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United States Government Accountability Office: 
Washington, DC 20548: 

December 8, 2010: 

Congressional Committees: 

Subject: Navy's Proposed Dual Award Acquisition Strategy for the 
Littoral Combat Ship Program: 

The Navy's Littoral Combat Ship (LCS) is envisioned as a vessel able 
to be reconfigured to meet three different mission areas: mine 
countermeasures, surface warfare, and antisubmarine warfare. Its 
design concept consists of two distinct parts--the ship itself 
(seaframe) and the mission package it carries and deploys. The Navy is 
procuring the first four ships in two different designs from 
shipbuilding teams led by Lockheed Martin and General Dynamics, which 
currently build their designs at Marinette Marine and Austal USA 
shipyards, respectively. 

Prior to September 2009, the Navy planned to continue building the 
class using both ship designs. This strategy changed following 
unsuccessful contract negotiations that same year for fiscal year 2010 
funded seaframes--an outcome attributable to industry proposals priced 
significantly above Navy expectations. In September 2009, the Navy 
announced that in an effort to improve affordability, it was revising 
the LCS program's acquisition strategy and would select one seaframe 
design before awarding contracts for any additional ships.[Footnote 1] 
Following approval of this strategy in January 2010, the Navy issued a 
new solicitation--intended to lead to a downselect--for fiscal year 
2010 seaframes. In support of this strategy, Congress authorized the 
Navy to procure up to 10 seaframes and 15 LCS ship control and weapon 
systems. The Navy planned to have a second competition in 2012 and 
provide five of the ship control and weapon systems to the winning 
contractor, who would construct up to 5 ships of the same design and 
install the systems. However, in November 2010, following receipt of 
new industry proposals for the fiscal year 2010 seaframes, the Navy 
proposed to change its acquisition strategy back to awarding new 
construction contracts to both industry teams.[Footnote 2] According 
to the Navy, in order to execute this proposed dual 10-ship award, 
congressional authorization is required. If approved, the Navy's 
authorization would increase from 10 ships to 20 ships--including ship 
control and weapon systems. Absent this authorization, the Navy plans 
to proceed with a single award for one design by mid-December 2010. 

In response to broad congressional interest arising from the Navy's 
proposed LCS acquisition strategy change, our objective was to assess 
any risks that could affect the Navy's ability to execute the program, 
using the authority of the Comptroller General to initiate our work. 
We relied primarily on our August 2010 report[Footnote 3] on the LCS 
program and more recent discussions with officials responsible for 
managing LCS acquisition including the Office of the Secretary of 
Defense; the Office of the Assistant Secretary of the Navy for 
Research, Development, and Acquisition; and Navy program officials, 
requirements officers, and cost analysts. To supplement our analysis, 
we reviewed (1) the most recent solicitation for LCS construction and 
(2) Navy briefing materials on the existing and proposed acquisition 
strategies for the LCS program. We were briefed on the Navy's analysis 
that supported its proposed change in acquisition strategy, but we did 
not evaluate it because of the time constraints that limited the scope 
of our work. Similarly, we did not evaluate the Navy's supporting data 
or the validity of the assumptions that informed the Navy's 
calculations of cost savings beyond the savings associated with the 
existing downselect strategy. We conducted this performance audit from 
November 2010 to December 2010 in accordance with generally accepted 
government auditing standards. Those standards require that we plan 
and perform the audit to obtain sufficient, appropriate evidence to 
provide a reasonable basis for our findings and conclusions based on 
our audit objectives. We believe that the evidence obtained provides a 
reasonable basis for our findings and conclusions based on our audit 


The Navy estimates that both its existing and proposed acquisition 
strategies will generate significant cost savings to the government. 
According to the Navy, 

$1.9 billion in savings resulted from the competition between the two 
offerors and is common to both strategies. However, the Navy estimates 
that approximately: 

$1.0 billion in additional cost savings would be realized under the 
proposed dual award strategy because of the avoidance of higher start- 
up costs and risks associated with the second source planned for 
fiscal year 2012, among other factors. According to the Navy, these 
additional savings would be offset, in part, by increased total 
ownership costs. The Navy plans to use some of the remaining savings, 
if realized, to fund construction of an additional LCS seaframe in 
fiscal year 2012. Table 1 compares the key tenets of each strategy. 

