When this study was being written, the Navy's force of surface combatants included 17 Spruance class destroyers, 27 Ticonderoga class cruisers, 33 Oliver Hazard Perry class frigates, and 38 Arleigh Burke class destroyers. According to published plans, the Navy will retire all of the Spruance class destroyers and the first five Ticonderoga class cruisers by 2006, upgrade the remaining cruisers and all of the Oliver Hazard Perry class frigates over the next 10 years, and deploy 24 more Arleigh Burke class destroyers by 2010. However, the Navy's main focus in transforming the surface combatant force is not those ships but the three new classes of ship--the DD(X) destroyer, the littoral combat ship (LCS), and the CG(X) cruiser--that it plans to buy starting as early as 2005.

In estimating costs for this study, the Congressional Budget Office assumed that the Navy would buy 16 DD(X)s, 56 LCSs, and 32 CG(X)s between 2005 and 2025 under its 160-ship plan. CBO estimates that purchasing those 104 ships would cost a total of about $120 billion (in 2003 dollars). Production costs for the CG(X) cruiser make up roughly 60 percent of that amount, or about $70 billion. Production costs for the DD(X) and LCS account for about $30 billion and $20 billion, respectively. This appendix gives the basis for those estimates as well as information about CBO's cost estimate for the 40 FFG(X) frigates envisioned in Option I.

The Navy has provided some details about the acquisition schedules for the DD(X) and LCS programs but little information on the schedule of the CG(X) program. The Navy has requested funds to buy the first DD(X) destroyer in 2005 and plans to buy a total of eight ships by 2009. It estimates that those eight ships will cost a total of about $10 billion (in 2003 dollars). The Navy also plans to purchase the first LCS in 2005 and a total of nine ships over the same period, at a total cost of about $2.5 billion, it estimates (including the cost of mission modules for those ships). However, the Navy has not yet determined the total production run for either the DD(X) or the LCS.⁽¹⁾

In the absence of detailed information from the Pentagon, CBO developed cost estimates for the DD(X), LCS, and CG(X) on the basis of top-level descriptions of those ships contained in Navy briefings and press reports. (The characteristics that CBO assumed in estimating production costs of those new ships are summarized in Table 1.) It also postulated procurement schedules for the three ships consistent with the information in those documents (see Table A-1). Similarly, CBO developed its cost estimate and procurement schedule for the FFG(X) on the assumption that the ship's general characteristics would be consistent with those of the FFG-7 frigate.

Significant uncertainty exists about the capabilities, technologies, and schedules for those new surface combatants. CBO's cost estimates represent one possible outcome, calculated under the assumptions described above. But programs (such as the ones for those ships) that are in the early stages of the development cycle and at the cutting edge of technology have a greater risk of cost and schedule growth than do programs that are better defined and based on proven technologies. Although current cost estimates for those ships account for such risks to some extent, CBO expects that its estimates will change, perhaps significantly, as each ship's design and acquisition plans are more fully defined.
 

Production Cost of the DD(X) Destroyer

CBO estimates that the DD(X) would cost about $1.9 billion apiece to build, or a total of about $30 billion for 16 (assuming that the new destroyer has the characteristics and capabilities described in Table 1). Although the Navy currently plans to buy the first ship with research, development, test, and evaluation funds, CBO included those costs in its estimate to measure the total costs of production more accurately.

CBO used two methods to calculate the total costs of the initial DD(X). In the first method, it started with the Navy's estimate of the costs for detail design and construction of the initial ship (roughly $2.4 billion) and increased construction costs by 17 percent to account for the average cost growth that has occurred in past ship construction programs.⁽²⁾ That approach yielded an estimate of about $2.7 billion for the first ship. In the second method, CBO used the actual cost of the first Arleigh Burke class (DDG-51) destroyer as an analogy and adjusted that cost for differences in weight and armament systems between the DD(X) and the DDG-51. That approach also produced an estimate of about $2.7 billion for the first DD(X). Both of those estimates include about $500 million for nonrecurring detail design work. CBO used the Navy's figure for that work because it has no basis from which to develop an independent estimate at this time. The way in which CBO estimated the remaining $2.2 billion in recurring production costs under the second method is described below.

