b. The Navy should make a public announcement of the fact that it has failed to reach agreement with Litton on these claims and that it is preparing to issue a contracting officer's decision which Litton may, if it desires, appeal to the Armed Services Board of Contract Appeals. I believe such actions would do much to restore public credibility and confidence in the Navy's handling of its large shipbuilder claims. G. Rick Copy to: Assistant Secretary of the Navy (Installations & Logistics) Chief of Naval Material Subj: Recommendations for improving Navy claims procedures based on experience gained from Litton Systems, Incorporated, Ingalls Nuclear Shipbuilding Division, claim against the Navy under Contract NO0024-68-C-0342 for construction of SSN's 680, 682, and 683 Ref: Encl: (a) My memorandum dtd 19 Jul 1972 for the Chief of Naval Material; (1) My memorandum dtd 10 May 1971 for the General Counsel of the Navy; (2) My memorandum dtd 11 Feb 1972 for the Chief of Naval Material; 1. As you are aware, I have been concerned about the Navy's claims processing 2. By reference (a) I advised you of the facts surrounding Litton's claim, and of the difficulties the Navy has encountered during the past year and a half in trying to evaluate it. Since December 1969 Litton submitted five different versions of this claim. The claim itself consisted of many smaller claims, each of which NAVSHIPS had to research and evaluate. Often after NAVSHIPS obtained facts which tended to disprove a particular item in the claim, Litton would withdraw that item and substitute another in its place. NAVSHIPS then had to conduct another evaluation. This repetitive submission and evaluation of Litton claim proposals has added substantially to the time required for the NAVSHIPS evaluation. 3. The data Litton provided to support its claim was incomplete and often unreliable. The company and tted data that did not support its claim. It was up to NAVSHIPS to collect relevant information and to piece together a balanced view of the facts. In this regard, NAVSHIPS had to rely mostly on contractor files because NAVSHIPS itself does not have a systematic method of collecting and recording significant data concerning contract performance. 4. After many man years of effort by NAVSHIPS technical, project, contract, and legal personnel, NAVSHIPS was able to reconstruct, with reasonable accuracy, what actually happened. The NAVSHIPS evaluation showed that the Government was liable for only about $4 - $7 million of the $37 million claimed by Litton. Litton had experienced a large cost overrun on the contract and, through its claims, was trying to pass the entire overrun to the Government. 5. The Litton claim read convincingly. But after NAVSHIPS had carefully reconstructed the facts it became obvious that the claim was greatly exaggerated. For example: In a. Litton claimed that late Government-furnished steel disrupted hull construction and eventually delayed ship deliveries by six months. fact, steel work on the pacing items was completed essentially in accordance with Litton's schedules. Moreover, Litton's own weekly production reports showed that construction was proceeding smoothly. b. Litton claimed that submarine hull sections had to be subcontracted due to late Government-furnished steel. Yet Litton's own documents prepared at the time the hull sections were subcontracted stated that the reason for subcontracting was a shortage of skilled manpower at the shipyard. C. In its fifth claim submittal, Litton introduced a new $4.6 million item entitled "Escalation in Excess of Total Estimated Escalation Payments to be Made Under Article 16 (proposed)". This item turned out to be simply a "plug figure" to keep the claim at about $37 million, after Litton had to drop other claim items that had been discredited during the NAVSHIPS evaluation. The Government auditor found there was no support for the item. 6. Litton was unwilling to negotiate the claim on an item-by-item basis. During the negotiation sessions, NAVSHIPS presented its evaluation of the claim and invited Litton to point out any errors in the NAVSHIPS analysis. Litton disagreed in general with the NAVSHIPS conclusions but provided no evidence to refute them. The company's approach seemed to be that it had spent the money claimed and it was up to the Navy to reimburse Litton, whether or not the company could demonstrate legal entitlement to the money. The company said that if NAVSHIPS would not agree to virtually the full $37 million claim, Litton would pursue settlement through other channels presumably with higher level Navy officials. 