Table 1: Comparison of the Navy's Current and Proposed LCS Acquisition 

Existing LCS acquisition strategy (January 2010): Contract with a 
single source on a fixed-price basis for up to 10 ships (2 ships 
awarded per year) from fiscal year 2010 through fiscal year 2014; 
Proposed LCS acquisition strategy (November 2010): Fixed-price 
contracts to two industry teams for up to 10 ships each (1 or 2 ships 
awarded per year) through fiscal year 2015 (total of up to 20 ships). 

Existing LCS acquisition strategy (January 2010): Second solicitation 
for up to 5 additional ships to be constructed at a separate yard with 
awards planned between fiscal years 2012 and 2014; 
* First source would provide the combat systems for the 5 additional 
ships constructed by the second shipyard; 
Proposed LCS acquisition strategy (November 2010): Program benefits, 
as identified by the Navy, that include: 
* stabilizing the program and the industrial base with award of 20 
* funding an additional ship in fiscal year 2012 to support 
operational requirements; 
* sustaining competition through the program, and; 
* enhancing Foreign Military Sales opportunities. 

Existing LCS acquisition strategy (January 2010): Navy estimates $1.9 
billion in cost savings attributable to:
* near-term competitive pricing pressures between the two current LCS 
shipbuilding teams; 
* economic order quantity purchases of key materials; 
* efficiencies associated with potentially moving to a single, common 
combat system, and; 
* significantly reduced total ownership costs for the Navy; 
Proposed LCS acquisition strategy (November 2010): Navy estimates 
program benefits would generate approximately $1 billion in additional 
savings above those estimated under the existing strategy that are 
attributable to: 
* avoiding higher start-up costs (such as nonrecurring engineering and 
design costs) associated with awarding contracts to a second source 
starting in fiscal year 2012 and by; 
* achieving greater labor efficiencies by constructing the ships at a 
higher rate. 

Existing LCS acquisition strategy (January 2010): Navy estimates that 
the cost benefits would be offset, in part, by the start-up costs 
associated with introducing a second source in fiscal year 2012; 
Proposed LCS acquisition strategy (November 2010): According to the 
Navy, these savings would be offset, in part, by an additional $842 
million in total ownership costs, which the Navy equates to a net 
present value of $295 million. 

Source: GAO analysis of Navy materials. 

Note: Given time constraints, GAO did not fully assess the Navy's 
assumptions that underpin the benefits it estimates for each strategy. 

[End of table] 

The quantities planned under both of the Navy's strategies are similar 
through fiscal year 2015. These similarities are outlined in table 2, 
which details the Navy's procurement plans for seaframes under both 
the existing downselect strategy and the proposed dual award strategy. 

Table 2: LCS Seaframe Procurement Plans: 

Existing downselect: Winner; 
Fiscal year 2010: 2; 
Fiscal year 2011: 2; 
Fiscal year 2012: 2; 
Fiscal year 2013: 2; 
Fiscal year 2014: 2; 
Fiscal year 2015: 4 (winner and second source combined). 

Existing downselect: Second source; 
Fiscal year 2010: [Empty]; 
Fiscal year 2011: [Empty]; 
Fiscal year 2012: 1; 
Fiscal year 2013: 2; 
Fiscal year 2014: 2.
Fiscal year 2015: 4 (winner and second source combined) 

Existing downselect: Total; 
Fiscal year 2010: 2; 
Fiscal year 2011: 2; 
Fiscal year 2012: 3; 
Fiscal year 2013: 4; 
Fiscal year 2014: 4; 
Fiscal year 2015: 4; 
Total: 19. 

Proposed dual award: Contractor A; 
Fiscal year 2010: 1; 
Fiscal year 2011: 1; 
Fiscal year 2012: 2; 
Fiscal year 2013: 2; 
Fiscal year 2014: 2; 
Fiscal year 2015: 2. 

Proposed dual award: Contractor B; 
Fiscal year 2010: 1; 
Fiscal year 2011: 1; 
Fiscal year 2012: 2; 
Fiscal year 2013: 2; 
Fiscal year 2014: 2; 
Fiscal year 2015: 2. 

