    [Senate Hearing 109-22]
    [From the U.S. Government Publishing Office]

                                                      S. Hrg. 109-22, Pt. 4

    DEPARTMENT OF DEFENSE AUTHORIZATION FOR APPROPRIATIONS FOR FISCAL YEAR
                                      2006

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

                                    HEARINGS

                                   before the

                          COMMITTEE ON ARMED SERVICES
                              UNITED STATES SENATE

                           ONE HUNDRED NINTH CONGRESS

                                 FIRST SESSION

                                       ON

                                    S. 1042

         TO AUTHORIZE APPROPRIATIONS FOR FISCAL YEAR 2006 FOR MILITARY
    ACTIVITIES OF THE DEPARTMENT OF DEFENSE, FOR MILITARY CONSTRUCTION, AND
       FOR DEFENSE ACTIVITIES OF THE DEPARTMENT OF ENERGY, TO PRESCRIBE
    PERSONNEL STRENGTHS FOR SUCH FISCAL YEAR FOR THE ARMED FORCES, AND FOR
                                 OTHER PURPOSES

                                   __________

                                     PART 4

                                    AIRLAND

                                   __________

                          MARCH 16, APRIL 6, 14, 2005

             Printed for the use of the Committee on Armed Services

                                   ----------
                             U.S. GOVERNMENT PRINTING OFFICE

    21-105 PDF                       WASHINGTON : 2005

    For sale by the Superintendent of Documents, U.S. Government Printing
    Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
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    Washington, DC 20402-0001

                          COMMITTEE ON ARMED SERVICES

                        JOHN WARNER, Virginia, Chairman

    JOHN McCAIN, Arizona                 CARL LEVIN, Michigan
    JAMES M. INHOFE, Oklahoma            EDWARD M. KENNEDY, Massachusetts
    PAT ROBERTS, Kansas                  ROBERT C. BYRD, West Virginia
    JEFF SESSIONS, Alabama               JOSEPH I. LIEBERMAN, Connecticut
    SUSAN M. COLLINS, Maine              JACK REED, Rhode Island
    JOHN ENSIGN, Nevada                  DANIEL K. AKAKA, Hawaii
    JAMES M. TALENT, Missouri            BILL NELSON, Florida
    SAXBY CHAMBLISS, Georgia             E. BENJAMIN NELSON, Nebraska
    LINDSEY O. GRAHAM, South Carolina    MARK DAYTON, Minnesota
    ELIZABETH DOLE, North Carolina       EVAN BAYH, Indiana
    JOHN CORNYN, Texas                   HILLARY RODHAM CLINTON, New York
    JOHN THUNE, South Dakota

                        Judith A. Ansley, Staff Director

                 Richard D. DeBobes, Democratic Staff Director

                                     ______

                            Subcommittee on Airland

                         JOHN McCAIN, Arizona, Chairman

    JAMES M. INHOFE, Oklahoma            JOSEPH I. LIEBERMAN, Connecticut
    JEFF SESSIONS, Alabama               JACK REED, Rhode Island
    JOHN ENSIGN, Nevada                  DANIEL K. AKAKA, Hawaii
    JAMES M. TALENT, Missouri            BILL NELSON, Florida
    SAXBY CHAMBLISS, Georgia             MARK DAYTON, Minnesota
    LINDSEY O. GRAHAM, South Carolina    EVAN BAYH, Indiana
    ELIZABETH DOLE, North Carolina       HILLARY RODHAM CLINTON, New York

                                      (ii)

                                C O N T E N T S

                                  ----------

                        CHRONOLOGICAL LIST OF WITNESSES
                Army Transformation and the Future Combat System
                                 march 16, 2005

                                                                       Page
    Cody, GEN Richard A., USA, Vice Chief of Staff, United States
      Army...........................................................   353
    Bolton, Hon. Claude M., Jr., Assistant Secretary of the Army for
      Acquisition, Logistics, and Technology.........................   358
    Francis, Paul L., Director, Acquisition and Sourcing Management,
      Government Accountability Office...............................   368
    Graham, Dr. David R., Deputy Director, Strategy Forces and
      Resources Division, Institute for Defense Analyses.............   382
    Boehm, Kenneth F., Chairman, National Legal and Policy Center....   388

                           Tactical Aviation Programs
                                 april 6, 2005

    Sullivan, Michael J., Acquisition and Sourcing Management,
      Government Accountability Office...............................   583
    Schmitz, Hon. Joseph E., Inspector General, Department of Defense   596
    Bolkcom, Christopher, Specialist in National Defense,
      Congressional Research Service, Library of Congress............   641
    Wynne, Hon. Michael W., Under Secretary of Defense for
      Acquisition, Technology, and Logistics.........................   657
    Young, Hon. John J., Jr., Assistant Secretary of the Navy for
      Research, Development, and Acquisition.........................   658
    Sestak, VADM Joseph A., Jr., USN, Deputy Chief of Naval
      Operations for Warfare, Requirements, and Programs.............   670
    Gorenc, Maj. Gen. Stanley, USAF, Director, Operational
      Capabilities and Requirements..................................   670
    Post, Brig. Gen. Martin, USMC, Assistant Deputy Commandant for
      Aviation.......................................................   670

                        Air Force Acquisition Oversight
                                 april 14, 2005

    McNulty, Hon. Paul J., United States Attorney for the Eastern
      District of Virginia...........................................   703
    Schmitz, Hon. Joseph E., Inspector General, Department of Defense   708
    Dominguez, Hon. Michael L., Acting Secretary of the Air Force....   715
    Gordon, Daniel I., Managing Associate General Counsel for
      Procurement Law, Government Accountability Office..............   719
    Flavin, Sallie H., Deputy Director, Defense Contract Management
      Agency.........................................................   758

                                     (iii)

    DEPARTMENT OF DEFENSE AUTHORIZATION FOR APPROPRIATIONS FOR FISCAL YEAR
                                      2006

                                  ----------

                           WEDNESDAY, MARCH 16, 2005

                                   U.S. Senate,
                               Subcommittee on Airland,
                                   Committee on Armed Services,
                                                        Washington, DC.

                ARMY TRANSFORMATION AND THE FUTURE COMBAT SYSTEM

        The subcommittee met, pursuant to notice, at 9:30 a.m., in
    room SR-232A, Russell Senate Office Building, Senator John
    McCain (chairman of the subcommittee) presiding.
        Committee members present: Senators McCain, Sessions,
    Talent, and Lieberman.
        Majority staff members present: William C. Greenwalt,
    professional staff member; Ambrose R. Hock, professional staff
    member; Gregory T. Kiley, professional staff member; Thomas L.
    MacKenzie, professional staff member; and Elaine A. McCusker,
    professional staff member.
        Minority staff members present: Daniel J. Cox, Jr.,
    professional staff member; Peter K. Levine, minority counsel;
    and Arun A. Seraphin, professional staff member.
        Staff assistants present: Alison E. Brill and Pendred K.
    Wilson.
        Committee members' assistants present: Cord Sterling,
    assistant to Senator Warner; Christopher J. Paul, assistant to
    Senator McCain; Arch Galloway II, assistant to Senator
    Sessions; Lindsey R. Neas, assistant to Senator Talent;
    Frederick M. Downey, assistant to Senator Lieberman; and
    William K. Sutey, assistant to Senator Bill Nelson.

           OPENING STATEMENT OF SENATOR JOHN McCAIN, CHAIRMAN

        Senator McCain. Good morning. The Airland Subcommittee
    meets today to receive testimony on Army transformation and the
    Future Combat System (FCS). We divided the hearing into two
    panels. The first panel will testify on the budgetary aspects
    of Army transformation and will specifically discuss Army
    aviation modularity and FCS.
        Secretary Bolton and General Cody, welcome. Thank you for
    coming today.
        As we meet today, the Army has over 650,000 soldiers on
    Active-Duty who are deployed, stationed overseas, or securing
    the homeland. We must ensure that our Armed Forces have the
    necessary personnel, training, and equipment to successfully
    accomplish their missions.
        The fiscal year 2006 Army budget requests $98.6 billion. It
    has not significantly changed from the 2005 appropriated
    levels. However, the 2005 appropriated levels include the $57
    billion for the Army in the fiscal year 2005 supplemental
    request.
        Additionally, the Army did not include all modularity costs
    in the 2006 budget request. Of the $57 billion requested for
    the Army in the bridge supplemental, $12.8 billion is in the
    procurement account and funds modularity force protection,
    recapitalization and equipment combat losses.
        This committee has jurisdiction over all of these areas,
    but, by funding these areas through supplementals, has little
    oversight. It is a concern to me. We would like to hear your
    views as to why you believe these costs should not have been
    budgeted in the fiscal year 2006 request.
        Over the past 2 years, the Army terminated two major
    programs, the Crusader field artillery system and the Comanche
    helicopter program. These programs were terminated to protect
    funding for the FCS and that is why we have to get the FCS
    program right.
        We will focus on the programmatic aspects of FCS in the
    first panel. We would be interested in hearing your views on
    the cost schedule and contractor performance of the FCS program
    and the rationale to restructure the program.
        Monday a Bloomberg News report indicated that the FCS
    program costs have increased to $133 billion, a 45-percent
    increase from its earlier estimate of $92 billion and the
    system will not be ready for combat until 2016, 4 years later
    than previously reported. I hope that our witnesses will be
    able to discuss that.
        FCS is of particular concern to me, especially the use of
    the Other Transaction Authority (OTA) as a contracting vehicle.
    That is why the FCS contract is the topic of the second panel.
    Secretary Bolton, thank you for sitting on the second panel.
    You will be joined by Paul Francis, Director, Acquisition and
    Sourcing Management of the Government Accountability Office
    (GAO); Dr. David Graham, Deputy Director of Strategy Forces and
    Resources Division for the Institute of Defense Analyses; and
    Ken Boehm, Chairman of the National Legal and Policy Center.
        In 1989, Congress recognized that traditional Government
    contracts were not an effective mechanism for managing Defense
    Advanced Research Projects Agency (DARPA) research projects.
    For this reason, we created a new type of agreement known as
    ``other transactions'' that would not be subject to the
    standard contracting requirements. At first limited to DARPA,
    section 845 of the National Defense Authorization Act (NDAA)
    for 1994 extended other transaction authority to prototype
    projects.
        Since the 1994 act, the Department of Defense (DOD)
    officials and industry have repeatedly requested that we extend
    ``other transaction authority'' to production contracts.
    Congress has consistently refused to do so because we have
    taken the view that with hundreds of millions of dollars or
    even billions of dollars at stake, the taxpayer needs the
    protections built into the traditional procurement system. I
    would be glad to hear from the witnesses if they think there is
    something wrong with the traditional procurement system and if
    it needs to be modernized or updated.
        While we recognize that there may be need for continuing
    doing business with nontraditional contractors in the
    production phase of a program, we have preferred to address
    this issue through targeted waivers that are limited to those
    companies who need them.
        Now the Army has put forward a program that uses other
    transaction authority for a $20 billion contract, a figure much
    greater than Congress intended and unprecedented. We look
    forward to your testimony and the testimony of the witnesses on
    the second panel regarding the appropriateness of using other
    transaction authority for a contract this size and whether the
    Army has included clauses that protect the Government's
    interest. I look forward to your testimony.
        I want to thank Senator Lieberman for his leadership on
    this subcommittee and I know we will continue our
    bipartisanship that this subcommittee has enjoyed over the last
    6 years.
        [The prepared statement of Senator McCain follows:]
                   Prepared Statement by Senator John McCain
        The Airland Subcommittee meets today to receive testimony on Army
    Transformation and the Future Combat System (FCS). We've divided the
    hearing into two panels. The first panel will testify on the budgetary
    aspects of Army Transformation and we will specifically discuss Army
    aviation, modularity, and the Future Combat System. Secretary Bolton,
    General Cody, welcome. We thank you for coming.
        As we meet today, the Army has over 650,000 soldiers on Active-Duty
    who are deployed, stationed overseas, or securing the homeland. We must
    ensure that our Armed Forces have the necessary personnel, training,
    and equipment to successfully accomplish their missions. That's what we
    are here for today.
        The fiscal year 2006 Army budget request of $98.6 billion has not
    significantly changed from fiscal year 2005 appropriated levels.
    However, the fiscal year 2005 appropriated levels include the $57.0
    billion for the Army in the fiscal year 2005 supplemental request.
    Additionally, the Army did not include all modularity costs in the
    fiscal year 2006 budget request.
        Of the $57.0 billion requested for the Army in the bridge
    supplemental, $12.8 billion is in the procurement account and funds
    modularity, force protection, recapitalization, and equipment combat
    loses. This committee has jurisdiction over all of these areas but, by
    funding these areas through supplementals, has little oversight. This
    is a concern to me. We would like to hear your views as to why you
    believe these costs should not have been budgeted in the fiscal year
    2006 request.
        Over the past 2 years, the Army terminated two major programs, the
    Crusader field artillery system and the Comanche helicopter program.
    These programs were terminated to protect funding for the Future Combat
    System. That is why we have to get the FCS program right.
        We will focus on the programmatic aspects of FCS in the first
    panel. We would be interested in hearing your views on the cost,
    schedule and contractor performance of the FCS program and the
    rationale to restructure the program. Monday, a Bloomberg news report
    indicated that FCS program costs have increased to $133 billion--a 45-
    percent increase from its earlier estimate of $92 billion--and that the
    system won't be ready for combat until 2016--4 years later than
    previously reported. I'm not sure the Army can afford the FCS program
    as it is currently structured.
        FCS is of particular concern to me, especially the use of Other
    Transaction Authority (OTA) as the contracting vehicle. That is why the
    FCS contract is the topic of the second panel. Secretary Bolton, thank
    you for sitting on the second panel. You will be joined by Paul
    Frances, Director, Acquisition and Sourcing Management, Government
    Accountability Office; Dr. David Graham, Deputy Director, Strategy,
    Forces and Resources Division, Institute for Defense Analyses; and
    Kenneth Boehm, Chairman, National Legal and Policy Center.
        In 1989, Congress recognized that traditional government contracts
    were not an effective mechanism for managing Defense Advanced Research
    Projects Agency (DARPA) research projects. For this reason, we created
    a new type of agreement, known as ``Other Transactions,'' that would
    not be subject to the standard contracting requirements. At first
    limited to DARPA, section 845 of the National Defense Authorization Act
    for 1994 extended ``Other Transaction Authority'' to prototype
    projects.
        Since the 1994 Act, Department of Defense (DOD) officials and
    industry have repeatedly requested that we extend ``Other Transaction
    Authority'' to production contracts. Congress has consistently refused
    to do so, because we have taken the view that with hundreds of millions
    or even billions of dollars at stake, the taxpayer needs the
    protections built into the traditional procurement system. While we
    recognize that there may be need to continue doing business with
    nontraditional contractors in the production phase of a program, we
    have preferred to address this issue through targeted waivers that are
    limited to those companies who need them.
        Now, the Army has put forward a program that uses ``Other
    Transaction Authority'' for a $20 billion contract, a figure much
    greater than Congress intended and unprecedented. We look forward to
    your testimony and the testimony of the witnesses on the second panel
    regarding the appropriateness of using ``Other Transaction Authority''
    for a contract this size and whether the Army has included clauses that
    protect the Government's interest.
        I look forward to your testimony.
        Before I turn this over to Senator Lieberman, I want to thank
    Senator Lieberman for his leadership on this subcommittee and hope to
    continue the bipartisanship this subcommittee has enjoyed over the past
    6 years.

        [Additional information inserted for the record by Senator
    McCain follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Senator McCain. Senator Lieberman.

                STATEMENT OF SENATOR JOSEPH I. LIEBERMAN

        Senator Lieberman. Thank you, Mr. Chairman. It has been my
    honor to be either the chairman or ranking member of this
    Airland Subcommittee now for the past 6 years, more often,
    unfortunately, the ranking member, but that is a longer story
    that we can get to at another time.
        Needless to say, the Senator from Arizona is one of my
    dearest friends and closest colleagues in the Senate, and I am
    thrilled that he has assumed the chairmanship of this
    subcommittee and look forward to working with him on the
    problems and challenges facing the Army and the Air Force. I am
    sure he will bring to this task his normal clear sense of
    national interest, his demanding intellect, and his truly
    terrible sense of humor. [Laughter.]
        The Army, followed closely by the Marine Corps, is clearly
    pulling the heaviest load among the Services in the operations
    that we are involved in now in Iraq and Afghanistan.
        Prior to September 11, 2001, in some ways the Army might
    have been described as the Rodney Dangerfield among its peer
    Services, not getting quite the respect or the sense of
    priority that it deserved. Well, what a difference 3 years
    makes.
        The Army has been, in my opinion, severely underfunded and
    struggling to maintain its two major modernization programs,
    the Comanche and the FCSs. In doing so, as it struggled, it
    terminated well over 100 programs, including the Crusader
    artillery system. The current force was, in many ways,
    neglected in an attempt to keep its transformation to the
    future force on track.
        After September 11, it was clear that the strategic pause
    the Army was depending on to effect its transformation no
    longer existed. The Army is now heavily engaged in combat
    operations at the same time it is transforming, reorganizing,
    and increasing the capability of its current force. There is
    now more of a balance between the current and future forces
    than had been the case prior to September 11.
        However, to a great extent, the Army is still being forced
    to pay for its transformation out of its own hide. The Army
    canceled the Comanche to pay for urgent requirements in the
    rest of its aviation battlefield operating system and it has
    delayed the FCS program to pay for improvements in the current
    force.
        The Army is obviously very busy, engaging in combat
    operations in Iraq and Afghanistan, resetting the force as
    units rotate out of the combat zones and prepare for
    redeployment in as little as a year's time, reorganizing the
    ground force into modular brigade combat teams and the aviation
    force into multi-functional aviation brigades, and pursuing
    programs to field the FCS and to spiral promising technologies
    from the future force program to the current force after
    testing and experimentation by a soon-to-be-created
    experimental unit. That is a lot happening at once.
        We as a subcommittee must thoroughly understand the Army's
    vision for the first half of this new century, what missions
    across the spectrum of conflict the Army expects to get, how
    the Army intends to fight, and how it intends to organize and
    equip itself for that fight, and particularly to understand
    what the Army will look like in size and organization at the
    completion of its conversion to a modular brigade combat team
    system and at the completion of its transition to the future
    force.
        It is our responsibility to ensure that the Army has the
    right number of personnel and the right kind of equipment and
    enough of it to prevail in its missions, and of course,
    adequate resources to effect those transformations while
    conducting ongoing combat operations. This is a very tall order
    and a very large challenge.
        I begin this process and the series of hearings that
    Senator McCain will chair and I will be privileged to
    participate in, with a belief that our Army needs to be bigger
    and the recipient of considerably more resources, to meet the
    challenges our Nation is giving it.
        Mr. Chairman, thanks for your leadership and I look forward
    to working with you to make our Army and Air Force even better
    than the best they are today. Thank you.
        Senator McCain. Thank you very much, Senator Lieberman.
        Secretary Bolton, welcome and please proceed.
        Mr. Bolton. With the chairman's indulgence, in order to set
    the stage, I would like to have the Vice Chief of Staff of the
    Army, General Cody lead off and set the stage and then I will
    follow.
        Senator McCain. That will be fine. General Cody.

