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GAO-14-547R: 

United States Government Accountability Office: 
GAO:
441 G St. N.W. 
Washington, DC 20548: 

May 29, 2014: 

Congressional Committees: 

Defense Acquisitions: Assessment of Institute for Defense Analyses' C-
130 Avionics Modernization Program Analysis: 

The Air Force's C-130 Avionics Modernization Program (AMP), which 
entered development in 2001, was to standardize and upgrade the 
cockpit and avionics for various configurations of the C-130 fleet. 
The C-130, a four-engine turboprop aircraft also known as "Hercules" 
that is used primarily for military transport, was originally designed 
in the 1950s. The AMP upgrades were intended to ensure that the C-130 
can satisfy the navigation and safety requirements it needs to operate 
globally while at the same time reducing crew size by one. The program 
would also have replaced many systems for which manufacturers no 
longer exist--a situation referred to as diminishing manufacturing 
sources. 

In 2007, the program experienced a critical breach of a statutory cost 
threshold,[Footnote 1] and in February 2012, the Department of Defense 
(DOD) proposed canceling the C-130 AMP. The National Defense 
Authorization Act for Fiscal Year 2013 (NDAA) stated that the 
Secretary of the Air Force may not cancel the program until 90 days 
after the Secretary provided the Congressional defense committees a 
cost benefit analysis conducted by the Institute for Defense Analyses 
(IDA). The NDAA required the Secretary to seek an agreement with IDA 
to conduct an independent study of the costs and benefits of upgrading 
and modernizing the legacy C-130H airlift fleet via AMP compared to 
the costs and benefits of a reduced-scope program.[Footnote 2] IDA 
began its work in March 2013 and produced the required study in 
September 2013, followed by a detailed annex in December 2013. 
[Footnote 3] The National Defense Authorization Act for Fiscal Year 
2014 mandated that we review IDA's analysis.[Footnote 4] This report 
describes IDA's study and provides our assessment. 

To conduct this work, we obtained IDA's September 2013 study of the C-
130 modernization alternatives and associated December 2013 Annex and 
reviewed the data and assumptions that IDA used to reach its 
conclusions and recommendations. GAO focused its assessment on IDA's 
cost estimates and did not assess the operational effectiveness 
portion of IDA's study as estimated costs were the major 
discriminating factor in IDA's conclusions. We compared how IDA's 
estimates were developed to the cost-estimating best practices 
outlined in the GAO Cost Estimating and Assessment Guide.[Footnote 5] 
Specifically, we analyzed the extent to which IDA's cost estimates met 
the characteristics of high-quality cost estimates. We also discussed 
the study results with relevant DOD officials. In addition, we 
reviewed IDA's C-130 AMP annex report to determine the methodologies 
used to support its findings. More detail on our methodology in 
applying the cost estimating best practices identified in the GAO Cost 
Estimating Guide can be found in enclosures II and III. 

We conducted this performance audit from February 2014 through May 
2014 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform our 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. 

Results in Brief: 

IDA's study is comprised of two key components: (1) its estimate of 
the costs of AMP and two reduced scope alternatives referred to as 
Options A and B, which offer fewer avionics upgrades than AMP and, 
unlike AMP, would both require a navigator in the cockpit: and (2) its 
assessment of the operational effectiveness--that is, benefits--of AMP 
and each alternative. IDA estimated that AMP's costs for research, 
development, test and evaluation (RDT&E), procurement, and operation 
and support (O&S) over a 25-year period would total $2.137 billion--
significantly higher than the estimated $1.531 billion for Option A 
and $530 million for Option B. Regarding benefits, IDA found that the 
lower-cost options offered nearly as much capability as AMP, and the 
study concluded that the Air Force should not pursue the C-130 AMP 
program as currently defined. 

We found that IDA's cost analysis generally followed best practices 
for high-quality cost estimates, which are critical to the success of 
any program. We analyzed the cost estimating methodology IDA used in 
its study compared to best practices and found that IDA's study 
substantially met two of the characteristics expected of high-quality 
cost estimates--that they be comprehensive and credible--and partially 
met the remaining two characteristics--being well-documented and 
accurate. 

Background: 

When the C-130 AMP entered development in 2001, it was intended for 20 
variants of the C-130 for a total of 519 aircraft. In June 2007, 
following the program's critical Nunn-McCurdy breach, DOD conducted a 
five-month review. Subsequently, in accordance with 10 U.S.C. § 2433, 
the Under Secretary of Defense for Acquisition, Technology and 
logistics certified the C-130 AMP program to Congress, but for a 
reduced number of 222 aircraft. 

The C-130 AMP entered production in 2010, and five aircraft were 
produced before production was halted. Figure 1 shows the cockpit of a 
C-130 with AMP. 

Figure 1: Cockpit of a C-130 with AMP: 

[Refer to PDF for image: photograph] 

Source: C-130 AMP Program Office. 

[End of figure] 

In the President's Budget for Fiscal Year 2013, DOD did not propose 
any funding for the C-130 AMP, which would have effectively canceled 
the program in favor of a minimum Communication, Navigation, 
Surveillance/Air Traffic Management (CNS/ATM) solution for the legacy 
C-130 combat delivery fleet. According to DOD, CNS/ATM would address 
diminishing manufacturing source issues and complete fleet 
modifications to meet required navigation performance mandated by 
2020. Congress did not authorize any modifications to the program, but 
rather required IDA's cost-benefit study of the issue. 

