Order Code RL33741
Navy Littoral Combat Ship (LCS) Program:
Background, Oversight Issues, and
Options for Congress
Updated October 5, 2007
Ronald O’Rourke
Specialist in National Defense
Foreign Affairs, Defense, and Trade Division

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Navy Littoral Combat Ship (LCS) Program: Background,
Oversight Issues, and Options for Congress
Summary
The Littoral Combat Ship (LCS) is a small, fast surface combatant that is to be
equipped with modular mission packages, including unmanned vehicles (UVs). The
basic version of the LCS, without any mission packages, is referred to as the LCS sea
frame. The first LCS (LCS-1) was procured in FY2005, another three (LCSs 2, 3,
and 4) were procured in FY2006, and two more (LCSs 5 and 6) were procured in
FY2007. The Navy’s proposed FY2008 budget, submitted to Congress in February
2007, requested $910.5 million in procurement funding for three more LCSs. Navy
plans call for procuring a total of 55 LCSs.
In response to significant cost growth in the building of the first LCSs, the Navy
in January 2007 placed a 90-day stop-work order on LCS-3 and in March 2007
announced a proposed plan for restructuring the LCS program. The plan would:
! cancel the two LCSs funded in FY2007 (LCSs 5 and 6) and use the
funding to pay for cost overruns on earlier LCSs;
! lift the stop-work order on LCS-3 — provided that the Navy reached
an agreement by April 12 with the Lockheed-led industry team
building LCS-3 to restructure the contract that the Lockheed team
has for building LCSs 1 and 3 from a cost-plus type contract into a
fixed price incentive (FPI)-type contract;
! alternatively, terminate construction of LCS-3 — if an agreement on
a restructured contract for LCS-1 and LCS-3 could not be reached
with the Lockheed team by April 12;
! seek to restructure the contract for building LCSs 2 and 4 (which are
being built by a second industry team led by General Dynamics) into
an FPI-type contract — if LCSs 2 and 4 experience cost growth
comparable to that of LCSs 1 and 3;
! reduce the number of LCSs requested for FY2008 from three to two
(for the same requested FY2008 procurement funding of $910.5
million), and the number to be requested for FY2009 from six to
three;
! conduct an operational evaluation to select a favored design for
LCSs to be procured in FY2010 and beyond; and
! conduct a full and open competition among bidders for the right to
build that design.
On April 12, 2007, the Navy announced that the Navy and Lockheed had not
reached an agreement on a restructured contract for LCS-1 and LCS-3, and that the
Navy consequently was terminating construction of LCS-3. On May 10, 2007, it was
reported that the Navy would ask Congress to increase the procurement cost cap for
the fifth and sixth LCSs to $460 million each in FY2008 dollars.
A primary issue for Congress at this point is whether to approve, reject, or
modify the Navy’s proposed restructuring plan. Congress has several potential
options regarding the LCS program. This report will be updated as events warrant.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Littoral Combat Ship (LCS) Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
March 2007 Program Restructuring Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
April 2007 Termination of LCS-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
September 2007 Report of Negotiations on LCSs 2 and 4 . . . . . . . . . . . . . . 8
Proposed Common Combat System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Potential Oversight Issues for Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Cost Increase on LCS Sea Frames . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Cost Cap on Fifth and Sixth Ships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Total Program Acquisition Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Termination of LCS-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Operational Evaluation and Competition for Production . . . . . . . . . . . . . . 21
Proposed Common Combat System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Pace of Mission Package Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Mission Packages Funded in OPN Account . . . . . . . . . . . . . . . . . . . . . . . . 24
Options for Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
FY2008 Legislative Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
FY2008 Defense Authorization Bill (H.R. 1585/S. 1547) . . . . . . . . . . . . . . 26
FY2008 Defense Appropriations Bill (H.R. 3222) . . . . . . . . . . . . . . . . . . . 35
List of Tables
Table 1. LCS Program Funding in FY2007 Budget . . . . . . . . . . . . . . . . . . . . . . . 4
Table 2. Projected Procurement Of LCSs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Table 3. LCS Sea Frame Unit Procurement Costs . . . . . . . . . . . . . . . . . . . . . . . 11

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Navy Littoral Combat Ship (LCS) Program:
Background, Oversight Issues, and
Options for Congress
Introduction
The Navy is procuring a new type of surface combatant called the Littoral
Combat Ship (LCS). The LCS is a small, fast ship that is to be equipped with
modular “plug-and-fight” mission packages, including unmanned vehicles (UVs).
The basic version of the LCS, without any mission packages, is referred to as the
LCS sea frame.
The first LCS (LCS-1) was procured in FY2005, another three (LCSs 2, 3, and
4) were procured in FY2006, and two more (LCSs 5 and 6) were procured in
FY2007. The Navy’s proposed FY2008 budget, submitted to Congress in February
2007, requested $910.5 million in procurement funding for three more LCSs. Navy
plans call for procuring a total of 55 LCSs.
In response to significant cost growth in the building of the first LCSs, the Navy
in January 2007 placed a 90-day stop-work order on LCS-3 and in March 2007
announced a proposed plan for restructuring the LCS program that would, among
other things, cancel LCSs 5 and 6 and use the funding for those two ships to pay for
cost overruns on earlier LCSs, and reduce the number of LCSs to be procured in
FY2008 from three to two. On April 12, 2007, the Navy announced that it was
terminating construction of LCS-3, leaving only LCSs 1, 2, and 4 under construction.
On May 10, 2007, it was reported that the Navy would ask Congress to increase the
procurement cost cap for the fifth and sixth LCSs to $460 million each in FY2008
dollars.
A primary issue for Congress at this point is whether to approve, reject, or
modify the Navy’s proposed restructuring plan. Congress has several potential
options regarding the LCS program.
Background
Littoral Combat Ship (LCS) Program
Announcement of LCS Program. The LCS program was announced on
November 1, 2001, when the Navy stated that it was launching a Future Surface
Combatant Program aimed at acquiring a family of next-generation surface

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CRS-2
combatants. This new family of surface combatants, the Navy stated, would include
three new classes of ships:
! a destroyer called the DD(X) — later redesignated the DDG-1000
— for the precision long-range strike and naval gunfire mission,1
! a cruiser called the CG(X) for the air defense and ballistic missile
mission,2 and
! a smaller combatant called the Littoral Combat Ship (LCS) to
counter submarines, small surface attack craft, and mines in heavily
contested littoral (near-shore) areas.
The LCS In Brief. The LCS is a small, fast surface combatant that is to be
equipped with modular “plug-and-fight” mission packages, including unmanned
vehicles (UVs). Rather than being a multimission ship like the Navy’s larger surface
combatants, the LCS is to be a focused-mission ship equipped to perform one or two
missions at any one time. The ship’s mission orientation is to be changed by
changing out its mission packages. The basic version of the LCS, without any
mission packages, is referred to as the LCS sea frame.
The LCS’s primary intended missions are shallow-water antisubmarine warfare,
mine countermeasures, countering small boats, and intelligence, surveillance, and
reconnaissance (ISR). Secondary intended missions include homeland defense,
maritime interception, and support of special operations forces.
The LCS is to displace about 3,000 tons — about the size of a corvette or Coast
Guard cutter. It is to have a maximum speed of about 45 knots, compared to
something more than 30 knots for the Navy’s larger surface combatants. The LCS
is to have a shallower draft than the Navy’s larger surface combatants, permitting it
to operate in certain coastal waters and visit certain ports that are not accessible to
the Navy’s larger surface combatants. The LCS is to employ automation to achieve
a reduced “core” crew of 40 sailors. Up to 35 or so additional sailors are to operate
the ship’s embarked aircraft and mission packages, making for a total crew of about
75, compared to more than 200 for the Navy’s larger surface combatants.
As mentioned earlier, Navy plans call for procuring a total of 55 LCSs. The
Navy currently plans to procure a total of 64 mission packages for the 55 ships.
Earlier Navy plans anticipated procuring between 90 and 110 mission packages for
a 55-ship fleet.
Congressional Action for FY2005-FY2007. In FY2005, Congress
approved the Navy’s plan to fund the construction of the first two LCSs using
1 For more on the DDG-1000 program, see CRS Report RL32109, Navy DDG-1000
Destroyer Program: Background, Oversight Issues, and Options for Congress, by Ronald
O’Rourke.
2 For more on the CG(X) program, see CRS Report RL34179, Navy CG(X) Cruiser
Program: Background, Oversight Issues, and Options for Congress, by Ronald O’Rourke.

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CRS-3
research and development funds rather than shipbuilding funds, funded the first
LCS’s construction cost, required the second LCS to be built to a different design
from the first, prohibited the Navy from requesting funds in FY2006 to build a third
LCS, and required all LCSs built after the lead ships of each design to be funded in
the SCN account rather than the Navy’s research and development account.
In FY2006, Congress funded the procurement of the second, third, and fourth
LCSs. (The Navy requested one LCS for FY2006, consistent with Congress’s
FY2005 action. Congress funded that ship and provided funding for two additional
ships.) Congress in FY2006 also established a $220-million unit procurement cost
limit on the fifth and sixth LCSs, plus adjustments for inflation and other factors
(Section 124 of the FY2006 defense authorization bill [H.R. 1815/P.L. 109-163] of
January 6, 2006), required an annual report on LCS mission packages, and made
procurement of more than four LCSs contingent on the Navy certifying that there
exists a stable design for the LCS.
In FY2007, Congress funded the procurement of the fifth and sixth LCSs.
Two Industry Teams, Each With Its Own Design. On May 27, 2004, the
Navy awarded contracts to two industry teams — one led by Lockheed Martin, the
other by General Dynamics (GD) — to design two versions of the LCS, with options
for each team to build up to two LCSs each. The two teams’ LCS designs are quite
different — Lockheed’s uses a semi-planing steel monohull, while GD’s uses an
aluminum trimaran hull. The Lockheed team was assigned LCS-1 and LCS-3, while
the GD team was assigned LCS-2 and LCS-4. Lockheed plans to build its LCSs at
Marinette Marine of Marinette, WI, and Bollinger Shipyards of Lockport, LA. (LCS-
1 being built by Marinette and LCS-3 was scheduled to have been built by Bollinger.)
GD plans to build its LCSs at the Austal USA shipyard of Mobile, AL.3
Program Funding. Table 1 shows LCS funding through FY2011 as reflected
in the FY2007 budget submitted to Congress in February 2006. CRS in February
2007 requested updated (FY2008-FY2013) budget information from the Navy, but
the Navy Office of Legislative Affairs informed CRS by telephone on March 28,
2007, that in light of the Navy’s proposed plan for restructuring the LCS program,
updated FY2008-FY2013 funding figures were not available.
With Congress’s permission, the Navy procured the first and second LCSs
through the Navy’s research and development account. Subsequent LCSs are being
procured through the Navy’s ship-procurement account, called the Shipbuilding and
Conversion, Navy (SCN) account. The Navy is procuring LCS mission packages
through the Other Procurement, Navy (OPN) account.
3 Austal USA was created in 1999 as a joint venture between Austal Limited of Henderson,
Western Australia and Bender Shipbuilding & Repair Company of Mobile, AL. The
Lockheed LCS team also includes GD/BIW as prime contractor to provide program
management and planning, provide technical management, and to serve as “LCS system
production lead.”

