Multi-Purpose American Marine Highways Series Product Ship

Task 7.3 Report on Build Strategy & Construction Cost Estimate

Appendix A Construction Cost Estimate

For

Herbert Engineering
Revised August 20, 2010

NOTICE
The cost estimates presented herein are believed to be fair representations of anticipated true costs based upon the design information provided and current average costs experienced within the U.S. shipbuilding industry. SPAR ASSOCIATES, INC. MAKES NO WARRANTIES OF ANY KIND WITYH REGARD TO THIS MATERIAL, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTIBILITY AND FITBNESS FOR A PARTICULALR PURPOSE. SPAR Associates, Inc. shall not be liable for errors contained herein or for incidental or consequential damages in connection with the furnishings, performance or use of this material.

Contents
Contents
1.0 Introduction ........................................................................................................................................... 4 2.0 Basis for the Estimates .......................................................................................................................... 5 2.1 Korean Engineering Package ............................................................................................................ 5 2.2 Korean Material Packages ................................................................................................................ 6 3.0 Summary of Cost Estimates .................................................................................................................. 7 3.1 Summary for Large Commercial U.S. Shipbuilder .......................................................................... 8 3.2 Summary for Mid-Tiered Commercial U.S. Shipbuilder ............................................................... 10 4.0 Engineering & Construction Cost Estimates ...................................................................................... 12 4.1 Engineering & Construction Cost Estimates Large U.S. Commercial Yard ............................... 12 4.1.1 Large Commercial Shipbuilder Using All American Technical Resources & Material Purchasing ......................................................................................................................................... 13 4.1.2 Large Commercial Shipbuilder Using Korean Technical & Material Packages ..................... 19 4.2 Engineering & Construction Cost Estimates Commercial Mid-Tiered Yard .............................. 26 4.2.1 Mid-Tier Shipbuilder Using All American Technical Resources & Material Purchasing ...... 26 4.2.2 Mid-Tier Shipbuilder Using Korean Technical & Material Packages..................................... 33 5.0 Conclusions ......................................................................................................................................... 40 6.0 The ESTI-MATE Cost Models ........................................................................................................... 41 7.0 Estimating Cost Risk........................................................................................................................... 45 7.1 Cost Risk of Applied CERs Due To Price, Economic & Technology Uncertainty........................ 48 7.2 Cost Risk Due To Anticipated Performance Problems of Detail Engineering ............................... 48 7.3 Cost Risk Due To Shipbuilders Relative Inexperience or Lack of Prior Performance ................. 50 7.4 Cost Risk Due To Compressed Production Schedule ..................................................................... 52 7.5 Cost Risk of Rework Due To Immature Detail Engineering When Overlapping With Production53

1.0 Introduction
The following provides a general description of the cost estimates produced for the CCDoTT RORO/Container Carrier designed by Herbert Engineering. Separate estimates were produced for the following: Design, Engineering & Production for a large U.S. shipbuilder that has modern shipbuilding facilities and has demonstrated better levels of productivity than expected from other U.S. shipbuilders. This large yard is not a U.S. Navy combatant builder, but one that has performed well in building commercial ships of the size of this RORO/Containership or larger. Design, Engineering & Production for a mid-tiered U.S. shipbuilder that has modern shipbuilding facilities and has demonstrated good levels of productivity as a U.S. shipbuilder, although somewhat less than expected from the large shipbuilder described above. This mid-tiered yard also is not an exclusive U.S. Navy combatant builder, but has been engaged in building commercial ships of the size of this RORO/Containership.

Cost estimates also were done for the following build strategies for each of the two described shipbuilders: Design, engineering and production utilizing all American resources for labor, materials and equipments. Design, engineering and production utilizing engineering and material packages provided by a Korean shipbuilder in much the same fashion as Hyundai and Daewoo has done for NASSCO and Aker Philadelphia Shipyard, Inc. (APSI) in the construction contracts for the 42,000 DWT product carriers over the past number of years.

The cost estimates for each of the above build scenarios were developed using SPARs ESTIMATE cost models. Section 6 generally describes these models and their capabilities. Finally, cost estimates (refer to Appendix B) were produced for a simulated commercial trailer and container transportation market in and out between the following U.S. East coast ports: Brunswick, GA (BGA) Norfolk, VA (NFK) New Haven, CT (NHC)

A second market route scenario is a round trip run only between BGA and NHC. These simulations estimated annual costs for capital, operations and maintenance in order to determine approximate required freight rates (RFR).

2.0 Basis for the Estimates

The base design that is to be considered is HEC's concept seven which includes 4 decks plus container cranes, drawing number 2009-76-06. The vessel has the following dimensions, capacities and characteristics; Length Overall Length Between Perpendiculars Breadth (Molded) Depth to Main Deck (Freeboard) Depth to Upper Deck Design Draft RO/RO Area (approximately) Trailer Capacity Container Capacity (stacks) Propulsion Service Speed (approximately) Weights & Margins Steel Mach & Electrical Outfitting Total Lightship 180.3 M 172.0 M 36.6 M 12.9 M 18.5 M 6.7 M 15,500 SM 181 194 Twin crew Diesel Electric, 23,500 KW 18 knots 10,800 MT 2,200 MT 1,400 MT 14,400 MT

The prices are estimated for the year 2012. Separate estimates are provided for each build scenario: Non-recurring engineering and production planning; Lead ship construction; and Construction cost for lead ship, one-of-three and for one-of-five multiple ship construction programs.

2.1 Korean Engineering Package

For the Korean engineering package, the following assumptions were made: The Korean engineering package is estimated at U.S. $12-million The U.S. shipbuilders contribution the detailed engineering and production planning is in addition to integrate the Korean technical data into the shipyard operations, facilities and capabilities.

2.2 Korean Material Packages

For the Korean material packages, the following assumptions were made: The cost savings for the shipbuilder for using Korean material packages is estimated to be approximately 25% The labor savings for the shipbuilder having to use the prepackaged materials is estimated to be 10%. The material packages would include pre-manufactured items, such as pipe spools, and eliminate/minimize these manufacturing processes from the shipbuilders responsibilities. In addition, it is assumed that these material packages would be delivered in an orderly way to better meet production schedules for earlier and more productive stages of construction.

3.0 Summary of Cost Estimates

This section summarizes the cost estimates detailed below in subsequent sections. Figure 3.0.1 compares for each build strategy the non-recurring costs, the lead ship construction costs, and associated cost risk. Details describing cost risk are provided in Section 7.

Millions

$400

180.3 Meter CCDoTT RORO/Container Carrier

Lead Ship Should Cost $340.21 $307.48 Non-Recurring Cost 20% Cost Risk $291.87 $259.11

$350

$300

$250 2012 US$ $202.19 $200

$238.38 $214.27 $178.32 $187.86

$235.62 $213.17

$165.88 $150

$100 $21.61 $26.15 $24.74 $11.21 $18.91 $17.28 $27.61 $19.68

$50

$Large Yard w/ USA Large Yard w/ Mid-Tiered Yard w/ Mid-Tiered Yard w/ Technical & Korean Technical & USA Technical & Korean Technical & Material Packages Material Packages Material Packages Material Packages

Figure 3.0.1: Lead Ship Cost Comparison for Four Different Build Strategies

3.1 Summary for Large Commercial U.S. Shipbuilder

Figure 3.1.1 provides for the large U.S. commercial shipbuilder the lead ship and follow ship average costs including apportioned1 costs non-recurring efforts. The should cost assumes an engineering and production program that is executed smoothly according to basic characteristics of the shipbuilder and of the engineering efforts. A more likely set of costs include a measure of an estimated maximum cost risk. Figure 3.1.1 further assumes that the large U.S. commercial shipbuilder provides all the nonrecurring cost efforts and all material purchases are made directly by the shipbuilder.

