Navy Shipbuilding: Opportunities Exist to Improve Practices Affecting Quality
Published: 2013-11-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Navy expects to spend about $15 billion per year to provide its fleet with the most advanced ships to support national defense and military strategies. Problems with recently delivered ships have focused attention on quality issues.
House Report No. 112-110, accompanying the Department of Defense Appropriations Bill, 2012, mandated that GAO review the Navy's quality assurance processes for new ship construction. This report discusses, among other issues, (1) quality problems in constructing recently delivered ships and Navy actions to improve quality and (2) key practices employed by leading commercial ship buyers and shipbuilders to ensure quality and how these compared with Navy practices.
GAO analyzed Navy data on ship quality from 2006 to May 2013 and spoke with Navy officials and shipbuilders. GAO also reviewed deficiency data for commercial ships and spoke with buyers and builders.
section_title: What GAO Found
paragraphs: The Navy has experienced significant quality problems with several ship classes over the past several years. It has focused on reducing the number of serious deficiencies at the time of delivery, and GAO's analysis shows that the number of deficiencies--particularly "starred" deficiencies designated as the most serious for operational or safety reasons--has generally dropped. Nonetheless, the Navy continues to accept ships with large numbers of open deficiencies. Accepting ships with large numbers of uncorrected deficiencies is a standard practice and GAO found that there are varying interpretations of Navy policy with regard to when the defects should be resolved. In 2009, the Navy organization that oversees ship construction launched the Back to Basics initiative to improve Navy oversight of ship construction. However, a key output of the initiative promoting consistent and adequate quality requirements in Navy contracts has yet to be implemented.
Although the environment in which leading commercial ship buyers and builders operate differs in many ways from the Navy's, some commercial practices aimed at helping to ensure that ships are delivered with a minimum number of deficiencies may be informative for the Navy. Throughout the course of commercial shipbuilding projects, significant numbers of quality defects and instances of non-conforming work are identified. However, leading commercial ship buyers and shipbuilders make great efforts to ensure that these issues are resolved prior to delivery. Further, commercial ship buyers establish clear lines of accountability and hold their personnel responsible for ensuring the shipbuilder delivers a quality vessel. While commercial ship buyers focus on regularly witnessing in-process work through roaming patrols and impromptu inspections, Navy processes at the shipyards place less emphasis on in-process work. Moreover, leading commercial shipbuilders have strong quality management processes that track quality problems to the worker or supervisor level. Navy shipbuilding contractors have historically experienced difficulties in holding production workers and supervisors accountable for their work, but some of the shipyards reported they are making progress on increasing worker accountability.
section_title: What GAO Recommends
paragraphs: To improve the construction quality of ships delivered to the Navy, GAO is recommending, among other things, that the Navy clarify policy on when deficiencies should be addressed, provide guidance on contract quality requirements, and assess applicability of certain commercial practices to Navy shipbuilding. DOD agreed with two recommendations and partially agreed with three, stating for example that current policy is adequate but that the Navy would monitor deficiency trends. GAO believes that the recommendations remain valid as discussed in the report.

section_title: Letter
paragraphs: The Navy seeks to provide its fleet with the most advanced ships to  support national defense and military strategies, expecting to spend about  $15 billion per year building ships. Given the difficult operating  environments and extended deployments for Navy ships, it is essential  that they operate as expected. Yet several cases of poor quality in Navy  shipbuilding programs have focused attention on quality issues for newly  constructed ships. Many of the problems were attributed to issues with  basic elements of shipbuilding, such as welding, installation of key  systems (like propulsion and anchoring systems), and electrical work. The  impact of poor quality can directly affect operational missions; for  example, the first ship built in the USS San Antonio class (LPD 17) had to  undergo emergency repairs during its first deployment that were primarily  attributed to poor workmanship and a lack of quality control during the  ship’s construction. Recognizing that quality problems in shipbuilding  needed to be addressed, the Navy established the “Back to Basics”  initiative in 2009 to ensure the efficiency and quality of ship construction.  The initiative focused on the Navy’s Supervisor of Shipbuilding,  Conversion and Repair (SUPSHIP)—the organization responsible for  overseeing ship construction processes—and involved senior Naval Sea  Systems Command leadership and the Navy Program Executive Offices  responsible for managing the development and procurement of ships.
Also in 2009, we identified best practices from the commercial  shipbuilding industry and made several recommendations to the  Department of Defense to improve management of shipbuilding programs involving, among other things, knowledge needed at key decision points.Building on that review, House Report No. 112-110, accompanying the  Department of Defense Appropriations Bill, 2012 (H.R. 2219), mandated  that we review the Navy’s quality assurance processes for new ship  construction. This report assesses (1) the extent to which newly  constructed ships delivered to the Navy from 2006 through May 2013 had  quality problems and the actions the Navy has taken to improve quality;  (2) key practices employed by leading commercial ship buyers and  shipbuilders to ensure satisfactory quality and the extent to which Navy  shipbuilding programs employ these practices; and (3) the role of  classification societies (e.g., the American Bureau of Shipping) in Navy  and commercial shipbuilding.
To identify the extent to which newly constructed Navy ships had quality  problems and the actions the Navy has taken to improve quality, we  reviewed Navy inspection reports, internal Navy reviews with regards to  ship quality, ship delivery reports, shipbuilding contracts, and other  documents discussing the quality of ships delivered to the Navy from  2006 through May 2013. We reviewed data on all ships delivered during  this period but only compared trends in quality from those ship classes  where multiple ships were delivered during this time period. To determine  the number and type of deficiencies for each vessel, we obtained and  analyzed data from the Navy’s Board of Inspection and Survey’s  (INSURV) Material Inspection data warehouse and the Navy’s Technical  Support Management (TSM) system. TSM is the primary database  SUPSHIP uses for tracking the status of new construction deficiencies.  We reviewed these data for completeness, and when we identified  obvious discrepancies we brought them to the attention of Navy officials  and worked with them to understand, correct, or omit the discrepancies.  We determined that the deficiency data we obtained were sufficiently  reliable for the purposes of this report with two exceptions. These  exceptions relate to data for T-AKE class ships. TSM data did not cover  T-AKE 1 through T-AKE 6. In addition, data for T-AKE 12 had numerous  data errors and is therefore not reported on. For other T-AKE ships, we  reviewed deficiency documentation (trial cards) to resolve discrepancies  between TSM and T-AKE program office data.
We visited eight U.S. private shipyards that build Navy ships and spoke  with shipyard representatives. We also met with officials and analyzed  data provided by several Navy organizations, including each of the  SUPSHIP commands and detachments; INSURV; Program Executive  Offices and shipbuilding programs; lifecycle and maintenance  organizations; Fleet Forces Command; the Military Sealift Command;  Navy Sea Systems Command Engineering, Contracting, and Logistics  directorates, among others. We catalogued several hull, mechanical, and  electrical quality problems with each ship class delivered since 2006. To  create this list of illustrative examples, we asked Navy officials and  shipbuilding contractor representatives to identify quality problems on  these vessels. Further, this list focused only on quality issues that pertain  to the construction of the hull, mechanical, and electrical systems; we did  not include quality issues with weapons systems or other warfighting  systems. We also reviewed the Navy’s Back to Basics initiative and  outcomes, as well as other recent efforts to improve the quality of  shipbuilding.
To learn about practices used by leading commercial ship buyers and  shipbuilders to ensure quality in new construction vessels, we spoke with  leading buyers and shipbuilders in the cruise, oil and gas, and  commercial shipping industries and reviewed our previous shipbuilding  best practices work. Where possible, we collected documentation and/or  witnessed quality assurance practices. For the purposes of this review,  the leading commercial ship buyers we spoke with are companies that we  identified as leaders in their industry in terms of being top operators of  cruise ships, oil and gas vessels or containerships, and that agreed to  participate in our review. We reviewed such indicators as annual sales,  number of vessels owned or procured, and total market share. Leading  commercial shipbuilders in this review were also identified as high quality  shipbuilders by the ship buyers in our review or shipbuilding experts we  met with. The firms participating in our review included Carnival  Corporation, Chevron Corporation, Daewoo Shipbuilding and Marine  Engineering, Ensco plc, ExxonMobil, Hyundai Heavy Industries, A.P.  Moller-Maersk A/S, Meyer Werft, Noble Corporation, Norwegian Cruise  Line, Royal Caribbean Cruises, Ltd., Seadrill Ltd., and STX Finland. We  requested deficiency data from the commercial ship buyers for one or  more new construction ships they acquired. With the exception of one  floating production storage and offloading vessel, all of these ships were  delivered to the buyers in 2012 or 2013. We assessed the reliability of  these data by obtaining information on the systems that stored the data  and interviewing ship buyer representatives knowledgeable about the  data. We determined that the data were sufficiently reliable for the  purposes of this report. We also identified common processes and tools  used by these ship buyers and shipbuilders to ensure the expected level  of quality. To determine the extent to which Navy quality assurance  processes used commercial best practices, we reviewed data and  information obtained from the Navy and its shipbuilding contractors as  well as from the leading commercial ship buyers and shipbuilders. We  also held meetings with SUPSHIP, program, and contracting officials  about the Navy’s quality practices and during our site visits to the U.S.  shipyards. We discussed with shipyard representatives their quality  assurance processes and the steps taken to ensure ships meet the  Navy’s quality expectations.
To better understand the role of classification societies in Navy and  commercial shipbuilding, including the American Bureau of Shipping  (ABS), we met with engineering and marine surveying representatives  from ABS at the Navy contractor shipyards where they maintain a  presence to obtain an overview of how they conduct their work. We also  held discussions with officials from several Navy organizations, including  SUPSHIP and Naval Sea Systems Command Engineering Directorate, as  well as representatives from Navy shipbuilding contractors on the role of  ship classification in Navy shipbuilding. We reviewed the classification  rule set developed by the Navy and ABS for the Navy’s surface  combatants, as well as other classification rule sets pertaining to Navy  and commercial vessels. We also spoke with representatives from other  classification societies, including Det Norske Veritas and Lloyd’s Register,  to discuss their approach to classification of commercial and navy  vessels, and met with commercial ship buyers and shipbuilders to discuss  the classification process.
Appendix I contains additional detail on our scope and methodology.
We conducted this performance audit from March 2012 to November  2013 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: In general, a quality product is one that performs as expected and can be  depended on to perform when needed. A quality product is also one that  is free of deficiencies. For the purposes of this review, we define  deficiencies as items that require corrective action to bring the material  condition or performance of a product into compliance with required  standards.
Performance, cost, schedule, and quality goals are interrelated. Improving  quality within an organization to achieve the desired level of performance  and reliability requires time and money in the short term. But in the longer  term, such efforts can reduce costs and production times, as process- related costs—such as labor and materials needed to correct defects— are reduced or eliminated. Such production efficiencies have been  demonstrated by companies that have successfully implemented quality  philosophies, including the Six Sigma methodology. Six Sigma and other  quality philosophies establish a framework by which the process of  production can be made more consistent by determining and eliminating  the root causes of process-related problems, resulting in improved  quality. Figure 1 demonstrates the interrelationship between schedule,  cost, performance and quality.
Shipbuilding is a major undertaking within the Navy, and several Navy  organizations are involved, either directly or indirectly, with the  acquisition, construction, and fielding of new ships. To some extent, all of  the organizations described below have a role in helping to ensure the  Navy acquires ships that meet quality expectations.