Proposed dual award: Total; 
Fiscal year 2010: 2; 
Fiscal year 2011: 2; 
Fiscal year 2012: 4; 
Fiscal year 2013: 4; 
Fiscal year 2014: 4; 
Fiscal year 2015: 4; 
Total: 20. 

Source: Navy. 

[End of table] 

Under the dual award strategy, the government will be authorized to 
contract for up to 20 ships. In contrast, the existing downselect 
strategy limits this authorization to up to 10 ships until fiscal year 
2012, when the Navy planned to solicit a second source for additional 

Realizing Savings under Either LCS Strategy Depends on Successful 
Management of Certain Identified Program Risks: 

Successful business cases for shipbuilding programs require balance 
between the concept selected to satisfy warfighter needs and the 
resources--technologies, design knowledge, funding, time, and 
management capacity--needed to transform that concept into a product. 
Without a sound business case, program execution will be hampered, 
regardless of the contracting strategy. The LCS, given its stage of 
maturity and its unique mission, design, and operational concept, 
still faces design and construction risks. As with the Navy's estimate 
of savings, most of these risks appear to be inherent to the program, 
regardless of which acquisition strategy is followed. Navy officials 
believe that experience to date on the program, coupled with fixed 
price contracts and a sufficient budget for ship changes, mitigates 
this risk. However, much work and demonstration remains for LCS, and 
other shipbuilding programs have had difficulty at this stage. On the 
other hand, a second ship design and source provided under the dual 
award strategy could provide the Navy an additional hedge against 
risk, should one design prove problematic. Mission equipment packages 
are common to both ships and would pose the same execution risks, 
apart from integration. 

Design Changes Could Increase Near-Term Costs above Current Estimates: 

Under both the existing downselect strategy and the proposed dual 
award strategy, the Navy plans to award fixed-price incentive 
contracts for new seaframes. This type of contract provides for 
adjusting profit and establishing the final contract price by 
application of a formula based on the relationship of total final 
negotiated cost to total target cost. The final price is subject to a 
price ceiling, negotiated at the outset. In the case of LCS, the 
solicitation stated that the government would share 50 percent of 
costs above the target cost, up to the price ceiling. Navy officials 
also stated that they have budgeted management reserve funds to 
accommodate potential impacts to cost performance during program 
execution. In other programs, the Navy has returned to Congress to 
request funding for costs exceeding the target costs. In the near 
term, cost increases are likely but it is unknown whether increases 
will exceed what the Navy has budgeted for fiscal years 2010 and 
beyond. The likely source of these cost increases is design changes, 
which result in out-of-sequence work, potentially limiting the 
shipbuilders' ability to achieve the benefits they anticipate from 
construction process improvements and shipyard capital investments. 

Our August 2010 report on LCS discussed issues with the performance of 
particular ship systems at the time of lead ship deliveries and as a 
result of subsequent operating experience.[Footnote 4] In an effort to 
address technical issues on the first two ships, the Navy has 
implemented design changes for the third and fourth LCS seaframes (LCS 
3 and LCS 4), several of which are not yet complete. These changes are 
significant and have affected the configuration of several major ship 
systems including propulsion, communications, electrical, and 
navigation. In addition, launch, handling, and recovery systems for 
both designs are still being refined, although the Navy reports recent 
progress related to each of these systems.[Footnote 5] To the extent 
that these design changes necessitate modifications in the ship 
specifications on which the contractors based their proposals for 
future ships, contract modifications will need to be negotiated and 
priced. According to the Navy, it estimates funding requirements for 
these change orders to total 5 percent for all future follow-on ships 
produced, regardless of whether it proceeds with a downselect strategy 
or the proposed dual award strategy. In addition, Navy officials 
stated that the seaframe solicitation includes a provision that agreed 
to design changes are "not to exceed" $12 million--a feature that Navy 
officials state will bound government cost risk due to design changes. 
Pending full identification and resolution of deficiencies affecting 
the lead ships, the Navy's ability to stay within its budgeted limits 
remains to be seen. 

