[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
 F-22 COST CONTROLS: HOW REALISTIC ARE PRODUCTION COST REDUCTION PLAN 
                               ESTIMATES?
=======================================================================

                                HEARING

                               before the

                   SUBCOMMITTEE ON NATIONAL SECURITY,
                   VETERANS AFFAIRS AND INTERNATIONAL
                               RELATIONS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             AUGUST 2, 2001

                               __________

                           Serial No. 107-101

                               __________

       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       MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida         EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California             PATSY T. MINK, Hawaii
JOHN L. MICA, Florida                CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia            ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia                    ROD R. BLAGOJEVICH, Illinois
DAN MILLER, Florida                  DANNY K. DAVIS, Illinois
DOUG OSE, California                 JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky                  JIM TURNER, Texas
JO ANN DAVIS, Virginia               THOMAS H. ALLEN, Maine
TODD RUSSELL PLATTS, Pennsylvania    JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida                 WM. LACY CLAY, Missouri
CHRIS CANNON, Utah                   DIANE E. WATSON, California
ADAM H. PUTNAM, Florida              ------ ------
C.L. ``BUTCH'' OTTER, Idaho                      ------
EDWARD L. SCHROCK, Virginia          BERNARD SANDERS, Vermont 
JOHN J. DUNCAN, Jr., Tennessee           (Independent)


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                     James C. Wilson, Chief Counsel
                     Robert A. Briggs, Chief Clerk
                 Phil Schiliro, Minority Staff Director

 Subcommittee on National Security, Veterans Affairs and International 
                               Relations

                CHRISTOPHER SHAYS, Connecticut, Chairman
ADAM H. PUTNAM, Florida              DENNIS J. KUCINICH, Ohio
BENJAMIN A. GILMAN, New York         BERNARD SANDERS, Vermont
ILEANA ROS-LEHTINEN, Florida         THOMAS H. ALLEN, Maine
JOHN M. McHUGH, New York             TOM LANTOS, California
STEVEN C. LaTOURETTE, Ohio           JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky                  JANICE D. SCHAKOWSKY, Illinois
TODD RUSSELL PLATTS, Pennsylvania    WM. LACY CLAY, Missouri
DAVE WELDON, Florida                 DIANE E. WATSON,California
C.L. ``BUTCH'' OTTER, Idaho          ------ ------
EDWARD L. SCHROCK, Virginia

                               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 August 2, 2001...................................     1
Statement of:
    Barr, Hon. Bob, a Representative in Congress from the State 
      of Georgia.................................................    20
    Druyun, Darleen A., Principal Deputy Assistant Secretary of 
      the Air Force, Acquisition and Management, Department of 
      the Air Force, Department of Defense; Dr. George Schneiter, 
      Director of Strategic and Tactical Systems, Department of 
      the Air Force, Department of Defense; and Francis P. 
      Summers, Regional Director, Defense Contract Audit Agency, 
      Department of Defense......................................    37
    Li, Allen, Director, Acquisition and Sourcing Management, 
      U.S. General Accounting Office, accompanied by Robert 
      Murphy, Assistant Director, Acquisition and Sourcing 
      Management, U.S. General Accounting Office; and Donald 
      Springman, Senior Analyst, Acquisition and Sourcing 
      Management, U.S. General Accounting Office.................     6
Letters, statements, etc., submitted for the record by:
    Barr, Hon. Bob, a Representative in Congress from the State 
      of Georgia, prepared statement of..........................    21
    Druyun, Darleen A., Principal Deputy Assistant Secretary of 
      the Air Force, Acquisition and Management, Department of 
      the Air Force, Department of Defense, prepared statement of    42
    Li, Allen, Director, Acquisition and Sourcing Management, 
      U.S. General Accounting Office, prepared statement of......    10
    Schneiter, Dr. George, Director of Strategic and Tactical 
      Systems, Department of the Air Force, Department of 
      Defense, prepared statement of.............................    73
    Shays, Hon. Christopher, a Representative in Congress from 
      the State of Connecticut, prepared statement of............     3
    Summers, Francis P., Regional Director, Defense Contract 
      Audit Agency, Department of Defense, prepared statement of.    81


 F-22 COST CONTROLS: HOW REALISTIC ARE PRODUCTION COST REDUCTION PLAN 
                               ESTIMATES?

                              ----------                              


                        THURSDAY, AUGUST 2, 2001

                  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 9:30 a.m., in 
room 2154, Rayburn House Office Building, Hon. Christopher 
Shays (chairman of the subcommittee) presiding.
    Present: Representatives Shays, Otter, Kucinich and 
Tierney.
    Also present: Representative Barr.
    Staff present: Lawrence J. Halloran, staff director and 
counsel; Jason M. Chung, clerk; David Rapallo, minority 
counsel; and Earley Green, minority assistant clerk.
    Mr. Shays. A quorum being present, the Subcommittee on 
National Security, Veterans Affairs and International Relations 
hearing, entitled, ``F-22 Cost Controls: How Realistic are 
Production Cost Reduction Plan Estimates,'' is hereby called to 
order.
    In less than 2 weeks the Defense Acquisition Board will be 
asked to launch production of the F-22 Raptor air superiority 
fighter as the Air Force's premiere tactical aircraft 
modernization platform begins to roll off the assembly line. 
The program faces a critical question: Can the F-22 hit 
production cost targets?
    The Air Force hopes to purchase 333 production aircraft 
while staying within the $37.6 billion cost cap set by 
Congress, but two Department of Defense DOD estimates put F-22 
production costs between $2 billion to $9 billion over the 
limit. A major factor contributing to the $7 billion 
disagreement is the value ascribed to near- and long-term cost-
cutting plans. A difference of that magnitude signals 
significant risk that current cost control strategies may not 
be adequate to allow production of the right number of F-22s at 
an affordable per-unit price.
    This is our third hearing on F-22 production cost reduction 
plans [PCRPs]. As in the past, the subcommittee asks the 
General Accounting Office to analyze DOD estimates and the PCRP 
evaluation to refine our understanding and increase our 
confidence in the scope and validity of the production cost 
savings effort. Today GAO reports some savings have been 
achieved, and more can be anticipated as the airframe and 
engine production programs mature, but cost pressures persist, 
and it is still not at all clear there will be enough PCRP 
savings to keep the F-22 on target, particularly if higher 
production estimates prove more accurate.
    Since we began following the formulation and implementation 
of ambitions PCRP initiatives, total savings needed to address 
cost growth has doubled, now totaling $26 billion. F-22 
contractors told GAO half of those cost reductions are already 
implemented in supply contracts or lean production processes. 
To varying degrees, cost estimators credited the program with 
additional savings identified but not yet implemented. So-
called challenge PCRPs represent more than $4 billion of hoped-
for, but still undefined, savings.
    If those savings can be achieved, the Raptor will soar. If 
gaping differences over estimating and evaluation methodologies 
can be narrowed, the F-22 production cost reduction process 
could represent a major weapons system acquisition reform. If 
DOD fully implemented an earlier GAO recommendation to improve 
the frequency and consistency of PCRP status reports, they 
would be far more effective management tools. And if the 
Department agreed to provide GAO and this subcommittee greater 
access to the data supporting costs and savings estimates, we 
would all have greater confidence in the adequacy and integrity 
of the PCRP effort.
    We welcome our witnesses this morning, and we look forward 
to their testimony on the important issue of tactical aircraft 
production cost reduction plans.
    [The prepared statement of Hon. Christopher Shays follows:]
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    Mr. Shays. At this time I would like to call on Mr. 
Kucinich, the ranking member of the committee.
    Mr. Kucinich. I thank the Chair. It's an honor to join you 
this morning for this hearing and welcome the witnesses.
    Over the past 2 years this subcommittee has held several 
hearings on the increasing costs of developing the F-22 fighter 
plane. Our previous inquiries revealed a strong potential for 
the program to exceed the budgeted cap established by Congress. 
It has now become necessary for this committee again to examine 
the project to determine whether the Air Force can deliver on 
its commitment to execute the F-22 program within the limits 
Congress prescribed.
    A more fundamental and perhaps more important question 
concerns the Department of Defense's overall aircraft 
acquisition strategy. In previous hearings GAO and others 
raised the problem of aging aircraft. As aircraft get older, 
they tend to break more often, they take longer to inspect and 
maintain, and they are less available for operations. But the 
Pentagon's current plan for acquiring replacement planes will 
not reduce the average age of aircraft.
    As GAO has pointed out elsewhere, the Pentagon is investing 
in extremely expensive programs that will yield very few 
aircraft. The F-22 program is a prime example. The original 
plan was to purchase 880 planes for $40 billion. Because of the 
Pentagon's inability to accurately predict costs or meet 
testing hurdles, however, we now expect fewer than 333 planes. 
In fact, GAO will testify today that the number most likely 
will decrease by another 85 planes. Rather than updating our 
fleet, the F-22 purchase will actually increase the average age 
of each aircraft.
    In addition, past assurances that the Air Force would stay 
under the cost caps--despite those past assurances that the Air 
Force would stay under the cost caps, it appears they have 
missed the mark again. GAO will report that estimates by both 
the Air Force and the Secretary of Defense exceed the cost gap, 
the Air Force by $2 billion, and the Secretary of Defense by $9 
billion.
    Why is the Pentagon proceeding on this course if these 
purchases result in a fleet that breaks down more and flies 
less? Shouldn't we buy more aircraft that, although less 
sophisticated, may be more reliable? Currently defense spending 
is approaching the average levels of the cold war in the 
1970's, yet the Pentagon is seeking billions more. Congress 
deserves reassurance that this money is going toward a force 
that is more effective, not less.
    Thus, our examination of the problem of cost controls 
within the F-22 program necessarily must take place in the 
context of the Pentagon's overall mode of operation and 
culture. Aging aircraft are a symptom of systemic issues and 
needs to be addressed.
    Finally, I would like to take this opportunity to thank the 
Project on Government Reform and Oversight for the report they 
are issuing today regarding this issue. The report further 
highlights these problems. It concludes as follows, ``As long 
as we keep investing in weapons systems that are highly complex 
and rely on technologies that are not fully proven, we will 
find ourselves spending more and more on fewer and fewer 
weapons that are of questionable relevance.''
    Danielle Brian, the executive director of the Project on 
Government Oversight, reiterated this observation in a 
statement she made when releasing the report, ``The F-22 is a 
continuation of the flawed weapons-building system that allows 
overpriced, undertested weapons to dominate our military 
policy. As long as the Pentagon continues this trend, defense 
contractors will benefit at the expense of the military and 
taxpayers,'' and I might add our national security.
    I thank the Chair for holding this hearing, and I look 
forward to the testimony.
    Mr. Shays. Thank the gentleman for his statement.
    At this time I would recognize our panel, Mr. Allen Li, 
Director, Acquisition and Sourcing Management, U.S. General 
Accounting Office, accompanied by Mr. Robert Murphy, Assistant 
Director of Sourcing Management, GAO; and Mr. Donald Springman, 
Senior Analyst, Acquisition and Source Management, GAO.
    And before I swear you, gentlemen, I would just like to say 
for both panels my hope is that we have an honest dialog with 
no games, no spin, just straight talk.
    At this time I would like to administer the oath, and if 
you gentlemen would stand.
    [Witnesses sworn.]
    Mr. Shays. Note for the record our witnesses have responded 
in the affirmative.
    And I also would say before, Mr. Li, you give your 
testimony, I don't know if we have all of the answers, because 
I'm not sure that you have all of the data submitted to you by 
DOD to answer all of the questions. We don't feel that we have 
all of the data, but let's give it a try and see what you have 
got.

  STATEMENTS OF ALLEN LI, DIRECTOR, ACQUISITION AND SOURCING 
  MANAGEMENT, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY 
  ROBERT MURPHY, ASSISTANT DIRECTOR, ACQUISITION AND SOURCING 
    MANAGEMENT, U.S. GENERAL ACCOUNTING OFFICE; AND DONALD 
SPRINGMAN, SENIOR ANALYST, ACQUISITION AND SOURCING MANAGEMENT, 
                 U.S. GENERAL ACCOUNTING OFFICE

