When the Navy unveiled its 30-year shipbuilding blueprint last year, defense watchdogs said the plan carried tremendous risks because it was based upon optimistic assumptions about the affordability of ships and expectations of an increasing budget.
The service this year submitted a revision that analysts say will cost even more. And during the past few months, the Navy has hit some rough seas with cost overruns on a crucial surface ship program that is a cornerstone of its shipbuilding plan.
Such developments not only threaten to veer the Navy’s course away from building its fleet to 313 ships by 2013, but they also validate critics’ longheld beliefs that the service’s plan is unrealistic and, in the end, may be unfeasible.
Only hours before the problems in the littoral combat ship program came to light at a Surface Navy Association conference in January, Navy leaders painted a rosy picture of major programs, promoting 313 ships as an attainable number and a must-do goal for the nation.
The Navy has a current inventory of 281 ships. Many of those systems are aging and becoming technologically obsolete. While some classes are being overhauled and updated, others are being retired in favor of the drawing board.
“We have more ship designs going on than we’ve had since World War II,” said Vice Adm. Paul Sullivan, commander of Naval Sea Systems Command, at the conference. He pointed at a slide showing photos of some of those up-and-coming, cutting-edge technologies — the littoral combat ship, the DDG-1000 destroyer, the LHA 6 and LHD 8 amphibious assault ships, the T-AKE 1 supply ship, the LPD 17 amphibious ship and the DDG 51 guided-missile destroyer.
“This is your surface Navy in 20 years. These are the ships your kids are going to serve on,” he told conference attendees.
The future Navy will be surface-ship heavy, with 11 aircraft carriers, 88 surface combatants and 55 littoral combat ships.
To get to that point, the Navy has been ratcheting up the number of ships it builds each year. In February, it submitted a budget request of $13.6 billion for seven new ships in 2008, including funds for one CVN aircraft carrier, one Virginia-class nuclear attack submarine, one San Antonio class LPD-17 amphibious ship, one Lewis and Clark T-AKE supply ship and three littoral combat ships.
In 2009, the Navy plans to build 11 ships; in 2010, it wants to construct 12; and in 2011, it intends to fund 13 new ships. That trend will remain in the low teens through 2016.
“We fully expect the budget that exists in ‘07 to exist in ‘08 and continue across the [future years defense plan],” said Rear Adm. Barry McCullough, III, director of the Navy’s surface warfare division.
With two ongoing wars, the Defense Department’s budget has soared during the past five years. But such funding inevitably cannot continue at current rates.
The Navy has said it will cost an average of $14.4 billion a year to sustain its 30-year shipbuilding plan. Budget analysts have argued that the cost is higher. They put the amount at more than $18 billion a year. But even maintaining a budget at the Navy’s estimated level will be a challenge.
“The long term trends for the naval shipbuilding plan to me still look pretty dire,” said Robert Work, vice president for strategic studies at the Center for Strategic and Budgetary Assessments. “It’s going to be difficult to sustain $15 billion a year.”
The annual funding for new ship construction in 2000 to 2005 has averaged about $10.2 billion, a Congressional Research Service report stated. Boosting that amount could pose a significant challenge for the service in budget-tightening times.
Several key lawmakers have said they want to increase the number of ships being built in 2008.
But there is skepticism about the origins of the additional money it would take to fund those extra ships, which reportedly could include two DDG-51 destroyers and a Virginia-class submarine.
“Where are they going to get the money from? Are they going to steal it from the aviation accounts? That may screw the Navy up in the long run,” said Work.
In its revised 30-year shipbuilding plan submitted this year, the Navy has added 13 ships in the 2020s. Last year’s plan indicated the Navy would buy two DDGX Arleigh-Burke class destroyer replacements per year beginning in the 2020s. Now it has been boosted to three per year, starting in 2022.
“This is, in fact, going to be a more expensive plan,” alleged a congressional naval analyst who cannot be identified because of office policy.
To offset those cost increases, the service has cut four combat logistic ships planned for 2020. But that won’t be sufficient to cover those costs, he said.
The fiscal foundation on which the plan was built initially has not improved, and if anything it has gotten worse, he added. The plan assumes everything will go right.
“We live in a world, as the littoral combat ship has proven, where something always goes wrong,” he said.
In the near term, the Navy’s shipbuilding plan has remained stable, with only one change: the LHAR amphibious ship will be procured one year earlier, in 2010. Keeping the plan stable is one factor in preventing cost escalations, but it’s not enough, analysts said.
“I have always believed that the Navy shipbuilding plan has been very ambitious in the assumptions that it used. I always believed it was right on the edge of fiscal feasibility,” said Work.
One of those assumptions is that the Navy will keep its fleet of 84 surface combatant ships in service for an average of 35 years.
But the Navy has no recent experience in keeping large surface combatants in commissioned service for 35 years, Work said. The average age of cruisers retired during the Cold War era was 28 years, said Work.
Part of the reason behind the truncated service lives is that those ships were built using hardware and software from the 1970s and 1980s, which cannot be upgraded easily. Nor are they compatible with each other.
