Shipbuilders want Congress to address Navy non-payments

The shipbuilding industry, which has accused the Navy of withholding payments to shipyards on completed contracts, is appealing to Congress to address the issue.

According to the American Shipbuilding Association, which represents the six largest U.S. shipbuilders and more than 70 companies that design and manufacture systems and components, the Navy is withholding and retaining more than $345 million in payments to six shipyards that build for the service, hampering their cash flow and ability to pay subcontractors.

The association is shopping around a legislative fix it hopes Congress will adopt as part of the 2008 defense authorization bill. Lending an ear to the association’s cause are Rep. Gene Taylor (D-Miss.), the chairman of the Seapower and Expeditionary Forces subcommittee on the Armed Services panel, and Guam Del. Madeleine Bordallo (D), also a member of Taylor’s subcommittee.

The association’s proposal would amend Navy acquisition law to prohibit the withholding of earned payments to shipyards under the terms of their contracts with the Navy, and the retention of payments at the conclusion of the guaranty period or one year following delivery of the ship.

It would also require the Navy to submit a report to the House and Senate armed services panels describing the precise amounts of current withholdings and retentions.

The proposed legislation does not limit or affect the Navy’s ability to negotiate terms and conditions of payment in individual shipbuilding and overhaul contracts, but it requires the Navy to abide by the terms and conditions agreed upon in individual contracts.

Without a law precluding the Navy from not paying back the shipyards, the practice can continue “unchecked” and drain shipyards of the cash they need to run their business, according to the association.

Currently, when shipyards do not receive payment on work performed according to a program’s schedule and the terms of a contract, their ability to operate can be impaired significantly, the association’s president, Cynthia Brown, said.

A lack of cash on hand for daily operations can exacerbate problems within a program when shipbuilders are experiencing delays or other issues with Navy programs, she added.

The Navy uses the withholding and retaining tactic mostly as leverage over a shipyard, but it is not in accordance with the contracts, Brown said.

In shipbuilding and overhaul contract negotiations, the contractor and the Navy agree to a payment schedule. They also decide together on an amount to be retained through a guaranty period, which usually is no more than a year after a ship has been delivered. The terms of such payments are documented in the “payments clause” of the contract.

The shipbuilding association charges that the Navy consistently has failed to pay negotiated payments during the course of a ship’s construction or overhaul, and has not released final payments to contractors long after the expiration of the guaranty period.

A survey conducted by the association last fall concluded that the Navy withheld $326 million in earned payments. According to the survey, the Navy also retained $19.2 million past the expiration of ship guaranty periods. The Navy is employing the tactic in all shipbuilding contracts, according to the association.

The Navy cannot validate the total amount of withholdings described by the American Shipbuilders Association fall 2006 survey, a Navy spokesman said. The Navy does retain amounts on each contract to ensure performance and correct deficiencies or incomplete work, the spokesman added.

In statement released to The Hill, the Navy’s Sea Systems Command said it is “not uncommon for the Navy and the contractor to have unresolved contract matters at the end of the guaranty period and thus the Navy retains a reasonable amount after the end of the guaranty period to cover incomplete or deficient work.”

Brown said the Navy seems to employ the tactic of not paying back the contractors in cycles. In the late 1990s, more than $450 million in owed payments to the six shipyards had accumulated. The Navy eventually released the payments but with strings attached. The shipyards had to agree to conditions on how to use the released funds.

Now the amount of withholdings and retentions again has risen to a level that is placing financial pressure on the industry, according to the association.