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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 10:00 a.m. EDT: 

Tuesday, February 26, 2008: 

Defense Acquisitions: 

Assessment of DOD Efforts to Enhance Missile Defense Capabilities and 
Oversight: 

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

GAO-08-506T: 

GAO Highlights: 

Highlights of GAO-08-506T, a testimony before the Subcommittee on 
Defense, Committee on Appropriations, U.S. House of Representatives. 

Why GAO Did This Study: 

Funded at $8 billion to nearly $10 billion per year, the Missile 
Defense Agency’s (MDA) effort to develop and field a Ballistic Missile 
Defense System (BMDS) is the largest research and development program 
in the Department of Defense (DOD). The program has been managed in 2-
year increments, known as blocks. Block 2006, the second BMDS block, 
was completed in December 2007. By law, GAO annually assesses MDA’s 
progress. 

This testimony is based on GAO’s assessment of MDA’s progress in (1) 
meeting Block 2006 goals for fielding assets, completing work within 
estimated cost, conducting tests, and demonstrating the performance of 
the overall system in the field, and (2) making managerial improvements 
to transparency, accountability, and oversight. 

In conducting the assessment, GAO reviewed the assets fielded; 
contractor cost, schedule, and performance; and tests completed during 
2007. GAO also reviewed pertinent sections of the U.S. code, 
acquisition policy, and the charter of a new missile defense board. 

We have previously made recommendations to improve oversight in the 
areas that MDA has recently taken action. We also have a draft report 
that is currently with DOD for comment that includes additional 
recommendations. 

What GAO Found: 

In the past year, MDA has fielded additional and new assets, enhanced 
the capability of some existing assets, and achieved most test 
objectives. However, MDA did not meet the goals it originally set for 
the block. Ultimately, MDA fielded fewer assets, increased costs by 
about $1 billion and conducted fewer tests. Even with the cost 
increase, MDA deferred work to keep costs from increasing further, as 
some contractors overran their fiscal year 2007 budgets. Deferring work 
obscures the cost of the block because such work is no longer counted 
as part of Block 2006. The cost of the block may have been further 
obscured by a way of planning work used by several contractors that 
could underestimate the actual work completed. If more work has to be 
done, MDA could incur additional costs that are not yet recognized. MDA 
also sets goals for determining the overall performance of the BMDS. 
Similar to other DOD programs, MDA uses models and simulations to 
predict BMDS performance. We were unable to assess whether MDA met its 
overall performance goal because there have not been enough flight 
tests to provide a high confidence that the models and simulations 
accurately predict BMDS performance. Moreover, the tests done to date 
have been developmental in nature, and do not provide sufficient 
realism for DOD’s test and evaluation Director to determine whether 
BMDS is suitable and effective for battle. 

GAO has previously reported that MDA has been given unprecedented 
funding and decision-making flexibility. While this flexibility has 
expedited BMDS fielding, it has also made MDA less accountable and 
transparent in its decisions than other major programs, making 
oversight more challenging. MDA, with some direction from Congress, has 
taken significant steps to address these concerns. MDA implemented a 
new way of defining blocks—its construct for developing and fielding 
BMDS increments--that should make costs more transparent. For example, 
under the newly-defined blocks, MDA will no longer defer work from one 
block to another. Accountability should also be improved as MDA will 
for the first time estimate unit costs for selected assets and report 
variances from those estimates. DOD also chartered a new executive 
board with more BMDS oversight responsibility than its predecessor. 
Finally, MDA will begin buying certain assets with procurement funds 
like other programs. This will benefit transparency and accountability, 
because to use procurement funding generally means that assets must be 
fully paid for in the year they are bought. Previously, MDA has been 
able to pay for assets incrementally using research and development 
funds. Some oversight concerns remain, however. For example, MDA does 
not plan to estimate the total cost of a block, nor to have a block’s 
costs independently verified—actions required of other programs to 
inform decisions about affordability and investment choices. Also, the 
executive board faces a challenge in overseeing MDA’s large technology 
development efforts and does not have approval authority for some key 
decisions made by MDA. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.GAO-08-506T]. 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's) strategy for acquiring a Ballistic Missile Defense System 
(BMDS) and its progress in fielding Block 2006-its second increment of 
capability. 

