Guided Missile Frigate: Navy Has Taken Steps to Reduce Acquisition Risk, but Opportunities Exist to Improve Knowledge for Decision Makers

In response to the shortcomings of the Navy's Littoral Combat Ship program and evolving threats, the Navy began the FFG(X) program. With FFG(X), the Navy intends to deliver a multi-mission ship that will provide anti-surface, anti-submarine, and air warfare capabilities. DOD approved FFG(X) requirements in February 2019.The Navy plans for a competitive contract award to support final FFG(X) design and construction. The program is expected to cost over $20 billion for 20 ships.

The House report accompanying the National Defense Authorization Act for Fiscal Year 2019 included a provision for GAO to review the FFG(X) program. This report addresses, among other things, the FFG(X) acquisition approach and contracting plans.

GAO reviewed requirements, acquisition, design, and cost-related documentation. GAO interviewed Navy and other defense officials, and conducted industry site visits to each shipyard participating in FFG(X) conceptual design activities. GAO also leveraged prior GAO reports and best practices guides.

The Navy undertook a conceptual design phase for the FFG(X) Guided Missile Frigate program that enabled industry to inform FFG(X) requirements, identify opportunities for cost savings, and mature different ship designs. The Navy also streamlined the FFG(X) acquisition approach in an effort to accelerate the timeline for delivering the ships to the fleet. As shown in the figure, however, the Navy has requested funding for the FFG(X) lead ship even though it has yet to complete key cost estimation activites, such as an independent cost estimate, to validate the credibility of cost expectations. Department of Defense (DOD) cost estimators told GAO the timeline for completing the independent cost estimate is uncertain. Specifically, they stated that this estimate will not be finalized until the Navy communicates to them which FFG(X) design is expected to receive the contract award. GAO-identified best practices call for requisite cost knowledge to be available to inform resource decisions and contract awards.

The Navy plans to use a fixed-price incentive contract for FFG(X) detail design and construction. This is a notable departure from prior Navy surface combatant programs that used higher-risk cost-reimbursement contracts for lead ship construction. The Navy also plans to require that each ship has a minimum guaranty of $5 million to correct shipbuilder-responsible defects identified in the 18 months following ship delivery. However, Navy officials discounted the potential use of a warranty—another mechanism to address the correction of shipbuilder defects—stating that their use could negatively affect shipbuilding cost and reduce competition for the contract award. The Navy provided no analysis to support these claims and has not demonstrated why the use of warranties is not a viable option. The Navy's planned use of guarantees helps ensure the FFG(X) shipbuilder is responsible for correcting defects up to a point, but guarantees generally do not provide the same level of coverage as warranties. GAO found in March 2016 that the use of a guaranty did not help improve cost or quality outcomes for the ships reviewed. GAO also found the use of a warranty in commercial shipbuilding and certain Coast Guard ships improves cost and quality outcomes by requiring the shipbuilders to pay to repair defects. The FFG(X) request for proposal offers the Navy an opportunity to solicit pricing for a warranty to assess the cost-effectiveness of the different mechanisms to address ship defects.

GAO recommends that the Navy provide Congress with the independent cost estimate for FFG(X) prior to the detail design and construction contract award and seek ship warranty cost information from industry as part of the request for proposal process. While DOD generally concurred with GAO's recommendations, it did not agree to update its request for proposal to solicit ship warranty pricing. GAO continues to believe this is an essential element of the recommendation, as discussed in the report.

With its new Guided Missile Frigate program, FFG(X), the Navy intends to  develop and deliver a ship with enhanced ability to destroy enemy targets  and avoid, withstand, or recover from damage as compared to its current  active small surface combatant—the Littoral Combat Ship (LCS).  Following significant cost increases, schedule delays, and reduced  capabilities for LCS, the Secretary of Defense directed the Navy in 2014  to explore other options for a new small surface combatant. After multiple  studies focused on a ship with enhanced lethality and survivability  capabilities, the Navy established its current design and construction plan  for the new frigate. In February 2018, the FFG(X) program initiated a  conceptual design phase to help solidify program requirements and  mature competitive ship designs. The Navy is scheduled to formally begin  the FFG(X) program in February 2020 and award a detail design and  construction contract in July 2020 through full and open competition. The  Navy’s fiscal year 2020 President’s budget request supports this contract  award plan, with nearly $1.3 billion requested for the lead ship  construction and over $20 billion projected to construct 20 planned  frigates.

The House Armed Services Committee report to accompany the National  Defense Authorization Act for Fiscal Year 2019 contained a provision for  GAO to review the FFG(X) program. This report addresses (1) the  requirements development process and results for FFG(X); (2) the Navy’s  efforts to streamline the FFG(X) acquisition approach; (3) any design and  technical risks for the program and how the Navy plans to address them;  and (4) the Navy’s contracting plans for the detail design and construction  award.

To assess the requirements development process and results for FFG(X),  we evaluated the Navy’s requirements development process beginning  with the Secretary of Defense’s direction to the Navy in 2014 to review  alternatives to LCS. This included reviewing the scope and methodology  used by the Navy across several studies to analyze capability needs, as  well as the approved requirements for LCS, the frigate (FF) program that  was planned immediately prior to FFG(X), and FFG(X). As part of our  requirements assessment, we interviewed relevant officials from the  FFG(X) program office, Chief of Naval Operations Surface Warfare  Directorate, and the Joint Chiefs of Staff to gain insight into the activities  undertaken to generate and refine FFG(X) requirements. We also  interviewed the prime contractors leading the five industry teams that  participated in the FFG(X) conceptual design phase and visited the  associated shipyards to learn about their efforts to align their ship designs  with the Navy’s requirements and identify potential cost reduction  initiatives associated with those designs. The prime contractors we met  with at their shipyards include Austal USA in Mobile, Alabama; General  Dynamics Bath Iron Works in Bath, Maine; Fincantieri Marinette Marine in  Marinette, Wisconsin; and Huntington Ingalls Industries, Ingalls  Shipbuilding in Pascagoula, Mississippi. We met with Lockheed Martin— the fifth prime contractor—in Washington, D.C. Lockheed Martin teamed  up with the Fincantieri Marinette Marine shipyard for its conceptual design  work.

To assess the program’s efforts to streamline its acquisition approach, we  reviewed program documentation outlining the Navy’s acquisition  approach and associated tailoring and streamlining plans for the program.  This included a review of the July 2018 FFG(X) acquisition streamlining  and tailoring memorandum and related acquisition decision memorandum  from November 2018, as well as the acquisition strategy approved in  November 2018. We also reviewed efforts to meet statutory requirements  and adhere to Department of Defense (DOD) and Navy acquisition policy.  This focused on DOD Instruction (DODI) 5000.02 acquisition guidance  and Secretary of the Navy Instruction 5000.2 guidance—both the March  2019 Secretary of the Navy Instruction (5000.2F) and the prior Secretary  of the Navy Instruction (5000.2E). We also assessed the program’s plans  compared to acquisition best practices, including those discussed in  GAO’s shipbuilding best practices work and the GAO Cost Estimating and  Assessment Guide. We also interviewed relevant officials from the Navy  and Office of the Secretary of Defense about their efforts to develop and  support the FFG(X) acquisition approach. This included DOD and Navy  officials from the Office of Cost Assessment and Program Evaluation  (CAPE); the FFG(X) program; Naval Sea Systems Command; and the  Program Executive Office for Integrated Warfare Systems.

