oversight

Navy Maintenance: Status of the Public and Private Shipyard Competition Program

Published by the Government Accountability Office on 1990-09-26.

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

                            United   States   General   Accounting   Office   ‘C
-”                                                                                 l



                            Report to the Chairman, Committee on
GAO                     .   Armed Services, U.S. Senate



September     1990
                            NAVY
                            MAINTENANCE                                                #
                            Status of the Public
                            and Private Shipyard
                            Competition Program




     GAO/NSLAD-90-161
.
                     United States
                   _ General Accounhng       Office
                     washington
                           Dc-axa, . .

                     National Security and
                     International Affairs Division

                     B-240400

                     September 26,199O

                     The Honorable Sam Nunn
                     Chairman, Committee on Armed
                       Services
                     United States Senate

                      Dear Mr. Chairman:

                      Since fiscal year 1985, defense appropriations acts have included provi-
                      sions for competition between public and private shipyards for a portion
                      of the Navy’s depot level ship maintenance and modernization work. In
                      a March 1988 report,1 we concluded, in part, that inherent differences
                      preclude public and private shipyards from competing on an equal
                      footing. We noted, however, that the Navy had taken steps to ensure
                      that public and private shipyards be treated as equitably as possible. At
                      that time, only a few overhauls and repairs had been completed. In
                      response to a request from your office, we reviewed the current status
                      of the shipyard competition program. This report summarizes the
                      results of that work.


                      The public and private shipyard competition program has resulted in
Results in Brief      limited competition between public and private shipyards with both
                      types of shipyards submitting proposals on less than half the vessels
                      competed. In part, this is because private shipyards can price proposals
                      below expected costs, whereas public shipyards are required to include
                      a proportionate share of all expected costs. Additionally, the limited
                      availability of commercial ship construction and repair work has cre-
                      ated a highly competitive market among private shipyards resulting in
                      relatively low price proposals. Also, only two private shipyards are
                      capable of overhauling or repairing nuclear submarines.

                      The Navy believes the program has encouraged the public shipyards to
                      adopt a more businesslike approach to ship repair work. However, the
                      Navy’s projected cost savings cannot be substantiated.


                      Before fiscal year 1985, Navy surface ship overhauls and repairs either
Background            were assigned to public shipyards or were competed, in most cases, only

                      ‘Navy Maintenance:CompetingVesselOverhaulsand RepairsBetweenPublic and Private Shipyards
                      (GAO/NSlAD43-109,Mar. 25,19&3).



                      Page 1                                              GAO/NSL4D9&161     Navy Maintenance
                          B240406
                  -   .




                          among private shipyards. Nuclear-powered vessels were allocated,
                          sometimes without competition, to private shipyards as well as assigned
                          to public shipyards.

                          In fiscal year 1985, the Congress created a program that tested the fea-
                          sibility of competing two Navy ship repairs and overhauls between
                          public and private shipyards. The program has since grown to include
                          an estimated 40 vessels to be competed in fiscal year 1990. (See app. II.)


                          As of the end of fiscal year 1989, work involving 43 surface ships and
Program Results and       25 submarines had been competed and final costs for 55 of these vessels
Cost Growth               had been determined. Private shipyards were awarded work involving
                          38 surface ships, and public shipyards were awarded work involving 5
                          surface ships. Of the submarines competed, 21 went to public shipyards
                          and 4 went to private shipyards. One of the four was later terminated at
                          the private yard’s request and assigned to a public shipyard. (See
                          am. V-1

                          Final costs for work on the 33 surface ships and 22 submarines com-
                          pleted totaled $962.5 million and showed an increase of about 23 per-
                          cent, or $182.3 million, over the cumulative award price of $780.2
                          million. Of the total increase of $182.3 million, about $69.8 million was
                          for work in public shipyards and about $112.5 million was for work in
                          private shipyards. In both cases, the cost growth resulted from
                          increased costs for (1) unanticipated work requirements, (2) correction
                          of inaccurate specifications and drawings, (3) delays in the delivery of
                          government-furnished materials, and (4) overly optimistic proposals.
                          (See app. III.)


                          So far, the program has resulted in limited competition between public
Limited Competition       and private shipyards. Price proposals from both public and private
                          shipyards were submitted for only 22 of 43 surface ships competed. Of
                          the 21 remaining vessels, 1 was assigned to a public shipyard and only
                          private shipyards submitted proposals on the 20 other ships.

                           In fiscal year 1989, private shipyards did not submit any proposals for
                           work involving nuclear submarines, and in fiscal year 1990, these ship-
                           yards submitted proposals on two solicitations, one of which was a
                           package for three submarine repair availabilities. For submarines to be
                           competed during fiscal year 199 1, private shipyards have indicated that



                           Page 2                                      GAO/NSW~l61     Navy Maintenance
                        they are interested in submitting proposals for only 2 of 13 submarines
                        to be included in the program.


