Corps of Engineers
Effects of Restrictions on Corps' Hopper Dredges Should Be Comprehensively Analyzed Gao ID: GAO-03-382 March 31, 2003The fiscal year 2002 Conference Report for the Energy and Water Development Appropriations Act directed GAO to study the benefits and effects of the U.S. Army Corps of Engineers' (Corps) dredge fleet. GAO examined the characteristics and changing roles of the Corps and industry in hopper dredging; the effect of current restrictions on the Corps' hopper dredge fleet; and whether existing and proposed restrictions on the fleet, including the proposal to place the McFarland in ready reserve, are justified. In addition, GAO identified concerns related to the government cost estimates the Corps prepares to determine the reasonableness of industry bids.
In response to 1978 legislation that encouraged private industry participation in dredging, the Corps gradually reduced its hopper dredge fleet from 14 to 4 vessels (the Wheeler, the McFarland, the Essayons, and the Yaquina) while a private hopper dredging industry of five firms and 16 vessels has emerged. Dredging stakeholders generally agreed that the Corps needs to retain at least a small hopper dredge fleet to (1) provide additional dredging capacity during peak demand years, (2) meet emergency dredging needs, and (3) provide an alternative work option when industry provides no bids or when its bids exceed the government cost estimate by more than 25 percent. In reviewing the cost estimation process, GAO found that the Corps' estimates are based on some outdated contractor cost information and an expired policy for calculating transit costs. The restrictions on the use of the Corps' hopper dredge fleet that began in fiscal year 1993 have imposed costs on the Corps' dredging program, but have thus far not resulted in proven benefits. The Corps estimates that it spends $12.5 million annually to maintain the Wheeler in ready reserve, defined as 55 workdays plus emergencies, of which about $8.4 million is needed to cover the costs incurred when the vessel is idle. A possible benefit of restrictions on the Corps' vessels is that they could eventually encourage existing firms to add dredging capacity or more firms to enter the market, which, in turn, may promote competition, improve dredging efficiency, and lower prices. Although there has been an increase in the number of private industry hopper dredges since the restrictions were first imposed, the number of private firms in the hopper dredging market has decreased. In addition, during the same time period, the number of contractor bids per Corps solicitation has decreased, while the number of winning bids exceeding the Corps' cost estimates has increased. Although the Corps proposed that the McFarland be placed in ready reserve, it has not conducted an analysis to establish that this action would be in the government's best interest. Specifically, in a June 2000 report to the Congress, the Corps stated that the placement of the Wheeler in ready reserve had been a success and proposed that the McFarland also be placed in ready reserve. However, when asked, the Corps could not provide any supporting documentation for its report. Furthermore, according to the Corps, future use of the McFarland will require at least a $25 million capital investment to ensure its safety, operational reliability, and effectiveness. Such an investment in a vessel that would be placed in ready reserve and receive only minimal use is questionable.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-03-382, Corps of Engineers: Effects of Restrictions on Corps' Hopper Dredges Should Be Comprehensively Analyzed
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Report to Congressional Committees:
United States General Accounting Office:
GAO:
March 2003:
CORPS OF ENGINEERS:
Effects of Restrictions on Corps‘ Hopper Dredges Should Be
Comprehensively Analyzed:
GAO-03-382:
GAO Highlights:
Highlights of GAO-03-382, a report to Congressional Committees
Why GAO Did This Study:
The fiscal year 2002 Conference Report for the Energy and Water
Development
\ Appropriations Act directed GAO to study the benefits and effects of
the
U.S. Army Corps of Engineers‘ (Corps) dredge fleet. GAO examined the
characteristics and changing roles of the Corps and industry in hopper
dredging; the effect of current restrictions on the Corps‘ hopper
dredge
fleet; and whether existing and proposed restrictions on the fleet,
including the proposal to place the McFarland in ready reserve, are
justified. In addition, GAO identified concerns related to the
government
cost estimates the Corps prepares to determine the reasonableness of
industry bids.
What GAO Found:
In response to 1978 legislation that encouraged private industry
participation in dredging, the Corps gradually reduced its hopper
dredge
fleet from 14 to 4 vessels (the Wheeler, the McFarland, the Essayons,
and
the Yaquina) while a private hopper dredging industry of five firms and
16
vessels has emerged. Dredging stakeholders generally agreed that the
Corps needs to retain at least a small hopper dredge fleet to (1)
provide
additional dredging capacity during peak demand years, (2) meet
emergency
dredging needs, and (3) provide an alternative work option when
industry
provides no bids or when its bids exceed the government cost estimate
by
more than 25 percent. In reviewing the cost estimation process, GAO
found
that the Corps‘ estimates are based on some outdated contractor cost
information and an expired policy for calculating transit costs.
The restrictions on the use of the Corps‘ hopper dredge fleet that
began
in fiscal year 1993 have imposed costs on the Corps‘ dredging program,
but
have thus far not resulted in proven benefits. The Corps estimates
that
it spends $12.5 million annually to maintain the Wheeler in ready
reserve,
defined as 55 workdays plus emergencies, of which about $8.4 million is
needed to cover the costs incurred when the vessel is idle. A possible
benefit of restrictions on the Corps‘ vessels is that they could
eventually encourage existing firms to add dredging capacity or more
firms
to enter the market, which, in turn, may promote competition, improve
dredging efficiency, and lower prices. Although there has been an
increase in the number of private industry hopper dredges since the
restrictions were first imposed, the number of private firms in the
hopper
dredging market has decreased. In addition, during the same time
period,
the number of contractor bids per Corps solicitation has decreased,
while
the number of winning bids exceeding the Corps‘ cost estimates has
increased.
Although the Corps proposed that the McFarland be placed in ready
reserve,
it has not conducted an analysis to establish that this action would be
in
the government‘s best interest. Specifically, in a June 2000 report to
the Congress, the Corps stated that the placement of the Wheeler in
ready
reserve had been a success and proposed that the McFarland also be
placed
in ready reserve. However, when asked, the Corps could not provide any
supporting documentation for its report. Furthermore, according to the
Corps, future use of the McFarland will require at least a $25 million
capital investment to ensure its safety, operational reliability, and
effectiveness. Such an investment in a vessel that would be placed in
ready reserve and receive only minimal use is questionable.
What GAO Recommends:
GAO recommends that the Secretary of the Army direct the Corps of
Engineers to (1) obtain and analyze baseline data to determine the
appropriate use of the Corps‘ hopper dredge fleet, (2) prepare a
comprehensive analysis of the costs and benefits of existing and
proposed
restrictions on the use of the Corps‘ hopper dredge fleet, and (3)
assess
the data and procedures used to prepare the government cost estimate.
The
Department of the Army agreed with GAO‘s recommendations. The Dredging
Contractors of America generally agreed with GAO‘s recommendations, but
strongly disagreed that restrictions on the Corps‘ hopper dredges have
not
resulted in proven benefits.
www.gao.gov/cgi-bin/getrpt?GAO-03-382.
To view the full report, including the scope
and methodology, click on the link above.
For more information, contact Barry T. Hill at (202) 512-3841 or
hillbt@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Corps Has Transferred Most of Its Hopper Dredging to Private Industry,
but Still Needs to Retain a Hopper Dredge Fleet:
Restrictions on the Corps‘ Hopper Dredge Fleet Have Imposed Costs, but
Benefits Are Unproven:
Corps Has Not Justified the Existing and Proposed Restrictions on Its
Hopper Dredge Fleet:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: The U.S. Hopper Dredge Fleet:
Appendix III: Comments from the Department of the Army:
Appendix IV: Comments from the Dredging Contractors of
America:
Appendix V: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Summary of Operations and Cost Data of Corps‘ Dredge Wheeler:
Table 2: Corps and Private Industry Hopper Dredge Fleets:
Figures:
Figure 1: Hopper Dredge:
Figure 2: Maintenance Hopper Dredging Work, Fiscal Years 1995 through
2002:
Figure 3: Estimated Volume of Material Dredged by Industry and Average
Number of Industry Bids per Corps Solicitation, Fiscal Years 1990
through 2002:
Figure 4: Annual Average Number of Industry Bids per Corps Solicitation
and Winning Bid as a Percentage of the Corps‘ Cost Estimate, Fiscal
Years 1990 through 2002:
Figure 5: Comparison of Number of Industry Bids per Corps Solicitation
Before and After Restrictions:
Figure 6: Comparison of Winning Industry Bids and Corps‘ Cost Estimates
Before and After Restrictions:
Abbreviations:
Army: Department of the Army:
Corps: U.S. Army Corps of Engineers:
DCA: Dredging Contractors of America:
GAO: General Accounting Office:
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United States General Accounting Office:
Washington, DC 20548:
March 31, 2003:
The Honorable Ted Stevens
Chairman
The Honorable Robert C. Byrd
Ranking Minority Member
Committee on Appropriations
United States Senate:
The Honorable James M. Inhofe
Chairman
The Honorable James M. Jeffords
Ranking Minority Member
Committee on Environment and Public Works
United States Senate:
The Honorable C.W. Bill Young
Chairman
The Honorable David R. Obey
Ranking Minority Member
Committee on Appropriations
House of Representatives:
The Honorable Don Young
Chairman
The Honorable James L. Oberstar
Ranking Democratic Member
Committee on Transportation and Infrastructure
House of Representatives:
Keeping the nation‘s navigation channels and ports fully functioning is
vital to U.S. commerce both domestically and abroad. In 2001, shipping
vessels moved more than $700 billion of import and export cargo through
the nation‘s ports and harbors. Vessels called dredges remove sediment
from the bottom of navigation channels, ports, and harbors to maintain
waterways at the navigable depths and widths necessary for shipping.
There is a variety of dredge types, each designed to perform optimally
under specific conditions. One dredge type--the hopper dredge--performs
much of the dredging needed in ports, harbors, and access channels
exposed to the ocean, where traffic and operating conditions render the
use of other dredges inefficient or impractical. A hopper dredge pumps
material (e.g., sand and water slurry) into its hopper where it is
stored before being transported to the disposal site. (See fig. 1.):
Figure 1: Hopper Dredge:
[See PDF for image]
[End of figure]
The U.S. Army Corps of Engineers (Corps) is responsible for dredging
U.S. ports and harbors. The Corps is to carry out projects for
improvements of rivers and harbors, by contract or otherwise, in the
manner most economical and advantageous to the United States. Until
1978, the Corps performed all hopper dredging work with its 14 hopper
dredges. In 1978, legislation directed the Corps to (1) contract out
much of its dredging work to private industry as industry demonstrated
that it could perform the work at reasonable prices and in a timely
manner, (2) reduce the federal fleet as industry demonstrated its
ability to perform, and (3) maintain a minimum fleet of federal vessels
for emergency and national defense purposes. The act also directed the
Corps to retain as much of the fleet as it determined necessary to
ensure that the federal and private fleets together could carry out
necessary dredging projects. As a result, the Corps reduced the size of
its hopper dredge fleet to four vessels--the Wheeler, the McFarland,
the Essayons, and the Yaquina. In the 1990s, in an effort to further
promote private industry participation in hopper dredging, the Congress
imposed restrictions on the Corps‘ hopper dredge fleet. These
restrictions (1) effectively reduced the annual work schedule of each
of the Corps‘ hopper dredges from about 230 to about 180 workdays and
(2) limited the Wheeler to 55 workdays per year plus emergencies
(referred to as ’ready reserve“ status). Furthermore, in fiscal year
2002, the Congress directed the Corps to confine the McFarland to
emergency work and operations in the Delaware River. The Corps was to
periodically evaluate the effects of the ready reserve program on the
costs, responsiveness, and capacity of the Corps‘ and private
industry‘s hopper dredges.