    Mr. Li. Mr. Chairman and members of the subcommittee, I'm 
pleased to be here today to summarize our statement on the 
impact of cost reduction plans on estimates for producing the 
F-22.
    We were asked by the chairman to update information we 
provided last year, and have prepared a report being released 
at today's hearing.
    As you know, the Air Force started developing the F-22 in 
1991. Development is scheduled to be completed by September 
2003. The Air Force plans to procure 333 production aircraft at 
a cost currently limited to $37.6 billion by the Fiscal Year 
1998 Defense Authorization Act. The act does not specify the 
total number of aircraft to be produced.
    Before I summarize our work, allow me to provide some 
background information with regards to the production of the F-
22. In 1997, the Air Force and contractors reported that the 
production costs could go up substantially. Since then the 
contractors and the Air Force have been developing and 
implementing plans to reduce costs by enhancing production 
technology, improving manufacturing techniques and improving 
acquisition practices.
    Cost reduction plans are categorized in three ways: 
challenge, not yet implemented, and implemented. Challenge 
plans are those that are not yet well defined and are not yet 
close to achieving future cost reductions. Not yet implemented 
plans are those that are better defined and are believed to be 
sound and possible. Implemented plans are those closest to 
achieving cost reductions.
    I have three main points this morning. Point one, potential 
cost reductions identified by contractors have increased, but 
their actual impact is yet to be determined. The estimated 
amount of contractor-identified cost reduction plans added up 
to $26.5 billion in January 2001. The total consists of about 
$4.2 billion in the challenge category, $8.5 billion in cost 
reductions not yet implemented, and about $13.7 billion in cost 
reductions that have been implemented.
    It is clear that if the savings from cost reduction plans 
are to be achieved, production costs--production contract 
prices and Air Force expenditures must be lower than would have 
been the case if the planes had not been implemented. However, 
until contracts are negotiated, cost estimates will continue to 
reflect the judgment of cost estimators about the potential 
impact of cost reduction plans.
    Because F-22 production is in its early stages, most of the 
cost reductions associated with the cost reduction plans have 
not yet been achieved. An analysis of some cost reduction plans 
categorized as implemented indicates that lower costs can be 
achieved.
    Last year the Air Force asked the Defense Contract Audit 
Agency [DCAA], to conduct a limited review of some of the 
plans. DCAA is responsible for contract audits at DOD. DCAA 
examined 11 cost reduction plans totaling $425 million in 
estimated cost reductions. DCAA's report indicated three 
things. First of all, DCAA did not take exception to the 
potential cost reductions for 8 of the 11 plans it reviewed. 
Second of all, the agency found potential cost reductions on 
two others to be based on judgment, not discrete, measurable 
events. And the third thing that it found, it has found the 
documentation on one to be lacking.
    Mr. Summers of DCAA will testify later and should be able 
to provide the subcommittee with further details.
    Point No. 2, latest F-22 production cost estimates still 
exceed the congressional cost elimination. As we reported to 
you last year, both the Air Force and Office of the Secretary 
cost estimators projected that in late 1999 that productions 
costs would exceed the congressional cost limitation.
    Air Force cost estimators projected productions costs at 
$40.8 billion, and those from the Office of the Secretary 
estimated $48.6 billion. Even though the cost estimates 
exceeded the cost limitations in effect at that time, the 
Secretary of the Air Force maintained that the actual costs 
would not exceed the limitation, and established the Air 
Force's position on production costs at the $39.8 billion 
limitation amount.
    So what are the latest projections we analyzed? In 
estimates made December 2000 to support the fiscal year 2002 
budget request, both the Air Force and the Office of the 
Secretary cost estimators continued to project that production 
costs will exceed the congressional cost limitations. The Air 
Force cost estimators projected that production costs were 
likely to exceed the current $37.6 billion congressional cost 
limitation by $2 billion. The estimate produced by the Office 
of the Secretary indicates that costs will likely exceed the 
limitations by $9 billion. The $7 billion difference between 
those two estimates is due to such things as the Office of the 
Secretary estimating higher labor costs for subcontractors, as 
well as higher costs for the F-22 engines.
    Air Force officials advise us that their estimates consider 
the same cost reduction means as those by the Office of the 
Secretary, but that they reflect differing judgments regarding 
the viability of the plans and potential amounts of cost 
reductions applied.
    At this time we cannot advise you on which estimate will 
prove to be more accurate, but what if the higher estimate 
turns out to be true? If the Office of the Secretary's higher 
estimate is correct, and additional cost reduction plans are 
not developed and implemented, we project that the Air Force 
would have to buy about 85 fewer F-22s than the 333 aircraft 
now planned to stay within the cost limitation.
    My final point. DOD has not completed action on our prior 
recommendations to reconcile the number of F-22s with the cost 
limitation and report to the Office of the Secretary on the 
status of cost reduction plans. We made two recommendations 
last year to the Secretary of Defense, namely that he reconcile 
the number of F-22s that need to be procured with the cost 
limitation and report to the Congress on the implications of 
procuring fewer F-22s because of potentially higher costs. And 
the second recommendation was to report to the Under Secretary 
of Defense on the status of the cost reduction plans each 
quarter.
    Regarding our first recommendation, DOD partially agreed, 
stating that affordability of the F-22 would be evaluated 
during QDR. More recently, DOD indicated that a review of DOD 
programs directed by the President must be completed before it 
can comment further on this recommendation.
    Regarding our second recommendation, we note that in the 
Air Force's March 2001 quarterly review to the Under Secretary, 
the information reported included only summary information on 
the total estimated cost reductions.
    DOD, in commenting on the draft of our report being 
released today, indicated the information reported in the last 
quarterly review in June 2001 contained more detailed 
information. We have examined documentation supporting that 
review and agreed that it contains more information on cost 
reduction plans than previous reviews; however, the information 
reported is still not consistent with what we recommended.
    Specifically, information was not reported regarding the 
total number of cost reduction plans identified, the number 
implemented, cost reductions realized to date, and any 
additions or deletions in the plans included in the prior 
report. Such information would be useful.
    And, Mr. Chairman, your statement with regards to getting 
more information is--I am referring to that point. For example, 
the quantification of cost reductions realized to date would 
allow us to
identify what the baseline cost estimate is prior to including 
the impact of implemented end-cost reduction plans.
    Mr. Chairman, that concludes my statement. I would like to 
answer any questions that you have at this time.
    Mr. Shays. Thank you.
    [The prepared statement of Mr. Li follows:]
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    Mr. Shays. I would like to recognize that we have Mr. Barr 
as the vice chair, and Mr. Tierney, who has sometimes served as 
the ranking member of this committee, to help Mr. Kucinich. So 
you have four Members who are very interested in the committee.
    And at this time I recognize Mr. Barr. You have your time.

