ECONOMICS OF DEFENSE PROCUREMENT: SHIPBUILDING CLAIMS WEDNESDAY, JANUARY 3, 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 notice, at 10:04 a.m., in room 5302, Dirksen Senate Office Building, Hon. William Proxmire (chairman of the subcommittee) presiding. Present: Senator Proxmire. 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. Welcome, gentlemen. We are glad to have you with us this morning. Today's hearing is one of a continuing series initiated several years ago in order to better understand the way the Navy buys its ships. I must say at the outset that the Navy's guided missile frigate program, the FFG, is one of the saddest cases of Government procurement, to come to my attention. The cost overruns alone indicate that the Navy has not benefited from its recent shipbuilding experiences. The FFG was estimated to cost $65 million each in 1973. Today the estimate is $195 million. You can account for about one-third of that increase because of inflation, but that is all. The 50-ship program was estimated at $3.2 billion. The current estimate for 52 ships, almost the same number, is over $10 billion. Two technical problems stand out among many that have been identified. First, this is the first ship that I have come across that the Navy knows will have to be recalled for structural changes after they are built, delivered and sent to sea. In other words, they build them, send them to sea, and then they have to come back and change them. The sterns of the first 26 ships will have to be redesigned and rebuilt in order to accommodate the LAMPS-Mk III, a larger helicopter than was originally intended for the ship. Second, the ships as presently designed have a serious survivability problem. They are vulnerable to low-level threats and "cheap kills" because of the lack of armor. What that means is that a fragment from a shell or a lucky shot from a rifle could conceivably put the ship out of action because vital items of equipment are exposed. Now, if this is an example of the new Navy, maybe we ought to get back to the way things were done in World War II. The evidence points to serious Navy mismanagement. Unless the Navy is able to come up with satisfactory answers to the questions raised thus far, I am afraid it will have to take full responsibility for what appears to be another shipbuilding disaster. I should add that at this time the facts do not suggest that the shipbuilders are to blame for the problems that have been identified so far. Except for the lead ship, schedules have not been delayed and construction costs seem to be under control. Of course, if problems do occur in the shipyards and large claims are filed, there will be additional cost overruns. In the meantime, we need to find out why the costs of the program have risen so high and the causes of the difficulties experienced to date. Our leadoff witness is Jerome Stolarow, Director of the Procurement and Systems Acquisition Division of the General Accounting Office. He will be followed by representatives of Bath Iron Works Corp. Mr. Stolarow, you may proceed as you wish with your statement and then we will have some questions. STATEMENT OF JEROME H. STOLAROW, DIRECTOR, PROCUREMENT AND SYSTEMS ACQUISITION DIVISION, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY FELIX E. ASBY, ASSISTANT DIRECTOR; AND JOHN D'ESOPO, TEAM LEADER Mr. STOLAROW. Thank you, Mr. Chairman. We are pleased to be here this morning to talk about Navy shipbuilding programs and particularly the FFG-7 program. I have a prepared statement for the record, but I would like to summarize it myself rather than read the whole statement. We have been concerned for some time, as have many of the congressional committees, about the problems in Navy ship acquisition, the rising costs, the claims and the performance of Navy ships, and GAO put quite a bit of effort into looking at various aspects of the Navy ship acquisition program. One of the programs that we have been following very closely has been the FFG-7 program, formerly called the patrol frigate program. The FFG-7 program is currently estimated at a 52-ship program with a total cost of about $10 billion just for the ships, or close to $200 million a ship. There are currently 26 ships for the U.S. Navy under contract with three different yards Senator PROXMIRE. May I interrupt for a minute? When you say "just for the ships," that does not include the cost of the helicopters? Mr. STOLAROW. It does not include the cost of the helicopters and some other weapons that may go on the ship. Senator PROXMIRE. Have you any general estimate as to how much that might add to the $10 billion? Mr. STOLAROW. I don't have a figure with me. We can supply that for the record. Senator PROXMIRE. All right. [The following information was subsequently supplied for the record:] Estimated program costs not included in September 30, 1978, FFG-7 class frigate Selected Acquisition Report (SAR) [All estimates are in fiscal year 1979 dollars] In millions of dollars Helicopters (assuming 2 LAMPS-Mk III helicopters per frigate). Total estimated program costs not included in Sept. 30, 1978, 1,310 588 1, 898 NOTE: The SAR also does not include the estimated costs of Harpoon and Standard missiles ($576,000 per unit and $151,900 per unit, respectively), MK-46 torpedoes ($100,000 per unit), 76-mm shells, or 20-mm bullets. Mr. STOLAROW. As I said, there are 26 ships under contract for the United States and 3 for the Royal Australian Navy. Senator PROXMIRE. $18 million a helicopter, I understand, and there are 2 helicopters per ship, and 52 ships. Is that $1.8 billion? Well, I will figure it out. Go ahead. Mr. STOLAROW. There are substantial additional costs for the program over and above what the ships cost. Senator PROXMIRE. It is $1.8 billion in addition, which would come close to $12 billion altogether? Mr. STOLAROW. That sounds reasonable. Our major area of concern right now with this program is the stern redesign. It has come to our attention that because of safety of flight considerations after the Navy decided to change the helicopter that would go onboard, the Navy decided that the LAMPS-MK III helicopter, which is bigger than the previous version of the LAMPS helicopter that was going on the ship, woul have to land from dead astern to give the proper safety and clearance, particularly in rough seas. Previously, it was intended that the helicopters would land from an angle off the stern of the ship. Because of this and because of some equipment that has to go on to handle the helicopter and a couple of other things, the stern will have to be redesigned. Now, this was determined after the initial design of the ship, but our concern at this point in time is that the Navy did not intend to modify or incorporate the new design into the first 26 ships under contract during construction, but, rather, would incorporate the new stern design into ships for contracts that would be