Defense Acquisitions: Challenges Associated with the Navy's	 
Long-Range Shipbuilding Plans (30-MAR-06, GAO-06-587T). 	 
                                                                 
The Navy's long-range shipbuilding plan spells out its approach  
to meeting the Navy's future needs. This plan shows the Navy is  
embarking on an ambitious, expensive undertaking to develop,	 
design, and construct a number of new ship classes. The Navy	 
expects these vessels to successfully execute missions in a	 
variety of environments through use of advanced technologies,	 
while utilizing reduced crews and greater automation to lower	 
costs. The Navy also expects these vessels to be constructed in  
quantities that sustain the industrial base and expand the	 
overall size of the Navy. The plan calls for the number of ships 
to increase by about 10 percent to an average of about 309 ships 
through 2036. This effort will cost billions of dollars. At the  
request of Projection Forces Subcommittee of the House Armed	 
Services Committee, GAO examined the Navy's shipbuilding plan and
is providing this discussion of 1) the multiple objectives the	 
plan proposes to meet; 2) the challenges that must be met to	 
execute the plan; and 3) ways the Navy can reduce the tension	 
between the demand for and supply of shipbuilding funds.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-587T					        
    ACCNO:   A50537						        
  TITLE:     Defense Acquisitions: Challenges Associated with the     
Navy's Long-Range Shipbuilding Plans				 
     DATE:   03/30/2006 
  SUBJECT:   Cost control					 
	     Military vessels					 
	     Naval procurement					 
	     Procurement planning				 
	     Shipbuilding industry				 
	     Ships						 
	     Strategic planning 				 
	     DD(X) Destroyer					 
	     F-22 Raptor Aircraft				 
	     Joint Strike Fighter				 
	     LHA(R) Amphibious Assault Ship			 
	     Littoral Combat Ship				 
	     LPD-17 Amphibious Ship				 
	     Navy Future Aircraft Carrier CVN-21		 
	     SSN 774 Submarine					 
	     SSN 775 Submarine					 
	     U.S.S. San Antonio 				 
	     U.S.S. Texas					 
	     U.S.S. Virginia					 

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GAO-06-587T

     

     * Summary
     * Shipbuilding Plan Proposes to Meet Multiple Objectives
     * Challenges Facing the Execution of the Navy's Plan
          * Challenge 1: Securing a Sufficient Supply of Funds for Shipb
          * Challenge 2: Controlling the Demand for Funds in Individual
     * Better Management of Acquisitions Can Help Reduce Unanticipa
          * Implementing a Knowledge-Based Acquisition Process Can Reduc
               * Matching Customer Needs and Developer Resources Early Is Key
               * Early Stabilization of Design Can Reduce Expensive Rework an
               * Individual Ship Strategies Align Knowledge and Decision Poin
          * Practices for Estimating Costs, Budgeting, and Contracting C
               * Cost Estimating and Reporting
               * Budgeting and Contracting
          * Savings in Long-Term Operations and Maintenance Costs are Ne
               * Optimizing Ship Crew Size Can Reduce Total Ownership Costs
               * Increasing Operational Availability
     * Objectives, Scope, and Methodology
     * Contact and Staff Acknowledgments
     * Related GAO Products
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs

Testimony Before the Subcommittee on Projection Forces, Committee on Armed
Services, House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 4:00 p.m. EST

Thursday, March 30, 2006

DEFENSE ACQUISITIONS

Challenges Associated with the Navy's Long-Range Shipbuilding Plan

Statement of Paul L. Francis, Director

Acquisition and Sourcing Management

GAO-06-587T

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss the Navy's long-range
shipbuilding plan. The plan lays out the Navy's approach to meeting its
future needs. If followed literally, the plan will be an expensive
undertaking that will require billions in new ship construction funding.
The feasibility of the plan depends on a number of factors, including
increasing the supply of shipbuilding funds while controlling the demand
for funds by individual programs.

Today I would like to discuss (1) the multiple objectives that the Navy's
long-range shipbuilding plan proposes to meet, (2) the challenges that
must be met to execute the plan, and (3) ways that the Navy can reduce the
tension between the demand and supply for shipbuilding funds. Before
discussing these issues, I want to recognize the value of the Navy's
having prepared the plan as requested by Congress. I look at it as a
vehicle for discussing and debating strategic shipbuilding issues before
embarking on individual programs. This course is much preferable to
pursuing individual programs without a strategic direction in mind. Thus,
the shipbuilding plan is not something that should be used to polarize
hardened positions, but rather to permit an intelligent discussion that
will make for better decisions in the future.

