Navy Ship Maintenance: Action Needed to Maximize New Contracting Strategy's Potential Benefits
Published: 2016-11-21T00:00:00

Fast Facts:
The Navy invests millions of dollars each year to maintain its ships and will use a new contracting strategy for ship repair. This strategy has the potential to significantly control costs by using firm-fixed-price contracts, increasing opportunities for competition, and improving maintenance planning processes.
Although the Navy has taken a thoughtful approach in developing the strategy, it has not established a systematic process for determining whether it works. We recommend that when the strategy is implemented, the Navy should determine how well it achieves its stated cost, schedule, and quality objectives.

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Navy has over 150 non-nuclear surface ships that it repairs, maintains, and modernizes using privately owned shipyards. The Navy concluded in 2010 that readiness of the surface ship force was below acceptable levels. This, in addition to the concerns of leadership about cost and schedule growth, led to a revised readiness strategy and, in 2015, introduction of a new contracting strategy for ship repair, referred to as MAC-MO.
House Report 114-102 accompanying the fiscal year 2016 National Defense Authorization Act included a provision for GAO to review the Navy's implementation of the MAC-MO strategy. This report assesses (1) the potential benefits of the MAC-MO contracting strategy, (2) process changes the Navy has made to address any challenges and to capitalize on anticipated benefits, and (3) how the strategy will potentially affect the Navy's ship repair industrial base.
GAO analyzed the Navy's acquisition planning documentation, lessons learned, and contracts. GAO interviewed Navy officials and visited regional maintenance centers in Norfolk, Va.; San Diego, Calif.; and Mayport, Fla. GAO also interviewed previous and prospective Navy ship maintenance contractors.
section_title: What GAO Found
paragraphs: The Navy's Multiple Award Contract, Multi Order (MAC-MO) contracting strategy for ship repair offers a number of potential benefits compared to the former Multi Ship, Multi-Option (MSMO) contracting strategy, including increased competition. A key difference is that the MAC-MO strategy intends to control costs through the use of firm-fixed price contracts and the use of third-party planners, which could be cost-effective if the planner produces clearly defined work specifications for the repair contractor to price and execute. Prior to implementation of the new strategy, the Navy conducted market research and pilot-tested attributes of the strategy with pilot maintenance periods for a number of ships.
The Navy recognized several lessons learned from its pilot maintenance periods and has made subsequent process changes to address key lessons and support MAC-MO. These include a longer time frame for the planning process for finalizing work requirements (see figure). According to the Navy, this additional time is needed to promote stable requirements and, therefore, pricing.
The Navy is assessing outcomes of individual maintenance periods; however, it lacks a systematic process involving the fleet- and shore-based maintenance communities to assess overall implementation of MAC-MO. This is inconsistent with federal standards for internal control, which state that management should evaluate its response to risks and evaluate progress made toward program objectives. Not ensuring progress is systematically assessed—particularly in light of the many stakeholders involved—could undermine the Navy's ability to obtain the improved outcomes it seeks with the MAC-MO strategy.
The MAC-MO strategy will increase competition opportunities and set aside work for small businesses, but it is too soon to determine how these changes will impact the ship repair industrial base. Industry viewpoints GAO collected on MAC-MO varied both by shipyard location and contractor size. However, former MSMO contract holders reported that the uncertainty associated with the need to continually compete for work could result in decisions to reduce their workforce and facilities. Small businesses GAO spoke with have in the past mostly performed work as subcontractors to MSMO contract holders, but many expressed interest in competing as prime contractors under MAC-MO.
section_title: What GAO Recommends
paragraphs: GAO recommends the Navy assign responsibility to a single entity to systematically assess implementation of the MAC-MO strategy. DOD agreed with GAO's recommended action and plans to report biennially on strategy implementation.

section_title: Letter
paragraphs: In support of its mission to maintain combat-ready forces, the Navy  acquires, fields, and sustains a large fleet, which currently includes over  150 non-nuclear surface ships. The Navy relies on these ships to be  ready to operate when needed and to meet their expected service lives.  To accomplish these objectives, the Navy contracts for ship repair,  maintenance, and modernization through scheduled periods, called  availabilities, during which the ship is temporarily unavailable for  operations. The Navy concluded in 2010 that the material readiness of  the surface ship force was well below acceptable levels to preserve ships  to their full service lives, finding that deferrals of scheduled maintenance  and reductions in the amount of time allowed for completing major repairs  contributed to persisting deficiencies. These deferrals and reductions also  had not remedied the longstanding problem of cost and schedule growth  in ship maintenance availabilities. The Navy has since taken steps to  improve the readiness of its non-nuclear surface combatant and  amphibious warfare ships, including introducing a revised operational  schedule intended to provide, among other things, for the predictable  scheduling of tasks for ship maintenance, known as the Optimized Fleet  Response Plan (OFRP).
In 2015, the Navy transitioned to a different contract strategy for the  maintenance and modernization of surface ships, which it expects to  support the goals of the OFRP and alleviate cost and schedule growth  incurred during availabilities. This new strategy is called Multiple  Award  Contract-Multi Order (MAC-MO). As opposed to the prior strategy, which  used cost-reimbursement contracts and was only competed among ship  repair contractors every 5 years, MAC-MO  will use firm-fixed-price  contracts, a third-party contractor to identify and plan the work, and  increased competition, among other things. The MAC-MO strategy will  cover maintenance needs for six classes of surface combatant and  amphibious assault ships, which the Navy estimates will cost about $6.5  billion to maintain from fiscal year 2016 through fiscal year 2020.
House Report 114-102 accompanying the fiscal year 2016 National  Defense Authorization Act included a provision for us to review the Navy’s  implementation of the MAC-MO  contracting strategy. This report  assesses (1) the potential benefits of the MAC-MO contracting strategy,  (2) process changes the Navy has taken to address any challenges and  to capitalize on anticipated benefits, and (3) how the strategy will  potentially affect the Navy’s ship repair industrial base.
To assess the potential benefits of the MAC-MO strategy, we analyzed  the Navy’s acquisition planning documentation, compared conditions  under which cost-reimbursement contracts and firm-fixed-price contracts  are appropriate, and interviewed senior contracting officials and  contractors with experience conducting maintenance availabilities. To  determine how the previous Multi-Ship,  Multi-Option (MSMO) and current  MAC-MO strategies differ in terms of contract pricing, planning the work,  and structuring the competition among ship repair yards, we analyzed the  contents of MAC-MO acquisition planning documentation, and reviewed  related Federal Acquisition Regulation (FAR) provisions and MSMO  contracts. To assess process changes the Navy has taken to address  challenges and to capitalize on intended benefits of the MAC-MO  strategy, we analyzed documentation on lessons learned from the  availabilities used to pilot the MAC-MO strategy and actions the Navy  took in response, such as were identified in staffing and training plans,  and proposals for revised planning milestones. For these two objectives,  we also interviewed Navy officials responsible for planning, administering,  and funding the ship repair contracts, including the offices of the Deputy  Commander for Surface Warfare (SEA 21); Commander, Naval Surface  Force, Atlantic; Commander, Naval Surface Force, Pacific; Commander,  Navy Regional Maintenance Center; the Mid-Atlantic  Regional  Maintenance Center (MARMC) in Norfolk, Virginia; the Southwest  Regional Maintenance Center (SWRMC) in San Diego, California; and  the Southeast Regional Maintenance Center (SERMC) in Mayport,  Florida. These are the three maintenance centers where the Navy is  implementing the new contracting strategy. To understand how the new  strategy might affect the Navy’s industrial base for ship repair, we used a  data collection instrument and a semi-structured interview to collect  viewpoints and a description of existing facilities from 14 selected  contractors serving the Navy homeports of Norfolk, Virginia; Mayport,  Florida; and San Diego, California. The contractors included former  MSMO contract holders and additional contractors the Navy identified as  potential competitors for MAC-MO contracts in its market research,  including small businesses. In addition, we obtained information from the  Navy on the number and scheduling of future availabilities for each of  these three home ports. See appendix I for more information about our  scope and methodology.
We conducted this performance audit from September 2015 to November  2016 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Several Navy organizations share responsibilities for scheduling,  planning, budgeting, overseeing, and setting policy for the repair,  maintenance, and modernization of non-nuclear surface ships:
The Secretary of the Navy, as directed by the Secretary of Defense,  is responsible for conducting, and has the authority under Title 10 of  the United States Code to conduct, all the affairs of the Department of  the Navy, including overseeing the repair of naval ships.
