This is the accessible text file for GAO report number GAO-07-799T 
entitled 'Defense Acquisitions: Missile Defense Agency's Flexibility 
Reduces Transparency of program Cost' which was released on April 30, 
2007. 

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as part 
of a longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov. 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 

Testimony before the Subcommittee on Defense, Committee on 
Appropriations, 

U.S. House of Representatives: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 1:30 p.m. EDT: 

Monday, April 30, 2007: 

Defense Acquisitions: 

Missile Defense Agency's Flexibility Reduces Transparency of Program 
Cost: 

Statement of Paul Francis, Director, 
Acquisition and Sourcing Management: 

GAO-07-799T: 

GAO Highlights: 

Highlights of GAO-07-799T, a testimony before the Subcommittee on 
Defense, Committee on Appropriations, U.S. House of Representatives 

Why GAO Did This Study: 

Over the next 5 years the Missile Defense Agency (MDA) expects to 
invest $49 billion in the BMD system’s development and fielding. MDA’s 
strategy is to field new capabilities in 2-year blocks. In January 
2006, MDA initiated its second block—Block 2006—to protect against 
attacks from North Korea and the Middle East. 

Congress requires GAO to assess MDA’s progress annually. GAO’s March 
2007 report addressed MDA’s progress during fiscal year 2006 and 
followed up on program oversight issues and the current status of MDA’s 
quality assurance program. GAO assessed the progress of each element 
being developed by MDA, examined acquisition laws applicable to major 
acquisition programs, and reviewed the impact of implemented quality 
initiatives. 

What GAO Found: 

During fiscal year 2006, MDA fielded additional assets for the 
Ballistic Missile Defense System (BMDS), enhanced the capability of 
some assets, and realized several noteworthy testing achievements. For 
example, the Ground-based Midcourse Defense (GMD) element successfully 
conducted its first end-to-end test of one engagement scenario, the 
element’s first successful intercept test since 2002. However, MDA will 
not meet its original Block 2006 cost, fielding, or performance goals 
because the agency has revised those goals. In March 2006, MDA:
* reduced its goal for fielded assets to provide funds for technical 
problems and new and increased operations and sustainment requirements;
* increased its cost goal by about $1 billion—from $19.3 to $20.3 
billion; and
* reduced its performance goal commensurate with the reduction of 
assets. MDA may also reduce the scope of the block further by deferring 
other work until a future block because four elements incurred about 
$478 million in fiscal year 2006 budget overruns. 

With the possible exception of GMD interceptors, MDA is generally on 
track to meet its revised quantity goals. But the deferral of work, 
both into and out of Block 2006, and inconsistent reporting of costs by 
some BMDS elements, makes the actual cost of Block 2006 difficult to 
determine. In addition, GAO cannot assess whether the block will meet 
its revised performance goals until MDA’s models and simulations are 
anchored by sufficient flight tests to have confidence that predictions 
of performance are reliable. 

Because MDA has not formally entered the Department of Defense (DOD) 
acquisition cycle, it is not yet required to apply certain laws 
intended to hold major defense acquisition programs accountable for 
their planned outcomes and cost, give decision makers a means to 
conduct oversight, and ensure some level of independent program review. 
MDA is more agile in its decision-making because it does not have to 
wait for outside reviews or obtain higher-level approvals of its goals 
or changes to those goals. Because MDA can revise its baseline, it has 
the ability to field fewer assets than planned, defer work to a future 
block, and increase planned cost. All of this makes it hard to 
reconcile cost and outcomes against original goals and to determine the 
value of the work accomplished. Also, using research and development 
funds to purchase operational assets allows costs to be spread over 2 
or more years, which makes costs harder to track and commits future 
budgets. 

MDA continues to identify quality assurance weaknesses, but the 
agency’s corrective measures are beginning to produce results. Quality 
deficiencies are declining as MDA implements corrective actions, such 
as a teaming approach designed to restore the reliability of key 
suppliers. 

What GAO Recommends: 

GAO continues to encourage DOD to act on prior recommendations to 
implement a knowledge-based acquisition strategy for all BMDS elements 
and to adopt more transparent criteria for reporting each element’s 
quantities, cost, and performance. In March 2007, GAO recommended that 
DOD adopt firm baselines, use procurement funds for operational assets, 
and adopt other measures to better track cost and outcomes against 
goals. DOD did not agree to an element-based reporting approach, but is 
investigating other ways to provide more program transparency. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-799T]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Paul Francis, (202) 512-
4841, francisp@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss the Missile Defense Agency's 
(MDA) strategy for acquiring a Ballistic Missile Defense System (BMDS) 
and its progress in developing and fielding Block 2006--the second 
iteration of BMDS. 