                                    Summary

The Navy is embarking on an ambitious undertaking to develop, design, and
construct a number of new ship classes to support operations on, under,
and beyond the world's oceans. The Navy expects these vessels to
successfully execute missions in a variety of environments through use of
advanced technologies, while utilizing reduced crews and greater
automation to lower costs. The Navy also expects these vessels to be
constructed in quantities that sustain the industrial base and increase
the number of Navy ships. There is tension inherent among the multiple
objectives of the plan. For example, demanding mission requirements can
result in more costly ships that cannot be built in the numbers desired
for presence and shipyard workload. Requirements to reduce manning can
actually demand more automation and sophistication, which can translate
into higher acquisition cost. These tensions presage the potential
trade-offs that will likely have to be made. The key is to anticipate and
make trade-offs early in the context of the overall shipbuilding strategy.
If the Navy starts more programs than it can finish within available
resources, it may be forced to make trade-offs in the future that it would
not find acceptable today.

Assuming the long-range shipbuilding plan is consistent with national
military priorities, the main challenge in execution is keeping the supply
and demand for funds in a rational balance that does not overly sacrifice
one objective to meet another. The Navy plan requires more funds than may
reasonably be expected. Specifically the plan projects a supply of
shipbuilding funds that will double by 2011 and will stay at high levels
for years to follow. At the same time, increasing demands stemming from
other federal programs, ongoing military operations, and acquisitions by
the other services suggest such growth in shipbuilding funds may not
materialize. The Navy's own ability to control the demand for shipbuilding
funds is also a challenge. Cost growth has been particularly high for
first-in-class ships-on the order of 27 percent. The shipbuilding plan
calls for more than double the number of new ship classes to start
construction in the next 10 years, as compared with the last 10 years. If
the Navy cannot control cost growth on these new ships, some other
objectives of the plan will have to be sacrificed, such as mission
capability or numbers of ships, which could impact presence and overall
warfighting capabilities.

There are several ways the Navy can help reduce the tension between the
demand and supply of shipbuilding funds. To control unanticipated cost
growth on individual programs, it is important that the Navy ensure
programs have sufficiently high levels of knowledge before making
programmatic, budgetary, or contractual commitments. Good practices along
these lines include attaining requirements stability, technology maturity,
and design stability early in programs; gaining actual experience with
design before budgeting and contracting for construction; contracting for
the construction of the lead ship separately from the construction of
follow-on ships; and making better use of tools such as cost performance
reports. To maximize the amount of funds the Navy can devote within its
budget to shipbuilding, it must continue to find ways to lower total
ownership costs by reducing manning requirements and to improve
operational availability of ships through means such as rotational
crewing.

             Shipbuilding Plan Proposes to Meet Multiple Objectives

The Chief of Naval Operations recently released a long-range plan for
shipbuilding1 that encapsulates the Navy's vision of the future naval
force structure. This is an ambitious plan that proposes to meet multiple
objectives, including

1 Report to Congress on Annual Long-Range Plan for Construction of Naval
Vessels for FY 2007.

           o  building ships that support new missions,
           o  building more sophisticated ships to support existing missions,
           o  building workhorse ships like tugboats,
           o  increasing numbers of ships to improve presence and ability to
           carry out missions,
           o  designing ships and operating concepts to reduce manning
           requirements, and
           o  devising construction workloads to stabilize the industrial
           base.

The plan would boost the number of ships in the Navy's inventory from
today's level of 281 to an average of about 309 ships through 2036-a 10
percent increase.2 The plan includes developing and constructing a number
of new ship classes to support the way the service would like to operate
in the future. New ships are proposed for nearly every class, from
improved aircraft carriers and submarines to new types of surface
combatants. The DD(X) destroyer is to provide strike and volume fires with
increased range and lethality. Seabasing is to be facilitated by large
deck, expeditionary warfare ships and connectors, by future maritime
prepositioning forces, and by a new generation of combat logistics forces.
Littoral combat ships are to provide defenses against submarine, mine, and
surface threats. Theater ballistic missile defense technologies are to be
employed on guided missile destroyers and cruisers.

Many of these ships are expected to perform their missions with reduced
crew sizes that are to be achieved through increased automation. The Navy
also plans to change the way it deploys and structures its fleet around
the world by shifting to a greater presence in the Pacific and employing
rotational crewing strategies. The fleet is expected to have the capacity
to overmatch the nation's most capable adversaries, in all waters, blue,
green and brown.

