Arsenal Ship Lessons Learned Report

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4.0 SHIP COSTS

4.1 Background

4.1.1 Philosophy: PAE

From its initial conception, the Arsenal Ship Program has steadfastly applied Price As Established (PAE) as a major component of its acquisition strategy. Price here means industry cost to manufacture and a reasonable profit (or return of investment to the company). A price goal was established early in the program. All designs were monitored by the contractor teams to ensure an affordable item at a price including all non-recurring and recurring costs to manufacture and a reasonable return on corporate investments or in other words, profit. All other aspects of the government desired capabilities were tradable against the price goal. This is different from Cost As an Independent Variable (CAIV). Cost as independent variable (CAIV) assumes two things; first, the government is monitoring and controlling the trade decisions to ensure affordability, and second, cost is only one of several factors to be traded. Requirements creep is most certain. CAIV in present government literature means a government program manager yardstick to consider trades against requirements.

After several months, all competitive teams were to fix their own price against their design or PAE. During later phases more trades could result. The contractor team should have responsibility for all trade decisions and be encouraged to use the trade space within the government's desired capabilities to ensure an acceptable and capable product that meets PAE. PAE focused the design trades on mission essential performance, without requiring the use of legacy systems as GFE (Government Furnished Equipment). This resulted in designs that were engineered at a total system level, highly integrated, commercially-based, and low cost, while at the same time introducing new systems with some attendant risk. Industry Teams were prepared to meet the goal of $450M for the average production ship cost, about 1/3 less than early Navy estimates for the production ship. Risk reduction programs were key to achieving the PAE goals and worked effectively. Under the Arsenal Ship acquisition strategy, substantial elements of the risk were transferred from Government responsibility to Industry. In short, competing teams concluded "zero risk is unaffordable."

PAE has been applied across all phases of the life cycle. The Phase V Unit Sailaway Price (USP) goal of $450M and the Phase III budget of $389M were established before the start of Phase I. Goals for annual operating and support cost ($13.7M per ship) and total program life cycle cost ($5.7B) were established early in Phase II. The competing Industry Teams were given full flexibility in designing the ships, in controlling the business environment and production process, and specifying the operating and support concept within the Concept of Operations (CONOPS) and Ships Capabilities Document (SCD).

4.1.2 Government Cost Team Tasks

The ASJPO cost team openly interacted with the three competing Industry Teams, providing feedback and encouragement, during Phase II. Government tasks included:

  • Establish an "aggressive but realistic" goal for the O&S Phase; integrate goals for all program phases into an overall life cycle goal. The cost goal for the development phase (Phase III) and the USP goal for Phase V were established at program initiation.
  • Analyze deliverable products and Phase II cost proposals and provide evaluation and recommendations to the Source Selection Evaluation Board (SSEB).
  • Develop a consistent but flexible structure for collecting, assessing, and comparing Industry Team cost proposals.
  • Provide forthright, but non-directive, feedback to the Industry Teams regarding their cost estimating assumptions, cost modeling approaches, and supporting rationale.
  • Through close interaction with industry, develop an understanding of the impact of commercial practices, manufacturing and design process improvement, simplified acquisition practices, and alternative approaches to life cycle support on all aspects of life cycle cost.
  • Assess the realism of the Teams' cost proposals in view of the following factors:
    • Experience with performance on current and past programs
    • Commercial practices to the extent incorporated in the Teams' designs
    • Acquisition Process streamlining (Sec. 845, etc.)
    • Application of state of the art systems and technology
    • Improved manufacturing and management practices where credibly supported
    • Relevant attributes of the ship concepts
4.1.3 Industry Cost Teams

The three Industry cost teams played a major role in the implementation of PAE in their design processes. Each of the three teams had its own individual organization and approach. A number of common characteristics became evident over the course of Phase II. A representative generic process, followed to some degree by all of the teams, included the following tasks:

  • Implement PAE as part of the team's system engineering process.
    • Flow down top-level PAE goals to subsystem IPT's.
    • Actively participate in subsystem IPT's to provide real-time cost sensitivity.
    • Define and perform cost trade studies in support of system configuration decisions.
    • Act as the "cost police" to ensure continuous emphasis on cost in the design process.
    • Flow up and integrate subsystem cost estimates into overall program cost.
  • Ensure life cycle considerations were prominently addressed in the system design.
    • Participate in the development of life cycle system support concepts.
    • Perform RMA and maintenance cost assessments. Motivate designers to address maintainability in the design process.
    • Perform manning and training assessments to ensure the consistency and feasibility of the manning and support concepts.
  • Improve corporate methods and tools for collecting, managing, and promulgating cost information across the program team.
  • Provide realistic assessments of program cost and feasibility to corporate management.
  • Interact with unprecedented openness with program office representatives, including cost engineers, during the development of a major acquisition proposal.
    • Understand customer concerns re cost visibility and realism.
    • Provide necessary backup information and data to make the case for credibility of cost estimates based on commercial practices, new processes, and non-traditional business arrangements.
In summary, the program's approach to PAE and ship cost required an unprecedented degree of cooperation between a Government program office and each of three Industry Teams in a competitive situation. Good will, highly professional attitudes and behavior, and commitment to this new way of doing business by everyone involved were required to make it work.

4.2 Lessons Learned

4.2.1 PAE Works. In a competitive environment, industry will strive to meet aggressive PAE goals.

4.2.2 Non-traditional acquisition processes offer opportunities for substantial savings. Expectation of 30-50% (or more) savings vs. traditional process can be supported if industry is given freedom from standard acquisition constraints. Competition is a very powerful motivator and can be used to ensure industry uses this freedom.

4.2.3 Close interaction between Government and Industry Cost Teams is beneficial to both sides. Government representatives must be very careful to protect proprietary information of each competitor. Industry personnel must learn to "let down their guard" and be reasonably trusting and open. Government gets unprecedented understanding of Industry's proposal and process and Industry better understands the customer's needs and produces better proposals.

4.2.4 Early emphasis on reducing total ownership cost (TOC) is required to produce meaningful results. Early design choices and equipment selection have a significant effect on procurement and maintenance costs. Making O&S costs an issue encourages the Industry Teams to trade-off for more reliable equipment and to design out some traditional maintenance. Significant maintenance reductions were predicted from re-engineering legacy equipment and performing manufacturer recommended maintenance.

4.2.5 The integrated product team (IPT) concept, that combined cost and production engineers with designers in the early stages of the program, led to predicted ownership costs considerably below historical levels. Significant process changes in both management and production were required to justify the use of non-traditional cost estimating relationship's (CER's) but when validated, predicted significant savings. Industry cost engineers were the crucial players ensuring that IPT's focused on cost from beginning to end of the process. Production engineers' early involvement was key in the evolution of designs for which a supportable case for lower than historical production costs could be made.

4.2.6 Use of cost models based on conventional weight-based methods for unconventional designs can lead to erroneous results. In several instances Industry Teams utilized weight-based cost estimating to estimate such areas as labor hours, paint, lagging, etc. A closer look revealed that weight-based cost estimating gave answers that were not accurate, and over inflated.

4.2.7 Product design details can be adjusted to improve producibility and substantially reduce cost. Designs evolved to utilize repeatable modules, to increase plate thickness and reduce numbers of parts, to employ COTS components where possible, and to tradeoff machinery configurations in an effort to minimize cost. Historically- based CER's can not easily capture these cost impacts; a more detailed and process sensitive methodology is required.

4.2.8 Industry offered credible life cycle support under a Full Service Contractor (FSC) approach. The FSC approach promises significant cost savings over traditional Navy life cycle support.

4.2.9 The key to PAE is to treat cost as another design requirement for the engineer and provide a detail budget breakdown at the outset. Although all of the Teams practiced some form of PAE, in the end those that had an early budget in Phase I had a better handle on costs and had more time for total ship trade studies.

4.2.10 There is a distinct advantage to use design tools that include real-time cost estimating. Industry Teams found it important that cost estimates associated with system design be available in real-time to accommodate faster design cycle times. Use of design tools that did not provide real-time cost estimates necessitated a separate effort to determine cost impacts.

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Last revision: 10 March 1998