Shipyards, Navy Vie for Work : Bid Process Unfair, S.D. Firms Claim
San Diego’s shipyards, already battered by cutthroat competition from the rest of the world, now are struggling with a tough new competitor: the U.S. Navy.
Despite the Reagan Administration’s philosophical bent toward private enterprise, the Navy has encouraged its own shipyards to compete for ship repair jobs that had been previously done in private yards.
So far, shipyards in San Diego have had mixed results in bidding against their nearest rival, the Long Beach Naval Shipyard. Both National Steel & Shipbuilding Co. and Southwest Marine, San Diego’s largest shipyards, were outgunned by Long Beach on a major contract last year for the overhaul and modernization of a destroyer. However, Southwest Marine has been able to underbid Long Beach on several smaller contracts at its yard in San Pedro.
But officials with Nassco and Southwest Marine say that the competition isn’t fair--indeed, that it can’t be fair, given the deep pockets of the U.S. government.
“How do you bid against a public agency?” asked Fred Hallett, vice president for finance and public relations for Nassco. “They can’t keep score the same way. There is no penalty if they (underbid).”
Costs Questioned
Local shipyard officials question whether the Navy yard in Long Beach has lower costs because wages in the government yard, they say, are at least 10% higher than those paid in San Diego. They contend the Navy yard has underbid them through creative accounting of labor units and overhead. The Navy yards can get away with such tactics, the private shipyards complain, because the “customer” for the work is just another arm of the Navy and has ample funds to cover “losses” if the shipyard bids too low.
“We do not understand the mechanism of their costs,” said Herb Engel, general manager of Southwest Marine. “We know there are lots of ways they can bury the funds and cover up for a loss.”
Navy officials counter that the competition has invigorated the naval shipyards and spurred on the private shipyards as well, saving the taxpayers $200 million since 1986 in lower ship repair costs along the way.
“There is an increased cost consciousness in both (public and private) yards,” as a result of the competition, said William Lindahl, manager of the Navy’s industrial management program. Although he admits there are difficulties in comparing costs between private and public shipyards, he said the Navy office that runs the competition is completely distinct from the part that manages the shipyards.
“To the best of our ability, we want it to be a straight up, open and fair competition,” Lindahl said. “As strange as it seems, we have put real boundaries between the Navy and the internal (naval shipyard) contractors,” Lindahl said.
Peace Shattered
The change has ended decades of usually peaceful coexistence between the nation’s private shipyards and the government-owned-and-operated naval shipyards.
As far back as the Revolutionary War, the U.S. government relied on Naval shipyards to build and repair its warships. The Navy now operates eight shipyards, including two in California (the Long Beach yard and the Mare Island Navy Ship Yard in the San Francisco Bay Area).
The Navy has always maintained that naval shipyards are vital to serve the fleet in emergencies and to be a mobilization base in wartime. The Navy yards also have a sizable investment in special facilities to repair and refuel nuclear-powered warships.
In the 1960s, however, the Navy stopped building new warships in naval shipyards because of the cost. Studies showed that private shipyards could construct new ships for significantly less.
So the Navy and the private yards worked out a gentlemen’s agreement: All new construction would be done in private shipyards, and the overhaul and repair work would be divided so that 70% would be done in the naval shipyards and 30% would be done privately.
By sending 70% of the repair work (which now totals $4 billion to $5 billion a year) to its own yards, the Navy would have plenty of work to maintain its investment in the yards and the specialized skills of the Navy’s shipyard workers. The remaining 30% would be divided among the private shipyards through competitive bidding.
Industry Troubles
That arrangement worked well until the early 1980s, when the shipbuilding industry began to fall apart. The Navy reached its goal of a 600-ship Navy by 1984, after which orders fell sharply. At the same time, the commercial ship market dried up almost completely, as a result of the oil (and oil-tanker) glut and the demise of the U.S. merchant marine.
In 1984, facing an imminent collapse of the industry, the shipbuilders asked Congress to order the Navy to split the repair work more evenly.
“The Navy yards could get along with 50% of the work. That would be a more equitable split,” said Nassco’s Hallett.
But the Navy said that shifting more work to the private yards would require cuts in its own work force. So, rather than establish a fixed percentage, the Navy convinced Congress to order a competition between the naval shipyards and the private yards as a way of allocating part of the work.
So far on the West Coast, the Navy has opened up five contracts worth about $64 million for competition in the last two years, But all five would have been repaired by prearrangement in private yards if there had been no competition. So, any work the Navy yards won would reduce the private yards’ workload.
As it turned out, the Long Beach Naval Shipyard won two of those contracts, worth $24.3 million.
