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37–310 2008

[H.A.S.C. No. 110–14]

ACQUISITION OVERSIGHT OF THE U.S.

NAVY’S LITTORAL COMBAT SYSTEM

HEARING

BEFORE THE

SEAPOWER AND EXPEDITIONARY FORCES

SUBCOMMITTEE

OF THE

COMMITTEE ON ARMED SERVICES

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

HEARING HELD

FEBRUARY 8, 2007
(II)

SEAPOWER AND EXPEDITIONARY FORCES SUBCOMMITTEE

GENE TAYLOR, Mississippi, Chairman

NEIL ABERCROMBIE, Hawaii

JAMES R. LANGEVIN, Rhode Island

RICK LARSEN, Washington

MADELEINE Z. BORDALLO, Guam

BRAD ELLSWORTH, Indiana

JOE COURTNEY, Connecticut

JOE SESTAK, Pennsylvania

ROSCOE G. BARTLETT, Maryland

KEN CALVERT, California

TERRY EVERETT, Alabama

JO ANN DAVIS, Virginia

J. RANDY FORBES, Virginia

JOE WILSON, South Carolina

WILL EBBS, Professional Staff Member

JENNESS SIMLER, Professional Staff Member

JASON HAGADORN, Staff Assistant
(III)

C O N T E N T S

CHRONOLOGICAL LIST OF HEARINGS

2007

Page

HEARING:

Thursday, February 8, 2007, Acquisition Oversight of the U.S. Navy’s Littoral

Combat System .................................................................................................... 1

APPENDIX:

Thursday, February 8, 2007 ................................................................................... 43

THURSDAY, FEBRUARY 8, 2007

ACQUISITION OVERSIGHT OF THE U.S. NAVY’S LITTORAL COMBAT

SYSTEM

STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

Bartlett, Hon. Roscoe G., a Representative from Maryland, Ranking Member,

Seapower and Expeditionary Forces Subcommittee .......................................... 3

Taylor, Hon. Gene, a Representative from Mississippi, Chairman, Seapower

and Expeditionary Forces Subcommittee ........................................................... 1

WITNESSES

Ellis, Mike, Executive Vice President and Chief Operating Officer, Bollinger

Shipyards, Inc. ...................................................................................................... 39

Etter, Hon. Dr. Delores M., Assistant Secretary of the Navy for Research,

Development and Acquisition; Vice Adm. Paul E. Sullivan, Commander,

Naval Sea Systems Command, U.S. Navy; Rear Adm. Charles S. Hamilton,

II, Program Executive Officer for Ships, U.S. Navy; Rear Adm. Barry J.

McCullough, Director of Surface Warfare, U.S. Navy, beginning on page ...... 5

McCreary, Richard, Vice President and Gen. Manager, Marinette Marine

Corp. ...................................................................................................................... 36

Moak, Kevin, Chairman and Persident, Gibbs & Cox .......................................... 30

Moosally, Fred P., President, Lockheed Martin MS2 ........................................... 26

APPENDIX

PREPARED STATEMENTS:

Etter, Dr. Delores M. joint with Vice Adm. Paul E. Sullivan, Rear Adm.

Charles S. Hamilton, II, and Rear Adm. Barry J. McCullough ................ 47

Moosally, Fred P. joint with Kevin Moak, Richard McCreary, and Mike

Ellis ................................................................................................................ 76

DOCUMENTS SUBMITTED FOR THE RECORD:

[There were no Documents submitted.]

QUESTIONS AND ANSWERS SUBMITTED FOR THE RECORD:

Mr. Taylor ......................................................................................................... 107

(1)

ACQUISITION OVERSIGHT OF THE U.S. NAVY’S

LITTORAL COMBAT SYSTEM

HOUSE OF REPRESENTATIVES, COMMITTEE ON ARMED SERVICES, SEAPOWER AND EXPEDITIONARY FORCES SUBCOMMITTEE, Washington, DC, Thursday, February 8, 2007.

The subcommittee met, pursuant to call, at 3:10 p.m., in room 2212, Rayburn House Office Building, Hon. Gene Taylor (chairman

of the subcommittee) presiding.

OPENING STATEMENT OF HON. GENE TAYLOR, A REPRESENTATIVE FROM MISSISSIPPI, CHAIRMAN, SEAPOWER AND EXPEDITIONARY FORCES SUBCOMMITTEE

Mr. TAYLOR. The committee will come to order. On January 12 of this year the Secretary of the Navy issued a stop work order for

the construction of the third vessel of the Navy’s Littoral Combat

Ships (LCS). At that time the Secretary’s explanation to the committee cited escalating costs in the LCS program. He indicated he

needed to verify that the correct oversight systems were in place

and that the reason behind the price escalation for the first ship

was completely understood in order to control cost of future ships.

The Secretary acknowledged that the stop work order would further escalate costs associated with the LCS program, specifically in

planning; however, he was convinced that he needed to fully comprehend the faults within the program execution before continuing.

As many of you are aware, the Navy currently uses large combatants to accomplish missions much more suitable to a fleet of smaller and faster ships. It is a waste of resources to have a modern

Aegis class destroyer conducting board and search operations. In

order to remedy this misallocation of assets the Navy advocated for

a smaller, faster and cheaper ship with reconfigurable warfighting

capability, the ability to operate in a Littoral Combat environment.

In a world of asymmetrical threats, this new ship would be capable

of both protecting the main naval force anti-submarine and antimine capability, taking the fight to the enemy with a wide array

of installed weapons systems.

This committee is supportive of that vision, which is now known

as the Littoral Combat Ship. One of the key selling points of the

development, design and construction of the LCS was affordability.

The Navy has routinely advised this committee that costs were

being closely watched and that the original estimates for affordability would be realized. In fiscal year 2006 National Defense Authorization Act, this subcommittee, led by my friend Representative

Roscoe Bartlett, directed the Secretary of the Navy to meet the cost

target of $220 million for the fifth ship of this class. The committee
2

was told that the cost target was achievable. Now it appears this

is not the case. I have been informed that Lockheed’s first ship, the

Freedom, is 50 percent above the baseline at about $270 million.

We are looking at a ship that is going to cost the American taxpayers almost $400 million.

I wish I could say that the cost overruns on defense programs

were an exception. Unfortunately, in recent years cost overruns

seem to be the rule. The American Congress has an inherent responsibility to the American taxpayer. We are expected and entrusted to account for how our tax dollars are spent. I have never

taken this responsibility lightly, and I am going to make sure that

this committee does due diligence on behalf of our citizens.

If this Nation is to maintain undisputed dominance of the oceans

of the world, we need to come to terms with out-of-control cost

growth of major shipbuilding programs. Congress will not continue

to throw money away at programs that exceed their cost projections. On behalf of the American taxpayers, this committee will demand accountability and transparency, not only in the case of LCS,

but across the range of acquisition programs. The bottom line is

this, the Navy needs to start budgeting with cost margins to deliver ships at a price they promise the American people. Industry

needs to understand that a government contract does not equal a

blank check from the people of the United States. If industry can’t

execute a contract at an agreed upon cost, then there will be repercussions.

To that end this committee will endeavor to determine the root

causes of the staggering cost increases of the LCS program. Let me

acknowledge that this committee is fully aware that the first ship

of every class has learning curves in construction. The cost differential for first ships and follow-on ships is well documented. In

the specific case of the LCS, the committee is aware that the

changes of design requirements to the vessel were implemented a

week before the contract was awarded. However, Lockheed Martin

began construction of the Freedom nine months after the award of

that contract. The committee is also aware of construction delays

caused by the late delivery of a key piece of the propulsion machinery. While Lockheed Martin fined its subcontractor for the late delivery, the cost of the delay is being paid out of the pockets of the

American taxpayer.

Today’s hearing will focus on the LCS contract award method,

the accelerated procurement plan, and the rationale behind using

a system integrator as a prime contractor. At an absolute minimum, the committee expects that the two panels of witnesses today

will address the following issues: What were the actual effects of

the design change and late arrival of the reduction gears? Were

these effects accurately understood by the contractor and by the

Navy program office? Why or why not? How did the schedule of the

program affect the decision making process of both the Navy and

the contractor? Was there an unneeded rush to complete this that

is now costing the taxpayer significantly more money? Have lessons

learned been captured? And is there a mitigation plan to assure

that these problems will not occur in follow-on ships? Does the current Navy oversight structure need to be modified? Does the Navy

have the correct personnel in place as program managers and su-
3

pervisors of shipbuilding with skills necessary to identify potential

problems with construction?

The first panel we will hear from today is comprised of representatives of the Department of the Navy. Testifying for the

Navy we have Dr. Delores Etter, Assistant Secretary of the Navy

for Research, Development, and Acquisition. Dr. Etter is the senior

acquisition official for the United States Navy. Vice Admiral Paul

Sullivan, the Commander of the Navy Sea Systems Command, who

issues technical authority on building naval ships and supervises

their construction. Rear Admiral Charles Hamilton, the Program

Executive Officer for Ship Construction, who is charged with oversight for all surface ship construction programs. Rear Admiral

Barry McCullough, Director of Surface Warfare Requirements for

the Chief of Naval Operations.

Second panel includes the following representatives of prime contractors and major subcontractors. Mr. Fred Moosally, President of

Marine Systems at Lockheed Martin, prime contractor and the system integrator for the LCS program. Mr. Richard McCreary, Vice

President and General Manager of Marinette Marine Shipyard, the

construction yard for the first LCS. Mr. Mike Ellis, Vice President

and Chief Operating Officer for Bollinger Shipyards, slated to build

LCS 3. Mr. Kevin Moak, Chairman, Gibbs & Cox, Inc., the naval

architecture firm that designed the LCS built by the Lockheed

Martin team.

I would now like to recognize our panel’s ranking member, Roscoe Bartlett.

STATEMENT OF HON. ROSCOE G. BARTLETT, A REPRESENTATIVE FROM MARYLAND, RANKING MEMBER, SEAPOWER AND

EXPEDITIONARY FORCES SUBCOMMITTEE

Mr. BARTLETT. Thank you, Mr. Chairman. Mr. Chairman, I

would like to thank the witnesses for being with us today. Dr.

Etter, on January 11 you announced publicly that the Navy was

aware of significant cost growth on LCS 1 and that the Navy will

be taking prompt action to investigate the matter further to determine the exact amount of cost growth as well as root causes. The

following day Secretary Winter delivered a stop work order to Lockheed Martin, the lead systems integrator for LCS 3, which had not

yet begun construction.

While I applaud your efforts and the efforts of your staff to keep

Members of Congress apprised of the steps being taken by the

Navy over the last four weeks, I have also expressed my concern

to you regarding our apparent inability to learn from past lessons.

Today will be the first opportunity for this subcommittee to receive

testimony on the Navy and Lockheed Martin’s preliminary findings

regarding root causes of cost growth, the LCS acquisitions strategy

which was widely heralded as a paradigm ship for shipbuilding

which may have inadvertently created challenges for the Navy and

industry team. The Navy and Lockheed Martin program management structures for LCS, how well did these structures perform

their duties and what lessons have we learned to mitigate further

cost growth on follow-on ships and other shipbuilding programs?

The reporting mechanisms and the incentives in place to minimize
4

cost schedule and requirements growth, particularly within a costplus contract and using a lead system integrator.

I cannot overemphasize the importance of your testimony in this

regard. This subcommittee has been committed to ensuring that

the Navy and Marine Corps receive the necessary resources to

maintain sufficient force structure to meet current and future operational requirements. However, if LCS costs cannot be controlled,

we will meet neither the operational requirements of our Navy nor

the needs of our industrial base. I consider this a serious threat to

our national security.

In the near term, the President submitted his budget request

this week. The request includes funding for an additional three

LCS sea frames which would provide authority for hull 7, 8, and

9. It is critical for this subcommittee to understand what measures

the Navy proposes to take and the point at which LCS design stabilizes in order to adequately evaluate the budget request and to

make appropriate decisions.

I would ask all of our witnesses to maintain an open dialogue

with this subcommittee even after this hearing to ensure a sensible

outcome for the fiscal year 2008. Last, I would like to remind members that while the Navy has awarded contracts to both Lockheed

Martin and General Dynamics for Flight Zero of LCS, both contractors remain in a competitive environment. As a result, some of the

information relevant to this hearing, such as exact cost and manhour estimates or engineering data that may provide a competitive

advantage is considered business sensitive. We should all respect

the proprietary nature of such information and the laws which govern the witnesses’ testimony. Both the Navy and Lockheed Martin

have done an extraordinary job of sharing such information as may

be necessary for this subcommittee to perform its oversight function. As a result, much of that data has been provided to committee

staff and is available to members upon request.

Again, I want to thank all of you for your distinguished service

to our country and for participating in today’s hearing. Thank you,

Mr. Chairman.

Mr. TAYLOR. Thank you, Mr. Bartlett. I would like to ask at this

time unanimous consent that our colleague from New Jersey be allowed to participate in the hearing. Without objection. Do any other

members wish to make an opening statement? We have unfortunately been called to a 15-minute vote followed by five 5-minute

votes. We have about seven minutes. What I would recommend is

that we go ahead and break, go ahead and make those votes and

give our witnesses—because I really—number one, we are on a day

of such a distinguished group here, and I want this panel, those

that are here, to give you our undivided attention, to not be interrupted by votes. So if you do not mind, we will break. Hopefully

we will be back, I regret to say, in a half-hour or so. Then we just

plan to proceed until we finish. Okay? All right.

[Recess.]

Mr. TAYLOR. I very much apologize for the delay. The House has

adjourned for the day so we will not anticipate—we had tried to see

if tomorrow was available but several of the members have conflicts. So if you don’t mind, we are going to go through. I guess the

good news is you probably won’t be getting as many questions as
5

you would have. But with that, I want to thank you again, our distinguished guests.

I guess we will begin with you, Madam Secretary.

STATEMENT OF HON. DR. DELORES M. ETTER, ASSISTANT SECRETARY OF THE NAVY FOR RESEARCH, DEVELOPMENT AND

ACQUISITION; VICE ADM. PAUL E. SULLIVAN, COMMANDER,

NAVAL SEA SYSTEMS COMMAND, U.S. NAVY; REAR ADM.

CHARLES S. HAMILTON, II, PROGRAM EXECUTIVE OFFICER

FOR SHIPS, U.S. NAVY; REAR ADM. BARRY J. MCCULLOUGH,

DIRECTOR OF SURFACE WARFARE, U.S. NAVY

STATEMENT OF HON. DR. DELORES M. ETTER

Secretary ETTER. Thank you. Chairman Taylor, Mr. Bartlett,

members of the subcommittee, thank you for the opportunity to appear before you to discuss the cost and schedule challenges associated with the Navy’s Littoral Combat Ship program, or LCS. On

behalf of myself and the others who join me I would like to submit

our written testimony for the record. As Assistant Secretary of the

Navy for Research, Development and Acquisition, I serve as the

Navy’s acquisition executive. The authority, responsibility and accountability for all Navy and Marine Corps acquisition functions

and programs rest with me. I assure you that we moved quickly

to determine the root causes of this cost growth and we are taking

corrective actions.

The Chief of Naval Operations (CNO) has reaffirmed the LCS requirement to defeat asymmetric anti-access threats generated by

diesel submarines, mines and swarming boats. LCS is also a key

element of the Navy’s requirement of 313 naval vessels. It comprises 55 of the 313 ships in the long-range shipbuilding plan. Because LCS is so critical to our national security, I want to share

with you some of the program challenges and the corresponding actions that we are taking to ensure that the LCS program is successful.

New ship designs historically face cost and schedule pressures.

LCS also incorporated many additional new approaches. LCS has

a rapid 24-month build cycle instead of 5 or more years. Naval Vessel Rules (NVR) were used for LCS for the first time as a building

code for warships, and this is the first construction of combatants

at mid-tier shipyards. The result was an aggressive focus on schedule which increased concurrency between design and production.

Unexpected vendor issues and design changes due to NVR were

also more difficult to accommodate. In addition, the Navy did not

properly adjust its management to accommodate for all of these

first and thus lacked sufficient oversight. Finally, there was not as

much transparency as was needed into management and cost matters.