MDA's mission is to develop and field an integrated, layered Ballistic 
Missile Defense System capable of defending the United States, its 
deployed forces, allies, and friends against enemy ballistic missiles 
launched from all ranges and during all phases of the missiles' flight. 
To carry out its mission, MDA is fielding missile defense capabilities 
in 2-year increments known as blocks. The first block--Block 2004-- 
fielded a limited initial capability that included early versions of 
Ground-Based Midcourse Defense (GMD); Aegis Ballistic Missile Defense 
(BMD); Patriot Advanced Capability-3 (PAC-3); and Command, Control, 
Battle Management, and Communications (C2BMC). Each of these components 
is an element of the integrated BMDS. During calendar years 2006 and 
2007, MDA is focusing Block 2006 to enhance and field four BMDS 
elements--GMD, Aegis BMD, Sensors, and C2BMC. Block 2006 is not only 
expected to field additional assets, but it also continues the 
evolution of Block 2004 by providing improved GMD interceptors, 
enhanced Aegis BMD missiles, upgraded Aegis BMD ships, a Forward-Based 
X-Band Transportable radar, and enhancements to the C2BMC software. 

The National Defense Authorization Acts for fiscal years 2002 and 2005 
mandate that we prepare annual assessments of MDA's ongoing cost, 
schedule, testing, and performance progress. We issued our most recent 
report on March 15, 2007.[Footnote 1] My statement today will focus on 
the issues covered in that report, specifically: 

* MDA's progress toward developing the Block 2006 configuration of the 
BMDS, 

* the flexibility granted to MDA and its effect on oversight and 
accountability, and: 

* the status of MDA's efforts to improve its quality processes. 

Summary: 

MDA continues to make progress on missile defense, but costs have grown 
and less work is being completed than planned. The fielding of 
additional assets and the first end-to-end test of GMD were notable 
accomplishments in fiscal year 2006, as was being able to put BMDS on 
alert status. Yet, MDA will not meet its original Block 2006 cost, 
fielding, or performance goals. MDA will field fewer assets than 
planned, which will cause a commensurate decrease in performance. 
Although scope has been reduced, costs are expected to increase by 
about $1 billion. There is no baseline against which to measure cost. 
For several reasons, we cannot be precise about the actual cost of 
Block 2006. MDA defers work from block to block and counts the cost of 
deferred work as a cost of the block in which the work is performed 
even though that work benefits the original block. For example, work 
deferred from Block 2004 is counted as a cost of Block 2006. Element 
program offices report costs inconsistently, with most underreporting 
costs. The cost of Block 2006 may change further because MDA may defer 
other work from Block 2006 until Block 2008 to cover $478 million in 
fiscal year 2006 budget overruns experienced by element prime 
contractors. We could not assess whether MDA is likely to achieve its 
revised performance goal because too few tests have been completed to 
have confidence in the models and simulations used to predict 
performance. Overall, the block approach has had advantages for 
fielding capabilities incrementally, but it has not proven to be a good 
construct for reconciling actual cost and performance with the 
justifications that MDA submits to support its budget request. 

Because the BMDS program has not formally entered system development 
and demonstration, application of laws that are designed to facilitate 
oversight and accountability of DOD acquisition programs has 
effectively been deferred. This gives MDA unique latitude to manage the 
BMDS. Specifically, the BMDS cost, schedule, and performance baseline 
does not have to be approved by anyone outside MDA. MDA is not yet 
required to obtain independent assessments of each configuration's cost 
or test results. Unlike other programs, MDA is permitted to use 
research and development funds to incrementally fund all activities, 
including the purchase and support of operational assets. MDA keeps 
others informed, but it does not need their approval. Collectively, 
this flexibility enables MDA to be more agile in its decision-making. 
By the same token, MDA can revise its own baseline to field fewer 
assets than planned, defer work to a future block, and increase planned 
cost. Over time, it becomes difficult to reconcile cost and outcomes 
against original goals and to determine the value of the work 
accomplished. Ultimately, Congress may know that it is getting less 
than expected for its investment, but it will not necessarily know the 
cost of what it did receive or whether it is being asked to again 
appropriate funds for work that had been scheduled in a prior block but 
could not be completed because its funding was diverted to pay for 
other activities. The foregoing does not mean that MDA has acted 
inconsistently with the authorities it has been granted. Rather, MDA 
has the sanctioned flexibility to manage exactly as it has. It could be 
argued that without this flexibility, the initial capability fielded 
last year and put on alert would not have been possible. Yet, the 
question remains as to whether this degree of flexibility should be 
retained for a program that is planning to spend on the order of $10 
billion a year for the foreseeable future. 

