    [House Hearing, 106 Congress]
    [From the U.S. Government Publishing Office]

           F-22 COST CONTROLS: WILL PRODUCT COST SAVINGS MATERIALIZE?

    =======================================================================

                                    HEARING

                                   before the

                       SUBCOMMITTEE ON NATIONAL SECURITY,
                      VETERANS AFFAIRS, AND INTERNATIONAL
                                   RELATIONS

                                     of the

                                  COMMITTEE ON
                               GOVERNMENT REFORM

                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED SIXTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 JUNE 15, 2000

                                   __________

                               Serial No. 106-221

                                   __________

           Printed for the use of the Committee on Government Reform

      Available via the World Wide Web: http://www.gpo.gov/congress/house
                          http://www.house.gov/reform

                                  -----------

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                         COMMITTEE ON GOVERNMENT REFORM

                         DAN BURTON, Indiana, Chairman
    BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
    CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
    CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
    ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
    JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
    STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
    JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
    THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
    DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington,
    MARK E. SOUDER, Indiana                  DC
    JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
    STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
    MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
        Carolina                         ROD R. BLAGOJEVICH, Illinois
    BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
    DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
    ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
    LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
    JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
    GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
    DOUG OSE, California                             ------
    PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont
    HELEN CHENOWETH-HAGE, Idaho              (Independent)
    DAVID VITTER, Louisiana

                          Kevin Binger, Staff Director
                     Daniel R. Moll, Deputy Staff Director
               David A. Kass, Deputy Counsel and Parliamentarian
                        Lisa Smith Arafune, Chief Clerk
                     Phil Schiliro, Minority Staff Director
                                     ------

    Subcommittee on National Security, Veterans Affairs, and International
                                   Relations

                    CHRISTOPHER SHAYS, Connecticut, Chairman
    MARK E. SOUDER, Indiana              ROD R. BLAGOJEVICH, Illinois
    ILEANA ROS-LEHTINEN, Florida         TOM LANTOS, California
    JOHN M. McHUGH, New York             ROBERT E. WISE, Jr., West Virginia
    JOHN L. MICA, Florida                JOHN F. TIERNEY, Massachusetts
    DAVID M. McINTOSH, Indiana           THOMAS H. ALLEN, Maine
    MARSHALL ``MARK'' SANFORD, South     EDOLPHUS TOWNS, New York
        Carolina                         BERNARD SANDERS, Vermont
    LEE TERRY, Nebraska                      (Independent)
    JUDY BIGGERT, Illinois               JANICE D. SCHAKOWSKY, Illinois
    HELEN CHENOWETH-HAGE, Idaho

                                   Ex Officio

    DAN BURTON, Indiana                  HENRY A. WAXMAN, California
                Lawrence J. Halloran, Staff Director and Counsel
                      J. Vincent Chase, Chief Investigator
                               Jason Chung, Clerk
                        David Rapallo, Minority Counsel

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on June 15, 2000....................................     1
    Statement of:
        Li, Allen, Associate Director, Defense Acquisitions Issues,
          National Security and International Affairs Division, U.S.
          General Accounting Office, accompanied by Leonard L.
          Benson, senior evaluator; and Donald Springman, senior
          evaluator..................................................     5
        Schneiter, George R., Director, Strategic and Tactical
          Systems, Office of the Under Secretary of Defense for
          Acquisition, Technology and Logistics; and Darleen A.
          Druyun, Principal Deputy Assistant Secretary of the Air
          Force for Acquisition and Management, accompanied by Joseph
          T. Kammerer, Deputy Assistant Secretary of the Air Force,
          Cost and Economics.........................................    44
    Letters, statements, etc., submitted for the record by:
        Barr, Hon. Bob, a Representative in Congress from the State
          of Georgia, prepared statement of..........................    24
        Chenoweth-Hage, Hon. Helen, a Representative in Congress from
          the State of Idaho, prepared statement of..................    91
        Druyun, Darleen A., Principal Deputy Assistant Secretary of
          the Air Force for Acquisition and Management, prepared
          statement of...............................................    55
        Li, Allen, Associate Director, Defense Acquisitions Issues,
          National Security and International Affairs Division, U.S.
          General Accounting Office, prepared statement of...........     8
        Schneiter, George R., Director, Strategic and Tactical
          Systems, Office of the Under Secretary of Defense for
          Acquisition, Technology and Logistics, prepared statement
          of.........................................................    46
        Shays, Hon. Christopher, a Representative in Congress from
          the State of Connecticut, prepared statement of............     3

           F-22 COST CONTROLS: WILL PRODUCT COST SAVINGS MATERIALIZE?

                                  ----------

                            THURSDAY, JUNE 15, 2000

                      House of Representatives,
           Subcommittee on National Security, Veterans
                  Affairs, and International Relations,
                                Committee on Government Reform,
                                                        Washington, DC.
        The subcommittee met, pursuant to notice, at 10 a.m., in
    room 2154, Rayburn House Office Building, Hon. Christopher
    Shays (chairman of the subcommittee) presiding.
        Present: Representatives Shays, Barr, Schakowsky, and
    Tierney.
        Staff present: Lawrence J. Halloran, staff director and
    counsel; J. Vincent Chase, chief investigator; Jason M. Chung,
    clerk; Earley Green, minority assistant clerk; and David
    Rapallo, minority counsel.
        Mr. Shays. Good morning. I'd like to call this hearing to
    order and to welcome our witnesses and our guests.
        Last year, the Air Force's F-22 air superiority fighter
    encountered unexpected turbulence when House appropriators
    questioned the ability of the program to stay within
    congressional mandated caps on design and development costs. In
    December, we were assured those expenses were being rigorously
    monitored and successfully controlled.
        But looming over the horizon even then were unacceptably
    high cost projections for the next more expensive phase of the
    program, aircraft production. So we asked the General
    Accounting Office [GAO], to evaluate cost production control
    plans being relied on to meet critical F-22 affordability
    goals. The results of their review indicate the Department of
    Defense [DOD], and the Air Force, and F-22 contractors, have
    made some progress, but have yet to tame the persistent cost
    growth that has long plagued the program.
        GAO finds some planned cost control strategies unlikely to
    yield any real savings. According to DOD, $21 billion in cost
    reductions will be needed to keep F-22 production spending
    below the $37 billion ceiling. To achieve savings on that
    scale, hundreds of cost reduction plans have been formulated by
    F-22 airframe and engineer manufacturers. But assessments of
    the impact of those plans vary widely in both methodology and
    outcome.
        One estimate by the Office of the Secretary of Defense
    concludes the program could exceed congressional production
    cost caps by more than $8 billion. The Air Force estimate
    conforms neatly with the cost cap, assuming almost complete
    success in trimming expenses, while pushing the risk of cost
    growth to the out years.
        While reaching very different conclusions, the two
    estimates appear to share common flaws. Both include
    speculative savings and potential cost shifts. Significant
    savings are assumed for multi-year procurements that may not be
    approved. Additional savings are seen flowing from
    manufacturing efficiencies once the Joint Strike Fighter [JSF],
    begins production.
        But Air Force support for the JSF may be waning. Savings
    attributed to contractor provided maintenance may only defer,
    not avoid, depot costs later in the program. Real savings are
    critical to the success of the Air Force's premier tactical air
    modernization effort. If high end estimates prove true and the
    program is to remain within budget, the total F-22 purchase
    would have to be reduced by 85 planes, nearly one-quarter of
    the planned production run of 339 aircraft. That would endanger
    the military utility and the fiscal viability of the F-22.
        Our goal this morning is clearly understanding how the Air
    Force can achieve, not just plan, the ambitious F-22 production
    cost reduction program. Again, we welcome our witnesses and
    look forward to their testimony.
        [The prepared statement of Hon. Christopher Shays follows:]

        [GRAPHIC] [TIFF OMITTED] T2259.001

        [GRAPHIC] [TIFF OMITTED] T2259.002

        Mr. Shays. We have testimony in our first panel from Mr.
    Allen Li, Associate Director, National Security and
    International Affairs Division, U.S. General Accounting Office,
    accompanied by Leonard Benson and Donald Springman, both senior
    evaluators of the same division of GAO.
        Mr. Li, I'm going to swear you all in and then we're going
    to take your testimony.
        If you would raise your right hands, please. Do you
    solemnly swear or affirm that the testimony you will give
    before this subcommittee will be the truth, the whole truth and
    nothing but the truth?
        [Witnesses sworn.]
        Mr. Shays. Note for the record that all three witnesses
    responded in the affirmative. And Mr. Li, it's very good to
    have you here.

    STATEMENT OF ALLEN LI, ASSOCIATE DIRECTOR, DEFENSE ACQUISITIONS
     ISSUES, NATIONAL SECURITY AND INTERNATIONAL AFFAIRS DIVISION,
       U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY LEONARD L.
        BENSON, SENIOR EVALUATOR; AND DONALD SPRINGMAN, SENIOR
                               EVALUATOR

        Mr. Li. Thank you, sir.
        Mr. Chairman and members of the subcommittee, I am pleased
    to be here today to discuss our ongoing work requested by the
    subcommittee on the impact of production cost reduction plans.
    With me today, as you said, are Leonard Benson and Donald
    Springman.
        As you know, the F-22 is an air superiority aircraft being
    developed to replace the F-15. Development, which started in
    August 1991, is scheduled to be completed by August 2003. The
    Air Force plans to enter low rate initial production in
    December 2000.
        Projections of higher production costs have been a source
    of concern for some time. In 1996, because of potential cost
    increases, the Air Force established the Joint Estimating Team
    [JET], to review the total estimated costs of the F-22 program.
    The JET concluded that the cost of production could grow
    substantially, but that cost reduction initiatives could be
    implemented to offset that cost growth.
        The Congress has also weighed in on F-22 production costs.
    The 1998 National Defense Authorization Act limited the total
    cost of F-22 production. Most recent production cost estimates
    were completed by the Air Force and the Office of the Secretary
    of Defense in 1999. Both groups considered cost reduction
    initiatives, known as production cost reduction plans, in
    coming up with their estimate.
        As you said, to date, hundreds of these plans have been
    identified by the airframe and engine contractors, with
    participation by the F-22 program office. These plans propose
    changes to business design processes and practices. Each plan
    must go through a series of analyses and meet specific criteria
    before it is considered to be implemented. For example, one
    criterion is that the impact of the reduction has been
    reflected in a current contract price by either the prime
    contractor or a supplier to the prime contractor.
        At the subcommittee's request, we are now reviewing these
    production cost reduction plans. We are focusing on determining
    the status of cost reduction plans, including some plans not
    implemented, and comparing the 1999 estimates developed by the
    Air Force and the Office of the Secretary of Defense with the
    congressional cost limitation.
        My statement today presents our preliminary observations.
    We plan to issue our final report later this summer.
        Before I share our observations with you, the magnitude
    represented by these cost reduction plans should be put in
    perspective. A total of $21 billion has been identified to
    date. How big is that? Allocated equally over a planned
    procurement of 339 F-22 aircraft, a $21 billion cost reduction
    equates to about $62 million per copy.
        In fiscal years 1996 through 1998, the Air Force paid an
    average unit cost of $46 million for an F-15. So I need not
    tell you how significant these cost reduction plans are.
        I will make two points today. Point No. 1, implementing all
    cost reductions identified will be challenging. Of the total
    $21 billion identified, half of that amount is currently
    categorized as implemented. Transforming the other half will
    not be easy. Our review of 10 plans not yet implemented,
    indicates that achieving reductions from three of the plans
    would depend on decisions by the Office of the Secretary and/or
    the Congress. Therefore, implementation of these plans is
    beyond the Air Force's ability to control.
        For example, one plan requires the Congress to approve a
    multi-year procurement of the F-22, which the airframe
    contractor estimates will reduce costs by about $1.5 billion.
    The contractor proposes that production be contracted for 5
    years in advance, beginning in 2004. According to the plan,
    because of cost reductions available through long term
    commitments, such as the 5-year contract, the subcontractors
    and the contractor would accept lower prices for the aircraft
    being procured.
        But a multi-year contract must meet specific criteria and
    be approved by the Congress. For example, the item being bought
    must have a stable design and not have excessive technical
    risks. Also, the estimated cost of the system and the estimated
    cost avoidance from the multi-year procurement must be
    realistic.
        The Air Force plans to award a multi-year contract for
    fiscal year 2004 and will need congressional approval for a
    multi-year contract in fiscal year 2003 to support advance
    procurement funding. Since the F-22 development program is not
    scheduled to be over until August 2003, the potential exists
    that the F-22 program will not meet the multi-year procurement
    criteria by 2003.
        Point No. 2. Both Office of the Secretary and Air Force
    cost estimators project that F-22 production costs have
    exceeded the congressional cost limitation. The two estimating
    groups did not use the same estimating methods and did not make
    the same assumptions about which plans were already implemented
    or about the cost reductions that could be achieved. For
    example, for plans not implemented, Air Force's estimating
    group allowed $10.2 billion for potential future cost
    reductions. Estimators from the Office of the Secretary allowed
    $6.1 billion.
        After considering the potential of all the cost reduction
    plans, the Air Force estimated F-22 production costs at $40.8
    billion and the Office of the Secretary at $48.6 billion. Both
    estimates were based on the production of 339 aircraft.
        The Office of the Secretary's estimate exceeded the Air
    Force's by $7.8 billion, or 19 percent. The difference is due
    to the Office's higher estimates of the cost of production and
    lower estimates of the impact of plans not implemented. The
    Office of the Secretary estimate exceeded the congressional
    cost limitation by about $8.8 billion.
        Let me put this estimate in perspective. Assume that the
    Office of the Secretary estimate is correct, and additional
    cost reduction plans are not developed and implemented. If this
    happens, the Air Force would have to buy on the order of about
    85 fewer F-22s to stay within the congressional cost
    limitation. I should note that although Air Force cost
    estimators projected a total of $40.8 billion in production
    costs, the official Air Force cost position is $39.8 billion,
    the same as the congressional cost limitation.
        The Air Force officials said that the Air Force selected
    the lower figure as its official cost estimate because the
    difference between the estimate and the budget is primarily
    associated with the years after 2005. They also said that their
    estimate of $40.8 billion has a 50 percent probability. That
    means that there is as much likelihood for the actual cost to
    be higher as it is to be lower.
        On the other hand, the official Air Force estimate of $39.8
    billion, the one that matches the congressional cost
    limitation, has a confidence level of 33 percent. That means
    that it is twice as likely that the $39.8 billion estimate is
    understated.
        Mr. Chairman, that concludes my statement. We'll be happy
    to respond to any questions you may have at this time.
        [The prepared statement of Mr. Li follows:]

