navy independent cost-estimating office. That 
was not its exact title, but I cannot remember what it was. But 
it was eliminated at one point.
    Mr. Taylor. Thank you, Admiral.
    The chair wants very much to thank our panel. I think you 
have done a great job of enlightening us, and we appreciate you 
being here. The chair is going to dismiss you all and ask for 
the second panel.
    The subcommittee will come to order.
    The second panel that we are very fortunate to have with us 
this afternoon is composed of representatives of the Department 
of the Navy: Vice Admiral Paul Sullivan, Ms. Allison Stiller, 
Rear Admiral Barry McCullough, and Mr. Dub Summerall.
    Thank you all for being here.
    Again, given the depth of knowledge that you bring to the 
table, we do not want to unnecessarily limit you to the five-
minute rule. I would remind you that I have got to leave at 
about ten till to visit with the speaker on something, so do 
what you can to stay near the five-minute rule, and then Mr. 
Ellsworth will take over.
    Ms. Stiller. Yes, sir. Chairman Taylor----
    Mr. Taylor. Particular order?
    Ms. Stiller.

STATEMENT OF ALLISON STILLER, DEPUTY ASSISTANT SECRETARY OF THE 
  NAVY FOR SHIPBUILDING; VICE ADM. PAUL SULLIVAN, COMMANDER, 
     NAVAL SEA SYSTEMS COMMAND, U.S. NAVY; REAR ADM. BARRY 
   MCCULLOUGH, DIRECTOR, WARFARE INTEGRATION; DUB SUMMERALL, 
 EXECUTIVE DIRECTOR FOR SURFACE COMBATANTS, PROGRAM EXECUTIVE 
                         OFFICER, SHIPS

