Coast Guard Embarks on Its Costliest Ship Buying Program

The Coast Guard’s fifth national security cutter left its construction birth in Pascagoula, Mississippi, in early May and is expected to be delivered to the service next year.

That came only months after the Obama administration put in its 2015 budget request money to build the final NSC of the eight-ship fleet. Meanwhile, a shipyard in Louisiana continues to turn out several fast response cutters per year.

This is all good news for the Coast Guard. In 1998, it embarked on a 25-year ship and aircraft modernization program called the Integrated Deepwater System. It became mired in cost overruns, poor management and delays, which prompted a major reorganization of the service’s procurement strategy and the scrapping of the Deepwater name and its sour connotations.

After bolstering its acquisition personnel and fighting for funds to complete the national security cutter fleet, experts interviewed said the Coast Guard has put its acquisition woes behind it.

The offshore patrol cutter is next.

The ship, which is designed to operate in waters farther than 50 miles offshore and in high sea states, will be the most expensive acquisition program in the Coast Guard’s history. The planned 25-ship fleet is expected to cost about $484 million per ship, which comes to $12.1 billion. Officials say it is a vital program because the average age of the two classes of medium endurance cutters it’s intended to replace is 46 years.

Adm. Robert Papp, commandant of the Coast Guard until his planned retirement at the end of May, acknowledged at a House Homeland Security Committee subcommittee on border and maritime security hearing that the large price tag for the program comes at a time of shrinking budgets.

“I’m fully aware of the fiscal restraints we face as a nation, but I must continue to support the development of the offshore patrol cutter,” he said.

The service issued three preliminary design contracts in February to Bollinger Shipyards, General Dynamics-Bath Iron Works and Eastern Shipbuilding. Two of the original eight companies in the competition, Huntington Ingalls and VT Halter, filed protests with the Government Accountability Office. Rulings are expected on those two cases the first week of June.

Papp, testifying in front of the House Committee on Transportation and Infrastructure, said the service is taking the protests in stride. “We believe there will be no measurable impact [on the schedule] at this point. It’s part of the process. They’re entitled to put in the protest. We’re working through that right now. I’m confident at this point that … our decisions will be sustained and then we’ll continue moving out on it.”

The first offshore patrol cutter is scheduled to be obtained in 2017 and the procurement of the remaining 24 is expected to last until the 2030s.

Coast Guard documents show that the winner of the downselect would build the first nine ships.

“The Coast Guard has pretty much recapitalized its aircraft fleet. The ships and cutters, the [OPC] was the last piece of it,” said Ashley Godwin, a senior defense advisor at the Shipbuilders Council of America. “It’s the largest Coast Guard acquisition program ever. … It’s not insignificant. $12 billion is a pretty good chunk of change.”

Questions remain on how many ships the Coast Guard truly requires and whether it will have the funding available for all its acquisition needs.

“The Coast Guard gets really great support in Congress. The problem is that it’s part of a much larger organization, the Department of Homeland Security. So it can get overlooked at times,” Godwin said.

Ronald O’Rourke, specialist in naval affairs at the Congressional Research Service, in an April report to Congress on the Coast Guard’s three cutter programs, noted that Papp and other service officials have testified before Congress that it needs about $2.5 billion per year to fund all its acquisition programs. It averages about $1.4 billion per year.

Papp said: “I have continually insisted that affordability is the driving requirement for the ship and I think that our contracting vehicle is unique in the fact that we have put in our contract. And that’s part of why it took us a little bit of time to get this going. I wanted to have affordability right in there.”

Meanwhile, the 2015 budget proposal asks only for $20 million for the offshore patrol cutter program. This is the same amount that was allocated in 2014. It was supposed to rise to $65 million next year, noted Brian Slattery, a Heritage Foundation defense studies research assistant. Shortchanging development dollars may come back to haunt the Coast Guard, he said.

“If you start building when the program is not mature, it ends up being more expensive,” he said.