The fiscal year 2002 Conference Report for the Energy and Water
Development Appropriations Act directed GAO to study the benefits and
effects of the Corps‘ dredge fleet. In response, we examined (1) the
changing roles of the Corps and industry in hopper dredging and the
characteristics of the hopper dredging industry; (2) the effect of
restrictions currently in place on the Corps‘ hopper dredge fleet; and
(3) whether the existing and proposed restrictions on the Corps‘ hopper
dredges, including placing the dredge McFarland in ready reserve, are
justified. In addition, during the course of our work we identified
concerns related to the government cost estimates that the Corps
prepares to determine whether industry bids for dredging work are
reasonable.
Results in Brief:
In accordance with legislative direction, the Corps has reduced its
hopper dredge fleet, while the private hopper dredging industry has
steadily increased its share of the annual hopper dredging workload.
Today, of the 20 hopper dredges in service in the United States, five
private industry firms operate 16 vessels and perform about 72 percent
of the nation‘s hopper dredging maintenance work, while the Corps
operates 4 vessels and performs the remaining 28 percent of the work.
Corps officials and representatives from the dredging industry,
selected ports, and the maritime industry generally agreed that the
Corps needs to retain a hopper dredge fleet to (1) provide additional
dredging capacity during peak demand years, (2) meet the emergency and
national defense needs identified in the 1978 legislation, and (3)
provide an alternative work option at times when industry offers
unreasonable bids or no bids at all. To determine the reasonableness of
private contractor bids, the Corps develops a government cost estimate
that serves as a benchmark against which industry bids are compared. If
the bids exceed the government estimate by more than 25 percent, the
Corps may elect to perform the work itself.
During our review, we identified a number of concerns regarding the
Corps‘ government cost estimate. Specifically, the Corps uses outdated
industry cost data to determine the reasonableness of contractor bids
when developing its cost estimate. In addition, the Corps continues to
follow a policy that expired in 1994 when calculating contractor
transit costs to the dredging site for some of its contracts. These
concerns raise questions about the practical value of using the Corps‘
cost estimate as protection against high industry bids.
Restrictions on the use of the Corps‘ hopper dredge fleet, which began
in fiscal year 1993, have imposed costs on the Corps‘ dredging program,
but have thus far not resulted in proven benefits. Most of the costs of
the Corps‘ hopper dredges are incurred regardless of how frequently the
dredges are used. For example, the Corps‘ placement of the Wheeler in
ready reserve--55 annual workdays plus emergencies--reduced the
vessel‘s productivity by 56 percent but reduced costs by only 20
percent. The Corps estimates that it spends $12.5 million annually to
maintain the Wheeler in ready reserve, of which approximately $8.4
million is needed to cover the costs incurred when the vessel is idle.
A possible benefit of restrictions on the Corps‘ vessels is that they
could eventually encourage existing firms to add dredging capacity or
more firms to enter the market, which, in turn, may promote more
competition, improve dredging efficiency, and lower prices. Although
there has been an increase in the number of private industry hopper
dredges since the restrictions were first imposed, the number of
private firms in the hopper dredging market has decreased. In addition,
during the same time period, the number of contractor bids per Corps
solicitation has decreased, while the number of winning bids exceeding
the Corps‘ cost estimate has increased. Another potential benefit of
the restrictions is enhanced Corps responsiveness to emergency dredging
needs. However, the Corps is unable to evaluate whether emergency
dredging needs have been met more or less efficiently since the
restrictions went into effect because it does not specifically identify
and track emergency work performed by either Corps or industry vessels.
In a June 2000 report to the Congress, the Corps stated that the
placement of the Wheeler in ready reserve had been a success and
recommended that the vessel remain in ready reserve. However, the
report contained a number of analytical and evidentiary shortcomings,
and, when asked, the Corps could not provide any supporting
documentation for its recommendation. In addition, the report also
proposed that the McFarland be placed in ready reserve, but the Corps
did not conduct an analysis to support this proposal. Furthermore,
according to the Corps, the McFarland will require at least a $25
million capital investment to ensure its safety, operational
reliability, and effectiveness for future service. It is questionable
whether such an investment in a vessel that would be placed in ready
reserve and receive only minimal use is in the best interest of the
government.
We are making recommendations to the Secretary of the Army regarding
the need to comprehensively analyze the costs and benefits of existing
and proposed restrictions on the use of the Corps‘ hopper dredge fleet
and to update the information and methodology that the Corps uses for
its hopper dredging cost estimates. In commenting on a draft of this
report, the Department of the Army agreed with all the recommendations
and provided time frames for implementing each of them. The Dredging
Contractors of America generally agreed with our recommendations, but
strongly disagreed that the benefits of the restrictions are unproven.
Background:
Since 1824 the Corps has been responsible for constructing and
maintaining a safe, reliable, and economically efficient navigation
system. Today, this system is comprised of more than 12,000 miles of
inland waterways, 300 large commercial harbors, and 600 small harbors.
From fiscal years 1998 through 2002, the Corps has removed an average
of about 265 million cubic yards of material each year from the
navigable waters of the United States, at an average annual cost of
about $856 million (in constant 2002 dollars). Private industry
performs most of the overall dredging, except for the work done by
hopper dredges, in which both the Corps and industry perform a
significant amount of the work. Of the $856 million spent annually on
overall dredging, about $197 million is spent on all hopper dredging
(both maintenance and new construction), with industry vessels
accounting for about $148 million annually and Corps vessels accounting
for about $49 million.
Each of the Corps‘ hopper dredges typically operates in a specific
geographic area. The Wheeler, a large-class dredge,[Footnote 1] usually
operates in the Gulf of Mexico. The McFarland, a medium-class dredge,
usually operates in the Atlantic and Gulf of Mexico. The Essayons, a
large-class dredge, and the Yaquina, a small-class dredge, typically
work along the Pacific coast.
Legislation enacted in the 1990s sought to further increase the role of
industry in hopper dredging by placing operational restrictions on the
Corps‘ hopper dredges. Specifically, the Energy and Water Development
Appropriations Act for fiscal year 1993 and subsequent appropriations
acts required the Corps to offer for competitive bidding 7.5 million
cubic yards of hopper dredging work previously performed by the federal
fleet. Since fiscal year 1993, the Corps has addressed this requirement
by reducing the use of each of its four dredges from about 230 workdays
per year to about 180 workdays per year. The Water Resources
Development Act for fiscal year 1996 required the Corps to initiate a
program to increase the use of private hopper dredges principally by
taking the Wheeler out of active status and placing it into ready
reserve. The Corps implemented this requirement by allowing the Wheeler
to work 55 days a year plus emergencies (which includes urgent and
time-sensitive dredging needs). The 1996 act did not alter the Corps‘
duty to implement the dredging program in the manner most economical
and advantageous to the United States, and it restricted the Corps‘
authority to reduce the workload of other federal hopper dredges. The
conference report that accompanied the act directed the Corps to
periodically evaluate the effects of the ready reserve program on
private industry and on the Corps‘ hopper dredge costs, responsiveness,
and capacity. The Energy and Water Appropriations Act for fiscal year
2002 placed another restriction on the use of the Corps‘ dredge
McFarland, limiting it to emergency work and its historical scheduled
maintenance in the Delaware River (about 85 workdays per year). Taken
together, these restrictions have increased private industry‘s share of
the hopper dredging workload.
In theory, restrictions on the use of the Corps‘ hopper dredges could
generate efficiency and cost-savings benefits to both government and
industry. For example, restricting the Corps‘ hopper dredges to fewer
scheduled workdays could make them more available to respond to
emergency dredging needs. In addition, the increase in demand for
dredging by private industry could lead to improvements in dredging
efficiency. If achieved, firms might be able to dredge the same amount
of material at a lower cost or more material at the same cost.
Furthermore, if more work were provided to the private hopper dredging
industry, competition could increase if the existing dredging firms
expanded their fleets or more firms entered the market.[Footnote 2]
Consequently, the prices that the government pays to contractors could
fall. However, economic principles also suggest that if an industry is
given more work without increasing capacity or the number of competing
firms, prices could rise because the demand for its services has
increased.
Corps Has Transferred Most of Its Hopper Dredging to Private Industry,
but Still Needs to Retain a Hopper Dredge Fleet:
The Corps‘ and private industry‘s respective roles in the hopper
dredging market have changed since legislation enacted in 1978 prompted
a movement toward privatization of hopper dredging in the United
States. Since that time, the Corps has gradually reduced its hopper
dredging fleet from 14 to 4 vessels, while a private hopper dredging
industry of five firms and 16 vessels has emerged. Corps officials and
representatives from the dredging industry, selected ports, and the
maritime industry generally agreed that the Corps needs to retain at
least a small hopper dredge fleet to (1) provide additional dredging
capacity during peak demand years, (2) meet the emergency and national
defense needs identified in the 1978 legislation, and (3) provide an
alternative work option at times when the industry offers unreasonable
bids or no bids at all. To determine the reasonableness of private
contractor bids, the Corps develops a government cost estimate for its
hopper dredging solicitations. If the low bid is no more than 25
percent above the government cost estimate, the Corps awards the
contract. If all bids exceed the government cost estimate by more than
25 percent, the Corps may pursue a number of options, including
performing the work itself. The practical value of this protection
against high bids, however, has been limited by the Corps‘ use of some
outdated contractor cost information and its continued use of an
expired policy to calculate transit costs.
Corps and Industry Roles in Hopper Dredging Have Shifted:
Before 1978, the Corps performed all of the nation‘s hopper dredge
work. In 1978, the Congress passed legislation to encourage private
industry participation in all types of dredging and required the Corps
to reduce the fleet of federal vessels to the minimum necessary for
national defense and emergency purposes, as industry demonstrated its
capability to perform the work. According to the Senate committee
report associated with the 1978 legislation, one of the law‘s main
purposes was to provide incentives for private industry to construct
new hopper dredges. Between 1978 and 1983, as a private hopper dredging
industry began to emerge, the Corps reduced its hopper dredge fleet
from 14 to its current 4 vessels. By the late 1980s, the Corps stopped
assigning its hopper dredges to new construction projects (primarily
channel deepening), leaving this work entirely to private industry.
Both Corps and private industry hopper dredges continue to perform
maintenance work on existing channels.
From fiscal years 1998 through 2002, the Corps‘ dredges performed about
28 percent of the nation‘s hopper dredging maintenance work, annually
dredging about 16 million cubic yards of material at a cost of about
$49 million (in constant 2002 dollars). During the same period,
industry dredges performed about 72 percent of the nation‘s hopper
dredging maintenance work, dredging about 40 million cubic yards of
material annually, at a cost of about $93 million.[Footnote 3] As a
result of the 1978 legislation, seven firms emerged to compete for the
Corps‘ hopper dredging contracts. Consolidation and firm buy-outs in
the 1990s have left five firms in today‘s market. (Appendix II contains
a more detailed description of the U.S. hopper dredge fleet.):
Corps‘ Hopper Dredge Fleet Addresses Several Needs:
Corps officials and representatives from the dredging industry,
selected ports, and the maritime industry generally agreed that the
Corps‘ hopper dredge fleet currently (1) provides additional dredging
capacity during peak demand years, (2) meets emergency dredging and
national defense needs identified in the 1978 legislation, and (3)
provides an alternative work option when industry provides no bids or
when its bids exceed the government cost estimate by more than 25
percent. In addition, representatives of selected ports and the
maritime industry generally supported the Corps‘ retention and
operation of a federal hopper dredge fleet to ensure that dredging
needs are met in a timely manner.