 STATEMENT OF HON. BOB BARR, A REPRESENTATIVE IN CONGRESS FROM 
                      THE STATE OF GEORGIA

    Mr. Barr. Thank you very much, Mr. Chairman. I thank you 
for allowing me to participate in this important hearing today 
on the air superiority fighter that will maintain our 
superiority and consequently lead directly to our superiority 
on the battle field well into the 21st century.
    Mr. Chairman, I have a more complete statement that I would 
appreciate unanimous consent to insert into the record.
    Mr. Shays. If I could at this time just take care of that 
business. I 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 would ask further unanimous consent that all witnesses be 
permitted to include their written statement in the record. 
Without objection, so ordered.
    Mr. Barr. Thank you, Mr. Chairman.
    Mr. Chairman, during the past year the F-22 Air Force 
Industry Team has achieved a number of significant 
accomplishments, among them: Completed all production release 
criteria required for a low-rate initial production go-ahead. 
Completed initial measurements of the F-22's in-flight stealth 
characteristics. These measurements confirmed that the F-22 is 
meeting or exceeding its stealth requirements; demonstrated in-
flight fusion of sensor data from the F-22's integrated 
avionics system; completed engine life testing representing the 
equivalent to 8 years of operational use; validated the 
detection range of the F-22's radar. These measurements 
confirmed the radar is capable of detecting targets at greater 
than ranges of the F-22's specification requirements; completed 
static strength testing of critical aircraft structure. These 
tests confirmed the F-22 meets operational strength 
requirements with a 50 percent safety margin.
    Additionally, the team has currently accomplished over 
1,250 hours of flight testing during 500 flights since flight 
tests began.
    Mr. Chairman, by any measure the F-22 is on range to be an 
outstanding aircraft which exceeds even the very, very high 
goals set for it earlier on. The F-22 program has met all 
calendar year double 00 LRIP DAB performance criteria. One 
thing, though, that concerns me, Mr. Chairman, is congressional 
action over the last several years which has eroded because of 
uncertainty over continuation of the program and size of the 
program, eroded supplier confidence.
    [The prepared statement of Hon. Bob Barr follows:]
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    Mr. Barr. I would like to ask Mr. Li, does superior 
uncertainty add to overall production cost?
    Mr. Li. I understand that the Air Force has identified 
that. I have not looked at that particular issue to verify that 
was the case. I would need to talk to the individual 
subcontractors that were involved and to identify whether or 
not that was indeed the case. But I do understand that the Air 
Force has raised that as an issue, sir.
    Mr. Barr. Thank you. I would appreciate that.
    Mr. Li, with the majority of the development program now 
complete, should the remaining effort principally involving 
testing move on to the testing phase?
    Ms. Li. When we are talking about the engineering, 
manufacturing and development phase of the program, our 
position has been that as of our last report which we issued 
last March, which was before some of the progress that you 
mentioned today, sir, our position has been that a lot of 
testing still needed to be performed, and that was the reason 
why we had made the recommendation that, because of the 
uncertainty with regards to how the testing was going--if it 
was going to be completed in time, we recommended not to 
accelerate production.
    However, in direct response to your question, sir, I 
believe that the remainder of the time that is associated with 
the engineering, manufacturing and development program is 
indeed for testing, and I would support that testing being 
completed.
    Mr. Barr. With regard to the significant cost investment 
that both the government and Lockheed Martin has had to put 
into place at their facility in Marietta, GA, to conduct the 
assembly, would moving that assembly to any other location 
involve substantial cost both to the government and to Lockheed 
Martin?
    Mr. Li. I have not looked at that particular issue. I do 
understand that discussions have been going on with regards to 
the possibility of either moving facilities or building. The 
facility currently at Martin Marietta that they are utilizing 
is a government-owned--part of it is a government-owned 
facility.
    Mr. Barr. Would not common sense tell you, though, that if 
there has been significant investment at a facility, in this 
case Air Force plant No. 7 at the Lockheed Martin facility in 
Marietta, in order to get to the point where the aircraft can 
be assembled there, and is there being assembled, to pick all 
of that up and have to invest, make that investment elsewhere 
would involve necessarily additional cost; would it not?
    Mr. Li. Yes. That is a very good point. That would be one 
of the factors that Lockheed and the Air Force would have to 
consider.
    Mr. Barr. Thank you.
    Mr. Shays. At this time, I would recognize Mr. Kucinich. We 
are going to do 5 minutes and then allow a longer time for the 
second time if we need it.
    Mr. Kucinich. I thank the Chair.
    To Mr. Li. You indicated in your report that the under 
Secretary of Defense cost estimate, the Pentagon will be forced 
to cut 85 more aircraft. How many airplanes do you expect will 
be acquired in this program? About 248.
    Mr. Li. The statement that we are making was to try to put 
a sense of magnitude as to what would happen if the Office of 
the Secretary's estimate was proven to be accurate and true. In 
other words, in the current cost limitation and the current 
plans, the Air Force currently plans to procure 333 aircraft. 
What we are saying, sir, was, if the higher estimate was proven 
to be true, and they could not develop any additional cost 
reductions, they would be--in essence--only be able to buy 200 
something--85 less. That was our analysis.
    Mr. Kucinich. How many were originally envisioned?
    Mr. Li. Over 700.
    Mr. Kucinich. And some cost estimates were $40 billion for 
project development; is that right?
    Mr. Li. Yes.
    Mr. Kucinich. What is the current total under the Secretary 
of Defense estimate?
    Mr. Li. The engineering, manufacturing, development 
congressional cost cap is around $20 billion, and the current 
production cost cap is at $37.6.
    Mr. Kucinich. Isn't it closer to $46 billion plus another 
$19 billion or so for development equals about $66 billion?
    Mr. Li. If you take those new--the other estimates into 
account.
    Mr. Murphy, do you have anything?
    Mr. Kucinich. That is satisfactory actually.
    So that the number of planes keep dwindling, and the cost 
keeps escalating. Do you have the ability to project out at 
least those rates?
    Mr. Li. Excuse me?
    Mr. Kucinich. Do you have the ability to project out at 
these rates the increase--cost escalating, the means 
guidelines; have you tracked the rate of decline for the number 
of aircraft and the rate of increase for cost so you estimate 
where we might be in 2 years or 3 years according to these 
trends?
    Mr. Li. We have not.
    Mr. Kucinich. You know, can you see something in the future 
where we have like one plane for, you know, $1 trillion?
    Mr. Li. I know, Mr. Augustine has indicated that with his 
theory, that soon we will only be able to buy one weapons 
systems for the billions of dollars investment. I don't have 
that projection, sir.
    Mr. Kucinich. That is what I was wondering. Can you do that 
projection?
    Mr. Li. I think it would depend upon the particular weapons 
systems itself.
    Mr. Kucinich. What about the average age of aircraft? Even 
if the Air Force procures all of the F-22s it wants as well as 
all of the Joint Strike Fighters, for that matter, won't the 
current planes leave our fleet even older, sir?
    Mr. Li. Absolutely, sir. We issued a report on this same 
subject, on the problem of aging aircrafts, and we did indicate 
that for the tactical fleet, using the current plans for 
modernization, that indeed, that after all is done, the average 
age of the Air Force fleet would be higher than what it was 
before its modernization started.
    Mr. Kucinich. Colonel Riccioni from the Project on 
Government Reform and Oversight submitted a report today that 
criticizes the Pentagon's aircraft procurement program. He 
cites exactly these kinds of cost and age problems. Essentially 
he finds, as a fighter pilot himself, that the Pentagon is 
engaged in what he calls a course of unilateral disarmament.
    What do you think? Could you comment on that?
    Mr. Li. I wouldn't go that far. I do think that it is of 
concern that individual aircraft programs that we have right 
now for modernization may not reach those particular goals in 
terms of allowing DOD to have the average age of aircraft that 
it currently enjoys.
    Obviously there are a lot of other factors, too, beside 
that age that come into play in terms of capabilities, that Mr. 
Barr was talking about, the increased capabilities that the F-
22, for example, would have. So many other factors would have 
to be----
    Mr. Kucinich. One final question before we go back. By 
permitting the reduction of the number of planes, does this 
actually reward cost overruns and put the burden for overruns 
on the taxpayers, not the contractors, rewarding 
inefficiencies, the taxpayers get less for more money? They are 
the ones that have to suffer because they are promised X amount 
of planes and they get far less.
    Doesn't it seem like a game of bait and switch?
    Mr. Li. Mr. Kucinich, I think that one of the problems that 
are associated with weapons systems is the difficulty to 
project out and to do cost estimating in the first place.
    Mr. Kucinich. I understand.
    Mr. Chairman, as I go over this material, you know, I'm 
here on behalf of people in my district who are taxpayers, and 
I have to tell you I feel that people are really being cheated 
on this. They are being cheated. They are being ripped off, and 
the national security is suffering adversely. And part of these 
hearings, you know, we go through these hearings, and I think 
in order for them to have the kind of meaning which they are 
meant to have, I think it's appropriate for us to call into 
accounting this rotten system, because it's very clear that the 
contractors are the last ones to lose, and the taxpayers are 
the first ones to lose.
    Thank you.
    Mr. Shays. Thank you.
    At this time, I recognize Mr. Tierney.
    Mr. Tierney. Thank you.
    Thank you, sir, for joining us. I'm going to ask that we 
put up a slide, and maybe you can help me with some 
calculations.
    See if we can get this done before we go down to vote on 
that.
    He is going to give you a written copy of that because if 
your eyes are as challenged as mine, on the wall, that won't 
help you too much.
    Now, supposedly the congressional cost cap currently stands 
at $37.6 billion?
    Mr. Li. That's correct.
    Mr. Tierney. In your report you said that both the Air 
Force and the Office of the Secretary came up with estimates 
that exceed that cap.
    Mr. Li. That is correct.
    Mr. Tierney. They were $39.6 billion and $46.9 billion; is 
that correct?
    Mr. Li. That's correct, sir.
    Mr. Tierney. On the issue of production cost reduction 
plans, PCRPs, my argument is that these savings are somehow not 
returned to the government, so they must be compensating for 
cost overruns in other areas. I'm trying to determine now how 
much those costs have escalated, and that is what this chart is 
all about. We asked the staff to help us with some tallying.
    First, we can determine how much money is saved through 
those so-called PCRPs, the production cost reduction plans. On 
page 8 of your report you stated that some PCRPs have been 
implemented, and others have not. You provided the amounts for 
those that are not yet implemented, which I listed on the 
chart, at $7.6 million under the Air Force estimate and $5.3 
billion--sorry, $7.6 billion under the Air Force estimate, and 
$5.3 billion under the OSD; is that right?
    Mr. Li. That's correct.
    Mr. Tierney. Your report did not list amounts for PCRPs 
that are already implemented, but during a meeting yesterday 
the staff asked the Air Force about this. The Air Force said 
that 87 percent of the contractors' projections are already 
implemented. So, according to your report, the contractors 
predicted $13.7 billion in reductions; is that right?
    Mr. Li. Yes. When we did our work, we tried to make that 
breakout of what was the effect of those PCRPs that were 
already implemented within the cost baseline, and they were 
unable to do so when we asked them.
    Mr. Tierney. So they have $13.7 billion in reductions, and 
they say 87 percent of the contractors' projections are already 
implemented. This apparently means that the Air Force has 
already implemented $11.9 billion worth of production cost 
reduction plans. Does that generally meet your calculations?
    Mr. Li. Yes.
    Mr. Tierney. So if you add the PCRPs that have already been 
implemented to those that have not, that comes to around $19\1/
2\ billion, as the chart indicates. When you add these to the 
Air Force estimate, you get about $59.1 billion, right?
    Mr. Li. Yes.
    Mr. Tierney. So the bottom line is that this amount somehow 
exceeds the congressional cost cap by $21.5 billion. And my 
question is, where did it go?
    Mr. Li. The cost to the contractor and to both Lockheed and 
to Pratt & Whitney, from your chart it is correct to say that 
had there been no PCRPs, it would have come in at this amount, 
but because of the cost reductions that both contractors have 
implemented, we are able to bring it in closer to the cap.
    Mr. Tierney. But, I mean, somewhere in that F-22 program, 
costs are escalating pretty fast. You are saving at the end, 
and you are still spending all of this money. I mean, costs are 
going up like wildfire somewhere else?
    Mr. Li. That's correct.
    Mr. Tierney. So you look at the estimate by the Secretary 
of Defense, their bottom line is even higher.
    Mr. Li. Yes.
    Mr. Tierney. They say under their analysis it could 
potentially be $26 billion. I find it a little hard to believe 
that somewhere in a $37 billion program, costs could have 
escalated by as much as $26 billion. That appears to be what 
they are saying.
    Do you have any idea where in the program costs have gotten 
so out of control?
    Mr. Li. No. That is one part of the analysis that we did 
not do. I think that would probably be a more appropriate 
question to ask the Air Force in terms of what happened to 
those particular costs.
    Mr. Tierney. I think your efforts have been commendable, 
but it seems like you are put in the position of always doing 
it after the fact. Every time the program goes over by another 
billion dollars, you go--point that out, they go out and try to 
find $1 billion in efficiencies, but never really address the 
inefficiencies that seem to be growing.
    So my concern is that they haven't really been accrually 
predicting the underlying costs to begin with, and they are not 
being realistic about how these costs rise over time. That is 
different than in compensating them after the fact. So I think 
if we can presume the program has already implemented the 
easiest efficiencies, it will be the low-hanging fruit, so to 
speak, what is going to happen in the future when there are 
fewer efficiencies to find, but the costs continue to escalate 
somewhere else?
    Mr. Li. That obviously is a concern. But, I know that with 
the cost pressures associated with the program, both Lockheed, 
Pratt & Whitney and the Air Force are working hard at trying to 
come up with cost reductions that will enable them to meet that 
cap.
    You are right in terms of trying to--in terms of the low-
lying fruit, that they have--it is more challenging, obviously, 
as the program goes along to find cost reductions.
    Mr. Tierney. I just close with the fact that the Air Force 
apparently is deeply committed to the President's faith-based 
programs, but we are losing faith.
    Thank you.
    Mr. Shays. Which cost estimates, Mr. Li, do you consider 
more accurate, the Air Force or the Office of the Secretary of 
Defense?
    Mr. Li. As I indicated in my short statement, I think that 
it is very difficult to be able to pinpoint which one is more 
accurate. I think what I can say is that in terms of program 
projections that have been made in the past, the ones that have 
been the lowest have been the least accurate, and that in this 
particular case, OSD has made a lot of projections that have 
proven to be closer to the truth.
    That said, I think before I could make an assessment as to 
which one is more accurate, I would have to look at more of the 
individual details associated with how they did their analysis.
    In terms of the Office of the Secretary, I believe that I 
would have to go into greater detail into how they made their 
projections, how they did their methodology to project those 
savings.
    Mr. Shays. Could you explain the production cost 
discrepancy between the two estimates?
    Mr. Li. We found that the differences are primarily--and 
this is a big amount of--the biggest chunk was in the estimate 
of labor costs associated with the subcontractors. There were 
costs also associated--of $1.2 billions--associated with engine 
cost that was a difference in the estimate; also $1 billion in 
terms of the production cost reduction plans, and also $800 
million difference in terms of what the Air Force's plans for--
relating to productivity investments.
    Mr. Shays. What would you say the significance of the 
production cost estimates discrepancy is? What is the 
significance? What should we take from these two different 
estimates?
    Mr. Li. Those are two very respectable cost estimating 
groups. I have a lot of respect for both of them. I think 
obviously people can disagree, but it also points out to me, 
Mr. Chairman, that the uncertainty associated with some of them 
still puts it into question.
    As to your initial question as to which one is more 
accurate, it--there are some differences of opinion there that 
underlie the fact that there is uncertainty.
    Mr. Shays. OK. We have 7 minutes left to vote. Let me just 
ask this question.
    We are actually going to come back. Let me just ask this 
last question and ask you to stay.
    What would be gained by providing detailed production cost 
reduction plans status reports to the Office of the Secretary 
of Defense, OSD?
    Mr. Li. I think it would be very helpful to both the 