SUPSHIP is the Navy’s primary on-site representative at the private  shipyards that build Navy ships, and is tasked with overseeing the  shipbuilder’s production processes. Services provided by SUPSHIP  include contract administration, project management, engineering  surveillance, quality assurance, logistics, and financial administration  of assigned shipbuilding contracts. Typical work activities performed  by SUPSHIP’s quality assurance department include the following:
Quality assurance planning activities, such as oversight plans for  monitoring the shipbuilder’s quality program and periodic  surveillance plans identifying the areas where quality assurance  personnel will be allocated.
Reviews of the shipbuilding contractor’s quality management  system and work procedures.  Inspection and testing of the shipbuilder’s completed work,  including physical inspections, verifications, and equipment  testing, as well as witnessing or monitoring the ship construction  process.
Audits and inspections of the shipbuilder’s work procedures to  verify that personnel are complying with the procedures.
Evaluating the results of (1) SUPSHIP’s quality inspections to  identify quality trends and (2) quality and test data the shipbuilder  is contractually required to provide the Navy.
Program Executive Offices (PEO), and the program managers that  report to them, are responsible for all aspects of life-cycle  management of their assigned shipbuilding programs, including  program initiation, ship design, construction, testing, delivery, fleet  introduction, and maintenance activities.
The Navy’s Board of Inspection and Survey (INSURV) is an  independent organization that inspects newly constructed and in- service Navy ships to determine their material condition and reports  these assessments to Congress and Navy leadership.
The Naval Sea Systems Command Contracting Directorate  (NAVSEA 02) awards contracts worth about $24 billion annually for  new construction ships and submarines, ship repair, major weapon  systems, and services.
The Naval Sea Systems Command Engineering Directorate  (NAVSEA 05) provides the engineering and scientific expertise and  technical authority for the Navy’s ships, submarines, and associated  warfare systems.
The Naval Sea Systems Command Nuclear Propulsion  Directorate (NAVSEA 08) is responsible for all aspects of the Navy’s  nuclear propulsion ships, including research, design, construction,  and operations.
The Military Sealift Command operates and maintains  approximately 119 non-combatant Navy ships that deliver supplies to  US forces and conduct specialized missions, such as supporting  humanitarian aid efforts. Unlike other Navy ships, the ships are  generally manned by civilian mariners. During construction of these  vessels, the Command assigns a construction oversight  representative at the shipyard to monitor compliance with  requirements.
The Naval Sea Systems Command Surface Warfare Directorate  (NAVSEA 21) and Undersea Warfare Directorate (NAVSEA 07)  provide life-cycle support for the Navy’s surface combatants and  submarines from when they are introduced into the fleet until they are  no longer in service. In addition, the directorates provide the  shipbuilding and submarine program offices with information on  quality problems and lessons learned from ship deployments that may  be used to improve the construction of subsequent vessels.
The Defense Contract Management Agency administers contracts  when delegated that authority by the contracting office. SUPSHIP  commands generally delegate quality oversight of shipbuilding parts  and equipment suppliers to the Defense Contract Management  Agency.
Figure 2 depicts how those Navy organizations fit within the overall  organizational structure of the Navy.
Shipbuilding is a complex, multistage industrial activity that includes a  number of key events that are common regardless of the type of ship  constructed or whether the buyer is the government or a commercial firm.  These events are sequenced among four primary phases: pre- contracting, contract award, design and planning, and construction, with  each successive phase building upon the work completed in earlier  stages.
In the pre-contracting stage, the ship buyer determines the ship’s  requirements. Early-stage design work occurs that culminates in a set of  specifications that documents the buyer’s requirements. In the contract  award phase, the specifications are incorporated into the shipbuilding  contract that the buyer enters into with the selected shipbuilder(s). After  entering into the shipbuilding contract, the design and planning phase  begins. The ship’s detailed engineering design is completed—often in the  form of a three-dimensional computer aided design model—and consists  of developing all aspects of the ship’s structures and the routing of major  distributive systems, such as electrical work or piping. Any necessary  modeling and simulation analyses, such as testing the structural integrity  of the design over the service life of the ship, are also completed. In  addition, during this stage the shipbuilder plans for beginning construction  and generates two-dimensional drawings that, once approved by the ship  buyer, will be used by production workers to build the ship.
Ship construction involves the following key events:
Block fabrication, assembly, outfitting, and erection: Metal plates  are welded together into elements called blocks—the basic building  units for a ship. Blocks are generally outfitted with pipes, brackets for  machinery or cabling, ladders, and any other equipment that may be  available for installation at this early stage of construction. The blocks  are then welded together to form grand blocks and erected with other  grand blocks in a drydock or building area. Outfitting work, painting,  and pre-commissioning activities take place prior to sea trials.
Sea trials: Once the shipbuilder is satisfied that the ship is completed,  the ship embarks on a series of dockside and at-sea tests to evaluate  overall quality and performance against the contractually required  technical specifications and buyer’s performance requirements. Navy  shipbuilding programs generally conduct two sets of sea trials— builder’s trials and acceptance trials.generally responsible for observing and identifying deficiencies during  the builder’s sea trials, while acceptance trials are observed by  inspectors from INSURV, the Navy’s inspection board.
Delivery / acceptance: Following the successful completion of sea  trials and when the buyer is satisfied that the ship meets  requirements, the shipyard delivers the ship to the buyer. In Navy  shipbuilding, the official transfer of custody occurs when the Navy  signs a Material Inspection and Receiving Report (Form DD 250).
Post-delivery activities that are specific to Navy shipbuilding, which can  generally take up to a year to complete, include the following:
Final outfitting, post-delivery tests: Following delivery and until the  ship sails away from the shipbuilder’s yard—usually anywhere from  10 to 90 days after delivery—the crew boards the ship and begins  training, and the ship’s mission systems are installed. Additional  training and operational tests of mission systems occur at the ship’s  home port.
Final contract trials: INSURV inspectors conduct a second round of  sea trials to assess whether the ship and all mission equipment are  operating as intended.
Post Shakedown Availability: A period of planned maintenance  follows final contract trials. During this time, class-wide upgrades and  correction of new or previously identified deficiencies that are the  government’s responsibility also occur.
Obligation and Work Limiting Date: The official date on which full  responsibility for funding the ship’s operation and maintenance is  transferred from the acquisition command to the operational fleet.
Construction-related quality deficiencies on Navy ships can be identified  at all points throughout the shipbuilding process, from initial block  fabrication to sea trials up through delivery. During acceptance trials,  INSURV inspectors label the most serious issues as “starred”  deficiencies. These issues can significantly degrade a ship’s ability to  perform an assigned primary or secondary operational capability or the  crew’s ability to safely operate and maintain ship systems. Because of  their importance, starred deficiencies must be corrected by the builder or  waived by the Chief of Naval Operations prior to ship delivery.
In addition to starred deficiencies, INSURV inspectors categorize other  types of deficiencies—each of which represent a piece of the vessel that  is not in compliance with Navy standards and/or contract specifications at  the time of inspection. While not deemed as serious as starred  deficiencies, these items can nonetheless affect the quality of life and  safety of the sailors on board the vessel or the operability of the ship.  INSURV categorizes these issues into three parts based on the  professional judgment of its inspectors:
Part I deficiencies are very significant in that they are likely to cause  the ship to be unseaworthy or to substantially reduce the ship’s ability  to carry out its assigned mission. “Part I Safety” is a sub-category that  INSURV uses to indicate that an issue is severe enough that the ship  is unsafe to operate until corrected. All starred deficiencies are Part I  deficiencies but not all Part I deficiencies are starred. An example of a  Part I starred deficiency would be an anchor that when deployed  during testing was not fully retrievable.
Part II deficiencies involve less significant material degradation but  should be corrected to restore the ship to required specifications. Part  II deficiencies can also have a safety designation. Examples are wide  ranging and can include items such as missing signage, or areas of  the ship having missing or damaged paint and coatings.
Part III deficiencies are generally categorized as things that prevent  the ship from meeting Navy standards but are cost prohibitive to fix.  An example is a lifeboat compartment that is too small to fit the size of  a lifeboat necessary to meet Navy requirements.
While INSURV inspectors identify deficiencies during acceptance trials,  throughout the ship construction process SUPSHIP quality inspectors,  during the normal course of their work, may observe work being  performed that is not in accordance with the technical specifications,  quality requirements included in the contract between the Navy and the  shipbuilder, or the shipbuilder’s work procedures. In such instances,  SUPSHIP inspectors will issue a request for the builder to correct the  deficient work. Depending on the severity and extent of the problems,  SUPSHIP’s quality officials may send a request for corrective action to  the builder to determine the cause of the problems, correct the affected  work, and improve its work processes so that the problems will not  reoccur. Once the shipbuilder takes the appropriate actions, SUPSHIP  closes out the corrective action request. At the time of the builder’s sea  trials, any unresolved SUPSHIP requests for corrective action are  generally grouped together with deficiencies identified by SUPSHIP  inspectors during the builder’s sea trials process.
subsections: section_title: Navy Shipbuilding Environment
paragraphs: As opposed to the commercial buyers included in our review, which  typically operate in a robust, competitive environment, the Navy has a  limited industrial base to build its ships. For example, throughout the  world there are at least 12 shipbuilding and offshore marine companies  that ship buyers in the oil and gas sector can choose from to build their  vessels. In contrast, two U.S. Navy shipbuilding contractors—General  Dynamics and Huntington Ingalls Industries—own all but three of the  larger shipyards, and each yard is specialized to build specific types of  ships. For example, aircraft carriers can only be built at one location. In  addition to building Navy ships, two of the shipyards, General Dynamics  NASSCO and V.T. Halter Marine, also build vessels for commercial  shipping firms. Figure 3 depicts the major U.S. shipbuilders and the types  of ships they build.
The Navy uses several different types of contracts for shipbuilding  programs. The Navy will often use cost-reimbursement contracts for the  first ships of a new class, as in many instances the Navy and its  shipbuilding contractors do not have a full understanding of the costs and  effort needed to build and deliver the ships. Such contracts provide for  payment of allowable incurred costs, to the extent prescribed in the  contract. The Navy also typically includes incentive or award fees on  these contracts. Our prior work has shown that this type of contract  places more cost risk on the government in the event that the shipbuilder  is unable to deliver the ship on time and within budget.programs where the Navy has greater certainty about costs and risks, the  Navy typically employs fixed-price-incentive contracts. Fixed-price- incentive (firm target) contracts include a target cost, target profit, ceiling  price (maximum price) and a formula used to determined the shipbuilder’s  profit that are negotiated at the outset. Final costs that are above the  target cost but below the ceiling price are shared between the Navy and  shipbuilder through the profit adjustment formula. If the final costs exceed  the ceiling price, the shipbuilder is generally responsible for most  additional costs. In some instances the Navy will use a firm-fixed-price  contract, in which the final price of the ship is agreed to at the outset. This  contract type generally places upon the contractor maximum risk and full  responsibility for all costs.
section_title: Classification Societies
paragraphs: The maritime industry has certain requirements to ensure ships meet a  minimum level of safety and quality. Under the International Maritime  Organization conventions, uniform requirements have been established  to, among other things, ensure safety of life while at sea and  environmental protection.designed, constructed, and maintained in accordance with the rules of a  recognized classification society or with applicable national standards that  provide an equivalent level of safety. Classification societies, such as the  American Bureau of Shipping (ABS), Det Norske Veritas, and Lloyd’s  Register, develop rules defining a minimum level of technical standards  that are applied to ships. Once a ship is “classed” with a certificate  indicating that it meets a minimum level of safety and quality, the ship is  subject to periodic inspection to verify that it continues to meet the  applicable rules of the issuing classification society. In many instances,  shipbuilders also use classification societies to audit their quality  management systems as an independent third-party, which often is  needed to maintain certain certifications such as the International   These requirements stipulate that ships are  Organization for Standardization’s ISO 9001 (quality), 14001  (environmental), and 18001 (occupational health and safety) series of  management systems standards.
