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37–891 2008

[H.A.S.C. No. 110–76]

SURFACE COMBATANT CONSTRUCTION

UPDATE

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

JULY 24, 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

HEATH BOPE, 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:

Tuesday, July 24, 2007, Surface Combatant Construction Update ..................... 1

APPENDIX:

Tuesday, July 24, 2007 ............................................................................................ 47

TUESDAY, JULY 24, 2007

SURFACE COMBATANT CONSTRUCTION UPDATE

STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

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

Seapower and Expeditionary Forces Subcommittee .......................................... 2

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

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

WITNESSES

Francis, Paul L., Director, Acquisition and Sourcing Management Team, Government Accountability Office ............................................................................. 9

Gilmore, Dr. J. Michael, Assistant Director for National Security, Congressional Budget Office ............................................................................................. 5

Labs, Dr. Eric J., Senior Analyst, Congressional Budget Office .......................... 7

O’Rourke, Ronald, National Defense Specialist, Congressional Research Service .......................................................................................................................... 4

Stiller, Allison, Deputy Assistant Secretary of the Navy for Shipbuilding;

Vice Adm. Paul Sullivan, Commander, Naval Sea Systems Command, U.S.

Navy; Rear Adm. Barry McCullough, Director, Warfare Integration; Dub

Summerall, Executive Director for Surface Combatants, Program Executive

Officer, Ships beginning on ................................................................................. 27

APPENDIX

PREPARED STATEMENTS:

Francis, Paul L. ................................................................................................ 90

Gilmore, Dr. J. Michael joint with Dr. Eric J. Labs ...................................... 67

O’Rourke, Ronald .............................................................................................. 51

Stiller, Allison, joint with Vice Adm. Paul Sullivan, Rear Adm. Barry

McCullough, and Dub Summerall ............................................................... 116

DOCUMENTS SUBMITTED FOR THE RECORD:

[There were no Documents submitted.]

QUESTIONS AND ANSWERS SUBMITTED FOR THE RECORD:

Mr. Bartlett ....................................................................................................... 137

Mr. Forbes ......................................................................................................... 139

Mr. Sestak ......................................................................................................... 138

Mr. Taylor ......................................................................................................... 137

(1)

SURFACE COMBATANT CONSTRUCTION UPDATE

HOUSE OF REPRESENTATIVES, COMMITTEE ON ARMED SERVICES, SEAPOWER AND EXPEDITIONARY FORCES SUBCOMMITTEE, Washington, DC, Tuesday, July 24, 2007.

The subcommittee met, pursuant to call, at 2:06 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.

I want to apologize to all of our witnesses. It is not that what

you are doing is not important. They have, unfortunately, called a

caucus meeting of the Democrat Party, and so that explains these

guys. Now, Roscoe will have to tell you where those guys are.

But anyway, the committee will come to order.

The purpose of this afternoon’s hearing is to receive testimony on

the progress of the construction of the Navy’s surface combatant

fleet. Testifying today are representatives of the Department of the

Navy, along with independent experts from the Congressional Research Service (CRS), Congressional Budget Office (CBO), and the

Government Accountability Office (GAO).

On behalf of the entire subcommittee, I welcome the witnesses

and look forward to their testimony.

Today’s first panel is composed of our independent experts in

ship operation and construction. They are Mr. Ronald O’Rourke, a

Specialist in National Defense from the Congressional Research

Service; Mr. Michael Gilmore, Assistant Director for National Security Research; Dr. Eric Labs, Naval Analysis, Congressional Budget

Office; and Mr. Paul Francis from the Government Accountability

Office.

The second panel is composed of representatives from the Department of the Navy: Vice Admiral Paul Sullivan, Commander,

Naval Sea Systems Command; Mrs. Allison Stiller, Deputy Assistant Secretary of the Navy for Ships; Rear Admiral Barry

McCullough, Director of Warfare Integration on the staff of the

Chief of Naval Operations; and Mr. Dub Summerall, Executive Director for Surface Combatants Office and the Program Executive

Officer (PEO).

Again, I thank the witnesses and welcome them here today.

The subcommittee has asked the witnesses to give an update on

the construction status of four of our major shipbuilding programs

for the Littoral Combat Ship (LCS), the San Antonio class amphibVerDate 22-MAR-2001 14:24 Sep 16, 2008 Jkt 037891 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 C:\DOCS\110-76\205280.000 HAS2 PsN: HAS2
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ious assault ship, the Arleigh Burke class destroyer, and the Gerald

Ford class aircraft carrier.

This subcommittee, and I believe this Congress, is committed to

restoring the nation’s fleet and preserving the strike and expeditionary warfare capability of the Navy and Marine Corps. This is

vitally important for the long-term security of our nation. Decisions

we make concerning the status of the fleet will have effects for decades to come. We need to get this right, and we need to do it now.

Only the Navy and the Marine Corps embarked with the expeditionary strike groups have the ability to respond to crises anywhere

in the world on short notice with overwhelming force in the face

of an enemy or significant humanitarian aide in the event of a natural disaster. Our nation must maintain this capability.

However, cost and schedule overruns on virtually every Navy

shipbuilding program threaten to sabotage the goal of a 313-ship

Navy envisioned by the chief of naval operations.

This year we have seen a total restructuring of the Littoral Combat Ship program caused by over-optimistic predictions of cost and

scheduling. The Marine Corps Expeditionary Fighting Vehicle

(EFV) has likewise suffered optimistic cost and schedule performance. The Coast Guard Deepwater program has been beset by technical and performance issues.

Everywhere this Congress turns, there is another major program

suffering from either poor management, technical challenges or

both. There is not an unlimited supply of funding for these programs, and right now the Mine Resistant Ambush Protected

(MRAP) vehicle program must have Congress’s and the Department’s top priority, because these vehicles can save lives today.

This hearing is important. We need to understand all the challenges facing the ship construction program so that we can make

informed decisions for the future force.

I again thank our witnesses and look forward to your insights on

these important matters.

I now recognize my partner and former chairman of this committee, the Honorable Roscoe Bartlett of Maryland.

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

EXPEDITIONARY FORCES SUBCOMMITTEE

Mr. BARTLETT. Thank you, Mr. Chairman. Mr. Taylor, I want to

thank both panels of witnesses for being with us today. I understand that many of my colleagues have a hard stop at 4 p.m. this

afternoon, so I will keep my remarks brief in the interest of getting

to our witnesses’ statements.

I would really like to thank the chairman, as well as the witnesses from the Navy, for today’s format. So often we have nonDOD witnesses testifying in the second panel. These witnesses

often have very perceptive insights, but when they testify last, it

does not allow the members to follow up with questions for the

DOD. Today we have a chance to hear from these witnesses and

then immediately discuss some of the oversight issues they have

raised with the subject matter experts from the Navy.

Although I expect that much of today’s hearing will focus on the

persistent challenges at LCS and LPD–17 programs, I am glad we

3

will be getting an update on DDG–1000 and CVN–21. I understand

that, as these programs come closer to completion design and the

start of construction, they, too, are facing serious schedule costs

and weight challenges.

I am especially interested in how the Navy is applying lessons

learned from LCS and LPD–17 to these shipbuilding programs to

avoid similar pitfalls as detailed design concludes and construction

begins.

With respect to LCS, I was dismayed to learn of additional

schedule slippage on LCS–1 and the further potential impact of

workforce challenges at Marinette Marine. I would like the Navy

to provide us with a detailed update on the construction phase to

both LCS–1 and LCS–2.

I would also like the Navy to address the status of LCS–4. What

are the cost trends for this platform? What actions is the Navy taking to ensure equitable treatment between the two contractors?

As well, we have heard a number of disturbing stories in the

press recently regarding LPD–17. I would like to understand what

risks remain in the completion of construction and performance of

LPD–17, 18, and 19 in particular.

What lessons has the Navy learned about accepting delivery of

ships prior to the completion of construction? Has the Navy ever

done this before? Does the Navy believe it may have to do it again?

What types of contractual remedies could have prevented such a

situation?

Finally, I am concerned about the impact that a potential shortage of steel may have on our shipbuilding programs. It is my understanding that the Defense Contract Management Agency

(DCMA) recently conducted an industrial capabilities assessment

for the MRAP program. According to this assessment, the limiting

factor for producing large quantities of MRAP vehicles is material

constraint, and not the production capacity of the prime contractors.

Tires and specialty mil-spec thin-gauge armor plate are the two

primary material constraints limiting production. It is imperative

we understand how the consumption of these materials for MRAP

will impact other DOD programs, particularly the shipbuilding programs this subcommittee oversees.

There is no reason why we should learn six months from now

that another critical platform cannot be delivered or has experienced excessive cost growth because all the steel has gone to

MRAP. It is incumbent upon the Department to do a thorough

evaluation of these impacts now and for members to fully understand the hard choices that will have to be made.

All of our witnesses, DOD and non-DOD, are performing an important job for our warfighting. Again, thank you for being here,

and I look forward to your testimony.

Thank you, Mr. Chairman.

Mr. TAYLOR. I thank the gentleman.

Sheriff Ellsworth, do you have an opening statement?

Mr. ELLSWORTH. No, sir.

Mr. TAYLOR. Okay.

With that, the chair would now recognize, I would hope, in this

order. We will start with Mr. O’Rourke.

4

STATEMENT OF RONALD O’ROURKE, NATIONAL DEFENSE

SPECIALIST, CONGRESSIONAL RESEARCH SERVICE

Mr. O’ROURKE. Chairman Taylor, Ranking Member Bartlett, distinguished members of the subcommittee, thank you for the opportunity to testify today on these programs.

With your permission, I would like to submit my statement for

the record and summarize it for you briefly.

Mr. TAYLOR. Without objection.

Mr. O’ROURKE. Concurrency between design and construction

was a significant cause of cost growth on the LCS. Avoiding such

concurrency is an old lesson in defense acquisition. In this sense,

the LCS program is not so much an instance of new lessons

learned as of old lessons that were forgotten.

Over the last several months, the Navy has maintained its support for procuring 55 LCSs. Continued stability in plan numbers

can help control costs. At the same time, however, there is a risk

of industry receiving an implicit message from the Navy that for

the LCS substantial cost growth does not pose a significant threat

to planned numbers. Such a message might not be conducive to rigorous cost control.

As the cost of the LCS increases, it puts added pressure on the

shipbuilding budget. But the more pressure there is on the shipbuilding budget, the more Navy officials might believe they need to

keep the relatively inexpensive LCS in the mix of ships being procured. Such a paradoxical situation might not be helpful to rigorous

cost control in the program.

The Navy testified that it was overly optimistic on the LCS program. It also testified that compared to CBO, the Navy budgets do

a much more aggressive number on its shipbuilding programs. This

raises a question regarding what the difference is between ‘‘overly

optimistic’’ and ‘‘much more aggressive.’’

A potential issue for the subcommittee is whether the Navy’s requested figure of $460 million would be too high to use in amending the LCS cost cap. If $460 million is more than what these ships

are expected to cost, then amending the cost cap to that figure

might encourage someone to believe that additional growth up to

$460 million would be acceptable, which again would not be conducive to rigorous cost control. Of the $160 million implicit delivery work performed on LPD–17,

a substantial part was for construction work that was remaining

to be done on the ship when the Navy took delivery. This post-delivery work was funded through a line item that is not included in

ship-end cost, so the ship’s reported end cost will understate its actual construction cost.

The Navy acquisition executive is now planning quarterly reviews of Northrop Grumman ship systems and the ships under contract there. A potential question for the subcommittee is why such

reviews are only now being planned, given the history of the LPD

program, and why they aren’t being planned for all shipyards and

all shipbuilding programs, given cost growth on other ships?

Despite putting an additional LPD at the top of its fiscal year

2008 unfunded priorities list, the Navy has expressed caution

about this option, in part, because it believes the shipyard would

not be able to start work on an additional LPD right away. AlVerDate 22-MAR-2001 14:24 Sep 16, 2008 Jkt 037891 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 C:\DOCS\110-76\205280.000 HAS2 PsN: HAS2
5

though that might be the case, Congress could still decide to procure the ship in fiscal year 2008, particularly if it decides that it

has the funding this year, but perhaps not in a future year, to do

so.

Funding two LPDs in fiscal year 2008, with the knowledge that

the second one might not be started right away, could be viewed

as somewhat analogous to Congress’s decisions in fiscal year 1983

and fiscal year 1988 to fund the procurement of two aircraft carriers in a single year, with the knowledge each time that the second ship would be started sometime after the first.

As DDG–1000 technologies mature, technical risk in the program

will shift to the task of system integration. Since the Navy is acting

as the program system integrator, the program will be an early test

of DOD’s ability to perform the system integration function following the downsizing of DOD’s technical and acquisition workforce.

On DDG–1000 work-share agreement, the Navy might have the

option of having the two yards compete for the role of final-assembly yard for the third and subsequent ships. A potential question

for the subcommittee is whether such a competition, particularly if

done on a one-time basis, would be consistent with the intent of

vital legislation prohibiting the Navy from a winner-take-all acquisition strategy for the program.

The Navy might find it difficult to fund both the fifth DDG and

the lead CGX in fiscal year 2011. One option for addressing this

would be to accelerate the procurement of that DDG to fiscal year

2009 or fiscal year 2010. Another possible option for the program

would be to authorize the Navy to use a block buy for procuring

several of the DDGs. This could reduce the cost by a few percent—

enough, for example, to procure an additional LCS.

Information provided by the Navy suggests that the Navy’s estimate for CVN–78 may be optimistic. The Navy interprets the cost

cap on the CVN program as being expressed in fiscal year 2006

then-year dollars. A potential question for the subcommittee is

whether this interpretation is correct. If it is, then CVN–78 and 79

could each experience millions of dollars of cost growth without exceeding their caps. This situation might not be conducive to rigorous cost control.

A potential option for the Congress would be to authorize a block

buy for CVN–78 and 79 or for CVN–79 and 80. The potential savings from such a block buy could be enough, for example, to procure an additional Navy auxiliary ship or two LCSs.

Mr. Chairman, this concludes my statement, and I will be happy

to respond to any questions the subcommittee may have.

[The prepared statement of Mr. O’Rourke can be found in the Appendix on page 51.]

Mr. TAYLOR. Thank you, Mr. O’Rourke.

The chair now recognizes Dr. Gilmore.

STATEMENT OF DR. J. MICHAEL GILMORE, ASSISTANT DIRECTOR FOR NATIONAL SECURITY, CONGRESSIONAL BUDGET

OFFICE

Dr. GILMORE. Mr. Chairman, Congressman Bartlett and members of the subcommittee, my colleague Eric Labs and I appreciate

6

the opportunity to appear here today to discuss the Navy’s shipbuilding program.

CBO’s analysis indicates a couple of things. First of all, executing

the Navy’s most recent 30-year shipbuilding plan will cost an average of about $23 billion a year in 2008 dollars, or about 30 percent

more than the Navy has projected.

And historical experience, including very recent experience that

Ron has discussed, suggests that a number of the Navy’s shipbuilding programs, particularly the DDG–1000 guided missile destroyer

and the CGX future cruiser, continue to face considerable risk of

cost growth relative to the Navy’s current projections for the cost

of those ships.

Eric will discuss some of the details underpinning those conclusions, but before he does that, I would like to provide the subcommittee a little bit of context that I hope it will find useful as

it considers the Navy’s current shipbuilding program and plans.

Regarding the Navy’s past and planned shipbuilding purchases,

assuming that the notional service life of a fleet is 35 years, the

Navy would need to buy an average of 8.9 or about nine ships per

year to sustain a 313-ship fleet. During the 16 years of the Clinton

and Bush Administrations, however, the Navy has acquired ships

at a rate of about seven per year. Thus, above average purchases

will be necessary over the next 30 years to meet the Navy’s goal

for fleet size.