To assess any design and technical risks for the program and how the  Navy plans to address them, we reviewed program documentation  including the acquisition strategy and systems engineering plan—both  approved in November 2018—to understand the Navy’s plans to mitigate  technical risk. This involved assessing factors like technology maturity,  systems engineering and integration plans, ship designs, and any risks  identified by DOD or industry. As part of this analysis, we interviewed  officials from the Navy and organizations under the Office of the  Secretary of Defense. This included officials from the offices of the  Deputy Assistant Secretary of Defense for Systems Engineering; Deputy  Assistant Secretary of Defense for Development, Test, and Evaluation;  Director, Operational Test and Evaluation; Navy’s Commander  Operational Test and Evaluation Force; Naval Operations Test and  Evaluation Directorate; and Office of Naval Research. We also used the  aforementioned interviews and site visits with industry to learn about their  design and facility plans if selected by the Navy for the detail design and  construction contract award.

To assess the FFG(X) contracting plans, we reviewed the program’s  acquisition strategy and March 2019 draft request for proposal for the  detail design and construction award. We also interviewed Navy officials  from the FFG(X) program office and Naval Sea Systems Command to  discuss different elements of contracting plans and the basis for the  Navy’s decisions supporting contracting plans. We also assessed the  program’s plans against the results of our prior work related to contract  types used for Navy shipbuilding and the use of warranties and  guarantees in contracts.

We conducted this performance audit from August 2018 to August 2019  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

In the early 2000s, the Navy conceived of a new small surface combatant  concept known as LCS. This ship was intended to offer the Navy an  affordable, flexible platform that would be able to swap out surface  warfare, anti-submarine warfare, or mine countermeasure mission  packages to provide for one of those mission needs. As we found in  multiple reports, the Navy’s vision for LCS evolved significantly over time  in response to diminished capability expectations and significant cost and  schedule growth. In 2014, the Secretary of Defense directed the Navy to  evaluate alternatives to LCS, citing survivability and lethality concerns.  This represented the beginning of the Navy’s pursuit of a solution to  address LCS shortcomings and the evolving threat environment  acknowledged by the department.

The Navy initially envisioned quickly fielding a frigate—referred to as the  FF program—based on a minor modified LCS design. The ship was  expected to provide a more lethal and survivable multi-mission ship  capable of simultaneous surface and anti-submarine warfare, with a  planned contract award for the lead ship in 2018. In 2016, we found that  the Navy’s planned upgrades for FF did not significantly improve certain  survivability areas and lacked capabilities that were prioritized by fleet  operators, such as the ship’s range of travel without refueling. Then, in  April 2017 we found the Navy’s aggressive FF acquisition schedule  increased risk to the government because it included a commitment to  buy ships in advance of adequate knowledge. In May 2017, the Navy  announced it was revising its frigate plans and began pursuing FFG(X).

In 2009, we identified commercial shipbuilding best practices that could  be adapted for use by the Navy. We found that successful shipbuilding  programs have sound business cases built on attaining critical levels of  knowledge at key points in the shipbuilding process before significant  investments are made, as shown in figure 1.

Regardless of the differences between Navy and commercial  shipbuilding, knowledge attainment is crucial to success. Executable  business cases use realistic cost and schedule targets to meet  performance and quality expectations by balancing inherent uncertainties  in acquisition programs. A solid business case provides for the resources  necessary to mitigate challenges, such as immature technologies and  design requirements. The greater the potential for challenges to occur,  the more time and money should be factored into the business case to  address them. The Navy has previously agreed, in principle, that  knowledge should be attained prior to key milestones to better ensure  ships are built to established cost, schedule, quality, and performance  standards.

In general, the Department of Defense (DOD) acquires new weapon  systems, such as Navy surface combatants, through a management  process known as the Defense Acquisition System. Under this system,  programs typically complete a series of milestone reviews and other key  decision points that authorize entry into a new acquisition phase. To  execute shipbuilding acquisition programs, the Navy uses the acquisition  processes included in the DOD Instruction 5000 series, as well as  acquisition instructions established by the Secretary of the Navy. The  Navy’s guidance supports a seven-gate review process intended to  ensure that requirements align with acquisition plans, and to improve  collaboration among stakeholders. Figure 2 provides an overview of the  notional framework for Navy shipbuilding acquisition programs described  by the DOD and Navy guidance.

This acquisition framework includes decision reviews and milestones at  key junctures in the acquisition cycle. The Milestone Decision Authority is  the individual responsible for determining what events and documentation  requirements will apply to an acquisition program, as well as providing  approval for a program to proceed to the next acquisition phase. The  acquisition framework and Milestone Decision Authority’s purpose is to  support careful assessment of a program’s readiness to proceed to the  next stage of acquisition activities.

The gates and milestones that will be included in an acquisition program’s  schedule can be customized based on its circumstances and needs. We  have previously found that shipbuilding programs typically have different  decision points than other DOD weapon systems. For example,  Milestone B for ship programs usually occurs after development of ship  specifications and system diagrams is well under way and is typically  aligned with the decision to authorize the start of detail design. While  Milestone C generally represents the decision to start production for  weapon systems, several of the Navy’s more recent shipbuilding  programs either do not include a Milestone C review or changed the  sequencing of the review to occur after delivery of the lead ship.  Programs can receive approval to tailor the requirements for information  that must be developed to support this process and to have the decision- making authority delegated to other individuals for acquisition decisions  and approvals.

Navy Expects That FFG(X) Requirements Will Provide a More Capable Small Surface Combatant, but at Increased Cost

The Navy expects that its current plans for FFG(X) will result in a small  surface combatant with considerable capability improvements compared  to LCS. To achieve this increased capability, the Navy is committing to  construct a larger, more expensive ship than LCS. To help refine FFG(X)  requirements and identify opportunities for cost savings, the Navy used a  conceptual design phase, in which it awarded $75 million in contracts to  industry.

FFG(X) Requirements Reflect Limitations of LCS and Evolution in Capability Needs

The Navy’s FFG(X) requirements represent the department’s recognition  of its need for a more capable small surface combatant and the limitations  of LCS. For LCS and its mission packages, the Navy has devoted nearly  $28 billion (constant fiscal year 2018 dollars) to develop and buy a ship  that has fallen far short of demonstrating it can meet the minimum level of  capability defined at the beginning of the program. Specifically, LCS was  designed with reduced survivability requirements as compared to other  surface combatants. Over time the Navy lowered several survivability and  lethality requirements further and removed some design features— making the ships less survivable in their expected threat environments  and less lethal than initially planned. As shown in figure 3, the Navy  arrived at its FFG(X) plans after spending several years developing and  evaluating a variety of inputs to address problems with LCS and emerging  capability needs.

The Small Surface Combatant Task Force study report maintained the  Navy’s need for 52 small surface combatants, which was revalidated in  the Navy’s 2016 Force Structure Assessment. In recognition of LCS’s  shortcomings, the Navy significantly reduced the total number of LCS,  and began planning for the new frigate based on minor modifications to  an LCS design—referred to as FF—to fulfill the 52-ship need.

