Order Code RL33741 Navy Littoral Combat Ship (LCS) Program: Background, Oversight Issues, and Options for Congress Updated October 1, 2008 Ronald O’Rourke Specialist in Naval Affairs Foreign Affairs, Defense, and Trade Division Navy Littoral Combat Ship (LCS) Program: Background, Oversight Issues, and Options for Congress Summary The Navy is procuring a new type of surface combatant called the Littoral Combat Ship (LCS). The LCS is a small, fast, relatively inexpensive combat 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 Navy wants to procure a total of 55 LCSs. The Navy’s planned force of 55 LCSs accounts for about 18% of its planned fleet of 313 ships of all types. The first ship in the program — LCS-1 — was delivered to the Navy on September 18, 2008, and is scheduled to be commissioned into service on November 8, 2008. The Navy substantially restructured the LCS program in 2007 in response to significant cost growth and schedule delays in the program. Congress originally funded a total of six LCS sea frames (LCSs 1 through 6) in the FY2005, FY2006, and FY2007 defense budgets. In 2007, as Congress was considering the proposed FY2008 defense budget, the Navy canceled LCSs 3 though 6 as part of its restructuring of the program, leaving only LCSs 1 and 2 under construction. Congress accepted these cancellations and funded an additional LCS in FY2008. The Navy’s proposed FY2009 budget requested $920 million for the procurement of two more LCSs, which were to be the fourth and fifth ships in the restructured LCS program. Section 122 of the compromise version of the FY2009 defense authorization bill (S. 3001) delays the implementation of the LCS sea frame unit procurement cost to ships procured in FY2010 and subsequent years. (The cost cap previously was to be applied to ships procured in FY2008 and subsequent years.) The compromise version of the FY2009 defense appropriations bill (Division C of H.R. 2638) provides $1,020 million ($100 million more than requested) for the procurement of two LCSs. Section 8042 of the bill rescinds $337 million in FY2008 shipbuilding funds for the LCS program, effectively canceling the LCS procured in FY2008. Following this action, there are now four LCSs either built, under construction, or funded — LCS-1, LCS-2, and the two ships funded in FY2009. The issue for Congress is whether to approve, reject, or modify the Navy’s plans for the LCS program. The LCS program raises potential oversight issues for Congress relating to cost growth, total program acquisition cost, the procurement cost cap, technical risk, operational evaluation and competition for production, a proposed common combat system, and coordination of sea frames and mission packages. This report will be updated as events warrant. Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 LCS Program in Brief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2007 Program Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Acquisition Strategy for Follow-On Ships in Program . . . . . . . . . . . . . . . . . 8 Cost Growth on LCS Sea Frames . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Potential Oversight Issues for Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Cost Growth on LCS Sea Frames . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Total Program Acquisition Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Procurement Cost Cap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Technical Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Acquisition Strategy for Follow-On Ships in Program . . . . . . . . . . . . . . . . 26 Coordination of Sea Frames and Mission Packages . . . . . . . . . . . . . . . . . . 27 Options for Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 List of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Potential for Common Hulls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Legislative Activity For FY2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 FY2009 Defense Authorization Bill (H.R. 5658/S. 3001) . . . . . . . . . . . . . . 34 FY2009 Defense Appropriations Bill (H.R. 2638) . . . . . . . . . . . . . . . . . . . 39 List of Tables Table 1. Actual and Planned LCS Procurement Through FY2013 . . . . . . . . . . . . 5 Table 2. LCS Program Acquisition Funding, FY2007-FY2013 . . . . . . . . . . . . . . 6 Table 3. Congressional Action on FY2009 Funding Request . . . . . . . . . . . . . . 34 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, relatively inexpensive combat 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 Navy wants to procure a total of 55 LCSs. The Navy’s planned force of 55 LCSs accounts for about 18% of its planned fleet of 313 ships of all types.1 The first ship in the program — LCS-1 — was delivered to the Navy on September 18, 2008, and is scheduled to be commissioned into service on November 8, 2008. The Navy substantially restructured the LCS program in 2007 in response to significant cost growth and schedule delays in the program. Congress originally funded a total of six LCS sea frames (LCSs 1 through 6) in the FY2005, FY2006, and FY2007 defense budgets. In 2007, as Congress was considering the proposed FY2008 defense budget, the Navy canceled LCSs 3 though 6 as part of its restructuring of the program, leaving only LCSs 1 and 2 under construction. Congress accepted these cancellations and funded an additional LCS in FY2008. The Navy’s proposed FY2009 budget requested $920 million for the procurement of two more LCSs, which were to be the fourth and fifth ships in the restructured LCS program. Section 122 of the compromise version of the FY2009 defense authorization bill (S. 3001) delays the implementation of the LCS sea frame unit procurement cost to ships procured in FY2010 and subsequent years. (The cost cap previously was to be applied to ships procured in FY2008 and subsequent years.) The compromise version of the FY2009 defense appropriations bill (Division C of H.R. 2638) provides $1,020 million ($100 million more than requested) for the procurement of two LCSs. Section 8042 of the bill rescinds $337 million in FY2008 1 For more on the Navy’s planned 313-ship fleet, see CRS Report RL32665, Navy Force Structure and Shipbuilding Plans: Background and Issues for Congress, by Ronald O’Rourke. CRS-2 shipbuilding funds for the LCS program, effectively canceling the LCS procured in FY2008. Following this action, there are now four LCSs either built, under construction, or funded — LCS-1, LCS-2, and the two ships funded in FY2009. The issue for Congress is whether to approve, reject, or modify the Navy’s plans for the LCS program. Decisions that Congress makes on this issue could affect future Navy capabilities and funding requirements, and the shipbuilding industrial base. Background LCS Program in Brief 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 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,2 ! a cruiser called the CG(X) for the air defense and ballistic missile mission,3 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. The LCS is a small, fast, relatively inexpensive 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 primary mission 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 intercept operations, and support of special operations forces. 2 For more on the DDG-1000 program, see CRS Report RL32109, Navy DDG-1000 and DDG-51 Destroyer Programs: Background, Oversight Issues, and Options for Congress, by Ronald O’Rourke. 3 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. CRS-3 The LCS is to displace about 3,000 tons, making it about the size of a corvette or Coast Guard cutter. It is to have a maximum speed of more than 40 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 frigates and 300 or more for the Navy’s current destroyers and cruisers. 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. Summary Of Congressional Action In FY2005-FY2009. FY2005. In FY2005, Congress approved the Navy’s plan to fund the construction of the first two LCS sea frames using research and development funds rather than shipbuilding funds, funded the first construction cost of the first LCS (LCS-1), required the second LCS (LCS-2) to be built (when funded in FY2006) 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. FY2006. In FY2006, Congress funded the procurement of LCSs 2, 3, and 4. (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 unit procurement cost limit on the fifth and sixth LCS sea frames of $220 million per ship, 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. FY2007. In FY2007, Congress funded the procurement of LCSs 5 and 6. (The Navy canceled these two ships in 2007 before they were placed under contract for construction.) FY2008. In FY2008, Congress accepted the Navy’s cancellation of LCSs 3 through 6; funded the procurement one additional LCS in FY2008 (which the Navy called LCS-5);4 significantly reduced the Navy’s FY2008 funding request for the 4 The Navy apparently called this ship LCS-5 because the original LCS-5 and LCS-6 were canceled by the Navy before they were replaced under contract, leaving LCS-4 as last LCS under contract to have been canceled. In spite of its designation, LCS-5 would h ave been (continued...) CRS-4 LCS program; amended the LCS sea frame unit procurement cost cap to $460 million per ship for LCSs procured in FY2008 and subsequent years (Section 125 of the conference report [H.Rept. 110-477 of December 6, 2007] on H.R. 1585, the FY2008 defense authorization bill, which was enacted as H.R. 4986/P.L. 110-181 of January 28, 2008); and required the Navy to use fixed-price-type contracts for the construction of LCSs procured in FY2008 and subsequent years. The Navy in 2007 requested that Congress amend the existing unit procurement cost cap for the fifth and sixth ships to $460 million, plus adjustments for inflation and other factors. Congress amended the cost cap to $460 million, but applied it not only to the fifth and sixth LCSs, but to all LCSs procured in FY2008 and subsequent years. The use of fixed-price contracts for future LCSs was something that the Navy had stated an intention to do as part of its plan for restructuring the LCS program. FY2009. In FY2009, Congress delayed the implementation of the LCS sea frame unit procurement cost cap by two years, to ships procured in FY2010 and subsequent years (Section 122 of the FY2009 defense authorization bill [S. 3001]); rescinded $337 million in FY2008 shipbuilding funds for the LCS program, effectively canceling the LCS procured in FY2008 (Section 8042 of the FY2009 defense appropriations bill [Division C of H.R. 2638]); and funded the procurement of two LCSs. Following Congress’s action in FY2009, there were four LCSs either built, under construction, or funded — LCS-1, LCS-2, and the two ships funded in FY2009. 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 (the nowcanceled) LCS-3, while the GD team was assigned LCS-2 and (the now-canceled) LCS-4. Lockheed announced plans to build its LCSs at Marinette Marine of Marinette, WI, and Bollinger Shipyards of Lockport, LA, with LCS-1 being built by Marinette and LCS-3 to have been built by Bollinger. GD announced plans to build its LCSs at the Austal USA shipyard of Mobile, AL.5 Planned Procurement. As shown in Table 1, following the restructuring of the program in 2007, the Navy wanted to procure a total of 21 LCSs through FY2013. 4 (...continued) the third LCS in the restructured LCS program, and was the seventh to have been funded by Congress. 