Navigation Brief
ALEXANDRIA, Va. -- Good Evening, Drifters
Thanks for joining me once again on our naval journey of discovery. Tonight we're going to get into a discussion about acquisition and cost controls on big programs. And I know, I know: Believe me, I know. I had to stifle a yawn just thinking about it.
But there is a special absurdity in the cost caps for aircraft carriers that I think warrants examination. And because I recognize that this is snoozer of a topic, I'm going to keep it quick!
So here goes.
Let's Drift!
-- DBL
Where the Price is Made Up and the Cost Caps Don't Matter
If you are a really, really dedicated reader of Defense News' naval coverage, you may have caught that I wrote about carrier cost caps this week. The very small, incremental update was that Congress lowerd the cost caps on Enterprise and its sister ship, unnamed CVN-81, to reflect savings from the two-carrier buy.
Read about that here:
Congress lowers cost caps on future aircraft carriers
Now, one thing that I want to point out from that story is this line:
Except: "As usual the cost caps do not include any overruns caused by inflation or costs incurred through the purchase of spare parts, the bill said. Furthermore, the secretary of the Navy can change the caps by notifying Congress."
That is correct: SECNAV can change the new caps anytime he wants, just needs to tell Congress 15 days in advance. That's actually new, SecNav could do so if he met certain conditions. If he did not, Congress would have to raise the caps. The new law is less restrictive, assuming it gets signed by the President.
Now another line I want to point out is that, before his untimely ouster, Navy Secretary Richard Spencer was loudly complaining about caps, saying they didn't help save any money.
“Sometimes we’re our own worst enemy," Spencer said. "You don’t get anything for free, and you’re not going to drive quality by cost-capping. We have to start thinking differently when we go to cost control.”
Now, let's get into some history here, courtesy of Congressional Research Service. The original cost cap for Ford was laid out in the FY2007 John Warner National Defense Authorization Act and capped total expenditures for CVN-78 at $10.5 billion, plus adjustments for inflation and other factors, and established a procurement cost cap for subsequent Ford-class carriers of $8.1 billion each. Well that turned out to be kind of a joke.
The cap has been raised numerous times since then, to the point where now the program costs about 25 percent more than its original cap. The most recent cap was in this most recent NDAA and it weighed in at $13.22 billion for Ford.
So, I ask myself: If we just hike the cost cap each time we blow through it, what's the point? This is usually the part where I call someone smarter than me to ask. And so, I called friend-of-The-Drift and analyst extraordinaire Bryan Clark at the Center for Strategic and Budgetary Assessments for his take on the effectiveness of Cost Caps. Here's what he had to say:
Clark:"The cost cap is a flawed idea, especially with large acquisition programs. You're not going to stop a program because it broke a cost cap. Anything that's a large acquisition program is going to have so much energy behind it, and money sunk into it, that it would be unlikely for Congress to cancel a program because it exceeded a cost cap.
"We've already got mechanisms through Nunn-McCurdy to evaluate cost growth relative to the original baseline. And that, to me, is a more useful mechanism to reveal program that have gotten more expensive, allow the agency to explain the cost increases and what they plan to do to address them. So to me the Nunn-McCurdy mechanism is a much better oversight tool than a cost cap.
"The cost cap is somewhat arbitrary. It's really a target that they are trying to get DoD to drive under through cost-savings measures. That's a noble aspiration, but there are better ways to drive those cost savings. For example, giving cost-share incentives on the price of the vessel. So, you can make it so any savings the shipbuilder is able to gain from efficiencies, they get to keep half. That is how a lot of shipbuilding programs incentivize shipbuilders to be more efficient."
Makes sense to me.
Now on to The Hotwash.
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