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Report to Congressional Committees: 

United States Government Accountability Office: 
GAO: 

May 2009: 

Best Practices: 

High Levels of Knowledge at Key Points Differentiate Commercial 
Shipbuilding from Navy Shipbuilding: 

GAO-09-322: 

GAO Highlights: 

Highlights of GAO-09-322, a report to congressional committees. 

Why GAO Did This Study: 

Cost growth is a prevalent problem in Navy shipbuilding programs, 
particularly for the first ships in new classes. In response to a 
mandate in the conference report accompanying the Defense 
Appropriations Act for Fiscal Year 2008, GAO undertook this review to 
(1) identify key practices employed by leading commercial ship buyers 
and shipbuilders that ensure satisfactory cost, schedule, and ship 
performance; (2) determine the extent to which Navy shipbuilding 
programs employ these practices; and (3) evaluate how commercial and 
Navy business environments incentivize the use of best practices. To 
address these objectives, GAO visited leading commercial ship buyers 
and shipbuilders, reviewed its prior Navy work, and convened a panel of 
shipbuilding experts. 

What GAO Found: 

Delivering ships on time and within budget are imperatives in 
commercial shipbuilding. To ensure design and construction of a ship 
can be executed as planned, commercial shipbuilders and buyers do not 
move forward until critical knowledge is attained. Before a contract is 
signed, a full understanding of the effort needed to design and 
construct the ship is reached, enabling the shipbuilder to sign a 
contract that fixes the price, delivery date, and ship performance 
parameters. To minimize risk, buyers and shipbuilders reuse previous 
designs to the extent possible and attain an in-depth understanding of 
new technologies included in the ship design. Before construction 
begins, shipbuilders complete key design phases that correspond with 
the completion of a three-dimensional product model. Final information 
on the systems that will be installed on the ship is needed to allow 
design work to proceed. During construction, buyers maintain a presence 
in the shipyard and at key suppliers to ensure the ship meets quality 
expectations and is delivered on schedule. 

Navy programs often do not employ these best practices. Ambitious 
requirements are set and substantial investments made in technology 
development, but often the Navy does not afford sufficient time to 
fully mature technology. New designs often make little use of prior 
ship designs. As a result, a full understanding of the effort needed to 
execute a program is rarely achieved at the time a design and 
construction contract is negotiated. This in turn leads the Navy and 
its shipbuilders to rely on cost-reimbursable contracts (rather than 
fixed-price contracts) that largely leave the Navy responsible for cost 
growth. Complete information on the systems that will be installed on 
the ship may not be available, leading to changes that ripple through 
the design as knowledge grows. Starting construction without a stable 
design is a common practice and the resulting volatility leads to 
costly out-of-sequence work and rework. These inefficient practices 
cause Navy ships to cost more than they otherwise should, reducing the 
number of ships that can be bought under constrained budgets. The Navy’
s in-house capability to oversee design and construction has eroded, 
and it has been slow to build capacity to support new programs. 
Congress has recently encouraged greater technology maturity and design 
stability at key points, but required reporting does not directly 
address completion of a three-dimensional product model. 

Differences in commercial and Navy practices reflect the incentives of 
their divergent business models. Commercial shipbuilding is structured 
on shared priorities between buyer and shipbuilder, a healthy 
industrial base, and maintaining in-house expertise. The need to 
sustain profitability incentivizes disciplined practices in the 
commercial model. In Navy shipbuilding, the buyer favors the 
introduction of new technologies on lead ships—often at the expense of 
other competing demands—including fleet size. This focus—along with low 
volume, a relative lack of shipyard competition, and insufficient 
expertise—contributes to high-risk practices in Navy programs. Further, 
the consequences of delayed deliveries and cost growth are not as 
severe in Navy programs because of the use of cost-reimbursable 
contracts. 

What GAO Recommends: 

GAO suggests Congress consider refining required reporting to include 
additional design stability metrics. GAO is also making recommendations 
to the Secretary of Defense aimed at improving shipbuilding programs by 
balancing requirements and resources early, retiring technical risk and 
stabilizing design at key points, moving to fixed-price contracts for 
lead ships, evaluating in-house management capability, and assessing if 
the desired fleet size sufficiently constrains the cost and technical 
content of new ships. The Department of Defense agreed with five 
recommendations and partially agreed with two. GAO believes all 
recommendations remain valid. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/products/GAO-09-322]. For more 
information, contact Paul Francis at (202) 512-4841 or 
francisp@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Commercial Shipbuilders Minimize Risk Early by Having High Levels of 
Knowledge at Key Junctures: 

Navy Shipbuilding Programs Make Key Decisions with Less Knowledge Than 
Deemed Acceptable in Commercial Shipbuilding: 

Differences in Commercial and Navy Practices Reflect Different 
Environments: 

Conclusions: 

Matter for Congressional Consideration: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Comments from the Department of Defense: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Best Practices in Commercial Shipbuilding: 

Table 2: Shipbuilder Performance on Notable Commercial Lead Ship 
Programs: 

Table 3: Emma Maersk-Class Technology Risks and Other Concerns Resolved 
Prior to Contract Award: 

Table 4: Design Phases Employed by Leading Commercial Firms: 

Table 5: Comparison of Navy Shipbuilding Practices and Commercial Best 
Practices: 

Table 6: Cost Growth in Recent Navy Lead Ships and Significant 
Follow-ons: 

Table 7: Delays in Achieving Initial Operating Capability in Recent 
Navy Lead Ships (Acquisition Cycle Time in Months): 

Table 8: Comparison of Commercial and Navy Shipbuilding Environments: 

Figures: 

Figure 1: Typical Shipbuilding Process: 

Figure 2: Cruise Ship Block Fabrication: 

Figure 3: Cruise Ship Block Outfitting: 

Figure 4: Cruise Ship Grand Block: 

Figure 5: Cruise Ship Blocks in Drydock after Keel Laying: 

Figure 6: Major Navy Shipbuilders and Associated Product Lines: 

Figure 7: Commercial Practices: Risk Minimized Pre-contract: 

Figure 8: Royal Caribbean Cruises, Ltd., Employment of Azipod 
Propulsion: 

Figure 9: Emma Maersk: 

Figure 10: Block Definition Plan for a Cruise Ship: 

Figure 11: Navy Practices: Significant Risks Remain Unresolved at 
Contract Award: 

Figure 12: LCS: 

Figure 13: CVN 21: 

Figure 14: DDG 1000: 

Figure 15: SSN 21: 

Figure 16: LPD 17: 

Figure 17: Department of Defense Weapon System Acquisition Framework: 

Figure 18: Typical Acquisition Framework for Navy Shipbuilding 
Programs: 

Figure 19: Navy's Two-Pass/Six-Gate Governance Process as Applied to 
Shipbuilding Programs: 

[End of section] 

United States Government Accountability Office: Washington, DC 20548: 

May 13, 2009: 

The Honorable Daniel K. Inouye: 
Chairman: 
The Honorable Thad Cochran: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
United States Senate: 

The Honorable John P. Murtha: 
Chairman: 
The Honorable C.W. Bill Young: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
House of Representatives: 

The U.S. Navy builds the most sophisticated, technologically advanced 
ships in the world, but pays too high a premium for this capability. 
Since fiscal year 2002, Congress has appropriated over $74.1 billion 
[Footnote 1] for new construction of aircraft carriers, nuclear 
submarines, surface combatants, and amphibious vessels. This 
investment, however, has included over $8.3 billion[Footnote 2] to 
cover cost growth associated with ships funded in prior years, 
subsequently reducing the overall buying power of the Navy and 
constraining the Department of Defense as a whole. 

Lead ships--the first to be built in a class--have proven the most 
problematic. In fact, the Navy's six most recent lead ships[Footnote 3] 
have experienced cumulative cost growth over $2.4 billion above their 
initial budgets. This cost growth has been accompanied by delays in 
delivering capability totaling 97 months across these new classes. 
Together, these outcomes have required the Navy to increasingly reshape 
its long-range ship procurement plans, placing its goal of a minimum 
313-ship fleet in jeopardy. 

In light of these developments, you directed that we conduct a review 
of shipbuilding-specific best practices to identify measures that could 
improve outcomes in Navy shipbuilding programs.[Footnote 4] 
Specifically, we (1) identified key practices employed by leading 
commercial ship buyers and shipbuilders that ensure satisfactory cost, 
schedule, and quality performance; (2) determined the extent to which 
Navy shipbuilding programs employ these practices; and (3) evaluated 
how effectively the business environments that exist in commercial and 
Navy shipbuilding incentivize the use of best practices. 

To identify key practices used by commercial ship buyers and 
shipbuilders, we met with representatives of leading ship buyers from 
the cruise, oil and gas, and commercial shipping industries, including 
Royal Caribbean, Exxon Mobil, and A.P. Moller-Maersk, respectively. We 
also met with officials from high-performing commercial shipyards 
responsible for building a variety of complex ships: Meyer Werft 
(Germany); Odense Steel Shipyard (Denmark); Aker Yards (Finland); 
[Footnote 5] and Samsung Heavy Industries, Hyundai Heavy Industries, 
Daewoo Shipbuilding and Marine Engineering, and STX Shipbuilding (South 
Korea). To determine the extent to which Navy shipbuilding programs 
employ best practices, we drew from our prior work on programs, 
including the San Antonio-class amphibious transport dock ship (LPD 
17), Littoral Combat Ship, Zumwalt-class destroyer (DDG 1000), Ford-
class aircraft carrier (CVN 21), Virginia-class submarine (SSN 774), 
and Lewis and Clark-class dry cargo and ammunition ship (T-AKE 1), 
among others. To supplement this analysis, we held discussions with a 
number of Navy offices responsible for shipbuilding programs. We also 
met with representatives from General Dynamics and Northrop Grumman 
Shipbuilding and visited the National Steel and Shipbuilding Company 
(NASSCO) and Electric Boat shipyards. To evaluate how effectively the 
business environments that exist in commercial and Navy shipbuilding 
incentivize the use of best practices, we convened a panel of 
shipbuilding experts representing both the Navy and industry to discuss 
factors that compel behaviors in different shipbuilding programs. A 
more detailed description of our scope and methodology is presented in 
appendix I. 

We conducted this performance audit from January 2008 to May 2009 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Background: 

Shipbuilding is a complex, multistage industrial activity that includes 
a number of key events that are common regardless of the type of ship 
constructed or nature of the buyer (Navy or commercial). As figure 1 
shows, these events are sequenced among three primary phases: pre- 
contract,[Footnote 6] design, and construction. Each phase builds upon 
work completed in earlier stages. 

Figure 1: Typical Shipbuilding Process: 

[Refer to PDF for image: illustration] 

Total duration of 2-5 years, depending on ship type: 

Pre-contract: 
* Concept refinement. 

Design: 
* Contract award; 
* Basic design; 
* Functional design; 
* Production design. 

Construction: 
* Steel cutting/block fabrication; 
* Assembly and outfitting of blocks; 
* Keel laying and block erection; 
* Launch; 
* Sea trials; 
* Delivery. 

Source: GAO. 

Note: Though this graphic depicts generic shipbuilding phases, Navy 
shipbuilding programs may use different terms to describe design 
phases. 

[End of figure] 

In the pre-contract phase, the buyer may work with different 
shipbuilders to refine its ship concept. This stage concludes with the 
buyer selecting its desired concept and agreeing to a design and 
construction contract with the chosen shipbuilder(s). In commercial 
shipbuilding, firm, fixed-price contracts are almost always used. This 
type of contract (1) provides for a price that is not subject to any 
adjustment on the basis of the contractor's experience in performing 
the contract and (2) places upon the contractor maximum risk and full 
responsibility for all costs and resulting profit or loss.[Footnote 7] 

Though some design work occurs in the pre-contract phase, the design 
phase continues in earnest after contract signing. The design phase 
encompasses three activities: basic design, functional design, and 
production design. Basic design serves to outline the steel structure 
of the ship, whereas functional design routes distributive systems-- 
such as electrical or piping systems--throughout the ship. Production 
design furnishes the work instructions used to construct elements of 
the ship. During this phase, all aspects of the ship are defined, a 
three-dimensional (3D) computer-aided design (CAD) model is often 
generated, and two-dimensional paper drawings are created that shipyard 
workers will use to build the ship. 

The construction phase includes several steps: steel cutting and block 
fabrication, assembly and outfitting of blocks, keel laying, block 
erection, launch, dock and sea trials, and delivery. The first 
milestone in production is steel cutting, which involves cutting large 
steel plates into appropriately sized pieces. This task often involves 
computerized cutting machinery, laser etching of steel plates based on 
the computerized ship design, and robotics to ensure accuracy and 
minimize future rework. Figure 2 illustrates the next step in the 
construction sequence, block fabrication, where steel plates are welded 
together into elements called blocks. Blocks are the basic building 
units for a ship, and when completed they will form completed or 
partial compartments, including accommodation space, engine rooms, and 
storage areas. 

Figure 2: Cruise Ship Block Fabrication: 

[Refer to PDF for image: photograph] 

Source: Aker Yards. 

[End of figure] 

Once any planned doorways or holes are cut into the block units, the 
blocks are ready for equipment installation, a process called block 
outfitting.[Footnote 8] Block outfitting is partially performed while 
the block is positioned upside down, as figure 3 shows. This approach 
enables shipyard workers to install equipment more efficiently by 
lowering it into the block instead of hoisting the equipment into 
place. Building blocks in the inverted (upside down) position also 
enables more down-head welding, rather than less efficient overhead 
welding. 

Figure 3: Cruise Ship Block Outfitting: 

[Refer to PDF for image: photograph] 

Source: Aker Yards. 

[End of figure] 

Blocks are generally outfitted with pipes, brackets for machinery or 
cabling, ladders, and any other equipment that may be available for 
installation at this early stage of construction. This allows a block 
to be installed as a completed unit with connectors to adjacent blocks. 
Installing equipment at the block stage of construction is preferable 
because access to spaces is not limited by doors or machinery, unlike 
at later phases. Shipbuilders often describe a "1-3-8 rule," where work 
that takes 1 hour to complete in a workshop takes 3 hours to complete 
once the steel panels have been welded into blocks, and 8 hours to 
complete after a block has been erected and/or after the ship has been 
"launched," or conveyed from its building site to the water.[Footnote 
9] 

As figure 4 illustrates, each block is ultimately welded together with 
other blocks to form larger sections, which are known as grand blocks 
and compose the ship's structure. These blocks and grand blocks are 
moved around the shipyard by wheeled block transporter vehicles and are 
lifted by large gantry cranes suspended over the drydocks. 

Figure 4: Cruise Ship Grand Block: 

[Refer to PDF for image: photograph] 

Source: Aker Yards. 

[End of figure] 

Once the shipyard has enough blocks and grand blocks completed based on 
its internal work sequencing, the yard lays the keel into the drydock, 
which is where the ship will be erected.[Footnote 10] After the keel is 
laid, other grand blocks are placed in the drydock and welded to the 
surrounding grand blocks, and the outfitting of machinery, engines, 
propeller shafts, and other large items requiring the use of overhead 
cranes occurs. Ships are typically built from the center-bottom up. 
Figure 5 illustrates how blocks are assembled in the drydock. 

Figure 5: Cruise Ship Blocks in Drydock after Keel Laying: 

[Refer to PDF for image: photograph] 

Source: Aker Yards. 

[End of figure] 

Finally, once the ship is watertight and the decision is made to 
launch--or float the ship in water--the drydock is flooded and the 
ship, now afloat for the first time, is towed into a quay or dock area 
where final outfitting and testing of machinery and equipment like main 
engines will occur.[Footnote 11] Different shipyards apply different 
criteria to assess if or when a ship is ready to launch. One factor 
that contributes to these decisions is shipyard facilities, including 
the capability to efficiently outfit the ship dockside once it has been 
launched. Shipyards we visited tended to have a high degree of 
outfitting completed prior to launch, and one Korean shipyard typically 
has close to 95 percent of the ship completed at the time of launch. 
One European shipyard we visited that builds cruise ships sometimes 
chooses to launch ships with less outfitting--about 50 percent--of the 
ship completed because cabin insertion--a major aspect of cruise ship 
construction--can efficiently take place pierside. Most shipyards 
agreed, however, that launching a ship at a lower level of outfitting 
than planned should be avoided because it is generally more expensive 
to perform work on a ship after it is launched. 

Once final outfitting activities and planned dock trials are completed, 
and the shipyard is satisfied that the ship is seaworthy, the ship 
buyers are brought aboard and the ship embarks on sea trials where 
performance is evaluated against the contractually required 
specifications and overall quality will be assessed.[Footnote 12] 
Following successful sea trials, the shipyard delivers the ship to the 
ship owner. 

The International Maritime Organization requires a ship's design and 
construction to be approved by ship classification societies, including 
the American Bureau of Shipping and Lloyd's Register.[Footnote 13] 
These societies (1) establish and maintain standards for the 
construction and classification of ships and offshore structures, (2) 
supervise construction in accordance with these standards, and (3) 
carry out regular surveys of ships in service to ensure the compliance 
with these standards. 

Commercial ships range from more basic vessels--such as cargo carriers, 
tankers, and product carriers--to ships that are highly complex and 
densely outfitted and incorporate technological advances vital to 
improving business operations. These ships include floating production 
storage and offloading (FPSO) vessels, which are able to collect, 
process, and store oil from undersea oil fields; large cruise ships, 
some of which exceed the size of a Ford-class aircraft carrier; and 
liquefied natural gas (LNG) carriers. Each of these ship types 
generally takes longer to build than simpler commercial ships with 
construction times lasting up to 3 years. Further, these ships are very 
dense, meaning that unlike a bulk carrier or an oil tanker that has 
large, empty voids to hold cargo, these ships have equipment and 
accommodation spaces tightly packed throughout. Similar to the mission 
equipment for certain Navy ships, FPSO vessels have oil refining 
equipment that may be built by a separate contractor and provided to 
the shipyard for installation. 

Cruise ships are typically built in European shipyards. Major builders 
include Aker Yards (now STX Europe) in Finland and France, Meyer Werft 
in Germany, and Fincantieri in Italy. Together, these three yards 
constitute an estimated 80 percent of global cruise shipbuilding. 
Commercial shipbuilding primarily occurs in Asia; Korean shipyards 
constitute approximately 35 percent of the market, Japanese shipyards 
approximately 30 percent, and Chinese shipyards approximately 12 
percent. 