The Chief of Naval Operations is the senior military officer of the  Department of the Navy and is responsible to the Secretary of the  Navy for the command, utilization of resources, and operating  efficiency of the operating forces of the Navy and of the Navy shore  activities assigned by the Secretary.
U.S. Pacific Fleet and U.S. Fleet Forces Command develop  budgets for the operations and maintenance of ships, while also  setting requirements for overall fleet readiness.
Commander, Naval Surface Force, U.S. Atlantic Fleet and  Commander, Naval Surface Force, U.S. Pacific Fleet—the Navy’s  surface type commanders—have specific responsibilities for  maintaining, training, and ensuring the readiness of their assigned  surface ships. In addition, the type commanders have a significant  role in scheduling repair planning activities, funding availability  work,  and coordinating the management and supervision of that work.
The Assistant Secretary of the Navy for Research, Development  and Acquisition serves as the Navy Acquisition Executive and has  authority, responsibility, and accountability for all acquisition functions  and programs, including surface ship repair, maintenance, and  modernization. The Assistant Secretary also represents the  Department of the Navy to the Under Secretary of Defense for  Acquisition, Technology and Logistics and to Congress on all matters  relating to acquisition policy and programs.
Naval Sea Systems Command (NAVSEA)  is charged with  maintaining ships to meet fleet requirements, while doing so within  defined cost and schedule parameters. NAVSEA  has the further  responsibility of establishing and enforcing technical authority in  combat system design and operation. These technical standards  ensure systems are engineered effectively, and that they operate  safely and reliably.
Figure 1 shows how these operating forces and shore-based entities are  organized within the Navy.
Within NAVSEA,  several organizations provide headquarters-based and  on-site, local support for surface ship availabilities. Functions these  offices perform include contract administration, program management,  and planning for future availabilities informed by the historical  maintenance needs of Navy ships. Figure 2 highlights the various  NAVSEA  offices that participate in surface ship availabilities and their  responsibilities.
The level of complexity of ship repair, maintenance, and modernization  can affect the length of a maintenance availability—which can range from  a few weeks to more than 6 months—and informs whether the work will  be competed among contractors only in the ship’s homeport or competed  among all ship repair yards on the East or West Coast. The types of  availabilities include the following:
Chief of Naval Operations (CNO) availabilities are scheduled to  accomplish industrial maintenance and modernization. Industrial  maintenance requires complex industrial processes to perform  restorative work on a ship, for example, involving structural,  mechanical, and electrical repairs. Modernization requirements  include changes that either add new capability or improve the  reliability of existing systems. For example, the Navy is currently in  process of modernizing cruisers and destroyers to upgrade their  combat systems. CNO availabilities can last 6 months or longer and  are normally scheduled every 2 to 3 years throughout a ship’s service  life. To inform the work scope for a CNO availability,  Navy officials or  contractor representatives typically perform one or more “ship checks”  to assess the material condition of the ship in advance of the  availability.
Continuous Maintenance availabilities are for routine maintenance  work, for example, repainting parts of a ship or repairing the nonskid  surfaces on a flight deck. These availabilities are normally 2 to 6  weeks in duration and typically scheduled once per non-deployed  quarter during a period when the ship will be in port.
Emergent Maintenance availabilities are for work of an urgent  nature when the risk of prolonged disruption to a ship’s operations  makes higher payments for repair acceptable. These availabilities are  only completed on an as-needed basis in order to keep a ship  operating. For example, in 2015, staff at one regional maintenance  center discovered a propeller blade was loose during a contractor’s  routine cleaning of an underwater hull of an amphibious ship and  immediately arranged for the repairs.
In support of its mission to ensure surface ships are mission-ready and  able to achieve their expected service life, NAVSEA’s Surface  Maintenance Engineering Planning Program (SURFMEPP) has  developed a series of products used to support long-term maintenance  for ships, focusing on capturing the technical requirements for a class of  ships. For example, maintenance plans for a class of ships could identify  a need for equipment overhauls, propulsion shaft replacements, and  corrosion protection. To identify requirements for a specific ship,  SURFMEPP coordinates the development of a “baseline availability  work  package” with the relevant type commander. This package represents the  NAVSEA-mandated  technical requirements to ensure a ship reaches its  expected service life and meets its operational commitments and is  tailored specifically to each ship. Planners then use these requirements  as a basis for developing detailed work specifications that direct the ship  repair contractor how to perform the work. SURFMEPP also manages the  Master Specification Catalog, which is a module within the Navy  Maintenance Database that contains information and specifications  needed by planners to develop the work specifications for the repair or  modernization of a specific surface ship. This catalog is the repository of  all work item instructions used to execute contracted depot-level  maintenance. Use of the catalog is intended to promote standardization  and planning products that reduce costs and increase quality of  contracted work.
In September 2012, we assessed a Navy readiness strategy, known as  the Fleet Response Plan, aimed at improving the readiness of Navy  surface combatant and amphibious warfare ships. Our report recognized  the Navy had taken steps to alleviate the consequences of deferred  maintenance—such as reduced readiness and increased costs once  repairs were made—by establishing SURFMEPP and the Commander,  Naval Regional Maintenance Center (CNRMC) in 2010 to oversee the  operations of the regional maintenance centers. However, we found the  Navy had not assessed certain risks to implementation of the strategy,  such as staffing shortages at SURFMEPP and CNRMC. We  recommended that the Navy develop a comprehensive assessment of the  risks the Navy faces in implementing its readiness strategy and develop  alternatives to mitigate risks. However, in responding to our  recommended actions, the Navy did not agree that a comprehensive  assessment of risks was necessary or desirable—stating its view that  existing assessment processes were sufficient—and did not take action.
subsections: section_title: Private Ship Repair Contractors and Facilities
paragraphs: The Navy contracts with private shipyards and other firms for the repair,  maintenance, and modernization of non-nuclear surface ships. These  contractors comprise what is referred to as the ship repair industrial  base. The extent of facilities required by a contractor to perform a  maintenance availability  varies by the complexity of the maintenance  requirements. Contractors’ facilities might include shipyards with piers,  drydocks, cranes, and separate facilities for pipe-fitting and valve repair.  Certain repairs, such as inspecting or repairing the ship’s hull, or  removing marine growth from the hull, might require placing a ship in a  drydock. Figure 3 shows a drydock and crane.
To support the execution of complex maintenance availabilities, the Navy  has established a certification process to ensure that contractors are  qualified to conduct the work. NAVSEA  will grant a “Master Ship Repair  Agreement” after certifying a ship repair firm’s capability and capacity to  perform all aspects of shipboard work. To obtain this level of  certification—the highest the Navy grants for ship repair—the firm must  meet certain standards, including having the management, organization,  production, and facilities to perform a complex repair. Certified firms must  also be capable of subcontracting for elements beyond their capability or  capacity, while ensuring that they have adequate oversight of the  subcontracted effort.
A June 1995 ship depot policy issued by the Secretary of the Navy  requires that, whenever possible, ship repair and maintenance work of 6  months or less be performed by shipyards at or near the ship’s home port  to improve the crew’s quality of life by reducing their time away from  home. If the estimate is more than 6 months, the Navy expands the  solicitation to include additional ship repair companies operating on the  relevant U.S. coast.
section_title: History of Navy Contracting, Planning, and Scheduling Approaches for Ship Repair
paragraphs: Over the years, the Navy has used different contracting strategies with  the private sector to support the repairs and modernization for surface  ships.
Pre-MSMO (before 2004): According to Navy contracting officials,  prior to the implementation of the MSMO contracting strategy that has  been in place until recently, the Navy generally used firm-fixed-price  contracts to contract for the maintenance and modernization of  surface ships and used its own planning workforce to draft work  specifications. A firm-fixed-price contract provides for a price that is  not subject to any adjustment on the basis of the contractor’s cost  experience in performing the contract. This contract type places  maximum risk and full responsibility for all costs—and resulting profit  or loss—on the contractor. It therefore provides maximum incentive  for the contractor to control costs. In 1982, we reported on  deficiencies with the Navy’s implementation of this contracting  strategy for ship repairs.
MSMO (2004 to present): The Navy has used the MSMO strategy,  which features the use of cost-reimbursement contracts, to contract  for ship maintenance work with the private sector. Cost- reimbursement contracts provide for the payment of allowable  incurred costs, to the extent prescribed in the contract. Under a cost- reimbursement contract, the government does not contract for the  performance of a specified amount of work for a predetermined price,  but instead agrees to pay the contractor’s reasonable costs of  performance regardless of whether the work is completed. In  addition, as part of the MSMO strategy, the contractor responsible for  executing the work develops the specifications to which the work was  performed. While the Navy initially identified several benefits with the  MSMO strategy, including contractor assistance with developing the  work package specifications, Navy leadership determined that the  business case for the strategy had deteriorated as ship availabilities  were incurring excessive cost and schedule growth.