Lockheed Martin also experienced some challenges. They did not

fully understand the impact of NVR on the design, resulting in

more design and production concurrency. They faced increased cost

of materials such as steel. Manufacturing failures on the main reduction gears on the lead ship created a total schedule impact of

27 weeks, and there was also not as much transparency as was

needed into management and cost issues.
6

You requested a timeline for the identification of the cost overrun. Deteriorating cost performance on LCS 1 was observed in late

summer 2006. However, cost performance did not improve as expected following the September 23, 2006 launch. In early November

I was briefed on the negative cost trends. Following that meeting

the Program Executive Office (PEO) and the contractor commenced

in-depth cost reviews. Lockheed Martin briefed me and the PEO

team on their cost review on December 18, confirming significant

LCS 1 overruns. I alerted Navy and Office of the Secretary of Defense (OSD) leadership and directed a Navy team to conduct a detailed analysis of the overrun. On January 12, 2007, the Navy

issued a 90-day stop work order for LCS 3. Work on the other

Lockheed Martin ship and on the two G.D. ships have not been affected. This stop work order was issued because the contractors’ estimates of cost to complete exceeded our budgets on LCS 1 and

LCS 3. I initiated a number of reviews to determine the root causes

for the cost overrun on LCS 1 and to determine the appropriate

courses of action. I briefed the initial results of the independent

program managers assist team, PMAT, including our detailed actions during the 90-day stop work period to your professional staff

yesterday.

Rear Admiral Chuck Goddard is conducting a review of all four

ships currently under contract. The Navy Inspector General is performing a review and Lockheed Martin also performed a review of

the root causes and actions to correct declining contractor performance. Our initial assessment revealed the following root causes: An

overconstrained program. We specified cost, schedule, and performance that together gave little room for design trades. A design and

build schedule concurrency that was made worse by the parallel

ship bid and development of NVR. The competitive environment resulted in contractor disincentive to raise concerns. Insufficient

metrics and tools to seek trends early and inadequate oversight of

design and construction by both the contractor and the Navy.

Our initial recommendations for actions include improving the

timing and staffing levels of onsite government oversight, examining the ability of the program office staff to keep pace with acquisition, matching the most experienced people to the programs with

the highest risk, and ensuring that earned value metrics are correctly reported by shipyard. These enhancements will help us identify and resolve program issues earlier before they become larger

problems. We are also aggressively applying the lessons from LCS

1 across all our ship programs.

In closing, LCS will bring a critical capability to our Nation. The

Navy continues to remain committed to cost control. Cost overruns

on Navy shipbuilding programs cannot be tolerated, and the Navy

intends to remain transparent as LCS decisions are implemented.

Thank you for this opportunity to appear before this subcommittee to discuss the Navy’s commitment to LCS and to correcting the

issues that have arisen. We look forward to responding to your

questions.

[The joint prepared statement of Secretary Etter, Admiral Sullivan, Admiral Hamilton and Admiral McCullough can be found in

the Appendix on page 47.]
7

Mr. TAYLOR. Madam Secretary, again I do want to apologize for

keeping you and your distinguished group late. Do any of the admirals wish to speak?

Admiral SULLIVAN. No, sir.

Mr. TAYLOR. The impression I get from your testimony and from

what I have read is that in order to build this ship, and I believe

the term that CNO used was ‘‘with the speed of light.’’ In order to

build this ship and deploy this ship at the speed of light, it certainly appears that a lot of costly mistakes were made that did not

result in building the ship any faster, but certainly resulted in the

citizens paying well over $100 million more for the ship than they

should have. The other thing that troubles me is, quite frankly, I

am disturbed by the whole thought of training young people at our

academies, having them spend a life at sea, having them get the

knowledge of that life at sea, and traditionally it would be those

senior level captains and admirals who would draw the specs to a

ship, put it out to industry, say give us a price on it. I am really

troubled with the whole design/build concept, not just this program

but with two Coast Guard programs that are equally screwed up.

I would like to hear your thoughts on whether or not your department is rethinking the entire design/build concept because in

my book, it is zero for three right now.

Secretary ETTER. Congressman Taylor, we are looking closely at

all of the things that went on in the design of this program so that

we can learn lessons from the mistakes that we made here. We are

finding a number of things, as I outlined in my initial statement,

and I do think that we are learning lessons that will apply to other

ships. I do believe we have the right processes. We understand how

to do this. But we have challenges when we try to address taking

risk and getting things done quickly. It is a balancing thing that

we have to do, and that is the challenge of making things happen

quickly so that we can get ships to the warfighter.

Mr. TAYLOR. In trying to work with—and believe me I want this

ship to be built. I want us to get to even better than a 313-ship

Navy and this is certainly slowing things down, but I have to tell

you there will be some skepticism within the halls of Congress and

in the other body when there are other pressing defense needs.

Two screwed up Coast Guard programs. This thing, quite frankly—

I have said it, I will say it again—the spokesperson for this program at the moment ought to be Michael Brown. That is how disappointed I am in the program. It has got to get better and we will

never get better unless we identify these problems, and I have

word from someone in the Department of the Navy this is not going

to happen again.

Traditionally some of the people who visited me say, well, we always have first-ship problems. When we are only going to build

seven of a kind of the DDG 1000, we can’t afford to throw away

one of seven. We can’t afford these kind of problems, and what I

would like to hear from you and from the admirals is what sort of

structural changes are going to take place so that this doesn’t become a habit?

I happen to have been in south Mississippi in the wake of Hurricane Katrina. I saw an enormous amount of waste on cost-plus contracts. I never want to see another cost-plus contract come out of
8

this Department as long as I live because I think someone at a

business school somewhere is telling defense contractors if you get

a cost-plus contract and if you don’t take advantage of the government you are a fool. We are not going to have that anymore. And

I want to hear from you and I want to hear from these admirals

this is never going to happen on their watch.

I am saying this in the form of a question, Ms. Etter. There are

other pressing defense needs. There are airplanes that need to be

bought. There are other pressing defense needs. There are a whole

lot of vehicles that this committee is going to try to get built to

make this more mine resistant. There are a lot of ways that we can

pay the taxpayers’ defense dollar on programs that work.

Secretary ETTER. At this point in our analysis we are finding this

ship meets all the capability requirements that we wanted in it. So

the problem is not with the ship. The capabilities are there. The

challenges are that we tried to do it too fast. There are a number

of things that we are learning from that we are applying as we look

at other ship programs. Certainly we are all concerned about DDG

1000 being very successful. So the things we are seeing here we are

fixing not only for LCS, but the other ships in terms of, as I mentioned, oversight.

One of the things we have learned is that we need to have more

people, the Superintendent of Ships people that are on the ground

at the shipyards. So we are working to make sure as just one example that we do that in a way that takes into account the more

priority programs.

Mr. TAYLOR. Secretary Etter, is that going to be a structural

change within the Navy to where this doesn’t occur again or is this

a one-time fix and then we turn around and find ourselves in the

same boat in a couple years on the DDG 1000? Within the Navy

what is going to change so that Naval Sea Systems Command

(NAVSEA) ships don’t do this again, so within the Navy the right

people and the right number of people are assigned to catch problems early on before they lead to other problems, just as the reduction gear led to an enormous cost of escalation on this program?

Secretary ETTER. I would like to ask Admiral Sullivan to talk to

the Naval Vessel Rules because that is one of the significant reasons for the cost growth on this ship, and this was something that

was very important to do for the ship and something that is important for us to do for these follow-on ships. Admiral Sullivan?

Admiral SULLIVAN. Yes, ma’am. Let me talk about Naval Vessel

Rules first and why we had to do them and why it was so concurrent. We had a set of—I will call them builders’ codes, like you

would do for builders’ codes for the warships of the Navy, called

GENSPECS, general specifications. Those are out of date because

they hadn’t been funded for a long time and the folks that we had

in house in the Navy technical authority to write and keep those

rules up to date had been cut severely. So budget cuts to both the

rules development and the people that did them put us in a situation in 1998 that we had to cancel those rules. With the DDG 1000

and the LCS coming down the road quickly at us, we had to do

something. So we started our partnership with American Bureau

of Shipping (ABS) in 2003 to write a new set of rules to take the

best of the old and some of the good commercial practice from ABS
9

and blend them together in a set of Naval Vessel Rules for the

ship. A problem is that we did that throughout—concurrently

throughout the time when the bidders were bidding on the ship

and the ship that we bid and the ship that we costed out is not

the same ship that we are buying today because of the parallel development of those rules, which are good rules, they are going to

keep our sailors safe. It would have been much better had we had

those rules complete, well understood before the ship was designed,

costed and tried to be built.

Mr. TAYLOR. Admiral, the whole concept, and again my memory

is so far from perfect, but I do remember someone appearing before

this committee and proposing that they go to ABS rules like somehow that that was absolutely the only course to take. And what

troubles me in retrospect is I am not a professional sailor, you are.

And what troubles me is that why no one in your profession was

raising the question that ABS is fine for a commercial vessel. It is

not intended to go in harm’s way. It is not going to be sent out in

the worst weather. People aren’t going to intensely try to sink it.

And why the whole delay in deciding well, we are not going to go

to ABS. We are going to go back to a naval vessel somewhere in

between. But even with that decision being made, there was still

seven months before the Navy said this is what we are going to

and the contractor beginning their work. I would think that is a

heck of a lot of time for those people to have implemented those

plans without using incredibly expensive cost delays.

Admiral SULLIVAN. Well, let me say first about using ABS rules.

The Naval Vessel Rules are our rules and I mean they are the

Navy’s rules. The ABS rules that are used for commercial ships

would not in any way, shape or fashion be used to build a United

States warship. I am talking about a combatant ship. The Naval

Vessel Rules are designed for combatant ships. They include the

best of the Navy technical authority in every single section of the

rules. Again, the concurrency of the design work and the build spec

gave—we in the Navy had, and I will say an impression that the

ship design and construction teams. Because they worked with us

on the Naval Vessel Rules and because we had several rounds of

discussion of those rules and several rounds of publication of those

rules, we felt that their design reflected the rules. It was only in

that seven-month period that you are talking about that we discovered we were—the ship that was bid did not include many of the

provisions of the Naval Vessel Rules because it was based on a

commercial design and in getting the ship design from the commercial design to meet the rules that we need to keep our sailors safe,

that is what took those seven months, and again, because of the

highly pressurized schedule, the ship construction started before

the design was complete.

Mr. TAYLOR. Admiral, I would think common sense would beg

that someone in the senior leadership with the Navy would have

said, this doesn’t make sense. Let’s don’t start cutting steel, let’s

not start putting the ship together until we know what the final

product will look like, where we want the stranglers to be, where

we want the pipe hangers to be, where the wiring and the plumbing have to be, and what is particularly troubling is not only is the
10

ship delayed but the taxpayers are out over a $100 million. That

is a heck of a lot of money.

Admiral SULLIVAN. Yes, sir. The need to go stand up and say this

isn’t going to make sense was not particularly visible to Navy leadership, partly because of the cause that Dr. Etter mentioned, which

was it was a lack of transparency in the program and also there

were not enough Navy supervisors, shipbuilding people on site

early in the process. We ramped those people up and we will be

ramping them up to about double today very shortly, but the time

to catch all this was early in the program, and we did not have eyeballs on site enough to do that.

Mr. TAYLOR. Admiral, another thing that troubles me, and I

would welcome your thoughts or any member of the panel’s

thoughts, and I will correct a mistake that I made. I made the mistake of saying that the taxpayers are going to pay twice for that

reduction gear when it turns out that the contractor, even though

it was a cost-plus contract, all he billed was once and apparently

they paid a penalty for that. But the delay in that reduction gear

did throw the building of the ship out of sequence, and it did cause

the citizens to pay a heck of a lot more for that ship because of

throwing it clear out of sequence.

This is water under the bridge. What I don’t want to see is this

become the norm in shipbuilding in our country, where a mistake

of that magnitude has occurred and the only person who pays a

penalty is the taxpayer. How are we going to address that? What

would be your recommendations to address that so it does not happen again?

Admiral SULLIVAN. For that specific——

Mr. TAYLOR. Or anything similar to that. The propulsor does not

show up, the generator, anything that has got to be there first does

not show up and causes sequential problems in the construction.

Admiral SULLIVAN. The best remedy for all of those sorts of problems are to not concurrently design and build the ship. The schedule should not be constructed so that you are building the ship

when you don’t have the design complete, and I would also suggest

that some of these major components that are arriving late should

be the source of an advanced procurement.

Now I am off my territory here because that works on the acquisition side. Maybe Admiral Hamilton can comment. Should there

be an advanced procurement for these ships to buy water jets, diesel engines, reduction gears, et cetera?

Mr. TAYLOR. All right. Seeing as how the DDG 1000 is coming

down the pike, is that advanced procurement money there? And

has the appropriate amount of advanced procurement been requested so this does not happen on the DDX 1000?

Admiral SULLIVAN. I will have to pass that one down to Admiral

Hamilton.

STATEMENT OF REAR ADM. CHARLES S. HAMILTON, II

Admiral HAMILTON. Chairman Taylor, good afternoon. It is great

to be with you again.

Mr. TAYLOR. Thank you for being here this evening. You are

quite a gentleman for sticking around this long.
11

Admiral HAMILTON. On DDG 1000 the analogies to the LCS program are pretty sparse in my opinion. In DDG 1000——

Mr. TAYLOR. Admiral Hamilton, if you could get a little bit closer

to the mic.

Admiral HAMILTON. The analogies between LCS and DDG 1000

are fairly sparse. In DDG 1000 we spent a three-year period developing engineering development models to do risk mitigation of the

technologies we were working on. In DDG 1000 we have two and

a half years of detailed design with teams that have been in place

with a design tool that has been in use for five years with both

teams. We have metrics in place that track those design artifacts

and products on DDG 1000 and those have been reported on a

quarterly basis to our leadership and the Navy and OSD. We have

those ships and DDG 1000 built in our new construction shipyards

at Bath Ironworks and North Montgomery Ship Systems,

Pascagoula, where there is a large footprint of supervisor over

ships personnel to maintain both earned value management tracking as well as ship performance during the production process. The

program office for DDG 1000 in headquarters is staffed at a level

of about five times that of the LCS program. The design concurrency that was deliberately built into the LCS program because

Admiral Vern Clark requested we get this at the speed of heat is

not resident in the DDG 1000 program. We invested significantly

in budgetary terms for both design and production, to include advanced procurement money for those materials that would allow us

to get those materials and your need date satisfied to a sequence

that construction over those ships in a way that would give us production efficiencies. Those conditions did not exist on LCS based on

our stated Navy need to get this ship in the water as fast as possible, to respond to the global war on terror threat. And so in that

process, we elected to invoke Naval Vessel Rules as part of both a

preliminary design process, the final systems design process, and

the detailed design and construction process. We teamed with our

industry partners to help write those rules in realtime. They participated in that rule set in the technical committee, they were advised of their requirement to deal with that in source selection.

They testified in both writing and in orals and source selection that

they understood those rules and were executing to those rules. Following publication of those rules in May of 2004, the companies

had the opportunity to come back to us through the engineering

change proposal (ECP) process to deal with the NVR changes that

were required. That did occur. We did negotiate those ECPs with

the two companies and proceeded along our production dilemmas

with the reduction gear and steel frankly followed the mitigation

of the ECPs for Naval Vessel Rules and Naval Vessel Rules is

clouding this conversation.

Mr. TAYLOR. Now I will yield to my ranking member, Mr. Bartlett.

Mr. BARTLETT. Thank you very much. I had the privilege of

spending many hours with three of our witnesses on Congressional

Delegations (CODELs) and on each of those our chairman was with

us when we visited the shipyards in Europe and Asia and in this

country. I was impressed that the taxpayers were getting a really

good value for the salaries that we paid you. I never traveled with
12

people that I thought were harder working or more knowledgeable,

and I am surprised that we are here today because you are really

very bright people and we shouldn’t be here today talking about

this, and so I have been asking myself, how in the heck did we get

here? If design/build could work anywhere, it ought to have worked

for this ship. This is not rocket science. This is a sea frame with,

I presume, relatively defined interfaces with the modules. If design/

build, Mr. Chairman, would ever work, Mr. Chairman, it ought to

have worked here because this is probably the least complicated

package that we—you know, it has got—it is just the sea frame.