At present, the shipbuilding industry in the United States is 
predominantly composed of three different types of shipyards: (1) 
privately owned shipyards that build commercial vessels; (2) privately 
owned shipyards that build Naval vessels; and (3) U.S. government-owned 
naval shipyards that conduct maintenance, repairs, and upgrades on Navy 
and Coast Guard vessels.[Footnote 14] In the past, major U.S. shipyards 
have consolidated under larger corporate entities. As a result, two 
major companies--General Dynamics and Northrop Grumman Shipbuilding-- 
now own the six largest shipyards capable of building most Navy ships. 
[Footnote 15] General Dynamics owns Bath Iron Works in Bath, Maine; 
Electric Boat in Groton, Connecticut, and Quonset Point, Rhode Island; 
and NASSCO in San Diego, California. Northrop Grumman Shipbuilding owns 
Ingalls in Pascagoula, Mississippi; Newport News in Newport News, 
Virginia; and Avondale in Avondale, Louisiana. As figure 6 outlines, 
Navy vessels constructed at these yards include nuclear submarines, 
aircraft carriers, surface combatants, and auxiliary ships. Beyond the 
six major yards, there are a number of midsized, commercial shipyards 
the Navy uses that are capable of constructing ships smaller in size 
like the Littoral Combat Ship (LCS) and Maritime Prepositioning Force 
utility boats. 

Figure 6: Major Navy Shipbuilders and Associated Product Lines: 

[Refer to PDF for image: map] 

Map of the United States depicting the location of Major Navy 
Shipbuilders and Associated Product Lines: 

General Dynamics: 

1. Bath Iron Works - Bath, ME: Surface combatants. 

2. Electric Boat - Groton, CT, and Quonset Point, RI: Submarines. 

3. NASSCO - San Diego, CA: Auxiliary ships. 

Northrop Grumman Shipbuilding: 

4. Newport News - Newport News, VA: Submarines and aircraft carriers. 

5. Ingalls Operations - Pascagoula, MS: Surface combatants and 
amphibious ships. 

6. Avondale Operations - Avondale, LA: Auxiliary ships and amphibious 
ships. 

Sources: GAO, MapArt. 

[End of figure] 

Several of these shipyards have specialized production capabilities 
that constrain the types of vessels they are capable of building. For 
instance, of the six major shipyards, only Newport News is capable of 
erecting nuclear powered aircraft carriers, and only Newport News and 
Electric Boat have facilities to construct nuclear submarines. In 
addition, of the six major shipyards, only NASSCO regularly builds 
commercial ships alongside Navy ships. NASSCO typically builds Navy 
auxiliary ships, such as the T-AKE 1 class of dry cargo/ammunition 
vessels that share similarities with commercial ships. According to the 
shipbuilder, this enables NASSCO to share production processes and 
equipment between the two types of projects. The commercial ships built 
at NASSCO and other U.S. shipyards are typically ships that will 
operate exclusively between U.S. ports, and thus are required by the 
Merchant Marine Act (commonly referred to as the Jones Act) to be built 
in U.S. shipyards and to be U.S. owned.[Footnote 16] 

Commercial Shipbuilders Minimize Risk Early by Having High Levels of 
Knowledge at Key Junctures: 

Commercial shipbuilding programs are characterized by the high levels 
of knowledge that ship buyers and shipbuilders insist upon at key 
junctures throughout the acquisition process. This knowledge enables 
leading commercial shipbuilders to deliver innovative new ships within 
cost and schedule estimates. Buyers and builders are willing to take 
the steps necessary to minimize the risk that a ship will deliver late 
or exceed its budget. Most important, commercial shipbuilders and 
buyers retire all major risk posed by technological advances or novel 
design features prior to signing a contract for a ship. In order to 
develop a comfort level with these new technologies or features, the 
shipyards will work with the buyers to test, model, and run simulations 
on the technology--utilizing both in-house and third-party technical 
experts--to validate that the risk is low enough to not jeopardize the 
success of the program. Once most of the program risk is retired, the 
shipbuilders can agree with the buyer at contract signing on the ship 
concept, fix the ship's cost and delivery date, and guarantee that the 
ship will perform as specified. All basic and functional design is 
completed prior to starting construction, and a disciplined 
construction process is followed by the shipbuilder and supervised by 
the buyer to ensure delivery of a quality product on cost and on 
schedule. Table 1 further highlights key commercial practices in 
shipbuilding. 

Table 1: Best Practices in Commercial Shipbuilding: 

Phase: Pre-contract; 
Commercial practices: Commercial shipbuilders and ship buyers retire 
all major risk prior to signing a contract; 
* Shipyards will not sign a contract if there is outstanding technical 
risk; 
* Shipyards and buyers leverage existing designs to minimize risk. 

Phase: Contract; 
Commercial practices: Commercial shipbuilders fix the cost and delivery 
date at contract signing; 
* Leading buyers and shipbuilders use only firm, fixed-price contracts; 
* Buyer cannot change specifications/drawings without incurring 
financial or technical performance penalties once a contract is signed; 
* Shipyard guarantees that the ship will perform as defined in the 
agreed specifications. 

Phase: Design; 
Commercial practices: Commercial shipbuilders complete all basic and 
functional design prior to starting construction; 
* Shipyards will not start construction until a design is complete and 
stable; 
* 3D CAD is completed prior to construction. 

Phase: Construction; 
Commercial practices: Commercial shipbuilders have a disciplined 
construction process that delivers ships within cost and on schedule; 
* In order to maintain tight schedules across multiple ships, drydock 
time is rigorously monitored and controlled by the shipbuilder; 
* Change orders are minimized to avoid delays and cost growth; 
* Buyers perform vigorous oversight of construction in order to ensure 
quality and to monitor schedule. 

Source: GAO analysis. 

[End of table] 

Leading Commercial Shipbuilders Routinely Deliver Innovative Ships 
within Planned Cost and Schedule Estimates: 

The shipyards we visited had recent experience successfully delivering 
complicated lead ships that featured new design or technological 
features. Table 2 highlights several of these examples. 

Table 2: Shipbuilder Performance on Notable Commercial Lead Ship 
Programs: 

Buyer: Royal Caribbean Cruises, Ltd.; 
Lead ship, type, and displacement: Freedom of the Seas; Cruise; 154,000 
tons displacement; 
Shipyard: Aker Yards; 
Approximate cost and construction cycle time[A]: $800 million; 36 
months; 
Notable new features: Largest cruise ship in the world at delivery. 
Ship features included an improved hull form, more efficient air 
conditioning systems, and a new topside surfing water park feature 
requiring significant pump machinery and deck stabilization; 
Construction outcomes: Delivered complete, at promised cost, and within 
30-day grace period outlined in contract. 

Buyer: A.P. Moller-Maersk; 
Lead ship, type, and displacement: Emma Maersk; Container; 170,974 tons 
displacement; 
Shipyard: Odense Steel Shipyard; 
Approximate cost and construction cycle time[A]: $145 million; 32 
months; 
Notable new features: Largest containership ever, high-speed 
capabilities, novel 14-cylinder engine, new waste heat recovery 
technology; 
Construction outcomes: Eight-ship class delivered from July 2006 
through November 2007. First ship was erected in 45 days with the yard 
operating on three shifts. 

Buyer: Star Deep Water Petroleum, Ltd. (a Chevron-affiliated company); 
Lead ship, type, and displacement: Agbami; FPSO; 417,000 metric tons 
full load displacement; 
Shipyard: Daewoo Shipbuilding and Marine Engineering; 
Approximate cost and construction cycle time[A]: $1.2 billion; 22 
months (hull only); 
Notable new features: Large FPSO vessel capable of 250,000 barrels per 
day crude oil production, storage of 2.1 million barrels of crude oil, 
and accommodations for 155 people; 
Construction outcomes: Seven-year planning period for a complex, costly 
vessel, which was delivered on time and complete, enabling its 
commercial operations to begin 1 month earlier than scheduled. 

Buyer: Carnival Corporation; 
Lead ship, type, and displacement: Elation[B]; Cruise; 70,367 tons 
displacement; 
Shipyard: Kvaerner Masa Yard (now part of STX Finland); 
Approximate cost and construction cycle time[A]: $280 million; 22 
months; 
Notable new features: First cruise ship to incorporate novel Azipod 
propulsion technology; 
Construction outcomes: Challenges were experienced in sea trials with 
the newly developed bridge joystick control of the Azipods. 
Subsequently, an improvement program was initiated with buyer 
assistance, and the ship was successfully delivered 4 days earlier than 
specified in the contract. 

Buyer: Qatar Petroleum and Exxon Mobil[C]; 
Lead ship, type, and displacement: Q-Flex and Q-Max; LNG carriers; Q-
Flex--147,000 tons displacement, Q-Max--179,000 tons displacement; 
Shipyard: Samsung Heavy Industries, Daewoo Shipbuilding and Marine 
Engineering, and Hyundai Heavy Industries; 
Approximate cost and construction cycle time[A]: $300 million (Q-Max); 
32-36 months; 
Notable new features: Revolutionary size for an LNG carrier; Q-Max 
carries 80 percent more LNG than existing ships; novel reliquification 
technology; first two-rudder and propeller LNG design; 
Construction outcomes: Forty-five ships to be acquired across all of 
the Qatar joint ventures; second largest single ship acquisition in 
history after U.S. Liberty Ship program in World War II. Ships to date 
have delivered on time or early, at anticipated costs, and with minimal 
change orders. 

Source: GAO analysis of industry-provided data. 

[A] Defined as the period between contract award and delivery for the 
lead ship. 

[B] Although not technically a lead ship, Elation incorporated a 
revolutionary propulsion system. 

[C] Joint ventures between Qatar Petroleum and Exxon Mobil lease the Q- 
Flex and Q-Max LNG carriers from ship owners. In the role of lessee, 
these joint ventures managed the technology evaluation and design 
review processes for Q-Flex and Q-Max ships, and currently monitor 
construction activities. 

[End of table] 

Commercial Shipbuilders and Ship Buyers Retire Project Risks Prior to 
Signing a Contract: 

Leading commercial ship buyers and shipbuilders insist upon identifying 
and retiring all major program risks early. This analysis occurs during 
the pre-contract phase, which can be as long as 5 years or more 
depending on the complexity of the ship and the novelty of the proposed 
design and systems on board. Commercial shipyards may self-finance this 
pre-contract work to position themselves to ultimately win the contract 
to design and build the ship. They also do this work to gain a full 
understanding of potential technical risks associated with a project 
and to better inform the decision of whether to bid on the ship. 
Sometimes this process includes buyer acceptance and evaluation of 
several concept designs from different shipyards to determine which 
best meets its needs. For example, when Exxon Mobil and its partner, 
Qatar Petroleum, were interested in buying a number of new LNG 
carriers, they provided several Korean shipyards with the 
specifications that the Qatar project expected the ships to meet. Each 
shipyard was given the opportunity to develop its own concept designs 
for the buyer to review. Ultimately, three shipyards presented concepts 
that met the project's requirements. In turn, the project 
representatives awarded contracts to each of the three shipyards in 
order to maximize productivity on the project, even though the LNG ship 
designs differed among the three shipyards. 

In the commercial model, a program will only move forward to contract 
signing once the ship buyer and shipbuilder reach agreement that 
potential showstoppers have been mitigated so as to not jeopardize the 
planned cost and delivery schedule for the ship. If the shipyard fails 
to resolve program risks or showstoppers before committing to a firm, 
fixed-price and a fixed-delivery schedule, it could encounter problems 
later in the construction process that will require the diversion of 
additional, unplanned resources to the project. This result could 
detract from the shipyard's performance on other projects in the yard 
and have a cascading effect, delaying multiple ships on order, which 
would hurt the shipyard's professional reputation and could jeopardize 
future business. Figure 7 illustrates the strong emphasis the 
commercial sector places on retiring risk early in its shipbuilding 
programs. 

Figure 7: Commercial Practices: Risk Minimized Pre-contract: 

[Refer to PDF for image: illustration] 

More risk: 

* Technologies are mature; 
* Shipyard has capacity; 
* Hull model tested and seaworthy. 

Project initiation: 

Pre-contract: 
* Cost and schedule are inviolate, so the shipyard works with ship 
owner to retire all major risk. 

* Ship attributes are well understood and unchanging. 

* New technologies are evaluated and discarded if not well understood. 

* Commercial ship buyers and shipbuilders refuse to sign contracts 
involving immature technologies. 

* Price and delivery date set and firm, fixed contracts used. 

* Uncertainty is limited by leveraging existing designs or designing 
based on commonality with reference ships. 

Lesser Risk: 

Contract is signed only when all major risk has been retired. 

Design: 
* More time is allotted in the schedule if a clean sheet design is 
used. 

* Basic and functional design are both fully complete – usually in the 
form of a 3D CAD model – prior to starting construction. 

Construction begins only when basic and functional design are fully 
complete. 

Less risk: 

Construction: 
* Emphasis is on maximizing yard throughput and minimizing time spent 
in drydock. 

* Because of backlog of ships, shipyard has business imperative to 
deliver on time. 

Most risk is noted at project initiation, moving to least risk upon 
ship delivery. 

Source: GAO analysis. 

[End of figure] 

In the commercial model, the pre-contract phase involves the 
development of the ship concept and the ship specifications based on 
negotiations between the ship buyer and the shipyard, which will 
specify the performance expected and the major equipment on the ship. 
Generally, the ship buyer has an idea of the type of ship it would like 
to buy and the performance parameters that it will require the ship to 
meet, which help form the basis for these negotiations. Several 
representatives of commercial shipbuilders and ship buyers we met with 
stated that during this initial phase, they will analyze one or more 
ship concepts to identify areas of potential risk and they will either 
mitigate these risks or remove the risky elements from the ship before 
signing a contract. Risk can be minimized in several ways before 
signing the contract. One option is that the buyer can opt to use a 
ship design that the shipyard has already built rather than requiring a 
new design to be created. Using an existing design minimizes the amount 
of design work that has to be done and provides assurances that the 
yard can actually build the ship for the planned cost and schedule 
since the shipyard has previously built the design. This approach was 
used in the Korean shipyards we visited. Those yards maintain standard 
designs for different classes of ships that buyers can select from and 
modify, as desired. 

Similarly, the cruise industry relies on previous ship designs to the 
extent possible. Royal Caribbean's Freedom-class ship drew heavily upon 
design attributes from the preceding Voyager class. For example, though 
Freedom-class ships are 27 meters longer than Voyager-class ships, they 
have the same propulsion system, power lines, and other basic features 
as Voyager-class ships. The cruise industry also undertakes ship 
revitalizations--which can be quite complex in nature--during the life 
span of its ships. For one of its ships, Enchantment of the Seas, Royal 
Caribbean invested $90 million to perform a 60-day overhaul that 
included cutting the ship in half and inserting a new middle section 
that would provide additional cabin space and capacity. Further, these 
revitalization projects provide opportunities for Royal Caribbean to 
introduce new features or technologies to a ship--such as 
hydrodynamically efficient ducktails to improve fuel efficiency--that 
were not incorporated during initial construction. The revitalized ship 
could also provide a test bed for fully proving out new technologies 
ahead of Royal Caribbean installing them on future newbuild ships. 

Alternatively, common design elements from previous ships can be 
incorporated to minimize the amount of new content in the design. 
However, should these options not meet buyer requirements, a new "clean 
sheet" design can be undertaken. In cases where a new hullform is 
necessary, the ship buyer and the shipyard will work together to model 
and validate design attributes, such as seakeeping abilities, speed, 
and fuel consumption, as desired by the buyer. This modeling exercise 
is completed using both water tanks and computer simulation. 
Performance of other items, such as new propeller designs, is also 
validated using these means. 

According to commercial shipbuilders and buyers, new technologies are 
vetted through a similar process of extensive testing, modeling, and 
analysis. One buyer told us that among other considerations, a new 
technology has to earn its way onto a ship through the form of 
significant savings to operations and maintenance costs. However, 
despite the allure of innovative technologies within the competitive 
marketplace, if a novel technology cannot be matured to a level that 
provides the buyer and builder with confidence that it will not impede 
delivery of the ship and will perform as expected, it will be discarded 
to maximize the chances of program success. Additionally, one buyer's 
representative told us that a shipyard refused to install an air 
cushion hull on a ship because it thought that the project was too 
risky, even though the technology had been vetted through model testing 
and on existing ships. See figure 8 for a case study about how Royal 
Caribbean worked with a shipyard to vet a propulsion technology before 
deciding to build it into new ships. 

Leading commercial shipbuilders may test new technologies aboard 
existing ships prior to installing them on a new ship to validate the 
performance of the technologies in a lower-risk environment for both 
the buyer--since the existing ship has redundant systems--and the 
shipyard--since it will not accept responsibility for installing and 
integrating an untested prototype under a firm, fixed-price contract. 
Shipbuilders and larger ship buyers maintain an in-house or contracted 
capability to conduct technical research to evaluate the maturity and 
expected performance of new technologies during the pre-contract phase. 

Figure 8: Royal Caribbean Cruises, Ltd., Employment of Azipod 
Propulsion: 

[Refer to PDF for image: photograph of Azipod Propulsion] 

In the 1990s, Royal Caribbean wanted to change the propulsion system on 
its cruise ships from standard fixed propellers driven by propeller 
shafts to a rotating, podded propulsion system called Azipod. These 
pods carry the propeller and motor outside of the ship and have the 
capability to rotate 360 degrees, allowing for the ship to be pulled 
through the water as well as pushed. This technology, developed by a 
company called ABB, offered the potential of improved fuel efficiency 
and greatly enhanced maneuverability—affording Royal Caribbean the 
ability to construct significantly larger cruise ships capable of 
accessing major ports. At the time Royal Caribbean wanted to move from 
conventional propulsion to Azipod, the technology had only been 
installed on smaller ships, including tug boats and icebreakers. Royal 
Caribbean approached ABB about the possibility of scaling Azipod up to 
the size required for a cruise ship and brought the shipyard it planned 
on using for the project on board. The three parties worked together to 
extensively prove the technology and built close-to-scale versions of 
Azipod before Royal Caribbean and the shipbuilder both became 
comfortable enough to move forward with the project. Further, despite 
its growing confidence in Azipod, Royal Caribbean decided that it was 
prudent to maintain some redundancy through installation of fixed pods 
that could provide propulsion in the event that the new Azipods failed. 
After overcoming some initial maintenance issues, the Azipods project 
proved successful for Royal Caribbean. The enhanced maneuverability 
offered by the Azipods enabled the company to initiate development of 
the new 220,000-ton Oasis of the Seas, which is currently under 
construction and planned to be the largest cruise ship ever built. 

Sources: Royal Caribbean Cruises, Ltd. (photo); GAO (data). 

Note: By the time Royal Caribbean built a cruise ship with Azipods, 
Carnival Corporation had also built ships that employed Azipods. 