MDA has been charged with developing and fielding the Ballistic Missile 
Defense System (BMDS), a system expected to be capable of defending the 
United States, deployed troops, friends, and allies against ballistic 
missiles of all ranges in all phases of flight. In fulfilling this 
charge, MDA placed an initial set of missile defense components in the 
field in December 2005. These components are collectively referred to 
as Block 2004. Recently, MDA delivered its second increment of 
capability--Block 2006--which includes additional components as well as 
performance enhancements. 

The National Defense Authorization Acts for fiscal years 2002 and 2006 
mandated that we prepare annual assessments of MDA's ongoing cost, 
schedule, testing, and performance progress. In March 2008, we plan to 
issue our report covering MDA's progress toward achieving Block 2006 
goals during fiscal year 2007 as well as its efforts to improve 
transparency, accountability, and oversight. My statement today will 
focus on the issues covered in that report. We conducted this 
performance audit from May 2007 to March 2008 in accordance with 
generally accepted government auditing standards. Those standards 
require that we plan and perform the audit to obtain sufficient, 
appropriate evidence to provide a reasonable basis for our findings and 
conclusions based on our audit objectives. We believe that the evidence 
obtained provides a reasonable basis for our findings and conclusions 
based on our audit objectives. 

Summary: 

During Block 2006, MDA fielded additional and new assets, enhanced the 
capability of some existing assets, and achieved most test objectives. 
In short, MDA increased BMDS capability. However, MDA did not meet the 
goals it originally set for the block. Ultimately, MDA fielded fewer 
assets, increased costs by about $1 billion and conducted fewer tests. 
Even with the cost increase, MDA deferred work to keep Block 2006 costs 
from increasing further, as some contractors overran their fiscal year 
2007 budgets. We could not determine the full cost of the block as 
deferred work is no longer counted as part of the block. Further, 
several BMDS contractors plan work in such a way that could result in 
MDA incurring costs that are not yet recognized. We could not assess 
attainment of another MDA goal: the overall performance of fielded 
assets as an integrated BMDS. This is because (1) there have not been 
enough flight tests to validate the models and simulations that are 
used to predict system-level performance, (2) the reliability of some 
interceptors could be affected by problematic parts that have not been 
replaced yet, and (3) tests done to date have been developmental in 
nature, and do not provide sufficient realism for DOD's test and 
evaluation Director to determine whether BMDS is suitable and effective 
for battle. 

MDA has been given unprecedented funding and decision-making 
flexibility that has expedited the fielding of assets but also lessened 
the transparency and accountability needed for oversight. In the past 
year, MDA has taken significant actions to improve oversight. First, 
MDA has adopted a new block approach that offers several improvements- 
unit costs for selected assets will now be tracked and work will no 
longer be deferred from one block to another. Second, DOD has 
established an executive board to review and make recommendations on 
MDA's acquisition strategy, plans, and funding that could play a more 
significant role than its predecessor. Third, Congress directed that 
MDA begin using procurement funds to purchase certain assets, which 
generally means they must be fully paid for in the year they are 
bought. Previously, using research and development funding, MDA could 
pay for assets over several years, making it difficult to determine 
their cost. Some oversight concerns remain, however. For example, MDA 
will not estimate the total cost of each block nor have that cost 
independently verified, as is done for other major programs. While the 
new executive board promises to be more substantive than its 
predecessor, it will not have the information or the approval authority 
to provide the oversight that a Defense Acquisition Board provides on 
other major programs. It also faces the unique challenge of evaluating 
technology development efforts that range from $2 billion to about $5 
billion a year--efforts that normally do not have a firm cost, 
schedule, and performance baseline. 

We have previously made recommendations to improve oversight in the 
areas that MDA has recently taken action. We also have a draft report 
that is currently with DOD for comment that includes additional 
recommendations. 

Background: 

Funded at $8 billion to nearly $10 billion annually, MDA's BMDS is the 
largest research development program in the Department of Defense's 
budget. Since the 1980s, DOD has spent more that $100 billion on the 
development and early fielding of this system and it estimates that 
continued development will require an additional $50 billion between 
fiscal years 2008 and 2013. 

