Those connected with the Kitty Hawk fiasco must have thought things could not get any worse between the industry and the Navy. But they have, and today’s air is polluted with charges of incompetence, greed, and vanity. A former shipbuilder, former naval officer sees blame on both sides but, more, the urgent need to reverse the trend that is giving us costly, inferior ships which take too long to build.
The U.S. Government faces an unprecedented situation today in that its naval shipbuilding establishment is in great disarray—in fact, is severely crippled. It is vital to the national defense and to our effectiveness in dealing with the Soviets—whose shipbuilding strength has recently become very impressive—that an objective analysis be made of the factors which brought about the U.S. situation and that prompt action be taken to correct the mistakes of the past.
In making the statements that follow, I am not unmindful that the Navy has made great technological advances in its ships since World War II. It deserves high praise for the successful development of nuclear power, its marriage to the inherently hazardous submarine vehicle with very few accidents, incorporation of nuclear power in surface ships, great advances in electronic sensors, tactical warfare data systems, and in weaponry, to mention only a few. The comments and suggestions that follow are directed to what I consider to be the unreasonably high cost and lengthy building periods for our naval vessels today and to suggest some of the reasons for this state of affairs.
The most productive and economical era in recent naval shipbuilding history was during World War II. In the short span of 44 months between the Pearl Harbor attack and V-J Day, 1,496 oceangoing warships and 4,915 cargo ships were constructed. Despite enormous expansion of facilities and manpower, ships were not only built very quickly but were generally of good quality. The wartime program was outstanding for several reasons:
► Large numbers of identical ships were built in each shipyard.
► U.S. ships were technically superior to those of our enemies because their evolution in peacetime was the result of time-tested design and construction procedures.
► Decision-making was decentralized, and much of it was done at the shipyard level.
► Minimum changes in specifications were made, and minimum paperwork was required by the Navy.
► The profit motive was strong—albeit heavily taxed (up to 87%)—and excellent teamwork prevailed between the Navy and private industry.
► There was minimum interference from Congress.
But the biggest reason for the accomplishments in shipbuilding during the war was that the program was in the hands of technically trained professionals at the policymaking and top management levels, both in the Navy Department and in the shipyards.
Since World War II, many drastic changes have taken place in the organization of the armed services and in the methods used in designing, contracting for, and constructing warships; in the relationship of government to industry; and in the organization and internal management of the private shipbuilding industry. All of these changes, together, are responsible for the deterioration in our shipbuilding posture.
After the war, Congress “unified” the armed services and created the Department of Defense, the idea being to effect better coordination and increase the efficiency of our armed forces. Three military departments were created where two had previously existed, and the Army, Navy, Marine Corps, and Air Force were overlaid with a large additional bureaucracy which further complicates the management of all armed services contracts. The Navy’s effectiveness in procuring ships expeditiously has been especially damaged. Decision-making and contract approvals go through many more authorities than previously before work can proceed or before changes can be authorized and their costs adjudicated.1
Soon after the war, congressional criticism of the business practices of the armed forces led to the issuance of the Armed Forces Procurement Regulations. These regulations prescribe in great detail how business must be transacted with the armed forces. Combined with more centralized control of shipbuilding contracts, the new rules resulted in increased paperwork, slowing of construction, and more detailed specifications. The ships, too, became much more complicated because of new developments in electronics, nuclear power, missiles, and power plant refinements. Many changes in the design of the ships occurred during construction for two reasons—many new gadgets and systems were being developed, and the shipbuilding process itself had slowed as the result of less decision-making in the field, more paperwork, and decreased urgency. Prototype ships of new designs, nevertheless, were built in about three years from contract award and at costs which were not unreasonable in view of the small numbers of each class built.
Prior to the 1960s, the Navy had done the basic design of its own ships “in house.” Ships are among the most complex and the largest things made by man, and their design has to be a compromise between many competing factors. Because of the rapid strides of technology, no matter how short the building period, a warship is always “out of date” even when brand new. During that era, therefore, every effort was made to keep the design and building period as short as possible. To this end, technical and fleet representatives, all within the Navy Department, discussed ship designs with one another daily and made the necessary compromises and changes rather quickly. Designs for various ships were continually under study, improving on earlier designs and incorporating the latest developments. This process provided the U. S. Navy with the best designed ships, for the least money, and in the shortest possible time.
