Coast Guard Cutter Procurement: Background and Issues for Congress
Released: 2019-05-22T00:00:00

Introduction

This report provides background information and potential oversight issues for Congress on the Coast Guard's programs for procuring 8 National Security Cutters (NSCs), 25 Offshore Patrol Cutters (OPCs), and 58 Fast Response Cutters (FRCs). The Coast Guard's proposed FY2020 budget requests a total of $657 million in procurement funding for the NSC, OPC, and FRC programs.

The issue for Congress is whether to approve, reject, or modify the Coast Guard's funding requests and acquisition strategies for the NSC, OPC, and FRC programs. Congress's decisions on these three programs could substantially affect Coast Guard capabilities and funding requirements, and the U.S. shipbuilding industrial base.

The NSC, OPC, and FRC programs have been subjects of congressional oversight for several years, and were previously covered in other CRS reports that are now archived. CRS testified on the Coast Guard's cutter acquisition programs most recently on November 29. The Coast Guard's plans for modernizing its fleet of polar icebreakers are covered in a separate CRS report.

Background

Older Ships to Be Replaced by NSCs, OPCs, and FRCs

The 91 planned NSCs, OPCs, and FRCs are intended to replace 90 older Coast Guard ships—12 high-endurance cutters (WHECs), 29 medium-endurance cutters (WMECs), and 49 110-foot patrol craft (WPBs). The Coast Guard's 12 Hamilton (WHEC-715) class high-endurance cutters entered service between 1967 and 1972. The Coast Guard's 29 medium-endurance cutters include 13 Famous (WMEC-901) class ships that entered service between 1983 and 1991, 14 Reliance (WMEC-615) class ships that entered service between 1964 and 1969, and 2 one-of-a-kind cutters that originally entered service with the Navy in 1944 and 1971 and were later transferred to the Coast Guard. The Coast Guard's 49 110-foot Island (WPB-1301) class patrol boats entered service between 1986 and 1992.

Many of these 90 ships are manpower-intensive and increasingly expensive to maintain, and have features that in some cases are not optimal for performing their assigned missions. Some of them have already been removed from Coast Guard service: eight of the Island-class patrol boats were removed from service in 2007 following an unsuccessful effort to modernize and lengthen them to 123 feet; additional Island-class patrol boats are being decommissioned as new FRCs enter service; the one-of-a-kind medium-endurance cutter that originally entered service with the Navy in 1944 was decommissioned in 2011; and Hamilton-class cutters are being decommissioned as new NSCs enter service. A July 2012 Government Accountability Office (GAO) report discusses the generally poor physical condition and declining operational capacity of the Coast Guard's older high-endurance cutters, medium-endurance cutters, and 110-foot patrol craft.

Missions of NSCs, OPCs, and FRCs

NSCs, OPCs, and FRCs, like the ships they are intended to replace, are to be multimission ships for routinely performing 7 of the Coast Guard's 11 statutory missions, including

search and rescue (SAR); drug interdiction; migrant interdiction; ports, waterways, and coastal security (PWCS); protection of living marine resources; other/general law enforcement; and defense readiness operations.

Smaller Coast Guard patrol craft and boats contribute to the performance of some of these seven missions close to shore. NSCs, OPCs, and FRCs perform them both close to shore and in the deepwater environment, which generally refers to waters more than 50 miles from shore.

NSC Program

National Security Cutters ( Figure 1 )—also known as Legend (WMSL-750) class cutters because they are being named for legendary Coast Guard personnel —are the Coast Guard's largest and most capable general-purpose cutters. They are larger and technologically more advanced than Hamilton-class cutters, and are built by Huntington Ingalls Industries' Ingalls Shipbuilding of Pascagoula, MS (HII/Ingalls).

The Coast Guard's acquisition program of record (POR)—the service's list, established in 2004, of planned procurement quantities for various new types of ships and aircraft—calls for procuring 8 NSCs as replacements for the service's 12 Hamilton-class high-endurance cutters. The Coast Guard's FY2019 budget submission estimated the total acquisition cost of a nine-ship NSC program at $6.030 billion, or an average of about $670 million per ship.

Although the Coast Guard's POR calls for procuring a total of 8 NSCs to replace the 12 Hamilton-class cutters, Congress through FY2018 has funded 11 NSCs, including the 10 th and 11 th in FY2018. The seventh was delivered to the Coast Guard on September 19, 2018, and the eighth was delivered on April 30, 2019. The ninth through 11th are under construction; the ninth is scheduled for delivery in 2021. The Coast Guard's proposed FY2020 budget requests $60 million in procurement funding for the NSC program; this request does not include funding for a 12 th NSC.

For additional information on the status and execution of the NSC program from a May 2018 GAO report, see Appendix C .

OPC Program

Offshore Patrol Cutters ( Figure 2 , Figure 3 , and Figure 4 )—also known as Heritage (WMSM-915) class cutters because they are being named for past cutters that played a significant role in the history of the Coast Guard and the Coast Guard's predecessor organizations —are to be somewhat smaller and less expensive than NSCs, and in some respects less capable than NSCs. In terms of full load displacement, OPCs are to be about 80% as large as NSCs. Coast Guard officials describe the OPC program as the service's top acquisition priority. OPCs are being built by Eastern Shipbuilding Group of Panama City, FL.

The Coast Guard's POR calls for procuring 25 OPCs as replacements for the service's 29 medium-endurance cutters. The Coast Guard's FY2019 budget submission estimated the total acquisition cost of the 25 ships at $10.523 billion, or an average of about $421 million per ship. The first OPC was funded in FY2018 and is to be delivered in 2021. The second OPC and long leadtime materials (LLTM) for the third were funded in FY2019. The Coast Guard's proposed FY2020 budget requests $457 million in procurement funding for the third OPC, LLTM for the fourth and fifth, and other program costs.

The Coast Guard's Request for Proposal (RFP) for the OPC program, released on September 25, 2012, established an affordability requirement for the program of an average unit price of $310 million per ship, or less, in then-year dollars (i.e., dollars that are not adjusted for inflation) for ships 4 through 9 in the program. This figure represents the shipbuilder's portion of the total cost of the ship; it does not include the cost of government-furnished equipment (GFE) on the ship, or other program costs—such as those for program management, system integration, and logistics—that contribute to the above-cited figure of $421 million per ship.

At least eight shipyards expressed interest in the OPC program. On February 11, 2014, the Coast Guard announced that it had awarded Preliminary and Contract Design (P&CD) contracts to three of those eight firms—Bollinger Shipyards of Lockport, LA; Eastern Shipbuilding Group of Panama City, FL; and General Dynamics' Bath Iron Works (GD/BIW) of Bath, ME. On September 15, 2016, the Coast Guard announced that it had awarded the detail design and construction (DD&C) contract to Eastern Shipbuilding. The contract covers detail design and production of up to 9 OPCs and has a potential value of $2.38 billion if all options are exercised.

