This html article is produced from an uncorrected text file through optical character recognition. Prior to 1940 articles all text has been corrected, but from 1940 to the present most still remain uncorrected. Artifacts of the scans are misspellings, out-of-context footnotes and sidebars, and other inconsistencies. Adjacent to each text file is a PDF of the article, which accurately and fully conveys the content as it appeared in the issue. The uncorrected text files have been included to enhance the searchability of our content, on our site and in search engines, for our membership, the research community and media organizations. We are working now to provide clean text files for the entire collection.
They don’t make Constellations today the way they did back in 1797 when the first "Connie” was launched at Baltimore, or the way they did back in 1957 when the newest namesake was being built at New York Naval Shipyard. But, no matter how or where naval ships are built, most of them end up costing more than anticipated. The shipbuilder always claims it’s the Navy's fault, and often it is. But claims are easier to make than to prove.
Department. Progress was slow. There was a serious shortage of live oak, and the war in Europe made the importation of copper and other necessary materials difficult.
A number of other factors combined to raise construction costs. The increased circulation of paper money produced inflation. Costs of both labor and supplies were constantly rising. Moreover, construction sites were selected for political, rather than economic reasons. Each of six new shipyards was asked to build a single ship.
Additionally, as the Secretary of War predicted correctly (and I might add parenthetically, the words retain a familiar ring): "It is questionable whether the actual cost will not considerably exceed the estimate.” Initially, the cost for six standard frigates was estimated to be $600,000. Yet the ultimate designs were not standard frigates—but the largest, most powerful frigates in the world. Thus, estimated costs rose to
p
JL rocurement problems go back to the earliest days of our Navy. Actually, they predate the founding of the U. S. Navy.
Perhaps the first editorial slap at military management was delivered in the song, "Yankee Doodle,” after a young New Englander visited General Washington’s encampment. He reported:
"And there we saw a thousand men
As rich as Squire David,
And what they wasted every day
I wish it could be saved”
The words of this ballad really struck home a few years later—after the Revolutionary War had ended, and the first chapter of the U. S. Navy’s history had been written by the exploits of our Continental Navy. With the close of that war came the now-traditional disarmament, including gradual disbanding of the Navy until the sale of the frigate Alliance in 1785 left us without any navy at all.
The years of peace following the Revolution, however, brought about great expansion in merchant trade. Since our ships were forbidden by Great Britain to trade in the West Indies, American merchantmen turned to the Mediterranean Sea and the west coast of Europe. These unprotected U. S. merchantmen were soon subjected to great harassment on the high seas—in particular from the Barbary pirates based in North Africa.
As a result, Congress took under consideration reestablishment of a naval force. Much debate ensued. Opponents of a navy cited the cost involved, claimed a navy would offend Great Britain, worried that a navy would involve us in war, and suggested we "buy” protection from the pirates or hire foreign navies to protect our merchantmen.
Advocates of a navy argued that increases in revenue from safe passage of commercial vessels would more than offset the cost of a naval squadron, paying ransom was cowardly, foreign navies could not be depended upon, peace with the pirates could only be maintained by strength, our unprotected coasts could be ravaged by enemies, and concluded: "This country is particularly well-fitted for a Navy.”
In any event, on 27 March 1794, legislation calling for construction of six frigates was adopted—with, however, a clause that construction would cease if a treaty was signed with the Barbary pirates. Our first naval appropriation of $768,000 was to finance construction and manning of six ships. (Today, we couldn’t even meet one payday for an aircraft carrier with this sum, but it was a lot of money then.)
Since there was not yet any Department of the Navy, construction proceeded under direction of the War
t
$800,000.
Meanwhile, treaties were signed with Algiers and Tripoli, and relations eased with France and Tunis. According to the original law, construction on the six frigates was supposed to stop. There were halts and delays which helped increase costs. Finally, President George Washington persuaded Congress to continue building three frigates: the United States, Constitution, and Constellation. Costs continued to mount, however. The Secretary of War had to return to Congress for additional funds. By the time these frigates were finally launched in 1797, it had taken even more money than was originally appropriated for six ships to build only three!
