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Strategic Mobility: Late Deliveries of Large, Medium Speed Roll-On/Roll-Off Ships (Letter Report, 06/16/97, GAO/NSIAD-97-150).

GAO reviewed the Navy's progress in acquiring 19 large, medium speed
roll-on/roll-off (LMSR) ships, focusing on: (1) the Navy's efforts to
deliver LMSR conversion and new construction ships on schedule and the
impact of any delays on the Army meeting its prepositioning afloat
requirements; (2) the capability of the LMSR conversion ships to
adequately perform their mission; (3) the level of crewing for the LMSR
ships; and (4) increases in LMSR procurement costs.

GAO noted that: (1) as of May 1997, four of the five LMSR conversion
ships were delivered 16 to 20 months late and the remaining ship is 24
months behind schedule; (2) the delays in conversion ships are due to
both government and contractor problems; (3) late deliveries of the new
construction ships are due to labor strikes and similar problems
experienced in the conversions; (4) additionally, inadequate controls in
the material management systems at all three shipyards could result in
further schedule delays; (5) these delays will cause the Army to rely on
smaller, less capable ships and to incur an estimated $18.5 million
additional cost in operations and maintenance funds over 3 years ending
fiscal year (FY) 1998; (6) the number of major deficiencies identified
on the four delivered conversion ships has decreased since the first
delivery; (7) the final performance issue, the inability of the cargo
discharge system to remove water from cargo areas, was corrected and
cleared by the Coast Guard after testing in mid-May 1997; (8) also, the
Navy operational testers identified the inability of the first
conversion ship to sustain a speed of 24 knots, it averaged a maximum
speed of 23.665 knots; (9) Department of Defense (DOD) officials said
that the older LMSR conversion ships would likely require increased
maintenance; (10) the Military Sealift Command, through its ship
manager, plans to crew the five conversion ships at the minimum levels
required by the Coast Guard plus four additional crewmembers to manage
and perform food service and housekeeping duties for a total of 26
crewmembers; (11) minimum crewing is a cost-saving measure several ship
operating companies use, but it may not provide the crew levels
necessary for adequate ship maintenance; (12) according to Military
Sealift Command officials, the ship operating company will use
industrial assistance workers to augment the permanent crew for ship
maintenance and repair; (13) the LMSR conversion and new construction
ships have had a net cost increase of about $131.5 million as result of
schedule delays; (14) the five conversion ships have experienced ships
have experienced a total cost increase of about $173.3 million; (15) the
new construction ships have experienced a cost decrease of about $41.8
million, which can primarily be attributed to a change in price indexes
issued by the Office of Management and Budget; and (16) despite the net*

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-97-150
     TITLE:  Strategic Mobility: Late Deliveries of Large, Medium Speed 
             Roll-On/Roll-Off Ships
      DATE:  06/16/97
   SUBJECT:  Navy procurement
             Military vessels
             Industrial mobilization
             Military cost control
             Shipbuilding industry
             Defense contingency planning
             Cost analysis
             Department of Defense contractors
             Defense capabilities
IDENTIFIER:  DOD Mobility Requirements Study
             DOD Mobility Requirements Study Bottom-Up Review Update
             National Defense Sealift Fund
             Fast Sealift Ship
             Large Medium-Speed Roll On Roll Off Ship
             Army Afloat Prepositioning Program
             
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Cover
================================================================ COVER


Report to the Secretary of Defense

June 1997

STRATEGIC MOBILITY - LATE
DELIVERIES OF LARGE, MEDIUM SPEED
ROLL-ON/ROLL-OFF SHIPS

GAO/NSIAD-97-150

Strategic Mobility

(703169)


Abbreviations
=============================================================== ABBREV

  DCAA - Defense Contract Audit Agency
  DOD - Department of Defense
  GAO - General Accounting Office
  LMSR - Large,Medium Speed Roll-On/Roll-Off
  NASSCO - National Steel and Shipbuilding Company

Letter
=============================================================== LETTER


B-276849

June 16, 1997

The Honorable William S.  Cohen
The Secretary of Defense

Dear Mr.  Secretary: 

This report discusses the Navy's progress in acquiring 19 Large,
Medium Speed Roll-On/Roll-Off (LMSR) ships to preposition Army
equipment and add to surge sealift capacity.  To fulfill its sealift
requirements, the Department of Defense (DOD) is converting 5 used
commercial container ships and will build 14 ships.  Specifically,
this report discusses (1) the Navy's efforts to deliver the LMSR
conversion and new construction ships on schedule and the impact of
any delays on the Army meeting its prepositioning afloat
requirements, (2) the capability of the LMSR conversion ships to
adequately perform their mission, (3) the level of crewing for the
LMSR ships, and (4) increases in LMSR procurement costs. 