During the 8 years of the Reagan Administration, the Navy

spent $138 billion—all these costs are in 2008 dollars—to buy 147

ships at an average cost of about $.9 billion apiece—$900 million

apiece—and, of course, that was to support a much larger fleet, almost twice the size of the one we have today.

In the 8 years of the Clinton Administration, the Navy spent $62

billion to buy 54 ships at an average cost of $1.2 billion a ship. In

the 8 years of the Bush Administration, the Navy will spend, according to most recent plans, about $98 billion to purchase 53 ships

at an average cost of $1.9 billion per ship—so 54 ships during the

Clinton Administration, 53 ships during the Bush Administration,

and an increase in cost per ship of about 50 percent.

During the 8-year period spanning 2009 to 2016, the Navy plans

to spend $158 billion to purchase 91 ships at an average cost of

$1.7 billion per ship, CBO estimates. Thus, notwithstanding large

purchase of what are called inexpensive Littoral Combat Ships during the next 8 years, the Navy plans for 2009 through 2016 indicate it will spend about 15 percent more than during the Reagan

years, in total, while purchasing about 40 percent fewer ships.

Now, these ships will be more capable, perhaps, than the ships

that were purchased during the Reagan Administration, but numbers also matter, and the numbers are going to be smaller, while

the costs will be higher.

Regarding CBO’s estimates for the costs of the Navy ships, CBO

considers the relationship between cost and weight, specifically the

cost-per-thousand-tons of light ship displacement, as one of the key

factors determining its projections for the prices of future naval

vessels. That method assumes, broadly speaking, that what has

happened in the past will happen again.

7

CBO takes account of changes in productivity improvements in

shipbuilding practices and procedures, but such changes are frequently offset by, for example, cost increases for labor and materials, unexpected production problems, increased requirements, or

new technologies.

In testimony before this subcommittee, some Navy officials have

characterized our methodology for estimating costs as worst-case

analysis or extremely conservative estimating techniques that seek

to include all possible sources of cost risk. In that regard I note

that our method would have understated the actual cost of Littoral

Combat Ship, the LPD–17 amphibious warfare ship, and the CVN–

76 and CVN–77 aircraft carriers, and it would have closely approximated the cost of a lead Virginia class attack submarine.

Now, I will turn to Eric for some additional details.

Mr. TAYLOR. The chair recognizes Dr. Labs.

STATEMENT OF DR. ERIC J. LABS, SENIOR ANALYST,

CONGRESSIONAL BUDGET OFFICE

Dr. LABS. Mr. Chairman, Congressman Bartlett, members of the

subcommittee, I want to thank you for the opportunity to be here

today to discuss the Navy’s ship programs. I will focus my remarks

on the DDG–1000, CVN–78, and the LCS programs.

In CBO’s view the Navy’s cost estimate for the DDG–1000 is optimistic. Using the DDG–51 destroyer and the CG–47 class cruiser

as analogies, CBO estimates the two lead DDG–1000 will cost

about $4.8 billion each, while the Navy’s estimate is about $3 billion each.

The Navy has argued that comparing the DDG–1000 with the

DDG–51 may not be valid, because the design of the DDG–51 was

disrupted and incomplete when construction began. In comparison,

the design of the DDG–1000 is going more smoothly, and the Navy

expects to have the design largely settled when construction begins.

Also, the Navy says the DDG–51 was a smaller, more densely

built ship, and thus on a ton-for-ton basis was more difficult and

more expensive to construct than the DDG–1000 cost will be.

Several factors offset those arguments. First, as Navy officials

will state, lead ships are difficult to build and encounter unexpected problems during construction. The first two Littoral Combat

Ships and the LPD–17, both of which are much less complex technologically than the DDG–1000, illustrate that point. The lead

DDG–1000 may not have the same difficulties as the DDG–51, but

it will have problems of its own.

Second, the DDG–1000 program is incorporating 10 new technologies that are not found in current destroyers. In the past the

Navy has typically introduced just three or four technologies in

new class of service combatants. Integrating them may prove more

challenging than the Navy anticipates.

Finally, a comparison of the Navy’s cost estimates for two more

DDG–51s and for the seventh DDG–1000 to be purchased in 2013,

illustrates the risk for cost growth. The Navy stated to this subcommittee that two additional DDG–51s authorized in 2008 would

cost $1.5 billion to $1.6 billion each. At the same time, the Navy

expects the seventh DDG–1000 purchased in 2013 to cost about

$2.1 billion in 2013 dollars.

8

Deflated to 2008 dollars, using the Navy’s inflation index, that

equals $1.6 billion, or the same as an additional DDG–51 that benefits from efficiencies and learning of 62 prior ships. The light ship

displacement of the DDG–1000 is 5,000 tons more than the DDG–

51. In effect, the Navy’s numbers imply that those 5,000 extra tons

and the 10 new technologies will be free.

CBO also believes that the Navy’s cost estimate for the CVN–78

is optimistic. The Navy estimates that the ship will cost $10 billion

in 2008 dollars, including $2.2 billion for non-recurring engineering

and design. The Navy argues that construction time and cost for

the CVN–78 will be less than for the CVN–77.

In contrast, CBO estimates that CVN–78 will cost about $11 billion, including cost growth that has affected past shipbuilding programs at the same stage of construction. And if the CVN–78 experience has cost growth similar to other lead ships, then the cost

could even be higher.

The LCS was supposed to be simple to design and build and cost

about $250 million in 2008 dollars per sea frame. The reported cost

growth, especially the Navy’s need to raise the cost caps for the

fifth and sixth ships to $460 million, implies that the Navy’s estimate for the total acquisition cost for the first two LCSs will be

around $600 million each.

Historical experience had suggested that cost growth would occur

in the LCS program. Historical cost-weight relationships using the

lead ship of the FFG–7 class of frigates as an analogy indicated

that the Navy’s original cost target for the LCS was highly optimistic.

The first FFG–7, including its combat systems, cost a total of

about $650 million in 2008 dollars. That suggests that the lead

LCSs would cost about $575 million to $600 million apiece. In

short, cost-to-weight relationships produced an estimate less than

the cost of the first LCSs, but substantially greater than the Navy’s

original estimate.

Incorporating the most recent cost growth, CBO estimates that

the first two LCSs would cost about $630 million each as a total

acquisition cost. As the program advances with a settled design

and high rates of production, the average cost-per-ship is likely to

decline to about $450 million each, excluding mission modules.

A quick note on the LPD–17—on a per-time basis, the LPD–17

is the most expensive amphibious war ship ever built, and while

the Navy’s cost of follow-on ships has come down, they are still far

above the Navy’s original estimates.

In closing, Mr.Chairman, I would like to add that CBO uses what

I would call a realistic approach to estimating the cost of ships. In

my ten years as a naval analyst, CBO has yet to overprice a ship.

Thank you, Mr.Chairman, and I would be happy to answer any

questions that you might have.

[The joint prepared statement of Dr. Gilmore and Dr. Labs can

be found in the Appendix on page 67.]

Mr. TAYLOR. Thank you, sir.

The chair now recognizes Mr. Francis.

9

STATEMENT OF PAUL L. FRANCIS, DIRECTOR, ACQUISITION

AND SOURCING MANAGEMENT TEAM, GOVERNMENT ACCOUNTABILITY OFFICE

Mr. FRANCIS. Thank you, Mr. Chairman, Mr. Bartlett, Mr. Ellsworth, for involving me in a discussion of shipbuilding issues today.

I will echo what Mr. O’Rourke said. The problems in shipbuilding

today I do not think are new to shipbuilding, nor are they unique

to shipbuilding. As, Mr. Chairman, you noticed, the Expeditionary

Fighting Vehicles have those problems. We see those across the

board in weapons systems. I think what is different today is it is

our turn to wrestle with the problem and make headway on it, and

I really think we can.

The first thing I would like to talk about is cost growth in shipbuilding. And suffice it to say that the patient does have a fever.

In the over 40 ships that are in construction today, they have overrun by a total of about $5 billion, so far. Most of that you have paid

for, but some is coming.

If you look at cost growth, you will see that lead ships are the

long pole in the tent. They typically overrun by about 30 percent.

That is going to be a real challenge for us, because in the Navy

shipbuilding plan there are about nine classes of new ships. So we

really have to get those right.

One of the things that you realize when you look at cost growth

is in construction you have to get about 60 percent into the construction of the ship before you actually start to recognize real cost.

That means there is a time lag of several years between when you

authorize money for construction and when you get real data on

what it is really costing, and then you get the overruns.

And that is what we have seen, I think, recently on the LPD and

the LCS. And for that reason, you need to put the DDG–1000 and

the CVN–78 on your watch list, because they are just going into

that phase. And in particular, we have to watch the margins for

error on these programs, because even with LCS, a 100 percent

overrun is $200 million. A 10 percent overrun on DDG is $300 million. Ten percent on the carrier will be a billion. So margins for

error will be much smaller there, I hope.

That puts a lot of pressure, I think, on the committee and what

it does in the 2008 and 2009 budget deliberations, because the

moneys that you authorize there are going to be a factor in whether and how large the overruns will be in 2010, 2011, 2012, and

2013.

So you ask yourself what can we do about this structural problem? And I think what we really need is a new paradigm for establishing programs and overseeing them. And I would say that would

consist of three things. One is a better business case, a real solid

business case up front for programs, a good plan for making business arrangements and contracting on programs, and a good plan

for execution.

And I think to curb the optimism of what we have seen in programs today, we really do need that solid business case up front,

which I would describe as firm requirements, mature technologies,

a knowledge-based lay down of all the key events in design and

construction, coupled with metrics for goodness. It is one thing to

10

lay the events down; it is another to have a set of metrics or criteria to know whether they make sense or not.

Now, with that you would have to put good resources: time,

money, and people. I think time, schedule, will be derived from a

good knowledge-based lay-down of a program. And I think cost will

come from that as well, but I think there are other things we could

do with cost estimating, such as confidence levels.

In terms of business arrangements, it just means what we are

doing with competition and what we are doing with contracting

strategies. And on contracting strategies, it is the type of contract,

how we are going to scope work on the contract, and the government’s roles there.

And there are a couple of lessons learned in contracting. One is

it makes sense to separate detailed design from construction, as

the committee has stated this year, and it makes sense to separate

lead ships from follow-on ships.

And finally, in the area of execution, basically we are talking

about two things there. One is the shipyard’s ability to design and

construct the ship that they have at hand, and the government’s

ability to provide what I would call agile oversight—that is, the

ability to detect and react to variances before they become big problems.

And if you took a lens like that and applied it to a couple of programs, like LCSs, I think that is one where you would say, ‘‘Gee,

the cost estimate was no good. The schedule estimate was no good.

The requirements were in flux.’’

We tried to do detail design, system design, and construction at

the same time. When we signed up for construction, we did not understand the design. We went with the shipyard that was not very

experienced with designing naval surface combatants, and the government was, I think, too focused on schedule, and not the whole

program.

Take the same lens and put it on CVN–78, which, for what it is

worth, I happen to think is a pretty well-laid-out program, pretty

well-managed, but nonetheless you see risks. You see very demanding requirements, high technical content with, I think, several

breakthrough technologies that are not mature yet, a schedule that

is bounded by the retirement of the Enterprise, and a cost estimate

that is optimistic. And the budget is set at the target right now,

and we have never delivered a lead ship in target.

So that is a very pressurized business case for the CVN. In the

business arrangements, I think they are doing pretty well. We gave

them an extra year, and that construction preparation contract allowed them to really pursue a robust process, and I think we will

have 75 percent of their design before they go into construction.

They separated detail design from construction, so that is good.

We have seen some risks in execution, which I would describe as

the technologies. There are three really key technologies that have

had problems. Their schedules have slipped to the right. They have

used up all their margin. If they have more problems, they are

going to interrupt the ship’s construction schedule.

So if you are just using that lens, you would come back and say,

‘‘Well, why can’t we do that more on other programs?’’ And I would

say, I think there is a language barrier. When we look at programs,

11

it seems like each program uses a different language to describe its

key events, the criteria it is using for judging the completeness of

those events, and the programs are scheduling milestone decisions

at a different point relative to those at hand.

So it is hard to get a common language, and I will just use LCS

as an example. I think everyone would agree that the launch of the

first ship was premature, with only 63 percent of construction

done. I can see that.

Well, what should it have been? What are the standards for

launch? What are the things that should have happened beforehand, and can’t we see that in a proposal for a ship? And if it is

true for launch, isn’t it true for keel way? Isn’t it true for fabrication, detail, design systems, and so on?

Those are the types of things I think are not knowable when a

program is presented for approval. So, again, I would just sum up

by saying we really need a knowledge-based foundation for solid,

executable business cases on these programs that does provide

transparency for oversight.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Francis can be found in the Appendix on page 90.]

Mr. TAYLOR. Thank you, sir.

The chair now recognizes the gentleman from Maryland, Mr.

Bartlett.

Mr. BARTLETT. Thank you very much.

Mr. O’Rourke, you testified about the Navy’s proposed change to

the cost cap for LCS. Do you or any of the other witnesses have

any thoughts about how Congress might more effectively implement cost caps? For example, would it be feasible to establish caps

on labor hours or material cost by imposing a cost reduction or laborsaving scale similar to a learning curve?

Mr. O’ROURKE. That is a possibility. My own sense is that there

might be an advantage in keeping the cost cap as legislated simpler, rather than more complex, so as to preserve the Navy’s ability

to manage the program under that cap in the best way that it can

find how.

In terms of options for amending the cost cap, I mentioned in my opening remarks one issue about the $460 million figure possibly

being a little too high. Now, if it is actually higher than what the

Navy might expect those ships to cost, then you are actually providing some room for extra cost growth on those ships. And so one

potential issue for the subcommittee to explore would be whether

the $460 million figure is perhaps too high, and if so, what a lower

figure should be.

The second thing in terms of how else you might think about

amending the cost cap would be to apply the cost cap not to simply

ships five and six in the program, but to some or all of the follow

ships in the program. Some of the other cost caps that the subcommittee has implemented on Navy shipbuilding programs have

applied to a larger number of ships in the program in question, and

the subcommittee can look to those examples as potential models

for how they might want to go about amending the cost cap on the

LCS program.

Mr. BARTLETT. Thank you.

12

Dr. Gilmore, you mentioned that recent ship procurements are

costing us roughly 50 percent more than the prior generation. I assume that those are in constant dollars, so that we can compare

dollar to dollar?

Dr. GILMORE. Yes, the numbers I cited were in 2008 dollars.

Mr. BARTLETT. Okay.

Dr. GILMORE. They were averages over all the ships that were

bought during certain periods.

Mr. BARTLETT. Clearly, these newer ships have more capabilities,

but in the commercial world, each new generation of sophisticated,

complex equipment has increased capabilities over the last generation, and they are costing less. Why are our ships costing more?

Dr. GILMORE. I do not have an answer for you that would satisfy

you. I like to base my answers on the results of analysis. We have

not done any analysis that would shed light on that. I can only observe that this is the trend not just for shipbuilding, as Mr. Francis

mentioned and Mr. O’Rourke mentioned.

This is the trend not just for shipbuilding, but it has been a longestablished trend for all DOD weapons systems, which are built

only for the government, for which the government assumes all the

risks of development. It pays all the costs of development. Those

are not recouped later on.

And so there are just a lot of unique aspects to these programs

in terms of requirements, which are usually aggressive in terms of

what the new capabilities are that are wanted, in terms of who

bears the risk—which is the government—and who the prime customer is—which is the government—and it is a customer for a relatively small number of items, although they are obviously very expensive items, that are at variance with what happens in the commercial world.

