Guided Missile Frigate: Navy Has Taken Steps to Reduce Acquisition Risk, but Opportunities Exist to Improve Knowledge for Decision Makers

Published by the Government Accountability Office on 2019-08-09.

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

              United States Government Accountability Office
              Report to Congressional Committees

              GUIDED MISSILE
August 2019


              Navy Has Taken
              Steps to Reduce
              Acquisition Risk, but
              Opportunities Exist to
              Improve Knowledge
              for Decision Makers

                                                August 2019

                                                GUIDED MISSILE FRIGATE
                                                Navy Has Taken Steps to Reduce Acquisition Risk,
                                                but Opportunities Exist to Improve Knowledge for
                                                Decision Makers
Highlights of GAO-19-512, a report to
congressional committees

Why GAO Did This Study                          What GAO Found
In response to the shortcomings of the          The Navy undertook a conceptual design phase for the FFG(X) Guided Missile
Navy’s Littoral Combat Ship program             Frigate program that enabled industry to inform FFG(X) requirements, identify
and evolving threats, the Navy began            opportunities for cost savings, and mature different ship designs. The Navy also
the FFG(X) program. With FFG(X), the            streamlined the FFG(X) acquisition approach in an effort to accelerate the
Navy intends to deliver a multi-mission         timeline for delivering the ships to the fleet. As shown in the figure, however, the
ship that will provide anti-surface, anti-      Navy has requested funding for the FFG(X) lead ship even though it has yet to
submarine, and air warfare capabilities.        complete key cost estimation activites, such as an independent cost estimate, to
DOD approved FFG(X) requirements in             validate the credibility of cost expectations. Department of Defense (DOD) cost
February 2019.The Navy plans for a              estimators told GAO the timeline for completing the independent cost estimate is
competitive contract award to support           uncertain. Specifically, they stated that this estimate will not be finalized until the
final FFG(X) design and construction.
                                                Navy communicates to them which FFG(X) design is expected to receive the
The program is expected to cost over
                                                contract award. GAO-identified best practices call for requisite cost knowledge to
$20 billion for 20 ships.
                                                be available to inform resource decisions and contract awards.
The House report accompanying the
National Defense Authorization Act for          Timeline of FFG(X) Program Key Cost and Design Knowledge and Budgeting Activities
Fiscal Year 2019 included a provision
for GAO to review the FFG(X) program.
This report addresses, among other
things, the FFG(X) acquisition approach
and contracting plans.
GAO reviewed requirements,
acquisition, design, and cost-related
documentation. GAO interviewed Navy
and other defense officials, and
conducted industry site visits to each
shipyard participating in FFG(X)
conceptual design activities. GAO also
leveraged prior GAO reports and best            The Navy plans to use a fixed-price incentive contract for FFG(X) detail design
practices guides.                               and construction. This is a notable departure from prior Navy surface combatant
                                                programs that used higher-risk cost-reimbursement contracts for lead ship
What GAO Recommends                             construction. The Navy also plans to require that each ship has a minimum
GAO recommends that the Navy                    guaranty of $5 million to correct shipbuilder-responsible defects identified in the
provide Congress with the independent           18 months following ship delivery. However, Navy officials discounted the
cost estimate for FFG(X) prior to the           potential use of a warranty—another mechanism to address the correction of
detail design and construction contract         shipbuilder defects—stating that their use could negatively affect shipbuilding
award and seek ship warranty cost               cost and reduce competition for the contract award. The Navy provided no
information from industry as part of the        analysis to support these claims and has not demonstrated why the use of
request for proposal process. While             warranties is not a viable option. The Navy’s planned use of guarantees helps
DOD generally concurred with GAO’s              ensure the FFG(X) shipbuilder is responsible for correcting defects up to a point,
recommendations, it did not agree to            but guarantees generally do not provide the same level of coverage as
update its request for proposal to solicit      warranties. GAO found in March 2016 that the use of a guaranty did not help
ship warranty pricing. GAO continues to         improve cost or quality outcomes for the ships reviewed. GAO also found the use
believe this is an essential element of         of a warranty in commercial shipbuilding and certain Coast Guard ships improves
the recommendation, as discussed in             cost and quality outcomes by requiring the shipbuilders to pay to repair defects.
the report.
                                                The FFG(X) request for proposal offers the Navy an opportunity to solicit pricing
View GAO-19-512. For more information,          for a warranty to assess the cost-effectiveness of the different mechanisms to
contact Shelby S. Oakley at (202) 512-4841 or   address ship defects.

                                                ______________________________________ United States Government Accountability Office

Letter                                                                                 1
              Background                                                               4
              Navy Expects That FFG(X) Requirements Will Provide a More
                Capable Small Surface Combatant, but at Increased Cost                 8
              Streamlined Acquisition Approach Accelerates Planned FFG(X)
                Schedule, but Reduces Knowledge Available for Key Program
                Decisions                                                             16
              The Navy Has Taken Steps to Reduce Design and Technical
                Risk, but Technology Integration and Testing Will be Key to
                Meeting Program Expectations                                          27
              Contracting Plans for FFG(X) May Help Mitigate Some Risk, and
                Use of Warranties Could Potentially Further Reduce Costs              33
              Conclusions                                                             38
              Recommendations for Executive Action                                    39
              Agency Comments and Our Evaluation                                      39

Appendix I    Comments from the Department of Defense                                 43

Appendix II   GAO Contact and Staff Acknowledgments                                   45

              Table 1: Small Surface Combatant Requirements Evolution from
                      Littoral Combat Ship (LCS) to Frigate (FF) to Guided
                      Missile Frigate (FFG(X))                                        11
              Table 2: FFG(X) Acquisition Process Streamlining of Early
                      Program Activities                                              19
              Table 3: Examples of Existing Systems Planned for the FFG(X)
                      Guided Missile Frigate Used by Other Navy Ship Classes          29

              Figure 1: Knowledge Attainment in the Shipbuilding Process               5
              Figure 2: Notional Acquisition Framework for Navy Shipbuilding
                       Programs                                                        7
              Figure 3: Key Events Contributing to FFG(X) Guided Missile
                       Frigate Requirements Development                                9
              Figure 4: GAO Assessment of Average Small Surface Combatant
                       Acquisition Cost                                               12

              Page i                                     GAO-19-512 Guided Missile Frigate
Figure 5: Key Information for Industry Teams Participating in
         FFG(X) Guided Missile Frigate Conceptual Design Phase          14
Figure 6: FFG(X) Guided Missile Frigate Acquisition Schedule            17
Figure 7: Timeline of Key Cost and Design Knowledge and
         Budgeting for FFG(X) Guided Missile Frigate Program
         Detail Design and Construction                                 23
Figure 8: Department of Defense Fixed-Price Incentive Contract
         Shareline and Price Ceiling Risk                               35

Page ii                                    GAO-19-512 Guided Missile Frigate

ACAT              Acquisition category
CAPE              Office of Cost Assessment and Program Evaluation
CNO               Chief of Naval Operations
DOD               Department of Defense
EASR              Enterprise Air Surveillance Radar
FF                Frigate program
FFG(X)            Guided Missile Frigate
FRET              Frigate Requirements Evaluation Team
LCS               Littoral Combat Ship
nAILES            New Advanced Integrated Line-of-Sight Equipment System
OWLD              Obligation work limiting date
RFP               Request for proposal
TRL               Technology readiness level

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Page iii                                                GAO-19-512 Guided Missile Frigate

441 G St. N.W.
Washington, DC 20548

                       August 9, 2019

                       Congressional Committees

                       With its new Guided Missile Frigate program, FFG(X), the Navy intends to
                       develop and deliver a ship with enhanced ability to destroy enemy targets
                       and avoid, withstand, or recover from damage as compared to its current
                       active small surface combatant—the Littoral Combat Ship (LCS). 1
                       Following significant cost increases, schedule delays, and reduced
                       capabilities for LCS, the Secretary of Defense directed the Navy in 2014
                       to explore other options for a new small surface combatant. After multiple
                       studies focused on a ship with enhanced lethality and survivability
                       capabilities, the Navy established its current design and construction plan
                       for the new frigate. In February 2018, the FFG(X) program initiated a
                       conceptual design phase to help solidify program requirements and
                       mature competitive ship designs. The Navy is scheduled to formally begin
                       the FFG(X) program in February 2020 and award a detail design and
                       construction contract in July 2020 through full and open competition. The
                       Navy’s fiscal year 2020 President’s budget request supports this contract
                       award plan, with nearly $1.3 billion requested for the lead ship
                       construction and over $20 billion projected to construct 20 planned
                       frigates. 2

                       The House Armed Services Committee report to accompany the National
                       Defense Authorization Act for Fiscal Year 2019 contained a provision for
                       GAO to review the FFG(X) program. 3 This report addresses (1) the
                       requirements development process and results for FFG(X); (2) the Navy’s
                       efforts to streamline the FFG(X) acquisition approach; (3) any design and
                       technical risks for the program and how the Navy plans to address them;

                        The Navy organizes its surface combatant ships into large surface combatants, including
                       cruisers and destroyers, and small surface combatants, including frigates, LCS, mine
                       warfare ships, and patrol craft. Frigates have been identified as typically being open-
                       ocean, multi-role ships capable of performing surface, anti-submarine, and anti-air
                       warfare. The term “frigate” can be applied to ships of different sizes and capability. The
                       now retired Oliver Hazzard Perry-class frigate (FFG 7) was the last U.S. Navy frigate.
                        The $20 billion projected FFG(X) cost is in then-year dollars; we use then-year dollars
                       throughout this report, unless otherwise specified. Then-year dollars reflect the effects of
                       inflation, including escalation up to and during the year of the appropriation, and
                       throughout the period during which dollars are expended from the Treasury.
                        See H.R. Rep. No. 115-676, at 17 (2018).