   BACKGROUND
------------------------------------------------------------ Letter :1

DOD bases its requirements for strategic mobility forces on the 1992
congressionally mandated analysis called the Mobility Requirements
Study.  The study established a requirement for an additional 3
million square feet of surge capacity and 2 million square feet of
prepositioned capacity by fiscal year 1998.\1 The study recommended
that DOD acquire 20 LMSR ships, 9 for prepositioning, and 11 for
surge to meet this requirement.  In 1992, we reported on the Navy's
plans to acquire the 20 ships and concluded that significant time and
cost savings could be realized to the extent that the Navy buys and
converts ships.\2 In its most recent requirements study--the 1995
Mobility Requirements Study Bottom-Up Review Update--DOD validated
the study's recommendation and reinforced an earlier recommendation
by the Joint Chiefs of Staff to buy 19 LMSR ships and established a
requirement for 10 million square feet of surge capacity and 4
million square feet of prepositioned capacity, for a total capacity
of 14 million square feet.  In addition to the LMSR ships, sealift
capacity would come from reduced operating status ships already in
the Ready Reserve Force and Fast Sealift Ships under Maritime
Administration and Military Sealift Command control. 

Eight LMSR ships will provide about 2 million square feet of cargo
capacity to preposition Army equipment for heavy forces and support
units, nearly 50 percent of DOD afloat prepositioning requirements. 
The remaining 11 LMSR ships will move equipment quickly from the
United States to areas of conflict.  This action will provide nearly
3 million square feet of surge capacity, or nearly 30 percent of
DOD's surge sealift requirements.  Initially, the Army will use the
five conversion LMSR ships for prepositioning equipment; eventually,
these ships will move into the surge force as the new construction
ships are completed (see fig.  1). 



   Figure 1:  Projected
   Operational Schedule for LMSR
   Ships and Capacity Provided
   (1997-2001)

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)

Notes:  LMSR ships that have not been given names are identified by
Navy-assigned hull numbers. 

The five conversion ships will begin to move to surge status as T-AKR
311, T-AKR 303, T-AKR 312, and T-AKR 313 are deployed. 

Source:  Our analysis based on data from U.S.  Transportation
Command, Military Sealift Command, and Naval Sea Systems Command. 

Of the five conversion ships, two are being converted by Newport News
Shipbuilding, Newport News, Virginia, and three are being converted
by National Steel and Shipbuilding Company (NASSCO), San Diego,
California, from container ships purchased from commercial ship
operators.  Avondale Industries, New Orleans, Louisiana, and NASSCO
are each designing and building six new ships.  One or both of these
shipyards will build the last two LMSR ships.  The Military Sealift
Command, DOD's manager for sealift, operates and maintains the LMSR
ships with civilian commercial contract merchant mariners.  The
Military Sealift Command puts each ship through a ship introduction
period, which usually lasts about 8 months, after delivery from the
contractor.  The ships are ready for prepositioning or surge
deployment once all major deficiencies have been resolved.  (See app. 
I for photographs of LMSR conversion ships and app.  II for drawings
of LMSR new construction ships.)

As of April 1997, the Congress had appropriated about $4.8 billion of
the estimated $6 billion for the 19 LMSR ships at an average cost of
about $314 million.  Funding for the LMSR acquisition program is
appropriated in the defense budget through the National Defense
Sealift Fund, which was established in fiscal year 1993 as a
revolving fund that acts as a centralized fiscal authority for all
sealift activities. 


--------------------
\1 Surge sealift ships transport equipment and supplies from the
United States to help complete the initial buildup of U.S.  forces. 
Prepositioning ships store equipment and supplies for U.S.  military
forces in ocean areas close to potential regional crises and
conflicts. 

\2 Shipbuilding:  Navy's Plan to Acquire Additional Strategic Sealift
(GAO/NSIAD-92-224, July 30, 1992). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

As of May 1997, four of the five Large, Medium Speed Roll-On/Roll-Off
conversion ships were delivered 16 to 20 months late and the
remaining ship is 24 months behind schedule.  Deliveries of new
construction ships are expected to be 4 to 12 months later than
planned.  The delays in conversion ships are due to both government
and contractor problems.  Late deliveries of the new construction
ships are due to labor strikes and similar problems experienced in
the conversions.  Additionally, inadequate controls in the material
management systems at all three shipyards could result in further
schedule delays.  These delays will cause the Army to rely on
smaller, less capable ships and to incur an estimated $18.5 million
additional cost in operations and maintenance funds over 3 years
ending in fiscal year 1998. 

The number of major deficiencies identified on the four delivered
conversion ships has decreased since the first delivery.  The final
performance issue, the inability of a water discharge system to
remove water from cargo areas, was corrected and cleared by the Coast
Guard after testing in mid-May 1997.  Also, the Navy operational
testers identified the inability of the first conversion ship to
sustained a speed of 24 knots; it averaged a maximum speed of 23.665
knots. 

