Coast Guard Acquisitions: Lessons Learned to Inform Coast Guard and NOAA Shipbuilding Efforts
Released: 2018-10-11T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: Both the Coast Guard—a component of the Department of Homeland Security (DHS)—and the Department of Commerce's National Oceanic and Atmospheric Administration (NOAA) are investing significant resources to recapitalize their aging fleets of ships. Ensuring that the Coast Guard and NOAA maintain their ships and address potential capability gaps is vital for protecting national security and scientific interests.

This statement summarizes lessons that GAO has identified from its prior reviews of Coast Guard and Navy acquisitions, which can be applied to the Coast Guard's and NOAA's shipbuilding efforts. Specifically, this testimony provides information on, among other things, (1) long-term strategic planning for acquisitions, (2) the need for a sound business case, and (3) the leveraging of the Navy's acquisition resources and shipbuilding expertise. In its prior work, GAO reviewed Coast Guard and Navy programs and interviewed officials. For this testimony, GAO obtained publicly available information on NOAA's ship acquisition efforts.

section_title: What GAO Found
paragraphs: GAO has found that acquisition programs can benefit from long-term strategic planning that identifies how tradeoff decisions would affect the future of the acquisition portfolio. In July 2018, GAO found the Coast Guard continues to manage its acquisitions through its annual budget process and the 5-year Capital Investment Plan. As a result of this planning process, the Coast Guard has continued to defer planned acquisitions to future years and left a number of operational capability gaps unaddressed. Incorporating the use of a long-term strategic plan and additional tradeoff discussion into the Capital Investment Plan could lead to more informed choices before irreversible commitments are made.

GAO's prior work has also found that acquisition programs should start with solid business cases before setting program baselines and committing resources. At the heart of a business case is a knowledge-based approach—successful shipbuilding programs build on attaining critical levels of knowledge at key points in the shipbuilding process before significant investments are made (see figure).

In September 2018, GAO found the Coast Guard did not have this type of sound business case when it established the program baselines for its polar icebreaker program in March 2018 due to risks in technology, design, cost, and schedule. For example, the Coast Guard's planned delivery dates were not informed by a realistic assessment of shipbuilding activities, but rather were primarily driven by the potential gap in icebreaking capabilities once the Coast Guard's only operating heavy polar icebreaker reaches the end of its service life.

Agencies have partnered with the Navy to take advantage of its resources and shipbuilding expertise, including the Coast Guard when acquiring the polar icebreakers. For example, in September 2018, GAO found that the Coast Guard and the Navy had established an integrated program office and a ship design team. These teams provided input to Navy cost estimators, who developed the polar icebreaker program's cost estimate.

section_title: What GAO Recommends
paragraphs: GAO has previously recommended that the Coast Guard develop a 20-year fleet modernization plan, reflect acquisition trade-off decisions in its annual Capital Investment Plans, and address risks to establish a sound business case for its polar icebreakers acquisition. DHS concurred with these recommendations and is taking steps to implement them.

section_title: Letter
paragraphs: I am pleased to be here today to discuss key lessons and insights we  have identified from our prior work in Coast Guard and Navy acquisitions  that may be useful in informing the Coast Guard’s and the National  Oceanic and Atmospheric Administration’s (NOAA) current efforts to  recapitalize their aging fleets of ships. The Coast Guard’s multi-billion  dollar ship acquisition portfolio includes the National Security Cutters,  Offshore Patrol Cutters, Fast Response Cutters, and heavy polar  icebreakers, which collectively perform critical missions such as search  and rescue, law enforcement, and icebreaking. NOAA’s research and  survey ships comprise the largest fleet of federal research ships in the  United States. Ensuring that the Coast Guard and NOAA maintain their  ship fleets and address potential capability gaps is vital for protecting  national security and scientific interests.

