The Six Hundred Million Dollar...

Historical experience indicates that cost growth in the LCS program is likely. In particular, using the lead ship of the FFG-7 Oliver Hazard Perry class frigate as an analogy, historical cost-to-weight relationships indicate that the Navy’s original cost target for the LCS of $260 million in 2009 dollars (or $220 million in 2005 dollars) was optimistic. The first FFG-7 cost about $670 million in 2009 dollars to build, or about $250 million per thousand tons, including combat systems. Applying that metric to the LCS program suggests that the lead ships would cost about $600 million apiece, including the cost of one mission module. Thus, in this case, the use of a historical cost-to-weight relationship produces an estimate that is less than the actual costs of the first LCSs to date but substantially more than the Navy’s original estimate.

Based on actual costs the Navy has incurred for the LCS program, CBO estimates that the first two LCSs could cost about $700 million each, including outfitting and postdelivery and various nonrecurring costs associated with first ships of a class but excluding mission modules. However, as of April 27, 2008, LCS-1 was 87 percent complete and LCS-2 was 72 percent complete. Thus, additional cost growth is possible, and CBO’s estimate reflects that cost risk.

Overall, CBO estimates that the LCSs in the Navy’s plan would cost about $550 million each, on average, excluding mission modules. That estimate assumes that the Navy would select one of the two existing designs and make no changes. As the program advanced with a settled design and higher annual rates of production, average ship costs would probably decline. If the Navy decided to make changes to that design, however, the costs of building future ships could be higher than CBO now estimates.

Congressional Budget Office, Resource Implications of the Navy’s Fiscal Year 2009 Shipbuilding Plan (PDF), June 8, 2008, pp. 26-27

Yesterday, the Naval Sea Systems Command Office of Corporate Communications posted this little memo on the Navy website.

As a result of the Navy's change in acquisition strategy for the Fiscal Year (FY) 2010 Littoral Combat Ship (LCS) program, the Navy can now release the pricing for LCS 3 and LCS 4 awarded contracts.

The total value of the LCS 3 contract, awarded to Lockheed Martin Corporation on March 23, was $470,854,144 which includes ship construction, non-recurring construction and additional engineering effort, configuration management services, additional crew and shore support, special studies and post delivery support.

The total value of the LCS 4 contract, awarded to General Dynamics - Bath Iron Works on May 1, was $433,686,769 which includes ship construction, non-recurring construction and additional engineering effort, configuration management services, additional crew and shore support, special studies and post delivery support.

The contract values do not include government costs which include government furnished equipment, change orders, and program management support costs. The contract values do not include the cost of continuation work and material used from the terminated original contract options for LCS 3 and 4. The value of the continuation work and material from the terminated LCS 3 was $78 million for Lockheed Martin Corporation and $114 million from the terminated LCS 4 for General Dynamics/Bath Iron Works.

The dollar value of the fixed-price-type contracts awarded to each LCS prime contractor to procure two LCS seaframes in FY 2009 was previously considered source-selection sensitive information because the price of the FY 2009 ships was to be linked to the competitive solicitation for the FY 2010 ships. That solicitation was cancelled and a new acquisition strategy does not link the FY 2009 prices with the FYs 2010-2014 source selection, thereby allowing normal release of this contract data.

The Navy remains committed to the LCS program and the requirement for 55 of these ships to provide combatant commanders with the capability to defeat anti-access threats in the littorals, including fast surface craft, quiet submarines and various types of mines. The Navy's acquisition strategy will be guided by cost and performance of the respective designs as well as options for sustaining competition throughout the life of the program.

Lockheed Martin Corporation LCS-3

$470,854,144 + $78,000,000 = $548,854,144

General Dynamics - Bath Iron Works LCS-4

$433,686,769 + $114,000,000 = $547,686,769

Give credit to Chris Cavas for beating around DC for the rest of the story. From Navy Times, he finds someone on Capitol Hill ready to offer analysis.

“What you have here are numbers that would have to be manipulated quite a lot to understand what the construction costs of the ships are,” said one congressional source. “This is interesting, but there are so many variables here. It would be hard to use these numbers to get a clear understanding of what these ships cost to build.”

The true cost of the new ships is actually closer to $600 million each, said one professional analyst.

“If you add to the contract price about $20 million for change orders, government-furnished equipment and other categories, you get costs of $560 million to $570 million,” the professional analyst said. “Then throw in outfitting and post delivery, and they’re about $600 million each.”

Chris also finds an industry perspective to complete the story.

An industry source also noted the LCS 3 and 4 costs are for single ships only, and don’t have the advantages of the 10-ship buy the Navy is expected to award next year.

“There was a long time between each builder’s first and second ships, and you’ve got to consider the costs of relearning,” said the industry source. “There are no new techniques to introduce, no best practices being figured and no economical buys because there are no cost savings from ships after these.”

