oversight

Multiyear Procurement Authority for the Virginia Class Submarine Program

Published by the Government Accountability Office on 2003-06-23.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

United States General Accounting Office
Washington, DC 20548

          June 23, 2003

          The Honorable Jerry Lewis
          Chairman
          Subcommittee on Defense
          Committee on Appropriations
          House of Representatives

          Subject: Multiyear Procurement Authority for the Virginia Class Submarine
          Program

          Dear Mr. Chairman:

          On May 29, 2003 we briefed your staff on the fiscal year 2004 budget request for the
          Virginia class submarine program. This letter summarizes the information we
          provided in that briefing on the advantages that multiyear procurement authority
          offers the Virginia class submarine program as well as the risks of actually realizing
          these advantages.

          Background

          The Virginia class submarine program is currently the Navy’s largest shipbuilding
          program. The attack submarine will replace the Los Angeles class submarines to
          provide battle space dominance across a broad spectrum of missions. The Navy
          already has four ships in various stages of construction and under contract with
          General Dynamics Electric Boat and Northrop Grumman Newport News. The lead
          ship, the SSN 774 (Virginia), will be delivered in June 2004, and the SSN 775 (Texas)
          will be delivered in 2005. The SSN 776 (Hawaii) and SSN 777 (North Carolina) are
          36 percent and 18 percent complete, respectively. Two ships will be launched from
          each yard. Each shipyard has about 50 percent of the work, with both responsible for
          certain segments of each submarine. The Navy is currently in contract negotiations
          for submarines beyond the four under contract.

          In its fiscal year 2004 budget submission, the Navy requested $2.8 billion for the
          Virginia class program. The Navy estimates that the total cost for the program will be
          $64.7 billion in base year (1995) dollars for 30 submarines. The estimated cost for the
          ship to be authorized in fiscal year 2004 is $2.15 billion. As part of its fiscal year 2004
          budget submission, the Navy requested $390 million in support of a potential
          multiyear procurement contract. If multiyear procurement authority is approved, the
          fiscal years 2005 and 2006 budget submissions will also include funding requests of
          about $390 million and $195 million respectively, to support the multiyear
          procurement contract. These funds will be used to procure components and


                                                          GAO-03-895R Virginia Class Submarine Program
materials in economic order quantities for ships authorized in future years. This
advance funding will reduce needed funds in later years.

The Navy has asked Congress for authority to enter into a multiyear procurement
                                                                                     1
contract for seven submarines to be authorized in fiscal years 2004 through 2008.
Multiyear procurement contracts enable the contractor and the Navy to realize
savings from economies of scale or manufacturing efficiencies. Programs awarding a
multiyear procurement contract are required by law to show that substantial savings
will accrue, cost estimates are realistic, funding is stable for the period covered by
the contract, and the design is stable. A program using multiyear procurement
authority must also show that the requirement for the system is stable and the
program is needed for national security. Expected savings will be eroded if costs
increase or if the design of the system changes substantially.

Advantages and Risks of Multiyear Procurement Authority for the Virginia
Class Submarine

The main advantage of multiyear procurement authority for the Virginia class
submarine is its potential to reduce the program’s future costs by $805 million ($115
million per submarine). Program documents indicate that these savings would be
derived from reduced inflation, vendor procurement efficiencies, and greater
manufacturing efficiencies. According to program officials, should Congress approve
multiyear procurement authority, the contract currently under negotiation would
transition into a multiyear procurement contract for fiscal year 2004 through 2008
ships. Program officials stated that without multiyear procurement authority, the
program’s funding would be able to support the ships to be authorized in fiscal years
2005 and 2006, but additional funding would be needed to cover the higher costs for
the ships to be authorized in fiscal years 2007 and 2008.

Several factors could offset the potential cost savings, which should also be
considered along with the Navy’s request for multiyear procurement authority.

    • Stable funding for the Virginia class submarine program may not be assured.
      The Navy stated in its justification for multiyear procurement authority that the
      program is a high priority and that the Navy is committed to funding the
      program at required levels. But, competing demands from other programs for
      acquisition funding may result in instability in the program’s funding. For
      example, according to program officials, the Navy cut $270 million in Research,
      Development, Test, and Evaluation (RDT&E) funds across fiscal years 2004
      through 2007, and an additional $40 million per ship in technology insertion
      funds across the same time period partly to help fund higher Navy priorities.
      These cuts will delay core RDT&E efforts such as: continued development of an
      information assurance solution for the sonar and combat control networks,
      correction of high priority deficiencies noted in the operational assessment of
1
 Multiyear procurement authority would allow the Navy to contract for seven ships authorized over 5
years, thus committing future budgets to support these acquisitions. Contract terms require the Navy
to pay certain charges if the contract is terminated or quantities reduced. A multiyear contract of $500
million or more for a Defense weapon system may not be awarded unless the contract is specifically
authorized by law in an appropriations act and a law other than an appropriations act, such as an
authorization act.


Page 2                                            GAO-03-895R Virginia Class Submarine Program
      the non-propulsion electronics systems, and evaluating causes and developing
      fixes for acoustic performance deficiencies. Technology insertion efforts will
      also be delayed until the later years of the current defense plan. Finally, the
      Navy recently cut $600 million from the program’s procurement account and $2
      million per year in RDT&E funds across the 2004 to 2009 defense plan due to
      Defense-wide inflation adjustments.

