In November 2013, we reported on quality shortfalls across Navy  shipbuilding programs, including LCS. The Navy addressed some, but not all, of our recommendations in these  different reports. The  Navy also met FAR requirements related to responsibility for and place of  acceptance and transfer of title, among other provisions. Under the cost- reimbursement contracts, the LCS 1 and LCS 2 prime contractors were  only required to give their best efforts to complete quality-related  activities—along with the other work specified in the contracts—up to  each contract’s estimated cost. These efforts resulted in LCS 1 and LCS  2 not completing final contract trials, and LCS 2 not finishing its  acceptance trials—resulting in increased knowledge gaps related to ship  performance and deficiencies. In addition, the Navy did not achieve the  quality standards on LCS 1 and LCS 2 that are outlined in its own ship  acceptance policy, although the policy also contains several notable  flexibilities to these standards. In particular, the policy recognizes  situations where the Navy may defer work until after delivery and final  acceptances and affords the Chief of Naval Operations the power to  waive certain quality standards outlined in the policy. The Navy relied  extensively on these waivers to facilitate its trials and acceptance  processes for LCS 1 and LCS 2. Navy Acceptances of LCS 1 and LCS 2 Complied with FAR Acceptance Provisions, Largely Because of Contract Type

Although LCS 1 and LCS 2 contained numerous deficiencies—including  areas of the ships that remained incomplete when the Navy took final  acceptance—the Navy’s actions complied with section 46.501 of the FAR  because these actions were consistent with the cost-reimbursement   Under cost-reimbursement type  terms of the respective contracts.contracts, the government generally reimburses the contractor for the  costs it incurs in performing the contract. Navy Decisions to Accept Ships in Deficient Condition Driven by Cost and Fleet Needs, and Quality Problems Persist

Navy decisions to accept delivery of LCS 1 and LCS 2 in incomplete,  deficient conditions were driven by a focus on near-term cost  performance by shipbuilders, a desire to introduce the long-delayed ships  to the fleet, and—in the case of LCS 1—environmental and treaty  considerations associated with the location of that ship’s construction. In  prioritizing these factors, the Navy shortchanged its quality assurance  processes for both ships, which has caused it to devote considerably  more time and money to resolving deficiencies post-delivery than  anticipated. However, because the Navy did not establish clear deadlines  for resolving ship deficiencies, corrections were allowed to lag, to the  point that fleet operators inherited unresolved starred deficiencies on  each seaframe. Further, these deficiencies have constrained recent  shipboard operations. Consequently, we are not making recommendations in this  report. Appendix I: Scope and Methodology

This report evaluates the Navy’s acquisition of the first two Littoral  Combat Ships (LCS). Specifically, we (1) assessed the extent to which  the Navy complied with applicable federal regulations, contracts, and  policies in accepting LCS 1 and LCS 2 and (2) evaluated the basis for  and outcomes from the Navy’s decision to accept delivery of these ships.
Why GAO Did This Study

GAO has reported extensively on LCS—an innovative Navy program, consisting of a ship and its mission packages. The Navy bought the first two ships using research and development funds, initially planning to experiment with them to test concepts and determine the best design. As GAO reported in July 2013, the Navy later opted to fund additional ships without having completed this planned period of discovery and learning. Further, LCS 1 and LCS 2 have experienced major cost growth and schedule delays. In August 2010, GAO reported that the ships were incomplete at delivery and in November 2013, GAO reported on significant quality problems with Navy ships, including LCS 1 and LCS 2, noting that the Navy regularly accepts ships with numerous open deficiencies.
Congress mandated that GAO review the Navy's compliance with federal regulations in accepting LCS 1 and LCS 2. This report (1) assesses the extent to which the Navy complied with applicable federal regulations, policies, and contracts and (2) evaluates the basis for and outcomes from decisions to accept these ships. To conduct this work, GAO analyzed applicable federal regulations, policies, contracts, and program documentation, and spoke with relevant Department of Defense (DOD) and contractor officials.

What GAO Found

Navy decisions to accept the first two littoral combat ships (LCS)—LCS 1 and LCS 2—in incomplete, deficient conditions complied with the Federal Acquisition Regulation's (FAR) acceptance provisions, largely due to the cost-reimbursement type contracts in place to construct these ships. The Navy also met FAR requirements related to responsibility for and place of acceptance, among other provisions, by using an authorized Navy representative to accept each ship at its respective contractor's facility. Under the cost-reimbursement contracts, the LCS 1 and LCS 2 prime contractors were only required to give their best efforts to complete quality-related activities—along with the other work specified in the contracts—up to each contract's estimated cost. These efforts resulted in both ships not completing all required sea trials—tests that evaluate ships' overall quality and performance against contractual requirements—including acceptance and final contract trials, as shown in the table below.
Not completing these trials increased knowledge gaps related to ship performance and deficiencies. In addition, LCS 1 and LCS 2 did not meet the quality standards outlined in the Navy's ship acceptance policy, although the policy also contains several notable flexibilities to these standards. In particular, the policy recognizes situations where the Navy may defer work until after delivery and final acceptances and affords the Chief of Naval Operations the authority to waive certain quality standards outlined in the policy. The Navy relied extensively on these waivers to facilitate its trials and acceptance processes for LCS 1 and LCS 2.
Navy decisions to accept delivery of LCS 1 and LCS 2 in incomplete, deficient conditions were driven by a focus on near-term cost performance by shipbuilders, a desire to introduce the long-delayed ships to the fleet, and—in the case of LCS 1—environmental and treaty considerations associated with constructing that ship adjacent to the Great Lakes. The Navy prioritized these factors over its quality assurance processes for both ships, which has caused it to devote considerably more time and money to resolving deficiencies after delivery than anticipated. However, because the Navy did not establish clear deadlines for resolving ship deficiencies, corrections were allowed to lag, to the point that fleet operators inherited unresolved deficiencies on each ship. These deficiencies have constrained recent shipboard operations.

What GAO Recommends

Because the opportunity to implement acquisition changes to these two ships has passed, GAO is not making any new recommendations in this report, but has made prior recommendations to improve LCS acquisition. DOD has acted on some, but not all, of these.