IDA Study Examined Lower-Cost Options to the C-130 AMP: 

IDA's cost-benefit analysis of C-130 AMP and alternative options is 
comprised of two key components: its estimate of the costs of AMP and 
the alternatives, and its assessment of the operational effectiveness--
that is, benefits--of AMP and each of the alternatives. In addition to 
AMP, IDA examined reduced-scope alternatives it referred to as Options 
A and B. It reported that AMP was the most sophisticated of the three 
alternatives and Option B the least. IDA's study noted that they 
differ in many details. For example, the alternatives differ with 
respect to level of area navigation and required navigation 
performance, potentially imposing future restrictions on airfield 
access for Options A and B and aircraft routing for Option B. IDA also 
noted that the most significant difference is the removal of the 
navigator from the cockpit allowed by the degree of automation, a head-
up display and advanced flight assistance equipment by the AMP 
alternative.[Footnote 6] Both Options A and B would have fewer 
avionics upgrades than AMP and would require the navigator. Unlike 
Option B, Option A would replace older technology gauges with multi-
function displays, as would AMP. In addition, unlike AMP and IDA's 
Option A, Option B would not replace the current self-contained 
navigation system (SCNS) with a more modern SCNS capable of higher 
location and planning precision. IDA concluded that the lower-cost 
options to C-130 AMP had nearly as much capability and that the Air 
Force should not pursue the C-130 AMP program as currently defined. 

To provide the cost portion of the cost-benefit analysis, IDA 
developed 25-year cost estimates for the alternatives and assessed 
their operational implications. IDA developed estimates for RDT&E, 
procurement, and O&S for the alternatives and combined those estimates 
to determine overall 25-year costs for each alternative. IDA assumed a 
fleet of 192 C-130Hs for all options, the number of aircraft defined 
in the Air Force Capability Development Document; appropriately 
excluded the approximately $1.7 billion previously spent on the AMP 
program; and estimated the costs in constant fiscal year 2013 dollars. 
The results of IDA's analysis of the costs of AMP and Options A and B 
are presented in table 1. 

Table 1: IDA Cost Estimates for Three C-130 Modernization Alternatives. 

Cost Estimates (constant fiscal year 2013 dollars in millions). 

RDT&E; 
C-130 AMP: $104; 
Option A: $437; 
Option B: $140. 

Procurement; 
C-130 AMP: $3,060; 
Option A: $1,320; 
Option B: $480. 

O&S Savings[A]; 
C-130 AMP: -$1,027; 
Option A: -$226; 
Option B: -$90. 

Totals; 
C-130 AMP: $2,137; 
Option A: $1,531; 
Option B: $530. 

Source: GAO presentation of IDA results: 

[A] These estimates represent solely the avionics-related O&S costs 
and savings to be incurred as a result of implementing each of the 
alternatives. A negative amount depicts a net savings for that option. 

[End of table] 

IDA's estimates showed that the AMP's costs for RDT&E, procurement, 
and O&S over a 25-year period were significantly higher than the 
alternative options it considered. Specifically, the analysis shows 
while Options A and B have higher development costs and lower O&S 
savings (due primarily to the fact that they do not enable the 
reduction of one crew member), these costs are more than offset by 
lower procurement costs. 

Regarding overall effectiveness, IDA found the AMP's operational 
effectiveness advantage over Options A and B to be marginal. 
Specifically, the study found Option A to be at least as operationally 
effective as AMP since both AMP and Option A address the diminishing 
manufacturing sources problem. (See enclosure I for further details on 
IDA's analyses and results.) 

IDA's Cost Estimating Generally Followed Best Practices: 

Given that IDA reported finding Option A at least as operationally 
effective as AMP, and that estimated costs were the apparent 
discriminating factor in IDA's recommendation that the Air Force not 
pursue AMP, we limited our assessment of IDA's cost estimating quality 
to AMP and Option A. We found that IDA's cost analysis either 
substantially or partially met each of the four characteristics 
expected of high quality cost estimates. Such estimates are critical 
to the success of any program as they provide the basis for informed 
investment decision making, realistic budget formulation and program 
resourcing, meaningful progress measurement, proactive course 
correction when warranted, and accountability for results. These 
characteristics are described briefly below in table 2. A more 
detailed description of each characteristic of high-quality cost 
estimates and our complete assessment can be found in enclosure II. 

Specifically, we analyzed the cost estimating practices used by IDA in 
its analysis of the C-130 AMP and alternative options against best 
practices for high-quality cost estimates. As table 2 shows, we found 
that the cost estimates in IDA's study substantially met two of the 
characteristics expected of high-quality cost estimates--
comprehensiveness and credibility--and partially meet the remaining 
two characteristics--being well-documented and accurate. 

Table 2: Evaluation of IDA's Cost Estimates: 

Characteristics of high-quality cost estimates: 1. Comprehensive 
(estimate is complete and accounts for all possible costs); 
Our evaluation[A]: Substantially Met. 

Characteristics of high-quality cost estimates: 2. Well documented 
(detail and quality of the information used); 
Our evaluation[A]: Partially Met. 

Characteristics of high-quality cost estimates: 3. Accurate (should be 
unbiased and neither overly conservative or optimistic); 
Our evaluation[A]: Partially Met. 

Characteristics of high-quality cost estimates: 4. Credible (to 
include sensitivity analysis, risk and uncertainty analysis); 
Our evaluation[A]: Substantially Met. 

Source: GAO assessment. 

[A] For the purposes of our analysis, we determined that a 
characteristic was "met" if IDA provided complete data that satisfies 
the entire criterion; "substantially met" if IDA provided data that 
satisfies a large portion of the criterion; "partially met" if IDA 
provided evidence that satisfies about half of the criterion; 
"minimally met" if IDA provided evidence that satisfies a small 
portion of the criterion; and "not met" If IDA provided no data that 
satisfies any of the criterion. 

[End of table] 

More specifically we found the following: 

* Comprehensiveness: We found the estimates to be substantially 
comprehensive because the estimates appeared to include the pertinent 
life cycle costs and the estimates' cost element structure was at an 
sufficient level of detail considering the purpose of the study was a 
cost benefit analysis comparison of alternatives. However, we also 
found that few of the typical technical baseline elements were 
described in the study and that ground rules and assumptions were 
incomplete. Specifically, the study itself did not identify inflation 
indices or their source, although IDA subsequently identified that 
they used the OSD Comptroller's Green Book for indices. 

