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Before the Committee on Oversight and Government Reform, House of 

United States Government Accountability Office: 


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

Thursday, February 8, 2007: 

Homeland Security: 

Observations on the Department of Homeland Security's Acquisition 
Organization and on the Coast Guard's Deepwater Program: 

Statement of David M. Walker: 
Comptroller General of the United States: 


GAO Highlights: 

Highlights of GAO-07-436T, a testimony to Committee on Energy and 
Natural Resources, U.S. Senate 

Why GAO Did This Study: 

The U.S. insular area of the Commonwealth of the Northern Mariana 
Islands (CNMI) is a self-governing commonwealth of the United States 
that comprises 14 islands in the North Pacific. In a December 2006 
report—U.S. Insular Areas: Economic, Fiscal, and Financial 
Accountability Challenges (GAO-07-119)—regarding four insular areas 
including CNMI, GAO identified and reported the following: (1) economic 
challenges, including the effect of changing tax and trade laws on 
their economies; (2) fiscal condition; and (3) financial 
accountability, including compliance with the Single Audit Act. The 
Chairman of the Senate Committee on Energy and Natural Resources, which 
requested the December 2006 report, asked GAO to present and discuss 
the results as they pertain to CNMI. Our summary and conclusions are 
based on our work performed for our December 2006 report on U.S. 
insular areas. For this testimony we also had available CNMI’s fiscal 
year 2005 audited financial statements, which we have included in our 
review, along with some recent developments in fiscal year 2006. 

What GAO Found: 

The Commonwealth of the Northern Mariana Islands (CNMI) faces serious 
economic, fiscal, and financial accountability challenges. CNMI’s 
economy depends heavily on two industries, garment manufacturing and 
tourism. However, recent changes in U.S. trade law have increased 
foreign competition for CNMI’s garment industry, while other external 
events have negatively affected its tourism sector. 

CNMI’s garment industry has declined in recent years with factory 
closings and reduced production. The value of garment shipments to the 
United States dropped by more than 16 percent between 2004 and 2005 and 
by an estimated 25 percent in 2006. 

Tourism in CNMI declined sharply in the late 1990s as a result of a 
series of external events, including the Asian financial crisis; 
cancellation of Korean Air service; and fears of international crises 
such as the SARS epidemic, terrorism, and the Iraq war. In 2005, Japan 
Airlines withdrew direct flights to the capital. 

The fiscal condition of CNMI’s government has steadily weakened from 
fiscal year 2001 through fiscal year 2005, as government spending has 
exceeded revenues each year since 2002. CNMI ended fiscal year 2005 
with a deficit of $84.1 million in its governmental fund balance. 
CNMI’s liabilities also exceed its assets for its primary government. 
Indicators point to a severe financial crisis in fiscal year 2006. In 
response, the CNMI government has implemented cost-cutting and 
restructuring measures, including “austerity holidays,” consisting of 
biweekly furloughs during which government workers are not paid and 
many government operations are closed to reduce personnel and operating 

CNMI’s long-standing financial accountability problems include the late 
submission of financial audit reports, inability to achieve “clean” 
opinions in its financial statements by the independent financial 
auditors, and reports showing serious internal control weaknesses over 
financial reporting. Many of the auditors’ findings are longstanding, 
going back in some cases to 1987. 

Federal agencies and CNMI have sponsored and participated in 
conferences, training sessions, technical assistance, and other 
programs to improve CNMI’s economy, fiscal condition, and 
accountability. During 2006, the CNMI government took steps to reverse 
its prior patterns of deficit spending. It will need to continue to 
work toward long-term sustainable solutions, with concentrated 
attention on the challenges facing the islands and feedback mechanisms 
for continuing improvement. Leadership on the part of the CNMI 
government and the Department of the Interior’s Office of Insular 
Affairs is critical to providing long-term stability and prosperity for 
this U.S. insular area. 


To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Jeanette Franzel, (202) 

[End of section] 

Mr. Chairman and Members of the Committee: 

Thank you for inviting me here today to discuss our reviews of the 
Department of Homeland Security's (DHS) acquisition organization and 
the U.S. Coast Guard's Deepwater program. When it was established in 
March 2003, DHS faced the challenge of integrating 22 separate federal 
agencies and organizations with multiple missions, values, and cultures 
into one cabinet-level department.[Footnote 1] The success of this 
mammoth task--one of the biggest mergers ever to take place within the 
federal government--rests in large part on DHS's ability to implement 
the necessary management structure and processes for effectively 
acquiring goods and services. A wide range of contractor-provided 
products, technologies, and services are critical to the department's 
ability to achieve its mission of protecting the nation from terrorism. 
For example, DHS has purchased increasingly sophisticated screening 
equipment for air passenger security, acquired technologies to secure 
the nation's borders, and is upgrading the Coast Guard's offshore fleet 
of surface and air assets. 