      STATEMENT OF GEN RICHARD A. CODY, USA, VICE CHIEF OF STAFF,
                           UNITED STATES ARMY

        General Cody. Thank you, Secretary Bolton.
        Chairman McCain, Senator Lieberman, the Army has submitted
    written testimony and we request for the record that you accept
    it. I have a slight recap of that testimony.
        First, I would like to express our appreciation for the
    opportunity to appear before you to discuss your Army's
    transformation and particularly the modular Army and the FCS
    Army. Because of the complexity of these subjects, I have
    brought some charts that I may ask your permission to reference
    as we proceed in your questions. We have also provided paper
    copies of those charts.
        Sir, I have two of your soldiers here with me today: 1st
    Lieutenant Rob McChrystal and Staff Sergeant Benjamin Hanner,
    both from our Stryker brigade, 5th Battalion, 20th Infantry.
    They just returned from Iraq. During their tour, their unit
    conducted a 2-day, 270-mile movement from Mosul to An Najaf to
    fight the Mahdi Army, involving enemy engagements and
    navigating around blown bridges and fighting the terrorists.
    This effort highlights the increased maneuverability, combat
    effectiveness, and combat situational awareness that our
    Stryker Brigade Combat Team has but also gives us a glimpse to
    where we want to go with the modular Army and the FCS.
        Senator McCain. Welcome to both of you and thank you for
    your service.
        General Cody. Both of these soldiers have been decorated
    for their actions during the successful recovery of a downed
    Kiowa helicopter where they saved two of the pilots in a fierce
    fire fight.
        Lieutenant McChrystal was decorated for his actions during
    ambushes elsewhere in Iraq.
        Staff Sergeant Hanner also was the staff sergeant that did
    about 8,000 worth of truck convoys where he only lost 4 trucks
    during his tour. He was also awarded the Purple Heart when his
    Stryker vehicle was hit by a roadside daisy chain bomb where
    five of his other Stryker fellows were also wounded. They all
    survived that improvised explosive device (IED) because of the
    advanced survivability of the Stryker.
        Your Stryker units have exhibited superior performance and
    operational capabilities to meet the combatant commanders'
    requirements in Iraq and successfully fight the fight. Again,
    as I said, they give us an insight, especially with their
    embedded battle command systems, of where we want to go with
    our FCS.
        The Nation expects this Army to operate over the full
    spectrum of conflict and the Army, with your assistance, is
    doing so now and looks forward to be able to do it with the
    FCS. The Army modularity that we are going to brief you on
    today helps us set up moving toward the FCS.
        Change anytime while a nation is fighting a war requires
    dealing concurrently with both the current force and the future
    force capability gaps. The Army Modular Force addresses the
    immediate, urgent current force capability gaps using
    organizational changes and systems and technologies available
    immediately off the shelf to reset the force but also meet the
    combatant commanders' requirements. The Army Modular Force
    reflects a continuing cycle of innovation, experimentation,
    experience, and change. Development of our Stryker Brigade
    Combat Team informed the FCS-equipped Unit of Action
    organizational design that we are working, which in turn really
    underpin the modular Brigade Combat Team organizational designs
    that we are moving to.
        The Army Modular Force, taken together with the FCS-based
    Brigade Combat Team, will give the combatant commanders of the
    future a required versatile set of responsive capabilities for
    the future battlefield where we want to see first, understand
    first, act first, and then win decisively. The Army Modular
    Force will have relevancy in the foreseeable future, but severe
    anti-access environments and daunting anti-armor systems will
    pose a future force capability gap unless we take action now.
    The FCS will address those future force gaps.
        The Army is applying lessons learned from today's fight,
    like Sergeant Hanner and Lieutenant McChrystal, to help us
    reshape our future force programs, even if that means adjusting
    some of the directions and timing of those systems. This
    strategy really underpins our efforts of accelerating the FCS
    technology to the entire force by spiraling out selected FCS
    capabilities such as our unmanned guided vehicles, sensors,
    unattended munitions, and elements of the battle command
    network.
        The Army Modular Force will also set several conditions for
    the FCS' success involving our doctrinal, organizational,
    training, and leader development. As we continue to build the
    modular force and spiral in our FCS capabilities, our FCS and
    non-FCS units will be able to fight together through an
    integrated, compatible command and control system, thus our
    emphasis up front of spiraling into battle command systems.
        I thank the members of this committee for their continued
    outstanding support to all of the men and women in uniform who
    make up your great Army. As the Army moves forward, the soldier
    will continue to remain the centerpiece of our combat systems
    and formation and is really the indispensable part of the joint
    team. They are adaptive, they are competent, and infused with
    the Army values and warrior culture that fight wars and win the
    peace. We appreciate your wisdom, your guidance, and strong
    support as we work to ensure that we have what they need to
    successfully accomplish their missions and return home safely
    today and tomorrow.
        Sir, I look forward to your questions.
        [The joint prepared statement of General Cody and Mr.
    Bolton follows:]
     Joint Prepared Statement by GEN Richard A. Cody, USA, and Hon. Claude
                                 M. Bolton, Jr.
        Chairman McCain, Senator Lieberman, and distinguished members of
    the Senate Armed Services Committee, I would like to express our
    appreciation at the opportunity to appear before you to discuss your
    Army's Transformation, in particular the Army Modular Force and the
    Future Combat Systems (FCS). I thank the members of the committee for
    their continued, outstanding support to the men and women in uniform
    who make up our great Army. Your concern, resolute action, and deep
    commitment to America's sons and daughters are widely recognized
    throughout the ranks of our Service.
        Our Army is the dominant land campaign force for our combatant
    commanders in fighting the global war on terror, transforming to meet
    present and future threats, resetting to sustain a high operational
    tempo, and leading the most radical change of its institutional and
    training base since World War II.
        Today, our All-Volunteer Army, with 650,000 soldiers on Active-
    Duty, is providing forces and capabilities for Operation Iraqi Freedom,
    Operation Enduring Freedom, and other global requirements beyond global
    war on terror. The Army continues to deter aggression and keep peace on
    the Korean Peninsula, the Sinai Peninsula, the Horn of Africa, Kosovo,
    Bosnia, and elsewhere around the world. Army soldiers are supporting
    homeland security and providing military support to civil authorities
    for many different missions within the United States. In addition, the
    Army supports numerous humanitarian assistance missions and supports
    organizations such as Joint Task Force Bravo in Central America in its
    effort to counter illicit narcotics trafficking.
        As the Army fights the global war on terror and meets other global
    commitments, it remains committed to transforming. We are moving
    forward while focused on two core competencies: (1) training and
    equipping soldiers and growing leaders; and (2) providing relevant and
    ready land power to combatant commanders as part of the joint team.
        The Army developed the Army Campaign Plan (ACP) to synchronize the
    training, providing, transforming and resetting of forces to both
    sustain the current operations tempo and be relevant to future threats.
    Also, the ACP monitors the overhaul of our training base and
    institutional Army. The ACP's objective is to continue our
    transformation toward increasing joint interdependent capability,
    furthering our expeditionary qualities, and providing the Nation with a
    campaign quality force.
        One of the primary objectives of Army Transformation is
    restructuring from a division-based to a brigade-based force. These
    brigades are designed as modules or self-sufficient and standardized
    brigade combat teams, that can be more readily deployed and combined
    with other Army and Joint Forces to meet the precise needs of combatant
    commanders. The results of this transformational initiative will be an
    operational Army that is larger and more powerful, flexible, and
    deployable.
        This program, which we call modularity, will increase the combat
    power of the active component by 30 percent, as well as the size of the
    Army's overall pool of available forces by over 50 percent. The total
    number of combat brigades will increase with 10 active brigades (three-
    and-a-third divisions in our old terms) being added by the end of 2006.
    Our goal for this larger pool of available forces is to enable the Army
    to generate forces in a rotational manner that will support 2 years at
    home following each deployed year for Active Forces, 4 years at home
    following each deployed year for the Army Reserve and 5 years at home
    following each deployed year for National Guard Forces. During units'
    operational cycles, soldiers can expect to complete an operational
    deployment rotation between 6 to 12 months. We will only reduce the
    amount of time units stay on home station if we have no other options
    in supporting the National Security Strategy. Implementing this program
    will provide more time to train, predictable deployment schedules, and
    the continuous supply of land power required by the combatant
    commanders and civil authorities.
        To efficiently modularize the force, the ACP will leverage our
    current efforts to reset units redeploying from combat. Reset requires
    intensive resource allocation, repair, and overhaul of our ground
    equipment and aircraft, and prioritization and streamlining of our
    facilities and personnel to support these efforts. The Army will reset
    redeploying units into their new modular configurations in a manner in
    which a unit's component is completely transparent.
        The active component's 3rd Infantry Division and the New York
    National Guard's 42nd Infantry Division Headquarters are providing the
    Army's first test of our modular concept. Today in Iraq, two modular
    brigades of the 3rd Infantry Division are serving under the 42nd
    Division along with two National Guard brigades, one from Tennessee and
    one from Idaho. Likewise in Iraq, one National Guard brigade from
    Louisiana currently serves as part of the 3rd Infantry Division. When
    all units redeploy, the National Guard brigades will be set into a
    standard modular configuration in the same manner as active component
    brigades.
        As the Army continues to transform more of its units into this new
    configuration, all components will increasingly realize the
    efficiencies and benefits of modularity. Beyond the primary purpose of
    providing more lethal and agile units, our modular design facilitates a
    more streamlined logistical support structure across the Army. This
    characteristic of modularity will particularly benefit the Army
    Reserve, as it processes the bulk of the Army's theater-level support.
    This is because our Combat Support and Combat Service Support units,
    instead of collectively having to support nine different types of
    brigade configurations, will only have to support three different types
    of brigade configurations once the force is transformed.
        The force, above the brigade-level, will be supported by similarly
    modular supporting brigades such as Multi Functional Aviation Brigades.
    By design, these brigades will possess the bulk of the Army's aviation
    combat power and comprise attack, reconnaissance, assault, and general
    support capabilities. This design efficiently provides tailored
    aviation formations to effectively meet the combat brigade's
    requirements. Additional above brigade-level modular supporting
    brigades will provide fires, logistics, and other support.
        Modularity also allows our above brigade headquarters structure to
    become far more versatile and efficient as we eliminate an entire
    echelon of command--moving from three to two levels. Concurrently, the
    Army Reserve, Expeditionary Force packages are being structurally
    tailored to rapidly deploy in support of modular combat formations.
    Similar innovations will occur in the logistics and intelligence
    organizations that support our forces and other Services.
        FCS is the core of our Future Force's combat brigade, consisting of
    18 systems, plus the continued expansion of the network and
    capabilities to the soldier--all designed to function as a single,
    integrated system. FCS is the Army's primary materiel program for
    achieving future force capabilities. It will integrate existing
    systems, systems already under development, and systems to be
    developed. Fielding FCS is essential to providing the kind of lethal,
    agile forces required for full spectrum operations in the future. FCS
    will connect units through enhancements to the current and evolving
    network architecture that leverages inter-Service capabilities and
    provides greater situational awareness. This, in turn, leads to
    synchronized operations heretofore unachievable.
        In May 2003, FCS moved on schedule into the Systems Development and
    Demonstration phase. In July 2004, the Army identified and announced
    FCS Program adjustments that strengthened the FCS Program and improved
    the Current Force through early delivery, or spiral insertion, of
    selected FCS capabilities. The adjustments maintain the Army focus on
    FCS-equipped brigade development.
        The FCS program continues Department of Defense program reviews
    with a Milestone B update in May 2005 and a System Functional Review in
    August 2005. FCS Milestone C decision (to begin initial production) is
    in 2012. This will lead to an Initial Operational Capability in 2014
    and a Full Operational Capability FCS-equipped Brigade Combat Team in
    2016.
        The FCS approach to evolutionary acquisition includes iterative
    insertion of technology into FCS during the life cycle of the program.
    As a minimum, required threshold capability will be achieved by the
    initial production of FCS-equipped units in 2014. The FCS embraces
    evolutionary acquisition through iterative development for FCS
    components and systems that will be adequately mature to produce as
    spiral insertions to the Current Force.
        The evolutionary development approach to the FCS program
    acquisition strategy falls into four primary categories: first, the
    priority of development will be on the network, unattended munitions,
    unmanned systems, and finally manned ground vehicles (MGV).
    Consequently, MGV development will be extended. Non-line of sight
    cannon (NLOS-C) will lead MGV development and deliver prototype NLOS-C
    systems in 2008 with pre-production systems starting in 2010. Second,
    all core deferred FCS systems will now be funded and fielded with the
    first equipped brigade, allowing FCS-equipped brigade combat team
    fielding to begin in 2014. Third, more robust assessment,
    experimentation, and evaluation are included in the program to prove
    revolutionary concepts, mature the architecture and components, and
    assist in technology development. Finally, a series of Spiral-Out
    packages of technology insertion, beginning in 2008 will successively
    insert FCS capabilities into an Evaluation Brigade Combat Team (E-BCT)
    for test, evaluation, and experimentation. Validated Spiral Out systems
    will be fielded to Current Force modular combat brigades for
    integration onto host platforms, i.e., Stryker, Heavy, and Infantry.
    The FCS program will spiral installments of FCS Battle Command
    capability to the Current Force beginning in fiscal year 2009 with the
    fielding of the Joint Tactical Radio System (JTRS) and Warfighter
    Information Network--Tactical (WIN-T), envisioned as the backbone of
    the Future Force network. The recent restructuring of the JTRS Cluster
    1 program resulted in the need to re-synchronize this effort. The
    Program Manager for unit of action has implemented plans that include
    pre-Engineering Development Models (EDMs) as well as surrogate systems
    in early integration and experiment efforts. By 2014, the network
    complementary programs will be synchronized to support the replacement
    of Army Battle Command and Control Systems with an integrated FCS
    Battle Command system that provides on the move capability down to the
    platoon level.
        Risk associated with the maturation of technologies contributed to
    the Army's decision to restructure the FCS program and extend it by 4
    years. The restructured plan significantly reduces risk through both
    the spiral plan and the increased development time between Milestone B
    and Milestone C. The program has accepted the advice of several review
    panels that suggested that FCS mature and field technologies over time
    to the forces. FCS remains at the heart of the Army's strategy to
    mitigate risk using the Current to Future Force construct. At the same
    time, the Army is accelerating selected technologies to reduce
    operational risk by improving the Current Force's survivability,
    intelligence, surveillance and reconnaissance, and joint
    interdependence. Just as emerging FCS capabilities enhance the Current
    Force, the Current Force's operational experience informs the FCS
    program, further mitigating future challenges and risk.
        To execute spiral insertions of FCS technology to the Current
    Force, the Army will lead overall program management and development
    efforts while using the Lead Systems Integrator (LSI) to assist the
    Army in managing the system of systems integration. The LSI is the
    program integrator from industry partnered with the Army. The LSI is
    responsible for providing direct support to the Army in requirements
    development and analysis, and operational, systems, and technical
    architectures development. In order to solicit participation in the
    bidding process by the best of industry, no company was excluded from
    competition for the systems and subsystems contracts. To address the
    LSI's ability to operate in a dual role as both integrator and
    contractor, it was recognized that a potential conflict of interest
    might arise from a company acting as both the LSI and a potential
    bidder. The Army is ensuring stringent oversight and has built
    appropriate firewalls as reviewed and certified by the Institute for
    Defense Analysis.
        The Army's commitment to the future is certain. We will continue to
    provide our Nation, the President, the Secretary of Defense, and the
    combatant commanders with a unique set of core competencies and
    capabilities. We remain dedicated to training and equipping our
    soldiers and growing leaders. We will continue to deliver relevant and
    ready land power to the combatant commanders and the Joint Force.
        Our soldiers continue to perform magnificently around the globe.
    Simultaneously executing the global war on terror, implementing our
    modularity and transformation initiatives, and setting the force will
    be a challenge. However, it is also an opportunity to reshape ourselves
    for the future that we cannot pass up. As we move forward, the soldier
    remains the centerpiece of our combat systems and formations and is
    indispensable to the joint team. Adaptive, confident, and competent
    soldiers, infused with the Army's values and warrior culture, fight
    wars and win the peace.
        American soldiers display unrelenting tenacity, steadfast purpose,
    quiet confidence, and selfless heroism. We appreciate your wisdom,
    guidance, and strong support as we work to ensure that they have what
    they need to successfully accomplish their missions and return home
    safely--not only today's force but tomorrow's force as well.

        Senator McCain. Thank you very much, General.
        Secretary Bolton.

    STATEMENT OF HON. CLAUDE M. BOLTON, JR., ASSISTANT SECRETARY OF
          THE ARMY FOR ACQUISITION, LOGISTICS, AND TECHNOLOGY

        Mr. Bolton. Mr. Chairman and Senator Lieberman and other
    distinguished members of the subcommittee who may join us, I
    too want to thank you for this opportunity to discuss the
    authorization request for 2006 and the Army transformation. I
    too want to foot-stomp what General Cody has just mentioned,
    and that is your wisdom, your guidance, and your steadfast
    support that we have enjoyed over these many years.
        General Cody spoke about our efforts to reorganize the Army
    from a division-centric organization to one where brigades are
    the best basic fighting units. As he mentioned, the 3rd
    Infantry Division (ID) is now back in Iraq as a restructured
    modular force. Each brigade is now a self-sustaining Brigade
    Combat Team that can operate outside the full division.
        Now, my job was to equip those brigades with everything
    from increased intelligence, surveillance, reconnaissance, to
    increased battle command for the Force 21 battle command
    brigade and below, or as we call it, the FBCB2, the joint
    network node, the tactical operations center to maneuver and
    support, in other words, trucks. That has been done, and now we
    are about to see how well that will work in the 3rd ID.
        I had the great opportunity to meet with the 3rd ID within
    48 hours of their deployment to talk to the commander, and to
    look him in the eye and ask if there was anything else that we
    needed to do in terms of my part of this, and that is to make
    sure he had all the supplies. He said he had everything that he
    needed. The troops were trained and they were ready to go. I
    said we will be watching very closely to see what, if anything,
    we needed to provide over the next year to increase their
    capabilities.
        Now let me turn to the Army's Future Combat Systems, also
    known as the FCS, the Army's primary materiel program for our
    future force combat brigades.
        FCS will provide our future force with unprecedented
    military capability, rapid deployability, lethality,
    survivability, well into the 21st century. The FCS will be a
    network systems of systems, 18 systems plus the continued
    expansion of the network all centered around the soldier. With
    such a complex undertaking, it is important for us to
    understand the requirements, resources, which of course you
    provide, and integrated processes, which is why in order to
    succeed we need the right people from the Government and the
    right people from industry working as a team to make this work.
        We have a lead systems integrator, or LSI, to assist the
    Army in managing this system of systems integration. All 18
    separate systems and the network, as I said before, are
    centered on the soldier. In order to meet the time and funding
    constraints, we require not only an LSI but also a team
    approach overall.
        When the Defense Advanced Research Projects Agency (DARPA)
    served as the lead to develop and define an FCS design concept,
    they used the OTA to effectively accomplish this task, build
    the FCS team, and protect the public interests. Currently in
    the system design and development, or SDD, phase production OTA
    allows us to attract the best and brightest of our Nation's
    industry and their subcontractors in this endeavor.
        Now, to measure the value and appropriateness of the LSI
    and OTA, which is done on a regular basis, we use the earned
    value management system, which basically tells me that the LSI
    is tracking the program to costs, schedule, and performance as
    planned at the beginning of this agreement or contract.
        After nearly 22 months on the OTA, the Future Combat System
    today is on schedule, on cost, and on performance.
        Senator McCain. May I interrupt, Mr. Secretary?
        Mr. Bolton. Yes.
        Senator McCain. Then that Bloomberg News report is
    incorrect.
        Mr. Bolton. As far as I am concerned, it is. It talked
    about the total program, and we can get into that, obviously,
    in great detail, how we have changed the program over the last
    several months to allow this technology that we are developing
    for the FCS to get into the current force quicker rather than
    waiting for a full-up unit sometime out in the future.
        It was the desire of this Chief of Staff, General Peter
    Schoomaker, that rather than waiting, we needed to put
    technology in the current force as quickly as possible. We have
    been doing that over the last 3 years. The blue force tracking
    that I just mentioned, the FBCB2, the improvements to
    connectivity on the battlefield are all things that we have
    taken from the current technology base and put into that force.
    He wanted to see the same thing from this FCS.
        So we have taken four spirals out, the first one to start
    in 2008. We have costed that out. We have stretched out the
    basic program and added back things that we took out last year,
    whether that is unmanned aerial vehicles (UAV), also putting
    back two auxiliary power units (APS), on each one of the
    vehicles and so forth.
        That has increased the costs, and it has taken more time in
    terms of the basic program. However, the technology will be
    going to the current force a lot faster.
        So the Bloomberg report is correct in that we stretched the
    program. It is also correct that we have increased the costs,
    and that is allowing us to put it into the field quicker and to
    put back things that allow the FCS, when it is finally
    deployed, to fight better. I can go into that, sir, at greater
    detail. If I may just finish up these comments, sir.
        But as I said, we are on schedule and that is the schedule
    in the agreement. There are a lot of schedules floating around,
    but what is on contract we are holding pretty fast to that.
        Senator McCain. In all due respect, Mr. Secretary, we do
    not want a lot of schedules floating around.
        Mr. Bolton. You are absolutely right.
        Senator McCain. We need one that we can plan with.
        Mr. Bolton. Yes, sir. We will hit this later on. I cannot
    tell you how many times I have spent over the last 30 years
    trying to track down who has what schedule and where it came
    from.
        The earned value management system that I talked to earlier
    is what I use to measure this contractor, and in fact, all the
    contractors because it goes through all the subcontractors.
    What I put on that agreement tells me how long it is supposed
    to take, how much money it is supposed to take, and that is
    what I track people to.
        Senator McCain. That is what we would like to have too, Mr.
    Secretary.
        Mr. Bolton. As a matter of fact, I come up here about once
    a quarter to talk to the four staffs that we do business with,
    and we bring that earned value data in. That is ground truth.
    That is what the taxpayers pay, not someone else's schedule. If
    we get all balled up with all these other things, which are
    great for planning--and we do that all the time and people get
    confused, and in the past we have made some rather expensive
    mistakes.
        We have also looked outside the Department of Defense,
    obviously, outside the Army, on a regular basis, for me about
    every 6 months, about the concept of the LSI and the OTA, as
    well as other aspects of the program. Those outside independent
    reviews have further validated the appropriateness of the LSI
    and the OTA. By the way, I am getting ready to go out on my
    next 6-month. We will identify a completely different,
    independent source and take another look at the LSI, the OTA,
    and some other things that I would like to take a look on this.
        The bottom line is that we need to acquire the best
    capabilities that we can afford within time constraints given
    to us by the warfighter. I believe that the LSI and the OTA are
    both vitally important to the success of this program. I will
    continue to challenge the management tools, as we continue to
    look for better ways to get to the warfighter what they need,
    when they need it, and where they need it, better, faster, and
    cheaper.
        Sir, that concludes my opening comments. Again, I want to
    thank this committee for its continuing wisdom, guidance, and
    support, and I too look forward to your questions.
        Senator McCain. Thank you very much.
        Senator Inhofe could not be here today because the
    Environment and Public Works Committee is marking up the
    highway bill. He has asked his statement be entered in the
    record. If there is no objection, so ordered.
        [The prepared statement of Senator Inhofe follows:]
                 Prepared Statement by Senator James M. Inhofe
        I remember, General Shinseki sat where you currently are seated in
    March 2000 and stated the following about Army Transformation:

            ``This is the most significant effort to change the Army in 100
            years. Our aim is not a single platform swap out, but a
            systemic change and full integration of multidimensional
            capabilities--space, air, sea, and land. Not since the
            beginning of the last century has such a comprehensive
            transformation been attempted. Then, the new weaponry--
            aircraft, machine guns, rapid-fire artillery, motorized
            vehicles--were all being developed and tested in relative
            isolation. The Army is building support for this
            Transformation. We have been talking to the defense industry.
            We know that this Vision entails risk, but it promises great
            reward for our national security. We need to continue our long
            tradition of partnership between the Army and Industry. . . For
            years, Members of Congress have counseled the Army to change--
            we're changing. Now, we need your help, but more than that we
            need your ideas, your criticism, your energy, and your
            enthusiasm. We need your approval and fiscal support.''

        We, Congress, gave him our approval and fiscal support. I believe
    Senators Santorum and Lieberman were strong advocates for the program
    when they each chaired this subcommittee. With our help the Army moved
    forward and began to change. I recall having private discussions with
    General Shinseki referencing the Army's role in Bosnia and the problems
    with TF Hawk. The talk around town back then was the Army's challenge
    to remain relevant. The Army needed to ``think out of the box.'' Not
    just organizationally, but also in terms of the acquisition process.
    Here we are today more than 4 years later. Now let me ask my
    distinguished colleagues around this table who have been to Iraq and
    Afghanistan: is there any doubt how relevant our Army is today? On
    behalf of a grateful Nation, how fortunate we are that the Army
    embarked on this transformation. If the call to ``think out of the
    box'' would not have been sent out at the beginning of this decade, we
    would NOT have the Stryker, which is performing so well in Iraq, and
    FCS would still be bogged down in protests. More importantly we would
    be denying a capability to our brave soldiers. In the final analysis,
    that's what we are talking about, putting capability into the hands of
    our soldiers, sooner rather than later. FCS is not about 18 plus
    systems; it's about capability.
        I don't know what path this committee is going down regarding what
    ``t's'' were crossed and which ``I's'' were dotted in terms of the
    contracting method the Army used to jump start its transformation. I
    for one will be watching very closely to ensure whatever this committee
    does do, it does not deny capabilities that our soldiers need today and
    in the future.

