oversight

Navy Shipbuilding: Cost and Schedule Problems on the DDG-51 AEGIS Destroyer Program

Published by the Government Accountability Office on 1990-01-17.

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

                 United   States   denerai   Accounting   Office
                 Report to the Secretary of Defense



January   1990
                 NAVY SHIPBUILDING
                 Cost ad Schedule
                 Problems on the
                 DDG-51AEGIS
                 Ikstroyer Program
National Security and
International Affairs Division

B-228619

January 17,199O

The Honorable Richard B. Cheney
The Secretary of Defense

Dear Mr. Secretary:

This report discusses our review of the DDG-51 AEGIS destroyer program, which is a 33-
ship, $27 billion program that extends through 1999. Bath Iron Works, the lead yard, was
awarded a contract to design and construct the lead ship. Ingalls Shipyard is the follow yard
and shares the program with Bath.

Bath Iron Works has encountered problems in designing and constructing the lead ship. The
contract costs have increased substantially, and the ship will be about 17 months late. Since
the lead ship is only 50 percent complete, additional problems could surface and delay the
follow ships.

The report recommends that you ensure that sufficient information exists to justify the
award of contracts for follow ships beyond the seven now under contract. As you know, 31
U.S.C. 720 requires the head of a federal agency to submit a written statement on actions
taken on this recommendation to the Senate Committee on Governmental Affairs and the
House Committee on Government Operations not later than 60 days after the date of the
report and to the House and Senate Committees on Appropriations with the agency’s first
request for appropriations made more than 60 days after the date of the report.

Copies of this report are also being sent to the Secretary of the Navy.

Sincerely yours,




Frank C. Conahan
Assistant Comptroller General
Executive Surnmq


                   The Navy currently plans to acquire at least 33 Arleigh Burke (DDG-51
Purpose            class) guided missile destroyers at a total cost of about $27 billion. The
                   ships will replace retiring battle-force destroyers and will be equipped
                   with the AEGIS combat system. Originally, the Department of Defense
                   (DOD) estimated the total cost of the lead ship at about $1.25 billion (in
                    1985 dollars) after design, construction, and outfitting with the AEGIS
                   combat system.

                   The lead ship’s complex design incorporates features to increase its abil-
                   ity to survive during battle. For example, it will have a seakeeping hull,
                   which increases stability by reducing vertical motion; all-steel construc-
                   tion and extensive armor around vital spaces; and a collective protection
                   system to protect the crew from contaminated air.

                   Because of the program’s importance to the Navy mission and its signifi-
                   cant costs, GAO assessed the status of the program.


                   In April 1985, the Kavy awarded Bath Iron Works a fixed-price incen-
Background         tive contract for the lead ship of the DDG-51 class destroyers. Bath Iron
                   Works was responsible for designing the ship, which included integrat-
                   ing the AEGIS combat system and other government-furnished equip-
                   ment. The contract called for ship construction to begin in May 1987,
                   with delivery of the ship to the Navy in September 1989.

                   The Navy has awarded construction contracts for seven additional, or
                   follow ships. The Navy awarded the contract for the second ship (DDG-
                   52) in May 1987 to Ingalls Shipbuilding and the contract for the third
                   ship (DDG-53) in September 1987 to Bath Iron Works. Contracts for five
                   additional ships (DDGs 54 through 58) were awarded in December
                   1988-three to Bath Iron Works and two to Ingalls Shipbuilding.


                   Bath Iron Works has encountered problems in designing and construct-
Results in Brief   ing the lead ship. As a result of these problems and Navy changes in the
                   contract requirements, costs have increased substantially over the origi-
                   nal contract estimate. Design and other problems contributed to two
                   revisions to the ship’s delivery schedule. The revisions, in January 1987
                   and February 1988, delayed the expected delivery by 17 months. Bath
                   Iron Works is now accelerating construction to meet the planned deliv-
                   ery in February 1991,




                   Page 2                                            GAO,‘NSW90-&4   Shipbuilding
                        Executive   Summary




                        While Bath Iron Works estimates that more than 50 percent of the lead
                        ship is complete, the major part of outfitting the ship still has to be
                        done. The combat system and certain other technical components have
                        to be installed and integrated within the ship. Often in the development
                        of new systems, it is these activities and the subsequent testing of the
                        complete system that surface problems that could affect follow ships’
                        schedule and cost. Therefore, GAO believes that DOD should ensure that
                        sufficient information exists on program development and affordability
                        before the award of contracts for follow ships beyond the seven
                        awarded to date.



Principal Findings

Design Delays           Bath Iron Works planned to prepare production drawings using
                        computer-aided design, but major problems arose. The computer equip-
                        ment did not have adequate data storage capacity needed to design a
                        complex warship. Design delays were also due to Navy changes in ship
                        requirements, late government-furnished design data for the reduction
                        gear, and difficulties with several developmental systems. As of Novem-
                        ber 1989, Bath Iron Works and Navy representatives believed that
                        design problems had been resolved and production drawings were essen-
                        tially complete. GAO believes that the installation and integration of the
                        ship systems, which still has to be done, could surface additional design
                        or performance problems.


Construction Problems   Design and other problems contributed to two revisions to the ship’s
                        scheduled delivery, totaling 17 months. The last revision to the delivery
                        schedule was made in February 1988. The ship, originally scheduled to
                        be completed in September 1989, is currently scheduled for delivery in
                        February 1991. Bath Iron Works is accelerating construction to meet
                        this date.

                        Bath Iron Works had not been able to perform as much construction in
                        the fabrication buildings as planned because of delays in preparing pro-
                        duction drawings. Therefore, more construction has been required in the
                        production yard, which is more time-consuming and costly.

                        Bath Iron Works launched the lead ship in September 1989. According
                        to Bath Iron Works representatives, the ship was more than 50 percent


                        Page 3                                           GAO,‘NSIAD!X-84   Shipbuilding


                                                                                                          I
                            Executive   Summary




                            complete in October 1989. However, to complete the ship requires incor-
                            porating and integrating the AEGIS combat system and demonstrating
                            that other systems, such as the collective protection system, work as
                            designed.


Cost Issues                 According to the June 1989 cost performance report, the total cost for
                            Bath Iron Works to design and construct the ship was estimated at
                            about $500 million (in May 1984 dollars). Design costs were expected to
                            more than double, from the original contract estimate of $111 million to
                            about $247 million. Construction costs were expected to grow more than
                            60 percent, from $157 million to about $253 million. In September 1989,
                            representatives of Bath Iron Works said that their estimate at comple-
                            tion had increased to $505 million and that costs could increase further.
                            ma believes that the total cost, after integrating the combat system, will
                            still be under the original estimate of $1.25 billion (in 1985 dollars).

                            In September 1989, Bath Iron Works and the Navy modified the lead
                            ship contract to resolve outstanding contractual issues. The issues were
                            varied and included many technical matters. The modification provided
                            for restructuring compensation to Bath Iron Works and, on the basis of
                            information supplied by Bath Iron Works to the Kavy, could increase
                            Navy compensation as much as $7 1.7 million. Projected losses of about
                            $41.5 million on design and construction would be eliminated.

                            GAO  has reported that over 50 percent of competitively awarded fixed-
                            price incentive shipbuilding contracts were experiencing overruns.
                            Therefore, GAO was concerned that the contract modification for chang-
                            ing the lead ship contract terms could establish an inappropriate prece-
                            dent. During the audit, GAO discussed this with Navy officials who said
                            they expected the total cost of the ship to be under the original estimate
                            and current shipbuilding appropriations were appropriate to cover the
                            additional costs. DOD, in commenting on this report, stated that the
                            restructuring will not set a precedent for future pricing of changes to
                            Navy shipbuilding contracts because this instance presented a unique
                            set of circumstances, GAO remains concerned about the modification in
                            view of the high incidence of overruns on other fixed-price contracts.


Rescheduling of the First   In January 1989, the Navy modified the DDG-52 contract to provide for
Two Follow Ships            better helicopter support capabilities, which rescheduled the delivery
                            date by 8 months. Also, the Xavy has approved a proposal by Bath Iron
                            Works to reschedule the DDG-53 construction schedule. The 7-month


                            Page 4                                            GAO,‘NSIAD90-84   Shipbuilding
                      Executive   Summary




                      rescheduling will allow Bath Iron Works to more efficiently schedule its
                      work on other ships it is building for the government. These ships will
                      be delivered earlier than expected.


Other Follow Ships    Contracts for seven follow ships, including the DDG-52 and DDG-53,
                      have been awarded and will be under construction before the lead ship
                      is completed. A major program milestone-approval      for full-rate pro-
                      duction - is scheduled for July 1990. Before then, contracts for five
                      more follow ships could be awarded. Moreover, contracts for another
                      five ships could be awarded before the scheduled February 1991 deliv-
                      ery of the lead ship. Thus, as many as 17 follow ships could be under
                      construction or awarded before the lead ship has finished testing and
                      has been delivered.

                      Although the Navy and Bath Iron Works believe the potential for lead
                      ship problems is minimal, much work needs to be done to complete the
                      ship. Unanticipated lead ship problems may increase costs and delay
                      deliveries for many follow ships. Because of the technical advances
                      being made in the destroyer program and because the lead ship is still
                      only about 50 percent complete, putting a large number of ships in con-
                      struction or under contract seems to be a risky procurement strategy.
                      Before contracting for additional ships, the Secretary of Defense should
                      review the status of the destroyer program. This is especially important
                      in light of current deliberations on force structure and budget
                      reductions.


                          recommends that the Secretary of Defense ensure sufficient infor-
Recommendations       GAO
                      mation exists to justify the award of contracts for follow ships beyond
                      the seven now under contract.


                           commented that the probability of a major problem affecting follow
Agency and            DOD
                      ships is minimal and did not concur in our recommendation in the report
Contractor Comments   draft. DOD said that it had complied with existing federal statute regard-
                      ing the adequacy and the evaluation of tests necessary to proceed
                      beyond limited production. It stated that the adequacy and results of
                      testing would continue to be evaluated and would be an important factor
                      in the deliberation and decision to award contracts for additional follow
                      ships.




                      Page 5                                           GAO/NSIALh90-84   Shipbuilding
Executive   Summary




GAO maintains the thrust of its recommendation because the program
risks are significant; however, GAO reworded the recommendation to
emphasize the need for high-level assurance on the overall program
development and affordability. If DOD is not able to provide the
assurances, it should delay contract award for additional follow ships.

Bath Iron Works commented that the report did not assess the validity
of the Navy’s acquisition process -most importantly, the fixed-price
incentive type of contract. Bath Iron Works commented that it has
become widely recognized that the use of a fixed-priced contract is not
workable or compatible with the developmental nature of a highly com-
plex warship.

GAO did not review the appropriateness of a fixed-price incentive con-
tract for the DDG-51 acquisition. However, in commenting on this
report, DOD did not agree with Bath Iron Works that, at the time of con-
tract award, a fixed-price incentive contract was inappropriate. DOD said
the contract terms at the time of award were appropriate to balance the
risk between the Navy and Bath Iron Works. It also said that while Bath
Iron Works’ bid was aggressive, it was not unreasonably low,




Page 6                                         GAO/NSIAD-90-84   Shipbuilding
Page 7   GAO/NSIAD-90-84   Shipbuilding
Contents


Executive Sun-u-nary                                                                                     2


Chapter 1                                                                                               10
Introduction            Bath Iron Works Awarded Lead Ship Contract
                        BIW and Ingalls Shipbuilding Awarded Follow Ship
                                                                                                        10
                                                                                                        11
                            Contracts
                        Objectives, Scope, and Methodology                                              11

Chapter 2                                                                                               13
Delivery Delays and     Lead Ship Delivery Delays
                        Design Delays
                                                                                                        13
                                                                                                        13
Cost Growth With the    BIW Actions                                                                     15
Lead Ship of the DDG-   Construction Inefficiencies                                                     16
                        Other Factors Cited by BIW as Contributing to Cost                              16
51 :Program                  Problems
                        Significant Cost Growth for Both Design and Construction                        17
                        BIW-Navy Agreement to Restructure Compensation                                  18
                             Under the Lead Ship Contract
                        Cost Growth on Shipbuilding Contracts                                           19
                        Conclusion                                                                      19
                        DOD Comments and Our Evaluation                                             20
                        BIW Comments and Our Evaluation                                             21

Chapter 3                                                                                               22
Lead Ship Delays        Impact on Lead Ship Delays on the DDG-52                                        22
                        Rescheduling of the DDG-53                                                      23
Create Potential        Potential for Major Problems With Follow Ships                                  24
Problems for Follow     Full-Scale Production Without Milestone IIIB Approval                           25
Ship Production         Conclusions                                                                     26
                        Recommendation                                                                  27
                        DOD and BIW Comments and Our Evaluation                                         27

Appendixes              Appendix I: Overview of Contract Costs for Lead Ship of                         30
                            DDG-51 Destroyer Class
                        Appendix II: Comments From the Department of Defense                        35
                        Appendix III: Comments from the Bath Iron Works                             49
                        Appendix IV: Major Contributors to This Report                              60




                        Page 8                                         GAO,‘NSIADs(L&I   Shipbuilding
         Contents




Tables   Table I. 1: Estimated Design and Construction Cost Data                    31
             Before Contract Modification
         Table 1.2: Computation of Estimated Navy Prices and                        32
             Estimated BIW Net Losses Before Contract
             Modification
         Table I.3: Comparison of Estimated Cost Data Before and                    33
             After Contract Modification
         Table 1.4: Comparison of Estimated Navy Prices and BIW                     34
             Profits (Losses) Before and After Contract
             Modification




         Abbreviations

         DOD        Department of Defense
         GAO        General Accounting Office
         BIW        Bath Iron Works Corporation


         Page 9                                        GAO/NSIAIHWM   Shipbuildii
Chapter 1

Introduction


                    The Arleigh Burke is the Navy’s newest class of guided missile equipped
                    destroyers. The Navy currently plans to acquire at least 33 destroyers at
                    a total acquisition cost of about $27 billion, or about $820 million per
                    ship. The ships will replace retiring battle force destroyers and perform
                    simultaneous missions in antiair, strike, antisurface, and antisubmarine
                    warfare.


                    In April 1985, the Navy awarded Bath Iron Works Corporation (BIW) of
Bath Iron Works     Bath, Maine, a fixed-price incentive contract for about $322 million; it
Awarded Lead Ship   included about $268 million to design and construct the first, or lead,
Contract            ship of the class (DDG-51). The remaining $54 million included $31 mil-
                    lion in profits to BIW and $23 million for other program support costs.
                    Originally, the Department of Defense (DOD) estimated the total cost of
                    the lead ship at about $1.25 billion (in 1985 dollars), which included
                    government-furnished equipment-primarily         the AEGIS weapon sys-
                    tem-and other program costs.

                    Ship construction was to begin in May 1987, with delivery to the Navy
                    in September 1989, a contract allowance of 54 months for design and
                    construction. Construction actually began in July 1987, and the ship was
                    launched in September 1989. According to BIW representatives, the ship
                    was more than 50 percent complete in October 1989. Delivery has been
                    rescheduled to February 1991.

                    BIW subcontracted with Gibbs & Cox Inc., a marine engineering firm, to
                    help it design the lead ship. Using the Navy’s specifications, Gibbs devel-
                    oped the initial engineering design for the various ship systems. BIW then
                    transformed this design into production drawings, which provide the
                    detailed instructions and techniques needed to construct. the ship.