It has got only interfaces for the modules that are going to go on

it. So we really need to take another look at the design. I am not

ready yet to admit that the design/build will not work. It clearly

didn’t work here. I am not sure that the reason that we are here

today is because of design, of design/build.

Dr. Etter briefed me on this program when we were on one of

the CODELs and there were several of what looked like modest

overruns, but every one of them were explainable. One of them was

I understand that somehow we got caught up with $220 million

and never put in the program office cost. So we should have been

talking about $220 million plus whatever the program office costs

were. The second was that there was some inflation that had gone

about, and that is a usual thing. And always there is inflation, unfortunately. Because we spend too darn much money in Washington, and the input I got then was that considering these things, we

were okay, we were on schedule, and the hull minus inflation and

minus the program office was still at $220 million. That is what

I was told on that CODEL. I have really thought about this and

why we are here with such confident, knowledgeable people running this program. Who imposed the schedule? Because I look back

on it, every one of the cost overruns except for whatever cost increase there would have been, a result of the Naval Vessel Rules,

all the other costs were because we were trying to build to a schedule that was totally unrealistic.

When the reduction gears didn’t get there, we started building

other modules on the ship, and that greatly increased the cost, I

understand, the final integration of those modules, and we were

doing that simply because there was a schedule that we were trying to adhere to. Instead of taking a meaningful pause to look at

what the Naval Vessel Rules would cost us in terms of schedule

and time, we had a relatively modest increase in schedule and a

relatively modest increase in cost, both which turned out to be very

unrealistic.

Who imposed the schedule on us? Because Mr. Chairman, as I

look back at this program, I think that we can attribute almost all

of the costs except those attributable to Naval Vessel Rules, almost

all of the costs to trying to adhere to a schedule which was just

very unrealistic. Who imposed this schedule on us? I think that

was probably above your pay grade, wasn’t it?

Secretary ETTER. I would like to ask Admiral McCullough to address this in representing the requirements part of the program.
13

STATEMENT OF REAR ADM. BARRY J. MCCULLOUGH

Admiral MCCULLOUGH. Yes, ma’am. Chairman Taylor, Ranking Member Bartlett, it is a pleasure to be here with you this evening.

To answer the senior member’s question, the global war games

hosted by the Naval War College in both 2000 and 2001 identified

a critical warfighting gap in the Littoral with respect to quiet diesel submarines, submerged mines and small swarming boats with

anti-ship cruise missiles, specifically directing us to build a capability to punch through and support joint forcible entry operations. As

such, the then CNO Admiral Vernon Clark in his posture hearing

for the 2004 budget in February of 2003 said, we will capitalize on

DOD initiatives, spiral development and new acquisition methods

to streamline the acquisition process and begin construction of the

first LCS in 2005. The CNO believed this was a critical warfighting

gap and we needed this capability to the fleet soonest and we were

going to take advantage of revisions to the DOD 5000 manual that

occurred in May of 2003. Additionally, then Assistant Secretary of

the Navy for Research, Development and Acquisition John Young

directed that this be a fast track acquisition program similar to

what the U.S. Air Force does with Pathfinder, and he said we

would take this ship from conceptualization to initial operational

capability (IOC) in five years and directed that the IOC date be

2007. That is what drove the schedule. We had a critical

warfighting gap and the Navy leadership believed we needed to fill

it.

Mr. BARTLETT. Yeah, this whole thing reminds me a little bit of General Shinseki and his berets. He wanted them by a certain date

and somehow nobody in his chain of command had the courage to

tell him the only way we are going to get those is to have the Chinese build them, make them. And I was at the hearing when he

first learned that and I suggested that maybe he should put an

anonymous suggestion box out in front of his office because certainly someone in that chain of command knew he would be embarrassed when he learned that the berets that he wanted were being

made in China. And there had to be somebody in your organization

and in Lockheed Martin that realized that this was an unrealistic

schedule, that if we tried to adhere to the schedule we were simply

going to increase cost, and it just seems to me that is very unfortunate because I think the design/build can work. It clearly didn’t

work here but I am not willing to blame design/build because if

ever it could work it should work on a ship like this probably, being

a sea frame one of the most simplest predictable things we have

built in a long time, isn’t it?

Secretary ETTER. Yes. Admiral Sullivan.

Mr. BARTLETT. That was supposed to be the genius of this, that

it is a sea frame. And we define interfaces that interface with the

modules.

Admiral Sullivan. Yes, sir. That was our impression at the very

start of this project where we were adopting commercial high speed

ferry designs, and that was the intent when we marched off on this

project. However, when you take a design that is for limited service, close to shore, that doesn’t have to fight wars, and translate

that basic design into a ship that has to go forward, fight wars, get

out of harm’s way, get hit, have a combat system, have guns, have
14

missiles, have Navy computers on it, and also perform in high sea

states where the parent craft, the ferry, would come in and just

not—was just not—we don’t have that choice. A myriad of changes

in hull structure, auxiliary systems and electronics take place and

we were all caught, I would say, by the increasing complexity.

Mr. BARTLETT. Would you agree though if we hadn’t been constrained by a schedule that we probably could have ultimately built

it a lot cheaper with fewer false starts? My understanding is that

a lot of modules that were built before we had final design trying

to adhere to the schedule, we had a lot of rework on those.

Admiral SULLIVAN. That is right.

Mr. BARTLETT. Because we wanted to reach—to meet a launch

date, we didn’t keep the modules in the yard upside down as long

as we could, we didn’t keep them in the yard as long as we could,

we put them in the ship, hoping that we could catch up in the most

inefficient mode for building, which is once it is in the water, as

I understand, and so we kind of abbreviated what we could have

done upside down. What we could have done when it was modules

in the yard and because we wanted to meet a launch date, we

rushed these things to weld them together for launching, we would

fix it once it was in the water. Am I wrong that that is what happened?

Secretary ETTER. There were aspects of that that were true about

this problem, but what we are trying to do at this point is understand what really occurred in the difference in price. We have

roughly $100 million that is different in the price that we anticipated. So we are trying to understand, what part of that really was

caused by doing the concurrent design and build? Because if it is

attributable to that, then we won’t see that expense as we go on

to the next ships. So that was the reason for the stop work, so we

could look at things precisely as you are describing and understand

whether it was attributed to, for example, the Naval Vessel Rules

being invoked in parallel with this or whether it was due to the reduction gear or whether it was due to materials or whatever. So

that is the reason for the stop work, to understand that difference

in price.

Mr. BARTLETT. But doesn’t this all get back to schedule? I would

think that you wouldn’t build a module where you didn’t have the

specifications, and apparently we went ahead and built a lot that

we had to redo, is that correct?

Secretary ETTER. That is correct. Admiral Hamilton——

Mr. BARTLETT. And that is because we were trying to adhere to

a schedule? And nobody waved a red flag and said, hey, you know,

you might adhere to that schedule but it is really going to cost a

lot more money.

Admiral HAMILTON. Congressman Bartlett, we did several things

on the time frame based on the urgency of the need. As we provided the drawings for ABS for certification, we triaged and

prioritized the drawings to help follow the erection sequence of the

modules for the ship, and so the modules that were first under construction were sequenced first and the majority of the drawing

packages to support that were completed in a timely way to execute that construction sequence.

Mr. BARTLETT. How come there is so much rework then?
15

Admiral HAMILTON. A specific piece of the rework was vendor

furnished information provided to the client by their subcontractors

which inaccurately reflected foundation points, connections, fittings

and some of that was impacted by design and some of that was impacted by bad material ordering and procurement.

Mr. BARTLETT. We were told there was $26 million increased cost

because of the reduction gear, of course reduction gear cost us no

more. We understand now that was a fixed price item from General

Electric and they ate the extra expense of cutting the gear wrong

the first time. Isn’t it true that there would have been no increased

cost from that except for trying to adhere to a schedule and build

modules out of sequence?

Admiral HAMILTON. It is true we elected to build modules out of

sequence, again to meet the schedule and the urgency of the need.

At the disclosure of the reduction gear problem we were not presented with—here is a 27-week delay in one discrete bite which

would have allowed decision making to perhaps proceed in a different way. We were given in fact six different disclosures over a

seven-month period, the aggregation of those disclosures got us the

27-week schedule delay. When we started, we thought we had

about a two and a half-month schedule and thought that we could

resequence around that initially without fundamental disruption to

the ship construction.

Mr. BARTLETT. If we could roll back the hands of ship and be as

smart then as we are now, what would you do differently?

Admiral HAMILTON. From my perspective, I would have done several things. I would have said to my design community, both in the

Navy and in Lockheed, the design products are not maturing on a

timeline that we really need to do, let us slow down and get that

right. Separately, I would have relooked at the decision making we

executed on the reduction gear resequencing to see if we had

enough of the requisite information in hand to make the correct decisions about that sequencing, but I will tell you in both cases that

both the industry team and the government were motivated by the

belief that this need was now and we needed to satisfy it it as

quickly as we could, and we tried very hard within the constraints

of the program to satisfy that need.

Mr. BARTLETT. So a lot of these overruns were schedule driven,

that is what you are saying?

Admiral HAMILTON. Yes, sir.

Mr. BARTLETT. Which was my assessment when I looked at it.

Organizations looking over your shoulder like Congressional Research Service (CRS), did they do some assessments of this during

this process? And if so, what did they tell you or tell us? Because

they report to us, not you.

Admiral HAMILTON. CRS has examined our cost estimating procedures and are designed in a macro sense as part of their analysis. To the best of my knowledge, CRS has not specifically looked

at either the design/build NVR concurrency question or the reduction gear question to date.

Mr. BARTLETT. Admiral Sullivan says that there weren’t enough

Navy personnel on site. How many were there? We understand

that there were 13, and now it is going up to 14. That doesn’t look

like much of a ramp-up.
16

Admiral SULLIVAN. At the start of construction there was nobody

there, at the start of the contract there was nobody there because

the ship was getting built in Marinette, which is a place we don’t

have a supervisor presence. So we had to develop a plan to ramp

up those—that the people onsite from Supervisor of Shipbuilding

(SUPSHIP) Gulf Coast. SUPSHIP Gulf Coast, as you know, is in

an area that just had finished a hurricane and a third of the people

who worked there lost everything. So that office had to get stood

up in stages. We started with about three or four people. Then we

ramped up to nine. We are ramping up to this month to about 14,

15. We will be up to over 20 in the next couple of months. So we

are taking action right now, but we should have done this months

ago.

I have to say that SUPSHIP Gulf Coast is about half the size it

was about 15 years ago with a higher workload and that has been

challenging. There are other high risk programs that are going on

at SUPSHIP Gulf Coast with the small ship builders on the Gulf

Coast, the LPD 17 program, recovering the DDG that was damaged

by the storm and trying to get LHD 8 and LHA 6 on track whilst

also trying to deal with work on the DDG 1000 program. We are

still working on the design piece so they are stressed, they are half

the size they used to be, and we did not allocate enough people up

to Marinette quickly enough because of the overall picture down

there.

Mr. BARTLETT. Just one last question. We have to move on. We

have another whole panel. What confidence do you have that our

whole estimated completion cost will be any better than our estimation before?

Secretary ETTER. We have had a number of people looking at our

cost estimates over the past few weeks. We feel that we have a

pretty good estimate of what it will cost to complete the ship. We

are continually improving our cost-estimating capabilities, but it is

a challenge because it is forecasting when you don’t have a lot of

data for similar ships. We do believe at this point with the analysis

going on now we will be able to predict the cost of the follow-on

ship for LCS.

Mr. BARTLETT. Thank you very much. I hope we are not back

here with a similar hearing after the ship is finally delivered.

Thank you, Mr. Chairman.

Mr. TAYLOR. The Chair now recognizes the gentleman from

Pennsylvania, Joe Sestak.

Mr. SESTAK. Thanks for your time.

I am sorry, I probably missed some of what was already said.

I want to ask a couple of questions of process because I think the

idea of LCS still is pretty darn good, the seaframe, get it out there,

modules in and out. And Admiral Clark had a great idea. Admiral

Clark really wanted to move this along but, like with anything

else, victory has a thousand fathers and defeat is an orphan.

My question I think has to do with process. You have the performance of the shipyard. You have the vendors’ costs and the construction standards. My understanding is that by and large, the

vendor issues and the construction costs were all taken care of in

October of 2005, so they were within the fiscal year 2007 budget

baseline, so to speak, and those were counted right; is that right?
17

Secretary ETTER. Yes. That is true. We did a rebaseline in which

we accounted for the Naval Vessel Rules and the reduction gear

and then some ship performance issues.

Mr. SESTAK. So is it the Navy’s view the shipyard performance

is causing the recent growth of the LCS?

Secretary ETTER. The recent growth is partly due to shipyard

performance, but we also are concerned about understanding that

in more detail.

Mr. SESTAK. Is there anything else—yards, shipyard growth—

since you rebaselined those other vendor costs and the ABS, you

know, the standards—is there anything else that causes a recent

growth, in your view, not just understanding it, but anything else?

Secretary ETTER. We know that there were some materials cost.

We know that there is performance cost, and I think that there is

also still some impact of Naval Vessel Rules that were not completed earlier. So we think those are the three key categories, probably.

Mr. SESTAK. It was said in the papers that Lockheed Martin had

come forward as early as March 2006 and let the Navy know about

these concerns. Is that the case?

Secretary ETTER. There were constant discussions with the contractor, as we saw the performance, such that the cost was growing

and the performance was deteriorating. So there were constant dialogues, and it was at different points in this process where different

people began to recognize that there was something here more than

just the lead cost issues.

Mr. SESTAK. But should it have taken—I think it was November

that you were apprised of it.

Secretary ETTER. I was aware of increasing costs, but to point

out at what time did I begin to recognize that, it was something

more than the lead ship costs for me that really occurred into the

fall.

As we look back on the data now and you pull all the pieces together so you have it at one time, I think clearly we should have

recognized it earlier. But we did not have people that had all the

data together at one time, and that is part of what we have to

change as we look at going forward.

We also found that some of the metrics we were using were not

correctly computed and so that also caused some problems. But I

would like to also offer that question to Admiral Hamilton, if I

could.

Mr. SESTAK. If I could, could I ask Admiral McCullough a followup.

I am not that smart, but I never really understood quite the relationship between NAVSEA PEO and the Secretary’s Office. Does

the PEO report to you, or do you write its fitness report?

Admiral SULLIVAN. The PEO reports to Dr. Etter, as do I.

Mr. SESTAK. And who writes the fitness report?

Admiral SULLIVAN. Dr. Etter.

Mr. SESTAK. So you have an an-hoc relationship with PEO?

Admiral SULLIVAN. No. For in-service ships, if a PEO runs inservice ships, delivered ships, not acquisition ships, he reports to

the CNO VME, because I am responsible and accountable for delivered ships, maintenance and modernization to the CNO VME. But
18

in my acquisition role, it is—if you are familiar with the support

and reporting commander, the PEO is the supported commander

and the NAVSEA is the reporting commander.

Mr. SESTAK. So the three-star is supporting the one- or two-star.

Is that the best way to have this done, oversight set up by the

Navy?

Admiral SULLIVAN. It is the way the Navy executed GoldwaterNichols.

Mr. SESTAK. Watching how the Chief of Materiel came into the

NAVSEA and other things, is it the best—in view of what has happened here and other things, is it the best way to have this oversight? I mean, you have SUBSHIPs reporting to you, correct?

Admiral SULLIVAN. Yes, sir.

Mr. SESTAK. And there were, according to how you talked to the

Chairman, not enough people and yet the response is giving you an

alarm about the acquisition sites, so to speak?

Admiral SULLIVAN. Right.

Mr. SESTAK. And yet you are not really responsible. You are supporting someone for it. And yet you strip people on the deckplate

kind of reporting it. Is this the best way for the Navy to have set

up this system?

Admiral SULLIVAN. You can always do better. When the program

offices worked for the systems commands, it didn’t give us overruns. It gave us the A–12s.

Mr. SESTAK. When they reported to you?