        Senator McCain. Senator Lieberman, I know that you may have
    to leave, so why do you not lead off with your questions.
        Senator Lieberman. I think I am all right. You go ahead.
        Senator McCain. No, go ahead.
        Senator Lieberman. Thank you, Mr. Chairman.
        Thanks, Secretary and General. I want to talk to you,
    first, about the first generation force size and organizational
    structure. I know that the Army analysis and gaming have
    identified a need for up to 20 Brigade Combat Teams to be
    deployed at any one time as a steady state requirement, plus an
    ability to surge to 40 to 43 to effectively support the 2004
    national defense strategy and national military strategy.
        I note that the recent force level committed to Iraq is 20
    brigades. I am just curious whether that is a coincidence that
    the numbers worked out that way or did something else happen.
        General Cody. No, sir, it is not a coincidence. In fact, it
    was done separately. I think you know that in the Center of
    Army Analysis, in concert with the Joint Staff, we run several
    operational availabilities studies to take a look at the
    national military strategy. I think you know it is a 1-4-2-1: 1
    being homeland defense; 4 being four critical areas of
    engagement; 2 being swiftly defeat the efforts of which one of
    them becomes a win-decisive. When you lay all that down and
    take a look at the contemporary operating environment, we
    looked at what will it take on any given day to have ready for
    deployment for this Nation--how many Brigade Combat Teams
    active and National Guard based upon a rotational basis.
        The reason why we did that is because when they did the
    force sizing constructs on the old Quadrennial Defense Review
    (QDR) back in 2001 or so, no one took into account that if you
    go to a swiftly defeat like Iraq and it becomes rotational, you
    do not have the base and the accessibility to be able to
    sustain it. We are now in the third year of Afghanistan and
    Iraq. Yet the force sizing construct that drove the Army to 10
    divisions, and then sometimes there were discussions of 8
    divisions, left us with this structure.
        That is why we are growing to 43 active brigades, as well
    as taking all the National Guard brigades and making them the
    same as the active brigades, and then moving into this force
    generation model that deals with the accessibility of the
    National Guard brigades in concert with the accessibility on
    any given day of the active component.
        That is what that had to do with. The 20 just happened to
    correspond to the 19-some-odd brigades that are now in Iraq,
    but it was done separately.
        Senator Lieberman. I appreciate the answer.
        So is it fair to say that you would say that the Army plan
    for size and structure of the force is appropriate for the
    types of operations it has been performing and may be called on
    to perform in the near term?
        General Cody. Yes, sir. If I could show one chart, I think
    it would be kind of interesting. I will go right to this. You
    all have the chart.
        What we did is we looked back at where the Army had been. I
    do not want to belabor this, but this is the spectrum of
    conflict. This is high-end conflict. You see Korea, Vietnam,
    Just Cause, Grenada. This is down here in the domestic support/
    disaster relief. In the 1950's and 1989 before the wall came
    down and during the Cold War, we deployed an Army. It had 40
    divisions during Vietnam, 28 divisions before the wall came
    down. We deployed that Army across this spectrum about 10
    times. It was sized for this. It was sized for the plains of
    Europe. It was sized for the fights in the Sinyang Gap in North
    Korea, as well as our experience in Vietnam.
        If you take a look at what happened to the Army after the
    wall came down, we went to 10 divisions active, 8 divisions
    National Guard, 44 percent reduction in force across the three
    components. But here is where we have been since the wall came
    down in 1989, 43 deployments and counting, but you take a look,
    it is full spectrum. Yet, we had a Cold War structure.
        So that is what drove the former Chief and now our new
    Chief and myself to say how do we make this Army more modular
    that can meet the full spectrum requirements that we know we
    are going to face in the future and be able to be agile and
    modular, as well as be able to not have to transform it again
    in 2010 to 2014 when we bring on the Future Combat System. So
    that is what we used as we looked at this.
        Senator Lieberman. Those are very graphic. You have a
    clause at the bottom of the second one: ``more missions, fewer
    soldiers.'' Those graphs make that clear.
        Senator McCain. Could I follow up with that?
        Senator Lieberman. Please.
        Senator McCain. General, you are aware that the sentiment
    on the Armed Services Committee and in the Senate and the House
    is that we need more people in the Army?
        General Cody. I concur, sir.
        Senator McCain. You concur with that.
        General Cody. I have been on testimony since--well, 1999 I
    testified that the Army was stretched after the Kosovo
    experience, and I believe I testified last year that we needed
    30,000 right now so that we could do those things that you and
    Senator Lieberman laid out that the Army is doing: reorganizing
    in a rotational, swiftly defeat the efforts right now with
    Afghanistan and Iraq, resetting this force that we have used in
    the harshest environment, resetting our training, as well as
    setting ourselves up for the future environment that we know we
    are going to fight in. In order to do that, we have to grow
    this active component force by at least 30,000 right now until
    we can get our reorganization going at the level of commitment
    we are in Iraq and Afghanistan, as well as relieve the pressure
    on the National Guard and Reserves who we have used now since
    Operation Noble Eagle after September 11. So that is all in the
    balance.
        Senator McCain. Thank you.
        Senator Lieberman. Mr. Secretary.
        Mr. Bolton. Let me add to that. My background is in the Air
    Force. I spent 33 years there. Last weekend I had an
    opportunity to go to a function, and up front we do the normal
    things of introducing folks. Someone stood up to acknowledge
    the Air Force participation in our current global war on
    terrorism and happened to mention that there are about 30,000
    airmen stationed worldwide on duty that particular night. I
    thought to myself I have over 300,000 soldiers in 120 countries
    tonight.
        When I came to the Army just 3 years ago, the thing that
    impressed me most and certainly over the last 3 years is how
    busy this Army is and the need for personnel. Going to the
    modularity, we did that in the Air Force in the mid-1990s, had
    to do it for the same reasons. We were double-banging, triple-
    banging folks way too much, and you had to get some
    predictability into that. This Army is very, very, very busy.
        To get to Senator Lieberman's point earlier on, we took a
    respite for a decade, maybe a decade and a half, with the Army.
    Now it is an opportunity for the country to really see what the
    Army is doing to make up its mind as to what it wants it to do
    in the future and then to resource that.
        Senator Lieberman. Thanks, Mr. Secretary. Mr. Chairman, let
    me just ask one more question and it builds on General Cody's
    direct answer about your question about personnel, which I
    appreciate.
        Obviously, it is critical to have a rotation base that
    allows sustained commitments without overstressing the force or
    understaffing the critical training base, which is exactly what
    you talked about.
        I have been reading that there are independent analysts now
    who are questioning whether a 3-to-1 rotation base in the
    Active Force is adequate, with some saying 4-to-1 or even 5-to-
    1 is necessary. If the 20 brigade assumption should prove
    incorrect--for instance, you were asked to carry out a mission,
    which we hope will not happen but realistically is a possible
    contingency, in a place like Pakistan or even Iran, or if the
    Army needs to surge as a result of those kinds of missions to a
    larger number, then the current force generation may prove
    inadequate. It will prove inadequate if that happens.
        So I want to ask you whether you believe that the temporary
    addition of 30,000, which we have now done in end strength, and
    an additional 10 brigades will allow the Army to maintain that
    three-to-one rotation base for a contingency requiring 20-plus
    brigades for 4 or 5 years.
        General Cody. Mr. Senator, thank you for that question
    because it is one we grapple with every day. Let me start by
    saying what keeps me awake at night is what will this All-
    Volunteer Force look like in 2007.
        Senator Lieberman. Right.
        General Cody. We mentioned the 3rd ID going back. You may
    not know. I have two sons that are captains in the Army. My
    oldest son is getting ready to deploy on his third combat tour
    since he graduated from flight school, Afghanistan, Iraq, now
    Afghanistan in 4 years. My youngest son is getting ready to go
    back with him for his second tour. Just like young Rob
    McChrystal and Sergeant Hanner, we have thousands of those
    types of stories. We are going out and we are trying to
    understand, because this is the first time we have taken this
    All-Volunteer Force into this type of fight rotational. Twelve
    months is a long time.
        The Army during the 1990s was doing 6-month tours in
    Implementation Forces (IFOR), then Stabilization Forces (SFOR),
    then Kosovo Forces (KFOR), and we had some concerns about that.
    Our really only short tour was in Korea.
        When this fight started, we had 29,000 to 30,000 soldiers
    on a short tour in Korea and 166,000 in short tours in combat.
    That is what we had to manage.
        So when we looked at this in particular, we said, okay, if
    we have to do this, 30,000 is what we need right now, and then
    we want to make a decision in 2006. After we get the 10th new
    brigade built, that will bring the active Army up to 43
    brigades, which also allows us to restructure the combat
    service support. We have gone from nine types of brigades in
    the Army to three. That allows us to restructure our combat
    service support. We think there are probably 6,000 or 7,000
    spaces by restructuring there that we can gain to reinforce our
    tooth versus tail.
        In 2006, we will take a look at what end strength should be
    after we complete the first year of modulatiry. But what really
    will drive the number you talked about is the 20 Brigades if we
    have to do two swifty-defeats simultaneously. Is it one in
    five? Is it one in six? If it is one in five and one in six, we
    think that the structure that we are going to come in 2006 will
    be about right.
        Senator Sessions. What do you mean one in five or----
        General Cody. If you can only go to a National Guard unit
    under partial mobilization--I think it is title 10, section
    12203--you can only use them for 24 months consecutive by law.
    It was written in 1953. If by policy we cannot go back to a
    National Guard unit after they have served a cumulative of 24
    months for 7 years, that will drive what your Active Force is
    going to look like.
        Senator McCain. Well, General, in all due respect, the
    Guard was never designed to have those kinds of deployments,
    and we are not meeting Guard recruiting goals. The Guard are
    fighting magnificently and with great patriotism. They are
    wonderful, but it is a tremendous strain on their families. So
    it seems to me to require the Guard to serve more often, which
    I think could probably have an effect on recruitment and
    retention, why do we not increase the size of the Army? This is
    a subject probably more for the Personnel Subcommittee, but it
    seems to me that the right direction to go if we are going to
    be in Iraq for a long period of time, as has been stated by
    several of your colleagues in uniform, then we should have an
    Army sized to meet that. It is called the National Guard for a
    reason, General.
        General Cody. Sir, you and I are in agreement. Let me
    explain it because I absolutely agree with you.
        One in five means a unit like the 81st out of Washington
    State that served the tour in Iraq. Then for 5 years, we would
    not go back to that unit. But the 20 Brigade Combat Teams that
    we think this Nation needs on any given day to be ready to
    deploy--not used, but ready to deploy--is 20. As you look at
    that chart, five or four--I cannot remember the number--will be
    National Guard units not being used, but the first 3 to 4 years
    they would be doing their title 32 with the Governor and
    homeland security, and then we would ramp up their training. So
    they would be ready to deploy so that if this Nation called--it
    does not mean we would use them, but we would get them in a
    cycle, so that if we had another Operation Iraqi Freedom-type
    of conflict, we had readily available C-1 type Guard units that
    we could bring in. It is not that we want to have them on
    Active-Duty every 5 years. That is not the case. But the case
    is to have them in a cycle of training so that we do have
    access to them if we have to fight this size of a war.
        Senator Lieberman. I will just wind up by saying--and my
    time is up. I thank you, Mr. Chairman--that part of what we
    are, obviously, looking for here is your estimate of what the
    permanent Active-Duty Army end strength should be to carry out
    your vision of a restructured Army. Part of that is the balance
    between the Guard and Reserve on the one hand and the active
    Army on the other. I think there is a concern certainly that
    the two of us share that reliance on the Guard and the Reserve
    may be more than we can sustain over the long term. So we have
    to make some tough decisions about active Army end strength.
        I presume that what I am hearing you say is that I am not
    going to hear you give us a number today, but you are going to
    work on that until 2006 and then you are going to come in with
    a number, which I presume will be for the next budget cycle.
        General Cody. Mr. Senator, we believe that the 30,000 that
    Congress has authorized us in NDAA 2005 is probably the right
    number, fully recognizing that we also have the ability to
    continue to grow that while we are still fighting this war
    based upon things like other measures we can take.
        I think the number, at the end of the day, if this is a
    plateau and not a spike, is going to be higher than 30,000 that
    it is going so that we can retain the National Guard in the
    right rotation readiness, not deployable, but ready to deploy,
    and the reservists, as well as give this Nation the footprint
    that we need as a rotational Army. I think it is going to be
    more than 30,000. We will be able to come up with that number
    here as we go through this.
        I have seen all kinds of numbers and I have been doing this
    for 3 years. I have seen them higher and lower, but I think it
    is going to be higher than 30,000 in 2006. I think we are going
    to come to that realization.
        Senator Lieberman. I agree with you and I look forward to
    working with you on it. Thanks, Mr. Chairman.
        Senator McCain. Thank you.
        Senator Sessions.
        Senator Sessions. Thank you, Mr. Chairman. I am delighted
    to have you chair this subcommittee. Nobody could do it better
    or has more insight, history, and concern for the issues coming
    before the subcommittee than you. I am delighted to have you
    there.
        General Cody, the whole thing is very significant in terms
    of numbers. What do we do? The Army Reserve unit I was in was
    mobilized in 1991 in the Gulf War. It was mobilized again. I
    visited them over there. I was not in it when we were
    mobilized. I had gotten out before 1991, but I was in it for 10
    years. A lot of those people are personal friends of mine.
        That is a pretty stressful thing every 10 years. Probably
    only about 20 percent of the people in that unit were in it the
    first time they went.
        I understand we are only using 40 percent of the Guard and
    Reserve.
        The only thing I would say is a little bit different than
    my colleagues. They are prepared to go to war. The Guard and
    Reserve--we have combat units. If they are not going to be
    called up, then they need to be told right away. We need to
    reevaluate that. But they cannot be called up too often. They
    are prepared to go and serve.
        They serve with so few complaints it is just incredible. I
    visited in Fallujah a young marine. He told me his trucking
    business was hurt by being there. He thought he may lose it. He
    said that in an open meeting. He came up to me later and said,
    but I want you to know, Senator, 2 hours from now I am signing
    up again. I am going to recommit and do another 6 years.
        So they are really remarkable. They want to serve, but we
    cannot overuse them. We have to use them very smartly, and some
    people are getting called up too much because of their skills
    and some are not. I know you are working on that and we are
    going to have to have more numbers. I have become convinced
    that you are correct. I do think the rain barrel analogy is a
    good one.
        With regard to the Future Combat System, General Cody or
    Secretary Bolton, you said that we want to put in the force as
    quickly as possible. I think I understand what that means.
    General Cody, I guess I will ask you since the Secretary has
    already discussed it, exactly what do we mean by that? As I
    understand it, there are certain things that are part of our
    vision for a Future Combat System that can be brought on
    quickly that can help us right now and that you have made a
    decision not to wait until the entire perfect architecture is
    here but to, at least, bring those on early and become familiar
    with them and utilize them. Would you discuss with me--have I
    gotten that right, and what are the pitfalls and advantages of
    doing that?
        General Cody. Thank you, Mr. Senator. First off, I agree
    with you about the unbelievable service of our National Guard
    and reservists. I just came back from Iraq. I know you all have
    visited there several times. Also, let me say they enjoy seeing
    our elected officials over there because it reconnects them and
    reminds them of how important their service to the Nation is.
        We do not have a finer National Guard or Reserve than we
    have today. We are all very proud of them. We could not be
    closer to be a one Army today than we are because of
    Afghanistan and Iraq. The comraderie and the esprit de corps is
    just unbelievable and we have to be careful about the usage of
    the National Guard. We know that and we are concerned about it.
        When General Schoomaker, myself, the Secretary of the Army,
    and Secretary Bolton looked at all the things that we were
    being confronted with in this fight in Iraq and the fight in
    Afghanistan, all what I would call off-the-shelf robotics,
    sensor systems, battle command systems. We looked at where we
    were with the 18 plus 1 complex, integrated Future Combat
    Systems that we had. We looked at where they were in technology
    and asked the question, as we have this force in motion and as
    we are structuring it based upon the combatant commander's
    desires--and he wanted more sensors to look for IEDs. He wanted
    more robotics. He wanted to be able to have battle command
    across all his units so it would be seamless in terms of
    command, control, communications, computers, intelligence,
    surveillance, and reconnaissance (C\4\ISR). So we looked and we
    said, okay, there is no longer a strategic pause here to be
    able to wait until 2012 to put all 18 plus 1 systems onto a
    formation. We have to do two things.
        One is we have to set up the Army for what the combatant
    commander needs and closely get it aligned to what the
    formation will be for the Future Combat System-equipped
    formation.
        Second, we need to have, on any given day, a battle command
    system that, as we move forward, and start fielding the Future
    Combat System, whether it is a Stryker brigade or a new modular
    brigade or an FCS-equipped brigade, they can all communicate
    and still see first, understand first, act first. The fight
    will be just a little bit different because of the systems. So
    understanding that, we went and said, okay, we have some
    unattended ground sensors we can spiral forward now as we build
    our new modular brigade. We have the non-line-of-sight cannon
    that we can bring forward because we know we need that to help
    shape the fight in the future. There is the intelligent
    munitions systems, and then there is the systems of systems
    common operating environment which really sets up the
    operational network for battle command. We knew we could bring
    that into spiral one a little quicker once we brought in
    warfighter information network-terrestrial (WIN-T) and these
    joint network nodes. So we made that decision in restructuring.
        We also looked at some of the other capabilities for spiral
    two. Our plan is rather than spiral all this stuff in on a new
    experimental unit in 2014 when everything is ready is to take 6
    to 9 to maybe even 10 of these systems and put the into the
    force now in 2008, 2010 and populate them across them so that
    we are not having to change the whole Army all at once and we
    are also able to bring enhanced technology to the fight today.
    That is really our strategy.
        Senator McCain. Thank you very much. General Cody, thank
    you. We will move to our next panel then. Thank you for being
    here. Secretary Bolton, stay where you are.
        Mr. Bolton. Yes, sir. [Laughter.]
        Senator McCain. Mr. Paul Francis, the Director of
    Acquisition and Sourcing Management of the Government
    Accountability Office; Dr. David Graham, Deputy Director of
    Strategy Forces and Resources Division, the Institute of
    Defense Analyses; and Mr. Kenneth Boehm, who is the Chairman of
    the National Legal and Policy Center. Secretary Bolton, do you
    have an additional opening statement that you would like to
    make?
        Mr. Bolton. No, sir, I do not.
        Senator McCain. Okay. Thank you again, Mr. Bolton.
        Mr. Francis, welcome and thank you for appearing before
    this subcommittee today. Please proceed.