Navy officials stated that the certification requirement for submarines is as rigorous as  that of classification societies. During the design, construction, and maintenance of  submarines, they use an oversight and certification program analogous to ship  classification—called Submarine Safety—as a means to help ensure requirements are  met and a minimum level of safety is achieved. The officials noted the Submarine Safety  program is a cornerstone of the Navy’s submarine design, construction, and maintenance  practices and provides the basis for certification of every submarine. the applicable classification rule sets. Upon completion of all  requirements, ABS issues a classification certificate.
section_title: The Navy Has Reduced Deficiencies at Delivery but Still Accepts Some Ships with Numerous Construction Deficiencies
paragraphs: Recognizing that it has experienced significant quality problems with  several ship classes, the Navy has focused on reducing the number of  serious deficiencies, particularly “starred” deficiencies, which require a  waiver from the Chief of Naval Operations to defer correction until after  delivery. The number of uncorrected deficiencies at delivery, including  starred deficiencies, has generally dropped for ships delivered over the  past few years due, at least in part, to the Back to Basics quality  improvement initiative. Even so, the Navy still accepts some ships with  large numbers of open deficiencies. Navy policy states that ships are to  be delivered based on acceptance trials and satisfactory correction or  resolution of deficiencies. Instead, correction of deficiencies is often  deferred until after the Navy accepts delivery of the ship, which can  interfere with post-delivery activities. Further, one product of the Back to  Basics initiative, a quality management provision for inclusion in Navy  shipbuilding contracts, has not been implemented on any Navy  shipbuilding contract.
subsections: section_title: The Navy Has Reduced the Number of Starred Deficiencies at Delivery
paragraphs: The Navy has reduced the total number of uncorrected starred  deficiencies at delivery on both established and newer ship classes for  which multiple ships have been delivered. It is up to INSURV inspectors  to categorize deficiencies identified by severity during acceptance trials.  Because there can be ambiguity regarding who is responsible for  correcting the deficiencies, the program office, SUPSHIP, and the  shipbuilder collectively determine whether the government or the  shipbuilding contractor is responsible. Deficiencies that the government is  responsible for correcting can include, among other things, problems  requiring a change to the ship design or ship specification, or equipment  that the government is responsible for providing. For example, during the  acceptance trial of LCS 2, the rescue boat could not be properly deployed  and INSURV inspectors categorized the problem as a starred deficiency.  It was subsequently determined that, as designed, the rescue boat  system did not have the ability to meet requirements and that the Navy  would assume responsibility for the corrective work. Figures 4 through 7  show the open number of starred deficiencies at delivery for the LPD 17,  DDG 51, T-AKE, and LCS ship classes during the 2006 through 2012  time frame.delivered in this time frame. The figures also show when the Back to  Basics initiative began.
section_title: Commercial Firms Resolve Quality Deficiencies before Delivery, with Some Practices Potentially Informative for Navy in Spite of Different Environment
paragraphs: The environment in which leading commercial ship buyers and builders  operate differs in substantial ways from the Navy’s. Key differences  include the level of competition, different incentives at play, and the timing  of ship deliveries to the end user. Nevertheless, some commercial  practices supporting delivery of ships with a minimum number of  deficiencies may be useful for the Navy. These practices include a focus on resolving deficiencies before ship delivery, contracting approaches that place the cost risk associated with  addressing quality problems on the shipbuilder and incentivize prompt  resolution of problems, and an oversight process with clear lines of accountability and an  emphasis on observing in-process work.
subsections: section_title: Environment and Key Incentives Differ between Commercial and Navy Shipbuilding
paragraphs: The commercial shipyards and ship buyers we visited build and buy ships  that are highly complex and densely outfitted. These ships include floating  production storage and offloading (FPSO) vessels, which collect, process,  and store oil from undersea oil fields; large cruise ships, some of which  are comparable to the size of an aircraft carrier and can accommodate  over 5,000 passengers; liquefied natural gas carriers; and offshore drilling  ships, which in some instances can sit unanchored and drill for oil in  water depths of over 10,000 feet while maintaining a fixed position.  Construction can take up to three years at a cost ranging from about $600  million for a drill ship to well over $1 billion for a cruise ship or FPSO. In  many cases, these ships incorporate technological advances that are vital  to improving business operations. For example, for enhancing operational  and commercial efficiencies, the new generation liquefied natural gas  carriers developed a range of techniques from reliquefaction of the boil off  gas to its utilization as fuel for engines for propulsion. Key characteristics  of selected commercial ships and offshore structures included in our  review are presented in appendix VIII.
Commercial shipbuilders, particularly those in the oil and gas industry,  operate in a robust, competitive environment, as opposed to the U.S.  Navy’s limited shipbuilding industrial base, where sole source contracts  may be awarded in order to sustain workloads and the solvency of the  companies involved. This environment provides commercial buyers with  additional leverage to expect quality at delivery, as they can go elsewhere  if they are not satisfied with the end product. One oil and gas company  reported that there are as many as a dozen shipbuilders from which they  can solicit proposals at any one time. As a result, commercial shipbuilders  put a premium on reputation. They do not want to risk their credibility with  buyers if the ship is not delivered by the contracted delivery date with the  buyer’s expected level of quality. These factors create additional pressure  on the shipbuilder to ensure that outstanding deficiencies are resolved in  a timely manner. In contrast, the Navy has fewer choices of shipbuilders  and has an interest in sustaining these shipbuilders despite shortfalls in  performance.
In addition, commercial buyers and builders operate in an environment  where both parties seek to maximize profits. A delay in delivery has  significant profit impacts to both the buyer and shipbuilder. For example, it  is common for a drill ship to be leased to an oil and gas company early  during the ship’s construction process, and both the ship buyer and the  company leasing the vessel rely on the ship to be at its drill site by the  contracted date to begin operations. Any delay in meeting this schedule  can not only cause the ship buyer to lose revenue—which for some drill  ships can amount to over $600,000 per day—but also may require the  buyer to pay predetermined sums to the company leasing the drill ship for  lost work days. Also, newly constructed cruise ships are expected to start  generating revenue weeks if not days after being delivered. For example,  Royal Caribbean officials told us that they had a full cruise 3 days after  taking delivery of the Celebrity Solstice in October 2008. The monetary  risks faced by the ship buyer for late delivery or acquiring a ship that does  not meet key performance requirements—such as fuel consumption—are  also passed along to the shipbuilder in the form of liquidated damages  that can potentially cost the shipbuilder tens of millions of dollars.
section_title: Leading Commercial Ship Buyers Focus on Taking Delivery of Ships Meeting Quality Expectations
paragraphs: Throughout the construction process, the ship buyer’s oversight team, the  shipbuilders’ quality personnel, and classification society personnel  routinely identify deficiencies such as design errors, supplier and vendor  quality issues, and problems with workmanship. Commercial ship buyers  we met with expect that identified problems will be corrected prior to  delivery of the ship. We found this to be the case for all types of ships  included in our assessment of commercial practices, whether a lead ship  (i.e., the first ship built according to a new design) or a ship built from a  proven design. Unresolved issues that affect the safety, seaworthiness, or  operability of the ship would be reason for the ship buyer to not accept  delivery until such items are corrected. For the generally minor  deficiencies that have not been corrected by the ship’s delivery date, the  buyer and shipbuilder may enter into a formal agreement outlining  specific actions that the builder will take to ensure correction of the  outstanding issues in the prescribed time.
There is a fair amount of subjectivity as to what constitutes a major or  minor deficiency that largely depends on the ship’s intended use. While  each ship-buying company may take a slightly different view of what  constitutes a major or minor deficiency, minor deficiencies are generally  those items that do not have an effect on the mission, operability, or  safety of the vessel and are not indicative of problems with the builder’s  production processes. Major deficiencies can be viewed as problems with  the shipbuilder’s production processes that limit the builder’s ability to  meet ship specifications, or those deficiencies that could have an adverse  effect on the mission, operability, or safety of the vessel if not resolved.  We found that commercial ship buyer definitions for major and minor  deficiencies do not necessarily align with the definitions used by the  Navy. For example, in the cruise industry, where aesthetics and the  customer experience are critical factors, a major deficiency may be an  issue such as higher than anticipated engine vibration or elevated noise  levels. Typical minor deficiencies include cosmetic defects such as  scratches on windows, paint, and furniture. For oil and gas ships that are  expected to endure harsh environments, common major outstanding  deficiencies at the time of delivery could involve equipment that has not  yet been installed or equipment that requires additional calibration.  Typical minor deficiencies might include missing signage or technical  manuals.
A drill ship for Noble Corporation, the Noble Don Taylor, illustrates the  process for correcting deficiencies leading up to delivery of commercial  ships. In this case, the shipbuilder reduced the number of corrective  items, totaling over 15,000 throughout construction, to around 3,800 by  the time sea trials were scheduled to occur. At the time of ship delivery,  the number of unresolved corrective actions was down to just over 59  items, which the shipbuilder agreed to correct no later than three months  following the date of delivery. One day following ship delivery, this  number dropped to 37 items. These items included minor deficiencies  such as incorrect labels and missing manufacturer documentation for  equipment, and in some instances, more significant corrective actions  including replacement of equipment which measures the weight and  torque of the drill that did not have the correct calibration.
Additional examples depicting the extent to which quality problems  identified by the ship buyer are resolved prior to key delivery milestones  are provided in table 1.
The commercial ships reviewed were delivered with considerably fewer  defects than is common with Navy ships, even with the recent  improvements realized by the Navy. With the exception of the Celebrity  cruise ship where there were a large number of minor (often cosmetic)  uncorrected deficiencies at the time of delivery, the number of total  deficiencies ranged from 4 to 59 for the commercial ships reviewed. For  the Navy, recent T-AKE class ships, the Joint High Speed Vessel, and the  Mobile Landing Platform were comparable to the numbers of outstanding  deficiencies found on commercial ships.
section_title: Commercial Ship Buyers Put More Risk on Shipbuilders through Choice of Contract Type and Payment Structure
paragraphs: The Navy and commercial ship buyers agree that responsibility for quality  must be put on the shipbuilders, as they are in the best position to ensure  quality. However, the commercial buyers we spoke with structure their  contracts to ensure that the shipbuilder absorbs the cost risks associated  with quality problems. For example, they require delivery of a ship at an  expected quality level for a firm-fixed-price and delay a majority of  payment until the expectation is met. The Navy shares more of the cost  risk associated with delivery of a quality product with its shipbuilders  through cost-reimbursement and fixed-price-incentive contracts. The  Navy also makes regular progress payments throughout construction so  that the bulk of payment has already been made by delivery.