Large Yard w/ USA Technical & Material Packages

$300

Should Cost $250 $221.10 $200 $197.79 $206.43 $183.17 $191.09 $238.38

$150

$100

$50

$Lead Ship w/Non-Recurring Costs One-of-Three Cost w/Allocated One-of-Five Cost w/Allocated NonNon-Recurring Cost Recurring Cost

Figure 3.1.1: Large Commercial U.S. Shipbuilder Using All American Technical & Purchasing Services
Non-recurring costs for design, engineering and detail production planning are apportioned across a multiple ship construction program equally. For example, for a three-ship program, each ship cost estimate includes one-third of the total non-recurring costs. For a five-ship program, each ship cost estimate includes one-fifth of the total non-recurring costs.
1

Figure 3.1.2 shows resulting cost savings for the large shipbuilder by its purchasing a complete design and detail production engineering package from a notable Korean shipbuilder that is experienced in providing such services. The large U.S. shipbuilder does contribute some technical efforts to implement the Korean technical package within its production operations. These estimates further assume that the large shipbuilder has purchased the majority of equipment and construction materials (except for steel) from the Korean shipbuilder.

Millions

$250

Large Yard w/ Korean Technical & Material Packages

$214.27 $203.06

$200 $176.30

Should Cost $184.19 $163.02 $170.25

$150

$100

$50

$Lead Ship w/Non-Recurring Costs One-of-Three Cost w/Allocated Non-Recurring Cost One-of-Five Cost w/Allocated Non-Recurring Cost

Figure 3.1.2: Large Commercial U.S. Shipbuilder Using Korean Technical & Purchasing Services

3.2 Summary for Mid-Tiered Commercial U.S. Shipbuilder

Figure 3.2.1 provides for the mid tier shipbuilder the lead ship and follow ship average costs including apportioned costs non-recurring efforts. The should cost assumes an engineering and production program that is executed smoothly according to basic characteristics of the shipbuilder and of the engineering efforts. A more likely set of costs include a measure of an estimated maximum cost risk. Figure 3.2.1 further assumes that the mid tier shipbuilder outsources all the non-recurring cost efforts to a U.S. engineering firm and all material purchases are made directly by the shipbuilder.

$250

Mid-Tiered Yard w/ USA Technical & Material $235.62 Packages

Should Cost $209.48 $198.48 $186.31 $172.21 $183.39

$200

$150

$100

$50

$Lead Ship w/Non-Recurring Costs One-of-Three Cost w/Allocated One-of-Five Cost w/Allocated NonNon-Recurring Cost Recurring Cost

Figure 3.2.1: Mid-Tier U.S. Shipbuilder Using All American Technical & Purchasing Services

10

Figure 3.2.2 shows resulting cost savings for the mid tier shipbuilder by its purchasing a complete design and detail production engineering package from a notable Korean shipbuilder that is experienced in providing such services. The mid tier shipbuilder does contribute some technical efforts to implement the Korean technical package within its production operations. It further assumes that the mid tier shipbuilder has purchased the majority of equipment and construction materials (except for steel) from the Korean shipbuilder.

$250

Mid-Tiered Yard w/ Korean Technical & Material Packages

$213.17 $193.49 $180.91 $169.56 Should Cost $165.91 $155.51

$200

$150

$100

$50

$Lead Ship w/Non-Recurring Costs One-of-Three Cost w/Allocated One-of-Five Cost w/Allocated NonNon-Recurring Cost Recurring Cost

Figure 3.2.2: Mid Tier U.S. Shipbuilder Using Korean Technical & Purchasing Services

11

4.0 Engineering & Construction Cost Estimates

The following provides details of the design and construction cost estimates for the various build strategies.

4.1 Engineering & Construction Cost Estimates Large U.S. Commercial Yard
The overall schedule for the shipyard non-recurring engineering and production planning is estimated to be 12 months. The overall production schedule for the lead ship is estimated to be 18 months, with an overlap with the non-recurring efforts by three months. The ship yard labor rates, fully burdened are as follows: Technical Production $73.88 (2012) $61.56 (2012)

A 6% markup (G&A) on material and 4% markup (G&A) on labor has been applied to the yard estimate and a profit of 12%. The cost estimates for construction include a 5% added cost for design contingency margin (due to current early stage of design development) and a typical 2.5% added costs for anticipated change orders. These costs have been included in the cost models SWBS 1000 group along with MARAD Title XII fees, ABS fees, insurance and bonding costs. It has been assumed that no third party program manager overseeing these efforts is required. This net cost is considered the should cost. This analysis assumes that this would be a three or five ship procurement program, whereby there are learning benefits to both labor and material costs described below. The non-recurring design, detail engineering and production planning costs are allocated equally across the three or five ships for a one-of-three or one-of-five ship should cost estimate. The cost model also develops estimates of cost risk as described in Section 7. Cost risk is assessed based on expected levels of over-runs. Over-runs can be based on problematic production engineering and/or problematic ship construction processes or both. A more likely capital cost includes some measure of this cost risk added to the should cost. A figure of 20% of the total (100%) estimated cost risk has been applied for a more likely ship cost estimate.

12

4.1.1 Large Commercial Shipbuilder Using All American Technical Resources & Material Purchasing The non-recurring detailed engineering and production planning is anticipated to be provided by the large U.S. shipbuilder for approximately 187,643 labor hours. For the all American build scenario, the large yard has been given the following levels of productivity: Relative steel productivity 1.00 Relative outfit productivity 1.00

Productivity factors of 1.0 apply to a large, well-run and efficient U.S. commercial shipbuilder. Figure 4.1.1 summarizes the non-recurring and recurring construction cost estimates for the lead ship. For a multiple ship construction program, an 85% learning curve has been applied to the lead ship labor hours. However, since the 2nd ship of a series typically does not follow this theoretical rate of cost reduction, the 2nd ship has been given a labor hour learning of 95% of the lead ship. The costs for each of the follow ships thereafter have been estimated to follow the 85% learning. In addition, material costs also have been estimated to follow a learning (discount) of 92%, but maxing out at a total 20% off the lead ship material costs. Figure 4.1.2 summarizes total ship costs for multiple ship programs showing estimated levels of learning (labor) and material savings for each successive ship built.. Non-recurring costs are allocated equally across each ship of a series. The blue bars indicate the should cost, including estimated contingency and change orders. The red bars have added the full amount (100%) of estimated cost risk. Figure 4.1.3 breaks out the cost risk into the categories described in the description of the cost models cost risk assessments. Figure 4.1.4 presents the estimated non-recurring labor hours for shipyard engineering and production planning. Figure 4.1.5 presents the estimated manpower requirements for this build strategy scenario.

13

% Margin % Mark-Up % Change Orders % Program Costs % Design Contingencies

% % %

Mono Hull RO/CON/PAX Cost Model

(Model Version March 2009) NON-RECURRING COSTS
Ship Type: HEC RORO-CONTAINER CARRIER - Large US Yard Version: A Basic Research - Concept Design Preliminary Design Functional Design Production Planning & Scheduling 40.00 hours/week $ $ $ $ $ 73.88 per hour 73.88 per hour 73.88 per hour 73.88 per hour 73.88 per hour Purchase Specs & Support ILS, Spares & Load Items Contract Engineering Management Contingency Labor: Contract Detail Design Package Miscellaneous Material & Support: TOTAL NON-RECURRING COSTS: $ $ $ $ $ $ $ $ $ $ $ 2,210,593 2,901,404 736,864 184,216 1,197,405 1,473,729 865,927 16,216,111 Date: 20-Aug-10

2.50 % 5.00 %

Pricing:
Shipbuilder Economic Mark-Up/Down: Technical Wage $/Mhr: $ Production Wage $/Mhr: $ % Overhead: % G&A Labor: % G&A Material: % Profit: 0.0% 32.83 27.36 $ $ 73.88 w/ overhead 61.56 w/ overhead 120% 120% 120% 120% 120% Navy C4ISR Jones Act Premium Material Factor: Current Year: Additional Material Escalation: Shipyard Material Cost Factor: No Yes 1.15 Shipyard Tech Support Labor Factor: Steel Productivity Factor: Outfit Productivity Factor: On-Block Paint Factor: M-Hrs Per Mton 51.16 182.04 29.42 316.21 261.05 188.54 5.12 13.65 87.02 Modular M-Hrs Production M-Hrs 570,286 102,304 42,484 4,000 122,171 139,896 73,586 196,228 1,250,955 $ $ Labor 15,603,804 2,799,169 1,162,411 109,445 3,342,765 3,827,746 2,416,081 5,369,068 34,630,490 $ $ $ Overhead 19,504,756 3,498,961 1,453,014 136,807 4,178,457 4,784,683 3,020,101 6,711,335 43,288,113 $ Shipyard Non-Recurring Engineering & Production Planning Standard Work Week: Labor Rates: Senior Professional/Manager Engineer Designer/Draftsperson/Planner Clerical Contingency (weighted average)

