Ford-Class Aircraft Carrier: Follow-On Ships Need More Frequent and Accurate Cost Estimates to Avoid Pitfalls of Lead Ship
Released: 2017-06-13T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: The Navy intended for the Ford Class aircraft carrier to improve combat capability while reducing acquisition and life-cycle costs. However, as GAO has reported on extensively since 2007, the lead ship has experienced cost growth of nearly 23 percent, with a reduced capability expected at delivery. CVN 78 is estimated to cost $12.9 billion, while the next ship, CVN 79, is estimated to be $11.4 billion. The Navy plans to buy 1-2 more ships in the coming years.

The Senate Armed Services Committee Report accompanying the National Defense Authorization Act for Fiscal Year 2016 included a provision that GAO review Ford-class cost estimates, among related issues. This report assesses: (1) the extent to which the CVN 79 cost estimate is a reliable basis for meeting the cost cap and addresses known cost risks from the lead ship, and (2) the extent to which oversight mechanisms provide Congress with insight into ship costs. To do this work, GAO compared the CVN 79 cost estimate with GAO's Cost Estimating and Assessment Guide, analyzed cost reports, and interviewed relevant officials.

section_title: What GAO Found
paragraphs: The cost estimate for the second Ford-Class aircraft carrier, CVN 79, is not reliable and does not address lessons learned from the performance of the lead ship, CVN 78. As a result, the estimate does not demonstrate that the program can meet its $11.4 billion cost cap. Cost growth for the lead ship was driven by challenges with technology development, design, and construction, compounded by an optimistic budget estimate. Instead of learning from the mistakes of CVN 78, the Navy developed an estimate for CVN 79 that assumes a reduction in labor hours needed to construct the ship that is unprecedented in the past 50 years of aircraft carrier construction, as shown in the figure below.

After developing the program estimate, the Navy negotiated 18 percent fewer labor hours for CVN 79 than were required for CVN 78. CVN 79's estimate is optimistic compared to the labor hour reductions calculated in independent cost reviews conducted in 2015 by the Naval Center for Cost Analysis and the Office of Cost Assessment and Program Evaluation. Navy analysis shows that the CVN 79 cost estimate may not sufficiently account for program risks, with the current budget likely insufficient to complete ship construction.

The Navy's current reporting mechanisms, such as budget requests and annual acquisition reports to Congress, provide limited insight into the overall Ford Class program and individual ship costs. For example, the program requests funding for each ship before that ship obtains an independent cost estimate. During an 11-year period prior to 2015, no independent cost estimate was conducted for any of the Ford class ships; however, the program received over $15 billion in funding. In addition, the program's Selected Acquisition Reports (SAR)—annual cost, status, and performance reports to Congress—provide only aggregate program cost for all three ships currently in the class, a practice that limits transparency into individual ship costs. As a result, Congress has diminished ability to oversee one of the most expensive programs in the defense portfolio.

This is a public version of a sensitive but unclassified report that GAO issued in March 2017. Information the Department of Defense deemed sensitive has been removed. Areas where redactions occurred are noted in the body of the report.

section_title: What GAO Recommends
paragraphs: The Navy should develop a new, reliable cost estimate for CVN 79 validated by cost reviews and obtain an independent cost estimate before requesting funding for future ships. The Navy partially concurred with these recommendations, but did not concur with a draft recommendation to prepare a SAR for each Ford class ship. In response to comments, GAO revised the recommendation to focus on SAR cost and funding summaries.

section_title: Letter
paragraphs: The Navy is investing over $43 billion to develop three Ford-Class  nuclear-powered aircraft carriers. This class of ships was intended to  feature an array of cutting-edge technologies to improve combat  capability and create operational efficiencies by increasing the rate of  aircraft launches and reducing the number of personnel needed to  operate the ship. The Navy expected to achieve these improvements  while simultaneously reducing acquisition and life-cycle costs. However,  this expectation has not been borne out. Costs to construct the lead ship  Gerald R. Ford (CVN 78) have increased from $10.5 billion to $12.9  billion (nearly 23 percent), and promised levels of capability have been  reduced. Since 2007, we have reported extensively on issues with the  Ford-Class program, including weaknesses in the program’s cost  estimates. To help ensure that the Navy adhered to its cost estimates,  Congress established a procurement cost cap for Ford-Class ships. The  lead ship is now capped at $12.9 billion, while the follow-on ships are  capped at $11.4 billion each. CVN 78 was recently delivered, in May  2017. Construction of the second ship John F. Kennedy (CVN 79) is  underway, and Congress appropriated advance procurement funding for  the carrier replacement program in fiscal year 2016, which the Navy has  budgeted for the third ship Enterprise (CVN 80). The Navy is currently  considering adding a fourth ship (CVN 81) to the program baseline.

The Senate Armed Services Committee report accompanying the  National Defense Authorization Act for Fiscal Year 2016 included a  provision for us to review the Ford-Class acquisition program, including  the quality and reliability of cost estimates and how the Navy reports  program costs to Congress. This report assesses: (1) drivers of CVN 78  cost growth, (2) the extent to which the CVN 79 cost estimate is a reliable  basis for meeting the cost cap and addresses known cost risks from the  performance of the lead ship, and (3) the extent to which Ford-Class  oversight mechanisms provide Congress with insight into ship costs.

To determine the drivers of CVN 78 cost growth, we leveraged our past  Ford-Class program reports and analyzed Navy budget submissions and  program documentation, including memorandums to members of  Congress. To assess the reliability of the CVN 79 cost estimate, we  determined the extent to which the estimate was consistent with cost  estimating best practices as identified in GAO’s Cost Estimating and  Assessment Guide, as well as Navy cost estimating guidance. We also  reviewed supporting documentation and conducted interviews with  relevant DOD and Navy officials responsible for developing and updating  the CVN 79 estimate. To determine the extent oversight mechanisms  provide Congress with insight into Ford-Class ship costs, we reviewed  legislation on the congressional cost caps and examined budget requests  from 2001 to 2016 and Selected Acquisition Reports (SAR) from 2005 to  2015 to assess the transparency of cost information. A more detailed  description of our scope and methodology is presented in appendix I.

The performance audit upon which this report is based was conducted  from December 2015 to March 2017 in accordance with generally  accepted government auditing standards. Those standards require that  we plan and perform the audit to obtain sufficient, appropriate evidence to  provide a reasonable basis for our findings and conclusions based on our  audit objectives. We believe that the evidence obtained provides a  reasonable basis for our findings and conclusions based on our audit  objectives.

This report is a public version of a sensitive but unclassified (SBU) report  issued in March 2017. After issuing that SBU report, we subsequently obtained comments from DOD from March 2017 to June 2017 on  information the department deemed not releasable to the public. We  redacted that information in order to prepare this public version of the  original SBU report for public release. This public version of the report  was also prepared in accordance with generally accepted government  auditing standards.
subsections: section_title: Background
paragraphs: The Ford-Class nuclear-powered aircraft carriers are the successors to  the Nimitz-Class carriers designed in the 1960s. The Navy set ambitious  goals for the Ford-Class program, designing the carrier with an array of  cutting-edge technologies, including an aircraft launch system that would  use electromagnetics—versus steam—to propel aircraft off of the ship  (EMALS), an advanced arresting gear (AAG) with an electric motor to  recover aircraft, and a dual band radar (DBR) that would use two planar  (stationary) radars to provide air traffic control, ship self-defense, and  other capabilities. These technologies, along with new design features  like a new propulsion system, an enlarged flight deck, and an aft- positioned island, would improve combat capability, while simultaneously  reducing acquisition and life-cycle costs. Newport News Shipbuilding, in  Newport News, Virginia, began construction of CVN 78 in September  2008 with delivery originally expected in September 2015. Delivery was  delayed, however; and CVN 78 was delivered in May 2017. Construction  of CVN 79 began in June 2015, with an expected initial delivery in 2022.

Due to their vast size and complexity, aircraft carriers require funding for  design, long-lead materials, and construction over many years. To  accomplish these activities on the Ford Class, the Navy has awarded  contracts for two phases of construction—(1) construction preparation  and (2) detail design and construction—which are preceded by the start  of advance procurement funding. The CVN 78 detail design and  construction contract was a cost-plus incentive fee contract, which means  that the shipbuilder is reimbursed for its allowable costs plus a fee which  is adjusted according to a formula and is capped by a negotiated  maximum fee. In contrast, the CVN 79 detail design and construction  contract is a fixed-price incentive fee contract, meaning the government’s  liability is capped at a negotiated ceiling price. However, because the  Navy budgeted the ship at the target cost, any cost increases above the  target would require the Navy to adjust its budget planning and request  additional funding from Congress. DOD and the Navy have conducted  program reviews for each Ford-Class ship prior to major phases in the  program, such as prior to awarding advanced procurement and detail  design and construction contracts.
subsections: section_title: Our Prior Reports and Recommendations
paragraphs: We have reported extensively on issues with the cost and execution of  the Ford-Class program and made a number of recommendations. DOD  has addressed some but not all of our recommendations:  In 2007, we reported that delays in Ford-Class technology  development and overly optimistic cost estimates would likely result in  higher lead ship costs than what the Navy planned in its budget.  Among other things, we recommended actions to improve the realism  of the CVN 78 budget estimate and the Navy’s cost surveillance  capability. We also recommended that the Navy develop carrier- specific tests of DBR to ensure that it could meet carrier-specific  requirements. While DOD agreed with these recommendations and  eventually acted on some of them, including improving the Navy’s  cost surveillance capability, the Navy’s updates to CVN 78’s cost  estimate did not reflect its most likely costs.

