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December 21, 2006: 

The Honorable C. W. Bill Young: 
The Honorable John P. Murtha: 
Ranking Minority Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
House of Representatives: 

Subject: Defense Contracting--Questions for the Record: 

On September 7, 2006, I testified before the Subcommittee on recent 
trends in Department of Defense (DOD) contracting. Specifically, I 
testified about practices that undermine DOD's ability to establish 
sound business arrangements, particularly those involving the selection 
and oversight of DOD's contractors and their performance. The need for 
prudence with taxpayer funds and long-range fiscal challenges demand 
that DOD ensure that its funds are spent wisely, and that it is buying 
the right things, the right way. 

The Subcommittee requested that I respond to a number of post-hearing 
questions relating to various issues, including measures that DOD can 
employ to ensure better contracting outcomes. The specific questions 
and my responses are attached in appendix I. The responses are based on 
previously issued GAO products on DOD acquisitions, all of which were 
conducted in accordance with generally accepted government auditing 
standards. Because the responses are based on prior work, we did not 
obtain comments from DOD. 

We will make copies of this letter available to others upon request, 
and it will be available at no charge on the GAO Web site at If you have any questions about this letter or need 
additional information please contact Katherine V. Schinasi at (202) 
512-4841 or Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this letter. Key contributors to this letter were Carol Dawn 
Petersen, Chris Kunitz, and Bill Woods. 


Signed by: 

David M. Walker: 

Comptroller General of the United States: 


Appendix I: GAO Responses to Questions for the Record: 

Award and Incentive Fees: 

1.Could you address how these award and incentive fees work, in 
practical terms? 

When we talk about fees, we are really talking about a government 
expense and a form of profit for contractors. Depending on how a 
contract is structured, award and incentive fees can account for all or 
a portion of a contractor's potential fee or profit. Unlike other 
contracts, award-and incentive-fee contracts allow an agency to adjust 
the amount of fee paid to contractors based on the contractors' 
performance. In practical terms, an award-fee contract sets up a system 
where the government periodically assesses the contractor's performance 
in areas such as quality, timeliness, technical ingenuity, and cost- 
effective management. These criteria are generally subjective and can 
include inputs as well as outcomes. Incentive fees, however, are more 
objective and outcome-based. The contract identifies specific cost or 
delivery targets, and/or performance goals, and the amount of fee 
earned by the contractor is to be directly related to achievement of 
these goals. 

2.Do you believe they are an effective way to create incentives with 
contractors? In other words, do they improve contractor performance? 

Award and incentive fees can be an effective tool if properly designed 
and effectively administered. However, for these fees to be effective, 
DOD must address the underlying problems in its acquisition system and 
more directly link the fees to the outcomes it wants. Because the 
weapon system programs that result from this system are in many cases 
unexecutable and/or subject to changing "requirements" or funding 
levels, DOD has been unwilling to hold its programs or its contractors 
accountable for achieving the very acquisition outcomes it has 
identified. As a result, fees are paid even when outcomes do not meet 
expectations. Addressing these broader acquisition issues and 
strengthening the link between fees and acquisition outcomes can 
increase the accountability of DOD programs for fees paid, of 
contractors for results achieved, and the likelihood that these fees 
will motivate the contractors and be an effective tool for the 

3.Do you believe we should discontinue the use of award and incentive 

No, we do not believe they should be discontinued. Award and incentive 
fees can be useful if they are used in the appropriate setting. Each 
contract type has a use based on the level of risk involved. The 
problem occurs when you proceed into programs without realistic 
requirements and sufficiently mature technologies on which to base 
realistic cost and schedule estimates and attempt to offset that 
increased risk by offering award fees to motivate the contractor to 
overcome that risk. The important question is: Have you adequately 
defined and established appropriate criteria that enable you to measure 
outcomes? And finally, how do you apply those criteria in determining 
the level of fee that can be justified? We have made several 
recommendations to this effect, and DOD has responded favorably with 
new guidance to link award fees to acquisition outcomes. However, as 
with other recommendations we have made related to DOD weapon system 
acquisitions, the key will be how this new policy is implemented. 

Acquisition Policy: 

1.Given that DOD's acquisition policy seems to embrace practices 
endorsed by the Defense Acquisition Performance Assessment, the Defense 
Science Board Summer Study 2005, and GAO, what is preventing the 
services from consistently executing these policies? 

The services are not consistently executing these policies because DOD 
is not enforcing a knowledge-based approach, discipline is lacking, and 
business cases do not measure up. This is occurring, in part, because 
there are no consequences for actions that run counter to the intent of 
DOD acquisition polices--officials responsible for approving program 
starts are no longer in their positions by the time the consequences of 
their actions become evident. The department routinely accepts high 
levels of technology risk at the start of major acquisition programs. 
Mature technologies are pivotal to developing new products. Without 
mature technologies at the outset, a program will almost certainly 
incur cost and schedule problems. However, DOD's acquisition community 
moves forward on programs with technologies before they are mature and 
takes on responsibility for technology development and product 
development concurrently. Our work has also shown that DOD allows 
programs to begin without establishing a sound business case that 
matches requirements with technology, acquisition strategy, time, and 
funding. And once these programs begin, their requirements and funding 
change over time. In fact, program managers consider shifting 
requirements--which can result in added program complexity and costs-- 
and funding instabilities--which occur throughout the program--to be 
their biggest obstacles to success. Fundamentally, DOD will need to 
reexamine the entirety of its acquisition process and how it is 
affected by requirements and funding processes. This includes making 
significant changes to program requirements setting, funding, and 

2.What else is needed to ensure that cost, schedule, and performance 
outcomes for new weapons are predictable and achievable when these 
programs seek approval from Congress? 