My statement today provides information on: (1) long-term strategic  planning for acquisitions (2) the need for a sound business case when  acquiring new ships (3) leveraging of the Navy’s acquisition expertise and  resources and (4) considerations when selecting contracting  mechanisms. This statement is based on our extensive body of work  examining the Coast Guard’s and Navy’s acquisition efforts, including our  September 2018 report on the Coast Guard’s polar icebreaker acquisition  and July 2018 report on Coast Guard recapitalization. For the reports  cited in this statement, among other methodologies, we analyzed Coast  Guard and Navy guidance, data, and documentation, and interviewed  Coast Guard and Navy officials. Detailed information on our scope and  methodology can be found in the reports cited in this statement. In  addition to our prior work, for this statement we obtained publicly  available information from NOAA regarding its ship acquisition and  recapitalization efforts; we did not assess its efforts.

We conducted the work on which this statement is based 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 the evidence obtained provides  a reasonable basis for our findings and conclusions based on our audit  objectives.
subsections: section_title: Long-Term Strategic Planning in Acquisitions Enables Better Tradeoff Decisions
paragraphs: Key elements of strategic planning include establishing long-term goals  and strategies for how those goals are to be achieved. Specifically for  managing Coast Guard acquisitions, we have noted that a long-term plan  that includes acquisition implications would enable tradeoffs to be  addressed in advance, which leads to better informed choices and makes  debate possible before irreversible commitments are made to individual  programs. Without this type of plan, decision makers do not have the  information they need to better understand and address an agency’s  long-term outlook. Similarly, according to the Office of Management and  Budget’s capital planning guidance referenced by the Coast Guard’s  Major Systems Acquisition Manual, each agency is encouraged to have a  plan that justifies its long-term capital asset decisions. This plan should  include, among other things, (1) an analysis of the portfolio of assets  already owned by the agency and in procurement, (2) the performance  gap and capability necessary to bridge the old and new assets, and (3)  justification for new acquisitions proposed for funding.

In June 2014, we found that the Coast Guard—a component within the  Department of Homeland Security (DHS)—did not have a long-term fleet  modernization plan that identified all acquisitions needed to meet mission  needs over the next two decades within available resources. Without  such a plan, the Coast Guard repeatedly delayed and reduced its  capabilities through its annual budget process and did not know the  extent to which it could meet mission needs and achieve desired results.  We recommended that the Coast Guard develop a 20-year fleet  modernization plan that identifies all acquisitions needed to maintain the  current level of service and the fiscal resources necessary to build the  identified assets. DHS agreed with our recommendation but it has not yet  approved a 20-year plan.

Further, in July 2018, we found the Coast Guard continues to manage its  acquisitions through its annual budget process and the 5-year Capital  Investment Plan, which is congressionally mandated and submitted to  Congress annually. Coast Guard officials told us the Capital Investment  Plan reflects the highest priorities of the department and that trade-off  decisions are made as part of the annual budget process. However, the  effects of these trade-off decisions, such as which acquisitions would take  on more risk so others can be prioritized and adequately funded, are not  communicated in the Capital Investment Plan to key decision makers.  Over the years, this approach has left the Coast Guard with a bow wave  of near-term unfunded acquisitions, negatively affecting recapitalization  efforts, and limiting the effectiveness of long-term planning. As a result of  this planning process, the Coast Guard has continued to defer planned  acquisitions to future years and left a number of operational capability  gaps unaddressed that could affect future operations. We recommended  that the annual Capital Investment Plans reflect acquisition trade-off  decisions and their effects. DHS concurred with this recommendation and  plans to include additional information in future Capital Investment Plans  to address how trade-off decisions could affect other major acquisition  programs. According to Coast Guard officials, the Coast Guard plans to  implement this recommendation by March 2020.