CBO estimated the recurring costs for six elements of the DD(X)--basic construction; electronics; hull, mechanical, and electrical (HM&E) systems; ordnance; other costs; and change orders (see Table A-2). Basic construction includes labor and material costs for assembling the hull structure as well as the shipbuilder's profit and other fees. Electronics includes the costs of government-furnished hardware such as radars, sonars, navigation, and communications equipment. The HM&E category includes the costs of pumps, motors, cooling systems, piping, and electrical wiring. Ordnance includes the costs of combat systems, guns, missile launchers, and other systems related to the ship's weapons. Other costs include the costs of system integration and engineering, equipment testing, and management support. Finally, the category of change orders includes costs that result from government-imposed modifications to the design of the ship.

CBO based its estimate of the costs of basic construction, HM&E systems, and ordnance on similar costs for the first DDG-51 and adjusted those costs for the differences in weight and ordnance between the two ships (as shown in Table 1). For the categories of electronics and other costs, CBO did not have enough information about the DD(X) to make similar adjustments to the DDG-51's costs, so CBO used Navy cost estimates for those two categories. (Those estimates are significantly higher than the equivalent costs for the first DDG-51.) For the category of change orders, CBO based its estimate on the relationship between actual change-order costs and total costs for the first DDG-51. Those change orders amounted to about 16 percent of total recurring construction costs.

CBO estimated the costs of the other 15 DD(X)s by analyzing the actual costs of the DDG-51s that were bought during the 1985-1992 period. That analysis indicated that doubling the annual purchase rate reduced unit costs by about 15 percent. Thus, CBO estimated that the cost of the second DD(X) would total about $2.2 billion (the same amount as the first ship minus the nonrecurring detail design) and that the unit cost of the remaining ships would fall to $1.7 billion when the production rate rose to three a year.
 

Production Cost of the Littoral Combat Ship

CBO estimates that building 56 littoral combat ships would cost a total of about $20 billion, or about $350 million per ship (assuming that the Navy buys the LCS with the characteristics described in Table 1 and on the schedule shown in Table A-1). To estimate the cost of the first LCS, CBO used the actual costs of buying Oliver Hazard Perry class (FFG-7) frigates as an analogy and adjusted those costs for technical differences between the two ships. That approach produced an estimate of about $700 million for the initial LCS, including about $200 million for nonrecurring detail design efforts. The basis for that $700 million estimate is outlined below.

DoD reports actual budgeted costs for weapon systems in its Selected Acquisition Reports (SARs). CBO analyzed the final SAR for the FFG-7 program and determined that the cost to build the first FFG-7 totaled about $600 million (in 2003 dollars). CBO increased that amount by about $100 million to account for differences between the existing FFG-7 frigates and the planned LCS in three areas.

First, CBO decreased the estimate by about $150 million to reflect the difference in weight between the LCS (3,000 tons) and the FFG-7 (4,100 tons).

Second, CBO increased the estimate by about $50 million to cover the cost of the additional equipment (called mission modules) that is likely to be required for each littoral combat ship. Although the Navy has provided few details about the LCS program, it has stated that it wants a ship that will be able to quickly swap out mission equipment to tackle rapidly changing jobs. CBO assumes that the Navy would need to purchase 70 mission modules for the force of 56 LCSs. The extra 14 modules (beyond the one included in the cost of each LCS) would cost about $2.5 billion in all, CBO estimates, or about $50 million per LCS when amortized across the 56 ships.

Third, CBO increased the estimate by about $200 million to account for the cost of detail design. In the 1970s, when the FFG-7 was being built, the Navy did not pay for detail design work with production funds, as it does now. All of the expenses of that work for the FFG-7 program were included in research and development funds, which totaled about $100 million in today's dollars. CBO assumes that the $200 million for the LCS is appropriate because it falls within the range of the detail design costs for the FFG-7 and the equivalent costs for the DD(X). The Navy has not indicated what the cost would be for detail design work for the LCS.