Production Engineering & Construction Drawings,158,051 $ 5

125.00 % 4.00 % 6.00 % 12.00 %

Jigs, Cradles, & Templates, Tools & Instruments 1,487,921 $

Profit not included

Fab/Assy Mod'les 1.0000 No Ext.Modules 1.000 1.0000 1.0000 1.000 0.9500 40 % Hours On Block RMS Men/Month: $ G&A Labor Only 1,404,342 251,925 104,617 9,850 300,849 344,497 217,447 483,216 $ 3,116,744 554,491 $ $ 2012 $ Material 10,659,162 30,296,905 6,347,185 1,407,061 9,099,004 11,464,818 25,000 4,182,446 20,377,164 93,858,745 2,353,848 $ $

2012
1.00 1.000 = none 1.00 MILSPEC Prem.=1.21 1.00 Weight MTons 11,146.1 562.0 1,444.0 12.7 468.0 742.0 7.5% 20.0% 14,375

Estimated Schedules
Est. Detail Engineering Time: Est. Construction Time: Overlap: 253 $ G&A Material Only 639,550 1,817,814 380,831 84,424 545,940 687,889 1,500 250,947 1,222,630 5,631,525 116,334 $ Profit Labor + Material 5,737,394 4,639,773 1,133,767 209,710 2,096,042 2,533,156 681,615 2,039,641 2,591,975 21,663,074 2,026,432 $ $ $ 12.00 Months 18.00 Months 3.00 Months 0.09 Months $ Total 53,549,008 43,304,547 10,581,826 1,957,297 19,563,056 23,642,789 6,361,744 19,036,654 24,191,769 202,188,691 18,913,367 221,102,058 23,873,710 w/o Profit 172,818 w/o Profit 26,929,982 w/o Profit 34,362,756 w/o Profit 1,038,726 w/o Profit 307,480,051 w/o Profit $ $ 202,188,691 221,102,058 16.7% 0.5% $ Cum.Total

Combined Material Cost Factor:

SWBS Group Structures Propulsion Electrical Electronics & Navigation Auxiliary Systems Outfit & Furnishings Armament Technical Support Shipyard Services Margin, Bonds & Insurance Lead Ship Totals: Non-Recurring Costs: 1 2 3 4 5 6 7 8 9 10

% Total Lead Ship G1-7 Man-Hours: Technical Support: Shipyard Services: Fees & Insurance: Non-Recurring Costs:

187,643 $ 13,862,263 15% 4.17% Production $ Costs 12.47% Production $ Costs 15.85% Production $ Costs 12.39% Production $ Costs Production Costs (1-7): $ 152,598,524

Estimated Cost for Prime Contractor Management Team: Over-All Program Management Fee:

0.0% $

Total Price with Prime Contractor Management: $ Est. Construction/Technology Risk: $ 75.5% GR 1-10 0.80 0.80 Estimated Overlap Rework Risk: $ Est. Shipyard Experience Risk: $ Est. Engineering Performance Risk: $ Production Schedule Cost Risk: $ Total Price with 100% Risk: $

Production Hrs/LSW:

87.02

Figure 4.1.2: Large Shipbuilder, All American Technical & Material Purchasing Estimated Lead Ship Cost 14

Average Cost Per Ship of Series 2012US$

Millions

$307

$350 $300 $221 $250

$285

Includes Non-Recurring & Mgmt Fee, If Applicable $263 $248 $238 $230

$224

$210

Average Cost Design & Build

$198

$189

$183

$178

$174

$200 $150 $100 $50 $0 1 2 3

Number of Ships In Series

Figure 4.1.2: Large Shipbuilder, All American Technical & Material Purchasing Estimated Cost Range for Multi-Ship Procurement

15

$171 8

$219

Lead Ship Estimated Price & Cost Risk 2012US$

Millions $250

$202 $200

Non-Recurring Design, Engineering & Planning Est. Price of Construction $150 Est.Construction/Technology CER Cost Risk Est. Overlap Rework Cost Risk Est. Shipyard Experience Cost Risk $100 Est. Engineering Performance Cost Risk Est. Schedule Cost Risk

$50 $34 $19 $TOTALS: $26 $0 $27 $1

Figure 4.1.3: Large Shipbuilder, All American Technical & Material Purchasing Estimated Cost Risk

16

Non-Recurring Costs (Does Not Include Overall Management Fee, If Applicable) 2012US$
Thousands $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $-

Figure 4.1.4: Large Shipbuilder, All American Technical & Material Purchasing Estimated Non-Recurring Costs

17

Estimated Manpower Requirements

250
Structures

Propulsion

200

Electrical

Manpower Requirements

Electronics & Navigation Auxiliary Systems

150

Outfit & Furnishings

100

Armament

Technical Support

50

Shipyard Services

Non-Recurring Design, Engineering & Planning

20 40 60 80 100 120 Weeks from Start of non-Recurring Design, Engineering & Detail Production Planning

Figure 4.1.5: Large Shipbuilder, All American Technical & Material Purchasing Estimated Manpower Requirements

18

4.1.2 Large Commercial Shipbuilder Using Korean Technical & Material Packages The non-recurring detailed engineering and production planning is anticipated to be provided mostly by the Korean shipbuilder for a price estimated to be $12-million. The U.S. large yard will contribute another 95,886 labor hours of non-recurring technical efforts. These shipyard technical efforts are necessary to fully integrate the Korean technical package into the operations and facility capabilities of the shipyard. For the build scenario involving the Korean technical and material packages, the large yard has been given the following levels of productivity: Relative steel productivity 1.00 Relative outfit productivity 0.90

Productivity factors of 1.0 apply to a large, well-run and efficient U.S. commercial shipbuilder. No specific improvements are expected for steel work productivity over the all American build strategy, but the outfit labor should be less. In particular, the Korean material packages should provide the shipbuilder with pre-fabricated parts (pipe spools, etc.) that eliminates the aspect of the shipyards manufacturing costs. It is estimated that these Korean material packages should reduce shipyard outfit labor by 10%. The Korean material packages assumes that a 33% cost savings is available over the cost for equivalent all American direct purchases from normal American vendors and suppliers. However, the more typical cost of freight changes for the shipbuilder has been increased from 5% to 15%. Figure 4.1.6 summarizes the non-recurring and recurring construction cost estimates for the lead ship. For a multiple ship construction program, an 85% learning curve has been applied to the lead ship labor hours. Since the Korean technical package is expected to be well organized to expedite production processes, it is assumed that the 2nd ship, like all other follow ships, follows this labor hour cost savings profile. In addition, material costs also have been estimated to follow a learning (discount) of 92%, but maxing out at a total 20% off the lead ship material costs. Figure 4.1.7 summarizes total ship costs for multiple ship programs showing estimated levels of learning (labor) and material savings for each successive ship built.. Non-recurring costs are allocated equally across each ship of a series. The blue bars indicate the should cost, including estimated contingency and change orders. The red bars have added the full amount (100%) of cost risk. Figure 4.1.8 breaks out the cost risk into the categories described in Section 7. 19

Figure 4.1.9 presents the estimated non-recurring labor hours for shipyard engineering and production planning. Figure 4.1.10 presents the estimated manpower requirements for this build strategy scenario.

