Tuesday, June 25, 2013

Government Supplied Equipment

The Navy is engaged in a very deceptive accounting manipulation regarding the cost of the LCS that borders on fraud.  You’ve heard me discuss it in numerous previous posts.  It involves the practice of citing construction costs that only include the bare hull.  All of the electronics, radars, sensors, computers, weapons, and other fittings are supplied from a separate government account line that is not included in the construction contract cost.  Thus, we don’t really know what the cost of the LCS is.  Best guess is that the hull + govt. equipment is $500M + $200M = $700M;  and that’s without a module.  I’ve previously discussed that this practice was undoubtedly intended to bypass the Congressionally mandated cost cap.

Well, it now appears that this practice is not limited to just the LCS but is being used in the DDG-51 and DDG-1000 programs, as well.

From the most recent Congressional Research Service report (1) on the DDG-51 and DDG-1000 programs we see the following statements regarding construction costs.

“The Navy’s proposed FY2013 budget requests $3,048.6 million to complete the procurement funding for the two DDG-51s [Flt IIa] scheduled for procurement in FY2013. The Navy estimates the total procurement cost of these ships at $3,149.4 million …”

Thus, we see what appears to be a construction cost of $1.57B per Flt IIa ship.  The report goes on to note,

“… the Navy estimates the procurement cost of the first Flight III DDG-51 at roughly $2.3 billion.”

So, the Flt III appears to cost $2.3B.  However, the report quotes a Navy official as saying,

“We also have a very significant cost associated with government-furnished equipment, …”

We see, then, that just like the LCS program, the DDG-51 program is using the unmonitored government equipment account line for a significant portion of the construction.  This has the effect of greatly reducing the apparent (or publicly acknowledged) cost.  This is misleading, at best, and fraudulent, at worst.  The Navy should be up front about the construction costs and let Congress do its job of approving or not.  Trying to manipulate Congress just breeds mistrust which we’ve seen more and more evidence of, of late.

Consider the impact of this practice on DDG-51 construction costs.  Presumably, the Aegis system is part of the separate government supplied equipment along with the immensely more extensive range of additional equipment compared to the LCS.  Thus, the incremental cost of the government supplied equipment for the DDG-51 is probably on the order of several hundred million dollars on up to over a billion dollars.  If so, that’s a radically different cost than the Navy is trying lead people to believe.

Now, let’s consider the DDG-1000 construction costs.  The report states,

“The first two DDG-1000s were procured in FY2007 and … the Navy’s FY2013 budget submission estimates their combined procurement cost at $7,795.2 million. The third DDG-1000 was procured in FY2009 and … the Navy’s FY2013 budget submission estimates its procurement cost at $3,674.9 million.”

Thus, the DDG-1000 appears to cost $3.9B each.  However, one has to assume that the Navy is using the same accounting trick of government supplied equipment.  So, what is the real cost of the DDG-1000?  Who knows?  One suspects that given the much more limited quantities and more experimental nature of much of the government supplied equipment, the incremental cost is probably well over a billion dollars.  Again, quite a difference!

Clearly, the Navy doesn’t want anyone to know the true cost of naval ship construction and uses government supplied equipment as a means of reducing apparent construction costs for DDG-51 and, most likely, DDG-1000 variants.  I suspect that this accounting practice is now standard for the Navy and is probably used for all ship construction programs.  Keep this practice in mind as you discuss ship costs in the future.  The Navy’s credibility and integrity is next to non-existent.  Very disappointing.


(1) Congressional Research Service, Navy DDG-51 and DDG-1000 Destroyer
Programs: Background and Issues for Congress, Ronald O'Rourke, March 27, 2013

4 comments:

  1. Another way they hide things is even when the put out a official press release on DDG-51 contracts they don’t say which hull numbers they are talking about and how much money is being spent on each ship. I can’t even tell from this press release whether these are all Flt IIA or if some are Flt III.

    They give the public information but make sure that its vague and confusing.

    http://www.defense.gov/contracts/contract.aspx?contractid=5056

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  2. The depth of the corruption and fraud on Navy Ship Building (and most of DoD) is amazing and demoralizing. The flow of cash to defense contractors in congressional districts followed by the Admirals retiring to fatcat jobs at those companies is putting sailors and the Country at risk. Read the Straus reports on how to fix the system. http://www.pogo.org/our-work/straus-military-reform-project/

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    1. I've read it, thanks.

      It's interesting that fraud is normally an attempt to obtain money through illegal or unethical means. In the Navy's case, there is no money, in a sense, rather, it's the attempt to obtain weapon systems.

      Also, the entire practice of Admirals retiring and then taking jobs with the same defense contractors they dealt with while on active service is a conflict of interest, though a delayed one. There's nothing illegal about it but the knowledge that if they "play" the game with contractors they will be hired upon retirement certainly represents a conflict of interest. How can Admirals deal with contractors in the manner they should, knowing that they have to make the contractors happy if they want to get hired later?

      If I had the ability, I'd outlaw that kind of delayed conflict of interest.

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    2. Good points

      The sad summation is that we spend too much time asking if it is legal and NOT NEARLY enough time asking is it ethical.

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