Firm fixed-price contracts used in commercial shipbuilding—even for lead  ships—put more of the cost risks associated with quality on the  shipbuilder than cost-reimbursement and fixed-price-incentive contracts  which are commonly used by the Navy. Under a firm-fixed-price contract,  the shipbuilder takes on the full cost of any quality problems that result in  rework. As many quality problems require rework to existing blocks or  compartments and can thus erode the shipbuilder’s profit that is included  in the firm-fixed-price, there is a greater incentive to minimize production  deficiencies throughout construction.
Similar to commercial ship buyers, the Navy has made some limited use  of firm-fixed-price contracts to purchase ships included in our review, and  in those cases the contractor has taken on more cost risk associated with  any quality problems. Of the 11 shipbuilding programs we reviewed, three  (DDG 51, T-AKE, and T-AGM 25) used firm-fixed-price contracts. For  example, starting with the 10th ship in the T-AKE ship class, the Navy  successfully moved to a firm fixed-price contract for the remaining 5  ships. Whereas some of the earlier T-AKE ships exceeded the contracted  target price, the ships constructed under firm-fixed-price contracts  continued to maintain good quality. T-AGM 25 was purchased using a  firm-fixed-price contracting arrangement from the outset, but in this case  the project experienced quality problems and delays. Although the  shipbuilding project did not perform as expected, the Navy’s exposure to  cost overruns resulting from quality problems was mitigated.
Under a cost-reimbursement contract, the cost risks associated with poor  quality remain with the Navy because the government pays for all  allowable costs of construction, including any rework, although lower  costs may be incentivized by the use of award or incentive fees. The  Navy has used cost-reimbursable contracts on lead ships due to  concerns that the level of uncertainty and risk common on Navy programs  make fixed-price contracts too costly. For example, one NAVSEA  directorate stated that some Navy shipbuilding programs would likely be  deemed unaffordable under a fixed-price contract due to the shipbuilders’  need to include in the price the risk of uncertainty associated with new  construction methods, new technologies, and new designs. However, the  Navy generally moves more mature ship programs to fixed-price-incentive  contracts, and Navy officials have stated that the cost sharing provisions  in this type of contract incentivize quality. Under a fixed-price-incentive  type contract, the contract is awarded for a target cost. The Navy and the  shipbuilder share both cost savings and cost overruns below or above the  target cost (referred to as the “share line”), pursuant to a formula, until the  ceiling price is reached. Navy officials have stated that they see this type  of contract as an incentive to quality because the shipbuilders will receive  more profit if they construct the ship efficiently and deliver it below the  target cost. Appendix IX further illustrates how cost risks pertaining to  quality are allocated under the different contract types.
In the commercial world, ship buyers use payment terms as leverage to  ensure that the shipbuilder delivers a ship to the expected level of quality.  Payments are generally made at milestones negotiated with the  shipbuilder, such as contract signing, steel cutting, and keel laying. The  bulk of the payment, sometimes 60 to 80 percent, is made only on  delivery of a ship that meets expected quality and performance levels.  The buyers we met with alter payment terms based on the quality of the  shipbuilder and also use the payment terms to incentivize the builder to  fix any outstanding deficiencies prior to making the last payment. For  example, one construction manager stated that his company normally  makes equal payments to shipbuilders at five different milestones, so that  20 percent of the ship cost remains to be paid at delivery, but the  company would likely increase the percentage of the overall payment  outstanding at delivery with a lesser quality shipbuilder. Another ship  buyer said that his company normally pays 60 to 70 percent of contract  price at delivery, but would not make final payment if the ship had major  outstanding quality issues. Two other ship buyers told us they make  milestone payments during construction, but generally retain 5 to 10  percent of the payment as a means to ensure that the builder addresses  deficiencies before delivery. Those buyers also said they can retain these  funds at delivery to ensure prompt resolution of any unresolved  deficiencies. These practices create a strong financial incentive for the  builder to quickly complete work and clear any outstanding quality  defects. One project manager indicated that on two recent shipbuilding  projects, it was not necessary to withhold any of the payment after taking  delivery of the vessels because of the small number of deficiencies.
Of the 11 fixed-price contracts we reviewed (with the exception of TAGM- 25), the Navy makes periodic payments to its shipbuilders according to  the progress made in construction.shipbuilder to submit payment invoices every two weeks that are based  on the progress made in construction as long as the billed amount is over  $5,000. While commercial ship buyers may pay the bulk of payment at  delivery, this system also requires shipbuilders to finance construction  and related finance costs, which are ultimately passed on to the ship  buyer in the contract cost.
For example, one contract allows the  According to Navy contracting officials, they consider potential impacts on  pricing in developing payment provisions. In the fixed-priced shipbuilding  contracts we reviewed, we found that the Navy generally retains a  percentage from each progress payment—anywhere up to 10 percent— that decreases as the ship is being built. Navy contracting officials told us  that they will only reduce the retention to the lower percentage once  outstanding problems have been cleared. The following example from a  recent shipbuilding contract illustrates this process:
Up to 25 percent of the ship’s physical completion—5 percent is  retained from each progress payment;
25 to 50 percent of the ship’s physical completion—3 percent is  retained from each progress payment;
50 to 75 percent of the ship’s physical completion—1.5 percent is  retained from each progress payment; and
Once 75 percent of the ship’s physical completion has been  reached—1 percent is retained from each remaining progress  payment.
At delivery, the Navy retains a minimum amount of the shipbuilder’s  payment as a performance reserve that ranges from 0.75 to 1.5 percent  of the ship’s contract value, and will withhold additional funds from the  shipbuilder’s last invoice or the amount retained during construction if  there are uncorrected deficiencies or incomplete work. However, the  Navy may be constrained in terms of how it can incentivize contractors  since the bulk of payments are made during the course of construction  rather than at delivery. As it is common for Navy ships to have many  more deficiencies and incomplete work items at delivery than the  commercial ships in our review, the amount retained may not sufficiently  motivate the shipbuilder to correct all deficiencies. Further, there is not  specific NAVSEA guidance that addresses the extent to which retentions  should be used as a means to incentivize the shipbuilder to promptly  resolve outstanding deficiencies and incomplete work items at ship  delivery. However, standards for internal control in the federal  government identify the need for documenting policies and procedures to  ensure appropriate measures are taken to address risk. Program  officials stated that for uncorrected deficiencies that are large in scope  they will typically develop an estimated cost to complete each item. For  the remaining deficiencies, the officials stated they develop an average  cost that is based on the estimated cost to complete a selected sample of  the deficiencies and apply that cost universally across the remaining  deficiencies. In the case of LHD 8, which was delivered to the Navy in  April 2009 with over 12,000 outstanding shipbuilder-responsible  deficiencies, the Navy retained about 2.5 percent of the final estimated  cost. Navy officials told us that some of these outstanding items are still  being completed during maintenance periods.
More recently, Navy and SUPSHIP officials stated that in at least three  instances they have temporarily increased the amount of the retained  payments in an effort to prompt the shipbuilder to correct persistent  deficiencies. SUPSHIP officials told us this approach was successful for  problems they encountered with the LHA 6, DDG 51, and LPD 17 ship  classes. In the case of LPD 17 class ships, the Navy withheld over $15  million in progress payments on four ships that were under construction  until the shipbuilder resolved persistent problems with pipe cleanliness.
section_title: Commercial and Navy Shipbuilding Utilize Differing Approaches to Foster Accountability and Ensure Quality
subsections: section_title: Commercial Ship Buyer Oversight Structure Creates Clear Lines of Accountability While Navy Oversight Is More Diffused
paragraphs: Another mechanism commercial ship buyers use to ensure quality  assurance is having dedicated, trained inspection teams on site to  monitor and oversee all aspects of construction. All of the commercial  ship buyers we met with create clear lines of responsibility for functional  areas to ensure accountability within their on-site teams, which are  primarily responsible for quality during construction. Within the on-site  teams of the commercial buyers we met with, responsibility for a  functional area such as paint or hull and structure is consolidated under  one functional area lead who reports to the buyer’s overall project or  construction manager on-site. The on-site project manager has overall  responsibility within the buyer’s company to ensure that the shipbuilder  delivers the ship on time and at the expected level of quality. Quality  inspectors are integrated within each functional area team. Commercial  ship buyers told us that their on-site quality inspectors are expected to  independently identify critical inspection areas during the course of their  day-to-day inspections. We found that commercial quality inspectors use  design drawings and ship specifications during their work to ensure that  the items are built in accordance with the detailed design. Furthermore,  these inspectors are also responsible for tracking and closing all  corrective actions they identify during the course of construction and  ensuring that the corrected work or work processes resolved the identified  problems. Overall, commercial ship buyers place a high-level of  responsibility on their inspectors to be able to identify important quality  issues in their functional area and ensure that the company will take  delivery of a ship that meets quality standards.
Within the Navy, SUPSHIP quality assurance departments have limited  authority over the shipbuilder compared to commercial ship buyers’  inspectors. SUPSHIP quality assurance teams identify and report defects  found during their inspections, and can close out the deficiencies once  the defects are rectified. However, deficiencies that are technical in  nature, or with which the builder disagrees, are adjudicated by SUPSHIP  engineering and the ship’s program office and not the quality assurance  department. For example, SUPSHIP’s engineering department reviews  and adjudicates technical issues related to design and system  engineering that quality assurance teams identify during inspections. If  the engineering group finds that a defect is technically acceptable, a  waiver may be provided indicating that the shipbuilder does not need to  correct the defect. The ship’s program office is primarily responsible for  successful delivery of the ship, including responsibility for cost, schedule  and performance requirements. Program office officials also review  certain defects identified by the SUPSHIP quality assurance teams and  make the determination as to whether or not they will be corrected by the  shipbuilder, provided the defect is technically acceptable.
As shown in figure 13 below, there are major departments within  SUPSHIP, such as contracting, engineering, and program management  that have delegated responsibilities from the respective NAVSEA level  directorates or the PEOs and are able to elevate technical risks or  concerns about the structure of the shipbuilding contract to those that  have decision-making authority. SUPSHIP quality officials receive policy  guidance from the NAVSEA Logistics, Maintenance and Industrial  Operations Directorate (NAVSEA 04), but there is not a quality assurance  team at the NAVSEA level to which they can raise quality related issues.
Officials within NAVSEA 04 told us the Navy is formulating plans to  reorganize the structure of the directorate, and plans include establishing  a centralized quality team. Although the roles, responsibilities, and  authorities of the quality team are not yet defined, the officials expect that  the team would provide support to SUPSHIP quality assurance  departments in helping to ensure that matters related to quality are given  sufficient attention at the NAVSEA level. Increasing the emphasis on  quality may help contribute to the goal of delivering ships that are defect- free, or nearly defect-free, as called for in Navy policy and demonstrated  in commercial shipbuilding.
Prior to construction, the commercial ship buyers and shipbuilders we met  with negotiate to one common understanding of quality inspections  through an agreed-upon quality inspection plan. The plan identifies (1)  all formal inspection points during the construction process; (2) who  attends and approves the inspections; and (3) criteria on how the  inspections will be carried out. One ship buyer noted that establishing the  quality inspection plan in conjunction with the shipbuilder and ensuring  that all parties agree to, and are aware of, the key drivers that affect  quality is of the utmost importance in ensuring the ship is built and  delivered at the expected level of quality. According to company officials,  the shipbuilder is contractually required to notify the buyer of any formal  inspection points to provide the buyer an opportunity to inspect a product  or process at a designated point of production.