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        [GRAPHIC] [TIFF OMITTED] T2259.015

        Mr. Shays. I think what we'll do, Mr. Li, is just get rid
    of some housekeeping and go and vote and then come back. Mr.
    Tierney would like to make a statement maybe before we go,
    we'll do that too. But I'd first ask unanimous consent that all
    members of the subcommittee be permitted to place an opening
    statement in the record and that the record remain open for 3
    days for that purpose.
        Without objection, so ordered.
        I ask further unanimous consent that all witnesses be
    permitted to include their written statement in the record, and
    without objection, so ordered.
        Would the gentleman like to make an opening statement
    before we go vote?
        Mr. Tierney. Yes, I would. I thank the Chair, and I
    apologize for my tardiness. I thank the witnesses for being
    here.
        Chairman Shays, I want to thank you for your continuing
    efforts in this series of hearings on the F-22 aircraft
    program. Your leadership in this area obviously is appreciated,
    and I welcome the testimony of our witnesses here concerning
    the status of the F-22 and its costs and the attempt to control
    those costs.
        I'd like to read a few lines from a statement that I
    believe is relevant to today's hearing. The quotation is, the
    broad question raised is whether the Air Force should be more
    realistic in terms of anticipating delays in construction, in
    subcontractor performance and in software development. Looking
    at the record for the past 10 years, it appears that the Air
    Force has consistently underestimated the length of delays and
    the increases in costs.
        At some point, repeated upward adjustments cease to be
    unexpected. At some point, they reveal a strategy that is
    overly optimistic. As with any prioritization analysis, cost
    concerns for the F-22 program must inform the larger questions,
    such as the relevance of the F-22 program in light of the
    ongoing aircraft development programs.
        Mr. Chairman, those are my own remarks that were made as
    part of the opening statement to this subcommittee's December
    7, 1999 hearing on cost controls for the F-22. At that hearing,
    the Air Force responded by assuring us that cost control was a
    critical focus of the F-22 team. The Air Force Deputy Under
    Secretary Darleen Druyun estimated that the Air Force was on
    track to deliver the F-22 within the congressionally mandated
    cost cap of $39.8 billion.
        Today, however, the General Accounting Office reports that
    the Air Force completed a revised production cost estimate
    later the same month as our hearing, last December. Apparently
    that new estimate indicated that production costs would be $1
    billion over budget. Even worse, the GAO also reports that the
    Office of the Secretary of Defense completed its own production
    cost estimate, also last December.
        This estimate predicted that production costs for the F-22
    could exceed congressional cost caps by as much as $8.8
    billion, almost $9 billion over budget.
        Of course, I'm going to have questions later on about these
    two cost estimates and why they could possibly be so different.
    $1 billion compared to almost $9 billion is quite a wide range.
        But I return to my original statement, that the Air Force
    has consistently underestimated cost increases in the F-22
    program. On one hand, I want to commend the Air Force for
    initiating and implementing a wide range of cost reduction
    initiatives. These measures are forward thinking, they leverage
    initial investments today for savings throughout the life of
    the aircraft, and they can be utilized in various forms and
    other manufacturing lines.
        On the other hand, however, I continue to have concerns
    when I hear about these cost saving initiatives. My first
    concern is that they do not address the fundamental problem
    with the Air Force being unable to control costs elsewhere.
    These reforms are new initiatives to streamline processes, to
    develop cheaper technologies and to utilize lean business
    practices. And I wholly endorse those efforts.
        But they are not substitutes for more realistically
    estimating and more aggressively controlling other costs at the
    outset. Let's use an analogy. Suppose you're asked to go to the
    store to buy dinner, and you tell me it's going to cost $50.
    For some reason, the price of chicken keeps going up
    repeatedly. Instead of trying to determine why you're
    constantly underestimating the price of chicken, you go out and
    tell me how you're going to save money on milk. That seems to
    be what's going on here.
        My second concern is that underlying costs are continuing
    to escalate despite cost reduction initiatives. We can gauge
    these increases by the amounts the Air Force is now trying to
    save through reform initiatives. In 1997, the JET team
    estimated that production costs would grow by as much as $13
    billion. In an April 1999 letter to the subcommittee, the
    Deputy Under Secretary of Defense for Acquisition Reform stated
    that contractors were pursuing $16 billion in savings
    initiatives. Now GAO reports that the Air Force is hoping to
    save $21 billion through these initiatives and measures.
        But these savings are not being transferred back to the
    taxpayer, at least as far as we can see. So they must be
    compensating for costs that are increasing elsewhere in the
    program. Every time we hear about a new increased savings
    estimate, we know these savings are paying for a new increased
    cost somewhere else.
        Although I'm happy to listen today to the good news about
    cost saving initiatives and their progress, I sincerely hope
    that the Department of Defense and the Air Force will address
    the more fundamental problems with their inability to
    accurately predict or control the costs of the F-22 program.
        Thank you, Mr. Chairman.
        Mr. Shays. I thank the gentleman.
        We've been joined by Mr. Barr. Mr. Barr, we're going to
    take questions afterwards, but you're a member of the full
    committee and very welcome to participate here. I don't know if
    you'd like to make a statement.
        Mr. Barr. Thank you very much, Mr. Chairman, and I won't
    overstay my welcome. I know we also have a vote on the floor.
        I would like to state for the record that Mr. Shays is an
    outstanding member of the full committee and a standing
    chairman of this subcommittee. He's a very fair man. He asks
    tough questions, I know that, that in every instance they are
    heartfelt, they are sincere, and they are designed to get at
    very, very important information for his constituents, for
    people all across this land. And he is a very, very legitimate
    and appropriate watchdog for those things of which we are
    stewards for the public, and that is the public moneys and so
    forth.
        So I appreciate very much your work in this area, Mr.
    Chairman. I appreciate the courtesy extended to me as the
    representative for the Seventh District of Georgia, in which is
    located the Lockheed Martin plant, which is the final assembly
    point for both the F-22 and the C-130J, two very important long
    term procurement programs involving the Air Force and our other
    services.
        I would like, Mr. Chairman, to ask the courtesy of
    unanimous consent to include my full statement in the record.
        Mr. Shays. Without objection, so ordered.
        [The prepared statement of Hon. Bob Barr follows:]

