LCS Frigate Block Buy Battle: Should Navy Buy Upgraded Ships Wholesale?

WASHINGTON: Should the Navy buy the next generation of Littoral Combat Ships in bulk? A contentious hearing today before House Armed Services subcommittee on oversight largely framed the options as polar opposites. You can either sign a multi-ship deal to drive down the price, at the risk of getting “locked in” to buying a flawed design. (This is how LCS is currently bought). Or you buy ships one year at a time to preserve congressional freedom to change the program, at the price of paying more per ship. But the quiet voice of Capitol Hill’s leading naval expert, Ron O’Rourke, suggested the year-at-a-time approach could have costly unintended consequences.

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In today’s hearing, no one disputed that the Navy’s contention that buying 12 upgraded LCS “frigates” in a single multi-year contract would save money — one estimate was roughly 5 percent — over negotiating with builders one ship at a time. But 12 ships at 5 percent off is still more expensive than buying zero ships.

A lot of LCS critics would rather rid themselves of the small, low-firepower, breakdown-prone vessels altogether. But cancellation is unlikely, because the Navy wants large numbers of the relatively affordable LCS to sweep mines, hunt subs, and patrol the seas, freeing up heavier destroyers for missile defense and other high-intensity missions. So the critics at least want to have the option every year to hold the threat of cancellation over the contractors’ heads to force better performance.

“Maybe LCS should stand for ‘Leaking, Cracked Ship,'” snarked Rep. Jackie Speier both on her Twitter account — using the hashtag #PorkShip — and in person at the hearing. “I and my @HASCDemocrats colleagues want to know why Congress should waste $120 billion on the Edsel of the sea.”

Speier frequently turned her ire on the Navy’s chief shipbuilder, Deputy Assistant Secretary Sean Stackley. “Mr. Stackley, I am so disappointed in your testimony, I can’t begin to tell you,” was the first thing she said to him in the hearing, saying his statement that the contractors properly warrantied their work on LCS “was very deceptive.”

Later in the hearing, Speier accused Stackley of not just deception but disrespect for the law: “My understanding is that, Sec. Stackley, you’ve already put out an RFP that presupposes a block buy, even though you don’t have authorization yet from Congress.”

“What we have put out an RFP for is the 2017 ships (only), with an option for a block buy,” Stackley replied, his frustration clearly simmering throughout the hearing. “We will be coming back to the Congress with the 2018 budget for authorization for the block buy.” That gives enough time to do the design work for the frigate upgrade, he told a skeptical Speier.

“Miss Makin, what are the downsides of a block buy?” Speier said next, turning to the Government Accountability Office witness, acquisition and management director Michele Makin.

“It could have advantages for cost control…” Makin begin.

“Which Mr. O’Rourke has already talked about,” Speier interrupted, urging her along.

“The disadvantage [is] the program can be considered quote-unquote ‘locked in,'” Makin said. While Congress has the legal power to cancel block buys, the military usually stops such changes by arguing any disruption to the contract raises the price to taxpayers while hurting companies and their workers.

Since the beginning of the Littoral Combat Ship program, Makin said, the Navy has prioritized continued, rapid production over proper testing. The result has been warships with unproven combat value and unreliable components. Yet despite the Navy’s urgency, there have been delays delivering on the current bulk-buy contracts, which are for first-generation LCS, so the shipyards are backed up. Austal and Marinette Marine have work to keep them in business through 2021, said Makin, “so there’s no schedule imperative to add frigates to the pipeline right now.”

Yet the Navy has already issued a Request For Proposals to start a two-phase bulk buy for the next generation LCS. Instead of splitting work between the two shipyards, Austal and Marinette will be in a loser-take-all competition for an initial contract for 12 vanilla Littoral Combat Ships. That award will be followed an add-on contract for upgrading all 12 to the upgunned frigate variant, which is still being designed. But even before the frigate design is finished and the add-on contract is awarded, in fact as soon as that initial contract is signed, Makin warned, the program is arguably “locked in.”

Not quite, said O’Rourke, when the soft-spoken Congressional Research Service expert held the floor for only the third time in the entire hearing, in the last few minutes before it adjourned. (A cultural difference is in play here: While CRS and GAO are both arms of Congress, GAO is the high-profile attack dog that legislators love to sic on suspect programs, whereas CRS is smaller, less influential, and more genteel).

1. To start, O’Rourke argued, Congress has done plenty of oversight of programs which have block buys, including LCS: It’s conducted hearings, commissioned GAO reports, and written admonitory report language into annual bills.
2. “Congress does retain the ability to terminate the block buy contract, and a block buy contract can be written without a termination penalty,” O’Rourke continued. It’s just a matter of writing the contract right. Another way to do a block buy without getting locked in, he said, is to avoid bulk purchases of components up front, which then create a sunk cost: Gee, we’ve bought all these propellers or engines or whatever, how can we not buy the ships to put them on? “That’s how the Navy has done the (current) LCS block buy contracts,” O’Rourke noted, “without any up-front batch buys.”
3. Yes, it’s true that Congress is historically reluctant to cancel block buy contracts, O’Rourke said, but it’s reluctant to cancel any major Pentagon program, whether it’s a multi-year contract or a year-at-time, especially once procurement has begun.
4. Finally, remember that the Navy wants to stop buying LCS from two shipyards simultaneously and award all work to either Austal or Marinette, whichever offers the better and more affordable frigate design. LCS critics have been urging such a “downselect” for over a decade, arguing buying two different designs from two different shipyards is inefficient.

But, “when you downselect to a single builder, you’re creating a monopoly,” O’Rourke warned. That’s not such a problem if you’ve already negotiated a bulk buy deal as part of the downselect competition. But, he said, “if the Navy then has to go back to that sole builder and contract on an annual basis and get into an annual negotiation with that builder, the Navy’s leverage in that situation might be reduced.”

“That’s the situation we’re in, for example, with aircraft carriers,” O’Rourke noted, and the results have been deeply unsatisfactory to many both in Congress — such as Senate Armed Services chairman John McCain — and the Pentagon — notably Navy Secretary Ray Mabus.

In other words, if you hold a winner-take-all competition for 12 ships, you can use the competition between the two shipyards to get a better price on all 12. If you hold a winner-take-all competition, eliminate one yard, and then go back to the sole survivor every year, then, in every year after the first, you’re negotiating with a monopoly of your own creation.

Annual negotiations with a monopolist do not put the Navy in a great position to get a better price. It does not put Congress in a great position to demand improved performance, either. In both cases, you can no longer threaten to take the taxpayers’ business to another yard, because the other yard’s no longer in business. But if you kept both shipyards going through annual buys, or if you had a once-and-for-all winner-take-all competition for a bulk buy while both were still in business, you’d have the leverage of competition. A block buy done right — and there are plenty of ways to do it wrong — might just be the best option.