And so, not having done the analysis, I cannot tell you exactly

which of those factors are most important or quantify how they are

important. I can just observe that there are all these differences,

and that is probably a large part of the story.

Mr. BARTLETT. Clearly, there is an apparent disconnect. The

newer generations of similar kinds of complex integrated systems

in the commercial world are actually decreasing in price, so it is

not a given that because you have more capability, the cost has to

go up. And it would be very interesting for us to see what the differences are between our world and the commercial world. The

commercial world costs are going down with increased complexity.

Our costs are going up.

Mr. Francis, your written testimony references challenges integrating mission packages with LCS. Would you please elaborate on

the weight and personnel issues that may impact the mission package integration? To your knowledge, what steps is the Navy taking

to manage these issues?

Mr. FRANCIS. Mr. Bartlett, as you know, the mission packages

are not included in the ship itself, and I think a rough order of

magnitude to get the mission packages on the LCS is going to add

about $100 million to the cost per ship. So the costs we have been

talking about have been sea frame so far. So we add the mission

packages—that is a separate development effort, as you know, and

separately funded.

13

What we are seeing on that so far is the Navy has allotted about

180 tons on the ship for the mission packages. Right now, it looks

like they are overrunning about 13 tons right now in development.

And similarly, I think there are about 35 people allotted to man

those mission packages, and we understand right now that they

are roughly about seven people over that that were currently in development.

Some of the challenges associated with that is the number of the

mission packages have been reduced in size so that the redundancy

you might have, or if one component goes out, you would have another one there—that is gone. And a lot of the organic maintenance

that would be on the ship right now is gone. So I think the Navy

is working very hard to try to manage the weight and the people,

but they are having to make trade-offs in potential capability.

Mr. BARTLETT. Thank you. The cost growth on LCS–1 was really

quite perplexing, because, as you mentioned, it was essentially a

sea frame, and one would have suspected that the major uncertainties would have been in the packages.

Mr. O’Rourke, I am sorry that I didn’t get your gesture. You had

a comment on a prior question?

Mr. O’ROURKE. Just a quick addendum, which is the question

you asked about why the cost of ships is going up the way that it

has is a question that the previous CNO asked during his time in

office, and he went off and asked the RAND Corporation to study

that question. RAND did look into it in a formal analysis. They reported out the results last year, and I will make a copy of that

analysis available to your office.

Mr. BARTLETT. Thank you.

And one last quick question for any of the witnesses. Have you

seen any changes in the Navy’s program management, ship construction supervision, contracting or cost estimation procedures

since the stop work and termination of LCS–3, which would indicate a change to best practices incorporating lessons learned?

Mr. O’ROURKE. Just to start, I have seen things that I can point

to. One is a beefing up of the oversight staff for the program, both

on the private sector and on the Navy side. And just to cite one

other example, there has been a change in the cost-estimating

standard that is being applied to the program.

Mr. BARTLETT. So you would anticipate from that that we would

not have this spread in the next——

Mr. O’ROURKE. I think both of these things are helpful, but in

terms of lessons, as I said earlier, I think this is not so much a case

of new lessons to learn as it is to apply old lessons that were

learned long ago.

Mr. FRANCIS. Mr. Bartlett, we have seen, I think, the Navy is

moving more toward putting confidence levels in their estimates.

There is a debate as to what level that should be. The Defense Acquisition Performance Assessment (DAPA) panel says 80 percent.

I think the CAIG would say it needs to be less than that. But the

fact that they are starting to do that is a step in the right direction.

By the same token, we do see some, I would say, shortfalls in the

ability of SUPSHIP to oversee some of the construction contracts

and to get the kind of cost data they need to react quickly to problems. So I think the picture is mixed.

14

If I could offer a comment, Mr. Bartlett, on cost caps. I just wanted to say I think once we get to the point where we are considering

cost caps, I think the battle may be lost already.

Really, your point of leverage is early when you are setting requirements and doing design, and I think one of the things we

would have to do up front better is to identify what trade space we

are going to have maybe within the ship or other ships, so that if

cost becomes a problem, you can make trades, because once the design is set and the strategy is set, I think the cost cap, really, is

going to be a victim of what happens on the program. So it is, I

think, a measure that probably comes too late.

Dr. LABS. Mr. Bartlett, I guess the only thing I would add to

that—because I would echo some of the things Mr. O’Rourke said—

is that a lot of these issues come up because I am not convinced

the Navy has realistic cost estimates for their ship programs to

start with.

If the Navy had come to the Hill, for example, and said they

thought the LCS was going to cost $450 million, it would not have

come as a shock as much to see some cost growth with that type

of a number as opposed to $220 million to start with. So a lot of

it is sort of in the setting of expectations and what your baseline

is to start with.

Dr. GILMORE. I would say that looking at the issue of cost growth

and realistic costing from the perspective of the overall shipbuilding program, we will have to wait to see whether the improvements

that Mr. O’Rourke mentioned and Mr. Francis mentioned translate

into the Navy’s programming process, because right now, the Navy

is basing its future-year ship program under unrealistic estimates.

They are top-down-driven estimates.

When they derive the costs of several of the classes of new ships,

they have done that by allocating budget shares and dividing the

number of ships that they want to buy into a budget share. That

is what they have done in generating their 30-year shipbuilding

plan. So those do not generate realistic estimates, and I do not

think they generate for either the department or the Congress a realistic appraisal of the number of ships that are going to be bought.

So if these improvements in pricing-out the individual ships and

pricing them at something a little bit higher than the 50th percentile level of confidence translates into more realism in the shipbuilding program, that would be a good thing. But we have not seen the

next 30-year shipbuilding program yet, so we will have to wait.

Mr. BARTLETT. Mr. Chairman, one quick last comment which

may or may not need some observations by the panel. Clearly, we

want our new ships to be as good and capable as they can be, but

very frequently, getting that very last five percent improvement in

capability may double the cost.

Is there somebody sitting at the table that is challenging these

requirements as the contractor gets them, and they would say, ‘‘Do

you really need that? That will cost you twice as much as if you

only asked for 95 percent of that capability.’’ Do we have those discussions?

Dr. GILMORE. Well, they are supposed to occur. When I worked

in the department, I worked for the Office of Program Analysis and

Evaluation, which provides the guidance and oversees the conduct

15

of what are now called analyses of alternatives which, if done correctly, are done before a program’s requirements are set and explore exactly the issues that you described.

What do you have to pay realistically to get a certain level of requirements? And if you are willing to back-off that level of requirements, how much might that cost be, and would that still produce

an article that was useful, that could do what people think needs

to be done—perhaps not as much as people would like, but still

make a useful contribution to the missions the Navy is pursuing?

And those kinds of analyses are supposed to be done, but my experience is that often they are done in a way that adopts assumptions that drive the analysis to support conclusions on what the capabilities should be that have already been reached before the

analysis explores those issues.

Mr. BARTLETT. Mr. O’Rourke.

Mr. O’ROURKE. Just as, again, a quick adjunct, there used to be

an organization at one time in the Navy for many, many years that

performed the function of being the ‘‘requirements police,’’ if you

will, to add some discipline into the requirement-setting process,

and that was the Ship Characteristics Board or the Ship Characteristics Improvement Board.

Now, that board was disestablished some number of years ago,

and we went through a period of time when the Navy was looking

at some ship designs when that board was not in place. Now, the

Navy has now reestablished this organization under a new name,

and so they do now once again have in place an organization that

can act as the ‘‘requirements police,’’ if you will, to help separate

requirements from desirements.

And the proof will be in the pudding. We will have to wait and

see just how tough this board acts in terms of actually policing requirements and making sure that the Navy does not let its requirements get away from them. But the Navy has once again reestablished that organization.

Mr. BARTLETT. Thank you very much.

Thank you, Mr. Chairman.

Mr. TAYLOR. The chair thanks the gentleman from Maryland.

The chair now recognizes the gentleman from Indiana, Mr. Ellsworth.

Mr. ELLSWORTH. Thank you, Mr. Chairman.

Gentlemen, I have to admit that my past dealings with government contracts have been more in the tens of millions and not

these numbers that you have been talking about today.

And I am even more proud now, Mr. Chairman, that the last jail

that I built, we came in half-a-million dollars under budget. And

that makes me more proud now when I hear about these government projects.

There are a few things we have talked about today that concern

me. My first question is that on the change orders that you all see,

who is more responsible? When we are in this shipbuilding project,

is it the Navy comes in and says—the hull is there; they start putting the guts in this thing and they say—‘‘No, we would like this

switched over here. We want to do this with our left hand instead

of our right.’’ Or, ‘‘We would like this window to be here, or this’’

whatever it might be?

16

Who does more of that? The shipbuilder saying, ‘‘Oh, here we

have our schematic design on the table, but now it is like we have

got steel hung. We cannot do that; we have got to change it.’’ Is

there a feel for that? Who has more of that—the Navy or the shipbuilder themselves—that would naturally add to that cost when we

switch this over here? Does that make any sense at all?

Dr. LABS. CBO does not have any data as to who is the initiator

of a lot of those changes, whether it is the contractor or the Navy.

But I can say at sort of a general level that a lot of times those

change orders are at the instigation of either the contractor or the

Navy, because maybe they just want something different than what

was originally there.

But in many instances, when you translate a design that is on

paper into actual construction, things do not necessarily—through

no fault of anyone, really—work out in reality the way they seem

on paper. So it looks like a certain pipe can be hung in a certain

way, and when you actually start building the thing, ‘‘Oh, that isn’t

going to work,’’ for whatever reason, and so that becomes a change

and a change order under that category.

But we do not have data that can break out as to levels of responsibility or attribution.

Mr. O’ROURKE. You can take those change orders and divide

them, if you will, into two basic groups. One is those that arise as

a function of the construction process of the ship—the errors you

just talked about. And the others are those that have to do with

the fact that the Navy has reconsidered what it wants the ship to

be or what it wants the ship to do.

Ultimately, final responsibility for those change orders happening and being put into place resides with the Navy. And it is especially that second category that I think people are concerned about,

because those are the ones that are more likely to be initiated by

the Navy and might be initiated by the Navy in part because the

Navy had not completely thought through ahead of time what they

wanted that ship to be and what they wanted that ship to do.

I think the Navy recognizes that, and they are trying to move

back to a greater sense of self-discipline on requirements so that

they do not come back later with this second group of change orders that gets added to the first that are going to arise as a result

of the construction process.

Mr. FRANCIS. Mr. Ellsworth, I will say change orders are expected, and they build in a number in all the cost estimates and

the contracts for change orders. So I do not know the answer to

this question, but it is a good one to see how are we doing that?

Are those budgets anywhere close to reality? Because there is an

expectation of a fairly significant level of change order traffic.

Mr. ELLSWORTH. And they are certainly not making up the kind

of dollars we are talking about—the increase to the total price of

the ship I would hope they are changing.

Mr. FRANCIS. Right.

Mr. ELLSWORTH. Or the person who draws the ship needs to go

back to Drafting 101, I would say. That kind of leads me to the

next question.

It sounds like at the very end of y’all’s presentation and Mr.

Bartlett’s questioning that maybe Congress and the Navy—prior

17

past Congresses—haven’t really demanded very accurate figures. Is

that fair to say, that we are talking about so many dollars that the

old saying about ‘‘a billion here or a few hundred million here,’’ we

kind of expect that?

Maybe we have not had that construction manager in there, that

person that is watching that cost, and as it gets away from us, it

is like ‘‘Well, it is going to be $100 million here.’’ Has Congress

been doing our job to watch and really put the thumb down, saying

this needs to come in maybe not on budget or under budget, but

at least some kind of reasonable figure?

Mr. FRANCIS. I think that is an astute observation, Mr. Ellsworth, and I think it transcends the acquisition role—not just shipbuilding. There are those who would say the acquisition process is

broken, and it needs to be fixed. I would offer a different explanation.

I think the acquisition process is in equilibrium, and part of the

rules of the game is, as we were talking earlier, performance sells.

So higher requirements are going to allow your alternative—whether it is a ship, an aircraft, a missile, a tank—to defeat any other

alternative. So you have that high performance, but you also have

to have low cost. Your cost has to fit in the budget.

And I am not trying to be glib about this, but that is sort of the

rules of the game to get a program into the budget where you can

actually start to attract funds to do something. There are conventions that you build around that, and we kind of all participate in

that.

So if the Navy, for example, were to come here and say, ‘‘The cost of the LCS is actually going to be $500 million, not $200 million,’’

then the budget would accommodate maybe 20 ships, and not 55.

So you might say, ‘‘No,’’ and nobody wants to get a ‘‘no’’ answer.

So it is easy for you if the budget proposal when it first comes in

is low, because then you don’t have to make trade-offs. And our

system kind of works that way.

Mr. ELLSWORTH. It is just like it is heading that way, I know,

with the MRAPs. We have been having a lot of discussion about

that. We went from—was it $6 million to $16 million apiece—because that was my recollection on the cost of the—oh, I am sorry.

No, I am thinking about the——

Mr. FRANCIS. EFV?

Mr. ELLSWORTH. The other boat.

Mr. O’ROURKE. I have got a couple of things to that. In addition

to the sort of the sociology of the situation that can drive people

to price things to sell and price things to get programs started,

there are a couple of other things, which is Congress can demand

realistic estimates, but once it gets estimates, it may not always

have enough information to evaluate independently whether in fact

that estimate is realistic.

I remember a hearing that Chairman Taylor held a year or 2 ago

where the DDG–1000 was discussed, and as I recall, he asked Admiral Hamilton, ‘‘Will you wager 1 or 2 months of your pay to

make sure that the DDG–1000 is going to come in at cost?’’ And

Admiral Hamilton said, ‘‘Yes.’’

And so we have that commitment there, but once the Navy says

that, what position is Congress in to evaluate that number and say,

18

‘‘Well, okay, he said it was.’’ But now how do you parse that number apart and say, ‘‘Was Admiral Hamilton right about that or

not?’’

The other issue that the evidence for these numbers being wrong,

as was mentioned earlier, always comes years later, so by the time

it comes in, it is a different cast of characters, and the people who

talked to you at the time about whether a number was supposedly

realistic or not—they are gone by that time. And I have seen this.

I think we have all witnessed this on a number of systems over the

years.

So there is the issue of consequences and accountability in a system where people only have limited tenures in office. By the time

some of the different numbers start to become available to Congress, we are dealing not with the people who originally spoke to

those numbers, but with their successors or even their successors’

successors.

Mr. ELLSWORTH. Thank you, Mr. O’Rourke.

Mr. Chairman, if I could have one more question.

Mr. TAYLOR. Certainly.

Mr. ELLSWORTH. One of you—and I cannot remember which

one—were talking about the 60 percent point of construction where

we really start projecting those costs. I don not remember which

one of you was talking about that.

Mr. FRANCIS. I did.

Mr. ELLSWORTH. Mr. Francis, could you just go and kind of

elaborate on that just a little bit, why that is that we get to 60 and

then we start knowing the price of steel, the price of technology;

we think we have all those bugs worked out, those change orders—

is that when we——

Mr. FRANCIS. Yes. The 60 percent is a number that we have observed in looking at actual construction of ships. I would not say

it has scientific precision, but back of the envelope precision.

But basically, the main thing we see is that when labor hours

really start to come in, and you can start then measuring how

many labor hours we are associating with work packages, because

once you get into construction, your packages of work are pretty

discreet. And you know whether or not you are starting to construct in a certain sequence, because you plan to do things in a certain order.

When you get past the halfway mark, around 60 percent, you

start to realize, one, what actual labor is taking and, two, the

things that did not get delivered to the yard in time are starting

now to disrupt the construction sequence.

