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Testimony: 

Before the Subcommittee on Defense, Committee on Appropriations, House 
of Representatives: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 10:00 a.m. EDT: 

Thursday, September 7, 2006: 

DOD Acquisitions: 

Contracting for Better Outcomes: 

Statement of David M. Walker: 

Comptroller General of the United States: 

DOD Contracting: 

GAO-06-800T: 

GAO Highlights: 

Highlights of GAO-06-800T, a testimony before the Subcommittee on 
Defense, Committee on Appropriations, House of Representatives 

Why GAO Did This Study: 

The Department of Defenseís (DOD) spending on goods and services has 
grown significantly since fiscal year 2000 to well over $250 billion 
annually. Prudence with taxpayer funds, widening deficits, and growing 
long-range fiscal challenges demand that DOD maximize its return on 
investment, while providing warfighters with the needed capabilities at 
the best value for the taxpayer. DOD needs to ensure that its funds are 
spent wisely, and that it is buying the right things, the right way. 

In this testimony, GAO discusses (1) recent trends in DOD contracting 
activity and the environment in which this activity takes place, and 
(2) practices which undermine its ability to establish sound business 
arrangements, particularly those involving the selection and oversight 
of DODís contractors and incentivizing their performance. 

This statement is based on work GAO has completed over the past 6 years 
covering a range of DOD acquisition and contracting issues. Some of 
these issues are long-standing. GAO has identified DOD contract 
management as a high-risk area for more than decade. With awards to 
contractors large and growing, DOD will continue to be vulnerable to 
contracting fraud, waste or misuse of taxpayer dollars, and abuse. 

What GAO Found: 

DOD obligated nearly $270 billion on contracts for goods and services 
in fiscal year 2005, an 88 percent increase over the amount obligated 
in fiscal year 2000. All indications are that this upward trend will 
continue. Aside from growth in dollar value there have also been 
changes in what DOD is buying. DODís new weapons system programs are 
expected to be the most expensive and complex ever and will consume an 
increasingly large share of its budget. In the last 5 years DOD has 
doubled its commitment to major weapon systems from $700 billion to 
$1.4 trillion, and DOD is counting on these efforts to fundamentally 
transform military operations. As overall obligations have increased so 
has its reliance on the private sector to provide services to fulfill 
DODís missions and support its operations. Additionally, in recent 
years DOD has increased its use of existing contracts awarded by other 
agencies (i.e. interagency contracts). While this approach provides a 
number of benefits, our work, and that of some agency inspector 
generals, revealed instances of improper use, including issuing orders 
that were outside the scope of the underlying contract as well as 
failing to establish clear lines of accountability and responsibility. 
While the amount, nature, and complexity of DOD contract activity have 
increased, its acquisition workforce has remained relatively unchanged 
in size. At the same time, the acquisition workforce faces certain 
skills gaps and serious succession planning challenges. 

There are a number of DOD practices which undermine its ability to 
establish sound business arrangements. For example, with regard to 
competition and pricing, we recently found that the Army acquired guard 
services under authorized sole-source contracts at 46 of 57 Army 
installations, despite the Armyís recognition that it was paying about 
25 percent more for its sole-source contracts than for those it 
previously awarded competitively. Another element of a sound business 
arrangement is the fee mechanism used to incentivize excellent 
contractor performance. In December 2005, we reported that DOD gives 
its contractors the opportunity to collectively earn billions of 
dollars through monetary incentives. Unfortunately, we found DOD 
programs routinely engaged in practices that failed to hold contractors 
accountable for achieving desired outcomes and undermined efforts to 
motivate results-based contractor performance. As a result, DOD paid 
out an estimated $8 billion in award fees on contracts in our study 
population, regardless of whether acquisition outcomes fell short of, 
met, or exceeded DODís expectations. DOD also increased its risk of 
poor acquisition outcomes by not assuring that another element of a 
sound business arrangement, contractor oversight, was sufficient. For 
example, in 2005 we reported that DODís oversight on nearly a third of 
90 service contracts reviewed was insufficient, in part because DOD 
failed to assign performance monitors. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-800T]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Katherine V. Schinasi at 
(202) 512-4841 or schinasik@gao.gov. 