Buyer representatives, including on-site teams and headquarter-level  officials, review the builder’s quality inspection plan and may ask for  additional inspections and hold points based on ship design, criticality of  the system, and previous experiences of the buyer. For example, one  ship buyer reported experiencing significant failure rates during pressure  testing of piping systems on a drill rig, and decided to incorporate  additional inspection points at the joints where pipes are welded together  on future drill ship projects. In another instance, a ship buyer  representative told us his company solicits input on the quality inspection  plan from company personnel that operate similar types of vessels, which  he noted provides valuable information on the types of quality issues  observed from an operator’s perspective. The quality inspection plan is a  key tool in ensuring quality as it enables consistency in inspections by  focusing the ship buyer and builder on the same inspection items using  the same criteria. Figure 14 further describes actions taken by one  commercial firm, Chevron’s Project Resources Company, to improve  quality.
Inspectors for commercial ship buyers enforce quality requirements, in  part, by attending all formal inspections, according to almost all of the  commercial ship buyers in our review (seven of nine companies). For  example, one ship buyer we met with reported having up to 80  inspections in a day for the team of about 14 inspectors. These inspectors  use design drawings and review the ship specification to ensure that the  compartment or block is built in accordance with requirements.
Along with the formal inspections, commercial ship buyers consistently  cited “roaming patrols” as central to their oversight process. Inspectors  regularly patrol the shipyard, where they observe the shipyard’s in- process work. All of the buyers emphasized the importance of these  patrols as providing assurance that shipbuilders are adhering to their  work processes even when a formal inspection is not scheduled. These  patrols facilitate the early recognition of quality problems, which are  typically less expensive and time consuming to correct than later in the  construction process. Some officials told us that these impromptu patrols  can be particularly effective in yards with more quality issues. The  percentage of inspectors’ time allocated to these roaming patrols can vary  depending on the stage of construction—but can exceed 50 percent over  the course of a ship’s construction—with a greater proportion of time  allocated during the earlier stages of construction when there are not as  many formal inspections.
In contrast to commercial shipbuilding, where buyer and builder  inspection activities are aligned through one common inspection plan,  Navy shipbuilding involves layers of oversight and quality inspections that  are resource intensive and not necessarily aligned with shipbuilders’  inspections. In Navy shipbuilding, NAVSEA officials told us formal  inspection points that relate to quality are identified in multiple ways  including Navy technical documents, inspection proposals from the  shipbuilder, or the ship’s technical specifications. NAVSEA’s engineering  directorate reviews and approves the shipbuilder’s quality-related test and  inspection documents. Other formal test and inspection points, such as  those for equipment and system installations, are contained in separate  test plans that the shipbuilder develops and SUPSHIP engineering  reviews. In addition to attending formal inspections, SUPSHIP’s quality  assurance department independently develops its own surveillance plans,  and these surveillance plans are revised several times a year.
Unlike inspectors for commercial ship buyers, SUPSHIP inspectors do not  attend all formal inspections identified in the shipbuilding contract.  SUPSHIP quality managers determine which inspections their inspectors  attend—generally based on priority or potential problem areas—but it is  understood that inspectors will not attend all call-outs, in part due to  staffing levels at the SUPSHIP locations. NAVSEA and SUPSHIP officials  noted that the unpredictability of which inspections will be attended by  SUPSHIP helps ensure the shipbuilder maintains focus on all aspects of  production.
SUPSHIP officials described their oversight approach in very different  terms than commercial ship buyers. SUPSHIP surveillance plans set forth  goals that focus on collecting numbers of observations. SUPSHIP quality  assurance teams in the locations we visited stated that they generally  focus most of their inspection efforts, in terms of observations conducted,  on performing planned inspections identified in shipbuilding contracts and  SUPSHIP surveillance plans, and less effort conducting random  inspections of in-process work (similar to the roaming patrols used by  commercial buyers’ inspectors). The main inspection activity carried out  by SUPSHIP quality inspectors, as measured by the number of  observations, are product verification inspections. These are inspections  of end products such as fabricated blocks, installed equipment, and  completed compartments to ensure that the work conforms to the contract  specifications. SUPSHIP’s Gulf Coast and Bath locations reported  spending 64 percent and 60 percent, respectively, of their inspection  efforts on product verification inspections, while Groton and Newport  News spent less time—39 percent and 35 percent, respectively.
As part of SUPSHIPs’ surveillance plan for a shipyard, quality inspectors  also observe work being performed by production workers—work that is  in process—for compliance with the builders’ procedures and technical  specifications. Similar to commercial ship buyers, SUPSHIP officials  stated it is important to identify, and remedy, any potential quality issues  early in the construction process. Most SUPSHIP locations reported  spending about 30 percent of their inspection efforts on in-process  evaluations. These evaluations are planned in advance and may last a  few hours to several days. SUPSHIP officials have reported that they are  putting more effort into in-process inspection activities rather than just  inspecting end products For example, one SUPSHIP location has  established a goal of having 70 percent of their inspectors’ observations  related to in-process work. SUPSHIP officials also told us that their  inspectors conduct some general surveillance or random inspections, but  it is unclear how much of their effort is spent on these activities as they  are not recorded as such.
Also in contrast to commercial shipbuilding practice, not all SUPSHIP  locations use design drawings while conducting inspections. Instead,  inspectors use pre-developed checklists and ship technical specifications  to perform inspections. The use of design drawings during inspections  helps to ensure that work is being produced in accordance with the  approved design and that the builder’s workers are using the correct  version of the design. For example, ABS officials told us that during  construction of the Littoral Combat Ship, ABS found in a number of  instances that the production drawings used to build the ship were  different from the approved design. In some cases the production  drawings identified different sizes of pipes and flanges, or depicted piping  arrangements that were not included in the approved design, but such  issues generally went unnoticed by the SUPSHIP inspectors because  they did not compare the design drawings to the work performed. Quality  officials at two SUPSHIP locations stated that their inspectors have been  trained and use the design drawings during inspections, and officials from  both locations view this as an important tool for ensuring quality.  Officials at one of these SUPSHIP locations said they have long realized  the benefits of using design drawings during the course of their quality  inspectors’ work and ensure the inspectors are trained to be able to read  design drawings. At the other location, officials stated they just recently  started having their quality inspectors use the design drawings when  conducting quality inspections, which they attribute as being a good  practice they observed from ABS.
Commercial shipbuilders create an environment of accountability for  quality by implementing systems to track quality problems down to the  supervisor and individual worker level. Systems used by shipbuilders  included complex enterprise resource management systems that track  workers assigned to specific work packages or assignments, as well as  simple systems such as requiring production workers to sign their work  (on the compartment itself or related paperwork) with a unique identifier.  For example, one shipbuilder we visited conducts non-destructive tests  on welds as dictated in the quality inspection plan developed with the ship  buyer. Each test record includes information on the welder who  performed the work and the outcome of the testing. This allows the  shipbuilder to identify welders producing defective work. Furthermore, the  shipbuilder uses the test data to rate welder performance across the yard  as part of its regular performance appraisal system. This same system  allows the shipbuilder to track performance of supervisors and individual  workers in terms of producing quality products and minimizing rework.
Most Navy shipbuilding contractors we met with (five of eight shipyards)  reported that they have historically had difficulties identifying when and  where in the production process specific quality problems occurred, as  work was not always tracked at the supervisor or individual worker level.  This has been a major challenge that they have been trying to address in  recent years. The shipbuilders agree that quality problems are generally  the result of a breakdown with the execution of their quality management  plans rather than problems with the plans themselves.contractor shipyards we visited reported having made progress on this  front, and shipbuilder quality representatives told us they have been able  to improve the detection of quality problems earlier in the production  process and hold front-line supervisors accountable for the quality of the  work they oversee. For example, quality officials at one shipbuilder told us  that their quality personnel are now focusing more on conducting in- process inspections to identify process-related problems occurring within  a specific trade or work crew, as opposed to inspecting completed work  products and then trying to locate the specific source of the problem  within the broader production process. In another example, a shipbuilder  has created quality advocates within the various tradecrafts that augment  the builder’s quality assurance department by assisting with day-to-day  quality activities, such as conducting inspections and providing training,  as well as representing production workers in yard-wide quality  improvement efforts. Further, there are signs that builders are starting to  hold their workforce accountable for quality issues. For example, a quality  official at one shipyard we visited told us that his inspectors now routinely  collect quality and defect data at the production supervisor level and  develop a report of where each supervisor ranks as compared to the peer  group. These reports are posted throughout the production facilities and  are visible to all employees. In some rare instances, the quality official  reported that his company instituted disciplinary actions for supervisors  that repeatedly allowed poor quality work products to proceed to the next  stage of production.
In addition, Navy shipbuilding contractors reported that quality at some of  the shipyards has been affected by high attrition rates, making it difficult  to maintain a qualified workforce. One shipbuilder representative told us  that his company is recruiting new technical graduates from other parts of  the country to fulfill their production staff needs. Another shipbuilder  representative told us that his company has had quality problems related  to inexperienced labor. The need to put new staff in place to meet work  demands puts pressure on the builders to expedite hiring and training.  According to one shipbuilder, without a rigorous hiring and training  program, under-qualified workers could be performing the work, leading  to higher incidences of quality issues. Although the four international  commercial shipbuilders we visited did not report having similar labor  problems, we were told high turnover of the labor force is a problem at  other commercial yards.
section_title: Classification Societies Play a Role in Commercial and Navy Shipbuilding
paragraphs: In commercial shipbuilding, classification societies are an integral part of  design and construction processes. All of the commercial ship buyers we  met with pointed out that the role of the classification society is to ensure  their ships are built in accordance with the designated classification  society’s rules and requirements and that it is the buyers’ responsibility to  ensure that shipbuilders are building ships in accordance with the buyer’s  requirements. Further, commercial ship buyers realize that adhering to  the rules and regulations of a classification society will ensure that a new  construction ship only meets the quality and safety requirements  stipulated in the applicable rules.
During the contracting phase, the designated classification society’s  applicable rules and regulations, as well as statutory requirements (such  as those pertaining to safety of life issues or marine environmental  protection), are generally incorporated into the shipbuilding contract. The  classification society also plays a role during the design of commercial  ships, as its engineers review and approve key structural design drawings  to ensure the design complies with classification society rules. These  engineers also review and approve key design drawings to verify  compliance with any applicable statutory requirements, if so authorized by  the country where the vessel will be registered. The buyers we met with  had high confidence in the classification society’s engineering review of  the ship design and viewed this expertise as a core competency. In some  instances, commercial ship buyers noted that they contract with the  classification societies for engineering services when developing and  testing new technologies. For example, officials from Royal Caribbean  told us they sought technical assistance from the classification society  Det Norske Veritas during the development and implementation of a pilot  program that tested advanced engine exhaust cleaning technologies in  two of its ships. Figure 15 below provides additional detail on how one  commercial shipbuilding project sought technical assistance from  classification societies to reduce potential risks to quality.