[End of figure] 

Before signing a contract to build its new Emma Maersk-class of 
containerships, ship buyer A.P. Moller-Maersk worked with its 
shipbuilder, Odense Steel Shipyard, to resolve several major issues 
that might have prevented the program from progressing. Specifically, 
this ship class--consisting of eight ships--was expected to (1) be the 
largest containership ever designed, (2) operate at high speeds in 
excess of 25 knots, (3) incorporate higher fuel efficiency standards, 
and (4) be powered by what would be the largest diesel engine ever 
built. As such, this project presented many challenges to the buyer and 
builder, including several potential showstoppers--any one of which 
could threaten the viability of the program if not resolved early. 
Table 3 depicts how the ship buyer and shipyard worked together to 
mutually identify and resolve risk prior to signing a contract for the 
lead ship. Ultimately, the shipyard delivered eight ships that 
performed to specification, and Emma Maersk was given the Ship of the 
Year award, presented annually by Lloyd's List. 

Table 3: Emma Maersk-Class Technology Risks and Other Concerns Resolved 
Prior to Contract Award: 

Technology risks and other concerns: Building a ship of such a large 
size that would be propelled with only one propeller and one propeller 
shaft; If propelling such a large ship with one propeller could be 
accomplished, it was unknown if any supplier could cast a propeller 
that large; 
Mitigation strategies: Computer modeling and simulations completed 
prior to signing contract to validate that propeller and shaft would 
work as required; Contacted propeller suppliers and verified capability 
to produce propeller. 

Technology risks and other concerns: The ship design required a very 
long drive shaft (120 meters) because the engine had to be placed near 
midship for seakeeping (stability) purposes. It was unknown if such a 
long shaft would work properly with the hull and main engine so as to 
avoid damage to engine bearings and other components; 
Mitigation strategies: Computer modeling and simulations completed pre-
contract to validate drive shaft concept. 

Technology risks and other concerns: A ship of the size required would 
need good seakeeping abilities, meaning that it would be stable at sea; 
Mitigation strategies: Model testing of hullforms in a model basin and 
computer simulations completed to validate seakeeping. 

Technology risks and other concerns: A new 14-cylinder main engine 
would need to be developed, and the impacts that a 14-cylinder engine 
would have on the crankshaft were uncertain; 
Mitigation strategies: Determined with the engine manufacturer that 
adding cylinders to existing engines would be low risk and feasible. 
Since a 14-cylinder engine did not already exist, the buyer had the 
manufacturer install and test some of the new components on existing 12-
cylinder engine versions. 

Technology risks and other concerns: Higher grades of steel than 
previously used in this type of shipbuilding would be needed to provide 
the strength required for the hull and the steel plate, which had to be 
reinforced to carry so much cargo; 
Mitigation strategies: The ship classification societies American 
Bureau of Shipping and Lloyd's Register were brought in to assist in 
the technical calculations of required steel grade and thickness, and 
special class society approval was obtained. The Danish Technical 
Institute and a technical institute in St. Petersburg were also used to 
conduct tests on steel strength, and the shipyard performed fatigue 
analysis of this plate thickness to ensure that it would meet 
construction requirements. 

Technology risks and other concerns: The shipyard's ability to 
physically build/launch a ship of that size was uncertain. Physical 
capabilities of the yard, including the size of the drydocks and the 
lifting capacities of the overhead cranes, would need to be evaluated; 
Mitigation strategies: The shipbuilder made substantial capital 
investments in the shipyard, including building new production halls 
that could accommodate the larger ship and to enable the production of 
eight ships in a compressed schedule. 

Technology risks and other concerns: Overall ship cost would be 
controllable; 
Mitigation strategies: Because materials constituted 60 percent of the 
ship's cost, the shipyard got fixed prices for materials (with the 
exception of steel) and supplies in advance of signing the shipbuilding 
contract. 

Source: Odense Steel Shipyard. 

[End of table] 

In addition, the shipyard identified other lesser, but still important, 
concerns to resolve prior to contract signing, including (1) the need 
to identify the rules under which the ship would be classified because 
classification rules or requirements for a ship as large as Emma Maersk 
did not exist and (2) the design's ability to meet the desired speed, 
maneuvering, and weight capacity requirements. Ultimately, two ship 
classification societies were brought into the project early to assist 
with the technological evaluations. Figure 9 is a photo of the 
completed Emma Maersk. 

Figure 9: Emma Maersk: 

[Refer to PDF for image: photograph] 

Note: Emma Maersk incorporated several novel design features, including 
the world's largest container handling ability and containership 
dimensions, the world's first 14-cylinder diesel engine, and the use of 
a waste-heat recovery technology used to maximize fuel efficiency. 

[End of figure] 

Generally, a commercial shipyard will accept responsibility for the 
total performance of the ship, including any systems that it installs, 
provided that the shipyard is comfortable that the technology used on 
the ship is well understood and will perform as anticipated. The Azipod 
propulsion technology employed by Royal Caribbean and Aker Yards 
provides one example where this approach was employed. Owner-provided 
technology is rare in commercial shipbuilding; in certain cases, 
however, some commercial ship buyers may insist on having an unproven 
technology installed on a ship or on having the shipyard install a 
technology provided by the buyer. This may occur if a specific 
technology is needed to enable a new ship concept, and this practice is 
more common to certain industries, such as the oil and gas industry 
because of the specialized equipment used in this industry. In these 
limited instances when unproven technologies are employed, the shipyard 
will generally not contractually accept responsibility for the 
performance of the system. For example, on the Emma Maersk class, the 
owner wanted to include a new waste-heat recovery boiler technology 
with which the shipyard was not familiar. Subsequently, the yard agreed 
to install this technology on the ships, but would not contractually 
accept responsibility for the performance of this system. Further, 
several commercial shipbuilders we interviewed do not allow buyers to 
provide equipment that has to be installed deep in the ship, since a 
late equipment delivery could disrupt the entire construction sequence 
of the ship and compromise the timely delivery of other ships. Instead, 
owner-furnished equipment is generally restricted to that which can be 
mounted on the top of a ship or installed after launch or delivery. 

Commercial Shipbuilders and Ship Buyers Reach Agreement on Ship 
Concept, Cost, Delivery Schedule, and Performance Attributes at 
Contract Signing: 

By the time a leading commercial shipyard signs a contract to build a 
new ship, the builder and buyer have fully defined and agreed upon the 
ship concept, required performance, and contract terms. A ship 
specification accompanies the contract as part of a larger contract 
package. This document originates as what is commonly called an outline 
specification, which may be developed by the buyer. The shipyard takes 
the lead in expanding this document into a ship specification, which is 
a highly detailed document that describes all ship performance 
parameters, including speed, fuel consumption rates, ship weight and 
draft, and required redundancies. Representatives from one shipyard 
told us that commercial ship specifications range from several hundred 
pages to thousands of pages in length, depending on the ship type and 
complexity. Cruise ship specifications may refer to "reference ships," 
which are previous ships built by the shipyard that can be used to 
gauge the level of quality and craftsmanship desired for the new ship. 
Once the contract is signed, any changes that the owner wants to make 
to the contract specification are considered change orders and may 
incur a cost to the buyer. Other contract package documents include the 
general arrangement drawing, the midship drawing, and the makers list. 
The general arrangement drawing shows the ship hull structure and the 
footprints of all major equipment. Alternatively, the midship drawing 
shows the steel hull structure of a cross section of the middle of the 
ship, and communicates important information on deck thicknesses, 
heights, and loads, which is used to estimate steel needs and 
subsequently inform the cost estimate. The contract package also 
includes the makers list, which identifies for the shipyard the owner- 
approved suppliers for major equipment, such as main engines and 
propellers. Finally, the contract itself describes the process for 
owner review of drawings, according to leading buyers and builders. 
These firms stated that generally the owner does not review and approve 
all drawings, but the owner identifies at the outset the key drawings 
it will want to review. Further, the ship buyer typically has 10 to 15 
days to review and approve a drawing. 

Among leading commercial shipbuilders and ship buyers, only firm, fixed-
price contracts are used for design and construction activities, and 
the delivery date of the ship is clearly established in the contract 
with accompanying penalties for delays. The commercial shipbuilders we 
interviewed stated that they nearly always deliver new ships--be they 
lead ships or follow-ons--within the delivery dates specified in their 
contracts. Further, since the contract sets a firm, fixed price, they 
are required to deliver at that price. Leading shipbuilders are able to 
sign fixed-price contracts with confidence because they have worked 
beforehand with the ship buyer to close expectation gaps and minimize 
technical risk. Both buyers and builders stated that the shipbuilding 
contract generally does not include adjustment clauses for materials, 
which would otherwise help the shipyard manage costs if materials such 
as steel become more expensive after the contract is signed. The 
shipyards take responsibility for negotiating with their materials 
suppliers before signing a contract so they can accurately price their 
bid to the ship owner. One shipyard stated that an 80/20 rule applies 
to shipbuilding materials, where 20 percent of the materials and 
components for a ship typically constitutes 80 percent of the ship's 
total materials cost. In that case, the shipbuilder tries to obtain 
price commitments early for that key 20 percent of materials. Some 
shipbuilders are able to get fixed-price quotes from major equipment 
suppliers prior to contract signing, but this is not always the case. 
Leading ship buyers we interviewed stated that commercial shipbuilding 
contracts for containerships, LNG carriers, and other similar vessels 
sometimes include progress payments for milestones, including steel 
cutting, keel laying, and launch. Cruise ships may follow a different 
schedule of payments with the bulk of the payment made on delivery, 
causing shipyards constructing those vessels to largely self-finance 
construction of these projects. 

According to leading commercial ship buyers we interviewed, cargo 
ships, including containerships, tankers, and LNG carriers, have a set 
delivery date and a grace period of approximately 1 month when there is 
no penalty for late delivery. These buyers stated that delivery after 
the grace period causes the commercial shipbuilder to incur financial 
penalties and liquidated damages. In addition, they noted that 
commercial shipbuilding contracts may include a cancellation clause 
where the buyer can cancel delivery of the ship in the event the 
shipyard does not deliver the ship by a certain date. Cruise ships have 
a different delivery model than other commercial vessels--because of 
the business demands, cruise lines must get new ships into operation 
and generating revenue as quickly as possible. Thus, delivery is 
expected on the exact day stipulated in the contract. During 
construction, cruise line owners will often book a revenue-generating 
cruise with passengers to embark shortly after the scheduled delivery, 
so late delivery of a ship can carry tremendous business consequences 
to a cruise line. In this sector, a late delivery qualifies as anything 
not delivered on the day promised. 

Commercial Shipbuilders Achieve Design Stability by Completing Basic 
and Functional Design Prior to Construction Start: 

Table 4 defines the three design phases typically associated with 
commercial ships--basic design, functional design,[Footnote 17] and 
production/detail design.[Footnote 18] 

Table 4: Design Phases Employed by Leading Commercial Firms: 

Design phase: Basic design; 
Tasks involved and parties responsible: 
* Fix ship steel structure and set hydrodynamics; 
* Design safety systems and get approvals from applicable authorities; 
* Route all major distributive systems, including electricity, water, 
and other utilities; 
* Ensure that the ship will meet the performance specification; 
* Complete (shipbuilder) and review (buyer). 

Design phase: Functional design; 
Tasks involved and parties responsible: 
* Provide further iteration of the basic design; generally equates to 
3D modeling; 
* Provide information on exact position of piping and other outfitting 
in each block; 
* Complete (shipbuilder) and review (buyer). 

Design stability achieved upon completion of basic and functional 
design phases. 

Design phase: Production design/detail design; 
Tasks involved and parties responsible: 
* Generate work instructions that show detailed system information, and 
include guidance for subcontractors and suppliers, installation 
drawings, schedules, materials lists, and lists of prefabricated 
materials and parts; 
* Often outsourced by shipbuilder and generally not reviewed by buyer. 

Source: GAO analysis. 

[End of table] 

Leading commercial shipbuilders will not start ship construction until 
they have a stable ship design, meaning that all basic and functional 
design has been completed (usually in the form of a complete 3D product 
model). At the point of design stability, the shipbuilder has a clear 
understanding of both ship structure as well as every ship system, 
including how those systems traverse individual blocks of the ship. To 
achieve design stability, shipbuilders need suppliers (also called 
vendors) to provide complete, accurate system information prior to 
entering basic design. This vendor-furnished information describes the 
exact dimensions of a system or piece of equipment going into a ship, 
including space and weight requirements, and also requirements for 
power, water, and other utilities that will have to feed the system. 
Commercial shipbuilders generally know before signing a contract what 
vendors they will use for major equipment, and since they do not 
include developmental technology in ship designs, they are able to 
embark on their ship designs with stable, complete vendor-furnished 
information. This approach enables designers to lock in system 
requirements for power, water, and other utilities early and reduces 
the occurrence of design changes to previously "closed out" (completed) 
spaces. Reopening closed out spaces--which is a possibility when 
tentative or notional vendor-furnished information for a developmental 
system is included in a design--can create a cascading effect 
throughout the ship design whereby additional, unanticipated aspects of 
the design must be reworked to accommodate a seemingly innocuous 
change. By delaying construction start until a stable design is 
achieved--complete with final vendor-furnished information-- 
shipbuilders minimize the risk of design changes and the subsequent 
costly rework and out-of-sequence work these changes can drive. 

Leading commercial shipbuilders also focus intently on designing for 
producibility. This concept refers to efforts a shipyard employs to 
ensure that the ship design will ultimately be matched to the 
capabilities and production techniques of the shipyard and that the 
ship can be efficiently constructed. Activities associated with 
designing for producibility include (1) use of common design elements 
across multiple classes of ships and (2) adoption of common parts and 
components that support multiple classes of ships. The prevalence of 3D 
CAD tools in the commercial shipbuilding sector enables increased 
commonality among ship classes as the shipyards can readily maintain 
and access databases of elements or parts currently in service and 
reemploy them in new designs. 

Commercial Shipbuilders Employ a Disciplined Construction Process with 
Strong Buyer Oversight to Ensure Delivery of a Quality Product within 
Cost and on Schedule: 

Among leading commercial shipbuilders, the production schedule is 
inviolate, and drydocks often represent the primary choke point to 
delivering a ship. Drydocks are thus key to efficient process flows and 
increased throughput in shipyards. Because shipyards generally have a 
backlog of ships awaiting time in the drydock, close adherence to 
planned construction schedules is critical. As such, commercial 
shipbuilders proactively work to minimize the time each ship spends in 
drydock to ensure on-time deliveries and to help maximize the 
throughput of work in their shipyards. This focus prevents the 
premature laying of a ship's keel as doing so would consume a valuable 
physical space that could be taken by another ship. In turn, 
shipbuilders will not advance to this stage until all the blocks for a 
ship have as much outfitting completed as possible. For example, STX 
Shipbuilding completes all outfitting, painting, cabling, and 
installation of insulation (if required) prior to a block being erected 
in the drydock. Alternatively, a shipyard may choose to launch ships 
like FPSO vessels or drillships that have buyer-furnished equipment or 
customized equipment that is mounted on the topside of the ship 
earlier, since this equipment can be installed at a quay after launch. 
In addition, leading shipyards use state-of-the-art measuring and 
production capabilities early on in the construction process to measure 
blocks and ensure that they will fit together and require little or no 
trimming at the erection phase. Together, these practices allow the 
shipbuilder to erect the ship in the shortest amount of time and move 
it out of the drydock. For example, Odense Steel Shipyard quality 
assurance inspectors employ a 3D coordinate measuring system to ensure 
that every block is measured in 3D detail. These measurements are then 
compared to the 3D design to ensure that the ship is within set 
tolerances and to minimize any trimming of blocks during erection in 
the drydock. 

The block definition plan for a ship is developed months before the 
start of steel cutting, and the way the ship is divided into blocks 
determines how the ship will ultimately be constructed. Early 
definition of the construction strategy is important because it allows 
the shipyard to plan for the use of the drydock and other resources. 
Representatives from Aker Yards stated that any problems with blocks 
are resolved as soon as they are discovered to prevent later delays 
once the blocks are combined into grand blocks, when access to interior 
spaces becomes more difficult. Similarly, Meyer Werft has an intensive 
testing process where all systems and their subcomponents (e.g., 
piping, valves, etc.) are tested both in the workshop and on board 
before the ship is launched so that any problems can be resolved early. 
Commercial shipyards may build prototype blocks or sections of the ship 
if there are particularly challenging or dense sections to ensure that 
they are producible and to get their shipyard personnel familiar with 
the work required. Figure 10 shows a sample block definition plan for a 
cruise ship. 

Figure 10: Block Definition Plan for a Cruise Ship: 

[Refer to PDF for image:illustration] 

Source: GAO analysis of Aker Yards data. 

[End of figure] 

Commercial ship construction is overseen by several different groups 
that have differing focuses. Each shipyard has quality assurance 
inspectors, quality control inspectors, or both responsible for 
monitoring the construction process and overseeing quality testing. 
Commercial ship buyers always have teams of inspectors in place to 
oversee the building of their ships to ensure quality and adherence to 
the contract specifications and to monitor the progress against the 
schedule. Buyer representatives will observe factory acceptance tests 
for equipment, oversee the production of blocks and prefabricated 
sections at subcontractor factories, and inspect each block to ensure 
quality and weld integrity. In addition, the classification society 
selected to perform a technical review of the ship will conduct similar 
tests--focusing primarily on safety aspects of the ship--often in 
combination with the buyer. 

Cruise ship buyers, in particular, very aggressively monitor the 
progress of their ships because a delivery delay of even a few days can 
cost them significant revenue. The cruise ship buyers we studied often 
ask their shipyards to produce detailed weekly reports on construction 
progress data needed to track the schedule; if necessary, the buyer 
proactively engages the shipyard to manage variance that could affect 
schedule. In order to further prevent delivery delays, the shipyard 
will refuse to accept and execute change orders if they will cause 
delays to the ships in the drydock. All change orders are evaluated on 
the basis of their impacts on cost, weight, and labor hours to 
implement. Commercial buyers also restrict the type and number of 
change orders they submit; often change orders have to be approved by 
senior buyer management to minimize costs and prevent delays. For 
instance, at Carnival Corporation, the Corporate Chairman personally 
approves all change orders. Shipyards also make capital investments in 
equipment and procedures that reduce production time. For example, 
Meyer Werft has invested in a computer-aided logistics system that 
enables the precise bar code tracking of supplies and ship components 
to permit on-time and as-needed delivery of parts, limiting backlog and 
delays. This system also places bar codes on every part so defects can 
be tracked back to the specific shop and worker who made the part, 
enabling quality control feedback. 