    Ms. Stiller. I am going to give an opening statement for 
the four of us.
    Chairman Taylor, Mr. Bartlett and members of the 
subcommittee, thank you for the opportunity to appear before 
you to discuss the topic of Navy surface ship construction.
    On behalf of Admiral Sullivan, Admiral McCullough, Mr. 
Summerall and myself, I would like to submit our written 
testimony for the record.
    Mr. Taylor. Without objection.
    Ms. Stiller. I would like to begin by thanking the 
committee for its keen interest in shipbuilding. I will try to 
condense my remarks. They were a bit lengthy.
    The Navy is committed to building an affordable 313-ship 
fleet by 2020.
    Mr. Taylor. Ms. Stiller.
    Ms. Stiller. Yes, sir?
    Mr. Taylor. Take your time.
    Ms. Stiller. Okay.
    Mr. Taylor. Again, we are happy to have you here. We want 
to hear what you have to say.
    Ms. Stiller. Yes, sir.
    The department continues to utilize a long-range plan for 
construction of naval vessels which reinforces the 313-ship 
plan, and is designed to stabilize workload and funding 
requirements. A stable plan will enable the shipbuilding 
industry to maintain critical skills and to make business 
decisions that increase efficiency and productivity.
    We still face challenges. Recent setbacks with the Littoral 
Combat Ship have underscored the need for closer scrutiny of 
our acquisition process from contracting practices to ship 
production monitoring.
    Additionally, as a result of Hurricane Katrina and the 
recent strike at Northrop Grumman ship systems Ingalls 
operations, the Navy is working within GSS to review the 
baselines for current NGSS contracts with the Navy and 
understand how to best execute the future shipbuilding efforts. 
The review effort will help both the Navy and NGSS to closely 
monitor and best utilize manning resources and facilities.
    At your request, I am pleased today to provide you an 
update on our current surface ship shipbuilding programs. LPD-
17 and LPD-18 have been delivered to the Navy and are now 
commissioned. LPD-19 is scheduled to be delivered this fall.
    LPD-17 was accepted with incomplete work as a result of 
higher than planned ship construction costs and to mitigate 
potential schedule or cost impacts to follow-on ships in the 
shipyard. The Navy decided to complete portions of the ship in 
the home port area after delivery to both improve the sailors' 
quality of life and to allow the remaining work to be completed 
more affordably by local ship repair companies using 
competitively bid contracts.
    LPD-17 recently completed her Post Shakedown Availability 
this month. All compartments and mission critical systems are 
now complete. The remaining items, mainly routine maintenance 
work, are scheduled to be completed in the upcoming maintenance 
availabilities. Lessons learned and improvements identified on 
LPD-17 during production and since delivery have been 
incorporated on follow ships.
    In light of competing priorities for resources, the 
President's budget for fiscal year 2008 represents the best 
balances of resources to requirements. However, an additional 
LPD-17 class ship was identified by CNO as the number-one item 
in this year's unfunded program requirements letter. If 
Congress were to provide sufficient additional funds, they 
could be used for procurement of a tenth LPD-17 class ship in 
mid-2008.
    General Dynamics NASCO has been performing well on the T-
AKE class, with three ships delivered, a successful operational 
evaluation, a fourth ship to be delivered later this year, and 
a fifth, sixth and seventh ship under construction. The Navy 
and NASCO are in the process of restructuring the T-AKE 
contract to address the procurement of the next five ships--two 
more than the original 12 planned.
    This approach will benefit both the Navy and the 
shipbuilder and results in the lowest overall cost per hull 
over the entire class. Two additional T-AKEs were identified by 
the CNO in his letter as well, and the Navy would support 
procurement of additional ships, if sufficiently funded.
    The CVN-21 acquisition program is designed to improve 
operational capability while simultaneously driving down 
manpower and total ownership cost. Since Milestone B in April 
2004, the program has made significant progress. The Navy plans 
to award detail design and construction contracts for the lead 
ship of the class in 2008 with planned delivery in fiscal year 
2015.
    The program is fully funded to the current cost estimate, 
which was independently validated by Office of the Secretary of 
Defense (OSD) CAIG at Milestone B, and is within the 
congressional cost cap. All critical technology elements are 
fully on track to support the planned construction schedule.
    The President's budget request for CVN-21 program includes 
funding for the CVN-78 Ship Self Defense System, or SSDS. Full 
funding of this budget request is critical. All 62 ships of the 
DDG-51 class have been authorized and appropriated. The final 
ship, DDG-112, is scheduled for delivery in 2011.
    The President's budget included a request for funding 
primarily for production shutdown requirements expected with 
the shipbuilders and the government furnished manufacturers. 
Congressional reductions to this requested budget may prevent 
the Navy from meeting our contract obligations in 2008.
    The Navy is continuing its dual lead ship strategy for the 
DDG-1000 program, with lead ships to be constructed 
concurrently at NGSS and General Dynamics Bath Iron Works. 
Contracts for detail design were awarded to the shipbuilders in 
August 2006. Both contractors were also awarded contracts for 
long lead material and pre-production planning to support 
detail design and construction in June of 2007. Construction 
contracts for the dual lead ships are planned to be awarded 
later this year.
    The Navy, Northrop Grumman Ingalls Ops go in different 
options on the specifics of the construction schedules, based 
on the future workload of both shipyards. The DDG-1000 program 
continues to execute on cost and schedule.
    CGX is envisioned to be a highly capable surface combatant 
tailored for joint air and missile defense and joint air 
control operations. The analysis of alternatives is ongoing, 
and it started in June and is scheduled to complete this year. 
The AOA is examining both fuel-efficient conventional power 
plants and nuclear power plant alternatives for CGX.
    The Navy takes seriously the House's desire that we 
carefully consider nuclear power for CGX and other future 
platforms. However, the Navy does not support legislation that 
would effectively require nuclear power for major combatant 
vessels. The Navy supports a process that includes a rigorous 
technical analysis of alternatives and matches requirements 
with operational demands of the warfighter for the projected 
threat.
    The President's budget in 2008 also requests outfitting and 
post delivery funding that ensures our ships will receive their 
full allowance of spare parts and operating space items. It 
allows for post delivery correction of deficient government 
responsible items and ensures the ability to perform essential 
tests and trials.
    Our 2008 request is fully adjusted for delivery delays 
resulting from Hurricane Katrina and other factors. Any 
reduction in this area would severely jeopardize our ability to 
deliver fully operational capable, and safe ships.
    After an extensive LCS program assessment, the Navy has 
developed an executable program that adjusts the acquisition 
profile, ship cost estimates, budgets and schedules. It also 
provides resources for effective management of costs, 
production and technical risk to deliver the ships to the fleet 
to support the urgent and revalidated warfighting requirement.
    Progress on the LCS program continues. LCS-1 is reported by 
Lockheed Martin to be approximately 84 percent complete. The 
Navy currently projects LCS-1 will conduct underway trials next 
spring with delivery in summer of 2008. LCS-2 is under contract 
with General Dynamics. The contractor estimates the ship is 
approximately 53 percent complete in construction at Austal in 
Mobile, Alabama. The Navy projects LCS-2 to launch in early 
2008, and deliver in late summer 2008.
    LCS-4 has not yet begun fabrication. The Navy will continue 
to monitor GD's performance on LCS-2 and 4 and assess the need 
for further action if GD experiences cost growth comparable to 
LCS-1.
    The Navy appreciates Congress's support at a recent 
reprogram request for the portion of the 2007 LCS funds and 
looks forward to working with Congress on the remaining funding 
required to execute the revised plan.
    The restructured LCS plan also includes reduced procurement 
of the Flight 0 sea frames in fiscal year 2008 and fiscal year 
2009 to address critical warfighting gaps. The President's 
budget request for 2008 is $911 million, and that is required 
to procure two LCSs in fiscal year 2008.
    Additionally, the Navy is requesting a change in the 
current statutory cost cap to $460 million per ship for the two 
proposed fiscal year 2008 procurements. This estimate includes 
basic construction costs, and represents a 55 percent increase 
in the sea frame cost, and reflects the restructured program in 
the revised ship end-cost estimates. Without an adjustment to 
the cost cap, the Navy will not be able to procure any new LCSs 
in fiscal year 2008.
    The two existing sea frame designs will undergo operational 
performance testing in fiscal year 2009, and the results will 
be considered as part of the Navy's evaluation for a single sea 
frame design selection. Flight 1 ships will be based on the 
selected design and will incorporate lessons learned from tests 
and trials.
    The Navy also intends to implement a government furnished 
open architecture common combat systems and C4I suite as part 
of Flight 1 to optimize lifecycle cost and capability across 
the family of surface combatants. Subject to OSD approval, the 
Navy intends to hold a full and open competition for the 
procurement of the Navy's Flight 1 design in fiscal year 2010 
and beyond. The proposed acquisition strategy does not preclude 
continuing with those sea frames, if the operational evaluation 
concludes the need for both.
    The Navy has taken swift action to ensure the lessons 
learned from the LCS program cost growth do not reoccur for 
other Navy programs. As an initial response to the findings of 
the LCS program assessment, ASN(RDA) directed a series of 
specific actions to reduce risk and improve management of Navy 
acquisition programs.
    These actions have included a review of design build 
concurrency risk in Navy programs, reviews of acquisition 
program performance conducted by portfolios such as air or ship 
programs, and a review of staffing levels, organization and 
qualifications in both our PEOs and our onsite contractor 
oversight.
    As a longer-term effort, ASN(RDA) is leading the Navy 
acquisition reengineering to better control cost and 
requirements growth, more accurately estimate the cost risk in 
Navy programs, and match contracting models and incentives to 
the cost and risk of each program. The efforts will focus 
resources where they are most needed and ensure our higher-risk 
and most critical programs are resourced properly.