                    The ship’s complex design incorporates features to increase its ability to
                    survive during battle. For example, it will have a seakeeping hull, which
                    increases stability by reducing vertical motion. The ship will have all-
                    steel construction and extensive topside armor in vital command, elec-
                    tronic, and machinery spaces. Better and redundant fire-fighting equip-
                    ment will allow the ship to withstand damage. Noise and infrared
                    suppression systems, in combination with other electronic gear, will
                    make the ship difficult to detect or target. The collective protection sys-
                    tem will protect the crew against contaminated air from nuclear, biologi-
                    cal, and chemical agents.




                    Page 10                                           GAO/NSIAD90434   Shipbuilding
                        Chapter 1
                        Introduction




                        In May 1987, the Navy awarded Ingalls Shipbuilding of Pascagoula, Mis-
BIW and Ingalls         sissippi, a $16%million fixed-price incentive contract to construct the
Shipbuilding Awarded    second ship of the class-the DDG-52. In September 1987, BIW was
Follow Ship Contracts   awarded a contract for about $190 million to construct the third ship,
                        the DDG-53. Contracts for five additional ships (DDG-54 to DDG-58)
                        were awarded in December 1988-three to BIW and two to Ingalls-at a
                        total price of about $1.2 billion.

                        Through fiscal year 1994, the Navy plans to award construction con-
                        tracts for 25 more DDG-51 class destroyers. The Congress approved an
                        authorization of 10 ships (5 ships each in fiscal years 1990 and 1991)
                        and an appropriation for 5 ships in fiscal year 1990.


                        We examined the status of the DDG-51 destroyer program because of
Objectives, Scope,and   the program’s importance to the Navy mission and its significant costs.
Methodology             We focused on contracts for the lead ship of the class and on contracts
                        for the first two follow ships. Our work did not include an evaluation of
                        the ship’s operational systems, such as the AEGIS combat system.
                        Because the DOD Inspector General had reviewed the Navy’s DDG-51
                        acquisition strategy and review process, we did not evaluate these
                        areas.

                        We interviewed officials and obtained data at the Naval Sea Systems
                        Command in Washington, D.C.; the Supervisor of Shipbuilding and Bath
                        Iron Works Corporation in Bath, Maine; and at the Supervisor of Ship-
                        building and Ingalls Shipbuilding in Pascagoula, Mississippi.

                        Cost data in this report (except as indicated) are shown in base month
                        (May 1984) dollars. These amounts exclude adjustments in compensa-
                        tion (escalation) that BIW receives under the contract based on certain
                        labor, material, and other indexes from the Bureau of Labor Statistics.
                        We relied on data in HIWand Navy cost reports.

                        In March 1989, we briefed staff of the House and Senate Appropriations
                        Committees to provide information and analysis in time to be of use to
                        the Congress in deliberations concerning the fiscal year 1990 budget.

                        As we were finalizing our review at BIW in September 1989, the Navy
                        and BIW modified the lead ship contract, which included restructuring
                        BIW’S compensation under the contract. Although we did not perform a




                        Page 11                                                     WS4 Shipbuilding
Chapter 1
tntroduction




detailed review of the justification supporting the contract restructur-
ing, we have provided information on the modification because it is inte-
gral to discussing BIW’Scosts under the contract.

We provided a draft of this report to both DOD and BIW for comments. We
revised the report to consider their comments where appropriate. DOD’S
comments appear in appendix II and BIW’S appear in appendix III.

Our review was performed in accordance with generally accepted gov-
ernment auditing standards. The review was performed between April
1988 and December 1989.




Page 12                                         GAO/NSIAD-90-84   Shipbuilding
Chapter 2

Delivery Delays and Cost Growth With the
Lead Ship of the DDG-51Program

                        Design delays with the lead ship contributed to revisions in the lead ship
                        delivery schedule and also created inefficiencies in constructing the
                        ship. The design delays and construction inefficiencies have caused sub-
                        stantial cost growth under the lead ship contract. As a result of these
                        problems and Navy changes in the contract requirements, costs have
                        increased substantially over the original contract estimate. Design and
                        other problems contributed to two revisions to the ship’s delivery sched-
                        ule, totaling 17 months.

                        In March 1989, BIW submitted a proposal for resolving outstanding con-
                        tractual issues, which included provisions for major changes to the con-
                        tract terms for calculating Navy compensation to BIW. The proposal was
                        negotiated in September 1989 and will substantially increase Navy com-
                        pensation to BIw.



                        gram because of design and other problems. In January 1987, the Navy
Delays                  and BIW revised the construction milestone dates, which included a 9-
                        month delay in the delivery to July 1990. The extension was the result
                        of changes to the ship’s specifications, corrections to government-
                        furnished information, and modifications to the duration and the phas-
                        ing of testing requirements of the AEGIS combat system.
                                                                                                         r
                        In February 1988, the Navy and BIW agreed to a second delay of 8
                        months, from July 1990 to February 1991. BIW had experienced produc-
                        tion inefficiencies and capacity limitations for CG-47 class cruisers
                                                                                                         I
                        within its fabrication buildings. Because of scheduling and space limita-
                        tions, delays with the cruisers also created delays for the destroyer
                        units. Although the Navy and BIW attributed the delay to the cruiser
                        production problems, design issues remained a major problem affecting
                        the lead ship delivery schedule.


                             encountered major delays in designing the lead ship. The design
Design Delays           BIW
                        delays were mainly the result of (1) problems with computer-aided
                        design, (2) changes in design requirements, (3) late government-
                        furnished design data for the reduction gear, and (4) difficulties in
                        designing several developmental ship systems.


Computer-Aided Design   BIW planned to prepare the lead ship production drawings using a com-
                        puter-aided design system. This involves the storing of ship dimensions,


                        Page 13                                           GAO/NSMD-90-M   Shipbuilding
                     Chapter 2
                     Delivery Delays and Cost Growth With the
                     Lead Ship of the DDGBI Pmgmm




                    material information, equipment arrangements, and specifications in a
                    3-dimensional computer model. Draftsmen use computer-aided design to
                    arrange ship zones and verify that all the systems interface properly
                    without any interferences. BIW was convinced that the computer-aided
                    design would reduce significantly the hours and elapsed time in develop-
                    ing the production drawings for the lead ship.

                    The computer-aided design for shipbuilding was planned for develop-
                    ment in parallel with the design of the lead ship. The engineering con-
                    cept of the computer-aided design had been tested in smaller pilot
                    projects but had never been used to develop the entire design of a com-
                    plex surface combatant ship.

                    BIW experienced problems using the computer-aided design to develop
                    the production drawings. RIW’Scomputer equipment did not have the
                    capacity to handle the extensive level of data required for the ship’s
                    various systems (such as piping, electrical, and structural systems).
                    Although RIWexpanded the computer capability to store additional data,
                    problems remained. The subcontractor, responsible for assisting in the
                    system development, did not meet its required dates for delivering the
                    software that was critically important to support the computer-aided
                    design. Because of these problems, BIW scaled down significantly the use
                    of computer-aided design and, with the assistance of other subcontrac-
                    tors, prepared a significant amount of the production drawings manu-
                    ally. BIW was able to use computer-aided design in developing the
                    structural drawings.


Changes in Design   BIWrepresentatives cited changes in design requirements as a major
Requirements        cause for the design delays. These changes have caused an increase in
                    the original target cost for the design portion of the contract by about
                    $37 million, from about $111 million to about $148 million as of June
                    1989. In conjunction with the approval for the second delivery delay in
                    February 1988, nrw agreed to incorporate a series of changes in the lead
                    ship, many related to the AEGIS combat system. These lead ship
                    changes, according to Navy representatives, included 47 modifications
                    to the original ship design and required revision of about 30 to 40 per-
                    cent of the drawings. The Navy eventually agreed to increase the esti-
                    mated price by about $14 million to make these changes.




                    Page 14                                         GAO,‘NSIAD-90&4   Shipbuilding
                            Chapter 2
                            Delivery Delays and Cost Growth With the
                            Lead Ship of the DDG-51 Program




Government-Furnished        One major design issue involved the reduction gear, which is a major
                            component of the ship’s propulsion system, Although the reduction gear
E;E for the Reduction       is furnished to BIW by the government, BIW is responsible for designing
                            the compartment for the ship’s reduction gear, as well as the equip-
                            ment-purifiers,    coolers, and pumps-needed for its operation. BIW had
                            to use preliminary data obtained from the Navy because the final design
                            data were not available. The final requirements, which were 6 months
                            late, necessitated increases to the size of coolers and design changes to
                            the compartment. According to BIW representatives, this resulted in
                            design rework, increased costs, and design delays.


Difficulties With Several   BIW  representatives told us that they have encountered problems with
Technical Systems           designing several technical systems for the ship, which BIW considers
                            developmental in nature. For example, the collective protective system1
                            provides environmental protection from nuclear, biological, and chemi-
                            cal threats. This system uses sophisticated air filtration units, airtight
                            compartments, and decontamination rooms. Problems occurred in
                            designing high-pressure fans, pressure-relief valves, and ventilation sys-
                            tems. In another example, the system to protect the ship from damage
                            by fragments during battle had to be modified.


                                 has taken several actions to deal with the design delays and prob-
BIW Actions                 BIW
                            lems. BIW and Gibbs & Cox significantly increased the number of engi-
                            neers and draftsmen working on the program. Further, in February
                            1988, BIW replaced several managers and reorganized the engineering
                            division to strengthen BIW’S ability to complete the drawings, incorpo-
                            rate engineering changes, and monitor the status of the drawings. In
                            mid-1988, BIWsubcontracted with several companies throughout the
                            country to help complete the initial drawings. In March 1989, BIW again
                            subcontracted with several engineering firms to help it incorporate revi-
                            sions in the drawings. According to BIW and Navy representatives, the
                            design problems have been resolved for the lead ship and the drawings
                            were essentially complete as of September 1989.

                            BIW representatives have said they know of no significant design issues
                            remaining to be resolved. While this may be true, much work remains to
                            be done, which includes incorporating and integrating the AEGIS combat
                            system and other components. Often in the development of new systems,

                            ’ Navy representatives told us that the collective protection system had been used on a smaller scale
                            on other surface combatants and that therefore the Navy did not consider the system developmental.



                            Page 16                                                             GAO/NSIAD90-84      Shipbuilding
                         Chapter 2
                         Delivery Delays and Cost Growth With the
                         Lead Ship of the DDG-61 Program




                         it is these activities and the subsequent testing of the complete system
                         that surface problems that could affect follow ships’ schedule and cost.


Construction             portions of the ship’s units inside fabrication buildings. This method,
Ine ff iciencies         called preoutfitting, calls for structural,‘piping, and electrical work to be
                         done to the extent possible inside the fabrication buildings under opti-
                         mum conditions. The ship’s structure is then formed by combining the
                         modular units outside the buildings in the production yard until the ship
                         is launched. Less construction, however, was performed during preout-
                         fitting than planned because the drawings were not completed. As a
                         result, more construction than planned has been done outside in the pro-
                         duction yard, which is more time-consuming and costly than performing
                         the work inside fabrication buildings.


                             representatives cited factors besides design problems and schedule
Other Factors Cited by   BIW
                         delays that contributed to the cost problems with the lead ship contract.
BIW as Contributing
to Cost Problems         The shipbuilding industry has declined significantly due to the virtual
                         elimination of commercial U.S. shipbuilding. According to BIW represent-
                         atives, the competitive award process forces shipbuilders to bid very
                         aggressively to obtain any of the limited number of Navy contracts. BIW
                         was in the final stages of completing ships in the FFG-7 Patrol Frigate
                         program at the time of the lead ship contract award. The company had
                         limited prospects for future work. Although BIW had been awarded con-
                         tracts for CG-47 class cruisers, BIWbelieved that the company’s
                         survivability depended on the DDG-51 destroyer program. Therefore,
                         according to BIW representatives, the firm bid very aggressively. BIWrep-
                         resentatives said that they looked at many contract variables and calcu-
                         lated cost estimates on the basis of good performance. BIWanticipated
                         cost savings through improved technology. They feel that it would be
                         optimistic to think that excellent performance on individual variables is
                         achievable, but excellent performance could be achieved on all variables
                         concurrently. This results in an aggressive bid with the likelihood of a
                         major cost overrun.

                         BIW representatives believe that having fixed-price contracts for proto-
                         type ships, such as the DDG-51 destroyer, is inappropriate because of
                         the developmental nature of the lead ship design and construction.
                         Thus, according to BIW representatives, the fixed-price incentive con-
                         tract puts an unfair burden of risk on the firm. BIW had never designed a


                         Page 16                                            GAO/NSIAD90-84   Shipbuilding
                   Chapter 2
                   Delivery Delays and Cost Growth With the
                   Lead Ship of the DDG-61 Program




                   collective protection system, for example, and thus the level of required
                   design work was unknown. Navy representatives said that cost control
                   was a prime factor in selecting the contract type and that the contract
                   terms at the time of contract award were appropriate to balance the risk
                   between the Navy and BIW.


                   The cost estimate for completing the design and construction portions of
Significant Cost   the contract has increased substantially since the contract award. The
Growth for Both    original estimate [target cost) in the April 1985 contract was about $268
Design and         million. This estimate was increased to $324 million to incorporate
                   approved Navy changes in the scope of the contract.
Construction
                   BIW’S  June 1989 cost performance report shows, however, estimates for
                   completing design and construction of the lead ship at about $500 mil-
                   lion.2 Design costs are expected to more than double, from the original
                   contract estimate of $111 million to about $247 million. Construction
                   costs are expected to increase more than 60 percent, from $157 million
                   to $253 million. In September 1989, however, BIWrepresentatives told us
                   that the estimate to complete the design and construction has increased
                   to $505 million and that costs might increase further. Details on the cost
                   increases are shown in appendix I.

                   Under the original contract terms, BIW would have incurred substantial
                   losses on the lead ship contract. On the basis of estimates at completion
                   in the cost performance report, BIW would have incurred losses of about
                   $41.5 million-about    $27.1 million on design and about $14.4 million on
                   construction. The losses would have been offset to some degree by earn-
                   ings under an incentive provision of the contract. However, a September
                   1989 modification to the Lead ship contract eliminated BIW’S losses under
                   the contract. See appendix I for details on the contract modification.




                   “Cost data are shown in base month (May 1984) dollars. The amounts exclude adjustments in com-
                   pensation (escalation) that BIW receives under the contract. BIW said that part of this cost growth
                   had occurred because government escalation payments were less than forecasted.



                   Page 17                                                             GAO/NSlAD-90-84     Shipbuilding
                     Chapter 2
                     Delivery Delays and Cost Growth With the
                     Lead Ship of the DDG51 Program




                     In March 1989, BIW submitted to the Navy a proposal to resolve out-
BIW-Navy Agreement   standing contractual issues. The issues were varied and included mat-
to Restructure       ters related to technical areas, such as the collective protection system
Compensation Under   and other developmental systems. Also, according to the proposal, HIW
                     would accelerate work to maintain the milestone schedule of the lead
the Lead Ship        ship. In September 1989, BIWand the Navy reached agreement on modi-
Contract             fying the lead ship contract.

                     The agreement provided for major restructuring of BIW’s compensation
                     under the contract. Among other things, the contract modification
                     increased the maximum contract price and revised a ratio used to calcu-
                     late BIW and Navy shares of certain cost increases. According to BIW rep-
                     resentatives, the changes in contract terms diminished the risk of a
                     financial loss and created a contractual environment more appropriate
                     to a developmental program.

