Estimation of Ship Construction Costs

by

Aristides Miroyannis

B.S., Naval Architecture and Marine Engineering (2005)

Webb Institute, NY

Submitted to the Department of Mechanical Engineering in

Partial Fulfillment of the Requirements for the Degree of

Master of Science in Mechanical Engineering at the

MA SS OCH US ETTSNsTrr TE
Massachusetts Institute of Technology

June 2006

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Ar Isides Miroyannis
May 12, 2006
I

Certified by .......... . . . . . . . ...---

Henry S. Marcus
Profes or of Marine Systems
Thesis Supervisor

Accepted by ........
Professor Lallit Anand
Chairman
Department Committee on Graduate Students
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OUTLINE

Outline................................................................................................................................. 2
List of Figures..................................................................................................................... 3
A cknow ledgem ents:....................................................................................................... 5
Abstract ............................................................................................................................... 6
Introduction......................................................................................................................... 7
Chapter 1 - Overview of U S N avy:..................................................................................... 9
Reasons for Cost Overruns: .......................................................................................... 11
Chapter 2 - Cost Estimation:........................................................................................... 20
Chapter 3 - Design To Build Improvements/ build strategy:......................................... 34
Product W ork Breakdown Structure........................................................................... 34
Modular Construction:............................................................................................... 36
Learning Curves:........................................................................................................... 41
Benefits of Reduced Construction Time:.................................................................. 46
M ulti- Purpose V essels ............................................................................................. 51
Cost Estim ating Relationships:.................................................................................. 53
CHAPTER 4 - NAVSEA 017 Ship Cost Estimating System:................... 55
NAV SEA 's use of CER 's ......................................................................................... 64
Limitations of W eight Based System : ...................................................................... 68
CH APTER 5 - PODA C: ................................................................................................ 73
Use of Empirical CERs in the PODA C M odel......................................................... 76
Improving Empirical CERs: ...................................................................................... 81
Sam ple Representations of Empirical CERs: ........................................................... 83
Interim Products (IP).....................................................................................................86
Design Trade off Capabilities.................................................................................... 89
Risk Analysis................................................................................................................93
Life Cycle Costs............................................................................................................95
Problems......................................................................................................................97
CHA PTER 6 - M IT M ath Model.................................................................................. 98
CHA PTER 7 - Ship Cost Reduction Suggestions: ......................................................... 100

2
Conclusion ...................................................................................................................... 103
B ibliography ................................................................................................................... 105

LIST OF FIGURES

Figure 1. Growth in Program Budget (4)...................................................................... 11

Figure 2. Shipyard Cost and Productivity (24)............................................................. 12
Figure 3. Typical Weapons Systems Production Times (4) .......................................... 13
Figure 4. Components of US Navy Cost Growth (4).................................................... 15
Figure 5. Reasons for Shipyard Labor Hours Growth (4) ............................................. 16
Figure 6. Growth in Material Costs (4)......................................................................... 18
Figure 7. Typical Project Timeline (1) .......................................................................... 20
Figure 8. Cost of Scope of Various Cost Estimations (1)............................................. 22
Figure 9. Cost of Design Change (1)............................................................................. 23
Figure 10. Comparison of Cost Estimates (25)............................................................. 27
Figure 12. Addition of Risk in CER's (1)....................................................................... 30
Figure 13. One Digit SWBS Breakdown (1)............................................................... 31
Figure 14. DDG-51 Design Issues (26) ........................................................................ 33
Figure 15. Efficiency of Group Technology (21)........................................................ 35
Figure 16. Modular and Zonal Construction (26)......................................................... 36
Figure 17. Converting to Re-Use Modules (25) .......................................................... 37
Figure 18. Using Modular Architecture in the Navy (26) ............................................. 39
Figure 19. Modular Construction of UK Destroyer (12)............................................... 40
Figure 20. Predicted Cost Savings (26) ........................................................................ 40
Figure 21. Effect of Learning on Cost (14).................................................................... 42
Figure 22. Typical Learning Rates (20)......................................................................... 43
Figure 23. Effect of Break in Production (1)............................................................... 45
Figure 24. Construction using PWBS (21).................................................................... 50
Figure 25. A Single or Multi Purpose Navy (19)........................................................... 53
Figure 26. Asset Model Output (20)............................................................................. 59

3
TABLE 1. NAVSEA SHIP COST ESTIMATE CLASSIFICATION SYSTEM.......... 60
Figure 27. Total Ship Cost Categories (18)................................................................... 63
Figure 28. Index of Estimated Shipbuilding Costs (16) ............................................... 71
Figure 29. System vs. Product WBS (16)......................................................................... 74
Figure 30. PODAC PWBS Sections (PODAC)............................................................. 75
Figure 31. CER Change with PWBS Hierarchy (14) ................................................... 76
Table 2. Sample Ship Type Factors for Empirical CERs ............................................ 78
Table 3. Empirical Preliminary CER Derivation........................................................... 79
Table 4. Empirical Contract Level CER Examples ...................................................... 80
Figure 32. Complexity Factor by Work Stage (15) ...................................................... 85
Figure 33. Complexity Factor by Work Area (23) ........................................................ 86
Figure 34. Examples of Work Packages (14)............................................................... 87
Figure 35. Example of Re-Useable Work Package (16)............................................... 88
Figure 36. Possible Outfitting Cost Savings (15) .......................................................... 89
Figure 37. Material Options with PODAC (16)............................................................. 90
Figure 38. Material Trade-off Analysis (16).................................................................. 91
Figure 39. Construction Cost Material Trade-off (16).................................................. 92
Figure 40. Cumulative Cost Distribution (14)............................................................... 94
Figure 41. Probability Cost does not Exceed Estimate (14).......................................... 95

4
ACKNOWLEDGEMENTS:

I would like to express my sincere appreciation and many

thanks to my thesis advisor, Professor Henry Marcus. His

continued help, guidance, and trust throughout my tenure at

MIT from acceptance to graduation will stay with me

forever.

I would also like to thank Laurent Deschamps who ever so

patiently and painstakingly helped me understand the

detailed inner workings of the PODAC system and the

benefits that it presents to ship cost estimating. It is

also necessary to mention John Hootman and his other

associates from NAVSEA who so readily gave their time and

effort to explain the ship procurement process of the Navy.

Lastly I would like to thank Professor Howard Bunch from

the University of Michigan for his information about PODAC

and Professor Patrick Keenan from MIT for his help with the

MIT Math Model.

To Lindsey...

5
ABSTRACT

Since the end of the Cold War naval procurement for the US
Navy has seen a dramatic decrease. This decrease in defense
spending has placed existing programs under more scrutiny
than previous years. As a result there is less tolerance on
the part of taxpayers and Congress for procurement cost
growth. This Thesis attempts to examine the current method
that the Navy conducts ship cost estimates and suggests
changes in order to improve the confidence level and
accuracy of the forecasts. An examination of how industry
is conducting cost estimates was used as a comparison to
the current Navy practices. Finally using only a weight
based approach to ship cost estimating is insufficient. It
is necessary to develop and use a model that incorporates
other cost driving factors in order to develop estimates of
sufficient quality at the preliminary design level.

6
INTRODUCTION

Since the end of the Cold War naval procurement for the US

Navy has seen a dramatic decrease. This decrease in defense

spending has placed existing programs under more scrutiny

than previous years. As a result there is less tolerance on

the part of taxpayers and Congress for procurement cost

growth.

Government and especially the Navy have been known to take

conservative steps when determining whether they need a re-

evaluation of their practices. Ship cost estimating has

evolved in industry to include new production processes and

developments since the 80's. The Navy has not. As a result

the Navy is estimating the cost of ships using processes

that are part of the past during an era where vessels were

being built at a much higher rate with less need for

transparency and cost cutting.

An ability to perform effective, detailed, and reliable

ship cost estimating could finally create a change in the

way the Navy is able to negotiate its contracts. A greater

understanding of the factors that drive costs can hopefully

lead to a decrease in cost overruns for two reasons: First

7
designers will be in a better position to quickly perform

trade off studies and therefore develop a better

understanding of how their designs affect cost. Second,

with an ability to perform reliable cost estimates at the

preliminary level, the Navy will be able to negotiate more

favorable contract terms that could decrease costs.

In the past the Navy has used a weight based model to

estimate costs. It has been shown that this is not a good

and reliable method for estimating costs since weight is

not the only factor driving costs. Thus this thesis

attempts to examine how the Navy conducts its estimates and

the limitations of the current method. Furthermore an

examination of current industry ship cost estimating

practices has been included suggesting ways that the Navy

could improve its current models and practices. The MIT

ship cost estimating model has been examined in order to

determine its capabilities in estimating ship construction

and life cycle costs. Finally some suggestions for

decreasing ship construction costs have been included.

8
CHAPTER 1 - OVERVIEW OF US NAVY:

The US Navy, which is currently comprised of 283 vessels,

is the most technologically advanced Navy in the world. The

US government assigns a sizable amount of its budget each

year to maintain this superiority. The president's budget

for the US Navy for the year 2006 amounted to $133 billion.

The projected increase for the budget in 2007 will be $4.4

billion. In 2005, the Navy devoted $7.6 billion to new ship

construction projects of which 96% was allocated between

four classes: the Arleigh Burke Class destroyer, the Nimitz

Class aircraft carrier, the San Antonio Class amphibious

transport dock ship, and the Virginia Class submarine.

Procurement cost growth in naval construction programs has

been a longstanding problem that has plagued Navy officials

and Members of Congress. Admiral Vernon Clark, Chief of

Naval Operations (CNO), has expressed strong concern, if

not outright frustration about the matter (7). Combined

with the rising procurement costs, the Navy is also facing

reduced budgetary constraints on ship procurement funding.

The 2006 defense authorization bill (H.R. 1815) as reported

by the House Armed Services Committee (H.Rept. 109-89)

contains provisions that establish procurement cost caps on

9
several Navy shipbuilding programs, direct the Navy to

begin developing a lower cost destroyer, a lower cost

nuclear-powered submarine, and create a new program for US

shipyards aimed in part at improving the efficiency and

cost effectiveness of the construction of Navy ships (7).

In order to fund cost overruns in its ship construction

programs, the Navy has had to resort to "prior year

completion" funding. This is essentially additional

appropriations for vessels already under contract. Congress

appropriated funds to cover a $2.1 billion increase in ship

budget requirements for vessels that are currently more

than 30% complete. The total appropriations are expected to

surpass $3 billion by the time all vessels are complete

since the cost estimates assume that shipyards will

maintain current efficiencies and meet all their

milestones. This would correspond to a cost increase range

of 12% to 17% of the initial contract price (Figure 1).

Over the past 5 years, about 10% of the Navy's ship

construction budget of $52 billion has paid for cost growth

for ships funded in prior years. The implication of these

cost overruns is that it reduces the buying power of the

budget for current construction and reduces the rate of

modernization of the Navy.

10
 Table 3: Growth in Program Budgets for Case Study Ships
Dollars in millions
Initial and fiscal year 2005 President's
budget Difference in budgets
Difference due to Difference due to
Navy-furnished construction
Case study ship Initial' FY2005 Total difference equipment costs
DDG 91 $917 $997 S80 $43 $37
DDG 92 925 979 55 (7) 62
CVN 76 4.476 4,600 124 (128:' 252
CVN 77 4.975 5,024 49 100 (51:
LPD 17 954 1,758 804 21 734
LPD 18 762 1,011 249 3 246
SSN 774 3.260 3,682 422 95 327
SSN 775 2.192 2,504 312 18 294
Total 18.461 20.556 2.095 145 1.951
S,:uron: New O ,prfrafildcsi.
Gdai,

'Estimated cost from the President's tudget submission for year of ship authorization.
'Includes all prior year requests through fiscal year 2005.
'Part of increased cost Is due to changes in the scop of tie contract.
'Negative reflects savings resulting from th. use of a more economical warfare system than was
initially budgeted on the DDG 92.
'Negatlve reflects savings garnered from Navy-furnished reactor plant equipment.

'Negative reflects shifting of funds f rom the construction contract to Navy-fumished equipnent.

