Review of Efforts by the Navy and Its Contractors To Control Ship Construction Costs at Major Private Shipyards

Published by the Government Accountability Office on 1971-08-23.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

        In oceo~dance    with your letters   of August 18 and December    10,
\ 1970, we are reviewing     efforts                                                             7
                                 --.~ by the Navy and its contractors  to con-
/ trol ship construction    costs at majo% private    shipyards.

            e have n43w completed         a substantia3b part of tlhis work.         On some
  of the q.uestiona you saised, h             ver, we are finding it necessary           to
  expend 8 greater       anount    of aa       effort than we originally        thought would
  be needed.      Rather than delay reporting           u&Xl we obtain all the neces-
  sary inforn~ation,      we p.l.axx to furnish      you with separate     reports    on major
  segments      of the work as they are completed.             Therefore      on June 4 we
  fwnished      year office with the Navy’s re epon             to specific    questions    in
  your letters.      Today*s letter furnishes          our pesponv      to the following
  que &ion included in your August 18 letter.

         ‘Is there enough competitive           pressure   in the shipbuilding
          we?--      or  are  the  types    of gmernment      contracts     awarded
         for shipbuilding     work ade          e to give the shipprds        an
         incentive   to control    costs and work. efficiently        on govern-
         ment contracts      without    close government       surveillance?~~

           chr exa       tion8 of the award a       adxmini&kation        of contracts
  with private     8   yards, which include          ~a.ster fog sbip,overhU.ls        as
  well ae for their construction,      lead us to con&de         that, although there
  is a certain    amount 0% cornpetit        in the shipbuilding      industry,    the
  benefits    are reduced by (1) the        ited number     of contractors       competing
  for contra                   (2) the large nun                      88 and daims

         Competition    ia often limited  to the few shipyards            having the capa-
  bility to construct   certain  types of ves      1s. P=senW,            for e=vle,
  only one private    shipyard   has the capability    to construct         nuclear  aircraft

carrier 8. Only two shipyards             are capable of constructing     missile-
equipped nuclear   submarines;            only three can construct    other types             of
nuclear  submarine  6.

        En overhauJ.s, competition   is usually solicited               only from those
shipyards    which are located within the geographical                   area at or near       the
home port to maintain     morale   of the crew.

        We have been told by Navy officials     that heavy work loads at times
prevent   shipyards   from seriously    bidding or from being solicited   and
that, conversely,   the Navy has at times restricted      the competition  for
some awards to the shipyard       in need of work to help the yard maintain
its capability.


       Even where there are several bidders            and competition    is obtained
for the original     award,     changes are so prevalent    in ship construction
and overhaul     contracts     that they tend to negate a considerable      portion
of the advantages       obtained through the original     competition.

        The changes usually        represent      additional     amounts    claimed     by the
contractor     to have resulted      from some action by the Government                  or to
cover the value of modifications           in work scope.         The changes,       of neces-
sity, are negotiated      on a sole-source        basis.     Further,    many changes
are negotiated      after the work is completed.             For additional     information
on this matter,      see our enclosed       reports     to the Congress       dealing with
pricing    of ship overhaul     contracts     and claims on ship construction
contracts     (B-13317Q    dated A4arch 19, 1970, and B-171096                dated
April   28, 1971).

          We have been examining         nine contracts         awarded     in fiscal years
1967-70 that amount to about $4 billion.                 The   contractors     are Newport
New’s Shipbuilding      and Dry Dock Company,                Newport     News, Virginia,
and two Litton    Industries,     Inc.,   facilities      at  Pascagoula,     .M.ississippi.
Two of the contracts       were formally          advertised.       Five contracts,       for
about 8Q percent      of the total value of the awards,              were negotiated         com-
petitively.    The remaining       two contracts,         involving     $680 million,      were
awarded     on a sole-source      basis.

        Only    one of the nine contracts      we are examining       was essentially
complete     at the time of our examination.          This construction      co,rtract,
a firm fixed-price         type, had changes of about $U million         added :o the
basic contract         amount of about $39 million--an       almost   30-percent        iz-
crease.     Similarly,      we found that, in a prior    review    of skip overhaul.
contracts,     initial   awards   of about $65 million     BPere increased     by about
 23 million,       or 35 percent,    for supplemental     work.

        To determine    the magnitude  of changes,    we reviewed     construction
contracts   for ships that were completed      in 1970. Here changes amounted
               on, or about 22 percent   of original   contract  prices    which

         In conclusion,       it seems apparent       that real competition         is lacking
for a significant       portion    of the Navyfs     ship repair      and construction
program       and that, in the final analysis,         many contracts        are priced     to
a large extent on the basis of incurred               costs.     Under these circum-
 stances,    contractors        may not have the financial        incentive     needed to
operate     in the most efficient        and econoniical      manner.       Therefore     we
believe that it is essential          that the’Navy     exercise     close sweilkmce
over contractors*         operations      and costs to assure       itself that the ship-
yards ape being properly             managed     so that the Government          will pay
only for costs necessary            to the efficient    perforHlance”of       the contract.

        We are a     re that last year the Navy instituted          a new program
designed to reduce the number         of contractor    claims    I;and to improve  the
ship acquisition   program,     ix general.    Organizational       changes and other
actions  atiectisg  per     nnel and procurement       procedures       are al&ady
being implemented.          e have examined      the actions   tak.en by the Navy
and are currently     preparing    a report   on this subject.

          In the near future  we will furnish you with reports     on the other
specific     areas set out in your request.   We plan to make no further        dis-
tribution     of this report unless copies are specific&y      requested,   axd