Defense Department officials said that the older, Large, Medium Speed
Roll-On/Roll-Off conversion ships would likely require increased
maintenance.  The Military Sealift Command, through its ship manager,
plans to crew the 5 conversion ships at the minimum levels required
by the Coast Guard plus 4 additional crewmembers to manage and
perform food service and housekeeping duties for a total of 26
crewmembers.  Minimum crewing is a cost-saving measure several ship
operating companies use, but it may not provide the crew levels
necessary for adequate ship maintenance.  According to Military
Sealift Command officials, the ship operating company will use
industrial assistance workers to augment the permanent crew for ship
maintenance and repair. 

The Large, Medium Speed Roll-On/Roll-Off conversion and new
construction ships have had a net cost increase of about $131.5
million as a result of schedule delays.  The five conversion ships
have experienced a total cost increase of about $173.3 million.  The
new construction ships have experienced a cost decrease of about
$41.8 million, which can primarily be attributed to a change in price
indexes issued by the Office of Management and Budget.  Despite the
net increase, Navy cost projections show a downward trend in ship
cost through delivery of the last ship in fiscal year 2001. 


   DELIVERY DELAYS AND IMPACT ON
   ARMY'S AFLOAT PREPOSITIONING
------------------------------------------------------------ Letter :3

As of May 1997, the LMSR conversion ships were 16 to 24 months late
and deliveries of new construction ships were expected to be 4 to 12
months behind schedule.  These delays have caused the Army to change
its afloat prepositioning plans. 


      SIGNIFICANT CONVERSION
      DELAYS AFFECT ARMY AFLOAT
      PREPOSITIONING PLANS
---------------------------------------------------------- Letter :3.1

To date, four of the five LMSR conversion ships have been delivered
16 to 20 months late.  The remaining ship, the USNS Soderman, is in
the final phases of conversion and is expected to be delivered in
November 1997, 24 months behind schedule.  Table 1 shows the delivery
delays based on the revised contract dates. 



                                Table 1
                
                 Delays in Delivery of LMSR Conversion
                          Ships as of May 1997

                           Contract       Actual                Months
Ship name and number       delivery date  delivery date        delayed
-------------------------  -------------  -------------  -------------
USNS Shughart              Jan. 1995      May 1996                  16
T-AKR 295

USNS Gordon                Jan. 1995      Aug. 1996                 19
T-AKR 296

USNS Yano                  June 1995      Feb. 1997                 20
T-AKR 297

USNS Gilliland             Sept. 1995     May 1997                  20
T-AKR 298
----------------------------------------------------------------------
Note:  The delivery date is the month the contractor delivered the
ship to the Military Sealift Command. 

Source:  Our analysis based on data from Naval Sea Systems Command. 

These delays are due to both government and contractor problems,
according to Navy officials.  The USNS Gordon was delivered 19 months
late.  The late government-furnished information on class standard
equipment slowed completion of detail design work by 7 months.  There
were also government-required changes in the foam fire fighting
system design that required major redesign work.  Navy officials
stated that the shipyard's underestimation of the complexity and
difficulty of the conversion work and its efforts in detail design
and production, especially in the double bottom hull, caused an
additional delay of 12 months.  The USNS Shughart and the USNS Yano
were delivered 16 months and 20 months late, respectively, for
basically the same reasons as the USNS Gordon, with the exception of
the double bottom hull work.  The USNS Gilliland was delivered in May
1997, 20 months later than the original scheduled date.  According to
Navy officials, 18 months of this delay was caused by the same
government- and contractor-related problems associated with the other
conversion ships.  The most recent delay of 2 months was attributed
to the contractor temporarily lowering the level of workers. 

The Navy accepted the LMSR conversion ships at delivery with major
deficiencies.  According to Navy officials, this practice is common
in shipbuilding programs because they have about 45 days to correct
the deficiencies before accepting a ship for sail-away and
deployment.  Major deficiencies included the Machinery Control
Console System computer screen locking up, problems with fire
detection sensor limits, short operational life of gas detection
sensors, and auxiliary fire fighting foam valves that did not operate
properly. 

The number of major deficiencies identified on the four delivered
LMSR conversion ships has decreased since the first delivery.  For
example, the first conversion ship was delivered with 22 major
deficiencies, the second with 3, the third with 1, and the fourth
with 3.  According to Navy officials, these deficiencies generally do
not preclude the conversion ships from being used for training. 
However, in the case of the USNS Shughart, the problem with the
ship's fire fighting system, machinery console, and system for
removing water from the cargo areas delayed its deployment.  The
contractor corrected the water removal system deficiency and the
Coast Guard cleared the deficiency after testing in mid-May 1997. 
The contractor also corrected the other deficiencies. 