In addition, the Navy's shipbuilding plan seeks to stabilize the
industrial base by providing predictable workloads for the shipyards. The
Navy has previously reported that a stable shipbuilding industry is
essential to meet requirements for an affordable and capable force
structure. Cost growth in any given shipbuilding program could result in a
fluctuation in the number of ships procured, leading to less work in a
particular yard and even cost growth in other shipbuilding programs. We
have reported, for example, that overhead costs for the DDG 91 and DDG 92,
two ships in the current class of destroyers, increased as a result of the
delay in signing the contract for the DD(X). Similarly, the pace of the
DD(X) detail design and construction schedule has been dictated in part by
the desire to avoid work gaps in shipyards.

2 According to the Navy's plan the naval ship inventory would increase to
315 by 2012, peak at 330 in 2019, and decline slowly to 296 by 2036.

Laying out such a plan now is constructive because it can be seen as the
first stages of an investment strategy or portfolio for new ship
acquisitions. Without a plan to guide program choices, there is a risk
that individual programs will dictate the plan. A long-term plan, to the
extent that it is consistent with national military priorities and is
rationalized by reasonable resource expectations, can enable trade-offs to
be seen and addressed in advance, leading to better informed choices now.
Such a plan makes debate possible before irreversible commitments are
made.

There is an inherent tension among the multiple objectives of the plan,
which presage the potential trade-offs that will likely have to be made.
These are depicted in simple form in figure 1.

Figure 1: Multiple Objectives Embodied in the Navy Shipbuilding Plan

The tensions between objectives can play out in several ways. If, for
example, a class of ship is expected to perform multiple challenging
missions, it will have sophisticated subsystems and costs will be high.
The cost of the ship may prevent its being built in desired numbers,
reducing presence and reducing work for the industrial base. Requirements
to reduce manning can actually add sophistication if mission requirements
are not reduced. To some extent, this has happened with the DD(X)
destroyer. Several years ago, it was anticipated that the ship would cost
about $1 billion, and 32 would be produced. Over time, sophistication and
cost of the ship grew as mission requirements increased while manning
levels lower than current destroyers were maintained. Today, each DD(X)
ship will cost an average of $3.2 billion, and no more than seven are
anticipated.3 Presence (in terms of quantity) was reduced; shipyard work
was reduced; and currently the program is looking at reducing some mission
capacity to control cost. Similarly, the cost of the Virginia class
submarine has precluded producing the volume originally anticipated. The
key is to anticipate and make trade-offs early in the context of the
overall shipbuilding strategy. Otherwise, the strategy will be the yield
of the individual ship programs-a suboptimal outcome.

               Challenges Facing the Execution of the Navy's Plan

Assuming the long-range shipbuilding plan is consistent with national
military priorities, the main challenge in execution is keeping the supply
and demand for funds in a rational balance that does not unduly sacrifice
one objective to meet another. Except for the savings the Navy is able to
generate from reductions in operation, support, and personnel costs, as
well as reductions in non-ship acquisitions, the supply of funds will
largely be beyond the Navy's control. The demand for funds, on the other
hand, is dictated mainly by the numbers and cost of individual acquisition
programs and should be a managed outcome on the part of the Navy.

Challenge 1: Securing a Sufficient Supply of Funds for Shipbuilding

The main risk in the Navy's shipbuilding plan is that it requires more
funds than may reasonably be expected. To support its plan, the Navy
depends on significant increases in funding for new ship construction. The
plan calls for shipbuilding funds to grow from $8.7 billion in fiscal 2007
to $17.2 billion in fiscal 2011 and beyond that sustains levels well above
current funding. Should this funding fail to materialize, whether due to
other demands on the federal budget that limit Navy funds or to overruns
in other Navy programs, the shipbuilding plan will not be executable and
trade-offs will have to be made.

3 According to the Navy's November 2005 Acquisition Program Baseline for
the DD(X) program, program acquisition unit cost (PAUC) is $3,154.79
million. PAUC is calculated by dividing program acquisition cost,
including research and development funding, by the program acquisition
quantity.

When contemplating an increase in funding that almost doubles the
shipbuilding budget in the near future, it is important to keep in mind
that demands on federal discretionary funds, which include the Navy's
budget, are growing as well. Budget simulations show that the nation faces
a large and growing structural deficit due primarily to known demographic
trends and growing health care costs. In addition, current military
operations, such as those in Iraq and Afghanistan, put further pressure on
DOD's weapon system investments by accelerating the need for replacement
or refurbishment of existing weapons.

Within this context, the development and production of new weapon systems
remains one of the largest discretionary investments the federal
government makes. From 2001 to 2006, DOD has doubled its planned
investments in ongoing major weapons from $700 billion to $1.4 trillion.
As shown in figure 1, DOD is planning to increase its procurement budget
from about $75 billion to about $100 billion (33 percent) over the next 5
years to accommodate these growing investments.

