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Letter to the Honorable John McCain 1 (December 2010)

handle is hein.congrec/cbo10046 and id is 1 raw text is: CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director U.S. Congress Washington, DC 20515 December 10, 2010 Honorable John McCain Ranking Member Committee on Armed Services United States Senate Washington, DC 20510 Dear Senator: As you know, the Navy is planning to acquire a fleet of 55 littoral combat ships (LCSs), which are designed to counter submarines, mines, and small surface craft in the world's coastal regions.' Two of those ships have already been built, one each of two types: a semiplaning steel monohull built jointly by Lockheed Martin and Marinette Marine in Wisconsin and an all- aluminum trimaran built by Austal in Alabama. The Navy also has two more ships (one of each type) under construction. The remaining 51 ships would be purchased from 2010 through 2031.2 In response to your request, the Congressional Budget Office (CBO) analyzed the cost implications of the Navy's existing plan for acquiring new LCSs and a new plan that it is currently proposing: Existing Down-Select Plan: In September 2009, the Navy asked the two builders to submit fixed-price-plus-incentive bids to build 10 ships, 2 per year from 2010 to 2014, beginning with funds appropriated for 2010.3 The Navy planned to select one of the two versions of the LCS, awarding a contract for those 10 ships to the winning bidder, and For a full discussion of the LCS program, see Ronald O'Rourke, Navy Littoral Combat Ship (LCS) Program: Background Issues, and Options for Congress, CRS Report RL33741 (December 9, 2010). 2 The 2010 ships would be purchased using procurement funds that the Congress appropriated for fiscal year 2010 but that the Navy has not yet obligated. 3 A fixed-price-plus-incentive contract specifies a target cost, a target profit, a price ceiling, and a profit-adjustment formula (usually involving a sharing ratio that determines how the contractor and the government split any costs incurred above the target cost). When the contractor completes performance, the two parties agree to the final realized cost, and the final price is established by applying the formula. For example, if the final cost is less than the target cost, application of the formula results in a final profit greater than the target profit. Conversely, when the final cost exceeds the target cost, the government reimburses a portion of the extra cost, but not all of it; the portion that is not reimbursed acts to reduce the contractor' s profit below the target amount. The price ceiling is the maximum that may be paid to the contractor; any costs above the price ceiling (unless eligible for reimbursement under other contract clauses) are fully borne by the contractor and reduce profits dollar-for-dollar. See Federal Acquisition Regulation (FAR) 16.403-1. www.cbo.gov

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