        [GRAPHIC] [TIFF OMITTED] T2259.016

        [GRAPHIC] [TIFF OMITTED] T2259.017

        Mr. Barr. Thank you.
        And I would like to say, Mr. Chairman, that my support of
    the F-22 and my support of your efforts to ensure that it is a
    weapon system that is as cost effective as possible in today's
    environment, I would like to say that it is not born out of the
    fact that the final assembly point for the plane is in my
    district. That certainly is of concern to me as a
    Representative.
        But my support for the F-22 is born out of the simple fact
    that within a very short number of years that could be counted
    on one hand, our Nation's security forces, the men and women
    that we send overseas to support and defend our Nation's
    interests anywhere in the world will be put at risk. And the
    reason they will be put at risk is we will no longer, with the
    current F-15 configuration and the other aircraft that we have,
    be able to guarantee or even be assured of air superiority.
        This is a cold, hard fact of the world. Other nations are
    moving forward with the development of air superiority
    aircraft. The F-15, a magnificent aircraft, can only be
    modified so much. It is reaching the end of its useful life.
    The F-22 is the next generation, the only generation of air
    superiority aircraft we have. It has been and will continue and
    should continue to be very vigorously evaluated, constantly
    evaluated.
        But I am assured, and I believe, Mr. Chairman, very
    sincerely, after talking with administration officials, with
    industry officials, with other Members on both the House and
    the Senate side and with Air Force officials, that this plane
    is and will continue to meet the criteria set down for it,
    which is more rigorous than any other aircraft or weapons
    system in our Nation's history.
        But I do commend you and thank you, Mr. Chairman, for the
    fairness with which you approach this. And hope that and
    anticipate that this very, very vital weapon system will move
    forward.
        Mr. Shays. I thank the gentleman for his very gracious
    comments, and appreciate his presence.
        Mr. Barr. Thank you.
        Mr. Shays. We'll just recess and go vote, and be right
    back. I'm sorry, we have two votes, so it may take us 15
    minutes or so. Thank you.
        [Recess.]
        Mr. Shays. We call this hearing to order.
        And I'll start with some questions, and then we'll go to
    Mr. Tierney and Mr. Barr also probably has questions that he
    might like to ask.
        The chart in your draft on costs that have already been,
    reductions that have already taken place, and those to be
    implemented, I'd like you to walk down each of the chart items
    and just in brief discuss them with me. So you have the floor
    to do that.
        Mr. Li. There are several, in talking about the individual
    and the grouping of production cost reduction plans, what we
    did was we tried to cluster them in areas that people would
    understand. For example, in improving manufacturing processes
    and incorporating new technology, we're talking about
    situations here where the Government and the contractors would
    want to make some investment in their processes and provide up
    front money, so that they could achieve some savings later on.
        Improving the efficiency and reducing supplier costs. In
    the current manufacturing process, many industries are going to
    something called lean manufacturing. In that process, they're
    trying to do time and motion analyses to make sure that they've
    gotten rid of all the inefficiency associated with the
    manufacturing process.
        Another category that they've identified--that's going to
    be for a total $1.6 million--is to resolve some obsolescence
    and diminishing source issues. And this is an interesting
    issue, because one of the initiatives is one in which they want
    to replace the computer, the main part, the CIP, that's going
    to be the primary focal point of bringing in all the
    information. That particular processor is being redesigned, and
    that's what their CIP 2000 computer is all about.
        Another one is improving material procurement strategies.
    And that is also another interesting area, because what they're
    trying to do is to make some efficiencies in the way that they
    acquire material. One of the PCRPs that I reviewed, for
    example, is one in which the different contractors and
    subcontractors would actually be buying the material at the
    same time, and thereby, they would be achieving efficiencies.
        Another one is their application of performance-based
    contracting practices. That is one which is closely aligned to
    some of the definitions of acquisition reform, which I know the
    chairman has talked about many, many times. In this particular
    case, they are envisioning being able to have less of a
    reporting requirement. The contractor would not have to report
    and write reports back to the Air Force as many times as has
    been envisioned in the past.
        To defer and to avoid Government investing in depot
    maintenance, that is a very large area of savings that they
    have projected. That is one in which they have decided not to
    have what they call an organic depot maintenance capability.
    The contractor, in essence, will be doing that.
        And finally, the one that the chairman has mentioned
    himself in terms of the Joint Strike Fighter, there are some
    efficiencies that they envision that combine individual pieces
    and components and the overhead that would be associated with
    one of the winning vendors of the JSF, they are envisioning
    getting some efficiencies from that.
        Mr. Shays. Briefly describe how we get, the Office of the
    Secretary estimates $48 billion and the Air Force estimates
    $40.8 billion in total costs. What contributes to the
    difference there?
        Mr. Li. It's very difficult to be able to explain on a line
    by line basis. The best explanation that I can provide to you,
    Mr. Chairman, is the fact that when they made these estimates--
    and these estimates are made by professionals--they made
    different assumptions on different things. For example, some
    people feel that some things would not be achieved, some at not
    the same rate. On return on investment one of the groups
    estimated a higher amount than the other one.
        When all those things are considered, that's how these
    differences come about. And I understand your concern and your
    question, that how can this happen, that there is this
    magnitude. And as Mr. Tierney mentioned, he is also concerned
    about this.
        The best that I can answer that particular question is that
    it's the knowledge that you have with which to make that
    estimate, you have to have good knowledge to do that. In our
    best practices work, we have found that the best commercial
    companies go into production with having a good knowledge of
    how much it's going to cost to build something. And I don't
    believe that we're at that point here. That's what this is
    pointing toward.
        Mr. Shays. Just a simple answer, it's just based on
    different assumptions?
        Mr. Li. That's part of it, sir.
        Mr. Shays. I want you to be more specific.
        Mr. Li. For example, the assumption that the return rate,
    the amount of money that you would invest in a production
    enhancement.
        Mr. Shays. Let me just tell you what I'm wrestling with.
    First off, I think it's difficult to estimate the cost of any
    major undertaking like this. But since we are making the effort
    do that for obvious reasons, I just would like to feel a little
    more comfortable that two bodies that basically should be
    making generally similar assumptions are not. And I would think
    that there must be some major differences in assumptions that
    would account for a difference of 20 percent in the cost of the
    product.
        Mr. Li. Let me give you another example, maybe this will
    help. When they estimated the cost of the avionics, one body,
    the Air Force, estimated and used historical data using the F-
    18 as their basis. The Office of the Secretary used a larger
    basis using several aircraft. Perhaps I gave you some detail
    that would help.
        Mr. Shays. Let me ask you this way. Which cost estimate,
    the Air Force or the Secretary of Defense estimate do you
    consider more accurate?
        Mr. Li. Again, this goes back to my initial point. I think
    only time will tell. I don't have that crystal ball that can
    say which one is better.
        However, I can say this. I think the reason why we have
    this disparity of 19 percent between the two, in my personal
    opinion, is because we don't have the basis from which to make
    a good projection right now.
        Mr. Shays. What would give you that basis?
        Mr. Li. What would give me that better basis is if the
    processes were in better control, the statistical processes. I
    was mentioning before about private companies, what do they do
    before they launch into production. They have some processes
    under control, they know they can produce products consistently
    with the quality and the timeliness that they project. I don't
    believe we're at that point.
        Mr. Shays. I'm going to yield the rest of my time to Mr.
    Tierney and I'm going to come back.
        Mr. Tierney. Thank you.
        We are talking about private companies. Who's making these
    things?
        Mr. Li. I was talking about commercial practices, I'm
    sorry. I'm talking about commercial practices like the 777,
    producing a commercial product.
        Mr. Tierney. Can you explain to me why these companies
    don't use those practices? Is it just because they've got an
    open checkbook here?
        Mr. Li. No. In the work that we have done, and we have a
    body of work that we have completed in the past 2 years, in
    trying to talk about what are the best commercial, best
    practices in developing products. We have mentioned things, as
    the ones that I just talked about, which is not going and
    launching a production line before you have full knowledge of
    some of the details.
        The issue that I'm raising is that also, in the work that
    we've done, we've talked about the barriers that DOD has in
    mimicking the same sort of commercial best practices. I'm
    giving DOD credit, they are recently, and they will be
    announcing a change to their procurement practices and their
    guidelines, in which they are going to be trying to alter and
    get better commercial practices within their process.
        Mr. Tierney. And they're just getting to this point now,
    after how long?
        Mr. Li. Well, yes, it does take a long time. But the
    incentives, and Mr. Tierney, you're well aware of this, the
    funding exigencies that occur are not an incentive for programs
    to be identifying problems. They're all competing for funds
    early on, and they're trying to do the best they can to say
    yes, this is a challenge, but we're going to come in at this
    particular price.
        Mr. Tierney. I understand what you're saying. I'm a
    skeptic, I guess, on the whole process. My questions probably
    wouldn't get us much further along, except to say that it's
    beyond my comprehension that you can be 20 percent off and just
    at this date deciding some of your processes are wrong.
        Mr. Li. I think perhaps, sir, that would be a good question
    to ask our witnesses from DOD and Air Force.
        Mr. Tierney. You can bet it would be. We're talking now
    about the fact that you think there's going to be $8.8 billion
    over the congressional cap, right? And you base that on the
    $39.8 billion cap. But we look now that the cap has been
    adjusted to $37.6 billion, so if you base it on that, you're
    really kicking that estimate up to $11 billion over cost.
        Mr. Li. Well, the difficulty in making that comparison,
    sir, is that the $37.6 billion was adjusted because some of the
    aircraft that were in the production phase are now being
    produced in the engineering and manufacturing development
    phase. So that was to compensate for that particular point.
        Mr. Tierney. Really the only question that I hear, and
    you've pretty much answered it as far as you're able to go on
    this, is how can those costs get out of control. So a $40
    billion production thing becomes a $60 billion production
    thing. And I think you've exhausted your analysis of that.
        So I appreciate your comments. I'm frustrated with your
    answer, and I'm mindboggled how we get into this. There's a lot
    of questions you have about just the reason for even building
    this particular weapon. But when you start looking at these
    class configurations and the comparison and everything, it
    gets--and I just make the comment for no other reason than to
    get it off my chest, that here we go again with the national
    missile defense, of building something before we determine
    whether or not it can realistically be built.
        I'll yield back to the chairman.
        Mr. Shays. I think before going to Mr. Barr I just want to
    nail down some really simple stuff that I'm missing here. The
    $10.2 billion represents cost savings that are being
    implemented or will be implemented, in other words, explain to
    me implemented, to be implemented.
        Mr. Li. Of course. In the total of $21 billion, that is
    what the contractor, in conjunction with the SPO, has
    identified as the whole universe of reduction plans.
        Mr. Shays. Right.
        Mr. Li. In that particular universe, when something is
    implemented, there are some criteria that have to be met in
    order to be implemented. If something is already reflected in
    the contract, if something has been submitted in terms of a
    contract, if some prices have already been reduced in getting
    the subcontractor to pay for things, selling things to the
    contractor, those are the criteria that must be met in the
    implemented category.
        The things that are to be implemented----
        Mr. Shays. Before you leave that, implemented doesn't mean
    that it's occurred yet, it just means it's a work in process,
    that they're on a plan to implement this.
        Mr. Li. Yes. Len, can you please?
        Mr. Benson. It could be either. It could be some of the
    plans have actually been implemented, where the cost reductions
    have been reflected in firm fixed price contracts that they've
    got from either the supplier or the prime contractor. So they
    could be actually implemented.
        Mr. Shays. Now, do both the Air Force and DOD accept the
    $10.2 billion figure?
        Mr. Benson. No.
        Mr. Shays. Do they disagree? Whose numbers, these are the
    contractors' numbers. Where does the DOD disagree with these
    numbers on the implemented part, and where does the Air Force
    agree or disagree?
        Mr. Li. We tried to get a definitive description and
    quantity amount of that $10.2 billion. The difficulty is that
    when each one of the estimators came up with their baseline,
    one considered, and one did not consider all of the ones that
    were identified as implemented within their baseline. And I
    know it's very complicated, and I'll ask Len again to explain
    that.
        But the basic issue is that because the baselines, both
    from the Office of the Secretary of Defense and the Air Force,
    were different, they considered a different portion of those
    that were already implemented. Len.
        Mr. Benson. One of them that you talked about earlier is
    the Joint Strike Fighter. For example, on that one, the Office
    of the Secretary of Defense estimate assumed for estimating
    purposes that that was an implemented cost reduction plan. They
    just, one of their assumptions was that that's going to be----
        Mr. Shays. Who did this, the Air Force?
        Mr. Benson. The Office of the Secretary of Defense assumed
    that that was an implemented recommendation.
        Mr. Shays. On what basis could that make that?
        Mr. Benson. I can't speak for them. The Air Force, on the
    other hand, did not----
        Mr. Shays. But under what criteria? I'm going to be willing
    to expose my ignorance more than I usually like to. But I'm
    having trouble first identifying whose chart this is. And is
    the chart that is up there, the reasons for reductions
    implemented, to be implemented, that is the contractor's chart.
    Is that your chart or the contractor's chart? Is it DOD's
    chart, is it the Air Force chart?
        Mr. Li. It's a contractor identified split of all----
        Mr. Shays. Well, why should this be helpful to me? Wouldn't
    I want to see two other charts? Wouldn't I want to see the Air
    Force's version of this chart and DOD's version of this chart?
        Mr. Benson. The Air Force provided this chart to us.
        Mr. Shays. Does the Air Force accept this as the chart?
        Mr. Benson. This was the data the Air Force provided to us
    when we asked for information on cost reduction plans that had
    been implemented and those that remain to be implemented. So we
    had to assume since that was the data the Air Force provided
    that they were----
        Mr. Shays. Is this the chart on which the Air Force bases
    their estimates?
        Mr. Benson. Yes.
        Mr. Shays. OK. So the Air Force accepts this?
        Mr. Benson. Yes.
        Mr. Shays. OK. So I'm going to say this was supplied by the
    contractor, unless I hear differently, and Air Force will speak
    later, I'm going to assume this is the Air Force's acceptance
    of what they think reality is.
        Mr. Li. This particular chart is a summary of a data base
    which is a working data base which the contractor and the Air
    Force work with on a daily basis. And this is like a snapshot
    at the point in time which we asked for a run and we summarized
    it, and we said, this is the current status.
        Mr. Shays. Do you accept the numbers as you see them, the
    $10.2 billion total, as what you think is the most reasonable
    thing to assume has been in fact implemented?
        Mr. Li. We did not look at every single cost reduction
    plan. For the ones we looked at, we thought that they were
    reasonable.
        Mr. Shays. What I'm confused by is under Joint Strike
    Fighter and F-22 components at the same plants, they have down
    zero. They don't think that's been implemented.
        Mr. Li. But, they have utilized that in their cross-
    derivation in the ``to be implemented'' and they did accept
    that.
        Mr. Shays. So then this chart doesn't represent what they
    think has been implemented.
        You know, I can ask them that. But I'd like to know if you
    know the answer. Because if you don't know that answer, I'm
    getting uneasy.
        Mr. Benson. Specifically on the Joint Strike Fighter, see,
    we have two columns there. One is called implemented, the other
    is to be implemented.
        Mr. Shays. I see those two differences.
        Mr. Benson. The Air Force originally came up with what they
    considered a baseline estimate. Their baseline estimate was
    about $51 billion. They then did an analysis of the production
    cost reduction plans that had been proposed by the contractors
    and reviewed and analyzed by the Air Force.
        They interpreted those plans that $10.2 billion of those
    plans that had been proposed by the contractor would be a
    reduction to their baseline estimate of $51 billion. That got
    the Air Force's net estimate down to $40.8 billion.
        And that's why I said----
        Mr. Shays. I just want you to explain why I see zero under
    implemented. Manufactured Joint Strike Fighter F-22 components
    in the same plan. I see zero there under implemented. So they
    are not saying it's being implemented, if this is the Air
    Force's version.
        Mr. Li. But they feel that it is a cost reduction plan that
    will be implemented in the future. And they have also----
        Mr. Shays. I understand it's to be implemented in the
    future. It hasn't been implemented now, under this chart. I
    just want to understand whose chart this is. I want someone to
    take ownership of this chart and I want to then go from there.
    I'm just trying to find something to have an anchor on. I'm
    floating all around space right now.
        Mr. Li. I apologize.
        Mr. Shays. Well, so is it your testimony that this
    represents what the Air Force believes to be true, or have they
    modified this chart.
        Mr. Li. They have not modified this chart. This is what
    they're identifying as what is implemented and----
        Mr. Shays. OK, well, when I look at this chart, then, I am
    going to read it that the manufactured Joint Strike Fighter F-
    22 components in the same plants have not yet been implemented,
    and that they make the assumption of the 1.2 to be implemented.
        Mr. Li. Correct.
        Mr. Shays. I misunderstood you, then. I thought you said
    they thought it had been implemented.
        Mr. Benson. That was the Office of Secretary of Defense
    that said it had been implemented, not the Air Force.
        Mr. Shays. Except the Office of Secretary of Defense has a
    higher estimate of the cost overruns.
        Well, let's just take to be implemented. Mr. Barr, I'll
    take you in 1 second here. Thank you for your patience.
        There's a difference of the $10.8 billion, a difference of
    $4.1 billion, is that accurate, in your statement, on page 6,
    that you read from? The difference is due to the Office's
    higher estimates of the cost of production, 3.7, and lower
    estimates the impact of the plans. Is this number, $10.8
    billion, why don't you first tell me how I should view the
    $10.8 billion number?
        Mr. Li. The $10.8 billion is that which, within the $21
    billion, is considered to be cost reduction plans that have yet
    to be implemented. When I was talking about the $7.8 billion,
    that was the difference in the estimates, not the production
    cost reduction plans, but the total estimate difference between
    the Air Force and the Office of the Secretary.
        Mr. Shays. Let me ask you this. What's the total cost of
    this project before we do any cost reductions by all the
    various parties?
        Mr. Li. The estimate that we have in the testimony, and
    I'll have to, let me turn to that page if you don't mind, on
    page 10 of my written statement----
        Mr. Shays. Page 10 of your statement, submitted statement
    or read?
        Mr. Li. Submitted statement.
        Mr. Shays. OK.
        Mr. Li. In the submitted statement, we say that the Office
    of the Secretary, before, now, this is what, when I refer as
    the baseline, before considering those production reduction
    plans that have not yet been implemented, the Office of the
    Secretary estimated $54.7 billion. The Air Force estimate was
    $51 billion.
        In subtracting, the Office of the Secretary identified $6.1
    billion of those that were not yet implemented as those that
    they were willing to accept. Therefore----
        Mr. Shays. You're answering a question I don't want to get
    into yet. I just want to first nail down, before the cost
    reductions, the Office of the Secretary, in other words, DOD,
    is looking at $54.7 billion. Correct?
        Mr. Li. If you will allow me to just modify your statement,
    sir, the baseline of $54.7 billion includes those cost
    reduction plans which are already implemented that they agreed
    to.
        Mr. Shays. OK. And that's the $6.1 billion? No, before the
    $6.1 billion?
        Mr. Li. Correct.
        Mr. Shays. OK. And how much of the--and what are they
    agreeing to? What brings that number down to $54.7 billion?
        Mr. Li. They did not identify that specifically in their
    analysis. They have two numbers coming out with their analyses,
    Mr. Chairman. One is the baseline, in which they considered
    those reduction plans that were already implemented. That's one
    number. They don't have a subset that says, this is how much
    I'm going to take that is production cost reduction plan
    related.
        Mr. Shays. It would just be helpful for me to know, because
    then I can see if we're double counting or not double counting.
        Mr. Li. I understand, sir. They don't have that
    information.
        Mr. Shays. But how can we even get to first base if we
    don't have that information?
        Mr. Li. I understand your concern.
        Mr. Shays. Explain the $51 billion.
        Mr. Li. The $51 billion is the Air Force's estimate which
    includes those production cost reduction plans that are
    implemented. That's how much they've allowed. They've built
    that into there.
        Mr. Shays. And are they using--that are already
    implemented?
        Mr. Li. Yes.
        Mr. Shays. Then they're subtracting another $10.2 billion
    that's been implemented as well?
        Mr. Li. The $10.2 billion is the proportion of the $10.8
    billion which is not yet implemented. There is a total of $10.8
    billion----
        Mr. Shays. I understand that. You're going to have another
    $10.8 billion that has to come off that number, correct, the
    $40.8 billion?
        Mr. Li. No. No, sir.
        Mr. Shays. I don't understand.
        Mr. Li. The $51 billion is the baseline. The baseline
    includes their assessment of what reduction plans have already
    been implemented.
        Mr. Shays. Yes, past that.
        Mr. Li. The next thing that you can take off are the
    production reduction plans that have yet to be implemented.
    There's a maximum of $10.8 billion if they accepted everything.
    They accepted $10.2 billion.
        Mr. Shays. I'm looking at your chart on page 10.
        Mr. Li. Yes, sir.
        Mr. Shays. OK. I see $51 billion. I see a reduction of
    $10.2 billion. It happens to match the implemented. Is that a
    coincidence?
        Mr. Li. Yes.
        Mr. Shays. That's just a coincidence? Well, that's helpful.
    So the $10.2 billion here is not the $10.2 here? It's the $10.8
    billion but they don't take it all. You know what? I'm going to
    adjourn this hearing in a second if I don't see some sense
    here. If you guys can't help me, we're adjourning.
        Mr. Tierney, we'll go to your questions.
        Mr. Tierney. Well, let me just try a couple here.
    Essentially what I think we're seeing is the Air Force just
    accepts the manufacturer's numbers, by and large, except for,
    and the projected savings, instead of taking all $10.8 billion,
    they take $10.2 billion. They tank out on the rest and they buy
    whatever the manufacturer puts up there.
        Mr. Li. The thing I would again try to add some more
    detail, we're not just talking about the contractor making
    estimates. The contractor develops these cost reduction plans
    in conjunction with the program office.
        Mr. Tierney. Given the history of this thing, why should I
    have any confidence at all in the Air Force's projections?
        Mr. Li. I don't have an answer for that, sir.
        Mr. Tierney. Well, neither do I.
        The Defense Appropriations bill that we just passed in the
    House is going to eliminate the two separate congressional
    caps, you're aware of that. So we'll no longer have a cap for
    development production, one for development and one for
    production. We're going to have one cap for the whole program.
    So development is over budget. It would look at, once you
    guessed, I guess the most immediate effect then would be to
    allow more of that money to go to development and we're going
    to have less left for production.
        Mr. Li. That's correct.
        Mr. Tierney. We're going to end up short on that end of the
    stick. Do you have any opinion about the capability or the
    ability of the Air Force to accurately predict any future cost
    increase?
        Mr. Li. What I believe, and I think that the commitment,
    and I understand that commitment does not always translate into
    action, but I know that the Air Force and DOD and the
    contractor are very, very much aware of the fiscal constraints
    imposed on this program. As they find cost increases, they do
    go back and diligently try to develop new cost reduction plans.
        Mr. Tierney. Let me speak to that. They're always talking
    about cost controls, the Air Force tells us they have cost
    controls, they're going to keep costs down. Can you identify
    what precise mechanisms the Air Force apparently has to do
