LCS is designed to move fast and transport manned and unmanned mine countermeasures, surface warfare, and anti-submarine warfare systems into theater. For LCS, the seaframe consists of the hull; command and control systems; automated launch, handling, and recovery systems; and certain core combat systems like an air defense radar and 57-millimeter gun. The Navy is procuring the first four ships in two different designs from shipbuilding teams led by Lockheed Martin and General Dynamics. Lockheed Martin and General Dynamics currently build their designs at Marinette Marine and Austal USA shipyards, respectively. Figure 1 shows the first two LCS seaframes, USS Freedom (LCS 1) and USS Independence (LCS 2). The Navy is embedding LCS’s mine countermeasures, surface warfare, and anti-submarine warfare capabilities within mission packages. These packages are comprised of unmanned underwater vehicles, unmanned surface vehicles, towed systems, and hull- and helo-mounted weapons. Table 1 identifies the systems included in the LCS mission packages. Fundamental to the capability of the LCS seaframe is its ability to move quickly ahead of other ships and deploy its offboard sensors to secure lanes of transit. To deploy LCS’s mine countermeasures and anti- submarine warfare systems, the Navy will rely extensively on (1) automated launch, handling, and recovery systems embedded in each seaframe and (2) helicopters and unmanned aerial vehicles. The Navy’s acquisition approach is to populate initial versions of mission packages with a mixture of developmental and production-representative systems, gradually moving to all production-representative systems that constitute the baseline configuration for each package. The Navy plans to procure 55 seaframes and 64 mission packages (24 mine countermeasures, 24 surface warfare, and 16 anti-submarine warfare) as part of the LCS program. The Navy has required LCS seaframes to meet Level 1 survivability standards. Ships built to Level 1 are expected to operate in the least severe environment, away from the area where a carrier group is operating or the general war-at-sea region. These vessels should also maintain good handling in bad weather—including seas above 30 feet high (sea state 8)—and have systems for fighting fires on board the ships, hardening against electromagnetic pulses, and protection against chemical, biological, or radiological contamination. Unlike surface warships like cruisers and destroyers, Level 1 ships (including LCS) are not designed to maintain their mission capabilities after incurring substantive damage. Current ships in the fleet built to the Level 1 standard include material support ships, mine-warfare vessels, and patrol combatants. Two broad categories of contract types are available for government procurements, including ship procurement: fixed-price and cost- reimbursement. Fixed-price contracts provide for a firm price or, in appropriate cases, an adjustable price that may include a ceiling price, a target price, or both. This contract type places the risk on the contractor, who generally bears the responsibility of increased costs of performance. Cost-reimbursement contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract. This contract type places most of the risk on the government, which may pay more than budgeted should incurred costs be more than expected when the contract was signed. The Navy awarded cost-reimbursable contracts for detail design and construction of the first two seaframes—LCS 1 and LCS 2—in December 2004 and October 2005 for $188.2 million and $223.2 million, respectively. It later exercised options on each of these contracts in June and December 2006 for construction of the third and fourth ships (LCS 3 and LCS 4). However, changing technical requirements, evolving designs, and construction challenges increased the government’s estimated prices at completion for the LCS 1 and LCS 2 seaframes to about $500 million each. This cost growth precipitated concern within the Navy that similar outcomes were possible for LCS 3 and LCS 4. In response, the Navy reassessed program costs and structure, revisited the acquisition strategy for future ships, and entered into negotiations with its shipbuilders to convert the LCS 3 and LCS 4 contracts into fixed-price contracts. The Navy was unable to reach agreement with its shipbuilders on fixed-price terms for these ships, subsequently leading the Navy to terminate, in part, the LCS 3 and LCS 4 contracts in April and November 2007 for the convenience of the government. In March and May 2009, the Navy awarded new fixed-price contracts for LCS 3 and LCS 4. According to the Navy, work completed and materials procured under the terminated original contract options for LCS 3 and LCS 4—totaling approximately $192 million—are not included in the current contract values for those ships. In our work on shipbuilding best practices, we found that achieving design stability before start of fabrication is a key step that leading commercial shipbuilders and ship buyers