[End of Section] 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss challenges that the Department 
of Defense (DOD) faces to achieving better acquisition outcomes. With 
DOD spending well over $250 billion annually to acquire products and 
services, prudence with taxpayer funds, widening deficits, and growing 
long-range fiscal challenges demand that DOD maximize its return on 
investment and provide the warfighter with needed capabilities at the 
best value for the taxpayer. DOD needs to ensure that its funds are 
spent wisely, and, in doing so, it needs to ensure that it is buying 
the right things, the right way. Several elements are essential to 
achieving this objective, including a sound business case supporting 
executable programs, sound business arrangements, and clear lines of 
responsibility and accountability. 

My testimony today is based on work we have completed over the past 6 
years that covered a range of acquisition and contracting issues and 
which was conducted in accordance with generally accepted government 
auditing standards. My testimony will focus on (1) DOD's recent 
contracting trends, such as the spending on goods and services and the 
environment in which this activity takes place; and (2) selected 
practices which undermine DOD's ability to establish solid business 
arrangements, particularly those involving the selection and oversight 
of DOD's contractors and incentivizing their performance. As requested, 
we have included briefing slides that we previously gave to your staff 
regarding these issues and I will make reference to specific slides 
during the course of my testimony. 

First, I would like to reiterate the broader context. Given current 
policies, in the next few decades the nation will face large and 
growing structural deficits due to known demographic trends, rising 
healthcare costs and current revenue-to-expenditure gaps. At the same 
time, weapons programs are commanding more and more resources as DOD 
undertakes increasingly ambitious efforts to transform its ability to 
confront current and potential threats. Further, managing DOD is a 
challenge as it is one of the world's largest and most complex 
organizations, spending billions of dollars each year to sustain key 
business operations that support our forces. While DOD has embarked on 
a series of efforts to reform its business operations, serious 
challenges and inefficiencies remain. In fact, eight individual areas 
that GAO considers to be high risk because of their greater 
vulnerabilities to fraud, waste, abuse and mismanagement are specific 
to DOD. Some of these issues are long-standing; for example, we have 
identified DOD weapon systems acquisition and contract management as 
high-risk areas for more than a decade.[Footnote 1] In a report issued 
in July,[Footnote 2] we concluded that, with awards to contractors 
large and growing, DOD will continue to be vulnerable to contracting 
fraud, waste or misuse of taxpayer dollars, and abuse. While DOD has 
acknowledged its vulnerabilities and taken some actions to address 
them, many of the initiatives are still in their early stages and it is 
too soon to tell what impact they may have. 

Further, there are numerous factors that can contribute to poor 
acquisition outcomes, which in turn erode DOD's buying power. We list 
some of these factors on slide 2. This list is illustrative and not 
intended to be exhaustive, and the risk these factors pose may manifest 
itself differently depending on the nature of the acquisition. To 
start, DOD's tendency to look for revolutionary solutions that depend 
on the maturation and availability of critical technologies often 
results in programs taking longer, costing more and delivering less 
capability than originally promised to the warfighter. Further, DOD 
wants often do not reflect "true" requirements--in other words, based 
on credible threats and risk-based needs--resulting in a mismatch 
between wants, needs, affordability and sustainability. Once true 
requirements are established, they need to be stable. At times, DOD has 
allowed new requirements to be added well into the acquisition cycle, 
significantly stretching technology and creating design challenges, and 
exacerbating program budget overruns. Of course, defining requirements, 
managing contracts and overseeing contractors requires a capable 
workforce that is up to meeting these challenges, adheres to sound 
contracting practices, and provides contractors with incentives that 
are based on results, rather than attitudes and efforts. 

Recent Contracting Trends: 

With this context in mind, I would like to turn now to recent trends in 
DOD's contracting activities. If you would turn to slide 4, DOD's 
spending on goods and services has increased by 88 percent since fiscal 
year 2000. In fiscal year 2005, DOD obligated nearly $270 billion on 
contracts for products, research and development efforts, and services, 
such as for information technology and management support. 

All indications are that this upward trend will continue. Aside from 
growth in dollar value, there have also been changes in what DOD is 
buying. DOD's new weapon system programs are expected to be the most 
expensive and complex ever, and will consume an increasingly large 
share of DOD's budget. To illustrate, in the last 5 years DOD has 
doubled its commitment to major weapon systems from $700 billion to 
$1.4 trillion. DOD is counting on these efforts to fundamentally 
transform military operations. The Army, for example, is undertaking 
the Future Combat Systems program--a family of weapons, including 18 
manned and unmanned ground vehicles, air vehicles, sensors and 
munitions, that will be linked by an information network--to enable its 
combat force to become lighter, more agile, and more capable. Future 
Combat Systems' procurement will represent 60 to 70 percent of Army 
procurement from fiscal years 2014 to 2022. 