In 2013, we reported that the Navy faced technical, design, and  construction challenges to completing CVN 78 that had led to  significant cost increases and reduced the likelihood that a fully  functional ship would be delivered on time. The Navy’s strategy for  providing timely demonstration of CVN 78 capabilities was hampered  by post-delivery test plan deficiencies, Joint Strike Fighter aircraft  delivery delays (this is one of the primary aircraft slated to operate  from the carrier), and reliability shortfalls affecting key ship systems.  We recommended that DOD:  conduct a cost-benefit analysis on required CVN 78 capabilities—  namely, reduced manning and the increased rate of aircraft  launches (known as the sortie generation rate)—in light of known  and projected reliability shortfalls for critical systems; update the Ford-Class program’s test and evaluation master plan  and adjust the planned post-delivery test schedule; defer the CVN 79 detail design and construction contract award  until land-based testing for critical systems was complete; and update the CVN 79 cost estimate on the basis of actual costs and  labor hours needed to construct CVN 78.

While DOD agreed to update the test plan and delayed the CVN 79 detail  design and construction contract award, it partially concurred with and  has taken only modest action to address our other recommendations.

In 2014, we reported that the extent to which CVN 78 would be  delivered on time and within the Navy’s $12.9 billion estimate was  dependent on the Navy’s plan to defer work and costs to the post- delivery period. We found that CVN 78 would deploy without  demonstrating full operational capabilities because it could not  achieve certain key requirements—such as increasing launch and  recovery rates—according to its test schedule. We also found that the  Navy was implementing steps to achieve the congressional cost cap  for CVN 79, but that they were largely based on ambitious efficiency  gains and reducing a significant amount of construction, installation,  and testing—work traditionally completed prior to ship delivery. We  made no new recommendations in this report but noted that our 2013  recommendations remained valid. However, we suggested that  Congress consider revising the cost cap legislation to ensure that all  work included in the initial ship cost estimate that is deferred to post- delivery is counted against the cost cap; if warranted, we noted, the  Navy could seek statutory authority to increase the cap. To date,  Congress has not taken action to change the cost cap legislation;  however, the National Defense Authorization Act for Fiscal Year 2016  lowered the cost cap for all follow-on ships, to include CVN 79, from  $11.5 billion to $11.4 billion.

section_title: Cost Estimating
paragraphs: A reliable cost estimate is critical to the success of any program. Such an  estimate provides the basis for informed investment decision making,  realistic budget formulation and program funding, meaningful progress  measurement, proactive course correction when warranted, and  accountability for results. The GAO Cost Estimating and Assessment  Guide states that reliable cost estimates reflect 4 characteristics, which  encompass 20 best practices. The characteristics are (1)  comprehensive, (2) accurate, (3) credible, and (4) well-documented, as  shown in table 1 below.

For Navy shipbuilding programs, including the Ford Class, several  different entities are involved in cost estimating:

The Naval Sea Systems Command (NAVSEA) Cost Engineering and  Industrial Analysis Group (05C) is responsible for developing the  program life-cycle cost estimate, which is an estimate accounting for  the total cost to the government of acquisition and ownership of a  system over its full life.

The Naval Center for Cost Analysis (NCCA) is responsible for  developing an independent cost assessment for certain Navy  programs at program milestone events in the defense acquisition  system. This assessment is not a separate estimate, but rather a  review of the NAVSEA 05C program life-cycle cost estimate. NCCA  and NAVSEA 05C, with support from the program office, collaborate  to develop the Navy Service Cost Position, based on the program life- cycle cost estimate and the independent cost assessment. NCCA first  assessed the Ford-Class program in 2015.

The Office of the Secretary of Defense’s Office of Cost Assessment  and Program Evaluation (CAPE) develops an independent cost  estimate. According to DOD’s Cost Analysis Guidance and  Procedures, independent cost reviews are required for major defense  acquisition programs at milestone events. The Navy Service Cost  Position and the CAPE independent cost estimate are compared and  presented to the Under Secretary of Defense for Acquisition,  Technology, and Logistics (the Milestone Decision Authority for the  Ford-Class program) to establish the program acquisition baseline.  DOD policy states that a major defense acquisition program should  budget to the independent cost estimate unless an alternative  estimate is approved by the Milestone Decision Authority.

The program office uses cost and risk information from the program  life-cycle cost estimate to inform all resource and programming  decisions. The program office is responsible for developing and  annually updating the Cost Analysis Requirements Description, which  includes the program acquisition approach, system characteristics,  and preliminary schedules. This document is used as the basis for all  program cost estimates.

The most recent CAPE and NCCA independent cost estimate and  assessment for the Ford Class were completed in May 2015 and April  2015, respectively, to support an April 2015 Defense Acquisition Board  Review prior to the Navy’s June 2015 award of the CVN 79 detail design  and construction contract. The Under Secretary of Defense for  Acquisition, Technology, and Logistics accepted the Navy Service Cost  Position as the program estimate.

The Ford-Class program held a Milestone B review in 2004 to approve  the program development decision, coinciding with the award of the  construction preparation contract, as shown in figure 1 below. Milestone  C was aligned with the end of operational testing, scheduled for fiscal  year 2020. In 2014 the Under Secretary of Defense for Acquisition,  Technology, and Logistics decided to shift this milestone review to April  2015 to take place during the planned Defense Acquisition Board  Review. In 2015 the Under Secretary canceled the milestone review,  and rescheduled it for fiscal year 2018.

section_title: Test Events
paragraphs: During the acquisition process, major defense programs, including  shipbuilding programs, execute several types of testing, while the ship  progresses toward operational milestones including the point when the  fleet initially receives the ship.

Developmental testing is intended to assist in the maturation of  products, product elements, or manufacturing or support processes. For  ship technologies, developmental testing typically includes land-based  testing activities prior to introducing a new technology in a maritime  environment and commencing with shipboard testing. Shipboard testing— which occurs during both developmental and integration testing—is meant to ensure correct installation and operation of the equipment and  systems in a maritime environment. Testing in this phase is a complex  and iterative process, as problems inherent with the start-up and initial  operation of a system must be identified, corrected, and retested to  ensure that the issues have been resolved.

Integration testing is intended to assess, verify, and validate the  performance of multiple systems operating together to achieve required  ship capabilities.

Operational testing occurs after delivery and assesses the ship’s  capability in a realistic environment when maintained and operated by  sailors, subjected to routine wear-and-tear, and employed in combat  conditions against simulated enemies. During this test phase, the ship is  exposed to as many actual operational scenarios as possible to reveal  the weapon system’s capability under stress.

section_title: Legislative Cost Cap of Ford-Class Ships
paragraphs: To ensure the Navy adheres to its cost estimates, Congress established a  procurement cost cap for the Ford Class. In the National Defense  Authorization Act for Fiscal Year 2007, Congress set the cap at $10.5  billion for the lead ship and $8.1 billion for each subsequent carrier. This  legislation also established six provisions, including economic inflation  and insertion of new technologies, which allow the Navy to make  adjustments to the cost cap without seeking statutory authority.  Following the 2007 legislation, Congress has twice increased the cap,  which now stands at $12.9 billion for the lead ship and $11.4 billion for  follow-on ships. The National Defense Authorization Act for Fiscal Year  2014 further expanded the list of allowable adjustments, solely for CVN  78, to include cost changes due to urgent and unforeseen requirements  identified during shipboard testing.

section_title: Persistent Issues with Lead Ship Construction Continue to Drive Cost Uncertainty
paragraphs: Since August 2007, we have reported on key risks to the CVN 78  program that would impair the Navy’s ability to deliver the ship at cost, on  time, and with its planned capabilities. These risks have been realized,  with nearly $2.4 billion in cost growth and over a 1-year delay in delivery.  While construction of CVN 78 is complete, recent technical deficiencies— discovered as the Navy continues to test the systems installed on the ship  and the shipbuilder completes the latter stage of construction activities— suggest that additional costs are likely. Program officials stated they have  not fully estimated these remaining costs. As a result, the current cost cap  of $12.9 billion does not represent the required budget necessary to  deliver the ship.
subsections: section_title: Challenges with Technology Development, Design, and Construction, Coupled with an Optimistic Budget, Drove Lead Ship Cost Growth
paragraphs: Our work has shown that the key drivers of CVN 78’s procurement cost  growth were an ambitious technology development plan for incorporating  critical technologies on the ship and the ship’s incomplete design at the  start of construction. These factors, along with engineering and  construction challenges, contributed to inefficiencies in ship construction  and have led to $2.4 billion in cost increases as of 2016. We highlight the  cost drivers to date in table 2.

CVN 78’s critical technologies drove approximately 40 percent of the  ship’s procurement cost growth. This cost growth was largely attributable  to EMALS, DBR, and AAG, as seen in table 3.

