Navy struggles to get multiyear funds for Va.-class submarines.

A General Accounting Office report is questioning whether unrealistic cost estimates, inflation adjustments and competition among other Navy programs will offset any savings from multiyear procurement for the Virginia-class submarine program.

The report, released on June 23, raised concern about the Navy's request for advance funding for the submarine program.

The Navy is seeking advanced funding for seven Virginia-class submarines from fiscal years 2004 through 2008. The Navy has sought congressional approval of a multiyear procurement of $390 million in fiscal years 2004 and 2005 and $190 million in 2006. Navy officials claim this will allow the program to reduce needed funding in future years.

But savings could be eroded if the program's costs increase or substantial design changes are needed. And competition among Navy programs could also affect long-term savings, the report stated.

GAO points out the Navy cut $270 million in research, development, test and evaluation funds from fiscal years 2004 through 2007, and an additional $40 million per submarine in technology insertion funds for the same time period. The cuts were made to "help fund higher Navy priorities," the report states.

The cuts will impact such efforts as continued development of an information assurance solution for the sonar and combat control networks, correction of high priority deficiencies noted in the operational assessment of the non-propulsion electronics systems, and evaluating causes and developing fixes for acoustic performance deficiencies. Technology insertion also will be delayed for several years, GAO said.

In addition, procurement savings over several years could be eroded as the Navy continues to cut funding due to "defense-wide inflation adjustments," the report said. The Navy has already cut $600 million from the Virginia-class procurement account and $2 million a year in RDT&E funding from 2004 to 2009.

According to GAO, the "program's costs estimates have not proven realistic." Using the Navy's own documents, GAO said costs on the submarine have "exceeded baseline estimates by 24 percent." That included the potential savings from multiyear procurement funding which has yet to be authorized. Without the savings, cost overruns would have been 31 percent, GAO said.

Program officials revised the baseline estimate in April 2003. Contract negotiations for the acquisition of additional ships raised further questions about the realism of the Navy's cost estimates. Program officials said the contractor's bid exceeded the Navy's estimate by $1 billion. Officials reported that a tentative agreement has been reached resulting in a price within the program's budget, but the Navy altered the scope of the contract to reach that price, GAO reported.

"This experience with the program's cost estimates raises questions regarding the realism of potential savings estimates. Moreover, should costs exceed estimates, the program would need additional funding or would have to make additional tradeoffs to program scope," GAO said.

Design changes are still likely, because the program is early in the acquisition cycle, the report noted.

"The lead ship (SSN 774), which will be delivered in June 2004, will undergo only a pier-side review of the total ship survivability trial and will not undergo a full ship shock test. The second ship (SSN 775), is expected to undergo both the total ship survivability trial and the full ship shock test in 2006. These tests, as well as sea trials, are likely to identify necessary design changes that may affect the components and materials already purchased as well as the cost and schedule of the program," GAO said.

The last shipbuilding program to get multiyear procurement contracts was the Arleigh Burke-class (DDG-51) destroyer. It was well into its acquisition cycle when authority for the multiyear procurement contract was approved, according to the study.

Navy officials, however, dispute GAO claims about design and cost estimates. Although officials conceded that several factors could affect savings, they did not agree that the Navy gives priority to other programs over the submarine. According to a Navy official, the Virginia-class submarine is "given priority by the Navy when allocating planned resources."

"GAO's view fundamentally misunderstands the Virginia class program and Navy shipbuilding" a Navy official said.

The Defense Department has accepted the Navy's cost estimates. But GAO says it does not believe the Navy's numbers are reliable.

Navy officials also believe that the ship's design is stable "based on completion of 99.8 percent of the drawings and low engineering changes," the report said.

Navy officials said, in response to GAO claims, that improved design and modeling technologies have diminished the risk of design changes.

But GAO said it's reasonable to expect that changes to the design will be necessary as a result of launching and testing of the first submarines.

"Design changes could erode expected savings," GAO warned.