    Defense Acquisitions: Navy Faces Challenges Constructing the
    Aircraft Carrier Gerald R. Ford within Budget (23-AUG-07,
    GAO-07-866).

    The Navy is investing over $3 billion to develop technologies for
    a new type of aircraft carrier--the Ford class--and it expects to
    spend almost $11 billion to design and construct the USS Gerald
    R. Ford (CVN 78)--the lead ship of the class. New technologies
    are to improve the carrier's performance and reduce crew size.
    The Navy requested authorization of CVN 78 in its fiscal year
    2008 budget. GAO was asked to assess the Navy's ability to meet
    its goals for developing the new carrier. Specifically, this
    report assesses (1) the extent to which technology development
    could affect the capability and construction of CVN 78, (2) the
    status of efforts to achieve design stability, and (3) the
    challenges to building CVN 78 within budget. To accomplish this,
    our work includes analysis of test reports, development
    schedules, and ship progress reviews; interviews with Navy and
    other officials; and examinations of cost estimates and our own
    past work.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-07-866
        ACCNO:   A74975
      TITLE:     Defense Acquisitions: Navy Faces Challenges Constructing
    the Aircraft Carrier Gerald R. Ford within Budget
         DATE:   08/23/2007
      SUBJECT:   Construction costs
    	     Cost overruns
    	     Critical technologies
    	     Defense cost control
    	     Military vessels
    	     Naval procurement
    	     Program evaluation
    	     Ships
    	     Systems design
    	     Military research and development
    	     Cost growth
    	     CVN(X) Aircraft Carrier
    	     Navy Future Aircraft Carrier CVN-21
    	     Nimitz Class Aircraft Carrier

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    GAO-07-866

         * [1]Results in Brief
         * [2]Background

              * [3]CVN 78 Critical Technology Development
              * [4]CVN 78 Acquisition Costs

         * [5]Remaining Work on Key Technologies Poses Risks to Ship Cost

              * [6]The Ship's Optimum Construction Sequence and Capability Depe
              * [7]Technologies That Greatly Affect both Capability and Constru
              * [8]EMALS, Dual Band Radar, and Advanced Arresting Gear Have Exp

                   * [9]EMALS
                   * [10]Dual Band Radar
                   * [11]Advanced Arresting Gear

              * [12]Other Technologies May Disrupt the Ship's Construction Seque

         * [13]The Navy Has Made Significant Design Progress, but Sustained

              * [14]Significant Design Development Is Being Performed Prior to C
              * [15]Delays in Developing Critical Technologies Could Impede Desi

         * [16]Costs for CVN 78 Will Likely Exceed Budget

              * [17]The Navy's Cost Estimate May Be Optimistic
              * [18]Target Cost for Ship Construction May Not Be Achievable
              * [19]Insufficient Cost Surveillance Hinders the Navy's Ability to

         * [20]Conclusions
         * [21]Recommendations for Executive Action
         * [22]Matters for Congressional Consideration
         * [23]Agency Comments and Our Evaluation
         * [24]GAO Contact
         * [25]Staff Acknowledgments
         * [26]GAO's Mission
         * [27]Obtaining Copies of GAO Reports and Testimony

              * [28]Order by Mail or Phone

         * [29]To Report Fraud, Waste, and Abuse in Federal Programs
         * [30]Congressional Relations
         * [31]Public Affairs

    Report to the Ranking Minority Member, Subcommittee on Seapower and
    Expeditionary Forces, Committee on Armed Services, House of
    Representatives

    United States Government Accountability Office

    GAO

    August 2007

    DEFENSE ACQUISITIONS

    Navy Faces Challenges Constructing the Aircraft Carrier Gerald R. Ford
    within Budget

    GAO-07-866

    Contents

    Letter 1

    Results in Brief 2
    Background 4
    Remaining Work on Key Technologies Poses Risks to Ship Cost and Capability
    11
    The Navy Has Made Significant Design Progress, but Sustained Progress
    Depends on Technology Development 25
    Costs for CVN 78 Will Likely Exceed Budget 32
    Conclusions 41
    Recommendations for Executive Action 42
    Matters for Congressional Consideration 43
    Agency Comments and Our Evaluation 43
    Appendix I Scope and Methodology 46
    Appendix II Comments from the Department of Defense 48
    Appendix III GAO Contact and Staff Acknowledgments 52

    Tables

    Table 1: Major Events in the Development of Future Aircraft Carriers 6
    Table 2: CVN 78 Critical Technologies 8
    Table 3: Extent of Potential Impact on the Construction Sequence 13
    Table 4: Critical Technologies' Impact on Ship Capability 14
    Table 5: Matrix of the Impact of Critical Technologies 15
    Table 6: Schedule of Key Events Relating to EMALS 17
    Table 7: Challenges Faced by the EMALS Program in Meeting Program
    Requirements 18
    Table 8: Schedule of Key Events Relating to Dual Band Radar 20
    Table 9: Schedule of Key Events Relating to Advanced Arresting Gear 22
    Table 10: Other Technologies That Affect the Construction Sequence 24
    Table 11: Other Technologies That Affect CVN 78's Planned Capability 24
    Table 12: Design Progress by Location on Ship 30
    Table 13: Construction Labor Hour Change 34

    Figures

    Figure 1: CVN 78 Aircraft Carrier Currently in Development 4
    Figure 2: CVN 78's Budgeted Cost 10
    Figure 3: Product Model Design Process 26
    Figure 4: Ship Design Status as of April 2007 28
    Figure 5: Knowledge of Carrier Material Costs Prior to Construction
    Contract Award 38

    Abbreviations

    DOD Department of Defense
    DCAA Defense Contract Audit Agency
    DCMA Defense Contract Management Agency
    EMALS electromagnetic aircraft launch system
    JPALS joint precision approach and landing system
    NAVSEA Naval Sea Systems Command
    SAR Selected Acquisition Report
    SUPSHIP Supervisor of Shipbuilding, Conversion and Repair

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. The published product may be reproduced
    and distributed in its entirety without further permission from GAO.
    However, because this work may contain copyrighted images or other
    material, permission from the copyright holder may be necessary if you
    wish to reproduce this material separately.

    United States Government Accountability Office
    Washington, DC 20548

    August 23, 2007

    The Honorable Roscoe G. Bartlett
    Ranking Minority Member
    Subcommittee on Seapower and Expeditionary Forces
    Committee on Armed Services
    House of Representatives

    The Navy is developing the Ford-class nuclear-powered aircraft carrier,
    which will serve as the future centerpiece of the carrier strike group.
    The Ford class is the successor to the Nimitz-class aircraft carrier
    designed in the 1960s. Until the establishment of the future aircraft
    carrier program, the Navy had not invested significantly in research and
    development to incorporate leading edge technologies into current
    carriers. The new carrier was designed to include a number of advanced
    technologies in propulsion, aircraft launch and recovery, and weapons
    handling. These technologies, along with an expanded and improved flight
    deck, are designed to increase operational efficiency and enable higher
    sortie rates while at the same time reducing manpower requirements for the
    ship and air wing as compared with current aircraft carriers. The Navy is
    investing over $3 billion to research and develop technologies for the new
    class of carriers, and it expects to spend almost $11 billion to design
    the class and construct the lead ship, USS Gerald R. Ford (CVN 78). The
    Navy is developing the Ford-class nuclear-powered aircraft carrier, which
    will serve as the future centerpiece of the carrier strike group. The Ford
    class is the successor to the Nimitz-class aircraft carrier designed in
    the 1960s. Until the establishment of the future aircraft carrier program,
    the Navy had not invested significantly in research and development to
    incorporate leading edge technologies into current carriers. The new
    carrier was designed to include a number of advanced technologies in
    propulsion, aircraft launch and recovery, and weapons handling. These
    technologies, along with an expanded and improved flight deck, are
    designed to increase operational efficiency and enable higher sortie rates
    while at the same time reducing manpower requirements for the ship and air
    wing as compared with current aircraft carriers. The Navy is investing
    over $3 billion to research and develop technologies for the new class of
    carriers, and it expects to spend almost $11 billion to design the class
    and construct the lead ship, USS Gerald R. Ford (CVN 78).

    The Navy requested authorization of CVN 78 as part of its fiscal year 2008
    budget and plans to fund the carrier in fiscal years 2008 and 2009. Given
    the carrier's sizable investment and the Navy's long-standing problem of
    cost growth on shipbuilding programs, you asked us to assess the Navy's
    ability to meet its goals for developing the CVN 78 aircraft carrier.
    Specifically, we assessed (1) the extent to which technology development
    could affect the capability and construction of CVN 78, (2) the status of
    efforts to achieve design stability, and (3) the challenges to building
    CVN 78 within budget. The Navy requested authorization of CVN 78 as part
    of its fiscal year 2008 budget and plans to fund the carrier in fiscal
    years 2008 and 2009. Given the carrier's sizable investment and the Navy's
    long-standing problem of cost growth on shipbuilding programs, you asked
    us to assess the Navy's ability to meet its goals for developing the CVN
    78 aircraft carrier. Specifically, we assessed (1) the extent to which
    technology development could affect the capability and construction of CVN
    78, (2) the status of efforts to achieve design stability, and (3) the
    challenges to building CVN 78 within budget.

    To address the first objective, we developed a matrix based on the degree
    to which CVN 78's technologies could have an impact on the optimum
    capability and construction of the ship. We categorized technologies based
    on our analysis of key program documents, including test reports,
    development schedules, and ship progress reviews. To supplement our
    analysis, we visited contractors and test sites where the ship's major
    technologies are being developed and tested. To assess the Navy's progress
    in achieving design stability, we examined the ship's design To address
    the first objective, we developed a matrix based on the degree to which
    CVN 78's technologies could have an impact on the optimum capability and
    construction of the ship. We categorized technologies based on our
    analysis of key program documents, including test reports, development
    schedules, and ship progress reviews. To supplement our analysis, we
    visited contractors and test sites where the ship's major technologies are
    being developed and tested. To assess the Navy's progress in achieving
    design stability, we examined the ship's design requirements and analyzed
    design maturity metrics captured in the shipbuilder's integrated master
    schedule. Finally, we examined the ship's estimated costs and identified
    cost challenges by examining the ship's budget; Navy, independent, and
    shipbuilder cost estimates; ship progress reviews; defense contract audit
    reports; and GAO's past work on shipbuilding cost growth. To address all
    of the above objectives, we held discussions and attended briefings with
    Department of Defense (DOD), Navy, and CVN 78 program officials, as well
    as the shipbuilder and developers of CVN 78's critical technologies. We
    conducted our analysis from July 2006 to June 2007 in accordance with
    generally accepted government auditing standards.

    Results in Brief

    As a result of a substantial investment of time and money, the Navy has
    reduced the risks associated with a number of essential technologies,
    including the nuclear propulsion and electric plant. At this time, several
    technical risks that could lead to increased construction costs and
    potentially result in capability reductions still remain. In particular,
    the electromagnetic aircraft launch system (EMALS), the advanced arresting
    gear, and the dual band radar face key tests with little margin for
    resolving problems before they begin to disrupt the optimal CVN 78
    construction schedule and increase ship costs. If key systems arrive late,
    more labor cost may be incurred because of inefficient work-arounds and
    schedule delays. EMALS and the advanced arresting gear are vital to
    meeting key capabilities and must be delivered to the shipyard on time to
    maintain the construction schedule. The dual band radar enables a smaller
    island structure on the deck of the carrier, facilitating the ship's
    increased sortie generation rate. All three systems have experienced
    schedule delays because of technical and other challenges. Demanding tests
    lay ahead for all three systems:

               o In November 2007, the EMALS program will begin testing a
               production-representative system, including a critical generator
               component that will be field-tested for the first time.
               o Land-based testing of a dual band radar prototype is expected to
               begin in December 2008, but will not demonstrate full power output
               critical to meeting requirements. Specific testing has not yet
               been planned for all carrier-unique capabilities, including a
               number of air traffic control scenarios.
               o Testing of the advanced arresting gear, including, for the first
               time, the software control system, is scheduled to begin in 2008.

    The Navy has made significant progress in maturing the ship's design. The
    shipbuilder has completed about 67 percent of the ship's design, and
    design efforts are on track to support the construction schedule. A
    structured design approach and a lengthy construction preparation contract
    have enabled the program to perform more work prior to construction than
    on previous carriers. The program, however, may face challenges completing
    more detailed phases of design because of delays in the development of the
    ship's critical technologies, which in turn could impede the design
    process--and construction--of CVN 78.

