New Destroyer is Déjà Vu for US Navy
Richard B Gasparre looks at the history of the latest DDG-1000 cost overruns. They could quite possibly weigh heavily on future maritime projects.
In terms of meeting budget, the US Navy's future surface combatant programme (FSCP) is zero for two. Consequently, the navy's new destroyer is now set to suffer a very premature death.
On 19 July, navy and Pentagon leaders decided to terminate the next-generation DDG-1000 destroyer programme after the first two ships are built. Thus, the navy is withdrawing its request for a third Zumwalt Class ship and will abandon plans to build four more of the highly innovative vessels.
Instead, the navy wants to restart production of the Arleigh Burke Class destroyer, currently the backbone of the navy's surface combatant force. The navy thinks it can build between eight and 11 additional ships, and for good reason – at around $900m a unit, the Burke Class is over 40% cheaper than even the back-end DDG-1000 models.
The holy grail of transformation
In the late 1990s, the navy embarked on the FSCP with the goal of creating ships so innovative that they would transform navy capabilities. Programme managers eventually envisioned three ship classes (from largest to smallest):
- The CG(X) cruiser, for air defense and anti-ballistic missile missions
- The DD(X) destroyer, for surface strike missions and onshore fire support
- The littoral combat ship (LCS), a new class of hybrid warship for engaging smaller combatants, sweeping mines, and inserting small units ashore
At that time, the navy was targeting a 375-ship fleet comprising 32 DD(X) warships. The original DD(X) incarnation, the DD-21, had a 16,000t displacement – essentially double the size of the Burke model. The DD-21 concept, however, was troubled from the start, and the navy shelved prior to the 2000 election.
The 'budget destroyer'
The navy announced the replacement DDG-1000 programme on 1 November 2001, the same day it rolled out the LCS programme. At that time, the navy planned to acquire 16 to 24 DDG-1000s. According to Rep. Roscoe Bartlett of the House Armed Services Committee (HASC), the navy originally estimated the strict procurement cost for the fifth ship at between $1.06bn and $1.23bn, which implied a total programme cost between $17bn and $30bn.
Like the LCS, the DDG-1000 started emitting distress signals about three years into development. Navy officials informed Congress in 2005 that their requirement had dropped to between eight and 12 ships – a 50% decrease at a time when global naval challenges were certainly not declining.
In February 2006, the navy further cut its planned procurement to just seven DDG-1000s. As the navy was not offering to refund development dollars, the programme was clearly experiencing major cost slippage, as the Congressional Budget Office (CBO), Congressional Research Service (CRS), and GAO had predicted almost from the programme's inception.
Nevertheless, the navy committed to building the first two ships of the programme on 14 February 2008. General Dynamics and Northrop Grumman were the dual competitive contractors, under the same competitive sourcing guidelines that governed LCS procurement (prior to their modification). According to the contract baseline, prototype construction was pegged at $1.4bn each.
On 14 March 2008, in testimony before the Seapower Subcommittee of the HASC, Ronald O'Rourke of the CRS issued what was tantamount to an 'abandon ship' call. O'Rourke estimated that building all seven ships would incur roughly $11.8bn in cost overruns – for which amount the navy could buy one next-generation CVN-21 carrier (at least in theory). O'Rourke's testimony indicated that for all seven ships, the new price estimate would have been $31.0bn versus the $19.1bn adjusted baseline cost at the beginning of 2006.
- For the last five ships, according to a CBO forecast, the navy's adjusted baseline cost of $12.8bn would have risen by roughly $8.0bn to $20.8bn – this 63% overrun implied a jump in unit cost from $2.6bn to $4.2bn
- For the first two ships, the implicit adjusted baseline cost $6.3bn would have grown by $3.9bn to $10.2bn – this 62% increase implied a rise in unit cost from roughly $3.2bn to $5.1bn
Even more favourable analyses were still fairly pessimistic. For a seven-ship purchase, the Pentagon's total price forecast was $28.9bn, only a few percentage points lower than O'Rourke's estimate.
On the other hand, stripping out amortisable R&D costs made procurement overruns look even worse. Rep. Bartlett noted the Navy's own strict procurement estimate of $2.3bn – double the midpoint of the original range he cited.
In conjunction with the LCS suspension, these forecasts not only exacerbated Congressional anger, but also raised concerns within the navy that DDG-1000 overruns could cannibalise other programmes. This fear ultimately compelled the navy to chop the programme. Whether the $10bn already sunk into development can be recycled into the CG(X) programme is currently a matter of debate.
Birds of a feather crash together
From programme origin to curtailment, the DDG-1000 and LCS have produced similar adverse budgetary results. This does not necessarily mean that the overruns in both programmes had identical causes.
However, a few key similarities deserve highlighting. Both the DDG-1000 and LCS platforms were designed from scratch and called for the seamless integration of several new and highly innovative technologies. Making a single major technological leap is difficult enough; trying to make a bunch of them at once is begging for trouble.
'Design drift' evidently affected both programmes. For example, the original DDG-1000 design had a displacement of roughly 12,000 long tons, which represented a 25% reduction from the original DD-21. Over time, however, the DDG-1000 crept back to its current displacement of 14,564t.
Perhaps most critically, the navy and Pentagon applied the same management philosophy to both programmes. In particular, the destroyer procurement contracts are both cost-plus agreements – with the same absence of price caps that killed any incentive for Lockheed Martin and General Dynamics to aggressively control costs on the LCS.