And that is the point maybe of reckoning where you have to

admit, ‘‘Gee, the schedule is not going to go the way we want it.’’

And we either have to add more calendar time, which is labor and

overhead, or we have to put more labor on it and drive the cost up.

In some cases, too—and ships are unique in this respect—because of the long construction time, the cost of materials does

change, even though we put in economic adjust clauses. Price of

steel in a number of the ships that we have looked at has gone up

when they are in that stage of construction.

Mr. ELLSWORTH. Thank you.

Thank you, gentlemen, for your testimony.

19

I yield back.

Mr. TAYLOR. The chair thanks the gentleman.

Gentlemen, I want to thank all of you for being here.

And given our desire to not be surprised with an LCS-type scenario again or a Deepwater-type scenario, both of which are regrettable—they happened, and we hope they are being fixed, and what

we do not want to see is this become a reoccurring problem—I am

curious to hear your thoughts if there is an institutional problem

within the Navy to where there is no one person who is responsible

for our shipbuilding programs for a long enough period of time—

given how long it takes to go from development to R&D to actual

construction to delivery—where there is one person who, in effect,

is not going to let this happen on their watch.

Is this something this committee ought to be looking into?

It is strange that you should mention Admiral Hamilton. Heck

of a nice guy. Bottom line is, I am told he is going to retire in September. So he is not going to be around in position to make good

on that bet, one way or the other. And that would be an example

of this.

But I would like to hear your thoughts on it. Again, the Navy

guys are going to be—I have great respect for them—kind of restrained by the uniform they wear to actually what they can say.

So what are your thoughts?

Mr. O’ROURKE. Just one thought to start the answer, which is

that within the Navy there already is a model of a person who has

a much longer tenure in office, and that tenure was designed specifically because it was felt that it would be beneficial for someone

to be around long enough to live through the consequences of actions or decisions that were made earlier in that person’s tenure,

and that is the director of Naval Reactors.

Mr. TAYLOR. Admiral Donald.

Mr. O’ROURKE. Currently, Admiral Donald—that is right—who is

the fifth person to hold that office in about 50 years. Now, that

term of office is 8 years, and there are very few other parallels in

the Federal Government for that.

That long term of office reflected a sense many years ago when

Naval Reactors was being set up that this was a very special, very

important technology, and therefore, a person of that tenure would

be beneficial in helping to bring to come to pass and to make sure

that it was done right.

But if we decide now that shipbuilding—because of the very long

time spans, because of the large amount of dollars involved and because of consistent congressional concern over the issue over the

years—has now become an issue like that, or sort of like that, then

one possible model would be to look to what we have with Naval

Reactors and not necessarily copy it verbatim, but look at it as a

rough model for doing something within the shipbuilding arena

that is maybe a little bit like that.

Mr. TAYLOR. Is there value to that, in your opinion?

Mr. O’ROURKE. I think that there is merit enough that it may be

worth investigating. There are always downsides to these options

as well, and there are differences between shipbuilding in general

and the responsibilities of Naval Reactors in particular, but what

I want to get across is that we do have this model over here which

20

does seem to have worked well for this one function of bringing nuclear power to the Navy.

And so if we have that model, and if it is a model also that Sean

O’Keefe, after leaving the Navy, felt that NASA could benefit from,

then maybe it can be something that a part of the Navy elsewhere

can also benefit from.

Again, I cannot make a recommendation on the issue one way or

the other, but I do think it is a model that there has been enough

evidence accumulating on for at least people to look at that and

come to a decision about whether they think that would make

sense or not.

Mr. TAYLOR. Would any of the other gentlemen like to weigh in?

And I very much appreciate your answer, Mr. O’Rourke.

Dr. GILMORE. If you do not have a realistic cost estimate to begin

with, it does not matter how long the person is there. They are not

going to be able to manage the program to achieve an unrealistic

target.

Now, to the extent that longer tenure would mean that might

translate into the person being responsible at the initial stages of

the program where the first cost estimates are generated generating more realistic ones, that might help.

But there are still all these incentives in the system to generate

estimates that are optimistic. And estimates that are a little bit

low are probably good, because they help you manage the program

and control costs, as Mr. O’Rourke has mentioned.

But estimates like the ones that existed for LCS and that exist

for DDG–1000 probably are not helpful, because they are too low

initially. The initial estimates for DDG–1000 for the fifth ship were

about $1.1 billion, and the Navy is now admitting that in its estimates the cost will be maybe two or three times that, and our estimates would be a little bit higher.

So the initial estimates for that program were extremely optimistic, and I disagree a little bit with my colleague, Mr. O’Rourke.

There were plenty of people inside the Pentagon at the time those

estimates were generated that knew there was no way in the world

that those ships were going to be built for that cost. Sometimes

that is known very early on, and if you try to manage the program

to those targets, you just cannot do it.

Mr. O’ROURKE. Just one quick additional comment, and not to

disagree with what was just said, but we have had a number of

hearings this year, as you are aware, on the Deepwater program,

and at one of those hearings—it was one of those on the House

side—the commandant was asked, ‘‘Well, who is responsible for

this situation?’’

And I thought his answer to that question was fairly powerful.

He said, in essence—and I am paraphrasing here a little bit—

‘‘Well, the program manager and the chief engineer of the Coast

Guard and the vice commandant of the Coast Guard and the commandant of the Coast Guard at the time are all no longer here.’’

And I think that gets to the crux of your question.

Mr. FRANCIS. Mr. Chairman, my boss, David Walker, has recommended that type of position for the Department of Defense, a

chief management officer who would have a tenure long enough

that they could, let us say, last through the ups and downs of indiVerDate 22-MAR-2001 14:24 Sep 16, 2008 Jkt 037891 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 C:\DOCS\110-76\205280.000 HAS2 PsN: HAS2
21

vidual decisions. So I think conceptually something like that in the

Navy is something worth considering.

I would have to add that that person would have to be empowered to make decisions, and he would have to be supported by the

kind of systems like Dr. Gilmore just said—cost estimating, good

trade-offs. In other words, they need a support system to generate

business cases that they could make good decisions about.

And one of the things I worry about is what is going on in the

program offices and the PEOs, because I think there are really exceptional people there. But I think when they get unexecutable programs, we are grinding them up. So we have to find some way to

allow the PM to weigh in and be able to say when something is

not doable or unexecutable. And that type of information would

have to get to that level.

Mr. O’ROURKE. One more quick comment?

Mr. TAYLOR. Sure.

Mr. O’ROURKE. Which is that, although I have mentioned the

fact that there are a lot of old lessons that can be brought back in

and reinforced, there are, I think, some new ideas out there.

And one of those that I think has particular promise is the concept that Admiral Sullivan has promoted for reducing the Navy

over the longer run to a smaller number of common hull designs

so as to recover some of the lost economies of scale that were suffered by the Navy when the shipbuilding rates went down.

That idea, I think, has a lot of promise for being a powerful engine for reducing ship costs and for allowing the country to support

a larger Navy for a given amount of dollars.

But it is also a vision that would take a long time to implement

over time, and if you have an idea like that that requires somebody

to be behind it consistently over time, then having someone in the

Navy who has a long tenure in office to pursue that idea and to

make the decisions at the critical points along time to help make

that vision come about can be potentially beneficial for doing that.

So if you have an idea for reducing ship costs, that is inherently

one that would take a long time to implement—which strikes me

that is what you have, in the case of what Admiral Sullivan is proposing—then that might lead you to think, ‘‘Well, maybe the person

in charge of implementing it should have a longer term of office.’’

Mr. TAYLOR. We will see.

Gentlemen, it seems like within days of the change with last November’s elections, we had the secretary of Navy come see me and

say, ‘‘We have got a big problem with LCS.’’ The commandant of

the Coast Guard shows up: ‘‘We have a big problem with home

porting.’’

Let us just say both of them kind of took me by surprise and—

water under the bridge—my point being, do you see anything we

are missing, any problems that we can prevent by actions this summer or this fall that are coming down the line anywhere near those

problems that probably could have been avoided or certainly mitigated?

In the case of the Coast Guard, apparently the deputy commandant had raised concerns about premature failure of the hull.

In the case of LCS, someone had to see that there was a problem

22

last summer and would not tell. So is there anything that you see

that we should be addressing now?

Mr. FRANCIS. Mr. Chairman, if I can start, I would say you really

need to be looking at the DDG–1000 and the CVN–78, because

again, the moneys that you are going to authorize in 2008 and

2009 are going to form part of their business case.

Mr. TAYLOR. And your specific concerns with those two hulls are

what?

Mr. FRANCIS. On the DDG–1000, when we convened here last

year, I think the cost estimate at the time was $3.3 billion per ship,

and the Navy then went through a cost reduction on the ship and

got it down to $3 billion, and the idea was to keep the $.3 billion

in there as a hedge against future cost growth. My understanding

is that money has been scrubbed out of the program, so we have,

I think, a very tight cost estimate on that program.

And the other things we need to be looking at are what is happening with the key technologies on that, and are we holding

schedule? So that is my concern there. On the CVN–78——

Mr. TAYLOR. Do you know of any specific instances that you can

name as a for-instance?

Mr. FRANCIS. Two for-instances. One is the dual band radar,

which affects both the CVN and the DDG–1000. They have had

trouble generating the power out of the transmit-receive units that

they need for that radar, and it does not look like they are going

to be able to generate that power until they get that system into

production.

If the dual band radar does slip, the current construction sequence is to install the radar into the composite deckhouse and deliver that as a unit. That is going to be the construction sequence.

If the dual band radar gets delayed much further, they are going

to have to install the deckhouse first and then put the radar in

afterwards. That is going to be a cost issue.

The other thing on the DDG–1000 is the software—the total ship

computing environment. That was to be released in six stages. The

first three went okay, but a lot of work now in the last three has

been deferred, basically reflecting late delivery of information like

vendor-furnished information where the software has to wait. So

there is going to be more software work on the tail of the program

on that.

Mr. TAYLOR. Mr. Francis, I very much appreciate that. If you

have that or any other concerns, I know this committee would welcome hearing them up-front, so, hopefully, we can address them before the Nation has a needless delay or a needless expenditure of

funds.

Mr. O’ROURKE. Mr. Chairman, just to add two quick things,

things that the committee might consider doing this summer as it

looks forward into the shipbuilding program.

One would be to look for instances of where a cost-plus type contract is being combined with a schedule driven program, because

that was one of the other lessons that were forgotten that came out

of LCS. That has been commented by others as a recipe for cost

growth, and so you would look to see if there were other instances

in the Navy shipbuilding program that combined those two things

together.

23

And the second thing I think that——

Mr. TAYLOR. Again, do you have any specific examples of where

you see a——

Mr. O’ROURKE. I would have to go actually survey the programs

to see which programs would meet both of those conditions, but

that definitely is something the committee may want to consider

doing on its own and then arrive at their own judgments about

which programs may satisfy both of those conditions.

And the other thing that the subcommittee, I think, may wish to

do this summer is gain a better understanding of the risk balance

of the cost estimates that are the cost estimating standards that

were used to estimate the cost for each of the Navy’s shipbuilding

programs so that you at least have that baseline data to then

evaluate what the Navy is really telling you when they give you

an estimate for each of these programs.

Mr. TAYLOR. Anyone else?

If not, the chair is going to recognize—I am trying to remember

who got here first. Admiral Sestak?

Mr. SESTAK. I think it was Mr. Courtney.

Mr. COURTNEY. I pass. I pass.

Mr. TAYLOR. Okay. Mr. Courtney was here first but has no questions.

Admiral Sestak.

Mr. SESTAK. Thanks, Mr. Chairman.

If I could follow up on the question, Mr. Francis, that you asked. When the funding went from $3.3 billion to $3 billion, did requirements fall out?

Mr. FRANCIS. Some ship content was taken out. So I think a

magazine was taken out and some of, I think, the content of the

advanced gun systems. So some specific things were taken off. I

would not describe them as a complete capability like, ‘‘Gee, we lost

the gun; we lost the radar,’’ but a less capacity, if you will.

Mr. SESTAK. Then the tail, all that—whatever is going to happen

to that, none of that—the consequence of trying to squeeze down

to $3 billion is just the ship’s contents?

Mr. FRANCIS. To my knowledge, yes, sir.

Mr. O’ROURKE. Some of it was content. Some of it was things like

documentation for the program that was judged to be no longer

necessary.

If I remember right, at the time the Navy testified that the actions it took—we are talking about things that were in the spring

and summer of last year; at least that is when we talked about it—

had the effect of reducing the lead ship cost by $250-something million and having the effect of reducing the follow-on ships’ cost on

a recurring basis by $215 million, something like that.

So there was content taken out of the design, but there were

other things as well in terms of documentation.

Mr. SESTAK. Mr. O’Rourke, your question on Admiral Sullivan’s

proposals for three or four common hulls. If one of those hulls—the

cruiser, let’s say—that idea you have of DDG–1000 becoming a CG,

if it is to be nuclear-powered, does that have implications for that?

Mr. O’ROURKE. It does, because for one thing the nuclear power

plant that the Navy is considering might not be easily fittable into

the DDG–1000 hull, in which case that might tend to argue in

24

favor of going to a different hull design for a nuclear-powered version of the ship.

That is not clear at this point, but what I do want to emphasize

is that Admiral Sullivan is talking along these lines, and if you had

one person in office over a longer span of time to make decisions

about implementing that, then you could maintain that momentum

of vision to help bring it about.

But yes, the nuclear power issue is one that could become a hard

choice for the Navy in terms of whether to stick with hull commonality or not within the DDG–1000 and CGX efforts.

Mr. SESTAK. Just one last one. You had mentioned—I think it

was you, Mr. Francis—I am trying to read my notes that I wrote

as you were talking—even though you did not say it, this is really

a software-controlled ship. Even the engineering software is all

automatic, and it fits into—and I forgot what you call it—a tactical

ship control system.

Mr. FRANCIS. Total ship computing environment.

Mr. SESTAK. Computing system.

So your comment about vendors—there was a delay because of

vendors—I assume these vendors are probably software vendors

that did not potentially have the engineering code done so that the

combat systems over all ships could be done.

My question is how we fund these ships. I cannot remember the

terms—partial funding, incremental funding. There have been

some reports that that has an impact upon the sub-prime contractors, that way down at the tail, these vendors are not able to get

the money to start the engineering code which impacts the overall

thing on such a ship that is built upon software.

Is that part of the reason for some of the delays—how we do the

process of funding?

Mr. FRANCIS. Well, on the vendor furnished information, what I

was referring to is not so much the software vendors, but for the

people doing the software for the ship, they need specific information coming from the detailed design of specific subsystems that a

vendor may be supplying. That could be a fire control system. It

could be a missile, and so forth, but they need the specific specifications from that system to build that into the code for the entire

ship. So it may not necessarily be software vendors in this case.

Mr. SESTAK. The over-arching question of the process—is the way

we fund an issue in this?

Mr. FRANCIS. In this case I do not see—and I would be interested

in what my colleagues have to say—where split funding or incremental funding would have a direct impact on the ability to get

money to the key vendors when they need it. It is a way to fit in

the Navy’s budget, but for the DDG–1000, for example, we do have

roughly $2.7 billion in each year’s budget. It would seem to be that

that would be enough money to get the front-end-loaded work done

to the vendors.

Dr. LABS. I would agree with that, Congressman, because the

way the Navy sort of handles when they do split funding—at least,

the way it should be done—is that when they do get priority to do

split funding or incremental funding, they are funding the things

that they need to have done to support their vendors to get the

25

ship constructed on time. And that is the way they sort of allocate

the funding.

