Using the Steel Vessel Material-cost Index to Mitigate Shipbuilder Risk

Report Number: NPS-AM-08-039

Series: Acquisition Management

Category: Fixed-price

Report Series: Proceedings Paper

Authors: Edward G. Keating, Robert Murphy, John F. Schank, John Birkler

Title: Using the Steel Vessel Material-cost Index to Mitigate Shipbuilder Risk

Published: 2008-04-01

Sponsored By: Acquisition Research Program

Status: Published--Unlimited Distribution

Research Type: Other Research Faculty

Full Text URL: http://acquisitionresearch.net/files/FY2008/NPS-AM-08-039.pdf

Keywords: Fixed-price Shipbuilding Contract, Fixed-price, Incentive-fee Shipbuilding Contract, Labor-cost Index, Material-cost Index

Abstract:

This paper describes how the US Navy structures fixed-price and fixed-price, incentive-fee shipbuilding contracts and how labor- and material-cost indexes can mitigate shipbuilder risk in either type of contract. The Navy frequently uses the Steel Vessel material-cost index, a Bureau of Labor Statistics-derived cost index based on the mix of materials in a typical commercial cargo ship constructed in the 1950s. The Steel Vessel Index has excessive weighting on iron and steel, thereby providing shipbuilders with a mismatch between their actual and the Index-assumed material-cost structure. We recommend the Navy use a material-cost index with more up-to-date weightings.