CBO estimated the costs of the succeeding 55 littoral combat ships using statistical analyses of the costs of the FFG-7s bought during the 1970s. Those analyses show that costs decline as production rates increase. The unit cost for the FFG-7 fell by 20 percent when the annual purchase rate doubled. On the basis of that relationship, CBO estimated that the remaining LCSs would cost an average of $350 million apiece.
 

Production Cost of the CG(X) Cruiser

The future CG(X) cruiser is even less well defined than the littoral combat ship. The Navy suggests that it would share many features with the DD(X) destroyer. It would be a large, multimission surface combatant and use the same hull form, propulsion plant, and basic combat systems as the DD(X). A key difference between the DD(X) and CG(X) is that the new cruiser would probably be equipped with a next-generation air and missile defense combat system that included advanced radars. Also, the CG(X) would be expected to trade the advanced gun systems on the DD(X) for additional vertical launch system (VLS) cells. Building 32 CG(X) cruisers would cost a total of about $70 billion, or an average of about $2.2 billion per ship, CBO estimates (assuming that the Navy bought the CG(X) with the characteristics described in Table 1 and on the schedule shown in Table A-1). The initial ship of that class would cost about $3.2 billion (see Table A-3).

To calculate the cost of the first CG(X), CBO started with its estimate of $2.7 billion for the initial DD(X) destroyer, since the two ships will be roughly the same size and share many of the same features. CBO then raised that amount by about $500 million to account for differences between the ships in four areas. First, CBO increased the estimate for ordnance by $250 million to capture the increased cost of the state-of-the-art weapon system that would probably be installed on the new cruiser. (CBO used the cost of the existing Aegis system as the basis for the cost of that next-generation weapon system.) Second, CBO boosted the estimate for basic construction by about $100 million to account for the increase in construction costs from installing the new weapon system. Third, CBO raised the estimate for ordnance by another $75 million because it assumed that each CG(X) would have 200 VLS cells instead of the 128 cells planned for the DD(X). Fourth, CBO increased the estimate for change orders by $75 million so that the cost of those orders would equal about 16 percent of total recurring construction costs.

To estimate the costs of the remaining 31 CG(X)s, CBO derived a cost-estimating relationship using the same analysis it used for the DD(X). That analysis indicates that a doubling of the annual purchase rate reduces unit costs by about 15 percent. Thus, CBO estimated that the average cost of the other new cruisers would be about $2.2 billion.
 

Production Cost of the FFG(X) Frigate

For the new frigate envisioned in Option I of this study, CBO estimated an average cost of $700 million per ship (assuming that the FFG(X) followed the production schedule in Table A-1).⁽³⁾ Building 40 FFG(X) frigates would cost about $28 billion in all, CBO estimates.

Much as it did in calculating the cost of the first littoral combat ship, CBO estimated the cost of the initial FFG(X) by starting with the actual cost to build the first FFG-7 (about $600 million). CBO increased that amount by about $500 million to account for three major differences between the FFG-7 and the FFG(X). First, CBO increased the estimate by about $250 million to reflect the difference in weight between the new frigate (6,000 tons) and the existing one (4,100 tons). Second, CBO raised the estimate by about $50 million to cover the costs of the additional VLS cells that the FFG(X) is assumed to have. Third, CBO included an estimated $200 million for detail design to account for the cost of such work not included in the cost of the first FFG-7. (That figure is the same amount that was included in the cost estimate for the first LCS.)

The cost estimate for the other 39 FFG(X)s is based on an analysis similar to the one used to derive LCS costs. That analysis suggests that doubling the annual purchase rate reduces unit costs by about 20 percent. Thus, CBO estimated that the other new frigates would cost about $700 million apiece, on average.