    Costs for CVN 78 will likely exceed the budget for several reasons. First,
    the Navy's cost estimate that underpins the budget is optimistic. For
    example, the Navy estimates that CVN 78 will be built with fewer labor
    hours than were needed for the previous two carriers. Second, the Navy's
    target cost for ship construction may not be achievable. The Navy
    established a cost target for the shipbuilder based on the budget. The
    shipbuilder's initial cost estimate for construction was 22 percent higher
    than the Navy's cost target. The Navy and the shipbuilder are working to
    reduce costs by incentivizing capital improvements, removing noncritical
    capabilities to save costs, and introducing other production efficiencies.
    However, experience on other shipbuilding programs suggests that actual
    construction costs will increase above the cost target as a result of
    labor inefficiencies and late material deliveries. Third, the Navy may not
    have the management tools necessary to identify and react to early signs
    of cost growth because current contractor cost performance reports do not
    have meaningful performance measurements, the Navy's on-site Supervisor of
    Shipbuilding, Conversion and Repair (SUPSHIP) does not have an independent
    cost surveillance capability. Given CVN 78's magnitude, managing cost
    growth will be essential to the Navy's ability to execute its 30-year
    shipbuilding plan. Decisions the Navy makes on CVN 78's budget this year
    and next year will determine whether and to what extent overruns will
    require offsets in the budgets for future fiscal years.

    We are making several recommendations to the Secretary of Defense aimed at
    ensuring that the budget for CVN 78 is executable and at improving
    technology development efforts. We are also making recommendations to
    improve the Navy's management of shipyard performance and early
    recognition of issues that may affect cost. DOD agreed with most of our
    recommendations, but did not agree with all recommended actions aimed at
    ensuring that the budget for CVN 78 is executable. Therefore, future cost
    growth beyond the budget remains likely. As a result, this report also
    contains matters for congressional consideration to ensure that CVN 78 is
    budgeted at the likely costs of the ship.

    Background

    The Ford-class nuclear aircraft carriers are intended to replace the USS
    Enterprise--the Navy's first nuclear-powered aircraft carrier--and the
    Nimitz-class carriers. The Ford class will serve as the premier forward
    asset for crisis response and early decisive striking power in a major
    combat operation. The first Ford-class carrier--CVN 78--is scheduled for
    delivery to the fleet in September 2015. Figure 1 depicts an artist's
    rendition of CVN 78.

    Figure 1: CVN 78 Aircraft Carrier Currently in Development

    Delivery of CVN 78 is an important step in maintaining the Navy's force of
    operational carriers. The Navy outlined its strategy of sustaining a force
    of 11 operational carriers and achieving a force of 313 ships in its
    long-range shipbuilding plan.^1 This plan outlines future ship
    construction rates, fiscal constraints, and force structure requirements
    that the Navy envisions over the next 30 years. In the near term, the Navy
    plans to significantly increase its rate of construction and introduce
    several new classes of ships, including the Ford class. The Navy
    recognizes that the success of the plan will depend on its ability to
    control shipbuilding costs.

    Starting with the lead ship, the Ford class features a number of
    improvements over existing aircraft carriers that the Navy believes will
    improve the combat capability of the carrier fleet while simultaneously
    reducing acquisition and life cycle costs. Some of the improvements
    include the following:

               o increased sortie generation rates,

               o a near three-fold increase in electrical generating capability,

               o increased operational availability, and

               o increased service life margins (e.g., weight and stability) to
               support future changes.

    These improvements are made possible through a number of design features,
    including an enlarged flight deck; a smaller, aft-positioned island with
    fewer rotating radars; and a flexible ship infrastructure to accommodate
    future changes to the ship.

    The Navy's strategy for acquiring a new class of carriers has changed
    since the initial concept was determined. The Navy established the CVN(X)
    program in 1998 after deciding that the next class of carriers would be
    nuclear-powered and feature a large deck, with over 75 aircraft.
    Initially, the Navy employed an evolutionary acquisition strategy, with
    technology improvements introduced gradually with each successive carrier.
    In 2002 the Navy established the CVN 21--or 21st century--aircraft carrier
    program and decided to use a Nimitz hull on all carriers, but accelerate
    the introduction of new technologies on the first lead ship. Follow-on
    ships will largely repeat the lead ship design, with some modifications.
    In 2006 the Navy decided to delay awarding a contract for construction of
    the first two ships by 1 year in order to meet other Navy priorities,
    thereby shifting lead ship delivery. This delay will reduce the Navy's
    inventory to 10 aircraft carriers in 2013 and 2014--1 below its force
    requirement.

    ^1The Navy plans to increase its inventory to 12 aircraft carriers
    beginning in 2019. See Report to Congress on Annual Long-Range Plan for
    Construction of Naval Vessels for FY 2008.

    The Navy requested authorization of CVN 78 in its fiscal year 2008 budget
    request, with funding split over 2 years. Table 1 outlines the major
    events in the development of future aircraft carriers.

    Table 1: Major Events in the Development of Future Aircraft Carriers

    Year Events
    1993    o Navy establishes a carrier working group to investigate the
               requirements and available technologies and systems for a new
               class of aircraft carriers.
    1998    o CVN(X) evolutionary design approach established.
    2000    o Integrated process and product development contract awarded to
               Northrop Grumman Newport News.
               o Design begins on the new propulsion system.
               o CVN(X) program reaches Milestone 1.
    2002    o CVN(X) changes to the CVN 21 program following the Navy's
               decision to eliminate an evolutionary strategy.
    2003    o Construction contract award date shifted from 2006 to 2007.
    2004    o CVN 21 program receives approval for Milestone B, the point for
               entry into the system development and demonstration phase of the
               DOD acquisition system.
               o Navy awards a construction preparation contract to Northrop
               Grumman Newport News.
    2005    o Fabrication of the lead ship (CVN 78) begins.
    2006    o Construction contract award date shifted from 2007 to 2008.
               o Construction preparation contract extended by 1 year until 2008.
               o Secretary of the Navy names CVN 78 USS Gerald R.
               Ford--initiating the Ford class.
               o Congress establishes a cost cap of $10.5 billion for CVN 78
               procurement in the Defense Authorization Act for Fiscal Year 2007
               (Pub. L. No. 109-364S122 (2006)).
    2007    o Navy requests authorization of CVN 78 construction in its 2008
               budget request.
               o Defense Acquisition Board program review (expected). Updated
               Navy and DOD independent cost estimates were expected in support
               of the review.
    2008    o CVN 78 construction contract award to Northrop Grumman Newport
               News.
    2010    o CVN 78 keel lay.
    2012    o Construction contract award for CVN 79.
    2015    o CVN 78 delivery.

    Source: Navy data.

    CVN 78 Critical Technology Development

    A number of new technologies will be installed on CVN 78. These
    technologies will enable CVN 78 to achieve its capability enhancements.
    The Navy identifies 16 critical technologies--technologies that it defines
    as new or novel that the ship depends on to meet development, production,
    employment, and operations^2 (see table 2). The number of critical
    technologies changes when the Navy decides to remove a technology from the
    ship or if it determines that a technology warrants additional attention.
    The Navy recently removed a dynamic armor protection system from the CVN
    78 design, deferring this technology to follow-on ships and is currently
    considering identifying CVN 78's electronic warfare and command and
    control systems as critical technologies.

    ^2The Navy recently removed the 1,100-ton air-conditioning plant and the
    aviation data management control system from its critical technologies
    list because they are no longer considered developmental systems.

    Table 2: CVN 78 Critical Technologies

    Technology                       Capability improvement
    1,100-ton air-conditioning plant Greater cooling capability with fewer
                                        units than the legacy system.
    Advanced arresting gear          Recovers current and future aircraft,
                                        lighter than the legacy system, software
                                        controls reduce manning.
    Advanced weapons elevator        Elevators that use moving electromagnetic
                                        fields instead of cabling. Allows
                                        elevator shaft to use horizontal doors to
                                        close off magazines. Reduces manning and
                                        maintenance costs.
    Aviation data management control Optimizes weapons inventory and
    system                           arrangement. Interfaces new technologies
                                        such as EMALS and the advanced arresting
                                        gear for operation and management
                                        purposes.
    Dual band radar--multifunction   Integrates two radars operating on
    radar and volume search radar    different frequency bands:

                                           o volume search radar: long-range
                                           searches to detect small targets.
                                           o multifunction radar: horizon/surface
                                           search and tracking.
    Evolved Sea Sparrow missile for  Supports raid requirement with a data
    CVN 21                           link between combat systems and missiles.
    EMALS                            Replaces steam catapult. Uses an
                                        electrically generated, moving magnetic
                                        field to propel aircraft to launch speed.
    Heavy underway replenishment     Quicker shipboard replenishment through
                                        reinforced steel beams that increase ship
                                        separation (180 to 300 ft.) and load
                                        transport (5,700 lbs to 12,000 lbs).
    High-strength low-alloy steel 65 Lightweight steel reduces ship weight.
    and 115
    Joint precision approach and     Global positioning system technology
    landing system (JPALS)           allows for all-weather, day-night
                                        landings.
    Nuclear propulsion and electric  Converts energy into electricity.
    plant                            Provides 2.8 times more electrical
                                        generating capacity than previous carrier
                                        class.
    Plasma arc waste destruction     Uses extreme temperatures to convert
    system                           6,800 lbs/day of paper, cardboard,
                                        plastic, cloth, wood, incidental food,
                                        metal, and glass into gaseous emissions.
    Reverse osmosis desalination     Desalinates water without requiring a
    system                           steam distribution system and creates
                                        potable water.
    Shipboard weapons loader         Self-powered, self-charging munitions
                                        loader intended to lift up to 3,000 lbs
                                        in sea states 5 or 6.

    Source: Navy data.

    The Navy tracks the status of critical technologies through quarterly
    integrated product team meetings with the various program offices and
    developers responsible for systems that will be installed on the ship.

    CVN 78 Acquisition Costs

    CVN 78's current total acquisition cost is estimated at $13.9 billion,
    including funding for research and development, and design of the ship
    class. The Navy is spending approximately $3.4 billion over several years
    on research and development of technologies and ship design. Of this
    amount, approximately $1.8 billion is to develop the ship's propulsion
    system. To date, the Navy has received almost $3.7 billion in advanced
    procurement funding. The Navy estimates a total shipbuilding budget of
    $10.5 billion, including $8.1 billion for CVN 78 construction and $2.4
    billion for ship class design. The Navy requested $2.7 billion in fiscal
    year 2008 and plans to request $4.1 billion in fiscal year 2009, thereby
    fully funding construction of the ship. Figure 2 outlines CVN 78's
    budgeted costs.

    Figure 2: CVN 78's Budgeted Cost

    The Navy's budget for CVN 78 is based largely on an initial life cycle
    cost estimate developed in 2004 to support the Milestone B acquisition
    decision. An independent DOD cost estimate performed that same year
    estimated the cost of CVN 78 at $13.8 billion, $1.3 billion higher than
    the Navy estimate. DOD leadership approved an amount between the two
    estimates, establishing a Milestone B cost estimate of $13.1 billion for a
    fiscal year 2007 ship procurement. The Navy's fiscal year 2008 budget
    request of $13.9 billion is based on the Milestone B estimate, adjusted
    upward to include inflation, additional funding for government-furnished
    equipment, and the 1-year delay in the program.^3

    Unlike previous carriers, which were budgeted for in the first year of
    construction, funding for CVN 78 construction is split over 2 fiscal
    years. By funding the ship over multiple years, the Navy hopes to mitigate
    potential disruptions to other programs that can be caused by a large
    budget outlay in a single year. In the event that CVN 78's costs grow
    above the budget for fiscal years 2008 and 2009, the Navy will need to
    seek additional funding. Funds will be transferred from other programs or
    obtained through a prior year completion request, a mechanism used to fund
    cost growth for ships budgeted in prior years.

