Friday, November 2, 2012

LCS - Cost Cap

I’ve long been fascinated by the Congressional cost cap that has been applied to the LCS program.  It’s been interesting to watch Congress’ attempt to apply oversight and fiscal restraint and then observe the Navy’s response.  The cost cap was Congress’ reaction to the combination of controversy about the LCS combined with the early indications of runaway cost growth.  Congress was, in essence, telling the Navy that they weren’t comfortable with the LCS program but that the Navy could continue the program if they could keep the costs below a threshold.  So, how did it all play out?  Let’s review …

The original Navy cost estimate was for a $200M ship.  It’s unclear whether that estimate included the module cost.  As it became clear that that target would not be met, Congress in 2006 passed Section 124 of the FY2006 National Defense Authorization act (H.R. 1815/P.L. 109-163 of January 6, 2006) which set a cap of $220M per ship.

Then, in 2008 the cost cap was changed by Section 125 of the FY2008 National Defense Authorization Act (H.R. 4986/P.L. 110-181 of January 28, 2008) to $460M  per ship.  The cap was applied to all LCS procured from 2008 on.

Later in 2008, the cost cap was amended again by Section 122 of the FY2009 Duncan Hunter National Defense Authorization Act (S. 3001/P.L. 110-417 of October 14,
2008) which deferred the implementation of the cost cap by two years, from 2010 on. 

In 2010 the cost cap was amended again by Section 121(c) and (d) of the FY2010
National Defense Authorization Act (H.R. 2647/P.L. 111-84 of October 28,
2009) to set a cap of $480M.  However, the cap excluded certain costs from being counted against the cap and included provisions for adjusting the $480 million figure over time to take inflation and other events into account, and permitted the Secretary of the Navy to waive the cost cap under certain conditions.  The Navy has stated that the cap equates to $538M as of December 2010, due to inflation.

In summarized form, here’s the progression of the cost cap:

2006     $220M
2008   $460M
2008   $460M  deferred
2010   $480M  inflation and “events” adjustment clause; waivers
2010   $538M  Navy inflation adjustment

What was the Navy’s response to all this?

The Navy sought and obtained the cost cap language that allows the cap to be adjusted and even waived because they know they can’t build the ships for the cap amount.  But wait!  Doesn’t the Navy have a fixed price contract for less than the cap amount?  Doesn’t that prove they can build the LCS for the cap amount?  If you’re asking that, then you haven’t been a regular follower of this blog.

Yes, the Navy has a fixed price contract for less than the cap and, no, they can’t build the LCS for the contracted amount.  I’ve said it before and I’ll repeat it.  The fixed price contract is only for the seaframe (the hull).  The weapons, electronics, computers, fire control software and systems, sensors, radars, and most other equipment is being supplied from another, separate account line that is not included in the cap limit.  Pretty clever of the Navy, huh?  If you can’t meet the cost cap, just split off half the cost into an unregulated account and then you can claim to be building cheap LCSs.  Technically true but bordering on fraudulent in that it is a deliberate ploy to bypass Congress’ intent.  Add to that the fact that the modules, without which the ships are useless, are also being funded from a separate account and you’ve got a pretty fraudulent accounting practice by the Navy.

The real cost of the LCS is the seaframe (~$500M inflation adjusted) plus government supplied equipment ($200M ?) plus module ($30M - $200M) and you’ve got an actual total cost for the LCS of $750M - $900M.

Also, the fixed price contract contains language allowing the manufacturer and the Navy to split cost overruns, 50:50, or even allowing the manufacturer to recover all overrun costs under certain circumstances.  That’s not a fixed price contract!  

I also don't know whether the fixed price contract automatically increases each year due to inflation adjustment or whether it stays at the original contract price.  A few things I've read, including the contract's inflation adjustment clause, hint that the fixed price increases each year.  If so, the current fixed price for the seaframe is actually somewhere around $550M each per the Navy's stated inflation adjustment and allowing for continued adjustment through 2012.  As I said, I'm unsure about this aspect.  If anyone knows for sure, cite a reference and let me know!

Regardless, you’ve got to give the Navy credit.  Faced with a seemingly impossible cost cap, they manipulated the system, bypassed the intent of Congress, and got their LCS program.  That’s some outstanding integrity being demonstrated there, Navy!  What’s wrong with being upfront about the real costs and then letting Congress do their job and decide if it’s worth it to the country?

15 comments:

  1. And I thought British military procurement was FUBAR.

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  2. $538M - that can't just be for the hull surely. Must include other stuff like, you know, engines, freezers, mini-bars, etc? Is this the cost for the first 24 ships ordered, with the R&D costs piled on to them, so if you order the whole 55, the cost should come down by half?

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    1. I've gone over this repeatedly but I'll document it one more time. Read the United States Goverment Accountability Office document GAO-12-400SP, Mar 2012, page 107. It states that the total program costs for the LCS program are $32.9B of which $3.5B are R&D with the remainder being procurement costs. Thus, the procurement amount is $29.136B for 53 seaframes (remember the first two were paid for out of R&D) which is an average cost of $549M each - greater, even, than the Navy inflation adjusted cost of $538M. It also explicitly states that the cost data is for the seaframe only.

