Navy says destroyer deal helps two yards boost capacity at best pace

WASHINGTON — The U.S. Navy believes a pair of contracts it awarded this week for Arleigh Burke-class destroyers — covering as few as nine and as many as 15 ships over the next five years — is the best way to help two shipyards recover from challenges and increase their output.

However, the quantity — fewer than two per year guaranteed — stands in contrast to another program with multiyear shipbuilding contracts, the Virginia-class attack submarine program, where the government continues to award industry with more work than it can accommodate to help encourage investments.

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Navy awards nine Arleigh Burke destroyers in five-year contracts

The Navy awarded Ingalls Shipbuilding a contract for six destroyers across 2023 to 2027, and Bath Iron Works a contract for three DDGs.

By Megan Eckstein

The destroyer-industrial base is currently running behind schedule. Navy Secretary Carlos Del Toro previously told Defense News the service is buying two ships a year, but industry is delivering an average of 1.8 annually.

The Navy awarded a pair of five-year, multi-ship contracts to the two prime shipbuilders on the program. HII’s Ingalls Shipbuilding will produce six destroyers from fiscal 2023 through fiscal 2027. The work will see two in FY25 and one in each of the fiscal years.

General Dynamics’ Bath Iron Works will build a ship in FY23, FY24 and FY26.

Those nine ships are the only guarantees to industry, though the contract also covers options for a second ship in FY27 and for a third ship in each fiscal year.

Jay Stefany, the acting assistant secretary of the Navy for research, development and acquisition, told reporters Wednesday he believes the yards’ bids, which led to the Navy picking the 6-3 split, indicated each shipyard knew what its ideal workload would be to get back on track and grow its capacity.

“The way it turned out is probably the best way for each of them to grow, so they bid it in a way that would allow them both to grow … at the right pace for them and their suppliers,” he told Defense News at a media roundtable.

“The contract, I think, allows the two companies [and their suppliers] to continue the recovery from COVID and, in Bath’s case, the strike from two or three years ago,” he said.

He added that the workload “does allow both companies the best path forward” and to “surge or flex” if the Navy requests or Congress demands more than two ships a year.

Rear Adm. Tom Anderson, the program executive officer for ships, said the Navy considered each yard’s workload and throughput as it developed a strategy for writing the request for proposals. Both yards submitted offers for a 6-3 split and a 5-4 split for the nine guaranteed ships, as well as offers for all the optional ships.

Anderson, too, said he believes the yards knew what workload would be most efficient, which affected pricing for the two scenarios and the options. The Navy is not releasing information about the price of the ships because any options that are exercised will undergo competition, with Ingalls and Bath allowed to lower their original bids.

Without getting into specifics, Anderson said the bids also revealed how the two yards are looking at their current and future workforce needs. This is the first contract to include a measure passed into law in the FY23 defense policy bill — Section 122 — which creates a Navy shipbuilding workforce development special incentive and calls for between 0.25% and 1% of the contract value to fund workforce recruiting and retention measures such as training, housing and bonuses.

Anderson later said the Navy’s confidence in the yards’ performance is increasing as they come out of the pandemic.

“We certainly had some challenges with workforce and throughput, but we are seeing improving trends with regards to schedule performance. There are also a number of capital investments that are being made: HII has made their ‘Shipyard of the Future’ investments, and we’re starting to see payoff in efficiency,” Anderson explained. “And Bath Iron Works is undergoing a number of capital improvements, in large part supported by the surface combatant-industrial base funds that Congress has appropriated.”

But one expert thinks awarding more work in this multiyear contract would have better helped stabilize the workforce and the supply chain.

Bryan Clark, director of the Center for Defense Concepts and Technology at the Hudson Institute think tank, said only guaranteeing as much work as the yards can comfortably build “makes sense in that you’re not putting demands on them that they can’t meet” and putting them at risk of delivering late.

“But the problem with that logic is, the alternative would be, I’m going to contract with you to do more ships, but I’m going to give you more time. I’m going to give you the money to generate a backlog, and then you can go make the investments necessary to deliver on that backlog. And that’s a way to fund their infrastructure and workforce improvement efforts,” he said.

The submarine-industrial base, with General Dynamics Electric Boat and HII’s Newport News Shipbuilding as the construction yards, is delivering about 1.2 boats a year, despite the Navy buying two annually.

Despite the larger delay in this program, the Navy continues to buy at a steady pace and re-baselined the ship delivery schedules, extending those timelines so the yards aren’t penalized for late deliveries.

Clark said this gives the shipbuilders and their suppliers enough cash on hand to invest in infrastructure and workforce to get back to at least two deliveries a year.

By guaranteeing the destroyer-industrial base fewer than two a year, Clark said, “then you’re really not incentivizing them to expand their capacity; you’re just making it so that you’re not putting unreasonable demands on them.”

Clark said he thought Bath might have a maximum production rate between four and five ships in five years, once the company gets back on track — but awarding just three ships doesn’t help the company get to that better throughput any faster.

At Ingalls, Clark said there’s a great opportunity to increase destroyer production, if the Navy wanted to. The Mississippi yard is about to wrap up its work on the Coast Guard’s National Security Cutter program, and could move around people and resources to build more destroyers.

There has been longstanding support from Congress for buying three destroyers a year, but top Pentagon and Navy leaders aren’t interested in budgeting for those ships. Defense Department Comptroller Mike McCord said in March the “track record” of industry shows it can’t build three a year. Del Toro, too, cautioned against buying three a year until industry makes investments to increase capacity.

“That’s true, they don’t have that capacity,” Clark said. “Well, the only way you get there is if you create the demand signal for three destroyers per year. In the submarine force, they’ve created that demand signal for two, two-plus submarines per year, so they’re building to reach that inside the submarine-industrial base. And we just haven’t done the same thing in the surface-industrial base, and there’s sort of this implication that the shipbuilders need to do that with their own money — build this capacity and have it standing by.”

With the U.S. government being the only customer for Bath and Ingalls, Clark noted, they wouldn’t hire the additional workforce unless there was work to perform, leading to a chicken-and-egg situation.

Clark said he believes awarding all 15 ships upfront but agreeing to longer delivery timelines would have been a better way to incentivize these investments to create greater production capacity and grow the fleet.

But, he added, the fundamental problem is “they don’t have the money to pay for more ships.”