7. Faced with Litton's continuing intransigence, NAVSHIPS was forced to issue a formal contracting officer's decision; Litton may appeal this decision, if it so chooses, to the Armed Services Board of Contract Appeals. If Litton does appeal, NAVSHIPS will have to spend many more man years of effort defending itself against this one $37 million claim. Considering that the Navy's current claim backlog is about $1.2 billion, we must streamline our claim processing procedures or most of NAVSHIPS' manpower will be consumed in claims work. 8. Our experience with the Litton claim shows that a contractor today holds the upper hand in the claims process. He has it in his power to make it impossible for the Navy to evaluate the claim. By changing items in the claim after the Navy has evaluated them, he can make the Navy spend months or even years in the evaluation process. He can make it difficult for the Navy to determine the facts. He can exaggerate his claims with impunity and with no penalty. Capitalizing on the resulting delays, he can exert political pressure to arrive at a favorable lump-sum settlement at higher management levels in the Navy, where the details of the claim are not known or understood. The Navy is then constantly placed on the defensive. 9. In order to improve its handling of shipbuilder claims, NAVSHIPS has gone into great detail to determine the contractor's specific legal entitlement and cost of each element of a claim. By following this procedure on Litton's SSN and AE claims, NAVSHIPS determined that only a small fraction of each claim was valid. However, NAVSHIPS cannot continue to apply so much effort on shipbuilding claims and still carry out its primary functions. The rules must be tightened so that the Navy can have ready access to relevant facts, so as not to be compelled to waste large amounts of time trying to evaluate claims that are not properly documented by the shipbuilder. Such access would produce a more prompt and equitable resolution of claim. 10. My specific recommendations are: a. . The Navy should reject promptly claims that are not adequately supported and documented. Contractors should be required to relate specific dollar amounts with individual items of a claim so that each item can be evaluated and settled on its merits. Contractors who repetitively submit unfounded or unwarranted claims, or those who frustrate the claims process by changing the basis of the claim during evaluation, should not be considered for future business when other viable sources are available. b. The senior company official in charge at the plant or location involved should be required to certify, upon first submittal of a claim, that he has personally reviewed the claim and all supporting data, and that the information contained therein is current, complete, and accurate. Moreover, he should also certify that all information bearing on the claim, whether or not it is favorable to the company's position, has been disclosed. The Navy should prosecute the offenders in any case where a certification is erroneous. c. The contractor should be required to differentiate between factual and judgmental data in his claim. Factual statements should be keyed to the specific supporting documents to facilitate evaluation. d. Field contract administration offices should be required to maintain a daily record of significant events occuring during the life of each contract. The record should be supplemented by photographs, references to key documents, or other information as necessary to ensure a complete and independent record of contractor performance in the event of subsequent claims. 11. By requiring full and accurate disclosure of relevant facts the Navy would be better able to dispose of contractor claims promptly and equitably. Where agreements cannot be reached despite full disclosure of the facts, the Navy should make its determination and then let the matter be handled within the legal mechanism that was specifically designed and set up to deal with such disputes. 12. With regard to shipbuilder claims, we have become thoroughly trapped in a system of our own creation in which a contract entered into by the Navy is no longer a "meeting of the minds" but has become a license for the contractor to use every means he can devise to achieve his predetermined profit goals regardless of his actual performance. Our contractors have fully developed the concept that they are no longer bound by the contracts they freely entered into. And, in fact, they are not so bound since they are able to deal on an informal basis with high officials who are not familiar with the facts nor legally responsible for the contract. I submit that under these conditions there is no real contract in the traditional, legal, or moral sense of the term. 13. It is wrong to imagine that the system is better than its officials and that things will work out for the better no matter how our officials conduct themselves. I recommend that we go back to dealing with our contractors in the traditional legal and moral manner. We show require our contractors to deal with those who have been assigned responsibility for our contracts. We should establish rigid rules in accordance with the recommendations listed above for processing contractor claims. The machinery for this manner of dealing is legal and is available; it does not need or require informal interpretation on the part of those who are not themselves responsible for the contract. I would appreciate being informed of what action you take with regard to my recommendations. 14. G. Rickover Copy to: Commander, Naval Ship Systems Command |