    In closing, Mr. Chairman, I would like to thank you for 
this opportunity to discuss Navy shipbuilding. I think we have 
a strong plan to ensure the way ahead for the Navy to meet the 
fleet requirements in an affordable matter. I continue to look 
forward to working with you in the future.
    Admiral Sullivan, Admiral McCullough, Mr. Summerall and I 
will be happy to answer any questions.
    [The joint prepared statement of Ms. Stiller, Admiral 
Sullivan, Admiral McCullough, and Mr. Summerall can be found in 
the Appendix on page 116.]
    Mr. Taylor. Thank you very much, Ms. Stiller. And other 
than your remarks on the nuclear cruiser, I thought it was 
well-said. [Laughter.]
    Ms. Stiller. I am pretty good at it.
    Mr. Taylor. For the record I would like you, just for the 
fun of it--no, not for the fun of it--for the record, I would 
like your estimate as to fuel costs for that cruiser 20 years 
from today--cost and availability. Because if it is nuclear, I 
can tell you what the cost and availability of the fuel is. For 
a conventionally powered platform, I would like your 
projection.
    Ms. Stiller. Sir, I do not have a projection on that.
    Do you want to--on the affordable----
    Mr. Taylor. Conventionally powered--for the record, I would 
like the Navy's estimate of fuel cost and availability for 20 
years from now for a conventionally powered cruiser.
    Ms. Stiller. I would have to take that for the record, sir, 
because I cannot predict the price, and I think that is your 
point.
    Mr. Taylor. Or the availability.
    Ms. Stiller. Or the availability.
    Mr. Taylor. That is what the point is, as the gentleman 
from Maryland has done, I think, an excellent job of making our 
nation aware of.
    The gentleman from Maryland is recognized.
    Mr. Bartlett. Thank you very much. Thank you, Mr. Chairman, 
for that question. I would suggest that the cost would be very 
much higher and the availability limited 20 years from now.
    I have some questions that I would like, because of 
constraints of time, some brisk answers to. If, upon 
reflection, you would like to add more material, would you 
please do that for the record?
    The first question, I think, is especially important 
because the decision, I understand, to start construction of 
LCS-4 is happening this week.
    In the March 29th brief provided to members, the Navy 
stated that, as a part of the LCS program restructuring, the 
path ahead would rely on the use of internal Navy cost 
estimates, as though the Navy has established specific cost 
thresholds that would trigger a stop work on LCS-4 and possibly 
a renegotiation of the LCS-2 and 4 contract.
    Understanding that the cost estimated at completion, the 
EAC, is competition-sensitive, has the Navy's internal EAC for 
LCS-4 met or exceeded the cost threshold established by the 
Navy?
    Ms. Stiller. No, sir. The cost threshold was actually 
established for LCS-2. And no, sir, they have not reached that 
threshold that you are speaking about.
    Mr. Bartlett. Okay. My second question, a really important 
one. The MRAP program has been given a DX priority level, the 
highest priority for procurement of steel. Given the importance 
of the MRAP program, how will this DX priority level affect 
shipbuilding in the near and far term?
    Ms. Stiller. We have not yet evaluated in great detail, 
because we have not been told exactly. You have to look at how 
material is procured when you are in a shipbuilding 
environment. They will buy the steel as they are getting ready 
to build those particular modules, so it might have an impact 
on shipbuilding, but right now we have not seen any impact on 
that.
    Mr. Bartlett. In the process of establishing this 
priority----
    Mr. Taylor. Would the gentleman yield?
    Mr. Bartlett [continuing]. Did anyone talk to you about the 
possible effects on your programs, if they gave this kind of 
priority to the MRAP program?
    Ms. Stiller. Yes, sir. There has been a data call to look 
at impacts on all programs across the department. What has not 
been decided is where will the resources be deviated from, 
whether that will come from shipbuilding or not.
    Mr. Summerall. Mr. Bartlett, we are providing data, as Ms. 
Stiller has said, on all our shipbuilding programs to RDA so 
they can start to formulate a sense of what our requirements 
are going forward. So we are starting to put the data in place 
and anticipate that.
    If I could, just to supplement Ms. Stiller's response to a 
prior question, we had a production readiness review on LCS-4 
on June 28th. Coming out of that, we reached agreement--
actually, the company proposed this, and we concurred with it--
to consider start fabrication in the September timeframe. As 
far as I know, that is still the plan going forward.
    Mr. Taylor. Will the gentleman yield?
    And this is a follow-up. The Army was nice enough to take 
me to Aberdeen yesterday and show me the nine potential MRAPs 
that they are taking a look at. And one in particular caught my 
eye. It was under license from the Israelis. And they said, 
``Well, you know, if we order this one, we are going to have to 
order the top half from the Israelis, and we could domestically 
produce the bottom half.''
    As I am looking at those fairly flat steel panels on the 
top half that have obviously been cut probably with a laser, 
given how pretty the cut was, because we are talking now--I had 
an opportunity to visit with the secretary of the Army this 
morning for perspective--you know, you are looking at 19,000 
potential panels--each one of those panels.
    And one of the things that the shipyards are telling us is, 
``Well, we can't invest in this laser cutting because there 
isn't the volume,'' which leads to the question to what extent 
is the right hand of the DOD speaking to the left hand? To what 
extent are you going to places like the shipyards and saying, 
``Hey, if we are in a position to work with the vendor to have 
this steel cut at your facility and then shipped to a 
manufacturing plant, would you then look at getting a more 
efficient high volume machinery than you have now--making those 
investments?''
    I am not convinced there is a lot of integration going on 
as far as that kind of thought, but if there is, I would like 
to know about it.
    Ms. Stiller. There is certainly an opportunity that would 
present itself. In the past the shipyards have done work on 
non-ship programs, so certainly that is an opportunity.
    Mr. Taylor. Again, Ms. Stiller, you are a very good person. 
We are lucky to have you serving our country, okay?
    So, with that said, this is a high-priority program. And my 
apologies to my friend Peter Geren for a temporary lapse in 
remembering his name, but Secretary Geren actually threw the 
number out of 17,700 this morning. That is on top of the 
approximately 4,000 that have already been ordered.
    So we are talking about a mass production of something that 
the military needs on one hand with the MRAPs. We are talking 
about something that our shipyards need to be going to, as far 
as laser cutting, laser welding. And they have had a reluctance 
to do so, because they don't see the need for volume.
    And this really is an opportunity to get the mass 
production, high-order quantity, short delivery time that the 
Nation needs, and serve the long-term best interests of the 
shipyards. And I really do think it is important that there be 
a greater cooperation between the MRAP program and what you are 
trying to accomplish.
    And I don't say that to scold you. I say that as knowing 
that you are a capable person, to encourage you to try to make 
that happen--and knowing Secretary Winters' desire to modernize 
the yards to the greatest extent possible, knowing at the end 
of the day the taxpayer is going to pay for all of this.
    Ms. Stiller. Mr. Chairman.
    Mr. Taylor. The six Navy shipyards have only one customer. 
We are their one customer. But this really is an opportunity to 
do some short-term good in the case of the MRAP and some long-
term good. It is something the Nation needs.
    Ms. Stiller. Sir, I will be happy to take that back and 
work with the MRAP program.
    Mr. Taylor. With that, again, I very much appreciate you 
being here. I have a meeting concerning the Gulf Coast recovery 
with the speaker, so I hope you will excuse me, and I am going 
to turn the chair over to Mr. Ellsworth.
    Mr. Bartlett. Thank you.
    I have several more questions, but I will ask just one more 
here and submit the others to you for the record, if that would 
be okay.
    My understanding is that this last week there was a cure 
notice given by Lockheed Martin to Marinette Marine. What is 
the Navy's assessment of this contractual action taken by 
Lockheed Martin on LCS-1? Does the Navy believe Lockheed Martin 
and its subcontractor Marinette Marine will be able to achieve 
propulsion trials by December of 2007?
    Ms. Stiller. I will start this, and then I will defer to 
Mr. Summerall on the propulsion trials.
    As you know, the Navy's contract on LCS-1 is with Lockheed 
Martin, so our contractual relationship is with Lockheed 
Martin. The Navy does not have privity of contract with 
Marinette. There is a contractual letter. We are aware of a 
contractual letter between Lockheed Martin and their 
subcontractor, and they are working to try to resolve some 
issues so that they can move forward on the program.
    And I will defer to Mr. Summerall on the propulsion trials 
and where we see that now.
    Mr. Summerall. It is true as a priority we would like to 
see that ship go to propulsion trials in December as a risk 
mitigation effort. If we did trials in December, we would be 
able to address whatever needs were identified during those 
trials during the ice period up there.
    We have asked the Lockheed Martin team to give us an 
integrated master schedule and a resource plan to support that 
schedule that would get us to propulsion trials in the December 
timeframe. To date we have not yet received that.
    I believe that to try to expedite that effort was one of 
the reasons Lockheed made the contractual request that they did 
to their subcontractor. We hope to get the initial submittal of 
that integrated master schedule in the next few weeks.
    Ms. Stiller. Presumably, Lockheed Martin selected Marinette 
Marine because they had a long history of delivering on time on 
budget. And as was emphasized in the first panel, what 
Marinette Marine is building under contract to Lockheed Martin 
is essentially a sea frame--that the major uncertainties and 
sophistication will be in the modules that are procured 
separately.
    Mr. Bartlett. When will we learn what went wrong--that this 
company that was selected because they have a long history of 
delivering on time on budget now has failed to deliver either 
on time or on budget? When will you be able to tell us what 
happened?
    Mr. Summerall. Sir, as we outlined on our February hearing, 
what we think went wrong is the schedule pressure on what is 
basically a good contractor driven by requirements of schedule 
and a design that was far more complex in the end than they bid 
on the ship.
    And the sophistication of that design, driven by the change 
in what I would call the builder's codes--not the military 
