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Navy Says No to “Low Balling”

June 1, 2009

Here is Strategypage clarifying something yours truly mentioned over the weekend, about how the Navy deliberately plays down the price of a warship program in order to sell it to Congress. This article maintains it’s the shipbuilders:

For several decades now, the navy has had growing ship construction problems, with poor quality, delays and inflated prices making it difficult to maintain the size and effectiveness of the fleet. One of the major problems is the practice of “low balling.” This is where the shipbuilder gives the navy a very low estimate of what a proposed ship is going to cost. Then, when construction is under way, costs creep up, often resulting in the ship costing more than twice the original estimate. When this practice began, after World War II, it was with the cooperation of the navy, that wanted to have an easier time convincing Congress to allow construction of new ships.
For the past decade, the navy has been saying, “no more”, while the ship builders say, “OK.” But the low balling continues. All current ship building projects over budget. The worst case is the LCS (Littoral Combat Ship), which was to be the poster boy for doing it right. Didn’t work out that way. Four years ago, when building plans for the LCS were laid out, each one was to cost $223 million. Now the estimated price is $460 million, and the navy is confident that the ultimate price will be higher. Congress is outraged, and are demanding that the admirals do something.

Makes sense that the Navy would want nothing to do with this practice anymore, since its is they who are raked over the coals in Congress when things go wrong. As far as I know the shipbuilders are not being held accountable, and even get off with “early cancellation fees” if the government changes its mind about a program.

14 Comments leave one →
  1. west_rhino permalink
    June 2, 2009 10:41 am

    Scott, the one drawback for Absalon is the not invented here syndrome…

  2. Scott B. permalink
    June 2, 2009 5:54 am

    (missing link in previous post)

    Absalon leading the US Navy into the future

  3. Scott B. permalink
    June 2, 2009 5:52 am

    Mike Burleson said : “The problem with LCS is not in its concept but how it was built.”

    You’re wrong, the problem is in the concept, in fact, the concept is the problem.

    To further elaborate on the software analogy I alluded to earlier, the situation looks like this :

    1) The software is WRONG, but the Navy and DoD leadership, for ideological reasons, decided they would persist and try to iron the numerous bugs in the software : this will fail and cost much more money in the process.

    2) What you’re proposing is to reboot and re-run from the start. Because the software is WRONG, full of BUGS and VIRUSES, you’ll end up with the same result : your computer is going to crash again and again and again. This is how you’ll start with your $100 million corvette and end up with a $700 million boondoggle.

    What you have to do to solve the problem is change the software, i.e. change the paradigm.

    The paradigm that solves the problem exists : it’s called the Station Wagon.

    Furthermore, the new paradigm has already given birth to a mature and proven design : it’s called ABSALON and it’s already leading the way.

    There’s no need to try and reinvent the wheel : just BRING ON THE ABSALON !!!

  4. Mike Burleson permalink
    June 2, 2009 5:32 am

    Scott said “Your notional 1,000-ton corvette is NOT the solution : you’ll merely reboot and re-run the software from the start, i.e. when LCS was called Streetfighter, and the same causes will produce the same effects : undercapable (war)ships that are prohibitively expensive to acquire and equally expensive to operate.”

    The problem with LCs is not in its concept but how it was built. My idea for a corvette is a return to basics, to offset the continued growth of warship sizes which has given us a shrinking fleet, too few shipyards, not enough experience in building warships quickly, too many add-ons to the design while under construction, thus increasing the cost far beyond original estimates and also giving the Navy more technical headaches to work out after the ship is delivered.

    The 1000 ton corvette would make the best use of the new robot weapons which have been used successfully in warfare on land, and now will be transferred to sea warfare. These will include precision guided missiles, UAVs, and unique to the oceans, unmanned surface and submarines craft. If costs are kept under control, you can deploy more such weapons, which are the real revolution in warfare today, without a hugely expensive platform siphoning all your funds. The small corvette built in large numbers will be the perfect vessel for littoral warfare, which can be risked in such high threat waters more so than a billion dollar missile destroyer or frigate.

    You are correct Scott in that we could make the same mistake with the corvette as ith LCS. Better though to make mistakes with $100 billion boats than a $700 million warship whose faulty design we are stuck with for decades.