Figure 1. Growth in Program Budget (4)

Reasons for Cost Overruns:

New production technologies and organizational improvements

in shipyards have resulted in a continuous reduction in

manhours/tonne over time. If time spent in dock is

decreasing, then why is cost continuing to rise (Figure 2)?

11
 MfianU per Thms in
tXOnn suma doddrhh
A n aswre reee~e

WI-nk i ovd U69anig2

tea m i tes tw te tenies te w s e

Sa"flaC- -yar

Figure 2. Shipyard Cost and Productivity (24)

1. Types of Shipbuilding Contracts

The nature of the shipping business in general lends itself

to situations that place an excessive difficulty to

effective cost estimation even to the most experienced ship

cost estimator. Ship contracting is still at a time where

it takes 9-14 years for a new class of surface combatants

to be developed from concept design to delivery, when at

the same time new technologies have a 3-5 year life cycle.

It is therefore imperative to design vessels with a focus

on technological convertibility. Figure 3 shows typical

production times for various weapon systems.

12
 Figure 1: Typical Production Tlmes for Various Weapon Sysrna

AlrcnMt ow vIm

4- -hun- GUbrneskM

-w, Ta*

0 I 2 1 4 5

*
Vamminprocaiedn

Figure 3. Typical Weapons Systems Production Times (4)

In most cases ship construction contracts are being agreed

upon without the completion of detailed design. The reason

for this is that detailed designs with a detailed cost

estimate are very expensive and excessively time consuming.

Shipyard work in terms of work specification is difficult

to formalize and predict directly from intricate detailed

ship designs. This presents a very large risk to both the

buyer who might end up overpaying for a vessel and the

seller who might have to incur exorbitant costs due to the

lack of clear definition of the work at hand.

Two types of contracts have emerged that try to deal with

the difficulty that naval acquisitions present to all

parties involved in the transaction. The first is fixed

13
price contracts. In this case the price is pre-arranged and

agreed upon by both parties. Adjustments can be made in

some cases but there is a definite ceiling price that if

the shipyard surpasses, it agrees to pay all additional

costs. The second is method is cost reimbursement

contracts. The contract forces the government to pay all

additional costs of completing a vessel if the shipyard can

prove that the incurred costs were unavoidable. Generally

cost reimbursement contracts are used for the lead ship and

the fixed price contracts are used for the following

vessels in the class due to the large amount of uncertainty

present in a lead ship acquisition.

The contracts themselves however are not so clearly

defined. They both have provisions that attempt to control

cost and profit. These are called incentive fees. The

shipbuilder and the Navy share the savings if the final

cost is less than the estimated target, and they share the

cost when the price exceeds the target. This process

attempts to provide incentives for both parties to do their

jobs efficiently. Either way, both contracts place an

absolute emphasis on the need for a reliable cost estimate.

Due to the absence of an effective cost estimating

methodology, the contracts that are being used inherently

14
create ways to force the buyer (in this case the Navy) to

incur the major cost of overruns.

2. Labor and Materials Cost

Figure 4 shows the breakdown of the components of cost

growth. It is apparently clear that labor and material

surcharges which account for 78% of cost overruns are the

leading cost burden that the US Navy has to manage.

Figure 2: Components of Cost Growth

7< 5%
17% Overhead rate and labor rate increases

40%
38 . -e Material increases

Labor hour increases

Percentage of cveral lot grwth due to shipbuilde construction costs

Percentage of ontraiccet r th due bo cost of Navy-turnished equipment

Otu ct pcriudor ana~ dflS a; '.. 'anotonto.
Note: Tutal growth in constructic -costs is $3.2 billion. based on shipbuilders' esimte at completion.

Figure 4. Components of US Navy Cost Growth (4)

For the vessels that were examined by GAO, the total cost

growth due to increased labor hours totaled more than $1.3

billion. The main reasons for the cost growth can be seen

in Figure 5. The repeated issue causing the delays was

determined to be the lack of maturity of the design which

directly led to rework. Examples of such issues include the

LPD 17 where construction began as the design of the vessel

15
continued to evolve. The vessel has faced the largest cost

increases of all the vessels due to this fact. The DDG 91

and 92 suffered from severe reworking and delays due to the

installation of the remote minehunting system which was a

technology not fully developed at the time.

Table 6: Reasons Given by Shipbuilder for Labor Hours Cost Growth

Case study ship Reasons for increase
DD& 91 . Inesperienced laborers
- Design upgrades that reed Iin reowcrk
DDG 92 . Intrcduclion of a new construction facelity, setfng workers
back on the learning curve
. Design upgrades that read tin reswk and -. *karunds
* Strike increased number of hours needed to constfuct ship
CV N 76 . Less-skilled workers due to demands ltr le;r on other
prcqraim at shipyard
. Extensive use ot cverfi-m
. Design changes resulting in rework
CVN 77 . Late material delivery results in delays ard workarourds
. Design chamnge resulting n rework
LPD 1 . Inexpertenced subt.ontracted lab:.r
. Design difficulties led to doing wck out of sequence and
rework
. &hedule delays
* Bused workers to meet latr shortages
LPD 18 . Increases in LPD 1 translated into more hours for LPD 1

SSN 774 . Late matenal delrvery

. First in class design issues
SSN 775 . Quality prblems and design changes
. Incluskn of rcn-recurring labor hours
sau Empiu~r ianasoa0nu

Figure 5. Reasons for Shipyard Labor Hours Growth (4)

Overhead costs include a wide variety of costs incurred in

the operation of the shipyard which are not directly

chargeable to particular ship contracts. The overwhelming

majority of overhead costs are time related. This leads to

an understanding that by reducing construction time there

are significant benefits, even if labor manhours don't

decrease. The increased cost growth relating to overhead

costs in this case are attributed to the decreased workload

16
that US shipyards are facing which would absorb some of the

operating costs.

Navy furnished equipment refers to the costs for

technologies and equipment that the Navy purchases and has

installed. Such equipment typically accounts for about 30%

of the total budget for recent vessels. The growth of this

significant cost sector has remained relatively low at 5%

(Figure 4) . The reasons for this is that the Navy benefits

from economies of scale due to the affordability through

commonality approach that it is beginning to use when

procuring equipment in bulk. The Navy is however still far

from creating an organized trans-vessel class commonality

approach to its equipment acquisitions.

3. Underbudgeting and Price Increases

Underbudgeting and price increases have dramatically

increased the levels of material cost growth. For the San

Antonio, Nimitz, and Virginia class vessels, material cost

was the most significant component of cost growth (Figure

6) . DDG 91 had $22 million in material cost savings due to

consolidation of Ingalls Shipyard with Avondale Shipyard

under Northrop Grumman. Therefore materials were purchased

17
for four ships at one time leading to a price decrease due

to economies of scale.

Tab Is7: Growth in Material Costs

Dollers in millions
Ar"Oystased.:n data availelIe J ULy 2i4
Total dollars due to Material cost as a percent of
Case study ship increased material costs Percent increase total contract growth
DDG 91 (S22) (3% (40,
30 20 23
DDG 92
294 43 46
CVN 76
34 13 31
cVN 77
0 iCG 47
LPE 17
93 39 24
LPC 18
141 43 49
SSN 774
209 56 49
SSN 775
Total $1.210 38%
UNSu sM : G1c ympe5
Note W4 cicnpar-d WHOl target i6I b3 the uIrEnt - -te at -xipietion ic .dt-4fline total c>:inat
.>>st grcK*Ih. 0:t jrvJP:th wj tb due to Navy chanrge6 I rlract so:p. nShOullde per ntcnCA O . -.
unanicipabed oevnis.

Figure 6. Growth in Material Costs (4)

The reasons for these cost increases rely heavily on the

quality of the budget of the materials and the way the

contracts are formulated. The first four Virginia class

submarines' materials cost budget was $132 million lower

than actual price quotes that were received by vendors and

subcontractors. For the Nimitz class aircraft carriers, the

materials cost budget was based on an incomplete materials

list. Why? The reason again lies in the types of contract

that are negotiated between the shipyards and the Navy.

Since shipyards know that they will be reimbursed for

change orders in contracts or price increases for high

value specialized items, they underbudget their cost

18
forecasts, win the contract to build and then simply pass

on the higher cost back to the Navy.

Price increases of materials is another significant

component of material cost growth. Factors that affect

price increase are more than just national inflation

levels. Inflation itself is an average number of a range of

products that do not directly display the price increases

that are faced by the naval construction industry. Changes

in the supplier base since the end of the cold war due to

the subsequent decreasing rate of ship production has

resulted in industry consolidation. A lower number of

suppliers has resulted in a lack of competition between

subcontractors and a consequent increase in price. Over 75%

of the ship material contracts for the Virginia class

submarines have been from single source vendors. While on

the LPD 17, the increase in cost of the subcontractors

accounted for 70% of the increase in material costs (4).

19
 CHAPTER 2 - COST ESTIMATION:

The cost of a vessel is the sum of all the labor and

materials costs involved in the construction including any

overhead costs. The final price of a vessel will include

allowances for capital cost financing, inflation, and

shipyard profit. Due to the particular nature of the

shipbuilding industry and the high degree of variation

between particular projects, the necessity of reasonably

correct cost estimations is imperative. The complexity and

cost of detailed ship design and the length of time between

preliminary design and completion are the leading factors

that determine the flexibility of contract between the Navy

and the shipyard. This inherent flexibility and lack of

definition is the leading cause for the increasing number

of design change orders and final price escalation costs.

Figure 7 shows a typical project timeline.

c:plete r-=tr aci

Cnt:jct P..ans

Io) 7Cam r je T lne (

I I, I n,t1

Figure 7. Typical Project Timeline (1)

20
Historically designers and shipyards have been able to

categorize costs by consistent work breakdown structure

such as hull structure, outfit, machinery, piping,

electrical. Hull Structure is priced on hull weight and

material type. More developed systems segregate different

sections of the hull and develop different costs according

to the production difficulty of the section. Major

equipment is directly priced from the vendor. Other outfit

systems are generally priced through parametric analysis

and extrapolated historical data for the construction and

installation of the system.

Cost estimates are required at all stages of design

development. The importance of a good cost estimate

particularly at the early levels of design can be crucial

when comparing different design proposals. It is very easy

to manipulate early cost estimating programs that use basic

parameters as a basis and criteria for determining cost.

The different types of cost estimates can be broken down

into three general groups relating to stage of design: 1)

Concept Design, 2) Preliminary Design, 3) Detailed Contract

Design. Figure 8 shows a comparative cost comparison as the

breadth and scope of each stage of cost estimation changes.

21
 BREADTH

/1 E

LEVEL
SSESSMENT H
<$IK
LEVELI
ASSESSMENT LEVEL 9I
< $1OK ASSESSMENT
<$IOOK

Figure 8. Cost of Scope of Various Cost Estimations (1)

A detailed explanation of each cost estimate according to

stage will be presented in the following section. Figure 9

shows how cost analysis in the early design stages is in

the enviable position of applying maximum effect for

minimum cost (relative to project cost). Possible cost

savings decrease dramatically as the project is defined

more clearly. This relationship is particularly applicable

with the introduction of advanced technologies in ship

design. The greatest savings result from the introduction

of innovations at the early stages of development.

Incorporating new technologies at later stages when the

design is already committed to a certain technology will

result in increased labor costs and change orders.

22
 CUMULATIVE SYSTEM PROGRAM COST

COMMITMENT DECISIONS

COST-

POSSIBLE COSTa SAVINGS

Less Then, 5% Program 10-95% of total Prograrn

Figure 9. Cost of Design Change (1)

In the Concept Design stage, the purpose of the cost

estimate is to create a very rough order of magnitude (ROM)

cost estimate. At this stage basic ship type and parameters

are presented and the mission and operational requirements

are broadly defined. The cost estimate is used as a

feasibility check on the project. At this stage the cost

estimate is based on historically extrapolated data and

basic parametric analysis.

The Preliminary Design stage is a very crucial design

stage. At this phase, the methodology and validity of the

cost estimate is imperative since it is at this point where

the design will be evaluated against other options. It is

23
therefore important for the designer to understand how his

decisions will affect cost since major tradeoff studies are

performed and major decisions about the future of the

project will be made. This is a very powerful and exciting

time of the design process, but also one that requires

careful decisions and thorough understanding of the cost

implications of each design choice. The two necessary

components that must be addressed at this stage are: the

initial capital cost for the construction of the vessel,

and the net present value of the operating costs discounted

throughout the life of the vessel.