Employment Sags
Meanwhile, employment in the San Diego yards has sagged. Since the beginning of 1986, Nassco has cut its work force by 56%, from 5,300 to 2,300. Earlier this year, Nassco delivered the last commercial ship under construction on the West Coast. Next year, Nassco will begin work on the first of four combat supply ships for the Navy. In the interim, however, it must depend on Navy repair and overhaul work to keep its doors open.
Southwest Marine, which also depends on the Navy for virtually all of its work, has cut employment at its San Diego yard by 43%, from 1,400 to 800, over the same period.
(The other two shipyards in San Diego that are approved by the Navy for repair contracts, Campbell Industries and Continental Maritime, are not affected by the public-private competition because they do specialized or short-term repair jobs or work limited to the San Diego area--jobs that are not open to the Long Beach yard.)
What irks local shipbuilders about the public-private competition isn’t only that Long Beach won the contracts, but how it won them.
‘Buying In’
In the first major West Coast competition, for the overhaul of the destroyer Fletcher, the Long Beach yard stunned Nassco and Southwest Marine when it underbid them by at least $4 million. The Long Beach bid of $22.7 million was 20% below the bid of Southwest Marine, according to Engel, a difference of about $4.5 million. Nassco wouldn’t release its bid for the ship, but it recently won a contract for the overhaul for a sister ship of the Fletcher, the Hewitt, with a $26.6-million bid, a job on which Long Beach didn’t bid.
“I would describe that as ‘buying in’,” said Engel, using an expression for purposely underbidding a contract. “I didn’t think it was a realistic bid whatsoever.”
Nassco’s Hallett said that wages at the government yard were about 10% higher than those at Nassco at the time of the Fletcher bid, a difference that, by itself, should have made Long Beach uncompetitive. He said Long Beach pays $14 per hour for comparable civilian journeymen, compared to Nassco’s wage then of $12.80. (Last month Nassco cut journeymen’s wages by 17%, to $10.80, and cut laborer wages by as much as 50%, to $5.75 per hour, which would widen the differential.)
“Does anyone credibly believe that a government bureaucracy runs leaner than this hard-pressed industry?” asked Hallett.
Calculating Overhead
Both Hallett and Southwest Marine’s Engel argue that the Navy’s newfound competitive edge derives not from labor efficiency, but from the complex measurement of overhead.
Overhead for a private contractor is measured according to widely accepted and understood accounting practices. But for a public enterprise, the measurement of overhead is far more difficult.
An example raised by both sides involves the charge for equipment--large, specialized cranes, for example, that aren’t used on a particular contract. Private shipyards generally must include an overhead charge for such equipment even if it will not be used on a job. But the Navy has contended that, in some cases, such equipment at its yards has “strategic value” for the national security and shouldn’t be included in its bids.
But the issue, according to Hallett, extends to all aspects that support the two different enterprises.
“In our overhead we have to include a charge for our parent company (Morrison-Knudsen Corp.),” he said. “But where is the cost of the secretary of defense included in the Navy’s bid? You won’t find that anywhere.”
Engel said the shipbuilding industry association has asked for details about the preparation of the Long Beach bid but that the Navy has declined to release it on grounds that the Navy yard is a competitor.
Efficiency Gains Claimed
Lindahl, in a recent interview at his Arlington, Va., office, admits that there is ambiguity over the measurement of overhead in the Navy yards. But he insisted that the bids reflect genuine cost savings resulting from improved efficiency.
He said the efficiency gains have come from adopting state-of-the-art management techniques from other industries. The list of companies and facilities Lindahl surveyed reads like a list from the latest “how-to” management manual, including Ford’s team-based operation for the design and assembly of the Taurus.
A key change, he said, was to introduce a team approach to overhaul tasks that previously had been done sequentially. Such a team approach cut the time for some overhaul work in half, he said.
Besides improving organization of the Navy’s work, employees in the public yards have been motivated by the threat of further workload cuts if they can’t demonstrate their competitiveness, Lindahl said.
“The workers believe it is a matter of survival,” he said.
Although the Navy hasn’t revealed how many jobs it will offer for competition in the coming fiscal year, the shipyards are betting that the program will stay at least as large as it is to date. That could spell even more trouble.
Forecasting into the early 1990s, both sides agree that there isn’t enough repair work to keep both the public and private yards at their current strength. The problem has been compounded because the Navy is using money earmarked to finance overhauls to pay for tanker escorts in the Gulf of Suez, costing $15 million to $20 million per month. Reducing the maintenance budget means postponed overhauls and even less work.
“The 70-30 split worked great when there was lots of work,” said the Navy’s Lindahl. “But we’re going to have to make some hard choices in the late 1980s,” he added. “We don’t have enough work for everybody.”