                        Our earlier report concluded that the Navy’s original estimate that the
Projected Cost Saving   program resulted in cost savings of $200 million could not be substanti-
and Claimed             ated. The Navy’s report on the two surface ships competed in fiscal year
Improvements Not        1985 concluded that the private shipyard costs were about 8 percent
                        less than the public shipyard’s costs. The Navy now believes that the
Substantiated           final costs were comparable since the private shipyard, subsequently,
                        submitted a claim and was paid for some additional costs.

                        Navy officials claim the program has encouraged public shipyards to
                        adopt a more businesslike approach to ship overhauls and repairs and
                        has reduced costs. However, they have not provided empirical evidence
                        to support these claims. (See app. IV.)


                        We did not obtain official agency comments. However, we discussed a
Agency Comments         draft of this report with Navy program officials and have included their
                        comments where appropriate.


                        Our scope and methodology are discussed in appendix I.

                        We are sending copies of this report to the Chairmen, Senate Committee
                        on Governmental Affairs, Senate and House Committees on Appropria-
                        tions, and House Committees on Government Operations and on Armed
                        Services; the Director of the Office of Management and Budget; the Sec-
                        retaries of Defense and the Navy; and other interested parties.

                        Please contact me at (202) 275-6504 if you or your staff have any ques-
                        tions concerning the report. Major contributors to this report are listed
                        in appendix VI.

                        Sincerely yours,




                        Martin M Ferber
                        Director, Navy Issues


                        Page 3                                      GAO,‘NSIAD3@161   Navy Maintename
Contents


Letter
Appendix I                                                                                                6
Scopeand
Methodology
Appendix II
Background               Initiating Competition

Appendix III
Program Results          Ships Competed                                                                9
                         Cost Growth                                                                   9
                         Limited Competition                                                          10
                         Agency Comments and Cur Evaluation                                           13

Appendix IV
Projected Cost Savings   Original $200 Million Projected Cost Savings                                 15
                         Reported Test Results                                                        16
Not Substantiated        Current Navy Position on the Competition Program                             16
                         Agency Comments and Our Evaluation                                           17

Appendix V                                                                                                18
List of Ships
Competed Fiscal Years
1985 Through 1989
Appendix VI
Major Contributors to
This Report
Tables                   Table II. 1: Vessels in the Program and the Percentage of                        8
                             the Ship Maintenance and Modernization Budget
                             Represented
                         Table 111.1:Distribution of Overhaul and Repair Work                              9
                             Between Public and Private Shipyards From Fiscal
                             Years 1985 Through 1989



                         Page 4                                      GAO/TQ3IAIMW161   Navy Maintenancr
Contenta




Table 111.2:Cost Growth of Completed Work                                  10
Table 111.3:Competitions Where Both Public and Private                     12
    Shipyards Offered Proposals
Table 111.4:Public Shipyard Participation in the                           13
    Competition Program Through Fiscal Year 1989




Abbreviations

NAVSEA     Naval Sea Systems Command


Page 6                                    GAO/NtUMO-161   Navy Mahtmance
Scopeand Methodology


             We performed work at the offices of the Assistant Secretary of the Navy
             (Shipbuilding and Logistics);’ the Naval Sea Systems Command (NAVSEA);
             the Commander in Chief, U.S. Atlantic Fleet, and the Supervisors of
             Shipbuilding, Conversion, and Repair at Bath, Maine; Groton, Connect-
             icut; Boston, Massachusetts; Newport News, Virginia; Portsmouth, Vir-
             ginia; Long Beach, California; and Seattle, Washington. We also
             performed work at the Norfolk Naval Shipyard, Portsmouth, Virginia;
             Charleston Naval Shipyard, Charleston, South Carolina; the Long Beach
             Naval Shipyard, Long Beach, California; the Puget Sound Naval Ship
             yard, Bremerton, Washington; the Newport News Shipbuilding and Dry-
             dock Company, Newport News, Virginia; and the General Ship
             Corporation, Boston, Massachusetts.

             We reviewed specific contracts for work that had been competed
             between public and private shipyards as of September 1989, to deter-
             mine program results. We analyzed current financial data on those con-
             tracts to determine the amount of cost growth as of December 31,1989.
             For work completed by public shipyards, we compared award prices
             with actual shipyard costs. For work completed by private shipyards,
             we compared contract award prices with final contract prices. If the
             final contract prices had not been negotiated, we compared contract
             award prices to the Navy’s estimate of the final contract prices. Further-
             more, we reviewed contract files and interviewed public shipyard and
             Navy officials to document the (1) causes for cost growth, (2) extent of
             cost savings, and (3) additional costs of the program. In conducting this
             review, we used the same accounting systems, reports, and statistics
             that the Navy uses to monitor the competition program. We did not inde-
             pendently determine their reliability.

             Navy officials reviewed a draft of this report, and we have incorporated
             their comments where appropriate. Our review was performed from
             February 1989 through May 1990 in accordance with generally accepted
             government auditing standards.