In January 2003, we designated DHS's implementation and transformation 
as high risk because of the size and complexity of the effort and the 
existing challenges faced by the components being merged into the 
department.[Footnote 2] Although DHS has made some progress 
transforming its components into a fully functioning department, this 
transformation remains high risk.[Footnote 3] DHS has yet to implement 
a corrective action plan that includes a comprehensive transformation 
strategy, and its management systems--including those related to 
acquisition--are not yet integrated and wholly operational. DHS's 
acquisition systems will require continued attention to help prevent 
waste and ensure that DHS can allocate its resources efficiently and 

In fiscal year 2006, DHS reported obligating $15.6 billion in 
acquisitions, making it the third largest federal department in 
spending taxpayer dollars. DHS is undertaking large, complex 
investments as the federal government increasingly relies on 
contractors for roles and missions previously performed by government 
employees. Contractors have an important role to play in the discharge 
of the government's responsibilities, and in some cases the use of 
contractors can result in improved economy, efficiency, and 
effectiveness. At the same time, there may be occasions when 
contractors are used to provide certain services because the government 
lacks another viable and timely option. In such cases, the government 
may actually be paying more than if such services were provided by 
federal employees. In this environment of increased reliance on 
contractors, sound planning and contract execution are critical for 
success. We have previously identified the need to examine the 
appropriate role for contractors to be among the challenges in meeting 
the nation's defense needs in the 21st century.[Footnote 4] 

My statement today will focus on the overarching challenges DHS faces 
in creating an effective, integrated acquisition organization and will 
discuss our prior work on one of the department's most complex 
programs--the Coast Guard's Deepwater program. I will also discuss 
areas where we have related ongoing work. 

This testimony is based on our work on DHS's acquisition organization 
and the Deepwater program. That work was conducted in accordance with 
generally accepted government auditing standards. 


DHS faces challenges in creating an effective acquisition organization: 

* DHS has a stated goal of integrating the acquisition function more 
broadly across the department. We have reported that this goal has not 
yet been accomplished and have identified key impediments to achieving 
it. A management directive intended to integrate the acquisition line 
of business did not provide the Chief Procurement Officer with the 
enforcement authority needed in practice, and it does not pertain to 
the Coast Guard and Secret Service. Also, the procurement organizations 
within the department remained somewhat autonomous, and centralized 
acquisition oversight had not been implemented. While DHS's review 
process for major investments adopts some best practices, key decision- 
making reviews at certain points are not required. 

The Coast Guard's Deepwater program illustrates the type of problems 
that can occur when effective program management and contractor 
oversight are not in place: 

* From the outset, we have expressed concern about the risks involved 
with the Coast Guard's acquisition strategy for the Deepwater program. 
In 2004, we reported that well into the contract's second year, key 
components needed to manage the program and oversee the system 
integrator's performance had not been effectively implemented. For 
example, integrated product teams, comprised of government and 
contractor employees, are the Coast Guard's primary tool for managing 
the program and overseeing the contractor. We found that the teams had 
not been effective due to changing membership, understaffing, 
insufficient training, lack of authority for decision-making, and 
inadequate communication among members. We also reported that, despite 
documented problems in schedule, performance, cost control, and 
contract administration throughout the first year of the Deepwater 
contract, the contractor had received a rating of 87 percent, which 
fell in the "very good" range and resulted in an award fee of $4.0 
million of the maximum $4.6 million.[Footnote 5] In 2006, we reported 
that the Coast Guard had taken steps to address some of the problems we 
identified.[Footnote 6] However, the actions had not been adequate to 
resolve continuing concerns about program management and contractor 
oversight. In addition to these overall management issues, there have 
been problems with the design and performance of specific Deepwater 

We continue to review DHS's overall acquisition organization and the 
Deepwater program: 

* Clearly, the challenges DHS faces in establishing an effective, 
integrated acquisition organization will take some time to resolve. We 
are continuing to assess DHS's progress, as well as examining other 
aspects of its acquisition function such as its use of performance- 
based acquisitions. 

* Similarly, we continue to review the Deepwater program as it moves 
into the 5TH year of the contract. We recognize that a variety of 
factors have contributed to the problems we have identified. In some 
cases, the Coast Guard has taken actions to improve outcomes; in other 
cases it has either not taken action or actions taken to date have not 
been effective. We are currently doing work on Deepwater for the House 
and Senate Appropriations Committees. When we complete our work in 
several months, we would be happy to provide our results to this 

Challenges to Creating an Integrated Acquisition Function at DHS: 

We have reported in the past on acquisition management at several 
components of DHS. We have also assessed the department's overall 
acquisition management efforts. [Footnote 7] A common theme in these 
reports is DHS's struggle, from the outset, to provide adequate 
procurement support to its mission components and to provide 
departmentwide oversight of its acquisition function. Of the 22 
components that initially joined DHS from other agencies, only 7 came 
with their own procurement support. An eighth office, the Office of 
Procurement Operations, was created anew to provide support to a 
variety of DHS entities--but not until January 2004, almost a year 
after the department was created. DHS has established a goal of 
aligning procurement staffing levels with contract spending at its 
various components by the last quarter of fiscal year 2009. 

