United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Projection 

Forces, Committee on Armed Services, 

House of Representatives 

DEFENSE ACQUISITIONS

Challenges Associated with 

the Navy's Long-Range 

Shipbuilding Plan 

Statement of Paul L. Francis, Director

Acquisition and Sourcing Management 

For Release on Delivery

Expected at 4:00 p.m. EST 

Thursday, March 30, 2006

 

GAO-06-587T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

March 30, 2006

DEFENSE ACQUISITIONS 

Challenges Associated with the Navy's 

Highlights of GAO-06-587T, a testimony to Long-Range Shipbuilding Plan 

the Subcommittee on Projection Forces, 

Committee on Armed Services, House of 

Representatives 

The Navy’s long-range shipbuilding

plan spells out its approach to

meeting the Navy’s future needs. 

This plan shows the Navy is 

embarking on an ambitious,

expensive undertaking to develop, 

design, and construct a number of

new ship classes. The Navy expects 

these vessels to successfully

execute missions in a variety of

environments through use of 

advanced technologies, while 

utilizing reduced crews and greater 

automation to lower costs. The

Navy also expects these vessels to 

be constructed in quantities that

sustain the industrial base and 

expand the overall size of the Navy.

The plan calls for the number of 

ships to increase by about 10 

percent to an average of about 309 

ships through 2036. This effort will 

cost billions of dollars. 

At the request of Projection Forces

Subcommittee of the House Armed

Services Committee, GAO

examined the Navy’s shipbuilding

plan and is providing this 

discussion of 1) the multiple

objectives the plan proposes to

meet; 2) the challenges that must 

be met to execute the plan; and 3) 

ways the Navy can reduce the 

tension between the demand for 

and supply of shipbuilding funds. 

While the Navy’s shipbuilding plan is beneficial in that it lays out a strategic 

approach for decision making, there is tension inherent among the plan’s 

multiple objectives. For example, demanding mission requirements can 

result in more costly ships that cannot be built in the numbers desired for 

presence and shipyard workload. These tensions presage the potential tradeoffs that will likely have to be made. The key is to anticipate and make tradeoffs early in the context of the overall shipbuilding strategy. If the Navy

starts more programs than it can finish within available resources, it may be 

forced to make trade-offs in the future that it may not find acceptable today. 

Multiple Objectives Embodied in the Navy Shipbuilding Plan

Multiple

Missions

Adequate

Presence

Stable

Industrial

Base

Reduced 

Manning

 GAO (presentation). 

Assuming the long-range shipbuilding plan is consistent with national 

military priorities, the main challenge in execution is keeping the supply and 

demand for funds in a rational balance that does not overly sacrifice one 

objective to meet another. The Navy projects a supply of shipbuilding funds 

that will double by 2011 and stay high. At the same time, increasing demands 

on the federal budget—including for weapons for other services—suggest 

such growth in shipbuilding funds may not materialize. The Navy’s own 

ability to control the demand for shipbuilding funds is also a challenge. If the 

Navy cannot control cost growth on new ships, some other objectives of the 

plan will have to be sacrificed, such as mission capability or presence. 

There are several ways the Navy can help reduce the tension between the

demand for and supply of shipbuilding funds. To control unanticipated 

cost growth on individual programs, it is important that the Navy ensure 

programs have sufficiently high levels of knowledge before making 

programmatic, budgetary, or contractual commitments. To maximize the 

amount of funds the Navy can devote within its budget to shipbuilding, it

must continue to find ways to lower total ownership costs by reducing 

manning requirements and to improve operational availability of ships 

through means such as rotational crewing.

www.gao.gov/cgi-bin/getrpt?GAO-06-587T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Paul Francis at 

(202) 512-4841 or francisp@gao.gov. 
Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss the Navy’s long-range

shipbuilding plan. The plan lays out the Navy’s approach to meeting its 

future needs. If followed literally, the plan will be an expensive 

undertaking that will require billions in new ship construction funding. 

The feasibility of the plan depends on a number of factors, including 

increasing the supply of shipbuilding funds while controlling the demand 

for funds by individual programs. 

Today I would like to discuss (1) the multiple objectives that the Navy’s 

long-range shipbuilding plan proposes to meet, (2) the challenges that 

must be met to execute the plan, and (3) ways that the Navy can reduce

the tension between the demand and supply for shipbuilding funds. Before 

discussing these issues, I want to recognize the value of the Navy’s having

prepared the plan as requested by Congress. I look at it as a vehicle for 

discussing and debating strategic shipbuilding issues before embarking on 

individual programs. This course is much preferable to pursuing individual 

programs without a strategic direction in mind. Thus, the shipbuilding plan 

is not something that should be used to polarize hardened positions, but 

rather to permit an intelligent discussion that will make for better 

decisions in the future. 