MDA auditors report that quality deficiencies are declining and on-time 
deliveries are improving as corrective measures are implemented. For 
example, MDA quality audits show that one key supplier has decreased 
open quality issues by 64 percent, reduced test failures by 43 percent, 
and increased on-time deliveries by 9 percent. The mechanisms being 
used to improve quality assurance processes include the development of 
a teaming approach to restore reliability in key suppliers, conducting 
regular quality audits, adjusting award fee plans to encourage 
contractors to maintain a good quality assurance program and implement 
industry best practices, and continuing to incorporate key quality 
provisions into the agency's prime contracts. 

In our March 2007 report, we recommended that MDA establish firm 
baselines for those elements considered far enough along to be in 
system development and demonstration, and report against those 
baselines; propose an approach for those same elements that provides 
information consistent with the acquisition laws that govern baselines 
and unit cost reporting, independent cost estimates, and operational 
test and evaluation; include in blocks only those elements that will 
field capabilities during the block period and develop a firm block 
baseline that includes the unit cost of its assets; request and use 
procurement funds, rather than research, development, test, and 
evaluation funds, to acquire fielded assets; and conduct an independent 
evaluation of the ABL and KEI elements prior to making a decision on 
the future of the programs. 

DOD partially concurred with the report's first three recommendations, 
but did not agree to use procurement funds to acquire fielded assets or 
to conduct an independent evaluation of the ABL and KEI elements. In 
partially agreeing, DOD recognized the need to provide greater program 
transparency and committed to providing information consistent with 
acquisition laws that govern baselines and unit cost reporting. 
However, DOD objected to the element-centric approach recommended, 
believing that this would detract from managing the BMDS as a single, 
integrated system. DOD also stated that reporting at the BMDS-level in 
accordance with our third recommendation would appear to be 
inconsistent with reporting at the element level. We continue to 
believe that all recommended changes are needed to provide a better 
balance between MDA's flexibility and BMDS program transparency. 
Because DOD awards contracts and requests funding by individual 
elements that compose the BMDS, we believe that the element approach is 
the best way to achieve increased program transparency. However, a BMDS-
level baseline derived from the capabilities that individual elements 
yield is needed to describe and manage a BMDS-wide capability. We also 
believe that the use of procurement funds contributes to program 
transparency by making clear at the outset the size of the investment 
being requested in fielded assets. Finally, we continue to believe that 
an independent assessment of the ABL and KEI capabilities can provide a 
transparent basis for making decisions on the future of the programs, 
but we did revise the recommendation to specify that the assessment 
should follow key demonstrations in 2009. 

Background: 

Missile defense is important because at least 25 countries now possess 
or are acquiring sophisticated missile technology that could be used to 
attack the United States, deployed troops, friends, and allies. MDA's 
mission is to develop and field an integrated, layered BMDS capable of 
defending against enemy ballistic missiles launched from all ranges and 
during all phases of the missiles' flight. DOD has spent and continues 
to spend large sums of money to defend against this threat. Since the 
mid-1980s, about $107 billion has been spent, and over the next 5 
years, another $49 billion is expected to be invested. While the 
initial set of BMDS assets was fielded during 2004-2005, much of the 
technical and engineering foundation was laid by this prior investment. 
DOD also expects to continue investing in missile defense for many more 
years as the system evolves into one that can engage an enemy ballistic 
missile launched from any range during any phase of the missile's 
flight. 

To enable MDA to field and enhance a missile defense system quickly, 
the Secretary of Defense, in 2002, directed a new acquisition strategy. 
The Secretary's strategy included removing the BMDS program from DOD's 
traditional acquisition process until a mature capability was ready to 
be handed over to a military service for production and operation. 
Therefore, development of the BMDS program is not segmented into 
concept refinement, technology development, and system development and 
demonstration phases, as other major defense acquisition programs are. 
Instead, MDA initiates one development phase that incorporates all 
acquisition activities and that is known simply as research and 
development. MDA also has approval to use research and development 
funds, rather than procurement funds, to acquire assets that could be 
made available for operational use. 