For additional information on the status and execution of the OPC program from a May 2018 GAO report, see Appendix C .

FRC Program

Fast Response Cutters ( Figure 5 )—also called Sentinel (WPC-1101) class patrol boats because they are being named for enlisted leaders, trailblazers, and heroes of the Coast Guard and its predecessor services of the U.S. Revenue Cutter Service, U.S. Lifesaving Service, and U.S. Lighthouse Service —are considerably smaller and less expensive than OPCs, but are larger than the Coast Guard's older patrol boats. FRCs are built by Bollinger Shipyards of Lockport, LA.

The Coast Guard's POR calls for procuring 58 FRCs as replacements for the service's 49 Island-class patrol boats. The POR figure of 58 FRCs is for domestic operations. The Coast Guard, however, operates six Island-class patrol boats in the Persian Gulf area as elements of a Bahrain-based Coast Guard unit, called Patrol Forces Southwest Asia (PATFORSWA), which is the Coast Guard's largest unit outside the United States. Providing FRCs as one-for-one replacements for all six of the Island-class patrol boats in PATFORSWA would result in a combined POR+PATFORSWA figure of 64 FRCs.

The Coast Guard's FY2019 budget submission estimated the total acquisition cost of the 58 cutters at $3.748.1 billion, or an average of about $65 million per cutter. A total of 56 FRCs have been funded through FY2019, including six in FY2019. Four of the 56 (two of the FRCs funded in FY2018 and two of the FRC funded in FY2019) are to be used for replacing PATFORSWA cutters and consequently are not counted against the Coast Guard's 58-ship POR for the program. Excluding these four OPCs, a total of 52 FRCs for domestic operations have been funded through FY2019.

The 32nd FRC was commissioned into service on May 1, 2019. The Coast Guard's proposed FY2020 budget requests $140 million in acquisition funding for the procurement of two more FRCs for domestic operations.

For additional information on the status and execution of the FRC program from a May 2018 GAO report, see Appendix C .

Funding in FY2013-FY2020 Budget Submissions

Table 1 shows annual requested and programmed acquisition funding for the NSC, OPC, and FRC programs in the Coast Guard's FY2013-FY2020 budget submissions. Actual appropriated figures differ from these requested and projected amounts.

Issues for Congress

FY2020 Funding for a 12th NSC

One issue for Congress is whether to whether to provide funding in FY2020 for the procurement of a 12 th NSC. Funding long leadtime materials (LLTM) for a 12 th NSC in FY2020 could require tens of millions of dollars; fully funding the procurement of a 12 th NSC in FY2020 could require upwards of $700 million.

Supporters of providing funding for a 12 th NSC in FY2020 could argue that a total of 12 NSCs would provide one-for-one replacements for the 12 retiring Hamilton-class cutters; that Coast Guard analyses showing a need for no more than 9 NSCs assumed dual crewing of NSCs—something that has not worked as well as expected; and that the Coast Guard's POR record includes only about 61% as many new cutters as the Coast Guard has calculated would be required to fully perform the Coast Guard's anticipated missions in coming years (see " Planned NSC, OPC, and FRC Procurement Quantities " below, as well as Appendix A ).

Skeptics or opponents of providing funding for a 12 th NSC in FY2019 could argue that the Coast Guard's POR includes only 8 NSCs, that the Coast Guard's fleet mix analyses (see " Planned NSC, OPC, and FRC Procurement Quantities " below, as well as Appendix A ) have not shown a potential need for more than 9 NSCs, and that in a situation of finite Coast Guard budgets, providing funding for a 12 th NSC might require reducing funding for other FY2020 Coast Guard programs.

Whether to Procure Two FRCs or a Higher Number in FY2020

Another issue for Congress is whether to fund the procurement in FY2020 of two FRCs, as requested by the Coast Guard, or some higher number, such as four or six. Supporters of funding the procurement of a higher number could argue that FRCs in past years have been procured at annual rates of up to six per year; that procuring them at higher annual rates reduces their unit procurement costs due to improved production economies of scale; and that procuring four or six FRCs in FY2020 would accelerate the replacement of aging and less-capable Island-class patrol boats with new and more capable FRCs.

Opponents of procuring more than two FRCs in FY2020, while acknowledging these points, could argue that in a situation of finite Coast Guard funding, procuring more than two could require offsetting reductions in funding for other FY2020 Coast Guard programs, producing an uncertain net result on overall Coast Guard capabilities, and that replacing Island-class patrol boats, while desirable, is not so urgent a requirement that the procurement of FRCs needs to be accelerated beyond what the Coast Guard plans under its FY2020 budget submission.

Annual or Multiyear (Block Buy) Contracting for OPCs

Another issue for Congress is whether to acquire OPCs using annual contracting or multiyear contracting. The Coast Guard currently plans to use a contract with options for procuring the first nine OPCs. Although a contract with options may look like a form of multiyear contracting, it operates more like a series of annual contracts. Contracts with options do not achieve the reductions in acquisition costs that are possible with multiyear contracting. Using multiyear contracting involves accepting certain trade-offs.

One form of multiyear contracting, called block buy contracting, can be used at the start of a shipbuilding program, beginning with the first ship. (Indeed, this was a principal reason why block buy contracting was in effect invented in FY1998, as the contracting method for procuring the Navy's first four Virginia-class attack submarines.) Section 311 of the Frank LoBiondo Coast Guard Authorization Act of 2018 ( S. 140 / P.L. 115-282 of December 4, 2018) provides permanent authority for the Coast Guard to use block buy contracting with economic order quantity (EOQ) purchases (i.e., up-front batch purchases) of components in its major acquisition programs. The authority is now codified at 14 U.S.C. 1137.

CRS estimates that if the Coast Guard were to use block buy contracting with EOQ purchases of components for acquiring the first several OPCs, and either block buy contracting with EOQ purchases or another form of multiyear contracting known as multiyear procurement (MYP) with EOQ purchases for acquiring the remaining ships in the program, the savings on the total acquisition cost of the 25 OPCs (compared to costs under contracts with options) could amount to roughly $1 billion. CRS also estimates that acquiring the first nine ships in the OPC program under the current contract with options could forego roughly $350 million of the $1 billion in potential savings.

One potential option for the subcommittee would be to look into the possibility of having the Coast Guard either convert the current OPC contract at an early juncture into a block buy contract with EOQ authority, or, if conversion is not possible, replace the current contract at an early juncture with a block buy contract with EOQ authority. Replacing the current contract with a block buy contract might require recompeting the program, which would require effort on the Coast Guard's part and could create business risk for Eastern Shipbuilding Group, the shipbuilder that holds the current contract. On the other hand, the cost to the Coast Guard of recompeting the program would arguably be small relative to a potential additional savings of perhaps $300 million, and Eastern arguably would have a learning curve advantage in any new competition by virtue of its experience in building the first OPC.

