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.
K
K
Even as the nuclear submarine Billfish (SSN-676) was under construction, the builder, Electric Boat Division, was losing money on her and other submarines. The Billfish and many other Navy vessels illustrate the problem that commercial shipbuilders face in this country—trying to make a profit in the risky business of dealing with a customer that is not equal but sovereign.
In recent years, there have been a number of c°nt
/rr
versial studies of the profit experience in the
defend
d to
i#
industry. In general these studies have attempt compare profits for defense work with that of comP‘ ble commercial work. Unfortunately, the control surrounding these studies have focused more on ^ question of measures of profitability (profit as a pef of sales, equity capital, or total capital) than on more basic question of the relationship between contractor’s opportunity for reward and his assumP of risk.1 ^!
This article seeks to evaluate the risk and re experience of the U. S. shipbuilding industry ernment contracts. Risk and reward are considered r the viewpoint of the contractor. Concentration isc fore placed on financial risk, the underlying ^ which create financial risk, the sharing of such^ ^ between the contractor and the government, an relationship between risk and reward in industry^.^, The contractor’s risk can be defined as the ma
,rSies
the
to project the level of future rewards with certa' ^ Profit is only one measure of this reward. ^ important to a corporation is the ability to P future cash flows. , #]
Federal government policy, as stated in ^ Services Procurement Regulations (ASPR) is to u5^g(fi- profit motive to stimulate efficient contract perf0 ance and to attract the best industrial capabn'1 , defense contracts. It warns, "Negotiation of fic
profits, the use of historical averages, or the aut application of a predetermined percentage to the ^ estimated cost of a product does not provide 1110 tion to accomplish such performance.” 2 ^
This policy has been implemented since
o'1'
through the weighted guideline approach to £l ating profits. One of the four profit factors cons1
'For footnotes, please turn to page 55.
PORTA Rl_
Boat
in the weighted guidelines is reward based upon the extent of cost risk which the contractor assumes. A 1972 report by the Department of Defense (DoD) Comptroller indicated that the general policy in applying weighted guidelines to profits on defense contracts is to match profits for comparable commercial work.3 U. S. shipbuilders, however, have concluded that the weighted guidelines have actually become a means of limiting profits, with the emphasis on assuring that profits are not excessive rather than on negotiating a fair market value for the product.
Part of the purpose of what follows is to investigate the validity of these conflicting assessments. Before proceeding, it would be well to use the shipbuilders’ fair market value approach to illuminate the basic difference between negotiating a merchant ship contract with a private ship owner and a naval ship contract with the government.
In the former, the ship has a fair market value that is related to its earnings potential, not its construction cost. Merchant ships are built when the owner’s assessment of fair value agrees with the builder’s estimate of cost plus a fair rate of return. With naval construction, however, there is no earnings potential and no market within which to determine value. Once the decision is made to build ships of a certain type, the Navy’s purpose is to obtain these ships at minimum cost and thus to maximize the cost-effectiveness of the program. Because the basic difference will remain between these two types of contract negotiation, the question in naval ship procurement is whether profit guidelines actually provide adequate rewards and incentives for contractors.
There are 17 major private shipyards in this country which either build or repair ships or both. They are listed in Table 1. All own their own facilities. They range in size from Newport News Shipbuilding and Dry Dock Co., the largest with about 22,000 employees, to Maryland Shipbuilding and Drydock Co. and Alabama Dry Dock and Shipbuilding Co., each with about 2,000. They vary also in financial capability, facility investment and modernization, and in market participation (naval vs. merchant and repair vs. construction).
Since I960, most of the private shipyards have become part of large multi-division corporations. Only Alabama Dry Dock and Shipbuilding Co. at Mobile and the various facilities of Todd Shipyards Corp. remain independent. The industry usually has an excess of capacity over demand. For example, in 1970 it was estimated that only 60-65% of shipyard capacity was being used.4 The percentage increased from 1972 through 1974, but it had peaked by the end of last year, and most shipyards were actively seeking contracts for ships to be delivered in 1977 or later.
Table 1 Major Private Shipyards
East Coast
Bath Iron Works, Bath, Me.
General Dynamics Corp., Quincy Div.,
Quincy, Mass.
