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entitled 'Coast Guard: Deepwater Program Acquisition Schedule Update 
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Report to the Chairmen, Subcommittees on Homeland Security, Committees 
on Appropriations, House of Representatives and U.S. Senate:

United States General Accounting Office:

GAO:

June 2004:

Coast Guard:

Deepwater Program Acquisition Schedule Update Needed:

GAO-04-695:

GAO Highlights:

Highlights of GAO-04-695, a report to the Chairmen, Subcommittees on 
Homeland Security, Committees on Appropriations, House of 
Representatives and U.S. Senate 

Why GAO Did This Study:

In 2002, the Coast Guard began its $17 billion, 20-year Integrated 
Deepwater System acquisition program to replace or modernize its 
cutters, aircraft, and communications equipment for missions generally 
beyond 50 miles from shore. During fiscal years 2002-03, Deepwater 
received about $125 million less than the Coast Guard had planned. In 
fiscal year 2004, Congress appropriated $668 million, $168 million more 
than the President’s request.

GAO has raised concern recently about the Coast Guard’s initial 
management of Deepwater and the potential for escalating costs. GAO was 
asked to review the status of the program against the initial 
acquisition schedule and determine the impact of the additional $168 
million in fiscal year 2004 funding on this schedule.

What GAO Found:

The degree to which the Deepwater program is on track with its original 
2002 integrated acquisition schedule is difficult to determine because 
the Coast Guard has not updated the schedule. Coast Guard officials 
said they have not updated it because of the numerous changes Deepwater
experiences every year and the cost, personnel, and time involved. 
However, in similar acquisitions—those of the Department of Defense 
(DOD)—cost, schedule, and performance updates are fundamental to 
congressional oversight. DOD is required to update the schedule at 
least annually and whenever cost and schedule thresholds are breached. 
In practice, DOD continually monitors and reports schedules for 
management on a quarterly basis. Updating the acquisition schedule—
including phases such as design and fabrication, interim phase 
milestones, and critical paths linking assets—on a more timely basis is 
imperative so that annual Coast Guard budget submissions can allow 
Congress to base decisions on accurate information.

GAO used available data to develop the current acquisition status for a 
number of selected Deepwater assets and found that they have 
experienced delays and are at risk of being delivered later than 
anticipated.

GAO analysis of current acquisition of selected Deepwater assets: 

[See PDF for image]

[End of figure]

The additional $168 million in fiscal year 2004, while allowing the 
Coast Guard to conduct a number of Deepwater projects that had been 
delayed or would not have been funded in fiscal year 2004, will not 
fully return the program to its original 2002 acquisition schedule. 
Reasons include: all work originally planned for fiscal year 2004 was 
not funded and some will have to be delayed to fiscal year 2005; 
delivery of some assets has fallen so far behind schedule that ensuring 
their original delivery dates is impossible; and nonfunding reasons 
have caused delays, such as greater than expected hull corrosion of 
patrol boats delaying length extension upgrades.

What GAO Recommends:

GAO recommends the Coast Guard update the original 2002 Deepwater 
acquisition schedule in time to support the fiscal year 2006 Deepwater 
budget submission to the Department of Homeland Security and Congress 
and at least once a year thereafter to support each budget submission. 
The updated schedule should include the current status of asset 
acquisition phases, interim phase milestones, and the critical paths 
linking assets. In written comments, the Coast Guard generally 
concurred with GAO’s findings and recommendation.

www.gao.gov/cgi-bin/getrpt?GAO-04-695.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Margaret Wrightson at 
(415) 904-2200 or wrightsonm@gao.gov.

[End of section]

Contents:

Letter:

Background:

Results:

Conclusions:

Recommendation for Executive Action:

Agency Comments:

Appendix I: Briefing Slides:

Appendix II: Coast Guard's Comments:

Abbreviations:

C4ISR: Command, Control, Communications and Computers, Intelligence, 
Surveillance, and Reconnaissance:

Deepwater: Integrated Deepwater Systems program:

DHS: Department of Homeland Security:

DOD: Department of Defense:

EVMS: Earned Value Management System:

GAO: General Accounting Office:

ICGS: Integrated Coast Guard Systems, LLC:

IMS: Integrated Master Schedule:

MPA: Maritime Patrol Aircraft:

OPC: Offshore Patrol Cutter:

UAV: Unmanned Air Vehicle:

United States General Accounting Office:

Washington, DC 20548:

June 14, 2004:

The Honorable of Thad Cochran: 
Chairman, Subcommittee on Homeland Security: 
Committee on Appropriations: 
United States Senate:

The Honorable Harold Rogers: 
Chairman, Subcommittee on Homeland Security: 
Committee on Appropriations: 
House of Representatives:

In 2002, the Coast Guard began the acquisition phase of the largest and 
most complex procurement in its history, the Integrated Deepwater 
System program (Deepwater). Under this program, the Coast Guard will 
replace or modernize its cutters, aircraft, and communications 
equipment used for missions generally beyond 50 miles from shore but 
which may start at ports, waterways, and coasts and extend seaward to 
wherever the Coast Guard is required to take appropriate action. In 
developing the program, the Coast Guard chose a contracting approach 
that relies heavily on a "systems integrator"--a contractor that will 
translate the Coast Guard's mission requirements into specific 
acquisitions and upgrades. This contracting approach also relies 
heavily on a steady, predictable funding stream throughout the 
program's anticipated 20-year acquisition span[Footnote 1]. When the 
program began, we expressed concern that, given this approach's 
particularly heavy dependence on funding at planned levels, the Coast 
Guard risked schedule slippages and cost escalation if program funding 
fell short of planned funding amount[Footnote 2]s. During the program's 
first 2 years (fiscal years 2002-03), the total amount of funding 
available was nearly $125 million less than the amount the Coast Guard 
had planned and $32 million less than the President's request. The 
Congress then increased the Deepwater appropriation for fiscal year 
2004 to about $668 million, or about $86 million more than the agency's 
original plan for that year and $168 million more than the President's 
request.

You asked us to assess the Deepwater program's status in light of this 
increased funding. We focused our work on (1) reviewing the status of 
the program against the initial acquisition schedule and (2) 
determining the impact of the additional $168 million in fiscal year 
2004 funding on returning the program to this schedule. You also asked 
us to provide information on the Coast Guard's status in revising 
Deepwater's mission to meet increased homeland security requirements 
and the amount of assistance the Department of Defense (DOD) has 
provided for Deepwater from fiscal years 2002 to 2004. On March 12, 
2004, we briefed your offices on the preliminary results of our work to 
date. This report and the briefing slides in appendix I provide our 
final results.

Our work for this report involved reviewing and analyzing a variety of 
documents and interviewing officials from the headquarters of the Coast 
Guard and Integrated Coast Guard Systems, LLC, (ICGS). To determine the 
status of Deepwater's acquisition schedule for selected assets, we 
analyzed (1) the delivery task orders and their associated statements 
of work for individual Deepwater assets to establish what work was 
started, when it was started, and the period of performance for that 
work, and (2) the monthly assessment reports of Deepwater program 
managers on the performance of executing the delivery task orders. We 
compared these start and end dates of the delivery task orders with the 
acquisition schedule laid out in the original June 2002 Integrated 
Deepwater System Implementation Plan, which covers the first 5 years of 
the program. To determine the specific assets that were originally 
planned to have been funded by fiscal year 2004 but were not, we 
compared the Coast Guard's original plan listing the work scheduled to 
begin (contract line item numbers) for each fiscal year with the work 
that was actually begun (the delivery task orders that were issued for 
those line items). We interviewed Coast Guard and ICGS officials about 
the reliability of the data in the Integrated Master Schedule (IMS) 
management tool. On the basis of those discussions, we determined that 
the data within IMS were not reliable enough for use in our report. To 
determine the amount of funding support DOD provided to the Deepwater 
program from fiscal years 2002 to 2004, we interviewed officials and 
analyzed documents from the Navy. We also interviewed officials from 
other DOD components; however, they all referred us back to the Navy. 
We conducted our work from January through June 2004 and did our work 
in accordance with generally accepted government auditing standards.

