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 business 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 negotiated 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 E-133170 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. CliLA.NGES NEZQTPATED AFTER AWARD 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. B-133170 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 million. 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 3
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)