While the FF program was developing its acquisition plans and moving  toward a contract award for the lead ship scheduled for 2018, the  maritime operating environments continued to rapidly evolve, becoming  increasingly complex and contested. In recognition of this, the Chief of  Naval Operations directed the Navy to conduct another study, increasing  air defense and survivability beyond the FF baseline. In response, the  Navy convened a Frigate Requirements Evaluation Team from January to  June 2017. The purpose of this team was to build upon FF requirements  by analyzing options for air defense and vulnerability upgrades to help  determine top-level mission requirements that would yield a more capable  frigate. The results of this review led the Navy to cancel its FF acquisition  plans and focus on meeting increased requirements through a new  FFG(X) Guided Missile Frigate program.

Both the FF and FFG(X) requirements reflect the 2015 Small Surface  Combatant Task Force report findings that identified a need for increased  capabilities for small surface combatants to address evolving threats. As  we reported in June 2016, an FF based on a minor modified LCS only  partially fulfilled the small surface combatant capabilities that the task  force identified as most valued by the fleet. In particular, FF  requirements supported a multi-mission ship with some of the fleet’s  highest priority mission capabilities, such as surface and anti-submarine  warfare, but did not provide air warfare capability. For FFG(X), the Navy  maintained the FF requirements and added local air defense as a  capability. Table 1 outlines the requirements evolution that the Navy  undertook to support a more lethal and capable small surface combatant.

Requirements Drive Higher FFG(X) Cost than for Previous Small Surface Combatants

To achieve the increased capability expectations for FFG(X), the Navy  committed to acquiring a larger, more expensive ship than LCS or the  previously planned FF. Figure 4 provides average shipbuilding cost  estimates for the three different ships, with costs shown in same-year  dollars for comparison.

Although the FFG(X) requirements have been finalized, the Navy plans to  make final cost and capability tradeoffs through the process of evaluating  proposed designs before selecting which one will be built.

The Navy Used Conceptual Design Phase to Better Understand Ship Requirements and Associated Costs

In an effort to focus on the relationship between requirements and cost,  the Navy undertook a conceptual design phase for FFG(X), which  enabled industry to inform requirements and identify opportunities for cost  savings. In February 2018, the Navy competitively-awarded FFG(X)  conceptual design contracts valued at nearly $15 million each to five  industry teams. These 16-month contracts were intended to enable  industry to mature parent ship designs—designs for FFG(X) that are  based on ships have been built and demonstrated at sea—and help  refine technical and operational program requirements.

The purpose of the conceptual design phase has parallels with the  purpose of pre-contractual negotiations in commercial shipbuilding. As we  previously have reported, these pre-contractual practices minimize ship  buyer risk prior to awarding construction contracts by developing the ship  concept and specifications based on negotiations between the ship buyer  and the shipyard. The practices include specifying the expected  performance and the major equipment on the ship. As part of these  activities, commercial shipbuilders and ship buyers analyze one or more  ship concepts to identify areas of potential risk and either mitigate these  risks or remove the risky elements from the ship before signing a  contract. Figure 5 provides an overview of the industry teams and  shipyards participating in the FFG(X) conceptual design.

Each industry team performed ship development, ship design, workforce  planning, and shipyard improvement planning, among other activities, in  support of FFG(X) requirements refinement and cost reduction efforts.  Industry teams updated the Navy regularly on their design progress and  technical approach to fulfill requirements through monthly technical  exchange meetings and two design review meetings. Navy officials stated  that these meetings were intended to provide information to support the  program’s Preliminary Design Review in May 2019 and mitigate risk prior  to the Navy’s release of its request for proposal in June 2019 for the  FFG(X) detail design and construction competition.

Our prior work on shipbuilding best practices emphasizes the importance  of having a full understanding of the effort needed to design and construct  a ship before awarding a contract for ship construction in order to reduce  cost and schedule risk. Navy and industry officials stated that the  conceptual design phase facilitated dialogue and information sharing that  helped ensure FFG(X) requirements were more fully understood by  industry and the government. Specifically, industry officials noted that  communication and activities during conceptual design improved their  understanding of the impetus for specific Navy requirements, allowing  industry the opportunity to get clarification on the intent of some  requirements, propose less costly alternatives, and get government  feedback on the proposed alternatives. It also improved their  understanding of the linkages between FFG(X)’s approved capability  requirements and system specifications. In particular, industry officials  told us that one-on-one opportunities with the Navy aided knowledge  sharing and provided them with a means to ask questions without  concern that disclosing such information could jeopardize their  competitive position. They emphasized that in other cases where the  request for proposals process is their primary means for communicating  with the Navy (as opposed to having a conceptual design phase),  submitting questions about requirements or system specifications can be  challenging because those inquiries are available to the public. As a  consequence, contractors may opt to infer more about the intent of  requirements to avoid compromising their competitive interests.

The conceptual design phase included a formal cost savings effort, with  the Navy seeking proposals internally and from industry participants to  reduce cost through requirement and system specification refinement. To  support this effort, Navy officials stated they established a Frigate  Affordability Board to review potential cost reduction measures submitted  by both contractors and government that responded directly to Navy  requirements and specifications. Navy officials said the Board—co- chaired by the Program Executive Office for Unmanned and Small  Combatants and the Naval Sea System Command’s Naval Systems  Engineering Directorate, as well as the Chief of Naval Operations’  Surface Warfare Directorate—assessed the potential cost and capability  trade-offs of these proposed changes to requirements, and accepted or  declined them. Before going to the Board, relevant Navy subject matter  experts reviewed the technical and requirements implications of cost  reduction measures. The program office subsequently worked with Navy  engineering and requirements officials to balance cost with capabilities. If  the program office, Navy engineers, and requirements officials could not  reach agreement on the appropriate cost and capability mix, then their  different positions were presented to the Board.

For cost reduction initiatives submitted by industry, the Navy provided  feedback on the Board’s decision, and incorporated fully or partially  accepted cost reduction initiatives into the FFG(X) system specifications.  Navy officials said they informed all industry teams of any changes to the  specifications on a monthly basis. Navy officials also stated that industry  submitted about 350 cost reduction ideas, with roughly 60 percent  partially or fully accepted by the Navy. They estimated $86 million in  savings per ship (constant year 2018 dollars) based on changes made in  response to the cost reduction measures submitted by industry or  government-initiated cost savings measures influenced by engagement  with industry.

Streamlined Acquisition Approach Accelerates Planned FFG(X) Schedule, but Reduces Knowledge Available for Key Program Decisions

In an effort to accelerate the time between FFG(X) acquisition planning  and the fielding of ships, the Navy streamlined the program’s acquisition  approach and leveraged knowledge obtained from industry during the  conceptual design phase. While the program may benefit from the  streamlining efforts, the acquisition approach for FFG(X) required the  Navy to submit its budget request for lead ship construction before the  program had a comprehensive understanding of the potential ship  designs and cost. Recent Navy policy changes have created some  uncertainty for Navy cost estimation activities by altering roles and  responsibilities within the Navy for completing component cost positions  and independent cost assessments.