Congress and obviously to myself if I was asked to continue 
monitoring this program.
    I think that an example would be, the question that Mr. 
Tierney just put up there, in terms of he was saying there was 
no ability to identify what was the true impact of when they 
interpreted the baseline, what is the amount associated with 
what has already been implemented, and you--they never 
identified that. If I had that number, it would help me. So 
that is an example.
    Mr. Shays. OK. What we'll do is we'll come back, and we'll 
go back to Mr. Barr if he has more questions. Thank you.
    I think we have one vote, a Journal. I have this concern 
that there may be a procedural--a motion to adjourn, so we may 
be a little longer, but we'll keep you informed. Thank you.
    [Recess.]
    Mr. Shays. I'll call this hearing to order.
    Mr. Li, I'd like you to explain to me what information you 
would like to get that you aren't getting, and I'd like to 
explain why you're not getting that information. And what is 
the--first off, is there some information that you are not 
getting? Is there some information that you're not getting from 
the Department of Defense? So they are basically saying they 
won't--the Department of Defense--and who in particular is 
saying they will not provide information to you?
    Mr. Li. Let me give you some background on that particular 
set of circumstances. To respond to your request that we update 
last year's report, what we said before to do was to identify 
what were the latest cost estimates from both the Air Force and 
the Office of the Secretary. The specific organization that 
you're asking me to identify is the CAIG, C-A-I-G, the Cost 
Assessment Estimating Group. And that particular group, we 
asked them in writing to provide us with some information. They 
identified to us that information was predecisional and could 
not be provided at that point in time, Mr. Chairman. In trying 
to answer the question that you had in terms of what the 
estimates were, I found an alternative source that identified 
what that top number was. I took that number, and I went back 
to the Office of the Secretary, because I wanted to corroborate 
and to say, is this indeed the number that the Office of the 
Secretary had identified? And they confirmed that. So for the 
purposes of my work, I was able to complete my work in the 
report.
    Had you asked me to provide additional details on assessing 
such things as the accuracy, I would have to start at the point 
of perhaps doing a greater sample of the PCRPs, something 
similar to what the DCAA did in terms of looking at the 
methodologies involved in each one and the reasonableness of 
the rates. I would need greater information from that 
standpoint, and I did not have that information to do that.
    Mr. Shays. Is the information that you requested, was that 
made available under the previous administration?
    Mr. Li. We did not do this type of work on the F-22, so we 
did not--I can't comment on that.
    Mr. Shays. And the justification for not providing it being 
predecisional is that they were not basically going to 
acknowledge that they had come to a conclusion or that--in 
other words, let me understand. Is predecisional meaning that 
there is evaluation, judgment that had not been made, or was 
there raw data that you wanted? Do you see the difference?
    Mr. Li. Yes, I wanted the raw data. I did--was not looking 
for the decision. It is DOD's position, however, that the 
information that I was requesting was not yet acted on by the 
highest levels which would in essence, the Defense Acquisition 
Board, and that information was performed at their request for 
them. And their position was since it had not been acted on, I 
could not get access to it.
    Mr. Shays. And when did they say it would be ``acted on?''
    Mr. Li. They did not identify that.
    Mr. Shays. So they didn't say give us 2 weeks?
    Mr. Li. I'm sorry. I'd like for Mr. Springman to add 
something.
    Mr. Springman. If I might interject.
    Mr. Shays. Is your mic on, Mr. Springman?
    Mr. Springman. I believe so.
    Mr. Shays. Tap the mic just so I have confidence. Thank 
you.
    Mr. Springman. They did indicate that after the DAB was 
completed, that ``the cost estimate remains predecisional until 
the DAB'' are their exact words.
    Mr. Shays. Until the what?
    Mr. Springman. Until the Defense Acquisition Board meeting, 
the upcoming Defense Acquisition Board.
    Mr. Shays. Did they say when that board would be meeting?
    Mr. Springman. At this time the letter back from them was 
dated March 28th. At that point I don't remember what date the 
DAB was actually scheduled for, but it is currently scheduled, 
as I understand, for----
    Mr. Shays. So even if you wanted this information today, 
you wouldn't get it; is that what you're saying?
    Mr. Li. That's correct. The board is not scheduled to meet, 
as Mr. Springman said, until August 14th.
    Mr. Springman. August 14th.
    Mr. Li. And that would be the earliest time at which they 
would provide that information.
    Mr. Shays. Mr. Kucinich.
    Mr. Kucinich. I would like to review with Mr. Li, if I may, 
some questions regarding cost control measures. Can you tell us 
about this new category of production cost reduction measures 
called challenge measures? What are they exactly?
    Mr. Li. Challenge plans are those that are not yet well 
defined, and they are different from those that are not yet 
implemented because of the lack of firm definition. In our 
report that we're releasing today, Mr. Kucinich, we actually 
have a diagram on page 6 that gives you a pictorial with 
regards to the progression, and it shows that--it gives you an 
example that--for example, if--for a challenge plan currently 
that is being identified is being characterized as the 
potential cost reductions by buying rather than making selected 
components. While there is a dollar value added to that, it is 
not very specific, and I wanted to contrast how each one gets 
better defined as you go along.
    Mr. Kucinich. I appreciate that. I had the chance to review 
it, but I'm wondering if contractors haven't fully developed 
their ideas about these challenge measures, how in the world 
can they estimate the amount they hope to save by implementing 
them? In other words, on page 5 of the report.
    Mr. Li. I can't address specifically and I can't answer for 
the contractor----
    Mr. Kucinich. Well, I just wonder if you go to page 5, 
where do contractors get that $4.2 billion?
    Mr. Li. I did not go into seeing how they estimate it. 
However, I do want to add, sir, that both the Air Force and the 
CAIG did not consider challenge PCRPs when they did their 
estimates.
    Mr. Kucinich. Now, the Air Force has argued on occasion 
that cost increases are really Congress' fault. They say 
contractors suffer from uncertainty about the government's 
commitment to the program and that this causes cost to 
increase. Specifically they say contractor prices have gone up, 
because there has been no production decision. Let me ask you, 
when the Air Force originally went to these contractors for 
estimates, they didn't have a production decision then, did 
they?
    Mr. Li. No.
    Mr. Kucinich. And they don't have one now either, do they?
    Mr. Li. No.
    Mr. Kucinich. So are things really that different?
    Mr. Li. I will ask Mr. Murphy to answer, give you some more 
specifics, but this is the same point that Mr. Barr brought up 
earlier. I think the subcontractor--the Air Force has 
identified the fact that the lack of certainty associated with 
making the production decision has--that delay has, according 
to them, caused some concern and perhaps been viewed as a lack 
of commitment on the part of the government.
    Mr. Kucinich. So if I may, contractors could argue that 
they feel uncertain because a production decision was postponed 
at the beginning -.
    Mr. Li. That's right.
    Mr. Kucinich [continuing]. Of the year? Have you heard 
that?
    Mr. Li. Yes. I have heard that from the Air Force.
    Mr. Kucinich. But as you stated on page 7 of your report, 
the estimates you cited in your report were from December of 
last year. Isn't that right?
    Mr. Li. That's correct.
    Mr. Kucinich. So that argument doesn't explain how these 
new estimates increased, does it?
    Mr. Li. No, no.
    Mr. Kucinich. Now, even assuming that there's something to 
this contractor uncertainty argument, how does it work in 
practice? I mean, 1 year the contractor provides detailed cost 
estimates to the Air Force. The next year the contractor says, 
you know, I'm not sure about the commitment to this program. So 
my price just went up by 50 percent. Now, does the Air Force 
really accept that kind of justification when dealing with 
contractors?
    Mr. Murphy. They have mentioned this several times. I think 
as I see it, it is a generalization that they've made. If 
there's some data that they have put together that shows how 
the subcontractors are reacting to the current continued 
extension of a production decision, we haven't seen any data 
that would support that statement.
    Mr. Kucinich. Mr. Li, just I want to take this in a 
different direction for a moment. I just want to take this in a 
different direction for a moment.
    You know, I read your report and am grateful for the work 
of JO on this, but if you were a Member of Congress, how in the 
world would you explain to your constituents why they keep 
paying more and getting less?
    Mr. Li. This goes back to my point about not being able to 
do good cost estimates in the first place. I think that, 
perhaps, they were too optimistic in identifying what those 
iterational costs were. Mr. Kucinich, I'm also associated with 
reviewing all of NASA's programs, and very similar types of 
issues have come up with regards to the space station, and a 
lot of people are saying that--how do I explain to my 
constituent it is fact that the program is getting more 
expensive and the content is getting less?
    Mr. Kucinich. Well, if I may, though, you know, just to 
respond and then to yield back to the Chair, there is a 
critical difference here. We accept NASA as an incubator of new 
technologies and the price of developing alpha technologies is 
something that the government has long been ready to absorb. We 
don't accept the role of contractors in propelling costs of any 
material. We don't accept that. And it is not up to them to 
make that decision, because that is really done apart from the 
government. NASA is an internal program, in the sense of some 
of the cost increases have been anticipated. But for the first 
time we are beginning to scrutinize some of these weapons 
systems, where, you know, the taxpayer isn't ready to give the 
Department of Defense a blank check on anything.
    Mr. Li. My parallel was not to try to say that there is 
some parallel in terms of the mission of either. My only reason 
for bringing this up was to say that the issue of cost 
estimating is very difficult and other agencies besides DOD are 
trying to tackle this issue.
    Mr. Kucinich. All right. I appreciate the gentleman's 
comments. Mr. Chairman, thank you so much.
    Mr. Shays. Thank you. Mr. Otter, do you have any questions 
you'd like to ask?
    Mr. Otter. I do, Mr. Chairman.
    Mr. Shays. You've got the floor.
    Mr. Otter. Thank you. My apologies to the panel for being 
late. It's been kind of an exciting morning after a long night. 
It sounds like I ought to be back in Idaho at the Shorty's 
Country Western Lounge, but unfortunately that isn't where it 
was.
    You know, as a citizen and as a businessman for years and 
years and years, I always heard of these horror stories of cost 
overruns in the Defense Department and it was always made a big 
deal for one reason or another. If you didn't like the Defense 
Department, you made a big deal out of how inadequate they were 
at leadership in managing their own operation. But it seems to 
me that we continue to kind of aggravate the whole concept. And 
I guess maybe our mechanical and out aviation technology is 
outrunning our technology on accounting, because we haven't 
been able to develop a system that says, this is what our 
expectations of the costs are, and this is what they're going 
to be.
    Now, for 30 years when I worked in the private sector, if I 
were going to build a potato french fry plant--and my apologies 
again, Mr. Chairman, for this constant use of this analogy. But 
I went out to many contractors. I went out to the contractors 
that were going to pour the concrete and put the beams up who 
were different contractors, and then of course all the 
equipment that went through the plant, so that I could send a 
potato in one end, and in exactly 22 minutes I had a french fry 
for McDonald's coming out the other end.
    Mr. Shays. Can we just state for the record that this 
process made him a very wealthy man?
    Mr. Otter. I don't think I could buy one of these 
airplanes, though. Anyway, one of the things that generally--
about the only thing that we could accept is when our engineers 
would come running back in to us and they'd say, Butch, we've 
got a problem here, and the problem is that we underestimated 
the cost of the cutter deck, and so instead of buying seven 
cutter decks, we really only have the budget in place to buy 
five. I go back to Milestone, who happened to be the company 
that makes the cutter decks, and I say, you know, that template 
that you just made, now you were prepared to amortize that 
template over seven cutter decks, but now you can only do it in 
five. And they'd say, well, you know what's going to have to 
happen. Each cutter deck has got to go up in price in order for 
us to get the amortization that--and the full economic utility 
out of the template that we were going to use.
    I'm reminded of that only because in the short time I've 
been here I've seen how fickle and how indecisive sometimes 
those who benefit from congressional decisions and how tenuous, 
I think, their position can be. And I'll tell you, if--and I'm 
not laying this totally to blame for that, but I do know that 
your unit cost is going to go up considerably if you're not 
going to build very many units. Henry Ford figured that out 100 
years ago. I don't know why we can't figure that out ourselves. 
But I would just ask you to be as gentle as possible on myself 
and my colleagues, Mr. Li, and is sometimes the go, no-go 
decision period for us of Congress where we say we're going to 
cut the program or not going to cut the program, does that have 
an obvious effect on the contractors and the subcontractors, in 
terms of where they think they're going to have to go to get 
the economic recovery back out of the equipment--the equipment 
that they have to build that is uniquely for a specific piece 
of defensive equipment, like the F-22?
    Mr. Li. I think that I understand the point that you're 
making. Where I come from is I'd like to think that I'm 
advising the Congress, I'm looking out for the interests of the 
Congress and the taxpayer, and the issue here is, yes, the 
contractors have that particular concern, but we as taxpayers 
should have confidence that whatever we're being sold that we 
can afford and can meet the requirements that have been 
established. Many times the confidence in both the 
affordability and in the ability to meet the requirements have 
not been established yet, and, therefore, I don't think it is 
prudent to make a financial commitment to something where you 
don't have that confidence.
    Mr. Otter. That I understand, Mr. Li. But I think we ought 
to have at least somewhere in all these buildings, some 
institutional memory, and that institutional memory should 
maybe lead us to believe that in our bid and acquisition 
process, we say, well, what if--you know, before this has 
happened on another piece of equipment, instead of 35, what if 
we only buy 20, and what if we buy 15, and what if we buy 12, 
so that we've got some sort of a predetermined course of action 
and an expectation that if in fact we do decide we can't buy as 
many as we thought or for some reason somebody decides in the 
Pentagon that this isn't going to be able to fulfill and 
execute the mission that we had hoped it would, and so we don't 
need as many as we thought we did. But it seems to me that this 
has gone on for a long, long, long time, and--the cost overrun, 
I mean. And there has got to be some core reason for that to 
happen, and the only thing--the common denominator that I can 
look at is indecision, and many times in indecision, we make a 
decision. And that inability of us to make a decision or go 
forward with a commitment, you know, we want 35, no, we want 
20, well, maybe we'll take 27, that can cause us a lot of 
problems. And it just seems to me that we would prepare the 
environment for being unsatisfied by saying, if you don't go 
full force with this, if you don't take the 35 that you said so 
that we can get a cost unit amortization out of this equipment 
that you need to the construction of this piece of armor, that 
your cost per unit has got to go up.
    Mr. Li. I understand. The only caution I would add, sir, 
that by almost acknowledging the fact that you might have 
reduced quantities reduces the leverage that the government has 
in terms of trying to get the contractor to sharpen his or her 
pencil.
    Mr. Otter. I hear that, but is your way working now?
    Mr. Li. It's not my way, sir. It's the----
    Mr. Otter. Is the way that we're employing now working?
    Mr. Li. I would say no.
    Mr. Otter. OK. Thank you, Mr. Chairman.
    Mr. Shays. I thank the gentlemen. Bottom line, I have the 
feeling that you probably will be staying to hear the 
testimony.
    Mr. Li. I will.
    Mr. Shays. And you'll get your information any way you can 
get it, right?
    OK. So we may ask you to comment on what you've heard. And 
at this time we thank this panel and we'll go to the next.
    At this time we would call and ask them to remain standing 
Ms. Darleen A. Druyun, Principal Deputy Assistant Secretary of 
the Air Force Acquisition and Management Department of Defense; 
Dr. George Schneiter, Director of Strategic and Tactical 
Systems, Department of Defense; Mr. Francis P. Summers, 
Regional Director of Defense Contract Audit Agency, Department 
of Defense. What we'll do is we'll swear you in.
    [Witnesses sworn.]
    Mr. Shays. Note for the record that our witnesses responded 
in the affirmative.
    And if we could proceed on the basis of how I called you. 
So Ms. Druyun, you will go first and then Mr. Schneiter and 
then Mr. Summers. We'll help you in this process. We will have 
5 minutes, and we'll wait to show it red for you just a little 
bit and then we'll roll it to another 5 minutes. So you have 
basically 10 minutes at the very max, each of you. So we'll go 
that way. OK?