So if there is a problem there that is a result that money is not

getting to the vendors that need to get the money in the proper

amount of time, I would suggest that that is probably more of a

management issue than it is a funding issue.

Mr. O’ROURKE. It is not technically funding, but one difference

in an acquisition arrangement that can affect the lives of the vendors is whether or not you use something like multi-year procurement. That is a contracting arrangement, not a difference in how

you fund the program.

But if you were to go to multi-year procurement on a shipbuilding program, then both the shipyards and the vendors would have

confidence in the future business that would come from the procurement of those downstream end-items, and they could therefore

take steps to optimize their workforce in their production plant to

build what they build at the lowest possible cost.

In my earlier testimony, I talked about the option not of an official multi-year, but of the alternative of a block buy. And I raised

that alternative, because in the case of the two programs I mentioned, which were the destroyer and the aircraft carrier, we will

not be able to use a multi-year for some number of years until that

lead ship is delivered.

But in the meantime, you could use a block buy. That would at

least allow the shipyards to optimize their workforce and their productive plan and get some savings.

But one difference between a block buy and a multi-year is that

it does not include the authority to bring long lead items forward

and fund them all at once. So the vendors would not benefit from

that. They would, however, still benefit from the confidence in future business that you would get from the block buy.

Mr. SESTAK. A very last question, if I might, just one last one?

Mr. TAYLOR. Sure.

Mr. SESTAK. Did you all read the article by Secretary Winters in

proceedings last month?

Mr. O’ROURKE. The one based on his speech.

Mr. SESTAK. I do not know if you addressed—it laid out his new

approach. It was titled, ‘‘Tough Love.’’

Mr. O’ROURKE. The ‘‘Tough Love’’ speech.

Mr. SESTAK. Did you all talk about that and the value, if you

saw, of his seven or eight points? Have you talked on that?

Mr. O’ROURKE. I think Eric and I probably have talked about it

together at the time that it came out.

Mr. SESTAK. Is there value in those various points he brought

out?

Mr. O’ROURKE. I think there is potential value in some of the

things he talked about, at least, if not all of them. There are probably points in there that would need to be debated. I think it reflected a recognition on the part of the Secretary of the Navy that

shipbuilding is central to the future of the Navy, and that it therefore deserves oversight attention at the highest levels.

Dr. LABS. I would agree with Mr. O’Rourke on that. There are

certainly things in there that are worth exploring and doing. Other

things you are going to have to sort of think about and explore in

26

a little bit more detail, but he has got his eyes apparently focused

on the problem, and I think that certainly deserves some recognition.

Mr. SESTAK. I thought the most salient point he made, though,

was this charity of optimism that you probably spoke of, meaning

that the service can lose, and is losing, credibility by this effort to

try to fit—to use your words—the split-funding things in, and over

the longer term that can stand us not in good stead.

Would you agree with that, Dr. Gilmore?

Dr. GILMORE. Yes. Well, as I said before, though, these problems

are not unique to shipbuilding. When you look at what has happened with the F–22 program, for example—and of course, that got

caught up in the end of the Cold War, but nonetheless, there were

plenty of problems that occurred with the program after that. And the Air Force spent $5 billion or $6 billion a year developing

that program for 10 or 15 years, and it is now going to get about

180 planes out of it, which is, what, 10 percent or less of the overall inventory of planes that they would like to maintain right now?

Now, this situation with shipbuilding is not nearly as dire, but

the reason that I provided some of the numbers at the outset of my

testimony on what we spent during the Cold War and the number

of ships we bought and how the price per ship has escalated quite

a bit—along with the capabilities of the ships, no doubt—was to

point out that the shipbuilding program is facing a similar situation, not as stark in terms of numbers and budgets, but still, a

similar situation to the situation that the Air Force is facing in

terms of modernizing its fleets of tactical aircraft and, for example,

the situation that the Army is facing with the Future Combat System.

So, as you know, these problems have existed for a long time.

Some of them are now becoming more apparent in terms of what

is actually happening versus what the predictions were of some

people several years ago.

And I would say whatever actions you take, if you do not have

realistic estimates at the beginning of the program of what the program will cost, you will run into trouble.

And to say that we should manage these programs to cost really

is not addressing the problem, because if the initial cost estimates

are very unrealistic, no manager, no matter how intelligent or how

heroic, is going to be able to manage a program to hit a cost estimate that is completely unrealistic.

Mr. SESTAK. Thank you.

Mr. FRANCIS. Mr. Sestak, I have Dr. Winters’ points right here,

and I know when I went through them, I think the first one he

makes about who is going to be the integrator—that is a sophisticated discussion I think that needs to be had.

And I think Mr. Taylor brought up the issue of Deepwater. We

have had issues with the contractors’ integrator there. We have it

on Future Combat Systems. So I think that is a rich debate that

needs to be had—not an easy one.

But the other points are in principle hard to argue with. The

Navy must define design constraints to optimize the capability of

the fleet. Contractors must design for production and sustainment.

The Navy needs to use independent cost estimates for trade-offs.

27

Detailed design constructions must be supported by mature specifications. And the Navy needs to provide knowledgeable program

oversight. These seem like almost unarguable principles, I would

say.

Dr. GILMORE. Let me just comment with regard to independent

cost estimating. The Navy eliminated its capability to do independent cost estimating. Its only independent cost-estimating office was

essentially eliminated. Now it has been rebuilt a little bit, but it

is nothing like it was in terms of capability previously.

Again, as Mr. Francis pointed out, I cannot argue and would not

argue with the need for independent cost estimating, but the Navy

does not have much capability there now.

Mr. SESTAK. That was 1996?

Dr. GILMORE. Yes, well, I was thinking of—what was it?—well,

it was the Navy independent cost-estimating office. That was not

its exact title, but I cannot remember what it was. But it was

eliminated at one point.

Mr. TAYLOR. Thank you, Admiral.

The chair wants very much to thank our panel. I think you have

done a great job of enlightening us, and we appreciate you being

here. The chair is going to dismiss you all and ask for the second

panel.

The subcommittee will come to order.

The second panel that we are very fortunate to have with us this

afternoon is composed of representatives of the Department of the

Navy: Vice Admiral Paul Sullivan, Ms. Allison Stiller, Rear Admiral Barry McCullough, and Mr. Dub Summerall.

Thank you all for being here.

Again, given the depth of knowledge that you bring to the table,

we do not want to unnecessarily limit you to the five-minute rule.

I would remind you that I have got to leave at about ten till to visit

with the speaker on something, so do what you can to stay near

the five-minute rule, and then Mr. Ellsworth will take over.

Ms. STILLER. Yes, sir. Chairman Taylor——

Mr. TAYLOR. Particular order?

Ms. Stiller.

STATEMENT OF ALLISON STILLER, DEPUTY ASSISTANT SECRETARY OF THE NAVY FOR SHIPBUILDING; VICE ADM. PAUL

SULLIVAN, COMMANDER, NAVAL SEA SYSTEMS COMMAND,

U.S. NAVY; REAR ADM. BARRY MCCULLOUGH, DIRECTOR,

WARFARE INTEGRATION; DUB SUMMERALL, EXECUTIVE DIRECTOR FOR SURFACE COMBATANTS, PROGRAM EXECUTIVE OFFICER, SHIPS

Ms. STILLER. I am going to give an opening statement for the

four of us.

Chairman Taylor, Mr. Bartlett and members of the subcommittee, thank you for the opportunity to appear before you to discuss

the topic of Navy surface ship construction.

On behalf of Admiral Sullivan, Admiral McCullough, Mr.

Summerall and myself, I would like to submit our written testimony for the record.

Mr. TAYLOR. Without objection.

28

Ms. STILLER. I would like to begin by thanking the committee for

its keen interest in shipbuilding. I will try to condense my remarks.

They were a bit lengthy.

The Navy is committed to building an affordable 313-ship fleet

by 2020.

Mr. TAYLOR. Ms. Stiller.

Ms. STILLER. Yes, sir?

Mr. TAYLOR. Take your time.

Ms. STILLER. Okay.

Mr. TAYLOR. Again, we are happy to have you here. We want to

hear what you have to say.

Ms. STILLER. Yes, sir.

The department continues to utilize a long-range plan for construction of naval vessels which reinforces the 313-ship plan, and

is designed to stabilize workload and funding requirements. A stable plan will enable the shipbuilding industry to maintain critical

skills and to make business decisions that increase efficiency and

productivity.

We still face challenges. Recent setbacks with the Littoral Combat Ship have underscored the need for closer scrutiny of our acquisition process from contracting practices to ship production monitoring.

Additionally, as a result of Hurricane Katrina and the recent

strike at Northrop Grumman ship systems Ingalls operations, the

Navy is working within GSS to review the baselines for current

NGSS contracts with the Navy and understand how to best execute

the future shipbuilding efforts. The review effort will help both the

Navy and NGSS to closely monitor and best utilize manning resources and facilities.

At your request, I am pleased today to provide you an update on

our current surface ship shipbuilding programs. LPD–17 and LPD–

18 have been delivered to the Navy and are now commissioned.

LPD–19 is scheduled to be delivered this fall.

LPD–17 was accepted with incomplete work as a result of higher

than planned ship construction costs and to mitigate potential

schedule or cost impacts to follow-on ships in the shipyard. The

Navy decided to complete portions of the ship in the home port

area after delivery to both improve the sailors’ quality of life and

to allow the remaining work to be completed more affordably by

local ship repair companies using competitively bid contracts.

LPD–17 recently completed her Post Shakedown Availability this

month. All compartments and mission critical systems are now

complete. The remaining items, mainly routine maintenance work,

are scheduled to be completed in the upcoming maintenance availabilities. Lessons learned and improvements identified on LPD–17

during production and since delivery have been incorporated on follow ships.

In light of competing priorities for resources, the President’s

budget for fiscal year 2008 represents the best balances of resources to requirements. However, an additional LPD–17 class ship

was identified by CNO as the number-one item in this year’s unfunded program requirements letter. If Congress were to provide

sufficient additional funds, they could be used for procurement of

a tenth LPD–17 class ship in mid–2008.

29

General Dynamics NASCO has been performing well on the T–

AKE class, with three ships delivered, a successful operational

evaluation, a fourth ship to be delivered later this year, and a fifth,

sixth and seventh ship under construction. The Navy and NASCO

are in the process of restructuring the T–AKE contract to address

the procurement of the next five ships—two more than the original

12 planned.

This approach will benefit both the Navy and the shipbuilder and

results in the lowest overall cost per hull over the entire class. Two

additional T–AKEs were identified by the CNO in his letter as

well, and the Navy would support procurement of additional ships,

if sufficiently funded.

The CVN–21 acquisition program is designed to improve operational capability while simultaneously driving down manpower

and total ownership cost. Since Milestone B in April 2004, the program has made significant progress. The Navy plans to award detail design and construction contracts for the lead ship of the class

in 2008 with planned delivery in fiscal year 2015.

The program is fully funded to the current cost estimate, which

was independently validated by Office of the Secretary of Defense

(OSD) CAIG at Milestone B, and is within the congressional cost

cap. All critical technology elements are fully on track to support

the planned construction schedule.

The President’s budget request for CVN–21 program includes

funding for the CVN–78 Ship Self Defense System, or SSDS. Full

funding of this budget request is critical. All 62 ships of the DDG–

51 class have been authorized and appropriated. The final ship,

DDG–112, is scheduled for delivery in 2011.

The President’s budget included a request for funding primarily

for production shutdown requirements expected with the shipbuilders and the government furnished manufacturers. Congressional reductions to this requested budget may prevent the Navy

from meeting our contract obligations in 2008.

The Navy is continuing its dual lead ship strategy for the DDG–

1000 program, with lead ships to be constructed concurrently at

NGSS and General Dynamics Bath Iron Works. Contracts for detail

design were awarded to the shipbuilders in August 2006. Both contractors were also awarded contracts for long lead material and

pre-production planning to support detail design and construction

in June of 2007. Construction contracts for the dual lead ships are

planned to be awarded later this year.

The Navy, Northrop Grumman Ingalls Ops go in different options on the specifics of the construction schedules, based on the future workload of both shipyards. The DDG–1000 program continues to execute on cost and schedule.

CGX is envisioned to be a highly capable surface combatant tailored for joint air and missile defense and joint air control operations. The analysis of alternatives is ongoing, and it started in

June and is scheduled to complete this year. The AOA is examining

both fuel-efficient conventional power plants and nuclear power

plant alternatives for CGX.

The Navy takes seriously the House’s desire that we carefully

consider nuclear power for CGX and other future platforms. However, the Navy does not support legislation that would effectively

30

require nuclear power for major combatant vessels. The Navy supports a process that includes a rigorous technical analysis of alternatives and matches requirements with operational demands of the

warfighter for the projected threat.

The President’s budget in 2008 also requests outfitting and post

delivery funding that ensures our ships will receive their full allowance of spare parts and operating space items. It allows for post delivery correction of deficient government responsible items and ensures the ability to perform essential tests and trials.

Our 2008 request is fully adjusted for delivery delays resulting

from Hurricane Katrina and other factors. Any reduction in this

area would severely jeopardize our ability to deliver fully operational capable, and safe ships.

After an extensive LCS program assessment, the Navy has developed an executable program that adjusts the acquisition profile,

ship cost estimates, budgets and schedules. It also provides resources for effective management of costs, production and technical

risk to deliver the ships to the fleet to support the urgent and revalidated warfighting requirement.

Progress on the LCS program continues. LCS–1 is reported by

Lockheed Martin to be approximately 84 percent complete. The

Navy currently projects LCS–1 will conduct underway trials next

spring with delivery in summer of 2008. LCS–2 is under contract

with General Dynamics. The contractor estimates the ship is approximately 53 percent complete in construction at Austal in Mobile, Alabama. The Navy projects LCS–2 to launch in early 2008,

and deliver in late summer 2008.

LCS–4 has not yet begun fabrication. The Navy will continue to

monitor GD’s performance on LCS–2 and 4 and assess the need for

further action if GD experiences cost growth comparable to LCS–

1.

The Navy appreciates Congress’s support at a recent reprogram

request for the portion of the 2007 LCS funds and looks forward

to working with Congress on the remaining funding required to

execute the revised plan.

The restructured LCS plan also includes reduced procurement of

the Flight 0 sea frames in fiscal year 2008 and fiscal year 2009 to

address critical warfighting gaps. The President’s budget request

for 2008 is $911 million, and that is required to procure two LCSs

in fiscal year 2008.

Additionally, the Navy is requesting a change in the current statutory cost cap to $460 million per ship for the two proposed fiscal

year 2008 procurements. This estimate includes basic construction

costs, and represents a 55 percent increase in the sea frame cost,

and reflects the restructured program in the revised ship end-cost

estimates. Without an adjustment to the cost cap, the Navy will

not be able to procure any new LCSs in fiscal year 2008.

The two existing sea frame designs will undergo operational performance testing in fiscal year 2009, and the results will be considered as part of the Navy’s evaluation for a single sea frame design

selection. Flight 1 ships will be based on the selected design and

will incorporate lessons learned from tests and trials.

The Navy also intends to implement a government furnished

open architecture common combat systems and C4I suite as part

31

of Flight 1 to optimize lifecycle cost and capability across the family of surface combatants. Subject to OSD approval, the Navy intends to hold a full and open competition for the procurement of

the Navy’s Flight 1 design in fiscal year 2010 and beyond. The proposed acquisition strategy does not preclude continuing with those

sea frames, if the operational evaluation concludes the need for

both.

The Navy has taken swift action to ensure the lessons learned

from the LCS program cost growth do not reoccur for other Navy

programs. As an initial response to the findings of the LCS program assessment, ASN(RDA) directed a series of specific actions to

reduce risk and improve management of Navy acquisition programs.