As we reported earlier this year, the LCS shipbuilding teams have 
implemented process and capacity improvements based on lessons learned 
from constructing lead ships and have made capital investments in 
their yards in an effort to increase efficiency.[Footnote 6] Fully 
realizing these improvements may be challenging given the design 
changes still occurring in the program. To the extent that addressing 
technical issues disrupts the optimal construction sequence for follow-
on ships, additional labor hours could be required beyond current 
forecasts. Introducing such inefficiencies could offset initial 
benefits obtained from the process improvements and new facilities the 
shipbuilders have put into place, increasing the risk of out-of-
sequence work and rework. Some level of design changes can be 
reasonably expected given the testing that remains. To date, however, 
Navy officials report that LCS 3 and LCS 4 changes are being managed 
efficiently--citing improved cost and schedule performance by both 
shipbuilders. The Navy also believes that the LCS seaframe may be less 
affected by mission equipment changes than other ships given the 
equipment's modular design. Maintaining a high level of performance 
will depend on avoiding significant design changes to seaframes under 

Operations and Support Costs Difficult to Estimate: 

Navy officials expressed confidence that their cost estimate 
supporting the dual award provides details on the costs to operate and 
support both designs. However, since little actual LCS operating and 
support data are available to date, the Navy's estimates for these 
costs are currently based on data from other ships and could change as 
actual cost data become more available. These estimates are also based 
on new operational concepts for personnel, training, and maintenance 
that have not been fully developed, tested, and implemented. For 
example, the Navy has not yet implemented a comprehensive training 
plan, and it is possible that the plan could cost more or less than 
the training costs currently accounted for by the Navy. 

In addition, the Navy has not studied--within the context of the 
downselect strategy--the potential savings associated with early 
retirement of the two nonselected design ships. As such, decision 
makers do not have a complete picture of the various options available 
to them related to choosing between the downselect and dual award 
strategies. Under the existing downselect strategy, the Navy's 
intention is to keep in service--at least initially--the other two 
ships of the design not selected for long-term production. The Navy 
acknowledged that operating and supporting two different designs 
carries increased costs as compared to the costs of employing only one 
design. As we previously reported, these costs include separate 
training facilities because each design has unique equipment and 
therefore different operating and maintenance requirements.[Footnote 
7] In February 2010, we recommended that the Navy conduct a cost- 
benefit analysis of options for these two ships, including the 
possibility of retiring them from service--a recommendation with which 
the Department of Defense agreed. As we point out in the February 
report, it is important that estimates of long-term operating and 
support costs are available to assess alternatives before a decision 
is made, particularly since these costs constitute over 70 percent of 
a system's life cycle costs. However, in discussions with Navy 
officials in November 2010, they told us that their latest assessment 
of the long-term costs of maintaining two ship designs does not 
consider the option of retiring the two nonselected ships. 

Mission Package Uncertainties and Delays: 

The Navy's request to double its current 10-ship authorization to 20 
ships--at a time when the mine countermeasures, surface warfare, and 
antisubmarine warfare mission packages continue to face significant 
developmental challenges--highlights the Navy's risk of investing in a 
fleet of ships that has not yet demonstrated its promised capability. 
Absent significant capability within its mission packages, seaframe 
functionality is largely constrained to self-defense as opposed to 
mission-related tasks. 

Navy officials acknowledged that mission package systems have taken 
significantly longer to develop and field than anticipated. 
Underscoring this situation is the fact that development efforts for 
most of these systems predate the LCS program--in some cases by 10 
years or more. However, Navy officials expressed confidence that their 
latest testing and production plans for mission package systems are 

Recent testing of mission package systems has yielded mixed results. 
The Navy reports that two systems within the mine countermeasures 
mission package recently completed developmental testing, but another 
system is undergoing reliability improvements following production of 
several units that did not meet performance requirements.[Footnote 8] 
Further, test failures contributed to the cancellation of a key 
surface warfare mission package system, and the future composition of 
the package remains undetermined.[Footnote 9] 

Developmental challenges facing individual systems have led to 
procurement delays for all three mission packages and have disrupted 
program test schedules. Most notably, the Navy reports the first 
operational testing event involving a seaframe and partial mission 
package is now scheduled for late second quarter of fiscal year 2012, 
and the Navy expects individual mission package systems to remain in 
development through 2017.[Footnote 10] 

