GAO: Navy needs more contracting discipline

Poor contracting practices and lenient oversight, combined with an unqualified contractor, contributed to ongoing problems with a Navy vessel that continues to have reliability and performance problems 10 years after its scheduled completion date, auditors found in a new report.

Navy officials awarded a contract to Northrop Grumman Corp. in 1994 to design and build a submersible vessel that could secretly drop off and pick up Navy SEALs and equipment during dangerous missions. Navy officials accepted the Advanced SEAL Delivery System, or ASDS, on an as-is basis in 2003, six years after its planned delivery date, despite its not meeting technical requirements. The single ASDS vehicle in operation continues to have reliability and performance problems, according to a Government Accountability Office report, requested by the Senate Armed Services Committee.

In a blunt assessment, GAO reviewers set much of the blame for the problem at the agency's feet.

"Had the original business case for ASDS been properly assessed as an under-resourced, concurrent technology, design and construction effort led by an inexperienced contractor, DoD may have adopted an alternative solution or strategy," the report stated. "Ironically, after having invested about $885 million in nearly 13 years, DoD may still face this choice."

Reviewers criticized the Navy's 2003 decision to accept the underperforming ASDS vehicle, which transferred responsibility for fixing the remaining problems from Northrop Grumman to the service.

But the assessment focused largely on contracting and oversight decisions made since that time.

In the first two years after accepting the vessel, the Navy continued to pay the contractor for repairs, maintenance and upgrades, mostly under labor-hour contracts or agreements based on actual costs plus a prenegotiated fee. The contracts provided little incentive to meet schedule or cost goals, and the contractor exceeded cost estimates on almost half the delivery orders and missed schedule targets on 20 of 26 orders, GAO found.

Navy officials justified those contract structures as reasonable given the high risk associated with implementing new and complicated technologies, but shifted to more incentive-based fee structures over the following two years. GAO said there were early signs of better performance in the later period, though it was too soon to gauge results.

Navy officials also failed to follow best contracting practices by frequently not settling on terms such as cost and scope of work before authorizing the contractor to proceed, GAO found. In some cases, terms were not agreed upon until after the work was complete.

Navy officials told GAO they were taking more time with requirements development and pushing the contractor to be realistic in its cost and schedule estimates, and said all contract terms have been fully defined before award during the last two years.

The Navy is evaluating how much it would cost to finish the existing ASDS and whether it makes sense to do so, and expects to make a program decision in about a year.

In a series of recommendations, GAO said the Navy should establish firm criteria and test critical systems under operating conditions in time for the program decision, and officials should drop ASDS if the criteria are not met. Navy officials only partially agreed, arguing that some planned modifications will not be finished in time.

They agreed with a broader recommendation that the service should make sure the next follow-on contract appropriately balances risk between the government and contractor, and that the Navy should provide good management and oversight.

Auditors warned that the burden for fixing ASDS rests heavily on the Navy. "DoD's inadequate program and contract management in essence made the prime contractor's poor performance acceptable," they said. "Instilling more discipline into the contracting process is a step in the right direction, but its success hinges on DoD's willingness to hold the contractor accountable."

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