Navy's Proposed Dual Award Acquisition Strategy for the Littoral Combat Ship Program
Gao ID: GAO-11-249R December 8, 2010In Process
Successful business cases for shipbuilding programs require balance between the concept selected to satisfy warfighter needs and the resources--technologies, design knowledge, funding, time, and management capacity--needed to transform that concept into a product. Without a sound business case, program execution will be hampered, regardless of the contracting strategy. The LCS, given its stage of maturity and its unique mission, design, and operational concept, still faces design and construction risks. As with the Navy's estimate of savings, most of these risks appear to be inherent to the program, regardless of which acquisition strategy is followed. Navy officials believe that experience to date on the program, coupled with fixed price contracts and a sufficient budget for ship changes, mitigates this risk. However, much work and demonstration remains for LCS, and other shipbuilding programs have had difficulty at this stage. On the other hand, 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. Mission equipment packages are common to both ships and would pose the same execution risks, apart from integration. Under both the existing downselect strategy and the proposed dual award strategy, the Navy plans to award fixed-price incentive contracts for new seaframes. This type of contract provides for adjusting profit and establishing the final contract price by application of a formula based on the relationship of total final negotiated cost to total target cost. The final price is subject to a price ceiling, negotiated at the outset. 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. The Navy's request to double its current 10-ship authorization to 20 ships--at a time when the mine countermeasures, surface warfare, and antisubmarine warfare mission packages continue to face significant developmental challenges--highlights the Navy's risk of investing in a fleet of ships that has not yet demonstrated its promised capability. Absent significant capability within its mission packages, seaframe functionality is largely constrained to self-defense as opposed to mission-related tasks.
GAO-11-249R, Navy's Proposed Dual Award Acquisition Strategy for the Littoral Combat Ship Program
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GAO-11-249R:
United States Government Accountability Office:
Washington, DC 20548:
December 8, 2010:
Congressional Committees:
Subject: Navy's Proposed Dual Award Acquisition Strategy for the
Littoral Combat Ship Program:
The Navy's Littoral Combat Ship (LCS) is envisioned as a vessel able
to be reconfigured to meet three different mission areas: mine
countermeasures, surface warfare, and antisubmarine warfare. Its
design concept consists of two distinct parts--the ship itself
(seaframe) and the mission package it carries and deploys. The Navy is
procuring the first four ships in two different designs from
shipbuilding teams led by Lockheed Martin and General Dynamics, which
currently build their designs at Marinette Marine and Austal USA
shipyards, respectively.
Prior to September 2009, the Navy planned to continue building the
class using both ship designs. This strategy changed following
unsuccessful contract negotiations that same year for fiscal year 2010
funded seaframes--an outcome attributable to industry proposals priced
significantly above Navy expectations. In September 2009, the Navy
announced that in an effort to improve affordability, it was revising
the LCS program's acquisition strategy and would select one seaframe
design before awarding contracts for any additional ships.[Footnote 1]
Following approval of this strategy in January 2010, the Navy issued a
new solicitation--intended to lead to a downselect--for fiscal year
2010 seaframes. In support of this strategy, Congress authorized the
Navy to procure up to 10 seaframes and 15 LCS ship control and weapon
systems. The Navy planned to have a second competition in 2012 and
provide five of the ship control and weapon systems to the winning
contractor, who would construct up to 5 ships of the same design and
install the systems. However, in November 2010, following receipt of
new industry proposals for the fiscal year 2010 seaframes, the Navy
proposed to change its acquisition strategy back to awarding new
construction contracts to both industry teams.[Footnote 2] According
to the Navy, in order to execute this proposed dual 10-ship award,
congressional authorization is required. If approved, the Navy's
authorization would increase from 10 ships to 20 ships--including ship
control and weapon systems. Absent this authorization, the Navy plans
to proceed with a single award for one design by mid-December 2010.
In response to broad congressional interest arising from the Navy's
proposed LCS acquisition strategy change, our objective was to assess
any risks that could affect the Navy's ability to execute the program,
using the authority of the Comptroller General to initiate our work.
