BUDGET MATTERS BUDGET
The Guessing Game of Shipbuilding Costs
The Surface Navy Association recently held its 36th annual symposium, and keynotes and panels focused on the need to “get more players on the field” — an odd turn of phrase for a Navy conference — by improving readiness, adopting new technologies, getting ships in and out of maintenance faster and of course building and launching new ships.
However, it wasn’t until the last panel on the conference’s final day that anyone discussed the costs of carrying out the Navy’s current shipbuilding plan.
The Congressional Budget Office’s Eric Labs, who produces an annual analysis of the Navy’s 30-year shipbuilding plan, noted the 2024 plan included three long-range alternatives ranging from 290 to 340 ships.
“By design, the 2024 shipbuilding plan is very similar to the 2023 shipbuilding plan,” he said. “It was a status quo plan. They said that these shipbuilding plans were not aligned to the National Defense Strategy,” which the 2025 shipbuilding plan will be, according to information he has received.
“The big story of the 2024 shipbuilding is rising costs in real terms,” Labs said. “By the Navy’s own estimates, those costs grew by 10 percent in real terms.”
His office estimates the growth to be about 15 percent in real terms, he said. “So, I think the numbers are in the neighborhood of $34 [billion] to $36 billion a year is going to be needed, on average, over a 30-year period to implement the shipbuilding plan, depending on which plan you’re talking about.
“That’s 31 to 40 percent more than what the Navy has spent on shipbuilding over the past five years in real terms, so you’re talking about something greater than the Reagan era build-up going on for 30 years,” he said.
According to his analysis, 80 percent of the real cost growth in the shipbuilding budget results from rising unit costs, and 20 percent comes from changing composition, such as moving from an Arleigh Burke-class destroyer to a DDG(X).
And 80 percent of the unit cost growth comes from submarines, which account for more than half the shipbuilding budget, Labs said. For now, that means cost growth in attack submarines, as there is no cost growth projected for the Columbia class … yet.
“Columbia costs, it seems to me, are going to have to grow,” he said. “You could argue that the Columbia is the number one priority. They are putting their best managers, their best welders, their best workers, the best of everything to that program in an effort to keep it on schedule and to keep costs under control.”
That may be the case, “but my experience in doing this work for 25 years is that there is going to be substantial cost growth in the Columbia-class program before it has finished,” he said. “I’ve got those ships up north of $9 billion apiece right now. And that is largely reflective of what the conditions are in the submarine industry today as I see them.”
Similarly, estimates for the cost of the DDG(X) are optimistic, he said. “The Navy’s costs on that from one plan to the other change very little, they just changed with inflation. But the reality still is that you’re talking about a ship that is going to be 40 percent larger than the Flight III Arleigh Burke, and it is only costing — according to the Navy’s estimates — 14 percent more than the Arleigh Burke. I don’t see how that’s possible.”
This all raises the question, if the Congressional Budget Office is producing realistic estimates of shipbuilding costs, why do Navy requests and congressional appropriations routinely come up short?
“On the one hand, the Navy has an incentive to not want to put perhaps the cost that they really think a ship might be into the budget because they have to go through a process where they negotiate with the shipbuilder,” Labs told National Defense.
Thus, the Navy doesn’t want to give shipbuilders more ammunition in negotiations.
“If they go for something lower, maybe they can negotiate with the shipbuilder a little bit to sort of get the best price they possibly can,” he said. “So, there’s that incentive at work.”
There are other incentives for the Navy to use best-case scenarios when costing out ship construction, he said.
Just because things went wrong with a previous program, “they can’t necessarily assume that things are going to go wrong in [the next] program. That’s not the way they do it. I do that,” he said.
“My view of it is that things have gone wrong in the past, something will go wrong on this shipbuilding program,” he continued. “That’s what the history of shipbuilding programs tells us. So, it’s that tyranny of a series of optimistic decisions — little decisions every step along the way end up producing an estimate that looks very plausible and reasonable in many instances but does not necessarily comport with what history would tell you.”
Thus, history — and CBO analysis — says the $32 billion Congress has authorized for nine new ships in the 2024 National Defense Authorization Act is not going to cover the cost, meaning another “complete bill” down the line like the $1.6 billion the Navy must pay in 2024 for previously purchased ships, Labs said.
“We’re still waiting, of course, for final appropriations,” he continued. “We’re all going to hope that we get final appropriations, and we’re not stuck under a [continuing resolution] because then that number will look quite a bit different. But that’s where we are as of right now.” ND