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CONTENTS Preface iii Figures vii Tables ix Summary xi Historical Cost Escalation xi Principal Sources Of Cost Escalation For Navy Ships xii Shipbuilders' Perspective on Cost Escalaiton xiv Options For Reducing Shipbuilding Costs xv Conclusions xvi Acknowledgments xix Glossary, List of Symbols, Etc. xxi 1. The Growth Of Shipbuilding Costs 1 CNO's Perspective And Significance Of The Problem 1 Shipbuilding Cost Escalation And Complexity 4 Study Objectives And Overview 6 Approach 6 Sources of Data 9 Report Organization 10 2. Historical Cost Escalation For Ships 11 Cost Escalation For Navy Ships 11 Surface Combatant Example 11 Comparing Cost Escalation Among Ships 14 Cost Escalation For Other Weapon Systems 15 Cost Escalation In Other Sectors Of The Economy 17 DoD Deflator 17 GDP Deflator 17 Consumer Price Index 18 Summary 19 3. Sources Of Cost Escalation For Navy Ships 20 Types Of Cost Escalation 20 Comparing Ship Costs Across Time 21 Economy-Driven Factors 22 Labor 22 Material and Equipment 26 Summary of Economy-Driven Factors 29 Customer-Driven Factors 30 Characteristic Complexity 31 Other Ship Features 37 Procurement Practices 41 Summary of Customer-Driven Factors 44 Total Contribution Of Factors 45 4. Industry Views On Ship Cost Escalation 47 Unstable Business Bases 47 Shrinking Vendor Base 49 Workforce Issues 50 Increasing Government Regulations 51 Summary 52 5. Options For The Navy To Reduce Shipbuilding Costs 54 Increase Investments In Shipbuilding Infrastructure Aimed At Producibility 54 Increase Shipbuilding Procurement Stability 55 Shipbuilding Technology And Efficiency Improvements 57 Improved Management Stability 58 GFE-Program Management Controls 58 Batch Production Scheduling 59 Further Consolidation Of the Industrial Base 60 International Competition And Participation 60 Build Ship As Vehicle 60 Change Design Life 61 Buy A Mix Mission-Focused and Multi-Role Of Ships 62 Build CommerciaL-Like Ships 62 Summary 62 6. Conclusion 64 A. Ship Classes Included In The Multivariate Regression Analysis 66 B. Multivariate Regression for Ship Cost 67 C. RAND Questions To Each Firm 68 D. Cost Escalation Over The Past Fifteen Years 69 Historical Comparisons 69 Points of Comparison 71 Economomy-Driven Factors 72 Customer Factors 74 Total Contribution of Factors 75 Summary 75 E. Passenger Ship Price Escalation 77 Data 77 Analysis 78 Summary 81 Bibliography 82 FIGURES Figure S.1 ; Contributions of Different Factors to Shipbuilding Cost Escalation for Surface Combatants [DDG2 (FY61) to DDG51 (FY02)] xiv Figure 1.1 ; Average Number of Ships Acquired per Year and Corresponding Steady State Fleet Size Under Varying Levels of Fixed Shipbuilding Budgets 3 Figure 2.1 ; Cost Escalation for Selected Surface Combatants 12 Figure 2.2 - P-5 Component Escalation for FFG 7 Class 14 Figure 2.3 ; Fighter Aircraft Cost Escalation, 1950 to 2000 15 Figure 2.4 ; Cost Escalation for UK Weapon Systems 16 Figure 2.5 ; CPI, DoD TOA Procurement Deflator, and GDP Deflator Trends Since 1965 18 Figure 3.1 ; Shipyard Labor Rate Escalation, 1977 to 2005 24 Figure 3.2 ; Class Average Light Ship Hours Per Ton by First Fiscal Year of Construction for Class 25 Figure 3.3 ; Material and Equipment Cost Escalation 28 Figure 3.4 ; Power Density for Surface Combatants, 1970 to 2000 36 Figure 3.5 ; Average Living Space per Sailor on Surface Combatants, 1945 to 1975 38 Figure 3.6 ; Increasing Complexity of Weapons Systems for Surface Combatants 39 Figure 4.1 ; Actual DoD Spending Compared to POM Projections 48 Figure D.1 / Comparison of DoD and GDP Deflators with the CPI (1990- 2004) 71 Figure D.2 / Shipbuilding Labor Rate Escalation (1990 to 2004) 72 Figure D.3 / Material and Equipment Cost Escalation (1990-2004) 73 Figure E.1 - Passenger Ship Size Versus Year of Order 78 Figure E.2 - Regression Relationship Between Price and GRT for Passenger Vessels 79 TABLES Table S.1 Cost Escalation Rates for Battle Force Ships, 1950 to 2000 xii Table 1.1 Cost Escalation of Naval Ships 1 Table 2.1 Cost Escalation Rates for Battle Force Ships, 1950 to 2000 14 Table 2.2 Annual Growth Rate of Selected CPI Components 19 Table 3.1 Labor as Percent of End Cost by Ship Type 23 Table 3.2 Equipment and Material as Proportion of Construction Costs, by Ship Type 27 Table 3.3 Material and Equipment Annual Escalation Rates, 1965 to 2004 29 Table 3.4 Contributions to Annual Cost Escalation by Labor, Material, and Equipment 30 Table 3.5 Ship Characteristics to Measure Ship Complexity 33 Table 3.6 Contributions to Annual Escalation Rate by Characteristic Complexity 37 Table 3.7 Mission Capability Factors 37 Table 3.8 Cost Escalation Due to Standards, Regulations, and Requirements 41 Table 3.9 Summary Statistics for Rate Slope 43 Table 3.10 Annual Escalation Rate Due to Procurement Rate 43 Table 3.11 Contributions to Annual Escalation Rate By Customer Driven Factors 45 Table 3.12 Contributions to Annual Escalation Rate By Customer Driven Factors 46 Table B.1 Multivariate Regression Output for Ship Characteristics 67 Table D.1 Battle Force Cost Escalation Rates (1990-2004) 70 Table D.2 Annual Growth Rate for Comparison Indices (1990-2004) 70 Table D.3 Material and Equipment Annual Escalation Rates (1990-2004) 74 Table D.4 Cost Escalation Due to Standards, Regulations, and Requirements 75 Table D.5 Contributions to Annual Escalation Rate By Customer Driven Factors 75 Table E.1 Statistical Summary of Passenger Ship Data 77 Table E.2 Regression Diagnostics for ln(price05) Versus ln(grt) 80
Library of Congress Subject Headings for this publication:
United States. Navy -- Procurement.
Warships -- United States -- Costs.
Shipbuilding -- United States -- Costs.
Shipbuilding industry -- United States -- Costs.