We relied primarily on our August 2010 report[Footnote 3] on the LCS
program and more recent discussions with officials responsible for
managing LCS acquisition including the Office of the Secretary of
Defense; the Office of the Assistant Secretary of the Navy for
Research, Development, and Acquisition; and Navy program officials,
requirements officers, and cost analysts. To supplement our analysis,
we reviewed (1) the most recent solicitation for LCS construction and
(2) Navy briefing materials on the existing and proposed acquisition
strategies for the LCS program. We were briefed on the Navy's analysis
that supported its proposed change in acquisition strategy, but we did
not evaluate it because of the time constraints that limited the scope
of our work. Similarly, we did not evaluate the Navy's supporting data
or the validity of the assumptions that informed the Navy's
calculations of cost savings beyond the savings associated with the
existing downselect strategy. We conducted this performance audit from
November 2010 to December 2010 in accordance with generally accepted
government auditing standards. Those standards require that we plan
and perform the audit to obtain sufficient, appropriate evidence to
provide a reasonable basis for our findings and conclusions based on
our audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives.
Background:
The Navy estimates that both its existing and proposed acquisition
strategies will generate significant cost savings to the government.
According to the Navy,
$1.9 billion in savings resulted from the competition between the two
offerors and is common to both strategies. However, the Navy estimates
that approximately:
$1.0 billion in additional cost savings would be realized under the
proposed dual award strategy because of the avoidance of higher start-
up costs and risks associated with the second source planned for
fiscal year 2012, among other factors. According to the Navy, these
additional savings would be offset, in part, by increased total
ownership costs. The Navy plans to use some of the remaining savings,
if realized, to fund construction of an additional LCS seaframe in
fiscal year 2012. Table 1 compares the key tenets of each strategy.
Table 1: Comparison of the Navy's Current and Proposed LCS Acquisition
Strategies:
Existing LCS acquisition strategy (January 2010): Contract with a
single source on a fixed-price basis for up to 10 ships (2 ships
awarded per year) from fiscal year 2010 through fiscal year 2014;
Proposed LCS acquisition strategy (November 2010): Fixed-price
contracts to two industry teams for up to 10 ships each (1 or 2 ships
awarded per year) through fiscal year 2015 (total of up to 20 ships).
Existing LCS acquisition strategy (January 2010): Second solicitation
for up to 5 additional ships to be constructed at a separate yard with
awards planned between fiscal years 2012 and 2014;
* First source would provide the combat systems for the 5 additional
ships constructed by the second shipyard;
Proposed LCS acquisition strategy (November 2010): Program benefits,
as identified by the Navy, that include:
* stabilizing the program and the industrial base with award of 20
ships;
* funding an additional ship in fiscal year 2012 to support
operational requirements;
* sustaining competition through the program, and;
* enhancing Foreign Military Sales opportunities.
Existing LCS acquisition strategy (January 2010): Navy estimates $1.9
billion in cost savings attributable to:
* near-term competitive pricing pressures between the two current LCS
shipbuilding teams;
* economic order quantity purchases of key materials;
* efficiencies associated with potentially moving to a single, common
combat system, and;
* significantly reduced total ownership costs for the Navy;
Proposed LCS acquisition strategy (November 2010): Navy estimates
program benefits would generate approximately $1 billion in additional
savings above those estimated under the existing strategy that are
attributable to:
* avoiding higher start-up costs (such as nonrecurring engineering and
design costs) associated with awarding contracts to a second source
starting in fiscal year 2012 and by;
* achieving greater labor efficiencies by constructing the ships at a
higher rate.
Existing LCS acquisition strategy (January 2010): Navy estimates that
the cost benefits would be offset, in part, by the start-up costs
associated with introducing a second source in fiscal year 2012;
Proposed LCS acquisition strategy (November 2010): According to the
Navy, these savings 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.
Source: GAO analysis of Navy materials.
Note: Given time constraints, GAO did not fully assess the Navy's
assumptions that underpin the benefits it estimates for each strategy.