Annual OPC Procurement Rate

The current procurement profile for the OPC, which reaches a maximum projected annual rate of two ships per year, would deliver OPCs many years after the end of the originally planned service lives of the medium-endurance cutters that they are to replace. Coast Guard officials have testified that the service plans to extend the service lives of the medium-endurance cutters until they are replaced by OPCs. There will be maintenance and repair expenses associated with extending the service lives of medium-endurance cutters, and if the Coast Guard does not also make investments to increase the capabilities of these ships, the ships may have less capability in certain regards than OPCs.

One possible option for addressing this situation would be to increase the maximum annual OPC procurement rate from the currently planned two ships per year to three or four ships per year. Doing this could result in the 25 th OPC being delivered about four years or six years sooner, respectively, than under the currently planned maximum rate. Increasing the OPC procurement rate to three or four ships per year would require a substantial increase to the Coast Guard's Procurement, Construction, and Improvements (PC&I) account, an issue discussed in Appendix B .

Increasing the maximum procurement rate for the OPC program could, depending on the exact approach taken, reduce OPC unit acquisition costs due to improved production economies of scale. Doubling the rate for producing a given OPC design to four ships per year, for example, could reduce unit procurement costs for that design by as much as 10%, which could result in hundreds of millions of dollars in additional savings in acquisition costs for the program. Increasing the maximum annual procurement rate could also create new opportunities for using competition in the OPC program. Notional alternative approaches for increasing the OPC procurement rate to three or four ships per year include but are not necessarily limited to the following:

increasing the production rate to three or four ships per year at Eastern Shipbuilding—an option that would depend on Eastern Shipbuilding's production capacity; introducing a second shipyard to build Eastern's design for the OPC; introducing a second shipyard (such as one of the other two OPC program finalists) to build its own design for the OPC—an option that would result in two OPC classes; or building additional NSCs in the place of some of the OPCs—an option that might include descoping equipment on those NSCs where possible to reduce their acquisition cost and make their capabilities more like that of the OPC. Such an approach would be broadly similar to how the Navy is using a descoped version of the San Antonio (LPD-17) class amphibious ship as the basis for its LPD-17 Flight II (LPD-30) class amphibious ships.

Impact of Hurricane Michael on OPC Program at Eastern Shipbuilding

Another potential issue for Congress concerns the impact of Hurricane Michael on Eastern Shipbuilding of Panama City, FL, the shipyard that is to build the first nine OPCs. A May 22, 2019, press report states:

A Category 5 hurricane that battered Florida's panhandle region last fall, including shipbuilder Eastern Shipbuilding Group, will impact the new medium-endurance cutter ship the company is building for the Coast Guard but at the moment it's unclear what the effects will be on cost and schedule, Coast Guard Commandant Adm. Karl Schultz said on Tuesday [May 21].

Eastern Shipbuilding's analysis of Hurricane Michael's impact on the Offshore Patrol Cutter (OPC) is due to the Coast Guard by May 31, and from there the service expects to have an understanding on the way forward with the program before the end of June, Schultz said in response to questions from Rep. Garret Graves (R-La.), during a hearing hosted by the House Transportation and Infrastructure Coast Guard and Maritime Transportation Subcommittee. He said Eastern Shipbuilding will provide "perspectives" on the cost and schedule and any other impacts.

"It's safe to say that we understand the impacts of a Category 5 hurricane on Eastern Shipbuilding Group will have an impact on the OPC program," Shultz said. He expects there to be some "puts and takes" after Eastern Shipbuilding submits its analysis.

Rep. Peter DeFazio (D-Ore.), citing a press report earlier in the hearing, said that Sen. Marco Rubio (R-Fla.) has inserted language in a draft disaster assistance bill allowing the Coast Guard and Eastern Shipbuilding to renegotiate the firm fixed-price contract the shipbuilder is working under for the OPC to account for damage to shore side facilities from Hurricane Michael and increased labor costs.

DeFazio said he is skeptical of the company's claim, noting, "I'm pretty sure they had insurance," and adding that "I question whether or not this has something to do with their original bid, which some thought was low." He also said he has concerns that a former Coast Guard Commandant that works for Eastern Shipbuilding has said he'll have authority to negotiate with his former service.

Retired Adm. Robert Papp, the 24th commandant of the Coast Guard, runs Eastern Shipbuilding's Washington, D.C., operations.

Eastern Shipbuilding did not respond to a query from Defense Daily about impacts to the OPC program from Hurricane Michael and any relief it may need from the current contract.

Schultz said that the OPC contract can't be renegotiated without legislative authorities from Congress. He said the Coast Guard, in response to an "ask" from Congress, provided language to help with drafting the proposed legislation related to the OPC in the disaster bill.

Schultz also said that the Coast Guard is not involved in Eastern Shipbuilding's lobbying efforts with Congress.

A May 17, 2019, press report stated:

As the Senate continues to negotiate the particulars of the supplemental disaster relief bill that seems poised to go to a vote next week, a new provision to save something many likely didn't know was at risk has been added.

A new line in the draft bill will let Eastern Shipbuilding Group renegotiate its contract with the U.S. Coast Guard to build up to 25 new off-shore patrol cutters.

"Under the old contract we were prohibited from negotiating for additional money for increased costs," said Admiral Bob Papp, President of Washington Operations for Eastern.

That meant that after Hurricane Michael, they would be unable to negotiate with the Coast Guard to help cover a slew of new costs associated with both the project and the hurricane, such as the damage from the Category 5 storm that needed repairs, the prolonged schedule and the "skyrocketing" costs of labor, Papp said. The contract—the largest in the Coast Guard's history at more than $10 billion—didn't account for a natural disaster.

It was going to be hard, Papp said, for Eastern to complete the project and to "stay healthy" without some negotiations. At stake in the community are 900 planned jobs and up to 5,000 indirect jobs officials believe will help jump-start the region's manufacturing economy.

But an official in Sen. Marco Rubio's office said the latest version of the supplemental disaster relief bill now includes a provision that will allow negotiations.

Rubio, according to the official, spoke with the President Donald Trump on Air Force One following the president's rally in Panama City Beach last week, helping to secure the language that made it into the bill.

"We've waited far too long (for disaster relief), and we're also involved in some Florida-specific issues," Rubio said in a recent video. "For example, the Hurricane had an impact on a very important Coast Guard project that's in Northwest Florida and we want to make sure that project stays on target and continues to feed jobs because Northwest Florida desperately needs those jobs to recover. We're very hopeful. Cautiously optimistic, that next week can be a very good week."