They were fine ships, of course, and proved their worth in the troubled years that followed. This debacle also produced one other lasting achievement. In March 1798, the Secretary of War reported to Congress that naval matters were taking too much of his time, with the result that a separate Department of the Navy was created on 30 April 1798.
In addition to the matter of cost overruns, there is another historical shipbuilding phenomenon that continues to plague us today—claims. As recently as three years ago, the Navy faced claims against new ship construction contracts totalling over $1 billion. That figure has been reduced by more than half through the superb efforts of skilled negotiating teams, which include representation from all Naval Material systems commands and the Office of the General Counsel of the Navy. Success for the government case in claims negotiation depends on professionals who prepare carefully-drawn government positions based on exhaustive analysis of records and the accumulation of facts and evidence.
cer nC °Ur m°St unresolved claims, and
rat^ain^ our oldest, surfaced again just recently. This ^ .Cr curl°us case involves a shipbuilding contract jt . ^ack to the mid-1800s. It is unusual because be3n claim. It is worth mentioning again, only cause in many respects the elements of the claim ^mble those of today.
str^Ctorc^ng to the claimant, the contract for con- sj Ctj°n a double-ended, side-wheel steamer was C0[^C on 9 September 1862. Under the terms of the l7,t‘jact> ^ contractor was to build this vessel within t0days f°r a sum of $75,000, plus $500 to be paid nu 1 Su^contractor (boiler manufacturer). Because of j^j mer°us changes in the design of the vessel by the ^avy Department, however, coupled with the sub- tj1”t^actor’s failure to meet the deadline for building rnet °ders> flle completion date for the vessel was not f0r ,d Secretary of the Navy realized the reasons ve t] *S dday and Permitted the contractor to keep the p]ejC °n c^e ways until the boilermaker could com- tjj tC d‘s Part of the construction. The vessel was on jnWays 0ver a year. The cost of labor and material ex feaSed during that time and left the contractor with rc$Ia ckarges totaling $16,000. The government found po^bility for only $5,000 of this amount, leaving fQ ^.000 balance. (A claim board, formed in 1865 act C iC PurPose °f determining exact cost, showed an rne^a, C°St owed °f $11,708.97.) Because of the govern- ut s decision not to pay this complete amount, the f0 ^ contractor went bankrupt. All the ingredients the C modern'day claims are represented above. Even t()(j rc fere nee to bankruptcy has the familiar ring of jjty s contractor requests for financial relief. berUr‘nS the period from early 1967 through Decem- bjp;1971’ the Navy received claims totalling about $1.4 Th *°n an<^ rcso^ved about $300 million of this amount.
$1 a/.^c us with a balance in December 1971 of over to 8' ^°n *n <da*ms- ^ was apparent that we needed pr^ev°te a major effort to both claims settlement and fQ ^ttt'on. The first step was to set down clear policies ced Ca wuh claim submissions and operating pro- tQUres to assure adequate feedback of lessons learned Prevent or minimize claims. The policies and procedures were incorporated into the Navy procurement directives (NPD) in early 1972. Also, in early 1972, the Navy established a claims board composed of the senior procurement civilians in the Naval Material Command headquarters and the systems commands to review proposed settlements and to ensure a balanced and thorough evaluation of claims against the Navy. At the same time, we began an orderly buildup resulting in a highly competent staff of over 300 people covering multi-disciplinary functions to fully evaluate claims. These people are assigned to various claims with as many as 70 people assigned to a single claims team. The result has been steady progress in settling claims out of court by negotiation.
Of all the many demands on the time and attention of my office during my tenure as Chief of Naval Material, one was in the forefront—the problem of contractor financial stability. This problem began to surface in the middle Sixties as contractors began to lose money under the then-established forms of contracts— forms which theretofore had almost always provided a reasonable profit. We saw the beginnings of staggering claims which contractors employed to remedy their losses.
The contractors sought relief under their contracts for their losses on the grounds that costly government-directed changes or action tantamount to changes (constructive changes such as defective or impossible government issued specifications) were the cause of their financial predicament. But a review of a contractor’s claim would often indicate that the matter wasn’t that simple and that other contributing factors applied.
