Formula for Slashing Ship Costs: Simplify Designs, Cut Industry Overhead
Rear Adm. Victorino G. Mercado, the Navy’s deputy director of surface warfare, conducted a familiar drill last week: He met with shipyard executives and solicited their help in taming the spiraling costs of building and maintaining Navy ships.
Admirals for years have been asking shipbuilders to lower prices, but so far the results have been underwhelming given recent cost trends in Navy ship programs. Manufacturers, for their part, have argued that if only the Navy ordered more ships, the industry could operate more efficiently.
Navy officials now insist that actions by both industry and government will be needed to reverse rising cost trends.
With ship inflation estimated at 10 to 12 percent a year and the Pentagon projecting a flat budget of about $15 billion a year for ship procurement for the foreseeable future, the Navy’s purchasing power is on a downward slide.
“How can we reduce overhead and produce efficiency?” Rear Adm. Ann Phillips, special assistant for surface warfare, asked an audience of military contractors at the Surface Navy Association annual convention.
The Navy needs to squeeze billions of dollars in costs from its ship programs soon, before “OCO funds” — overseas contingency operations money that is not part of the Navy’s regular budget — run out, Phillips said. “In the last 10 years, we were supported by OCO,” she said. “Now we have to manage without OCO.”
The problem is not just the cost of buying new ships but also the expense of keeping up a diverse fleet with many ship types and models, each of which requires unique support, maintenance and training. One obvious way to save money would be to standardize equipment, Phillips said.
Across classes of ships there are untold variants of combat systems, weapons and command-and-control suites. New ships from now on, said Phillips, should emphasize lower “ownership” cost, and should “minimize surprises” in the form of high maintenance tabs that pop up years after a ship has been in the fleet.
“Old habits die hard, but we must retrain ourselves,” she said.
A Pentagon-funded study by The Rand Corp. estimated that 50 percent of ship cost escalation results from “economy-driven” factors that are largely outside the control of the government such as wage rates and the cost of material and equipment. The half comes from “customer-driven” factors — regulations the Navy imposes and methods it uses to purchase ships. In recent decades, the Navy’s desire for more complex ships has been a significant contributor to ship cost inflation.
A group of senior Navy officials, retired admirals and ship designers has been working on a study on how to build a new generation of ships that are cheaper to construct and can be more easily upgraded. The study has been dubbed “future concepts on modular platforms,” and has been described by one of the participants as a “Lego-like” approach to building a ship.
The goal is a “true plug-and-play ship,” said Richard M. Biben, president and CEO of Gibbs & Cox, a ship engineering firm. The Littoral Combat Ship is the Navy’s first attempt at decoupling the hull from the combat systems, but LCS is still more tightly integrated than the concept that is now being discussed for a future design, Biben said in an interview.
If the Navy is serious about saving money, it will have to simplify the makeup of the fleet — eliminate obsolete software and hardware that requires costly upkeep, use off-the-shelf computing technology, and reduce combat systems and weapon variants, said Rear Adm. Jim Syring, program executive officer of integrated warfare systems. The plan is to “decouple combat system development from platform development,” he said in a presentation at the SNA conference.
Chief of Naval Operations Adm. Jonathan Greenert hinted in comments to SNA attendees that “modularity” and “common hull” would be the operative words in planning for a replacement to current destroyers and cruisers.
Another proposed remedy to cost overruns in ship programs is to reduce yards’ overhead expenses, particularly full-time staff.
Biben said the Navy’s small production orders makes it tough for shipyards to keep engineers on their payrolls. Gibbs & Cox has turned this into a business opportunity by providing temp services from its staff of 350 engineers, most of whom have security clearances to work on military projects.
“For yards [especially mid-tier and small] to keep their high-end technically skilled engineering work force on staff is cost prohibitive in this day and age,” said Gibbs & Cox Vice President of Business Development Shawn R. Tallant.
Rent-an-engineer services have fueled Gibbs & Cox’s revenues from $175 million to $360 million since a year ago.
Biben predicts the Navy’s top tier shipyards increasingly will have to outsource engineering work as they seek to lower the overhead costs in Navy programs.
One of the largest yards, Bath Iron Works, in Maine, already has laid off hundreds of skilled workers in response to a slowdown in Navy work. “We briefed BIW leaders” on the possibility of Gibbs & Cox becoming their “engineering arm,” said Biben. “We told them, ‘You don’t have to worry about keeping 30 to 40 engineers on the staff. You’re renting expertise from us.”
Navy leaders have reacted favorably to the idea that shipyards should use temp workers to lower costs, said Biben. “Their response is we’re hitting exactly at the challenge they’re having.”