The Navy is embarking on an ambitious undertaking to develop, design, 

and construct a number of new ship classes to support operations on, 

under, and beyond the world’s oceans. The Navy expects these vessels to 

successfully execute missions in a variety of environments through use of

advanced technologies, while utilizing reduced crews and greater 

automation to lower costs. The Navy also expects these vessels to be 

constructed in quantities that sustain the industrial base and increase the 

number of Navy ships. There is tension inherent among the multiple 

objectives of the plan. For example, demanding mission requirements can 

result in more costly ships that cannot be built in the numbers desired for 

presence and shipyard workload. Requirements to reduce manning can 

actually demand more automation and sophistication, which can translate 

into higher acquisition cost. These tensions presage the potential tradeoffs that will likely have to be made. The key is to anticipate and make 

trade-offs early in the context of the overall shipbuilding strategy. If the 

Navy starts more programs than it can finish within available resources, it 

may be forced to make trade-offs in the future that it would not find 

acceptable today. 

Summary 

Page 1 GAO-06-587T
Assuming the long-range shipbuilding plan is consistent with national 

military priorities, the main challenge in execution is keeping the supply 

and demand for funds in a rational balance that does not overly sacrifice 

one objective to meet another. The Navy plan requires more funds than 

may reasonably be expected. Specifically the plan projects a supply of 

shipbuilding funds that will double by 2011 and will stay at high levels for 

years to follow. At the same time, increasing demands stemming from 

other federal programs, ongoing military operations, and acquisitions by 

the other services suggest such growth in shipbuilding funds may not 

materialize. The Navy’s own ability to control the demand for shipbuilding 

funds is also a challenge. Cost growth has been particularly high for firstin-class ships—on the order of 27 percent. The shipbuilding plan calls for 

more than double the number of new ship classes to start construction in 

the next 10 years, as compared with the last 10 years. If the Navy cannot

control cost growth on these new ships, some other objectives of the plan 

will have to be sacrificed, such as mission capability or numbers of ships, 

which could impact presence and overall warfighting capabilities. 

There are several ways the Navy can help reduce the tension between the

demand and supply of shipbuilding funds. To control unanticipated cost 

growth on individual programs, it is important that the Navy ensure 

programs have sufficiently high levels of knowledge before making 

programmatic, budgetary, or contractual commitments. Good practices 

along these lines include attaining requirements stability, technology 

maturity, and design stability early in programs; gaining actual experience 

with design before budgeting and contracting for construction; contracting 

for the construction of the lead ship separately from the construction of 

follow-on ships; and making better use of tools such as cost performance 

reports. To maximize the amount of funds the Navy can devote within its 

budget to shipbuilding, it must continue to find ways to lower total 

ownership costs by reducing manning requirements and to improve 

operational availability of ships through means such as rotational crewing. 

The Chief of Naval Operations recently released a long-range plan for 

shipbuilding1

 that encapsulates the Navy’s vision of the future naval force 

structure. This is an ambitious plan that proposes to meet multiple 

objectives, including 

Shipbuilding Plan 

Proposes to Meet 

Multiple Objectives 

 1 Report to Congress on Annual Long-Range Plan for Construction of Naval Vessels for 

FY 2007.

Page 2 GAO-06-587T
• building ships that support new missions, 

• building more sophisticated ships to support existing missions, 

• building workhorse ships like tugboats, 

• increasing numbers of ships to improve presence and ability to carry 

out missions, 

• designing ships and operating concepts to reduce manning 

requirements, and 

• devising construction workloads to stabilize the industrial base. 

The plan would boost the number of ships in the Navy’s inventory from 

today’s level of 281 to an average of about 309 ships through 2036—a 10 

percent increase.2

 The plan includes developing and constructing a 

number of new ship classes to support the way the service would like to 

operate in the future. New ships are proposed for nearly every class, from 

improved aircraft carriers and submarines to new types of surface 

combatants. The DD(X) destroyer is to provide strike and volume fires 

with increased range and lethality. Seabasing is to be facilitated by large 

deck, expeditionary warfare ships and connectors, by future maritime 

prepositioning forces, and by a new generation of combat logistics forces. 

Littoral combat ships are to provide defenses against submarine, mine, and

surface threats. Theater ballistic missile defense technologies are to be 

employed on guided missile destroyers and cruisers. 

Many of these ships are expected to perform their missions with reduced 

crew sizes that are to be achieved through increased automation. The 

Navy also plans to change the way it deploys and structures its fleet 

around the world by shifting to a greater presence in the Pacific and 

employing rotational crewing strategies. The fleet is expected to have the 

capacity to overmatch the nation’s most capable adversaries, in all waters, 

blue, green and brown. 

