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Navy to Congress: Block Buy Contracting Saves Money and Time

Newport News Shipbuilding placed a 900-ton superlift into dry dock, continuing construction of the nuclear-powered aircraft carrier John F. Kennedy (CVN 79). Nearly 90 lifts have been placed in the dock and joined together since the ship’s keel was laid in August 2015. Newport News Shipbuilding photo.

WASHINGTON, D.C. — The Navy’s top weapons buyer was on Capitol Hill this week pitching block buy contracting authority as a way for the service to cut both the cost of large programs and time required to field capabilities.

Since becoming the Navy’s chief weapons buyer, finding ways to save money throughout the department has been the focus of James Geurts, the assistant secretary of the Navy for research, development and acquisition. Appearing during a Wednesday House Armed Services Committee hearing, Geurts said the Navy is exploring whether block buy contracting could help make large purchases more affordable.

“How do we create the right business environment to allow business to operate cost-effectively and with an element of urgency,” Geurts said.

Block buy contracting, something the Navy has only used for a couple of recent large purchases was described by Geurts as being an authority worth exploring more.

Citing the Virginia-class block buy as an example, Geurts said “We’re delivering submarines to the fleet two years earlier at a greatly reduced price with a more capable submarine. That to me is a good mission outcome.”

The block buy contract for the next batch of 10 Virginia-class submarines will save the Navy $5.4 billion, Geurts said after the hearing. Continuous production on the Columbia-class will save $1.2 billion.

The Navy has also used block buy contracts for the Littoral Combat Ship program, and the John Lewis-class oilers, according to a December Congressional Research Service report, Multiyear Procurement (MYP) and Block Buy Contracting in Defense Acquisition: Background and Issues for Congress.

When the Navy establishes requirements and knows what it wants, it can send the message to industry that multiple programs or capabilities will be purchased at once, Geurts said. The Navy’s shipbuilding plan lays out the framework for industry to use when planning where to invest.

Following up on comments he made with the Senate on Tuesday, and echoing past comments from his boss, Secretary of the Navy Richard Spencer, Geurts said, block buying the next two carriers could save a billion dollars.

“Are there better ways to write the business contract to take advantage of that,” Geurts said. “That would be the premise that we’re studying.”

  • Curtis Conway

    “Block Buy Contracting Saves Money and Time”? Absolutely, and the greatest example wasn’t even mentioned. . . DDG-51 Arleigh Burke Destroyers. That example saved enough to purchase an additional destroyer. An additional factor was involved in that equation. Competition between Bath Iron Works and Huntington Ingalls Industries kept cost down. It even got where resources were shared between the two yards to meet national production goals, which is an example to which other Defense companies should pay attention.

  • Zorcon, Fidei Defensor

    A MAJOR cost to contractors, small or large, is the endless requirements of proposals. In the quest to make everything transparent and to limit the profits of contractors, the DoD ends up taking countless hours of time satisfying all sorts of stuff. Well guess what? You have to recover that somewhere and guess who pays?

    How about streamlining the procurement process, especially for small companies under some reasonable threshold?

    A million dollar contract in this age is very small and yet it takes a year to go from award to a PO?

  • D. Jones

    Make Burke’s like crazy. Eliminate the disastrous LCS (there’s a block buy failure) and let Burke-lite’s do the job. Same hull, same powerplant, fewer missiles and maybe a less super duper radar, but both designed to be upgraded quickly. Sure, they’re overkill for some missions, but what of it? Commonality of a terrific platform drives down training and procurement costs. A Lite version could chop half a billion out. Fewer crew too.

    For all the money we’ve piddled away on PORK like the LCS, we could have fielded as many Burke-lites as LCS.

  • Marcd30319

    The best example of a block buy was the CVN-72 and CVN-73 which were funded under the FY1983 Defense Appropriations. Act and CVN-74 and CVN-75 funded under the FY988 Defense Appropriations. Act. The results were substantial savings and faster delivery while being able to maintain the overall industrial base to support carrier construction.