    Remaining Work on Key Technologies Poses Risks to Ship Cost and Capability

    Delays in technology development may lead to increases in CVN 78's planned
    construction costs and potential reductions in the ship's capability at
    delivery. CVN 78's success depends on on-time delivery and insertion of
    fully mature and operational technologies in order to manage construction
    cost and enhance ship capabilities. Technologies that are highly
    integrated into the construction sequence or provide vital capabilities
    for the ship to carry out its mission are the most critical in achieving
    this goal. While the Navy has mitigated the impact of some technologies,
    such as the nuclear propulsion and electric plant, three systems--EMALS,
    the dual band radar, and the advanced arresting gear--have faced problems
    during development that may eventually affect the ship's construction
    costs. Upcoming critical tests must be executed as planned in order for
    these systems to remain on schedule.

    The Ship's Optimum Construction Sequence and Capability Depend on Technologies
    Being Delivered as Planned

    In order for CVN 78 to deliver with its promised capability and within
    construction cost, the ship's technologies must be delivered as
    planned--on schedule, fully mature, and operational. EMALS, the dual band
    radar, and the advanced arresting gear warrant the most concern at this
    point because they have a high impact on both ship capability and
    construction schedule, have had difficulties during development that have
    absorbed much of their schedule margin, and have a significant amount of
    work to complete before they can demonstrate full maturity. Other
    technologies are either further along in development or have less impact
    on capability and construction. The Navy has been actively managing
    technical risks on CVN 78 and has mitigated the risk on several
    technologies, such as the propulsion and electric plant, that have a high
    impact on both capability and construction.

    ^3Government-furnished equipment includes technologies, electronics,
    weapons systems, propulsion, mechanical equipment, and other items, which
    are purchased by the Navy and installed by the shipbuilder.

    The first key impact on the ship is the construction sequence. Ships are
    designed and constructed with an optimal sequence--that is, the most
    cost-efficient sequence to construct the ship. This includes designing and
    building the ship from the bottom up and maximizing the work completed in
    shipyard shops and minimizing tasks performed when the ship is already in
    the water, which tends to be costlier than tasks on land. This sequence is
    outlined in the shipbuilder's integrated master schedule, which links all
    of the detailed construction tasks based on key event dates. The plan for
    installing CVN 78's critical technologies takes advantage of construction
    efficiencies. If a technology does not arrive on time, the shipbuilder
    will have to work around the missing technology. Additional labor hours
    may be needed because spaces will be less accessible and equipment may
    require more time for installation. Certain technologies have an increased
    potential to affect the optimum construction sequence--and, consequently,
    are more likely to increase costs. Similarly, if areas of the ship require
    redesign, costs can increase and can significantly delay construction.

    The degree to which technologies can affect construction and increase
    costs depends on the interrelationship of several factors--including the
    following:

               o The date that technologies are first needed in the yard for
               installation. Technologies that are located low in the ship have
               earlier installation dates.
               o The degree to which a technology is embedded in the ship's
               design. CVN 78's design is divided into 423 separate zones (75 for
               the propulsion plant and 348 for the platform). Although each zone
               is a separate design unit, there are dependencies among them,
               including technologies that cross multiple zones. Changes to one
               design zone must be applied to all dependent design zones.
               Problems with technologies that affect several zones can have a
               cascading effect on other areas of the ship.
               o The extent of integration. For example, the dual band radar is
               highly integrated in the design of the island and enables the
               smaller island design. CVN 78 cannot install legacy radars without
               major redesign of the ship.

    Table 3 shows the degree to which CVN 78's technologies can affect the
    ship's construction sequence.

    Table 3: Extent of Potential Impact on the Construction Sequence

                                                   Total design
    Technology                     In-yard date  zone impact  Deck location
    High-strength low-alloy steel          2005          348  All decks
    65
    Nuclear propulsion and                 2006           75  Below third deck
    electric plant
    Reverse osmosis desalination           2008           10  Below third deck
    system
    1,100-ton air-conditioning             2009            9  Below third deck
    plant
    Advanced weapons elevator              2010           68  All decks
    High-strength toughness steel          2010           15  Flight deck
    115
    EMALS                                  2011           48  Flight deck and
                                                                 above main deck
    Advanced arresting gear                2011           18  Above main deck
    Heavy underway replenishment           2011            6  Main deck
    Plasma arc waste destruction           2011            4  Main deck
    system
    Dual band radar (multifunction         2012            9  Island
    radar and volume search radar)
    Evolved Sea Sparrow missile            2012            0  Flight deck
    for CVN 21
    JPALS                                  2013            2  Island
    Aviation data management               2013            0  Not applicable
    control system                                            (N/A) (software)
    Shipboard weapons loader               2015            1  Flight deck

    Source: GAO analysis of Navy data.

    The second key impact of CVN 78's critical technologies is on the ship's
    planned capability. CVN 78's capability is predicated on technologies
    meeting requirements. The ship's capability is based on technologies
    meeting five key performance parameters: sortie generation rates, manpower
    reduction, electric generation capacity, service weight and stability
    allowance, and interoperability. Table 4 describes the impact of critical
    technologies on the ship's capability.

    Table 4: Critical Technologies' Impact on Ship Capability

                           Sortie       Manpower
                           generation   reduction (in
    Technology          rate enabler billets)^a      Other capability impact
    1,100-ton           None         Maintenance     N/A
    air-conditioning                 reduction
    plant
    Advanced arresting  High         41              50 tons lighter than the
    gear                                             legacy system
    Advanced weapons    Moderate to  Over 20         N/A
    elevator            high
    Aviation data       Low          6               N/A
    management control
    system
    Dual band radar:    High^b       28              Projected weight
    multifunction radar                              reduction,
    and volume search                                interoperability
    radar
    EMALS               High         32              N/A
    Evolved Sea Sparrow None         0               Interoperability
    missile for CVN 21
    Heavy underway      High         Decrease        N/A
    replenishment                    manpower surge
                                        time
    High-strength       None         0               700-ton projected weight
    low-alloy steel 65                               reduction
    High-strength       None         0               175-ton projected weight
    toughness steel 115                              reduction
    JPALS               Low          Maintenance     Interoperability
                                        reduction
    Nuclear propulsion  Low          220 (includes   1350-ton projected weight
    and electric plant               reverse osmosis reduction (includes
                                        desalination    reverse osmosis
                                        system)         desalination system),
                                                        electric generation
    Plasma arc waste    None         Decrease trash  Reduction of trash and
    destruction system               sorting time    equipment weight
    Reverse osmosis     None         See nuclear     See nuclear propulsion
    desalination system              propulsion      plant, weight reduction
                                        plant reduction
    Shipboard weapons   Moderate     4-5 per loader  N/A
    loader

    Source: GAO analysis of Navy data.

    aCVN 78's total system manpower requirements reflect a manpower billet
    reduction of 500 (threshold) and 900 (objective) compared to the last
    class of carriers.

    bThe dual band radar does not directly affect sortie generation rates, but
    it enables the smaller island design, which greatly affects sortie
    generation rates.

    Technologies That Greatly Affect both Capability and Construction Will Have the
    Greatest Impact on the Ship if They Are Not Delivered as Planned

    We categorized CVN 78's technologies according to the degree they can
    affect the construction and capability of the ship (see table 5).
    Technologies in quadrant 1 affect both the construction sequence and
    capability of the ship--and would present the greatest risk to the cost
    and capability of the ship if not delivered as planned. Of the
    technologies in quadrant 1:

               o The Navy has largely retired the risk posed by the nuclear
               propulsion and electric plant, the reverse osmosis desalination
               system, and the high-strength low-alloy steel 65.
               o The design of the weapons elevator has been developed--but
               full-scale testing, scheduled for later this year, is needed to
               demonstrate a shipboard representative system.
               o Significant risks remain in the development of EMALS, the dual
               band radar, and the advanced arresting gear.

    Table 5: Matrix of the Impact of Critical Technologies

    High impact on     Quadrant 2: Medium         Quadrant 1: High
    ship construction
                          1,100-ton air-conditioning Advanced arresting gear Dual
                          plant                      band radar: volume search
                                                     and multifunction radars
                                                     EMALS Advanced weapons
                                                     elevator High-strength
                                                     low-alloy steel 65 Nuclear
                                                     propulsion and electric
                                                     plant Reverse osmosis
                                                     desalination system
    Low impact on ship Quadrant 4: Low            Quadrant 3: Medium
    construction
                          Aviation data management   Heavy underway replenishment
                          control system Evolved Sea JPALS Shipboard weapons
                          Sparrow missile for CVN 21 loader
                          High-strength toughness
                          steel 115 Plasma arc waste
                          destruction system
                          Low impact on ship         High impact on ship
                          capabilities               capabilities

    Source: GAO.

    Early planning and testing of several CVN 78 critical technologies have
    mitigated risk, including some technologies with the highest impact on
    construction and capability. The Navy fully demonstrated:

               o Nuclear propulsion and electric plant. Development began in 1998
               and the overall design is complete. The Navy tested and qualified
               the system generator in 2005, and fabrication and installation of
               components are under way.
               o Reverse osmosis desalination system. In 2003 units were
               successfully tested at a land-based test facility. The Navy is
               currently evaluating units aboard an amphibious assault ship. The
               design is complete and the system is currently being manufactured.
               o High-strength low-alloy steel 65. After testing finished in
               2002, the Navy certified its use on naval ships in 2003. Steel is
               currently being used to fabricate the ship.
               o Plasma arc waste destruction system. System is currently in use
               on a commercial cruise ship.

    The Navy can also still choose not to install a number of the low-impact
    technologies, if they do not mature as planned, without significantly
    affecting the ability of the ship to meet minimum performance
    requirements. For example, the new weapons management system is a software
    upgrade; the Navy can opt to use legacy software--and the ship will still
    achieve threshold performance requirements. Similarly, the Navy is
    considering the use of new high-strength steel on the flight deck to
    reduce weight if ballistic testing proves successful. Steel currently
    scheduled for use on the ship is an acceptable backup.

    EMALS, Dual Band Radar, and Advanced Arresting Gear Have Experienced Schedule
    Delays That Could Disrupt CVN 78's Construction Schedule

    EMALS, the dual band radar, and the advanced arresting gear are each
    critical to realizing CVN 78's planned capability--and the Navy has
    committed to installing these technologies on the ship. Upcoming system
    testing of each technology is expected to demonstrate its capability. The
    ship's construction sequence, however, is at risk. While progress has been
    made in developing components, EMALS, the dual band radar, and the
    advanced arresting gear have encountered difficulties during development
    that have led to delays. Difficulties include achieving needed performance
    in key components, as well as reaching agreement with the Navy on systems
    engineering and other requirements. While each technology has passed
    critical design milestones, they now face demanding test and production
    schedules with little or no margin to address problems discovered in
    testing or manufacturing. If problems occur, EMALS and the advanced
    arresting gear will be hard pressed to meet their schedule for delivery to
    the shipyard. Problems with the dual band radar could have an immediate
    impact on the next generation destroyer (DDG 1000) program, but delays in
    producing radars for the first two DDG 1000 ships could cascade down to
    CVN 78--affecting delivery to the shipyard.

      EMALS

    EMALS is critical to meeting sortie generation rates and reducing manpower
    on the ship. The contractor has demonstrated the feasibility of using
    magnetic fields to launch aircraft on a land-based test bed designed to
    simulate a flight deck--but at half the length. Land-based tests are
    scheduled to begin in February 2008 will demonstrate a ship-ready system.
    Table 6 outlines EMALS' schedule.

    Table 6: Schedule of Key Events Relating to EMALS

    2003          2004         2006        2007         2008          2009       2011
    Developmental Preliminary  Follow-up   Construction High-cycle    Production EMALS
    testing of    design       testing and of a         and           start.     required in
    competing     competition  evaluation. land-based   land-based               yard for
    systems on a  completed,               test         developmental            carrier
    half-length   contractor               facility     testing on a             construction.
    test bed.     begins                   completed.   full-length
                  system                                test bed.
                  development.             Critical
                                           design
                                           review held.

    Source: Navy data.

    The EMALS program finished its system integration phase over 15 months
    behind schedule and substantially above budget. Delays resulted from
    technical challenges, as well as difficulties meeting detailed Navy
    requirements.

    Although progress has been made on many of EMALS' components, the system
    has faced technical challenges, largely because of failures with the
    prototype generator that stores the high power needed to propel the
    launchers. The prototype generator malfunctioned during integrated and
    follow-on testing. The contractor believes that the problem has been
    resolved through redesign of the prototype generator. The first tests of
    the redesigned generators are scheduled for 2008 at the contractor's
    facility, followed by full-scale testing of the EMALS prototype.