    that?
        Mr. Li. To keep costs under control?
        Mr. Tierney. What are they using to keep them down on
    individual projects, make sure they don't increase?
        Mr. Li. As the Air Force's testimony will, that they will
    provide right after me, they do look at this on a monthly
    basis. They look at the production initiatives. However, what
    we found was that at the Office of the Secretary level, they
    are not provided with the detail on these cost reduction
    initiatives. We believe that that is something that they should
    have.
        Mr. Tierney. I mean, I guess what happens is, they find out
    if they have this great analysis after the fact to find out
    that they are not saving money, in fact, they're spending more
    than they think. So they go somewhere else to try to save
    money, instead of looking at where they're consistently falling
    behind. They don't appear to be doing much about that, but they
    go look for a new avenue, like my analogy I used earlier, like
    the chicken price keeps going up, so let's save money on milk.
        Mr. Li. The Air Force acknowledges the fact that some
    production cost reduction plans, when they first identify them
    and they think are promising, if they find that those are not
    achieving the types of savings that could be achieved, they
    will go to another area and develop and look at other areas.
    They acknowledge that.
        Mr. Tierney. Thank you.
        Mr. Shays. Just a brief question, and then we'll go to Ms.
    Schakowsky, and then Mr. Barr.
        Just for my continued edification here, on the chart with
    the $54.7 billion on cost estimate for considering cost
    reductions, and the $51 billion of the Air Force, can I make
    the assumption, or are the numbers coincidental, $10.2 billion,
    that that number, $51 billion, would be $61.2 billion if the
    implemented cost savings, I had not yet taken?
        Mr. Li. Correct, sir.
        Mr. Shays. OK, so we have $61.2 billion.
        Mr. Li. Correct.
        Mr. Shays. Can I make the assumption, with the Office of
    the Secretary, that the $50.7 billion I could add the same
    $10.2 billion to get their higher base?
        Mr. Li. No, you would add the $6.1 billion to the $54.7
    billion.
        Mr. Shays. No, no, you wouldn't.
        Mr. Li. I'm sorry.
        Mr. Shays. I'm going up, I'm not going down. The Air Force
    gross costs before any savings, I'm making the assumption is
    $61.2 billion. The Air Force can tell me differently. And I'm
    subtracting the implemented of $10.2 billion to get at the $51
    billion.
        Mr. Li. Correct.
        Mr. Shays. And I'm taking another $10.2 billion which was
    part of the $10.8 billion to get the $40.8 billion. I am
    looking at the Office of the Secretary and wondering if I can
    make the same assumption that they both agree on the
    implemented at $10.2 billion as bringing their number down to
    $54.7 billion.
        Anybody there answer it?
        Mr. Benson. The answer is no, you cannot make that
    assumption.
        Mr. Shays. OK.
        Mr. Benson. The Office of the Secretary of Defense made
    different assumptions on what had been implemented or not
    implemented.
        Mr. Shays. So is it conceivable that what they say may not
    have been implemented, they would shift over to the
    implemented?
        Mr. Benson. Yes.
        Mr. Shays. OK. What I would like is a chart, I would like a
    chart sometime soon that would describe to me what the
    Secretary's office, how they view this chart of implemented-to
    be implemented, and I would like the same chart for the Air
    Force and the same chart for the contractors, the same basic
    terms. And then I'd just like to see how they differ.
        The Air Force and the contractor, you are making the
    assumption, is the same?
        Mr. Li. Yes.
        Mr. Shays. OK. Ms. Schakowsky. Mr. Barr will follow but
    he'll ask as many questions as he wants. We have no time limit,
    but you're next in line.
        Ms. Schakowsky. I'm a new member here, and I'm trying to
    figure all this out, and have been, I guess, more confused by
    what I've heard so far in trying to at least understand what
    we're trying to get at here. In response to a question you said
    you can't tell us why we should have confidence in the cost
    estimates that have been made and you also said you don't have
    a crystal ball and can't project which of the two estimates
    would be--we're not asking you to have a crystal ball. The
    reason that we come to you is to look at the objective criteria
    and help us figure out what really is accurate.
        I mean, after all, we're talking about billions of dollars
    here. I just came from the floor where we're dealing with the
    housing budget, the Housing and Urban Development Budget. And
    I'm worrying about millions of dollars that are being cut from
    Chicago. And we're talking about discrepancies of billions.
        I'm trying to understand why it is that you can't help us
    to figure out what is more likely to be true.
        Mr. Li. And I certainly would like to do so, and provide
    some advice. What we were trying to do was to identify how
    these estimates were different. When you identify two different
    estimates, it's not necessarily going to lead toward somebody
    having a better estimate than somebody else. Those assumptions
    are projections into the future that may or may not
    materialize.
        Ms. Schakowsky. Yes, that's right, but it's the
    assumptions, isn't it, that we have to look at?
        Mr. Li. Correct. And the assumption on individual things,
    like if I looked at one individual cost reduction initiative,
    if somebody made an estimate, for example, and one of the
    examples that we have was talking about being able to have
    multi-year procurement. There are some savings associated with
    that. $1.5 billion would be achieved through multi-year is what
    their assumption was.
        What we raised to this body was that, don't take that $1.5
    billion to the bank just yet. Because that requires the
    Congress and the Office of the Secretary of Defense to weigh in
    on it. That is the level at which we made our analysis, to
    point out those issues.
        If you take all of those into account, I don't think it's a
    possible situation for me to be able to say, therefore, as a
    result, I think that the Air Force's estimate is better than--
    --
        Ms. Schakowsky. Well, one way to do it might be to look at
    what has been implemented in that rather confusing debate on,
    or discussion on implemented and to be implemented. Let me ask
    you this. That chart that we're looking at, what's the date of
    that chart?
        Mr. Li. As of December----
        Mr. Benson. Dated as of July 1999.
        Ms. Schakowsky. OK, as of July 1999, and that gets back to
    your criticism that there has not been timely or as required
    quarterly updating?
        Mr. Li. To the Office of the Secretary of Defense.
        Ms. Schakowsky. To the Office of the Secretary. So is that
    one of the reasons why this whole thing is harder to project?
        Mr. Li. It is. I believe that currently the visibility of
    the production cost reduction plans and I know that the
    chairman is concerned about a good explanation of these, that
    visibility has not been put on until today, I believe. I think
    the discussion of these is healthy. Because the bottom line of
    my testimony is that this is such a large issue in terms of
    amount that we're going to have to achieve that we need to keep
    an eye on this.
        That is the message that I'm trying to provide today, that
    it's a large amount of money, that there are differences and
    yet there are some things that won't occur until a few years.
    Trying to apply that visibility is important.
        Ms. Schakowsky. But when we talk about what concrete data
    we have, we're looking at numbers that will be a year old in
    June, the end of June or July.
        Mr. Li. The Office of the Secretary of Defense and the Air
    Force, in conjunction with the decision that will occur this
    December, are going to be updating these numbers. I believe,
    and again, I'm addressing you and the chairman, I think that a
    request should be made for the Air Force and the Office of the
    Secretary to make sure that they can reconcile the basis on
    which they're making these projections so we don't have this
    discussion again.
        I feel, if I may say, I feel that these are questions that
    should be asked of the Office of the Secretary of Defense and
    the Air Force. I understand, I'm trying to provide you with the
    information. But this is the level of information that I can
    provide to you.
        Ms. Schakowsky. Thank you.
        Mr. Shays. I thank the gentlelady for her question. It
    relates to this bottom line on page 7. And I want to be clear.
    What has the Air Force not been providing since June 1999?
        Mr. Li. They have not provided the detailed description of,
    at the detail level, of the production cost reduction plan.
    They've provided an overall summary of, this is how much we've
    achieved. But they haven't provided information at the level of
    detail to be able to identify for the OSD level which specific
    production plans have been successful and which ones haven't.
        Mr. Shays. And what I am gathering from your report, you
    are merely, and I use merely in a very loose way, describing
    the discrepancies between the Secretary's estimates of
    alternately the program after cost savings are made, and the
    Air Force's. You haven't evaluated whether either are accurate
    or not.
        Mr. Li. Correct. That is a correct statement.
        Mr. Shays. So, I mean, it could be, the Secretary's could
    be on target or off, the Air Force could be on target or off,
    or it could be something even much different than that. You
    haven't tried to ascertain which is more accurate. You just
    tried to disclose to us today that they're different?
        Mr. Li. That's correct, sir.
        Mr. Shays. That's the extent of what I should make?
        Mr. Li. That is correct.
        Mr. Shays. That's amazing. So we're kind of like chasing
    smoke.
        I would say then we have a disagreement on what the total
    cost of the project is by both entities. And a disagreement
    about the total cost savings by each entity.
        Mr. Li. I would not use the word savings, sir. I would use
    the word cost reduction.
        Mr. Shays. Cost reduction, fine.
        Mr. Li. Because they're not savings.
        Mr. Shays. And I'm saying this as someone who is still
    supportive of this program. I'm not here saying we don't need
    the F-22. But I guess my expectation was that you were in a
    sense evaluating the estimates that you were seeing and
    therefore would be able to speak in greater depth. You're
    basically able to say there are differences in cost and there
    are differences in reduction, cost reductions. But you don't
    even, you can't speak to the validity of any of it.
        Mr. Li. Mr. Chairman, our central focus was the production
    cost reduction plans. And to identify for the subcommittee how
    much the extent to which those have been identified. The
    concern was that, the genesis being Mr. Tierney's letter that
    he received from the Air Force that $16 billion were
    identified. We were asked to identify, is it $16 billion, how
    much is there? We identified $21 billion.
        The next question was, well, were those cost reduction
    plans incorporated in their estimates? And that's what we did,
    sir.
        Mr. Shays. Well, to some extent. Because you still can't
    tell me whether the Secretary's account is making the
    assumption that some have been implemented and some haven't
    been, correct? You're not able to dissect the differences. You
    know there's differences, but you haven't been able to clearly
    identify all that.
        Mr. Li. We went to the level that data was available.
        Mr. Shays. OK. And this is, I think, the most shocking
    thing, to me. And I want to know, shouldn't they be providing,
    shouldn't the Air Force be providing quarterly reports to the
    Under Secretary on cost reduction plans?
        Mr. Li. Yes, I think they should.
        Mr. Shays. OK. And the problem we encountered at the last
    hearing was a recognition that the Air Force kept saying they
    were meeting their caps, but we kept changing the caps to meet
    the Air Force. That was my interpretation.
        But I felt like we were finally agreeing to the caps and
    those wouldn't change. But now we have a different kind of
    floating uncertainty here.
        Mr. Barr. You have as much time as you want.
        Mr. Barr. Thank you, Mr. Chairman.
        I think one could probably drive oneself crazy trying to
    find a degree of certainty that is very difficult to find in
    current projection, much less trying to project into the
    future. And I think that Mr. Li and his colleagues have done a
    very good job of trying to bring into focus perhaps not the
    same kind of focus and certainty that we would have if we go to
    the automobile showroom and ask for the price of a particular
    car compared to another car compared to that same car with
    different options. These are things that are currently in
    production, we know exactly how much they cost to be produced,
    to be added on, and the profit margins.
        It is impossible to have that same degree of certainty in
    the development of any weapon systems. And if one looks for
    that, one will be searching, I suppose as Diogenes did, quite
    in vain.
        I don't think that our job here in the Congress is to
    demand absolutely certainty, that we know precisely how much
    each and every plane is going to cost. Our job, though, rather
    is, as Mr. Li says in his draft report at page 4, this is in
    his narrative following this chart, ``Allocated equally over a
    planned procurement of 339 F-22 aircraft, a $21 billion cost
    reduction equates to about $62 million per F-22 produced. This
    amount of reduction per F-22, if achievable, is significant.
    For example, F-15 aircraft, which the F-22 is planned to
    replace, were procured in fiscal years 1996 to 1998 at an
    average unit cost of about $46 million.''
        This places in some appropriate perspective what we're
    dealing with here. We are trying to develop an aircraft that is
    generations ahead of that which we currently use for air
    superiority. And we are trying to do so within reasonable
    strictures of finances. And I think really the job of GAO and
    the job of the Air Force and the Secretary of Defense and our
    job are all the same, and that is to continue to monitor the
    development of these processes as much as possible to make sure
    that the projected cost reductions are in fact implemented,
    that the Air Force continues to search out for new cost
    reductions that can be implemented, that we make sure that they
    do, so that year to year to year, we bring each one of these
    plans more into focus.
        But to demand absolute certainty at this point about
    hypotheticals upon hypotheticals, I think is a little bit
    unfair and gets us off track from what I think ought to be the
    main focus here. And that is, our fighting forces need the F-
    22. If they do not have the F-22, they will be at risk. There
    is no aircraft currently in production or even anywhere near
    production that provides the capability that the F-22 does.
        And rather than try and drive ourselves crazy by arguing
    over hypotheticals on hypotheticals, I think what we ought to
    do is take the materials that Mr. Li and his colleagues have
    presented to us here, ask critical questions about them,
    monitor it, demand that as more information comes in, as more
    and more of those hypotheticals become reality, which they
    inevitably will as we move forward with production, that we
    make sure that the feet are held to the fire and that these
    cost savings are in fact implemented.
        But I think there is an awful lot of material here, and
    yes, it can be deceiving, if one, as is easy to do, looks at
    any one of these figures four or five different ways to Sunday.
    But I think GAO, Mr. Chairman, and I presume you would agree,
    is doing a very good job with what they have and is asking the
    questions as the chairman is doing, to continue to ask these
    questions, hold periodic hearings, but not to lose sight of the
    forest for the trees.
        Because there is an awful lot at stake here, Mr. Chairman,
    with the need for this aircraft. Because if we don't, as even
    outside groups have done, they have looked at comparisons
    between the F-22 and fighter foreign aircraft, the MG-29 and
    the SE-27, the projected Eurofighter, the Raphael, and the SU-
    35. And the F-15, there's no way that it can compete with those
    aircraft that will be coming on line within the next few years.
        The F-22 can, it will. And I think we ought to, again, Mr.
    Chairman, not lose sight of the goal here. But again, I commend
    you, Mr. Chairman, for having this followup hearing. I hope
    that you will have additional hearings. But I would hope also
    that we would not get so bogged down into trying to have a
    degree of certainty about future hypotheticals that it's
    impossible anywhere that we cutoff our nose to spite our face.
        Thank you, Mr. Chairman.
        Mr. Shays. I thank the gentleman.
        The bottom line is that Congress, DOD, White House all
    agreed that we have a cap of $39.8 billion for the entire
    production of this plane.
        Mr. Li. Not to correct you, Mr. Chairman, but the current
    cap because of inflation and the number of changes is now at
    $37.6 billion for production.
        Mr. Shays. $37.6. So how do I relate to the $40.8 billion
    of the net cost to the Air Force? So am I to assume that we are
    nearly, so we are $3 billion over?
        Mr. Li. Since the basis is different, 339 aircraft was the
    basis on which they made those projections of the $40.8
    billion, you would have to make some adjustments to it to
    equate to the $37.6 billion. So it would not be comparing
    apples with apples if you compare the $37.6 billion with the
    $40.8 billion.
        Mr. Shays. Before we let you go, then, let me compare
    apples to apples. Do I make an assumption, comparing apples to
    apples, that the $40.8 billion is $1 billion over?
        Mr. Li. Yes.
        Mr. Shays. And I make an assumption that the $40.6 billion
    is $8.8 billion over?
        Mr. Li. Correct, sir.
        Mr. Shays. OK. But I also hear your testimony that you
    can't speak with certainty about the validity of either the
    cost, the foundation point of the cost of the aircraft, or you
    can't speak with any comfort level about the validity of the
    cost, reasons for reduction implemented or to be implemented.
    You can't speak on that?
        Mr. Li. Right. I cannot, because the information is not
    available from either the Air Force or the contractor.
        Mr. Shays. So in the end, I'm going to accept as your
    primary contribution now that you are alerting this committee
    to the fact that in either case, the Air Force or the Secretary
    are acknowledging that to date, even with cost reductions, we
    are going to be over the cap level. And that second, between
    them, they have a disagreement of about $7.8 billion?
        Mr. Li. That's correct.
        Mr. Shays. Would you say that that would be a fair thing
    for me to gain from this?
        Mr. Li. Yes, sir.
        Mr. Shays. OK. I feel that there are probably some other
    things that you wish we had discussed and focused on. Is there
    anything, Mr. Benson or Mr. Springman, that you think you need
    to state for the record? I don't want you all to come to me
    later and say, well, you know, by the way, this is a factor as
    well. I think in fairness to the Air Force, who will testify
    later, what else do you think needs to be put on the table that
    they could then be able to respond to? Is there anything else?
        Mr. Li. I think the issue that you're raising, and your
    frustration with our not being able to identify for you the
    discrete portion of what has been implemented and to track
    those is part of that concern that I expressed and that we
    talked about, which is they should be giving that information.
        Mr. Shays. I'm less concerned now, because you made no
    attempt to verify those numbers. Seems like you made an attempt
    to understand them, but you couldn't. But it wasn't like you
    didn't try.
        Mr. Li. Correct, sir.
        Mr. Shays. And can I make an assumption as well that one of
    the most significant findings as well is that you have a hard
    time accepting the fact that the Air Force has not been
    providing quarterly reports since June 1999?
        Mr. Li. That's correct.
        Mr. Shays. And should they be quarterly, or should they be
    even more often than that?
        Mr. Li. No, I think quarterly would be a reasonable time.
        Mr. Shays. Had they been doing that before that time?
        Mr. Li. They had provided some information, but----
        Mr. Shays. But not on a quarterly basis?
        Mr. Li. No.
        Mr. Shays. OK. So we're at a point now where we need to be
    able to do that. Do you think that they have those numbers?
        Mr. Li. Yes.
        Mr. Shays. They just haven't been providing them?
        Mr. Li. Correct.
        Mr. Shays. OK. Mr. Springman, is there anything that you
    want to add?
        Mr. Springman. Sir, I was here to provide an update to the
    development side of the F-22, if you wanted an update to the
    flight test program, if that came up, as an update to when I
    was here in December.
        Mr. Shays. OK, why don't you do that.
        Mr. Springman. OK, sure.
        In December 1999, we testified before your subcommittee
    that we had concerns about the lack of progress in the F-22
    flight test program, mainly because manufacturing problems had
    led to significant delays in the delivery of test aircraft.
        Also in our March 2000 report, we indicated that as much as
    37 to 50 percent of the flight test program might not be
    completed as planned, for three reasons. One was that the
    continued delayed delivery of the flight test aircraft. Two was
    that the completed test aircraft were requiring more
    modifications than expected. And three was that the flight test
    program efficiency was less than planned, meaning they were not
    completing as many test points per flying hour than they had
    planned.
        Since that time, since our March 2000 report, we have not
    seen anything to indicate that this situation has improved. In
    fact, for several reasons, we believe it has worsened.
        First, there continues to be additional delays in the
    delivery of flight test aircraft for testing. As a result, the
    Air Force has now almost 45 fewer flight test months available
    to complete the flight test program, and has lost over 971
    potential flight test hours.
        Second, a problem with cracks in the F-22 canopies halted
    flight testing from May 9th to June 5th, and this problem is
    not yet resolved. Currently, there is only one usable canopy on
    one test aircraft available for use in the flight test program.
        These delays and other factors have resulted in the program
    not currently achieving flight test program goals for the year
    2000. The program is 21 percent behind their flight test hour
    goal and 16 percent behind their flight test point goal for the
    year 2000. And in no month this year has the program achieved
    its goal of flying each available test aircraft over 26 hours
    per month.
        That concludes my update.
        Mr. Shays. Do you have any other information like that? I
    would be pretty unhappy to find that out after you had left.
        Mr. Springman. Sir, I can get you anything you want on
    updates to the flight test program.
        Mr. Shays. Pardon me?
        Mr. Springman. I can get you anything you want on updates
    to the flight test program. I can give you some more
    information.
        Mr. Li. I think in reading the Air Force's statement, I
    think they make reference to all those issues of the canopy.
        Mr. Shays. What risks does a reduced flight test schedule
    pose to active production costs? What's the significance of,
    besides the fact that we're not meeting our goal, what does it
    have ultimately, it's impact on production?
        Mr. Springman. Immediately, it has an impact on EMD costs.
    If you're behind in your flight test program but you still have
    the same planned date of completion for your flight test
    program, and you get to the end and you haven't completed what
    you need to complete in your flight test program and things
    have to be extended, there's more money involved.
        Mr. Shays. Do we wait for the production to make sure that
    we've done all the testing, or do we begin to produce before
    we've done all the testing?
        Mr. Li. The Air Force has chosen a strategy of not one
    phase starting and the next on stopping. In other words, they
    don't go through development, finish development and then go
    into production. There's a concurrency, overlap issue here. The
    low rate initial production decision will be made in December
    and our concern that we have expressed many times before was
    that the operational test and evaluation was not completed by
    the time at which that decision was made.
        Mr. Shays. What other concerns do you have, other than what
    we've read in your report or that you've testified?
        Mr. Li. I think we've expressed our concern over the past
    few years on the accelerated rate in which we're going to go
    into production. That's directly tied in with some of the
    concerns that we expressed today. If you don't have full
    knowledge of how to produce this particular aircraft, we don't
    think it's wise for us to be going into an accelerated rate of
    producing 10 aircraft per year.
        We think that six per year is a more reasonable number. We
    think that number is such that if some changes had to be made,
    because of problems that could come out during OT&E, that the
    changing of whatever has been produced would be lessened. That
    has been our position.
        Mr. Shays. Mr. Benson, is there any other complaint or
    concern that you feel we need to express at this hearing right
    now?
        Mr. Benson. I would just like to say that as we were trying
    to get a comparison of the Air Force and the Office of
    Secretary of Defense estimates to get a better understanding of
    why they did vary by the $7.8 billion, we asked both the Air
    Force and OSD cost estimators about that. They weren't able to
    do that themselves. They did in fact try to get together to
    resolve some of the differences to identify why the estimates
    differed. And because they used different cost estimating
    techniques, they were not able to do that.
        They both advised us that, as part of the current estimate
    they're working on, they have resolved some of those
    differences. So hopefully this December, when they come out
    with their new estimate, they will at least be able to compare
    those and address why they differ.
        Mr. Shays. Thank you very much, gentlemen. It's been very
    enlightening, thank you.
        We'll go to the next panel. Thank you so much.
        I would now call our second panel and ask them to remain
    standing until we swear them in, so you don't have to sit and
    stand. Ms. Darleen A. Druyun is Principal Deputy Assistant
    Secretary of the Air Force, Acquisition and Management,
    Department of Defense, accompanied by Mr. Joseph T. Kammerer,
    Deputy Assistant Secretary of the Air Force, Cost and
    Economics, Department of Defense. And also, we'll hear
    testimony from Dr. George Schneiter, Director of Strategic and
    Tactical Systems, Department of Defense.
        I think Dr. Schneiter, we'll have you go first, and then
    we'll go with the Air Force. Thank you.
        If you would raise your right hands, please.
        [Witnesses sworn.]
        Mr. Shays. Thank you. Note for the record that all three
    witnesses have answered in the affirmative. And I want to
    welcome you all back. I appreciated the testimony we received
    last time, and we look forward to your testimony.
        OK, Dr. Schneiter, I think you're first.

