Turbulent waters: ship construction costs endanger Navy's fleet expansion.

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With runaway shipbuilding costs, disruptions in key programs and competing budgetary needs, the Navy is heading into one of its toughest procurement cycles yet.

"The U.S. Navy is facing a numbers crunch," said Stuart Slade, senior naval editor at Forecast International, a Connecticut-based marketing research and consulting firm.

"The cost of ships is going up through the roof," he said.

As a result, it remains uncertain whether the Navy can reach its goal of a 313-ship force by 2020. The fleet currently stands at 280 ships.

To get to 313 ships, the Navy must spend $13.4 billion--in 2005 dollars--each year, said Rear Adm. Barry McCullough, director of warfare integration.

The Navy, however, historically has programmed $11 billion a year in its shipbuilding accounts. If that rate holds, the service will end up with a fleet of 260 ships, McCullough said.

"We have to get the costs out of our ships to meet the inventory," he said.

George Sawyer, a former assistant secretary of the Navy for research, development and acquisitions, estimated that the Navy needs $19 billion a year to catch up.

But it is unlikely that the Navy will see such a boost, despite recent congressional add-ons to the Virginia-class submarine program. In the fiscal 2008 defense budget, Congress provided an additional $588 million in advance procurement funding to accelerate submarine production. However, even that plus-up is not enough to complete the buy of the ships, which will require between $1.5 to $2 billion more in future years, said Ronald O'Rourke, a naval analyst with the Congressional Research Service.

The Congressional Budget Office has estimated that warships will cost substantially more to build than the Navy estimates. The 30-year shipbuilding plan could cost an average of $20.8 billion per year in fiscal 2008 dollars to execute--about 35 percent more than the Navy's $15.4 billion, according to O'Rourke.

"If the Navy in coming years does not receive or cannot devote more budgetary resources to ship construction, and if the Navy retains roughly the same proportionate mix of ship types as called for in the 313-ship proposal, the fleet could eventually be reduced to a total of 211 ships, or about 33 percent fewer than called for in the 313-ship proposal," he wrote in a report.

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"We are in a vicious cycle. As costs go up, ship numbers go down, and if numbers go down, they drive costs up further," said Slade. "These are the questions that the Navy is struggling with at the moment, and they're not easy ones to answer."

Already, the service has taken measures such as cutting sailors from the fleet to free up money. But the drawdown has not generated as big a savings as Navy officials had hoped.

The Navy would have a tough time convincing Congress that it needs a bigger budget right now, said Shaun McDougall, a military budget analyst at Forecast International. "The Navy has no glamorous role to play in the wars in Iraq and Afghanistan," he wrote in a recent report. "There is little in the current Navy story that can be used to push back against encroachment on its budget by the other services."

Ship procurement has been further hindered by program changes and delays, as well as cost overruns in a number of the Navy's most important projects, McDougall said.

The current DDG-1000 destroyer program is a prime example of the difficulties facing the Navy, he noted. "Because the ship is designed to include several new still-experimental technologies, the costs of its development have gone so far beyond the original projections that cancellation is a real possibility."

Navy officials have argued that the costs of DDG-1000 are justified because the ship will be the launch pad for a host of new technologies. Congress appears unconvinced by this argument, McDougall said. "Lawmakers have shown concern over the long-term future of the new destroyer, and may be unwilling to provide full funding down the road should the costs continue to soar."

The Littoral Combat Ship program has been facing even more problems.

At $220 million per ship, the LCS was supposed to be a relatively inexpensive way to boost the Navy's fleet numbers by 55 ships. Now it seems unlikely that the service will have even half of those ships in operation by 2020.

A cost growth of more than 50 percent in the first two LCS prototypes has dealt a serious blow to the program. More importantly, McDougall noted, the LCS is key to the Navy's intent to dominate "green water," or littoral areas.

"The Navy has begun to see its future as supporting expeditionary forces ashore and interdicting terrorists attempting to use the ocean for movement," McDougall said. "The new Littoral Combat Ship is meant to serve as the backbone of this practice."

"Both House and Senate defense committees slammed the program, going so far as to call LCS a 'case study in how not to acquire ships,'" said McDougall.

Through fiscal 2007, the Navy experienced a cumulative cost growth of nearly $5 billion among the 41 ships it was constructing during the year, he said. The first two San Antonio class amphibious ships, LPD-17 and -18, have seen their costs grow by more than $1.3 billion. The CVN-77, the final aircraft carrier of the Nimitz class, is currently under construction. It has gone over budget by about 17 percent, McDougall estimated.

Like other analysts, McDougall believes the current shipbuilding plan is unrealistic. "The 2008 30-year shipbuilding plan contained 10 more ships than the previous year's plan, yet the annual funding estimated for the plan went largely untouched," he said. "That means the Navy assumes the cost of shipbuilding will decrease as the years pass by, though recent history suggests otherwise. If today's trends continue, the Navy's buying power will be severely diminished in the out-years, making a 313-ship fleet an impossibility without a significant boost to the service's annual budget."

Navy officials have announced in recent years several new initiatives designed to lower the cost of ships, but it remains to be seen whether they will pay off. These include limiting design changes, standardizing engineering plans, sharing combat system suites, allowing longer production lines and stabilizing shipbuilding plans, said McCullough.

Acquisitions officials also are considering whether to pare down the number of ship models in the fleet for affordability. Having only 10 different models of ships, rather than the current 29, will change the way the Navy thinks, said Rear Adm. Charles Goddard, program executive officer for ships. In 2020, for example, the Navy could potentially have a single type of amphibious ship. "That's a debate we need to have in the future," he said.

This is not the first time that the Navy has lived through a turbulent shipbuilding era when it was experimenting with new ship designs, Slade said. That happened in the 19th century when steam was revolutionizing the industry and metal was replacing wooden hulls.

Ship prices escalated vastly then, too, said Slade, and as navies produced small batches of prototype ships during a course of 20 to 30 years, they eventually hit upon a formula that worked.

"The Navy is doing very much the same thing. It's building prototypes, looking at concepts, evaluating concepts, trying to work out what is going to work, and what isn't. Eventually, out of this process, probably in about five years or 10 years, a new concept of warship would arrive, which is tuned into the strategic environment and buildable at an affordable cost," said Slade.

But the service does not have the luxury of time--or money--to waste. Its shipbuilding affordability challenges are not endemic to the United States. They are indicative of a much larger problem.

"This is something that's hitting every navy everywhere in the world," said Slade. The Australians are paying $900 million for destroyers and the Dutch paid $600 million for their new warships. The Germans are paying $700 million for a new F125-class frigate. All of these ships are short-term projects that will be finished in the next five years.

"By 2015, the billion-dollar warship is going to be the industry standard. That is what everybody will be buying and we're well on our way to that now," he said.

"This is actually a very serious problem. Countries have maritime interests. How are they going to fill these interests if ship prices are going through the roof?."

Under budget constraints, the Danish navy came up with a money-saving technique by building ships with modularity, so that weapons systems could be removed and upgraded without having to construct a new ship. "We're beginning to see they probably had a point," said Slade.

Both the LCS and the DDG-1000 are embracing that philosophy.

Because the Navy is looking at the real possibility of having its ship numbers decrease, Naval Sea Systems Command is examining the feasibility of extending the service life of all ships by five years, said McCullough.

"If you look at the surface combatant force and look at where we've routinely decommissioned our ships, we decommission them about halfway through their engineering service life projections," he said. For example, a ship with a service life of 35 years is often decommissioned at 17 years because it cannot be upgraded at an affordable cost. Destroyers have been decommissioned at about 22 years while cruisers have gone out of service at 20 years.