Classification society surveyors also have a role in monitoring ship  construction; however, none of the leading buyers we met with use their  designated class society as a substitute for their own construction  oversight and quality assurance processes. Specifically, while  classification society surveyors assess whether the ship is constructed in  accordance with prescribed rules and regulations, these rules may not  take into account the ship buyer’s own technical specification  requirements. For example, the rules do not address the quality of every  structure or piece of equipment installed on the ship, such as the ship  buyer’s mission-related equipment, but rather only what is determined to  be critical to safe operation of the ship. In addition, class societies  conduct technical assessments of key parts and equipment. For a wide  range of materials, parts, and equipment used in the construction of a  ship, such as main engines, generators, and pumps, it is generally a class  society requirement that the surveyors attend inspections and witness  testing conducted at the manufacturing facility prior to the equipment  being shipped to the builder’s shipyard to certify that the items comply  with the applicable rule requirements.
subsections: section_title: ABS No Longer Provides Classification Services on Navy Surface Combatants but Continues to Play a Role in Navy Shipbuilding
paragraphs: After almost 10 years of ABS participation in the development and  implementation of the Naval Vessel Rules for the DDG 1000 and LCS  shipbuilding programs, the Navy, in late 2011, made a decision that as a  cost savings measure it would no longer seek to obtain ABS class  certification for surface combatants. ABS’s services were initially  expected to end in June 2012, but the Navy extended ABS’s involvement  on construction of LCS 4 for continued marine surveying and inspection  services through October 2013. The original intent of class certification  was to transfer what the Navy viewed as higher-volume, lower-risk hull,  mechanical, and electrical design and construction oversight work to  ABS, which would allow Navy engineers to focus on higher-risk areas  including mission systems and military-unique aspects of a ship such as  combat systems integration. However, according to Navy engineering  officials, this process was more expensive than originally envisioned.
Of the three surface combatants—LCS 1 through LCS 3—that were  designed, constructed, and delivered to the Navy under the auspices of  the Naval Vessel Rules, none of the ships have received ABS class  certification. Prior to the Navy’s determination to no longer contract for  ABS’s services, unresolved issues precluded issuance of class  certificates. According to ABS officials, the classification process  involved a level of discipline that the Navy found difficult to integrate into  the design and construction of surface combatants, and in some  instances the Navy chose to accept design drawings or approve  completed production work prior to ABS completing its own review and  approval process. For example, the Naval Vessel Rules require that  during the design engineering phase of the shipbuilding project computer  analyses determining the structural integrity of the ship are to be reviewed  and approved by ABS. However, the Navy allowed the shipbuilder to  commence construction and deliver the lead ship (LCS 1) and begin  construction on the second ship (LCS 3) before the ship designers were  able to submit a structural analysis that met the ABS requirements. The  analysis identified several areas on the ship’s superstructure that were  under high stress and could be prone to failure. Program officials  indicated they operated the ship with knowledge of the high-stress areas  as a means to field test the strength of the ship. During the initial  operating period of LCS 1, cracks emerged in a number of the predicted  locations, requiring repair and additional strengthening of LCS 1 and  structural modifications during construction of LCS 3.
NAVSEA engineering and SUPSHIP officials indicated that the Navy’s  decision to cease its arrangement with ABS was also attributed to the  view that the class society’s role largely duplicated the work being  performed by SUPSHIP and Navy engineers. These officials were  confident that SUPSHIP was appropriately positioned in terms of the  needed skills and resources, as their inspectors were already tasked with  overseeing the builders’ work to ensure compliance with the  specifications. In addition, the officials informed us that NAVSEA’s  engineering directorate is in the process of revising the Naval Vessel  Rules to take into consideration the departure of ABS from the surface  combatant shipbuilding programs. SUPSHIP officials told us that a key  difference between SUPSHIP’s and ABS’s inspection processes is the  level of discretion the inspectors and surveyors have in determining  whether or not work is in accordance with the prescribed rules.  Specifically, it is common in commercial shipbuilding for the classification  rule set to stipulate that certain work be performed to the satisfaction of  the attending surveyor, which gives the classification society surveyors  the flexibility to use their professional judgment as to whether or not  completed work meets the intent of the rules and is fit for its purpose.  According to SUPSHIP officials, the Navy’s revised rules will remove such  language so that work performed either meets, or does not meet, the  applicable technical specifications.
The Navy plans to continue work with ABS in several areas:
NAVSEA engineering officials informed us that they will continue to  contract with ABS on an as-needed basis for design and technical  assistance services on new construction surface combatants as a way  to augment the Navy’s skill sets in specialized areas such as  structural drawing reviews.
ABS will continue to provide classification services and issue class  certifications to new construction Navy ships operated by the Military  Sealift Command.
Beginning in 2008, Naval Sea Systems Command’s Surface Warfare  directorate contracted with ABS to perform baseline structural  assessments of the condition of the surface combatant fleet when  ships are dry-docked for scheduled maintenance after several years  of operations. Under this arrangement, scheduled to continue  through fiscal year 2016, ABS is conducting marine inspections on  148 surface ships. Using the information obtained during these  inspections, ABS is developing models which identify areas of ships  where there is an increased risk of failure or corrosion, which allows  the Navy the ability to selectively target its maintenance activities.
More recently, in January 2013, the Navy issued a request for information  and is seeking input from industry to look into the feasibility of applying  commercial shipbuilding design and construction practices on its future  amphibious ships. Specifically, the Navy is seeking input from industry  regarding the feasibility of building an amphibious ship to ABS’s  commercial standards while still retaining warship capabilities. One  approach identified in the request notification is to use commercial  shipbuilding practices for as much of the ship as possible and apply  military standards only where necessary.
section_title: Conclusions
paragraphs: The Navy pays hundreds of millions and in many cases billions of dollars  for ships that warfighters rely on to perform as expected under stressing  conditions. Yet it routinely accepts ships with numerous uncorrected  deficiencies. Addressing these deficiencies after delivery can be costly,  time consuming, and disruptive.
In recent years, Navy leadership has increased its focus on reducing what  it considers to be the most serious deficiencies (“starred” deficiencies”) at  the time of ship delivery with some notable successes. However, the  continued practice of accepting ships with a substantial number of  deficiencies differs from the commercial practices we observed and can  be attributed to differing interpretations of what Navy policy requires.   Navy policy officials focus on provisions addressing delivery of the ship to  the Navy, while program officials focus on the provisions addressing the  much later point at which full financial responsibility for the ship is  transferred to the operating fleet. This suggests that clarification and  consistency in practice is needed. While it is understandable that there  may be instances where the Navy would accept delivery of a ship with  some level of uncorrected deficiencies, such actions should be the  exception rather than the practice. Further, waiting until after delivery to  correct known deficiencies can interfere with the activities that should be  taking place during this time—ship outfitting, crew training, additional  testing, and planned maintenance, as well as other class-wide upgrades.  This approach is a sharp contrast to that of commercial ship buyers, who  consider quality to be the focus and expect a ship that is defect-free (or  nearly so) at delivery.
Navy shipbuilding entails building some of the world’s most  technologically advanced ships in a limited competitive environment with  an industrial base that is generally reliant on the Navy to remain in  business—a landscape that is much different than commercial  shipbuilding. As such, any quality improvement effort must focus not only  on the realities of operating in such an environment, but also on ways to  incentivize the shipbuilder to produce a quality product. The Navy’s Back  to Basics quality improvement effort was directed at SUPSHIP and  resulted—albeit in conjunction with other factors—in several positive  actions that had an influence on improving quality. While the recent  deliveries of the first Joint High Speed Vessel and Mobile Landing  Platform represent marked improvements over previous lead ships,  continued emphasis on quality and maintaining the momentum created by  the Back to Basics initiative is warranted, given that other recently  delivered ships had numerous deficiencies.
While the Navy and leading commercial buyers agree that quality is the  responsibility of the shipbuilder, a key difference is that the Navy makes  use of cost-reimbursement and fixed-price-incentive type contracts, which  assign less cost risk to the shipbuilder for quality problems. Leading  commercial ship buyers have made a business decision that the risks to  quality belong with the shipbuilder, and that the premium paid to transfer  this risk is worth the cost of a firm-fixed-price contract. They also make  greater use of how payments are structured in the shipbuilding contract to  incentivize the builders to ensure timely correction of deficiencies. Even  under fixed-price-incentive type contracts, when appropriate, the Navy  could choose to structure certain payment provisions to incentivize  shipbuilder performance and to enhance contract requirements for  managing quality. For example, a standardized quality performance  standard, proposed by SUPSHIP, has not been incorporated in any  shipbuilding contract.
Commercial shipbuilders also attach considerable importance to having a  robust oversight process. A few SUPSHIP locations have begun to make  use of some oversight practices emphasized by commercial ship buyers,  such as using design drawings, and these practices may be applicable to  other locations as well. Further, although SUPSHIP quality inspectors  conduct some level of random inspections, the Navy has not defined the  role these inspections should play; and we found significant variation in  their use among SUPSHIP locations.
Commercial ship buyers also place responsibility for delivering a quality  ship on the site team. Responsibility for quality is more diffused in the  Navy. Program offices, NAVSEA, SUPSHIP, INSURV, and others all  have roles, and concerns about schedule, costs, or other strategic needs  may supersede the focus on quality. While SUPSHIP’s quality assurance  department is closest to the work being performed, the organization has  limited authority to make or exert influence on the shipbuilder and on  decisions made early in the contracting process that could have a direct  impact on quality. The Navy is formulating plans to establish a quality  team within the NAVSEA Logistics, Maintenance and Industrial  Operations Directorate that would promote, in some capacity, attention to  quality assurance, but the roles, responsibilities, and authorities of the  team are not yet defined. If the team is given sufficient authorities and  tasked with elevating SUPSHIP quality assurance concerns throughout  the acquisition process, this could present an opportunity to address  some of the issues we identified in our report and emphasize the  importance of quality when trade-off decisions affecting cost, schedule,  and quality are at hand.
section_title: Recommendations for Executive Action
paragraphs: To improve the construction quality of ships delivered to the Navy, we  recommend that the Secretary of the Defense direct the Secretary of the  Navy to take the following five actions:  1.  Ensure that, when established, the NAVSEA-level quality team  provides support and a direct link to directors of SUPSHIP quality  assurance departments and is tasked with raising concerns within  NAVSEA about issues affecting or potentially affecting quality  throughout the acquisition process.  2.  Clarify Navy policy (Navy Instruction 4700.8J) by clearly identifying at  what point(s) during the acquisition process contractor-responsible  deficiencies are to be fully corrected and ensure the policy is followed.  3.  Provide additional guidance on the quality requirements in  shipbuilding contracts, including the extent to which the SUPSHIP  Management Group’s Quality Performance Standard for Construction  of Naval Vessels should be incorporated.  4.  Provide additional guidance on use of payment withholds and  retentions as a means to incentivize the shipbuilding contractor to  promptly correct significant or persistent deficiencies and to deliver a  defect-free, or nearly defect free ship, to the Navy.  5.  Assess the benefits and determine whether the following practices, in  effect at some SUPSHIP locations, would be useful in detecting  quality problems across all locations: use of design drawings during SUPSHIP quality inspections, and increased focus on random and in-process inspections compared  to use of resources for other types of inspections and  observations.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOD for comment. In its response,  DOD concurred with two of our recommendations and partially concurred  with three. DOD’s written comments are reproduced in appendix X.
DOD concurred with our first recommendation, and said that it is  formulating plans to develop a quality team within the Logistics,  Maintenance and Industrial Operations Directorate (NAVSEA 04). This  team is envisioned to provide a direct link to SUPSHIP quality assurance  departments at the shipyards to enhance communication within NAVSEA  on quality related issues. The quality team would also serve as a  resource for identifying appropriate quality requirements in shipbuilding  contracts.