5 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 GD 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.” CRS-5 Table 1. Actual and Planned LCS Procurement Through FY2013 (following restructuring of program in 2007) FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 1 1a 0a 1b 2 3 3 4 6 Source: Navy FY2009 budget submission. a. Four additional LCSs that were originally funded by Congress in FY2007 and FY2008 (two in each year) were canceled by the Navy as part of the 2007 restructuring of the LCS program. b. Funding for this ship was rescinded by Congress as part of its action on the FY2009 budget; as a result, future displays will show a quantity of zero ships in FY2008. Program Funding. Table 2 shows LCS acquisition (i.e., research and development plus procurement) funding for FY2007 through FY2013 as reflected in the FY2009 budget submission. The figures in the table reflect reprogramming of prior-year program funding undertaken as part of the Navy’s 2007 restructuring of the LCS program. In addition to the funding shown in the table, the LCS program also received about $1.7 billion in acquisition funding between FY2003 and FY2006. 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. 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 $29.4 billion. This estimate includes $2.5 billion in research and development costs (including the construction of first two LCS sea frames and the procurement of the first four mission packages), procurement of 53 additional LCS sea frames at a cost of $460 million each, and procurement of 60 additional mission packages procured at an average cost of about $42.3 million each.6 This estimate does not include costs for LCS-related aircraft procurement or weapon procurement, such as those shown in the APN and WPN rows of Table 2. 6 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.) CRS-6 Table 2. LCS Program Acquisition Funding, FY2007-FY2013 (millions of dollars; figures rounded to nearest million) Budget accounta FY07 FY08 FY09 FY10 FY11 FY12 FY13 Total for FY07 thru FY13 664 304 371 281 139 168 116 2044 SCN 93 337b 920 1380 1380 1840 2760 8709 APN 37 37 55 73 76 96 103 478 WPN 0 0 3 25 47 45 11 131 OPN 79 0 131 235 242 252 227 1167 RDT&EN TOTAL 873 678 1480 1994 1884 2401 3217 12529 Source: Navy FY2009 budget submission. Figures may not add due to rounding. The program also received about $1.7 billion in acquisition funding between FY2003 and FY2006. a. RDT&EN = Research, Development, Test, and Evaluation, Navy account; SCN = Shipbuilding and Conversion, Navy account; APN = Aircraft Procurement, Navy account; WPN = Weapons Procurement, Navy account; OPN = Other Procurement, Navy account. b This funding was rescinded by Congress as part of its action on the FY2009 budget. 2007 Program Restructuring March 2007 Navy Restructuring Plan. In response to significant cost growth and schedule delays in the building of the first LCSs that first came to light in January 2007 (see next section), the Navy in March 2007 announced a plan for restructuring the LCS program that: ! canceled the two LCSs funded in FY2007 (LCSs 5 and 6) and redirected the funding for those two ships to pay for cost overruns on earlier LCSs; ! announced an intention to lift a 90-day stop-work order that the Navy had placed on LCS-3 in January 2007 — provided that the Navy reached an agreement with the Lockheed-led industry team by April 12, 2007, to restructure the contract for building LCSs 1 and 3 from a cost-plus type contract into a fixed price incentive (FPI)type contract — or terminate construction of LCS-3 if an agreement on a restructured contract could not be reached with the Lockheed team by April 12, 2007; ! announced an intention to seek to restructure the contract with the General Dynamics-led industry team for building LCSs 2 and 4 into an FPI-type contract — if LCSs 2 and 4 experienced cost growth comparable to that of LCSs 1 and 3 — and, if such a restructuring CRS-7 were sought, terminate construction of LCS-4 if an agreement on a restructured contract for LCS-2 and LCS-4 could not be reached; ! reduced 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; and ! announced an intention to conduct an operational evaluation to select a favored design for the LCS that would be procured in FY2010 and subsequent years, and to conduct a full and open follow-on competition among bidders for the right to build that design.7 April 2007 Termination of LCS-3. On April 12, 2007, the Navy announced that it had not reached an agreement with Lockheed on a restructured FPI-type contract for LCS-1 and LCS-3, and consequently was terminating construction of LCS-3.8 (The Navy subsequently began referring to the ship as having been partially terminated — a reference to the 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.) November 2007 Termination of LCS-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 were to be completed by October 19, 2007 — 30 days from September 19.9 On November 1, 2007, the Navy announced that it had not reached an agreement with General Dynamics on a restructured FPItype contract for LCS-2 and LCS-4, and consequently was terminating construction of LCS-4.10 7 Source: Navy briefing to CRS and Congressional Budget Office (CBO) on Navy’s proposed LCS program restructuring plan, March 21, 2007. 8 Department of Defense News Release No. 422-07, April 12, 2007, “Navy Terminates Littoral Combat Ship 3.” 9 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 28, 2007; Jason Sherman, “Navy, General Dynamics Discuss Fixed-Price Contract For LCS,” Inside the Navy, October 1, 2007. 10 Department of Defense News Release No. 1269-07, November 1, 2007, “Navy Terminates Littoral Combat Ship (LCS 4) Contract.” CRS-8 Acquisition Strategy for Follow-On Ships in Program The Navy’s acquisition strategy for the follow-on ships in the LCS program is unclear. Below are points taken from testimony and press reports that bear on the Navy’s potential acquisition strategy for these ships. July 2007 Navy Testimony on 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 testified in July 2007 that it wanted to shift to a common, government-furnished combat system for LCSs procured in FY2010 and beyond.12 The Navy proposed 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. August 2007 Navy Report on Building One or Two Designs. Although the Navy in its March 2007 restructuring plan announced an intention to conduct an operational evaluation to support the selection of a single LCS design to be procured in FY2010 and beyond, the Navy 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.”13 March 2008 Navy Testimony on LCS Acquisition Strategy. The Navy testified in March 2008 that: The Navy believes that active oversight and strict cost controls are needed to deliver these ships [LCSs] to the fleet over the long run. The Navy demonstrated strong oversight when it terminated the contracts for LCS-3 and LCS-4 in 2007. It is vital that the Navy continue through first-of-class construction challenges to complete LCS 1 and LCS 2. When these ships are delivered, the Department [of the Navy] will be able to better evaluate their costs and capabilities. LCS 1 and LCS 2 are currently scheduled to deliver to the Navy in 2008. Both LCS 1 and LCS 2 will conduct post-delivery test and trials in 2009.... The FY 2009 President’s Budget request includes $920 million for two additional LCS seaframes. The Navy also intends to execute the FY 2008 appropriation for one seaframe, utilizing the remaining funding and material from the terminated ships. The Navy will also seek congressional support for the reprogramming of these funds for the FY 2008 procurement. Under an 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. 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. 13 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. CRS-9 acquisition strategy approved in January 2008 by the Defense Acquisition Executive, the FY 2008 and 2009 awards will be for fixed-price incentive fee contracts, based on a limited competition between the current LCS seaframe prime contractors. These ships will be designated as Flight 0+ and will include all existing approved engineering changes developed from lessons learned, along with any current improvements to construction or fabrication procedures. The Navy will incorporate further lessons learned from LCS 1 and 2 sea trials into these ships prior to production. Any such changes will be minimized to those essential for safety and/or operability. Acquisition strategies for FY 2010 and follow ships are under Navy review. OSD will conduct a Milestone B prior to FY 2010 procurement. The Navy and OSD will consider the questions of single seaframe assessment and competition plans as part of the FY 2010 acquisition strategy deliberations.14 April 2008 Press Report on Building One or Two Designs. An April 21, 2008, press report quoted the Department of Defense (DOD) acquisition executive as stating that he anticipates both LCS designs being procured in significant quantities, and that the purpose of the operational evaluation of the two designs would consequently shift to one of finding problems in each design that need to be fixed. The press report stated: The competition between General Dynamics and Lockheed Martin to determine which bidder ends up building the bulk of the Navy’s nascent Littoral Combat Ship hulls will continue for a prolonged period of time, the Pentagon’s acquisition czar told reporters late last week. The Navy could end up buying large numbers of each LCS design, John Young, the acquisition chief, said in a roundtable interview with reporters April 18 at the Pentagon. The Navy ultimately plans to procure 55 LCS sea frames.... “I think you would want to have [the acquisition strategy in place] to buy 25 and 25 or 20 and 30 — it keeps the pressure on people to perform,” Young said last week. “I think being able to compete them together and eventually say, quality and cost performance can win you a greater share, is exactly what I need going forward, because the big picture is I still need this class of ships,” Young argued. “I need to stop boarding small ships in a terrorist world with billion-dollar destroyers.” Young added Chief of Naval Operations Adm. Gary Roughead “would tell you I need this ship yesterday.” 14 Statement of Vice Admiral Barry McCullough, Deputy Chief of Naval Operations For Integration of Capabilities and Resources, and Ms. Allison Stiller, Deputy Assistant Secretary of the Navy (Ship Programs), before the Subcommittee on Seapower and Expeditionary Forces of the House Armed Services Committee on Navy Force Structure and Shipbuilding, March 14, 2008, pp. 3-4. CRS-10 Nonetheless, the acquisition czar noted sea trials for the first two LCS hulls under construction are necessary to learn how these first-of-their-kind ships will operate. “We gotta get both ships in the water and learn some things,” Young noted. “We do need some tolerance in the enterprise for learning. “I could learn I have a cracking issue, or I could learn I have an engine reliability [issue], I could learn a lot of things . . . we’ll go fix those things,” he continued. “We wouldn’t just stop and terminate the whole program over something, we’d go fix it unless it was a fatal flaw.” The Navy may have to “spend some money” to get through problems with the first ships, but Young said he does not think any of the potential issues will be “fatal flaws.”15 August 2008 Press Report on Building One or Two Designs. An August 11, 2008, press report stated: The Navy will not rush to down select to one of the two different Littoral Combat Ship hulls under construction, potentially opting instead to use a mixture of the first-of-their kind ships, Navy Secretary Donald Winter told Inside the Navy last week. “It’s quite possible we could have a mixed fleet,” Winter said in an Aug. 7 interview in his Pentagon office. “We want to see what both these ships can do and there are pros and cons that people have talked about for a long time with the perceived differences. We need to see them.”