In addition to cost increases to buy these systems, costs to develop these  systems also increased above initial estimates. For example, EMALS  experienced a $549 million increase in its development costs.  Development costs for AAG and DBR are not reflected in the  development costs for CVN 78, as the systems are managed through  different Navy programs. Development costs for the AAG program  (managed by the Naval Air Systems Command) increased by $572  million—an over 300 percent increase above its initial estimate from  2005. The Navy initially planned to retrofit AAG on the Nimitz Class; it  opted to install the system only on the Ford Class, in part as a result of  cost increases. Similarly, DBR, which is managed by NAVSEA’s  Integrated Warfare Systems Program Executive Office, experienced  development cost increases. However, since this system was initially  developed for the Zumwalt Class destroyer program, its cost increases  are not accounted for in the CVN 78 program.

In our November 2014 report, we elaborated on ongoing issues with  DBR, AAG, and EMALS, which were attributed to unanticipated  challenges in development, as highlighted in table 4.

The Navy took steps to limit procurement cost growth for EMALS and  AAG, which, as noted above, are being developed and produced under  contracts separate from the CVN 78 detail design and construction  contract. Most notably, in fiscal year 2010, the Navy awarded a firm fixed- price contract for production of these systems for CVN 78, which had the  effect of leveling off the systems’ procurement cost growth as shown in  figure 2 below. The contractor developing these systems is generally  responsible for any cost growth beyond the contract’s firm fixed-price.

In August 2007, we found that the Navy’s cost estimate of $10.5 billion  used to develop the CVN 78 budget was optimistic. We highlighted a  number of concerns:

The cost estimate made the unprecedented assumption that CVN 78  would take 2 million fewer labor hours to build than its more mature  predecessor—CVN 77. We questioned the Navy’s assumption that  the lead ship’s costs would be offset by the use of the computer- assisted product model and other investments in facilities, as these  were unproven.

Key technology costs were likely to increase because the systems  were still in development.

Material costs were uncertain. CVN 78 was already beginning to  experience slips in the delivery of material in August 2007. According  to the shipbuilder, none of the delays to date were expected to disrupt  the construction schedule. However, late material delivery led to labor  hour increases on both CVN 76 and CVN 77.

CVN 78’s costs grew, as the budget did not appropriately reflect the  actual effort required to construct the ship. As a result, the Secretary of  the Navy increased the cost cap in 2010, and Congress approved an  additional increase to the cap in 2013. The Navy attributed the cost  increases to construction cost overruns and economic inflation. Figure 3  depicts CVN 78’s procurement cost growth and cost cap increases.

section_title: Recent Shipboard Testing Problems Create Cost and Schedule Uncertainty
paragraphs: Recent issues discovered during shipboard testing of the systems  installed on the ship further delayed CVN 78’s delivery date, creating  added uncertainty regarding the program’s ability to maintain costs under  the current $12.9 billion cost cap. Since we last reported on the status of  CVN 78 in November 2014, EMALS has completed deadload testing—a  key aspect of the system’s test program—and the shipbuilder has  positioned the ship to begin testing the ship’s propulsion system in  preparation for sea trials. However, other systems have experienced the  following problems, which have resulted in cost and schedule uncertainty:

DBR—In August 2016, program officials told us that testing for DBR  had been further delayed due to problems with ship integration,  specifically related to its interface with the power system. The Navy is  working to resolve technical deficiencies with the volume search  radar. Program officials stated that they plan to continue DBR testing  during sea trials following ship delivery. However, issues with DBR  may still affect CVN 78’s schedule. For example, warfare and aircraft  operations events scheduled for 6 weeks after ship delivery may be  pushed back if DBR issues are not resolved.

AAG— In May 2017, the Navy reported that shipboard testing of AAG  is 85 percent complete, and the remaining testing has been deferred  to post-delivery. The Navy is still resolving issues with emergent  faults with the AAG system discovered during shipboard testing, while  land-based testing with live and simulated aircraft continues. The  Navy needs to resolve these issues in order to support aircraft  operations during an exercise scheduled to take place 10 weeks after  ship delivery.

Propulsion Plant—According to the Navy, in June 2016, a transformer  in one of the main turbine generators in CVN 78’s propulsion plant  experienced a catastrophic failure. A shipbuilder and vendor review of  this incident found that the failure was likely due to a manufacturing  defect in the transformer. However, a follow-on review uncovered  additional problems, including issues with the voltage regulator on the  main turbine generator; design and performance problems with the  protection system; and excessive noise in the plant. Detailed  assessments of these issues show that the voltage regulator and  protection systems require design modifications. Laboratory testing of  the design modifications are complete and shipboard installation is  underway, which will be followed by shipboard testing. The generator  incident and the time needed to conduct the subsequent reviews have  affected propulsion plant testing, but program officials believe that  they are able to meet the new delivery date.

Advanced Weapons Elevators—In early January 2017, the Navy  reported that testing of the Advanced Weapons Elevators was 35  percent complete and that the shipbuilder would complete  construction and testing of 2 of the 11 elevators by ship delivery. The  Navy is working to resolve a problem with the elevator doors in order  to continue with testing. In general, the elevators continue to have  issues with reliability, which will affect their ability to support aircraft  operations.

Program officials stated that they are considering several options to  resolve problems uncovered during shipboard testing and have not fully  estimated the resulting costs. Because the remaining costs have not been  estimated, the current program baseline does not represent the required  budget necessary to deliver the ship. Data from contract performance  reports—owned and maintained by the shipbuilder—in turn no longer  provide an accurate assessment of the costs at completion, as additional  undefined work will be required to resolve problems identified in testing.  In the likely event that additional funding is needed to complete the ship,  the Navy may choose to defer more construction work or installation of  mission-related systems until after ship delivery to stay within the cost  cap. Finally, the delivery schedule for CVN 78 has continued to slip from  its initial plan of September 2015 and was delivered in May 2017.  Delays in delivery will result in additional costs, as the government may  continue to have to pay for unanticipated construction work and  unanticipated overhead costs.

section_title: CVN 79 Cost Estimate Is Not Reliable, with Construction Costs Likely to Exceed Cost Cap
paragraphs: The $11.4 billion the Navy has budgeted to construct CVN 79 is likely  insufficient, in part because the cost estimate that supports the budget is  not reliable and does not address lessons learned from the experiences  of the lead ship. We compared the program life-cycle cost estimate to  best practices criteria as outlined in GAO’s Cost Estimating and  Assessment Guide. While the estimate was comprehensive in that it  included all life-cycle costs—meaning development, procurement, and  sustainment—we found several weaknesses that indicate the $11.4 billion  is not a realistic program estimate.

First, we question the accuracy of the CVN 79 estimate because of its  optimistic assessment regarding the labor hours needed to construct  the ship and because the estimate did not use timely data to ensure  that it reflected the costs most likely to be incurred. While Navy  officials stated they have updated the cost estimate, the  documentation they provided to us was only a high-level briefing chart  reflecting final numbers. This documentation is not sufficient for us to  gain insights into the sources or timeliness of the data—key aspects  of our cost estimating best practices.

Second, we question the credibility of the estimate because it does  not sufficiently account for program risks. As a result, the cost  estimate does not provide a reliable basis for program decision  making, such as developing annual budgets, making requirement  trade-offs, and gauging shipbuilder progress, among other things.

Third, we found that the estimate lacked documentation and analysis  to support the derived cost savings from CVN 78.

For a high-level summary of the CVN 79 cost estimate compared to GAO  best practices, see appendix II.

Finally, the contractor performance reports indicate the shipbuilder has  not been consistently achieving the anticipated labor efficiencies needed  to meet the $11.4 billion cost cap.
subsections: section_title: Cost Estimate Is Not Accurate Because of Overly Optimistic Labor Hour Projections and Untimely Cost Data
paragraphs: The CVN 79 cost estimate does not address lessons learned from the  experiences of the lead ship, specifically in terms of its optimistic  assessment of the labor hours required to complete construction. A cost  estimate is considered accurate when it is based on an assessment of the  most likely costs—that is, it is neither overly conservative nor overly  optimistic—and it is updated regularly to reflect the current status of the  program. However, the cost estimate for CVN 79 does not fully meet  GAO’s best practice standards for accuracy because: (1) it is based on a  projected reduction in construction labor hours that is unprecedented in  aircraft carrier construction and relies on untested efficiencies and (2)  inadequate documentation existed regarding the timeliness of data to  ensure that it reflected the costs most likely to be incurred. Additional  information supporting the GAO conclusions in this section may be found  in the sensitive version of this report, which is available upon request for  official use only to those with the appropriate need-to-know.
subsections: section_title: Labor Hour Estimate Is Based on Unprecedented Reductions Compared to Prior Carrier Class Construction
paragraphs: The April 2015 cost estimate calculated that significantly fewer labor  hours would be required to construct CVN 79 compared to CVN 78.  NAVSEA 05C cost estimators attributed most of this labor hour reduction  to the assumption that CVN 79 would not experience the same  challenges that led to increased labor hours for CVN 78, including an  immature design, and the construction and engineering challenges  discussed above. The estimate also assumed reductions would result  from changes in the processes to build the ship that would make  construction more efficient and thus require fewer labor hours. Specific  details of the CVN 79 estimate were redacted because the directorate  responsible for NAVSEA contracting deemed the information to be  sensitive in the context of CVN 80 contract negotiations.