Since 2002, MDA has worked to fulfill its mission through its 
development and fielding of a diverse collection of land-, air-, sea-, 
and space-based assets. These assets are developed and fielded through 
nine BMDS elements and include the Airborne Laser (ABL); Aegis 
Ballistic Missile Defense (Aegis BMD); BMDS Sensors; Command, Control, 
Battle Management, and Communications (C2BMC); Ground-based Midcourse 
Defense (GMD); Kinetic Energy Interceptors (KEI); Multiple Kill 
Vehicles (MKV); Space Tracking and Surveillance System (STSS); and 
Terminal High Altitude Area Defense (THAAD).[Footnote 1] 

To develop a system capable of carrying out its mission, MDA, until 
December 2007, executed an acquisition strategy in which the 
development of missile defense capabilities was organized in 2-year 
increments known as blocks. Each block was intended to provide the BMDS 
with capabilities that enhanced the development and overall performance 
of the system. The first 2-year block, known as Block 2004, fielded a 
limited initial capability that included early versions of the GMD, 
Aegis BMD, Patriot Advanced Capability-3, and C2BMC elements. The 
agency's second 2-year block-Block 2006-culminated on December 31, 2007 
and fielded additional BMDS assets. This block also provided improved 
GMD interceptors, enhanced Aegis BMD missiles, upgraded Aegis BMD 
ships, a Forward-Based X-Band-Transportable radar, and enhancements to 
C2BMC software. On December 7, 2007, MDA's Director approved a new 
block construct that will be the basis for all future development and 
fielding, which I will discuss in more detail shortly. 

To assess progress during Block 2006, we examined the accomplishments 
of nine BMDS elements that MDA is developing and fielding. Our work 
included examining documents such as Program Execution Reviews, test 
plans and reports, production plans, and Contract Performance Reports. 
We also interviewed officials within each element program office and 
within MDA functional directorates. In addition, we discussed each 
element's test program and its results with DOD's Office of the 
Director, Operational Test and Evaluation. In following up on 
transparency, accountability, and oversight issues raised in our March 
2007 report, we held discussions with officials in MDA's Directorate of 
Business Operations to determine whether its new block structure 
improved accountability and transparency of the BMDS. In addition, we 
reviewed pertinent sections of the U.S. Code to compare MDA's current 
level of accountability with federal acquisition laws. We also 
interviewed officials from the Office of the Under Secretary of Defense 
for Acquisition, Technology, and Logistics and DOD's Joint Staff to 
discuss the oversight role of the new Missile Defense Executive Board 
(MDEB). Additionally, we reviewed the MDEB charter to identify the 
oversight responsibility of the board. 

Fielded Capability Increased, but Less than Planned at Higher Cost: 

MDA made progress in developing and fielding the BMDS during 2007. 
Additional assets were fielded and/or upgraded, several tests met 
planned objectives, and other development activities were conducted. On 
the other hand, fewer assets were fielded than originally planned, some 
tests were delayed, and the cost of the block increased by 
approximately $1 billion. To stay within the revised budget despite 
increasing contractor costs, MDA deferred some budgeted work to future 
blocks. Such deferrals, coupled with a planning methodology used by 
some contractors that could obscure cost reporting, prevent us from 
determining the full cost of Block 2006. MDA was able to meet most test 
objectives despite delays in several elements' test schedules. Neither 
we nor DOD could evaluate the aggregate performance of fielded assets 
because flight testing to date has not generated sufficient data. An 
evaluation of aggregate performance would also have to consider that 
(1) some parts in fielded interceptors identified as potentially 
problematic have not been replaced yet, and (2) tests done to date have 
been developmental in nature and do not provide sufficient realism for 
DOD to determine if the BMDS is suitable and effective for battle. 

Fielding of Assets and Cost: 

During Block 2006, MDA increased its inventory of BMDS assets while 
enhancing the system's performance. It fielded 14 additional Ground- 
based interceptors, 12 Aegis BMD missiles designed to engage more 
advanced threats, 4 new Aegis BMD destroyers, 1 new Aegis BMD cruiser, 
and 8 Web browsers and 1 software suite for C2BMC. In addition, MDA 
upgraded half of its Aegis BMD ship fleet, successfully conducted four 
Aegis BMD and two GMD intercept tests, and completed a number of ground 
tests to demonstrate the capability of BMDS components. 