requirement, but the building specs--caused them to do a lot of 
rework, caused them to not be able to follow the cardinal rule 
of large projects, which is make sure you have the design and 
the drawings complete before you start construction.
    A lot of rework was done, a lot of out of sequence 
construction was done, and that is what got us off track.
    Mr. Bartlett. Thank you very much.
    Thank you, Mr. Chairman. I will submit my remaining 
questions for the record, if that is okay.
    Mr. Ellsworth [presiding]. Thank you, Mr. Bartlett.
    The chair recognizes Mr. Courtney from Connecticut.
    Mr. Courtney. Mr. Ellsworth, a follow-up on the last 
question.
    Secretary Stiller, given all the problems and the sort of 
scrambling that has been going on to try and figure out what 
went wrong and how to fix it, does it make any sense for us to 
still be procuring two ships a year in 2008 and 2009? Is it 
possible for us to even accomplish that, given what we already 
know about what went wrong? And it still seems like up until 
just the last few weeks ago that there are still problems.
    Ms. Stiller. Yes, sir. From a capacity perspective, from 
the acquisition perspective, we have capacity. We could execute 
additional ships. We looked very carefully at that as we 
restructured the entire program.
    The real driver behind why we want to continue in 2008 and 
2009 is the warfighting requirement, and I will turn to Admiral 
McCullough to address that.
    Admiral McCullough. Yes, sir. There is a critical 
warfighting gap in the area of swarm surface combatants 
carrying in our ship cruise missiles as well as the rapid 
clearance of sea mines--in specific areas of the world, sea 
lines of communication.
    We have this gap today. We need those ships to meet the 
warfighting gaps that have been identified, and so the Flight 0 
ships in 2008 and 2009 are very necessary from a warfighting 
requirement standpoint.
    Mr. Courtney. Okay. Again, just looking at the memo that 
was prepared by the staff which described a fire that took 
place a couple of months ago and again, the cure notice.
    Again, I think what the admiral just testified to was 
obviously a strategic rationale for us moving forward, but it 
just seems that we also have to budget and authorize based on 
what is feasible, and even the Navy itself has been self-
critical about being over-optimistic.
    Are we really there now where we really feel like it is 
okay for Congress to proceed with that type of procurement 
schedule?
    Ms. Stiller. Yes, sir. As I said, we laid out in great 
detail. We looked at the program holistically and said, ``What 
makes sense?'' And that is why the quantities are less than 
what we had proposed in the President's budget 2008 omission. 
We said, ``Okay, what are the right quantities from loading in 
the shipyards, et cetera.''
    So, yes, we can accommodate it, and as I said in my 
statement, the ships will both deliver in 2008, and the plan is 
in fiscal year 2009 for both sea frame designs to go through 
the operational evaluation.
    So certainly procurement can continue in the 2008 and 2009 
timeframe even while that evaluation is ongoing so that we meet 
the warfighter need.
    Mr. Courtney. Thank you, Mr. Ellsworth.
    Mr. Ellsworth. Thank you, Mr. Courtney.
    The chair would recognize Mr. Sestak from Pennsylvania.
    Mr. Sestak. Thank you very much. I had one question, I 
think, on the power issue, now that he has left. [Laughter.]
    Admiral Sullivan, as I kind of remember your study--haven't 
looked at it for a while--but it had something like $73 per 
barrel, and then it went up to what is called, I think--and I 
have forgotten these words--fully burdened costs, which is like 
$153 or something. That fully burdened cost takes into account 
all the storage facilities, the acquisition of oilers and 
things like that.
    Could you get back? We have had some discussion on this, if 
you remember, a few months ago, and I was supposed to get 
together with you, but I would like to know that when they did 
their cost-benefit analysis and the curves crossed, did you 
include in that the fully burdened cost? It seems to me that at 
least some elements of the burdened cost are a sump cost.
    If this nuclear power capability is to be CGs--I think that 
is what it is supposed to be--cruisers--we are still going to 
have such an enormous amount of other ships. Is it 316?
    Ms. Stiller. Thirteen.
    Mr. Sestak. Three-hundred-thirteen. It has changed. That 
313 is to come about--only a relatively small amount will be 
nuclear-powered. So that is kind of a sump cost. Should that 
have been considered into your overall nuclear power study of 
when it became cost-effective?
    Admiral Sullivan. I apologize for not following through on 
that.
    Mr. Sestak. No, we were supposed to--we are good 
classmates.
    Admiral Sullivan. We had a miscommunication. And I believe 
that the cost of those fuel farms was included in the fully 
burdened cost. What I would like to do is take for the record 
the analysis both with that and without that.
    Mr. Sestak. If they included all of those fully burdened 
costs, it is kind of an unfair metric, I think, because we are 
going to have those facilities anyway for all the other ships. 
And when I read the study, it looked to me as though they 
included them all, I thought. I am probably wrong.
    Admiral Sullivan. We will get you that for the record, 
sir--both ways.
    Mr. Sestak. DBR--I have to go to a hearing on habeas 
corpus. But let me ask you maybe instead about CGX. Do you 
still expect it? Is it 2015, ma'am, you said you expect it? 
When is CGX supposed to come along? 2019?
    Ms. Stiller. The lead ship procurement is in fiscal year 
2011 with delivery in 2019.
    Mr. Sestak. 2019.
    Ms. Stiller. IOC in 2019. Delivery in 2017.
    Mr. Sestak. All right. I was just curious on that one. And 
DBR is probably, as they said in the previous panel, the key 
long pole in the tent, correct?
    Admiral McCullough. Not for the CGX, Congressman. The DBR 
is----
    Mr. Sestak. I am sorry. The----
    Ms. Stiller. DDG-1000.
    Mr. Sestak. What is the radar called?
    Admiral McCullough. On the CGX?
    Mr. Sestak. Yes.
    Admiral McCullough. We are currently going through an 
analysis of alternatives based on the potential threat set in 
2024, and the initial indication is that it will be a two-
frequency spectrum radar BNS band in the 3.5-gigahertz range.
    Mr. Sestak. This is the one that would be embedded?
    Admiral McCullough. Yes, sir. Well, there is an embedded 
radar that Northrop Grumman Electronic Systems and Integrated 
Systems has shown the Navy. I don't know whether that is 
specifically the one that we would choose, but Northrop Grumman 
has at least shown that capability and concept embedded in the 
deckhouse.
    Mr. Sestak. All right. There were some studies that were 
being done in other worlds that had held some propensity. Are 
we still going down this path? Do we still think this radar is 
going to be able to do what we want on the size that we want on 
the ship?
    Admiral McCullough. Yes, sir. I believe that is within 
projected technology that would support that radar coming 
online potentially to support. In 2019 I would see that ship.
    Mr. Sestak. All right. I asked a question of the other 
panel. Do you expect--I didn't ask this one, but it was leading 
to--DDG-1000 to split to the right again? Is there any 
expectation right now that software or engineering designs or 
anything with the vendors that you expect it to slip to the 
right?
    Mr. Summerall. No, sir. We are at the point where we are 
getting ready to hopefully release the RFP for the two lead 
ships construction. Detail is on track. Based on current 
schedule, we project we will be 85 percent complete with detail 
design when we go to start fabrication on the two lead ships.
    Mr. Sestak. So the software configuration is coming along.
    Mr. Summerall. Yes, sir, it is. And during the transition 
to production phase three phase of the program, as you know, 
sir, we actually completed two million lines of code, 10 EDMs 
on cost on schedule, a $2.9 billion effort to mitigate a lot of 
risk of this program.
    We are still on track. We are reporting metrics quarterly 
to OSD--CPR analysis and other metrics in a package to OSD--so 
this is all available to the CAIGs. They can look at it during 
milestone----
    Mr. Sestak. So we won't hear two or three months from now 
that engineering control system code has caused any 
perturbations in the overall tactical combat systems code and 
delayed this down the line?
    Mr. Summerall. No indication of that at this time, sir.
    Mr. Sestak. All right. Thank you.
    One other thing on LCS. I was taken with LCS. It seems to 
me that in DDG-1000 you kind of had PEO ships kind of in single 
belly button with IWS supporting and others. LCS--it seems as 
though there is quite a diverse group of PEOs involved. And I 
jotted some down. There are IWS ships. These begin to get into 
modules.
    Ms. Stiller. Sure.
    Mr. Sestak. We have submarines. People get involved with 
SPAWAR with the communications. We have warfare centers that 
are involved as we get into Littoral-type stuff.
    Has there ever been any thought that we need to take some 
of the people out of the decision loop in a sense and go to a 
more of a single button type of approach as we do in DDG-1000 
as we look back upon any lessons learned with LCS?
    Ms. Stiller. On the ship side----
    Mr. Sestak. Particularly the interface of the module, since 
that is the real combat system and all--that you have these 
people that kind of don't work for one another, but they are 
really responsible for very important parts.
    Ms. Stiller. Yes, sir. On the ship side, as you said, PEO 
Ships has the responsibility for the sea frame. On the mission 
module side, PEO LMW, Littoral and Mine Warfare, has 
responsibility for the mission modules. And so they go and 
integrate with SPAWAR, the laboratories and others to pull 
together the mission packages. They are the belly button.
    As for the interface, there is a very detailed interface 
specification that was part of the delay in the program way 
back when, as we stopped and we said we need this interface 
described for both sea frames so that the mission modules would 
work on either sea frame seamlessly.
    And so that interface document is developed. It is a 
living, breathing document that both PEOs work to. And 
ultimately, if there are issues, ASN(RDA) has responsibility 
over both of those PEOs. So on the mission module side, there 
is a single belly button to deliver the mission modules.
    Admiral Sullivan. We have added an extra level of oversight 
to at least the mine warfare mission in that PEO Ships has the 
ship. PEO LMW has the module. Two program managers in PEO LMW--
one for the module, one for the mine countermeasures sweep, and 
PEO-A in NAVAIR has the responsibility for the mine sweeping 
helicopter.
    So there are four program managers, three PEOs, two 
SYSCOMS. Admiral Venlet and myself and his predecessor, Admiral 
Massenburg, have periodic discussions with the program managers 
and all the PEOs in the room to synchronize scheduling.
    Mr. Sestak. The last question I had is, as I have to go 
next-door, the requirements for DDG-1000. Have there been any 
