There’s a long lingering perception that Washington State Ferries pays more for building ferry boats than do other ferry agencies. A frequent implication is that for decades, WSDOT and WSF leadership and rank-and-file don’t know what they’re doing.
The Washington State Auditor took on the issue of ferry boat construction costs and factors that drive them. It collected and reviewed a lot of data and convened a review panel of national experts. The report, Washington State Ferries: Vessel Construction Costs was issued earlier today. It’s sure to generate a lot of conversation, and possibly some legislative proposals, when the State Legislature convenes. We hope to bring you reaction from WSF, the shipbuilding industry and labor in a future story.
The question of vessel construction costs is timely because WSF’s 2009 Long Range Transportation Plan calls for the replacement of seven ferries within the next 20 years. And ferries can cost upwards of $200 million.
WSF’s system is one of the world’s largest, annually transporting more than 22 million passengers and ten million vehicles on 22 ferries. The system connects state highways, acting as super-bridges to provide freight and goods to communities – including island communities. It is heavily used by commuters, and is a significant contributor to tourism revenue for local communities and businesses.
The audit was designed to answer the following questions:
- How do the construction costs of WSF’s ferries compare with those of comparable ferries built elsewhere?
- What factors affect the cost of constructing ferries and to what extent do those factors affect total construction spending?
- Does WSF use leading practices to develop, manage, and monitor its ferry construction contracts?
How was the Audit conducted?
The SAO reviewed relevant Washington laws and regulations, and collected information on 39 ferries built in the United States by eight ferry operators, including WSF, in the last 20 years. Data on all ferry construction costs were adjusted to 2011 dollars. The data was analyzed to help identify and control for factors that drive ferry construction costs, such as weight and anticipated service life, and to estimate the additional amount WSF pays to construct its ferries compared to other ferry purchasers.
The SAO also collected information from BC Ferries in British Columbia, but did not include it the construction analysis, because they are built under different laws and requirements. However, “the information BC Ferries provided gave us the perspective of another operator with a large, complex system based in the Pacific Northwest.”
WSF’s ferry construction practices were compared to a set of 15 leading practices which SAO developed “based on a review of industry literature, construction industry leading practices, interviews with ferry purchasers and shipyards, and the advice of the panel of experts we worked with.”
Finally, the SAO engaged an “independent, five-person technical panel with expertise in maritime industries to review and provide advice on our audit methodology, results, and recommendations.”
What did the Audit find?
- WSF’s ferries are among the largest and most expensive vessels to build.
- WSF spent more when two ferries with comparable designs are compared. WSF had “49 change orders valued at $614,600 (in unadjusted dollars) for the Island Home. A key difference was the $6.5 million spent by WSF for additional time and materials to maintain the project schedule. WSF officials said that these changes were necessary because the agency’s top priority for the project was to build the replacement ferries as quickly as possible to restore service to affected communities.”
- Build in Washington laws contribute to higher costs because they limit competition on new ferry procurements. The same shipyard has won competitive bids to build the last six WSF ferries, in addition to the two boats currently under construction. “Under Build in Washington, out-of-state builders cannot qualify to compete for the contract unless the company also has an in-state shipyard location. According to state law, the purpose of the requirement is to help sustain the state’s shipbuilding and repair industry.” Note: In 2010, a national Passenger Vessel Association panel reviewed WSF practices, and recommended the Legislature allow WSF to bid their vessel construction nationwide because of the high price WSF paid for in-state construction.
- The Apprenticeship Act contributes to higher costs. “Washington shipyards capable of building new ferries have not pursued bidding on WSF’s projects because of this requirement. Two shipyards we interviewed cited the requirement as a primary barrier to their ability to compete for WSF new ferry construction contracts.” The purpose of this Act is “to ensure an adequate supply of skilled workers in the construction industry; it was established in response to studies that found population trends are not likely to provide the needed workforce. It requires participating agencies to ensure that 15 percent of the work on state construction projects worth more than $2 million is completed by apprentices participating in a program approved by the Regulatory Apprenticeship Council.”
The shipyard currently constructing [a vessel] told the Senate Transportation Committee in 2011 that compliance adds about 10 percent to 15 percent to its hourly labor costs. Some technical panel members estimated a three-fold increase in labor costs to the purchaser from work performed by apprentices because the shipyard must supervise the apprentice, slowing production.
- Of the 15 leading practices, WSF uses eight effectively. Five are used but could be strengthened, and two are not used.
- It is unclear whether paying more to design and build ferries reduces life cycle costs for WSF.
What does the SAO recommend?
A. That the Legislature address the regulatory barriers that limit competition on WSF vessel procurements by:
1. Allowing WSF to use alternative strategies to encourage competition for its ferry procurements when insufficient interest exists or higher-than-expected bids are received from Washington shipyards. One possible strategy to ensure an adequate level of competition could be to allow WSF to invite out-of-state shipyards to bid on new vessel construction contracts in these instances.
2. Undertake a study of the Apprenticeship Act to identify and resolve potential barriers for prospective applicants, in particular shipyards with established apprenticeship training programs.
3. We recommend that WSF continue to improve its vessel construction program by determining whether adopting the leading practices and suggestions for improvement provided in this report would result in program improvements and/or cost savings, and implementing those with the greatest potential for benefit to the program.
B. The four leading practices identified by the technical panel as having the greatest potential for cost savings, especially if implemented together:
• Fully adhering to fixed price contracts for ship design and construction.
• Waiting to start vessel construction until after the design is complete and approved.
• Using an independent owner’s representative.
• Shifting all responsibility for project delivery and quality to the shipyard.
The suggested improvements by the Technical Panel to three leading practices WSF currently uses:
• Timely completion and effective use of lessons learned activities.
• Strengthen financial management of construction contracts.
• Improve use of design-build contracting method.