BATH IRON WORKS CORP.-FFG FOLLOW SHIP PROGRAM-CONTRACT COST, PRICE, AND ESTIMATES AT

Senator PROXMIRE. Have you had to redesign and modify your stern-or, if you had to do that, could you still meet your delivery schedule?

Mr. HARVIE. That is a very broad question.

Certainly not on the earliest of the follow ships, which are now very well advanced, as I mentioned in my prepared statement.

Senator PROXMIRE. All right.

Mr. Harvie, I want to thank you, too. I didn't mean to imply any criticism of you in my questioning, but, once again, I must say that I am deeply concerned about this.

In the original estimate of the cost per copy, that was in 1971, I understand, and it was $48 million, or something like that. In 1973, it was $65 million.

Now, these estimates are supposed to include estimates for inflation. The inflation, I am sure, was understated, and that is understandable, because nobody anticipated the inflation we have had. But, as I say, even if you allow fully for inflation, and make the assumption in 1973 that there was no estimate for inflation, it would still only account for one-third of the cost.

With the allowance for inflation, I think it would be one-third, or one-sixth, or one-eighth, or one-tenth of the cost.

So here is a ship that does come in way, way, way over cost. For whatever reason, the delivery date on the first copy was late. We are going to have a further 6-to-12 month delay now in the ships before they are capable of fulfilling their mission because of the helicopter problem and the reconstruction of the stern, and the ship is vulnerable, and for years it will not be able to perform its mission adequately because the helicopter is too light, and the big helicopter won't be available.

So, all in all, I think that the Congress and the taxpayer have a great deal to complain about and be concerned about.

Certainly that article by George Wilson indicated early that this is the best ship in 20 years. If that is correct, we really are in trouble.

Mr. Stolarow, I understand the Navy intends to build a new series of ships called TAGOS.

Can you explain what you know about that ship?

Mr. STOLAROW. That is designed to be a long-range surveillance ship, primarily for submarines. It is designed to operate in conjunction with other surveillance activities and to feed information to shore stations that would enable the Navy to locate and keep track of Soviet submarines.

The problem we have right now is that the Navy is asking for funds to begin construction of these ships, but there are serious technical problems with the sonar system, the so-called surtass system, that is really the key part of the ship's system. It is still in early stages of development. There are still problems with accumulating the data, feeding it to the shore stations, and it has to be operated in conjunction with a satellite for feeding information to the shore.

There are many serious technical problems with this, and we are concerned that the Navy may be moving ahead too fast to build the ships without knowing if these technical problems can be resolved.

Senator PROXMIRE. So, on the one hand you have technical problems that haven't been resolved, and those technical problems may make it costly and delay it. I understand the life cycle costs for the 12 TAGOS ships are estimated at $2 billion. Is it true, although you have given some explanation now of what the mission is supposed to be, that the Navy still has not provided the justification for this ship, the formal justification of why this ship is necessary at that very high

cost?

Mr. STOLAROW. That is correct.

Senator PROXMIRE. They have not provided it. Is the specific problem in this program excessive concurrency?

Mr. STOLAROW. I think so.

Senator PROXMIRE. What would be your recommendation on this program?

Mr. STOLAROW. My recommendation would be that the Congress not fund the ship until it is satisfied that the technical problems are solvable and are reasonably in hand.

Senator PROXMIRE. Well, gentlemen, I want to thank you very, very much. I think you have made a fine record and a record for which the Navy has a lot to account for.

They will be here tomorrow, as you know. Secretary of the Navy Graham Claytor and chairman of the board of Todd Shipyards, John Gilbride, will be our witnesses tomorrow.

Thank you very much.

The subcommittee will stand in recess until 10 o'clock tomorrow morning.

[Whereupon, at 11:47 a.m., the subcommittee recessed, to reconvene at 10 a.m., Thursday, January 4, 1979.]

ECONOMICS OF DEFENSE PROCUREMENT:

SHIPBUILDING CLAIMS

THURSDAY, JANUARY 4, 1979

CONGRESS OF THE UNITED STATES,

SUBCOMMITTEE ON PRIORITIES AND ECONOMY IN

GOVERNMENT OF THE JOINT ECONOMIC COMMITTEE,

Washington, D.C.

The subcommittee met, pursuant to recess, at 10:06 a.m., in room 5302, Dirksen Senate Office Building, Hon. William Proxmire (chairman of the subcommittee) presiding.

Present: Senators Proxmire and Warner.

Also present: Richard F. Kaufman, general counsel; Katie MacArthur, press assistant; and Mark Borchelt, administrative assistant.

OPENING STATEMENT OF SENATOR PROXMIRE, CHAIRMAN Senator PROXMIRE. The subcommittee will come to order. Secretary Claytor, the subcommittee is honored to have you with us this morning.

Secretary CLAYTOR. Thank you.

Senator PROXMIRE. We are glad to be having this very interesting inquiry.

The Navy asserts that the FFG program is different from other shipbuilding contracts, based on the lessons learned from earlier experience and a point of departure upon which improvements have been and will continue to be made. Navy spokesmen point out there have been no claims filed by the FFG shipbuilders and some argue that it is the best ship built in 20 years. Now we can agree that the FFG program is different from other shipbuilding contracts, but is it better? Based on yesterday's testimony the answer has to be a resounding No.