Godwin said since the OPC is still in the development phase, ”there is more wiggle room there. But [funding] has to remain stable and increase in coming years.”

Papp said pressure to keep costs down will be put on the winning shipyard.

“We’ve made it known to the shipyards … what we think our budget is, what we think that ship should cost and that’s going to drive their process if they want to be selected as the final candidate for building this ship,” he testified.

There are also questions as to whether 25 offshore patrol cutters are sufficient.

Twenty-five OPCs are the bare minimum, Slattery added. The numbers required to carry out all the service’s missions are actually much higher.

O’Rourke noted in his report that the national security cutter, fast response cutter and offshore patrol cutters will total 91 ships if current plans hold. They are replacing 90 legacy ships. Since the modern boats will be far more capable than the decades-old ones that will be retired, this may seem reasonable on the surface.

“Coast Guard studies have concluded that the planned total of 91 NSCs, OPCs and FRCs would be considerably fewer ships than the number that would be needed to fully perform the service’s statutory missions in coming years,” O’Rourke wrote.

In fact, the objective fleet mix number for OPCs is 57, more than double the planned buy of 25, he said.

The Coast Guard has 11 statutory missions, seven of which will be carried out by offshore patrol cutters: search and rescue; drug interdiction; migrant interdiction; ports, waterways and coastal security; protection of living marine resources; general law enforcement and defense readiness operations.

Pulling back on initial requirements numbers is common in the defense acquisition world, Slattery said. Papp has been adamant that 25 is the bare minimum, Slattery noted. The national security cutter program was pared down to eight and the Coast Guard had trouble making that happen.

“It is quite possible that will happen with the offshore patrol cutter. That is just the nature of budgetary pressure,” Slattery said.

O’Rourke said either the number of ships will have to increase, or the number of missions the Coast Guard is obligated to execute will have to be reduced, or both.

And that is just not going to happen, said Slattery.

“I see no indication that [Congress] will reduce the number of core missions that the Coast Guard has. And the demand is only going to increase,” he said.

There will be more demands on Coast Guard ships in the Arctic region in coming years, Slattery predicted, The OPC’s role in that region is not yet clear, but certainly the larger national security cutters will be pressed into duty there. That will in turn put pressure on the offshore patrol cutter fleet, Slattery said.

Another unknown is whether Congress will allow the Coast Guard to pursue multi-year procurement authority for the OPC. Rather than funding ships in each budget cycle and keeping the service on pins and needles every year as to whether it will be able to remain on a steady acquisition schedule — as was the case for the national security cutter — the service could be assured of some stability, he said.

Military services, including the Navy, have effectively used this authority, Godwin said, particularly in the DDG-51 guided missile destroyers and Virginia-class submarine programs.

In this mechanism, Congress gives up its yearly budget control in exchange for cost savings for taxpayers. It allows contractors to buy long-lead items in higher quantities, which saves money as well as giving suppliers guarantees of steady work.

“Instead of having to buy a cutter up front all at once, you get to kind of smooth out the acquisition costs,” she said.

The Navy has “achieved a good amount of saving using that authority. With an acquisition of this size — 25 cutters, if they can get that authority … it makes sense.”

Slattery said: “In any shipbuilding contract, or other military contracts in general, multi-year procurement really gives assurances to the industrial partners, to make long lead material buys and really generate economies of scale. Where possible, multi-year procurement makes sense.”

Godwin noted that the House in the Coast Guard Authorization Act already voted for OPC multi-year contract authority. This is just an authorization bill, she said. “It’s really up to the appropriators … They are the ones that can really make this happen if they want it to,” she added.

The Coast Guard has never administered a multi-year contract, Godwin added.

Overall, the OPC program is going to be a big win for whichever shipyard or yards, gets the contract. It will have a ripple effect for the industry.

“It’s going to be great for suppliers. It’s going to keep these guys in business for awhile,” she said.

Topics: Homeland Security, DHS Budget, Procurement, Shipbuilding, Surface Ships