“A lot of times, we’re overseas, and we can’t talk to them even though they have the same systems that we have,” said Rear Adm. Michael S. Frick, program executive officer for integrated warfare systems.
The Navy was unable to modernize the DDG-993 Kidd class destroyers and decommissioned them at 17 years when its expected service life was 35 years, said McCullough. It also wasn’t able to modernize the first five Ticonderoga class cruisers, and those were decommissioned at 19 years. Likewise, the Spruance class destroyers were decommissioned at 22 years.
“A surface combatant averages $1 billion in costs, and if you only keep it for half its service life, then you’re throwing away $500 million per unit copy,” said McCullough.
The USS Valley Forge, a ship with 18 years of service, was sunk because it was not affordable to modernize.
On average, it costs $400 million to upgrade the software, Frick told the conference.
“If we don’t get to an open architecture computing environment … we will be decommissioning our ships at half their service lives,” said McCullough.
That, in part, is why the Navy has been pushing the littoral combat ship and the DDG-1000 Zumwalt class destroyer programs as the wave of the future. These gleaming technologies have open architecture at the core of their designs— the capability to accommodate multiple systems and simply “plug in” advanced weapons systems as newer ones develop.
With its modular design, smaller size and cheaper price tag, the littoral combat ship is the poster child of the Navy’s shipbuilding future. The Navy wants to build 55 of these multi-mission, coastal vessels.
The first LCS ship was built in record speed — two years—from an initial design on paper to the hull hitting the water last September. But it has come at a price: what was supposed to cost the Navy $220 million has instead come in around $350 to $375 million.
In January, Secretary of the Navy Donald Winter issued a 90-day stop-work order on the third LCS, being built by Lockheed Martin, because of significant cost increases on the first LCS. There are two different designs in construction, one by Lockheed Martin Corp. and one by General Dynamics. The Navy in 2004 secured funds for two of each design. Last year, Congress approved procurement of two additional ships to begin in 2007.
The stop-work order was an unusual step for the Navy to take, analysts said. The decision underpinned the high-stakes value attached to this ship.
“Cost control on the LCS is absolutely critical for the Navy to achieve its 313-ship goal,” said Work. The ship, designed for mine, anti-surface and anti-submarine warfare, comprises 18 percent of the future fleet, second only to the 88 large surface combatant ships.
“The whole shipbuilding plan really depends on this ship coming in at a relatively inexpensive cost,” said Work.
The logic behind LCS was to find a ship that the Navy could build three for the price of a single DDG-51 Arleigh-Burke class destroyer, which at the time was $1.2 billion. That meant each LCS ship, with all the bells and whistles, had to come in at around $400 million.
The Navy decided to build the hull separately from the mission modules to fit into the “plug and play” criteria of next generation ships. Under that model, the hull would cost $220 million and the mission modules would cost $180 million, paid for through two different accounts: ship conversion Navy, (SCN), and other procurement Navy, (OPM), respectively.
The problem with the LCS hull coming in at higher cost is that SCN dollars are tight. If the basic hull cost goes up, that adds more pressure to the SCN budget.
“That’s bad over the long term, because if the original plan was for each of the hulls to cost $220 million, and they come in at $300 million, then 55 times $80 million is a lot of money,” said Work.
The Navy has been eager to get LCS into service to replace 56 ships in its mine warfare vessel inventory: 30 FFG Oliver Hazard Perry frigates, 14 Avenger class mine countermeasure ships and 12 Osprey class coastal mine hunters. Getting rid of ships like the frigate, with its large crew and high operating costs, will save the Navy money because the LCS crews will be much smaller, said Work.
The first of class LCS, the USS Freedom, has seen a cost increase from a baseline of $270 million to about $375 million. The Navy had promised Congress it could deliver the LCS at $220 million by the fifth ship.
But the LCS recurring cost is $300 million, according to the Navy’s 2008 budget submission, which did not factor in the cost growth, said the congressional naval analyst. A more realistic cost is $340 million, factoring in the cost growth of the Lockheed Martin ship.
“If anything, the cost might be more than that — and that doesn’t include mission modules,” he said.
With one mission module, he puts the total cost of LCS at $410 million. The Navy hasn’t specified how many mission modules each ship will have, but last year’s budget indicated it could be two per ship.
Each mission module is running about $70 million per package, including the vertical take off and landing tactical unmanned aerial vehicle. If the Navy is planning two mission modules per ship, then the total cost of LCS could be $480 million, he said.
“They have certainly shot themselves in the foot in many ways by advertising this as a system that was going to be bought quick, fast and cheap,” he added.
If LCS turns out to be about $50 million each more expensive to build than the Navy previously estimated, then that would increase the cost of the 30-year shipbuilding program by about $2.75 billion, or an average of about $90 million per year, said Ronald O’Rourke, naval analyst for the Congressional Research Service. A $50 million increase would hike the cost of procuring six LCS ships — the annual number the Navy wants to buy starting in 2009 — by roughly $300 million. If an equivalent amount of funding were not added, then this could place additional funding pressure on other Navy shipbuilding programs, said O’Rourke.