Figure 2: Total Obligation Authority for Procurement (Dollars in Fiscal
Year 2006 Millions)

According to the shipbuilding plan, the Navy will have to find substantial
new funds at a time when the Army is planning to get increased funds for
its Future Combat System and the Air Force plans to purchase F-22A Raptors
and Joint Strike Fighters. Given the increased funding needed to cover the
systems already underway and the competition for funds beyond the
acquisition of systems, it will be very difficult for the Navy to secure
the kinds of increases it needs to afford the long-range shipbuilding
program.

Challenge 2: Controlling the Demand for Funds in Individual Shipbuilding
Programs

Cost growth has been a long-standing problem for all types of weapon
systems. For an individual program, cost growth represents additional and
unanticipated demand for more funds. If more funds are not available,
quantities to the warfighter are reduced and buying power is sacrificed.
Shipbuilding programs, like other systems, have experienced cost growth.
Cost growth has been particularly high on first-of-class ships. In the
last 10 years, only a few first-of-class ships have been built. However,
based on the long-range plan, the number of first-of-class ships will more
than double in the next 10 years. If the Navy cannot control cost growth
on these new ships, some other objectives of the plan would have to be
sacrificed, such as mission capability or presence.

Recent shipbuilding outcomes suggest that cost growth continues to be a
problem for the Navy, particularly on the lead ship(s) of a new class.
(See table 1.)

Table 1: Cost Growth in Lead Ships (Dollars in Millions)

aEstimated cost from the President's budget submission for year of ship
authorization.

bIncludes all prior year requests through fiscal year 2007.

cSSN 775 is the second Virginia class submarine, but will be the first
hull delivered by Northrop Grumman Newport News shipyard.

For example, the first-in-class USS San Antonio (LPD 17), commissioned in
January 2006, experienced cost growth of $804 million above its initial
budget-an increase of 84 percent. The budgets for the new attack
submarines, USS Virginia (SSN 774) and Texas (SSN 775), have grown by $492
million and $523 million, respectively, requiring Congress to appropriate
additional funds to cover these increases. It is not only the first ship
in the class that is at risk for cost growth; the second ship, if it is
assembled in a different shipyard, is at risk as well. This was the case
with the SSN 775. Devoting resources to support completion of prior year
shipbuilding programs reduces the buying power of the Navy's budget for
construction and can slow the pace of modernization. The Navy is in its
early stages of procuring a number of advanced, new ship classes,
including the DD(X) destroyer, CVN 21 aircraft carrier, and the Littoral
Combat Ship. Their actual costs have yet to be realized.

The Navy's long-term shipbuilding plan envisions procuring several new
classes of ships to meet force structure needs. In fact, the Navy plans to
more than double its new class construction programs over the next 10
years. (See fig. 3.)

Figure 3: Schedule for Construction of New Lead Ships

*Dates beyond fiscal year 2011 are notional.

The financial strain of starting so many new ship programs may be
unprecedented in post-World War II times. Successful development, design,
and construction of these new classes will be predicated on the Navy's
ability to break past patterns of cost growth. Otherwise, the Navy could
be forced to divert funding from planned ship classes to cover cost
overruns on its current programs. If the Navy starts more programs than it
can finish within available resources, it may be forced to make trade-offs
in the future that it would not find acceptable today.

Better Management of Acquisitions Can Help Reduce Unanticipated Demands for More
                                     Funds

There are several steps the Navy can take to help control unanticipated
cost growth on individual programs. Primarily, these steps involve having
sufficiently high levels of knowledge before making programmatic,
budgetary, or contractual commitments. These measures include

           o  attaining requirements stability, technology maturity, and
           design stability early in programs;
           o  gaining actual experience with design before budgeting and
           contracting for construction;
           o  contracting the construction of the lead ship separately from
           the construction of follow-on ships; and
           o  employing good cost-estimating techniques and making better use
           of cost reports.

Implementing a Knowledge-Based Acquisition Process Can Reduce the Risk of Cost
Growth in Shipbuilding Programs

A first step in stemming unanticipated cost growth is for the Navy to
follow a knowledge-based acquisition approach for its new shipbuilding
programs. Over the last several years, we have undertaken a body of work
that examines weapon acquisitions by drawing upon lessons learned from
best product development practices in both the private sector and DOD.
Collectively, best practices comprise a process that ensures a high level
of knowledge at key program decision points. Central to successful
outcomes is the separation of technology development and product
development. The process of developing technology is one of discovery and
must allow room for unexpected failures that could result in delays. The
process of developing a product culminates in delivery and depends on
specific knowledge about a new product to stabilize design and plan for
production. Similarly, it is important to stabilize design before
production to avoid rework and resequencing of work, which ultimately
results in cost growth and schedule delays.

