	Background

The U.S. Navy currently operates 288 surface ships and submarines. 1.) The Navy’s  budgeting for cost growth has changed over the past 2 decades. However, the total projected cost growth on contracts for  the eight ships is likely to be higher. Cost growth was more pronounced for the lead  ships in the two new classes we looked at—the Virginia class and  especially the San Antonio class—than the more mature Arleigh Burke and  Nimitz classes. From  fiscal years 2001 to 2005, 5 to 14 percent of the Navy’s ship construction  budget, which totaled about $52 billion over the 5-year period, went to pay  for cost growth for ships funded in prior years. 2.) The most common causes were related to design modifications, the  need for additional and more costly materials, and changes in employee  pay and benefits. For example, the  design of LPD 17 continued to evolve even as construction proceeded. As a result, workers were required to rebuild completed  areas of the ship to accommodate design changes. Price increases also contributed to the growth in materials costs. Navy Funding and Management Practices Result in Insufficient Provision for Risk

Navy practices for estimating costs and for contracting and budgeting for  ships have resulted in unrealistic funding of programs and when  unexpected events occur, tracking mechanisms are slow to pick them up. Navy Estimates Do Not Capture Uncertainty and Are Often Not Independently Evaluated

In developing cost estimates for the eight case study ships, Navy cost  analysts did not conduct uncertainty analyses to measure the probability  of cost growth, nor were independent estimates conducted for some  ships—even in cases where major design changes had occurred. Independent  cost estimates can provide decision makers with additional insight into a  program’s potential costs—in part because these estimates frequently use  different methodologies and may be less burdened with organizational  bias. For example, for the San Antonio class ships, the Navy negotiated  prices for the detail design and construction of the lead ship (LPD 17) and  the first two follow-on ships (LPD 18 and LPD 19) at the same time. Both the Virginia class submarine and the Nimitz class  aircraft carrier programs’ variance analysis reports discussed the root  causes for any cost growth and schedule slippage and described how these  variances were affecting the shipbuilders’ projected final costs. To improve the quality of cost estimates for shipbuilding programs and  reduce the magnitude of unbudgeted cost growth, we recommend the  Secretary of Defense    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,    conduct independent reviews of every acquisition of an aircraft carrier,    direct the Secretary of the Navy to develop a confidence level for all ship  cost estimates, based on risk and uncertainty analyses. This report identified eight ship classes with ships under construction. Therefore, the  Navy will need additional appropriations to cover this cost growth. 7.) CVN 77  has also experienced a significant increase in material costs due to under  budgeting. Since that time, the Congress has appropriated $1 billion to cover the  increases in the ships’ costs. For the two case study ships we examined, we found that  increases in the number of labor hours and material costs to build the  submarines accounted for 83 percent of the cost growth on shipbuilding  construction contracts.
Why GAO Did This Study

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.

What GAO Found

For the eight ships GAO assessed, the Congress has appropriated $2.1 billion to cover the increases in the ships' budgets. The GAO's analysis indicates that total cost growth on these ships could reach $3.1 billion or even more if shipyards do not maintain current efficiency and meet schedules. Cost growth for the CVN 77 aircraft carrier and the San Antonio lead ship (LPD 17) has been particularly pronounced. Increases in labor hour and material costs together account for 77 percent of the cost growth on the eight ships. Shipbuilders frequently cited design modifications, the need for additional and more costly materials, and changes in employee pay and benefits as the key causes of this growth. For example, the San Antonio's lead ship's systems design continued to evolve even as construction began, which required rebuilding of completed areas to accommodate the design changes. Materials costs were often underbudgeted, as was the case with the Virginia class submarines and Nimitz class aircraft carriers. For the CVN 77 carrier, the shipbuilder is estimating a substantial increase in material costs. Navy practices for estimating costs, contracting, and budgeting for ships have resulted in unrealistic funding of programs, increasing the likelihood of cost growth. Despite inherent uncertainties in the ship acquisition process, the Navy does not account for the probability of cost growth when estimating costs. Moreover, the Navy did not conduct an independent cost estimate for carriers or when substantial changes occurred in a ship class, which could have provided decision makers with additional knowledge about a program's potential costs. In addition, contract prices were negotiated and budgets established without sufficient design knowledge and construction knowledge. When unexpected events did occur, the incomplete and untimely reporting on program progress delayed the identification of problems and the Navy's ability to correct them.