The cruise ship builders we interviewed stated that they were 
evaluating the use of modular components in their designs that can be 
prefabricated off-site. Currently, this practice is employed in the 
cruise industry through the use of prefabricated cabin compartments. 
For instance, both Aker Yards and Meyer Werft have all ship cabins 
built off-site by cabin manufacturers and bring them fully completed-- 
including piping, wiring, furnishings, and carpeting--to the shipyard 
by truck and hold them in a staging area until they are needed. These 
prefabricated units can be slid into the ship from the outside and 
maneuvered into the proper location, and can have the piping and wiring 
connected to terminals on board. According to two shipbuilders, 
increased application of the prefabrication techniques could further 
reduce construction time and increase drydock availability at their 
shipyards. In addition, other commercial shipyards often use off-site 
suppliers to build different parts of ships. For example, the deckhouse 
and crew cabin blocks of ships are often built in factories external to 
the shipyard, and other ship blocks are outsourced as needed to 
maximize shipyard capacity and maintain throughput. 

Navy Shipbuilding Programs Make Key Decisions with Less Knowledge Than 
Deemed Acceptable in Commercial Shipbuilding: 

Across the shipbuilding portfolio, the Navy has not been able to 
execute programs within cost and schedule estimates, which has, in 
turn, led to disruptions in its long-range construction plans. The Navy 
places great importance on delivering highly capable, robust ships to 
the fleet. This emphasis is evident in the performance requirements 
established in Navy shipbuilding programs, which often are not 
constrained by the availability of technology. As a result, the Navy 
initiates major technology development efforts in its shipbuilding 
programs prior to detail design and construction contract award. While 
these efforts advance individual technologies, the Navy does not 
allocate sufficient time in the pre-contract phase to retire technical 
risks, unlike the approach used in the commercial sector. Further, Navy 
shipbuilding programs do not devote sufficient time for engaging key 
stakeholders early in the program to evaluate and balance ship 
requirements, specifications, and costs. As a result, Navy programs 
often proceed to contract award with significant technical risk, 
unclear expectations between buyer and builder, and cost uncertainty. 
These conditions preclude the prudent use of fixed-price contracts and 
cause cost-reimbursable contracts to be the primary means of designing 
and constructing lead ships. Consequently, cost, schedule, and 
performance risk in the program resides primarily with the government. 
This risk often translates into cost growth and schedule delays as 
lingering technology immaturity destabilizes design development for the 
ship, and subsequent design changes produce inefficient work sequencing 
and rework during construction. Congress and the Navy have recently 
taken steps to begin addressing these challenges, but table 5 
highlights key areas where Navy shipbuilding practices continue to 
differ significantly from best practices found in the commercial 
sector. These differences largely explain why the Navy does not achieve 
the same outcomes in its shipbuilding programs that leading commercial 
firms produce. 

Table 5: Comparison of Navy Shipbuilding Practices and Commercial Best 
Practices: 

Phase: Pre-contract; 
Navy practices: Navy programs generally proceed with high levels of 
risk and uncertainty; 
* Requirements are not constrained by technology availability; 
* Ship concepts may not leverage existing designs to minimize risk; 
Commercial practices: Commercial shipbuilders and ship buyers retire 
all major risk prior to signing a contract; 
* Shipyards will not sign a contract if there is outstanding technical 
risk; 
* Shipyards and buyers leverage existing designs to minimize risk. 

Phase: Contract; 
Navy practices: Navy programs cannot fix the cost and delivery date for 
a ship at contract signing; 
* Programs use cost-reimbursable contracts for lead and early follow-on 
ships; 
* Navy can change specifications/drawings as critical technologies 
develop; 
* Because technologies often remain in development at contract signing, 
eventual ship performance remains uncertain; 
Commercial practices: Commercial shipbuilders fix the cost and delivery 
date for a ship at contract signing; 
* Leading buyers and shipbuilders use only firm, fixed-price contracts; 
* Buyer cannot change specifications/drawings without incurring 
financial or technical performance penalties once a contract is signed; 
* Shipyard guarantees that the ship will perform as defined in the 
agreed specifications. 

Phase: Design; Navy practices: Navy programs attain varying levels of 
design completion prior to starting construction; 
* Ship programs may prematurely start construction to support the 
industrial base; 
* 3D CAD is under way, but not fully complete at construction start; 
Commercial practices: Commercial shipbuilders complete all basic and 
functional design prior to starting construction; 
* Shipyards will not start construction until a design is complete and 
stable; 
* 3D CAD is completed prior to construction. 

Phase: Construction; 
Navy practices: Navy programs are characterized by construction 
inefficiencies that impede ships from delivering within cost and on 
schedule; 
* The amount of time a ship spends under construction--or in the 
drydock--is not of critical importance to the shipbuilder when faced 
with low or uncertain future workload; 
* Design changes during construction are common and can cause schedule 
delays and cost growth; 
* Navy maintains a shipyard presence, but is often slow to respond to 
changes in workload distribution and complexity; 
Commercial practices: Commercial shipbuilders have a disciplined 
construction process that delivers ships within cost and on schedule; 
* In order to maintain tight schedules across multiple ships, drydock 
time is rigorously monitored and controlled by the shipbuilder; 
* Change orders are minimized to avoid delays and cost growth; 
* Buyers perform vigorous oversight of construction in order to ensure 
quality and to monitor schedule. 

Source: GAO analysis. 

[End of table] 

The Navy Consistently Underestimates the Effort Required to 
Successfully Execute Its New Shipbuilding Programs: 

Cost growth and schedule delays are persistent problems for Navy 
shipbuilding programs as they are for other weapon systems. These 
outcomes occur when project scope exceeds available resources. As 
tables 6 and 7 show, these challenges are amplified for lead ships in a 
class. 

Table 6: Cost Growth in Recent Navy Lead Ships and Significant 
Follow-ons (Dollars in millions): 

Ship: SSN 774; 
Initial President's budget request[A]: $3,260; 
Most recent President's budget request: $3,752; 
Cost growth as a percentage of initial budget: 15%. 

Ship: SSN 775[B]; 
Initial President's budget request[A]: $2,192;
Most recent President's budget request: $2,740; 
Cost growth as a percentage of initial budget: 25%. 

Ship: T-AKE 1; 
Initial President's budget request[A]: $489; 
Most recent President's budget request: $538; 
Cost growth as a percentage of initial budget: 10%. 

Ship: LPD 17; 
Initial President's budget request[A]: $954; 
Most recent President's budget request: $1,758; 
Cost growth as a percentage of initial budget: 84%. 

Ship: LHD 8; 
Initial President's budget request[A]: $1,893; 
Most recent President's budget request: $2,196; 
Cost growth as a percentage of initial budget: 16%. 

Ship: LCS 1; 
Initial President's budget request[A]: $215; 
Most recent President's budget request: $631; 
Cost growth as a percentage of initial budget: 193%. 

Ship: LCS 2[C]; 
Initial President's budget request[A]: $257; 
Most recent President's budget request: $636; 
Cost growth as a percentage of initial budget: 147%. 

Ship: CVN 77; 
Initial President's budget request[A]: $4,975; 
Most recent President's budget request: $5,843; 
Cost growth as a percentage of initial budget: 17%. 

Source: GAO analysis of Navy data. 

[A] Estimated cost from the President's budget submission for year of 
ship authorization. 

[B] SSN 775 is the second Virginia-class submarine, but is the first 
hull delivered by Northrop Grumman's Newport News shipyard. 

[C] LCS 2 remains under construction. 

[End of table] 

Table 7: Delays in Achieving Initial Operating Capability in Recent 
Navy Lead Ships (Acquisition Cycle Time in Months): 

Ship class: T-AKE 1; 
Initial schedule: 61; 
Schedule slip: 7. 

Ship class: SSN 774; 
Initial schedule: 124; 
Schedule slip: 17. 

Ship class: LPD 17; 
Initial schedule: 80; 
Schedule slip: 52. 

Ship class: LCS; 
Initial schedule: 41; 
Schedule slip: 21. 

Source: GAO analysis of Navy data. 

[End of table] 

The Navy's six most recent lead ships[Footnote 19] have experienced 
cumulative cost growth over $2.4 billion above their initial budgets. 
These cost challenges have been accompanied by delays in delivering 
capability totaling 97 months across these new classes. The first San 
Antonio-class ship (LPD 17) was delivered to the warfighter incomplete 
and with numerous mechanical failures--52 months late and at a cost of 
over $800 million above its initial budget. For the LCS program, the 
Navy established a $220 million cost target and a 2-year construction 
cycle for each of the two lead ships. To date, combined costs for these 
two ships have exceeded $1 billion, and initial capability has been 
delayed by 21 months. Cost increases are also significant if the second 
ship is assembled at a different shipyard than the first ship. This was 
the case with SSN 775, the second Virginia-class submarine, which 
experienced cost growth of well over $500 million above its initial 
budget request of $2.192 billion. 

The Navy's fiscal year 2009 long-range ship construction plan reflects 
many of the recent challenges that have confronted Navy shipbuilding 
programs. The plan provides for fewer ships at a higher unit cost--in 
both the near term and the long term--from what the Navy outlined in 
its fiscal year 2008 plan. As cost growth has mounted in current 
shipbuilding programs, the Navy has had to reallocate funds planned for 
future ships to pay for ones currently under construction. These 
problems have required the Navy to adjust its long-term plans and 
presume that significant funding increases--on the order of $22 billion 
from fiscal years 2014 through 2018 alone--will become available 
through fiscal year 2038. 

Navy Shipbuilding Programs Often Afford Insufficient Time Prior to 
Contract Award to Retire Technology Risk and Define Realistic 
Requirements: 

The Navy seeks to deliver capabilities to the fleet that it expects 
will outpace and overmatch anticipated future threats. To support this 
goal, the Navy sets forth ambitious requirements in its shipbuilding 
programs that are generally not constrained by the availability of 
technologies. To compensate, the Navy invests considerable resources 
before contract award toward identifying and developing new 
technologies to meet its mission requirements. These efforts often 
increase the Navy's understanding of key technologies, but seldom does 
the Navy afford sufficient time to retire risk by maturing these 
technologies into complete, fully functional prototypes--upon which the 
Navy can validate its performance expectations--prior to contract 
signing. Absent this knowledge, the new technologies remain unproven to 
both the Navy (as ship buyer) and to the shipbuilder(s) it selects to 
design and construct the lead ship. This limitation impedes both the 
Navy's and the contractor's ability to clearly define the level of 
effort required to design and construct the lead ship, which in turn 
precludes the use of a fixed-price contract. Figure 11 highlights the 
differences in how the Navy approaches risk management in its 
shipbuilding programs compared with best practices used in commercial 
shipbuilding. 

Figure 11: Navy Practices: Significant Risks Remain Unresolved at 
Contract Award: 

[Refer to PDF for image: illustration] 

Navy risk cone: Illustrates risk from more risk to less risk, including 
the commercial risk cone from figure 7: 

More risk: 
* Concept designed; 
* Technologies are mature (commercial risk cone); 
* Shipyard has capacity (commercial risk cone); 
* Hull model tested and seaworthy (commercial risk cone); 
* Technological needs identified. 

Lesser risk: 
* Technology development complete; 
* Hull model testing complete. 

More risk: 

Project initiation: 

Pre-contract: 
* Major risk still outstanding by contract signing. 
* Cost-reimbursable or fixed-price incentive contracts used. 
* Delivery dates are often optimistic and do not include penalties for 
late delivery. 

Contract is signed before all major risk has been retired. 

Lesser risk: 

Design: 
* Lead ships are often based on clean sheet designs. 
* Schedules are generally optimistic, regardless of complexity of 
design. 
* Basic and functional design and a completed 3D product model are 
often incomplete prior to starting construction. 

Less risk: 

Construction begins with varying levels of design complete. 

Construction: 
* Shipyards often start construction prematurely. 
* Work often completed out of sequence and at higher cost. 
* No business imperative to deliver on time. 
* Navy supervises construction quality. 

Ship delivery. 

Source: GAO analysis. 

[End of figure] 

Similar to the activities that occur in the commercial sector, the Navy 
uses the pre-contract phase for a lead ship to establish performance 
requirements, write ship specifications, and estimate design and 
construction costs. However, Navy shipbuilding officials reported that 
Navy programs often afford insufficient time to engage all stakeholders 
in these deliberations. Instead, decisions on requirements and 
specifications are frequently expedited--and cost uncertainty is 
downplayed--in a concerted effort to get a detail design and 
construction contract in place and demonstrate tangible progress to 
interested program observers. 

The Navy's LCS program illustrates the importance of engaging 
stakeholders early in a program to clarify requirements and set 
realistic cost and schedule goals. Several Navy and industry officials 
reported that had the opportunity to engage in honest, open dialogue 
among applicable communities about program resources and requirements 
existed, it would have become clear that the program's $220 million 
lead ship cost target and 2-year construction cycle were unachievable. 
Figure 12 further highlights challenges the Navy has faced in the LCS 
program. 

Figure 12: LCS: 

[Refer to PDF for image: photograph of LCS] 

Mission: LCS is designed to perform mine countermeasures, anti-
submarine warfare, and surface warfare missions in littoral (coastal) 
regions. 

Issues: From the outset, the Navy sought to concurrently design and 
construct two lead ships in the LCS program in an effort to rapidly 
meet pressing mission needs. Implementation of the new Naval Vessel 
Rules (design standards) further complicated the Navy’s concurrent 
design-build strategy for LCS. According to Navy officials, these rules 
required program officials to redesign major elements of each LCS 
design to meet enhanced survivability requirements, even after 
construction had begun on the first ship. While these changes improved 
the robustness of the LCS designs, they contributed to out-of-sequence 
work and rework on the lead ships. The Navy failed to fully account for 
these changes when establishing its $220 million cost target and 2-year 
construction cycle for the lead ships. When design standards were 
clarified with the issuance of Naval Vessel Rules and major equipment 
deliveries were delayed (e.g., main reduction gears), adjustments to 
the schedule were not made. Instead, with the first LCS, the Navy and 
the shipbuilder continued to focus on achieving the planned schedule, 
accepting the higher costs associated with out-of-sequence work and 
rework. This approach enabled the Navy to achieve its planned launch 
date for the first LCS, but required it to sacrifice its desired level 
of outfitting—a practice that further increased costs later in 
construction. 

Sources: Alion Science (photo); GAO (data). 

[End of figure] 

In the LCS program, the opportunity to fully engage stakeholders to 
identify realistic cost and schedule targets as well as potential 
capability trade-offs--before embarking on an unexecutable path--was 
lost. Alternatively, this program illustrates the consequences of 
proceeding into a contract absent a clear understanding among all 
stakeholders of the desired end product and the resources that are 
required to deliver it. Notably, the Navy's requirements community had 
an insufficient understanding of the costs associated with the 
capability objectives it set for these ships. Further, the program 
offices, contractors, and shipbuilders held unclear and sometimes 
conflicting interpretations of performance requirements and ship 
specifications. These inconsistencies were not recognized and did not 
preclude the Navy from entering into contract awards for the lead ships 
in this class. 

The Navy's Ford-class aircraft carrier (CVN 21) program offers another 
example where more time allotted to the pre-contract phase for 
interaction among the Navy's acquisition program office, the 
requirements community, and its shipbuilder could have produced a 
better balance between technology scope and program resources. One of 
the defining technologies shaping the ship's design is the 
Electromagnetic Aircraft Launch System (EMALS), a catapult system that 
uses an electrically generated, moving magnetic field instead of steam 
to propel aircraft to launch speed. EMALS contributes to meeting 
desired sortie generation rates and manpower reductions on the ship. 

EMALS finished its system integration phase over 15 months behind 
schedule and substantially above budget. As we reported in August 2007, 
delays resulted from technical challenges--largely because of failures 
with the prototype generator that stores the high power needed to 
propel the launchers--as well as difficulties meeting detailed Navy 
requirements.[Footnote 20] Requirements challenges were amplified by 
limited coordination between the EMALS contractor and the CVN 21 
program shipbuilder. Initially, requirements were communicated only 
through the Navy.[Footnote 21] These issues prompted the Navy to 
request a $44 million increase in research, development, test, and 
evaluation funding for CVN 21 in fiscal year 2009. Figure 13 outlines 
additional challenges related to developmental efforts in the CVN 21 
program. 

Figure 13: CVN 21: 

[Refer to PDF for image: photograph of CVN 21] 

Mission: The Navy’s CVN 21 program is developing a new class of nuclear-
powered aircraft carriers that will replace USS Enterprise and the 
Nimitz-class as the centerpiece of the carrier strike group. The new 
carriers are to include advanced technologies in propulsion, weapons 
handling, aircraft launch and recovery, and survivability designed to 
improve operational efficiency and enable higher sortie rates while 
reducing required manpower. 

Issues: CVN 21 technologies, including EMALS, the dual band radar, and 
the advanced arresting gear, have all experienced schedule delays that 
could disrupt construction of the lead ship in the Ford-class, CVN 78. 
EMALS was initially designed and tested in a configuration that 
minimized the system’s weight. However, after the Navy defined the ship’
s survivability requirements, the system was reconfigured and its 
weight increased above its margin, resulting in reallocation of weight 
elsewhere on the ship and the redesign of a subsystem. Further, the 
contractor for EMALS designed one subsystem component—the power 
conversion system—to generic shock and vibration requirements while 
waiting for the Navy’s final determination of shipboard requirements. 
At present, the subsystem may need to be reconfigured during production 
in order to meet final requirements—an outcome the contractor 
attributes to delays arising from limited coordination with the 
shipyard on requirements issues. Dual band radar testing has been 
delayed as a result of technical difficulties in developing the volume 
search radar. Upcoming land-based tests will be conducted at a lower 
voltage than needed to meet requirements and without the radar’s 
composite shield. Full power output will not be tested on a complete 
system until 2012, and carrier-specific functionalities will be 
demonstrated shortly before shipyard delivery in 2013—an approach that 
leaves little time to resolve problems ahead of ship installation. In 
addition, the advanced arresting gear has encountered delays resulting 
from difficulties meeting the Navy’s requirements for the system. 
Specifically, the Navy and the contractor disagreed on the necessary 
format of design drawings, drawings were delivered late, and changes in 
Navy requirements for shock and vibration led to a redesign of a major 
subsystem. 

Sources: CVN 21 Program Office (photo); GAO (data). 

