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

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