Admiral SULLIVAN. Yes, sir. So I could see it either way, but fundamentally this is a pretty good organization. The reason it was

stood up this way is so that the PEO had a direct line of accountability to the service acquisition executive, and that is a very clear

line of distinction. So me, as the supporting guy, independent technical authority, independent head of contracting agency, independent head of budget office, and independent cost surveillance, we did

not adequately do our job for the PEO and in my reporting relationship to Dr. Etter.

Mr. SESTAK. I am sorry. Admiral, you wanted to say something?

Admiral HAMILTON. Yes, sir, Congressman. We saw rising costs

over the summer time frame. We tracked that in the July through

September time frame. We specifically expected to see some disruption of the earned value management metrics as a subset of the

execution of the run-up to the launching of the ship in September.

We also expected in September after the ship was in the water that

those metrics would stabilize and that the performance would be

significantly higher than the disrupted metrics in the July-August

time frame. We were disappointed to find a fundamental drop-off

in performance after the ship was in the water.

Mr. SESTAK. Were you aware of the increased costs during the

summertime? Is that when you first got notice?

Admiral HAMILTON. We have been tracking estimated completion

for this ship since the inception of the ship.

Mr. SESTAK. I mean, since—this particular cost group, I thought,

came to attention only by newspapers’ reports, and I know those

aren’t always reliable in March.

Admiral HAMILTON. As we worked on the ship together and

tracked costs, the costs of the ship and our budget were aligned
19

through the end of September. They started to diverge at that

point based on bad reporting and the earned value management

system (EVMS) at the shipyard. We dove into that and attempted

to correct it and understand it. As we continued to work through

that and reported to our leadership, it became increasingly clear

that there was some fundamental dilemma in the execution of the

workforce and the tracking of that in the October-November time

frame.

Mr. SESTAK. So up until September, what Lockheed Martin was

telling you was everything seemed to be on track?

Admiral HAMILTON. We were within our budget and executing to

that budget.

Mr. SESTAK. And that was about the time when you heard about

it, Admiral?

Admiral SULLIVAN. Well, first off, the discussions between Lockheed Martin and the program office were ongoing. There are plenty

of numbers that have been thrown around but the fundamental

ground truth, as you know well, is EVMS system. There were problems with that earned value management system. My supervisor

recognized them, as did the program office, and in I would say late

Spring of 2006, worked hard over the summer with the program office and the contractor to get the management reporting system to

get good numbers. And as Admiral Hamilton had said, had a couple of months of good numbers, September, October; and again,

that is what showed the dramatic increase in price or in costs to

the government that was going to exceed the budget.

Mr. SESTAK. So it is about the same time as Admiral Hamilton

found out that you found out?

Admiral SULLIVAN. Yes.

Mr. SESTAK. And the other question I think I didn’t pick up, and

I am sure it is in the testimony, is what is the cost now expected

to be of the fall 1–LCS, your best estimate at this time?

Secretary ETTER. At this point, it is somewhere in the range of

350 to 375 million. We are still evaluating cost estimates on the

other ships.

Mr. SESTAK. So the following ships, I guess the last time it came

across, there were roughly about 300 million, the LCS and fiscal

year 2007 when the budget was submitted——

Secretary ETTER. The budget right now for the ships, the Lockheed Martin ships in June 2006, the contract was signed for 203

million.

Mr. SESTAK. I am sorry. I meant for number 5, 6, 7, and 8, when

you start laying the speculated costs for them it is still about 300

million for them?

Secretary ETTER. We don’t have an estimate for that. The original estimate had been 220. And our goal had been to get to 220

by the fifth ship. But we are now doing analysis to really understand what is——

Mr. SESTAK. So the fiscal year 2007 still had the 220 number in

it?

Admiral MCCULLOUGH. The 2007 budget has the ships priced at

$260 million apiece for $720 million in 2007.

Mr. SESTAK. How much?
20

Admiral MCCULLOUGH. 260 apiece for 521. I am sorry. In the

2008 budget the ships were priced at about $303.5 million. There

is $911 million in the budget, as is currently written, for three

ships in fiscal year 2008.

Mr. SESTAK. The 220 ship is now about 300.

Mr. MWANGI-KIOI. Well, the 220 was unit cost, which includes

the basic construction cost that Dr. Etter says that we now estimated at between 350 and $375 million plus the government-furnished equipment. It wasn’t the end cost of the ship—change proposals, program management costs, and oversight. So we had a

unit cost and then we had an end cost, and 220 was the end cost.

Mr. SESTAK. Don’t you include all of those costs normally in the

budget? You failed to do so in 2006.

Mr. MWANGI-KIOI. Yes. That is correct.

Mr. SESTAK. So really, the original cost you just didn’t accurately

depict what you should have in the 2006 budget, correct?

Admiral MCCULLOUGH. That is correct. We incorrectly priced the

ships, as we understood the program then. Yes, sir.

Mr. SESTAK. Because government costs and overhead are normally included?

Admiral MCCULLOUGH. Correct.

Mr. SESTAK. So when you correctly included them, it was about

300?

Admiral MCCULLOUGH. That was what we knew, when we submitted the budget. The average cost of the modules is about 55

modules, the surface module being the cheapest—and I don’t want

to give you numbers because I don’t have them in front of me—but

the most expensive one is the mine module and that is more than

the $55 million average.

Mr. SESTAK. So if you are buying two modules per ship, it is

about 100 million?

Admiral MCCULLOUGH. If you took the average, yes, sir. It would

be about $110 million. But in the 2008 budget as we submitted it,

we have rephased the modules to support more advanced

warfighting campaign analysis so there won’t be two modules per

ship.

Mr. TAYLOR. We have a new rule in the subcommittee. Anybody

who works past 6 o’clock can ask as many questions as they want.

Mr. SESTAK. Only changed when I got here, those working hours.

The Navy said it is going to have 313 ships. And I gather some

of that number is based upon the Navy not anticipating any bigger

piece of the pie, kind of somewhat of a continuing line of what it

has, Operation and Maintenance (O&M) and Military Personnel

(MILPERS) kind of remaining flat and at least not increasing, and

Research and Development (R&D) going down somewhat, maybe

even staying down. But the real key of that 313, my understanding

is that all ships will come in at estimated prices.

What does something like LCS do to that number of 313 ships?

I mean, if those are really what undergirds the assumptions of

313?

Admiral MCCULLOUGH. What we have looked at, Congressman,

is we have increased the shipbuilding budget from $11 billion to

about $14 billion over the past year in the 313 balance risk, affordability, industrial-based concerns, in the 20—15 to 20—20 time
21

frame in accordance with the Quadrennial Defense Review (QDR)

direction to support the warfighter, and there is risk in budget

when we laid it out on a $13.4 billion 2005 dollar-escalated line.

Mr. SESTAK. On what line?

Admiral MCCULLOUGH. 13.4, 2005——

Mr. SESTAK. Procurement?

Admiral MCCULLOUGH. Supply Chain Management (SCM) budget. Only ship procurement. Not only the things that we use in the

SCM budget. And we understand there is risk in that, but we believe we can make the 313 plan.

Mr. SESTAK. What does something like that, when the cost of the

ship has increased so much, do to that estimate?

Admiral MCCULLOUGH. I will tell you, sir, that that is currently

under review, and when we get that information, we will gladly

provide it to the committee.

Mr. SESTAK. LCS cost overrun. This isn’t the first time though,

right, where initial estimates have been much lower than what finally came out on whether it is DDX or DDG 1000 or whether it

is LPD, or whatever; is that correct?

Admiral SULLIVAN. We typically have, if you look at the history,

lead ship costs we underestimated by an average of about 20 percent. We try to put in the adders for all of the first-time costs and

sometimes we get it. Most of the time we don’t.

Mr. SESTAK. And then the average cost of the follow-on ships,

they are usually how much above?

Admiral SULLIVAN. We are usually very close on follow-on ships

within 5 percent either way.

Mr. SESTAK. Thanks very much.

Mr. TAYLOR. Last year in this bill, then-Chairman Bartlett included very strong language that the price cap for this ship was

going to be 220 million. What I have failed to have heard is a proper explanation of—and I will give the panel an opportunity to address—is that as the reduction gear is late, someone had to make

the decision to continue construction of the ship, knowing that the

cost of that ship was going to rise dramatically because of the rework that would take place when that gear shows up later; it has

to be installed.

Someone had to know it was going to cost a lot more than $220

million. Who is the someone? Who did they seek the approval of

and at what point did they intend on notifying Congress of those

additional costs? Because the alternative is for someone to have

said to Congress, knowing the Chairman’s interest in controlling

the cost of this ship, ‘‘Mr. Chairman, we are at a crossroads. We’ve

got a former CNO who wants the ship built quickly. We have got

you, that told us that the cost of this is going to be 220 million.

What is it that you want? Do you want it done quickly, or do you

want it done expensively?’’ and we didn’t hear that. I don’t believe

the Chairman heard that on his watch. I know that no one from

your office contacted me.

I think it is a very fair question. When was that decision made,

and at the time what did you anticipate the costs to be and how

close was that anticipated cost to the real cost that we incurred?

Secretary ETTER. Mr. Taylor, we had in our budget during the

summer approximately $270 million to cover this ship, and that
22

was to cover the increases in the Naval Vessel Rules, the gear

issues, and ship performance. So up through the summer, the anticipation was that we had enough dollars to cover this. It was only

as we began to understand that from the various estimates we

were getting and the errors we were finding in the earned value

metrics that we were starting to have problems. And as those problems began to become more clear, we became more concerned.

I agree with you, there was not sufficient transparency in the organization. That is one of the things that we must change and we

are already in the process of doing that. But we did not have a

process that allowed the individual pieces of the problem that people were seeing to come together and then, by coming together, be

able to bring that information up through the organization so that

we could identify the problem and go to our leadership and go to

you to explain the issues.

Mr. TAYLOR. Have you had a chance to look at the prepared testimony from the Lockheed Martin team?

Secretary ETTER. I have seen some of the text they have written,

yes.

Mr. TAYLOR. Do you agree with their statements? If there is any

point of disagreement that you have, I would like to hear it now,

because you won’t have an opportunity to respond, since they will

be coming after you.

Secretary ETTER. I do not agree with some of the ways in which

they explain the Naval Vessel Rules, and I think I would offer this

to Admiral Sullivan to discuss.

Admiral SULLIVAN. Yes, sir. As we discussed before, the rules

were, in fact, developed in parallel with the bid process and the

source selection process. Lockheed Martin was good enough to provide me a copy of their independent analysis of what has gone

wrong here, and we agree with most of it.

I just wanted to put the point in that that analysis will tell you

there are 14,000 changes from the February version of the rules to

the May version of the rules which were invoked in the contract.

And, yes, if you do a word search of the document by a ‘‘shall,’’

‘‘will,’’ ‘‘is to be,’’ you get 14,000 instances of that. Again, remember

it said the rules apply to all surface combatants. If you take out

the rules sections that don’t apply to LCS because they are for

acoustics or shock or something, you get—that takes out about

5,000 of those ‘‘as to be,’’ ‘‘will,’’ ‘‘shall’’ references. And then if you

take the sections of the Naval Vessel Rules where we had a previous document such as our old general specs or an IEEE spec, that

gets out another 8,000. And I will sign up to not 14,000 changes

in the rules, I will sign up to 14,000 word changes in the rules. But

you get down to a number that is around 800 to 1,000 real changes.

And that is a big number anyway. But it isn’t 14,000.

I wanted to make that clear.

Mr. TAYLOR. Admiral McCullough, anything to add to that?

Admiral MCCULLOUGH. I reviewed portions of the testimony that

affect the requirements, and I have no disagreements with the testimony with respect to requirements and the ship. The operational

requirements have not changed since the inception of the LCS concept.
23

Mr. TAYLOR. How about any other part of that document? Do you

have any disagreements with——

Admiral MCCULLOUGH. I concur with what Admiral Sullivan

said.

Admiral HAMILTON. I believe the characterization of the Naval

Vessel Rules changes, as stated by Admiral Sullivan, as a better

characterization than that in the Lockheed Martin prepared testimony.

Mr. TAYLOR. Any follow-up questions?

Mr. SESTAK. When will you have the estimate of what the new

costs will be for the following LCSs based on what you heard?

Secretary ETTER. At this point, I would not be able to give you

a specific date, but we are certainly working very hard to get that

because as you know, in order to look at whether or not we—what

we do with—to the stop work. That was a 90-day stop work, so that

is part of the motivation to getting to that point to work with that.

We also need to look at what our acquisition strategy is going to

be for follow-on ships. That is another very important piece of this.

So both of those things rely on getting a cost estimate for the

next ship. So this is very high priority for us.

Mr. SESTAK. Before the budget is approved or anything, will you

have the information over here? Is it a matter of weeks or months?

This springtime?

Secretary ETTER. It is a matter of weeks that we will have this

information.

Mr. SESTAK. And one last question, just because I think process

is so important. How many direct reports do you have? How many

direct reports do you have?

Secretary ETTER. I have 12 PEOs I have within my organization

in the Pentagon. I believe it is like 10 to 12 deputies that cover

various areas.

Mr. SESTAK. And they all report directly to you?

Secretary ETTER. They report to me and then the Naval Systems Command (SYSCOM) commands, such as Admiral Sullivan, for the

things that support the PEOs.

Mr. SESTAK. And then there are three?

Admiral SULLIVAN. Five.

Mr. SESTAK. So about 30 direct reports?

Secretary ETTER. Yes.

Mr. SESTAK. Thank you very much.

Mr. TAYLOR. Is that it?

The Chair recognizes the Ranking Member.

Mr. BARTLETT. I didn’t hear a crisp answer to our Chairman’s

question. Who finally imposed this unrealistic delivery schedule on

you? I think that was your question, sir. I didn’t hear a crisp answer to it.

Secretary ETTER. I believe at the time that the program was

started, it was the senior leadership of the Navy agreed that it was

important to do this to meet the threat.

Mr. BARTLETT. And nobody told you, that you know of, this is

probably going to run costs up, that this isn’t a realistic schedule?

Secretary ETTER. Not that I am aware of.

Mr. SESTAK. If I may.

Mr. TAYLOR. Absolutely.
24

Mr. SESTAK. Is it true, though, that this rapid acquisition strategy was something—would it be wrong to say that the Navy leadership, Admiral Clark in particular, was interested in, but the Navy

bought off on it. I mean, slides were being shown for how long it

took to build a ship in World War II and remember all of those

slides?

Admiral SULLIVAN. Given that we thought we were working with

a commercial derivative that would not take the complexity and

the rework needed to turn it into a military ship, and given the fact

that the entire team was leaning very far forward to try to get this

ship to the fleet as soon as possible, yes, we were optimistic.

Mr. SESTAK. So it was something where everyone seemed as

though it was going to work? I mean, I think somebody was looking

for an individual, but is it fair to say that the individual organization as a whole was buying off on this and it wasn’t imposed? Or

am I wrong?

Secretary ETTER. We all thought we could do it, the Navy and

the contractors.

Mr. SESTAK. Then it really comes back to how do you have a

process where someone does put up their hand and say this isn’t

working?

Secretary ETTER. Well, we have to have that process. And that

is a part of what we are looking to change right now within the

organization. We had a long list of things that we are changing,

and we are going to learn from these lessons. Just one example of

that is I have already scheduled essentially acquisition

standdowns, and we are going to have meetings in three different

locations to get our program managers together and to use that

time to help share with them what we are learning from this program.

We have an E–MAG review that is being done. And the admiral

that is chairing that is going to be presenting the lessons learned

and the things that should have been flags to us about this problem. We will be presenting that in three locations where most of

our program managers are: In San Diego, Pax River, and then here

in the Washington area.

Mr. SESTAK. The PEO of the ship was an 06 not of ships. Of the

LCS program, program manager.

Admiral SULLIVAN. An 06?

Mr. SESTAK. That is why they kept me in requirement.

Was he given an undue task when he had really two different

class ships here? He is not here today. I gather he is not on the

job any longer. An 06. And yet he had two very different class

ships, but he doesn’t have a job anymore. Is that the right way to

approach it?

Secretary ETTER. He did not have sufficient support that he

needed for this program.

Mr. SESTAK. But he doesn’t have his job anymore; is that correct?

Secretary ETTER. That is correct.

Mr. SESTAK. He is the accountability?

Secretary ETTER. I am not sure what you are implying.

