The below blog was written by Assistant Secretary of the Navy (Research Development & Acquisition) Sean Stackley and Deputy Chief of Naval Operations, Integration of Capabilities and Resources (N8) Vice Adm. John T. Blake
Based on a report issued by the Congressional Budget Office (CBO), there has been media reporting and discussion about the cost estimating methodology used by the Navy to forecast over the 30-year shipbuilding plan.
The Navy’s 30-year plan assesses DoN investments in battle force ships in three 10-year periods, called near, mid, and far-term. The near-term 10-year period (FY13-FY22) comprises the FY13-FY17 Future Years Defense Program (FYDP) and the next FYDP. The mid-term planning period covers the two FYDPs between FY23-FY32, and the far-term planning period covers the two FYDPs between FY33-FY42. Confidence in cost estimates over these time periods inevitably declines over time. Unsurprisingly, then, the difference in Navy and CBO forecasts for new ship construction increases over time. Depending on the costs being considered, CBO’s numbers are 9-11 percent higher in the near-term planning period, 11-13 percent higher in the mid-term planning period, and 30-33 percent in the far-term.
The Navy’s confidence in our cost estimates in the FYDP (i.e, the current budget window) is extremely high. From FY13 through FY17, there is great stability in our shipbuilding programs. Pending Congressional approval, DDG 51 and Virginia Class submarines will be procured via fixed price incentive multiyear contracts. LCS ships are being bought under fixed price incentive block buy contracts through FY15 and it is envisioned follow-on fixed price incentive block buys or multiyear contracts will be used. CVN 79 and LHA 8 will be procured under fixed price incentive contracts. The Navy’s Oiler Replacement (TAOX), as all other auxiliary ships, will be procured using fixed price contracts. The stability afforded by fixed price, long-term contracts, particularly on these mature programs with stable ship configurations lends greater confidence in the Navy’s estimates for the first FYDP in the near term. In fact, Navy and CBO estimates for this time frame are within five percent.
The second five year period of the near term continues to build stable designs of the Virginia, LCS, LHA, TAOX, and DDG 51 classes. There are two lead ships that will be introduced during the second five years. The Navy is focused on balancing requirements with affordability for these and all new ship classes. The Navy will begin the LSD replacement in FY18. While the design for this ship is not yet finalized (analysis is on-going), this is a replacement for the LSD 41/LSD 49 Class – the cost to build this class of ships is well understood. The other lead ship introduced at the end of the near-term period is the Ohio Replacement. The Department has already established affordability targets for the lead and follow Ohio Replacement and is investing Research and Development (R&D) in order to meet these targets.
The focus on stable designs and focus on affordability for future platforms is considered in the Navy’s cost estimates for the mid and far-term periods, during the mid-term period (FY23-FY32), there is relative stability in all classes of ships as the Navy continues to build existing designs. Any new designs during the mid-term period will also focus on affordability and be informed by the class it is intended to replace. Clearly, however, uncertainty regarding the future requirements, related costs and external factors such as escalation, increases during the mid-term.
The far-term period simply assumes a one for one replacement for ships expected to retire in that period. The Navy estimates for these ships are based on the cost knowledge of today’s ships escalated to the far-term.
Overall the Navy’s 30-year plan is built upon the confidence in our estimates during the next five years and the affordability focus placed on our new shipbuilding programs. The Navy acknowledges in the 30-year plan that the accuracy of its estimates decrease in the mid to far term planning periods. However, our 30-year plan provides the best estimate possible balancing stable costs in the near-term and cost projections of capability required over time.