General Dynamics Corp., Electric Boat Div., Groton, Conn.
Seatrain Shipbuilding Corp.,
Brooklyn, N.Y.
Sun Shipbuilding and Dry Dock Co.,
Chester, Pa.
Bethlehem Steel Corp., Shipbuilding Div., Sparrows Point, Md.
Maryland Shipbuilding and Drydock Co., Baltimore, Md.
Newport News Shipbuilding and Dry Dock Corp-' Newport News, Va.
Gulf Coast
Litton Industries, Ingalls Shipbuilding Division, Pascagoula, Miss.
Alabama Dry Dock & Shipbuilding Co.,
Mobile, Ala.
Avondale Shipyards, Inc.
New Orleans, La.
Bethlehem Steel Corp., Shipbuilding Div., Beaumont, Tex.
West Coast
National Steel and Shipbuilding Co.,
San Diego, Calif.
Bethlehem Steel Corp., Shipbuilding Div.,
San Francisco, Calif.
Todd Shipyards Corp.,
San Pedro, Calif.
Todd Shipyards Corp.,
Seattle, Wash.
Lockheed Shipbuilding and Construction Co., Seattle, Wash.
CfQr
In terms of production worker employment ( 1956 to 1974, new construction represented 70-8' the total workload. In the years 1959-1971, Navy c struction was the dominant source of employ^, with subsidized construction for the Maritime A ^ istration (MarAd) and construction for private of f being a highly variable second and third respect^ ^ However, under the Merchant Marine Act of 1 ,, subsidized construction has expanded. By 19’74> ^ chant shipbuilding accounted for about one-ha ^ total construction employment. Table 2 lists ship ^ struction orders and order backlog from 1956 t°
“'-CCS!
^evelopr
h:
x j y ^ w ^ xxxixxxix\„# It
^ 0 be composed of the best-equipped and most suita- skips, constructed and maintained by an efficient ' • shipbuilding and repair industry. The merchant t^arme is intended to be capable of carrying all domes- commerce, a substantial portion of foreign com- Ce> and to act as a naval auxiliary when needed.7 n implementation of this policy, a part of the for- gn trade segment of the merchant fleet receives direct and ft thr°USh ^ec^era^ subsidies of daily operations . skip replacement. The subsidies are designed to (q a 1Ze t^ie U. S. ship costs with those of competitive eign ships. The shipbuilding industry receives its th/°r suPPort f°r t*ie construction of merchant ships °ugh the construction subsidy, which is adminis
ave a privately-owned, U. S.-flag merchant marine. It
To understand the U. S. shipbuilding market, it is necessary to study the factors which characterize each Cust°mer. Naval construction funds are specifically appropriated by Congress on a ship-by-ship basis, tough the years, these funds have been reserved m°st exclusively for U. S. private and naval shipyards, °ugh the naval shipyards are now doing only repair '''°rk. In recent years, a provision has been written into tl^ annua^ Navy Appropriation Act which prohibits e use of funds for construction in foreign shipyards.6 . Merchant ship construction is a more complex situa- 10n- Almost since the founding of the nation, a ship as had to be built in a U. S. shipyard to obtain U. S. egistry. Current federal maritime policy states that it necessary for reasons of national defense and the 'tnent of foreign and domestic commerce to
tered by MarAd. For subsidized ship construction to occur, Congress must appropriate subsidy funds, and private investors must be willing to provide the unsubsidized portion.
The largest portion of unsubsidized merchant shipbuilding is that of the U. S. domestic fleet. This source of construction is protected by the Merchant Marine Act, 1920 (Jones Act) which restricts domestic traders to the U. S.-flag ships built in U. S. shipyards. Much smaller is the unsubsidized part of the U. S. foreign trade fleet. Because of the higher U. S. shipbuilding costs, the industry has not received a foreign ship order since 1957.
In summary, U. S. shipbuilding is a protected industry which has the government as its largest customer and which depends on the government for the laws and regulations which maintain its protected status. It does not compete in the world market.
Risk in the shipbuilding industry can be divided into three major categories: structural, technical, and financial.