[End of table]
The quantities planned under both of the Navy's strategies are similar
through fiscal year 2015. These similarities are outlined in table 2,
which details the Navy's procurement plans for seaframes under both
the existing downselect strategy and the proposed dual award strategy.
Table 2: LCS Seaframe Procurement Plans:
Existing downselect: Winner;
Fiscal year 2010: 2;
Fiscal year 2011: 2;
Fiscal year 2012: 2;
Fiscal year 2013: 2;
Fiscal year 2014: 2;
Fiscal year 2015: 4 (winner and second source combined).
Existing downselect: Second source;
Fiscal year 2010: [Empty];
Fiscal year 2011: [Empty];
Fiscal year 2012: 1;
Fiscal year 2013: 2;
Fiscal year 2014: 2.
Fiscal year 2015: 4 (winner and second source combined)
Existing downselect: Total;
Fiscal year 2010: 2;
Fiscal year 2011: 2;
Fiscal year 2012: 3;
Fiscal year 2013: 4;
Fiscal year 2014: 4;
Fiscal year 2015: 4;
Total: 19.
Proposed dual award: Contractor A;
Fiscal year 2010: 1;
Fiscal year 2011: 1;
Fiscal year 2012: 2;
Fiscal year 2013: 2;
Fiscal year 2014: 2;
Fiscal year 2015: 2.
Proposed dual award: Contractor B;
Fiscal year 2010: 1;
Fiscal year 2011: 1;
Fiscal year 2012: 2;
Fiscal year 2013: 2;
Fiscal year 2014: 2;
Fiscal year 2015: 2.
Proposed dual award: Total;
Fiscal year 2010: 2;
Fiscal year 2011: 2;
Fiscal year 2012: 4;
Fiscal year 2013: 4;
Fiscal year 2014: 4;
Fiscal year 2015: 4;
Total: 20.
Source: Navy.
[End of table]
Under the dual award strategy, the government will be authorized to
contract for up to 20 ships. In contrast, the existing downselect
strategy limits this authorization to up to 10 ships until fiscal year
2012, when the Navy planned to solicit a second source for additional
ships.
Realizing Savings under Either LCS Strategy Depends on Successful
Management of Certain Identified Program Risks:
Successful business cases for shipbuilding programs require balance
between the concept selected to satisfy warfighter needs and the
resources--technologies, design knowledge, funding, time, and
management capacity--needed to transform that concept into a product.
Without a sound business case, program execution will be hampered,
regardless of the contracting strategy. The LCS, given its stage of
maturity and its unique mission, design, and operational concept,
still faces design and construction risks. As with the Navy's estimate
of savings, most of these risks appear to be inherent to the program,
regardless of which acquisition strategy is followed. Navy officials
believe that experience to date on the program, coupled with fixed
price contracts and a sufficient budget for ship changes, mitigates
this risk. However, much work and demonstration remains for LCS, and
other shipbuilding programs have had difficulty at this stage. On the
other hand, 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. Mission equipment packages
are common to both ships and would pose the same execution risks,
apart from integration.
Design Changes Could Increase Near-Term Costs above Current Estimates:
Under both the existing downselect strategy and the proposed dual
award strategy, the Navy plans to award fixed-price incentive
contracts for new seaframes. This type of contract provides for
adjusting profit and establishing the final contract price by
application of a formula based on the relationship of total final
negotiated cost to total target cost. The final price is subject to a
price ceiling, negotiated at the outset. In the case of LCS, the
solicitation stated that the government would share 50 percent of
costs above the target cost, up to the price ceiling. Navy officials
also stated that they have budgeted management reserve funds to
accommodate potential impacts to cost performance during program
execution. In other programs, the Navy has returned to Congress to
request funding for costs exceeding the target costs. In the near
term, cost increases are likely but it is unknown whether increases
will exceed what the Navy has budgeted for fiscal years 2010 and
beyond. The likely source of these cost increases is design changes,
which result in out-of-sequence work, potentially limiting the
shipbuilders' ability to achieve the benefits they anticipate from
construction process improvements and shipyard capital investments.