        STATEMENT OF PAUL L. FRANCIS, DIRECTOR, ACQUISITION AND
         SOURCING MANAGEMENT, GOVERNMENT ACCOUNTABILITY OFFICE

        Mr. Francis. Thank you, Mr. Chairman. Good morning. Good
    morning, Mr. Lieberman. I appreciate the opportunity to appear
    before the subcommittee this morning. I do have a written
    statement which I would like to submit for the record.
        I also had an oral statement that I was going to read
    through, but I thought in lieu of that, I would just try to hit
    some points that I think are relevant to the discussion that we
    just had. I might not be as smooth, but I think I will be a
    little bit more on point, if that is okay.
        Senator McCain. Thank you.
        Mr. Francis. I would say that lead system integrators and
    other transactions are mechanisms the Government uses to try to
    get better outcomes than it could using traditional
    instruments. I think these come with inherent risks that
    generally involve protecting the Government's interests.
        I think in the case of the FCS, there are some additional
    risks, and they would have to do with the lead system
    integrator being also a prime item contractor on the program.
    The solution that we are trying to buy is not well defined yet,
    and the technical task is really monumental. So I think these
    are additional risks that the program faces.
        The Army has taken a number of steps both in the
    contracting mechanism and in its management oversight to try to
    mitigate these risks. We are just beginning to look at how they
    are working now. I do not have a bottom line on how well the
    Army is doing, and we are working with your staff on that, Mr.
    Chairman.
        I think that the Army could make a good case that using the
    LSI and the OTA to get to an acquirable solution is not a bad
    approach given the size of the task.
        Senator McCain. Does that mean to you that we should look
    at the rules of procurement?
        Mr. Francis. My thought is that now that we are into
    acquisition, we need to be looking at this as an acquisition
    program. So I think that if we were looking at it as a science
    and technology or experimental effort to see what we can do, I
    think there could be an argument made that was a good approach
    to get to that point.
        But now we are past that point. We are about 2 years into
    the acquisition process, and at this point the program is not
    mature. As is included in my testimony, the technologies are
    not mature. We have not firmed requirements. I would say the
    cost estimate at this point would be tentative. I think no
    matter what contracting instrument we used up to this point,
    the program would still be at this relative state of
    immaturity.
        I think the concern I would like to get across is being 2
    years into the acquisition program, we are now going down the
    chute of acquisition, which means we are going to be designing
    a system. We are going to build prototypes. We are going to
    test, and we are going to buy. In reality for the next few
    years, the program is going to be at a point of discovery to
    see what it can and cannot do. So we may be faced with
    questions over the next few years, such as, what if the cost
    does double, would we still do FCS then? It is a hypothetical
    question. What if we can only get an 80-percent solution, would
    that be okay? What if we come out with F-22-like outcomes which
    say we get the solution we want, but it is so expensive we
    cannot buy many of them, would that be okay? I think we are
    going to see these types of issues come up over the next few
    years in the program.
        So what I would like to say is as we go through that and we
    discuss the contracting mechanisms and the arrangement with the
    contractor, I think it is really important that the Government
    preserve its options to change course based on the discovery of
    these facts that we will be going through over the next few
    years.
        [The prepared statement of Mr. Francis follows:]
                     Prepared Statement by Paul L. Francis
        Mr. Chairman and members of the subcommittee: I am pleased to be
    here today to discuss the Department of the Army's Future Combat
    Systems (FCS), a networked family of weapons and other systems. FCS is
    the centerpiece of the Army's plan to transform to a lighter, more
    agile, and more capable force. It consists of an information network
    linking a new generation of 18 manned and unmanned ground vehicles, air
    vehicles, sensors, and munitions. FCS began system development and
    demonstration in May 2003. In July 2004, the Army announced a major
    restructuring of the program, including plans for transitioning FCS
    capabilities to current forces. Total costs of the restructured program
    have not yet been estimated but will be at least $108 billion, in
    fiscal year 2005 dollars. The fiscal year 2005 budget provides $2.8
    billion in research and development funds for FCS; the fiscal year 2006
    budget requests an increase to $3.4 billion.
        Today, I would like to discuss (1) the technical and managerial
    challenges of the FCS program; (2) the prospects for delivering FCS
    capabilities within cost and scheduled objectives; and (3)
    considerations on how to proceed.
                                    summary
        The FCS program faces significant challenges in setting
    requirements, developing systems, financing development, and managing
    the effort. The Army has set the bar for requirements very high. FCS
    vehicles are to be a fraction of the weight of current vehicles, yet
    are to be as lethal and survivable. Their light weight and small size
    are critical to meeting the other Army goals: more mobile forces that
    are easier to sustain in combat. For FCS-equipped units to see and hit
    the enemy first, rather than to rely on heavy armor to survive, the
    Army must develop (1) a network to collect, process, and deliver vast
    amounts of intelligence and communications information and (2)
    individual systems, such as manned ground vehicles, that have been
    likened in complexity to fighter aircraft. FCS is a development of
    unprecedented complexity for the Army. From a financial standpoint, the
    first increment of FCS--enough to equip about 1/3 of the force--will
    cost at least $108 billion. Funding requests will run from over $3
    billion per year to about $9 billion per year at a time when the Army
    faces the competing demands of sustaining current operations,
    recapitalizing the current force, and paying for modularization.
    Finally, because of the management challenge the program's pace and
    complexity pose, the Army has turned to a Lead System Integrator to
    manage the entire effort and is making use of a contracting instrument
    known as Other Transaction Agreement, which allows the parties to
    negotiate contract terms based on the program requirements and their
    needs.
        As restructured, the FCS strategy includes 4 additional years to
    reduce risk, increase the demonstration of FCS capabilities, and
    harvest successes for the current force. Even with these improvements,
    the FCS is still at significant risk for not delivering planned
    capability within budgeted resources. This risk stems from the scope of
    the program's technical challenges and the low level of knowledge
    demonstrated at this point. The current schedule allows about 9\1/2\
    years from development start to the production decision. FCS is
    developing multiple systems and a network within a period of time that
    the Department of Defense (DOD) typically needs to develop a single
    advanced system. The FCS has demonstrated a level of knowledge far
    below that suggested by best practices or DOD policy. Nearly 2 years
    after program launch and about $4.6 billion invested to date,
    requirements are not firm and only 1 of over 50 technologies are
    mature--activities that should have been done before the start of
    system development and demonstration. If everything goes as planned,
    the program will attain the level of knowledge in 2008 that it should
    have had before it started in 2003. But things are not going as
    planned. Progress in critical areas, such as the network, software, and
    requirements has been slower than planned. Proceeding with such low
    levels of knowledge makes it likely that FCS will encounter problems
    late in development, when they are costly to correct. The relatively
    immature state of program knowledge at this point provides an
    insufficient basis for making a good cost estimate. Independent
    estimates should provide more information but are not yet completed. If
    the cost estimate for FCS is no more accurate than traditional
    estimates, the impact of cost growth could be substantial, given the
    program's magnitude.
        At this point, the FCS provides a concept that has been laid out in
    some detail, an architecture or framework for integrating individual
    capabilities, and an investment strategy for how to acquire those
    capabilities. It is not yet a good fit as an acquisition program. If
    FCS-like capabilities are to be made acquirable--for which the Army has
    made a compelling case--then different approaches for FCS warrant
    consideration because they offer building higher levels of knowledge
    and thus lower risk. One approach, in keeping with DOD acquisition
    policy and best practices, would be to set the first spiral as the
    program of record for system development and demonstration. To make
    such a spiral executable, it should meet the standards of providing a
    worthwhile military capability, having mature technology, and having
    firm requirements. Other capabilities currently in the FCS program
    could be taken out of system development and demonstration and instead
    be bundled into advanced technology demonstrations that could develop
    and experiment with advanced technologies in the more conducive
    environment of science and technology until they are ready to be put
    into a future spiral. Advancing technologies in this way will enable
    knowledge to guide decisions on requirements, lower the cost of
    development, and make for more reasonable cost and schedule estimates
    for future spirals.
                                   background
    Army Transformation and the FCS Concept
        A decade after the cold war ended, the Army recognized that its
    combat force was not well suited to perform the operations it faces
    today and is likely to face in the future. The Army's heavy forces had
    the necessary firepower but required extensive support and too much
    time to deploy. Its light forces could deploy rapidly but lacked
    firepower. To address this mismatch, the Army decided to radically
    transform itself into a new ``Future Force.''
        The Army expects the Future Force to be organized, manned,
    equipped, and trained for prompt and sustained land combat. This
    translates into a force that is responsive, technologically advanced,
    and versatile. These qualities are intended to ensure the Future
    Force's long-term dominance over evolving, sophisticated threats. The
    Future Force is to be offensively oriented and will employ
    revolutionary operational concepts, enabled by new technology. This
    force is to fight very differently than the Army has in the past, using
    easily transportable lightweight vehicles, rather than traditional
    heavily armored vehicles. The Army envisions a new way of fighting that
    depends on networking the force, which involves linking people,
    platforms, weapons, and sensors seamlessly together.
        The Army has determined that it needs more agile forces. Agile
    forces would possess the ability to seamlessly and quickly transition
    among various types of operations from support operations to
    warfighting and back again. They would adapt faster than the enemy
    thereby denying it the initiative. Agile forces would allow commanders
    of small units the authority and high quality information to act
    quickly to respond to dynamic situations.
        To be successful, therefore, the transformation must include more
    than new weapons. It must be extensive, encompassing tactics and
    doctrine as well as the very culture and organization of the Army.
    The FCS Solution
        FCS will provide the majority of weapons and sensor platforms that
    comprise the new brigade-like modular units of the Future Force known
    as units of action. Each unit is to be a rapidly deployable fighting
    organization about the size of a current Army brigade but with the
    combat power and lethality of the current larger division. The Army
    also expects FCS-equipped units of action to provide significant
    warfighting capabilities to the overall joint force. The Army is
    reorganizing its current forces into modular, brigade-based units akin
    to units of action.
        FCS is a family of 18 manned and unmanned ground vehicles, air
    vehicles, sensors, and munitions that will be linked by an information
    network. These include, among other things, eight new ground vehicles
    to replace current vehicles such as tanks, infantry carriers and self-
    propelled howitzers, four different unmanned aerial vehicles, several
    unmanned ground vehicles, and attack missiles that can be positioned in
    a box-like structure.

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        The manned ground vehicles are to be a fraction of the weight of
    current weapons such as the Abrams tank and Bradley fighting vehicle,
    yet are to be as lethal and survivable. At a fundamental level, the FCS
    concept is replacing mass with superior information; that is, to see
    and hit the enemy first, rather than to rely on heavy armor to
    withstand a hit.
        The essence of the FCS concept itself--to provide the lethality and
    survivability of the current heavy force with the sustainability and
    responsiveness of a force that weighs a fraction as much--has the
    intrinsic attraction of doing more with less. The FCS concept has a
    number of progressive features, which demonstrate the Army's desire to
    be proactive in its approach to preparing for potential future
    conflicts and its willingness to break with tradition in developing an
    appropriate response to the changing scope of modern warfare. If
    successful, the program will leverage individual capabilities of
    weapons and platforms and will facilitate interoperability and open
    system designs. This is a significant improvement over the traditional
    approach of building superior individual weapons that must be netted
    together after the fact. Also, the system-of-systems network and
    weapons could give managers the flexibility to make best value
    tradeoffs across traditional program lines. This transformation of the
    Army, both in terms of operations and equipment, is underway with the
    full cooperation of the Army warfighter community. In fact, the
    development and acquisition of FCS is being accomplished using a
    collaborative relationship between the developer (program manager), the
    contractor, and the warfighter community.
        FCS Program Has Been Restructured During the Last Year
        The FCS program was approved to start system development and
    demonstration in May 2003. On July 21, 2004, the Army announced its
    plans to restructure the program. The restructuring responded to
    direction from the Army Chief of Staff and addresses risks and other
    issues identified by external analyses. Its objectives include:

             Spinning off ripe FCS capabilities to current force
            units;
             Meeting congressional language for fielding the non-
            line of sight cannon;
             Retaining the system-of-systems focus and fielding all
            18 systems;
             Increasing the overall schedule by 4 years; and
             Developing a dedicated evaluation unit to demonstrate
            FCS capabilities

        The program restructuring contained several features that reduce
    risk--adding 4 additional years to develop and mature the manned ground
    vehicles; adding demonstrations and experimentation; and establishing
    an evaluation unit to demonstrate FCS capabilities. The program
    restructuring also adds scope to the program by reintroducing four
    deferred systems, adding four discrete spirals of FCS capabilities to
    the current force, and accelerating the development of the network.
    About $6.1 billion was added to the system development and
    demonstration contract and the Army has recently announced that the
    detailed revision of the contract has been completed.
                       objectives, scope, and methodology
        To develop the information on whether the FCS program was following
    a knowledge-based acquisition strategy and the current status of that
    strategy, we interviewed officials of the Office of the Under Secretary
    of Defense (Acquisition, Technology, and Logistics); the Secretary of
    Defense's Cost Analysis Improvement Group; the Assistant Secretary of
    the Army (Acquisition, Logistics, and Technology); the Army's Training
    and Doctrine Command; Surface Deployment and Distribution Command; the
    Program Manager for the Unit of Action (previously known as Future
    Combat Systems); the Future Combat Systems Lead Systems Integrator
    (LSI); and LSI One Team contractors. We reviewed, among other
    documents, the Future Combat Systems' Operational Requirements
    Document, the Acquisition Strategy Report, the Baseline Cost Report,
    the Critical Technology Assessment and Technology Risk Mitigation
    Plans, and the Integrated Master Schedule. We attended the FCS
    Management Quarterly Reviews, In-Process Reviews, and Board of
    Directors Reviews.
        In our assessment of the FCS, we used the knowledge-based
    acquisition practices drawn from our large body of past work as well as
    DOD's acquisition policy and the experiences of other programs. We
    discussed the issues presented in this statement with officials from
    the Army and the Secretary of Defense, and made several changes as a
    result. We performed our review from May 2004 to March 2005 in
    accordance with generally accepted auditing standards.
                 the fcs program is an unprecedented challenge
        The FCS program faces significant challenges in setting
    requirements, developing systems, financing development, and managing
    the effort. It is the largest and most complex acquisition ever
    attempted by the Army.
    The Requirements Challenge
        The Army wants the FCS-equipped unit of action to be as lethal and
    survivable as the current heavy force, but to be significantly more
    responsive and sustainable. For the unit of action to be lethal, it
    must have the capability to address the combat situation, set
    conditions, maneuver to positions of advantage, and to engage enemy
    formations at longer ranges and with greater precision than the current
    force. To provide this level of lethality and reduce the risk of
    detection, FCS must provide high, single-shot, weapon effectiveness. To
    be as survivable as the current heavy force, the unit of action must
    find and kill the enemy before being seen and identified. The
    individual FCS systems will also rely on a layered system of protection
    involving several technologies that lowers the chances of a vehicle or
    other system being seen and hit by the enemy. To be responsive, the
    unit of action must be able to rapidly deploy anywhere in the world and
    be rapidly transportable by various means--particularly by the C-130
    aircraft--and ready to fight upon arrival. To facilitate rapid
    transportability on the battlefield, FCS vehicles are to match the
    weight and size constraints of the C-130 aircraft. The unit of action
    is to be capable of sustaining itself for periods of 3 to 7 days
    depending on the level of conflict--necessitating a small logistics
    footprint. This requires subsystems with high reliability and low
    maintenance, reduced demand for fuel and water, highly effective
    weapons, and a fuel-efficient engine.
        Meeting all these requirements is unprecedented not only because of
    the difficulty each represents individually, but because the solution
    for one requirement may work against another requirement. For example,
    solutions for lethality could increase vehicle weight and size.
    Solutions for survivability could increase complexity and lower
    reliability. It is the performance of the information network that is
    the linchpin for meeting the other requirements. It is the quality and
    speed of the information that will enable the lethality and
    survivability of smaller vehicles. It is smaller vehicles that enable
    responsiveness and sustainability.
    The Development Challenge
        In the Army's own words, the FCS is ``the greatest technology and
    integration challenge the Army has ever undertaken.'' It intends to
    concurrently develop a complex, system-of-systems--an extensive
    information network and 18 major weapon systems. The sheer scope of the
    technological leap required for the FCS involves many elements. For
    example:

             First-of-a-kind network will have to be developed that
            will entail development of unprecedented capabilities--on-the-
            move communications, high-speed data transmission, dramatically
            increased bandwidth, and simultaneous voice, data and video;
             The design and integration of 18 major weapon systems
            or platforms has to be done simultaneously and within strict
            size and weight limitations;
             At least 53 technologies that are considered critical
            to achieving FCS' critical performance capabilities will need
            to be matured and integrated into the system-of-systems;
             Synchronizing the development, demonstration, and
            production of as many as 157 complementary systems with the FCS
            content and schedule. This will also involve developing about
            100 network interfaces so the FCS can be interoperable with
            other Army and joint forces; and
             At least an estimated 34 million lines of software
            code will need to be generated (about double that of the Joint
            Strike Fighter, which had been the largest defense undertaking
            in terms of software to be developed).
    The Financial Challenge
        Based on the restructured program, the FCS program office initially
    estimated that FCS will require $28.0 billion for research and
    development and around $79.9 billion for the procurement of 15 units of
    action. The total program cost is expected to be at least $107.9
    billion. These are fiscal year 2005 dollars. Since this estimate, the
    Army has released an updated research and development cost estimate of
    $30.3 billion in then-year dollars. An updated procurement estimate is
    not yet available. The Army is continuing to refine these cost
    estimates. As estimated, the FCS will command a significant share of
    the Army's acquisition budget, particularly that of ground combat
    vehicles, for the foreseeable future. In fiscal year 2006, the FCS
    budget request of $3.4 billion accounts for 65 percent of the Army's
    proposed spending on programs in system development and demonstration
    and 35 percent of that expected for all research, development, test,
    and evaluation activities.
        As the FCS begins to command large budgets, it will compete with
    other major financial demands. Current military operations, such as in
    Afghanistan and Iraq, require continued funding. Since September 2001,
    DOD has needed over $240 billion in supplemental appropriations to
    support the global war on terrorism. Current operations are also
    causing faster wear on existing weapons, which will need refurbishment
    or replacement sooner than planned. The equipment used by the current
    force, such as Abrams tanks and Bradley Fighting Vehicles, is expected
    to remain in the active inventory until at least 2030. The cost to
    upgrade and maintain this equipment over that length of time has not
    been estimated but could be substantial. Also, the cost of converting
    current forces to new modular, brigade-based units is expected to be at
    least $48 billion. Further, FCS is part of a significant surge in the
    demand for new weapons. Just 4 years ago, the top 5 weapon systems cost
    about $280 billion; today, in the same base year dollars, the top 5
    weapon systems cost about $521 billion. If megasystems like FCS are
    estimated and managed with traditional margins of error, the financial
    consequences are huge, especially in light of a constrained
    discretionary budget.
    The Management Challenge
        The Army has employed a management approach that centers on a Lead
    System Integrator (LSI) and a non-standard contracting instrument,
    known as an other transaction agreement (OTA). The Army advised us that
    it did not believe it had the resources or flexibility to use its
    traditional acquisition process to field a program as complex as FCS
    under the aggressive timeline established by the then-Army Chief of
    Staff.
        Although there is no complete consensus on the definition of LSI,
    those we are aware of appear to be prime contractors with increased
    program management responsibilities. These responsibilities have
    included greater involvement in requirements development, design and
    source selection of major system and subsystem subcontractors. The
    government also has used the LSI approach on programs that require
    system-of-systems integration.
        The Army selected Boeing as the LSI for the FCS system development
    and demonstration in May 2003. The Army and Boeing established a One-
    Team management approach with several first tier subcontractors to
    execute the program. According to the Army, Boeing has awarded 20 of 24
    first tier subcontracts, to 17 different subcontractors. The One-Team
    members and their responsibilities are depicted in table 1.

                            TABLE 1: ONE-TEAM MEMBERS
    ------------------------------------------------------------------------
                  One-Team Member                      Responsibility
    ------------------------------------------------------------------------
    Army......................................  Program Oversight and
                                                 Insight
    Boeing/SAIC...............................  Program Management
                                                 (including source
                                                 selection), Development of
                                                 System-of-Systems Common
                                                 Operating Environment,
                                                 System Integration
    General Dynamics Land Systems.............  Manned Ground Vehicles
    General Dynamics C4 Systems...............  Planning and Preparation
                                                 Services, Sensor Data
                                                 Management
    General Dynamics Robotics Systems.........  Autonomous Navigation System
    General Dynamics Advanced Information       Integrated Computers
     Systems.
    United Defense, LP........................  Manned Ground Vehicles,
                                                 Armed Robotic Vehicle
    iRobot Corporation........................  Small Unmanned Ground
                                                 Vehicle
    Lockheed Martin Missiles and Fire Control.  Multifunction Utility/
                                                 Logistics and Equipment
                                                 Vehicle
    Lockheed Martin, Orincon..................  Intelligence, Surveillance
                                                 and Reconnaissance Sensor
                                                 Fusion
    Austin Information Systems................  Situational Understanding
    BAE Systems CNI...........................  Ground Platform
                                                 Communication
    BAE Systems IESI..........................  Air Platform Communication
    Computer Sciences Corporation.............  Training Support
    Dynamics Research Corporation.............  Training Support
    Honeywell Defense and Space Electronic      Platform Soldier Mission
     Systems.                                    Readiness System
    Northrop Grumman..........................  Air Sensor Integrator, Class
                                                 IV Unmanned Aerial Vehicle,
                                                 Logistics Decision Support
                                                 Systems, Network
                                                 Management, Training
                                                 Support
    Raytheon Network Centric Systems..........  Battle Command and Mission
                                                 Execution, Ground Sensor
                                                 Integrator
    Textron Systems...........................  Unattended Ground Sensors,
                                                 Tactical and Urban Sensors
    ------------------------------------------------------------------------
    Source: U.S. Army

        Boeing was awarded the LSI role under an OTA which is not subject
    to the Federal Acquisition Regulation (FAR). Consequently, when using
    an OTA, DOD contracting officials have considerable flexibility to
    negotiate the agreement terms and conditions. This flexibility requires
    DOD to use good business sense and to incorporate appropriate
    safeguards to protect the government's interests. The OTA used for FCS
    includes several FAR or Defense FAR Supplement clauses, many of which
    flow down to subcontracts. The value of the agreement between the Army
    and Boeing is approximately $21 billion. It is a cost reimbursement
    contract.
        Congress has incrementally expanded the use and scope of other
    transaction authority since first authorizing its use more than a
    decade ago. In 1989, Congress gave DOD, acting through the Defense
    Advanced Research Projects Agency (DARPA), authority to temporarily use
    other transactions for basic, applied, and advanced research projects.
    In 1991, Congress made this authority permanent and extended it to the
    military departments. In 1993, Congress enacted Section 845 of the
    National Defense Authorization Act for Fiscal Year 1994, which provided
    DARPA with authority to use, for a 3-year period, other transactions to
    carry out prototype projects directly relevant to weapons or weapon
    systems proposed to be acquired or developed by DOD. Subsequent
    amendments have extended this authority to the military departments and
    other defense agencies. Most recently, the National Defense
    Authorization Act for Fiscal Year 2004 extended the prototype project
    authority until 2008 and provided for a pilot program to transition
    some other transaction prototype projects to follow-on production
    contracting.
        According to program officials, under the LSI and OTA arrangement
    on FCS, the Army primarily participates in the program through
    Integrated Product Teams that are used to make coordinated management
    decisions in the program about issues related to requirements, design,
    horizontal integration and source selection.
        fcs remains at risk of not delivering planned capability within
                              estimated resources
        During the past year, the FCS underwent a significant
    restructuring, which added 4 years to the schedule for reducing risk,
    increasing the demonstration of FCS capabilities, and harvesting
    successes for the current force. Yet, even with these improvements, the
    FCS is still at significant risk for not delivering planned capability
    within budgeted resources. This risk stems from the scope of the
    program's technical challenges and the low level of knowledge
    demonstrated thus far.
    High Levels of Demonstrated Knowledge Are Key to Getting Desired
            Outcomes
        Our previous work has shown that program managers can improve their
    chances of successfully delivering a product if they employ a
    knowledge-based decision-making process. We have found for a program to
    deliver a successful product within available resources, managers
    should build high levels of demonstrated knowledge before significant
    commitments are made.\1\ In essence, knowledge supplants risk over
    time. This building of knowledge can be described in three levels that
    should be attained over the course of a program:
    ---------------------------------------------------------------------------
        \1\ GAO, Best Practices: Capturing Design and Manufacturing
    Knowledge Early Improves Acquisition Outcomes. GAO-02-701. (Washington,
    DC: July 15, 2002); Best Practices: Better Management of Technology
    Development Can Improve Weapon System Outcomes. GAO/NSIAD-99-162.
    (Washington, DC: July 30, 1999); Best Practices: Successful Application
    to Weapon Acquisition Requires Changes in DOD's Environment. GAO/NSIAD-
    98-56. (Washington, DC: February 24, 1998).

