Private Shipyards Made Investments to Improve, Upgrade, and Maintain Facilities and Equipment over the Last 10 Years

Over the last 10 years, major shipyards used public and corporate funds to  invest more than $1.9 billion in facilities and equipment that improved  shipbuilding efficiency, developed new capabilities, and maintained  existing capabilities. These categories are defined as follows:  Improving shipbuilding efficiency. Developing new capabilities. Maintaining capabilities. For  example, Electric Boat officials explained that its shipyard had to make a  major investment in dock repair in order to maintain the shipyard’s ability  to launch and repair submarines. Through investments to improve efficiencies and develop new capabilities,  major shipyards modernized their facilities and equipment, thus  transforming their shipbuilding processes. The Navy Supports Facilities and Equipment Investments by Offering Incentives at Most Major Shipyards and Has Expanded This Support over the Last 10 Years

To incentivize investments, the Navy has provided support to most major  shipyards with four mechanisms: early release of contract retentions,  accelerated depreciation, special contract-incentive fees, and contract  share-line adjustments. Navy officials cited the lack of  competition and instability of Navy work in shipbuilding as major reasons  why the Navy needs to incentivize investments in facilities and equipment  at major shipyards. Over the last 10 years, the Navy has  expanded its use of investment incentives and is now involved with  providing some form of investment support at all major shipyards. By releasing contract retentions  early, the Navy disburses money to a shipyard earlier than scheduled from  a reserve normally retained to ensure ships are delivered according to  specifications. The Navy also manages Hurricane Katrina relief funds, which Congress  appropriated for infrastructure improvements at shipyards that build Navy  ships in states affected by Hurricane Katrina. Navy officials told us that the Navy negotiates investment incentives with  major shipyards because limited competition in the market does not foster  an environment that encourages shipyards to invest without incentives. Officials from major shipyards argued that instability in long-range Navy  shipbuilding plans discourages shipyards from making investments  without guaranteed Navy work. The Navy Lacks a Policy to Ensure Investment Incentives Achieve Expected Outcomes

The Navy does not have a policy outlining its goals and objectives for  providing financial incentives to shipyards to encourage facilities and  equipment investments. This results in differences in  expected outcomes across investment mechanisms. Individual program offices and contracting officers also make decisions  about which types of investments to pursue, without any policy from the  Navy about the kinds of investments that are in its best interest. Recommendations for Executive Action

We recommend that the Secretary of Defense direct the Secretary of the  Navy to develop a policy that identifies the intended goals and objectives  of investment incentives, criteria for using incentives, and methods for  validating outcomes. Appendix I: Scope and Methodology

To identify facilities and equipment investments over the last 10 years, we  obtained and analyzed data on all capital investments over $1 million at all  major, privately owned shipyards including General Dynamics Bath Iron  Works, General Dynamics NASSCO, General Dynamics Electric Boat,  Northrop Grumman Shipbuilding–Gulf Coast, Northrop Grumman  Shipbuilding–Newport News, and two smaller, privately owned shipyards,  Austal USA and Marinette Marine shipyard. To  supplement this analysis, we met with officials from the Office of the  Deputy Assistant Secretary of the Navy–Ships, the Office of the Deputy  Assistant Secretary of the Navy–Acquisition and Logistics Management,  and the Office of the Secretary of Defense–Industrial Policy to understand  how the Navy’s role in investment support at shipyards has evolved over  the past 10 years. Due to a Navy  scheduling conflict, Newport News was going to have two aircraft carriers  that needed to be at this pier at the same time in fiscal year 2007. For  these investments, the contractor submits a business case to claim a  special incentive fee tied to the first four submarines for the amount  necessary to achieve the documented corporate minimum return on  investment.
Why GAO Did This Study

As fiscal constraints increasingly shape Navy shipbuilding plans, the pressure to increase efficiency mounts. Modernizing facilities and equipment at shipyards that build Navy ships can lead to improved efficiency, ultimately reducing the cost of constructing ships. In response to a request from the House Appropriations Subcommittee on Defense, GAO (1) identified investments in facilities and equipment at privately-owned shipyards over the last 10 years; (2) determined the Navy's role in financing facilities and equipment investments at these shipyards; and (3) evaluated how the Navy ensures investments result in expected outcomes. To address these objectives, GAO analyzed shipyard investment data over the past 10 years; interviewed shipyard, corporate, and Navy officials; and reviewed contracts, investment business cases, and other Navy and contractor documents.

What GAO Found

Over the past 10 years, large shipyards that build Navy ships used public and corporate funds to invest over $1.9 billion in facilities and equipment to improve efficiency, develop new shipbuilding capabilities, and maintain existing capabilities. Examples of each category include the following: (1) Improving efficiency--General Dynamics Bath Iron Works built a new facility--the Ultra Hall--that improves efficiency by allowing shipbuilders to access work space more easily in a climate-controlled environment. (2) Developing capabilities--Northrop Grumman Shipbuilding-Newport News built a replacement pier that allowed shipbuilders to work on two aircraft carriers simultaneously due to a Navy scheduling conflict. (3) Maintaining capabilities--General Dynamics Electric Boat invested to repair docks in order to maintain the shipyard's ability to launch and repair submarines. Investments at two smaller shipyards, Austal USA and Marinette Marine shipyard, were primarily to maintain and develop new capabilities as both are competing for new Navy contracts. Over the last 10 years, the Navy expanded its use of investment incentives and has recently provided some form of investment support at all large shipyards. To incentivize facility and equipment investments, the Navy has (1) released money early from the reserve of contract funds normally held back to ensure ships are delivered according to specifications, (2) accelerated asset depreciation schedules, (3) tied a portion of the contractor's fee to investing in new facilities and equipment, and (4) adjusted the contract share-line to give the contractor more of the savings if costs decrease. The Navy also manages funds appropriated by Congress for Hurricane Katrina relief at shipyards in the Gulf Coast. Outside of Hurricane Katrina funding, the Navy has not supported investments at the two smaller shipyards. Navy officials stated that the Navy has to negotiate investment incentives with large shipyards because limited competition and instability of Navy work does not foster an environment for shipyards to invest without incentives. Shipyard officials argued that instability in Navy shipbuilding plans makes it difficult to invest without guaranteed work from the Navy and incentives are necessary to help meet corporate minimum rates of return needed to justify an investment, especially given the large dollar amounts involved with some investments. The Navy lacks policy to help ensure it achieves goals and objectives from providing facility and equipment investment incentives at private shipyards. Absent this policy, individual program offices and contracting officers make decisions about what type of incentive to use, desired return on investments, and what kinds of investments to support. Without policy, program officers and contracting officers use different methods to validate expected outcomes and safeguard the Navy's financial support.

What GAO Recommends

GAO recommends that the Navy develop a policy that identifies the intended goals and objectives of investment incentives, criteria for using incentives, and methods for validating outcomes. The Department of Defense concurred with this recommendation.