... Winter’s comments about the potential for a mixed LCS fleet echoed statements made by Pentagon acquisition czar John Young in an April meeting with reporters. “I think you would want to have [the acquisition strategy in place] to buy 25 and 25 or 20 and 30 — it keeps the pressure on people to perform,” Young said at the time.... How LCS is used will determine what the right mix of hulls should be, Winter said. “A lot of it will depend on how we intend to use and leverage these capabilities,” he explained. “I have this nagging sense that we don’t understand all but a small part of the possibilities that this type of platform is going to open up. And that’s good and we’ve just got to let it happen and see what happens.”16 15 Zachary M. Peterson, “DOD Acquisition Czar: Littoral Combat Ship Competition To Continue,” Inside the Navy, April 21, 2008. 16 Zachary M. Peterson, “Winter Impressed Wit LCS-1, Says A Mix of Hulls Likely In Future,” Inside the Navy, August 11, 2008. CRS-11 Cost Growth on LCS Sea Frames Summary of Cost Growth. The Navy originally spoke of building LCS sea frames for about $220 million each in constant FY2005 dollars. Estimated LCS sea frame procurement costs have since grown substantially above that figure. The estimate for LCS-1 has grown from $215.5 million in the FY2005 budget to $531 million in the FY2009 budget. The estimate for LCS-2 has grown from $213.7 million in the FY2005 budget to $507 million in the FY2009 budget. The figures of $531 million and $507 million in the previous paragraph are endcost figures. End cost is the figure often reported as the total procurement cost of a Navy ship. It is a fairly comprehensive figure for a ship’s procurement cost, but it does exclude certain cost elements. The FY2009 budget submission states that when additional costs for outfitting and post delivery and for “final system design/mission systems and ship integration team” are included, the total estimated procurement costs of LCS-1 and LCS-2 become $631 million and $636 million, respectively. The Navy stated that although costs for “final system design/mission systems and ship integration team” are shown in the Navy’s FY2009 budget-justification documents as part of the total estimated procurement costs of LCS-1 and LCS-2, the work in question is normally funded from a shipbuilding program’s general research and development funds, rather than from funds used to pay for the construction of individual ships in the program. The Navy stated that in the case of the LCS program, these costs are shown as part of the total procurement costs of LCS-1 and LCS-2 because this is where there was room in the LCS program’s line-item funding breakdown to accommodate these costs.17 Removing these costs from the total procurement costs of LCS-1 and LCS-2 would lead to adjusted total procurement costs of $606 million and $582 million, respectively, for the two ships. The FY2009 budget submission also showed that the estimated cost of followon LCS sea frames had increased to $460 million each — the same figure that Congress used in 2007 in amending the unit procurement cost cap for LCS sea frame procurement. A March 2008 press report suggested that the cost of LCS-2 might increase by $41 million above the figures reported in the FY2009 budget submission. This increase, if realized, would increase the cost of LCS-2 to $548 million (end cost) or $677 million (more broadly defined cost). CBO testified in March 2008 that it estimated that the cost of LCS-1 and LCS-2 (more broadly defined) could increase to about $700 million each, and that the cost of follow-on LCSs could increase to about $550 million each. Review of Cost Growth Over Time. Estimated LCS sea frame procurement costs can be viewed as having increased three times — in early 2006, early 2007, and early 2008. 17 Source: Navy briefing to CRS and CBO on the LCS program, May 2, 2008. CRS-12 Early 2006. The proposed FY2007 Navy budget, submitted in February 2006, showed that: ! the estimate for the first LCS had increased from $215.5 million in the FY2005 budget and $212.5 million in the FY2006 budget to $274.5 million in the FY2007 budget — an increase of about 27% from the FY2005 figure and about 29% form the FY2006 figure; ! the estimate for the second LCS increased from $213.7 million in the FY2005 budget and $256.5 million in the FY2006 budget to $278.1 million — an increase of about 30% from the FY2005 figure and about 8% from the FY2006 figure; and ! the estimate for follow-on ships scheduled for FY2009-FY2011, when the LCS program was to have reached a planned maximum annual procurement rate of six ships per year, had increased from $223.3 million in the FY2006 budget to $298 million — an increase of about 33%. 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 certain potential oversight issues for Congress.18 Early 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 had grown to $350 million to $375 million. This suggested that the end cost of LCS-1 — which also includes costs for things such as Navy program-management costs and an allowance for changes — 18 These oversight issues included 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? — 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? CRS-13 could be in excess of $400 million. The Navy did not publicly provide a precise cost overrun figure for LCS 2, but it stated that the cost overrun on LCSs 1 and 2 was somewhere between 50% and 75%, depending on the baseline that is used to measure the overrun. The Government Accountability Office (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%.19 The Congressional Budget Office (CBO) testified in July 2007 that: 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.20 Early 2008. As mentioned above, the proposed FY2009 budget, submitted in February 2008, showed that the estimated end costs of LCS-1 and LCS-2 had increased to $531 million and $507 million, respectively (or to $606 million and $582 million, respectively, when outfitting and post-delivery costs are included), and that the estimated unit cost of follow-on ships in the program has increased to $460 million. On March 14, 2008, the Navy testified that The end costs included in the FY 2009 President’s Budget request for LCS reflects [sic] the current estimates for LCS 1 and LCS 2 end cost. However, on February 25, 2008, after the submission of the President’s Budget to Congress, General Dynamics submitted to the Navy and over target baseline request for LCS 2. The Navy is reviewing the request prior to granting approval for General Dynamics to implement. The details of the request are business sensitive and 19 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. 20 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. CRS-14 proprietary. The Navy will continue to actively monitor LCS 1 and 2 cost and schedule performance and to keep the Office of the Secretary of Defense and Congress informed of those estimated costs. The Navy will seek congressional support to complete the reprogramming of FY 2007 LCS shipbuilding funds to complete LCS 1 and 2.21 A March 26, 2008, press report stated that the cost of LCS-2 will increase $41 million “for the year ending Sept. 30,” according to “a defense official with knowledge of the increase.”22 The press report characterized the $41-million increase as an increase of 9.3% in the ship’s estimated basic construction cost of $440 million. Basic construction cost is a component of ship end cost. When measured against the ship’s estimated end cost or its adjusted total procurement cost (which also includes outfitting and post-delivery costs) as shown in the FY2009 budget ($507 million or $582 million, respectively), an increase of $41 million would equate to an increase of about 8.1% or about 7.0%, respectively. June 2008 CBO Report. CBO reported on June 9, 2008 that: Historical experience indicates that cost growth in the LCS program is likely. In particular, using the lead ship of the FFG-7 Oliver Hazard Perry class frigate as an analogy, historical cost-to-weight relationships indicate that the Navy’s original cost target for the LCS of $260 million in 2009 dollars (or $220 million in 2005 dollars) was optimistic. The first FFG-7 cost about $670 million in 2009 dollars to build, or about $250 million per thousand tons, including combat systems. Applying that metric to the LCS program suggests that the lead ships would cost about $600 million apiece, including the cost of one mission module. Thus, in this case, the use of a historical cost-to-weight relationship produces an estimate that is less than the actual costs of the first LCSs to date but substantially more than the Navy’s original estimate. Based on actual costs the Navy has incurred for the LCS program, CBO estimates that the first two LCSs could cost about $700 million each, including outfitting and postdelivery and various nonrecurring costs associated with first ships of a class but excluding mission modules. However, as of May 1, 2008, LCS-1 was 83 percent complete and LCS-2 was 68 percent complete. Thus, additional cost growth is possible, and CBO’s estimate reflects that cost risk. Overall, CBO estimates that the LCSs in the Navy’s plan would cost about $550 million each, on average, excluding mission modules. That estimate assumes that the Navy would select one of the two existing designs and make no changes. As the program advanced with a settled design and higher annual rates of production, average ship costs would probably decline. If the Navy decided 21 Statement of Vice Admiral Barry McCullough, Deputy Chief of Naval Operations For Integration of Capabilities and Resources, and Ms. Allison Stiller, Deputy Assistant Secretary of the Navy (Ship Programs), before the Subcommittee on Seapower and Expeditionary Forces of the House Armed Services Committee on Navy Force Structure and Shipbuilding, March 14, 2008, p. 4. 22 Tony Capaccio, “General Dynamics Littoral Combat Ship Cost Jumps 9.3 Percent,” Bloomberg News, March 26, 2008. CRS-15 to make changes to that design, however, the costs of building future ships could be higher than CBO now estimates.23 Reasons for Cost Growth. Various reasons have been cited for cost growth in the LCS program, including the following: ! Unrealistically low original estimate. Some observers believe that the original cost estimate of $220 million for the LCS sea frame was unrealistically low. If so, a potential follow-on question would be whether the LCS represents a case of “low-balling” — using an unrealistically low cost estimate in the early stages of a proposed weapon program to help the program win approval and become an established procurement effort. ! Impact of Naval Vessel Rules (NVR). Navy and industry officials have attributed some of the cost growth to the impact of applying new Naval Vessel Rules (NVR) — essentially, new rules specifying the construction standards for the ship — to the LCS program. The NVR issued for the LCS program incorporated, among other things, an increase in the survivability standard (the ability to withstand damage) to which LCSs were to be built.24 Building the ship to a higher survivability standard represented a change in requirements for the ship that led to many design changes, including changes that made ship more rugged and more complex in terms of its damagecontrol systems. In addition, Navy and industry officials have testified, the timing of the issuing of NVR created a situation of concurrency between design and construction in the LCS program, meaning that the ship was being designed at the same time that the shipyard was attempting to build it — a situation long known to be a potential cause of cost growth. This concurrency, Navy officials testified, was a consequence of the compressed construction schedule for the LCS program, which in turn reflected an urgency about getting LCSs into the fleet to meet critical mission demands. ! Improperly manufactured reduction gear. Navy and industry officials testified that cost growth on LCS-1 was partly due to a main reduction gear25 that was incorrectly manufactured and had to be 23 Congressional Budget Office, Resource Implications of the Navy’s Fiscal Year 2009 Shipbuilding Plan, June 8, 2008, pp. 26-27. 