Papp thanked the area's congressional delegation for stepping up to advocate for this project, saying the company is "honored and delighted" to receive help.

A January 28, 2019, press release from Eastern Shipbuilding stated:

Panama City, FL, Eastern Shipbuilding Group [ESG] reports that steel cutting for the first offshore patrol cutter (OPC), Coast Guard Cutter ARGUS (WMSM-915), commenced on January 7, 2019 at Eastern's facilities. ESG successfully achieved this milestone even with sustaining damage and work interruption due to Hurricane Michael. The cutting of steel will start the fabrication and assembly of the cutter's hull, and ESG is to complete keel laying of ARGUS later this year. Additionally, ESG completed the placement of orders for all long lead time materials for OPC #2, Coast Guard Cutter CHASE (WMSM-916).

Eastern's President Mr. Joey D'Isernia noted the following: "Today represents a monumental day and reflects the dedication of our workforce - the ability to overcome and perform even under the most strenuous circumstances and impacts of Hurricane Michael. ESG families have been dramatically impacted by the storm, and we continue to recover and help rebuild our shipyard and community. I cannot overstate enough how appreciative we are of all of our subcontractors and vendors contributions to our families during the recovery as well as the support we have received from our community partners. Hurricane Michael may have left its marks but it only strengthened our resolve to build the most sophisticated, highly capable national assets for the Coast Guard. Today's success is just the beginning of the construction of the OPCs at ESG by our dedicated team of shipbuilders and subcontractors for our customer and partner, the United States Coast Guard. We are excited for what will be a great 2019 for Eastern Shipbuilding Group and Bay County, Florida."

A November 1, 2018, statement from Eastern Shipbuilding states that the firm

resumed operations at both of its two main shipbuilding facilities just two weeks after Hurricane Michael devastated Panama City Florida and the surrounding communities….

… the majority of ESG's [Eastern Shipbuilding Group's] workforce has returned to work very quickly despite the damage caused by the storm. "Our employees are a resourceful and resilient group of individuals with the drive to succeed in the face of adversity. This has certainly been proven by their ability to bounce back over the two weeks following the storm. Our employees have returned to work much faster than anticipated and brought with them an unbreakable spirit, that I believe sets this shipyard and our community apart" said [Eastern Shipbuilding] President Joey D'Isernia. "Today, our staffing levels exceed 80% of our pre-Hurricane Michael levels and is rising daily."

Immediately following the storm, ESG set out on an aggressive initiative to locate all of its employees and help get them back on the job as soon as practical after they took necessary time to secure the safety and security of their family and home. Together with its network of friends, partners, and customers in the maritime community, ESG organized daily distribution of meals and goods to employees in need. Additionally, ESG created an interest free deferred payback loan program for those employees in need and has organized Go Fund Me account to help those employees hardest hit by the storm. ESG also knew temporary housing was going to be a necessity in the short term and immediately built a small community located on greenfield space near its facilities for those employees with temporary housing needs.

ESG has worked closely with its federal, state and commercial partners over the past two weeks to provide updates on the shipyard as well as on projects currently under construction. Power was restored to ESG's Nelson Facility on 10-21-18 and at ESG's Allanton Facility on 10-24-18 and production of vessels under contract is ramping back up. Additionally, all of the ESG personnel currently working on the US Coast Guard's Offshore Patrol Cutter contract have returned to work….

"We are grateful to our partners and the maritime business community as a whole for their support and confidence during the aftermath of this historic storm. Seeing our incredible employees get back to building ships last week was an inspiration," said D'Isernia. "While there is no doubt that the effects of Hurricane Michael will linger with our community for years to come, I can say without reservation that we are open for business and excited about delivering quality vessels to our loyal customers."

An October 22, 2018, press report states the following:

U.S. Coast Guard officials and Eastern Shipbuilding Group are still assessing the damage caused by deadly category 4 Hurricane Michael to the Panama City, Fla.-based yard contracted to build the new class of Offshore Patrol Cutters.

On September 28, the Coast Guard awarded Eastern Shipbuilding a contract to build the future USCGC Argus (WMSM-915), the first offshore patrol cutter (OPC). The yard was also set to build a second OPC, the future USCGC Chase (WMSM-916). Eastern Shipbuilding's contract is for nine OPCs, with options for two additional cutters. Ultimately, the Coast Guard plans to buy 25 OPCs.

However, just as the yard was preparing to build Argus , Hurricane Michael struck the Florida Panhandle near Panama City on October 10. Workers from the shipyard and Coast Guard project managers evacuated and are just now returning to assess damage to the yard facilities, Brian Olexy, communications manager for the Coast Guard's Acquisitions Directorate, told USNI News.

"Right now we haven't made any decisions yet on shifts in schedule," Olexy said….

Since the yard was just the beginning stages of building Argus , Olexy said the hull wasn't damaged. "No steel had been cut," he said.

Eastern Shipbuilding is still in the process of assessing damage to the yard and trying to reach its workforce. Many employees evacuated the area and have not returned, or are in the area but lost their homes, Eastern Shipbuilding spokesman Justin Smith told USNI News.

At first, about 200 workers returned to work, but by week's end about 500 were at the yard, Smith said. The company is providing meals, water, and ice for its workforce.

"Although we were significantly impacted by this catastrophic weather event, we are making great strides each day thanks to the strength and resiliency of our employees," Joey D'Isernia, president of Eastern Shipbuilding, said in a statement.

Planned NSC, OPC, and FRC Procurement Quantities

Another issue for Congress concerns the Coast Guard's planned NSC, OPC, and FRC procurement quantities. The POR's planned force of 91 NSCs, OPCs, and FRCs is about equal in number to the Coast Guard's legacy force of 90 high-endurance cutters, medium-endurance cutters, and 110-foot patrol craft. NSCs, OPCs, and FRCs, moreover, are to be individually more capable than the older ships they are to replace. Even so, Coast Guard studies have concluded that the planned total of 91 NSCs, OPCs, and FRCs would provide 61% of the cutters that would be needed to fully perform the service's statutory missions in coming years, in part because Coast Guard mission demands are expected to be greater in coming years than they were in the past. For further discussion of this issue, about which CRS has testified and reported on since 2005, see Appendix A .

Legislative Activity in 2019

Summary of Appropriations Action on FY2020 Acquisition Funding Request

Table 2 summarizes appropriations action on the Coast Guard's request for FY2020 acquisition funding for the NSC, OPC, and FRC programs.

Appendix A. Planned NSC, OPC, and FRC Procurement Quantities

This appendix provides further discussion on the issue of the Coast Guard's planned NSC, OPC, and FRC procurement quantities.

Overview

The Coast Guard's program of record for NSCs, OPCs, and FRCs includes only about 61% as many cutters as the Coast Guard calculated in 2011 would be needed to fully perform its projected future missions. The Coast Guard's planned force levels for NSCs, OPCs, and FRCs have remained unchanged since 2004. In contrast, the Navy since 2004 has adjusted its ship force-level goals eight times in response to changing strategic and budgetary circumstances.