             ‘This office is now referred to as Research,Development,and Acquisition.



             Page 6                                                    GAO/NSIAD9O-161Navy Maintenance
Background


                         In the early 197Os, the Congress limited the amount of funds for altera-
                         tions, overhauls, and repairs of naval vessels that should be done in
                         public shipyards to a percentage of the total amount appropriated for
                         such purposes. In fiscal year 1985, it also initiated a program to test
                         competing a portion of that work between public and private shipyards.


                         Beginning in fiscal year 1974, the Congress placed a 70-percent ceiling
Initiating Competition   on appropriations for all alterations, overhauls, and repairs of naval
                         vessels that could be reserved exclusively for public shipyards. Current
                         legislation contains no such restriction.

                         In fiscal year 1985, the Congress created a program to test acquiring
                         naval vessel overhauls and repairs through competition between public
                         and private shipyards. Although this legislation did not earmark
                         amounts available for competitive purposes, it made funds available
                         that year for two or more ships to be placed in the test and stated that:

                         “The Secretary of the Navy shall certify, prior to the award of a contract under this
                         test, that the successful bid includes comparable estimates of all direct and indirect
                         costs for both public and private shipyards.”

                         NAVSEAdevised its plan for conducting the test of competition so that
                         each sector would overhaul one ship. The Navy’s competitive test
                         involved the regular overhauls of the USS Duluth (LPD 6) and the USS
                         Cleveland (LPD 7), which were homeported on the west coast and had
                         comparable work packages and overhaul schedules. Under the plan,
                         NAVSEAissued a solicitation for the USS Duluth to both public and pri-
                         vate shipyards on the west coast. A fixed-price incentive contract was
                         awarded to Northwest Marine Iron Works of Portland, Oregon, which
                         was the lowest priced, technically qualified private sector offeror.
                         NAVSEAthen assigned the USS Cleveland to the lowest priced, technically
                         qualified public sector offeror - Long Beach Naval Shipyard. The
                         results of the test were published by the Navy in fiscal year 1987 and
                         are discussed in detail in appendix IV.

                         In legislation for fiscal year 1986, the Congress continued the program,
                         authorizing competition for work involving at least four ships. The
                         number of ships was not specified for fiscal year 1987 or 1988. How-
                         ever, the conference report on the Defense Department’s appropriations
                         for fiscal year 1989 required that four naval vessel upgrades be
                         included in that fiscal year’s program. Table II.1 shows the number of



                         Page 7                                              GAO/NSIAD-90-161   Navy Maintenance
                                         ships included in the competition program each fiscal year and the per-
                                         centage of the ship maintenance and modernization budget the work
                                         represented.

Table 11.1:Ver8els in the Program and
the Percentage of the Ship Maintenance   Fiscal year                                             No. of ships                Percent of budget
and Modernization Budget Represented     1985                                                                 la                                       b


                                         1986                                                                12                                 10.5
                                         1987                                                                15                                  9.6
                                         1988                                                                19                                  4.6
                                         1989                                                                21                                 10.8
                                         1990 (est.)                                                         40                                 13.1
                                         ‘The other vessel in the test was asslgned to the lowest priced, technically qualified pubk   sector
                                         offeror.
                                         bLess than 1 percent.




Program Implementation                   NAVSEA   implements the program, issues project orders to public ship
                                         yards for competed work, and manages the eight public shipyards.
                                         NAVSEA and the Supervisors of Shipbuilding, Conversion, and Repair
                                         award contracts to private shipyards. The Commanders in Chief, U.S.
                                         Atlantic and Pacific Fleets, also issue project orders. The Navy Comp-
                                         troller issues pricing guidance to the public shipyards for the competi-
                                         tion program.

                                         In performing its responsibilities, NAVSEA nominates each vessel to be
                                         competed and sends a solicitation to public and private shipyards quali-
                                         fled to perform the work. After evaluating proposals, NAVSEA performs a
                                         comparability analysis on the apparently lowest priced, technically
                                         acceptable proposal received from a public and private shipyard. This
                                         analysis is the Navy’s basis for certifying to the Congress that the suc-
                                         cessful proposal includes comparable estimates of all direct and indirect
                                         costs. NAVSEA, in its analysis, adds certain costs, such as those for mili-
                                         tary personnel and the services of the Navy’s Supervisors of Ship-
                                         buikling, Conversion, and Repair, which are not funded by either public
                                         or private shipyards. If a public shipyard’s proposal is the lowest,
                                         NAVSEA also performs a cost analysis to determine if the proposed
                                         amount reflects reasonable and realistic costs. Awards are made based
                                         on the lowest evaluated price for technically acceptable proposals.




                                         Page I3                                                         GAO/NSLAIHO-161       Navy Maintenance
Appendix III

Program Results


                                           The Navy has competed overhaul and repair work for 68 vessels since
                                           the program’s inception through the end of fiscal year 1989. Private
                                           shipyards were awarded work on most of the surface vessels, and public
                                           shipyards were awarded work on most of the submarines. Final costs to
                                           the government for work on 55 vessels completed as of that date were
                                           $182.3 million more than the cumulative award price of $780.2 million.