20

% Margin % Mark-Up % Change Orders % Program Costs % Design Contingencies

% % %

Mono Hull RO/CON/PAX Cost Model

(Model Version March 2009) NON-RECURRING COSTS
Ship Type: HEC RORO-CONTAINER CARRIER - Large US Yard Version: A Basic Research - Concept Design Preliminary Design Functional Design Production Planning & Scheduling 40.00 hours/week $ $ $ $ $ 73.88 per hour 73.88 per hour 73.88 per hour 73.88 per hour 73.88 per hour Purchase Specs & Support ILS, Spares & Load Items Contract Engineering Management Contingency Labor: Contract Detail Design Package Miscellaneous Material & Support: TOTAL NON-RECURRING COSTS: $ $ $ $ $ $ $ $ $ $ $ 1,763,904 447,976 111,994 727,960 895,951 12,000,000 653,842 21,225,378 Date: 20-Aug-10

2.50 % 5.00 %

Pricing:
Shipbuilder Economic Mark-Up/Down: Technical Wage $/Mhr: $ Production Wage $/Mhr: $ % Overhead: % G&A Labor: % G&A Material: % Profit: 0.0% 32.83 27.36 $ $ 73.88 w/ overhead 61.56 w/ overhead 120% 120% 120% 120% 120% Navy C4ISR Jones Act Premium Material Factor: Current Year: Additional Material Escalation: Shipyard Material Cost Factor: No Yes 1.15 Shipyard Tech Support Labor Factor: Steel Productivity Factor: Outfit Productivity Factor: On-Block Paint Factor: M-Hrs Per Mton 51.16 163.83 26.48 284.58 234.94 169.69 4.90 13.08 83.38 Modular M-Hrs Production M-Hrs 570,286 92,073 38,235 3,600 109,954 125,907 70,504 188,011 1,198,571 $ $ Labor 15,603,804 2,519,252 1,046,170 98,501 3,008,489 3,444,972 2,314,907 5,144,238 33,180,332 $ $ $ Overhead 19,504,756 3,149,065 1,307,713 123,126 3,760,611 4,306,214 2,893,634 6,430,297 41,475,415 $ $ Shipyard Non-Recurring Engineering & Production Planning Standard Work Week: Labor Rates: Senior Professional/Manager Engineer Designer/Draftsperson/Planner Clerical Contingency (weighted average)

Production Engineering & Construction Drawings,135,830 $ 3

125.00 % 4.00 % 6.00 % 12.00 %

Jigs, Cradles, & Templates, Tools & Instruments 1,487,921 $

Profit not included

Fab/Assy Mod'les 1.0000 No Ext.Modules 1.000 1.0000 0.9000 1.000 0.9500 40 % Hours On Block RMS Men/Month: $ G&A Labor Only 1,404,342 226,733 94,155 8,865 270,764 310,047 208,342 462,981 2,986,230 283,345 $ $ 2012 $ Material 7,994,372 22,722,679 4,760,389 1,407,061 6,824,253 8,598,614 18,750 5,923,985 18,705,048 76,955,149 14,141,763 $ $

2012
1.00 1.000 = none 0.75 MILSPEC Prem.=1.21 0.75 Weight MTons 11,146.1 562.0 1,444.0 12.7 468.0 742.0 7.5% 20.0% 14,375

Estimated Schedules
Est. Detail Engineering Time: Est. Construction Time: Overlap: 243 $ G&A Material Only 479,662 1,363,361 285,623 84,424 409,455 515,917 1,125 355,439 1,122,303 4,617,309 577,004 $ Profit Labor + Material 5,398,432 3,597,731 899,286 206,637 1,712,829 2,061,092 652,411 2,198,033 2,379,282 19,105,732 2,650,287 $ $ $ 12.00 Months 18.00 Months 3.00 Months 0.09 Months $ Total 50,385,369 33,578,820 8,393,337 1,928,614 15,986,400 19,236,856 6,089,168 20,514,972 22,206,632 178,320,167 24,736,014 203,056,182 20,776,688 w/o Profit 156,800 w/o Profit 25,912,926 w/o Profit 8,288,371 w/o Profit 920,510 w/o Profit 259,111,477 w/o Profit $ $ 178,320,167 203,056,182 16.7% 0.5% $ Cum.Total

Combined Material Cost Factor:

SWBS Group Structures Propulsion Electrical Electronics & Navigation Auxiliary Systems Outfit & Furnishings Armament Technical Support Shipyard Services Margin, Bonds & Insurance Lead Ship Totals: Non-Recurring Costs: 1 2 3 4 5 6 7 8 9 10

% Total Lead Ship G1-7 Man-Hours: Technical Support: Shipyard Services: Fees & Insurance: Non-Recurring Costs:

95,886 $ 7,083,615 8% 4.70% Production $ Costs 15.84% Production $ Costs 17.15% Production $ Costs 19.10% Production $ Costs Production Costs (1-7): $ 129,509,394

Estimated Cost for Prime Contractor Management Team: Over-All Program Management Fee:

0.0% $

Total Price with Prime Contractor Management: $ Est. Construction/Technology Risk: $ 72.6% GR 1-10 0.80 0.95 Estimated Overlap Rework Risk: $ Est. Shipyard Experience Risk: $ Est. Engineering Performance Risk: $ Production Schedule Cost Risk: $ Total Price with 100% Risk: $

Production Hrs/LSW:

83.38

Figure 4.1.6: Summary of Non-Recurring Engineering & Planning and Lead Ship Construction

21

Average Cost Per Ship of Series 2012US$

Millions

$259

$300

$238

Includes Non-Recurring & Mgmt Fee, If Applicable $223 $214 $206 $200

$250 $203 $187

$195

Average Cost Design & Build

$169

$163

$158

$200

$176

$155

$150

$100

$50

$0 1 2 3 4 5 6 7 8

Number of Ships In Series

Figure 4.1.7: Summary Cost Estimates for Multiple Ship Construction Programs

22

$151

$191

Lead Ship Estimated Price & Cost Risk 2012US$

Millions $200 $180 $160 $140 $120 $100 $80 $60 $40 $25 $20 $0 $TOTALS: $23 $26 $8 $1 Non-Recurring Design, Engineering & Planning Est. Price of Construction Est.Construction/Technology CER Cost Risk Est. Overlap Rework Cost Risk Est. Shipyard Experience Cost Risk Est. Engineering Performance Cost Risk Est. Schedule Cost Risk $178

Figure 4.1.8: Estimated Non-Recurring, Lead Ship Construction Costs & Cost Risk

23

Non-Recurring Costs (Does Not Include Overall Management Fee, If Applicable) 2012US$
$12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $Thousands $14,000

Figure 4.1.9: Estimated Shipyard Non-Recurring Cost Labor Hours

24

Estimated Manpower Requirements

250
Structures

Propulsion

200

Electrical

Manpower Requirements

Electronics & Navigation Auxiliary Systems

150

Outfit & Furnishings

100

Armament

Technical Support

50

Shipyard Services

Non-Recurring Design, Engineering & Planning

20 40 60 80 100 120 Weeks from Start of non-Recurring Design, Engineering & Detail Production Planning

Figure 4.1.10: Estimated Shipyard Manpower Requirements

25

4.2 Engineering & Construction Cost Estimates Commercial Mid-Tiered Yard

The non-recurring detailed engineering and production planning is anticipated to be provided by an outsourced U.S. design and engineering firm for approximately 216,342 labor hours at an average labor rate of $80.74 per hour.. The overall schedule for the shipyard non-recurring engineering and production planning is estimated to be 12 months. The overall production schedule for the lead ship is estimated to be 18 months, with an overlap with the non-recurring efforts by three months. The ship yard labor rates, fully burdened are as follows: Shipyard Technical Production $60.99 (2012) $50.83 (2012)

A 4% markup (G&A) on material has been applied to the yard estimate and a profit of 10%. The cost estimates for construction include a 10% added cost for design contingency margin (due to current early stage of design development) and a typical 2.5% added costs for anticipated change orders. These costs have been included in the cost models SWBS 1000 group along with MARAD Title XII fees, ABS fees, insurance and bonding costs. It has been assumed that no third party program manager overseeing these efforts is required. This net cost is considered the should cost. This analysis assumes that this would be a three or five ship procurement program, whereby there are learning benefits to both labor and material costs described below. The non-recurring design, detail engineering and production planning costs are allocated equally across the three pr five ships for a one-of-three or one-of-five ship should cost estimate. The cost model also develops estimates of cost risk as described in Section 7. A more likely capital cost include some measure of this cost risk added to the should cost. A figure of 20% of the total (100%) estimated cost risk has been applied.