To carry out its mission, MDA is fielding missile defense capabilities 
in 2-year increments known as blocks. The first block--Block 2004-- 
fielded a limited initial capability that included early versions of 
GMD, Aegis BMD, PAC-3, and C2BMC. This was the capability that was put 
on alert status in 2006. MDA formally began a second BMDS block on 
January 1, 2006, that will continue through December 31, 2007. This 
block is expected to provide protection against attacks from North 
Korea and the Middle East. During the 2-year block timeframe, MDA is 
focusing its program of work on the enhancement and fielding of 
additional quantities of the GMD, Aegis BMD, and C2BMC elements, as 
well as fielding a Forward-Based X-Band radar that is part of the 
Sensors element. When MDA defined the block in March 2005, shortly 
after submitting its fiscal year 2006 budget request to Congress, it 
also included three other elements--Airborne Laser (ABL), Space 
Tracking and Surveillance System (STSS), and Terminal High Altitude 
Area Defense (THAAD)--that are primarily developmental in nature. 
According to MDA, these elements were included in the block even though 
they were not expected to be operational until future blocks because 
the elements offered some emergency capability during the block 
timeframe. In March 2006, MDA removed THAAD from Block 2006. According 
to MDA, this action better aligned resources and fielding plans. The 
development of two other elements--Multiple Kill Vehicle (MKV) and 
Kinetic Energy Interceptor (KEI)--also continued in fiscal year 2006, 
but these elements were not considered part of Block 2006 because, 
according to MDA officials, the elements provide no capability-- 
emergency or operational--during the block. 

The bulk of the funding that MDA requests for the BMDS each fiscal year 
is for the development, fielding, and sustainment of BMDS elements. For 
example, in fiscal year 2006, funding for the nine BMDS elements 
collectively accounted for 72 percent of MDA's research and development 
budget. MDA requests funds for each of these elements, with the 
exception of C2BMC and THAAD, under separate budget line items. In 
addition, MDA issues separate contracts for each of the nine elements. 

Prior to beginning each new block, MDA establishes and submits block 
goals to Congress. These goals present the business case for the new 
block. MDA presented its Block 2006 goals to Congress in March 2005, 
shortly after submitting its fiscal year 2006 budget. At that time, MDA 
told Congress that the agency expected to field the following assets: 
up to 15 GMD interceptors, an interim upgrade of the Thule Early 
Warning Radar, a Forward-Based X-Band radar, 19 Aegis BMD missiles, 1 
new Aegis cruiser for the missile defense mission, 4 new Aegis 
destroyers capable of providing long-range surveillance and tracking, 
and 8 Aegis destroyers upgraded for the engagement mission. MDA's cost 
goal for the development of the six elements that compose the block, 
the manufacture of assets being fielded, and logistical support for 
fielded assets was $19.3 billion.[Footnote 2] MDA also notified 
Congress of the Block 2006 performance goals established for the BMDS. 
These goals were composed of numerical values for the probability of 
engagement success, the land area from which the BMDS could deny a 
launch, and the land area that the BMDS could defend.[Footnote 3] 
Fiscal year testing goals were also established by element program 
offices, but these goals were not formally reported to Congress. 

We examined numerous documents and held discussions with agency 
officials. In determining the elements' progress toward Block 2006 
goals, we looked at the accomplishments of six BMDS elements--ABL, 
Aegis BMD, BMDS Sensors, C2BMC, GMD, and STSS--that compose the Block 
2006 configuration. Our work included examining System Element Reviews, 
test plans and reports, production plans, and Contract Performance 
Reports. We also interviewed officials within each element program 
office and within MDA functional offices. In assessing whether MDA's 
flexibility impacts BMDS oversight and accountability, we examined 
documents such as those defining MDA's changes to Block 2006 goals, 
acquisition laws for major DOD programs, and BMDS policy directives 
issued by the Secretary of Defense. We examined the current status of 
MDA's quality assurance program by visiting various contractor 
facilities and holding discussions with MDA officials, such as 
officials in the Office of Quality, Safety, and Mission Assurance. We 
performed our work from June 2006 through March 2007 in accordance with 
generally accepted government auditing standards. 

MDA Has Made Progress with Block 2006, but Scope Has Been Reduced and 
Costs Have Gone Up: 

MDA made progress during fiscal year 2006, but it will not achieve the 
goals it set for itself in March 2005. One year after establishing its 
Block 2006 goals, the agency informed Congress that it planned to field 
fewer assets, reduce performance goals, and increase the block's cost 
goal. It is also likely that in addition to fielding fewer assets, 
other Block 2006 work will be deferred to offset growing contractor 
costs. MDA is generally on track to meet its revised quantity goals, 
but the performance of the BMDS cannot yet be fully assessed because 
there have been too few flight tests conducted to anchor the models and 
simulations that predict overall system performance. Several elements 
continue to experience technical problems that pose questions about the 
performance of the fielded system and could delay the enhancement of 
future blocks. In addition, the Block 2006 cost goal cannot be 
reconciled with actual costs because work travels to and from other 
blocks and individual element program offices report costs 
inconsistently. 

