Thursday, June 2, 2016

I Want More Money

As reported by USNI News website, a group called the Aircraft Carrier Industrial Base Coalition is asking Congress to authorize a two-ship block buy contract for Ford class aircraft carriers (CVN-80, CVN-81) (1).  In addition, they are asking for money to research ways of saving money on carrier construction.  Let’s look at bit closer at this.

Block Buy Contracts are similar to Multi-Year Procurement contracts and are supposed to be limited to purchases of well established, mature designs.  Such contracts can only be authorized by Congress.  There is also a formal difference between “block buys” and “block buy contracts” and it’s not clear from the article which terminology is being referenced.  Regardless, given that the first Ford class carrier is not yet complete and that several major pieces of equipment are still highly suspect regarding their long term viability, it’s hard to see how a block buy contract makes sense or would even be permissible.  This is clearly an attempt by a defense industry “lobby” to lock in construction business and profits.

Such an acquisition move is not necessarily a bad thing.  Theoretically, there are savings to be had from such a contract structure although, as CRS points out, such savings are small and often difficult to demonstrate in the face of the many other sources of cost increases which can obscure any savings (2).

Curiously, the article references the desire of the Coalition to initiate block buys of common equipment at a very early point in construction.  However, as the CRS report points out, this may not be legal.

“Economic order quantity (EOQ) authority—the authority to bring forward selected key components of the items to be procured under the contract and purchase the components in batch form during the first year or two of the contract—does not come automatically as part of BBC authority because there is no permanent statute governing the use of BBC that includes EOQ authority as an automatic feature.” (2)

This appears, then, to be a questionable contracting procedure intended to solidify the defense industry’s work load more so than to produce savings for the Navy.  Again, it’s not necessarily bad as long as the Navy enters into the agreement carefully and with a well thought out contract – something the Navy has not been noted for in the past!

Moving on to the more interesting point, the Coalition is asking for money to research ways to save money building carriers.  Well, here’s one way to save money:  don’t spend money to research ways to save money! 

The group is requesting $20M for research.  Hey, here’s an interesting procurement tidbit - figuring out how to make construction less expensive is supposed to be what the shipbuilder does all the time.  In fact, under a fixed price contract, there is enormous incentive for the shipbuilder to find ways to reduce construction costs because the savings go completely to the shipbuilder.  If savings can be demonstrated, the next ship can be built to a cheaper contract price and the cycle continues.  This is what economy of scale is.  The Navy doesn’t need to finance the shipbuilder’s cost savings efforts;  the fixed price contract already does that!

This effort is just industry trying to get the Navy to pay for what industry should be doing, and has every incentive to do.  I hope the Navy isn’t dumb enough to do this.  It all goes back to our discussions about running procurement contracts like a business instead of like an industry welfare program.

That industry would even ask for (demand) these financial concessions illustrates how ingrained poor contracting practices have become and how desensitized the Navy has become to being financially abused (willingly) on a regular basis.  This must end.


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(1)USNI News, “Industry Pushing Congress for CVN-80 and 81 Block Buy, Research for Shipbuilding Efficiency”, Megan Eckstein, March 18, 2016,


(2)Congressional Research Service, “Multiyear Procurement (MYP) and Block Buy Contracting in Defense Acquisition: Background and Issues for Congress”, Ronald O'Rourke & Moshe Schwartz, November 6, 2015

1 comment:

  1. Article heading at USNI:
    Rear Adm. Brian Antonio, Former PEO LCS, Takes Over As PEO Aircraft Carriers

    So let's see how much a Carrier can be made to cost now.

    How is it that people are held accountable?

    ReplyDelete