One of the reasons for the Corps to maintain a hopper dredge fleet is
that changes in annual weather patterns, such as El Niņo, and severe
weather events, such as hurricanes and floods, can create a wide
disparity in the demand for hopper dredging services from year to year.
During fiscal year 1997 the Corps and private industry used their
hopper dredges for maintenance work to remove almost 77 million cubic
yards nationwide. In contrast, during fiscal year 2000 they removed
about 50 million cubic yards. (See fig. 2.) Hopper dredging needs at
the mouth of the Mississippi River are particularly variable from year
to year, with annual dredging requirements ranging from 2 million to 50
million cubic yards. Representatives from private dredging firms
maintain that industry is not likely to build the additional capacity
needed to meet demand in peak years. Corps officials and
representatives from the dredging industry, selected ports, and the
maritime industry generally agreed that the federal government should
provide the additional dredging capacity required to meet the needs of
peak demand years.
Figure 2: Maintenance Hopper Dredging Work, Fiscal Years 1995 through
2002:
[See PDF for image]
Note: GAO analysis of Corps‘ Navigation Data Center data.
[End of figure]
The Corps‘ hopper dredges are also needed to respond to emergency
dredging assignments. For example, according to a Corps official, it
was necessary for the Corps to send the Essayons to finish work on a
project in Alaska that was critical to complete before the winter
season and freezing conditions set in. In addition, Corps vessels have
been used during instances where industry has submitted no bids in
response to solicitations. For example, when rains in the Mississippi
River Basin caused a build-up of material in navigation channels, the
Corps issued a solicitation, but no bids were received because industry
vessels were unavailable. Consequently, the Wheeler was used to perform
the work. In such situations, the Corps‘ fleet acts as insurance to
meet dredging needs, ensuring that shipping patterns are not adversely
affected.
The existence of the Corps‘ fleet theoretically offers a measure of
protection against inordinately high bids from private contractors.
While the private dredging market consists of 16 dredges owned by five
firms, not all dredges compete for any given solicitation because (1)
some, if not most, hopper dredges are committed to other jobs; (2)
hopper dredges may be in the shipyard; (3) differences in hopper dredge
size and capability mean that not all hopper dredges are ideally suited
to perform the work for a particular job; and (4) hopper dredges cannot
quickly move from one dredging region to another.[Footnote 4] For
example, large hopper dredges may have difficulty maneuvering in small
inlet harbors, and small hopper dredges may be inefficient at
performing large projects with distant disposal sites. Thus, the Corps‘
hopper dredge fleet provides an alternative dredging capability that
can be brought to bear when private dredges are not available or when
private industry bids are deemed too high.
Corps Bases Its Cost Estimate on Outdated Information:
The Corps‘ government cost estimate for hopper dredging work is pivotal
in determining the reasonableness of private contractor bids. The Corps
is required to determine a fair and reasonable estimate of the costs
for a well-equipped contractor to perform the work. By law, the Corps
may not award a dredging contract if the price exceeds 25 percent of
the government estimate. In such cases, the Corps has several options.
It can (1) cancel the solicitation, (2) readvertise the solicitation,
(3) consider challenges to the accuracy of the Corps‘ cost estimate by
bidders, (4) convert the solicitation into a negotiated procurement, or
(5) use one of its own dredges to do the work.
The accuracy of the Corps‘ cost estimate depends on having access to
up-to-date cost information. Although the Corps adjusts contractor cost
data annually to reflect current pricing levels, this step does not
account for fundamental changes, such as an industry vessel reaching
the end of its depreciable life or industry acquisition of new vessels.
The Corps has not obtained comprehensive industrywide contractor cost
information since 1988. Since then, contractors have provided the Corps
updated cost information to support specific costs included in the
Corps‘ cost estimates that they believe to be outdated, but they are
not required to provide updated information for all costs. As a result,
the Corps only has updated cost information that contractors provide.
In our discussions with Corps officials, they acknowledged the need to
initiate an effort to obtain and verify current cost data for industry
vessels.
In addition, the Corps continues to follow an expired policy when
calculating contractor transit costs to the dredge site, further
calling into question the accuracy of the government cost estimates.
The Corps‘ Engineering Regulation 1110-2-1300, which called on the
Corps to calculate industry transit costs to the dredge site based on
the location of the second-closest industry dredge, expired in
1994.[Footnote 5] However, the Corps continues to use this method when
calculating transit costs for at least some of its solicitations. For
example, Corps officials followed the expired policy when demonstrating
to us how they calculated the transit costs for a solicitation in
Washington State.[Footnote 6] In this case, the second-closest industry
dredge was located in the Gulf of Mexico, and the estimated transit
costs amounted to about $480,000 because the vessel would have had to
travel thousands of miles and go through the Panama Canal. However, the
private contractor‘s dredge that performed the work was located fewer
than 500 miles from the dredge site, for which the transit costs were
estimated to be about $100,000. After bringing this issue to the Corps‘
attention, the Corps told us that it plans to reexamine its transit
cost policies.
Restrictions on the Corps‘ Hopper Dredge Fleet Have Imposed Costs, but
Benefits Are Unproven:
Restrictions on the Corps‘ hopper dredge fleet, which began in fiscal
year 1993, have imposed costs on the Corps‘ dredging program, but have
thus far not resulted in proven benefits. Most of the costs of the
Corps‘ hopper dredges are incurred regardless of how frequently the
dredges are used. A possible benefit of the restrictions is that they
could eventually encourage more firms to enter the market or existing
firms to add capacity, which, in turn, may promote competition, improve
dredging efficiency, and thus reduce prices. Although there has been an
increase in the number of private industry hopper dredges since the
restrictions were first imposed, the number of private firms in the
hopper dredging market has decreased. In addition, during the same time
period, the number of contractor bids per Corps solicitation has
decreased, while the number of winning bids exceeding the Corps‘ cost
estimate has increased. Restrictions on the Corps‘ vessels could also
potentially enhance the Corps‘ responsiveness to emergency dredging
needs. However, the Corps is unable to evaluate whether emergency
dredging needs have been met more or less efficiently since the
restrictions went into effect because it does not specifically identify
and track emergency work performed by either Corps or industry vessels.
Corps Incurs Costs by Keeping the Wheeler in Ready Reserve:
The Corps incurs many of the costs for maintaining and operating its
hopper dredges regardless of how much the vessels are used. Thus, as
shown in table 1, when the Wheeler was placed in ready reserve and
restricted to 55 workdays plus emergencies, the average number of days
it worked per year and its productivity (measured by cubic yardage
dredged) declined by about 56 percent, while its costs declined by only
20 percent. Crew size declined by about 21 percent, but payroll costs
declined by just 2 percent because dredging needs required the Corps to
pay the smaller crew overtime to finish the work. In addition, fuel
costs did not drop in proportion to use and productivity because the
vessel‘s engines were utilized for shipboard services (e.g.,
electricity) while it remained at the dock--a necessary procedure for
maintaining minimal vessel readiness. Other costs unrelated to crew or
fuel represent the plant or capital costs of a dredge, many of which
the Corps incurs regardless of how much a dredge is used.
Table 1: Summary of Operations and Cost Data of Corps‘ Dredge Wheeler:
Component: Average days worked; Before reserve[A]: 183; After
reserve[B]: 83; Percentage change: -55%.
Component: Average cubic yards; Before reserve[A]: 11,847,040; After
reserve[B]: 5,245,606; Percentage change: -56%.
Component: Crew size; Before reserve[A]: 54; After reserve[B]: 42;
Percentage change: -21%.
Component: Average cost[C]; Before reserve[A]: $17,136,028; After
reserve[B]: $13,631,862; Percentage change: -20%.
Component: Payroll costs; Before reserve[A]: $3,635,146; After
reserve[B]: $3,557,938; Percentage change: -2%.
Component: Fuel costs; Before reserve[A]: $1,206,578; After reserve[B]:
$832,452; Percentage change: -31%.
Component: Other costs[D]; Before reserve[A]: $12,294,304; After
reserve[B]: $9,241,472; Percentage change: -25%.
Source: U.S. Army Corps of Engineers.
Note: GAO analysis of data obtained from the Corps‘ Annual Form 27
Report of Operations--Hopper Dredges, fiscal years 1994 through 2001.
[A] Fiscal years 1994 through 1997 represent the time period before
ready reserve.
[B] Fiscal years 1998 through 2001 represent the time period after
ready reserve.
[C] In constant 2001 dollars.
[D] These costs include, among other things, depreciation and repairs.
[End of table]
The Corps refers to the difference between a vessel‘s total costs and
the value of the dredging services it provides (the net cost) as a
’subsidy.“ The Corps estimates the annual subsidy to maintain the
Wheeler idle in ready reserve at about $8.4 million.[Footnote 7] This
subsidy is a direct cost of ready reserve. In addition to the subsidy,
the Corps must pay contractors to do the work the Wheeler no longer
performs. The difference between the vessel‘s traditional workload and
its current workload is approximately 6.6 million cubic yards.
Depending on whether private industry hopper dredges are able to
perform this work in aggregate at a lower or higher cost than if the
Wheeler performed the work, the total cost to government of the Wheeler
in ready reserve status could be either lower or higher than the Corps‘
estimated subsidy.
In addition to the Wheeler‘s subsidy, restrictions have led to
inefficient operations for the other Corps hopper dredges, resulting in
additional costs for the Corps. According to Corps officials, September
is the ideal time to dredge in the Pacific Northwest, because dredging
conditions generally deteriorate in October. The officials mentioned
that, at times, the Essayons and the Yaquina have reached their fiscal
year operating limits and returned to port in September, before the
projects they were working on were complete. The dredges were sent back
to complete the project after the new fiscal year began in October,
even though weather conditions may have made dredging conditions less
than optimal, and the Corps incurred additional transit costs.
According to some Corps officials, the annual operating limit cannot be
extended. For example, the Essayons stopped dredging the mouth of the
Columbia River and returned to port at the end of fiscal year 2001 when
it reached its operating limit. The vessel returned to finish the work
at the start of the new fiscal year, but adverse weather conditions
prevented it from fully dredging the river. As a result, some projects
may be postponed until the following fiscal year, reprioritized, or
canceled altogether.
Benefits of Restrictions Are Unproven:
A potential benefit of the restrictions on the Corps‘ hopper dredge
fleet is that an increase in demand for industry‘s dredging services
could encourage existing firms to make capital investments (e.g., build
new dredges or improve existing dredges) or encourage more firms to
enter the dredging market. Dredging industry representatives told us
that the restrictions have already led to an increase in the number of
industry vessels and, as evidence, pointed to the addition of two new
dredges, the Liberty Island, a large-class dredge introduced in 2002,
and the Bayport, a medium-class dredge introduced in 1999, as well as
the return of the Stuyvesant, a large-class dredge, to the U.S. hopper
dredging market. Moreover, they added that since the restrictions, the
private hopper dredging industry has also made improvements and
enhancements to its existing fleet--specifically the Columbia--thus
improving the efficiency of its dredging operations and increasing the
capacity of its vessels. However, the representatives also told us that
the restrictions are only one of several factors the private hopper
dredging industry considers when deciding to acquire or build an
additional dredge. In addition, firms must invest in equipment to
remain competitive in any industry. As a result, it is unclear to what
extent the restrictions on the Corps‘ vessels were a factor in
industry‘s investment decisions to increase its fleet size and add
dredging capacity.
While the private hopper dredging industry has recently placed two new
dredges on line, it has sold the small-class dredge Mermentau and
placed another small-class dredge, the Northerly Island, up for sale.
