Thursday, February 9, 2017

Ship Warranties

Apparently, Congress is just as sick of brand new ships breaking down and having no warranty to show for a billion-plus dollar investment as the rest of us are.  Congress has now inserted language in the 2017 National Defense Authorization Act requiring ship warranties.  Here’s the language.

Chapter 633 of title 10, United States Code, is amended by adding at the end the following new section:
Sec. 7318. 
Warranty requirements for shipbuilding contracts
(a) Requirement
A contracting officer for a contract for new construction for which funds are expended from the Shipbuilding and Conversion, Navy account shall require, as a condition of the contract, that the work performed under the contract is covered by a warranty for a period of at least one year.

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Update:

Reader Eric's comment below has prompted me to add the following.

No amount of warranty can compensate for the failure of responsibility by the Navy in accepting incomplete ships.  In fact, if the Navy (NAVSEA) were doing their job correctly and actually insisting that the ships be delivered in a complete and tested condition, a warranty wouldn't even be all that necessary!  


7 comments:

  1. So will warranties will be a direct cost to all shipbuilding contracts? Will they get profit on top of it? Do we know how to price these warranties? What are the unintended consequences?

    Warranties seem fine in a liquid market, but in defense it seems like a shortcut for aligning responsibility and authority.

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    1. I'm not quite sure what point you're making. I don't quite know how to interpret your last sentence. Maybe try again?

      I think you may be alluding to the failure of responsibility for acceptance. If so, you're correct. No amount of warranty can take the place of the responsibility to NOT accept an incomplete product to begin with.

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    2. When those with authority to accept ships are not responsible for their actions... Do we need specific rules and mandates determining what constitutes fully tested and complete? How many programs get through IOC and FOC without real capabilities? Where is the feedback to program management, their responsibility to the warfighter?

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  2. The Navy came under severe criticism in the GAO March 2016 report to Congress 'NAVY AND COAST GUARD SHIPBUILDING"  Navy Should Reconsider Approach to Warranties for Construction GAO-16-71

    "Navy and Coast Guard paid the shipbuilder to build the ship as part of the construction contract, and then paid the same shipbuilder again to repair the ship when defects were discovered after delivery—essentially rewarding the shipbuilder for delivering a ship that needed additional work. Navy officials stated that this approach reduces the overall cost of purchasing ships; however, the Navy has no analysis that proves their point. In contrast, the warranty on another Coast Guard ship—the Fast Response Cutter (FRC)—improved cost and quality by requiring the shipbuilder to pay to repair defects."

    Surprised the clause made it into the FY2017 NDAA and was not killed off by 'friends' of Navy, as the was the other new clause re. delivery that you highlighted under 'Incomplete Delivery of Zumwalt'. Where the combat system and VLS cells yet to be installed, planned for completion in 2018 but Navy accepted 'delivery' and commissioned Zumwalt last year. Congress has now determined that a vessel must be assembled and complete before custody of the vessel and all systems contained in the vessel transfers to the Navy. So think Zumwalt has created a precedent as the first ever ship commissioned into Navy before Navy can legally accept delivery:)

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  3. Although I have used Warranties in he past, you have to be VERY careful in your cost analysis to not get billed twice or to have the Contractor make a boatload of more money.

    If the Contractor bids an additional cost for the Warranty, which they will based on being used to getting repair monies in the past, and does the work correctly then the warranty bid just becomes additional fee.

    Given the sorry state of the Government Acquisition workforce and the current state of shipbuilding I do not think the Government can tell what is a realistic bid for good work being done the first time. I am worried that they will instead continue the current bid review process and merely add in the repair costs as the cost of the warranty.

    With good execution, Contractors could make a profit killing.

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    1. Your point is an excellent one. On the other hand, the current situation not only has an unlimited opportunity for the manf to bill twice (once for the "construction" and again for the repair of the flawed "construction") but it actually provides an incentive for the manf to perform poorly on the initial construction because the worse the initial construction, the more the manf makes on repair.

      At least with a warranty, there is an incentive for the manf to perform well on initial construction. The less the warranty work, the more profit the manf makes. That's incentive to deliver a good initial product/ship.

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  4. The 963s were built with a one year warranty guarantee period calculated from date of delivery. A warranty guarantee engineer was assigned to determine whether or not to accept the claim. There was an appeals process if denied. If accepted, Litton provided the parts. Regarding labor, Liston used their employees, local private shipyard labor, or navy personnel to repair. If navy personnel were used, the navy was reimbursed based on the pay scale for An E5.

    In some cases, the engineer accepted the claim for "parts only." In the case of plug in electronic modules, either for the engineering control consoles, or the combat/communications systems, this was frequently the case. This did raise a problem later on; in many cases, ship's force failed to document usage of the contractor provided parts within the navy supply system. Subsequently, the system saw no usage of these components, some of which failed with some regularity, hence there was insufficient parts support in the navy system, once these ships got out of their warranty period.

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