    The contractor also faced challenges meeting the requirements involved
    with Navy ships. Ships, especially carriers, have complex requirements,
    largely because they operate at sea and must meet unique survivability
    requirements. The contractor has never produced a shipboard
    system--particularly one as highly integrated into the ship as EMALS--and
    underestimated the effort needed to meet Navy requirements. Additionally,
    the contractor received requirements after much of the system had already
    been designed. Specific challenges are summarized in table 7. According to
    the contractor, the company has taken action to address these problems,
    including hiring experts familiar with the Navy's processes.

    Table 7: Challenges Faced by the EMALS Program in Meeting Program
    Requirements

    Weight requirement     The contractor initially designed and tested  EMALS
                              in a  configuration  that  minimized  the  system's
                              weight.  After   the   Navy  defined   the   ship's
                              survivability   requirements,   the   system    was
                              reconfigured,  separating   EMALS  components   and
                              increasing  the  use   of  cabling.  EMALS   weight
                              increased  above   its  margin,   resulting  in   a
                              reallocation of weight  elsewhere on  the ship  and
                              the redesign of  a subsystem. EMALS  is now  within
                              its revised weight allocation.
    Electromagnetic        Due to the effects of electromagnets, EMALS may
    environmental effects  interfere with the operations of shipboard systems
    requirementa           or ordnance--and potentially harm the ship or
                              personnel. After EMALS' design was stable, a number
                              of electromagnetic effect issues emerged. The
                              program has now taken steps to examine potential
                              interference by hiring an expert and creating an
                              integrated product team to analyze electromagnetic
                              effects. However, tests to understand potential
                              electromagnetic effects have not yet started and
                              the effort required to mitigate these effects
                              remains unclear.
    Shipboard requirements Shipboard requirements evolved during EMALS' design
                              process as the design of the ship became better
                              known. The contractor designed one subsystem
                              component, the power conversion system, to generic
                              shock and vibration requirements while waiting for
                              the Navy's final determination of requirements. The
                              subsystem may need to be reconfigured in order to
                              meet final shock and vibration requirements, but
                              the redesign will not occur until production.
                              According to the contractor, limited coordination
                              with the shipyard contributed to delays in meeting
                              requirements. Initially, requirements were
                              communicated via the Navy, creating a lag in
                              delivery time. The contractor now believes that
                              coordination issues have been resolved through
                              direct communication between the shipyard and the
                              EMALS program.
    Systems engineeringb   The contractor underestimated the extent that
                              systems engineering is needed to integrate EMALS
                              into other shipboard systems The contractor had not
                              previously worked on shipboard systems and lacked
                              the necessary staff to address the Navy's systems
                              engineering requirements. The contractor has now
                              hired additional systems engineers to manage the
                              requirements process.

    Source: GAO analysis of EMALS contractor and Navy data.

    aElectromagnetic environmental effects refer to the impact of the
    electromagnetic environment on the operational capability of military
    forces, equipment, systems, and platforms. System electromagnetic effects
    can interfere with other systems, specifically causing undesirable
    responses, malfunctions, degradation of performance, or premature and
    undesired location, detection, or discovery by enemy forces.

    bSystems engineering is a technical management tool that provides the
    knowledge necessary to translate requirements into specific, achievable
    capabilities. Tasks include defining what the customer wants, turning the
    requirements into specific functions, and identifying technical and design
    solutions to achieve system functionality.

    Challenges to date have led to schedule delays and cost growth. Without
    the 1-year delay in the ship's schedule, it would have been unlikely that
    EMALS would have met the ship's installation date. Even with an additional
    year of development, it may be difficult to deliver EMALS components. To
    meet ship installation dates for EMALS' components, the contractor
    eliminated all schedule margin, normally reserved for addressing
    unexpected issues. As a result, the schedule cannot accommodate
    unanticipated testing or production problems. While the contractor
    believes that problems during system integration have been resolved and
    EMALS' delivery schedule can be met, challenges remain:

               o Demonstrating shipboard-ready system. Demanding tests lay ahead.
               An integrated full-scale prototype will undergo over 4 months of
               testing. These tests will be the first demonstrations of the
               redesigned prototype generator and the first time the system will
               be tested with actual aircraft. With no margin for delays, any
               problems encountered during testing will likely prevent an on-time
               delivery to the shipyard.
               o Demonstrating program requirements. In order to stay on
               schedule, the program shifted a number of key test events,
               including maintainability testing, to the production phase. This
               introduces additional risk to EMALS production if problems are
               discovered during testing. Additionally, tests of electromagnetic
               interference and shock and vibration could lead to redesign of
               some components--which may result in additional delays.
               o Producing a shipboard-ready system. EMALS' contractor has
               traditionally been involved in projects aimed at research and
               development--not producible systems. Converting EMALS design into
               producible, affordable components, with established test and
               quality controls, may prove challenging. The contractor recently
               opened a new production facility in Mississippi to control
               production costs. The contractor acknowledges the risk associated
               with manufacturing EMALS components at a new facility
               inexperienced with production, but believes it has taken steps to
               mitigate the risks through training and manufacturing automation.

      Dual Band Radar

    The dual band radar, composed of two systems (the multifunction and volume
    search radars), is being developed and tested as part of the DDG 1000
    program. The Navy initially intended to install the dual band radar on CVN
    77--the last carrier of the Nimitz class. When it was clear that the radar
    would not mature in time for ship delivery, the Navy chose to use legacy
    radars on CVN 77 and delay initial installation until CVN 78. Use of
    legacy radars, however, necessitated the redesign of CVN 77's island
    structure. Key events in the development of the dual band radar can be
    seen in table 8.

    Table 8: Schedule of Key Events Relating to Dual Band Radar

    2006          2007        2008       2009       2010      2011      2012
    Multifunction Preliminary Volume     Dual band  First     Second    Third dual
    radar         volume      search     radar      dual band dual band band radar
    completes     search      radar      completes  radar     radar     required in
    at-sea        radar       completes  integrated delivered delivered yard for
    testing.      "string"    land-based testing.   to DDG    to DDG    carrier
                  testing     testing.              1000.     1000.     construction.
                  complete.              Dual band
                              Dual band  radar
                  Volume      radar      integrated
                  search      begins     with power
                  radar       integrated system.
                  begins      testing.
                  land-based
                  testing.

    Source: Navy data.

    Development and testing of the multifunction radar have progressed further
    than the volume search radar. Land-based and at-sea testing of the
    multifunction radar prototype demonstrated the radar's key
    functions--clutter rejection and firm tracking range.

    The volume search radar has encountered difficulties developing key
    components of the transmit-receive units, the individual radiating
    elements that are the essence of the radar. Specifically, critical circuit
    technology experienced failures during testing and could not reliably
    operate at the radar's voltage needed to meet requirements. The contractor
    believes it has identified a solution, and is currently pursuing two
    design iterations that it believes will improve the reliability of the
    circuit while also achieving greater affordability. However, the
    redesigned circuit technology has not been included in testing of the
    volume search radar. In an effort to maintain schedule, the contractor is
    only testing the radar at a reduced voltage. Upcoming land-based testing
    of the volume search radar prototype and integrated testing of the dual
    band radar will not demonstrate the higher-voltage output necessary to
    meet ship requirements. The contractor does not anticipate testing the
    complete radar system, with the redesigned circuit technology, until
    production unit testing in 2010--shortly before the dual band radar is
    required for DDG 1000 installation. Moreover, the volume search radar will
    not be fully demonstrated until operational testing on DDG 1000 in 2013.
    Problems discovered during testing may not only affect DDG 1000, but may
    affect installation on CVN 78 scheduled to begin in 2012.

    Dual band radar testing must occur as planned in order to meet the radar
    production schedule. Testing of the volume search radar at a land-based
    test facility is now currently planned to begin in September 2007,
    followed by integration with the multifunction radar and testing as the
    dual band radar now scheduled to begin in December 2008. Further, the
    construction of the land-based test facility is over 8 months behind
    schedule. In order to maintain the current test schedule, the Navy moved
    testing of the volume search radar to a different site. The dual band
    radar is scheduled to complete integrated testing at the land-based test
    site in 2009--after production of the radars is scheduled to begin in
    2008. This concurrency introduces additional risk if problems are
    discovered during testing. Upcoming land-based testing will not include
    tests designed to demonstrate all carrier-specific capabilities. The dual
    band radar was initially designed to meet both destroyer and aircraft
    carrier requirements, including air traffic control. Although the
    contractor is obligated to meet air traffic control requirements, the
    prototype for the volume search radar--the key component in air traffic
    control--is not designed to demonstrate air traffic control in short
    ranges. The Navy decided to waive minimum requirements for the volume
    search radar prototype as long as the CVN 78 production unit radar
    satisfied these requirements. Testing to verify all aspects of the air
    traffic control capability, however, has not yet been planned, but the
    Navy anticipates that the radar will demonstrate this capability by the
    end of fiscal year 2012. This leaves little to no time to incorporate any
    necessary upgrades into CVN 78's air traffic control capabilities prior to
    the radar's delivery date to the shipyard.

    Additionally, electromagnetic effects with the dual band radar and other
    major electronic systems involved in aircraft operations are not yet fully
    understood. In particular, if the multifunction radar is not restricted
    during flight landings, it could interfere with an aircraft-landing radar
    during aircraft approach and could result in a major accident on the
    flight deck. The Navy has identified this as the highest risk of
    electromagnetic interference. Any interference between the multifunction
    radar and aircraft landing systems will be engineered to remove the threat
    of flight deck accidents. The Navy plans to conduct studies to further
    evaluate electromagnetic effects, but has not yet determined how it will
    address these concerns. It may be necessary to relocate antennas or make
    other changes to the ship's topside to isolate interference of the radars.

    Further development of CVN 78's integrated warfare system is needed to
    ensure its operation with the dual band radar. The warfare system is
    composed of the ship's command and control, mission planning, air traffic
    control, and self-defense systems. The dual band radar is a critical
    element of CVN 78's warfare system because it provides the ship's
    surveillance and air traffic control capability. Available carrier
    electronic warfare and command and control systems, however, cannot
    function on CVN 78 because they were not designed to interface with the
    dual band radar. The Navy plans to modify the current carrier command and
    control system by integrating modules from the DDG 1000 total ship
    computing system, which was designed to function with the dual band radar.
    While the Navy has developed a plan for upgrading the command and control
    system, a solution for the electronic warfare system has not yet been
    identified. The electronic warfare system used on existing carriers cannot
    operate effectively with the dual band radar. The electronic warfare
    system being developed for the DDG 1000 can operate with the dual band
    radar, but is designed only to meet the destroyer's surveillance
    requirements--not CVN 78's electronic attack requirements. The Navy is
    currently drafting a plan to develop an electronic warfare system for CVN
    78.

      Advanced Arresting Gear

    The Navy plans to install the advanced arresting gear on not only
    Ford-class carriers, but anticipates retrofitting the system on current
    carriers. The advanced arresting gear successfully completed early
    verification tests that proved the system's concept, and tested a number
    of components. Integrated testing of simulated aircraft loads is scheduled
    to begin in 2008, and is expected to demonstrate aircraft arresting
    capability on a land-based test site. See table 9 for key events in the
    development of the advanced arresting gear.

    Table 9: Schedule of Key Events Relating to Advanced Arresting Gear

    2003          2007         2008       2010      2011          2012
    Arresting     Complete     Complete   Complete  Arresting     Arresting
    gear contract design of    system     testing   gear required gear
    awarded to    hardware and testing of of live   in the yard   scheduled
    begin         software     simulated  aircraft  to begin CVN  for backfit
    technology    components.  aircraft   landings. 78            into a
    development.               loads.               installation. Nimitz-class
                                                                     carrier for
                                                                     operational
                                                                     testing.

    Source: Navy data.

    Similar to the EMALS program, the contractor faced difficulties meeting
    the Navy's requirements for the system, a fact that contributed to program
    schedule delays.^4 The Navy and the contractor disagreed on the necessary
    format of design drawings to meet the Navy's requirements. The contractor
    underestimated the number of drawings required at critical design review.
    The schedule slipped due to late delivery of drawings, and critical design
    review was delayed by over 5 months. Additionally, changes in the Navy's
    requirements in shock and vibration led to redesign of a major subsystem.