In addition, during the last decade the private hopper dredging
industry has decreased from seven firms to five firms. Specifically,
since 1993, two firms exited the market, one firm entered the market,
and two firms merged. The consolidation in the industry does not
necessarily mean that competition has been reduced because the new
industry structure could have resulted in enhanced capacity,
flexibility, and efficiency for the remaining firms. However, it is
uncertain whether the private hopper dredging industry is more or less
competitive now than it was prior to the restrictions.
Historical data reveal that, in general, as shown in figure 3, in years
when more material is available to private industry, industry submits
fewer bids per Corps solicitation. For example, during fiscal year
1991, when the Corps estimated that 31.3 million cubic yards of
maintenance material would be contracted out to industry, the average
number of bids per solicitation was 3.2. In contrast, during fiscal
year 1998, when the Corps estimated that 53.7 million cubic yards of
maintenance material would be contracted out to industry, industry
submitted an average of about 2 bids per solicitation.
Figure 3: Estimated Volume of Material Dredged by Industry and Average
Number of Industry Bids per Corps Solicitation, Fiscal Years 1990
through 2002:
[See PDF for image]
Notes: GAO analysis of the Corps‘ Dredging Information System data.
Each point represents a fiscal year.
The inverse, linear relationship is statistically significant at the 95
percent level.
[End of figure]:
Likewise, as shown in figure 4, in years when there were fewer industry
bids per Corps solicitation, the average winning industry bid, as a
percentage of the Corps‘ cost estimate, was higher.[Footnote 8] For
example, during fiscal year 1991, when the average number of bids per
solicitation was 3.2, the average winning bid was 79 percent of the
Corps‘ estimate. In contrast, during fiscal year 1998, when the average
number of bids per solicitation was 2, the average winning bid was 97
percent of the Corps‘ estimate.
Figure 4: Annual Average Number of Industry Bids per Corps Solicitation
and Winning Bid as a Percentage of the Corps‘ Cost Estimate, Fiscal
Years 1990 through 2002:
[See PDF for image]
Notes: GAO analysis of the Corps‘ Dredging Information System data.
Each point represents a fiscal year.
The linear relationship is statistically significant at the 99 percent
level.
[End of figure]:
In general, when there are fewer industry bids per solicitation, the
winning industry bid relative to the Corps‘ cost estimate increases. In
fiscal years 1990 through 2002, more than half of the solicitations for
hopper dredging maintenance work received just one or two bids from
private contractors. During these years, when only one contractor bid
on a solicitation, the bid exceeded the government estimate 87 percent
of the time. In contrast, when there were three or more bids on a
solicitation, the winning bid exceeded the government estimate only 22
percent of the time. After the Corps‘ hopper dredge fleet was
effectively restricted to 180 workdays (fiscal years 1993 through
2002), the number of industry bids per solicitation declined from about
3 to roughly 2.4. Specifically, as shown in figure 5, when there were
no limits on the use of the Corps‘ hopper dredges (fiscal years 1990
through 1992), only 5 percent of solicitations received one bid. After
limits were placed on the Corps‘ hopper dredges (fiscal years 1993
through 2002), 19 percent of solicitations had only one bid.[Footnote
9] Moreover, before the restrictions, 67 percent of the solicitations
had three or more bids, whereas, after the restrictions, only 42
percent had three or more bids. These changes might have been expected
because, after the restrictions, industry‘s share of hopper dredging
work increased while the number of hopper dredging firms decreased from
seven to five.
Figure 5: Comparison of Number of Industry Bids per Corps Solicitation
Before and After Restrictions:
[See PDF for image]
Note: GAO analysis of the Corps‘ Dredging Information System data.
[A] Fiscal years 1990 through 1992 represent the time period before the
restrictions were implemented.
[B] Fiscal years 1993 through 2002 represent the time period after the
restrictions were implemented.
[End of figure]:
Furthermore, in the time period following the imposition of the 180-day
restriction, the frequency with which the winning industry bid exceeded
the Corps‘ cost estimate has increased. For example, as shown in figure
6, prior to the restrictions, the winning bid exceeded the Corps‘ cost
estimate 24 percent of the time. After the restrictions were imposed,
the winning bid exceeded the Corps‘ estimate 45 percent of the
time.[Footnote 10] This finding is consistent with economic principles;
that is, all else equal, an increase in demand for dredging by private
industry with fixed supply would result in higher prices.
Figure 6: Comparison of Winning Industry Bids and Corps‘ Cost Estimates
Before and After Restrictions:
[See PDF for image]
Note: GAO analysis of the Corps‘ Dredging Information System data.
[A] Fiscal years 1990 through 1992 represent the time period before the
restrictions were implemented.
[B] Fiscal years 1993 through 2002 represent the time period after the
restrictions were implemented.
[End of figure]
It should be noted that the extent to which the restrictions
contributed to the decrease in the number of industry bids per Corps
solicitation and the increase in the winning industry bid relative to
the Corps‘ cost estimate is unknown. Other factors could have also
contributed to these changes. For example, an increase in the demand
for hopper dredging services for new construction projects or beach
nourishment could lead to a decrease in the number of bids received for
maintenance projects. Similarly, the introduction of environmental
restrictions on when hopper dredging can take place could contribute to
an increase in the winning industry bid relative to the Corps‘ cost
estimate. Nevertheless, the decrease in the number of bids per
solicitation and the increase in bids exceeding the Corps‘ cost
estimates raises questions about the effects the restrictions may have
had on competition and prices, demonstrating the need for a
comprehensive analysis of the effects of the restrictions on
competition, efficiency, and prices.
Another potential benefit of restrictions on the use of the Corps‘
vessels is enhanced responsiveness to emergencies. However, there is
disagreement within the Corps on this issue. One Corps official
believes that a dredge in ready reserve is better able to handle
emergencies than if it were working 180 days because it is in a
’standby“ status at the dock, ready to respond. In contrast, others in
the Corps believe that a dredge can respond just as well or better to
an emergency while working a full schedule because the dredge can
temporarily halt the project it is working on, respond to the
emergency, and then return to its scheduled work.[Footnote 11] During
our discussions with representatives from selected ports and the
maritime industry, we did not learn of any instances of problems in the
Corps‘ responsiveness to emergencies prior to restrictions or instances
of improved response time since the restrictions went into effect.
A major reason that the Corps is unable to evaluate whether emergency
dredging needs have been met more or less efficiently since the
restrictions went into effect is that its dredging database--the
Dredging Information System--does not specifically identify and track
emergency work performed either by Corps or industry vessels.
Consequently, the Corps cannot readily determine how many days have
been needed for each of its vessels to respond to emergencies. In
addition, the Corps does not know whether it is paying contractors more
or less for performing the emergency dredging projects compared to the
costs it pays for routinely scheduled maintenance work. Such
information would be a valuable tool for determining how emergency
dredging needs can be met in a manner that is the most economical and
advantageous to the government--that is, when and under what
circumstances to contract with the private hopper dredging industry for
these emergencies or when to use Corps vessels. In discussing this
issue, Corps officials agreed that obtaining information on emergencies
is important for managing their hopper dredging program and told us
they have initiated efforts to collect such data to incorporate into
their dredging database.
Corps Has Not Justified the Existing and Proposed Restrictions on Its
Hopper Dredge Fleet:
In a June 2000 report to the Congress, the Corps stated that the
placement of the Wheeler in ready reserve had been a success and
recommended that the vessel remain in ready reserve. However, the
report contained a number of analytical and evidentiary shortcomings,
and, when asked, the Corps could not provide any supporting
documentation for its recommendation. In addition, the report also
proposed that the McFarland be placed in ready reserve, but the Corps
did not conduct an analysis to support this proposal. The costs to
place the McFarland in ready reserve are likely to be similar to the
costs incurred by placing the Wheeler in ready reserve. Because the
McFarland‘s workload would be reduced from 180 days to 55 days plus
emergencies, the Corps would incur annual costs of about $8 million
when the vessel is idle--largely because much of a vessel‘s costs are
incurred regardless of its level of use. Furthermore, according to the
Corps, the McFarland will require at least a $25 million capital
investment to ensure its safety, operational reliability, and
effectiveness for future service. It is questionable whether such an
investment in a vessel that would be placed in ready reserve and
receive only minimal use is in the best interest of the government.
Corps Has Not Comprehensively Analyzed the Costs and Benefits of
Restrictions:
The Water Resources Development Act for 1996 required the Corps to
determine whether (1) the Wheeler should be returned to active status
or continue in ready reserve status or (2) another federal hopper
dredge should be placed in ready reserve status, and issue a report to
the Congress on its findings. The Corps issued the required report in
June 2000,[Footnote 12] recommending that the Wheeler remain in reserve
and proposing that an additional dredge, the McFarland, also be placed
in reserve. However, when asked, the Corps official who authored the
report told us that he did not have any supporting documentation for
the report. In addition, the report had a number of evidentiary and
analytical shortcomings. For example, the evidence presented in the
report showed that the price the government paid to the industry for
hopper dredging was higher in the 2 years after the Wheeler was put in
ready reserve than it was the year before. This raises questions about
the validity of the recommendation contained in the report.
Furthermore, the report did not contain a comprehensive analysis. A
comprehensive economic analysis of a government program or policy would
identify all the resulting costs and benefits, and, where possible,
quantify these measures. Both the quantitative and qualitative costs
and benefits would need to be compared and evaluated to determine the
success or failure of a program and to potentially be used as a basis
for future policy decisions. With regard to the restrictions on the
Corps‘ hopper dredges, a comprehensive economic analysis might contain,
among other things, all costs associated with the nonuse of the vessel
and the potential benefits that might result due to efficiency gains,
increased competition, and lower prices. The analysis might also
examine whether ports, harbors, and access channels were maintained
more or less effectively, or whether emergency dredging needs were met
in a more or less timely and cost-effective manner following
implementation of the restrictions.
Corps Has Not Demonstrated that Further Restrictions on the Use of the
Corps‘ Dredge McFarland Are Warranted:
The Corps has not demonstrated that placing an additional hopper dredge
in ready reserve, specifically the McFarland, would be beneficial to
the United States. In its June 2000 report to the Congress on the ready
reserve status of the dredge Wheeler, the Corps proposed that the
McFarland be the next dredge placed in reserve. However, the Corps did
not offer any analysis on the potential costs of placing an additional
Corps hopper dredge in reserve or the benefits of such an action.
Moreover, to be available for future use, the 35-year-old McFarland
requires at least a $25 million capital investment to ensure its
safety, operational reliability, and effectiveness. The repairs include
asbestos removal; repairs to the hull; engine replacement; and upgrades
of equipment, machinery, and other shipboard systems. It is
questionable whether spending $25 million to rehabilitate the McFarland
and then placing it in ready reserve is prudent.
Furthermore, if the McFarland were placed in ready reserve, the Corps
would incur annual costs similar to the subsidy that is already
incurred for the Wheeler. Because the Wheeler‘s costs do not vary
proportionally to its use, the costs to operate the vessel 55 days a
year plus emergencies in ready reserve is only marginally less than if
it were to operate 180 days a year. The Corps estimates that if the
McFarland were placed in ready reserve, it would require an annual
subsidy of about $8 million to remain idle. The Corps would also need
to contract out the work the McFarland would no longer be doing--
approximately 2 to 3 million cubic yards per year. Depending on whether
private industry hopper dredges are able to perform this work in
aggregate at a lower or higher cost than if the McFarland performed the
work, the total cost to government of the placing the McFarland in
reserve could be either lower or higher than the estimated annual
subsidy. Finally, placing the McFarland in ready reserve could increase
competition if such restrictions spurred an increase in investment in
private hopper dredges. However, it is questionable whether placing the
McFarland in ready reserve would provide enough incentive for industry
to make additional investments.
