Littoral Combat Ships: Acqusition Strategies and Construction Revelations

If you have been wondering what is going on with the Littoral Combat Ship program, it turns out the US government and US Navy has been working hard to insure there is plenty of information. In a span of 24 hours there was a new report from the Government Accountability Office and Ronald O'Rourke put out no less than 3 updates to the Congressional Research Service report Navy Littoral Combat Ship (LCS) Program: Background, Issues, and Options for Congress - the latest being the second report issued dated December 8th.

Lets start with the dual-purchase acquisition strategy first. Ronald O'Rourke's latest CRS report has incorporated both the GAO report and further information provided by the Navy that outlines a great deal of the issues that were brought up last week by Sean Stackley at the launching of the USS Fort Worth (LCS 3) regarding costs. I quote in full some new sections from the CRS report.

Enough Time for Adequate Congressional Review of Navy Proposal?

Regarding the first item above—whether the timing of the Navy’s proposal provides Congress with enough time to adequately assess the relative merits of the down select strategy and the dual award strategy—it can be noted that this is the third time in the history of the LCS program that the Navy has presented Congress with an important choice about the future of the LCS program late in the congressional budget-review cycle, after Congress had completed its spring budget review hearings and some of its committee markups. The first instance was in mid-2002, when the Navy submitted an amended request to Congress for FY2003 funding to get the LCS program started using a rapid acquisition strategy. The second was in September 2009, when the Navy announced its proposed down select strategy for the LCS program (see the discussion of this issue in following section on the down select strategy). In light of the third instance—the Navy’s proposal in November 2010 for using a dual-award strategy rather than a down select strategy—a potential issue for Congress are the implications for the LCS program and congressional oversight of defense acquisition programs in general of proceeding with the LCS program in part on the basis of policies originally presented as proposals to Congress late in the congressional budget-review cycle, after Congress had completed its spring budget-review hearings and some of its committee markups.

Potential Relative Ship Procurement Costs

Regarding the second item above—the potential relative costs of the down select and dual-award acquisition strategies—the Navy estimates that procuring LCSs under the dual-award strategy would cost $1 billion less through FY2016 than procuring them under the down select strategy.

Under the down select strategy, shipyards competing to become the second LCS builder could include yards that currently build other ships for the Navy, such as, possibly, General Dynamics’ Bath Iron Works (GD/BIW) of Bath, ME, Northrop Grumman’s Ingalls shipyard of Pascagoula, MS, or General Dynamics’ National Steel and Shipbuilding Company (NASSCO) of San Diego, CA. If such a yard were to be selected under the down select strategy to become the second LCS builder, it could reduce the cost of other Navy ships being built at that yard by more fully spreading the fixed overhead costs of that yard. It is not clear whether the Navy’s estimated $1 billion savings accounts for a possible reduction in the cost of other Navy ships that might be realized under the down select strategy through more full spreading of shipyard fixed overhead costs.

Potential Combat System-Related Investment Costs

Any savings the dual-award strategy might realize relative to the down select strategy in terms of costs for procuring LCSs could be offset by potential additional costs under the dual-award strategy for developing, procuring, and installing a common combat system for the two LCS designs. Developing a new common combat system for the two LCS designs might cost tens of millions of dollars. Procuring replacement combat systems for LCSs could cost tens of millions of dollars per ship. Removing an LCS’s existing combat system and installing a replacement system could cost several millions of dollars per ship.

If, for example, the Navy decided to develop a new common combat system for both LCS designs, developed that new system at a one-time cost of, say, $30 million, procured 24 copies of that system at a recurring cost of, say, $50 million per copy, and installed them on the first 24 LCSs (i.e., LCSs 1 through 4, plus the 20 ships to be awarded under the dual-award strategy’s two 10-ship block-buy contracts) at a recurring installation cost of, say $5 million per ship, the total cost would be $1,350 million.

If, as another example, the Navy decided to adopt one of the two existing LCS combat systems as the common combat system for both designs, adapted that existing system for the other LCS design at a one-time cost of, say, $10 million, procured 12 copies of that system at a recurring cost of, say, $50 million per copy, and installed them on 12 of the first 24 LCSs (i.e., the LCSs originally built or to be built with the other combat system ) at a recurring installation cost of, say $5 million per ship, the total cost would be $670 million.