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CRS-4
Table 1. LCS Program Funding in FY2007 Budget
(Funding as shown in FY2007 budget submitted to Congress in February 2006;
millions of then-year dollars; totals may not add due to rounding)
Total
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
thru
FY11
Research, Development, Test & Evaluation, Navy (RDT&EN) account
Ship 1 construction
0
0
206.7
59.2
8.5
0
0
0
0
274..5
(qty)
(1)
Ship 2 construction
0
0
16.0
207.1
55.0
0
0
0
0
278.1
(qty)
(1)
Ships 1and 2 outfit-
0
0
0
8.7
36.7
36.8
7.1
0
0
89.3
ting/post delivery
LCS ship development
35.3
160.1
228.0
86.0
57.0
60.3
43.2
43.9
22.4
736.2
LCS mission package
0
0
0
213.0
162.3
90.4
82.5
100.1
40.8
689.2
project (qty)
(3)
(1)
(4)
Subtotal RDT&EN
35.3
160.1
450.8
574.0
319.6
187.6
132.8
144.1
63.2
2067.3
Shipbuilding and Conversion, Navy (SCN) account
Ships 3-27
0
0
0
440.0
520.7
947.6 1764.3 1774.2 1825.4
7272.3
construction
(2)
(2)
(3)
(6)
(6)
(6)
(25)
(qty)
Outfitting & post
0
0
0
0
13
37
70
95
122
337
delivery
Subtotal SCN
0
0
0
440.0
533.7
984.6 1834.3 1869.2 1947.4
7609.3
Other Procurement, Navy (OPN) account (for LCS mission packages)
Subtotal OPN
0
0
0
40.1
79.1
207.6
652.3
656.2
720.2
2355.5
(qty)
(0)
(1)
(3)
(13)
(12)
(15)
(44)
Weapons Procurement, Navy (WPN) account
Subtotal WPN
0
0
0
0
0
12.5
39.1
91.0
134.2
276.8
TOTAL
35.3
160.1
450.8 1054.1
919.3 1355.3 2588.5 2665.6 2743.0 12308.9
Source: Navy Office of Legislative Affairs (NOLA), March 6 and April 17, 2006, based on figures
from FY2007 budget submitted to Congress in February 2006. CRS in February 2007 requested
updated (FY2008) budget information from the Navy, but NOLA informed CRS by telephone on
March 28, 2007, that in light of the Navy’s proposed plan for restructuring the LCS program, updated
FY2008 funding figures are not available.
Potential Total Acquisition Cost. The Navy has not provided an estimated
total acquisition (i.e., development plus procurement) cost for the LCS program.
CRS estimates that the LCS program (including mission packages) might have a total
acquisition cost of roughly $23.8 billion to $29.6 billion. This estimate includes $2.5
billion in research and development costs (including the construction of first two sea
frames and the procurement of the first four mission packages), procurement of 53

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CRS-5
additional sea frames at a cost of $350 million to $460 million each,4 and 64 mission
packages procured at an average cost of about $42.3 million each.5
30-Year Procurement Profile. Table 2 shows projected procurement of
LCSs as shown in a Navy 30-year shipbuilding plan submitted to Congress in
February 2007. This plan does not take into account the Navy’s proposal to cancel
LCSs 5 and 6, its decision to terminate construction of LCS-3, and its proposal to
reduce planned procurement of LCSs to two ships in FY2008 and three ships in
FY2009.
March 2007 Program Restructuring Plan
In response to significant cost growth in the building of the first LCSs that first
came to light in January 2007, the Navy in March 2007 announced a proposed plan
for restructuring the LCS program. The Navy’s proposed restructuring would:
! cancel the two LCSs funded in FY2007 (LCSs 5 and 6) and use the
funding to pay for cost overruns on earlier LCSs;
! lift the 90-day stop-work order that the Navy placed on LCS-3 in
January 2007 — provided that the Navy reached an agreement by
April 12 with the Lockheed-led industry team building LCS-3 to
restructure the contract that the Lockheed team has for building
LCSs 1 and 3 from a cost-plus type contract into a fixed price
incentive (FPI)-type contract;
! alternatively, terminate construction of LCS-3 — if an agreement on
a restructured contract for LCS-1 and LCS-3 could not be reached
with the Lockheed team by April 12;
! seek to restructure the contract for building LCSs 2 and 4 (which are
being built by a second industry team led by General Dynamics) into
an FPI-type contract — if LCSs 2 and 4 experience cost growth
comparable to that of LCSs 1 and 3;
! reduce the number of LCSs requested for FY2008 from three to two
(for the same requested FY2008 procurement funding of $910.5
4 The figure of $350 million is based on Navy statements in early 2007 that LCS-1 might
cost $350 million to $375 million; the figure of $460 million is based on the Navy’s request
to have Congress amend the procurement cost cap on the fifth and sixth LCSs to $460
million per ship.
5 The Navy reportedly wants to procure 24 mine warfare mission packages at an average
cost of $68 million each, 16 antisubmarine warfare packages at an average cost of $42.3
million each, and 24 surface warfare packages at an average cost of $16.7 million each.
(Emelie Rutherford, Littoral Combat Ship Mission Packages Range In Costs, Features,”
Inside the Navy, September 3, 2007; for similar figures, see Christopher P. Cavas, “First
LCS Mission Package Ready For Delivery,” DefenseNews.com, August 29, 2007.)

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CRS-6
million), and the number to be requested for FY2009 from six to
three;
! conduct an operational evaluation to select a favored design for the
LCS — to be procured in FY2010 and subsequent years; and
! conduct a full and open competition among bidders for the right to
build that design.6
Table 2. Projected Procurement Of LCSs
FY
LCSa
08
3
09
6
10
6
11
6
12
6
13
5
14
6
15
6
16
5
17
18
19
20
21
22
23
24
25
26
27
28
29
30
1
31
2
32
3
33
4
34
6
35
6
36
6
37
6
Source: U.S. Department of the Navy, Report to Congress on Annual Long-Range Plan for
Construction of Naval Vessels for FY 2008, February 2007. Table 3 on page 6.
a. Plus one LCS procured in FY2005, three more in FY2006, and two more in FY2007.
6 Source: Navy briefing to CRS and Congressional Budget Office (CBO) on Navy’s
proposed LCS program restructuring plan, March 21, 2007.

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CRS-7
Although the Navy intends to conduct an operational evaluation to support the
selection of a single LCS design to be procured in FY2010 and beyond, the Navy also
stated in an August 2007 report to Congress on the LCS program that
the Navy may elect to continue production of both seaframes should each design
present a unique operational advantage.
The Navy carefully considered the two primary alternatives for LCS
seaframe acquisition in FY 2010 and beyond; (1) selecting a single seaframe
design and (2) continuing to procure two seaframe designs.
Selecting a single Flight 1 design [i.e., a design to be procured in FY2010
and beyond] achieves commonality in hull, mechanical, and electrical (HM&E)
and C4I systems in the LCS class. This alternative also allows the Navy to move
more easily to a common combat system and C4I suite7 for the class. One
seaframe design with a common combat system and C4I suite is projected to
reduce life cycle cost with reduced logistics and training costs. To maintain
competitive pricing pressure for Flight 1, the Navy intends to conduct a full and
open competition for procurement in FY 2010 and beyond. This may result in
some additional non-recurring start up costs in the near-term, but expanding
potential sources increases competitive pricing pressure and enables higher
production rates in the outyears needed to procure a 55-ship LCS class and
achieve the CNO’s [the Chief of Naval Operation’s] force structure objective of
[a total Navy fleet] of 313 ships.
Continued procurement of two seaframe designs into FY2010 and beyond
is also an alternative since both ships are currently assessed as being capable of
meeting all the Key Performance Parameter and critical requirements. Existing
Navy and industry nonrecurring investments would be leveraged to the maximum
extent under continuation of Flight 0 ship [i.e., ships procured prior to FY2010]
production with the current primes [prime contractors]. Additionally, the
common combat system and C4I suite would be included in the alternative.
The Navy’s decision to move to Flight I procurement in FY 2010 allows
these ships to more easily incorporate lessons learned from the operational
evaluation. The implementation of a common combat system and C4I suite as
part of Flight 1 would reduce lifecycle cost of the common warfare system, but
does not achieve the savings in seaframe HM&E [hull, mechanical, and electrical
systems], crew training, and logistics costs anticipated from selecting a single
seaframe design.8
April 2007 Termination of LCS-3
On April 12, 2007, the Navy announced that the Navy and Lockheed had not
reached an agreement on a restructured contract for LCS-1 and LCS-3, and that the
Navy consequently was terminating construction of LCS-3. (The Navy subsequently
began referring to the ship as having been partially terminated — a reference to the
7 C4I stands for command, control, communications, computers, and intelligence.
8 Report to Congress, Littoral Combat Ship, Prepared by Deputy Assistant Secretary of the
Navy, Ships, Washington, DC 20350, August 2007, p. 7. See also p. 3.

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CRS-8
fact that Lockheed was allowed to continue procuring certain components for LCS-3,
so that a complete set of these components would be on hand to be incorporated into
the next LCS built to the Lockheed design.) The Navy’s April 12, 2007
announcement of the termination decision stated:
Secretary of the Navy Donald C. Winter announced today that the
Department of the Navy is terminating construction of the third Littoral Combat
Ship (LCS 3) for convenience under the Termination clause of the contract
because the Navy and Lockheed Martin could not reach agreement on the terms
of a modified contract.
The Navy issued a stop-work order on construction on LCS 3 in January
following a series of cost overruns on LCS 1 and projection of cost increases on
LCS 3, which are being built by Lockheed Martin under a cost-plus contract.
The Navy announced in March that it would consider lifting the stop-work order
on LCS 3 if the Navy and Lockheed Martin could agree on the terms for a fixed
price incentive agreement by mid-April. The Navy worked closely with
Lockheed Martin to try to restructure the agreement for LCS 3 to more equitably
balance cost and risk, but could not come to terms and conditions that were
acceptable to both parties.
The Navy remains committed to completing construction on LCS 1 under
the current contract with Lockheed Martin. LCS 2 and 4 are under contract with
General Dynamics, and the Navy will monitor their cost performance closely.
The Navy intends to continue with the plan to assess costs and capabilities of
LCS 1 and LCS 2 and transition to a single seaframe configuration in fiscal year
10 after an operational assessment and considering all relevant factors. General
Dynamics’ ships will continue on a cost-plus basis as long as its costs remain
defined and manageable. If the cost performance becomes unacceptable, then
General Dynamics will be subject to similar restructuring requirements.
“LCS continues to be a critical warfighting requirement for our Navy to
maintain dominance in the littorals and strategic choke points around the world,”
said Winter. “While this is a difficult decision, we recognize that active
oversight and strict cost controls in the early years are necessary to ensuring we
can deliver these ships to the fleet over the long term.”9
September 2007 Report of Negotiations on LCSs 2 and 4
In late-September 2007, it was reported that the Navy on September 19 had sent
a letter to General Dynamics to initiate negotiations on restructuring the contract for
building LCSs 2 and 4 into an FPI-type contract. The negotiations reportedly are to
be completed by October 19, 2007 — 30 days from September 19.10 If the
9 Department of Defense News Release No. 422-07, April 12, 2007, “Navy Terminates
Littoral Combat Ship 3.”
10 Geoff Fein, “Navy Seeking To Negotiate FPI Contract With General Dynamics,” Defense
Daily, September 24, 2007; Geoff Fein, “Navy, General Dynamics Meet To Discuss New
LCS Fixed Price Structure,” Defense Daily, September 27, 2007; Tony Capaccio, “General
Dynamics Urged To Take Fixed Price On Warship Contract,” Bloomberg News, September
(continued...)