After developing this cost estimate, the Navy negotiated an 18 percent  reduction in the labor hours to construct CVN 79 compared to CVN 78.  However, this reduction is twice the labor hour reduction from the Nimitz  Class of carriers. Even if the shipbuilder did not experience the same  challenges as CVN 78, a nearly 9 million labor hour reduction would be  unprecedented in 50 years of aircraft carrier construction since the  construction contract for CVN 68 was awarded in 1967. As shown in table  5, in each successive aircraft carrier build, the number of labor hours  needed to complete construction has, at most, decreased by 9.3 percent  as compared to the previous ship (with CVN 69 compared to CVN 68  accounting for the largest percentage decrease). Specific details of the  CVN 79 estimate were redacted because the directorate responsible for  NAVSEA contracting deemed the information to be sensitive with regard  to CVN 80 contract negotiations.

The planned labor hour reduction in the CVN 79 cost estimate includes a  reduction as a result of several shipbuilder initiatives intended to increase  efficiency. NAVSEA 05C cost estimators derived this reduction based on  the shipbuilder’s estimates of its efficiencies, but did not conduct any  additional assessments to validate these estimates. The shipbuilder’s  planned efficiencies include a new build sequence aimed at completing  more work earlier in the construction sequence and in the shops instead  of after the ship is in the dock, as well as improvements to some shipyard  construction facilities. Work completed earlier in the build process is more  efficient and less costly than work done later on the ship when spaces are  more difficult to maneuver within. In addition, the shipbuilder’s revised build plan consolidates and increases the size of superlifts—fabricated  units and block assemblies that are grouped together and lifted into the  dry dock—to form larger sections of the ship. However, the new build  sequence and shipyard improvements are untested and there are no  historical data available to support whether the planned labor reductions  can be achieved. Shipbuilder representatives told us they had not fully  estimated the anticipated savings from future efficiencies. Since a  complete plan to achieve the required efficiencies has not been  developed, the shipbuilder is at risk of not meeting the planned $11.4  billion budget. Specific details of the CVN 79 estimate were redacted  because the directorate responsible for NAVSEA contracting deemed the  information to be sensitive in the context of CVN 80 contract negotiations.

Independent DOD and Navy cost reviews also found NAVSEA 05C’s  labor hour estimates to be optimistic. To calculate the labor hour  reduction, CAPE accounted for CVN 78 work packages that were  adversely impacted by concurrency of design and construction, and  material unavailability. NCCA developed two different estimates of the  labor hour reduction from Nimitz-Class labor hour data, accounting for the  weight of each ship. Specific details of the CAPE and NCCA estimates  were redacted because the directorate responsible for NAVSEA  contracting deemed the information to be sensitive.

NCCA officials stated they do not believe that CVN 79 construction will be  as efficient as the program office projects. CAPE’s independent cost  estimate also assumed fewer construction efficiencies than the program  estimate. Additionally, CAPE’s review noted that challenges may arise  during construction when parts are assembled at the dock and pier, and  estimated that 15 percent of future work will begin late relative to the  schedule. CAPE’s independent cost estimate projected that CVN 79  would exceed the program’s cost estimate by several hundred million  dollars, with nearly all of that difference for labor costs. Similarly, NCCA  noted that the shipbuilder is at risk of not achieving the entire estimated  labor hour savings from CVN 78 to CVN 79, and estimated that labor  costs could potentially increase by over $100 million. Specific details of  the CAPE and NCCA estimates were redacted because the directorate  responsible for NAVSEA contracting deemed the information to be  sensitive with regard to CVN 80 contract negotiations.

Although the CAPE and NCCA labor estimates are more conservative  than the NAVSEA 05C estimate, they are still optimistic compared to  historical aircraft carrier construction data. CAPE and NCCA officials told  us they had limited time to prepare their reviews, in part due to delayed  access to shipbuilder labor hour data. As a result, these reviews may not  have captured the full extent of potential cost risks. According to DOD  and Navy cost guidance, CAPE and NCCA should have been notified at  least 7 or 6 months, respectively, in advance of the program milestone  event. NCCA only had 3 months to develop its cost review and officials  stated they had to shorten their internal review process. In addition,  NCCA officials stated they did not receive shipbuilder labor hour data.  CAPE officials stated they received this data only one month prior to the  estimate completion date. At the April 2015 Defense Acquisition Board  review, the CAPE estimate was still in development, so the optimistic  NAVSEA 05C estimate was the only complete estimate available to  inform decision makers at that review. The final CAPE estimate was  completed in May 2015, prior to issuance of the Acquisition Decision  Memorandum in June 2015.

section_title: The Navy Did Not Demonstrate the Estimate Has Been Updated with Current Data
paragraphs: In its April 2015 estimate, NAVSEA 05C used an estimate of CVN 78’s  total labor hours at ship completion as the starting point to determine  CVN 79 labor hours. Since CVN 78 had not yet been delivered, NAVSEA  05C used shipbuilder data on the actual labor hours expended and an  estimate of the labor hours for the remaining work. However, some of the  shipbuilder data used to calculate the distribution of production labor  hours were from March 2014, which was already a year out of date at the  time of the estimate. GAO’s Cost Estimating and Assessment Guide  advises regularly updating cost estimates as technical or program  assumptions change and more data become available. The guide also  recommends that the cost estimate be continually updated as actual  costs begin to replace the original estimates, as shown in figure 4.

GAO’s Cost Estimating and Assessment Guide emphasizes that cost  estimates should be realistic and timely. If an estimate is not regularly  updated with actual costs, it is difficult to analyze changes, accurately  estimate future costs, and provide decision makers with accurate  information for assessing alternatives. Regularly updating cost estimates  also allows program officials and estimators to have a track record of the  estimate for comparison over time. Without a documented comparison  between a current estimate—updated with actual costs—and the previous  estimate, cost estimators cannot determine how different the two  estimates are, and thus how well they are estimating.

While NAVSEA 05C cost estimators assert they have updated the CVN  79 cost estimate since April 2015, we are unable to validate this claim  based on the documentation provided. In June 2016, we were provided  with a demonstration of the cost estimating model NAVSEA 05C used to  develop the CVN 79 cost estimate. However, the cost estimating model  did not incorporate any updates based on new performance data.  According to officials from NAVSEA 05C, the cost estimating model was  updated in July and September 2016 with actual costs. However, officials  were unable to provide documentation sufficient for us to verify the  assumptions and sources of the estimate. This level of detail is a key  component of the “accurate” characteristic for our cost best practices.

section_title: CVN 79 Cost Estimate Is Not Credible Because It Does Not Include Sufficient Risk for Program Uncertainties
paragraphs: To determine an estimate’s credibility, cost estimators should test, among  other things, the sensitivity of key elements of cost, such as labor hours  and labor rates, and conduct uncertainty analyses to quantify risks.  Uncertainty analysis provides the basis for adjusting estimates to reflect  known facts and circumstances that could affect costs and a level of  confidence in the estimate to help inform decision makers about the  effects of varying levels of cost. Additionally, an independent cost  estimate should be conducted by a group outside the acquiring  organization to determine whether other estimating methods produce  similar results. While CAPE and NCCA conducted independent cost  assessments and NAVSEA 05C conducted sensitivity and risk analyses  to test the validity of its estimate, our evaluation of the cost estimate  shows that it may not accurately account for the risk of certain  technologies and the new shipbuilder efficiencies. As a result, the amount  the Navy has budgeted for CVN 79 is likely insufficient to cover program  costs. Additional information supporting the GAO conclusions in this  section may be found in the sensitive version of this report, which is  available upon request for official use only to those with the appropriate  need-to-know.

In August 2016, the Under Secretary of Defense for Acquisition,  Technology, and Logistics expressed concern about CVN 78’s schedule  and performance and directed an independent team to review the critical  technologies in order to identify and mitigate potential risks for Ford-Class  follow-on ships. In December 2016, the independent review found that  CVN 79 is at risk of not meeting planned efficiencies. In particular, the  review found that the new radar system, which was intended to reduce  cost and technical risk, is at risk of not meeting the CVN 79 schedule. The  review also found that reverting to legacy systems for follow-on Ford- Class ships is impractical and would impact the ships’ ability to meet key  performance parameters.
subsections: section_title: Sensitivity Analysis Indicates CVN 79 Cost Estimate Does Not Accurately Reflect Program Uncertainties
paragraphs: While NAVSEA 05C conducted a sensitivity analysis to identify a range of  possible costs, we found that the results of this analysis were not realistic.  We reviewed some of the top cost drivers identified in the sensitivity  analysis developed for NAVSEA 05C’s cost estimate and how each driver  impacts the range of potential program costs. Our analysis of the results  of the sensitivity analysis found that for some cost drivers, NAVSEA 05C  estimated a higher likelihood that these costs would be lower than  expectations (or underrun), rather than higher than expectations (or  overrun)—which seems unlikely given the program uncertainties.

