Federal agents visited Littoral Combat Ship manufacturer Austal USA in its Mobile, Ala., shipyard as part of an unspecified investigation involving the U.S. Navy, according to local media.
“Department of Defense, NCIS and [the Defense Criminal Investigative Service] have been seen on site,” according to NBC 15 in Mobile, Ala.
“Investigators are expected to be on site for several hours.” (1)
Apparently, Austal’s troubles are not confined just to the US.
Earlier Thursday, Australian media reported Austal was under investigation by the Australian Securities and Investments Commission over market updates related to losses around the Independence-class LCS.
The Australian authorities are said to be focusing on statements issued by Austal regarding the blow out, or sudden increase in costs, associated with finishing USS Jackson (LCS-6). (1)
The Jackson was the first of a block buy contract and, according to the article, Austal implemented a variety of production and productivity improvements that failed to produce the expected cost savings. From a Dec 2015 Austal statement,
Austal’s ability to apply lessons learnt and productivity enhancements from LCS 6 to vessels in advanced construction, namely LCS 8 and LCS 10, has been more limited than anticipated. (1)
The most interesting part of the article was this somewhat cryptic statement,
A significant portion of the company’s loss for the year was the US $115 million charge Austal recorded to account for the increased cost in LCS construction. The sudden increase in cost was related to work required to make the ships meet the Navy’s military shock testing, according to a July 4, 2016, release from Austal. Jackson conducted full ship shock trials in June and July 2016, which required the shipyard to prepare for the trials and then conduct maintenance afterwards to repair anything that broke during the underwater blast. (1)
This would seem to suggest that the shock testing resulted in far more costs, both in immediate repairs and required construction design changes, than the Navy had previously acknowledged. You’ll recall that the Navy declared the shock testing an unmitigated success. Shockingly (no pun intended), it would appear that the Navy’s declaration was inaccurate, misleading, and borderline fraudulent, as usual.
Here’s some additional information which further emphasizes just how bad the shock trials really were.
On June 30, 2016, after the preliminary trials, Austal entered into a trading halt and issued an earnings announcement. The firm cautioned that it would have to increase its cost estimate for follow-on hulls due to "design changes required to achieve shock certification and U.S. Naval Vessel Rules."
10 contracted ships were already in various phases of construction at the time of the announcement, and Austal anticipated "significant modifications to vessels already nearing completion" in an "extensive rework program." LCS 6, 8, 10 and 12 would all require at least 4,000 specific modifications each. The expense amounted to a $115 million writeoff and a full-year loss groupwide for FY2016. (2)
Thus, it appears the Austal has been hit with massive, unforeseen (unforeseen by Austal), cost increases related to shock trial deficiencies. Does this sound like the spectacular success the Navy declared the shock trials to be?
There are two possible scenarios.
One is that Austal made contract cost commitments based on anticipated production cost savings that did not materialize and was left facing large cost increases that it tried to pass on to the Navy in some manner that triggered a criminal investigation and the Navy, for unknown reasons, has picked this program and this manufacturer to contest the charges and has opened a criminal investigation.
The alternative explanation is that this is strictly an Australian stock exchange investigation that the Navy is assisting on although the use of NCIS for a foreign financial investigation seems odd.
Regardless of which scenario, there are a few aspects that warrant some additional consideration.
Systematic Underestimating – It is no secret that systematic and chronic underestimating of production costs is a widespread and, indeed, accepted practice. It is used routinely to secure contracts and mislead Congress. The Navy is not only complicit in the practice but is the leading practitioner. Navy cost estimates are ridiculously underestimated as proven in program after program. For example, the Navy’s original cost estimate for the LCS was $200M which immediately rose to $220M, then to $700M or so, and has steadied out somewhere around $500M depending on what numbers are used – and this doesn’t include module costs! The Ford is $2B-$4B over estimate, depending on what numbers are used!!!!!!
Unrealized Savings – Every program builds cost savings assumptions into its cost estimates – especially long term cost estimates – and those savings rarely, if ever, materialize. Savings are assumed from serial production, manufacturing efficiencies, computer aided design, block buys, wildly optimistic labor hour reductions, optimistic inflation estimates, etc. and they simply never materialize or, if they do, they’re swamped by other cost increases.
Frigate Competition – Austal is one of the contenders in the Navy’s new frigate competition. The inability to estimate costs and achieve production efficiencies should be concerning in the extreme to the Navy and, if the rumored issues are true, should disqualify Austal from the competition.
Inexperienced Builder – There were clearly massive shock trial deficiencies that now require correction and for which Austal appears to bear the responsibility for. These deficiencies were, presumably, unforeseen by Austal which can only be ascribed to their inexperience at building naval warships. I suspect that they’ve never experienced shock trials for any vessel they’ve built so they would have no way of knowing what should or should not have been designed into their LCS. This is what happens when you turn warship design over to industry and over to and inexperienced builder. This is also what happens when the Navy abdicates its design responsibility and eliminates its in-house expertise. No one in the Navy was able to competently review the LCS design and identify shock deficiencies. This is also what happens when you start construction of a ship while the design is still being worked on. We need to bring back BuShips but, I digress …
Why Austal? – Was Austal engaged in deceptive cost estimating, intentional underestimating of costs, and overcharging? Probably, but why single out Austal for criminal investigation? Given the exact same practices for the Ford, LPD-17, Zumwalt, and F-35 programs but on a massively larger scale, why choose Austal to focus on? The Ford is billions of dollars over cost but no one cares. The F-35 has demonstrated fraud on a scale that defies belief but no one cares. The LCS program, and Austal’s portion of the LCS program, is small potatoes by comparison. This suggests that the investigation is more likely the stock exchange scenario. We’ll have to wait for more information.
The most interesting aspect of this story is the emerging information about just how badly the shock testing went and how many modifications are required as a result.
(1)USNI News website, “Federal Agents Comb Through Austal USA Shipyard as Part of Apparent Financial Investigation”, LaGrone, Werner, & Eckstein, 24-Jan-2019,https://news.usni.org/2019/01/24/austal-usa-part-unknown-investigation-federal-agents-comb-shipyard
(2)The Maritime Executive website, “Austal Confirms Investigation into its Market Announcements”, 25-Jan-2019,https://maritime-executive.com/article/austal-confirms-investigation-into-its-market-announcements