  STATEMENTS OF DARLEEN A. DRUYUN, PRINCIPAL DEPUTY ASSISTANT 
    SECRETARY OF THE AIR FORCE, ACQUISITION AND MANAGEMENT, 
DEPARTMENT OF THE AIR FORCE, DEPARTMENT OF DEFENSE; DR. GEORGE 
    SCHNEITER, DIRECTOR OF STRATEGIC AND TACTICAL SYSTEMS, 
DEPARTMENT OF THE AIR FORCE, DEPARTMENT OF DEFENSE; AND FRANCIS 
 P. SUMMERS, REGIONAL DIRECTOR, DEFENSE CONTRACT AUDIT AGENCY, 
                     DEPARTMENT OF DEFENSE

    Mr. Druyun. Thank you, Mr. Chairman, and members of the 
committee for the opportunity to appear before you to discuss 
the Air Force's F-22 program and the cost controls we've 
implemented to deliver an affordable program.
    I've been involved in the program for many years. During 
that time congressional caps in production were established, 
and production cost reduction plans were developed in response 
to the Air Force and congressional goal to deliver 339 aircraft 
within a mandated production program cap. Therefore, I am able 
to describe the underlying philosophy of PCRPs that are being 
implemented to meet program affordability goals and assess 
progress in meeting the original affordability strategy 
objectives. The F-22 team remains absolutely dedicated to the 
objective to deliver 339 production aircraft to the war fighter 
at an affordable cost.
    In order to achieve that objective, we continue to define 
and implement effective cost reduction initiatives. These 
initiatives have become known as the F-22 production cost 
reduction plans to drive down aircraft costs over the life of 
the production program. This will ensure we can deliver the 
revolutionary F-22 to guarantee air superiority well into the 
21st century.
    Today I'd like to discuss the status of our PCRPs and the 
realism of our projected savings. I will summarize the 
historical changes in production quantities as a key factor 
affecting average production unit costs. Next I will describe 
changes in the production program acquisition strategy mandated 
by changes in funding, appropriations and delays in the LRIP 
decision. I will also describe the production cost estimates 
that were prepared for a scheduled DAB in December 2000. In 
addition, I will summarize the elements of accounting for 
production costs with flyaway cost as the preferred method to 
report the production costs.
    Finally, the results of PCRPs through Lot 1 will provide 
evidence of results to date, and PCRP cost savings and the 
metric used to assess progress in meeting program affordability 
goals, which we've set through the target price commitment 
curve.
    In 1985, at the beginning of the Advanced Tactical Fighter 
demo program, the Air Force planned to procure 750 aircraft at 
a rate of 72 aircraft per year, between 1992 and 2005. The 1997 
QDR established the current F-22 production baseline and 
represents a 48 percent reduction in production quantity since 
the start of the F-22 EMD. The reduced quantity in production 
rates have been the dominant factors in increased F-22 
production unit costs. Changing a total procurement of 750 
aircraft at a rate of 72 aircraft per year to 339 aircraft at a 
rate of 36 aircraft per year results in about a 66 percent 
increase in the aircraft cost when calculated in base year 2000 
dollars.
    Simply stated, the average aircraft cost is higher, because 
fewer aircraft are being produced.
    When I was before this committee last year, the original 
LRIP DAB had slipped from December 1999 to December 2000 in 
response to constraints established in the fiscal year 2000 
Defense Appropriation Act. As a result, we were planning on the 
LRIP DAB for December 2000. The LRIP DAB would authorize full 
funding of 10 Lot 1 aircraft and advance buy for 16 F-22 
aircraft. The LRIP DAB was delayed pending completion of two 
exit criteria and all of those criteria were completed the 
first week of February.
    Because a defense strategic review had been initiated, the 
new Secretary of Defense elected to delay the LRIP decision. To 
avoid a break in production resulting from a delayed LRIP 
decision, Congress approved reprogramming the funds necessary 
to extend the Lot 1 advance by contract period of performance 
through September of this year.
    Congress and the DOD have worked together to fund the F-22 
production. However, the F-22 contractor industrial base, about 
1,150 contractors total, have informed us that the greatest 
threat to meeting production program affordability goals has 
been the delayed LRIP decision. This lack of program commitment 
is perceived as a serious risk in the procurement of 339 
aircraft and the 777 engines required for those airplanes.
    Unfortunately, risk in business base and future business 
computations realistically translates into higher individual 
lot prices. An LRIP decision will greatly benefit the program 
by reaffirming DOD's commitment to current and future program 
execution. The fiscal year 1998 Defense Authorization Act 
established a $43 billion cost cap in the F-22 production 
program. The Secretary of the Air Force on an annual basis 
notifies Congress of adjustments to the caps for inflation and 
any changes in law. The current production cap is $37.6 billion 
for 333 airplanes. These changes resulted from the fiscal year 
2000 Defense Appropriation Act, which funded the six PRTV II 
aircraft with RDT&E funds, and also due to reductions in 
inflation. The inflation adjustments amount to about $3.9 
billion. The cap reduction of $1.5 billion created from the 
transfer of the six aircraft from procurement money into R&D 
money was budget neutral, but obviously it affected the total 
production cap, which today is approximately $37.6 billion.
    In preparation for the LRIP DAB, the Air Force and DOD 
completed production cost estimates in November 2000. The 
estimate focused on the annual production funding requirements 
and total production program costs. The December 2000 Air Force 
estimate for the F-22 production program of 333 aircraft was $2 
billion above the current production cap established by the 
Congress. The OSD estimate was approximately $9.1 billion above 
the current production cap.
    But those estimates indicating a higher probability the 
program would exceed the production cost cap, the Air Force 
developed a revised F-22 acquisition plan to fund additional 
cost reduction initiatives. The Air Force believes that 
additional investments in cost reduction will be effective in 
helping to reduce the total production program cost for the 333 
airplanes. A revised act plan has been formulated by the Air 
Force and presented to the Office of the Secretary of Defense, 
which is currently under review by the SECDEF's organization. 
The PCRP program is reducing the flyaway cost for the F-22 
program. The flyaway cost has decreased the first two airplanes 
we bought on the Lot 1 was approximately $318 million a piece. 
The next six airplanes we bought were approximately $231 
million a piece. And the first Lot 1 airplanes were further 
reduced to $199 million a piece.
    Cost control and affordability are critical focus 
priorities for the F-22 team. In June 1996, I think all of you 
were aware of the fact that a Joint Estimating Team was 
established. When the JET presented their findings in 1997, the 
initial estimate for the F-22 production of 339 aircraft, 
without benefit of cost reduction initiatives to really lean 
out the production line and become efficient, was $61 billion. 
Leveraging the recommendations made at that time to reduce 
production costs and lean out the manufacturing line following 
the principles from the Massachusetts Institute of Technology 
published report, the Air Force and contractor teams initiated 
a very comprehensive cost reduction program back then. The 
initial PCRPs that were established included initiatives in 
areas of producibility, process changes, adoption of new 
manufacturing techniques and implementation of acquisition 
reform. The results of the PCRPs are reviewed on a monthly 
basis by the Service Acquisition Executive and at least on a 
quarterly basis with the OSD staff and the Defense Acquisition 
Executive.
    During the most recent DAE review, the Air Force estimated 
total value of PCRPs to be $21.5 billion for the airframe 
vehicle and for the engine about $4.8 billion. The F-22 program 
has built an efficient management structure to jointly oversee 
the development and, more importantly, the implementation of 
these projects. The management effort includes an online 
interactive data base for real-time reporting of the status of 
these PCRPs, spanning ideas from the very inception to the 
actual implementation.
    We agree with the GAO assessment that approximately one-
half of the then-year savings for both the airframe and the 
engine are in the production cost baseline, and the remaining 
PCRPs as they are actually implemented won't be incorporated 
into the future production lots.
    The F-22 program does enjoy extensive oversight in 
evaluating cost performance and has established a standard 
methodology to assess cost performance based on several tenets. 
The first tenet is a methodology to establish a baseline and 
then measure cost reductions to that baseline.
    Mr. Shays. Let me just interrupt for a second. How much 
longer do you think you have?
    Ms. Druyun. I probably have, sir, about 5 more minutes, and 
it really kind of gives you the summary of what was in my 
detailed statement for the record.
    Mr. Shays. Why don't we let you proceed?
    Ms. Druyun. Thank you.
    The second tenet is to update the estimate annually with 
the actually cost data from the current and prior production 
lots, and our third tenet is to leverage actual cost data as 
the primary method to validate the cost estimates. And that 
process is part of the ongoing Air Force and OSD review of the 
F-22 program.
    The PCRPs for the air vehicle contract that became 
effective with Lot 1 totaled about $1.2 billion in savings or 
cost avoidance. The cost savings per engine was about $4.8 
million per engine in Lot 1. The more significant element of 
the management process is the formal procedures used in the 
evaluation, selection and implementation of cost savings ideas. 
The process and procedures are documented and a published joint 
procedure is used by Lockheed Martin, Boeing and the government 
team, and I can submit that for the record.
    The overall process is an iterative and a continuous 
process to go through all of the projects that are actually 
being implemented and then to go through the new ones as they 
are being recommended and further details being attached with 
each one of them. The Lockheed Martin and Boeing team 
implemented an on-line data base to assist in managing the cost 
savings initiative program. The management team assesses the 
status of cost savings that are coming from this and watches 
these very carefully on a monthly basis. I personally review 
them, and the actual teams at the SPO look at these as 
frequently as on a weekly basis.
    The PCRP management and cost estimating process has been 
reviewed by the Defense Contract Audit Agency. DCAA reviewed 
the methodologies for establishing the cost savings initiatives 
at Lockheed and the Boeing manufacturing sites. Their written 
assessments did not take exception with the contractor 
methodologies in estimating production savings. The report also 
identified cases where additional information was required to 
substantiate the contractor estimates, and I believe that you 
should get an update on that today.
    In addition to the DCAA audits, as I said before, I review 
these on a monthly basis, and then on a quarterly basis we do 
review this with the OSD staff. The process begins with the Air 
Force and OSD working integrated product team reviews, which 
are conducted on a quarterly basis, and the data from those 
detailed reviews are basically summarized and presented to the 
defense acquisition executive.
    I think a very good way to measure the effectiveness of our 
production cost reductions is in the target price curve that 
was put on contract in the development contract. The target 
price curve is a subset of the flyaway costs, and basically it 
captures all recurring costs, which includes materiel as well 
as labor to produce the aircraft. It does not include 
nonrecurring costs, such as spares or auxiliary mission 
equipment, for example. The target price curve establishes unit 
price goals in the LRIP phase of this program.
    The goals for PRTV through Lot 4 aircraft are designed to 
achieve a rate of cost reduction adequate to achieve the 
necessary starting point for cost reduction once we get into 
high rate production. And I would tell you that if you were to 
look today at the target price commitment cost performance for 
the first three lots of airplanes that we currently have in 
contract today, you would find that they are clearly within the 
5 percent band that was established back in the 1997 timeframe. 
In the case of the engines, the price for PRTV and PRTV II 
engines met the targets and Lot 1 engines were slightly under 
the specified TPC. Now, we laid this in as an incentive. We 
felt this was very important, and we attached about $150 
million worth of funds associated with achieving that to really 
get them on the right point to be able to achieve the average 
unit flyaway costs.
    Through actions such as this, the program maintains an 
aggressive and flexible management style and a challenging task 
of meeting the production program affordability goals. I 
believe that we do have a well-structured plan that is focused 
on pursuing cost savings initiatives. We do have I think a very 
good electronic data base that has been established that 
provides real-time monitoring.
    I was down Monday at the Fort Worth facility and went 
through that data base again to see exactly what the latest 
status was. And I would tell you that performance to date for 
the first three lots is within the target price band 
established back in 1997.
    Thank you for this opportunity to provide more information 
on the results of F-22 affordability initiatives, and I look 
forward to responding to your questions.
    [The prepared statement of Mrs. Druyun follows:]
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    Mr. Shays. Thank you. Dr. Schneiter.
    Mr. Schneiter. Mr. Chairman, members of the committee, 
thank you for the opportunity to discuss with you again the 
Department of Defense efforts to control and monitor the cost 
of the F-22 aircraft program, particularly with regard to the 
PCRPs.
    When I was here last year, I indicated that a program as 
technically challenging as the F-22 brings with it a challenge 
regarding cost and schedule performance. I also noted this 
challenge has been complicated by the congressional cost caps 
on the engineering and manufacturing development and 
production. Let me first very briefly discuss program progress.
    The F-22 program continues to demonstrate technical 
progress that meets or exceeds the performance measures 
established for the program. Progress in the past year, 
particularly in flight testing, was impeded by some delays in 
the delivery of engineering and manufacturing development 
aircraft. More recently, however, in the past 4 months the 
program has shown a significant increase in flight testing 
tempo. We now have five flight test aircraft flying at Edwards 
Air Force Base.
    Also earlier this year, the program successfully completed 
the exit criteria for the low-rate initial production milestone 
decision, including demonstration of Block 3.0 avionics 
software.
    However, as Ms. Druyun mentioned, the LRIP decision was 
postponed to permit the new administration to review the 
program, and as you know, the Department has been conducting a 
comprehensive review of strategy and programs. We're now ready 
to conduct the LRIP review, and the Defense Acquisition Board 
will meet on the program later this month.
    Ms. Druyun has covered in some detail the PCRP process. 
I'll mention some of the things the Office of Secretary of 
Defense is continuing to do regarding cost control on F-22. F-
22 cost control has been a key item for the Department for 
sometime. Following the Defense Acquisition Executive's review 
of the program in December 1998, he reiterated the importance 
of seeking to execute the program within the cost caps and 
directed quarterly briefings to him on the development in 
production cost status. We continue to use these special 
quarterly reviews to examine cost and schedule trends and track 
program progress.
    I described last year that the OSD cost estimates in 
November 1998, December 1999 included assessments of the 
effects of the PCRPs and broadly the estimates were prepared 
into steps: The recurring costs incurred to date on the 
engineering and manufacturing development units, including the 
actual costs which reflect PCRPs that had been implemented to 
date, and then a separate estimate on the savings to be 
expected from the still unimplemented PCRPs.
    I'll agree the PCRPs will have a significant effect on cost 
and are well worth undertaking. This is not an issue. There are 
disagreements about the magnitude of the reductions to be 
achieved by the PCRPs and about what cost experience to date 
implies for the future apart from the PCRPs. The repeated 
disagreements have had to do with how rapidly the cost of 
purchased materials and subsystems will decline from the levels 
observed in EMD and in the first lot of the production 
representative test vehicles.
    Both we and the Air Force have updated our cost estimates, 
and four important events in the past year have influenced 
these estimates.
    First, we have another year of actual costs that have been 
accrued on the aircraft being built. Second, the low-rate 
initial production decision was delayed. Third, the 
contractor's fiscal year 2001 contract terms were negotiated. 
And fourth, the Air Force's planned cost savings program has 
been enlarged.
    The first three of these increased the expected costs, and 
the last was constructed to offset those costs. This year the 
actual costs came in somewhat higher than the Air Force 
expected, and as a consequence, they raised their aircraft 
production cost estimate from $39.6 billion in November 1999 to 
$42 billion in November 2000.
    Let me talk about the differences between the cost 
estimates between OSD and the Air Force, both of which are now 
above the congressionally mandated production cost cap. The 
difference between the OSD and Air Force estimate, as has been 
stated here, is $7.2 billion, and of that, $4.7 billion is the 
difference due to estimating the basic cost estimating process, 
which I mentioned includes PCRPs already implemented, and $2.5 
billion due to differences in savings expected from PCRPs.
    The Department considers F-22 costs very important. The 
Under Secretary of Defense for Acquisition, Technology and 
Logistics and the Secretary of the Air Force have personally 
been addressing this issue as a high priority. The result of 
their review, as well as our continuing review will be an input 
into the upcoming Defense Acquisition Board review. If the 
outcome of the DAB review is a decision to proceed with low-
rate initial production, the Department will comply with the 
current statute and send Congress the reasons for proceeding 
with F-22 LRIP, the revised production plan for the F-22, and 
the revised cost estimate for the remainder of EMD in 
production.
    Thank you very much.
    [The prepared statement of Mr. Schneiter follows:]
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    Mr. Shays. Thank you, Dr. Schneiter.
    Mr. Summers.
    Mr. Summers. Mr. Chairman, members of the subcommittee----
    Mr. Shays. Is your mic on?
    Mr. Summers. It's on.
    Mr. Shays. Just a little closer, please.
    Mr. Summers. All right.
    Mr. Chairman, members of the subcommittee, as you 