      STATEMENTS OF GEORGE R. SCHNEITER, DIRECTOR, STRATEGIC AND
    TACTICAL SYSTEMS, OFFICE OF THE UNDER SECRETARY OF DEFENSE FOR
     ACQUISITION, TECHNOLOGY AND LOGISTICS; AND DARLEEN A. DRUYUN,
       PRINCIPAL DEPUTY ASSISTANT SECRETARY OF THE AIR FORCE FOR
    ACQUISITION AND MANAGEMENT, ACCOMPANIED BY JOSEPH T. KAMMERER,
    DEPUTY ASSISTANT SECRETARY OF THE AIR FORCE, COST AND ECONOMICS

        Mr. Schneiter. Thank you, Mr. Chairman. I appreciate the
    opportunity to be back to discuss the Department's efforts to
    control and monitor the cost of the F-22 aircraft program,
    particularly with regard to the production cost reduction
    plans.
        As you know, and as has been stated here, the F-22 is a
    technically challenging development program. It has a goal of
    providing a tactical fighter aircraft with unprecedented
    capabilities in the areas of low observability, the ability to
    fly supersonically without afterburner, and advanced avionics
    and sensors. The F-22 is intended to ensure our air forces
    remain dominant in the 21st century.
        Thus far, the program has demonstrated technical progress
    that meets or exceeds the technical performance measures
    established for the program. However, there have been some
    delays in static structural testing, delamination issues with
    composite parts, a professional engineer's strike at the Boeing
    company, and more recently, cracking of aircraft canopies.
        These factors have affected the pace of flight testing at a
    time when a more aggressive flight test tempo was planned. The
    good news is that of these, only the canopy issue remains
    unresolved at this time, and significant progress is being made
    toward a solution for that. Mrs. Druyun will discuss some of
    these more in her statement.
        Despite these slowdowns, the Air Force is continuing to
    aggressively pursue the test program, so they can successfully
    complete the key exit criteria established for the low rate
    initial production decision planned for this December. As the
    GAO witnesses indicated in June 1996, the Air Force established
    an F-22 Joint Estimating Team, called the JET, to produce a
    solid estimate of the cost of completing the F-22 EMD
    production programs. They were later directed to identify cost-
    reduction initiatives that would enable the F-22 program to be
    completed within the established funding caps.
        The latter assignment gave rise to the restructuring of the
    program, to a set of cost-reduction initiatives, and to a
    memorandum of agreement between the Air Force and the prime
    contractors designed to motivate them to achieve prices
    consistent with planned F-22 resources. This part of the JET
    plan focused on production affordability for attaining unit
    cost goals jointly agreed.
        A key aspect of this was to use industry and Government
    investments to reduce unit costs. We successfully employed the
    same strategy to lower production costs of the C-17.
        As a result of Defense Acquisition Executive Dr. Gansler's
    review of the F-22 program in December 1998, he approved the
    go-ahead for production of the two-aircraft lot, and reiterated
    the importance of maintaining continued emphasis on executing
    the F-22 program within the congressional cost caps. He
    challenged the Air Force and its contractors to continue
    efforts to reduce costs and directed the Air Force to provide
    him quarterly briefings on development and production cost
    status. We've used these special quarterly reviews to examine
    cost and schedule trends, and to track the program's status.
        The Office of the Secretary of Defense made cost estimates
    in November 1998 and December 1999. These included assessments
    of the effects of the PCRPs, these production cost reduction
    plans. The estimates were broadly prepared in two steps. First,
    the recurring costs incurred to date on the engineering and
    manufacturing development units were used to forecast
    production costs. These actual costs reflect the degree of
    success, or lack thereof, of the PCRPs that have been
    implemented to date.
        Second, a separate estimate was made of savings to be
    expected from the still unimplemented PCRPs. And these were
    combined to give a final production estimate.
        All of the contractor, Air Force, and OSD estimators that
    looked into the effects of the PCRPs agree they will have a
    significant effect on reducing costs, and they are well worth
    undertaking. This is not at issue. There have been and are some
    disagreements about the magnitude of the reductions that will
    be achieved by the PCRPs. The OSD staff generally favored lower
    realization rates and was not willing to take large reductions
    on the basis of PCRPs that had not yet been fully defined.
        There also have been disagreements about what the cost
    experience to date implies for the future, apart from the
    PCRPs. The key disagreements here have had to do with how
    rapidly the cost of purchased materials and subsystems will
    decline from the levels observed in engineering and
    manufacturing development and the first lot of production--
    representative test vehicles.
        We continue to employ the best oversight and insight tools
    available to us to ensure the F-22 program will be accomplished
    for an acceptable cost and on an acceptable schedule.
        That completes my remarks, sir.
        [The prepared statement of Mr. Schneiter follows:]

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        [GRAPHIC] [TIFF OMITTED] T2259.022