4.2.1 Mid-Tier Shipbuilder Using All American Technical Resources & Material Purchasing For the all American build scenario, the large yard has been given the following levels of productivity:

26

 Relative steel productivity 1.20 Relative outfit productivity 1.20 Productivity factors of 1.0 apply to a large, well-run and efficient U.S. commercial shipbuilder. Figure 4.2.1 summarizes the non-recurring and recurring construction cost estimates for the lead ship. For a multiple ship construction program, an 85% learning curve has been applied to the lead ship labor hours. However, since the 2nd ship of a series typically does not follow this theoretical rate of cost reduction, the 2nd ship has been given a labor hour learning of 95%. The cost for the follow ships thereafter have been estimated to follow the 85% learning. In addition, material costs also have been estimated to follow a learning (discount) of 92%, but maxing out at a total 20% off the lead ship material costs. Figure 4.2.2 summarizes total ship costs for multiple ship programs showing estimated levels of learning (labor) and material savings for each successive ship built. Non-recurring costs are allocated equally across each ship of a series. The blue bars indicate the should cost, including estimated contingency and change orders. The red bars have added the full amount (100%) of cost risk. Figure 4.2.3 breaks out the cost risk into the categories described in Section 7. Figure 4.2.4 presents the estimated non-recurring labor hours for shipyard engineering and production planning. Figure 4.2.5 presents the estimated manpower requirements for this build strategy scenario.

27

% Margin % Mark-Up % Change Orders % Program Costs % Design Contingencies

% % %

Mono Hull RO/CON/PAX Cost Model

(Model Version March 2009) NON-RECURRING COSTS
Ship Type: HEC RORO-CONTAINER CARRIER - MidTiered US Yard Version: A Date: 02-Jul-10 Basic Research - Concept Design $ Prelim inary Design Functional Design $ $ 2,160,183 2,471,179 627,601 156,900 973,319 1,353,420 865,943 19,648,605

2.50 % 5.00 %

Pricing:
Shipbuilder Econom ic Mark-Up/Dow n: Technical Wage $/Mhr: $ Production Wage $/Mhr: $ % Overhead: % G&A Labor: % G&A Material: % Profit: 0.0% 27.11 22.59 $ $ % 60.99 w / overhead 50.83 w / overhead 187% 167% 147% 80% 159% Navy C4ISR Jones Act Prem ium Material Factor: Current Year: Additional Material Escalation: Shipyard Material Cost Factor: No Yes 1.15 Shipyard Tech Support Labor Factor: Steel Productivity Factor: Outfit Productivity Factor: On-Block Paint Factor: M -Hrs Per M ton 61.40 218.44 35.31 379.45 313.26 226.25 6.14 12.29 100.33 15% M odular Producti on M -Hrs M -Hrs 684,344 122,765 50,980 4,800 146,605 167,875 88,303 176,605 1,442,277 216,342 $ $ $ Labor 15,458,757 2,773,149 1,151,606 108,428 3,311,692 3,792,165 2,393,622 3,989,369 32,978,787 17,467,572 $ $ $ Overhead 19,323,446 3,466,436 1,439,508 135,535 4,139,615 4,740,206 2,992,027 4,986,712 41,223,484 $ $ Shipyard Non-Recurring Engi neering & Producti on Planning Standard Work Week: Labor Rates: Senior Professional/Manager Engineer Designer/Draftsperson/Planner Clerical Contingency (w eighted average) $ $ $ $ $ 95.28 per hour 85.06 per hour 74.88 per hour 40.83 per hour 80.74 per hour 40.00 hours/w eek

Production Engineering & Construction Draw ings $ 9,724,971 Production Planning & Scheduling $ Purchase Specs & Support ILS, Spares & Load Item s Contingency Labor: Contract Detail Design Package $ $ $ $

125.00 % 4.00 % 10.00 %

Contract Engineering Managem ent $

Miscellaneous Material & Support:$ TOTAL NON-RECURRING COSTS: $

Jigs, Cradles, & Tem plates, Tools & Instrum ents $ 1,315,089

Profit not included

Fab/Assy Mod'les Estimated Schedules 1.1000 No Ext.Modules 1.000 1.2000 Est. Detail Engineering Tim e: 12.00 Months 1.000 1.2000 Est. Construction Tim e: 18.00 Months 0.9500 40 % Hours On Bl ock 3.00 Months Overlap: RMS Men/Month: 294 $ G&A M aterial Onl y 426,366 1,211,876 253,887 56,282 363,960 458,646 1,000 167,301 775,358 $ $ 3,714,678 0.12 Months $ Profit Labor + Material 4,586,773 3,774,837 919,219 170,731 1,691,427 2,045,718 541,165 1,332,589 2,015,932 17,078,390 1,964,860 $ $ $ $ Total 50,454,505 41,523,202 10,111,405 1,878,037 18,605,698 22,502,898 5,952,814 14,658,484 22,175,250 187,862,292 21,613,465 209,475,757 22,502,084 w/o Profit 157,767 w/o Profit 49,233,360 w/o Profit 57,559,495 w/o Profit 1,278,509 w/o Profit 340,206,973 w/o Profit $ $ 187,862,292 209,475,757 $ G&A Labor Onl y $ $ 2012 $ M aterial 10,659,162 30,296,905 6,347,185 1,407,061 9,099,004 11,466,162 25,000 4,182,513 19,383,959 92,866,952 2,181,033

2012
1.00 1.000 = none

1.00 MILSPEC Prem .=1.21 1.00 Wei ght M Tons 11,146.1 562.0 1,444.0 12.7 468.0 742.0 7.5% 15.0% 14,375

Combined M aterial Cost Factor:

SWBS Group Structures Propulsion Electrical Electronics & Navigation Auxiliary Systems Outfit & Furnishings Armament Technical Support Shipyard Services Margin, Bonds & Insurance Lead Ship Totals: Non-Recurring Costs: 1 2 3 4 5 6 7 8 9 10

16.7% 0.7% $ Cum .Total

% Total Lead Shi p G1-7 M an-Hours: Technical Support: Shipyard Services: Fees & Insurance: Non-Recurring Costs:

4.10% Production $ Costs 10.10% Production $ Costs 15.29% Production $ Costs 14.90% Production $ Costs Producti on Costs (1-7): $ 145,075,745

Estim ated Cost for Prim e Contractor Managem ent Team : Over-All Program M anagement Fee:

0.0% $ $ $ $ $ $ $

Total Price w ith Prim e Contractor Managem ent: $ Est. Construction/Technol ogy Risk: 77.2% GR 1-10 0.53 Estimated Overl ap Rework Risk: Est. Shipyard Experience Risk: Production Schedul e Cost Risk: Total Price with 100% Risk: E 0.61 st. Engineering Performance Risk:

Production Hrs/LSW:

100.33

Figure 4.2.1: Mid Tier Shipbuilder, All American Technical & Material Purchasing Estimated Lead Ship Cost 28

Average Cost Per Ship of Series 2012US$

Includes Non-Recurring & Mgmt Fee, If Applicable Millions $400 $340 Includes Total Cost Risk $311 $282 $350 $300 Average Cost Design & Build $250 $200 $150 $100 $50 $0 1 2 3 4 5 6 7 8 $209

$264

$252

$243

$236

$198

$186

$178

$172

$167

$163

Number of Ships In Series

Figure 4.2.2: Mid Tier Shipbuilder, All American Technical & Material Purchasing Estimated Cost Range for Multi-Ship Procurement

29

$160

$230

Lead Ship Estimated Price & Cost Risk 2012US$

Millions $200 $180 Non-Recurring Design, Engineering & Planning $160 $140 $120 $100 $80 $60 $40 $22 $20 $0 $TOTALS: $1 $25 $58 $49 Est. Price of Construction Est.Construction/Technology CER Cost Risk Est. Overlap Rework Cost Risk Est. Shipyard Experience Cost Risk Est. Engineering Performance Cost Risk Est. Schedule Cost Risk $188

Figure 4.2.3: Mid Tier Shipbuilder, All American Technical & Material Purchasing Estimated Cost Risk

30

Non-Recurring Costs (Does Not Include Overall Management Fee, If Applicable) 2012US$
$10,000 $8,000 $6,000 $4,000 $2,000 $Thousands $12,000

Figure 4.2.4: Mid Tier Shipbuilder, All American Technical & Material Purchasing Estimated Non-Recurring Costs