The cost estimating methodology used at this preliminary

stage depends on the type of project underway. If the

vessel designed is radically different from all past

designs using new technologies, new equipment, and

composite materials, then the difficulty of making a

realistic and reliable estimate will be compounded. This is

because of the four main types of cost estimating methods

that are available at this stage: 1) Analogy, 2)

Parametric, 3) Extrapolation, 4) Expert Opinion.

The Analogy type uses a direct comparison between two

similar systems. It is used in early stages of design and

24
is inherently historically based. Its inability to account

for new features and changes in productibility due to labor

learning rate are its major flaws.

Parametric estimates base their predictions on design

parameters such as ship size, weight, horsepower, etc. Such

analyses use a mathematical relationship between input

parameter and cost that is historically determined through

regression analysis (i.e. Cost = f*(weight)). The cost

estimator using this system must be knowledgeable enough to

know when an adjustment factor is needed, and to know what

the factor should be.

Extrapolation methods can only be used when there are

return costs available for similar systems used in prior

vessels (adjusting for inflation). The accuracy of the

system is a function of the length of the extrapolation and

the consistency of the factor being extrapolated. They

should only be used if the project has progressed to such a

level of definition. In the case of new technologies this

type of methodology is difficult to assume.

Expert opinion can prove to be very effective but it can

also be misleading. Personal involvement in projects

25
carries with it the agenda that each person wants to

follow. A person's occupation and position influences the

forecast. Low estimates are generated by persons whose

interests are served by low estimates. Examples could be

the vessel designers, shipyards, subcontractors, and

material vendors who want the vessel to be built.

Similarly, high estimates are generated by persons whose

interest is served by high estimates. In this case it could

be the government cost estimator who does not want to be

scrutinized by his superiors or some Congressional

Committee when it turns out the project requires additional

funds.

The value of an experienced cost estimator is that he has a

better understanding of which particular CER is applicable

to each situation. Since most CER's include empirically

derived factors, it is necessary to have them used by

someone who appreciates and understands their implications.

This is particularly important if the new design uses new

technologies which have not been used in the past.

Furthermore, expert opinion is very useful in providing a

rational crosscheck of the data that modern, complex,

general, computer generated equations produce. It is

therefore the appropriate combination of the value of

26
judgment provided by the expert used in conjunction with

estimating relationships that can result in better

forecasts. A summary of the effectiveness of various types

of cost estimates is shown in Figure 10.

ABILITY ABILITY
TO TO DATA WORK
TYPE OF COST REFLECT REFLECT BASE WITH
ESTIMATE PRECISION COST TIME PROD'TN DESIGN COST PODAC
CHANGES CHANGES
Parametric Fair Low Quick Requires Requires Some New
Factor Factor Work
I Req'd
Engineering High Very Slow Yes Yes Large Yes
Large II
Analog (Comparison) Fair/Good Medium Modente Requires Yes Some New
Factor Wok
Req'd
Extrapolation Fair Low Quick Requires Requires Some New
Factor Factor Wouk
Red
Expert Opinion Fair-Low Low Modeate Possibly Possibly Low Possible

Performance Based Unknown Low Quick Requires Possibly Some Unknown

__________ ______ ___ I__ Factor
Re-use/Module High Low- Quick- Yes Yes Irp Yes
Medium Moderate . _Startup

Figure 10. Comparison of Cost Estimates (25)

The final design stage before the project moves into

construction is the Detailed Contract Design stage. In this

phase the engineering methodology is used to determine

costs. It is a timely, expensive and tedious process based

on a detailed "bottom up" accounting of the required work

and materials used to construct the ship. It is however,

the most accurate method available. The costing information

at this level of design provides the fundamental basis for

27
the contract price rather than to create a design trade off

analysis. The final technique that can be implemented is

the introduction of re-use modules. This is a method that

requires a strong detailed design structure that can

formulate and categorize the vessel into modules and re-use

elements. There are indications however that the Navy is

moving towards a modularized production oriented approach

to design. This will be discussed further in the following

sections.

The difficulty of assigning an assumed final cost to a

product 3 to 7 years before its materialization is logical;

however, it is necessary to understand the factors that

could result in cost changes in order to develop better

methods of analysis to deal with them:

1. Technology Change

" New processes

" New materials

2. Social, Economic, and Political Situation

* Changing workforce

* Economic downturn and unrest

3. Shipyard Backlog

0 Heavy backlog causes confusion

28
 0 Few orders results in loss of learning

4. Labor Rates

0 Different for each shipyard

0 Unpredictable changes

5. Material Costs

* Vendor base changes

" Delayed shipments

6. Regulatory Structure

0 New rules

7. Inflation

* Fluctuates unpredictably

* Different rate for each item

The new cost estimating systems that industry and the Navy

are developing are currently trying to incorporate factors

that will deal with these issues that distort parameter

estimates. One of the most important additions to the new

system (discussed in Chapter 5) will be the uncertainty

analysis which will assign a certain probabilistic

distribution to each parametric regression equation (Figure

11). This will provide cost estimates with a certain range

of probable outcomes. In this way it will be easier for the

29
Navy to plan and manage the level of risk associated with

each project.

Figure 12. Addition of Risk in CER's (1)

Since cost estimates are often required well in advance of

the contract design phase, the US Navy developed a method

which is based on a single common parameter: weight. The

basic construction cost of a ship is then directly

determined, through the use of historically determined

factors. These form cost estimating relationships (CER's)

that are used to provide parametric analysis of ship

construction costs. This method uses the Ship Work

Breakdown Structure (SWBS) as a common means of

communicating the level of technical definition between the

designer, shipyard and cost estimator. Its definition

varies in depth and breadth as a project moves through each

design phase. The main components that make up the one

30
digit SWBS group system are shown in Figure 13. The total

weight of the ship is the sum of groups 100 through 700.

SWBS Group Description

100 Hull Structure

200 Propulsion Plant

300 Electric PIlant

400 Command & Sur vwi ance

500 Auxiliary SyStwms

600 Out4it & FarnishingS

700 Armament

800 Design & Cnqgn*rirnq Sev~iceu

900 construction Services

Figure 13. One Digit SWBS Breakdown (1)

As the level of design increases, so does the level of

group specification within the system. For example, a two

digit weight group such as group 130 defines hull decks. On

the three digit level, group 132 could be second deck.

Engineers like using this type of classification system

because it is system based. It is good for early stages of

design and it lends itself to parametric extrapolation or

analogy cost estimating methods.

Such an approach which results in a heavy reliance on

weight as the surrogate of costs can be deceiving.

Experience has shown that there are cost drivers other than

31
weight that cannot be ignored. The DDG51 suffered from

severe operational issues due to the use of a solely weight

based cost estimate method. Designers believed that

decreasing the beam by 2ft would decrease costs. The

construction difficulty factor however, increased to such a

level that the overall cost of the ship increased. Also

operational issues arose due to the change since stretchers

couldn't fit in the 2ft narrower corridors.

Another issue with the SWBS classification is that it is

system based rather than production based. The current

system ignores the possibility of production friendly

designs which would reduce costs. This is an issue that

arises when designers try to optimize one aspect or system

rather than the efficient production of the vessel as a

whole. Figure 14 shows the effect of increasing the deck

height of the DDG51 from 9ft to 11'2". Since 6'5" is

required for access of personnel, the DDG51 had only 2'7"

available for distributive systems. This led to congested

overheads, costly and difficult installation due to

structural member penetration and the deviation from

optimum pipe runs. The lack of available space meant that

interference between systems was common which resulted in

design changes in multiple systems. This fueled change

32
orders and dramatically increased construction time and

cost.

Lnangener
80
-Pjaruwt
2.

- PU.4 Umz
4,-,

omoo, %te* CeCX

Woo Fram* 641g

M&cUnary Plaorm
PIZOam M

Figure 14. DDG-51 Design Issues (26)

33
CHAPTER 3 - DESIGN TO BUILD IMPROVEMENTS/ BUILD

STRATEGY:

Product Work Breakdown Structure

The US Navy has been using a SWBS classification system for

the past 60 years. It is a system that provides an initial

approximation at an early stage of design; however, at the

more detailed level it is necessary to incorporate new

features that look at production methods rather than just a

systems approach. Ships are built in subassemblies that are

grouped by common characteristics. The Product Work

Breakdown Structure (PWBS) classifies the different interim

products that are assembled and subdivides the required

work accordingly. These products benefit from cost and

schedule savings because the work is sequenced into a

convenient and functional order. This process is referred

to as group technology. A typical example of its function

is shown in Figure 15.

34
 R
A) CONVENTIONAL PROCESS METHOD

IG M

B) GROUP PROCESS METHOD

KEY: L - LATHE D DRILL PRESS
M - MILLING MACHINE G -GRINDER
C - CUTTING MACHINE

Figure 15. Efficiency of Group Technology (21)

This system of grouping resources efficiently can be

expanded from subassembly to blocks to outfit zones in

order to improve productivity and result in a more

efficient use of a shipyard's resources. Since the PWBS

system operates by creating interim products, the vessel is

built according to zones and assembled at the final stage.

(Figure 16)

35
 Modular Construction Types of Zone Ouftftinc

P-ocess F~ow Lanes Zone Constructionand COutfit On-Slack

Cuftfiln

UiA Asseffibly Launcfl

On~ ~ 7

Ouffitting
Onn.acat

Figure 16. Modular and Zonal Construction (26)

A shipyard that uses this production sequence system needs

to have ship designs that allow vessels to be subdivided

efficiently in this way. In attempting to maximize

productivity, the PWBS approach implies a significant

amount of overlap of design, material procurement, and

production. This is therefore placing added pressure on the

already difficult position of the designer who now has to

incorporate and anticipate the method and sequence of

production.

Modular Construction:

The concept of modular construction is becoming more viable

due to the changes that are occurring in the framework of

the US Navy's procurement strategy. The Navy's

36
Affordability Through Commonality (ATC) program is an

example of the effective use of reuse modules. The program

attempts to standardize the number of different components

of Naval Designs (such as using common pumps, pipe sizes,

and plate thickness) . Reuse modules are a logical extension

of standard components of an existing system that can be

incorporated in a new system. If an existing module can be

described, classified, and priced within an interim PWBS,

then that module or direct adaptation of it can be added

directly into the new cost estimate. The cost of the module

and the associated information will be added to the

existing database of modules. Eventually it will be

possible to define any design almost entirely by reuse

modules at any level of the production line from

subassembly to hull erection. (Figure 17)

Product A
Design A

Desin aProducl 0

Develqopmn

Figure 17. Converting to Re-Use Modules (25)

37
Using the new design and production organization methods

can result in easier, faster, and cheaper ship procurement.

Moreover, the time taken to make a comparative

determination of the effects of a change in design and its

consequent impact on cost will be reduced. The accuracy of

the cost estimate will approach that of a detailed

engineering estimate without the incurred cost and time

lost to conduct the study. It will also give naval

architects a better understanding of the cost implications

of the design decisions that they make and ultimately

result in producing lower cost vessels.

DDG51 vessels were built using modular construction but

they were not designed with modular ship architecture

thereby limiting the possible savings that would result

from the advanced outfitting capabilities of the shipyard.

Figure 18 shows how modular architecture and reuse systems

can be incorporated, scaled, and used throughout different

vessel classes.

38
 Common Modular System Architecture
OBJECTIVE: RILD3 SH4IPS COMPORPM OF COMMON MODULtP -q- UL9DINn BLOCKS. AND
DJSTRIBUTED SYSTEMS RCHMTECTURES
A

U----- - - - - - -

-
4a
Fn t

Figure 18. Using Modular Architecture in the Navy (26)

The economies of scale that are reaped from pursuing such a

and organized construction process cannot be

focused

understated or overlooked. Using similar modules for

different vessel types improves shipyard productivity and

decreases costs. Other benefits arise through the process

of purchasing materials and equipment in bulk which again

results in economies of scale. The Navy has attempted to

incorporate an increasing number of subcontracting deals in

order to decrease costs. Having multiple suppliers

increases competition between the contractors which in turn

should increase quality, service, and reduce acquisition

cost. It will also let shipyards focus on the aspects of

that they are more efficient or proficient at

construction

39
 . . ... ......
..
.........
......

conducting. This would deal with the labor hour overruns

due to the inexperience of the workforce shown in Figure 4.