                       Page 1                                                    GAO-19-512 Guided Missile Frigate
and (4) the Navy’s contracting plans for the detail design and construction

To assess the requirements development process and results for FFG(X),
we evaluated the Navy’s requirements development process beginning
with the Secretary of Defense’s direction to the Navy in 2014 to review
alternatives to LCS. This included reviewing the scope and methodology
used by the Navy across several studies to analyze capability needs, as
well as the approved requirements for LCS, the frigate (FF) program that
was planned immediately prior to FFG(X), and FFG(X). As part of our
requirements assessment, we interviewed relevant officials from the
FFG(X) program office, Chief of Naval Operations Surface Warfare
Directorate, and the Joint Chiefs of Staff to gain insight into the activities
undertaken to generate and refine FFG(X) requirements. We also
interviewed the prime contractors leading the five industry teams that
participated in the FFG(X) conceptual design phase and visited the
associated shipyards to learn about their efforts to align their ship designs
with the Navy’s requirements and identify potential cost reduction
initiatives associated with those designs. The prime contractors we met
with at their shipyards include Austal USA in Mobile, Alabama; General
Dynamics Bath Iron Works in Bath, Maine; Fincantieri Marinette Marine in
Marinette, Wisconsin; and Huntington Ingalls Industries, Ingalls
Shipbuilding in Pascagoula, Mississippi. We met with Lockheed Martin—
the fifth prime contractor—in Washington, D.C. Lockheed Martin teamed
up with the Fincantieri Marinette Marine shipyard for its conceptual design

To assess the program’s efforts to streamline its acquisition approach, we
reviewed program documentation outlining the Navy’s acquisition
approach and associated tailoring and streamlining plans for the program.
This included a review of the July 2018 FFG(X) acquisition streamlining
and tailoring memorandum and related acquisition decision memorandum
from November 2018, as well as the acquisition strategy approved in
November 2018. We also reviewed efforts to meet statutory requirements
and adhere to Department of Defense (DOD) and Navy acquisition policy.
This focused on DOD Instruction (DODI) 5000.02 acquisition guidance
and Secretary of the Navy Instruction 5000.2 guidance—both the March
2019 Secretary of the Navy Instruction (5000.2F) and the prior Secretary
of the Navy Instruction (5000.2E). We also assessed the program’s plans
compared to acquisition best practices, including those discussed in
GAO’s shipbuilding best practices work and the GAO Cost Estimating and

Page 2                                          GAO-19-512 Guided Missile Frigate
Assessment Guide. 4 We also interviewed relevant officials from the Navy
and Office of the Secretary of Defense about their efforts to develop and
support the FFG(X) acquisition approach. This included DOD and Navy
officials from the Office of Cost Assessment and Program Evaluation
(CAPE); the FFG(X) program; Naval Sea Systems Command; and the
Program Executive Office for Integrated Warfare Systems.

To assess any design and technical risks for the program and how the
Navy plans to address them, we reviewed program documentation
including the acquisition strategy and systems engineering plan—both
approved in November 2018—to understand the Navy’s plans to mitigate
technical risk. This involved assessing factors like technology maturity,
systems engineering and integration plans, ship designs, and any risks
identified by DOD or industry. As part of this analysis, we interviewed
officials from the Navy and organizations under the Office of the
Secretary of Defense. This included officials from the offices of the
Deputy Assistant Secretary of Defense for Systems Engineering; Deputy
Assistant Secretary of Defense for Development, Test, and Evaluation;
Director, Operational Test and Evaluation; Navy’s Commander
Operational Test and Evaluation Force; Naval Operations Test and
Evaluation Directorate; and Office of Naval Research. We also used the
aforementioned interviews and site visits with industry to learn about their
design and facility plans if selected by the Navy for the detail design and
construction contract award. 5

To assess the FFG(X) contracting plans, we reviewed the program’s
acquisition strategy and March 2019 draft request for proposal for the
detail design and construction award. We also interviewed Navy officials
from the FFG(X) program office and Naval Sea Systems Command to
discuss different elements of contracting plans and the basis for the
Navy’s decisions supporting contracting plans. We also assessed the
program’s plans against the results of our prior work related to contract
types used for Navy shipbuilding and the use of warranties and
guarantees in contracts.
 GAO, Best Practices: High Levels of Knowledge at Key Points Differentiate Commercial
Shipbuilding from Navy Shipbuilding, GAO-09-322 (Washington, D.C.: May 13, 2009); and
GAO Cost Estimating and Assessment Guide: Best Practices for Developing and
Managing Capital Program Costs, GAO-09-3SP (Washington, D.C.: March 2009).
 The Lockheed Martin industry team for FFG(X) conducted conceptual design activities,
but, according to a Lockheed Martin representative, the company is not planning to submit
a proposal for the detail design and construction contract award competition based on its
LCS-based ship design.

Page 3                                                 GAO-19-512 Guided Missile Frigate
             We conducted this performance audit from August 2018 to August 2019
             in accordance with generally accepted government auditing standards.
             Those standards require that we plan and perform the audit to obtain
             sufficient, appropriate evidence to provide a reasonable basis for our
             findings and conclusions based on our audit objectives. We believe that
             the evidence obtained provides a reasonable basis for our findings and
             conclusions based on our audit objectives.

             In the early 2000s, the Navy conceived of a new small surface combatant
Background   concept known as LCS. This ship was intended to offer the Navy an
             affordable, flexible platform that would be able to swap out surface
             warfare, anti-submarine warfare, or mine countermeasure mission
             packages to provide for one of those mission needs. As we found in
             multiple reports, the Navy’s vision for LCS evolved significantly over time
             in response to diminished capability expectations and significant cost and
             schedule growth. 6 In 2014, the Secretary of Defense directed the Navy to
             evaluate alternatives to LCS, citing survivability and lethality concerns.
             This represented the beginning of the Navy’s pursuit of a solution to
             address LCS shortcomings and the evolving threat environment
             acknowledged by the department.

             The Navy initially envisioned quickly fielding a frigate—referred to as the
             FF program—based on a minor modified LCS design. The ship was
             expected to provide a more lethal and survivable multi-mission ship
             capable of simultaneous surface and anti-submarine warfare, with a
             planned contract award for the lead ship in 2018. In 2016, we found that
             the Navy’s planned upgrades for FF did not significantly improve certain
             survivability areas and lacked capabilities that were prioritized by fleet
             operators, such as the ship’s range of travel without refueling. 7 Then, in
             April 2017 we found the Navy’s aggressive FF acquisition schedule
             increased risk to the government because it included a commitment to

              GAO, Littoral Combat Ship and Frigate: Delaying Planned Frigate Acquisition Would
             Enable Better-Informed Decisions, GAO-17-323 (Washington, D.C.: Apr. 18, 2017);
             Littoral Combat Ship and Frigate: Congress Faced with Critical Acquisition Decisions,
             GAO-17-262T (Washington, D.C.: Dec. 1, 2016); and Navy Shipbuilding: Significant
             Investments in the Littoral Combat Ship Continue Amid Substantial Unknowns about
             Capabilities, Use, and Cost, GAO-13-530, (Washington, D.C.: July 22, 2013).
              GAO, Littoral Combat Ship: Need to Address Fundamental Weaknesses in LCS and
             Frigate Acquisition Strategies, GAO-16-356 (Washington, D.C.: June 9, 2016).

             Page 4                                                  GAO-19-512 Guided Missile Frigate
                    buy ships in advance of adequate knowledge. 8 In May 2017, the Navy
                    announced it was revising its frigate plans and began pursuing FFG(X).

Shipbuilding Best   In 2009, we identified commercial shipbuilding best practices that could
Practices           be adapted for use by the Navy. 9 We found that successful shipbuilding
                    programs have sound business cases built on attaining critical levels of
                    knowledge at key points in the shipbuilding process before significant
                    investments are made, as shown in figure 1.

                    Figure 1: Knowledge Attainment in the Shipbuilding Process

                    Regardless of the differences between Navy and commercial
                    shipbuilding, knowledge attainment is crucial to success. Executable
                    business cases use realistic cost and schedule targets to meet
                    performance and quality expectations by balancing inherent uncertainties
                    in acquisition programs. A solid business case provides for the resources
                    necessary to mitigate challenges, such as immature technologies and
                    design requirements. The greater the potential for challenges to occur,
                    the more time and money should be factored into the business case to
                    address them. The Navy has previously agreed, in principle, that


                    Page 5                                            GAO-19-512 Guided Missile Frigate
                        knowledge should be attained prior to key milestones to better ensure
                        ships are built to established cost, schedule, quality, and performance
                        standards. 10

Navy Shipbuilding       In general, the Department of Defense (DOD) acquires new weapon
Acquisition Framework   systems, such as Navy surface combatants, through a management
                        process known as the Defense Acquisition System. Under this system,
                        programs typically complete a series of milestone reviews and other key
                        decision points that authorize entry into a new acquisition phase. To
                        execute shipbuilding acquisition programs, the Navy uses the acquisition
                        processes included in the DOD Instruction 5000 series, as well as
                        acquisition instructions established by the Secretary of the Navy. 11 The
                        Navy’s guidance supports a seven-gate review process intended to
                        ensure that requirements align with acquisition plans, and to improve
                        collaboration among stakeholders. Figure 2 provides an overview of the
                        notional framework for Navy shipbuilding acquisition programs described
                        by the DOD and Navy guidance.

                          GAO, Navy Shipbuilding: Past Performance Provides Valuable Lessons for Future
                        Investments, GAO-18-238SP (Washington, D.C.: June 6, 2018).
                          DOD Instruction (DODI) 5000.02, Operation of the Defense Acquisition System (Jan. 7,
                        2015), serves as the overall DOD acquisition guidance for weapon system programs.
                        Secretary of the Navy Instruction 5000.2F, Defense Acquisition System and Joint
                        Capabilities Integration and Development System Implementation (Mar. 26, 2019),
                        establishes a seven-gate review process specific to Department of the Navy weapon
                        system programs.

                        Page 6                                                GAO-19-512 Guided Missile Frigate
Figure 2: Notional Acquisition Framework for Navy Shipbuilding Programs

                                        This acquisition framework includes decision reviews and milestones at
                                        key junctures in the acquisition cycle. The Milestone Decision Authority is
                                        the individual responsible for determining what events and documentation
                                        requirements will apply to an acquisition program, as well as providing
                                        approval for a program to proceed to the next acquisition phase. The
                                        acquisition framework and Milestone Decision Authority’s purpose is to
                                        support careful assessment of a program’s readiness to proceed to the
                                        next stage of acquisition activities.

                                        The gates and milestones that will be included in an acquisition program’s
                                        schedule can be customized based on its circumstances and needs. We
                                        have previously found that shipbuilding programs typically have different
                                        decision points than other DOD weapon systems. 12 For example,
                                        Milestone B for ship programs usually occurs after development of ship
                                        specifications and system diagrams is well under way and is typically


                                        Page 7                                        GAO-19-512 Guided Missile Frigate
                              aligned with the decision to authorize the start of detail design. While
                              Milestone C generally represents the decision to start production for
                              weapon systems, several of the Navy’s more recent shipbuilding
                              programs either do not include a Milestone C review or changed the
                              sequencing of the review to occur after delivery of the lead ship.
                              Programs can receive approval to tailor the requirements for information
                              that must be developed to support this process and to have the decision-
                              making authority delegated to other individuals for acquisition decisions
                              and approvals.

                              The Navy expects that its current plans for FFG(X) will result in a small
Navy Expects That             surface combatant with considerable capability improvements compared
FFG(X)                        to LCS. To achieve this increased capability, the Navy is committing to
                              construct a larger, more expensive ship than LCS. To help refine FFG(X)
Requirements Will             requirements and identify opportunities for cost savings, the Navy used a
Provide a More                conceptual design phase, in which it awarded $75 million in contracts to
Capable Small
Surface Combatant,
but at Increased Cost

FFG(X) Requirements           The Navy’s FFG(X) requirements represent the department’s recognition
Reflect Limitations of LCS    of its need for a more capable small surface combatant and the limitations
                              of LCS. For LCS and its mission packages, the Navy has devoted nearly
and Evolution in Capability
                              $28 billion (constant fiscal year 2018 dollars) to develop and buy a ship
Needs                         that has fallen far short of demonstrating it can meet the minimum level of
                              capability defined at the beginning of the program. Specifically, LCS was
                              designed with reduced survivability requirements as compared to other
                              surface combatants. Over time the Navy lowered several survivability and
                              lethality requirements further and removed some design features—
                              making the ships less survivable in their expected threat environments
                              and less lethal than initially planned. As shown in figure 3, the Navy
                              arrived at its FFG(X) plans after spending several years developing and
                              evaluating a variety of inputs to address problems with LCS and emerging
                              capability needs.