Although MDA fielded an increased capability, it was unable to deliver 
all assets originally planned for Block 2006.[Footnote 2] The Sensors 
element was the only Block 2006 element to meet all of its original 
goals set in March 2005 while the remaining elements--GMD, Aegis BMD, 
C2BMC--were unable to meet all of their original quantity goals. 
Sensors delivered a second FBX-T in January 2007 while the GMD element 
fielded 14 of 15 Ground-Based interceptors originally planned during 
Block 2006. Last year, we reported that MDA delayed the partial upgrade 
of the Thule early warning radar--one of GMD's original goals--until a 
full upgrade could be accomplished. Additionally, the Aegis BMD element 
delivered 4 additional Destroyers and 1 new Cruiser as originally 
planned, but did not meet its original goal for missile deliveries-- 
delivering 12 of 19 SM-3 missiles planned for the block. C2BMC also did 
not deliver two of the three software suites originally planned for 
Block 2006. 

MDA's Block 2006 program of work culminated with higher than 
anticipated costs. In March 2007, we reported that MDA's cost goal for 
Block 2006 increased by approximately $1 billion because of greater 
than expected GMD operations and sustainment costs and technical 
problems. If the contractors continue to perform as they did in fiscal 
year 2007, we estimate that at completion, the cumulative overrun in 
the contracts could be between about $1.9 billion and $2.8 billion. To 
stay within its revised budget, MDA deferred some work it expected to 
accomplish during the block. When work is deferred, its costs are no 
longer accounted for in the original block. In other words, if work 
planned and budgeted for Block 2006 was deferred to Block 2008, that 
work would be counted as a Block 2008 cost. Because MDA did not track 
the cost of the deferred work, the agency could not make an adjustment 
that would have matched the cost with the correct block. Consequently, 
we were unable to determine the full cost of Block 2006. 

Another reason why it is difficult to determine the actual cost of 
Block 2006 is a planning methodology employed by MDA prime contractors 
that can obscure the full cost of work. Contractors typically divide 
the total work of a contract into small efforts in order to define them 
more clearly and to ensure proper oversight. Work is planned into types 
of work packages including: (1) level of effort-work that contains 
tasks of a general or supportive nature and does not produce a definite 
end product and (2) discrete--work that has a definable end product or 
event. When work is discrete, delivery of the end product provides a 
sound basis for determining actual contractor performance. When 
discrete work is instead planned as level of effort, the contractor's 
performance becomes less transparent because work is considered 
complete when the time planned for it has expired, whether or not the 
intended product has been completed. Earned value management does not 
recognize such variances in completing scheduled work and to the extent 
more work has to be done to complete the product, additional costs 
could be incurred that are not yet recognized.[Footnote 3] Many of 
MDA's prime contractors plan a large percentage of their work as level 
of effort. MDA officials agree that its contractors have improperly 
planned discrete work as level of effort, and are taking steps to 
remedy the situation. 

We also observed that while several contractors had difficulty with 
controlling costs, during fiscal year 2007, MDA awarded approximately 
90 percent or $579 million of available award fee to its prime 
contractors. In particular, contractors developing the ABL and Aegis 
BMD Weapon System were rated as performing very well in the cost and/or 
program management elements and received commensurate fees, even though 
earned value management data showed that their cost and schedule 
performance was declining. Although DOD guidance discourages the use of 
earned value performance metrics in award fee criteria, MDA includes 
this--one of many factors for consideration in rating contractors' 
performance--in several of its award fee plans. The agency recognizes 
that there is not always a good link between its intentions for award 
fees and the amount of fee being earned by its contractors. In an 
effort to rectify this problem, the agency has begun to revise its 
award fee policy to align agency practices more closely with DOD's 
current policy that better links performance with award fees. 

Testing and Performance of Fielded Capability: 

Most test objectives were achieved during 2007, although several BMDS 
programs experienced setbacks in their test schedules. The MKV, KEI, 
and Sensors elements were able to execute all scheduled activities as 
planned. The Aegis BMD, THAAD, ABL, STSS, and C2BMC elements 
experienced test delays, but all were able to achieve their primary 
test objectives. GMD successfully completed an intercept with an 
operationally representative interceptor and a radar characterization 
test. A second intercept test employing the SBX radar has been delayed 
because a target malfunction delayed the execution of the first 
intercept test. The SBX capability is important as it is a primary 
sensor to be used to engage ballistic missiles in the midcourse phase 
of flight. As of yet, this capability has not been verified through 
flight testing. 