31

Estimated Manpower Requirements

300
Structures

Propulsion

250
Electrical

Manpower Requirements

200

Electronics & Navigation Auxiliary Systems

150

Outfit & Furnishings

Armament

100
Technical Support

50

Shipyard Services

Non-Recurring Design, Engineering & Planning

20 40 60 80 100 120 Weeks from Start of non-Recurring Design, Engineering & Detail Production Planning

Figure 4.2.5: Mid Tier Shipbuilder, All American Technical & Material Purchasing Estimated Manpower Requirements

32

4.2.2 Mid-Tier Shipbuilder Using Korean Technical & Material Packages The non-recurring detailed engineering and production planning is anticipated to be provided mostly by the Korean shipbuilder for a price estimated to be $12-million. The U.S. mid-tiered yard will contribute another 139,195 labor hours of non-recurring technical efforts. These shipyard technical efforts are necessary to fully integrate the Korean technical package into the operations and facility capabilities of the shipyard. For the build scenario involving the Korean technical and material packages, the mid-tier yard has been given the following levels of productivity: Relative steel productivity 1.20 Relative outfit productivity 1.10

Productivity factors of 1.0 apply to a large, well-run and efficient U.S. commercial shipbuilder. No specific improvements are expected for steel work productivity over the all American build strategy, but the outfit labor should be less. In particular, the Korean material packages should provide the shipbuilder with pre-fabricated parts (pipe spools, etc.) that eliminates the aspect of the shipyards manufacturing costs. The Korean material packages assumes that a 33% cost savings is available over the cost for equivalent all American direct purchases from normal American vendors and suppliers. However, the more typical cost of freight changes for the shipbuilder has been increased from 5% to 15%. Figure 4.2.6 summarizes the non-recurring and recurring construction cost estimates for the lead ship. For a multiple ship construction program, an 85% learning curve has been applied to the lead ship labor hours. It is assumed that the 2nd ship, like all other follow ships, follows this labor hour cost savings profile. In addition, material costs also have been estimated to follow a learning (discount) of 92%, but maxing out at a total 20% off the lead ship material costs. Figure 4.2.7 summarizes total ship costs for multiple ship programs showing estimated levels of learning (labor) and material savings for each successive ship built.. Non-recurring costs are allocated equally across each ship of a series. The blue bars indicate the should cost, including estimated contingency and change orders. The red bars have added the full amount (100%) of cost risk. Figure 4.2.8 breaks out the cost risk into the categories described in Section 7.

33

Figure 4.2.9 presents the estimated non-recurring labor hours for shipyard engineering and production planning. Figure 4.2.10 presents the estimated manpower requirements for this build strategy scenario.

34

% Margin % Mark-Up % Change Orders % Program Costs % Design Contingencies

% % %

Mono Hull RO/CON/PAX Cost Model

(Model Version March 2009) NON-RECURRING COSTS
Ship Type: HEC RORO-CONTAINER CARRIER - MidTiered US Yard Version: A Date: 20-Aug-10 Basic Research - Concept Design Preliminary Design Functional Design Production Planning & Scheduling 40.00 hours/week $ $ $ $ $ 95.28 per hour 85.06 per hour 74.88 per hour 40.83 per hour 80.00 per hour Purchase Specs & Support ILS, Spares & Load Items Contract Engineering Management Contingency Labor: Contract Detail Design Package Miscellaneous Material & Support: TOTAL NON-RECURRING COSTS: $ $ $ $ $ $ $ $ $ $ $ 1,799,054 456,903 114,226 708,590 976,211 12,000,000 653,855 25,103,847

2.50 % 5.00 %

Pricing:
Shipbuilder Economic Mark-Up/Down: Technical Wage $/Mhr: $ Production Wage $/Mhr: $ % Overhead: % G&A Labor: % G&A Material: % Profit: 0.0% 27.11 22.59 $ $ % 60.99 w/ overhead 50.83 w/ overhead 187% 167% 147% 80% 157% Navy C4ISR Jones Act Premium Material Factor: Current Year: Additional Material Escalation: Shipyard Material Cost Factor: No Yes 1.15 Shipyard Tech Support Labor Factor: Steel Productivity Factor: Outfit Productivity Factor: On-Block Paint Factor: M-Hrs Per Mton 61.40 200.24 32.36 347.83 287.15 207.39 5.93 11.86 96.83 Modular M-Hrs Production M-Hrs 684,344 112,534 46,732 4,400 134,388 153,886 85,221 170,443 1,391,948 $ $ Labor 15,458,757 2,542,053 1,055,639 99,392 3,035,718 3,476,151 2,310,094 3,850,156 31,827,960 $ $ $ Overhead 19,323,446 3,177,566 1,319,549 124,240 3,794,647 4,345,189 2,887,617 4,812,696 39,784,950 $ $ Shipyard Non-Recurring Engineering & Production Planning Standard Work Week: Labor Rates: Senior Professional/Manager Engineer Designer/Draftsperson/Planner Clerical Contingency (weighted average)

Production Engineering & Construction Drawings,079,920 $ 7

125.00 % 4.00 % 10.00 %

Jigs, Cradles, & Templates, Tools & Instruments 1,315,089 $

Profit not included

Fab/Assy Mod'les 1.1000 No Ext.Modules 1.000 1.2000 1.1000 1.000 0.9500 40 % Hours On Block RMS Men/Month: $ G&A Labor Only $ $ 2012 $ Material 7,994,372 22,722,679 4,760,389 1,407,061 6,824,253 8,599,622 18,750 5,924,098 17,890,317 76,141,540 13,968,944 $ $

2012
1.00 1.000 = none 0.75 MILSPEC Prem.=1.21 0.75 Weight MTons 11,146.1 562.0 1,444.0 12.7 468.0 742.0 7.5% 15.0% 14,375

Estimated Schedules
Est. Detail Engineering Time: Est. Construction Time: Overlap: 284 $ G&A Material Only 319,775 908,907 190,416 56,282 272,970 343,985 750 236,964 715,613 3,045,662 $ Profit Labor + Material 4,309,635 2,935,120 732,599 168,698 1,392,759 1,676,495 521,721 1,482,391 1,860,593 15,080,011 2,510,385 $ $ $ 12.00 Months 18.00 Months 3.00 Months 0.13 Months $ Total 47,405,984 32,286,325 8,058,591 1,855,674 15,320,347 18,441,441 5,738,932 16,306,305 20,466,523 165,880,123 27,614,232 193,494,355 19,603,269 w/o Profit 143,243 w/o Profit 47,683,877 w/o Profit 29,789,213 w/o Profit 1,156,899 w/o Profit 291,870,855 w/o Profit $ $ 165,880,123 193,494,355 16.7% 0.7% $ Cum.Total

Combined Material Cost Factor:

SWBS Group Structures Propulsion Electrical Electronics & Navigation Auxiliary Systems Outfit & Furnishings Armament Technical Support Shipyard Services Margin, Bonds & Insurance Lead Ship Totals: Non-Recurring Costs: 1 2 3 4 5 6 7 8 9 10

% Total Lead Ship G1-7 Man-Hours: Technical Support: Shipyard Services: Fees & Insurance: Non-Recurring Costs:

139,195 $ 11,134,903 10% 4.65% Production $ Costs 13.22% Production $ Costs 16.59% Production $ Costs 22.38% Production $ Costs Production Costs (1-7): $ 123,368,362

Estimated Cost for Prime Contractor Management Team: Over-All Program Management Fee:

0.0% $

Total Price with Prime Contractor Management: $ Est. Construction/Technology Risk: $ 74.4% GR 1-10 0.53 0.80 Estimated Overlap Rework Risk: $ Est. Shipyard Experience Risk: $ Est. Engineering Performance Risk: $ Production Schedule Cost Risk: $ Total Price with 100% Risk: $

Production Hrs/LSW:

96.83

Figure 4.2.6: Mid Tier Shipbuilder Using Korean Technical & Material Packages Estimated Lead Ship Cost 35

Average Cost Per Ship of Series 2012US$

Millions

$350 $292 $300 $250 $269 Includes Non-Recurring & Mgmt Fee, If Applicable $247 $233