                     The modification could increase Navy compensation to BIW as much as
                     $7 1.7 million, based on BIW information provided to the Navy during
                     negotiations of the contract modification. Projected losses of about $41.5
                     million on design and construction would be eliminated.

                     Navy representatives believe that changing the contract terms was
                     appropriate to compensate BIWfor the technical issues and recognizes
                     the appropriate risk sharing for a lead combatant ship. According to the
                     Navy program manager, the additional Navy compensation can be
                     absorbed within existing Navy appropriations. This may involve use of
                     savings from other shipbuilding programs.

                     Given the number of competitively awarded fixed-price incentive con-
                     tracts for shipbuilding that experience overruns, the contract modifica-
                     tion could, in our opinion, establish an inappropriate precedent of
                     significant importance in Navy shipbuilding programs. We discussed this
                     with Navy officials, who said that (1) the total cost for the DDG-51
                     (which includes the government-furnished weapon systems and other
                     equipment) was still under the original projection and (2) current ship-
                     building appropriations were adequate to cover the additional costs.




                     Page 18                                          GAO/‘NSIAD-9084   Shipbuilding



                                                                                                       ,
                         Chapter 2
                         Delivery Delays and Cost Growth With the
                         Lead Ship of the DDG-61 Program




                         In August 1989, we issued a report3 showing that many competitively
Cost’Growth on           awarded contracts are expected to have significant cost overruns. A cost
Shipbuilding Contracts   overrun is the projected cost over the target cost for the contract. Of 46
                         shipbuilding fixed-price incentive contracts reviewed, 25 were experien-
                         cing cost overruns, The net cost overrun was projected at about $3 bil-
                         lion of about $26 billion worth of contracts. On the basis of then-existing
                         contractual relationships, $1.8 billion represented the commercial ship-
                         yards’ potential liability and $1.2 billion was the Navy’s potential
                         liability.

                         Included in the proprietary supplement to that report4 were figures for
                         the DDG-51 class destroyers showing the percentage of work completed
                         on contracts and the cost estimate at completion. For the DDG-52, the
                         report shows 5 percent of work under the contract complete and the
                         estimated cost at completion already 9 percent above the contract’s ceil-
                         ing price. For the DDG-53, with only 1 percent of work under the con-
                         tract complete, the cost estimate at completion was 1 percent above
                         ceiling price.


                         Cost growth and schedule delays on the lead ship have resulted from
Conclusion               both difficulties with the design process and inefficiencies with the con-
                         struction process. Design delays have resulted from problems in the use
                         of a computer-aided design system, Navy changes in design require-
                         ments, late government-furnished design data for the reduction gear,
                         and difficulties with several technical systems. These design delays
                         affected the construction by limiting the use of efficient modular
                         construction.

                         In September 1989, BIW and the Navy modified the lead ship contract to
                         resolve outstanding contractual issues. The modification, among other
                         things, increased the maximum contract price and revised a ratio used
                         to calculate BIW and Navy shares for certain cost increases. The modifi-
                         cation, depending on the final costs for the lead ship, could increase the
                         Navy compensation to BIW by as much as $71.7 million. Projected losses
                         of about $41.5 million on design and construction would be eliminated.
                         The modification could establish an inappropriate precedent of signifi-
                         cant importance in Navy shipbuilding programs.


                         3Navy Contracting: Status of Cost Growth and Claims on Shipbuilding    Contracts (GAO/
                                89-189, Aug. 4, 1989).

                         4Navy Contracting:   Cost Growth on Shipbuilding   Contracts [GAO/NSIAD-89-189S,    Aug. 4,1989).




                         Page 19                                                             GAO/NSWM             ShipbuUdIng
                   Chapter 2
                   Delivery Delays and Cost Growth With the
                   Lead Ship of the DDG61 Program




                         comments on a draft of this report are provided in appendix II,
DOD Comments and   DOD’S
                   and BIW’S comments are in appendix III. Significant comments and our
Our Evaluation     evaluations are shown below and in chapter 3.

                   DOD commented that the Navy expected to deliver the lead ship under
                   the original congressional budget submission of $1.252 billion in fiscal
                   year 1985 dollars. DOD stated that the portion of this congressional sub-
                   mission (made in 1983) related to the shipbuilder ($542.2 million) com-
                   pared very favorably with the estimated end Navy cost for these items.

                   We question DOD’S rationale for comparing the current estimates at com-
                   pletion with the original congressional submission made in 1983. For
                   example, the original estimate of $542 million was updated and reduced
                   in fiscal year 1987 to about $357 million, or a reduction of about $185
                   million. However, whatever comparisons are used, BIW has experienced
                   significant cost problems on the design and the construction of the lead
                   ship.

                   DOD commented that the restructuring     “equitably adjusted” the contract
                   to recognize a number of changes and that the contract in its new form
                   provided an effective incentive arrangement and reflected the current
                   Navy position on risk and uncertainty for a lead combatant ship con-
                   tract. The report points out the potential cost impact of the contract
                   modification, as well as BIW and Navy positions on the contract
                   restructuring.

                   We did not assess the justification supporting the contract modification,
                    including whether the modification equitably adjusted the contract. The
                    modification was completed in mid-September 1989, near the end of our
                   review. However, given the number of fixed-price incentive contracts
                   experiencing overruns, we were concerned that the modification could
                   establish an inappropriate precedent within the shipbuilding industry.
                   Navy officials were not concerned because they felt the total costs of the
                   program would be under the original estimate and funds were available
                   to cover the additional costs. DOD said that the contract restructuring
                   would not set a precedent for pricing of changes to Navy shipbuilding
                   contracts because the changes in this instance presented a unique set of
                   circumstances. We remain concerned about the modification in view of
                   the high incidence of overruns on other fixed-price contracts.




                   Page M1                                          GAO/NSWW       Shipbuilding
                   chapter 2
                   DeliveryDelays and Cost Growth With the
                   Lead Ship of the DDG-51 Program




                        commented that the report did not assess the validity of the Navy
BIW Comments and   BIW
                   acquisition process-including   the type of contract (fixed-price
Our Evaluation     incentive) and the tight 54-month delivery schedule. BIWcommented
                   that it has become widely recognized that the fixed-priced form of con-
                   tract is not workable or compatible with the developmental nature of a
                   highly complex warship.

                   We did not review the appropriateness of a fixed-price incentive con-
                   tract for the DDG-51 acquisition. However, in commenting on this
                   report, DOD did not agree with Bath Iron Works that, at the time of con-
                   tract award, a fixed-price incentive contract was inappropriate. DOD said
                   that the contract terms at the time of contract award were appropriate
                   to balance the risk between the Navy and BIW. DOD also said that, while
                   BIW’S bid was aggressive, it, was not determined to be unreasonably low.


                   BIW  commented that recent policy guidance from the Congress and WD
                   supplied more than adequate rationale for the restructuring of the con-
                   tract but that the report created the impression that BIW alone con-
                   tended that fixed-price contracts were inappropriate for designing and
                   constructing highly sophisticated warships. RIWcommented that it was
                   convinced the modification had been negotiated because (1) BIW proved
                   entitlement, (2) actual experience has shown that several original con-
                   tract terms required adjustment, (3) the revised structure provided a
                   better form to efficiently complete the lead ship, (4) restructuring will
                   prove beneficial to follow ships, and (5) BIW gave additional considera-
                   tion such as extended warranties.

                   As discussed above, the scope of our review did not assess the appropri-
                   ateness of the contract modification, including whether the modification
                   equitably adjusted the contract. However, we did obtain a legal analysis
                   on the contract restructuring performed in August 1989 by the Naval
                   Sea Systems Command at the request of the Navy contracting officer.
                   According to the analysis, the submissions by BIW were less than specific
                   regarding the basis for its request to modify the contract sharing ratios
                   and ceiling prices. The vagueness was attributable to a number of
                   causes, including the difficulties created by the classified nature of the
                   subject matter and BIW’S general laxity in generating proposal support.
                   The analysis further pointed out that the Navy had a difficult time in
                   quantifying the adjustment due BIW. The analysis concluded that the
                   contract restructuring was highly unusual, but not improper, provided
                   that the ultimate impact is fully assessed and judged reasonable. The
                   contract was restructured in September 1989.



                   Page 21                                          GAO/NSIAD-SOsa   Shipbuilding
Chapter 3

Lead Ship Delays Create Potential Problemsfor
Follow Ship Production

                       Technical and other problems related to the lead ship must be identified
                       and resolved as early as possible before they affect the construction of
                       follow ships. The impact of lead ship design and construction delays on
                       follow ships to date has been minimal because of major changes in the
                       delivery schedules of both the DDG-52 and DDG-53 for other reasons.
                       Although the Navy and BIW believe that the potential for future lead
                       ship problems is minimal, much work needs to be done to complete the
                       ship. Unanticipated lead ship problems may increase costs and delay
                       deliveries of many follow ships in the program. With force structure and
                       defense budget reductions being deliberated, it is important that the sta-
                       tus of major programs, such as the DDG-51, be reviewed before major
                       increases are authorized.


                       The Navy is responsible for supplying the lead ship drawings to Ingalls
Impact of Lead Ship    Shipbuilding for use in constructing the DDG-52. BIW is contractually
Delays on the DDG-52   responsible for supplying the drawings to Ingalls Shipbuilding on behalf
                       of the Navy. The start of construction was delayed due to serious prob-
                       lems with incomplete drawings provided by BIW. For example, an Ingalls
                       review of 388 pipe drawings in January 1989 disclosed that 129 (or
                       about 33 percent) were less than 51 percent complete. Another review
                       of 112 ventilation drawings showed that 45 (or about 40 percent) had
                       extensive data missing. Similar problems existed for drawings covering
                       the first four ship assemblies that Ingalls planned to construct. For these
                       four assemblies, 16 percent of the pipe and 12 percent of the ventilation
                       drawings were incomplete.

                       In January 1989, the Navy modified the DDG-52 contract to provide for
                       better helicopter support capabilities. The modification called for a
                       reschedule of the DDG-52 delivery by 8 months and a maximum cost
                       increase of about $12.7 million. Although the 8-month delay is attrib-
                       uted to the helicopter modification, Ingalls representatives told us that
                       incomplete drawings would have significantly delayed the DDG-52
                       schedule.

                       In March 1989, Ingalls began to construct the DDG-52. When we dis-
                       cussed the lead ship design problems with Ingalls representatives in
                       June 1989, they said that many changes had been made in the drawings
                       affecting construction but that the major problems with the drawings
                       had been resolved. Although there was some uncertainty, Ingalls repre-
                       sentatives were optimistic about meeting the revised delivery date.




                       Page 22                                          GAO/NSIAb9044   Shipbuilding
                             Chapter 3
                             Lead Ship Delays Create Potential   Problems
                             for Follow Ship Production




Lack of Drawing              The DDG-52 contract between the Navy and Ingalls specifies that the
                             Navy will provide warranted drawings. The contract provides Ingalls
Verification Could Reslult   with a guarantee from the Navy that about 1,950 drawings are accurate
in Additional Ingalls        as of a certain warranty date (the warranty dates are contractually
Compensation                 established and staggered primarily over an l&month period). If the
                             contractor identifies a problem with a drawing after the warranty date,
                             the Navy is at risk for additional compensation to Ingalls for any addi-
                             tional costs to correct the problem.

                             The Navy planned considerable work to ensure that Ingalls received
                             accurate drawings. The DDG-51 contract required BIW to develop a plan
                             to ensure the accuracy and the completeness of DDG-51 drawings. This
                             plan was to include BIW’S methodology for (1) revising drawings on the
                             basis of problems identified during construction of the lead ship, (2) val-
                             idating drawings through the review and acceptance of drawings by
                             engineers, and (3) verifying drawings through comparison of drawings
                             with actual lead ship construction. In addition, the Navy contracted
                             with another marine engineering firm to review and comment on the
                             drawings.

                             Delays in designing and constructing the lead ship, however, may signif-
                             icantly diminish the amount of verification that can be accomplished in
                             time to benefit the DDG-52, which is already under construction. Under
                             the process, the drawings for a compartment of the lead ship would be
                             physically matched against the actual ship construction, and the draw-
                             ing would be updated for any identified interferences or problems.
                             Insufficient time exists between the physical check (and drawing
                             update) of the actual construction of the lead ship and the warranty
                             dates for many drawings. The Navy is considering a limited verification
                             effort that would examine the lead ship after the foundations, piping,
                             and ventilation work have been installed.

                             According to BIW representatives, every effort is being made to provide
                             complete and accurate drawings. BIW is providing updated information
                             to Ingalls daily.


                             In February 1989, HIW proposed to the Navy a realignment of construc-
Rescheduling of the          tion schedules for cruisers and destroyers. According to BIW representa-
DDG-53                       tives, the proposed sequencing of ships would maximize production
                             efficiencies for both the cruiser and destroyer programs at BIW. Further,
                             BIW representatives said that the revised approach would give them
                             additional time to resolve design and construction problems identified


                             Page 23                                           GAO/NSLAD90-84   Shipbuilding
                       Chapter 3
                       Lead Ship Delays Create Potential   Problems
                       for Follow Ship Production




                       during lead ship construction, The Navy approved the change in April
                       1989, and the DDG-53 contract was formally modified in September
                       1989.

                       Under the proposal, BIW would begin to construct the last cruiser in the
                       CG-47 class of ships before beginning to construct the DDG-53 and later
                       destroyers. Using this proposal, the DDG-53 delivery would be resched-
                       uled from July 1992 to February 1993. BIW also planned to deliver other
                       ships earlier than contractually required, One CG-47 class cruiser would
                       be delivered 7 months earlier, and a second cruiser would be delivered 1
                       month earlier. Three other DDG-5 I class destroyers under contract to
                       BIW would each be delivered 2 months early.


                       The completion of design, construction, and testing of the lead ship of
Potential for Major    any class of ship is important to the success of the entire program. Tech-
Problems With Follow   nical and other problems need to be identified and resolved as early as
Ships                  possible in order to minimize the impact of any identified problems on
                       follow ships. Although the Navy has test facilities for the propulsion
                       system and the AEGIS combat system, it is important to integrate the
                       various systems by building and testing the lead ship,

                       The lead DDG-51 ship delay may increase costs and delay deliveries of
                       follow ships to be built in the program. Because of design and delivery
                       delays with the lead ship, limited time exists to identify and resolve
                       problems that may adversely affect these follow ships. At the current
                       rate, contracts for 17 follow ships, or more than 50 percent of the ships
                       in the program, could be awarded before the lead ship has finished its
                       at-sea trials and has been delivered to the Navy. Any further delays in
                       the construction of the lead ship could further increase the possibility of
                       adversely affecting follow ships by compressing the time between the
                       completion of the lead ship and the construction of follow ships.

                       Although the scope of our review did not include a review of combat
                       systems, we did note potential problems with the ship’s antisubmarine
                       warfare combat system. A Navy operational evaluation completed in
                       January 1989 of the sonar to be used concluded that it was only poten-
                       tially operationally effective and suitable. The report recommended that
                       fleet introduction for the system be limited and that full fleet introduc-
                       tion not take place until the Navy corrects specific deficiencies noted in
                       the report. In April 1989, DOD performed an operational system assess-
                       ment on the sonar. The resulting report identified limitations in the



                       Page 24                                           GAO/NSIAD9084   Shipbuilding
                         Chapter 3
                         Lead Ship Delays Create Potential   Problems
                         for Follow Ship Production




                         scope of the testing and some potential problems. Nevertheless, DOD
                         determined the sonar to be operationally effective and suitable.

