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USN Shipbuilding Cost Estimates Disputed

Jul. 26, 2012 - 09:00PM   |  
By CHRISTOPHER P. CAVAS   |   Comments
The Navy is buying 33 Virginia-class submarines through 2025. Here, the Minneapolis is under construction at Newport News Shipbuilding in Virginia.
The Navy is buying 33 Virginia-class submarines through 2025. Here, the Minneapolis is under construction at Newport News Shipbuilding in Virginia. (U.S. Navy)
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The yearly price tag to carry out the U.S. Navy’s latest 30-year shipbuilding plan comes to about $20 billion, a new congressional report said, more than $3 billion a year above the Navy’s projections.

Overall, even though the latest plan features seven fewer ships than the previous year, the price tag for the future fleet has risen, reported the Congressional Budget Office (CBO) in its annual assessment of the Navy’s shipbuilding plan.

In the 30-year plan sent to Congress in late March, covering the years from 2013 to 2042, the Navy estimates it needs an annual shipbuilding budget of $16.8 billion, up from $16 billion a year ago.

CBO, however, using different methods to compute costs, figures a new budget of $20 billion is necessary, up from its forecast last year of $18.6 billion.

Including all ship types — ranging from small Joint High Speed Vessels to giant nuclear-powered aircraft carriers — the Navy’s estimate for the average cost per ship of the 268 ships it plans to buy over the next three decades is $1.9 billion. CBO’s estimate is $2.2 billion.

The differences between the Navy and CBO figures are typical, and reflect little change in ongoing trends. In virtually every annual assessment, CBO concludes the Navy’s plan is underfunded.

The gap between the estimates, however, has risen.

The Navy estimates that, over the entire 30 years, it will spend $505 billion in constant 2012 dollars. But CBO forecasts $599 billion — a gap of $94 billion, up from last year’s differential of $76 billion.

The expanded gap seems to primarily derive from different assessments of the CVN 78 aircraft carrier program, the SSBN(X) Ohio-class replacement program for a new strategic missile submarine, and the DDG 51 Flight III version of the Arleigh Burke-class destroyer.

The first of the carriers now is under construction. The Flight III is scheduled to appear in the 2016 budget, and the SSBN(X) in 2019.

While the report highlighted familiar differences between CBO and the Navy, the service took the somewhat unusual step of issuing a blog statement about how its cost forecasts are calculated.

Titled “The Rigor Behind Costing of the Navy’s 30-Year Shipbuilding Plan,” the blog post was posted late July 27. It was written by Assistant Secretary of the Navy (Research Development & Acquisition) Sean Stackley and Vice Adm. John Blake, the deputy chief of naval operations, integration of capabilities and resources, known as N8.

The blog post is quoted here in its entirety:

“Based on a report issued by the Congressional Budget Office (CBO), there has been media reporting and discussion about the cost estimating methodology used by the Navy to forecast over the 30-year shipbuilding plan.

“The Navy’s 30-year plan assesses Department of the Navy investments in battle force ships in three 10-year periods, called near, mid, and far-term.

“The near-term 10-year period (fiscal year 2013-FY22) comprises the FY13-FY17 Future Years Defense Program (FYDP) and the next FYDP. The mid-term planning period covers the two FYDPs between FY23-FY32, and the far-term planning period covers the two FYDPs between FY33-FY42.

“Confidence in cost estimates over these time periods inevitably declines over time. Unsurprisingly, then, the difference in Navy and CBO forecasts for new ship construction increases over time. Depending on the costs being considered, CBO’s numbers are 9 to 11 percent higher in the near-term planning period, 11 to 13 percent higher in the mid-term planning period, and 30 to 33 percent in the far-term.

“The Navy’s confidence in our cost estimates in the FYDP (i.e, the current budget window) is extremely high. From FY13 through FY17, there is great stability in our shipbuilding programs. Pending Congressional approval, DDG 51 Arleigh Burke-class destroyers and SSN 774 Virginia-class submarines will be procured via fixed-price incentive multiyear contracts. Littoral Combat Ships (LCS) are being bought under fixed price incentive block buy contracts through FY15 and it is envisioned follow-on fixed price incentive block buys or multiyear contracts will be used. The CVN 79 aircraft carrier and LHA 8 assault ship will be procured under fixed price incentive contracts. The Navy’s Oiler Replacement (T-AOX), as all other auxiliary ships, will be procured using fixed price contracts. The stability afforded by fixed price, long-term contracts, particularly on these mature programs with stable ship configurations, lends greater confidence in the Navy’s estimates for the first FYDP in the near term. In fact, Navy and CBO estimates for this time frame are within five percent.

“The second five-year period of the near term continues to build stable designs of the Virginia, LCS, LHA, T-AOX, and DDG 51 classes.

“There are two lead ships that will be introduced during the second five years. The Navy is focused on balancing requirements with affordability for these and all new ship classes. The Navy will begin the LSD (landing ship dock amphibious ship) replacement in FY18. While the design for this ship is not yet finalized (analysis is on-going) — this is a replacement for the LSD 41/LSD 49 Class — the cost to build this class of ships is well understood.

“The other lead ship introduced at the end of the near-term period is the SSBN(X) Ohio Replacement. The department has already established affordability targets for the lead and follow Ohio Replacement and is investing research and development in order to meet these targets.

“The focus on stable designs and focus on affordability for future platforms is considered in the Navy’s cost estimates for the mid and far-term periods. During the mid-term period (FY23-FY32), there is relative stability in all classes of ships as the Navy continues to build existing designs. Any new designs during the mid-term period will also focus on affordability and be informed by the class it is intended to replace. Clearly, however, uncertainty regarding the future requirements, related costs and external factors such as escalation, increases during the mid-term.

“The far-term period simply assumes a one-for-one replacement for ships expected to retire in that period. The Navy estimates for these ships are based on the cost knowledge of today’s ships escalated to the far-term.

“Overall, the Navy’s 30-year plan is built upon the confidence in our estimates during the next five years and the affordability focus placed on our new shipbuilding programs. The Navy acknowledges in the 30-year plan that the accuracy of its estimates decrease in the mid to far term planning periods. However, our 30-year plan provides the best estimate possible balancing stable costs in the near-term and cost projections of capability required over time.”

The link to the CBO’s shipbuilding report is at http://www.cbo.gov/publication/43468

The Navy response is posted online at http://navylive.dodlive.mil/2012/07/26/the-rigor-behind-costing-of-the-navys-30year-shipbuilding-plan/

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