MAC-MO (2015 to present): In 2015, the Navy began transitioning to  the use of its newest contracting strategy for ship maintenance— MAC-MO—which relies on (1) cost-reimbursement type contracts with  a third-party planner (i.e., a contractor other than the contractor  performing the actual repair work) to develop work specifications and  (2) firm-fixed-price contracts with ship repair contractors to execute  availabilities. In addition, the MAC-MO contracting strategy features  the use of indefinite delivery/indefinite  quantity (IDIQ) contracts for  ship repair contractors. IDIQ contracts do not specify exact times for  delivery of supplies or services at contract award; those are  established via task orders during contract performance. The use of  multiple award, IDIQ contracts (contract awards to more than one  contractor) and orders is consistent with Department of Defense  Better Buying Power initiatives aimed at increasing competition.
Shortly preceding implementation of the MAC-MO strategy, in November  2014 the Navy began implementing OFRP—a revision of its earlier Fleet  Response Plan outlining fleet training, maintenance, deployment, and  sustainment schedules. As we found in a May 2016 report, to meet heavy  operational demands over the past decade, the Navy has increased ship  deployment lengths and has reduced or deferred ship maintenance,  reducing the predictability of ship deployments. In addition, we found  that public and private shipyards involved in Navy ship maintenance face  a number of challenges in completing maintenance on time, including  unanticipated work requirements, workforce inexperience, and workload  fluctuations. The OFRP is intended to prioritize maintenance by  developing a predictable schedule that allows sufficient time to  accomplish needed maintenance tasks and ensure that platforms meet  their expected service lives.
section_title: Market Research and Piloting Helped Inform Roll-out of MAC-MO Strategy, Which Offers Potential Benefits Compared to MSMO
paragraphs: Our analysis of the key attributes of the MAC-MO contracting strategy  versus its MSMO predecessor indicates that the new strategy offers  significant potential benefits, key among them being the ability to control  contract costs through the use of firm-fixed-price contracts. The Navy has  taken several proactive steps, including market research and piloting,  which provided insights ahead of the strategy’s implementation. Because  MAC-MO is in the early stages of implementation, though, it is too soon to  assess the extent to which the new strategy will achieve its objectives.
subsections: section_title: The MAC-MO Strategy Reflects Potential Benefits to Government as Compared to MSMO Strategy
paragraphs: The Navy’s objectives for the MAC-MO  contracting strategy are to: maximize competition for surface combatants and amphibious ships  improve cost control, quality of workmanship, and schedule  adherence, and maintain an appropriate level of flexibility and responsiveness to the  fleet.
The MAC-MO  contracting strategy differs from the previous MSMO  strategy in four significant ways, as shown in table 1.
The attributes of MAC-MO offer significant benefits as compared to  MSMO. The increase in competition opportunities that MAC-MO offers  has the potential to help save the taxpayer money, improve contractor  performance, and promote accountability for results. MAC-MO contract  structures also offer benefits as compared to MSMO. Under MAC-MO’s  firm-fixed-price contracts for executing availabilities, prices do not change  based on contractor performance, even if the contractor underbids to win  the contract. For MAC-MO’s third-party planning contracts, NAVSEA  determined that those should be cost-reimbursement type contracts, but  that incentives were appropriate to motivate contractor performance. The  contracts will feature two types of incentives, incentive fees and award terms. The incentive fees will allow the contractor to earn profit based on  the accuracy of its work specifications, adherence to schedule, or both.  The award term plan allows the contractor to earn additional option years,  exercisable at the government’s discretion, if the government decides the  contractor generally performed satisfactorily regarding quality, cost, and  schedule.
section_title: The Navy Used Market Research and Pilot Ship Availabilities to Inform MAC-MO Implementation
paragraphs: Prior to finalizing the MAC-MO acquisition plan in April 2015, NAVSEA  conducted market research to identify how the proposed strategy could  promote competition for the award of contracts for third-party planners  and for the execution of maintenance availabilities. Market research—the  process used to collect and analyze data about capabilities in the market  that could satisfy an agency’s needs—is a critical step in the acquisition  process, informing key decisions about how best to acquire goods and  services. The FAR requires, among other things, that market research  be used to promote and provide for full and open competition, and as part  of the acquisition planning process, that contract requirements be  structured to facilitate competition by and among small business  concerns.
NAVSEA  contracting staff used a variety of market research techniques  to inform their analyses, such as holding industry days and publishing  requests for information on www.FedBizOpps.gov to gauge industry  interest in competing for MAC-MO contracts. As a result of the  analyses, NAVSEA:  identified potential competition for the execution of complex  maintenance availabilities for the six ship classes included in the  strategy within the three homeports (Mayport, Florida; Norfolk,  Virginia; and San Diego, California) and the East and West Coast- wide competitions, as well as for the third-party planning contracts. determined that two or more capable small businesses existed to  justify setting aside noncomplex work to small businesses in the  homeports of Norfolk and San Diego, but not Mayport  or the coast- wide competitions. made an initial determination that the use of a single award IDIQ,  planned for the repair of destroyers, was feasible. However, according  to NAVSEA  officials, the Navy subsequently decided not to pursue  this contracting approach on the basis of two factors. First, single  award IDIQs would have required potential contractors to pre-price  availabilities years into the future, which industry cited as highly  problematic. In addition, NAVSEA found that the use of single award  IDIQs would likely undermine its negotiating position with respect to  individual modernizations.
In addition, in 2014 NAVSEA  used San Diego-based pilot availabilities for  five ships to test the MAC-MO strategy, and assembled lessons learned.  These availabilities, which SWRMC oversaw in San Diego, California,  ranged in level of complexity. The Navy also considered lessons learned  from earlier maintenance availabilities,  particularly the USS Porter in  2013, for which NAVSEA awarded a firm-fixed-price contract for  maintenance and collision damage repairs. A mixed maintenance team  composed of personnel from SERMC and MARMC provided oversight  over the planning and execution of this availability  in Norfolk, Virginia.  Table 2 identifies the MAC-MO  attributes demonstrated during these pilot  availabilities.
While the pilot ships provided the Navy useful information, the Navy did  not test all aspects of the MAC-MO  strategy. For example, the pilot was  limited to maintenance, modernization, and repair of DDG 51 and CG 47  class ships in San Diego, California. In addition, the cost of the more  complex pilot availabilities—the destroyers USS William P. Lawrence and  USS Spruance—was relatively low compared to more typical costs for  surface combatants, suggesting that the scope of work was much less  than a typical CNO availability.  Our analysis showed that these  availabilities cost about $4.2 million and $3.7 million, respectively,  whereas CNRMC data from 2011 to 2014 shows the average cost of a  CNO availability for a destroyer to have been about $17 million and a  cruiser about $32 million. In responding to our analysis, SWRMC  contracting staff said that the type of work conducted in the pilot  availabilities was typical of other drydocking availabilities and was ideal  because it was small enough to identify potential problems with the  proposed strategy without risking significant schedule delays and cost  overruns.
section_title: Implementation of the MAC-MO Strategy Is Underway
paragraphs: NAVSEA  began implementing the MAC-MO  strategy following the Deputy  Assistant Secretary of the Navy for Acquisition and Procurement’s  approval in May 2014 and April 2015, respectively, of acquisition  strategies for acquiring third-party planning services and for execution of  the ship availabilities.  In February 2015, NAVSEA awarded the first of  three third-party planning contracts to QED Systems, Inc. and, in  February 2016, NAVSEA awarded the first of the two multiple award IDIQ  contracts specifically for complex availabilities in Norfolk, Virginia.
To provide a bridge between when the MSMO contracts ended and the  award of the MAC-MO contracts, NAVSEA awarded a series of single  contracts for the execution of mostly destroyer availabilities, including one  that was competed along the East Coast. NAVSEA refers to these as  “gap ships.” Nine contract competitions to date have taken place for gap  ships homeported in Norfolk, Virginia, and an additional availability  was  competed along the East Coast. According to NAVSEA officials, they do  not anticipate requiring gap ship awards for any ships homeported in San  Diego, California or Mayport, Florida. Figure 4 shows the timeline for  these gap ship contract awards and other awards related to the MAC-MO  strategy.