  Matching Customer Needs and Developer Resources Early Is Key to a
  Knowledge-Based Approach

We have found that it is essential that at program start, a match must be
made between the customer's requirements and the product developer's
available resources in terms of knowledge, time, money, and capacity. One
fundamental is a balanced set of requirements that takes into account not
only a desire for sizeable gains in performance, but also the
resources-technology, time, and money-that are available to execute the
program.

One of the most important practices in reaching a match between resources
and requirements is achieving a high level of technology maturity at the
start of system development. This improves the ability to establish
realistic cost, schedule, and performance objectives as well as the
ability to meet them. We believe that in shipbuilding, technology maturity
should be reached by the preliminary design review. This assures that the
form, fit, and function of the individual components of a vessel are
understood before they become integrated in a system design. Including
immature technologies in the system design increases the risk of
discovering problems late and can increase the cost and time needed to
complete design and fabrication.

The match between resources and requirements can be achieved in several
ways. The Littoral Combat Ship provides one way. Rather than attempting to
achieve full capability in a single leap, the program is structured to
deliver incremental capabilities to the warfighter through evolutionary
acquisition. Evolutionary acquisition has the potential to reduce cycle
times and costs by enabling developers to rely more on available resources
rather than making promises about unproven technologies. The CVN-21
carrier program provides a different way to get the match. One critical
technology that the Navy wants to incorporate on the new carrier is the
electromagnetic aircraft launching system. Since this system affects the
design of the ship, the Navy is spending a lot of time and money to
demonstrate this key technology before committing to the ship's design.
The DD(X) program is somewhere in between. It has a rational approach to
maturing 12 critical technologies through demonstration models, but these
were not complete before the detail design phase began, and thus the DD(X)
program carry technical risk into that phase.

  Early Stabilization of Design Can Reduce Expensive Rework and Resequencing of
  Work

Another key knowledge-based practice is achieving a stable product design
at the system-level design readiness review. According to Navy and
contractor officials, design stability in shipbuilding is achieved through
completion of general arrangement drawings, ship specifications, and major
equipment lists. Attaining design stability on time can help assure that a
product will meet customer requirements as well as cost and schedule
targets. Programs that have entered construction before achieving stable
system designs did experience significant cost growth. The lack of design
maturity in these programs led to rework and resequencing of work,
increasing the number of labor hours needed for ship construction. For
example, in the LPD 17 program, ship design continued to evolve even as
construction proceeded. Without a stable design, outfitting work for
individual ship sections was often delayed from early in the building
cycle to later, when these sections were integrated on the hull.
Shipbuilders stated that doing the work at this stage could cost up to
five times the original cost. On LPD 17, 1.3 million labor hours were
deferred from the build phase to the integration phase. Consequently, LPD
17 took much longer to construct and cost more than originally estimated.

  Individual Ship Strategies Align Knowledge and Decision Points Differently

While shipbuilding programs may differ in the specific knowledge that must
be gained to reduce risk, the order and timing in which such knowledge
must be achieved should not vary. Technology maturity must be proven
before a design can be considered stable, and production outcomes cannot
be guaranteed until a stable design is demonstrated. Similarly, this
knowledge should correspond with and inform key decisions in a program.
For example, in programs other than shipbuilding, the Milestone B decision
represents the commitment to design and develop a system for production,
at which time requirements should be firm and critical technologies
mature.

However, each shipbuilding program seems to embody its own strategy for
making decisions that vary from program to program. Milestone B means
different things in different shipbuilding programs. In the DD(X) program,
negotiation of a construction contract was authorized at Milestone B,
which was held shortly after the critical design review. The CVN-21
program plans to gain approval to negotiate construction of the first ship
at a major program review held over 2 years after Milestone B decision. In
yet another approach, the Littoral Combat Ship began construction of its
first vessels about 2 years before its scheduled Milestone B decision.
This inconsistency in both decision points and knowledge gained makes it
difficult to gauge whether an individual program is attaining sufficient
levels of knowledge at the right points in time.

Practices for Estimating Costs, Budgeting, and Contracting Can Make Funding
Demands More Realistic

The Navy can take steps to more realistically provide the funds needed to
execute individual programs. These include some methodological practices
for cost estimates and better alignment of budgeting and contracting
commitments with requisite levels of knowledge. The Navy has begun
implementing some of these practices, but more can be done.