DOD needs to take additional steps to achieve outcomes on par with best 
practices. These include: 

* developing and implementing an acquisition investment strategy; 

* ensuring that individual programs are executable; and: 

* clearly delineating responsibilities and holding government employees 
and contractors accountable for achieving desired results. 

While DOD has incorporated into policy a framework that supports a 
knowledge-based acquisition process similar to that used by leading 
organizations, it must establish stronger controls to ensure that 
decisions on individual programs are informed by demonstrated 
knowledge. Moreover, Congressional approval of programs that have not 
taken these steps encourages DOD's subsequent requests for additional 

3.What are the services doing now to ensure that the technologies in 
these programs are achieving the desired level of maturity before they 
proceed into system development? 

DOD is now required by law to certify to the Congress that technology 
is demonstrated to a specific maturity level before being approved for 
system development. However, this is a recent statutory requirement and 
it is too early to tell whether this requirement will ensure 
achievement of the desired technology maturity level before programs 
are authorized to proceed into system development. Prior to this new 
law, some of the criteria upon which this certification is based were 
reflected in DOD policy. However, our prior work showed that DOD 
written polices are not always observed in practice. 

4.GAO believes a sound business case is needed before a weapon system 
begins system development and demonstration yet finds many of the 
existing weapons' business cases to be broken. What do you consider key 
elements of a business case for starting a development program and how 
do you ensure these are followed in each planned development program? 

The following are the essential elements of a sound business case: 

* A requirement exists that warrants a solution consistent with 
national security priorities. 

* The developer has the mature technologies and technical knowledge 
necessary to meet the requirement. 

* The developer has a knowledge-based product development plan that 
will attain high levels of design and production maturity at the right 

* Reasonable estimates have been developed to execute the product 
development and production plan. 

* Current and future funding will be available to fully resource the 
product development and production plan. 

* The agency has the capacity, either in-house or by contractual 
arrangement, to manage its programs, including ensuring that 
contractors are subject to appropriate independent oversight as to 
cost, schedule, and quality. 

To ensure that these elements are in place at the individual program 
level, DOD needs to (1) begin programs in the context of an overall 
funding-constrained, weapon system portfolio, and (2) say "no" when 
individual programs do not measure up. DOD will need the support of the 
Congress to succeed. 

Management of Technological Risk: 

1.It has often been demonstrated that concurrent technology development 
and production in programs lead to wasted funds and undelivered 
capability. Do you share in this concern? Please elaborate. 

I do share in this concern. It is essential that technology be 
developed separately--and before--the development phase of a product or 
weapon system. This is a best practice that results in predictable 
program outcomes. Our work shows programs that proceed with mature 
technology average about 5 percent cost growth; programs with immature 
technology experience about 35 percent cost growth. Moreover, immature 
technology delays design and production maturity. 

2. Your most recent annual report on DOD weapon systems has many cases 
in which programs are entering production before TRL Level 7 has been 
reached. Can you offer some examples of programs with unnecessary 

As we noted in that report (GAO-06-391), allowing technology 
development to spill over into product development puts an extra burden 
on decision makers and provides a weak foundation for making product 
development estimates. We found that programs that began with immature 
technologies have experienced average research and development cost 
growth of 34.9 percent; programs that began with mature technologies 
have only experienced cost growth of 4.8 percent. Examples of programs 
with concurrency include the F-22A, the Joint Strike Fighter, the 
Future Combat Systems, the VH-71 Presidential Helicopter, the Global 
Hawk, the CVN-21, the DDG-1000, the Multi-mission Maritime Aircraft, 
and the National Polar-orbiting Operational Environmental Satellite 
System, among others. 

3.What prevents service acquisition executives from demanding that 
acquisition programs not go forward until technology is mature? 

First, the budgeting process requires that funding for a program is put 
on the table 2 to: 

3 years in advance--this creates pressure to proceed with the program 
despite how mature the technology is. Second, the requirements process 
tends to settle on ultimate performance, which puts pressure on 
programs to reach for exotic technology. Third, it is easier to say 
"yes" than "no". There can always be a compelling case made that a 
particular program is an exception; the problem is that there are way 
too many exceptions. And finally, this is occurring, in part, because 
there are no consequences for actions that run counter to the intent of 
DOD acquisition polices--officials responsible for approving programs 
are no longer in their positions by the time the consequences of their 
actions become evident. 

4.Should concurrent technology development and system production be an 
exception rather than the rule? 

Definitely. Sequential phasing of technology development and system 
development is DOD policy, best practice, and essential to delivering 
capability faster to the warfighter and more economically to the 

5.What concrete proposals should be put in place to ensure programs are 
not allowed to proceed to production without demonstrated maturity in 

DOD needs to make sure each new program is executable before the 
development begins, and well before production is considered. For 

* Science and technology organizations need the resources, authority, 
and tools to mature technology and transition it to acquisition 

* Requirements must be clearly defined and achievable given available 
resources, including beginning product development with mature 
technologies. Once begun, requirements should not change without 
assessing their potential to disrupt the program and without being 
fully resourced. 

* DOD should say no to programs that do not measure up, including 
canceling programs when appropriate. 

* If a decision is made to proceed with immature technologies, the cost 
and schedule estimates should be increased commensurate with the 
additional risk. 

In addition, the Congress can help by not funding programs that do not 
measure up. 

Role of Contractors: 

1.Would you agree that DOD is relying more heavily on contractors to 
manage and deliver weapon systems? 