By April 2016, the Navy had awarded all three of the third-party advance  planning contracts—all to QED Systems, Inc. While the Navy anticipated  competition, it reported that only the Landing Helicopter Assault/Landing  Helicopter Deck class third-party advance planning solicitation received  multiple offers. As a result, one firm is currently responsible for planning  specifications for all of the MAC-MO availabilities. According to Navy staff  we interviewed, QED Systems had prior experience drafting work  specifications for ship availabilities  as a subcontractor for MSMO ship  repair contractors. As of August 2016, QED Systems had developed  specifications for the Norfolk gap ships USS Normandy and USS  Gettysburg and was in the process of planning additional availabilities.
NAVSEA  has awarded multiple award IDIQ contracts for the execution of  complex availabilities in Norfolk and San Diego, and reported MARMC  and SWRMC have issued their first orders. In addition, as of August  2016, SERMC had solicited, with the intent to award multiple IDIQ  contracts, for the execution of availabilities in Mayport, Florida. MARMC  and SWRMC have posted draft solicitations for the award of IDIQs to  small business contractors in their respective ports.
section_title: Additional Action Needed to Address Potential Challenges to Implementation of the MAC-MO Contract Strategy
paragraphs: The Navy has taken steps to mitigate potential challenges as it moves  forward with the MAC-MO contracting strategy, primarily by responding to  11 key lessons learned from its pilot availabilities.  As of August 2016, the  Navy has taken actions that partially address 8 and fully address 3 of  those lessons learned. A persistent theme across several of the lessons  learned is the need for sufficient staffing within the regional maintenance  centers (RMC)—a deficiency that has existed for years, according to  NAVSEA  officials. In addition, the lessons learned highlight the  importance of stabilizing requirements prior to solicitation of firm-fixed- price contracts—a cornerstone of the MAC-MO approach. The Navy has  developed new milestones that aim to do so; however, its discipline in  performing to these milestones remains largely untested, and it has  historically experienced challenges in this area. In addition, although  individual RMCs are assessing the outcomes of individual ship  availabilities under MAC-MO, many different maintenance community  stakeholders are involved and the Navy lacks a coordinated process to  evaluate whether implementation of the new strategy is progressing as  planned.
subsections: section_title: The Navy Has Made Progress Addressing Potential Challenges in Implementing MAC-MO
paragraphs: Based on our analysis of Navy documentation and interviews with  NAVSEA  officials, we identified 11 key lessons learned stemming from  the pilot maintenance availabilities. All but one of these lessons learned  focused on the need to mitigate potential challenges associated with  MAC-MO’s envisioned use of firm-fixed-price contracts and third-party  planners. We considered lessons learned to be key if (1) NAVSEA  staff  documented them as lessons learned and (2) NAVSEA officials  knowledgeable with the pilot ship experiences identified them as  significant. According to our analysis, the Navy has made progress  towards addressing the lessons learned, fully addressing 3 and partially  addressing the remaining 8.
Table 3 highlights these lessons learned, Navy actions related to them,  and our assessment of the Navy’s actions.
The documented need to hire additional staff applied to two attributes— use of firm-fixed-price contracts and use of third-party planners. This  issue also surfaced in interviews we conducted at two of the three MAC- MO implementing RMCs—MARMC and SWRMC. MARMC staff we  interviewed reported they did not have the staff needed to implement  MAC-MO, and SWRMC leaders reported that the San Diego pilot  availabilities validated the importance of them moving forward with hiring  to approved staffing levels in areas such as specification review.
However, firm-fixed-price contracts—such as exist under MAC-MO— generally should require fewer government resources to administer than  the cost-reimbursement contracts of the MSMO strategy. For instance,  the use of a cost-reimbursement contract requires the contracting officer  to determine before the award the contractor’s accounting system is  adequate, to perform surveillance during execution to ensure the  contractor is exercising effective cost controls, and to employ audits to  ensure only allowable costs are being paid. None of these measures is  necessary for firm-fixed-price contracts, under which the contractor must  perform the specified work regardless of incurred expenses.
In response to our question on why additional staff were needed to  support the MAC-MO  strategy, a senior CNRMC official commented that  the current need for additional staffing at MARMC and SWRMC was not a  result of the change in contracting strategy to MAC-MO, but rather  indicative of persistent staffing shortages that existed under the MSMO  strategy. For example, the officials said that although RMC staff reported  the need to hire qualified contracting specialists to support the MAC-MO  strategy, shortages in this position existed under MSMO because the  demands of the job produced high turnover. In 2014, several years after  the establishment of the RMCs, U.S. Fleet Forces Command  commissioned a study that assessed RMC manning requirements.  CNRMC officials stated that this study served as justification for  requesting approximately 300 additional staff across the RMCs beginning  in fiscal year 2017. However, a senior CNRMC official cited budget  constraints within U.S. Fleet Forces Command, which approves RMC  budgets, as a limiting factor on how rapidly the RMCs could overcome  existing staffing shortfalls. Nonetheless, a CNRMC official stated that  MAC-MO might alleviate shortfalls, although it could be years before the  impacts are realized.
In addition, Navy officials stated that they plan to continuously assess and  incorporate lessons learned throughout implementation of the MAC-MO  strategy. According to CNRMC officials, one recent example of this  learning occurred during the execution of the gap ship availabilities in  Norfolk, which identified a need to train contracting staff on how to obtain  funding for contract changes when funding for the original contract had  been obligated in the prior fiscal year. Since this process was never  needed to fund changes to MSMO cost-reimbursement contracts,  MARMC  staff were unfamiliar with the process. In addition, RMC  officials identified a variety of lessons learned after the third-party  planning contractor completed its first set of work specifications for the  USS Normandy, a gap ship availability.  RMC officials reported that  although the third-party planner met almost all of the planning milestones,  the experiences during the planning process underscored the importance  of RMC staff meeting frequently with the planner to discuss and answer  questions and review specifications and outcomes of ship checks.
section_title: Transition to the MAC-MO Strategy Requires Stakeholders to Stabilize Requirements Early to Support Development of Accurate Specifications
paragraphs: Unstable work requirements have historically posed risks to the Navy’s  maintenance and readiness goals and hold significant implications for the  MAC-MO contracting strategy. Without stable requirements, the third- party planner cannot develop work specifications that reflect the full scope  of work needed to be done. In our May 2016 report on OFRP, we found  that from 2011 to 2014, on average, surface combatants experienced a  34 percent increase in unanticipated growth in maintenance  requirements, resulting in average annual cost growths of $164.8 million.  Officials primarily attribute the unanticipated growth and new work to  estimating difficulties and high operational tempo, among other reasons.  Increases in growth and new work also have consequences for the length  of a maintenance availability as RMC staff and contractors need to  negotiate contract changes and agree on costs. For example, the Navy  reported that from May to October 2015, the median time to process and  complete negotiations for new work for surface combatants was 18 days,  exceeding the Navy’s standard of 5 days.
The MAC-MO  San Diego pilot availabilities identified the need for  NAVSEA  to provide sufficient time to finalize work requirements (known as package lock) before the third-party planner develops the work  specifications that accompany the solicitation. Accordingly, in 2015,  NAVSEA  proposed revised planning milestones for CNO availabilities,  which lengthened the amount of time between the start of the planning  process and the start of maintenance availability from 360 days (which  was the MSMO standard) to 540 days. Although key stakeholder roles  remain the same under the new MAC-MO  milestones, NAVSEA’s move  to lock the work package earlier to allow time for solicitation of the  contract has implications for stakeholders who develop modernization  and maintenance requirements, as well as stakeholders who verify the  accuracy of the work specifications prepared by the third-party planner.  For example, the requirements must be locked 175 days, rather than 90  days, before the start of an availability.
According to NAVSEA officials, the Navy has not yet formally approved  and implemented the revised MAC-MO milestones. NAVSEA  officials  reported currently using the revised milestones for its firm-fixed-price  contracts as it wants to see how they work before formally approving  them. See figure 5 for a comparison of the planning milestones for a CNO  availability  under MSMO and MAC-MO.
Senior NAVSEA,  type command, RMC, and SURFMEPP officials agreed  that development of fully-defined and timely work requirements is needed  to support the planning process, but senior RMC officials as well as  NAVSEA  officials expressed concerns related to the occasionally  conflicting goals of the fleet and the maintenance community. As officials  explained, the fleet would prefer to wait as late as possible to define the  requirements, as for example, ship systems continue to operate—and can  thus break—up to the point that a ship enters an availability.  Alternatively,  the maintenance community prefers to lock requirements early in order to  award the contract and support the solicitation of the availability.  One  senior NAVSEA  program official commented that defining requirements  later in the planning process was possible under the MSMO contracting  strategy because the contract holder was responsible for repairing and  maintaining the same ship year after year and could more easily  accommodate changes in the scope of work to be completed. According  to Navy officials, under MSMO, the contractor could even be tasked with  writing requests for contract changes, which was the common practice at  MARMC,  but not SERMC or SWRMC. Alternatively,  under MAC-MO,  RMC staff exclusively are expected to develop these requests.