                         Although we did not evaluate this specific operational assessment, we
                         have reported1 on the quality of DOD operational testing and reporting.
                         Our report pointed out that (1) DOD operational testing reports contained
                         incomplete and inaccurate statements and (2) the majority of favorable
                         overall assessments of testing adequacy and of system effectiveness and
                         suitability were not supported by the evidence. If the sonar does need to
                         be modified, it could result in redesign and reconstruction work on the
                         lead ship and other follow ships.

                         The Navy has constructed a land-based engineering test site for the pro-
                         pulsion system for the DDG-5 1 in Philadelphia. This facility, which
                         became fully operational in the spring of 1989, is to test the engines,
                         reduction gear, electrical generators, and shaft for the ship. Through
                         this facility, as well as the combat system testing, the Navy believes it
                         has significantly reduced the risks in the performance of the lead ship
                         and thus the risks for the follow ships.

                         BIWrepresentatives stated that they believed the risks to follow ships
                         are low because design problems have been minimized. Although BIW
                         representatives believe there are always some modest design risks with
                         a lead ship, they are confident that the risks are manageable. Further,
                         they believe that further delays in contract awards could delay the start
                         of follow ship construction, This would increase the costs of follow ships
                         because production would be interrupted. The higher costs would be
                         attributed to loss of learning in production trades, loss of skilled labor,
                         material procurement, and other costs associated with delay.


                         The management of major acquisition programs, like the DDG-51, is nor-
Full-Scale Production    mally divided into phases to provide effective oversight during develop-
Without Milestone IIIB   ment and procurement. These phases include concept definition, full-
Approval                 scale engineering development, limited production, and full-rate
                         production. Both DOD and Navy approval is normally required at key
                         decision points, or milestones, before the program can proceed to the
                         next phase. In October 1986, the DDG-51 program received approval to
                         proceed with limited production (milestone IIIA). A total of seven follow
                         ships were authorized in fiscal years 1987, 1988, and 1989. In August

                         ‘WeaponsTesting:Quality of DOD Operational Testingand Reporting(GAO/PEMDE%32BR,July
                         26, 1988).



                         Page 25                                                  GAO/NSIAD90-84   Shipbuilding
              Chapter 3
              Lead Ship Delays Create Potential   Problems
              for Follow Ship Production




              1989, the program received extended approval for limited production
              through the award of ships in fiscal year 1990. According to Navy regu-
              lations, approval for limited production signifies that the system is
              potentially operationally effective. It also signifies that the system has
              undergone initial developmental and initial operational test and
              evaluation.

              The next major milestone for the DDG-51 program is approval for full
              rate production (milestone IIIB), which is scheduled for July 1990.
              Although a milestone IIIB decision normally requires successful comple-
              tion of technical and operational testing, the Navy recognizes the unique
              character of ship construction, including the 3 to 4 years necessary to
              build a ship. While there are some differences in documentation and
              decision reviews, the Navy’s management of ship programs is consistent
              with overall DOD and Navy requirements for managing major
              acquisitions.

              As discussed above, contracts for seven follow ships have been
              awarded. A total of 12 ships-the 7 ships awarded to date plus 5 addi-
              tional ships authorized in fiscal year 1990-could be awarded before the
              milestone IIIB decision in July 1990. Thus, 12 follow ships, or more than
              one-third of the ships in the program, could be either under construction
              or under contract with approval for only limited production. Moreover,
              as many as 17 ships could be under construction or awarded (which
              includes 5 ships in fiscal year 1991) before the lead ship has finished
              testing and been delivered to the Navy.


              In view of the problems encountered with the lead ship of the class and
Conclusions   the potential impact on follow ships, the Navy should tailor the DDG-5 1
              acquisition strategy to provide for a full-rate production decision meet-
              ing as soon as possible. Such a meeting would provide information to
              decisionmakers to assess the risks of the current acquisition strategy
              and to make any necessary changes if the risks are unacceptable. Unan-
              ticipated problems with the lead ship may increase costs and delay
              deliveries for many follow ships in the program.

              Because of the technical advances being made in the destroyer program
              and because the lead ship is still only about 50 percent complete, putting
              a large number of ships in construction or under contract seems a risky
              procurement strategy. Before contracting for additional ships, the Secre-
              tary of Defense should review the status of the destroyer program. This



              Page 26                                           GAO/NSlAD-SO-84   Shipbuilding
                  Chapter 3
                  Lead Ship Delays Create Potential   Problems
                  for Follow Ship Production




                  is especially important in light of current deliberations on force struc-
                  ture and budget reductions.


                  We recommend that the Secretary of Defense ensure sufficient informa-
Recommendation    tion exists to justify the award of contracts for follow ships beyond the
                  seven now under contract.


                  DOD commented that while any problem may affect follow ships, the
DOD and BIW       probability of a major problem with the DDG-51 affecting follow ships is
Cements and Our   minimal. The design has been supported by the construction of two land-
Evaluation        based engineering sites-one for the propulsion system and another for
                  the AEGIS combat system. The basic AEGIS combat system for the
                  destroyer has been proven at sea with the AEGIS cruiser program. Many
                  elements of the propulsion system have operated successfully at sea or
                  have been successfully tested.

                  We maintain that the program risks are significant because the Navy
                  will not actually know whether major problems exist with the lead ship
                  until testing at sea trials have actually been completed. At the current
                  rate, 17 follow ships, or more than 50 percent of the ships in the pro-
                  gram, could be under construction or could be awarded before the lead
                  ship has finished the sea trials and been delivered to the Navy.

                  Although DOD agrees that it is desirable to have a full-rate production
                  decision as soon as possible, DOD did not concur in our proposal in a
                  draft of this report. We had proposed that DOD ensure that the DDG-51
                  lead ship schedule provide for completion of the task and test necessary
                  to support an informed full-rate production decision before award of
                  contracts for additional follow ships. DOD said that it had complied with
                  existing federal statute regarding the adequacy and the evaluation of
                  tests necessary to proceed beyond limited production. It stated that the
                  adequacy and the results of testing would continue to be evaluated and
                  would be an important factor in the deliberation and decision to award
                  contracts for additional follow ships.

                  We maintain the thrust of our proposal because the program risks are
                  significant and it is timely to review the status of major acquisitions
                  because of likely force structure and budget reductions. However, we
                  have reworded the recommendation to emphasize the need for high-level
                  assurance on the overall program development and affordability. If DOD



                  Page 27                                            GAO/NSLAD-SO-84   Shipbuilding
Chapter 3
Lead Ship Delays Create Potential   Problems
for Follow Ship Production




is not able to provide the assurances, it should delay the award of addi-
tional follow ships,




Page 28                                          GAO,‘NSIAD%S4   Shipbuilding
Page 29   GAO/NSIAD-90-84   Shipbuilding
Appendix I

Overview of Contract Costsfor Lead Ship of
DDG-51 Destroyer Class

                In April 1985, the Navy awarded a fixed-price incentive contract to BIW
                for about $322 million. This included about $268 million to design and
                construct the lead ship. The remaining $54 million included $3 1 million
                in profits for design and construction and $23 million for other program
                support costs (including special studies, spares and repair parts, certain
                engineering services, and design and development of the machinery con-
                trol system). In June 1989, the BIW estimate to design and construct the
                lead ship had increased to $499.6 million.

                In September 1989, BIW and the Navy modified the lead ship contract to
                resolve outstanding contractual issues. The modification provided for
                major restructuring of BIW’S compensation under the contract. This
                appendix discusses (1) contract cost elements, (2) cost data before the
                contract modification, and (3) an analysis of the cost impact of the
                modification.


                Under the contract terms, the ultimate costs to the Navy and BIW are
Contract Cost   determined on the basis of final BIW costs relative to certain contractual
Elements        elements-target   costs, target profits, sharing ratios, and ceiling prices.
                Costs are accumulated separately for design, construction, and other
                requirements.

                A target cost was established separately for design and construction.
                The target cost is the negotiated dollar value (an estimate excluding
                profits) to complete the requirements in the original contract, plus the
                cumulative cost applicable to contract changes since the beginning of the
                contract. The target price consists of the target cost plus profits.

                The contract incentives were established through separate sharing
                ratios established in the contract for design and construction. The Navy
                and BIW share costs above the target costs up to the specified ceiling
                prices, which are the maximum contract prices the Navy will pay
                (including profits) under the contract. All costs above the ceiling are
                paid by the contractor. For example, the go-to-10 sharing ratio for
                design meant that the government was responsible for 90 percent of
                costs above the target cost up to the ceiling price and that BIW was
                responsible for 10 percent of the costs above the target cost. The ceiling
                prices were specified in the contract as percentages of the target costs.

                Contract amounts are shown in base month (May 1984) dollars. The con-
                tract amounts exclude adjustments in compensation (escalation) that
                BIW receives in accordance with the contract provisions. The escalation




                Page 30                                            GAO/NSIAlHO-84   Shipbuilding
                                         Appendix I
                                         Overview of Contract Costs for Lead Ship of
                                         DDG-51 Destroyer Class




                                         is computed on the basis of certain labor, material, and other indexes
                                         from the Bureau of Labor Statistics.


                                         Lead ship contract cost data based on the cost performance report (June
Cost Data Before the                     1989) are shown in table I. 1.
Contract Modification
Table 1.1 Estimated Design and
Construction Cost Data Before Contract   Dollars   in millions
                                                                        .-..            -
Modification                                                                                                      Design             Construction
                                                   _~. .-__-                                      --
                                         BtW cost estimates         at comptetlon        (EAC)                     $247 1                       $252.5
                                                                                                        --
                                         Target costs                                                                147.6                        176.4
                                         Target    profits                                                            10.5                         26.1
                                                                                                                             “-~
                                         Tarqet    prices                                                            158.1                       202.5
                                         Costs over targets         (EACs less target          costs)                 99.5                         76.1
                                         Sharing    ratios                                                    90/l 0 ratio                  50/50 ratio
                                                   “_     ~~~-~~~              ~                                                   . _-~-
                                         Ceiling   prices                                                            220.0                        238.1
                                         Ceiling   prices-percentages              of target    costs        149 percenta               135 percent

                                         aThe contract established a celling ratio of 145 percent for the design portion of the contract The celling
                                         price for certain engineering changes in the contract was negotiated at 175 percent The combination of
                                         these results IS a revised cellmg at about 149 percent.


                                         On the basis of the above data, the contract price to the Navy for design
                                         and construction, as well as BIW’S profit or losses, could be estimated.
                                         The Navy would be responsible for paying the ceiling price for design
                                         ($220 million) and construction ($238.1 million) because of the level of
                                         BIW’Scosts. Any additional costs incurred over the ceiling price would
                                         have been BIW’S responsibility. BIWwould have incurred about a $41.5
                                         million loss. The computations derived from a cost analysis prepared by
                                         the Navy are shown in table 1.2.




                                         Page 31                                                                GAO,‘NSIAD90-94        Shipbuilding
                                          Appendix 1
                                          Overview of Contract Costs for Lead Ship of
                                          DDG-51 Destroyer Class




Table 1.2 Computation of Estimated Navy
Prices and Estimated BIW Net Losses       Dollars in millions                                        __-     __-              ----
Before Contract Modification              Navy price                                                               Design             Construction
                                          Target   costs                                                            $147.6                    $176.4
                                          Navy share of costs over targets up to ceiling
                                             pricea                                                                   61.9                       35.6
                                                                      - .~ ----.-
                                          Target profits                                                              10.5                       26.1
                                            Estimated        Navy prices                                            $220.0                    $238.1

                                          BIW profit (loss)                                                 _____I______-
                                          Target   profits                                                           10.5                        26.1
                                                                                                           __-.~
                                          BIW share of costs       over tzrgets   up to ceiling
                                            price                                                                    (10.5)                     (26.1)
                                          BIW costs over ceiling                                                     (27.1)          --___      (14.4)
                                                                                             ___--         __-
                                            BIW net profits      (losses)                                           ($27.1)           ____-    ($14.4)

                                          aThese amounts are dewed from a formula in the contract. When the costs approach the ceiling price,
                                          the amounts do not mathmatlcally equate directly to the sharing ratio percentage.



                                          In September 1989, BIW and the Navy modified the lead ship contract to
Analysis of the                           resolve outstanding contractual issues. The modification provided for a
Estimated Cost Impact                     major restructuring of BIW’S compensation under the contract. The modi-
of the Contract                           fication called for (1) increasing the target cost by $3 1 million and target
                                          profit by about $3.7 million, (2) combining the design and construction
Modification                              portions of the contract, (3) revising the sharing ratio to SO-to-20 for
                                          combined design and construction costs, and (4) increasing the ceiling
                                          ratio to 15 1 percent of target cost for design and construction.

                                          Table I.3 compares estimated costs before the contract modification
                                          with estimated costs after the modification. The first column represents
                                          the total of design and construction data in the June 1989 cost perform-
                                          ance report. (See table I. l.} The second column represents an estimate
                                          after the modification, based on the provisions of the contract modifica-
                                          tion and information as of September 1989 provided by BIW to the Navy
                                          during negotiations of the modification. The estimate is also based on
                                          the revised ceiling price for design and construction.




                                          Page 32                                                                GAO/NStAIH3O-84       Shipbuilding
                                            Appendix I
                                            Overview of Contract Costs for Lead Ship of
                                            DDG-K1 Destroyer CIMS




Table 1.3: Comparison of Estimated   Cost
Data Before and After Contract              Dollars   in millions
                                                                                                       Design and construction estimates
                                                                                                  Before modification   After modification
                                            Cost estimates           at completion     (EAC)                    $499.6                 $529.8
                                            Taraet    costs                                                      324.0                  350.9
                                            Target profits                                                         36.6                   40.0
                                            Target    prices                                                      360.6                 390.9
                                            Costs over targets             (EACs less target
                                              costs)                                                              175.6                 178.9

                                            Sharing      ratios
                                               design                                                       90/10 ratio
                                               construction                                                 50150 ratio
                                               combined           design    and construction                                      80/20 ratio

                                            Ceiling     prices                                                    458. t                529.8
                                            Ceiling prices-percentages                of target
                                              costs
                                               design                                                      149 percent
                                               construction                                                135 percent
                                               combined           design    and construction                                    151 percent

                                            Share of costs over target
                                               Navy costs          up to ceiling                                   97.5                  138.9
                                               BIW costs          up to ceiling                                    36.6                   40.0
                                               BIW costs over ceiling                                              41.5                        -0.
                                               Total f3IW costs over target                                        78.1                   40.0



                                            On the basis of the data, a comparison of the Navy’s prices and BIW’S net
                                            profit or losses can be estimated. On the basis of the estimates, the con-
                                            tract modification could increase compensation to BIW by as much as
                                            $71.7 million. The estimated Navy price would increase from $458.1 mil-
                                            lion to $529.8 million. At the revised ceiling, BIW’S estimated loss of
                                            $41.5 million for design and construction is eliminated. If costs increase
                                            beyond the ceiling price, BIW would absorb them all and incur them as
                                            losses. The computations are shown in table I.4.




