PANAMA CITY, Fla. — Eastern Shipbuilding Group transformed its shipyard and its business practices to win its first-ever U.S. Coast Guard construction program. But now, after suffering extensive damage from Hurricane Michael in 2018, the yard is awaiting word on whether it can keep that deal.
In 2016, Eastern Shipbuilding shocked many in the industry when it beat out several bigger and better-known yards for the Coast Guard’s offshore patrol cutter program, which the service now calls its top acquisition priority. But within two weeks of the yard wrapping up the detailed design phase and being awarded construction funds for the first ship, the category 5 hurricane hit the Panama City area, leveling homes and businesses in its path.
Despite parts of the shipyard being flattened and much of the workforce being left homeless, the company got back to work on OPC almost right away and is on track to deliver first-in-class Coast Guard cutter Argus next year, Eastern Shipbuilding Group President Joey D’Isernia told Defense News.
“For us, there was no other choice. We had a mission, and we were going to meet it,” he said during an Oct. 18 interview at the yard.
Since the hurricane, the company has not only rebuilt the yard, it has transformed its business practices to meet government audit standards, in what D’Isernia called an important step in establishing the small family-owned company as a reliable government shipbuilder.
Still, in 2019 the Coast Guard decided to take the bulk of the OPC program from Eastern, hoping to keep its all-important medium-endurance cutter replacement program on schedule. It left Eastern to work on the first four ships in the programs, with the remaining 21 to be recompeted.
That competition is now underway: D’Isernia said Eastern submitted its bid in June and is awaiting feedback.
Coast Guard spokesman Brian Olexy told Defense News he can’t say how many companies submitted bids, but “the Coast Guard expects to award the OPC second stage detail design and construction contract in spring 2022.”
Eight companies were awarded industry study contracts for stage 2 in March 2020, though it’s unclear how many went on to submit bids for the contract.
Bollinger Shipyards announced in June it submitted a bid for stage 2, with shipyard president Ben Bordelon saying in a statement that “our long history building for the Coast Guard is unparalleled.”
Ingalls Shipbuilding also submitted a bid; Huntington Ingalls Industries spokesman Danny Hernandez told Defense News the yard “is pleased to have submitted a proposal for what we feel is a sound and affordable plan for the Offshore Patrol Cutter. We are a committed partner to the Coast Guard today on the National Security Cutter program” after delivering nine of 11 ships in the NSC program of record.
Austal USA previously told Defense News that it too would bid on the OPC program as it stands up a steel shipbuilding capability at the Alabama yard to supplement the aluminum ships it already builds.
Still, D’Isernia said he’s optimistic Eastern will win back the contract and build the 25 total ships for the Coast Guard.
The plan before the hurricane
In 2016, Eastern Shipbuilding was a family-owned business best known for making fishing boats. The company had grown since D’Isernia’s father, Brian, founded it in the 1970s — adding things like fire boats, ferries, tugs and offshore supply vessels to the portfolio — but building a Coast Guard cutter was like nothing the company had done before.
Joey D’Isernia, appointed president of the company in 2015, said Eastern Shipbuilding was upfront about how much it didn’t know when it set out to win the contract.
“We understood that we didn’t know what we didn’t know. We have a strong shipbuilding background ... we have vessels all over the world. But we traditionally have not been in the government shipbuilding market,” he told Defense News during an interview at the shipyard’s headquarters.
“Right off the bat, we knew a mistake would be to think that we knew what it would take to not only bid but write a good proposal and ultimately execute on that,” he added. “We were very careful to bring in a team of folks that had a lot of experience in this.”
That team included a Cutter Advisory Board of current and former Coast Guard cuttermen, aviators and others who had experience with the legacy medium-endurance cutters. Since the Coast Guard’s request for proposals included performance-based specifications but little guidance on what the ship should look like, D’Isernia said “we used them as a constant sounding board” to understand what ship design would be most functional and comfortable for the operators.
D’Isernia attributed the company’s winning bid — which beat out teams at General Dynamics Bath Iron Works, which builds U.S. Navy destroyers, and Bollinger Shipyards, which builds Coast Guard cutters and Navy auxiliary ships — to a smart design, but also a great execution plan.
Key to that plan was designating the Nelson Street yard, the main hub of shipbuilding activity closer to downtown Panama City, as a dedicated OPC construction yard. All commercial projects would be sent to the Allanton facility farther down the beach; Nelson Street would only support the Coast Guard “to ensure just unimpeded, uninterrupted production line for that one customer: we want to be solely focused on you at this yard,” D’Isernia said.
Eastern overhauled the Nelson Street yard primarily through state appropriations and economic development grants from the Triumph Gulf Coast non-profit organization.
In September 2018, the company had just finished its detailed design work and was awarded funds to start construction on Argus.
“And then 10 days later, whammo. So to say it devastated our yard and our community is just a huge understatement. It’s one of those things that you have to be on the ground to really experience,” said the lifelong Florida panhandle resident.
Rebuilding from the hurricane
“It’s been a blur” from the day the hurricane hit until now, D’Isernia said. He said he never allowed the company to hit the pause button on the offshore patrol cutter program, despite the main OPC fabrication facility being blown down and having to bring in dozens of trailers to house homeless workers.
Part of the urgency had to do with proving the yard was capable of handling the contract.