Mr. SESTAK. He was removed because of performance.
25

Secretary ETTER. He was put on administrative leave. The PEO

recommended to me that he be put on administrative leave and

that is what we have done. We are in the process of——

Mr. SESTAK. So he was held accountable. Would you, looking

back on it, do you think it was fair to him to have two very different class ships that he was responsible for?

Admiral HAMILTON. There are several program offices that work

for me and PEO SHIP, and several of those program managers

have a multitude of ship classes that they are producing within

their program offices. The complexity of those tasks are different,

program office to program office.

The challenge in the LCS program office was to manage to a

common interface. Inspire two different designs and production

teams to conduct their work in a constrained timeline with a constrained budget and very constrained supporting resources. And

that program office team moved heaven and earth to try to make

this happen on the timeline it was given. And in large part I believe they did very well.

Mr. SESTAK. I would agree. I mean no one—Admiral Sullivan—

well, nobody, as Mr. Bartlett said, who works harder or anything.

I was curious that something happened in the process that wasn’t

accountable this time. I didn’t know if it all came to this 06 or not.

One guy.

Thank you very much. I hope it doesn’t.

Mr. TAYLOR. Again, I want to thank our panel. There are a number of members who have submitted questions for the record. I

have a very long number of questions for the record, but given that

the hour is late and we still have another panel.

Last, I want to say starting with our uniformed personnel how

grateful we are for your government service, and I know tonight

hasn’t been pleasant for anyone, starting with myself. But the bottom line is we have some fundamental changes that have to take

place. We have other naval weapons programs coming down the

pike. This cannot be the norm. And if you thought tonight was unpleasant, this is nothing if we see this type of behavior with the

DDX program or any other program, now that we see these sorts

of changes.

The other part is, in fairness, we are going to write a defense authorization bill over the next 90 days. If there are portions of your

budget that are inadequate to do the duties that are required of

you, we need to know about it. If there aren’t enough people at the

academy or anywhere else in the Navy to properly supervise programs like this, now is the time to tell us. We welcome that testimony.

But the bottom line is what would happen with this program

cannot become the norm. And when I look at the two Coast Guard

programs that are simultaneously going on in some of the same

yards, or some of the same contractors, it sure looks like it is the

norm to me. And we have got to put a stop to it.

So thank you collectively for years of service, for military personnel; Secretary Etter, for putting your life on hold for choosing to

serve our Nation. But we want to fix this.

And I want to tell you, just a few minutes ago on the House floor,

Congressman Murtha, Chairman of Defense Appropriations,
26

stopped me. It is fully his intention and my intention to try to fund

two ships this year. We want to reverse that trend, and we want

to reverse that trend this year. But without the cooperation of the

uniformed personnel and without your cooperation, without solving

these problems, we are not going to get this. And I want to let you

know I want to get there. I hope you do as well.

So thank you very much.

The Chair now welcomes our second panel: Mr. Fred Moosally,

the President of Marine Systems Division in the Lockheed Martin

Company; Mr. Richard McCreary, the Vice President and General

Manager of the Marinette Marine Corporation; Mr. Mike Ellis, Executive Vice President and Chief Operating Officer of Bollinger

Shipyards; Mr. Kevin Moak, the Chairman of Gibbs & Cox, Incorporated, naval architects.

Thank you, gentlemen. You may proceed.

STATEMENT OF FRED P. MOOSALLY, PRESIDENT, LOCKHEED

MARTIN MS2

Mr. MOOSALLY. Thank you for the invitation to appear here

today. We have submitted a formal and detailed written statement

for the record, and I have a brief remark to move along here because of the time.

You have introduced our partners here on the Lockheed Martin

LCS team. I think what we have covered a lot here in the previous

panel was part of my remarks about senior leaders in the Navy,

senior leaders in the Navy commenting on the LCS. So I won’t discuss that further.

As I mentioned earlier, Lockheed Martin’s team includes Naval

architects Gibbs & Cox, shipbuilders Marinette Marine and

Bollinger, and we are the prime contractor for this program, with

the overall responsibility for program performance, and it is a responsibility that we take very seriously. We have made significant

financial investments and used the talent of our team to build the

first in this class of revolutionary warship. It has not been without

challenges, as you have pointed out, and as typical in first-of-class

warship construction.

FREEDOM is a prototype vessel set in a new acquisition paradigm using R&D funding, as you point out, in a cost-plus contract

structure. LCS has gone from concept to first ship in the water in

just over 4 years, 60 percent faster than historical shipbuilding

norms.

In addition, LCS 1 is the first combatant designed to the Navy’s

new Naval Vessel Rules and the first surface combatant classified

by the American Bureau of Shipping.

As such, we are paving the way in learning countless lessons for

the design of future U.S. Navy surface combatants such as DDG

1000 that are also being designed to the same standards. Once industry has removed the unique challenges of early learning, we are

confident of achieving a smooth production process at both of our

builders’ yards and providing the U.S. Navy with its most affordable surface combatant ever.

We have faced four major challenges in building FREEDOM.

First, a desire by the Navy to get this ship to the fleet yesterday,

allowing the warfighter to use its capabilities as quickly as pos-
27

sible. While completely understandable, this aggressive schedule

contained risk, some of which is now clearly seen as causing cost

growth.

Second, there was significant design changes within the implementation of the Naval Vessel Rules shortly after our contract was

awarded in 2004, which caused significant overlap between design

and construction and resulted in a high degree of risk and cost

challenges.

There were over 14,000 new technical requirements, and I heard

what Admiral Sullivan said. We have translated those 14,000 into

about 12,690 of the LCS 1 that we are building. These changes require significant review and adjudication to determine which of

these rules apply to Lockheed Martin LCS design.

This in turn drove many of our over 600 engineering change proposals on the lead ship. Make no mistake about it, FREEDOM and

her sister ships will be better warships because of this change, to

the great advantage of the sailors who will sail her into harm’s

way, and the ship is being built to tougher standards than originally required and bid by industry.

These improvements came with a major impact on cost and

schedule. There were a variety of external factors: the availability

of the right steel at the right time; the miscutting of the ship’s reduction gears that affected FREEDOM in unique ways. Fourth,

there were first-of-class discovery issues associated with the process of transitioning a new ship design into production.

Collectively, these four issues forced a less-than-efficient construction sequence, adding risk and cost to the effort. These firstof-class issues are regrettable. However, the U.S. Navy and the

Lockheed Martin team thoroughly understand these issues and

have procedures and suppliers in place so that future ships will not

face these same challenges.

FREEDOM is a warship, not a commercial ship. She is the first

surface combatant designed to meet the rigors of high speed, extreme ocean conditions, and extended service life. The whole structure is built of high-strength steel that provides resistance to fatigue and weapons effects and will exceed a 30-year service life. By

way of comparison FREEDOM’s structural scattlings in many cases

exceed that of the FFG–7 class which are of similar size and displacement, and are battle-proven in terms of survivability. She also

has the survivability and damage control that will enable the ship

and crew to survive battle damage and return safely to port.

We have learned much in building FREEDOM, and we will undoubtedly learn other lessons when we build our first LCS in

Bollinger shipyards, but we have done our best to flatten the learning curve by having Bollinger people present at Marinette at every

phase of construction, observing and assisting with the process and

taking those lessons learned toward our second ship.

Indeed, Bollinger has built the largest and one of the most complex modules for FREEDOM. So there is the beginning of LCS

building experience at our second shipyard.

Mr. Chairman, FREEDOM and her sister ships will be superior

warships. Sailors will take them to sea, will be proud to sail them,

and pleased with their capabilities. The Lockheed Martin LCS

team will take lessons learned from building FREEDOM and apply
28

them in an efficient and rapid way to our future vessels in this

class, to the standard our sailors deserve and our taxpayers expect.

As a former sailor myself, you have my word on that.

Thank you again for this opportunity, Mr. Chairman. I look forward to your questions.

Mr. TAYLOR. Thank you.

[The joint prepared statement of Mr. Moosally, Mr. Moak, Mr.

McCreary and Mr. Ellis can be found in the Appendix on page 76.]

Mr. TAYLOR. Anyone else on the panel wish to speak?

Mr. Ranking Member.

Mr. BARTLETT. Thank you very much for being here. Clearly, in

hindsight, you all were complicit in agreeing to the schedule which

was almost certain to increase costs. Do you have any documentation that you told the Navy that if they insisted on the schedule

that we were going to monstrously overrun the budget?

Mr. MOOSALLY. No, we do not. And I don’t think we ever believed

that—you know, this is hindsight—when we look back on what the

effect of the Naval Vessel Rules—and we certainly at the time

didn’t know it when we learned of the reduction gears. As he said,

I will say there was a sequence of disclosures on the reduction

gears that went from 2 months and we thought we could work

around the 2 months’ delay that ended up being 6 months. So there

was a series of three delays on the reduction gear.

I must say we thought we understood the Naval Vessel Rule impacts and when you give, as Admiral Sullivan indicated, when you

are handed the Naval Vessel Rules—we are given that 2 days after

contract award—the Naval Vessel Rules require interpretation to

each class of ship, and that took a period of time. I have heard 9

months. You have got a contract and start building a ship 9

months later.

During that time, we were involved in taking the Naval Vessel

Rules, seeing how they applied to our ship, an interpretation of

how they applied to our ship, working with the Navy technical authority and ABS. That took a period of time to see how that was

applied, and we thought we had characterized that. But in fact, as

we went through that process—and it took longer than we

thought—we didn’t capture all of the costs within the ECPs that

we had submitted with regard to NVR.

And I think you have characterized that very well, Congressman

Bartlett, that we didn’t capture that. And in hindsight, we could

say, well, maybe we should have said hey, let’s stop. Let’s make

sure we have complete understanding between ourselves and ABM

technical authority and the program manager of how do we, in fact,

interpret the Naval Vessel Rules, and have mature drawings that

we would have to build this ship.

But we were kind of looking, just like I said here, we were—we

had the task of trying to get this program out on a schedule, because it was needed by the warfighter, and that is how we behaved.

Mr. BARTLETT. There was a rebaselining dialogue, was there not?

How long were you engaged in that before you agreed with the

Navy that this was a realistic schedule?

Mr. MOOSALLY. We had a rebaselining of the schedule in September in 2005. The original delivery of the ship was December 2006.
29

We had an overtarget baseline discussion with the Navy in September of 2005, and in fact, got the schedule rebaselined to June

of 2007. We did not rebaseline the cost at that time. And we are

still working with the Navy to rebaseline the cost of the ship, but

we rebaselined the schedule in September or October of 2006.

Mr. BARTLETT. It seems fairly apparent from everybody’s answers that the primary problem for the overrun here was an unrealistic schedule. I am just amazed that there was nobody that

waved a red flag and said hey, this is not going to work. We had

three different organizations involved here. We had the shipyards

who were building them, who have experience in building ships of

this size; we had the prime contractor, Lockheed Martin, watching;

and we had the Navy people. And nobody apparently waved a red

flag.

Do we have a mechanism for people to anonymously tell us that

what we are doing is probably not going to work? I understand the

chain of command, and I understand whistle-blowers which—and

what happens to whistle-blowers discourages people from being

whistle-blowers. But it is inconceivable to me, Mr. Chairman, that

somebody in one of these three organizations didn’t understand

this wasn’t going to work.

What I would like to see as a result of this is some kind of thing

here: We sit, everything is going just fine, and nobody is coming

and whispering in our ear, hey, you better take a look at that. This

all comes pretty much as a big surprise to us. I would like to have

some mechanism for us, Mr. Chairman, that, you know, some email address or something with an e-mail traffic that is

untraceable, that you know, gee, you better look at this because all

is not going well. Every one of your workers are taxpayers and

their dollars could have bought more ships if this hadn’t——

Mr. TAYLOR. Will the gentleman yield?

Mr. BARTLETT. Yes, sir.

Mr. TAYLOR. Captain Ebbs is going to make that happen.

Mr. BARTLETT. I appreciate that very much.

Last question. What questions should have been asked by us of

the former panel that we didn’t ask, that we would be wiser having

asked them?

Mr. MOOSALLY. I can’t think of any. I think that, you know, in

my view, the Navy was pretty straightforward on what happened

on this program, why we were focused on schedule. We’re a ‘‘can

do’’ outfit. We tend to think ‘‘can do.’’ we tend to think we can overcome obstacles that were thrown at us. This didn’t happen all at

one time. It was sequential over a period of time, going from two

months to six months.

And you know, a lot of the stuff, if you look in 20/20 hindsight,

yes, if we had done something different to slow the thing down, to

readdress the schedule, till we had all of the drawings, I would say

yes. But our mentality, the way we thought was hey, the Navy

needs this ship, schedule is king, and we are going to work to get

this workaround here, start out with steel, get in the right steel—

because the steel, as it turns out, there is only one manufacturer

of the kind of steel in the country, and that is going to Humvee.

So we worked very hard to workaround so we could get steel

from everywhere we could to build this ship. And then we had the
30

reduction gear problem. We were told initially that the gear was

cut wrong. It would be about a two-month delay. Then the tooling

broke down and that extended it again.

But it is all sequential. And as we look back, had we known a

lot of the stuff was going to happen, would we have behaved differently? Yes, probably. I think you framed that very well when

you were talking about schedule. And I think the Navy, we would

agree with the Navy. We were all focused on we have got to get

the ship out here, the fleet needs this ship. It is a new paradigm.

We were kind of breaking ground here. We are the first ship to go

through the NVR rules and clearly it is not a fact of well, here is

the NVR rules, go put this disk in a computer and fix your drawing. It requires months of interpretation and discussion with the

Navy authorities to understand how those rules apply to the ship

that we were building.

And then I could ask Mr. Moak at Gibbs & Cox how that affects

the drawing approval process.

STATEMENT OF KEVIN MOAK, CHAIRMAN AND PRESIDENT,

GIBBS & COX

Mr. MOAK. Thank you for allowing us to be here tonight.

We did work closely with ABS early on to develop a schedule. As

these changes came in, we actually had to take products that we

had previously developed and sent to ABS for approval, and withdraw them in some cases and redo them as a result of the rules

changes. We did not understand as well as we probably should

have—I am not sure anyone could have—but we did not understand all of the downstream impacts until we got further and further into it. In fact, it took a process of over 3 months of working

directly with the United States Navy and ABS in development of

the build spec based on the NVR rules. During that time, there was

a lot of discovery on all parties’ parts on things that we are going

to need to change. And all of those impacted the schedule of delivery of product, not only to ABS for approval, but also to the shipyard to start construction.

Mr. BARTLETT. Thank you.

That is all the questions I have right now, Mr. Chairman.

Mr. TAYLOR. Admiral Sestak.

Mr. SESTAK. Thank you, sir.

Hi, sirs. Good to see you.

One thing I may have just missed. When they did what they call

the rebaselining in September-October time frame, that was not

all-inclusive of the moneys that were discussed on the vendor

issues and the construction standards?

Mr. MOOSALLY. Well, you are talking about the NVR.

Mr. SESTAK. Yes, the NVR.

Mr. MOOSALLY. We were on a fast timeline, so one of the things

that we obviously did not do correctly was to estimate the impact

of the NVR rules when we put the ECPs together, the 600 ECPs

together for more money as a result of the NVR invocation on this

ship. So we didn’t estimate that properly.

Mr. SESTAK. I didn’t mean that. I am sorry. What I was trying

to get to is you did come together with the Navy and what you

knew at that time for NVR, what you knew at that time for the
31

reduction in gear, all that was, by and large, accounted for what

you knew at the time.

Mr. MOOSALLY. What we knew at the time, I would say not all

the reduction because the reduction gear, like I said, was sequence.

I would say about a third of what we believed the impact—what

ended up being the total impact on reduction gears was in the October 2005 rebaseline. The rest of it flowed to later on.

Mr. SESTAK. So that gets to the Secretary’s point, is I had a

thought from listening to everything and some reading that, by and

large, the Navy felt that since that period of time, the primary

cause of the increasing cost had been shipyard performance. They

then came back and said no, there was some other NVRs, some

other costs. But it still left in the impression that she discussed it

that in the Navy’s mind, the continuing increase in cost was shipyard performance. Do you agree with that?