  5. Scott B. permalink
    June 2, 2009 4:31 am

    Towards a New Paradigm : THE STATION WAGON

    At a recent conference on naval strategy in Sweden, Dr. Robert Dalsjö, a Senior Analyst specializing in politico-military affairs at the Division of Defence Analysis of the Swedish Defence Research Agency, presented a very interesting paper entitled :

    “We No Longer Need a Sports Car, We Need a Station Wagon : Conceptual Challenges and Issues for the Royal Swedish Navy”

    In his paper, Dr. Dalsjö emphasized the need for such critical attributes as :

    1. endurance : the ability to operate at sea for an extended time without replenishment or service.

    2. seakeeping : the ability to operate in or transit rough waters while maintaining not only safety, but also operational effectiveness.

    3. versatility : the ability to solve several different tasks in differing circumstances.

    4. adaptability : the ability to reconfigure the ship’s capabilities in order to meet changing circumstances.

    5. air defense : not only for self-defense

    6. interoperability : including C3I and replenishment at sea

    7. survivability : being able to take a hit from a RPG or even a SSM, without undue casualties and while remaining not only afloat but also able to operate.

    8. crew comfort : quite important during extended deployments, especially with an all-volunteer crew.

    9. free spaces : for additional elements, functions or equipment.

    10. and at least one medium-sized embarked helicopter.

    One very last parameter needs to be injected in the equation :

    11. affordability : the Station Wagon must be affordable, in terms of both acquisition costs and operating costs.

    The Station Wagon already exists : it’s called ABSALON.

    Not only does the Absalon meet all 10 criterias listed by Dr. Robert Dalsjö, but at $230 million a piece, the Absalon also delivers on the promise of an AFFORDABLE design.

    To quote what Naval Analyst Stuart Slade said not so long ago : “The Absalon and her near-sisters are exactly what the LCS should have been”.

    And to further quote Dr. Robert Dalsjö : “It would seem silly […] not to look closely at that option.”

  6. Distiller permalink
    June 2, 2009 4:29 am

    Think has a lot to do with the U.S. ship building industry mess. Of the handful of shipyards that could build something like LCS, NG and GD are busy (and could as well be called the manufacturing branch of the Department of the Navy), Todd is left dying (and with it any meaningful commerical yard capacity on the Pacific coast), and only Aker PA, Atlantic Marine, and the Edison Chouest Group seem to survive in the commercial world. For Austal and Fincantieri LCS is the only real source of income – of course they are milking it to the max.

  7. Scott B. permalink
    June 2, 2009 4:10 am

    Mike Burleson said : “They’re the ones which took a design for an 800 -1000 ton corvette as put forth by Admiral Cebrowski and turned it into something more familiar, a low end frigate type.”

    We’ve now reached a point where the Rumsfeldian software is about to produce a major system crash.

    Your notional 1,000-ton corvette is NOT the solution : you’ll merely reboot and re-run the software from the start, i.e. when LCS was called Streetfighter, and the same causes will produce the same effects : undercapable (war)ships that are prohibitively expensive to acquire and equally expensive to operate.

    Back in October 2007, LockMart themselves estimated that LCS-1 O&S costs would be equal to more than 50% of the DDG-51 O&S costs, but nobody seems to have caught this rather insignificant detail so far.

    Merely Changing the Narrative as Mr. Raymond Pritchett recommends won’t solve the problem either : rhetorics will merely produce yet another smoke screen.

    What’s needed is a change in paradigm.

  8. badbear permalink
    June 1, 2009 9:02 pm

    Right on, Jim. A few interesting snippets from a recent GAO report I found shed some more light on this topic:

    “Had the Navy anticipated that LCS lead ship costs would more than double, it may have altered its commitment to the program. On the other hand, competition for funds among different Department of Defense programs creates incentives to be optimistic regarding technology, design, construction, and cost risks.” (p. 51)

    “These outcomes are consistent with the incentives at play in the Navy’s environment. While commercial shipbuilders and buyers are incentivized to turn a profit and achieve maximum return on their investments, the Navy and defense shipbuilders are incentivized differently. In Navy shipbuilding, a symbiotic relationship exists where the buyer has a strong interest in sustaining its shipbuilders despite shortfalls in performance. Cost-reimbursable contracts—commonly used for lead and early ships in a class—enable this environment to exist. These contracts offer the Navy the chance to acquire highly capable ships offering the latest technologies, and they provide shipbuilders—serving a single buyer, largely—sufficient business to sustain operations. For the Navy, cost-reimbursable contracts allow it to enter into shipbuilding agreements with incomplete knowledge about what it wants built. For defense shipbuilders, cost-reimbursable contracts provide a buffer against the consequences of risks, delays, and cost growth, and also offer a means for allocating overhead costs.” (p. 53)