As we reported in March 2007, MDA altered its original Block 2006 
performance goals commensurate with the agency's reductions in the 
delivery of fielded assets.[Footnote 4] For several reasons, 
information is not sufficient to assess whether MDA achieved its 
revised performance goals. First, MDA uses a combination of simulations 
and flight tests to determine whether performance goals are met. 
However, too few flight tests have been completed to ensure the 
accuracy of the models and simulations predictions. Second, confidence 
in the performance of the BMDS is reduced because of unresolved 
technical and quality issues in the GMD element. For example, the GMD 
element has experienced the same anomaly during each of its flight 
tests since 2001. This anomaly has not yet prevented the program from 
achieving any of its primary test objectives, but to date neither its 
source nor solution has been clearly identified. Program officials plan 
to continue their assessment of test data to determine the anomaly's 
root cause. The performance of some fielded GMD assets is also 
questionable because they contain parts identified by auditors in MDA's 
Office of Quality, Safety, and Mission Assurance as less reliable or 
inappropriate for use in space that have not yet been replaced. MDA has 
begun to replace the questionable parts in the manufacturing process 
and to purchase the parts for retrofit into fielded interceptors. 
However, it will not complete the retrofit effort until 2012. 

Finally, tests of the GMD element have been of a developmental nature, 
and have not included operationally representative test geometries in 
which GMD will perform its mission. MDA has added operational test 
objectives to its developmental test program, but the objectives are 
mostly aimed at proving that military personnel can operate the 
equipment. The lack of data has limited the operational test and 
evaluation Director's annual BMDS assessment to commenting on aspects 
of tests that were operationally realistic and thus has prevented the 
Director from determining whether the system is suitable and effective 
for the battlefield. 

Key Steps Taken to Enhance BMDS Oversight, But More Can Be Done: 

Since its initiation in 2002, MDA has been given a significant amount 
of flexibility. While this flexibility allows agile decision making, it 
lessens the transparency of MDA's acquisition processes, making it 
difficult to conduct oversight and hold the agency accountable for its 
planned outcomes and costs. As we reported in March 2007, MDA operates 
with considerable autonomy to change goals and plans, which makes it 
difficult to reconcile outcomes with original expectations and to 
determine the actual cost of each block and of individual operational 
assets. In the past year, MDA has begun implementing two initiatives-- 
a new block construct and a new executive board--to improve 
transparency, accountability, and oversight. These initiatives 
represent improvements over current practices, although we see 
additional improvements MDA can make. In addition, Congress has 
directed that MDA begin buying certain assets with procurement funds 
like other programs, which should promote accountability for and 
transparency of the BMDS. 

New Block Structure Offers Improvements, but Does Not Resolve All 
Issues: 

In 2007, MDA redefined its block construct to better communicate its 
plans and goals to Congress. The agency's new construct is based on 
fielding capabilities that address particular threats as opposed to the 
previous biennial time periods. MDA's new block construct makes many 
positive changes. These include establishing unit cost for selected 
block assets, incorporating into a block only those elements or 
components that will be fielded during the block, and abandoning the 
practice of deferring work from block to block. 

These changes should improve the transparency of the BMDS program and 
make MDA more accountable for the investment being made in missile 
defense. For example, the actual cost of each block can be tracked 
because MDA will no longer defer work planned for one block, along with 
its cost, to a future block. In addition, MDA plans to develop unit 
cost for selected BMDS assets--such as THAAD interceptors--so that cost 
growth of those assets can be monitored. In addition, the agency plans 
to request an independent verification of these unit costs and report 
significant cost growth to Congress. However, MDA has not yet 
determined all of the assets that will report a unit cost or how much a 
unit cost must increase before it is reported to Congress. 