                              Page 8                                        GAO-19-512 Guided Missile Frigate
Figure 3: Key Events Contributing to FFG(X) Guided Missile Frigate Requirements

The Small Surface Combatant Task Force study report maintained the
Navy’s need for 52 small surface combatants, which was revalidated in
the Navy’s 2016 Force Structure Assessment. In recognition of LCS’s
shortcomings, the Navy significantly reduced the total number of LCS,
and began planning for the new frigate based on minor modifications to
an LCS design—referred to as FF—to fulfill the 52-ship need.

Page 9                                            GAO-19-512 Guided Missile Frigate
While the FF program was developing its acquisition plans and moving
toward a contract award for the lead ship scheduled for 2018, the
maritime operating environments continued to rapidly evolve, becoming
increasingly complex and contested. In recognition of this, the Chief of
Naval Operations directed the Navy to conduct another study, increasing
air defense and survivability beyond the FF baseline. In response, the
Navy convened a Frigate Requirements Evaluation Team from January to
June 2017. The purpose of this team was to build upon FF requirements
by analyzing options for air defense and vulnerability upgrades to help
determine top-level mission requirements that would yield a more capable
frigate. The results of this review led the Navy to cancel its FF acquisition
plans and focus on meeting increased requirements through a new
FFG(X) Guided Missile Frigate program.

Both the FF and FFG(X) requirements reflect the 2015 Small Surface
Combatant Task Force report findings that identified a need for increased
capabilities for small surface combatants to address evolving threats. As
we reported in June 2016, an FF based on a minor modified LCS only
partially fulfilled the small surface combatant capabilities that the task
force identified as most valued by the fleet. 13 In particular, FF
requirements supported a multi-mission ship with some of the fleet’s
highest priority mission capabilities, such as surface and anti-submarine
warfare, but did not provide air warfare capability. For FFG(X), the Navy
maintained the FF requirements and added local air defense as a
capability. 14 Table 1 outlines the requirements evolution that the Navy
undertook to support a more lethal and capable small surface combatant.

  In general, air warfare is the capability to protect a ship against aircraft and anti-ship
cruise missiles, and local air defense is the capability to provide air warfare protection of
escorted, closely stationed ships.

Page 10                                                    GAO-19-512 Guided Missile Frigate
Table 1: Small Surface Combatant Requirements Evolution from Littoral Combat Ship (LCS) to Frigate (FF) to Guided Missile
Frigate (FFG(X))

Proposed change from LCS to
FF                                                Proposed change from FF to FFG(X)                 Significance of overall change
Switch from single mission to                     Additional multi-mission capability by            Ship will be multi-mission capable, allowing for
multi-mission capability (both                    adding air warfare and electronic                 engagement of different threats at all times. In
surface warfare and anti-                         warfare/information operations missions.          contrast, LCS is single-mission capable, with
submarine warfare).                               May also augment anti-submarine warfare           capability at any given time dependent on which
                                                  capability.                                       single mission package is available for use.
Improve air warfare systems for                   Provide local air defense capability              Reduces susceptibility to attacks from air-based
self-defense with an improved air-                through addition of improved air-search           threats (e.g., aircraft, missiles), and increases air
search radar and defensive                        radar and vertical launch system.                 warfare capability, with ability for FFG(X) to provide
countermeasures.                                                                                    air defense for other ship classes. Vertical launch
                                                                                                    system provides flexibility for future weapons
Decrease in unrefueled range                      Increase unrefueled range to 4,000-6,000          Increases range consistent with fleet operator
from 3,500 nautical miles to a                    nautical miles.                                   priorities in the 2015 Small Surface Combatant Task
minimum range of 3,000 nautical                                                                     Force study; reduces demands for the limited number
miles.                                                                                              of refueling platforms.
Reduce sustained speed from 40+ Reduce sustained speed to 26-28 knots                               Navy officials determined that the high speed of LCS
knots for LCS to 32 knots.      based on mission need and cost                                      was not essential to FFG(X) mission performance,
                                considerations.                                                     which allowed for additional weapons and sensors.
Add armor to vital spaces and                     Further reduce vulnerability via additional       Reduces vulnerability, resulting in a ship with
magazines. Improve shock-                         armoring and shock hardening, and                 survivability standards similar to current Navy
hardening.                                        separation of critical systems within the         destroyers.
                                                  ship design.
Add over-the-horizon missile        Provisions for 8-16 over-the-horizon                            Increases lethality by providing the ability to strike
system for long range, anti-surface missiles.                                                       surface targets further from the ship.
missile capability.
Upgrade electronic warfare                        Further upgrade electronic warfare                Reduces susceptibility and increases capacity for
capabilities by improving                         capabilities via Surface Electronic Warfare       electronic warfare mission via early detection, signals
defensive alert capabilities.                     Improvement Program system, signature             analysis, threat warning, and protection from anti-ship
                                                  reduction, and spectral system for signals        missiles.
Increase crew from 98 personnel                   Increase crew to a range of 165-200,              Moves from “minimally manned” crewing concept of
on LCS to 130 on FF.                              depending on ship design selected.                LCS to more traditional crewing; adds endurance and
                                                                                                    self-sufficiency, including enabling a robust onboard
                                                                                                    engineering department to facilitate a high operational
                                                                                                    availability and ship-level maintenance. Navy-
                                                                                                    acknowledged byproduct of additional crew is
                                                                                                    increased life cycle costs.
Source: GAO analysis of Navy documentation. | GAO-19-512

                                                           Note: LCS includes mine countermeasures capability that was not planned for either of the frigate
                                                            Depending on the final configuration of the FFG(X) design the Navy selects, the ship may have both
                                                           a variable depth sonar–a moveable sonar towed from a ship—and a low-band hull array—a fixed
                                                           sonar fitted to the bow of a ship. The Navy’s preferred requirement is for both, but having only one of
                                                           these types of sonar meets the minimum requirement.

                                                           Page 11                                                         GAO-19-512 Guided Missile Frigate
Requirements Drive           To achieve the increased capability expectations for FFG(X), the Navy
Higher FFG(X) Cost than      committed to acquiring a larger, more expensive ship than LCS or the
                             previously planned FF. Figure 4 provides average shipbuilding cost
for Previous Small Surface
                             estimates for the three different ships, with costs shown in same-year
Combatants                   dollars for comparison.

                             Figure 4: GAO Assessment of Average Small Surface Combatant Acquisition Cost

                             Note: FF and FFG(X) average costs are rounded to the nearest $5 million and are based on
                             estimated costs derived from analysis of Navy budget requests. For FFG(X), the average is based on
                             the first nine ships, as the budget request data did not provide sufficient funding detail for the 11
                             additional ships planned for the program. FF average cost is based on the ships listed in the fiscal
                             year 2017 President’s budget request. LCS average cost does not include the costs of the ship’s
                             mission packages. Navy officials stated that the total average cost for the anti-submarine warfare and
                             surface warfare mission packages on LCS is $85 million per ship in constant year 2018 dollars.

                             Although the FFG(X) requirements have been finalized, the Navy plans to
                             make final cost and capability tradeoffs through the process of evaluating
                             proposed designs before selecting which one will be built.

                             Page 12                                                        GAO-19-512 Guided Missile Frigate
The Navy Used               In an effort to focus on the relationship between requirements and cost,
Conceptual Design Phase     the Navy undertook a conceptual design phase for FFG(X), which
                            enabled industry to inform requirements and identify opportunities for cost
to Better Understand Ship
                            savings. In February 2018, the Navy competitively-awarded FFG(X)
Requirements and            conceptual design contracts valued at nearly $15 million each to five
Associated Costs            industry teams. These 16-month contracts were intended to enable
                            industry to mature parent ship designs—designs for FFG(X) that are
                            based on ships have been built and demonstrated at sea—and help
                            refine technical and operational program requirements.

                            The purpose of the conceptual design phase has parallels with the
                            purpose of pre-contractual negotiations in commercial shipbuilding. As we
                            previously have reported, these pre-contractual practices minimize ship
                            buyer risk prior to awarding construction contracts by developing the ship
                            concept and specifications based on negotiations between the ship buyer
                            and the shipyard. The practices include specifying the expected
                            performance and the major equipment on the ship. As part of these
                            activities, commercial shipbuilders and ship buyers analyze one or more
                            ship concepts to identify areas of potential risk and either mitigate these
                            risks or remove the risky elements from the ship before signing a
                            contract. 15 Figure 5 provides an overview of the industry teams and
                            shipyards participating in the FFG(X) conceptual design.


                            Page 13                                       GAO-19-512 Guided Missile Frigate
Figure 5: Key Information for Industry Teams Participating in FFG(X) Guided Missile Frigate Conceptual Design Phase

                                         Note: Ingalls Shipbuilding elected to not publicly disclose its parent design for FFG(X) based on the
                                         impending full and open competition for detail design and construction.

                                         Each industry team performed ship development, ship design, workforce
                                         planning, and shipyard improvement planning, among other activities, in
                                         support of FFG(X) requirements refinement and cost reduction efforts.
                                         Industry teams updated the Navy regularly on their design progress and
                                         technical approach to fulfill requirements through monthly technical
                                         exchange meetings and two design review meetings. Navy officials stated
                                         that these meetings were intended to provide information to support the
                                         program’s Preliminary Design Review in May 2019 and mitigate risk prior
                                         to the Navy’s release of its request for proposal in June 2019 for the
                                         FFG(X) detail design and construction competition.

                                         Our prior work on shipbuilding best practices emphasizes the importance
                                         of having a full understanding of the effort needed to design and construct
                                         a ship before awarding a contract for ship construction in order to reduce
                                         cost and schedule risk. Navy and industry officials stated that the

                                         Page 14                                                         GAO-19-512 Guided Missile Frigate
conceptual design phase facilitated dialogue and information sharing that
helped ensure FFG(X) requirements were more fully understood by
industry and the government. Specifically, industry officials noted that
communication and activities during conceptual design improved their
understanding of the impetus for specific Navy requirements, allowing
industry the opportunity to get clarification on the intent of some
requirements, propose less costly alternatives, and get government
feedback on the proposed alternatives. It also improved their
understanding of the linkages between FFG(X)’s approved capability
requirements and system specifications. In particular, industry officials
told us that one-on-one opportunities with the Navy aided knowledge
sharing and provided them with a means to ask questions without
concern that disclosing such information could jeopardize their
competitive position. They emphasized that in other cases where the
request for proposals process is their primary means for communicating
with the Navy (as opposed to having a conceptual design phase),
submitting questions about requirements or system specifications can be
challenging because those inquiries are available to the public. As a
consequence, contractors may opt to infer more about the intent of
requirements to avoid compromising their competitive interests.