These actions have included a review of design build concurrency

risk in Navy programs, reviews of acquisition program performance

conducted by portfolios such as air or ship programs, and a review

of staffing levels, organization and qualifications in both our PEOs

and our onsite contractor oversight.

As a longer-term effort, ASN(RDA) is leading the Navy acquisition reengineering to better control cost and requirements growth,

more accurately estimate the cost risk in Navy programs, and

match contracting models and incentives to the cost and risk of

each program. The efforts will focus resources where they are most

needed and ensure our higher-risk and most critical programs are

resourced properly.

In closing, Mr. Chairman, I would like to thank you for this opportunity to discuss Navy shipbuilding. I think we have a strong

plan to ensure the way ahead for the Navy to meet the fleet requirements in an affordable matter. I continue to look forward to

working with you in the future.

Admiral Sullivan, Admiral McCullough, Mr. Summerall and I

will be happy to answer any questions.

[The joint prepared statement of Ms. Stiller, Admiral Sullivan,

Admiral McCullough, and Mr. Summerall can be found in the Appendix on page 116.]

Mr. TAYLOR. Thank you very much, Ms. Stiller. And other than

your remarks on the nuclear cruiser, I thought it was well-said.

[Laughter.]

Ms. STILLER. I am pretty good at it.

Mr. TAYLOR. For the record I would like you, just for the fun of

it—no, not for the fun of it—for the record, I would like your estimate as to fuel costs for that cruiser 20 years from today—cost and

availability. Because if it is nuclear, I can tell you what the cost

and availability of the fuel is. For a conventionally powered platform, I would like your projection.

Ms. STILLER. Sir, I do not have a projection on that.

Do you want to—on the affordable——

Mr. TAYLOR. Conventionally powered—for the record, I would

like the Navy’s estimate of fuel cost and availability for 20 years

from now for a conventionally powered cruiser.

Ms. STILLER. I would have to take that for the record, sir, because I cannot predict the price, and I think that is your point.

Mr. TAYLOR. Or the availability.

Ms. STILLER. Or the availability.

32

Mr. TAYLOR. That is what the point is, as the gentleman from

Maryland has done, I think, an excellent job of making our nation

aware of.

The gentleman from Maryland is recognized.

Mr. BARTLETT. Thank you very much. Thank you, Mr. Chairman,

for that question. I would suggest that the cost would be very much

higher and the availability limited 20 years from now.

I have some questions that I would like, because of constraints

of time, some brisk answers to. If, upon reflection, you would like

to add more material, would you please do that for the record?

The first question, I think, is especially important because the

decision, I understand, to start construction of LCS–4 is happening

this week.

In the March 29th brief provided to members, the Navy stated

that, as a part of the LCS program restructuring, the path ahead

would rely on the use of internal Navy cost estimates, as though

the Navy has established specific cost thresholds that would trigger

a stop work on LCS–4 and possibly a renegotiation of the LCS–2

and 4 contract.

Understanding that the cost estimated at completion, the EAC,

is competition-sensitive, has the Navy’s internal EAC for LCS–4

met or exceeded the cost threshold established by the Navy?

Ms. STILLER. No, sir. The cost threshold was actually established

for LCS–2. And no, sir, they have not reached that threshold that

you are speaking about.

Mr. BARTLETT. Okay. My second question, a really important

one. The MRAP program has been given a DX priority level, the

highest priority for procurement of steel. Given the importance of

the MRAP program, how will this DX priority level affect shipbuilding in the near and far term?

Ms. STILLER. We have not yet evaluated in great detail, because

we have not been told exactly. You have to look at how material

is procured when you are in a shipbuilding environment. They will

buy the steel as they are getting ready to build those particular

modules, so it might have an impact on shipbuilding, but right now

we have not seen any impact on that.

Mr. BARTLETT. In the process of establishing this priority——

Mr. TAYLOR. Would the gentleman yield?

Mr. BARTLETT [continuing]. Did anyone talk to you about the possible effects on your programs, if they gave this kind of priority to

the MRAP program?

Ms. STILLER. Yes, sir. There has been a data call to look at impacts on all programs across the department. What has not been

decided is where will the resources be deviated from, whether that

will come from shipbuilding or not.

Mr. SUMMERALL. Mr. Bartlett, we are providing data, as Ms.

Stiller has said, on all our shipbuilding programs to RDA so they

can start to formulate a sense of what our requirements are going

forward. So we are starting to put the data in place and anticipate

that.

If I could, just to supplement Ms. Stiller’s response to a prior

question, we had a production readiness review on LCS–4 on June

28th. Coming out of that, we reached agreement—actually, the

company proposed this, and we concurred with it—to consider start

33

fabrication in the September timeframe. As far as I know, that is

still the plan going forward.

Mr. TAYLOR. Will the gentleman yield?

And this is a follow-up. The Army was nice enough to take me

to Aberdeen yesterday and show me the nine potential MRAPs that

they are taking a look at. And one in particular caught my eye. It

was under license from the Israelis. And they said, ‘‘Well, you

know, if we order this one, we are going to have to order the top

half from the Israelis, and we could domestically produce the bottom half.’’

As I am looking at those fairly flat steel panels on the top half

that have obviously been cut probably with a laser, given how pretty the cut was, because we are talking now—I had an opportunity

to visit with the secretary of the Army this morning for perspective—you know, you are looking at 19,000 potential panels—each

one of those panels.

And one of the things that the shipyards are telling us is, ‘‘Well,

we can’t invest in this laser cutting because there isn’t the volume,’’

which leads to the question to what extent is the right hand of the

DOD speaking to the left hand? To what extent are you going to

places like the shipyards and saying, ‘‘Hey, if we are in a position

to work with the vendor to have this steel cut at your facility and

then shipped to a manufacturing plant, would you then look at getting a more efficient high volume machinery than you have now—

making those investments?’’

I am not convinced there is a lot of integration going on as far

as that kind of thought, but if there is, I would like to know about

it.

Ms. STILLER. There is certainly an opportunity that would

present itself. In the past the shipyards have done work on nonship programs, so certainly that is an opportunity.

Mr. TAYLOR. Again, Ms. Stiller, you are a very good person. We

are lucky to have you serving our country, okay?

So, with that said, this is a high-priority program. And my apologies to my friend Peter Geren for a temporary lapse in remembering his name, but Secretary Geren actually threw the number out

of 17,700 this morning. That is on top of the approximately 4,000

that have already been ordered.

So we are talking about a mass production of something that the

military needs on one hand with the MRAPs. We are talking about

something that our shipyards need to be going to, as far as laser

cutting, laser welding. And they have had a reluctance to do so, because they don’t see the need for volume.

And this really is an opportunity to get the mass production,

high-order quantity, short delivery time that the Nation needs, and

serve the long-term best interests of the shipyards. And I really do

think it is important that there be a greater cooperation between

the MRAP program and what you are trying to accomplish.

And I don’t say that to scold you. I say that as knowing that you

are a capable person, to encourage you to try to make that happen—and knowing Secretary Winters’ desire to modernize the

yards to the greatest extent possible, knowing at the end of the day

the taxpayer is going to pay for all of this.

Ms. STILLER. Mr. Chairman.

34

Mr. TAYLOR. The six Navy shipyards have only one customer. We

are their one customer. But this really is an opportunity to do some

short-term good in the case of the MRAP and some long-term good.

It is something the Nation needs.

Ms. STILLER. Sir, I will be happy to take that back and work

with the MRAP program.

Mr. TAYLOR. With that, again, I very much appreciate you being

here. I have a meeting concerning the Gulf Coast recovery with the

speaker, so I hope you will excuse me, and I am going to turn the

chair over to Mr. Ellsworth.

Mr. BARTLETT. Thank you.

I have several more questions, but I will ask just one more here

and submit the others to you for the record, if that would be okay.

My understanding is that this last week there was a cure notice

given by Lockheed Martin to Marinette Marine. What is the Navy’s

assessment of this contractual action taken by Lockheed Martin on

LCS–1? Does the Navy believe Lockheed Martin and its subcontractor Marinette Marine will be able to achieve propulsion

trials by December of 2007?

Ms. STILLER. I will start this, and then I will defer to Mr.

Summerall on the propulsion trials.

As you know, the Navy’s contract on LCS–1 is with Lockheed

Martin, so our contractual relationship is with Lockheed Martin.

The Navy does not have privity of contract with Marinette. There

is a contractual letter. We are aware of a contractual letter between Lockheed Martin and their subcontractor, and they are

working to try to resolve some issues so that they can move forward on the program.

And I will defer to Mr. Summerall on the propulsion trials and

where we see that now.

Mr. SUMMERALL. It is true as a priority we would like to see that

ship go to propulsion trials in December as a risk mitigation effort.

If we did trials in December, we would be able to address whatever

needs were identified during those trials during the ice period up

there.

We have asked the Lockheed Martin team to give us an integrated master schedule and a resource plan to support that schedule that would get us to propulsion trials in the December timeframe. To date we have not yet received that.

I believe that to try to expedite that effort was one of the reasons

Lockheed made the contractual request that they did to their subcontractor. We hope to get the initial submittal of that integrated

master schedule in the next few weeks.

Ms. STILLER. Presumably, Lockheed Martin selected Marinette

Marine because they had a long history of delivering on time on

budget. And as was emphasized in the first panel, what Marinette

Marine is building under contract to Lockheed Martin is essentially

a sea frame—that the major uncertainties and sophistication will

be in the modules that are procured separately.

Mr. BARTLETT. When will we learn what went wrong—that this

company that was selected because they have a long history of delivering on time on budget now has failed to deliver either on time

or on budget? When will you be able to tell us what happened?

35

Mr. SUMMERALL. Sir, as we outlined on our February hearing,

what we think went wrong is the schedule pressure on what is basically a good contractor driven by requirements of schedule and a

design that was far more complex in the end than they bid on the

ship.

And the sophistication of that design, driven by the change in

what I would call the builder’s codes—not the military requirement, but the building specs—caused them to do a lot of rework,

caused them to not be able to follow the cardinal rule of large

projects, which is make sure you have the design and the drawings

complete before you start construction.

A lot of rework was done, a lot of out of sequence construction

was done, and that is what got us off track.

Mr. BARTLETT. Thank you very much.

Thank you, Mr. Chairman. I will submit my remaining questions

for the record, if that is okay.

Mr. ELLSWORTH [presiding]. Thank you, Mr. Bartlett.

The chair recognizes Mr. Courtney from Connecticut.

Mr. COURTNEY. Mr. Ellsworth, a follow-up on the last question.

Secretary Stiller, given all the problems and the sort of scrambling that has been going on to try and figure out what went wrong

and how to fix it, does it make any sense for us to still be procuring

two ships a year in 2008 and 2009? Is it possible for us to even

accomplish that, given what we already know about what went

wrong? And it still seems like up until just the last few weeks ago

that there are still problems.

Ms. STILLER. Yes, sir. From a capacity perspective, from the acquisition perspective, we have capacity. We could execute additional ships. We looked very carefully at that as we restructured

the entire program.

The real driver behind why we want to continue in 2008 and

2009 is the warfighting requirement, and I will turn to Admiral

McCullough to address that.

Admiral MCCULLOUGH. Yes, sir. There is a critical warfighting

gap in the area of swarm surface combatants carrying in our ship

cruise missiles as well as the rapid clearance of sea mines—in specific areas of the world, sea lines of communication.

We have this gap today. We need those ships to meet the

warfighting gaps that have been identified, and so the Flight 0

ships in 2008 and 2009 are very necessary from a warfighting requirement standpoint.

Mr. COURTNEY. Okay. Again, just looking at the memo that was

prepared by the staff which described a fire that took place a couple of months ago and again, the cure notice.

Again, I think what the admiral just testified to was obviously

a strategic rationale for us moving forward, but it just seems that

we also have to budget and authorize based on what is feasible,

and even the Navy itself has been self-critical about being over-optimistic.

Are we really there now where we really feel like it is okay for

Congress to proceed with that type of procurement schedule?

Ms. STILLER. Yes, sir. As I said, we laid out in great detail. We

looked at the program holistically and said, ‘‘What makes sense?’’

And that is why the quantities are less than what we had proposed

36

in the President’s budget 2008 omission. We said, ‘‘Okay, what are

the right quantities from loading in the shipyards, et cetera.’’

So, yes, we can accommodate it, and as I said in my statement,

the ships will both deliver in 2008, and the plan is in fiscal year

2009 for both sea frame designs to go through the operational evaluation.

So certainly procurement can continue in the 2008 and 2009

timeframe even while that evaluation is ongoing so that we meet

the warfighter need.

Mr. COURTNEY. Thank you, Mr. Ellsworth.

Mr. ELLSWORTH. Thank you, Mr. Courtney.

The chair would recognize Mr. Sestak from Pennsylvania.

Mr. SESTAK. Thank you very much. I had one question, I think,

on the power issue, now that he has left. [Laughter.]

Admiral Sullivan, as I kind of remember your study—haven’t

looked at it for a while—but it had something like $73 per barrel,

and then it went up to what is called, I think—and I have forgotten

these words—fully burdened costs, which is like $153 or something.

That fully burdened cost takes into account all the storage facilities, the acquisition of oilers and things like that.

Could you get back? We have had some discussion on this, if you

remember, a few months ago, and I was supposed to get together

with you, but I would like to know that when they did their costbenefit analysis and the curves crossed, did you include in that the

fully burdened cost? It seems to me that at least some elements of

the burdened cost are a sump cost.

If this nuclear power capability is to be CGs—I think that is

what it is supposed to be—cruisers—we are still going to have such

an enormous amount of other ships. Is it 316?

Ms. STILLER. Thirteen.

Mr. SESTAK. Three-hundred-thirteen. It has changed. That 313 is

to come about—only a relatively small amount will be nuclear-powered. So that is kind of a sump cost. Should that have been considered into your overall nuclear power study of when it became costeffective?

Admiral SULLIVAN. I apologize for not following through on that.

Mr. SESTAK. No, we were supposed to—we are good classmates.

Admiral SULLIVAN. We had a miscommunication. And I believe

that the cost of those fuel farms was included in the fully burdened

cost. What I would like to do is take for the record the analysis

both with that and without that.

Mr. SESTAK. If they included all of those fully burdened costs, it

is kind of an unfair metric, I think, because we are going to have

those facilities anyway for all the other ships. And when I read the

study, it looked to me as though they included them all, I thought.

I am probably wrong.

Admiral SULLIVAN. We will get you that for the record, sir—both

ways.

Mr. SESTAK. DBR—I have to go to a hearing on habeas corpus.

But let me ask you maybe instead about CGX. Do you still expect

it? Is it 2015, ma’am, you said you expect it? When is CGX supposed to come along? 2019?

Ms. STILLER. The lead ship procurement is in fiscal year 2011

with delivery in 2019.

37

Mr. SESTAK. 2019.

Ms. STILLER. IOC in 2019. Delivery in 2017.

Mr. SESTAK. All right. I was just curious on that one. And DBR

is probably, as they said in the previous panel, the key long pole

in the tent, correct?

Admiral MCCULLOUGH. Not for the CGX, Congressman. The DBR

is——

Mr. SESTAK. I am sorry. The——

Ms. STILLER. DDG–1000.

Mr. SESTAK. What is the radar called?

Admiral MCCULLOUGH. On the CGX?

Mr. SESTAK. Yes.

Admiral MCCULLOUGH. We are currently going through an analysis of alternatives based on the potential threat set in 2024, and

the initial indication is that it will be a two-frequency spectrum

radar BNS band in the 3.5-gigahertz range.

Mr. SESTAK. This is the one that would be embedded?