To safeguard against excess quantities of ships and mission packages 
being purchased before their combined capabilities are demonstrated, 
we recommended in our August 2010 report that the Secretary of Defense 
update the LCS acquisition strategy to account for operational testing 
delays in the program and resequence planned purchases of ships and 
mission packages, as appropriate.[Footnote 11] The Department of 
Defense agreed with this recommendation, stating that an updated 
schedule was under development to better align seaframe and mission 
module production milestones. However, it is unclear how the 
department's concurrence with our recommendation can be reconciled 
against the Navy's current request to increase the planned seaframe 
commitment, particularly since no operational testing involving 
mission packages--or any of their individual systems--has since taken 
place. Until mission package and operational testing progresses--and 
key mine countermeasures, surface warfare, and antisubmarine warfare 
systems are proven effective and suitable onboard seaframes--the Navy 
cannot be certain that the LCS will deliver the full capability 
desired. This risk would increase with a commitment to higher 
quantities. The Navy believes this increased commitment is 
appropriately balanced against competing risks in the program. 

Agency Comments and Our Evaluation: 

The Department of Defense provided us with written comments on a draft 
of this report. The department's response reiterated the benefits it 
anticipates realizing under the proposed dual award acquisition 

In its comments, the department stated it had assessed the cost of 
sustaining a two ship class to be less than the cost--in financial and 
operational terms--of replacing these ships in a future procurement 
budget request. However, we are unaware of the underlying analysis the 
department has conducted to support this statement. Navy officials 
told us recently that they have not undertaken any type of analysis to 
weigh the potential benefits and drawbacks of retiring the two ships 
of the nonselected design, despite agreeing with our February 2010 
recommendation to conduct such analysis.[Footnote 12] 

Further, the department stated that both LCS designs are now stable, 
citing the minimal change activity to date for LCS 3 and LCS 4 and the 
continued availability of change order budgets for those ships. 
However, our analysis shows that the Navy has deferred several changes 
affecting key ship systems until post-delivery for LCS 3 and LCS 4--a 
decision that has contributed to the positive, near-term performance 
the department cites. Further, as the Navy continues to address 
technical deficiencies affecting the lead ships--generally through 
design changes--the scope of deferred work for follow-on ships can 
reasonably be expected to grow. Until this scope is fully identified-- 
and priced into existing and future LCS contracts--the department 
cannot be fully confident that its budgets for follow-on ships are 
sufficient to offset the cost increases associated with performing 
work out of sequence. 

The department also emphasized progress it has made developing and 
testing LCS mission package systems, while at the same time 
acknowledging that some systems continue to experience developmental 
issues--noting that these systems have either been replaced with 
alternate systems or have become targets of increased Navy focus and 
attention. According to the department, its mission package approach 
allows substitute or re-engineered systems to be quickly and 
seamlessly identified for incorporation into the mission package 
development stream without impacting overall fielding plans. However, 
our analysis shows that developmental delays to individual systems 
have caused all of the LCS mission packages--mine countermeasures, 
surface warfare, and antisubmarine warfare--to experience test 
disruptions and procurement delays. In fact, none of the mission 
packages--either in partial or full configuration--has completed 
operational testing onboard an LCS seaframe. 

The department's written comments can be found in enclosure I. The 
department also provided technical comments, which were incorporated 
into the report as appropriate. 

We are sending copies of this report to interested congressional 
committees, the Secretary of Defense, and the Secretary of the Navy. 
The report is also available at no charge on the GAO Web site at 

If you or your staff have any questions about this report, please 
contact me at (202) 512-4841 or Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. Staff making key contributions to 
this report were Diana Moldafsky, Assistant Director; Christopher R. 
Durbin; Jeremy Hawk; Simon Hirschfeld; Kristine Hassinger; and Karen 

Signed by: 

Belva M. Martin:
Acting Director:
Acquisition and Sourcing Management: 


List of Committees: 

The Honorable Carl Levin:
The Honorable John McCain:
Ranking Member:
Committee on Armed Services:
United States Senate: 

The Honorable Susan M. Collins:
Ranking Member:
Committee on Homeland Security and Government Affairs:
United States Senate: 

The Honorable Claire McCaskill:
Ad Hoc Subcommittee on Contracting Oversight:
Committee on Homeland Security and Government Affairs:
United States Senate: 

The Honorable Ike Skelton:
The Honorable Howard P. "Buck" McKeon:
Ranking Member:
Committee on Armed Services:
House of Representatives: 

The Honorable Darrell Issa:
Ranking Member:
Committee on Oversight and Government Reform:
House of Representatives: 