Our August 2010 report on LCS discussed issues with the performance of
particular ship systems at the time of lead ship deliveries and as a
result of subsequent operating experience.[Footnote 4] In an effort to
address technical issues on the first two ships, the Navy has
implemented design changes for the third and fourth LCS seaframes (LCS
3 and LCS 4), several of which are not yet complete. These changes are
significant and have affected the configuration of several major ship
systems including propulsion, communications, electrical, and
navigation. In addition, launch, handling, and recovery systems for
both designs are still being refined, although the Navy reports recent
progress related to each of these systems.[Footnote 5] To the extent
that these design changes necessitate modifications in the ship
specifications on which the contractors based their proposals for
future ships, contract modifications will need to be negotiated and
priced. According to the Navy, it estimates funding requirements for
these change orders to total 5 percent for all future follow-on ships
produced, regardless of whether it proceeds with a downselect strategy
or the proposed dual award strategy. In addition, Navy officials
stated that the seaframe solicitation includes a provision that agreed
to design changes are "not to exceed" $12 million--a feature that Navy
officials state will bound government cost risk due to design changes.
Pending full identification and resolution of deficiencies affecting
the lead ships, the Navy's ability to stay within its budgeted limits
remains to be seen.
As we reported earlier this year, the LCS shipbuilding teams have
implemented process and capacity improvements based on lessons learned
from constructing lead ships and have made capital investments in
their yards in an effort to increase efficiency.[Footnote 6] Fully
realizing these improvements may be challenging given the design
changes still occurring in the program. To the extent that addressing
technical issues disrupts the optimal construction sequence for follow-
on ships, additional labor hours could be required beyond current
forecasts. Introducing such inefficiencies could offset initial
benefits obtained from the process improvements and new facilities the
shipbuilders have put into place, increasing the risk of out-of-
sequence work and rework. Some level of design changes can be
reasonably expected given the testing that remains. To date, however,
Navy officials report that LCS 3 and LCS 4 changes are being managed
efficiently--citing improved cost and schedule performance by both
shipbuilders. The Navy also believes that the LCS seaframe may be less
affected by mission equipment changes than other ships given the
equipment's modular design. Maintaining a high level of performance
will depend on avoiding significant design changes to seaframes under
construction.
Operations and Support Costs Difficult to Estimate:
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.
In addition, the Navy has not studied--within the context of the
downselect strategy--the potential savings associated with early
retirement of the two nonselected design ships. As such, decision
makers do not have a complete picture of the various options available
to them related to choosing between the downselect and dual award
strategies. Under the existing downselect strategy, the Navy's
intention is to keep in service--at least initially--the other two
ships of the design not selected for long-term production. The Navy
acknowledged that operating and supporting two different designs
carries increased costs as compared to the costs of employing only one
design. As we previously reported, these costs include separate
training facilities because each design has unique equipment and
therefore different operating and maintenance requirements.[Footnote
7] In February 2010, we recommended that the Navy conduct a cost-
benefit analysis of options for these two ships, including the
possibility of retiring them from service--a recommendation with which
the Department of Defense agreed. As we point out in the February
report, it is important that estimates of long-term operating and
support costs are available to assess alternatives before a decision
is made, particularly since these costs constitute over 70 percent of
a system's life cycle costs. However, in discussions with Navy
officials in November 2010, they told us that their latest assessment
of the long-term costs of maintaining two ship designs does not
consider the option of retiring the two nonselected ships.
Mission Package Uncertainties and Delays:
The Navy's request to double its current 10-ship authorization to 20
ships--at a time when the mine countermeasures, surface warfare, and
antisubmarine warfare mission packages continue to face significant
developmental challenges--highlights the Navy's risk of investing in a
fleet of ships that has not yet demonstrated its promised capability.
Absent significant capability within its mission packages, seaframe
functionality is largely constrained to self-defense as opposed to
mission-related tasks.
