Defense Acquisitions:

Improved Management Practices Could Help Minimize Cost Growth in Navy Shipbuilding Programs

GAO-05-183: Published: Feb 28, 2005. Publicly Released: Mar 10, 2005.

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The U.S. Navy invests significantly to maintain technological superiority of its warships. In 2005 alone, $7.6 billion was devoted to new ship construction in six ship classes--96 percent of which was allocated to four classes: Arleigh Burke class destroyer, Nimitz class aircraft carrier, San Antonio class amphibious transport dock ship, and the Virginia class submarine. Cost growth in the Navy's shipbuilding programs has been a long-standing problem. Over the past few years, the Navy has used "prior year completion" funding--additional appropriations for ships already under contract--to pay for cost overruns. This report (1) estimates the current and projected cost growth on construction contracts for eight case study ships, (2) breaks down and examines the components of the cost growth, and (3) identifies any funding and management practices that contributed to cost growth.

For the eight ships GAO assessed, the Congress has appropriated $2.1 billion to cover the increases in the ships' budgets. The GAO's analysis indicates that total cost growth on these ships could reach $3.1 billion or even more if shipyards do not maintain current efficiency and meet schedules. Cost growth for the CVN 77 aircraft carrier and the San Antonio lead ship (LPD 17) has been particularly pronounced. Increases in labor hour and material costs together account for 77 percent of the cost growth on the eight ships. Shipbuilders frequently cited design modifications, the need for additional and more costly materials, and changes in employee pay and benefits as the key causes of this growth. For example, the San Antonio's lead ship's systems design continued to evolve even as construction began, which required rebuilding of completed areas to accommodate the design changes. Materials costs were often underbudgeted, as was the case with the Virginia class submarines and Nimitz class aircraft carriers. For the CVN 77 carrier, the shipbuilder is estimating a substantial increase in material costs. Navy practices for estimating costs, contracting, and budgeting for ships have resulted in unrealistic funding of programs, increasing the likelihood of cost growth. Despite inherent uncertainties in the ship acquisition process, the Navy does not account for the probability of cost growth when estimating costs. Moreover, the Navy did not conduct an independent cost estimate for carriers or when substantial changes occurred in a ship class, which could have provided decision makers with additional knowledge about a program's potential costs. In addition, contract prices were negotiated and budgets established without sufficient design knowledge and construction knowledge. When unexpected events did occur, the incomplete and untimely reporting on program progress delayed the identification of problems and the Navy's ability to correct them.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: According to DOD officials, the revised Data Item Description (DI-MGMT-81466) issued as a result of USD(AT&L) changes to the DOD Earned Value Management policy promulgated in March 2005 requires the CPR to be submitted no less frequently than monthly. This change in policy is not retroactive, but shall be implemented on applicable future contracts. The CVN 77 program will begin receiving monthly CPR reports in March 2006 in accordance with the current contract. The SSN 774 Virginia class program receives labor performance data every two weeks in addition to quarterly CPR reports as required under the current contract. This data is provided for both of the construction shipyards through General Dynamics, Electric Boat.

    Recommendation: To improve management of shipbuilding programs and promote early recognition of cost issues, the Secretary of Defense should direct the Secretary of the Navy to require shipbuilders to submit monthly cost performance reports.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: In the DDG 1000, CVN 78, and Littoral Combat Ship programs, the Navy has negotiated the pricing of follow-on ships separately from the pricing of lead ships. This practice has contributed to increased realism of cost estimates and budget requests for these programs.

    Recommendation: To assure that realistic prices for ship construction contracts are achieved, the Secretary of Defense should direct the Secretary of the Navy to separate pricing of follow-on ships from pricing of lead ships, negotiating prices for early ships in the budget year in which the ship is authorized and funded.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: In both the DDG 1000 and CVN 78 programs, the Navy has acted to negotiate prices for the construction of lead ships separately from that of detail design. This practice has contributed to an increased understanding of ship pricing that has contributed to more realistic budget requests for these programs.