Although improvements are inherent in MDA's proposed block construct, 
the new construct does not resolve all transparency and accountability 
issues. For example, MDA officials told us that the agency does not 
plan to estimate the full cost of a block. Instead, the cost baseline 
reported to Congress will include all prior costs of the block and the 
expected budget for the block for the 6 years included in DOD's Future 
Years Defense Plan.[Footnote 5] Costs beyond the 6TH year of the plan 
will not be estimated. Once baselined, if the budget for a block 
changes, MDA plans to report and explain those variations to Congress. 
Because the full cost of each block will not be known, it will be 
difficult for decision makers to compare the value of investing in each 
block to the value of investing in other DOD programs or to determine 
whether a block is affordable over the long term. Other DOD programs 
are required to provide the full cost estimate of developing and 
producing their weapon system, even if the costs extend beyond the 
Future Years Defense Plan. 

Another issue yet to be addressed is whether the concurrent development 
and fielding of BMDS assets will continue. Fully developing an asset 
and demonstrating its capability prior to production increases the 
likelihood that the product will perform as designed and can be 
produced at the cost estimated. To field an initial capability quickly, 
MDA accepted the risk of concurrent development and fielding during 
Block 2004. It continued to do so during Block 2006 as it fielded 
assets before they were fully tested. For example, by the end of Block 
2004, the agency realized that the performance of some ground-based 
interceptors could be degraded because the interceptors included 
inappropriate or potentially unreliable parts.[Footnote 6] As noted 
earlier, MDA has begun the process of retrofitting these interceptors, 
but work will not be completed until 2012. Meanwhile, there is a risk 
that some interceptors might not perform as designed. MDA has not 
addressed whether it will accept similar performance risks under its 
new block construct or whether it will fully develop and demonstrate 
all elements/components prior to fielding. 

MDA has not addressed whether it will transfer assets produced during a 
block to a military service for production and operation at the block's 
completion. Officials representing multiple DOD organizations recognize 
that transfer criteria are neither complete nor clear given the BMDS's 
complexity. Without clear transfer criteria, MDA has transferred the 
management of only one element--the Patriot Advanced Capability-3--to 
the military for production and operation. For other elements, MDA and 
the military services have been negotiating the transition of 
responsibilities for the sustainment of fielded elements-
-a task that has proven to be time consuming. Although MDA documents 
show that under its new block construct the agency should be ready to 
deliver BMDS components that are fully mission-capable, MDA officials 
could not tell us whether at the end of a block MDA's Director will 
recommend when management of components, including production 
responsibilities, will be transferred to the military. 

New Executive Board Offers Improved, but Not Full, Oversight: 

Oversight improvement initiatives are also underway for MDA. In March 
2007, the Deputy Secretary of Defense established a Missile Defense 
Executive Board (MDEB) to recommend and oversee implementation of 
strategic policies and plans, program priorities, and investment 
options for protecting the United States and its allies from missile 
attacks. The MDEB is also to replace existing groups and structures, 
such as the Missile Defense Support Group. 

The MDEB appears to be vested with more authority than the Missile 
Defense Support Group. When the Support Group was chartered in 2002, it 
was to provide constructive advice to MDA's Director. However, the 
Director was not required to follow the advice of the group. According 
to a DOD official, although the Support Group met many times initially, 
it did not meet after June 2005. This led to the formation of the MDEB. 
Its mission is to review and make recommendations on MDA's 
comprehensive acquisition strategy to the Deputy Secretary of Defense. 
It is also to provide the Under Secretary of Defense for Acquisition, 
Technology and Logistics, with a recommended strategic program plan and 
a feasible funding strategy based on business case analysis that 
considers the best approach to fielding integrated missile defense 
capabilities in support of joint MDA and warfighter objectives. The 
MDEB will be assisted by four standing committees. These committees, 
who are chaired by senior-level officials from the Office of the 
Secretary of Defense and the Joint Staff, could play an important 
oversight role as they are expected to make recommendations to the 
MDEB, which in turn, will recommend courses of action to the Under 
Secretary of Defense and the Director, MDA as appropriate. 