The UK Royal Navy uses such an approach to build its Type

45 destroyer (Figure 19).

........ ***
.......... Vosper Thomycroft
BAE Marine Barrow
BAE Marine Govan

BLOCK A MEGA-BLOCK B+ C BLOCK D BLOCK E BLOCK F

Figure 19. Modular Construction of UK Destro yer (12)

The possible savings that can be realized by switching to a

modular production process can be pronounced. Figure 20

shows the cost savings expected for DD-21 due to the new

design initiatives.

SWBS Mannours (K mnnrs) Mannours Percent Notes:

(using DOG CERs) (using DGIAmpntb CERs) Savings
100 1.458 1,018 30% more producole structure, tritcKer plate,
SI less weld distortion
200 145 1 145 0%
300 289 289 0%
400 199 135 32% SMART decks, air lown fiber optics.
modulanty
500 557 394 29% increased deck heights, zonal systems.
ATC modules
600 612 374 39% incresed deck heights. ATC mocuies

700 68 66 ] 0%
800&900 and margin 1 2.336 1.700 | 27% function of SWBS 100-700
Total 5
b.662 1 4121 1 27%

Figure 20. Predicted Cost Savings (26)

40
Learning Curves:

Modularity and increased specialization decreases average

construction cost as more similar vessels are produced.

This is because ship construction labor costs decrease with

experience as build strategy, manufacturing and production

strategy, and management coordinate their efforts with a

more efficient outcome. Therefore the CER's used for the

original vessel have to be modified to take into account

the effects of learning as series of several vessels of the

same class are constructed in sequence.

The basic form of the learning curve is:

Log(y) = Log(a)+b(Log(x))

where: y = Cost of x# of units

a = Cost of 1 St unit

b = Learning curve coefficient

The slope of the learning curve is the learning rate. So,

for 2 units, x =2, and b(Log(x)) equal to the log of the

slope. Thus,

b = Log (slope) / Log(2)

For a 90% slope, b = Log (0.9) / Log (2) = -0.152

41
 . . . ....
.....
..
.....
........
...

.
Cost of Nth vessel = Cost of 1 st *N^ (b)

The theory is that each time the total quantity of ships

built doubles, the basic construction cost decreases by a

constant percentage of the former cost. Therefore if the

cost for the first year is 1, the cost for the second

vessel will be 10% less i.e. 90% of the cost of the first.

(Or using the equation, y = 2^(-0.152) = 0.9). The cost of

the third vessel will be = 3^(-0.152) = 0.846, or 84.6% of

the cost of the first vessel. Figure 21 shows how the

effect of different learning curves decreases costs as

output increases.

Cost Learning Curves

0 1Z 15 0 25
Ship Number in Series Ship Construction
Program

Figure 21. Effect of Learning on Cost (14)

42
Learning is different for each process that is being

performed and varies depending on a variety of factors

including system complexity, manufacturing technology, and

construction time between completion and start of each

following ship. Low skill level processes tend to exhibit

low levels of learning since there is little or no

reduction in the amount of labor with repeated performance

of a certain task. Highly automated operations tend to also

have slopes close to unity since machines do not increase

their productivity through experience. Production

innovation processes such as modulization and PWBS increase

shipyard efficiency and decrease cost but it is not

necessarily attributed to learning effects. The major

region where learning makes a substantial difference is

with highly skilled labor. This is because skilled labor

can significantly improve its efficiency with experience.

Figure 22 shows how different manufacturing activities

exhibit differences in learning rates.

Manufacturing Activity Typical Slope

%

Electronics 90-95
Machining 90-95

Electrical 75-85

Welding 88-92

Figure 22. Typical Learning Rates (20)

43
Generally, if an operation requires 75% manual and 25%

automation, slopes in the vicinity of 80% are common. If

the ratio is 50:50, slopes are in the 85% region. If the

ratio is 25:75 the learning rate is in the 90% region.

Typical shipbuilding learning slopes tend to run between 80

and 85%.

There are instances when using learning curve correction

factors is not appropriate. Such situations include:

" When ship construction is sporadic

" When the types of functions performed are inconsistent

(custom products)

" When work is highly automated and production rate

cannot increase further

" When rules and regulations limit the production rate

" When production quantities are small

Sporadic production, either due to low levels of orders, or

labor issues such as extended strikes, results in breaks in

production. The effects of such a time gap between

resumption of construction can result in a stepped increase

in cost upon resumption of construction as shown in Figure

23.

44
 Break

Produr f.an

RecurrIng
Unit
Pro.Iuction
Cost

Figure 23. Effect of Break in Production (1)

Other instances where similar increases in cost can occur

include major upgrades to facilities and changes to

production processes since labor requires a certain amount

of time to become accustomed to the new facilities and

production methods. A typical example would be Philadelphia

Kvaerner Masa yard. A major upgrade to the facilities

increased the cost of construction because workers were not

trained to use the new equipment. Significant design

changes and technological upgrades to a class of vessels

can also result in a loss of learning since the production

process is inherently different. Thus CER's that the Navy

uses for ship cost estimating have to be used with extreme

caution since they can result in significant variations

between actual and predicted costs.

45
A major point of contention between the Navy and shipyards

has been the costs of DDG 79 and the Virginia class

submarines due to the cancellation of the order of 5

vessels over the past 10 years. During the cold war the US

was constructing about 17 vessels per annum. Today, the

number is down to less than 6. It is therefore necessary to

re-evaluate and question whether it is applicable to use

current correction factors for cost benefits that could

arise from improvements in learning.

Benefits of Reduced Construction Time:

Korean shipyards proved that by pre-negotiating an exact

delivery time with a detailed work breakdown structure and

essentially outlawing change orders, it was possible to

decrease construction time by 30%. Analysis of construction

costs has shown that by decreasing the time taken from

concept design to delivery by 50% it will be possible to

decrease total costs by as much as 30% (19) . Although it

may be infeasible and undesirable to decrease costs by 50%,

it is clear that the time value of money should play a much

more important role in the decision making aspects of the

46
naval procurement process. By having longer projects the

Navy incurs the following costs:

1. Interest on capital

2. Interest on material inventory

3. Extra labor and material cost due to escalation

factors (inflation)

4. Opportunity cost of facilities usage and cost

of occupancy of facilities

5. Increased overhead costs

6. Cost of built-in obsolescence

7. Cost of rescheduling and planning

In short, as long as the vessel is held in drydock, the

final acquisition cost will continue to rise. With post

cold war reduction in military spending and the consequent

decrease in procurement of naval vessels combined with a

historical decrease in the Jones Act fleet, shipyards are

not interested in decreasing manhours and/or project time.

Since shipyards rely on naval procurement to remain in

business, they inherently work slowly, and produce

expensive ships with as many extra change orders as

possible. Thus the Navy has to re-evaluate the way it

47
expects shipyards to operate if any benefits are to be made

by using modern, highly efficient production methods. The

existence of a PWBS system of construction has been in

existence since the late 1980's. In fact the same shipyards

that produce cost and time overruns for naval construction

projects can build commercial vessels in a fraction of the

time and cost. Figure 24 shows the speed that a commercial

bulk carrier was built at Avondale shipyards by using a

PWBS for vessel construction.

48
 Z<.

1:

-R now

1
vi
60

49
 ........
.............
..........

Fig, 3-64

Figure 24. Construction using PWBS (21)

The vessel was launched 43 days after keel laying! US

shipyards are still very far from attaining production

levels experienced in Far East yards, which generally

produce similar vessels at about 50% of the time. However,

there is no reason that the same US yards cannot use the

same production methods to build naval vessels.

50
In order to understand the value of a shorter construction

period, it is necessary to conduct a present value analysis

of future costs associated with longer construction

periods. While it is relatively trivial to estimate the

costs relating to labor, capital and material of a longer

project, assigning a value to the added cost of built-in

obsolescence is much harder. Built-in obsolescence itself

is a knife with two edges. The elimination of change orders

would probably result in an increase in short term re-

conversion and upgrade of equipment; conversely, it has

been shown that there are significant benefits that can be

attained by shorter construction times without expensive,

time consuming change orders.

Multi- Purpose Vessels

Navy mission requirements have become less focused and as a

result, vessels have been designed with multiple

capabilities. As a result, the navy is more flexible at any

given time at the expense of capital and operating costs.

By their nature multipurpose vessel designs incorporate

performance penalties that are imposed by their various

different requirements. It can be argued, that most vessels

under typical missions perform only one main mission

51
function. For example, during the Gulf War, the primary use

of warships was surface to surface bombardment. Most

vessels were equipped and manned to perform many other

functions such as anti-submarine and surface-to-air

warfare, but the capabilities were never used.

In naval ships the operating cost breakdown is 37%

personnel, 21% maintenance, and 13% modernization (14).

This emphasizes the need to reduce both manning and extra

equipment. With more focused missions it is possible to

reduce the crew size which would have dedicated personnel

for each mission capability. Furthermore, specialization

and training of the crew on primary and secondary mission

requirements could improve operational proficiency and

effectiveness.

Figure 25 performs a present value comparison of three

different vessel configurations by mission. The multi

purpose cost is significantly more expensive to construct

and operate. Clearly, a more specialized mission oriented

Navy would require more vessels and better operations

management. A fleet increase of 35% comprising 60% type A

and 75% type B vessels could be procured and operated at:

(0.6*1.113+0.75*1.032) = 1.442C. This is about 82.5% of the

52
 -~ 7 -

-
cost of procuring and operating a smaller fleet of multiple

purpose vessels.

Table I Comparative characteristics

Multi-purposc shiw Single purpot-e ships

TFpe A Type R
Displacement D 0.4D 0.4C
AAW capability Primary Pumarv Fair
ASW capability Primary Fair Primary
GSF capabilitv Good Poor Good
Screws# 2 2 1
Speed (kn) X X+2 X
MaIning M OM 0.5M
Procu rement cost C 0.tC 0.iC
Endurance Same Same Same

FuIe cvst. PV 20 vears* 0-0780C 0.067C 0.05iC

Crew cost PV20 years 0.480C 0.310C 0.310C
Overhaui cos / 20 year 0.11 4C 0 00C 0.067C
Operating ;und! /PV 20 y. rs 0.O IC 0.010C 0.010(C
Re-air Oarts,. PV 20 yeas 0.031C 0.022C 0.020(
Commissr P\ '0 ears. 0.040C 0.024C 0 024C
Port costs and scervice PV 20 yeArs
Total discounted
comparative 20 year cost 1.746C 1.113C 1.032C
PV=pfes4,- viu 2ear Lot

Figure 25. A Single or Multi Purpose Navy (19)

Cost Estimating Relationships:

CER's are formulas that relate the cost of an item to the

item's physical or functional characteristics. They can

also compare the cost of an item to the cost of another

item or group of items. They are historically derived

through regression and parametric analysis. Since CER's are

derived from physical data, it is necessary to understand

how the data correlates to the problem that is being solved

in each particular cost estimate. CER's vary in complexity

53
and detail between the concept design stage and the detail

design stage. Their significance lies in their ability to

provide ship cost estimators with reliable results without

the time and cost that would be incurred through the use of

a detailed engineering analysis of a design. There are five

main types of CER's:

" Manual - determined from external information such as

vendors and subcontractors

" Calculated - determined and derived from actual

previous ship cost data.

" Predictive - determined though regression from return

data of multiple vessels over time, or from a common

manufacturing method that is changing over time.

" Empirical - determined through statistical regression

analysis of particular shipyard processes.

" Standard Interim Products - determined at each level

of the PWBS. Existing CER's are grouped together into

standard common interim products and modules called

re-use packages.

54
CHAPTER 4 - NAVSEA 017 SHIP COST ESTIMATING SYSTEM:

NAVSEA 017 refers to the Naval Sea Systems Command Office

of Cost Engineering and Industrial Analysis. The department

prepares the Navy's ship cost estimates from the initial

design feasibility study phase through production award and

extends into actual contract execution for submission to

the annual Department of Defense's shipbuilding budget.