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CRS-9
negotiations do not result in an agreement by October 19, it is possible the Navy
could terminate construction of LCS-4, just as it terminated construction of LCS-3
when Lockheed and the Navy failed to reach agreement within 30 days on terms for
restructuring the contract for building LCSs 1 and 3 into an FPI-type contract.
Proposed Common Combat System
The two LCS designs currently use two different, contractor-furnished combat
systems.11 As an added element of its restructuring of the LCS program, the Navy
is proposing to shift to a common, government-furnished combat system for LCSs
procured in FY2010 and beyond. The Navy testified in July 2007 that:
The LCS Flight 0 ships [i.e., the LCSs procured prior to FY2010]
acquisition strategy allowed the industry teams to design and acquire the combat
system/C4I suite. As a result, each team developed a combat system whose
components varied greatly from those found in other Navy combat systems as
well as being significantly different from each other. The lack of commonality
between the two current designs and Navy components negatively impacts the
expected combat systems ownership costs to support these ship variants: i.e.,
materiel logistics, training programs, maintenance, system upgrades and
technology refreshment. Additionally, some system components are foreign
and/or proprietary designs that may not convey with Government Purpose Rights,
limiting sources for obtaining component support.
To minimize impacts to the combat systems ownership costs to acquire,
operate, and maintain the LCS 1 Class, the Navy is amending its acquisition
strategy for acquiring the LCS combat system beginning with FY 2010 Flight 1
procurements [i.e., LCS procured starting in FY2010]. The Navy intends to
transition from Contractor Furnished Equipment (CFE) designs to a single
common combat system that will be provided as Government Furnished
Equipment (GFE)/Government Furnished Information (GFI). This strategy will
incorporate, wherever possible, existing Navy programs of record combat system
components. Where no Navy program of record or fleet-common component
exists that meet LCS requirements, a full and open competition will be
conducted. This strategy allows the Navy to establish commonality of LCS
combat system components across all Flight 1 ships in the class, preserve
Government Purpose Rights for the Navy, and assure that required capabilities
are met with a set of combat system components that optimizes performance,
acquisition and ownership costs.
The current Flight 0 combat system solutions consist of eight major
elements: an open architecture combat management system, volume search radar,
identification friend or foe system, electronic surveillance system, medium
caliber gun, gun fire control system, electro-optical/infrared sighting system, and
10 (...continued)
28, 2007; Jason Sherman, “Navy, General Dynamics Discuss Fixed-Price Contract For
LCS,” Inside the Navy, October 1, 2007.
11 A ship’s combat system typically includes its sensors, computers, displays, and weapon
launchers. The discussion here refers to the part of the LCS combat system that is
permanently built into each sea frame, and not to the part that would be added by a modular
mission package.

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CRS-10
a close-in/self-defense weapon system. The common combat system that the
Navy will provide as GFE/GFI is comprised of these same elements. The Navy
is not developing a new LCS combat system or adding elements to the current
solution configuration. Rather, for Flight 1 the Navy is replacing the two unique
sets of Flight 0 combat system components with a single set of combat system
components.
During the FY 2008-09 timeframe, ship design changes from the common
combat system/C4I suite, lessons learned from LCS Flight 0 production,
developmental/operational testing and at-sea testing will be incorporated into a
Government-furnished design package. The Government-furnished design
package provides the technical baseline for FY 2010 Flight 1 full and open
competitive solicitation and subsequent Flight 1 ship production contract
awards.12
The Navy is proposing to begin work on the common combat system in FY2007
using some of the prior-year LCS program funding that the Navy has requested
Congress to reprogram.
Potential Oversight Issues for Congress
Cost Increase on LCS Sea Frames
The Navy originally spoke of building LCS sea frames for about $220 million
each, but estimated procurement costs for LCS sea frames have risen substantially
above that figure. Cost growth in building the first LCS sea frames is the primary
issue underpinning the Navy’s proposed plan for restructuring the LCS program and
the Navy’s decision to terminate construction of LCS-3. The cost growth issue was
the focus of an oversight hearing held before the Seapower and Expeditionary Forces
subcommittee of the House Armed Services Committee on February 8, 2007, and
was also a focus of an additional hearing on Navy surface combatant programs held
before the same subcommittee on July 24, 2007.
Estimated LCS sea frame unit procurement costs have increased twice — in
early 2006, and again in 2007. The discussion below summarizes both increases.
Increase Reported in Early 2006. The proposed FY2007 Navy budget
submitted to Congress in February 2006 showed that LCS sea frame procurement
costs had grown substantially from figures in the FY2006 budget submitted a year
earlier. The estimate for the first LCS increased from $212.5 million in the FY2006
budget to $274.5 million in the FY2007 budget, an increase of about 29%. The
estimate for the second LCS increased from $256.5 million to $278.1 million, an
increase of about 8%. As shown in Table 3, the estimate for follow-on ships to be
procured in FY2009-FY2011, when the LCS program is to reach its maximum
12 Statement of VADM Paul Sullivan, et al, Before the Subcommittee on Seapower and
Expeditionary Forces of the House Armed Services Committee on Surface Combatant
Construction Update, July 24, 2007, p. 8.

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CRS-11
annual procurement rate of six ships per year, increased from $223.3 million to $298
million, an increase of about 33%.
Table 3. LCS Sea Frame Unit Procurement Costs
(costs in millions of then-year dollars)
FY09-
FY07
FY08
FY09
FY10
FY11
FY11
FY2006 budget submission
Procurement cost
542.4
779.7
1,127.2
1,112.3
1,110.3
3,349.8
Number of ships
2
3
5
5
5
15
Unit procurement cost
271.2
259.9
225.4
222.5
222.1
223.3
FY2007 budget submission
Procurement cost
520.7
947.6
1,764.3
1,774.2
1,825.4
5,363.9
Number of ships
2
3
6
6
6
18
Unit procurement cost
260.4
315.9
294.1
295.7
304.2
298.0
% change in unit pro-
(4%)
21%
30%
33%
37%
33%
curement cost, FY07
compared to FY06
Source: Prepared by CRS using Navy data from FY2006 and FY2007 Navy budget submissions.
The Navy stated in early 2006 that the cost increase from the FY2006 budget to
the FY2007 budget was due mostly to the fact that LCS procurement costs in the
FY2006 budget did not include items that are traditionally included in the so-called
end cost — the total budgeted procurement cost — of a Navy shipbuilding program,
such as Navy program-management costs, an allowance for changes, and escalation
(inflation). The absence of these costs from the FY2006 LCS budget submission
raised potential oversight issues for Congress, including the following:
! Why were these costs excluded? Was this a budget-preparation
oversight? If so, how could such an oversight occur, given the many
people involved in Navy budget preparation and review, and why
did it occur on the LCS program but not other programs? Was
anyone held accountable for this oversight, and if so, how? If this
was not an oversight, then what was the reason?
! Did the Navy believe there was no substantial risk of penalty for
submitting to Congress a budget presentation for a shipbuilding
program that, for whatever reason, significantly underestimated
procurement costs?
! Do LCS procurement costs in the budget now include all costs that,
under traditional budgeting practices, should be included? If not,
what other costs are still unacknowledged?

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CRS-12
! Have personnel or other resources from other Navy programs been
used for the LCS program in any way? If so, have the costs of these
personnel or other resources been fully charged to the LCS program
and fully reflected in LCS program costs shown in the budget?
Further Increase Reported in 2007. On January 11, 2007, the Navy
reported that LCS-1 was experiencing “considerable cost overruns.” The Navy
subsequently stated that the estimated shipyard construction cost of LCS-1 is $350
million to $375 million. This suggested that the end cost of LCS-1 — the ship’s total
budgeted procurement cost, which also includes costs for things such as Navy
program-management costs and an allowance for changes — could be in excess of
$400 million. The Navy has not publicly provided precise cost overrun figures for
LCSs 2 and 4, but the Navy has stated that the cost overrun on LCSs 1 and 2 is
somewhere between 50% and 75%, depending on the baseline that is used to measure
the overrun.
As discussed in the section below on the LCS procurement cost cap, it was
reported on May 10, 2007, that the Navy would ask Congress to increase the
procurement cost cap for the fifth and sixth LCSs to $460 million each in FY2008
dollars. This figure is roughly 53% higher than the approximate figure of roughly
$300 million for follow-on LCSs in the FY2007 budget, as shown in Table 3.
CBO July 2007 Estimate. At the July 24, 2007, hearing on Navy surface
combatant programs, the Congressional Budget Office (CBO) presented its own
estimates of potential LCS procurement costs:
Several months ago, press reports indicated that the cost could well exceed
$400 million each for the first two LCS sea frames. Recently, the Navy requested
that the cost cap for the fifth and sixth sea frames be raised to $460 million,
which suggests that the Navy’s estimate of the acquisition cost for the first two
LCSs would be around $600 million apiece....
As of this writing, the Navy has not publicly released an estimate for the
LCS program that incorporates the most recent cost growth, other than its request
to raise the cost caps for the fifth and sixth ships. CBO estimates that with that
growth included, the first two LCSs would cost about $630 million each,
excluding mission modules but including outfitting, postdelivery, and various
nonrecurring costs associated with the first ships of the class. As the program
advances, with a settled design and higher annual rates of production, the average
cost per ship is likely to decline. Excluding mission modules, the 55 LCSs in the
Navy’s plan would cost an average of $450 million each, CBO estimates.13
13 Statement of J. Michael Gilmore, Assistant Director for National Security, and Eric J.
Labs, Senior Analyst, [on] The Navy’s 2008 Shipbuilding Plan and Key Ship Programs,
before the Subcommittee on Seapower and Expeditionary Forces Committee on Armed
Services U.S. House of Representatives, July 24, 2007, p. 18.

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CRS-13
Lockheed Perspective on Cost Growth14. Lockheed said in February
2007 that cost growth on LCS-1 was due primarily to three factors:
! manufacturing issues that are typically discovered in the construction
of a lead ship of a class;
! problems with vendors supplying components and materials for the
ship; and
! changes in ship-construction standards directed by the Navy.
A major vendor issue, Lockheed said, were the ship’s reduction gears, which
link the ship’s gas-turbine engines to its waterjets (i.e., its propellers). Due to a faulty
tool at the manufacturer (General Electric), the gears were manufactured incorrectly,
causing a 27-week delay in delivery that forced a major resequencing of construction
work on LCS-1.
A second vendor issue concerned HSLA-80, a kind of steel used to build the
bottom half of the ship’s hull.15 The same kind of steel is in demand for up-armoring
U.S. Army and Marine Corps Humvees used in Iraq, leading to delays in obtaining
it for the LCS program.
The issue of ship-construction standards involves building the LCS to a standard
called Naval Vessel Rules (NVR). Lockheed said it submitted its LCS bid in January
2004, using a combination of the high-speed naval craft (HSNC) rules issued by the
American Bureau of Shipping (ABS) and a draft version of the NVR that the Navy
had issued. The LCS design in the January 2004 bid, Lockheed said, was the design
accepted by the Navy. The final version of the NVR, Lockheed said, was issued by
the Navy in May 2004 and was much more extensive than the draft version. The
final version, Lockheed said, impacted 75% of the completed design products for
LCS-1, resulted in about 25% additional drawings, and required the ship to include
more rugged construction and more capable components in various places.
Lockheed believes that the lead-ship manufacturing issues and the faulty
manufacturing of the reduction gears will not recur on follow-on Lockheed-built
LCSs, but that the NVR issue will increase the cost of follow-on Lockheed-built
LCSs.
Lockheed said it took several actions in response to the situation concerning
LCS-1, including:
! co-locating Lockheed management and the LCS’s naval architects
(from the naval architectural firm of Gibbs & Cox) at the shipyard;
14 This section is based on a Lockheed briefing on the status of the LCS program presented
to CRS on February 1, 2007.
15 HSLA means high-strength, low-alloy, and 80 is a measurement of the strength of the
steel.