The conceptual design phase included a formal cost savings effort, with
the Navy seeking proposals internally and from industry participants to
reduce cost through requirement and system specification refinement. To
support this effort, Navy officials stated they established a Frigate
Affordability Board to review potential cost reduction measures submitted
by both contractors and government that responded directly to Navy
requirements and specifications. Navy officials said the Board—co-
chaired by the Program Executive Office for Unmanned and Small
Combatants and the Naval Sea System Command’s Naval Systems
Engineering Directorate, as well as the Chief of Naval Operations’
Surface Warfare Directorate—assessed the potential cost and capability
trade-offs of these proposed changes to requirements, and accepted or
declined them. Before going to the Board, relevant Navy subject matter
experts reviewed the technical and requirements implications of cost
reduction measures. The program office subsequently worked with Navy
engineering and requirements officials to balance cost with capabilities. If
the program office, Navy engineers, and requirements officials could not
reach agreement on the appropriate cost and capability mix, then their
different positions were presented to the Board.

For cost reduction initiatives submitted by industry, the Navy provided
feedback on the Board’s decision, and incorporated fully or partially

Page 15                                        GAO-19-512 Guided Missile Frigate
                           accepted cost reduction initiatives into the FFG(X) system specifications.
                           Navy officials said they informed all industry teams of any changes to the
                           specifications on a monthly basis. Navy officials also stated that industry
                           submitted about 350 cost reduction ideas, with roughly 60 percent
                           partially or fully accepted by the Navy. They estimated $86 million in
                           savings per ship (constant year 2018 dollars) based on changes made in
                           response to the cost reduction measures submitted by industry or
                           government-initiated cost savings measures influenced by engagement
                           with industry. 16

                           In an effort to accelerate the time between FFG(X) acquisition planning
Streamlined                and the fielding of ships, the Navy streamlined the program’s acquisition
Acquisition Approach       approach and leveraged knowledge obtained from industry during the
                           conceptual design phase. While the program may benefit from the
Accelerates Planned        streamlining efforts, the acquisition approach for FFG(X) required the
FFG(X) Schedule, but       Navy to submit its budget request for lead ship construction before the
                           program had a comprehensive understanding of the potential ship
Reduces Knowledge          designs and cost. Recent Navy policy changes have created some
Available for Key          uncertainty for Navy cost estimation activities by altering roles and
                           responsibilities within the Navy for completing component cost positions
Program Decisions          and independent cost assessments.

Navy Streamlined FFG(X)    As permitted by DOD and Navy policy, the Navy has streamlined the
Program Acquisition        FFG(X) acquisition approach to move from planning to ship delivery and
                           fielding quicker than in a more traditional acquisition program. 17 The
Approach in an Effort to
                           accelerated schedule reflects the Navy’s desire to field a minimum of 52
Accelerate Fielding of     small surface combatants, which the Navy’s long-range shipbuilding plan
Ships                      states will be achieved by fiscal year 2034. Navy officials stated that the
                           significant amount of knowledge that already existed to inform the
                           program’s early activities and the use of parent designs helped enable the
                           streamlined approach for FFG(X). For example, Navy officials cited

                             Navy officials stated the FFG(X) program office developed a notional frigate design to
                           analyze requirements feasibility, provide a starting point for trade studies, and support
                           cost estimating efforts. This included estimates for cost savings associated with
                           requirements changes. The program office used data received from industry during the
                           conceptual design phase to calibrate models and verify cost savings estimates. Navy
                           officials noted that not all changes based on cost savings measures were applicable to the
                           specific FFG(X) designs developed by the five conceptual design industry teams. We did
                           not assess the reliability of this cost savings estimate.
                            DODI 5000.02 and Secretary of the Navy Instruction 5000.2F.

                           Page 16                                                 GAO-19-512 Guided Missile Frigate
                                         previous efforts by the Small Surface Combatant Task Force and the
                                         Frigate Requirements Evaluation Team to determine appropriate ship
                                         requirements, as well as activities performed in support of the FF frigate
                                         acquisition plan that immediately preceded the shift to FFG(X). The Navy
                                         also leveraged industry input received from a request for information in
                                         2017 to understand cost drivers and the potential shipbuilders’ abilities to
                                         meet top level FFG(X) requirements and incorporate Navy-defined
                                         equipment into ship designs. Figure 6 provides a high-level schedule of
                                         key activities for the program.

Figure 6: FFG(X) Guided Missile Frigate Acquisition Schedule

                                         Note: All dates beyond the July 2020 contract award are Navy estimates and may be adjusted
                                         depending on the FFG(X) design the Navy selects for contract award. Ship delivery is when the Navy
                                         takes custody of a new construction ship from the shipbuilder. At that point, a variety of tests, trials,
                                         and construction remains to be completed in what is called a post-delivery period. OWLD generally
                                         concludes the post-delivery period and is when full financial responsibility for maintaining and
                                         operating a ship is transferred from the acquisition command to the operational fleet. Gates are Navy
                                         review points for acquisition programs outlined in the Secretary of the Navy Instruction 5000.2F.

                                         To support its decision to pursue an accelerated acquisition schedule, the
                                         Navy used the previously discussed conceptual design phase as well as
                                         its decisions to limit FFG(X) to parent ship designs and minimize
                                         technology development. Navy officials noted the use of parent designs is
                                         allowing the program to proceed at a much faster pace from early
                                         assessment of capability options to detail design and construction
                                         contract award. They added that the parent designs provided a higher-
                                         fidelity design baseline from which the conceptual design industry teams
                                         incorporated Navy systems and other requirements. Use of parent
                                         designs is consistent with our best practices work in shipbuilding, which

                                         Page 17                                                          GAO-19-512 Guided Missile Frigate
has found that commercial shipbuilders use previous ship designs to the
extent possible. 18 Doing so can reduce technical, schedule, and cost risk
in building a ship as compared to a “clean sheet” new ship design.
FFG(X) program officials noted the latter approach can take up to 9 years
to complete an analysis of alternatives and move through the acquisition
process to construction contract award.

Navy officials said the program also used opportunities available as an
Acquisition Category (ACAT) 1B program to shorten the approval timeline
for specific acquisition requirements. 19 For an ACAT 1B program, the
head of the DOD component is generally the Milestone Decision Authority
but, as appropriate, may delegate approval authorities to lower level
offices under its jurisdiction. In the case of FFG(X), the Assistant
Secretary for the Navy for Research, Development, and Acquisition
serving as the Milestone Decision Authority delegated specific approval
authorities to the Program Executive Office for Unmanned and Small
Combatants. These approval authorities applied to the program’s life
cycle sustainment plan, independent logistics assessment, program
protection plan, and a compliance schedule addressing environmental

The Navy also took advantage of opportunities to alter or waive some
significant early acquisition activities. For example, the Milestone
Decision Authority waived the formal Analysis of Alternatives and
Affordability Analysis, decided not to conduct a Milestone A review, and
deferred the full “Should-Cost” Analysis to later in the acquisition
process. 20 Table 2 defines the purpose of these DOD acquisition program
elements and provides an overview of the Navy’s actions related to them.

  See DODI 5000.02; Secretary of the Navy Instruction 5000.2F. For ACAT 1D programs,
the Defense Acquisition Executive— the Under Secretary of Defense for Acquisition and
Sustainment—is generally the Milestone Decision Authority. For programs designated as
ACATs 1C and 1B, the head of the DOD component (e.g. Navy, Army, or Air Force) is
generally the Milestone Decision Authority.
  In general, a “should-cost” analysis is intended to develop an estimated cost that is
based on bottoms-up assessments of what programs should cost, if reasonable efficiency
and productivity enhancing efforts are undertaken. These cost targets are intended to be
used as a basis for contract negotiations and contract incentives, as well as to track
contractor and program management performance.

Page 18                                                GAO-19-512 Guided Missile Frigate
Table 2: FFG(X) Acquisition Process Streamlining of Early Program Activities

Acquisition          Defined purpose in Department of
element              Defense acquisition guidance                        FFG(X) acquisition approach to fulfill requirement and rationale
Analysis of          Assess potential materiel solutions to satisfy      Requirement waived. The Navy predetermined that it would pursue a
Alternatives         validated capability requirements and               ship-based solution to provide desired capabilities as opposed to a
                     support a decision on the most cost                 potential range of materiel solutions to meet capability needs. Navy and
                     effective solution.                                 Office of the Secretary of Defense officials stated that the Navy used
                                                                         studies from the 2015 Small Surface Combatant Task Force and the
                                                                         2017 Frigate Requirements Evaluation Team (FRET), a requirements
                                                                         gap analysis of the former FF frigate requirements, and independent
                                                                         Navy force structure assessments to address the intent of the Analysis
                                                                         of Alternatives. Navy officials confirmed this approach was accepted by
                                                                         the Office of the Secretary of Defense and the Joint Staff. Office of the
                                                                         Secretary of Defense officials said FFG(X) requirements are being
                                                                         further evaluated and analyzed within the ongoing Future Surface
                                                                         Combatant Force Structure Analysis of Alternatives. Navy officials noted
                                                                         that the study will likely support increasing FFG(X) quantities beyond the
                                                                         20 planned ships.
Affordability        Develop affordability constraints for               Requirement waived. The Navy cites cost development activities for the
Analysis             procurement unit cost and sustainment               FFG(X) capability development document and component cost estimate
                     costs; conduct Navy portfolio affordability         plans for the Gate 5 review as replacements for a more typical
                     analysis that demonstrates the ability of the       affordability analysis.
                     Navy’s estimated budgets to fund the new
                     program over its planned life cycle.
Should-Cost          Proactively target cost reduction and drive         Requirement deviates from the guidance for should-cost targets to be
Analysis             productivity improvement into programs.             completed to support the detail design and construction request for
                                                                         proposal release. The Navy established initial, limited should-cost
                                                                         figures as part of acquisition strategy for average follow-on ship costs to
                                                                         support the program through the detail design and construction request
                                                                         for proposal release. The acquisition strategy states the should-cost
                                                                         targets will be established after component cost position completion.
                                                                         This includes more complete targets that account for research,
                                                                         development, test and evaluation; procurement; and sustainment prior
                                                                         to incorporation into the program baseline.
Milestone A          Evaluate product options and approve the       Milestone not conducted and all associated documentation
                     preferred solution, as well as authorize entry requirements for the milestone waived. The Navy stated the FFG(X)
                     into the technology development phase.         program will enter the defense acquisition system at Milestone B
                                                                    because the program is not developing critical technologies and the
                                                                    ships will be based on a proven parent design.
Source: GAO analysis of DOD and Navy documentation. | GAO-19-512

                                                            As the first major milestone for many major acquisition programs,
                                                            Milestone A is a review by the Milestone Decision Authority of key
                                                            program documents that support the materiel solution and risk reduction.
                                                            We have previously found that DOD officials place a high value on the
                                                            information developed for some of these documents, including the
                                                            Analysis of Alternatives, Affordability Analysis, and Should-Cost

                                                            Page 19                                               GAO-19-512 Guided Missile Frigate
Analysis. 21 The Navy’s decision to not conduct a Milestone A review also
eliminated a formal opportunity to bring the broad set of FFG(X)
stakeholders within the Navy and the Office of the Secretary of Defense
together at a relatively early stage to assess the program’s acquisition
strategy and affordability and feasibility, as well as technical, cost, and
schedule risks. Further, it reduced the FFG(X) acquisition approach to a
single milestone decision point—Milestone B—for the broader group of
DOD stakeholders to evaluate program progress and readiness to
proceed to the detail design and construction contract award planned in
July 2020.