The Honorable Norman D. Dicks:
The Honorable C.W. Bill Young:
Ranking Member:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives: 

[End of section] 

Enclosure I: Comments from the Department of Defense: 

Office Of The Under Secretary Of Defense: 
Acquisition Technology And Logistics: 
3000 Defense Pentagon: 
Washington, Dc 20301-3000: 

December 6, 2010: 
Ms. Belva M. Martin: 
Acting Director, Acquisition and Sourcing Management: 
U.S. Government Accountability Office: 
441 G Street NW: 
Washington, DC 20548: 

Dear Ms. Martin: 

This is the Department of Defense (DoD) response to the GAO draft 
report, GAO Draft Report, GAO-11-249R, 'LCS Proposed Acquisition 
Strategy' dated December 3, 2010, (GAO Code 120959). 

The LCS program is a competitive dual-source shipbuilding program. Two 
industry teams have each designed, built and delivered a lead ship 
meeting the LCS performance requirements. Both of these lead ships are 
in Navy service, executing Fleet operational tasking as well as 
conducting a comprehensive test and evaluation program. The LCS 
shipbuilding teams are currently building their second ships with 
lessons learned from the lead ships fully incorporated into the 
designs. Both shipbuilders have dramatically improved performance from 
their lead ships as a result of design stability and through 
improvements in facilities and production efficiencies. 

To achieve necessary further improvements in cost performance on the 
program, the Navy developed a competitive block buy down select 
strategy for procuring ten ships (two per year) of the 15 LCS ships 
planned in the Fiscal Year (FY) 2010 — 2014 shipbuilding plan. That 
LCS competitive strategy has been extremely effective in meeting one 
of the Navy's and Congress' key program objectives: competitive, 
affordable, fixed-price proposals. In fact, these competitive 
proposals, coupled with Navy's desires to increase ship procurement 
rates to support operational requirements, has created a new 
opportunity to award each offeror a fixed price ten-ship block buy, a 
total of 20 ships from FY 2010 — FY 2015. This dual award approach would
procure all of the LCS' planned for those budget years, plus one 
additional ship in FY 2012. Adding the four LCS ships programmed for 
FY 2015 to the block buys brings the total to 20 ships. 

The dual award strategy would allow the Navy to award two block buy 
contracts (ten ships each from FY 2010 — FY 2015), creating 
significant, additional savings compared to a down select, by 
leveraging the competitive fixed-price proposals in-hand. Under these 
two contracts, while all 20 ships will be congressionally authorized, 
the Government will be contractually obligated only for the ships that 
are appropriated in each year. Unlike a multiyear procurement, there 
is no termination liability required if the Government decides not to 
fund the out year ships. It is important to note that while this dual 
award increases the number of ships procured during this period, with 
the addition of the FY 2012 ship financed by the dual award savings, 
it does not 'double' the quantity planned or programmed. 

With the production start-up costs for both versions already retired, 
and proposals provided that reflect stable design and planning, stable 
production, learning curve performance, and long term vendor 
agreements, the acquisition savings for a dual award is projected to 
be $2.9 billion (Then Year (TY)) through FY 2016, as measured against 
the President's Budget (PB) 2011 request. Of these savings, 
approximately $1 billion (TY) is directly attributable to the dual 
award alone. Some of these savings are used to fund the additional FY 
2012 ship. The savings enable the Navy to strengthen the total 
shipbuilding plan as well as enabling procurement of an additional LCS 
in FY 2012. 

A dual award increases Navy's shipbuilding rate and eliminates the 
need to conduct a FY 2012 competition for a second shipyard source to 
build the successful design, delivering needed ships to the fleet 
sooner. In addition to adding one LCS in FY 2012, a dual award for 20 
ships sustains existing stable, hot production lines at two shipyards. 
Dual award results in an accelerated delivery of LCS capabilities to 
the fleet, all while actually reducing total program
cost and providing important stability for the industrial base. These 
new LCS savings can be reinvested in other programs, including 
shipbuilding, increasing recapitalization opportunities across the 

Both shipbuilders are already realizing significant production 
efficiencies on the two ships currently under construction as a direct 
result of capital investments that were not in place for LCS 1 and LCS 
2. Additional savings are anticipated for future ships from further 
facility upgrades that will be self-financed by industry, with support 
from state and local governments. To date, all facility improvements 
have been completed on cost and schedule at both shipyards. 