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CRS-14
! increasing the number of Lockheed personnel at the shipyard
through the addition of production managers with Navy shipbuilding
experience;
! instituting process improvements at the shipyard;
! establishing new metrics for measuring performance on work
packages at the shipyard;
! integrating the American Bureau of Shipping and the on-scene Navy
supervisor of shipbuilding (SUPSHIP) into daily production
meetings;
! strengthening the earned-value management system (EMVS) and
financial-management processes for the program; and
! replacing senior management at the shipyard.
Lockheed reportedly warned the Navy about increasing costs on LCS-1 on
multiple occasions since March 2006 — a month after the FY2007 budget was
submitted to Congress.
Navy Perspective on Cost Growth16. The Navy testified in July 2007 that
it
established a Program Management Assist Group (PMAG) to conduct a review
of cost growth associated with LCS 1, and to review projected costs for LCS 2,
LCS 3 and LCS 4. The PMAG assessment was completed, and identified the
following root causes of cost growth:
• Aggressive cost goal and schedule
• Pressure to build to schedule was strongly emphasized and generated cost
growth.
• The ambitious schedule relied upon concurrent design and construction that
was not achieved.
• For LCS 1, the timing of LM’s bid to the finalization of Naval Vessel Rules
resulted in underestimated efforts for design and construction by the contractor.
• The competitive environment created disincentive for the contractor to surface
execution challenges to the Navy.
The PMAG made several recommendations based on the assessment of
LCS root causes:
• Emphasize rigorous risk management for high risk programs, including
incorporation of risk mitigation strategies directly into shipbuilding contracts.
• ASN(RD&A)17 issue guidance highlighting critical program management
functions and emphasizing chain of command notification of unexpected results,
including details surrounding changes in contract baselines.
• Conduct formal independent cost estimates before exercising future options or
contracts in LCS. Incorporate appropriate risk margins in budgets for future LCS
procurements.
16 This section is based in part on a Navy briefing on the status of the LCS program
presented to CRS on February 5, 2007.
17 The Assistant Secretary of the Navy (Research, Development, and Acquisition) — the
Navy’s acquisition executive.

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CRS-15
• Implement organizational changes across supporting offices: improving timing
and staffing levels of on-site government oversight (Supervisor of Shipbuilding,
SUPSHIP) to better match construction schedules; providing adequate resources
and manning to the acquisition program office and supporting NAVSEA18
offices; and improving experience and training levels of the program managers
and their staffs.
• Implement contractual and acquisition policy changes to improve visibility and
performance expectations.
Responses to these recommendations will be addressed in the following
discussion of the revised LCS program plan, and in a later overview of changes
being made to prevent reoccurrence of LCS lessons across all Navy acquisition
programs.19
GAO Perspective on Cost Growth. GAO testified in July 2007 that
according to its own analysis of Navy data, the combined cost of LCSs 1 and 2 had
increased from $472 million to $1,075 — an increase of 128%.20 GAO testified that:
We have frequently reported on the wisdom of using a solid, executable
business case before committing resources to a new product development
effort....
A sound business case would establish and resource a knowledge-based
approach at the outset of a program. We would define such a business case as
firm requirements, mature technologies, and an acquisition strategy that provides
sufficient time and money for design activities before construction start. The
business case is the essential first step in any acquisition program that sets the
stage for the remaining stages of a program, namely the business or contracting
arrangements and actual execution or performance. If the business case is not
sound, the contract will not correct the problem and execution will be subpar.
This does not mean that all potential problems can be eliminated and perfection
achieved, but rather that sound business cases can get the Navy better
shipbuilding outcomes and better return on investment. If any one element of the
business case is weak, problems can be expected in construction. The need to
meet schedule is one of the main reasons why programs cannot execute their
business cases. This pattern was clearly evident in both the LPD 17 [amphibious
ship] and LCS programs. In both cases, the program pushed ahead with
production even when design problems arose or key equipment was not available
when needed. Short cuts, such as doing technology development concurrently
with design and construction, are taken to meet schedule. In the end, problems
occur that cannot be resolved within compressed, optimistic schedules.
18 Naval Sea Systems Command — the branch of the Navy with lead responsibility for
acquisition of ships.
19 Statement of VADM Paul Sullivan, et al, Before the Subcommittee on Seapower and
Expeditionary Forces of the House Armed Services Committee on Surface Combatant
Construction Update, July 24, 2007, pp. 9-10.
20 Defense Acquisitions[:] Realistic Business Cases Needed to Execute Navy Shipbuilding
Programs, Statement of Paul L. Francis, Director, Acquisition and Sourcing Management
Team, Testimony Before the Subcommittee on Seapower and Expeditionary Forces,
Committee on Armed Services, House of Representatives, July 24, 2007 (GAO-07-943T),
pp. 4 and 22.

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CRS-16
Ultimately, when a schedule is set that cannot accommodate program scope,
delivering an initial capability is delayed and higher costs are incurred....
What happens when the elements of a solid business case are not present?
Unfortunately, the results have been all too visible in the LPD 17 and the LCS.
Ship construction in these programs has been hampered throughout by design
instability and program management challenges that can be traced back to flawed
business cases. The Navy moved forward with ambitious schedules for
constructing LPD 17 and LCS despite significant challenges in stabilizing the
designs for these ships. As a result, construction work has been performed out
of sequence and significant rework has been required, disrupting the optimal
construction sequence and application of lessons learned for follow-on vessels
in these programs....
In the LCS program, design instability resulted from a flawed business case
as well as changes to Navy requirements. From the outset, the Navy sought to
concurrently design and construct two lead ships in the LCS program in an effort
to rapidly meet pressing needs in the mine countermeasures, antisubmarine
warfare, and surface warfare mission areas. The Navy believed it could manage
this approach, even with little margin for error, because it considered each LCS
to be an adaptation of an existing high-speed ferry design. It has since been
realized that transforming a high-speed ferry into a capable, networked,
survivable warship was quite a complex venture. Implementation of new Naval
Vessel Rules (design guidelines) further complicated the Navy’s concurrent
design-build strategy for LCS. These rules required program officials to redesign
major elements of each LCS design to meet enhanced survivability requirements,
even after construction had begun on the first ship. While these requirements
changes improved the robustness of LCS designs, they contributed to out of
sequence work and rework on the lead ships. The Navy failed to fully account for
these changes when establishing its $220 million cost target and 2-year
construction cycle for the lead ships.
Complicating LCS construction was a compressed and aggressive schedule.
When design standards were clarified with the issuance of Naval Vessel Rules
and major equipment deliveries were delayed (e.g., main reduction gears),
adjustments to the schedule were not made. Instead, with the first LCS, the Navy
and shipbuilder continued to focus on achieving the planned schedule, accepting
the higher costs associated with out of sequence work and rework. This approach
enabled the Navy to achieve its planned launch date for the first Littoral Combat
Ship, but required it to sacrifice its desired level of outfitting. Program officials
report that schedule pressures also drove low outfitting levels on the second
Littoral Combat Ship design as well, although rework requirements have been
less intensive to date. However, because remaining work on the first two ships
will now have to be completed out-of-sequence, the initial schedule gains most
likely will be offset by increased labor hours to finish these ships.
The difficulties and costs discussed above relate to the LCS seaframe only.
This program is unique in that the ship’s mission equipment is being developed
and funded separately from the seaframe. The Navy faces additional challenges
integrating mission packages with the ships, which could further increase costs
and delay delivery of new antisubmarine warfare, mine countermeasures, and
surface warfare capabilities to the fleet. These mission packages are required to
meet a weight requirement of 180 metric tons or less and require 35 personnel
or less to operate them.c However, the Navy estimates that the mine

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CRS-17
countermeasures mission package may require an additional 13 metric tons of
weight and 7 more operator personnel in order to deploy the full level of
promised capability. Because neither of the competing ship designs can
accommodate these increases, the Navy may be forced to reevaluate its planned
capabilities for LCS.21
Potential Oversight Issues. Potential oversight issues raised by the
reported further increase in LCS sea frame unit procurement costs include the
following:
! When did various Navy leaders first learn of the cost increase on
LCS-1? Why did the Navy wait until January 2007 to publicly reveal
the cost increase? Lockheed testified at the February 8, 2007 hearing
that it sends monthly reports with LCS cost information to the Navy.
In which of these monthly reports did Lockheed first attempt to alert
the Navy regarding the potential for significant cost growth on LCS-
1?
! When will the Navy announce its estimates of cost overruns on
LCSs 2 and 4?
! How much of the cost increase on LCSs 1, 2 and 4 attributable to
prime contractor performance? To performance by supplier firms?
To Navy actions in managing the program?
! Concurrency in design and construction has long been known as a
source of risk in shipbuilding and other weapon-acquisition
programs. Eliminating concurrency forms part of DOD’s effort to
move toward best practices in acquisition. In retrospect, did the
Navy make a good decision in letting its sense of urgency about the
LCS override the known risks of concurrency in design and
construction?
! When will the Navy have a sense of whether corrective actions taken
by the Navy and industry in response to the cost growth are
succeeding in controlling LCS construction costs?
! Do the estimated costs of LCSs 1, 2, and 4 reflect systems,
components, or materials provided by vendors at reduced prices as
part of an effort by those vendors to secure a role in the 55-ship LCS
program? If so, how much more expensive might these systems,
components, or materials become on later LCSs? Is this a source of
concern regarding the potential for cost growth on follow-on LCSs?
! In light of cost growth LCSs, where does the LCS program now
stand in relation to the Nunn-McCurdy provision (10 U.S.C. §2433),
21 Ibid, pp. 8-11.

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CRS-18
which requires certain actions to be taken if the cost of a defense
acquisition program rises above certain thresholds?
! How might the increase in LCS unit procurement costs affect the
number of LCSs that the Navy can afford to procure each year, and
the total number it can afford to procure over the long run?
! Is the Navy planning to finance cost growth on LCS sea frames by
reducing funding for the procurement of LCS mission packages?
For example, is cost growth on LCS sea frames linked in some way
to the reduction in the planned number of LCS mission packages
from the earlier figure of 90 to 110 to the current figure of 64? If the
Navy is financing cost growth on LCS sea frames by reducing
funding for the procurement of LCS mission packages, how might
this reduce the capabilities of the planned 55-ship LCS fleet?
! In light of the cost growth, is the LCS program still cost-effective?
For follow-on LCSs, what is the unit procurement cost, in FY2008
dollars, above which the Navy would no longer consider the LCS
program cost-effective?
! If Congress had known in 2004, when it was acting on the FY2005
budget that contained funding to procure LCS-1, that LCS sea frame
unit procurement costs would increase to the degree that they have,
how might that have affected Congress’s views on the question of
approving the start of LCS procurement?
! How might the increase in LCS unit procurement costs affect the
affordability and executability of the Navy’s overall shipbuilding
program?22
! What implications, if any, does the increase in LCS unit
procurement costs have for estimated procurement costs of other
new Navy ship classes?23
22 On this point, CRS testified in July 2007: “LCS cost growth reported since January 2007
is one of three developments in recent months that have increased the risks associated with
implementing the Navy’s 30-year shipbuilding plan.” (Statement of Ronald O’Rourke,
Specialist in National Defense, Congressional Research Service, Before the House Armed
Services Committee Subcommittee on Seapower and Expeditionary Forces Hearing on
Surface Combatant Construction Programs, July 24, 2007, p. 1) For further discussion of
this issue, see CRS Report RL32665, Navy Force Structure and Shipbuilding Plans:
Background and Issues for Congress, by Ronald O’Rourke.
23 On this point, CBO testified in July 2007: “The relatively simple design of the LCS and
the large cost increases that have occurred in the program suggest that the Navy may also
have trouble meeting its cost targets for the larger, much more complex surface combatants
in its shipbuilding plan, such as the DDG-1000 and the CG(X).” (Statement of J. Michael
Gilmore, Assistant Director for National Security, and Eric J. Labs, Senior Analyst, [on] The
Navy’s 2008 Shipbuilding Plan and Key Ship Programs, before the Subcommittee on
(continued...)