$223

$216

$210

Average Cost Design & Build

$193

$181

$162

$156

$151

$200 $150 $100 $50 $0

$170

$147

Number of Ships In Series

Figure 4.2.7: Mid Tier Shipbuilder Using Korean Technical & Material Packages Estimated Cost Range for Multi-Ship Procurement

36

$144 8

$205

Lead Ship Estimated Price & Cost Risk 2012US$

Millions $180 $166 $160 Non-Recurring Design, Engineering & Planning Est. Price of Construction $140 Est.Construction/Technology CER Cost Risk Est. Overlap Rework Cost Risk $120 Est. Shipyard Experience Cost Risk Est. Engineering Performance Cost Risk $100 $80 Est. Schedule Cost Risk

$60 $48 $40 $28 $21 $20 $0 $TOTALS: $1 $30

Figure 4.2.8: Mid Tier Shipbuilder Using Korean Technical & Material Packages Estimated Cost Risk

37

Non-Recurring Costs (Does Not Include Overall Management Fee, If Applicable) 2012US$
$12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $Thousands $14,000

Figure 4.2.9: Mid Tier Shipbuilder Using Korean Technical & Material Packages Estimated Non-Recurring Costs

38

Estimated Manpower Requirements

300
Structures

Propulsion

250
Electrical

Manpower Requirements

200

Electronics & Navigation Auxiliary Systems

150

Outfit & Furnishings

Armament

100
Technical Support

50

Shipyard Services

Non-Recurring Design, Engineering & Planning

20 40 60 80 100 120 Weeks from Start of non-Recurring Design, Engineering & Detail Production Planning

Figure 4.2.10: Mid Tier Shipbuilder Using Korean Technical & Material Packages Estimated Manpower Requirements

39

5.0 Conclusions
There are significant cost savings for the shipbuilder to purchase a production-engineered technical package from one of the major Korean shipyards, as well as pre-marshaled material packages. The Koreans have developed world class engineering and due to their enormous shipbuilding experience are able to purchase material and equipment at prices much lower than what U.S. shipyards are able to do. It has been estimated that there should be little difference in the ship pricing offered by the large shipbuilder versus the mid-tiered shipbuilder. While the large yard has the potential for greater productivity, the mid-tiered yard is benefited from lower labor rates. The mid-tiered yard, however, should carry a great cost risk2 than for the large yard. However, the cost risk is expected to be less when the shipbuilder is working with Korean technical and material resources. A much greater cost risk is expected when all-USA resources are employed, more risk with the mid-tiered shipbuilder.

Section 7 describes the components of cost risk and how each is developed within the cost model.

40

6.0 The ESTI-MATE Cost Models

The ESTI-MATE cost model used to estimate the design, engineering and production of the RORO/Container Carrier permits quick assessments of costs, risk, and design/mission trade-off alternatives. The model provides a range of structural and powering selections to predict weights, costs and various performance characteristics. Separate models are available for different hull types (Mono-Hulls, Catamarans and Trimarans). In addition, some models focus on particular ship types: tankers, bulk carriers, container ships, patrol boats, cutters, frigates, hydro-graphics vessels, etc. The cost model substitutes default ship design parameters developed from statistical data analyses until actual design data can be determined. In this way, the cost estimate can follow the design evolution and can produce quickly cost changes due to design trade off alternatives. Flexible Hull Structures Modeling The models allow the designer to define the structural requirements broken down by structural components: double bottoms, decks, bulkheads, side shell, super structure, equipment foundations, etc. Whatever information is not provided is computed automatically by the system from sets of default assumptions and functional relationships. Besides structural component weights, the designer may select from a list of structural materials for each component. The material selections will have influence on lightship weight, manufacturing (labor hours) and material costs. Flexible Powering Options The models allow the designer to select from a list of possible powering options, such as direct drive diesels, diesel electric, pods, props or water jets, etc. These options allow the use of multiple powering selections for both high-speed transit and low speed maneuvering. From the power selections, the models compute system weights, costs, and fuel load requirements that directly affect available design payload. Automated Cost Adjustments Material costs are summarized and escalated to a common year value. Material & equipment prices are escalated by commodity. Escalation factors, both historical and predicted, are obtained from U.S. Government and industry-recognized commercial and foreign sources 1. Application of commodity cost escalation to estimated future year material costs 2. Application of shipbuilders productivity factors 41

3. Application of interim product size and manufacturing complexity factors 4. Impact of cost estimates & production schedules on projected manpower requirements Labor Pricing & Cost Rates Labor pricing requires the designer to define labor rates for technical and for production. All other labor estimates and material costing is provided by the system from internal manufacturing and material cost estimating relationships (CERs). The generic CERS are based upon a modern mid-size U.S. commercial shipbuilding facility having the following general operating characteristics: a) Current technology CAD and resource planning and management systems b) Moderate levels of pre-outfitted hull block and module construction c) N/C plasma plate cutting d) Automated panel line e) Large hull block assembly hall f) Automated shot blast and painting facilities g) Steel manufacturing capacity of approximately 20,000 MTONs per annum. The models operate using CERs based on a wide range of cost metrics including weight for structural components, kW for powering and electric generation, ship volumes, deck areas, physical hull dimensions, crew size and type breakdown, etc. Users of these models have access to the CERs to modify if necessary and to apply any additional factors that may be appropriate for the ship being estimated. Shipyard Productivity Factors The cost models use labor and material cost data based upon a cross-industry analysis of cost performance data collected from various sources and specially formulated for a generic U.S. commercial shipyard. Productivity factors may be applied to these generic costs to suit expected differences for the expected type of shipyard, whether commercial or combatant builder. Productivity factors adjust costs up or down depending on the relative levels of efficiency, shipbuilding facilities, and management capabilities. The higher costs measured from combatant builders may be identified with the following: 1. Shipyards that specialize in building combatants generally operate in a much less competitive environment. As such, they have not had the same incentives to reduce costs, as do shipyards that focus more on commercial work. 2. Contracts for building combatants have more stringent documentation and quality control requirements imposed upon production processes. These requirements add considerable cost to the shipbuilding operations. 3. The higher costs for combatant construction may be due, to some degree, to differences in materials and complexity of design from what is generally expected for commercial ship designs. 42

The models have options for specifying various levels of productivity relative to shipbuilding facilities and to different build strategies, including outsourcing. Productivity benefits can be simulated for exploiting early stage construction methods: pre-fitted hull blocks, zone outfit, and equipment/outfit modules. Costing & Pricing The models compute the cost for a lead ship. These costs are broken down into ten (10) cost groups (structures, propulsion system, electrical, etc.). The models develop for each of these cost groups estimated weights, production labor hours, labor costs, material costs, and profit. Non-recurring detail design and production engineering costs and prices are computed separately. The cost models also produce estimated average costs for multiple ship construction programs that may be developed with expected learning factors. Transport Factor The models compute an important measure for the ship design being analyzed: the Transport Factor (DWT x Speed/SHP). This factor is a relative measure of high-speed commercial transport efficiency. The greater the payload capacity (deadweight) and speed, the design should be expected to be more effective in satisfying the basic high-speed commercial transport objectives. However, high shaft horsepower is very expensive and becomes a penalizing factor for this economic measure. Cost Risk The models develop cost risk within several focus areas: 1. 2. 3. 4. Cost risk of applied CERs Cost risk due to shipbuilders relative inexperience Cost risk due to compressed production schedule Cost risk of rework due to immature detail engineering when overlapping with production 5. Cost risk due to anticipated performance problems of detail engineering

Estimated Manpower Requirements The cost models automatically generate estimated engineering and shipyard production manpower requirements. This is a good cross-check on the defined schedule and the estimated labor hours. Design Trade-Off Studies

43

The cost models can generate quickly costs across a wide range of ship design parameters, materials alternatives and propulsion/equipment system options. Details of the cost models are described in the user manual available for downloading from SPARs web site: http://sparusa.com

44

7.0 Estimating Cost Risk

Cost risk arises from a wide variety of potential problems: Inadequate development of new technology Lack of worker skills Lack of experience with new production facilities Limited sources of materials and specialized expertise Political factors restricting free market pricing or interfering with the most productive shipbuilding approach Escalating vendor prices Escalating exchange rates of foreign purchased goods and services Ineffective planning, budgeting, scheduling & coordinating Ineffective design and engineering (not oriented towards simplifying production) Inadequate development of technical information suitable for efficient production performance. High degree of internal or external design changes & rework Ineffective integration of changes into plans and schedules Ineffective purchasing, material deliveries and material control Ineffective quality controls Ineffective management of plans, costs and schedules Inability of management to solve problems quickly and effectively.