In the absence of Milestone A, the Navy’s Gate 3 review for FFG(X)
provided an opportunity to communicate the program’s progress toward
developing requirements and acquisition expectations, albeit to a more
limited audience than typically would participate in a Milestone A. In
particular, the Navy used Gate 3 to discuss top-level requirements
changes and receive capability development document approval from the
Chief of Naval Operations. It also included cost discussion related to
FFG(X) affordability within the overall Navy shipbuilding portfolio. The
gate’s participants included officials from the Navy and the Office of Cost
Assessment and Program Evaluation (CAPE) within the Office of the
Secretary of Defense.

The Navy’s Gate 4 conducted in February 2019 focused on a review of
the FFG(X) system specification before the draft detail design and
construction request for proposal release. Gate 4 documentation for
FFG(X) indicates that participants were limited to stakeholders from the
office of the Deputy Assistant Secretary of the Navy for Ships; Naval Sea
Systems Command Cost and Design Directorates; Program Executive
Office for Unmanned and Small Combatants; the FFG(X) program office;
and the Chief of Naval Operations Surface Warfare Directorate. This
excludes a number of key stakeholders that Navy guidance calls on to
attend and certify gate reviews, such as the Assistant Secretary of the
Navy (Financial Management and Comptroller) and the testing
community. As a result, the Navy would not have received insight from
several key stakeholders during the Gate 4 review for acquisition
activities, such as the program life cycle cost estimate development and
release of the draft request for proposal. These activities are generally

  GAO, Acquisition Reform: DOD Should Streamline Its Decision-Making Process for
Weapon Systems to Reduce Inefficiencies, GAO-15-192 (Washington, D.C.: Feb. 24,

Page 20                                             GAO-19-512 Guided Missile Frigate
                           relevant to this gate review, as Navy guidance notes program affordability
                           as a focus and the Navy’s streamlining documentation indicates that the
                           gate was focused on reviewing the FFG(X) system specification before
                           releasing the draft request for proposal. Navy officials noted that
                           stakeholders have regularly received insight into FFG(X) activities
                           through other prior program reviews and will have additional opportunities
                           to review program costs and sustainment plans leading up to Milestone B.

                           We also found that some key stakeholders did not provide formal
                           approval for the initial FFG(X) life cycle sustainment plan that was
                           approved in March 2019. Specifically, only FFG(X) program officials and
                           the Program Executive Officer for Unmanned and Small Combatants—
                           the delegated approval authority—signed the plan. However, as stated in
                           DOD guidance, representatives from the relevant sustainment command
                           and the Program Executive Office for Integrated Warfare Systems are key
                           stakeholders that should provide their signed concurrence when
                           approving the life cycle sustainment plan. The FFG(X) life cycle
                           sustainment plan is a key document outlining the Navy’s plans to address
                           the program’s sustainment needs and costs, as typically around 70
                           percent of a weapon system program’s total cost is in the sustainment
                           phase after procurement. Navy officials stated that the plan has been
                           reviewed by the independent logistics assessment team members that
                           are evaluating the FFG(X) program’s integrated product support activities,
                           and noted that the Program Executive Office for Integrated Warfare
                           Systems has separate life cycle sustainment plans for government
                           furnished equipment systems included in the FFG(X) design. Navy
                           officials also said that FFG(X) sustainment plans would be reviewed by
                           stakeholders as part of Gate 5 and the Milestone B independent logistics

Budget Request for         The FFG(X) acquisition approach required the Navy to submit its nearly
FFG(X) Lead Ship           $1.3 billion budget request for lead ship construction before the program
                           had established a comprehensive understanding of the potential ship
Preceded the Completion
                           designs and estimated cost for the program. Our shipbuilding and
of Key Cost Estimation     acquisition best practices call for resource decisions to be timed to align
Activities That Should     with the availability of requisite cost, schedule, and technical knowledge
Inform Funding Decisions   in order to inform key program decisions. 22 Navy officials stated that they

                            GAO, Best Practices: Capturing Design and Manufacturing Knowledge Early Improves
                           Acquisition Outcomes, GAO-02-701 (Washington, D.C.: July 15, 2002); and

                           Page 21                                            GAO-19-512 Guided Missile Frigate
had sufficient knowledge to inform key program decisions based on cost
estimation and conceptual design efforts that had previously been
completed. Navy officials said this included development of an FFG(X)
cost estimate by November 2018 to support a realistic budget request for
the lead ship. However, at the time of the Navy’s fiscal year 2020 budget
request to fund detail design and the lead ship, the Navy had not
completed its component cost position, which will formalize the life cycle
cost expectations for FFG(X). Further, CAPE had not completed the
independent cost estimate for the program. The GAO Cost Estimating
and Assessment Guide says that comparing the component cost position
with an independent cost estimate to validate methodologies produce
similar results reinforces the credibility of a cost estimate. 23

In addition to key cost estimating best practices that had not been
completed, the Navy had not received final design review information
from the industry teams participating in the conceptual design phase
before requesting lead ship funds from Congress. Figure 7 reflects the
budget request timeline for the FFG(X) detail design and lead ship
contract award, as well as notable cost and design-related program
activities that were planned to be completed after the request.


Page 22                                       GAO-19-512 Guided Missile Frigate
Figure 7: Timeline of Key Cost and Design Knowledge and Budgeting for FFG(X)
Guided Missile Frigate Program Detail Design and Construction

The considerable cost growth that we have previously reported is
common to many shipbuilding programs, as well as challenges in
deviating from shipbuilding plans once a program has begun procuring
ships, emphasize the importance of having a strong understanding of

Page 23                                          GAO-19-512 Guided Missile Frigate
program expectations to back the initial procurement decision for
FFG(X). 24 Given the timing of the Navy’s budget request for lead ship
funding, Congress faces a decision on whether to authorize funding for
FFG(X) detail design and lead ship based on a budget request that was
not informed by key cost and design information.

If Congress authorizes and appropriates FFG(X) funding as the Navy
requested in March 2019, it will be critical that the Navy demonstrate the
program’s acquisition program baseline reflects the results of the
component cost position and independent cost estimate before awarding
the detail design and construction contract. Doing so before the contract
award will help ensure a more reliable acquisition program baseline upon
which future costs and variances are measured and funding decisions are
made. Further, it will help mitigate remaining risk that stems from the
Navy not being able to account for the actual FFG(X) design and
associated estimated cost for ship construction until after the planned July
2020 contract award. Specifically, as currently planned, the Navy’s
budget requests for fiscal years 2020 and 2021—which are intended to
fund the first 3 ships—will be made before the Navy has agreed to
contract pricing for FFG(X).

Navy officials stated that they have completed a robust program life cycle
cost estimate. They noted that the estimate was informed by Navy
modeling of a notional ship design that leveraged data received from
industry during conceptual design and reflected ship design elements
needed to meet program requirements Navy officials also said that, as of
May 2019, some additional work remains for the cost estimate to account
for training and military construction considerations, as well as address
any needed changes related to the final industry design reviews for the
conceptual design phase. They also said that the program life cycle cost
estimate informed the Gate 4 review in February 2019, and an updated
version of the estimate will provide a basis for the Navy’s efforts to
establish the component cost position in October 2019. As of the
issuance of this report, we have requested the program life cycle cost
estimate from the Navy, including the estimate’s criteria and underlying
assumptions, but have not yet received this information.


Page 24                                        GAO-19-512 Guided Missile Frigate
Recent Navy Changes in       Recent policy changes by the Navy related to cost analysis and
Cost Estimation Policy and   estimation have created some uncertainty for Navy cost estimation
                             activities going forward. Specifically, a March 2019 Secretary of the Navy
the FFG(X) Program
                             instruction for acquisition program cost analysis shifts the Naval Center
Schedule Create              for Cost Analysis’s role and responsibilities for Navy cost estimation to the
Uncertainty for Remaining    Navy’s systems commands. 25 Previously, the Naval Center for Cost
Cost Estimation Activities   Analysis—organizationally residing completely outside of the systems
                             command structure—would provide an independent cost assessment of
                             the program life cycle cost estimate. The Naval Center for Cost Analysis
                             and the acquisition program, in coordination with the relevant systems
                             command, would discuss and adjudicate any differences between the
                             program life cycle cost estimate and the independent cost assessment to
                             produce the Navy’s component cost position. This independent cost
                             assessment by the Naval Center for Cost Analysis was an important
                             verification of the program office estimates, which were often found to be
                             too optimistic, prior to the Navy finalizing its component cost position. The
                             Navy’s recent changes for cost estimation and analysis may pose a risk
                             of overly optimistic estimates carrying forward in programs.

                             Navy officials stated that they believe Naval Sea Systems Command cost
                             estimators can provide an independent cost estimate, as they are
                             intended to provide technical support to acquisition programs
                             independent of programmatic authority and report to a separate chain of
                             command. However, as stated by the Naval Sea Systems Command, the
                             collective mission of its organizations is to build, buy, and maintain the
                             Navy’s ships. Based on this, we believe, as do CAPE officials with whom
                             we spoke, that shifting independent cost assessment activities to the
                             systems commands diminishes the Navy’s ability to independently verify
                             a program life cycle cost estimate. As a result, the program life cycle cost
                             estimate essentially will become the component cost position based on
                             the lack of additional cost estimation input, such as what the Naval Center
                             for Cost Analysis previously provided.

                             Furthermore, CAPE officials stated that having a systems command
                             execute cost analysis responsibilities for an acquisition program within the
                             same system command effectively eliminates the Navy’s capacity to
                             perform independent cost estimates for its programs based on their
                             shared overarching mission. This position is consistent with the GAO
                             Cost Estimating and Assessment Guide, which states that an
                               Secretary of the Navy Instruction 7110.12, Acquisition Program Cost Analysis (Mar. 28,

                             Page 25                                                GAO-19-512 Guided Missile Frigate
independent cost estimate should be conducted by an organization
independent of the acquisition chain of command. 26 The Director of CAPE
is required to conduct or approve independent cost estimates and cost
analyses for all major defense acquisition programs. As noted by CAPE
officials, CAPE has previously delegated certain cost estimation
responsibilities to the Naval Center for Cost Analysis. With the recent
Navy policy changes, CAPE may no longer choose to delegate
independent cost estimation activities to Navy cost estimators. 27

For FFG(X), CAPE intends to complete an independent cost estimate to
verify the Navy’s component cost position. These plans include site visits
and data collection from the shipyards participating in the conceptual
design contracts. CAPE confirmed that the final independent cost
estimate will reflect the content of the winning proposal, indicating that
any FFG(X) proposals that the Navy receives from contractors not
involved in the conceptual design phase will be evaluated to ensure the
independent cost estimate accounts for those cost and design plans.

