DDG-1000 Review

After revealing last week that Admiral Roughead is the one who has been working behind the scenes to kill the DDG-1000, we have gone back to review the various costs involved to better understand why he would change his position. What impresses us most about the events as they have unfolded is that we have learned that Admiral Roughead wanted to change the FY09 budget as far back as January, before submission, but was unable to due to the process already being completed in time for the Presidents budget submission. If what we are hearing is accurate, that means Roughead's plan to kill the DDG-1000 goes back as far as January of this year, which would explain much of the behavior noted by critics regardless his less than enthusiastic support for the program.

The cost issue is the most popular reason why the Navy is expected to kill the DDG-1000. We don't believe that is the only reason, but there can be no doubt it is a major factor.

For our own research, we have been studying this CRS report (PDF) available on the FAS website that covers the history, including the cost history of the DDG-1000.

Labor

Before we start talking numbers though, we want to highlight some of the considerations Congress will factor other than cost. Important to the discussion is that there is a construction arrangement for the DDG-1000. This is a critical aspect of the DDG-1000 class often not discussed, because what the construction arrangement does is allow for consolidated cost as each yard is building the same components for 25% of the remaining 5 ships.

NGSB and GD/BIW have agreed on a shared-production arrangement for building DDG-1000s. Under this arrangement, certain parts of each ship will be built by NGSB, certain other parts of each ship will be built by GD/BIW, and the remaining parts of each ship would be built by the yard that does final-assembly work on that ship. Each firm’s repeating portion of the ship would amount to about 25% of the labor hours for the ship; the yard that does the final-assembly work on the ship would also perform the remaining 50% or so of the labor hours needed to build the ship. The arrangement can be viewed as somewhat analogous to the joint-production arrangement for Virginia-class submarines.

This is an important part to understand. It has been reported that the DDG-1000 requires 2.5 as many man hours to build as a single DDG-51, however according to this report, it isn't quite so simple. The 2.5 figure applies to the first two ships already paid for, not the last 5 ships. The report details the specifics on page 19.

The Navy informed CRS on March 11, 2008, that a DDG-1000 would require, by Navy estimates, about 2.5 times as much shipyard labor to build as would be required to build a DDG-51.27 On April 10, 2008, the Navy clarified that this ratio was based on the number of labor hours that the Navy estimates will be needed to build the first two DDG-1000s, and that subsequent DDG-1000s would require smaller amounts of shipyard labor, reducing the ratio for subsequent ships to something less than 2.5 to 1.28 (The DDG-51 design, in contrast, is already well down its learning curve and would not decline by a substantial additional amount through additional production.) Assuming a rate of learning in the DDG-1000 production process that might be typical for a complex combatant ship, and taking into account the shared production arrangement for the DDG-1000, a seventh DDG-1000 might require roughly 1.7 to 1.9 times as much shipyard labor to build as a DDG-51, and a class of seven DDG-1000s might require roughly 2 to 2.2 times as much shipyard labor to build as a group of seven DDG-51s.

In other words, if shipyard labor was a primary concern, the 5 remaining DDG-1000s would require 11 DDG-51s for an equal number of labor hours at the 2.2 figure, or 10 DDG-51s for an equal number of labor hours at the 2.0 figure. We don't know where the number 8 DDG-51 replacements comes from in that story.

Finally, it is noteworthy one of the key considerations is the sub-contractors. While labor will be fine for the yards with a swap of 11 DDG-51s for 5 DDG-1000s, many sub-contractors from all across the nation lose big. This will be a factor in any Congressional vote.

Costs

These are the real costs using Navy budget figures of the DDG-1000 program.

Based on the figures in the table (Table 2 on page CRS 5), when $1.1 billion in FY1995-FY2001 DD-21/DD(X) research and development costs and $513 million in post-FY2013 outfitting and post-delivery costs are included, the Navy estimates the total acquisition (i.e., development plus procurement) cost of the seven-ship DDG-1000 program at about $28.9 billion in then-year dollars, or an average of about $4.1 billion per ship, not including additional DDG-1000 research and development costs after FY2013.

The Navy doesn't count a lot of the R&D costs because those technologies are intended to scale to other future ships, including the Ford class CVN and CG(X) program, so the Navy uses a cost figure that averages $2.8 billion per ship. We will come back to the R&D discussion at a later time, but from what we are seeing, some of these costs that originally were intended for future platforms may not be. While we have intentionally avoided the CG(X) discussion to date, we should mention there is growing evidence the DDG-1000 hull will not be used for the CG(X), which may be a factor in stopping construction of DDG-1000 at two ships. Whether the DDG-1000 is a waste without the CG(X) being built on its design is subject to debate. We will make our case why the 2 prototypes are good investment in another discussion.

The CBO, specifically Eric Labs who is the only person in Washington with a track record of being accurate estimating Navy shipbuilding in the 21st century, has the following cost estimates.

Under CBO’s estimates, the first two DDG-1000s, instead of having a combined cost of about $6.3 billion in then-year dollars, as the Navy now estimates, might have a combined cost of roughly $10.2 billion in then-year dollars, which would be an increase of roughly $3.9 billion in then-year dollars. The remaining five ships in the class, instead of having a combined procurement cost of about $12.8 billion in then-year dollars, as the Navy now estimates, might have a combined procurement cost of roughly $20.7 billion in then-year dollars, which would be an increase of roughly $7.9 billion in then-year dollars. Under CBO’s estimates, the combined cost growth for all seven ships would be roughly $11.8 billion in then-year dollars, which is a figure roughly comparable to the total amount of funding in Shipbuilding and Conversion, Navy (SCN) appropriation account in certain recent years.

