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, CBO 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.
In developing its estimates for the costs of the Navy’s ships, CBO relies on a method that has four stages:
- CBO first projects the size of a future ship, using existing ship classes as guides for the size and capabilities of the new ship.
- 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.
- 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 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).
- 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 and is projected to grow 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.