DOD partially concurred with our second recommendation, to clarify Navy  policy regarding acceptance of ships with quality defects. DOD said that it  will continue to strive to reduce the number of open deficiencies to zero at  the time the ship is delivered to the Navy. The Navy will monitor whether  the trend of fewer deficiencies continues to determine if future revisions to  the Navy policy instruction are needed. However, we believe the policy  needs to be clarified, given the lack of consensus about whether  contractor-responsible deficiencies are to be corrected before ships are  delivered to the Navy. As we note in the report, addressing deficiencies  post-delivery undermines the goal of constructing a defect-free or nearly  defect-free ship and can also interfere with testing and crew training.  Further, although trends have improved over time, recently delivered  ships still had a significant number of deficiencies.
DOD partially concurred with our third recommendation, to provide  guidance on quality requirements in contracts. The response cited  existing FAR requirements and NAVSEA’s Contract Administration  Quality Assurance Program. It also stated the planned quality team within  NAVSEA 04 will be a resource for consultation on appropriate contract  quality assurance provisions and that this, along with the progress in  reducing deficiencies, is sufficient. We believe that greater attention to  contractual quality provisions is needed. SUPSHIP quality assurance staff  stated that a primary reason for the development of the Quality  Performance Standard for Construction of Naval Vessels was to limit  inconsistencies found in shipbuilding contract quality requirements that  affected SUPSHIP’s ability to conduct effective quality oversight. As  discussed in the report, we observed considerable variance in the  specificity of contract quality provisions for different ship classes, and  SUPSHIP’s suggested quality performance standard has not been fully  incorporated in any shipbuilding contract. Therefore we continue to  believe that additional guidance on quality, including the extent to which  the quality performance standard should be incorporated, would be  beneficial for the Navy.
DOD concurred with our fourth recommendation, noting that, as part of its  ongoing Better Buying Power initiative, it plans to better align contractor  profitability with DOD goals through the use of contract incentives; actions  that will assist in improving quality in shipbuilding. DOD explained that as  part of this effort, the Office of the Secretary of Defense will revise and  reissue guidance on the use of incentives in defense acquisition  strategies. Its response noted that new tools, along with existing tools,  provide sufficient opportunity for program managers and contracting  officers to ensure the construction of quality ships for the Navy.
DOD also partially concurred with our fifth recommendation, to determine  whether using design drawings in SUPSHIP quality inspections and  increasing the focus on random and in-process inspections would be  beneficial. DOD stated that use of design drawings is essential and is  being used, but not necessarily by the same personnel that use checklists  and other tools for inspections. It also said that random and in-process  inspections are all necessary, but that the correct balance should be left  to individual ship programs. We found that SUPSHIP quality assurance  teams that have trained their staff to use design drawings—a commercial  best practice—report benefits from this approach. Also, our work on  commercial buyers’ quality assurance practices consistently identified  random, in-process oversight as a key tool in assuring that shipyards are  following their own construction quality processes. DOD’s response did  not identify any additional actions the Navy plans to take to address our  recommendation. We continue to believe that a SUPSHIP-wide  assessment of the potential benefits of these practices could yield quality  improvements.
DOD also provided technical comments that were incorporated as  appropriate. These comments included questions about the deficiency  data we reported for the T-AKE ship class. We reviewed individual  deficiency reports (trial cards) and compared results with program office  and shipbuilder reported data. We resolved anomalies and updated the  data on T-AKE presented in this report.
We also provided the Navy shipbuilding contractors, commercial ship  buyers, international shipbuilders, and classification societies we met with  relevant excerpts of the report and incorporated their technical comments  as appropriate.
We are sending copies of this report to the Secretary of Defense,  Secretary of the Navy, interested congressional committees, and other  interested parties. This report will also be available at no charge on  GAO’s 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 XI.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: To identify the extent to which newly constructed Navy ships had quality  problems and the actions that Navy has taken to improve quality, we  reviewed the Navy’s Board of Inspection and Survey reports for all Navy  ships delivered from 2006 through May 2013: including Arleigh Burke  class (DDG 51) destroyers, USS George H. W. Bush (CVN 77) aircraft  carrier, USNS Howard O. Lorenzen (T-AGM 25) missile range  instrumentation ship, Lewis and Clark-class (T-AKE) dry cargo and  ammunition ships, Littoral Combat Ship (LCS)—both the Independence  and Freedom variants, USS Makin Island (LHD 8) Wasp-class  amphibious assault ship, USNS Montford Point Mobile Landing Platform,  San Antonio-class (LPD 17) amphibious transport dock ships, USNS  Spearhead Joint High Speed Vessel, and Virginia-class submarines (SSN  774). Even though the lead LPD and SSN ships were built outside of the  last 8 years, we included these two vessels in our sample because the  rest of the class was built within the last 8 years. We also drew from our  prior work on these programs, Navy documents created to address  quality issues, and various other Navy reports, such as those from the  Navy’s Judge Advocate General.
To determine the number and type of deficiencies for each vessel, we  obtained data from the Navy’s Board of Inspection and Survey’s  (INSURV) Material Inspection data warehouse and the Navy’s Technical  Support Management (TSM) system. TSM is the primary database the  Navy’s Supervisor of Shipbuilding, Conversion and Repair uses to track  the status of new ship construction deficiencies. We analyzed these data  to determine the total number of open deficiencies (1) when the ship was  delivered to the Navy; (2) 120 days following ship delivery—the  approximate time when final outfitting is completed prior to the ship  leaving the shipyard; and (3) 1 year following ship delivery. Total  deficiencies include those identified during construction, builder’s trials,  and acceptance trials that were not closed by the milestones listed above.  Because TSM deficiency data is compiled on paper forms and manually  entered into the system, we considered as being closed at delivery those  deficiencies that were closed through 7 days following the date the ship  was delivered to the Navy (with the exception of the T-AKE ship class), as  stated on the Navy’s Naval Vessel Register. To the extent feasible, we  reviewed these data for completeness and for obvious inconsistency  errors and compared them with paper documents that also catalogue  these deficiencies. When we found obvious discrepancies while  conducting our analyses, we brought them to the attention of the Navy  Sea Systems Command and INSURV and worked with them to  understand, correct, or omit the discrepancies. The data we collected  represents the deficiencies at a particular moment in time. Further,  deficiencies may be subdivided into multiple deficiencies or consolidated  into a smaller number when the Navy and its shipbuilding contractors  determine whether the government or the shipbuilder is responsible for  correcting the respective deficiencies. For ships we reviewed, we  determined that TSM deficiency data were sufficiently reliable for the  purposes of this report with a few exceptions. These exceptions relate to  data for T-AKE class ships. TSM data did not cover T-AKE 1 through T- AKE 6. Data for T-AKE 12 had numerous data errors and is therefore not  reported on. For other T-AKE ships, we reviewed deficiency  documentation (trial cards) to resolve discrepancies between TSM and T- AKE program office data.
We catalogued several hull, mechanical, and electrical issues with each  ship class delivered in the last 8 years, in addition to the individual hulls  that were also delivered during this period. To create this list of illustrative  examples, we asked Navy officials familiar with each ship class to identify  problems that occurred during the construction of the vessels. We also  asked officials from INSURV to identify significant issues that affected  multiple hulls within each major class. We then identified several of the  issues to highlight that were illustrative of hull, mechanical, and electrical  problems. Given the uniqueness of the ships’ capabilities, we elected not  to catalog quality issues with weapon systems or other warfighting  systems. To supplement this analysis, we held discussions with or  requested information from a number of Navy officials involved in Navy  shipbuilding. These included the Supervisor of Shipbuilding, Conversion  and Repair (SUPSHIP), Bath, Maine; Groton, Connecticut; Gulf Coast,  Pascagoula, Mississippi; Newport News, Virginia; Bath Detachment, San  Diego, California; Bath Detachment, Marinette, Wisconsin; and Gulf  Coast Detachment, Mobile, Alabama. We also interviewed the Director of  the Board of Inspection and Survey and officials in the Naval Sea  Systems Command Management Group for SUPSHIP; Naval Sea  Systems Command Contracting Directorate; Naval Sea Systems  Command Engineering Directorate; Naval Sea Systems Command  Surface Warfare Directorate; Naval Sea Systems Command Nuclear  Propulsion; Program Executive Offices for Carriers; Program Executive  Office for Submarines, and the Littoral Combat Ship; representatives from  acquisition program offices including PMS 317 (LPD 17), PMS 377 (LHD  8 and LHA 6), PMS 385 (Joint High Speed Vessel and Mobile Landing  Platform), PMS 400 D (DDG 51), and, PMS 501 (LCS); Norfolk Ship  Support Activity—Regional Maintenance Center; Southwest Regional  Maintenance Center; Commander, Operational Test and Evaluation  Force; Military Sealift Command; Fleet Forces Command; and the  Defense Contract Management Agency.
We also visited eight U.S. Navy contractor shipyards that build some of  the larger Navy vessels and met with representatives from the contractor  that owns each shipyard, including Austal USA in Mobile, Alabama;  General Dynamics Electric Boat Corporation in Groton, Connecticut and  Quonset Point, Rhode Island; General Dynamics NASSCO in San Diego,  California, and General Dynamics Bath Iron Works in Bath, Maine;  Huntington Ingalls Industries Ingalls Shipbuilding in Pascagoula,  Mississippi and Huntington Ingalls Industries Newport News Shipbuilding  in Newport News, Virginia; Marinette Marine Corporation in Marinette,  Wisconsin; and, V.T. Halter Marine at its shipyard in Pascagoula,  Mississippi. In addition, we observed the underway portion of the  acceptance trial for T-AKE 13 in San Diego, California.
Lastly, we reviewed the Navy’s efforts to improve ship quality by  reviewing key memos and documents outlining the Back to Basics  program and meeting with the officials responsible for implementing these  efforts—most of whom were in the Navy’s Supervisor of Shipbuilding,  Conversion and Repair commands. We also reviewed selected parts of  11 fixed-priced-incentive and firm-fixed priced Navy shipbuilding  contracts, such as clauses pertaining to quality requirements and ship  delivery, for San Antonio class (LPD 17) amphibious transport dock ships  (one contract); America class (LHA 6 and LHA 7) amphibious assault ship  (two contracts); Arleigh Burke class (DDG 51) destroyer (one contract);  Joint High Speed Vessel (one contract); Littoral Combat Ship (LCS)— Freedom and Independence variants (two contracts); Lewis and Clark  class (T-AKE) dry cargo and ammunition ship (one contract); USNS  Howard O. Lorenzen (T-AGM 25) missile instrumentation ship (one  contract) ; USS Makin Island (LHD 8) amphibious assault ship (one  contract); and the Mobile Landing Platform (one contract).