        Mr. Shays. Thank you, Dr. Schneiter.
        Mrs. Druyun.
        Mrs. Druyun. Thank you, sir.
        I have prepared approximately 15 charts which I can get
    through fairly rapidly.
        I thank the chairman and the members of the committee for
    the opportunity to appear at your hearing to discuss the F-22
    program and the cost controls that we have in place to ensure
    we can deliver 339 aircraft within the cost caps established by
    the Congress in September 1997. If we could go to chart No. 3,
    which is entitled, Why Do We Need the F-22, if you look at the
    total threat to American air dominance, it includes advanced
    surface-to-air missiles, fighter aircraft and air-to-air
    missiles.
        If you look at the capabilities of the F-15 today, it is
    unable to operate in an advanced surface-to-air missile
    environment. Clearly, the F-22 provides air dominance over the
    battlefield. It is optimized for the air-to-air environment.
    The F-22 also complements the Joint Strike Fighter, which will
    be optimized for ground attack. It's kind of what we refer to
    as the high-low mix.
        If I could have the next chart and speak to where we are in
    terms of our production costs. Back in 1997, when we concluded
    the Joint Estimate Team, the JET effort, we implemented a
    number of initiatives within the program to ensure that we
    could control production costs. One of the key items that we
    implemented is called the target price commitment curve. And
    this was actually put on contract back in the 1997 timeframe.
        And basically, this target price commitment curve
    established a set of price goals for the production
    representative test vehicles all the way through lot four. It
    started a learning curve and at the end of lot four, we would
    be on a learning curve that would ensure that we would be able
    to deliver 339 airplanes for the caps established by the
    Congress.
        As part of this target price commitment curve, we are
    providing incentives up to $151 million to the contractors
    which will be awarded to those contractors that are making
    investments today and began making these investments back in
    the 1998 timeframe to basically bring down the cost, the actual
    cost, of producing this airplane.
        The next chart lays out the production cost estimate. To
    develop the Air Force cost estimate for the F-22 we made use of
    the Air Force Cost Analysis Improvement Group process. The
    AFCAIG group chairman is responsible for management. This
    process was conducted under the auspices of the Air Force
    financial management organization, which is separate from the
    Air Force acquisition organization.
        In using our AFCAIG process to develop a production cost
    estimate, we estimated the cost of production as part of this
    process of $40.8 billion. This estimate included approximately
    $10.2 billion for the production cost reduction plan and
    approximately $1 billion to cover risks associated with the
    production program.
        Without the $1 billion cost risks, the cost estimate for
    production is $39.8 billion, which is at the congressional cap.
    That cap has since been reduced. It's been reduced because of
    the color of money that was used upon the six PRTV contracts,
    six PRTV aircraft which are on contract. It was also reduced
    because of inflation adjustments. And that cap is roughly $37.6
    billion.
        In establishing the service cost position, I'm going to
    cover in the next chart our rationale as to why we settle on
    $39.8 billion. The service cost position budgets to $39.8
    billion, which at the time was the production cost cap. We have
    a very high degree of confidence that the budget will be met
    within the FYDP. Matter of fact, the greatest uncertainty in
    the estimate is beyond the FYDP.
        The AFCAIG's estimate clearly reinforces the program's
    effort to reduce and control production costs. The two
    production readiness contracts, one was awarded in 1998, the
    other was awarded in December 1999, which we tracked very
    carefully. The 1998 contract for two airplanes, this is our
    pre-production contract, the data indicates that it is actually
    costing less than what we had estimated. And this is good. This
    is the type of behavior we need to see in this program.
        The same is also true for 1999. In fact, if you looked at
    our negotiated settlement position in 1998, the contractor
    projected losing approximately 2 percent. In other words, he
    wasn't going to make any profit. When I look at the cost
    reporting data that we get on that contract today, it shows the
    contractor is probably going to make a profit in the range of 6
    percent. What that basically says is that he is continuing to
    bring down the cost of this program.
        The same thing is also true of PRTV2, which we put on
    contract in December 1999. The cost reporting data is showing
    that the contractor has a potential for making more profit than
    what we originally estimated, which is also good, because he is
    really focusing in on bringing down the cost of these
    airplanes. And these are the types of indicators that we use to
    gauge how well we are doing in terms of tracking costs and
    turning our production cost reduction initiatives into reality.
        The bottom line when you look at the service cost position
    of $39.8 billion is that this represents a reasonable risk to
    manage the program and incentivize cost savings to remain
    within the congressional cap. Clearly, we are managing risk
    just like industry manages risk. And I think that I have to
    stress to you that this is a continuing process. You can never
    take your eye off the goal post. And clearly, we are all
    focused on the goal post and examine these costs on a very,
    very regular basis.
        My next chart, I really refer to what's going on, and it's
    called the lean revolution. The F-22 signed off to the lean
    enterprise process sponsored by both industry and Massachusetts
    Institute of Technology back in the mid-1990's timeframe. And
    just as the auto industry made a revolutionary leap from mass
    production to a lean production, F-22 is leading the way for
    revolutionary change in transforming the defense industrial
    base and in transforming that from one of mass production to
    one of lean production.
        As you will recall, sir, back in the 1980's, our F-15
    production lines produced approximately 130 to 135 aircraft per
    year. And the F-16, 180 a year. What we're looking at today is
    36 airplanes a year when it gets into full rate production. And
    that really forces you to radically change the processes that
    were used in the past that have to be used today and in all
    future weapon systems to ensure that they are affordable.
        This next chart is the same chart that I showed to you back
    in the December 7th, 1999 hearing. These are the summaries of
    the production cost reduction initiatives that we have been
    very aggressively working. I'm expecting the contractors
    proposal in next month. This chart will be outdated and from
    the data that I have seen, I can tell you that this continues
    to grow.
        Looking at the next chart, which lays out the engine
    production cost reduction savings, once again, this is the same
    chart I showed to you, $4.1 billion, contractors proposal
    coming in next month I believe will also show that this is
    continuing to grow.
        I have a couple of examples to use in the next several
    charts. This one example I have is of a what we call a
    producibility improvement example. It's called single pass
    drilling. And this is where we used to have a two step process
    for drilling, first, and there are a lot of holes in this
    airplane, obviously, for a lot of fasteners. Originally, the
    process was we used two separate drilling operations, one for
    drilling and then you'd go back and do the same hole and ream
    it out.
        And this is one of the initiatives, many of the hundreds of
    initiatives that were identified by the contractor, by the
    workers on the floor. They actually brought, we call this the
    dreamer tool. We now have a one pass operation. We no longer
    have to use two separate tools. This effort was an investment
    of $841,000 by the contractor. And the payback is $41.1
    million, basically a 49 to 1 payback.
        My next example is another producibility improvement
    process. And this is something that we have been able to
    introduce into this airplane in the last 18 to 24 month period.
    And this is called the use of commercial parts. The example
    that you see here is an analog to digital conversion unit. It's
    obviously a board that we use in our flight management system.
    We did a commercial prototype with the TRW automotive side of
    industry.
        And this is an example of where these savings are real.
    When we wrote PRTV contract one and two, these are the savings
    that we were able to extract by using commercial grade
    components, getting rid of military grade components like
    circuits, resistors, capacitors, those types of components.
        And one, which is estimated to be in the range of, as you
    can see, over $1 million, we will consider that implemented
    once it is actually put on contract. But the other two are
    actually on contract and are part of our savings.
        When I look at the example of what is to be lean, this is
    on the next chart, this is an example of a printed circuit
    board lean effort that the Sanders Corp. went through for just
    one component. Basically you use a video camera which allows
    them to film the entire process used to build a component.
        And in this case, Sanders was able to use new labor
    standards. They really are more commercial like labor
    standards. And as you can see, in terms of parts travel, they
    went from 2.3 miles down to 320 feet, just tremendous examples
    of how you go and lean out a production line. This is on
    contract, and we're looking at about a $1.6 million savings.
        My next example of lean, and I think this is an important
    one, what we basically see is a common machine part. This is
    done by a contractor in Texas. And we originally were on
    contract with firm fixed price from Lockheed to this particular
    vendor. Lockheed went in there and worked with them to really
    begin to lean out their production line. The contractor came
    back in and basically reopened up his purchase order and gave
    money back to the contractor, because we saved money. This is
    on contract.
        And more importantly, and this is what I refer to as really
    being revolutionary, the contractor was so excited with the
    processes that he has experience, he's put this across his
    whole business base that he does within the Department of
    Defense. These are examples of what has actually occurred.
        I know a question that I am continually asked is, is all of
    this affordable. And the answer is yes. This is the same chart
    that I showed to you. The F-22 is fully funded in our budget as
    is the Joint Strike Fighter is also fully funded in our budget.
    Both of those programs are absolutely essential to the Air
    Force.
        In conclusion, sir, I'd like to say that we clearly are
    managing our risk on this program. We believe that the service
    cost position of $39.8 billion represents a reasonable risk and
    that the processes are laid in place and clearly we track those
    processes. The F-22 is leading the way for transforming the
    defense industrial base from one of being that of mass
    production to lean production.
        And I will look forward, sir, to answering your questions
    as we proceed through the rest of this hearing. Thank you.
        [The prepared statement of Mrs. Druyun follows:]