* Documentation: We found the estimates partially met best practices 
for this characteristic. The study documentation described the 
estimating methodology used to derive each cost element, but did not 
describe in detail the calculations performed to arrive at the 
estimate. Additionally, the documentation described step-by-step how 
the estimate was developed, but it did not contain sufficiently 
detailed data to allow a cost analyst unfamiliar with the program to 
replicate the estimate. Furthermore, the documentation does not 
contain the source data used to develop the estimates. 

* Accuracy: We found the estimates partially met best practices for 
this characteristic. The estimates were based on actual costs from the 
C-130 AMP and other programs, program office estimates for C-130 AMP 
and other similar programs, cost estimating relationships, and 
factors, but because the historical source data were not included, we 
could not assess the reliability and relevance of the data. 
Additionally, while the study team performed uncertainty analysis and 
displayed the point estimates and low and high ranges of the estimate, 
they did not show the confidence levels of the point estimates to 
allow us to determine if the estimates were unbiased. 

* Credibility: We found the estimates substantially met best practices 
for this characteristic. The study included a risk and uncertainty 
analysis and displayed the results in the difference between the net 
present value of AMP and Option A. However, the documentation did not 
contain cumulative probability distributions, known as "S curves," of 
the alternative estimates. Further, the study sensitivity analysis was 
limited to examination of the most significant contributors to AMP 
cost variance. 

Life cycle cost analyses may be sensitive to underlying assumptions, 
such as, the time period covered by an analysis. In this case, IDA was 
tasked with and developed costs for a 25-year period. Over that 
period, it estimated that the estimate for Option A was nearly $600 
million less than for AMP. Comparatively, in the last year of its 
study, IDA estimated AMP annual savings that were $47 million greater 
than for Option A. Hence, had the time period been less than 25 years, 
the difference between the AMP and Option A estimates could have been 
greater; had the time period been longer than 25 years, the difference 
could have been less. Other assumptions can similarly influence 
results. For example, IDA noted in its conclusions that factors 
outside of the scope of its study --including retirement schedules for 
C-130s and the acquisition of new C-130Js--should inform decisions 
determining the specific upgrade program chosen. 

We are not making recommendations in this report. 

Agency Comments and Our Evaluation: 

DOD and IDA provided comments on a draft of this report, which are 
reprinted in enclosures IV and V, respectively. In its comments, DOD 
referred to our work as validating IDA's analysis. We note that we 
analyzed the cost estimating methodology IDA used in its study 
compared to best practices for producing reliable and valid cost 
estimates. However, we did not produce separate estimates nor did we 
evaluate IDA's recommendations. DOD also commented that it took into 
consideration the data sources that supported IDA's conclusions when 
reviewing IDA's recommendations. 

In addition, IDA commented that it agreed with our assessment that its 
cost analysis generally followed best practices for high quality 
estimates. Specifically, IDA agreed with our assessment that its cost 
analysis was comprehensive and credible, but believed they warranted a 
higher rating of "met", rather than "substantially met" for these two 
characteristics. IDA also noted that it strongly believes our 
assessments of its study against the remaining two characteristics--
being well-documented and accurate--should have been higher. As noted 
in our report, we assessed IDA's cost estimating as having partially 
met the criteria for being well documented because it did not, in our 
opinion, contain sufficiently detailed data to allow a cost analyst 
unfamiliar with the program to replicate the estimate. Similarly, we 
assessed IDA's estimate as having only partially met the best practice 
of accuracy because the historical source data were not included, and 
we could not, therefore, assess the reliability and relevance of the 
data. Our assessment was governed by the information contained in the 
report itself, which was limited in these two areas. That does not 
necessarily mean that the information did not exist elsewhere. IDA 
also commented that we did not find any evidence that its cost 
estimates were not accurate and that nothing in our assessment 
undermines its findings and recommendations. 

We are sending copies of this report to interested congressional 
committees; the Secretary of Defense; the Under Secretary of Defense 
for Acquisition, Technology, and Logistics; and the Secretary of the 
Air Force. This report also is available at no charge on GAO's website 
at [hyperlink, http://www.gao.gov]. 

Should you or your staff have any questions on the matters covered in 
this report, please contact me at (202) 512-4841 or sullivanm@gao.gov. 
Contact points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this report. Key contributors 
to this report were Bruce H. Thomas, Assistant Director; Marvin 
Bonner, Analyst-in-Charge; John Beauchamp; Susan Ditto; Karen Richey; 
Brian Bothwell; Marie Ahearn; and Kenneth E. Patton. 

Signed by: 

Michael J. Sullivan: 
Director, Acquisition and Sourcing Management: 

Enclosures - 5: 

List of Committees: 

The Honorable Carl Levin: 
Chairman: 
The Honorable James Inhofe: 
Ranking Member: 
Committee on Armed Services: 
United States Senate: 

The Honorable Richard J. Durbin: 
Chairman: 
The Honorable Thad Cochran: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
United States Senate: 

The Honorable Howard P. "Buck" McKeon: 
Chairman: 
The Honorable Adam Smith: 
Ranking Member: 
Committee on Armed Services: 
House of Representatives: 

The Honorable Rodney Frelinghuysen: 
Chairman: 
The Honorable Pete Visclosky: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
House of Representatives: 

[End of section] 

Enclosure I: IDA's Cost Estimating and Operational Effectiveness 
Methodology and Results: 

RDT&E Cost Estimates: 

In developing estimated RDT&E costs associated with AMP and each of 
the options, IDA reported that it included nonrecurring design costs 
as well as the cost of building the test article and conducting 
associated testing. Utilizing data from the last C-130 AMP Selected 
Acquisition Report, the C-130J Avionics upgrade, and the KC-10 AMP, 
IDA estimated that the remaining development costs for AMP to be about 
$104 million. To estimate the development costs for Options A and B, 
IDA utilized data from the C-130 AMP program, removing costs 
associated with reduced content (eliminated requirements and fewer 
variants and conversions) and sunk costs. IDA then accounted for the 
reduced content of Options A and B, determining the subset of 
equipment and associated cost necessary for the functionality of 
Options A and B, including government costs, as it did with AMP. Table 
3 summarizes IDA's RDT&E cost estimates for C-130 AMP and the 
alternatives considered. 