The Navy has responded by going all hands on deck, with Chief of Naval Operations Adm. Michael Mullen admitting to Congress that he’s embarrassed. Within the service, heads have rolled: the LCS program manager was reassigned, as was the program executive officer for ships.
Navy and Lockheed Martin officials testified before a congressional subcommittee in February about the cost overruns.
The Navy admitted to oversight problems while the Lockheed Martin team explained cost increases from materials and delays due to the improper sizing of reduction gears. Both sides took issue with the naval vessel rules — specifications that are required in order to militarize a ship.
Because the LCS is a new class of surface combatant, the Navy had to write up naval vessel rules as the bidding proceeded for the contracts. That meant once the contracts were awarded, the Lockheed Martin and General Dynamics teams had to re-engineer their designs to incorporate those specifications.
For example, LCS 1 originally had a single-loop fire main system — a system that sucks water from the sea and circulates it through a single loop of piping to various hydrants throughout the ship. The naval vessel rules required a second fire main system to fortify the ship against possible damage to the first system. As a result, the Lockheed team had to redo the drawings to incorporate the additional system, which added costs along the way.
“All ships are relatively constrained on space, and once you start moving things around, you have a domino effect on other components,” said Craig Quigley, spokesman for Lockheed Martin.
That is a typical problem with ships that are concurrently designed and constructed, said Joe Carnevale, senior defense advisor at the Shipbuilders Council of America.
“I have seen cases of other ship acquisition programs where you had a piping system installed multiple times because things had been learned and you have to go back and fix it,” he said. “Concurrent design and development is a very big factor in a cost risk of a first ship.”
Exacerbating the issue was the accelerated pace at which the Navy demanded the shipbuilders to deliver the LCS. Ships typically take as long as a decade to go from design to construction to delivery. The LCS schedule was compressed into two years.
“Every single decision they made emphasized delivery schedule over cost,” said Work. “When you adopt that strategy, you’re going to pay more. You’re going to have these overruns.”
Navy officials testified that they became aware of the cost growth last summer, but sources said the service knew about the increases as early as the fall of 2005 via a reporting system used by shipbuilders.
Reports are generated through an earned value management system that measures the cost of work completed against expected costs at a shipyard. Those reports are processed on a monthly basis and typically are shared on a quarterly basis with the ship’s program manager, who sends it up through the program executive officer. The PEO sends a composite report up to the assistant secretary for the Navy for research, development and acquisition. Because the LCS program was managed at the Defense Department level, the information ultimately landed in the office of the undersecretary of defense for acquisition, technology and logistics.
“Lockheed Martin was being very diligent in trying to tell the Navy the problems they were having. They weren’t trying to cover anything up,” said Work. He guessed some of the cost overruns were due to a failure of communications inside the Navy and a failure of keeping senior leadership informed.
To adhere to the expedited building schedule was important to the Navy, but it contributed to the cost growth.
“Every time there was a decision point, they made the decision to keep on schedule rather than slip it,” said Work. The schedule reigned supreme.
“Now it’s clear that cost is king, too,” said Quigley.
Observers said the Navy might be able to trim costs in the near future.
“If they can’t get the ship down to $300 million on the follow-on ships, then I think the Navy may consider canceling it and trying another design,” said Work.
The Navy, however, appears intent on staying the course with LCS.
“We have the right ship to go into harm’s way,” said Delores M. Etter, assistant secretary of the Navy for research, development and acquisitions. “The problem was we wanted to do it too fast,” she told reporters in late February. “We’re going to get the ship we want, but it’s not going to be at the price we thought we could get.”
A two-year build cycle is achievable for the ship, she stressed.
An alternative to scrapping the ship is to buy fewer mission modules. If the Navy can get to one ship for $400 million with a single mission module, or $450 million for one or two mission modules, that would still allow them to buy three LCS for the price of one Arleigh-Burke, said the congressional naval analyst.
Much of the debate hinges on General Dynamics’ LCS, the first of which is about halfway complete. The company expects it to launch in December, as scheduled.
But Etter told reporters, “we think it’s going to have a cost overrun, too,” probably not too far in growth from what the Navy has seen with the Lockheed Martin LCS.
The LCS problems will add costs to the Navy’s shipbuilding budget in the short term, analysts said. LCS also provides the public a high visibility example that shows things go wrong in shipbuilding, and that could have graver implications in the long run.
“Here was your quicker, faster, cheaper, more affordable ship coming in with a number of problems and higher costs than anticipated. What happens when you start building ships that cost and weigh 10 times as much?” said the congressional naval analyst.
Work agreed with that assessment.
“If you can’t contain costs on that ship, then that leads me to believe that you would have extreme difficulty containing the costs on a ship as complex as the DDG-1000.”
Not so, said Etter. The DDG-1000 program is different because it is not being designed and built at the same time.
“In many ways, the DDG-1000 is laid out the way you’d like to lay out a program,” she said. But that program has been in progress more than a decade and has yet to bend any steel. And defense analysts agree that the Navy’s estimated $3.3 billion price tag for the first two destroyers is conservative. There are seven DDG-1000s in the Navy’s 30-year shipbuilding plan.
“We have challenges to get to the 313-ship Navy, and affordability is going to be a big part of it,” said Etter.
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