The USNS Soderman is expected to be delivered in November 1997, 24
months later than its original scheduled date.  This delay also is
directly related to the other ship delays previously discussed for a
total of about 22 months.  A labor strike against the shipyard
resulted in an additional 2-month delay. 

These late LMSR conversion deliveries have also delayed ship
deployments, which are normally scheduled to deploy between 6 to 8
months after delivery.  Table 2 shows the delays in deployments of
the LMSR conversion ships. 



                                Table 2
                
                Delays in Deployment of LMSR Conversion
                          Ships as of May 1997

                           Original       Estimated
                           deployment     deployment
Ship name and number       date           date             Months late
-------------------------  -------------  -------------  -------------
USNS Shughart              Sept. 1995     June 1997                 21
T-AKR 295

USNS Gordon                Sept. 1995     Feb. 1997                 17
T-AKR 296

USNS Yano                  Feb. 1996      Oct. 1997                 20
T-AKR 297

USNS Gilliland             May 1996       Feb. 1998                 21
T-AKR 298

USNS Soderman              July 1996      June 1998                 23
T-AKR 299
----------------------------------------------------------------------
Note:  The deployment date represents the month in which the Army
loads its equipment aboard ship and moves it to a prepositioning
location. 

Source:  Our analysis based on data from Naval Sea Systems Command. 

Had the original delivery schedules been achieved, the five
conversion ships would now be deployed to their prepositioning
locations.  These larger LMSR ships would replace smaller, less
capable Ready Reserve Force ships in operation.\3 The LMSR ships can
get to an area of conflict faster than the ships currently in use. 
For example, the Ready Reserve Force ships currently in operation
require 7 to 8 days to transit from their base in the Indian Ocean to
Southwest Asian ports, whereas the LMSR ships require only 5 days for
this journey.  According to Army officials, the faster time is
significant because operational flexibility increases, military risks
decrease, and equipment arrives in theater sooner. 

The deployment delays will cause the Army to incur an estimated $18.5
million in additional operations and maintenance costs over a 3-year
period.  These costs are for additional ship leasing and operating
costs for the prepositioning ships activated from the Ready Reserve
Force.  The increased costs include $1.7 million in fiscal year 1996
for extended leasing and associated operations and maintenance costs
(i.e., canal fees, deactivation charges, and additional ship leasing
days, etc.) for two Ready Reserve Force ships; $14.5 million in
fiscal year 1997 for additional ship leasing days, increased leasing
rates, canal fees, and ship deactivation; and $2.3 million in fiscal
year 1998 for additional ship leasing days and ship deactivation
cost. 


--------------------
\3 The Ready Reserve Force is a government-owned, inactive fleet of
former commercial ships of various configurations and capabilities. 
This fleet is the government's largest source of strategic sealift
capability. 


      NEW CONSTRUCTION DELAYS
      COULD RESULT IN LATE
      DELIVERIES
---------------------------------------------------------- Letter :3.2

The LMSR new construction ships are critical to the Army's afloat
prepositioning program as they increase the square foot capacity from
about 1.1 million square feet to the Military Requirements Study's
requirement of at least 2 million.  These ships will also increase
total surge sealift capacity from nearly 7 million to nearly 10
million square feet.  The first new construction ship, the USNS Bob
Hope, is expected to deploy in the fall of 1998.  The last ship for
the Army's prepositioning program is scheduled to deploy in late
fiscal year 2000, and the last ship for surge sealift is scheduled
for late fiscal year 2001.  The current planned delivery dates meet
the Army's operational requirements.  Table 3 shows the delays in
delivery of the first four new construction ships based on revised
contract dates. 



                                Table 3
                
                 Delays in Delivery of First Four LMSR
                 New Construction Ships as of May 1997

                                          Current
                                          estimated
                           Original       contract
                           contract       delivery
Ship name and number       delivery date  date\a           Months late
-------------------------  -------------  -------------  -------------
USNS Bob Hope              Sept. 1997     Jan. 1998                  4
T-AKR 300

USNS Fisher                Mar. 1998      Sept. 1998                 6
T-AKR 301

USNS Watson                Oct. 1997      Oct. 1998                 12
T-AKR 310

T-AKR 302                  Sept. 1998     Apr. 1999                  7
----------------------------------------------------------------------
\a Date includes estimated impact of labor strikes. 

Source:  Our analysis based on data from Naval Sea System Command. 

Early production inefficiencies, a 4-month bid protest action, and a
1-month labor strike contributed to delays of the new construction
ships at NASSCO.  Avondale Industries is currently negotiating an
extension of 8 to 10 weeks on three ships--T-AKR 301, T-AKR 302, and
T-AKR 303--due to a strike at a subcontractor's facility. 

