Multiyear Procurement Authority for the Virginia Class Submarine 
Program (23-JUN-03, GAO-03-895R).				 
                                                                 
On May 29, 2003 GAO briefed the Subcommittee on Defense, House	 
Committee on Appropriations' staff on the fiscal year 2004 budget
request for the Virginia class submarine program. This letter	 
summarizes the information we provided in that briefing on the	 
advantages that multiyear procurement authority offers the	 
Virginia class submarine program as well as the risks of actually
realizing these advantages.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-895R					        
    ACCNO:   A07364						        
  TITLE:     Multiyear Procurement Authority for the Virginia Class   
Submarine Program						 
     DATE:   06/23/2003 
  SUBJECT:   Naval procurement					 
	     Procurement appropriations 			 
	     Procurement evaluation				 
	     Procurement planning				 
	     Strategic planning 				 
	     Submarines 					 
	     Military cost control				 
	     Arleigh-Burke Class Destroyers			 
	     SSN 774 Submarine					 
	     SSN 775 Submarine					 
	     SSN 776 Submarine					 
	     SSN 777 Submarine					 
	     Virginia Class Submarine				 
	     DDG-51 Destroyer					 

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GAO-03-895R

GAO- 03- 895R Virginia Class Submarine Program

United States General Accounting Office Washington, DC 20548

June 23, 2003 The Honorable Jerry Lewis Chairman Subcommittee on Defense
Committee on Appropriations House of Representatives

Subject: Multiyear Procurement Authority for the Virginia Class Submarine
Program

Dear Mr. Chairman: On May 29, 2003 we briefed your staff on the fiscal
year 2004 budget request for the Virginia class submarine program. This
letter summarizes the information we provided in that briefing on the
advantages that multiyear procurement authority offers the Virginia class
submarine program as well as the risks of actually realizing these
advantages.

Background

The Virginia class submarine program is currently the Navy*s largest
shipbuilding program. The attack submarine will replace the Los Angeles
class submarines to provide battle space dominance across a broad spectrum
of missions. The Navy already has four ships in various stages of
construction and under contract with General Dynamics Electric Boat and
Northrop Grumman Newport News. The lead ship, the SSN 774 (Virginia), will
be delivered in June 2004, and the SSN 775 (Texas) will be delivered in
2005. The SSN 776 (Hawaii) and SSN 777 (North Carolina) are

36 percent and 18 percent complete, respectively. Two ships will be
launched from each yard. Each shipyard has about 50 percent of the work,
with both responsible for certain segments of each submarine. The Navy is
currently in contract negotiations for submarines beyond the four under
contract.

In its fiscal year 2004 budget submission, the Navy requested $2.8 billion
for the Virginia class program. The Navy estimates that the total cost for
the program will be $64.7 billion in base year (1995) dollars for 30
submarines. The estimated cost for the ship to be authorized in fiscal
year 2004 is $2.15 billion. As part of its fiscal year 2004 budget
submission, the Navy requested $390 million in support of a potential
multiyear procurement contract. If multiyear procurement authority is
approved, the fiscal years 2005 and 2006 budget submissions will also
include funding requests of about $390 million and $195 million
respectively, to support the multiyear procurement contract. These funds
will be used to procure components and

GAO- 03- 895R Virginia Class Submarine Program Page 2 materials in
economic order quantities for ships authorized in future years. This

advance funding will reduce needed funds in later years. The Navy has
asked Congress for authority to enter into a multiyear procurement
contract for seven submarines to be authorized in fiscal years 2004
through 2008. 1 Multiyear procurement contracts enable the contractor and
the Navy to realize

savings from economies of scale or manufacturing efficiencies. Programs
awarding a multiyear procurement contract are required by law to show that
substantial savings will accrue, cost estimates are realistic, funding is
stable for the period covered by the contract, and the design is stable. A
program using multiyear procurement authority must also show that the
requirement for the system is stable and the program is needed for
national security. Expected savings will be eroded if costs increase or if
the design of the system changes substantially.