In the Sixties, under pressure from the Secretary of Defense, the Navy changed its entire system for designing and building warships. Under the new scheme—masterminded by two men with little or no shipyard experience—the warships were to be designed by the private shipbuilders (following aircraft practice), all were to be built in one shipyard (to “save money from series production”), and they were to be priced not only on the cost of building the ships but that of maintaining them throughout their fleet service. Total Package Procurement was the name of this program.
The requirement for “life cycle costing” was finally dropped, but it provides an insight into the naivete of those conceiving the program that it was ever seriously considered. It was under the new scheme that the very costly and long-delayed lha-1 program for nine amphibious assault ships (since reduced to five which will cost more than the nine originally contemplated) and the dd-963 program for 30 destroyers were contracted for in 1969 and 1970. Eight to ten years after the programs were conceived, designs prepared by several yards, and a destroyer “competition” which cost the Navy more than $40 million, only two of the lhas and a third of the destroyers had been delivered. A brand-new, mass-production shipyard, paid for from the sale of tax-free bonds, was built for lease to the company which won the contract for the lhas and dds. The “target” price was $1.79 billion for the 30 destroyers—some $273 million less than the other competitor in the “finals.” Only ten ships had been finished by the end of 1977. In June 1976, the cost of the 30 ships was estimated at more than $3 billion, considerably higher than even the “ceiling” price of slightly over $2 billion. The last ship is now expected to be completed about 1980. Based on the costs of ships of similar size and complexity built under the former system, these 30 destroyers should have been built for approximately $950 million, and all 30 should have been completed by 1972 or 1973 at the latest.2 They could easily have been built in then-existing facilities, saving the $130 million cost of the new mass-production shipyard.
Looking back on this unfortunate venture, it is clear that men with inadequate experience in naval shipbuilding were responsible for its conception and implementation. The basic mistake was that ships are not Produced like aircraft. A new, highly automated facility apparently takes longer to build and “debug” than it does to build 30 duplicate ships themselves in already existing yards. Changes are always introduced in naval vessels under construction, and changes wreck a highly automated production line. Shipyards building naval vessels have to be flexible in their facilities and their management systems.
At the time these drastic changes in ship design
and procurement methods were being devised in the office of the Secretary of Defense, a preloaded assault ship (fdl—fast deployment logistic ship) had been designed. Contract plans were issued to the shipyards for bids, and the main propulsion machinery for several of the ships had been ordered by the Bureau of Ships, the office in charge of naval ship design and construction for the Navy. The Chief of BuShips learned that the Secretary of Defense was taking over the arrangements for design and construction of these ships, following aircraft procurement techniques. The Chief of BuShips and his Deputy Chief, both highly competent and experienced naval architects and shipbuilders, were unable to present their views to higher authority, so they retired from the Navy in protest to this unorthodox departure from good management.3 The fdl ships were never built because Congress refused to authorize the concept. Largely as a result of the new shipbuilding arrangements initiated in the Sixties, the Navy Department today is woefully weak in trained ship designers and shipbuilders.
Inefficiency and wastefulness in Navy shipbuilding are not limited to the lha-1 and dd-963 programs, however; they are widespread.4 One quality yard, a producer of low-cost ships for decades, is now building the lead ship of a large new fleet of Oliver Hazard Perry-class (ffg-7) single-screw, guided-missile frigates. This compact, gas-turbine-powered ship of 3,600 tons (full load) is expected to cost three to four times as much as the lead ship of the 7,800-ton Leahy class (dlg/cg-16)—a twin-screw, guided-missile frigate (now designated a “cruiser”)—which was built only 15½ years ago in the same yard. (Shipbuilding cost indices are up about 120% in that period so the increase can’t all be blamed on inflation.) The man-hours “targeted” for this relatively small ship, for direct and indirect labor, are about 1.4 times the hours required to build the much larger Leahy in the early 1960s.
Costs are especially high in the yards building nuclear-powered ships. The original Navy budget for 1978 included one aircraft carrier at over $2 billion, two Trident submarines at $1.7 billion, and one conventionally powered Aegis-equipped destroyer at $930 million! At such very high costs, the number of Navy ships will shrink drastically.5
In a competitive society, costs are most effectively reduced by the profit motive. Over the years, since the Nye Committee’s investigation of the munitions industry in the 1930s and the promulgation of profit controls such as the Vinson-Trammell Act and the Renegotiation Acts, the Congress and the Navy have been preoccupied with control of profit to the neglect, unfortunately, of costs. Making use of the profit motive (without the “gimmickry” being tried today) is quite necessary to reduce the cost of warships. It would take too long in this brief article to outline the many mistakes that have been made by the Congress and the Navy in contracting for ships in recent years. As a result, they have created disincentives to good producers of ships and at the same time have encouraged what I believe to be incompetent shipbuilders to enter the market. This is one of the reasons the Navy is not getting ships built today as well, as quickly, or as economically as in the past.
