The Coast Guard could save up to $1.2 billion in its acquisition budget if its shifts several new and ongoing shipbuilding projects to some form of multiyear contracting, a naval affairs specialist with the Congressional Research Service (CRS) told a House panel on Wednesday.
The Offshore Patrol Cutter (OPC) and heavy Icebreaker programs are potential candidates for block buy contracting and the acquisition of most of the remaining 26 Fast Response Cutters (FRC) could be done with either a multiyear procurement or block buy contract, Ronald O’Rourke told the House Transportation and Infrastructure Subcommittee on the Coast Guard.
The way the Coast Guard is acquiring its National Security Cutters (NSC), the first tranche of 32 FRCs, and is planning to purchase its fleet of 25 OPCs through contracts with options “do not achieve the reductions in acquisition costs that are possible with multiyear procurement and block buy contracting,” O’Rourke said.
O’Rourke estimates about $1 billion in potential savings using a block buy contract for the OPC program, $100 million in possible savings from a block buy or multiyear contract for the remaining FRCs, and savings upward of $100 million if the Coast Guard uses block buy contracting for a two-ship polar icebreaker program.
“The $1 billion potential savings in the OPC program would be about enough to pay for a polar icebreaker, and the combined potential savings across all three programs of about $1.2 billion is about equal to the average annual funding level in the Coast Guard’s acquisition, construction and improvements account,” O’Rourke said.
The Navy and other Defense Department agencies have saved about 10 percent on a number of shipbuilding and aircraft acquisition programs using either multiyear procurement or block buy contracting versus traditional annual contracting, O’Rourke said. To his knowledge, the Coast Guard has never used a form of multiyear procurement, he said.
Rear Adm. Joseph Vojvodich, assistant commandant for acquisition and the chief acquisition officer of the Coast Guard, told the panel that the Coast Guard does have statutory authority under Title X to conduct multiyear procurements and “we understand the benefits” of this as long as the design is stable, there is an “enduring need” for the capability, and the costs are understood. However, he said, the “downside” to multiyear contracts is if funding isn’t made available in subsequent appropriations bills.
Rep. Duncan Hunter (R-Calif.), chairman of the subcommittee, replied that “That’s not your job, that’s our job,” referring to the fact that Congress provides annual appropriations to departments and agencies.
Multiyear procurements and block buy contracts give manufacturers such as shipbuilders the confidence to invest in capital and the workforce, allowing them to better size their investments over a number of years, thereby realizing cost savings. These contracting authorities can also provide upfront funding to allow manufacturers to make large buys of supplies and components, enabling cost savings in their supply chains. However, these contracting approaches don’t avoid the need for annual appropriations.
Vojvodich said that more recent contracts for big acquisition programs have been traditional procurements with options but said the service will work with the Department of Homeland Security and Obama administration on the “upside and downside” of multiyear-type contracts.
A Coast Guard acquisition spokesman told Defense Daily via an email response to questions after the hearing that the service hasn’t “decided against a multi-year procurement strategy on the OPC.” The preliminary and contract design phase of that program recently concluded and the Coast Guard currently plans to select one contract for detail design before FY ’16 ends in September. The second phase detail design contract “will include fixed-price options for production of up to 11 OPCs,” he said.
The spokesman added that the Phase II OPC contract “does not preclude a potential multiyear procurement strategy once full-rate production is achieved.” The OPCs that are acquired under the Phase II contract would all be low-rate initial production units and the remaining vessels would be built if a decision is made to proceed to full-rate production. The current plan calls for the Coast Guard to recompete OPC production after Phase II.
Separate teams led by Bollinger Shipyards, General Dynamics [GD], and Great Eastern Shipbuilding, completed respective preliminary and contract design contracts for the OPC. Bollinger is building the first 32 FRCs, and while the Coast Guard is hosting a competition for construction of the remaining ships, the company is the only bidder (Defense Daily, Feb, 2).
There are tradeoffs to consider in pursuing multiyear contracts, O’Rourke said, such as Congress giving up some control over program funding, reduced flexibility for the Coast Guard in its acquisition programs, particularly if there are “changes in strategic and budgetary circumstances,” and penalties paid to manufacturers if a contract has to be terminated if funds aren’t available. These tradeoffs need to be balanced against the potential benefits of these contracts, he said.
Michele Mackin, the director for Acquisition and Sourcing Management at the Government Accountability Office, testified that multiyear and block buy contracting “can result in savings,” but pointed out that even though the Navy is acquiring the Littoral Combat Ship (LCS) under a block buy strategy, the ship class has had problems because requirements were not firm. “The key really is to have the requirements nailed down and firm before construction,” she said.
O’Rourke said his view is that the troubles that have plagued LCS are independent of the block buy approach, and that the “actual construction of the ships that are under the block buy contracts under the LCS program has gone a lot more smoothly than the construction of the earlier ships that were done under annual contracts.”
As for the Coast Guard’s new polar icebreaker program, the service is expected to announce procurement plans in its FY ’17 budget request next Tuesday. In January the Coast Guard released a notional schedule and draft data package for the program based on the operational requirements document. The schedule calls for a contract award between the fourth quarter of FY ’18 and fourth quarter of FY ’19.
A 2013 Mission Need Statement produced by the DHS for a polar icebreaker recapitalization project shows the need for up to three heavy and three medium icebreakers, O’Rourke said. The need for up to six polar icebreakers is based on Coast Guard and other agency needs, including the Defense Department, he said.