In addition, the Navy’s shipbuilding plan seeks to stabilize the industrial 

base by providing predictable workloads for the shipyards. The Navy has 

previously reported that a stable shipbuilding industry is essential to meet 

requirements for an affordable and capable force structure. Cost growth in 

any given shipbuilding program could result in a fluctuation in the number 

of ships procured, leading to less work in a particular yard and even cost

growth in other shipbuilding programs. We have reported, for example, 

 2

 According to the Navy’s plan the naval ship inventory would increase to 315 by 2012, peak

at 330 in 2019, and decline slowly to 296 by 2036. 

Page 3 GAO-06-587T
that overhead costs for the DDG 91 and DDG 92, two ships in the current 

class of destroyers, increased as a result of the delay in signing the 

contract for the DD(X). Similarly, the pace of the DD(X) detail design and 

construction schedule has been dictated in part by the desire to avoid 

work gaps in shipyards. 

Laying out such a plan now is constructive because it can be seen as the 

first stages of an investment strategy or portfolio for new ship acquisitions. 

Without a plan to guide program choices, there is a risk that individual 

programs will dictate the plan. A long-term plan, to the extent that it is 

consistent with national military priorities and is rationalized by 

reasonable resource expectations, can enable trade-offs to be seen and 

addressed in advance, leading to better informed choices now. Such a plan

makes debate possible before irreversible commitments are made. 

There is an inherent tension among the multiple objectives of the plan,

which presage the potential trade-offs that will likely have to be made. 

These are depicted in simple form in figure 1. 

Figure 1: Multiple Objectives Embodied in the Navy Shipbuilding Plan

Source: GAO.

Multiple

Missions

Reduced

Manning

Adequate

Presence

Stable

Industrial

Base

The tensions between objectives can play out in several ways. If, for 

example, a class of ship is expected to perform multiple challenging 

missions, it will have sophisticated subsystems and costs will be high. The 

cost of the ship may prevent its being built in desired numbers, reducing 

presence and reducing work for the industrial base. Requirements to 

reduce manning can actually add sophistication if mission requirements 

Page 4 GAO-06-587T
are not reduced. To some extent, this has happened with the DD(X) 

destroyer. Several years ago, it was anticipated that the ship would cost 

about $1 billion, and 32 would be produced. Over time, sophistication and 

cost of the ship grew as mission requirements increased while manning 

levels lower than current destroyers were maintained. Today, each DD(X) 

ship will cost an average of $3.2 billion, and no more than seven are 

anticipated.3

 Presence (in terms of quantity) was reduced; shipyard work 

was reduced; and currently the program is looking at reducing some 

mission capacity to control cost. Similarly, the cost of the Virginia class 

submarine has precluded producing the volume originally anticipated. The 

key is to anticipate and make trade-offs early in the context of the overall 

shipbuilding strategy. Otherwise, the strategy will be the yield of the 

individual ship programs—a suboptimal outcome. 

Assuming the long-range shipbuilding plan is consistent with national 

military priorities, the main challenge in execution is keeping the supply 

and demand for funds in a rational balance that does not unduly sacrifice 

one objective to meet another. Except for the savings the Navy is able to 

generate from reductions in operation, support, and personnel costs, as 

well as reductions in non-ship acquisitions, the supply of funds will largely 

be beyond the Navy’s control. The demand for funds, on the other hand, is 

dictated mainly by the numbers and cost of individual acquisition 

programs and should be a managed outcome on the part of the Navy. 

Challenges Facing the 

Execution of the 

Navy’s Plan 

Challenge 1: Securing a 

Sufficient Supply of Funds 

for Shipbuilding 

The main risk in the Navy’s shipbuilding plan is that it requires more funds 

than may reasonably be expected. To support its plan, the Navy depends 

on significant increases in funding for new ship construction. The plan 

calls for shipbuilding funds to grow from $8.7 billion in fiscal 2007 to $17.2 

billion in fiscal 2011 and beyond that sustains levels well above current 

funding. Should this funding fail to materialize, whether due to other 

demands on the federal budget that limit Navy funds or to overruns in 

other Navy programs, the shipbuilding plan will not be executable and

trade-offs will have to be made. 

 3

 According to the Navy’s November 2005 Acquisition Program Baseline for the DD(X) 

program, program acquisition unit cost (PAUC) is $3,154.79 million. PAUC is calculated by

dividing program acquisition cost, including research and development funding, by the 

program acquisition quantity. 