24 The LCS was earlier conceived as a ship that would be built to a survivability standard that would be sufficient, in the event of significant battle damage, to save the ship’s crew, but not necessarily the ship. The survivability standard for the LCS was increased as part of the issuing of NVR to one that would be sufficient to save not only the ship’s crew, but the ship as well. (Other U.S. Navy combat ships are built to a still-higher survivability standard that is sufficient not only to save the crew and the ship, but to permit the ship to keep fighting even though it has sustained damage.) 25 A ship’s reduction gear is a large, heavy gear that reduces the high-speed revolutions of (continued...) CRS-16 replaced, forcing a reordering of the construction sequence for the various major sections of the ship. ! Increased costs for materials. Some observers have attributed part of the cost growth in the program to higher-than-estimated costs for steel and other materials that are used in building the ships. ! Emphasis on meeting schedule combined with cost-plus contract. Some portion of cost growth on LCS-1 has been attributed to a combination of a Navy emphasis on meeting the ship’s aggressive construction schedule and the Navy’s use of a costplus contract to build the ship.26 ! Shipyard Performance. Shipyard performance and supervision of the LCS shipyards by the LCS team leaders and the Navy has been cited as another cause of cost growth.27 25 (...continued) the ship’s turbine engines to the lower-speed revolutions of its propellers. 26 The Senate Armed Services Committee, as part of its discussion of the LCS program in its report (S.Rept. 110-77 of June 5, 2007) on the FY2008 defense authorization bill (S. 1547), stated: 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 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. (Page 98) 27 A recent press report based on remarks made by Admiral Gary Roughead, the Chief of Naval Operations, included remarks on causes of cost growth in the LCS program: “There was a rush, and we thought we could get by with some commercial specifications,” Roughead said. “As we got into building the ship, some of those commercial applications weren’t going to do it from a survivability standpoint. That required some recasting of specifications.”... The Navy sought to design and build the ship concurrently, “which is not necessarily a good thing,” Roughead said. And in an effort to improve efficiency, the service “backed off” staffing in technical and oversight areas in the shipyards. “That came back to bite us,” he said. (Katherine McIntire Peters, “Navy’s Top Officer Sees Lessons In Shipbuilding Program Failures,” September 24, 2008.) (continued...) CRS-17 Press Reports on Shipyard Performance and Supervision. Regarding shipyard performance and supervision of the LCS shipyards by the LCS team leaders and the Navy, a February 4, 2008, press report stated: Marinette Marine, the Wisconsin shipyard building the first Littoral Combat Ship, never received proper certification to manage the project, which has suffered severe cost growth and schedule delays, according to an internal naval audit obtained by sister publication Inside the Pentagon [ITP]. The interim report is the most damning account yet of the LCS program’s failure to use earned value management (EVM). Pentagon officials and contractors are supposed to use the process to manage the cost, schedule and performance of acquisition efforts. The idea is to coordinate key project goals and objectively measure progress. In prepared testimony for his Senate confirmation hearing last October, Pentagon acquisition executive John Young noted that EVM was a “serious deficiency” in the LCS program. The audit reveals how this deficiency has undermined work on the Freedom (LCS-1), which Marinette Marine is building for Lockheed Martin. The review, which began a year ago, is still ongoing. However, ITP obtained a redacted copy of the Jan. 7 interim report, originally stamped “for official use only,” through the Freedom of Information Act.... The review reveals Marinette Marine’s poor management and faults the Navy, the Defense Contract Management Agency (DCMA) and Lockheed for failing to notice and fix the problem. The press report also states: Robert Herre, the president and general manager of Manitowoc Marine Group, which operates the shipyard, told ITP in an interview that Marinette Marine never worked on a project before that required the robust EVM needed for the Freedom contract. The management software that the shipyard acquired several years ago was not up to the task. Marinette Marine tried to adapt for the Freedom project by using a manual system, too, Herre said, but it became “more of a cumbersome process than first thought.” Lockheed spokesman Craig Quigley blamed “cost and schedule baseline disconnects” on the Navy for making big changes to the Freedom without agreeing, until last November, to rebaseline both the program’s cost and schedule. Previously only the schedule had been rebaselined, he said. Lockheed’s team has maintained an EVM system baseline on the program and accurately reported monthly variances, he said. 27 (...continued) CRS-18 “Not having the cost and schedule baseline in synchronization prohibits accurate system predictions, but that was accounted for via adjunct reports,” he added. The report says DCMA and Naval Sea Systems Command did not provide sufficient oversight to ensure proper management of the contract; the Navy’s Gulf Coast-based shipbuilding office and industry did not effectively review the EVM, or lack thereof; and the program office and the shipyard “placed limited emphasis” on the implementation of EVM for the contract. DCMA initially granted a “conditional approval” for Marinette Marine’s EVM system in April 2006, the report says. The conditional nod was based on a Navy-led EVM system review conducted the year before. However, Pentagon policy does not allow for a “conditional approval” of a contractor’s EVM system. DCMA only recognized its error 10 months later, in February 2007, according to the report. The agency then alerted the program office, Lockheed and Marinette Marine that the “conditional approval” had been inappropriate. Now all agree Marinette Marine lacks a DCMA-validated EVM system, a problem that must be fixed. The report says Marinette Marine’s EVM system did not provide valid and reliable cost, schedule, and technical performance data to support the LCS program office’s decision-making. Auditors found the shipyard was not following 24 of the Pentagon’s 32 EVM rules. DCMA failed to check whether the 32 rules were being followed. Further, the Navy and DCMA failed to perform formal surveillance to ensure the shipyard heeded the rules, the report says. And Marinette Marine failed to use EVM as an integrated program management tool. As a result, the Navy is “not receiving full value for program management services and information paid for under this contract,” the report states. The press report also states: The report describes a “significant breakdown in internal controls.” Navy decision-makers are not receiving accurate and reliable earned value data for the Freedom, the review says. The shipyard’s projected estimates-at-completion for the Freedom contract are “not supported.” Further, the program office “did not have visibility” for project work totaling approximately $51 million. The lack of oversight left the Navy’s financial interest in the ship’s construction unprotected, the review concludes.... Auditors recommended eight fixes. The report says four remain to be done, but Quigley said two remain to be done. Last November, the Navy completed a new estimate for the cost of completing the Freedom contract, conducted a schedule review and had the program develop a new baseline for the ship. Officials have also had Lockheed start work on a plan to fix the problems. Quigley said officials have reviewed, approved and monitored Lockheed’s plan. He also said the shipyard’s efforts are now being checked continuously against the 32 rules. CRS-19 In March [2008], the Navy plans to review the new baseline. And DCMA is due to conduct a review to ensure the shipyard is following the rules by year’s end, the report says. Quigley said that last step could take 18 months. Unlike Marinette Marine, Lockheed and Gibbs & Cox (another team member), have EVM certification, he said. Young’s predecessor, Kenneth Krieg, warned in a memo last summer that the Pentagon’s EVM efforts were “insufficient, especially given the number of major defense programs experiencing execution problems.”28 A July 14, 2008, press report states: The Navy’s Littoral Combat Ship program has not one, but two black eyes on earned value management because both LCS shipbuilders violated Defense Department rules for managing the cost, schedule and performance of acquisition efforts, a new audit finds. The June 12 report by the Naval Audit Service reveals that Austal, General Dynamics and the Navy all failed to apply the rules to the second Littoral Combat Ship, Independence (LCS-2). The report is stamped “for official use only.” Inside the Pentagon obtained a redacted version through the Freedom of Information Act. This finding is nearly as bad as the failure of Marinette Marine, Lockheed Martin and the Navy to apply the rules to the first LCS, Freedom (LCS-1), a debacle documented by auditors earlier this year. In that case, Marinette Marine ran afoul of more rules and also lacked the required management certification. The idea behind earned value management is to coordinate key project goals and objectively measure progress. Many Pentagon contractors and programs have failed to use the tool properly. But the failures in the LCS program are particularly well documented, providing a road map for how not to do earned value management. The latest audit — conducted from February 2007 to April 2008 — reveals Alabama-based Austal, the shipyard building LCS-2 for prime contractor General Dynamics, failed to heed 20 of the Pentagon’s 32 rules for earned value management. GD spokesman Jim DeMartini said the company had not yet reviewed the June 12 report. “However, we are aware of the issue and we are aggressively taking actions to improve the implementation and oversight of EVM in the LCS program,” he told ITP. “We are working in close cooperation with our Navy customer and have achieved a number of noteworthy accomplishments along the path to improving the implementation of EVM in the LCS program.” 