Navy officials acknowledged that mission package systems have taken
significantly longer to develop and field than anticipated.
Underscoring this situation is the fact that development efforts for
most of these systems predate the LCS program--in some cases by 10
years or more. However, Navy officials expressed confidence that their
latest testing and production plans for mission package systems are
executable.
Recent testing of mission package systems has yielded mixed results.
The Navy reports that two systems within the mine countermeasures
mission package recently completed developmental testing, but another
system is undergoing reliability improvements following production of
several units that did not meet performance requirements.[Footnote 8]
Further, test failures contributed to the cancellation of a key
surface warfare mission package system, and the future composition of
the package remains undetermined.[Footnote 9]
Developmental challenges facing individual systems have led to
procurement delays for all three mission packages and have disrupted
program test schedules. Most notably, the Navy reports the first
operational testing event involving a seaframe and partial mission
package is now scheduled for late second quarter of fiscal year 2012,
and the Navy expects individual mission package systems to remain in
development through 2017.[Footnote 10]
To safeguard against excess quantities of ships and mission packages
being purchased before their combined capabilities are demonstrated,
we recommended in our August 2010 report that the Secretary of Defense
update the LCS acquisition strategy to account for operational testing
delays in the program and resequence planned purchases of ships and
mission packages, as appropriate.[Footnote 11] The Department of
Defense agreed with this recommendation, stating that an updated
schedule was under development to better align seaframe and mission
module production milestones. However, it is unclear how the
department's concurrence with our recommendation can be reconciled
against the Navy's current request to increase the planned seaframe
commitment, particularly since no operational testing involving
mission packages--or any of their individual systems--has since taken
place. Until mission package and operational testing progresses--and
key mine countermeasures, surface warfare, and antisubmarine warfare
systems are proven effective and suitable onboard seaframes--the Navy
cannot be certain that the LCS will deliver the full capability
desired. This risk would increase with a commitment to higher
quantities. The Navy believes this increased commitment is
appropriately balanced against competing risks in the program.
Agency Comments and Our Evaluation:
The Department of Defense provided us with written comments on a draft
of this report. The department's response reiterated the benefits it
anticipates realizing under the proposed dual award acquisition
strategy.
In its comments, the department stated it had assessed the cost of
sustaining a two ship class to be less than the cost--in financial and
operational terms--of replacing these ships in a future procurement
budget request. However, we are unaware of the underlying analysis the
department has conducted to support this statement. Navy officials
told us recently that they have not undertaken any type of analysis to
weigh the potential benefits and drawbacks of retiring the two ships
of the nonselected design, despite agreeing with our February 2010
recommendation to conduct such analysis.[Footnote 12]
Further, the department stated that both LCS designs are now stable,
citing the minimal change activity to date for LCS 3 and LCS 4 and the
continued availability of change order budgets for those ships.
However, our analysis shows that the Navy has deferred several changes
affecting key ship systems until post-delivery for LCS 3 and LCS 4--a
decision that has contributed to the positive, near-term performance
the department cites. Further, as the Navy continues to address
technical deficiencies affecting the lead ships--generally through
design changes--the scope of deferred work for follow-on ships can
reasonably be expected to grow. Until this scope is fully identified--
and priced into existing and future LCS contracts--the department
cannot be fully confident that its budgets for follow-on ships are
sufficient to offset the cost increases associated with performing
work out of sequence.
The department also emphasized progress it has made developing and
testing LCS mission package systems, while at the same time
acknowledging that some systems continue to experience developmental
issues--noting that these systems have either been replaced with
alternate systems or have become targets of increased Navy focus and
attention. According to the department, its mission package approach
allows substitute or re-engineered systems to be quickly and
seamlessly identified for incorporation into the mission package
development stream without impacting overall fielding plans. However,
our analysis shows that developmental delays to individual systems
have caused all of the LCS mission packages--mine countermeasures,
surface warfare, and antisubmarine warfare--to experience test
disruptions and procurement delays. In fact, none of the mission
packages--either in partial or full configuration--has completed
operational testing onboard an LCS seaframe.
