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
