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
"Regardless of which scenario, there are a few aspects that warrant some additional consideration."
ReplyDeleteIt's likely that the NCIS insisted on taking point for national security reasons
" 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."
ReplyDeleteIt bodes ill I it think for the information the USN will release about the Ford's shock testing the navy so desperately wanted to avoid.
Should this not a be a reason to just flat out kill the LCS and find somebody to sell give them too.
You raise a great point about the Ford shock testing. You're right that the Navy was desperate to avoid it and one can only assume it's because they know how badly it will go and how many problems it will reveal.
DeleteAhhhhhh, the Joy's of concurrency. Instead of fixing 1 or 2 ships, let's fix 10 of them!!!
ReplyDeleteYou raise a good point. Will the already built LCS's be fixed or will they be left as is which means substandard. I'd bet anything that they'll be left as is.
DeleteWe've already seen this in the F-35 program with the official recognition that the three or four hundred concurrency orphans will never be brought to front line standards. If we won't upgrade F-35s, I find it highly unlikely that we'll upgrade LCS's.
Just thinking outloud but if this happened because of shock testing, why and how come USN was so happy with results? Was the USN properly in control of the tests and results? Or did they just take the manufacturer's word that everything was cool with their LCS?!? Who's lying here? Everybody can't be right! Did USN know about these extra costs and their reason, are they shocked about it and launched the investigation or is somebody just covering their butt? If this goes to court, will some of results be released to the public and/or what measures had to be taken to repair the damage? Not sure how happy USN will be about that....lots of questions, hopefully we will get some answers.
ReplyDeleteAs I said in the post, I suspect this is an Australian stock exchange issue rather than a criminal issue here in the US. The costs resulting from the shock trial was simply the precipitating event which caused the Austal stock to plummet and it's some aspect of that that is being investigated.
DeleteThat aside, the USN lies (spins, if you want to be more diplomatic) about test results routinely. That they lied about the shock test results is no surprise.
I have no doubt that the Navy had a pretty good idea how bad the results would be. Look at how hard the fought to avoid conducting the tests. Look at how hard they're fighting to delay the Ford class shock trials. That suggests that they know those won't go well, either.
Why Austal?
ReplyDeletebeacause they are australians and someone in the USA want that piece of the pie
?????
DeleteAlthough I know it won’t happen, it would be great if NCIS used this as justification to start an investigation of corruption on the LCS program.
ReplyDeleteThey could justify it saying they saw information due to assisting the Australian investigation.
Since has to do with shock testing, they could also then have a foot in the door for all shock testing.
Of course the challenge is they are only doing this so far as joint investigation because the Aussies themselves can’t fully investigate on US soil.
Bear in mind that things like avoiding shock testing and the myriad other problems with the LCS, while they may indicate a lack of honesty and integrity, are not criminal matters, as far as I know.
DeleteTrue, but when you look at the baffling way that after years of problems the Navy seems to want to double down and still make "frigates" of them, I have to question if there are not pay-offs going on somewhere. It is one thing to say "the idea was good but the implementation bad" for the LCS--that I can agree with. But to continue support on such flawed platforms? You have to wonder if some admirals are getting a nice second retirement check from the private sector. As the Fat Leonard scandal has proven, some naval leaders are not above bribery.
DeleteAnd remember that things like avoiding shock testing and those myriad other problems can lead to dead sailors in an actual conflict.
I was hoping the FTC was going after Austal for deceptive marketing. Selling the LCS as "combat" ship is a commercial false claim. The FTC should mandate a black box warning 20 ft high on the LCS,
ReplyDelete"This ship has not been tested for use
as a combat vessel, such use is strongly discouraged."
A. Pai
I like that idea! We put warning labels on ladders and everything else so why not on the LCS?
Delete