Ships Competed                             table III. 1.

Table 111.1:Distribution of Overhaul and
Repair Work Between Public and Private     Shipyard                                 Submarines               Surface ships                Total
Shipyards From Fiscal Years 1985           Public                                              21                         5                 28
Through 1989
                                           Private                                              4a                       38                 428
                                           Total                                               25                       43                  88
                                           aOne submarine won by a pnvate shipyard was subsequently   terminated at that yard’s request and
                                           assigned to and repaired by a public shipyard.


                                           The ships included in the competition program, the shipyard awarded
                                           the work, and the amount of the award are shown in appendix V.


                                           Cost growth was experienced on the 55 vessels completed as of the end
Cost Growth                                of fiscal year 1989. Table III.2 shows that the final cost for 23 vessels
                                           completed by public shipyards was $576.6 million, about 14 percent
                                           more than the total original job order price of $506.8 million. The final
                                           cost of 32 vessels completed by private shipyards was $385.9 million,
                                           about 41 percent more than the contract award prices of $273.4 million.




                                            Page 9                                                    GAO/NSIADsQ161        Navy Maintenance
                                       AppendixIII
                                       Program Resulta




Table 111.2:Cost Growth of Completed
Work (Dollars in millions)                                                                 Award         Final                 Percent of
                                       Shipyards                       No. of ships         price        cost    Growth.          growth

                                       Public
                                       Surface ships                                4        $52.6       $87.4       $34.0             66.2
                                       Submarines                                  19        454.2       489.2        35.0              7.7
                                       Subtotal                                    23        508.8       578.8        69.8             13.8

                                       Private
                                       Surface shkx                                29        249.0       356.6       109.6             440
                                       Submarines                                   3         24.4        27.3         2.9             11.9
                                       Subtotal                                    32        273.4       388.9       112.5             41.1
                                       Total                                       55       $780.2      $982.5     $182.3              23.4
                                       Test growth can include both growth work and new work. Growth work relates to technvzal shortfalls in
                                       the original estimate of work requirements, and new work pertains to requirements not included in the
                                       original scope of work


                                        The causes for cost growth of overhauls and repairs are discussed in a
                                        recent report, Navy Maintenance: Cost Growth and Schedule Overrun
                                        Problems Continue at The Shipyards (GAO/NSIADQO-M,      July 24,199O).
                                        According to Navy officials, the causes include (1) work requirements
                                        not foreseen at the time the proposals were developed, (2) inaccurate
                                        specifications and drawings, (3) untimely deliveries of govemment-fur-
                                        nished material, and (4) overly optimistic bidding.




                                        posals to do the work for less than the expected costs. In contrast, public
                                        shipyards are required by the Navy to include a proportionate share of
                                        all expected costs. Another reason is that the limited availability of com-
                                        mercial ship construction and repair work has created a highly competi-
                                        tive market among private shipyards for work involving Navy surface
                                        ships resulting in relatively low price proposals compared to public ship-
                                        yards’ proposals. Additionally, only two private shipyards are capable
                                        of overhauling or repairing nuclear submarines, and they have shown
                                        limited interest in submitting proposals for that type of work. As a
                                        result, both public and private shipyards submitted proposals on less
                                        than half of the vessels competed.




                                        PaaelO                                                       GAO/NSIADS@161NwyMaintenance
                          Appendix III
                          ProgmInltesult.9




Public Shipyards Now      In mid-1987, NAVSEA began requiring public shipyards to include a pro-
Include a Proportionate   portionate share of all overhead costs in their price proposals to more
                          accurately reflect the cost of accomplishing competed work. Before
Share of All Costs        then, the proposals were developed using only the incremental overhead
                          costs expected to be incurred to accomplish the competed work. Prior to
                          that change, public shipyards had won 3 of 10 surface ships competed.
                          Since then, public shipyards won only 1 of the 12 surface ships com-
                          peted from the end of fiscal year 1987 through fiscal year 1989.

                          Conversely, private shipyards can propose prices below their expected
                          costs to complete work. Current laws and NAVSEA regulations provide no
                          basis to exclude an otherwise technically acceptable, responsible private
                          shipyard from a competition solely on the basis that the contractor sub-
                          mitted an excessively low proposal. Thus, the Navy can award a con-
                          tract to a shipyard if the Navy determines that the shipyard can sustain
                          the loss and is otherwise responsible.

                          Further, limited commercial ship repair work in the United States
                          results in a highly competitive market among private shipyards and,
                          thus, lower price proposals for available Navy surface ship repair work
                          The results of the program show that it is difficult for public shipyards
                          to compete for surface ships in this environment.


