LHD 8 construction
(click to view full)

LHD 8 Makin Island is under construction in Pascagoula, MS as the last ship of America’s Wasp Class amphibious assault carriers. While many of its characteristics are similar to its sister ships, there are also differences. For one thing, it will be a no-steam, all electric ship, including electric propulsion, all driven by 2 GE LM2500+ gas turbines and 6 diesel-electric generators. Other features will include central machinery control using fiber optics, upgraded communications systems including tele-medicine, structural modifications required to host and service the MV-22 Osprey tilt-rotor aircraft, and self-defense improvements including the SSDS Mk 2 Mod 3A unified combat system controlling Phalanx Block 1B guns, RIM-116B RAM short-range missiles, and RIM-162 Evolved Sea Sparrow missiles.

The keel was laid in February 2004, but all these changes meant that about 67% of the previous line drawings, and 75% of the test procedures, needed to be modified for Makin Island. Then Hurricane Katrina hit the in-progress ship hard. The labor pool also took a hit, with up to 1/3 of the Gulf Coast personnel leaving the area and the company. The pool of electrical professionals was especially hard hit, with 55-60% of the LHD 8’s current labor force under the 4-5 year threshold for experienced workers.

Even so, Katrina hit in August 2005. Which is why Northrop Grumman was surprised at the slowness of its integration and testing progress during final construction in 2008, as part of the ship’s preparation for sea trials. That led to a comprehensive review and audit – and a bill of $320-360 million to fix the ship, which will be footed by Northrop Grumman…

Katrina 2005
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In their April 15/08 teleconference, Northrop Grumman executives noted that any development problems have quality issues, but the quality systems that are supposed to catch them early were not run properly and missed the problems.

As one example, the Makin Island’s new machinery control system is connected by fiber optic cables, allowing it to be monitored and run centrally. Its failure to work was puzzling, since high reliability was supposed to be one of its virtues. Northrop Grumman’s program review and detailed physical audit of the ship identified the problem: due to the poor quality of the installation work, the fiber optic cables had been crushed in a number of areas.

Northrop Grumman shipbuilding says that this need for substantial rework is present throughout the ship, especially in electrical cable installations of all types.

Quality is only free when it catches problems early – its absence until the late hours, on the other hand, is almost always very costly. As anyone who has remodeled a home knows, electrical system problems are especially bad news at a late stage, because ripping up existing work is often required in order to fix the problem. Since the contract is fixed-price, incentive-fee, there will be no incentive, and the cost of fixing the problems fall on Northrop Grumman.

The components of the $320+ million additional charge for LHD 8 stem from 3 main sources:

• Labor. This is the biggest component of the increase. The ship will continue to employ 1,500 craftspeople for an additional 6 months, out of Pascagoula’s 19,000 or so. This adds direct level-of-effort costs, and also means that these employees must be replaced on other new ships that would have used them once they were done.

• The 2nd cost source is the material required for rework.

• The 3rd source of the charges involves reduction in accounting “intangible values” related to the shipyard when it was bought from Litton.

LHD 8 Makin Island,
Pascagoula, 2005
(click to view full)

In terms of financial impact on Northrop Grumman, Hurricane Katrina’s impact had used up more than 1/2 the remaining shared risk reserve on the fixed-price, incentive-fee contract, leaving smaller margins to absorb problems of this nature. By June 2007, in fact, Northrop Grumman was already booking the program at break-even. It is also fair to note, however, that the firm has received some specific compensation in response to Katrina.

The exact amount of the expected charge will be finalized later, and will be disclosed when Northrop Grumman issues its Q1 2008 results later in April 2008. It will leave the entire LHD 8 program in a net loss position, but the expected charge does not impact the company’s previously announced 2012 financial targets, delivered at its February 2008 investment conference.

A number of personnel changes have been made in the program, and LHD 8 Makin Island is now expected to be delivered in the second quarter of 2009.

Northrop Grumman executives said in their teleconference that audits had been done on other ships under construction, and assured listeners that LHD 8’s quality problems were not present on other ships. The expensive lesson in quality processes and risk management, on the other hand, will be present in many of the company’s future ships and other defense programs.

Additional Readings & Sources

• Northrop Grumman – Northrop Grumman Announces Schedule Extension and Charge On Shipbuilding Program

• Northrop Grumman (April 15/08) – Northrop Grumman Conference Call [Windows Media]