Navy Sees 4-1 Odds for Budget Bloat on $12 Billion-Plus Carriers

(Bloomberg) -- U.S. Navy analysts are placing 4-to-1 odds against meeting cost targets of $12.2 billion and $12.9 billion for the last two aircraft carriers in the next-generation Gerald R. Ford class, the latest budgetary warning sign for one of the Pentagon's costliest weapons program.

An internal Defense Department “information paper” prepared by the Navy and obtained by Bloomberg News sees just a 20% chance that the USS Enterprise and USS Doris Miller will meet those goals.

“A 20% confidence level is low, even compared to the fairly low confidence levels that the Navy has shared for aircraft carriers in the past,” said Ronald O'Rourke, the naval analyst for the Congressional Research Service.

Like Las Vegas oddsmakers, analysts for the three military services regularly rank their “confidence level” on meeting cost targets for major weapons as an internal reality check. “The Navy often prefers to get to a 50% confidence level on its shipbuilding programs,” O'Rourke said.

The first carrier in the class, the USS Gerald R. Ford, is now a $13.3 billion vessel after an estimated $2.8 billion in increased costs, making it the world's most expensive warship. It has completed initial post-delivery sea trials, and the Navy is continuing to install tardy munitions elevators for an initial combat deployment that's still years away.

The cost-confidence paper on the carriers, dated June 10 but not previously made public, estimates that the second of the four carriers in the class, the USS John F. Kennedy, which is more than 70% complete, has a 36% chance of meeting its cost target.

Work on the Kennedy is more than 70% complete, and the ship is scheduled for delivery in September 2024. The keel-laying for the Enterprise is scheduled for February 2022, with delivery projected for September 2028. The Doris Miller's keel-laying is scheduled for January 2026 with delivery in February 2032.

A confidence level can change as a contract progresses, depending on issues such as whether risks are resolved or reduced since a previous calculation, O'Rourke said. The Pentagon document says the estimates take into account variables such as forecasted price increases for labor, materials and government-provided equipment.

Budget Office

The Congressional Budget Office, in its 2018 and 2019 Navy shipbuilding assessments, reported on earlier Navy confidence levels that indicated a more than 60% chance and then a 78% chance that the Enterprise would exceed its cost target.

The Navy says it's taking aggressive measures to mitigate cost growth after the USS Gerald R. Ford's overrun.

Beci Brenton, a spokeswoman for prime contractor Huntington Ingalls Industries Inc., said it's in the very early stages of construction on the Enterprise, and the company has begun procuring material for the Doris Miller. When the Newport News, Virginia-based company signed the contract “we anticipated significant savings” through several initiatives, she said.

They include the application of lessons learned from the first carrier, an investment in digital shipbuilding, stabilization of the workforce, bulk material purchases “and the ability for the supplier base of more than 2,000 in 46 states to phase work more efficiently,” she said. “We remain confident in our ability to create savings.”

Cost estimates on these types of contracts are typically just approximations, one analyst said.

“The Navy is well-aware these are cost estimates in name only,” said Shelby Oakley, an acquisition director at the Government Accountability Office who oversees shipbuilding analysis. “Our best practices in cost estimating are to have a 55%-65% confidence interval.”

Costs on the the USS John F. Kennedy are “creeping up, and the next two ships assume even more cost savings” from the building process, Oakley added. But “I wouldn't bet on it.”

‘Block Buy'

To help rein in costs, the Navy purchased the third and fourth vessels in January 2019 under an umbrella “block buy” that was estimated to save the service $4 billion.

A key Navy goal for lowering costs of the vessels after the Ford was reducing the number of labor hours on each succeeding ship. The Navy goal was to reduce the Kennedy's number by 18% over the first vessel, but the Navy now projects a 16% reduction. The Navy assumes a 22% reduction from the Kennedy to the Doris Miller.

Asked to comment on the confidence levels, Captain Danny Hernandez, a Navy spokesman, said the service signed fixed-price incentive contracts with Huntington Ingalls for basic construction of the second through fourth vessels. Those contracts “limit the Navy's liability” for overruns “and incentivizes the shipyard's best performance,” Hernandez said.

“The Navy is confident in the cost estimates that went into these contracts and is working with the shipbuilder to build these ships in the most efficient and cost-effective manner,” he said.

The two-ship contract also “has special incentives in place aligned with improvements in specific areas such as schedule, material availability and capital expenditures,” according to the Pentagon's fiscal 2021 Selected Acquisition Report on the program.

Still, “the Navy's low confidence suggests Navy leaders will need congressional dispensation” to request more money, “which could be challenging if defense budgets become more constrained next year and thereafter,” said Bryan Clark, a naval operations and systems analyst for the Hudson Institute in Washington.

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