Several NAVSEA officials, including RMC officials, and a type command  official commented that the use of firm-fixed-price contracts under MAC- MO will force earlier definition of requirements, which necessitates the  Navy becoming more disciplined in its planning processes. Further, one  RMC contracting official, experienced with the use of firm-fixed-price  contracting, commented that one of the biggest challenges to MAC-MO  will be making sure stakeholders responsible for developing  the  requirements are collectively meeting each of the milestones for locking  the requirements. Consistently, Navy officials at the various commands  we interviewed acknowledged the importance of achieving accurate work  specifications for a maintenance availability,  as inaccurate work  specifications could result in contract modifications, leading to schedule  delays and cost growth and thus contravening the goals of MAC-MO.
Several senior Navy officials expressed hope about the MAC-MO  strategy’s likelihood of success because they said the nature of firm-fixed- price contracts would make the tradeoffs between adding additional work  after the start of an availability  and adhering to the schedule more  apparent, adding discipline to the process. A CNRMC official commented  that adding additional work under the MSMO contracting strategy was  relatively easy because the type commands and the modernization teams  could go straight to the contractor and ask for more work to be done, and  the contractors were willing to have new work added. In contrast, under  the MAC-MO  strategy adding work will be more time-consuming yet  transparent because the cost of additional work will need to be negotiated  before the work commences. Further, one senior acquisition planning  official added that even if the need for new and growth work was  identified after the contract was awarded, the government has the option  of performing the work later at a subsequent availability  provided the  additional work is not related to the core functionality of the ship or a  safety issue.
section_title: The Navy Lacks a Systematic Process for Evaluating MAC-MO Implementation and Progress
paragraphs: The Navy has processes in place for evaluating the contract performance  of its individual surface ship availabilities, including metrics that measure  schedule delays, cost growth, and contract changes associated with  growth and new work. This evaluation process, which is centered in the  RMCs, has largely carried over from the previous MSMO strategy,  although under MAC-MO’s firm-fixed-price contracts, it will not include  award fee evaluation board reviews of the availability contractor. In  addition, while the CNRMC collectively analyzes the metrics, it is not  responsible for determining whether the strategy itself is achieving its  objectives.
Apart from these availability-specific evaluations, the Navy does not have  a systematic process in place to evaluate the extent to which the MAC- MO strategy is meeting its overall objectives and whether risks to its  success, such as timely completion of work requirements under the  proposed milestones and shortfalls in RMC staffing, have been  cooperatively addressed and mitigated by stakeholders within the Navy  maintenance community. According to federal standards for internal  control, management should design control activities to respond to risks  and evaluate if objectives are being met, which involves leadership-level  reviews of performance and establishment of performance measures.  As we have previously reported, risk assessment can provide a  foundation for effective program management because it provides  reasonable assurance that such risks are being minimized.
As noted above, the Navy faces some challenges to successfully  implementing MAC-MO.  Greater discipline is required to plan and execute  ship availabilities using firm-fixed-price contracts and third-party planners,  requiring greater coordination among stakeholders in the fleet and  NAVSEA  to identify potential risks to the strategy. Achieving stable  requirements and specifications requires extensive coordination within the  type commands, across NAVSEA offices, and with the third-party  planner—an approach the Navy has only demonstrated to a limited extent  to date, primarily through its San Diego pilot availabilities. Further, as  experiences with the Norfolk gap ships suggest, the Navy is likely to  identify additional lessons learned. Without effective coordination across  myriad stakeholders within the Navy’s maintenance communities who  together are responsible for scheduling, planning, budgeting, overseeing,  and setting policy for surface ship availabilities, there is the risk that MAC- MO will not be implemented as envisioned and the potential benefits may  not be fully realized.
The Navy already recognizes the importance of establishing forums  where issues of cross-cutting interest to the fleet and maintenance  communities can be addressed. In June 2016, the Navy chartered a  committee to identify and address maintenance and modernization  requirements for surface ships. This committee, known as the Surface  and Expeditionary Warfare Maintenance and Modernization  Committee,  includes stakeholders from the fleet and shore-based maintenance  communities. As stated in the Navy instruction establishing the  committee, this coordination is best accomplished through a standing  group of knowledgeable and accountable representatives who actively  participate in the development and assessment of maintenance and  modernization requirements and resourcing solutions. In addition, as  SWRMC recommended as part of its lessons learned from the San Diego  pilot availabilities, a committee known as Surface Team 1 could have the  potential to track the successful aspects of MAC-MO’s implementation  and develop metrics to evaluate its performance. The Navy has tasked  Surface Team 1, a previously existing committee, whose representatives  also include members of the fleet and shore-based maintenance  communities, with responsibilities for setting and developing surface ship  maintenance and modernization priorities, but has not tasked it with  assessing MAC-MO’s implementation.
section_title: MAC-MO Strategy Will Increase Competition Opportunities, but It Is Too Soon to Assess Other Effects on the Ship Repair Industrial Base
paragraphs: NAVSEA  designed the MAC-MO contracting strategy to increase the  number of competition opportunities for the maintenance and  modernization of surface ships. This goal is achieved through a  competitive ordering process for individual availabilities, expansion of the  base of potential prime contractors to include small businesses, and  greater use of coast-wide—rather than just homeport-specific— solicitations. Aside from these increased competitions, it is too soon to tell  what other effects MAC-MO may have on the ship repair industrial base.  Navy MSMO contractors in the MAC-MO homeports of Mayport, Florida;  Norfolk, Virginia; and San Diego, California stated they have begun taking  steps to reduce overhead costs to position them to operate efficiently  within a firm-fixed-price contracting environment. Contractor  representatives report these steps include reduced investments in training  and facilities. The effect of these steps, however, depends in part on  factors unrelated to MAC-MO—most notably, the Navy’s ability to provide  consistent and stable workloads within these ports. In contrast, non- MSMO contract holders, including small businesses, did not share these  concerns since they were accustomed to working in a firm-fixed-price  contract environment and maintained less extensive facilities. All of the  contractors we interviewed intend to compete for MAC-MO contracts, and  several cited potential changes needed to their workforces to prepare for  an environment of increased competition under MAC-MO.
subsections: section_title: MAC-MO Strategy Expands Competition Opportunities in Three Ways
paragraphs: The MAC-MO  strategy expands competition opportunities in three key  ways: holders of IDIQ multiple award contracts will compete for orders for noncomplex availabilities are set aside for small businesses, and coast-wide competitions will enable contractors not located in the  ship’s homeport to compete for the maintenance availability.
NAVSEA  officials told us they expect increased competition to reduce the  overall cost of ship availabilities, although it is too soon to determine if the  Navy will realize these benefits. Details follow on each aspect of planned  competition.
subsections: section_title: IDIQ Multiple Award Contracts Facilitate Competition for Each Availability
paragraphs: Under the MAC-MO strategy, more opportunities for contractors to  compete for work will exist because the multiple award contract structure  allows the Navy to compete orders for each individual  availability among  the pool of IDIQ awardees. This represents a departure from the MSMO  strategy because under MSMO, a single contract is awarded to one  contractor to execute availabilities for a class of ship over a 5-year period.  Under MSMO two contracts could be awarded for a class of ships—one  for maintenance availabilities that required a drydock facility (docker  contract) and one for those that did not (non-docker contract).
To illustrate the number of IDIQ orders that could potentially be competed  under the MAC-MO strategy, we analyzed DDG 51-class destroyer  availabilities completed in Norfolk between fiscal years 2010 and 2014.  The Navy executed these maintenance availabilities under two different  MSMO contracts—a docker contract and a non-docker contract. We  performed this analysis because under the MAC-MO strategy, individual  availabilities—which were previously covered by a single MSMO  contract—could now be competed as individual orders among the pool of  IDIQ awardees. As shown in table 4, our analysis indicates that over a 5- year period, the Navy could have realized over 350 competitive orders for  the destroyer availabilities it completed in Norfolk, had a MAC-MO IDIQ  contract with associated competition opportunities been in place.