Examples of other fleet modernization plans include the Navy’s annual  naval vessel construction plan (also known as the Navy’s long range  shipbuilding plan), which reflects the quantity and categories of assets  that the Navy needs to buy as well as the total number of assets in  operation for each year. While we found in March 2006 that the Navy faced challenges associated with its long range shipbuilding plan, we also  observed that such a plan is beneficial in that it lays out a strategic  approach for decision making. In October 2016, NOAA—which is within  the Department of Commerce—approved a fleet plan that is intended to  identify an integrated strategy for long-term recapitalization, including  acquisition of up to eight new ships. In March 2017, NOAA indicated that  long-term recapitalization of the NOAA fleet requires an annual, stable  funding profile on the order of its fiscal year 2016 appropriations—about  $80 million. NOAA noted that it will continue to proceed on schedule, as  laid out in its fleet plan, or make adjustments based on available funding.

section_title: Successful Acquisition Programs Begin with Sound Business Cases
paragraphs: Our prior work has repeatedly found that successful acquisition programs  start with solid, executable business cases before setting program  baselines and committing resources. A sound business case requires  balance between the concept selected to satisfy operator requirements  and the resources—design knowledge, technologies, funding, and time— needed to transform the concept into a product, such as a ship. At the  heart of a business case is a knowledge-based approach—we have  found that successful shipbuilding programs build on attaining critical  levels of knowledge at key points in the shipbuilding process before  significant investments are made (see figure 1).

We have previously found that key enablers of a good business case  include firm, feasible requirements; plans for a stable design; mature  technologies; reliable cost estimates; and realistic schedule targets.  Without a sound business case, acquisition programs are at risk of  experiencing cost growth, schedule delays, and reduced capabilities.

In September 2018, we found the Coast Guard did not have this type of  sound business case when it established the cost, schedule, and  performance baselines for its polar icebreaker program in March 2018.  This was primarily due to risks in four key areas:

Technology. The Coast Guard intends to use proven technologies for  the program, but did not conduct a technology readiness assessment  to determine the maturity of key technologies—which include the  integrated power plant and azimuthing propulsors— prior to setting  baselines. As a result, the Coast Guard does not have full insight  into whether these technologies, which we believe are critical  technologies and merit such an assessment, are mature. Without a  technology readiness assessment, the Coast Guard is potentially  underrepresenting technical risk and increasing design risk.

Cost. The cost estimate that informed the program’s $9.8 billion cost  baseline—which includes lifecycle costs for the acquisition,  operations, and maintenance of three polar icebreakers—substantially  met our best practices for being comprehensive, well-documented,  and accurate, but only partially met best practices for being credible.  The cost estimate did not quantify the range of possible costs over the  entire life of the program, such as the period of operations and  support. As a result, the cost estimate was not fully reliable and may  underestimate the total funding needed for the program.

Schedule. The Coast Guard’s planned delivery dates of 2023, 2025,  and 2026 for the three ships were not informed by a realistic  assessment of shipbuilding activities, but rather were primarily driven  by the potential gap in icebreaking capabilities once the Coast  Guard’s only operating heavy polar icebreaker—the Polar Star— reaches the end of its service life (see figure 2).

The Polar Star’s service life is estimated to end between fiscal years 2020  and 2023. This creates a potential heavy polar icebreaker capability gap  of about 3 years, if the Polar Star’s service life were to end in 2020 and  the lead polar icebreaker were to be delivered by the end of fiscal year  2023 as planned. If the lead ship is delivered later than planned in this  scenario, the potential gap could be more than 3 years. The Coast Guard  is planning to recapitalize the Polar Star’s key systems starting in 2020 to  extend the service life of the ship until the planned delivery of the second  polar icebreaker (see figure 3).

Further, our analysis of selected lead ships for other shipbuilding  programs found the icebreaker program’s estimated construction time  of 3 years is optimistic. An unrealistic schedule puts the Coast Guard  is at risk of not delivering the icebreakers when promised and the  potential gap in icebreaking capabilities could widen.

Design. The Coast Guard set program baselines before conducting a  preliminary design review—a systems engineering event that is  intended to verify that the contractor’s design meets the requirement  of the ship specifications and is producible—which puts the program  at risk of having an unstable design, thereby increasing the program’s  cost and schedule risks. Although the Coast Guard set the program  baselines prior to gaining knowledge on the feasibility of the selected  shipbuilder’s design, it has expressed a commitment to having a  stable design prior to the start of lead ship construction. This is  consistent with shipbuilding best practices we identified in 2009.