The Army, however, is not alone in pursuing complex and costly systems. 
For example, the Air Force is modernizing its tactical aircraft fleet 
as part of the $200 billion Joint Strike Fighter program and the F-22A 
Raptor aircraft, which is expected to cost more than $65 billion. 
Similarly, the Navy's Virginia class submarine is expected to cost 
about $80 billion, while the DDG-51 class of destroyer is expected to 
cost some $70 billion. DOD's development of such systems requires more 
funds than may reasonably be expected to be available. For example, we 
testified in April 2006 that the Navy's shipbuilding plan projects a 
supply of shipbuilding funds that will double by 2011 and will stay at 
high levels for years to follow.[Footnote 3] 

As overall obligations have increased, so has DOD's reliance on the 
private sector to provide services to fulfill DOD's missions and 
support its operations. In some cases, the growth in services reflects 
that DOD is using a different acquisition approach to support its 
missions. For example, DOD is now buying launch services, rather than 
rockets. Service contracts pose a number of challenges in terms of 
defining requirements, establishing expected outcomes, and assessing 
contractor performance. 

Additionally, in recent years, federal agencies including DOD have 
moved away from using in-house contracting capabilities and are making 
greater use of existing contracts awarded by other agencies. If you 
would turn now to slide 7, these interagency contracts are intended to: 

* leverage the government's buying power; 

* provide a faster and easier method for procuring commonly used goods 
and services, and: 

* reduce initial contracting administrative costs. 

If you would turn to slide 7, you will see the growth in interagency 
contracts since 1992. DOD is the largest user of these interagency 
contracting vehicles, and their availability has enabled DOD to save 
time by paying other agencies to award and administer contracts for 
goods and services on its behalf. DOD, however, lacks complete 
information about purchases made through other agencies' contracts. 
Moreover, our work and that of some agency inspectors general have 
uncovered instances of improper use of interagency contracts, including 
issuing orders that were outside the scope of the underlying contract, 
failing to follow procedures intended to ensure best pricing, and 
failing to establish clear lines of accountability and responsibility. 
Further, in some instances fee-for-service arrangements may have led to 
an inordinate focus on meeting customer demands at the expense of 
complying with sound contracting policy and required ordering 
procedures. These and other issues led us to designate management of 
interagency contracting a governmentwide high-risk issue in January 
2005. Ensuring the proper use of interagency contracts must be viewed 
as a shared responsibility which requires that agencies clearly define 
responsibilities and adopt clear, consistent, and enforceable policies 
and processes that balance the need for customer service with the 
requirements of contract regulations. 

At the same time that the amount, nature, and complexity of contract 
activity has increased, DOD's acquisition workforce has remained 
relatively unchanged in size and At the same time, the acquisition 
workforce faces certain skill gaps and serious succession planning 
challenges. DOD's acquisition workforce must have the right skills and 
capabilities if it is to effectively implement best practices and 
properly manage the goods and services it buys. We noted in a report 
issued in 2003, and again in July 2006, earlier this month,however, 
that procurement reforms, changes in staffing levels, workload, and the 
need for new skill sets have placed unprecedented demands on the 
acquisition workforce.[Footnote 4] Moreover, DOD's current civilian 
acquisition workforce level reflects the considerable downsizing that 
occurred in the 1990s. DOD's approach to acquisition workforce 
reduction during the 1990s was not oriented toward shaping the makeup 
of the workforce; rather, DOD relied primarily on voluntary turnover 
and retirements, freezes on hiring authority, and its authority to 
offer early retirements and buyouts to achieve reductions. Indeed, 
during our work on the early phases of DOD downsizing, some DOD 
officials voiced concerns about what was perceived to be a lack of 
attention to identifying and maintaining a balanced, basic level of 
skills needed to maintain in-house capabilities. 

Sound Business Arrangements: 

I would like to turn now to briefly discuss some of DOD's practices in 
three areas--(1) competition and sound pricing; (2) incentivizing 
contractors; and (3) contract oversight--that increase risks and 
undermine DOD's ability to establish sound business arrangements. 