Limited Interest in       Private shipyards did not offer any proposals for submarine repairs
Submarine Competition     during fiscal year 1989. As a result, in September 1989, NAVSEA
                          requested approval from the Assistant Secretary of the Navy for Ship-
                          building and Logistics to temporarily suspend the competition program
                          for submarines. The Assistant Secretary directed NAVSEA to continue the
                          competition but to survey capable shipyards to determine the level of
                          interest in competing for the proposed work. If less than two shipyards
                          were interested or if no private shipyard was interested, NAVSIU could
                          eliminate the competitive process and make assignments where deemed
                          most effective.

                          As of May 10,1990, NAVSEA had surveyed the private shipyards and
                          found they had no interest in submitting proposals for eight submarines
                          not yet competed in fiscal year 1990 and had interest in only 2 of 13
                          submarines to be competed during fiscal year 1991. Thus, public ship-
                          yards will likely be assigned the work.




                          Page11                                      GAO/NSIAD-9@161NavyMaintenance
                                       Appendix III
                                       PNxgramResults




Head-To-HeadCompetition                Proposals from both public and private shipyards were offered on 22
on Less Than Half the                  surface ships and 10 submarines of the 68 vessels competed as shown
                                       by table 111.3.
Ships
Table 111.3:Competitions Where Both
Public and Private Shipyards Offered                              Number of                 Winning shipyard
Proposals                              Type of vessel           competition8          Public                 Private
                                       Surface ships                       22               4                     18
                                       Submarines                         10               9                       1
                                       Total                              32              13                     19


                                       In addition to the USS Cleveland, which was assigned to a public ship
                                       yard as part of the test of the program, public shipyards won four sur-
                                       face ships when competing directly with private shipyards. Private
                                       shipyards won 18 ships on which both sectors offered contract pro-
                                       posals. Private shipyards won another 20 surface ships because the
                                       public shipyards did not offer contract proposals or withdrew proposals
                                       because they could not accommodate the work at that time.

                                       Public shipyards won competitions for 9 of 10 submarines on which
                                       both sectors offered contract proposals and were assigned 8 other sub-
                                       marines when private shipyards did not offer price proposals. They
                                       were assigned four other submarines because no proposals or no accept-
                                       able proposals were offered by either sector. Private shipyards were
                                       awarded work involving three submarines when no public shipyard
                                       offered contract proposals. One submarine won by a private shipyard
                                       was later assigned to a public shipyard at the private shipyard’s
                                       request.


Two Public Shipyards Not               Of the eight public shipyards, six have participated in the program.
Participating in the                   They are Portsmouth Naval Shipyard, Philadelphia Naval Shipyard,
DWC.rlrr\-                             Norfolk Naval Shipyard, Charleston Naval Shipyard, Puget Sound Naval
rru~lalll
                                       Shipyard, and Long Beach Naval Shipyard. The two shipyards that had
                                       not competed as of fiscal year 1989 were the Pearl Harbor Naval Ship-
                                       yard and the Mare Island Naval Shipyard. Navy officials said that the
                                       Pearl Harbor shipyard has not participated because it has no effective
                                       competition in Hawaii and it is noncompetitive against mainland ship-
                                       yards. They also said Mare Island’s heavy work load has precluded that
                                       shipyard’s participation. The Philadelphia and the Long Beach ship
                                       yards are not qualified to do nuclear work.- Table III.4 shows public
                                       shipyards’ participation in the program.


                                       Page 12                                    GAO/NSIAD-90.161Navy Maintenance
Table 111.4:Public Shipyard Participation in the Competition Program Through Fiscal Year 1989
                                                                           Public shipyards
                                                          Puget
                                     Long Beach          Sound    Charleston     Norfolk Portsmouth              Philadelphia          Total
Surface ships
No. of proposals offered                        1 3a          3              1          2          0                            6         25
No. won                                          4            0              0          0          0                            1          5
No. of ships repaired                             4           0              0          0          0                            1 -        5

Submarines
No. of proposals    offered                  0               2               6            5                8                    0         21
No. won                                      0               1               5            5                6                    0         17
No. of submarines     reoaired               0               1               8            7                6                    0         22
                                           %cludes a proposal the Long Beach shipyard prepared on the USS Cleveland after being asslgned the
                                           ship as part of the original test


                                           In only two instances did more than one public shipyard offer a proposal
                                           on the same surface vessel. Public shipyards capable of doing nuclear
                                           work offered six contract proposals on surface ships but did not win any
                                           of those competitions. In only two instances did more than one public
                                           shipyard offer contract proposals on the same submarine.