Background:

In June 2002, the Coast Guard awarded a contract to ICGS to begin the 
acquisition phase of the Deepwater program. Rather than using the 
traditional approach of replacing classes of ships or aircraft through 
a series of individual acquisitions, the Coast Guard chose to employ a 
"system of systems" acquisition strategy that would replace its aging 
assets of ships, aircraft, and communication capabilities with a 
single, integrated package of new or modernized assets and 
capabilities. The focus of the program is not just on new ships and 
aircraft, but rather on an integrated approach to modernizing existing 
or "legacy" assets while transitioning to newer, more capable assets, 
with improved command, control, communications and computers, 
intelligence, surveillance, and reconnaissance (C4ISR) capabilities. 
At full implementation, the Deepwater program will replace the Coast 
Guard's entire fleet of current deepwater surface and air assets, 
comprising three classes of new cutters and their associated small 
boats, a new fixed-wing manned aircraft fleet, a combination of new and 
upgraded helicopters, and both cutter-based and land-based unmanned air 
vehicles (UAVs). In addition, all of these assets will be linked with 
state-of-the-art C4ISR capabilities and computers and will be supported 
by an integrated logistics management system.

ICGS, a business entity jointly owned by Northrop Grumman and Lockheed 
Martin, acts as the system integrator to develop and deliver the 
Deepwater program. They are the two first-tier subcontractors for the 
program and either provides Deepwater assets themselves or award 
second-tier subcontracts for the assets. The Coast Guard's contract 
with ICGS has a 5-year base period with five additional 5-year options. 
The Coast Guard is scheduled to decide on whether to extend ICGS's 
contract by June 2006, which is 1 year prior to the end of the first 5-
year contract term. Although ICGS is responsible for designing, 
constructing, deploying, supporting, and integrating Deepwater assets, 
the Coast Guard maintains responsibility for oversight and overall 
management of the program. To help fulfill this responsibility, the 
Coast Guard uses several management tools to track progress in the 
program, such as monthly status reports called quad reports, a 
performance-based management tool called the Earned Value Management 
System (EVMS), and a schedule management system called IMS. The quad 
reports are monthly summaries of the work performed on the various 
deepwater assets and were developed to give managers a monthly progress 
report on the performance of the program in such areas as cost, 
schedule, and contract administration. EVMS is used to track cost and 
schedule for certain delivery orders that have been placed to manage 
the risk of the major assets and activities. IMS is a three-tiered, 
calendar-based schedule used to track the completion of tasks and 
milestones of the individual Deepwater delivery task orders. However, 
data reliability with IMS has been an area of concern for the Coast 
Guard, and it is currently working with a private contractor and ICGS 
to address these concerns. Currently, the Coast Guard only maintains 
the lowest and most detailed level of IMS with monthly updates. These 
updates reflect the status of active contracts of individual assets and 
feed into EVMS's monthly cost performance reports of those individual 
contracts, which allow program management to monitor the cost, 
schedule, and technical performance of ongoing work at these lowest and 
most detailed levels.

In recent months, we have issued two reports that have raised concern 
about the Coast Guard's initial management of the Deepwater program and 
the potential for escalating costs. In March 2004,[Footnote 3] we 
reported that key components needed to manage the Deepwater program and 
oversee the system integrator's performance have not been effectively 
implemented. We recommended that the Secretary of Homeland Security 
direct the Commandant of the Coast Guard to take a number of actions to 
improve Deepwater program management and contractor oversight. In April 
2004,[Footnote 4] we testified that the most significant challenge the 
Coast Guard faces as it moves forward in the Deepwater program is 
keeping the program on schedule and within planned budget estimates. We 
noted that the Coast Guard was at risk of having to expend funds to 
repair deteriorating legacy assets that otherwise had been planned for 
Deepwater modernization initiatives, which could potentially further 
delay the program and increase total program costs. We noted further 
that the Coast Guard's current estimate for completing the acquisition 
program within the 20-year schedule has risen to $17.2 billion, an 
increase of $2.2 billion over the original $15 billion 
estimate.[Footnote 5]

Results:

The degree to which the Deepwater program is on track with regard to 
its original 2002 acquisition schedule is difficult to determine, 
because the Coast Guard has not maintained and updated the acquisition 
schedule. The original acquisition schedule included acquisition phases 
(such as concept technology and design, system development and 
demonstration, and fabrication), interim phase milestones (such as 
preliminary and critical design reviews, installation, and testing), 
and the critical paths integrating the delivery of individual 
components to particular assets. However, while the Coast Guard has 
what is called an integrated master schedule, it currently uses it only 
at the lowest and most detailed levels and have not updated it to 
demonstrate whether individual components and assets are being 
integrated and delivered on schedule and in the critical sequence. 
There are a number of reasons why tracking the current integrated 
schedule on a major government investment or acquisition is important, 
but two stand out. First, our work has shown that it is important to 
identify potential risks in major acquisitions as early as possible so 
problems can be avoided or minimized. The ability to achieve scheduled 
events is a key indicator of risk. Second, cost, schedule, and 
performance are fundamental to the Congress's oversight of major 
acquisitions. In fact, by law, DOD's major defense acquisition programs 
have to report cost, schedule, and performance updates to the Congress 
at least annually and whenever cost and schedule thresholds are 
breached. In practice, schedules on DOD's major defense acquisitions 
are continually monitored and reported to management on a quarterly 
basis.

While Coast Guard officials indicated that the management tools they 
use are sufficient for tracking delivery dates throughout the 
acquisition, we found that these tools could not provide a ready and 
reliable picture of the current integrated Deepwater acquisition 
schedule. For example, IMS has had problems with data reliability and 
the monthly status reports, while assessing the progress of individual 
assets, do not translate those individual assessments into an overall 
integrated Deepwater acquisition schedule. In fact, the February 2004 
status report noted that because there was no accurate overall 
integrated schedule for the command and control design phase, the 
linkages with the development of other assets were largely unknown. 
Although maintaining a current integrated schedule is a best practice 
for ensuring adequate contract oversight and management and is a 
requirement for DOD acquisitions, Coast Guard officials said they have 
not done so because of the numerous changes the Deepwater Program 
experiences every year and because of the cost, personnel, and time 
involved in crafting a revised master plan with the systems integrator 
on an annual basis. The officials said they have not planned to update 
the original acquisition schedule until just prior to deciding whether 
to extend the award of the next 5-year Deepwater contract in 2007. 
However, we have found that in acquisitions of similar scope--and in 
particular, acquisitions made by DOD--maintaining a current schedule is 
a fundamental practice that the department considers necessary.

While the Coast Guard could not provide us with an updated integrated 
schedule, we developed the current acquisition status of a number of 
selected Deepwater assets from documents provided by the Coast Guard. 
Our analysis indicates that several Deepwater assets and capabilities 
have experienced delays and are at risk of being delivered later than 
anticipated in the original implementation plan. For example, the 
delivery of the first two maritime patrol aircraft is behind schedule 
by about 1 year, and the delivery and integration of the vertical-take-
off-and-land unmanned air vehicle to the first national security cutter 
has been delayed 18 months.

The $168 million appropriated in fiscal year 2004 for the Deepwater 
program above the President's request of $500 million will allow the 
Coast Guard to conduct a number of projects that had been delayed or 
would not have been funded in fiscal year 2004, but it will not fully 
return the program to its original 2002 acquisition schedule. Our 
analysis indicates there are several reasons for this result. First, 
even with the additional amount, the program still had a cumulative 
funding shortfall of $39 million through fiscal year 2004, as compared 
to the Coast Guard's planned funding amount. Second, because part of 
the additional $168 million was needed to start work delayed from 
fiscal year 2003, it did not provide enough funding for the delayed 
work and for all the work that the Coast Guard had originally planned 
for fiscal year 2004. As a result, some of this work will have to be 
delayed to fiscal year 2005. Third, the delivery of some assets has 
fallen so far behind schedule that it is impossible to ensure their 
delivery according to the original 2002 implementation schedule by 
simply providing more money. For example, according to the 2002 
implementation schedule, nine maritime patrol aircraft were to be 
delivered by the end of 2005; according to the current contract, none 
will be delivered in 2005 and two will be delivered by the end of 2006. 
Similarly, the original schedule called for completing 18 123-foot 
patrol boat conversions by the end of 2005; according to the current 
contract, 8 will be completed by the end of 2005.[Footnote 6] Fourth, 
the acquisition of some assets has been delayed for reasons other than 
funding. For example, greater than anticipated hull corrosion in the 
110 ft. patrol boats has delayed the conversion of those into 123 
footers and delays in the availability of faster satellite service for 
legacy cutters has delayed the delivery of those upgraded legacy 
cutters. Finally, in keeping with appropriations conference committee 
directives for how the additional amount was to be spent, part of the 
additional funding went for design of the offshore patrol cutter, work 
that, under the original schedule, would not begin for another 6 to 8 
years. This work may speed up acquisition of these assets, but they 
were not on the original schedule this early in the program.