Conclusions:
Hopper dredges play a critical role in keeping the nation‘s ports open
for both domestic and international trade. This function has been and
will likely continue to be carried out through a mix of private
industry and government-owned dredges. At issue is how to use this mix
of dredges in a manner that maintains the viability of the private
fleet while minimizing the costs to government. The Corps has proposed
to the Congress that additional restrictions on the use of its hopper
dredges are warranted, but it cannot provide any analytical evidence to
support its position. The limited evidence that does exist indicates
that these restrictions have imposed costs on the government, while the
benefits are largely unproven. Unless and until the Corps gathers the
data, comprehensively analyzes the costs and benefits of restrictions
on the use of its hopper dredges, and takes the steps to update its
cost estimates, there is no assurance that the nation‘s hopper dredging
needs are being met in a manner that is the most economical and
advantageous to the government.
Recommendations for Executive Action:
In an effort to discern the most economical and advantageous manner in
which to operate its hopper dredge fleet, and because the Corps has
been unable to support, through analysis and documentation, the costs
and benefits of placing its hopper dredges in ready reserve, we
recommend that the Secretary of the Army direct the Corps of Engineers
to:
* obtain and analyze the baseline data needed to determine the
appropriate use of the Corps‘ hopper dredge fleet including, among
other things, data on the frequency, type, and cost of emergency work
performed by the Corps and the private hopper dredging industry;
contract type; and solicitations that receive no bids or where all the
bids received exceeded the Corps‘ estimate by more than 25 percent;
* prepare a comprehensive analysis of the costs and benefits of
existing and proposed restrictions on the use of the Corps‘ hopper
dredge fleet--including limiting the Corps‘ dredges to 180 days of work
per year, placing the Wheeler into ready reserve, limiting the
McFarland to its historic work in the Delaware River, and placing the
McFarland into ready reserve status; and:
* assess the data and procedures used to perform the government cost
estimate when contracting dredging work to the private hopper dredging
industry, including, among other things, (1) updating the cost
information for private industry hopper dredges and (2) examining the
policies related to calculating transit costs.
Agency Comments:
We provided a draft of this report to the Acting Assistant Secretary of
the Army and the Dredging Contractors of America for review and
comment.
In a letter dated March 21, 2003, the Department of the Army (Army)
provided comments on a draft of this report. The Army agreed with our
recommendations and provided time frames for implementing each of them.
It also provided additional comments suggesting clarification and
elaboration on a number of issues discussed in our report. See appendix
III for the Army‘s comments and our responses.
In a letter dated March 3, 2003, the Dredging Contractors of America
(DCA) provided detailed comments on a draft of this report. DCA
generally agreed with our recommendations. However, it believed
strongly that reducing the scheduled use of the Corps‘ hopper dredges
has resulted in proven benefits. We continue to believe that the
relationship between the restrictions and benefits to the government
are unproven because (1) the Corps incurs costs related to the
underutilization of its dredges, and (2) since the restrictions were
first imposed, the Corps has received fewer industry bids per
solicitation, and the percentage of winning industry bids that exceed
the Corps‘ cost estimates has increased. See appendix IV for DCA‘s
comments and our responses.
We conducted our review between January 2002 and February 2003 in
accordance with generally accepted government auditing standards. A
detailed discussion of our scope and methodology is presented in
appendix I.
We will send copies of the report to the Secretary of the Army,
appropriate congressional committees, and other interested Members of
Congress. We will also make copies available to others upon request. In
addition, the report will be available at no charge on the GAO Web site
at http://www.gao.gov.
If you or your staff have questions about this report, please contact
me at (202) 512-3841. Key contributors to this report are listed in
appendix V.
Barry T. Hill
Director, Natural Resources and Environment:
Signed by Barry T. Hill
[End of section]
Appendix I: Scope and Methodology:
To assess the changing roles of the Corps and industry in hopper
dredging and the characteristics of the hopper dredging industry, we
obtained Corps‘ studies and data from the Corps‘ Navigation Data Center
that provided information on the hopper dredging requirements of the
United States, including the quantity of material dredged annually by
the Corps and the private hopper dredging industry, and their
associated costs. We also reviewed the laws that define these roles. In
addition, we interviewed Corps officials; representatives from the five
hopper dredging firms (B+B Dredging Co., Inc., Bean Stuyvesant LLC,
Great Lakes Dredge & Dock Company, Manson Construction Co., and Weeks
Marine, Inc.); the maritime industry (the Delaware River Port
Authority, Maritime Exchange for the Delaware River and Bay, Navios
Ship Agencies, Inc., and the Steamship Association of Louisiana);
dredging and port associations (Dredging Contractors of America,
Pacific Northwest Waterways Association, and American Association of
Port Authorities); and selected ports (Portland, Seattle, New York/New
Jersey, New Orleans, and Wilmington). To obtain a better understanding
of hopper dredging from the perspective of the private hopper dredging
industry, we visited and toured a medium-class industry hopper dredge
working in the Chesapeake and Delaware Canal and interviewed its crew.
Moreover, we reviewed the Corps‘ cost estimating policies.
To determine the intent and effects of the restrictions placed on the
use of the Corps‘ hopper dredge fleet, we analyzed the laws governing
the use of the Corps‘ hopper dredges. We also reviewed studies
conducted by the Corps and the Pacific Northwest Waterways Association.
For qualitative information, we obtained documents and interviewed
Corps officials from headquarters and district and division offices,
including Jacksonville, New Orleans, Philadelphia, Portland, Walla
Walla, and the North Atlantic Division, as well as representatives from
the private hopper dredging firms, selected ports, dredging and port
associations, and the maritime industry. For quantitative information,
we performed descriptive statistical analyses using data on the winning
contractor bids, estimated industry dredging volumes, and the Corps‘
cost estimate available from the Corps‘ Dredging Information System
database.
To evaluate whether further restrictions on the Corps‘ hopper dredge
fleet, including placing the Corps‘ dredge McFarland in ready reserve,
are justified, we reviewed studies and analyses performed by the Corps
to support its proposal to place the McFarland in ready reserve. We
also interviewed officials from the Corps and representatives from the
private hopper dredging industry, selected ports, and the maritime
industry to gain their views on the possible effects on competition and
emergency response if the current restrictions on the Corps‘ hopper
dredges, particularly the McFarland, were modified. To determine the
costs associated with repairing the McFarland, we obtained and analyzed
cost estimates for the repairs prepared by the Corps‘ Philadelphia
district office and discussed the estimates with Corps district and
headquarters officials. We also visited and toured the McFarland when
it was working in the Delaware River and interviewed the McFarland‘s
crew and Corps officials from the Philadelphia district and the North
Atlantic Division offices.
We conducted our review between January 2002 and February 2003 in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: The U.S. Hopper Dredge Fleet:
There are currently 20 hopper dredges operating in the United States.
(See table 2.) Of the 20 dredges, 4 are small-class hopper dredges, 10
are medium-class hopper dredges, and 6 are large-class hopper dredges.
Of the 16 private hopper dredges, Great Lakes Dredge & Dock Company
owns 7, Manson Construction Co. owns 3, and the remaining firms (B+B
Dredging Co., Inc., Bean Stuyvesant LLC, and Weeks Marine, Inc.) each
own 2.
Table 2: Corps and Private Industry Hopper Dredge Fleets:
Size: Large-class:
Owner: Great Lakes Dredge & Dock Company; Vessel: Liberty
Island; Capacity (in cubic yards): 6,540; Year built: 2002.
Vessel: Long Island; Capacity (in cubic yards): 16,000; Year built:
1971.
Owner: Bean Stuyvesant LLC; Vessel: Stuyvesant; Capacity (in cubic
yards): 11,200; Year built: 1982.
Vessel: Eagle I; Capacity (in cubic yards): 6,600; Year built: 1981.
Owner: Corps of Engineers; Vessel: Wheeler; Capacity (in cubic yards):
8,256; Year built: 1982.
Vessel: Essayons; Capacity (in cubic yards): 6,000; Year built: 1983.
Size: Medium-class:
Owner: B+B Dredging Co., Inc.; Vessel: Columbia; Capacity (in
cubic yards): 4,000; Year built: 1986[A].
Owner: Weeks Marine, Inc.; Vessel: B.E. Lindholm; Capacity (in cubic
yards): 4,150; Year built: 1985.
Vessel: R.N. Weeks; Capacity (in cubic yards): 4,000; Year built: 1987.
Owner: Manson Construction Co.; Vessel: Bayport; Capacity (in cubic
yards): 5,000; Year built: 1999.
Vessel: Newport; Capacity (in cubic yards): 4,000; Year built: 1983.
Owner: Great Lakes Dredge & Dock Company; Vessel: Dodge Island;
Capacity (in cubic yards): 3,600; Year built: 1980.
Vessel: Manhattan Island; Capacity (in cubic yards): 3,600; Year built:
1977.
Vessel: Padre Island; Capacity (in cubic yards): 3,600; Year built:
1981.
Vessel: Sugar Island; Capacity (in cubic yards): 3,600; Year built:
1979.
Owner: Corps of Engineers; Vessel: McFarland; Capacity (in cubic
yards): 3,140; Year built: 1967.
Size: Small-class:
Owner: Great Lakes Dredge & Dock Company; Vessel: Northerly
Island; Capacity (in cubic yards): 2,160; Year built: 1983.
Owner: Manson Construction Co.; Vessel: Westport; Capacity (in cubic
yards): 1,800; Year built: 1978.
Owner: B+B Dredging Co., Inc.; Vessel: Atchafalaya; Capacity (in cubic
yards): 1,300; Year built: 1980.
Owner: Corps of Engineers; Vessel: Yaquina; Capacity (in cubic yards):
1,020; Year built: 1981.
Source: U.S. Army Corps of Engineers.
[A] Although the vessel was originally built in 1944 to transport
military equipment in World War II and later converted to a hopper
dredge, according to Corps‘ data, 1986 is listed as the year the vessel
began its service.
[End of table]
[End of section]
Appendix III: Comments from the Department of the Army:
DEPARTMENT OF THE ARMY OFFICE OF THE ASSISTANT SECRETARY CIVIL WORKS
108 ARMY PENTAGON WASHINGTON DC 20310-0108:
REPLY TO ATTENTION OF:
21 MAR 2003:
Mr. Barry T. Hill, Director:
Natural Resources and Environment United States General Accounting
Office 441 G Street, NW:
Washington, D.C. 20548-0001:
Dear Mr. Hill:
This is in response to your letter dated February 20, 2003, requesting
comments on GAO‘s proposed report entitled Corps of Engineers: Effects
of Restrictions on Corps‘ Hopper Dredges Should be Comprehensively
Analyzed (GAO-03-382).
Comments on the draft report are enclosed. This constitutes the
Department of:
Defense response on the draft report.
Sincerely,
George S. Dunlop Deputy Assistant Secretary of the Army (Policy and
Legislation):
Signed by George S. Dunlop:
Enclosure:
Effects of Restrictions on Corps‘ Hopper Dredges Should be
Comprehensively Analyzed:
GAO-03-382:
Recommendation: Obtain and analyze the baseline data needed to
determine the appropriate use of the Corps‘ hopper dredge fleet
including, among other things, data on the frequency, type, and cost of
emergency work performed by the Corps and the private hopper dredging
industry; contract type; and solicitations that receive no bids or
where all the bids received exceeded the Corps‘ estimate by more than
25 percent.
