Navy: Carrier cost overruns may hit $1.1 billion

By Tony Capaccio

Bloomberg News

The Navy has estimated a worst-case cost overrun of as much as $1.1 billion for the aircraft carrier Gerald R. Ford, the service's most expensive warship.

The carrier is being built in Newport News by Huntington Ingalls Industries under a cost-plus, incentive-fee contract in which the Navy pays for most of the overruns. Even so, the service's efforts to control expenses may put the company's $579.2 million profit at risk, according to the Navy.

A review of the carrier's rising costs began in August after the Navy's program manager indicated that the "most likely" overrun had risen to $884.7 million, or about 17 percent over the contract's target price of $5.16 billion. That's up from a $650 million overrun estimated in April, according to internal Navy figures made available to Bloomberg News. The worst-case assessment would be about 21 percent over the target.

"Regular reviews of the cost performance indicated cost increases were occurring," Capt. Cate Mueller, a Navy spokeswoman, said in a statement.

Some rising costs are tied to construction inefficiencies, the Navy said. Sean Stackley, the Navy's assistant secretary for acquisition, directed the review "to determine specific causes and what recovery actions could be put in place," Mueller said.

Even as the Navy conducts its internal review, it is trying to assure lawmakers and Pentagon officials that costs of major vessel programs are being controlled. The Pentagon is evaluating strategy, retirement health benefits, weapons programs and military service budgets to find as much as $488 billion in reductions through 2021. The service has already offered to delay by two years the construction of the second Ford-class vessel, the CVN-79 John F. Kennedy.

Stackley's assessment is focusing on "every aspect of the ship's construction including the risks" of delays and cost growth to both contractor- and government-furnished equipment, Mueller said. Among the largest government-furnished equipment is the carrier's nuclear reactor.

The review includes officials from Stackley's office, as well as the Naval Sea Systems Command, the chief of naval operations and the Navy's supervisor of shipbuilding, Mueller said.

Late delivery of Huntington-furnished material has been a key factor in late assembly and inefficient construction, the Navy said. Still, the carrier remains on schedule for its planned September 2015 delivery, the service said.

Huntington Ingalls' goal is to reduce the program's costs, Chief Executive Michael Petters said.

"If there was something else I thought we needed to do, we'd be doing it," Petters said. "If there is something else somebody else thinks we ought to be doing, we'll listen and, if it makes sense, we'll do it."

Mueller said some of Huntington's cost-control efforts are producing "favorable results." For example, the Newport News-based shipbuilder has established specific labor-cost targets for its key manufacturing and construction jobs. Mueller did not say whether those moves have reduced costs yet.

The Navy also has agreed to consider changes to specifications and modify them "where appropriate to lower cost and schedule risk," Mueller said.

Huntington has designated a senior vice president and ship construction superintendent with daily oversight responsibility.

The Navy plans to report a new contract completion cost in its next annual report to Congress.

Mueller declined to discuss the current overrun estimates. The Navy earlier disclosed that the carrier faced the $650 million overrun to complete the contract, $562 million of which the Navy would absorb, with the remaining $88 million absorbed by Huntington.

The completed initial vessel, the first of three in the $40.2 billion program, is projected to cost at least $11.5 billion.

The $11.5 billion comprises $2.9 billion in detailed design and $8.6 billion for construction and government-furnished equipment, such as the nuclear reactor. An additional $3.7 billion is for research that applies to all three vessels in the class, the Navy said.

The Congressional Budget Office wrote in a June report that cost growth typically occurs when a ship is more than half finished. The Ford design contract is about 42 percent complete.

The Navy's projected cost has risen 10 percent between the fiscal 2008 and 2012 budgets and "further increases appear likely," CBO analyst Eric Labs wrote.

The office estimates that the final price tag will be about $12.9 billion if the increases in the aircraft carrier's cost follow historical patterns.

Any discussion of cost growth should reflect the Gerald Ford's status as a first-of-a-kind ship under development, Petters said.

"A lead ship comes with a whole lot of churn - things that don't go the way it should," he said. "It's like building a prototype."