             First, at program start, the customer's needs should
            match the developer's available resources--mature technologies,
            time, and funding. An indication of this match is the
            demonstrated maturity of the technologies needed to meet
            customer needs.\2\
    ---------------------------------------------------------------------------
        \2\ Technology readiness levels are a way to measure the maturity
    of technology. According to best practices, technology is considered
    sufficiently mature to start a program when it reaches a readiness
    level of 7. This involves a system or prototype demonstration in an
    operational environment. The prototype is near or at the planned
    operational system.
    ---------------------------------------------------------------------------
             Second, about midway through development, the
            product's design should be stable and demonstrate that it is
            capable of meeting performance requirements. The critical
            design review is the vehicle for making this determination and
            generally signifies the point at which the program is ready to
            start building production-representative prototypes.
             Third, by the time of the production decision, the
            product must be shown to be producible within cost, schedule,
            and quality targets and have demonstrated its reliability. It
            is also the point at which the design must demonstrate that it
            performs as needed through realistic system level testing.

        The three levels of knowledge are related, in that a delay in
    attaining one delays those that follow. Thus, if the technologies
    needed to meet requirements are not mature, design and production
    maturity will be delayed. On the successful commercial and defense
    programs we have reviewed, managers were careful to conduct development
    of technology separately from and ahead of the development of the
    product. For this reason, the first knowledge level is the most
    important for improving the chances of developing a weapon system
    within cost and schedule estimates. DOD's acquisition policy has
    adopted the knowledge-based approach to acquisitions. DOD policy
    requires program managers to provide knowledge about key aspects of a
    system at key points in the acquisition process. Program managers are
    also required to reduce integration risk and demonstrate product design
    prior to the design readiness review and to reduce manufacturing risk
    and demonstrate producibility prior to full-rate production.
        DOD programs that have not attained these levels of knowledge have
    experienced cost increases and schedule delays. We have recently
    reported on such experiences with the F/A-22, the Joint Strike Fighter,
    the Airborne Laser, and the Space Based Infrared System High. For
    example, the $245 billion Joint Strike Fighter's acquisition strategy
    does not embrace evolutionary, knowledge-based techniques intended to
    reduce risks. Key decisions, such as its planned 2007 production
    decision, are expected to occur before critical knowledge is captured.
    If time were taken now to gain knowledge it could avoid placing sizable
    investments in production capabilities at risk of expensive changes.
    FCS Strategy Will Not Demonstrate High Levels of Knowledge Consistent
            With DOD Policy or Best Practices
        The FCS program has proceeded with low levels of knowledge. In
    fact, most of the activities that have taken place during its first 2
    years should have been completed before starting system development and
    demonstration. It may be several years before the program reaches the
    level of knowledge it should have had at program start. Consequently,
    the Army is depending on a strategy that must concurrently define
    requirements, develop technology, design products, and test products.
    Progress in executing the program thus far does not inspire confidence:
    the requirements process is taking longer that planned, technology
    maturity may actually have regressed, and a program that is critical
    for the FCS network has recently run into problems and has been
    delayed. Figure 2 depicts how the FCS strategy compares with the best
    practices described above.

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        The white space in figure 2 suggests the knowledge between best
    practices and the FCS program. Clearly, the program has a tremendous
    amount of ground to cover to close its knowledge gaps to the point that
    it can hold the design reviews as scheduled and make decisions on
    building prototypes, testing, and beginning production with confidence.
        Several other observations can be made from the figure:

             A match between mature technologies and firm
            requirements was not made at program start.
             The preliminary design review, which ideally is
            conducted near the program start decision to identify
            disconnects between the design and the requirements, will be
            held 5 years into the program.
             The critical design review, normally held midway
            through development, is scheduled to take place in the seventh
            year of a 9-year program.
             The first test of all FCS elements will take place
            after the production decision.

        Requirements and Resources Gap
        The FCS program entered system development and demonstration
    without demonstrating a match between resources and requirements, and
    will not be in a position to do so for a number of years. The Army now
    expects to have a reasonably well defined set of requirements by the
    October 2006 interim preliminary design review. The Army has been
    working diligently to define these requirements, but the task is very
    difficult given that there are over 10,000 specific system-of-systems
    requirements that must collectively deliver the needed lethality,
    survivability, responsiveness, and sustainability. For example, the
    Army is conducting at least 120 studies to identify the design
    tradeoffs necessary before firming up requirements. As of December
    2004, 69 remain to be completed. Those to be completed will guide key
    decisions on the FCS, such as the weight and lethality required of the
    manned ground vehicles.
        On the resources side, last year we reported that 75 percent of FCS
    technologies were immature when the program started in 2003; a
    September 2004 independent assessment has since shown that only one of
    the more than 50 FCS critical technologies is fully mature. The Army
    employed lower standards than recommended by best practices or DOD
    policy in determining technologies acceptable for the FCS program.\3\
    As a result, it will have to develop numerous technologies on a tight
    schedule and in an environment that is designed for product
    development. If all goes as planned, the Army estimates that most of
    the critical technologies will reach a basic level of maturity by the
    2010 Critical Design Review and full maturity by the production
    decision. This type of technical knowledge is critical to the process
    of setting realistic requirements, which are needed now. In addition, a
    program critical to the FCS network and a key element of FCS' first
    spiral, the Joint Tactical Radio System, recently encountered technical
    problems and may be delayed 2 years. We provide more detail on this
    program later.
    ---------------------------------------------------------------------------
        \3\ To achieve full maturity at TRL 7, the technology should be in
    the form, fit, and function needed for the intended product and should
    be demonstrated in a realistic environment. For a basic level of
    maturity at TRL 6, the technology is not necessarily in the form, fit,
    and function for the intended product.
    ---------------------------------------------------------------------------
        Late Demonstrations of FCS Performance Could Prove Costly
        The FCS strategy will result in much demonstration of actual
    performance late in development and early in production, as
    technologies mature, prototypes are tested, and the network and systems
    are brought together as a system-of-systems. A good deal of the
    demonstration of the FCS design will take place over a 3-year period,
    starting with the critical design review in 2010 through the first
    system level demonstration of all 18 FCS components and the network in
    2013. This compression is due to the desired fielding date of 2014,
    coupled with the late maturation of technologies and requirements
    previously discussed.
        Ideally, a critical design review should be held midway through
    development--around 2008 for FCS--to confirm the design is stable
    enough to build production representative prototypes for testing. DOD
    policy refers to the work up to the critical design review as system
    integration, during which individual components of a system are brought
    together. The policy refers to the work after the critical design
    review as system demonstration, during which the system as a whole
    demonstrates its reliability as well as its ability to work in the
    intended environment. The building of production representative
    prototypes also provides the basis to confirm the maturity of the
    production processes. For the FCS, the critical design review will be
    held just 2 years before the production decision. The FCS program is
    planning to have prototypes available for testing prior to production
    but they will not be production-representative prototypes. The Army
    does not expect to have even a preliminary demonstration of all
    elements of the FCS system-of-systems until sometime in 2013, the year
    after the production decision.
        This makes the program susceptible to ``late cycle churn,'' a
    condition that we reported on in 2000.\4\ Late-cycle churn is a phrase
    private industry has used to describe the efforts to fix a significant
    problem that is discovered late in a product's development. Often, it
    is a test that reveals the problem. The ``churn'' refers to the
    additional--and unanticipated--time, money, and effort that must be
    invested to overcome the problem. Problems are most serious when they
    delay product delivery, increase product cost, or ``escape'' to the
    customer. The discovery of problems in testing conducted late in
    development is a fairly common occurrence on DOD programs, as is the
    attendant late-cycle churn. Often, tests of a full system, such as
    launching a missile or flying an aircraft, become the vehicles for
    discovering problems that could have been found out earlier and
    corrected less expensively. When significant problems are revealed late
    in a weapon system's development, the reaction--or churn--can take
    several forms: extending schedules to increase the investment in more
    prototypes and testing, terminating the program, or redesigning and
    modifying weapons that have already made it to the field. While DOD has
    found it acceptable to accommodate such problems over the years, this
    will be a difficult proposition for the FCS given the magnitude of its
    cost in an increasingly competitive environment for investment funds.
    ---------------------------------------------------------------------------
        \4\ GAO, Best Practices: A More Constructive Approach is Key to
    Better Weapon System Outcomes, GAO/NSIAD-00-199 (Washington, DC, July
    31, 2000).
    ---------------------------------------------------------------------------
        The Army has made some concrete progress in building some of the
    foundation of the program that will be essential to demonstrating
    capabilities. For example, the System-of-Systems Integration Lab--where
    the components and systems will be first tested--has been completed.
    Initial versions of the System-of-Systems Common Operating Environment,
    the middleware that will provide the operating system for FCS software,
    have been released. Several demonstrations have taken place, including
    the precision attack munition, the non-line of sight cannon, and
    several unmanned aerial vehicles.
        The Army has embarked on an impressive plan to mitigate risk using
    modeling, simulation, emulation, hardware in the loop, and system
    integration laboratories throughout FCS development. This is a credible
    approach designed to reduce the dependence on late testing to gain
    valuable information about design progress. However, on a first-of-a-
    kind system like the FCS that represents a radical departure from
    current systems, actual testing of all the components integrated
    together is the final proof that the system works both as predicted and
    as needed.
    Examples of Execution Challenges for Two Key FCS Elements
        The risks the FCS program faces in executing the acquisition
    strategy can be seen in the information network and the manned ground
    vehicles. These two elements perhaps represent the long poles in the
    program and upon which the program's success depends.
    Network
        The Joint Tactical Radio System (JTRS) and Warfighter Information
    Network-Tactical (WIN-T) are central pillars of the FCS network. If
    they do not work as intended, battlefield information will not be
    sufficient for the Future Force to operate effectively. They are
    separate programs from the FCS, and their costs are not included in the
    costs of the FCS. Both JTRS and WIN-T face significant technical
    challenges and aggressive schedules, which threaten the schedule for
    fielding Future Force capabilities and make their ultimate ability to
    perform uncertain.
        JTRS is a family of radios that is to provide the high capacity,
    high-speed information link to vehicles, weapons, aircraft, and
    soldiers. Because they are software-based, they can also be
    reprogrammed to communicate with the variety of radios currently in
    use. JTRS is to provide the warfighter with the capability to access
    maps and other visual data, communicate on-the-move via voice and video
    with other units and levels of command, and obtain information directly
    from battlefield sensors. JTRS can be thought of as the information
    link or network to support FCS units of action and the combat units on
    the scene that are engaged directly in an operation. In particular, its
    wideband networking waveform provides the ``pipe'' that will enable the
    FCS vehicles to see and strike first and avoid being hit. The WIN-T
    program is to provide the information network for higher military
    echelons. WIN-T will consist of ground, airborne, and space-based
    assets within a theater of operations for Army, joint, and allied
    commanders and provide those commanders with access to intelligence,
    logistics, and other data critical to making battlefield decisions and
    supporting battlefield operations. This is information the combat units
    can access through WIN-T developed equipment and JTRS.
        The JTRS program to develop radios for ground vehicles and
    helicopters--referred to as Cluster 1--began system development in June
    2002 with an aggressive schedule, immature technologies, and lack of
    clearly defined and stable requirements. These factors have contributed
    to significant cost, schedule, and performance problems from which the
    program has not yet recovered. The Army has not been able to mature the
    technologies needed to provide radios that both generate sufficient
    power as well as meeting platform size and weight constraints. Changes
    in the design are expected to continue after the critical design
    review, and unit costs may make the radios unaffordable in the
    quantities desired. Given these challenges, the Army has proposed
    delaying the program 24 months and adding $458 million to the
    development effort. However, before approving the restructure, the
    Office of the Secretary of Defense directed a partial work stoppage,
    and the program is now focusing its efforts on a scheduled operational
    assessment of the radio's functionality to determine the future of the
    program. Consequently, the radio is not likely to be available for the
    first spiral of the FCS network, slated for fiscal year 2008, and
    surrogate radios may be needed to fill the gap.
        A second JTRS program, to develop small radios including those that
    soldiers will carry (referred to as Cluster 5), also entered system
    development with immature technologies, lack of well-defined
    requirements, and faces even greater technical challenges due to the
    smaller size, weight, power, and large data processing requirements for
    the radios. For example, the Cluster 5 program has a requirement for a
    wideband networking waveform despite its demanding size and power
    constraints. In addition, the program was delayed in starting system
    development last year because of a contract bid protest. Consequently,
    the Cluster 5 radios are not likely to be available for the first FCS
    spiral either. The Army has acknowledged that surrogate radios and
    waveforms may be needed for the first spiral of FCS.
        The WIN-T program also began with an aggressive acquisition
    schedule and immature technologies that are not scheduled to mature
    until after production begins. Backup technologies have been
    identified, but they offer less capability and most are immature as
    well. In addition, the schedule leaves little room for error correction
    and rework that may hinder successful cost, schedule and performance
    outcomes. More recently, the program strategy was altered to identify a
    single architecture as soon as possible and to deliver networking and
    communications capabilities sooner to meet near term warfighting needs.
    Specifically, the Army dropped its competitive strategy and is now
    having the two contractors work together to develop the initial network
    architecture. A plan for how to develop and field capabilities sooner
    is still to be determined.
        Manned Ground Vehicles
        FCS includes eight manned ground vehicles, which require critical
    individual and common technologies to meet required capabilities. For
    example, the Mounted Combat System will require, among other new
    technologies, a newly developed lightweight weapon for lethality; a
    hybrid electric drive system and a high-density engine for mobility;
    advanced armors, an active protection system, and advanced signature
    management systems for survivability; a Joint Tactical Radio System
    with the wideband waveform for communications and network connection; a
    computer-generated force system for training; and a water generation
    system for sustainability. At the same time, concepts for the manned
    ground vehicles have not been decided and are awaiting the results of
    trade studies that will decide critical design points such as weight
    and the type of drive system to be used. Under other circumstances,
    each of the eight manned ground systems would be a major defense
    acquisition program on par with the Army's past major ground systems
    such as the Abrams tank, the Bradley Fighting Vehicle, and the Crusader
    Artillery System. As such, each requires a major effort to develop,
    design, and demonstrate the individual vehicles.
        Developing these technologies and integrating them into vehicles is
    made vastly more difficult by the Army's requirement that the vehicles
    be transportable by the C-130 cargo aircraft. However, the C-130 can
    carry the FCS vehicles' projected weight of 19 tons only 5 percent of
    the time. In 2004, GAO reported a similar situation with the Stryker
    vehicles. The 19-ton weight of these vehicles significantly limits the
    C-130's range and the size of the force that can be deployed.\5\
    Currently, FCS vehicle designs are estimated at over 25 tons. To meet
    even this weight, the advanced technologies required put the
    sophistication of the vehicles on a par with fighter aircraft,
    according to some Army officials. This is proving an extremely
    difficult requirement to meet without sacrificing lethality,
    survivability, and sustainability. Currently, program officials are
    considering other ways to meet the C-130 weight requirement, such as
    transporting the vehicles with minimal armor and with only a minimal
    amount of ammunition. As a result, vehicles would have to be armored
    and loaded upon arrival to be combat ready.
    ---------------------------------------------------------------------------
        \5\ GAO, Military Transformation: Fielding of Army's Stryker
    Vehicles Is Well Under Way, but Expectations for Their Transportability
    by C-130 Aircraft Need to Be Clarified, GAO-04-925 (Washington, DC,
    August 12, 2004).
    ---------------------------------------------------------------------------
    FCS Cost and Affordability Still to Be Determined
        The low levels of knowledge in the FCS program provide an
    insufficient basis for making cost estimates. The program's immaturity
    at the time system development and demonstration began resulted in a
    relatively low-fidelity cost estimate and open questions about the
    program's long-term affordability. Although the program restructuring
    provides more time to resolve risk and to demonstrate progress, the
    knowledge base for making a confident estimate is still low. If the FCS
    cost estimate is not better than past estimates, the likelihood for
    cost growth will be high while the prospects for finding more money for
    the program will be dim.
        The estimates for the original FCS program and the restructured
    program are shown in table 2 below.

        TABLE 2: INCREASED COST FROM ORIGINAL TO RESTRUCTURED FCS PROGRAM
    ------------------------------------------------------------------------
                                    Research and
          2005 BY$ (millions)        Development   Procurement      Total
    ------------------------------------------------------------------------
    Original......................        18,574        60,647      a 79,836
    Restructured..................      b 28,007        79,960       107,967
    Dollar increase...............         9,433        19,313        28,131
    Percent increase..............         50.79         31.84        35.24
    ------------------------------------------------------------------------
    Sources: GAO.
    a Both the original and the restructured figures are for about 15 Units
      of Action (i.e., 1/3 of the current active force).
    b Includes four originally deferred systems, a lengthened schedule,
      additional tests, and the addition of the four spirals.

        At this point, the FCS cost estimate represents the position of the
    program office. The Army and the Office of the Secretary of Defense's
    Cost Analysis Improvement Group will provide their independent
    estimates for the May 2005 Milestone B update review. It is important
    to keep in mind that the FCS program cost estimate does not reflect all
    of the costs needed to field FCS capabilities. The costs of the
    complementary programs are separate and will be substantial. For
    example, the research and development and procurement costs for the
    JTRS (Clusters 1 and 5) and the WIN-T programs are expected to be about
    $34.6 billion (fiscal year 2005 dollars).
        In addition, by April 2005, the Army has been tasked to provide an
    analysis of FCS affordability considering other Army resource
    priorities, such as modularity. This will be an important analysis
    given that estimates of modularity costs have been put at about $48
    billion, and costs of current operations and recapitalizing current
    equipment have been covered by supplemental funding.
        As can be seen in table 3, substantial investments will be made
    before key knowledge is gained on how well the system can perform. For
    example, by the time of the critical design review in 2010, over $20
    billion of research and development funds will have been spent.

                     TABLE 3: ANNUAL AND CUMULATIVE FCS FUNDING AND PLANNED EVENTS AND ACHIEVEMENTS
                                                [In millions of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                                                        Cumulative
                                                  Annual Research      Research and
                    Fiscal year                   and Development      Development      Planned Events/Achievements
                                                      Funding            Funding
    ----------------------------------------------------------------------------------------------------------------
      2003                                                   158.9              158.9  Systems development and
                                                                                        demonstration Start
    ----------------------------------------------------------------------------------------------------------------
      2004                                                 1,637.3            1,796.2  Program restructured
    ----------------------------------------------------------------------------------------------------------------
      2005                                                                             Contract redefinitized
                                                                                       Milestone B Update
                                                           2,800.8            4,597.0  Updated cost estimate
    ----------------------------------------------------------------------------------------------------------------
      2006                                                                             Requirements firmed up
                                                           3,404.8            8,001.8  Interim preliminary design
                                                                                        review
    ----------------------------------------------------------------------------------------------------------------
      2007                                                 3,742.0           11,743.8  .............................
    ----------------------------------------------------------------------------------------------------------------
      2008                                                                             System preliminary design
                                                                                        review
                                                           3,682.3           15,426.1  Interim critical design
                                                                                        review
    ----------------------------------------------------------------------------------------------------------------
      2009                                                 3,460.0           18,886.1  .............................
    ----------------------------------------------------------------------------------------------------------------
      2010                                                 3,181.5           22,067.6  Technologies reach basic
                                                                                        maturity; system critical
                                                                                        design review
    ----------------------------------------------------------------------------------------------------------------
      2011                                                 2,690.7           24,758.3  Design readiness review
    ----------------------------------------------------------------------------------------------------------------
      2012                                                                             Technologies reach full
                                                                                        maturity
                                                           1,949.6           26,707.9  Production decision
    ----------------------------------------------------------------------------------------------------------------
      2013                                                 1,412.0           28,119.9  Initial System-of-Systems
                                                                                        demonstration
    ----------------------------------------------------------------------------------------------------------------
      2014                                                 1,169.0           29,288.9  Initial Operational
                                                                                        Capability
    ----------------------------------------------------------------------------------------------------------------
      2015                                                   901.0           30,189.9  .............................
    ----------------------------------------------------------------------------------------------------------------
      2016                                                   111.0           30,300.9  Full Operational Capability
    ----------------------------------------------------------------------------------------------------------------
    Source: U.S. Army.

        The consequences of even modest cost increases and schedule delays
    for the FCS would be dramatic. For example, a 1-year delay late in FCS
    development, not an uncommon occurrence for other DOD programs, could
    cost over $3 billion. Given the size of the program, financial
    consequences of following historical patterns of cost and schedule
    growth could be dire.
        alternatives to current fcs acquisition strategy still warrant
                                 consideration
        For any acquisition program, two basic questions can be asked.
    First, is it worth doing? Second, is it being done the right way? On
    the first question, the Army makes a compelling case that something
    must be done to equip its future forces and that such equipment should
    be more responsive but as effective as current equipment. The answer to
    the second question is problematic. At this point, the FCS presents a
    concept that has been laid out in some detail, an architecture or
    framework for integrating individual capabilities, and an investment
    strategy for how to acquire those capabilities. There is not enough
    knowledge to say whether the FCS is doable, much less doable within a
    predictable frame of time and money. Yet making confident predictions
    is a reasonable standard for a major acquisition program given the
    resource commitments and opportunity costs they entail. Against this
    standard, the FCS is not yet a good fit as an acquisition program.
        That having been said, another important question that needs to be
    answered is: if the Army needs FCS-like capabilities, what is the best
    way to advance them to the point to which they can be acquired? Efforts
    that fall in this area--the transition between the laboratory and the
    acquisition program--do not yet have a place that has right
    organizations, resources, and responsibilities to advance them
    properly.
        At this point, alternatives to the current FCS strategy warrant
    consideration. For example, one possible alternative for advancing the
    maturity of FCS capabilities could entail setting the first spiral or
    block as the program of record for system development and
    demonstration. Such a spiral should meet the standards of providing a
    worthwhile military capability, having mature technology, and having
    firm requirements. Other capabilities currently in the FCS program
    could be moved out of system development and demonstration and instead
    be bundled into advanced technology demonstrations that could develop
    and experiment with advanced technologies in the more conducive
    environment of ``pre-acquisition'' until they are ready to be put into
    a future spiral. Advancing technologies in this way will enable
    knowledge to guide decisions on requirements, lower the cost of
    development, and make for more reasonable cost and schedule estimates
    for future spirals.
        Mr. Chairman, this concludes my prepared statement. I would be
    happy to answer any questions that you or members of the subcommittee
    may have.
                      contacts and staff acknowledgements
        For future questions about this statement, please contact me at
    (202) 512-4841. Individuals making key contributions to this statement
    include Lily J. Chin, Marcus C. Ferguson, Lawrence D. Gaston, Jr.,
    William R. Graveline, John P. Swain, Robert S. Swierczek, and Carrie R.
    Wilson.(120352)

        Senator McCain. Thank you very much.
        Dr. Graham, welcome.