DHS has set forth a stated goal of integrating the acquisition function 
more broadly across the department. However, the goal has not been 
accomplished. In March 2005, we identified key factors impeding 
accomplishment of the department's objective, including limitations of 
a 2004 management directive and lack of departmentwide oversight of 
component acquisition organizations. We also identified potential gaps 
in the department's knowledge-based approach for reviewing its major, 
complex investments. On a related issue, a number of systemic 
acquisition challenges we have identified at the Department of Defense 
could apply equally to DHS. 

Management Directive Has Limitations: 

In October 2004, the Secretary of DHS signed a management directive 
entitled "Acquisition Line of Business Integration and Management," the 
department's principal guidance for leading, governing, integrating, 
and managing the acquisition function. It directs managers from each 
component organization to commit resources to training, development, 
and certification of acquisition professionals. It also highlights the 
Chief Procurement Officer's broad authority, including management, 
administration, and oversight of departmentwide acquisition. 

However, we have reported that the directive may not achieve its goal 
of creating an integrated acquisition organization because it creates 
unclear working relationships between the Chief Procurement Officer and 
heads of DHS's principal components. For example, the Chief Procurement 
Officer and the director of Immigration and Customs Enforcement share 
responsibility for recruiting and selecting key acquisition officials, 
preparing performance ratings for the top manager of the contracting 
office, and providing appropriate resources to support procurement 
initiatives. The policy leaves unclear how the responsibilities will be 
implemented or what enforcement authority the Chief Procurement Officer 
has to ensure that initiatives are carried out. 

Further, the directive does not apply to the Coast Guard or Secret 
Service, two entities that are required by the Homeland Security Act of 
2002[Footnote 8] to be maintained as distinct entities within DHS. 
According to the directive, the Coast Guard and Secret Service are 
exempted by statute. We are not aware of any explicit statutory 
exemption that would prevent the application of this directive. Nothing 
in the document would reasonably appear to threaten the status of these 
entities as distinct entities within the department or otherwise impair 
their ability to perform statutory missions. DHS's General Counsel has 
agreed, telling us that the applicability of the directive is a policy, 
not legal, matter. Excluding certain components from complying with 
management directives regarding the acquisition function hampers 
efforts to integrate the acquisition organization. The Coast Guard, for 
example, is one of the largest organizations within DHS. 

Procurement Organizations are Somewhat Autonomous and Lack 
Departmentwide Oversight: 

We have reported that DHS's principal organizations are, to a large 
extent, still functioning much as they did in pre-merger days with 
regard to acquisition-related functions. Embedded within the seven 
procurement organizations that came to DHS were, for the most part, the 
same contracting staffs that joined the department from their former 
agencies.[Footnote 9] In addition, the Chief Procurement Officer, who 
is held accountable for departmentwide management and oversight of the 
acquisition function, lacks the enforcement authority and has limited 
resources to ensure compliance with acquisition policies and processes. 
As of August 2006, according to DHS officials, only five staff were 
assigned to departmentwide oversight responsibilities. The officials 
told us that, because their small staff faces the competing demands of 
providing departmentwide oversight and providing acquisition support 
for urgent needs at the component level, they have focused their 
efforts on procurement execution rather than oversight. Our prior work 
shows that in a highly functioning acquisition organization, the chief 
procurement officer is in a position to oversee compliance by 
implementing strong oversight mechanisms.[Footnote 10] Adequate 
oversight of acquisition activities across DHS is imperative, in light 
of the department's mission and the problems that have been reported by 
us and inspectors general for some of the large components within the 

Knowledge-based Acquisition Review Process: 

Some DHS organizations have large, complex, and high-cost acquisition 
programs--such as the Coast Guard's Deepwater program--that need to be 
closely managed. DHS's investment review process involves several 
different levels of review, depending on the dollar threshold and risk 
level of the program. Deepwater, for example, has been designated as a 
level 1 investment, meaning that it is subject to review at the highest 
levels within the department. We reported in 2005 that DHS's framework 
for reviewing its major investments adopts several best practices from 
lessons learned from leading commercial companies and successful 
federal programs that, if applied consistently, could refine its 
ability to reduce risk to meet cost and delivery targets.[Footnote 11] 
One of these best practices is a knowledge-based approach for managers 
to hold reviews at key decision points in order to reduce risk before 
investing resources in the next phase of a program's development. For 
example, DHS's investment review policy encourages program managers to 
demonstrate a product's design with critical design reviews prior to a 
production decision. 