Page 5 GAO-06-587T
When contemplating an increase in funding that almost doubles the 

shipbuilding budget in the near future, it is important to keep in mind that 

demands on federal discretionary funds, which include the Navy’s budget, 

are growing as well. Budget simulations show that the nation faces a large 

and growing structural deficit due primarily to known demographic trends

and growing health care costs. In addition, current military operations, 

such as those in Iraq and Afghanistan, put further pressure on DOD’s 

weapon system investments by accelerating the need for replacement or 

refurbishment of existing weapons. 

Within this context, the development and production of new weapon 

systems remains one of the largest discretionary investments the federal

government makes. From 2001 to 2006, DOD has doubled its planned 

investments in ongoing major weapons from $700 billion to $1.4 trillion. As 

shown in figure 1, DOD is planning to increase its procurement budget 

from about $75 billion to about $100 billion (33 percent) over the next 5 

years to accommodate these growing investments. 

Figure 2: Total Obligation Authority for Procurement (Dollars in Fiscal Year 2006 

Millions) 

Dollars in FY 2006 millions

Source: OSD (data); GAO (presentation).

Fiscal year

Air Force

Navy

Army

0

20,000

40,000

60,000

80,000

100,000

120,000

2006 2007 2008 2009 2010

Page 6 GAO-06-587T
According to the shipbuilding plan, the Navy will have to find substantial 

new funds at a time when the Army is planning to get increased funds for 

its Future Combat System and the Air Force plans to purchase F-22A 

Raptors and Joint Strike Fighters. Given the increased funding needed to

cover the systems already underway and the competition for funds beyond

the acquisition of systems, it will be very difficult for the Navy to secure 

the kinds of increases it needs to afford the long-range shipbuilding 

program. 

Challenge 2: Controlling 

the Demand for Funds in 

Individual Shipbuilding 

Programs 

Cost growth has been a long-standing problem for all types of weapon 

systems. For an individual program, cost growth represents additional and 

unanticipated demand for more funds. If more funds are not available, 

quantities to the warfighter are reduced and buying power is sacrificed. 

Shipbuilding programs, like other systems, have experienced cost growth. 

Cost growth has been particularly high on first-of-class ships. In the last 10 

years, only a few first-of-class ships have been built. However, based on 

the long-range plan, the number of first-of-class ships will more than 

double in the next 10 years. If the Navy cannot control cost growth on 

these new ships, some other objectives of the plan would have to be 

sacrificed, such as mission capability or presence. 

Recent shipbuilding outcomes suggest that cost growth continues to be a

problem for the Navy, particularly on the lead ship(s) of a new class. (See 

table 1.) 

Page 7 GAO-06-587T
Table 1: Cost Growth in Lead Ships (Dollars in Millions) 

Navy lead ship Initial

President's

budget

request

Total

difference

Cost growth as a

percent of initial

budget

LPD 17 $954 $1,758 $804 84%

LCS 1 $212 $274 $62 29%

SSN 774 $3,260 $3,752 $492 15%

SSN 775 $2,192 $2,715 $523 24%

T-AKE 1 $489 $538 $49 10%

Totals $6,895 $8,763 $1,868 27%

Source: Navy (data); GAO (presentation).

Initial and most recent President's budget request Difference in budgets

a b

c

a

Estimated cost from the President’s budget submission for year of ship authorization. 

b

Includes all prior year requests through fiscal year 2007. 

c

SSN 775 is the second Virginia class submarine, but will be the first hull delivered by Northrop

Grumman Newport News shipyard.

For example, the first-in-class USS San Antonio (LPD 17), commissioned 

in January 2006, experienced cost growth of $804 million above its initial 

budget—an increase of 84 percent. The budgets for the new attack 

submarines, USS Virginia (SSN 774) and Texas (SSN 775), have grown by 

$492 million and $523 million, respectively, requiring Congress to 

appropriate additional funds to cover these increases. It is not only the 

first ship in the class that is at risk for cost growth; the second ship, if it is 

assembled in a different shipyard, is at risk as well. This was the case with

the SSN 775. Devoting resources to support completion of prior year 

shipbuilding programs reduces the buying power of the Navy’s budget for 

construction and can slow the pace of modernization. The Navy is in its 

early stages of procuring a number of advanced, new ship classes, 

including the DD(X) destroyer, CVN 21 aircraft carrier, and the Littoral 

Combat Ship. Their actual costs have yet to be realized. 

The Navy’s long-term shipbuilding plan envisions procuring several new 

classes of ships to meet force structure needs. In fact, the Navy plans to 

more than double its new class construction programs over the next 10 

years. (See fig. 3.) 