The department's written comments can be found in enclosure I. The
department also provided technical comments, which were incorporated
into the report as appropriate.
We are sending copies of this report to interested congressional
committees, the Secretary of Defense, and the Secretary of the Navy.
The report is also available at no charge on the GAO Web site at
[hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-4841 or martinb@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Staff making key contributions to
this report were Diana Moldafsky, Assistant Director; Christopher R.
Durbin; Jeremy Hawk; Simon Hirschfeld; Kristine Hassinger; and Karen
Zuckerstein.
Signed by:
Belva M. Martin:
Acting Director:
Acquisition and Sourcing Management:
Enclosure:
List of Committees:
The Honorable Carl Levin:
Chairman:
The Honorable John McCain:
Ranking Member:
Committee on Armed Services:
United States Senate:
The Honorable Susan M. Collins:
Ranking Member:
Committee on Homeland Security and Government Affairs:
United States Senate:
The Honorable Claire McCaskill:
Chairman:
Ad Hoc Subcommittee on Contracting Oversight:
Committee on Homeland Security and Government Affairs:
United States Senate:
The Honorable Ike Skelton:
Chairman:
The Honorable Howard P. "Buck" McKeon:
Ranking Member:
Committee on Armed Services:
House of Representatives:
The Honorable Darrell Issa:
Ranking Member:
Committee on Oversight and Government Reform:
House of Representatives:
The Honorable Norman D. Dicks:
Chairman:
The Honorable C.W. Bill Young:
Ranking Member:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:
[End of section]
Enclosure I: Comments from the Department of Defense:
Office Of The Under Secretary Of Defense:
Acquisition Technology And Logistics:
3000 Defense Pentagon:
Washington, Dc 20301-3000:
December 6, 2010:
Ms. Belva M. Martin:
Acting Director, Acquisition and Sourcing Management:
U.S. Government Accountability Office:
441 G Street NW:
Washington, DC 20548:
Dear Ms. Martin:
This is the Department of Defense (DoD) response to the GAO draft
report, GAO Draft Report, GAO-11-249R, 'LCS Proposed Acquisition
Strategy' dated December 3, 2010, (GAO Code 120959).
The LCS program is a competitive dual-source shipbuilding program. Two
industry teams have each designed, built and delivered a lead ship
meeting the LCS performance requirements. Both of these lead ships are
in Navy service, executing Fleet operational tasking as well as
conducting a comprehensive test and evaluation program. The LCS
shipbuilding teams are currently building their second ships with
lessons learned from the lead ships fully incorporated into the
designs. Both shipbuilders have dramatically improved performance from
their lead ships as a result of design stability and through
improvements in facilities and production efficiencies.
To achieve necessary further improvements in cost performance on the
program, the Navy developed a competitive block buy down select
strategy for procuring ten ships (two per year) of the 15 LCS ships
planned in the Fiscal Year (FY) 2010 ” 2014 shipbuilding plan. That
LCS competitive strategy has been extremely effective in meeting one
of the Navy's and Congress' key program objectives: competitive,
affordable, fixed-price proposals. In fact, these competitive
proposals, coupled with Navy's desires to increase ship procurement
rates to support operational requirements, has created a new
opportunity to award each offeror a fixed price ten-ship block buy, a
total of 20 ships from FY 2010 ” FY 2015. This dual award approach would
procure all of the LCS' planned for those budget years, plus one
additional ship in FY 2012. Adding the four LCS ships programmed for
FY 2015 to the block buys brings the total to 20 ships.
The dual award strategy would allow the Navy to award two block buy
contracts (ten ships each from FY 2010 ” FY 2015), creating
significant, additional savings compared to a down select, by
leveraging the competitive fixed-price proposals in-hand. Under these
two contracts, while all 20 ships will be congressionally authorized,
the Government will be contractually obligated only for the ships that
are appropriated in each year. Unlike a multiyear procurement, there
is no termination liability required if the Government decides not to
fund the out year ships. It is important to note that while this dual
award increases the number of ships procured during this period, with
the addition of the FY 2012 ship financed by the dual award savings,
it does not 'double' the quantity planned or programmed.