changes in requirements through time contracted----
    Admiral McCullough. Congressman, there has been no change 
to the warfighting requirements for that ship. One of the 
things we have done is lay out cost drivers from a capability 
standpoint, and when we look at potential cost trades that 
drive the cost of the ship down, the PEO and I, when I was in 
1986 at the record surface warfare, would sit and figure out 
what we could do to get at cost.
    And it enabled us to reduce cost a couple of hundred 
million dollars by taking non-key performance parameters and 
non-key system attributes out of the ship to find those cost 
savings. And we laid it out for the leadership in a chart that 
showed where you could go get those type trades, as opposed to 
where you would get trades that affected KPPs, and then where 
you would get trades that affected both the KPPs, key 
performance parameters, and the schedule of delivery. So the 
warfighting requirements----
    Mr. Sestak. Which EW system are you going with?
    Admiral McCullough. I am sorry, sir?
    Mr. Sestak. Which electronic warfare system are you going 
with?
    Admiral McCullough. We looked initially at MFWS, and we 
found that that probably was not the right system--Multi-
Frequency W System--and so, because of the way that system was 
developing, we did a fall-back to a very needed Surface Ship 
Electronic Warfare Improvement Program.
    Mr. Sestak. Is it as capable?
    Admiral McCullough. Yes, sir, it is.
    Mr. Sestak. Why did we fall back to it?
    Admiral McCullough. It has to do with the antenna arrays 
and how much capability you can put into various antennae 
array.
    Mr. Sestak. Would the other one, if it had borne out, been 
more capable?
    Admiral McCullough. No, sir, not from a warfighting 
perspective. From an antenna co-site capability, probably. But 
we don't envision that antenna technology.
    Mr. Sestak. So Nulka will be there?
    Admiral McCullough. Sir?
    Mr. Sestak. Nulka would be there?
    Admiral McCullough. Yes, sir.
    Mr. Sestak. You are sure?
    Admiral McCullough. Yes, sir.
    Mr. Sestak. Okay. And Tomahawk is still there.
    Admiral McCullough. Yes, sir. You can put Tomahawks in the 
launchers.
    Mr. Sestak. And could VLA?
    Admiral McCullough. Yes, sir. It will fit in the launchers.
    Mr. Sestak. In the tail?
    Admiral McCullough. I have to get back to you on that, 
Congressman. I don't remember off the top of my head.
    Mr. Sestak. I was just curious. There had been some talk 
that as we came down in cost--it appears it is wrong--is that 
we kept the same capabilities.
    Admiral McCullough. Yes, sir. We have kept the same key 
performance parameters in the ship and the same warfighting 
capability in the ship.
    Mr. Sestak. Thank you very much.
    Admiral McCullough. Yes, sir.
    Mr. Ellsworth. Thank you, Mr. Sestak.
    We have got big shoes to fill here for Chairman Taylor. We 
will give it a try.
    Thank you all for being here.
    Going back to some of the prior group's testimony, we 
talked about the construction manager theory, and I would like 
your analysis on the continuity of naval employees that oversee 
these projects.
    A, do we have that person on scene that his focus is keep 
this thing going, an on-scene person that watches it day to day 
as these changes come on, but he has that authority? And their 
length of stay--the turnover that is watching out for our 
side--I would like your analysis on that continuity employee 
and how we might improve that.
    Ms. Stiller. Yes, sir. There are tenure agreements for the 
PEOs, the program executive officers, and their executive 
directors--four years--as well as the major program manager. It 
is a four-year tenure agreement or until you get to a major 
milestone. That is the standard for all large programs, so 
pretty much any shipbuilding program will fall under that 
requirement.
    As for the on-site support, we have the supervisor of 
shipbuilding that falls under Admiral Sullivan's expertise, and 
I will let him talk to you about program managers' 
representatives that are actually physically in the shipyard.
    Admiral Sullivan. Okay. So the waterfront is supervised by 
a Navy captain engineering duty officer who has been in the 
business probably for at least 15, probably 18, years, rotating 
through various jobs. His or her tenure on the waterfront in 
the command job is approximately 3 years.
    And working for that organization are a variety of 
disciplines from quality assurance specialists to engineering 
processing folks to progressing folks who oversee the ship. And 
in our previous testimony, particularly on LCS, we went through 
the lack of numbers as far as depth charge of the folks in the 
supervisor's office.
    The ship was being built in Marinette, Wisconsin. The 
supervisor herself was on the waterfront at Gulf Coast in 
Ingalls. And so we had a detachment team up at Marinette. And 
we had far fewer people doing that oversight than were 
required, and the reason for that was a variety of reasons--
one, the hurricane; two, the four supervisor offices that 
supervised construction on our new construction shipyards had 
been cut 50 percent in staff since 1992.
    That doesn't relieve us of the responsibility of having to 
make sure we have sufficient folks onsite for a high-risk 
program. We just didn't ramp up the staff fast enough, so when 
this all went down in January-February of this year, we had 
about eight people onsite. We are now up to 18, headed for 20, 
which is our steady state onsite. So we are in the process of 
correcting the problem, but certainly we undermanned that at 
the start.
    Ms. Stiller mentioned a thing called the program manager's 
rep. That is a naval officer of the lieutenant commander or 
commander rank, typically has been in the business anywhere 
from three to eight years, and that person has a dual reporting 
responsibility.
    They report to their waterfront supervisor of shipbuilding, 
and they also report to the Washington, D.C., program manager 
who has that four-year tenure agreement. So that is a pretty 
good arrangement. It is very powerful, because that person has 
the autonomy of having to report to both bosses.
    That said, earlier the previous panel talked about lack of 
cost reporting in the Navy. We have two problems with cost 
reporting. First, in those cuts of the personnel on the 
waterfront to go watch the ships, earned value management was 
one of the disciplines that fell by the wayside, because we 
just couldn't sustain the staff to do meaningful, independent 
cost verification. That is the first thing that we have started 
to work on as we stood those back up.
    Second, there is a backup at headquarters there where our 
cost estimating shop would have normally done that earned value 
management independent from the Washington, D.C., viewpoint, 
looking at all the numbers coming in from the waterfront. 
Headquarters staff has been cut, between the program officers 
and my supporting infrastructure, 51 percent since 1992, and 
again, earned value management is one of the disciplines that 
went by the wayside.
    I have asked for an increase in the staff in that office so 
we can re-grow, but that is tough to re-grow overnight, because 
that is a specific discipline that has to be generated. 
Fortunately, my counterpart in the Naval Air Systems Command 
stuck with the earned value management system, and they have 
folks who may be able to help us in that process.
    Mr. Ellsworth. What you have asked for, is that the magic 
wand, in your best estimate, that says, ``This is exactly what 
I need''? Have you asked for exactly what you need, or have you 
fallen below that on the scale, would you say? If you had total 
control--the budget, the manpower, and you could wave the wand?
    Admiral Sullivan. Well, everyone would like margin in their 
numbers. I have asked for program office people. I have asked 
for technical people. And I have asked for onsite supervisors 
of shipbuilding people, and I have asked for what I consider to 
be the minimum.
    Mr. Ellsworth. Can you explain? You know, CBO was in here 
an hour ago, and it appears that their cost estimates were more 
accurate than the Navy's. Is that due to the fact that you were 
understaffed and didn't have those people on there? Again, do 
we go back to that turnover? Can you give me some analysis on 
that?
    Admiral Sullivan. I would tell you we tend to not like the 
first cost estimate that comes out when we go first cost a 
ship. And so we go sharpen our pencils.
    Our initial cost estimate for LCS was $400 million. That 
was based on a mil spec model--pretty crude--at the very, very 
inception of the program, based on only a set of 
characteristics.
    Subsequently, in dealing with the information coming in 
from the competing teams, our cost estimators came down to be 
within I would say $30 million of the contractors' cost 
estimates. And that is probably for a variety of reasons, one 
of which is pressure and another which is a lack of good cost 
estimating tools for this particular type of ship, where it 
comes to LCS.
    And I think there was a lot of pressure from the Navy to 
control that program cost, and it turns out that when you set a 
very aggressive cost target, people will lean very far forward 
to try to produce that cost. So the over-optimism that you 
discussed on the previous panel was definitely there for LCS.
    Mr. Ellsworth. Admiral, when you said that the cardinal 
rule of shipbuilding was violated, that they started building 
before they had the finished--wouldn't there be a point where, 
when you had the construction documents, that somebody would 
say, ``Ooh, the last hundred pages, the last thousand pages are 
gone here; let's not start this''? Should that not have been 
caught when we said, ``Somebody is violating a cardinal rule; 
we are not going to start construction here,'' during the 
project review? Can you elaborate?
    Admiral Sullivan. Again, we went forward with full 
knowledge of that state of the design, and again, the pressure 
for cost and schedule were pervasive, and everybody leaned far 
forward, and you have seen the result.
    Mr. Ellsworth. When we have changes--this thing starts 
coming up; the hull is built; and I asked this in the last 
panel also--certainly, there are going to be changes. And I 
have been involved in projects where, along the way, we have 
said, ``This just isn't going to work. We need to change 
that.''
    Who do you see having more changes: the shipbuilders 
themselves that say, when they get it up, ``This pipe won't go 
through here; engineering-wise we can't do this''? Versus when 
you guys go in and say, ``Look, my sailor needs this; I need 
more of this,'' whatever?
    Who has more of those changes that obviously are going to 
add to that cost when we have got to re-engineer or you want 
something? Where does more of that come from, the engineer or 
from the Navy?
    Ms. Stiller. The Navy program manager is limited in what 
changes he can approve, and there are five areas: safety, 
unavailable contractor furnished equipment, test and trial 
deficiencies, contractual defects, and statutory and regulatory 
changes that are passed down. So a program manager is very 
limited on the amount of change he can approve.
