Multiyear Procurement Authority for the Virginia Class Submarine Program
Gao ID: GAO-03-895R June 23, 2003On May 29, 2003 GAO briefed the Subcommittee on Defense, House Committee on Appropriations' staff on the fiscal year 2004 budget request for the Virginia class submarine program. This letter summarizes the information we provided in that briefing on the advantages that multiyear procurement authority offers the Virginia class submarine program as well as the risks of actually realizing these advantages.
The main advantage of multiyear procurement authority for the Virginia class submarine is its potential to reduce the program's future costs by $805 million ($115 million per submarine). Program documents indicate that these savings would be derived from reduced inflation, vendor procurement efficiencies, and greater manufacturing efficiencies. According to program officials, should Congress approve multiyear procurement authority, the contract currently under negotiation would transition into a multiyear procurement contract for fiscal year 2004 through 2008 ships. Program officials stated that without multiyear procurement authority, the program's funding would be able to support the ships to be authorized in fiscal years 2005 and 2006, but additional funding would be needed to cover the higher costs for the ships to be authorized in fiscal years 2007 and 2008. Several factors could offset the potential cost savings, which should also be considered along with the Navy's request for multiyear procurement authority. Stable funding for the Virginia class submarine program may not be assured. To date, the program's cost estimates have not proven realistic. Changes in the program's test plan could affect stability of design. In contrast, the Arleigh Burke class (DDG-51) destroyer program, the last shipbuilding program to enter into a multiyear procurement contract, was well into its acquisition cycle when multiyear procurement authority was approved. Twenty-one ships had already been commissioned and an additional 17 were under construction.
GAO-03-895R, Multiyear Procurement Authority for the Virginia Class Submarine Program
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June 23, 2003:
The Honorable Jerry Lewis:
Chairman:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:
Subject: Multiyear Procurement Authority for the Virginia Class
Submarine Program:
Dear Mr. Chairman:
On May 29, 2003 we briefed your staff on the fiscal year 2004 budget
request for the Virginia class submarine program. This letter
summarizes the information we provided in that briefing on the
advantages that multiyear procurement authority offers the Virginia
class submarine program as well as the risks of actually realizing
these advantages.
Background:
The Virginia class submarine program is currently the Navy's largest
shipbuilding program. The attack submarine will replace the Los Angeles
class submarines to provide battle space dominance across a broad
spectrum of missions. The Navy already has four ships in various stages
of construction and under contract with General Dynamics Electric Boat
and Northrop Grumman Newport News. The lead ship, the SSN 774
(Virginia), will be delivered in June 2004, and the SSN 775 (Texas)
will be delivered in 2005. The SSN 776 (Hawaii) and SSN 777 (North
Carolina) are 36 percent and 18 percent complete, respectively. Two
ships will be launched from each yard. Each shipyard has about 50
percent of the work, with both responsible for certain segments of each
submarine. The Navy is currently in contract negotiations for
submarines beyond the four under contract.
In its fiscal year 2004 budget submission, the Navy requested $2.8
billion for the Virginia class program. The Navy estimates that the
total cost for the program will be $64.7 billion in base year (1995)
dollars for 30 submarines. The estimated cost for the ship to be
authorized in fiscal year 2004 is $2.15 billion. As part of its fiscal
year 2004 budget submission, the Navy requested $390 million in support
of a potential multiyear procurement contract. If multiyear procurement
authority is approved, the fiscal years 2005 and 2006 budget
submissions will also include funding requests of about $390 million
and $195 million respectively, to support the multiyear procurement
contract. These funds will be used to procure components and materials
in economic order quantities for ships authorized in future years. This
advance funding will reduce needed funds in later years.