[End of figure] 

Successful business cases for ships require balance between the concept 
selected to satisfy warfighter needs and the resources--technologies, 
design knowledge, funding, time, and management capacity--needed to 
transform that concept into a product. The Navy often bases its 
business cases for lead ships on promised capabilities associated with 
revolutionary, new technologies. However, when these technologies do 
not mature within the window of time the Navy allocates pre-contract, 
the ship's ability to execute its planned missions is called into 
question, and the business case for the program begins to erode. 
Compromises then have to be made, most often in the form of decisions 
to continue technology development after contract award--as opposed to 
removing the technology from the ship--despite the disruptive effect 
this activity can have on ship design and construction work. For 
example, in a program like the DDG 1000 that undertook multiple 
technical leaps to meet challenging requirements, yet also had to 
deliver in time to match shipyard availability, pressures existed to 
make optimistic assumptions about the pace of technology maturity. 
Figure 14 provides additional context on the DDG 1000 program's efforts 
to compress technology development activities within the confines of 
the design and construction schedule for the lead ships. 

Figure 14: DDG 1000: 

[Refer to PDF for image: photograph of DDG 1000] 

Mission: DDG 1000 is a multimission surface ship designed to provide 
advanced land attack capability in support of forces ashore and 
contribute to U.S. military dominance in littoral (coastal) operations. 

Issues: The Navy undertook development of 12 novel technologies to meet 
the DDG 1000 program’s ambitious requirements. Despite significant 
investment to progress these technologies, the Navy has faced 
challenges maturing some of them as scheduled. Currently, lead ship 
construction is scheduled to begin before the volume search radar and 
integrated power system technologies are fully demonstrated. In the 
event that these technologies encounter any problems during later 
testing, resolving them could require redesign and spur out-of-sequence 
work or rework during lead ship construction. Earlier problems with the 
integrated power system led the Navy to replace the permanent magnet 
motor in favor of an advanced induction motor for that system. Because 
the Navy maintained the induction motor as a fallback technology, the 
integrated power system was able to meet its performance criteria. 
Because of a stealth requirement, DDG 1000 also includes a novel 
tumblehome hullform and a composite deckhouse, which were revolutionary 
technologies not in existence at the time requirements for the program 
were established. Instead of considering alternatives to the stealth 
requirement, the Navy proceeded under the assumption that the hull and 
deckhouse would be suitably mature to meet the planned design and 
construction schedule. As the lead ship enters construction, building 
the composite deckhouse now poses risks to successful cost and schedule 
execution. In addition, the Navy is writing and releasing six blocks of 
software code for the new total ship computing environment, which it 
initially planned to develop and demonstrate over 1 year before ship 
light-off (activation and testing of systems aboard ship). As a result 
of changes in the software development schedule, however, the Navy 
eliminated this margin. More recently, the Navy certified software 
release 4 before it met about half of its requirements, and the 
contractor deferred work to release 5, primarily due to issues with the 
ship’s command and control system. 

Sources: PEO Ships (PMS 500) (photo); GAO (data). 

[End of figure] 

In many cases, Navy lead ships become the platforms upon which planned 
technologies are eventually proven. The Navy employs this approach in 
cases where (1) it judges further maturation of an existing, functional 
prototype system to be cost prohibitive--as has occurred with the DDG 
1000 advanced gun system--or (2) development work for a technology is 
so delayed that the only viable option in order to maintain the ship 
construction schedule is to install the prototype system and evaluate 
its full functionality following delivery of the ship--as the Navy 
plans to do with the DDG 1000 volume search radar. 

Navy Shipbuilding Contracts for Lead Ships Are Often Structured to 
Accommodate Uncertainty about Project Workload and Costs: 

Unlike the commercial model, which exclusively employs firm, fixed- 
price contracts for design and construction of lead ships, Navy 
shipbuilding relies upon contract structures that leave a higher level 
of risk with the buyer. Often the Navy and its shipbuilders enter into 
the detail design and construction contract without a full 
understanding of the effort needed to deliver the ship. This incomplete 
understanding translates into uncertainty about costs, causing 
contracts for the first ships of a new class to be typically negotiated 
as cost-reimbursable contracts. For example, cost-reimbursable 
contracts were used to procure the lead vessels in programs such as CVN 
21, LPD 17, LCS, DDG 1000, and SSN 774. Several follow-on ships in the 
LPD 17 and SSN 774 classes were also bought under cost-reimbursable 
contracts. More mature shipbuilding programs, where there is greater 
certainty about costs, typically employ fixed-price contracts with an 
incentive fee. Fixed-price contracts are currently used, for instance, 
to buy Arleigh Burke-class (DDG 51) destroyers, which shipyards have 
been building since the 1980s. 

Both cost-reimbursable and fixed-price incentive fee contracts can 
include a target cost, a target profit, and a formula that allows the 
fee to be adjusted by comparing the actual cost to the target cost. 
According to Navy officials, construction contracts for ships generally 
include provisions for controlling cost growth with incentive fees, 
whereby the Navy and the shipbuilder split any savings when the 
contract cost is less than its anticipated target. Conversely, when 
costs exceed the target, the excess is shared between the Navy and the 
shipbuilder up to a specified level. Once this level is reached, under 
the Navy's cost-reimbursable incentive fee contract, financial 
responsibility shifts to the Navy. Fixed-price incentive contracts 
include a ceiling price (maximum), which if reached makes the 
shipbuilder generally responsible for all additional costs. The nature 
of the risk and available knowledge used to justify the use of cost- 
reimbursable contracts enables shipbuilders to sign contracts without a 
complete understanding of the activities needed to successfully deliver 
the ship. If shipbuilders are unable to complete their contracts on 
time and within cost in this environment, it is likely that the 
government will be at least partially responsible for funding the 
associated cost increases. 

The LCS program offers a vivid example of the cost risk the government 
can face when executing cost-reimbursable contracts for ships. The Navy 
awarded contracts for detail design and construction of the first two 
ships--LCS 1 and LCS 2--in December 2004 and October 2005 for $188.2 
million and $223.2 million, respectively. The Navy later exercised 
options on each of these contracts in June and December 2006 for 
construction of the third and fourth ships (LCS 3 and LCS 4). However, 
changing technical requirements, evolving designs, and construction 
challenges drove the government's estimated prices at completion for 
the LCS 1 and LCS 2 seaframes to about $500 million each--cost growth 
that will be borne in large part by the government. This cost growth 
precipitated concern within the Navy that similar outcomes were 
possible for LCS 3 and LCS 4. In response, the Navy reassessed program 
costs and structure, revisited the acquisition strategy for future 
ships, and entered into negotiations with its shipbuilders to convert 
the LCS 3 and LCS 4 contracts into fixed-price contracts. The Navy was 
unable to reach agreement with its shipbuilders on fixed-price terms 
for these ships, subsequently leading the Navy to terminate the LCS 3 
and LCS 4 contracts, in part, for the convenience of the government. 
However, it is possible that these cancellations will further increase 
LCS 1 and LCS 2 indirect costs (overhead) given that the LCS 
shipbuilders now have fewer quantities under contract against which 
overhead costs can be charged. 

Design Processes Vary among Navy Programs but Consistently Occur Absent 
Key Knowledge Required in the Commercial Sector: 

The Navy and defense shipbuilders go through the same design steps that 
commercial shipbuilders follow--the ship's structure and equipment is 
defined along with the weight, power, cooling, and other requirements 
associated with each piece of equipment, and systems are subsequently 
routed through the ship. However, Navy design terminology varies from 
forms employed in the commercial model, and even internally Navy 
programs do not share a common language or process. The Navy uses the 
term detail design to encompass the three design phases commonly 
referred to as basic, functional, and production (detail) design in the 
commercial world. However, each Navy program often defines the 
individual stages of detail design uniquely. For example, in designing 
the CVN 21 aircraft carrier, the program office defined three stages-- 
concept, arrangement, and detail--corresponding with 3D product model 
development. The Navy also created a three-stage process for DDG 1000, 
but defined its stages as functional, transition, and zone/nonzone 
detail. Beyond these naming differences, the design tasks completed at 
each stage--as well as the Navy's review processes--varied between the 
two programs. For DDG 1000, the Navy held its final design reviews in 
the third stage once design zones were 90 percent complete. 
Alternatively, final reviews in the CVN 21 program were held in the 
second stage upon inclusion of form, fit, and function of components 
into the 3D product model. While these divergent processes may have 
been appropriate at the individual program level, the lack of a common 
nomenclature and review process across programs makes it difficult to 
apply standards such as best practices. In turn, it is harder for the 
Department of Defense and congressional leadership to effectively 
assess design stability and the readiness of shipbuilding programs for 
construction. 

In addition, design processes in Navy programs often must accommodate 
changing information about key aspects of systems planned for the ship 
that remain in development. For example, as development proceeds on a 
new technology, initial assumptions about size, shape, weight, and 
power and cooling requirements can change significantly. These changes-
-if not resolved during the pre-contract phase--can introduce 
considerable volatility to the design process for a lead ship. For 
instance, in the Seawolf-class attack submarine (SSN 21) program, the 
AN/BSY-2 combat system did not mature to fit into the space and weight 
reservations that the Navy had allocated for it within the submarine's 
design. As a result, a portion of the submarine had to be redesigned at 
additional cost. Figure 15 highlights additional information about the 
Seawolf-class's design instability. The Navy also runs the risk of 
changing information in the CVN 21 program that could disrupt its 
design processes, particularly related to EMALS, whose testing has not 
kept pace with the program schedule. Should EMALS not mature as 
anticipated, the Navy may be forced to revert to a legacy steam 
catapult system, which would require significant redesign across the 
ship. 

Figure 15: SSN 21: 

[Refer to PDF for image: photograph of SSN 21] 

Mission: The Navy’s SSN 21 nuclear-powered submarines are designed to 
track and engage enemy targets with greater depth, speed, and stealth 
capabilities than predecessors. 

Issues: The timely development of AN/BSY-2—a computer-aided detection, 
classification, and tracking combat system—was critical to the 
submarine meeting its mission requirements. Even though this technology 
was a modified successor to the AN/BSY-1 system found on earlier Los 
Angeles-class submarines, the technology did not mature as quickly as 
the Navy expected. Changes to the AN/BSY-2 system’s design caused a 
portion of the submarine to be redesigned at an additional cost. The 
Navy originally provided Newport News with general space and weight 
information for the AN/BSY-2 that the shipyard used to begin designing 
its portion of the Seawolf. The Navy later provided the shipyard with 
more specific information that caused considerable redesign of the 
submarine and increased design costs, according to Newport News. The 
lead submarine ultimately experienced cost growth on the order of 45 
percent above initial budget estimates. 

Sources: General Dynamics Electric Boat (photo); GAO (data). 

[End of figure] 

This design volatility has been a major source of cost growth in Navy 
programs. Construction regularly begins in Navy programs before basic 
and functional design activities are fully complete--that is, before 
the design is stable--increasing the likelihood that redesign and 
costly out-of-sequence work and rework will be required. This challenge 
is accentuated when the Navy chooses to produce a clean sheet design 
for a lead ship. Clean sheet designs are largely driven by the unique, 
challenging mission requirements that are approved for Navy programs. 
Accommodating new technologies intended to meet these requirements can 
require more space, power, cooling, and other supporting attributes 
than a legacy design can sometimes offer. These cases compel the use of 
a clean sheet design. 

The Virginia-class submarine program, however, offers a more positive 
example of successful Navy/industry design effort. This program-- 
although technically a clean sheet design--reused a number of 
components tested and used on previous submarine classes and produced a 
complete 3D product model before construction start. This progress 
contributed significantly to the relatively low number of design- 
related change orders--totaling 3 percent of the contract price, 
according to the Navy--needed for the first submarine in the class. 

The Navy's plans for the DDG 1000 program call for greater design 
stability prior to beginning construction. More design has been 
completed than on other recent lead ships. As of January 2009, the Navy 
had completed 88 percent of the 3D product model and planned to start 
ship construction in February. 

Construction Processes for Navy Ships Are Characterized by 
Inefficiencies That Impede Quality and Increase Cost and Schedule: 

Navy programs often enter construction with unstable designs and 
incomplete 3D product models, which can disrupt the planned sequence of 
construction. For instance, in the LPD 17 program, ship design 
continued to evolve even as construction proceeded. Without a stable 
design, outfitting work for individual ship sections was often delayed 
from early in the building cycle to later, when these sections were 
integrated on the hull. Shipbuilders stated that doing the work at this 
stage could cost up to five times the original cost. In total, 1.3 
million labor hours were deferred from the build phase to the 
integration phase for LPD 17. Consequently, the ship took much longer 
to construct and cost more than originally estimated. Figure 16 further 
illustrates the challenges experienced in the program. 

Figure 16: LPD 17: 

[Refer to PDF for image: photograph of LPD 17] 

Mission: This amphibious ship class is designed to transport Marines 
and their equipment and allow them to land using helicopters, landing 
craft, and amphibious vehicles. 

Issues: In the LPD 17 program, the Navy’s reliance on an immature 
design tool led to problems that affected all aspects of the lead ship’
s design. With slightly over half of the design completed, construction 
of the ship began. Without a stable design, work was often delayed from 
early in the building cycle to later, during integration of the hull. 
Shipbuilders stated that doing the work at this stage could cost up to 
five times the original cost. The lead ship in the class, LPD 17, was 
delivered to the warfighter incomplete and with numerous mechanical 
failures, resulting in a lower-than-promised level of capability. 
Problems with the ship’s steering system, reverse osmosis units, 
shipwide computing network, and electrical system—among other 
deficiencies—remained unresolved in a subsequent sea trials phase 
nearly 2 years following delivery. At that time, Navy inspectors noted 
that 138 of 943 ship spaces remained unfinished and identified a number 
of safety concerns related to personnel, equipment, ammunition, 
navigation, and flight activities. The Navy invested over $1.75 billion 
constructing LPD 17, compared with its initial budget estimate of $954 
million. 

Sources: LPD 17 Class Program Office (PEO Ships/PMS 317) (photo); GAO 
(data). 

[End of figure] 

Similar to commercial buyers, the Navy maintains a visible presence in 
the shipyards where it has projects under way. For Navy shipbuilding 
contracts, this oversight function is performed by the Navy's 
Supervisor of Shipbuilding (SUPSHIP). SUPSHIP services include contract 
administration, engineering surveillance, quality assurance, logistics, 
and financial administration of assigned contracts. However, SUPSHIP 
has, at times, displayed slow response to changes in its workload 
distribution and the complexity of the projects it is supervising. 

For example, the Navy awarded the construction contract for LCS 1 in 
December 2004. As we have previously reported, the LCS program was 
characterized by concurrent technology development, design completion, 
and lead ship construction--and further complicated by unclear and 
evolving technical requirements.[Footnote 22] Despite the ambitious 
strategy that the Navy tasked its shipbuilder with executing, SUPSHIP 
Gulf Coast (the responsible organization) only assigned two people to 
the LCS 1 shipyard in February 2005 when construction began. As 
problems mounted in the program, SUPSHIP reacted by assigning nine 
additional personnel to the yard. 

Recent Congressional and Navy Actions Encourage Technology Maturity and 
Design Stability at Key Points in Programs: 

Congress and the Navy have both taken a series of steps aimed at 
promoting timely attainment of technology maturity and design stability 
in weapons acquisition programs. However, because the acquisition 
process followed in Navy shipbuilding programs differs considerably 
from that employed in other Department of Defense programs--most 
notably, in the timing of key milestone reviews--the associated 
benefits have proven limited. 

Since 2000, Department of Defense policy has called for demonstrating 
technologies in a relevant environment by the time a program reaches a 
key acquisition decision point (milestone B) marking the start of 
engineering and manufacturing development. Guidance defines technology 
prototypes as "representative" but does not require that prototypes of 
the system or equipment incorporating the technology be in their final 
form.[Footnote 23] Congress reinforced the importance of technology 
maturity when, as part of the National Defense Authorization Act for 
Fiscal Year 2006, it included a provision requiring that the approving 
official certify that "the technology in the program has been 
demonstrated in a relevant environment" before the program may receive 
milestone B approval.[Footnote 24] 

The impact of this provision on shipbuilding programs differed from 
other programs because of the timing of the milestone B decision for 
ships. As figure 17 shows, milestone B for most weapon systems 
acquisitions occurs at the start of engineering and manufacturing 
development, several years before production of the system begins. 

Figure 17: Department of Defense Weapon System Acquisition Framework: 

[Refer to PDF for image: illustration] 

User needs: 
Technology opportunities and resources: 

Decision point: Materiel development decision. 

Pre-systems acquisition: 
Materiel solution analysis: 
Milestone A: 
Technology development: 
Decision point: Preliminary design review: 
Milestone B: Program initiation. 

Systems acquisition: 
Engineering and manufacturing development: 
Decision point: Critical design review: 
Milestone C: 
Production and deployment: 
Initial operational capability: 
Decision point: Full rate production decision review: 

Sustainment: 
Full operational capability: 
Operations and support: 

Source: GAO analysis of Department of Defense data. 

Note: Figure represents a framework consistent with Department of 
Defense Instruction 5000.02 dated December 8, 2008. Pursuant to this 
policy, the technology development strategy may plan for the 
preliminary design review to occur before milestone B, as depicted in 
figure 17. If it does not occur before milestone B, the policy calls 
for the preliminary design review to occur as soon as feasible after 
milestone B. 

[End of figure] 

In contrast, as figure 18 illustrates, the most common practice in ship 
programs is for milestone B to be aligned with the decision to 
authorize the start of detail design, although this is not uniformly 
the case. For instance, milestone B is not scheduled to be held for the 
LCS program until over 5 years after the first ship began detail 
design. 

Figure 18: Typical Acquisition Framework for Navy Shipbuilding 
Programs: 

[Refer to PDF for image illustration] 

User needs: 
Technology opportunities and resources: 

Decision point: Materiel development decision. 
Materiel solution analysis: 
Milestone A: Program initiation: 
Technology development: 
Decision point: Preliminary design review: 
Development of ship specifications and system diagrams: 
Decision point: Detail design and construction contract authorized: 
Milestone B: 
Detail design: 
Decision point: Lead ship construction decision: 
Construction: 
Lead ship operational capability: 
Milestone C: 

Source: GAO analysis of Department of Defense data. 

[End of figure] 

Because, in practice, milestone B for ship programs occurs after 
development of ship specifications and system diagrams is well under 
way, the requirement for demonstrating representative prototypes in a 
relevant environment occurs later than in other weapon acquisition 
programs. This means that maturing the technology into its final form 
is occurring concurrent with detail design. Yet, completion of detail 
design--and subsequent achievement of design stability--requires 
shipbuilders to have final information on the form and fit of each 
system that will be installed on the ship, including the system's 
weight and its demand for power, cooling, and other supporting 
elements. To the extent that key systems are not in their final form 
and have not been fully demonstrated, assumptions are made about the 
final form, and the design proceeds based on this notional information. 
As development and demonstration of the system continues, changes may 
occur that need to be incorporated into the ship design and that 
potentially ripple through much of the ship design. 