Aside from profit controls, political considerations in the award of shipbuilding contracts have created some very serious problems for the Navy over the past few years. To prevent recurrences of some of these problems—late deliveries, poor workmanship, financial difficulties—the Navy has been forced to institute many new procedures and controls over the shipyards to try to get soundly built ships. These controls proliferated in the Sixties and were applied to good and bad contractors alike, adding tremendously to the cost, the building time, and, ironically, resulting in lower quality work at some of the best yards.
For example, some of these required Navy procedures, especially in the quality control area, upset internal methods used for years in the best yards and created counterproductive results. It became a “game” in one yard with highly trained mechanics and supervisors and a magnificent record for building quality ships. The men sought to beat the new system—elaborate quality control “procedures”—by deliberately making mistakes to see if the “system” would find them. Usually it did not! “Procedures” are no substitute in themselves for knowledgeable, experienced, professionally trained people of integrity. Navy “procedures” hamstring innovative, efficient, timely construction of warships in the better shipyards, reducing all to the lowest common denominator.
In an effort to be more precise about what is wanted in a ship and to satisfy contractual requirements which too frequently have fussy legal rather than sound engineering emphasis, specifications and other documents incorporated in Navy contracts have steadily gotten wordier and more voluminous. Before the war, the book of specifications for an entire ship could be carried around in a man’s hand. Today, there are several books the size of an unabridged dictionary with thousands of related specs for specific items of material or machinery. Specifications became so involved a few years ago that a major machinery supplier refused to take another Navy order because the 1,250 applicable specs were so confusing and contradictory that compliance with the contract was impossible. After some time elapsed, this particular situation was remedied, but the specifications jungle still persists!
The inspection and contract administration offices of the Navy at the shipyards are staffed with large numbers of people, civilian and military, many of whom would be unnecessary if procedures and paperwork in general were reduced. For example, in one yard recently building both commercial and naval ships, the commercial shipowner’s inspection staff, including the American Bureau of Shipping (the classification society) and the Maritime Commission, consisted of 11 people. The Navy office had 140 people, although the volume of commercial work was larger than the Navy work at the time, in terms of both dollars and tons.
Over the years since World War II, Congress has passed much social legislation, well intended and Perhaps desirable. But the cost to industry—especially industry directly involved in government contracts—has been very high. Government contracts contain many pages of special articles to satisfy legislation. These require additional people preparing reports to various government agencies in addition to the reports required directly by the Navy and do nothing to enhance the value of the ships. Compliance with these requirements is mandatory and brings about heavy added costs and inefficiencies in building ships today. The growth of nonproductive Paperwork has proliferated to the extent that in the case of the dd-963 contract, the total cost of all paperwork and/or software was estimated to be about $800 million—about 40% of the original “ceiling” cost—for the 30 ships. Obviously, the wasteful growth of paperwork is one of the principal reasons our ships take so long to build and cost so much more than they should.
Another serious internal detriment to efficient Navy management of its shipbuilding programs stems from the rapid turnover of its people. Naval officers change duty on the average every 12 to 36 months. Rarely does one stay in one spot for four years. Not only is there great expense involved in moving people around the country and the world, but there is a serious loss of continuity in the efficient execution of construction programs such as shipbuilding. Ships take a long time to design, build, and evaluate even under the most efficiently managed programs. Few naval officers in charge of shipbuilding programs stay in one position long enough to finish what they start. The man who makes mistakes often passes them on to someone else rather than having to live with them himself. Important shipbuilding programs would be carried out much more efficiently if naval commands were lengthened considerably so that men who initiate new programs could see them through to successful completion.6
Having related some of the principal causes of the shipbuilding breakdown resulting from the actions of the Congress and the Defense and Navy Departments, let us look at the shipbuilding industry itself where great changes have taken place in recent years. These changes have had an unsettling effect that has added greatly to the confusion and inordinately high costs in building warships in this country.