                                            In commenting on a draft of this report, Navy program officials stated
Agency Comments and                         that much of the difference between the award price and the final cost is
Our Evaluation                              related to new work resulting from (1) “open and inspect” repairs when
                                            the full scope of repairs and price cannot be determined until after the
                                            systems have been opened and their condition is determined or (2) the
                                            addition of alterations or other new work items after the contract has
                                            been awarded. In addition, these officials said that some cost growth is
                                            not necessarily bad. They asserted that the award price is driven prima-
                                            rily by competition and market pressures and the resultant proposals
                                            may not be reflective of the basic work package or the Navy’s initial
                                            predicted end cost. They added that the Navy gets the initial work at a
                                            lower rate because of competition but gets subsequent work at a pre-
                                            mium price rate because it is then negotiating in a sole-source environ-
                                            ment. On balance, they believe the overall costs for the work are fairly
                                            close to what the Navy predicted. Thus, the Navy obtains greater value
                                            for maintenance dollars spent. The Navy believes a more balanced
                                            approach would be to evaluate the predicted end cost against the final
                                            contract cost.




                                            Page 13                                                  GAO/NSIADoQ161       Navy Maintenance
Appendix Ill
Program l&sults




We agree that the difference between the award price and the final cost
results, in part, from both (1) growth in the original scope of work and
(2) new work. Our intent was to show that the difference can be signifi-
cant; for example, the difference was over 23 percent for the vessels
included in the scope of this review.




Page 14                                     GAO/NSuD90-161   Navy Maintenance
Appendix IV

ProjectedCost SavingsNot Substantiated


                         We could not substantiate the Navy’s original estimate that the competi-
                         tion program has resulted in a cost saving of $200 million. Also, not all
                         costs resulting from the competition program were included in the
                         Navy’s estimate. The Navy’s report on the results of a fiscal year 1985
                         two-ship test competition concluded that the private shipyard’s price to
                         repair the USS Duluth was about 8 percent less than the public ship-
                         yard’s price to repair the USS Cleveland. The Navy now believes that
                         the final prices were comparable. The Navy believes there have been
                         other program benefits but does not have any analyses that directly link
                         savings with the competition program.


                         In March 1987, the Navy claimed an estimated savings of $200 million
Original $200 Million    from the competition program. This projected savings was based on an
Projected Cost Savings   estimated $150 million savings from the overhaul of five submarines
                         and $50 million in savings from the overhaul of six surface ships. Dif-
                         ferent methodologies were used for the two types of vessels because,
                         according to Navy officials, submarine work packages are better defined
                         and historically have been more consistent than surface ship work
                         packages.

                         Now that the ships have completed repairs, we found that cost growth
                         of $55.6 million on the six surface ships canceled the projected cost sav-
                         ings of $50 million. The cost growth of $89.9 million experienced on the
                         five submarines substantially reduced the projected savings on those
                         vessels. Also, the Navy’s methodology used to estimate the savings for
                         submarine-related work attributed all savings to the program without
                         considering the impact of the Navy’s other cost reduction efforts that
                         may have created savings in public shipyards during this period. The
                         analysis also did not consider costs associated with implementing the
                         program. The analysis excluded the costs of evaluating proposals,
                         awarding the contract or project orders, performing a comparability
                         analysis on the lowest priced proposals from a public and a private ship-
                         yard, certifying to the Congress that the successful proposal included
                         comparable estimates of all direct and indirect costs, and developing the
                         public shipyard’s initial proposal.

                         According to a public shipyard official, a shipyard expends between
                         $60,000 and $75,000 to develop a proposal for less complex projects and
                         between $150,000 and $250,000 for more complex proposals. Another
                         public shipyard official said that the preparation of a proposal costs
                         over $185,000. From fiscal years 1985 through 1989, public shipyards



                         Page 15                                     GAO/NSIAKWO-161   Navy Mdntenance
                          Appendix   IV
                          Pro]ected Coat Savings Not Substantiated




                          submitted 24 unsuccessful proposals. Significant headquarters and ship-
                          yard personnel resources were involved in preparing, submitting, and
                          evaluating necessary documentation that produced no significant cost
                          savings and actually deprived shipyards of needed planning time.


                          In fiscal year 1985, the Congress authorized a test competition to eval-
Reported Test Results     uate the possibility of public and private shipyards competing for repair
                          and overhaul work. In November 1987, the Secretary of the Navy
                          reported the results to the Chairman, Senate Subcommittee on Defense,
                          Committee on Appropriations1 The report stated that the quality and
                          the schedule performance of the two shipyards performing the over-
                          hauls were satisfactory. The report also stated that the two overhauls
                          were not exactly identical in scope, though the work was similar. The
                          scope of work at the public shipyard was about 8 percent larger than
                          that done by the private shipyard. Thus, the report concluded that the
                          private shipyard performed work for about 8 percent less than the
                          public shipyard after a government estimate was used as a normalizing
                          factor to account for the difference in work scope.

                          This evaluation was made before a $6.4 million claim filed by the pri-
                          vate shipyard was settled. The claim was settled for $2.7 million in
                          December 1988. A NAVSEAofficial stated that the Navy now believes the
                          costs to the government were comparable for both shipyards after con-
                          sidering the private shipyard’s increased price. Further, another Navy
                          representative stated that the private shipyard’s costs actually
                          exceeded the price the government paid by about $3.7 million. The con-
                          tractual ceiling price prevented the shipyard from recovering the addi-
                          tional costs from the Navy.