Congress reinforced the need for design stability in the National 
Defense Authorization Act for Fiscal Year 2008.[Footnote 25] The act 
requires that at the start of ship construction, the Navy provide a 
report on production readiness that includes, among other things, 
assessments of: 

* the maturity of the ship's design as measured by the degree of 
completion of detail design and production design drawings and: 

* the maturity of developmental systems, including hull, mechanical, 
and electrical systems and warfare systems. 

The statutory language does not specifically require that the 
assessment of design maturity directly address the completeness of the 
3D modeling or completion of the activities that make up basic and 
functional design. 

In addition, Navy leadership has recently expressed interest in 
minimizing the number of clean sheet designs employed in future 
programs. This interest is consistent with the findings of a 2005 
analysis completed by the Office of the Secretary of Defense.[Footnote 
26] This analysis recommended that the Navy work to employ a common set 
of hulls tailored to different missions and employing modular mission 
systems. Further, the Navy has moved a number of recent programs into 
design and construction that leverage existing hull designs. These 
programs include the Maritime Prepositioning Force Future (MPF(F)), 
which will make use of several existing designs, as well as the America-
class amphibious assault ship (LHA 6), which leverages approximately 45 
percent of the LHD 8 hull design. 

More recently, the Navy has taken initial steps to instill a more 
disciplined process for decision making related to requirements, 
specifications, and cost management in its acquisition programs through 
its recent implementation of a new two-pass/six-gate review process. 
This process aims to improve governance and insight in the development, 
establishment, and execution of acquisition programs in the Navy. In 
particular, the review process seeks to ensure alignment between 
service-generated capability requirements and acquisition programs, as 
well as to improve senior leadership decision making through better 
understanding of risks and costs throughout a program's entire 
development cycle. Figure 19 illustrates the Navy's new two-pass/six- 
gate review process for shipbuilding programs. 

Figure 19: Navy's Two-Pass/Six-Gate Governance Process as Applied to 
Shipbuilding Programs: 

[Refer to PDF for image: illustration] 

Pass 1: Navy Actions: 

Lead organization: Office of the Chief of Naval Operations: 

Gate 1: Initial capabilities approval; 

Gate 2: Alternative selection; 

Gate 3: Capability development document and concept of operations 
approval. 

Pass 2: Navy Actions: 

Lead organization: Assistant Secretary of the Navy (Research, 
Development, and Acquisition): 

Gate 4: System design specification approval; 

Gate 5: Request for proposal approval; 

Gate 6: Sufficiency review. 

During the entire process, the Office of the Secretary of Defense 
initiates the following actions: 

Milestone A: At the end of Pass 1 (Gate 3) and the beginning of Pass 2 
(Gate 4); 

Milestone B: During Gate 4 and Gate 5. 

Source: GAO analysis of Navy data. 

[End of figure] 

While the new two-pass/six-gate process appears to support better 
collaboration and communication among Navy entities and senior 
leadership at different stages of a program, a number of key 
stakeholders are excluded from or have a reduced role in the decision- 
making process. For example, the acquisition community does not have a 
leadership role in the review process until Gate 4, which for 
shipbuilding programs corresponds with approval of a system design 
specification.[Footnote 27] By that point, a number of key decisions 
related to the ship concept and program requirements will have been 
defined, which the acquisition community will ultimately be charged 
with executing. In addition, shipbuilders are excluded in practice from 
the Navy's process, which limits opportunities to fully evaluate 
potential requirements trades and increase exchange of ideas prior to 
contract award. 

Differences in Commercial and Navy Practices Reflect Different 
Environments: 

The differences in commercial and Navy shipbuilding practices reflect 
the incentives of their divergent business models. Commercial 
shipbuilding is structured on shared priorities between buyer and 
shipbuilder, a healthy industrial base, and maintaining in-house 
expertise. In commercial shipbuilding, both buyers and builders are 
incentivized by the need to sustain profitability. This incentive, in 
turn, drives disciplined practices. Alternatively, Navy shipbuilding is 
characterized by (1) a buyer that favors the introduction of new 
technologies on lead ships--often at the expense of other competing 
demands, such as fleet presence; (2) low volume and relative lack of 
shipyard competition; and (3) insufficient buyer and builder expertise. 
These factors contribute to high-risk practices in Navy programs. Table 
8 further illustrates the differences. 

Table 8: Comparison of Commercial and Navy Shipbuilding Environments: 

Buyer and shipbuilder priorities: 
Commercial shipbuilding: 
* Commercial buyers and shipbuilders have shared goals and interests. 
Most notably, both benefit from within cost, on schedule deliveries. As 
such, they consider cost and schedule inviolate, resulting in an 
intense focus on retiring technical risks before contract signing and 
systematic, efficient progress through design and construction; 
* Buyers and shipbuilders both make acquisition decisions based on 
anticipated return on investment. Capability of an individual ship is 
balanced against the need for multiple ships to efficiently execute 
operations; 
Navy shipbuilding: 
* The Navy often prioritizes revolutionary technological achievement 
over its other competing demands, such as cost and schedule 
performance; 
* Navy shipbuilders largely operate in a cost-reimbursable environment. 
As such, the consequences of cost and schedule growth on their programs 
are not as significant to their continued viability and the risk of 
lost business is mitigated. 

Industrial base conditions: 
Commercial shipbuilding: 
* Global demand for new ships produces high workloads that can keep 
shipbuilders at capacity for years into the future; 
* Commercial buyers have an array of yards and suppliers to choose from 
and generally do not need to consider the long-term health of their 
yards/suppliers; 
Navy shipbuilding: 
* The Navy is the primary customer for the major U.S. shipbuilders. The 
desire to sustain workloads in each of these yards affects the Navy's 
ability to rely on full and open competition; 
* Navy shipbuilding programs are executed in an environment that often 
emphasizes long-term preservation of the industrial base over short- 
term efficiencies. 

Workforce capabilities and capacities; 
Commercial shipbuilding: 
* Commercial builders highly emphasize project management and 
supervision within the yard; 
* Commercial buyers invest in and retain experienced, talented 
individuals who usually have high levels of technical, design, 
production, and operations knowledge; 
Navy shipbuilding: 
* Naval in-house technical expertise has declined because of staffing 
reductions, while workload requirements have increased; 
* Unstable workloads for Navy shipbuilders make recruitment and 
retention of skilled workers challenging. 

Source: GAO analysis. 

[End of table] 

Commercial Shipbuilding Practices Are Driven by the Need to Sustain a 
Profitable Business Environment: 

Commercial shipbuilding is characterized by a shared priority between 
buyer and builder on sustaining profitability. Achieving this 
imperative depends on shipbuilding programs executing as planned, which 
compels buyers and shipbuilders to hold cost and schedule inviolate in 
their programs. Failure to achieve predicted cost and schedule outcomes 
in programs can jeopardize profitability. This is why leading 
commercial ship buyers and shipbuilders retire major risks prior to 
signing contracts; establish firm, fixed-price contracts; and progress 
through design and construction in systematic order to provide timely 
delivery of new capabilities. The buyer profits by adding the ship to 
its fleet, whereas the shipyard profits from moving the ship out of 
drydock so it can begin construction on a new ship. 

Leading commercial buyers and shipbuilders make their investment 
decisions based on anticipated return on investment without 
compromising the need to deliver on schedule and on budget. Commercial 
buyers weigh needs and the desire for new technologies against delivery 
date and cost. Doing otherwise would jeopardize cost and schedule and 
thus profit. Risk assessments are pragmatic versus optimistic. 
Commercial buyers also believe that "schedule is sacred" because a ship 
cannot produce revenue until it has been delivered. Once a delivery 
date has been agreed to, buyers will not make changes to a ship that 
may place the delivery timeline at risk. Cruise ships, for instance, 
are booked and scheduled to sail with passengers as early as 1 day 
after delivery. Any delays to the delivery of a cruise ship can be 
prohibitively expensive in terms of lost revenue and damaged reputation 
to the buyer--at a cost far beyond what is recouped from assessing 
financial penalties against the shipbuilder under the terms of the 
contract. As such, the commercial buyer remains vigilant during the 
construction process and on hand to render technical assistance to the 
shipbuilder, as necessary. 

Commercial shipbuilders are also incentivized to balance their desire 
for increased profits and workload against their need to deliver 
existing projects within promised deadlines and cost estimates. As 
such, leading shipbuilders will only take on projects that they are 
confident they can complete using the labor and facilities they are 
likely to have available and without jeopardizing the delivery 
schedules of other projects in the yard. This approach was consistent 
with the favorable business climate that existed in commercial 
shipbuilding at the time of our review. We found that leading yards 
were operating at full capacity with respect to their drydock(s), 
design and production departments, or both, which allowed them both the 
discipline and the flexibility to avoid projects that contained less- 
than-desirable levels of technical risk. This environment also 
instilled disciplined behaviors from buyers, who understood that 
pushing forward with risky, unstable projects would likely result in 
their not finding a willing builder. 

Overall, the strong, worldwide demand for commercial shipbuilding has 
produced a healthy industrial base of both shipyards and suppliers. The 
commercial shipyards that we visited in both Europe and Korea, while 
differing on economies of scale, were operating at capacity for years 
into the future. Commercial buyers are thus able to choose from a 
competitive global base of available shipyards and suppliers without 
generally needing to consider the long-term health of any individual 
yard or supplier. Further, the high, global demand has contributed to 
years-long waiting lists across several leading yards that prevent 
immediate construction of new projects. For instance, representatives 
of one buyer we interviewed stated that their company waits almost 42 
months for a new ship to deliver following contract signing, even 
though actual construction of the ship generally requires only 12 to 21 
months. In a number of instances, we found shipbuilders willing to make 
capital investments aimed at expanding their capacity to take on new 
projects while also increasing overall efficiency. For example, Odense 
Steel Shipyard officials noted that their company made substantial 
capital investments to build new production halls to accommodate the 
large size and desired delivery schedule of the Emma Maersk class of 
containerships--all aimed at increasing the yard's prospects for future 
business.[Footnote 28] In return, the buyer, A.P. Moller-Maersk, 
reportedly contracted for the construction of every vessel in the class 
prior to delivery of the first ship, further demonstrating its 
commitment to the project. Similarly, officials from both Daewoo 
Shipbuilding and Marine Engineering and STX Shipbuilding noted that 
their shipyards invested in floating drydocks, which have enabled those 
yards to take on additional projects and, subsequently, increase 
profits. 

For builders, vigilant project management minimizes construction cycle 
time and produces cost savings for the shipyard. As such, they hire and 
retain experienced, talented individuals who can recognize and help 
eliminate technical uncertainty prior to contract award. 
Representatives of one major commercial ship buyer we visited noted 
that project management, yard supervision, and having a strong working 
relationship with the shipyard are more important factors than yard 
facilities and equipment when making a build decision. 

Commercial ship buyers also place a premium on project management and 
supervision within a shipyard. Leading buyers we interviewed maintain 
in-yard representatives to supervise construction and ensure the 
quality of the final product during ship construction. Buyer 
representatives usually have high levels of technical, design, 
production, and operations knowledge, and thus are capable of solving 
problems with the ship while it is being built. Notably, when an 
exceptional event occurs, buyers may supplement their existing 
capabilities with outside expertise to ensure that sufficient capacity 
is available for problem solving. One example is the assistance Royal 
Caribbean Cruises, Ltd., offered to Aker Yards on a cruise ship 
project. When faced with a potential delivery delay caused by Azipod 
challenges and a winter freeze of the surrounding channel, Royal 
Caribbean provided technical expertise and obtained the services of ice-
breaking ships and tugboats to ensure that the cruise ship could be 
delivered as planned. Royal Caribbean could have invoked the late 
delivery penalties in the contract. Instead, the firm stepped in to 
help the builder deliver. 

Leading ship buyers also take proactive steps to retain their technical 
expertise during periods when business declines. For instance, during 
the early part of this decade, Royal Caribbean recognized that in light 
of reduced customer demand for cruises--and the company's corresponding 
decline in new cruise ship construction projects--it faced the prospect 
of losing much of its highly skilled and trained workforce. Valuing 
this asset, and recognizing that the business cycle would likely 
rebound, Royal Caribbean initiated a number of complex revitalization 
projects on its existing ships to occupy its workforce in the interim. 
This investment enabled the company to capitalize early on a number of 
new ship construction projects once its business climate improved. 

Navy Shipbuilding Practices Reflect an Environment of Competing 
Priorities and Pressures That Favor High-Risk Acquisition Approaches: 

The Navy often prioritizes revolutionary technological achievement at 
the expense of its other competing demands and has, through its 
decisions, favored sacrificing cost and schedule goals in programs to 
achieve its technology goals. Although these priorities produce 
capable, robust ships for the fleet, the resulting cost and schedule 
growth delays capability and reduces quantities. The desire to recover 
schedule losses while achieving technology advancement can drive 
practices in Navy programs such as (1) continuing technology 
development concurrent with design and (2) starting construction 
without achieving a stable design--activities that generally preclude 
the use of fixed-price contracts. These practices can cause 
shipbuilders to have to make certain assumptions about key ship 
equipment and systems during design. In the event the technologies do 
not develop and deliver according to these assumptions, shipbuilders 
are then faced with having to redesign aspects of the ship and complete 
rework or out-of-sequence work--each of which can significantly disrupt 
construction and carries cost consequences for the Navy. 

The Navy seeks to satisfy multiple objectives across its shipbuilding 
programs. Most notably, the Navy works to: 

* build sophisticated ships to support new and existing missions, 

* improve presence by increasing the numbers of ships available to 
execute missions, 

* design ships and operating concepts that reduce manning requirements, 
and: 

* supply construction workloads that stabilize the industrial base. 

Among these objectives is an inherent tension that can play out in 
several ways. If, for example, a class of ship is expected to perform 
multiple challenging missions, it will have sophisticated subsystems 
and costs will be high. The cost of the ship may prevent it from being 
built in desired numbers, subsequently reducing presence and reducing 
work for the industrial base. Requirements to reduce manning can 
actually add sophistication if mission requirements are not reduced. To 
some extent, this happened in the DDG 1000 program as decisions have 
tended to trade quantities (that affect presence and industrial base) 
in favor of sophistication. Several years ago, the program was expected 
to deliver 32 ships at an approximate unit cost of $1 billion. Over 
time, sophistication and cost of the ship grew as manning levels lower 
than current destroyer levels were maintained. Today, the lead ships 
are expected to cost over $3 billion each to build. Similarly, cost 
growth in the LCS program--a significant portion attributable to 
survivability improvements across the class--has precluded producing 
ships at the rate originally anticipated, and it is possible that the 
Navy will never regain the ships it traded off to save cost. Had the 
Navy anticipated that LCS lead ship costs would more than double, it 
may have altered its commitment to the program. On the other hand, 
competition for funds among different Department of Defense programs 
creates incentives to be optimistic regarding technology, design, 
construction, and cost risks. 

The Navy's focus on maximizing the capability of its individual ships 
has come at the expense of decreased fleet presence in terms of the 
number of operationally available ships--both in the near term and long 
term. For instance, the Navy's decision to introduce 16 new 
technologies on the lead Ford-class aircraft carrier--rather than 
incrementally improve capability--required the Navy to plan a lengthy 
design and construction schedule for the ship. The Navy currently 
expects the lead carrier, CVN 78, to deliver in September 2015. This 
strategy, however, contributes to a gap in meeting the minimum aircraft 
carrier force-level requirement, given that USS Enterprise (CVN 65) is 
scheduled to decommission in November 2012. The Navy's long-term force 
structure plans also suffer because of the cost growth and schedule 
delays typically associated with shipbuilding programs that seek to 
introduce a number of revolutionary advancements. For example, the 
Navy's fiscal year 2009 long-range shipbuilding plan reflects a delay 
to when the fleet goal of 313 ships will be met. The fiscal year 2008 
plan envisioned reaching the 313 goal by 2016, while the previous 
fiscal year 2007 plan outlined the Navy's intention to reach 313 ships 
by 2012. The current fiscal year 2009 plan states that goal will now be 
met in 2019. In addition, while the fiscal year 2009 plan meets the 
goal of 313 ships by 2019, it fails to achieve specific fleet component 
requirements, resulting in shortfalls in the number of desired attack 
submarines, ballistic missile submarines, amphibious transport docks, 
and logistics ships. 

These outcomes are consistent with the incentives at play in the Navy's 
environment. While commercial shipbuilders and buyers are incentivized 
to turn a profit and achieve maximum return on their investments, the 
Navy and defense shipbuilders are incentivized differently. In Navy 
shipbuilding, a symbiotic relationship exists where the buyer has a 
strong interest in sustaining its shipbuilders despite shortfalls in 
performance. Cost-reimbursable contracts--commonly used for lead and 
early ships in a class--enable this environment to exist. These 
contracts offer the Navy the chance to acquire highly capable ships 
offering the latest technologies, and they provide shipbuilders-- 
serving a single buyer, largely--sufficient business to sustain 
operations. For the Navy, cost-reimbursable contracts allow it to enter 
into shipbuilding agreements with incomplete knowledge about what it 
wants built. For defense shipbuilders, cost-reimbursable contracts 
provide a buffer against the consequences of risks, delays, and cost 
growth, and also offer a means for allocating overhead costs. These 
shipbuilders determine overhead rates on the basis of their anticipated 
future work. In the event that a Navy program does not materialize as 
expected, overhead costs can be paid (at least in part) by other Navy 
projects. Under cost-reimbursable contracts, the government alone is 
responsible for absorbing any cost growth resulting from these 
increases. 

In addition, Navy shipbuilding is characterized by low volume and 
limited sources, which limits the Navy's ability to competitively award 
projects. Only two companies own the six major shipyards that build 
Navy vessels. These yards specialize in building specific types of 
ships, and some ships have only one qualified builder. Unlike 
commercial shipbuilding, the Navy and its shipbuilders largely operate 
in a monopsonistic relationship, meaning that the Navy is the only 
buyer for the ships constructed in these shipyards. As such, Navy 
shipbuilders can flourish or suffer based on the Navy's changing demand 
for new ships. Currently, the Navy has low demand for new ships 
relative to its total shipyard capacity, and this existing demand has 
proven unstable, as reflected in a number of recent changes to the 
Navy's long-range shipbuilding plan. This instability also produces 
peaks and valleys in shipyard labor requirements--making retention and 
recruitment of skilled workers difficult--as shipyards analyze and 
react to the Navy's changing demand signal. Further, as Navy and 
industry officials stated to us, during times when a shipbuilder may 
face a period of low or uncertain workload on Navy projects, that 
shipbuilder may be less inclined to provide timely delivery of the 
ships it is constructing. In this situation, extending a ship's build 
schedule can enable the shipyard to maintain its current workforce and 
technical expertise as opposed to laying off skilled workers. 