Structural risk: A DoD procurement policy study (the Fitzhugh Blue Ribbon Panel Report of 1970) notes that there are several unique problems in the acquisition of naval ships. Primary is the fact that the Navy is the largest customer and the only customer which buys the types involved. Therefore, the manner in which the Navy conducts its business has a profound effect on the industry. The report states: ". . . the procurement process for Navy ships, even more than
for
not
termination or reduction, the effect of which may
ments.
bee11
use of their facilities—facilities which have also
d. For
ship
found in contracts between equal parties. Examp sovereign privileges whjch increase risk:
► The power to invoke change orders unilaterally
les1
in other procurements, must reflect a concern for the existence of a sufficiently broad industrial base to provide competition for such procurements.”8
Through fiscal year 1963, the Navy followed the policy of allocating contracts to qualified shipyards after price competition (without the lowest bid alone governing awards) in order to sustain the production capacity of the industry. An example of the way contracts were fragmented is the destroyer program. Between 1951 and 1963, 109 guided-missile and antisubmarine warfare ships of seven basic classes were built by nine private shipyards and three naval yards. There were 53 separate contracts with no more than four ships to a contract.9
The Maritime Administration followed a similar policy, except that awards were always to the low bidder. Between fiscal years 1958 and 1971, there were contract awards for 190 subsidized ships of 38 different designs—an average of five ships per design. Prior to fiscal year 1968, there was only one design which consisted of ten or more ships, and not all of these were built by one yard. The average contract award for the period was three ships.10
The result of both policies was an excess of shipyard capacity. This produced an overly competitive atmosphere with one or more bidders requiring success to maintain a minimum workload. It also encouraged underbidding and resulted in contractors attempting to recover by building on the most economical schedule —regardless of contract delivery dates—and by cutting corners where possible.
Starting in fiscal year 1964, the Navy moved to multi-year procurements in an effort to reduce shipbuilding costs through series production, to standardize ship designs, and to encourage private investment in shipyard modernization by providing a longer-range workload for a particular contract. A subsequent development was total package procurement (TPP), in which all design, development, production, and definable system support are included in one multi-year contract. Under the Merchant Marine Act, 1970, MarAd has basically followed suit. Examples of these contracts:
Ship Type or Class | No. | Contractor | Award | Type |
DE-1078 (now FF-1078) | 20 | Avondale | $300 mil|jon | Multi-year |
LST-1179 | 17 | National Steel | $250 million | Multi-year |
DD-963 | 39 | Litton | $2.15 billjpn | TPP |
LASH (MarAd) | 20 | Avondale | $235 million | Multi-year |
These new developments present higher risks to the industry. The prior allotments of small-quantity contracts were geneyally acceptable because they did keep the industry alive, and because there was the apparent feeling among many that the government would n0t allow them to suffer serious financial loss. Under the multi-year concept, the risk is greater because:
► Contract value is increased and is often greater th$ the asset value of the firm.
► The number of contracts available to bid on is les5,
and smaller firms do not have the resources to competC for larger contracts. !
► Greater shipbuilder investment in modernized fat' ties is expected and often required as a condition the contract award. These improvements are often sf* cialized in nature, and future uses for them are untd tain because there is rdoubt concerning the type5 0 ships to be awarded three or more years in the future,
► The cost of competing for contracts in terms dollars and management/engineering talent is great^
► Because congressional funding remains increment • there is a risk to the successful bidder of conn3 be adequately compensated for in cancellation Pal ► For TPP contracts, the unsuccessful bidders risk j1011
lost to them during the protracted proposal perio1 the DD-963 contract, the award date was extended n0^ five months after contract definition submission t0 months.11
When a shipbuilder negotiates with a private owner, they negotiate as equals. All matters of inT tance in their contractual relationship are subject ^ negotiation, including the type of contract, ship ^eS1^v. delivery schedule, and price. However, when the g , ernment contracts for ships, it does so not as an but as a sovereign—one entitled to indepc*1 authority. While this is a valid concept where f*1* of national interest are paramount, it is sometimes in contractual matters where the basis of mUtuJ- p should apply. Whether the application of sovef privilege is used justifiably or otherwise, it create® additional measure of risk to the contractor above , to require performance before the price of the c 1fC is determined. This creates uncertainty as to . construction disruptions and as to whether negocl will produce adequate compensation.