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CRS-19
Cost Cap on Fifth and Sixth Ships
A second issue for Congress concerns the Navy’s request to amend the current
procurement cost cap on the fifth and sixth LCSs.24 On May 10, 2007, it was
reported that the Navy would ask Congress to increase the procurement cost cap for
the fifth and sixth LCSs to $460 million each in FY2008 dollars. This $460-million
figure applies to end cost — the total budgeted procurement cost of the ship. The
Navy’s request that Congress increase the procurement cost cap for the fifth and sixth
LCSs to $460 million each in FY2008 dollars raises potential questions for Congress,
including the following:
! Given the Navy’s termination of LCS-3 and its proposal to cancel
the two LCSs funded in FY2007, which LCSs should now be
considered the fifth and sixth ships?
! Is $460 million per ship in FY2008 dollars a reasonable figure to use
for the cost cap?
! Should the cost cap be amended so that it applies not only to the fifth
and sixth LCSs, but to some or all subsequent ships in the program?
In connection with the second question above, CRS testified in July 2007 that:
One potential issue for the subcommittee is whether $460 million would be
an excessive figure to use in amending the LCS cost cap. Prior to the May 10
news report, Navy testimony and other public statements had suggested that
LCSs might cost upwards of $400 million each, or perhaps a bit more than $400
million each, to procure. The Chief of Naval Operations testified in February
[207] that he was “embarrassed” by cost growth on the LCS program. In light of
this, one question is whether Navy settled on the $460-million figure in part
23 (...continued)
Seapower and Expeditionary Forces Committee on Armed Services U.S. House of
Representatives, July 24, 2007, p. 18.)
24 Navy officials stated to CRS in 2006 that LCSs 5 and 6 would meet the legislated cost cap
for those two ships of $220 million per ship because the hands-on construction costs of the
ships, when adjusted for inflation, would fall within the $220-million figure. (Source:
Information paper provided to CRS by Navy Office of Legislative Affairs, April 3, 2006)
The Navy’s explanation suggested that the Navy was interpreting the LCS cost cap as
something that applied to the hands-on construction costs of the ships, rather than to end
cost — the larger procurement costs of the ships as they appear in the budget, which include
costs for other items, such as Navy program-management costs and allowance for changes.
The LCS cost cap (Sec. 124 of H.R. 1815/P.L. 109-163) refers to “the total amount obligated
or expended for procurement of the fifth and sixth vessels....” The Navy’s explanation on
this issue at the time raised certain potential oversight questions for Congress, including the
following: Does the Navy’s apparent interpretation of the meaning of the LCS cost cap
mean that the Navy will interpret cost caps on other Navy shipbuilding programs the same
way, so as to exclude budgeted procurement costs other than the actual hands-on
construction costs of the ships? Is the Navy’s apparent interpretation of the LCS cost cap
consistent with how the Navy interpreted past legislated cost caps on ships such as the
Seawolf-class submarines and the aircraft carrier CVN-77?

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CRS-20
because it would permit the LCS program to experience some additional (albeit
unanticipated or unwanted) cost growth without causing the Navy the additional
embarrassment of exceeding a cost cap that Congress had amended at the Navy’s
request. From the Navy’s perspective at least, there would be value in avoiding
such additional embarrassment. At the same time, however, if the $460-million
figure is somewhat higher than what the Navy currently expects the fifth and
sixth ships to cost, then amending the cost cap to the $460-million level could
create a situation in which additional cost growth to the $460-million figure
might be viewed by some as acceptable. Such a view might not be conducive to
rigorous cost control on the program.25
When asked at the same hearing whether the $460 million figure was the correct
figure to use to amend the cost cap, the Navy testified:
We think that the $460 million cost cap is the right number. We’ve worked
that through our cost estimating and budget process, and we’ve had that approved
by the CNO and the Secretary [of the Navy] that we believe that’s what these
ships are going to cost to produce in FY08 dollars as an end cost.26
In connection with the third question above, CRS testified in July 2007 that:
Another potential issue for the subcommittee is whether the LCS cost cap
should be amended to apply not just to the fifth and sixth ships in the program,
but to subsequent ships in the class as well. The cost cap on the CVN-78 aircraft
carrier program (Section 122 of the FY2007 defense authorization act [H.R.
5122/P.L. 109-364 of October 17, 2006]) includes caps for both the lead ship
(CVN-78) and for any follow-on ships in the class. The cost cap on the LHA-6
(LHA[R]) amphibious ship program (Section 125 of the FY2007 defense
authorization act) applies to any ship constructed under the program. The cost
cap for the LPD-17 program (Section 126 of the FY2007 defense authorization
act) includes individual caps for ships six through nine in the program — the
final four ships that the Navy plans to procure.27
Total Program Acquisition Cost
Although this CRS report estimates that a 55-ship LCS program with 64 mission
packages might have a total acquisition cost of roughly $23.8 billion to $29.6 billion,
the potential total acquisition cost of the LCS program is uncertain. Supporters could
argue that total program acquisition cost will become clearer as the Navy works
25 Statement of Ronald O’Rourke, Specialist in National Defense, Congressional Research
Service, Before the House Armed Services Committee Subcommittee on Seapower and
Expeditionary Forces Hearing on Surface Combatant Construction Programs, July 24, 2007,
pp. 3-4.
26 Transcript of spoken remarks of Rear Admiral Barry McCullough at July 24, 2007,
hearing before House Armed Services Committee Subcommittee on Seapower and
Expeditionary Forces Hearing on Surface Combatant Construction Programs.
27 Statement of Ronald O’Rourke, Specialist in National Defense, Congressional Research
Service, Before the House Armed Services Committee Subcommittee on Seapower and
Expeditionary Forces Hearing on Surface Combatant Construction Programs, July 24, 2007,
p. 4.

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CRS-21
through the details of the program. Critics could argue that a major acquisition
program like the LCS program should not proceed at full pace until its potential total
acquisition costs are better understood.
Termination of LCS-3
Another potential issue for Congress concerns the Navy’s decision to terminate
construction of LCS-3. Potential questions raised by this decision include the
following:
! What were the remaining differences between the Lockheed and
Navy positions that prevented an agreement on a restructured
contract? Were the negotiating positions of one or both sides
unreasonable? Would the two sides have been more likely to come
to an agreement if the Navy had provided more than 30 days of
negotiating time?
! What are the termination costs associated with terminating
construction of LCS-3? How do these costs compare with the
potential cost of building LCS-3 under cost plus-type or FPI-type
contracting terms?
! How much unexpended LCS-3 funding is available for potentially
covering cost overruns on LCSs 1, 2, and 4?
! How will the decision to terminate LCS-3 affect Bollinger, the
shipyard firm that was to build the ship?
! Where would be the next Lockheed-designed LCS be built — at
Marinette or Bollinger?
! What implications, if any, does the termination of LCS-3 have for
the Navy’s planned operational evaluation for selecting a favored
LCS design to procure in FY2010 and beyond? (For more
discussion on this question, see the next section.)
! Does the Navy’s decision to terminate LCS-3 send a signal to
Congress or industry about Navy or Department of Defense (DOD)
contracting approaches or other acquisition issues, and if so, what
signal? Was the Navy’s decision to terminate LCS-3 intended in
part to send a signal?
Operational Evaluation and Competition for Production
Potential for Keeping Two Designs in Production. As mentioned in the
Background section, although the Navy intends to conduct an operational evaluation
to support the selection of a single LCS design to be procured in FY2010 and beyond,
the Navy also stated in an August 2007 report to Congress on the LCS program that
it may “elect to continue production of both seaframes should each design present a

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CRS-22
unique operational advantage.” Potential oversight questions for Congress include
the following:
! What are the potential comparative production and life-cycle
operation and support (O&S) costs of procuring a single design vs.
procuring both designs in FY2010 and beyond?
! What unique operational advantages might each design have, and
how would these advantages compare to the additional costs of
keeping both LCS designs in production in FY2010 and beyond?
Potential Implications of LCS-3 Termination.28 Lockheed is concerned
that the Navy’s decision to terminate construction of LCS-3 will create a bias against
the Lockheed LCS design in the operational evaluation that the Navy plans to
conduct to select a favored design for procurement in FY2010 and beyond, and also
a bias against the Lockheed-led industry team in the planned follow-on competition
to determine which firm or firms should build the winning LCS design.
Lockheed is concerned about a potential bias against its design in the LCS
operational evaluation for two reasons. The first is that LCS-3 would have
incorporated one modification of the design used for LCS-1. Lockheed is concerned
that, without LCS-3 in built form, the Navy will not be able to confirm through real-
world tests the improvement in ship performance resulting from this or other
potential design modifications that LCS-3 would have incorporated. The second is
that without building LCS-3, the Navy at the time of the evaluation will lack a data
point showing improvement in production costs for the Lockheed design in moving
down the learning curve from LCS-1 to LCS-3. Lockheed believes this second data
point would increase Navy confidence in the potential production costs of follow-on
LCSs built to the Lockheed design.
Lockheed is concerned about a potential bias against the Lockheed-led industry
team in the follow-on competition to determine which firm or firms should build the
winning LCS design because, without LCS-3, the Lockheed-led team’s LCS design
staff, shipyards, and suppliers will go “cold,” compared to the General Dynamics-led
industry team’s design staff, shipyard, and suppliers, who will build LCS-4 after
LCS-2, and will consequently remain “hot.”29
The Navy’s position is that since the LCS operational evaluation will be
determined by fundamental differences between the two LCS designs, the additional
performance resulting from design modifications planned for LCS-3 will not be a
critical factor. The Navy says that since the fleet will make the flyoff decision based
28 This section is adapted from Statement of Ronald O’Rourke, Specialist in National
Defense, Congressional Research Service, Before the House Armed Services Committee
Subcommittee on Seapower and Expeditionary Forces Hearing on Surface Combatant
Construction Programs, July 24, 2007, pp. 4-5.
29 The paragraphs summarizing Lockheed’s position are based on consultations with
Lockheed officials on July 17, 2007, and previous dates, and are presented with Lockheed’s
permission.

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CRS-23
on the operational performance of the two designs, and not on acquisition-related
factors such as potential construction cost, the absence of a second data point on the
Lockheed LCS production cost learning curve will not be a factor in the decision.
The Navy’s position on the follow-on competition to determine which firm or
firms will build the winning design is that the Lockheed-led industry team would be
brought back into a “hot” status in time for the competition if Congress funds the
LCSs that the Navy wants to procure in FY2008 and FY2009 and some of those ships
are then awarded to the Lockheed-led team.30
Treatment of LCSs Built to Losing Design. Under the Navy’s
restructured plan for the LCS program, a total of eight LCSs are to be procured
through FY2009. Depending on how LCSs procured in FY2008 and FY2009 are
awarded between the two competing industry teams, three to five of these eight LCSs
might be built to the design that is not chosen by the Navy as a result of the
operational evaluation. Compared to the LCSs built to the winning design, these
three to five LCSs will likely have some unique operation and support (O&S) costs.
The Navy could choose to operate these ships with their unique O&S costs, or sell
them to foreign buyers, or modify their combat systems or other features so as to
make them more like the Navy’s other LCSs in terms of their O&S requirements.
Potential Oversight Questions. Potential oversight questions for Congress
include the following:
! How does the Navy intend to conduct the operational evaluation of
the two LCS designs? Does the termination of LCS-3 create a bias
against the Lockheed design in the operational evaluation, or against
the Lockheed-led industry team in the subsequent competition to
select a firm or firms to build the winning design? How might this
issue be affected by Congress’s decision regarding the Navy’s
request for funding to procure two LCSs in FY2008?
! If firms that designed the winning LCS design are not among those
selected to build it, what message might that send to industry
regarding stability in Navy shipbuilding plans, and the potential
benefits of investing industry funds in the design of Navy ships, and
in facilities to produce them?
! When does the Navy anticipate being able to report to Congress on
its strategy regarding the three to five LCSs built to what turns out
to be the design that is not chosen by the Navy as a result of the
operational evaluation?
30 The paragraphs summarizing the Navy’s position are based on consultations with Navy
officials on July 16, 2007, and are presented with the Navy’s permission.