Navy officials stated that the progress of the first new construction
ships' schedule is more difficult to predict than subsequent ship
deliveries.  However, they are optimistic that the two shipyards will
deliver the ships on schedule by meeting program milestones such as
launching the ship and dock and sea trial tests.  They further stated
that they will be able to project schedule progress with greater
confidence as they gain experience with the first new construction
ships. 

The Defense Contract Audit Agency (DCAA) found that the three
contractors could improve schedule efficiencies by correcting
deficiencies in their material management and accounting systems. 
These deficiencies include inadequate procedures or practices for
measuring the accuracy of production and material ordering schedules. 
The DCAA audit reports identified deficiencies that could result in
late delivery of end items, increased contract costs resulting from
purchases of parts that were not required, and the need to compress
work schedules due to late deliveries of purchased parts.\4 According
to a DCAA official, DCAA has been trying to resolve these
deficiencies with the contractors since 1994.  The official told us
that the contractors' production efficiency could be adversely
affected and ship construction could be delayed until the
deficiencies are corrected.  However, DOD officials responsible for
the LMSR program do not believe that these system deficiencies have
had an affect on the delivery schedule for the new construction
ships. 


--------------------
\4 Report on Audit of Avondale Industries, Inc.'s Material Management
and Accounting System (DCAA:  Audit Report No.  1221-96B12500001
Chron.  No.  080), December 1996.  For Newport News Shipyard see
Report on Material Management and Accounting System Internal Controls
(DCAA:  Audit Report No.  1721-945F12500012 Chron.  0122), June 1996. 
For NASSCO see Report on Review of Material Management and Accounting
System for New Construction Contracts (DCAA:  Audit Report No. 
4151-96R1200001), September 1996. 


   LMSR SHIP PERFORMANCE
------------------------------------------------------------ Letter :4

The USNS Shughart was the first ship scheduled to deploy for
prepositioning service.  However, the contractor's and the Navy's
attempts to resolve a mission critical deficiency during the
post-delivery period had not been fully resolved to support a
February 1997 deployment.  As a result, the Military Sealift Command
replaced the USNS Shughart with the USNS Gordon for the first
prepositioning deployment.  Army and Navy officials stated that there
was no adverse impact to the Army's operations since the USNS Gordon
was able to support the deployment date that was previously scheduled
for the USNS Shughart.  However, as of May 1997, the USNS Shughart
did not have any mission critical deficiencies, and it is now
scheduled for deployment in June 1997. 

The Army and Navy operational test commands jointly conducted tests
on the USNS Shughart in September 1996 and recommended the continued
deployment of the conversion ships in their report.  Also, in the
same report, they stated that the USNS Shughart did not sustain the
required speed of 24 knots in a loaded condition.  The speed was
recorded at 23.665 knots.  The test report also said that there will
be occasions when currents, seas, and winds will increase the ships
speed above 24 knots.  The operational testers recommended that
military planners should not rely on a sustained 24-knot speed for
the Shughart class ships in developing operational plans.  However,
Navy officials disagreed with this recommendation and contended that
tests on the USNS Shughart during predelivery trials verified its
average speed at 24.4 knots. 

Based on the experience with the USNS Shughart, the Navy's Supervisor
of Shipbuilding established more rigorous criteria for future LMSR
ship deliveries.  According to officials from the Navy Board of
Inspection and Survey, the Navy Supervisor of Shipbuilding, and the
Military Sealift Command, the USNS Yano was delivered with fewer
deficiencies and in better operational condition than the USNS
Shughart.  The Military Sealift Command officials believe that the
USNS Yano should meet its planned deployment date of October 1997. 


   CREWING LEVELS FOR LMSR SHIP
   MAINTENANCE
------------------------------------------------------------ Letter :5

The Military Sealift Command, through its contracted ship operating
company, plans to crew the five LMSR conversions at the minimum
number required by the Coast Guard to operate the ships and ensure
the safety of the crew, the public, and the environment.  These
minimum Coast Guard standards are used on many commercial ships;
however, these standards may not provide the crewing levels necessary
for adequate ship maintenance. 

In our 1992 report on the Navy's plan to acquire LMSR ships, DOD
stated that the older, LMSR conversion ships would likely require
increased maintenance and support.  According to the current contract
between the Military Sealift Command and the ship operating company,
the LMSR conversion ships will use a minimum of 26 crewmembers.  The
minimum Coast Guard crew level includes 22 crewmembers to operate,
maintain, and repair the ships' systems and equipment.  The Military
Sealift Command adds four crewmembers to manage and perform food
service and housekeeping duties. 