The late 1950s and the 1960s constituted an era unprecedented in corporate history in this country. Mergers, acquisitions, and conglomeration of businesses became the vogue in industry. The private shipbuilding industry was largely taken over by the aerospace giants and by corporate empire builders during this period. Many fine small- and medium-sized companies of great stature lost their identities and their esprit de corps in this amalgamation process. One of the finest independent shipyards in this country—Electric Boat Company, the nation’s primary submarine builder—was the foundation on which lawyer John Jay Hopkins built the enormous General Dynamics Corporation in the 1950s. It was the first of the aerospace giants to include shipbuilding. One of the largest shipyards, New York Shipbuilding in Camden, New Jersey, was taken over by Louis Wolfson and his Merritt-Chapman and Scott Company (which he had previously taken over) in the mid-Fifties. Wolfson filled the yard with shipbuilding contracts including the aircraft carrier Kitty Hawk (cva-63) at prices which looked dubious to knowledgeable shipbuilders at the time. Using Merritt-Chapman and New York Shipbuilding as a base, Wolfson tried to get control of Montgomery Ward but failed. A few years later, in the late Sixties, the shipyard was closed. Meanwhile, the Navy paid $58 million in extras to get the carrier finished. According to press accounts at the time, the completed ship had a multitude of unsatisfactory items.
In the late Fifties and early Sixties, the corporate takeovers of shipbuilding accelerated: Lockheed took over Puget Sound Bridge and Dredge in Seattle; Litton took over Ingalls in Pascagoula; General Dynamics bought the large Bethlehem Steel yard in Quincy, Massachusetts, and Tenneco took over Newport News Shipbuilding and Dry Dock Company, the nation’s largest and one of its finest private yards. A Milwaukee financier took over Bath Iron Works in Maine—the Navy’s premier destroyer builder. With Bath’s considerable liquid assets in hand, he built a conglomerate called Bath Industries, which in a few years included 13 various and sundry companies, including Congoleum-Nairn, making all kinds of products, largely in the home furnishings field. The conglomerate has since divested itself of (or closed down) several of the companies not meeting its corporate objectives and changed its name to the Congoleum Corporation.
People inexperienced in ship design and construction entered the naval shipbuilding business at the top management level of the private shipyards. A new breed of shipyard managers, trained in industries other than shipbuilding, largely replaced the former managers. They had no knowledge of ships and how they are produced. By the early Seventies, the shipyards had lost most of their experienced shipbuilding managers, disdained by the new managers brought in from other industries.
A financial auditing firm was employed to analyze the big, red, bottom-line figure of one shipyard in 1967. Although this yard had never before lost money in 60 years of warship construction for the Navy, it was suddenly deeply in the red, much to the puzzlement and consternation of the yard’s new management. The losses came about primarily because payments were improperly denied by the Navy for extra costs resulting from changes (actual and constructive), for extra costs due to disruption and delays in construction caused by the Navy, and for escalation of labor and material costs—all of which were provided for in the contracts. Although the auditing firm was without expertise in shipbuilding or shipyard management, it recommended that the new management revise basic shipyard operating procedures and organization. Needless to say, it was a case of confusion, and it was confounded from then on! The lawyers ultimately processed claims against the government to convert these losses into profits, but the changes in management procedures introduced by the auditing firm unfortunately stayed. They were cumbersome, costly, and counterproductive.
Because members of top management in the shipbuilding industry were unschooled in naval ship design, construction, and most important, in Navy contracting methods, they undertook, in ignorance, contracts containing specifications that were impractical and that were impossible to price or to meet. To make matters worse, the Navy was staffed at the contracting level by men with little shipbuilding background. For those yards building nuclear-powered ships, Admiral Hyman G. Rickover continually redefined the scope of the work and interfered on a grand scale with normal shipbuilding procedures. The nation’s largest private shipyard—and the only one now equipped to build aircraft carriers—told the Navy in desperation in 1976 that it could no longer continue construction of a nuclear-powered carrier and requested that the Navy remove the ship from the yard. There is no other yard in the country capable of building the ship. The yard is continuing to work on a nuclear-powered cruiser only because a court has ordered it to do so.
As costs rose, claims for extra payments proliferated, and the lawyers, successful for a while in getting big settlements for the shipyards, got rich. Finally, stung by criticism from certain members of Congress for outlandish settlements, the Navy refused to pay many claims. The cost change adjudication process had completely broken down. Work came to a screeching halt on several ships, and the courts finally ordered the yards to proceed on what amounted to a “pay 90% of the costs as you go” or a “cost plus 7%” basis. The Navy’s coffers were, and are, thus wide open to pay whatever it costs to get ships finished. Unsettled claims in early 1977 amounted to $2.4 billion.
