Should Navy warships come with a warranty?

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The future USS Somerset was launched from Huntington Ingalls Industries' Avondale Shipyard in April, 2012.  USS Somerset Public Affairs
The future USS Somerset was launched from Huntington Ingalls Industries' Avondale Shipyard in April, 2012. USS Somerset Public Affairs

Should Navy warships come with a warranty?

by: Hugh Lessig | .
Daily Press (Newport News, Va. | .
published: March 14, 2016

Shortly after the Navy accepted the USS Somerset in 2014, the hull paint began to peel.

The Navy determined that Huntington Ingalls Industries, which built the ship at its former Avondale shipyard in New Orleans, didn't adequately prepare the surface before applying the second coat.

HII workers repainted the vessel, submitted invoices, and received another $315,000 from the Navy.

This example comes from the U.S. Government Accountability Office, the auditing arm of Congress, which recommends the Navy reconsider how it deals with problems found on a new warships. It warns that the Navy is missing money-saving opportunities if it essentially pays a company to build a ship, then pays it again to correct mistakes found after acceptance trials.

The GAO published its findings in a 43-page report released March 3. The Defense Department only partially concurred with it. A senior Navy official, in an interview with the Daily Press, took issue with GAO's contention that the system allows shipbuilders to earn profit by correcting their own mistakes.

"We're not incentivizing defects," said Elliott B. Branch, deputy assistant Navy secretary for acquisition and procurement. "We're trying to strike a balance between affordability and protecting the taxpayers' interest in delivering a quality product."

In the case of the Somerset repainting, Ingalls received reimbursement, but it also bore some of the cost in a shared-responsibility arrangement — one that Navy officials say results in a lower overall cost to taxpayers than if the military paid for a warranty up front.

That said, the Defense Department has agreed to study the issue in the wake of the GAO report. A spokesman for Ingalls Shipbuilding, a division of Newport News-based Huntington Ingalls Industries, deferred comment to the Navy.

The report focuses on two types of contract provisions that allow the government to address problems for which shipbuilders are responsible: warranties and guarantees.

A warranty allows the government to order repairs at the contractor's expense. In concept, it works like a consumer warranty The Navy does not use warranties, but the Coast Guard does in some cases. Commercial ship-buyers also use warranties.

A guarantee, which the Navy uses, is a negotiated agreement that varies from contract to contract.

The GAO report recommends the Navy should consider using warranties. A warranty promotes quality "because the shipbuilder's profit erodes as it spends money to correct deficiencies after delivery, during the warranty period," it states.

Warranties also result in customers submitting more claims to correct problems, the report says. Further, federal acquisition guidelines address the use of warranties, but not the Navy's use of guarantees.

"The Navy has no stated objectives for its guarantees, and guidance for contracting officers is minimal as to when or how to use a guarantee," the report states.

It concludes: "The Navy may be missing opportunities for savings by not considering use of warranties."

Warranty versus guarantee

Anyone who has purchased a computer or major appliance is familiar with the question: "Would you like to purchase a warranty with that?" The decision comes down to whether a warranty would pay for itself, or whether it's more economical to pay for problems on a case-by-case basis.

That is partly the issue facing the Navy, albeit on a more complex scale.

The Navy does not use warranties and "accepts the costs of fixing deficiencies to lower the overall purchase price of the ship," the report states.

GAO says the Navy hasn't done an analysis to prove that point. The Defense Department study, which could address this, is due in September.

GAO included six case studies in its report, the USS Somerset being one. Another was a Coast Guard cutter built at Ingalls at its Pascagoula yard, a guided-missile destroyer built at General Dynamics Bath Iron Works in Maine, and two littoral combat ships, one built by Austal USA in Mobile, Ala., and another by Marinette Marine Corp. in Wisconsin.

The sixth example was a fast-response Coast Guard cutter built at Bollinger Shipyards in Lockport, La. This was the single example of a ship that came with a warranty. The other five had contracts with guarantee clauses.

For the fast-response cutter — and for commercial ship buyers surveyed — more claims for defects were submitted under the warranty compared to the Navy under its guarantee clauses.

"This is not because the Navy's ships had fewer defects, as Navy ships are delivered to the government with numerous defects that must be corrected later," the report says.

A commercial ship buyer told GAO that it prefers warranties that extend beyond the shipbuilder to original equipment manufacturers. Thus, some warranty claims don't fall on the shipbuilder, which demonstrates "how a warranty can provide value without unduly harming the shipbuilder's profits."

However, Navy officials questioned the comparison between military and commercial shipbuilding. In the commercial world, the manufacturers control the processes, material and design. They can build a low probability of error into their product, so it makes economic sense for them to sell a warranty on top of the purchase price. There's less of a chance of problems.

But in military shipbuilding, the design, processes and materials are a result of collaboration between the Navy and the shipbuilder. The Navy might specify a certain type of weld, for example, or it will order certain components to be installed. Were a military shipbuilder to offer a warranty, it would be much more expensive than a commercial warranty because the shipbuilder doesn't control everything.

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