      STATEMENT OF DR. DAVID R. GRAHAM, DEPUTY DIRECTOR, STRATEGY
     FORCES AND RESOURCES DIVISION, INSTITUTE FOR DEFENSE ANALYSES

        Dr. Graham. Yes. Thank you. I am with the Institute for
    Defense Analyses (IDA).
        IDA performed an independent review of the FCS management
    last year at the request of the Office of the Secretary of
    Defense (OSD) and also Acting Secretary Les Brownley of the
    Army. The use of other transaction authority was one of the
    important focus areas of our study. We were asked to identify
    whether there were any unique issues or challenges associated
    with the use of OTA for the program. So we did a detailed
    review of the agreement between the Army and Boeing and also
    looked in detail at the subcontracts that Boeing had written
    with the, at that time, 24 subcontractors. I will briefly
    summarize the findings that are germane to the panel's
    considerations today. We put together an extract of our report
    for the record, if that is okay.
        Let me speak first to the Army-Boeing agreement. As you
    said in the introduction, Congress created OTA to establish
    flexibility and what OTA does is it gives the participants in a
    contract the ability to put in as much or as little flexibility
    in the contract as the situation merits.
        Now, when we looked at the Army-Boeing agreement, we find
    that it does provide flexibility for managing the program, but
    in the broader scheme of things, this agreement looks very much
    like a traditional Federal Acquisition Regulation (FAR)
    contract. After reviewing the details of the agreement, we
    felt--and we told the Army this--that we did not think that the
    agreement that they had in place and the way they were managing
    it created any unusual risks for the program.
        I do agree with what Mr. Francis just said. There are a lot
    of technical and programmatic issues, but the use of the
    agreement was not one of the major issues that we raised with
    the Army.
        This particular agreement is very much like a conventional
    defense contract based on the defense acquisition regulations.
    It incorporates numerous standard defense contracting clauses.
    These include termination rights, disputes resolution clauses,
    cost accounting, auditing, and these are the things that are
    commonly viewed as protecting the Government's interests. There
    are a large number of provisions that are taken directly from
    the FAR and referenced in this agreement. There are also a lot
    of other areas that would normally be covered in a FAR contract
    that are addressed in this contract using different language.
        We think the Army-Boeing agreement reflects the fact that
    the Integrated Defense Systems Division of Boeing is, in fact,
    a longstanding defense contractor, and they are used to dealing
    with FAR-style contracts and felt comfortable in doing that
    with the Army.
        Senator McCain. Even though OTA was designed to help people
    who were not familiar with contracting with the Department of
    Defense?
        Dr. Graham. Yes, sir.
        Senator McCain. That was the original reason for OTA?
        Dr. Graham. Yes, sir.
        Senator McCain. But now you are saying it is a good deal
    because they are familiar with defense contracting.
        Dr. Graham. Well, what we concluded is there are two sides
    to this. One is there is a cost of the way this has been
    executed because, as you said, the primary intent of OT was to
    engage nontraditional contractors in defense business. At the
    time that we looked, the program was primarily comprised of
    traditional defense contractors. Now, that may have changed
    since we looked because there are additional rounds of sub-tier
    contracting that was to be done after we took our look at the
    program. But at the time we did it, it was mainly defense
    contractors.
        The other side of the coin is that the way they have set it
    up is a benefit from the standpoint of insulating the program
    from the criticism that the Army has not put in enough to
    protect the Government's interests. That is our basic bottom
    line on that.
        Let me turn then to the question of using OTA for
    production. There is no statutory authority today, so if the
    Army were to desire to use OTA for production, they would have
    to make a business case for why that makes sense and is in the
    country's interests.
        Senator McCain. Can I make a taxpayers' protection case?
        Dr. Graham. Yes, sir. No, no. Right.
        Senator McCain. Like gratuities are exempted from here,
    anti-kickback procedures, subcontractor cost or pricing data,
    price read for defective cost or pricing data, penalties for
    unallowable costs. Can I make a case from the taxpayer
    standpoint that there is a reason why we have these on regular
    contracting? It is protection of the taxpayer, and these are
    excluded in this OTA contract. I cannot get access to
    subcontractor pricing data, unless I subpoena it, because this
    has been exempted from FAR.
        Mr. Bolton. Well, that is not true.
        Senator McCain. The display of the DOD hotline poster.
        You say it is not true? Well, I will be glad to----
        Mr. Bolton. On contract--in fact, you will find when you
    read through the agreement, there is a FAR clause for CAS,
    which is the standard cost accounting system.
        Senator McCain. Are there penalties for unallowable costs?
        Mr. Bolton. Yes, there are.
        Senator McCain. You are sure of that.
        Mr. Bolton. Yes, sir.
        Senator McCain. That is not the information I have, and we
    will debate it. Let me let Dr. Graham finish. Okay?
        Dr. Graham. You are absolutely right. Again, it comes down
    to this tradeoff that we spoke about.
        Senator McCain. This is an Army document, by the way, that
    I am reading from, Mr. Secretary.
        Mr. Bolton. I understand that, sir.
        Senator McCain. Go ahead.
        Dr. Graham. What case could the Army make for using OTA in
    production? It basically comes down to does it give access to
    nontraditional suppliers who are important for executing the
    FCS program or are able to supply technologies that are useful
    to support this spiral-out strategy that we were talking about.
        As I said earlier, what we found is that since the Army has
    taken such a conservative approach in implementing this
    agreement and since the program at the time that we looked at
    it was comprised mainly of traditional defense contractors who
    are used to operating with the FAR, what we told the Army was
    that it would be a tough case to make on a practical matter as
    to why OTA would be needed for production with the FCS program.
        I would say the jury really is out on that. There could be
    cases that would come up where it would seem to make sense.
        [The prepared statement of Dr. Graham follows:]
                   Prepared Statement by Dr. David R. Graham
        The Institute for Defense Analyses (IDA) reviewed the management of
    the Future Combat System (FCS) program at the request of the acting
    Secretary of the Army and the Office of the Under Secretary of Defense
    (Acquisition, Technology, and Logistics) to identify ``weaknesses in
    procedures, policies, or practices that could impact Future Combat
    System program development efforts.'' The review addressed a number of
    specific questions posed by the Army's senior leadership. In addition,
    the acting Secretary of the Army tasked IDA \1\ to identify any other
    issues that might pose risks to the successful execution of the
    program.
    ---------------------------------------------------------------------------
        \1\ This statement is based on the IDA study report for this task.
    David R. Graham, Amy A. Alrich, Richard P. Diehl, Forrest R. Frank,
    Anthony C. Hermes, Robert C. Holcomb, Dennis O. Madl, Michael S. Nash,
    J. Richard Nelson, Gene Porter, David A. Sparrow, and Michael D. Spies,
    IDA Review of FCS Management, (Alexandria, Virginia, Institute for
    Defense Analyses, IDA P-3929), August 2004.
    ---------------------------------------------------------------------------
        The fact finding for this review was performed between February and
    June 2004. IDA observed ongoing FCS management activities, including
    the FCS Quarterly Management Review in March and the Design Concept
    Review in June. The study team conferred frequently with government and
    Lead System Integrator (LSI) officials. Boeing granted IDA access to
    the FCS Advanced Collaborative Environment, which provided essentially
    unlimited access to the program management information available within
    that computer database. Our findings are based on the management
    information developed by the program; IDA did not perform original
    assessments in such areas as system performance, technology
    feasibility, cost, or schedule.
        As IDA performed this review of FCS management issues, the Army
    undertook a separate, close-hold programmatic review of FCS, resulting
    in a decision in late July to restructure the program. Although the IDA
    team was provided an overview after the restructuring was formally
    announced, we were not tasked to assess this action; our review of the
    restructuring plan was confined to determining whether our original
    findings and recommendations required any adjustment.
        IDA's findings and recommendations were presented to the Army and
    the Office of the Secretary of Defense (OSD) in our August 2004 report.
    Presented here are IDA's findings concerning the terms and conditions
    of the agreement between the Army and Boeing, and IDA's response to the
    Army's request that we assess the suitability of using Other
    Transactions Authority, should Congress allow it, for the production
    phase of FCS.
     use of other transactions authority as the basis for the army-boeing
                                   agreement
        Congress created other transactions authority (OTA) to increase the
    government's flexibility to contract with firms that are not accustomed
    to doing business with the Federal Government. The original goals
    underlying the 1989 legislation were to:

             Contribute to a broadening of the technology and
            industrial base available for meeting Department of Defense
            needs;
             Foster within the technology and industrial base new
            relationships and practices that support the national security
            of the United States; and,
             Encourage commercial firms to join with the government
            in the advancement of dual-use technologies.\2\
    ---------------------------------------------------------------------------
        \2\ See 10 U.S.C. Sec. 2371(h)(2) and 139 Congressional Record
    S11158, S11288 (daily edition, September 9, 1993).

        Congress originally authorized only the Defense Advanced Research
    Project Agency (DARPA) to enter into OTA agreements on a test basis for
    research and development related to weapons systems. That authority was
    to be used only when a contract, grant, or cooperative agreement was
    not feasible or appropriate. It also required that the non-governmental
    party contribute at least 50 percent of the funding.
        In the 1994 Defense Authorization Act (Section 845), Congress
    extended this authority to include DARPA prototyping projects that were
    directly relevant to proposed weapons and weapons systems.\3\ Congress
    also eliminated the cost share requirement and the limitation on its
    use to cases where a ``contract, grant, or cooperative agreement was
    not feasible or appropriate.'' The Defense Authorization Act of 1997
    (Section 804) extended this authority to the military departments.\4\
    ---------------------------------------------------------------------------
        \3\ Section 845 of the Defense Authorization Act for Fiscal Year
    1994: Public Law Number 103-160, 107 Stat. 1547 (1993). Section 845
    authority initially extended only until the end of fiscal year 1998.
    The National Defense Authorization Act for Fiscal Year 1999 extended
    that authority through September 30, 2001.
        \4\ P.L. 104-201, 110 Stat. 2422, 2605 (1996).
    ---------------------------------------------------------------------------
        Because a considerable body of Federal procurement law applies only
    to contracts, grants, and cooperative agreements, Other Transactions
    Authority provides a legal basis for government agencies to use
    agreement (contract) forms and clauses (terms and conditions) that are
    not governed by those laws and regulations. In particular, Federal
    Acquisition Regulation (FAR) clauses that are not essential to a
    particular situation may be excluded, replaced by locally crafted
    clauses, or modified to meet the particular needs of the parties.
        OTA provides the capability to create an agreement that is
    carefully and closely crafted for the specific transaction, without the
    inclusion of nonessential verbiage. However, it also creates the
    possibility that important issues normally addressed by standard
    clauses may be omitted. Critics of the OTA see risks in the flexibility
    afforded by OTA and prefer the prescribed format of a FAR-regulated
    contract as a strength, because this structure has been established in
    law and regulation based on decades of experience.
        The flexibility provided by OTA is illustrated by contrasting the
    agreements that governed the concept and technology development (CTD)
    and system development and demonstration (SDD) phases of FCS. Both
    agreements--the first awarded by DARPA and the second by the Army--were
    structured and awarded under the authority of Section 845, Public Law
    104-201, as amended. Both follow the overall format established by
    DARPA in its 2002 DARPA-Boeing CTD agreement. A few statistics suggest
    the degree of difference:

             The DARPA OTA agreement is 30 pages, with an
            additional 8 pages of attachments, with a value of $130
            million;\5\
    ---------------------------------------------------------------------------
        \5\ Agreement number MDA972-02-9-0005, Order numbers M995/00 and
    N196/00.
    ---------------------------------------------------------------------------
             The Army-Boeing agreement is 81 pages, plus a
            Statement of Work (Attachment 1) of 28 pages, and Attachments 2
            through 14, which total an additional 195 pages, with a value
            of $14.8 billion.\6\
    ---------------------------------------------------------------------------
        \6\ Agreement number DAAE07-03-9-F001, Modification number PZ0007.
    ---------------------------------------------------------------------------
    The Army-Boeing Agreement
        The Army-Boeing agreement provides for flexibility in managing FCS,
    but overall it implements a very conservative approach for employing OT
    authority, and as a consequence is very much like a conventional
    defense contract based on the Federal Acquisition Regulations. The top
    half of Table 1 summarizes selected provisions dealing with such key
    issues as cancellation, dispute resolution, cost management and
    reporting, change control, and data rights.\7\ This agreement makes
    extensive use of standard government contractual terms and conditions.
    Some provisions are taken verbatim from the FAR; others have been
    modified after negotiation between the government and Boeing. (By
    contrast, the earlier CTD-phase agreement includes no FAR clauses and
    incorporated none by reference.)
    ---------------------------------------------------------------------------
        \7\ The FCS agreement was shaped through Army-Boeing negotiations.
    Initial Army drafts included over 120 FAR/DFARS clauses. Incorporated
    by reference within the Army-Boeing agreement are 24 FAR clauses and 16
    DFARS clauses. Additionally, a review of the agreement clauses
    themselves shows that local clauses relate to the subject matter of 63
    additional terms and conditions that would be required to be included
    as clauses within a cost reimbursement research and development FAR
    contract. See FCS Other Transaction Agreement, Information Briefing,
    Use of FAR/DFARS Clauses in FCS Other Transaction Agreement for System
    Development and Demonstration, dated 25 April 2003.
    ---------------------------------------------------------------------------

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        The form of the Army-Boeing agreement at least in part reflects the
    fact that Boeing Integrated Defense Systems is an experienced defense
    contractor. Unlike the nontraditional or commercial firms that OT
    authority was created to address, Boeing's defense business operations
    are adapted to a FAR-based style of contracting; Boeing management, at
    least in its defense business, apparently considers the FAR framework
    to be a ``best practice.''
        Table 1 also summarizes the flow-down provisions for the Tier 1
    subcontractors. While the OTA gave Boeing the flexibility to adopt
    innovative contractual forms, Boeing officials told the study team that
    they followed government contracting practices because these were well-
    understood by the participants  predominantly large,
    traditional defense contractors. The ``nontraditional'' suppliers are
    iRobot from Burlington, MA ($25.2 million) and Austin Information
    Systems from Austin, TX ($56.6 million). Although there eventually may
    be others at the lower tiers, for now, the $14.78 billion is being
    shared almost entirely by defense industry giants.
        A review of the subcontracts awarded by Boeing and SAIC to Tier 1
    subcontractors shows that those subcontracts largely follow the
    conventions of traditional defense contracts, including format. Boeing
    terms and conditions come from a standard list, are accessible through
    their web site, and are generally of the same scope, complexity, and
    breadth of coverage as the FAR system.\8\
    ---------------------------------------------------------------------------
        \8\ The subcontracts follow the format of FAR 15.204-1. Moreover,
    Boeing uses standard contract terms and conditions, which incorporate
    by reference numerous FAR and Defense Federal Acquisition Regulation
    Supplement (DFARS) clauses. The subcontracts incorporate by reference
    the FAR and DFARS provisions and clauses incorporated by reference
    within the OTA, and also take account of others not included (e.g., FAR
    52.246-15 Certificate of Conformance, 52.247-34 F.O.B Destination,
    52.245-17 Special Tooling).
    ---------------------------------------------------------------------------
        The lower half of Table 1 identifies some of the provisions that
    provide flexibility for managing the FCS program. The Army-Boeing
    agreement provides additional flexibility through the creation of the
    Integrated Product Team (IPT) structure, the specification definition
    process, and the subcontracting system employed.
    Observations
        The Army's conservative approach in creating the FCS agreement does
    much to defuse potential criticism--often heard in the past with
    respect to programs operating under an OTA agreement--that the use of
    an agreement based on OTA creates special risks for the program.
    Moreover, Boeing liberally used standard FAR and DFARS clauses in its
    subcontracts--all of which are in standard FAR format.
        potential use of other transactions authority for fcs production
        The potential benefits of employing Other Transactions Authority in
    the production phase of any program are expected to be:

             Attracting non-traditional suppliers, thereby
            broadening the technology and industrial base available for
            meeting Department of Defense needs;
             Fostering new relationships and practices that improve
            efficiency and effectiveness;
             Reducing costs by eliminating unnecessary FAR-required
            cost drivers.

        Language has been added to bills being drafted by various
    congressional committees to extend OT authority to production phases,
    but that language has not survived committee mark-ups. While Congress
    has supported the employment of OTA in appropriate contexts, it does
    not view OT authority as a substitute for, or as a way to circumvent,
    standard contracting processes and procedures. In particular, the
    committees responsible for extending the authority in the National
    Defense Authorization Act for Fiscal Year 1999 were concerned that OT
    authority be used in a limited manner:

            ``[S]ection 845 authority should only be used in exceptional
            cases where it can be clearly demonstrated that a normal
            contract or grant will not allow sufficient access to
            affordable technologies. The Conferees are especially concerned
            that such authority not be used to circumvent the appropriate
            management controls in the standard acquisition and budgeting
            process.'' \9\
    ---------------------------------------------------------------------------
        \9\ The Final Report of the Integrated Product Team on the
    Services' Use of 10 U.S.C. Sec. 2371 ``Other Transactions'' and 845
    Prototype Authorities, dated June 10, 1996. Quote extracted from
    Department of Defense Other Transactions: An Analysis of Applicable
    Laws, A Project of the Ad Hoc Working Group on Other Transactions
    Section of Public Contract Law, American Bar Association, 2000, quoting
    H.R. Conference Report Number 105-736, at 590 (1998).

        The relevance and desirability of an OTA agreement for the FCS
    production phase will depend on the potential availability and the
    production readiness of nontraditional suppliers at various tiers.
    There may be instances where ``nontraditional'' suppliers might find it
    attractive to support the FCS production program if they could do so
    under an OTA agreement structured to provide relief from clauses
    typically considered onerous by non-traditional contractors. The Army-
    Boeing agreement illustrates that there is considerable flexibility to
    create an agreement that protects government interests, whether by
    using traditional FAR language or by developing new language
    specifically crafted to suit the transaction. Prudent use of the OTA
    conceivably could make the defense marketplace more attractive to
    potentially valuable suppliers. An OTA agreement also might be a viable
    contracting framework to support ``spiral out'' development strategies
    for FCS concepts and capabilities for use by current forces. IDA has
    not discovered anything to indicate that this is the case within the
    current FCS program, however. Indeed, the Army's conservative use of
    OTA in establishing the current FCS OTA agreement will make it
    difficult for the Army to present a fully developed business case for
    expanding the current OT authority beyond the prototype development
    threshold.
      Future Competition for Production in the FCS Program
        Whether competition for FCS production will prove to be the most
    cost-effective acquisition approach will depend on a number of program
    factors that remain to be determined. In general, the desirability and
    feasibility of sustaining an option for future competition for FCS
    production depends on three factors:

             First, there has to be a viable industrial base that
            is sustaining alternative suppliers. Most of the major defense
            contractors are already participating in their respective areas
            of expertise, which may restrict the Army to a competition for
            relative program shares among the current team members, at
            least in Tier 1 commodities. At the 2nd tier and below, it is
            still too early to assess the potential for follow-on
            competition because the source selections have not yet been
            made.
             Second, preserving the option for competition requires
            an investment to provide adequate technical data, accompanied
            by appropriate government rights.
             Third, the competitive process itself requires
            significant investments of time and resources.

        These three factors, in combination, argue that the cost-effective
    competitive strategy will depend on a number of variables that remain
    to be defined. So, it is premature to commit to a particular course of
    action at this early stage of the program. At the same time, preserving
    the option for future competition would require the Army to act now to
    ensure that it will receive, through Boeing, sufficient access to the
    technical data needed to support a competition for production.
        At the LSI level, the OTA agreement lays the groundwork for Boeing
    to continue as the LSI through initial production and into full-rate
    production:

             There are references to a subsequent production
            contract with Boeing throughout.\10\
    ---------------------------------------------------------------------------
        \10\ See Article III, paragraph B of the Agreement.
    ---------------------------------------------------------------------------
             Boeing's incentive fee structure is predominantly
            weighted (3.5 of 5 percent) toward the two initial production
            decision reviews.\11\
    ---------------------------------------------------------------------------
        \11\ See Article VII of the Agreement.
    ---------------------------------------------------------------------------
             Research and development (R&D) incentives are geared
            to production costs.\12\
    ---------------------------------------------------------------------------
        \12\ See Paragraph 11 b(2), Article VII of the Agreement.
    ---------------------------------------------------------------------------
             Defense Federal Acquisition Regulation Supplement
            (DFARS) clauses are incorporated into the OTA agreement in
            contemplation of Boeing's and its subcontractors' continuance
            into production, including long-lead-item procurements
            initiated during the SDD phase.\13\
    ---------------------------------------------------------------------------
        \13\ See Article XXXII of the Agreement.
    ---------------------------------------------------------------------------
             Section 3 of the Statement of Work \14\ contains
            subparagraphs related to production operations planning and
            product assurance and other post-SDD requirements.
    ---------------------------------------------------------------------------
        \14\ See Attachment 1 to the Agreement.

        At the subcontractor level, the Army has taken the position that it
    has secured adequate rights to access all of the necessary technical
    information. But, we found some ambiguity on the status of government
    rights to technical data associated with future system support as well
    as future competition for FCS production. We therefore recommended that
    the Army review the current provisions of the Boeing agreement to
    ---------------------------------------------------------------------------
    confirm that it will have access to the needed technical data.

        Senator McCain. Thank you, Dr. Graham. Could I express my
    appreciation not only for you but IDA, which I think has done
    tremendous work for all Americans, but particularly Congress,
    and your interaction with DOD I think has been very important.
    I thank you for all the great work that IDA has done.
        Mr. Boehm.