The Navy has asked Congress for authority to enter into a multiyear
procurement contract for seven submarines to be authorized in fiscal
years 2004 through 2008.[Footnote 1] Multiyear procurement contracts
enable the contractor and the Navy to realize savings from economies of
scale or manufacturing efficiencies. Programs awarding a multiyear
procurement contract are required by law to show that substantial
savings will accrue, cost estimates are realistic, funding is stable
for the period covered by the contract, and the design is stable. A
program using multiyear procurement authority must also show that the
requirement for the system is stable and the program is needed for
national security. Expected savings will be eroded if costs increase or
if the design of the system changes substantially.
Advantages and Risks of Multiyear Procurement Authority for the
Virginia Class Submarine:
The main advantage of multiyear procurement authority for the Virginia
class submarine is its potential to reduce the program's future costs
by $805 million ($115 million per submarine). Program documents
indicate that these savings would be derived from reduced inflation,
vendor procurement efficiencies, and greater manufacturing
efficiencies. According to program officials, should Congress approve
multiyear procurement authority, the contract currently under
negotiation would transition into a multiyear procurement contract for
fiscal year 2004 through 2008 ships. Program officials stated that
without multiyear procurement authority, the program's funding would be
able to support the ships to be authorized in fiscal years 2005 and
2006, but additional funding would be needed to cover the higher costs
for the ships to be authorized in fiscal years 2007 and 2008.
Several factors could offset the potential cost savings, which should
also be considered along with the Navy's request for multiyear
procurement authority.
Stable funding for the Virginia class submarine program may not be
assured. The Navy stated in its justification for multiyear procurement
authority that the program is a high priority and that the Navy is
committed to funding the program at required levels. But, competing
demands from other programs for acquisition funding may result in
instability in the program's funding. For example, according to program
officials, the Navy cut $270 million in Research, Development, Test,
and Evaluation (RDT&E) funds across fiscal years 2004 through 2007, and
an additional $40 million per ship in technology insertion funds across
the same time period partly to help fund higher Navy priorities. These
cuts will delay core RDT&E efforts such as: continued development of an
information assurance solution for the sonar and combat control
networks, correction of high priority deficiencies noted in the
operational assessment of the non-propulsion electronics systems, and
evaluating causes and developing fixes for acoustic performance
deficiencies. Technology insertion efforts will also be delayed until
the later years of the current defense plan. Finally, the Navy recently
cut $600 million from the program's procurement account and $2 million
per year in RDT&E funds across the 2004 to 2009 defense plan due to
Defense-wide inflation adjustments.
The multiyear procurement strategy calls for the acquisition rate to
increase to two ships per year for fiscal years 2007 and 2008. Should
funding pressures continue and prevent realization of this increase,
savings would be eroded.
To date, the program's cost estimates have not proven realistic.
According to program documents, the cost estimates are based on
historical shipbuilding and submarine program experience and actual
performance on the first submarines under construction, among other
factors. Nonetheless, the Navy reported that, as of December 31, 2002,
costs had exceeded baseline estimates by 24 percent. This calculation
included savings from the yet-to-be-authorized multiyear. Had the Navy
not included these savings, the cost overrun would have been 31
percent.[Footnote 2] Program officials stated that they subsequently
revised the baseline estimate in April 2003. Recent contract
negotiations for the acquisition of additional ships raised further
questions about the realism of the Navy's cost estimates. According to
the program officials, the contractor's bid exceeded the Navy's
estimate by $1 billion. Officials reported that a tentative agreement
has been reached that has resulted in a price within the program's
budget, but the Navy altered the scope of the contract to reach that
price.
This experience with the program's cost estimates raises questions
regarding the realism of potential savings estimates. Moreover, should
costs exceed estimates, the program would need additional funding or
would have to make additional tradeoffs to program scope.
Changes in the program's test plan could affect stability of design.
Changes to the ship's design are still likely because the program is
early in the acquisition cycle. The lead ship, which will be delivered
in June 2004, will undergo only a pier-side review of the total ship
survivability trial and will not undergo a full ship shock test. The
second ship, the SSN 775, is expected to undergo both the total ship
survivability trial and the full ship shock test in 2006. These tests,
as well as sea trials, are likely to identify necessary design changes
that may affect the components and materials already purchased as well
as the cost and schedule of the program.