Navy shipbuilding programs are also executed in an environment that 
includes restrictions and demands often not found in the commercial 
sector. The pressures created by low volumes in shipyards can push Navy 
shipbuilding programs to focus energy toward starting construction as 
early as possible, often at the expense of long-term efficiencies. 
Consequently, as recent Navy shipbuilding programs, including LCS and 
LPD 17, have demonstrated, sufficient time is generally not afforded 
before construction to permit the buyer and builder to collaborate and 
reach clear agreement on ship requirements, technologies, and design 
characteristics--all prerequisites to minimizing risk during 
construction. When these prerequisites are not met, cost-reimbursable 
contracts are used. With these contracts, Navy shipbuilders do not bear 
the financial risks that commercial shipbuilders face operating under 
firm, fixed-price contracts. Further, federal statutes and other 
considerations constrain the number and variety of shipbuilding and 
supplier sources available to the Navy. While these constraints may be 
warranted--for instance, the need to ensure a sufficient industrial 
base over the long term to meet the Navy's anticipated needs--they can 
sometimes preclude the Navy's selection of a shipbuilder or supplier 
best suited to meet its near-term program needs. 

Further, the Navy often does not have the expertise it needs on hand to 
provide timely oversight and assistance when technical challenges arise 
during ship construction. Navy programs rely upon a wide range of 
warfare centers and laboratories throughout the pre-contract, design, 
and construction phases to supplement program office and shipyard 
technical capabilities. For the Navy, maintaining a high level of in- 
house, technical expertise is critically important to successfully 
introducing new technologies on ships. However, technical expertise in 
Naval Sea Systems Command and within the SUPSHIP office, which acts as 
in-yard buyer representative, has greatly diminished over the past 15 
years. Over the past 15 years, both of these offices have experienced 
staffing reductions of 50 percent or more, while facing significant 
increases in workload. During this same time span, the number of major 
defense acquisition programs under the command's purview grew from 17 
to 22, major ship designs increased from 15 to 21, and the number of 
ships constructed changed from 20 to 44, including 5 lead ships. 

However, because cost identification and surveillance, schedule 
monitoring, and quality assurance in Navy programs are responsibilities 
shared among a number of Navy organizations, programs must satisfy a 
number of competing demands and interests to which commercial programs 
are not always subjected. One example Navy officials pointed to is the 
tension that can exist between shipbuilding program managers-- 
responsible for delivering ships on time and within budgeted costs--and 
technical warrant holders, who are charged with ensuring design quality 
and safety. Because technical warrant holders are not held directly 
accountable for cost and schedule performance in a program, they are 
not--in the view of program officials--constrained by the program's 
availability of funds in their decision making on design attributes. 
Subsequently, as program officials described to us, technical warrant 
holders can insist upon a higher level of design quality and system 
safety late in the design or construction stage than is provided for in 
a program's cost and schedule budget. This situation, in turn, can 
result in additional work that the program's cost and schedule estimate 
does not provide for. In contrast, the technical community views its 
role as ensuring that design and construction products satisfy the 
existing program requirements. Should a program's funds be constrained 
such that it cannot execute to fully meet its requirements, the 
technical community believes that relief is most appropriately granted 
by the requirements sponsor--namely, the community representing the 
warfighter. The disagreements that can arise between technical warrant 
holders and program officials highlight the difficulties typically 
encountered when ship contracts are finalized before technical and 
design requirements are fully understood. 

Conclusions: 

The Navy's ability to meet and counter future threats depends on having 
a sufficient number of ships to provide timely presence where needed. 
The Navy has identified a need for approximately 313 ships to execute 
its planned missions. However, current business practices in Navy 
shipbuilding programs lead to ships costing more than anticipated, 
making it difficult to buy ships in the needed quantities at a time of 
constrained budgets. New ships are increasingly complex and cost 
significantly more than their predecessors--often double. Moreover, 
they routinely exceed their budget estimates, forcing unplanned trade- 
offs in the form of reductions to the number of ships built and put 
into operation. 

In Navy shipbuilding, tough decisions on trade-offs are often made late 
in programs. Early in a program, pressures often exist to make 
optimistic assumptions about the pace of technology maturity. At the 
same time, budget constraints exert pressure on cost estimates to be 
lower. Efforts to contain cost primarily involve reducing the quantity 
of ships. This outcome results in less work for shipbuilders, which 
impairs their ability to maintain skilled workforces and supplier 
bases. The consequences of delayed deliveries and cost growth, which 
would be egregious to a commercial firm, are assuaged for Navy programs 
through the use of cost-reimbursable contracts. On the other hand, the 
need to avoid workload gaps in a Navy shipyard can create pressure to 
start construction before the design is ready. In this sense, the 
incentive is to finish the ship in the commercial sector, while there 
may be a strong incentive to start ship construction in the Navy 
shipbuilding programs. The up-front incentives to accept significant 
risk, with the downstream consequences thus accommodated, have helped 
put Navy shipbuilding in a form of equilibrium. 

The practices that leading commercial shipbuilding firms employ produce 
better outcomes. These firms have benefited from a strong market for 
new ships, which makes the shipyards more competitive and supports a 
robust industrial base for components, labor, and other assets that 
subcontractors can supply. Trade-offs in capabilities, quantities, and 
cost are all made early, before contract signing. This discipline 
provides clearer visibility for buyers and builders on eventual program 
outcomes--permitting the use of fixed-price contracts. Leading ship 
buyers and shipbuilders do not follow disciplined practices because of 
altruism, but rather because it helps them both make money. The Navy is 
different; its priority is not profit but capability. Navy shipbuilding 
is not in a period of growth but rather contraction. Its industrial 
base has much greater capacity than the demand for ships. Thus, there 
is a temptation to say that because the Navy is different, best 
commercial practices do not apply. Yet, the status quo for the Navy 
does not appear to be sustainable in the long run. 

The better question to ask is how Navy shipbuilding programs can 
benefit from best commercial practices. Commercial practices, 
thoughtfully applied to a new Navy shipbuilding program, can help a 
ship deliver faster and at lower cost by reducing risk earlier. Moving 
to fixed-price contracting is an important element in changing the 
paradigm for shipbuilding programs--fixed-price contracting can only be 
used if risk is appropriately retired by the time a contract for 
construction is agreed on and a clear understanding of the effort 
needed to deliver the ship exists. However, the Navy needs a better 
approach to retiring technical and design risk before fixed-price 
contracting can be effectively used for lead ships. The Navy's gated 
review process could potentially be adapted to instill this discipline, 
but is impeded by inconsistent application of policy--both among 
shipbuilding programs and as compared to other weapons acquisition 
programs--for the timing of milestone reviews and the knowledge 
required at key points. Moreover, the recent congressional reporting 
requirement for production readiness could be refined to identify 
additional metrics related to design stability, which would preclude 
Navy shipbuilding programs from entering construction prematurely. 

To reach this point, a better match is needed between the desired 
capabilities and the technologies, budget, and schedule to realize 
them. Best commercial practices can help the Navy--in cooperation with 
industry--achieve this match in deciding the capabilities and schedule 
requirements for an individual ship program. Factors outside the 
confines of an individual ship merit strong consideration in achieving 
this match as well. Specifically, the Navy's desire to provide a 
certain fleet size can rightly serve to limit the technical content and 
cost of any individual ship. These decisions will largely determine 
from the outset whether an executable program--one that retires risk 
early and enables fixed-price contracts--is possible. 

Matter for Congressional Consideration: 

Congress may want to refine the required reporting on production 
readiness[Footnote 29] to incorporate additional metrics into the 
assessment of design stability that address completion of basic and 
functional design activities and 3D product modeling (when employed). 

Recommendations for Executive Action: 

We recommend that the Secretary of Defense take the following seven 
actions: 

* Define a shipbuilding acquisition approach that calls for (1) 
demonstrating balance among program requirements, technology demands, 
and cost considerations by preliminary design review; (2) retiring 
technical risk and closing any remaining gaps in design requirements 
before a contract for detail design is awarded; and (3) stabilizing a 
ship's design before construction can start. While shipbuilding 
programs can differ in scope and complexity, any new shipbuilding 
program should embody these three principles. 

* To attain the level of knowledge needed to demonstrate balance among 
requirements, technologies, and cost in programs, require that by the 
preliminary design review for a new ship, (1) critical technologies be 
developed into representative prototypes and successfully demonstrated 
in a relevant environment and (2) the Navy develop, in cooperation with 
industry, an analysis of cost and requirements trade-offs that can 
identify ways to further reduce the technical demands of the ship. 

* To attain the level of knowledge needed to retire technical risk and 
close gaps in design requirements, require that before a contract is 
awarded for detail design of a new ship, (1) critical technologies be 
matured into actual system prototypes and successfully demonstrated in 
a realistic environment and (2) the Navy provide sufficient time for 
thorough discussion with the prospective shipbuilder(s) to fully 
understand the technical specifications that will guide the ship's 
design and to resolve key differences. 

* To attain the level of knowledge needed to retire design risk and 
reduce construction disruptions, require that by the start of 
construction for a new ship, the design be stabilized through 
completion of basic and functional design and 3D product modeling (when 
employed), with the recognition that complete--versus notional--vendor 
information must be incorporated for the design to be truly stable. 

* To promote disciplined application of knowledge-based practices in 
shipbuilding programs, direct the Secretary of the Navy to report to 
Congress on what steps and changes in the acquisition process would be 
needed to allow the Navy to rely primarily upon fixed-price contracts 
for lead ships within 3 years. 

* To maximize the Navy's role as an intelligent buyer, direct the 
Secretary of the Navy to evaluate the Navy's in-house capability and 
capacity to provide strong, consistent buyer oversight and to make 
changes where necessary. 

* To promote efficient investments in fleet capabilities, assess 
whether the Navy's desire to provide a certain fleet size sufficiently 
constrains decisions on the technical content and cost of each new ship 
class, and recommend changes where necessary. 

Agency Comments and Our Evaluation: 

In commenting on a draft of this report, the Department of Defense 
concurred with five of the seven recommendations and partially 
concurred with two. The department partially concurred with our 
recommendation to report to Congress on steps and changes in the 
acquisition process needed to allow the Navy to rely primarily on fixed-
price contracts for lead ships within 3 years. While the department 
committed to identifying an initial set of changes necessary within 1 
year, it cited concern that the changes identified might not eliminate 
the significant risk to the shipbuilder that in practice, is reflected 
as higher bids for fixed-price contracts for lead ships. Our analysis 
of practices followed by leading commercial ship buyers and 
shipbuilders convinces us that early retirement of technical and design 
risk--a prerequisite for fixed-priced contracts--is essential for a 
paradigm change and will facilitate realistic pricing of contracts. 
This paradigm change would afford clear visibility on cost, schedule, 
and technical requirements for new ships and instill discipline in 
shipbuilder and ship buyer processes both before and during 
construction. The alternative--cost-reimbursable contracting--is a key 
enabler of the patterns we now see in Navy shipbuilding. Whenever a 
cost-reimbursable contract is employed in a shipbuilding program, the 
government assumes primary responsibility for cost, schedule, and 
performance risk. In this environment, contractors can be expected to 
agree to build whatever their customer wants--no matter how poorly 
defined the desired end product may be. 

In addition, the Department of Defense partially concurred with our 
recommendation to provide sufficient time for thorough discussion with 
prospective shipbuilder(s) before detail design contract award for a 
new ship so that the technical specifications that will guide the 
ship's design can be fully understood and key differences resolved. The 
department expressed its intent to implement this recommendation in 
sole source environments, but identified a more limited application to 
competitive procurements. For competitive procurements, the department 
stated that it will encourage discussions with prospective shipbuilders 
to ensure that the technical specification is well understood. 

The Department of Defense concurred with our remaining recommendations. 
However, in its responses to several of these recommendations, the 
department offered reasons why it could not be expected to fully change 
the way it does business. For example, while the department concurred 
with our recommendation to retire technical risk and close remaining 
gaps in design requirements before a contract for detail design is 
awarded, it also stated that some technology risk reduction 
appropriately occurs during detail design to reduce the overall time 
required from the start of design to ship delivery. Moreover, the 
department offered the view that the relatively long construction span 
for ships requires flexibility in technology development and ship 
design processes to deal with factors such as obsolescence and ship 
construction and delivery schedule requirements. As our work has shown, 
however, these practices have been tried before in Navy shipbuilding 
programs and have consistently contributed to ship deliveries that are 
over cost and behind schedule--LCS representing the most recent 
example. In fact, commercial best practices show that in order to 
progress rapidly through design and construction, programs must allot 
the necessary time up front to retire technical and design risks, 
respectively. This approach--in essence, going slower at first to 
enable going faster later--can position the Navy to improve cost 
outcomes in programs and deliver capabilities to the warfighter on 
schedule. 

The Department of Defense's written comments are reprinted in appendix 
II. The department also provided technical comments, which were 
incorporated into the report as appropriate. 

We are sending copies of this report to interested congressional 
committees, the Secretary of Defense, and the Secretary of the Navy. 
The report also is available at no charge on the GAO Web site at 
[hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-4841 or francisp@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made major contributions 
to this report are listed in appendix III. 

Signed by: 

Paul L. Francis: 
Managing Director: 
Acquisition and Sourcing Management: 

[End of section] 

Appendix I: Scope and Methodology: 

To assess key practices used by commercial ship buyers and 
shipbuilders, we interviewed and met with leading ship buyers from the 
cruise, oil and gas, and commercial shipping industries, including 
Royal Caribbean Cruises, Ltd., and Carnival Corporation; Exxon Mobil, 
Transocean--the world's leading offshore drilling contractor--and 
Chevron Shipping; and A.P. Moller-Maersk, respectively. We elected to 
study the cruise ship industry because the complexity and cost of 
cruise ships are higher than for other types of commercial ships: 
cruise ships are densely packed and require a lot of outfitting, making 
these ships somewhat similar to military ships. Additionally, cruise 
ship buyers often include innovations or design changes in their ships 
and start new classes of ships regularly in order to maximize passenger 
satisfaction; this allowed us to examine recent lead ship programs and 
the outcomes of specific commercial practices. We met with buyers from 
the oil and gas industry because offshore oil platforms are often built 
in shipyards and are complex, dense structures. Similarly, Exxon Mobil 
and its partners recently undertook a large acquisition program for two 
new classes of liquefied natural gas (LNG) carriers (comprising five 
designs). We met with A.P. Moller-Maersk because it is one of the 
largest shipping companies in the world and acquires many ships: in 
2007 the company took delivery of 114 new ships. 

We also met with officials from high-performing commercial shipyards 
responsible for building a variety of complex ships: Meyer Werft 
(Germany) and Aker Yards (Finland), which both build cruise ships; 
Odense Steel Shipyard (Denmark), Samsung Heavy Industries, Hyundai 
Heavy Industries, Daewoo Shipbuilding and Marine Engineering, and STX 
Shipyard (South Korea), which all build commercial ships, including 
containerships, LNG carriers, floating production storage and 
offloading ships, and oil tankers. These shipyards were recommended to 
us by the ship buyers we met with as being leading shipyards that 
deliver quality ships on time and on cost. At some of the shipyards, we 
also met with buyers' representatives who were responsible for 
overseeing the construction of the ships and monitoring the 
construction schedule. We also met with a naval architecture firm that 
has experience advising ship owners throughout the ship acquisition 
process and offers a full menu of services to prospective ship owners, 
including concept design, preliminary design, development of contract 
specifications, negotiations with shipyards, and participation as 
owners' representatives during the construction phase. 

To assess the extent to which Navy shipbuilding programs employ best 
practices, we drew from our prior work on programs, including the San 
Antonio-class amphibious transport dock ship, Littoral Combat Ship, 
Zumwalt-class destroyer, Ford-class aircraft carrier, Virginia-class 
submarine, and Lewis and Clark-class dry cargo and ammunition ship. To 
supplement this analysis, we held discussions with a number of Navy 
officials responsible for shipbuilding programs, including the 
Assistant Secretary of the Navy for Research, Development, and 
Acquisition; the Deputy Assistant Secretary of the Navy for Ship 
Programs; and the Program Executive Officer for Ships. To understand 
the gated process developed to help structure the ship acquisition 
process, we met with the Office of the Deputy Assistant Secretary of 
the Navy for Acquisition and Logistics Management. We also met with 
representatives from General Dynamics and Northrop Grumman Shipbuilding 
and visited the National Steel and Shipbuilding Company and Electric 
Boat shipyards. Additionally, we held a teleconference with First 
Marine International (FMI), an independent shipbuilding consultancy 
firm in England that was commissioned by the Department of Defense to 
study the cost-effectiveness of U.S. Navy shipbuilding programs. FMI 
produced a report entitled First Marine International Findings for the 
Global Shipbuilding Industrial Base Benchmarking Study, which we also 
reviewed as part of our work. 

To evaluate how effectively the business environments that exist in 
commercial and Navy shipbuilding incentivize the use of best practices, 
we convened a panel of shipbuilding experts representing both the Navy 
and industry to discuss factors that compel behaviors in different 
shipbuilding programs. We also met with officials from the Department 
of Transportation's Maritime Administration, which in part seeks to 
ensure that the United States maintains adequate shipbuilding and 
repair services. Further, we met with officials from the National 
Shipbuilding Research Program (NSRP), an organization that is part of 
the Advanced Technology Institute. NSRP is a nonprofit research 
consortium that manages and focuses national shipbuilding and ship 
repair research and development funding on technologies that will 
reduce the cost of ships to the U.S. Navy. We also met with a senior 
official from the American Bureau of Shipping, one of the ship 
classification societies that inspect and approve ships during and 
following construction. 

We conducted this performance audit from January 2008 to May 2009 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

[End of section] 

Appendix II: Comments from the Department of Defense: 

Office Of The Under Secretary Of Defense: 
Acquisition Technology And Logistics: 
3000 Defense Pentagon: 
Washington, DC 20301-3000: 

May 4, 2009: 

Mr. Paul L. Francis: 
Managing Director, Acquisition and Sourcing Management: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, DC 20548: 

Dear Mr. Francis: 

This is the Department of Defense (DoD) response to the GAO draft 
report, GAO-09-322, "Best Practices: High Levels of Knowledge at Key 
Points Differentiate Commercial Shipbuilding from Navy Shipbuilding" 
dated March 3, 2009, (GAO Code 120703). The Department's comments on 
the 11 specific recommendations are enclosed. 