28 Christopher J. Castelli, “Audit Exposes Failed Management of Troubled Littoral Warship,” Inside the Navy, February 4, 2008. CRS-20 GD intends to “continue to aggressively address these issues until they are resolved, and to execute the established processes and procedures for the duration of the LCS program,” DeMartini said.... “We found that EVM was not sufficiently implemented and overseen by any of the responsible parties on the LCS-2 ‘Independence’ detailed design and construction contract,” the report states. The audit warns the Navy’s supervisor at GD’s Bath Iron Works shipyard did not provide adequate surveillance over Austal’s EVM implementation. GD, as the prime contractor, did not effectively oversee Austal’s EVM implementation, auditors write. And the Navy’s program executive office for ships, as well as the program manager, lacked adequate visibility over the LCS contractor’s cost, schedule, and technical performance because they “placed limited emphasis on the implementation of EVM,” the report says. The report faults the Defense Contract Management Agency and Naval Sea Systems Command for insufficient oversight that failed to ensure EVM was properly implemented for LCS-2. The Defense Contract Audit Agency did not perform the required audits of Austal’s earned value management system, the report adds. “The Navy is committed to earned value management and is working proactively to ensure that it is implemented properly,” Navy spokesman Lt. Clay Doss told ITP. “We asked the Naval Audit Service to independently review how EVM was being used on the Littoral Combat Ship program in order to provide a baseline for continuous self-assessment. We are in the process of taking the corrective actions as recommended in the report.” The report’s recommendations aim to bring Austal into compliance with the 32 rules, provide better oversight and ensure required audits are conducted. The audit also critiques the work of the Navy’s LCS program management assist group (PMAG), which studied the cost growth on the first LCS and the projected costs for three more LCSs in early 2007. Though the PMAG answered all nine questions regarding cost estimates, cost growth, contractor and subcontractor arrangement, EVM, and oversight issues, the review was “not comprehensive,” the audit finds, noting the PMAG was given less than 15 working days to do its study. “Given the complexity of the ship design and construction process, use of multiple contractors, geographical dispersion of the key players, and the size of the LCS acquisition program, we believe 15 days was not sufficient time to adequately conduct in-depth analyses to fully assess the validity and accuracy of program data and decisions used to support their findings,” the report says.29 29 Christopher J. Castelli, “Audit Reveals Both LCS and Industry Teams Violated Management Rules,” Inside the Pentagon, July 10, 2008. The article was reprinted in essentially identical form, with the same headline, in the July 14, 2008, issue of sister (continued...) CRS-21 July 2007 GAO Testimony. GAO testified in July 2007 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. 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 29 (...continued) publication Inside the Navy. CRS-22 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. However, the Navy estimates that the mine 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.30 Potential Oversight Issues for Congress Cost Growth on LCS Sea Frames Potential oversight issues concerning cost growth on LCS sea frames include the following: ! 30 Are the actions taken by the Navy as part of its restructuring of the LCS program sufficient to prevent further growth in estimated LCS sea frame unit procurement costs? 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. 8-11. CRS-23 ! How much of the cost increases on LCSs 1 and 2 are attributable to Navy actions in managing the program? To prime contractor performance? To shipyard performance? To performance by supplier firms? ! 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? ! Do the estimated costs of LCSs 1 and 2 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 on LCS sea frames, where does the LCS program now stand in relation to the Nunn-McCurdy provision (10 U.S.C. §2433), 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 financing 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 an 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 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? CRS-24 ! How might the increase in LCS unit procurement costs affect the affordability and executability of the Navy’s overall shipbuilding program?31 ! What implications, if any, does the increase in LCS unit procurement costs have for estimated procurement costs of other new Navy ship classes?32 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 $29.4 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 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. Procurement Cost Cap In light of current estimated costs for building LCS-1 and LCS-2, some observers are concerned that it might not be possible to build complete follow-on LCSs for $460 million each. In addition, unlike cost caps for certain other Navy shipbuilding programs that Congress has established in recent years, the $460-million cost cap for the LCS program (Section 125 of the conference report [H.Rept. 110-477 of December 6, 2007] on H.R. 1585, the FY2008 defense authorization bill, which was enacted as H.R. 4986/P.L. 110-181 of January 28, 2008) does not include a provision allowing the $460 million figure to be increased over time in response to inflation. Other observers have argued that the LCS cost cap is written in a way so as to include costs not included in cost caps for other Navy shipbuilding programs.33 The Navy testified in February 2008 that it anticipated asking Congress at some point to amend the cost cap to permit the cap to be adjusted over time for inflation.34 31 For a discussion of the potential affordability of the Navy’s overall shipbuilding program, see CRS Report RL32665, Navy Force Structure and Shipbuilding Plans: Background and Issues for Congress, by Ronald O’Rourke. 32 On this point, CBO testified in March 2008: “The relatively simple design of the LCS and the substantial 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 Eric J. Labs, Senior Analyst, [on] Current and Projected Navy Shipbuilding Programs, before the Subcommittee on Seapower and Expeditionary Forces, Committee on Armed Services, U.S. House of Representatives, March 14, 2008, p. 24.) 33 For further discussion, see Andrea Shalal-Esa, “Navy Unhappy With LCS Bids, Wants Cost Cap Raised,” Reuters, September 9, 2008; Emelie Rutherford, “Defense Authorization Conferees Weighing Changes To LCS Cost Cap,” Defense Daily, September 22, 2008. 34 Source: transcript of spoken remarks of Allison Stiller at February 27, 2008 hearing on Navy shipbuilding before the Defense subcommittee of the House Appropriations (continued...) CRS-25 Technical Risk Seaframe. Regarding technical risk in developing the LCS seaframe, GAO reported in March 2008 tha The first ship in the program — LCS-1 — was delivered to the Navy on September 18, 2008, and is scheduled to be commissioned into service on November 8, 2008. The Navy identifies a total of 19 critical technologies across both LCS seaframe designs. Fifteen of these technologies are fully mature, and another 2 technologies are approaching maturity. Two other technologies — the overhead launch and retrieval system in the Lockheed Martin design and the aluminum structure in the General Dynamics design — remain immature. The Navy has identified the watercraft launch and recovery concept as a major risk to both LCS seaframe designs. This capability is essential to complete anti-submarine warfare and mine countermeasures missions planned for LCS. According to the Navy, industry watercraft launch and recovery designs are untested and unproven. To mitigate this risk, the Navy is conducting launch and recovery modeling and simulation, model basin testing, and experimentation. The Navy is encouraging the LCS seaframe industry teams to adopt similar approaches. Final integration of watercraft to each LCS seaframe design is not expected until the third quarter of fiscal year 2009 — after the Navy has accepted delivery of the first two LCS seaframes. In addition, while the Navy has identified the aviation landing/retrieval system as a mature technology, it is concerned that this system may not be qualified for use on the Lockheed Martin seaframe and may, in fact, result in damage to aircraft. The Navy has developed a system qualification and certification plan to mitigate this risk and intends to conduct pierside testing and training of the aviation landing/retrieval system in the first quarter of fiscal year 2009.35 Antisubmarine Warfare (ASW) Module. Regarding technical risk in developing the antisubmarine warfare (ASW) module for the LCS, GAO reported in March 2008 that: As the delivery of the first anti-submarine warfare mission package approaches, the critical technologies and design both continue to mature. The program office identified 12 technologies as critical for this package, 5 of which remain immature. A production representative, deployable package will not be delivered until fiscal year 2011. The program tracks design drawings for only those portions of mission systems that require alteration to deploy from LCS, as well as those for the containers in which mission systems are stored and transported. The design was not complete at critical design review. Neither the critical technologies nor the design of this package are expected to be fully mature until after they have been demonstrated as prototypes aboard the second 34 (...continued) Committee. 35 Government Accountability Office, Defense Acquisitions[:] Assessments of Selected Weapon Programs, GAO-08-467SP, March 2008, p. 118. CRS-26 LCS ship. The program office does not currently track critical process control data or use other production metrics.36 Mine Countermeasures (MCM) Module. Regarding technical risk in developing the mine countermeasures (MCM) module for the LCS, GAO reported in March 2008 that: Technologies used in the MCM package are all mature or approaching maturity. However, delays in testing some airborne systems from the MH-60S helicopter — due to both integration challenges and competing fleet demands for the MH-60S — may delay the fielding of some MCM systems to later packages. Some systems in the MCM package were initially developed for fielding on other ships, and the Navy is redesigning them to accommodate launch and recovery systems planned for LCS. The MCM package design is not yet stable; at the design readiness review, only 47 percent of design drawings were releasable. The program does not track production metrics and is relying on test results using ships other than LCS to inform full-rate production decisions.37 Surface Warfare (SuW) Module. Regarding technical risk in developing the surface warfare (SuW) module for the LCS, GAO reported in March 2008 that: The program office identified four critical technologies for the SuW mission package, three of which are mature. A production representative, deployable package will not be delivered until fiscal year 2011. The non-line-of-sight missile system is not mature and the program relies on the Army to develop that system. Design of the SuW mission package is tracked in a unique manner, as many of the technologies are complete systems in themselves. The program office tracks only the changes to those systems needed to interface and deploy with LCS. Design completion of the SuW mission package has been delayed due to the immaturity of the missile system and funding issues for the 30 mm gun. The program office does not currently track critical process control data or other production metrics.38 Acquisition Strategy for Follow-On Ships in Program Potential oversight questions for Congress regarding the Navy’s acquisition strategy for the follow-on ships in the LCS program include the following: ! Is it now the Navy’s intention — as suggested in April and August 2008 press reports — to build both LCS designs in significant quantities, and consequently to shift the purpose of the operational evaluation to one of finding problems in each design that need to be fixed? If so, could the Navy have made this shift in the acquisition strategy clearer in its prepared statements for the March 14 or April 8, 2008, House and Senate subcommittee hearings that reviewed 36 Ibid, p. 119. 37 Ibid, p. 121. 38 Ibid, p. 123. CRS-27 Navy shipbuilding programs?39 What are the comparative costs and benefits of procuring a single design versus procuring both designs in FY2010 and beyond? ! Is it still the Navy’s plan to shift to a common combat system for all LCSs? 