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

Published by the Government Accountability Office on 1990-01-24.

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

                    United States General Accounting   Office

                    NAVY SHIPBUILDING:         Cost and Schedule          Problems           /
For Release                                                                                  *
on Delivery         on the DDG-51 AEGIS        Destroyer Program
Expected    at
2:00 p.m. est
January    24,

                    Statement    of
                    Martin    M Ferber,    Director
                    National    Security    and International          Affairs
                    Before      the
                    Subcommittee       on Seapower and     Strategic        and
                       Critical      Materials
                    Committee       on Armed Services
                    House of Representatives

GAO-T-NSIAD-90-14                                                        GAOForm160(12/87)
Mr.      Chairman                and Members                       of    the       Subcommittee:

We are            pleased              to       be here             today          to     discuss                 the     results               of    our

review            of     the         cost        and schedule                      of     the         Arleigh             Burke          (DDG-51
class)            guided             missile            destroyers.                       I would                 like      to        briefly

summarize                our         report,            which            we issued                   last      week,          and ask                that        the

report            be entered                    into        the         record.


In      April          1985,           the       Navy         awarded              Bath      Iron            Works          a fixed-price

incentive                contract                for        the         lead       ship      of         the        DDG-51          class
destroyers.                      The        ships           will         replace           retiring                  destroyers                  and be

equipped               with          the        AEGIS combat                    system.                 The        lead       ship's             complex
design            incorporates                     features                to      increase                 the      ship's            ability              to
survive               during           battle.                For        example,               it      will         have        a seakeeping
hull,           all      steel          construction                       and extensive                       armor          around             vital
spaces,               and a system                     to     protect              the     crew             from         contaminated                    air,

Bath       Iron         Works              is    responsible                    for       designing                  this        ship,           including

integrating                    the      AEGIS combat                       system          and other                     government-furnished

equipment.                     Initially,                   construction                   was to              begin          in May 1987                    and
the      ship          was scheduled                        for         delivery           in         September               1989.              The Navy
has      awarded              contracts                 for         seven         additional,                      or     follow           ships.                The
contract               for       the        second            ship         (DDG-52)                  was awarded                 to      Ingalls
Shipbuilding                  in     May 1987,             and the           contract                      for      the        third           ship

(DDG-53)            was awarded                to Bath           Iron        Works              in         September                1987.

Contracts              for      five        additional            ships             were          awarded                 in      December             1988

--     three        to       Bath      Iron     Works           and     two         to         Ingalls              Shipbuilding.                           The

Navy      currently                 plans      to    acquire            at         least          33 ships                   at     a total            cost

of     about        $27 billion.

Costs,         Affordability,                   and Schedule                       Should            be
Reevaluated                  Before         Additional            Contracts                     are         Awarded

Bath      Iron       Works           has      encountered               problems                  in        designing                   and
constructing                  the      lead     ship.            For        example,                  it         had planned                   to     use
mostly         computer-aided                   design,           but         it      was unable                        to     and       it         was also
unable         to      do as much construction                                in      its         fabrication                       buildings                as
it     had planned.                    As a result               of     these             problems                  and Navy                  changes          in
the     contract              requirements,                  costs          have          increased                     substantially                       over
the     original              contract          estimate.                   Schedule                 delays               in      1987         and 1988
delayed          the         expected          delivery           by 17 months.                                  Bath        Iron       works          is      now
accelerating                  construction                 to    meet        the          planned                 delivery               in     February

Although            Bath       Iron         Works     estimates                    that         about             50 percent                   of     the
lead      ship         is     complete,             the     major           part          of     outfitting                       the         ship     still
has     to     be done.                The combat               system         and other                         technical               components
have      to     be installed                  and        integrated                within                 the      ship.            Often,            in      the

development                of     new systems,                       it      is     during           these         activities               and

subsequent              testing             of         the     complete                 system           that      problems            surface
that       could        affect            follow             ships'           schedule               and cost.

The Navy             has    awarded               contracts                  for        seven        follow             ships        and    is
getting           ready         to    award             additional                  contracts.                   The Navy             could            have

as many as 17 ships                             under          construction                     or      awarded            before          the         lead
ship       has       finished             testing              and has              been        delivered.                  Currently,                  the
Department             of       Defense                and     the         Navy         are      exploring               options           for

reducing             forces          to     respond              to        budget          constraints                   and recent
geopolitical                events.                Therefore,                      we believe               it      is     an opportune                   time
to      reexamine             the     DDG-51              program.                  In     our       report,             we recommend                   that
the      Secretary              of    Defense                ensure           that         sufficient                   information               exists
on the        DDG-51            program             development                     and affordability                           to    justify             the
award       of     additional                    follow          ships             beyond          the      seven          awarded          to         date,

Cost       Growth          on Shipbuilding                        Contracts
and DDG-51             Contract                 Restructurinq