Mr. MOOSALLY. I think if you relate shipyard performance to production efficiency, then it has been affected by, you know, further

disclosure of the impact or ripple effect of the NVR rules. And I am

not going to sit up here and say we have done things 100 percent

correct. We haven’t. We have learned a lot on this program ourselves, and we have made some mistakes. But we didn’t understand. And I would say a lot of the inefficiency is the fact that we

are still, in some cases, going through rework, because we either

discovered a first-of-class ship where the drawings don’t exactly

match when you get down there and physically put something together, or the ripple effect of NVR rules.

For example, I will just give an example. If there is a pump that

has to be turned around because the vendor furnished—the material was different and we got a new pump because of an NVR

change, then that affects understanding how that affects a piping

or piping hangers or so forth, then we didn’t take all of that into

account into some cases. So there is this ripple effect that was not

accounted for, and Dr. Etter said is still having an effect somewhat,

although that is leveling out and we are getting it behind us as we

continue to build the ship and we are 75 percent complete now.

Mr. SESTAK. What does that say about the rapid acquisition

strategy that the Navy was trying to undertake in view that the

next rapid acquisition strategy would be for a new class of ships

or would be for a new type of platform?

Mr. MOOSALLY. I would say that the big lesson learned here is,

stay out of overlap in design and build, especially when you have

a two-year build cycle. This ship was going to be built in no two

years, but four, because of the issues. I think we could build it in

two years but you have to have a mature design package. You can’t

be changing drawings on the run.

And unfortunately, we bid, as Admiral Sullivan said, a commercial ship. ABS class ship was our bid. The Navy decided, for good

reasons, to make this ship a surface combatant which would be

very survivable, which it is. And that caused a lot of change.

And I would say, looking back on this stuff, that if you are going

to have a two-year shipbuilding cycle, then you have to have a mature design that we all agree on. We all sit in the room: This is

the ship we are going to build. This is the characteristics of the

ship. And I believe if you give that—and this is one of the reasons
32

we went with our mid-tier shipyards—if you give them a design

that is mature, that they can get the job done,and they can do it

cheaper, I believe, than anybody else.

And one of the reasons we went with the yard is because they

do a lot of commercial work. And a good example is during the

stop-work order where Bollinger didn’t have the ship down there

to do work on, they were able to bring in a commercial job so they

wouldn’t have to lay off their workforce. This is the beauty of midtier yards who have commercial work as well as government work,

so they are not totally relying on a government contract.

Mr. SESTAK. Admiral Sullivan said that normally the cost for the

initial ship of a class is about 20 percent more and the cost of classes of ship after that are about 5 percent. I was surprised at those

figures. I thought they were much more than that and I think——

Mr. MOOSALLY. Some are. I think some are. If you look at the

data, I think there are first-in-class ships that are much more than

20 percent.

Mr. SESTAK. If you look at DDG 1000 or SEAWOLF or a number

of others, or LOS ANGELES or others, and I will ask—I will go

back to that.

My question has to do with the Navy, understandably, wanting

313 ships, but historically these costs keep coming up. What is the

right industrial base strategy that has to be undertaken and how

can it be undertaken? You have talked about competition, you

know, by the mid-tiers. We have watched this time and again. I

mean, there is really nothing new here. What is it that we can try

to arrest this cost growth to get the Navy to the requisite number

of ships?

Mr. MOOSALLY. I think what we have to do is all sit down in a

room together—and I am talking about the decision-makers in the

Navy, the requirements section, the technical authority, the acquisition authority, and the contractor—and decide, once you have a

contractor, or even before you get a contractor, put up for bid and

decide what we are going to build. What are the requirements both

from an operational standpoint and a technical standpoint? And

then draw the line in the sand and say we are not going to change

any requirements unless we all sit in a room and decide we are

going to do that together. And therefore you don’t have the lastminute requirements that come in that now you have got to deal

with that are going to raise costs.

And there has got to be a way to get—I will call it a cosigned

check—where everybody is in a room saying what are we going to

build.

Mr. SESTAK. Of those thousands of changes that came across in

requirements—they were all requirements, right, sir?

Mr. MOOSALLY. They are technical requirements, not operational

requirements.

Mr. SESTAK. Were they all born in the PEO shop?

Mr. MOOSALLY. No. I think they were, the Navy—when they

looked—when I talked about the NVR rules the Navy decided—I

think Admiral Sullivan said they were going to make this a tough

warship, not a commercially based, ABS-based ship. So when that

happens, then the NVR rules became the replacement, I will call

it, for Gen Specs or Mil Specs.
33

Mr. SESTAK. So that was unique to this case?

Mr. MOOSALLY. This was the first ship that those NVR rules

have been invoked. And then what happened is you have to sit

down out of all of those changes and decide which ones are going

to be applicable to this ship, and that takes time. That takes——

Mr. SESTAK. To go back to your case of how to address shipbuilding at large, let us throw away the NVR because it was a unique

situation here. Do these changes still come about at all times—because that seemed to be what you focused most on, is that everyone

in a room so the requirement doesn’t change.

Mr. MOOSALLY. Right. We all have to understand—we all have

the same——

Mr. SESTAK. So the cost that really comes out is on the Navy side

that they keep changing requirements. Is that what you are saying?

Mr. MOOSALLY. I don’t want to say that. Obviously, there are

costs that would happen on things like the reduction gear that we

are responsible for.

Mr. SESTAK. Not in this case. But the value of getting everybody

in a room to sit around, I mean, it sounds good, but is the only purpose of that to keep requirements suppressed?

Mr. MOOSALLY. I think to understand—we have to obviously—I

think there has to be. And we have control boards that are set up,

the Navy does. We have as industry to make sure that we, in fact,

when you have a requirement——

And if you look at this, the ship class was based on the $22 million K process. So what you have to do if you are going to keep it—

if you are going to have a cost gap, then you have to do trades. If

you are going to add things, then okay, am I going to take something off? If you are going to be trading cost and requirements,

then you have to do that across the board.

Mr. SESTAK. The only reason I am asking is that it just seems

that almost every class I can think of with the exception of one, the

cost has been significantly different than what was the initial estimate. And if you get everybody in a room and if it is just the requirement suppression, then that means the industrial base is fine,

correct?

Mr. MOOSALLY. Well, you are going to have—as I said, you are

going to have—any first of class ship you are going to have discovery because of, you know, when you start building a ship—and I

think all ships are complex to some degree, you are going to have

first the class discovery and it is going to be probably more than

you had budgeted for.

Mr. SESTAK. All right. Thanks very much.

Mr. TAYLOR. Mr. Moosally, in listening to your description of

some of the troubles, it really does cause me to ask the question,

is the person responsible for that contract or for building the ship?

What would be your personal professional preference? Would you

prefer to have the United States Navy or the United States Coast

Guard put a set of specifications out for bid and bid on their

thoughts? Or would you prefer the design/build concept? Speaking

from the industrial side.

Mr. MOOSALLY. Yes, sir. I understand. I think that either one can

build. I think the design/build concept can work, as I said, if we
34

do that in such a way that there is not huge overlap and if we all

decide—and in this case NVR rules—that we are going to interpret

the NVR rules together and come to a common understanding of

the technical implications and the technical requirements that the

NVR rules give us, and I think if we have a common understanding

and adjudication of that up front and then have that design, mature design to go forward with, I think that would do it. We would

be able then to together decide this is what we are going to build,

this is the schedule to build what we are going to—what we have

decided to build, and I think it will work. I think that what—the

model that we set up on LCS can work going forward with a mature design, and the problem that we have had, as everybody

points out, we had a lot of churn, design churn caused by the NVR

rules coming to us basically almost simultaneously with us getting

a contract, and that caused a lot of churn on the program as we

went on to decide, okay, here is the NVR rules, how do we interpret all this change and lay that out in our design and get approval

on it. So that is kind of what happened. So if you are going to go

that route, there has to be some sequencing here that you don’t

have a lot of, I will say, overlap between design and construction.

Mr. TAYLOR. Going to the National Security Cutter, which your

company has also.

Mr. MOOSALLY. Well, sir, I would have to take a little exception.

We are not the prime contractor on the National Security Cutter.

Mr. TAYLOR. Okay. Your company is involved in.

Mr. MOOSALLY. We are providing the C4ISR system on the National Security Cutter.

Mr. TAYLOR. One of the things that came out in the Coast Guard

hearing was a very senior admiral, I want to say he is the deputy

commandant, looked at the design and said, if we build a ship like

this, and it was just way down in the build, just the most difficult

place to get to after the fact, if we build a ship like this, we will

be back in within two to three years fixing things, and we have significantly shortened the life of this ship as far as its durability. I

am using that as a for instance because my question is, when your

folks looked at the changes that were made because the reduction

gear got there late, things being built out of sequence, things having to be torn apart and rewelded, replaced, is there anyone in your

organization who is saying we are creating a problem that this

ship’s life expectancy is going to be less than it should have been,

that this ship is on track to fail in two or three years and we will

be right back in here fixing something?

Mr. MOOSALLY. Yes, sir. I would like to answer a little bit of that

and I would like to turn it over to Gibbs & Cox, who is a naval

architect, who has had a lot of experience starting with DDG–51s

and FFG–7. We believe we have a very tough ship here with a 30-

year life and don’t believe that what we have done in terms of out

of sequence work has affected that. And all the model testing done

independently by Carderock has shown that even in hurricane

winds this ship really rides well, is very survivable. So I don’t feel

that is the case Mr. Chairman, but would you like to comment on

that?

Mr. MOAK. Sure. I would be happy to. In terms of the types of

things you are talking about that would affect the service life of the
35

ship, sir, I believe primarily we would be interested in talking

about the structural adequacy of the ship. The fact that the shipbuilder had to build out of sequence did not affect in any way,

shape, or form the actual service life effectiveness of the ship. That

is based on the actual structural design. The design itself did not

change based on out-of-sequence work. The problem was that there

were—it was never the structure that was causing the problems,

it was quite frankly the distributive systems that caused them difficulty in the out-of-sequence work because we were unable to provide that information to them once we went out of sequence in as

rapid a fashion as we had hoped, and therefore there were situations where they did, in fact, as they built out of sequence, they

had problems where they—we didn’t give them enough information

early enough based on all sorts of reasons, which I am happy to

go into, that caused them in many cases to have to go in later and

change things that were already there, but that did not affect the

basic structure of the ship. So the sequencing of the build doesn’t

affect the service life of the ship.

Mr. TAYLOR. So if frames were cut and rewelded, if plates were

cut and rewelded, if piping had to be cut and rewelded, that none

of those things in your professional opinion would lead to a situation where in 5 years someone coming before this committee and

says——

Mr. MOAK. That is correct, sir. I do not believe in my professional

opinion that that is going to happen.

Mr. TAYLOR. Okay. Mr. Moosally, and again we are trying to do

two things. This committee wants to deliver the message that the

sort of mistakes that were made on the LCS are not acceptable to

the American taxpayer and not acceptable to this committee. The

second thing, we are trying to prevent it from happening again.

Part of trying to prevent it from happening again is to understand

how it happened. And what continues to trouble me, as the gears

were delivered late, as the ship is being built out of sequence, as

timelines keep getting extended, trying to walk through the construction of this vessel in my mind, I can see that some things

could happen early on and some would say, not that big a deal, not

that expensive. But as the gear takes longer and longer to be delivered you are getting farther and farther into the ship and someone

has to be saying, this is getting serious, this is getting expensive.

And at what point did someone in your organization or at what

point did someone in the Navy say, we would save a lot of money,

we would actually save time if we just stopped where we are?

Mr. MOOSALLY. Well, I will say in working with the Navy, and

we have obviously kept them informed what was going on, we

talked to the Navy about how we were going to do that, that we

are on a can-do mission that we are going to deliver the ship as

soon as we could because the requirement was, it was a scheduledriven requirement, schedule is king, and we worked very hard.

Like I said, we look back on this now with hindsight and I can tell

you, our team worked very hard to overcome every obstacle, the

steel, the reduction gears the bad vendor furnished information

(VFI), the workarounds to do our very best to deliver this ship as

fast as we could. In hindsight, was that a mistake? I guess maybe

we could say—we could have slowed down and stopped work. We
36

would have had to lay off a lot of people up at Marinette because

of the kind of work they were doing and there certainly would have

been a cost associated with that, like there would be with any stop

work order. So there was a trade. In hindsight, we may want to

look at it. We didn’t do it. I will be very honest with you, Mr.

Chairman. We didn’t do it. We had the mindset and the mentality

that we can do and we are going to build this ship for the U.S.

Navy as fast as we can, and we are going to work obstacles like

gears and steel and out-of-sequence work.

Mr. TAYLOR. So you never at any time raised in effect the red

flag to the Navy of saying, we are going to be way over budget?

Mr. MOOSALLY. We by contract are required to give the Navy a

cost report every month. So this is not like we didn’t—we have to

do that every month, okay, so they—it is not—we didn’t hide any

costs or schedule—and plus, we supplemented that with a number

of meetings that took place with the program manager and the

PEO. So we were there hand in glove, teammates and partners

with the Navy all the way on this. And there was constant transparency or continuous transparency between our cost and our

schedule, performance entities.

Mr. TAYLOR. If there is constant transparency, why is it in the

past three weeks I get a call saying a certain naval officer is being

transferred from his job but it has nothing to do with LCS. A day

later I get a call, another naval officer has been relieved of his position overseeing LCS. Two days later I get a call from Under Secretary of Defense saying I am putting a stop work order on. Obviously there wasn’t transparency. For that scenario to have occurred, something is wrong, sir.

Mr. MOOSALLY. I can’t answer that question. As I said earlier, we

are required by contract to send a cost performance report to the

Navy every month and we certainly did that, and I have no idea

why those things happened.

Mr. TAYLOR. I have a question Mr. O’Rourke would like to know,

how do you feel like your shipyard is performing now?

Mr. MOOSALLY. I think they have worked very hard. They have

overcome a lot of, I will say, overlap between design and build

here. I think we have worked very hard to overcome a lot of obstacles. I think they are performing well. We haven’t been rebaselined

with our new costs we are projecting. We are on a path. We have

laid out a plan to have our cost performance index approved on a

curve and I think we are kind of working on that, but if you want

to comment.

STATEMENT OF RICHARD MCCREARY, VICE PRESIDENT AND

GEN. MANAGER, MARINETTE MARINE CORP.

Mr. MCCREARY. Mr. Chairman, members of the committee, thank

you for the opportunity to give you testimony today. From the aspect of cost preformance index (CPI) performance on the ship, at

this point in time in Marinette we are by no means satisfied with

the performance, but the big cost drivers in that CPI performance

are out-of-sequence work, which costs a multiple of what it costs

to do it in the right sequence and new work; that is, discovered

work that is unbudgeted, that has been driven by the Naval Vessel

Rules and other issues that we are still uncovering on the ship.
37

And it is those kinds of drivers that have created such a large problem for us. From a productivity standpoint we believe overall we

have done reasonably well despite all of these things and have

done a root cause analysis on the productivity, and our overall root

cause analysis would indicate that our own productivity problems—

and by no means do I take pleasure in telling you this—are around

an eight percent problem, and we have been taking steps to address that. Some of that has been because of the churn, but nonetheless, the other portions of this are really very much attributable

to the other aspects that I gave you.

Mr. TAYLOR. If you were asked or directed by the Navy to build

a second vessel starting tomorrow, do you feel like you have a clear

understanding now of the Naval Vessel Rules or are there still

some things in your mind where you are not completely sure

whether you are building it according to the regulations as far as

the Navy is concerned?

Mr. MCCREARY. We are still on FREEDOM because the drawing

package is not fully developed as far as the change paper getting

incorporated into the drawing package. Still finding some things in

distributive systems where we are making changes to make the

systems work properly. We believe that we are very near to the tail

end of that because we are almost to the point where distributive

systems are largely completed. Once we get to that point, the only

real risk factor going forward for FREEDOM in our eye is in the

whole test and trials mode because it is a prototype and very complex propulsion system. So that is the one other factor as we go forward, but that has nothing to do with a build process per se. That

has to do with working out whatever the issues might be in the

propulsion train.

Mr. TAYLOR. Mr. Moosally, last question. And again I appreciate

you staying so late.

Mr. MOOSALLY. Yes, sir.