It is clear that DOD continues to increase its reliance on contractors 
to provide both products and services. DOD's obligations on service 
contracts rose from $82.3 billion in fiscal year 1996 to $141.2 billion 
in fiscal year 2005. Based on our work looking at various major 
systems, we have observed how DOD is relying on contractors in new ways 
to manage and deliver weapon systems. For example, the Army's Future 
Combat Systems is using a lead system integrator approach in which the 
prime contractor has greater than usual responsibilities in areas such 
as requirements definition, system design, and selection of major 
subsystem contractors. This could increase taxpayer risk, especially if 
the government does not provide adequate oversight. 

2.What factors are contributing to this increased dependence on 

A variety of factors have contributed to the increased dependence on 
contractors. In the case of the Future Combat Systems program, for 
example, the Army chose to use a lead systems integrator because it did 
not believe it had the in-house resources or flexibility to field such 
a complex system in the time required. More generally, spending on 
service contracting has increased in part to compensate for a declining 
civilian workforce. Increased security requirements since September 11 
have also led to more contract spending, particularly in areas such as 
guard services. 

3.What risks does it pose to protecting the government's interests? 

As reliance on contractors has increased, so has the need to ensure 
that the government's interests are protected. Organizational conflicts 
of interest present one type of risk to the government and these must 
be identified and managed, which requires careful government oversight. 
When the government is acquiring services, challenges arise when 
attempting to define requirements, establish measurable and performance-
based outcomes, and assess contractor performance. 

4.Do you think this increased dependence has been a conscious, managed 
trend, or has it more or less happened to us? 

In the area of service acquisitions in particular, which currently 
exceeds the value of major weapon systems, the growth in spending has 
not been a managed outcome. For example, when DOD reduced the size of 
its civilian workforce in the 1990s, it did so without proactively 
shaping the workforce to ensure that it had the specific skills and 
competencies needed to accomplish its mission. DOD has acknowledged 
that it faces significant workforce challenges that, if not effectively 
addressed, could impair the responsiveness and quality of acquisition 
outcomes. In a recent report, Defense Acquisitions: Tailored Approach 
Needed to Improve Service Acquisition Outcomes, GAO-07-20, Nov. 2006, 
we recommended a number of steps DOD should take to make service 
acquisitions a managed outcome. 

5.What steps do we need to take to protect the government's interests 
(that is, on behalf of both the warfighter and the taxpayer) in an 
environment of increasing dependence on contractors? 

We are currently reviewing a number of aspects of this issue, including 
conflict of interest laws and ethical conduct standards for contractor 
employees. In addition, the Congress can play an important role through 
its oversight function in making sure that taxpayer interests are 
protected. On November 17, 2006, we offered a set of issues, based on 
GAO's work, for consideration for the agenda of the 110th Congress 
(Suggested Areas for Oversight for the 110th Congress, GAO-07-235R). 
The first set suggested targets for near-term oversight, including the 
need to address governmentwide acquisition and contracting issues. In 
this regard, we noted that the work of the government is increasingly 
being performed by contractors and many agencies rely on contractors to 
carry out their basic missions. At the same time, GAO's list of 
government high-risk areas includes acquisition and contract management 
issues that collectively expose hundreds of billions of taxpayer 
dollars to potential waste and misuse. Consequently, we suggested that 
Congress continue to monitor agencies' efforts to address existing 
problems, while facilitating a re-examination of the rules and 
regulations that govern the government-contractor relationship in an 
increasingly blended workforce. Actions and topics that need continued 
congressional oversight include: 

* requiring agencies to report on mechanisms in place to ensure that 
contractors are playing appropriate roles and that agencies have 
retained sufficient workforce capacity to monitor contractor cost, 
quality, and performance, particularly in such critical operations as 
responding to Hurricane Katrina and rebuilding Iraq; 

* assessing agencies' efforts to ensure that acquisitions are 
performance-and outcome-based, with appropriate risk-sharing contracts 
in place. 

* requiring agencies with significant acquisition budgets, such as DOD, 
to better align requirements, budget, and acquisition processes to 
reconcile the differences between wants, needs, affordability, and 
sustainability, given current and future demands and resources; and: 

* monitoring the implementation of agency action plans to address the 
GAO high-risk areas related to acquisition and contract management. 

Incremental Funding: 

1.Is it a good idea to expand the use of incremental funding for major 
weapon system programs? If not, why not? 

GAO has advocated full funding for capital asset acquisitions as a way 
to increase recognition of implied commitments embodied in budgetary 
decisions as compared to the incremental funding approach. That said, I 
am not aware of any plans by DOD to expand the use of incremental 
funding for major weapon system programs. Nevertheless, in testimony 
earlier this year before the Airland Subcommittee of the Senate Armed 
Services Committee, I expressed concern about an Air Force plan to use 
incremental funding for a multiyear contract for the F-22A program 
(Tactical Aircraft: Questions Concerning the F-22A's Business Case, GAO-
06-991T, July 25, 2006). Subsequent to that hearing, the Congress 
authorized multiyear procurement for the F-22A, but expressly 
prohibited the use of incremental funding for the contract. 

2.Is it more dangerous to expand the use of incremental funding when 
the overall budget is projected to fall or become more competitive? If 
so, why? 

Inherent in the concept of incremental funding of a program or project 
is the expectation that additional funds will be available in 
subsequent years to bring the program or project to completion. 
Declining budgets or increased competition for available resources in 
subsequent years would certainly make it more difficult for that 
expectation to be realized. 

Navy: DD(X) Destroyer: 

1.What factors have contributed to driving DD(X) costs up and 
quantities down? 

