GAO: Navy Pays Shipbuilders Extra to Fix Mistakes

The U.S. Government Accountability Office (GAO) has released a report criticizing the construction quality guarantee measures in Navy and Coast Guard shipbuilding contracts, saying that for most ships reviewed, the measures “did not help improve cost or quality outcomes.”

The GAO futher found that in four of six vessel contracts studied, the government had effectively given shipyards additional profits to correct defects, despite guaranty clauses – “essentially rewarding the shipbuilder for delivering a ship that needed additional work.”

Among other vessel types, two of the ships studied were of the LCS class – USS Fort Worth (LCS 3) and USS Coronado (LCS 4) – on which “the Navy spent $46 million and $77 million, respectively, under . . . post-delivery agreements to correct defects, complete ship construction, and assist with tests and trials, among other tasks,” GAO said. However, GAO noted that the Navy did not track which of these expenses were the “result of shipbuilder-responsible defects.”

GAO contrasted these outcomes with the final procurement cost for Coast Guard Fast Response Cutter Paul Clark (FRC 6), in which the USCG paid up front for a warranty against defects. The cost of the warranty came to about 40 percent of the cost of needed repairs for defects, meaning that the shipbuilder bore the majority of the expense to bring her up to specification.

The GAO distinguished between warranties written to federal standards, which give “the government a contractual right to direct the correction of defects at the contractor's expense,” and guarantees, which are “Navy-specific” contract clauses that do not follow guidelines used by the rest of the government. “Without a clear objective and guidance for using a guaranty and for determining when a warranty is appropriate in shipbuilding, Navy contracting officers do not have the information they need to make informed decisions regarding which mechanism is in the best interest of the taxpayer,” the agency said.

“[The Department of Defense and the Navy] should take steps to structure contracts so shipbuilders cannot earn profit for correcting defects for which they are responsible; determine whether a warranty is appropriate; and establish a guaranty objective and guidance,” the agency concluded.

The U.S. spends about $17 billion per year on defense shipbuilding, and Congress had directed GAO to conduct the study to see if there were opportunities for cost efficiencies. 

GAO has issued reports critical of the Navy's acquisition process in the past, including a recent examination of the contentious Littoral Combat Ship program. 

LCS 3 contractor Lockheed Martin said Monday that its ships “have met or exceeded Navy specifications for quality and performance prior to acceptance. The Lockheed Martin-led LCS team is executing the program within the Navy's budget and fulfilling its commitment to build 11 ships at a competitive construction price of approximately $360 million each. With each ship produced, the team is increasing efficiency and productivity."