    • USNVO

      Buying two carriers was a good move, and actually it allowed numerous cases where three carriers of equipment to be ordered at one time because CVN-71 was under construction (for example all the aircraft elevators were ordered at once) and it did result in much earlier delivery, but it really didn’t save that much, at least to the country. Because of the nature of the contract, much higher amounts of funds were spent earlier in the build process (where the savings came from), as a result the added storage cost for materials and interest to service the increased debt pretty much matched the savings to the Navy. However, they did get each of the ships to be delivered anywhere from 2-3 years early. As a totally unexpected side effect, it also completely messed up the ROH schedule of the Roosevelt, Lincoln, and Washington that we are seeing today.

      • Marcd30319

        The figure is I have seen for saving from the block buy for CVN-72 and CVN-73 was around $750 million USD per Noman Polmar (The Ships and Aircraft of the U.S. Fleet) and various contemporaneous sources.

        • USNVO

          And that was, and is, the conventional wisdom. And when looked at just the Navy, that is true. I think the Navy saved quite a bit more because the TR was still under construction at the time and quite a bit of savings were made on it as well.

          However, you need to remember that in 1984, the 30yr treasury was over 10% (the 10yr was 14%!). So the more you borrowed up front (increase in deficite spending) the more the country paid in interest. At 10%, it doesn’t take a huge amount or a long time to wipe out your savings. But again, that was for the country as a whole and not for the Navy, they never saw the interest payment, just the principle.
          For example, if you figure the country carried on average an extra $1B for 7 years at 10%, the increased interest payment is $700M (somewhat simplistic calculation because it doesn’t use compounding interest and the actual amount was significantly higher to begin with and less in later years but it serves the purpose).

          So even though the Navy saved years of overhead on the construction, it was countered by the interest that was paid. The Navy paid a huge amount up front, often 5 or more years in advance of when they normally would so they could generate economy of scale. That is a way easier problem at the 3% of today versus the 10-12% of then.

          Bottom line is the Navy saved a lot but the country ended up footing the bill for roughly the same amount the Navy saved, they just didn’t know it. It is like getting a great saving on a new winter coat for your son who won’t grow into it for several years. If you pay cash, it is a win. If you financed the amount on a credit card for those few years, you better have got a great deal.

          However, this is not to say it wasn’t a good deal. The Navy got both of the ships significantly earlier than through previous contracting methods and that was a significant win by itself considering the goal was to grow the fleet. As noted though, the compressed build schedule is playing havoc with the mid-year refueling overhauls.

          • Marcd30319

            I concur with you that the interest rates are a hidden factor. Given the current low rates, blocking buying may be an even better deal now.

          • USNVO

            Even without the projected rising rate environment, block buys look especially good for the Navy and currently, for the country as well.

          • Marcd30319

            Hopefully CVN-80 and CVN-81 will get a block buy.

  • Curtis Conway

    The PMS-400 Office and all its divisions, were seasoned, experienced, and competent in their tasks. Some people throw rocks at tradition, particularly after declaring PEACE Across the Planet after the Berlin Wall came down, and the Master Drawdown plan was executed. However, in things Naval, the one thing that does not change is the Sea! Learn from her, and all the lessons of Combat (i.e. US Navy Survivability Standard paid for in BLOOD), or let it be replaced with expediencey and false currency in the form of Cost Savings by skipping the hard and meaningful things. That is why Huntington Ingalls builds real combat ships. The two LCS yards are playing at it. One LCS tied to a pier in the Great Lakes is proof. Want to send them to the Arctic in a Emergency? I don’t think so. A less capable NSC would be much more likely to get there at least. Put more combat capability on the NSC, and it will be able to accomplish the mission when sent to the Arctic, and come back as well, even in an ice water environment. The LCS is No-Soap in that scenario. It would be a throw away vessel, and a throw away crew . . . except make negative headlines for the Navy and cause much sorrow for the public . . . NOT the mission of the US Navy! Where is our leadership when we need it? These new guys are False Dice.

  • Marc Apter

    More DDG-51 derivatives would be great. Now let’s start the discussion as to where we will get the crew to man them correctly!

    • Chesapeakeguy

      Agreed. Perhaps those derivatives can be designed with less crew involved?

  • marc6850

    The John Lewis class of Oilers need to have the names designated for each ship re-evaluated. These ships should be named after sailors and officers, not political selections.

    • USNVO

      Or, and this is just spitballing, they could be named after rivers.

  • Refguy

    How has it worked out for the F-35? We’ve bought Block 10 and are negotiating Block 11 and still haven’t had a full OpEval?