DD(X) (now DDG 1000) lead ship procurement costs have increased to $3.3 
billion because the Navy underestimated the resources that would be 
required to construct (as well as design) a multi-mission ship offering 
significant new capabilities related to air defense, land attack, and 
undersea warfare. In addition, the Navy did not complete a 
comprehensive, program life cycle cost estimate until March 2005. Prior 
to this estimate, the Navy relied on program and contractor estimates 
and the life cycle cost estimate completed in 1997 for the former DD 21 

2.Is this symptomatic of DOD's requirements, budgeting, and acquisition 
processes in general? 

Yes. Our work has shown that DOD programs often cost more and take 
longer to develop than estimated when program managers are forced to 
make cost and schedule predictions based on unproven technologies. 
Alternatively, initiating product development with a high level of 
knowledge about program technologies can help mitigate such risks. 

As knowledge has grown in the DD(X) program, the Navy has frequently 
discovered that its desired capabilities did not align with the funding 
it had available. To compensate, the Navy has steadily reduced planned 
ship quantities and land attack capabilities to enable continued 
funding of other technology demonstration efforts on the ship. 

We have also pointed out that the Navy generally does not hold a 
milestone B, which approves entry into the System Development and 
Demonstration phase, for ship programs until it is authorizing ship 
construction. Other DOD programs are required to complete milestone B 
before entering System Development and Demonstration. Completion of an 
independent cost estimate is tied to the milestone. As a result the 
Navy invested billions in DD(X) research and development without an in- 
depth analysis of cost. This practice of delaying the milestone 
continues today on such programs as Littoral Combat Ship and amphibious 
assault ship (LHA 6). 

3.What are the key risks that could jeopardize delivering the DD(X) on 
time and within cost? 

The Navy's strategy to continue maturing DD(X) technologies while 
refining the ship's design and beginning construction of lead ships 
places the program at significant risk for additional cost growth and 
schedule delays. 

Key development risks include remaining work associated with maturing 
technologies, especially the volume search radar; completing design of 
the integrated deckhouse; and maintaining software release schedules. 

Because the Navy plans to begin construction of the lead DD(X) ships 
with an incomplete understanding of the ship's critical technologies, 
design changes may occur that could require costly rework throughout 
the construction phase for the lead ships. 

4.What steps need to be taken on DD(X) to ensure that it is delivered 
on time and within cost? 

The Navy's cost estimate for DD(X) assessed a 45 percent probability of 
the lead ship delivering at or below a cost of $3.3 billion. 
Consequently, the Navy may be forced to revisit planned capabilities 
for the ship in the event that its $3.3 billion cost target becomes 
unattainable. Moreover, before construction begins in fiscal year 2008, 
the Navy should ensure that all technologies, such as the volume search 
radar, have been fully demonstrated. 

Navy/marine Corps: Expeditionary Fighting Vehicle (EFV): 

1.What went wrong on the EFV program after it had such a good start? 

Program difficulties occurred in part because not enough time was 
allowed to demonstrate maturity of the EFV design during the System 
Development and Demonstration (SDD) phase. Best practices and current 
DOD acquisition policy call for system integration work to be conducted 
before critical design review is held. This review represents the 
commitment to building full-scale SDD prototypes that are 
representative of the production vehicle. In the case of the EFV, 
however, the SDD critical design review was held before the system 
integration work had been completed. While testing of early prototypes 
began one year before the SDD critical design review, it continued for 
three more years after the decision to begin building the SDD 
prototypes. Test schedules for demonstrating design maturity proved 
optimistic and success-oriented, and were extended, and major problems 
were discovered in testing of the prototypes. Specifically, the 
original schedule did not allow adequate time for testing, evaluating 
the results, fixing the problems, and retesting to make certain that 
problems are fixed before moving forward. The SDD schedule of about 
three years proved too short to conduct all necessary planning and to 
incorporate the results into design changes, resulting in schedule 
delays and cost increases. 

2.Could these problems have been avoided? 

Yes. The program was positioned for a good start in that it had mature 
technologies fairly early. Subsequent problems could have been avoided 
if the program's System Development and Demonstration phase followed 
DOD policy preferences and best practices as they related to design and 
production maturity. 

3.Was DOD policy in error, or was the program not following policy? 

DOD policy was not in error. In fact, the EFV was following a knowledge-
based approach and other best practices, which had been incorporated 
into DOD's guidelines in 2000 for major acquisition and expanded into 
its May 2003 policy. In addition to having reached a relatively high 
level of technology maturity before starting SDD, the EFV program had 
earlier adopted best practices in its implementation of Integrated 
Product Teams and had trained its program office staff on this 
acquisition improvement initiative. As noted above, the EFV departed 
from the tenets of DOD acquisition policy and best practices shortly 
after SDD began, when it attempted to do system integration and system 
demonstration concurrently. 

4.How do strategies that go against sound policy get approved? 

Our work on multiple weapon systems shows that most programs proceed 
with strategies that do not comport with the knowledge-based approach 
embodied in DOD written policies. For example, in our March 2006 
assessment of weapon systems, only 10 percent of the weapon systems 
reviewed had begun SDD with mature technologies. There are several 
reasons for this. First, although DOD acquisition policy allows 
individual programs to tailor their own acquisition approaches, it does 
not include sufficient controls to ensure that key aspects of the 
policy are implemented. Second, programs proceed with optimistic 
assumptions about what they can accomplish for their estimated cost and 
schedules. Third, as weapon system programs proceed through 
development, the desire to protect the program against disruption 

What lesson from the EFV experience can be drawn and applied to DOD 
acquisitions in general? 