During the first year of Block 2006, MDA continued to improve the BMDS 
by enhancing its performance and fielding additional assets. In 
addition, the BMDS elements achieved some notable test results. For 
example, the GMD element completed its first successful intercept 
attempt since 2002. The test was also notable because it was an end-to- 
end test of one engagement scenario, the first such test that the 
program has conducted. Also, the Aegis BMD element conducted a 
successful intercept test of its more capable Standard Missile-3 design 
that is being fielded for the first time during Block 2006. 

In March 2006, soon after the formal initiation of Block 2006, MDA 
announced that events such as hardware delays, technical challenges, 
and budget cuts were causing the agency to field fewer assets than 
originally expected. MDA's goal now calls for fielding 3 fewer GMD 
interceptors; deferring the upgrade of the Thule radar until Block 
2008, when it can be fully upgraded; producing 4 fewer Aegis BMD 
missiles; upgrading 1 less Aegis destroyer for the engagement mission; 
and delivering 3 C2BMC Web browsers rather than the more expensive 
C2BMC suites. With the exception of the GMD interceptors, MDA is on 
track to deliver the revised quantities. The GMD program planned to 
emplace 8 interceptors during calendar year 2006, but was only able to 
emplace 4. Program officials told us that the contractor has increased 
the number of shifts that it is working and that this change will 
accelerate deliveries. However, to meet its quantity goal, the GMD 
program will have to more than double its interceptor emplacement rate 
in 2007. 

MDA also reduced the performance expected of Block 2006 commensurate 
with the reduction in assets. However, insufficient data are available 
to determine whether MDA is on track to meet the new goal. Although the 
GMD test program has achieved some notable results, officials in DOD's 
Office of the Director of Operational Test and Evaluation told us that 
the element has not completed sufficient tests to provide a high level 
of confidence that the BMDS can reliably intercept intercontinental 
ballistic missiles. Further testing is needed as well to confirm that 
GMD can use long-range tracking data developed by Aegis BMD to prepare-
-in real time--a weapon system task plan for GMD interceptors. 

Delayed testing and technical problems may also impact the performance 
of the current and future configurations of the BMDS. For example, the 
performance of the Block 2006 configuration of the Aegis BMD missile is 
unproven because design changes in the missile's solid attitude and 
divert system and one burn pattern of the third stage rocket motor were 
not flight-tested before they were cut into the production line. The 
current configuration of the GMD interceptor also continues to struggle 
with an anomaly that has occurred in each of the element's flight 
tests. The anomaly has not yet prevented the program from achieving its 
primary test objectives, but neither its source nor a solution has been 
clearly identified or defined. The reliability of some GMD interceptors 
remains uncertain as well because inadequate mission assurance/quality 
control procedures may have allowed less reliable or inappropriate 
parts to be incorporated into the manufacturing process. Program 
officials plan to introduce new parts into the manufacturing process, 
but not until interceptor 18. MDA also plans to retrofit the previous 
17 interceptors, but not until fiscal year 2009. In addition to the 
performance problems with elements being fielded, the ABL element that 
is being developed to enhance a future BMDS configuration experienced 
technical problems with its Beam Control/Fire Control component. These 
problems have delayed a lethality demonstration that is needed to 
demonstrate the element's leading-edge technologies. ABL is an 
important element because if it works as desired, it will defeat enemy 
missiles soon after launch, before decoys are released to confuse other 
BMDS elements. MDA plans to decide in 2009 whether ABL or KEI, whose 
primary boost phase role is to mitigate the risk in the ABL program, 
will become the BMDS boost phase capability. 

While MDA reduced Block 2006 quantity and performance goals, it 
increased the block's cost goal from about $19.3 billion to 
approximately $20.3 billion.[Footnote 4] The cost increases were caused 
by the addition of previously unknown operations and sustainment 
requirements, realignment of the GMD program to support a successful 
return to flight, realignment of the Aegis BMD program to address 
technical challenges and invest in upgrades, and preparations for round-
the-clock operation of the BMDS. Although MDA is expected to operate 
within its revised budget of $20.3 billion, the actual cost of the 
block cannot be reconciled with the cost goal. To stay within its Block 
2004 budget, MDA shifted some of that block's work to Block 2006 and is 
counting it as a cost of Block 2006, which overstates Block 2006 cost. 
In addition, MDA officials told us that it is likely that some Block 
2006 work will be deferred until Block 2008 to cover the $478 million 
fiscal year 2006 budget overruns experienced by five of the six element 
prime contractors. If MDA reports the cost of deferred work as it has 
in the past, the actual cost of Block 2006 will be complicated further. 
Another factor complicating the reconciliation of Block 2006 cost is 
that the elements report block cost inconsistently. Some elements 
appropriately include costs that the program will incur to reach full 
capability, while others do not.[Footnote 5] 