To address these four areas and other risks, we made six  recommendations to DHS, Coast Guard, and the Navy in our September  2018 report. DHS concurred with all six recommendations and identified  actions it planned to take to address them.

In its October 2016 fleet plan, NOAA indicated the need to construct up to  eight new ships by 2028 to maintain its capabilities for at-sea  requirements. Ensuring a sound business case for each acquisition will  be important as NOAA moves forward.

section_title: Leveraging Navy’s Shipbuilding Experience May Create Efficiencies
paragraphs: Given the Navy’s experience in shipbuilding, agencies have partnered  with the Navy to take advantage of its expertise. For example, in April and  September 2018, we found examples of how the Coast Guard had  leveraged the Navy’s resources and acquisition approaches when  acquiring the polar icebreakers, including:

Establishing an integrated program office and potentially using  funding from both organizations. In 2016, in response to a  congressional report, the Navy and the Coast Guard established an  integrated program office to acquire the icebreakers for Coast Guard  operations. This relationship was officially memorialized through three  memorandums in 2017.

Given potential plans to fund the polar icebreaker program with both  Navy and Coast Guard appropriations, the Navy and the Coast Guard  had a memorandum of agreement with a budgeting and financial  management appendix. In September 2018, however, we found that  the Coast Guard and the Navy interpreted the meaning of “cost  overruns” differently in the context of their agreement. We also  found that the agreement itself did not address how the Coast Guard  and the Navy plan to handle any cost growth stemming from changes  to the scope, terms, and conditions of the detail design and  construction contract. We recommended that the Coast Guard, in  collaboration with the Navy, revise the agreement to clarify and  document how cost growth in the polar icebreaker program, including  changes in scope, will be addressed between the two organizations.  The Coast Guard concurred with this recommendation and plans to  update the agreement by March 2019.

Establishing an integrated ship design team. The ship design team  includes Coast Guard and Navy technical experts who develop ship  specifications based on the polar icebreaker program’s operational  requirements document. The ship design team is under the  supervision of a Coast Guard ship design manager, who provides all  technical oversight for development of the polar icebreaker’s design.

Leveraging Navy cost estimating and contracting functions. With  input from the integrated program office and ship design team, Navy  cost estimators developed the polar icebreaker program’s cost  estimate, which informed the program’s cost baselines and  affordability constraints. In addition, the Navy plans to award the polar  icebreaker’s detail design and construction contract under the Navy’s  contracting authority and use a tailored DHS acquisition process.

Supplementing the DHS acquisition process with the Navy’s gate  review process. Coast Guard and Navy agreed to manage the polar  icebreaker program using a tailored acquisition approach that  supplements DHS acquisition decision event reviews with additional  “gate” reviews that were adopted from Navy’s acquisition processes.  The gate reviews allow both Coast Guard and Navy leadership to  review and approve key documents before proceeding to the  acquisition decision events. Each acquisition decision event is also  overseen by acquisition oversight board with members from both the  Coast Guard and the Navy (see figure 4).

By collaborating with the Navy, the Coast Guard is leveraging the Navy’s  experience in ship design, cost estimating, contracting, and other  shipbuilding processes. This partnership may allow the Coast Guard to  more efficiently manage the polar icebreaker program.

In March 2017, NOAA indicated that it had partnered with the Navy  through an interagency agreement to leverage the Navy’s acquisition  expertise for Auxiliary General Purpose Oceanographic Research  Vessels, which will be the basis for a new class of NOAA ships. In April  2018, the Navy released the request for proposal for the preliminary  contract design of this new class of ships.