Competition and Sound Pricing: 

Our work has identified a number of issues related to competition and 
pricing in DOD's efforts to obtain needed goods and services. Under the 
Competition in Contracting Act of 1984, DOD contracting officers are, 
with certain exceptions, to solicit offers and award contracts using 
full and open competition, in which all responsible sources are 
permitted to compete. As shown on slide 10, DOD reports that more than 
only forty-one percent of its contract obligations in fiscal year 2005 
were made on contracts that were awarded using full and open 
competition. The impact of not using full and open competition is 
reflected in one recent example involving the Army's award of sole- 
source contracts for security guards. In this case, we found that the 
Army devoted twice as many contract dollars -n--nearly $495 million--- 
to sole-sourced contracts for security guards at 46 of 57 Army 
installations, despite the Army's recognition that it was paying about 
25 percent more for its sole-source contracts than for those it 
previously awarded competitively. 

Incentivizing Contractors: 

Another element of a sound business arrangement is the fee mechanism 
used to incentivize excellent contractor performance3. In December 
2005, we reported that DOD gives its contractors the opportunity to 
collectively earn billions of dollars through monetary 
incentives.[Footnote 5] Unfortunately, we found DOD programs routinely 
engaged in practices that failed to hold contractors accountable for 
achieving desired outcomes and undermined efforts to motivate results-
based contractor performance, such as: 

* evaluating contractor performance on award-fee criteria that are not 
directly related to key acquisition outcomes (e.g., meeting cost and 
schedule goals and delivering desired capabilities to the warfighter); 

* paying contractors a significant portion of the available fee for 
what award-fee plans describe as "acceptable, average, expected, good, 
or satisfactory" performance, which sometimes did not require meeting 
the basic requirements of the contract; and: 

* giving contractors at least a second opportunity to earn initially 
unearned or deferred fees. 

As a result, DOD has paid out an estimated $8 billion in award fees on 
contracts in our study population, regardless of whether acquisition 
outcomes fell short of, met, or exceeded DOD's expectations. On slide 
15, we have included four cases in which contractors that were behind 
schedule and over cost were paid between 74 and 100 percent of the 
available award fee. 

Despite paying billions of dollars in award and incentive fees, DOD has 
not compiled data or developed performance measures to evaluate the 
validity of its belief that award and incentive fees improve contractor 
performance and acquisition outcomes. DOD's strategies for 
incentivizing its contractors, especially on weapon system development 
programs, are symptomatic of a lack of discipline, oversight, 
transparency, and accountability in DOD's acquisition process. 

Contract Oversight: 

I would like to briefly discuss the third element of sound business 
arrangements, DOD's oversight of its service contracts. Government 
monitoring and inspection of contractor activity, if not done well, can 
contribute to a lack of accountability and poor acquisition outcomes. 
noted 6In 2005, we reported that DOD's monitoring of nearly a third of 
the 90 service contracts we reviewed was insufficient.[Footnote 7] In 
these cases, we identified a number of contributing factors, including 
DOD's failure to assign government performance monitors and the fact 
that personnel are usually assigned such duties on a part-time basis 
and not evaluated on how well they performed their duties. DOD and 
senior military acquisition policy officials acknowledged that the 
priority of contracting offices is awarding contracts, not ensuring 
that trained performance monitors are assigned early so that contract 
oversight can begin upon contract award. Ultimately, however, if 
appropriate monitoring is not being done, DOD is at risk for paying 
contractors more than the value of the services they performed. 

In closing, these three illustrative business arrangement issues, along 
with those we have identified in DOD's acquisition and business 
management processes, present a compelling case for change. In short, 
it takes a myriad of things to go right for acquisitions to be 
successful, but only a few things to go wrong to cause major problems. 
Slide 17 provides examples of the impact of the impact that these 
problems can have on reducing the government's buying power. Such 
examples illustrate the outcomes of poor acquisition executions. The 
debate now centers on future investments and what return on investment 
will be realized. 