In contrast, the Arleigh Burke class (DDG-51) destroyer program, the
last shipbuilding program to enter into a multiyear procurement
contract, was well into its acquisition cycle when multiyear
procurement authority was approved. Twenty-one ships had already been
commissioned and an additional 17 were under construction.
Agency Comments and Our Evaluation:
The Department of Defense provided oral comments on a draft of this
letter. The department agreed that several factors could impact the
magnitude of savings it reported, but did not agree with our comments
concerning the realism of cost estimates and the stability of design.
The department underscored the importance of the requirement for the
attack submarine and implications for national security. It also stated
that the program is given priority by the Navy when allocating planned
resources.
Regarding cost estimates, the department said that it has accepted the
Navy's cost estimates and that these estimates reflect cost experience
on the first four ships. However, based on recent experience, we do not
believe that the Navy has demonstrated that its cost estimates are
reliable. The program is currently overrun by over 24 percent (assuming
savings if multiyear procurement authority is granted) and initial bids
for the next buy of ships were $1 billion over the Navy's estimates.
Regarding stability of design, the department emphasized that it
believes the design is stable based on completion of 99.8 percent of
the drawings and low engineering changes. It also said that improved
design and modeling technologies mitigate the risk of design changes.
We recognize and strongly support the effort the Navy is undertaking to
mitigate the risk of design changes. However, it is reasonable to
expect that changes to the design will be necessary as a result of
launching and testing the first ships. Design changes could erode
expected savings.
- - - -:
Scope and Methodology:
In the course of our review of the fiscal year 2004 defense budget, we
reviewed the Virginia class submarine program's request for multiyear
procurement authority. At your request, we also assessed the advantages
and risks associated with the multiyear procurement proposal.
Specifically, we identified issues related to the following criteria:
substantial savings, stability of funding, realism of cost estimates,
and stability of design. To assess the Navy's request, we reviewed the
Navy's budget submission, the Navy's justification document for
multiyear procurement authority, the fiscal year 2004-2009 defense
plan, the Virginia class submarine Selected:
Acquisition Report, and documents relating to planned test events. We
also discussed the Navy's request with Virginia class submarine program
officials.
We conducted our work from April 2003 through June 2003 in accordance
with generally accepted government auditing standards.
We are sending copies of this letter to the Honorable John P. Murtha,
Ranking Minority Member; the Honorable Donald H. Rumsfeld, Secretary of
Defense; the Honorable Hansford T. Johnson, Acting Secretary of the
Navy; and interested congressional committees. We will make copies
available to other interested parties upon request. In addition, the
letter will be available at no charge on the GAO Web site at http://
www.gao.gov.
Please contact me at (202) 512-4841 or Karen Zuckerstein at (202) 512-
6785 if you or your staff have any questions concerning this letter.
Other major contributors to this letter were Rick Hensley, J.
Kristopher Keener, Julie Leetch and Adam Vodraska.
Sincerely,
Paul L. Francis:
Director:
Acquisition and Sourcing Management:
Signed by Paul L. Francis:
(120264):
FOOTNOTES
[1] Multiyear procurement authority would allow the Navy to contract
for seven ships authorized over 5 years, thus committing future budgets
to support these acquisitions. Contract terms require the Navy to pay
certain charges if the contract is terminated or quantities reduced. A
multiyear contract of $500 million or more for a Defense weapon system
may not be awarded unless the contract is specifically authorized by
law in an appropriations act and a law other than an appropriations
act, such as an authorization act.
[2] A 31 percent increase would have triggered the requirement in 10
U.S.C. 2433 (known as Nunn-McCurdy), applicable to cost increases
exceeding 25 percent, that the Secretary of Defense submit to Congress
a certification that (1) the program is essential to national security,
(2) no alternatives exist which will provide equal or greater military
capability at less cost, (3) the new cost estimates are reasonable, and
(4) the program's management structure is adequate to manage and
control cost.