      STATEMENT OF KENNETH F. BOEHM, CHAIRMAN, NATIONAL LEGAL AND
                             POLICY CENTER

        Mr. Boehm. Mr. Chairman, I want to thank you for this
    opportunity to testify. I am Ken Boehm with the National Legal
    and Policy Center. We promote accountability in public life and
    in the Government, and we have been critical of Boeing in
    recent months because of their role in the numerous procurement
    scandals. One of our earliest entries into this was when we had
    uncovered the financial conflicts of interest with Darleen
    Druyun and filed a complaint with the Inspector General (IG).
    It was on the front page of the Wall Street Journal, and as a
    result, a month later she was fired by Boeing.
        Senator McCain. I was taking credit for that, Mr. Boehm.
    [Laughter.]
        Mr. Boehm. Well, there is plenty of credit for you on all
    this stuff. But, we had actually found Ms. Druyun's daughter's
    employment, and I think she had sold her house to John Judy who
    was a Boeing executive employed in the tanker deals, if I am
    not mistaken. But that was a coincidence.
        In any case, we looked at the Future Combat Systems
    program. Our first red flag was we had trouble even getting a
    copy of the other transaction agreement. I filed a Freedom of
    Information Act (FOIA) and was told by the FOIA officer
    something I had never heard after filing more than 1,000 FOIAs
    in my 20-year career of doing this sort thing, and that was
    that Boeing objected to us having a copy. But they could not
    cite any particular exemption within FOIA to get it. So we did
    get it, and when we looked at it, it confirmed, I would say,
    our worst suspicions.
        There are four factors, very briefly, to look at,
    underscoring the problems with the use of this particular type
    of agreement.
        First, everyone acknowledges that the FCS is a high-risk
    project. The GAO said so in an excellent analysis written by
    Mr. Francis last April that there were significant risks. If
    you read the OTA itself, which I had the joy of going through
    week after week, you will see that they state in there that
    there are significant risks associated with the project and, of
    course, followed it up with a line that this should, in fact,
    be the reason to allow maximum opportunity for the LSI to earn
    fees, the LSI being Boeing in this case.
        Perhaps the best single sentence describing how important
    this element of risk is in FCS was made by Congressman Curt
    Weldon over in the House Armed Services Committee, chairing the
    Counterparts Subcommittee, when he said last year: ``If FCS
    experiences the technical difficulties that every major
    development program seems to experience, the cost overruns will
    consume the Army budget.'' That is the risk in a sentence.
        The second factor, Boeing is an exceptionally poor choice
    for lead system integrator. It makes a risky or a high-risk
    project even riskier for all the obvious reasons. Trust is an
    important element of any LSI arrangement. A lead system
    integrator has to have the trust of the Government because they
    are taking over the Government's management role.
        But it also has to have the trust of the other firms that
    are competing, the other defense firms that are supplying,
    because as lead system integrator, they have access to the
    proprietary information of these companies, which in other
    contexts are their competitors. If you think back, you do not
    have to look too far to see that Boeing has not arguably the
    worst record in terms of being sticky-fingered with its
    competitors' proprietary information, but the worst record.
        In a quick review, one of them in particular I would like
    to stress is when Boeing was the lead system integrator in
    missile defense. They improperly used some Raytheon proprietary
    information. They were forced out of the competition. But if
    you read the GAO report on that particular incident, you see
    that the Army recommended debarment of the Boeing unit. That
    did not happen. So here you have a company that abused its LSI
    position in a very major way, a substantial way, in the
    Raytheon case, and yet was selected by the same Army knowing
    this as lead system integrator in their highest-risk project.
    That shows a lapse in judgment.
        Second, you look at the Lockheed case where they got a hold
    of 40,000 of their competitors' documents. The Air Force said
    this was ``a significant and substantial violation of Federal
    law.'' They got the longest suspension of any major defense
    contractor, 20 months, and they also paid fines or penalties in
    terms of lost contract of something like $1 billion. So they
    are breaking all kinds of records.
        Of course, we know in the Airbus case Darleen Druyun, on
    the day of her sentencing, it was released by Mr. McNulty that
    she had admitted giving proprietary pricing information to
    Boeing that belonged to Airbus.
        The third factor is these OTAs were meant for
    nontraditional defense contracts. You see this everywhere. You
    see it in congressional statements. You see it in IG reports.
    You see it in GAO. It was meant to attract nontraditional
    defense contractors to work for the Defense Department because
    the Defense Department needed their technology.
        Here is the statement from a recent GAO report on defense
    acquisitions stating this rationale. ``In an era of shrinking
    defense industrial base and new threats, DOD views other
    transaction prototype authority as a key to attracting
    nontraditional defense contractors.''
        Well, Boeing hardly fits the description, and they are the
    second-largest defense contractor in the country. You look down
    the list of all of the other firms, and you will find very
    little. In the IDA report that was discussed, they have this
    statement. ``One intended benefit of OT authority, attracting
    nontraditional suppliers, has not been realized to date; the
    initial round of subcontracts has gone almost exclusively to
    traditional defense suppliers.''
        When you look at the funding, if you look at the pie charts
    for the funding, very, very little goes to anything that
    remotely could be considered a nontraditional defense
    contractor.
        Fourth and final, in terms of most important factors, OTAs
    provide less accountability and oversight. They minimize
    oversight and accountability in almost every way you can
    imagine. This was their purpose. It was meant as a tradeoff to
    get these nontraditional firms in. It was not meant for very
    large, high-risk programs. There has been criticism through the
    years.
        In 1999, when Congress extended OTA's authority, they said
    the following, ``It should only be used in exceptional cases
    where it can be clearly demonstrated that a normal grant or
    contract will not allow sufficient access to affordable
    technologies. The conferees are especially concerned that such
    authority not be used to circumvent the appropriate management
    controls in the standard acquisition and budgeting process.''
    In other words, be careful.
        There are approximately 20 statutes that apply to defense
    contracts that are exempt, and unless they are added back in,
    piecemeal or in whole, they do not exist there. I have included
    a list of the statutes in exhibit B. It tracks the list found
    in the Defense Department's own OTA guide that has come out
    perennially, and it is also based on some research of an
    excellent study, the only excellent private study, by the
    American Bar Association on other transactions, where they warn
    virtually, as the theme of the book, you have to be
    extraordinarily carefully if you are stripping these out for
    the benefit of the taxpayer, for the benefit of oversight and
    accountability. In effect, you are taking something meant for a
    small, high-tech project and giving it to major defense
    contractors. When you consider the statutes that are stripped
    out and you look at their legislative history, they were put in
    there because major defense contractors abused their position
    of trust. So to strip them out willy-nilly or in the quantity
    they were stripped out here really raises the risk.
        We went through the 81-page OTA. That is all it is, the one
    that was signed in December 2003. It had exhibits, but it was
    81 pages. I recall, as a lowly yeoman 30 years ago, it would
    take that much paperwork to order boxed lunches for people to
    fly and so forth. But it is 81 pages.
        You look through it. There are some severe problems. Some
    acts are not in there at all. The Procurement Integrity Act
    does not apply at all to the FCS. This law sets rules for
    procurement officials who are contacted by a defense contractor
    for future employment, and it provides for a 1-year ban on
    accepting compensation. It seems like this issue has been in
    the news lately involving the LSI in this case.
        Another example of a law that does not apply at all is the
    Truth in Negotiations Act (TINA). It requires accurate
    disclosure to the Government of a defense contractor's pricing
    and costs. It has been a long problem in the defense community
    and with Boeing, you can go back to the mid-1980s when they
    were caught charging the Air Force $748 for a pair of pliers
    you can get in any hardware store for a little over $7. It goes
    as recently as the Airborne Warning and Control System (AWACS)
    case where they found millions of dollars in what they called
    excess profits.
        On and on it goes in terms of what is stripped out, but the
    bottom line is this, it is essentially a type of contracting
    form that minimizes oversight and accountability. Considering
    who you are dealing with here, considering it is a high-risk
    project, considering how important it is to the Army's
    development budget, to minimize accountability and oversight
    seems to be 180 degrees away from where the public needs to be
    vis-a-vis this type of arrangement.
        The best recommendation I can say at this point where
    Boeing is already in as LSI, we are already underway in this. I
    do not see any alternative to Congress intensifying its
    oversight because the oversight is lacking in the arrangement
    that is in hand. It is a recipe for disaster. We are already
    starting to see that.
        But one of the things that needs to be done is a truly
    independent legal review of the FCS OTA to identify in every
    significant way how it fails to meet the standards
    accountability in a standard defense procurement contract. This
    should be a statute-by-statute review and it needs to propose
    modifications to increase oversight and accountability.
        Similarly, there ought to be a look at the financial and
    fee structure of the FCS program because Boeing is being
    compensated for a type of an arrangement where the fact of the
    matter is a lot of the business risk of this has been stripped
    away. This is not a regular defense contract. It should not
    call for regular fees, and their fee arrangement is quite
    generous.
        Then to the degree the Government can modify in any way the
    existing program, they should try to do so. Whatever objections
    Boeing may have to such a modification I think pale next to the
    risks the Government is taking by not asserting its right to
    protect its interests. There are legitimate ways to increase
    oversight. I think they need to be taken.
        But in conclusion, I would just say this. The most
    ethically challenged defense contractor in the country is now
    in charge of the most expensive high-risk defense program using
    an agreement that minimizes oversight and accountability. If
    that does not call for increased oversight, what does?
        Thank you, Mr. Chairman.
        [The prepared statement of Mr. Boehm follows:]
                     Prepared Statement by Kenneth F. Boehm
        Mr. Chairman and members of the subcommittee, thank you for this
    opportunity to testify.
        My name is Ken Boehm and I serve as Chairman of the National Legal
    and Policy Center (NLPC). My legal center promotes accountability in
    public life and has been critical of the actions of the Boeing Company
    during the recent series of defense procurement scandals. In October
    2003, NLPC filed a complaint with the Defense Department's Office of
    Inspector General detailing former Air Force official Darleen Druyun's
    ties to Boeing through her daughter's job with that company and the
    sale of her house to a Boeing official while she was overseeing
    significant acquisition matters for the Air Force involving Boeing.\1\
    ---------------------------------------------------------------------------
        \1\ See Letter to Defense Department Inspector General and Defense
    Criminal Investigative Service, October 6, 2003, at www.nlpc.org.
    ---------------------------------------------------------------------------
        The complaint went on to question whether Druyun was negotiating
    for future employment with Boeing while she was representing the Air
    Force in multi-billion dollar business issues affecting Boeing
    contracts.
        The next day, the Wall Street Journal ran a front-page story on the
    NLPC complaint, ``Air Force Ex-Official Had Ties to Boeing During
    Contract Talks,'' and Boeing disingenuously told the media that Druyun
    was not working on the tanker deal as part of her employment for
    Boeing.\2\ The Air Force weighed in with an equally disingenuous
    statement to the effect that Druyun had recused herself from decisions
    affecting Boeing but declined to specify when Druyun had recused
    herself.
    ---------------------------------------------------------------------------
        \2\ See ``Air Force Ex-Official Had Ties to Boeing During Contract
    Talks,'' The Wall Street Journal, October 7, 2003, p. 1.
    ---------------------------------------------------------------------------
        The following month Boeing terminated employment for both Darleen
    Druyun and its Chief Financial Officer Michael Sears, citing violation
    of the company's standards in the hiring of Druyun.\3\
    ---------------------------------------------------------------------------
        \3\ See, e.g., ``Boeing Dismisses Two Exeucitve for Unethical
    Conduct,'' Boeing news release. November 24, 2003, available at http://
    www.boeing.com/news/releases/archive2003.html.
    ---------------------------------------------------------------------------
        Today, Darleen Druyun is in Federal prison and Michael Sears will
    be entering Federal prison shortly, both in connection with their
    conspiracy to violate conflict of interest laws.
        NLPC turned its attention to the Army's Future Combat Systems
    program because it was the largest military procurement project
    involving Boeing and--much like the tanker case--featured many
    anomalies which appeared to favor Boeing at the expense of the Army.
        The conclusion reached was that while there appeared to be a
    consensus that the Future Combat System (FCS) program was high risk
    because of its ambitious plan to coordinate so many as yet undeveloped
    technologies into a coordinated weapons program of the future, these
    risks were compounded by the decision to use Boeing as the Lead System
    Integrator and to structure the legal agreement for FCS through a
    wholly inappropriate Other Transaction Agreement (OTA) in a way that
    minimized oversight and accountability.
        The OTA exempted Boeing from most of the standard statutes which
    apply to major military procurement contracts to deter waste, fraud and
    abuse. Moreover, the use of an OTA in the FCS program was unprecedented
    insofar as OTAs were intended by Congress to attract nontraditional
    suppliers to deal with the Defense Department without the cost of the
    bureaucratic procedures associated with major defense contracts. Even a
    cursory examination of the FCS program shows that the highest amount of
    funding by far goes to Boeing with very little to any nontraditional
    suppliers and the $20 billion cost of the FCS development phase dwarfs
    any previous use of an OTA for prototype development purposes.
                            fcs: a high risk project
            ``FCS is at significant risk for not delivering required
            capability within budgeted resources. Three-fourths of FCS'
            needed technologies were still immature when the project
            started.''
      Paul Francis, Director, Acquisition and Sourcing
                                    Management, GAO \4\
    ---------------------------------------------------------------------------
        \4\ See Defense Acquisitions: The Army's Future Combat System's
    Features, Risks, and Alternatives, by Paul Francis, Director,
    Acquisition and Sourcing Management, April 1, 2004, GAO-04-635T.

        There is a consensus that the FCS is an ambitious project which
    faces significant risks. This view has been expressed in both
    legislative hearings and within the defense community.
        Even the FCS Other Transaction Agreement signed on December 10,
    2003, acknowledged:

            ``The complexities and risk associated with the FCS system
            development and demonstration (SDD) Increment I Program are
            significant.'' \5\
    ---------------------------------------------------------------------------
        \5\ See Agreement Between the Boeing Company and U.S. Army Tank-
    Automotive and Armaments Command Concerning Future Combat Systems
    System Development and Demonstration Phase, Agreement No. DAAE07-03-9-
    F001, at page 14.

        Among the risk factors cited by the GAO's acquisition expert, Mr.
    Paul Francis, in testimony to the House of Representatives'
    Subcommittee on Tactical Air and Land Forces of the Committee on Armed
    ---------------------------------------------------------------------------
    Services on April 1, 2004, were the following:

             The first FCS prototypes will not be delivered until
            just before the production decision.
             Full demonstration of FCS' ability to work as an
            overarching system will not occur until after production has
            begun. This demonstration assumes complete success--including
            delivery and integration of numerous complementary systems that
            are not inherently a part of FCS but are essential for FCS to
            work as a whole. When taking into account the lessons learned
            from commercial best practices and the experiences of past
            programs, the FCS strategy is likely to result in cost and
            schedule consequences if problems are discovered late in
            development.
             Because the cost already dominates its investment
            budget, the Army may find it difficult to find other programs
            to cut in order to further fund FCS.\6\
    ---------------------------------------------------------------------------
        \6\ See Defense Acquisitions: The Army's Future Combat System's
    Features, Risks, and Alternatives, by Paul Francis, Director,
    Acquisition and Sourcing Management, April 1, 2004, GAO-04-635T.

        These conclusions were explicitly understood by the Chairman of the
    House Armed Services Subcommittee on Tactical Air and Land Forces when
    the GAO presented its findings at a hearing on April 1, 2004. Chairman
    Curt Weldon (R-PA) summed up the problem succinctly when he stated,
    ``If FCS experiences the technical difficulties that every major
    development program seems to experience, the cost overruns will consume
    the Army budget.'' \7\
    ---------------------------------------------------------------------------
        \7\ See ``GAO hoists red flag over costly Boeing Army project,'' by
    Darrell Hassler and Tony Capaccio, Bloomberg News, The Seattle Times,
    April 2, 2004, p. E1.
    ---------------------------------------------------------------------------
        Representative John Spratt (D-SC) accepted this assessment as well
    when he told Army Lt. Gen. Joseph Yakovac, who testified about the
    program as deputy to the Army acquisition secretary, ``I can't think in
    the 23 years I've sat here of a system more fraught with risk. It's
    going to be a Herculean task to bring it together on the ambitious
    schedule you've set.'' \8\
    ---------------------------------------------------------------------------
        \8\ See Id.
    ---------------------------------------------------------------------------
        The technological challenges were summed up by Chairman Weldon at
    the hearing when he stated:

            ``Unfortunately, however, the Future Combat Systems program
            also carries high risk. The Army has never managed any program
            the size and complexity of FCS. Eighteen systems, 32 critical
            technology areas, 34 million lines of code, 129 trade studies,
            157 programs being developed independent of FCS, and all in
            5\1/2\ years.'' \9\
    ---------------------------------------------------------------------------
        \9\ See Hearing of the Tactical Air Land Forces Subcommittee of the
    House Armed Services Committee on Future Combat Systems and Force
    protection Initiatives, April 1, 2004, Federal News Service transcript,
    p.3.

        While the testimony of GAO Acquisition and Sourcing Management
    Director Paul Francis has already been cited, his analysis of the
    underlying management judgment associated with the FCS program was
    ---------------------------------------------------------------------------
    especially harsh:

              ``In our more than 30 years of analyzing weapons systems, we
            have not found concurrent strategies to work, particularly when
            advanced technologies are involved. Delaying the demonstration
            of knowledge results in problems being discovered late in
            development. FCS is susceptible to such problems as a
            demonstration of multiple technologies, individual systems, the
            network and the system of systems will all culminate late in
            development and early production.'' \10\
    ---------------------------------------------------------------------------
        \10\ See Hearing of the Tactical Air Land Forces Subcommittee of
    the House Armed Services Committee on Future Combat Systems and Force
    Protection Initiatives, April 1, 2004, Federal News Service transcript,
    p. 8.

        Mr. Francis further concluded that even modest delays and cost
    increases could end up costing the government billions of dollars and
    that such funds would be very difficult to find since the FCS was
    already consuming such a considerable portion of Army funding.\11\
    ---------------------------------------------------------------------------
        \11\ See Id.
    ---------------------------------------------------------------------------
               boeing: a high risk lead system integrator for fcs
        The FCS program--which the Army has called its ``greatest
    technological and integration challenge ever undertaken''--is a system
    of manned and unmanned ground vehicles, air vehicles, and munitions all
    connected with a cutting-edge communications and information system.
    Boeing became the Lead System Integrator on the SDD phase of FCS when
    it received, along with partner Science Applications International
    Corp. (SAIC), $14.8 billion to oversee the 8-year effort in December
    2003.\12\ In August 2004, a modification to FCS added $6.4 billion to
    the cost of the program.\13\
    ---------------------------------------------------------------------------
        \12\ See, e.g., ``U.S. Army Signs Milestone FCS Contract,''
    December 10, 2003, www.boeing.com/defensespace/ic/fcs/bia/031212--nr--
    armyannounce.html.
        \13\ See ``Army Boosts Boeing's Future Combat Program Value By Up
    to $6.4 Billion,'' August 17, 2004, http://www.spacedaily.com/news/
    milspace-04x.html.
    ---------------------------------------------------------------------------
        Boeing's initial selection as Lead System Integrator (LSI) for FCS
    ``shocked defense observers'' \14\ and raised serious questions. As
    LSI, Boeing functions very much like a general contractor in overseeing
    other key suppliers and contractors to ensure that program objectives
    are met. That aspect of the LSI role has caused controversy for reasons
    touched upon in a Financial Times article:
    ---------------------------------------------------------------------------
        \14\ See, e.g., ``Boeing Plays Defense: Beset by Airbus and rocked
    by scandal, the aircraft maker turns to a new CEO--and the Pentagon--
    for help,'' Fortune, April 19, 2004.

            ``Boeing's ability to defend its reputation will be critical.
            It has positioned itself as a `systems integrator' for many of
            the big defence contracts it has secured--such as missile
            defence and the Future Combat Systems project--acting as the
            middleman, piecing together often complex technology from
            rivals, and treading a fine line about managing access to
            proprietary information from rivals.'' \15\ (emphasis added)
    ---------------------------------------------------------------------------
        \15\ See ``Condit focuses on domestic problems,'' by Caroline
    Daniel, Financial Times, June 19, 2003, p. 29.