Admiral MCCULLOUGH. Yes, sir. Well, there is an embedded

radar that Northrop Grumman Electronic Systems and Integrated

Systems has shown the Navy. I don’t know whether that is specifically the one that we would choose, but Northrop Grumman has at

least shown that capability and concept embedded in the deckhouse.

Mr. SESTAK. All right. There were some studies that were being

done in other worlds that had held some propensity. Are we still

going down this path? Do we still think this radar is going to be

able to do what we want on the size that we want on the ship?

Admiral MCCULLOUGH. Yes, sir. I believe that is within projected

technology that would support that radar coming online potentially

to support. In 2019 I would see that ship.

Mr. SESTAK. All right. I asked a question of the other panel. Do

you expect—I didn’t ask this one, but it was leading to—DDG–1000

to split to the right again? Is there any expectation right now that

software or engineering designs or anything with the vendors that

you expect it to slip to the right?

Mr. SUMMERALL. No, sir. We are at the point where we are getting ready to hopefully release the RFP for the two lead ships construction. Detail is on track. Based on current schedule, we project

we will be 85 percent complete with detail design when we go to

start fabrication on the two lead ships.

Mr. SESTAK. So the software configuration is coming along.

Mr. SUMMERALL. Yes, sir, it is. And during the transition to production phase three phase of the program, as you know, sir, we actually completed two million lines of code, 10 EDMs on cost on

schedule, a $2.9 billion effort to mitigate a lot of risk of this program.

We are still on track. We are reporting metrics quarterly to

OSD—CPR analysis and other metrics in a package to OSD—so

this is all available to the CAIGs. They can look at it during

milestone——

Mr. SESTAK. So we won’t hear two or three months from now

that engineering control system code has caused any perturbations

in the overall tactical combat systems code and delayed this down

the line?

38

Mr. SUMMERALL. No indication of that at this time, sir.

Mr. SESTAK. All right. Thank you.

One other thing on LCS. I was taken with LCS. It seems to me

that in DDG–1000 you kind of had PEO ships kind of in single

belly button with IWS supporting and others. LCS—it seems as

though there is quite a diverse group of PEOs involved. And I

jotted some down. There are IWS ships. These begin to get into

modules.

Ms. STILLER. Sure.

Mr. SESTAK. We have submarines. People get involved with

SPAWAR with the communications. We have warfare centers that

are involved as we get into Littoral-type stuff.

Has there ever been any thought that we need to take some of

the people out of the decision loop in a sense and go to a more of

a single button type of approach as we do in DDG–1000 as we look

back upon any lessons learned with LCS?

Ms. STILLER. On the ship side——

Mr. SESTAK. Particularly the interface of the module, since that

is the real combat system and all—that you have these people that

kind of don’t work for one another, but they are really responsible

for very important parts.

Ms. STILLER. Yes, sir. On the ship side, as you said, PEO Ships

has the responsibility for the sea frame. On the mission module

side, PEO LMW, Littoral and Mine Warfare, has responsibility for

the mission modules. And so they go and integrate with SPAWAR,

the laboratories and others to pull together the mission packages.

They are the belly button.

As for the interface, there is a very detailed interface specification that was part of the delay in the program way back when, as

we stopped and we said we need this interface described for both

sea frames so that the mission modules would work on either sea

frame seamlessly.

And so that interface document is developed. It is a living,

breathing document that both PEOs work to. And ultimately, if

there are issues, ASN(RDA) has responsibility over both of those

PEOs. So on the mission module side, there is a single belly button

to deliver the mission modules.

Admiral SULLIVAN. We have added an extra level of oversight to

at least the mine warfare mission in that PEO Ships has the ship.

PEO LMW has the module. Two program managers in PEO

LMW—one for the module, one for the mine countermeasures

sweep, and PEO–A in NAVAIR has the responsibility for the mine

sweeping helicopter.

So there are four program managers, three PEOs, two

SYSCOMS. Admiral Venlet and myself and his predecessor, Admiral Massenburg, have periodic discussions with the program managers and all the PEOs in the room to synchronize scheduling.

Mr. SESTAK. The last question I had is, as I have to go next-door,

the requirements for DDG–1000. Have there been any changes in

requirements through time contracted——

Admiral MCCULLOUGH. Congressman, there has been no change

to the warfighting requirements for that ship. One of the things we

have done is lay out cost drivers from a capability standpoint, and

when we look at potential cost trades that drive the cost of the ship

39

down, the PEO and I, when I was in 1986 at the record surface

warfare, would sit and figure out what we could do to get at cost.

And it enabled us to reduce cost a couple of hundred million dollars by taking non-key performance parameters and non-key system attributes out of the ship to find those cost savings. And we

laid it out for the leadership in a chart that showed where you

could go get those type trades, as opposed to where you would get

trades that affected KPPs, and then where you would get trades

that affected both the KPPs, key performance parameters, and the

schedule of delivery. So the warfighting requirements——

Mr. SESTAK. Which EW system are you going with?

Admiral MCCULLOUGH. I am sorry, sir?

Mr. SESTAK. Which electronic warfare system are you going

with?

Admiral MCCULLOUGH. We looked initially at MFWS, and we

found that that probably was not the right system—Multi-Frequency W System—and so, because of the way that system was developing, we did a fall-back to a very needed Surface Ship Electronic Warfare Improvement Program.

Mr. SESTAK. Is it as capable?

Admiral MCCULLOUGH. Yes, sir, it is.

Mr. SESTAK. Why did we fall back to it?

Admiral MCCULLOUGH. It has to do with the antenna arrays and

how much capability you can put into various antennae array.

Mr. SESTAK. Would the other one, if it had borne out, been more

capable?

Admiral MCCULLOUGH. No, sir, not from a warfighting perspective. From an antenna co-site capability, probably. But we don’t envision that antenna technology.

Mr. SESTAK. So Nulka will be there?

Admiral MCCULLOUGH. Sir?

Mr. SESTAK. Nulka would be there?

Admiral MCCULLOUGH. Yes, sir.

Mr. SESTAK. You are sure?

Admiral MCCULLOUGH. Yes, sir.

Mr. SESTAK. Okay. And Tomahawk is still there.

Admiral MCCULLOUGH. Yes, sir. You can put Tomahawks in the

launchers.

Mr. SESTAK. And could VLA?

Admiral MCCULLOUGH. Yes, sir. It will fit in the launchers.

Mr. SESTAK. In the tail?

Admiral MCCULLOUGH. I have to get back to you on that, Congressman. I don’t remember off the top of my head.

Mr. SESTAK. I was just curious. There had been some talk that

as we came down in cost—it appears it is wrong—is that we kept

the same capabilities.

Admiral MCCULLOUGH. Yes, sir. We have kept the same key performance parameters in the ship and the same warfighting capability in the ship.

Mr. SESTAK. Thank you very much.

Admiral MCCULLOUGH. Yes, sir.

Mr. ELLSWORTH. Thank you, Mr. Sestak.

We have got big shoes to fill here for Chairman Taylor. We will

give it a try.

40

Thank you all for being here.

Going back to some of the prior group’s testimony, we talked

about the construction manager theory, and I would like your analysis on the continuity of naval employees that oversee these

projects.

A, do we have that person on scene that his focus is keep this

thing going, an on-scene person that watches it day to day as these

changes come on, but he has that authority? And their length of

stay—the turnover that is watching out for our side—I would like

your analysis on that continuity employee and how we might improve that.

Ms. STILLER. Yes, sir. There are tenure agreements for the PEOs,

the program executive officers, and their executive directors—four

years—as well as the major program manager. It is a four-year tenure agreement or until you get to a major milestone. That is the

standard for all large programs, so pretty much any shipbuilding

program will fall under that requirement.

As for the on-site support, we have the supervisor of shipbuilding

that falls under Admiral Sullivan’s expertise, and I will let him

talk to you about program managers’ representatives that are actually physically in the shipyard.

Admiral SULLIVAN. Okay. So the waterfront is supervised by a

Navy captain engineering duty officer who has been in the business

probably for at least 15, probably 18, years, rotating through various jobs. His or her tenure on the waterfront in the command job

is approximately 3 years.

And working for that organization are a variety of disciplines

from quality assurance specialists to engineering processing folks

to progressing folks who oversee the ship. And in our previous testimony, particularly on LCS, we went through the lack of numbers

as far as depth charge of the folks in the supervisor’s office.

The ship was being built in Marinette, Wisconsin. The supervisor

herself was on the waterfront at Gulf Coast in Ingalls. And so we

had a detachment team up at Marinette. And we had far fewer

people doing that oversight than were required, and the reason for

that was a variety of reasons—one, the hurricane; two, the four supervisor offices that supervised construction on our new construction shipyards had been cut 50 percent in staff since 1992.

That doesn’t relieve us of the responsibility of having to make

sure we have sufficient folks onsite for a high-risk program. We

just didn’t ramp up the staff fast enough, so when this all went

down in January-February of this year, we had about eight people

onsite. We are now up to 18, headed for 20, which is our steady

state onsite. So we are in the process of correcting the problem, but

certainly we undermanned that at the start.

Ms. Stiller mentioned a thing called the program manager’s rep.

That is a naval officer of the lieutenant commander or commander

rank, typically has been in the business anywhere from three to

eight years, and that person has a dual reporting responsibility.

They report to their waterfront supervisor of shipbuilding, and

they also report to the Washington, D.C., program manager who

has that four-year tenure agreement. So that is a pretty good arrangement. It is very powerful, because that person has the autonomy of having to report to both bosses.

41

That said, earlier the previous panel talked about lack of cost reporting in the Navy. We have two problems with cost reporting.

First, in those cuts of the personnel on the waterfront to go watch

the ships, earned value management was one of the disciplines

that fell by the wayside, because we just couldn’t sustain the staff

to do meaningful, independent cost verification. That is the first

thing that we have started to work on as we stood those back up.

Second, there is a backup at headquarters there where our cost

estimating shop would have normally done that earned value management independent from the Washington, D.C., viewpoint, looking at all the numbers coming in from the waterfront. Headquarters staff has been cut, between the program officers and my

supporting infrastructure, 51 percent since 1992, and again, earned

value management is one of the disciplines that went by the wayside.

I have asked for an increase in the staff in that office so we can

re-grow, but that is tough to re-grow overnight, because that is a

specific discipline that has to be generated. Fortunately, my counterpart in the Naval Air Systems Command stuck with the earned

value management system, and they have folks who may be able

to help us in that process.

Mr. ELLSWORTH. What you have asked for, is that the magic

wand, in your best estimate, that says, ‘‘This is exactly what I

need’’? Have you asked for exactly what you need, or have you fallen below that on the scale, would you say? If you had total control—the budget, the manpower, and you could wave the wand?

Admiral SULLIVAN. Well, everyone would like margin in their

numbers. I have asked for program office people. I have asked for

technical people. And I have asked for onsite supervisors of shipbuilding people, and I have asked for what I consider to be the

minimum.

Mr. ELLSWORTH. Can you explain? You know, CBO was in here

an hour ago, and it appears that their cost estimates were more accurate than the Navy’s. Is that due to the fact that you were understaffed and didn’t have those people on there? Again, do we go back

to that turnover? Can you give me some analysis on that?

Admiral SULLIVAN. I would tell you we tend to not like the first

cost estimate that comes out when we go first cost a ship. And so

we go sharpen our pencils.

Our initial cost estimate for LCS was $400 million. That was

based on a mil spec model—pretty crude—at the very, very inception of the program, based on only a set of characteristics.

Subsequently, in dealing with the information coming in from

the competing teams, our cost estimators came down to be within

I would say $30 million of the contractors’ cost estimates. And that

is probably for a variety of reasons, one of which is pressure and

another which is a lack of good cost estimating tools for this particular type of ship, where it comes to LCS.

And I think there was a lot of pressure from the Navy to control

that program cost, and it turns out that when you set a very aggressive cost target, people will lean very far forward to try to

produce that cost. So the over-optimism that you discussed on the

previous panel was definitely there for LCS.

42

Mr. ELLSWORTH. Admiral, when you said that the cardinal rule

of shipbuilding was violated, that they started building before they

had the finished—wouldn’t there be a point where, when you had

the construction documents, that somebody would say, ‘‘Ooh, the

last hundred pages, the last thousand pages are gone here; let’s not

start this’’? Should that not have been caught when we said,

‘‘Somebody is violating a cardinal rule; we are not going to start

construction here,’’ during the project review? Can you elaborate?

Admiral SULLIVAN. Again, we went forward with full knowledge

of that state of the design, and again, the pressure for cost and

schedule were pervasive, and everybody leaned far forward, and

you have seen the result.

Mr. ELLSWORTH. When we have changes—this thing starts coming up; the hull is built; and I asked this in the last panel also—

certainly, there are going to be changes. And I have been involved

in projects where, along the way, we have said, ‘‘This just isn’t

going to work. We need to change that.’’

Who do you see having more changes: the shipbuilders themselves that say, when they get it up, ‘‘This pipe won’t go through

here; engineering-wise we can’t do this’’? Versus when you guys go

in and say, ‘‘Look, my sailor needs this; I need more of this,’’ whatever?

Who has more of those changes that obviously are going to add

to that cost when we have got to re-engineer or you want something? Where does more of that come from, the engineer or from

the Navy?

Ms. STILLER. The Navy program manager is limited in what

changes he can approve, and there are five areas: safety, unavailable contractor furnished equipment, test and trial deficiencies,

contractual defects, and statutory and regulatory changes that are

passed down. So a program manager is very limited on the amount

of change he can approve.

In the case of LCS when—we have also testified before—the

naval vessel rules, which are your building codes, were also in development during the design of the ship and—well, not into construction, but they were going on at the same time. You had the

building specs being developed at the same time, so that caused a

lot of change and a lot of churn in the case of LCS.

But certainly on a lead ship, you are going to see challenges as

you go into production that the contractor is going to find as he

starts to produce. And in most of our combatant vessels, we used

a design tool that is very mature so you can see interferences and

know ahead of time, but in some cases you don’t catch everything.

Mr. ELLSWORTH. On the changes on the LCS–1, my note shows

58 proposed change orders. Given the current issues and the estimated costs, are these—the things that we list are 58; I don’t have

them in front of me—we would like to have, nice to have, or we

have to have—these are ‘‘need these’’ changes.

Admiral SULLIVAN. If you start the clock back to when they first

started, when they were first awarded the contract, there were certainly more changes than that. The majority of the changes were

generated by the shipbuilder going back and looking at the naval

vessel rules—again, the building codes.

43

The military requirement for the ship has not changed at all, but

that is at the top level. There are tiered requirements that go all

the way down to how you will assemble pipes together. The shipbuilder looked at the naval vessel rules as they were finally published and had to go back and do a lot of changes to his own diagram. And some of those didn’t come before the Navy; they went

before the shipbuilder’s own change control board.

But then the Navy was also looking at and approving drawings

and looking at and approving a ship specification that the shipbuilder derived from naval vessel rules and the military requirements. And we would, on a safety or military performance basis,

tell them that ‘‘Well, this doesn’t meet the naval vessel rules.’’

The current round—we are trying to close that out right now; if

it is 58, that is approximately the number—were actually instituted by my chief engineer basically going up to resolve issues that

we had been arguing about—well, not arguing—discussing with the

shipbuilder, because it is a pretty robust discussion.

And he actually crawled through the engine room, and they are

all safety to the sailor-related deficiencies, such as you can’t access

a circuit breaker because there is a pipe running in front of it or

a sailor running across the deck plate and there are three pipes

right in his walking path that he would trip over or you have a

shaft coupling that is four to five feet in diameter rotating at several hundred rpm with no guards over it that could kill a person

walking past it.