Finally, on slide 18, you will find a number of actions that can and 
should be taken to improve acquisition outcomes. By implementing the 
recommendations we have made on individual issues, DOD can improve 
specific processes and activities and save huge amounts of taxpayers 
dollars. At the same time, by working more broadly to improve its 
acquisition practices, DOD can set the right conditions for becoming a 
smarter buyer, getting better acquisition outcomes, and making more 
efficient use of its resources in what is sure to be a more fiscally 
constrained environment. DOD's written acquisition policies reflect 
many of our recommendations and often incorporate best practices. As 
such, the policies provide the basis for sound decisions and actions. 
The policies, however, are not consistently manifested on decisions 
made on individual acquisitions. In these cases, officials are rarely 
held accountable when acquisitions go astray. It is essential to create 
an environment conducive to changing behaviors and to recognize that 
achieving sound acquisition outcomes are a shared responsibility 
between the Congress, DOD, and the contractor community. Unless changes 
are made, DOD will continue on a path where wants, needs, affordability 
and sustainability are mismatched, with predictably and recurring 
unsatisfactory results. 

Mr. Chairman and members of the subcommittee, this concludes my 
testimony. I would be happy to answer any questions you may have. 

Scope and Methodology: 

In preparing for this testimony, we relied principally on previously 
issued GAO reports. We also obtained data on DOD's contract activity 
from DOD's DD350 database and from the General Services 
Administration's Federal Procurement Data System. We have previously 
expressed concerns about the accuracy of the data contained in the 
Federal Procurement Data System. We determined, however, that the data 
were sufficiently reliable for the purposes of this testimony. We also 
obtained data from the Office of Personnel Management regarding DOD's 
acquisition workforce. For the purposes of this report, we selected 14 
occupation series including contracting, business, purchasing, quality 
assurance and supply and inventory management personnel. We conducted 
our work in April and July 2006 in accordance with generally accepted 
government auditing standards. 

Contact and Staff Acknowledgments: 

For further information regarding this testimony, please contact 
Katherine V. Schinasi at (202) 512-4841 or schinasik@gao.gov. Contact 
points for our Offices of Congressional Relations and Public Affairs 
may be found on the last page of this testimony. Key contributors to 
this report were Lily Chin, David E. Cooper, Brendan Culley, Thomas 
Denomme, Timothy DiNapoli, Paul Francis, Alan Frazier, Christopher 
Kunitz, Michele Mackin, William Russell, Adam Vodraska, and Karen 
Zuckerstein. 

[End of section] 

Appendix I: 

DOD Acquisitions: Contracting for Better Outcomes: 

House Appropriations Committee: 
Subcommittee on Defense: 
September 2006: 

Factors Contributing to Poor Acquisition Outcomes: 

DOD's buying power eroded due to: 

Historical preference for grand, revolutionary solutions that depend on 
immature technology: 

Frequent mismatch between wants, needs, affordability, and 
sustainability: 

Unrealistic and continually changing requirements: 

Undisciplined management of programs once started: 

Lack of competition and adherence to sound contracting practices that 
adequately allocates risk between the contractor and taxpayer: 

Incentives and fees based on attitudes and efforts rather than results: 

Workforce capabilities strained to meet 21st century challenges: 

Conducting the Business of Government: 

Among the 21st century challenges faced by the government is 
determining who will do the business of government. 

The work of the government is increasingly performed by the private 
sector under contract. 

DOD's spending on goods and services has grown significantly since 
fiscal year 2000, and all indications are the trend will continue. 

DOD's weapon systems acquisition and contract management processes have 
been on GAO's high-risk list for more than a decade. 

GAO designated the management of interagency contracting a 
governmentwide high-risk issue in January 2005; DOD is the largest user 
of interagency contracting vehicles. 

DOD Contract Obligations and Acquisition Workforce Trends Since Fiscal 
Year 2000: 

Dollars in billions/Personnel in thousands; 

[See PDF for Image] 

Source: Contract obligations: DD350 database. 
Workforce: GAO analysis of OPM data of 14 acquisition-related job 
series. 

[End of Figure] 

Obligations Increased Across Goods and Services Categories: 

Contract obligations Dollars in billions:  

[See PDF for image] 

Source: DD350 database, actions over $25,000. 

[End of figure]

Growth in Contracting for Services Poses New Challenges: 

New missions and approaches contribute to increased spending on 
services: 

* Following the terrorist attacks of September 11, 2001, increased 
security requirements and deployment of active duty and reserve 
personnel resulted in DOD having fewer military personnel to protect 
domestic installations. The U.S. Army awarded contracts worth nearly 
$733 million to acquire contract guards at 57 installations. 

