Thursday, September 1, 2016

Those Add-On Costs Add Up !

The Navy loudly and proudly announces shipbuilding contracts for seemingly low prices (that’s a relative phrase!) but fails to announce quite as loudly and proudly all the add on and follow up costs to that go into producing an actual delivered, functioning ship.  Here’s a recent example of a contract award for additional post-shakedown work.

“BAE Systems Southeast Shipyards Mayport LLC, Mayport, Florida, was awarded an $11,891,935 cost-plus-award-fee contract for the accomplishment of Post Shakedown Availability (PSA) for one Freedom variant Littoral Combat Ship.  The PSA encompasses all of the manpower, support services, material, non-standard equipment and associated technical data and documentation required to prepare for and accomplish the PSA.  The work to be performed will include correction of Government responsible trial card deficiencies, new work identified between custody transfer and the time of PSA, and incorporation of approved engineering changes that were not incorporated during the construction period which are not otherwise the building yard's responsibility under the ship construction contract.  This contract includes options which, if exercised, would bring the cumulative value of this contract to $74,741,487.” (1) [emphasis added]

So, in addition to the cost of the hull contract, we can add another $75M (of course the options will be exercised!).  Note that none of this includes other add-ons like Government Furnished Equipment (GFE).

Let’s be fair to the LCS program, this type of additional cost occurs with every ship of every class.  It may be common but it also obscures the true cost of a ship and makes oversight very difficult.


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(1)Defense.gov website, contract listings, 29-Aug-2016

14 comments:

  1. Defense Aerospace quotes MAC1 contract value with a max. ceiling of $742 million to support sustainment execution efforts on LCS 1 variant placed with BAE Systems and GD NASSCO. Additional MAC 2 contracts with ceiling of $209 million placed with Epsilon and LM for providing preventative/planned maintenance, and facilities maintenance/corrosion control within the continental United States.
    Seems light on detail what USN buying for $951 million in total.

    http://www.defense-aerospace.com/article-view/release/176555/four-us-yards-win-%24950m-to-support-lcs-1_variant-ships.html

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  2. In this instance, the contract summary wording notes

    “The PSA encompasses all of the manpower, support services, material, non-standard equipment and associated technical data and documentation required to prepare for and accomplish the PSA. The work to be performed will include correction of Government responsible trial card deficiencies, new work identified between custody transfer and the time of PSA, and incorporation of approved engineering changes that were not incorporated during the construction period which are not otherwise the building yard's responsibility under the ship construction contract.”

    “Government responsible trial card deficiencies” indicates that (effectively) the Navy has accepted responsibility for some aspects of the work being accomplished at a Civilian Ship Yard???

    “New Work identified between custody transfer and the time of the PSA” is code speak for Navy added requirements they (probably intentionally) desired but didn’t dare add to the cost of the ship.

    The phrase “incorporation of approved engineering changes that were not incorporated during the construction period which are not otherwise the building yard's responsibility under the ship construction contract” is at least more honestly revealing – the Navy is simply openly stating they wanted these engineering changes, but for either cost or other reasons didn’t include them as modifications to the specs. It could have been that the Contractor provided the Navy a realistic cost and / or schedule increase estimate that was too high, in the Navy’s opinion, to include in the initial Program costs, thus the use of a post--program “Cost Plus Contract.”

    In past decades I was involved in Program / Project Management, both in the Navy and at a major Defense Contractor afterwards. Those of us from my era read about what is now occurring and shake our heads. After the TFX (F-111) program debacle no one believed the military would ever again be so foolish as to have a single program attempt having one platform designed from the beginning for multiple services – it is a management and engineering disaster waiting to happen, i.e. the F-35. It is too complex an approach. Second, the military knows that a significant percentage of the cost overruns and schedule changes result from added requirements – but for political reasons they refuse to publicly acknowledge that fact. Some seemingly high costs result from some military officer’s (usually O-6 level and above) intransigence – they refuse to recognize the absurdities of what they demand and know the defense contractor will never advise any authority it was the military which caused the problem – never anger the customer.

    But, the use of a “Cost Plus” approach for program add-ons is a new one on me. Talk about arrogance.

    The military simply does not value competent Program Management -- in their mentality not what Officers should excel at, and DoD is fixated on initial low cost and (absurdly) schedule reduced estimates. Don’t know if it is true, but my former Submarine Officer Acquaintances advise this program management failure disease has not as yet affected their domain.

    The military's attitude --be it for programs or operational matters is to estimate low or accept low estimates, however impractical, then come back later for added funds, manpower, time, etc. There is no reward in the Program world for running under cost and ahead of schedule -- in fact it will cost you problems.

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    Replies
    1. The submarine community is just as bad. They just are better at keeping it quiet.

      The original Virginias ran about a billion over cost (I'm working off the top of my head so I could be off a bit). They were supposed to cost $1.5B and wound up $2.5B. The Navy then embarked on a program to reduce costs and shaved $500M (if you believe the Navy's claims) to get back to $2B. The Navy claimed the Virginia program was a huge success for shaving $500M while glossing over that fact that the $2B was still $500M OVERBUDGET! So, yes, the sub programs are just as screwed up, just not as publicized.

