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Commentary: Tricky Waters of Comparing Shipbuilding Costs

Jun. 16, 2014 - 02:31PM   |  
By Robert Holzer   |   Comments
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As the US Navy’s Small Surface Combatant Task Force presses ahead to develop future ship options, the issue of comparative shipbuilding costs continues to raise concerns. This is particularly the case when attempting to compare costs between different types and classes of warships, sometimes acquired decades apart.

While it seems simple enough, in actuality it is very difficult to do correctly. Failure to fully understand this issue could lead to a kind of actuarial sea blindness.

Navy Secretary Ray Mabus and Chief of Naval Operations Adm. Jon Greenert stood up the task force following Defense Secretary Chuck Hagel’s decision to buy only 32 littoral combat ships, while directing the Navy to develop new options for a small surface combatant. Options publicly identified include continuing LCS as is, buying an upgraded version of existing LCS designs or building a new ship. The task force’s conclusions are due in July.

The issue of cost, more specifically life-cycle costs, is playing a huge role in the task force’s deliberations.

I am not a cost expert, but in talks with skilled practitioners of this arcane science, I have come away with several key truisms that seem to animate every discussion. These keys are not limited to the surface combatant task force’s work, but can be applied to the numerous other agencies, entities and research groups conducting separate reviews, reports and assessments of other Navy shipbuilding efforts.

■ Cost differences between old and new ship classes are huge and potentially misleading. The easiest course of action is to attempt to compare one ship class versus another class based simply on raw budget numbers. This leads to flawed analysis on several levels.

First, it ignores the time-value of money or shipbuilding inflation that often outpaces other sectors of the economy. That is why naval analysts at the Congressional Budget Office and Congressional Research Service are careful to compare ship costs in a common fiscal-year framework to all ships.

Second, new ships are burdened by higher costs and smaller datasets when compared with legacy ship classes. This is far more than an apples-to-oranges comparison. It’s more akin to comparing apples to anchors.

For example, comparing early LCS life-cycle costs and future cost projections to the mature Oliver Hazard Perry-class FFG 7 frigates will yield badly skewed results. The Perry-class frigates joined the fleet between 1977 and 1989 and have well-established and documented maintenance, support and training pipelines based on decades of steady use and “tweaking.” Moreover, these costs are accounted for by the budgets for Regional Maintenance Centers, the fleet or other maintenance entities, which appear to significantly lower the life-cycle costs for in-service frigates compared to ships like LCS, which is just joining the operating forces.

Finally, the lead-ship cost premium, which is often substantial, is not usually included in the life-cycle costs of older ships since that cost had long been amortized by follow-on ships.

LCS, on the other hand, being a new class is programmatically burdened by the early start-up costs for all of its maintenance, sustainment, training and support, which is spread only across the few ships deployed. This program situation significantly increases its apparent life-cycle costs. The Navy’s LCS program also bears the current lead-ship research-and-development costs for two separate ship designs.

■Accounting for total costs between ship classes is difficult. The differences between the total amount of data available between legacy and new ship classes can be significant and how that information is used or interpreted can also yield false conclusions. Legacy class ships, like the Navy’s CG 47 Ticonderoga-class cruisers, for example, no longer have many of the myriad maintenance and modernization costs contained within their operations and sustainment budget.

Critical pieces such as development of the Aegis combat system, its procurement, successive baseline improvements and training are accounted for in separate budgets. Much of the maintenance support is likewise budgeted for in separate Navy accounts that are not reflected in the CG 47 classes’ total life-cycle costs. As a result, the life-cycle costs for cruisers may appear to be much lower than what they actually are.

■ Impact of ship learning curves must be taken into account. It is not uncommon for the fifth (or tenth, for that matter) ship of a class to experience a significant decrease in the number of man-hours required to deliver a ship to the Navy, all other elements (e.g., design alterations) held constant. Comparing the life-cycle costs for a mature ship class well into its acquisition (if not decommissioning) phase versus a new construction shipbuilding program will make the new ship appear vastly more expensive than it truly is.

This same equation also applies to shipbuilding programs, like the DDG 51, which is now into an improved Flight IIA version, where virtually all first-ship-of class costs have been captured by Flight I ships and no longer are “counted” by some accounting practices.

In addition, the cost of Flight IIA ships now with more than 30 hulls of experience have all but averaged-out costs that new programs such as LCS are still incurring as they advance along the shipbuilding learning curve. All of the start-up costs for new programs like testing and training, infrastructure, military construction and training simulators have likewise been amortized over more ships and a longer time frame when compared to new ship starts.

Defense acquisition is always complicated and naval shipbuilding is an incredibly complex process. The late-Rear Adm. Wayne E. Meyer, the “father” of Aegis, frequently noted that nothing, not even the Space Shuttle, was as difficult as building a warship. A successful shipbuilding program requires the minute orchestration of millions of different parts and materials to integrate these disparate parts into a warship. The same discipline, accuracy and precision are similarly needed for ship costs. Comparing apples to anchors is not an acceptable standard. ■

Robert Holzer is a Senior National Security Manager with Gryphon Technologies. The opinions expressed here are his own.

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