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!  


16 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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  5. Over the past 30 years, I've been delivery Master on 3 MSC new constructions(2 x T-AO, 1x T-AKE). All three events had some sort of warranty period attached to it. Anonymous (Feb. 9, 2017 at 4.53pm) accurately describes the warranty procedures that were in play.
    I also worked as a warranty analyst for a major US shipping company on four of their new constructions.
    In the case of the navy new constructions, the shipyard was fairly responsive to warranty items, provided they accepted it (and they could charge to cost to a sub-contractor. However, we saw ALOT of wiggling out of it (such as "not called for in the spec" or declaring the item defect was caused by "improper ship's maintenance" as reason to deny a warranty claim. It all depends on how bad NAVSEA/SUPSHIP is willing to back you up and, unless its clear cut, they won't because it damages the relationship of the on-site personnel with the shipyard. Warranty items were treated by individual ship, even when they were class items, meaning that if the ship was still in a warranty period when the item was identified, it was corrected, but if the ship was out of the warranty period, the navy ate the cost.
    In the commercial world, if the shipyard didn't fix it, the company fixed it and billed it back to the shipyard. At the end of the warranty period, we negotiated the disputed items. On the navy side, I didn't see ANY of that going on on any of the three new constructions, but I was part of ship's force (CO), so once we sailed away, the only shipyard people we saw was the warranty engineer and maybe some worker types.

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    1. Thank you for that background information. Very interesting.

      So, what's your opinion about the value of warranties for naval construction? Do you see warranty issues as just a fringe issue with total costs (whoever bears them) being such a small percentage of the total cost that the entire issue is meaningless? Or, do you see warranty issues as significant and well worth the effort to improve the overall warranty process?

      You hinted at NavSea's role in the warranty process and suggested that the "success" of warranty claims is related to the degree to which NavSea wishes to push the issue. Should NavSea be pushing warranty issues more than they are? How does warranty tie into the Navy's increasing tendency to accept unfinished ships? Can a warranty even be applied to a ship that has been accepted substantially unfinished?

      In short, you have a lot to offer, based on your experience. Tell me more!

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  6. In my view, warranties and accepting ships that are not finished are two different animals. In a nutshell, warranty determines who fixes something that is already there; accepting an unfinished ship is accepting something that is not yet there. "Unfinished" is in the eyes of the beholder. case in point - one of the ships I took through major (15 month) conversion - when we left the conversion yard (Norfolk, VA), we were unfit to do anything but steam from point A to point B - yet the conversion was deemed "completed" because the contract had been fulfilled. That none of our mission essential equipment (i.e. underway replenishment gear, etc)worked was confusing the issue with facts. The mission essential stuff was to be addressed during a post-conversion availability after we reached San Diego. Same with a T-AKE I took delivery of. Acceptance of the ship from the builder's yard depends on how the contract was written. If the builder has completed what his specifications call for, he (SUPSHIP) deems the ship completed. "Mission ready" bears no role in the equation. My observation is that it seems (in the MSC world anyway)there is no longer any attempt to make a new construction ship mission ready, rather there is a reliance on a follow-on availability to make the ship mission ready, which is also paid for by different funds, which lowers the "cost" of building the ship. In the commercial world, in most cases, a new construction sails away from the builders yard to the loading berth for its first paying voyage. If that's the way the navy wants to manage shipbuilding, so be it. What is not right, however, is for a USN ship to be commissioned before it is mission ready (i.e. all mission essential equipment is installed and tested). To me, commissioned means the ship, as a platform is ready to perform its mission.

    As to warranties items, I found both with naval ships and commercial ships, the degree to which the shipyard will accept them is often a function of the validity they feel and what the direct cost to them will be (as opposed to their sub-contractor). I don't think NAVSEA/SUPSHIP pushes warranty items enough, but at the same time, I don't think the ship should be inundating the yard with small items that would normally be considered routine maintenance just because the ship is in the warranty period (unless the submission is for parts only). In other words, pick the battles and fight for the significant ones. This is a major factor. I offer the example of two T-AOs (built one after the other). The T-AO #1 submitted every little thing they could find as a warranty item - most if not all were probably legitimate, but it went on and on - little things, well within ship's force ability to correct. They had a very contentious warranty period with the shipyard digging in, fighting the claims and dragging out their correction of others. T-AO #2 submitted approximately 1/3 the number of claims, but they were more significant items and received good cooperation from the same shipyard and most claims were accomplished expeditiously. What I had no visibility of is how the disputed claims were settled. What I did wonder some times is who's side SUPSHIP was on - the shipyard or mine - when it came to supporting me.

    To answer your first question about the value of warranties for naval construction - I think warranties are necessary. If the ship was built "right", there should be little or no warranties items and it becomes a fringe issue. However, when serious class problems occur, the warranty clause in the contract is often what gets the "fix" rolling (T-AKE too-small anchor problem is case in point).

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    1. Another excellent and informative comment. Thank you for contributing!

      "deemed "completed" because the contract had been fulfilled."

      An excellent point and quite correct. If the contract only calls for partial "completion" than partially complete is perfectly acceptable. When I've referred to "incomplete" I've been talking about delivery of the basic hull (meaning the compartments therein) in a substantially incomplete status. This is failure to complete the basic contract requirements. I recognize, as you point out, that other instances, such as the Zumwalt, called for incomplete delivery in the contract. The Zumwalt was not intended to be delivered complete. Nothing wrong with that, contractually.

      "What is not right, however, is for a USN ship to be commissioned before it is mission ready"

      Unfortunately, this is happening more and more often. Zumwalt and Ford will both be commissioned while incapable of executing their basic missions.

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    2. "warranty item - most if not all were probably legitimate, but it went on and on - little things, well within ship's force ability to correct."