However, we have found that, based on our extensive body of work on 
this knowledge-based approach, additional program reviews could be 
incorporated into the process as internal controls to better position 
DHS to make well-informed decisions on its major, complex investments. 
For example, DHS does not require a review to ensure that an 
investment's design performs as expected before investing in a 
prototype. We also reported that DHS review processes permitted low- 
rate initial production to be well underway before a mandatory review 
gave the go-ahead to proceed to production. A review prior to 
initiating low-rate initial production was not mandatory; rather, it 
was held at the discretion of the Investment Review Board (IRB). Our 
best practices work shows that successful investments reduce risk by 
ensuring that high levels of knowledge are achieved at these key points 
of development. We have found that investments that were not reviewed 
at the appropriate points faced problems--such as redesign--that 
resulted in cost increases and schedule delays. It is not clear how the 
Deepwater acquisition has been influenced by the department's 
investment review process. According to a DHS official, an IRB review 
of the Deepwater acquisition program baseline, scheduled for January 
2007, was postponed. 

In its Performance and Accountability Report for fiscal year 2006, DHS 
stated that it has improved its process for investment reviews by 
providing greater clarity on DHS policies and procedures. It 
acknowledges that developing and maintaining the capability needed to 
achieve DHS missions requires a robust investment program. DHS also 
states that its components are now required to report on the status of 
major investments on a quarterly basis and to submit information to 
ensure that investments are staying within established baselines for 
cost, schedule, and performance. The report says that the department 
will identify and introduce acquisition best practices into the 
investment review process by the first quarter of fiscal year 2008. 

Systemic Acquisition Challenges: 

We have identified a series of systemic acquisition challenges for 
complex, developmental systems, based mostly on our reviews of 
Department of Defense programs. In principle, many may apply equally to 
DHS as it moves forward with its major, complex investments. Some of 
these challenges include: 

* Program requirements are often set at unrealistic levels, then 
changed frequently as recognition sets in that they cannot be achieved. 
As a result, too much time passes, threats may change, and/or members 
of the user and acquisition communities may simply change their minds. 
The resulting program instability causes cost escalation, schedule 
delays, fewer quantities, and reduced contractor accountability. 

* Program decisions to move into design and production are made without 
adequate standards or knowledge. 

* Contracts, especially service contracts, often do not have measures 
in place at the outset in order to control costs and facilitate 

* Contracts typically do not accurately reflect the complexity of 
projects or appropriately allocate risk between the contractors and the 

* The acquisition workforce faces serious challenges (e.g. size, 
skills, knowledge, succession planning). 

* Incentive and award fees are often paid based on contractor attitudes 
and efforts versus positive results, such as cost, quality, and 

* Inadequate government oversight results in little to no 
accountability for recurring and systemic problems. 

Deepwater Program Is Illustrative of Problems Stemming from Lack of 
Effective Program Management and Contractor Oversight: 

The Deepwater program is the Coast Guard's major effort to replace or 
modernize its aircraft and vessels. It has been in development for a 
number of years. Between 1998 and 2001, three industry teams competed 
to identify and provide the assets needed to transform the Coast Guard. 
In 2001, we described the Deepwater project as "risky" due to the 
unique, untried acquisition strategy for a project of this magnitude 
within the Coast Guard.[Footnote 12] Rather than using the traditional 
approach of replacing classes of ships or aircraft through a series of 
individual acquisitions, the Coast Guard chose to use a system-of- 
systems acquisition strategy that would replace its deteriorating 
assets with a single, integrated package of aircraft, vessels, and 
unmanned aerial vehicles, to be linked through systems that provide 
C4ISR,[Footnote 13] and supporting logistics. 

System Integrator Concept and the Role of Contractors: 

In June 2002, the Coast Guard awarded the Deepwater contract to 
Integrated Coast Guard Systems (ICGS). ICGS--a business entity jointly 
owned by Northrop Grumman and Lockheed Martin--is a system integrator, 
responsible for designing, constructing, deploying, supporting, and 
integrating the Deepwater assets to meet Coast Guard requirements. The 
management approach of using a system integrator has been used on other 
government programs that require system-of-systems integration, such as 
the Army's Future Combat System, a networked family of weapons and 
other systems. This type of business arrangement gives the contractor 
extensive involvement in requirements development, design, and source 
selection of major system and subsystem subcontractors. 

Government agencies have turned to the system integrator approach when 
they believe they do not have the in-house capability to design, 
develop, and manage complex acquisitions. Giving contractors more 
control and influence over the government's acquisitions in a system 
integrator role creates a potential risk that program decisions and 
products could be influenced by the financial interest of the 
contractor (who is accountable to its shareholders), which may not 
match the primary interest of the government--maximizing its return on 
taxpayer dollars. The system integrator arrangement creates an inherent 
risk, as the contractor is given more discretion to make certain 
program decisions. Along with this greater discretion comes the need 
for more government oversight and an even greater need to develop well- 
defined outcomes at the outset. 