In addition, NAVSEA officials told us they plan to broaden the pool of  potential competitors for IDIQ complex and noncomplex awards by setting  up rolling admissions for additional proposals, meaning that qualified  contractors can apply to become a part of the pool of IDIQ awardees  beyond the initial IDIQ solicitation period. They plan to release a  solicitation for rolling admissions in San Diego and Norfolk in early fiscal  year 2017. The purpose of the rolling admission is to expand the  contractor base for modernization of surface combatants and amphibious  ships. A representative from one small business, which did not hold a  MSMO contract, told us it would consider applying for an IDIQ award for  complex availabilities once the MAC-MO strategy is fully implemented  because of the flexibility  offered by rolling admissions.
section_title: Noncomplex Availabilities Competed Among Small Businesses
paragraphs: The MAC-MO  strategy broadens the pool of prime contractors qualified to  compete for work in Norfolk, Virginia and San Diego, California by setting  aside noncomplex availabilities  in those locations for small businesses.  Small businesses told us that historically they were more likely to work as  subcontractors to MSMO contract holders, offering specialized services  such as electrical work, sometimes under a teaming agreement with the  prime contractor.
Under MAC-MO, small businesses are not required to hold a Master Ship  Repair Agreement (MSRA) certification in order to compete for  noncomplex availabilities. In March 2016, a NAVSEA official briefed  contractors that, alternatively,  small businesses competing for  noncomplex contracts would be required to have “MSRA-like” capabilities  and capacity to successfully compete for the contract. The term “MSRA- like” means that small businesses will be required to have similar  management and quality processes to that required of a certified MSRA  holder, and the capability to successfully complete typical work  requirements associated with continuous maintenance availabilities.  As of  September 2016, NAVSEA had not awarded any IDIQ contracts for  noncomplex availabilities, so it is too soon to tell how NAVSEA will  adjudicate this process.
Small business representatives we interviewed consistently expressed  interest in performing as prime contractors under MAC-MO.  Representatives of all seven small businesses we interviewed stated that  they plan to compete as prime contractors for noncomplex availabilities— even in Mayport,  Florida, where the Navy plans to compete noncomplex  availabilities among both small and large businesses. Some small  business representatives noted they were likely to continue to act as  subcontractors for complex availabilities.  Representatives from small  businesses identified a variety of factors they would consider on whether  to compete for complex availabilities. For example, three small  businesses told us it would depend on the nature of the work in a given  availability,  and more specifically, the facility requirements set forth in the  solicitation. Further, 4 of the 7 small businesses we interviewed told us  they do not own their own piers or have the dredged water space  alongside the piers to berth ships. These businesses told us they typically  rely on the Navy’s facilities or those of large contractors to berth the ship  so that they can conduct work on the ship. NAVSEA  officials told us that it  is not their intent for small businesses to perform work at facilities owned  by large contractors and that, in general, the Navy will provide pier space  for completion of noncomplex availabilities.
section_title: Increased Use of Coast Wide Competitions
paragraphs: Navy policy requires that, whenever possible, ship repair and  maintenance work of 6 months or less be performed by shipyards at or  near the ship’s homeport to improve the crew’s quality of life by reducing  their time away from home. Although NAVSEA  officials told us they  solicited few if any coast-wide availabilities  under MSMO, as part of the  transition to the MAC-MO  strategy, NAVSEA  has already competed  several availabilities  coast-wide and plans to compete nine additional  maintenance availabilities along the East and West Coasts from 2017 to  2019. Accordingly, any contractor on either coast with access to a pier  and drydock will be able to compete for these availabilities. For example,  shipyards in Charleston, South Carolina and Pascagoula, Mississippi  would be allowed to compete for East Coast solicitations. NAVSEA  officials told us they intend to evaluate the total cost of moving a ship out  of its homeport—including fuel and transportation—before making an  award for availabilities competed coast-wide, as moving ships from their  homeport can be expensive and offset potential savings from the  competition.
The Navy’s plan to compete nine coast-wide availabilities represents a  significant increase over those competed under MSMO, where, according  to NAVSEA  officials, RMCs competed few if any coast-wide availabilities.  Under the statute in effect since 1986 and Navy policy dating back to  1995, if the work will take 6 months or less and there is adequate  competition available among firms able to perform the work at the  homeport of the vessel, then the contract solicitation must be limited to  only homeport firms. Contract solicitations for work taking longer than 6  months generally must be competed coast-wide. According to NAVSEA  officials, under MSMO, the availabilities were planned to be shorter than 6  months.
Navy officials offered various reasons as to why availabilities under  MSMO were planned to be completed in less than 6 months. Because MSMO contracts typically provided for 5 years of planned availabilities for  a ship class within a given homeport, NAVSEA officials told us estimates  of availability  durations regularly had to be made years before the actual  work requirements were known. Nevertheless, by planning the  availabilities to be less than 6 months, NAVSEA  did not need to compete  them coast-wide (as it would have under the 1986 statute) and move the  ship out of its homeport. In one instance, though, we found a MSMO  contract that included options to cover any instances of work anticipated  to take longer than 6 months, such as extended modernization  availabilities. Therefore, the period of performance of these availabilities  would have exceeded the 6-month limitation if the options had been  exercised. NAVSEA  and RMC officials told us that, in general, RMC  contracting staff have been opposed to moving a ship out of its homeport  because of the potential negative effects on sailor morale and the  anticipated costs of moving the ship.
NAVSEA  officials reported taking two separate actions to clarify the  homeport exception to coast-wide competitions. First, NAVSEA officials  recognized that the Navy homeport policy does not use the term “work”,  which is included in the current statute. Specifically, the homeport policy  does not define the scope of work included in an availability  or when  measuring of that work (estimating the number of days needed to execute  the availability)  should take place. NAVSEA  officials stated they are  drafting a revision to the 1996 homeport policy and that this draft revision  will define the term “work” as meaning “work for the overhaul, repair, or  maintenance of a naval vessel”. Additionally,  the Navy’s proposed policy  revision will require that 540 days prior to the start of an availability, the  Navy identify how work days will be measured for that availability.  In  addition, NAVSEA officials told us they are developing a legislative  proposal to increase the 6-month exception to coast-wide competitions to  allow for a longer period before they have to do a coast-wide competition  because availabilities with modernization packages now regularly exceed  6 months, unlike in the past.
section_title: Multiple Factors Likely to Affect the Industrial Base as Contractors Respond to the MAC-MO Strategy
paragraphs: A variety of factors, including the Navy’s level of demand for maintenance  and repair work at each of the three homeports in our review, will  determine how the MAC-MO strategy might affect the industrial base, if at  all. The possibility exists that some firms may choose to exit or enter the  market, but it is too soon to tell how the MAC-MO contracting strategy  might affect the industry’s capacity to meet the Navy’s long-term needs,  especially since fluctuations in the Navy’s workload forecasts could also  affect industrial base conditions within individual  homeports.
subsections: section_title: Navy Maintenance Workloads Drive Demand for Contractor Services
paragraphs: CNRMC officials told us they expect a predictable repair and  maintenance workload in the homeports of Mayport, Florida; Norfolk,  Virginia; and San Diego, California in future years, although this workload  is cyclical in nature as it was under the MSMO strategy. Various factors,  including the deployment of ships, can affect the demand for work in each  of the homeports. For example, according to a Fleet Forces Command  official, an upswing in workload for surface ships is expected in Norfolk as  deployed ships move back into their homeport during fiscal year 2018.  Similarly, the Navy plans to homeport newly constructed surface ships in  San Diego, providing an upswing in future workload there as these new  ships come in for maintenance and repairs. However, the Navy could  make other decisions that could affect a homeport’s industrial base, such  as when the Navy relocated three amphibious ships from Norfolk, Virginia  to Mayport, Florida in fiscal year 2014. See figures 6, 7, and 8 for the  Navy’s recent historical and forecasted workload in these three ports.
Generally, former MSMO contract holders we interviewed in Norfolk and  San Diego expressed less concern about the transition from MSMO to  MAC-MO than they did the Navy’s ability to provide stable workloads in  their ports, irrespective of contract type. In May 2016, we found that wide  swings in port workload can have a negative effect on the private-sector  industrial base, and various factors can affect those workloads. Further, Navy documents show that OFRP will drive changes to the maintenance  cycles for carrier and expeditionary  strike groups and, in turn, cause  significant fluctuations in port workloads, which could affect the industrial  base’s ability to hire and retain a skilled workforce. Navy officials stated  that they have begun to take steps to ensure that ships that comprise a  carrier or expeditionary strike group—including non-nuclear surface ships,  such as destroyers, cruisers, and amphibious ships—stagger their  maintenance start and stop timelines, which would alleviate, in part, the  concerns that industry cited.
section_title: Availability of Industrial Base Facilities and Workforce
paragraphs: Former MSMO and non-MSMO contractors offered various views on the  potential effects of the MAC-MO strategy on the industrial base, primarily  related to the need for contractors to compete for orders after the award  of the IDIQ multiple award contracts. In part, these views are shaped by  the various types of facilities—such as drydocks and piers—that an  individual contractor maintains. According to two former MSMO  contractors, these facilities represent significant capital investments on  the part of the contractor, which then relies on sustained Navy workloads  to fund their maintenance. Figure 9 highlights the characteristics of  selected contractors we interviewed across the three ports where the  Navy is implementing the MAC-MO strategy.