  Cost Estimating and Reporting

In our analysis of shipbuilding programs last year, we found that the Navy
tended to underestimate the costs needed to construct ships-which resulted
in large cost increases after ship construction began. One way to improve
the quality of cost estimates and reduce the magnitude of unbudgeted cost
growth is to present a confidence level for a cost estimate based on risk
and uncertainty analyses. By conducting uncertainty analyses that measure
the probability of cost growth, the Navy can identify a level of
confidence for its cost estimates. The Navy can then make better-informed
budget decisions on whether to proceed with a program.

The Navy has begun taking some action to improve its cost estimating
capabilities, including the use of quantitative risk analysis in
generating shipbuilding cost estimates. For example, the Navy did conduct
an uncertainty analysis for the DD(X) cost estimate. The analysis showed
the current estimate to have a confidence level of 45 percent, meaning
that the program has a 45 percent chance of achieving its estimated cost.
This represents a positive step in creating more transparent cost
estimates. We believe that the Navy and DOD should go on to establish an
acceptably high confidence level on which to base more realistic program
commitments and budget requests. Recently, the Defense Acquisition
Performance Assessment panel recommended that an 80 percent confidence
level is necessary to ensure realism in a budget request.

The Navy can also use contractor cost performance reports more
effectively. With the significant risk of cost growth in shipbuilding
programs, it is important that the Navy receive timely and complete cost
performance reports to allow it to take corrective actions more quickly.
DOD recently issued changes to its earned value management policy
requiring contract performance reports to be submitted no less than
monthly. Monthly cost performance reports can help improve the Navy's
ability to mitigate risk on ships currently under construction. Although
the Navy will implement this policy on future contracts, it stated that it
will not apply monthly reporting requirements retroactively. As a result,
current programs such as the Virginia class submarine, which continues to
experience high cost growth, will only receive cost performance reports on
a quarterly basis-slowing the Navy's ability to take corrective action
against negative cost and performance trends.

  Budgeting and Contracting

The Navy can better ensure realism in its budgets and contracts by
separating requests for funding detail design from construction.
Generally, the Navy has requested authorization for both detail design and
construction of the lead ship in a single budget year, before research and
development have been completed and an independent cost estimate
developed. Contract prices are often negotiated for constructing the lead
ship and early follow-on ships before detail design has even begun. In our
February 2005 report, we recommended that the Navy allow time to gain
knowledge from detail design before negotiating contract prices for the
construction of the lead ship and time to gain knowledge from the lead
ship before negotiating contracts for follow-on ships. This would enable
knowledge and experience to be gained with the design before locking in
budget requests and contractual commitments.

Budget requests for DD(X) illustrate the problems with requesting funding
early, when uncertainty about costs is high. The Navy first requested
funding for detail design and construction of the lead ship in February
2004 as part of its fiscal year 2005 budget request. According to the
Navy's budget presentation, detail design and construction would cost $2.7
billion. The Congress did not fund construction of the lead ship but
instead provided funding for detail design and some materials in the
fiscal years 2005 and 2006 budgets. In March 2005, the Navy completed a
detailed life-cycle cost estimate for DD(X) that placed the cost of DD(X)
at $3.3 billion. The independent cost estimate placed the cost even
higher. The budget request for fiscal year 2007 now includes $3.3 billion
for each of the two lead ships. Though the accuracy of this estimate is
still being debated, it is clearly more realistic than the budget
estimates of 2 years ago.

The same logic applies to contracting for follow-on ships. Early
negotiation of follow-on ship contracts can also affect the realism of
program cost estimates and budget requests to fund these contracts.
Experience has shown the difficulty in delivering the lead ship of a class
within estimates. Negotiating contracts for follow-on ships at the same
time as the lead ship extends the estimating weaknesses to those ships as
well. The result is unbudgeted demands for increased funds. While the Navy
maintains that this practice can give the government some leverage in
negotiating prices, a possible advantage only exists in the case of ships
acquired under fixed-price contracts-a rare occurrence for new ship
classes.

Savings in Long-Term Operations and Maintenance Costs are Needed to Free Funds
for Shipbuilding

The Navy's efforts to control personnel costs and minimize total ownership
costs have been important in their own right. Today, these efforts are
becoming increasingly important because the savings they produce are one
source of the increased funding sought for the Navy's long-range
shipbuilding plan.

  Optimizing Ship Crew Size Can Reduce Total Ownership Costs

The ship's crew is the single largest cost incurred over the ship's life
cycle. One way to lower personnel costs is to use a systems-engineering
approach called human systems integration to optimize crew size. This is
particularly important in the early phases of a ship program as total
ownership costs are largely determined during a ship's design. (See fig.
4.)