section_title: Estimated Savings and Requirements Stability Should be Considered When Selecting Contracting Mechanisms
paragraphs: When acquiring multiple quantities of a product, agencies generally have  several options for contracting mechanisms. Annual contracting, which  can be considered the typical method, refers to awarding a contract for  one year’s worth of requirements. Annual contracting allows for the use of  options for subsequent requirements. Options give the agency the  unilateral right to purchase additional supplies or services called for by  the contract, or to extend the term of the contract. Besides annual  contracting with options, agencies may also be able to choose among  other contracting mechanisms—multiyear contracting and “block buy”  contracting, which are discussed in more detail below.
subsections: section_title: Multiyear Contracting Requirements and Considerations
paragraphs: Multiyear contracting allows agencies to acquire known requirements for  up to 5 years under a single contract award, even though the total funds  ultimately to be obligated may not be available at the time of contract  award. Before DOD and Coast Guard can enter into a multiyear contract,  certain criteria must be met. Table 1 provides some of the multiyear  contracting requirements for DOD and the Coast Guard.

Multiyear contracts are expected to achieve lower unit costs compared to  annual contracts through one or more of the following sources: (1)  purchase of parts and materials in economic order quantities, (2)  improved production processes and efficiencies, (3) better utilized  industrial facilities, (4) limited engineering changes due to design stability  during the multiyear period, and (5) cost avoidance by reducing the  burden of placing and administering annual contracts. Multiyear  procurement also offers opportunities to enhance the industrial base by  providing contractors a longer and more stable time horizon for planning  and investing in production and by attracting subcontractors, vendors,  and suppliers. However, multiyear procurement entails certain risks that  must be balanced against the potential benefits, such as the increased  costs to the government should the multiyear contract be changed or  canceled and decreased annual budget flexibility for the program and  across an agency’s portfolio of acquisitions.

In February 2008, we found that it is difficult to precisely determine the  impact of multiyear contracting on procurement costs. For example, for  three multiyear procurements (Air Force’s C-17A Globemaster transport,  the Navy’s F/A-18E/F Super Hornet fighter, and the Army’s Apache  Longbow helicopter), we identified unit cost growth ranging from 10 to 30  percent compared to original estimates, due to changes in labor and  material costs, requirements and funding, and other factors. In some  cases, actual costs for the multiyear procurement were higher than  original estimates for annual contracts. We noted that we could not  determine how cost growth affected the level of savings achieved, if any,  because we did not know how an alternative series of annual contracts  would have fared. Although programs using annual contracts also have  unit cost growth, it is arguably more problematic when using multiyear  contracting because of the up-front investments and the government’s  exposure to risk over multiple years.

section_title: Block Buy Contracting Considerations
paragraphs: Block buy contracting generally refers to special legislative authority that  agencies seek on an acquisition-by-acquisition basis to purchase more  than one year’s worth of requirements, such as purchasing supplies in  economic order quantities. Unlike multiyear contracting, block buy  contracting does not have permanent statutory criteria and, therefore, can  be used in different ways.

We have previously analyzed several cases where block buy contracts  were considered or used and have not found evidence of savings. For  example:  In September 2018, we found that for the polar icebreaker program,  the Navy gave offerors an opportunity to provide the estimated  savings that the government could achieve if it were to take a “block  buy” approach in purchasing the ships or purchasing supplies in  economic order quantities. The Navy told us that they did not  receive any formal responses from industry on potential savings from  block buys or economic order quantities.

In April 2017, we found that the Navy’s Littoral Combat Ship contracts’  block buy approach could affect Congress’s funding flexibility.  Specifically, the block buy contracts provided that a failure to fully fund  a purchase in a given year would make the contract subject to  renegotiation, which provides a disincentive to the Navy or Congress  to take any action that might disrupt the program because of the  potential for the government to have to pay more for ships.

In February 2005, we found that the Navy believed that a block-buy  contract contributed to increased material costs for the Virginia class  submarine. Under this block-buy contract, subcontracts for  submarine materials were for single ships spread over several years.  According to the Navy, this type of acquisition approach did not take  advantage of bulk-buy savings and incurred the risk that funding will  not be available in time to order the material when needed.

Based on our prior work, it is important for agencies to consider multiple  factors such as estimated savings, the stability of the requirements,  quantities required, and potential contract terms and conditions before  committing to a contracting mechanism approach.