“At the time, there were a lot of naysayers that wanted Eastern to fail, and when the hurricane hit, I’m sure to an extent that was like sharks getting the scent of blood in the water. ... There was no choice: it was get back on that horse, get things back up and running, take care of your people, charge forward, and the rest will take care of itself,” D’Isernia said.
But another part of the urgency was the importance of this government contract to the local community. Eastern Shipbuilding was already the largest private employer in Bay County. Now, with other businesses lost to the hurricane, the regional economy needed the yard more than ever.
“I have people come up to me at supermarkets, convenience stores and ask me how the offshore patrol cutter project is. And I have no idea who they are. So to these folks in this community, it’s a big deal. ... They know about it, they ask about it, they care about it,” D’Isernia said.
So, the yard started rebuilding. The insurance payments eventually caught up and paid most of the bills. Long-time subcontractors and business partners helped out, and the local community and the state pitched in, helping to take care of the workforce so employees could get to building the first cutter.
Argus was originally expected to deliver in 2021. After the hurricane, the Coast Guard reassessed the schedule and moved the expected delivery date to 2022. D’Isernia said Argus is tracking “on time” to the new schedule.
Transforming the family business
In the last three years, the yard physically rebuilt, but the company also transformed from a family shop to a proper government contractor — a major challenge, D’Isernia said, and key to the company’s bid to win back the rest of the cutter program.
The Coast Guard required Eastern to be certified or audited in three areas — the earned value management system, the accounting system and the purchasing system.
After the hurricane, the company first tackled the earned value management system and was certified by the Defense Contract Management Agency.
This fall, the yard’s accounting system was certified by the Defense Contract Audit Agency. D’Isernia said this was a major effort, ditching the entire accounting system and practices from the last 40-plus years and adopting the Deltek enterprise resource planning system familiar to the government.
The purchasing system is audit-ready, he added; the company is just waiting for the government to initiate the audit.
“It is quite a bit more work,” he said, but “these are the kind of things that the government doesn’t just put on paper because they just want to make you do it; it’s all about ability to manage a government contract.”
For Eastern Shipbuilding, that’s part of the pitch for the stage two competition for the remaining 21 cutters.
“This is great in that we’re able to execute, we’re able to transform our business for this OPC project, which is their highest acquisition priority, it’s the backbone of their fleet — but it also positions us very well for Stage 2 in that the government has been very clear that they like the design, they want a stable design, and they want to get these ships to the fleet as fast as possible,” D’Isernia said.
His pitch comes down to risk: the yard has a hot production line, the workforce is trained, and the company is near to passing its third and final certification, all of which reduces cost and schedule risk.
The Congressional Research Service in a report updated Oct. 19 noted the cost estimate for Eastern’s four ships had increased by a combined total of $300 million to $400 million compared to the Coast Guard’s 2017 Life Cycle Cost Estimate for the program, with that increase being primarily attributed to Argus.
Though much of that comes as part of the the restructure the Coast Guard and Eastern Shipbuilding agreed to after the hurricane, CRS still notes it’s an 18- to 24-percent increase in the per-hull cost of the program for Eastern’s four ships and questions whether there will be further cost increases as the Panama City yard builds the remaining vessels on contract.
Alternatively, the CRS report looks at risk for hulls 5 through 25. The estimated full load displacement — the ship hull plus all the systems installed onboard — grew by as much as 1,000 tons, or more than 20 percent, compared to estimates in 2017.
“Since, as a general matter, the cost of a ship of a given type is roughly proportional to its displacement, the increase of more than 20% in the OPC’s estimated full load displacement raises a possibility that the cost to build OPCs may have increased, perhaps substantially, from earlier estimates,” the CRS report finds.
Given the ongoing potential for cost increases compared to original program estimates, CRS urges lawmakers to consider: “How much of a production learning curve advantage will ESG have in the Stage 2 competition as a result of having some amount of experience in building its OPC design?”
What comes next?
Asked if having these three certifications would open up opportunities beyond OPC, D’Isernia said he is solely focused on executing OPC — all 25 ships — and hasn’t started considering what the yard might pursue next.
He noted the new facilities at the Nelson Street yard, as well as the new C5I integration and test facility at Allanton, “were specifically designed to turn the Nelson Street facility into an OPC factory” that could meet the Coast Guard’s most aggressive delivery needs.
OPC is already “the lion’s share of our work right now,” having crossed the 50-percent mark recently, but D’Isernia doesn’t want to give up the commercial work altogether. The company is wrapping up a project to build three Staten Island Ferries, which has become something of a tourist attraction as the hulls took shape and hit the water at the company’s third yard in Port St. Joe, Fla. If Eastern wins the second piece of the OPC program, D’Isernia said he hopes to have about 1,600 to 1,800 employees on OPC and perhaps several hundred working on other commercial projects.
Now the company is just waiting on that stage two contract.
After submitting the bid, “we’re anxiously awaiting some feedback and ready to provide whatever feedback we need to the government,” D’Isernia said. “In the meantime, we’re just out there executing.”
Megan Eckstein is the naval warfare reporter at Defense News. She has covered military news since 2009, with a focus on U.S. Navy and Marine Corps operations, acquisition programs and budgets. She has reported from four geographic fleets and is happiest when she’s filing stories from a ship. Megan is a University of Maryland alumna.