    “Navy shipbuilding programs are also executed in an environment that includes restrictions and demands often not found in the commercial sector. The pressures created by low volumes in shipyards can push Navy shipbuilding programs to focus energy toward starting construction as early as possible, often at the expense of long-term efficiencies. Consequently, as recent Navy shipbuilding programs, including LCS and LPD 17, have demonstrated, sufficient time is generally not afforded before construction to permit the buyer and builder to collaborate and reach clear agreement on ship requirements, technologies, and design characteristics—all prerequisites to minimizing risk during construction. When these prerequisites are not met, cost-reimbursable contracts are used. With these contracts, Navy shipbuilders do not bear the financial risks that commercial shipbuilders face operating under firm, fixed-price contracts. Further, federal statutes and other considerations constrain the number and variety of shipbuilding and supplier sources available to the Navy. While these constraints may be warranted—for instance, the need to ensure a sufficient industrial base over the long term to meet the Navy’s anticipated needs—they can sometimes preclude the Navy’s selection of a shipbuilder or supplier best suited to meet its near-term program needs.” (p. 53)

    http://www.gao.gov/new.items/d09322.pdf

  9. jim permalink
    June 1, 2009 4:57 pm

    Congress is in on the “low-balling” and have been the whole time. Low prices make an easier sale to taxpayers, and gets jobs and votes in their district. There are no innocents in our parliament of whores — especially not with our big chief corrupt scumbag Obama.

  10. Mike Burleson permalink
    June 1, 2009 3:46 pm

    Scott, lets don’t let the Navy off too easy. They’re the ones which took a design for an 800 -1000 ton corvette as put forth by Admiral Cebrowski and turned it into something more familiar, a low end frigate type. So we keep getting 10,000 ton destroyers, and there are no alternatives to the 100,000 ton aircraft carrier, assuring us of a smaller, more costly, and less capable fleet. Its the Navy which sets the specifications for the shipbuilders.

  11. Scott B. permalink
    June 1, 2009 2:59 pm

    Under Robert Work’s plan to build the LCS indefinitely and retire them after 15 years, the numbers given in Chris Cavas’ article means that one LCS would have roughly the same acquisition cost as one DDG-51 over a period of 30 years.

    I am hoping that Robert Work will revise his judgement now that he’s been appointed as the new Under Secretary of the Navy, otherwise he’ll lead the US Navy straight into the biggest disaster of its history…

  12. Scott B. permalink
    June 1, 2009 2:40 pm

    Take note that, as mentioned by Chris Cavas in his article, “most of the cost growth on the LCS-2 came under Basic Construction Costs”, as opposed to other subcategories like Change Orders or GFE.

    In order words, cost growth is a clear signal that the contractor failed to put the ever escalating costs under control.

    So much for the *it’s the Navy’s fault* mantra…

  13. Scott B. permalink
    June 1, 2009 1:54 pm

    The excellent Chris Cavas of Defense News has an update on the costs of LCS-1 and LCS-2 and it’s really ugly :

    LCS-1 now costs $637 million a piece, and it doesn’t even include the mission package.

    LCS-2 now costs $704 million a piece, and again, it doesn’t even include the mission package.

    Not so long ago, over at Mr. Raymond Pritchett’s lace, I predicted that LCS-2 would soon hit the $800 million mark. We’re getting there, gradually and inexorably.

    Do I need to remind anyone that for less than $700 million, you could actually get three (as in 3) of these excellent Station Wagons ?

  14. west_rhino permalink
    June 1, 2009 1:02 pm

    Inflation aside, the cost overruns played out by defence contractors is an iniquity that should have been dealt with long ago, though the prospect of playing a bankruptcy card as GM, Ford and Chrysler have, seems to have stayed the congressional hand at keeping voting shipbuilders occupied and campaign contribuiotns flowing.

    I doubt that he shipbuilders are the only scalawags at play here, just the ones with the biggest tickets per unit produced. What’s the cost of the Super Hornet now reached?

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