The carrier Ford’s construction costs seem way out of line even allowing for traditional first-in-class elevated costs. In fact, carrier costs seem to have been increasing over and above simple inflation increases. Those are my impressions at any rate. Let’s take a look at some data and see what the situation really is.
While some might be tempted to write the Ford costs, staggering as they are, off to first-in-class, we should note that the second and third Fords are also projected to be around $12B each and we know with 100% certainty that those cost estimates will go up! So, the Ford costs are not just first-in-class costs but real, albeit stunning, cost increases for unknown reasons.
The overall conclusion is absolute, if unexplainable: carrier costs are rising faster than inflation. I have no idea why carrier costs are rising faster than inflation and without access to a detailed, itemized cost list, I can’t begin to explain it.
That was from ComNavOps, “Carrier Costs.” Even though he is flabbergasted by the cost increases of carriers, I’m actually surprised at how flat the construction costs have been. For example, between the launch of CVN-68 in 1972 and CVN-78 in 2013, the real price change over and above inflation was only 1.1 percent per year. That’s nothing compared to 5-9 percent real price change found in many other military systems, or in healthcare and education.
If we take the real price change between CVN-68 and CVN-76 (launched in 2001), then it was only 0.2 percent per year. Seems to be no issue there. That’s a world I’d like to live in. Only between the CVN-76 and CVN-78 do we get to a 3 percent real price change figure, which better reflects average price increases in the Navy’s shipbuilding index, which the Navy claims “historically it has been up to three percentage points higher than general inflation.”
One uncertainty about all this is that the GAO didn’t specify what “inflation” index it used. For example, if it (correctly) used the GDP Price Index, about 2-3 percent a year, these numbers might look very different than if the Consumer Price Index were used, usually about percent higher than the GDP Price Index. If the Navy’s shipbuilding index were used to deflate the carrier costs shown above, then we are in effect compensating not just for inflation, but for inflation and the real price change in Navy labor/material costs, which has historically been about 3 percent above inflation.
Let’s say that the CVN-68 costs, shown at $8.5 billion, were deflated using the shipbuilding index, which let’s conservatively say is 1 percent greater than “real” inflation. That means the figure appears to be 50 percent too high. Instead of $8.5 billion, CVN-68 could, under these assumptions, be about $5.6 billion. That makes it look like carrier costs are growing much faster.
One issue here is that the Navy’s official SCN index as measured by the BLS was indeed a bit faster than inflation, but is not quite 1 percent higher, let alone 3 percent as the Navy reports in their 30 year shipbuilding plan. The Navy uses a different index in their cost estimation practices that isn’t publicly available. So there’s a few indexes floating around, not to mention the shipbuilding indexes developed by in the Producer’s Price Index or the Bureau of Economic Analysis.
Let’s do a quick open-source fact check. Wikipedia says that CVN-68 construction costs were $1.0 billion in 1975 dollars. If we hit that with regular (raw) inflation, then the total cost is now $3.8 billion in FY 2019 dollars. That is substantially less than the reported $8.5 billion figure. This implies that the GAO/ComNavOps were deflating the CVN-68 costs using an index that grows annually at 1.8 percent over and above inflation.
We can pretty safely conclude that the figures shown in the table above are not an accurate reflection of what the casual observer would suppose. Those figures are in a “constant price” rather than inflation-adjusted constant year dollars. Over decades, small changes to these adjustments can make all the difference. After all, 1.8 percent over 40 years creates a factor over 2x.
One last point. Even with a detailed, itemized breakdown of costs by component, it wouldn’t tell you much about the sources of cost escalation. There’s simply no way that the allocation of costs to different Work Breakdown Structure items has been that consistent over time, and with variations in labor and material assignment. These assignments are highly subjective, and can be very dependent upon how contracts were formulated in addition to nuances of accounting systems.
Leave a Reply