Advantages and Risks of Multiyear Procurement Authority for the Virginia
Class Submarine

The main advantage of multiyear procurement authority for the Virginia
class submarine is its potential to reduce the program*s future costs by
$805 million ($ 115 million per submarine). Program documents indicate
that these savings would be derived from reduced inflation, vendor
procurement efficiencies, and greater manufacturing efficiencies.
According to program officials, should Congress approve multiyear
procurement authority, the contract currently under negotiation would
transition into a multiyear procurement contract for fiscal year 2004
through 2008 ships. Program officials stated that without multiyear
procurement authority, the program*s funding would be able to support the
ships to be authorized in fiscal years 2005 and 2006, but additional
funding would be needed to cover the higher costs for the ships to be
authorized in fiscal years 2007 and 2008.

Several factors could offset the potential cost savings, which should also
be considered along with the Navy*s request for multiyear procurement
authority.

Stable funding for the Virginia class submarine program may not be
assured.

The Navy stated in its justification for multiyear procurement authority
that the program is a high priority and that the Navy is committed to
funding the program at required levels. But, competing demands from other
programs for acquisition funding may result in instability in the
program*s funding. For example, according to program officials, the Navy
cut $270 million in Research, Development, Test, and Evaluation (RDT& E)
funds across fiscal years 2004 through 2007, and an additional $40 million
per ship in technology insertion funds across the same time period partly
to help fund higher Navy priorities. These cuts will delay core RDT& E
efforts such as: continued development of an information assurance
solution for the sonar and combat control networks, correction of high
priority deficiencies noted in the operational assessment of

1 Multiyear procurement authority would allow the Navy to contract for
seven ships authorized over 5 years, thus committing future budgets to
support these acquisitions. Contract terms require the Navy to pay certain
charges if the contract is terminated or quantities reduced. A multiyear
contract of $500 million or more for a Defense weapon system may not be
awarded unless the contract is specifically authorized by law in an
appropriations act and a law other than an appropriations act, such as an

authorization act.

GAO- 03- 895R Virginia Class Submarine Program Page 3 the non- propulsion
electronics systems, and evaluating causes and developing

fixes for acoustic performance deficiencies. Technology insertion efforts
will also be delayed until the later years of the current defense plan.
Finally, the Navy recently cut $600 million from the program*s procurement
account and $2 million per year in RDT& E funds across the 2004 to 2009
defense plan due to

Defense- wide inflation adjustments. The multiyear procurement strategy
calls for the acquisition rate to increase to two ships per year for
fiscal years 2007 and 2008. Should funding pressures continue and prevent
realization of this increase, savings would be eroded.

To date, the program*s cost estimates have not proven realistic. According
to program documents, the cost estimates are based on historical
shipbuilding and submarine program experience and actual performance on
the first submarines under construction, among other factors. Nonetheless,
the Navy reported that, as of December 31, 2002, costs had exceeded
baseline estimates by 24 percent. This calculation included savings from
the yet- to- be- authorized multiyear. Had the Navy not included these
savings, the cost overrun would have been 31 percent. 2 Program officials
stated that they subsequently revised the baseline estimate in April 2003.
Recent contract negotiations for the acquisition of additional ships
raised further questions about the realism of the Navy*s cost estimates.
According to the program officials, the contractor*s bid exceeded the
Navy*s estimate by $1 billion. Officials reported that a tentative
agreement has been reached that has resulted in a price within the
program*s budget, but the Navy altered the scope of the contract to reach
that price.

This experience with the program*s cost estimates raises questions
regarding the realism of potential savings estimates. Moreover, should
costs exceed estimates, the program would need additional funding or would
have to make additional tradeoffs to program scope.