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? ! Given the shifts that have now occurred in the announced acquisition strategy for the follow-on ships in the LCS program, why should Congress have confidence that the acquisition strategy for these ships will not shift again at some point? How might such shifts in the announced LCS acquisition strategy affect Congress’s ability to evaluate and conduct oversight of the LCS program? Coordination of Sea Frames and Mission Packages On the issue of coordination of schedules for delivering LCS sea frames and LCS mission packages, an October 2007 GAO report stated: The Navy has made progress developing individual mine countermeasures systems and the Littoral Combat Ship.... However, significant challenges remain to fielding new capabilities. • Operational testing plans for four systems in limited production will not provide a complete understanding of how the systems will perform when operated from the Littoral Combat Ship. Other ships will be used in testing to inform full-rate production decisions on the individual systems. While other ships may serve as platforms for the anti-mine systems, the Littoral Combat Ship is their primary platform, and it will have different launch, recovery, and handling systems. In addition, Navy plans call for testing these systems in smooth, uncluttered environments, although operating environments are expected to be less favorable. • The first two Littoral Combat Ships have encountered design and production challenges. Costs are expected to more than double from initial estimates, and the Navy anticipates lead ship delivery nearly 18 months later than first planned. This may slow the planned transition from current mine countermeasures platforms. 39 Statement of Vice Admiral Barry McCullough, Deputy Chief of Naval Operations For Integration of Capabilities and Resources, and Ms. Allison Stiller, Deputy Assistant Secretary of the Navy (Ship Programs), before the Subcommittee on Seapower and Expeditionary Forces of the House Armed Services Committee on Navy Force Structure and Shipbuilding, March 14, 2008; and Statement of Vice Admiral Barry McCullough, Deputy Chief of Naval Operations for Integration of Capabilities and Resources, and Ms. Allison Stiller, Deputy Assistant Secretary of the Navy (Ship Programs) before the Subcommittee on Seapower of the Senate Armed Services Committee on Navy Force Structure and Shipbuilding, April 8, 2008. CRS-28 • The Navy has reduced its investments in intelligence preparation of the environment capabilities — including the capability to locate and map minefield boundaries — even though improvements in this area could reduce mine countermeasures mission timelines by 30 to 75 percent. These capabilities are especially important for the Littoral Combat Ship, as it must stand clear of suspected minefields. The Navy has refined its concepts of operation for the Littoral Combat Ship, increasing awareness of operational needs. However, the Navy has not yet reconciled these concepts with the ship’s physical constraints, and the trade-offs involved ultimately will determine the ship’s capabilities. For example, operation of mine countermeasures systems is currently expected to exceed the personnel allowances of the ship, which could affect the ship’s ability to execute this mission. In addition, the Littoral Combat Ship will have only limited capability to conduct corrective maintenance aboard. However, because the Navy recently reduced the numbers of certain mission systems from two to one per ship, operational availability for these systems may decrease below current projections. Moreover, the mine countermeasures mission package currently exceeds its weight limitation, which may require the Navy to accept a reduction in speed and endurance capabilities planned for the Littoral Combat Ship. It is important that the Navy assess these uncertainties and determine whether it can produce the needed mine countermeasures capabilities from the assets it is likely to have and the concepts of operation it can likely execute.40 See also the earlier section on technical risk in the LCS program. Options for Congress A primary issue for Congress in 2008 was whether to approve, reject, or modify the Navy’s restructured LCS program as presented in the proposed FY2009 budget. List of Options Potential options for Congress included but are not limited to the following: 40 ! FY2009 budget request. Congress could approve, reject, or modify the Navy’s FY2009 budget request for the LCS program in areas such as research and development funding, sea frame procurement, or mission package procurement. ! Acquisition Strategy for Follow-On Ships in Program. Congress could establish terms and conditions for the acquisition strategy for the follow-on ships in the LCS program. Government Accountability Office, Defense Acquisitions[:] Overcoming Challenges Key to Capitalizing on Mine Countermeasures Capabilities, GAO-08-13, October 2007, summary page. CRS-29 ! Reporting requirements. Congress could impose new reporting requirements for the program so as to facilitate congressional oversight on issues such as cost growth. Potential for Common Hulls In General. Some observers, including some Members of Congress, have expressed interest in the idea of using common hulls for Navy and Coast Guard ships, so as to improve economies of scale in the construction of these ships and thereby reduce their procurement costs. In earlier years, this interest focused on using a common hull for the LCS and the Offshore Patrol Cutter (OPC), a cutter displacing roughly 3,000 tons that is to be procured under the Coast Guard’s Deepwater acquisition program.41 More recently, this interest has focused on using a common hull for the LCS and the National Security Cutter (NSC), a cutter displacing about 4,300 tons that is also being acquired under the Deepwater program. Reported Proposal to Build Variant of NSC for Navy. In January 2008, it was reported that Northrop Grumman, the builder of the NSC, had submitted an unsolicited proposal to the Navy to build a version of the NSC for the Navy as a complement to, rather than a replacement for, the LCS. January 14, 2008, Press Report. A press report dated January 14, 2008, stated: The U.S. Navy is stumbling to build the ship it wants — the Littoral Combat Ship (LCS) — so shipbuilder Northrop Grumman is urging the service to turn to a ship it can get sooner and cheaper: a patrol frigate version of the Coast Guard’s National Security Cutter (NSC). “We have listened to what the Navy has said — to be more efficient, be innovative and produce affordable and capable ships,” said Phil Teel, president of Northrop’s Ship Systems sector. “The patrol frigate is a response to that, and to the Navy’s new National Maritime Strategy.” Northrop’s analysts have studied remarks and themes oft repeated by senior Navy leaders and concluded a de facto requirement exists for a frigate-size ship capable of handling a range of low- and mid-intensity missions. Those missions, said Eric Womble, head of Ship Systems’ Advanced Capabilities Group, are detailed in the Navy’s new Maritime Strategy and include forward presence, deterrence, sea control, maritime security, humanitarian assistance and disaster response. “You don’t want a high-end Aegis ship to handle those missions,” Womble said, “you want something cheaper and smaller.” The National Security Cutter (NSC) as configured for the Coast Guard could easily handle those roles, Womble said. 41 For more on the Deepwater program, see CRS Report RL33753, Coast Guard Deepwater Program: Background, Oversight Issues, and Options for Congress, by Ronald O’Rourke. CRS-30 The first NSC, the Bertholf, successfully carried out its initial trials in early December and will be commissioned this year by the Coast Guard. Womble said a Navy version would avoid the first-of-class issues that have plagued numerous Navy programs, including both designs being built for the LCS competition. Northrop in late December began briefing select Navy leaders on its unsolicited proposal. The company is taking pains to avoid presenting the ship as an LCS alternative, instead calling it an LCS “complement,” which is being built under a competition between Lockheed Martin and General Dynamics. Key features of Northrop’s concept are: — The ship is based on a proven design already under construction. — The NSC’s weapons, sensors and systems already have a high degree of commonality with Navy systems, increasing affordability. — While the NSC is 15 knots slower than the 45-knot LCS, the cutter can stay at sea up to two months, much longer than the LCS. The report also stated: Northrop is claiming it can deliver the first ship at the end of 2012 at an average cost of less than $400 million per ship, exclusive of government-furnished equipment, in fiscal 2007 dollars. That’s close to the $403 million contract cost of the third NSC, which incorporates all current design upgrades. A major element of Northrop’s proposal, Womble said, is that the Navy should make no changes to the current Block 0 design. “That’s the only way we can deliver the ship at this price.” The design, however, has plenty of room for upgrades, Womble claimed, and Northrop is proposing future upgrades be handled in groups, or blocks, of ships, rather than modifying individual ones. Those upgrades could include non-line-of-sight missiles, SeaRAM missile launchers and more capabilities to handle unmanned systems. The design even has room for an LCS-like reconfigurable mission area under the flight deck, he claimed. Northrop admits the ships are deficient in one significant Navy requirement: full compatibility with the Naval Vessel Rules (NVR), essentially building codes developed by the Naval Sea Systems Command and the American Bureau of Shipping. The belated application of the NVR to both LCS designs was a major factor in the cost growth on those ships. Most of the NSC design already is NVR-compatible, Womble said, but upgrading the entire design to NVR standards would involve a fundamental redesign and eliminate the proposal’s cost and construction time attributes. “We’d need a waiver [from the NVR rules] to make this proposal work,” he said. The report also stated: CRS-31 Navy Response: ‘No Requirement’ The official response from the Navy to Northrop’s proposal so far is unenthusiastic. “There is currently no requirement for such a combatant,” said Lt. Clay Doss, a Navy spokesman at the Pentagon. The Navy’s other surface ship programs, he said, “address specific requirements.” Doss did note that “the Navy and Coast Guard have considered a common platform for the LCS and the Coast Guard’s National Security Cutter. However, due to the unique mission requirements of each service, a common hull is not a likely course of action.” Problems with the LCS have caused some observers to predict the program’s demise, but the Navy “is completely committed to the LCS program,” Doss said. “We need 55 Littoral Combat Ships sooner rather than later, and we need them now to fulfill critical, urgent war-fighting gaps.” Northrop however, is not alone in proposing the NSC as an LCS alternative. Coast Guard Capt. James Howe, writing in the current issue of the U.S. Naval Institute’s Proceedings magazine, is urging Navy leaders to consider the NSC. “I think the Navy should look at it,” he said Jan. 10. “Northrop is building a naval combatant here. It has standard U.S. Navy weapon systems as part of its packages. Its communications are interoperable. It can handle underway replenishment. If there’s a possibility it could be a cost saver or a good deal for the Navy, it needs to be explored.” Howe, who said he was unaware of Northrop’s patrol frigate proposal, agreed the NSC is capable of further enhancements. “There’s a lot of space on that ship,” he said. ‘Potential Game-changer’ Northrop likely is facing an uphill battle with its patrol frigate, as the Navy culturally prefers to dictate requirements based on its own analysis. But the Navy is having trouble defending the affordability of its shipbuilding plan to Congress and bringing programs in on budget. One congressional source noted the service “can’t admit their plan won’t work.” An unsolicited proposal, the source said, “opens the way for someone else to come up with a potential game-changer.” Northrop’s plan, the source said, may be an unexpected opportunity. “Northrop is listening to the people who have been criticizing the Navy’s shipbuilding plan,” the source said. “They’ve gotten a sense that maybe the Navy