requested, I will describe the audit activities of the Defense 
Contract Audit Agency [DCAA], as they relate to the production 
cost reduction plans under the F-22 program. I am Francis 
Summers, Jr., Director of the Central Region of DCAA. The 
region is comprised of 13 field audit offices, geographically 
dispersed throughout the central United States. One of these 
field offices is located at the Lockheed Martin Aeronautics Co. 
Resident Office in Fort Worth, TX. This office is responsible 
for the audits of the Lockheed Martin Aeronautics Co., the 
prime contractor on the F-22 program.
    Before I begin, I'd like to provide a brief background 
about DCAA. DCAA is a separate agency of the Department of 
Defense under the direction, authority and control of the Under 
Secretary of Defense, Comptroller. The DCAA mission is to 
perform all necessary contractor audits for DOD and to provide 
accounting and financial advisory services regarding contracts 
and subcontracts to all DOD components responsible for 
procurement and contract administration.
    These services are provided in connection with the 
negotiation, administration and settlement of contracts and 
subcontracts. As Regional Director, I am responsible for the 
oversight of all facets of contract audit operations and 
related support services of the Central Region. This 
responsibility includes the quality of audit and financial 
advisory services, technical support services and litigation 
support.
    The F-22 program is performed by Lockheed Martin 
Aeronautics Co. at its three major sites, Fort Worth, TX, 
Marietta, GA and Palmdale, CA. Boeing Aircraft and Missiles 
Systems, Puget Sound, WA is the major subcontractor to Lockheed 
Martin. The United Technologies Corp., Pratt-Whitney, military 
engines division, East Hartford, CT, provides the engines under 
a separate contract. Although my direct responsibility involves 
only the Lockheed Martin portion of the F-22 program in Fort 
Worth, my testimony today addresses effort by DCAA at all three 
contractors as it relates to the production cost reduction 
plans [PCRPs].
    To date, we have performed discrete evaluations addressing 
11 PCRPs, which cover about $425 million in projected savings. 
The objective of these evaluations was to determine the 
reasonableness of the objective savings by examining the 
estimating techniques, assumptions and underlying evidential 
support. To put our effort into perspective, we evaluate about 
2 percent of the PCRP savings. Overall, of the $425 million, we 
were unable to reach a conclusion on about $71 million because 
the savings were based on judgmental contractor estimates 
without sufficient evidential support. In addition, during our 
evaluation of the $425 million, the contractor provided more 
current information, resulting in a reduction in the estimated 
savings of about $4 million.
    Our other involvement was significant PCRP cost savings 
that occurred in late 1997 during evaluations of various F-22 
proposals. This PCRP related effort primarily involved 
performing procedures requested by the Air Force, including 
verifying that the proposal reflected the projected PCRP 
savings previously estimated by the contractor. In general, we 
concluded that the contractor was including its estimated PCRP 
savings and applicable proposals.
    As described, our involvement has been fairly limited to 
date as we have only evaluated certain aspects of a limited 
number of PCRPs.
    Mr. Chairman and members of the subcommittee, this 
concludes my statement, and I will answer any questions you may 
have. Thank you.
    [The prepared statement of Mr. Summers follows:]
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    Mr. Shays. Thank you. At this time, the Chair would 
recognize Mr. Barr for 5 minutes, rolled over to 10.
    Mr. Barr. Thank you very much, Mr. Chairman. Ms. Druyun, it 
is good to see you again. We appreciate you and the other 
witnesses being here today and I appreciate the chairman 
allowing me to sit in as a member of the full committee on this 
hearing today.
    Ms. Druyun, is it not true that there have been no overruns 
in the production contract for the F-22 and that these 
production figures are simply estimates of what it might cost?
    Mr. Druyun. Yes, sir. That is, I think, very true. The Air 
Force believes that we're still very early in the production 
program. To date we have two what we call production 
representative test vehicle lots on contract. That is a total 
of 8 airplanes and we have another 10 on contract, which is a 
total of 18. And then we have a long lead contract. We're 
looking at costs that go out through the year 2013. If you look 
at the target price commitment curve that we set up back in 
1997 to really focus in on where we need to be in the learning 
curve to be able to achieve delivering 339 airplanes within the 
cost cap established by the contractors, I would tell you for 
PRTV I and II and for Lot 1 we are within the 5 percent band 
and in some cases actually below the commitment curve that was 
put on contract. And we also put some very specific incentives 
in terms of money to the contractors.
    The first set of investments were made by the contractors 
to try to bring down the cost of these airplanes, and we 
further incentivized a return on those investments if in fact 
they stayed within those target price commitment curves. And 
the first 3 lots show that we are currently, you know, within 
that area. I would tell you for Lot 2 we have our own set of 
challenges. We're in the process of negotiating that, and we're 
working very hard with the primes, as well as with the 
suppliers to try to bring Lot 2 in within that 5 percent band 
as well.
    Mr. Barr. Thank you. With regard to the location where the 
aircraft is assembled, it's currently assembled at the Lockheed 
Martin plant, Air Force Plant No. 7 in Marietta, GA. Given the 
fact that there has already been a very substantial, in the 
hundreds of millions of dollars, investment by Lockheed Martin 
and certainly by the government, both directly and indirectly 
in building that infrastructure to accommodate the final 
assembly, would it be reasonable to expect that there will be 
substantial additional costs over and above what we now see for 
this aircraft if that production--if that assembly 
responsibility were to be picked up and moved to another plant 
where they don't have that infrastructure in place?
    Mr. Druyun. Yes. I think that's a very fair statement, sir. 
In fact, it was about 2 years ago, perhaps 2\1/2\ years ago 
that we did actually go in and take a look at what it would 
cost the program if we were to move the production facility 
final assembly to Fort Worth, and our estimates ran, as I 
recall, somewhere in the range of an additional $600 million to 
$1 billion cost; you know, the penalty that one would incur. 
But more importantly, it would be terribly disruptive to the 
program. I think if you were to go today and look at the 
Marietta facility, they had made tremendous investments there, 
and they are building a lean production line, and, you know, 
when you look at the training that has gone on with the people, 
if one were to try to make some decisions to change the final 
assembly, it would have a very detrimental effect on the 
program in terms of our ability to meet schedule and certainly 
our ability to meet costs.
    Mr. Barr. Thank you. Mr. Chairman, again, I appreciate your 
allowing me to be a part of this hearing, and I would urge the 
chairman, who I know is very concerned about costs and is 
certainly a good steward of taxpayer money, to keep a 
continuing eye on these rumors that we hear and we see from 
time to time some evidence of. I think this would have a very, 
very--the Assistant Deputy Secretary of State has indicated 
will have very significant effect, both monetarily and 
otherwise on the production of this aircraft.
    Thank you, Mr. Chairman.
    Mr. Shays. I thank the gentlemen.
    At this time the Chair would recognize Mr. Otter.
    He is curious to know if there will be any more potato 
analogies.
    Mr. Otter. Probably so. And let me apologize in advance for 
the possibility of that.
    Mr. Shays. For the record, this full committee and all 
future variants, you will never need to apologize.
    Mr. Otter. Thank you.
    Dr. Schneiter, you said in your statement that initially 
the challenges that the F-22 brings with it--in fact, your 
statement is the F-22 brings with it a challenge regarding cost 
and scheduling performance. I also noted that this challenge 
has been complicated by congressional cost caps on the 
engineering and manufacturing phase, now $20.4 billion, and on 
the production phase, $37.6 billion of the program.
    How did Congress arrive at those caps? Surely it wasn't 
congressional people. I mean, it wasn't the Congressmen and 
women themselves that said they are going to put these caps on 
there. They had to get information from someone to arrive at 
these caps.
    Mr. Schneiter. Yes. And I believe those caps were based on 
the then current estimates of the program costs for the 
development.
    Mr. Otter. And who made those at that time, those estimate 
costs that the Congress relied upon to set the caps?
    Mr. Schneiter. I believe the Air Force did. Right?
    Mrs. Druyun. Yes, that's correct. That was back in the 1997 
timeframe.
    Mr. Otter. That was back in 1997?
    Mrs. Druyun. Yes.
    Mr. Otter. I understand that.
    How does the Department of Defense then arrive at the cost 
estimates; I mean, solely from the Air Force, or is there an 
independent body? Is there an independent accounting--is there 
some kind of watchdog that says the Air Force may be a little 
too generous here or may not be thinking about this and 
thinking about that?
    Mr. Schneiter. We do that independently with this group 
called Cost Improvement Analysis Group, which we called the CIG 
in OSD. They make an estimate. In fact, at certain milestones 
they are required, I believe by statute, to make a certain 
estimate of what the costs will be, and do that independently.
    Mr. Otter. When these caps were set, was there oversight on 
those caps? Did somebody get a chance to look at the Air 
Force's caps and, say, suggestions for the caps and say, hey, 
we agree with these, we disagree with these?
    Mr. Schneiter. I don't recall that OSD was asked for 
suggestions.
    Mr. Otter. Would it be a good idea if they did that?
    Mr. Schneiter. I think that we would think so, yes.
    Mr. Otter. Would there be some capability, would there be a 
way in which all who are going to be looking at this through 
the future and working as this team that you talk about to say 
we can agree or we disagree with those caps that are set?
    Mr. Schneiter. I think clearly that would be the case. 
There is also the question as to the wisdom of caps, 
particularly on a development program. And I think the 
Department is now on record at this point of requesting relief 
from the engineering and manufacturing development cap, because 
we think that at this point it could serve only to cause us to 
not do things that we need to in completion of the development 
program.
    Mr. Otter. So maybe we need--philosophically we need to go 
back and take a look at our beginning points. Is it a good idea 
to put on caps or not?
    Mr. Schneiter. Yes, sir.
    Mr. Otter. What were the reasons that caps were put on in 
the first place?
    Mr. Schneiter. You would have to ask those who put the caps 
on, which I believe was Congress.
    Mr. Otter. I see. So----
    Mr. Shays. Could I just ask the gentleman to yield?
    You have the ability and some knowledge to explain what the 
rationale was. You don't have to agree with it, but there was 
rationale, and this gentleman is a new Member, and you could 
give him some history as to why. So whether or not you agree 
with it or not, aren't you in a position to explain why the 
caps are there?
    Mr. Schneiter. I can give you my views as to----
    Mr. Shays. There was rationale for it, and the Air Force 
bought off on it, and it would be helpful for the record at 
least for us to have an understanding of--if you appreciate why 
they were put in--and if you----
    Mr. Schneiter. I would be pleased to do that.
    Mr. Shays. Could you answer the gentleman's question there?
    Mr. Otter. Thank you, Mr. Chairman.
    Mr. Schneiter. My understanding is that Congress's intent 
was basically to arrest growth in costs of the program. The 
program had experienced some cost increases in the past, and 
they wanted to stop that, and they felt a way to do that would 
be to put caps on the engineering and manufacturing development 
program and on the production program.
    Mr. Otter. Well, I guess my time is up, Mr. Chairman.
    Mr. Shays. You have another 5 minutes.
    Mr. Otter. Thank you, Mr. Chairman. I'll give you another 
order of french fries for that.
    I'm really interested in this because in the discipline, 
and I understand that maybe it isn't fair for me to always use 
the discipline that I have become familiar with or that I grew 
up with, that I worked with for 30 years in the private sector, 
but we had kind of a cost versus benefit analysis. If we were 
going to buy one forklift that could lift 4,000 pounds to load 
a truck, and maybe we could get some additional utility out of 
it by maybe having it perform another function, maybe we would 
buy one that could lift 6,000 pounds, so that was going to cost 
a little bit more, so we kind of had to factor that in.
    The process that I go through in thinking about these 
things is that we are going to buy a new piece of equipment 
that will provide some certain national defense, but it still 
has to have some kind of cost versus benefit: We can do this 
with fewer people, we have a greater level of service in 
national security, we can eliminate all of the F-4s, which is 
the one I'm most familiar with.
    But there was a cost versus benefit analysis, and so from 
that we established an expectation of what we were going to get 
this piece of equipment for.
    Is there a cost versus benefit analysis that the--what kind 
of process does the Air Force go through in order to say, we 
want all of these F-22s?
    Mr. Schneiter. Yes, sir, we have such a process. We 
exercise it particularly at milestones in the program. For 
example, when we start a program, we will do a cost-benefit 
analysis. We examine alternative ways of doing the job and see 
which makes the most sense. Does it make more sense to improve 
our old aircraft, buy more of the old aircraft with some 
updates, or buy a new aircraft?
    In the case of the F-22, we decided that for assured air 
superiority that we needed new aircraft, and we knew it was 
going to be more expensive than other aircraft, but we 
concluded that was worth what we would pay for it. And as we 
proceed with the program, we continue to make that assessment.
    Mr. Otter. I understand. And I understand there is mission 
assessment, and the success of the mission assessment is 
invisible. I mean, it is an expectation that you have, but it 
is going to work to the degree and to the effectiveness that we 
thought.
    But is there any savings? Are we going to eliminate--for 
instance, if we eliminated the F-4 and ended up with the 
whatever the new aircraft was that replaced the Phantom, and we 
figure, well, you know, these have been breaking down. It is an 
aircraft technology from 1966, 1968, and here we are 30 years 
later, and we finally decommission it. We are going to save a 
lot of money because we are not going to have to maintain it 
and maintain parts.
    In the cost versus benefit analysis and the deciding caps 
that are put on, is there a savings factor figured in?
    Mr. Schneiter. We assess the costs, do the cost-benefit 
analysis. We include in the cost the operating costs of our air 
fleet. And so we gain the advantage in buying new aircraft of 
not having to do the increasingly expensive maintenance of the 
old aircraft that we replace.
    And just commenting on the point, I'm sorry that, Mr. 
Kucinich isn't here, but part of what we are doing here with 
the F-22 is arresting the aging of our air superiority 
aircraft.
    Right now, until we start building the F-22, they get 1 
year older every year. As the F-22 is introduced into the air 
superiority fleet and replacing older F-15s, then we will see 
the average age of the fleet start to come down and reach 
levels which we believe are satisfactory.
    Mr. Otter. How soon after employment then do we expect the 
first report of success or fairly--where are the hurdles met? 
Do we have a followup, this is what it was going to do? When do 
we get the first report saying it is doing what we intended it 
to do?
    Mr. Schneiter. Really I think the first report of that sort 
is what we call the initial operational test and evaluation. 
And that is something, that is where the operational pilots fly 
the aircraft in operationally realistic scenarios, and we see 
how it performs against its requirements. And we have to 
complete that process, that IOT&E process, before we begin 
full-rate production of the aircraft.
    This decision we are facing now is low-rate initial 
production. It is the first production. We will, a few years 
from now, go into full-rate production, and we must precede 
that by the IOT&E program on the basis that program, the 
Director of Operational Testing Evaluation submits a report to 
the Secretary of Defense and to the Congress on the results of 
that operational testing.
    Mr. Otter. Thank you.
    Mr. Schneiter. So that is the point whether we know if we 
have been successful in providing a good product to the 
warfighter.
    Mrs. Druyun. I would also add that for the last 2 years, 
the test community has been conducting operational assessments 
and have reported on an annual basis, which I think Mr. 
Schneiter could talk on, how well it is potentially going to 
satisfy the requirements. And basically it has been very 
favorable reports that have come forward.
    Mr. Schneiter. That is true. As I mentioned in my 
statement, the aircraft is meeting all of its technical 
criteria. We have a set of so-called key performance 
parameters, acceleration, speed, stealth, things of that sort, 
and all of those are being, for the most part, exceeded by the 
performance that we have seen in the tactical assessments so 
far.
    Mr. Otter. Thank you.
    Mr. Chairman, might I ask that those reports that were just 
referred to be part of the official record of this hearing?
    Mr. Shays. Without objection, we will do that.
    Mr. Schneiter. I'm not sure I understand which reports.
    Mrs. Druyun. Yes. We certainly can submit that.
    Mr. Otter. Thank you.
    Mr. Shays. Thank you. I appreciate the gentleman's 
questions. I would say besides looking at cost-benefit, we also 
look at opportunity costs, which is somewhat, I think, Mr. 
Kucinich's and Mr. Tierney's questions were getting at.
    Although there is some limit to what we can spend, if we go 
above that, we are going to be taking from other programs 
within DOD. Then we say is that opportunity cost worth it?
    Let me ask all three of you, does it make sense for 
Congress to have caps on this program? Start with you, Mrs. 
Druyun.
    Mrs. Druyun. If I could start with development, I think you 
recognize in development we are 95 percent complete. The phase 
of development we are in right now is very detailed testing, 
and I have formally recommended, as I believe the Secretary of 
the Air Force and the Chief of Staff, that it is time to remove 
the cap on the development portion of this aircraft, because we 
need to finish the testing that is required to show very 
clearly that it will satisfy the needs of the warfighter as 
established in the operational requirements document.
    When the cost cap was established back in the 1997 