MDA's Flexibility Makes Oversight and Accountability More Difficult: 

Because the BMDS has not formally entered the system development and 
demonstration phase of the acquisition cycle, it is not yet required to 
apply several important oversight mechanisms contained in certain 
acquisition laws that, among other things, provide transparency into 
program progress and decisions. This has enabled MDA to be agile in 
decision making and has facilitated fielding an initial BMDS capability 
quickly. On the other hand, MDA operates with considerable autonomy to 
change goals and plans, making it difficult to reconcile outcomes with 
original expectations and to determine the actual cost of each block 
and of individual operational assets. 

Over the years, a framework of laws has been created that make major 
defense acquisition programs accountable for their planned outcomes and 
cost, give decision makers a means to conduct oversight, and ensure 
some level of independent program review. The application of many of 
these laws is triggered by a program's entry into system development 
and demonstration. To provide accountability, once major defense 
programs cross this threshold, they are required by statute to document 
program goals in an acquisition program baseline that as implemented by 
DOD has been approved by a higher-level DOD official prior to the 
program's initiation. The baseline provides decision makers with the 
program's best estimate of the program's total cost for an increment of 
work, average unit costs for assets to be delivered, the date that an 
operational capability will be fielded, and the weapon's intended 
performance parameters. Once approved, major acquisition programs are 
required to measure their program against the baseline, which is the 
program's initial business case, or obtain the approval of a higher- 
level acquisition executive before making significant changes. Programs 
are also required to regularly provide detailed program status 
information to Congress, including information on cost, in Selected 
Acquisition Reports. In addition, Congress has established a cost- 
monitoring mechanism that requires programs to report significant 
increases in unit cost measured from the program baseline.[Footnote 6] 

Other statutes provide for independent program verifications and place 
limits on the use of appropriations. For example, 10 U.S.C. § 2434 
prohibits the Secretary of Defense from approving system development 
and demonstration unless an independent estimate of the program's life- 
cycle cost has been conducted by the Secretary. In addition, 10 U.S.C. 
§ 2399 requires completion of initial operational test and evaluation 
before a program can begin full-rate production. These statutes ensure 
that someone external to the program examines the likelihood that the 
program can be executed as planned and will yield a system that is 
effective and suitable for combat. The use of an appropriation is also 
controlled so that it will not be used for a purpose other than the one 
for which it was made, except as otherwise provided by law. Research 
and development appropriations are typically specified by Congress to 
be used to pay the expenses of basic and applied scientific research, 
development, test, and evaluation. On the other hand, procurement 
appropriations are, in general, to be used for production and 
manufacturing. In the 1950s, Congress established a policy that items 
being purchased with procurement funds be fully funded in the year that 
the item is procured. This is meant to prevent a program from 
incrementally funding the purchase of operational systems. Full funding 
ensures that the total procurement costs of weapons and equipment are 
known to Congress up front and that one Congress does not put the 
burden on future Congresses of deciding whether they should appropriate 
additional funds or expose weapons under construction to uneconomic 
start-up and stop costs. 

The flexibility to defer application of specific acquisition laws has 
benefits. MDA can make decisions faster than other major acquisition 
programs because it does not have to wait for higher-level approvals or 
independent reviews. MDA's ability to quickly field a missile defense 
capability is also improved because assets can be fielded before all 
testing is complete. MDA considers the assets it has fielded to be 
developmental assets and not the result of the production phase of the 
acquisition cycle. Additionally, MDA enjoys greater flexibility than 
other programs in the use of its funds. Because MDA uses research and 
development funds to manufacture assets, it is not required to fully 
fund those assets in the year of their purchase. Therefore, as long as 
its annual budget remains fairly level, MDA can request funds to 
address other needs. 

On the other hand, the flexibilities granted MDA make it more difficult 
to conduct program oversight or to hold MDA accountable for the large 
investment being made in the BMDS program. Block goals can be changed 
by MDA, softening the baseline used to assess progress toward expected 
outcomes. Similarly, because MDA can redefine the work to be completed 
during a block, the actual cost of a block cannot be compared with the 
original cost estimate. MDA considers the cost of deferred work, which 
may be the delayed delivery of assets or other work activities, as a 
cost of the block in which the work is performed even though the work 
benefits or was planned for a prior block. Further, MDA does not track 
the cost of the deferred work and, therefore, cannot make adjustments 
that would match the cost with the block that is benefited. For 
example, during Block 2004, MDA deferred some planned development, 
deployment, characterization, and verification activities until Block 
2006 so that it could cover contractor budget overruns. The costs of 
the activities are now considered part of the cost of Block 2006. Also, 
although Congress provided funding for these activities during Block 
2004, MDA used these funds for the overruns and will need additional 
funds during Block 2006 to cover their cost. Planned and actual unit 
costs of fielded assets are equally difficult to reconcile. Because MDA 
is not required to develop an approved acquisition program baseline, it 
is not required to report the expected average unit cost of assets. 
Also, because MDA is not required to report significant increases in 
unit cost,[Footnote 7] it is not easy to determine whether an asset's 
actual cost has increased significantly from its expected cost. 