    Recommendation: To assure that realistic prices for ship construction contracts are achieved, the Secretary of Defense should direct the Secretary of the Navy to negotiate prices for construction of the lead ship separately from the pricing of detail design.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: Cost analysts at NAVSEA 017 (Naval Sea Systems Command Cost Estimating) have already begun to use risk and uncertainty analyses in developing their ship cost estimates. The 2005 Naval Sea Systems Command Cost Estimating Handbook, which covers conducting risk and uncertainty analyses, has been issued and a copy is available on NAVSEA 017's website. Cost estimates done under this guidance, beginning with the cost estimate on DD(X), will identify a confidence interval for the cost estimate.

    Recommendation: To improve the quality of cost estimates for shipbuilding programs and reduce the magnitude of unbudgeted cost growth, the Secretary of Defense should direct the Secretary of the Navy to develop a confidence level for all ship cost estimates, based on risk and uncertainty analyses.

    Agency Affected: Department of Defense

  5. Status: Closed - Implemented

    Comments: DOD concurred with our recommendation and according to a Navy official the Navy is now conducting independent reviews for future aircraft carriers--including the next carrier to be built, CVN 78. A Defense Acquisition Board (DAB) review will be conducted in 2006--prior to the award of the CVN 78 contract. This review will include an independent cost estimate by the DOD's independent cost analysis group known as the CAIG for the first three ships in the class (CVN 78 - CVN 80). At each milestone review, these cost estimates will be updated with actual cost data.

    Recommendation: To improve the quality of cost estimates for shipbuilding programs and reduce the magnitude of unbudgeted cost growth, the Secretary of Defense should conduct independent reviews of every acquisition of an aircraft carrier.

    Agency Affected: Department of Defense

  6. Status: Closed - Not Implemented

    Comments: Although recent Navy shipbuilding programs including the Zumwalt class destroyer and Littoral Combat Ship have experienced significant changes in the form of anticipated schedule, capabilities, and quantities, the Navy has not pursued comprehensive independent cost reviews for follow-on ships in these programs. Further, the Navy has not established criteria defining what constitutes significant changes within a shipbuilding program. According to Navy officials, the Navy conducts independent cost reviews when unbudgeted cost growth may result in a Nunn-McCurdy breach. In addition, DOD may request that the CAIG conduct an additional independent cost estimate or assessment, if needed, to support follow-on ship decisions after Milestone B. For Navy MDAPs designated as ACAT 1C, in which the Navy serves as the Milestone Decision Authority, the Naval Cost Analysis Division performs the independent cost estimate. The Navy, however, recognizes the need to manage requirement changes and has instituted capabilities and requirements review processes. The Naval Capabilities Board (NCB) and Resources and Requirements Review Boards (R3B) are chaired at the highest levels of Navy Leadership in an effort to manage changes to shipbuilding programs.

    Recommendation: To improve the quality of cost estimates for shipbuilding programs and reduce the magnitude of unbudgeted cost growth, the Secretary of Defense should conduct independent cost reviews for all follow-on ships when significant changes occur in a program and establish criteria as to what constitutes significant changes to a shipbuilding program.

    Agency Affected: Department of Defense

  7. Status: Closed - Implemented

    Comments: The Undersecretary of Defense for Acquisition, Technology, and Logistics has directed components of the Department of Defense (DOD), including the Navy, to conduct a comprehensive review of earned value management system policies and practices in order to help improve the quality of cost/schedule reporting and surveillance in DOD programs. This review is intended to address recent audit findings and other identified deficiencies, such as the quality of variance analysis reports.

    Recommendation: To improve management of shipbuilding programs and promote early recognition of cost issues, the Secretary of Defense should direct the Secretary of the Navy to require shipbuilders to prepare variance analysis reports that identify root causes of reported variances, associated mitigation efforts, and future cost impacts.

    Agency Affected: Department of Defense

 

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