    ^4The same contractor is responsible for developing EMALS and the advanced
    arresting gear.

    While components have been tested, future tests are critical for
    demonstrating system performance, including software functionality. Unlike
    the legacy landing system, the advanced arresting gear uses a software
    control system to regulate the arresting process and prepare the system
    for incoming aircraft. The contractor recently completed software system
    design, but the software system has not yet been tested. Upcoming
    land-based testing is expected to demonstrate the ability of the software
    control system using simulated aircraft loads as well as live aircraft.

    Even if testing is successful, the advanced arresting gear may not meet
    its delivery date to the shipyard. Schedule delays have slipped the
    program's production decision and delivery for CVN 78 by 6 months. Timely
    delivery of the arresting gear is necessary to save shipyard labor hours.
    Unlike with previous carriers, the shipbuilder plans to install the
    arresting gear prior to laying the flight deck. If the arresting gear is
    delivered after installation of the flight deck, the shipbuilder will
    expend additional labor hours lowering the system into place through a
    hole cut in the deck and welding the deck back together. The Navy believes
    that the delivery schedule can be met if the system is delivered to the
    shipyard in pieces and test events are consolidated. Specifically, the
    Navy will increase the rate of test cycles during testing to eliminate
    schedule margin. Compressing test events, however, introduces additional
    risk because there will be limited time to address any failures that may
    occur during testing prior to the start of production.

    Other Technologies May Disrupt the Ship's Construction Sequence or May Not Be
    Fully Capable at Ship Delivery

    Additional testing is necessary to ensure that other technologies needed
    early in construction will operate as intended. Technologies responsible
    for achieving future carrier capabilities such as heavy underway
    replenishment and JPALS may not be fully available at ship delivery,
    requiring the installation of additional legacy technologies or increasing
    expected ship manpower.

    Some technologies with early installation dates still require testing to
    demonstrate a shipboard-ready system. Table 10 highlights two technologies
    developed by the shipbuilder--the advanced weapons elevator and
    air-conditioning plant--that have not yet demonstrated a full prototype
    but are required in the yard early in ship construction.

    Table 10: Other Technologies That Affect the Construction Sequence

    Advanced weapons elevator  Elevators that use moving magnetic fields and
                                  no cabling is a new technology--never
                                  previously used in any application. In 2005,
                                  the shipbuilder demonstrated the elevator's
                                  functionality through testing of a model
                                  representing a quarter of the elevator. A
                                  shipboard representative prototype is currently
                                  in production, and full-scale testing is
                                  scheduled for later this year. The elevators
                                  will not be tested at sea until CVN 78
                                  qualification testing, shortly before ship
                                  delivery.
    1,100-ton air-conditioning Since the components are readily available and
    plant                      used on ships and shore-based applications, the
                                  Navy considers this technology a low risk. The
                                  shipbuilder will not demonstrate a full
                                  prototype until fiscal year 2008--after
                                  fabrication of shipboard units is already under
                                  way. An air-conditioning plant of this size has
                                  never been used on a ship before. If any
                                  unexpected problems arise during testing,
                                  little time remains for resolution prior to
                                  ship installation.

    Source: GAO analysis of Navy and shipbuilder data.

    Other technologies do not affect construction, but could affect CVN 78's
    planned capability at ship delivery. For example, if the shipboard weapons
    loader is not ready at ship delivery, additional manpower will be needed
    to install aircraft weapons, and the ship's sortie generation rates will
    be affected. Although weapons loaders are not required until 2015, the
    system is still in early development and requirements continue to be
    modified. In addition, the ability to achieve enhanced ship capability
    provided by the heavy underway replenishment system and JPALS depends upon
    the reciprocal installation on other platforms (see table 11). Without
    these enhancements, the carrier will only perform at legacy capability.

    Table 11: Other Technologies That Affect CVN 78's Planned Capability

    Heavy underway The system is a modification of current replenishment
    replenishment  technology. The design is complete, and land-based testing
                      of a full-scale shipboard system is scheduled to conclude
                      this year. However, the system's improved capability will
                      not be achieved unless it is also outfitted on logistics
                      ships that replenish the carrier. Heavy underway
                      replenishment is not installed on logistic ships currently
                      in the fleet, and it is unclear when logistic ships with
                      this capability will be delivered.
    JPALS          The program is still in early development, and it is
                      unclear when JPALS will be inserted into the carrier air
                      wing. Until installation, the carrier will use legacy
                      systems to land aircraft. This will require additional
                      design to accommodate the installation of legacy radars on
                      the carrier's smaller island structure. JPALS is the
                      primary landing system for the Joint Strike Fighter. While
                      a backup landing system will be installed on the Joint
                      Strike Fighter, it will be less capable to land aboard the
                      carrier during inclement weather compared to other
                      aircraft.

    Source: GAO analysis of Navy and shipbuilder data.

    The Navy Has Made Significant Design Progress, but Sustained Progress Depends on
    Technology Development

    The Navy has completed the basic design of the ship and the shipbuilder is
    currently developing the detailed design. Given the amount of design work
    to be performed, it appears that CVN 78's design will be more complete
    than that of the previous carrier at construction contract award. Progress
    in designing the ship is due in part to a structured design approach and
    an extended construction preparation period that enables the shipbuilder
    to perform more work prior to construction than on previous carriers. With
    about 67 percent of the ship's design complete, the shipbuilder appears on
    track to support the construction schedule. However, the program may face
    challenges in maintaining its design schedule because of delays in the
    development of the ship's critical technologies. Such delays in technology
    development could impede completion of design and interfere with
    construction of CVN 78.

    Significant Design Development Is Being Performed Prior to Construction Contract
    Award

    The Navy has already completed the basic design of the ship. In 2004, the
    Navy completed the Operational Requirements Document, a necessary step in
    the acquisition process. This document outlines the requirements that the
    ship must possess to perform its mission. The Navy also certified the
    ship's specifications, a key event in the design process that defines the
    technical requirements that the ship must fulfill. After certification,
    the ship is under configuration control and any changes must be approved
    by Navy management. The basic design of the ship was approved through
    general arrangement and block/system diagram drawings, which describe the
    use of space and location of systems within the ship, including the
    location of compartments, ductwork and cabling, and the height of decks.
    The shipbuilder is currently designing more detailed phases of the ship
    and generating the drawings needed for construction.

    A structured design approach enables the shipbuilder to more efficiently
    and effectively design CVN 78. For the first time, the shipbuilder is
    using a computer-aided design product model to generate the design of an
    entire carrier.^5 The product model generates a detailed design, allowing
    engineers to visualize spaces. The design is also fed into a simulated
    three-dimensional environment that allows engineers to test the design by
    conducting a virtual "walk-through." This validates elements of design
    prior to construction, thereby avoiding potentially costly rework.

    ^5This approach has been used to design previous ships and select sections
    of CVN 77.

    Each of the ship's design zones go through the three phases of the product
    model: concept, arrangement, and detail (see fig. 3). The phases build on
    each other, progressively adding more detail to the design. The final
    phase enables the shipbuilder to order all necessary material.

               o Concept phase defines the primary structures of the design zone,
               including structures, gratings, ladders, and passageways.
               o Arrangement phase adds the form, fit, and function of
               components, including piping and cables. Data are gathered during
               this phase to generate material estimates and the schedule for
               ordering long-lead materials.
               o Detail phase provides all design zone attributes, including part
               numbers, vents, drains, and other detailed information.

    After completion of the detail phase, construction drawings are developed.
    Once construction drawings are released, work on building the ship can
    begin.

    Figure 3: Product Model Design Process

    The product model gives greater visibility into the progress of design,
    allowing tracking of design zones through each stage of design. The Navy
    has approval points in each phase of design, including critical design
    reviews at the end of the arrangement phase and a review of significant
    design changes made in the detail phase. In addition, the shipbuilder
    tracks the progress of design zones measured against an established design
    schedule. The shipbuilder can use the product model to assess the impact
    that a delay in one phase of design will have on other design zones or on
    the construction schedule.

    Using this approach, the shipbuilder has completed approximately 67
    percent of the ship's design, including almost all of the propulsion plant
    (see fig. 4 and table 12). Despite weight increases in some key
    technologies, design is within threshold requirements for weight,
    stability, and sortie generation rates. According to the shipbuilder, the
    product model creates design efficiencies, but without the 1-year slip in
    schedule, it would have been more difficult for the design to keep pace
    with the construction schedule.

    Figure 4: Ship Design Status as of April 2007

    Table 12: Design Progress by Location on Ship

    Data as of April 2007
                                  Percent complete in design product model design
                                                       phase
    Location                        Concept     Arrangement             Detail
    Whole ship                          84%             70%                55%
    Below third deck                    100              99                 98
    Third deck to main deck             100              99                 62
    Main deck and above                  59              19                  1
    Miscellaneous trunk and              83              67                 11
    elevators

    Source: Northrop Grumman Newport News.

    Progress in developing the ship's design is also due to a lengthier
    preparation period than was the case on previous carriers. Under the
    contract for construction preparation, the shipbuilder is not only
    designing the ship but procuring long-lead materials and fabricating parts
    of the ship. The Navy has had more time to prepare for CVN 78 construction
    than previous carriers. The shipbuilder will have 44 months to prepare,
    compared to just 28 months for CVN 77, an increase of 16 months, or 57
    percent.^6

    The extended length of the preparation period and the improved design
    process are allowing the shipbuilder to perform more work on CVN 78 prior
    to the award of the construction contract than has been performed on
    previous carriers. The shipbuilder estimates that 75 percent of ship
    design will be completed prior to construction contract award in January
    2008. In comparison, design of CVN 77 was largely incomplete at
    construction award, even though much of the design was rolled over from
    the previous ship. With more design complete, the shipbuilder is better
    able to estimate its material needs. By contract award, the shipbuilder
    expects to have contracted for or quotes received on approximately 70
    percent of total material costs, compared to about 55 percent for CVN 77.
    Design progress also facilitates construction work. The shipbuilder is
    fabricating more of the ship prior to construction award than on previous
    carriers. Approximately 13 percent of construction units for CVN 78 are
    expected to be complete prior to contract award, compared to just 3
    percent of units for CVN 77.

    ^6This is partially a result of the 1-year delay in CVN 78's construction
    schedule.

    Delays in Developing Critical Technologies Could Impede Design Progress

    Despite design progress to date, the shipbuilder may not be able to
    complete design on schedule if it does not receive technical information
    required to complete design or if ship technologies are not delivered as
    planned.

    The Navy is required to deliver technical information to the shipbuilder,
    including power needs, weight requirements, and critical interfaces of
    various technology-dependent systems. Without this information, the
    shipbuilder cannot complete the design of the ship. Up until now the
    shipbuilder has established the general parameters of the technologies and
    has not needed the technical information. The shipbuilder is now beginning
    more detailed phases of design that require finalized technical
    information in order to complete design. The Navy is already experiencing
    delays in transmitting information to the shipbuilder, including delays in
    delivering data on 110 items for the advanced arresting gear, 11 for the
    dual band radar, and 76 for EMALS. According to the shipbuilder, these
    delays have not significantly affected the schedule. However, the
    availability of some of the technical information is dependent upon the
    Navy completing design and testing of key technologies. Because the
    development schedule for some technologies has slipped, the date that the
    Navy can deliver technical information to the shipbuilder may also slip.
    Further delays in completing testing and stabilizing design for critical
    systems such as EMALS and the dual band radar could in turn delay when the
    Navy can deliver technical information about these systems to the
    shipyard, thus affecting the design schedule. Moreover, the Navy has not
    yet defined the electronic warfare system. As a result, the system's
    interfaces with the ship--like power, cooling water, and
    air-conditioning--are not yet known, affecting the shipbuilder's ability
    to complete detailed design phases.

    Some of CVN 78's technologies have not completed testing. Problems
    discovered during testing may lead to redesign, which could result in
    changes to other sections of the ship. For example, weight increases for
    EMALS and the advanced arresting gear affected the ship's weight and
    stability margin, leading the shipbuilder to compensate for weight
    elsewhere on the ship. While the ship is currently within threshold,
    redesign of ship systems could affect other sections of the ship that have
    already completed design. Moreover, the physical characteristics of the
    electronic warfare system are not yet known because the system remains
    undefined. According to the Navy's commander for operational test and
    evaluation, the weight and stability effects on the ship will remain
    uncertain until the system is determined.

