By Emelie Rutherford
The Pentagon’s outgoing acquisition czar said he expects most of the DDG-1000 and DDG-51 destroyers the Navy plans to buy under a new setup will have fixed-price contracts, and predicted this type of contracting will increase.
Under Secretary of Defense for Acquisition, Technology, and Logistics (AT&L) John Young also praised last Friday the “remarkable work” of industry, the Navy, and the Office of the Secretary of Defense in reaching a “swap” agreement this month for Northrop Grumman [NOC] to restart the DDG-51 line and General Dynamics [GD] to build all of the three DDG-1000s the defense secretary wants. Previously the two yards planned to share the DDG-1000 work.
“Once you’ve awarded contracts and have programs of record…it’s very difficult to make changes,” Young told reporters at a Pentagon roundtable. “Companies undertake business plans, they make personnel decisions, and they assume certain manhours and cashflows and the execution of the shipbuilding plans and operation of their shipyards. Changes are disruptive to these plans and inevitably drive give and take on critical business issues like manhours, cashflow, and profit potential.”
“Nonetheless it was clear that the program of record was not optimal for the Navy or for the taxpayer,” he added. “We could not build only three DDG-1000s in two different shipyards.”
Young said the second DDG-1000 that General Dynamics’ Bath Iron Works in Maine will build will have a fixed-price, incentive-fee contract. Negotiations on the price are ongoing, he said.
“So they are assigning to build the second ship of a new class on a fixed-price-incentive contract basis,” he said. “That is unprecedented.”
Young said the shipbuilder is agreeing to such terms because the design work is mature and it is using an advanced computer-design system that gives it confidence work on the follow-on ships will not entail excessive risk.
Still, Young added: “If that ship proves to be very expensive, there’s no question in my mind that the (Defense) Department and the Navy will not buy it.”
Young also said he “absolutely” expects the third DDG-1000 to have a fixed-price contract. And he believes the Navy intends to have fixed-price contracts for the DDG-51s it plans to start building again, with Northrop Grumman’s Ingalls shipyard in Mississippi beginning the work on the older ships before Bath does. Young noted all the other ship-types Ingalls is building have fixed-priced contracts.
Young told reporters he “definitely agree(s) with both the Congress and the Obama administration (in pushing) us to use those tools” for “more aggressive contract terms and conditions” such as fixed-price contracting.
“Across the board, where it’s appropriate, we are moving in that direction, because I think it’s good for the taxpayer,” he added, though he warned fixed-priced contracts are not reasonable when there is excessive risk.
“The challenge (to the acquisition team) is going to be to explain when those tools are appropriate,” he said. “The help to the acquisition team is if the bias is to use those kind of tools, that’s going let us stand up and say, ‘Hey, we’re not changing the design, because that pushes risk. And, oh, by the way, the requirements bar is too high. And we need to engage you in a discussion of lowering the requirements bar so the technology is a better match for the requirements, the risk is reduced, and we can engage industry in that kind of contract discussion.'”
Young acknowledged the cost of the DDG-1000 is a “constant source of discussion,” and said he “certainly hope(s)” estimates that the ship will cost as much as $5 billion are inaccurate.
The current budget for the lead DDG-1000 is $3.2 billion, he said.
Yet he cautioned that the $3.2 billion cost will rise, but not because of cost growth. Instead, he said, engineering-design costs will increase for each ship, because the new destroyer plan endorsed by Defense Secretary Robert Gates calls for building three DDG-1000s instead of the seven the Navy previously wanted, and such costs will be spread out between fewer ships.
“So you’re going to see this $3.2 billion price be higher by $200 million to $300 million, solely because they’re now only three hulls instead of seven,” he said.
Young added, “I think we can reasonably expect that (DDG-)1001 (the second ship) will be a good bit less than $3.2 billion, and (DDG)-1002, the third ship, will be even less beyond that. Because we’re going to go down a learning curve and have a chance to do the production and detailed design work once.”
Young said he hopes the DDG-1000s will end up being $2.5 billion hulls.
Navy estimates show putting the DDG-51s back in production will likely cost $2 billion per hull.
Young said he “definitely” has concerns about the vendor base not being in place to support the restart of the DDG-51 line. Yet he said there “was a fair amount of analysis done to make sure this is the best deal for the taxpayer and produces ships for the Navy.”
The Navy bought the most-recent DDG-51s in 2005 under a multiyear contract. Thus, a lot of the long-lead parts have been out of production for several years, Young said.
“The view was, when it was discussed about restarting production…there is some risk that we may have to assemble the ship out of sequence…you may have to go in and open up parts of the ship to install long-lead items that can’t be there in time for the normal construction process,” he said. “That is expensive and costs money.”
Still, he said the Navy factored for those costs, and “the prospect of doing that twice, simultaneously in two yards, was really bad for the taxpayer and the government and posed a great deal of risk.”
“That’s why I’m particularly positive about the chance to really restart (DDG-)51 production in one yard first and then follow it the next year with that yard and starting the second yard,” Young said.