This is particularly evident in NAVSEA 05C’s sensitivity analysis for  production labor hours. As previously mentioned, we found the CVN 79  labor hour estimate to be optimistic. This optimism results in an unrealistic  range of labor hours in the sensitivity analysis. Compared to historical  aircraft carrier data, the minimum value represents a labor reduction  which is significantly more than the largest decrease that has been  observed in the past 50 years of carrier construction. The sensitivity  analysis also indicates that the range for labor hour underruns is larger  than the range for overruns, which is not realistic given that construction  for CVN 76 and CVN 77 have required more labor hours than originally  estimated. Specific details of the CVN 79 sensitivity analysis were  redacted because the directorate responsible for NAVSEA contracting  deemed the information to be sensitive with regard to CVN 80 contract  negotiations.

In addition, the sensitivity analysis for EMALS and AAG may not  accurately reflect program uncertainty. Specifically, the analysis for AAG  conducted by NAVSEA 05C indicates that a cost underrun is more likely  than a cost overrun. Given the significant technical issues on AAG that  are still being resolved for the lead ship, this risk analysis may not  accurately reflect the cost risk associated with AAG performance issues.  Specific details of the CVN 79 sensitivity analysis were redacted because  the directorate responsible for NAVSEA contracting deemed the  information to be sensitive.

Further, NAVSEA 05C’s estimate did not sufficiently account for potential  changes during CVN 79 construction. NAVSEA 05C estimators only  included a factor of 3 percent of the total construction cost for changes.  However, 3 percent is not realistic compared to historical data from the  Nimitz-Class ships. The actual change order costs for all but one carrier  were greater than 3 percent, with an average cost of 5 percent.  Additionally, the estimate is on the low side of cost guidance from  NAVSEA for programs to budget between 3 and 5 percent of total  construction costs for potential changes on its follow-on ships. Due to the  uncertainty of the new technologies and build strategies, CVN 79 will  likely have above average change orders that will exceed the 3 percent  budget.

Finally, none of the cost reviews validated the program office’s anticipated  savings of $188 million from replacing the DBR with a new radar solution,  known as the Enterprise Air Surveillance Radar. The NCCA  independent cost assessment stated that analysts could not develop a  cost estimate for the radar since the program office did not provide  sufficient technical details. At the time of NCCA’s estimate, the Navy had  not yet begun development of the Enterprise Air Surveillance Radar. In  addition, NCCA pointed out that the radar program was not fully funded to  the cost estimate. As a result, the Navy may need to request additional  funding. The Navy awarded a contract for the radar development in  August 2016. While the new radar may result in procurement cost  savings, as the independent review team identified, there is risk for  additional costs going forward to integrate the radar on the ship.

section_title: Risk Analysis Indicates CVN 79 Budget Will Not Cover Most Likely Costs and Has No Reserve for Cost Growth
paragraphs: Based on our analysis, the CVN 79’s program estimate will likely be  insufficient to complete ship construction. NAVSEA 05C analysts  conducted a risk analysis to identify and quantify program risks, and  determined the effects of changing key cost driver assumptions and  factors—important steps in creating a high quality estimate. However,  NAVSEA 05C’s risk analysis indicates that the point estimate of $11.5  billion represented less than a 50 percent confidence level—the  probability that costs for the program will be at or below that level. For  example, a 50 percent confidence level indicates that there is an equal  chance that program costs will be above or below that cost level. An  estimate’s confidence level is used to inform a program budget, and as  additional budget is allocated to a program, there is a higher confidence  that program costs will fall under the budgeted amount. Navy cost  guidance recommends using the “risk adjusted mean” as the best  estimate for unknown cost for the program, which usually lies between 50  and 60 percent. Additionally, GAO’s Cost Estimating and Assessment  Guide states that program cost estimates should be budgeted to at least  the 50 confidence level. Even then, there is still a chance that the  program will need additional funding because programs tend to overrun  more than underrun. Thus, budgeting to the mean of the distribution or  higher, which is between the 55 percent to 65 percent confidence level, is  considered a best practice to guard against potential risks. Specific  details of the CVN 79 risk analysis were redacted because the directorate  responsible for NAVSEA contracting deemed the information to be  sensitive in the context of CVN 80 contract negotiations.

However, NAVSEA 05C’s risk analysis indicates that the current budget  does not provide margin for cost risk. We compared NAVSEA 05C’s risk  analysis of CVN 79’s potential cost outcomes and the associated  probability that such an outcome will be realized, with the typical risk- adjusted funding levels based on Navy cost guidance and GAO best  practices. Specific details of the CVN 79 risk analysis were redacted  because the directorate responsible for NAVSEA contracting deemed the  information to be sensitive.

The National Defense Authorization Act for Fiscal Year 2016 reduced  CVN 79’s cost cap to $11.4 billion and the program budget was further  reduced, resulting in a confidence level well below typical risk-adjusted  funding levels based on GAO’s best practices and Navy guidance. As a  result, the current budget for CVN 79 construction is unlikely to cover the  program costs even if there are no issues or schedule delays, and  therefore leaves no margin for program risk or uncertainty. The program  office plans to meet the cost cap in part from anticipated savings through  a two-phase delivery for CVN 79. Under this strategy, labor hours would  shift to a second phase, where installation of some electronic systems (in  particular the Enterprise Air Surveillance Radar) and compartments will  be completed after the ship is delivered and competed among different  vendors, which the Navy hopes will lower costs. The NAVSEA 05C  estimate did not include any savings from the two-phased delivery  approach beyond the savings identified for radar replacement, assuming  that the shipbuilder would remain responsible for completing all remaining  installation work. However, the NCCA independent cost assessment  reviewed the two-phase approach and could not substantiate the  assumption that the shift in labor hours to the second phase would  decrease overall costs. As a result, it is unclear whether the two-phase  approach will result in cost savings to meet the CVN 79 cost cap. Specific  details of the CVN 79 risk analysis were redacted because the directorate  responsible for NAVSEA contracting deemed the information to be  sensitive.

Further, we found that since the cost estimate does not sufficiently  account for program risks, it is likely that its confidence levels are  optimistic and this ship is at an even higher risk of exceeding the budget.  Based on an insufficient reflection of risk in the program office estimate  and recent budget reductions, the Navy will likely need additional funding  beyond the cost cap to complete CVN 79 construction. Typically, a high  confidence level means that there is a high probability that funding is  available to cover costs, even if multiple risks are realized. In the case of  CVN 79, this means that a high confidence level should cover the  shipbuilder not meeting planned labor efficiencies, as well as any critical  technologies requiring unplanned changes. We found the estimate does  not realistically reflect the full potential of CVN 79 cost growth, compared  to CVN 76 and CVN 77, the last two ships in the Nimitz Class, which had  6 and 17 percent cost growth respectively. Considering the cost risks  associated with potential changes to CVN 79’s baseline and the cost  growth observed on previous carriers, it is unlikely that the confidence  levels reflects the potential for CVN 79 cost growth. Since NAVSEA 05C  applied a narrow risk range to the cost estimate, the confidence levels are  particularly sensitive to change. However, since CVN 79 is not a low risk  program, it is likely that the cost estimate does not capture all potential  risks or costs.

section_title: Basis for Program Cost Estimate Is Poorly Documented
paragraphs: A reliable cost estimate is supported by detailed documentation that  describes how it was derived and how the expected funding will be spent  in order to achieve an objective. It is important that outside parties can  replicate the cost estimate and understand the logic behind the estimate.  The cost estimate documentation we reviewed did not describe the  estimating methodologies used and estimators had to provide us with  additional explanations to support the methodologies. Although  production man hours are identified as the top risk variable, there is  limited documentation to support the inputs behind the labor hour risk  analysis. For example, the estimate for planned construction efficiencies  was based on a shipbuilder estimate and had insufficient documentation  and no historical data to support it. To be considered fully documented in  accordance with best practices, we would expect to see data sources,  methodologies, and assumptions behind the estimate. For example, for  Milestone B in 2004, a 58-page document with 13 separate appendixes  was produced for the Ford-Class program life-cycle cost estimate. In  contrast, the primary documentation for the April 2015 program life-cycle  cost estimate was a 14-page memorandum which did not include the  same level of detail. Specific details of the CVN 79 cost analysis were  redacted because the directorate responsible for NAVSEA contracting  deemed the information to be sensitive with regard to CVN 80 contract  negotiations.

Poorly documented cost estimates can cause a program’s credibility to  suffer because the documentation cannot explain the rationale of the  methodology or the calculations underlying the cost elements. Therefore,  estimates that lack sufficient documentation are not useful for updates or  information sharing and can hinder understanding and proper use.  Furthermore, without adequate documentation, analysts unfamiliar with  the program will not be able to replicate the estimate because they will  not understand the logic behind it. Documentation is essential for  validating and defending a cost estimate. That is, without a well- documented cost estimate, one cannot present a convincing argument of  an estimate’s validity, or answer decision makers’ and oversight groups’  probing questions.

section_title: Current CVN 79 Construction Performance Suggests Cost Estimate May Not Be Achieved
paragraphs: Shipbuilder representatives told us that they are still working to define  some of the future efficiencies that will help them meet the planned  reduction in labor hours. As of January 2016, the shipbuilder had primarily  made progress on structural and component fabrication assembly work,  which represents only 15 percent of total labor. The largest labor  category, ship assembly, which is 45 percent of total labor, was only 5  percent complete, so it is uncertain whether shipbuilder performance will  continue to progress similarly as more ship assembly work is completed.  CAPE noted in its May 2015 independent cost estimate that although the  CVN 79 construction preparation contract was performing well at the time,  ship assembly is a key cost driver for the remainder of the construction  contract. Since efficiencies will be implemented for specific phases of  work, achieving efficiencies to date does not ensure that the shipbuilder  can achieve future efficiencies.