Using the lens of a knowledge-based business case, the EFV at the start 
of SDD was sound on requirements and technology maturity (knowledge 
point 1). While design stability was judged to be attained at the 
critical design review (knowledge point 2) immediately after entering 
SDD, it appears that holding critical design review so soon was 
premature. This particular acquisition strategy did not provide the 
resources (time and money) necessary to demonstrate design maturity and 
production maturity (knowledge point 3). A key lesson learned is that 
while it is necessary to demonstrate one knowledge point before a 
subsequent one can be demonstrated, this alone is not sufficient. 
Attaining one knowledge point does not guarantee the attainment of the 
next one. Rather, the acquisition strategy for any program must 
adequately provide for the attainment of each knowledge point even in 
programs, such as the EFV, which were in a favorable position at the 
start of SDD. If the acquisition strategy does not adequately provide 
for the attainment of all knowledge points, the estimates for cost and 
schedule will not have a sound basis. 

Navy: Cost Growth in Shipbuilding Programs: 

1.What did the GAO's work reveal as the major causes of continued 
overruns in the Navy's shipbuilding program? 

Our February 2005 report (GAO-05-183) on cost growth in shipbuilding 
programs cited unrealistic estimates of costs as a key source of cost 
growth. Unrealistic estimates in turn led to unrealistic budgets and 
contract prices. Increases in labor hours and material costs were 
common, with low technology maturity at program start and immature 
design before beginning production contributing to these. We also 
identified deficiencies in cost reporting as a problem. 

2.The Navy has pledged over the past year or so to address this 
problem. Have you seen any concrete proposals, and if so, what do you 
think of them? 

The Navy has cited several actions it has taken to improve cost 
performance. These include using risk analysis in developing cost 
estimates, budgeting at the Office of the Secretary of Defense Cost 
Analysis Improvement Group estimate, using realistic inflation rates in 
developing cost estimates, withholding fees if the contractor does not 
provide useable and timely cost reports, and introducing more 
aggressive contract incentives. 

We believe these are positive steps but it remains to be seen whether 
the Navy will follow through with these efforts. For example, while the 
Navy has said that it will use contract incentives in the form of more 
demanding share lines, lower ceiling prices, and lower minimum fees 
(for cost plus incentive fee contracts), a key issue is whether these 
policies will be sustained over time. 

We also believe that further actions are needed. To reduce the risk of 
cost growth, the Navy needs to insure that technology risk is not 
carried forward into construction. Technology risk, and with it the 
potential for design changes, needs to be addressed before construction 
begins. This has not been the case with the DD(X) program, where key 
technologies--such as the dual band radar--have not been fully 

Moreover, we believe the Navy could better ensure realism of budgets 
and contracts. We believe funding and contracting for a detailed design 
of the ship should be separated from the funding and contracting for 
construction. A budget request for ship construction would be informed 
by the knowledge gained from the first year or two of detail design. 

3.Should ship programs be put on firm fixed price contracts? 

Use of fixed price contracts is dependent on how much uncertainty 
exists. It is important to reduce uncertainty early in a program so 
that technology and design risks are not carried forward into 
construction. Following a knowledge-based approach will likely enable 
follow-on ships to use fixed price contracts. Use of such contracts 
would provide the strongest incentive for improving cost performance-- 
under a fixed price contract the cost risk of performance generally 
shifts to the contractor. 

4.What specific ideas would you offer to deal with this problem? 

In addition to the suggestions discussed above, we believe the Navy 
should increase its use of cost-performance trade studies--including 
design-to-cost and cost as an independent variable (CAIV) techniques-- 
to identify cost reduction opportunities in its new ship designs and 
position the Navy to achieve "best value" outcomes in its shipbuilding 
programs. Establishing design-to-cost goals early in a program 
encourages consideration of cost as a key design parameter when 
evaluating other parameters such as schedule, performance, and 
operational capability. Goals can be set in each phase of the 
shipbuilding acquisition process and tracked until desired cost targets 
have been achieved. In addition, iterative CAIV analyses can aid Navy 
efforts to properly balance cost with performance, design, and system 
requirements in its shipbuilding programs. Such analyses can help the 
Navy quantify and evaluate the degree to which its planned investments 
will result in increased utility to the warfighter and subsequently 
position the Navy to tailor future ship capabilities in ways that 
maximize value. 

Army: Future Combat Systems (FCS): 

1.Was the Army's decision to begin System Development and Demonstration 
phase with over 75 percent of FCS critical technology elements immature 
consistent with DOD policy? 

The decision to enter the System Development and Demonstration phase 
with 75 percent of technologies immature does not satisfy the basic 
tenets of DOD policy and best practices. DOD policy and best practices 
are very clear that technologies should be mature before system 
development begins. FCS, in particular, is worrisome because it is now 
three years past the beginning of development, and most of the 
technologies remain immature by best practice standards. 

2.In retrospect, what should have been done to bring the program in 
line with DOD policy and best practices? 

The program should not have entered System Development and 
Demonstration with undefined requirements and immature technologies. 
Rather, it should have remained in the science and technology community 
until the enabling technologies were mature, or requirements should 
have been traded down to match the available technologies. 

3.What are the implications for other acquisition programs--will they 
adhere to DOD policies for awarding System Development and 
Demonstration contracts for only those weapons whose critical 
technologies have achieved desired maturity levels? 

Programs like FCS underscore the challenge in getting better program 
outcomes. Despite being out of alignment with the knowledge-based 
approach outlined in DOD policy and advocated by best practices, the 
program was approved to begin the System Development and Demonstration 
phase and funded at high levels. The example of success then becomes 
not programs that follow the intent of the policy, but those that do 
not and still win approval and funding. 