The Shipbuilding and Conversion, Navy Appropriation (SCN)

constitutes approximately 10 percent to 15 percent of the

Navy's total annual procurement budget. The appropriation,

as indicated by its name, includes the procurement of ships

and craft to be newly constructed and major ship

conversions (18). An SCN procurement item that has been

authorized by Congress must be fully funded or the work on

it must cease. This "end costed" policy assures that funds

are always available for all reasonably expected costs

through the ship construction. Exceptions to this policy

include ship outfitting and post delivery costs. Also there

are provisions that allow for cost escalation of shipyard

costs due to inflation. In order for a ship cost estimate

to be considered as a potential budget candidate the

following conditions must be met:

55
 " Written OPNAV cost and feasibility request must be in
hand.

* Formal technical design inputs must be available.

* An approved acquisition strategy and shipbuilding

schedule must be available.

* A cognizant Program Manager must be involved.

Cost estimates are to be prepared and submitted during each

phase of the Planning, Programming and Budgeting system.

These estimates are based on program acquisition strategy,

technical definition and economic data available at the

time of the estimate preparation. Clearly, the confidence

and reliability of the estimates improve as the level of

technical definition increases.

In the past, acquisition design was divided into four new

ship design phases: Feasibility Study Phase, Preliminary

Design Phase, Contract Design Phase and Detail Design

Phase. For almost all major ship programs, NAVSEA would

develop a ship design up to and including Contract Design.

The intent of Contract Design was to provide a ship design

that was sufficiently detailed and technically mature that

a shipbuilder could use it to develop a cost proposal and

ultimately sign a contract to develop the Detail Design and

build the ship. Nowadays, NAVSEA only develops rough

56
designs at the concept design level by the NAVSEA 05

division. This allows it to make an analysis of different

alternatives that are submitted. If the specifications that

the DoD requests are met, then the development of the ship

design will be turned over to industry. The latter then

performs feasibility, preliminary and contract designs.

The NAVSEA ship cost estimate classification system is

shown in Table 1. The class "C" estimate is the ultimate

goal of the ship cost estimating process. A class C is a

commitment to Congress by the Navy that additional funds

will not be required (exceptions being escalation factors

due to inflation) . The estimate is based on the three-digit

SWBS system. The estimate also includes cost for government

furnished material. The Cost Estimating Relationships

(CERs) used to calculate the cost estimates are based on:

" an accepted weight estimate using bid information

" current weight estimate when using cost data from the

contractor's latest Cost Performance Report (CPR)

* similar ship construction data of the prospective

building yard(s) where new designs are being costed.

57
Class D estimates deal with ship conversions,

modernizations, and Ship Life Extension Programs (SLEP).

The estimate is comparable to that of a class C except

there are provisions that deal with the uncertainties that

occur with the repair and/or conversion. The requirements

for this estimate include: a complete parts list, weights

of equipment and material that is to be replaced, and a

proposed list of ship alterations.

Class F estimates are prepared using information from

feasibility studies based on single digit SWBS weights and

only general guidance with respect to major electronics and

weapons equipment. The cost estimate is in most cases a

parametric extrapolation of a previous ship design. An

example of such an ASSET model estimate is shown on Figure

26.

58
 A C ] L E F I 0 -
_LEAD SHIP
H
I SW5 I KN LEADSHIP LEADSHIP,
____ INPUTS
I________ FACTORS COT i SK $31 T (S903K) T .('92SK
2 _ CRACUP LI
=3 8892 = 1.04)-2
4 00 HULL5T UR _ _ LTONS 1_291 _._ 85 r _i461 12331
1PROPULSION PLANT HP 41000 23S 1 233i - 31057 3359 1
S 200
ILECTRIC PLANT LTONS 94.3 1.00 4701 6260 6771.
6 300
8475
URV. LONS 100.6 3.15 736
1 400 r
ItS
500 LTN 288.1 I.3 j 1216'.: 1 6204
8 4AUXSYST r1S
9 0 __UTFIT/F1JRNI3H1NG$ IT.N. 98.1 91.00 1
f1 700 ARHARENT LTONS 94-5 1 1.00 746 994 10?5
I1 0.5 r 2996, 39901 43.16
1 RA9---r----VWM
2
13 900 1CNSTRLRONSERYICES 426 17115 227941 24654
--- -- --
14
4.. 2 24 I
15 OTA NTRUCTION COST I
16 17261 22969 2486S5
17 _PROFIT 10V
9PIj16987Si 252683f 2731_
201 ~ *T*~ li
21 __

22

Figure 26. Asset Model Output (20)

A class R estimate is a rough order of magnitude estimate.

It is applicable for designs when the design information

that is being used is not of feasibility standards quality.

There is limited weight information known and the cost

estimate uses old or generalized adjustment factors. Some

examples are:

" a new design of an unconventional ship platform.

* a ship platform that is initially designed to carry

many unconventional or developmental equipments.

* a ship designed beyond the current state of the art.

A class X estimate is applied to situations where the

design is:

59
 * not developed by the NAVSEA Cost Engineering and

Industrial Analysis Division or the NAVSEA Ship Design

Integration and Engineering Directorate, Cost

Engineering Office, through the normal estimating

process

" provided by other commands or agencies

" directed by higher authority.

TABLE 1. NAVSEA SHIP COST ESTIMATE CLASSIFICATION SYSTEM

Class Basic Technical Input Use

C Completed Preliminary Design Budget Phase

Three Digit Weights (New Construction)

D Scope of Work, Including Budget Phase

Weights of Deletes & Adds (Conversion)
SHIPALTS and Repairs

F Feasibility Study Planning/Programming

One Digit Weights Phase

R Rough Order of Magnitude Planning Phase

Less Than Feasibility Study

X A directed or modified
estimate - an estimate not
developed through the normal
NAVSEA estimating process.
An estimate established
external to NAVSEA.

NAVSEA 05 uses a parametric ship design model called ASSET

(Advanced Surface Ship Evaluation Tool). The model starts

with an existing ship design, or parent ship, that is most

60
closely analogous with the new ship concepts. The ASSET

model iteratively changes the parent ship to reach a

solution that accommodates the desired set of ship

requirements. The design input provided to the cost

estimator from ASSET is adequate to develop Class "R" cost

estimates. The program also has the capability to be linked

with the ACEIT (Automated Cost Estimating Integrated Tools)

program which is a joint Army/Air force program supported

by the Navy. It is also SWBS based in order to conform with

NAVSEA standards but also includes indirect costs,

escalation factors, and learning curves. The system can

also output total life cycle costs for the vessel.

Once a design has been agreed upon, the development of the

project is turned over to industry. The role of the Navy

cost estimator then becomes that of a validation instrument

of the contractors' cost models and estimates. This

requires a large amount of interaction, communication, and

cooperation between the contractor and the Navy personnel.

Several issues of contention arise at this level of

involvement due to the differences in estimating methods

used by the Navy and all the different contractors that it

uses. As a result, NAVSEA generally requires that all data

is provided in SWBS form in order to be effectively and

61
efficiently analyzed by 017. This is necessary because

NAVSEA 017 still has to develop cost estimates of budget

quality class C ratings for submission to Congress. 017

also requests that shipbuilders provide actual return cost

data in order to keep the system updated.

The categories that constitute total end cost for a ship

are show in Figure 27. The Major Category Codes (MCC)

conform to the collection, accounting, and review systems

used by NAVSEA. The categories can be separated into three

groupings: shipbuilder portion, government furnished

material (GFM), and general administrative. Construction

plans, basic construction, and change orders (including

shipyard profit which is about 10%) constitute the shipyard

portion.

62
 Construction Plans
ESWBS MCC 100
Group
100 Hull Structure Basic Construction Contract
MCC 200 Escalation
200 Propulsion MCC 291
300 Electric Plant
Change Orders
400 Command and MCC 300
Surveillance
500 Auxiliary Systems GFM Electronics
MCf 400
600 Outfit and
Furnishings
GFM Ordnance/Air
700 Armament
MCC 900
0aA
Integration/
Engineering GFM HM&E
Ship Assembly and MCC 500
900
Support Services
GFM Propulsion
MCC 521

Other Support
MCC 800

Total Ship End Cost (Dollars)

Figure 27. Total Ship Cost Categories (18)

Change orders have long been a region of difficulty for

both the Navy and Congress. The existence of change orders

is commonly due to the looseness of the initial award

contract. The methods that such a change can take place are

indicated in the federal acquisition regulation "changes"

clauses. The reasons for change orders are the following:

0 To include state-of-the-art improvements that come

about during the lengthy construction periods of a
ship,

0 To correct deficiencies discovered in contract

drawings or government furnished information which is
the responsibility of the government,

63
 * To correct differences between contract drawings and
ship specifications,

* To incorporate safety items that emerge during

construction,

0 To incorporate improvements that are generated by the

operational forces afloat, and approved for
implementation,

* To have the shipbuilder repair or modify GFM,

" To change the contract ship delivery point, the

contract date of delivery, or the method of shipment
or packing.

There are about 3000 to 8000 change orders each fiscal

year. The budgeted cost for change orders amounts to 10%

for lead ships and 5% for follow ships. As it is in the

interest of the shipyard to include as many change orders

as possible, there is currently no incentive under the

present system to see a decrease in their levels. As

already mentioned in Chapter 1, change orders and the

consequent increase in costs is a very significant number

especially for lead ships. For the DDG-51 change orders

accounted for over 17% of the total cost.

NAVSEA's use of CER's

Historically CER's were used to relate cost to SWBS weights

under the following formula:

64
 C = f * (SWBS weight)

Where f represents a functional relationship relating

material cost per ton and/or labor cost per ton. Other

technical parameters are also used when better results are

anticipated. These could include cost of energy generating

systems that relate cost to power rating and weight. The

following equation would be used:

C = (R/Rs)Kr X (Km x W)

where
Kr = cost factor based on unit power rating
R = power rating (e.g., horsepower) of unit under
consideration
Rs = power rating of "standard" unit
Km = cost per unit of weight
W = weight of unit

These equations generate basic CER relationships. It is

then in the discretion of the estimator as to what extent

he is going to expand on or change the initial CER. Typical

adjustments are made for inflation of labor and material

costs as well as an incorporation of a historically

acceptable level of risk. This process is far from an exact

science and therefore requires judgment and experience.

According to the level of detail of the data available from

the contractor or shipyard, the estimator has to develop

CER's according to the class of estimate that is being

performed. The following estimating relationships are

65
presented by NAVSEA as the suggested group relationships

for class F estimates:

SWBS 100 - Hull Structure

Item Labor CER Material CER

GR 150, Deckhouse X MH/Ton $/Tons

weight (Tons) (specific (specific)
material)

GR 100, Remaining X MH/Ton X $/Ton

weight (Tons) (steel) (steel)

Adjustments are made for different materials used:

Mild Steel (Tons) X MH/Ton X $/Ton

High-Yield Steel (Tons) X MH/Ton X $/Ton
High-Strength, High- X MH/Ton X $/Ton
Alloy Steel (Tons)

For Submarines:
Pressure Hull Weight X MH/Ton X $/Ton
(Tons)
GR 100, Remaining X MH/Ton X $/Ton
weight (Tons)

SWBS 200 - Propulsion Plant

Item Labor CER Material CER

GR 220, Energy MH/Unit, Rating, Marine Vendor

Generation System Ton, or Combination Input

GR 230, Propulsion MH/Unit, Rating, Marine Vendor

Ton, or Combination Input

GR 240, Transmission MH/Ton $/Ton

Propulsion Systems

GR 200, All Other MH/Ton $/Ton

66
SWBS 300 - Electric Plant
Item Labor CER Material CER
GR 310, Electric Power MH/Unit, Rating, Vendor
Generation Ton, Input

GR 320, Power Distribution MH/To n $/Ton

Systems (Tons)

GR 330, Lighting System MH/To n $/Ton

(Tons)

GR 300, All Other (Tons) MH/To n $/Ton

SWBS 400 - Command and Surveillance

Item Labor CER Material CER
GR 400, Command and MH/Ton $/Ton
Surveillance

SWBS 500 - Auxiliary Systems

Item Labor CER Material CER
GR 510, Climate Control MH/Ton $/Ton*

GR 520, 530, 540, 550, MH/Ton $/Ton*

GR 500, All Other(Tons) MH/Ton $/Ton*

SWBS 600 - Outfit and Furnishings

GR 600, Outfit and MH/Ton $/Ton
Furnishings (Tons)

GR 630, Painting MH/Ton $/Ton

MH/Cubic Number

SWBS 700 - Armament

Since the majority of armament is GFM, the items are
separately costed by the vendor or subcontractor. Shipyard
costs are for installation of the equipment.