The Coast Guard is currently revising Deepwater's mission needs 
statement in response to increased homeland security requirements 
resulting from the terrorist attacks of September 11, 2001. According 
to the Coast Guard, in May 2004 it submitted the revised statement to 
the Department of Homeland Security's (DHS) Joint Requirements Council, 
which conditionally accepted it until the Deepwater contractor, ICGS, 
completes a new estimate of the costs needed to acquire the necessary 
functional capabilities resulting from the revised mission needs 
statement. The council further directed the Coast Guard to complete the 
new cost estimate in order to brief the DHS Investment Review Board in 
October 2004. Acting as an agent of the DHS, the board will approve any 
increases in the Deepwater total ownership cost associated with the 
revised mission needs statement and any growth in the Deepwater budget. 
Specifications for some specific Deepwater assets--most notably the 
National Security Cutter--will be changed in light of the Coast Guard's 
added homeland security responsibilities. Coast Guard officials said 
the main impact of the revision would be to close the gaps in Deepwater 
asset capabilities created by the expansion of Coast Guard mission 
requirement after September 11.[Footnote 7]

Regarding DOD's assistance to the Coast Guard for Deepwater, the Navy 
budgeted $25 million for the Deepwater program in fiscal years 2002-04, 
mainly to help outfit the National Security Cutter. The Navy budgeted 
these funds to provide capabilities and equipment it regarded as 
important for the Coast Guard to have for potential national defense 
missions that would be carried out in conjunction with Navy 
operations.[Footnote 8]

Conclusions:

The 2002 Deepwater acquisition schedule showed not only the individual 
planned phases and interim milestones for designing, testing, and 
fabricating assets but also the integrated schedules of critical 
linkages between assets. The absence of an up-to-date integrated 
acquisition schedule for the Deepwater program is a concern, because it 
is a symptom of the larger issues we reported in March 2004 that are 
related to whether this complicated acquisition is being adequately 
managed and whether the government's interests are being properly 
safeguarded. Since the inception of the unique contracting approach to 
this project, we have pointed out that it poses risks, in that it would 
be expensive to alter and, because of the unique "systems integrator" 
approach, does not operate like a conventional acquisition. The recent 
disclosure that, just 3 years into the acquisition, costs have risen by 
$2.2 billion points to the need for a clear understanding of what 
assets are being acquired, when they are being acquired, and at what 
cost. This lack of such a current schedule lessens the Coast Guard's 
ability to monitor the contractor's performance and to take early 
action on potential risks before they become problems later in the 
program.

The Coast Guard has so far maintained that it is not worth the time and 
cost involved to update the acquisition schedule until just before the 
award of the next 5-year Deepwater contract, but we disagree. We 
recognize that there are costs involved with keeping an acquisition 
schedule updated. However, for Department of Defense acquisitions of 
such scope, maintaining a current schedule is a fundamental and 
necessary practice. Deepwater remains a program in transition, in that 
the Coast Guard is currently revising the program's mission 
requirements to include increased homeland security requirements. The 
major modifications that may result to key assets make keeping the 
program on track that much harder. As evolving mission requirements are 
translated into decisions about what assets are needed and what 
capabilities they will need to have, it becomes even more imperative 
that Coast Guard officials update the acquisition schedule on a more 
timely basis, so that budget submissions by the Coast Guard can allow 
DHS and Congress to base decisions on accurate information.

Recommendation for Executive Action:

We recommend that the Secretary of Homeland Security direct the 
Commandant of the Coast Guard to update the original 2002 Deepwater 
acquisition schedule in time to support the fiscal year 2006 Deepwater 
budget submission to DHS and Congress and at least once a year 
thereafter to support each budget submission. The updated schedule 
should include the current status of asset acquisition phases (such as 
concept technology and design, system development and demonstration, 
and fabrication), interim phase milestones (such as preliminary and 
critical design reviews, installation, and testing), and the critical 
paths linking the delivery of individual components to particular 
assets.