Navy Streamlined FFG(X) Program Acquisition Approach in an Effort to Accelerate Fielding of Ships

As permitted by DOD and Navy policy, the Navy has streamlined the  FFG(X) acquisition approach to move from planning to ship delivery and  fielding quicker than in a more traditional acquisition program. The  accelerated schedule reflects the Navy’s desire to field a minimum of 52  small surface combatants, which the Navy’s long-range shipbuilding plan  states will be achieved by fiscal year 2034. Navy officials stated that the  significant amount of knowledge that already existed to inform the  program’s early activities and the use of parent designs helped enable the  streamlined approach for FFG(X). For example, Navy officials cited previous efforts by the Small Surface Combatant Task Force and the  Frigate Requirements Evaluation Team to determine appropriate ship  requirements, as well as activities performed in support of the FF frigate  acquisition plan that immediately preceded the shift to FFG(X). The Navy  also leveraged industry input received from a request for information in  2017 to understand cost drivers and the potential shipbuilders’ abilities to  meet top level FFG(X) requirements and incorporate Navy-defined  equipment into ship designs. Figure 6 provides a high-level schedule of  key activities for the program.

To support its decision to pursue an accelerated acquisition schedule, the  Navy used the previously discussed conceptual design phase as well as  its decisions to limit FFG(X) to parent ship designs and minimize  technology development. Navy officials noted the use of parent designs is  allowing the program to proceed at a much faster pace from early  assessment of capability options to detail design and construction  contract award. They added that the parent designs provided a higher- fidelity design baseline from which the conceptual design industry teams  incorporated Navy systems and other requirements. Use of parent  designs is consistent with our best practices work in shipbuilding, which  has found that commercial shipbuilders use previous ship designs to the  extent possible. Doing so can reduce technical, schedule, and cost risk  in building a ship as compared to a “clean sheet” new ship design.  FFG(X) program officials noted the latter approach can take up to 9 years  to complete an analysis of alternatives and move through the acquisition  process to construction contract award.

Navy officials said the program also used opportunities available as an  Acquisition Category (ACAT) 1B program to shorten the approval timeline  for specific acquisition requirements. For an ACAT 1B program, the  head of the DOD component is generally the Milestone Decision Authority  but, as appropriate, may delegate approval authorities to lower level  offices under its jurisdiction. In the case of FFG(X), the Assistant  Secretary for the Navy for Research, Development, and Acquisition  serving as the Milestone Decision Authority delegated specific approval  authorities to the Program Executive Office for Unmanned and Small  Combatants. These approval authorities applied to the program’s life  cycle sustainment plan, independent logistics assessment, program  protection plan, and a compliance schedule addressing environmental  considerations.

The Navy also took advantage of opportunities to alter or waive some  significant early acquisition activities. For example, the Milestone  Decision Authority waived the formal Analysis of Alternatives and  Affordability Analysis, decided not to conduct a Milestone A review, and  deferred the full “Should-Cost” Analysis to later in the acquisition  process. Table 2 defines the purpose of these DOD acquisition program  elements and provides an overview of the Navy’s actions related to them.

As the first major milestone for many major acquisition programs,  Milestone A is a review by the Milestone Decision Authority of key  program documents that support the materiel solution and risk reduction.  We have previously found that DOD officials place a high value on the  information developed for some of these documents, including the  Analysis of Alternatives, Affordability Analysis, and Should-Cost  Analysis. The Navy’s decision to not conduct a Milestone A review also  eliminated a formal opportunity to bring the broad set of FFG(X)  stakeholders within the Navy and the Office of the Secretary of Defense  together at a relatively early stage to assess the program’s acquisition  strategy and affordability and feasibility, as well as technical, cost, and  schedule risks. Further, it reduced the FFG(X) acquisition approach to a  single milestone decision point—Milestone B—for the broader group of  DOD stakeholders to evaluate program progress and readiness to  proceed to the detail design and construction contract award planned in  July 2020.

In the absence of Milestone A, the Navy’s Gate 3 review for FFG(X)  provided an opportunity to communicate the program’s progress toward  developing requirements and acquisition expectations, albeit to a more  limited audience than typically would participate in a Milestone A. In  particular, the Navy used Gate 3 to discuss top-level requirements  changes and receive capability development document approval from the  Chief of Naval Operations. It also included cost discussion related to  FFG(X) affordability within the overall Navy shipbuilding portfolio. The  gate’s participants included officials from the Navy and the Office of Cost  Assessment and Program Evaluation (CAPE) within the Office of the  Secretary of Defense.

The Navy’s Gate 4 conducted in February 2019 focused on a review of  the FFG(X) system specification before the draft detail design and  construction request for proposal release. Gate 4 documentation for  FFG(X) indicates that participants were limited to stakeholders from the  office of the Deputy Assistant Secretary of the Navy for Ships; Naval Sea  Systems Command Cost and Design Directorates; Program Executive  Office for Unmanned and Small Combatants; the FFG(X) program office;  and the Chief of Naval Operations Surface Warfare Directorate. This  excludes a number of key stakeholders that Navy guidance calls on to  attend and certify gate reviews, such as the Assistant Secretary of the  Navy (Financial Management and Comptroller) and the testing  community. As a result, the Navy would not have received insight from  several key stakeholders during the Gate 4 review for acquisition  activities, such as the program life cycle cost estimate development and  release of the draft request for proposal. These activities are generally relevant to this gate review, as Navy guidance notes program affordability  as a focus and the Navy’s streamlining documentation indicates that the  gate was focused on reviewing the FFG(X) system specification before  releasing the draft request for proposal. Navy officials noted that  stakeholders have regularly received insight into FFG(X) activities  through other prior program reviews and will have additional opportunities  to review program costs and sustainment plans leading up to Milestone B.

We also found that some key stakeholders did not provide formal  approval for the initial FFG(X) life cycle sustainment plan that was  approved in March 2019. Specifically, only FFG(X) program officials and  the Program Executive Officer for Unmanned and Small Combatants— the delegated approval authority—signed the plan. However, as stated in  DOD guidance, representatives from the relevant sustainment command  and the Program Executive Office for Integrated Warfare Systems are key  stakeholders that should provide their signed concurrence when  approving the life cycle sustainment plan. The FFG(X) life cycle  sustainment plan is a key document outlining the Navy’s plans to address  the program’s sustainment needs and costs, as typically around 70  percent of a weapon system program’s total cost is in the sustainment  phase after procurement. Navy officials stated that the plan has been  reviewed by the independent logistics assessment team members that  are evaluating the FFG(X) program’s integrated product support activities,  and noted that the Program Executive Office for Integrated Warfare  Systems has separate life cycle sustainment plans for government  furnished equipment systems included in the FFG(X) design. Navy  officials also said that FFG(X) sustainment plans would be reviewed by  stakeholders as part of Gate 5 and the Milestone B independent logistics  assessment.

Budget Request for FFG(X) Lead Ship Preceded the Completion of Key Cost Estimation Activities That Should Inform Funding Decisions

The FFG(X) acquisition approach required the Navy to submit its nearly  $1.3 billion budget request for lead ship construction before the program  had established a comprehensive understanding of the potential ship  designs and estimated cost for the program. Our shipbuilding and  acquisition best practices call for resource decisions to be timed to align  with the availability of requisite cost, schedule, and technical knowledge  in order to inform key program decisions. Navy officials stated that they  had sufficient knowledge to inform key program decisions based on cost  estimation and conceptual design efforts that had previously been  completed. Navy officials said this included development of an FFG(X)  cost estimate by November 2018 to support a realistic budget request for  the lead ship. However, at the time of the Navy’s fiscal year 2020 budget  request to fund detail design and the lead ship, the Navy had not  completed its component cost position, which will formalize the life cycle  cost expectations for FFG(X). Further, CAPE had not completed the  independent cost estimate for the program. The GAO Cost Estimating  and Assessment Guide says that comparing the component cost position  with an independent cost estimate to validate methodologies produce  similar results reinforces the credibility of a cost estimate.