    Costs for CVN 78 Will Likely Exceed Budget

    Costs for CVN 78 are likely to exceed the Navy's budget because the cost
    estimate that underpins the budget is optimistic, and more specifically,
    the target cost for construction of the ship may not be achievable. The
    budget includes a target cost for ship construction, as well as costs for
    government-furnished equipment and other expenses. While the Navy and the
    shipbuilder are working to reduce costs through the use of incentive fees,
    capital improvements, and other initiatives, costs will likely exceed the
    budget if

               o key technology-dependent systems are delivered late;
               o labor efficiencies are not realized;
               o materials are delayed, resulting in labor-intensive
               work-arounds; or
               o material costs exceed estimates.

    The Navy does not have an effective cost surveillance program in place to
    recognize and mitigate risks that could increase costs. Currently, the
    Navy is not able to measure shipbuilder performance because contractor
    performance reports are not informative. Because the Navy is not gaining
    insight into current performance, it is not benefiting from knowledge that
    could give insight into future costs under the construction contract.

    The Navy's Cost Estimate May Be Optimistic

    The Navy's cost estimate used to develop the budget for CVN 78 is
    optimistic, in part because it underestimates the cost of
    government-furnished equipment. Government-furnished equipment covers the
    costs for technologies and equipment items--such as ship weapon systems,
    electronics, and propulsion--purchased by the Navy and provided to the
    shipbuilder for installation on the carrier.^7 Government-furnished
    equipment costs may increase because a number of critical technologies are
    still in development and their production costs are not as fully
    understood as those of systems that are currently fielded. For example,
    EMALS has experienced schedule slips during development, which could
    affect production costs. Navy cost analysts told us that they expect to
    increase EMALS costs in their updated cost estimate for CVN 78.
    Government-furnished equipment costs will also increase because costs
    associated with an additional aircraft landing radar are not included in
    the current budget estimate. The radar, however, is necessary to land
    aircraft that are not equipped with the JPALS interface. The Navy intends
    to request additional funding for the radar in future budget years.

    ^7The costs are only to procure the equipment; development costs for the
    majority of the systems--with the exception of EMALS and the propulsion
    system--are captured under separately funded acquisition programs. While
    the costs for the equipment are the responsibility of the Navy,
    installation and integration costs are the responsibility of the
    shipbuilder.

    The Navy estimates that fewer labor hours will be needed to construct CVN
    78 than for the previous two carriers--CVN 76 and CVN 77. The Navy
    developed its initial labor hour estimate by adjusting the average labor
    hours needed to construct previous carriers. This average, however,
    includes ships that were bought as part of two-ship procurements, which
    tend to be more cost-efficient due to economies of scale (see table 13).
    By contrast, independent cost analysts within DOD based their estimate on
    the construction experience of CVN 76, the last carrier delivered. CVN 76,
    like CVN 78, included unique changes to the design of the ship and
    required more labor hours to construct than previous carriers. Lead ships,
    like CVN 78, typically require more labor hours to construct than
    follow-on ships in the class. The Navy adjusted its estimate by 10
    percent--the increase experienced for the lead ship of the Nimitz class.
    DOD cost analysts, however, estimated a higher percentage recognizing CVN
    78's greater technological leap than the lead Nimitz-class carrier.^8 The
    Navy believes that costs associated with the lead ship will be offset by
    design changes that make the ship easier to construct. Officials stated
    that efficiencies from investments in facilities, use of the product
    model, and design improvements should generate savings of some 2 million
    labor hours. However, our past work has found that labor hour savings
    based on efficiencies often did not materialize as expected.^9 Savings
    expected through the use of a computer-assisted design process on CVN 77
    were not achieved. DOD's independent cost analysts did not estimate
    efficiency savings for CVN 78 because their effects have not yet been
    demonstrated.

    ^8 The final estimate approved by DOD leadership at Milestone B increased
    the labor hour estimate based on differences between DOD's independent
    cost estimate and the Navy's cost estimate. Even with this adjustment,
    estimated labor hours are still below the previous two carriers of the
    Nimitz class.

    ^9See GAO, Defense Acquisitions: Improved Management Practices Could Help
    Minimize Cost Growth In Navy Shipbuilding Programs, [32]GAO-05-183
    (Washington, D.C.: Feb. 28, 2005).

    Table 13: Construction Labor Hour Change

    Labor hours in millions
                                Labor hour
    Hull   Total hours           change Type of ship buy   Contract award date
    CVN 70        36.5                0           Single            April 1974
    CVN 71        44.4              7.9           Single        September 1980
    CVN 72        42.5             -1.9              Two         December 1982
    CVN 73        38.4             -4.1              Two         December 1982
    CVN 74        36.9             -1.5              Two             July 1988
    CVN 75        36.5             -0.4              Two             July 1988
    CVN 76        45.0              8.5           Single         December 1994
    CVN 77        43.1             -1.9           Single          January 2001
    CVN 78   Est. 42.7             -0.4           Single     Estimated January
                                                                             2008

    Source: GAO analysis of Navy data.

    Note: Figures for CVN 78 do not include 25.9 million in nonrecurring labor
    hours and CVN 77 labor hours are based on Navy estimates at completion.

    By optimistically estimating the costs to construct CVN 78, the Navy risks
    cost increases after construction has been funded and is well under way.
    Recent first-in-class ships have experienced particularly high cost
    growth--on average 27 percent^10--partly because the total effort needed
    to build new designs and incorporate new technologies is not yet
    understood. One way to reduce the probability 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 estimates and determine whether program costs are realistically
    achievable. In an effort to better ensure realism in DOD budgets, a panel
    on acquisition reform established by the Deputy Secretary of Defense
    recommended that programs be budgeted to an 80 percent confidence level,
    meaning that a program has an 80 percent chance of achieving its estimated
    costs.^11 Navy cost analysts told us that they performed quantitative risk
    analyses and calculated a confidence level to test the validity of their
    cost estimate. However, the analyses for CVN 78 were well below an 80
    percent confidence level. While there is room to debate what is the right
    level to use as a standard, the difference between an 80 percent
    confidence level and the one established for CVN 78 adds to the likelihood
    that costs will grow above budget.

    ^10We examined the average growth in construction budgets for all
    first-in-class ships built between 1996 and 2006.

    ^11Defense Acquisition Performance Assessment Panel, Defense Acquisition
    Performance Assessment Report (Washington, D.C.: January 2006).

    Target Cost for Ship Construction May Not Be Achievable

    The Navy established a target cost for construction based on the fiscal
    year 2008 budget request.^12 The Navy and shipbuilder are working to
    implement strategies that will reduce construction costs and minimize the
    risk of cost growth. However, despite the progress made to date, the
    shipbuilder may not be able to build the ship within its target cost.

    In recent years, the Navy has had difficulty delivering ships within its
    initial target. Establishing a realistic cost target is especially
    difficult for first-in-class ships because uncertainty about costs is
    high. The Navy is taking action to encourage the shipbuilder to meet its
    target cost by initiating cost reduction efforts prior to negotiating the
    construction contract. For example, the Navy is taking the following
    steps:

               o designing the ship to threshold capability requirements, rather
               than to objective requirements that are more costly to achieve;
               o establishing incentive fees for capital improvements that will
               improve the efficiency of the shipyard; and
               o awarding incentive fees in the current contract if the
               shipbuilder can progressively demonstrate reductions in its cost
               estimate for ship construction.

    Initially, the shipbuilder's estimate was 22 percent higher than the
    Navy's cost target. The shipbuilder is identifying capabilities that can
    be removed from the ship while still meeting threshold requirements, such
    as eliminating one of the waste disposal systems from the ship. A dynamic
    armor protection system that was recently removed from CVN 78's design was
    a technology that the shipbuilder had suggested removing in order to save
    costs. The shipbuilder has also invested in a number of efforts that it
    believes will increase efficiency at the shipyard and lead to lower costs,
    including the following:

               o upgrading the lift capacity of its crane,
               o building a covered modular assembly facility that will allow
               larger sections of the ship to be assembled indoors, and
               o cutting holes in steel plates early--during fabrication--which
               is expected to reduce labor hours associated with welding and
               pulling cable once construction of the ship begins in the dock.

    ^12The target cost for construction is based on the fiscal year 2008
    budget request for basic construction and escalation, minus the cost of
    fees and facilities.

    While such initiatives have helped close the gap between the shipbuilder's
    estimate and the Navy's cost target by over 90 percent, the shipbuilder
    does not believe that the target is achievable without further capability
    trade-offs. The Navy believes it can further mitigate the risk of cost
    growth to the government by inserting a share line into the construction
    contract. However, even if the shipbuilder succeeds in reducing its cost
    estimate, experience indicates that the program is still at risk of
    exceeding the budget for construction. The shipbuilder's initial cost
    estimates for both CVN 76 and CVN 77 were higher than the Navy's target
    costs. During negotiations, the shipbuilder lowered its estimate to meet
    the cost target, and a share line was included in the contract to
    incentivize the shipbuilder to contain costs. Yet in both cases, costs
    grew not only above the negotiated contract price, but above the original
    estimate of the shipbuilder as well.

    Higher costs for labor and material could also increase the likelihood
    that actual construction costs will exceed the target cost. Costs for the
    previous two carriers, CVN 76 and CVN 77, grew because more labor hours
    and material were needed to construct the ship than originally estimated.
    Additional labor hours will be needed for CVN 78 if labor hour savings do
    not materialize as expected. The shipbuilder estimates hundreds of
    thousands of labor hour savings based on new but untested initiatives. For
    example, the shipbuilder believes that the product model will generate
    efficiencies in pipe production that will result in savings of 400,000
    shipboard labor hours. The shipbuilder also anticipates labor hour savings
    as a result of facilities enhancements and design improvements. However,
    the shipbuilder recognizes that it is difficult to accurately estimate the
    total labor hours that will be saved as a result of the new initiatives.
    Further, our past work on cost growth in shipbuilding programs has shown
    that labor hour savings based on untested efficiencies are often initially
    overestimated.^13

    13We found that savings that were anticipated through the use of
    computer-assisted design and manufacturing for the LPD 17 amphibious
    transport ship were not achieved. Similar efficiencies estimated for the
    DDG 92 destroyer were also not initially achieved. See [33]GAO-05-183 ,
    20.

    Delays in receiving material may also result in additional labor hours.
    Late material delivery led to labor hour increases on both the CVN 76 and
    CVN 77. In both instances, when material did not arrive on time, the
    shipbuilder had to work around the missing items in order to maintain
    schedule--resulting in a less efficient construction sequence. The CVN 78
    program is already beginning to experience slips in the delivery of
    material. According to the shipbuilder, while none of the delays to date
    are expected to disrupt the construction schedule, any further changes to
    the delivery of a number of EMALS and propulsion components will result in
    increased labor hours and costly work-arounds.

    The CVN 78 program could reduce costs by improving labor practices at the
    shipyard. The Defense Contract Audit Agency (DCAA) measures the
    effectiveness of the shipbuilder's labor practices by analyzing the rate
    at which workers perform work versus non-work-related activity. More time
    spent on work-related activities will generate cost savings. DCAA has
    found that people assigned to new carrier construction work at a lower
    rate than suggested by DCAA and below the average of other shipyards
    constructing Navy ships. Improving the amount of time spent on
    work-related activity could decrease the number of hours required to build
    CVN 78 and result in savings of tens of millions of dollars.

    Actual material costs for CVN 78 may exceed estimates and grow above
    target. Material costs have been significant drivers of cost growth on
    past carriers. For CVN 76 and CVN 77, cost growth was due partly to the
    shipbuilder basing its estimate on an incomplete bill of materials needed
    to construct the ship and a 15 percent increase in material prices.
    According to the shipbuilder, material requirements for previous carriers
    were developed by using the bill of materials from prior ships before the
    extent of design changes was well understood. The shipbuilder expects a
    more accurate material estimate for CVN 78, in part because a significant
    percentage of design will be completed prior to construction award.
    Further, the costs for materials are better understood because the
    shipbuilder is contracting for more material and receiving more actual
    quotes from suppliers prior to contract award than on previous carriers
    (see fig. 5). Quotes from vendors can help provide a greater degree of
    realism in material cost estimates.

