Off Course

The Navy's shipbuilding plans are hitting the shoals of fiscal reality.

"The most serious threat to the U.S. Navy is now the U.S. Navy." That was the damning conclusion of an August 2008 study by the Center for Strategic and International Studies, a Washington think tank. In Abandon Ships: The Costly Illusion of Unaffordable Transformation, Hans Ulrich Kaeser wrote, "The Navy's shipbuilding efforts are-to be charitable-a triumph of hope over experience." Fundamentally, the service has failed to link its military strategy to realistic procurement plans and budgets, Kaeser wrote: "A strategy that cannot be implemented or resourced is not a strategy, but rather a critical failure in leadership and management. It is nothing more than a statement of hopes and good intentions without credibility."

The subject of Kaeser's study was the Navy's plan to achieve and maintain a 313-ship fleet-the force service leaders say they need to carry out missions worldwide. Kaeser is not some lonely voice on the topic. The Center for Strategic and Budgetary Assessments, Government Accountability Office and many other organizations have analyzed the Navy's plans to expand its rapidly aging fleet of 283 ships. While their prescriptions for reshaping the Navy differ, all have reached the same conclusion: The service cannot build and sustain the 313-ship fleet it wants unless it substantially increases its procurement budget, or dramatically cuts the cost of building ships still on the drawing board.

Ronald O'Rourke, a longtime specialist in naval affairs at the Congressional Research Service, says to meet its goal, the Navy would have to build more than 12 ships every year during the next 18 years at an estimated annual cost of $23 billion to $25 billion. That estimate is hard to square with recent history: During the past 17 years, the Navy has built an average of 5.4 ships annually, and its annual shipbuilding budget is now about $11 billion, O'Rourke says. Given the nation's economic woes and the Obama administration's other priorities, anyone expecting a big boost in shipbuilding likely is fantasizing, analysts say.

Planning for the future fleet and putting a price on those plans is not an exact science. It can take more than a decade (or a presidential administration) to design and build a new surface combatant or submarine. Requirements change as new technologies are developed or disproved, enemies emerge, and economic and political priorities shift.

The Navy has recast its desired mix of combat ships more than once since it published the 313-ship plan in 2006, in response to an evolving understanding of future threats. Perhaps service leaders' most significant decision has been to truncate the next-generation destroyer program, known as DDG-1000, at three ships (the service originally wanted to buy seven; the first ship has yet to be completed) and build more of the older DDG-51 Arleigh Burke-class destroyers.

The Navy decided in July 2008, after sinking a decade and several billion dollars into the program, which was to field a number of revolutionary technological advances, that an upgraded version of the stalwart Arleigh Burke would be more reliable and affordable.

Estimating the cost of the evershifting future fleet always has been problematic. Ships have vastly different price tags depending on what they're designed to do. A $1.3 billion Arleigh Burke-class destroyer can seem like a bargain compared to a $5 billion DDG-1000, or a $9 billion aircraft carrier.

What's more, like any major weapons program, prices change-the lead ships developed in any class always are more expensive than later models coming off a production line when manufacturing efficiency is at its peak. But even allowing for cost overruns, redesigns and other unforeseen changes that inevitably will occur in any decades-long program, the Navy's basic math doesn't add up.

The Navy's plans, of course, are subject to further change. The Obama administration's fiscal 2010 budget proposal would make a number of significant modifications in ship acquisitions.

The Pentagon also is undergoing a Quadrennial Defense Review, which most observers believe will alter future weapons purchases substantially for each of the services. Whatever the outcome of the 2010 budget negotiations or the review, however, it's clear the Navy is going to have to do a much better job of controlling costs if it is to build anything approaching a 313-ship force.

Transformation Poster Child

When Rep. Gene Taylor, chairman of the House Armed Services Seapower and Expeditionary Forces Subcommittee, talks about the Littoral Combat Ship, you almost expect to see steam come out of his ears. "To call the LCS troubled would be an understatement," the Mississippi Democrat says. The program was conceived in 2002 to deliver a high-speed, easily maneuverable ship that could perform a range of missions in coastal areas, giving the Navy an edge on what strategists believe are the most likely future maritime battlegrounds.

"A look at the plan from just two years ago [shows] we should by now have at least four ships delivered, three more nearing completion from a fiscal year 2008 authorization, six more under contract from a fiscal year 2009 authorization, and today we should be discussing the authorization of six more ships for fiscal year 2010," Taylor lectured two senior admirals during a March 10 hearing.

"The fact of the matter is that this program has so far delivered one ship- one ship," a frustrated Taylor repeated. The Littoral Combat Ship was supposed to be a transformational platform, in terms of its capabilities and construction process. Navy officials believed contractors could build an agile, lowdraft ship based on the designs of highspeed commercial ferries to save time and money. The ships would be built so weapons packages could be changed out quickly, allowing them to be configured for a range of missions from antisubmarine warfare to counterinsurgency operations. Service leaders contracted with Lockheed Martin Corp. and General Dynamics Corp. to design and build two versions, which would compete for future contracts. The Navy and the contractors agreed the ships would cost about $220 million each, not including weapons packages-a bargain for a combat ship. But it turns out that commercial ferries don't provide good models for warships, even those designed to operate in shallow waters.

Lockheed Martin, with little shipbuilding experience, got the first contract and began work at the Marinette Marine shipyard on the Menominee River in Wisconsin. There were a number of problems from the outset. First, in an effort to save time, the Navy and contractors decided to begin construction of the lead ship before the design was complete, a decision that would prove fatal to both schedule and cost commitments.