Although the Coast Guard's strategic situation and resulting mission demands may not have changed as much as the Navy's have since 2004, the Coast Guard's budgetary circumstances may have changed since 2004. The 2004 program of record was heavily conditioned by Coast Guard expectations in 2004 about future funding levels in the PC&I account. Those expectations may now be different, as suggested by the willingness of Coast Guard officials in 2017 to begin regularly mentioning the need for an PC&I funding level of $2 billion per year (see Appendix B ).

It can also be noted that continuing to, in effect, use the Coast Guard's 2004 expectations of future funding levels for the PC&I account as an implicit constraint on planned force levels for NSCs, OPCs, and FRCs can encourage an artificially narrow view of Congress's options regarding future Coast Guard force levels and associated funding levels, depriving Congress of agency in the exercise of its constitutional power to provide for the common defense and general welfare of the United States, and to set funding levels and determine the composition of federal spending.

2009 Coast Guard Fleet Mix Analysis

The Coast Guard estimated in 2009 that with the POR's planned force of 91 NSCs, OPCs, and FRCs, the service would have capability or capacity gaps in 6 of its 11 statutory missions—search and rescue (SAR); defense readiness; counterdrug operations; ports, waterways, and coastal security (PWCS); protection of living marine resources (LMR); and alien migrant interdiction operations (AMIO). The Coast Guard judges that some of these gaps would be "high risk" or "very high risk."

Public discussions of the POR frequently mention the substantial improvement that the POR force would represent over the legacy force. Only rarely, however, have these discussions explicitly acknowledged the extent to which the POR force would nevertheless be smaller in number than the force that would be required, by Coast Guard estimate, to fully perform the Coast Guard's statutory missions in coming years. Discussions that focus on the POR's improvement over the legacy force while omitting mention of the considerably larger number of cutters that would be required, by Coast Guard estimate, to fully perform the Coast Guard's statutory missions in coming years could encourage audiences to conclude, contrary to Coast Guard estimates, that the POR's planned force of 91 cutters would be capable of fully performing the Coast Guard's statutory missions in coming years.

In a study completed in December 2009 called the Fleet Mix Analysis (FMA) Phase 1, the Coast Guard calculated the size of the force that in its view would be needed to fully perform the service's statutory missions in coming years. The study refers to this larger force as the objective fleet mix. Table A-1 compares planned numbers of NSCs, OPCs, and FRCs in the POR to those in the objective fleet mix.

As can be seen in Table A-1 , the objective fleet mix includes 66 additional cutters, or about 73% more cutters than in the POR. Stated the other way around, the POR includes about 58% as many cutters as the 2009 FMA Phase I objective fleet mix.

As intermediate steps between the POR force and the objective fleet mix, FMA Phase 1 calculated three additional forces, called FMA-1, FMA-2, and FMA-3. (The objective fleet mix was then relabeled FMA-4.) Table A-2 compares the POR to FMAs 1 through 4.

FMA-1 was calculated to address the mission gaps that the Coast Guard judged to be "very high risk." FMA-2 was calculated to address both those gaps and additional gaps that the Coast Guard judged to be "high risk." FMA-3 was calculated to address all those gaps, plus gaps that the Coast Guard judged to be "medium risk." FMA-4—the objective fleet mix—was calculated to address all the foregoing gaps, plus the remaining gaps, which the Coast Guard judge to be "low risk" or "very low risk." Table A-3 shows the POR and FMAs 1 through 4 in terms of their mission performance gaps.

Figure A-1 , taken from FMA Phase 1, depicts the overall mission capability/performance gap situation in graphic form. It appears to be conceptual rather than drawn to precise scale. The black line descending toward 0 by the year 2027 shows the declining capability and performance of the Coast Guard's legacy assets as they gradually age out of the force. The purple line branching up from the black line shows the added capability from ships and aircraft to be procured under the POR, including the 91 planned NSCs, OPCs, and FRCs. The level of capability to be provided when the POR force is fully in place is the green line, labeled "2005 Mission Needs Statement." As can be seen in the graph, this level of capability is substantially below a projection of Coast Guard mission demands made after the terrorist attacks of September 11, 2001 (the red line, labeled "Post-9/11 CG Mission Demands"), and even further below a Coast Guard projection of future mission demands (the top dashed line, labeled "Future Mission Demands"). The dashed blue lines show future capability levels that would result from reducing planned procurement quantities in the POR or executing the POR over a longer time period than originally planned.

FMA Phase 1 was a fiscally unconstrained study, meaning that the larger force mixes shown in Table A-2 were calculated primarily on the basis of their capability for performing missions, rather than their potential acquisition or life-cycle operation and support (O&S) costs.

Although the FMA Phase 1 was completed in December 2009, the figures shown in Table A-2 were generally not included in public discussions of the Coast Guard's future force structure needs until April 2011, when GAO presented them in testimony. GAO again presented them in a July 2011 report.

The Coast Guard completed a follow-on study, called Fleet Mix Analysis (FMA) Phase 2, in May 2011. Among other things, FMA Phase 2 includes a revised and updated objective fleet mix called the refined objective mix. Table A-4 compares the POR to the objective fleet mix from FMA Phase 1 and the refined objective mix from FMA Phase 2.

As can be seen in Table A-4 , compared to the objective fleet mix from FMA Phase 1, the refined objective mix from FMA Phase 2 includes 49 OPCs rather than 57. The refined objective mix includes 58 additional cutters, or about 64% more cutters than in the POR. Stated the other way around, the POR includes about 61% as many cutters as the refined objective mix.

Compared to the POR, the larger force mixes shown in Table A-2 and Table A-4 would be more expensive to procure, operate, and support than the POR force. Using the average NSC, OPC, and FRC procurement cost figures presented earlier (see " Background "), procuring the 58 additional cutters in the Refined Objective Mix from FMA Phase 2 might cost an additional $10.7 billion, of which most (about $7.8 billion) would be for the 24 additional FRCs. (The actual cost would depend on numerous factors, such as annual procurement rates.) O&S costs for these 58 additional cutters over their life cycles (including crew costs and periodic ship maintenance costs) would require billions of additional dollars.