The FFG may turn out to be the most unsound shipbuilding program in recent years and those familiar with fiascoes such as the DE1052, LHA and DD963 know that they are hard to beat. Here is a ship which, according to official figures, already has a $7 billion cost overrun. The current estimate to complete 52 ships is $10.1 billion and an additional $2 billion plus is not even included in the official figures. Excluded from the official figures are the costs of rebuilding the stern and a number of items such as fin stabilizers and weapons that have to be backfitted on the ship after it is delivered to the Navy. I can't think of a worse way to build a ship. Reconstructing the stern will take the ships out of action and keep them in drydock from 6

months to a year. The Navy is pleased that so far there have been no FFG claims. Well, I'm pleased, too. The Navy appears to have "solved" the claims problem by sweeping them under the deck. It is no solution at all to postpone necessary changes until after the ship is delivered when they will be more costly to the taxpayer.

Worst of all, the FFG is vulnerable to "cheap kills." It is subject to low level enemy threats, although not so low perhaps as to include the U.S. Congress. The FFG may be the best example of military planned obsolescence since the B-70.

The Navy began this program by asking Congress to approve a new series of small, fast, highly capable and low-cost ships. We are getting ships that are small, not so fast, with reduced capabilities and very expensive. The effects of such wasteful expenditures are to weaken our defenses and add to economic inflation.

Our first witness this morning is W. Graham Claytor, Secretary of the Navy. Secretary Claytor will be followed by John T. Gilbride, chairman of the board and chief executive officer of Todd Shipyards Corp.

Secretary Claytor, we are pleased to have you with us once again. You have always been candid and helpful to this subcommittee and I very much appreciate that attitude. You and I have worked together on a number of occasions and I have greatly admired your dedication to your work and your deep concern about costs and about doing the best job that you feel you can. You may present your prepared statement as you wish and then we will get into the questions.

STATEMENT OF HON. W. GRAHAM CLAYTOR, JR., SECRETARY OF THE NAVY, ACCOMPANIED BY EDWARD HIDALGO, ASSISTANT SECRETARY; TOGO D. WEST, JR., GENERAL COUNSEL; AND CAPT. JOHN D. BEECHER, U.S. NAVY, PROJECT MANAGER, GUIDED MISSILE FRIGATE PROJECT

Secretary CLAYTOR. Thank you, Mr. Chairman.

I am very pleased to appear before you today to discuss Navy shipbuilding, specifically the areas you have suggested for today's hearing: the settlement of the Newport News claims and the FFG-7 frigate program.

I would like to submit my prepared statement for the record and summarize it briefly.

Senator PROXMIRE. Very good. We are happy to do that. We will have the entire statement put in the record in full.

Secretary CLAYTOR. I also would like to mention that I have here Assistant Secretary Hidalgo on my right and Mr. Togo West on my left who was the general counsel during the shipbuilding claims negotiations and Captain Beecher of the FFG program office.

Before turning first to the Newport News settlement, Mr. Chairman, I do feel that I will live up to your description of me as being at least frank by saying that I think I very respectfully disagree with you almost completely on almost everything you said on the FFG program and I would like to go into some of the reasons I do so.

First, the Newport News settlement. The Newport News agreement reached on October 5, 1978, represents the final settlement of the large

shipbuilding claims backlog of over $2.7 billion arising out of shipbuilding contracts entered into under procurement policies and practices of the 1960's and early 1970's. The largest aspect of the Newport News settlement was the resolution of $742 million in claims arising out of five contracts made from 1969 through 1971 for 12 nuclear powered warships including two aircraft carriers, 3 guided missile cruisers and 7 attack submarines.

The claims alleged Navy responsibility for added costs and delays in the construction of the ships. Two years of painstaking analysis and audit of the claims, conducted by the Navy Claims Settlement Board headed by Rear Adm. F. F. Manganaro, resulted in an evaluation of approximately $142 million. In addition to settlement of these claims on the basis of this evaluation by the Board, the agreement included two limited actions under Public Law 85-804.

First, a reformation of the CVN 68-69 carrier contract in response to a written request by Newport News under Public Law 85-804 based upon a mutual mistake in connection with the reimbursement of fringe benefits admittedly paid by the contractor. The Navy Contract Adjustment Board reviewed the contractor's request and concluded that a mistake had in fact occurred and recommended payment to Newport News of $13.2 million, a recommendation adopted by Assistant Secretary Hidalgo.

Second, Assistant Secretary Hidalgo authorized an increase in the claim settlement under cach of the four contracts for the nuclear attack submarines, the guided missile cruisers and the nuclear aircraft carriers by $2.5 million as additional relief under Public Law 85-804 in view of the comprehensive releases to be given by Newport News beyond the dates of claims submission-1975-76-and up to the date of the settlement agreement itself as well as the various other significant elements of the overall settlement of open issues. The total amount of ceiling price adjustments, including the limited Public Law 85–804 relief, is $165.1 million.

As I have stated on other occasions, our approach to the shipbuilding problems and our negotiations with the shipbuilders have systematically proceeded on the principle that it was not enough merely to settle the outstanding claims. All existing elements of disagreement and controversy had to be eradicated. The settlements with Litton and General Dynamics, as to which we testified before this subcommittee in September of this year, resolved not merely the claims but also numerous outstanding issues and the serious backlog of unpriced change orders. The result was to establish a new environment and a baseline from which to work in the future in order to concentrate on the fundamental objective of constructing essential combatant ships. In my opinion the settlement is very fair to all the parties and very much in the Government's interests.

Now these negotiations, in addition to resolving the claims and other open issues, resulted in the formalization of the contract for the third Nimitz class carrier, the U.S.S. Carl Vinson (CVN-70). This ship was being constructed under an option, undefinitized as to price, exercised by the Navy in April of 1974. Newport News had, in the intervening years, been receiving reimbursement of costs and a profit thereon.