                          In a hearing before the House Armed Services Committee in March 1989,
Current Navy Position     a Navy official said that the program had paid the following dividends:
on the Competition
Program               .   The public shipyards had developed a more businesslike approach to the
                          ship repair business. There had been improvements in the overall esti-
                          mating process as well as more discipline in identifying new work and
                          growth in the work package itself.



                          ‘Public Private SectorOverhaul CompetitionFinal Report,August 31,1987, Departmentof the Navy,
                          NAVSEA,Washington,DC.



                          Page 16                                                GAO/NSIAD-SO-161    Navy Maintenance
                      Appendix   IV
                      Rejected   Coat Savings Not Substantiated




                  l   In the instances where true public/private competition existed (e.g.,
                      more than one proposal was received), the early nuclear ballistic subma-
                      rines and surface ship availabilities did show reduced costs.
                  l   As a result of the move toward competition and increased cost efficien-
                      cies, the naval shipyards had placed stronger emphasis on “state-of-the-
                      art” management and technical processes.

                      While these may be valid observations, the Navy has not substantiated
                      that the program has directly resulted in major improvements and costs
                      reductions.


                      Navy program officials restated their belief that the competition pro-
Agency Comments and   gram has resulted in cost savings. They cited as an example, the reduc-
Our Evaluation        tion in the cost to complete nuclear ballistic submarine overhauls since
                      the inception of competition. They also noted that two of the most active
                      public shipyards in the competition program have made significant
                      improvements as a result of the program,

                      We agree that the program has encouraged public shipyards to adopt a
                      more businesslike approach to ship overhaul and repair work. However,
                      since the inception of the program, many management and technical ini-
                      tiatives have been undertaken to improve the efficiency of public ship
                      yards. Also, as we pointed out in another report on the program,
                      officials at one of the public shipyards that has been actively involved
                      in overhauling nuclear ballistic submarines believed that their experi-
                      ence with that type of work had enabled them to estimate the scope and
                      cost of work more accurately. Therefore, we do not believe it is appro-
                      priate to directly attribute all cost reductions to the competition
                      program.




                       Page 17                                    GAO/NSIAIMO-161   Navy Maintenance
List of Ships CompetedF’iscalYears 1985
Through 1989


Dollars in millions
                                                                                                 Amount
Name (USS)/HuII No.              Successful offeror                                           Private           Public

Surface shiDs
--‘--”   \-’   -   --I
                                 \lorthwest Manne Iron Works                                       $12.3
Cleveland (LPD 7)                Long Beach Naval Shipyard                                                        $23.8
Jarrett (FFG 33)                 Long Beach Naval Shipyard                                                          16
L.Y. Sbear (AS 36)               Norfolk Shipbuildinq and Drydock Corp.                             18.4
Fort Fisher (LSD 40)             Lockport Marine Co.                                                15.4
Mahan (DDG 42)                   Metro Machine Corp.                                                13.8
Albert David (FF 1050)           National Steel & Shipbuilding Co.                                  14.6
O’Callahan (FF 1051)             Todd Pacific Shtpyards Corp.                                       16.6
John A. Moore (FFG 19)           Southwest Marine, Inc.                                              6.0
Clifton Sprague (FFG 16)         Philadelphia Naval Shipyard                                                        4.5
Fletcher (DD 992)                Long Beach Naval Shipyard                                                         22.7
Farragut (DDG 37)                Norfolk Shipbuilding and Drydock Corp.                              2.5
Paul F. Foster (DD 964)          Northwest Marine Iron Works                                        26.4
Santa Barbara (AE 28)            Metal Trades, Inc.                                                  2.2
Brumby (FF 1044)                 Bath Iron Works Corp.                                              14.5
Coontz (DDG 40)                  Metro Machine Corp.                                                 1.6
Trippe (FF 1075)                 General Ship Corp.                                                  8.8
Prairie (AD 15)                  Southwest Marine, Inc.                                              7.2
A.W. Radford (DD 968)            Avondale Industries, Inc.                                          20.8
Bowen (FF 1079)                  Metro Machine Corp.                                                 6.9
Knox (FF 1052)                   Southwest Marine, Inc.                                              8.1
Stern (FF 1065)                  Southwest Marine, Inc.                                              9.1
Crommelin (FFG 37)               Todd Pacific Shipvards Corp.                                        4.3
 Estocin (FFG 15)                 Phillv Ship                                                        3.8
 Robert E. Peary (FF 1073)        Honolulu Shipyard                                                  1.5
 Harold E. Holt (FF 1074)         Marisco Limited                                                    1.9
 Ouellet (FF 1077)                Honolulu Shipyard                                                  1.7
 Caron (DD 970)                   Avondale Industries. Inc.                                         18.9
 John Hancock (DD 981)            lngalls Shipbuilding Div., Litton Industries                      17.8
 Vreeland (FF 1068)               Metro Machine Corp.                                                 6.5
 Halsey (CG 23)                   Continental Maritime, Inc.                                         27.9
 Fox (CG 33)                      National Steel and Shipbuilding Co.                                34.4
 O’Brien (DD 975)                 Southwest Marine. Inc.                                             22.0
 Callaghan (DDG 994)              Long Beach Naval Shipyard                                                         25.3
 Chandler (DDG 996)               Todd Pacific Shipyards Corp.                                       26.7
 Reasoner (FF 1063)               National Steel and Shipbuilding Co.                                 7.9
                                                                                                            (contrnued)