Our analysis of contract performance reports shows the shipbuilder is not  achieving the estimated labor efficiencies and cost performance—as  illustrated by the cost performance index, which indicates a steady  decline in performance. The cost performance index measures the ratio  of work performed to actual costs for work performed.

A cost performance index of less than 1 is unfavorable, because work is  being performed less efficiently than planned; a value greater than 1 is  favorable, implying that work is being performed more efficiently than  planned. Cost performance can be expressed in dollars: 0.9 means that  for every dollar spent, the program has received 90 cents worth of  completed work. Calculating the cost performance of the prior 6 months  provides an average measure of recent shipbuilder performance. Our  analysis found recent drops from the established baseline in both monthly  cost performance and the cost performance of the prior 6 months. The  first shipbuilder performance report for the new construction contract was  provided in October 2015, so a 6-month cost performance average could  not be calculated until March 2016. Additional information supporting the  GAO conclusions in this section may be found in the sensitive version of  this report, which is available upon request for official use only to those  with the appropriate need-to-know.

Shipbuilder contract performance reports identify several labor  categories, such as sheet metal, insulation, and piping, where completed  work has cost more than planned. In some of these categories, the  shipbuilder may not realistically be able to improve labor efficiencies and  complete certain work within the budget. Independent analysis from the  Navy’s Supervisor of Shipbuilding also found that overall construction  labor cost performance has been slowly degrading. The shipbuilder  must complete future work more efficiently and below budget in order to  compensate for recent performance issues. If current shipbuilder  performance trends continue, CVN 79 is at risk of not being completed  within the $11.4 billion cost cap.

section_title: Ford Class Oversight Mechanisms Provide Limited Insight into Ship Costs
paragraphs: Current reporting mechanisms, such as budget requests and the SAR,  provide limited insight into the overall Ford-Class program and individual  ship costs. Because the Navy has designated the entire Ford-Class  program as a single major defense acquisition program, independent cost  reviews have been infrequent and are not conducted for each ship before  the Navy must request funding for ship construction. As a result,  individual ships have received a significant portion of funding with limited  information on program costs. Additionally, annual acquisition reports to  Congress provide only aggregate program cost for all three ships  currently in the class, a practice that diminishes transparency into  individual ship costs. As a result of unreliable cost estimates and limited  acquisition reporting, Congress has limited ability to oversee one of the  most expensive programs in the defense portfolio.
subsections: section_title: Significant Funding Decisions Are Made Prior to Attaining Independent Cost Estimates
paragraphs: Because the entire Ford-Class program is considered a single major  defense acquisition program, the Navy requested and received a  significant portion of funding for each of the first three Ford-Class ships  without an independent cost estimate to confirm the credibility of program  estimates. An independent cost estimate is important because it  provides an unbiased assessment of whether a program’s estimate is  reasonable. DOD acquisition policy and federal statute state that  independent cost estimates for major defense acquisition programs are  conducted at milestone events. In the case of the Ford-Class program,  although each individual ship exceeds the $2.79 billion procurement cost  threshold to be designated a major defense acquisition program, DOD  considers the entire Ford-Class program—rather than each individual  ship—as a major defense acquisition program. Therefore, independent  cost estimates are not required for each individual ship and CAPE only  developed independent cost estimates to support milestone events in  2004 and 2015 for the Ford-Class program as a whole.

Figure 5 shows that the independent cost estimates have trailed behind  the Navy’s funding requests and Congress’s authorization of advance  procurement and construction funding.

CAPE developed its first independent cost estimate for CVN 78 in 2004 in  support of the program’s Milestone B decision. However, at this point the  program had already received $1.7 billion in advance procurement  funding. For CVN 79, an independent cost estimate was not developed  until May 2015 to support the Ford-Class program’s originally planned  Milestone C. This occurred after the CVN 79 construction preparation  contract was awarded and $6.0 billion of procurement funding had been  received. As a result, no independent cost estimates were conducted  during the 11-year period between these milestones. Program officials  stated that CAPE reviewed NAVSEA 05C’s estimate in 2007 and 2010;  however, CAPE did not develop an independent cost estimate during  those reviews to provide decision makers with an alternative estimate.  During that time, the program received $15.1 billion in procurement  funding. In particular, there was no current independent cost estimate to  inform the Department of Navy’s President’s budget request for  construction of CVN 78 in 2007, and no independent cost estimate prior  to the budget request for construction of CVN 79 in 2012. Additionally,  there was no independent cost review of CVN 79 before Congress raised  the program cost cap from $8.1 billion to $11.5 billion in 2013.

No independent cost estimate to date has included CVN 80, and before  an independent cost estimate for CVN 80 is developed, the Navy will  have received nearly $2.2 billion in advance procurement funding.  According to guidance, CAPE will be required to develop an independent  cost estimate, to include costs for CVN 80, for the Ford-Class program  Milestone C now scheduled for fiscal year 2018. The Joint Explanatory  Statement accompanying the National Defense Authorization Act for  Fiscal Year 2016 required the Navy to assess the merits associated with  using economic order quantity procurement with CVN 80 and CVN 81  and the Navy has estimated savings of $1.3 billion by pursuing this  strategy. However, since there will be no future milestone events for the  program after the Milestone C scheduled for fiscal year 2018, CAPE will  not be required to develop independent cost estimates for any follow-on  ships in the class after CVN 80—including CVN 81, which may soon be  added to the acquisition program baseline.

If each individual carrier were designated a separate major defense  acquisition program, each ship would have its own milestone events.  The Navy could align these milestones to correspond with major funding  decisions—for example, prior to budget requests for advanced  procurement funding, or prior to requesting funding to begin ship  construction—and CAPE would develop independent cost estimates prior  to these major milestones. Similarly, NCCA would also develop more  frequent independent cost assessments that focus on each individual  carrier. NCCA officials stated they have only conducted one review of the  Ford-Class program since it began in 2000. In comparison, Air Force  instruction requires the Air Force Cost Analysis Agency to conduct annual  independent cost assessments of all major defense acquisition programs.

In February 2005, we recommended, and DOD concurred, that an  independent review should occur with every acquisition of every aircraft  carrier. But DOD has not implemented this recommendation, as  demonstrated by the fact that no independent estimate was conducted  prior to the start of CVN 79 construction and the request for construction  funding. Given the fact that CVN 78’s costs have increased $2.4 billion  and CVN 79 faces cost increases as well, more realism in the budget  requests would help inform Congress about expected costs to the  taxpayer for the Ford Class.

section_title: Program Selected Acquisition Reports Obscure Individual Ship Cost Growth
paragraphs: The Navy totals Ford-Class performance measures for all three Ford- Class ships in the SAR, a practice that diminishes transparency and  encumbers oversight efforts. The SAR is a statutorily-mandated,  comprehensive acquisition summary required for major defense  acquisition programs. DOD submits SARs to Congress for program  oversight purposes. The SAR for the Ford Class is prepared in  accordance with the current Ford-Class acquisition program baseline— which is approved for three ships (CVN 78 to CVN 80). As a result, the  Navy reports combined average unit costs for the three ships annually,  rather than preparing separate reports for individual ships. The program  office noted that costs for non-recurring engineering and EMALS apply to  the entire Ford-Class program and cannot be easily allocated to individual  ships. While this is true, most costs are for ship procurement, which is  budgeted specifically for each ship. Reporting combined average unit  costs obscures individual ship cost growth and does not provide insight  into cost performance against the specific cost caps Congress has  mandated for each ship.

Further, this practice is in contrast to Nimitz-Class ships, which were  reported by individual hull in the SAR, with the exception of CVN 72 and  CVN 73, and CVN 74 and CVN 75, which were procured under single  contracts. Navy officials could not provide an explanation for why SAR  reporting changed.

The effect of the current practice of reporting combined average unit  costs for the three Ford-Class ships is clear when considering the Navy’s  reported procurement costs for the class. The 2015 SAR reported a  decline in the base year program and average procurement unit costs for  the class, when actual costs for CVN 78 have increased. This reported  decline is driven by a decrease in the estimated costs for CVN 80.  However, since an independent cost estimate for CVN 80 has not yet  been developed, it is possible that the anticipated ship savings have not  been accurately estimated and will not compensate for cost growth in  CVN 78 and CVN 79.

Principle 15 in Standards for Internal Control in the Federal Government  states that management should externally communicate the necessary  quality information to achieve the entity’s objectives. As a result of the  combined Ford-Class reporting, program managers are not externally  communicating the necessary quality information to achieve their  program’s objective. Reporting the program cost by hull for the Ford- Class program would allow for enhanced oversight—which is necessary  given the magnitude of the investment required for each ship. It would  also allow Congress more visibility into the cost performance of each ship  against the legislated cost caps.