As the business relationships between the Navy and the shipbuilders deteriorated during the Sixties and early Seventies, an atmosphere of distrust developed, and day-to-day contacts became strained and bitter, especially in the yards building nuclear-powered ships. Instead of the collaboration and teamwork that had existed prior to this unfortunate era, there developed an adversary relationship which itself impeded progress and added to the costs.
A by-product of the adversary relationship between the Navy and the private shipyards is that few yards have been interested in Navy work in recent years, and there is little or no competition for Navy contracts.7 The ffg-7, one of the Navy’s largest current surface warship programs, was of interest to only two shipbuilders. As a result, the prices negotiated for these ships are high, and they should be very Profitable to the builders. This is a switch which may be good in the long run, for the Navy too, if the increased profitability attracts real competition.
Congress has concerned itself with many of the Very large cost overruns of Navy (and other Department of Defense) contracts, but there has been no improvement in the situation. In the writer’s judgment, there will be little improvement until fundamental changes take place in the attitude of the Congress toward business, especially the attempt to reduce or limit profits rather than costs. There will also be no improvement until the Congress lets the Navy select and assign its key officers to top jobs and retire every officer in accordance with the statutes. The Navy must also again be permitted to award its shipbuilding contracts strictly on the basis of merit.
There will be little improvement until the Navy staffs its shipbuilding programs with professionally trained ship designers and builders, does the conceptual designs for its own ships, and greatly reduces the volume of paperwork and “procedures” which are largely unnecessary if experienced professionals are in charge in the Navy and in the shipyards. There can be no substantial improvement until the private shipbuilding industry again is managed by professionally trained shipbuilders who have learned the business from the bottom up instead of from the top down and, somehow, regains the esprit de corps it formerly enjoyed and which is so necessary to good performance.
Mr. Newell has been closely affiliated with the shipbuilding industry, especially naval shipbuilding, all his life. Born in 1912 in Bath, Maine, his father before him was for many years prominent in naval ship construction. A graduate of the Massachusetts Institute of Technology in naval architecture and marine engineering, the author spent several summers as a boy working in shipyards and at sea. He was an officer in the Navy Department’s old Bureau of Ships during the latter part of World War II. For 30 years, he held various positions in private yards building ships for the Navy. From 1950 until 1965, he served as president of Bath Iron Works, one of the nation’s oldest private shipyards. Mr. Newell is a past president of the Society of Naval Architects and Marine Engineers, a former director of the Federal Reserve Bank of Boston, and holds honorary degrees from the University of Maine, Nasson College, Bowdoin College, and Stevens Institute of Technology.
1 For footnotes, please turn to page 31.
2 The price for the USS William H. Standley (DLG-32) and USS Biddle (DLG-34) in a contract awarded to Bath Iron Works in early 1962 was $ 19,875,000 per ship. These are larger and more complex ships than the Spruance-class destroyers. Thirty such ships could have been built for much less cost because of large savings resulting from series production. Adding escalation for labor and material, cost increases based on Bureau of Labor Statistics indices for shipyards, and design costs (which were not included in the DLG-32 price), I arrive at $950 million for 30 DD-963- class ships built under the old system if contracted for in 1967 (the year the program was conceived) and completed in 1972. Government-furnished material costs are assumed to be in the same ratio as in the DLG-32.
3 Perhaps the full story of this unusual and morale-shattering incident will be told in detail by those closer to the scene in some future issue of the Proceedings.
4 The estimated cost of "modernizing” destroyers built 10 to 15 years ago is now many times the original cost of building the entire ships.
5 In 1940 Congress authorized the "two-ocean” Navy—virtually doubling the size of our fleet. Naval shipbuilding authorizations that year totaled $3.5 billion, less than the cost of two aircraft carriers today.
6 Incidentally, since World War II the U.S. has had 14 Secretaries of Defense, 16 Secretaries of the Navy, and 12 Chiefs of the Bureau of Ships (Sea Systems Command). The Soviets have had the same man in charge of their navy for nearly 22 years.
7 The Navy has withdrawn from shipbuilding in its own yards as the result of much higher costs than in the private yards. This difference was demonstrated by several independent cost studies made in the Sixties.