Figure 4: Total Ownership Costs Are Determined Early in a System's
Development

Applying human systems integration principles to optimize crew size has
the potential to yield substantial cost and operational benefits,
including saving billions of dollars by reducing total ownership costs and
increasing operational performance and ship maintainability.

We have reported that the Navy has not consistently optimized ship crew
size.4 For example, we calculated that a nominal 25 percent reduction in a
large deck amphibious ship such as the LHA(R) with a 1,245-person crew
could provide a personnel cost avoidance of nearly $1 billion over the
service life of a ship.5 However, the LHA(R) program did not establish a
crew reduction requirement. As a result it is unlikely to achieve a
meaningful reduction in crew size. The DD(X) destroyer program is an
example of how requiring human systems integration early, establishing a
crew size reduction requirement as part of the design, and holding program
managers accountable can create significant progress toward reducing crew
size. While actual reductions remain to be seen, currently, the crew size
for the DD(X) is estimated at 150, compared with 382 for the current DDG
51 class destroyer.

4 See GAO, Military Personnel: Navy Actions Needed to Optimize Ship Crew
Size and Reduce Total Ownership Costs, GAO-03-520 (Washington, D.C.: June
9, 2003).

  Increasing Operational Availability

The Navy has developed and implemented several initiatives to increase the
operational availability of Navy and Marine Corps fleet forces, including
the Fleet Response Plan and rotational crewing. Navy officials have cited
these initiatives as ways to increase readiness and reduce the numbers of
ships needed in the Navy's force structure, thereby freeing funding for
other priorities. The Fleet Response Plan modifies the Navy's pre-2001
rotational deployment policy, replacing 6-month routine deployments with
more flexible deployment options for as many as eight carrier strike
groups when and where needed. The Navy has also demonstrated that rotating
crews aboard surface ships on extended deployments may be a feasible
alternative to traditional 6-month ship deployments. According to the 2006
Quadrennial Defense Review Report, the Fleet Response Plan has increased
the amount of time a ship or other naval unit is fully ready to deploy,
and rotational crewing has further increased the operational availability
of forces by up to 33 percent.

These are positive results for which the Navy deserves credit. As the Navy
extends these initiatives to more ships, we have recommended steps it can
take to get maximum return on investment and offset billions of dollars in
future total ownership costs. These include establishing an analytical
framework-consisting of formal measurable goals, objectives, and
metrics-that could be used to assess the feasibility of operational
availability initiatives and determine their impact on operational
requirements, ship condition, and crew morale.6 In the past, the Navy had
not systematically collected or developed accurate cost data to perform
complete cost-effectiveness analysis. We believe that the Navy needs to
more systematically collect data on current and potential operational
availability initiatives, including complete and accurate cost data for
cost-effectiveness analyses. This will facilitate informed decisions about
the potential for applying these initiatives to current and future ships.

5 Fiscal year 2002 dollars.

6 See GAO, Force Structure: Navy Needs to Fully Evaluate Options and
Provide Standard Guidance for Implementing Surface Ship Rotational
Crewing, GAO-05-10 (Washington, D.C.: Nov. 10, 2004); GAO, Military
Readiness: Navy's Fleet Response Plan Would Benefit from a Comprehensive
Management Approach and Rigorous Testing, GAO-06-84 (Washington, D.C.:
Nov. 22, 2005).

Mr. Chairman this concludes my statement and I would be pleased to answer
any questions.

                       Objectives, Scope, and Methodology

To develop information on obstacles for the Navy's long-term shipbuilding
strategy and practices for improving the acquisition of programs that make
up that strategy, we relied largely on work previously performed for a
number of related GAO products as well as the Navy's planning documents
and testimony. In the course of our previous work we analyzed the
documentation of and interviewed officials associated with a number of
shipbuilding programs including CVN-21, DD(X), and the Littoral Combat
Ship. In our past work on analyzing cost growth in shipbuilding, we
reviewed cost performance and earned value data on a number of ships then
in construction, as well as applicable Navy acquisition guidance. In
addition, we interviewed officials with the Navy and Office of Secretary
of Defense with oversight of cost estimating and contract execution. To
supplement work previously performed we analyzed the Navy's most recent
long-term plan for shipbuilding and updated some figures on cost estimates
through use of the Navy's budget justification documentation.