    In the case of LCS when--we have also testified before--the 
naval vessel rules, which are your building codes, were also in 
development during the design of the ship and--well, not into 
construction, but they were going on at the same time. You had 
the building specs being developed at the same time, so that 
caused a lot of change and a lot of churn in the case of LCS.
    But certainly on a lead ship, you are going to see 
challenges as you go into production that the contractor is 
going to find as he starts to produce. And in most of our 
combatant vessels, we used a design tool that is very mature so 
you can see interferences and know ahead of time, but in some 
cases you don't catch everything.
    Mr. Ellsworth. On the changes on the LCS-1, my note shows 
58 proposed change orders. Given the current issues and the 
estimated costs, are these--the things that we list are 58; I 
don't have them in front of me--we would like to have, nice to 
have, or we have to have--these are ``need these'' changes.
    Admiral Sullivan. If you start the clock back to when they 
first started, when they were first awarded the contract, there 
were certainly more changes than that. The majority of the 
changes were generated by the shipbuilder going back and 
looking at the naval vessel rules--again, the building codes.
    The military requirement for the ship has not changed at 
all, but that is at the top level. There are tiered 
requirements that go all the way down to how you will assemble 
pipes together. The shipbuilder looked at the naval vessel 
rules as they were finally published and had to go back and do 
a lot of changes to his own diagram. And some of those didn't 
come before the Navy; they went before the shipbuilder's own 
change control board.
    But then the Navy was also looking at and approving 
drawings and looking at and approving a ship specification that 
the shipbuilder derived from naval vessel rules and the 
military requirements. And we would, on a safety or military 
performance basis, tell them that ``Well, this doesn't meet the 
naval vessel rules.''
    The current round--we are trying to close that out right 
now; if it is 58, that is approximately the number--were 
actually instituted by my chief engineer basically going up to 
resolve issues that we had been arguing about--well, not 
arguing--discussing with the shipbuilder, because it is a 
pretty robust discussion.
    And he actually crawled through the engine room, and they 
are all safety to the sailor-related deficiencies, such as you 
can't access a circuit breaker because there is a pipe running 
in front of it or a sailor running across the deck plate and 
there are three pipes right in his walking path that he would 
trip over or you have a shaft coupling that is four to five 
feet in diameter rotating at several hundred rpm with no guards 
over it that could kill a person walking past it.
    So they are small changes, but they are significant in that 
they are all safety related. Anything in that screening, 
anything that was not absolute safety or operability related 
was tossed. There were about 20 to 25 changes tossed in that 
process.
    Mr. Summerall. Admiral, if I could just follow on what you 
just said. I think in large part due to Admiral McCoy's 
personal visit up there on I believe it was the 13th of July, 
we were able to come to agreement on the technical baseline, 
and the changes moving forward are just as the admiral said.
    There are some changes in the machinery spaces for 
clearance safety issues to enable us to get underway on trials, 
but any additional changes will be deferred to post delivery. 
So we are minimizing changes going forward to absolutely bare 
minimum.
    Admiral Sullivan. I would characterize it as a punch list.
    Mr. Ellsworth. This kind of goes back to one of my previous 
questions and one for the former panel. Congress changes a 
certain amount of seats every two years. The chairmen change. 
You all are career, and we certainly appreciate that. We are 
kind of the visiting dignitaries for a certain amount of years.
    What would you say to the folks that might think that 
because of that reason, because we change--we have new freshmen 
on Seapower--that the contractors, even though they are great 
contractors--they have built us great products--know that 
coming in and that by the time these ships get built, there is 
not going to be the oversight. And what this Congress approves 
for ships down the road could be totally different than that, 
and that we don't have that continuity just becomes the regular 
part of doing Federal business as expected.
    And I said this on the last panel. I built a jail two years 
ago, and I was so proud that we came in half-a-million dollars 
under budget. Everybody was shocked in my county that a 
government project came in under budget. That was just almost 
unheard of. And so we have almost come to expect that Federal 
budgets can't be on time and under budget or even at budget.
    I know we have overruns, and certainly a ship with its 
complexities is not the same, but that we are not putting 
enough pressure and enforcing the importance with the 
taxpayers' dollars of saying this thing really needs to be more 
in line with what you are estimating, even though it is going 
to be three years out. You have got to be better at estimating 
what the cost is than what you are doing.
    We had a boat that has been estimated from $6 million when 
at the first step. Now it is up to $16 million. I don't think 
the American public minds so much a little bit here and there, 
but $6 million to $16 million is pretty substantial. And I 
guess I would like someone to answer that we are going to do 
our best, and we are improving.
    How do we assure the American public and our vendors that 
we have got to do a better job of keeping these costs closer to 
the estimates of what they are? That is the only way we can 
budget--if we know what it is. And we couldn't buy a car like 
we are buying these ships.
    Admiral Sullivan. Sir?
    Ms. Stiller. Yes, sir.
    Admiral Sullivan. Do you want to take it?
    Ms. Stiller. I will start.
    Admiral Sullivan. Okay.
    Ms. Stiller. One of the keys that I mentioned, too, in my 
statement is stability. Over time we have not given the 
shipbuilders the ability to look ahead and say, ``This is what 
the Navy plans to buy.''
    And with our 313-ship Navy and where we want to go, we have 
laid out that roadmap, and we are attempting to stick to that 
roadmap so that we show them we are serious and where we are 
headed. Giving them that stability allows them to estimate what 
a ship is going to cost, knowing what the future is looking 
like. It is harder if you are not certain what is coming.
    So that has been, I think, a critical factor. It had to 
start with the Navy, and we are committed to that. And I think 
that is an important first step in getting our arms around the 
cost.
    Admiral Sullivan. And a second element--and I know the 
previous panel discussed this some--is the fidelity of the cost 
estimating tools and the training of the independent cost 
estimators.
    We have been embarked for a couple of years on working on 
cost estimating tools and training our cost estimating. That is 
a cyclic business, and I would say ten years ago we had a real 
problem in the cost estimating discipline where we weren't 
hiring any new folks, and we had to train up a whole new set. 
We talked about cuts in personnel. Cuts in ship design and ship 
cost estimating tools followed the same pattern of reductions 
that the people followed.
    And so, the last couple of years we have been standing up 
some of the new estimating tools. I know you talked on the last 
panel about--I will call it--probabilistic cost estimating, 
where you don't just come up with a point estimate based on the 
displacement of the ship and a couple of military 
characteristics.
    We have actually worked pretty hard over the last five to 
eight years coming up with hundreds of cost estimating 
relationships, because the pipes cost something, engines cost 
something, valves cost something, the steel costs something. 
Each labor pool that assembles those things has a different 
labor cost structure and a different amount of money that you 
would pay that sort of an artisan.
    But probably the biggest thing is coming up with what is 
the probability that the cost will not exceed that cost number 
that you have come up with, and now instead of arguing who is 
right, we argue over where do we want to be on the probability 
curve, and where do you want to budget? Do you want to budget 
to an 80 percent probability of success, or 60 or 4 or 99?
    And a lot of the difference in the numbers that you see 
between us and the CBO or the GAO is based on how much risk are 
you willing to take.
    Mr. Ellsworth. I have only one more question, unless 
somebody slips me a note, or--oh, as they just did.
    I did want to ask you if the Navy is keeping up on the 
situation in Wisconsin on some labor issues that could affect 
the shipbuilding there and the follow-up ship. I am not sure if 
it is the boilermakers or which labor organization, but 
apparently, there are some contract problems that are causing 
some problems.
    Do they update on that? Or is that any concern that the 
follow-up ship may be in jeopardy?
    Ms. Stiller. We are aware of it. The shipyard is in 
negotiations with the union. I don't have an update today. Our 
supervisor of shipbuilding in the yard watches that very 
closely for us. But certainly we are aware. Whether that would 
jeopardize future procurements--that is usually not a factor in 
the Navy's decision-making.
    Mr. Summerall. To date, there has been no work stoppage. I 
don't see why going forward with the plan that we have in place 
to deliver the ships in 2008, to do the fly-off in 2009, and 
then to deploy the ships in fiscal year 2010--if we get 
additional ships in 2008 and 2009, I don't see why the current 
negotiations and labor discussions would have any impact on 
that company being able to compete going forward.
    Mr. Ellsworth. Thank you.
    And unless I get slipped another note, I will ask you this 
question.
    Mr. O'Rourke from the last panel stated that we should re-
think the $460 million cost cap--and this would be in 
conference; that is why I am asking--that the Navy proposes, 
because it might be too high. And I just want to know if you 
agree or disagree and why.
    Admiral McCullough. We think that the $460 million cost cap 
is the right number. We have worked that through our cost 
estimating and budget process, and we have had that approved by 
the CNO and the secretary that we believe that is what these 
ships are going to cost to produce in fiscal year 2008 dollars 
as an end-cost.
    Mr. Ellsworth. Mr. Bartlett, any other questions?
    Mr. Bartlett. I just want to thank both panels.
    Thank you very much for your testimony. Thank you.
    Mr. Ellsworth. And I would also like to thank the four of 
you in both panels for that exchange, and I appreciate your 
time you spent with us today.
    Admiral Sullivan. Thank you, sir.
    Ms. Stiller. Thank you.
    Admiral McCullough. Thank you, sir.
    Mr. Summerall. Thank you very much.
    [Whereupon, at 4:33 p.m., the subcommittee was adjourned.]


