Earl Industries' $75M Navy contract: What went wrong?

PORTSMOUTH

A week after the Navy terminated a five-year, $75 million contract with Earl Industries LLC for work on San Antonio-class amphibious warships, the long-term impact on the company’s reputation and its ability to win future contracts is unclear.

This much, however, is clear: The Navy thought enough of Earl to award it the contract twice, despite the protests of a competing shipyard.

The Navy’s announcement on May 6 blindsided Jerry Miller, Earl’s president, and others at the Portsmouth-based company, he said, given the company’s established track record as a reliable contractor.

“My company’s been around since 1985,” said Miller, who has been with Earl since its founding. “We’ve done quality repairs for 26 years.”

The Navy canceled Earl’s “multi-ship, multi-option” contract on San Antonio-class ships, citing problems with a previous contract for engine repairs on the San Antonio, which has been plagued by design and construction defects since it was delivered to the Navy six years ago.

Recently, Miller dubbed the Navy’s decision unfair, but he declined last week to talk more extensively about the San Antonio and the contract cancellation.

Others in the maritime industry vouch for Earl’s good reputation and wondered why the Navy terminated the contract “for convenience,” an option to cancel for any or no reason at all, instead of “default,” or for cause.

Tim Colton, a Florida-based maritime industry expert, said Earl Industries has a very good track record.

“It’s a very public reprimand,” Colton said of the Navy’s action. “Every shipyard screws up occasionally; the Navy does it themselves. But, you know, this is a very major reaction to Earl’s performance. I think there’s more to come out.”

The Navy, too, has been a believer in Earl.

Twice in the past 10 months – in July and January – the Navy chose Earl over another local shipyard to win the contract to maintain the San Antonio-class ships in Norfolk.

Both times, Marine Hydraulics International Inc., a Norfolk-based shipyard operator better known as MHI, filed protests of the Navy’s award with the U.S. Government Accountability Office.

In a Nov. 3 decision, the GAO upheld MHI’s first claim that the Navy had “misevaluated” what MHI’s costs would be, which had the effect of making MHI’s bid higher than Earl’s. The GAO suggested that the Navy terminate Earl’s contract if it could get a better offer.

In January, the Navy again awarded the contract to Earl, even though Earl’s bid was found to be costlier than MHI’s proposal.

In a side-by-side evaluation of Earl’s and MHI’s strengths, the Navy rated Earl “exceptional” for its past performance, while MHI was rated “very good.”

In its January protest, MHI argued that the Navy had failed to take into account Earl’s performance on two repair contracts for the San Antonio.

“According to the protester, Earl has experienced cost overruns on the USS San Antonio contracts that the agency should have taken into consideration in evaluating Earl’s past performance, as well as its evaluation of Earl’s cost proposal,” the GAO stated.

The GAO, however, denied MHI’s second protest. It said the Navy was right not to consider Earl’s performance on the San Antonio repair contracts when it assigned it its “exceptional” rating.

“The record showed that the San Antonio work was ongoing work for which there was not yet a past performance rating under the Navy’s contractor performance assessment reporting system,” the GAO found. “Additionally, the San Antonio work involved principally diesel engine repair and was not particularly relevant to the extensive work contemplated under the notional work packages under the current requirement.” The GAO’s decision – denying MHI’s second protest – was dated May 5.

The next day – May 6 – the Navy announced that it was terminating the contract with Earl.

The comments about the prior contract attributed to Vice Adm. Kevin McCoy, who heads Naval Sea Systems Command, in the Navy’s news release were blunt.

“The company’s performance on this contract was not in keeping with the type of quality work the Navy expects from our industry partners,” McCoy stated. “These failures are unacceptable, and we have lost confidence in Earl’s ability to continue successfully performing this same type of work on the rest of the LPD-Class ships under the MSMO contract.”

The reasons cited for the Navy’s decision stemmed not from problems with the terminated contract, but rather from problems with Earl’s earlier work on the San Antonio.

The Navy cited the number and severity of corrective action reports issued concerning Earl’s performance on the San Antonio last year. In an email, the Navy said there were 50 such reports.

“The contracting officer determined in this case that a termination for convenience was in the best interests of the Government, because the nature of the quality assurance problems that arose under Earl’s LPD 17 repair contract raised a fundamental question regarding Earl’s ability to successfully perform the same type of work on LPD 17 Class ships under the five year Multi-Ship, Multi- Option (MSMO) contract,” wrote Alan Baribeau, a Navy spokesman, in an email.

Such cancellations are rare.

“Cancelling a military contract is infrequent, and is truly a last resort because the government is often placed in the position to find another contractor, which generally results in increased costs and delays,” wrote Scott Amey, general counsel with the Project On Government Oversight, a Washington-based advocacy group, in an email.

The Navy said it now plans to compete contracts for scheduled and “emergent” maintenance work on the ships on an individual basis among all eligible contractors in the Norfolk area, including Earl.

Executives at several local shipyards did not want to comment on the cancellation.

The cancellation of Earl’s contract is the latest bit of fallout from problems embroiling the Norfolk-based San Antonio.

Commissioned in 2006, the San Antonio was built at Northrop Grumman Corp.’s shipyard in Avondale, La. The amphibious transport dock has been dogged by engine and other problems ever since.

Its first deployment more than two years ago included emergency engine repairs in Bahrain. The ship hasn’t been back to sea, but is scheduled to sail for sea trials this week, the Navy said.

“Why are they still having all these problems all these years later? You know, it’s insane,” Colton said. “The Navy is as much to blame as anybody – certainly Northrop Grumman didn’t cover itself in glory.”

Northrop Grumman has since gotten rid of its shipbuilding business, spinning it off to shareholders as Huntington Ingalls Industries Inc., which also owns Newport News Shipbuilding.

The new company, based in Newport News, plans to follow through with Northrop’s plan to close the Louisiana shipyard.

Word of the latest problems surfaced about a month ago, when the Navy announced it had launched a new investigation into engine repairs aboard the San Antonio after audits uncovered serious problems with records kept by private contractors who overhauled the engines.

The Navy said the two contractors responsible were Earl Industries, the prime contractor, and Fairbanks Morse, the engine manufacturer.

A week later, the Navy announced that it had suspended the oversight authority of its Norfolk Ship Support Activity, a command responsible for supervising ship repairs. The command, headquartered at Norfolk Naval Station, oversees maintenance work done by private companies on Navy surface ships in the mid-Atlantic region.

By suspending the command’s oversight authority – formally known as its “technical warrant” – the Navy essentially said it no longer trusts it to make sure work by contractors is being done properly.

The Navy also has removed at least one top official at the command.

Thomas J. Murphy, who had been the command’s civilian executive director since 2004, was replaced last month.

Sources outside the Navy said several other officials at the command also were removed.

The Navy has declined to confirm that, saying it would violate privacy rights.

Earl, meanwhile, may have to lay off some of its 800 workers, but Miller said it wouldn’t be a significant number.

It continues to work with the Navy on other contracts. In March, the company announced it won a Navy contract – valued at about $163.5 million – for work on aircraft carriers.

Aside from ship repair, Earl also has business units specializing in precision aerospace machining and metal fabrication, among other things. “We’ve been around for 26 years, doing complex work for a long time,” Miller said.

Robert McCabe, (757) 446-2327, robert.mccabe@pilotonline.com