4.What can be done to mitigate risks in FCS, given where it is today? 

We have recommended that the Secretary of Defense limit DOD's 
commitment to the FCS product development phase and eventual production 
until a sound business case that is consistent with DOD acquisition 
policy and best practices can be clearly demonstrated. Further, we have 
recommended a go/no-go decision be made in 2008 after the preliminary 
design is done. This would in essence be the time that the program is 
ready for a system development decision, as technologies should have 
reached a basic level of maturity and system level requirements should 
be finalized by this time. In addition, the Army's fiscal outlook is 
extremely challenging. Outside of the Army, competition for production 
dollars will be great as both the Air Force and Navy have significant 
production programs planned for that time. Outside DOD, there will be 
an increasing squeeze on discretionary funds (weapons are 
discretionary) from other federal sectors. 

5.What does the reliance on a lead systems integrator (LSI) say about 
the Army's ability to manage a program of this magnitude? 

The Army's reliance on a LSI suggests that the FCS is so ambitious in 
scope, complexity and schedule, that it exceeded the Army's own ability 
to effectively manage such a complex program. 

6.What risks does the use of an LSI pose for protecting the interests 
of the government? 

The use of an LSI can pose a risk with respect to organizational 
conflicts of interest. For example, an LSI might favor its own 
solutions over other competing solutions. Further, if the LSI stands to 
benefit from the continuation of a program into production, it has a 
financial stake in the outcome that could compromise judgment. Over 
time, the government's ability to oversee and act independently from 
the LSI could weaken as experienced government managers retire and 
dependence on the LSI increases. 

Army: Warfighter Information Network-Tactical (WIN-T): 

1.Was WIN-T another program that was approved with unrealistic 
expectations for requirements, technology, cost, and schedule? Did the 
program's original strategy follow DOD policy and best practices? 

At the time DOD approved the start of system development in August 
2003, only three of WIN-T's 12 critical technologies were close to full 
maturity. Although DOD policy calls for technology maturity by the 
start of system development, DOD did not require that the other nine 
critical technologies reach a level close to full maturity until the 
start of low-rate production.[Footnote 1] The technical and program 
risks of moving forward with immature technologies are exacerbated by 
the significant interrelationships among WIN-T's critical technologies. 
For example, mobile communications technologies--a critical component 
of WIN-T's operational concept--rely on antennas and other technologies 
to achieve their performance objectives, and a lag in the development 
of any of these technologies would result in a lag in the overall 
development of mobile communications. 

With respect to requirements, DOD had approved an operational 
requirements document for WIN-T shortly before the start of system 
development. However, WIN-T's interdependencies with other programs 
further heighten the technical challenges and risks associated with the 
program. In particular, at the time WIN-T system development began, the 
Army's networking requirements for FCS--which WIN-T is expected to 
heavily support--were not well understood. As a result, the networking 
needs of FCS and the capabilities WIN-T planned to deliver to this 
program were not well synchronized. In addition, WIN-T's tightly 
compressed schedule assumed nearly flawless execution and did not allow 
sufficient time for correcting problems if they arose. 

2.What steps did the Army have to take to buy JNN? Why was this 
approach necessary? 

Rather than undergoing the normal acquisition processes, the Army 
resorted to extraordinary measures outside of the normal requirements, 
acquisition, and budgeting processes--including the supplemental budget 
process--to rapidly acquire and field the Joint Network Node- Network 
(JNN-N). Specifically, instead of initiating a formal acquisition 
program, the Army utilized existing contracts, originally established 
for modifying legacy networking systems, to procure JNN-N equipment in 
approximately 5 months. For example, a purchase agreement from the WIN-
T program was used to procure satellite trailers; a General Services 
Administration contract was used to arrange training; and existing Army 
contracts were used to procure JNN-N in seven spirals, with each spiral 
equating to approximately one division's worth of equipment. 
Supplemental funding totaling $763.6 million for fiscal years 2004 and 
2005 was used to purchase the first seven spirals of JNN-N. Additional 
supplemental funding totaling $818.7 million for fiscal year 2006 is 
being used to acquire JNN-N lots 8 through 10.[Footnote 2] 

The Army's approach for acquiring JNN-N was intended to address an 
urgent need identified during Operation Iraqi Freedom and Operation 
Enduring Freedom to provide better communications capabilities between 
soldiers fighting out of sight of one another. DOD's processes for 
approving formal programs are extensive and have not been conducive to 
rapid acquisition.[Footnote 3] However, these processes exist to ensure 
that programs are managed and overseen, properly funded, and adequately 
tested prior to fielding. The Army's decision to acquire the capability 
through an approach that was outside these processes did not address 
the legal and policy requirements for managing an acquisition program 
of this magnitude. In particular, JNN-N procurement did not complete 
initial operational testing before going beyond low-rate production, as 
required by law and DOD policies. 

The acquisition of JNN-N through extraordinary measures was made 
necessary, in part, by DOD's decision to acquire a revolutionary WIN-T 
capability. When the Army opted to pursue large technology advances in 
networking capabilities to support the future force through WIN-T, 
rather than pursuing a more incremental approach, it accepted a gap in 
providing tactical networking capabilities to the warfighter. Moreover, 
the Army's optimistic acquisition approach for WIN-T created the 
impression that this capability gap was far smaller than it really was. 
As the Army pursued an advanced WIN-T capability, its existing 
communications equipment became increasingly obsolete and the need for 
near-term improvements became more urgent with the onset of the war in 
Iraq. If the Army had followed DOD's acquisition policy preferences, 
which emphasize achieving capabilities in increments based on mature 
technologies to get capability into the hands of the user more quickly, 
it might have been able to get needed communications capabilities to 
the warfighter sooner. 