* The Air Force historically bought space launch vehicles, such as the 
Delta and Titan rockets, as products; under the Evolved Expendable 
Launch Vehicle program, the Air Force purchases launch services using 
contractor-owned launch vehicles. Projected program cost is $28 
billion. 

Defining requirements, establishing expected outcomes, and assessing 
contractor performance is often more complicated compared with 
contracting for supplies and equipment. 

Rapid Growth of Interagency Contracting: 

While total sales of GSA's Multiple Award Schedule are available, data 
on the full extent of interagency contracting were not available. 

Multiple Award Schedule Sales, Fiscal Year 1992 through 2004: 

Dollars in billions: 

[See PDF for Image] 

Source: GSA. 

[End of Figure] 

Interagency Contracting Designated a Governmentwide High-Risk Area: 

Rapid growth in use of these contracts in terms of amount spent: 

Lack of transparency and reliable data regarding extent and details of 
use of interagency contracting: 

Increasing demands on the acquisition workforce, coupled with 
insufficient training and guidance: 

Fee-for-service arrangements in interagency contracting, which may have 
led to an inordinate focus on meeting customer demands at the expense 
of proper use and good value: 

Lack of a meaningful "fair opportunity" process when selecting 
contractors for individual task orders: 

Lack of clearly established lines of accountability between agencies 
that award umbrella contracts and agencies that issue individual orders 
under those umbrella contracts: 

Lack of Fully Defined Requirements Increases DOD Cost Risk: 

Lack of fully defined requirements in DOD acquisitions contributes to 
numerous changes to the scope and cost of the work. 

Use of task order contracts and time-and-materials contracts provides 
DOD flexibility to add work to contracts once needs are defined but may 
pose additional management and oversight risks. 

DOD may authorize contractors to begin work before reaching agreement 
on terms and conditions, including scope of work, specifications, and 
price, under agreements termed letter contracts or undefinitized 
contract actions. 

* DOD obligated nearly $6.5 billion under letter contracts in fiscal 
year 2004. 

* Allows DOD to initiate work quickly to meet urgent operational needs, 
but contract incentives to control costs are likely to be less 
effective. 

Competition: 

The Competition in Contracting Act of 1984 requires that contracting 
officers promote and provide for full and open competition-i.e. all 
responsible sources are permitted to compete-when soliciting offers and 
awarding government contracts. 

* This enables the government to rely on competitive market forces to 
obtain needed goods and services at fair and reasonable prices. 

* Use of other than full and open competition must be justified in 
writing and must cite specific statutory authority. 

Fiscal Year 2005 DOD Competition Statistics: 

[See PDF for image] 

Pie chart divided into 3 sections: 

Other than full and open competition: 50%.  

Not reported 9%.  

Full and open competition 41%.  

Source: GAO analysis of DOD data. 

[End of figure] 

Examples of Competition and Pricing Issues: 

Army's approach to acquire contract guard services under sole-source 
contracts at 46 of 57 installations resulted in the Army paying 25 
percent more for its sole-source contracts than for those it previously 
awarded competitively. 

February 2005 review of sole-source AWACS spare parts found that DOD 
did not 

* obtain or evaluate appropriate pricing information, such as sales 
data for items asserted to be commercial, or: 

* adequately consider analyses conducted by the Defense Contract Audit 
Agency or Defense Contract Management Agency. 

In the absence of adequate price competition, the Truth-in-Negotiations 
Act enables DOD to obtain certified cost and pricing data for 
negotiated contracts exceeding $550,000 that are not for commercial 
items. 

* GAO reviewed 20 contract actions valued at $4.4 billion in which DOD 
waived the requirement for cost and pricing data. 

* DOD lacked guidance to help contracting officers determine whether a 
waiver should be granted, what constitutes acceptable data and 
analyses, or the need for assistance. 

Impact of Multiple Contractor Levels on Costs Uncertain: 

Evidence suggests DOD is increasingly relying on contractors to manage 
a greater range of responsibilities than traditional prime contractors. 
Examples include: 

* The Army's $200 billion Future Combat Systems, in which the 
contractor is acting as a lead system integrator. Contractor is 
assuming greater responsibility for requirements development, design, 
and source selection of major system and subsystem contractors, and 
trade-off decisions. 