Agency Comments:

We provided a draft of this report to DHS and the Coast Guard for their 
review and comment. In written comments, which are reproduced in 
appendix II, the Coast Guard generally concurred with the findings and 
recommendations in the report. The Coast Guard also provided technical 
comments, which we incorporated as appropriate.

The Coast Guard, however, did not concur with three areas of 
discussion. First, the Coast Guard said that our draft report did not 
accurately portray its current acquisition tools and disagreed with our 
determination that data within one of those tools, the IMS, was not 
reliable enough for use in our report. As we noted in the report, at 
the time of our review Coast Guard officials expressed concerns about 
the reliability of IMS data, such as out-dated data and less than 
adequate data input and adjustment, and told us that they had hired a 
consultant to address those concerns. For that reason and with Coast 
Guard and ICGS agreement on our methodology, we based our analysis on 
the same source documents the Coast Guard uses as inputs to IMS's 
lowest, most detailed level. The Coast Guard stated in its written 
comments that while not in the form of an acquisition schedule, IMS's 
lower level data are reliable. According to its written comments, the 
Coast Guard is making improvements in updating IMS at all levels.

Second, the Coast Guard said that we did not highlight that delays in 
the delivery schedule have been caused by a lack of funding and the 
subsequent need to sustain legacy assets rather than a lack of 
acquisition schedule updates. The scope of our review was to determine 
the impact of the additional $168 million in fiscal year 2004 on 
returning Deepwater to its original 2002 schedule, not to determine 
effects of receiving appropriations that were less than requested in 
previous years. However, in explaining why the $168 million will not 
return the Deepwater to its original schedule, we did note that part of 
the $168 million was needed to start work delayed from fiscal year 
2003, and that the acquisition of some assets had been delayed due to 
greater than anticipated hull corrosion in legacy 110-foot patrol boats 
causing the delay in converting them to 123-footers.

Finally, we did not intend to imply that the lack of acquisition 
schedule updates caused delays in delivery schedule. However, we 
continue to believe that not updating an integrated schedule to show 
the acquisition linkages between critical assets is a management 
concern. We believe in the importance of updating acquisition schedules 
at least annually not only as a best practice for managing and 
overseeing a complex integrated acquisition such as Deepwater but also 
as a up-to-date source of information on which DHS and the Congress can 
base annual budget decisions.

As agreed with your office, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 15 days 
from its issue date. At that time, we will send copies of this report 
to the Secretary of Homeland Security, the Commandant of the Coast 
Guard, appropriate congressional committees, and other interested 
parties. The report will also be available at no charge on GAO's Web 
site at http://www.gao.gov. If you or your staffs have any questions 
about this report, please contact me at (415) 904-2200 or by email at 
wrightsonm@gao.gov, or Steve Calvo, Assistant Director, at (206) 287-
4839 or by email at calvos@gao.gov. Other key contributors to this 
report were Shawn Arbogast, Leo Barbour, David Best, Michele Fejfar, 
Paul Francis, Sam Hinojosa, David Hooper, Michele Mackin, and Stan 
Stenersen.

Margaret T. Wrightson: 
Director, Homeland Security and Justice Issues:

[End of section]

Appendix I: Briefing Slides:

[See PDF for image]

[End of figure]

[End of section]

Appendix II: Coast Guard's Comments:

U.S. Department of Homeland Security:

United States Coast Guard:

Commandant
2100 Second Street SW
Washington, DC 20593 
Staff Symbol: CG-8 
Phone: 202-267-2405 
Fax: 202-267-4850:

3800:
27 May 2004:

Mr. Steven Calvo:
U.S. General Accounting Office 
441 G Street, NW 
Washington, DC 20548:

Dear Mr. Calvo,

This letter is the Coast Guard and Department of Homeland Security 
response to the draft June 2004 audit of the Coast Guard entitled 
"Deepwater Program Acquisition Schedule Update Needed." The Coast Guard 
and the Department concur generally with the findings and 
recommendation of the report.

Over the last six months, the Coast Guard has engaged with your staff 
to help address the questions of the Committee on Appropriations, 
Subcommittee on Homeland Security, concerning the Integrated Deepwater 
System. We welcome your observations and recommendations as an 
independent review of the program, and I appreciate the opportunity to 
respond to the draft report. The Coast Guard has already provided your 
staff with detailed observations, and I wish to review additional key 
points in the draft report at this time.

