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

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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
[email protected].

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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