awarded in 1979 and 1980 and thereafter. The first 26 ships would then have to come back into the yard at some future time, be out of commission for from 6 to 12 months and incur a cost, a preliminary estimate, of $8 million a ship to have the stern modified. As we look at the program right now, and attached to my prepared statement is a construction schedule for the first 26 ships— Senator PROXMIRE. That $8 million a ship is included in the overall ship cost estimate? Mr. STOLAROw. It is not at the time. Senator PROXMIRE. So that would be an additional amount. That $8 million per ship is whose estimate, the Navy's? Mr. STOLAROW. Yes. Senator PROXMIRE. Do you accept that as realistic? Mr. STOLAROW. I don't think so. I think it will run higher. Senator PROXMIRE. How much higher? Mr. STOLAROW. It is hard to say at this time. It is a very rough estimate, as they classify it, and when they do that, I think it will be higher. Senator PROXMIRE. Go ahead. Mr. STOLAROW. In any event, of the 26 U.S. ships under contracts which the Navy did not intend to incorporate the new stern design on during construction, the keel has not even been laid vet for 15 of them. The keel was just laid in December 1978, for three of them and so they are just at a very early stage or stages of construction. Now, it is our feeling that a substantial amount of money could be saved if the Navy had gone back to the yards and said, "We want the new design at least on those 18 ships," and I don't know how many more under construction where it would still be appropriate without running into lots of problems in the yards to have made that change. Just last week, we wrote a letter to the Secretary of Defense calling this to his attention and recommending that the Navy be instructed to adopt the new stern design on every ship already under contract during construction where it is possible. Senator PROXMIRE. I have a copy of this letter here. I am releasing that copy to the press this morning. That was a letter written in December. Mr. STOLAROW. Yes, sir. I think it was dated the 29th. I have submitted a copy for the record. So, in any event, we would hope that the Navy would take a good, hard look at this program right now and make those changes as early as possible. As we talked to the Navy, they had never gone back to the yards. and to the contractors to find out if it would be feasible to make this change for those ships already under contract, what it would costin other words, to make an analysis of what is the most economical way to make these changes for the ships that were under contract already. So at this point in time we don't know what the Navy's plans will be for those ships, but as I say, we have written to the Secretary of Defense and asked him to look into the matter and take whatever action is appropriate. That is the main concern we have with that particular program right now. There are other aspects of this program and of Navy shipbuilding in general that we have been concerned with. This particular program, the FFG-7 program, was characterized initially as a design-to-cost program. That is, the Navy, recognizing the high cost of building and acquiring ships today, and realizing that they needed a fairly large number of ships like this, made an attempt right from the beginning to hold the costs down on this particular program. When you do that, naturally if you are going to keep costs down and use what is referred to as a design-to-cost, there are tradeoffs that have to be made as far as effectiveness of the ships. Early in this program we talked to the Navy, and I personally discussed it with Admiral Zumwalt in his office, that we felt some of the steps that were being taken because of budget constraints, because of attempts to keep the costs down, were leading to a ship that might not be effective in performing its mission. Of course, this is a military judgment, and we in GAO can't really quarrel with them too much, but we did raise several issues with them. One had to do with using the current version of the sonar that is on the ship that is much less effective than other available sonars. Another problem that you alluded to, and it is not only limited to the FFG-7 program, is the fact that Navy ships designed and built since World War II generally are vulnerable to what is characterized by the Navy as "cheap kills." That is, fragmentation, shock damagethings like that—and we are not talking about a direct hit from a major weapon or major piece of munitions. Today's ships are highly sophisticated, particularly with electronics and fire control systems. The old ships we had in World War II, if they took a hit, much of the mission could be accomplished manually, but today we rely on electronics and radar and other sophisticated systems to perform the mission of a ship. These systems have to be protected as much as possible from other than a direct hit, so that if they suffer damage, they are not really put out of commission. In other words, the ship would still be afloat, but it couldn't fire or it couldn't perform its mission if some of these electronics systems are put out of commission. The Navy itself, back at least 5 years ago, began to recognize that its ships were highly vulnerable and susceptible to so-called "cheap kills." Several study groups were set up to look into the problem, but without getting into classified details, very little has been done up to now to resolve this problem. We have issued a report, a draft report, to the Department of Defense bringing up these concerns and making some recommendations to the Secretary of Defense. We have not yet received a reply from the Department of Defense on our report, but we have pointed out many of the problems, and again it is not ours-these are from Navy reports and Navy officials who are very much concerned about the vulnerability of the Navy ships. But, again, this is somewhat exascerbated in the FFG program by the fact that the ship was designed as a relatively inexpensive ship, and I use the term "relative," and in an attempt to keep the cost down. This is a laudable effort, because we have all criticized the services for highly expensive systems, but there has to be some determination made when you go too far and the effectiveness of the weapons system is severely impacted by attempts to keep the cost down, and we think that is what has happened in this program. In conclusion, to summarize, we in GAO are doing a major study of the whole ship acquisition process. We have started to go back on several programs to the initial design, the initial cost estimates, and follow the programs through to see if we can come up with some constructive recommendations for changes in the way the Navy acquires ships, to avoid the kinds of problems, the claims and the controversies, the overruns that have occurred in the past and have been of such concern to the Congress and to the Department of Defense itself. |