Contractors we interviewed commented on potential challenges and  changes they are making to prepare for the increase in competition  opportunities under the MAC-MO fixed price approach.
Five former MSMO contractors told us they are working to reduce  their overhead costs in order to remain competitive in a firm-fixed- price environment. In general, under the 5-year MSMO cost- reimbursable contract, they stated they had confidence that they  would receive regular workload from the Navy for a given class of  ships. This confidence underpinned investments they made in  maintaining and upgrading their facilities and training their workforces.  Under MAC-MO, which will require competition for every availability  within a homeport, these contractors do not have similar confidence or  visibility into future work. Consequently, three MSMO contract holders  told us they are laying off staff and reducing training programs to  remain competitive. These layoffs are in addition to ones in 2015 and  2016 reported by several Norfolk contractors and attributed to the  decrease in workload in that port, which was unrelated to the MAC- MO strategy. Four MSMO contract holders also told us they are  eliminating apprenticeship programs for workers. Further, one  contractor told us that it may cease dredging the water surrounding its  drydock to reduce its overhead costs, which would eliminate certain  classes of ships being serviced in that port. Because the Navy only  recently implemented MAC-MO, whether these reductions actually  occur and, if so, their net effect on the industrial base’s capability and  capacity to respond to the Navy’s maintenance needs remains  indeterminate.
Non-MSMO  contractors told us that they are accustomed to working  under firm-fixed-price contracts, having served as prime contractors  for the Military Sealift Command, commercial companies, and small- scale NAVSEA  availabilities. However, six of the non-MSMO contract  holders we interviewed were small businesses with varying  experience working as a prime contractor for the Navy.  Representatives from one small business told us that the type of  contract does not change the type of work to be completed.  Representatives from four small businesses told us they are making  changes to become more competitive under MAC-MO, such as  realigning staff positions to reduce the company’s overhead costs.
Both former MSMO holders and non-MSMO holders rely on full-time  and temporary laborers to conduct work on Navy availabilities. Three  MSMO contract holders told us they have laid off skilled laborers in  response to decreases in work and may have to rely on temporary  laborers to complete certain availabilities. One contractor told us that  it is harder to secure and incentivize temporary laborers to complete  requested work on time. Contractors also have the option of hiring  new, untrained laborers into their workforces, but these individuals  require time to train and become proficient at their trades, which can  reduce work efficiencies in the near-term. Two contractors also  expressed concern about finding, training, and retaining qualified,  skilled laborers when new contracts are secured under MAC-MO.
Navy officials told us they anticipated certain workforce reductions  within the private sector under the firm-fixed-price contract structure.
section_title: Maintaining Contractor Interest in Competing for Navy Work
paragraphs: Representatives from all of the companies we interviewed told us they  plan to compete for work under the MAC-MO strategy; for many, the Navy  is their primary customer. For instance, former MSMO contract holders in  Norfolk reported they rely on Navy work for at least 97 percent of their  revenue. However, nine of the companies we interviewed across the  three MAC-MO ports reported that they diversify their Navy workload with  work from other government customers and commercial work, and three  would consider competing for other work should they not have a Navy  contract in hand. For example, in San Diego, one former MSMO contract  holder reported less than 60 percent of their revenue coming from the  Navy. In Mayport, one small business contractor reported more than 40  percent of its revenue coming from commercial and other government  customers and signaled an intention to shift more resources into  commercial work if it did not secure a MAC-MO  contract.
Small businesses who are dependent on the Navy for work, and do not  own drydocks or piers, told us they plan to aggressively compete for non- complex work. In addition, three of the four small businesses in Norfolk  told us they depend on the Navy for more than 75 percent of their  revenue. Three Norfolk small businesses told us they have relocated  personnel to Mayport in order to compete for Navy availabilities there.
section_title: Conclusions
paragraphs: In developing its MAC-MO contracting strategy, the Navy has taken a  thoughtful approach that builds on the promising results from its pilot  availabilities by incorporating lessons learned, and establishing  milestones that promote the timely definition of work requirements in  availabilities. These steps reflect an upfront recognition on the part of the  Navy that the practices and processes it employed to manage  availabilities under cost-reimbursement, MSMO contracts would likely  prove untenable under firm-fixed-price, MAC-MO contracts. However, the  implementation process does not end there. Additional learning is likely to  take place as the Navy orders ship maintenance availabilities under MAC- MO. New aspects of the strategy will be tested, as will the discipline of the  Navy’s fleet and shore-based maintenance communities to adhere to the  MAC-MO milestones they have set. Further, the actions the ship repair  industrial base takes to adapt to MAC-MO will become more evident, as  will any potential implications. Harnessing new lessons learned, and  ensuring key stakeholders are committed to their implementation, can  position the MAC-MO strategy for success. The Navy has not put in place  such a process for MAC-MO. Particularly in light of the large and complex  nature of ship repair stakeholders in the Navy, not ensuring that progress  is systematically assessed and that new lessons learned are incorporated  in a timely manner could undermine the Navy’s ability to obtain the  improved cost, schedule, and quality outcomes it seeks under the new  strategy. To realize MAC-MO’s benefits, the Navy will need information to  decide on how to make adjustments to the strategy. The existing  committees—Surface Team 1 or the Surface and Expeditionary Warfare  Maintenance and Modernization Committee—could provide a starting  point.
section_title: Recommendation for Executive Action
paragraphs: In order to promote effective implementation of the MAC-MO contracting  strategy, we recommend that the Secretary of Defense direct the  Secretary of the Navy to complete the following action:  Assign responsibility to a single entity comprised of representatives from  the fleet and shore-based maintenance communities, such as Surface  Team 1, to perform systematic assessments of MAC-MO’s  implementation that include the following:
Review of lessons learned and identification of changes to Navy  processes, including staffing, needed to support the MAC-MO  strategy,
Evaluation of performance against anticipated cost, schedule, and  quality objectives, as outlined in the MAC-MO acquisition strategy,  and  Input and recommendations from all Navy parties that participate in  the scheduling, planning, budgeting, oversight, and policy  development for the repair, maintenance, and modernization of non- nuclear surface ships.
section_title: Agency Comments
paragraphs: We provided a draft of this product to DOD for comment. In its written  comments, reproduced in appendix II,  DOD concurred with our  recommendation on the need to provide systematic assessments of the  MAC-MO strategy implementation. To address our recommendation, the  Navy will identify criteria to be used to perform the assessment, identify  appropriate stakeholders, identify which entity is best positioned to  perform the assessment, and submit biennial reports beginning in  December 2017 to the Director, Defense Procurement and Acquisition  Policy in the Office of the Under Secretary of Defense for Acquisition,  Technology and Logistics.
We are sending copies to appropriate congressional committees, the  Secretary of Defense, the Secretary of the Navy, and other interested  parties. In addition, the report will be available at no charge on the GAO  website at http://www.gao.gov.