In the area of maintenance and support, the Military Sealift
Command's automated maintenance manual identifies the LMSR ship's
periodic maintenance requirements and the hours required to
accomplish them.  The ship operating company is responsible for
properly managing the maintenance and repairing of the LMSR ships and
determining the most cost-effective method to accomplish these tasks. 
Some ship operating companies' maintenance and repair methods include
using the permanent crew for most maintenance and repair tasks, doing
more of this work at shipyards, or using industrial assistance
workers to augment the permanent crews. 

Industrial assistance workers are temporary personnel brought aboard
ships by the ship operating company to accomplish specific
maintenance and repair tasks.  They perform time-consuming and labor
intensive tasks, such as paint removal and painting, which allows the
permanent crews to focus on more complex maintenance and repair tasks
and ship operations.  According to DOD officials, the use of
industrial assistance workers allows the ship operating company to
lower overall operating costs by operating with minimum permanent
crews and reducing the amount of shipyard repairs.  According to
Military Sealift Command officials, this is a common commercial
practice and is currently used in the Marine Corps' prepositioning
program. 

Military Sealift Command officials told us that the use of industrial
assistance workers on LMSR ships appears to be the most
cost-effective method.  The Military Sealift Command, working with
the ship operating company, has developed a maintenance and repair
plan using these industrial assistance workers.  These officials
believe that adequate maintenance and repair can be performed on the
ships with the 26 permanent crewmembers augmented by industrial
assistance workers. 


   LMSR COSTS EXCEED CURRENT
   PROJECTIONS
------------------------------------------------------------ Letter :6

Since 1993, acquisition cost growth of the LMSR conversion and new
construction ships has had a net increase of about $131.5 million. 
This net increase represents about a 2-percent total program cost
growth, from approximately $5.8 billion to $5.9 billion.  The LMSR
conversion ships account for $173.3 million of the cost increase,
while the new construction ships show an estimated net cost decrease
of $41.8 million.  The cost increase was the direct result of the
previously discussed delivery delays, while the net decrease can be
attributed to a change in the escalation indexes.  However, the cost
increase in the conversion ships shows a downward trend from the
first to the last completed ship.  Table 4 shows the estimated cost
increases at completion for the LMSR conversion ships. 



                                Table 4
                
                     Increases in Estimated Cost at
                  Completion of LMSR Conversion Ships

                         (Dollars in millions)

                                 Initial        Current
                               estimated      estimated
                                 cost at        cost at
Ship's name and number        completion     completion     Difference
-------------------------  -------------  -------------  -------------
USNS Shughart                    $ 297.8        $ 343.6         $ 45.8
 T-AKR 295
USNS Gordon                        303.1          355.8           52.7
 T-AKR 296
USNS Yano T-AKR 297                251.9          277.5           25.6
USNS Gilliland                     254.0          279.3           25.3
 T-AKR 298
USNS Soderman T-AKR 299            252.3          276.2           23.9
======================================================================
Total                           $1,359.1       $1,532.4        $ 173.3
----------------------------------------------------------------------
Source:  Our analysis based on data from Naval Sea Systems Command. 

The first four new construction ships, in the early stages of
production, show a net increase in cost of about $5 million.  This
cost increase, according to Navy officials, can be attributed to an
escalation adjustment in the cost indexes to reflect inflation
projections.  According to the terms of the LMSR contracts, the Navy
and the shipyards each pay 50 percent of cost increases above target
cost and share the same percentage in savings on all contracts that
are completed below the target cost.  Also, the contractor assumes
total responsibility for cost once it reaches 130 percent of the
contract target cost.  Table 5 shows the changes in the estimated
cost at completion for the LMSR new construction ships. 



                                Table 5
                
                Changes in Estimated Cost at Completion
                     of LMSR New Construction Ships

                         (Dollars in millions)

                                 Initial        Current
                               estimated      estimated
                                 cost at        cost at
Ship's name and/or number     completion     completion     Difference
-------------------------  -------------  -------------  -------------
USNS Bob Hope\a                  $ 378.7         $384.1          $ 5.4
 T-AKR 300
USNS Fisher\a                      294.9          297.3            2.4
 T-AKR 301
T-AKR 302\a                        292.9          294.2            1.3
T-AKR 303                          301.9          293.2          (8.7)
T-AKR 304                          308.5          295.7         (12.8)
T-AKR 305                          314.6          299.3         (15.3)
USNS Watson\a                      386.7          382.5          (4.2)
 T-AKR 310
T-AKR 311                          296.9          307.8           10.9
T-AKR 312                          289.4          301.3           11.9
T-AKR 313                          294.2          288.3          (5.9)
T-AKR 314                          295.3          283.4         (11.9)
T-AKR 315                          296.9          282.0         (14.9)
T-AKR 99A\b                        298.6          298.6              0
T-AKR 99B\b                        392.4          392.4              0
======================================================================
Total                           $4,441.9       $4,400.1        $(41.8)
----------------------------------------------------------------------
\a Indicates first four new construction deliveries. 