CAPE officials also stated that their timeline for finalizing the independent
cost estimate for FFG(X) is tied to when the Navy decides on the winning
proposal for detail design and construction and communicates this
information to CAPE. Specifically, CAPE’s final independent cost estimate
will reflect only the winning FFG(X) design, so completion of the estimate
will occur after the Navy informs CAPE about the FFG(X) design for
which it intends to pursue a contract award. CAPE officials said that
because the Navy’s decision may not be made in advance of the planned
February 2020 Milestone B review for FFG(X), CAPE would likely just

  Pursuant to 10 U.S.C. § 2334, the Director of CAPE is required to conduct or approve
independent cost estimates and cost analyses for all major defense acquisition programs
in advance of any decision to grant milestone approval pursuant to 10 U.S.C. § 2366b,
which addresses certification requirements before Milestone B approval. See 10 U.S.C. §
2334(a)(6); 10 U.S.C. § 2336b(a). CAPE may decide to delegate certain independent cost
estimation responsibilities to a military service cost agency. See DODI 5000.73, Cost
Analysis Guidance and Procedures (June 9, 2015).

Page 26                                               GAO-19-512 Guided Missile Frigate
                            provide input to support the milestone and complete the independent cost
                            estimate after that review. 28

                            The Navy’s decision to pursue a parent ship design for FFG(X) was
The Navy Has Taken          intended to reduce design uncertainty for the program. The Navy’s
Steps to Reduce             planned use of existing technologies for the ship’s mission and combat
                            systems also supports reduced technical risk, though further maturation
Design and Technical        of some key systems and successful integration and testing will be critical
Risk, but Technology        to demonstrate the ship provides required capability within cost and
                            schedule expectations.
Integration and
Testing Will be Key to
Meeting Program
Use of a Parent Ship        Adopting a parent design requirement for FFG(X) provided the conceptual
Design Was Intended to      design industry teams with a proven baseline ship design. This enabled
                            them to focus on incorporating modifications to meet the Navy’s specific
Increase Design Certainty
                            FFG(X) requirements rather than designing a new ship. The Navy did not
                            set any limitations on the extent contractors could modify or deviate from
                            the parent design. However, Navy officials stated they actively reviewed
                            parent design modifications through contract deliverables, technical
                            exchange meetings, and design reviews with industry teams. The design
                            reviews included an interim report in October 2018 and a final report in
                            May 2019 from each industry team on their design progress.

                            FFG(X) program officials noted that the design maturity reviews provided
                            sufficient information to support the Navy’s decision that the designs were
                            mature enough to release the request for proposals for the detail design
                            and construction contract award. In addition, some industry officials told
                            us that the conceptual design work on parent designs enabled them to

                              In major defense acquisition programs and major subprograms, the independent cost
                            estimate is a statutory requirement at Milestone A and Milestone B. See 10 U.S.C. §§
                            2334(a)(6), 2366a, and 2366b. DODI 5000.02 directs MDAs to tailor program strategies
                            and oversight, including program information, acquisition phase content, the timing and
                            scope of decision reviews and decision levels, based on the specifics of the product being
                            acquired. To this end, 10 U.S.C. § 2366b allows the MDA to waive any of the Milestone B
                            certification and determination requirements—including the independent cost estimate—
                            before Milestone B if the MDA determines that, but for such a waiver, DOD would be
                            unable to meet critical national security objectives.

                            Page 27                                                 GAO-19-512 Guided Missile Frigate
                            develop more mature and refined designs than typical for this stage of the
                            shipbuilding acquisition process. They also noted that continuing work in
                            response to the pending competition should move at least some design
                            elements closer to a detail design-level of maturity, and may provide the
                            Navy with greater confidence in the contract proposals it receives from

Technology Re-Use           The FFG(X) program’s design concept requires the use of many existing,
Should Reduce Some          more mature combat and mission systems to reduce technical risk. As
                            stated in the approved acquisition strategy for FFG(X), the program has a
Risk, but Integration and
                            requirement for all integrated systems to have achieved maturity of a
Testing Remain to           technology readiness level (TRL) 6 or higher. 29 TRL 6 is defined by GAO
Demonstrate Critical        as the capability to produce a prototype system in a production-relevant
Systems                     environment. 30 Program officials confirmed that, as of May 2019, many
                            but not all FFG(X) integrated systems were at TRL 6 or higher. For
                            selected key systems planned for FFG(X), Navy officials stated they will
                            have achieved TRL 7 or higher by the planned July 2020 detail design
                            and construction contract award. Doing so would be consistent with our
                            acquisition best practices, which include maturing new key ship
                            technologies into actual system prototypes and demonstrating them in a
                            realistic environment—achieving a TRL 7—before the award of the
                            contract for lead ship design and construction. This practice helps reduce
                            the likelihood of costly design changes later. 31

Technology Re-Use           Many of the systems planned for FFG(X) have been demonstrated and
                            are in use on other Navy ship classes, which helps the program fulfill
                            capability needs while avoiding developmental risks. Table 3 provides an
                            overview of some of the key existing systems planned for the ship.

                              FFG(X) program officials defined an integrated system as a system that has combined
                            different functions together in order to work as one entity. The concept of the integrated
                            system is used in systems engineering, systems analysis, and operations research. An
                            integrated system can be broken down—not necessarily uniquely—into a finite number of
                            parts called subsystems.
                             GAO, Technology Readiness Assessment Guide: Best Practices for Evaluating the
                            Readiness of Technology for Use in Acquisition Programs and Projects—Exposure Draft,
                            GAO-16-410G (Washington, D.C.: August 2016).

                            Page 28                                                 GAO-19-512 Guided Missile Frigate
Table 3: Examples of Existing Systems Planned for the FFG(X) Guided Missile Frigate Used by Other Navy Ship Classes

Existing system                           Description of system                                    Other Navy ship classes using system
Mk 41 Vertical Launch                     Missile launching system                                 CG 47 Cruiser, DDG 51 Destroyer
Mk 110 57-Millimeter Gun                  Gun system based on a 57-millimeter gun; fires up to Littoral Combat Ship (LCS)
                                          220 rounds per minute, with a 9-mile range
Mk 53 Decoy Launching                     Ship defense system using decoys to defeat anti-         CG 47, CVN 68 Aircraft Carrier, DDG 51, LHA 6
System                                    ship missiles                                            Amphibious Assault Ship, LPD 17 Amphibious
                                                                                                   Transport Dock
RIM-116 Rolling Airframe                  Ship self-defense system employing short-range         CVN 68, LCS, LHA 6, LPD 17
Missile                                   missiles designed to destroy anti-ship cruise missiles
                                          or air and surface threats
Surface Electronic Warfare                Provides for early detection, signal analysis, threat    CG 47, CVN 68, DDG 51, LHA 6, LPD 17
Improvement Program,                      warning and protection from anti-ship missiles
Block 2
Source: GAO analysis of Navy documentation. | GAO-19-512

Developmental Systems                                      In addition to the systems that have been utilized by other Navy ships, the
                                                           FFG(X) program plans to incorporate some systems that are still in
                                                           development, such as the Enterprise Air Surveillance Radar (EASR) and
                                                           a new version of the Aegis Weapon System.

                                                           •    Navy officials stated that EASR—a complex radar system expected to
                                                                provide long-range detection and engagement of advanced threats—
                                                                is critical to FFG(X)’s air and surface warfare missions. It is a scaled
                                                                down version of the Navy’s Air and Missile Defense Radar that is in
                                                                production and scheduled for initial integration with the Aegis combat
                                                                system on a DDG 51 Flight III destroyer in fiscal year 2020. In early
                                                                2019, the Navy began testing a full-scale, single-face EASR array
                                                                engineering developmental model—the full system planned for
                                                                FFG(X) will have three array faces—at a land-based test site to
                                                                further demonstrate its functionality. 32 The Navy expects to complete
                                                                land-based testing of the EASR engineering development model by
                                                                February 2020. The Navy also plans to integrate a rotating version of
                                                                EASR and a fixed-face version on other ship classes prior to
                                                                integrating the radar on the lead FFG(X). The Navy’s results from

                                                             An engineering development model—which can be viewed as an advanced prototype of
                                                           a system—is acquired during the engineering and manufacturing development phase of
                                                           the DOD acquisition process and is built from approved critical design review drawings. It
                                                           may be used for developmental and operational testing to demonstrate maturing
                                                           performance during the latter stages of development and to finalize proposed production
                                                           specifications and drawings.

                                                           Page 29                                                 GAO-19-512 Guided Missile Frigate
                               planned EASR developmental testing at the land-based site will be
                               integral to achieving a TRL 7 and reducing risk prior to the start of
                               FFG(X) detail design.
                          •    The Navy is developing a new version of the Aegis Weapon System—
                               FFG(X)’s combat management system—to coordinate radar and
                               weapons system interactions from threat detection to target strike. For
                               example, the system will support the ship’s ability to employ the Naval
                               Strike Missile for over-the-horizon offensive capability as well as a 32-
                               cell vertical launch system to employ missiles for air defense. The
                               Aegis Weapon System for FFG(X) will leverage the Aegis common
                               source software that supports the combat systems found on the
                               Navy’s DDG 51-class destroyers and CG 47-class cruisers. 33 Navy
                               officials noted that they anticipate at least 70 percent of the Aegis
                               Weapon System software for FFG(X) will be common to the Aegis
                               software used for DDG 51 Flight III ships.
                          Rigorous testing of the Aegis Weapon System with EASR will be critical
                          for FFG(X), as the radar and combat management system must work in
                          concert for the ship to detect, track, and assess possible targets. Given
                          the radar and software commonalities, the risk level for both of these
                          FFG(X) systems should be reduced once the DDG 51 Flight III radar and
                          Aegis system baseline, upon which the FFG(X) integrated system is
                          based, have been demonstrated through testing on a ship beginning in
                          2022. Specific to the Aegis Weapon System for FFG(X), software
                          development is expected to run from fiscal year 2022 to late fiscal year
                          2024. The system’s integration and testing with EASR is scheduled to
                          occur through fiscal year 2024.

Integration and Testing   While the Navy is planning to use many already mature systems on
                          FFG(X), integration and testing of those systems will be critical to
                          demonstrate systems fit and work together as intended on the ship. The
                          Navy completed a technology readiness assessment in spring 2019 to
                          identify potential technical risks, and concluded that FFG(X) does not
                          have any critical technology elements. DOD generally defines a critical
                          technology element as one that may pose major technological risk during

                            Aegis is the current combat system used by the majority of U.S. Navy surface
                          combatants. The system enables a ship to detect, track, and engage multiple air and
                          surface threats simultaneously. The Aegis Weapon System for FFG(X)—a variant of Aegis
                          baseline 10 planned for DDG 51 Flight III ships—will be limited to air and surface warfare
                          functions and will not include Aegis’s ballistic missile defense capability.

                          Page 30                                                 GAO-19-512 Guided Missile Frigate
development. 34 Navy officials who completed the assessment stated that
they reviewed about 150 systems as part of their activities and found
none composed of new or novel technologies for which the Navy has
insufficient knowledge to demonstrate maturity. The assessment noted
one technology—the New Advanced Integrated Line-of-Sight Equipment
System (nAILES) multi-coupler for antennas—as a watch item. The Navy
would like to utilize nAILES for FFG(X), but according to Navy officials, it
is not considered a critical technology because the Navy has identified
alternative, proven technologies that will be used to meet the ship’s needs
if nAILES is not available for use.