Contact and Staff Acknowledgments

For future questions about this statement, please contact me at (202)
512-4841. Individuals making key contributions to this statement include
Robert L. Ackley, Christina Connelly, Ryan Consaul, Diana Dinkelacker,
Christopher R. Durbin, J. Kristopher Keener, Patricia W. Lentini, Roderick
W. Rodgers, Janet St. Laurent, Martin G. Campbell, and Karen Zuckerstein.

Related GAO Products

Military Readiness: Navy's Fleet Response Plan Would Benefit from a
Comprehensive Management Approach and Rigorous Testing. GAO-06-84 ,
Washington, D.C.: Nov. 22, 2005.

Defense Acquisitions: Progress and Challenges Facing the DD(X) Surface
Combatant Program. GAO-05-924T , Washington, D.C.: July 19, 2005.

Defense Acquisitions: Assessments of Selected Major Weapon Programs.
GAO-05-301 , Washington, D.C.: March 31, 2005.

Defense Acquisitions: Plans Need to Allow Enough Time to Demonstrate
Capability of First Littoral Combat Ships. GAO-05-255 , Washington, D.C.:
March 1, 2005.

Defense Acquisitions: Improved Management Practices Could Help Minimize
Cost Growth in Navy Shipbuilding Programs. GAO-05-183 , Washington, D.C.:
Feb. 28, 2005.

Force Structure: Navy Needs to Fully Evaluate Options and Provide Standard
Guidance for Implementing Surface Ship Rotational Crewing. GAO-05-10 ,
Washington, D.C.: Nov. 10, 2004.

Military Personnel: Navy Actions Needed to Optimize Ship Crew Size and
Reduce Total Ownership Costs. GAO-03-520 , Washington, D.C.: June 9, 2003.

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www.gao.gov/cgi-bin/getrpt? GAO-06-587T .

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Highlights of GAO-06-587T , a testimony to the Subcommittee on Projection
Forces, Committee on Armed Services, House of Representatives

March 30, 2006

DEFENSE ACQUISITIONS

Challenges Associated with the Navy's Long-Range Shipbuilding Plan

The Navy's long-range shipbuilding plan spells out its approach to meeting
the Navy's future needs. This plan shows the Navy is embarking on an
ambitious, expensive undertaking to develop, design, and construct a
number of new ship classes. The Navy expects these vessels to successfully
execute missions in a variety of environments through use of advanced
technologies, while utilizing reduced crews and greater automation to
lower costs. The Navy also expects these vessels to be constructed in
quantities that sustain the industrial base and expand the overall size of
the Navy. The plan calls for the number of ships to increase by about 10
percent to an average of about 309 ships through 2036. This effort will
cost billions of dollars.

At the request of Projection Forces Subcommittee of the House Armed
Services Committee, GAO examined the Navy's shipbuilding plan and is
providing this discussion of 1) the multiple objectives the plan proposes
to meet; 2) the challenges that must be met to execute the plan; and 3)
ways the Navy can reduce the tension between the demand for and supply of
shipbuilding funds.

While the Navy's shipbuilding plan is beneficial in that it lays out a
strategic approach for decision making, there is tension inherent among
the plan's multiple objectives. For example, demanding mission
requirements can result in more costly ships that cannot be built in the
numbers desired for presence and shipyard workload. These tensions presage
the potential trade-offs that will likely have to be made. The key is to
anticipate and make trade-offs early in the context of the overall
shipbuilding strategy. If the Navy starts more programs than it can finish
within available resources, it may be forced to make trade-offs in the
future that it may not find acceptable today.

Multiple Objectives Embodied in the Navy Shipbuilding Plan

GAO (presentation).

Assuming the long-range shipbuilding plan is consistent with national
military priorities, the main challenge in execution is keeping the supply
and demand for funds in a rational balance that does not overly sacrifice
one objective to meet another. The Navy projects a supply of shipbuilding
funds that will double by 2011 and stay high. At the same time, increasing
demands on the federal budget-including for weapons for other
services-suggest such growth in shipbuilding funds may not materialize.
The Navy's own ability to control the demand for shipbuilding funds is
also a challenge. If the Navy cannot control cost growth on new ships,
some other objectives of the plan will have to be sacrificed, such as
mission capability or presence.

There are several ways the Navy can help reduce the tension between the
demand for and supply of shipbuilding funds. To control unanticipated cost
growth on individual programs, it is important that the Navy ensure
programs have sufficiently high levels of knowledge before making
programmatic, budgetary, or contractual commitments. To maximize the
amount of funds the Navy can devote within its budget to shipbuilding, it
must continue to find ways to lower total ownership costs by reducing
manning requirements and to improve operational availability of ships
through means such as rotational crewing.
*** End of document. ***