Cost growth is a persistent problem for shipbuilding programs as it is for other weapon systems. Over 40 ships were under construction at the beginning of this fiscal year. If the performance of future shipbuilding programs continues at the same rate as current programs, the Navy will be forced to fund cost growth in future budget years at the expense of other ships in the Navy’s shipbuilding plan. Funding for the 41 ships under construction is over $56 billion, almost $4.6 billion above initial budget requests. Congress has already appropriated additional funds to cover most of these cost increases (see table 1). Breaking these costs down further reveals the dynamics of shipbuilding cost growth and the challenges it presents for the 30 year shipbuilding plan. For example, cost growth in mature programs, like the Arleigh Burke class destroyers (DDG 100-112) is low because most cost growth has already been captured in earlier ships. Cost growth in the Virginia class submarines (SSN 775-783) and the Lewis and Clark class auxiliary ships (T-AKE 1-9) is also low because they include several ships early in construction—before cost growth tends to occur. On the other hand, cost growth is particularly high on lead ships of a new class (see fig. 1). Cost growth for recent lead ships has been on the order of 27 percent. The Navy is developing two lead ships in the LCS program—each with a unique design. These ships have already experienced a 128 percent cost growth. Cost increases are also significant if the second ship is assembled at a different shipyard than the first ship. This is the case with SSN 775, which has had cost growth of well over $500 million. Although the ship has been delivered, the Navy continues to incur costs for unfinished work. Follow-on ships in many cases are also experiencing significant cost increases in construction. Although LPD 18 is the second ship of the class, construction costs grew by over $500 million—a more than 90 percent increase over its initial budget for construction. LPD 18 has recently been delivered, but the Navy requested an additional $20.6 million in reprogrammed funding in 2007 to complete the ship. Cost growth is particularly prevalent where major changes were made to an existing ship design. For example, CVN 77 is the final aircraft carrier of the Nimitz class and is based on the design of previous carriers, but it included over 3,500 design changes. CVN 77 has experienced cost growth in construction of over $847 million—a 17 percent increase over the initial budget. Besides lead and mature ships, a number of ships under construction may not have realized the full extent of cost growth—which tends to lag behind the initial budget request by several years. In fact, the magnitude of cost growth occurs in later phases of construction—after ships are 60 percent or more complete (see fig. 2). Total corowth (doll in million) The current budgets for many ships have already proven inadequate to cover the likely costs to complete construction. Funding has been transferred from other Navy programs, obtained through prior year completion requests or shifted away from future build plans. The most prominent example is the LCS program. The Navy has already reprogrammed almost $485 million to fund cost increases for the first two LCS and deleted three Flight 0 ships from its budgets. The Navy transferred about $62 million in funding from future T-AKE ships to cover cost increases on the first two ships under construction. In the Virginia- class program, the Navy estimates about $130 million shortfall and plans to cover the shortfall from transfers from within the program. In December 2006, the Navy believed that about $67 million would be needed to complete LPD 20 and LPD 21. However, Navy officials stated that these estimates are too conservative because they represent cost growth against the current contract baseline for LPD ships under construction. The Navy anticipates increasing the baseline for the LPD 17 ships—resulting in even higher completion costs. If current patterns of performance continue in the future, the Navy’s shipbuilding plan will be in jeopardy. The Navy outlined its strategy for achieving a 313-ship force in its updated long-range shipbuilding plan. Over the next 5 years, the Navy plans to significantly increase the rate of construction and introduce nine new classes of ships, including the Ford- class aircraft carrier (CVN 78) and the Zumwalt-class destroyer (DDG 1000). To support the plan, the Navy will require shipbuilding funding significantly above current levels—on the order of $5 billion more by fiscal year 2013. The Navy recognizes that the success of the plan will depend on its ability to realistically estimate and control shipbuilding costs. Over the next year the Navy will begin construction of CVN 78, DDG 1000, and LHA 6 amphibious assault ship. The Navy estimates that these ships alone will require nearly $20 billion in construction funding, representing the Navy’s most costly lead ships. Even a small percentage of cost growth on the big ships could lead to the need for hundreds of millions of dollars in additional funding. Navy shipbuilding programs are often framed around an unexecutable business case, whereby ship designs seek to accommodate