67
Item Labor CER Material CER

Guns (Units) MH/Unit $/Unit

Missile Launchers (Units) MH/Unit $/Unit

Torpedo Tubes (Units) MH/Unit $/Unit

GR 700, All Other (less MH/Ton $/Ton

weight of guns, etc.) (Tons)

SWBS 800 and 900- Integration/Engineering and Ship Assembly

and Support Services
The manhours and material dollars required for the work

represented by these groups are a function of specification

requirements, type of ship, and most significant, which

shipyard is involved. The historical manhours and material

dollars of Group 800 and 900 can be expressed as a

percentage of the sum of historical manhours and material

dollars for Groups 100 through 700 of the same ship.

Limitations of Weight Based System:

" It cannot easily estimate cost differentials below gross

levels of the work breakdown structure (WBS) . This

precludes the method from being useful for trade-off

studies of designs, materials, and manufacturing

processes.

" It cannot estimate cost differentials of outfit work

performed at different stages of construction: on unit,

68
 on block and on board. Various established rules of

thumb indicate that these cost differentials can vary

from 300% to 500% or more.

* It cannot estimate cost differentials due to

configuration complexity, such as compartment or system

density (e.g. HVAC system installation in tight

deckhouse) or location on board the ship (e.g. confining

engine room installation versus easily accessible weather

deck installation).

* It cannot estimate cost differentials due to orientation

of work (e.g. less productive over head work versus more

productive down hand work).

" It cannot estimate cost differentials due to changes in

build strategy, including outsourcing the manufacturing

of selected components to more productive, less costly

vendors and suppliers.

* Since it operates mostly at high levels of the WBS, it

cannot easily translate or segment costs from one type of

ship to another, particularly ship types and hull forms

not yet developed and built.

In typical government fashion, although it is clear that a

Paleolithic cost estimating system is being used, little is

being done to improve the current situation. The NAVSEA

69
guide for the ship cost estimator (18) suggests that

although "weight is the most commonly used parameter and

has been shown in the past to provide good estimates, in

the past the cost estimator has been encouraged to explore

other available parameters to be used with, or in lieu of

weight if improved results are anticipated". Although the

reference manual states this fact, cost estimates conducted

by the Navy are still primarily weight based.

How can weight be the single most important cost factor

when different designs can have the same weight but

completely different cost? The current approach inherently

gives incorrect estimates especially when comparing

competing preliminary designs because the system is not

sensitive enough when evaluating the effects of subtle

design changes.

The weight based model does not reflect or incorporate the

effects of productivity changes or the process by which the

vessel is built. An example is increasing the "shape" of a

hullform by reducing the amount of parallel midbody. The

change in actual steel structure weight may be

insignificant in terms of the cost estimating

relationships, resulting in no change in estimated cost.

70
 .............

However, eliminating several flat block modules will

definitely result in a cost increase within a modular

product oriented cost module such as PODAC. Figure 28 shows

that cost not only changes with ship size but also with

ship form.

Average Structural Size Productivity Factors

(Variable by Block Coefficient)

2.50

L.0 2.00
-+- 040
U
-a- 0.50
0.60
1.50
- 0.70
0
0 --- 0.80
-0- 0.90
C,,
-J 1.00 i

0.50 +-

4 4 + f I

0 100 200 300 400 500 600

LWL (M)
i

Figure 28. Index of Estimated Shipbuilding Costs (16)

The current estimating method makes no allowance or

consideration of life cycle costs. This is major impediment

when making trade off studies between different designs.

Operating costs over the life of a vessel can amount to

71
over 75% of total life cycle costs. Thus a cost estimating

system that only focuses on initial acquisition cost

without consideration for life cycle costs is inherently

flawed. It is important and necessary that both designers

be able to conduct reliable cost benefit analysis and

design trade offs at the early stage of program

development; and that mission leaders ensure that the

mission requirements are realistic and can be met in an

efficient and cost effective manor. In most cases a lack of

visibility of the true problem or issue can lead to

appropriation of unnecessary, ineffective, and

operationally useless and/or expensive vessels.

In all fairness to the Navy, NAVSEA faces great difficulty

in acquiring useful data from shipyards. In most cases the

costs are bid data. The data is also gathered on the basis

of a distributed system rather than on the basis of a

production unit which forces the Navy to use a SWBS cost

breakdown.

The next chapter will give insight into how industry has

evolved its ship cost estimating capabilities in order to

incorporate non weight based parameters into their

forecasts.

72
CHAPTER 5 - PODAC:

The Product Oriented Design and Construction (PODAC) cost

model was conceived as a means of developing a cost model

that would employ a product oriented work breakdown system

(PWBS) and group technology (GT) . The system was developed

by a joint government, industry, and academia consortium

and the research funded by the Naval Surface Warfare Center

(NSWC). The developing team was comprised of:

" Avondale Industries

" Bath Iron Works

" Ingalls Shipbuilding

* National Shipbuilding and Steel Company

* Newport News Shipbuilding

" University of Michigan

" Designers and Planners

" SPAR Associates

* NAVSEA

The new program was designed to address the long standing

issue facing the traditional weight based models that were

primarily linked to design features. The PODAC system

incorporates algorithms that can determine the effects on

cost of subtle design changes that have little or no impact

on weight. It is a program that focuses on the production

73
process of each interim product rather than on broad

generalizations provided for by weight based CER's. Figure

29 shows how PODAC changes the viewpoint of a project from

a System based to a Product based approach.

SYSTEM WBS PRODUCT WBS

De:e & Eanrn $lp
S:ucStre lLp Zone & -HullBkck
1i Machi:iai- iull Um: & C-ifit Modjle:
Electxcal Askmb.
Hui1 Ouri: Sub Assembly
C systenz MPnXactSud Fa:-
A, c =:2:odat-:: Camnpc:entm
SLp-md Suppcr Seice I

Figure 29. System vs. Product WBS (16)

The program has been operational since 1997 and has been

successfully used in a wide range of programs both for

government and industry specifications both domestically

and internationally.

As already previously described, the system uses a PWBS

system to define costs. The work is defined using three

types of information: product structure, process, and work

type. The hierarchical classification breakdown is shown on

Figure 30. At each stage or process, interim products are

defined by their specific work types that make up the

finished product. In this way it is possible to assess the

effects of design changes and innovations as well as to

74
analyze their impact on the total life cycle cost of a

vessel.

