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Government Report Says Navy Pays Shipbuilders to Fix Defects

Official U.S. Navy file photo of the littoral combat ship USS Fort Worth (LCS 3).
Official U.S. Navy file photo of the littoral combat ship USS Fort Worth (LCS 3).

The U.S. Navy is paying shipbuilders a profit for correcting defects from the builders, according to a new government report that cites multiple examples including a littoral combat ship built in Marinette.

That's despite guarantees that come with vessels costing hundreds of millions of dollars, the Government Accountability Office said in the report titled Navy and Coast Guard Shipbuilding.

On four ships with guarantee clauses in the contract, the government paid the shipbuilder 89% of the cost -- including profit -- to correct defects, according to the report.

"This means the Navy and the Coast Guard paid the shipbuilder to build the ship as part of the construction contract, and then paid the same shipbuilder again to repair the ship when defects were discovered after delivery -- essentially rewarding the shipbuilder for delivering a ship that needed additional work," the report noted.

"Navy officials stated that the Navy accepts the cost of fixing deficiencies to lower the overall purchase price of its ships. However, this contracting approach results in the shipbuilder profiting from fixing deficiencies on a ship that it was initially responsible for delivering to the government in a satisfactory condition," the GAO said.

The report was not centered on littoral combat ships being built by Marinette Marine, in Marinette, and Austal USA in Mobile, Ala.

"The Navy and Coast Guard paid shipbuilders to repair shipbuilder-responsible deficiencies after delivery for most of the ships that we reviewed," the report noted.

However the GAO referenced two littoral combat ships, USS Fort Worth built in Marinette, and USS Coronado built by Austal USA in Mobile, Ala.

The Navy spent $46 million, under a post-delivery agreement, to correct defects, complete ship construction, and assist with other tasks including tests and trials, the GAO said about Fort Worth.

Marinette Marine employs about 2,000 people building littoral combat ships designed for a variety of missions, including combat in shallow, coastal waters.

Defense contractor Lockheed Martin Corp., through Marinette, has delivered three of the vessels to the Navy: USS Freedom, USS Fort Worth and USS Milwaukee, which was christened in Milwaukee in November.

Seven more of the warships are in various stages of construction in Marinette, while a different version is being built in Mobile, Ala.

In a statement Monday, Lockheed Martin said: "Each of the three ships delivered have met or exceeded Navy specifications for quality and performance prior to acceptance. The Lockheed Martin-led LCS team is executing the program within the Navy's budget and fulfilling its commitment to build 11 ships at a competitive construction price of approximately $360 million each. With each ship produced, the team is increasing efficiency and productivity."

Navy officials did not answer Journal Sentinel questions about the GAO report, which says shipbuilding problems aren't a new phenomenon.

"While Navy ships include complex and technically sophisticated systems, we noted, in November 2013, significant quality issues with the basic construction of some Navy ships. We found that some ship classes are routinely delivered with thousands of outstanding defects with the hull, mechanical, and electrical systems," the report noted.

In December, USS Milwaukee broke down at sea and had to be towed more than 40 miles to a Navy base near Norfolk, Va. Not long after, USS Fort Worth had a major mechanical failure in Singapore.

USS Freedom, the first littoral ship built by Marinette, has suffered several setbacks including a 6-inch crack in the hull, a failed gas turbine, problems with the jet propulsion system, and a leak in the port-shaft seal that caused flooding inside the vessel.

These kinds of problems, while troubling, are not unusual for ships of a new design, according to some experts. USS Fort Worth was the second littoral combat ship built in Marinette, following USS Freedom.

"The GAO complaint is justified when a shipyard is building the fifth or sixth vessel in a series. But on something as revolutionary as the littoral combat ship, you expect changes to be necessary," said Loren Thompson, chief operating officer of the Lexington Institute, an Arlington, Va., policy research group that studies military matters.

"The Navy has always approached shipbuilding as a partnership with industry. And that means any cost required by rework needs to be shared between the government, which set the requirements, and the industry, which sought to execute them," Thompson said.

The GAO recommended that the Navy structure contracts so that shipbuilders cannot profit from correcting defects deemed to be their responsibility.

In some cases, defects have occurred on new ships where the design has barely changed since World War II, said Norman Polmar, who has been an adviser or consultant to three U.S. secretaries of the Navy and two chiefs of naval operations.

"To me, that borders on criminal," Polmar said.

Still, shipyards are feeling budget pressures, said John Rogers, a former Defense Department official and now president of Capstone National Partners, a Milwaukee consulting firm.

"The pressure on them to go out and squeeze every dollar they can is increasing," Rogers said.

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