is looking for a solution, and the Navy can’t produce a solution because it might be too embarrassing.” One more aspect that could be at work in the Northrop proposal: “I think there’s something coy going on here,” the source said. “They may be promoting CRS-32 this as an LCS complement, but their idea might be part of a strategic plan to replace the LCS.”42 January 17, 2008, Press Report. A press report dated January 17, 2008, stated: Northrop Grumman Corp said on Wednesday [January 16, 2008, that] a proposal to turn its 418-foot Coast Guard cutter into a new class of Navy frigates is sparking some interest among U.S. Navy officials and lawmakers. Northrop is offering the Navy a fixed price for the new ship of under $400 million and could deliver the first one as early as 2012 to help out with maritime security, humanitarian aid and disaster response, among other things, said Eric Womble, vice president of Northrop Grumman Ship Systems. So far, the officials briefed have found Northrop’s offer “intriguing,” Womble told Reuters in an interview. “They like the fact that we’re putting an option on the table. No one has told us, ‘Go away, don’t come back, we don’t want to hear this’,” Womble said. At the same time, the Navy says it remains committed to another class of smaller, more agile ships — the Littoral Combat Ships (LCS) being built by Lockheed Martin Corp (LMT.N: Quote, Profile, Research) and General Dynamics Corp (GD.N: Quote, Profile, Research) — amid huge cost overruns. “There currently is no requirement for a frigate,” Navy spokesman Lt. Clay Doss said. He said the Navy and Coast Guard had discussed a common hull during the initial stage of the LCS competition, but agreed that was “not a likely course of action due to the unique mission capabilities.” For now, he said the Navy was proceeding as quickly as it could with the 55-ship LCS program as well as design work on a new DDG-1000 destroyer, and a planned cruiser, CG-X.... The report also stated: Virginia-based defense consultant Jim McAleese said the fixed-price offer could be good news for the Navy, which has typically borne the risk of cost-based shipbuilding contracts. “That is a potential catalyst that could have a huge impact on the way the Navy buys small- and mid-sized surface combatants,” McAleese said. Northrop says its new Coast Guard cutter also experienced some cost growth, but says that was mainly due to requirements added after the Sept. 11, 2001, hijacking attacks. The first of the new ships is due to be delivered to the Coast Guard in March, followed by one ship annually over the next few years. 42 Christopher P. Cavas, “Northrop Offers NSC-Based Vessel To Fill LCS Delays,” Defense News, January 14, 2008. CRS-33 Northrop said it could offer the Navy a fixed price on the frigate because design work on the ships is already largely completed. Its price excludes government-furnished equipment that would still have to be put on board. “We’re not advocating an LCS replacement,” said spokesman Randy Belote. “But after listening to the Navy leadership and studying the new maritime strategy, we think we can get hulls and capabilities into the water at a much faster pace.” Womble said Northrop analysts and an outside consultant studied the Navy’s needs and concluded the Navy could use another ship that can operate in shallow water, be forward deployed, has the range and endurance to operate independently, and can work with U.S. allies, if needed. The press report also stated: The proposed ship can be deployed for 60 days without new supplies, has a range of 12,000 nautical miles, and can travel at 29 knots, fast enough to keep up with other warships. That compares to 20 days and a range of 3,500 miles for LCS. Northrop began sharing a PowerPoint presentation about the proposal with Navy officials and lawmakers at the end of December, and has already met with several senior officials, including Chief of Naval Operations Adm. Gary Roughead. It could deliver the first frigate by 2012, if the Navy was able to add $75 million for long lead procurement items into the fiscal 2009 budget proposal to be sent to Congress next month, Northrop said. The frigate is about 75 percent compliant with special requirements that apply only to U.S. Navy ships. Northrop said it believed it could qualify for waivers on the remaining 25 percent because similar waivers were granted in the past.43 Legislative Activity For FY2009 Table 3 summarizes Congressional action on the Navy’s FY2009 funding request for the LCS program. 43 Andrea Shalal-Esa, “Northrop Offers US Navy New Ship For Fixed Price,” Reuters, January 17, 2008. CRS-34 Table 3. Congressional Action on FY2009 Funding Request (millions of dollars; figures rounded to nearest tenth of a million) Budget accounta Request Authorization HASC SASC Appropriation Comp.a HAC/Db SAC/Dc Comp.a RDT&EN 371.0 371.0 371.0 371.0 n/a n/a 369.3 SCN 920.0 840.0 797.0 920.0 n/a 1090.0 1020.0 APN 55.3 55.3 55.3 55.3 n/a n/a 50.3 WPN 2.8 2.8 2.8 2.8 n/a n/a 2.8 OPN 131.2 81.2 131.2 106.2 n/a n/a 73.9 Sources: FY2009 Navy budget submission, committee reports on FY2009 defense authorization bills, joint explanatory statement and associated funding tables on compromise version of FY2009 defense authorization bill, press releases on the HAC/D and SAC/D markups of the FY2009 defense appropriation bills, and explanatory statement on compromise version of FY2009 defense appropriation bill. Notes: HASC is House Armed Services Committee; SASC is Senate Armed Services Committee, HAC/D is Defense subcommittee of House Appropriations Committee; SAC/D is Defense subcommittee of Senate Appropriations Committee; Comp. is compromise version of bill. n/a = not available. a. In lieu of conference reports on the FY20009 defense authorization and appropriation bills, there were compromise versions of the two bills, each accompanied by an explanatory statement intended to serve the same general function as a conference report. b A House committee report was not filed. A July 30, 2008, press release from Representative John Murtha, chairman of the Defense subcommittee of the HAC, summarized the subcommittee’s markup that day of the FY2009 defense appropriation bill. The press release did not mention the LCS program. c. A Senate committee report was not filed. On September 10, 2008, the Senate Appropriations Committee issued a press release summarizing the markup that day by the committee’s Defense subcommittee of the FY2009 defense appropriations bill. The press release stated, in its section on procurement funding for shipbuilding, that the subcommittee “Adds $170 million for the Littoral Combat Ship (LCS).” FY2009 Defense Authorization Bill (H.R. 5658/S. 3001) House. Section 123 of H.R. 5658 as reported by the House Armed Services Committee would amend the cost cap on the LCS program, which was previously amended by Section 125 of the FY2008 defense authorization act (H.R. 4986/P.L. 110-181 of January 28, 2008). As described by the committee, Section 123: would amend section 124 of the National Defense Authorization Act for Fiscal Year 2006 (Public Law 109-163) as amended by section 125 of the John Warner National Defense Authorization Act for Fiscal Year 2007 (Public Law 109-364) by allowing costs associated with economic inflation to exceed the cost cap of $460.0 million per vessel, provided that the increase for economic inflation does not exceed $10.0 million per vessel. The provision would also allow costs associated with the introduction of new technology, not fielded on the first two ships of the class, provided that the insertion of new technology would reduce CRS-35 life-cycle cost of the vessel, or the new technology is required to meet an emergent warfighting threat. (Page 141) Section 123 states: SEC. 123. LITTORAL COMBAT SHIP (LCS) PROGRAM. Section 124 of the National Defense Authorization Act for Fiscal Year 2006 (Public Law 109-163; 119 Stat. 3157), as amended by section 125 of the National Defense Authorization Act for Fiscal Year 2008 (Public Law 110-181; 122 Stat. 29), is amended in subsection (d) by adding at the end the following: ‘(3) The amounts of increases or decreases in costs attributable to economic inflation after September 30, 2007. However, in the case of a vessel the procurement of which is funded from amounts appropriated pursuant to an authorization of appropriations or otherwise made available for fiscal year 2008 or 2009, the amount of such an increase for such a vessel may not exceed $10,000,000. ‘(4) The amounts of increases or decreases in costs of that vessel that are attributable to insertion of new technology into that vessel, as compared to the technology built into the first and second vessels, respectively, of the Littoral Combat Ship (LCS) class of vessels. However, the Secretary of the Navy may make an adjustment under this paragraph only if — ‘(A) the Secretary of the Navy determines, and certifies to the congressional defense committees, that insertion of the new technology would lower the life-cycle cost of the vessel; or ‘(B) (i) the Secretary of the Navy determines, and certifies to the congressional defense committees, that insertion of the new technology is required to meet an emerging threat; and ‘(ii) the Secretary of Defense certifies to those committees that such threat poses grave harm to national security.’ The House Armed Services Committee, in its report (H.Rept. 110-652 of May 16, 2008) on H.R. 5658, approved the Navy’s request for procurement of two LCSs in FY2009 but reduced the Navy’s FY2009 procurement funding request for the LCS program by $80 million. (Page 79, line 013)44 The report recommended reducing the Navy’s FY2009 funding request for LCS mission modules by $50 million. (Page 87, line 029) The report states that “The committee disagrees with the submitted Future Years Defense Plan and budget request” for several reasons, including “the failure to deliver a coherent strategy for Littoral Combat Ship acquisition.” (Pages 82 and 83) The report also states that “The committee expects the budget submission for fiscal 44 The report’s table on page 79 states that the committee recommended procurement of one LCS rather than two in FY2009, but this appears to be a typo, as the report does not elsewhere mention reducing the procurement request from two ships to one, and the committee’s summary of its markup states that it approved procurement of two LCSs. CRS-36 year 2010 to contain” several things, including “a comprehensive decision on the acquisition plan for surface combatants including the plan for the Littoral Combat Ship class.” (Page 83) The report does not discuss the recommended $80-million reduction in ship procurement funding, but the committee’s summary of its markup states that “reduction of $80 million [is] due to the availability of material previously procured for construction of ships that were subsequently canceled by the Navy.”45 The committee’s report does not discuss the recommended $50-million reduction in procurement funding for LCS mission modules. Senate. The Senate Armed Services Committee, in its report (S.Rept. 110-335 of May 12, 2008) on S. 3001, approved the Navy’s request for procurement of two LCSs in FY2009 but reduced the Navy’s FY2009 procurement funding request for the LCS program by $123 million, which the repot states would “Fully fund two ships to [the LCS program] cost cap in FY[20]09, reflecting government furnished material (GFM) from cancelled ships.”