Better Navy Management of Shipbuilding Contracts Could Save Millions of Dollars

PSAD-80-18: Published: Jan 10, 1980. Publicly Released: Jan 10, 1980.

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The problem of cost and schedule overruns in Navy ship construction due to changes in the shipbuilding program has persisted for 75 years. GAO reviewed changes made to three major shipbuilding programs to evaluate the Navy's effectiveness in managing changes.

Two types of changes were identified and discussed. Formal changes modified contracts in writing and were used only to correct deficiencies or errors in design, meet operational requirements, provide for safety of personnel and equipment, or reduce costs. Although instances of questionable formal changes were noted, generally the Navy managed them effectively. Constructive changes resulted from Navy action or inaction that caused the shipbuilder to do additional or different work than was required by the contract. If the Navy assumed responsibility for the change, a formal change was made in the contract to reflect the additional expense incurred by the contractor. If the Navy disagreed, the changes could form the basis for a contractor's claim. Since assuring GAO in 1971 that they would act to prevent constructive changes, the Navy made limited progress in controlling such changes by allowing 2 years for ship design concepts to stabilize before issuing definitive plans to follow-yards and through the use of contract clauses which put the burden of identifying constructive changes on the contractor. Two other factors were viewed as sources of increased costs under Navy shipbuilding contracts. Escalation provisions in Navy fixed-price contracts sheltered shipbuilders from inflation by paying cost increases beyond the control of the shipbuilder or the Navy and, under a new policy, paid escalation on costs which may not have been significantly affected by inflation. Another new policy allowed escalation payments to continue after the ship delivery date.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Secretary of the Navy should: (1) ensure that enough time will be allowed to correct lead-yard plans before they are used by follow-yards; (2) establish guidelines for use in fixed-price incentive shipbuilding contracts to spread the risk between the contractor and the Navy; (3) direct Navy contracting officers to discontinue negotiating shipbuilding contracts which pay escalation on costs not affected or affected to a lesser degree by inflation; (4) discontinue paying escalation on costs incurred after the delivery date set in the contract; and (5) continue using Bureau of Labor Statistics indexes of the shipbuilding industry as the basis for escalation and not adopt the Naval Ship Procurement Process Study recommendation to pay shipbuilders' actual labor escalation.

    Agency Affected:


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