The larger force mixes in the FMA Phase 1 and 2 studies, moreover, include not only increased numbers of cutters, but also increased numbers of Coast Guard aircraft. In the FMA Phase 1 study, for example, the objective fleet mix included 479 aircraft—93% more than the 248 aircraft in the POR mix. Stated the other way around, the POR includes about 52% as many aircraft as the objective fleet mix. A decision to procure larger numbers of cutters like those shown in Table A-2 and Table A-4 might thus also imply a decision to procure, operate, and support larger numbers of Coast Guard aircraft, which would require billions of additional dollars. The FMA Phase 1 study estimated the procurement cost of the objective fleet mix of 157 cutters and 479 aircraft at $61 billion to $67 billion in constant FY2009 dollars, or about 66% more than the procurement cost of $37 billion to $40 billion in constant FY2009 dollars estimated for the POR mix of 91 cutters and 248 aircraft. The study estimated the total ownership cost (i.e., procurement plus life-cycle O&S cost) of the objective fleet mix of cutters and aircraft at $201 billion to $208 billion in constant FY2009 dollars, or about 53% more than the total ownership cost of $132 billion to $136 billion in constant FY2009 dollars estimated for POR mix of cutters and aircraft.

A December 7, 2015, press report states the following:

The Coast Guard's No. 2 officer said the small size and advanced age of its fleet is limiting the service's ability to carry out crucial missions in the Arctic and drug transit zones or to meet rising calls for presence in the volatile South China Sea.

"The lack of surface vessels every day just breaks my heart," VADM Charles Michel, the Coast Guard's vice commandant, said Dec. 7.

Addressing a forum on American Sea Power sponsored by the U.S. Naval Institute at the Newseum, Michel detailed the problems the Coast Guard faces in trying to carry out its missions of national security, law enforcement and maritime safety because of a lack of resources.

"That's why you hear me clamoring for recapitalization," he said.

Michel noted that China's coast guard has a lot more ships than the U.S. Coast Guard has, including many that are larger than the biggest U.S. cutter, the 1,800-ton [sic:4,800-ton] National Security Cutter. China is using those white-painted vessels rather than "gray-hull navy" ships to enforce its claims to vast areas of the South China Sea, including reefs and shoals claimed by other nations, he said.

That is a statement that the disputed areas are "so much our territory, we don't need the navy. That's an absolutely masterful use of the coast guard," he said.

The superior numbers of Chinese coast guard vessels and its plans to build more is something, "we have to consider when looking at what we can do in the South China Sea," Michel said.

Although they have received requests from the U.S. commanders in the region for U.S. Coast Guard cutters in the South China Sea, "the commandant had to say 'no'. There's not enough to go around," he said.

Potential oversight questions for Congress include the following:

Under the POR force mix, how large a performance gap, precisely, would there be in each of the missions shown in Table A-3 ? What impact would these performance gaps have on public safety, national security, and protection of living marine resources? How sensitive are these performance gaps to the way in which the Coast Guard translates its statutory missions into more precise statements of required mission performance? Given the performance gaps shown in Table A-3 , should planned numbers of Coast Guard cutters and aircraft be increased, or should the Coast Guard's statutory missions be reduced, or both? How much larger would the performance gaps in Table A-3 be if planned numbers of Coast Guard cutters and aircraft are reduced below the POR figures? Has the executive branch made sufficiently clear to Congress the difference between the number of ships and aircraft in the POR force and the number that would be needed to fully perform the Coast Guard's statutory missions in coming years? Why has public discussion of the POR focused mostly on the capability improvement it would produce over the legacy force and rarely on the performance gaps it would have in the missions shown in Table A-3 ?

Appendix B. Funding Levels in PC&I Account

This appendix provides background information on funding levels in the Coast Guard's Procurement, Construction, and Improvements (PC&I) account.

Overview

As shown in Table B-1 , the FY2013 budget submission programmed an average of about $1.5 billion per year in the PC&I account. As also shown in the table, the FY2014-FY2016 budget submissions reduced that figure to between $1 billion and $1.2 billion per year.

The Coast Guard has testified that funding the PC&I account at a level of about $1 billion to $1.2 billion per year would make it difficult to fund various Coast Guard acquisition projects, including a new polar icebreaker and improvements to Coast Guard shore installations. Coast Guard plans call for procuring OPCs at an eventual rate of two per year. If each OPC costs roughly $400 million, procuring two OPCs per year in an PC&I account of about $1 billion to $1.2 billion per year, as programmed under the FY2014-FY2016 budget submissions, would leave about $200 million to $400 million per year for all other PC&I-funded programs.

Since 2017, Coast Guard officials have been stating more regularly what they stated only infrequently in earlier years: that executing the Coast Guard's various acquisition programs fully and on a timely basis would require the PC&I account to be funded in coming years at a level of about $2 billion per year. Statements from Coast Guard officials on this issue in past years have sometimes put this figure as high as about $2.5 billion per year.

Using Past PC&I Funding Levels as a Guide for Future PC&I Funding Levels

In assessing future funding levels for executive branch agencies, a common practice is to assume or predict that the figure in coming years will likely be close to where it has been in previous years. While this method can be of analytical and planning value, for an agency like the Coast Guard, which goes through periods with less acquisition of major platforms and periods with more acquisition of major platforms, this approach might not always be the best approach, at least for the PC&I account.

More important, in relation to maintaining Congress's status as a co-equal branch of government, including the preservation and use of congressional powers and prerogatives, an analysis that assumes or predicts that future funding levels will resemble past funding levels can encourage an artificially narrow view of congressional options regarding future funding levels, depriving Congress of agency in the exercise of its constitutional power to set funding levels and determine the composition of federal spending.

Past Coast Guard Statements About Required PC&I Funding Level

At an October 4, 2011, hearing on the Coast Guard's major acquisition programs before the Coast Guard and Maritime Transportation subcommittee of the House Transportation and Infrastructure Committee, the following exchange occurred:

REPRESENATIVE FRANK LOBIONDO:

Can you give us your take on what percentage of value must be invested each year to maintain current levels of effort and to allow the Coast Guard to fully carry out its missions?

ADMIRAL ROBERT J. PAPP, COMMANDANT OF THE COAST GUARD:

I think I can, Mr. Chairman. Actually, in discussions and looking at our budget—and I'll give you rough numbers here, what we do now is we have to live within the constraints that we've been averaging about $1.4 billion in acquisition money each year.

If you look at our complete portfolio, the things that we'd like to do, when you look at the shore infrastructure that needs to be taken care of, when you look at renovating our smaller icebreakers and other ships and aircraft that we have, we've done some rough estimates that it would really take close to about $2.5 billion a year, if we were to do all the things that we would like to do to sustain our capital plant.

So I'm just like any other head of any other agency here, as that the end of the day, we're given a top line and we have to make choices and tradeoffs and basically, my tradeoffs boil down to sustaining frontline operations balancing that, we're trying to recapitalize the Coast Guard and there's where the break is and where we have to define our spending.

An April 18, 2012, blog entry stated the following:

If the Coast Guard capital expenditure budget remains unchanged at less than $1.5 billion annually in the coming years, it will result in a service in possession of only 70 percent of the assets it possesses today, said Coast Guard Rear Adm. Mark Butt.