immature technologies, design stability is not achieved until late in production, and both cost and schedule estimates are unrealistically low. This situation has recently been evidenced in the LPD 17 and LCS programs, which have required costly out-of-sequence work during construction. The DDG 1000 and CVN 78 programs are at risk because of lingering technology immaturity, coupled with cost and schedule estimates with little margin for error. We have frequently reported on the wisdom of using a solid, executable business case before committing resources to a new product development effort. In its simplest form, a business case requires a balance between the concept selected to satisfy warfighter needs and the resources— technologies, design knowledge, funding, time, and management capacity—needed to transform the concept into a product, in this case a ship. At the heart of a business case is a knowledge-based approach that requires that managers demonstrate high levels of knowledge as the program proceeds from technology development to system development and, finally, production. Adapting this approach to shipbuilding is a challenge, as I will discuss later. Ideally, in such an approach, key technologies are demonstrated before development begins. The design is stabilized before the building of prototypes or, in the case of ships, construction begins. At each decision point, the balance among time, money, and capacity is validated. In essence, knowledge supplants risk over time. A sound business case would establish and resource a knowledge-based approach at the outset of a program. We would define such a business case as firm requirements, mature technologies, and an acquisition strategy that provides sufficient time and money for design activities before construction start. The business case is the essential first step in any acquisition program that sets the stage for the remaining stages of a program, namely the business or contracting arrangements and actual execution or performance. If the business case is not sound, the contract will not correct the problem and execution will be subpar. This does not mean that all potential problems can be eliminated and perfection achieved, but rather that sound business cases can get the Navy better shipbuilding outcomes and better return on investment. If any one element of the business case is weak, problems can be expected in construction. The need to meet schedule is one of the main reasons why programs cannot execute their business cases. This pattern was clearly evident in both the LPD 17 and LCS programs. In both cases, the program pushed ahead with production even when design problems arose or key equipment was not available when needed. Short cuts, such as doing technology development concurrently with design and construction, are taken to meet schedule. In the end, problems occur that cannot be resolved within compressed, optimistic schedules. Ultimately, when a schedule is set that cannot accommodate program scope, delivering an initial capability is delayed and higher costs are incurred. In shipbuilding programs, the consequences of moving forward with immature technologies or an unstable design become clear once ship construction begins. Ships are designed and constructed with an optimal sequence—that is, the most cost-efficient sequence to construct the ship. This includes designing and building the ship from the bottom up and maximizing the units completed in shipyard shops and installed in the dry dock while minimizing tasks performed when the ship is already in the water, which tend to be costlier than tasks on land. Once units are installed access to lower decks of the ship becomes more difficult. If equipment is not ready in time for installation, the shipbuilder will have to work around the missing equipment. Additional labor hours may be needed because spaces will be less accessible and equipment may require more time for installation. What happens when the elements of a solid business case are not present? Unfortunately, the results have been all too visible in the LPD 17 and the LCS. Ship construction in these programs has been hampered throughout by design instability and program management challenges that can be traced back to flawed business cases. The Navy moved forward with ambitious schedules for constructing LPD 17 and LCS despite significant challenges in stabilizing the designs for these ships. As a result, construction work has been performed out of sequence and significant rework has been required, disrupting the optimal construction sequence and application of lessons learned for follow-on vessels in these programs. In the LPD 17 program, the Navy’s reliance on an immature design tool led to problems that affected all aspects of the lead ship’s design. Without a stable design, work was often delayed from early in the building cycle to later, during integration of the hull. Shipbuilders stated that doing the work at this stage could cost up to five times the original cost. The lead ship in the LPD class was delivered to the warfighter incomplete and with numerous mechanical failures, resulting in a lower than promised level of capability. These problems continue today—2 years after the Navy accepted delivery of LPD 17.