In addition to key cost estimating best practices that had not been  completed, the Navy had not received final design review information  from the industry teams participating in the conceptual design phase  before requesting lead ship funds from Congress. Figure 7 reflects the  budget request timeline for the FFG(X) detail design and lead ship  contract award, as well as notable cost and design-related program  activities that were planned to be completed after the request.

The considerable cost growth that we have previously reported is  common to many shipbuilding programs, as well as challenges in  deviating from shipbuilding plans once a program has begun procuring  ships, emphasize the importance of having a strong understanding of  program expectations to back the initial procurement decision for  FFG(X). Given the timing of the Navy’s budget request for lead ship  funding, Congress faces a decision on whether to authorize funding for  FFG(X) detail design and lead ship based on a budget request that was  not informed by key cost and design information.

If Congress authorizes and appropriates FFG(X) funding as the Navy  requested in March 2019, it will be critical that the Navy demonstrate the  program’s acquisition program baseline reflects the results of the  component cost position and independent cost estimate before awarding  the detail design and construction contract. Doing so before the contract  award will help ensure a more reliable acquisition program baseline upon  which future costs and variances are measured and funding decisions are  made. Further, it will help mitigate remaining risk that stems from the  Navy not being able to account for the actual FFG(X) design and  associated estimated cost for ship construction until after the planned July  2020 contract award. Specifically, as currently planned, the Navy’s  budget requests for fiscal years 2020 and 2021—which are intended to  fund the first 3 ships—will be made before the Navy has agreed to  contract pricing for FFG(X).

Navy officials stated that they have completed a robust program life cycle  cost estimate. They noted that the estimate was informed by Navy  modeling of a notional ship design that leveraged data received from  industry during conceptual design and reflected ship design elements  needed to meet program requirements Navy officials also said that, as of  May 2019, some additional work remains for the cost estimate to account  for training and military construction considerations, as well as address  any needed changes related to the final industry design reviews for the  conceptual design phase. They also said that the program life cycle cost  estimate informed the Gate 4 review in February 2019, and an updated  version of the estimate will provide a basis for the Navy’s efforts to  establish the component cost position in October 2019. As of the  issuance of this report, we have requested the program life cycle cost  estimate from the Navy, including the estimate’s criteria and underlying  assumptions, but have not yet received this information.

Recent Navy Changes in Cost Estimation Policy and the FFG(X) Program Schedule Create Uncertainty for Remaining Cost Estimation Activities

Recent policy changes by the Navy related to cost analysis and  estimation have created some uncertainty for Navy cost estimation  activities going forward. Specifically, a March 2019 Secretary of the Navy  instruction for acquisition program cost analysis shifts the Naval Center  for Cost Analysis’s role and responsibilities for Navy cost estimation to the  Navy’s systems commands. Previously, the Naval Center for Cost  Analysis—organizationally residing completely outside of the systems  command structure—would provide an independent cost assessment of  the program life cycle cost estimate. The Naval Center for Cost Analysis  and the acquisition program, in coordination with the relevant systems  command, would discuss and adjudicate any differences between the  program life cycle cost estimate and the independent cost assessment to  produce the Navy’s component cost position. This independent cost  assessment by the Naval Center for Cost Analysis was an important  verification of the program office estimates, which were often found to be  too optimistic, prior to the Navy finalizing its component cost position. The  Navy’s recent changes for cost estimation and analysis may pose a risk  of overly optimistic estimates carrying forward in programs.

Navy officials stated that they believe Naval Sea Systems Command cost  estimators can provide an independent cost estimate, as they are  intended to provide technical support to acquisition programs  independent of programmatic authority and report to a separate chain of  command. However, as stated by the Naval Sea Systems Command, the  collective mission of its organizations is to build, buy, and maintain the  Navy’s ships. Based on this, we believe, as do CAPE officials with whom  we spoke, that shifting independent cost assessment activities to the  systems commands diminishes the Navy’s ability to independently verify  a program life cycle cost estimate. As a result, the program life cycle cost  estimate essentially will become the component cost position based on  the lack of additional cost estimation input, such as what the Naval Center  for Cost Analysis previously provided.

Furthermore, CAPE officials stated that having a systems command  execute cost analysis responsibilities for an acquisition program within the  same system command effectively eliminates the Navy’s capacity to  perform independent cost estimates for its programs based on their  shared overarching mission. This position is consistent with the GAO  Cost Estimating and Assessment Guide, which states that an  independent cost estimate should be conducted by an organization  independent of the acquisition chain of command. The Director of CAPE  is required to conduct or approve independent cost estimates and cost  analyses for all major defense acquisition programs. As noted by CAPE  officials, CAPE has previously delegated certain cost estimation  responsibilities to the Naval Center for Cost Analysis. With the recent  Navy policy changes, CAPE may no longer choose to delegate  independent cost estimation activities to Navy cost estimators.

For FFG(X), CAPE intends to complete an independent cost estimate to  verify the Navy’s component cost position. These plans include site visits  and data collection from the shipyards participating in the conceptual  design contracts. CAPE confirmed that the final independent cost  estimate will reflect the content of the winning proposal, indicating that  any FFG(X) proposals that the Navy receives from contractors not  involved in the conceptual design phase will be evaluated to ensure the  independent cost estimate accounts for those cost and design plans.

CAPE officials also stated that their timeline for finalizing the independent  cost estimate for FFG(X) is tied to when the Navy decides on the winning  proposal for detail design and construction and communicates this  information to CAPE. Specifically, CAPE’s final independent cost estimate  will reflect only the winning FFG(X) design, so completion of the estimate  will occur after the Navy informs CAPE about the FFG(X) design for  which it intends to pursue a contract award. CAPE officials said that  because the Navy’s decision may not be made in advance of the planned  February 2020 Milestone B review for FFG(X), CAPE would likely just  provide input to support the milestone and complete the independent cost  estimate after that review.

The Navy Has Taken Steps to Reduce Design and Technical Risk, but Technology Integration and Testing Will be Key to Meeting Program Expectations

The Navy’s decision to pursue a parent ship design for FFG(X) was  intended to reduce design uncertainty for the program. The Navy’s  planned use of existing technologies for the ship’s mission and combat  systems also supports reduced technical risk, though further maturation  of some key systems and successful integration and testing will be critical  to demonstrate the ship provides required capability within cost and  schedule expectations.

Use of a Parent Ship Design Was Intended to Increase Design Certainty

Adopting a parent design requirement for FFG(X) provided the conceptual  design industry teams with a proven baseline ship design. This enabled  them to focus on incorporating modifications to meet the Navy’s specific  FFG(X) requirements rather than designing a new ship. The Navy did not  set any limitations on the extent contractors could modify or deviate from  the parent design. However, Navy officials stated they actively reviewed  parent design modifications through contract deliverables, technical  exchange meetings, and design reviews with industry teams. The design  reviews included an interim report in October 2018 and a final report in  May 2019 from each industry team on their design progress.

FFG(X) program officials noted that the design maturity reviews provided  sufficient information to support the Navy’s decision that the designs were  mature enough to release the request for proposals for the detail design  and construction contract award. In addition, some industry officials told  us that the conceptual design work on parent designs enabled them to  develop more mature and refined designs than typical for this stage of the  shipbuilding acquisition process. They also noted that continuing work in  response to the pending competition should move at least some design  elements closer to a detail design-level of maturity, and may provide the  Navy with greater confidence in the contract proposals it receives from  industry.

