Retired Rear Admiral Butler was Program Executive Officer (Submarines) until his retirement from the U. S. Navy in 2005. He is currently vice president for Fleet Ballistic Missile program requirements for Lockheed Martin Space Systems Company.
Republished with permission from the June 2011 issue of PROCEEDINGS a monthly publication of the U.S. Naval Institute of Annapolis, Maryland 21402.
A former submarine procurement guru details what was behind the Virginia-class program, one of the most talked-about cost-saving acquisitions in Department of Defense history.
In 2011, Congress authorized the Navy to build two Virginia-class submarines, marking the first time since 1989 that two submarines of the same class were authorized in the same year. While at press time the two ships scheduled to begin construction in Fiscal Year 2011 had not received full funding, Congress seems intent on providing the funds so the Navy can move forward.
Originally, the Navy planned to increase production from one ship per year to two starting in 2002. However, changes to the shipbuilding plan, budget cuts, and cost growth delayed such production by nine years-and even that was not guaranteed. To reach this point, the Virginia- class program had to execute a one-of-a-kind cost-reduction effort to remove nearly 20 percent from its acquisition costs. What made this endeavor both extraordinary and difficult was that it had to occur on a mature program already in serial production. That the program could successfully execute this task serves as a model for other acquisition efforts facing more constrained budgets as the government looks to reduce spending.
Program History
From the time the program started in the mid-1990s to now, its total obligation authority-the amount of money required to fully fund construction and delivery of 30 submarines-grew by about one-third. The reasons behind this growth have never been fully explained.
The cost grew for four primary reasons:
- Originally, the Navy intended to use a single shipyard, but to ensure that the nation retained a viable nuclear shipbuilding industrial base, Congress passed a law requiring that General Dynamics Electric Boat and Northrop Grumman Shipbuilding (formerly Newport News Shipbuilding and Dry Dock) each build parts of every Virginia Class submarine. While this added roughly $200 million to the cost of each ship, the move had an unexpected benefit.
- Restarting submarine building at Northrop Grumman Shipbuilding-which had been out of submarine production since the delivery of the last Los Angeles-class boat-and general shipbuilder learning curves added approximately $300 million to each ship.
- Unexpected material-cost growth, coupled with an estimated inflation rate that was well under the real inflation rate, added $300 million to the cost of each ship.
- Delaying increased production to two ships per year from 2002 to 2011 added approximately $200 million per ship as boats originally scheduled for construction over that span were moved to later years. Such shifts made the submarines more expensive because of inflation, increased material costs, and the loss of economies of scale.
All told, each boat’s final cost increased by approximately $1 billion on average and, over the 30-ship program, the total obligation authority went from approximately $60 billion in the mid-1990s to $90-plus billion in the mid-2000s.
The Writing on the Wall
With an average ship-construction budget of about $15 billion a year from the early 2000s out for the immediate future, the Navy could not afford to build two Virginias per year while recapitalizing the surface fleet at the same time. This problem did not escape either the Navy’s or its shipbuilders’ attention.
The Navy took steps early in the program to reduce costs and in so doing laid the foundation for the Virginia-class program’s successful money-saving efforts. In the second, or Block II, construction contract signed in August 2003, the Navy included a clause that would allow both shipbuilders to draw from a capital-expenditure incentive pool to make infrastructure improvements at their facilities. To earn the fee, the companies had to submit a business plan for how proposed improvements would reduce the Virginia class acquisition costs. If the Navy agreed, it would fund half of the cost for making the enhancements.
Once the company proved that the project reduced construction costs, the Navy would pay for the second half of its investment in the project. In the end, both companies would have more modern and efficient production facilities at no cost to themselves, and the Navy would save money over the life of the program. The $91 million set aside for capital-expenditure improvements in the Block II contract allowed the Navy to avoid more than $400 million in acquisition costs-a greater than 4 to 1 return on investment. It is important to emphasize that the companies had to prove the cost savings before the Navy paid for the second half of the improvement project. Those savings are, therefore, accounted for by both the Navy and its industry partners and cannot be questioned.
The Block II contract had another clause that with congressional authorization would allow it to transition from a block-buy contract into a multi-year procurement agreement. In a block-buy contract, the Navy is not obligated to purchase all the ships listed in the deal. Consequently, the shipbuilders lacked incentive to buy material in bulk for multiple hulls. as they would put themselves at risk should the Navy decide not to exercise all of the contract’s options. In a multi-year procurement contract, the Navy commits itself to buying all the ships listed in the deal, thereby removing the companies’ risks associated with making bulk purchases. While the first ship of the Block II contract remained as a block-buy boat, Congress allowed the Navy to transition the Block II to a multi-year procurement agreement in January 2004, saving $400 million over the remaining five ships of the contract because of the improved buying power.
When Congress authorized the change in contracting strategy, the first ship, USS VIRGINIA (SSN-774), had not yet been delivered, and the second ship of the class, USS TEXAS (SSN-775), was showing significant cost growth and schedule delay. Traditionally, Congress had waited until an acquisition program was more mature and established before authorizing it to award multi-year procurement contracts.