If you or your staff have any questions concerning this report, please  contact me at (202) 512-4841 or by e-mail at mackinm@gao.gov. Contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this report. Key contributors to this report are  listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: In 2015, the Navy transitioned to the Multiple Award Contract-Multi Order  (MAC-MO) contract strategy for the maintenance and modernization of  surface ships. This report assesses (1) the potential benefits of the MAC- MO contracting strategy, (2) process changes the Navy has taken to  address any challenges and to capitalize on anticipated benefits, and (3)  how the strategy might affect the Navy’s ship repair industrial base.
subsections: section_title: Potential Benefits of the MAC-MO Strategy
paragraphs: To assess the potential benefits of the MAC-MO strategy, we analyzed  acquisition planning and contract documentation and interviewed senior  Naval Sea Systems Command (NAVSEA) officials about the strategy,  including staff from the Deputy Commander for Surface Warfare. To  determine the key differences between the MAC-MO and the Multi-Ship,  Multi-Option (MSMO) contracting strategies in contract pricing, planning  the work, ordering, and structuring the competition among ship repair  contractors, we analyzed NAVSEA’s  acquisition planning documentation  for the MAC-MO strategy and reviewed contents of selected MSMO  contracts the Navy identified as illustrative, most recent, or were still in a  period of performance and MAC-MO contract documentation for third- party planning contract awards. We also considered applicable Federal  Acquisition Regulation (FAR) provisions describing the conditions under  which firm-fixed-price and cost-reimbursement contracts are appropriate.  To identify the Navy’s rationale on how to proceed with the new strategy,  we analyzed acquisition planning documentation to understand how  NAVSEA  applied the results of its market research as prescribed by the  FAR. To further our understanding of NAVSEA’s decision to proceed  with the MAC-MO strategy, we examined the characteristics of ship  availabilities used to pilot features of the strategy, for example, the use of  firm-fixed-price contracts and use of indefinite delivery, indefinite quantity  (IDIQ) contracts and interviewed Southwest Regional Maintenance  Center (SWRMC) in San Diego, California, who administered the pilot  contracts. We also interviewed senior NAVSEA  officials, including the  Commander, Navy Regional Maintenance Center (CNRMC) staff, and  contractors with experience in executing ship availabilities, to obtain their  perspectives on the strategy. To identify the progress the Navy had made  as of September 2016 in implementing the MAC-MO strategy, including  the “gap ship” contract awards, we interviewed and obtained information  from the Mid-Atlantic  Regional Maintenance Center (MARMC) staff in  Norfolk, Virginia and senior NAVSEA  contracting staff, and analyzed  supporting contract documentation.
section_title: Navy Process Changes
paragraphs: To assess process changes the Navy has made to address any  challenges and to capitalize on anticipated benefits, we analyzed Navy  documentation containing assessments of lessons learned from pilot  maintenance availabilities used to test key features of the MAC-MO  strategy. We identified a total of 18 lessons learned based on our  assessment the Navy’s documentation of the San Diego pilot and USS  Porter maintenance availabilities. We categorized 11 of the lessons- learned as key because they were also identified as lessons-learned in  one or more interviews with NAVSEA officials knowledgeable about the  pilot ship experiences. We excluded 7 lessons that did not meet this  additional criterion. We interviewed Navy officials responsible for  availability  funding and oversight, contract administration, and program  management pertaining to the MAC-MO contracting strategy and pilot  availabilities. These offices included the Deputy Commander for Surface  Warfare; Commander, Naval Surface Force, Atlantic; Commander, Naval  Surface Force, Pacific; CNRMC; MARMC  in Norfolk, Virginia; SWRMC in  San Diego, California; and the Southeast Regional Maintenance Center  (SERMC) in Mayport, Florida. To assess the Navy’s progress in taking  actions to address potential challenges posed by the 11 key lessons  learned, we evaluated Navy documents, including staffing and training  plans for the contracting workforce across the RMCs, proposals for  revised planning milestones, strategy and planning documents, and the  contents of contracts for the third-party planner. We also interviewed  Navy contracting, maintenance, and program management officials  previously mentioned. To assess the extent to which the Navy has taken  actions, we developed the following three-point scale:
Not Met—The Navy has not taken any action to respond to identified  lessons learned.
Partially Met—The Navy has taken some action to respond to the  identified lessons learned, but has not completed the action needed to  address the identified risk.
Met—The Navy has completed the action needed to address the  identified lesson learned.
To identify roles and responsibilities for planning maintenance  availabilities, we reviewed procedural documents to ascertain the lead  offices that administer, plan and coordinate Navy availabilities,  including  organizations that oversee repair and modernization efforts at private  shipyards. In addition, as previously discussed, we interviewed officials  responsible for planning and implementing the strategy. To describe the  extent of maintenance overruns and their impact on the Navy, we used  information from a previous GAO report that analyzed ship maintenance  data from fiscal years 2011 to 2015, which included availabilities  conducted before and after Optimized Fleet Response Plan  implementation, to ascertain the extent to which maintenance  availabilities for surface combatants had been completed on time.
To identify the extent to which the Navy has made provisions to assess  implementation of the strategy and if it is meeting its goals, we  interviewed senior NAVSEA  officials on whether performance metrics had  been developed to assess the strategy and if an organization had been  assigned responsibility. We used federal internal control standards to  determine if the Navy appropriately defined objectives related to the  contracting strategy; assessed its internal processes to identify risks  related to the strategy, including the development of performance  measures; and created strategies to mitigate those risks.
section_title: Ship Repair Industrial Base
paragraphs: To assess how the MAC-MO  contracting strategy might affect the ship  repair industrial base for surface ships, we examined the ways in which  the strategy had the potential to increase competition opportunities and  how the contractors within the industrial base might respond to these  opportunities. To understand how IDIQ multiple award contracts and how  setting aside noncomplex work to small businesses might promote  competition, we identified how MAC-MO and MSMO contract provisions  differed, as previously described, and also obtained the perspectives of  NAVSEA  officials and selected contractors. To understand the potential  of IDIQ multiple award contracts for increasing competition, we selected  two contracts reflective of the work—DDG 51 class ships in the homeport  of Norfolk, Virginia—that would to be included under the MAC-MO  strategy. To do so, we analyzed documentation listing the availabilities  completed under two MSMO contracts—one contract requiring a drydock  and one not requiring a drydock—to ensure we covered the range of  availabilities that could be covered by a MAC-MO  complex and  noncomplex contract. We analyzed the data for consistency and  completeness, although we did not trace the data to the original contract  documentation. Since the purpose of this analysis was to illustrate how  the number of competitive opportunities contract awards could increase  under an IDIQ contract for one class of ships, and the Navy’s  maintenance needs can change year by year, the results are not  generalizable to other availabilities or future time periods. In addition, to  understand how the Navy intends to promote the use of coast-wide  competitions, we interviewed NAVSEA policy officials about the  application of the Navy’s June 1995 Ship Depot Maintenance  Solicitation  Policy and obtained data from CNRMC on the use of such competitions  under MSMO.
To identify the Navy’s projected workload for non-nuclear surface ships in  the homeports of Mayport, Florida; Norfolk, Virginia, and San Diego,  California, where the MAC-MO strategy will be implemented, we obtained  data from CNRMC from fiscal years 2015 through the end of 2020. The  CNRMC estimated these trends based on an analysis of needed staffing  resources, including data housed in the Navy Database Environment.  Since the purpose of our analysis was to show the Navy’s projections in  anticipated port workload, we did not conduct our own assessment of the  accuracy of this data. We excluded data on the coast-wide competitions  from our analyses because these availabilities could be executed in ports  other than the ship’s homeport.
To obtain the perspective of contractors from the three homeports where  the MAC-MO  contracting strategy will implemented, we conducted semi- structured interviews to obtain viewpoints from selected 14 contractors.  We identified 30 contractors which (1) held MSMO contracts as prime  contractors under the MSMO contracting strategy, (2) the Navy identified  as potential competitors in the MAC-MO acquisition plan, and (3) the  Navy identified as potential competitors in its market research  documentation. From these 30 contractors, we selected 14 contractors  that represented a mix of these categories. Specifically, the 14  contractors included 6 former MSMO contract holders and 8 non MSMO contract holders, which comprised 7 small businesses and 7 large  businesses. We used data provided by the Navy to verify if the selected  contractors met the Navy’s small business certification requirements. We  conducted 10 semi-structured interviews in person and 4 by  teleconference. The viewpoints of the 14 contractors are  nongeneralizable to all contractors which conduct and perform work  under Navy maintenance, repair, and modernization contracts.
Further, we used a data collection instrument to collect information from  each of the selected 14 contractors on their facilities, workforce, and  sources of revenue. For example, we gathered information on what types  of facilities the contractor owned, such as a drydock or a pier, the number  of the contractor’s full-time staff, and the percentage of revenue from  entities other than from the Navy. We verified that contractors did or did  not have drydocks for 10 of the 14 contractors during our onsite  contractor visits. We did not verify the number of full-time staff that the  contractor employed or the contractor sources of revenue.
We conducted this performance audit from September 2015 to November  2016 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Comments from the Department of Defense
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named, Christopher R. Durbin, Assistant  Director; Pedro A. Almoguera; Peter Anderson; Sonja Bensen; Jessica M.  Berkholtz; Lorraine R. Ettaro; Kurt S. Gurka; Cale T. Jones; Charles T.  Schartung; Leslie G. Stubbs; and Roxanna Sun made key contributions to  this report.