      The multiyear procurement strategy calls for the acquisition rate to increase to
      two ships per year for fiscal years 2007 and 2008. Should funding pressures
      continue and prevent realization of this increase, savings would be eroded.

    • To date, the program’s cost estimates have not proven realistic. According to
      program documents, the cost estimates are based on historical shipbuilding and
      submarine program experience and actual performance on the first submarines
      under construction, among other factors. Nonetheless, the Navy reported that,
      as of December 31, 2002, costs had exceeded baseline estimates by 24 percent.
      This calculation included savings from the yet-to-be-authorized multiyear. Had
      the Navy not included these savings, the cost overrun would have been 31
      percent.2 Program officials stated that they subsequently revised the baseline
      estimate in April 2003. Recent contract negotiations for the acquisition of
      additional ships raised further questions about the realism of the Navy’s cost
      estimates. According to the program officials, the contractor’s bid exceeded the
      Navy’s estimate by $1 billion. Officials reported that a tentative agreement has
      been reached that has resulted in a price within the program’s budget, but the
      Navy altered the scope of the contract to reach that price.

      This experience with the program’s cost estimates raises questions regarding the
      realism of potential savings estimates. Moreover, should costs exceed
      estimates, the program would need additional funding or would have to make
      additional tradeoffs to program scope.

    • Changes in the program’s test plan could affect stability of design. Changes to
      the ship’s design are still likely because the program is early in the acquisition
      cycle. The lead ship, which will be delivered in June 2004, will undergo only a
      pier-side review of the total ship survivability trial and will not undergo a full
      ship shock test. The second ship, the SSN 775, is expected to undergo both the
      total ship survivability trial and the full ship shock test in 2006. These tests, as
      well as sea trials, are likely to identify necessary design changes that may affect
      the components and materials already purchased as well as the cost and
      schedule of the program.

      In contrast, the Arleigh Burke class (DDG-51) destroyer program, the last
      shipbuilding program to enter into a multiyear procurement contract, was well
      into its acquisition cycle when multiyear procurement authority was approved.
2
 A 31 percent increase would have triggered the requirement in 10 U.S.C. 2433 (known as Nunn-
McCurdy), applicable to cost increases exceeding 25 percent, that the Secretary of Defense submit to
Congress a certification that (1) the program is essential to national security, (2) no alternatives exist
which will provide equal or greater military capability at less cost, (3) the new cost estimates are
reasonable, and (4) the program’s management structure is adequate to manage and control cost.



Page 3                                              GAO-03-895R Virginia Class Submarine Program
     Twenty-one ships had already been commissioned and an additional 17 were
     under construction.


Agency Comments and Our Evaluation

The Department of Defense provided oral comments on a draft of this letter. The
department agreed that several factors could impact the magnitude of savings it
reported, but did not agree with our comments concerning the realism of cost
estimates and the stability of design. The department underscored the importance of
the requirement for the attack submarine and implications for national security. It
also stated that the program is given priority by the Navy when allocating planned
resources.

Regarding cost estimates, the department said that it has accepted the Navy’s cost
estimates and that these estimates reflect cost experience on the first four ships.
However, based on recent experience, we do not believe that the Navy has
demonstrated that its cost estimates are reliable. The program is currently overrun
by over 24 percent (assuming savings if multiyear procurement authority is granted)
and initial bids for the next buy of ships were $1 billion over the Navy's estimates.

Regarding stability of design, the department emphasized that it believes the design is
stable based on completion of 99.8 percent of the drawings and low engineering
changes. It also said that improved design and modeling technologies mitigate the
risk of design changes. We recognize and strongly support the effort the Navy is
undertaking to mitigate the risk of design changes. However, it is reasonable to
expect that changes to the design will be necessary as a result of launching and
testing the first ships. Design changes could erode expected savings.

                                         ----

Scope and Methodology

In the course of our review of the fiscal year 2004 defense budget, we reviewed the
Virginia class submarine program’s request for multiyear procurement authority. At
your request, we also assessed the advantages and risks associated with the multiyear
procurement proposal. Specifically, we identified issues related to the following
criteria: substantial savings, stability of funding, realism of cost estimates, and
stability of design. To assess the Navy’s request, we reviewed the Navy’s budget
submission, the Navy’s justification document for multiyear procurement authority,
the fiscal year 2004-2009 defense plan, the Virginia class submarine Selected
Acquisition Report, and documents relating to planned test events. We also
discussed the Navy’s request with Virginia class submarine program officials.

We conducted our work from April 2003 through June 2003 in accordance with
generally accepted government auditing standards.




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We are sending copies of this letter to the Honorable John P. Murtha, Ranking
Minority Member; the Honorable Donald H. Rumsfeld, Secretary of Defense; the
Honorable Hansford T. Johnson, Acting Secretary of the Navy; and interested
congressional committees. We will make copies available to other interested parties
upon request. In addition, the letter will be available at no charge on the GAO Web
site at http://www.gao.gov.

Please contact me at (202) 512-4841 or Karen Zuckerstein at (202) 512-6785 if you or
your staff have any questions concerning this letter. Other major contributors to this
letter were Rick Hensley, J. Kristopher Keener, Julie Leetch and Adam Vodraska.

Sincerely,




Paul L. Francis
Director
Acquisition and Sourcing Management




(120264)




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