Regarding the Navy’s intentions regarding the currently different combat systems on the two LCS designs, a November 29, 2010, press report states that “the Navy intends to keep separate the combat systems of the Lockheed and Austal USA versions of the Littoral Combat Ships for its dual buy strategy, but will ‘procure the tech data package to allow for consideration of [a] common combat system in the future,’ according to Navy spokeswoman Capt. Cate Mueller.” The report also quoted an industry official as saying that the Navy is likely “still strategizing as to how they’re going to single up on a combat system.”

Potential Relative Life-Cycle Operation and Support (O&S) Costs

Any savings the dual-award strategy might realize relative to the down select strategy in terms of costs for procuring LCSs could also be offset by potential additional life-cycle operation and support (O&S) costs of operating significant numbers of two different LCS designs. A December 8, 2010, GAO report states: “According to the Navy, [estimated savings in LCS procurement costs under the dual-award strategy] would be offset, in part, by an additional $842 million in total ownership costs, which the Navy equates to a net present value of $295 million.” The GAO report also states:

Navy officials expressed confidence that their cost estimate supporting the dual award provides details on the costs to operate and support both designs. However, since little actual LCS operating and support data are available to date, the Navy’s estimates for these costs are currently based on data from other ships and could change as actual cost data become more available. These estimates are also based on new operational concepts for personnel, training, and maintenance that have not been fully developed, tested, and implemented. For example, the Navy has not yet implemented a comprehensive training plan, and it is possible that the plan could cost more or less than the training costs currently accounted for by the Navy.

Potential Relative Risks

Regarding the potential relative risks of the down select and dual-award acquisition strategies, the GAO report states that “a second ship design and source provided under the dual award strategy could provide the Navy an additional hedge against risk, should one design prove problematic.” A converse argument might be that monitoring the construction of two very different LCS designs could place increased demands on the Navy’s Supervisor of Shipbuilding (SUPSHIP) capabilities for on-site monitoring of the construction of Navy ships, which might increase the chances of the Navy not detecting in a timely manner construction-quality problems that might occur in one or both LCS designs.

If you have not read the GAO report, believe it or not the GAO report shines a very favorable light on the dual-purchase strategy the Navy is currently seeking as the more responsible way forward. I also recommend reading the 4 page statement by the Navy included at the end of the GAO report. The $2.9 billion savings that Sean Stackley claims is saved is explained in more detail in that statement as follows:

With the production start-up costs for both versions already retired, and proposals provided that reflect stable design and planning, stable production, learning curve performance, and long term vendor agreements, the acquisition savings for a dual award is projected to be $2.9 billion (Then Year (TY)) through FY 2016, as measured against the President’s Budget (PB) 2011 request. Of these savings, approximately $1 billion (TY) is directly attributable to the dual award alone. Some of these savings are used to fund the additional FY 2012 ship. The savings enable the Navy to strengthen the total shipbuilding plan as well as enabling procurement of an additional LCS in FY 2012.

What I see is the Navy saying that the competition for down select between two different classes has yielded about $1.9 billion in savings in the budget estimates from FY2011 for Littoral Combat Ships purchased through FY2016. By executing the new proposal for a dual-purchase acquisition strategy the Navy will save an additional $1 billion.

This makes some sense if we are discussing only construction costs. Clearly there was going to be savings from the competition of two designs, and savings of $1.9 billion per ship comes in at a savings of $100 million per ship. That makes sense to me if the Navy budgeted Littoral Combat Ships at $600 million and was able to get bids at $500 million per ship. I do believe the Navy budget factored risk putting the price near $600 million, and I also believe because we are talking about mostly empty warships with very little sophistication in comparison to a warship with a missile launcher or AEGIS, that the shipbuilder could still profit at an average cost of $500 million - if the Navy believed they had achieved design maturity and did not expect large numbers of additional change orders. On that last point, the Navy statement at the end of the GAO report discusses those specific issues.

First this:

Both shipbuilders are already realizing significant production efficiencies on the two ships currently under construction as a direct result of capital investments that were not in place for LCS 1 and LCS 2. Additional savings are anticipated for future ships from further facility upgrades that will be self-financed by industry, with support from state and local governments. To date, all facility improvements have been completed on cost and schedule at both shipyards.