Table 3: IDA's C-130 AMP and Options RDT&E Cost Estimates. 

Cost Estimates (constant fiscal year 2013 dollars in millions). 

IDA's estimates; 
C-130 AMP: $104; 
Option A: $437; 
Option B: $140. 

Source: GAO presentation of IDA results. 

[End of table] 

As a cross-check on its RDT&E cost estimates for Options A and B, IDA 
examined additional data. They collected data from the C-130J avionics 
upgrade and reduced its content to derive a comparison cost estimate. 
IDA also developed comparison estimates based on the C-5 AMP 
development program (deemed similar to Option A) and the KC-10 AMP 
development program (deemed similar to Option B). In addition, IDA 
reported that it examined Air Force Cost Analysis Agency (AFCAA) 
estimates for the two successor programs the Air Force had proposed 
for: 

C-130 AMP--sometimes called the "Optimize" and the "Minimize" CNS/ATM 
programs. Table 4 provides IDA's Option A and Option B RDT&E cost 
estimate and the associated cross-check estimates. 

Table 4: IDA's Cost and Cross-check Estimates for RDT&E for Options A 
and B. 

Cost Estimates (constant fiscal year 2013 dollars in millions). 

IDA cost estimate; 
Option A: $437; 
Option B: $140. 

IDA Adjusted C-130J avionics upgrade analogy cross-check; 
Option A: $418; 
Option B: $220. 

IDA C-5 AMP analogy cross-check; 
Option A: $501; 
Option B: [Empty]. 

IDA KC-10 AMP analogy cross-check; 
Option A: [Empty]; 
Option B: $57. 

AFCAA "Maximize" and "Minimize" estimates cross-check; 
Option A: $368; 
Option B: $185. 

Source: GAO presentation of IDA results. 

[End of table] 

As the table above shows, the IDA estimate for RDT&E costs fall 
between the upper and lower bounds of the other estimates. 

Procurement Cost Estimates: 

In discussing its estimation of procurement costs, IDA noted that 
programs that modify existing platforms have distinctive features that 
result in cost elements that are unique relative to a new-start 
acquisition. In developing its procurement cost estimates for the C-
130 AMP and the alternatives, IDA examined those elements: kits (i.e. 
hardware), installation, and other acquisition costs (e.g. training 
equipment, peculiar support equipment, depot standup, initial spares, 
and interim contractor support), and program support (e.g. system 
engineering and program management). IDA reported that it utilized 
acquisition schedules based on plans and estimates previously put 
forth by the Air Force and assumed a sole-source procurement strategy 
for each of the three alternatives. 

IDA noted that estimating procurement costs for AMP was unique as cost 
data for completed production-configuration kits and installations for 
five aircraft were available. It estimated procurement costs for the 
AMP by defining price-improvement curves for the kits and installation 
and extrapolating previous experience forward to define fly-away cost 
(the sum of kits and installation costs). IDA reported that it 
estimated other acquisition costs using the relationships of other 
costs to flyaway costs suggested by historical data for C-130 and 
other transport aircraft modification programs. For Options A and B, 
IDA's estimates used "catalog" prices presented by AFCAA for off-the-
shelf components that would meet Option A and B defined capabilities. 
IDA reported that it estimated the cost of associated hardware needed 
for the installation of those off-the-shelf components (e.g. brackets, 
mounts, cables, etc.) and the cost of installation itself based on a 
combination of historical factors and other analyses. IDA also 
calculated average procurement unit costs for each of the 
alternatives. Table 5 summarizes IDA's procurement total and average 
unit (per aircraft) cost estimates for C-130 AMP and the alternatives 
considered. 

Table 5: IDA's C-130 AMP and Options Procurement Cost Estimates. 

Cost Estimates (constant fiscal year 2013 dollars in millions). 

Total estimated procurement costs; 
C-130 AMP: $3,060; 
Option A: $1,320; 
Option B:$480. 

Average estimated unit procurement cost; 
C-130 AMP: $16.4; 
Option A: $7.0; 
Option B:$2.5. 

Source: GAO presentation of IDA results. 

[End of table] 

IDA calculated the average procurement unit costs to enable comparison 
with estimates it developed based on information from other sources, 
thereby providing a cross-check against its estimates for AMP and 
Option A.[Footnote 7] For example, IDA developed two cross-check 
estimates for AMP: one based on the 2010 Selected Acquisition Report 
produced for the C-130 AMP program; the other based on a C-130 AMP 
System Program Office "should cost" estimate.[Footnote 8] To make 
these estimates comparable, IDA adjusted the unit costs from them to 
account for differences in their associated quantities with the number 
of AMP aircraft used in calculating its estimate and adjusted them to 
constant fiscal year 2013 dollars. Table 6 provides IDA's AMP 
procurement cost and associated cross-check estimates. 

Table 6: IDA's Cost and Cross-check Estimates for Procurement of AMP. 

Cost Estimates (constant fiscal year 2013 dollars in millions). 

IDA estimated average unit procurement cost; 
C-130 AMP: $16.4. 

IDA cross-check estimate based on C-130 AMP Final SAR; 
C-130 AMP: $19.5. 

IDA cross-check estimate based on adjusted "should cost"; 
C-130 AMP: $14.3. 

Source: GAO presentation of IDA results. 

[End of table] 

As can be seen, the IDA estimate for AMP procurement costs falls 
between the upper and lower bounds of the other estimates. 

O&S Cost Estimates: 

IDA estimated O&S costs for the three alternatives--O&S for 192 
aircraft (including aircraft previously completed) over a 25 year 
period--in constant fiscal year 2013 dollars and also calculated a net 
present value for each. IDA reported that it included only the 
incremental O&S costs associated with each alternative, which for all 
three modernization alternatives amounted to savings from the current 
C-130 fleet. Elements of O&S costs included personnel, indirect costs, 
training, fuel, depot-level reparables, diminishing manufacturing 
sources, consumables, sustaining engineering, program management, 
support equipment, and software. 