Changes in the program*s test plan could affect stability of design.
Changes to the ship*s design are still likely because the program is early
in the acquisition cycle. The lead ship, which will be delivered in June
2004, will undergo only a pier- side review of the total ship
survivability trial and will not undergo a full ship shock test. The
second ship, the SSN 775, is expected to undergo both the total ship
survivability trial and the full ship shock test in 2006. These tests, as
well as sea trials, are likely to identify necessary design changes that
may affect the components and materials already purchased as well as the
cost and schedule of the program.

In contrast, the Arleigh Burke class (DDG- 51) destroyer program, the last
shipbuilding program to enter into a multiyear procurement contract, was
well into its acquisition cycle when multiyear procurement authority was
approved.

2 A 31 percent increase would have triggered the requirement in 10 U. S.
C. 2433 (known as NunnMcCurdy), applicable to cost increases exceeding 25
percent, that the Secretary of Defense submit to Congress a certification
that (1) the program is essential to national security, (2) no
alternatives exist

which will provide equal or greater military capability at less cost, (3)
the new cost estimates are reasonable, and (4) the program*s management
structure is adequate to manage and control cost.

GAO- 03- 895R Virginia Class Submarine Program Page 4 Twenty- one ships
had already been commissioned and an additional 17 were

under construction.

Agency Comments and Our Evaluation

The Department of Defense provided oral comments on a draft of this
letter. The department agreed that several factors could impact the
magnitude of savings it reported, but did not agree with our comments
concerning the realism of cost estimates and the stability of design. The
department underscored the importance of the requirement for the attack
submarine and implications for national security. It also stated that the
program is given priority by the Navy when allocating planned resources.

Regarding cost estimates, the department said that it has accepted the
Navy*s cost estimates and that these estimates reflect cost experience on
the first four ships. However, based on recent experience, we do not
believe that the Navy has demonstrated that its cost estimates are
reliable. The program is currently overrun by over 24 percent (assuming
savings if multiyear procurement authority is granted) and initial bids
for the next buy of ships were $1 billion over the Navy's estimates.

Regarding stability of design, the department emphasized that it believes
the design is stable based on completion of 99.8 percent of the drawings
and low engineering changes. It also said that improved design and
modeling technologies mitigate the risk of design changes. We recognize
and strongly support the effort the Navy is undertaking to mitigate the
risk of design changes. However, it is reasonable to expect that changes
to the design will be necessary as a result of launching and testing the
first ships. Design changes could erode expected savings.

- - - -

Scope and Methodology

In the course of our review of the fiscal year 2004 defense budget, we
reviewed the Virginia class submarine program*s request for multiyear
procurement authority. At your request, we also assessed the advantages
and risks associated with the multiyear procurement proposal.
Specifically, we identified issues related to the following criteria:
substantial savings, stability of funding, realism of cost estimates, and
stability of design. To assess the Navy*s request, we reviewed the Navy*s
budget submission, the Navy*s justification document for multiyear
procurement authority,

the fiscal year 2004- 2009 defense plan, the Virginia class submarine
Selected Acquisition Report, and documents relating to planned test
events. We also discussed the Navy*s request with Virginia class submarine
program officials. We conducted our work from April 2003 through June 2003
in accordance with

generally accepted government auditing standards.

GAO- 03- 895R Virginia Class Submarine Program Page 5 We are sending
copies of this letter to the Honorable John P. Murtha, Ranking

Minority Member; the Honorable Donald H. Rumsfeld, Secretary of Defense;
the Honorable Hansford T. Johnson, Acting Secretary of the Navy; and
interested congressional committees. We will make copies available to
other interested parties upon request. In addition, the letter will be
available at no charge on the GAO Web site at http:// www. gao. gov.

Please contact me at (202) 512- 4841 or Karen Zuckerstein at (202) 512-
6785 if you or your staff have any questions concerning this letter. Other
major contributors to this letter were Rick Hensley, J. Kristopher Keener,
Julie Leetch and Adam Vodraska.

Sincerely, Paul L. Francis Director Acquisition and Sourcing Management

(120264)

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