Congressional Trust
At the time, the Virginia was likely the most immature pro-gram ever to receive multi-year authority. However, it had shown a real understanding of what needed to be done to get on track, and its ongoing and preemptive work gave Congress confidence that things were moving in the right direction. The trust exhibited by Congress was, and still is, well placed as evidenced in the dramatic improvements in reducing the construction span.
Both of the Virginia- class shipbuilders understood the Navy’s budgetary constraints and, in addition to taking full advantage of the capital-expenditure incentive, began working on how they could reduce costs. General Dynamics Electric Boat led the charge on two ideas that would end up paying significant dividends. In 2004, it presented a concept for a modified bow-sonar array to the Navy. Instead of the traditional transducer-populated, SUBSAFE-boundary sonar sphere, it theorized that a horseshoe-shaped passive bow array that used hydrophones, coupled with a small active array, could be used on Virginia- class submarines. Electric Boat’s concept had two significant characteristics: It was not a SUBSAFE boundary and therefore much less expensive to build and maintain, and it used less costly components.
Electric Boat followed up with an equally impressive idea that would replace the 12 vertical-launch tubes aft of the sonar array with two large-diameter tubes. Essentially, it proposed using the guided-missile submarine’s multiple all-up-round canisters in the Virginias. While there would be no reduction in weapons, as each tube would still hold six Tomahawks, replacing the 12 smaller tubes with two large ones would simplify construction, making them less expensive to build while also reducing life-cycle costs because of fewer moving parts. While those new ideas still required significant engineering and design work, they laid the foundation for the Virginia-dass program’s next phase.
A Thousand Voices, One Message: 2 for 4 in ’12!
In September 2005, then-Chief of Naval Operations Admiral Mike Mullen issued a statement that began one of the most successful cost-reduction efforts undertaken by a Department of Defense program. While acknowledging that the Navy needed to increase production of the Virginia class, he also asserted that the service could not afford to do so at the current cost.
Admiral Mullen then challenged the Virginia program by saying that the Navy would budget $4 billion, as measured in FY 05 dollars, in the FY 12 budget for two Virginia- class submarines. The Virginia-class submarine authorized in 2005, the USS MISSOURI (SSN-780), was budgeted for $2.4 billion. Therefore, the Navy had to find a way to remove nearly 20 percent of the ship’s cost to meet Admiral Mullen’s goal of two Virginias for $4 billion in FY 12-or “2 for 4 in ’12.”
The phrase “2 for 4 in ’12” became the Virginia class’ rallying cry. The mantra spanned not only the Navy, but also infected the shipbuilders, their suppliers, and even members of Congress who used the term during testimony. That all parties involved with the Virginia class bought into the message proved highly beneficial, as the Navy cut the program’s total obligation authority in anticipation that the program would succeed.
To meet the CNO’s cost goal, the Virginia program instituted a three-pronged effort that it believed would reduce acquisition costs by $400 million (in FY 05 dollars) per hull. First, the Block III contract would have to be a multi-year procurement pact that increased production to two ships per year in FY 12. The economic order-quantity savings associated with a large multi-year procurement contract would allow the shipbuilders and their vendors to negotiate the best price possible, while increasing production would spread overhead costs across two hulls. All told, increasing production to two ships in a multi-year procurement contract would account for about one-half of the savings required.
The Virginia program office, then, had to find roughly $200 million per hull in savings. First, the program and shipbuilders investigated how they could redesign parts of the ship to make them less expensive without adding to the class’ total life-cycle costs. The Virginia-class team evaluated more than 1,000 separate design changes and implemented more than 200 modifications, from the mundane to the extraordinary.
Pieces of the Puzzle
On the less-complicated side, the engineers determined that they could use a composite main seawater pump impeller and save $400,000 per ship. They also found that they could save $2.6 million per ship by using different paints and coating and improving how they are applied. Possibly the most significant effort came in the Virginia class’ bow, where Electric Boat’s ideas of replacing the sonar sphere with a large-aperture bow array and using two Virginia payload tubes in the place of 12 vertical-launch tubes became reality. Those changes in the bow alone will save $40 million per ship, starting with the two boats authorized in 2012.
The third piece of the cost-reduction puzzle involved reducing the Virginia-class construction span from 84 months to 60. Once again, the Navy and the shipbuilders collaborated on ways to make the vessels more efficient to build. One of the most significant changes involves constructing the ships in four super modules instead of the previous ten modules. Reducing the number of modules moved between the shipyards not only saves on transportation costs but also allows the shipbuilders to more completely populate the hull cylinders. The more work completed before the hull sections are joined together, the easier and faster it is to complete final assembly and test.
The Virginia program also benefited from the $91 million set aside for capital-expenditure improvements. Without the more modern facilities at the two shipyards, it would have been far more difficult for General Dynamics Electric Boat and Northrop Grumman Shipbuilding to improve their throughput while maintaining the high degree of quality required for submarine manufacturing.