The proper role of contractors in providing services to the government 
is currently the topic of some debate. I believe there is a need to 
focus greater attention on what type of functions and activities should 
be contracted out and which ones should not. There is also a need to 
review and reconsider the current independence and conflict of interest 
rules relating to contractors. Finally, there is a need to identify the 
factors that prompt the government to use contractors in circumstances 
where the proper choice might be the use of civil servants or military 
personnel. Possible factors could include inadequate force structure, 
outdated or inadequate hiring policies, classification and compensation 
approaches, and inadequate numbers of full-time equivalent slots. 

Performance-based Acquisition: 

The Deepwater program has also been designated as a performance-based 
acquisition. When buying services, federal agencies are currently 
required to employ--to the maximum extent feasible--this concept, 
wherein acquisitions are structured around the results to be achieved 
as opposed to the manner in which the work is to be performed. That is, 
the government specifies the outcome it requires while leaving the 
contractor to propose decisions about how it will achieve that outcome. 
Performance-based contracts for services are required to include a 
performance work statement; measurable performance standards (i.e., in 
terms of quality, timeliness, quantity, etc.) and the method of 
assessing contractor performance against these standards; and 
performance incentives, where appropriate. If performance-based 
acquisitions are not appropriately planned and structured, there is an 
increased risk that the government may receive products or services 
that are over cost estimates, delivered late, and of unacceptable 

Assessments of Deepwater Program: 

In 2001, we reported that the Deepwater project faced risks, including 
the ability to control costs in the contract's later years; ensuring 
that procedures and personnel were in place for managing and overseeing 
the contractor; and minimizing potential problems with developing 
unproven technology.[Footnote 14] We noted that the risks could be 
mitigated to varying degrees, but not without management attention. Our 
assessment of the Deepwater program in 2004 found that the Coast Guard 
had not effectively managed the program or overseen the system 
integrator.[Footnote 15] We reported last year that the Coast Guard had 
revised its Deepwater implementation plan to reflect additional 
homeland security responsibilities as a result of the September 11, 
2001, terrorist attacks.[Footnote 16] The revised plan increased 
overall program costs from the original estimate of $17 billion to $24 
billion. Overall, the acquisition schedule was lengthened by 5 years, 
with the final assets now scheduled for delivery in 2027. 

Our reported concerns in 2004 and in subsequent assessments in 2005 and 
2006 have centered on three main areas: program management, contractor 
accountability, and cost control through competition. While we 
recognize that the Coast Guard has taken steps to address our findings 
and recommendations, aspects of the Deepwater program will require 
continued attention, such as the risk involved in the system-of-systems 
approach with the contractor acting as overall integrator. A project of 
this magnitude will likely continue to experience other problems as 
more becomes known. 

Program Management: 

In 2004, we reported that more than a year and a half into the 
Deepwater contract, the key components needed to manage the program and 
oversee the system integrator had not been effectively implemented. For 
example, integrated product teams, comprised of government and 
contractor employees, are the Coast Guard's primary tool for managing 
the program and overseeing the contractor. We found that the teams had 
not been effective due to changing membership, understaffing, 
insufficient training, lack of authority for decision making, and 
inadequate communication among members. 

Although some efforts have been made to improve the effectiveness of 
the integrated product teams, we have found that the needed changes are 
not yet sufficiently in place. In 2005, we reported that decision 
making was to a large extent stove-piped, and some teams lacked 
adequate authority to make decisions within their realm of 
responsibility.[Footnote 17] One source of difficulty for some team 
members has been the fact that each of the two major subcontractors has 
used its own management systems and processes to manage different 
segments of the program. We noted that decisions on air assets were 
made by Lockheed Martin, while decisions regarding surface assets were 
made by Northrop Grumman. This approach can lessen the likelihood that 
a system-of-systems outcome will be achieved if decisions affecting the 
entire program are made without the full consultation of all parties 
involved. In 2006, we reported that Coast Guard officials believed 
collaboration among the subcontractors to be problematic and that ICGS 
wielded little influence to compel decisions among them. For example, 
when dealing with proposed design changes to assets under construction, 
ICGS submitted the changes as two separate proposals from both 
subcontractors rather than coordinating the separate proposals into one 
coherent plan. According to Coast Guard performance monitors, this 
approach complicates the government review of design changes because 
the two proposals often carried overlapping work items, thereby forcing 
the Coast Guard to act as the system integrator in those situations. 

In addition, we reported in 2004 that the Coast Guard had not 
adequately communicated to its operational personnel decisions on how 
new and old assets would be integrated and how maintenance 
responsibilities would be divided between government and contractor 
personnel. We also found that the Coast Guard had not adequately 
staffed its program management function. Despite some actions taken to 
more fully staff the Deepwater program, we reported that in January 
2005 shortfalls remained. While 244 positions were assigned to the 
program, only 206 were filled, resulting in a 16 percent vacancy rate. 