z .. me. b
Naraska ho is i

wd-p r ftffl Piew 12 a MM

WR 1
yes Fahne~r~ft wM 1.m11atfrmsst

.
het from meeapw 1A4
orr L 1.4

IS 1
30.3.*4..VAS3

Sujlo Anon"m 3 uve

sp ~ ,j%c321

. WA LIM
32ns

S&radw*c Asmeft y 03eve ani

m. I11.411-1

1
-Pr~di.s 1

iuoem &1c4n
e~nge.reem a .. KA

Figure 30. PDAC PWBS Setin (P2DAC

75
 ~~~~~1111111
~~......~~nn
nill I1'11"
...........
"1111

"
Whereas in a SWBS cost estimating system CER's are

generally defined through weight based relationships, in a

PWBS system the definition of CER's changes with each level

of definition. Examples of such evolution of CER definition

is shown in Figure 31.

Possible Levels of Cost Estimating Relationships

-- Mhrs"EA

Mhrs/To
hlrs/Toni
Nhrs/Ton

Figure 31. CER Change with PWBS Hierarchy (14)

Use of Empirical CERs in the PODAC Model

Empirical CERs are also used in the Parametric Module of

the PODAC Cost Model to provide a top-down approach for

estimating Basic Construction Costs at the Concept,

Preliminary, and Contract stages of design:

* concept design level cost based on complexity factor

(explained later in this report), displacement, and

speed,

76
 " preliminary design level cost based on complexity

factor and system-based weight at the SWBS one-digit

level,

* contract design level cost based on complexity

factor and system-based weight at the SWBS two- or

three-digit level.

A combination of traditional weight based CER's used in

conjunction with complexity factors, process, and product

based CER's form the backbone of the PODAC estimating

system at every level of design.

1. Concept Design Level:

Price = Complexity Factor x [ 752 x DISPL0 .835 x SPEED' .2]

*where Price is the sum of Labor Cost, Material Cost,

All Indirect Costs, and Profit

Complexity Factor = Ship Type Factor x Size Factor

Ship Type Factor from Table 2

Size Factor = 32.47 x DISPL 03 7 9 2

DISPL = full load displacement in long tons

SPEED = maximum sustained speed in knots

It is important to note that at the Concept Design level,

there is no ability to distinguish between the various

elements of price, such as labor and material costs.

77
Additionally, the price estimate determined using this

approach was for U.S. Shipbuilding Programs, was for the

first ship of a class, and did not include the cost for

design and engineering. For naval ships, it did not

include the costs of weapons or Navy program management.

LSHIP TYPE FACTOR

Tanker 0.80
Product Tanker Single Hull 1.13
Chemical Tanker 1.25
Double Hull Tanker 0.90
Bulk Carrier 0.86
Ore/Bulk/Ore Carrier 0.95
Reefer 1.16
Containership 0.96
Roll-On/Roll-Off 0.83
Car Carrier 0.61
Liquid Petroleum Gas Carrier 1.14
Liquid Natural Gas Carrier 1.12
Ferry - Aluminum High Speed 0.15
Ferry 1.25
Ferry - Aluminum SWATH 0.70
Passenger 3.00
Fishing 2.20
Harbor Tug 0.20
Naval Aircraft Carrier 6.00
Naval Combatant, Cruiser (Nuclear) 9.00
Naval Combatant, Destroyer 8.00
Naval Combatant, Frigate 7.00
Naval Amphibious, LHD/LHA 7.00
Naval Amphibious, LSD/LPD 5.00
Naval Auxiliary, Oiler 2.25
Naval Auxiliary, Tender 4.50
Naval Research 1.25
Naval Fleet Tug 1.00
US Coast Guard Icebreaker 4.50
US Coast Guard Buoy Tender 2.00

Table 2. Sample Ship Type Factors for Empirical CERs

78
Complexity Factor = Ship Type Factor (from table 2) x Size

Factor

0
Size Factor = 32.47 x DISPL- .3792

DISPL = full load displacement in long tons

2. Preliminary Design Level:

At the Preliminary Design level, the following weight-based

CERs for Domestic Shipbuilding Programs can be seen to

distinguish labor from material as shown in Table 3.

Complexity Factors are derived from the Ship Type Factors

and Size Factors as shown before in Table 2.

SWBS DESCRIPTION LABOR MANHOURS MATERIAL DOLLARS

100 Structure CF x 177 x 800 x WGT1 oo
WGT1 0 0 0.862
200 Propulsion CF x 365 x 15,000 + 20,000 x
WGT 200 0.704 WGT 2 0 0
5
300 Electrical 682 x WGT 30 0 1 .0 2
25,000 x WGT 30 0 I
400 0
I
Command and 1, 605 x WGT 40 0 .795 40,000 x WGT 40 0
Control
500 Auxiliary CF x 34.8 x 10,000 + 10,000 x U
U
U
WGT50 1.24 WGT500 U

600 Outfit and 310 x WGT 6 00 .9 49 5, 0 0 + 10, 000 x

Furnishings WGT 60 0

Table 3. Empirical Preliminary CER Derivation

79
CF = Complexity Factor = Ship Type Factor x Size Factor

0
Size Factor = 32.47 x DISPL- .3792

DISPL = full load displacement in long tons

WGTxoo = weight of SWBS X00 in long tons

3. Contract Design Level:

At the Contract Design level, weight-based CERs for

Domestic Shipbuilding Programs can also be seen to distin-

guish labor from material, as shown in Table 4. As before,

Complexity Factors are derived from the Ship Type Factors

and Size Factors.

SWBS DESCRIPTION LABOR MANHOURS

110 Hull Structure CF x 4 x WGT110' 321
0 384
150 Superstructure CF x 5, 157 x WGT1 5 0 .

161 Structural Castings and CF x 314 x WGT 1 6 1 0. 62 3

Forgings
1 95
60 x WGT 1 67 / 8 -2
167/ Structural Closures
8
96 9
169 Special Purpose Closures CF x 36 x WGT1 6 9 0.
0 73 5
170 Masts and Towers CF x 149 x WGT 1 7 0 '

Table 4. Empirical Contract Level CER Examples

80
CF = Complexity Factor = Ship Type Factor x Size Factor

3 7 92
Size Factor = 32.47 x DISPL-.

DISPL = full load displacement in long tons

WGTxyo = weight of SWBS XYO in long tons

Similar Contract Design Labor CERs have been derived for

SWBS Groups 2 - 6.

Improving Empirical CERs:

The suggested product-based and process-based Empirical

CERs include the following, at the Preliminary Design level

of detail. It is important to note that these Preliminary

CERs are constructed by collecting data at the Contract and

Detailed Design levels.

* STRUCTURE at the BLOCK level, with known block

structural weight, number of parts, surface area,

and joint weld length:

- manhours = f (number of parts) for preparation,

- manhours = f (number of parts) for fabrication,

- manhours = f (weight, surface area, weld length) for

sub-assembly,

81
- manhours = f (weight, surface area, weld length) for

assembly,

- manhours = f (weight, surface area, weld length)

for erection.

* PIPING at the BLOCK level, with known block piping

number of parts:

- manhours = f (number of parts) for preparation,

- manhours = f (number of parts) for fabrication,

- manhours = f (number of parts) for sub-assembly,

manhours = f (number of parts) for assembly.

* OUTFIT at the BLOCK level, with known block outfit

weight and number of parts:

- manhours = f (weight, number of parts) for on-unit

outfitting,

- manhours= f (weight, number of parts) for on-block

outfitting,

- manhours= f (weight, number of parts) for on-board

outfitting.

82
 0 PAINTING at the BLOCK level, with known block

surface area:

- manhours = f (surface area) for block painting,

- manhours = f (surface area) for final painting.

Sample Representations of Empirical CERs:

For Preliminary Design level CERs for LABOR in MANHOURS:

STRUCTURE manhours:

Preparation = f (Complexity Factor (CF), number of parts)

Fabrication = f (CF, number of parts)

Sub-Assembly = f (CF, weight, surface area, weld length)

Assembly = f (CF, weight, surface area, weld length)

Erection = f (CF, weight, surface area, weld length)

PIPING manhours:

Preparation = f (CF, number of parts)

Fabrication = f (CF, number of parts)

Sub-Assembly = f (CF, number of parts)

Assembly = f (CF, number of parts)

83
OUTFITTING manhours:

On-Unit Outfitting = f (CF, number of parts, weight)

On-Block Outfitting = f (CF, number of parts, weight)

On-Board Outfitting = f (CF, number of parts, weight)

PAINTING manhours:

Block Painting = f (CF, surface area requiring paint)

Final Painting = f (CF, surface area requiring paint)

SUPPORT manhours: = f (CF, displacement)

Complexity Factors:

There are several types of complexity factors that have

been introduced into the PODAC system that adjust CER's.

Several of these empirically derived complexity factors

have been presented in the previous section. Complexity

factors adjust CER equations according to each level of the

hierarchy of the PWBS. The reason for this is that working

conditions become increasingly more difficult, time

consuming, and expensive as the work progresses from the

workshop to on board installation. Ideally the most

preferable place to do work would be:

0 Under Cover

84
 .. nuwimus
...ng
min m
e.-
i in
ynsu
uumulys
mmm na. ienmi
"".. - m ---- '1111111"'- =111111..11.11............ --

* At an easily accessible area

" Where less support services are required

" Where tools and equipment are readily available

Thus the most cost efficient place to construct and

assemble the vessel is in the workshop. The least desirable

work location is to do the work on board. On block work

when the blocks are not too large (under 500 tons) are more

convenient workplaces than onboard. There is added

productivity if the blocks can be assembled under cover to

eliminate the effects of weather conditions. Lastly on unit

work, which involves the assembly of outfit modules, can

produce cost savings since it is easier to access, assemble

and outfit a unit on block rather than on board. Figure 32

shows comparative complexity factors assigned to different

work sites.

Addad Cost Factor

500%

400%-

300%-

200%-

100% 6
0%
In Shop On Block On Board

Figure 32. Complexity Factor by Work Stage (15)

85
Complexity factors differ not only by the location of the

work, but by the type of work being performed at that

particular location. For example down hand welding is much

cheaper and more productive than overhead work at any stage

of production. However, the CER's being used at each level

of the PWBS cannot be the same for the same type of work

being conducted due to the difficulty of access to the

workplace. Figure 33 shows typical complexity factors that

are assigned to different working sectors of a vessel.

TABLE 10.1 Typical Added Complexity Of Ship Zone Work

Ship Zone Added Cost Factor

On Weather Deck 0%
Oil Tanks 25%
Engine Room 50%
Superstructure 25%
Pump Room 50%
Holds 10%
Double bottom 25%

Figure 33. Complexity Factor by Work Area (23)

Interim Products (IP)

The CER's that are developed and incorporated into the new

system are there in order to subdivide the vessel in a

series of pre-costed, re-usable modules or packages of work

to be conducted. Typical examples of standard work packages

86
 are shown in Figure 34. Standard work packages, just like

CERs that are developed for different sections of the ship

are categorized and organized in libraries within the

system. The Cost estimator can then select the appropriate

combination of CERs or work packages pertaining to the

particular project.

I It f11 ' ' I It IIN - Iidm I %sipand M.-imjt-mf-nk

Fi Edt Vie Ervrrnnert LbraP Dala Sytlem Repot Window Het

?ia- @ CPG A Z U

Package De s cripfa n
',.
-~- -- h ; Alummirm b-r, b[7e- as;-_-bl., i tk
i
213 E &L IS i& Sh.' Alum mLLN b" bL. a;Au bli., :%A -6-_ khu
r m bcn20 bk-% asiE--biv, i-ipe _ .: -ti bo::.:rr
33 -E - J -ottor AJUMm
4hA, EAL - F hp,: Ahimitm bowi-n b-1r ar-',, fbly. - pp' - de -.rall
6 -E 3-~ !EA 3Kh
E3, Mi =I bw :-z bi: as;_biv, -at __ :he
734 F E rh~nttn-i M c, I h- h :, - IPr hn
, ppw
r344:JL-Y .. de ':hvIl M Z:u i 21 bcI z. b : el:bv, m-pw. zde i l
jN i4-A-e
.. Alumritmrri iy rkn uu' ;=~" :s . - r7, derr
1P BA 1: &L IButto,- Au ee g Jn uas-ey :ne .:.
11 4-.a-AL- (-:: -:.- AluM Cr w. :on ::C- r2 S~F-
, 11a: -ulu[ b.:.:-

Fird I -,I Im;I mr-nn- nn- ; '7P. -. nII l2k Al O

Figure 34. Examples of Work Packages (14)

Such reusable modules can be subdivided into reusable work

packages that consume a standard amount of material,

require a standard amount of work, and cost a standard

amount of money. A typical example of such a process is

shown on Figure 35.

87
 -- - -_
- ---- ____
--
--

-
Re-Use Package CER:
Welding Repairs:Cracks Labor CER Labor JoM I
Drill Out 0.500 MHtFT
Welding Repairs: 0.250 MHIFT
Gen Labor: 0.250 MH/FT

Total: 1.000 MH/FT

Figure 35. Example of Re-Useable Work Package (16)

In order for such a cost system to be effectively

implemented in shipyards in order to maximize cost savings

presented by pre outfitted, modular construction, it is

necessary that the technical design information sent to the

shipyard is tailored with such a build organization

strategy in mind. Experience from the construction of the

DDG-51 showed that although the shipyards had the

capability to construct the vessel using modular methods

and on block outfitting, the lack of design consideration

to the generic build strategy resulted in excessive re-

workings and a low level of productivity.

SPAR Associates conducted a study to determine the possible

cost savings that could occur by the use of a modular, PWBS

strategy built vessel that attempted to maximize cost

savings through the use of minimal on board outfitting.

Figure 36 shows a summary of the results. It is important

88
 to note the 16% cost savings realized by the implementation

of such a generic build strategy.

s I An lv
si5 Mcde1: S-jvi,qs rrc-, bkc k & 0ei Jn i OuIi it nq
Ssr ;:le S'im Drdjctic-. 20 130 2T T sikr

S.-rrrary ir 'cw'd St'p

Cos v

O rI C=ni c.ck Cri J Trt Cvi sad ';c:I Ra i&od Ca

&
5:C,5 - C . 5 XR ti 4 S% 1
15275 57! 7CC165CC
5yJro;
z%2 2X
_C S 106 CC
%

=e le ,4C X,13C
1% 3 1.5
1.C 2S
5 !1S4C

j1' 63 1&'n I 1I3

Grig mal taaid -aings

_,2 D-
cc C 312-1
37!
313
12
1E
5
T, :)-ce SXelCC'202C S 2522C.28 S63 . 719 927 1.5%

Figure 36. Possible Outfitting Cost Savings (15)

Design Trade off Capabilities

An interesting feature of the new PODAC system is the

incorporation of new hullforms such as catamarans, and

trimarans into the database. The development of new CER's

for different vessel classes and designs is very important

as the Navy continues to design and purchase vessels with

such configurations. Any added data into the system and CER

libraries helps make the final ship cost estimation more

89
 ..
. ................................. --------------

realistic. Clearly submarine CER's cannot be used for

destroyer class vessels. Similarly, steel monohull CER's

cannot be used for composite trimarans. Figure 37 shows the

variations of material CER's that are available with the

new PODAC system.

Stuctwal Mateial Selections: MMICode Structiral Materia Setections Nanced

Ml Steel (A. 8. C, CS, D. Ei Composte FRPC-Aed Ponei 12
HTS (AH) 2 Compoite - FRP Shf1ened Panel 3
HY -80 3 Comrs0e - FRP Stiffened Section 14
HSLA-80 4 Comvoste - SCRW FRP Cored Pane Is
H -100 5 Caffoste - SCFAW FRP Stiffened Paei 1_ _

HSLA-100 6 Coposue - SCRW FRP Stffened FUt Section 17

-. 1 30 7 Compeoste - vARTM E-gtsitnyesteir -USection 1
wanmAn (4:P Ti 5OAS Ti 130) a Composie - Carbon Fer & Epoxy 19

Aurzanum (Sxx) 9 Compomite KevAw 3 Epoxy 20

Aiumknum
r (2xn 7 10 opte - E-Gfas & EpoxY 21
Stanw*ss Steel itokpex Grscsj) 11 LASCCR Meil Sand 22
AdvwnCed Metabc or Noin-metW CoffpoksOe 23

De fo# each nudef W provided in StrwctprpfrAy eleit.

saeH Wor kshet. Advanced L9twett. 7?WT Capwcty 24
SJ4 HTs 3 3A Ad Steel 25
1113 HTS. d2MWSleel 26

Figure 37. Material Options with PODAC (16)

The inclusion of such data has led to a new area of

important design trade offs. That is the decision between

choosing different materials for particular ship regions.