As contractors were adapting a commercial design for military use, the service was overhauling its shipbuilding codes, establishing rules that essentially would preclude the use of most commercial standards for warships. What's more, the Navy exercised little oversight at the shipyard. A decade of outsourcing had decimated the service's in-house engineering and acquisition workforce. By the time Lockheed delivered the first ship in September 2008, the cost had more than doubled.

General Dynamics encountered similar problems building the second ship in Alabama, for which the Navy expects to take delivery this summer. In both cases, design changes during construction racked up enormous costs. The price tag for building the first two ships, including research and development, will exceed $1.3 billion, and production is running about 18 months behind schedule, GAO estimates.

Rear Adm. William Landay, the Navy's program executive officer for ships, told lawmakers during the March hearing that the service "overlooked hard-learned, fundamental lessons of shipbuilding" when it tried to develop warships based on commercial standards.

"You must have a solid, mature design before you start construction," Landay testified. "You cannot be negotiating standards and adding new technical requirements while you are building a ship. And if you have to make major changes, you need to stop and get them right, because rework kills productivity."

The Navy had to cancel contracts for the third and fourth ships in 2008 to cover the skyrocketing costs of finishing the first two. In March, the service again contracted with Lockheed Martin for a third ship; it plans to do the same with General Dynamics soon, for the fourth ship. Those ships will be purchased on a fixed-price basis, but the Navy had not released the price as of mid-April because negotiations were ongoing.

Now that the design is mature, future ships are likely to cost significantly less than the first two. Multiyear contracts could reduce costs further, according to Landay. "Our strategy is basically to get shipbuilders into serial production, where we can drive efficiencies in production and cost," he said. Eventually the Navy might settle on one of the designs, depending on cost and performance, or it might continue to buy a combination to reach the 55-ship goal.

The Navy's ability to meet that target, however, likely will depend on how well it can drive down costs. In the current fiscal climate, "You do not want to be a program that's breaking the bank," Taylor said.

Driving Costs

Allison Stiller, deputy assistant secretary of the Navy for ship programs, keeps in her files a copy of a memorandum to lawmakers explaining cost overruns in shipbuilding programs. The document lists a host of contributing factors, including design challenges, problems with new technologies and poor cost analysis. It dated July 10, 1939. "These are recurring issues," Stiller deadpans. She is determined to change the historical precedent, however, and is overseeing a range of efforts begun in 2008 to curb costs and improve the Navy's ability to estimate them. "Lead ships are extremely difficult for both the Navy and industry," she says.

The Navy has learned a lot from the LCS program, according to Stiller. For one thing, the naval vessel rules, which govern military ship production, are now complete, and the service plans to update them annually. They replaced general specifications for ships that had been allowed to atrophy during the past decade when the Navy had no new ships in development, she says.

To guard against cost overruns, the Navy now is requiring that new ship designs be at least 85 percent complete before construction begins. In addition, service leaders have established a formal review process that brings together at key intervals all of a ship's stakeholders before the requirements for a new program are even developed. Those stakeholders include Navy field personnel who will one day operate the ship, maintenance workers and logisticians who will be expected to support it, acquisition specialists who will have to write the contracts for industry, and the industry teams that likely will build it. Also, program managers for every ship in development and production now must convene annual configuration steering boards to scrub the program for cost-reduction opportunities.

The Virginia-class submarine program, the only nuclear sub now in production, offers an example of how rigorous oversight can prevent early cost overruns and production delays, Stiller says. The Navy wanted to produce two subs annually, but it couldn't afford to do so unless it could meet a target cost of $2 billion per sub. That meant General Dynamics' electric boat division and Northrop Grumman Corp., the contractors building the subs, would have to figure out how to cut about $500 million from the cost of each. So in 2007, the contractors hired consulting firm Booz Allen Hamilton for advice.

Vice President Mike Jones, who leads Booz Allen Hamilton's North American aerospace and defense strategy, says by combing through the boat's design and production processes and methodically documenting the costs incurred, the firm helped identify more than 250 specific steps-from redesigning some components to reworking production processes and schedules-that led to substantial savings.

By improving the production process, the companies were able to reduce the construction time frame from 100 months to 60 months for considerable savings, Jones says. In total, the improvements have resulted in an estimated $3.8 billion in savings for the life of the production schedule. "There's no reason you couldn't take this kind of approach with other major programs," he says.

None of the Navy's efforts to drive down shipbuilding costs will be successful, however, if the service doesn't have people with the right skills managing its acquisition programs. An acute shortage of engineers and contract managers contributed to some of the early problems with the LCS program, says retired Rear Adm. Charles Hamilton, Landay's predecessor.

James Thomsen, the Navy's principal civilian deputy assistant secretary for research, development and acquisition, says the service's engineering, science and technology workforce has decreased by about 56 percent during the past decade. "In the 1990s, we were asked by Congress to downsize the workforce," he says. "We've been on that trend for better than a decade." But if the workforce was too bloated a decade ago, it's malnourished today. Navy leaders created Thomsen's position in 2008 in recognition of that problem, and his principal responsibility is to rebalance the service's systems engineering and acquisition workforce.

"Before we go out and have a big hiring bonanza we want to think this through," Thomsen says. "A large portion of our acquisition workforce is in our warfare centers and our naval research laboratories, which is our science and engineering foundation that really supports acquisition. We are a technical navy," he says. "Our concern is we've outsourced areas we need to bring back in-house. Systems engineering is one. We do not need to be outsourcing our ability to understand these technical problems. We've got to reclaim that."

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