Defense Acquisitions: Improved Management Practices Could Help Minimize Cost Growth in Navy Shipbuilding Programs
GAO-05-183
Published: Feb 28, 2005. Publicly Released: Mar 10, 2005.
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Highlights
The U.S. Navy invests significantly to maintain technological superiority of its warships. In 2005 alone, $7.6 billion was devoted to new ship construction in six ship classes--96 percent of which was allocated to four classes: Arleigh Burke class destroyer, Nimitz class aircraft carrier, San Antonio class amphibious transport dock ship, and the Virginia class submarine. Cost growth in the Navy's shipbuilding programs has been a long-standing problem. Over the past few years, the Navy has used "prior year completion" funding--additional appropriations for ships already under contract--to pay for cost overruns. This report (1) estimates the current and projected cost growth on construction contracts for eight case study ships, (2) breaks down and examines the components of the cost growth, and (3) identifies any funding and management practices that contributed to cost growth.
Recommendations
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of Defense | To improve the quality of cost estimates for shipbuilding programs and reduce the magnitude of unbudgeted cost growth, the Secretary of Defense should conduct independent cost reviews for all follow-on ships when significant changes occur in a program and establish criteria as to what constitutes significant changes to a shipbuilding program. |
Although recent Navy shipbuilding programs including the Zumwalt class destroyer and Littoral Combat Ship have experienced significant changes in the form of anticipated schedule, capabilities, and quantities, the Navy has not pursued comprehensive independent cost reviews for follow-on ships in these programs. Further, the Navy has not established criteria defining what constitutes significant changes within a shipbuilding program. According to Navy officials, the Navy conducts independent cost reviews when unbudgeted cost growth may result in a Nunn-McCurdy breach. In addition, DOD may request that the CAIG conduct an additional independent cost estimate or assessment, if needed, to support follow-on ship decisions after Milestone B. For Navy MDAPs designated as ACAT 1C, in which the Navy serves as the Milestone Decision Authority, the Naval Cost Analysis Division performs the independent cost estimate. The Navy, however, recognizes the need to manage requirement changes and has instituted capabilities and requirements review processes. The Naval Capabilities Board (NCB) and Resources and Requirements Review Boards (R3B) are chaired at the highest levels of Navy Leadership in an effort to manage changes to shipbuilding programs.
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| Department of Defense | To improve the quality of cost estimates for shipbuilding programs and reduce the magnitude of unbudgeted cost growth, the Secretary of Defense should conduct independent reviews of every acquisition of an aircraft carrier. |
DOD concurred with our recommendation and according to a Navy official the Navy is now conducting independent reviews for future aircraft carriers--including the next carrier to be built, CVN 78. A Defense Acquisition Board (DAB) review will be conducted in 2006--prior to the award of the CVN 78 contract. This review will include an independent cost estimate by the DOD's independent cost analysis group known as the CAIG for the first three ships in the class (CVN 78 - CVN 80). At each milestone review, these cost estimates will be updated with actual cost data.
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| Department of Defense | To improve the quality of cost estimates for shipbuilding programs and reduce the magnitude of unbudgeted cost growth, the Secretary of Defense should direct the Secretary of the Navy to develop a confidence level for all ship cost estimates, based on risk and uncertainty analyses. |
Cost analysts at NAVSEA 017 (Naval Sea Systems Command Cost Estimating) have already begun to use risk and uncertainty analyses in developing their ship cost estimates. The 2005 Naval Sea Systems Command Cost Estimating Handbook, which covers conducting risk and uncertainty analyses, has been issued and a copy is available on NAVSEA 017's website. Cost estimates done under this guidance, beginning with the cost estimate on DD(X), will identify a confidence interval for the cost estimate.
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| Department of Defense | To assure that realistic prices for ship construction contracts are achieved, the Secretary of Defense should direct the Secretary of the Navy to negotiate prices for construction of the lead ship separately from the pricing of detail design. |
In both the DDG 1000 and CVN 78 programs, the Navy has acted to negotiate prices for the construction of lead ships separately from that of detail design. This practice has contributed to an increased understanding of ship pricing that has contributed to more realistic budget requests for these programs.
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| Department of Defense | To assure that realistic prices for ship construction contracts are achieved, the Secretary of Defense should direct the Secretary of the Navy to separate pricing of follow-on ships from pricing of lead ships, negotiating prices for early ships in the budget year in which the ship is authorized and funded. |
In the DDG 1000, CVN 78, and Littoral Combat Ship programs, the Navy has negotiated the pricing of follow-on ships separately from the pricing of lead ships. This practice has contributed to increased realism of cost estimates and budget requests for these programs.
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| Department of Defense | To improve management of shipbuilding programs and promote early recognition of cost issues, the Secretary of Defense should direct the Secretary of the Navy to require shipbuilders to submit monthly cost performance reports. |
According to DOD officials, the revised Data Item Description (DI-MGMT-81466) issued as a result of USD(AT&L) changes to the DOD Earned Value Management policy promulgated in March 2005 requires the CPR to be submitted no less frequently than monthly. This change in policy is not retroactive, but shall be implemented on applicable future contracts. The CVN 77 program will begin receiving monthly CPR reports in March 2006 in accordance with the current contract. The SSN 774 Virginia class program receives labor performance data every two weeks in addition to quarterly CPR reports as required under the current contract. This data is provided for both of the construction shipyards through General Dynamics, Electric Boat.
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| Department of Defense | To improve management of shipbuilding programs and promote early recognition of cost issues, the Secretary of Defense should direct the Secretary of the Navy to require shipbuilders to prepare variance analysis reports that identify root causes of reported variances, associated mitigation efforts, and future cost impacts. |
The Undersecretary of Defense for Acquisition, Technology, and Logistics has directed components of the Department of Defense (DOD), including the Navy, to conduct a comprehensive review of earned value management system policies and practices in order to help improve the quality of cost/schedule reporting and surveillance in DOD programs. This review is intended to address recent audit findings and other identified deficiencies, such as the quality of variance analysis reports.
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Topics
Appropriated fundsConstruction contractsConstruction costsCost analysisDefense budgetsFunds managementFuture budget projectionsLabor costsMilitary cost controlMilitary vesselsNaval procurementOverhead costsPast fiscal yearShipsCost estimatesCost growth