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        Mr. Shays. Thank you very much.
        Why don't I let Mr. Tierney ask questions, I'll go and
    vote, and then I'll come and ask questions. Because we want to
    be done before 1 o'clock, so I'll quickly vote. You have the
    gavel, Mr. Tierney.
        Mr. Tierney. Good afternoon. I apologize for being out of
    the room for most of your testimony, because I had other
    duties. If I'm repetitive at all, I hope you'll bear with me.
        I'm a little unclear as to what the Air Force production
    cost estimate actually is. I thought in your statement, as I
    read it, anyway, it said that the production cost estimate is
    $40.8 billion.
        Mrs. Druyun. The official service cost position for
    production is $39.8 billion. As I explained, sir, while you
    were out, we put together what's called an, we used the Air
    Force cost analysis group to develop the service cost position.
    The group, in doing their analysis and developing an official
    cost estimate for this program, estimated the cost at $40.8
    billion, which included $1 billion of risk in the out years, of
    risk that was unidentified.
        Without that $1 billion for risk, the estimate is $39.8
    billion.
        Mr. Tierney. Can I interrupt you just a second? Can you
    tell me what that $1 billion in risk was for?
        Mrs. Druyun. The $1 billion in risk is basically for the
    kind of unknowns that potentially might occur.
        Mr. Tierney. And wouldn't generally, if you were going to
    do a project like this, wouldn't you try to keep that number at
    least somewhere at 10 percent or around there, the risk number?
        Mrs. Druyun. I think clearly the philosophy that we are
    using and I think have used very successfully in managing this
    development program since the cost cap was put in place is to
    manage risk. And that is the philosophy that we have been
    using.
        If I could give you an example, the EMD cost cap that was
    established by the Congress back in September 1997, the EMD
    cost cap is basically $18.9 billion. We're 85 percent through
    the completion of our development contract. We saw potential,
    as I testified last December, for cost increases. We have very
    aggressively worked what we call development cost reduction
    initiatives, which we have put in place.
        And those development cost initiatives parallel what we are
    doing on the production side of the house. And those
    development cost reduction initiatives today still show that we
    are within the cap. They are working, they are paying off.
        Mr. Tierney. Getting back to my point, you had $1 billion
    in there that you said was a risk factor, but there was no
    identifiable risk at the moment, it was just in there as sort
    of a precautionary measure?
        Mrs. Druyun. It's basically tied beyond FYDP. Within the
    future 5-year defense plan, planning process that we go
    through, if I were to show you the service cost position, you
    would find that we have basically $540 million worth of risk
    built into that program for the first 5 years. Beyond that,
    when the service was developing its cost estimate, there is a
    potential, as there is in every program, for unknown, unknown
    risks, not well defined at this time.
        What I learned a long time ago is that you need to
    basically focus in on managing that risk. And if you were to
    sign off to an additional billion dollars risk, my 31 years of
    experience has clearly shown that it turns into reality, that
    it turns into a self-fulfilling prophecy. Because you take the
    pressure off the contractor.
        And this is like trench warfare in terms of dealing with
    cost. You cannot and we will not take the pressure off the
    contractor. We have to change the way we do business within our
    defense industrial base if we are to survive. And that's why
    the initiatives that we have laid in place, which clearly focus
    in on lean, we're following the example set by the automotive
    industry where they basically reinvented themselves.
        And that is the philosophy that we're using in managing
    this program. And as far as I'm concerned, that philosophy is
    working. It is working in development. As a matter of fact, if
    you would put that one chart up that shows my latest earned
    value data in my development program, what you would see from
    this particular chart, that blue line up there, is that my
    costs are doing better than what I had predicted at this point
    in the program. And my schedule is also doing better than what
    is predicted in this program.
        And it takes just consistent, persistent dedication to keep
    everyone clearly focused on what the issues are and work their
    way through. I don't want an escape mechanism. I don't want an
    escape valve. And that is the philosophy of our Assistant
    Secretary of the Air Force as to how we manage these programs.
        Mr. Tierney. Whose philosophy was it before when the
    billion dollar risk factor was put in?
        Mr. Kammerer. It was basically the Air Force cost analysis
    group, estimating group. They are people that work for me in
    the Air Force cost analysis community.
        We have a chart on risk here that I'd just like to show
    you----
        Mr. Tierney. So it was the same group that put that in
    there. And can you then tell me----
        Mr. Kammerer. It was the same group that put it in there--
    --
        Mr. Tierney. You were going to tell me what the basis was
    for them putting it in there. What were they figuring they were
    going to need that billion dollars for?
        Mr. Kammerer. Well, you have to understand the process that
    we go through. But it's a complex cost estimating answer, I'd
    be glad to explain it to you.
        But what we do is, as we're estimating, every component of
    the airplane, we try to estimate what we think is the most that
    this component can go up to and what's the least it could be
    and what's the most likely cost. We put that in for every
    component at a very detailed level. And then we convolute those
    distributions into one distribution that shows what the
    distribution of cost looks like, from high to low.
        Because you know, there is no point estimate really. Cost
    estimates should really be reflected as a range from here to
    there.
        Mr. Tierney. So with the billion dollars in, is that the
    high range?
        Mr. Kammerer. The billion dollars would take you from the
    point of our point estimate, which we estimated at $39.6
    billion, actually a little below the cap, and it would take us
    up to an area where we call our 50-50 estimate, 50 percent of a
    chance it would be below that estimate or 50 percent of a
    chance of being above that.
        Mr. Tierney. For the fudge factor.
        Mr. Kammerer. The chance of, if for example, we ended up at
    that $40.8 billion, the chance of getting from $39.6 billion,
    which we originally estimated, up to the $40.8 billion, is
    about 15 to 17 percent. So it's not a large thing. It's not as
    the GAO testified two-thirds that the estimate's going to be
    exceeded. There's a very small difference between that. I have
    a chart that shows that, and shows you the process.
        This is part of our complex cost estimating business that
    we do.
        Mr. Tierney. I guess what I'm trying to get at, at one
    point you thought it was necessary to put the billion dollars
    in, because there was some likelihood that you could go over on
    some of these components. Now you're telling me that you've
    readjusted because you no longer think you need the billion
    dollars.
        Mr. Kammerer. No, that's not what I'm telling you.
        Mr. Tierney. OK, tell me again.
        Mr. Kammerer. What I'm telling you is that if we wanted the
    estimate to be at the 50-50 estimate, we would call it $40.8
    billion.
        Mr. Tierney. And that's what you did at one point.
        Mr. Kammerer. That's right. That's the estimating process.
    When our AFCAIG met, including the headquarters people from Air
    Force, of which I'm the chairman of that, we decided to leave
    the estimate at the cap because we did not want this to be a
    self-fulfilling prophecy. We did not want to give the
    contractors a chance at another billion dollars. We said, look,
    let's keep the estimate down at the cap, so that we put the
    pressure on the contractors and the pressure on ourselves to
    bring this in at what we originally said we were going to bring
    it in for.
        Mr. Tierney. Thank you. I'm going to yield to Mr. Barr.
        Have you voted yet?
        Mr. Barr. Not yet.
        Mr. Tierney. OK, then we're going to recess for a second
    until Mr. Shays gets back, and we're going to try to run down
    and vote.
        Mr. Barr. Let me just ask you a quick question here. Mrs.
    Druyun, should we in the Congress have any reason to suspect
    the F-22 program will not be completed within the current EMD
    cost caps?
        Mrs. Druyun. No, sir. Our official position within the Air
    Force is that this program will be completed, as we see it
    today, within the cost caps established by the Congress. When
    you look at the production cost reduction initiatives that we
    have laid in place, we have, and I would invite you, sir, next
    time you're in Marietta, GA, to go look at the electronic data
    base that contains all of the data on every single one of these
    initiatives.
        And it tracks it through from PRTV1 until the Lot 12, and
    every single one of those initiatives is laid out. It explains
    what the initiative is, who the owner of the initiative is. It
    is updated, as I understand it, every 2 weeks. And we use that
    as the basis to continually understand where we are in the
    process.
        The other thing I have to emphasize, it's a journey. It's
    called continuous improvement. The contractors, particularly at
    the subcontractor, the vendor level, are actively engaged in
    this. And on a daily basis, as they go through performing their
    work, as they find better ways of building a part, for example,
    that data rises up. It is carefully examined, and if it looks
    like it is something that is doable, it is either, it is laid
    in either as something that is implemented. And if it's
    implemented, it means it's actually on contract. It's actually
    in our baseline today.
        Many of these initiatives today have been implemented on
    PRTV1 and PRTV2, which are on contract. And as I said to you
    earlier, we get cost data, even those with firm fixed price
    contracts, we get cost data to track what is actually
    happening. And what is actually happening are things like, it's
    taking fewer final assembly hours to put these airplanes
    together. So the data is clearly showing that the contractor,
    as we see it today, is clearly exceeding the goals that we set
    out for him in terms of cost reduction for these first two PRTV
    contracts.
        And that's the philosophy that we are using as we go
    through and manage this program.
        Mr. Barr. Thank you, Mrs. Druyun.
        Thank you, Mr. Chairman.
        Mr. Shays. Does the gentleman have other questions?
        Mr. Barr. I'd better go vote.
        Mr. Shays. Any question you want to ask that you want me to
    listen to?
        Mr. Barr. I was glad you were here for that one. Thank you.
        Mr. Shays. OK.
        I'd like to just kind of anchor onto something and then go
    from there. This is from the statement of the draft report of
    the GAO. And both of you have that at your desks, so you can
    look at it there. These are numbers, I think, that you both
    should be pretty familiar with.
        Dr. Schneiter, do you have a copy?
        Mr. Schneiter. If it's the tables, I think we do.
        Mrs. Druyun. We are sharing a copy.
        Mr. Shays. OK, thank you.
        Just so I can anchor down here, with the Air Force, I look
    at the Air Force estimate at $51 billion, and that includes, am
    I correct, the already implemented, which doesn't mean all the
    savings have occurred, but we're looking out at the future cost
    anyway. But the part that's been implemented, that $51 billion
    figure represents the $10.2 subtraction of the implemented,
    which is the chart on page 6 of--it's in the report. There are
    two reports. Maybe you could just rip out those two pages,
    because that's what I'm making reference to.
        I have table two, production cost estimates for the F-22,
    and table one, status of contractors production costs.
        Mr. Kammerer. In each one of those numbers, Mr. Chairman,
    the $51 billion does include implemented PCRPs. However, it
    does not include all of the $10.2 billion. Those $10.2 billion
    were----
        Mr. Shays. How much does it include of it?
        Mr. Kammerer. It includes, and I'll have to give you a
    rough estimate of this, because we don't have an exact
    estimate, but our rough estimate is between $6 billion and $7
    billion.
        Mr. Shays. Of the $10.2 billion?
        Mr. Kammerer. Yes. And the reason it doesn't include it all
    is because as we did our estimate, we evaluated what should be
    in and what should be out.
        Mr. Shays. Let me back up, then, let me go to the status of
    the contractors production cost reduction plan.
        Mr. Kammerer. OK.
        Mr. Shays. I'd like to hear both your opinion of that
    chart, Mr. Schneiter, and then Mrs. Druyun or Mr. Kammerer. Dr.
    Schneiter, what does this chart say to you, this table, rather?
    This is the one with the reasons for reductions implemented, to
    be implemented.
        Mrs. Druyun. If I could answer that, Congressman Shays,
    this is a contractor chart. This is how the contractor has
    captured his estimates of where he is in terms of these
    production cost reduction plans, where they have been
    implemented or where they remain to be implemented.
        We do have a common definition of what we mean by
    implemented, and I know that was a question you asked earlier.
    And what we mean by implemented is, I either have a firm fixed
    price proposal in hand that recognizes the impact of those cost
    reductions, or the contractor has basically reduced the
    standard number of hours allocated to a specific task which
    would correspond to the reductions that he would be signing up
    to, or the reduction has been negotiated in a forward pricing
    rate agreement. These are negotiated for all of our major
    contractors at their particular plants.
        Or the reduction has been negotiated with a subcontractor
    or vendor. Or finally, the impact of the reduction has been
    reflected in a current contract price, either with the prime or
    with its suppliers. That's what we call implemented. If it
    doesn't fall within those categories, then it's in the to be
    implemented column.
        Mr. Shays. So this doesn't represent your--you don't accept
    $10.2 billion, then?
        Mrs. Druyun. No. This is the contractors number. Our
    service cost position had a different number.
        Mr. Shays. What is that number?
        Mr. Kammerer. Well, as I mentioned to you, sir, our best
    estimate of that number, because we started from a baseline,
    and we had to estimate how much was in there, but our best
    estimate of that number is between $6 billion and $7 billion.
        Mr. Shays. If we are between $6 billion and $7 billion,
    well, then how much to be implemented? Where do you estimate
    that number to be?
        Mr. Kammerer. We estimate that number to be $10.2 billion.
        Mr. Shays. OK. How do you get to $21 billion?
        Mr. Kammerer. The $21 billion is the number of $16.9
    billion from the contractor for airframe avionics, Lockheed,
    and the $4 billion added to that to get $21 billion is from the
    engine contractor.
        Mr. Shays. But given your numbers, that doesn't jive.
        Mr. Kammerer. That's right.
        Mr. Shays. So?
        Mr. Kammerer. So we had a different baseline that we
    started from than the contractors.
        Mr. Shays. What was their baseline?
        Mr. Kammerer. What was their baseline?
        Mr. Shays. Yes.
        Mr. Kammerer. I do not know what their baseline was. I know
    that whatever they started at, they predicted that they could
    get $21 billion. We could supply that for the record.
        I'm here basically to defend our Air Force estimate.
        Mr. Shays. OK, let me just say this to you. I understand
    we're not going to answer some questions and this is a work in
    process. But I want to have some confidence that we're not just
    guessing, and that you're not just bringing everything under to
    be under the cap. And we have no way to evaluate. How do we
    evaluate? Trust me? It's like me standing up and saying, trust
    me, I'm a politician. It just doesn't work.
        And frankly, saying trust you, you're in charge of this
    program, I can't do it that way.
        Mr. Kammerer. My point is that the important number to
    start at is the number that the GAO showed in their table two.
    Because these PCRPs have been rolled into the estimate, we're
    saying that $51 billion is what that would be without
    implementing those that have yet to be implemented. And then we
    say, take the $10.2 billion off of that, and that's where we
    get down to our $40.8 billion estimate.
        In other words, everybody starts from the same baseline,
    the OSD people started from the baseline, saying there is a
    certain amount of these PRCPs in their baseline also.
        Mr. Shays. Dr. Schneiter, I'm getting an uncomfort. My
    uncomfort level is that basically, we have different baselines.
    We have a disagreement within the family that you weren't able
    to work out, evidently. And I don't know if either of you are
    right. Tell me, I don't know what is the first question I want
    to ask. I would like you to sort out the disagreement you
    appear to have with the Air Force.
        Mr. Schneiter. Let me comment. First of all, the OSD
    estimate is an independent estimate. We work very closely with
    the Air Force. Our cost estimators are in, I think, close to
    daily contact with them. And we do that to make sure we have a
    common data base, and that we have the same information to go
    on.
        Once that's done, however, we make an independent estimate;
    it's our job to do that. And it may be done using different
    methodology from that of the Air Force. If we did the same
    thing they did, it wouldn't really be independent.
        When we do that, the fact that we do that is part of the
    reason that Mr. Li and others have difficulty comparing the
    two, because they're done in a different way. So it's very hard
    to make such a detailed comparison.
        But the chart that was table 2 of the GAO testimony tells
    the story roughly as it exists at this point. And that is that
    the OSD estimate, setting aside the cost reduction initiatives
    still to be accomplished, or implemented, is somewhat higher
    than the Air Force estimate. If you look at that table, it's
    about $3.7 billion. And that's due to different assumptions
    that are made in terms of how we extrapolate from the data that
    we have collected on actual costs.
        We have a little bit of data at this point from the EMD and
    the PRTVs. What we have to do now is go way out, a decade,
    estimating from that. We have different approaches to doing
    that and different assumptions. And that results in that top-
    line difference, the $54.7 billion and the $51 billion. And
    that already takes account of the implemented cost-reduction
    initiatives.
        The second row is the difference in assumptions in terms of
    what will be realized from the cost-reduction initiatives that
    haven't yet been implemented. And that shows up here as about
    $4 billion. And that basically is a judgment call between the
    Air Force and the OSD cost estimators. And we tend to be less
    optimistic than they.
        Those two things combined result in the $7.8 billion
    difference that you see there.
        Mr. Shays. The last thing I would want to suggest is that
    as an independent organization that you would conform your
    numbers to the Air Force. But the fact is that you did it
    independently and you came up with a different number. You had
    the same basic facts and you came up with a different number
    based on different assumptions.
        So how am I to interpret that from your standpoint?
        Mr. Schneiter. I'll tell you how we interpret it. We
    interpret it that there is certainly some risk associated with
    meeting the numbers that are in the budget currently and
    expected in the out years.
        But also, we strongly want to encourage the Air Force
    actions in the program to meet what they say they think they
    can meet. And we won't know until we get successive contracts
    actually negotiated how that's going. If those negotiated
    contracts continue down the line that Mrs. Druyun showed during
    her testimony, then we would in fact end up at the Air Force
    estimate. It's too early at this point to say.
        Mr. Shays. I had a friend who said, I may not be right, but
    I'm never in doubt. You come across as being very convinced
    that you're right. You have a strong sense that you don't have
    much doubt about your numbers.
        But how do you respond to the Secretary's office coming up
    with $7.8 billion more in costs than you do?
        Mrs. Druyun. I think Dr. Schneiter has done a very good job
    of describing what some of those fundamental differences are.
    When you go back to that GAO chart, table two, when you go back
    to the GAO chart, there obviously are big differences with