Page 8 GAO-06-587T
Figure 3: Schedule for Construction of New Lead Ships

FY 1996 FY 2006 FY 2016

LPD-17

SSN-774

T-AKE LCS DD(X) MLP CG(X) T-ATK(X)*

CVN-21 HSS*

LHA-6 JHSV JCC(X)*

Source: U.S. Navy (data); GAO (analysis and presentation).

*Dates beyond fiscal year 2011 are notional. 

The financial strain of starting so many new ship programs may be 

unprecedented in post-World War II times. Successful development, 

design, and construction of these new classes will be predicated on the 

Navy’s ability to break past patterns of cost growth. Otherwise, the Navy 

could be forced to divert funding from planned ship classes to cover cost 

overruns on its current programs. If the Navy starts more programs than it 

can finish within available resources, it may be forced to make trade-offs 

in the future that it would not find acceptable today. 

There are several steps the Navy can take to help control unanticipated 

cost growth on individual programs. Primarily, these steps involve having 

sufficiently high levels of knowledge before making programmatic, 

budgetary, or contractual commitments. These measures include 

Better Management of 

Acquisitions Can Help 

Reduce Unanticipated 

Demands for More

Funds • attaining requirements stability, technology maturity, and design 

stability early in programs; 

• gaining actual experience with design before budgeting and 

contracting for construction; 

• contracting the construction of the lead ship separately from the 

construction of follow-on ships; and 

• employing good cost-estimating techniques and making better use of 

cost reports. 

Page 9 GAO-06-587T
A first step in stemming unanticipated cost growth is for the Navy to 

follow a knowledge-based acquisition approach for its new shipbuilding 

programs. Over the last several years, we have undertaken a body of work 

that examines weapon acquisitions by drawing upon lessons learned from

best product development practices in both the private sector and DOD. 

Collectively, best practices comprise a process that ensures a high level of

knowledge at key program decision points. Central to successful 

outcomes is the separation of technology development and product 

development. The process of developing technology is one of discovery 

and must allow room for unexpected failures that could result in delays. 

The process of developing a product culminates in delivery and depends 

on specific knowledge about a new product to stabilize design and plan for 

production. Similarly, it is important to stabilize design before production 

to avoid rework and resequencing of work, which ultimately results in cost 

growth and schedule delays. 

We have found that it is essential that at program start, a match must be 

made between the customer’s requirements and the product developer’s 

available resources in terms of knowledge, time, money, and capacity. One 

fundamental is a balanced set of requirements that takes into account not

only a desire for sizeable gains in performance, but also the resources—

technology, time, and money—that are available to execute the program. 

Implementing a 

Knowledge-Based 

Acquisition Process Can 

Reduce the Risk of Cost 

Growth in Shipbuilding 

Programs 

Matching Customer Needs and 

Developer Resources Early Is 

Key to a Knowledge-Based 

Approach 

One of the most important practices in reaching a match between 

resources and requirements is achieving a high level of technology 

maturity at the start of system development. This improves the ability to 

establish realistic cost, schedule, and performance objectives as well as 

the ability to meet them. We believe that in shipbuilding, technology 

maturity should be reached by the preliminary design review. This assures 

that the form, fit, and function of the individual components of a vessel are 

understood before they become integrated in a system design. Including 

immature technologies in the system design increases the risk of 

discovering problems late and can increase the cost and time needed to 

complete design and fabrication. 

The match between resources and requirements can be achieved in several 

ways. The Littoral Combat Ship provides one way. Rather than attempting 

to achieve full capability in a single leap, the program is structured to 

deliver incremental capabilities to the warfighter through evolutionary 

acquisition. Evolutionary acquisition has the potential to reduce cycle 

times and costs by enabling developers to rely more on available resources 

rather than making promises about unproven technologies. The CVN-21 

carrier program provides a different way to get the match. One critical

technology that the Navy wants to incorporate on the new carrier is the 

Page 10 GAO-06-587T
electromagnetic aircraft launching system. Since this system affects the 

design of the ship, the Navy is spending a lot of time and money to 

demonstrate this key technology before committing to the ship’s design. 

The DD(X) program is somewhere in between. It has a rational approach

to maturing 12 critical technologies through demonstration models, but 

these were not complete before the detail design phase began, and thus 

the DD(X) program carry technical risk into that phase. 

Another key knowledge-based practice is achieving a stable product 

design at the system-level design readiness review. According to Navy and

contractor officials, design stability in shipbuilding is achieved through 

completion of general arrangement drawings, ship specifications, and 

major equipment lists. Attaining design stability on time can help assure 

that a product will meet customer requirements as well as cost and 

schedule targets. Programs that have entered construction before 

achieving stable system designs did experience significant cost growth. 

