Tuesday, February 3, 2015

Ford Costs, Accounting, and Construction

Note:  Thanks to reader Nick for pointing out this subject in one of his comments.

One of the things that has made comparing historical ship construction costs difficult is that the Navy has radically changed its accounting, funding, and construction practices over the last few decades and, in particular, engaged in some highly creative accounting practices in the last several years. 

The funding and construction of a ship used to be relatively straightforward:  a contract was awarded and the ship was built to completion and then delivered.  There was a post-delivery maintenance period but it was minor compared to the construction effort and was a separate budget item. 

Today, however, the Navy engages in creative funding, highly questionable accounting practices, and is accepting ships that have significant degrees of incomplete work and large portions of unfinished compartments.  The LPD-17 program saw the Navy accept LPD-17 with 1.1M man-hours of incomplete work, LPD-17 with 400K man-hours of incomplete work, and so on.  The ships were delivered unfinished and by a significant amount!  Similarly, the LCSs have been accepted unfinished.  The Navy is now looking to push further into this realm with the Ford class.  The GAO report sums it up (1).

"The extent to which the lead Ford-class ship, CVN 78, will be delivered by its current March 2016 delivery date and within the Navy’s $12.9 billion estimate is dependent on the Navy’s plan to defer work and costs to the post-delivery period.  … With the shipbuilder embarking on one of the most complex phases of construction with the greatest likelihood for cost growth, cost increases beyond the current $12.9 billion cost cap appear likely. In response, the Navy is deferring some work until after ship delivery to create a funding reserve to pay for any additional cost growth stemming from remaining construction risks. This strategy will result in the need for additional funding later, which the Navy plans to request through its post-delivery and outfitting budget account. However, this approach obscures visibility into the true cost of the ship and results in delivering a ship that is less complete than initially planned." [emphasis added]

The Navy is intentionally planning to accept an incomplete ship in order to get around the Congressionally mandated cost cap.  This practice is irresponsible, at best, certainly unethical in that it violates the intent of Congress and the spirit of the law, and borders on (or actually is) fraud.

Given that the post-delivery work is paid from a separate budget line item, it also hides the true cost of the ship, as pointed out in the report.

Congress is complicit in this, as well.  As a bit of background, Congress established a cost cap for the Ford of $10.5B in FY2007.  The cap has subsequently been raised by various means to the current cap of $12.9B.  A cap that is repeatedly raised to accommodate runaway costs is not really a cap, is it? 

The second Ford class, CVN-79, also has a cost cap of $11.5B.

"...the Navy continues to revise its acquisition strategy for CVN 79 in an effort to ensure that costs do not exceed the cost cap, by postponing installation of some systems until after ship delivery, and deferring an estimated $200 million - $250 million in previously planned capability upgrades of the ship’s combat systems to be completed well after the ship is operational. Further, if CVN 79 construction costs should grow above the legislated cost cap, the Navy may choose to use funding intended for work to complete the ship after delivery to cover construction cost increases. As with CVN 78, the Navy could choose to request additional funding through post-delivery budget accounts not included in calculating the ship’s end cost. Navy officials view this as an approach to managing the cost cap. However, doing so impairs accountability for actual ship costs."

It’s obvious that the final construction cost for the Ford will exceed $12.9B by a significant margin.  How much of that cost will be captured and reported as construction costs remains to be seen.  My estimate is that the final cost will be in the $15B-$17B range.

Let’s be clear about this.  The Navy has instituted an intentional practice of deferring work from construction to post-delivery, thereby accepting substantially incomplete ships, in an effort to obfuscate costs and bypass Congressional cost control efforts.  As with other recent questionable Navy practices, this is intended to accomplish by fraud what the Navy could not accomplish legitimately. 

Faced with runaway acquisition costs, the Navy has opted for deceit rather than rigorous program management. 

The Navy’s ability to execute an acquisition program and control costs is almost non-existent.  Worse, the games that the Navy is playing to get around cost caps and hide actual costs are costing them credibility with Congress.  Congress is the source of funding.  Losing credibility with Congress is not a viable long term path to success and we’re already seeing pushback from Congress on a variety of Navy issues. 


(1) United States Government Accountability Office, “Ford-Class Aircraft Carrier”, GAO-15-22, November 2014

7 comments:

  1. Red Eagle, I removed your comment. If you wish to re-post a comment that is more relevant and appropriate, feel free.

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  2. What we have here is the result of a monopoly: one single carrier builder who can basically tell both congress and the Navy, "you want 11 carriers, then you have to live with it." The government either gets in bed with them or gets no new carriers. This would be one reason to look at smaller carriers. For the 15 billion (your estimate which is probably conservative) real dollars we could get 3 modified LHA class derivatives. For that matter, taking the CVE example form WW2, we could use modified commercial hulls, to a common design. While not meant for combat, a big, double hulled tanker/containership is still pretty survivalble as shown during the tanker war of the 80's especially if upgraded with Navy fire-fighting abilities. If Congress and/or the Navy declared that we were no longer tied to the Ford class as our sole carrier, then not only would new options become available, but watch Newport News start swallowing the cost overruns themselves to make it more affordable.
    Otherwise it's like Cable TV: you get one provider because your local government said so, and that one provider charges what they want.
    The US Navy needs to look at other examples to save money. If the new magnetic cat isn't working how about a ski-jump? Costs zip compared to any cat system and Russia, China, and India have all launched modern non-vtol jest using it.

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    1. Setting aside specifics, you are conceptually correct about the sole sourcing issue. That, combined with the very low quantities makes for a very high price.

      Good comment.

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  3. The issue is basically transparency and accountability. Congress has the oversight through the funding mechanism. The ball is really with Congress to address what is clearly a fraudulent effort by pass a legislative framework. The Navy can only get away with what Congress allows it to. This case will only opens up a bad precedent if unchecked.

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    1. An excellent observation. I agree completely.

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  4. Figures never lie but liers always figure!

    Funny how the old adages remain true and constant.

    The cost and reasons for the cost are one thing, and a very serious thing.

    However, the real problem here is the Navy trying to obfuscate the costs and the Congress going along with it. We have accounts that are well defined for what they should be used for. If an account runs out you have to reprogram money into it so that you have an audit trail and accounting. If any Corporation did this, they would be called up short quick time.

    It costs what it costs and if you pull those costs out into the sunshine you can identify why they are out of control and too high. If you allow the costs to hide in the shadows you will continue to have a festering mess.

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  5. The conclusion this points to, as for many of your other pieces about USN procurement, is that part of the Navy has changed its mission.

    It isn't about using ships, submarines and aircraft to provide defence and security. It's about providing money to defence contractors, provided they pretend to be delivering something, and Congress seems to be going along with that.

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