Rop­ing in the cost of ships

The Navy shouldn’t go over­board with in­cen­tives just to do a good job

The Washington Times Daily - - EDITORIAL -

Ev­ery sailor worth his salt knows the old knock: A boat is a hole in the wa­ter where you pour the money in. For Navy-size ves­sels, that hole in the wa­ter can be bot­tom­less. As he com­mands the ship of state, Pres­i­dent Trump has made it clear he in­tends to re­build the na­tion’s shrunken de­fense. While dol­ing out cash to the warfight­ing ser­vices, the pres­i­dent should keep a weather eye on Navy ship­build­ing con­tracts. They shouldn’t dig that hole deeper than it should be.

Mr. Trump re­cently ral­lied with Navy per­son­nel and hard-hat con­struc­tion work­ers aboard the mil­i­tary’s new­est air­craft car­rier, the $12.9 bil­lion USS Ger­ald R. Ford at its berth in New­port News, Va. “We will make it eas­ier for the Navy to plan for the fu­ture and thus to con­trol costs and get the best deals for the tax­payer, which, of course, is very im­por­tant, right?” he said. “Got to get a good deal. If we don’t make a good deal, we’re not do­ing our job.”

The Gov­ern­ment Ac­count­abil­ity Of­fice (GAO) re­ported last month that the Navy may not be stick­ing to Pentagon di­rec­tives for strik­ing good deals. At the re­quest of Congress, the GAO stud­ied the Navy’s fixed-price in­cen­tive con­tracts, which al­low the force and its con­trac­tors to share both cost sav­ings when projects fin­ish un­der bud­get, and ad­di­tional costs when they don’t. In­ves­ti­ga­tors ex­am­ined six con­tracts for 40 ships and found that the Navy had taken on the ma­jor­ity of cost risk for 38 ships while the risk was shared equally with the con­trac­tor in only two. Among the ships as­sessed were some of the Navy’s most ad­vanced ves­sels, such as Ar­leigh Burke-class guided-missile de­stroy­ers, lit­toral com­bat ships and Vir­ginia-class fast-at­tack nu­clear-pow­ered sub­marines.

Pentagon guid­ance, says the GAO, calls for the ba­sic con­tract to pro­vide the pri­mary in­cen­tive for the con­trac­tor to con­trol costs. “But GAO found that in five of the six con­tracts, the Navy added over $700 mil­lion in in­cen­tives.” For ex­am­ple, in the case of a Vir­ginia-class sub­ma­rine, the Navy cre­ated a “du­plica­tive in­cen­tive struc­ture” — es­sen­tially a dou­ble bonus for meet­ing cost tar­gets. It’s a deal any con­trac­tor would crave, a reg­u­lar pay­check and a hefty bonus just for do­ing his job. The GAO re­ported that cost over­runs for 11 ships ranged from less than 2 per­cent to nearly 45 per­cent, though three came in un­der bud­get.

The GAO didn’t say how much in ad­di­tional in­cen­tives the Navy ac­tu­ally paid out, but rec­om­mended the Pentagon in­struct Navy con­tract­ing of­fi­cials to fol­low guide­lines for re­port­ing their ra­tio­nale for both base con­tracts and in­cen­tives. Fur­ther, it urged the sec­re­tary of the Navy to “con­duct a port­fo­lio-wide as­sess­ment of the Navy’s use of ad­di­tional in­cen­tives” in its ship­build­ing con­tracts to de­ter­mine whether its in­cen­tive strate­gies are achiev­ing ex­pected out­comes.

In his role as com­man­der in chief, Mr. Trump has led by ex­am­ple in mas­ter­ing the art of the deal. He talked Boe­ing ex­ec­u­tives into knock­ing $1 bil­lion off the price tag of two new planes to be out­fit­ted to serve as Air Force One, and he leaned on Lock­heed Martin to slash $700 mil­lion off the cost of 90 new F-35 Joint Strike Fight­ers. Amer­i­cans want the best ar­ma­ments money can buy, but they don’t want to pay more than they should. Navy con­tract of­fi­cials should learn to bar­gain like their boss, or he might do it for them.

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