Year Identified: 2017

Area Number: 18

Area Type: Cost Savings & Revenue Enhancement

Action:

To improve the use of warranties and guarantees in Navy shipbuilding, GAO recommended that the Secretary of the Defense direct the Secretary of the Navy to, in arrangements where the shipbuilder is paid to correct defects, structure contract terms such that shipbuilders do not earn profit for correcting construction deficiencies following delivery that are determined to be their responsibility.

Progress:

Under direction of the Secretary of the Navy, in January 2018 the Navy finalized guidance that prohibits the Navy from allowing the shipbuilder to earn profit for correcting defects for which the shipbuilder is responsible. Although the extent of cost savings associated with this action cannot be measured, these steps should help the Navy lower costs to the taxpayer since shipbuilders will no longer earn profit to fix these defects.

Action:

To improve the use of warranties and guarantees in Navy shipbuilding, GAO recommended that the Secretary of the Defense direct the Secretary of the Navy to establish and document a clear objective for using a guaranty, and then create guidance for contracting officers that illustrates how to implement a guaranty that meets this objective.

Progress:

In January 2018, the Navy finalized guidance that clarifies the objective (or purpose) for using guarantees—a contract provision that applies to a specified period of time under which the shipbuilder retains responsibility for correcting construction defects that arise on the ship after delivery—and provides guidance about how to use a guaranty. This guidance should help the Navy better ensure the effectiveness of its guaranty in its shipbuilding contracts. 

Action:

The Secretary of Defense should direct the Secretary of the Navy to, for future ship construction contracts, determine whether or not a warranty as provided in the Federal Acquisition Regulation (FAR), provides value and document the costs, benefits, and other factors used to make this decision. To inform this determination, the Navy should begin differentiating the government's and shipbuilder's responsibility for defects and track the costs to correct all defects after ship delivery.

Progress:

The Navy partially agreed with GAO’s March 2016 recommendation and as of February 2020, has not been successful in collecting pricing data on warranties to better inform decisions about the use of warranties or guarantees in its ship contracts. The Navy stated that it requested warranty pricing for its current class of Ship to Shore connectors, but that the contractor declined to submit this pricing. However, in August 2019, GAO found that the Navy did not request warranty pricing on a new class of ships, the FFG(X) Guided Missile Frigate. The Navy’s purchase of this ship class presents a unique opportunity to gain pricing on a FAR-based warranty in a competitive environment but the Navy chose not to ask the shipbuilders for this information. GAO recommended that the Navy amend the request for proposals to seek warranty pricing.

In its response, the Navy stated that using up to an unlimited guaranty represents an appropriate balance between cost and risk for the Navy and the shipbuilders However, by not requesting warranty pricing, the Navy will not have complete information on whether a warranty could be more cost effective than a guaranty. Based on the Navy’s response to GAO’s report on FFG(X) and consistent with its response to GAO’s 2016 report, the Navy maintains that warranties are not practical for Navy ship purchases.

Regardless, GAO continues to encourage the Navy to request additional cost proposals from additional shipbuilders for FAR-based warranties on ship construction contracts. These data will help the Navy to determine if warranties are feasible. Without these data, the Navy cannot make informed decisions regarding whether a FAR-based warranty or other contract mechanism will best protect the government from paying for shipbuilder-responsible defects after ships are delivered.

Action:

The Navy should conduct a portfolio-wide assessment of its use of additional incentives on fixed-price incentive contracts across its shipbuilding programs. This assessment should include a mechanism to share proven incentive strategies for achieving intended cost, schedule, and quality outcomes among contracting and program office officials.

Progress:

The Navy agreed with GAO’s March 2017 recommendation, and as of December 2019, had taken some action to study its use of additional incentives on fixed-price incentive contracts across shipbuilding programs. In September 2018, the Center for Naval Analyses issued a report which concluded there was not sufficient evidence to demonstrate that the Navy's use of special incentives on fixed-price incentive contracts across shipbuilding programs was either unproductive or wasteful, or that the use was unequivocally productive and valuable.

The report recommended that the Navy implement a more structured process for capturing and applying the lessons learned on special incentives in shipbuilding contracts, which would better enable the department to share proven incentive strategies for achieving intended cost, schedule, and quality outcomes among contracting and program office officials. These findings are consistent with the March 2017 GAO report. In addition, a Navy official stated the Navy has had internal discussions about the way forward in sharing lessons learned, but that as of December 2019 nothing has been implemented. Until the Navy implements a process for assessing additional incentives and sharing proven incentive strategies, it cannot determine the effectiveness of these incentives in achieving the intended cost, schedule, and quality outcomes.

Action:

Congress should consider developing an oversight mechanism for evaluating shipbuilding programs’ sustainment cost estimate growth during the acquisition process, with requirements for the Navy to: (1) report sustainment cost estimate growth information to Congress and (2) reassess shipbuilding programs that are experiencing a high level of sustainment cost estimate growth.

Progress:

Pending

Action:

The Secretary of Defense should change its definition for setting operational availability for shipbuilding programs in its Joint Capabilities Integration and Development System policy by adding information that defines the operational availability requirement by mission area in addition to the ship level and includes all equipment failures that affect the ability of a ship to perform primary missions.

Progress:

Pending

Action:

The Secretary of Defense should change its definition for setting materiel availability for shipbuilding programs in its Joint Capabilities Integration and Development System requirements policy to include all factors that could result in a ship being unavailable for operations, such as unplanned maintenance, unplanned losses, and training.

Progress:

Pending

Action:

The Secretary of the Navy should direct the Assistant Secretary of the Navy (Research, Development, and Acquisition) and the Chief of Naval Operations, once Department of Defense requirements setting policy is revised, to update existing operational availability requirements for ongoing shipbuilding programs. When revising these requirements, the Navy should set operational availability requirements that: (1) are based on failures that affect the ability of a ship to perform primary missions and (2) are set at the mission level instead of ship level.

Progress:

Pending

Action:

The Secretary of the Navy should direct the Assistant Secretary of the Navy (Research, Development, and Acquisition) and the Chief of Naval Operations, once Department of Defense requirements setting policy is revised, to update the materiel availability requirements for ongoing shipbuilding programs. When developing or revising these requirements, the Navy should set materiel availability requirements that fully capture all factors that could preclude a ship from being ready when needed.

Progress:

Pending

Action:

The Secretary of the Navy should direct the Assistant Secretary of the Navy (Research, Development, and Acquisition) and the Chief of Naval Operations, once the Navy revises its sustainment requirements, to ensure that shipbuilding programs report operational availability and materiel availability requirements in Selected Acquisition Reports, and alternatives to the Selected Acquisition Reports, for Congress.

Progress:

Pending

Action:

The Secretary of the Navy should direct the Commander of Naval Sea Systems Command to ensure that cost estimators follow current guidance and GAO-identified best practices and conduct sensitivity analyses and other analyses to improve their assessment of cost risk in the operating and support costs in shipbuilding programs’ life-cycle cost estimates.

Progress:

Pending

Action:

The Secretary of the Navy should direct the Assistant Secretary of the Navy (Research, Development and Acquisition) to ensure all shipbuilding programs develop and update life-cycle sustainment plans, in accordance with Department of Defense policy, that demonstrate how a ship class can be affordably operated and maintained while meeting sustainment requirements, including associated business case analyses and identifying sustainment risk.

Progress:

Pending

Action:

The Secretary of the Navy should direct the Commander of Naval Sea Systems Command to evaluate and implement changes to the independent logistics assessment (ILA) in order to position the ILA to effectively identify key sustainment risks and make recommendations for risk mitigation, which may include existing Navy proposals to change the ILA process.

Progress:

Pending

Action:

The Secretary of the Navy should direct the Assistant Secretary of the Navy (Research, Development, and Acquisition) and the Chief of Naval Operations to ensure sustainment-related briefing topics prescribed by the Navy’s acquisition policy are consistently discussed at Gate reviews.

Progress:

Pending

Action:

The Secretary of the Navy should direct the Assistant Secretary of the Navy (Research, Development and Acquisition) and the Chief of Naval Operations to implement the sustainment program baseline initiative for shipbuilding programs and, in so doing, develop a mechanism that ensures that sustainment outcomes are a factor in shipbuilding programs’ decision-making during the acquisition process.

Progress:

Pending

Action:

The Secretary of the Navy should revise Secretary of the Navy Instruction 5000.2 and other associated guidance to ensure product support managers are assigned to shipbuilding program offices in time to inform early acquisition decisions, including development of the program’s sustainment requirements and life-cycle sustainment plans.

Progress:

Pending