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entitled 'Defense Acquisitions: Challenges Associated with the Navy's 
Long-Range Shipbuilding Plan' which was released on March 31, 2006. 

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

United States Government Accountability Office: 

GAO: 

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

Thursday, March 30, 2006: 

Defense Acquisitions: 

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

Statement of Paul L. Francis, Director: 

Acquisition and Sourcing Management: 

GAO-06-587T: 

GAO Highlights: 

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

Why GAO Did This Study: 

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

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

What GAO Found: 

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

Multiple Objectives Embodied in the Navy Shipbuilding Plan: 

[See PDF for image] 

GAO (presentation). 

[End of figure] 

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

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

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

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Paul Francis at (202) 512-
4841 or francisp@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Subcommittee: 

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

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

Summary: 

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

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

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

Shipbuilding Plan Proposes to Meet Multiple Objectives: 

The Chief of Naval Operations recently released a long-range plan for 
shipbuilding[Footnote 1] that encapsulates the Navy's vision of the 
future naval force structure. This is an ambitious plan that proposes 
to meet multiple objectives, including: 

* building ships that support new missions, 

* building more sophisticated ships to support existing missions, 

* building workhorse ships like tugboats, 

* increasing numbers of ships to improve presence and ability to carry 
out missions, 

* designing ships and operating concepts to reduce manning 
requirements, and: 

* devising construction workloads to stabilize the industrial base. 

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

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

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

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

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

Figure 1: Multiple Objectives Embodied in the Navy Shipbuilding Plan: 

[See PDF for image] 

[End of figure] 

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

Challenges Facing the Execution of the Navy's Plan: 

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

Challenge 1: Securing a Sufficient Supply of Funds for Shipbuilding: 

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

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

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

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

[See PDF for image] 

[End of figure] 

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

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

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

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

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

[See PDF for image] 

[A] Estimated cost from the President's budget submission for year of 
ship authorization. 

[B] Includes all prior year requests through fiscal year 2007. 

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

[End of table] 

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

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

Figure 3: Schedule for Construction of New Lead Ships: 

[See PDF for image] 

* Dates beyond fiscal year 2011 are notional. 

[End of figure] 

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

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

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

* attaining requirements stability, technology maturity, and design 
stability early in programs; 

* gaining actual experience with design before budgeting and 
contracting for construction; 

* contracting the construction of the lead ship separately from the 
construction of follow-on ships; and: 

* employing good cost-estimating techniques and making better use of 
cost reports. 

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

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

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

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

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

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

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

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

Individual Ship Strategies Align Knowledge and Decision Points 
Differently: 

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

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

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

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

Cost Estimating and Reporting: 

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

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

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

Budgeting and Contracting: 

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

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

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

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

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

Optimizing Ship Crew Size Can Reduce Total Ownership Costs: 

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

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

[See PDF for image] 

[End of figure] 

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

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

Increasing Operational Availability: 

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

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

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

Objectives, Scope, and Methodology: 

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

Contact and Staff Acknowledgments: 

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

Related GAO Products: 

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

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

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

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

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

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

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

FOOTNOTES 

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

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

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

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

[5] Fiscal year 2002 dollars. 

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