The lack of design maturity in these programs led to rework and 

resequencing of work, increasing the number of labor hours needed for 

ship construction. For example, in the LPD 17 program, ship design 

continued to evolve even as construction proceeded. Without a stable 

design, outfitting work for individual ship sections was often delayed from 

early in the building cycle to later, when these sections were integrated on

the hull. Shipbuilders stated that doing the work at this stage could cost up

to five times the original cost. On LPD 17, 1.3 million labor hours were 

deferred from the build phase to the integration phase. Consequently, LPD 

17 took much longer to construct and cost more than originally estimated.

Early Stabilization of Design 

Can Reduce Expensive Rework 

and Resequencing of Work 

While shipbuilding programs may differ in the specific knowledge that 

must be gained to reduce risk, the order and timing in which such 

knowledge must be achieved should not vary. Technology maturity must 

be proven before a design can be considered stable, and production 

outcomes cannot be guaranteed until a stable design is demonstrated. 

Similarly, this knowledge should correspond with and inform key 

decisions in a program. For example, in programs other than shipbuilding, 

the Milestone B decision represents the commitment to design and 

develop a system for production, at which time requirements should be 

firm and critical technologies mature. 

Individual Ship Strategies Align 

Knowledge and Decision Points 

Differently

However, each shipbuilding program seems to embody its own strategy for 

making decisions that vary from program to program. Milestone B means 

different things in different shipbuilding programs. In the DD(X) program, 

negotiation of a construction contract was authorized at Milestone B, 

Page 11 GAO-06-587T
which was held shortly after the critical design review. The CVN-21 

program plans to gain approval to negotiate construction of the first ship 

at a major program review held over 2 years after Milestone B decision. In 

yet another approach, the Littoral Combat Ship began construction of its 

first vessels about 2 years before its scheduled Milestone B decision. This 

inconsistency in both decision points and knowledge gained makes it 

difficult to gauge whether an individual program is attaining sufficient 

levels of knowledge at the right points in time. 

Practices for Estimating 

Costs, Budgeting, and 

Contracting Can Make 

Funding Demands More 

Realistic 

The Navy can take steps to more realistically provide the funds needed to

execute individual programs. These include some methodological 

practices for cost estimates and better alignment of budgeting and 

contracting commitments with requisite levels of knowledge. The Navy 

has begun implementing some of these practices, but more can be done.

In our analysis of shipbuilding programs last year, we found that the Navy 

tended to underestimate the costs needed to construct ships—which 

resulted in large cost increases after ship construction began. One way to 

improve the quality of cost estimates and reduce the magnitude of 

unbudgeted cost growth is to present a confidence level for a cost estimate 

based on risk and uncertainty analyses. By conducting uncertainty 

analyses that measure the probability of cost growth, the Navy can identify

a level of confidence for its cost estimates. The Navy can then make 

better-informed budget decisions on whether to proceed with a program. 

Cost Estimating and Reporting 

The Navy has begun taking some action to improve its cost estimating 

capabilities, including the use of quantitative risk analysis in generating 

shipbuilding cost estimates. For example, the Navy did conduct an 

uncertainty analysis for the DD(X) cost estimate. The analysis showed the 

current estimate to have a confidence level of 45 percent, meaning that the 

program has a 45 percent chance of achieving its estimated cost. This 

represents a positive step in creating more transparent cost estimates. We 

believe that the Navy and DOD should go on to establish an acceptably 

high confidence level on which to base more realistic program 

commitments and budget requests. Recently, the Defense Acquisition 

Performance Assessment panel recommended that an 80 percent 

confidence level is necessary to ensure realism in a budget request. 

The Navy can also use contractor cost performance reports more 

effectively. With the significant risk of cost growth in shipbuilding 

programs, it is important that the Navy receive timely and complete cost 

Page 12 GAO-06-587T
performance reports to allow it to take corrective actions more quickly.

DOD recently issued changes to its earned value management policy 

requiring contract performance reports to be submitted no less than 

monthly. Monthly cost performance reports can help improve the Navy’s 

ability to mitigate risk on ships currently under construction. Although the 

Navy will implement this policy on future contracts, it stated that it will 

not apply monthly reporting requirements retroactively. As a result, 

current programs such as the Virginia class submarine, which continues to

experience high cost growth, will only receive cost performance reports

on a quarterly basis—slowing the Navy’s ability to take corrective action 

against negative cost and performance trends. 

The Navy can better ensure realism in its budgets and contracts by 

separating requests for funding detail design from construction. Generally, 

the Navy has requested authorization for both detail design and 

construction of the lead ship in a single budget year, before research and

development have been completed and an independent cost estimate 

developed. Contract prices are often negotiated for constructing the lead

ship and early follow-on ships before detail design has even begun. In our 

February 2005 report, we recommended that the Navy allow time to gain 

knowledge from detail design before negotiating contract prices for the 

construction of the lead ship and time to gain knowledge from the lead

ship before negotiating contracts for follow-on ships. This would enable

knowledge and experience to be gained with the design before locking in 

budget requests and contractual commitments. 