IDA's study indicates that the largest driver of cost savings in its 
O&S estimate for AMP relates to the elimination of the navigator 
position from the C-130 cockpit--savings from personnel costs as well 
as training. To calculate these savings, IDA reported that it adjusted 
information from a 2010 AMP manpower estimate report as the basis for 
manpower reductions and applied current salary, training costs and 
turnover rate information from the Air Force. It assumed no navigator-
related savings for Options A and B. Another large driver of AMP cost 
savings relative to the other options was related to fuel consumption. 
IDA estimated the incremental O&S costs for fuel by factoring weight 
considerations for the avionic systems added or removed by each 
alternative along with costs relating to potential noncompliance with 
relevant future requirements. IDA noted that while AMP allows 
unrestricted global operations by meeting required navigational 
performance and area navigation, aircraft that do not meet those 
requirements--such as Options A and B--can have restrictions on 
maximum altitude and landings, which can reduce flying efficiency. To 
account for this, IDA studied historical C-130H flying and estimated 
the potential cost associated with not meeting future CNS/ATM 
requirements. In other O&S cost aspects, IDA estimated Options A and B 
to be less costly than the AMP. Table 7 provides IDA's total 
calculated 25-year life cycle O&S costs (actually savings) for each of 
the alternatives. 

Table 7: IDA's C-130 AMP and Options O&S Savings Estimates. 

Cost Estimates (constant fiscal year 2013 dollars in millions). 

IDA's total 25-year O&S estimates; 
C-130 AMP: -$1,027; 
Option A: -$226; 
Option B: -$90. 

Source: GAO presentation of IDA results. 

[End of table] 

Total Estimated Costs: 

Combining its RDT&E, procurement, and O&S cost estimates from the 
options, IDA calculated total costs for each of the options in fiscal 
year 2013 constant dollars. In addition, it discounted those amounts 
to compute net present values for each of the options. Table 8 
provides IDA's calculated total costs and net present values for the 
options. 

Table 8: IDA's 25-year Total Cost (RDT&E, Procurement, and O&S) 
Estimates for C-130 AMP and Options. 

IDA's 25-year total estimates (constant fiscal year 2013 dollars in 
billions); 
C-130 AMP: $2.12; 
Option A: $1.53; 
Option B: $0.53. 

IDA's 25-year net present value estimates (in billions of discounted 
dollars); 
C-130 AMP: $2.11; 
Option A: $1.46; 
Option B: $0.51. 

Source: GAO presentation of IDA results. 

[End of table] 

IDA Took An Additional Step to Address Estimation Uncertainty: 

To deal with the cost estimating uncertainty, IDA performed cost-risk 
analysis developing a cost-risk model and utilizing Monte Carlo 
simulation. For all but two of the variables in its model, IDA 
utilized triangular distributions defined by a most likely value--its 
point estimates--and lower and upper limits. For example, the RDT&E 
upper and lower limits were based on the range of RDT&E costs 
experienced on similar programs. For cost risk relating to the 
elimination of a navigator position from AMP, based on discussions 
with Air Force and U.S. Coast Guard Personnel, IDA considered the case 
where some tactical missions (e.g. airdrop) require a navigator or 
sensor operator even with AMP aircraft. To account for this risk, 
using analytical judgment, IDA defined a discrete distribution. 
Lastly, IDA accounted for variations in flying hours by utilizing a 
normal distribution centered on the C-130H planned flying program. 
IDA's analysis accounted for correlation among inputs. For example, 
IDA's model included positive correlation between procurement and 
depot-level costs as both depend on the cost of materials. 

IDA ran one hundred thousand simulations, finding that in 98 percent 
of the simulations AMP's net present value cost was greater than 
Option A. IDA also performed sensitivity analysis to identify facts 
that have the most effect on the AMP estimates, finding that AMP 
procurement cost was the most significant contributor to cost 
estimating variance, accounting of 72 percent of the observed 
variance. The second largest contributor was AMP depot-level reparable 
cost, which accounted for 13 percent. 

IDA's Analysis of Operational Effectiveness: 

IDA defined effectiveness as the ability of a modernized C-130 fleet 
to enable C-130 operations--consisting of combat delivery, non-combat 
cargo and passenger movement, and the necessary functions (e.g. 
training) to support the first two. IDA noted that given that aircraft 
availability is integrally tied to all aspects of operations, it 
should be included as a component of effectiveness. Overall, IDA found 
the AMP's operational effectiveness advantage over Options A and B to 
be marginal. It stated that it found Option A to be at least as 
operationally effective as AMP since both AMP and Option A address 
diminishing manufacturing sources. Additionally, it noted that 
training and scheduling inefficiencies have largely been solved 
outside of avionics modernization and crew work loads are not an issue 
with Option A as it retains the navigator position. 

In assessing the aircraft availability of the AMP and alternatives, 
IDA estimated the upper bound on expected improvements to the mission 
capable rate as a measure of availability as the mission capable rate 
is an indicator of whether the C-130 fleet is ready to perform its 
mission when needed.[Footnote 9] IDA examined historical mission 
readiness data for the C-130H fleet in determining the upper bound. It 
found that the best-case possible mission capable rate improvement 
that AMP could achieve was 1.4 percent. IDA then looked at the other 
extreme Option B. IDA found a best-case improvement for Option B of 
only 0.5 percent. IDA concluded that mission capable rate improvement 
is not a discriminating factor with regard to operational 
effectiveness. 