Butt, who spoke April 17 [2012] at [a] panel [discussion] during the Navy League Sea Air Space conference in National Harbor, Md., echoed Coast Guard Commandant Robert Papp in stating that the service really needs around $2.5 billion annually for procurement.

At a May 9, 2012, hearing on the Coast Guard's proposed FY2013 budget before the Homeland Security subcommittee of the Senate Appropriations Committee, Admiral Papp testified, "I've gone on record saying that I think the Coast Guard needs closer to $2 billion dollars a year [in acquisition funding] to recapitalize—[to] do proper recapitalization."

At a May 14, 2013, hearing on the Coast Guard's proposed FY2014 budget before the Homeland Security Subcommittee of the Senate Appropriations Committee, Admiral Papp stated the following regarding the difference between having about $1.0 billion per year rather than about $1.5 billion per year in the PC&I account:

Well, Madam Chairman, $500 million—a half a billion dollars—is real money for the Coast Guard. So, clearly, we had $1.5 billion in the [FY]13 budget. It doesn't get everything I would like, but it—it gave us a good start, and it sustained a number of projects that are very important to us.

When we go down to the $1 billion level this year, it gets my highest priorities in there, but we have to either terminate or reduce to minimum order quantities for all the other projects that we have going.

If we're going to stay with our program of record, things that have been documented that we need for our service, we're going to have to just stretch everything out to the right. And when we do that, you cannot order in economic order quantities. It defers the purchase. Ship builders, aircraft companies—they have to figure in their costs, and it inevitably raises the cost when you're ordering them in smaller quantities and pushing it off to the right.

Plus, it almost creates a death spiral for the Coast Guard because we are forced to sustain older assets—older ships and older aircraft—which ultimately cost us more money, so it eats into our operating funds, as well, as we try to sustain these older things.

So, we'll do the best we can within the budget. And the president and the secretary have addressed my highest priorities, and we'll just continue to go on the—on an annual basis seeing what we can wedge into the budget to keep the other projects going.

At a March 12, 2014, hearing on the Coast Guard's proposed FY2015 budget before the Homeland Security subcommittee of the House Appropriations Committee, Admiral Papp stated the following:

Well, that's what we've been struggling with, as we deal with the five-year plan, the capital investment plan, is showing how we are able to do that. And it will be a challenge, particularly if it sticks at around $1 billion [per year]. As I've said publicly, and actually, I said we could probably—I've stated publicly before that we could probably construct comfortably at about 1.5 billion [dollars] a year. But if we were to take care of all the Coast Guard's projects that are out there, including shore infrastructure that that fleet that takes care of the Yemen [sic: inland] waters is approaching 50 years of age, as well, but I have no replacement plan in sight for them because we simply can't afford it. Plus, we need at some point to build a polar icebreaker. Darn tough to do all that stuff when you're pushing down closer to 1 billion [dollars per year], instead of 2 billion [dollars per year].

As I said, we could fit most of that in at about the 1.5 billion [dollars per year] level, but the projections don't call for that. So we are scrubbing the numbers as best we can.

At a March 24, 2015, hearing on the Coast Guard's proposed FY2016 budget before the Homeland Security subcommittee of the House Appropriations Committee, Admiral Paul Zukunft, Admiral Papp's successor as Commandant of the Coast Guard, stated the following:

I look back to better years in our acquisition budget when we had a—an acquisition budget of—of $1.5 billion. That allows me to move these programs along at a much more rapid pace and, the quicker I can build these at full-rate production, the less cost it is in the long run as well. But there's an urgent need for me to be able to deliver these platforms in a timely and also in an affordable manner. But to at least have a reliable and a predictable acquisition budget would make our work in the Coast Guard much easier. But when we see variances of—of 30, 40% over a period of three or four years, and not knowing what the Budget Control Act may have in store for us going on, yes, we are treading water now but any further reductions, and now I am—I am beyond asking for help. We are taking on water.

An April 13, 2017, press report states the following (emphasis added):

Coast Guard Commandant Adm. Paul Zukunft on Wednesday [April 12] said that for the Coast Guard to sustain its recapitalization plans and operations the service needs a $2 billion annual acquisition budget that grows modestly overtime to keep pace with inflation.

The Coast Guard needs a "predictable, reliable" acquisition budget "and within that we need 5 percent annual growth to our operations and maintenance (O&M) accounts," Zukunft told reporters at a Defense Writers Group breakfast. Inflation will clip 2 to 3 percent from that, but "at 5 percent or so it puts you on a moderate but positive glide slope so you can execute, so you can build the force," he said.

In an interview published on June 1, 2017, Zukunft said the following (emphasis added):

We cannot be more relevant than we are now. But what we need is predictable funding. We have been in over 16 continuing resolutions since 2010. I need stable and repeatable funding. An acquisition budget with a floor of $2 billion. Our operating expenses as I said, they've been funded below the Budget Control Act floor for the past five years. I need 5 percent annualized growth over the next five years and beyond to start growing some of this capability back.

But more importantly, we [need] more predictable, more reliable funding so we can execute what we need to do to carry out the business of the world's best Coast Guard.

Appendix C. Additional Information on Status and Execution of NSC, OPC, and FRC Programs from May 2018 GAO Report

This appendix presents additional information on the status and execution of the NSC, OPC, and FRC programs from a May 2018 GAO report reviewing DHS acquisition programs.

NSC Program

Regarding the NSC program, the May 2018 GAO report states the following:

DHS's Under Secretary for Management (USM) directed the USCG to complete follow-on operational test and evaluation (OT&E) by March 2019. According to USCG officials, the program's OTA began follow-on OT&E in October 2017, which will test unmet key performance parameters (KPP) and address deficiencies found during prior testing. The NSC completed initial operational testing in 2014, but did not fully demonstrate 7 of its 19 KPPs, including those related to unmanned aircraft and cutter-boat deployment in rough seas. According to USCG officials, operators have since demonstrated these KPPs during USCG operations. For example, USCG officials stated that they successfully demonstrated operations of a prototype unmanned aircraft on an NSC. However, the USCG will not evaluate the NSC's unmanned aircraft KPP until the unmanned aircraft undergoes initial OT&E, currently planned for June 2019. In addition, the NSC will be the first USCG asset to undergo cybersecurity testing. However, this test has been delayed over a year with the final cyber test event scheduled for August 2018 because of a change in NSC operational schedules, among other things.

The DHS USM also directed the USCG to complete a study to determine the root cause of the NSC's propulsion system issues by December 2017; however, as of January 2018, the study was not yet complete. GAO previously reported on these issues—including high engine temperatures, cracked cylinder heads, and overheating generator bearings that were impacting missions—in January 2016....