► The power to determine unilaterally the type 0 ^\\ tract, the basic contractual arrangements that ^ apply, and, in effect, the allocation of risk betwe^^i parties. The government’s shifting of c°nt
geable
to current FFP contracts for the Navy and
CO;
Arilcy is not predictable other than in the short term. cexample is the effect on profits as a result of the tra^3S*S *n t^le ^^Os on firm fixed price (FFP) con- j s at a dme of excess capacity and tight competition p e industry. Former Assistant Secretary of the Navy x P- Sanders has noted that this policy especially >ered reasonable profits in the shipbuilding indus- c ' ^eneral Dynamics Electric Boat Division, for sut> C’ Statec^ f^at 11 l°st naoney on FFP contracts for riertlar*nes in 1967, 1968, and 1969.12 The profit expel °f other shipyards is described later in the article. 5 e government’s ability to invoke new clauses, such SQrj*n anti-claims clause, in contracts. Actions of this shift additional risk to the contractor in a way often difficult to foresee and for which explicit V **ng rewards are not provided.
0f 'e power to determine allowable costs in the pricing tej^egotiated contracts, change orders, and for cost- COstUrsement-type contracts. Changes in allowable Ujj ? °n cost-reimbursement contracts can be by ad- tetrlstrative—not contractual—action and can be S^ve. An example of this is a claim by Bethlehem 3hbl^at government auditors disallowed previously fee) c^e overhead allocations to CPFF (cost-plus-fixed- cL C°ntracts on the grounds that they were properly
ercial customers. Not being able to reopen FFP
Because of their attractive cash flows, nearly all major U. S. commercial shipyards, including the largest, Newport News, have been absorbed by large conglomerates.
contracts, the contractor was forced to absorb the costs out of profits.
Another example is that of interest payments on claims. It is a recognized point of law that a debt owed to the government earns interest even when there is no contract or statute so providing; the converse, however, is not true. Congressional hearings records cite claims which have remained unsettled for four to 12 years and for which either court or hearings examiners have found at least partially in favor of the contractors.13 Only in the last few years has the government started paying interest on shipbuilder claims against the Navy, and MarAd still does not. Since disruption is often not recognized by the government as an allowable cost except through the claims route, the failure to pay interest and the delays in claim settlement are added risk factors in government contracting.
Technical Risk: Shipbuilders are unable to predict with certainty future costs or to set and maintain a
if they are not available when needed (such as
least-cost construction schedule. The following are primary examples of technical risks in Navy contracts:
► The building period from contract signing to final ship delivery is greater for naval ships than for merchant vessels. A review of current naval shipbuilding contracts shows a building period of five to eight years; merchant ship contracts range from two to four years.14 To compensate, the Navy has included cost escalation clauses in fixed price contracts so that the contract price is periodically adjusted for labor and material cost increases or decreases. The adjustments are in accordance with an agreed-upon formula for each and based on Bureau of Labor Statistics cost indices. (Beginning in 1974, a similar provision has been included in merchant shipbuilding contracts.) Because cost increases are not uniform in all geographical areas, and because inflation can outstrip the escalation formula, an individual shipyard can experience unforeseeable cost increases during the long building period. These are not reimbursable.
► Only 55% of the ship construction funds appropriated in any one year flow to the shipbuilder. The remainder go for the purchase of government-furnished weapon systems, nuclear components, propulsion systems, etc. For 27 Knox-class frigates, the contract price to Avondale was $339.5 million. The government-furnished equipment (GFE) to be provided was expected to total $263 million. For 12 nuclear attack submarines built by Electric Boat, the contract price was approximately $378 million and the GFE totals $360 million.15 UtC or defective GFE and GFI (government-furnished info1' mation) has been a major justification in recent ship builder claims for price increases.16
► There is greater risk in naval contracts that the contractor will be unable to meet specification requ‘re' ments or to resolve specification inconsistencies ot ambiguities without disruptive effects on construct!0*1 schedules. Complex technical requirements involve shock hardening and noise reduction often push state of the art. Government policy on these techmca matters is subject to change (generally seeking 1(11 proved performance). Performance considered sat'5 factory on previous ships is no longer accepted in btet ships, even though specification wording remains U(1 changed. Sometimes subcontractors are less willing t0 bid on the more stringent military specifications, they fail to meet them after contract award.