Another area included in IDA's operational effectiveness assessment 
was combat delivery and passenger and cargo movement. IDA chose to 
include these areas as part of the effectiveness assessment because 
the primary mission of the C-130 is to deliver troops and cargo to the 
forward operating locations and drop-zones in a combat environment. 
Although the AMP and the reduced-scope alternatives were not intended 
to change combat delivery capabilities, elimination of the navigator 
in the AMP redistributes the workload and responsibilities of the 
remaining crew members during combat delivery. In evaluating the 
effectiveness of combat delivery of AMP and the alternatives, IDA 
examined whether AMP's combat delivery would be affected by replacing 
the navigator position. IDA found that some subject matter experts 
believe that removal of the navigator position would increase crew 
workload, especially in high-threat environments. IDA reported that 
Operations Iraqi Freedom and Enduring Freedom, with the C-130J and C-
17 aircraft, which also eliminate the navigator position, indicates 
that some percentage of airlift missions require augmentation with a 
third pilot to mitigate crew workload. In summary, IDA noted that if 
additional crew members are needed for AMP, then AMP will cost more 
than it estimated in calculating AMP O&S costs as it gave AMP full 
credit for removal of the navigator in determining its base AMP O&S 
costs. 

In evaluating non-combat cargo and passenger movement, IDA sought to 
determine if differences in required area navigation and navigation 
performance for AMP and the alternative options might impose 
restrictions on aircraft routing and airfield access, thereby 
affecting operational effectiveness. To determine the effectiveness of 
the modernization alternatives in this respect, IDA used two 
methodologies--assessing the effect of limited required area 
navigation and navigation performance capabilities on airfield 
approaches and assessing the impact to flying high-altitude routes. 
IDA found that AMP provides the most operational flexibility if the 
aviation community is converted to a predominately precision 
navigation-based system that completely replaces the current ground-
based system. There are currently no definitive FAA plans to do so. 
IDA also found that the AMP alternatives could experience delays at 
large airfields because of their limited navigation approach 
capability--potentially affecting up to 33 percent of C-130H sorties 
if certain larger airfields are required to adopt the newer 
technology. In assessing the effects to flying high altitude routes, 
IDA concluded that access to higher altitudes afforded by the AMP and 
Option A navigation capability result in modest fuel savings and 
increased payload capacity at extreme flying ranges and payloads, but 
may not be operationally significant for the most common routes and 
cargo weights. 

IDA also assessed operations support--involving primarily improvements 
to training and scheduling--for AMP and the alternatives. IDA's 
objective was to determine if the different modernization options 
sufficiently standardized the C-130H fleet to eliminate or reduce 
inefficiencies associated with tailoring training to each variant of 
the aircraft. Standardization had been cited as a key reason for the C-
130 AMP. To address this question, IDA obtained equipment lists for 
the C130H and sought to determine which avionics equipment varied 
across the C-130 fleet. IDA determined that there are eight avionics 
components that are the primary drivers for variations in C-130H 
training. Option A would standardize four of those differences and 
Option B one, while AMP would eliminate all of the avionics component 
differences. IDA noted that while differences in training would exist 
under Options A and B, the present day version of this training is no 
longer the concern it was a decade ago as a result of the selective 
retirement of aircraft that has minimized the number of C-130 
variants. IDA also noted that the fewer number of C-130H variants and 
sub-variants facilitates mission planning and scheduling. In summary, 
IDA found that while neither Options A nor B completely eliminates the 
need for differences in training, the significantly reduced number of 
C-130 variants has largely solved the training problems to the point 
that they are no longer of operational concern. 

[End of section] 

Enclosure II: Characteristics of High-Quality and Reliable Cost 
Estimates and Our Detailed Assessment of IDA's Cost-Benefit Analysis: 

Our research has identified a number of best practices that are the 
basis of effective program cost estimating and should result in 
reliable and valid cost estimates that management can use for making 
informed decisions. These four characteristics of a high-quality and 
reliable cost estimate are that it is comprehensive, credible: well-
documented, and accurate. 

* Comprehensive: The cost estimate should include both government and 
contractor costs of the program over its full life cycle, from 
inception of the program through design, development, deployment, and 
operation and maintenance to retirement of the program. It should also 
completely define the program, reflect the current schedule, and be 
technically reasonable. Comprehensive cost estimates should be 
structured in sufficient detail to ensure that cost elements are 
neither omitted nor double counted. Finally, where information is 
limited and judgments must be made, the cost estimate should document 
all cost-influencing ground rules and assumptions. 

* Credible: The cost estimate should discuss any limitations of the 
analysis because of uncertainty or biases surrounding data or 
assumptions. Major assumptions should be varied, and other outcomes 
recomputed to determine how sensitive they are to changes in the 
assumptions. Risk and uncertainty analysis should be performed to 
determine the level of risk associated with the estimate. Further, the 
estimate's cost drivers should be crosschecked, and an independent 
cost estimate conducted by a group outside the acquiring organization 
should be developed to determine whether other estimating methods 
produce similar results. 

* Well-documented: A good cost estimate--while taking the form of a 
single number--is supported by detailed documentation that describes 
how it was derived and how the expected funding will be spent in order 
to achieve a given objective. Therefore, the documentation should 
capture in writing such things as the source data used, the 
calculations performed and their results, and the estimating 
methodology used to derive each element's cost. Moreover, this 
information should be captured in such a way that the data used to 
derive the estimate can be traced back to, and verified against their 
sources so that the estimate can be easily replicated and updated. The 
documentation should also discuss the technical baseline description 
and how the data were normalized. Finally, the documentation should 
include evidence that the cost estimate was reviewed and accepted by 
management. 

* Accurate: The cost estimate should provide for results that are 
unbiased, and it should not be overly conservative or optimistic. An 
estimate is accurate when it is based on an assessment of most likely 
costs, adjusted properly for inflation, and contains few, if any, 
minor mistakes. Among other things, the estimate should be grounded in 
a historical record of cost estimating and actual experiences on other 
comparable programs. 

Table 9 provides our detailed assessment of IDA's cost estimating 
compared to best practices. 

Table 9: Detailed Assessment of IDA's Cost Estimating Compared to Best 
Practices: 

Characteristic: Comprehensive; 
Overall Assessment[A]: Substantially Met; 
Best Practice: The cost estimate includes all life cycle costs; 
Substantially Met. 