To assess key practices used by commercial ship buyers and  shipbuilders, we interviewed and met with leading commercial companies  from the cruise, oil and gas, and commercial shipping industries, including  Carnival Corporation; Chevron Corporation; Ensco plc; ExxonMobil; A.P.  Moller-Maersk A/S; Noble Corporation; Norwegian Cruise Lines; Royal  Caribbean Cruises, Ltd.; and Seadrill, Ltd. We identified leading  companies by analyzing such indicators as annual sales, number of  vessels owned and procured, and total market share. Our methodology  drew from our previous shipbuilding best practices work that identified the  commercial shipbuilding industries that support cruise, oil and gas, and  commercial shipping sectors as being most similar to Navy shipbuilding.  Cruise ships are more costly and complex than other types of commercial  ships, densely packed, and require significant outfitting, making them  somewhat similar to military ships. Additionally, cruise ship buyers often  include innovations or design changes in their ships and start new  classes of ships regularly in order to maximize passenger satisfaction;  approaches that allowed us to examine quality oversight practices on  recent lead ship programs and the outcomes of specific commercial  practices. The cruise line companies we met with are leaders in their  industry as identified in our previous work and based on operating  revenue or fleet size. We met with ship buyers from the oil and gas  industry because drill ships, floating production storage and offloading  (FPSO) vessels and offshore oil platforms are complex, dense structures.  Furthermore, FPSOs, essentially floating refineries, are often one of a  kind, costing well over $1 billion. The oil and gas companies we met with  are leaders in their industry as identified in our previous work as well as  our assessment of top operators of drilling vessels. Similarly, we met with  Maersk Line Limited and Maersk Drilling, two business units within A.P.  Moller-Maersk A/S, because the company was identified as an industry  leader in our prior work and remains one of the largest shipping  companies in the world. For example, Maersk Line Limited acquires many  ships: in 2012 the company took delivery of 19 new ships. For each  commercial ship buyer, we requested deficiency data on one or more new  construction ships they had acquired. With the exception of one FPSO, all  of these ships were delivered to the buyer in 2012 or 2013. We assessed  the reliability of this data by obtaining information on the systems that  stored the data and interviewing ship buyer and shipbuilder  representatives knowledgeable about the data. We determined that the  data were sufficiently reliable for the purposes of this report. We also  identified common processes and tools used by these ship buyers and  shipbuilders to ensure the expected level of quality.
To determine the extent to which Navy quality assurance processes use  common commercial practices, we reviewed data and information  obtained from the Navy and its shipbuilding contractors, as well as from  the leading commercial ship buyers and shipbuilders. We also reviewed  relevant payment and retention clauses for 11 fixed-priced Navy  shipbuilding contracts. During our meetings with SUPSHIP and program,  engineering, and contracting officials from the Naval Sea Systems  Command directorates, we inquired about the Navy’s quality assurance  practices. During site visits to eight U.S. private shipyards that build Navy  ships, we discussed with shipyard representatives their quality assurance  processes and the steps taken to ensure their ships meet the Navy’s  quality expectations. During our site visits, we collected documentation  related to the shipyard’s quality assurance activities, including quality  policies, plans, and procedures, and we also observed quality assurance  inspection activities when possible.
We also met with officials from international commercial shipyards that  are responsible for building a variety of complex ships, including Meyer  Werft (Germany) and STX Finland (Finland), which both build cruise  ships; and Hyundai Heavy Industries and Daewoo Shipbuilding and  Marine Engineering (South Korea), which build commercial ships,  including containerships, liquefied natural gas carriers, drill ships, FPSOs,  and oil tankers. We identified these shipbuilders as producers of high- quality vessels through a combination of our previous work and  recommendations from shipbuilding experts and the ship buyers that  participated in our review. At the shipyards, we met with ship buyers’  representatives who were responsible for overseeing the construction of  the ships and monitoring the construction schedule. Where possible, we  observed quality assurance activities at commercial shipbuilders or  viewed systems related to ensuring quality, such as quality database  systems. We collected documentation of quality assurance activities,  such as quality policies and inspection plans, where available. We met  with representatives from three classification societies, including the  American Bureau of Shipping (ABS), Det Norske Veritas, and Lloyd’s  Register regarding their roles in commercial ship construction. We also  met with representatives from Aker Shipyard in Philadelphia,  Pennsylvania, to discuss how a U.S. shipbuilder that solely builds  commercial vessels approaches quality assurance.
To better understand the role of classification societies in Navy and  commercial shipbuilding, we met with engineering and marine surveying  representatives from ABS to obtain an overview of how they conduct their  work. We held discussions on the role of classification in Navy  shipbuilding with Navy shipbuilding contractors, including Austal USA,  Mobile, Alabama; General Dynamics Bath Iron Works, Bath, Maine;  General Dynamics NASSCO, San Diego, California; Marinette Marine  Corporation, Marinette, Wisconsin; and V.T. Halter Marine, Pascagoula,  Mississippi. To learn the extent to which the Navy’s approach to new ship  construction oversight is similar to or different than the marine surveying  services provided by ABS during construction of Navy ships, we met with  officials from SUPSHIP locations at Bath, Maine; Bath Detachment, San  Diego, California; Bath Detachment, Marinette, Wisconsin; Gulf Coast,  Pascagoula, Mississippi; and Mobile, Alabama. We also held discussions  on this matter with officials from the Naval Sea Systems Command  SUPSHIP Management Group; Military Sealift Command; Naval Sea  Systems Command Engineering Directorate; Naval Sea Systems  Command Surface Warfare Directorate; Program Executive Office Littoral  Combat Ship; and representatives from acquisition program offices  including PMS 385 (Joint High Speed Vessel and Mobile Landing  Platform). We reviewed the classification rule set developed by the Navy  and ABS (the Naval Vessel Rules), as well as other classification rule  sets pertaining to Navy and or commercial vessels, such as High-Speed  Naval Craft rules and the Steel Vessel rules. In addition, we reviewed the  findings and observations of ABS’s marine surveyors for the Littoral  Combat Ship which is being built in accordance with the Naval Vessel  Rules, as well as the Joint High Speed Vessel, which is built in  accordance with ABS’s Naval High Speed Naval Craft Guide. We also  spoke with representatives from other classification societies, including  Det Norske Veritas and Lloyd’s Register, to discuss their approach to  classification of commercial and navy vessels. When meeting with  commercial ship buyers and shipbuilders, we also discussed the ship  classification process and the role of classification societies in  shipbuilding.
We conducted this performance audit from March 2012 to November  2013 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: Stages of Shipbuilding
paragraphs: There are four primary phases in shipbuilding: pre-contracting, contract  award, design and planning, and construction, with each phase building  upon the work completed in earlier stages. Within each phase, a number  of key events have an influence on the overall quality of the ship. In  addition, within Navy shipbuilding, additional key activities take place  following ship delivery. Table 2 describes some of the more significant  events occurring throughout the shipbuilding process.
section_title: Appendix III: Lewis and Clark Dry Cargo and Ammunition Ship Class (T-AKE)
paragraphs: Appendix III: Lewis and Clark Dry Cargo and  Ammunition Ship Class (T-AKE)
The Lewis and Clark class of dry cargo and ammunition ships (T-AKE 1)  consists of 14 ships which have been delivered to the Navy. The first ship  was delivered in 2006 and the final ship was delivered in 2012.
We analyzed data provided by the Supervisor of Shipbuilding,  Conversion, and Repair (SUPSHIP) to determine the number of open  deficiencies at delivery, 120 days after delivery, and one year after  delivery. Our analysis of the available data found that recently delivered  T-AKEs had noticeably fewer open deficiencies at delivery compared to  other ship classes. Unlike other classes in our review, the Navy was  responsible for the majority of these deficiencies.
section_title: Appendix IV: San Antonio Amphibious Transport Dock Ship Class (LPD 17)
paragraphs: Appendix IV: San Antonio Amphibious  Transport Dock Ship Class (LPD 17)
The San Antonio class of amphibious transport docks (LPD 17) consists  of eight ships which have been delivered to the Navy. The first ship was  delivered in 2005. As of September 2013, the Navy has three ships under  construction. The San Antonio class has generally seen a decline in the  number of open deficiencies at delivery, yet each ship still has a large  number of open deficiencies.
We analyzed data provided by the Supervisor of Shipbuilding,  Conversion, and Repair (SUPSHIP) to determine the number of open  deficiencies at delivery, 120 days after delivery, and one year after  delivery. Our analysis found that recently delivered ships had thousands  of open deficiencies, ranging from 1,403 on LPD 23 to 6,325 on LPD 21.  The majority of the deficiencies open at delivery were the responsibility of  the contractor with the exception of LPD 23 where only 40 percent of the  open deficiencies were the contractor’s responsibility. The data below  indicates that many of these deficiencies are being closed after the ships  are delivered to the Navy and are being outfitted.
section_title: Appendix V: Littoral Combat Ship (LCS) Class
paragraphs: The Littoral Combat Ship (LCS) class consists of 3 ships which had been  delivered to the Navy at the time of our review. The first hull was  delivered in 2008. Currently, the Navy has seven ships under construction  and has received funding to construct six ships. The Navy has an  additional eight ships under contract which are not yet funded. The LCS  class consists of two different seaframe designs, the LCS 1 design  (Freedom variant) and the LCS 2 design (Independence variant).
We analyzed data provided by the Supervisor of Shipbuilding,  Conversion, and Repair (SUPSHIP) to determine the number of open  deficiencies at delivery, 120 days after delivery, and one year after  delivery. Our analysis found that both designs of the LCS class were  delivered with a large number of open deficiencies at delivery. The  majority of these deficiencies were the responsibility of the contractor.  Our analysis found that over half of these deficiencies were closed after  the ships were delivered to the Navy and were being outfitted.
section_title: Appendix VI: Arleigh Burke Guided Missile Destroyer Ship Class (DDG 51)
paragraphs: Appendix VI: Arleigh Burke Guided Missile  Destroyer Ship Class (DDG 51)
The Arleigh Burke class of guided missile destroyers (DDG 51) consists  of 62 ships which had been delivered to the Navy at the time of our  review. The first ship was delivered in 1991. Currently, the Navy has  received funding to construct an additional four ships. Despite being a  well established program, the Arleigh Burke class continues to have a  large number of open deficiencies at various points in time.
We analyzed data provided by the Supervisor of Shipbuilding,  Conversion, and Repair (SUPSHIP) to determine the number of open  deficiencies at delivery, 120 days after delivery, and one year after  delivery. Our analysis found that recently delivered ships had a large  number of open deficiencies, ranging from a low of 333 open deficiencies  on DDG 110 to a high of 4,385 open deficiencies on DDG 109. The  majority of the deficiencies open at delivery were the responsibility of the  contractor. The data below indicates that many of these deficiencies were  being closed after the ships had been delivered to the Navy and were  being outfitted.
section_title: Appendix VII: Selected Quality Issues in Navy Ship Classes
section_title: Appendix VIII: Characteristics of Select Commercial Ships and Offshore Structures
paragraphs: Each of the ship buyers we met with acquires large, expensive, and  technologically advanced vessels. Below are illustrative examples of  ships and offshore structures acquired by the firms we met with, and  some of the key characteristics associated with each of the respective  vessels.
section_title: Appendix IX: Navy Shipbuilding Contract Types
paragraphs: In Navy shipbuilding, the type of contract used can significantly influence  the final cost of the ship. Table 8 below illustrates the basic differences  between fixed-price and cost-reimbursement contracts and how each  contract type can incentivize quality.
section_title: Appendix X: Comments from the Department of Defense
section_title: Appendix XI: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: Michele Mackin, (202) 512-4841 or mackinm@gao.gov.
section_title: Staff Acknowledgments
paragraphs: In addition to the contact above, Karen Zuckerstein, Assistant Director;  Diana Moldafsky, Assistant Director; Christopher E. Kunitz; Peter W.  Anderson; Ana I. Aviles; Mariana Calderon; Celina F. Davidson; Laurier  R. Fish; Kristine Hassinger; Jean L. McSween; Jungjin Park, Roxanna T.  Sun; Jeff M. Tessin; and Alyssa B. Weir made key contributions to this  report.