According             to    the       June          1989        DDG-51              cost        performance                 report,              the
total       target          cost          for      Bath          Iron         Works           to     design             and construct                   the

lead       ship       was estimated                       at     about             $500       million             (in      May 1984

dollars).              Design             costs           were            expected            to     more        than       double          from          the
original           target            cost         of      $111        million              to      $247         million,             and                         Y

construction                costs           were          expected                 to    grow        more        than       60 percent,                   from

$157       million          to       $253         million.                  These          costs          exclude           the       government-

furnished              equipment,              such              as the             AEGIS       combat              system.            However,            the

Department              of      Defense             believes                  that       the      total             cost      after
integrating               all        systems              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,           including

changes           to    give         the      DDG-51              a reduced               radar           cross            section.            The
modification                  restructured                       the      sharing              ratios          of     both       the      design           and

construction                 phases.                Design              had a 90-to-10                        sharing          ratio,          which
meant      that         the      government                      was responsible                        for         90 percent            of     costs

above       the        target         costs          up to              the         ceiling        price             and      that      Bath        Iron
Works      was responsible                          for          10 percent               of      the         costs         up to       the      ceiling
price      and all              costs         above              the      ceiling             price.            Construction                    costs
above      the         target         cost          up to              the      ceiling           price         were          shared          equally.

The modification                      combined                   both        design           and construction                         into      a 80-
to-20      sharing              ratio,         with              the      government                responsible                  for      80
percent.               The ceiling                  price           also            was increased                    from      the      then
current          $438        million           to         about           $530         million.                The modification                      could
increase           Navy         compensation                      to      Bath         Iron       Works         by as much as $71.7
million          and Bath             Iron         Work's               projected               losses          would          be eliminated.

Last      year         we reported                  that          over          50 percent                of    competitively                    awarded
fixed-price               incentive                 shipbuilding                       contracts               was experiencing                      cost

growth         (GAO/NSIAD-89-189,                        Navy       Contracting:                      Status           of     Cost         Growth

on Shi-nq                          Contracts,              August             4,     1989).           At      that       time         the        net

increase         over         target            costs      was projected                     at     $3 billion                --      the

shipyards            were       potentially                liable             for     $1.8         billion            and the            Navy
was liable             for      $1.2        billion.              The Navy              said        that        sufficient                  funds

were       included           in     the        shipbuilding                  appropriations                    to     cover          most           of
its    additional               costs.             Similarly,                 for     the         DDG-51        the     Navy          says           it

has    shipbuilding                  appropriations                      to    cover         the      additional                   costs         from
the    contract              modification,                 but      it        may not             have       enough          solely             in        the

DDG-51         class         program.

Because         of     the      number           of     fixed-price                  incentive               shipbuilding
contracts            experiencing                  overruns,                 we were         concerned                that         the      DDG-51
modification                 could         establish             an inappropriate                        precedent.                   For
example,          according                to    November           1989            Naval         Sea Systems                Command data,
the    DDG-52          was 1 percent                    complete              and was already                    estimated                 at        11

percent         over         ceiling            price      by     the         contractor              and       22 percent                 over            by
the    Navy.           While         the        Department               of    Defense             believes            that         the      DDG-51
contract         modification                    presents           a unique                set     of       circumstances,                      we
are    still         concerned              about        the      modification                     given       the      number             of
shipbuilding                 overruns            and     the      potential                 impact           on the          shipbuilding

Allegations             of    Mischarging                   by Bath                 Iron        Works

on Cruiser             and Destroyer                    Contracts

After       we completed               our     audit               work         on the           DDG-51          and were                finalizing

our      report,        we and the             Navy              received              fraud         hot      line          allegations                 of

mischarging             by Bath         Iron            Works         on the               cruiser          and destroyer
programs.              Immediately                 after           we began                to    investigate                     the

allegations,                the    Chairman,                Subcommittee                        on Oversight                 and
Investigations,                   Committee                on Energy                 and Commerce,                    wrote            to     GAO and
requested           that      we do the                 investigation                       at     his      request.                   We are
coordinating               with       the     Navy            in    its         investigation                    of        the     allegations
and are          building          upon       its          work.               At    a later             date,        we will               be
reporting           our      findings              to      the      Chairman                and will             provide               this

Committee           with      a copy          of        our        report.

                                                                    - - - -

In      summary,          although           the        Department                   of     Defense           believes                 that       the
probability             of    a major          problem                with           the        DDG-51        affecting                  follow

ships       is     minimal,           we note              that       it        is     often         during           the         work        that      is
still       to     be done         on the           DDG-51            that           problems             develop            that           could

affect        follow         ships.           Also,            budget               constraints               and world                 events
could       have       an effect            on future                 defense               force         structures                   and

equipment.              As a result,                    we believe                   the        Secretary             of     Defense              should

either      provide     assurances          on the       development        and affordability             of

the      DDG-51    program   or     delay     the    award       of   additional      follow     ships.

This      concludes     my prepared          remarks       and    I would      be pleased       to

respond       to   any questions.