Then this:

Many of the technical issues noted in the August 2010 GAO Report already have been addressed in the program. Specifically, in several instances the GAO notes cost risk as a result of design changes still occurring in the program. In fact, both LCS designs are now stable. Design change from the lead ship has been incorporated in the follow ships as part of their baseline and subsequent change activity has been minimized. At current change level, a few percent, change activity on this program is improved upon historical shipbuilding performance. There is no evidence that follow ship change order budgets will not be adequate to address any necessary changes that may occur during execution of the block buy. For example, the LCS 3 recently launched at 80 percent complete, at which point the change order budget is less than 50 percent expended. LCS 4 has expended only 4 percent of her planned change order budget at 45 percent construction complete. This substantially improved level of completeness at launch, the low rate of expenditure of change order budget, and the attendant improvement in cost and schedule performance by both shipbuilders is a clear indication that out-of-sequence work and design change activity have been contained. LCS 3 launched on December 4th at approximately 80 percent complete, as compared with LCS 1, which was barely 50 percent complete at launch. LCS 3 is also under budget and on schedule. LCS 4 is showing similar improvements over LCS 2.

Where are the PAOs when it comes to shipbuilding, and can we get those folks a cell phone? There are a number of items in this statement that nobody knew anything about, despite being the questions asked every day about a program no one outside the tiny LCS bubble is excited about.

For example, what design changes have been incorporated into follow-on ships? Did the design changes impact the size of the crew that could be supported on LCS? If it did, what is this new number for each ship class? What about the design changes necessary for the Independence class required so that the ship can actually deploy stuff out the back door? I'm looking at pictures from the launch of USS Fort Worth (LCS 3), and I still see a warship designed to take on small boats with machine guns that has a bridge fully exposed with glass windows. There have been concerns regarding the first of class ships being overweight - will this issue be discussed by the Navy?

LCS 3 is under budget and on schedule? That's good to know, but why did we have to wait for a statement included in a GAO report to learn this? LCS 4 has expended only 4 percent of her planned change order budget at 45 percent construction completion? Again, this is great news, will someone please release the shipbuilding PAO who appears to be gagged and tied to a chair.

Observations

The Navy isn't really addressing TOS with this LCS discussion on costs. Most of the operational concepts and maintenance activities are still being developed, and if you read closely you will find that the Navy includes the costs of operating both orphan vessels to their full life cycle as part of the operational costs for the down-select option. That is an impossible assumption to make and be taken seriously, as retiring ships early is the rule - not the exception - when it comes to surface vessels over the last 2 decades. Those 2 orphan ships will be retired by 2020 by some future CNO looking to cut costs if the Navy goes with the down-select strategy.

I will say this about the dual-selection strategy though. It looks like the savings one earns by doing the dual-selection as opposed to the down select does more than just buy an extra ship and allow the Navy to field LCSs faster, because dual-strategy also produces the extra savings the Navy can use to standardize the combat system. In other words, the savings from dual-acquisition it attractive enough that it pays for a down-select to a single combat system. That point should have been a major selling point of the dual-purchase option from the beginning.

Politics

Republicans need to be very wary of what is taking place over in the Senate, and not let history repeat itself. The USAF tanker competition went down in flames with a GAO protest largely because of opposition led by Senator McCain. We still don't have a tanker contract two years later. Senator McCain is once again looking at a competitive defense program that will almost certainly end in disaster with a GAO protest regardless of which ship is picked. If Republicans want a repeat of the USAF tanker disaster - listen to Senator McCain. McCain is a true statesman in the Senate on defense policy, but when it comes to acquisition - he has a record of sometimes being the kiss of death that ultimately cost taxpayers a lot of money.

The Navy has won both sides of the House on this issue, but it is now the 4th quarter and the situation in the Senate remains murky as time bleeds off the clock. The Navy needs to be in 'full court press' mode in the Senate to make this deal happen - and that starts by being forceful that the dual-purchase strategy isn't just a good option, it is the preferred option and the down-select is a far less preferred option based entirely on new information and new bids. The Navy needs to make clear that inaction by the Senate would prevent the Navy from being agile in taking advantage of the best possible procurement strategy. The Navy can do this by putting butts on Capitol Hill and making clear they are available to discuss questions and issues of Senators.

Senators are accountable to taxpayers. If Senators are unable to find a half hour to ask questions and get answers then that is something taxpayers and voters should know. The absence of a public hearing is really not a good excuse, the Senate has punted hearings on far more important topics in the past. In this situation the GAO, CRS, and Navy have made more information available publicly than any other shipbuilding issue in recent memory.

DDG-1000, for example, was all back room deals and private letters to Senators only found publicly to subscribers of the most expensive defense news services - and yet for the absence of transparency of a program twice the cost of the LCS - the Senate went along with everything even when it was clear the Navy was throwing smoke grenades in public House hearings with less than honest information and analysis. Public information for virtually every other shipbuilding program issue is so rare, even when there is a public hearing, that I think the Senate should reward the Navy for their public transparency with the dual-acquisition strategy of the Littoral Combat Ship program.