Best Practice: The cost estimate completely defines the program, 
reflects the current schedule, and is technically reasonable; 
Individual Assessment: Partially Met. 

Best Practice: The cost estimate is product-oriented, traceable to the 
statement of work/objective, and at an appropriate level of detail to 
ensure that cost elements are neither omitted nor double-counted; 
Individual Assessment: Substantially Met. 

Best Practice: The estimate documents all cost-influencing ground 
rules and assumptions; 
Individual Assessment: Partially Met. 

Characteristic: Well documented; 
Overall Assessment[A]: Partially Met; 

Best Practice: The documentation should capture the source data used, 
the reliability of the data, and how the data were normalized; 
Individual Assessment: Partially Met. 

Best Practice: The documentation describes in sufficient detail the 
calculations performed and the estimating methodology used to derive 
each element's cost; 
Individual Assessment: Partially Met. 

Best Practice: The documentation describes step by step how the 
estimate was developed so that a cost analyst unfamiliar with the 
program could understand what was done and replicate it; 
Individual Assessment: Partially Met. 

Best Practice: The documentation discusses the technical baseline 
description and the data in the baseline is consistent with the 
estimate; 
Individual Assessment: Partially Met. 

Best Practice: The documentation provides evidence that the cost 
estimate was reviewed and accepted by management; 
Individual Assessment: Substantially Met. 

Characteristic: Accurate; 
Overall Assessment[A]: Partially Met; 

Best Practice: The cost estimate results are unbiased, not overly 
conservative or optimistic and based on an assessment of most likely 
costs; 
Individual Assessment: Partially Met. 

Best Practice: The estimate has been adjusted properly for inflation; 
Individual Assessment: Substantially Met. 

Best Practice: The estimate contains few, if any, minor mistakes; 
Individual Assessment: Substantially Met. 

Best Practice: The cost estimate is regularly updated to reflect 
significant changes in the program so that it is always reflecting 
current status; 
Individual Assessment: Not Applicable. 

Best Practice: Variances between planned and actual costs are 
documented, explained, and reviewed; 
Individual Assessment: Not Applicable. 

Best Practice: The estimate is based on a historical record of cost 
estimating and actual experiences from other comparable programs; 
Individual Assessment: Partially Met. 

Best Practice: The estimating technique for each cost element was used 
appropriately; 
Individual Assessment: Partially Met. 

Characteristic: Credible; 
Overall Assessment[A]: Substantially Met; 

Best Practice: The cost estimate includes a sensitivity analysis that 
identifies a range of possible costs based on varying major 
assumptions, parameters, and data inputs; 
Individual Assessment: Partially Met. 

Best Practice: A risk and uncertainty analysis was conducted that 
quantified the imperfectly understood risks and identified the effects 
of changing key cost driver assumptions and factors; 
Individual Assessment: Substantially Met. 

Best Practice: Major cost elements were cross-checked to see whether 
results were similar; 
Individual Assessment: Substantially Met. 

Best Practice: An independent cost estimate was conducted by a group 
outside the acquiring organization to determine whether other 
estimating methods produce similar results; 
Individual Assessment: Not Applicable. 

Source: GAO analysis of IDA's data. 

[A] Not Met - IDA provided no evidence that satisfies any of the 
criterion, Minimally Met - IDA provided evidence that satisfies a 
small portion of the criterion, Partially Met - IDA provided evidence 
that satisfies about half of the criterion, Substantially Met - IDA 
provided evidence that satisfies a large portion of the criterion, and 
Met - IDA provided complete evidence that satisfies the entire 
criterion. 

[End of table] 

[End of section] 

Enclosure III: Objectives, Scope, and Methodology: 

To conduct this work, we obtained IDA's September 2013 cost benefit 
analysis study of the C-130 AMP program and reviewed it to determine 
the data and assumptions that IDA used to reach its conclusions and 
recommendations. To analyze IDA's cost estimating, we relied on GAO's 
Cost Estimating and Assessment Guide. In developing this guide, our 
cost experts assessed measures consistently applied by cost-estimating 
organizations throughout the federal government and industry and 
considered best-practices for the development of reliable cost-
estimates. We analyzed the cost estimating practices used by the IDA 
in its analysis of the C-130 AMP and alternative options against these 
best practices. For reporting, we collapsed these best practices into 
four general characteristics for sound cost estimating: comprehensive, 
well documented, accurate, and credible. 

We assigned each characteristic a rating of either met, substantially 
met, partially met, minimally met, or not met. We determined the 
overall assessment rating by assigning each individual rating a 
number: not met = 1, minimally met = 2, partially met =3, 
substantially met = 4, and met = 5. Then, we took the average of the 
individual assessment ratings to determine the overall rating for each 
of the four characteristics. The resulting average becomes the Overall 
Assessment as follows: not met = 1.0 to 1.4, minimally met = 1.5 to 
2.4, partially met = 2.5 to 3.4, substantially met = 3.5 to 4.4, and 
met = 4.5 to 5.0. A cost estimate is considered reliable if the 
overall assessment ratings for each of the four characteristics are 
substantially or fully met. If any of the characteristics are not met, 
minimally met, or partially met, then the cost estimate does not fully 
reflect the characteristics of a high-quality estimate and cannot be 
considered reliable. Because the cost estimates were developed for a 
cost-benefit analysis and not for a program office estimate, we did 
not assess two areas within the "accurate" characteristic--regular 
updating of cost estimates and tracking cost variances--and one area 
within the credible characteristic--independent cost estimates. 

Further, we interviewed agency officials from IDA, the Air Force Cost 
Analysis Agency, the Assistant Secretary of the Air Force Acquisition 
Office, and the Director of the Office of the Secretary of Defense's 
Cost Assessment and Program Evaluation office to discuss the IDA study 
results. In addition, we reviewed IDA's C-130 AMP annex report to 
determine the methodologies used to support findings in the September 
2013 report. 