                                            Page 33                                                          GAO/NSL4D90-84     Shipbuilding
                                          Appendix I
                                          Overview of Contract Costs for Lead Ship of
                                          DDG-61 Destroyer Class




Table 1.4: Comparison of Estimated Navy
Prices and BIW Profits (Losses) Before    Dollars   in millions
and After Contract Modification                                   _---        ---
                                                                                                         Design and construction estimates
                                          Navy price                                                Before modification   After modification
                                                                  __     -.-___
                                          Target    costs                                                         $324.0                 $350.9
                                                                 .----
                                          Navy share of costs over target            up to
                                             ceiling price                                                          97.5                  138.9
                                                           ---~      -.-.
                                          Target profits                                                            36.6                    40.0
                                                                                                                                         $529.8
                                          ~-.Estimated      Navy prices                                           $458.1

                                          BIW profits (losses)
                                                           --.    -
                                          Target profits
                                                         --_~--_-                                       -
                                                                                                                    36.6                    40.0
                                          BIW share of costs over target            up to ceiling
                                            price                                                                   (36.6)                 (40.0)
                                                                                                                                             -
                                          BIW costs over ceiiing                                                    (41 5)
                                            BIW net profits       (losses)                                        ($415)                    $0.0


                                          The contract also provides an incentive pool of $19 million to reward
                                          BIW performance for design and construction. Each 6-month period, the
                                          Navy assesses BIW performance in certain areas and awards funds from
                                          the incentive pool. The Navy assesses technical matters such as the
                                          quality of the engineering and workmanship, as well as management
                                          matters such as BIW’Sresolution of problems. BIW has earned incentives
                                          to date of about $11.3 million of a potential of about $13.9 million.




                                          Page 34                                                              GAO/NSIAIHO-S4    Shipbuilding
Appendix II

CommentsFrom the Department of Defense



                               DIRECTOR      OF DEFENSE       RESEARCH       AND    ENGINEERING

                                               WASHINGTON.        DC   20301-3010




              Mr. Frank C. Conahan
              Assistant    Comptroller     General
              National    Security     and International
                  Affairs   Division
              U.S. General Accounting         Office
              Washington,    DC 20545

              Dear Mr.      COnahdn:

                     This is the Department        of Defense      (DOD) response    to the General
              Accounting    Office     (GAO) draft   report,    "NAVY SHIPBUILDING:        Cost and
              Schedule   Problems     on the DDG-51     Destroyer     Program,"   dated October     13,
              1989 (GAO Code 394265/0SD Case 8149)+               The Department     agrees in part
              with the report      findings,    but disagrees      with the recommendation.

                       The DOD does not agree with the recommendation                           to delay the
              scheduled       award of contracts             for additional      follow       ships,      pending
              caompletion       of operational          tests    for a Milestone        IIIB full         rate
              production        decision.          In the DDG-51 program DOD has complied                      with the
              existing      Federal       statute     regarding      the adequacy and evaluation                  of the
              tests     necessary       to proceed beyond low-rate             initial        production--a
              decision      made in October            1986.     That testing      was based on key compo-
              nent tests,        as allowed         under Title      i0, rJ.S.C.,      Se&Ion        i36.      Addi-
              tional     operational         testing      has taken place since then and will                                    I
              continue      to be evaluated           by the DOD, in accordance               with the existing
              Federal      statute.       The additional        operational      testing       will     be an
              important       factor      in the deliberation           and decision        to award contracts
              for additional          follow      ships.

                       The basic report           is a balanced       presentation        of the facts,       data
              and rationale          on the DDG-51 program.             The Executive        Summary, however,
              conveys a more negative               message than the body of the report,                  because
              balancing         and clarifying       statements      are not present.           Unfortunately,
              many    readers       will    only scan the Executive             Summary.     It is the
              Department's          position     that the problems          cited   in this     report,     which
              was initiated          by the GAO approximately             two years earlier,          have been
              largely      overcome.         The shipyards      participating         in the DDG-51       program
              are meeting         the revised       design and construction             schedules     and the
              lead ship end cost compares favorably                     with the original          estimate
              provided        the Congress.




                  Page 36                                                                   GAO/NSIADSO-84        Shipbuilding
     Appendix II
     Comments From the Department      of hfense




      The detailed    DOD comments       on each finding     snd the recomnendation
are provided    in the enclosure.         The DOD appreciates     the opportunity
to comment on the &aft       report.




Enclosure




     Page 36                                                    GAO/NSLAD90-84   Shipbuilding
                               AppendixII
                               Comments       From the Department      of Defense




                                              GAO DRAFT REPORT - DATED OCTOBER 13,                     1989
                                                    (GAO CODE 394265)              OSD CASE 8149

                                       “NWY    SHIPBUIIDING:          COST AND SCHEDULE PRXL6MS                 ON
                                                     TNE DDG-51 DESTROYER Pm"

                                          FIRDINGSANDREC~                        ION TO BE ADDRESSED
                                           INTBEDODRESPCWSE                   MTEE   GAODRAFTREPORT

                                                     DEPARTMENT OF DEEXNSE -S


                                                                      *****

                                                                      FINDXNGS


                         .   FINDING    A:     Navy Acuuisition          of the DDG-51 Dmtrover.             The GAO
                             reported     that the Navy plans to acquire                 at least    33 Arleigh
                             Burke class guided-missile              destroyers        (DDG-51 class)     at a total
                             cost of about $27 billion.                The GAO noted that,         in 1983, the
                             Navy estimated         the lead ship would cost a total               of $1.25 billion
                             after    design,     construction       and outfitting         with the AEGIS weapon
                             systf3n.     The GAO observed         that,      in April     1985, the Navy awarded
                             Bath Iron Works a fixed-price                 incentive     contract    for design and
                             construction       of the lead ship of the DDG-51 class destroyers.
                             The GAO noted that this             contract       called   for construction       of the
                             ship to begin in May 1987, with delivery                      of the ship to the Navy
                             in October       1989.     The GAO also found that the Navy has awarded
                             construction       contracts      for seven additional,            or follow    ships,   as
                             follows:

                             -in May 1987,          the   second      ship      contract    (DDG-52)    to     Ingalls
                             Shipbuilding;

                              -in September 1987,              the   third      ship   contract    (DDG-53)       to Bath
                              Iron Works; and

                              -in December 1988, five additional           ship contracts                      (DDG-54
                              through   58)--three     to Bath Iron Works and two to                         Ingalls   Ship-
Now on pp. 10-I 1.            building.      (pp. I-3/GAO Draft    Report)

                              DOD RESPONSE:           Concur

                     l       FXNDXNG    B:   Lead Ship Delivery       Delays.    The GAO reported     that,
                             in January     1967, the Navy and Bath Iron Works revised            the
                             construction       milestone     dates, which included   a g-month delay in
                             the delivery--until          July 1990.   The GAO found that the delay was




                              Page 37                                                                   GAO,‘NSIAD-90-84       Shipbuilding
                       Appendix II
                       Comments From the Department                of Defense




                attributed        to design problems         and additional      time needed to test
                the AEGIS weapon system.                 The GAO also found that,           in February
                1988, the Navy and Bath Iron Works agreed to a second delay of
                eight     months--from        July 1990 to February         1991.      The GAO observed
                that,     although      the Navy and the contractor           attributed       the second
                delay to cruiser           construction      problems,    design     issues    remained    a
                major     problem      impacting      the lead ship delivery         schedule.      The
                GAO reported         that as a result        of design delays,         changes in
                contract       requirements       and inefficiencies        in construction,        the
                cost of the contract             will    be almost double the original            contract
Now orI p. 13   estimate.          (pp. 5-6/GAO Draft        Report)

                Don RESPONSE: Partially                     concur.         The GAO has correctly                  identi-
                 fied the delivery             extensions          and the dates that delivery                       sched-
                 ules were modified.                 The first         extension        was the result             of
                 changes to the ship specifications,                           corrections           to Government
                 furnished       information,           and modifications               to the duration              and
                phasing      of testing          requirements           of the installed               combat system.
                The test       schedule        revision         resulted       from experience              gained on
                the AEGIS cruiser              program.           The second extension                 was attribut-
                 able to production              inefficiencies             and capacity           limitations           at
                Bath Iron Works.               It should be noted that the schedule                              revisions
                were based on bilateral                   Bath Iron Works and Navy agreement.                                The
                Bath Iron Works is currently                       on schedule          with their          contract
                 requirements          established          20 months ago.              The DOD does not agree
                with the GAO statement                   (page 5), "As a result                  of these problem
                and Navy changes in the contract                          requirements,           costs will          be
                almost double the original                      contract       estimate..."             That statement
                appears to be based on a comparison                            of the original              contract
                target     price       for Detail         Design and Construction                    with the esti-
                mated cost at completion,                     and requires           some clarification.                  The
                contract       is a Fixed Price               Incentive        type.       With this contract
                type,    there       is a target          price      and a ceiling           price,       with ceiling
                being above target.                 Between target             and ceiling,           costs are
                shared between the contractor                        and the Navy, based on a share
                ratio.      Contractor           costs above target                reduce their          profit.          Bath
                Iron Work's proposed                target       price     was aggressive             and was likely
                to result        in a cost above target.                   The DDG-51 original                target
                price    was $346.0 million                 for all contract             line     items--not          just
                Detail     Design and Construction,                       The current         target       price      is
                $445.6 million            for the same contract                  items.       The difference              is
                the result         of authorized           contract        changes.          The original           Navy
                program estimate             for all shipbuilder                 items,      as shown on the Ship
                Construction,           Navy, Congressional                budget submission                (Plans,
                Basic and Changes),               was $542.2 million.                   The current          estimated
                cost to the Navy at completion                        for these items,               $564.5 million,
                reflects      risk sharing            in a Fixed Price               Incentive        contract.           The
                current     estimated          end cost compares very favorably                          with the




                      Page 38                                                                            GAO/NSIAD9O-84            Shipbuildii
                          Appendix II
                          Comments FromtheDepartmentof            Defense




                        original    Navy estimate,   The Navy               expects  to deliver       the   lead
                        ship under the original     Navy goal               and budget request        of
                        $1.252 billion,     in FY 1985 dollars.

                   .   HImIM;      c:     Delav8-Xawuter-tided                Deeian.       The GAO reported
                       that Bath Iron Works had planned                    to prepare       the lead ship
                       production       drawings       using a computer-aided              design system.       The
                       GAO observed        that the computer-aided               design     for shipbuilding      was
                       planned     for development           in parallel       with the design of the lead
                       ship.     The GAO found, however,                that the Bath Iron Works computer
                       equipment       did not have the capacity               to handle the extensive
                       level    of data required           for the various           ship systems and the
                       subcontractor         assisting       in the system development             missed dates
                       for delivery        of critical         software.       The GAO pointed        out that,     as
                       a result      of these problems,            Bath Iron Works scaled down signifi-
                       cantly    the use of computer-aided                 design and, with the assistance
                       of other subcontractors,                prepared      nearly     all of the production
                       drawings      manually.         The GAO concluded           that design delays
                       resulted      from the use of a computer-aided                    design system.
Now on pp.13-14.        (pp. 7-8/G&O Draft           Report)

                       DOD RESPONSE:          Concur.

                   .   B’WIM2     D:    Delaw--Chanue6          in Design     Wrcmmt6.             The GAO
                       reported     that contractor        representatives        cited   changes in design
                       requirements      as a major cause for the design delays.                     The GAO
                       found that changes have caused about a $36 million                       increase   in
                       the estimated       cost for the design portion              of the contract--from
                       about $111 million         to about $148 million,            as of July 1969.       The
                       GAO noted that,        in addition,        according    to Navy representatives,
                       44 changes in the lead ship design--                  many related     to the AEGIS
                       weapon system-- required          revision      of   30 to 40 percent       of the ship
                       drawings.       The GAO found that the Navy agreed to increase
                       payments to the contractor             by $16.6 million         to make these
                       changes.

                       The GAO also reported            that,     for the reduction          gear,    which is
                       Government-furnished,            Bath Iron Works had to use preliminary
                       data because       the final       design data was not available.                   The GAO
                       noted that the final           requirements,         which were six months late,
                       called      for changes that resulted             in (1) design         rework,
                        (2) increased       cost,    and (3) delay.           The GAO also reported             that
                       contractor      representatives          cited problems         designing      technical
                       systems such as those for nuclear,                   biological       and chemical
                       protection,       and for prevention           of damage from fragments               during
                       battle--which        they considered          developmental.          The GAO observed
                       that Bath Iron Works has taken several                     management actions            to
                       deal with the design delays               and problems,         including      signifi-




                         Page 39                                                                GAO/NSL4DSWM           Shipbuilaing
                              AppencIixiI
                              Comments      From the Department   of Defense




                     cantly       increasing      the number of engineers          and draftsmen      working
                     on the program,             The GAO noted that contractor           and Navy repre-
                     sentatives         believe     the design problems        have been resolved       for
                     the lead ship--that              the drawings     are essentially      complete    as of
                     September         1989.    The GAO concluded         that design delays       have
                     resulted        from (1) Navy changes in design requirements,                   (2) late
                     government         furnished       design data for the reduction          gear, and (3)
Now on p. 14.        difficulties          with several       developmental     systems.      (pp. S-lO/GAO
                     Draft      Report)

                     Da   REsFmsE:       Partially       concur.     This is the first          time Bath
                     Iron Works has designed            and constructed       a Collective        Protection
                     System for an entire          ship.      The system has, however,            been used
                     on a smaller     scale on other surface            combatants      and, therefore,
                     the Navy does not consider             it developmental.         The DOD recognizes
                     that there    is risk     in designing        and constructing         such systems on
                     a lead ship.      For this       reason it is appropriate            for the contract
                     to provide    for risk       sharing     between the Navy and the contractor.

                     The Navy is confident            with the lead ship design.               Ship design
                     has been supported          by construction        of two land-based           engineering
                     sites--one      for the propulsion         system and a second for the Aegis
                     Combat System.          The propulsion       plant      land-based     engineering
                     site,    built    to the Bath Iron Works design at the Naval Ship
                     Systems Engineering           Station,    Philadelphia,         was lit    off in April
                     1989 and completed          a Navy standard        full      power trial     in August.
                     The AEGIS Combat System, a follow                 on to the AEGIS Combat System
                     at sea on the TICONDEROGA Class                (CG 47) cruisers,          has a land-
                     based engineering         site     at the Combat System Engineering                Develap-
                     ment Site at Moorestown,              New Jersey.         It has completed       the
                     initial     operational       evaluation.       These two sites          have demon-
                     strated     the design and operability             of the two principal            ship
                     systems.       Consequently,        the Navy is confident          that these actions
                     have greatly        reduced the potential          for further       design problems.

                l   FIbDIMS     E:      Construction       Inefficiencies.             The GAO reported       that
                    the contractor's           construction         method called          for modular con-
                    struction       of portions       of the ship's          units     inside     fabrication
                    buildings.         The GA0 found, however,               that less construction           was
                    performed       this   way than planned             because the drawings            were not
                    completed.          The GAO observed          that,     as a result,         more construc-
                    tion has been done outside                in the production              yard, which is more
                    time consuming         and costly.          The GAO concluded             that schedule
                    &lays      on the lead ship have limited                   the use of efficient
                    modular construction,             resulting         in inefficiencies           in the con-
                    struction       process.       The GAO also concluded                that these design
                    delays     affected      the construction             by limiting       the use of effi-
Nowon   p.16.       cient    modular      construction.            (pp. lo-16/GAO Draft            Report)




                              Page 40                                                          GAO/NSWW              Shipbuilding
                              Appendix II
                              Comments From the Department          of Defense




                          DOD Rssl?msE:          Concur.

