Hitting the Fixed Price For the LCS Is Important

Continuing out theme this week of shipbuilding, I've been thinking about that $460 million target cost number for the LCS passed with last years defense budget. If you are not aware, Ronald O'Rourke summarizes the issue.

The Navy in 2007 requested that Congress amend the existing unit procurement cost cap for the fifth and sixth ships to $460 million, plus adjustments for inflation and other factors. Congress amended the cost cap to $460 million, but applied it not only to the fifth and sixth LCSs, but to all LCSs procured in FY2008 and subsequent years. The use of fixed-price contracts for future LCSs was something that the Navy had stated an intention to do as part of its plan for restructuring the LCS program.

People don't like the comparison of the Littoral Combat Ship to the Oliver Hazard Perry class costs ($650 million in FY08 dollars), or at least I've been told this again and again, so I thought I might try a different comparison. Regardless of how many Littoral Combat Ships get built, I think the LCS has the potential to the best minesweeper ever built. MIW is serious business, and I do not see a problem investing money in MIW, and I think $460 million per ship in FY08 dollars is a good target.

$460 million sounds like a ton of money for a 3100 ton ship. We all see places where costs could be cut for the LCS and it remain effective for the MIW role, and it seems really silly we are building a 50 knot minesweeper. Regular readers also know I think motherships should be big, and see the Navy building a flotilla of unrated mini motherships to lack serious strategic vision regarding the 21st century. However, despite these criticisms, if I was the Navy, or if I was advocating for MIW, this is probably something I'd try to highlight more often.

I found this interesting summery from 1996 regarding the Avenger class MCMs (DOC Formet). It got me thinking about all the problems we had building the Avenger class, so I decided to try calculating some costs.

According to this SAR report from December 1990, the base year cost of the MCM-1 class is $1466.3 million for 14 ships, or an average unit cost of $104.7 million in FY82 dollars. For those who aren't aware, the Navy uses a special index for measuring inflation for shipbuilding, but they do not make that shipbuilding inflation index public. The theory behind this special shipbuilding index is that shipbuilding inflation is higher than inflation in other DoD sectors.

However, with every budget the DoD does publish what is known as the Greenbook, an inflation index for calculating costs of different fiscal years. Because the LCS figure of $460 million is locked into FY08, I downloaded the DoD FY 2008 Greenbook and used this 'second best source' for this example.

Using Table 5.7 of the Fy08 Greenbook to adjust for inflation, we find the procurement deflater that excludes pay, fuel, and medical to be 53.02 for FY82. Admittedly I haven't studied my economics in over a decade, and may have skipped that class a lot, but if I'm remembering how to do this correctly the MCM-1 class which costs an average of $104.7 million in FY82 is around $197.5 million in FY08.

That got me thinking a bit. If the Avenger class went for $197.5 million, at 1312 tons that is an average of $150 million per 1000 tons. If the LCS is able to hit cost targets of $460 million, at 3100 tons that comes out to around $148 million per 1000 tons, which is less per 1000 tons than the really basic Avenger class.

If you believe shipbuilding inflation is higher than other sectors, then the FY08 $197.5 million figure for the Avenger class would be wrong, the actual cost figure would be much higher. I think most people would agree shipbuilding inflation is much higher than other sectors. In essence, if the LCS can hit the fixed price target of $460 million in FY08 dollars, it will be less expensive per ton than the Avenger class, potentially a lot less expensive, and a hell of a lot more capable.

Something I've been thinking about lately.