The findings of the technology readiness assessment are consistent with
the FFG(X) program’s decision to use existing systems that do not require
technological innovation to deliver desired capability. However, the
findings do not necessarily equate to the program having no technology
risk for planned systems. For example, the Aegis Weapon System for
FFG(X) did not qualify under the parameters of the technology readiness
assessment as a critical technology element. Still, as already discussed,
the Aegis Weapon System will carry technical risk for several years until
the Navy completes development and demonstrates the system works as
intended for FFG(X). The Next Generation Surface Search Radar is
another system that is relatively mature—FFG(X) program officials
confirmed in May 2019 it is nearing a TRL 6—but requires further
development to reduce risk.

The FFG(X) test and evaluation master plan and independent technical
risk assessment are significant documents yet to be completed that will
help to further define risks and plans to address them. The test and
evaluation master plan serves to outline the program’s integrated test
program and master schedule of major test events or phases. Navy
officials expect the test plan to be approved in December 2019 to support
the Milestone B decision. They noted that the plan may need to be
updated once the FFG(X) design is selected based on the additional
information that will be available to inform test planning. The independent
technical risk assessment is intended to categorize risks that cover a
broad range of factors, including technology maturity, integration needs,
and testing. If these factors are not sufficiently accounted for, a program
is likely to have difficulty meeting cost, schedule, and performance
objectives. An official from the Office of the Under Secretary of Defense
  DOD, Department of Defense Technology Readiness Assessment (TRA) Guidance
(April 2011).

Page 31                                          GAO-19-512 Guided Missile Frigate
for Research and Engineering who is participating in the technical
assessment for FFG(X) stated they plan to complete their work to identify
any risks in March or April 2020. The official added that at this early stage
of their activities, the potential for integration risks associated with the
FFG(X) combat system is an area of interest because of the extensive
number of existing systems that will need to be integrated into the new
ship design.

Navy test officials as well as DOD systems engineering and test officials
noted potential advantages and risks related to FFG(X) program’s plans
for using existing technologies. Similar to what we previously discussed
about the use of a parent design, the officials stated that the use of
existing systems can increase understanding of the ship and its systems,
which may help the FFG(X) program achieve its planned accelerated
timeline between development and delivery. However, systems
engineering and test officials also indicated that, regardless of maturity,
challenges typically arise when DOD takes systems from other platforms
and attempts to integrate and use them in new ways on a new platform.
They cautioned that programs like FFG(X) that plan to use a lot of
government-furnished equipment or non-developmental systems often
underestimate the amount of integration challenges they will face. The
officials told us this may occur because of overconfidence that the
maturity of systems demonstrated through use on other platforms
eliminates most technical risk, whereas experience confirms that it is
always challenging to get systems to fit and work together as intended on
a new platform. Officials from the office of the Director, Operational Test
and Evaluation said that the parent design approach for FFG(X) may
enable the Navy to reduce some developmental testing activities;
however, operational testing expectations would largely be unaffected
because there will still be substantial integration to be completed and
tested in order to demonstrate mission capabilities.

Page 32                                         GAO-19-512 Guided Missile Frigate
                           The draft FFG(X) request for proposal indicates that the Navy plans to
Contracting Plans for      use a fixed-price incentive contract to help control ship costs and special
FFG(X) May Help            performance incentive fees. 35 In addition, the Navy plans to use
                           guarantees with limited liability for the shipbuilder to correct defects after
Mitigate Some Risk,        ship deliveries. Our prior work has found that using comprehensive ship
and Use of                 warrantees instead of guarantees could reduce the Navy’s financial
                           responsibility for correcting defects.
Warranties Could
Potentially Further
Reduce Costs
Use of Fixed-Price         After completion of a full and open competition for FFG(X) detail design
Incentive Contract         and construction, the Navy plans to use a fixed-price incentive contract in
                           combination with additional special performance incentive fees to procure
Provides Benefits, but
                           the lead and follow-on ships. As we have previously reported, full and
Planned Contract           open competition allows all responsible sources—or prospective
Structure Results in the   contractors that meet certain criteria—to submit proposals for a contract.
Navy Absorbing More Cost   The use of competition in contracting is a critical tool for achieving the
Risk                       best possible return on investment for taxpayers. Competitively awarded
                           contracts can save the taxpayer money, improve contractor performance,
                           and promote accountability for results. 36 The fixed-price incentive
                           contracting approach for FFG(X) is intended to incentivize the contractor
                           to control costs and meet performance requirements. This contracting
                           strategy represents a significant departure from previous surface
                           combatant programs in which the Navy negotiated cost-reimbursement
                           contracts for construction of the lead ship. Under cost-reimbursement
                           contracts, the Navy assumes the cost risk because the shipbuilder is

                             There are two types of fixed-price incentive contracts: fixed-price incentive (firm target)
                           and fixed-price incentive (successive target). Fixed-price incentive (firm target) contracts
                           are commonly used in Navy shipbuilding programs. In contrast, fixed-price incentive
                           (successive target) contracts are rarely used in Navy shipbuilding programs. These
                           contracts are used in situations involving procurement of the first or second production
                           quantity of a newly developed item when cost or pricing information available at the time
                           may not be adequate for the establishment of an fixed-price incentive (firm target) contract
                           but when that information is expected at a point relatively early in performance of the
                           contract. Our analysis did not include any fixed-price incentive (successive target)
                           contracts. For purposes of this report, when we refer to fixed-price incentive contracts, we
                           mean fixed-price incentive (firm target) contracts under the larger umbrella of fixed-price
                           incentive type contracts.
                             GAO, Federal Contracting: Opportunities Exist to Increase Competition and Assess
                           Reasons When Only One Offer Is Received, GAO-10-833 (Washington, D.C.: July 26,

                           Page 33                                                   GAO-19-512 Guided Missile Frigate
reimbursed for its allowable incurred costs to the extent prescribed in the
contract, regardless of whether the work is performed to the exact level
desired by the Navy. For example, our prior work found that the Navy’s
decisions to accept the first two LCS in incomplete, deficient conditions
complied with federal acceptance provisions, largely due to the cost-
reimbursement type contracts in place to construct these ships. 37

Fixed-price incentive contracts provide an incentive for the shipbuilder to
control costs in order to maximize profit. Fixed-price incentive contracts
generally include a profit adjustment formula referred to as a shareline, as
well as a price ceiling, target cost, and target profit. The structure of the
shareline establishes how cost overruns or underruns in relation to a
target cost are shared between the government and shipbuilder. For
example, the 70/30 shareline that the Navy is planning for FFG(X) lead
ship overruns means that the government pays 70 percent of cost and the
shipbuilder pays 30 percent when the cost exceeds the target cost up to
the price ceiling. Generally, the shareline functions to decrease the
shipbuilder’s profit as actual costs exceed the target cost. The price
ceiling is generally the maximum the government will pay under the
contract and is typically negotiated as a percentage of the target cost. 38
The target cost generally informs the shareline and price ceiling.

Given the unknowns associated with design and construction, the Navy
plans to account for these unresolved risks by assuming responsibility for
cost growth above DOD recommended guidance. As we reported in
March 2017, when the Navy assumes a greater share of cost overruns
above the target cost, accepts a higher price ceiling, or both, the fixed-
price incentive elements may not provide sufficient motivation for the
shipbuilders to control costs. 39 Figure 8 depicts the how risk changes as
the Navy departs from a 50/50 shareline for cost overruns and a ceiling
price of 120 percent.

  GAO, Littoral Combat Ship: Navy Complied with Regulations in Accepting Two Lead
Ships, but Quality Problems Persisted after Delivery, GAO-14-827 (Washington, D.C.:
Sept. 25, 2014).
  The government may pay for adjustments under other contract clauses that are
unrelated to the contract price ceiling. See FAR § 16.403-1(a).
  GAO, Navy Shipbuilding: Need to Document Rationale for the Use of Fixed-Price
Incentive Contracts and Study Effectiveness of Added Incentives, GAO-17-211
(Washington, D.C.: Mar. 1, 2017).

Page 34                                               GAO-19-512 Guided Missile Frigate
Figure 8: Department of Defense Fixed-Price Incentive Contract Shareline and Price Ceiling Risk

                                         As we previously noted, for the FFG(X) lead ship the Navy is planning to
                                         have a shareline of 70/30 for target cost overruns. The Navy also plans to
                                         have a 60/40 target cost overrun shareline for the second ship, and a
                                         50/50 overrun shareline for the remaining seven ships included in the
                                         detail design and construction contract award. Based on this plan, the first
                                         two FFG(X) ships will depart from DOD’s guidance recommending a
                                         50/50 point of departure for negotiations between the government and
                                         shipbuilder for cost overruns up to the price ceiling. This results in more
                                         cost risk to the government for two ships in the detail design and
                                         construction contract. The Navy’s planned price ceiling for the 10 ships
                                         included in the contract award may deviate from DOD’s guidance
                                         recommending a ceiling price set at 120 percent of target cost as a point
                                         of departure for fixed price incentive contracts. 40 Specifically, Navy
                                         officials stated that the maximum ceiling price could be as high as 125
                                         percent for all of the ships. However, Navy officials stated that the request
                                         for proposal will provide incentive for industry to propose the minimum
                                         price ceiling that sufficiently accounts for the proposal’s level of risk,
                                         meaning that industry may propose price ceilings below 125 percent. The
                                         Navy also plans to include options for a special performance incentive fee
                                         for each of the FFG(X) ships, which will be established for the final
                                         request for proposal. These incentives have the potential to increase
                                         shipbuilder profitability.


                                         Page 35                                             GAO-19-512 Guided Missile Frigate
FFG(X) Plan for Guaranty   As outlined in the FFG(X) draft detail design and construction request for
Use Is More Robust than    proposal and confirmed by program officials, each frigate will have a
                           guaranty period that commences at ship delivery and is expected to end
Recent Shipbuilding
                           18 months after delivery. Navy officials stated the guaranty is intended to
Programs, but Use of       formalize a period of responsibility during which the shipbuilder must
Warranties Could Provide   correct defects, with the cost to the government and the contractor based
More Value to the          on the contract terms (cost shareline and price ceiling) associated with
Government                 the ship. During the guaranty period, the shipbuilder would be required to
                           correct all defects for which it is responsible, with proposals required to
                           include a minimum limitation of liability of $5 million per ship. Once the
                           total cost to correct identified defects reaches $5 million, the government
                           would pay the full cost to correct any additional guaranty period defects.

                           The $5 million minimum limitation of liability planned for FFG(X) has a
                           higher dollar value and covers a longer period of time than other recent
                           shipbuilding programs. For example, we previously found that for the
                           Navy’s LPD 25 amphibious transport dock construction, the contract
                           initially included a $1 million limitation of liability. 41 Navy officials stated
                           that the final request for proposal also will include a provision allowing
                           industry to propose a higher liability limit, up to and including no limitation
                           of liability. Navy officials said that any additional liability amount proposed
                           beyond the $5 million guaranty will be assessed as part of the technical
                           evaluation criteria used to select the winning FFG(X) design.