\b Final budget amounts will be established at contract award. 

Source:  Our analysis based on data from Naval Sea Systems Command. 

Contractors and Navy officials stated that the lessons learned from
the conversion ships will allow them to complete the new construction
ships near projected cost.  Navy officials stated that they monitor
the LMSR contractors' production progress, which is considered in the
LMSR program manager's cost estimate for each ship at completion. 
According to these officials, the LMSR program manager holds a
monthly cost performance review of each shipyard and uses the
information obtained to update the quarterly Defense Acquisition
Executive Summary and other status reports on the LMSRs' cost and
schedule performance.  Additionally, DCAA provides on-site contract
review and monitoring at each shipyard. 


   RECOMMENDATION
------------------------------------------------------------ Letter :7

The Defense Contract Audit Agency has identified long-standing
deficiencies in the material management and accounting systems at all
three LMSR shipyard contractors.  It believes these system
deficiencies could affect the delivery schedule for LMSR ships. 
While DOD officials acknowledge the deficiencies, they do not believe
they have had an effect on the delivery schedule.  Given that there
is a valid concern that these system deficiencies could affect the
delivery schedule for the LMSR ships, we recommend that the Secretary
of Defense direct the Secretary of the Navy to resolve these
deficiencies expeditiously to minimize the potential for additional
delays. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :8

In commenting on a draft of this report, DOD generally concurred with
the report but did not agree completely with our rationale or the
necessity for the Secretary of Defense to provide specific direction. 
For example, DOD partially concurred with our recommendation that the
Navy be directed to resolve the long-standing deficiencies in the
material management and accounting systems at all three LMSR shipyard
contractors and stated that the following efforts were underway to
demonstrate compliance with these required systems: 

  The Navy converted one shipyard contractor's contract to fixed
     price.  As of May 1997, the contractor had absorbed
     approximately $100 million of cost overruns. 

  The Navy sent a letter to another shipyard contractor requesting
     either an explanation of compliance with the required material
     management and accounting systems or a corrective action plan. 
     The contractor modified its testing procedures and schedules and
     the Navy is currently seeking DCAA concurrence with these
     modifications. 

  The Navy decided not to withhold part of the third shipyard
     contractor's progress payments after the shipyard contractor
     acknowledged that it was not in compliance with the required
     material management and accounting systems and outlined a plan
     to correct the deficiencies. 

We continue to believe that the Navy needs to resolve the
deficiencies expeditiously in the three shipyard contractors'
material management and accounting systems because DCAA has been
trying to resolve these deficiencies with the contractors since 1994
and the contractors' production efficiency could be adversely
affected and ship construction could be delayed until the
deficiencies are corrected. 

DOD also partially concurred with our draft recommendation that the
Navy be directed to resolve the issue of the inability of the Shugart
class of LMSR ships to maintain the required speed of 24 knots when
loaded.  In a May 23, 1997, letter, the Deputy Chief of Naval
Operations (Logistics) stated that the USNS Shughart has demonstrated
the ability to achieve speeds greater than the required speed of 24
knots when adjusted for full load conditions.  Based on that letter,
DOD stated that the difference in the required speed of 24 knots and
the demonstrated operational test speed of 23.665 knots is not
significant.  We agree that the difference between speeds of 24 knots
and 23.665 knots is not significant.  Therefore, we have deleted that
recommendation from our final report. 

DOD also provided technical comments, which we have incorporated
where appropriate.  (DOD's comments are presented in their entirety
in
app.  III.)


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :9

To obtain information on the Navy's efforts to deliver the conversion
and new construction ships on schedule, we gathered information on
the original contract and the current projected delivery dates
reported by the three LMSR contractors--NASSCO, Newport News
Shipbuilding, and Avondale Industries--and the Navy for each of the
LMSR prepositioning ships.  We examined DCAA reports to determine
whether there were deficiencies in the contractors' material
management and accounting systems that could affect the delivery
schedule for LMSR ships.  We determined the impact of any delays on
the Army meeting its prepositioning afloat requirements by examining
the Army's operational schedule and identifying those areas in which
the Army fell short of its goals.  We also identified the Army's
efforts to minimize the effects of late deliveries on its afloat
prepositioning requirements.  We interviewed Navy, Army, and
contractor officials at the Naval Sea Systems Command and the Army's
Deputy Chief of Staff for Logistics, Washington, D.C.  In addition,
we interviewed representatives from the Navy's Supervisor of
Shipbuilding and the ship contractors at Newport News Shipbuilding,
Avondale Industries, and NASSCO. 