► Contracts for follow-ships of a class include a pr°vl sion for the follow-yard to obtain the class drawing from the lead-yard for the cost of reproduction. Contractually, the government makes no warranty as to 1 timeliness, accuracy, or completeness of these drav/i°& (Contracts include a specific disclaimer on this.) Ne^ theless, low bid prices are induced from follow-)'^ on the implication that the lead-yard drawings ^ useful and therefore follow-yard engineering costs & be reduced. If the drawings prove to be defective.
the lead-ship is delayed and delivered after the foil0 ships), the shipbuilder’s only recourse is to attempt obtain compensation through the claims route.
Financial Risk: This element is measured by^ ^ certainty of maintenance of working capital an return on long-term capital investments. Cash shipyards have generally been considered good an given as one reason for the acquisition of shT'^^ by large corporations. Unlike supply contracts w . progress payments are paid on 80% of cost incU ^ both MarAd and the Navy pay for progress, uS^0„. monthly, on the basis of a formula related to -s struction progress and material receipts. The m®s 105% of cost incurred. There is an ultimate hoi of 1% of the contract price pending final settle01 ,£ It is therefore possible for the government to Pr in excess of 100% of the actual working capital refl ments. Working capital risk on government coflu is thus minimal, if any, even though shipbuilders that government procedures are more restrictive the event-type progress payment schedules which negotiate on private contracts.17 ^j-
The risks to long-range corporate planning f°r
pw'Hjr
IPBUILDING DIVISION
tal ;
di:
Scussed above. Additional emphasis is presented here aK i'^e volatility °f government funding and the variety of government commitment to policy.
^avy: in the i96i_i972 period, naval construction 1 ^r°Priati°ns fluctuated from a high of $3 billion in 2 and 1972 to a low of $800 million in 1969- Since s,. has been $3 billion or higher. The effect on v0rAers is evident in Table 2.
^arAd- - on
investment are evident from the structural risks
^ In the mid-1950s, the government embarked
a subsidized construction program designed to re- sul)Ce ^ earl>T 1970s the U. S. fleet of some 300 b 'uized ships engaged in foreign trade. However, ^ °f inadequate government funding and other by 8ram inefficiencies, only 158 ships had been built f In the interim, the U. S.-flag share of our
"sub^n commerce dropped to about 6%—hardly the a stantial portion” called for by the Merchant Marine ct of 1936.
has^'n^er c^e Merchant Marine Act of 1970, Congress Str^expdcitly set as a goal of national policy the con- jncCt'°n of 30 ships a year through 1980. The 1971 t|lere.IIlent> however, included only 12 ships because of shi ltla^dity to attract private investment into the jv |ln§ market, even with government subsidy funds trac*tVe'18 Through 1974, 59 ships had been con- njq C ^or under this act. While this represents a sig- increase over the subsidized construction in the s> u does not approach the goals established. It
The Ingalls yard at Pascagoula, Mississippi, where amphibious assault ships (LHAs) are under construction, is an example of the complex and expensive facilities that shipbuilders are "expected and often required” to invest in as a condition for contract awards.
is evident that the long-range future of our merchant marine construction program is subject to considerable risk.
Our ability to analyze the profit experience of construction work in the shipbuilding industry, differentiated by customer, is limited by the inability to obtain appropriate financial data. Specifically:
► Financial data do not differentiate between customers nor between construction and repair work.
► Since all but two shipyards are divisions of larger corporations which do less than 50% of their business in ship work, their financial data are not included in summarized industry statistics.
Because of these restrictions, analysis of industry profit experience is limited to the following:
► Average profit levels for the years 1956-1969, given in industry data and for those independent shipyards which participate in construction. Federal Trade Commission data are used for this purpose.
► Company profit experience by customer as reported in 1970 congressional hearings on the status of shipyards.
► Claims submissions and settlement rates on the basis that both are a measure of loss and/or risk for which compensation was not originally provided. General Accounting Office (GAO) data are used for this purpose.
► More current (1969-1973) profit data reported in a survey of selected and unidentified shipyards by the Office of the Assistant Secretary of Defense (Comptroller).