. (Page 58, line 013) Regarding funding for ship procurement, the report stated: 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 late 2008. The LCS-1 contractor team had barely started on their second ship (LCS-3) when the program ran into major cost problems earlier last 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. The Navy terminated the contract for LCS-3 for the convenience of the government. As a result of that termination, the government will take delivery of some sizeable inventory of equipment and material for the cancelled LCS-3. The second contractor team had a contract to build two LCS vessels of another design (LCS-2 and LCS-4). The Navy awarded this contract almost a year later, so LCS-2 was roughly 1 year behind the LCS-1. The Navy went ahead with activities leading to the start of construction on LCS-4, despite internal warnings that the second contractor would face similar cost and schedule problems as those faced by the first contractor. Late last year, the same poor performance and fixed priced negotiation scenario also played out on the LCS-2 and LCS-4. This led the Navy to also cancel the LCS-4, again with the result that the government will take delivery of some sizeable inventory of equipment and material for the cancelled LCS-4. Section 125 of the National Defense Authorization Act for Fiscal Year 2008 (Public Law 110-181) places a cost ceiling on LCS contracts of $460.0 million per ship, a dollar value provided by the Navy. Congress also authorized and appropriated one LCS in fiscal year 2008. The Navy has not awarded the one LCS approved in the fiscal year 2008 budget. The Navy’s acquisition strategy, which has been extremely fluid, is to award this ship, plus the two ships from the fiscal year 2009 program later this 45 House Armed Services Committee summary of H.R. 5658, page 13. CRS-37 calendar year. The Navy’s intent is that the award be a limited competition, with each yard assured of being awarded at least one ship. The total funding provided in fiscal year 2007 and prior budgets for the six previously authorized Littoral Combat Ships totals $1,639.0 million. The Navy has determined that $1,162.0 million of these funds is required for construction, test, trials, outfitting, and post-delivery of LCS-1 and LCS-2. The remaining $477.0 million funding is allocated against the terminated ships, LCS-3 and LCS4, including material purchased for those ships prior to termination. Within the remaining funding allocated against the terminated ships, sufficient funding should also be available for LCS class design to ensure that the follow-on ships commence production with “clean,” producible drawings and planning products. Presuming the Navy maintains stable design requirements, the availability of clean drawings and planning products should ensure healthy learning curve performance in production. This learning curve performance, in conjunction with material purchased in prior years (from the terminated ships), should more than offset the effects of one year’s escalation for ships purchased in 2009. The fiscal year 2008 budget has resources sufficient to award one LCS within the cost cap to either shipyard, when taking into account the inventory of equipment and material available from that shipyard’s cancelled ship. The Navy would provide this equipment and material to the shipyard that wins the fiscal year 2008 ship as government furnished material (GFM). The value of this GFM would count against the cost cap. Under their plan, the Navy would also award at least one of the two ships in the fiscal year 2009 budget to the other shipyard. The Navy would likewise provide the GFM from that shipyard’s cancelled ship to offset the cost of that one ship. Similarly, the value of this GFM would count against the cost cap on this ship as well. The fiscal year 2009 budget request, however, would fund both ships to the full cost cap and not take the value of this GFM for the second cancelled ship into account. This means that the budget request of $920.0 million includes more funding than can be placed on contract without violating the cost cap, unless the Navy were to withhold the GFM for the second shipyard. The committee believes that the Navy should apply the GFM to both contractors’ vessels as soon as a second ship is purchased from either yard. Therefore, the committee recommends a reduction of $123.0 million to take that GFM into account. This will leave sufficient funds in the Navy’s hands to award two ships in fiscal year 2009, with both ships fully funded to the congressional cost cap of $460.0 million. (Pages 77-78) Regarding LCS mission packages, the report states: The Navy has embarked on a program to develop modular counter-mine, anti-surface, and anti-submarine warfare systems, referred to as mission packages, to be deployed on the Littoral Combat Ship (LCS). The Navy envisions fielding 60 mission packages, which Navy commanders could interchange across the 55-ship LCS class as operational requirements dictate. This total system capability of the LCS program has been identified by the Chief of Naval Operations as a top priority for operations in the littorals. The committee similarly views the capability provided by a family of LCS mission CRS-38 packages as a key component of the maritime strategy. The committee is, therefore, concerned by the delays to mission package initial operational capability, deployment, and full operational capability caused by delays to the LCS construction program. The Navy has designed the LCS mission packages with modularity and with open architecture. Having done this, the Navy should be able to deploy this capability on other ship classes. Such an expanded concept of operations would provide opportunities to employ mission packages more rapidly, and against threats and in operational scenarios perhaps not envisioned today. Therefore, the committee directs the Secretary of the Navy to evaluate alternatives for employing LCS mission packages on other ship classes of the battle force, and to provide a report on his findings to the congressional defense committees with submission of the 2010 budget request. The report shall outline the feasibility, cost, and impacts associated with integrating mine countermeasures and anti-submarine mission packages on other surface combatant and amphibious force ship classes, and provide an assessment of the operational utility afforded by being able to deploy mission packages across the broader battle force. (Page 126) Compromise. In lieu of a conference report, there was compromise version of S. 3001 that was accompanied by a joint explanatory statement. Section 4 of S. 3001 states that the joint explanatory statement “shall have the same effect with respect to the implementation of this Act as if it were a joint explanatory statement of a committee of conference.” Section 122 of S. 3001 amends the unit procurement cost cap on LCS sea frames so as to delay the implementation of the cost cap to ships procured in FY2010 and subsequent years. (The cost cap previously was to be applied to ships procured in FY2008 and subsequent years.) The joint explanatory statement for S. 3001 states: The agreement would authorize the budget request of $920.0 million for two LCS vessels. Elsewhere in the agreement, we recommend a provision that would delay implementation of the cost cap for the LCS program until fiscal year 2010. We note that the Navy has taken delivery of the first ship of this class and anticipates taking delivery of the second by the end of the calendar year. While these are significant milestones, we remain concerned that the Navy has not taken sufficient actions to control costs for follow-on vessels. Moreover, in repeated testimony before the Committees on Armed Services of the Senate and the House of Representatives, we have been told that a primary benefit of utilizing mid-tier shipyards is that such yards can easily balance commercial and government workload to ensure that the Navy does not have to pay overhead costs to maintain capability during periods of limited government funding. Nevertheless, the Navy has requested, for the second year in a row, an adjustment to the cost cap in order to preserve industrial capability because the Navy is unable to purchase a ship at or below its budgetary estimate and lacks a coherent acquisition strategy for the program. We strongly encourage the Navy to take steps to procure follow-on vessels with required warfighting capability, while prioritizing the aggressive management of cost and the most efficient utilization of the industrial base. Likewise, we direct the Secretary to develop CRS-39 and submit to the Congress a long-term acquisition strategy for LCS vessels with the submission of the fiscal year 2010 budget request. The compromise recommended reducing the OPN request for the LCS program to $106.15 million — a reduction of $25.091 million from the request. FY2009 Defense Appropriations Bill (H.R. 2638) House. A House committee report was not filed. A July 30, 2008, press release from Representative John Murtha, chairman of the Defense subcommittee of the HAC, summarized the subcommittee’s markup that day of the FY2009 defense appropriations bill.46 The press release did not mention the LCS program. Senate. A Senate committee report was not filed. On September 10, 2008, the Senate Appropriations Committee issued a press release summarizing the markup that day by the committee’s Defense subcommittee of the FY2009 defense appropriations bill. The press release stated, in its section on procurement funding for shipbuilding, that the subcommittee “adds $170 million for the Littoral Combat Ship (LCS).”47 Compromise. In lieu of a conference report, there was compromise version of the FY2009 defense appropriations bill that was incorporated as Division C of H.R. 2638. (H.R. 2638, the FY2009 Department of Homeland Security appropriations bill, was amended to become a consolidated appropriations bill that included, among other things, the FY2009 defense appropriations bill.) The compromise version of H.R. 2638 was accompanied by an explanatory statement. Section 4 of H.R. 2638 states that the explanatory statement “shall have the same effect with respect to the allocation of funds and implementation of this Act as if it were a joint explanatory statement of a committee of conference.” The explanatory statement provides $1,020 million for procurement of two LCSs in FY2009. Section 8042 of the bill rescinds $337 million in FY2008 shipbuilding funds for the LCS program, effectively canceling the LCS procured in FY2008. The explanatory statement states: The bill includes $1,020,000,000 for [procurement of] two LCS seaframes [in FY2009] and a rescission of $337,000,000 in fiscal year 2008 LCS [shipbuilding] funding. Additionally, funds and material from fiscal year 2006 can be used to supplement the fiscal year 2009 LCS program. Due to industrial base concerns, the Navy is directed to make contract awards for the two fiscal year 2009 LCS seaframes as soon as practicable. 46 September 10, 2008, press release from Senate Appropriations Committee entitled “Senate Defense Appropriations Subcommittee Approves Fiscal Year 2009 Defense Appropriations Bill.” 47 Source: September 10, 2008, press release from Senate Appropriations Committee entitled “Senate Defense Appropriations Subcommittee Approves Fiscal Year 2009 Defense Appropriations Bill,” p. 2. CRS-40 The explanatory statement provides $369.3 million in research and development funding for the LCS program — a reduction of $1.7 million from the request. The net reduction of $1.7 million consists of a reduction of $12 million for “Combat System C4I Development,” an increase of $2.0 million for “Autonomous Acoustic Array Advanced Tubular Solid Oxide Fuel Cell,” an increase of $4.5 million for “LCS Common Mission Package Training Environment,” and an increase of $3.8 million for “Alternative Use of Mine Warfare Modules.” The explanatory statement provides $50.3 million in Aircraft Procurement, Navy (APN) funding for the LCS program — a reduction of $5 million from the request. The explanatory statement provides $73.902 million in Other Procurement, Navy (OPN) funding for the LCS program — a reduction of $57.339 million from the request. The reduction consists of a reduction of $9.291 million for “Mission Package Integrator,” and a reduction of $48.048 million for “Delay One Mission Module.”