The cost model develops cost risk within several focus areas: Cost Risk Of Applied Cost Estimating Relationships (CERs) Due To Price, Economic & Technology Uncertainty Cost Risk Due To Anticipated Performance Problems Of Detail Engineering Cost Risk Due To Shipbuilders Relative Inexperience Cost Risk Due To Compressed Production Schedule Cost Risk Of Rework Due To Immature Detail Engineering When Overlapping With Production

The cost risk analysis sets the maximum risk value at 100% of the estimated cost at project completion. When expected cost increases rise above 100% of the estimate, it is assumed that the project most likely may be cancelled. Other ramifications and legal exercises also may be in order. Figure 7.0.1 presents a sample that breaks out cost risk by risk category and compares them to the total non-recurring cost and the construction cost for the lead ship.

45

Lead Ship Estimated Price & Cost Risk 2012US$

Millions $180 $160 $158 Non-Recurring Design, Engineering & Planning Est. Price of Construction $140 Est.Construction/Technology CER Cost Risk Est. Overlap Rework Cost Risk $120 Est. Shipyard Experience Cost Risk Est. Engineering Performance Cost Risk $100 $80 Est. Schedule Cost Risk

$60 $48 $40 $28 $21 $20 $0 $TOTALS: $1 $30

Figure 7.01: Sample Breakout of Cost Risk Categories The following sections describe in more detail how the cost risk categories are developed. Figure 7.0.2 presents the impact of cost risk to a multiple ship construction program. The added 100% total cost risk as presented in this figure to the Should Cost most likely would indicate an unacceptable price. However, oftentimes construction programs do not run as smoothly as predicted for the Should Cost. An astute shipbuilder would incorporate some measure of risk especially for a fixed price contractual arrangement. Figure 7.0.3 presents some options for selecting the amount of cost risk. What amount of the total cost risk, of course, will depend on a variety of circumstances and that decision will be largely a subjective one that also includes appropriate considerations of the shipbuilders backlog and expected levels of competition. SPARs experience has been that 20% - 35% of the total (100%) cost risk often results in what a shipbuilder is more likely to bid. It should be understood that 20% of a small total cost risk results in a lower price compared to 20% of a large total cost risk.

46

Figure 7.0.2: Impact of Cost Risk on Multiple Ship Construction Programs

47

Figure 7.0.3: Impact of Accepting Levels of Cost Risk

7.1 Cost Risk of Applied CERs Due To Price, Economic & Technology Uncertainty
This area of risk focuses primarily on the degree of error that may be resulting in the use of the cost model cost data (CERs). The CERs are based on industry average costs that may not fit the cost performance for the shipbuilder being estimated. Differences between shipbuilders are accommodated with the use of the shipbuilders productivity factors to the CERs, but there may be other factors that may come into play as the construction program actually gets under way. The cost model normally assigns a 10% cost risk to the use of its CERs. However, for some CERs, particularly those for use of exotic materials, new manufacturing processes, etc. the cost risk for these cost items can be increased by the estimator.

7.2 Cost Risk Due To Anticipated Performance Problems of Detail Engineering

The quality of expected detail engineering is critical for whether or not the shipbuilder can meet cost estimates. Poor quality technical information almost always leads to much greater 48

production costs. If production needs to field engineer its work, cost penalties usually result. Poor engineering often means that the technical information is not capable of enabling production to perform work at the earlier and more productive stages of construction as epitomized by the cost savings from pre-outfitted assemblies and hull blocks. The cost model allows the estimator to provide a subjective assessment of the expected level of engineering performance as outlined in Figure 7.2.1. At the bottom of this figure is a net performance rating. When this rating is applied to the formula presented in Figure 7.2.2, the cost model can determine the associated cost risk.

Figure 7.2.1: Engineering Cost Risk Assessment Input

49

Shipbuilding Engineering Cost Risk 120% Percent Total Labor Cost Risk 100% 80% 60% 40% 20% 0% -20% 0.20 0.40 0.60 0.80 1.00

Expected Performance Rating (0 - 1)

Figure 7.2.2: Formula for Determining Engineering Cost Risk Using Estimated Performance Rating

7.3 Cost Risk Due To Shipbuilders Relative Inexperience or Lack of Prior Performance
The shipbuilders relative level of productivity and management of resources is critical for whether or not the shipbuilder can meet cost and schedule estimates. Poor quality performance leads to much greater production costs and delays. If the shipbuilder has never had experience building the ship type complexity being estimated, it may be assumed that the shipbuilder probably will undergo an expensive learning process. The cost model allows the estimator to provide a subjective assessment of the expected level of the shipbuilders performance as outlined in Figure 7.3.1. At the bottom of this figure is a net performance rating. When this rating is applied to the formula presented in Figure 7.3.2, the cost model can determine the associated cost risk.

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Figure 7.3.1: Shipbuilder Cost Risk Assessment Input

Shipbuilding Experience Labor Cost Risk 120% Percent Total Labor Cost Risk 100% 80% 60% 40% 20% 0% -20% 0.20 0.40 0.60 0.80 1.00

Experience Rating (0 - 1)

Figure 7.2.2: Formula for Determining the Shipbuilder Cost Risk Using Estimated Performance Rating

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7.4 Cost Risk Due To Compressed Production Schedule

When the construction schedule is severely compressed, there may be a greater likelihood that the shipbuilders costs will increase. Shortening a schedule for a fixed amount of work to build the ship translates into the shipbuilder having to enlist a greater amount of manpower and facilities throughput to finish the work within the specified time table. Excessive manpower may result in hiring less qualified workers whose work caries not only a lower level of quality, but an extra level of cost. The cost model simulates stages of excessive manpower and its effects upon cost risk as illustrated in Figure 7.4.1. The greater the size of manpower resources to manage, the greater is the risk that the resources will not remain fully productive over the entire course of the production period. Cost risk can increase exponentially as the number of resources to be managed increases. Cost risk can be minimized with outsourcing of major construction blocks and equipment modules and large projects can benefit from economies of scale, but usually from the potential of increased efficiencies from batch manufacturing methods. With the estimated labor hours developing from the cost model expended over the planned production schedule, the model develops an average estimate of total manpower requirement. For shipbuilding, the cost model assumes that a contract requiring more than 1,000 production workers historically have tended to create cost problems to some degree.

Production Schedule Cost Risk

120% Percent Schedule Cost Risk 100% 80% 60% 40% 20% 0% 500 1,000 1,500 2,000 2,500 3,000 Average Men/Month

Figure 7.4.1: Relating Cost Risk to the Size of the Manpower Requirements 52

7.5 Cost Risk of Rework Due To Immature Detail Engineering When Overlapping With Production
One element of the risk assessment focuses on the amount of design and engineering overlap with the planned production schedule. While risk assessment is never an exact science, the cost model provides valuable insight during the pre-planning stages of a construction program. The cost model develops estimates of cost risk directly from the anticipated planned schedule strategy for engineering and production. The cost model assumes that the risk of rework is essentially nil when all engineering can be completed prior to the start of production. It also assumes that maximum rework will occur when there is a 100% overlap of engineering and production. Too much overlap often results in increased levels of production rework. It also can force production to perform work at less productive stages of construction, hence higher cost. The cost model uses a maximum percentage potential for rework across each major grouping of the Ship Work Breakdown Structure (SWBS). Figure 7.5.1 illustrates such a breakdown.

Rework Cost Risk

100% 90% Percent Rework Cost Risk 80% 70% 60% 50% 40% 30% 20% 10% 0% 0% 20% 40% 60% 80% 100% 120% Percentage Engineering/Production Schedule Overlap
SWBS 100 SWBS 200 SWBS 300 SWBS 400 SWBS 500 SWBS 600 SWBS 700 SWBS 800 SWBS 900

Figure 7.5.1: Rework Cost Risk with Degree of Engineering/Production Overlapping Schedules

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