The USCG initially planned to implement a crew rotational concept in which crews would rotate while NSCs were underway to achieve a goal of 230 days away from the cutter's homeport. In February 2018, USCG officials told GAO they abandoned the crew rotational concept because the concept did not provide the USCG with the expected return on investment. Instead, USCG officials said a new plan has been implemented that does not rotate crew and is anticipated to increase the days away from home port from the current capability of 185 days to 200 days.

OPC Program

Regarding the OPC program, the May 2018 GAO report states the following:

DHS approved six key performance parameters (KPP) for the OPC related to the ship's operating range and duration, crew size, interoperability and maneuverability, and ability to support operations in moderate to rough seas. The first OPC has not yet been constructed, so the USCG has not yet demonstrated whether it can meet these KPPs. The USCG plans to use engineering reviews, and developmental and operational tests throughout the acquisition to measure the OPC's performance.

USCG officials told GAO that the program completed an early operational assessment on the basic ship design in August 2017, which entailed a review of the current design plans. The program plans to refine the ship's design as needed based on preliminary test results. However, as of December 2017, USCG officials had not received the results of this assessment.

The USCG plans to conduct initial operational test and evaluation (OT&E) on the first OPC in fiscal year 2023. However, the test results from initial OT&E will not be available to inform key decisions. For example, the results will not be available to inform the decision to build 2 OPCs per year—which USCG officials said is scheduled to begin in fiscal year 2021. Without test results to inform these key decisions, the USCG must make substantial commitments prior to knowing how well the ship will meet its requirements....

The USCG is in the process of completing the design of the OPC before starting construction, which is in-line with GAO shipbuilding best practices. In addition, USCG officials stated that the program is using state-of-the-market technology that has been proven on other ships as opposed to state-of-the-art technology, which lowers the risk of the program.

FRC Program

Regarding the FRC program, the May 2018 GAO report states the following:

In February 2017, DHS's Director, Office of Test and Evaluation (DOT&E) assessed the results from the program's July 2016 follow-on operational test and evaluation (OT&E) and determined that

• the program met its six key performance parameters, and

• the FRC was operationally effective and suitable.

During follow-on OT&E, the OTA found that several deficiencies from the program's initial OT&E had been corrected. For example, the OTA closed a severe deficiency related to the engines based on modifications to the FRC's main diesel engines. However, five major deficiencies remain. According to USCG officials, the remaining deficiencies are related to ergonomics (e.g., improving the working environment for operators) and issues with stowage space. USCG officials stated that they plan to resolve the remaining deficiencies by fiscal year 2020.

DOT&E noted that these deficiencies do not prevent mission completion or present a danger to personnel, but recommended that they be resolved as soon as possible. USCG officials indicated that they plan to resolve the remaining deficiencies through engineering or other changes....

The USCG continues to work with the contractor—Bollinger Shipyards, LLC—to address issues covered by the warranty and acceptance clauses for each ship. For example, 18 engines—9 operational engines and 9 spare engines—have been replaced under the program's warranty. According to USCG documentation, 65 percent of the current issues with the engines have been resolved through retrofits; however, additional problems with the engines have been identified since our April 2017 review. For example, issues with water pump shafts are currently being examined through a root cause analysis and will be redesigned and are scheduled to undergo retrofits starting in December 2018. We previously found that the FRC's warranty resulted in improved cost and quality by requiring the shipbuilder to pay for the repair of defects. As of September 2017, USCG officials said the replacements and retrofits completed under the program's warranty allowed the USCG to avoid an estimated $104 million in potential unplanned costs—of which $63 million is related to the engines.

For a discussion of some considerations relating to warranties in shipbuilding and other acquisition programs, see Appendix D .

Appendix D. Some Considerations Relating to Warranties in Shipbuilding and Other Acquisition Programs

This appendix presents some considerations relating to warranties in shipbuilding and other defense acquisition.

In discussions of Navy and Coast Guard shipbuilding, one question that sometimes arises is whether including a warranty in a shipbuilding contract is preferable to not including one.

Including a warranty in a shipbuilding contract (or a contract for building some other kind of military end item), while potentially valuable, might not always be preferable to not including one—it depends on the circumstances of the acquisition, and it is not necessarily a valid criticism of an acquisition program to state that it is using a contract that does not include a warranty (or a weaker form of a warranty rather than a stronger one).

Including a warranty generally shifts to the contractor the risk of having to pay for fixing problems with earlier work. Although that in itself could be deemed desirable from the government's standpoint, a contractor negotiating a contract that will have a warranty will incorporate that risk into its price, and depending on how much the contractor might charge for doing that, it is possible that the government could wind up paying more in total for acquiring the item (including fixing problems with earlier work on that item) than it would have under a contract without a warranty.

When a warranty is not included in the contract and the government pays later on to fix problems with earlier work, those payments can be very visible, which can invite critical comments from observers. But that does not mean that including a warranty in the contract somehow frees the government from paying to fix problems with earlier work. In a contract that includes a warranty, the government will indeed pay something to fix problems with earlier work—but it will make the payment in the less-visible (but still very real) form of the up-front charge for including the warranty, and that charge might be more than what it would have cost the government, under a contract without a warranty, to pay later on for fixing those problems.

From a cost standpoint, including a warranty in the contract might or might not be preferable, depending on the risk that there will be problems with earlier work that need fixing, the potential cost of fixing such problems, and the cost of including the warranty in the contract. The point is that the goal of avoiding highly visible payments for fixing problems with earlier work and the goal of minimizing the cost to the government of fixing problems with earlier work are separate and different goals, and that pursuing the first goal can sometimes work against achieving the second goal.

The Department of Defense's guide on the use of warranties states the following:

Federal Acquisition Regulation (FAR) 46.7 states that "the use of warranties is not mandatory." However, if the benefits to be derived from the warranty are commensurate with the cost of the warranty, the CO [contracting officer] should consider placing it in the contract. In determining whether a warranty is appropriate for a specific acquisition, FAR Subpart 46.703 requires the CO to consider the nature and use of the supplies and services, the cost, the administration and enforcement, trade practices, and reduced requirements. The rationale for using a warranty should be documented in the contract file....

In determining the value of a warranty, a CBA [cost-benefit analysis] is used to measure the life cycle costs of the system with and without the warranty. A CBA is required to determine if the warranty will be cost beneficial. CBA is an economic analysis, which basically compares the Life Cycle Costs (LCC) of the system with and without the warranty to determine if warranty coverage will improve the LCCs. In general, five key factors will drive the results of the CBA: cost of the warranty + cost of warranty administration + compatibility with total program efforts + cost of overlap with Contractor support + intangible savings. Effective warranties integrate reliability, maintainability, supportability, availability, and life-cycle costs. Decision factors that must be evaluated include the state of the weapon system technology, the size of the warranted population, the likelihood that field performance requirements can be achieved, and the warranty period of performance.