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.
A dual award increases Navy's shipbuilding rate and eliminates the
need to conduct a FY 2012 competition for a second shipyard source to
build the successful design, delivering needed ships to the fleet
sooner. In addition to adding one LCS in FY 2012, a dual award for 20
ships sustains existing stable, hot production lines at two shipyards.
Dual award results in an accelerated delivery of LCS capabilities to
the fleet, all while actually reducing total program
cost and providing important stability for the industrial base. These
new LCS savings can be reinvested in other programs, including
shipbuilding, increasing recapitalization opportunities across the
Department.
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.
A dual award ” which includes submission of respective technical data
packages ”creates many opportunities for future competition. The Navy
has numerous alternatives for sustaining effective competition on this
program beyond the dual award, more so than any other shipbuilding
program since the early years of FFG 7 class competition. These
include competing for cost and/or quantity, introduction of one or
more second sources for a particular design, a future down selection,
and competitive multiyear procurements, all of which would be viable
as the LCS program progresses beyond the Future Years Defense Program
(FYDP).
Regarding Operations & Support (O&S) costs, the acquisition savings
provided by a dual award far exceed estimates of the O&S cost delta
for two designs versus one design. Even under the down select
strategy, the Navy planned on sustaining the two ships of the design
not selected; the dual award only changes the marginal cost of this
support by adding ten more ships to the already planned two-ship
class. As noted, this marginal cost increase is more than offset by
the savings realized through a dual award. Further, the Navy will
continue to aggressively assess opportunities to reduce the O&S costs
for the Class. While it has been suggested that the Navy could retire
the two-ship class early to avoid O&S cost, the reality is that the
Navy needs this capability in numbers and the cost of sustaining the
two ship class has been assessed to be less than the cost ” in
financial and operational terms ” of replacing these ships in a future
procurement budget request.
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.
Perhaps most important, the Navy budget risk is contained by using
fixed price incentive contracts, which cap the government's price risk
at ceiling. The Navy projection of $2.9 billion in acquisition savings
for the dual award includes management reserve for any potential
impact to cost performance during execution.
Mission Package (MP) development and testing is progressing well. From
program inception, the acquisition strategy for mission packages has
employed an incremental approach and remained stable, fielding systems
as they achieve the required level of maturity. This phased plan
provides progressively greater capability through the introduction of
mature programs of record into the respective mission packages while
mitigating the risk of individual systems. Those few systems
experiencing developmental issues (Non-Line-of-Sight ” Launching
System (NLOS ” LS) and Remote Minehunting System (RMS)) are either
being replaced with alternate systems or are targets of increased
leadership focus and programmatic attention. Results are positive in
all cases. Rather than indicating weakness in the MP approach, these
few failures demonstrate its strength; substitute or re-engineered
systems are quickly and seamlessly identified and sequenced for in-
stride incorporation into the MP development stream without impacting
the overall fielding plan. Equally important, the MP approach has
succeeded in eliminating shipboard impact associated with changes to
the MP (as in the case of NLOS) through strict adherence to interface
controls between MP and the ship.
Recent mission package testing has demonstrated the ability to meet Mine
Counte measure (MCM) and Surface Warfare (SUW) Increment I fielding
requirements. The Navy is on track to deploy Increment I of the MCM MP
in 2013. Increment I will provide capability greater than is currently
fielded in the fleet. An Engineering Development Model (EDM) for the
Variable Depth Sonar (VDS) is under contract to deliver and commence
testing in FY 2012, which will be the foundation of the Anti-Submarine
Warfare (ASW) Spiral B MP. The Program of Record (PoR) is to continue
spiral development of additional capability through 2017. The PoR will
remain unchanged regardless of a down select or dual award acquisition
strategy. This will allow the MP procurement to remain in phase with
LCS deliveries.