Contractor Accountability: 

In 2004, we found that the Coast Guard had not developed quantifiable 
metrics to hold the system integrator accountable for its ongoing 
performance and that the process by which the Coast Guard assessed 
performance after the first year of the contract lacked rigor. For 
example, the first annual award fee determination was based largely on 
unsupported calculations. Despite documented problems in schedule, 
performance, cost control, and contract administration throughout the 
first year, the program executive officer awarded the contractor an 
overall rating of 87 percent, which fell in the "very good" range. This 
rating resulted in an award fee of $4.0 million of the maximum of $4.6 

We also reported in 2004 that the Coast Guard had not begun to measure 
the system integrator's performance on the three overarching goals of 
the Deepwater program--maximizing operational effectiveness, minimizing 
total ownership costs, and satisfying the customers. Coast Guard 
officials told us that metrics for measuring these objectives had not 
been finalized; therefore they could not accurately assess the 
contractor's performance against the goals. However, at the time, the 
Coast Guard had no time frame in which to accomplish this measurement. 

Cost Control through Competition: 

In 2004, we reported that, although competition among subcontractors 
was a key vehicle for controlling costs, the Coast Guard had neither 
measured the extent of competition among the suppliers of Deepwater 
assets nor held the system integrator accountable for taking steps to 
achieve competition.[Footnote 18] As the two major subcontractors to 
ICGS, Lockheed Martin and Northrop Grumman have sole responsibility for 
determining whether to provide the Deepwater assets themselves or to 
hold competitions--decisions commonly referred to as "make or buy." We 
noted that the Coast Guard's hands-off approach to make-or-buy 
decisions and its failure to assess the extent of competition raised 
questions about whether the government would be able to control 
Deepwater program costs. 

Failure to control costs can result in waste of taxpayer dollars. Along 
with my several colleagues in the accountability community, I have 
developed a definition of waste. As we see it, waste involves the 
taxpayers in the aggregate not receiving reasonable value for money in 
connection with any government funded activities due to an 
inappropriate act or omission by players with control over or access to 
government resources (e.g., executive, judicial or legislative branch 
employees, contractors, grantees or other recipients). Importantly, 
waste involves a transgression that is less than fraud and abuse and 
most waste does not involve a violation of law. Rather, waste relates 
primarily to mismanagement, inappropriate actions, or inadequate 

Status of Recommendations: 

We made 11 recommendations in 2004 in the areas of management and 
oversight, contractor accountability, and cost control through 
competition. In April 2006, we reported that the Coast Guard had 
implemented five of them. Actions had been taken to: 

* revise the Deepwater human capital plan; 

* develop measurable award fee criteria; 

* implement a more rigorous method of obtaining input from Coast Guard 
monitors on the contractor's performance; 

* include in the contractor's performance measures actions taken to 
improve the integrated product teams' effectiveness; and: 

* require the contractor to notify the Coast Guard of subcontracts over 
$10 million that were awarded to the two major subcontractors.[Footnote 

The Coast Guard had begun to address five other recommendations by: 

* initiating actions to establish charters and training for integrated 
product teams; 

* improving communications with field personnel regarding the 
transition to Deepwater assets; 

* devising a time frame for measuring the contractor's progress toward 
improving operational effectiveness; 

* establishing criteria to determine when to adjust the project 
baseline; and: 

* developing a plan to hold the contractor accountable for ensuring 
adequate competition among suppliers. 

We determined that, based on our work, these recommendations had not 
been fully implemented. 

The Coast Guard disagreed with and declined to implement one of our 
recommendations, to establish a baseline to determine whether the 
system-of-systems acquisition approach is costing the government more 
than the traditional asset replacement approach. While we stand behind 
our original recommendation, the Coast Guard maintains that the cost to 
implement this recommendation would be excessive. 

Performance and Design Problems: 

In addition to overall management issues discussed above, there have 
been problems with the design and performance of specific Deepwater 
assets. For example, in February 2006, the Coast Guard suspended design 
work on the Fast Response Cutter (FRC) due to design risks such as 
excessive weight and horsepower requirements.[Footnote 20] The FRC was 
intended as a long-term replacement for the legacy 110-foot patrol 
boats. Coast Guard engineers raised concerns about the viability of the 
FRC design (which involved building the FRC's hull, decks, and 
bulkheads out of composite materials rather than steel) beginning in 
January 2005. In February 2006, the Coast Guard suspended FRC design 
work after an independent design review by third-party consultants 
demonstrated, among other things, that the FRC would be far heavier and 
less efficient than a typical patrol boat of similar length, in part, 
because it would need four engines to meet Coast Guard speed 

In moving forward with the FRC acquisition, the Coast Guard will end up 
with two classes of FRCs. The first class of FRCs to be built would be 
based on an adapted design from a patrol boat already on the market to 
expedite delivery. The Coast Guard would then pursue development of a 
follow-on class that would be completely redesigned to address the 
problems in the original FRC design plans. Coast Guard officials now 
estimate that the first FRC delivery will slip to fiscal year 2009, at 
the earliest, rather than 2007 as outlined in the 2005 Revised 
Deepwater Implementation Plan. 

