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.
__________________________
(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
Article heading at USNI:
ReplyDeleteRear 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?