Budgeting and Contracting 

Budget requests for DD(X) illustrate the problems with requesting funding 

early, when uncertainty about costs is high. The Navy first requested 

funding for detail design and construction of the lead ship in February 

2004 as part of its fiscal year 2005 budget request. According to the Navy’s 

budget presentation, detail design and construction would cost $2.7 

billion. The Congress did not fund construction of the lead ship but instead 

provided funding for detail design and some materials in the fiscal years 

2005 and 2006 budgets. In March 2005, the Navy completed a detailed lifecycle cost estimate for DD(X) that placed the cost of DD(X) at $3.3 billion.

The independent cost estimate placed the cost even higher. The budget

request for fiscal year 2007 now includes $3.3 billion for each of the two 

lead ships. Though the accuracy of this estimate is still being debated, it is

clearly more realistic than the budget estimates of 2 years ago.

The same logic applies to contracting for follow-on ships. Early 

negotiation of follow-on ship contracts can also affect the realism of 

program cost estimates and budget requests to fund these contracts. 

Page 13 GAO-06-587T
Experience has shown the difficulty in delivering the lead ship of a class 

within estimates. Negotiating contracts for follow-on ships at the same 

time as the lead ship extends the estimating weaknesses to those ships as 

well. The result is unbudgeted demands for increased funds. While the 

Navy maintains that this practice can give the government some leverage 

in negotiating prices, a possible advantage only exists in the case of ships 

acquired under fixed-price contracts—a rare occurrence for new ship 

classes. 

Savings in Long-Term 

Operations and 

Maintenance Costs are 

Needed to Free Funds for 

Shipbuilding 

The Navy’s efforts to control personnel costs and minimize total 

ownership costs have been important in their own right. Today, these 

efforts are becoming increasingly important because the savings they 

produce are one source of the increased funding sought for the Navy’s 

long-range shipbuilding plan. 

The ship’s crew is the single largest cost incurred over the ship’s life cycle.

One way to lower personnel costs is to use a systems-engineering 

approach called human systems integration to optimize crew size. This is 

particularly important in the early phases of a ship program as total 

ownership costs are largely determined during a ship’s design. (See fig. 4.) 

Optimizing Ship Crew Size Can 

Reduce Total Ownership Costs 

Page 14 GAO-06-587T
Figure 4: Total Ownership Costs Are Determined Early in a System’s Development

Milestone decisions made here...

lock in 80 - 90 percent of costs here...

Source: U.S. Navy.

65%

33%

Development cost

Procurement cost

Operating and support cost

System life cycle

Applying human systems integration principles to optimize crew size has 

the potential to yield substantial cost and operational benefits, including 

saving billions of dollars by reducing total ownership costs and increasing 

operational performance and ship maintainability. 

We have reported that the Navy has not consistently optimized ship crew 

size.4

 For example, we calculated that a nominal 25 percent reduction in a 

large deck amphibious ship such as the LHA(R) with a 1,245-person crew 

could provide a personnel cost avoidance of nearly $1 billion over the 

 4

 See GAO, Military Personnel: Navy Actions Needed to Optimize Ship Crew Size and

Reduce Total Ownership Costs, GAO-03-520 (Washington, D.C.: June 9, 2003). 

Page 15 GAO-06-587T
service life of a ship.5

 However, the LHA(R) program did not establish a 

crew reduction requirement. As a result it is unlikely to achieve a 

meaningful reduction in crew size. The DD(X) destroyer program is an 

example of how requiring human systems integration early, establishing a 

crew size reduction requirement as part of the design, and holding 

program managers accountable can create significant progress toward 

reducing crew size. While actual reductions remain to be seen, currently, 

the crew size for the DD(X) is estimated at 150, compared with 382 for the

current DDG 51 class destroyer. 

The Navy has developed and implemented several initiatives to increase 

the operational availability of Navy and Marine Corps fleet forces, 

including the Fleet Response Plan and rotational crewing. Navy officials 

have cited these initiatives as ways to increase readiness and reduce the

numbers of ships needed in the Navy’s force structure, thereby freeing

funding for other priorities. The Fleet Response Plan modifies the Navy’s 

pre-2001 rotational deployment policy, replacing 6-month routine 

deployments with more flexible deployment options for as many as eight 

carrier strike groups when and where needed. The Navy has also 

demonstrated that rotating crews aboard surface ships on extended 

deployments may be a feasible alternative to traditional 6-month ship 

deployments. According to the 2006 Quadrennial Defense Review Report, 

the Fleet Response Plan has increased the amount of time a ship or other 

naval unit is fully ready to deploy, and rotational crewing has further 

increased the operational availability of forces by up to 33 percent. 