As I noted above, the Coast Guard and the Department concur generally 
with the findings and recommendation of the draft audit. However, there 
are two specific areas of discussion with which we do not concur. 
First, the draft audit report fails to accurately portray the existing 
acquisition schedule tools currently in use. Second, the draft audit 
report fails to highlight the fact that delays in the delivery schedule 
have been caused by a lack of funding and the subsequent need to 
sustain legacy assets rather than a lack of acquisition schedule 
updates.

The Coast Guard currently uses a multi-tiered Integrated Master 
Schedule (IMS) to oversee the Deepwater acquisition. The top-level plan 
in the IMS that tracks the full period of performance of the 
acquisition contract is Implementation Plan. Development of this plan 
is complex and costly, and, as noted in the report, the Coast Guard 
previously planned to do, at a minimum, one full update of this 
Implementation Plan every contract term. Following the draft audit 
report's guidance, the Coast Guard will now revise the Implementation 
Plan by the end of 2004.

The IMS supplements the Implementation Plan with additional levels of 
detail and adds definition and structure to it. The Coast Guard 
Acknowledges that the IMS has not been completely updated in its 
entirety (all periods of the three tiers) on a monthly basis. But 
significant improvements have been made. The near-term periods of all 
three tiers are now updated on a monthly basis. Necessary horizontal 
linkages across Delivery Task Orders (DTOs) and across the air, 
surface, logistics, and C4ISR domains have been validated. Tiers 1 and 
2 levels are now being reviewed on a monthly basis by the schedulers 
and planners in each of the major program areas with the first complete 
review planned for the end of May 2004.

Even before the GAO input, the Tier 3 IMS (the lowest, most detailed 
level of the IMS and considered to be the most important tool) has been 
consistently updated monthly over the last 
year. These monthly updates reflect the status of active DTOs fed into 
the Earned Value Management System's (EVMS) monthly Cost Performance 
Reports (CPRs).

Monthly CPRs give program management more than adequate insight into 
the cost, schedule, and technical performance variances associated with 
ongoing work. CPRs are the singularly most important tool for program 
management since the information for the various DTOs captured at those 
levels provides the essential data to manage the contract.

For these and other reasons, I do not concur with the statement that 
"the data within the IMS was not reliable enough for use in our 
report." There was sufficient data within the IMS, it simply wasn't in 
the form of an acquisition schedule. The GAO audit team's analysis was 
based on a comparison of the proposed June 2002 Implementation Plan 
with the Tier 3 IMS data, the statements of work for the active CLINs, 
and the monthly QUAD status reports. The audit team, like Deepwater 
program management, was able to use IMS to determine the status of 
assets, unfortunately the lack of an updated acquisition schedule, 
similar to what the team had used in auditing DoD's major defense 
acquisition programs, lead to conclusions such as, "(w)hile the Coast 
Guard could not provide us with an updated integrated schedule, we 
developed the current acquisition status of a number of key Deepwater 
assets from documents provided by the Coast Guard." The Coast Guard 
provided relevant IMS data, it was just at a lower tier than 
anticipated.

Overall, there is full agreement with the report's determination that 
the $168 million appropriated in fiscal year 2004 for the Deepwater 
program above the President's request of $500 million does not fully 
return the program to its original 2002 Implementation Plan Schedule 
nor to its planned funding levels. As noted in the report, this delay 
in asset delivery is due to lack of funding and other legacy 
sustainment problems such as responding to the extensive deterioration 
of 110' hulls and the need for immediate re-engining of HH-65s.

The draft report should highlight the impact of funding shortfalls on 
delays in asset delivery. For example, the graph on page 23 should 
explain that the reason for asset delivery delays was a lack of funds 
in the first two years of contract execution. Any program that receives 
approximately $125 million less than the $918 million planned, which is 
a 13.6 percent decrease for the first two years, will have delays.

This view is supported by the April 17, 2004, GAO testimony before the 
Senate Subcommittee on Oceans Fisheries, and Coast Guard, Committee on 
Commerce, Science, and Transportation. "In a 2001 report," GAO 
reported, "we expressed concern that the Coast Guard risked slippages 
and cost escalation if project funding fell short of planned funding 
levels. Now, very early in the program our concerns are being realized. 
Program funding in the first 2 years was less than the agency planned 
by about $125 million. This resulted in delays in the scheduled 
delivery of key Deepwater assets, such as the maritime patrol 
aircraft."