First, folks over at the Navy and in the industry who have been bashing on ole Eric Labs need to send him a Christmas card this year with the words "I'm sorry, you were right." written in ink. CBO has consistently produced the most accurate estimates, and after two years of consistently using CBO numbers for estimating costs accurately for the LCS program I'm feeling really damn smug right now for standing by CBO on this issue. Just being honest.

It really is remarkable. Eric Labs - I owe you a beer (wine is good too).

Second, the most interesting part of the announcement is how similar the costs are for both hulls. The difference between the second of each class is only $1,167,375. That tells me that cost will not be a factor at all in the down select to a single hull. Do we have a real capabilities competition? Too bad we are in such a hurry the competition isn't real.

This raises important questions for Congress. If cost isn't an issue, then why would the Navy want to down select to a single hull at all when each hull brings unique capabilities? I thought the rational for down select to a single hull was cost? That does not appear to be the case based on the Navy's own data. I think the absence of any significant cost differential makes the down select to a single hull a very controversial decision, as there are no apparent cost savings.

It would be inaccurate to suggest there will be operational cost savings too, because operational cost savings have to account for the additional costs of choosing the capabilities of one ship over the capabilities of the other, and the costs associated with what is lost. In different environments, one hull choice will be better than the other, and that matters a great deal to operations costs.

For example, if the Navy picks the Lockheed Martin version, the Navy loses a ton of potential space in the mission bays compared to the General Dynamics version. That means more ships would be needed to haul materials greater than the amount one Lockheed Martin hull could carry. At the same time, the General Dynamics version is much wider, and can't be built by any shipyard that would require it to pass through a river dam. There are a lot of things to consider, both ships have different properties that are desirable and it may actually be more cost effective from an operations perspective to build both instead of just one hull, and simply do a good job forward basing hulls of a single design together to regions where one hull is better suited than the other. Based on this cost data released and what we know to be the differences of the two designs, there is no evidence at all that down select to one hull will save money, and given the various environments globally the LCS will be expected to operate, there is a good case to be made that having both designs is actually more cost efficient than less.

Congress should not let the Navy dump a mature design for bogus reasons - like cost - as they are doing. With potential exports possible and a shipbuilding industry still working its way out of a hole, dumping a mature naval design right now after investing so much money would be a waste of time, money, and effort that doesn't add up without significantly more information.

Third, there will be cost savings with the new acquisition strategy, but those cost savings will likely only amount to enough to pay for the mission modules. In other words, $600 million per LCS, including all costs, now appears to be the appropriate estimate to use when discussing the Littoral Combat Ship. I'm ignoring the Congressional $460 million number. I have no idea where that number came from, but I do know where the original cost estimate came from.

If you recall to the beginning of the LCS program, 3 Littoral Combat Ships were supposed to equal the cost of one DDG-51. This is cost measurement we will often see repeated in the halls of Congress during testimony. Well, estimates are the restart of the DDG-51 program will result in new Burkes built at an average cost of $1.8 billion. Divide by three, and you find $600 million. The more things change, the more they really don't.

A bit of reflection and opinion by me for a second. I'm more optimistic about Navy shipbuilding right now than I have been since I began blogging. I think the industry is grinding through their problems, and I think the Navy is grinding through their problems, and I get a general sense from all sides that things are getting better, although the grind isn't pretty. It could also be said there was no where to go but up after the last few years.

I have no specific information what the new shipbuilding strategy will look like, no idea how many ships the Navy will end up in their plan, and no idea what the QDR will ultimately say. I do know this though, The LCS and the DDG-1000 are critical platforms to the Navy's future. Yes, both of them. The word vital applies. I'm not saying we need more than 3 DDG-1000s (although I would still build 4 to insure one is always deployed), but I am saying the modular system of the LCS and the ten new technologies of the DDG-1000 are the keys that are unlocking the future for the Navy. There is so much fog, with the industry agenda being part of the problem, that it is hard to understand what the future of the Navy looks like.

Not me, I see what the future looks like, I just haven't been able to write it up well enough to explain it in a way I feel comfortable posting or publishing yet. I no longer buy into conventional wisdom. Kaplan is wrong, the US is not in relative decline when it comes to Naval power, I think we are poised to outpace all competitors and adapt at a speed that no other Navy in the world will be able to match.

But I'm in a minority, few see the value of the Littoral Combat Ship, an imperfect ship with a high cost. It is an absolute fact the LCS is too small to do many things, and too big to be many things. It also happens to be one of, if not THE best idea to go to production in the US Navy since nuclear power. Conceptually it unquestionably represents a promising future, but the reality doesn't represent good enough for 51. In the end, I reject the 51 as much as I reject the $460 million.

Both are numbers that hold no value to the Littoral Combat Ship program and concept when talking to the American people. All that matters right now is 15 more hulls and $600 million each, and if the Navy was smart, they should only focus on those two numbers for at least a year as they begin to tell their story.