	Cost Growth Remains a Problem in Navy Shipbuilding Programs—and May Threaten Future Success

Cost growth is a persistent problem for shipbuilding programs as it is for  other weapon systems. Over 40 ships were under construction at the  beginning of this fiscal year. Funding for the 41 ships under construction is over $56 billion, almost   $4.6 billion above initial budget requests. On the other hand, cost  growth is particularly high on lead ships of a new class (see fig. Although LPD 18 is the second ship of the class,  construction costs grew by over $500 million—a more than 90 percent  increase over its initial budget for construction. The Navy  anticipates increasing the baseline for the LPD 17 ships—resulting in even  higher completion costs. Elements of a Business Case

We have frequently reported on the wisdom of using a solid, executable  business case before committing resources to a new product development  effort. In its simplest form, a business case requires a balance between the  concept selected to satisfy warfighter needs and the resources— technologies, design knowledge, funding, time, and management  capacity—needed to transform the concept into a product, in this case a  ship. The Navy moved forward with  ambitious schedules for constructing LPD 17 and LCS despite significant  challenges in stabilizing the designs for these ships. This approach enabled the Navy to  achieve its planned launch date for the first Littoral Combat Ship, but  required it to sacrifice its desired level of outfitting. DDG 1000 and CVN 78 Have More Thoughtful Business Cases, but Significant Technical Risks Remain

Elements of a successful business case are present in the Navy’s next- generation shipbuilding programs—CVN 78 and DDG 1000. While the Navy has recognized the need to mature each  ship’s design before beginning construction, CVN 78 and DDG 1000 remain  at risk of cost growth due to continuing efforts to mature technologies. Our work on best practices highlights the need for a disciplined,  knowledge-based approach so that programs proceed with a high  probability of success. This means technology maturity must be proven  before a design can be considered stable, and production outcomes cannot  be guaranteed until a stable design is demonstrated. These  include:    ensuring that initial shipbuilding budgets are realistically achievable by  improving cost estimating, and  improving cost management through increased use of fixed-price  contracting and comprehensive cost surveillance. Each  shipbuilding program seems to have a different measure as to how much  of the design needs to be complete—and what constitutes design  readiness—prior to beginning ship construction. Further, there appears to be few criteria across  shipbuilding programs regarding how much knowledge—such as the  percentage of ship units built—is needed at different decision points,  including keel lay, fabrication start, and ship launch. A clearer  understanding of the key knowledge junctures and corresponding criteria  across shipbuilding programs would help establish a better basis for cost  and schedule estimates. The foundation of an executable budget is a realistic cost estimate that  takes into account the true risk and uncertainty in a program. Defense Acquisitions: Plans Need to Allow Enough Time to Demonstrate  Capability of First Littoral Combat Ships.
Why GAO Did This Study

The Navy is beset with long-standing problems that affect its ability to accomplish ambitious goals for its shipbuilding portfolio. Significant cost growth and long schedule delays are persistent problems. Making headway on these problems is essential in light of the serious budget pressures facing the nation. This testimony focuses on (1) cost growth in shipbuilding, (2) acquisition approaches in the LPD 17, Littoral Combat Ship, DDG 1000 and CVN 78 programs and (3) steps the Navy can take to improve its acquisition decision-making, particularly the adoption of a knowledge-based framework.

What GAO Found

The Navy has exceeded its original budget by more than $4 billion for the 41 ships under construction at the beginning of this fiscal year. And more cost growth is coming. Cost growth is not just a problem for lead ships of a new class but also for follow-on ships. For example, costs for the first two Littoral Combat Ships have more than doubled. Similarly, costs for the first two San Antonio class (LPD 17 and LPD 18) amphibious ships have increased by over $1.3 billion--almost a 77 percent increase above the initial budgets. Cost growth of this magnitude leads to lost opportunities for tomorrow's needs. These types of problems point to the wisdom of using solid, executable business cases to design and build ships. A business case requires a balance between the concept selected to satisfy warfighter needs and the resources--technologies, design knowledge, funding, time, and management capacity--needed to transform the concept into a product, in this case a ship. Neither LPD 17 nor the Littoral Combat Ship programs was framed around an executable business case; rather, the programs pushed ahead without a stable design and without realistic cost estimates, resulting in higher costs, schedule delays, and quality problems. The Navy has a more thoughtful business case for its next generation aircraft carrier and destroyer programs (CVN 78 and DDG 1000, respectively) before construction, but the programs remain at risk for cost growth partly because of continuing efforts to mature technologies. GAO's work on best practices highlights the need for a disciplined, knowledge-based approach to help shipbuilding, and other defense acquisition programs achieve more successful outcomes. This approach is predicated on certain essentials, including: ensuring that technology maturity is proven before a design is considered stable and understanding that production outcomes cannot be guaranteed until a stable design is demonstrated; improving cost estimating to develop initial shipbuilding budgets that are realistically achievable; and improving cost management through increased use of fixed-price contracting and comprehensive cost surveillance. A significant challenge to adapting a knowledge-based approach is the lack of a common understanding across programs regarding the definition, timing, and criteria for key knowledge junctures. For example, each shipbuilding program seems to have a different measure as to how much of the design needs to be complete before beginning ship construction. Similarly, there appears to be little criteria across programs regarding how much knowledge--such as the percent of ship units built--is needed at different decision points, including keel lay, fabrication start, and ship launch.