Technology Re-Use Should Reduce Some Risk, but Integration and Testing Remain to Demonstrate Critical Systems

The FFG(X) program’s design concept requires the use of many existing,  more mature combat and mission systems to reduce technical risk. As  stated in the approved acquisition strategy for FFG(X), the program has a  requirement for all integrated systems to have achieved maturity of a  technology readiness level (TRL) 6 or higher. TRL 6 is defined by GAO  as the capability to produce a prototype system in a production-relevant  environment. Program officials confirmed that, as of May 2019, many  but not all FFG(X) integrated systems were at TRL 6 or higher. For  selected key systems planned for FFG(X), Navy officials stated they will  have achieved TRL 7 or higher by the planned July 2020 detail design  and construction contract award. Doing so would be consistent with our  acquisition best practices, which include maturing new key ship  technologies into actual system prototypes and demonstrating them in a  realistic environment—achieving a TRL 7—before the award of the  contract for lead ship design and construction. This practice helps reduce  the likelihood of costly design changes later.

Many of the systems planned for FFG(X) have been demonstrated and  are in use on other Navy ship classes, which helps the program fulfill  capability needs while avoiding developmental risks. Table 3 provides an  overview of some of the key existing systems planned for the ship.

In addition to the systems that have been utilized by other Navy ships, the  FFG(X) program plans to incorporate some systems that are still in  development, such as the Enterprise Air Surveillance Radar (EASR) and  a new version of the Aegis Weapon System.

Navy officials stated that EASR—a complex radar system expected to  provide long-range detection and engagement of advanced threats— is critical to FFG(X)’s air and surface warfare missions. It is a scaled  down version of the Navy’s Air and Missile Defense Radar that is in  production and scheduled for initial integration with the Aegis combat  system on a DDG 51 Flight III destroyer in fiscal year 2020. In early  2019, the Navy began testing a full-scale, single-face EASR array  engineering developmental model—the full system planned for  FFG(X) will have three array faces—at a land-based test site to  further demonstrate its functionality. The Navy expects to complete  land-based testing of the EASR engineering development model by  February 2020. The Navy also plans to integrate a rotating version of  EASR and a fixed-face version on other ship classes prior to  integrating the radar on the lead FFG(X). The Navy’s results from  planned EASR developmental testing at the land-based site will be  integral to achieving a TRL 7 and reducing risk prior to the start of  FFG(X) detail design.

The Navy is developing a new version of the Aegis Weapon System— FFG(X)’s combat management system—to coordinate radar and  weapons system interactions from threat detection to target strike. For  example, the system will support the ship’s ability to employ the Naval  Strike Missile for over-the-horizon offensive capability as well as a 32- cell vertical launch system to employ missiles for air defense. The  Aegis Weapon System for FFG(X) will leverage the Aegis common  source software that supports the combat systems found on the  Navy’s DDG 51-class destroyers and CG 47-class cruisers. Navy  officials noted that they anticipate at least 70 percent of the Aegis  Weapon System software for FFG(X) will be common to the Aegis  software used for DDG 51 Flight III ships.

Rigorous testing of the Aegis Weapon System with EASR will be critical  for FFG(X), as the radar and combat management system must work in  concert for the ship to detect, track, and assess possible targets. Given  the radar and software commonalities, the risk level for both of these  FFG(X) systems should be reduced once the DDG 51 Flight III radar and  Aegis system baseline, upon which the FFG(X) integrated system is  based, have been demonstrated through testing on a ship beginning in  2022. Specific to the Aegis Weapon System for FFG(X), software  development is expected to run from fiscal year 2022 to late fiscal year  2024. The system’s integration and testing with EASR is scheduled to  occur through fiscal year 2024.

While the Navy is planning to use many already mature systems on  FFG(X), integration and testing of those systems will be critical to  demonstrate systems fit and work together as intended on the ship. The  Navy completed a technology readiness assessment in spring 2019 to  identify potential technical risks, and concluded that FFG(X) does not  have any critical technology elements. DOD generally defines a critical  technology element as one that may pose major technological risk during  development. Navy officials who completed the assessment stated that  they reviewed about 150 systems as part of their activities and found  none composed of new or novel technologies for which the Navy has  insufficient knowledge to demonstrate maturity. The assessment noted  one technology—the New Advanced Integrated Line-of-Sight Equipment  System (nAILES) multi-coupler for antennas—as a watch item. The Navy  would like to utilize nAILES for FFG(X), but according to Navy officials, it  is not considered a critical technology because the Navy has identified  alternative, proven technologies that will be used to meet the ship’s needs  if nAILES is not available for use.

The findings of the technology readiness assessment are consistent with  the FFG(X) program’s decision to use existing systems that do not require  technological innovation to deliver desired capability. However, the  findings do not necessarily equate to the program having no technology  risk for planned systems. For example, the Aegis Weapon System for  FFG(X) did not qualify under the parameters of the technology readiness  assessment as a critical technology element. Still, as already discussed,  the Aegis Weapon System will carry technical risk for several years until  the Navy completes development and demonstrates the system works as  intended for FFG(X). The Next Generation Surface Search Radar is  another system that is relatively mature—FFG(X) program officials  confirmed in May 2019 it is nearing a TRL 6—but requires further  development to reduce risk.

The FFG(X) test and evaluation master plan and independent technical  risk assessment are significant documents yet to be completed that will  help to further define risks and plans to address them. The test and  evaluation master plan serves to outline the program’s integrated test  program and master schedule of major test events or phases. Navy  officials expect the test plan to be approved in December 2019 to support  the Milestone B decision. They noted that the plan may need to be  updated once the FFG(X) design is selected based on the additional  information that will be available to inform test planning. The independent  technical risk assessment is intended to categorize risks that cover a  broad range of factors, including technology maturity, integration needs,  and testing. If these factors are not sufficiently accounted for, a program  is likely to have difficulty meeting cost, schedule, and performance  objectives. An official from the Office of the Under Secretary of Defense  for Research and Engineering who is participating in the technical  assessment for FFG(X) stated they plan to complete their work to identify  any risks in March or April 2020. The official added that at this early stage  of their activities, the potential for integration risks associated with the  FFG(X) combat system is an area of interest because of the extensive  number of existing systems that will need to be integrated into the new  ship design.

Navy test officials as well as DOD systems engineering and test officials  noted potential advantages and risks related to FFG(X) program’s plans  for using existing technologies. Similar to what we previously discussed  about the use of a parent design, the officials stated that the use of  existing systems can increase understanding of the ship and its systems,  which may help the FFG(X) program achieve its planned accelerated  timeline between development and delivery. However, systems  engineering and test officials also indicated that, regardless of maturity,  challenges typically arise when DOD takes systems from other platforms  and attempts to integrate and use them in new ways on a new platform.  They cautioned that programs like FFG(X) that plan to use a lot of  government-furnished equipment or non-developmental systems often  underestimate the amount of integration challenges they will face. The  officials told us this may occur because of overconfidence that the  maturity of systems demonstrated through use on other platforms  eliminates most technical risk, whereas experience confirms that it is  always challenging to get systems to fit and work together as intended on  a new platform. Officials from the office of the Director, Operational Test  and Evaluation said that the parent design approach for FFG(X) may  enable the Navy to reduce some developmental testing activities;  however, operational testing expectations would largely be unaffected  because there will still be substantial integration to be completed and  tested in order to demonstrate mission capabilities.