                             Page 18                                             GAO/NSIAD-90461      Navy Maintenance
                                 Appendix V
                                 List of Ships Compe.tedFiscal     Years 1996
                                 Through 1999




-

Name (USS)/HuII No.                     Successful offeror                                                       Private            Public

Surface ships
Kirk (FF 1087)                          Todd Pacific Shipyards Corp                                                    93
Oliver Perrv (FFG 7)                    General Ship Corp.                                                            10.2
Estocrn (FFG 15)                        Metro Machine Corp.                                                            8.1
Emory S. Land (AS 39)                   Norfolk Shrpburlding & Drydock Corp.                                          11.4
Clifton Soraaue fFFG 16)                G. Marine Diesel                                                              2.5
Badaer (FF 1071)                        Marisco Limited                                                               2.3
Vandergrift (FFG 48)                    Southwest Marine                                                               1.9
Total                                                                                                               426.2              77.9

Submarines
Benjamrn Franklin (SSBN 640)            Charleston Naval Shipyard                                                                     112.0
Georae Bancroft (SSBN 643)              Charleston Naval Shrpvard                                                                     112.2
Lavfavette (SSBN 616)                   Portsmouth Naval Shipyard                                                                       6.4
Augusta (SSN 710)                       Portsmouth Naval Shipyard                                                                       5.7
Woodrow Wilson (SSBN 624)               Charleston Naval Shipyard                                                                     120.9
Kamehameha (SSBN 642)                   Portsmouth Naval Shipyard                                                                     112.1
Alexander Hamilton (SSBN 617)           Puaet Sound Naval Shipyard                                                                    110.7
Corpus Christ1 (SSN 705)                Portsmouth Naval Shipyard                                                                       6.4
Lapon (SSN 661)                         Norfolk Naval Shipyard                                                                          2.7
Norfolk (SSN 714)                       Norfolk Naval Shipyard                                                                          3.0
Providence (SSN 719)                    General Dvnamics Corp.. Electric Boat Division                                 6.1
Albuctueraue (SSN 706)                  Portsmouth Naval Shipvard                                                                        6.0
Philadelphia (SSN 690)                  Portsmouth Naval Shipyard                                                                        5.4
Henry Clay (SSBN 625)                   Charleston Naval Shipyard                                                                        9.7
Lewis & Clark a (SSBN 644)              Newport News Shipbuildinga and Drydock Company                                10.8a
George C. Marshall (SSBN 654)           Newport News Shipbuilding and Drydock Company                                 11.2
John Marshall (SSN 611)                 Norfolk Naval ShipvardI
                                                                                                                                        10.4
Baton Rouge (SSN 689)’                  Norfolk Naval Shipyard                                                                           5.5
Memphrs (SSN 691)                       Norfolk Naval Shipyard                                                                           8.5
Pittsburgh (SSN 720)                    Newport News Shipbuilding and Drydock Company                                   7.1
Henry L. Stimson (SSBN 655)             Charleston Naval Shipyard                                                                      10.1
Manano G. Valleio (SSBN 658)            Charleston Naval Shipvard                                                                       9.6
Pargo (SSN 650)                         Charleston Naval Shipyard                                                                       9.5
Cincinnati (SSN 693)                    Norfolk Naval Shipyard                                                                          9.3
Minneapolts/St. Paul (SSN 708)          Norfolk Naval Shipyard                                                                          9.6
Total                                                                                                                 35.2            685.7
Total                                                                                                              $461.4            $763.6
                                  aThe private shipyard requested that this availability be terminated. The availability was then asslgned
                                  to and repaired by a publrc shipyard.




                                  Page 19                                                        GAO/NSWWlBl            Navy Maintenance
Appendix VI

Major Contributors to This Report


                                         Associate Director
                                          Assistant Director
International Affairs
Division, Washington,
D.C.
              7
Los Angeles Regional    James R. Bancroft, Evaluator
Office

                        Johnnie M. Phillips, Senior Evaluator
Norfolk Regional        George 0. Morse, Evaluator
Office

                        Kevin F. Murphy, Senior Evaluator
Boston Re@ona1 Office   I&u,I A. Ferguson , 111
                                              >&&l&or




(394333)                Page20                                  GAO/NSIAIM@161   Navy Mahtenanct
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