Even with the Congressional increase of $168 million in the third year 
of the program, cumulative funding was still approximately $40 million 
less than planned. When a program is underfunded, schedule delays are 
unavoidable. This is not a unique risk to Deepwater, but a universal 
risk to any major program in that all major programs plan their Master 
Schedule based on a projected funding level. If the funding received is 
less than the funding planned, schedule slippage will result.

Additionally, if a substantial amount of the shortfall is made up in 
the third year and then an assessment is made right at the start of the 
third year, there will still be delays. These slippages 
have no relationship to updating the schedule. These delays would exist 
whether or not the schedule was updated. The updated schedule would 
have still shown the same delays that the GAO report displayed on page 
23.

Given the above information, the Coast Guard does not concur with the 
audit report's conclusion that the absence of an updated integrated 
schedule is a symptom of the management concerns GAO reported in March 
2004. Contrary to the implications of the draft report's language, the 
Coast Guard is effectively tracking cost, schedule, and performance, 
and identifying potential risks by maintaining existing management and 
tracking tools such as the Earned Value Management System (EVMS) and 
the Monthly Quad Charts. Just as defense acquisitions report quarterly 
to DoD management, the Coast Guard reports this information quarterly 
to DHS.

As we continue to work together, our agencies will achieve greater 
mutual understanding of this dynamic and challenging acquisition 
program. To further that understanding, I also would like to clarify 
one aspect of the Coast Guard's Deepwater missions and the program's 
history. While it is accurate to state that the Coast Guard's Deepwater 
missions generally occur beyond 50 miles from shore, it is important to 
recognize that these missions, so critical to America's homeland 
security, start at America's ports, waterways, and coasts and extend 
seaward to wherever the Coast Guard is required to take appropriate 
action. Deepwater's more capable, sustainable, interoperable, and 
flexible platforms and systems will contribute significantly. to the 
Coast Guard's ability to address and defeat maritime security threats 
closer to our shores and in our ports. These missions are characterized 
as requiring powerful C4ISR capabilities, extended on-scene presence, 
any mission using Coast Guard aviation assets, or significant 
prosecution power.

The Coast Guard has incorporated recommendations made by previous 
reviews of the Deepwater Program by GAO and the Department of Homeland 
Security. I thank you for your detailed analysis and observations and 
appreciate the opportunity to share our lessons learned, successes, and 
growing pains in an open environment as we continue to embrace the 
tenets of a successful learning organization. I look forward to 
continued positive dialog with you and your staff as we work to improve 
the management of the Deepwater program during the coming years. You 
have our commitment to engage in continuous improvement.

Signed by: 

ART S. HOROWITZ: 
Deputy Assistant: 
Commandant For Planning, Resources, and Procurement: 

FOOTNOTES

[1] The Deepwater program is scheduled to last for 30 years, the assets 
are expected to be delivered in the first 20 years, and the contractor 
is to be retained an additional 10 years to continue implementing the 
program.

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

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

[4] See U.S. General Accounting Office, Coast Guard: Key Management and 
Budget Challenges for Fiscal Year 2005 and Beyond, GAO-04-636T 
(Washington, D.C.: Apr. 7, 2004).

[5] These amounts are in nominal (current-year) dollars. 

[6] The conversion is to extend the 110-foot patrol boats by 13 feet to 
incorporate a stern ramp. 

[7] An April 2004 RAND Corporation study concluded that the Coast Guard 
will need twice the number of cutters and 50 percent more aircraft to 
meet new national security requirements. U.S. Coast Guard's Deepwater 
Force Modernization Plan: Can it Be Accelerated? Will Meet Changing 
Security Needs?, The Rand Corporation, Santa Monica, Calif., April 
2004.

[8] Through a 1987 agreement, the Navy provides to the Coast Guard all 
Navy-owned, military readiness equipment and associated support 
materials that the Navy deems necessary to enable the Coast Guard to 
carry out assigned missions while operating with the Navy. Upon 
declaration of war, or when the President directs, the Coast Guard 
operates as a service of the Navy and is subject to the orders of the 
Secretary of the Navy. 

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