* In an interagency contract for construction services, DOD paid 7 
percent to Treasury to award a contract to a staffing company, which 
then subcontracted to a construction firm. In combination, Army paid 17 
percent more than subcontractor's proposed price. 

Historically, DOD has limited visibility over the cost impact 
associated with using multiple layers of contractors to perform work. 

Award-and Incentive-Fee Structures: 

To encourage innovative, efficient, and effective performance, DOD 
provides its contractors the opportunity to collectively earn billions 
of dollars through monetary incentives known as award and incentive 
fees. 

* On award-fee contracts, DOD personnel conduct periodic evaluations of 
the contractor's performance against specified criteria and recommend 
the amount of fee to be paid. Criteria and evaluations tend to be 
subjective. 

* Incentive-fee contracts typically apply a formula, specified in the 
contract, that adjusts the fee based on an objective evaluation of the 
contractor's performance. 

DOD reports it obligated more than $75 billion on award-and incentive- 
fee contracts in fiscal year 2004. 

DOD Practices Undermine Award-and Incentive-Fee Objectives: 

December 2005 analysis of 93 award-or incentive-fee contracts found 
that DOD programs engaged in practices that undermined efforts to 
motivate contractor performance and that did not hold contractors 
accountable for achieving desired outcomes. DOD: 

* frequently paid most of available award fees regardless of whether 
acquisition outcomes fell far short of, met, or exceeded expectations; 

* allowed contractors at least a second opportunity to earn initially 
unearned or deferred fees; and: 

* paid significant amount of fee for "acceptable, average, expected, 
good, or satisfactory" performance. 

Contracts with incentive fees provided a clearer link to acquisition 
outcomes; however, about half of the contracts failed or are projected 
to fail to complete the acquisition at or below the target price. 

Despite paying billions in fees, DOD has little evidence to support its 
contention that these fees improved contractor performance. 

Award Fee Decisions Not Tied to Acquisition Outcomes: 

Program Performance and Award-Fee Payments on Selected DOD Development 
Programs: 

Acquisition Outcomes: Research and development cost increase over 
baseline; 
Comanache reconnaissance attack helicopter: $3.7 billion, 41.2%; 
F-22A Raptor tactical fighter aircraft: $10.2 billion, 47.3 %; 
Joint Strike Fighter tactical fighter aircraft: $10.1 billion, 30.1%; 
Space-Based Infrared System High: $3.7 billion, 99.5%. 

Acquisition Outcomes: Acquisition cycle time increase over baseline; 
Comanache reconnaissance attack helicopter: 33 months, 14.8%; 
F-22A Raptor tactical fighter aircraft: 27 months, 13.3 %; 
Joint Strike Fighter tactical fighter aircraft: 11 months, 5.9%; 
Space-Based Infrared System High: More than 12 months. 

Acquisition Outcomes: Percentage and total award fee paid to prime 
systems contractor (adjusted for rollover)*; 
Comanache reconnaissance attack helicopter: 85%, $202.5 million paid 
through 2004;  
F-22A Raptor tactical fighter aircraft: 91%, $848.7 million; 
Joint Strike Fighter tactical fighter aircraft: 100%, $494.0 million; 
Space-Based Infrared System High: 74%, $160.4 million. 

Sources: DOD submissions to GAO, and GAO-05-301 (data); GAO (analysis). 

*When calculating the percentage of award fee paid (i.e. percentage of 
award paid = total fee paid to date/ (total fee pool - remaining fee 
pool)), we included rolled-over fees in the remaining fee pool when 
those fees were still available to be earned in future evaluation 
periods. 

[End of table] 

Insufficient Oversight on DOD Service Contracts: 

Monitoring and inspection of contractor performance is a key oversight 
mechanism. 

* If monitoring and inspection is not performed, not sufficient, or not 
well documented, DOD is at risk of: 

- being unable to identify and correct poor contractor performance in a 
timely manner, and: 

- paying contractors more than the value of the services performed. 

DOD personnel performed insufficient monitoring on nearly a third of 
the 90 service contracts reviewed in March 2005 report. 

* DOD personnel failed to assign personnel to perform monitoring or did 
not document monitoring and some monitoring personnel were not formally 
trained; 

* Monitoring is not perceived as important as awarding contracts; and: 

* Personnel are usually assigned monitoring duties as a part-time 
responsibility and are not evaluated on how well duties were performed. 