So they are small changes, but they are significant in that they

are all safety related. Anything in that screening, anything that

was not absolute safety or operability related was tossed. There

were about 20 to 25 changes tossed in that process.

Mr. SUMMERALL. Admiral, if I could just follow on what you just

said. I think in large part due to Admiral McCoy’s personal visit

up there on I believe it was the 13th of July, we were able to come

to agreement on the technical baseline, and the changes moving

forward are just as the admiral said.

There are some changes in the machinery spaces for clearance

safety issues to enable us to get underway on trials, but any additional changes will be deferred to post delivery. So we are minimizing changes going forward to absolutely bare minimum.

Admiral SULLIVAN. I would characterize it as a punch list.

Mr. ELLSWORTH. This kind of goes back to one of my previous

questions and one for the former panel. Congress changes a certain

amount of seats every two years. The chairmen change. You all are

career, and we certainly appreciate that. We are kind of the visiting dignitaries for a certain amount of years.

What would you say to the folks that might think that because

of that reason, because we change—we have new freshmen on

Seapower—that the contractors, even though they are great contractors—they have built us great products—know that coming in

and that by the time these ships get built, there is not going to be

the oversight. And what this Congress approves for ships down the

road could be totally different than that, and that we don’t have

that continuity just becomes the regular part of doing Federal business as expected.

44

And I said this on the last panel. I built a jail two years ago, and

I was so proud that we came in half-a-million dollars under budget.

Everybody was shocked in my county that a government project

came in under budget. That was just almost unheard of. And so we

have almost come to expect that Federal budgets can’t be on time

and under budget or even at budget.

I know we have overruns, and certainly a ship with its complexities is not the same, but that we are not putting enough pressure

and enforcing the importance with the taxpayers’ dollars of saying

this thing really needs to be more in line with what you are estimating, even though it is going to be three years out. You have got

to be better at estimating what the cost is than what you are doing. We had a boat that has been estimated from $6 million when at

the first step. Now it is up to $16 million. I don’t think the American public minds so much a little bit here and there, but $6 million to $16 million is pretty substantial. And I guess I would like

someone to answer that we are going to do our best, and we are

improving.

How do we assure the American public and our vendors that we

have got to do a better job of keeping these costs closer to the estimates of what they are? That is the only way we can budget—if

we know what it is. And we couldn’t buy a car like we are buying

these ships.

Admiral SULLIVAN. Sir?

Ms. STILLER. Yes, sir.

Admiral SULLIVAN. Do you want to take it?

Ms. STILLER. I will start.

Admiral SULLIVAN. Okay.

Ms. STILLER. One of the keys that I mentioned, too, in my statement is stability. Over time we have not given the shipbuilders the

ability to look ahead and say, ‘‘This is what the Navy plans to buy.’’

And with our 313-ship Navy and where we want to go, we have

laid out that roadmap, and we are attempting to stick to that roadmap so that we show them we are serious and where we are headed. Giving them that stability allows them to estimate what a ship

is going to cost, knowing what the future is looking like. It is harder if you are not certain what is coming.

So that has been, I think, a critical factor. It had to start with

the Navy, and we are committed to that. And I think that is an

important first step in getting our arms around the cost.

Admiral SULLIVAN. And a second element—and I know the previous panel discussed this some—is the fidelity of the cost estimating tools and the training of the independent cost estimators.

We have been embarked for a couple of years on working on cost

estimating tools and training our cost estimating. That is a cyclic

business, and I would say ten years ago we had a real problem in

the cost estimating discipline where we weren’t hiring any new

folks, and we had to train up a whole new set. We talked about

cuts in personnel. Cuts in ship design and ship cost estimating

tools followed the same pattern of reductions that the people followed.

And so, the last couple of years we have been standing up some

of the new estimating tools. I know you talked on the last panel

about—I will call it—probabilistic cost estimating, where you don’t

45

just come up with a point estimate based on the displacement of

the ship and a couple of military characteristics.

We have actually worked pretty hard over the last five to eight

years coming up with hundreds of cost estimating relationships, because the pipes cost something, engines cost something, valves cost

something, the steel costs something. Each labor pool that assembles those things has a different labor cost structure and a different

amount of money that you would pay that sort of an artisan.

But probably the biggest thing is coming up with what is the

probability that the cost will not exceed that cost number that you

have come up with, and now instead of arguing who is right, we

argue over where do we want to be on the probability curve, and

where do you want to budget? Do you want to budget to an 80 percent probability of success, or 60 or 4 or 99?

And a lot of the difference in the numbers that you see between

us and the CBO or the GAO is based on how much risk are you

willing to take.

Mr. ELLSWORTH. I have only one more question, unless somebody

slips me a note, or—oh, as they just did.

I did want to ask you if the Navy is keeping up on the situation

in Wisconsin on some labor issues that could affect the shipbuilding there and the follow-up ship. I am not sure if it is the boilermakers or which labor organization, but apparently, there are some

contract problems that are causing some problems.

Do they update on that? Or is that any concern that the followup ship may be in jeopardy?

Ms. STILLER. We are aware of it. The shipyard is in negotiations

with the union. I don’t have an update today. Our supervisor of

shipbuilding in the yard watches that very closely for us. But certainly we are aware. Whether that would jeopardize future procurements—that is usually not a factor in the Navy’s decision-making.

Mr. SUMMERALL. To date, there has been no work stoppage. I

don’t see why going forward with the plan that we have in place

to deliver the ships in 2008, to do the fly-off in 2009, and then to

deploy the ships in fiscal year 2010—if we get additional ships in

2008 and 2009, I don’t see why the current negotiations and labor

discussions would have any impact on that company being able to

compete going forward.

Mr. ELLSWORTH. Thank you.

And unless I get slipped another note, I will ask you this question.

Mr. O’Rourke from the last panel stated that we should re-think

the $460 million cost cap—and this would be in conference; that is

why I am asking—that the Navy proposes, because it might be too

high. And I just want to know if you agree or disagree and why.

Admiral MCCULLOUGH. We think that the $460 million cost cap

is the right number. We have worked that through our cost estimating and budget process, and we have had that approved by the

CNO and the secretary that we believe that is what these ships are

going to cost to produce in fiscal year 2008 dollars as an end-cost.

Mr. ELLSWORTH. Mr. Bartlett, any other questions?

Mr. BARTLETT. I just want to thank both panels.

Thank you very much for your testimony. Thank you.

46

Mr. ELLSWORTH. And I would also like to thank the four of you

in both panels for that exchange, and I appreciate your time you

spent with us today.

Admiral SULLIVAN. Thank you, sir.

Ms. STILLER. Thank you.

Admiral MCCULLOUGH. Thank you, sir.

Mr. SUMMERALL. Thank you very much.

[Whereupon, at 4:33 p.m., the subcommittee was adjourned.]

A P P E N D I X

JULY 24, 2007

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QUESTIONS AND ANSWERS SUBMITTED FOR THE

RECORD

JULY 24, 2007

(137)

QUESTIONS SUBMITTED BY MR. TAYLOR

Mr. TAYLOR. I would like the Navy’s estimate of fuel cost and availability for 20

years from now for a conventionally powered crusier.

Ms. STILLER. The Department of the Navy takes seriously the House of Representatives’ desire that we carefully consider nuclear power for CG(X) and other platforms. The Analysis of Alternatives for the Maritime Air and Missile Defense of

Joint forces capability, which includes assessment of CG(X) platform alternatives,

is incorporating the methods of the Navy’s Fiscal Year 2006 study on Alternative

Propulsion for Surface Combatants and Amphibious Warfare Ships. The AoA is examining both fuel efficient conventional power plants and nuclear power alternatives.

Rather than assessing CG(X) alternatives against single point predictions of future fuel prices over the life of the ship, the Navy is conducting sensitivity studies

as part of the AoA that vary assumptions on fuel price to further understand the

influence of this variable. Projections of world oil prices and production are provided

by the Department of Energy/Energy Information Administration in their International Energy Outlook 2007, Report #: DOE/EIA–0484 (2007) released May 2007,

which will be considered in the Navy’s analyses.

The Navy will take a comprehensive approach to the development of CG(X). This

process will carefully weigh all pertinent force structure considerations including

projected force and platform operational capability requirements of the new maritime strategy, total ship procurement and life cycle costs and their impact on affordability of the overall shipbuilding plan, capabilities and capacity of the shipbuilding

industrial base, technology benefits and risks, and operational support considerations.

QUESTIONS SUBMITTED BY MR. BARTLETT

Mr. BARTLETT. In the March 29th brief provided to members, the Navy stated

that as part of the LCS Program Restructuring the path ahead for a low risk program would rely on the use of internal Navy cost estimates. As well, the Navy has

established specific cost thresholds that would trigger a stop work on LCS 4 and

possibly a renegotiation of the LCS 2 and 4 contract. Understanding that the cost

estimated at completion (EAC) is competition sensitive, has the Navy’s internal EAC

for LCS 4 met or exceeded the cost threshold established by the Navy?

Admiral MCCULLOUGH, Ms. STILLER, Admiral SULLIVAN, and Mr. SUMMERALL. The specific cost threshold that would trigger an assessment of the need for contract

action with General Dynamics applies to LCS 2 vice LCS 4. There are other factors

in addition to this cost threshold that the Navy continues to monitor. The Contractor’s Estimate at Completion (EAC) for LCS 2 has not met or exceeded the threshold. The specific threshold criteria, contractor cost performance reports, and Navy

assessments of contractor performance include proprietary and/or business sensitive

data. The Navy would be pleased to brief the Committee with further detail if desired.

Mr. BARTLETT. What was the LCS construction delay at General Dynamics due

to the delay in submission and approval of the reprogramming request? At Lockheed

Martin? What do you estimate the cost impact will be?

Admiral MCCULLOUGH, Ms. STILLER, Admiral SULLIVAN, and Mr. SUMMERALL. The LCS 1 schedule delay associated with the Above-Threshold Reprogramming approval timing is estimated to be 2–4 weeks. A cost impact has not been estimated.

There is no schedule or cost delay on LCS 2.

Mr. BARTLETT. Does the Navy believe that equity in future LCS competition is

still possible? Won’t General Dynamics be able to continue to refine their design on

LCS 4 and be bidding on a 3rd ship cost, leading to a lower cost for its FY08 bids?

Given all the construction problems on LCS, does the Navy still believe that it is

prudent to procure 2 ships in FY08 and 3 in FY09? Why?

Admiral MCCULLOUGH, Ms. STILLER, Admiral SULLIVAN, and Mr. SUMMERALL. Yes, the Navy believes an equitable competition is still possible. For continued procurement of Flight 0 Littoral Combat Ships, both Lockheed Martin and General DyVerDate 22-MAR-2001 14:24 Sep 16, 2008 Jkt 037891 PO 00000 Frm 00141 Fmt 6601 Sfmt 6621 C:\DOCS\110-76\205280.000 HAS2 PsN: HAS2
138

namics have advantages and disadvantages relative to their specific detail design

and construction experience. The Navy’s selection criteria for future contract awards

will be structured to fairly evaluate proposals in order to make awards that provide

best value to the government. For Flight 1 ships, the Navy is developing an acquisition strategy to establish a level playing field to procure ships based on the selected

design and will incorporate lessons learned from Flight 0 test and trials.

The FY08 and FY09 ships are needed to address a critical warfighting gap. Both

Lockheed Martin and General Dynamics are resolving lead ship design and production issues and applying lessons learned so that follow-on ships do not experience

similar issues.

Mr. BARTLETT. How has the Navy shared lessons learned from the LCS program

with other acquisition programs and with industry to ensure that neither community repeats the same mistakes?

Admiral MCCULLOUGH, Ms. STILLER, Admiral SULLIVAN, and Mr. SUMMERALL.

The Navy Senior Acquisition Executive (SAE) has taken the following actions in an

effort to share these lessons learned:

1. Personally conducted Portfolio Management Reviews, both internally with all

of the Program Executive Officers and externally with her Industry counterparts.

2. Personally conducted a series of Town Hall meetings at various geographic

locations to share her views with the entire enterprise acquisition workforce.

3. Issued new policy guidance on specific areas of concern raised during the review of the LCS program. These Policy memos have been posted to the ASN

(RDA) web site and are accessible by the entire enterprise.

4. Conducted a comprehensive review of the program management engineering

and technical authority staffing and on-site waterfront government oversight

requirements.

QUESTIONS SUBMITTED BY MR. SESTAK

Mr. SESTAK. I would like to know that when they did their cost-benefit analysis

and the curves crossed, did you include in that the fully burdened cost?

Admiral SULLIVAN. The cost analysis included the burdened cost of fuel and these

costs are appropriately considered in the study. In performing analysis of alternatives, all the affected costs or costs accruing to an option should be included when

comparing the alternatives. The Alternate Propulsion Study used the following cost

per barrel:

Fully Burdened Cost of Fuel (FY 07$) $152.95

Direct (DESC) $96.60

Crude Oil (variable) 74.15

Refinement (variable) 13.76

Transportation (fixed) 2.67

Facilities/Operations* (fixed) 5.93

Mark-Up (fixed) 0.09

Indirect (Burden) $56.35

Storage & Handling $ 0.05

Navy FISC* (fixed) (Incl. with DESC)

Navy Barge* (fixed) 0.05

Delivery $52.10

Oiler Acquisition* (fixed) 14.67

Oiler O&S/Charter Costs* (variable) 37.43

Environment (fixed) $4.20

* Portion of burdened fuel cost associated with storage and delivery infrastructure.

139

As indicated in the table, there are two parts to the fully burdened cost, direct

and indirect. Within each category, some of the costs vary with changes in the cost

of refined fuel (price and volume) and some do not (or neglibly so).

The direct portion of the cost per barrel is the price charged by the Defense Energy Supply Center (DESC). Since this price is based on the DOD-wide fuel usage,

changes to the cruiser fleet’s fuel usage will have little to no impact on the price

per barrel charged. Therefore, use of the entire DESC price is appropriate to the

Alternate Propulsion study.

Fleet Oiler acquisition and operating & support (O&S) costs are indirect costs.

The treatment of Oiler acquisition costs as a cost per barrel assumes Oiler acquisition is directly linked to the number of barrels delivered. For small changes in delivered fuel, this would not be the case. However, larger increases or decreases in fleet

fuel usage would impact Oiler force levels (and therefore acquisition costs) at some

point. This is not the case for Oiler O&S/Charter costs. The duty cycle of the oiler

fleet directly impacts manning, maintenance and charter cost. If more fuel is delivered, more O&S costs would be incurred. If Oiler acquisition costs are removed from

the calculation, the break-even per barrel costs would increase by $15/bbl (e.g., the

medium surface combatant break-even range would be $85–$240 per bbl vice the

range reported in the Alternate Propulsion study of $70–$225 per bbl).

QUESTION SUBMITTED BY MR. FORBES

Mr. FORBES. One of the ways the Congress can provide relief to monetary pressures facing Navy acquisition programs is to provide multi-year procurement for the

most expensive vessels. The FY 2007 Defense Authorization bill allowed for the

CVN 78 aircraft carrier to be financed over a four-year period, instead of the current

two-year plan. Why did the Navy choose not to take advantage of this, and does

the Navy intend to revisit this decision in the future, either on the CVN 78 or follow-on ships in the class?

Admiral MCCULLOUGH, Ms. STILLER, Admiral SULLIVAN, and Mr. SUMMERALL.

The Navy was unable to take advantage of the FY 2007 Defense Authorization bill

language which allowed the CVN 78 aircraft carrier to be financed over a four-year

period due timing. The Navy appreciates the four-year funding authorization, and

as stated in the Report to Congress on Annual Long-Range Plan for Construction

of Naval Vessels for FY 2008, we will evaluate feasibility of four-year funding in

future budgets.

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