In conclusion, as the Coast Guard and NOAA continue investing taxpayer  dollars to modernize their fleets, they could benefit from the lessons  learned from prior recapitalization and acquisition efforts. It is important  for agencies to develop strategic and comprehensive approaches for  managing their respective portfolios so that future requirements and  capability gaps can be addressed in a timely manner. For each  acquisition within their portfolios, agencies should ensure that they have  established a sound business case before committing significant  resources. Additionally, leveraging the Navy’s resources and expertise in  shipbuilding, such as by establishing integrated teams, could be  beneficial by helping agencies be more efficient. Finally, when it comes to  contracting mechanisms, factors such as estimated savings and program  risks should be assessed before committing to a particular approach.

Chairman Sullivan, Ranking Member Baldwin, and Members of the  Subcommittee, this concludes my prepared statement. I would be  pleased to respond to any questions.

section_title: GAO Contact and Staff Acknowledgments
paragraphs: If you or your staff have any questions about this statement, please  contact Marie A. Mak, (202) 512-4841 or makm@gao.gov. In addition,  contact points for our Offices of Congressional Relations and Public  Affairs may be found on the last page of this statement. Individuals who  made key contributions to this testimony include Rick Cederholm,  Assistant Director; Peter Anderson; Laurier Fish; Kurt Gurka; Claire Li;  and Roxanna Sun.

This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.

Fast facts: The Coast Guard and National Oceanic and Atmospheric Administration (NOAA) collectively spend billions of dollars to replace aging ships that conduct search and rescue, icebreaking, and research missions.

We testified on how lessons learned from our extensive work on ship acquisitions could be used to inform how the Coast Guard and NOAA buy ships. These include:

developing a long-term strategic plan

establishing a sound business case before committing resources

partnering with the Navy to use some of its shipbuilding resources and experience

estimating the costs and risks of different contracting approaches before committing to one

Question-summary annotations: questions: question: How can long-term strategic planning benefit acquisition programs?
answer: GAO has found that acquisition programs can benefit from long-term strategic planning that identifies how tradeoff decisions would affect the future of the acquisition portfolio.
child_questions: question: How does the Coast Guard manage its acquisitions?
answer: In July 2018, GAO found the Coast Guard continues to manage its acquisitions through its annual budget process and the 5-year Capital Investment Plan.
child_questions: question: How does this affect the Coast Guard's planned acquisitions?
answer: As a result of this planning process, the Coast Guard has continued to defer planned acquisitions to future years and left a number of operational capability gaps unaddressed.

question: How could additional planning help the Coast Guard implement their changes?
answer: Incorporating the use of a long-term strategic plan and additional tradeoff discussion into the Capital Investment Plan could lead to more informed choices before irreversible commitments are made.

questions: question: Why do agencies partner with the Navy?
answer: Agencies have partnered with the Navy to take advantage of its resources and shipbuilding expertise, including the Coast Guard when acquiring the polar icebreakers.
child_questions: question: What is the nature of the relationship between the Coast Guard and Navy?
answer: For example, in September 2018, GAO found that the Coast Guard and the Navy had established an integrated program office and a ship design team.
child_questions: question: How do these teams collaborate with the Navy?
answer: These teams provided input to Navy cost estimators, who developed the polar icebreaker program's cost estimate.

questions: question: What does this statement address?
answer: This statement summarizes lessons that GAO has identified from its prior reviews of Coast Guard and Navy acquisitions, which can be applied to the Coast Guard's and NOAA's shipbuilding efforts.
child_questions: question: What specific information does this testimony cover?
answer: Specifically, this testimony provides information on, among other things, (1) long-term strategic planning for acquisitions, (2) the need for a sound business case, and (3) the leveraging of the Navy's acquisition resources and shipbuilding expertise.

question: How did GAO collect information for its previous work?
answer: In its prior work, GAO reviewed Coast Guard and Navy programs and interviewed officials.
child_questions: question: How does this compare to how GAO collected information for this testimony?
answer: For this testimony, GAO obtained publicly available information on NOAA's ship acquisition efforts.