follow to ensure their vessels deliver on-time, within planned costs, and with planned capabilities. Leading commercial firms assess a ship design as stable once all basic and functional design activities have been completed. Basic and functional design refers to two- dimensional drawings and three-dimensional, computer-aided models (when employed) that fix the ship’s hull structure; set the ship’s hydrodynamics; route all major distributive systems including electricity, water, and other utilities; and identify the exact positioning of piping and other outfitting within each block of the ship. At the point of design stability, the shipbuilder has a clear understanding of both ship structure as well as ship electrical, piping, and other systems that traverse individual blocks of the ship. To achieve design stability, shipbuilders need suppliers (also called vendors) to provide complete, accurate system information prior to entering basic design. This vendor-furnished information describes the exact dimensions of a system or piece of equipment going into a ship, including space and weight requirements, and also requirements for power, water, and other utilities that will have to feed the system. As is typical for all ships, the LCS construction phase includes several steps: block fabrication, assembly and outfitting of blocks, block erection, launch, and delivery. During block fabrication, metal plates are welded together into elements called blocks. Blocks are the basic building units for a ship, and when completed they will form completed or partial compartments, including accommodation space, engine rooms, and storage areas. Blocks are generally outfitted with pipes, brackets for machinery or cabling, ladders, and any other equipment that may be available for installation at this early stage of construction. This allows a block to be installed as a completed unit when it is welded to the hull of the ship. Installing equipment at the block stage of construction is preferable because access to spaces is not limited by doors or machinery, unlike at later phases. Blocks are welded together to form grand blocks and then erected with other grand blocks in a drydock or, in the case of LCS, in a building hall. Finally, once the ship is watertight and the decision is made to launch—or float the ship in water—the ship is then towed into a quay or dock area where final outfitting and testing of machinery and equipment like main engines will occur. Afterwards, the ship embarks on sea trials where performance is evaluated against the contractually required specifications and overall quality is assessed. Following sea trials, the shipyard delivers the ship to the buyer. LCS 1 was delivered to the Navy in September 2008, with LCS 2 following in December 2009. The Navy has also accepted delivery of five partial mission packages to date. Currently, LCS 1 is on deployment, LCS 2 is undergoing post-delivery work, and LCS 3 and LCS 4 remain in different stages of construction. In addition, development and testing activities for the mine countermeasures, anti-submarine warfare, and surface warfare mission packages continue. The Navy deployed LCS 1 two years ahead of its previous schedule and prior to the ship completing initial operational test and evaluation. The Navy also stated that early deployment is possible for LCS 2. Initial operational test and evaluation is intended to assess a weapon system’s capability in a realistic environment when maintained and operated by sailors, subjected to routine wear-and-tear, and employed in typical combat conditions against a simulated enemy who fights back. During this test phase, the weapon system is exposed to as many actual operational scenarios as possible—a process that reveals the weapon system’s capabilities under stress. Once the fleet has attained the ability to effectively employ and operate the weapon system, initial operational capability is achieved. Until September 2009, the Navy planned to continue buying both ship designs. In September 2009, the Navy announced it was revising the LCS program’s acquisition strategy and would select one seaframe design before awarding contracts for any additional ships. In the National Defense Authorization Act for Fiscal Year 2010, Congress mandated a $480 million cost cap for each LCS, starting with fiscal year 2011 funded seaframes. In an effort to comply with this mandate, Navy officials have stated that a major program review (milestone B)—and completion of an independent cost estimate—will precede further contract awards in the program. Cost estimates are necessary for government acquisition programs, like LCS, for many reasons: to support decisions about funding one program over another, to develop annual budget requests, to evaluate resource requirements at key decision points, and to develop performance measurement baselines. A cost estimate is a summation of individual cost elements, using established methods and valid data, to estimate the future costs of a program, based on what is known today.