In December 2008, the Navy signed its single largest submarine-construction contract in dollar terms. The Virginia-class Block III contract is a five-year, eight-ship agreement worth a total of $14 billion. Most notable, though, is that it meets the program’s 2 for 4 in ’12 goal in FY 12, and it includes the two ships authorized in FY 11. The Virginia-class program’s successful cost-reduction effort is singular in DOD. No other program has been asked to reduce its acquisition costs by nearly 20 percent while already in serial production. The two ships authorized in this fiscal year, one year earlier than planned, demonstrates the confidence both the Navy and Congress have in the class. How the program accomplished this feat is worth noting. With every indication that the government will be tightening its fiscal belt, lessons can be applied to other acquisition programs.
Lessons Learned
It takes money to save money: The Virginia-class cost-reduction effort was not accomplished in a fiscal vacuum. The Navy provided $600 million between FY 08 and FY 13 to reduce the costs. The $3 billion-plus return on investment shows what can happen when motivated people are given a task with proper funding and reasonable schedule expectations. Without that investment, the Virginia class would not have been able to conduct the studies needed to reduce costs to the required levels.
Programs must have a clear, unchanging goal: The Virginia class had a well-conceived and accepted set of requirements at program inception and therefore was successful in avoiding change since the beginning of the construction program. Admiral Mullen provided a very clear goal for the Virginia-class program, and from 2005 to 2008, “2 for 4 in ’12” remained constant. With a stable requirement, the Virginia- class team could focus all of its efforts on a single result without having to make contingency plans to address new requirements.
Acquisition is a team affair: The long-standing synergy be-tween the Navy and its submarine builders proved integral in the cost-reduction effort. From the start, the major players on the acquisition team bought into the cost-reduction effort and worked in concert to ensure that their mutually beneficial goal-increasing production-became a reality. During the redesign efforts, the Navy, prime contractor General Dynamics Electric Boat, and primary subcontractor Northrop Grumman Shipbuilding all had to agree on the amount saved with each change. In doing so, they were able to track cost-reduction efforts using the same metric so that there could be no question on where they stood in relation to their goal.
Competition can take many forms: One of the criticisms of the teaming arrangement between shipbuilders has been that there can be no competition. While that is true from a pure cost standpoint, the reality is that competition is ongoing between the two shipyards. Both take pride in their craft and they both believe that they are the best at what they do. To prove that, they have seemingly entered into a contest on which yard can deliver a submarine more quickly. In fact, the last five submarines have been completed in record time. That said, quality of work is also improving with each ship, and the ships are delivered within the Navy’s budget. The shipbuilders are working harder and smarter to reduce the construction span, not cutting comers, and holding the line on cost, and the Navy is reaping the rewards.
Know your program inside and out: From the Navy’s program office to those at the shipyards, the people who oversee the Virginia-class program know their product. When the time came, they knew where to look for efficiencies and savings. Without such knowledge, it would have been far more difficult to execute the cost-reduction efforts in time to meet the deadline for awarding of the Block III contract.
Cost reduction does not have to mean capability reduction: The Navy let it be known in no uncertain terms that it would meet the CNO’s cost-reduction goals. The preferred method would not have reduced the Virginia class’ capabilities, but if that was the only way to bring costs down by nearly 20 percent then that was what was going to happen. Through hard work and diligence, the cost-reduction efforts allowed the Navy to meet its goal without reducing the submarines’ capabilities.
Cost reduction does not have to increase operational costs: The Virginia-class cost-reduction efforts preserved warfighting capability and reduced total ownership costs. The large-aperture bow array and the Virginia payload tubes will both allow the Fleet to realize real life-cycle savings. When done correctly, a savings in acquisition does not result in a requirement to pass a bill to the Fleet.
Don’t fold with the winning hand: The Virginia-class program expended considerable effort to put the right people together to successfully reduce costs. This winning team now is working on a new goal: further streamlining the total ownership costs of the class by reducing the number of major shipyard availabilities the boats will undergo during their life cycles from four to three and increasing the number of deployments they can conduct from 14 to 15. This “3: t 5,” as the Virginia program office is calling the effort, must be completed by the time of the Block IV award, which will likely occur in December 2013.
The Virginia-class cost-reduction effort, like the program overall, will forever stand as an acquisition success story. It reduced the average per-unit cost by nearly 20 percent for each submarine starting with the two ships in 2012, despite the program already being in serial production, and did so without reducing warfighting capabilities or passing future maintenance costs on to the Fleet. The program’s success is not a secret, and in fact several other programs have requested lessons learned and advice. In a time of tight federal budgets, more programs will likely be calling in an effort to learn from this hallmark program.
2005 Dollars versus 2012 Dollars: The Virginia Program Office is always eager to point out that the “4” in “2 for 4 in ’12” is in Fiscal Year 2005 dollars. This is important because when seven years of inflation is applied, $4 billion in 2005 becomes approximately $5.2 billion in 2012.