Although the MDEB is expected to exercise some oversight of MDA, it 
will not have access to all the information normally available to DOD 
oversight bodies. For other major defense acquisition programs, the 
Defense Acquisition Board has access to critical information because 
before a program can enter the System Development and Demonstration 
phase of the acquisition cycle, statute requires that certain 
information be developed. [Footnote 7] However, in 2002, the Secretary 
of Defense deferred application of DOD policy that, among other things, 
require major defense programs to obtain approval before advancing from 
one phase of the acquisition cycle to another. Because MDA does not yet 
follow this cycle, and has not yet entered System Development and 
Demonstration, it has not triggered certain statutes requiring the 
development of information that the Defense Acquisition Board uses to 
inform its decisions. For example, most major defense acquisition 
programs are required by statute to obtain an independent verification 
of life-cycle cost estimates prior to beginning system development and 
demonstration, and/or production and deployment. Independent life- 
cycle cost estimates provide confidence that a program is executable 
within estimated cost. Although MDA plans to develop unit cost for 
selected block assets and to request that DOD's Cost Analysis 
Improvement Group verify the unit costs, the agency does not yet plan 
to do so for a block cost estimate. 

Statute also requires an independent verification of a system's 
suitability for and effectiveness on the battlefield through 
operational testing before a program can proceed beyond low-rate 
initial production.[Footnote 8] After testing is completed, the 
Director for Operational Test and Evaluation assesses whether the test 
was adequate to support an evaluation of the system's suitability and 
effectiveness for the battlefield, whether the test showed the system 
to be acceptable, and whether any limitations in suitability and 
effectiveness were noted. However, a comparable assessment of the BMDS 
assets being fielded will not be available to the MDEB as MDA conducts 
primarily developmental tests of its assets with some operational test 
objectives. As noted earlier, developmental tests do not provide 
sufficient data for operational test officials to make such an 
assessment of BMDS. 

MDA will also make some decisions without needing approval from the 
MDEB or any higher level official. Although the charter of the MDEB 
includes the mission to make recommendations to MDA and the Under 
Secretary of Defense for Acquisition, Technology and Logistics on 
investment options, program priorities, and MDA's strategy for 
developing and fielding an operational missile defense capability, the 
MDEB will not necessarily have the opportunity to review and recommend 
changes to BMDS blocks. MDA documents show that the agency plans to 
continue to define each block of development without requiring input 
from the MDEB. According to a briefing on the business rules and 
processes for MDA's new block structure, the decision to initiate a new 
block of BMDS capability will be made by MDA's Director. Also cost, 
schedule, and performance parameters will be established by MDA when 
technologies that the block depends upon are mature, a credible cost 
estimate can be developed, funding is available, and the threat is both 
imminent and severe. The Director will inform the MDEB as well as 
Congress when a new block is initiated, but he will not seek the 
approval of either. 

Finally, there will be parts of the BMDS program that the MDEB will 
have difficulty overseeing because of the nature of the work being 
performed. MDA plans to place any program that is developing technology 
in a category known as Capability Development. These programs, such as 
ABL, KEI, and MKV, will not have a firm cost, schedule, or performance 
baseline. This is generally true for technology development programs in 
DOD because they are in a period of discovery, which makes schedule and 
cost difficult to estimate. On the other hand, the scale of the 
technology development in BMDS is unusually large, ranging from $2 
billion to about $5 billion dollars a year--eventually comprising 
nearly half of MDA's budget by fiscal year 2012. The MDEB will have 
access to the budgets planned for these programs over the next five or 
six years, each program's focus, and whether the technology is meeting 
short term key events or knowledge points. But without some kind of 
baseline for gauging progress in these programs, the MDEB will not know 
how much more time or money will be needed to complete technology 
maturation. MDA's experience with the ABL program provides a good 
example of the difficulty in estimating the cost and schedule of 
technology development. In 1996, the ABL program believed that all ABL 
technology could be demonstrated by 2001 at a cost of about $1 billion. 
However, MDA now projects that this technology will not be demonstrated 
until 2009 and its cost has grown to over $5 billion. 

MDA Directed to Use Procurement Funding: 

In an effort to further improve the transparency of MDA's acquisition 
processes, Congress has directed that MDA's budget materials delineate 
between funds needed for research, development, test and evaluation; 
procurement; operations and maintenance; and military 
construction.[Footnote 9] Congress gave MDA the flexibility to field 
certain assets using research, development, test and evaluation funding 
which allowed MDA to fund the purchase of assets over multiple years. 
Congress recently restricted MDA's authority and required MDA to 
purchase certain assets with procurement funds. Using procurement funds 
will mean that MDA will be required to ensure that assets are fully 
funded in the year of their purchase, rather than incrementally funded 
over several years. Additionally, our analysis of MDA data shows that 
incremental funding is usually more expensive than full-funding, in 
part, because inflation decreases the buying power of the dollar each 
year. For example, after reviewing MDA's incremental funding plan for 
THAAD fire units and Aegis BMD missiles, we analyzed the effect of 
fully funding these assets and found that the agency could save about 
$125 million by fully funding their purchase and purchasing them in an 
economical manner. 