      
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                            A P P E N D I X

                             July 24, 2007

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              PREPARED STATEMENTS SUBMITTED FOR THE RECORD

                             July 24, 2007

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             QUESTIONS AND ANSWERS SUBMITTED FOR THE RECORD

                             July 24, 2007

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                   QUESTIONS SUBMITTED BY MR. TAYLOR

    Mr. Taylor. I would like the Navy's estimate of fuel cost and 
availability for 20 years from now for a conventionally powered 
crusier.
    Ms. Stiller. The Department of the Navy takes seriously the House 
of Representatives' desire that we carefully consider nuclear power for 
CG(X) and other platforms. The Analysis of Alternatives for the 
Maritime Air and Missile Defense of Joint forces capability, which 
includes assessment of CG(X) platform alternatives, is incorporating 
the methods of the Navy's Fiscal Year 2006 study on Alternative 
Propulsion for Surface Combatants and Amphibious Warfare Ships. The AoA 
is examining both fuel efficient conventional power plants and nuclear 
power alternatives.
    Rather than assessing CG(X) alternatives against single point 
predictions of future fuel prices over the life of the ship, the Navy 
is conducting sensitivity studies as part of the AoA that vary 
assumptions on fuel price to further understand the influence of this 
variable. Projections of world oil prices and production are provided 
by the Department of Energy/Energy Information Administration in their 
International Energy Outlook 2007, Report #: DOE/EIA-0484 (2007) 
released May 2007, which will be considered in the Navy's analyses.
    The Navy will take a comprehensive approach to the development of 
CG(X). This process will carefully weigh all pertinent force structure 
considerations including projected force and platform operational 
capability requirements of the new maritime strategy, total ship 
procurement and life cycle costs and their impact on affordability of 
the overall shipbuilding plan, capabilities and capacity of the 
shipbuilding industrial base, technology benefits and risks, and 
operational support considerations.
                                 ______
                                 