Given that IDA reported finding Option A nearly (if not as) 
operationally effective as AMP, and that costs were the apparent 
driving factor in IDA's recommendation that the Air Force not pursue 
AMP, we limited our assessment of IDA's cost estimating to AMP and 
Option A. 

[End of section] 

Enclosure IV: Comments from the Department of Defense: 

Assistant Secretary of Defense: 
Acquisition: 
3015 Defense Pentagon: 
Washington, DC 20301-3015: 

May 16, 2014: 

Mr. Michael J. Sullivan: 
Director, Acquisition and Sourcing Management: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, DC 20548: 

Dear Mr. Sullivan: 

This is the Department of Defense (DoD) response to the GAO Draft 
Report,GAO-14-547R, 'Defense Acquisitions: Assessment of Institute for 
Defense Analyses C-130 Avionics Modernization Program (AMP) Analysis,' 
dated April 30, 2014 (GAO Code 121191). The Department has received 
the draft report and would like to include the following comments. 

The Department appreciates GAO validating the Institute for Defense 
Analyses' (IDA) cost analysis on the C-130 Avionics Modernization 
Program alternatives. When reviewing IDA's recommendations, DoD took 
into consideration the referenced data sources that supported IDA's 
conclusions. As a result, the Department did not pursue the costly C-
130 AMP option and pursued less costly alternatives. 

Sincerely, 

Signed by: 

Katrina McFarland: 

[End of section] 

Enclosure V: Comments from the Institute for Defense Analyses: 

IDA Response to GAO Assessment of IDA Paper P-5062, C-130 Avionics 
Modernization Analysis: 

GAO states that “IDA's cost analysis generally followed best practices 
for high quality cost estimates, which are critical to the success of 
any program.” IDA agrees with GAO's assessment, having completed a 
rigorous analysis of both cost and effectiveness for several C-130 
avionics modernization alternatives. 

GAO found that “IDA substantially met two of the characteristics 
expected of high-quality cost estimates – that they be comprehensive 
and credible.” While IDA believes these two assessments should have 
been rated “Met,” IDA agrees with GAO that its independent assessment 
was both comprehensive and credible. 

GAO also found that IDA “partially met the remaining two 
characteristics – being well-documented and accurate.” IDA strongly 
believes these two assessments should have been rated higher, and has 
provided GAO detailed justification. 

Regarding documentation, GAO found that “the study documentation 
described the estimating methodology used to derive each cost estimate”…
 and “the documentation described step-by-step how the estimate was 
developed, but it did not contain sufficiently detailed data to allow 
a cost analyst unfamiliar with the program to replicate the estimate.” 
The IDA report scrupulously identified all data sources, but did not 
in many cases copy the actual source data itself into the report. IDA 
referenced the source, but did not always repeat the actual data in 
the IDA report itself, especially when the data could be easily found 
by other analysts. IDA believes that a source reference itself is 
appropriate for a report of this nature. 

Regarding accuracy, GAO stated that “the estimates were based on 
actual costs from the C-130 AMP and other programs, program office 
estimates for C-130 AMP and other similar programs, cost estimating 
relationships, and factors, but because the historical source data 
were not included, we could not assess the reliability and relevance 
of the data.” IDA strongly believes they produced accurate cost 
estimates using sound methodology as described in detail in their 
report. GAO did not in fact find any evidence that the IDA assessment 
was not accurate. GAO's primary reason for its “Partially Met” rating 
was that they could not verify the accuracy of the analysis because 
all source documentation was not included in the IDA report. 

The IDA independent cost-benefit assessment determined there are lower 
cost options of nearly as much capability as C-130 AMP. The IDA report 
thus recommended that the US Air Force pursue a reduced scope option, 
such as Options A or B and not pursue C-130 AMP. Nothing in the GAO 
assessment undermines these findings and recommendations. 

[End of section] 

Footnotes: 

[1] DOD is required to notify Congress whenever a major defense 
acquisition program's unit cost experiences cost growth that exceeds 
certain thresholds. This is commonly referred to as a Nunn-McCurdy 
breach. Critical breaches occur when the program acquisition unit cost 
or procurement unit cost increases by at least 25 percent over the 
current baseline estimate or at least 50 percent over the original. 
When a program experiences a Nunn-McCurdy breach of the critical cost 
growth threshold, DOD is required to take a number of steps including 
reassessing the program and submitting a certification to Congress in 
order to continue the program. 10 U.S.C. §§ 2433 and 2433a. 

[2] Pub. L. No. 112-239, § 143. 

[3] Institute for Defense Analyses, C-130 Avionics Modernization 
Analysis, (Alexandria, VA: Sept. 2013); Institute for Defense 
Analyses, C-130 Avionics Modernization Analysis: Annex, (Alexandria, 
VA: Dec. 2013). 

[4] Pub. L. No. 113-66, § 133 (2013). The NDAA for Fiscal Year 2014 
also prohibited the Air Force from using any fiscal year 2014 
appropriations to cancel or modify the C-130 aircraft. 

[5] GAO, GAO Cost Estimating and Assessment Guide: Best Practices for 
Developing and Managing Capital Program Costs, [hyperlink, 
http://www.gao.gov/products/GAO-09-3SP], (Washington, D.C.: March 
2009). 

[6] These capabilities are similar to those found in the C-130J, which 
also operates without a navigator. 

[7] The IDA study did not provide procurement cross-check estimate 
calculations for Option B or explain why it did not. 

[8] In accordance with direction provided in Interim DOD Instruction 
5000.2. "Operation of the Defense Acquisition System," and memorandums 
issued by the Under Secretary of Defense for Acquisition, Technology, 
and Logistics, each program is to conduct a "should-cost" analysis 
which includes justifying each cost under the program's control with 
the aim of reducing negotiated prices for contracts and obtaining 
other efficiencies in program execution. 

[9] Mission capable rate is a measure of an aircraft's readiness to 
perform its missions. 

[End of section] 

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