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1 How the CBO Estimates the Cost of New Ships 1 (April 2018)

handle is hein.congrec/cbomayw0001 and id is 1 raw text is: Hw CAPRIL 2018 How CBO Estimates the Cost of New Ships At the direction of the Congress, the Department of Defense generally issues annual reports that describe the Navy's plan for building new ships over the next 30 years. To assist the Congress, the Congressional Budget Office evaluates the Navy's plan and produces its own estimates of those costs.' The estimates, which are expressed in constant dollars, can also be found in CBO's cost estimates as well as in other reports related to the construction of naval warships.2 In developing its estimates for the costs of the Navy's ships, CBO relies on a method that has four stages: 0 CBO first projects the size of a future ship, using existing ship classes as guides for the size and capabilities of the new ship. 0 The agency then uses historical data from an analogous class of ship (or analogous classes) to calculate the new ship's cost per thousand tons, multiplying that cost by the size that was determined in the first step. 0 As a third step, CBO adjusts the cost of the ship by factors associated with rate (the production efficiencies that are made possible when several ships of the same type are built simultaneously or in close succession at a given shipyard), learning (the gains in efficiency that accrue over the duration of a ship's production as shipyard workers gain familiarity with 1. See, for example, CBO's most recent assessment of the Navy's 30-year shipbuilding plan: Congressional Budget Office, An Analysis of the Navy Fiscal Year 2017 Shipbuilding Plan (February 2017), www.cbo.gov/publication/52324. 2. For examples of related reports, see Congressional Budget Office, Comparing a 355-Ship Fleet With Smaller Naval Forces (March 2018), www.cbo.gov/publication/53637, and Costs ofBuilding a 355-Ship Navy (April 2017), www.cbo.gov/ publication/52632. a particular ship model), and acquisition strategy (such as whether ship contracts are granted directly to a company or awarded as the result of a competitive process). 0 In the final step, CBO adjusts the estimated cost of the ship to account for the fact that inflation in the shipbuilding industry has been growing, and is projected to continue growing, faster than inflation in the economy as a whole. The difference between the naval shipbuilding index and the gross domestic product (GDP) price index is added to CBO's constant-dollar estimates to reflect real (inflation- adjusted) growth in costs. To illustrate its analytic method, CBO shows in this report how it estimated the cost of building Virginia class submarines when analyzing the Navy's 2017 shipbuilding plan. Projecting the Size of Future Ships To estimate the cost of a future ship, CBO first uses data from the Navy to estimate the ship's size, which is traditionally measured as displacement-the weight of the water it displaces. At this stage, CBO determines the size by full-load displacement for surface ships and by submerged displacement for submarines, both of which measure the weight displaced by the ships with their contents-crew, stores, ammunition, and fuel and other liquids. If such data are not available (perhaps because the ship is projected to be built in 20 years and the Navy does not specify ship designs that far in advance), CBO makes its estimate based on the sizes of existing ships of the same type that perform the same missions. For example, the Navy has described the DDG(X), a guided missile destroyer, as a future midsized sur- face combatant, although it has not yet designed the ship. The Navy estimates that the cost of a DDG(X)

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