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    2. "But, the use of a “Cost Plus” approach for program add-ons is a new one on me. Talk about arrogance."

      Cost Plus sounds a lot worse than it is.
      In theory it is pretty sensible method, costs have to be agreed by both parties, so its simply not the case where they can spend $30 on a can of coke and bill the government $33, unless the Navy approves that, which it does...

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  3. I guess everyone's read that DoD leadership is about to blow up the Ford program. https://news.usni.org/2016/08/30/pentagon-conducting-new-review-ford-carrier-program

    Since the Admirals will never do it themselves, even though everyone knows it will not work. But I suspect they will wait until after the elections, in December during the Christmas break.

    Options:

    1. Spend billions to rip the Ford apart and replace the launch and recovery system.

    2. Declare its time to try a VSTOL carrier, and fill it with the VTOL F-35Bs and V-22 support aircraft.

    I predict option 2, since it costs nothing and avoids bad press, and allows the Admirals to pretend they are brilliant to try this great opportunity.

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    1. With all due respect, you've completely misread the Navy/DoD's intent. As I stated in the post, these reviews NEVER result in cancelled programs or even radically restructured ones. They just provide PR cover while staying the course.

      Nothing is going to fundamentally change about the Ford program. The most likely change would be the arresting gear because it's just not functioning but even that is highly unlikely.

      What will happen is that the program will continue, the Ford will be accepted and commissioned incomplete and non-functional and will sit dockside for a few years while they continue to work on the various recalcitrant technologies.

      Your option 2 has zero chance. Sorry, but that's the reality.

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    2. This is one of those times I have to go to my happy place.

      Between the LCS not even working as a "sea frame", (let alone its mission modules), and the FOURTEEN BILLION dollar Ford likely going to sit dockside for the foreseeable future (measued in YEARS) soaking up more money because it can't do the one thing that justifies its existence.... The Navy is digging itself into a hole where it won't be able to perform its mission, and where it will suck up a significant portion of the defense budget.

      With current leadership; I just don't see a way out in the next 20 years.

      How did the Navy so badly lose its way?

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    3. "How did the Navy so badly lose its way?"

      It's no mystery. I've told you how.

      A's hire A's, B's hire C's.

      It's as simple as that and with no pressure of combat to show us whether our leaders are A's, B's, or C's, the C's naturally, over time, proliferate.

      Coming out of WWII, we had A's running the Navy. The selective pressure of combat saw to that. Once the war ended, inevitably a B got hired. That lead to C's and, well, here we are.

      If you don't understand the concept that I'm referring to, I'll explain it further. It's a well known phenomenon in industry and applies equally to the military.

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    4. I've never heard of the concept, though from context I think I get the idea.

      But let me put it another way; even prior to WWII our Navy seemed to be in better shape. The Standard battleships may not have been a great design idea, but they were internally consistent and well built. They provided good war service, even if it wasn't that service for which they were built.

      Sure, that Navy was a product of WWI to some extent, but the Standards were laid down prior to WWI and our naval experience in WWI was hardly harrowing.

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    5. The concept, as stated, is that A's hire A's. A's are good and they know it. They aren't intimidated by other A's and want to be surrounded by the best so they hire other A's. Inevitably, a B gets hired. B's aren't good. They aren't terrible. They know they're not A's so to make themselves look better they hire C's. You can figure out who C's hire.

      Bill Gates believed strongly in the concept and, in the early years, insisted on personally approving every hire to ensure that only A's got hired. At that point, Microsoft was a phenomenal place. Eventually, they got too big and Gates couldn't personally check every hire. Eventually B's got hired and then C's. Microsoft is now just another run of the mill company, getting by on past accomplishments and sheer brute strength.

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    6. The pre-WWII BB's had the benefit of lessons learned from fleet combat experience in the 1898 Spanish American War and WWI. Today's Navy hasn't fought a naval opponent 70 some years. We have forgotten our lessons.

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  4. You are absolutely right - they do not want anyone with competence in PM roles. Cost Plus for planned changes? That just stops any research and negotiation on the change orders.

    Since it is almost football season let's talk about what the game plan really is.

    The Senior Acquisition Officials (PMS, PEOs, Contacting Officers, etc. throw large amounts of money out to Defense Contractors and then retire and race to join those same Contractors and catch the money for a touchdown!

    Then to spike the ball, the Companies spend some of the large obscene profits (for non-working systems) on re-election campaigns for our purchased elected officials that oversee the flow of money and never throw a flag.

    As one of my Senators says: "The game is rigged."

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  5. The problem is that there is no incentive to lower prices. Senior management doesn't care, and may even view it as an opportunity after retirement.

    Companies like Lockheed stand to gain quite a bit if prices go up, while the quality of what gets produced goes down, because they get even more contracts.

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    1. I have stated before that there is a small tier of second level shipbuilders who could rise to first tier if given the opportunity (Bollinger, for example). However, that would assume that we have leaders who are not focused on getting post-retirement jobs with the companies they are dealing with. I'd like to believe that some Admiral would value national security more than post-retirement income and promote some of these second tier shipbuilders. Unfortunately, I'm getting old waiting for it to happen.

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