Mr. TAYLOR. We as a Congress are simultaneously—well, I think

it is fair to say that my ranking member, every member of this

committee very much wants to reverse the downward trend in

shipbuilding. None of us are happy that in the past six years the

fleet has shrunk by approximately 60 ships. The only way we are

ever going to turn this around is by putting more ships in the

budget, but also for those ships to operate for 30 years. One of the

things that has come off in many of the conversations that I have

had regarding this problem is a sort of acceptance that the first

ship of every class, you make your mistakes and I think some people—I am not faulting anyone. Well, your first ship is a throwaway

ship. I don’t think we can afford a throwaway ship, not at these

kinds of prices. We certainly can’t on DDX or anything. What assurances can you give this committee that when the Navy approaches us for a ship, it is going to be a viable weapon in the inventory for 30 years?

Mr. MOOSALLY. Well, Mr. Chairman, I will say this, I have been

retired from the Navy now for about 16 years but I still have blue

and gold running through my veins and I want to make sure—because I love the Navy and I still feel like a big part of it, and I

certainly personally and I know our company and my teammates

want to deliver the best ship possible and we believe today that
38

this is a 30-year ship, and we hope that that is proved out. I mean,

we have—as Mr. McCreary said, we have testing evaluation to go

through, but we feel very strongly about the survivability, the

toughness of the ship. We have seen the model testing we have

done at Carderock, the ship looks superb in hurricane winds. We

certainly want to make sure that those sailors, the men and women

who man that ship are safe, and hopefully as comfortable as they

can be in rough seas. So I feel comfortable that we will have a 30-

year ship on this first ship.

Mr. TAYLOR. And you know—and again not to belabor the point

but to make a point, you know the first five of the AEGIS cruisers

were retired at 20 years old. An incredible waste of taxpayers

money, an incredible waste of their capability. Do you see anything

in this ship, either in the modular concept, in the drive train, in

the hull design, anything in this ship where five years later someone is going to be coming before this committee and say, we saw

that coming, we didn’t address it because there was a need to get

this ship built on time?

Mr. MOOSALLY. I believe that—and my experience in the Navy

and in ships is there is always, just like your home, there is room

for improvement, and we have—I believe the Navy probably still

has a ship alteration (SHIPALT) program. We go and look at

things. Things when you run the ship that probably ought to be

changed for more efficiency, better maintenance, and so forth. I am

sure there will be changes on this ship but I think the beauty of

these ships in particular, you have this modular concept and a lot

of volume there that is not basically taken up with permanent installations of weapons, and the whole idea of LCS is you can

change out modules and reconfigure the ship for whatever threat

you are facing with Littorals. I also believe because the work we

are doing in the area for a lot of people, foreign nations are interested in this ship, the work we have done to look at how you could

adapt this ship to the needs of other countries, there is a lot of volume in this ship that allows you to do that. So I think there is a

lot of room for spiraling this ship up as the Navy gets out there

and operates a number of these LCSs, and through operations finds

out that they want to change things, either through things like

maintenance, the whole maintenance philosophy that we can build

into the ship or new flights of the ship or how you operate the ship.

Mr. TAYLOR. Mr. Bartlett.

Mr. BARTLETT. Thank you very much. You now have had a lot

of experience with these new Naval Vessel Rules and you are now

very much wiser for the experience of this program. Are you now

ready with this increased wisdom and knowledge to enter into a—

well, let me ask it this way. At what ship are you able—are you

willing to enter into a fixed price contract that is not going to blow

up? That you are going to deliver on time and if you can’t do that,

at least at the cost that you—how soon will you be ready? This, sir,

is not rocket science, as I said before. This is a sea frame. It is,

you know, it is a battleworthy fast ferry. At what point will you

be able to enter into a fixed price contract and we would be comfortable that you are going to perform?

Mr. MOOSALLY. Well, let me say that I understand the complexity issue. I believe that this—first of all, I know it is not complex
39

from a combat system standpoint compared to the Aegis system we

built for the Navy, but I would say the engineering propulsion system on this ship is very complex in comparison with the ships that

are out there today and we think that is the long pole in the tent

as far as the technical complexity of the ship. So I would agree

with the rest of the ship—the combat system isn’t as complex certainly as a lot of other ships we have out there. We are under contract for cost-plus contracts on the first ship. The first ship is an

Research, Development, Test and Evaluation (RDT&E) ship, the

second ship is Shipbuilding Conversion (SCN). And certainly we

would feel comfortable in talking to the Navy about fixed price

after we get through the testing evaluation phase on the first ship.

As part of the stop work order we are relooking at the pricing of

the ship with the Navy, the first ship, the second ship, and I am

sure we will be talking to the Navy after the first ship just the answer to the very question you asked of what kind of contract terms

and conditions would we accept on the—I would say on the third

ship going forward, and I am sure we are going to be asked on the

second ship that we haven’t started building yet. We will be answering those questions with the Navy and certainly we have to

feel comfortable that I would say, first of all, we are not going to

start a second ship without a complete drawing package because

we are not going to go through the concurrent overlap, concurrent

design/build overlap we have had here on the first ship. And at

some point when we get those mature drawings and have that experience behind us I am sure we will be talking to the Navy about

some fixed price contract of some kind.

Mr. BARTLETT. Mr. Moak, are we not going to have mature drawings when we accept delivery of this first ship?

Mr. MOAK. I am sorry. Accept delivery of which one?

Mr. BARTLETT. Will we not have mature drawings?

Mr. MOAK. Of LCS 1, you are asking?

Mr. BARTLETT. Yes, sir.

Mr. MOAK. Yes, I believe we will. In fact, that is the process

which will be in place.

Mr. BARTLETT. So they will certainly be mature. Are you readier

when you build the third one?

Mr. MOOSALLY. Ready or not, I think that is what we will be

looking at is a fixed price contract.

Mr. BARTLETT. Let me ask the representative from Bollinger, are

you comfortable, sir, that from the experience of the other yard and

information that is now available to you that you are going to be

comfortable with the delivery date and the cost that you are going

to be agreeing to?

STATEMENT OF MIKE ELLIS, EXECUTIVE VICE PRESIDENT

AND CHIEF OPERATING OFFICER, BOLLINGER SHIPYARDS,

INC.

Mr. ELLIS. Mr. Chairman, members of the committee, thank you

for allowing us to testify. To answer your question, Congressman,

we are comfortable with the schedule. We are comfortable with the

delivery date and the cost that we have submitted to the Navy at

this point. As Mr. Moosally said, we have a design that is scheduled to mature as we build this, our second vessel, and we are com-
40

fortable with that. Our engineers working with Gibbs & Cox have

met all their timelines to date on this schedule. So materials,

schedule, those are the things that we look forward to being able

to answer your questions and based on what we have seen so far,

the answer to your question is yes.

Mr. BARTLETT. So the next time you appear before this subcommittee there will be a celebration, you delivered the ship on

time and on budget rather than another hearing like this?

Mr. ELLIS. We certainly hope so, sir. Yes, sir.

Mr. BARTLETT. Thank you. I certainly hope so, too. Thank you,

Mr. Chairman.

Mr. SESTAK. Thank you, Mr. Chairman. Just two comments. Admiral Hamilton said it was about September that they began to

hear about the—he used some technical term or acquisition term

where it appeared as though the budget was differing from schedule or whatever.

Mr. MOOSALLY. I think he used the word ‘‘separate.’’

Mr. SESTAK. When did you, Lockheed Martin, first tell the Navy

that these are some real issues we have here, something the papers

said it was about March or so.

Mr. MOOSALLY. Like I said, every month. If you got a copy——

Mr. SESTAK. When did that begin?

Mr. MOOSALLY. Cost performance report, it is a monthly report,

you give the most likely, best case, worst case, there are three columns on it.

Mr. SESTAK. Yes, sir, I know that. But when did you see at Lockheed Martin the cost going awry?

Mr. MOOSALLY. It was on a monthly basis.

Mr. SESTAK. When did that month begin? What month was that?

Mr. MOOSALLY. It was probably somewhere in the summer of

2005.

Mr. SESTAK. Summer of 2005. You said it was September of

2006—I meant after the 2005.

Mr. MOOSALLY. Summer of 2006, yeah. I am sorry.

Mr. SESTAK. I guess my only comment is I guess—there is two

things as I look at it all, not just LCS, but because I think this

really is—this has happened before. I find on the one hand there

is a conspiracy of optimism where we have this overconfidence in

our ability to produce on the industrial side, and on the uniform

side we believe, and we believe at times because it fits, and it

makes the budget come out. The problem is the second point is, is

what are the consequences? I mean, is it an O–16 removed? I don’t

think that is it. I don’t think it is the people. They are trying their

best. But in this conspiracy of optimism, the programs—despite

this annual perennial cost growth, the programs continue. There

really aren’t consequences, and I just don’t know as we go into the

future and as the Navy is trying to get the requisite number of

ships with the war at $14 billion a year, the Expeditionary Fighting Vehicle, as you saw on the front page of The Washington Post, Coast Guard cutter, of course that is not in the Defense Department although Navy does pay portions of what goes on it, Army

modernization program, 92,000 more troops that we need they say,

GPS, you know, I am concerned. It gets back to my question about

how do you approach this so it doesn’t happen? Because the con-
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sequences may not be where Congress stops it and says, maybe it

should have at other times, you know, this is unacceptable. We

don’t want this national treasure—you know, this positive degree

of optimism just keeps rolling on but truly it becomes that—boy,

there are all these other competitions, these other issues that are

competing for the marginal dollar, and the Navy doesn’t get its requisite number of ships. What is the process again? To somehow

come to grips with, is there a better way when you look at shipyards around the world and other places, is there a better way to

bring the parties together to somehow in addition to requirements,

suppression once they are stated, to truly bring it in on what they

are saying they are going to bring it in upon? Is there anything

else to be done?

Mr. MOOSALLY. I think there is always room for improvement.

You know, we talk about a lot of Lean 6 Sigma things and I think

there is a lot of things we can learn how we are going to do things

differently. The full circle is government and industry working together.

Mr. SESTAK. Lean 6 was throughout the Navy, as you know, the

last sigma was the last few years. I mean is there any process?

Mr. MOOSALLY. I think there is a way to improve process but as

I say, you have to look at the entire process from beginning to end

and it just can’t be the government or just can’t be industry. It has

to be us working together to improve the way we do things and I

think there is certainly an opportunity to do that.

Just the two things that I learned in the Navy is invest correctly

in people and in systems, but be accountable. It just seems as

though this conspiracy of optimism, somehow we have to come to

grips with it because it isn’t permitting us to plan well in what I

think 77 million baby boomers retired and all that, it is not going

to permit us to get the kind of capability we want out there in the

future. And somehow some accountability in this process isn’t

brought out, and it is just not relenting in 2006.

Mr. SESTAK. Thank you.

Mr. MOOSALLY. Thank you.

Mr. TAYLOR. Last question for Mr. McCreary. When did the CPI

decrease to an unacceptable level? And did you work with the Navy

immediately to correct that? What was the timeline?

Mr. MCCREARY. In general, sir, I would tell you our CPI was

never acceptable to us virtually from the beginning as we started

dealing with a lot of the change, and that was probably after—that

was probably after the first quarter of 2005, and I mean, compared

to our usual experience on other government and commercial programs, because of the rate of change and so on, we never were at

a point where we thought that we were performing overall in the

program the way we would want to. And the real issue there was

we were trying every work-around and every strategy to try and

improve that at a time when we were finding more and more and

more new work and change work. And unfortunately we never

caught up, and never—I don’t honestly believe had any real way

to catch up because it was a constant process of discovery.

Mr. TAYLOR. So if it was never acceptable, when did it get so bad

that an Under Secretary of Defense had to stop the program?
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Mr. MCCREARY. Well, I believe that it was a steady decline in the

summer of 2006 prior to launch, and you heard, I believe the Navy

testified that the expectation was that post-launch we would start

to see an improving CPI, and in fact I believe that we will start

to see an improving CPI as we get through the majority of this

change, and the rate of change has been decreasing, but it was not

immediately upon launch, and we still are dealing with a lot of

that change. But as I say, the change—the rate of change is decreasing, and we are—because of the maturity as far as the percentage of completion, roughly 75 percent complete, getting to the

time when distributive systems will be complete, and once we get

there, we then move into the phase of doing work on the ship that

we originally had intended to do on the ship.

Mr. MOOSALLY. In the water?

Mr. MCCREARY. In the water, correct, as opposed to in the module stage or in the erection stage. And those have been the effects

that have just compounded the problem.

Mr. TAYLOR. How many of these problems were you aware of

when you were gracious to host the committee to your shipyard in

late August, early September? Because my recollection is everything was fine, everything was on budget. I don’t recall the presentation made by your yard as being anywhere near——

Mr. MOOSALLY. I don’t believe we would have covered that. We

would not—certainly would not have provided information that

wasn’t accurate. And I don’t believe that we discussed CPI during

that tour, but like I said, the Navy has been aware, we have

worked with the Navy and I believe the Navy testified that they

have insight into our CPI every month.

Mr. TAYLOR. Well, we will have some additional questions for the

record. And again I very much appreciate you being here. Mr.

Ranking Member, do you have any questions?

Mr. BARTLETT. Thank you all very much for your service and

apologies that it took so long. Thank you for being so patient. If

questions come to you that we should have asked the prior panel,

we have several days in which we can submit questions for the

record to them. Would you please indicate to us questions that you

think you and us would be the wiser for having asked them? If you

will do that, we will ask those questions for the record.

Mr. MOOSALLY. Yes, sir.

Mr. BARTLETT. Thank you very much.

Mr. TAYLOR. Committee stands adjourned.

[Whereupon, at 8 p.m., the subcommittee was adjourned.]
A P P E N D I X

FEBRUARY 8, 2007

PREPARED STATEMENTS SUBMITTED FOR THE RECORD

FEBRUARY 8, 2007

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QUESTIONS AND ANSWERS SUBMITTED FOR THE

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QUESTIONS SUBMITTED BY MR. TAYLOR

Mr. TAYLOR. Were Navy Acquisition personnel receptive to your concerns, did they

provide the necessary resources and guidance to overcome the challenges, and were

you ever disconcerted about the way the Navy Acquisition personnel were addressing your concerns?

Mr. MOOSALLY, Mr. MOAK, Mr. MCCREARY and Mr. ELLIS. The Lockheed Martin

Team maintained constant dialogue with the LCS Program Office and the Navy’s

program manager listened to our program concerns. Early in the program, we established bi-weekly Program Manager-to-Program Manager meetings to discuss key

issues and identify solutions to problems as they arose. Each issue was thoroughly

vetted and decisions were made to accept or reject each potential solution. In addition, Lockheed Martin provided the Navy LCS Program Office regular production

status and cost data including Contract Performance Reports (CPR) which have

been submitted monthly since the program began. As design changes were made

and costs continued to grow we moved to weekly status meetings where we discussed cost reduction opportunities. When the Lockheed Martin Team presented alternatives to reduce costs the Navy Program Manager provided guidance on whether these alternatives could be implemented.

Mr. TAYLOR. Did anyone on the Lockheed Martin team make a request to PEO

Ships, Admiral Hamilton, or the LCS Program Manager, Captain Babcock, to convey

cost growth concerns to Dr. Etter prior to December 18, 2006?

Mr. MOOSALLY, Mr. MOAK, Mr. MCCREARY and Mr. ELLIS. The monthly Contract

Performance Reports that Lockheed Martin submitted since the start of the program

highlighted the Best Case, Worst Case, and Most Likely cost estimates based on actual costs experienced and estimates to complete construction. In addition to these

mandatory, regular cost reports, our team provided multiple in-depth presentations

that included cost updates to the program office and also briefed PEO Ships on LCS

costs on 15 September 2005, 25 April 2006, 16 August 2006, 31 October 2006, 29

November 2006, and 18 December 2006. Our expectation was that the data would

be reviewed at the appropriate Government levels. We were surprised to learn, in

December 2006, that senior Navy leaders were surprised by cost growth on LCS

given all the communication we had with the Program Office and PEO.

Mr. TAYLOR. Was construction ever conducted on LCS 1 using designs that were

not approved?