Those numbers are procurement (SCN budget) and do not include the R&D, and are best compared to the Navy's $2.8 billion average. With those estimates dominating the media reports, we think this is the estimate that had Roughead shift policy. From page 12 of the CRS report.

On October 1, 2007, it was reported that the Cost Analysis Improvement Group (CAIG), a cost-estimating office within the Office of the Secretary of Defense, had estimated that the first two DDG-1000s would together cost about $7.2 billion to procure, or about 14% more than the Navy’s combined estimate for the two ships in 2007.

In asking around, the CAIG came up more than a few times. There are rumors that the CAIG has an estimate out that is more in line with the CBO than the Navy's numbers. This is no small detail. The CAIG doesn't officially exist, it is one of those groups that never actually meets except when it does. The Bush administration came into office with a pledge to support what was called 'realistic costing' for defense programs. While I'm sure no one remembers that, what it means is that the service would have absolute certainty that a programs estimates were good as a benchmark for moving forward. The DDG-1000 is the only program we are aware of where the Navy and the CAIG completely disagreed on the cost, and could not find a resolution. OSDs office gave the nod to the Navy anyway, and they moved forward with their cost estimate. While the events took place in 2005, the details reportedly came out in Congressional Testimony in October of 2007.

The Letter

Finally, the May 8, 2024 letter from CNO Roughead to Senator Kennedy reveals some interesting numbers that will factor in the discussion.

Thank you for your letter of April 21, 2008, concerning cost estimates for the continuation of the DDG 51 program and the DDG 1000 program. As you indicated in your letter, without firm contracts for future ships of either class, we are only able to provide a best estimate of the costs we would incur in either of these programs. Since we are phasing out production of the DDG 51 class, there would be start-up costs associated with returning this line to production. As a result, the estimated end cost to competitively procure a lead DDG-51 (Flight IIa — essentially a repeat of the final ships currently undergoing construction) in Fiscal Year (FY) 2009 assuming a truncation of the DDG 1000 class after the two lead ships would be either $2.2B for a single ship or $3.5B for two lead ships (built at competing production yards). This estimate is based on a Profit Related to Offer (PRO) acquisition strategy. The average cost of subsequent DDG 51 Flight IIa class ships would be about $1.8B (FY09) per ship compared to the $2.6B estimated cost of subsequent DDG 1000 class ships. Below is the breakdown of the one and two ship FY09 DDG 51 estimates, compared to that of the DDG 1000 in the same year...

The total annual cost for the DDG 51 is a class average based o 17 years of operations and maintenance, and does not include personnel reduction savings expected from the DDG Modernization program. While there are cost savings associated with the DDG 1000’s smaller crew, they are largely offset by higher estimated maintenance costs for this significantly more complex ship. Clearly the relative value of the DDG 1000 resides in the combat system (Dual-Band Radar, Volume Search Radar, ASW Suite, etc) that provide this ship with superior warfighting capability in the littoral. However, the DDG 51 can provide Ballistic Missile Defense capability against short and medium range ballistic missiles and area Anti-Air Warfare capability (required in an anti-access environment) where the DDG 1000 currently does not. Upgrading the DDG 1000 combat system with this capability would incur additional cost. The DDG 51 class also possesses better capability in active open ocean anti-Submarine Warfare than does the DDG 1000.

On balance, the procurement cost of a single DDG 51 is significantly less than that of a DDG 1000, and the life-cycle costs of the two classes are similar.

And that's where we are. Chris Cavas reported last week what is expected to come next.

A scheduled July 10 meeting between England, Winter, Roughead and Young to discuss DDG 1000 was postponed when Young was called to testify before Congress on an Air Force tanker program. Sources on Capitol Hill and the Pentagon said the meeting was to be a discussion of staying “on message,” and not getting ahead of official decisions. The meeting has been rescheduled for later this month.

The DDG 1000 issue will get a further airing when Taylor holds a Seapower subcommittee hearing on July 31, and the GAO is at work on another critical review of the program.

For those with InsideDefense subscriptions, the letters sent out by the HASC are there and you can see the list of who will attend the July 31 hearing. For those who keep score, there are actually three camps to the debate. The first camp, led by the Maine Senators, would keep the DDG-1000 and build all 7. The second camp, which included Gene Taylor and Adm Roughead, would trade the remaining 5 DDG-1000s for up to 11 DDG-51s. The third camp, led by Congressman Murtha would cancel the remaining 5 DDG-1000s and build more LPD-17s. We see these three camps like this.

The Maine camp is the industrial view, the Gene Taylor/Adm Roughead camp is the big Navy view, and from our perspective the Murtha camp represents some form of a strategic view, although we haven't heard enough to believe he is thinking strategic. The biggest industrial loser is Raytheon because their truly open combat system won't be deployed on the seven DDG-1000s, and the most to gain is Lockheed Martin who gets to keep their combat system monopoly in big Navy.

In a perfect world where we called the shots, we would prefer to see a plan that shifted the $400 million SCN funds in the House bill moved to a design program to build small combatants at BIW, a program that should include the Raytheon combat system. This represents the obvious position that Congress and the Navy both need more shipbuilding options. This decision would be based on the American system of competition being important to industry, and recognizing that BIW is the most important shipyard for the US Navy surface combatant fleet.

Our plan would also include continuing the LPD-17 line for 10 more ships to 19, and using the modernization funds for the LSDs that is happening for insuring they can properly operate the LCS mission modules, while adding CEC and SSDS to all LSDs. That would allow for the LCS and DDG-1000 funds to produce the large number of small surface combatants, LPD-17s, and modernized LSDs to fully engage a realistic peacetime strategy to compliment the existing 86 battleships.

But in that perfect world, the Navy aligns resources to strategy. A future discussion will further develop our thoughts regarding that last sentence, and paragraph.