timeframe, at the time the Assistant Secretary in the Air Force 
for Acquisition was Mr. Muellner. All of us basically signed on 
to the cost cap as being something good to really help keep the 
focus in on driving down the cost of this airplane. When that 
cost cap was established, we had not laid into the program 
funds, for example, to do produceability enhancements to make 
this airplane more cost-effective.
    And so that has been a challenge to us to find some funds 
within that cost cap to make those investments. What I have 
found is that if you make those investments up front, and you 
go in and you redesign elements of that airplane, or you spend 
money to work with subs to relayout their manufacturing 
facility, you have a great return on your investment.
    We had the contractors make an investment of about $170 
million up front. I didn't have the money to pay for it. And I 
think that----
    Mr. Shays. Let me just make this request. Your answers are 
very important. I'm going to ask that they be a little shorter, 
and I promise you--not that I need promise, but I will give you 
an opportunity to make any additional points at the end. But I 
almost forget what my question is after the question. The 
response is too long.
    Mrs. Druyun. Yes, sir.
    Mr. Shays. So what I'm hearing you tell me is that cost 
caps helped drive down costs, but you're concerned on the 
development side that you are getting to a point where the caps 
will prevent you from making some development discoveries that 
could ultimately save?
    Mrs. Druyun. Well, what we need is to have additional 
funds. We have testified to this before the Senate Armed 
Services and House Armed Services as well as Appropriation 
Committees. We need some additional funds and some additional 
time to finish testing this airplane.
    Mr. Shays. OK.
    Mrs. Druyun. I think everyone in OSD is in agreement with 
us.
    With respect to the production cost cap, it served us well, 
but I will also tell you that there are some things that have 
changed with respect to the timeframe in which that production 
cost cap was established. I think it is important for the 
Congress to periodically go back and see what has changed to 
ensure that you basically have kind of an equity or an apples 
and apples with what was started in 1997 versus what has 
happened in the last 4-year period, and I think it is important 
that be looked at.
    Mr. Shays. What is your answer to the question?
    Mr. Schneiter. I agree with Mrs. Druyun. The EMD cost cap, 
as I mentioned, should be dropped, in our view. That is also 
the position of my boss, the Under Secretary for Acquisition 
Technology and Logistics.
    With regard to the production cost cap, at this point 
everyone's estimate of what it would take for the program to 
complete production is above the cost cap. It seems that it has 
certainly outlived its usefulness in the present form, unless 
one wishes to constrain us in the number of aircraft that we 
can buy, which is a constraint at this point that we would 
prefer not to have.
    Mr. Shays. Mr. Summers.
    Mr. Summers. Yes. Certainly we would favor cost controls. 
We think that we bring cost controls to all of the Departments 
in the program. We certainly assisted on that. But any comment 
with caps with respect to this program I would have to defer to 
the Air Force and OSD.
    There is also a cost-benefit to what you do, and certainly 
the Air Force and OSD would have to evaluate whether or not 
those cost controls in the form of caps are impeding in some 
way their performance. So I have no position on cost caps on 
this program.
    Mr. Shays. Now, let me understand, Ms. Druyun. The cost 
caps are divided along each way, or it has it an overall cost 
cap, and then the Air Froce decides how to allocate within the 
different parts?
    Mrs. Druyun. Today we have two separate cost caps, one for 
development and one for production, and we basically have 
formerly asked that the development one be removed.
    Mr. Shays. With no limits as to what that would----
    Mrs. Druyun. We have--I think with--I believe that the Air 
Force and the OSD are pretty much in agreement as to what we 
believe it will take to get through all of the testing that 
needs to be done in this program, and we have laid into our 
budget approximately an additional $350 million to complete the 
testing of this program, which would bring development to an 
end.
    Mr. Shays. We had a hearing a year ago, almost a year ago--
well, actually a year ago, June 15th. And Mr. Barr asked you, 
should we in the Congress have any reason to suspect the F-22 
program will not be complete within the current EMD cost caps? 
That is--engineering, manufacturing, development cost caps. And 
your answer: No, sir.
    So I said, should we in the Congress have reason to suspect 
the F-22 program will not be completed within the current EMD 
cost caps? Your response. No, sir. Our official position with 
the Air Force is that this program will be completed, as we see 
it today, within the cost caps established by Congress. Then 
you went on.
    You said when you look at the production cost cap 
initiatives that we have laid in place, we have--and I would 
invite you, sir, next time you are in Marietta, GA, to go look 
at the electronic data base that contains all of the data on 
every single one of these issues, and it tracks it through the 
PRTV-1 unit of the Lot 2, and every single one of these 
initiatives laid out, explains what the initiative is, who the 
owner of the initiative is and so.
    What has changed? What has changed in the last year?
    Mrs. Druyun. With respect to development, it basically has 
been the issue of some late delivery of aircraft that were 
needed to successfully get us through the development program. 
And rather than reduce the number of test hours required on 
this program, we feel it was more important that we spend some 
extra money to do the full testing on this program as opposed 
to trying to shave off the number of test months.
    So what has changed? Last year we had expected that we 
would have had more aircraft available. Today I now have five 
aircraft available. The productivity in our test program has 
picked up significantly over the last 4\1/2\, 5-month period. I 
have five aircraft today, and I'm expecting three more 
aircraft, which will round up the number of airplanes that I 
need for testing to be delivered by the end of December of this 
year.
    In looking at the actual performance to date of those three 
remaining aircraft expected to be delivered, they are basically 
within 1 or 2 weeks of their projected delivery date, and that 
is why we have basically asked that the cost cap be shifted so 
that we do not have to trim back the number of test hours 
necessary to fully test out the airplane.
    Mr. Shays. To be lifted again to what level?
    Mrs. Druyun. We believe that IOT&E will start around April. 
We have funded, or we will fund in our upcoming budget through 
the end of July, a start as late as--that for the start of 
IOT&E, July 2003. That amounts to about, as I recall, in the 
neighborhood of I believe it has around $300, $350 million. If 
you were to look in the past at the Air Force estimate for 
development, as well as the OSD estimate for development, I 
think Dr. Schneiter would confirm that we were always very, 
very close.
    Mr. Schneiter. But I would caution that there is still a 
lot of testing to do in that period. There may still be 
unforeseen problems which we don't factor into those numbers, 
and they could take additional time and additional money.
    Mr. Shays. The thing that concerns me about the cost caps 
is that, we were looking at one time at a program that was 
going to cost about this much, and we were going to get twice 
as many planes, correct, early on? The way that we stayed 
within the cost on the program was to cut the number of planes 
almost in half. Obviously the per-unit costs go up.
    But the bottom line to it was that is what we did. We said, 
OK, we are going to make less, but we are going to stay within 
the costs. In fact, we even increased the cost of the program. 
We increased the cost of the program and kept reducing the 
number of planes.
    Now, there is a reason why we had these cost caps. If we 
didn't, the program would have been killed. We weren't going 
to, you know, have an $80 billion program. So I just want to 
make sure this isn't a ruse to have gotten us caught up in the 
program, and now we are seeing it unravel, and we are not going 
to start to see people say, we need to reduce the cost.
    Mrs. Druyun. I think if you were to look at the cost 
schedule performance data that is reported on a monthly basis, 
you would see that development is over 90 percent complete--I 
think it is about 95 percent complete--and that the task, the 
work to go, is basically in the test arena. We have worked very 
closely with the OSD test community to reach agreement on the 
number of hours we believe that it will take to complete the 
test program.
    Plus I asked a group of experts outside of the Department 
of Defense to go in and independently look and come back and 
make recommendations to us as to how much additional test time 
was required, and they basically recommended we make some 
changes. I have incorporated all of those changes, and we all 
agreed that a start date for IOT&E of April 2003 was a moderate 
risk, but that we had done everything humanly possible to 
moderate that risk.
    Mr. Shays. The bottom line point being what is your bottom 
line point, if you could?
    Mrs. Druyun. My bottom line point is that I think that we 
have a very clearly handle on what the estimated costs are to 
complete the operational testing required of this airplane that 
will bring EMD to an end.
    Mr. Shays. Now, what we are looking at is two cost 
estimates, one that is $2 billion over, and one that is $9 
billion over.
    Mr. Druyun. That is on the production side. Yes, sir.
    Mr. Shays. Right. So are you telling me that on the 
engineering, manufacturing we are going to go up? And now which 
estimate are you most comfortable with, the $2 billion or the 
$9 billion?
    Mrs. Druyun. The cost estimates itself that I have spoken 
to in previous hearings was the one that was developed this 
past fall. I have very good confidence in our cost estimators. 
We have seen additional procedures with respect to our 
subcontractors.
    Mr. Shays. I mean, the Air Force's $2 billion?
    Mrs. Druyun. The Air Force showed back in the November 
timeframe that we were about $2 billion over the cost cap 
established in this program, and our estimators have continued 
to work with the OSD estimators and to continue to update their 
data based on what they have seen in terms of performance under 
the production side of the program.
    Mr. Shays. How do you respond to Mr. Li basically saying 
the more conservative estimates--in other words, the ones that 
allowed for the cost--in other words, he is saying it was--the 
lower estimates were the ones that were not kept; usually the 
higher estimate always prove to be true? In other words, his 
implication is that he is probably more comfortable that it 
would be closer to the $9 billion than the $2 billion. How do 
you respond to that?
    Mrs. Druyun. In looking at our cost estimate, I believe 
that we have done a reasonable job of developing that cost 
estimate. That is done within the--a separate group who is 
independent.
    And I firmly believe that when you look at the target price 
commitment curve that we have on contract--on the contractors' 
performance to date, that the estimate that the Air Force has 
looked at in the past and as they have continued to update it, 
I believe that it is a reasonable estimate.
    And you must realize we are on the very front-end part of 
this program, and I think it is also difficult to make 
projections out to the year 2013. That is why we have focused, 
and we will continue to focus, this program on the first five 
lots, and to bring those first five lots down that learning 
curve so that we can have the ability to deliver 339 aircraft 
at an affordable price.
    Mr. Shays. Is there a point at which you would find this 
plane is too expensive? Is there any number that you would 
actually recommend pulling the switch on it?
    Mrs. Druyun. I have not really considered that. I think 
that you have to look very clearly at what the threat is out 
there. The F-15 that we have out there today flying is not able 
to meet that threat. And if you would like, we can show you 
some classified data that was run on our range recently that I 
think would clearly make that point.
    Mr. Shays. Mr. Otter, do you have some questions?
    Mr. Otter. I really only have one, Mr. Chairman. I thank 
you for the opportunity to ask it.
    Mrs. Druyun, you said that you have a feel now that we have 
a very clear handle on this new figure for the cost of 
completing the testing, and I can't remember and quote verbatim 
your entire statement, but you do feel like in order to get us 
to the end of testing, that you have a very clear firm figure 
that you believe. And what was that figure again?
    Mrs. Druyun. If I could elaborate on that for a moment, 
sir. We had a separate red team go out and basically look at 
what it would take for us to successfully get through testing 
of this airplane to satisfy all of the requirements out there.
    And basically they recommended that we slip the start of 
dedicated IOT&E from December 2002 to April 2003.
    I tried to build an additional factor in there when I 
talked to the Secretary of the Air Force, and basically what we 
have done, we have a 1\1/2\ percent cap that was granted by the 
Congress. That amounted to $307 million. Slipping the start of 
dedicated IOT&E, we have laid in another $250 million. We are 
laying that into the budget, and that really gives me about a 
3-month pad in case we are not ready to begin dedicated IOT&E.
    It has a moderate risk. The reason why it is at a moderate 
risk is because I only have one airplane that is instrumented 
to be able to do some of the flight testing that is required to 
fully open up the envelope, and that has always been a 
limitation of this program. We watched that very carefully. But 
we believe that what we have laid is basically a reasonable 
approach to successfully complete developmental operational 
testing.
    Mr. Otter. So for $557 million, that is the $307 plus the 
$250, so for $557 million you feel very comfortable that $557 
million is a clear handle, that is what is going to be required 
for resolving the testing?
    Mrs. Druyun. Based on the data that I have today, yes. I 
feel that is a reasonable estimate, and that is what we have 
laid in to successfully complete this program. Yes, sir.
    Mr. Otter. And you have gone through the analysis, and you 
feel very good about that?
    Mrs. Druyun. I have gone through the analysis in a fair 
amount of detail, and that is why I also called in outside 
experts who had many, many years of test experience, including 
the chief test pilot out of NASA, to help me take a look at the 
program.
    And more importantly, for the first time we actually have 
very detailed test sets and test sheets is basically the term 
we use that spells out what the tests are that we need to 
complete to buildup and get ready to enter into operational 
tests and evaluation.
    Mr. Otter. OK. Well, then, let me get to my bottom line, 
and just yes or no.
    Mr. Shays. We have 5 minutes basically to conclude. If we 
can conclude, I'm not going to have you wait for us to get back 
to vote. So if the answers could be concise, that would be 
helpful.
    Mr. Otter. Yes or no is all I would require.
    Would you accept the $557 million as a cap?
    Mrs. Druyun. No, sir. We do not believe it is appropriate 
when we get into the final testing of this aircraft. We think 
the cap has served its purpose, and that is the reason that we 
want the cap removed.
    Mr. Otter. OK. Thank you.
    Thank you, Mr. Shays.
    Mr. Schneiter. From an OSD point of view, if we may 
comment, we feel the same way. I think we are not as sanguine 
as Mrs. Druyun with regard to being ready to start IOT&E at 
that time.
    Mr. Shays. OK. We have a vote closing in about 8 or 9 
minutes, and I--the clock says 7. I have five questions. If we 
can get through them, then we won't come back.
    Bottom line. How confident is the Air Force that the 
challenged PCRPs can be achieved, the challenged ones?
    Mrs. Druyun. If you look at the Air Force cost estimate, we 
basically gave them zero, because there is--at the time, there 
was no specificity attached to them. And as contractors develop 
specific projects and programs, and they have about 1.4 billion 
of specific projects and programs, we will continue to evaluate 
them and update our estimate. But our estimate back in 
November, and I believe even our current estimate, gave them no 
credit for that.
    Mr. Shays. The bottom line. You have challenged, not yet 
implemented and implemented, and implemented obviously are 
clear. Not yet implemented and other, but challenged are the 
most difficult ones, correct?
    Mrs. Druyun. The challenged, I think the contractors' 
description of areas that they have specifically targeted to 
develop specific projects to further bring down the cost of the 
airplane.
    Mr. Shays. It is hard to get a yes answer from you, you 
know. I'll just have to come back. I'm sorry. We'll just come 
back.
    [Recess.]
    Mr. Shays. I now call to hearing to order. I know we are 
trying to do our best job, but I just want to say that I did 
have four questions, but that was in the hope that I didn't 
have to come back. And so there will be a number of other 
questions.
    Would any of the three of you tell me if you ever raised 
with the Department or Congress that caps on engineering, 
manufacturing and development were not appropriate? Did any of 
you suggest that they weren't appropriate?
    You are saying that now. I'm just wondering if you said it 
earlier.
    Mrs. Druyun. I have officially, along with, I believe, the 
Secretary of the Air Force and the Chief, but I have officially 
at the hearing back in July recommended that the cost cap 
established by the Congress for development on F-22 be removed.
    Mr. Shays. That is not what I asked. That was last year. I 
asked in 1997.
    Mrs. Druyun. No, that was this year, sir.
    Mr. Shays. July of this year?
    Mrs. Druyun. July 2001.
    Mr. Shays. But these caps were initiated in 1997, and we 
all basically agreed to them, and you last year, Mrs. Druyun, 
said that we were right on target. I'm just asking if you all 
ever made it clear to Congress that you didn't think caps on 
the engineering and testing was not appropriate?
    Mr. Schneiter. I did not.
    Mr. Summers. No, we did not.
    I would like to maybe rephrase my previous answer. We don't 
have a position on caps in Defense Contract. We think that is 
an Air Force position, so that is not in our charter.
    Mr. Shays. Mrs. Druyun.
    Mrs. Druyun. No, I don't have a recollection of that.
    Mr. Shays. OK. I mean, that, you know, is probably an 
interesting point, but not a crucial point.
    I would like to go back to the whole issue of--I felt that 
I was asking a simple question with the hope of understanding, 
and obviously this must not be a simple answer.
    We have three categories in our reduction plan. We have 
what you call challenged, not yet implemented and implemented. 
Implemented--would you make an answer--and I'll answer it, 
because maybe my answer will be shorter. Implemented means that 
we have already taken the cost savings and put it into place. 
Would that be accurate?
    Mrs. Druyun. Yes.
    Mr. Shays. OK. The not yet implemented, tell me the 
difference between not yet implemented and challenged. That 
would be helpful for me to understand. Is not yet implemented a 
