MOBILE, Ala. (WALA) – Austal USA’s managerial shakeup caught some experts off guard and raises questions about the future of southwest Alabama’s largest private employer.
The Australian-based shipbuilder, which has a facility along the Mobile River, cited multiple investigations involving its littoral combat ship program.
“The underlying concerns … (are) not that significant in the grand scheme of things, so I was very surprised at the level of reaction,” said Bryan Clark, a defense analyst at the Hudson Institute.
Austal USA said in a corporate statement Monday that its president, Craig Perciavalle, had resigned following the completion of an internal investigating paralleling probes by the Securities and Exchange Commission, the Justice Department and Australian regulators.
Austal issued three findings:
- It underestimated the cost of building the LCS vessels.
- It misallocated certain labor hours.
- It installed a valve on 11 of the vessels that did not comply with military specifications.
The cost underestimation is important because military contracts are structured in such a way as to allow companies to pass higher costs onto the military. That means taxpayers have been on the hook for at least part of the increased productions costs.
Clark that is, by far, the most serious issue. While that is not unusual, he said, the question is how quickly Austal corrected its estimate.
“The concern was that they didn’t properly go back and report how that cost had increased and really capture that so that the government understood what they were getting, and also what the government’s, you know, potential liability would be down the road when the bills came due to pay for the ships,” he said.
The cost of the LCS program has ballooned from an initial estimate of $250 million per ship to $450 million apiece. Clark said there are many reasons for this, but when a military project becomes more expensive than the original bid, taxpayers often end up on the hook for at least part of it.
“In the case of ships, it’s usually a cost share, meaning if I underestimate what ends up being the actual cost of the ship, the shipbuilder and the government negotiate a sharing arrangement where they each cover part of that cost,” he said.
Matt Caris, a naval analyst with Avascent, said the Pentagon has tried to keep cost overruns to a minimum. But he added that military contracts are fundamentally different than commercial contracts in the private sector because of their size, their precise requirements and the fact that the military has a vested interest to keep the limited number of defense companies operating – and competing with one another.
“They don’t have the ultimate trump card that, you know, a commercial customer has, which is they don’t care if the yard goes out of business,” he said. “The Navy cares if the yard goes out of business. So, there’s only so much financial pain that can be borne by the yards without government assistance.”
Caris noted that the issues cited by Austal date back to 2016. He said much of the reason for those increased costs has to do with changing requirements imposed by the Navy, itself.
“What’s interesting about it is the timing,” he said. “You know, this was several years ago. You know, clearly the investigations have been ongoing since then. And frankly, it’s not entirely without precedent. I don’t want to say it’s not a significant issue, but, you know, within the realm naval shipbuilding, issues like this have happened.”
Caris said it is impossible to know why the company acted now, but he noted that the Navy has several big projects that Austal will be competing for in the near future. He speculated that perhaps the company wanted a clear slate as it prepares for that competition.
“Certainly, Austal wants to have as special relationship with the Navy going into all these programs, and it’s going to – whether it’s real or symbolic, it becomes part of that turning the page,” he said.
The high-profile personnel change comes at an uncertain time for Austal. The LCS program is nearing the end, and the company last year lost out on a contract to build frigates.
But Clark and Caris both said the company’s position remains strong.
“I’d be much less worried that it might seem right now,” Clark said.
The experts point to another contract Austal has with the Pentagon to build a ferry-like troop transport called the expeditionary fast transport ship.
“They’ve been building those at a pretty good clip, like one per year for the last several years,” Clark said.
The government last year invested $50 million toward a $100 million expansion that will allow the shipyard to build steel ships in addition to the aluminum vessels it currently constructs. That should help it compete for frigate work and other jobs in the future, Caris said.
“I think that’s a really good sign. That is an indication that the Navy, you know, which takes a very active approach to industrial base management, relative to the other service … views Austal as part of that club,” he said.