Contracting Plans for FFG(X) May Help Mitigate Some Risk, and Use of Warranties Could Potentially Further Reduce Costs

The draft FFG(X) request for proposal indicates that the Navy plans to  use a fixed-price incentive contract to help control ship costs and special  performance incentive fees. In addition, the Navy plans to use  guarantees with limited liability for the shipbuilder to correct defects after  ship deliveries. Our prior work has found that using comprehensive ship  warrantees instead of guarantees could reduce the Navy’s financial  responsibility for correcting defects.

Use of Fixed-Price Incentive Contract Provides Benefits, but Planned Contract Structure Results in the Navy Absorbing More Cost Risk

After completion of a full and open competition for FFG(X) detail design  and construction, the Navy plans to use a fixed-price incentive contract in  combination with additional special performance incentive fees to procure  the lead and follow-on ships. As we have previously reported, full and  open competition allows all responsible sources—or prospective  contractors that meet certain criteria—to submit proposals for a contract.  The use of competition in contracting is a critical tool for achieving the  best possible return on investment for taxpayers. Competitively awarded  contracts can save the taxpayer money, improve contractor performance,  and promote accountability for results. The fixed-price incentive  contracting approach for FFG(X) is intended to incentivize the contractor  to control costs and meet performance requirements. This contracting  strategy represents a significant departure from previous surface  combatant programs in which the Navy negotiated cost-reimbursement  contracts for construction of the lead ship. Under cost-reimbursement  contracts, the Navy assumes the cost risk because the shipbuilder is  reimbursed for its allowable incurred costs to the extent prescribed in the  contract, regardless of whether the work is performed to the exact level  desired by the Navy. For example, our prior work found that the Navy’s  decisions to accept the first two LCS in incomplete, deficient conditions  complied with federal acceptance provisions, largely due to the cost- reimbursement type contracts in place to construct these ships.

Fixed-price incentive contracts provide an incentive for the shipbuilder to  control costs in order to maximize profit. Fixed-price incentive contracts  generally include a profit adjustment formula referred to as a shareline, as  well as a price ceiling, target cost, and target profit. The structure of the  shareline establishes how cost overruns or underruns in relation to a  target cost are shared between the government and shipbuilder. For  example, the 70/30 shareline that the Navy is planning for FFG(X) lead  ship overruns means that the government pays 70 percent of cost and the  shipbuilder pays 30 percent when the cost exceeds the target cost up to  the price ceiling. Generally, the shareline functions to decrease the  shipbuilder’s profit as actual costs exceed the target cost. The price  ceiling is generally the maximum the government will pay under the  contract and is typically negotiated as a percentage of the target cost.  The target cost generally informs the shareline and price ceiling.

Given the unknowns associated with design and construction, the Navy  plans to account for these unresolved risks by assuming responsibility for  cost growth above DOD recommended guidance. As we reported in  March 2017, when the Navy assumes a greater share of cost overruns  above the target cost, accepts a higher price ceiling, or both, the fixed- price incentive elements may not provide sufficient motivation for the  shipbuilders to control costs. Figure 8 depicts the how risk changes as  the Navy departs from a 50/50 shareline for cost overruns and a ceiling  price of 120 percent.

As we previously noted, for the FFG(X) lead ship the Navy is planning to  have a shareline of 70/30 for target cost overruns. The Navy also plans to  have a 60/40 target cost overrun shareline for the second ship, and a  50/50 overrun shareline for the remaining seven ships included in the  detail design and construction contract award. Based on this plan, the first  two FFG(X) ships will depart from DOD’s guidance recommending a  50/50 point of departure for negotiations between the government and  shipbuilder for cost overruns up to the price ceiling. This results in more  cost risk to the government for two ships in the detail design and  construction contract. The Navy’s planned price ceiling for the 10 ships  included in the contract award may deviate from DOD’s guidance  recommending a ceiling price set at 120 percent of target cost as a point  of departure for fixed price incentive contracts. Specifically, Navy  officials stated that the maximum ceiling price could be as high as 125  percent for all of the ships. However, Navy officials stated that the request  for proposal will provide incentive for industry to propose the minimum  price ceiling that sufficiently accounts for the proposal’s level of risk,  meaning that industry may propose price ceilings below 125 percent. The  Navy also plans to include options for a special performance incentive fee  for each of the FFG(X) ships, which will be established for the final  request for proposal. These incentives have the potential to increase  shipbuilder profitability.

FFG(X) Plan for Guaranty Use Is More Robust than Recent Shipbuilding Programs, but Use of Warranties Could Provide More Value to the Government

As outlined in the FFG(X) draft detail design and construction request for  proposal and confirmed by program officials, each frigate will have a  guaranty period that commences at ship delivery and is expected to end  18 months after delivery. Navy officials stated the guaranty is intended to  formalize a period of responsibility during which the shipbuilder must  correct defects, with the cost to the government and the contractor based  on the contract terms (cost shareline and price ceiling) associated with  the ship. During the guaranty period, the shipbuilder would be required to  correct all defects for which it is responsible, with proposals required to  include a minimum limitation of liability of $5 million per ship. Once the  total cost to correct identified defects reaches $5 million, the government  would pay the full cost to correct any additional guaranty period defects.

The $5 million minimum limitation of liability planned for FFG(X) has a  higher dollar value and covers a longer period of time than other recent  shipbuilding programs. For example, we previously found that for the  Navy’s LPD 25 amphibious transport dock construction, the contract  initially included a $1 million limitation of liability. Navy officials stated  that the final request for proposal also will include a provision allowing  industry to propose a higher liability limit, up to and including no limitation  of liability. Navy officials said that any additional liability amount proposed  beyond the $5 million guaranty will be assessed as part of the technical  evaluation criteria used to select the winning FFG(X) design.

We found in March 2016 that the use of a guaranty did not help improve  cost or quality outcomes for the Navy and Coast Guard ships we  reviewed. We also found that commercial ship buyers and Coast Guard  officials stated that warranties foster quality performance because the  shipbuilder’s profit erodes as it spends money to correct deficiencies after  delivery, during the warranty period. We further reported that the Coast  Guard has improved cost and quality by requiring the shipbuilder to pay to  repair defects by following Federal Acquisition Regulation warranty  provisions. For example, the Coast Guard paid up front for the Fast  Response Cutter warranty. The cost of the warranty amounted to 41  percent of the total defect correction costs. Although this ship does not  have the size and advanced systems planned for FFG(X), it serves to  demonstrate the potential value to the government presented by the use  of warranties. The Coast Guard also used a fixed-price incentive contract  with a warranty on its Offshore Patrol Cutter—a ship of comparable size  to FFG(X). The first Offshore Patrol Cutter has a 2-year warranty, and  follow-on ships will have 1-year warranties. The Coast Guard pays a set  amount for these warranties, and in return, the shipbuilder must fix all  applicable defects identified within the agreed-upon time period  regardless of cost.