For example, we have found that contractors, nationwide, experienced increased costs in the late 1960s because labor skills were being diminished by their extensive migration to the burgeoning building construction industry. To the extent that such costs were not anticipated in contractor bids, the contractual responsibility for such costs was the contractor’s. There were other factors which I shall address shortly in more detail.
For the moment, suffice to say that these claim submissions were merely symptomatic of the contractor’s financial malady and did not describe the reasons for his predicament. Generally speaking, a contractor’s financial difficulty with respect to its Navy contracts stems from one or all of several categories of events: government-responsible, act of God-type, and contractor-responsible. All of these areas must be searched when a contractor submits a claim.
To be sure, when the government issues a significant change to a procurement or takes some other equivalent action (such as a constructive change), its impact may be felt beyond the mere addition of work described by the change. Depending upon the complexity and the scope of the change—and when it is issued during contract performance—a contractor conceivably could experience higher costs than originally anticipated in the form of delay and disruption. Contractually, the government is responsible for these costs and must pay for them.
On the other hand, unforeseen economy or act of God-type events may also cause a contractor delay and increased costs. These could be events beyond the contractor’s control, such as a strike, unusually adverse weather, or an influenza epidemic. If these situations are costly, although the contractor may be entitled to extra time to complete his contract, there would be no cost remedy available under the contract. Still worse, if the economy-related contingency is a risk assumed by him under the contract, or one created by his own economic or business decision, he would not be able to secure contractual adjustment in time or money. Thus, it must be kept in mind that a review of a contractor’s claim will show the operation of cost-increasing events, some of which are contractually remedial, others which are not.
Because resolution of a contractor’s claim may not provide complete relief from his economic plight, he has sought relief through other avenues. In this regard, we find a contractor agonizing over spiraling costs and other economic factors which result in losses if he is held to strict performance of his contractual obligations. However, an important underlying principle governing the Navy’s efforts to resolve contractor difficulties is that a contractor assumes specific performance obligations when he signs a contract which he must be held to—unless by an act of God or an exculpatory contractual provision, he is excused from performance.
The Navy has in hand long-standing contracts and options for commodities at fixed prices which vest the government with the right to insist that the contractor strictly perform in accordance with his obligations. Most recently, we have found contractors threatening to decline to perform and face default under valid contracts rather than lose more money. It is situations such as this that precipitated congressional hearings in 1974 wherein some contractors hoped that the Congress would dictate remedial action in the form of direction to the Department of Defense to reform such contracts. There have been some isolated cases where the Navy has provided statutorily-authorized extra contractual relief where no other source of supply was available and where the contractor’s commodity was absolutely essential to the government. In such cases where the contract itself fails to provide a remedy, the powers of the executive branch, under Public Law 85-804, authorize this extraordinary remedy.
The Navy’s problems with contractors’ financial difficulties have received help and criticism from many quarters. The proliferation of claims has caught the attention of the Congress, the news media, the General Accounting Office (GAO), as well as various elements of DoD who contributed a great deal to the Navy’s efforts. The consensus is that the problems are complex; there isn’t any. single answer, and each case presents enough questions to puzzle a battalion of Philadelphia lawyers. Notwithstanding, the Navy has made great progress in resolving claims.
Claim submissions declined from $280 million in 1972 to $30 million in 1973, and no claims over $1 million were received in 1974. While these are gratifying results, the Navy must remain on guard because there are a number of large contracts dating from 1971 and prior years still to be completed, and there may be further claims to come.
On the other side, the Navy had disposed of over $900 million in claims over the past three years (including nearly $480 million in 1974 alone—settled for
Improved product definition (specifications and engining drawings
^ j^'se °f appropriate type of contracting
cvelopment and use of special contract clauses, e.g. ^calation, financing, etc.
► rJ1Crease<l testing of equipment/systems
etter reporting and control of government-furnished ^fnipment and information
rocedure for more rapid referral of problems to Suarters commands or Naval Material Command en project managers or local contract administration ces require assistance from higher levels
million) leaving about $300 million in claims *-m er Navy review as of the end of 1974. It is expected
1 at the majority of these will be disposed of by the end of 1975.