Concur. The Corps has initiated a revision to its existing Dredge
Information System to ensure the appropriate data are included. These
data will begin to be collected by:
1 September 2003.
Recommendation: Prepare a comprehensive analysis of the costs and
benefits of existing and proposed restrictions on the use of the Corps‘
hopper dredge fleet - including limiting the Corps dredges to 180 days
of work per year, placing the WHEELER into ready reserve, limiting the
MCFARLAND to its historic work in the Delaware River, and placing the
MCFARLAND into ready reserve status.
Concur. The Corps will prepare the analysis, and this analysis will be
completed on 1 December 2003.
Recommendation: Assess the data and procedures used to perform the
government cost estimate when contracting dredging work to the private
hopper dredging industry, including, among other things, (1) updating
the cost information for private industry hopper dredges and (2)
examining the policies related to calculating transit costs.
Concur. The Corps has initiated an evaluation of the estimating
procedures, policies and costs. A report of this evaluation will be
completed on 15 March 2004.
Additional Comments:
The following additional comments are included.
The GAO report addresses 6 issues, synopsized as follows:
1. Government Estimates - using outdated cost information and policies
related to calculating transit costs.
2. Restrictions on Corps hopper use not resulting in proven benefits.
3. No net increase in number of industry hopper dredges after 10 years
of restrictions.
4. Number of bids per solicitation decreased subsequent to imposition
of restrictions.
5. Data issues, including inability to determine emergency work.
6. June 2000 Report to Congress lacked supporting documentation.
1. Government Estimates:
The cost information for hopper dredges is outdated and needs to be
evaluated. An effort has been initiated to improve the cost data for
hopper dredges. However, it should be noted that significant cost
factors have increased, such as insurance, labor, and fuel.
Accordingly, when a dredge is at or near full depreciation, it normally
experiences increased maintenance and repair costs, such that the
offsets for one cost may be comparable to changes in other costs. The
issue regarding following an expired policy when calculating contractor
transit costs, or mobilization/demobilization costs, is not viewed as
presented by GAO. This issue is only pertinent to the hopper dredging
work in the Pacific Northwest. It is correct that the previous policy
prescribed calculating mobilization based on the second closest dredge,
and Government Estimates for hopper dredge procurements in the Pacific
Northwest did calculate the mobilization based on the second closest
dredge. However, the unique situation in the Pacific Northwest with
only 1 industry hopper dredge normally being stationed on the west
coast, warrants expansion of the normal area of operations to include a
reasonable number of bidders to include a second dredge from the Gulf
of Mexico. This application is consistent with current Corps
engineering regulations. In addition to having accurate cost
information to support a Government Estimate, there are opportunities
to minimize the cost impacts and improve competition by the development
of a regional hopper dredging procurement for the west coast, which
includes several navigation projects and additional hopper dredging
requirements. Regional packaging requires coordinated budget support
from at least 2 districts in 2 separate Major Subordinate Commands.
2. Restrictions on Corps Hopper Dredge Use Not Resulting In Proven
Benefits:
The GAO discussion regarding restrictions on Corps hopper dredge use
needs clarification . The report presents a specific case regarding
operational constraints in the Northwest, and a statement that the
total number of hopper dredges has not increased. Both of these are
misleading. The Corps hopper dredge owning district has the flexibility
to schedule the dredge, within the constraints of the maximum allowable
number of days, to be available for known shoaling events in the
navigation projects served by that dredge. As such, the district can
either choose to ensure operating days are scheduled to coincide with
the latter part of the Fiscal Year, or they can proactively procure an
industry hopper dredge to be scheduled for this same period.
The work not performed by the WHEELER as a result of being in a ready
reserve status averages about 6.6 million cubic yards (mcy) per year.
This equates to either 3 small contracts (2.3 mcy) or 1 large (6.8 mcy)
industry:
hopper dredge contract in the Mississippi River. If the river is not
shoaling, then none of those contracts would be required, and average
savings of $4.75 million (based on average cost of current industry
hopper dredge contracts in the Mississippi River) could be realized .
However, if the WHEELER were not in ready reserve, it would have been
scheduled to dredge in the river, or in some other project, taking away
additional work form the industry hopper dredges. When the WHEELER is
in ready reserve and industry is performing this work, this added work
increases the utilization of the industry dredges, and effectively
reduces the cost of the contractors‘ dredges over time. A simple
sensitivity analysis of hopper dredge utilization as a function of unit
price indicates that the cost of dredging could be reduced from 13-24
percent, depending upon the size of the industry hopper dredge and
whether the dredge worked 6 months or up to 11 months per year.
3. No Net Increase in Number of Industry Hopper Dredges after 10 Years
of Restrictions:
The GAO report does not address the significance of capacity in
measuring the net change in the industry hopper dredge fleet. Since
1993, significant changes have occurred in the makeup of the Corps and
industry:
hopper dredge fleets. Besides the acknowledged addition of the BAYPORT
and LIBERTY ISLAND, there have been additional improvements to the
industry hopper dredge capacity. The hopper dredge STUYVESANT was not
in country until 1995, and shortly after returning was committed to a
long term dredging project with the Navy in San Diego, which meant the
industry‘s largest hopper dredge was not available until 1996. When it
did return to the U.S., it:
reconfigured its hopper structure and increased the capacity of the
dredge from 9200 cubic yards to 11,200 cubic yards. The hopper dredge
COLUMBUS, now called the COLUMBIA, prior to 1998 was not used except
for daylight dredging for a few months only in the Great Lakes. In
1998, the dredge was taken out of the Great Lakes and began
successfully competing for hopper dredge work in the Gulf, operating 24
hours per day throughout the entire year. These changes are significant
additions to the industry capability.
4. Number of Bids Per Solicitation Decreased Subsequent to Imposition
of Restrictions:
With additional workload being offered to the same number of hopper
dredge companies, it would be expected that some jobs would result in
experiencing only one bid. With additional workload being offered to
these same industry hopper dredges resulting in peak workload periods
when all dredges are working, one would expect a contractor to take
advantage of an opportunity to bid a higher price, anticipating no
competition. The results of the GAO analysis regarding bid results seem
understandable and reflect normal supply and demand economic
principles.
S. Data Issues, Including Inability to Determine Emergency Work:
There are additional data sets that need to be included in the existing
Corps Dredging Information System. The Corps has initiated a revision
to its existing system to address these data. While it is true that
there is no current means to retrieve the work that was classified as
an emergency, the Corps can determine the minor amount of work that was
an emergency. One action taken as a result of Section 237 of the Water
Resources Development Act of 1996 (WRDA96) was the establishment of the
Industry Corps Hopper Dredge Management Group (ICHDMG). This group
works to ensure that the time-sensitive and urgent dredging needs are
managed to preclude the need to declare an emergency condition in most
cases. A mechanism has been developed to flag pending capability
shortfalls, address urgent dredging requirements, and implement an
iterative asset management process to ensure a best-case response. This
process has resulted in both industry and Corps assets being used to
resolve the time-sensitive dredging needs in a cost effective manner.
6. June 2000 Report to Congress Lacked Supporting Documentation:
In regard to the Report to Congress required by Section 237 of WRDA96,
the Corps reported to Congress based on the criteria implied in the
added title of the section, °(c) Program to Increase Use of Private
Dredges.“ The report considered the parameters addressed in the section
regarding private industry submitting responsive and responsible bids,
developing procedures to ensure private industry hopper dredge capacity
is available for routine and time-sensitive dredging needs, and
ensuring that the WHEELER, in its ready reserve status is able to
perform emergency work. While the data presented in the report indicate
a higher average unit price for industry work subsequent to the WHEELER
being placed in ready reserve, the difference in average unit price can
not be used as an indicator that the price paid to the industry was
higher for similar work as was previously performed by the industry.
There are many variables, as well as substantially different hopper
dredging requirements for the same projects in different years. Thus,
comparing average unit price alone can not be used as an indicator of
increased or decreased cost to the program. In a given year, the mix of
hopper dredging contracts includes beach nourishment work, shallow and
deep draft ocean inlet work, river dredging, some of which requires
pumpout, and new work dredging. The range in unit prices can be from
$0.26/cubic yard to as much as $14/cubic yard. Dredging in the same
project can vary substantially from year to year, e.g., the Mississippi
River can require dredging from 2 million cubic yards to 50 million
cubic yards per year. When there are several deepening contracts
underway, the flexibility of the industry hopper dredges are minimized
and reduced competition for other work may reflect higher unit prices.
Environmental windows have constricted the available time for
accomplishing hopper dredging work, imposing higher risks on the
contractors to complete the requirements in shorter periods of time.
All of these factors as well as several more can influence the cost of
hopper dredging. Therefore, it would be extremely difficult to conclude
that placing the WHEELER in ready reserve would result in increased
costs. With regard to the recommendation to place a second hopper
dredge in ready reserve, the Corps considered the changes in the
industry capacity, the management flexibility of having Corps assets in
a ready reserve status, and the fact that comparably sized industry
dredges operate at substantially less per day than the MCFARLAND.
In FY 2002, 73.9 million cubic yards were dredged by hopper dredges,
with 82% (60.6 mcy) of the hopper work performed in the Atlantic and
Gulf of Mexico. Of this portion, industry performed 90% of the work
(54.8 mcy).
Several deep draft navigation projects are being improved, and all have
an ocean channel that will require hopper dredging. Many of these
projects are subject to environmental windows.
With the projections for foreign trade expected to double in the next
20 years, and the rapid expansion, both in number and size, of
container ships that will use our ports, the requirements for reliable,
fully maintained navigation channels will increase. Coupled with this
requirement is the expectation that beach nourishment work will
continue at a relatively constant level. Hopper dredging workload will
increase.
In the last three years, industry has added 2 new hopper dredges to
their capability, the BAYPORT and the LIBERTY ISLAND. In response to
the large workload in the Gulf and Atlantic, all but two industry
dredges are located in the east. However, because of the Southeast
Atlantic turtle window restrictions, and the preference for beach
nourishment work to be performed during the winter months, peak
workload demands can exceed the capacity of the industry fleet. It is
during these peak periods when the value of the Corps dredges is fully
realized for two reasons. First, as the last available industry dredges
bid on work, and the expectation of being the sole bidder arises, the
cost of the work begins to escalate - a normal response to supply and
demand economics. The Corps minimum fleet hopper dredges represent a
means to keep these cost escalations in check. If contractor bids
exceed 125% of the Government Estimate, the Corps can reject the bids
and perform the work with the minimum fleet hopper dredges. Second, the
Corps ready reserve hopper dredge WHEELER and the MCFARLAND stand ready
to respond when industry is fully engaged and unforeseen, time-
sensitive requirements occur.
In summary, the Corps has been continually evaluating and analyzing the
appropriate use of Federal and industry hopper dredges in fulfilling
its navigation mission. Determinations of the proper mix of ready
reserve and fully operational Federal hopper dredges can not be solely
derived from analyzing previous data. The Corps is in the process of
refining the Dredging Information System to ensure the data will supply
the needed information for management of hopper dredging. The
Government Estimating process and data are being reviewed and, where
appropriate, will be updated.
We appreciate the opportunity to comment on this draft report.
[End of section]
Discussed below are GAO‘s corresponding detailed responses to the
Army‘s six numbered additional comments.
