Posted on September 25, 2023
Former Cabinet secretary Elaine Chao touts fixed-price, firm-delivery contract structure
Later this week, State University of New York Maritime College will receive a historic delivery — a state-of-the-art new training ship christened Empire State. The arrival of this vessel, the first of five cutting-edge National Security Multi-Mission Vessels, heralds a new era not just for the U.S. Merchant Marine, but potentially for procurement processes across the government.
Shipping is the lifeblood of the U.S. and global economy. And the backbone of our shipping infrastructure are the men and women of the U.S. Merchant Marine.
Most officers are trained at either the federal U.S. Merchant Marine Academy or one of the six state maritime academies. Yet for years, the ships used by the state academies to train these future officers have been in a state of disrepair — old, outdated, unsuitable and potentially unsafe.
The NSMV project was established to address this urgent problem by replacing the antiquated training ships with state-of-the-art vessels. These ships will be capable of properly preparing Merchant Marine officers by using modern technology reflective of the real-world merchant fleets they will crew.
Despite years of alarms sounded by the United States Maritime Administration, state maritime schools and the U.S. Merchant Marine Academy in Kings Point, N.Y., about the urgent need for new training ships, the situation has long been deemed a low priority.
Having served as deputy maritime administrator and deputy secretary of transportation, I was very much aware of the plight of the state academies and the training ships. Upon becoming secretary of Transportation, I determined that this needed to be a top priority and was finally in a position to do something about this issue. However, I quickly learned that Congress was reluctant to provide the necessary funding to build the ships, in large part over fears that the project would be prohibitively expensive.
I got together with my team and looked for a solution. As secretary of Transportation, I was allotted a discretionary sum of $300 million to allocate at my discretion among the various agencies at DOT. I decided to use this full sum as seed funding to build one modern training ship and hopefully demonstrate to Congress the urgency of fully completing this critical project and modernizing the training ship fleet.
However, this posed a challenge. Under normal government procurement circumstances, $300 million is wholly insufficient to build the type of vessel we needed. Shipbuilding is expensive, especially when the government is the one doing it on a time-and-labor basis.
To discipline costs, I insisted we employ fixed-price contracting with private shipbuilders where cost overruns fall upon the manufacturers, not the taxpayer. This model, the norm in commercial shipbuilding, forces accountability to a strict budget cap.
The Maritime Administration worked with Tote Services, acting as a vessel construction manager, to obtain competitive bids and negotiate a contract with Philly Shipyard Inc. to build this vessel. The final contract price was $300 million, which is a fraction of the $750 million-to-$1.2 billion price tag we would have faced had we used the Navy’s shipbuilding program.
When news of the construction of the NSMV on a fixed-price, firm-delivery basis was conveyed to Congress, lawmakers — most specifically Republican Sen. Susan Collins of Maine, who understood the need for the new vessels, worked tirelessly to ensure direct funding was supplied to build the four additional NSMV ships. All are being built by Philly Shipyard, Inc. on fixed-price, firm-delivery contracts and will be delivered on time and on budget to replace the training vessels in order of age — New York, Massachusetts, Maine, Texas and California.
Their skilled American workers spent the past three years building the Empire State. And this week, the nation will finally see the fruits of their labors.
The ship, American designed, commercially built with U.S. steel and powered by General Electric engines, takes advantage of off-the-shelf equipment. Voices clamor for more American innovation, manufacturing, and infrastructure skills. This ship answers the bell. It is perfectly suited to train the next generation of Merchant Marine officers, and is also designed to seamlessly switch from training to disaster relief.
Replacing the Merchant Marine training fleet was vital in its own right. But the creative contracting process pioneered here carries lasting implications, offering a valuable template for efficient and effective government procurement.
First, public servants managing major purchases need discretion over a slice of funds to allocate flexibly. This empowers piloting innovations like fixed-price contracting with commercial construction managers.
Second, the private sector must have a seat at the table and a role in shaping contract terms. Firms understand construction and off-the-shelf expenses better than distant bureaucrats.
Finally, incentives like firm-delivery deadlines and payment caps are crucial. Accountability, not $500 toilet seats, gets results. Too often, contracting means layering specifications until costs balloon out of control as bureaucratic behemoths soak up billions.
Moving forward, I hope leaders across government replicate this formula for similar, large-scale government expenditures.
The arrival of the Empire State should help usher in an era of fiscal responsibility and government accountability. The ship has sailed and avoided the shoals of bloated budgets, delays and routine cost overruns. Ideally, other projects can follow in its wake.
Elaine Chao was the 18th U.S. secretary of Transportation, 24th U.S. secretary of Labor and the first Asian American woman to be appointed to a president’s Cabinet.