Reforming Navy Shipyard Contracts: From Cost-Plus to Performance-Based Repair Programs

Naval shipyard commanders face a critical mandate: return warships to the fleet as swiftly as possible. Yet numerous public and private shipyards struggle to meet this objective consistently, resulting in costly delays that impair fleet readiness.

Scheduled maintenance periods for nuclear-powered vessels frequently extend well beyond planned timelines. Over the past decade, maintenance delays for attack submarines alone have cost the Navy 15,000 lost operational days and an estimated $3.4 billion, according to a recent Government Accountability Office report. While aging hulls, complex systems, workforce shortages, material delays, and expanding maintenance scopes are well-documented challenges, a less visible but equally significant bottleneck lies in how private-sector repair work at public shipyards is contracted.

Public shipyards depend heavily on private contractors due to high workload volumes. Currently, the Navy has outsourced portions of an aircraft carrier availability and over 30% of a submarine availability to private vendors at Norfolk Naval Shipyard. However, unlike contracts for work at private shipyards—typically firm-fixed-price—the Navy often uses cost-plus or level-of-effort agreements for private work at public facilities.

Cost-plus contracts reimburse contractors for allowable costs plus a fixed fee, while level-of-effort contracts pay for labor hours rather than finished outcomes. These approaches fail to align contractor incentives with operational goals, potentially rewarding labor consumption over timely delivery and contributing to indefinite extensions of shipyard availabilities.

Managing Uncertainty Without Rewarding Delays

Cost-reimbursement contracting serves a valid purpose in managing uncertainty during early phases of repair work, when conditions inside tanks and systems cannot be fully assessed until physical inspection. The issue arises when cost-plus structures persist beyond this initial phase, becoming the default mechanism for executing remaining work after uncertainty has diminished.

Extending cost-plus arrangements after scope definition creates perverse incentives: contractors gain financially from increased billable hours, while the government absorbs most cost growth. For instance, a contractor receiving a fixed fee of $700,000 on a $10 million project still earns the same fee even if actual costs rise to $15 million—with no financial penalty for inefficiency. In contrast, fixed-price contracts hold contractors accountable for controlling costs and schedules.

Definitizing Work to Drive Accountability

Rewarding successful outcomes rather than mere effort requires definitizing work—fully scoping, negotiating, and finalizing contracts. When contractors are paid for completing defined tasks—like replacing specific components—at a fixed price, they benefit directly from efficiency gains. Conversely, level-of-effort contracts incentivize prolonging labor input rather than achieving measurable results.

While definitizing work may introduce administrative overhead, confusing procedural rigor with operational delay undermines long-term effectiveness. The solution isn’t eliminating fixed-price contracts due to past inefficiencies but empowering contracting officers to act decisively within clearly defined frameworks that prioritize results.

Strategic Industrial Base Investment Through Contracting

Contracting decisions shape more than individual projects—they influence the broader ship-repair industrial base. Labor-driven reimbursement models discourage automation and productivity investments, as adding workforce often proves more profitable than innovation. Fixed-price or incentive-based contracts flip this equation: contractors retain savings from efficiency improvements, making advanced technologies financially attractive.

To expand repair capacity sustainably, the Navy must increase throughput per worker, per dock, and per dollar—not simply add labor to outdated systems.

A Balanced Approach to Risk Sharing

Transitioning entirely to fixed-price agreements risks destabilizing markets where few vendors compete, particularly in specialized areas like submarine combat systems. In thin markets, excessive performance risk can lead to inflated bids or vendor withdrawal, threatening industrial base viability.

In sole-source scenarios, the Navy should employ negotiated fixed-price incentive structures that establish realistic target costs and shared responsibility for variances. This approach maintains contractor participation while preserving incentives for productivity and cost control. Multiple-award indefinite-delivery vehicles have mitigated competition concerns in many cases, but vigilance remains essential.

Addressing Structural Barriers to Reform

Rigid adherence to cost-plus contracting persists partly because late-breaking technical requirements collide with relentless pressure for shorter availabilities. Contracting officers need adequate time to inspect, scope, and negotiate contracts before work begins—but compressed schedules often force reliance on familiar cost-plus mechanisms to deploy workers immediately.

Cultural shifts require institutional support: empowering contracting professionals with decision-making authority and aligning technical and operational timelines to enable effective contract structuring.

Building Readiness Through Accountability

Performance-based contracting demands disciplined execution—from detailed requirement definition to robust quality oversight. Initial bid prices may rise as contractors factor in execution risks, and the current industrial base remains vulnerable to abrupt transitions that could exclude smaller suppliers.

Fixed-price models also carry behavioral risks: threatened margins might prompt shortcuts in workmanship, while poorly defined scopes can breed adversarial disputes. Mitigating these risks requires rigorous planning, transparent communication, and proactive government oversight—not abandonment of accountability standards.

Ultimately, reforming shipyard contracting practices demands sustained commitment across all levels of the maintenance enterprise. By shifting focus from effort-based compliance to performance-driven outcomes, the Navy can break the cycle of perpetual delays while cultivating a resilient, innovation-ready industrial base capable of meeting tomorrow’s fleet demands.

Rear Admiral Kavon “Hak” Hakimzadeh has commanded Norfolk Naval Shipyard since August 2025. His previous assignments include commanding the USS Harry S Truman (CVN 75) and Carrier Strike Group 2.

The views expressed are solely those of the author and do not reflect the official policy or position of the Department of Defense, the U.S. Navy, or the U.S. Government.

Image: Shelby West via DVIDS.

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