    respect to the issue of not implemented PCRP savings.
        And I guess I would like to go back to my chart four and
    remind you what we set in place in 1997 and where we are today
    with respect to what we set in place in 1997.
        Mr. Shays. That chart doesn't have any numbers to it.
        Mrs. Druyun. No, but I can certainly----
        Mr. Shays. It's basically meaningless to me without
    numbers.
        Mrs. Druyun. I can certainly fill that in for you. When we
    set out our numbers back in 1997 for PRTV, what is now PRTV1,
    PRTV2, and we're getting ready now to receive the lot 1
    proposal, the fact remains for PRTV1 and I'm looking at, I
    believe it's an average flyaway cost of about $310 million a
    copy, this is part of our learning curve and this is basically
    what we have laid out here as a learning curve that we need to
    achieve to ensure we can deliver airplanes at the $39.8 billion
    cap.
        So we put that on contract 3 years later, and as you can
    see from what I'm basically showing you, what we put on
    contract, our data today, PRTV2 is about 25 percent complete.
    When we put that on contract, we basically thought the
    contractor would make no profit, as I said earlier. Today our
    cost reporting data which I get on this contract shows that we
    expect he will make some profit upwards to the range of about 6
    percent.
        We put PRTV2 on contract back in December 1999,
    approximately 6 months ago. And our cost reporting data shows
    that the actuals that we are seeing on that contract today are
    better than what we had expected.
        And so, this is how we build confidence. We laid this out 3
    years ago. The first two efforts that are on contract are firm
    fixed price. And we were able to put on contract and establish
    a learning curve and we're coming down that learning curve. The
    lot 1 proposal is due next month, and I expect in December when
    we have finally negotiated that effort and we're ready to put
    it on contract, which will be our low rate initial production,
    I am very confident----
        Mr. Shays. Can I ask, how is this responsive to my
    question, though? I'm hearing you, but I don't understand how
    it responds to my question.
        Mrs. Druyun. Our confidence, my confidence, comes from the
    fact that we brought PRTV1 and PRTV2 in on the Air Force
    estimate, and in on the target prices that we established 3
    years ago. We also have a very extensive electronic data base
    that tracks every one of the production cost reduction
    initiatives. And we are able to status exactly where we are,
    whether they have been implemented and to continue to track
    them through.
        And that is the philosophy that we use in this program. We
    identify it when it goes on contract. We track it and we
    continue to update our cost estimate to ensure that it is going
    to yield the savings that we basically feel are necessary to
    keep this program within the ceiling price established by the
    Congress.
        Mr. Shays. In 1997, you came in with $13 billion potential
    cost overruns. In 1999, you had $16 billion, and now we're
    looking at $21 billion. The trend line is up. Why shouldn't I
    not conclude that we're losing ground?
        Mrs. Druyun. These are cost reduction initiatives.
        Mr. Shays. Right. But there's a reason why you need to do
    cost reduction initiatives.
        Mrs. Druyun. It's called continuous improvement.
        Mr. Shays. No. You are making these improvements because
    you have overrun costs. Let me just make sure we're not playing
    a game here. I want you to find ways to save money. But don't
    come and tell me that the program is going to cost more and
    more and more and then you have to make cost reductions and
    that's a sign that we're making progress. That's idiotic.
        Mrs. Druyun. Sir, if you were to go back to the original
    ceiling that was established in law, you would find that there
    have been a number of adjustments to that ceiling. One of them
    is for inflation. Inflation that's used in preparing our budget
    estimates continues to decrease. That's why that cost cap is
    basically decreased.
        Mr. Shays. The cost cap is decreased?
        Mrs. Druyun. Well, the cost cap originally was $43.4
    billion for production.
        Mr. Shays. For the same number of planes?
        Mrs. Druyun. Yes, sir. And today that cost cap, with 333
    airplanes, remember 6 were funded in EMD, so we shifted it to
    EMD per congressional direction. That cost cap was----
        Mr. Shays. We didn't shift costs to the outer years so they
    don't show up?
        Mrs. Druyun. No, sir. Absolutely not.
        Mr. Shays. OK. So your response to me is that you're happy
    that we've brought the cap from $43 billion to $39.8, is that
    your point?
        Mrs. Druyun. No, sir.
        Mr. Shays. I want to make sure ultimately I get my question
    answered. You have a keen way of making sure I know what you
    want me to know. And I have never not allowed a witness not to
    have that opportunity.
        But what I do want to know is, we were looking at costs of
    $13 billion in 1997, cost reductions to $16 billion to $21
    billion. Are you saying of the $21 billion, $3 billion of it or
    $4 billion of it was to get the cap lower?
        Mrs. Druyun. No, sir. It is to ensure that we stay within
    the cap.
        Mr. Shays. And the reason why we have to make these cost
    reductions is the program is becoming more expensive than we
    anticipated. Therefore we had to make these cost reductions.
        Mrs. Druyun. No, I would not characterize it as the program
    becoming more expensive. Part of the phenomena that we see here
    is called inflation.
        Mr. Shays. No, the $21 billion, then let's just deal with
    the $21 billion. That $21 billion is a description of what?
        Mrs. Druyun. The $21 billion is a description of the cost
    reduction initiatives that the contractor has identified today
    and is actively pursuing----
        Mr. Shays. In order to stay within the caps, correct?
        Mrs. Druyun. In order to stay within the caps or come below
    the caps.
        Mr. Shays. OK, fair enough. Let's find the areas where we
    agree and then we'll find the areas we disagree.
        But the bottom line is that the program was looking more
    expensive and we had to find more ways to cut costs to stay
    within the caps. I believe that the Air Force should be
    congratulated anywhere we can make cost reductions. And the
    contractor. And I want you to rejoice in those areas.
        Given that I'm not an opponent of this program, though I
    will become on if I find that ultimately we are underestimating
    costs that we can trip our way into a big program and then
    later on, when someone else is taking your place, they'll say,
    well, I didn't make those estimates and they were wrong, and a
    lot of good that will do the country.
        I'm even willing, and I was going to say this in the
    beginning, I'm even willing to say this program should be, we
    should have this program if it costs $45 billion. In other
    words, I'm open to that view. Because I think it is an
    important program.
        But what I'm not open to is some kind of sense that we have
    this cap that we're going to stay under. What it looks like on
    the outside looking in is that the Air Force wants this program
    so much that it is going to find every way to tell the
    committee that they're going to meet the cap, and yet even
    within DOD, we have the Secretary's office saying, you know, we
    may not meet the cap.
        And so I think you can understand from my position that I
    could come to that conclusion. I want you to tell me how you're
    proud of this program and all the cost savings that you're
    going to make and I don't belittle that. But I wanted an answer
    to the question. And the question was, when we first were
    looking at this program, we didn't expect that we had to make
    these $13 billion worth of costs, or maybe we thought we had to
    make some of it. Then it looked to $16 billion, another $3
    billion, and now we're looking at another $5 billion in just 1
    year.
        And the $16 billion to $21 billion I don't think is related
    to our reducing the cap, it's to stay within the cap. Isn't
    that correct?
        Mrs. Druyun. No, sir. The reasons why the cost reduction
    increases continue to, that we've identified, continue to
    increase, so that we can stay within the cap, and the cap
    continues to come down. The cap today is $37.6 billion.
        Mr. Shays. Now, isn't the $39 billion to $37 billion in
    part because we're going to do six less planes?
        Mrs. Druyun. Yes, but----
        Mr. Shays. OK, wait, let me just interrupt you a second.
    When I see that happen, then I begin to doubt other things
    you're saying. I mean, that's unfair. We're making less planes,
    so obviously the costs are going to come down. Right?
        Mrs. Druyun. Yes, however, if I can answer the rest of the
    question, part of that is inflation. $600 million of that is
    inflation. That's the part that I have to continue to offset.
    The inflation rate that basically is used is in the
    neighborhood of about 1.1 percent.
        Mr. Shays. Well, let me ask you this.
        Mrs. Druyun. The real inflation that we see in this program
    is about 3 percent. When you look at the cost of people----
        Mr. Shays. I'll try to follow you here, and we're going to
    finish in 10 minutes. What I'm trying to logically follow is
    that when you mention inflation, then I will make an assumption
    that we're going to have to even make more than $21 billion of
    savings?
        Mrs. Druyun. If inflation continues to come down, the
    indices that we use----
        Mr. Shays. Down or up?
        Mrs. Druyun. If inflation indices continue to go down, I
    obviously will be forced to work even harder to find offsets
    because in reality----
        Mr. Shays. Is that realistic? I mean, I just want us to be
    realistic?
        Mrs. Druyun. Is it realistic? Well, as far as I'm
    concerned, it's reality that we have to deal with.
        Mr. Shays. No, no, but reality may not be realistic. In
    other words, your ability to deal with that may not be
    realistic. Reality may just, I mean, why wouldn't we make an
    assumption right now that the program, over the course of it
    is, we're going to have this much inflation and this is what
    it's going to cost us?
        Mrs. Druyun. But the inflation, sir, if you look back in
    the history of how inflation is done over the last 20 years,
    you would find it goes up and down. What we have seen for the
    last several years is that the inflation number has been going
    down. And remember, we're estimating through 2011.
        Mr. Shays. Let me just take that point. I thought you were
    telling me inflation was going up and that you had to make
    further cost reductions.
        Mrs. Druyun. No, no. The inflation factor that I have to
    use in doing our cost estimate has been going down. It's gone
    like from 1.5 percent down to about 1.2 percent.
        Mr. Shays. When you say you have to, in other words, that's
    what you're required in law to do?
        Mrs. Druyun. Yes, those are the rates that are set that we
    use.
        Mr. Shays. Right. I'm asking a different question. I'm
    asking a logical question that the rates you have to use may be
    different than reality.
        Mrs. Druyun. Yes, they are.
        Mr. Shays. And what is really bothering the hell out of me
    is that when I'm talking about inflation, you want to talk
    about the inflation rate that you have to meet. I want to just
    talk about inflation. Inflation costs go up. And I want to
    know, I just even want to know if the $39 billion is a real,
    $39.8 billion, is or was a realistic number. And I just want to
    know that. And that's the question I asked you.
        So is it logical that costs are going to keep going up
    every year? And the answer would logically be yes, right?
        Mrs. Druyun. Sir, let me just answer it this way. The $39.8
    billion estimate, which is our official service cost position
    that we have put together, I believe is realistic today. Now,
    will that be realistic if inflation were to go down to a half a
    percent and I still had to continue, contractors still continue
    paying in the neighborhood of 3 percent when you get into the
    out years? There's a point in time when it does become next to
    impossible to be able to offset it.
        Mr. Shays. Who sets that inflation rate?
        Mrs. Druyun. That inflation rate is basically set by the
    Office of Management and Budget.
        Mr. Shays. And that's the so-called allowable inflation
    rate that you were given?
        Mrs. Druyun. Yes.
        Mr. Shays. As opposed to the reality of what inflation
    really is?
        Mrs. Druyun. Yes, that's correct. And the problem is in the
    area, it's not materiel cost. The problem is in the area of
    people cost. There's a very short market of people out there.
    There's a shortage of people and contractors are paying higher
    rates than 1 percent.
        Mr. Shays. I understand that. I understand that you have
    inflation on people and you have increased costs for fuel. You
    have a lot of reasons why the costs may go up. And if the costs
    went up to $45 billion, there could be very logical reasons why
    the costs could.
        The question is, is it logical, and that's what I'm trying
    to see, is it logical that we will be able to stay under the
    caps. You are giving us a story that we'll be able to stay
    under the caps. But even as we have this dialog, I get less
    comfortable that you'll be able to.
        Mrs. Druyun. With the current cap that was established,
    that we have today which is $37.6 billion, it translates close
    to what was the $39.8 billion. The $39.8 billion, as you
    recall, went down because of inflation and the rest was because
    airplanes were moved into the development side rather than the
    production side. Today, we believe that's a realistic cap and
    that we can live within it and deliver 339 airplanes.
        But the big challenge in the future is obviously for us
    inflation.
        Mr. Shays. What I would like you to ask you to do is be
    able to give us a more accurate number. I'd like to understand
    your base. I'd like to understand, Dr. Schneiter, your base.
    And then we'll convene in a month. Let me ask you, how long
    will it take us to come back and do this? I would like to nail
    down what numbers you use as your base, Dr. Schneiter, what
    numbers you use as your base.
        And I'd also like to understand what numbers of the $21
    billion, I'd like to know what numbers you use and what numbers
    you use as already being implemented. Meaning, the very
    helpful, Mrs. Druyun, your helpful explanation of your number
    of firm fixed prices and your contract prices and so on, what
    is implemented and what is to be implemented. And I'd also like
    if we could have numbers on this.
        I don't think we're going to resolve all my questions, but
    what we'll do is we'll come back in a month's time and we'll
    try to sort it out. And I'm not asking, Dr. Schneiter and Mrs.
    Druyun, that you all conform your numbers, because you both are
    going to give us different assumptions. So that's not what I'm
    asking. But I'm interested in knowing that.
        And I would love to just ask you, would you just respond,
    Mrs. Druyun, to the GAO's concern that you're not giving the
    cost estimates in your reports to the Secretary? Is that
    something that I should be concerned about or not?
        Mr. Schneiter. I can comment on that. I think OSD has been
    well informed in terms of the status of these. As I indicated
    earlier, at the working level, we certainly do that on an
    almost daily basis. What gets reported in the quarterly
    meetings to Dr. Gansler depends in large part on what's changed
    since the last report. I think we probably have not focused on
    these much in the last couple of meetings, because really
    nothing had changed from what we saw before.
        Mr. Shays. Is it an unfair request for me to ask you that
    these be done on a quarterly basis? Then it becomes a more
    public document, correct?
        Mr. Schneiter. I don't think it becomes a more public
    document. Those are internal reports to Dr. Gansler.
        Mr. Shays. Well, it becomes a document, I would ask you to
    do that. It becomes a document that more information is in one
    document that we can then turn to, and it helps us do
    evaluation. Is there any reason not to expect that, Mrs.
    Druyun?
        Mrs. Druyun. There is no reason why we cannot officially
    give a report to Dr. Gansler. But I would also like to supply
    for the record, sir, all of the meetings that have occurred
    between the OSD staff and the Air Force staff looking at these
    production cost initiatives. I don't think the GAO has quite
    captured the amount of exchange and the amount of examination
    that has gone on and continues to go on, literally on a monthly
    basis.
        Mr. Shays. I think that you would agree that when they come
    in from the outside, though, it's a little harder to track a
    daily conversation on what transpires, and it's helpful to have
    periodic reports that they can then have, you know, grab onto.
    And I would think that's something that obviously this
    committee would be interested in as well.
        Mrs. Druyun. Certainly.
        Mr. Shays. Let me do this. Let me--I'm not adjourning this
    hearing, we will conclude it, and we will call another hearing,
    working it out with your schedules in a month or so, give or
    take, where we can go over these numbers in more depth. And I
    would just say that our committee will try to write a specific
    request of the things that would be helpful so there will be no
    misunderstanding. And we'll try to get that to you in the next
    few days.
        Mr. Kammerer. Just one point that I want to add, Mr.
    Chairman. If you take a look at the numbers with the
    implemented----
        Mr. Shays. Which one am I looking at?
        Mr. Kammerer. That's table two of the GAO report on page
    10. If you take a look at the numbers at the top line there,
    between $54.7 billion and $51 billion, the difference of $3.7
    billion on a base of $54.7 billion or $51 billion is a very, is
    well within cost estimating differences. In other words, that's
    a 7 percent difference. And that is a number between us and the
    OSD that is well within cost estimating uncertainty. You cannot
    do much better than that.
        Mr. Shays. Right. It would just be interesting to know
    where your differences are.
        Mr. Kammerer. I can explain pretty much where the
    differences are. I'll plan to do that the next time we testify.
        Mr. Shays. We're not going to do it in the next 3 minutes.
        But is the confidence level, this is something that counsel
    is asking me, what should be the confidence level; 7 percent,
    10 percent, 5 percent?
        Mr. Kammerer. Well, if you're within plus or minus 10
    percent, usually cost estimators say if you're within plus or
    minus 10 percent, that's a pretty good number.
        Mr. Shays. So if this project costs us $44 billion in the
    end, versus $39 billion or $40 billion, then----
        Mr. Kammerer. Yes, sir. Now, there are some good reasons
    why estimates should vary more than that. For example, if we
    were both in agreement on the production cost reduction
    programs [PRCPs], if that was within 7 percent, then that whole
    estimate would be within 7 percent.
        Mr. Shays. Mr. Kammerer, I am more comfortable with your
    comment, believe it or not, than you may realize, because
    that's more reality for me. But what that says is that the $39
    billion figure, it puts it in some perspective. And it does
    put, Mrs. Druyun, your extraordinary confidence that you're
    within this cap, it gives me a different perspective as well.
        I've never known us though, I've never known us to usually
    underestimate costs, though. That's what makes me concerned.
        Mr. Tierney, what we're going to do is we're going to come
    back, because we have to vacate this room at 1, and we're going
    to have a hearing in about a month to go over the numbers in
    more detail. We'll invite your staff to also help us in the
    letter drafting.
        Is there any comment that any of you want to make before we
    get on our way?
        Mrs. Druyun. We look forward to having a follow-on session.
    I would suggest perhaps if we had a pre-session with your
    staff, it could be very helpful to understand the differences
    in baselines.
        Mr. Shays. I think we'll need to do that, yes, I agree.
        Thank you very much. Let me ask you, have there not been
    communications with my staff on these issues? Your people have
    sat down with our people, right? This would not be the first
    time?
        Mrs. Druyun. No, we have sat down before. But I think we
    know what your issues are, I think we can really zero in on
    them.
        Mr. Shays. I just wanted the record to not make an
    indication that part of the problem is that we haven't been
    sitting down with each other. So I just want to make sure of
    that. We're happy to do that, and I think it's a good
    suggestion.
        I thank all of you for coming, and we'll be back.
        [Whereupon, at 12:55, the hearing was recessed, to
    reconvene at the call of the Chair.]
        [The prepared statement of Hon. Helen Chenoweth-Hage
    follows:]

    [GRAPHIC] [TIFF OMITTED] T2259.045