To determine the capability of the LMSR conversion ships to
adequately perform their mission, we observed (1) tests of critical
ship systems while they were in port and during tests at sea and (2)
the loading of Army afloat prepositioning equipment aboard the first
deployed LMSR ship.  We reviewed test reports and summaries,
including the combined Army and Navy independent, operational test
report of the LMSR ship.  Where there were performance deficiencies,
we discussed with Army and Navy officials the affect of the
deficiencies on the ship's ability to carry out its mission.  We
interviewed officials at the Deputy Chief of Naval Operations and
Strategic Sealift Programs and the Director of Navy Test and
Evaluation and Technology Requirements, Washington, D.C.; the Army
Operational Test and Evaluation Command, Alexandria, Virginia; the
Navy Operational Test and Evaluation Force, Norfolk, Virginia; the
Military Traffic Management Command, Falls Church, Virginia; and the
Navy Board of Inspection and Survey, Norfolk, Virginia. 

To determine the level of crewing for the LMSR ships, we reviewed
Military Sealift Command and Coast Guard crewing documents.  We
interviewed officials from the Military Sealift Command, Washington,
D.C., and representatives from the LMSR conversion ship operating
company in Charleston, South Carolina.  We also interviewed
crewmembers from a LMSR conversion ship in Newport News, Virginia. 

To identify the increases in the LMSR procurement costs, we examined
copies of LMSR conversion and new construction ship contracts, budget
estimates, and contractor cost performance reports.  We also examined
the operations and maintenance budget submittals for the Army's
Strategic Mobility Program.  We interviewed Navy and Army officials
at the Naval Sea Systems Command and the Department of the Army's
Deputy Chief of Staff for Logistics, Washington, D.C.  We also
interviewed representatives from the Navy's Supervisor of
Shipbuilding and contractor officials from Newport News Shipbuilding,
Avondale Industries, and NASSCO. 

We conducted our review from August 1996 through May 1997 in
accordance with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :9.1

As you know, the head of a federal agency is required by 31 U.S.C. 
720 to submit a written statement on actions taken on the
recommendation in this report to the Senate Committee on Governmental
Affairs and the House Committee on Government Reform and Oversight
not later than
60 days after the date of this letter and the House and Senate
Committees on Appropriations with the agency's first request for
appropriations made more than 60 days after the date of this letter. 

We are sending copies of this report to the Secretaries of the Army
and Navy and other interested congressional committees.  Copies will
be made available to others upon request.  Please contact me at (202)
512-5140 if you or your staff have any questions concerning this
report.  Major contributors to this report are listed in appendix IV. 

Sincerely yours,

Mark E.  Gebicke
Director, Military Operations
 and Capabilities Issues


PHOTOGRAPHS OF LARGE, MEDIUM SPEED
ROLL-ON/ROLL-OFF CONVERSION SHIPS
=========================================================== Appendix I

   Figure I.1:  Newport News
   Shipbuilding Conversion, East
   Asiatic Limited Containership
   (before conversion)

   (See figure in printed
   edition.)

Source:  Naval Sea Systems Command. 

   Figure I.2:  Newport News
   Shipbuilding Conversion, USNS
   Gordon (after conversion)

   (See figure in printed
   edition.)

Source:  Naval Sea Systems Command. 

   Figure I.3:  NASSCO Conversion,
   Maersk Containership (before
   conversion)

   (See figure in printed
   edition.)

Source:  Naval Sea Systems Command. 

   Figure I.4:  NASSCO Conversion,
   USNS Shughart (after
   conversion)

   (See figure in printed
   edition.)

Source:  Naval Sea Systems Command. 


DRAWINGS OF LARGE, MEDIUM SPEED
ROLL-ON/ROLL-OFF NEW CONSTRUCTION
SHIPS
========================================================== Appendix II

   Figure II.1:  Avondale
   Industries, New Construction

   (See figure in printed
   edition.)

Source:  Naval Sea Systems Command. 

   Figure II.2:  NASSCO New
   Construction

   (See figure in printed
   edition.)

Source:  Naval Sea Systems Command. 




(See figure in printed edition.)Appendix III
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
========================================================== Appendix II



(See figure in printed edition.)

Now on pp.  16 and 17. 



(See figure in printed edition.)

Now on p.  17. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV


   NATIONAL SECURITY AND
   INTERNATIONAL AFFAIRS DIVISION,
   WASHINGTON, D.C. 
-------------------------------------------------------- Appendix IV:1

Sharon A.  Cekala
Colin L.  Chambers
James A.  Driggins
Elliott C.  Smith
Sharon E.  Sweeney


   LOS ANGELES FIELD OFFICE
-------------------------------------------------------- Appendix IV:2

Dale M.  Yuge

*** End of document. ***



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