Upcoming Report: 

* Our annual report on missile defense is in draft and with DOD for 
comment. It will be issued in final by March 15, 2008. In that report, 
we are recommending additional steps that could build on efforts to 
further improve the transparency, accountability, and oversight of the 
missile defense program. Our recommendations include actions needed to 
improve cost reporting as well as testing and evaluation. DOD is in the 
process of preparing a formal response to the report and its 
recommendations. 

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 Acknowledgments: 

For questions about this statement, please contact me at (202) 512-4841 
or Francisp@gao.gov. Individuals making key contributions to this 
statement include David Best, Assistant Director; LaTonya D. Miller; 
Steven B. Stern; Meredith Allen Kimmett; Kenneth E. Patton; and Alyssa 
Weir. 

Footnotes: 

[1] The BMDS also includes a 10th element, Patriot Advanced Capability- 
3 (PAC-3), which has been transferred to the Army for production, 
operation, and sustainment. This report does not evaluate PAC-3 because 
its initial development is complete and is now being managed by the 
Army. 

[2] n March 2006, MDA made reductions to its block 2006 goals. It was 
able in nearly all instances to meet or exceed these revised goals. Two 
elements--GMD and C2BMC--were able to exceed their revised fielding 
goals. In addition, the Aegis BMD element was able to meet its revised 
block goals for one of its two components. The program upgraded all 
planned ships, but fielded three fewer Aegis BMD Standard Missile-3s 
(SM-3) than planned because the missiles were delayed into 2008 to 
accommodate an unanticipated requirement to deliver three missiles to 
Japan. 

[3] Earned Value Management (EVM) is a program management tool that 
integrates the technical, cost, and schedule parameters of a contract. 
During the planning phase, an integrated baseline is developed by time 
phasing budget resources for defined work. As work is performed and 
measured against the baseline, the corresponding budget value is 
"earned". Using this earned value metric; cost and schedule variances 
can be determined and analyzed. EVM is program management that provides 
significant benefits to both the Government and the contractor. 

[4] Defense Acquisitions: Missile Defense Acquisition Strategy 
Generates Results but Delivers Less at a Higher Cost, GAO-07-387 
(Washington, D.C.: Mar.15, 2007). BMDS performance goals included a 
numerical goal for the probability of a successful BMDS engagement, a 
defined area from which the BMDS would prevent an enemy from launching 
a ballistic missile, and a defined area that the BMDS would protect 
from ballistic missile attacks. 

[5] There are five blocks included in the new block construct--1.0, 
2.0, 3.0, 4.0, and 5.0. MDA expects to initially develop budget 
baselines and report variances to this baseline for Blocks 1.0, 2.0, 
and a portion of 3.0. 

[6] See Defense Acquisitions: Missile Defense Agency Fields Initial 
Capability but Falls Short of Original Goals, GAO-06-327 (Washington, 
D.C.: Mar. 15, 2006). 

[7] The Defense Acquisition Board advises the Under Secretary of 
Defense for Acquisition, Technology, and Logistics on critical 
acquisition decisions. 

[8] 10 U.S.C § 2399 requires completion of initial operational test and 
evaluation of a weapon system before a program can proceed beyond low- 
rate initial production. According to DOD policy, low-rate initial 
production is intended to result in completion of manufacturing 
development in order to ensure adequate and efficient manufacturing 
capability and to produce the minimum quantity necessary to provide 
production or production-representative articles for operational test 
and evaluation, establish an initial production base for the system; 
and permit an orderly increase in the production rate for the system, 
sufficient to lead to full-rate production upon successful completion 
of operational (and live-fire, where applicable) testing. 

[9] The National Defense Authorization Act for Fiscal Year 2008, Pub. 
L. No. 110-181, § 223. 

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