Additionally, cost and funding summaries for individual ships would allow  more transparency into the cost trade-offs of each ship. Federal  standards for internal control note that the information program managers  communicate to overseers, namely Congress, should include significant  matters relating to risks, changes, or issues that affect the program’s  internal control system. Internal control standards further note that  managers should select appropriate methods of communication for  external parties. Further, while the statute governing the SAR does not  require reporting on individual aircraft carriers, it requires that the SAR  provide information that the congressional defense committees need to  perform their oversight functions. Reporting cost and funding information  by individual hull would provide more transparency on cost tradeoffs and  cost drivers, which would improve the committees’ ability to perform  oversight. Reporting ship costs individually in the SAR would also allow  program managers to separately baseline, track, and manage each ship’s  cost. Without this more granular level of reporting, Congress and DOD  cannot determine the amount and cause of cost growth for each ship.

section_title: Conclusions
paragraphs: The experiences of the Ford-Class program are well known. We have  reported for many years on the program’s challenges that contributed to  nearly $2.4 billion in cost growth for the lead ship. Even as construction of  CVN 78 was just getting underway in 2007, we noted key risks in the  Ford-Class carrier program and pointed out the optimism in the cost  estimate. CVN 79’s cost estimate appears to suffer from similar optimism,  indicating that lessons were not learned from the lead ship in this regard.  NAVSEA 05C’s CVN 79 estimate is not realistic, as it does not accurately  capture actual program risks. As a result, CVN 79 is likely to experience  cost growth beyond the congressionally mandated cost cap and will  require additional program funding. Congress designed the cost cap in  order to encourage the program to adhere to its cost estimate. However,  the cost cap for CVN 79 was established without the input from a program  cost estimate. Consequently, instead of the program cost estimate  informing the cost cap, the cost cap informed the program cost estimate.  Developing a new CVN 79 cost estimate would allow the program to have  a more realistic budget that accurately reflects current shipbuilder  performance.

Further, the infrequent independent cost estimates result in Congress  being asked to commit billions of dollars to the program before key  information is available. As a result, individual ships receive billions of  dollars in funding before a realistic cost is determined, at which point  there are fewer opportunities to identify cost efficiencies or potential  tradeoffs. More frequent independent cost reviews would identify risks for  program cost growth sooner, allowing actions to be taken.

Finally, although each individual ship far exceeds the threshold for being  a major defense acquisition program, the entire Ford Class, rather than  each ship, is considered a major defense acquisition program, and thus  there is less oversight over individual ships as a result of infrequent  independent cost reviews and consolidated SAR reporting. Reporting cost  and funding summaries in the SAR individually for each ship would allow  Congress insight into individual ship cost growth and any tradeoffs that  are made to stay within cost caps. Additional information on ship costs  would allow for the Navy and Congress to develop a realistic acquisition  strategy and budget for the Ford-Class program.

section_title: Recommendations for Executive Action
paragraphs: We recommend the Secretary of Defense direct the Secretary of the Navy  to take the following three actions:

To ensure the Milestone Decision Authority has an accurate and  credible cost estimate for the Milestone C program review, NAVSEA  05C should update the cost estimate for CVN 79 as part of the Ford- Class program life-cycle cost estimate. This estimate should be  prepared in accordance with cost estimating best practices and  include current shipbuilder performance data.

NCCA should review the new CVN 79 cost estimate as part of the  planned independent cost assessment.

Further, the Secretary of Defense should direct the CAPE to  include the new CVN 79 cost estimate as part of the planned  independent cost estimate, which should form the basis of the  program budget request. If the independent cost estimate for CVN  79 should exceed the cost cap, the Navy should submit to  Congress a request to revise the cost cap.

Starting with CVN 80, NAVSEA 05C should develop program life- cycle cost estimates for each individual ship in the Ford-Class  program baseline.

Development of these estimates should be provided at milestone  reviews that should be aligned with major aircraft carrier funding  events. In particular, for CVN 80, a program life-cycle cost  estimate should be developed prior to the request for ship  construction funding.

For all ships in the class after CVN 80, a program life-cycle cost  estimate should be aligned with milestone reviews that correspond  with the receipt of any advance procurement funding and the first  year of the request for ship construction funding. These estimates  should be prepared in accordance with best practices and  updated regularly with actual cost data.

The Secretary of Defense should further direct the CAPE to  develop independent cost estimates for these ships prior to the  listed events.

The Secretary of the Navy should direct NCCA to conduct  independent cost assessments for these ships prior to the listed  events.

To improve insight into cost changes for individual ships in the Ford  Class, the program office should prepare cost summary and funding  summary sections for each individual ship in the class as part of the  SAR for the overall Ford-Class program.

section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOD for comment. In its written  comments, which are reprinted in appendix III, DOD concurred with much  of the report. DOD agreed that an accurate cost estimate for CVN 79 is  essential to support the Milestone C review for the program, but did not  concur with revising the cost cap should the CVN 79 cost estimate  exceed the current cost cap, stating that it will use the cost estimate to  determine whether the current cost cap is at risk and if additional cost  mitigation strategies are needed. While we understand that the program  would want to evaluate and balance the cost risks, we continue to believe  that the cost cap is meant to reflect the program’s baseline. If the  department chooses not to request that Congress update the cost cap,  then the cost cap is driving the cost estimate and not vice versa,  increasing the likelihood that the cost estimate will not reflect realistic  assumptions, such as regarding the number of labor hours needed to  construct the ships. We will review the updated CVN 79 cost estimate to  determine whether it accurately reflects likely program costs.

DOD agreed to develop program life-cycle cost estimates for each  individual ship according to our recommended timelines. However, DOD  stated that it will not be able to meet the timeline for CVN 80 since the  request for ship construction funding has already been submitted and the  first program life-cycle cost estimate is still being prepared to support the  program review in fiscal year 2018. DOD stated it will follow our  recommendation for all subsequent ships.

In response to agency comments, we revised one of our draft  recommendations, specifically regarding reporting in the SAR. DOD  informed us that submitting a separate SAR report for each individual ship  would result in duplicative information. We subsequently revised the  recommendation to focus on cost and funding data for each ship within  the overall Ford Class SAR. We believe this change will improve the  transparency of individual ship costs without imposing burdensome or  duplicative reporting requirements. DOD noted that the department  currently provides progress reports to Congress on costs for CVN 78 and  CVN 79. While true, the SAR is the primary statutorily required means for  DOD to report on program status. And as our report notes, at present the  SAR does not include any cost information on individual ships. Grouping  costs of all Ford-Class ships together does not provide Congress with an  adequate level of insight to monitor this approximately $40 billion  program. Further, the current progress reports do not include CVN 80.  Our recommendation would ensure that Congress receives insight into  the costs of each existing and planned Ford Class ship.

In addition, DOD provided technical comments that were incorporated as  appropriate.

We are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense and the Secretary of the Navy.  In  addition, the report is available at no charge on the GAO website at  http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-4841 or mackinm@gao.gov. GAO staff who made key  contributions to this report are listed in appendix IV.

section_title: Appendix I: Scope and Methodology
paragraphs: This report assesses cost drivers for the lead ship in the Ford Class, the  quality of the Navy’s Ford-Class cost estimates, and the cost insights  provided by Ford-Class reports. The scope of our work primarily focused  on the Gerald R. Ford (CVN 78) and the John F. Kennedy (CVN 79), as a  complete cost estimate has not yet been established for the Enterprise  (CVN 80). Specifically, we assessed (1) the drivers of CVN 78 cost  growth; (2) the extent to which the CVN 79 cost estimate is reliable and  addresses known cost risks from the performance of the lead ship; and  (3) the extent to which oversight mechanisms—including annual budget  requests and selected acquisition reports—provide insight into total ship  costs and budget execution.

To identify the drivers of CVN 78 cost growth and what, if any, challenges  remained for the lead ship as it approached delivery, we reviewed an  Office of the Under Secretary of Defense memorandum to the Secretary  of the Navy, Navy memorandums to members of Congress, and program  office briefings to Congress. In addition, we analyzed Navy budget  submissions. We also relied on our prior work evaluating the Ford-Class  program to supplement the above analyses. To further corroborate  documentary evidence and gather additional information in support of our  review, we conducted interviews with relevant Navy officials from the  Program Executive Office, Aircraft Carriers.

To assess the reliability of CVN 79’s cost estimate, we determined the  extent to which the estimate was consistent with best practices as  identified in GAO’s Cost Estimating and Assessment Guide. We  examined documents supporting the cost estimate, such as the CVN 79  estimate brief, memorandum, and other documents that contain cost,  schedule, and risk information, as well as relevant Department of Defense  (DOD) and Navy policies. We met with Navy personnel responsible for  developing the cost estimate to understand the processes used by the  cost estimators, to clarify information, and to allow the program to provide  additional documentation to support the estimate. Because we did not  have direct access to the CVN 79 cost model, we observed portions of  the model during a presentation and discussion with Navy cost  estimators. Finally, we examined Navy cost estimating guidance to  determine whether the Navy complied with the guidance in developing the  CVN 79 estimate. In addition, to inform our analysis of how well the CVN  79 cost estimate addresses known cost risks from the performance of  CVN 78, we relied on our prior work evaluating the Ford-Class program.  To further corroborate documentary evidence and gather additional  information in support of our review, we conducted interviews with  relevant DOD and Navy officials responsible for developing and updating  the Ford-Class cost estimates, such as the Office of Cost Assessment  and Program Evaluation; Naval Center for Cost Analysis; Naval Sea  Systems Command’s Cost Engineering and Industrial Analysis Group;  Program Executive Office, Aircraft Carriers; CVN 78 and 79 program  offices; Aircraft Launch and Recovery program office; and the Program  Executive Office, Integrated Warfare Systems.