Mr. MOOSALLY, Mr. MOAK, Mr. MCCREARY and Mr. ELLIS. No, the entire functional design was approved at the December 2005 Final Critical Design Review

(FCDR) and the Build Specification was approved in January 2006 prior to construction start in February 2006. Subsequently, ongoing interpretation of sub-tier specification references and ABS analysis and modeling resulted in changes to these designs. Final adjudication of the Build Specification with Naval Vessel Rule (NVR)

implementation also caused changes to designs that impacted construction by creating significant design-construction overlap.

Mr. TAYLOR. If so, who was the approval authority within Industry and the Navy

to proceed with Construction, and what consequences did you experience by using

unapproved designs?

Mr. MOOSALLY, Mr. MOAK, Mr. MCCREARY and Mr. ELLIS. N/A

Mr. TAYLOR. Did you fully understand the design approval process and the identity of all approval authorities? Did this process or those individuals change due to

the incorporation of NVR?

Mr. MOOSALLY, Mr. MOAK, Mr. MCCREARY and Mr. ELLIS. The design approval

authorities were identified from the beginning as the American Bureau of Shipping

(ABS), Naval Technical Authority (NTA), and the Navy’s Supervisor of Shipbuilding

(SUPSHIPS). However, the approval processes, roles, and responsibilities were not

clear. LCS 1 is the first warship designed to NVR and classed by ABS and, as a

result, this was the first time that all three of these organizations were required

to coordinate design review and approval.

Mr. TAYLOR. What incentives do you have, under a cost-plus contract, to minimize

costs to the taxpayers?
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Mr. MOOSALLY, Mr. MOAK, Mr. MCCREARY and Mr. ELLIS. Cost plus contracts are

appropriate for the LCS lead ship as it is an RDT&E funded ‘‘prototype’’ vessel with

significant development risk. Cost plus vehicles are an effective way of balancing

the significant risk between Industry and Government when there is no effective

way to accurately estimate costs due to the uncertainty of contract performance. A number of factors motivate the Lockheed Martin Team to minimize costs on

LCS. First, the LCS acquisition plan placed a $220M (FY05 dollars) cost cap on ship

price. Failure to meet this price in the initial proposal submission would prevent

award and this cap is still in place for follow-on LCS ships. Second, the LCS program has remained competitive with two primary suppliers, Lockheed Martin and

General Dynamics, working to provide the best LCS solution at the minimum price

to maximize the number of ships awarded to their teams. Third, the current LCS

contracts are Cost-Plus Incentive/Award Fee (CPIF/AF) structures. There are two

components of the fee available for contractors to earn. The incentive fees are

earned only if the contract cost does not exceed a certain threshold. The award fees

are earned through the Government’s evaluation of the contractor’s ability to control, adjust, and accurately project costs using the award fee criteria stated in the

contract. The evaluation results in an award fee payment if the contractor has met

the minimum criteria. Lockheed Martin’s Incentive/Award Fee has been significantly impacted as a result of the cost growth on LCS 1. Evidence of Lockheed Martin’s commitment to minimizing the cost and risk in the

program includes our corporate investment to mature the ship design prior to contract award to ensure we could meet production schedules with minimum risk. We

have continued to make significant investments in the program to help offset cost

increases and to ensure we can produce affordable LCS platforms.

Mr. TAYLOR. In what ways was it communicated to you that schedule was the primary priority for the LCS program?

Mr. MOOSALLY, Mr. MOAK, Mr. MCCREARY and Mr. ELLIS. From the beginning of

the program the emphasis was placed on producing LCS ‘‘at the speed of heat’’ in

accordance with direction by the CNO Admiral Clark. In fact, the FY03 President’s

Budget identified a seven month Final Design Phase and 24 month Build Cycle, unprecedented in Naval surface combatant programs. Senior Navy leadership continued to emphasize an accelerated schedule to meet urgent fleet needs. Lockheed Martin’s LCS contract award fee criteria also reflected the schedule priority with the

majority of the criteria emphasizing meeting program schedules and timely milestone completion. The priority for this event driven criteria was:

• Schedule

• Technical

• Cost

Examples of schedule driven milestones tied to award fee include start construction, keel laying, landing of gas turbines, water jet installation, and launch.

Mr. TAYLOR. Lockheed testified that it sends monthly reports with LCS cost information to the Navy. In which of these monthly reports did Lockheed first attempt

to alert the Navy regarding the potential for significant cost growth on LCS–1?

Mr. MOOSALLY, Mr. MOAK, Mr. MCCREARY and Mr. ELLIS. The Contract Performance Report (CPR) is a mandatory management report submitted monthly starting

from contract award. Each report shows Best Case, Worst Case, and Most Likely

cost estimates and describes the risk associated with each number. Specific cost

drivers were highlighted and discussed in each report. We began to recognize and

report cost increases as early as September 2005 and costs increased steadily

throughout 2006. As challenges such as material delays continued to impact cost we

continued to report growing cost estimates in the monthly reports.

Mr. TAYLOR. Does Lockheed believe that its representations to Navy officials in

2006 about cost growth on LCS–1 were being transmitted to senior Navy leadershipmeaning the Secretary of the Navy, the Chief of Naval Operations, and the Navy

Acquisition executive-in a sufficiently full and timely manner?

Mr. MOOSALLY, Mr. MOAK, Mr. MCCREARY and Mr. ELLIS. Lockheed Martin is not

aware of who or when ‘‘senior Navy leadership’’ was notified. However, we were surprised to learn in December 2006 that senior Navy leaders were surprised by cost

growth on LCS.

Mr. TAYLOR. How would you characterize the performance of the shipyard in

building LCS–1 in the months since that ship was launched?

Mr. MOOSALLY, Mr. MOAK, Mr. MCCREARY and Mr. ELLIS. Neither Lockheed Martin nor Marinette Marine Corporation (shipyard) is satisfied with the performance

since the LCS–1 launch; however, there are many factors driving this performance

including.

• High degree of out of sequence work
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• Significant Navy directed design changes which are driving higher than expected rework on the ship

Two primary drivers are negatively impacting performance. The first is the

amount and type of work that is being done post-launch, pier-side, that was originally planned to be completed more efficiently within the construction/erection facilities pre-launch. This work was delayed until after launch in order to meet the

launch schedule as agreed to between the U.S. Navy and Lockheed Martin. The second is the unanticipated amount of re-work we are still experiencing as a result of

NVR-related design changes. While not as rapid as we had predicted, the performance trend has been positive for four of the last five months.

Mr. TAYLOR. Is there any concurrency in design and construction on LCS–3? If

so, how much of an adjustment in the construction schedule for this ship would be

needed to eliminate this concurrency? If this adjustment is made, how would it affect Lockheed’s ability to execute in a timely way any additional LCSs that are authorized for FY 2008?

Mr. MOOSALLY, Mr. MOAK, Mr. MCCREARY and Mr. ELLIS. No, as a result of lessons learned on LCS–1, we have developed a plan to complete the LCS–3 design

updates and changes prior to the start of construction of the associated item. This

effort was on schedule before the stop work order was issued. Given this plan to

eliminate concurrency, Lockheed Martin expects to be able to execute any ships

awarded in FY 2008 on schedule.

Mr. TAYLOR. Do the estimated costs of LCS–1 or LCS–3 reflect systems, components, or materials provided by vendors at reduced prices, as part of an effort by

those vendors to secure a role in the 55-ship LCS program? If so, how much more

expensive might these systems, components or materials become on later LCSs? Is

this a source of concern regarding the potential for cost growth on follow-on LCSs?

Mr. MOOSALLY, Mr. MOAK, Mr. MCCREARY and Mr. ELLIS. Lockheed Martin’s subcontractors do not disclose this information. However, the sub-contractor cost increases we have experienced from LCS–1 to LCS–3, appear to be primarily due to

economic inflation.

Mr. TAYLOR. If one of the two yards building Lockheed’s version of the LCS proves

to be consistently superior to the other in building LCSs, is Lockheed prepared to

consolidate production of its LCSs at the superior yard?

Mr. MOOSALLY, Mr. MOAK, Mr. MCCREARY and Mr. ELLIS. The Lockheed Martin

team has two shipyards to ensure that we can meet the U.S. Navy’s maximum production rate planned for LCS. These two shipyards provide the added benefit of

being able to share design, material procurement, and production resources as necessary to ensure each ship is delivered on schedule and within budget. Lockheed

Martin continuously evaluates the performance of all subcontractors, including the

shipyards. We will consider all alternatives and take appropriate action in the event

a subcontractor is not performing in accordance with expectations. Our objective is

to provide the most cost effective, highly capable LCS platforms to the U.S. Navy

and the taxpayers.

Mr. TAYLOR. What added value do you believe Lockheed Martin provides as the

lead systems integrator?

Mr. MOOSALLY. Lockheed Martin is not a lead Systems Integrator on the LCS program. Our role on LCS is the prime contractor and Mission System provider. As the

prime contractor we are establishing a new shipbuilding paradigm by enabling cost

efficient mid-tier shipyards like Marinette Marine and Bollinger Shipyards to participate in a complex shipbuilding program like LCS. Lockheed Martin brings significant experience in managing large, complex defense programs. Our shipbuilding

experience includes the design and prime contract management of the Sea Shadow,

SLICE, AGOR 26, and E-Craft vessels. We have over 30 years of combat system integration experience on 7 ship classes for 6 different navies. We designed numerous

electronics spaces on DDG–51 Class ships as well as the entire topside spaces on

CG–47, DDG–51, the Spanish F100 Class Aegis Frigate, and the Norwegian F 310

Class Aegis Frigates. This experience includes the detailed design and integration

of all combat system related ship compartments. Lockheed Martin also brings the

ability to surge capabilities only when needed, so the Customer does not have to

pay for significant management overhead when the specific capability is no longer

needed. On LCS–1 we have provided significant program management, master planning, material procurement and quality assurance personnel to augment the shipyard’s indigenous resources. As the Mission System provider, we are responsible for

the design, development, production and support of the LCS Core Mission System

including command & control, sensors, weapons, communications, etc.

Mr. TAYLOR. When you submitted your proposal in response to the Request for

Proposal for Preliminary Design, you were aware that the Navy had established an
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objective and threshold cost targets. At any time, did you believe that Lockheed

Martin could not deliver LCS Seaframes that could not meet the threshold target?

Mr. MOOSALLY. No, when we submitted our proposal we showed that we could

meet the $220M cost cap. After contract award, the Navy directed the implementation of the Naval Vessel Rules (NVR) which resulted in significant design changes

and greater than planned design-build concurrency. Coupled with material delays

for steel and reduction gears, these issues caused cost growth resulting in a price

above $220M. As stated by VADM Sullivan during his testimony to the HASC on

8 February 2008 ‘‘. . . the ship that we bid and the ship that we costed out is not

the same ship that we’re buying today . . .’’

Mr. TAYLOR. Which cost drivers do you believe will result in re-occurring cost for

LCS?

Mr. MOOSALLY. Inflation as well as additional labor and material costs associated

with engineering changes implemented on LCS–1.

Mr. TAYLOR. You have built many other ships for the government, Coast Guard

Ice-Breakers, Barges, Tug Boats; did you ever start those ships without final design

plans?

Mr. MCCREARY. Yes. MMC has constructed ships for commercial and government

customers and has started construction without some of the final (detail) design

plans being completed. MMC’s process is a modular construction process. The Detail

Design is partitioned by zone and completed in support of the zone construction

schedule. Our approach includes the following prior to construction start:

a. The Functional Design (diagrams, calculations, scantlings) is complete and

submitted to ABS for approval

b. Long Lead Equipment specifications are complete and equipment is placed

on order

c. Detail Design is started and completed for each construction zone 2 to 4

months prior to the construction start for that zone.

Mr. TAYLOR. Did you ever ‘‘push back’’ to the Lead System Integrator when you

were directed to proceed with construction even though the final plans were not

available?

Mr. MCCREARY. Our team planned to construct the LCS vessels in a manner similar to MMC’s and Bollinger’s experience utilizing the modular construction process.

In using that process, Functional Design as well as the Detail Design for the Zone

under construction is completed 2 to 4 months prior to construction start. On the

LCS, our team completed the Preliminary Design and had ‘‘invested’’ in furthering

that design prior to contract award in order to mitigate the risk associated with developing the Detail Design. Upon contract award, design specifications were

changed due to Naval Vessel Rule implementation. After construction start, when

many design plans were arriving incomplete, MMC, on multiple occasions, made the

Prime Contractor (Lockheed Martin) aware of that fact and the resulting impact it

was having, and was going to have, on construction cost and schedule. MMC and

the Prime Contractor made the customer aware of the situation and worked to minimize the impact.

Mr. TAYLOR. What steps have you taken to transfer learning curve efficiencies to

Bollinger shipyards?

Mr. ELLIS. Bollinger engineers and production supervisors were involved with

Marinette Marine in major construction planning decisions on LCS–1 and established a formal lessons learned capture process at the beginning of the LCS program

to accelerate Bollinger’s learning.

Our Team is executing LCS–3 in an environment unlike that of LCS–1. LCS–3

has a more mature design, with 80% of detailed design unchanged from LCS–1 and

70% of LCS–3 design already approved by ABS. In addition, we are utilizing the

existing vendor base to stabilize Vendor Furnished Information (VFI). Our Team

conducted a comprehensive assessment of risks from LCS–1 for applicability on

LCS–3 and is proactively putting in place corrective actions on LCS–3. The following

are factors that are mitigating risks experienced on LCS–1:

• All purchase orders have been placed for LCS–3 material in advance of the

required dates and 63% of all required material is already on order, all with

delivery commitments in advance of in yard need dates.

• A dedicated LM LCS–3 Team was established five months in advance of contract award, containing key personnel with extensive program management

experience on U.S. Navy ACAT I programs.

• A comprehensive set of metrics has been established to track performance on

LCS–3. The metrics are reviewed on a weekly basis, at the performing area

level and with executive management.
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• A path finder approach has been implemented for LCS–3 to closely watch and

measure performance the first time a process is executed (e.g. design release

process). This vigorous process allows us to identify issues and take corrective

actions before repeating the same mistake numerous times. The approach has

yielded a 48% reduction in the average time for review of drawings.

• A negotiated Memorandum of Understanding with ABS that establishes

timelines for ABS review and approval of design changes.

• The work performed by Bollinger on LCS–1 to construct the largest and one

of the most complex ship modules has given our production staff first hand

experience in building from LCS design products in advance of construction

start on LCS–3. This early exposure has allowed the Team to accelerate the

LCS–3 production learning curve and demonstrate design producibility at

both shipyards

Mr. TAYLOR. At which of your shipyards, do you plan to build LCS?

Mr. ELLIS. LCS–3 will be constructed at our Lockport, LA facility. We will draw

upon the resources of over 3000 employees from 14 Bollinger shipyards to ensure

the success of LCS–3.

Mr. TAYLOR. As Lockheed Martin became aware of the implications of NVR and

the delay in delivery of the reduction gear, did you keep the Navy fully informed

of all these issues?

Mr. ELLIS. Yes, as we assessed the impact of NVR and the significant number of

resulting design changes, and experienced issues such as the material delays, we

communicated with the Navy through numerous methods including day-to-day programmatic communications, our bi-weekly Program Manager-to-Program Manager

meetings, monthly Contract Performance Reports (CPR), and periodic briefings and

site visits with PEO Ships throughout 2005 and 2006.

Mr. TAYLOR. What process does Lockheed Martin have in place to ensure that if

additional specifications and/or requirements were added to the program from this

point forward they would be thoroughly reviewed to ensure we understand the full

cost and schedule impact BEFORE we move forward?

Mr. ELLIS. Now that the LCS ship design is nearing completion and LCS–1 is over

75% constructed we have a true baseline from which we can assess material and

labor changes with much greater accuracy. Together with the Navy as we move to

LCS–3, we have implemented changes in the Configuration Management (CM) process to better track design changes and effectively asses change impact to cost and

schedule. Specifically:

• LCS Team made the decision that no change will be implemented until all

design impacts are thoroughly reviewed and approved by ABS and the Navy

Technical Authority and cost and schedule impacts have been assessed and

agreed with Lockheed Martin Team and the Navy.

• Established strict schedules with ABS and Naval Technical Authority to ensure potential changes and issues are highlighted early.

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