If we are to work our way out of this problem, it Tfl feCIU^re ’■he best efforts of both the Navy and ustry- The thrust of our current efforts throughout e Navy on claims is to prevent them from occurring ^ ne hest place by effective contract management, en and if they do occur, we hope to settle them 1 e they are small and as soon as the problems arise, aims, in effect, are requests for equitable adjustment contract prices. One of the most direct actions we oj!Ve taken is to provide for a more equitable sharing fhe risks in new contracts which are currently being awarded. An example of the method for achieving this e inclusion of price escalation clauses in contracts 0 I°ng duration.
Even though real progress has been made in settling °utstanding claims at levels equitable to both industry government—and the Navy is achieving more eClu'table risk-sharing in current contract awards—we re taking other vigorous steps to remove, insofar as possible, the root causes of claim issues. Our efforts 'Vl continue to focus on:
bile these steps are expected to be helpful, we ’cipate some continuing problems arising from ex- ^nal influences such as the current economic impact mflation, material shortages, and skill shortages in
certain occupational fields of heavy demand both by defense and commercial business. Under current procurement policy, we grant excusable delay for some of these external factors where they are clearly beyond the contractor’s control, but not equitable adjustment of contract prices. Perhaps one of the most important factors is that we are alert to those types of issues for which equitable adjustment of price is appropriate and have trained, specialized professional staffs in major Navy commands and headquarters offices to deal with these complicated contracting problems. These staffs are available upon call to all Navy procuring activities.
In summary, the Navy stands ready to settle contract changes, claims, and other unsettled pricing issues promptly on their merits but insists that the contractor bear the burden of proof without protracted dialogue.
Today the U. S. Navy has some 50,000 active procurement actions. Of these, the Navy has approximately 150 fixed-price incentive contracts for major—multimillion dollar—systems comprising about one-third of the Navy dollars obligated on active contracts. About 90% of these 150 contracts are at or below the target contract price. Less than one in 15 is above target price, but still below the contractual ceiling price. Consequently, only 3% of these contr.rs exceed or are expected to exceed ceiling price. Although not widely acknowledged, that represents pretty good financial management.
Admiral Kidd graduated from the U. S. Naval Academy shortly after the Japanese attack on Pearl Harbor. His World War II service included duty in the destroyers Crnie (DD-632) and Putnam (DD-757). Following the war, he served on the staff of Commander Destroyers, Aclantic Fleet, in the Bureau of Personnel, and in the USS Salem (CA-139). His first command was the destroyer Ellyson (DD-454). Subsequently, Admiral Kidd commanded Destroyer Squadron 32, Destroyer Squadron 18 (the U. S. Navy’s first all-missile squadron), Cruiser-Destroyer Flotilla 12, and the First and Sixth Fleets. Duty ashore has included being aide to the Superintendent of the Naval Academy, Joint Staff of the Commander-in-Chief, Pacific, student at the National War College, and executive assistant and senior aide to the Chief of Naval Operations. Admiral Kidd was Chief of Naval Materia] from December 1971 until April 1975 and has recently taken over as Commander-in-Chief, U. S. Atlantic Fleet, Commander-in-Chief, Atlantic, and Supreme Allied Commander, Atlantic.
-------------------------------------- It’s No Place Like Home
On board the aircraft carrier Lake Champlain (CVS-39) in the early 1960s, a lull in flight operations brought several of our squadron’s "brownshirts” into the ready room for relaxation. A new man, evidently right out of boot camp, sprawled out on one of the chairs and lit a cigarette. He was puffing away and flicking ashes on the deck when a ship’s master-at-arms passed through and bore down on him bawling, "Hey, kid, do you do that at home?” The youngster paused and then, gesturing to the overhead, replied, "No, but my mother doesn’t fly airplanes off the roof of our house either.”
Peter Kilduff
(The Naval Institute will pay $25.00 for each anecdote published in the Proceedings.)