3.What lessons do the WIN-T and JNN acquisitions have for DOD's 
requirements, budgeting, and acquisition processes? 

While JNN-N's acquisition was a pragmatic response to an urgent need, 
the urgency was brought about, in part, by the Army's decision to use a 
revolutionary, rather than evolutionary, approach to acquiring WIN-T. 
This approach appeared less risky at the time because optimistic 
projections created the impression that the capability gap was narrower 
than it really was. In hindsight, focusing on meeting the needs of the 
future force at the expense of providing capabilities to the current 
force proved detrimental once operations commenced in Iraq. To field 
capabilities quickly, the Army did not use DOD's formal requirements 
setting, budgeting, and acquisition processes, and over a billion 
dollars was spent on JNN-N without it being established as a formal 
program. This is not a good model for providing needed capabilities. 
The WIN-T/JNN-N experience has implications beyond these two 
communications systems. The Army's experience thus far creates 
opportunities to capture lessons learned and apply them not only to the 
Army's two programs but also to DOD's larger ongoing efforts to reform 
its acquisition processes. We recently recommended that the Secretary 
of Defense examine ways to apply the lessons learned from the Army's 
experience with the acquisition of WIN-T and JNN-N to ongoing DOD-wide 
efforts to reform its key decision support processes for setting 
requirements, allocating resources, and acquiring weapon systems. DOD 
concurred with this recommendation. 

4.What challenges are presented by the merging of aspects of the WIN-T 
and JNN programs? 

The Army ultimately intends to create a tactical communications network 
that functions as a single tactical backbone. To achieve this, the Army 
must now reconcile two separate acquisition efforts intended to meet 
one overarching need. Without a sound strategy for meeting near-and 
long-term needs for communications and networking capabilities, 
significant risks remain. Affordability continues to be an overriding 
concern, particularly as the Army and DOD as a whole struggle to meet 
the needs of current military operations while making prudent 
investments in the future in a difficult fiscal environment. We 
recently recommended that the Secretary of Defense direct the Secretary 
of the Army to develop a sound strategy for transitioning the Army's 
tactical communications from JNN-N to WIN-T. Such a strategy needs to 
ensure that requirements for both of these efforts are clearly defined 
and well integrated, that the fielding strategy is executable, and that 
sufficient funding has been committed. DOD concurred with this 
recommendation and noted that the Office of the Secretary of Defense 
has directed that an approved JNN-N to WIN-T transition strategy be in 
place before acquiring additional JNN-N systems. 

Air Force/Navy/Marine Corps: Multi-Service F-35 Joint Strike Fighter 

1.Were JSF technologies mature at the time of the decision to enter 
System Development and Demonstration? 

JSF entered development without its eight critical technologies being 
mature. Information from the program office indicates that maturity has 
progressed. However, seven technologies were not mature at the recent 
design review and two of the technologies needed for mission 
effectiveness are not expected to be fully mature until 3 years after 
production begins. We reported in October 2001 that failure to mature 
these critical technologies could result in increases in the production 
and long-term ownership costs, schedule delays, and compromised 
performance as problems arise in product development. 

2.Is the program ready for a low-rate initial procurement decision in 
FY 2007? What risks does the program face at the time of this decision? 

The JSF program is not well positioned to enter production at this 
time. At the time of the low-rate production decision, only one early 
prototype will have flown and less than one percent of the flight 
testing will be complete. In addition, none of the three variants will 
have a production-representative aircraft built and in flight testing. 
The program intends to invest $26 billion in initial production before 
a fully integrated, production-representative aircraft will fly in 
2011--4 years after the production decision. The cost of discovering 
design problems during production could be significant if testing shows 
that large, structural components of the aircraft require 
modifications. Furthermore, the length and scope of the remaining 
effort make it difficult to accurately estimate cost and completion 
schedules. The program has about 7 years to complete the remaining 
activities of the System Development and Demonstration phase, such as 
developing 22 million lines of software code and completing a 7-year, 
12,000-hour flight test program. By investing heavily in procuring JSF 
aircraft before flight testing proves it will perform as expected, DOD 
has significantly increased its risk of adding more cost and delaying 
the delivery of critical capabilities to the warfighter. 

3.What criteria must the program meet to demonstrate readiness for low- 
rate production? 

Key indicators of a program's readiness for entering production and 
making significant investments in tooling, facilities, and materials 
include demonstrating that (1) the aircraft's flying qualities function 
within the parameters of the flight envelope, (2) the aircraft design 
is reliable, or (3) a fully integrated and capable aircraft system can 
perform as intended. In addition to a stable design, production 
processes must be mature. This point is achieved when the program can 
manufacture the aircraft within cost, schedule, and quality targets. 
Because the program will lack key design and testing knowledge, DOD 
plans to use cost reimbursement contracts for early production 
aircraft. This type of contract places significantly greater cost risk 
on DOD and the taxpayer. Confidence that investment decisions will 
deliver expected capability within the cost and schedule goals is 
likely to increase when flight testing proves the JSF will work as 

4.When will the first production-representative, fully integrated 
prototype aircraft be demonstrated? How many production aircraft will 
be on contract by that time? 

