TAX CONFERENCE

The recently enacted "American Jobs Creation Act" gives significant tax breaks to a number of U.S. industries--including shipping.

MARINE LOG and BLANK ROME will present a senior level seminar CHANGES IN U.S. TAXATION OF SHIPPING INCOME in Stamford, Conn. on April 5 & 6, 2004

Make sure you know how the new tax rules work!


March 14, 2005

GAO looks at Navy shipbuilding cost growth

Cost growth in the Navy's shipbuilding programs has been a long-standing problem. Over the past few years, the Navy has used "prior year completion" funding--additional appropriations for ships already under contract--to pay for cost overruns.

A new report from the GAO estimates the current and projected cost growth on construction contracts for eight case study ships, breaks down and examines the components of the cost growth, and identifies any funding and management practices that contributed to cost growth.

For the eight ships GAO assessed, the Congress has appropriated $2.1 billion to cover the increases in the ships' budgets.

The GAO's analysis indicates that total cost growth on these ships could reach $3.1 billion or even more if shipyards do not maintain current efficiency and meet schedules.

Cost growth for the CVN 77 aircraft carrier and the San Antonio lead ship (LPD 17) has been particularly pronounced.

Increases in labor hour and material costs together account for 77 percent of the cost growth on the eight ships.

Shipbuilders frequently cited design modifications, the need for additional and more costly materials, and changes in employee pay and benefits as the key causes of this growth. For example, the San Antonio's lead ship's systems design continued to evolve even as construction began, which required rebuilding of completed areas to accommodate the design changes. Materials costs were often underbudgeted, as was the case with the Virginia class submarines and Nimitz class aircraft carriers. For the CVN 77 carrier, the shipbuilder is estimating a substantial increase in material costs.

Navy practices for estimating costs, contracting, and budgeting for ships have resulted in unrealistic funding of programs, increasing the likelihood of cost growth, says the GAO.

The report says that, despite inherent uncertainties in the ship acquisition process, the Navy does not account for the probability of cost growth when estimating costs. Moreover, the Navy did not conduct an independent cost estimate for carriers or when substantial changes occurred in a ship class, which could have provided decision makers with additional knowledge about a program's potential costs. In addition, contract prices were negotiated and budgets established without sufficient design knowledge and construction knowledge. When unexpected events did occur, the incomplete and untimely reporting on program progress delayed the identification of problems and the Navy's ability to correct them.

The GAO recommending that the Secretary of Defense take the following seven actions.

To improve the quality of cost estimates for shipbuilding programs and reduce the magnitude of unbudgeted cost growth, GAO recommends the Secretary of Defense

  • conduct independent cost reviews for all follow-on ships when significant changes occur in a program and establish criteria as to what constitutes significant changes to a shipbuilding program,
  • conduct independent reviews of every acquisition of an aircraft carrier, and direct the Secretary of the Navy to develop a confidence level for all ship cost estimates, based on risk and uncertainty analyses.

To assure that realistic prices for ship construction contracts are achieved, GAO recommends the Secretary of Defense direct the Secretary of the Navy to

  • negotiate prices for construction of the lead ship separately from the pricing of detail design and
  • separate pricing of follow-on ships from pricing of lead ships, negotiating prices for early ships in the budget year in which the ship is authorized and funded.

To improve management of shipbuilding programs and promote early recognition of cost issues, GAO recommends that the Secretary of Defense direct the Secretary of the Navy to

  • require shipbuilders to submit monthly cost performance reports and
  • require shipbuilders to prepare variance analysis reports that identify root causes of reported variances, associated mitigation efforts, and future cost impacts
.

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