    Figure 5: Knowledge of Carrier Material Costs Prior to Construction
    Contract Award

    Despite the shipbuilder's efforts to improve material cost estimates, the
    program is still at risk of cost growth. Over 70 percent of estimated
    material costs will not be under contract when the Navy awards the
    construction contract, leaving material costs vulnerable to market
    fluctuations.

    On the other hand, the shipbuilder's system for managing and accounting
    for materials may inflate material costs.^14 DCAA has found inadequacies
    in the shipbuilder's system and identified eight deficiencies that could
    lead to increases in material costs. For example, DCAA has reported that
    the shipbuilder purchases material prematurely--before it is needed in
    construction--costing the government millions of dollars in annual
    inventory carrying costs. DCAA has also found that inappropriate transfers
    of material between different programs could increase material cost to the
    government. As a result of its findings, DCAA recommended withholding 10
    percent of the shipbuilder's billed material costs. If the shipbuilder
    improves its material management system, costs to the government may be
    reduced.

    Instability of the workload at the shipyard may also lead to increased
    overhead costs and labor rates. Our past work, however, has shown that
    increases in overhead and labor rates are not major drivers of cost
    growth.^15 Nevertheless, increases in overhead and labor rates often
    result from changes in the workload at shipyards. For example, the CVN 77
    program had to absorb a greater percentage of the shipyard's overhead
    costs because of delays in the CVN 78 program and changes in the carrier
    overhaul schedule. Labor rates increased on CVN 76 when workers were
    diverted to carrier overhauls. In order to maintain schedule, the shipyard
    made significant use of overtime, which is more expensive than normal
    hourly wages. The overhead and labor rates for CVN 78 could similarly be
    affected if changes are made to the schedule for overhauling current
    carriers or to construction of the Virginia-class submarine, which is also
    being built at the shipyard. Shipbuilders have reported that the
    procurement schedule or acquisition strategy for the Virginia-class
    submarine has changed 12 times in 10 years.

    ^14The material management and accounting system is used to manage the
    purchase, use, and disposal of materials used to build the ship.

    ^15We found that almost 50 percent of the cost increase in overhead
    dollars was related to a growth in labor hours. See [34]GAO-05-183 , 16.

    Insufficient Cost Surveillance Hinders the Navy's Ability to Manage Cost Growth

    The Navy's approach to designing a substantial portion of the ship prior
    to the award of the construction contract award allows the Navy to gain
    insights that could be used to better inform the construction contract.
    The Navy, however, is not fully leveraging this knowledge because it lacks
    an effective surveillance capability that can capture and analyze current
    shipbuilder performance. Future government oversight may also be impeded
    if the Navy does not initiate adequate cost surveillance at the shipyard.
    Given the risk of cost growth, it is important that the Navy receive
    timely and informative cost performance reports that describe the
    shipbuilder's progress. Without such activity, the Navy is at risk of not
    identifying problems and taking corrective action promptly, allowing costs
    to grow.

    The Navy may not be effectively managing the shipbuilder's current cost
    performance because earned value management data are not informative.
    Earned value management is a tool that provides the government and
    contractors with insight into technical, cost, and schedule progress on
    their contracts. Although the Navy has not yet contracted for
    construction, the shipbuilder is currently performing work that is equal
    to 30 percent of the total cost of the ship. The Navy, however, is not
    receiving objective data on the shipbuilder's cost and schedule
    performance, because the construction preparation contract is a
    cost-reimbursement contract that specifies a level of effort for a stated
    period of time--an approach typically reserved for work that does not
    produce end products, such as program management support. Since work under
    the contract is not divided into tasks that produce end results, there is
    no schedule against which progress can be measured. As a result,
    contractor cost performance reports do not show schedule variances, and
    cost variances are likely to be misleading because progress is not
    actually measured.

    Navy officials recognize that contractor cost performance reports are not
    informative and told us that they evaluate the shipbuilder's performance
    using technical instructions, which direct the shipbuilder to accomplish
    certain work and include a period of performance and funding. Technical
    instructions, however, are not a sufficient tool for managing shipbuilder
    performance because they do not measure the value of work
    accomplished--that is, whether the shipbuilder is accomplishing tasks
    according to a planned budget and schedule. For example, one instruction,
    authorizing the shipbuilder to continue platform design efforts, has a
    period of performance of 1 year and funding of over $200 million. However,
    the instruction does not include a detailed plan against which to measure
    performance, stating instead that all design products should be delivered
    according to the shipbuilder's integrated master schedule. In earned value
    management, progress can be readily measured because contracts are usually
    divided into smaller, more manageable tasks that are short in duration
    (e.g., between 4 and 6 weeks long), with specific start and finish dates
    and individual budgets. Progress on accomplishing technical instructions
    cannot be fully understood until over a year later--eliminating the Navy's
    ability to take early corrective action should problems arise. Moreover,
    the Navy cannot readily assess the shipbuilder's performance because the
    technical instructions do not have stable schedule benchmarks. The
    integrated master schedule changes periodically--creating a fluctuating
    program baseline. Recognizing a lack of insight into contractor
    performance, the Navy recently instituted monthly briefings designed to
    improve contractor oversight.

    The Navy is missing an important opportunity to gain knowledge regarding
    shipbuilder performance prior to awarding the construction contract.
    Although ship construction is already under way--13 percent of the base
    units are expected to be finished prior to contract award--SUPSHIP is only
    minimally engaged in evaluating shipbuilder performance. SUPSHIP provides
    the Navy with unique insight into program performance because it is
    located at the shipyard, providing on-site contract administration and
    technical and business management. SUPSHIP is responsible for assessing
    contractor cost and schedule performance through a combination of on-site
    program surveillance and independent cost and schedule performance
    analyses. According to Navy officials, SUPSHIP traditionally assumes its
    responsibility when construction starts and will provide contract
    oversight after the award of the construction contract.

    Future cost surveillance efforts, however, may not provide adequate
    oversight of shipyard costs. According to SUPSHIP's operating manual, a
    formal cost surveillance strategy is desirable because it ensures that
    surveillance is effectively performed. However, neither the program office
    nor SUPSHIP has plans to develop a formal strategy for cost surveillance.
    In fact, SUPSHIP does not currently have the capability to conduct
    independent cost surveillance. According to officials, SUPSHIP is
    currently planning to develop this capability. Until then, the Navy will
    not have sufficient on-site representatives to analyze contractor cost
    data and verify that the data depict actual conditions and trends.
    Further, Navy officials have stated that they may not require variance
    analyses in the monthly contractor cost performance reports, only
    requiring reporting of variance analyses on a quarterly basis.^16 Variance
    analyses describe the reasons for cost and schedule variances shown in the
    cost performance report and are important because they serve as an
    official, written record of the problems or actions taken by the
    shipbuilder to address them.^17 Without monthly variance analyses, the
    Navy will miss timely information regarding root causes for cost and
    schedule problems and mitigation efforts--making it more difficult for
    managers to identify risk and take corrective action.

    Conclusions

    The Navy's ability to successfully execute its shipbuilding plan depends
    on improvements in the cost performance of individual programs. Since CVN
    78 is the Navy's most expensive lead ship, its cost performance is
    essential to the plan--even a small percentage of cost growth corresponds
    to hundreds of millions of dollars. If CVN 78 follows historical cost
    growth patterns for lead ships, the Navy may be forced to sacrifice other
    aspects of its plan. The recognition of ship cost growth lags the initial
    budget requests for construction, such that cost growth is recognized and
    funded in later years at the expense of other ships vying for funding at
    that time. While construction of CVN 78 will be budgeted in fiscal years
    2008 and 2009, the bulk of construction--and the recognition of actual
    cost--will occur in fiscal years 2010-2015. Thus, the steps the Navy takes
    between now and the fiscal year 2009 budget request to understand and plan
    for the likely costs of the ship will determine whether and how much cost
    growth will occur and require funding in those future years.

    The Navy has made strides in reducing risk in the program. Construction
    risk has been minimized for key systems like the nuclear propulsion and
    electric system, and much of the ship's design has been completed. Yet
    substantial risk remains, which the budget may not accommodate. The budget
    is optimistic, with a target cost for construction that the Navy will in
    all likelihood exceed. Both the budget and schedule need to accommodate
    carrier-specific testing of the dual band radar. Delays in the development
    of key systems, most notably EMALS and the dual band radar, will likely
    have a cost impact on CVN 78 construction and--in the worst
    case--schedule. To avoid the cost growth experienced by other lead ships,
    coupled with the high opportunity cost of displacing other ships to pay
    for cost increases, the Navy is in the best position now to make decisions
    on establishing a realistic cost estimate and a corresponding budget for
    CVN 78 and to put into place the tools needed to monitor actual cost
    performance and react quickly to potential variances from estimates.

    ^16In responding to a draft of this report, DOD stated that the Navy will
    require the shipbuilder to submit monthly cost performance reports.

    ^17Variance analyses are provided in format 5 of the cost performance
    report.

    Recommendations for Executive Action

    To provide more realism in the budget and minimize the likelihood of CVN
    78 cost growth, we recommend that the Secretary of Defense:

               o include in the fiscal year 2009 budget request a revised cost
               estimate that is based on updated Navy and independent DOD cost
               estimates and the actual progress in the program and

               o provide Congress, along with the budget request:

                            o a stated confidence level for the cost estimate;
                            o results of tests of key systems and technologies;
                            o schedule changes to test, production, or delivery
                            dates for key systems; and
                            o the impact of changes and test results of key
                            systems on shipyard costs due to changes in work
                            sequencing and workload management.

    To improve shipyard management and promote early recognition of cost
    issues, we recommend that the Secretary of Defense

               o develop an independent cost surveillance capability at the
               cognizant SUPSHIP and ensure that cost surveillance activities
               begin as soon as actual construction starts,
               o require monthly cost performance reports that include contractor
               variance analyses, and
               o require that earned value management captured in cost
               performance reports for construction and construction preparation
               contracts be made up of discrete measurable tasks so that true
               cost and schedule variances can be identified.

    We also recommend that the Secretary of Defense identify and schedule
    carrier-specific tests to ensure that the dual band radar meets
    carrier-specific requirements.

    Matters for Congressional Consideration

    On the basis of DOD's response to our report, the department does not plan
    to update the independent cost estimate in support of the 2009 budget
    request or provide Congress a stated confidence level for the cost
    estimate along with the budget request. As a result, Congress will be
    asked to approve the fiscal year 2009 funding request for ship
    construction without the ship's most likely costs and without
    understanding DOD's confidence in its cost estimate. Accordingly, Congress
    should consider directing the Secretary of Defense to provide Congress,
    concurrent with the fiscal year 2009 budget request:

               o certification that CVN 78 is budgeted at the most likely costs
               for the ship and
               o a stated confidence level for the cost estimate.

    Agency Comments and Our Evaluation

    In written comments on a draft of this report, DOD agreed with our
    recommendation to identify and schedule carrier-specific testing of the
    dual band radar. DOD also concurred with our recommendations aimed at
    developing an independent cost surveillance capability at the cognizant
    SUPSHIP and strengthening earned value management analysis. DOD noted that
    the Navy has recently increased the number of people at SUPSHIP and
    expects further increases in fiscal year 2008. Some of the manning
    increases will be available for cost surveillance activities. In addition,
    DOD stated that SUPSHIP is currently increasing its oversight of the
    construction preparation contract for CVN 78 in advance of the
    construction contract award, including routine reviews of contractor
    earned value data.

    DOD stated that it will require monthly cost performance reports that
    include variance analyses. The CVN 78 program office's initial decision to
    require quarterly cost performance reports would not have provided
    frequent formal reporting and review of contractor cost data necessary to
    manage a program of this size. DOD also agreed that data captured in cost
    performance reports should be composed of discrete measurable tasks and
    stated that the Navy plans to conduct a review of the program management
    baseline shortly after construction contract award to ensure that the
    shipbuilder has properly planned, scheduled, and resourced work. DOD noted
    that a similar review would also be conducted for the construction
    preparation contract of the first follow-on carrier--CVN 79, but it is not
    clear if the baseline for this program will be made up of discrete
    measurable tasks. If this contract also specifies a level-of-effort
    approach, similar to the CVN 78 contract structure, the Navy may again
    have difficulty accurately assessing the shipbuilder's cost and schedule
    performance. Our recommendation was intended to apply to all construction
    and construction preparation contracts--and not just the contract for CVN
    78. We have revised our recommendation to reflect this distinction.