In addition to problems with the FRC design, problems have also been 
discovered with the long-term structural integrity of the National 
Security Cutter's (NSC) design, which could pose operational and 
financial impacts to the Coast Guard. The Commandant of the Coast Guard 
recently stated that internal reviews by Coast Guard engineers, as well 
as by independent analysts have concluded that the NSC as designed will 
need structural reinforcement to meet its expected 30-year service 
life. In addition, a recent report by the DHS Inspector General 
indicated that the NSC design will not achieve a 30-year service life 
based on an operating profile of 230 days underway per year in General 
Atlantic and North Pacific sea conditions and added that Coast Guard 
technical experts believe the NSC's design deficiencies will lead to 
increased maintenance costs and reduced service life.[Footnote 21] 

In an effort to address the structural deficiencies of the NSC, the 
Commandant has stated that the Coast Guard is taking a two-pronged 
approach. First, the Coast Guard is working with the contractors to 
enhance the structural integrity of hulls three through eight that have 
not yet been constructed. Second, after determining that the NSC's 
structural deficiencies are not related to the safe operation of the 
vessel in the near term, the Coast Guard has decided to address the 
deficiencies of hulls one and two as part of depot-level maintenance, 
planned for several years after they are delivered. The Commandant 
stated that he decided to delay the repairs to the first two NSC hulls 
in an effort to prevent further cost increases or delays in 
construction and delivery. 

Further, the Deepwater program's conversion of the legacy 110-foot 
patrol boats to 123-foot patrol boats has also encountered performance 
problems. The Coast Guard had originally intended to convert all 49 of 
its 110-foot patrol boats into 123-foot patrol boats in order to 
increase the patrol boats' annual operational hours. This conversion 
program was also intended to add additional capability to the patrol 
boats, such as enhanced and improved C4ISR capabilities, as well as 
stern launch and recovery capability for a small boat. However, the 
converted 123-foot patrol boats began to display deck cracking and hull 
buckling and developed shaft alignment problems, and the Coast Guard 
elected to stop the conversion process at eight hulls upon determining 
that the converted patrol boats would not meet their expanded post-9/11 
operational requirements. 

Problems Have Operational Consequences: 

The design and performance problems illustrated above have clear 
operational consequences for the Coast Guard. In the case of the 123- 
foot patrol boats, the hull performance problems cited above led the 
Coast Guard to suspend all normal operations of the eight converted 
normal 123-foot patrol boats effective November 30, 2006. The 
Commandant of the Coast Guard has stated that having reliable, safe 
cutters is "paramount" to executing its missions, such as search and 
rescue and migrant interdiction.[Footnote 22] The Coast Guard is 
exploring options to address operational gaps resulting from the 
suspension of the 123-foot patrol boat operations. 

In regard to the suspension of FRC design work, as of our June 2006 
report, Coast Guard officials had not yet determined how changes in the 
design and delivery date for the FRC would affect the operations of the 
overall system-of-systems approach. However, because the delivery of 
Deepwater assets are interdependent within this acquisition approach, 
schedule slippages and uncertainties associated with potential changes 
in the design and capabilities of the new assets have increased the 
risks that the Coast Guard may not meet its expanded homeland security 
performance requirements within given budget parameters and milestone 

Additional Reviews Ongoing: 

Given the size of DHS and the scope of its acquisitions, we are 
continuing to assess the department's acquisition oversight process and 
procedures in ongoing work. For example, we are currently reviewing 
DHS's use of contractors to provide management and professional 
services, including the roles they are performing and how their 
performance is overseen. In addition, the conference report to the 
Department of Homeland Security Appropriations Act for Fiscal Year 
2007[Footnote 23] directed DHS's Chief Procurement Officer to develop a 
procurement oversight plan, identifying necessary oversight resources 
and how improvements in the department's performance of its procurement 
functions will be achieved. We have been directed to review the plan 
and provide our observations to congressional committees. We are also 
reviewing the department's use of performance-based acquisitions. 

We will also continue to review Deepwater implementation and contract 
oversight. We are currently reviewing aspects of the Deepwater program 
for the House and Senate Appropriations Committees' Subcommittees on 
Homeland Security.[Footnote 24] Our objectives are to review (1) the 
status of the development and delivery of the major aviation and 
maritime assets that comprise the Coast Guard's Deepwater program; (2) 
the history of the contract, design, fielding, and grounding of the 
converted 123-foot patrol boats and operational adjustments the Coast 
Guard making to account for the removal from service of the 123-foot 
patrol boats; and (3) the status of the Coast Guard's implementation of 
our 2004 recommendations on Deepwater contract management for improving 
Deepwater program management, holding the prime contractor accountable 
for meeting key program goals, and facilitating cost control through 
competition. We will share our results with those committees in April 
of this year. 

