Auditors: Navy pays extra to fix new ship defects

The Navy and Coast Guard paid 86% of costs for fixing defects on six new ships, according to a Government Accountability Office study that faults the Navy’s contract process for not having stronger guarantees.

“The Navy and Coast Guard paid shipbuilders to repair shipbuilder-responsible deficiencies after delivery for most of the ships that we reviewed,” GAO auditors wrote in their report issued March 3. “In the four case study ships that used a fixed-price incentive contract with a guaranty, the Navy and Coast Guard paid the shipbuilder to build the ship as part of the construction process, and then paid the same shipbuilder a second time to repair the ship when defects were discovered after delivery.”

The Coast Guard did better on its contract with Lockport, La.-based Bollinger Shipyards for the sixth fast response cutter (FRC) Paul Clark, paying for 41% of defect correction costs under its contract, which included those warranty costs up front, according to the GAO, which noted the Coast Guard’s contracts are generally closer to those of commercial ship buyers.

Navy officials told GAO auditors that their approach of paying builders to take corrective action “reduces the overall cost of purchasing ships; however, the Navy has no analysis that proves their point,” the report states.

The report examined costs for fixing two littoral combat ships, the Fort Worth built by Marinette Marine Corp., the Lockheed Martin subcontractor in Marinette, Wis., and the Coronado from Austal USA, Mobile, Ala., the subcontractor for General Dynamics/Bath Iron Works. Along with the Coast Guard national security cutter Hamilton and Navy landing platform dock Somerset, both delivered by Huntington Ingalls Industries Shipbuilding in Pascagoula, Miss., and Avondale, La., all four ships had the highest average cost to the government for repairing defects at 89%.

The report was ordered up by Congress as part of the 2015 defense spending bill, to examine the cost of fixing defects in the $17 billion worth of shipbuilding for the Navy and Coast Guard every year. It is the latest in several reports on that subject from the GAO, examining troubles in the Navy littoral combat ship program and the Coast Guard’s effort to recapitalize its cutter fleet and update technology.

These military vessels are much more technologically advanced than commercial ships, the GAO report notes, but many of the defects have been mistakes in basic ship construction such as welding.

“Navy contracting officials stated that the Navy accepts the costs of fixing deficiencies to lower the overall purchase price of its ships” the auditors wrote. “However, this contracting approach results in the shipbuilder profiting from fixing deficiencies on a ship that it was initially responsible for delivering to the government in a satisfactory condition. In contrast, commercial ship buyers and the Coast Guard — in the case of the FRC — used warranties combined with firm fixed-price or fixed-price with EPA (economic price adjustment) contracts, respectively, to lower the ultimate cost of the ship while also improving the ship’s quality.”

The auditors recommend that the Department of Defense and Navy structure contracts “so shipbuilders cannot earn profit for correcting defects for which they are responsible.” Military officials should determine whether a warranty is appropriate for a given shipbuilding contract, and set out a guaranty objective.

In their response, DOD and the Navy disagreed that “shipbuilding contracts always result in payment of profit for correction of defects which are shipbuilder responsibility,” and that the Navy needs flexibility for making those fixes. However they agreed the contracts need to be improved and promised to complete a study by the end of September 2016.

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Ashley Herriman

Ashley Herriman is WorkBoat's online editor.

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