Roping in the cost of ships
The Navy shouldn’t go overboard with incentives just to do a good job
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.