                  QUESTIONS SUBMITTED BY MR. BARTLETT
    Mr. Bartlett. In the March 29th brief provided to members, the Navy 
stated that as part of the LCS Program Restructuring the path ahead for 
a low risk program would rely on the use of internal Navy cost 
estimates. As well, the Navy has established specific cost thresholds 
that would trigger a stop work on LCS 4 and possibly a renegotiation of 
the LCS 2 and 4 contract. Understanding that the cost estimated at 
completion (EAC) is competition sensitive, has the Navy's internal EAC 
for LCS 4 met or exceeded the cost threshold established by the Navy?
    Admiral McCullough, Ms. Stiller, Admiral Sullivan, and Mr. 
Summerall. The specific cost threshold that would trigger an assessment 
of the need for contract action with General Dynamics applies to LCS 2 
vice LCS 4. There are other factors in addition to this cost threshold 
that the Navy continues to monitor. The Contractor's Estimate at 
Completion (EAC) for LCS 2 has not met or exceeded the threshold. The 
specific threshold criteria, contractor cost performance reports, and 
Navy assessments of contractor performance include proprietary and/or 
business sensitive data. The Navy would be pleased to brief the 
Committee with further detail if desired.
    Mr. Bartlett. What was the LCS construction delay at General 
Dynamics due to the delay in submission and approval of the 
reprogramming request? At Lockheed Martin? What do you estimate the 
cost impact will be?
    Admiral McCullough, Ms. Stiller, Admiral Sullivan, and Mr. 
Summerall. The LCS 1 schedule delay associated with the Above-Threshold 
Reprogramming approval timing is estimated to be 2-4 weeks. A cost 
impact has not been estimated. There is no schedule or cost delay on 
LCS 2.
    Mr. Bartlett. Does the Navy believe that equity in future LCS 
competition is still possible? Won't General Dynamics be able to 
continue to refine their design on LCS 4 and be bidding on a 3rd ship 
cost, leading to a lower cost for its FY08 bids? Given all the 
construction problems on LCS, does the Navy still believe that it is 
prudent to procure 2 ships in FY08 and 3 in FY09? Why?
    Admiral McCullough, Ms. Stiller, Admiral Sullivan, and Mr. 
Summerall. Yes, the Navy believes an equitable competition is still 
possible. For continued procurement of Flight 0 Littoral Combat Ships, 
both Lockheed Martin and General Dynamics have advantages and 
disadvantages relative to their specific detail design and construction 
experience. The Navy's selection criteria for future contract awards 
will be structured to fairly evaluate proposals in order to make awards 
that provide best value to the government. For Flight 1 ships, the Navy 
is developing an acquisition strategy to establish a level playing 
field to procure ships based on the selected design and will 
incorporate lessons learned from Flight 0 test and trials.
    The FY08 and FY09 ships are needed to address a critical 
warfighting gap. Both Lockheed Martin and General Dynamics are 
resolving lead ship design and production issues and applying lessons 
learned so that follow-on ships do not experience similar issues.
    Mr. Bartlett. How has the Navy shared lessons learned from the LCS 
program with other acquisition programs and with industry to ensure 
that neither community repeats the same mistakes?
    Admiral McCullough, Ms. Stiller, Admiral Sullivan, and Mr. 
Summerall. The Navy Senior Acquisition Executive (SAE) has taken the 
following actions in an effort to share these lessons learned:

      1.  Personally conducted Portfolio Management Reviews, both 
internally with all of the Program Executive Officers and externally 
with her Industry counterparts.
      2.  Personally conducted a series of Town Hall meetings at 
various geographic locations to share her views with the entire 
enterprise acquisition workforce.
      3.  Issued new policy guidance on specific areas of concern 
raised during the review of the LCS program. These Policy memos have 
been posted to the ASN (RDA) web site and are accessible by the entire 
enterprise.
      4.  Conducted a comprehensive review of the program management 
engineering and technical authority staffing and on-site waterfront 
government oversight requirements.
                                 ______
                                 
                   QUESTIONS SUBMITTED BY MR. SESTAK
    Mr. Sestak. I would like to know that when they did their cost-
benefit analysis and the curves crossed, did you include in that the 
fully burdened cost?
    Admiral Sullivan. The cost analysis included the burdened cost of 
fuel and these costs are appropriately considered in the study. In 
performing analysis of alternatives, all the affected costs or costs 
accruing to an option should be included when comparing the 
alternatives. The Alternate Propulsion Study used the following cost 
per barrel:





Fully Burdened Cost of Fuel (FY 07$)                             $152.95
------------------------------------------------------------------------

Direct (DESC)                                                     $96.60
------------------------------------------------------------------------
    Crude Oil (variable)                                           74.15
    Refinement (variable)                                          13.76
    Transportation (fixed)                                          2.67
    Facilities/Operations* (fixed)                                  5.93
    Mark-Up (fixed)                                                 0.09

Indirect (Burden)                                                 $56.35
------------------------------------------------------------------------

    Storage & Handling                                            $ 0.05
------------------------------------------------------------------------
    Navy FISC* (fixed)                                 (Incl. with DESC)
    Navy Barge* (fixed)                                             0.05

    Delivery                                                      $52.10
------------------------------------------------------------------------
    Oiler Acquisition* (fixed)                                     14.67
    Oiler O&S/Charter Costs* (variable)                            37.43

    Environment (fixed)                                            $4.20
------------------------------------------------------------------------

* Portion of burdened fuel cost associated with storage and delivery
  infrastructure.


    As indicated in the table, there are two parts to the fully 
burdened cost, direct and indirect. Within each category, some of the 
costs vary with changes in the cost of refined fuel (price and volume) 
and some do not (or neglibly so).
    The direct portion of the cost per barrel is the price charged by 
the Defense Energy Supply Center (DESC). Since this price is based on 
the DOD-wide fuel usage, changes to the cruiser fleet's fuel usage will 
have little to no impact on the price per barrel charged. Therefore, 
use of the entire DESC price is appropriate to the Alternate Propulsion 
study.
    Fleet Oiler acquisition and operating & support (O&S) costs are 
indirect costs. The treatment of Oiler acquisition costs as a cost per 
barrel assumes Oiler acquisition is directly linked to the number of 
barrels delivered. For small changes in delivered fuel, this would not 
be the case. However, larger increases or decreases in fleet fuel usage 
would impact Oiler force levels (and therefore acquisition costs) at 
some point. This is not the case for Oiler O&S/Charter costs. The duty 
cycle of the oiler fleet directly impacts manning, maintenance and 
charter cost. If more fuel is delivered, more O&S costs would be 
incurred. If Oiler acquisition costs are removed from the calculation, 
the break-even per barrel costs would increase by $15/bbl (e.g., the 
medium surface combatant break-even range would be $85-$240 per bbl 
vice the range reported in the Alternate Propulsion study of $70-$225 
per bbl).
                                 ______
                                 
                    QUESTION SUBMITTED BY MR. FORBES
    Mr. Forbes. One of the ways the Congress can provide relief to 
monetary pressures facing Navy acquisition programs is to provide 
multi-year procurement for the most expensive vessels. The FY 2007 
Defense Authorization bill allowed for the CVN 78 aircraft carrier to 
be financed over a four-year period, instead of the current two-year 
plan. Why did the Navy choose not to take advantage of this, and does 
the Navy intend to revisit this decision in the future, either on the 
CVN 78 or follow-on ships in the class?
    Admiral McCullough, Ms. Stiller, Admiral Sullivan, and Mr. 
Summerall. The Navy was unable to take advantage of the FY 2007 Defense 
Authorization bill language which allowed the CVN 78 aircraft carrier 
to be financed over a four-year period due timing. The Navy appreciates 
the four-year funding authorization, and as stated in the Report to 
Congress on Annual Long-Range Plan for Construction of Naval Vessels 
for FY 2008, we will evaluate feasibility of four-year funding in 
future budgets.

                                  
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