                      .   FIWING        F:     Other Problem8         Contribute      To Cost Problems.              The GAO
                          reported        that 3ath Iron Works representatives                    stated      that,
                          because of limited              prospects       for work in the U+S. shipbuilding
                          industry,         the company bid on an unfavorable                  form of contract
                           (fixed-price         incentive)       at a highly       competitive       price.         The GAO
                          further       reported      that company officials            believed       that the
                          survivability           of the company was dependent               on the DDG-51
                          destroyer         program.        The GAO noted that the company looked at a
                          large number of contract                 variables     and calculated          its cost
                          estimates         based on good performance              and improved        technoloqy--re-
                          suiting       in a bid with the likelihood                of a major cost overrun.
                          The GAO also reported               that company representatives                 believe
                          having      fixed     price     contracts       for prototype      ships,      such as the
                          DDG-51 Destroyer,             is inappropriate         because of the developmental
                          nature      of the lead ship design and construction.                          The GAO noted
                          that,     on the other hand, Navy representatives                       said that poten-
                          tial     cost savings         was a prime factor          in selecting         the contract
                          type and that the contract                  terms,    at the time of contract               award,
                          were appropriate            to balance        the risk between the Navy and the
Now 01’1 pp. 16-17.       contractor.            (pp. ll-12/GAO         Draft   Report)

                          DOD RESPONSE: Partially            concur.      The DOD cannot comment on
                          statements       by contractor      representatives      on business    strategies.
                          Prior     to award of the lead ship contract,             the Navy evaluated        all
                          offerors'      proposed    prices.       While the Bath Iron Works bid was
                          aggressive,       it was determined        to not be unreasonably       low.     The
                          DOD does not agree that at the time of award, a Fixed Price
                          Incentive      contract    type was inappropriate.           At the time of
                          award, the Navy considered             the contract    form, including       the
                          share ratios        and ceiling     percentages,     appropriate     to the
                          expected     risk    for both the contractor         and the Navy.

                      .   FINDING     G:     Increases       in Cost Growth.         The GAO reported       that the
                          cost estimate          for completing         the design    and construction        por-
                          tions    of the contract           has increased       substantially       since the
                          contract      award.        The GAO noted that design costs were expected
                          to double and construction                  costs to increase        by more than 60
                          percent     from original          estimates.         The GAO found that cost
                          estimates       have increased          from the original        April    1985 estimate
                          of $268 million           to $505 million         in September       1989--with   a
                          possible      further       increase      to $525 million.          The GAO concluded
                          that there is significant                 cost growth for both design and
Nowon   p.17.             construction.            (pp. ll-13/        GAO Draft   Report)

                          DOD RESPONSE: Partially      concur.                As clarified  in the DOD
                          response to Finding    B, the original                Navy proqram estimate  for




                              Page 41                                                                 GAO/NSIADW           Shipbuiiding
        Appendix II
        Comments kom      the Department    of Defense




    shipbuilder       items was $542.2 million            and the current        estimated
    cost to the Navy at completion                for these items is $564.5 mil-
    lion.      The difference         between the current        target    price    and the
    estimated      Navy cost at completion            is the effect       of risk sharing
    on the contract         shareline.        This shareline       effect    was antici-
    pated when the lead ship acquisition                  strategy      was formulated       and
    is typical      for a lead ship.           As noted in the GAO report,             devel-
    opment      problems      with computer-aided         design was one of the
    factors     that drove costs on the shareline.                  The Navy expects         to
    deliver     the lead ship under the original                Navy goal and budget
    request     of $1.252 billion,          in FY 1985 dollars.           The DOD does not
    agree with the GAO assessment               that,   under the original          contract
    terms,     Bath Iron Works would have incurred                 substantial      losses
    because this        ignores     the effect      of changes in explaining           cost
    increases.

.   FIXDING  H:    Asreement   to Rerrtructure      mation                 Under    the   Lead
    Ship Contract.       The GAO reported     that,    in March       1989, Bath Iron
    Works submitted        a proposal     to the Navy for a major restructuring
    of compensation        under the contract.          The GAO found that the
    contract    modification        (1) increased     the maximum    contract    price
    and (2) revised        the ratio     for sharing     certain   costs.     The GAO
    noted that,    according       to Bath Iron Works representatives,            the
    changes created        a contractual      environment      more appropriate      to a
    development    contract.

    Based on its analysis,       the GAO found that Navy payments to Bath
    would increase     by about    $53 million   and, if costs rise to the
    maximum contract     price,    Navy payments would increase     by another
    $29 million.      The GAO also found that the contract       modification
    could result    in a Bath Iron Works profit        of about $11.4 million,
    rather   than the previously       projected  loss of about $41.5 mil-
    lion.

    The GAO noted that Navy representatives           believe  that changing
    the terms of the contract        was appropriate     to compensate     the
    contractor     for the technical     issues   and the risk for a prototype
    lead ship.       The GAO noted that the Navy program manager believes
    the additional      compensation   required    can lx absorbed    within
    existing   Navy appropriations.

    The GAO also referenced          its August 4, 1989, report             "NhVY CON-
    TRACTING:        Status  of Cost Growth and Claims on Shipbuilding
    Contracts"       (OSD Case 8046), which found that of the 46 ship-
    building     fixed-price     incentive      contracts    it reviewed,      25 were
    experiencing        cost overruns--projected          to total   about     $3 billion
     (of which $1.2 billion         was the potential        Navy liability).          The
    GAO also referenced        the supplement         to that report       (OSD




        Page 42                                                             GAO/NSW-               Shipbtidhg
                           Appendix KI
                           Comments Fmm the Department               of Defense




                    Case 8046-A),       which showed that,        for the DDG-52, with only five
                    percent   of the work under the contract               complete,    the estimated
                    cost at completion         is already      9 percent    above the contract
                    ceiling   price     and, for the DDG-53, with only one percent                  of the
                    work completethe        cost at completion         is now estimated       at 1
                    percent   above the ceiling         price.      The GAO concluded       that,    given
                    the number of competitively             awarded fixed-price       incentive
                    contracts     for shipbuilding,         which have experienced         overruns--the
                    DDG-51 contract       modification       could establish       an inappropriate
                    precedent     of significant       importance      for Navy shipbuilding
Now on p. 18.
                    programs.       (pp. 13-17/(X0      Draft    Report)

                    DOD    RESPONSE:           Partially        concux.       The agreement          to restructure
                    the contract           in September          1989, equitably           adjusted       the contract
                    to recognize           a number of changes.                 As a result         of the incorpora-
                    tion of these changes,                   the original         sharing     ratio      and ceiling
                    percentage          no longer        reflected       an appropriate           sharing      of risk
                    between the Navy and Bath Iron Works, based on the nature                                        of the
                    work.      The contract,             in its present           form, provides          an effective
                    incentive         arrangement          and reflects         the current        Navy position         on
                    risk and uncertainty                 for a lead combatant              ship contract.            The
                    DOD does not agree with the GAO projection                              of Bath Iron Work's
                    losses     and Navy payments because this projection                               ignores     the
                    increases         in work scope reflected                by the modification.                The Bath
                    Iron Works projected                 loss of $41.5 million               (page 13) included
                    work authorized,              but not formally            in the contract            scope and
                    price.       That work was formally                  incorporated         in the contract          by
                    the restructuring               modification.           Similiarly,         the projection
                     (page 14) that the Navy could pay up to $82 million,                                     as a result
                    of the agreement,               is overstated.           Consistent         with the incentive
                    structure,          the Bath Iron Work profit                  or loss will          depend on
                    their     ability        to manage costs.              The restructuring             will   not set a
                    precedent         for future         pricing      of changes to Navy shipbuilding
                    contracts         because the changes in this                    instance      presented       a
                    unique set of circumstances.                       These changes had significant                   and
                    widespread          repercussions           on other work and altered                 the risk of
                    total     contract         performance         considerably.

                .   FINDING     I:    Ima&        of   Lead   Ship     Delays     on the     DDG-52     and
                    0X-53.      The GAO found that the impact of lead ship delays on
                    followon    ships to date has been minimal          because of changes in
                    the delivery     schedules     of both the DDG-52 and the DDG-53.          The
                    GAO noted,     however,    that further    Navy   design changes or con-
                    struction    problems    with the lead ship have the potential          to
                    increase    costs and delay deliveries          of many followon   ships in
                    the program.       The GAO found that Ingalls         Shipbuilding  delayed
                    the start    of construction      by 3 months because drawings        were not
                    complete.      The GRO reported      that,  in March 1989, when Ingalls




                          Page 43                                                                     GAO/NSL4D90-84          Shipbuilding
                           AppendixU
                           Comments     From the Department              of Defense




                    began to construct     the DDG-52, officials       indicated     that while
                    many changes had been made which affected            the drawings--all
                    major problems    with the drawings    had been resolved         and they were
                    optimistic   about meeting   the revised     delivery      date.

                    The GAO noted that the DDG-51 contract                    required     Bath Iron Works
                    to develop      a plan to assure the accuracy                and completeness         of the
                    DDG-51 drawings.          The GAO found, however,             that delays        in design-
                    ing and constructing           the lead ship may significantly                 diminish
                    the mount       of verification        that can be accomplished              in time to
                    benefit    the DDG-52, which is already                under construction.            The
                    G&r) concluded      that insufficient           time exists       between the physical
                    check of the completed            lead ship and the warranty              dates for many
                    drawings.       The GAO reported         that,     according      to Bath Iron Works
                    officials,      every effort        is being made to provide            complete      and
                    accurate     drawings --including          daily    updates     to Ingalls       Shipbuild-
                    ing .

                    The GAO also reported     a February    1989 Bath Iron Works proposal
                    to realign  the construction      schedules    for cruisers and destroy-
                    ers, which would result      in the following:

                    -the       last  cruiser  being                constructed        before     beginning        construc-
                    tion       of the DDG-53;

                    -push       back   delivery        of the          DDG-53 by 7 months;

                    -deliver       one cruiser           7 months          early;

                    -deliver       a second          cruiser         one month        early;     and

                    -deliver    three        other       DDG-51-class               destroyers         2 months    early.
Now on pp. 22-24.    (pp. 1%22/m             Draft       Report)


                    non     -SE:               Partially      concur.      While it is true that any
                    problem        has the potential           of affecting        the follow      ships,     the
                    Navy is confident               with the ship design.             The two land-based
                    engineering          sites      (see DOD response         to Finding      D) have demon-
                    strated        the operability          of the two principal           ship systems.          As
                    lead shipbuilder,               Bath Iron Works is required             to provide        Ingalls
                    Shipbuilding,            the follow       shipbuilder,       with construction          draw-
                    ings.         As of the end of September,               Bath Iron Works was to have
                    shipped        3005 of 3162 construction               drawings      to Ingalls.        At that
                    time,        a total     of 3063 had been shipped,               with fifty-nine        ahead of
                    schedule         and one overdue.            Initially      (June 1988~March 19a9) some
                    drawings         were released         out of sequence and Ingalls               had to
                    develop        work-around         plans to maintain         its schedule.          Ingalls
                    started        construction          on the DDG-52 on March 13, 1989, and




                           Page 44                                                                           GAO/NSLAB90~     Shipbuilding
                             Appendix 11
                             Comments From the Department           of Defense




                         achieved   their first   contract   milestone   (cutting                     of the first
                         100 tons of steel)     on schedule,    on May 15, 1989.                       Ingalls     has
                         advised  the Navy they expect to meet all contract                            milestones.

                     .   FINDINGJ:          Potential      for Major Problems        With Follow       ShiDS.       The
                         GAO found that the lead DDG-51 ship delay has the potential                              to
                         increase     costs and delay deliveries              of followon       ships.      The GAO
                         found that,        at the current         rate,  5 followon      ships could be under
                         construction         and 12 more under contract           before     the lead ship
                         finishes     its at-sea       trials      and is delivered       to the Navy.         The
                         GAO noted that any further                delays   in the construction         of the
                         lead ship could further              increase    the possibility        of adversely
                         affecting      followon      ships by compressing         the time between comple-
                         tion of the lead ship and the construction                     of the follow         ships.

                         The GAO also found a January                    1989 Navy operational                  evaluation
                         concluded       that the DDG-51 sonar system is only potentially
                         operationally          effective        and suitable--and              recommended that the
                         deficiencies          noted be corrected            before       full      fleet     introduction.
                         The GAO reported             that the Navy has constructed                       a land based
                         engineering         test     site    in Philadelphia           for the DDG-51 propulsion
                         system.       The GAO noted that,               with this        facility         and the combat
                         system testing,            it is the Navy view that it has significantly
                         reduced the risks              in the performance            of the lead ship and, thus,
                         the risks       for the followon             ships under         the program.             The GAO
                         reported      that Bath Iron Works officials                       indicated         that the risks
                         to follow       ships are low because               design problems               have been
                         minimized.          The GAO also reported              that,       according         to the Bath
                         Iron Works officials,                further     delays      in contract           award could
                         delay the start           of followon         ship construction               and such delays
                         would increase           costs--due        to (1) the loss of learning                     in the
                         production        trades,         (2) the loss of skilled                labor,       (3) delayed
Now own pp, 24-25.       material      procurement,           and (4) other costs.                   (pp. 22-24/G&O Draft
                         Report)

                         DOD RESPONSE: Partially                concur.      While it is true that any
                         problem has the potential               of affecting         follow ships,   it is the
                         DOD position         that,     in the case of DDG-51, the probability               of a
                         major problem affecting              the follow       ships is minimal.        This
                         conclusion     is supported          by the current          stage of construction       on
                         the DDG-51 and the extensive                testing      of the two principal       ship
                         systems at the land-based               engineering        sites.   The statement       by
                         the GAO (page 23) that the sonar system is "...                        only potentially
                         operationally          effective     and suitable        . .." is not current.        As of
                         April    1989, based on an operational                 system assessment,       the DOD
                         found the sonar to be operationally                    effective    and suitable.
                         Therefore,     little         or no potential       impact on the design and
                         construction         of DDG-51 from the sonar is anticipated.