As discussed in our report, the Corps‘ cost estimate is pivotal in
determining the reasonableness of private contractors bids, and by law
the Corps may not award a contract if the bid price exceeds the cost
estimate by more than 25 percent. Consequently, we believe that it is
critical for the Corps to have comprehensive data for all costs and all
industry vessels. The Army recognized in its comments that the cost
information for industry hopper dredges is outdated and needs to be
evaluated, and has initiated an effort to improve the cost data. While
we recognize that updating the cost data could potentially increase or
decrease the Corps‘ cost estimates, we believe that unless the Corps
has updated cost data for all industry vessels, there is no assurance
that the Corps‘ cost estimates are a reliable tool for determining
whether industry bids are within 25 percent of the government estimate
as required by law. The Army‘s suggestion of clustering several
navigation projects for west coast contracts--similar to the Dredging
Contractors of America‘s comment numbered 3--is one of several possible
options for addressing the costs of moving dredges to and from the west
coast region.
In our report, we illustrated how a rigid interpretation of the Corps‘
policy that limits the number of days its vessel can operate resulted
in inefficient operations. We recognize that the Corps‘ hopper dredge
owning district has the flexibility to schedule the dredge within the
maximum allowable number of days. However, because time-sensitive
dredging needs may disrupt the scheduled use of the dredge, we believe
that it would be prudent for the Corps to examine whether there is a
need for some flexibility in implementing the annual operating
restrictions on the Corps vessels.
As discussed in our report, the Corps incurs many of the costs for
maintaining and operating its hopper dredges regardless of how much the
vessels are used. While it is true that the Corps would save
contracting costs if the river is not shoaling and the work previously
performed by the Wheeler does not need to be done, the Corps is still
paying money to maintain the Wheeler idle in reserve when the vessel
could be working to pay for its costs. We recognize that it is
plausible that private industry‘s hopper dredging costs could decrease
over time if their vessels performed more work. However, more important
to the government, is how any potential decrease in industry costs are
passed along to the government in the form of lower prices. The data in
our report raise questions about whether any cost savings industry has
realized have trickled down to the government. The Army‘s suggestion
regarding a sensitivity analysis is one of many analyses that it may
wish to consider in its comprehensive analysis of the costs and
benefits of existing and proposed restrictions on the use of the Corps‘
hopper dredges.
As acknowledged in our report, private industry has increased its
hopper dredging capacity. However, the exact change in capacity and the
degree to which the capacity increases are attributable to the
restrictions on the Corps vessels is uncertain. While it is plausible
that the restrictions may have caused industry to make these capital
improvements, representatives of the dredging industry told us that the
restrictions were one of several factors that they considered before
building or acquiring additional vessels, including the construction of
the Bayport and the Liberty Island. It is uncertain whether these
investments occurred as a result of the restrictions or whether the
investments were necessary to remain competitive in the industry.
Hypothetically, more vessels and increased capacity should translate to
more bids and lower bid prices. However, our analysis showed that the
number of industry bids per hopper maintenance dredging solicitation
declined from about 3 bids before restrictions to roughly 2.4 bids
after restrictions were placed on the Corps vessels. This finding
reinforces the need for a comprehensive analysis of the benefits and
costs of the restrictions on the Corps‘ dredges.
The Army‘s comment reinforces our concerns about whether the
restrictions have resulted in proven benefits. This is one of the
issues that should be considered in the comprehensive analysis we are
recommending.
The Army recognizes the need to update the information being collected
by its Dredging Information System and has initiated efforts to address
this issue. Obtaining and analyzing such information is an important
prerequisite to determine whether all hopper dredging needs, in
particular time-sensitive needs, are being met in the manner most cost-
effective to the government. While the Army refers to a mechanism they
have developed with industry to ensure that time-sensitive and urgent
dredging needs are managed, we believe it is premature to claim that
the process has resulted in meeting time-sensitive dredging needs in a
cost-effective manner.
The Army‘s comments did not address the lack of supporting
documentation for its June 2000 Report to Congress. Instead, the Army
reiterated points it has made in its previous comments and raised a
number of other issues related to hopper dredging. Until a
comprehensive analysis is performed on the benefits and costs of
restrictions on the Corps‘ hopper dredge fleet, there is no assurance
that the Nation‘s hopper dredging needs are being met in the manner
that is most economic and advantageous to the government.
[End of section]
Appendix IV: Comments from the Dredging Contractors of America:
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Dredging Contractors of America
311 North Washington Street:
Alexandria, Virginia 22314:
(703) 518-8408:
Fax: (703) 518-8490:
March 3, 2003:
Barry T. Hill:
Director, Natural Resources and Environment:
U.S. General Accounting Office 441 G Street NW:
Washington, DC 20548:
Dear Mr. Hill:
Attached are the official written comments of the Dredging Contractors
of America (DCA) to the proposed General Accounting Office report
entitled Corps of Engineers. Effects of Restrictions on Corps‘ Hopper
Dredges Should be Comprehensively Analyzed (GAO-03-3 82).
DCA appreciates the opportunity to provide comments on this proposed
report. The information presented in the report will have direct and
significant implications for the DCA and its members that operate
hopper dredges.
DCA is a non-profit organization representing the nation‘s dredging and
marine construction contractors. DCA represents the private companies
that contract with the Army Corps of Engineers for dredging services,
including the five companies that provide hopper dredging services to
the Corps.
Please direct any questions that you may have regarding these comments
to me on (703) 518-8408. Again, thank you for this opportunity and for
the cooperation the General Accounting Office has shown regarding this
matter.
Sincerely yours,
Mark D. Sickles
Executive Director:
Signed by Mark D. Sickles:
DCA appreciates the opportunity to provide written comments on the
proposed General Accounting Office (GAO) report entitled Corps of
Engineers: Effects of Restrictions on Corps‘ Hopper Dredges Should be
Comprehensively Analyzed (GAO-03-382) and offers the following comments
with attached supporting information.
GAO characterizes the 1978 legislation as ’encouraging“ private
industry participation in dredging, but does not include reference to
the legal mandate requiring the Secretary of the Army to use contracts
if industry has the capability and can do so at reasonable prices and
in a timely manner. This provides important context for any analysis.
DCA generally agrees that the Corps should use updated contractor cost
information and should not use the expired policy for calculating
mobilization (transit) costs in developing cost estimates. (Refer below
to 1, 2 and 3.):
* DCA strongly disagrees that reducing the scheduled use of Corps
hopper
dredges has not resulted in proven benefits. Available information and
data show that benefits have resulted. In particular, benefits and
competition have been increasing since the Corps hopper dredge Wheeler
was placed in ready reserve. (Refer below to 4, 5, 6, 7 and 8.):
* DCA generally agrees that the Corps should analyze the costs and
benefits of existing and proposed reductions in the scheduled use of
the Corps hopper dredge fleet. Furthermore, DCA suggests that this
analysis be used to help determine the appropriate Corps minimum hopper
dredge fleet and how the fleet is managed. (Refer below to 9.):
1. The GAO report should recognize and account for the congressional
mandate regarding using private contactors for dredging work.
Specifically, the law states that the Secretary of the Army ’shall have
dredging and related work done by contract if he (the Secretary)
determines private industry had the capability to do such work and it
can be done at reasonable prices and in a timely manner.“ The law
further states that as private industry reasonably demonstrates its
capability to perform the work done by the federally owned fleet, at
reasonable prices in a timely manner, the federally owned fleet shall
be reduced in an orderly manner, as determined by the Secretary, by
retirement of plant. Again, Congress in 1996 said ’The Secretary shall
initiate a program to increase the use, of private-industry hopper
dredges for the construction and maintenance of Federal navigation
channels.“ (See appendix 1.):
2. DCA maintains that the Corps receives adequate updated contractor
cost information in its districts through claims and other audit-
related activities. This information should be coordinated and
distributed through Corps headquarters for the benefit of all
districts. DCA wants to ensure that current cost information is used
because the industry faces increasing labor, fuel, maintenance, and
insurance costs. DCA would welcome the opportunity to work with the
Corps to help ensure that updated cost data is applied to cost
estimates across all Corps
districts. It is important to remember that under law [33 U.S. Code §
624(a)(2)] and Corps policy the …fair and reasonable‘ estimate is not
written for the least costly producer for a particular job or for the
dredge that is closest to the job, but for a ’well-equipped
contractor.“ (See appendix 2.):
3. DCA agrees that the Corps should use its existing policy-Corps‘
Engineering Regulation 1110-2-1302-for calculating mobilization
(transit) costs in developing cost estimates. DCA considers this policy
appropriate and reasonable. As noted in the GAO draft report, this
policy calls on the Corps to base mobilization costs on a radius for a
normal area of operations from the project site that includes a
reasonable number of bidders. Concern about estimating mobilization
costs is primarily an issue in only one region-the West Coast. A
management option the Corps should explore to help address this issue
would be to combine several solicitations into a single solicitation.
(See appendix 3.):
4. For the 10-year period beginning in 1993 when scheduled work
reductions for the Corps hopper dredges began, there has been an
increase in the number of private industry hopper dredges available to
bid on Corps projects from 14 to 16 vessels. There have been two new
hopper dredges built (Bayport and Liberty Island), a substantial
investment in, and redeployment of, the Columbia, the return of the
Stuyvesant to the U.S. hopper market in 1995, and other capacity
improvements since 1993. (See appendix 4.):
5. For the 10-year period beginning in 1993 when scheduled work
reductions for the Corps hopper dredges began, there has been a
significant increase in private hopper dredging capacity from 59,710
cubic yards in the period 1993 through 1994 to 81,150 cubic yards by
the end of 2002, a 36 percent increase. This includes an overall
increase in capacity of 10,240 cubic yards since the Wheeler went into
ready reserve at the beginning of fiscal year 1998, a 17 percent
increase. (See appendix 5.):
6. Since the Corps hopper dredge Wheeler was placed in ready reserve
beginning in fiscal year 1998 and the private industry hopper dredges
Bayport and Liberty Island began service in 1999 and 2002,
respectively, there has been an increase in the number of bids per
Corps solicitation, an increase in the percentage of Corps
solicitations with three or more bids, an increase in the number of
winning bids that were below the Corps cost estimate, a decrease in the
winning bid as a percentage of the Corps cost estimate, and an increase
in the percentage of winning bids that were below the Corps cost
estimate. DCA recognizes that the year-to-year variations in the data
are largely due to fluctuations in Mississippi River levels and when
those fluctuations occurred during the year. DCA believes that future
data will confirm the shift over the last several years in increasing
competition, especially since the Liberty Island has not yet completed
a full fiscal year in service. (See appendix 6.):
7. The historical data do not generally indicate that the private
hopper
dredging industry submits fewer bids per Corps solicitation when it
’expects“ to dredge more material in a given year. Specifically, the
GAO draft report provides an example to support this position that in
fiscal year 1991, when the Corps estimated that 31.3 million cubic
yards of maintenance material would be contracted out to the private
sector the average number of bids per solicitation was 3.2, while in
fiscal year 1998 when the Corps estimated that 53.7 million yards of
maintenance would be contracted out, the average number of bids per
solicitation was 2. However, in fiscal year 2001 when the Corps
indicated that nearly 60 million cubic yards would be dredged, the
average number of bids was 3.1, essentially the same as for fiscal year
1991. DCA also maintains that it is difficult for industry to know how
much material it ’expects“ to dredge and that such projections do not
influence the future number of bids. (See appendix 7.):
8. DCA contends that for the 10-year period beginning in 1993 when
scheduled work reductions for the Corps hopper dredges began, there has
been an increase in the number of companies competing on a nationwide
basis from four to five. While it is true that seven companies were in
existence, only four competed on a national basis. Two companies
(Manson Construction Co. on the West Coast and B+B Dredging on the
Great Lakes) competed solely on a regional basis and one company
(Stuyvesant Dredging Co.) had withdrawn its equipment from the market.
