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Navy’s Shipbuilding Plan and the CBO Report—Similarities, Differences and Why

The Navy and CBO shipbuilding estimates are closer than you think and the differences between them are easy to understand.

ARABIAN SEA (June 9, 2012) The amphibious transport dock ship USS New York (LPD 21), right, aircraft carrier USS Abraham Lincoln (CVN 72), center, and the guided-missile cruiser USS Cape St. George (CG 71), left, transit in formation. The ship’s are currently on deployment to the U.S. 5th Fleet area of responsibility. (U.S. Navy photo by Mass Communication Specialist 2nd Class Colby Neal/Released)

Our current shipbuilding plan balances anticipated future demands for naval forces with expected resources. With anticipated future fiscal realities, we focus our investments to ensure the battle force is capable of meeting the Navy’s core missions, along with the capacity to operate forward in the most critical regions. The goal is to work within fiscal limitations to meet these core mission responsibilities with needed capacity.

Methodology:
The total inventory of battle force ships and numbers of each type of ship will vary from year to year as a result of the complex relationship between retirements, procurement, design and construction times, as well as funding availability, industrial base capacity, and war-fighting priorities. Not unlike previous CBO reports on Navy shipbuilding, there are differences in our estimates, especially in the far-term. CBO uses different estimating methods and assumptions to calculate costs associated with shipbuilding, which yield variations in the overall costs for ship procurement. Even small changes in estimating assumptions can cause the totals to vary greatly the farther out the estimates given the span of the report and the significant costs associated with individual ship procurement.

Shipbuilding Plan:
The shipbuilding plan covers DoN investments in battle force ships. In the near-term, the Navy plan invests about $15.1B in FY12 constant dollars annually in new construction to support an inventory of approximately 300 ships. The shipbuilding budget will rise to $19.5B-a-year in the mid-term due to the SSBN(X) Ohio Replacement Program before decreasing to $15.9B after recapitalization of the SSBN force.
The plan is organized into three planning horizons: near-term refers to the upcoming decade made up of the Future Years Defense Plan (FYDP) FY13-FY17 and the second FYDP (FY18 to FY22); mid-term covers FY23 to FY32; lastly, far-term covers FY33 to FY42.

Variances in Estimates Explained:
Near-term – Think buying your next automobile.
We are confident in our estimates. The Navy and CBO figures are almost exactly the same.

  • Navy cost estimates are within 4-5% of CBO within the FYDP.
  • The near-term planning period covers the two FYDP s between FY13 through FY22. The projections in this period are based on our most accurate understanding of required combat capabilities, future defense budget toplines, and shipbuilding costs. They also consider approved block buys and multi-year procurements using fixed price type contracts. The cost estimates for this period are therefore the most accurate of the three planning periods.

Mid-term – Think buying two cars into the future.
The Navy and CBO are close in their estimates and we understand where we have differences.

  • The FYDPs CBO estimates are 11% higher when compared to Navy’s. The mid-term period, which covers the two FYDPs between FY23 to FY32, is based on a projection of numerous new replacement ships in build plan. The costs for these ships have yet to be informed by formal analyses of alternatives, and are therefore based on inflation-adjusted projections of the building costs for ships they are scheduled to replace. As a result, the accuracy of plan cost estimates diminishes for the force structure estimates in this timeframe.

Far-term – Think buying four cars in the far future. These cars haven’t even been designed, much less built.
As one might expect, Navy and CBO estimates differ most in this period.

  • The final, far-term period, covering FY33 to FY42, simply assumes a one-for-one replacement for ships expected to retire during this period.
  • Due to the strategic environment and changing technology, the next 20-30 years are sure to be very different than today, ship and cost projections during this period are much more speculative.
  • Much of the difference between Navy and CBO estimates can be accounted for by inflation.

While there are differences in the assumptions and methods used in calculating future ship costs between the CBO and Navy, we believe our inflation estimates are accurate and are based on the actual inflation experienced in the shipbuilding sector, to develop our cost estimates.

As good stewards of taxpayer dollars, the Navy remains rigorous and pragmatic in planning as we continue to build our future Fleet.

SAN DIEGO (May 2, 2012) The first of class littoral combat ships USS Freedom (LCS 1), rear, and USS Independence (LCS 2) maneuver together during an exercise off the coast of Southern California. The littoral combat ship is a fast, agile, networked surface combatant designed to operate in the near-shore environment, while capable of open-ocean tasking, and win against 21st-century coastal threats such as submarines, mines, and swarming small craft. (U.S. Navy photo by Lt. Jan Shultis/Released)

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