Finally, using research and development funds to purchase fielded 
assets further reduces cost transparency because these dollars are not 
covered by the full-funding policy as are procurement funds. Therefore, 
when a program for a 2-year block is first presented in the budget, 
Congress is not necessarily fully aware of the dimensions and cost of 
that block. For example, although a block may call for the delivery of 
a specific number of interceptors, the full cost of those interceptors 
is requested over 3 to 5 years. Calculating unit costs from budget 
documents is difficult because the cost of components that will become 
fielded assets may be spread across 3 to 5 budget years--a consequence 
of incremental funding. 

MDA Audits Show Improvement in Quality Processes: 

During Block 2004, poor quality control procedures caused the missile 
defense program to experience test failures and slowed production. MDA 
has initiated a number of actions to correct quality control 
weaknesses, and the agency reports that these actions have been largely 
successful. Although MDA continues to identify quality assurance 
procedures that need strengthening, recent audits by MDA's Office of 
Quality, Safety, and Mission Assurance show such improvements as 
increased on-time deliveries, reduced test failures, and sustained 
improvement in product quality. 

MDA has taken a number of steps to improve quality assurance. These 
include developing a teaming approach to restore the reliability of key 
suppliers, conducting regular quality inspections to quickly identify 
and find resolutions for quality problems, adjusting award fee plans to 
encourage contractors to maintain a good quality assurance program and 
encourage industry best practices, as well as placing MDA-developed 
assurance provisions on prime contracts. For example, as early as 2003, 
MDA made a critical assessment of a key supplier's organization and 
determined that the supplier's manufacturing processes lacked 
discipline, its corrective action procedures were ineffective, its 
technical data package was inadequate, and personnel were not properly 
trained. The supplier responded by hiring a Quality Assurance Director, 
five quality assurance professionals, a training manager, and a 
scheduler. In addition, the supplier installed an electronic problem- 
reporting database, formed new boards--such as a failure review board-
-established a new configuration management system, and ensured that 
manufacturing activity was consistent with contract requirements. 
During different time periods between March 2004 and August 2006, MDA 
measured the results of the supplier's efforts and found a 64 percent 
decrease in open quality control issues, a 43 percent decline in test 
failures, and a 9 percent increase in on-time deliveries. MDA expanded 
its teaming approach in 2006 to another problem supplier and reports 
that many systemic solutions are already underway. 

During fiscal year 2006, MDA's audits continued to identify both 
quality control weaknesses and quality control procedures that 
contractors are addressing. During 2006, the agency audited six 
contractors and identified 372 deficiencies and observations.[Footnote 
8] As of December 2006, the six contractors had collectively closed 
157, or 42 percent, of the 372 audit findings. MDA also reported other 
signs of positive results. For example, in 2006, MDA conducted a follow-
on audit of Raytheon, the subcontractor for GMD's exoatmospheric kill 
vehicle. A 2005 audit of Raytheon had found that the subcontractor was 
not correctly communicating essential kill vehicle requirements to 
suppliers, did not exercise good configuration control, and could not 
build a consistent and reliable product. The 2006 audit was more 
positive, reporting less variability in Raytheon's production 
processes, increasing stability in its statistical process control 
data, fewer test problem reports and product waivers, and sustained 
improvement in product quality. 

Actions Recommended In Our Recent Report: 

In our March 15, 2007, report, we made several recommendations to DOD 
to increase transparency in the missile defense program. These 
included: 

* Develop a firm cost, schedule, and performance baseline for those 
elements considered far enough along to be in system development and 
demonstration, and report against that baseline. 

* Propose an approach for those same elements that provides information 
consistent with the acquisition laws that govern baselines and unit 
cost reporting, independent cost estimates, and operational test and 
evaluation for major DOD programs. Such an approach could provide 
necessary information while preserving the MDA Director's flexibility 
to make decisions. 

* Include in blocks only those elements that will field capabilities 
during the block period and develop a firm cost, schedule, and 
performance baseline for that block capability, including the unit cost 
of its assets. 