Since the reduction of scheduled work for the Wheeler, which triggered
industry investment, there are now five companies competing on a
nationwide basis with an accompanying increase in the number of bids
received per Corps solicitation. In conjunction with the development of
the industry, the Industry-Corps Hopper Dredge Management Group
(ICHDMG) has provided for a national focus and worked to maximize
utilization of available resources and provide more rapid response to
urgent and emergency dredging needs. (See appendix 8.):
9. To adequately perform any analysis, the Corps should have complete
and reliable data. This would include, among other things, inputting
correct information in the districts for items such as the total cubic
yards actually dredged and dredge type. Corps headquarters needs
additional resources to help ensure that data is inputted correctly by
the districts into their database. DCA welcomes better characterization
of urgent and emergency response outcomes. A system should be developed
to capture the nature of the emergency and a post facto analysis of the
cost and adequacy of the response. DCA also welcomes the opportunity to
work with the Corps to make these improvements. (See appendix 9.):
DCA generally agreed with our recommendations. However, DCA strongly
believes that reducing the scheduled use of the Corps‘ hopper dredges
has resulted in proven benefits. DCA stated that available information
and data show that benefits have resulted. However, we believe the
relationship between the restrictions on the Corps‘ hopper dredge fleet
and benefits to the government remains unproven. First, the extent to
which use restrictions on the Corps‘ vessels were a factor in
industry‘s investment decisions to increase its fleet size and add
dredging capacity is unclear. Second, the analysis provided by DCA to
support its claim is not persuasive; it covered an insufficient period
of time and presented data in a potentially misleading fashion.
Specifically, DCA only included data for activities that occurred after
the implementation of the first restriction on the Corps‘ dredges. We
believe that an analysis of the effects of the restrictions should
include data covering the period before and after the restrictions
because the time period before restrictions establishes the appropriate
baseline to compare changes resulting from the restrictions.
Discussed below are our corresponding detailed responses to DCA‘s nine
numbered comments in the three-page attachment to its letter. DCA also
provided 21 pages of appendices, which we have not included in this
final report because of the length. However, we have considered all of
DCA‘s comments in our response.
We have added language to expand our description of the legislation
enacted in 1996 that further increased the role of private industry in
hopper dredging.
We disagree that the Corps receives adequate, updated contractor cost
information through claims and other audit-related activities. As part
of this process, industry only provides the Corps updated information
to support specific costs that they believe are outdated. They are not
required to provide updated information for all costs. In addition, the
updated information obtained through claims and other audit-related
activities do not ensure that data are collected consistently for each
of the vessels. For a vessel involved in multiple claims, the Corps may
have more up-to-date costs than a vessel with fewer claims. DCA stated
in its comments that current cost information should be used because
industry faces increasing labor, fuel, maintenance, and insurance
costs. As mentioned in our report, the Corps adjusts estimated costs
annually to reflect current price levels. These adjustments, however,
do not account for fundamental changes, such as a vessel reaching the
end of its depreciable life, which may also affect the cost estimate.
For example, according to a Corps official, industry vessels are
depreciated over 20 to 25 years. In 2003, 9 of the 16 industry vessels
were 20 years or older and thus, may be nearing the end of their
depreciable lives. Unless the Corps has updated data for all costs and
for all industry vessels, there is no assurance that the Corps‘ cost
estimates are a reliable tool for determining whether industry‘s bids
are within 25-percent of the government estimate as required by law.
As our report recommends, we believe the Corps should examine its
policies related to calculating transit costs. We agree that DCA‘s
suggestion is one of several possible options for addressing this
issue.
The extent to which the restrictions on the Corps vessels caused
industry to make the investments that DCA cited as proven benefits is
unclear. First, representatives of the dredging firms told us the
restrictions were only one of several factors they considered before
building or acquiring additional vessels, including the construction of
the Bayport and Liberty Island. Second, firms must routinely replace
and update equipment to remain competitive in any industry. While DCA
stated that there was a substantial investment in the Columbia
following restrictions, the vessel was originally built in 1944 and
designed to transport military equipment during World War II. We
believe it is plausible that the restrictions on the Corps‘ vessels may
have contributed to industry‘s investment decisions; however, it is
unclear to what extent the restrictions contributed to these decisions.
While private industry has added capacity, we question the basis for
DCA‘s calculation of the exact change in capacity and the degree to
which the capacity increases are attributable to restrictions on the
Corps‘ hopper dredges. Over half of the increase in capacity cited by
DCA is attributable to the return of one vessel--the Stuyvesant--to
service in the United States. However, the Stuyvesant worked in the
United States prior to the restrictions, and thus it is questionable
whether this constitutes an increase in capacity. With regard to the
portion of capacity increase due to the construction of the Bayport and
the Liberty Island, as previously stated in response 4 above, the
owners of these vessels said the restrictions were only one of several
factors they considered in their decisions to build these two vessels.
For these reasons, we believe it is questionable whether the capacity
increases cited by DCA are proven benefits of the restrictions.
We believe that DCA‘s claims are based on incomplete information and
can be misleading because its analysis only included data after the
implementation of the first restriction in fiscal year 1993. As a
result, DCA only examined the marginal effects after the Wheeler was
placed in ready reserve, but not the effects of all the restrictions.
We believe a more appropriate analysis of the effects of the
restrictions would compare data covering the periods before and after
all restrictions because the time period before restrictions
establishes the appropriate baseline to compare changes resulting from
the restrictions.
The following example illustrates how not examining the entire time
period before and after all restrictions may produce incomplete and
misleading results. We found that the percentage of bids less than the
Corps‘ cost estimate was 55 percent after the fiscal year 1993
restriction went into effect (fiscal years 1993 through 2002) and 58
percent after the Wheeler was placed in reserve (fiscal years 1998
through 2002). This finding is consistent with DCA‘s claim, and taken
alone could be viewed as an improvement. However, prior to the 1993
restriction (fiscal years 1990 through 1992), 76 percent of the winning
bids were less than the Corps‘ cost estimate. Thus, although there has
been an increase in the percentage of bids less than the Corps‘ cost
estimate following reserve of the Wheeler, this change is significantly
less than what occurred before the restrictions.
Furthermore, in an appendix to its comments, DCA criticized our
approach of presenting data as averages across a number of years to
assess the effects of the restrictions, and argued that a year-to-year
evaluation should be used. However, in addition to restrictions on the
Corps‘ fleet, a number of other factors can lead to changes in the
number of bids per solicitation and winning bid relative to the Corps‘
cost estimate from one year to the next. For example, high water flows
in the Mississippi River can result in high accumulation of material at
the mouth of the Mississippi River and increase the demand for time-
sensitive dredging requirements. During such periods, the winning bids
relative to the Corps‘ cost estimate may increase. However, the
information necessary to control for these factors is unavailable. For
example, the Corps does not collect data on time-sensitive dredging
needs. As a result, we believe that presenting changes as averages
across a number of years is more appropriate because it mitigates for
the annual variability in the factors that can also affect the number
of bids per Corps solicitation and winning bid relative to the Corps‘
cost estimate.
We disagree with DCA‘s comment. In fact, the historical data do
indicate that, in general, in years when more material is available to
industry, industry submits fewer bids per Corps solicitation. The
information presented in figure 3 in our report, shows that there is an
inverse relationship between the estimated volume of material dredged
and the annual bids per solicitation, which is statistically
significant at the 95 percent confidence level.
DCA agreed that seven companies operated in the U.S. hopper dredging
market prior to the fiscal year 1993 restriction, while five companies
remain in the market today. However, DCA stated that the number of
companies competing on a nationwide basis has increased from four to
five in the last 10 years. Regardless of whether dredging firms
operated on a regional or national basis, prior to the restrictions
seven firms provided hopper dredging services and now there are five
firms. Furthermore, as recognized in our report, the consolidation in
the industry does not necessarily mean that competition has been
reduced because the new industry structure could have resulted in
enhanced capacity, flexibility, and efficiency for the remaining firms.
Moreover, regardless of the number of firms in the industry, DCA
acknowledged that the number of bids is more indicative of competition
than merely the number of companies. As stated in our report, the
number of industry bids per Corps solicitation has decreased on a
nationwide basis from approximately 3 bids in the 3 years prior to the
restrictions (fiscal years 1990 through 1992) to roughly 2.4 bids in
the period following the restrictions (fiscal years 1993 through 2002).
We agree with DCA‘s comment, which is already addressed by our
recommendations.
[End of section]
Appendix V: GAO Contact and Staff Acknowledgments:
GAO contact:
Barry T. Hill, (202) 512-3841:
Acknowledgments:
In addition, Chuck Barchok, Diana Cheng, Richard Johnson, Jonathan
McMurray, Ryan Petitte, and Daren Sweeney made key contributions to
this report.
FOOTNOTES
[1] A hopper dredge‘s class is determined by its capacity--hoppers with
up to 3,000 cubic yards of capacity are considered small, medium
hoppers have capacity from 3,000 to 6,000 cubic yards, and large
hoppers have a capacity of 6,000 cubic yards or more.
[2] Hopper dredging requires large capital outlays--a medium-class
hopper dredge costs between $20 million and $40 million and normally
takes 18 months to build--making it difficult for firms to enter the
market quickly.
[3] A direct and valid comparison of the Corps‘ and private industry‘s
costs to perform hopper dredge work is not possible due to various
factors, which include, among other things, design features in the
Corps‘ vessels in support of national defense missions, which add
weight to the vessels and make them less efficient than industry
vessels; limits to the number of days the Corps‘ vessels may operate--
180 days or fewer, compared to about 250 days for industry; and
differences between dredging projects--such as type of material
dredged, type of work and corresponding risk level, and distance from
the dredging operations to the disposal site.
[4] There are three main regions where hopper dredging takes place in
the United States--the Atlantic, the Gulf of Mexico, and the Pacific.
Dredges can move readily from the Atlantic to the Gulf of Mexico (which
requires at least a week), but moving from the Atlantic to the Pacific
requires several weeks and transit through the Panama Canal.
[5] In 1994 the Corps replaced the expired regulation with Corps‘
Engineering Regulation 1110-2-1302, which called on the Corps to base
transit costs on a radius for a normal area of operations from the
project site that includes a reasonable number of bidders.
[6] Transit costs have a greater impact on solicitations that take
place in the Pacific Northwest, where the second-closest dredge may be
more distant from the work site than for solicitations that take place
in the Gulf of Mexico or the Atlantic.
[7] According to the Corps, the Wheeler‘s average annual operating cost
during ready reserve was $12.5 million. While the vessel is credited
for ’earning“ $4.125 million for its 55 days of work (at a daily rental
rate of $75,000), a subsidy of $8.375 million per year is required to
maintain the Wheeler idle in ready reserve.
[8] As previously discussed, we have identified concerns related to the
Corps‘ cost estimate. However, these concerns were largely present both
before and after the restrictions, thus we have no reason to believe
that these concerns would materially affect the use of the cost
estimate in the information presented.
[9] In the 5-year period following ready reserve of the Wheeler (fiscal
years 1998 through 2002), there were roughly 2.5 industry bids per
Corps solicitation, and 19 percent of the solicitations had only one
bid, while 51 percent received three or more bids.
[10] In the 5-year period following ready reserve of the Wheeler
(fiscal
years 1998 through 2002), 42 percent of the winning bids exceeded the
Corps‘ cost estimate, and 58 percent of the winning bids were less than
the Corps‘ cost estimate.
[11] A vessel actively working will respond to an emergency with a full
crew, whereas a vessel in reserve may be called to respond to an
emergency during a period when it has a reduced crew and may be unable
to assemble a full crew and respond to an emergency in a timely manner.
[12] Report to Congress, Section 237, Hopper Dredges: Ready Reserve
Status of the Hopper Dredge Wheeler.
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