Table 3 is a summary of this analysis. The pr°^ experience of the top 12 firms is considered a g°°^ indicator up to the mid-1960s. After that date, mo'1 large shipyards were not included in the FTC report* because of acquisitions by larger firms. Profit levels f°r the-three firms and the top 12 show drops during ^ FFP contract period of the 1960s. The "selected ship yard” data (Table 5) show a continuation of profitability through 1973. In testimony before Co11'
1956
57
58
59
60
61
62
63
64
65
66
Top 12 Firms (SIC 373)
Ship I Boat Bldg. & Repair
11.0
8.6
6.2
7.6
-1.2
1.7
4.8
4.5
6.7
9-4
6.2
BATH
15.4
10.8
10.3
11.8
10.3
9.2
5.2
4.5
4.9
3.3
*
-28.2
Table 3 Profit Experience U. S. Shipbuilding Industry Return on Stockholder Investment (%)
* Attributed to late GFE/GFI; Unsat subcontract material; design changes; and labor increases.
NEWPORT NEWS
6.9
12.4
12.2
13.2
12.5
10.5
11.5
9.7
9.6
9-7
6.4
7.5
(Acquire
Tenneco)
:d by
** Diversified out of shipbuilding.
acts
TODD
Lost $8.6 million on $891 million Government contr
work
11.3 6.2 0.2 -2.2 1.6
1 January 1958 to 31 March 1969
-1.1
3.3
2.7
-0.01
8.3
9.4
9.4
9-4
9.0
Source: FTC Reports on Rates of Return in Selected Mfg. Industries 1956-1969 and Seapower Subcommittee, Status of Shipyards 1970.
Table 4
-Govt. $692 million sales; $1.3 million profit before taxes; Losses in 5 yrs; profit in 6 yrs; .2% on sales Commercial $719.3 million sales; $44.6 million profit before t3/ Profit in each of 11 yrs; 6.2% on sales.
1969 Reported a good year. Government Shipbuilding 55% of sales—only 28% of profits
Major Shipbuilder Claims for Price Increases (In millions of dollars)
Table 5 ___
Selected Shipyards
Percent Profit on Sales Before Taxes
Shipbuilder | Contract Price | Claim | Settlement | Company | 1969 | 1970 | 1971 | 1972 |
| |
TODD |
| 161.7 | 114.3 | 96.5 | A | 6.3 | 8.1 | 9.7 | 10.9 | 3.4 |
LOCKHEED |
| — | 46.3 | 17.9 | B | (16.8) | 1.6 | (3-9) | 0.8 | IJ 11 |
GD/QUINCY |
| — | 223.2 | — | C | (1.6) | 2.4 | (0.3) | 0.0 | |
NEWPORT NEWS | — | 98.1 | — | D | NA | NA | NA | 3-9 | rs a | |
AVONDALE LOCKHEED |
| 340 | 147.5 159.2 | _ | E ( ) Loss | 5.4 | 4.7 | 0.5 | (0.4) | 0-D |
INGALLS
BETHLEHEM
130.4
48.3
Source: Office of Asst. SecDef (Comptroller) 1974.
As Reported in Shipyard Weekly No. 18, 1 May 1975, Shipbuilders Council of America, p. 2.
Source: GAO, Causes of Shipbuilders Claims for Price Increases. B-133170, Feb. 1972
Todd
to participate in ship design
§ress, both Newport News and Todd provided specific figures showing either losses or comparably low profitability on government work.
Bath diversified out of shipbuilding to improve profitability and in 1971 shipbuilding represented only 23% of its sales.19 In 1963, Bethlehem sold its naval building yard because of low profitability and has since c°ncentrated on other than naval work.20 (New York Shipbuilding Corporation of Camden, New Jersey rlosed during this period, but that was a case of liquidation for profit.)
Table 4 shows the largest of the approximately $1.2 ulion in claims against the Navy. Whereas a 1958 GaO study found claims settlements to average 7% of 0r>ginal contract price, the 1972 study showed claims Settlements had climbed to 37% of original contract price.21
In summary, profits in the shipbuildipg industry have een low since the 1960s, and the lqigher rjsk govern- tTlent work has been less profitable than commercial Work.
