Why Has the Cost of Navy Ships Risen?

Why Has the Cost of Navy Ships Risen?

Introduction

Over the past four decades the cost of navy ships has exceed the rate of inflation. Although navy increases the budget from $10 billion to $12 billion, they will achieve a fleet of 260 ships by the year 2035 rather than the 290 it now has. In this document the reason and the sources of the increase are investigated. The problem is also considered from the industryЃfs point of view. Some options for the Navy to reduce ship costs are found.

In this document cost increase of four types of ships- nuclear attack submarines, guided missile destroyers, amphibious ships and nuclear aircraft carriers is noted. Generally we consider these four ships as a whole.

Cost escalation of naval ships

Ship class Cost in 1967 million $ Cost in 2005 million $ Cost Increase

%

Nuclear Attack Submarines $484 $2,427 401

Guided Missile Destroyers $515 $1,148 123

Amphibious Ships $229 $1,125 391

Nuclear Aircraft Carriers $3,036 $6,065 100

To organize analysis we divide sources of cost escalation factors into two groups.(economy driven and customer driven factors)

Economy driven factors: Largely outside of the control of government such as worker wages and indirect labor cost, and material equipment cost.

Customer driven factors are factors that the customer directly influences. Customer driven factors include elements the government wants on a ship.

The most important problem from shipbuildersЃf perspective is their main customer governmentЃfs fluctuating demands.

The growth of ship costs

Since 1950 Naval ships costs have escalated at rate between 7-11 percent. However inflation over this period ranged from 4-5 percent. To observe the inflation we can look at CPI (consumer price index) CPI is the best known measure of changes in consumer prices. This index measures price changes to a sample of typical consumer goods.

Annual growth rate of some CPI components

CPI Component Annual Growth Rate (%)

Private transportation 2.4

Food and beverage 4.2

Gasoline 4.9

Medical Care 6.6

College Tuition 8.0

Cost escalation rates for Force ships

Ship Type Annual Growth Rate

Amphibious ships 10.8

Surface combatants 10.7

Attach submarines 9.8

Nuclear Aircraft carriers 7.4

Cost escalation rate can be measured by (cost2/cost1)-1

Generally we examine the annual growth rate = (year2-year1)Ѓгcost2/cost1-1

We divide sources of cost escalation factors into two groups.

Economy driven factors: Largely outside of the control of government. Economy driven factors may include worker wages and benefit costs, labor productivity, indirect labor cost, and material equipment cost. These factors affect all shipbuilding programs uniformly.

Labor constitutes between 32 and 51 percent of the construction costs for the ships we analyzed. Equipment cost range from 35 to 57 percent of construction costs for the ships we analyzed, material cost range from 11 to 17 percent. Labor costs have increased at a rate greater than inflation but material and equipment costs have increased less than inflation.

Customer driven factors: Factors include elements the government wants on a ship. These factors are related to how a ship is built and acquired, features of that ship. Such as size, speed, power generation, stealth, survivability, habitability, and mission and armament systems. In general, a larger and more complex ship will cost more than a smaller and simpler one. And a larger and more complex ship costs more.

According to me it is a very interesting point that reducing crew size can increase cost. If you reduce the number of crew, you have to increase automation which increases procurement costs.

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