A dual award — which includes submission of respective technical data 
packages —creates many opportunities for future competition. The Navy 
has numerous alternatives for sustaining effective competition on this 
program beyond the dual award, more so than any other shipbuilding 
program since the early years of FFG 7 class competition. These 
include competing for cost and/or quantity, introduction of one or 
more second sources for a particular design, a future down selection, 
and competitive multiyear procurements, all of which would be viable 
as the LCS program progresses beyond the Future Years Defense Program 

Regarding Operations & Support (O&S) costs, the acquisition savings 
provided by a dual award far exceed estimates of the O&S cost delta 
for two designs versus one design. Even under the down select 
strategy, the Navy planned on sustaining the two ships of the design 
not selected; the dual award only changes the marginal cost of this 
support by adding ten more ships to the already planned two-ship 
class. As noted, this marginal cost increase is more than offset by 
the savings realized through a dual award. Further, the Navy will 
continue to aggressively assess opportunities to reduce the O&S costs 
for the Class. While it has been suggested that the Navy could retire 
the two-ship class early to avoid O&S cost, the reality is that the 
Navy needs this capability in numbers and the cost of sustaining the 
two ship class has been assessed to be less than the cost — in 
financial and operational terms — of replacing these ships in a future 
procurement budget request. 

Many of the technical issues noted in the August 2010 GAO Report 
already have been addressed in the program. Specifically, in several 
instances the GAO notes cost risk as a result of design changes still 
occurring in the program. In fact, both LCS designs are now stable. 
Design change from the lead ship has been incorporated in the follow 
ships as part of their baseline and subsequent change activity has 
been minimized. At current change level, a few percent, change 
activity on this program is improved upon historical shipbuilding 
performance. There is no evidence that follow ship change order 
budgets will not be adequate to address any necessary changes that may 
occur during execution of the block buy. For example, the LCS 3 
recently launched at 80 percent complete, at which point the change 
order budget is less than 50 percent expended. LCS 4 has expended only 
4 percent of her planned change order budget at 45 percent 
construction complete. This substantially improved level of 
completeness at launch, the low rate of expenditure of change order 
budget, and the attendant improvement in cost and schedule performance 
by both shipbuilders is a clear indication that out-of-sequence work 
and design change activity have been contained. LCS 3 launched on 
December 4th at approximately 80 percent complete, as compared with 
LCS 1, which was barely 50 percent complete at launch. LCS 3 is also 
under budget and on schedule. LCS 4 is showing similar improvements 
over LCS 2. 

Perhaps most important, the Navy budget risk is contained by using 
fixed price incentive contracts, which cap the government's price risk 
at ceiling. The Navy projection of $2.9 billion in acquisition savings 
for the dual award includes management reserve for any potential 
impact to cost performance during execution. 

Mission Package (MP) development and testing is progressing well. From 
program inception, the acquisition strategy for mission packages has 
employed an incremental approach and remained stable, fielding systems 
as they achieve the required level of maturity. This phased plan 
provides progressively greater capability through the introduction of 
mature programs of record into the respective mission packages while 
mitigating the risk of individual systems. Those few systems 
experiencing developmental issues (Non-Line-of-Sight — Launching 
System (NLOS — LS) and Remote Minehunting System (RMS)) are either 
being replaced with alternate systems or are targets of increased 
leadership focus and programmatic attention. Results are positive in 
all cases. Rather than indicating weakness in the MP approach, these 
few failures demonstrate its strength; substitute or re-engineered 
systems are quickly and seamlessly identified and sequenced for in-
stride incorporation into the MP development stream without impacting 
the overall fielding plan. Equally important, the MP approach has 
succeeded in eliminating shipboard impact associated with changes to 
the MP (as in the case of NLOS) through strict adherence to interface 
controls between MP and the ship. 

