‘Inconsistent Demand Signal’ Causes Shipyard Capacity Issues

U.S. shipyards have the inherent ability and capacity to meet the congressionally-mandated goal of a 355-ship Navy set in 2018. They can efficiently serve all government and private customers for vessels—but only if Washington’s procurement policies can mitigate “inconsistent demand signals” that disrupt that capacity and contribute to a permanent loss of skilled personnel.

That was the message of Matt Paxton, president of the Shipbuilders Council of America, in testimony before the House Armed Services Committee on February 8. The council represents 40 companies that own and operate shipyards across the nation and more than 100 industrial base partners. The committee’s hearings are examining the state of the defense industrial base.

“Despite industry’s proven willingness to invest in their people and facilities to meet the Navy’s stated demand, the shipyard industry has been challenged with volatile fleet mix numbers and projected ship-repair workloads, including truncated or significantly delayed construction programs and canceled maintenance periods, leaving the industry with unfilled facilities, underutilized strategic assets and an underemployed workforce,” Paxton said. “Private shipyards require a predictable workload and a volume of work to support the recapitalization of equipment, keep rates low and train a sustainable workforce.”Naval leaders have been sounding the alarm about the eroding U.S. shipbuilding base and the threat this erosion poses to national security. On October 15 of last year, Rear Adm. Michael Wettlaufer, commander of the Military Sealift Command, warned in a talk to the Navy League that America’s defense maritime industrial base has “atrophied to a point where the United States builds less than 1 percent of the world’s ocean-going fleets and has less than 4 percent of the world’s licensed mariners while China establishes itself as a maritime nation.”

More recently, Vice Adm. Bill Galinis, head of the Naval Sea Systems Command, told a conference of the American Society of Naval Engineers that workforce development and retention is the “No. 1 strategic challenge” for the Navy. He said naval shipyards compete against private industry and other agencies for a shrinking and undersized pool of skilled workers needed to bring the Navy forward as the next decades unfold, according to Defense News.

COVID Relief Payments Not Authorized

As a “designated critical infrastructure” industry, shipyards never shut down during the COVID-19 pandemic, Paxton said. But the pandemic did introduce new costs and delays into the system, and “there is uncertainty as to how those delays and costs will ultimately be addressed by the government customers. While certain programs have been authorized to give DoD the flexibility to adjust contracts to help industry absorb costs incurred because of the pandemic, those programs have either not been funded, or those authorities have not been exercised to provide industry relief.”

Paxton said smaller shipyards and contractors often negotiate firm-fixed-price contracts that assume an inflation rate of 2 or 3 percent. However, “[i]nflation is still elevated at 6.5 percent, and with lingering issues in the supply chain, companies are now faced with possible schedule delays, less output and cost increases. Those who have entered into firm-fixed-price contracts are even more susceptible to the changing dynamics of today’s economic environment. Unfortunately, in most cases, the services have expected the private shipyard industry to absorb the delta in costs.”

A 2018 report assessing the U.S. manufacturing and defense industrial base and supply chain found that since 2000, the defense industrial base has lost more than 20,500 manufacturing firms across all industries and that the shipbuilding and repair manufacturing component was one of the hardest hit in that time period, Paxton said. “It would be reasonable to conclude that the pandemic and follow-on challenges to these market conditions have caused additional companies to exit the industrial base.”

Naval Uncertainty

One source of uncertainty for shipbuilders is mixed signals about the Navy’s plans for the future. Public statements of various naval leaders have presented a “moving target,” said Paxton, on such topics as whether or not the 355-ship figure includes unmanned vessels; statements about changes to fleet structures; and the release of a long-term maintenance document in June 2021 that differed from one released just six months earlier.

“SCA does not advocate for one program or ship class over another,” Paxton said.  “[But] this inconsistency from our largest government customer hurts the ability of our industry to make critical investments in our workforce and facilities. While as an industry we pride ourselves on our ability to meet the needs of our customers and shift to incorporate new technologies and processes into our work, the industry is not a light switch that can be flipped on and off without our people and facilities needing to make major adjustments.”

Effects On Coast Guard Budget

Simultaneously, the U.S. Coast Guard is undertaking efforts to recapitalize essential national security assets such as the Polar Security Cutter, Offshore Patrol Cutters and the Waterways Commerce Cutters that ensure the safe navigation of inland marine transportation. “To meet the demands of these recapitalization plans requires significant and sustained investment by the Congress, the Navy the Coast Guard and industry in order to work together to meet the requirements of the future fleet,” Paxton said.

Alternative Procurement Strategies

Paxton said Congress could help by authorizing alternative procurement strategies, including advanced procurement, incremental funding and block buy contracting. These could “increase stability in Navy and Coast Guard shipbuilding plans and increase the number of ships that could be built for the same amount of procurement funding,” he said.

In incremental funding, cost is divided into two or more annual portions. It allows for expensive items, such as large Navy ships, to be procured in a given year while avoiding or mitigating budget spikes and major fluctuations in year-to-year budget totals.

“While this authorization also requires appropriations support, industry believes that incremental funding would also allow construction to start on a larger number of ships in a given year so as to achieve better production economies,” he said. “And an added benefit often not considered is a reduction in the amount of unobligated balances associated with DoD procurement programs.”

Block buy contracting permits the Department of Defense to use a single contract for more than one year’s worth of procurement of a given kind of ship without having to exercise contract options for each year after the first year.