To determine how oversight mechanisms provide insight into Ford-Class  ship costs and budget execution, we examined Navy budget requests and  Selected Acquisition Reports (SAR), to assess the transparency of cost  information. We reviewed the budget requests and the SARs to identify  cost information. To further corroborate documentary evidence and  gather additional information in support of our review, we conducted  interviews with relevant Navy and contractor officials responsible for  managing the technology development and construction of CVN 78, such  as the Program Executive Office, Aircraft Carriers; CVN 78 and CVN 79  program offices; and the Naval Sea Systems Command’s Cost  Engineering and Industrial Analysis Group. We also held discussions with  officials from the Office of the Assistant Secretary of the Navy Financial  Management and Comptroller and the Congressional Budget Office.

We conducted this performance audit from December 2015 to March  2017 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

section_title: Appendix II: Assessment of CVN 79 Cost Estimate
subsections: section_title: Summary of the GAO Methodology Used to Perform Cost Estimating Analysis
paragraphs: The GAO Cost Estimating and Assessment Guide (GAO-09-3SP) was  used as criteria in this analysis. For this guide, GAO cost experts  assessed measures consistently applied by cost-estimating organizations  throughout the federal government and industry and considered best  practices for the development of reliable cost estimates. We analyzed the  cost estimating practices used by the Navy against these best practices.  For our reporting needs, we collapsed these best practices into four  general characteristics for sound cost estimating, which include: well- documented, comprehensive, accurate, and credible. The cost estimating  analysis was also based on interviews with Navy officials and the Navy’s  written responses regarding their implementation of the 12-step cost- estimating process.
subsections: section_title: GAO High-Level Analysis
paragraphs: After reviewing documentation the Navy submitted for its cost estimate,  conducting numerous interviews, and reviewing relevant sources, we  determined that the CVN 79 cost estimate substantially met one and  partially met three of the four characteristics of a reliable cost estimate,  shown in table 6. We determined the overall assessment rating by  assigning each individual rating a number: Not Met = 1, Minimally Met =  2, Partially Met = 3, Substantially Met = 4, and Met = 5. Then, we took the  average of the individual assessment ratings to determine the overall  rating for each of the four characteristics. The resulting average becomes  the Overall Assessment as follows: Not Met = 1.0 to 1.4, Minimally Met =  1.5 to 2.4, Partially Met = 2.5 to 3.4, Substantially Met = 3.5 to 4.4, and  Met = 4.5 to 5.0. A cost estimate is considered reliable if the overall  assessment ratings for each of the four characteristics are substantially or  fully met. If any of the characteristics are not met, minimally met, or  partially met, then the cost estimate does not fully reflect the  characteristics of a high-quality estimate and cannot be considered  reliable.

See table 6 for a high level summary of each best practice and the  reasons for the overall scoring.

section_title: Appendix III: Comments from the Department of Defense

section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, key contributors to this report  were Diana Moldafsky, Assistant Director; Jessica E. Karnis; Juana S.  Collymore; Burns C. Eckert; Marcia Fernandez; Laura Greifner; Kristine  Hassinger; Karen Richey; and Roxanna Sun.

section_title: Related GAO Products
paragraphs: Defense Acquisitions: Assessments of Selected Weapon Programs.  GAO-17-333SP. Washington, D.C.: March 30, 2017.

Defense Acquisitions: Assessments of Selected Weapon Programs.  GAO-16-329SP. Washington, D.C.: March 31, 2016.

Ford Class Aircraft Carrier: Poor Outcomes Are the Predictable  Consequences of the Prevalent Acquisition Culture. GAO-16-84T.  Washington, D.C.: October 1, 2015.

Defense Acquisitions: Assessments of Selected Weapon Programs.  GAO-15-342SP. Washington, D.C.: March 12, 2015 [Reissued on April 9,  2015].

Ford-Class Aircraft Carrier: Congress Should Consider Revising Cost  Cap Legislation to Include All Construction Costs. GAO-15-22.  Washington, D.C.: November 20, 2014.

Ford-Class Carriers: Lead Ship Testing and Reliability Shortfalls Will Limit  Initial Fleet Capabilities. GAO-13-396. Washington, D.C.: September 5,  2013.

Defense Acquisitions: Navy Faces Challenges Constructing the Aircraft  Carrier Gerald R. Ford within Budget. GAO-07-866. Washington, D.C.  August 23, 2007.

Fast facts: The Navy's Ford-Class aircraft carrier was meant to improve combat capability while reducing costs. However, we've found that the first version of this ship cost over $2 billion more than estimated. We recently reviewed the second Ford-Class ship, and found that the Navy is again underestimating its cost—potentially to the tune of hundreds of millions of dollars.

We recommended that the Navy develop a more accurate cost estimate for the second ship, and obtain independent cost estimates before requesting funding for future Ford-Class ships.

Question-summary annotations: questions: question: Why does the cost estimate for CVN 79 not demonstrate that the program can meet its cost cap?
answer: The cost estimate for the second Ford-Class aircraft carrier, CVN 79, is not reliable and does not address lessons learned from the performance of the lead ship, CVN 78. As a result, the estimate does not demonstrate that the program can meet its $11.4 billion cost cap.
child_questions: question: What challenges lead to cost growth for the lead ship?
answer: Cost growth for the lead ship was driven by challenges with technology development, design, and construction, compounded by an optimistic budget estimate.

question: What assumptions in the Navy's estimate for CVN 79 make the estimate unrealistic?
answer: Instead of learning from the mistakes of CVN 78, the Navy developed an estimate for CVN 79 that assumes a reduction in labor hours needed to construct the ship that is unprecedented in the past 50 years of aircraft carrier construction, as shown in the figure below.

questions: question: How did the program estimate influence the amount of labor hours negotiated by the Navy?
answer: After developing the program estimate, the Navy negotiated 18 percent fewer labor hours for CVN 79 than were required for CVN 78.

question: Why is CVN 79's estimate optimistic?
answer: CVN 79's estimate is optimistic compared to the labor hour reductions calculated in independent cost reviews conducted in 2015 by the Naval Center for Cost Analysis and the Office of Cost Assessment and Program Evaluation.
child_questions: question: What does Navy analysis show about the CVN 79 cost estimate?
answer: Navy analysis shows that the CVN 79 cost estimate may not sufficiently account for program risks, with the current budget likely insufficient to complete ship construction.

questions: question: Why is insight into the Ford Class program and individual ship costs limited?
answer: The Navy's current reporting mechanisms, such as budget requests and annual acquisition reports to Congress, provide limited insight into the overall Ford Class program and individual ship costs.
child_questions: question: How do budget requests contribute to this lack of transparency?
answer: For example, the program requests funding for each ship before that ship obtains an independent cost estimate. During an 11-year period prior to 2015, no independent cost estimate was conducted for any of the Ford class ships; however, the program received over $15 billion in funding.

question: How do the program's Selected Acquisition Reports contribute to this lack of transparency?
answer: In addition, the program's Selected Acquisition Reports (SAR)—annual cost, status, and performance reports to Congress—provide only aggregate program cost for all three ships currently in the class, a practice that limits transparency into individual ship costs.

question: How does this affect Congress?
answer: As a result, Congress has diminished ability to oversee one of the most expensive programs in the defense portfolio.

questions: question: What was the Navy's intention for the Ford Class aircraft carrier?
answer: The Navy intended for the Ford Class aircraft carrier to improve combat capability while reducing acquisition and life-cycle costs.
child_questions: question: How has the Navy failed to meet their goal?
answer: However, as GAO has reported on extensively since 2007, the lead ship has experienced cost growth of nearly 23 percent, with a reduced capability expected at delivery.

question: What are the cost estimates for the two ships?
answer: CVN 78 is estimated to cost $12.9 billion, while the next ship, CVN 79, is estimated to be $11.4 billion.

questions: question: What prompted GAO to review Ford-class cost estimates?
answer: The Senate Armed Services Committee Report accompanying the National Defense Authorization Act for Fiscal Year 2016 included a provision that GAO review Ford-class cost estimates, among related issues.

question: What does this report cover?
answer: This report assesses: (1) the extent to which the CVN 79 cost estimate is a reliable basis for meeting the cost cap and addresses known cost risks from the lead ship, and (2) the extent to which oversight mechanisms provide Congress with insight into ship costs.
child_questions: question: How did GAO perform its assessments?
answer: To do this work, GAO compared the CVN 79 cost estimate with GAO's Cost Estimating and Assessment Guide, analyzed cost reports, and interviewed relevant officials.

questions: question: How should the Navy improve its processes to avoid the pitfalls of the lead ship?
answer: The Navy should develop a new, reliable cost estimate for CVN 79 validated by cost reviews and obtain an independent cost estimate before requesting funding for future ships.
child_questions: question: How did the navy respond to this suggestion?
answer: The Navy partially concurred with these recommendations, but did not concur with a draft recommendation to prepare a SAR for each Ford class ship.

question: How did GAO revise the recommendation?
answer: In response to comments, GAO revised the recommendation to focus on SAR cost and funding summaries.