Recent mission package testing has demonstrated the ability to meet Mine
Counte	measure (MCM) and Surface Warfare (SUW) Increment I fielding 
requirements. The Navy is on track to deploy Increment I of the MCM MP 
in 2013. Increment I will provide capability greater than is currently 
fielded in the fleet. An Engineering Development Model (EDM) for the 
Variable Depth Sonar (VDS) is under contract to deliver and commence 
testing in FY 2012, which will be the foundation of the Anti-Submarine 
Warfare (ASW) Spiral B MP. The Program of Record (PoR) is to continue 
spiral development of additional capability through 2017. The PoR will 
remain unchanged regardless of a down select or dual award acquisition 
strategy. This will allow the MP procurement to remain in phase with 
LCS deliveries. 

In summary, by leveraging the competitive, fixed price proposals 
currently in hand, the Navy, subject to annual congressional approval, 
has the opportunity to achieve dramatic procurement cost savings, 
accelerate fleet introduction of LCS, sustain stable production of 
both designs, mitigate potential risk associated with production start 
up at a second yard, and maintain opportunities for future 
competition. Not only do both designs meet the Navy's requirements, 
but also the design differences offer unique opportunities and 
flexibility to the Fleet in how these ships could be employed. 

Detailed comments on the report are enclosed. The Department 
appreciates the opportunity to comment on the report. For further 
questions concerning this report, please contact Darlene Costello, 
Deputy Director, Naval Warfare, 703-697-2205. 


Signed by: 

David G. Ahern: 
Deputy Assistant Secretary of Defense: 
Portfolio Systems Acquisition: 

Enclosure: As stated: 

[End of section] 


[1] The decision to select a single ship design is referred to as the 

[2] In response to the Navy's September 2009 LCS acquisition strategy 
change, General Dynamics and Austal USA revoked their teaming 
arrangement for future seaframes, in turn allowing the General 
Dynamics Bath Iron Works shipyard to compete for selection as the 
planned potential second source of the winning design. Austal USA and 
Lockheed Martin are the prime contractors competing for the current 10-
ship program. 

[3] See GAO, Defense Acquisitions: Navy's Ability to Overcome 
Challenges Facing the Littoral Combat Ship Will Determine Eventual 
Capabilities, [hyperlink,] 
(Washington, D.C.: Aug. 31, 2010). 

[4] [hyperlink,]. 

[5] According to Navy officials, the most recent progress related to 
LCS launch, handling, and recovery systems consists of (1) successful 
operation and movement of an embarked 11-meter rigid-hull inflatable 
boat onboard LCS 1 in March 2010, (2) synthetic lift lines on LCS 2 
successfully completing a 200 percent lift test, and (3) routine usage 
of a straddle carrier to move an 11-meter rigid-hull inflatable boat 
(with stowage cradle) and berthing modules around the LCS 2 mission 
bay. In addition, Navy officials state that LCS 1's system is 
scheduled to begin testing with the mine countermeasures mission 
package in fiscal year 2011 and testing of LCS 2's twin-boom 
extensible crane is progressing. 

[6] See GAO, Defense Acquisitions: Guidance Needed on Navy's Use of 
Investment Incentives at Private Shipyards, [hyperlink,] (Washington, D.C.: Jul. 26, 
2010) and [hyperlink,]. 

[7] See GAO, Littoral Combat Ship: Actions Needed to Improve Operating 
Cost Estimates and Mitigate Risks in Implementing New Concepts, 
[hyperlink,] (Washington, D.C.: 
Feb. 2, 2010). 

[8] According to Navy officials, the AN/AQS-20A sonar and Airborne 
Laser Mine Detection System recently completed developmental testing 
in August and October 2010, respectively. Alternatively, the Remote 
Minehunting System--produced since 2005--continues to struggle with 
reliability shortfalls. This has prompted the Navy to implement a 
series of design changes to the vehicle component and evaluate 
reducing the system's performance requirements. 

[9] Development of the Non-Line-of-Sight Launch System--an anticipated 
key system within the surface warfare package--was canceled in 2010 
following test failures and higher than expected cost estimates. The 
Navy continues to evaluate alternatives to replace this capability 
onboard LCS. 

[10] According to Navy officials, the planned fiscal year 2012 
operational test will employ the first LCS (LCS 1) seaframe and a 
(partial) surface warfare mission package. This date represents a 
recent update to the program's testing plan as the Navy's fiscal year 
2011 budget estimates showed this event occurring in the third quarter 
of fiscal year 2013. 

[11] [hyperlink,]. 

[12] [hyperlink,]. 

[End of section] 

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