Concluding Observations: 

Due to the complexity of its organization, DHS is likely to continue to 
face challenges in unifying the acquisition functions of its components 
and overseeing their acquisitions--particularly those involving large 
and complex investments. Although the Coast Guard has taken actions to 
improve its management of the Deepwater program and oversight of the 
system integrator, problems continue to emerge as the program is 
implemented. DHS and the Coast Guard face the challenge of effectively 
managing this program to obtain desired outcomes while making decisions 
that are in the best interest of the taxpayer. Given its experience 
with Deepwater, the department would be wise to apply lessons learned 
to its other major, complex acquisitions, particularly those involving 
a system integrator. 

Mr. Chairman, that concludes my statement. I would be happy to respond 
to any questions you or other Members of the Committee may have at this 

Contacts and Acknowledgements: 

For information about this testimony, contact Steve Caldwell at (202) 
512-9610 or John Hutton at (202) 512-7773. Other individuals making key 
contributions to this testimony include Michele Mackin, Christopher 
Conrad, and Adam Couvillion. 


[1] When the department was established, 22 agencies and organizations 
were brought in; Plum Island Animal Disease Center joined DHS afterward 
as the 23rd. 

[2] GAO, High-Risk Series: An Update, GAO-03-119 (Washington, D.C.: 
January 2003). 

[3] GAO, High-Risk Series: An Update, GAO-07-310 (Washington, D.C.: 
January 2007). 

[4] GAO, 21st Century Challenges: Reexamining the Base of the Federal 
Government, GAO-05-325SP (Washington, D.C.: February 2005). 

[5] We recently reported on the Department of Defense's use of award 
and incentive fees. 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). 

[6] GAO, Coast Guard: Changes to Deepwater Appear Sound, and Program 
Management Has Improved, but Continued Monitoring Is Warranted, GAO-06-
546 (Washington, D.C.: Apr. 28, 2006). 

[7] GAO, Contract Management: INS Contracting Weaknesses Need Attention 
from the Department of Homeland Security, GAO-03-799 (Washington, D.C.: 
July 25, 2003); Transportation Security Administration: High-Level 
Attention Needed to Strengthen Acquisition Function, GAO-04-544 
(Washington, D.C.: May 28, 2004); and Homeland Security: Successes and 
Challenges in DHS's Efforts to Create an Effective Acquisition 
Organization, GAO-05-179 (Washington, D.C.: Mar. 29, 2005). 

[8] Pub. L. No. 107-296, §§ 821, 888, 116 Stat. 2135 (2002). 

[9] GAO-05-179. 

[10] GAO, Best Practices: Taking a Strategic Approach Could Improve 
DOD's Acquisition of Services, GAO-02-230 (Washington, D.C.: Jan. 18, 

[11] GAO-05-179. 

[12] GAO, Coast Guard: Progress Being Made on Deepwater Project, but 
Risks Remain, GAO-01-564 (Washington, D.C.: May 2, 2001). 

[13] C4ISR refers to command, control, communications, computer, 
intelligence, surveillance, and reconnaissance. 

[14] GAO-01-564. 

[15] GAO, Contract Management: Coast Guard's Deepwater Program Needs 
Increased Attention to Management and Contractor Oversight, GAO-04-380 
(Washington, D.C.: Mar. 9, 2004). 

[16] GAO-06-546. 

[17] GAO, Coast Guard: Progress Being Made on Addressing Legacy Asset 
Condition Issues and Program Management, but Acquisition Challenges 
Remain, GAO-05-757 (Washington, D.C.: July 22, 2005). 

[18] GAO-04-380. 

[19] Our 2004 recommendation was to use a $5 million threshold because 
Lockheed Martin, one of the major subcontractors, uses that amount as 
the threshold for considering its suppliers major. The Coast Guard 
decided to use the $10 million threshold based on the criteria in the 
make-or-buy program provisions of the Federal Acquisition Regulation. 

[20] GAO, Coast Guard: Status of Deepwater Fast Response Cutter Design 
Efforts, GAO-06-764 (Washington, D.C.: June 23, 2006). 

[21] Department of Homeland Security, Office of Inspector General, 
Acquisition of the National Security Cutter, U.S. Coast Guard, OIG-07- 
23 (Washington, D.C.: Jan. 23, 2007). 

[22] Coast Guard Suspends Converted Patrol Boat Operations, November 
30, 2006, U.S. Coast Guard, Office of Public Affairs. 

[23] H.R. Conf. Rep. No. 109-699, at 118 (2006). 

[24] This work is based on Conference Committee Report language (H.R. 
Conf. Rep. No. 109-699, at 118 (2006)) incorporating GAO reporting 
provisions contained in a House Appropriations Committee Report (H.R. 
Rep. No. 109-476, at 15 (2006)). 

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