                             Page 45                                                                    GAO/NSIA.IHO-S4        Shipbuilding
                           Appendix        Lt
                           Comments         From the DepartmentofDefense




                    .   FItmING       K:     ~~11 Scale    Production          Without      Milestone        IIIB
                        approval      .     The GAO reported       that,          in October       1986, the DDG-51
                        program received           approval        to proceed with limited                production
                         (milestone      IIIA)     for seven followon                ships.     The GAO noted that
                        the program received              extended         approval       for limited      production
                        through      award of the ships in FY 1990.                         The GAO reported        that
                        the next major milestone                 for the DDG-51 program is approval                       for
                        ful.1 rate production              (Milestone         IIIB)--which         is scheduled       for
                        July 1990.         The GAO observed             that,       as a result       of approval       for
                        only limited         production,        the Navy could still                 have 17 followon
                        ships     (or more than 50 percent                   of the ships in the program)
                        either     under construction,               under contract,           or authorized.           The
                        GAO concluded          that program risks               are significant          because of the
                        technical       nature     of the destroyer               and the large number of ships
                        under construction             or contract           before     the lead ship has been
                        constructed.           The GAO also concluded                 that the Navy management of
                        the ship programs            is consistent            with overall         DOD and Navy
                        requirements         for managing major acquisitions.                         In summary,
                        however,      the GAO concluded              that,      because of the problems             encoun-
                        tered with the lead ship and the potential                             impact on followon
                        ships,     the Navy should tailor                  the DDG-51 acquisition             strategy        to
                        provide      for a full        rate production              decision    meeting      as soon as
Now on pp, 25-26.       possible.         (pp. 24-26/GAO Draft Report)

                        DOD RESPONSE:             Partially       concur.        The DOD agrees with the GAO
                        on the desirability              of providing         for a full        rate production
                        meeting      as soon as possible.                The DDG-51 Class acquisition                  plan
                        is designed         to meet the Department               of Defense requirements               with
                        minimum technical            risk.       While system development                 and testing
                        rely heavily          on land-based         engineering         sites,     the AEGIS program
                        has the advantage            of developing          the DDG-51 Class as an evolution
                        of the three AEGIS baselines                   already       at sea with the fleet.                The
                        basic AEGIS destroyer               system elements           are virtually          the same as
                        those proven in the AEGIS cruiser.                        The same pertains             to the
                        ship's     systems.        Although       the hull design            is new, it underwent
                        extensive      model testing            at David Taylor          Research Center prior              to
                        design incorporation.                 Many elements         of the propulsion             system
                        have already          operated      successfully         a& sea in the DD-963 and
                        E-47     classes.         New propulsion          system elements,            principally        the
                        reduction      gear and machinery              control      system,      have successfully
                        completed      full     factory       acceptance       testing       and are undergoing
                        full    system testing          at the land-based             engineering        site.       The
                        propulsion       system successfully              completed        a standard       Navy four
                        hour full      power trial          in August 1989.            The DOD does not agree
                        with the GAO statement                that the program risks               are significant
                        because of the technical                 nature    of the ship.            In September        1986,




                                                                                                        GAO,‘NSKAMW4           Shipbuilding
                           Comments From the Department            of Defense




                    in a report        prepared      in accordance          with Title        10, USC, Section
                    138, the Director,            Ope ra t' ional     Test and Evaluation            certified
                    through     an operational          assessment         of the DDG-51 that testing                 was
                    adequate     and the DDG-51 combat systems were operationally
                    effective      and suitable         and, based on operational                 testing,       "a
                    number of deficiencies              were identified             but none was considered
                    severe enough to pose any significant                         risk to the overall
                    operational        effectiveness          and suitability            of the DDG-51."
                    Milestone      IIIA,      Approval      for    Limited      Production       (ALP}, was
                    based on a Navy Program Decision                     Meeting       in October      1986.
                    Subsequent       reviews      were held by the Navy Acquisition                     Executive
                    in September         198, and August 1989, prior                   to extending        the
                    Approval     for Limited         Production        decision        for the annual acquisi-
                    tion.     The DDG-51 program,               based on the successful              AEGIS cruiser
                    program and supported              by extensive         land-based        engineering        site
                    testing,     has been reviewed              annually      prior      to extending        the
                    Approval     for Limited         Production.

                    However,   in the future,       should there me a mission          change for the
                    DDG class ship,     a significant       modification/product        improvement
                    pr0g-b     and/or  a major change in configuration               of the ship to
                    respond to the evolving         threat,   before      contracts   would be
                    awarded including     such changes,       the program would be subject          to
                    a Defense Acquisition        Board Milestone        V review    (or a Milestone
                    IV review,   as proposed      in the Defense Management Review).




                .   FXEC~TION            1: The GAO recommended that the Secretary               of
                    Defense assure that the DDG-51           lead     ship schedule    provides    for
                    completion      of those tasks and tests          necessary    to support   an
                    informed   full    rate production      decision      prior  to the scheduled
Now ctn p. 27       award of contracts       for additional       follow-on     ships.    (p. 26/GAO
                    Draft   Report)

                    QOJ RESPONSE:         Nonconcur.       As the GAO observed,            "the Navy's
                    management of ship programs             is consistent         with overall         Depart-
                    ment of Defense and Navy requirements                   for managing major acpui-
                    sitions."        In the DDG-51 program,          the DOD has complied              with the
                    existing      Federal    statute    regarding      the adequacy       and evaluation
                    of the tests       necessary     to proceed beyond low-rate               initial
                    production--a        decision    made in October 1986.              Additional         opera-
                    tional    testing     has taken place since then and will                   continue       well
                    into the future.           The adequacy      and results       of testing         will   be
                    evaluated       by DOD, in accordance         with the existing           Federal
                    statute,      and will     be an important       factor     in the deliberation             and
                    decision      to award contracts        for additional         follow     ships.




                          Page 47                                                                    GAO/NSIADSO-84         Shipbuilding
-
         Appendix II
         Comments From the Department      of Defense




    As indicated         in the DoD response         to Finding   K--if,     in the
    future,     there      is a mission     change for the DDG class ship,            a
    significant       modification/product           improvement    program,     and/or a
    major change in the configuration                  of the ship to respond to the
    evolving      threat,     before    contracts      would be awarded including
    such changes,          the program would be subjected           to a Defense
    Acquisition       Board Milestone         V review     (or a Milestone      IV review,
    as proposed        in the Defense Management Review).




       Page   48                                                         GAO/NSIAD-90-84 Shipbuilding
Appendix III

CommentsFrom Bath Iron Works



                           Bath Iron Works Corporation
                                                           7w WASHINGTON   STREET. ~*nd.~*fvtcwn~   po7j 443.3311



               WILLIAM     E. HAGGETT
                    Chairman    and
               Chwf Execuhve     Officer
                                                                     November 9, 1989


               Mr. Frank C. Conahan
               Assistant    Controller/General        Director
               National    Security     and International
                 Affairs    Division
               General Accounting        OfEice
               441 G Street,      N.W.                                                                                             i
               Washington,     DC 20548
               Dear Mr. Conahan:
                          This
                          is in response to         your request oE October 13, 1989, for
               comments   on the GAO draft         report entitled   "Navy Shipbuilding  -
               Cost and Schedule Problems           on the DDG-51 Destroyer    Program."
               Attached   are BIW's detailed          comments on the issues and problems
               as presented    in your draft         report.
                     My greatest       disappointment        with the draft  as currently
               constituted       is that it fails        to provide    any substantive
               contribution        toward improving       the process for acquisition     of Navy
               ships.      GAO has been auditing           the DDG 51 program for over two
               years.      During that time, we have been fully             open with GAO staff
               to ensure they received            a full     and complete understanding   of the
               program's     operation.
                     Although    the report   attempts   to convey the impression        of an
               in-depth     analysis,    it is primarily     a collection    of cost,
               schedule,      and technical   issues and fails       to come  to grips with
               underlying      causes which gave rise to many of the problems cited.
               In other words, the report         is largely    a recitation    of effects
               without     addressing    root causes.
                     It has become widely      recognized      now that the use of a
               fixed-price   form of contract        is not workable      or compatible      with
               the developmental     nature of a highly         complex ship.       This
               recognition   is reflected      in recent     actions    by the Congress and
               the Department of Defense.          The fact that the GAO report does not
               address that underlying       issue and treat         it accordingly
               constitutes   a flaw in the report's          logic,     The report     addresses
               symptoms, but skirts      the central      issues.




                          Page 49                                                          GAO/NSLAIMM4             Shipbuilding
        Appendix III
        Comments kom    Bath iron Works




Mr. Frank C. Conahan
November 9, 1989
Page 2

      Of equal concern are GAO's comments with respect to the
contract     modification     entered into by the Navy and BIW. GAO
expresses     the view that the contract           restructuring         could
establish     an "inappropriate        precedent"      because other
competitively       awarded fixed-price        incentive      shipbuilding
contracts     are also experiencing         overruns.       What GAO ignored is
that use of a fixed-price           form of contract        on DDG 51 was a unique
experience      and represented       a departure      from previous       combatant
lead ship procurement         practices.
       The real precedent-setting         aspect of this issue was use of a
fixed-priced     contract   with an extremely       tight  schedule in the
first    place.   That concept,      which was implemented        by a group of
well-intended     Navy leaders at the time, has not worked.               Current
Navy leadership      has recognized       the now clear and obvious
inequities,     and, to their     credit,    have taken   corrective    action.
       By not dealing      with the original      underlying      cause and failing
to acknowledge       that cost growth and schedule delays were a
Navy/BIW shared responsibility,              GAO implicitly      suggests that BIW
should have been held to terms of the original                   contract.     The
Navy's view is different.             They have worked professionally            to
treat    BIW's claims prudently         and equitably       and to construct       a
contractual     relationship       that will    assure the completion         of this
highly    complex ship within         available   appropriations.          In our
view, the government          should always be willing         to change its
position    when history       deems it appropriate.
     Finally,      in BIW's view, the report's      overall    tone understates
the excellent        progress    achieved over the last year, and the
probability      of delivering       a superb ship which meets Navy
expectations.         On the other hand, it overstates       concerns relative
to future     risks.      Had GAO's report been published        in late 1988,
many of those worries          may have been valid   concerns.      But, by late
1989, the program's          overall   status has been tremendously      improved
with no subsequent         schedule slips.
     Thank you for     providing     BIW an opportunity       to comment on this
report.
                                           Sincerely,

                                           LIiLkLE~y=
                                           William   E. Haggett




       Page 50                                                    GAO/NSLAD-90-94   Shipbuilding
        Appendix Ill
        Comments From Bath Iron Works




                          BATH IRON WORKSCORPORATION (BIW)
                       DETAILED COMMENTSON GAO DRAFT REPORT
                        "NAW SHIPBUILDING - Cost and schedule
                     Problems on the DDG-51 Destroyer  Program**

INTRODUCTION
BIW's comments are provided           on the draft      GAO report       in the
interest      of achieving     a more balanced and cohesive            depiction     of
issues in the Navy's AEGIS destroyer               shipbuilding       program.     The
draft    report   contains     a number of findings         regarding      lead ship
cost and schedule        and follow-ship     impact.        BIW's comments offer
a comprehensive       discussion     of acquisition       policy    issues,
design,     lead ship delays and cost, follow-ship               impact, contract
modification,      and current     status.
ACOUISITION           POLICY ISSUES
BIW believes   dissemination     of lessons learned in the DDG 51
program will   be of benefit     to DOD managers, Congressional
leaders,   and industry     in subsequent major procurements.
Inexplicably       however, GAO's draft          report   fails    to assess the
validity     of the initial         DDG 51 acquisition        approach or its
subsequent      evolution      in any comprehensive        manner.     Instead,
what is offered         is a critique      that focuses heavily        on the
recent contract         modification.        By so doing, GAO fails         to
provide     useful    public     policy  insights,      or even a sense of
context,     which the reader could legitimately                expect from GAO's
lengthy     review.
Recent      policy  guidance from Congress and the            Executive     Branch
supply       morethan adequate rationale   for the          Navy’s  recent
restructuring       of the DDG 51 combined design           and construction
contract     with BIW. Yet, the report creates               the  impression         that
BIW alone contended that fixed-price        contracts           are
inappropriate       for the design and construction            of highly
sophisticated       combatant  lead ships.
Congress for several         years    has curtailed     the authority      of the
services    to execute fixed-price         contracts      on major defense
acquisition     programs involving        developmental      risks.     Defense
Secretary    Cheney submitted         a comprehensive      Defense Management
Review to the President            in May of this year.        That document
contains    substantial      discussion    on the deleterious        effects    of
imposing excessive        risk on industrial        base elements engaged in
such undertakings       for the government.
The same Review prohibits      the use of fixed-price      contracts    for
lead ships.   Exceptions    to that policy   will    be granted only if
the Under Secretary     of Defense for Acquisition      concurs that a
particular  Navy procurement      strategy satisfies    a lengthy    set of
significant  preconditions.




                                                                   GAO,‘NSk409O-84      Shipbuilding
     Appendix III
     Comments From Bath Iron Works




                                        -2-

In August 1989, GAO released       the latest      in a series of report5
describing   mounting cost growth in fixed-priced           Navy
shipbuilding   contracts.     At that time, U. S. Comptroller
General Charles Bowsher was quoted in the press suggesting               that
one solution   was to "90 to so e cost-reimbursable           contracts    for
fheeof fi                             CIQ comnetitive    and fixed-vrice
for the follow-on     phase?"
Prior    to award of DDG 51 in 1985, BIW had outlined                  objections
not only to use of a fixed-price             incentive-fee       contract      for
this project,      but  particularly      its combination        with the
prescribed      54-month delivery       schedule.       BIW formally
recommended a cost-type          contract    and a 68-month schedule.              The
Navy issued a Request for Proposal              (RFP) for 63 months,
cancelled     that request,      and subsequently        reissued    the RFP with
a 54-month schedule.          The Navy's use of a fixed-priced
contract,     with a 54-month schedule,           was a rejection       of BIW's
most significant       recommendations.
While disagreeing     with the Navy decisions,         BIW understood     the
Navy's rationale     at the time the final       contract   type decision
was made. Fixed-price       incentive-fee     contracting     produced
acceptable   results   on many follow-shipbuilding         programs during
the late 1970s and early 1980s.           The Navy apparently      believed
that the same type ot contract          could be employed successEully
on a lead ship design in a competitive           market.
From decades of experience            successfully    designing    and building
lead ships for the Navy, under both fixed-price                 and cost-type
contract    strategies,     BIW is convinced       that long-term        program
beneEits    are optimized       when the Navy and the contractor             can
place their      highest   priority      on the rapid resolution         of
technical    challenges     and on achieving       excellent    quality.       On a
lead ship, in BIW's view,           that is best accomplished         under a
properly    managed cost-type         contract.    The importance        of a
cost-type    contract    on a developmental        program becomes even
greater    when the shipbuilders          were required     to compete
vigorously     for the contract        in a weak market.
In a fixed-price       environment,     contractual     issues can frequently
take on greater       importance    than the timely       resolution  of
technical    matters.      This may result       (and did with DDG 51) in
valuable   time   being lost before engineering            change proposals
can be implemented.
BIW supports     the competitive  procurement     process.    Competition
in Navy shipbuilding     not only returns    dividends     to the
government,    but, when managed responsibly,        can also have a
healthy  influence    on the shipyards   themselves.