Examples of Programs With Reduced Buying Power: 

Billions of fiscal year 2006 dollars: 

Program: Joint Strike Fighter; 
Initial estimate: $189.8; 
Initial quantity: 2,866 aircraft; 
Latest estimate: %216.2; 
Latest quantity: 2,458 aircraft; 
Percent of unit cost increase: 32.8. 

Program: Future Combat Systems; 
Initial estimate: $82.6; 
Initial quantity: 15 systems; 
Latest estimate: %127.2; 
Latest quantity: 15 systems; 
Percent of unit cost increase: 54.1. 

Program: F-22A Raptor; 
Initial estimate: $81.1; 
Initial quantity: 648 aircraft; 
Latest estimate: $66.8; 
Latest quantity: 185 aircraft; 
Percent of unit cost increase: 188.3. 

Program: Evolved Expendable Launch Vehicle; 
Initial estimate: $15.4; 
Initial quantity: 181 vehicles; 
Latest estimate: $27.6; 
Latest quantity: 138 vehicles; 
Percent of unit cost increase: 134.7. 

Program: Space-based Infrared System High; 
Initial estimate: $4.1; 
Initial quantity: 5 satellites; 
Latest estimate: $10.1; 
Latest quantity: 3 satellites; 
Percent of unit cost increase: 311.8. 

Program: Expeditionary Fighting Vehicle; 
Initial estimate: $8.1; 
Initial quantity: 1,025 vehicles; 
Latest estimate: $10.9; 
Latest quantity: 1,025; 
Percent of unit cost increase: 33.7. 

Source: GAO analysis of DOD Selected Acquisition Report data. Images 
sourced in their respective order: JSF Program Office; Program Manager, 
Unit of Action, U.S. Army; F-22A System Program Office; (Left) © 2003 
ILS/Lockheed Martin, (right) © 2003 The Boeing Company; Lockheed Martin 
Space Systems Company; General Dynamics Land Systems. 

[End of table] 

Improving Acquisition Outcomes: 

Reconcile the differences between wants, needs, affordability and 
sustainability on an enterprise-wide basis, considering current and 
future threats and resources levels: 

Nail down system requirements and ensure the maturity of technology to 
improve performance and enhance accountability: 

Ensure that acquisitions are performance-and outcome-based, with 
appropriate risk-sharing contracts in place: 

Limit pay for performance-based contract incentives to positive 
acquisition outcomes: 

Make it acceptable to pull the plug or reduce quantities of weapon 
systems and information systems projects when facts and circumstances 
warrant: 

Ensure a capable acquisition workforce and accountable leadership: 

Create an environment conducive to behavioral change; sound acquisition 
outcomes are a shared responsibility between Congress, DOD, and the 
contractor community: 

Assure that individual decisions are consistent with sound acquisition 
policies and practices: 

[End of Section] 

FOOTNOTES 

[1] GAO, GAO's High-Risk Program, GAO-06-497T (Washington, D.C.: Mar. 
15, 2006); and GAO, High-Risk Series: An Update, GAO-05-207 
(Washington, D.C.: Jan. 2005). 

[2] GAO, Contract Management: DOD Vulnerabilities to Contracting Fraud, 
Waste, and Abuse, GAO-06-838R (Washington, D.C.: July 7, 2006). 

[3] GAO, Defense Acquisitions: Actions Needed to Get Better Results on 
Weapons Systems Investments, GAO-06-585T (Washington, D.C.: April 5, 
2006). 

[4] GAO, Federal Procurement: Spending and Workforce Trends, GAO-03-443 
(Washington, D.C.: April 30, 2003); and GAO, Contract Management: DOD 
Vulnerabilities to Contracting Fraud, Waste, and Abuse, GAO-06-838R 
(Washington, D.C.: July 7, 2006). 

[6] GAO, Defense Acquisitions: DOD Has Paid Billions in Award and 
Incentive Fees Regardless of Acquisition Outcomes, GAO-06-66 
(Washington, D.C.: Dec. 19, 2005); and GAO, Defense Acquisitions: DOD 
Wastes Billions of Dollars through Poorly Structured Incentives, GAO-06-
409T (Washington, D.C.: April 5, 2006). 

[7] GAO, Contract Management: Opportunities to Improve Surveillance on 
Department of Defense Service Contracts, GAO-05-274 (Washington, D.C.: 
Mar. 17, 2005). 

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