      I can't make it any plainer than that. This isn't an opinion on my part. There's nothing to believe or not believe - it's documented fact.

      As far as what's included with the seaframe, I've listed what has been reported as being separate. Other items such as engines may or may not be included - I've never heard and the Navy has never broken it out, as far as I know, beyond what I've stated.

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  3. $538m does sound high.

    I'm sure the all in cost of a seventh Type 45 Destroyer was £650m, about a billion dollars.

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    1. See the above reply to WiseApe's comment. The costs are factual and documented. If you have a source that shows different costs, cite it and we'll examine it.

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  4. @ComNavOps - Not questioning your integrity, just expressing my astonishment at the cost of what appears to be an oversized fast patrol boat. Factor in the cost of helos and their equipment - wow. And they tried to save money by cutting crew numbers!

    Are the hulls made of adamantium (think Wolverine from X-Men) by any chance?

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    1. At the very least the hulls are made of money - the taxpayers!

      I've worked a lifetime in the chemical industry and seen countless large and small construction projects. By any measure I've ever seen, Navy shipbuilding is hugely overpriced. I've seen giant refinery complexes with pumps, reactors, sensors, control software, valves, backup systems, firefighting and toxic emission control systems, and so forth that cost a tiny fraction of a ship. Admittedly, to a large extent that's comparing apples and oranges and yet the basic building blocks (pumps, valves, controls, sensors, cable runs, HVAC, etc.) are the same. Sure MilSpec is applied to some ship components which increases costs but still, no matter what allowances I make, ship costs are not readily understandable. I believe the majority of the unexplainable cost is attributed to scale (rather than the ever popular "waste"). I'll discuss this in more detail in a future post.

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  5. If the LCS is going to cost us $538M per ship, then isn't time we cut the funding and switch to the patrol frigate out of the US Coast Guard's National security Cutter design. At that price at $538M, I can get a fully loaded Patrol frigate out of the US Coast Guard's National security cutter design with left over for some of the fancy toys like UAV, UUV and even SEA fox.

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    1. OK, that's an interesting claim but before I jump on the wagon with you, back it up with actual costs. What does an NSC cost? How much would you have left over? What does a UAV/UUV or Sea fox cost?

      Is the NSC equivalent in capability to the LCS or would more money have to be spent to bring it up to the same level? Does NSC have the same helo capability?

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    2. From What I heard online, I heard that an NSC like Patrol Frigate would cost around $400M per ship. It would take all the LCS gear and put it in the NCS and Turn it into a Patrol frigate with Sea legs.

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    3. Nicky, fair enough but here's where I try to ensure that this blog is a cut above the rest. I want to make sure that I and my reader's opinions are based on fact whenever possible. Here's what I've found for the NSC costs after a cursory look.

      The first of class, Bertholf, cost $641M as reported on Wiki and other websites and includes design and developmental costs. From National Defense Magazine's website the next several build costs (no R&D costs; pure construction) were:

      2 $432M
      3 $467M
      4 $480M
      5 $482M

      Those are 2010 or 2011 dollars. So, for 2012 an NSC would cost around $490M.

      While the NSC is comparable in many ways to the LCS, a major difference is in the aviation. The NSC can carry two MH-65C Dolphins which are 38 ft long and weigh 6900 lbs empty. The LCS, by comparison, carries two xH-60 Seahawk type helos which are 64 ft and 15,000 lbs. So, the LCS helos are roughly twice the size and built for ASW. The Dolphin is a search and rescue helo.

      Also, the NSC flight deck is 80 ft x 50 ft. I don't have the LCS numbers in front of me but their flight decks are twice as big. I don't whether the NSC flight deck is structurally weight rated for -60s but I suspect not. I believe the NSC's hangar is too small for -60s but, again, I don't have the exact numbers in front of me.

      So, to give the NSC the same helo capability as the LCS would probably require a significant lengthening of the ship, increase in structural support, enlargement of the hangar, and would increase the cost proportionally.

      These costs and requirements suggest that if the NSC were brought up to LCS helo equivalency (the -60 helo is, after all, the main component of the LCS modules!) the resulting ship construction cost would be about the same area as the LCS or possibly even greater.

      I've heard the same NSC arguments as a replacement for the LCS that you have. However, after looking at the numbers it doesn't seem like a valid proposal. I wish it was - the LCS is a disaster on multiple levels!

      What do you think? Does this change your opinion?

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    4. I still think that if we can't get a frigate out of the NSC, then can we get a frigate out of a Burke. Take the same Burke concept, design and make a mini version of a burke into a frigate. The other option would be for the US Navy to get involve with the British navy's Global Combat ship program. Since were giving the Brits, the F-35. We can make a trade offer by giving them more F-35's in return for getting in on the British Global Combat ship.

      Here's Info on the British Navy's Global Combat Ship
      http://en.wikipedia.org/wiki/Global_Combat_Ship

      http://www.baesystems.com/product/BAES_020346/global-combat-ship

      I think the Global Combat ship would make the LCS look like an OPV.

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  6. At best 3/4 a billion dollars, probably an even billion for a ship that's practically useless. I've asked this before.... WHY? What the #^*%# is happening to us?

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    1. OK, I'll put you down as undecided!

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