                                                                                                    i


     Page 52                                                      GAO/NSIADM         Shipbuilding
       Appendix III
       Comments From Bath Iron Works




                                           -3   -

DESIGN
The GAO draft       report    includes     numerous references   to design
difficulties       and resulting       increased   cost and schedule delays.
In the words of Chief of Naval Operations                    ADM Carlisle        A. H.
Trost,     "the ARLEIGH BURKE class of ships is being built                       to meet
the threat       of today as well          as the threat     of the 21st century.
DDG 51 incorporates           many of the survivability            lessons learned
and relearned        since World War II.             The ship will     mark the
return     of all-steel       construction        for US warships.         Extensive
topside      armor will      be placed around vital          command, electronic,
and machinery        spaces.        Better    and redundant    fire     fighting
equipment will         allow the ship to withstand            damage.        Noise and
infrared      suppression        systems, in combination         with other
electronic       gear, will       make the DDG 51 difficult           to detect or
target.       Protective       systems will       guard against      nuclear,
biological       and chemical        agents.      Hardening   systems will        also
provide      greater     protection       against    nuclear  and thermal blast."
The survivability      features for DDG 51 are vastly     more
comprehensive     than the simple examples used in the GAO draft
report.    In many respects,    those features     had developmental
elements,    are being employed in the DDG class for the first
time, or are being incorporated      to a considerably      more
extensive    degree than on any previous     surface   combatant.
In the aggregate,         they have had a major impact on the design
development      process and will        continue    to pose challenges       during
remaining     construction       on the lead ship.         While discussion      of
this topic     is necessarily       limited     due to the classified        nature
of specific      features,     it should be noted in the final            GAO
report    that these new survivability            features     represent   a
quantum advance in US naval surface combatant capabilities.
In a new ship design incorporating                 many advanced features,             the
design development         process is iterative           and time consuming.
Although     the contract      design provided          to BIW by the Navy at
time of DDG 51 contract            award was fundamentally           sound and had
been thoroughly       evaluated,      there were still        significant        issues
left   to be discovered         as the functional         and detail      design
process evolved.         Roughly ninety         percent    of the detailed
engineering       and drafting      work could not be accomplished               until
after    contract    award.      In many cases, vendor-furnished
information       is absolutely      essential       to the design completion
process,     but is not available         until      vendors have been selected
and purchase orders placed,
In GAO's discussion       of Computer-Aided'Design      (CAD), the
statement  that BIW "prepared       nearly    all of the production
drawings manually"      is misleading.      In an attempt to meet the
54-month schedule,      BIW's approach was to implement a very
aggressive   plan calling     for use of technical      and management




      Page 53                                                          GAO/NSIAB90-84        Shipbuilding
      Appendix   III
      Commentsl+omBathIronWorks




                                         -4-

systems which potentially    would minimize     elapsed time and
manhour expenditures.     One such system was CAD. BIW was able
to use CAD in the development     of essential      structural
information.    Where the company fell    short of its initial
objectives   was in areas of outfitting     design,     and this did
contribute   to increased  manhours, elapsed time,          and cost.
With the benefit   of hindsight,      the company attempted          to go too
far too fast with computer-aided         design technology.          The
company was, however,      faced with performing         to the 54-month
schedule  for design and construction         originally      required    by the
contract.    While that timetable      was subsequently        demonstrated
to have been unrealistic,       as evidenced     by award-to-delivery
terms on follow-on     ships,   every resource available          was
dedicated   toward achieving     the original      contract     schedule.
Despite     initial     difficulties,         the Navy, Gibbs & Cox, and BIW
have learned a great deal from their                  collective      efforts    to work
with CAD. BIW is planning                 to systematically      roll    the DDG
design into a CAD format which will:                    benefit   follow-ship
construction;        greatly       enhance the Navy's life-cycle            maintenance
of destroyers        once they enter the fleet;             and assist      the Navy's
attainment        of DDG class affordability           goals.     Those lessons
will   also be directly            applicable    to development       of new Navy
designs.
The statement     in the GAO draft that "BIW representatives           cited
changes in design requirements     as a major cause for the design
delays"  could lead readers to believe       that Navy-initiated
changes were inordinately     high or out of control.          In fact,     BIW
believes  the Navy has attempted     to diligently   control      the
change process from award through the present        time, even though
that is a difficult     management task, especially      in a first       of
class.
There have been few significant             changes approved by the Navy
which affect      the planned operating        characteristics        of the
ARLEIGH BURKE class.           However, in a developmental           design where
the government        is furnishing      the entire   combat system and
substantial     related     information,     many changes are mandatory to
assure    compatibility      within    the system and optimum integration
of the combat system with the balance of the ship which is
being designed by the lead-shipbuilding               team.      This evolution,
too, involves       one design iteration        after   another.
BIW believes      the final    GAO report        should reflect    the fact that
the Navy has done an outstanding               job of minimizing      changes
required      to modify or enhance the           planned operating
characteristics       of the ship, even          though many other changes had
to be implemented       as part of the         normal, evolutionary      design
and construction       process.




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   Appendix III
   Comments FromBathIron      Works




                                        - 5-

The draft      report     states that "BIW and Navy representatives
believe     the design problems have been resolved                for the lead
ship, and the drawings           are essentially      complete as of September
1989."      BIW representatives         told GAO they believed         all maior
design problems have been resolved                for the lead ship.        The
company knows oE no significant               or potentially      show-stopping
design issues which remain to be resolved.                     BIW from past
experience      does, however,      fully     expect there will       be a
continuing       flow of design issues which must be addressed and
solved as the ship continues              through its remaining
construction,        activation,    testing      and sea-trial      phases.
LEAD SHIP DELAYS AND COST
The GAO draft         report cites      two changes in the lead ship
delivery      date:      the first,     in January 1987, delayed delivery
nine months; the second, in February                  1988, delayed delivery       an
additional       eight months, until          February     1991.    BIW does not
disagree      with the reasons cited:             additional     time required   for
the design effort;          additional      time needed to test the AEGIS
weapon     system     (based on AEGIS cruiser           experience    to date);  and
BIW facility        throughput      schedules.      Two additional      points
should be considered,            however.
BIW believes      the destroyer     schedule was also affected           by its
clerical     and production     workers'     strikes   (February-October
1985), since work scheduled          for that time frame was moved to a
later    period.     This resulted     in a different     mix of work in 1986
and 1987 than was contemplated            when the destroyer      bid was
submitted.       Thus, BIW believes       the strike,    design development,
normal lead ship construction            problems,    and system    testing
requirements      all contributed      to the delays.
In addition,      it should be noted that the second delay,
attributed     to BIW facility     limitations,      allowed several
important    combat   system   engineering      changes to be incorporated
in line,    without   any associated       delay and disruption     costs to
the Navy.
It is also worth noting       that by the time of the second delay,
follow     ships had been awarded with construction     schedules
lonser tha;l the oriainal       54-month lead ship desian and
construction       schedule.  GAO, however, does not assess the
validity      of the original   contract schedule.
BIW does not disagree          that "design delays and construction
inefficiencies        have   caused substantial    cost growth under the
lead ship contract."           However, it is important     to note that
lower than forecast          government escalation     payments are
projected      to offset     $45 million   3f BIW's cost growth under the
lead-ship      contract.      Forty-five  million   dollars   less escalation
will     be paid to BIW      because the labor index has been virtually




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      Appendix III
      Cwnments From Bath Iron Works




                                           - 6 -

flat,  contrasted     to the company's projected   increase                   of four
percent per year.       Thirty   percent of BIW's estimated                   overrun
will  be attributable      to that factor  alone.


BIW believes       its overall         support of design and other supporting
data required        for the efficient           and high quality       construction
of DDG 52 at Ingalls            has been acceptable          and will     continue     to
meet future     requirements.            History    has proven it impossible             to
achieve perfection           in the design of a highly             complex combatant
ship requiring         over 3,000 basic drawings             and thousands of other
deliverables.          But, with few exceptions,             BIW's response time
has been supportive            of the follow       shipyard.       In addition,      as
problems are uncovered             in the lead-ship        construction       process,
most    are promptly       resolved,      and corrected       information       is
forwarded     to Ingalls        within    days.
Since the lead ship is being constructed              more than one year in
advance of DDG 52, BIW believes            this process is a sound method
of validating       and verifying      the design before DDG 52 major
construction       milestones     take place.    While all risks to the
follow    shipbuilder      cannot be eliminated,      the methodology being
employed on the DDG program should prove effective               in
minimizing     them.

With regard to the DDG 53, the Navy agreed to BIW's proposal                     to
swap two ship construction           schedules     at Bath to provide      a more
orderly     cruiser    and destroyer     construction      sequence in the
shipyard.        One of the benefits      of moving CG 70 seven months to
the left      and DDG 53 seven months to the right,            will   be that
most    DDG 53 software     will   have been tested on DDG 51 prior           to
construction        of DDG 53, BIW's first       follow-on    destroyer.
There is no evidence         presented     in the draft     report   to
substantiate       the assertion     that problems encountered          on DDG 51
will   have significant       impact on destroyers        awarded in FY89 and
contemplated       to be awarded in FY90. The keel for DDG 54, the
first   of the FY'89 ships awarded a year ago, will                 not be laid
until   three months after        the projected     delivery     date for
DDG 51, the lead ship at Bath.               BIW expects to build FY89
destroyers      in an efficient      manner,    on or ahead of contract
schedule     requirements.
The draft     report     raises concerns        about lead ship experience
impacting     follow-on       ship cost.       Although     there is always some
risk,    BIW sees no reason at this             time why follow         ships cannot
be built    efficiently.          TO the extent       some risk    will     remain
until    the lead ship is tested,            that potential       exposure needs to
be balanced against          the significant        costs associated         with a
decision    to delay construction            oE Eollow ships already under
contract,     or slow down the procurement               of additional       ships,




      Page 56                                                          GAO,‘NSL4D9@f34        Shipbuilding
       Appendix III
       Comments From Bath Iron Works




                                       -   7 -


While the magnitude       of cost increases        associated   with
consciously      delaying    the program would be large,        it is
impossible     to accurately     quantify     the impact without     evaluating
alternative      procurement    profiles.       In addition   to substantially
increased    costs due to the introduction           of program instability,
national    defense capability         would suffer    as a result   of later
deployment     of AEGIS destroyers         to the fleet.
BIW believes      the government can proceed with the DDG follow
shipbuilding      program with a high degree of conEidence          that the
class'     design and operating     characteristics      are sound and will
be achieved.        Furthermore,   presently      unknown problems that
could arise over the next year during construction               completion
on the lead ship should be known in sufficient               time to minimize
any potential       impact on follow-on      ships already under
contract.
CONTRACT MODIFICATION         (ECP 760)
The draft    report    suggests that the executed contract
modification      sets an "inappropriate     precedent."    That
allegation     represents    a complete failure    by GAO to acknowledge
the equity    on which the modiEication        was based.
BIW is convinced        the ECP was negotiated           because:    BIW proved
entitlement;       actual    experience     had shown that several         original
contract     terms required        adjustment;     the revised    structure
created     a better    form   to efficiently        complete the lead ship; it
was mutually       agreed that restructuring           the lead ship contract
would prove beneficial           to follow     ships;    and BIW gave the Navy
additional      consideration       such as Liquidated        Damages and
extended warranties.
The GAO draft       fails    to reflect      the Navy's agreement that the
shipyard     was clearly       entitled    to increased    compensation
irrespective      of whether other contractual            terms were modified.
Between late 1986 and September 1989, BIW was able to
demonstrate      conclusively         its entitlement   to significant    cost
increases     as a result       of growth experienced        resolving  numerous
technical     issues.      Many of those issues were associated           with
developmental      aspects of the design.
As a result     of extensive   data reviews and protracted
negotiations,     BIW and the Navy ultimately   agreed that target
cost should be increased       by $31 million, and target  profit
increased     by $3.7 million.
Other modifications       to contractual      terms, such as combining    the
design and construction        line items and implementing       one new
shareline     and ceiling   percentage,    were agreed upon to more
appropriately     share risks on a contract          which both parties  by
1969 had come to agree required          restructuring.




       Page 57                                                    GAO/NSIAD-90-84     Shipbuilding
          AppendixUI
          Comments    From Bath Iron Works




r
                                             -a-

    GAO should note in its report    that BIW provided      additional
    consideration   to the Navy in the form of liquidated         damages,
    extended warranties,   and the company's commitment to maintain
    high manning levels   on the lead ship until    delivery.
    Having now established       a contractual     environment      more
    appropriate     to a largely    developmental     program, BIW believes
    the resolution     of technical     issues will    move more rapidly        than
    was previously     possible.     The revised     contract    terms will     also
    help assure that DDG 51 is delivered            at the earliest      possible
    date.    Achieving   that objective      will  provide    the best leverage
    to produce optimum results        on each follow-on       ship in the class.
    CURRENT STATUS
    On September 16, 1989, DDG 51 USS ARLEIGH BURKE, lead ship of
    the advanced AEGIS destroyer class, was launched at Bath Iron
    Works in Maine.
    In October,     1989, DDG 51 is more than 50% complete.      BIW is
    achieving   physical   progress   at a rate of roughly  four percent
    per month, and the current      rate of progress will   be sustained
    until   sea trials   commence in the fall   of 1990.
    Virtually     all major structural          work     has been completed,    and
    most     power plant and other main machinery               is already   on board.
    The 61-cell      aft vertical      launcher       has been installed,     and by
    late April,      1990 AEGIS combat         system     spaces will   have been
    loaded-out      and activated.         By the end of June, 1990 the
    machinery     plant will      be in its      activation     cycle,  with dock
    trials     commencing shortly        thereafter.
    Confidence       in the quality   of the ship design grows daily   as
    production       progress continues    at a rapid rate on the lead ship.
    Shore-based      test facilities    have already     demonstrated     that the
    machinery     plant,    machinery  controls    and combat systems       are
    fundamentally        sound, even though they continue       to identify
    essential     changes with relatively       low impact which must be
    incorporated       into the destroyers.       Moreover,  in most key detail
    design areas, BIW’s engineers           and draftsmen   have undergone at
    least three reviews to assure design accuracy and completeness.
    During accomplishment       of each remaining      pre-delivery    activity,
    BIW will   discover   and resolve     the numerous small problems          which
    are a complicating      but manageable reality        in the construction
    of a sophisticated      lead warship.      In fact      as hardware is
    installed    and software    tested,    the remaining     universe  of
    previously    unknown problems diminishes        incrementally.
    A key point which should be understood              is that most of a lead
    ship's   design quality  and operational           characteristics     become
    confirmed    well before the actual ship           delivery      date. While
I
L

        Page 58                                                     GAO,‘NSLAt-90-84     Shipbuilding
     Appendix III
     Cmnzzents From Bath   Iron Works




                                        - 9 -

additional  knowledge is gained during the post-delivery
operational  phase, any necessary   modifications there usually
take the form of design reEinements    as opposed to the
disruptive  correction  of fundamental    flaws.
SUMMARY
Knowledgeable    observers  will agree that the rate of progress         on
DDG 51 during    the last year has truly    been impressive.       The
government can proceed in the AEGIS destroyer         shipbuilding
program with a high degree of confidence       that the DDG design is
fundamentally     sound and that the operating    characteristics
envisioned    for this advanced combatant class will        be achieved.
Building,      activating    and testing        a prototype        ship is a
sequential      process.     Some major design features                are proven very
early in the cycle,        but   typically,        every vital        system is tested
before sea trials,        and those exhaustive            trials      precede actual
delivery.       From BIW's lengthy          experience      with combatant lead
ships,     all critical    systems     are proven well           before final
acceptance      trials,   and remaining         production       tasks in the
post-trial      phase are generally          cosmetic in nature.
Policy     guidance     from Congress and the Executive Branch supply
substantial       rationale   for the Navy’s September 1989
restructuring        of the DDG 51 combined design and construction
contract.
Having now established      a contractual       environment      more   conducive
to a largely   developmental     program, BIW believes           the resolution
of technical   issues will    move more      rapidly    than previously
possible.    During each remaining        pre-delivery      activity     on
DDG 51, BIW and the Navy will        discover      and resolve       numerous
small problems which are a complicating              but manageable reality
in the construction    of a sophisticated          lead warship.
BIW believes   dissemination      oE lessons learned in the DDG 51
program will   be of benefit      to DOD managers, Congressional
leaders,   and industry.      BIW values the opportunity    to offer
comments on the draft      report   in contribution  to that important
objective.




     Page 59                                                      GAO/NSIAD90-84    Shipbuilding
                                                                                                         .
Appendix IV

 Major Contributors to This Report


                        Martin M. Ferber, Director, Navy Issues (202) 275-6504
National Security and   Julius S. Brown, Assistant Director
International Affairs
Division, Washington,
DC.

                        Richard Silveira, Navy Issues Area Coordinator
Regional Office         Kendall Graffam, Evaluator-in-Charge
                        Kevin Murphy, Evaluator
                        Lionel Ferguson, Evaluator




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‘,   ,I.   ,I




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