    In a draft of this report we recommended that DOD include in its fiscal
    year 2009 budget request a revised cost estimate that is based on updated
    Navy and independent DOD cost estimates and provide Congress with a
    confidence level for CVN 78 along with its budget request. DOD stated that
    the Navy revised its cost estimate for CVN 78 in support of the upcoming
    Defense Acquisition Board program review. DOD believes that this estimate
    validates the program budget for fiscal year 2008 and plans to update CVN
    78's budget request for fiscal year 2009 to reflect the program's funding
    needs. Moreover, DOD did not agree to an updated estimate by the Cost
    Analysis Improvement Group--DOD's independent cost analysts. Nonetheless,
    the differences between the cost group's prior estimate and the Navy's
    current estimate remain. Consequently, the ship's budget levels for
    construction are likely to be insufficient.

    DOD stated further that it does not routinely use confidence levels in
    developing cost estimates because the assumptions used to calculate
    confidence levels often lead to incorrect or misleading results. DOD also
    expressed concern about the use of high confidence levels in determining
    program budgets. We agree that confidence levels can be too low or too
    high, but the use of confidence levels is recognized as a best practice in
    cost estimating because it validates an estimate's realism. Moreover, DOD
    has previously agreed with our recommendation that the Navy develop
    confidence levels for all ship cost estimates and noted that the Navy
    trained its cost analysts in the use of risk and uncertainty analysis. In
    fact, Navy cost analysts established a confidence level for the CVN 78
    cost estimate--the estimate that was used to determine the budget request.
    While DOD may believe this confidence level for CVN 78 is sufficient, it
    seems appropriate that Congress have the same information available as it
    decides what funds to provide for CVN 78's budget. In the absence of an
    updated independent cost estimate and the reservations expressed by DOD
    over confidence levels, we have included as matters for congressional
    consideration that the Secretary of Defense provide Congress, concurrent
    with the fiscal year 2009 budget request, a certification that CVN 78 is
    budgeted at the most likely costs for the ship and a stated confidence
    level for the cost estimate.

    We also recommended that DOD provide Congress with the results of tests of
    key systems and technologies; changes to test, production, or delivery
    schedules; and the impact of such changes to construction costs. DOD
    agreed, stating that such updates are provided in the annual Selected
    Acquisition Report (SAR). However, the SAR does not adequately address our
    recommendation because it provides only a high-level view of the program
    and does not provide the level of detail that is necessary to identify
    changes in schedule and understand the risk of cost growth. As we state in
    the report, technologies like EMALS are behind schedule and could affect
    the ship's construction schedule. However, neither the 2005 nor the 2006
    SAR reports this fact--or even discusses EMALS at all. Consequently, the
    SAR alone does not provide Congress with sufficient information upon which
    to gauge the realism of the budget request and this does not fully address
    our recommendation.

    DOD's written comments are included in their entirety in appendix II. The
    department also provided technical comments, which were incorporated into
    the report as appropriate.

    As agreed with your office, unless you announce its contents, we will not
    distribute this report further until 30 days from its date. At that time,
    we will send copies to the Secretary of Defense, the Secretary of the
    Navy, and interested congressional committees. We will also make copies
    available to others on request. In addition, the report will be available
    at no charge on the GAO Web site at http://www.gao.gov.

    Please contact me on (202) 512-4841 if you or your staff have any
    questions concerning this report. Contact points for our Offices of
    Congressional Relations and Public Affairs may be found on the last page
    of this report. GAO staff who made contributions to this report are listed
    in appendix III.

    Paul L. Francis
    Director
    Acquisition and Sourcing Management

    Appendix I: Scope and Methodology

    To assess the Navy's ability to meet its goals for CVN 78, we examined the
    Navy's progress in developing its critical technologies, stabilizing the
    ship's design, and estimating the cost of the ship. To examine the extent
    to which technology development could affect the construction and
    capability of CVN 78, we analyzed all the technologies that the Navy
    defined as critical technologies at the time we began our review. We
    developed a matrix based on the degree to which the optimum construction
    sequence and planned capability of the ship could be affected if
    technologies did not deliver as planned. To determine the impact on
    construction, we analyzed the in-yard and erect dates and examined the
    location, number of design zones, and interfaces for each technology. To
    determine the impact on ship capability, we analyzed ship requirements by
    reviewing the Operational Requirements Document, examining the development
    of sortie generation rates, and assessing the program's schedule for
    technology off-ramp decisions. We categorized each technology based on the
    results above and examined their degree of risk by analyzing key program
    documents. We analyzed, among other documents, CVN 21 Milestone B Risk
    Assessment Report, Critical Technology Integrated Product Team briefings,
    CVN 78 Program and Design Review briefings, technology test reports,
    critical design review checkout lists, risk matrices, Defense Contract
    Management Agency (DCMA) reports, and contractor cost performance reports
    for key technologies. To supplement our analysis, we visited contractors
    and test sites where the ship's major technologies are being developed and
    tested.

    To evaluate the Navy's progress in achieving design stability, we reviewed
    the ship's design requirements and analyzed metrics captured in the
    integrated master schedule, including schedule delinquencies, key dates,
    receipt of government-furnished information, and progress in construction
    activity and material acquisition. We compared CVN 78's design process
    with GAO's knowledge-based acquisition methodology and past work on
    shipbuilding programs. We analyzed and compared CVN 78 design metrics with
    the experience of previous carriers, particularly CVN 77 and CVN 76. In
    conducting our analysis, we examined key documents, including Quarterly
    Ship Progress Reviews.

    We assessed the challenges to building CVN 78 within budget by examining
    the Navy's budget request and cost estimates as well as recent shipyard
    cost performance. We analyzed the Navy's cost estimates by examining the
    Program Life Cycle Cost Estimate for CVN 78 and updates since the
    Milestone B decision in 2004. We compared the Navy's estimate with
    estimates from Department of Defense (DOD) independent cost analysts and
    our past work on shipbuilding cost growth. We evaluated the ship's cost
    target by reviewing Defense Contract Audit Agency (DCAA) reports and
    examining the shipbuilder's cost-savings initiatives and cost performance
    on previous carriers. We assessed the Navy's practices for cost
    surveillance by analyzing the construction preparation contract,
    contractor cost performance reports, technical instructions, and
    Supervisor of Shipbuilding, Conversion and Repair's (SUPSHIP) Operating
    Manual. In addition, we reviewed, among other documents, Cost Analysis
    Requirements Description, business clearance memorandums, DOD's Earned
    Value Implementation Guide, and Naval Sea Systems Command's (NAVSEA) Cost
    Estimating Guide.

    In conducting our analysis, we held discussions and attended briefings
    with the shipbuilder and officials from NAVSEA, including the CVN 21
    Program Office; Naval Nuclear Propulsion Directorate; DDG 1000 Program
    Office; Program Executive Office, Integrated Warfare Systems; Cost
    Engineering and Industrial Analysis Division; Ship Design Integration and
    Engineering Division, Contracts Division; Naval Surface Warfare Center,
    Carderock; SUPSHIP, Newport News; as well Naval Air Systems Command,
    including the program offices for Aviation Support Equipment, Air Traffic
    Control and Combat Identification, and Aircraft Launch and Recovery. In
    addition, we interviewed officials from the Navy's Commander of
    Operational Test and Evaluation Force and DOD's Cost Analysis Improvement
    Group; DCAA in Newport News, Virginia; and DCMA in San Diego, California,
    Moorestown, New Jersey, and Tewksbury, Massachusetts.

    We conducted our review from July 2006 through June 2007 in accordance
    with generally accepted government auditing standards.

    Appendix II: Comments from the Department of Defense

    Note: Page numbers in the draft report may differ from those in this
    report

    Appendix III: GAO Contact and Staff Acknowledgments

    GAO Contact

    Paul L. Francis (202) 512-4841

    Staff Acknowledgments

    Other contributors to this report were Assistant Director Karen
    Zuckerstein, Lisa L. Berardi, Diana Moldafsky, Moshe Schwartz, and Alyssa
    Weir.

    (120576)

    [35]www.gao.gov/cgi-bin/getrpt?GAO-07-866 .

    To view the full product, including the scope
    and methodology, click on the link above.

    For more information, contact Paul Francis at (202) 512-4841 or
    francisp@gao.gov.

    Highlights of [36]GAO-07-866 , a report to the Ranking Minority Member,
    Subcommittee on Seapower and Expeditionary Forces, Committee on Armed
    Services, House of Representatives

    August 2007

    DEFENSE ACQUISITIONS

    Navy Faces Challenges Constructing the Aircraft Carrier Gerald R. Ford
    within Budget

    The Navy is investing over $3 billion to develop technologies for a new
    type of aircraft carrier--the Ford class--and it expects to spend almost
    $11 billion to design and construct the USS Gerald R. Ford (CVN 78)--the
    lead ship of the class. New technologies are to improve the carrier's
    performance and reduce crew size. The Navy requested authorization of CVN
    78 in its fiscal year 2008 budget. GAO was asked to assess the Navy's
    ability to meet its goals for developing the new carrier. Specifically,
    this report assesses (1) the extent to which technology development could
    affect the capability and construction of CVN 78, (2) the status of
    efforts to achieve design stability, and (3) the challenges to building
    CVN 78 within budget. To accomplish this, our work includes analysis of
    test reports, development schedules, and ship progress reviews; interviews
    with Navy and other officials; and examinations of cost estimates and our
    own past work.

    [37]What GAO Recommends

    GAO recommends that the Department of Defense (DOD) take actions to
    improve the realism of CVN 78's budget estimate, improve the Navy's cost
    surveillance capability, and schedule carrier-specific tests of the dual
    band radar. DOD partially concurred with our recommendations. This report
    also contains matters for congressional consideration to ensure that CVN
    78 is budgeted at the likely cost of the ship.

    Delays in technology development may lead to increases in CVN 78's planned
    construction costs and potential reductions in the ship's capability at
    delivery. CVN 78's success depends on on-time delivery and insertion of
    fully mature and operational technologies in order to manage construction
    costs and enhance ship capabilities. Technologies that are highly
    integrated into the construction sequence or provide vital capabilities
    for the ship to carry out its mission are the most critical in achieving
    this goal. While the Navy has mitigated the impact of some technologies,
    such as the nuclear propulsion and electric plant, three systems--the
    electromagnetic aircraft launch system (EMALS), the dual band radar, and
    the advanced arresting gear--have faced problems during development that
    may affect the ship's construction costs.

    The Navy has made significant progress in maturing the ship's design. With
    about 70 percent of the ship design complete, design appears on track to
    support the construction schedule. A structured design approach and a
    lengthy construction preparation contract have enabled the program to
    perform more work prior to construction than on previous carriers. The
    program, however, may face challenges completing more detailed phases of
    design because of the tight schedule remaining for development of the
    ship's critical technologies, which in turn could impede the design
    process--and construction--of CVN 78.

    Artist's Rendition of CVN 78

    Costs for CVN 78 will likely exceed the budget for several reasons. First,
    the Navy's cost estimate, which underpins the budget, is optimistic. For
    example, the Navy assumes that CVN 78 will be built with fewer labor hours
    than were needed for the previous two carriers. Second, the Navy's target
    cost for ship construction may not be achievable. The shipbuilder's
    initial cost estimate for construction was 22 percent higher than the
    Navy's cost target, which was based on the budget. Although the Navy and
    the shipbuilder are working on ways to reduce costs, the actual costs to
    build the ship will likely increase above the Navy's target. Third, the
    Navy's ability to manage issues that affect cost suffers from insufficient
    cost surveillance. Without effective cost surveillance, the Navy will not
    be able to identify early signs of cost growth and take necessary
    corrective action.

    References

    Visible links
      32.http://www.gao.gov/cgi-bin/getrpt?GAO-05-183
      33.http://www.gao.gov/cgi-bin/getrpt?GAO-05-183
      34.http://www.gao.gov/cgi-bin/getrpt?GAO-05-183
      35.http://www.gao.gov/cgi-bin/getrpt?GAO-07-866
      36.http://www.gao.gov/cgi-bin/getrpt?GAO-07-866
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