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CRS-24
Proposed Common Combat System
As mentioned in the Background section, the Navy is proposing to shift to a
common, government-furnished combat system for LCSs procured in FY2010 and
beyond, and is proposing to begin work on the common combat system in FY2007
using some of the prior-year LCS program funding that it has requested Congress to
reprogram. Some observers believe that the common combat system amounts to a
new start (i.e., starting a new acquisition effort), and that new starts should not be
initiated through a reprogramming of prior-year funding, since that can bypass the
normal process for Congress to fully review a proposed new start prior to deciding
whether to grant initial approval for it. The Navy argues that the common combat
system would not amount to a new start because the effort would simply replace
unique components of the two existing contractor-furnished combat systems with a
single set of combat system components. Potential oversight questions for Congress
include the following:
! What are the potential costs and operational benefits of maintaining
one or both of the current contractor-furnished combat systems vs.
shifting to a common, government-furnished combat system?
! Does the Navy’s plan to shift to a common, government-furnished
combat system amount to a new start, and if so, would it be
acceptable to fund that new start with reprogrammed prior-year
funds?
Pace of Mission Package Procurement
The Navy’s decision to terminate construction of LCS-3 and its proposal to
cancel LCSs 5 and 6 and reduce planned procurements of LCSs in FY2008 and
FY2009 would reduce the number of LCSs that would be delivered to the fleet over
the next few years. This, in turn, could reduce the number of LCS mission packages
the Navy would need to have in inventory in the near term. This raises a potential
oversight issue for Congress regarding whether the Navy’s planned schedule for
procuring LCS sea frames is properly coordinated with its planned schedule for
procuring LCS mission packages.
Mission Packages Funded in OPN Account
As mentioned in the Background section, the Navy plans to procure LCS
mission packages through the Other Procurement, Navy (OPN) appropriation account
rather than the Navy’s ship-procurement account. The OPN account, as its name
suggests, is a large, “grab-bag” appropriation account for procuring a wide variety of
items, many of them miscellaneous in nature.
Supporters of the Navy’s plan can argue that it is consistent with the traditional
practice of procuring ship weapons (e.g., missiles and gun shells) through the
Weapon Procurement, Navy (WPN) appropriation account or the Procurement of
Ammunition, Navy and Marine Corps (PANMC) appropriation account rather than
the ship-procurement account. LCS mission packages, they could argue, are the

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CRS-25
payload of the LCS, just as missiles and gun shells are the payload of other types of
surface combatants, and should therefore be funded outside the ship-procurement
account.
Those skeptical of the Navy’s plan to fund LCS mission packages through the
OPN account could argue that the LCS mission packages are not comparable to
missiles and gun shells. Missiles and gun shells, they could argue, are expendable
items that are procured for use by various classes of ships while the LCS mission
packages will incorporate sensors as well as weapons, are not intended to be
expendable in the way that missiles and gun shells are, and are to be used largely, if
not exclusively, by LCSs, making them intrinsic to the LCS program. In light of this,
they could argue, it would be more consistent to fund LCS mission packages in the
ship-procurement account rather than the OPN account.
Potential oversight questions for Congress include the following:
! Are LCS mission packages analogous to missiles and gun shells that
are procured through the WPN and PANMC appropriation
accounts?
! Does the Navy’s plan to fund the LCS mission packages through this
account effectively obscure a significant portion of the total LCS
program acquisition cost by placing them in a part of the Navy’s
budget where they might be less visible to Congress? If so, was this
the Navy’s intention?
! Does funding a significant portion of the LCS program’s total
procurement cost through the OPN account give the LCS program
an unfair advantage in the competition for limited ship-procurement
funding by making the LCS program, as it appears in the ship-
procurement account, look less expensive? If so, was this the
Navy’s intention?
Options for Congress
A primary issue for Congress at this point is whether to approve, reject, or
modify the Navy’s proposed LCS program restructuring plan, and what additional
actions, if any, should be taken in response to the Navy’s decision to terminate
construction of LCS-3. Potential options for Congress include but are not limited to
the following:
! Number of ships procured in FY2008. Congress could approve
the Navy’s amended request to procure two LCSs in FY2008, or
approve funding for the procurement of a lesser or greater number.
! Cost cap. Congress could approve the Navy’s request to amend the
cost cap on the fifth and sixth LCSs to $460 million, or approve a

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CRS-26
different dollar figure, or apply the cost cap to LCSs beyond
numbers five and six.
! LCS-3. Congress could direct the Navy to reinstate procurement of
LCS-3, or legislate terms or conditions regarding the way in which
the Navy executes the termination of LCS-3.
! LCS-4. Congress could direct the Navy to terminate procurement
of LCS-4, or legislate terms or conditions regarding the way in
which procurement of LCS-4 is to proceed.
! LCSs 5 and 6. Congress could approve the Navy’s request to cancel
LCSs 5 and 6 and use the funding for the two ships to pay for cost
growth on earlier LCSs and other LCS program costs, or direct the
Navy to proceed with the procurement of one or both ships, or
specify how the funding for one or both of the ships is to be used.
! Contracting. Congress could provide instructions to the Navy
regarding the types of contracts to be used in procuring LCSs or
executing other aspects of the program.
! Mission packages. Congress could approve the Navy’s FY2008
request for funding for procurement of LCS mission packages, or
approve a different amount, or specify terms and conditions
regarding procurement of mission packages.
! Research and development funding. Congress could approve the
Navy’s FY2008 request for funding for research and development
work on the LCS program, or approve a different amount, or specify
terms and conditions for how the funding is to be used.
! Operational evaluation and production competition. Congress
could establish terms and conditions for the LCS operational
evaluation and the subsequent production competition.
! Reporting requirements. Congress could impose new reporting
requirements for the program so as to facilitate congressional
oversight on issues such as cost growth.
FY2008 Legislative Activity
FY2008 Defense Authorization Bill (H.R. 1585/S. 1547)
House. The House Armed Services Committee, in its report (H.Rept. 110-146
of May 11, 2007) on the FY2008 defense authorization bill (H.R. 1585):
! recommends $710.5 million in the Shipbuilding and Conversion,
Navy (SCN) account for the procurement of two LCSs — a $200-

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CRS-27
million reduction from the Navy’s FY2008 request of $910.5
million, which was originally requested by the Navy to fund the
procurement of three LCSs and later amended by the Navy to fund
the procurement of two LCSs;
! directs the Secretary of the Navy to submit a report on several
aspects of the LCS program; and
! recommends $20.3 million in the Other Procurement, Navy (OPN)
account for the procurement of LCS mission modules — a $60-
million reduction from the Navy’s original FY2008 request.
The committee’s report states:
The committee notes with concern the significant cost growth experienced
within the LCS program, which has recently led to a termination of a contract
option to construct the third ship of the class. In testimony before the
Subcommittee on Seapower and Expeditionary Forces on February 8, 2007,
Navy and industry witnesses agreed that the original ship construction schedule
for the lead ship was overly aggressive and that Navy and industry program
managers sought to maintain schedule performance, rather than cost
performance, to the detriment of cost-effective construction. The witnesses also
agreed that additional major cost drivers on the lead ship were caused by the
inclusion of the new naval vessel rules into the design of the ship without a pause
in the construction schedule. Additionally, a necessary component for the
propulsion system arrived late to the construction yard changing the most
efficient construction sequence for the vessel.
The committee commends the Secretary of the Navy for taking action to
identify the issues discussed above; however the committee remains concerned
that recent Navy decisions to terminate the option for the third ship may
eliminate the benefit of a competitive environment for this program.
The proposed 55 ship class represents a significant portion of the Chief of
Naval Operations plan for a 313 ship Navy. If the Secretary cannot maintain
affordability in this vital program, the 313 ship fleet cannot be realized. The
committee believes it is imperative that the Navy pursue all reasonable means to
control costs in the LCS program. The committee believes that a key component
of cost control is competition. The committee strongly encourages the Navy to
avoid defaulting to a single design acquisition strategy for fiscal years 2008 and
2009 and expects the Navy to take all reasonable steps necessary to ensure
continued competition between the two LCS designs.
The committee is convinced that the capability that this vessel will bring
to the Navy is of the utmost urgency for responding to asymmetric threats. The
committee understands that in order to cover the cost increases of the first three
ships, the Secretary intends to submit to Congress an above threshold
reprogramming requesting for the appropriations for the two ships authorized in
fiscal year 2007. Further, the Secretary has communicated a request that the
committee only authorize two of the three ships submitted in the budget for fiscal
year 2008.

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CRS-28
The committee recommends $710.5 million, a decrease of $200.0 million
from the budget request, for the construction of two ships in fiscal year 2008.
The committee directs the Secretary of the Navy to submit a report to the
congressional defense committees by August 1, 2007, on the analysis of the root
causes of the LCS cost overruns; the methods and procedures put in place
throughout the various Program Executive Offices ensuring these mistakes are
not repeated in other programs; the structure of the Navy’s current contractual
agreements with both LCS prime contractors along with justification for
differences between the two, if any; an explanation of the Navy’s plan for testing
of the two different ship variants; and an analysis of alternatives for future
procurement and deployment of the LCS. (Pages 78-79)
The House-reported version of H.R. 1585 contains a provision (Section 127)
that would require that construction of a first ship in a shipbuilding program not start
until the Secretary of the Navy has certified that the detailed design of the ship is
completed and approved by the relevant design certification agents, to a level
determined by the Secretary to be acceptable for commencement of construction.
The provision states:
SEC. 127. LIMITATION ON CONCURRENT DESIGN AND
CONSTRUCTION ON FIRST SHIP OF A SHIPBUILDING PROGRAM.
(a) In General- For any shipbuilding program that is a major defense acquisition
program under section 2430 of title 10, United States Code, the start of
construction of a first ship (as defined in subsection (b)) may not occur until the
Secretary of the Navy certifies to the congressional defense committees that the
detailed design of the ship is completed and approved by the relevant design
certification agents, to a level determined by the Secretary to be acceptable for
commencement of construction, via a report described in subsection (d).
(b) First Ship- For purposes of subsection (a), a ship is a first ship if —
(1) the ship is the first ship to be constructed under that shipbuilding program;
(2) the shipyard at which the ship is to be constructed has not previously started
construction on a ship under that shipbuilding program; or
(3) the ship is the first ship to be constructed following a major design change,
characterized as a change in flight, under that shipbuilding program.
(c) Start of Construction- For purposes of subsection (a), start of construction
means the beginning of fabrication of the hull and superstructure of the ship.
(d) Report- The Secretary of the Navy shall provide the certification required by
subsection (a) in a report that provides an assessment of each of the following:
(1) The degree of completion of the detailed design drawings and specifications
for the ship.
(2) The readiness of the shipyard facilities and workforce to begin construction.

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CRS-29
(3) The maturity level of research and development efforts of any new
technologies that will be used in the ship’s command and control systems,
weapons systems, sensor systems, mechanical or electrical systems, or hull.
(4) The ability to meet cost and schedule estimates within the applicable program
baseline.
(e) Applicability-
(1) NEW SHIPBUILDING PROGRAMS- This section applies to each
shipbuilding program beginning after the date of the enactment of this Act.
(2) MAJOR DESIGN CHANGES FOR EXISTING SHIPBUILDING
PROGRAMS- In addition, subsection (b)(3) applies to any major design change
occurring after the date of the enactment of this Act to any shipbuilding program
in existence as of the date of the enactment of this Act.
The House-reported version of H.R. 1585 also contains a provision (Section
822) requiring federal agencies that award more than $1 billion in contracts per year
to develop and implement plans to maximize the use of fixed-price contracts. The
section states:
SEC. 822. MAXIMIZING FIXED-PRICE PROCUREMENT CONTRACTS.
(a) Plans Required- Subject to subsection (c), the head of each executive agency
covered by title III of the Federal Property and Administrative Services Act of
1949 (41 U.S.C. 251 et seq.) or, in the case of the Department of Defense, the
Under Secretary of Defense for Acquisition, Technology, and Logistics, shall
develop and implement a plan to maximize, to the fullest extent practicable, the
use of fixed-price type contracts for the procurement of goods and services by the
agency or department concerned. The plan shall contain measurable goals and
shall be completed and submitted to the Committee on Oversight and
Government Reform of the House of Representatives, the Committee on
Homeland Security and Governmental Affairs of the Senate, and the Committees
on Appropriations of the House of Representatives and the Senate and, in the
case of the Department of Defense and the Department of Energy, the
Committees on Armed Services of the Senate and the House of Representatives,
with a copy provided to the Comptroller General, not later than 1 year after the
date of the enactment of this Act.
(b) Comptroller General Review- The Comptroller General shall review the plans
provided under subsection (a) and submit a report to Congress on the plans not
later than 18 months after the date of the enactment of this Act.
(c) Requirement Limited to Certain Agencies- The requirement of subsection (a)
shall apply only to those agencies that awarded contracts in a total amount of at
least $1,000,000,000 in the fiscal year preceding the fiscal year in which the
report is submitted.
Senate. Section 132 of the Senate-passed version of H.R. 1585, which was
added by floor amendment as part of the Senate’s consideration of S. 1547/H.R.