Present trends point to a recognition of the need t0 reduce contractor risjc in government shipbuilding c°ntracts. First, the Navy has dropped the total package Procurement concept. While multi-year contracting has een retained, there are indications that contracts for rype of ship will be divided into units of ten or more. lsk allocation by type of contract is also changing to recognize the greater risk of design and lead-ship Production. The new guided-missile frigate (former l09) program provides:
A cpff (cost plus fixed fee) contract for Bath and
► A CPIF (cost plus incentive fee) contract for construction of the lead-ship
► FPI (fixed price incentive) contracts, presumably to three builders, to build a total of 50 ships
Second, both the Seapower Subcommittee of the House Armed Services Committee and the Navy and Marine Corps Acquisition Review Committee (NMARC) have in recent months issued recommendations aimed at reducing risk to the shipbuilding industry. These include:
► Adoption by Congress of a five-year shipbuilding program (recommended by both)
► Setting of realistic target cost levels and avoiding an auction-type environment in contract negotiations (NMARC)
► Developing improved escalation clauses (both)
► Revising claims adjudication procedures in order to expedite settlement (both)
► Allowing interest on claims settled in the contractor’s favor (Seapower Subcommittee)
► Using some type of cost-reimbursement contract when significant risk is present (NMARC)
Captain Palmieri received his commission and bachelor’s degree through the NROTC program of Tufts University in 1953. His first active duty was in destroyers, and then he reported to the Massachusetts Institute of Technology for postgraduate training from 1956 through 1959. He was awarded a master of science degree in naval architecture and marine engineering and the degree of naval engineer. From there he went to submarine school and served briefly in submarines before reporting to Pearl Harbor Naval Shipyard for his first tour as an engineering duty officer. Subsequently, Captain Palmieri was ship superintendent at Ingalls Shipbuilding in Pascagoula, Mississippi, served on the Board of Inspection and Survey and is now planning officer at the Charleston Naval Shipyard. In addition to his other degrees, Captain Palmieri also holds a master of business administration from George Washington University.
^d Services Procurement Regulations, Article 3-808. 'nomics of Defense Spending, p. 180.
^ summarization and critique of defense profit studies is contained in U. S. Partment of Defense (Comptroller), The Economics of Defense Spending—A ° at Realities (Washington, D.C.: Department of Defense, July, 1972).
Th‘ Eco,
s p
^ ' • Congress, House Armed Services Committee, Status of Shipyards, ***»gr, before the Seapower Subcommittee, 91st Congress, 2nd Session, l* PP- 10659, 10666, 10690, 10724, 10750, 10893-10894.
lh>d‘ P- 10653.
Vp. 11I70.
^erchant Marine Act, 1936, 49 Stat. 1985.
*s
^Powcr Subcommittee, Shipyards, p. 11172.
in Hood, and Nathan Sonnenshein, An Objective Look at Shipbuild-
the United States. Paper presented to the Society of Naval Architects lo ^a^nc ^ngineers» 18-21 June 1968, pp. 5-7.
c'al ^ ^^ltnieri, "The Effect of Government Subsidies on the U. S. Commer- % "Ierchant Shipbuilding Industry” (unpublished master’s thesis, George Kington University, 1972), pp. 148-153.
“Seapower Subcommittee, Shipyards, p. 10732.
12Ibid, pp. 10772 and 11142.
13Ibid, pp. 10787-88 and 10973-76.
“Shipbuilders Council of America, Naval Shipbuilding Report June 1, 1972 and Merchant Shipbuilding Report July 1, 1972 (Washington, D.C.: Shipbuilders Council of America). (Mimeographed).
“Seapower Subcommittee, Shipyards, pp. 10677 and 11147.
“Comptroller General of the United States, Causes of Shipbuilder Claims for Price Increases, B-133170 (Washington, D.C.: Comptroller General, 28 February 1972), p. 11.
“Seapower Subcommittee, Shipyards, p. 10762.
Effect of Government Subsidies, pp. 42, 101, 168.
“Standard and Poor’s, Stock Reports, XXXIX (9 June 1972), p. 292. 20Seapower Subcommittee, Shipyards, pp. 10973-78.
21 Causes of Shipbuilder Claims, p. 5.