Navy Contracting: Cost Growth Continues on Ship Construction Contracts
GENERAL ACCOUNTING OFFICE WASHINGTON DC NATIONAL SECURITY AND INTERNATIONAL AFFAIRS DIV
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For the last several years, we have monitored cost growth on Navy ship construction contracts and have testified and issued several reports on the subject see Related GAO Products at the end of this report. This report updates the status of the cost growth, describes trends in that growth, and discusses recent actions to finance additional costs and the implications of future cost growth. About 90 percent of the dollar value of the Navy ships under construction as of July 1991 can be accounted for in fixed-price incentive contracts with commercial shipyards. A fixed-price incentive contracts with commercial shipyards. A fixed-price incentive contract establishes a target cost and profit, a ceiling price, and a share formula that is used to determine the cost to the Navy and the profit earned by the shipyard. The target cost-a negotiated estimate of the ships actual cost-and target profit-the profit the shipyard should earn if the contract is completed at the target cost-can be adjusted by mutual agreement as work progresses, in which case the Navy is responsible for any additional expense. The target price is the sum of the target cost and the target profit. The ceiling price-generally 120 to 135 percent of the target cost-is the maximum amount the Navy will pay on the contract. The Navy and the shipyard share any over-target costs that exceed current target costs up to the ceiling price based on a formula that is negotiated as part of the contract.
- Economics and Cost Analysis
- Marine Engineering