The use of a re-use/ modular construction and design allows

the designer or cost estimator to immediately determine the

cost of using different materials for the whole vessel or

for parts of it. Figure 38 shows the effect on weight of

using different materials on a Trimaran hull.

90
 ...............

Trimaran Hull Materials

4,000
3.500 2,"1
3,000
2,500
2,000
1.500
1,000
500

Ftf

# , ~ .0 <
1; 40

Figre 8. ateia Trde-ff nalsi

(16)

As already stated rather repeatedly throughout this thesis,

it is not enough to simply have a weight based analysis in

order to determine costs. In an effort to produce lower

costs, DDG-51's deckhouse was built with thin plate. This

resulted in excessive plate distortion due to the welding

process. This distortion made the assembly of blocks highly

labor intensive requiring the use of hydraulic rams. Figure

39 shows the clear benefit of using a non weight based

system to analyze ship construction costs.

91
 e.s Structural Hull Materials
0

C. $20,000
.0 $18,000
4,5 $16.000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,00
Ir E)
wo C5Z

U) 7@ 4:
(D )< a" < <
LCs co
Cs X

Figure 39. Construction Cost Material Trade-off (16)

Although Aluminium is the least cost solution as presented

in Figure 38, it suffers from higher installation costs.

The welding process is difficult, expensive, and requires

highly trained labor. Aluminium also has a lower tensile

strength than steel and therefore requires stronger

structure to support the hull, equipment, and armament.

This results in more structure and thus higher costs. The

PODAC system has the capability with its comprehensive

CER's to incorporate the build complexity and difficulty of

production into its predictions.

Other trade-off studies that can be conducted by the new

system include:

92
 " Changes in equipment and related auxiliary systems

e.g. AZIPOD propulsion versus geared diesel and rudder

propulsion.

* Changes in subcontractors e.g. subcontracting the

vessel pipe work.

" Changes in general arrangement or mission requirement.

Such trade-off capabilities allow the vessel designers an

immediate understanding of the cost implication of their

design decisions or changes. An understanding on the part

of the designer as to why costs increase is a fundamental

paradigmatic change in the thought process of ship

procurement. It should definitely result in cheaper and

faster vessel construction.

Risk Analysis

An important capability of the PODAC system is the ability

that it presents the cost estimator to specify a range of

possible costs for items or processes that are considered

high risk. The greater the risk, the greater the

probability that the cost estimate is not realistic.

Since it is impossible to exactly determine beforehand the

type of probability distribution that can be applied to

93
each process or CER due to the variability of real life

issues, the program requires the input of an expected

maximum and minimum value of cost. This essentially

presents a series of triangular probability distributions.

The program then combines the different probability

functions into one single, complex distribution and the

data is analyzed using Monte Carlo Risk. The data is then

combined into a cumulative probability distribution of

costs. Figure 40 shows an example of such a distribution.

CO :4_1 0m1 1r 41: I

Siandard N rmal Distribution, Z-Values

Figure 40. Cumulative Cost Distribution (14)

The existence of a probability distribution allows the

estimator to develop a sense of confidence in the data that

is produced, the probability that the estimate will be

wrong, and what the range of possible cost will be about

the expected prediction. The probability that cost does not

94
exceed the estimators most likely cost estimate is

presented in Figure 41.

PC7 79
~WTE mA~.OMIAI~ w~UrE ~AR AP~94 f

21.: _______________ S22L>

1, (1)"n, ---

Figure 41. Probability Cost does not Exceed Estimate (14)

Life Cycle Costs

Life cycle costs can be essentially divided into four main

stages: conception, acquisition, operation, and disposal.

In order to correctly cost and evaluate a project it is

necessary to make a prediction for each stage. Such costs

have always been an area of concern for commercial ship

owners. The reason is that ship owners are interested in

the final bottom line of profit and return on investment.

SPAR Associates' shipyard cost estimating program provides

ship owners with design trade-offs that pertain to life

95
cycle costs. The significance of operational and

maintenance costs (about 75% of life cycle costs) has been

already stated several times in previous sections. The cost

estimating program allows the ship owner and the designer

to immediately determine the required freight rate in order

to have a certain return on investment (ROI) over a certain

time period. Thus the design trade-off analysis can be

expressed in terms of life cycle costs.

The importance of this added feature should not be

overlooked by the Navy. Although naval acquisitions do not

have a particular ROI requirement, they must satisfy a

national security commitment at the least possible cost. It

is therefore necessary for the Navy to understand the

components of life cycle costs and how it is possible to

reduce them. The Navy currently has several reporting

systems such as the Ownership Architecture Retrieval System

(OARS) for maintenance issues, COMET for personnel costs,

which are all part of a Total Ownership Cost (TOC)

breakdown. These systems deal with life cycle costs but

they are not integrated between themselves in order to

provide direct answers to design trade off questions at the

design, costing, and acquisition decision level.

96
Problems:

Several issues have arisen due to the lack of coordination

between the Navy, shipyards, and subcontractors. Designers

building ships for the US Navy are using system based cost

estimates which do not focus on the producibility of

design. Shipyards are costing and building vessels with a

product based approach; while the Navy is conducting its

own cost operation using cost data provided by the shipyard

in a product based format!

A cost estimate is only as good as the information

supporting the estimate... if historical costs cannot be

collected in ways that identify modular block costs,

estimating by modular blocks can be difficult and will

probably have a relatively high degree of risk in the

accuracy and validity of the estimate. (14) It is therefore

imperative that shipyards organize costs in ways that can

directly benefit the cost estimating process.

97
CHAPTER 6 - MIT MATH MODEL

The MIT Math Model was developed in 1975 by Clark Graham

while serving as the 13A course Associate Professor of

Naval Construction in conjunction with 13A student R.

Hamley. It was developed as an educational tool in order to

assist 13A students with the ship cost estimating process

for their ship design projects. It was adapted from the

Navy Synthesis Model and called "Simplified Math Model for

the Design of Naval Frigates". The model was revised and

updated in 1984, 1986, 1988, and 1990. It is in excel

format and designed to be a balance between simplicity,

sophistication, and generality. It is relatively easy to

understand and use and it is compatible with all personal

computers.

Users of the model have to; however, understand its

limitations. It is designed in order to be applicable to

Naval Frigates, with a range of displacements from 2500 to

8500 tons. The model analyzes only conventional monohulls

and assumes standard USN design practices. The system is

limited to single screw vessels with diesel generator sets.

The hull materials considered are mild steel hull with

options for aluminium or mild steel superstructure. The

98
system uses the USN SWBS weight breakdown system for

weights. The empirically derived CER's are therefore

primarily weight based. The model therefore has a limited

scope without much flexibility for change. Having said

that, its purpose is a teaching tool for naval ship design.

The students are not presenting their designs to NAVSEA for

appropriations from Congress, nore are they submitting

detailed engineering designs to shipyards for construction.

Thus at this level of preliminary design the model appears

to be successful. Even the most modern (PODAC) systems

still use parametric weight based empirical CER's from

historical data (Chapter 5) . Thus MIT's system is not using

methods that far from standard industry practice at this

level of design.

99
CHAPTER 7 - SHIP COST REDUCTION SUGGESTIONS:

1. Improve quality of Cost Estimates

* Improve the current cost estimating method that the

Navy is using incorporating improvements discussed

throughout this thesis.

0 Conduct independent cost estimates in addition,

support, and comparison of the Navy predictions to

assure accuracy.

* Conduct independent cost estimates of any change order

work that is suggested by shipyards in order to

determine accuracy and reliability.

2. Improve contract award process

0 Negotiate prices for construction of the lead ship

separately from the pricing of detail design work.

* Separate the pricing of lead ships from follow on

ships. (4)

3. Improve management of programs

Require shipyards to submit monthly cost performance

reports in order to allow project leaders to quickly

become aware of cost driving factors.

100
4. Design Cheaper Vessels

Cheaper vessels can be designed and built in cheaper,

simpler, and faster methods by using the following general

guidelines:

" Maximum use of standard plate and stiffener sizes.

* Avoid using thin plate to avoid distortions

* Do not carry hull curvature into the structure

inside of the hull plating

" Run strakes in the same direction as primary framing

* Design for maximum use of high productivity tools

such as automatic welding

" Design bilge strakes with the same thickness as

bottom plates

* Design to facilitate assembly and erection with

structural units, machinery units, and piping units

" Make port and starboard units similar

" Eliminate camber and sheer

" Eliminate cruiser sterns and cambered transoms

* Maximize use of flat panels, straight frames, and

reduce plate curvature

* Locate knuckles and chins at unit breaks

* Run chins parallel to keel (as much as possible)

101
 0 Simplify bow and stern shape by removing unnecessary

curvature

0 Allow for large deckspace to facilitate outfitting

(9)

It is necessary however to be able to balance producibility

with life cycle costs and performance. The ability to

perform design trade-offs particularly at the conceptual

and early stages of design, where decisions are generally

established rather firmly, should be a top priority.

102
CONCLUSION

Introducing paradigmatic change in any business is

difficult. Doing so is even harder for government. The

introduction of integrated product teams between the Navy

and the industry co-operating together from concept design

to delivery can ensure a better consideration for

acquisition and total life cycle costs.

Naval ship cost estimating has not seen any significant

change since the 1980's. Cost is still estimated using

outdated and inaccurate weight based ship cost estimating

models whose assumptions and inability to reflect subtle

design changes result in cost overruns.

The PODAC model attempts to deal with many of the issues

cost facing the Navy today. Although the government

essentially funded the project, cost estimations are not

using the new systems. To a large extent this is probably

because the results have not been clear in similar

projects. It probably does not help that the design of the

LPD-17, which ended up being grossly overpriced, included

many PODAC principles. Also in order for the new program to

be effective and produce realistic estimates, it is

103
necessary for both industry and the Navy to practice

operating and thinking in this new and different way. It

will take some time to get accustomed and begin to have

faith in a product based approach but I believe it will

eventually happen for the Navy as it has happened

effectively abroad.

The MIT Math Model is a useful engineering tool. For the

purpose that it serves it is probably a reasonable method.

Its estimates are not expected to be realistic given the

limitations of the model. It should be examined whether it

would be possible to acquire a cost estimating program such

as the one developed by SPAR Associates in order to improve

the accuracy of the cost estimates conducted at MIT.

104
BIBLIOGRAPHY

1. "An Approach for Developing a Preliminary Cost

Estimating Methodology for USCG Vessels", Mark Gray, MIT,
June 1987

2. Cost Assessment in Ship Production, The Naval Architect,

March 2005
3. Design and Cost Estimating Metrics, NASSCO, April 2000

4. Defense Acquisitions, GAO, February 2005

5. Characterization of Performance Requirements, NASSCO,

February 1999
6. "A Practical Approach for Ship Construction Cost

Estimating", Jonathan Ross

7. Navy Ship Acquisitions: Options for Lower-Cost Ship

Designs, Ronald O'Rourke, June 2005

8. "Portfolio of Ship Designs: Early-Stage Design Tools",
Thomas Schiller et al, Marine Technology, April 2001
9. "The Impact of Producibility on Cost and Performance in
Naval Combatant Design", Capt. Alan Brown et al, SNAME,

November 1996
10. "Navy Develops Product Oriented Design and Construction

Cost Model", Scott Truver, February 2001

11. "A Parametric Cost Model for Estimating Acquisition

Costs of Conventional US Navy Surface Ships", Kirk Loftus,

Naval Postgraduate School, September 1999

12. "A Producibility Review of the Contingency Producible
Corvette and an Alternative Producibility Design", Corey

Bruno and Thomas Lamb, University of Michigan, Report

#

9050-03-C5
13. Department of the Navy: 2007 President's Budget,
Admiral Stan Bozin, February 2006

105
14. Shipyard Cost Estimating, SPAR Associates Inc.

15. Cost Savings Using Modular Construction Methods & Other

Common Sense, SPAR Associates Inc., August 1998

16. Cost Estimating New Construction & Ship Repair User

Manual, SPAR Associates Inc., January 2003

17. MIT Math Model User Manual

18. NAVSEA Ship Cost Estimating: A Referance Manual for the

Ship Cost Estimator, NAVSEA, versions: 1992, 2002

19. "In Pursuit of a Cost Effective Navy", Prof. Frankel,

The Institute of Marine Engineers, September 1994

20. Short Course on Modern Ship Production and Ship Repair,

MIT, summer 1996

21. Ship Production, Second Edition, Richard Storch et al,

SNAME, 1995

22. Practical Ship Design, David Watson, 1998

23. Ship Design and Construction, Thomas Lamb, SNAME, 2003

24. Welding Mechanization and Automation in Shipbuilding

Worldwide, Richard Boekholt, 1996

25. Product Oriented Design and Construction (PODAC) Cost

Model Development, Howard Bunch, University of Michigan,

May 1995

26. DD-21 Cost Estimate: Cost Approach Methodology, SC 21

Program Office, June 1997

106
27. "Evolution of US Naval Surface Combatant Design and

Acquisition Policies", John Hootman et al, SNAME

Transactions, 2004

107