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1585, as reported by the Senate Armed Services Committee,31 makes certain findings
about the importance of the LCS program and about the causes of cost growth in the
construction of the first LCSs; increases the procurement cost cap for the fifth and
sixth LCSs to $460 million each, plus adjustments for certain factors; requires the
Navy to use fixed-price contracts for the construction of the fifth and subsequent
ships in the program; and limits the government’s cost liability for the fifth and sixth
ships in the program to $460 million each. The section states:
SEC. 132. LITTORAL COMBAT SHIP (LCS) PROGRAM.
(a) Findings- Congress makes the following findings:
(1) The plan of the Chief of Naval Operations to recapitalize the United States
Navy to at least 313 battle force ships is essential for meeting the long-term
requirements of the National Military Strategy.
(2) Fiscal challenges to the plan to build a 313-ship fleet require that the Navy
exercise discipline in determining warfighter requirements and responsibility in
estimating, budgeting, and controlling costs.
(3) The 55-ship Littoral Combat Ship (LCS) program is central to the
shipbuilding plan of the Navy. The inability of the Navy to control requirements
and costs on the two lead ships of the Littoral Combat Ship program raises
serious concerns regarding the capacity of the Navy to affordably build a
313-ship fleet.
(4) According to information provided to Congress by the Navy, the cost growth
in the Littoral Combat Ship program was attributable to several factors, most
notably that —
(A) the strategy adopted for the Littoral Combat Ship program, a so-called
`concurrent design-build’ strategy, was a high-risk strategy that did not account
for that risk in the cost and schedule for the lead ships in the program;
(B) inadequate emphasis was placed on `bid realism’ in the evaluation of contract
proposals under the program;
(C) late incorporation of Naval Vessel Rules into the program caused significant
design delays and cost growth;
(D) the Earned Value Management System of the contractor under the program
did not adequately measure shipyard performance, and the Navy program
organizations did not independently assess cost performance;
(E) the Littoral Combat Ship program organization was understaffed and lacking
in the experience and qualifications required for a major defense acquisition
program;
31 Section 132 was added by S.Amdt 3077 to S.Amdt 2011 to H.R. 1585. S.Amdt 3077 was
agreed to by unanimous consent on September 27, 2007. S.Amdt. 2011 to H.R. 1585 was
agreed to by unanimous consent on October 1, 2007.

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(F) the Littoral Combat Ship program organization was aware of the increasing
costs of the Littoral Combat Ship program, but did not communicate those cost
increases directly to the Assistant Secretary of the Navy in a time manner; and
(G) the relationship between the Naval Sea Systems Command and the program
executive offices for the program was dysfunctional.
(b) Requirement- In order to halt further cost growth in the Littoral Combat Ship
program, costs and government liability under future contracts under the Littoral
Combat Ship program shall be limited as follows:
(1) LIMITATION OF COSTS- The total amount obligated or expended for the
procurement costs of the fifth and sixth vessels in the Littoral Combat Ship
(LCS) class of vessels shall not exceed $460,000,000 per vessel.
(2) PROCUREMENT COSTS- For purposes of paragraph (1), procurement costs
shall include all costs for plans, basic construction, change orders, electronics,
ordnance, contractor support, and other costs associated with completion of
production drawings, ship construction, test, and delivery, including work
performed post-delivery that is required to meet original contract requirements.
(3) CONTRACT TYPE- The Navy shall employ a fixed-price type contract for
construction of the fifth and following ships of the Littoral Combat Ship class of
vessels.
(4) LIMITATION OF GOVERNMENT LIABILITY- The Navy shall not enter
into a contract, or modify a contract, for construction of the fifth or sixth vessel
of the Littoral Combat Ship class of vessels if the limitation of the Government’s
cost liability, when added to the sum of other budgeted procurement costs, would
exceed $460,000,000 per vessel.
(5) ADJUSTMENT OF LIMITATION AMOUNT- The Secretary of the Navy
may adjust the amount set forth in paragraphs (1) and (4) for either vessel
referred to in such paragraph by the following:
(A) The amounts of increases or decreases in costs attributable to compliance
with changes in Federal, State, or local laws enacted after September 30, 2007.
(B) The amounts of outfitting costs and costs required to complete post-delivery
test and trials.
(c) Repeal of Superseded Authority- Section 124 of the National Defense
Authorization Act for Fiscal Year 2006 (Public Law 109-163; 119 Stat. 3157) is
repealed.
The Senate Armed Services Committee, in its report (S.Rept. 110-77 of June 5,
2007) on the FY2008 defense authorization bill (S. 1547):
! recommends $480 million in the Shipbuilding and Conversion, Navy
(SCN) account for the procurement of one LCS — a reduction of
$430.5-million and one ship from the Navy’s amended FY2008
request of $910.5 million for two LCSs — but “directs that funds
authorized for a fiscal year 2008 LCS ship may only be used when

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combined with LCS SCN funds appropriated in prior years, to
solicit, on a competitive basis, bids for two fixed price LCS ship
construction contracts, one for each of the two competing LCS
variants”;
! directs the Secretary of Defense to submit a report on the acquisition
strategy for the LCS program; and
! recommends $15.3 million in the Other Procurement, Navy (OPN)
account for the procurement of LCS mission modules — a $65
million reduction from the Navy’s original FY2008 request.
With regard to SCN funding for the program and the report to be done by the
Secretary of Defense on the program’s acquisition strategy, the committee’s report
states:
The first ship (LCS-1) was scheduled to deliver in late 2006. The Navy is
now estimating that the first ship will deliver sometime in the middle of 2008.
The LCS-1 contractor team had barely started on their second ship (LCS-3) when
the program ran into major cost problems earlier this year. The Navy then issued
a stop work order on LCS-3 in order to reduce expenditures and limit further cost
exposure on the program while it separately re-evaluated program cost estimates.
The Navy entered into negotiations with the LCS-1 team to sign up to a
fixed price contract on the two ships or face outright cancellation on the second
ship. These negotiations occurred during this past spring. When the stop work
order was nearly ready to expire, the Navy announced that it and the LCS-1
contractor team were unable to reach an agreement and that the Navy was
terminating the contract for LCS-3 for the convenience of the Government. It is
too early to precisely estimate the termination costs, but the Navy has reported
that significant funds for LCS-3 are on hold pending completion of the
termination negotiations.
The second contractor team has a contract to build two LCS vessels of
another design (LCS-2 and LCS-4). The Navy awarded this contract later, so
LCS-2 is roughly 1 year behind the LCS-1. Unfortunately, it appears that this
team is experiencing similar cost problems. The Navy has not issued the same
ultimatum to this contractor team, but has claimed that the Navy will do so if the
cost of LCS-2 continues to grow toward the Navy’s estimate. Meanwhile, the
Navy is proceeding with the start of construction on LCS-4, although it is not
clear that the root causes for early cost growth on LCS-2 have been addressed.
The committee is disappointed that the cost of the lead ship has more than
doubled and the delivery schedule has slipped several times.
The committee commends the Secretary of the Navy for exercising
oversight and for trying to bring cost and schedule discipline to this troubled
program. The committee is also interested in supporting the Secretary’s efforts
to improve the Navy’s acquisition process. Reviewing this LCS situation will
undoubtedly result in a new set of “lessons learned” that the acquisition
community will dutifully try to implement. However, the committee has
previously expressed concerns about the LCS concept and the LCS acquisition
strategy. The LCS situation may be more a case of “lessons lost.” Long ago, we

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knew that we should not rush to sign a construction contract before we have
solidified requirements. We also knew that the contractors will respond to
incentives, and that if the incentives are focused on maintaining schedules and
not on controlling cost, cost growth on a cost-plus contract should surprise no
one. After the fact, everyone appears ready to agree that the original ship
construction schedule for the lead ship was overly aggressive.
The Navy has said that the capability that this vessel will bring to the fleet
is of the utmost urgency for responding to asymmetric threats. The committee
believes that if the Navy really believed that the threat were that urgent, it might
have taken more near-term steps to address it. For example, the Navy might not
have cancelled the remote minehunting system (RMS) capability on a number of
the DDG-51 class destroyers, ships that will be available to the combatant
commanders much sooner than LCS. The Navy might also have taken this
modular capability slated for the LCS and packaged those modules to deploy
sooner on ships of opportunity. Rather, the Navy is waiting on a shipbuilding
program to deliver that capability (in a useful quantity) at some future date.
The Navy now proposes to use the funds requested in fiscal year 2008 to
award contracts for two LCS vessels, rather than the three originally envisioned.
Given the uncertainty about what is happening with the earlier ships in the
program and uncertainties about the options for an acquisition strategy that will
remain available to the Navy next year, the Navy does not intend to award these
two contracts until late in fiscal year 2008.
In summary:
(1) a high degree of cost uncertainty will continue to overshadow the LCS
program until the two lead ships execute test and trials, starting late in 2007.
(2) the Navy’s current estimate is that the approximately $1.6 billion
appropriated for the first six ships will be required to complete the three ships
currently under contract, with significant additional funding being held for
termination of a fourth ship.
(3) if the Navy’s estimates are correct, or low, then the Navy will be
engaging in fixed price negotiations with the second prime contractor for LCS-2
and LCS-4 late in 2007, with the distinct possibility that LCS-4 would be
terminated.
(4) if the Navy’s estimates are high, then sufficient funding from within
previous appropriations should be available for a newly procured LCS.
(5) the Navy has yet to formulate its acquisition strategy for the LCS
program, however, the challenges inherent to fair competition between two
dissimilar ship designs have become LCS-3 (or potential termination of LCS-4).
(6) the Navy has announced a delay for conducting a program downselect
decision until 2010, at which time it also plans to revise the LCS combat system,
which raises concerns regarding the infrastructure and life cycle support costs for
the three or four ships of the LCS variant not selected for “full rate production.”
(7) program delays have pushed the next notional contract award until late
in fiscal year 2008.
(8) termination negotiations for LCS-3 will likely be proceeding at the same
time the prime contractor is being solicited for a proposal to build another LCS
ship, in which case the material procured for LCS-3 would likely revert back to
the contractor for this new procurement. The net effect is that the current LCS-3
obligations that are fenced for termination costs would sufficiently cover the
contractor’s fiscal year 2008 obligations for a newly procured LCS.