* Request and use procurement funds, rather than research, development, 
test, and evaluation funds, to acquire fielded assets. 

DOD partially agreed with the first three recommendations and 
recognized the need for greater program transparency. It committed to 
provide information consistent with the acquisition laws that govern 
baselines and unit cost reporting, independent cost estimates, and 
operational test and evaluation. DOD did not agree to use elements as a 
basis for this reporting, expressing its concern that an element- 
centric approach to reporting would have a fragmenting effect on the 
development of an integrated system. We respect the need for the MDA 
Director to make decisions across element lines to preserve the 
integrity of the system of systems. We recognize that there are other 
bases rather than elements for reporting purposes. However, we believe 
it is essential that MDA report in the same way that it requests funds. 
Currently MDA requests funds and contracts by element, and at this 
time, that appears to be the most logical way to report. MDA currently 
intends to modify its current block approach. We believe that a 
management construct like a block is needed to provide the vehicle for 
making system-of-system decisions and to provide for system-wide 
testing. However, at this point, the individual assets to be managed in 
a block--including quantities, cost, and delivery schedules--can only 
be derived from the individual elements. 

Mr. Chairman, this concludes my statement. I would be pleased to 
respond to any questions you or members of the subcommittee may have. 

Contacts and Staff Acknowledgements: 

For future questions about this statement, please contact me at (202) 
512-4841 or francisp@gao.gov. Individuals making key contributions to 
this statement include Barbara H. Haynes, Assistant Director; LaTonya 
D. Miller; Michael J. Hesse; Letisha T. Jenkins; Sigrid L. McGinty; 
Kenneth E. Patton; and Steven B. Stern. 

FOOTNOTES 

[1] GAO, Defense Acquisitions: Missile Defense Acquisition Strategy 
Generates Results but Delivers Less at a Higher Cost, GAO-07-387 
(Washington, D.C.: Mar. 15, 2007). 

[2] We have adjusted the cost goal reported to Congress to reflect 
MDA's removal of the THAAD element and its future development cost from 
Block 2006. 

[3] Specifics of the BMDS performance goals are classified and cannot 
be presented in an open forum. 

[4] Specific details regarding the cost increase can be found in GAO-07-
387. 

[5] An element has reached full capability if it has completed all 
system-level testing and has shown that it meets expectations. At this 
state, all doctrine, organization, training, material, leadership, 
personnel, and facilities are in place. 

[6] 10 U.S.C. § 2433, known as Nunn-McCurdy. 

[7] Because the BMDS or its major elements have not been designated by 
MDA as being in system development and demonstration, no acquisition 
program baseline is required under 10 U.S.C. § 2435. Thus there is no 
basis for determining unit cost under 10 U.S.C. § 2433 (also known as 
Nunn-McCurdy), which requires calculation of unit cost from the 
baseline. Further, for the same reason, only limited Selected 
Acquisition Reports to Congress on program status are generated [10 
U.S.C. § 2432(h)] that do not include unit costs. 

[8] Deficiencies are considered more serious and are recognized when 
contractors do not comply with a contractual or internal procedure 
requirement. On the other hand, observations are made when a contractor 
fails to employ an MDA or industry best practice.

GAO's Mission: 

The Government Accountability Office, the audit, evaluation and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the performance 
and accountability of the federal government for the American people. 
GAO examines the use of public funds; evaluates federal programs and 
policies; and provides analyses, recommendations, and other assistance 
to help Congress make informed oversight, policy, and funding 
decisions. GAO's commitment to good government is reflected in its core 
values of accountability, integrity, and reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO's Web site (www.gao.gov). Each weekday, GAO posts 
newly released reports, testimony, and correspondence on its Web site. 
To have GAO e-mail you a list of newly posted products every afternoon, 
go to www.gao.gov and select "Subscribe to Updates." 

Order by Mail or Phone: 

The first copy of each printed report is free. Additional copies are $2 
each. A check or money order should be made out to the Superintendent 
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 
more copies mailed to a single address are discounted 25 percent. 
Orders should be sent to: 

U.S. Government Accountability Office 441 G Street NW, Room LM 
Washington, D.C. 20548: 

To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202) 
512-6061: 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: fraudnet@gao.gov 
Automated answering system: (800) 424-5454 or (202) 512-7470: 

Congressional Relations: 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 U.S. 
Government Accountability Office, 441 G Street NW, Room 7125 
Washington, D.C. 20548: 

Public Affairs: 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800 
U.S. Government Accountability Office, 441 G Street NW, Room 7149 
Washington, D.C. 20548: