Navy Contracting:

Ship Construction Contracts Could Cost Billions Over Initial Target Costs

NSIAD-91-18: Published: Oct 5, 1990. Publicly Released: Oct 5, 1990.

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Pursuant to a congressional request, GAO monitored cost growth on Navy ship construction contracts.

GAO found that: (1) by the beginning of fiscal year 1990, the estimated cost of the Navy's open shipbuilding and conversion fixed-price contracts increased $5.5 billion over the initial target cost; (2) the Navy agreed to pay $1.5 billion for contract change orders, contract adjustments, and claims; (3) the Navy might need another $1.7 billion to pay for projected cost overruns and potential contract adjustments and claims; (4) shipyards might need to pay $2.3 billion for its share of the potential cost growth; (5) many of the contracts reviewed were near or above ceiling prices and one-half were less than 50-percent complete; and (6) contract implementation practices and adjustment and claim trends might have future cost implications for the Navy. GAO also found that the Navy had sufficient funds to cover contract cost growth due to its: (1) procedures and practices for budgeting ship construction programs; and (2) authority to redistribute surpluses and adjust funds within each ship construction program. In addition, GAO found that reasons for cost overruns include: (1) low initial prices due to intense competition; (2) problems with ship designs; (3) contract adjustments; and (4) late government-furnished equipment deliveries.

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