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CRS-34
The committee recommends $480.0 million for LCS in fiscal year 2008, a
decrease of $430.5 million. We cannot relive the early days of the LCS program
and remember “lessons learned,” but we have the opportunity to take positive
steps now to right the program. Before awarding contracts for additional ships
in the LCS program, we need to maintain focus on delivering the most capability
possible for the $1.6 billion invested thus far for six ships. This would require
that we impose accountability for the quality of program estimates; halt further
changes to program requirements; and ensure that the contracts provide effective
incentives for cost performance.
The Secretary of the Navy has advised the committee that the Navy’s
estimates appear to be quite conservative based on contractor performance over
the past quarter, as measured against recently revised baselines. Although further
risk is acknowledged, the Navy has expressed confidence that the program will
be able to improve on the Navy’s worst case estimates and avoid further
termination action. If the Navy and industry are successful in managing costs
going forward, this should allow four ships to be delivered within previously
appropriated funds.
The committee notes that the LCS-1 contractor was awarded a lead ship
contract that targeted a significantly lower price and a significantly more
aggressive schedule for starting construction. The risks inherent in this
aggressive schedule were exacerbated by changes to Navy requirements. These
factors may have contributed to the decision to terminate LCS-3 — an outcome
referred to as “winner-loses.” The resultant imbalance between the two
competing shipbuilders jeopardizes the Navy’s ultimate goal for a competitive
downselect in 2010, followed by full and open competition for the winning LCS
variant.
Therefore, the committee directs that funds authorized for a fiscal year
2008 LCS ship may only be used when combined with LCS SCN funds
appropriated in prior years, to solicit, on a competitive basis, bids for two fixed
price LCS ship construction contracts, one for each of the two competing LCS
variants. The Secretary of the Navy may waive this requirement only if: he
determines that there is only one acceptable LCS variant, based on completion
of acceptance trials on the two LCS variants; and he notifies the congressional
defense committees 30 days before releasing a solicitation based on that waiver
determination.
The committee believes that the history of the LCS acquisition strategy has
been one of documenting decisions, rather than guiding and informing decisions.
Therefore, the Secretary of Defense is directed to submit a report on the
approved acquisition strategy for the LCS program at least 90 days prior to
issuing any solicitation or requests for proposal, but no later than December 1,
2008. (Pages 97-100)
With regard to OPN funding for the program, the committee’s report states:
As described elsewhere in this report, the LCS program has run into serious
problems. The committee sees no particular reason to acquire mission modules
at the pace planned by the Navy, since there have been significant delays in the
ship program. The committee recommends a decrease of $65.0 million for LCS
modules. (Page 100)

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CRS-35
FY2008 Defense Appropriations Bill (H.R. 3222)
House. The House Appropriations Committee, in its report (H.Rept. 110-279
of July 30, 2007) on the FY2008 defense authorization bill (H.R. 3222),
recommends:
! $339.5 million in the Shipbuilding and Conversion, Navy (SCN)
account for the procurement of one LCS — a $571 million reduction
from the Navy’s FY2008 request of $910.5 million, which was
originally requested by the Navy to fund the procurement of three
LCSs and later amended by the Navy to fund the procurement of two
LCSs;
! zero funding in the Other Procurement, Navy (OPN) account for the
procurement of LCS mission modules — a $80.3 million reduction
from the Navy’s original FY2008 request; and
! $229.0 million in the Navy’s research and development account for
the LCS program — an $11.5 million increase over the requested
amount, with the additional funding to be used for “Anti-Submarine
Warfare (ASW) Contact Management Mission Planning
Improvement” ($3.5 million), “LCS Mission Package Enterprise”
($5 million), and “Remote Multi-Mission Vehicle Anti-Submarine
Warfare (ASW) Mission Module for LCS” ($3 million).
With regard to ship-procurement funding, the committee’s report states:
The Littoral Combat Ship (LCS) was conceived as a low cost, flexible,
rapidly fielded platform to counter asymmetric littoral threats and conduct
coastal missions. With a stated requirement of 55 vessels, the LCS will comprise
a significant portion of the Navy’s 313 ship fleet. However, this program has
been plagued by cost growth and schedule delays. Although many variables have
contributed to this growth, the underlying reason can be attributed to concurrency
between ship design and ship construction. Through fiscal year 2007, the
Congress has appropriated funds for the construction of six LCS vessels. The
Navy has terminated the contract for one of these ships and has proposed using
the funding for two more ships to pay for cost growth within the program. The
end result will be that the funding originally appropriated for six ships will
actually only procure three vessels. The Committee is disturbed by the revelation
that the recent efforts of the Congress to improve the Navy’s shipbuilding
program via the LCS program have not borne fruit. In light of the recent LCS
problems, the Committee believes that the best course of action is to allow the
program to stabilize, finalize the design, obtain actual program costs, and firm
up the outyear acquisition strategy. Therefore, the Committee provides
$339,482,000 for the procurement of a single LCS, a reduction of $571,000,000.
This funding is to be combined with the materials purchased in prior years for the
LCS whose contract was terminated [LCS-3], which the Committee understands
to be approximately $120,000,000. This allows the Navy to have sufficient
funding/materials to purchase a ship at the proposed fiscal year 2008 LCS cost
cap value of $460,000,000. (Page 229; see also page 227)
The report also states:

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CRS-36
Outfitting funds [in the Navy’s shipbuilding account] are used to acquire
on-board repair parts, equipage and other secondary items to fill the ships initial
allowances. The request includes $4,900,000 in fiscal year 2007 and $4,900,000
in fiscal year 2008 to satisfy outfitting requirements for LCS-3. Since the
construction contract for LCS-3 was terminated by the Navy, these funds are
excess to requirement. The fiscal year 2007 funds will carry forward and be used
to satisfy fiscal year 2008 requirements for other ships. Therefore, the fiscal year
2008 outfitting account is reduced by $9,800,000. Additionally, since the
delivery date of LCS-4 has been delayed, the outfitting account also contains an
excess of $5,000,000 that was appropriated in fiscal year 2007 and can now be
used to satisfy other ship requirements. Therefore, the fiscal year 2008 outfitting
program can be reduced an additional $5,000,000 to account for this delay.
(Page 230)
With regard to mission package procurement funding, the report states:
The Littoral Combat Ship (LCS) is a small surface combatant and will
operate with the flexibility to be configured with one of a variety of three
different mission modules depending on the tasking. The Navy plan for mission
modules is to procure a total of 64 LCS modules for the 55 ship class. The
request includes $80,324,000 for the procurement of two mission modules and
associated procurement support as well as $2,900,000 for spare parts. At the time
of the submission, funding had been appropriated for the procurement of six
ships and six mission modules through fiscal year 2007. Since the submission of
the request, only three of these six ships will actually be constructed. The
Committee believes the six mission modules purchased in prior years will be
more than sufficient to satisfy near term LCS requirements considering the
reduced near term LCS construction quantity. Therefore, no funding is provided
for the procurement of LCS mission modules and associated spares. (Pages 242-
243)
The report also states:
The Vertical Take-off Unmanned Aerial Vehicle (VTUAV) will provide
real-time Intelligence, Surveillance and Reconnaissance (ISR) data to tactical
users without the use of manned aircraft or national assets. The VTUAV program
will initially satisfy mission requirements for the Littoral Combat Ship (LCS).
However, the LCS program is experiencing significant program delays and only
three of the six ships appropriated through fiscal year 2007 will actually be
constructed. With this slowdown in the LCS program, the Committee believes
it is prudent to slow the procurement of LCS-associated equipment and therefore
provides no funding for the three VTUAV aircraft (and associated support
equipment) requested in the budget. (Page 210)
The committee’s recommended additions to the LCS program’s requested
FY2008 research and development funding appear on page 336 of the committee’s
report.
Senate. The Senate Appropriations Committee, in its report (S.Rept. 110-155
of September 14, 2007) on H.R. 3222, recommends:
! zero funding in the Shipbuilding and Conversion, Navy (SCN)
account for the procurement of additional LCSs in FY2008 — a

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CRS-37
$910.5-million reduction from the Navy’s FY2008 request, which
was originally requested by the Navy to fund the procurement of
three LCSs and later amended by the Navy to fund the procurement
of two LCSs;
! $75 million in additional FY2008 advance procurement funding in
the SCN account for the procurement of a Flight 1 LCS in FY2009;
! cancelling construction of LCS-4, and rescinding $300 million in
prior-year funding for the ship (the rescission is written into Section
8401 of the bill);
! $15 million in funding in the Other Procurement, Navy (OPN)
account for the procurement of LCS mission modules — a $65.3
million reduction from the Navy’s original FY2008 request; and
! $300.5 million in the Navy’s research and development account for
the LCS program — an $83 million increase over the requested
amount, with the additional funding to be used for fully funding the
construction of LCSs 1 and 2, which were originally procured
through the Navy’s research and development account ($81 million),
and for “new payloads and sensors unmanned surface vehicle
program” ($2 million).
With regard to ship-procurement funding, the committee’s report states:
The Committee supports the capability envisioned by the LCS program.
The LCS program is extremely important and will provide the Navy with the
necessary tools to face the asymmetric threats of the future. The Committee notes
that the LCS does not replace a current capability in the fleet but provides a new
capability for future commanders.
The Committee strongly supports the development of a surface combatant
vessel that can be acquired in affordable volume production. The LCS program,
planned as a 55 ship class, is an integral component of the Navy’s future
shipbuilding plan.
Unfortunately, the LCS program has been plagued with significant cost
growth and schedule slip. Time has shown that the initial acquisition strategy of
the LCS was ill-conceived. The short history of the LCS program, as outlined in
the report to accompany S. 1547, the National Defense Authorization Act for
Fiscal Year 2008 [S.Rept. 110-77 of June 5, 2007], has been a case study in how
not to acquire ships.
The Committee has concluded that a fundamental change needs to be made
to the current LCS acquisition strategy in order to develop a ship that meets
future naval requirements and can be affordably procured. The Committee also
believes that the Navy will require additional time to correct the cost, schedule
and performance issues with the LCS mission modules and the new start
development of a common combat system.
Therefore, the Committee makes the following recommendations:

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CRS-38
— no funding for additional LCS seaframes, a reduction of $910,500,000;
— a rescission of $300,000,000 in fiscal year 2007 LCS funding,
cancelling LCS-4;
— an addition of $75,000,000 in advance procurement funding for one
LCS Flight 1 seaframe in fiscal year 2009; and
— full funding for the development and construction of LCS 1 and 2.
Due to the significant uncertainty surrounding the LCS program, the
Committee does not believe that funding for additional seaframes in fiscal year
2008 is justified. The Committee believes that only one ship of each design is
required for the Navy to conduct a comprehensive evaluation of the competing
designs that will result in the down select of one design for the Flight 1 LCS
seaframe. The cancellation of LCS-4 will leave the Navy with one ship of each
design for operational performance testing by the fleet. The Committee
understands that both LCS-1 and LCS-2 will deliver in the third quarter of fiscal
year 2008. Upon delivery of both ships, the Navy is directed to proceed with a
comprehensive evaluation of both designs as soon as practicable. This will allow
the Navy sufficient time to conduct operational performance testing of both ships
and make a down-select decision in late fiscal year 2008. The Committee has
every confidence that the Secretary of the Navy will ensure that a fair
competition takes place between the two ship designs. The Committee further
directs the Navy to include in the fiscal year 2009 budget submission a new
acquisition strategy for the future procurement of the LCS class.
The Committee expects the Navy to proceed with an acquisition strategy
that includes a full and open competition for the Flight 1 ships. The Committee
further expects the Navy to continue with its plan providing “contract design
packages” to industry and conducting a new competition for Flight 1 ships. The
Committee directs the Navy to include lead and follow shipyards and open this
competition to shipyards not currently involved in the LCS program. The
Committee also directs the Navy to use fixed priced incentive contracting for all
Flight 1 ships. (Pages 133-134)
With regard to mission package procurement funding, the report states:
Due to disruptions in the LCS program, as well as technical challenges to
several components of the mission modules, the Committee recommends
$15,000,000, a reduction of $65,324,000. The Committee recommended amount
provides for one Remote Minehunting Vehicle to maintain production facilities
and one Airborne Laser Mine Detection System in anticipation of an accelerated
initial operational capability. The Committee urges the Navy to reexamine the
future years’ schedule for production of mission packages to reflect the delays
in the LCS program. (Page 145)
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