Under the current schedule, the first production representative, fully 
integrated aircraft will not begin flight testing until the 2011 
timeframe. This occurs 4 years after production has begun. At that 
time, DOD will have committed to buy about 190 aircraft costing $26 
billion. By the time testing is planned to be completed, in 2013, DOD 
will have procured more than double that amount--424 aircraft--at an 
estimated cost of about $49 billion. 

5.What are the cost implications if that prototype indicates the need 
for design changes at that stage of the program? 

The costs of discovering design changes could be significant if testing 
shows that large, structural components of the aircraft require 
modifications or mission systems require additional development. For 
example, problems discovered late in the development of the F-22A 
increased a 4-year flight test program to about 8 years and affected 
the program's ability to conduct operational testing and move into 
production. In the JSF program, design changes needed in one variant 
could also ripple through the other two variants, reducing efficiencies 
necessary to lower production costs with common parts and manufacturing 
processes for the three variants. Some industry officials have 
indicated that the cost of design changes such as these could be 10 to 
1,000 times greater, depending on how far the product has progressed 
into production. 

6.Under a cost-reimbursable production contract, will the government be 
responsible for assuming the risk and cost of any needed design 

Cost reimbursement contracts provide for payment of allowable incurred 
costs, to the extent prescribed by the contract. These contracts are 
generally used when uncertainties involved in contract performance do 
not permit costs to be estimated with sufficient accuracy to use any 
type of fixed price contract. Under a cost reimbursement contract, the 
government assumes most of the risks of performance--because it agrees 
to pay the contractor its allowable incurred costs to the extent 
prescribed in the contract. 

Air Force: F-22 Aircraft: 

1.What fundamental causes led to the F-22's cost, schedule, and 
performance problems? 

We have reported in the past on the inefficiencies of the F-22 
acquisition program that led to numerous schedule delays and cost 
increases. This program provides an excellent example of what can 
happen when a major acquisition program is not guided by the principles 
of evolutionary, knowledge-based acquisition. The F-22 program failed 
to match requirements with resources and make early trade-offs and took 
on a number of new and unproven technologies. As a result, the program 
failed to capture the appropriate technology, design, and manufacturing 
knowledge of the F-22 aircraft at the right times during the 
development process. This created a challenging and risky acquisition 
environment that ultimately delayed by about 10 years to the warfighter 
the capabilities expected from this new aircraft. It additionally led 
to rising development costs, affordability issues, and changing 
requirements over the 19 years in development. 

2.Has the F-22 followed DOD policy and best practices? 

No, the F-22 did not follow a best practices approach to its 
development and procurement. As to whether the F-22 followed DOD 
policy, we have not specifically assessed the F-22 program's compliance 
with DOD policy. However, we reported in 2003 (GAO-04-53) and 2006 (GAO-
06-368) that DOD policy includes a good framework for weapons system 
development and acquisition, but it does not include sufficient 
controls to ensure key elements of the policy are implemented in each 
phase of a weapons system program. As a result, our 2006 report found 
that weapons system development programs continue to experience cost 
and schedule growth. 

3.What concerns do you have over the multiyear procurement proposal for 
buying more F-22s? 

In testimony earlier this year before the Airland Subcommittee of the 
Senate Armed Services Committee, we expressed a number of concerns 
about an Air Force proposal for multiyear procurement of the F-22A 
(TACTICAL AIRCRAFT: Questions Concerning the F-22's Business Case, GAO- 
06-991T, July 25, 2006). These concerns related to the savings expected 
to be realized, the use of incremental funding, and the cost risk that 
could arise if quantities to be ordered continued to decline. Although 
Congress subsequently authorized multiyear procurement of the F-22A, it 
listed a number of requirements the Air Force would have to address 
related to the concerns we had expressed. In addition, the Congress 
expressly prohibited the use of incremental funding. 

Questions from Representative Kaptur: 

In addition to the questions listed above, the Subcommittee also 
submitted to GAO and DOD a list of eleven supplemental questions for 
the record from Representative Marcy Kaptur, some of which deal with 
the use of contractors in Iraq. These questions and others touch on an 
emerging issue of critical importance, that is, the increasing role 
that contractors play in conducting the business of government. We 
appreciate and share the concern underlying the questions. Although DOD 
is in a better position than GAO to provide the information that would 
be needed to respond to each of the eleven questions, we have issued 
reports regarding the use of private security contractors in Iraq and 
DOD's use of logistic support contractors, which we believe are 
relevant to the issues raised by Representative Kaptur. The reports 

Rebuilding Iraq: Actions Needed to Improve Use of Private Security 
Providers, GAO-05-737, July 2005. 

Military Operations: DOD's Extensive Use of Logistics Support Contracts 
Requires Strengthened Oversight, GAO-04-854, July 2004. 

We would be pleased to provide copies of these reports upon request. 
They are also available on our Web site, 



[1] In mid-2003, the Army developed risk mitigation plans for the nine 
immature technologies, but a program review sponsored by the Army in 
July 2004 concluded that these plans lacked sufficient detail. 

[2] In keeping with its transition from a division-based to a modular 
brigade-based force, the Army is now procuring JNN-N in batches of 
brigade sets. It terms these batches lots, rather than spirals. 

[3] The Army explored using special rapid acquisition authority to 
respond to combat emergencies to formally waive acquisition laws and 
policies for JNN-N, but the dollar limit for use of this authority-- 
$100 million per year for the entire Department of Defense--was far too 
low to accommodate the Army's need for JNN-N. See section 806 of the 
Bob Stump National Defense Authorization Act for Fiscal Year 2003 (P.L. 
107-314), as amended by section 811 of the Ronald W. Reagan National 
Defense Authorization Act for Fiscal Year 2005 (P.L. 108-375). 

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