      This is a fascinating issue. You contrast this approach to the opposite one of only submitting large claims and seem to suggest that you believe the latter to be the preferred approach. Forgive me if I've misstated your position.

      While the latter approach is not unreasonable, I would note that the builder expects that every dollar delivered to them in payment be an actual dollar worth 100 cents - fully operable, financially, in other words. The builder would raise hell and sue if some of the dollars delivered were found to be worth only 90 cents. Why then, should the customer be expected to meekly accept items, no matter how small, that are less than 100% of the contracted status (meaning fully functional - not 95% functional but fixable by ship's company). If the customer wanted a ship that was only 95% built and would "build" the remainder via ship's company then they should have contracted for that. It's kind of like buying a car that's delivered with only three wheels and having the manuf expect you to provide the missing fourth wheel yourself even though the purchase contract calls for four wheels.

      Either the builder delivers a fully functioning item or it does not. There is no legal case for delivering 95% of a contract but expecting 100% payment while refusing to honor the warranty.

      As an aside, I encountered this exact scenario in industry. We took delivery of a large complex unit (doesn't matter what it was) and as we commissioned it, we found many, many small issues. At first, we dealt with them ourselves but as they mounted we began to consider making a warranty claim. Finally, we determined that the overall number and scope of the numerous small issues rendered the entire unit inoperable and we submitted a claim to have the entire unit brought up to fully functioning status. The claim was turned down and, after much legal wrangling, our lawyers told us that we had forfeited our warranty rights by fixing the small issues ourselves. By failing to initiate warranty claims right from the start, on every single item, no matter how small, we had invalidated our ability to make any claim, no matter how large. By fixing the initial small items ourselves, we had apparently denied the manuf the opportunity to apply warranty corrections and thus invalidated the entire warranty. The manuf eventually settled with us for a monetary lump sum (nowhere near the cost of repairs!) to avoid a drawn out court case. No attempt at reasonableness goes unpunished!

      The lesson I, personally, drew from this incident was that if you have a warranty you either have to use it fully or not use it at all. Legally, there is no in between.

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    3. ""What is not right, however, is for a USN ship to be commissioned before it is mission ready"

      Though not really relevant to the post, one could make a pretty strong case that the entire LCS class has been commissioned unable to perform their mission! Given the lack of a workable MCM or ASW module and only a tiny subsection of the ASuW module, the LCS has no mission capability.

      Just an interesting thought.

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    4. Good points all and I don't disagree with you, but we also have to be realistic. MSC ships are under strong pressure (from CPF and FFC primarily) to get the ship up and running. Time lines for testing and training are much compressed when compared to USN. For example, on my T-AKE, I had six months from delivery to overseas deployment. This included post-delivery availability, certifications (helo, ammo, etc) final acceptance trials, voyage repair periods to correct deficiencies, crew training and initial load-out! Therefore, the priority has to get the deficiencies fixed! We couldn't afford to have deficiencies "pending" while MSC/SUPSHIP and the builder haggled over whether it was a legitimate warranty claim or not. I made a conscious decision to submit only those deficiencies that seemed to me clear cut warranty items and not nickel & dime the builder with items that may be a warranty item but we could fix quickly and easily. At some point, you just have to get the item fixed. What it is, how expensive it is to fix, what the level of effort to fix it will be and what role it plays in your overall mission are all factors that go into my decision on whether to submit and push a warranty claim or not.
      I am the first person to say the warranty process needs to be reformed because as you and the commenters point out, the navy is not getting 100 cents for the dollar, but there is always give and take - even in the commercial shipping industry. The key is to take as much or more than you give. But that gets tricky because then politics enters into it and our congressional representatives are rarely willing to support the navy in holding the builders' feet to the fire - because that means votes - and we've seen this over and over!

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    5. "six months from delivery to overseas deployment."

      That's conflating two separate problems: warranty and poor operations planning. If the planning were more realistic, the warranty would be less of an issue because you'd have more time to pursue additional warranty items. No warranty can make up for poor operational planning.

      The larger issue also revolves around finding and selecting a manuf who can produce a product with substantially fewer warranty issues to begin with. For whatever reason(s) we've come to accept poor initial performance by the builder as being normal. We need to begin the long process of finding and promoting alternate shipyards that will do a better initial job. In theory, the manf should deliver a product with NO warranty items.

      Unfortunately, I don't have a magic wand to make new, better shipyards suddenly appear. We need to identify smaller shipyards that are doing good work and begin awarding them larger and larger work (both in ship size and contract size) and bring them along to the point where they can compete with the established and poor performing yards. Of course, this gets back to workloads which takes us off into a world of force structure, quantities, environmental regulations, labor laws, etc. Well beyond the scope of this blog!

      My overall point regarding warranties is that we need to begin pushing back against the "norm" of poor workmanship and incomplete deliveries. It's a long process but needs to be done.

      Your thoughts and comments have been outstanding and are greatly appreciated. Thanks for sharing your experiences.

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  7. I did MSC ship introduction and would like to second what the Master said. Warranties and Ship Acceptane are quite different. In point of fact, most ships are Conditional Acceptances, the govt signs its acceptance BUT there is a list of deficiencies attached as exceptionns.
    Warranty and other material issues are recorded on discrepancy item cards. Those cards are divided up by the NAVSEA project engineer. Card reading sessions are done right after trials and can be tedious and contentious.
    Why because of money. NAVSEA only has so much funding programmed. And that must be spent by SCNOWLD SCN Obligation Work Limiting Date. For MSC ship contracts that is one year from the End of Acceptance Trials and typically includes the PSA period. Funds go poof !! afterwards. MSC has to pick up the shortage.

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