potential challenged reduction plan, or is it--or--the other 
way around?
    Mrs. Druyun. Challenged is basically the contractors' 
description, I believe, of future cost reductions that they 
want to pursue. They put them into a variety of categories, and 
as they identify specific projects, then they move them in to 
be implemented.
    Mr. Shays. What would be an example of that?
    Mrs. Druyun. Well, OK. Let me give you an example. Back in 
September----
    Mr. Shays. Is this of challenged?
    Mrs. Druyun. This is of challenged, sir.
    Mrs. Druyun. Back in September 2000, they had identified 
$4.1 million in challenged PCRPs. Since that time, they have 
identified some specific projects. One I will give to you is 
Lockheed Martin aeronautics consolidation. The company is, in 
fact, moving out and consolidating some of its overhead 
functions, for example, and they have attached a dollar amount 
with that.
    And about 2 months ago, I had a cost team from--with 
representatives from DCMA, Defense Contract Management Agency, 
the SPO, and a variety of other folks go out and take a look at 
that to see how that was coming along, and indeed it is coming 
along. So today that wouldn't be part of the challenge, it 
would be moved into one of the other categories.
    Mr. Shays. And the other categories would--it wouldn't be 
not yet implemented?
    Mrs. Druyun. Not implemented means it is defined, but it 
has not been laid into the pricing, as I understand it, for Lot 
2 or later.
    Mr. Shays. OK.
    Going back to the issue of the testing and so on. 
Originally we were looking at the $350 million, and then there 
was the number of $500 million. And Mr. Otter, Congressman 
Otter, asked could you stay within that, and you responded that 
you wouldn't stay necessarily within that cap.
    Where was the $350 number and the $500, and tell me what 
you say ultimately the additional amount is we need to spend.
    Mrs. Druyun. If you look at the--we had a cap increase of 
1.5 percent. It required, as I recall, a certification made by 
OSD, I believe it was the----
    Mr. Shays. That is the cost of living?
    Mrs. Druyun. No, sir.
    Mr. Shays. No.
    Mrs. Druyun. There was in the 2001 statute that if the 
Director of IOT&E certified if we needed an additional increase 
in our cap, that they would grant us up to 1\1/2\ percent. The 
Director of IOT&E certified that we needed an additional 
increase in our development cap, the EMD cap of 1\1/2\ percent.
    Mr. Shays. Of the total program or 1\1/2\ percent of the 
engineering part?
    Mrs. Druyun. Of the EMD cap.
    Mr. Shays. Right.
    Mrs. Druyun. That was $307 million.
    Mr. Shays. OK.
    Mrs. Druyun. As a result of the further analysis that we 
have done, and the red team that I mentioned, we have added in 
or will be adding into our budget an additional $250 million.
    Mr. Shays. $557.
    Mrs. Druyun. Which gives you up to $557 million. And that 
basically delays the start of dedicated IOT&E from December 
2002 until April 2002. But I put enough management reserve in 
that number, I could start as late as the end of July, first 
part of August and still have enough management reserve to 
cover that period of time.
    Mr. Shays. And how comfortable are you with this number? 
With Mr. Otter, you basically said you weren't going to agree 
to cap that at $557. So what does that mean? How do you 
interpret that?
    Mrs. Druyun. I thought that you were asking Dr. Schneiter.
    Mr. Shays. Dr. Schneiter is fine. I was just throwing it 
out there.
    Mr. Schneiter. Well, my position is that we still have a 
lot of testing to do between now and the spring of 2002, and 
there may be additional problems. History would indicate that 
there likely will be. I'm not sure. I think in our view, we 
would not like to see a cap, for example, at that amount, 
because it would not leave us adequate reserve.
    Mr. Shays. OK. So but would you say that $557 million is a 
conservative number, or conservative in the sense that you have 
given yourself some leeway, or is it kind of at the edge?
    Mr. Schneiter. I think Mrs. Druyun is saying that her 
estimate is that--it is adequate. I would say it is at the 
edge----
    Mr. Shays. OK.
    Mr. Schneiter [continuing]. If I understand your 
terminology.
    Mr. Shays. Yeah.
    Mrs. Druyun. Yes. It is basically our best estimate with 
management reserve laid in. Based on the----
    Mr. Shays. By laid in, in other words you have already 
included it, so you haven't left a reserve in case you have to 
go up?
    Mrs. Druyun. I have left some reserve in that number. I 
have left about 3\1/2\ months of reserve in that number.
    Mr. Shays. OK.
    Mrs. Druyun. That is why it is our best estimate, and we 
think it is reasonable.
    Mr. Shays. How confident is the Air Force that the 
challenged PCRPs can be achieved?
    Mrs. Druyun. Well, as I explained to you earlier, sir, when 
the service cost Air Force estimate was put together, we gave 
them zero credit for the challenged PCRPs.
    Mr. Shays. So you have no confidence that they can achieve 
them?
    Mrs. Druyun. No. As the projects are specifically 
identified, we will evaluate them and see how reasonable they 
are in terms of their ability to turn them into reality. And 
there is cost estimation that went along with them.
    Mr. Shays. So I'm trying to translate your answer. The 
bottom line is you can't answer the question because you 
haven't yet evaluated them?
    Mrs. Druyun. No, sir. I tried to explain.
    Mr. Shays. I know you are trying to explain. I'm just 
trying to understand.
    Mrs. Druyun. Our cost estimate did not give them any credit 
for the PCRP.
    Mr. Shays. That part I understand. You have given them no 
credit. So what is the process? What does that mean?
    Mrs. Druyun. The process is that the contractor will begin 
to, and has begun to, identify specific projects that they are 
going to pursue that will be included in the challenge, and 
once they identify those and go through the process of clearly 
defining them, laying in plans as to how they would execute 
them, how they would develop the estimate of what the savings 
would be associated with it, we will evaluate them and decide.
    Mr. Shays. So the answer is you can't give an answer yet 
now because you haven't yet evaluated them.
    Mrs. Druyun. That's correct.
    Mr. Shays. Why hasn't DOD fully complied with the GAO 
recommendation to report cost reduction plan information in the 
quarterly reviews?
    Mr. Schneiter. The Air Force does in its quarterly reviews 
present the status of the PCRPs.
    I think part of the issue between us and the GAO view is 
the amount of detail that one needs to go into with regard to 
that. It is always done in a summary fashion. In some cases we 
go into more detail. At the last one of our reviews, I think 
something over 300 were actually shown, although certainly not 
evaluated.
    The Under Secretary for Acquisition, Technology and 
Logistics, I believe, has a good understanding of the PCRPs. 
When he visited the plant in Marietta, he spent some amount of 
time going through the process that they used as well as 
sampling some of those.
    So we believe that we have done that adequately.
    Mr. Shays. So my question, will further quarterly review 
include all of the PCRP information GAO recommended you have? 
Basically the answer would be that you all have a disagreement 
as to whether you are complying or not, and so that would be 
hard to answer? I mean, how would you answer that?
    Mr. Schneiter. Well, there is something over 1,100 PCRPs. I 
think it is impractical for us to go through these at each of 
the quarterly reviews. We do examine how well they are doing, 
and then additionally we have the Cost Analysis Improvement 
Group examine these in great detail. They are our cost analysis 
people, and so they examine those. They take account of those 
in their estimate, and they report to the Under Secretary.
    Mr. Shays. I'm going to let counsel ask a question.
    Mr. Halloran. Would you at some point agree to provide the 
same level of detail twice in a row? The problem, I think, we 
are having is to track the progress and interpretation of PC 
data when you pick and choose what goes upstairs for review, so 
it is never the same twice in a row. We just can't connect the 
dots. What would be wrong with settling on some consistent 
level of detail from quarter to quarter?
    Mr. Schneiter. If that is what the request is, I would have 
to consider that and get back to you.
    Mr. Halloran. That was the request last August.
    Mr. Schneiter. Then that is failure on our part in 
understanding exactly what you were after there. I think the 
important thing in this is really what the estimate is, and not 
tracking each and every PCRP. How well the PCRPs do is less 
important than what the overall estimate is, taking account of 
the PCRPs.
    So on the OSD side, we try to not focus just solely on the 
PCRPs, because the basic estimate is important, actually more 
important. And over time, the PCRPs become part of the basic 
estimate.
    As I explained in my statement, the estimate that we do is 
made of two parts, what we now call the basic estimate, which 
includes a number of PCRPs, and so that now becomes part of the 
basic estimating process.
    Mr. Halloran. I understand.
    Mr. Schneiter. But the implemented PCRs----
    Mr. Halloran. But as long as you are operating under the 
cost cap on the production side, the PCRP content of the 
estimate is very significant, it is the measure of your chance 
of getting at the cap--at or near the cap.
    Mr. Schneiter. It is significant, but so are many other 
aspects of the cost estimate.
    Mr. Shays. Talking in general, we had the concept of cost-
benefit and opportunity cost. What concerns me in my 10 years 
serving on the Budget Committee is the issue of opportunity 
costs. There is only so many things that we can do. And I 
basically consider myself a supporter of the F-22. When I say 
basically, I just want to know it is not going to cost $80 
billion.
    I don't want a fair fight. In other words, I want our men 
and women to basically have superior platforms. I want them to 
be able to shoot and see the enemy before the enemy sees us.
    I get concerned when I see the 700 number go down--750 
number go down to 339, 333, and I get concerned that ultimately 
a year from now we may be looking at a continued reduction of 
the number of platforms, and then obviously the per-unit cost 
going up, and that we won't have significant new costs.
    I supported the tax cut. I voted for taking off some of the 
surplus so we don't have this unlimited sum out there, and I'm 
not unlike other Members of Congress. The thing that concerns 
me the most, and I'll say this to you, Mrs. Druyun, I find you 
a difficult witness, and that is a negative in the one sense 
for me. But it is a positive, because I have a feeling that you 
are difficult with the contractors, and I like that. So that is 
a plus. But what starts to happen to me is when I feel that 
information isn't being provided, to GAO in particular, I then 
start to get nervous.
    And we had made requests to the Secretary of Defense for 
information, and we are basically being told that if decisions 
haven't been made, then it is not available to us. With 
specific reference--here is the letter that we sent to Mr. 
Rumsfeld June 19th. We said, with specific reference to the F-
22 cost controls, it is certainly our impression that the 
decision to pursue cost control initiatives has been made. We 
conclude the bases for the decision are within the legitimate 
oversight reach of the subcommittee. Cost estimate methodology 
and the validity of PCRPs are not dependent on any production 
milestone being relevant generally to acquisition processes and 
applicable specifically to the production of 1, 339 or more in 
the 700 F-22s.
    And our response on that: This is in reply to your letter 
to--and this is from Mr. Aldridge. This is in reply to your 
letter of Secretary Rumsfeld requesting access to the F-22 cost 
estimate records provided by the Office of the Secretary of 
Defense, Cost Analysis Improvement Group.
    Our policy to not allow access to predecisional material 
continues. This is essential to allowing the Department of 
Defense [DOD], to fully debate program funding internally 
before making program decisions.
    What I'm interested in knowing is the raw data that is 
involved is also being denied us. Why would the data be denied 
us and not necessarily the decisions or the interpretation of 
the data?
    Mr. Schneiter. I'm not sure exactly what you mean by the 
raw data. The GAO has had good access to the data from the Air 
Force. Mrs. Druyun can speak to that process.
    I think some of what has been sought here is not what I 
would call raw data, but rather data that has been processed by 
our cost analysts, which includes many judgments on their part, 
and we don't like to have all of that be debated publicly while 
we are in the process of making internal decisions within the 
Department.
    The Department lawyers perhaps can tell you more about 
that, but this is my understanding of why it is that we are as 
unwilling as we are in the process of going up to a decision 
and making a decision to provide some of that information, much 
of which in this case is judgmental. The reason for a lot of 
the difference between our estimate and the Air Force estimate 
on this has to do with the judgments of the cost analysts in 
terms of what learning curves are going to be, how much the 
cost will go down as we learn more and so forth, and that is 
not raw data.
    Mr. Shays. The difference between the $2 billion and the $9 
billion is within the Department of Defense. I mean, it is not 
GAO saying $9 billion and DOD saying $2 billion. It has an 
internal difference. And don't you think it is important for 
Congress to understand in very real terms how we can arrive at 
two different numbers, especially since both are over the cap? 
I mean, both are truly over the cap.
    Mr. Schneiter. The Department has not yet made a decision 
as to what it thinks the cost estimate of the program is in the 
context of the current program.
    Mr. Shays. When will that decision be made?
    Mr. Schneiter. That decision will be made, I think, within 
a month. As I indicated in my statement, we have a 
congressional--a statutory requirement that if we decided in 
the Department to proceed with low-rate initial production, 
that then we need to send Congress the reasons for proceeding 
with low-rate initial production, the revised production plan. 
And that is revised in the sense of revised from what we had 
previously, which we now all agree will not fit within the cap. 
So we have to give you a revised production plan, and the 
revised cost estimate for the reminder of EMD and production. 
So by law we need to provide that if we decide to proceed with 
low-rate initial production. So the Department will provide a 
revised cost estimate.
    Mr. Shays. In other words, when you say if, the question is 
when, not if, correct?
    Mr. Schneiter. I would not prejudge myself that.
    Mr. Shays. What would be the alternative, to stop the 
program?
    Mr. Schneiter. That is one alternative.
    Mr. Shays. What, just stay in EMD for a while longer? Just 
help me understand. What can I anticipate? In other words, not 
that you know what is going to be done, but the options are to 
basically begin production, stay in EMD, end EMD or stop the 
program. Those will be the three potentials. Are there any 
other choices?
    Mr. Schneiter. None come to mind. I think there is a 
general expectation that we will proceed. We have put money in 
the budget for the next LRIP, but the decision is not made.
    Mr. Shays. OK. So since you all haven't determined where 
that number between $2 and $9 billion is, but once you 
determine that, then all of the data that we have requested is 
going to be made available?
    Mr. Schneiter. I don't know exactly what all has been 
requested.
    Mr. Shays. Fair enough.
    Mr. Schneiter. I think that more will be made available 
once the decision is made. You have a Department position, and 
I think that we will have an obligation then to explain the 
basis for what our estimate is.
    Mr. Shays. I would just love to have GAO take the mic and 
just enlighten me as to what data we might be looking at. If 
you can just lift the mic up and speak while standing.
    Mr. Li. Mr. Chairman, the type of data--and I guess I would 
disagree with Mr. Schneiter. When we issued our draft report, 
it was commented on by DOD, and at that point in time in our 
draft, in response to the words that we had, there was a 
misunderstanding as to what was the level of detail.
    In our final report we clarified our position in terms of 
summary data, and a few minutes ago there was some responses 
about the number of PCRPs and the detail that was provided. 
That is not what I'm looking for.
    I'm well aware of the fact that it is a very time-consuming 
and labor-intensive thing to do. I'm looking at summary data. I 
indicated that the summary data that--an example. When you 
asked me, that question was providing summary data regarding 
the dollar impact of those PCRPs that were implemented, and 
that is the type of thing that I'm looking for so that I can 
answer the type of questions that Mr. Tierney was raising.
    I would like to note the fact that in the 60-day letter, 
which is a requirement, a statutory requirement, that the 
agency respond to the final report, that DOD did acknowledge 
the fact that I modified my recommendations, they agreed with 
those recommendations.
    So they did agree with the fact that, yes, I'm going to 
provide summary data in a way that you described in the draft 
report.
    Mr. Shays. I would just request that you stay in close 
contact with the committee in terms of the future analysis of 
this project, and, you know, we'll try to work this out 
internally. I have never recommended that we subpoena--at least 
I don't recall that this committee has, but I wouldn't be 
hesitant to recommend that information about the F-22 be 
provided, and if it is not, to subpoena.
    And I will be very candid with you. I would have to get the 
chairman's approval and the Speaker's, so that obviously gives 
you the opportunity to talk to the Speaker. But I would 
certainly argue very strenuously that information about this 
project be provided so we have a fair analysis.
    I know all of you are very sincere about this project. I 
think that you are working overtime to keep it within cost. I 
don't have any doubt about that, and I consider all of you very 
fine public servants, and we are grateful that you are working 
for the government. But these may be just tensions that exist 
between three different groups.
    But in the end, if information isn't provided, you have the 
potential of making enemies out of friends who, you know, would 
like to see this project go forward. And I also understand that 
we are still dealing with estimates.
    So, Ms. Druyun, when you were pretty certain that we 
weren't within costs and comfortable at that a year ago, I 
realize things can change, so I am not--I like definitive 
statements and I like us to say how well we are able to keep 
them, so I don't have complaint about that. I am just concerned 
that this may be a $9 billion overrun instead of a $2 billion 
overrun, and it still may be worth it. But it would be better 
that we know it.
    I have no questions that I want to ask.
    Do you have any? Do any of you want to make a closing 
comment? Then we can adjourn.
    Mr. Summers. No, sir.
    Ms. Druyun. No.
    Mr. Schneiter. No, sir.
    Mr. Shays. Thank you all very much.
    This hearing is adjourned.
    [Whereupon, at 12:55 p.m., the subcommittee was adjourned.]

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