                           We found in March 2016 that the use of a guaranty did not help improve
                           cost or quality outcomes for the Navy and Coast Guard ships we
                           reviewed. We also found that commercial ship buyers and Coast Guard
                           officials stated that warranties foster quality performance because the
                           shipbuilder’s profit erodes as it spends money to correct deficiencies after
                           delivery, during the warranty period. 42 We further reported that the Coast
                           Guard has improved cost and quality by requiring the shipbuilder to pay to
                           repair defects by following Federal Acquisition Regulation warranty
                           provisions. For example, the Coast Guard paid up front for the Fast
                           Response Cutter warranty. The cost of the warranty amounted to 41
                           percent of the total defect correction costs. Although this ship does not
                           have the size and advanced systems planned for FFG(X), it serves to
                           demonstrate the potential value to the government presented by the use
                             GAO, Navy and Coast Guard Shipbuilding: Navy Should Reconsider Approach to
                           Warranties for Correcting Construction Defects, GAO-16-71 (Washington, D.C.: Mar. 3,

                           Page 36                                               GAO-19-512 Guided Missile Frigate
of warranties. The Coast Guard also used a fixed-price incentive contract
with a warranty on its Offshore Patrol Cutter—a ship of comparable size
to FFG(X). The first Offshore Patrol Cutter has a 2-year warranty, and
follow-on ships will have 1-year warranties. The Coast Guard pays a set
amount for these warranties, and in return, the shipbuilder must fix all
applicable defects identified within the agreed-upon time period
regardless of cost.

Rather than using guarantees for the FFG(X) contract to provide for the
correction of defects, the Navy could help control costs to the government
through the use of warranties. 43 Under warranties, the government
generally receives a contractual right for the correction of all defects for
which the shipbuilder is responsible at the shipbuilder’s expense. 44 The
use of warranties is typically not mandatory, but federal and defense
acquisition regulations instruct contracting officers to consider various
factors when deciding whether a warranty is appropriate for an
acquisition. The regulations also instruct contracting officers to use a
warranty when it is practicable and cost-effective to do so. 45 We
previously found that, unlike a warranty, the Navy almost exclusively paid
for defects that were the shipbuilder’s responsibility under a guaranty
because of the contract type and terms in contracts that we reviewed.
Such conditions limit the incentive to discover every deficiency during the
guaranty period, and may negatively affect quality improvements over

The Navy’s FFG(X) plans suggest that the Navy may be prematurely
discounting warrantees as a mechanism to improve ship quality and
decrease cost to the government. Navy officials told us that mandating

  In January 2018, the Navy issued shipbuilding contract guidance to contracting officers
in support of effective implementation and application of shipbuilding warranty and
guaranty provisions.
  See Federal Acquisition Regulation (FAR) Subpart 46.7.
  See FAR § 46.703; Defense Federal Acquisition Regulation Supplement § 246.708. For
shipbuilding contracts, Navy acquisition regulations expressly state that “contracts for new
construction shipbuilding, for which funds are expended from the Shipbuilding and
Conversion, Navy account, shall require, as a condition of the contract, that the work
performed under the contract is covered by a warranty for a period of at least 1 year.”
However, the regulations allow a Navy contracting officer to waive the requirement and
limit the liability of the work performed if they determine that a limited liability is in the best
interest of the Government. For FFG(X), the Navy plans to limit liability to $5 million per
ship as part of its guaranty. See Navy and Marine Corps Acquisition Regulation
Supplement § 5246.703.

Page 37                                                       GAO-19-512 Guided Missile Frigate
              that industry propose a warranty could result in additional costs to the
              government because the initial cost of the ship could be raised
              substantially to include the cost of the warranty. Additionally, Navy
              officials said a requirement for warranty pricing could serve to limit
              industry participation in the FFG(X) competition if offerors are unwilling to
              accept the risk associated with a warranty and unable to provide
              reasonable pricing. The Navy provided no analysis to support these
              claims and confirm a clear understanding of whether a warranty could
              provide greater value than the $5 million guaranty the Navy is proposing
              for FFG(X).

              As part of the competitive proposal process for FFG(X) detail design and
              construction, the Navy could maintain its plans to require a guaranty but
              also seek ship warranty pricing. The full and open competition for the
              FFG(X) contract award may increase the potential for receiving warranty
              pricing that provides a cost-effective alternative to the Navy’s guaranty
              plans. By limiting the request for proposal to guarantees, the Navy misses
              an opportunity to obtain information on what comprehensive warranty
              coverage against defects would cost, and use it to evaluate whether
              warranties could further reduce risk for the FFG(X) program.

              As the Navy approaches the Milestone B review for FFG(X), it is critical
Conclusions   that funding and other major programmatic decisions are fully informed by
              the knowledge necessary to support them. This is especially important to
              help ensure that the FFG(X) program does not face some of the same
              cost, schedule, and performance shortfalls that have been faced by the
              LCS program. The Navy’s fiscal year 2020 budget request to authorize
              and appropriate funding for the lead frigate was developed and submitted
              without the benefit of key cost and design information, such as the
              independent cost estimate and the final results from conceptual design.
              As a result, it is necessary that the Navy provide Congress with a clear
              understanding of FFG(X) cost expectations, including CAPE’s
              independent cost estimate, prior to awarding the detail design and
              construction contract. This will help ensure that the FFG(X) program is
              grounded in cost and design expectations that reflect the specific aspects
              of the ship that the Navy selects for construction.

              With the start of the planned $20 billion FFG(X) procurement
              approaching, the Navy has limited time left to position the government to
              obtain the best deal possible to fix any deficiencies discovered upon
              delivery of the first 10 ships. The Navy’s guaranty plan for FFG(X) offers
              some improvements compared to recent shipbuilding programs, but does

              Page 38                                         GAO-19-512 Guided Missile Frigate
                      not offer the degree of coverage that could potentially be provided by a
                      warranty. The competitive qualities of the FFG(X) acquisition approach
                      present an opportunity for the Navy to, at a minimum, obtain warranty
                      pricing from industry so that the program may use that input to evaluate
                      whether a warranty would be a cost-effective means of reducing the
                      government’s cost risk.

                      We are making two recommendations to the Secretary of the Navy:
Recommendations for
Executive Action      •   Ensure that the Assistant Secretary of the Navy for Research,
                          Development, and Acquisition provides to Congress the finalized
                          independent cost estimate prior to award of the detail design and
                          construction contract and demonstrates that the estimate is consistent
                          with the fiscal year 2020 budget request for the lead ship.
                          (Recommendation 1)
                      •   Ensure that the Assistant Secretary of the Navy for Research,
                          Development, and Acquisition directs the FFG(X) program office to
                          request pricing for warranties for the lead ship and the nine follow-on
                          ship options planned for FFG(X) as part of the detail design and
                          construction request for proposals. (Recommendation 2)

                      We provided a draft of this report to DOD for comment. DOD provided
Agency Comments       written comments, which have been reproduced in appendix I. In
and Our Evaluation    responding to the draft report, DOD concurred and described the actions
                      it planned to take to address our two recommendations.

                      In response to the second recommendation to request pricing for
                      warranties for the lead ship and the nine follow-on ship options planned
                      for FFG(X) as part of the detail design and construction request for
                      proposals, DOD acknowledged that the Navy will receive guaranty rather
                      than warranty pricing, but stated that the solicitation allows industry to
                      propose a higher limitation of liability amount, up to an unlimited limitation
                      of liability, in its guaranty pricing for FFG(X). While this could allow for a
                      better value to the government than has been typical for recent
                      shipbuilding programs, permitting higher limitation of liability guaranty
                      pricing but not requesting warranty pricing from offerors means the Navy
                      will not have complete information on whether a warranty could be more
                      cost-effective than a guaranty. Our prior work found that the use of
                      Federal Acquisition Regulation warranty provisions improved shipbuilding
                      program cost and quality outcomes. As a result, we maintain our belief
                      that the FFG(X) program office should implement this recommendation by

                      Page 39                                         GAO-19-512 Guided Missile Frigate
seeking warranty pricing as part of the detail design and construction
request for proposals. The full and open competition for the FFG(X)
contract award may increase the potential for receiving warranty pricing
that provides a cost-effective alternative to the Navy’s guaranty plans.

DOD stated that modifying the solicitation to incorporate a warranty
pricing component would cause an unacceptable delay to the FFG(X)
program, but did not provide an analysis to support this assertion or
specify the extent of delay associated with adding a warranty pricing
request. The current FFG(X) schedule has roughly 10 months between
the request for proposals deadline and the contract award, and the
program originally had been planning for the solicitation period to end in
December 2019 before moving the deadline to September 2019 shortly
before its release. We recognize the substantial effort the proposal
development and review process requires, but we continue to believe that
the government would benefit from adding a request for warranty pricing
to the detail design and construction solicitation. While DOD stated that
the Navy will support the recommendation after award by requesting
pricing for an unlimited warranty before exercising the first ship option,
doing so would eliminate any potential warranty pricing advantages that
would occur as a result of the competitive conditions that currently exist
for the current detail design and construction contract.

In addition to DOD’s written response to the report, DOD officials and
industry representatives associated with the FFG(X) conceptual design
activities provided separate technical comments, which we incorporated
as appropriate.

We are sending copies of this report to the appropriate congressional
committees, the Secretary of Defense, and the Secretary of the Navy.
This report will also be available at no charge on GAO’s website at

Page 40                                       GAO-19-512 Guided Missile Frigate
If you or your staff members have any questions regarding this report,
please contact me at (202) 512-4841 or oakleys@gao.gov. Contact points
for our Offices of Congressional Relations and Public Affairs may be
found on the last page of this report. GAO staff who made key
contributions to the report are listed in appendix II.

Shelby S. Oakley
Director, Contracting and National Security Acquisitions

Page 41                                       GAO-19-512 Guided Missile Frigate
List of Committees

The Honorable James M. Inhofe
The Honorable Jack Reed
Ranking Member
Committee on Armed Services
United States Senate

The Honorable Richard C. Shelby
The Honorable Dick Durbin
Ranking Member
Subcommittee on Defense
Committee on Appropriation
United States Senate

The Honorable Adam Smith
The Honorable Mac Thornberry
Ranking Member
Committee on Armed Services
House of Representatives

The Honorable Peter J. Visclosky
The Honorable Ken Calvert
Ranking Member
Subcommittee on Defense
Committee on Appropriations
House of Representatives

Page 42                            GAO-19-512 Guided Missile Frigate
Appendix I: Comments from the Department
             Appendix I: Comments from the Department of

of Defense

             Page 43                                       GAO-19-512 Guided Missile Frigate
Appendix I: Comments from the Department of

Page 44                                       GAO-19-512 Guided Missile Frigate
Appendix II: GAO Contact and Staff
                  Appendix II: GAO Contact and Staff


                  Shelby S. Oakley, (202) 512-4841 or oakleys@gao.gov.
GAO Contact
                  In addition to the contact named above, the following staff members
Staff             made key contributions to this report: Diana Moldafsky (Assistant
Acknowledgments   Director), Lori Fields, Kurt Gurka, Stephanie Gustafson, Chad Johnson,
                  Jennifer Leotta, Sean Merrill, Miranda Riemer, Jillena Roberts, Hai Tran,
                  and Alyssa Weir.

                               Page 45                                     GAO-19-512 Guided Missile Fri
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