The Department concurs with recommendations 1 through 6, 8, 10, and 11. 
The Department partially concurs with recommendations 7 and 9. The 
partial concur on recommendation 7 relates to Department concerns about 
the level of discussions that could be conducted under a competitive 
acquisition environment as compared to a sole-source environment. The 
partial concur on recommendation 9 relates to Department concerns about 
process changes targeted at eliminating shipbuilder risks that would 
otherwise raise shipbuilder bids under a fixed-price contracting 
strategy, and whether those process changes would have any real effect 
in practice. 

The Department appreciates the opportunity to comment on the draft 
report. Technical comments were provided separately. For further 
questions concerning this report, please contact Ms. Darlene Costello, 
Deputy Director, Naval Warfare, 703-697-2205. 

Sincerely, 

Signed by: 

David G. Ahern: 
Director: 
Portfolio Systems Acquisition: 

Enclosure: As stated: 

[End of letter] 

GAO Draft Report Dated March 3, 2009: 
GAO-09-322 (GAO Code 120703): 

"Best Practices: High Levels Of Knowledge At Key Points Differentiate 
Commercial Shipbuilding From Navy Shipbuilding" 

Department Of Defense Comments To The GAO Recommendations: 

Recommendation 1: The GAO recommends that the Secretary of Defense 
define a shipbuilding acquisition approach that calls for demonstrating 
balance among program requirements, technology demands, and cost 
considerations by preliminary design review. (p. 55/GAO Draft Report) 

DOD Response: Concur. The Department agrees that operational 
requirements, critical technologies, and other cost drivers in the 
design need to be fully understood and balanced at the time of the 
shipbuilding program preliminary design review. The acquisition 
strategy for each shipbuilding program is the appropriate document to 
reflect the implementation of these provisions. The Department is 
preparing appropriate guidance prescribing that these items are to be 
reviewed at the preliminary design review (PDR) for shipbuilding 
programs. This element, identified as Element GAO-09-322-01, will be 
considered for implementation on programs that plan to conduct the 
preliminary design review in fiscal year 2010 and later. 

Recommendation 2: The GAO recommends that the Secretary of Defense 
define a shipbuilding acquisition approach that calls for retiring 
technical risk and closing any remaining gaps in design requirements 
before a contract for detail design is awarded. (p. 55/GAO Draft 
Report) 

DOD Response: Concur. The Department agrees that technical risks should 
be retired and gaps in design requirements should be closed before a 
contract for detail design is awarded. The acquisition strategy for 
each shipbuilding program is the appropriate document to reflect the 
implementation of these provisions. The Department recognizes that not 
every technology risk can be afforded the opportunity to be fully 
retired in every program prior to awarding the detail design contract. 
Some technology risk reduction appropriately occurs during detail 
design to reduce the overall time required from the start of design to 
ship delivery. This must be balanced within each shipbuilding program 
to deliver capabilities to the warfighter when needed. The relatively 
long construction span for ships also requires flexibility in the 
design process to deal with factors such as obsolescence and ship 
construction and delivery schedule requirements. The risks entailed by 
risk reduction during detail design must be assessed on an individual 
program basis and clearly identified early in the program. The 
Department is preparing appropriate guidance outlining that these items 
are to be reviewed prior to awarding the contract for detail design. 
This element, identified as Element GAO-09-322-02, will be considered 
for implementation on programs that plan to award detail design 
contracts for a lead ship in fiscal year 2011 and later. 

Recommendation 3: The GAO recommends that the Secretary of Defense 
define a shipbuilding acquisition approach that calls for stabilizing a 
ship's design before construction can start. (p. 55/GAO Draft Report) 

DOD Response: Concur. The Department agrees that the ship's design 
should be stable before starting construction. The acquisition strategy 
for each shipbuilding program is the appropriate document to reflect 
the implementation of this provision. The Department is preparing 
appropriate guidance outlining the design stability parameters to be 
reviewed prior to starting construction of shipbuilding programs, such 
as the levels of maturity of the ship product model and other key 
design artifacts, including vendor information, which will ensure that 
the design is stable. The guidance will also recognize that the 
relatively long construction span for ships requires flexibility in the 
design process to deal with factors such as obsolescence and ship 
construction and delivery schedule requirements. This element, 
identified as Element GAO-09-322-03, was implemented on the DDG 1000 
and the CVN 21 shipbuilding programs. It will be considered for 
continuation on shipbuilding programs that plan to start construction 
of a lead ship in fiscal year 2010 or later. 

Recommendation 4: The GAO recommends that the Secretary of Defense 
require that, by the preliminary design review for a new ship, critical 
technologies be developed into representative prototypes and 
successfully demonstrated in a relevant environment. (p. 56/GAO Draft 
Report) 

DOD Response: Concur. The Department agrees that by the preliminary 
design review for a new ship, critical technologies should be developed 
into representative prototypes and successfully demonstrated in a 
relevant environment, or evaluated through modeling and simulation. The 
technology development strategy for each shipbuilding program is the 
appropriate document to reflect the implementation of this provision. 
The Department is preparing appropriate guidance outlining that this 
item is to be reviewed during the preliminary design review of 
shipbuilding programs. The DoD 5000.02 requires early technology 
readiness assessments that will identify the critical technologies. The 
guidance will require that the technology readiness panel follow up 
with validation of the proposed demonstrations or simulations for each 
critical technology. The guidance will also recognize that the 
relatively long construction span for ships requires flexibility in 
technology development and ship design processes to deal with factors 
such as obsolescence and ship construction and delivery schedule 
requirements. This element, identified as Element GAO-09-322-04, will 
be considered for implementation on shipbuilding programs that plan to 
enter the Technology Development phase in fiscal year 2010 or later. 

Recommendation 5: The GAO recommends that the Secretary of Defense 
require that, by the preliminary design review for a new ship, the Navy 
develop, in cooperation with industry, an analysis of cost and 
requirements trade-offs that can identify ways to further reduce the 
technical demands of the ship. (p. 56/GAO Draft Report) 

DOD Response: Concur. The Department agrees that an open dialogue 
between prospective shipbuilders, other key industrial entities, and 
the Government, including an analysis of cost and requirements trade-
offs, might identify ways to further reduce the technical demands of 
the ship as the shipbuilding program requirements evolve. The 
Department will ensure that the acquisition strategy for each 
shipbuilding program reflects the implementation of this provision when 
properly placed within the restrictions in the Federal Acquisition 
Regulations (FAR) that restrict communications in a competitive 
environment. The Navy has and will continue to host industry days for 
feedback on proposed acquisition strategies. This element, identified 
as Element GAO-09-322-05, will be implemented in accordance with FAR 
guidelines and considered for programs that plan to enter the 
Technology Development phase in fiscal year 2010 or later. 

Recommendation 6: The GAO recommends that the Secretary of Defense 
require that before a contract is awarded for detail design of a new 
ship, critical technologies be matured into actual system prototypes 
and successfully demonstrated in a realistic environment. (p. 56/GAO 
Draft Report) 

DOD Response: Concur. The Department agrees that before a contract is 
awarded for detail design of a new ship, critical technologies should 
be matured into actual system prototypes and successfully demonstrated 
in a realistic environment, or evaluated through modeling and 
simulation. The technology development strategy and the acquisition 
strategy for each shipbuilding program are the appropriate documents to 
reflect the implementation of this provision. The Department is 
preparing appropriate guidance outlining that this item is to be 
reviewed during the preliminary design review of shipbuilding programs. 
The DoD 5000.02 requires early technology readiness assessments that 
will identify the critical technologies. The guidance will require that 
the technology readiness panel follow up with validation of the 
proposed demonstrations or simulations for each critical technology. 
However, testing all systems in a relevant shipboard environment is 
impractical for some systems before award of the detail design and 
construction contract, and, therefore, land based testing could be used 
where appropriate to drive out component risks in support of detail 
design and construction needs. The technology development strategies 
and acquisition strategies will need to identify that in these cases 
the component delivery schedule to the shipbuilder includes adequate 
time allowance for testing to ensure the ship detail design and 
construction schedules are not degraded. This element, identified as 
Element GAO-09-322-06, will be considered for implementation on 
shipbuilding programs that plan to enter the Engineering and 
Manufacturing Development phase in fiscal year 2011 or later. 

Recommendation 7: The GAO recommends that the Secretary of Defense 
require that before a contract is awarded for detail design of a new 
ship, the Navy provide sufficient time for thorough discussion with the 
prospective shipbuilder(s) to fully understand the technical 
specifications that will guide the ship's design and to resolve key 
differences. (p. 56/GAO Draft Report) 

DOD Response: Partially concur. For sole source environments, the 
Department will ensure that the acquisition strategies for shipbuilding 
programs require the Government and the prospective shipbuilder(s) to 
dedicate adequate resources and time to ensure that technical 
specifications that will guide the detail design of the ship are 
disclosed in adequate time to support the detail design contract for 
the lead ship of the shipbuilding program. The acquisition strategy 
will also identify the process for ensuring that technical differences, 
design concurrency, design reservations, and preplanned product 
improvements that emerge after the start of detail design are resolved 
to the Government's satisfaction while also taking into consideration 
program cost and schedule impacts. For competitive procurements, the 
Department will encourage discussions with prospective shipbuilders to 
ensure the technical specification is well understood. This element, 
identified as Element GAO-09-322-07, will be considered for 
implementation on programs that plan to award contracts for detail 
design of a lead ship in fiscal year 2011 or later. 

Recommendation 8: The GAO recommends that the Secretary of Defense 
require that, by the start of construction of a new ship, the design be 
stabilized through completion of basic and functional design and 3D 
product modeling (when employed), with the recognition that complete - 
versus notional - vendor information must be incorporated for the 
design to be truly stable. (p. 56/GAO Draft Report) 

DOD Response: Concur. The Department agrees that the ship's design 
should be stable before starting construction, including completion of 
basic and functional design and 3D product modeling (when employed), 
and recognizing that complete - versus notional - vendor information 
must be incorporated. The acquisition strategy for each shipbuilding 
program is the appropriate document to reflect the implementation of 
this provision. The Department is preparing appropriate guidance 
outlining that this item is to be reviewed prior to starting 
construction of shipbuilding programs. The Department will ensure that 
the acquisition strategy for each shipbuilding program will require 
that the ship's design is sufficiently mature before start of 
construction of the shipbuilding program. The guidance will define the 
levels of maturity of the ship product model and other key design 
artifacts, including vendor information, which will ensure that the 
design is stable. The guidance will also recognize that there is 
benefit to sequencing the design process to level load the design 
workforce as much as possible, ensuring sufficient time is allowed to 
prove out any new process in construction prior to widespread 
implementation, and to address any obsolescence issues that might occur 
during the design process. This element, identified as Element GAO-09-
322-08, will be considered for implementation on shipbuilding programs 
that plan to start construction of a lead ship in fiscal year 2012 or 
later. 

Recommendation 9: The GAO recommends that the Secretary of Defense 
direct the Secretary of the Navy to report to Congress on what steps 
and changes in the acquisition process would be needed to allow the 
Navy to rely primarily upon fixed-price contracts for lead ships within 
3 years. (p. 56/GAO Draft Report) 

DOD Response: Partially concur. The Department of the Navy, in 
conjunction with the Office of the Secretary of Defense, will review 
the shipbuilding acquisition process and the US shipbuilding 
environment to identify necessary steps and changes to processes that 
would enable the Government to use fixed-price type contracts for lead 
ships, where appropriate. The Department will identify an initial set 
of changes necessary within one year. The Department is concerned, 
however, that the changes identified might not eliminate the 
significant risk to the shipbuilder that is reflected as higher bids 
for fixed-price contracts for lead ships, in practice. This task is 
identified as Element GAO-09-322-09. 

Recommendation 10: The GAO recommends that the Secretary of Defense 
direct the Secretary of the Navy to evaluate the Navy's in-house 
capability and capacity to provide strong, consistent buyer oversight, 
and to make changes where necessary. (p. 56/GAO Draft Report) 

DOD Response: Concur. The Department of the Navy is reviewing its in-
house capability and capacity to provide strong, consistent buyer 
oversight for shipbuilding programs over the long term. The Navy will 
provide a report to the Under Secretary of Defense (Acquisition, 
Technology and Logistics) within one year. The report will identify the 
specific shortfalls and provide a plan of action, with timetable and 
resources identified, to correct the shortfalls. This task is 
identified as Element GAO-09-322-10. 

Recommendation 11: The GAO recommends that the Secretary of Defense 
assess whether the Navy's desire to provide a certain fleet size 
sufficiently constrains decisions on the technical content and cost of 
each new ship class, and recommend changes where necessary. (p. 56/GAO 
Draft Report) 

DOD Response: Concur. The Department agrees that there is a 
relationship between the Navy's long term shipbuilding plan and the 
technical content and cost of the new ship classes it entails. The 
Department regularly assesses this relationship when reviewing budgets, 
Analysis of Alternatives results, individual programs, and in 
conjunction with force structure decisions. However, the Department 
will consider if additional changes are warranted and recommend 
accordingly. This task is identified as Element GAO-09-322-11. 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Paul L. Francis (202) 512-4841 or francisp@gao.gov: 

Acknowledgments: 

In addition to the contract named above, key contributors to this 
report were Karen Zuckerstein, Assistant Director; Kelly Bradley; 
Christopher R. Durbin; Brian Egger; Kristine Heuwinkel; Jason Kelly; 
and C. James Madar. 

[End of section] 

Footnotes: 

[1] Total excludes funding appropriated for conversions, nuclear 
aircraft carrier and submarine refuelings, modernizations, service life 
extension programs, service and special purpose craft, outfitting, post-
delivery work, first destination transportation, and canceled ships. 

[2] Total includes approximately $4.8 billion in prior year completion 
funding, $2.6 billion in supplemental funding related to the effects of 
Gulf Coast hurricanes, $667.6 million in cost growth for the first and 
second Littoral Combat Ships funded outside of procurement accounts, 
and $251.2 million in incrementally funded cost growth for the eighth 
Wasp-class amphibious assault ship (LHD 8). 

[3] Includes the second Virginia-class submarine, which was constructed 
in a different shipyard than the first submarine in the class. 

[4] H.R. Rep. No. 110-434, at 190 (2007). 

[5] In August 2008, Aker Shipyards was purchased by STX Shipbuilding, a 
Korean company, and is now known as STX Europe. This report will refer 
to Aker Yards because this was the name of the individual Turku, 
Finland, yard at the time of our visit, and to distinguish it from 
other shipyards in the STX Europe portfolio. 

[6] "Pre-contract phase" refers to the activities that occur before 
award of a contract for design and construction. 

[7] See, for example, 48 C.F.R. § 16.202-1 (Title 48 of the Code of 
Federal Regulations is the Federal Acquisition Regulation). 

[8] Industry differentiates between outfitting at the block stage and 
outfitting in the drydock--the floodable basin that provides the 
platform for ship construction. Equipment such as piping and cable 
trays is typically outfitted at the block stage, whereas equipment of 
heavy machinery, such as engines and generators, is outfitted in the 
drydock. 

[9] Some shipbuilders identify slightly different numbers of hours for 
the second and third phases (block and post-erection/post-launch 
construction) cited in the rule. These numbers of hours tend to 
increase as the complexity and outfitting density of a ship increase. 

[10] Historically, keel laying coincided with laying the main timber of 
the ship hull, or keel. Today, keel laying generally means landing the 
first grand block into the drydock. 

[11] Some shipyards launch ships by sliding them backwards or sideways 
into the water. 

[12] Liquefied natural gas ships also have a gas trial where the gas 
containment systems are tested. 

[13] There are 10 classification societies worldwide that have been 
approved and recognized by the International Maritime Organization. The 
Navy recently partnered with one of these societies, the American 
Bureau of Shipping, to develop new design guidelines for its ships, 
which are referred to as Naval Vessel Rules. 

[14] The Navy operates four publicly owned shipyards located in Pearl 
Harbor, Hawaii; Puget Sound, Washington; Seavey Island, Maine; and 
Portsmouth, Virginia. 

[15] The U.S. Navy is statutorily prohibited, unless waived by the 
President in the interests of national security, from constructing a 
vessel, or major component of the hull or superstructure of a vessel, 
in a foreign shipyard. 10 U.S.C. § 7309. 

[16] 46 U.S.C. § 55102. 

[17] Some shipyards use different terms to denote the functional design 
phase. However, the tasks completed in this phase are the same 
regardless of terminology. 

[18] The Navy uses "detail design" in a different manner than 
commercial industry. To minimize confusion, this report uses 
"production design" to refer to the final design stage for commercial 
shipbuilding projects. 

[19] While SSN 775 did not use a different ship design than SSN 774, it 
was constructed in a different shipyard. 

[20] See GAO, Defense Acquisitions: Navy Faces Challenges Constructing 
the Aircraft Carrier Gerald R. Ford within Budget, [hyperlink, 
http://www.gao.gov/products/GAO-07-866] (Washington, D.C.: Aug. 23, 
2007). 

[21] The Navy has since tasked the shipbuilder to coordinate with the 
EMALS contractor for production planning, and the two established a 
contractual relationship for that purpose in May 2008. 

[22] See GAO, Defense Acquisitions: Overcoming Challenges Key to 
Capitalizing on Mine Countermeasures Capabilities, [hyperlink, 
http://www.gao.gov/products/GAO-08-13] (Washington, D.C.: Oct. 12, 
2007). 

[23] The Department of Defense uses technology readiness levels (TRL) 
to describe maturity of critical technologies in programs. Technologies 
developed into representative prototypes and successfully tested in a 
relevant environment meet requirements for TRL 6. Technologies 
developed into actual system prototypes (full form, fit, and function) 
and tested in an operational environment meet requirements for TRL 7. 

[24] Pub. L. No. 109-163, § 801; 10 U.S.C. § 2366b. 

[25] Pub. L. No. 110-181, § 124 (b)(1). 

[26] Department of Defense, Office of the Secretary of Defense, 
Alternative Fleet Architecture Design Report for the Congressional 
Defense Committee (Washington, D.C., January 2005). 

[27] According to Navy policy, the system design specification outlines 
the basic functional requirements for the preferred system alternative 
and major programmatic actions required to deliver the system. 
Secretary of the Navy Instruction 5000.2D, Annex 2-C (Oct. 16, 2008). 

[28] It should be noted that Odense Steel Shipyard is owned by the A.P. 
Moller-Maersk Group. 

[29] Pub. L. No. 110-181, § 124 (b)(1). 

[End of section] 

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