Increasing Operational 

Availability

These are positive results for which the Navy deserves credit. As the Navy

extends these initiatives to more ships, we have recommended steps it can 

take to get maximum return on investment and offset billions of dollars in 

future total ownership costs. These include establishing an analytical

framework—consisting of formal measurable goals, objectives, and 

metrics—that could be used to assess the feasibility of operational 

availability initiatives and determine their impact on operational 

requirements, ship condition, and crew morale.6

 In the past, the Navy had 

 5

 Fiscal year 2002 dollars. 

6

 See GAO, Force Structure: Navy Needs to Fully Evaluate Options and Provide Standard

Guidance for Implementing Surface Ship Rotational Crewing, GAO-05-10 (Washington,

D.C.: Nov. 10, 2004); GAO, Military Readiness: Navy’s Fleet Response Plan Would Benefit 

from a Comprehensive Management Approach and Rigorous Testing, GAO-06-84 

(Washington, D.C.: Nov. 22, 2005). 

Page 16 GAO-06-587T
not systematically collected or developed accurate cost data to perform 

complete cost-effectiveness analysis. We believe that the Navy needs to 

more systematically collect data on current and potential operational 

availability initiatives, including complete and accurate cost data for costeffectiveness analyses. This will facilitate informed decisions about the 

potential for applying these initiatives to current and future ships. 

Mr. Chairman this concludes my statement and I would be pleased to 

answer any questions. 

Page 17 GAO-06-587T
To develop information on obstacles for the Navy’s long-term shipbuilding 

strategy and practices for improving the acquisition of programs that make 

up that strategy, we relied largely on work previously performed for a 

number of related GAO products as well as the Navy’s planning documents 

and testimony. In the course of our previous work we analyzed the 

documentation of and interviewed officials associated with a number of 

shipbuilding programs including CVN-21, DD(X), and the Littoral Combat 

Ship. In our past work on analyzing cost growth in shipbuilding, we 

reviewed cost performance and earned value data on a number of ships 

then in construction, as well as applicable Navy acquisition guidance. In 

addition, we interviewed officials with the Navy and Office of Secretary of 

Defense with oversight of cost estimating and contract execution. To 

supplement work previously performed we analyzed the Navy’s most 

recent long-term plan for shipbuilding and updated some figures on cost 

estimates through use of the Navy’s budget justification documentation. 

For future questions about this statement, please contact me at (202) 512-

4841. Individuals making key contributions to this statement include 

Robert L. Ackley, Christina Connelly, Ryan Consaul, Diana Dinkelacker, 

Christopher R. Durbin, J. Kristopher Keener, Patricia W. Lentini, Roderick

W. Rodgers, Janet St. Laurent, Martin G. Campbell, and Karen Zuckerstein. 

Military Readiness: Navy’s Fleet Response Plan Would Benefit from a 

Comprehensive Management Approach and Rigorous Testing. 

GAO-06-84, Washington, D.C.: Nov. 22, 2005. 

Objectives, Scope, 

and Methodology 

Contact and Staff 

Acknowledgments 

Related GAO 

Products 

Defense Acquisitions: Progress and Challenges Facing the DD(X)

Surface Combatant Program. GAO-05-924T, Washington, D.C.: July 19, 

2005. 

Defense Acquisitions: Assessments of Selected Major Weapon Programs.

GAO-05-301, Washington, D.C.: March 31, 2005. 

Defense Acquisitions: Plans Need to Allow Enough Time to Demonstrate 

Capability of First Littoral Combat Ships. GAO-05-255, Washington, D.C.: 

March 1, 2005. 

Defense Acquisitions: Improved Management Practices Could Help 

Minimize Cost Growth in Navy Shipbuilding Programs. GAO-05-183, 

Washington, D.C.: Feb. 28, 2005. 

Page 18 GAO-06-587T
Force Structure: Navy Needs to Fully Evaluate Options and Provide 

Standard Guidance for Implementing Surface Ship Rotational Crewing. 

GAO-05-10, Washington, D.C.: Nov. 10, 2004. 

Military Personnel: Navy Actions Needed to Optimize Ship Crew Size 

and Reduce Total Ownership Costs. GAO-03-520, Washington, D.C.: June 

9, 2003. 

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permission from GAO. However, because this work may contain copyrighted images or 

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reproduce this material separately. 

Page 19 GAO-06-587T
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