In summary, by leveraging the competitive, fixed price proposals
currently in hand, the Navy, subject to annual congressional approval,
has the opportunity to achieve dramatic procurement cost savings,
accelerate fleet introduction of LCS, sustain stable production of
both designs, mitigate potential risk associated with production start
up at a second yard, and maintain opportunities for future
competition. Not only do both designs meet the Navy's requirements,
but also the design differences offer unique opportunities and
flexibility to the Fleet in how these ships could be employed.
Detailed comments on the report are enclosed. The Department
appreciates the opportunity to comment on the report. For further
questions concerning this report, please contact Darlene Costello,
Deputy Director, Naval Warfare, 703-697-2205.
Sincerely:
Signed by:
David G. Ahern:
Deputy Assistant Secretary of Defense:
Portfolio Systems Acquisition:
Enclosure: As stated:
[End of section]
Footnotes:
[1] The decision to select a single ship design is referred to as the
"downselect."
[2] In response to the Navy's September 2009 LCS acquisition strategy
change, General Dynamics and Austal USA revoked their teaming
arrangement for future seaframes, in turn allowing the General
Dynamics Bath Iron Works shipyard to compete for selection as the
planned potential second source of the winning design. Austal USA and
Lockheed Martin are the prime contractors competing for the current 10-
ship program.
[3] See GAO, Defense Acquisitions: Navy's Ability to Overcome
Challenges Facing the Littoral Combat Ship Will Determine Eventual
Capabilities, [hyperlink, http://www.gao.gov/products/GAO-10-523]
(Washington, D.C.: Aug. 31, 2010).
[4] [hyperlink, http://www.gao.gov/products/GAO-10-523].
[5] According to Navy officials, the most recent progress related to
LCS launch, handling, and recovery systems consists of (1) successful
operation and movement of an embarked 11-meter rigid-hull inflatable
boat onboard LCS 1 in March 2010, (2) synthetic lift lines on LCS 2
successfully completing a 200 percent lift test, and (3) routine usage
of a straddle carrier to move an 11-meter rigid-hull inflatable boat
(with stowage cradle) and berthing modules around the LCS 2 mission
bay. In addition, Navy officials state that LCS 1's system is
scheduled to begin testing with the mine countermeasures mission
package in fiscal year 2011 and testing of LCS 2's twin-boom
extensible crane is progressing.
[6] See GAO, Defense Acquisitions: Guidance Needed on Navy's Use of
Investment Incentives at Private Shipyards, [hyperlink,
http://www.gao.gov/products/GAO-10-686] (Washington, D.C.: Jul. 26,
2010) and [hyperlink, http://www.gao.gov/products/GAO-10-523].
[7] See GAO, Littoral Combat Ship: Actions Needed to Improve Operating
Cost Estimates and Mitigate Risks in Implementing New Concepts,
[hyperlink, http://www.gao.gov/products/GAO-10-257] (Washington, D.C.:
Feb. 2, 2010).
[8] According to Navy officials, the AN/AQS-20A sonar and Airborne
Laser Mine Detection System recently completed developmental testing
in August and October 2010, respectively. Alternatively, the Remote
Minehunting System--produced since 2005--continues to struggle with
reliability shortfalls. This has prompted the Navy to implement a
series of design changes to the vehicle component and evaluate
reducing the system's performance requirements.
[9] Development of the Non-Line-of-Sight Launch System--an anticipated
key system within the surface warfare package--was canceled in 2010
following test failures and higher than expected cost estimates. The
Navy continues to evaluate alternatives to replace this capability
onboard LCS.
[10] According to Navy officials, the planned fiscal year 2012
operational test will employ the first LCS (LCS 1) seaframe and a
(partial) surface warfare mission package. This date represents a
recent update to the program's testing plan as the Navy's fiscal year
2011 budget estimates showed this event occurring in the third quarter
of fiscal year 2013.
[11] [hyperlink, http://www.gao.gov/products/GAO-10-523].
[12] [hyperlink, http://www.gao.gov/products/GAO-10-257].
[End of section]
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