Rather than using guarantees for the FFG(X) contract to provide for the  correction of defects, the Navy could help control costs to the government  through the use of warranties. Under warranties, the government  generally receives a contractual right for the correction of all defects for  which the shipbuilder is responsible at the shipbuilder’s expense. The  use of warranties is typically not mandatory, but federal and defense  acquisition regulations instruct contracting officers to consider various  factors when deciding whether a warranty is appropriate for an  acquisition. The regulations also instruct contracting officers to use a  warranty when it is practicable and cost-effective to do so. We  previously found that, unlike a warranty, the Navy almost exclusively paid  for defects that were the shipbuilder’s responsibility under a guaranty  because of the contract type and terms in contracts that we reviewed.  Such conditions limit the incentive to discover every deficiency during the  guaranty period, and may negatively affect quality improvements over  time.

The Navy’s FFG(X) plans suggest that the Navy may be prematurely  discounting warrantees as a mechanism to improve ship quality and  decrease cost to the government. Navy officials told us that mandating  that industry propose a warranty could result in additional costs to the  government because the initial cost of the ship could be raised  substantially to include the cost of the warranty. Additionally, Navy  officials said a requirement for warranty pricing could serve to limit  industry participation in the FFG(X) competition if offerors are unwilling to  accept the risk associated with a warranty and unable to provide  reasonable pricing. The Navy provided no analysis to support these  claims and confirm a clear understanding of whether a warranty could  provide greater value than the $5 million guaranty the Navy is proposing  for FFG(X).

As part of the competitive proposal process for FFG(X) detail design and  construction, the Navy could maintain its plans to require a guaranty but  also seek ship warranty pricing. The full and open competition for the  FFG(X) contract award may increase the potential for receiving warranty  pricing that provides a cost-effective alternative to the Navy’s guaranty  plans. By limiting the request for proposal to guarantees, the Navy misses  an opportunity to obtain information on what comprehensive warranty  coverage against defects would cost, and use it to evaluate whether  warranties could further reduce risk for the FFG(X) program.

As the Navy approaches the Milestone B review for FFG(X), it is critical  that funding and other major programmatic decisions are fully informed by  the knowledge necessary to support them. This is especially important to  help ensure that the FFG(X) program does not face some of the same  cost, schedule, and performance shortfalls that have been faced by the  LCS program. The Navy’s fiscal year 2020 budget request to authorize  and appropriate funding for the lead frigate was developed and submitted  without the benefit of key cost and design information, such as the  independent cost estimate and the final results from conceptual design.  As a result, it is necessary that the Navy provide Congress with a clear  understanding of FFG(X) cost expectations, including CAPE’s  independent cost estimate, prior to awarding the detail design and  construction contract. This will help ensure that the FFG(X) program is  grounded in cost and design expectations that reflect the specific aspects  of the ship that the Navy selects for construction.

With the start of the planned $20 billion FFG(X) procurement  approaching, the Navy has limited time left to position the government to  obtain the best deal possible to fix any deficiencies discovered upon  delivery of the first 10 ships. The Navy’s guaranty plan for FFG(X) offers  some improvements compared to recent shipbuilding programs, but does  not offer the degree of coverage that could potentially be provided by a  warranty. The competitive qualities of the FFG(X) acquisition approach  present an opportunity for the Navy to, at a minimum, obtain warranty  pricing from industry so that the program may use that input to evaluate  whether a warranty would be a cost-effective means of reducing the  government’s cost risk.

We are making two recommendations to the Secretary of the Navy:

Ensure that the Assistant Secretary of the Navy for Research,  Development, and Acquisition provides to Congress the finalized  independent cost estimate prior to award of the detail design and  construction contract and demonstrates that the estimate is consistent  with the fiscal year 2020 budget request for the lead ship.  (Recommendation 1)

Ensure that the Assistant Secretary of the Navy for Research,  Development, and Acquisition directs the FFG(X) program office to  request pricing for warranties for the lead ship and the nine follow-on  ship options planned for FFG(X) as part of the detail design and  construction request for proposals. (Recommendation 2)

We provided a draft of this report to DOD for comment. DOD provided  written comments, which have been reproduced in appendix I. In  responding to the draft report, DOD concurred and described the actions  it planned to take to address our two recommendations.

In response to the second recommendation to request pricing for  warranties for the lead ship and the nine follow-on ship options planned  for FFG(X) as part of the detail design and construction request for  proposals, DOD acknowledged that the Navy will receive guaranty rather  than warranty pricing, but stated that the solicitation allows industry to  propose a higher limitation of liability amount, up to an unlimited limitation  of liability, in its guaranty pricing for FFG(X). While this could allow for a  better value to the government than has been typical for recent  shipbuilding programs, permitting higher limitation of liability guaranty  pricing but not requesting warranty pricing from offerors means the Navy  will not have complete information on whether a warranty could be more  cost-effective than a guaranty. Our prior work found that the use of  Federal Acquisition Regulation warranty provisions improved shipbuilding  program cost and quality outcomes. As a result, we maintain our belief  that the FFG(X) program office should implement this recommendation by  seeking warranty pricing as part of the detail design and construction  request for proposals. The full and open competition for the FFG(X)  contract award may increase the potential for receiving warranty pricing  that provides a cost-effective alternative to the Navy’s guaranty plans.

DOD stated that modifying the solicitation to incorporate a warranty  pricing component would cause an unacceptable delay to the FFG(X)  program, but did not provide an analysis to support this assertion or  specify the extent of delay associated with adding a warranty pricing  request. The current FFG(X) schedule has roughly 10 months between  the request for proposals deadline and the contract award, and the  program originally had been planning for the solicitation period to end in  December 2019 before moving the deadline to September 2019 shortly  before its release. We recognize the substantial effort the proposal  development and review process requires, but we continue to believe that  the government would benefit from adding a request for warranty pricing  to the detail design and construction solicitation. While DOD stated that  the Navy will support the recommendation after award by requesting  pricing for an unlimited warranty before exercising the first ship option,  doing so would eliminate any potential warranty pricing advantages that  would occur as a result of the competitive conditions that currently exist  for the current detail design and construction contract.

In addition to DOD’s written response to the report, DOD officials and  industry representatives associated with the FFG(X) conceptual design  activities provided separate technical comments, which we incorporated  as appropriate.

We are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense, and the Secretary of the Navy.  This report will also be available at no charge on GAO’s website at  http://www.gao.gov.

If you or your staff members have any questions regarding this report,  please contact me at (202) 512-4841 or oakleys@gao.gov. Contact points  for our Offices of Congressional Relations and Public Affairs may be  found on the last page of this report. GAO staff who made key  contributions to the report are listed in appendix II.

Appendix I: Comments from the Department of Defense

Appendix II: GAO Contact and Staff Acknowledgments

Shelby S. Oakley, (202) 512-4841 or oakleys@gao.gov.

In addition to the contact named above, the following staff members  made key contributions to this report: Diana Moldafsky (Assistant  Director), Lori Fields, Kurt Gurka, Stephanie Gustafson, Chad Johnson,  Jennifer Leotta, Sean Merrill, Miranda Riemer, Jillena Roberts, Hai Tran,  and Alyssa Weir.

The Navy plans to add 20 new guided missile frigates to the fleet a cost currently estimated at about $20 billion. Prospective shipbuilders are working on potential frigate designs that are derived from the designs of existing ships. The Navy plans to award a construction contract in July 2020.

Portions of the Navy's approach should reduce the risk of design and technology problems. However, the Navy has asked for $1.3 billion to build the first ship before having a solid understanding of its design and cost.

We recommended that the Navy provide Congress with an independent cost estimate before it awards the construction contract.