        Boeing's reputation for illegally obtaining proprietary information
    from its rivals is arguably the worst of any in the defense community.
    Since January 2003, Boeing has been implicated in three major cases
    involving improper access to competitors' proprietary information.
        Raytheon Case
        A report by the Government Accountability Office (GAO) concluded
    that Boeing had obtained and misused Raytheon proprietary information
    in the course of a competition to provide a ``kill vehicle'' for the
    missile defense system. Boeing's actions violated Pentagon regulations
    for a project that was described as ``the core of the missile defense
    system.'' \16\ When the misuse of Raytheon proprietary documents by
    Boeing came to light, Boeing was forced to withdraw from the
    competition. Boeing's actions hurt the government because the default
    award of the contract resulted in a design said by experts to be flawed
    in that the kill vehicle could not adequately distinguish between
    warheads and decoys. Also at issue was whether the government took
    appropriate steps to punish Boeing and recoup some of the $800 million
    invested by the Pentagon in the design competition.
    ---------------------------------------------------------------------------
        \16\ See ``Antimissile Contract Won on Technicality, GAO Report
    Finds; Award Made After Boeing Spy Case,'' by Bradley Graham, The
    Washington Post, January 30, 2003, p. A21.
    ---------------------------------------------------------------------------
        Especially important in considering Boeing's role in the Raytheon
    case is the fact that when Boeing illegally used Raytheon's proprietary
    documents in an attempt to win a major contract, Boeing was the LSI of
    the National Missile Defense Program.\17\ The GAO report also stated
    that the Army had recommended debarment against the Boeing employees
    involved in the wrongdoing and against Boeing's Electronic Systems and
    Missile Defense Group.
    ---------------------------------------------------------------------------
        \17\ See ``Missile Defense: Events Related to Contractor Selection
    for the Exoatmospheric Kill Vehicle,'' General Accounting Office-03-
    324R Missile Defense, January 27, 2003.
    ---------------------------------------------------------------------------
        Ultimately, the Ballistic Missile Defense Organization ``abandoned
    recovery efforts because of litigation risks associated with proving
    damages, as well as anticipated litigation costs, and the belief that
    litigation was inconsistent with its partnership with Boeing as the LSI
    contractor.'' \18\
    ---------------------------------------------------------------------------
        \18\ See ``Missile Defense: Events Related to Contractor Selection
    for the Exoatmospheric Kill Vehicle,'' General Accounting Office-03-
    324R Missile Defense, January 27, 2003, p. 11.
    ---------------------------------------------------------------------------
        It is difficult to imagine a more clear-cut example of a defense
    contractor abusing its Lead System Integrator role in a major project.
    Yet, in the end, Boeing received a mere slap on the wrist. There was no
    debarment of the company, no lawsuit to recoup the $800 million lost on
    the tainted competition and no criminal prosecution.
        Boeing's selection by the Army as LSI for its largest procurement
    project ever, the high risk FCS program, is especially difficult to
    understand in that the Army was not only aware of Boeing's intentional
    misconduct in the case involving Raytheon's proprietary information but
    had recommended far more appropriate sanctions against Boeing than was
    finally meted out. The following excerpt from the GAO letter regarding
    the matter underscores this point:

              ``Concurrently, the Army recommended debarment proceedings
            against the Boeing employees involved in the wrongdoing, and
            against Boeing's Electronics Systems and Missile Defense Group.
            The Army also considered the alternative recommendation on a
            monetary settlement commensurate with the damages suffered by
            the government.
              The Army's assessment of damages focused on: the loss of the
            Integrity of a planned competition that had been carefully
            maintained for 8 years at great administrative expense; the
            loss of the benefit of a head-to-head ``best value'' comparison
            of two technical approaches developed at the cost of
            approximately $400 million each; and the loss of the potential
            savings that might have been achieved by the abandoned
            competition, which the Army suggested should be valued at
            approximately 25 percent of the cost of Raytheon's EKV.'' \19\
    ---------------------------------------------------------------------------
        \19\ See ``Missile Defense: Events Related to Contractor Selection
    for the Exoatmospheric Kill Vehicle,'' General Accounting Office-03-
    324R Missile Defense, January 27, 2003, p. 11.
    ---------------------------------------------------------------------------
      Lockheed-Martin Case
        Boeing's ethical problems with proprietary documents belonging to
    its competitors also figured prominently when Boeing was discovered to
    have some 25,000 proprietary documents belonging to Lockheed Martin
    Corp. while the two companies competed for a major Pentagon rocket
    launch contract.
        The Air Force stripped Boeing of approximately $1 billion in
    potential revenue as a penalty in the case and also suspended three
    Boeing subsidiaries for an unspecified period. The Air Force stated
    that the suspension was appropriate for the ``serious and substantial
    violations of Federal law'' involving the illegal acquisition of the
    Lockheed documents. The fallout continued with a civil racketeering
    case filed against Boeing by Lockheed, a Justice Department
    investigation and the indictment of two former Boeing employees.
    Speaking of the case, Air Force Undersecretary Peter B. Teets stated,
    ``I have never heard of a case of this scale.'' \20\
    ---------------------------------------------------------------------------
        \20\ See ``U.S. Strips Boeing of Launches; $1 Billion Sanction Over
    Data Stolen From Rival,'' by Renae Merle, The Washington Post, July 25,
    2003, p. 1.
    ---------------------------------------------------------------------------
        The suspension was not lifted until March 4, 2005, making it the
    longest suspension of a major defense contractor ever.\21\
    ---------------------------------------------------------------------------
        \21\ See ``Air Force Lifts Boeing Suspension,'' Reuters, Los
    Angeles Times, March 5, 2005, Part C, p. 3
    ---------------------------------------------------------------------------
        Coming just months after the discovery of Boeing's misdeeds in the
    Raytheon case, the Lockheed Martin case represented one of the largest
    penalties ever assessed against a defense contractor. But the year was
    not yet over.
        Airbus Case
        Proprietary information involving a Boeing competitor was also an
    issue in the Boeing tanker lease scandal. E-mail messages written by
    Boeing executives and found by members of Congress suggested that
    ``Darleen Druyun, who handled acquisitions for the Air Force at the
    time, might have shared confidential details of the Airbus offer with
    Boeing officials--thus giving them competitive advantage in crafting
    their own proposal.'' \22\
    ---------------------------------------------------------------------------
        \22\ See ``Pentagon to probe how Airbus lost refueling tanker deal
    to Boeing,'' AFX.COM, September 18, 2003.
    ---------------------------------------------------------------------------
        The Department of Defense Inspector General's office initiated an
    investigation of the allegations.\23\ An attorney for the Airbus parent
    firm, European Aeronautic Defense & Space Co. (EADS), raised additional
    questions with the allegation that if Druyun did pass along proprietary
    information to Boeing, that could have unfairly influenced a
    competition underway in Britain for the same kind of tankers.\24\
    ---------------------------------------------------------------------------
        \23\ See ``Pentagon to probe how Airbus lost refueling tanker deal
    to Boeing,'' AFX.COM, September 18, 2003.
        \24\ See ``Boeing Deal on Tankers Again on Hold; Rumsfeld Orders
    Review After Executives are Fired,'' by Renae Merle, The Washington
    Post, November 26, 2003, p. E1.
    ---------------------------------------------------------------------------
        All doubt as to Druyun's actions with respect to Airbus proprietary
    information was removed on October 1, 2004, when Druyun was sentenced
    to 9 months in Federal prison. In a document released by the U.S.
    Attorney's office, it was stated that Druyun ``acknowledges providing
    to Boeing during the [tanker] negotiations what she considered to be
    proprietary pricing data'' from the European plane maker Airbus, which
    was competing to build the planes.\25\
    ---------------------------------------------------------------------------
        \25\ See ``Ex-Pentagon Official admits to more illegal help to
    Boeing,'' by David Bowermaster, Seattle Times, October 2, 2004, p. A1
    ---------------------------------------------------------------------------
        The cases involving Raytheon, Lockheed and Airbus all involve
    allegations of misconduct by Boeing in connection with proprietary
    information belonging to Boeing's competitors. All cases arose during
    major defense procurement competitions and all stories broke in 2003.
    But the ethical problems associated with Boeing's conduct as a defense
    contractor were not limited to proprietary information issues. A recent
    study by the Project on Government Oversight, a well-respected watchdog
    group, determined that Boeing ``committed 50 acts of misconduct and
    paid $378.9 million in fines and penalties between 1990 and 2003.''
    \26\
    ---------------------------------------------------------------------------
        \26\ See ``U.S. Strips Boeing of Launches; $1 Billion Sanction Over
    Data Stolen From Rival,'' by Renae Merle, The Washington Post, July 25,
    2003, p. A01.
    ---------------------------------------------------------------------------
        An excerpt from the Project on Government Oversight Federal
    Contractor Misconduct Database detailing Boeing misconduct in defense
    cases from 1990 through 2003 is appended at Exhibit A. It is all the
    more striking in that it leaves out many of the billions of dollars in
    tainted procurement contracts involving Boeing which have been
    disclosed in the past 18 months. When former Air Force official and
    former Boeing executive Druyun was sentenced on October 1, 2004, U.S.
    Attorney Paul McNulty revealed that Druyun, after failing a polygraph,
    had confessed to:

             providing Boeing with proprietary information about a
            competitor as a parting gift to Boeing
             negotiating an excessive $100 million payment to
            Boeing from the North Atlantic Treaty Organization (NATO)
             awarding Boeing a $4 billion contract in 2001 to
            modernize more than 500 C-130 aircraft built by Lockheed-
            Martin, disclosing that ``an objective selection authority may
            not have selected Boeing.''
             negotiating a $412 million payment to Boeing in 2000
            tied to its production of C-17 transports because a senior
            Boeing executive at the time was helping secure a job for her
            future son-in-law, Michael McKee \27\
    ---------------------------------------------------------------------------
        \27\ See ``Ex-Pentagon official admits to more illegal help to
    Boeing,'' by David Bowermaster, The Seattle Times, October 2, 2004, p.
    A1.

        As recently as February 14, 2005, the Department of Defense
    revealed that it was turning over to the Inspector General for
    investigation eight additional questionable contracts overseen by
    Darleen Druyun worth billions of dollars. Four of the eight contracts
    involved Boeing, including a $1.5 billion KC-135 Programmed Depot
    maintenance contract from 2000-2001.\28\
    ---------------------------------------------------------------------------
        \28\ See ``Department of Defense Announces Contract Reviews,'' DOD
    News Release No. 157-04, February 14, 2005.
    ---------------------------------------------------------------------------
        The Future Combat Systems project with Boeing as LSI has already
    generated controversy after it was learned that Boeing executives had
    gotten access to secret information of companies competing with Boeing
    for FCS contracts: \29\
    ---------------------------------------------------------------------------
        \29\ See ``Boeing's Role in Defense Project Worries Pentagon,
    Competitors,'' by Anne Marie Squeo, The Wall Street Journal, June 16,
    2003.

             Boeing executives James Albaugh and Roger Krone were
            brought inside the so-called fire-wall, causing competitors and
            senior Army officials to worry that ``Boeing could get an
            unfair advantage on the work it bids for.''
             ``Concerns about Boeing's role in the project come
            against the backdrop of recent allegations that the Chicago-
            based aerospace titan on at least two occasions inappropriately
            obtained a rival's information while competing for military
            contracts.''

        The article went on to state that Army officials were ``unhappy
    with the fire-wall situation'' and that ``any further controversy could
    undercut the Pentagon's emerging practice of using a `lead system
    integrator' from the private sector on big military programs.'' While
    Boeing was quick to deny any problem with the revelations, that may be
    small comfort insofar as Boeing also misrepresented the extent of the
    wrongdoing in both the Raytheon and Lockheed cases.\30\
    ---------------------------------------------------------------------------
        \30\ See ``Boeing's Misconduct is Detailed in Memo,'' by Peter Pae,
    The Los Angeles Times, April 23, 2004.
    ---------------------------------------------------------------------------
        By all accounts, an LSI for a major Pentagon project must have a
    reputation beyond reproach because the LSI has access to sensitive
    proprietary information from companies with which it is in competition
    on a regular basis. As this is a defining feature of the LSI role, a
    strong argument can be made that not only is Boeing a questionable
    selection for LSI in the FCS project, but given its documented
    reputation for illegally misusing proprietary information of
    competitors, Boeing is the worst possible choice for the role.
      boeing's fcs ota: where are the nontraditional defense contractors?
        The agreement between the Army and Boeing structuring the legal
    relationship for the FCS program's System Development and Demonstration
    (SDD) Phase is known as an ``other transaction agreement'' or OTA. The
    legal authority for the FCS OTA is derived from 10 U.S.C. Sec. 2371 and
    Section 845 of the Public Law 103-160, as modified by Section 804 of
    Public Law 104-201, and as modified by Section 803 of the Floyd D.
    Spence National Defense Authorization Act for Fiscal Year 2001.\31\
    These agreements are also sometimes referred to as Section 845
    agreements. One of the distinguishing features of an OTA is that they
    are not generally subject to the Federal laws and regulations which are
    applicable to procurement contracts.
    ---------------------------------------------------------------------------
        \31\ See Agreement Between the Boeing Company and U.S. Army Tank-
    Automotive and Armaments Command Concerning Future Combat Systems
    System Development and Demonstration Phase, Agreement No. DAAE07-03-9-
    F001, at page 1.
    ---------------------------------------------------------------------------
        One of the principal purposes of removing the legal requirements
    associated with standard procurement contracts for major defense
    contractors is in order to attract nontraditional defense contractors
    to consider working with the Defense Department.
        The rationale for this purpose was expressed in a recent GAO Report
    on defense acquisitions:

            ``In an era of shrinking defense industrial base and new
            threats, DOD views `other transaction' prototype authority as a
            key to attracting nontraditional defense contractors.'' \32\
    ---------------------------------------------------------------------------
        \32\ See Defense Acquisitions: DOD Has Implemented Section 845
    Recommendations but Reporting Can Be Enhanced, Report to the Chairman
    and Ranking Minority Member, Committee on Armed Services, U.S. Senate,
    October 2002, GAO-03-150, p. 3

        The GAO Report went on to cite as an example of a benefit to these
    agreements ``attracting business entities that normally do not do
    business with the government.''
        Despite the intent of Congress that OTAs be used to reach out to
    the newer high tech companies which might not otherwise consider
    dealing with the Pentagon, all too often prototype funds associated
    with OTAs do not flow to the nontraditional suppliers but to major
    defense contractors.
        Such is the case with the FCS OTA. Boeing is the second largest
    defense contractor in the country and most of the other firms
    participating in the FCS program do not fit the description of a
    nontraditional defense contractor.
        This fact was readily conceded in a report prepared last year for
    Acting Army Secretary Brownlee on FCS management issues:

            `One intended benefit of OT authority--attracting
            nontraditional suppliers--has not been realized to date; the
            initial round of subcontracts has gone almost exclusively to
            traditional defense suppliers.'' \33\
    ---------------------------------------------------------------------------
        \33\ See Review of FCS Management Issues, Final Report to Acting
    Secretary of the Army Hon. R. L. Brownlee, Institute for Defense
    Analyses, August 17, 2004, p. ES-3.

        A closer look at the funding of the FCS SDD program shows that just
    four large defense contractors account for most of the funding. The
    cost share of the planned work shows Boeing receiving $4.9 billion,
    SAIC receiving $1.3 billion, and General Dynamics and United Defense
    together receiving $4.6 billion. The 21 Tier 1 competitive subcontracts
    combined total $1.7 billion.\34\
    ---------------------------------------------------------------------------
        \34\ Op cit.
    ---------------------------------------------------------------------------
    boeing's fcs ota: less accountability and oversight for america's most
                          dishonest defense contractor
        In recognition of potential problems with using an OTA in lieu of a
    standard procurement contract, Congress was very careful in the
    extension of legal authority to the Department of Defense to utilize
    OTAs. The conference report accompanying the National Defense
    Authorization Act for Fiscal Year 1999,\35\ which extended the OTA
    authority, cautioned that any further extension would be contingent on
    the congressional defense committees concluding that OTAs had been used
    in a responsible and limited manner:
    ---------------------------------------------------------------------------
        \35\ See Pub. L. 105--261, 112 Stat. 1920, 1954 (1998).

            ``[S]ection 845 authority should only be used in the
            exceptional cases where it can be clearly demonstrated that a
            normal grant or contract will not allow sufficient access to
            affordable technologies. The conferees are especially concerned
            that such authority not be used to circumvent the appropriate
            management controls in the standard acquisition and budgeting
            process.'' \36\ (emphasis added)
    ---------------------------------------------------------------------------
        \36\ See H.R. Conf. Rep. No. 105-736, at 590 (1998).

        Because the use of OTA authority can result in an agreement that is
    virtually exempt from most of the statutes and regulations governing
    Defense Department R&D or prototyping efforts, repeated efforts have
    been made to identify and clarify exactly which legal authorities might
    apply to an OTA. Paul G. Kaminski, as Undersecretary for Acquisition
    and Technology in December 1996, identified 21 statutes relating to
    procurement that ``are not necessarily applicable to `other
    transactions.' '' \37\
    ---------------------------------------------------------------------------
        \37\ See ``Memorandum from Undersecretary of Defense for
    Acquisition and Technology Paul G. Kaminski to Secretaries of the
    Military Departments and Directors of Defense Agencies,'' December 14,
    1996, reprinted in full in Department of Defense Other Transactions: An
    Analysis of Applicable Laws, a project of the Ad Hoc Working Group on
    Other Transactions Section of Public Contract Law, American Bar
    Association, 2000, Attachment 1.
    ---------------------------------------------------------------------------
        While the objectives of cutting government red tape to empower the
    Defense Department to have increased flexibility in dealing with high-
    tech companies for advanced technology projects is clearly desirable,
    the fact that many of the statutes inapplicable to OTAs were
    specifically enacted to deter waste, fraud and abuse--a very real and
    persistent problem for government contracting--calls for very careful
    analysis. Simply stripping out decades of protective statutes without
    protecting the government's interests in dealing with contractors is a
    formula for financial disaster. Put simply, such a process would leave
    the government vulnerable to almost any kind of waste, fraud and abuse
    and--adding insult to injury--an unethical company could say its
    actions were ``legal'' because laws restricting its unscrupulous
    activities simply did not apply.
        A group of contract experts assembled as an ad hoc working group
    sought to analyze exactly which statutes were exempted from OTAs and
    the ramifications of those exemptions, publishing an excellent treatise
    on the subject in January 2000.\38\ The group concluded that
    inapplicability of certain statutes and regulations ``may raise
    significant questions of accountability for the public fisc and other
    matters of public policy.'' \39\ Increased risks and uncertainties in
    areas such as funding limitations and dispute resolution were
    identified.\40\ There was a warning that, ``Confusion over OT's
    statutory exemption can be costly either in litigation or in the misuse
    of OTs.'' \41\
    ---------------------------------------------------------------------------
        \38\ See Department of Defense Other Transactions: An Analysis of
    Applicable Laws, a project of the Ad Hoc Working Group on Other
    Transactions Section of Public Contract Law, American Bar Association,
    2000.
        \39\ See Id. at 2.
        \40\ See Id at 2.
        \41\ See Id. at 2.
    ---------------------------------------------------------------------------
        The signal contribution made by the ad hoc working group to the
    understanding of potential risks and benefits of OTAs comes from its
    analysis of the question as to whether OTAs are exempt from the 21
    statutes identified in the Kaminski memo \42\ as well as an additional
    11 statutes identified by the working group.
    ---------------------------------------------------------------------------
        \42\ See Id. at Attachment I
    ---------------------------------------------------------------------------
        Among the statutes determined to not apply to OTAs are the
    following:

             Competition in Contracting Act
             Contract Disputes Act
             Extraordinary Contractual Authority and Relief Act
             10 U.S.C. Sec. 2313, Examination of records of
            contractor
             10 U.S.C. Sec. 2403, Major Weapons Systems: Contractor
            Guarantees
             10 U.S.C. Sec. 2408, Prohibition on persons convicted
            of defense contract related felonies and related criminal
            penalty as defense contractors
             10 U.S.C. Sec. 2409, Contractor employees: protection
            from reprisal for disclosure of certain information
             31 U.S.C. Sec. 1352, Limitation on the use of
            appropriated funds to influence certain Federal contracting and
            financial transactions
             41 U.S.C. Sec. 423, Procurement Integrity Act
             41 U.S.C. Sec. 701-707, Drug-Free Workplace Act of
            1988
             41 U.S.C. Sec. 10a-10d, Buy American Act
             41 U.S.C. Sec. 2306a, Truth in Negotiations Act
             41 U.S.C. Sec. 422, Cost Accounting Standards
             10 U.S.C. Sec. 2334, Cost Principles

        The statutes just listed, along with their enabling regulations,
    represent a partial list of the statutory exemptions for OTAs. While an
    OTA may incorporate some of the missing statutory protections and terms
    by writing them into the agreement, any omissions can easily become
    loopholes through which an unscrupulous contractor can extract
    financial benefits not typically available to other contractors who are
    subject to the standard procurement contract.
        A more detailed listing is appended to this testimony as Exhibit B:
    Applicability of Specific Statutes to Other Transaction Agreements.
        Also of concern is the fact that the lack of major procurements
    handled through OTAs has meant that there is a distinct lack of case
    law interpreting possible ambiguities. This means additional
    uncertainties and costs in the event of disputes that may occur between
    the contractor and the government with the burden of proof being on the
    government in most instances.
        While there has never been an OTA as large as the FCS OTA, problems
    of accountability have arisen in recent OTAs such as the Evolved
    Expendable Launch Vehicle (EELV) project. A great deal of financial
    information about the project is off-limits to the public and, among
    other issues, the public and the media have no practical way to assess
    whether claims of government savings are credible.
        A recent article on the EELV raised issues directly relevant to the
    FCS project:

              ``In its audits, the Government Accountability Office warned
            the Other Transaction Agreement approach was risky for a
            billion-dollar-project. It's a tool previously Reserved for far
            smaller contracts. The GAO said it posed considerable
            challenges because it exempted the project from normal rules
            for spending tax dollars, limited Defense Department oversight
            and did not give the military the authority to conduct audits,
            GAO said.
              `The use of Other Transaction instruments for Evolved
            Expendable Launch Vehicle development will challenge (the
            Defense Department) in determining how to protect the
            government's interests,' GAO said.
              The Defense Department inspector general also challenged
            whether there was enough `visibility' into the program's
            spending in its 1999 review of the EELV program, according to
            the agency's congressional testimony.
              `The EELV other transactions agreements included technical
            safeguards but provided limited insight into the financial
            aspects of the program,' assistant auditor Don Mancuso told
            Congress in the spring of 2000.'' \43\
    ---------------------------------------------------------------------------
        \43\ See ``$1 billion question--Taxpayers may never know how
    companies spent Air Force rocket money,'' by John Kelly, Chris Kridler,
    and Kelly Young, Florida Today, August 25, 2002, p. 1

        The lack of transparency and accountability is a serious issue in
    its own right but, as indicated in the EELV case above, disclosure acts
    ---------------------------------------------------------------------------
    as an important deterrent to unscrupulous behavior by contractors:

              ``However, government auditors and taxpayer watchdog groups
            cautioned one side effect of the new way of doing business is
            far less public disclosure of what the companies and the
            military are doing with public money.
              `Anything that removes financial transparency is not a good
            deal for the taxpayers,' said Eric Miller, a defense industry
            investigator for the Project on Government Oversight, which has
            spent two decades investigating deals between the Defense
            Department and its contractors. `Time and again defense
            contractors have shown they will sometimes take advantage of
            these types of situations. When you eliminate that kind of
            oversight, you have a potential disaster.' '' \44\
    ---------------------------------------------------------------------------
        \44\ See Id.

        Mr. Miller went on to state that the Other Transaction Agreement
    strategy was never intended for big companies to avoid scrutiny on 9-
    and 10-figure contracts. ``We don't think such large contracts should
    come without financial oversight. It's a dangerous practice.'' \45\
    ---------------------------------------------------------------------------
        \45\ See Id.
    ---------------------------------------------------------------------------
                 boeing's fcs ota: how sweet a financial deal?
        By all accounts the FCS deal has been an exceptionally good one for
    Boeing. The $14.8 billion initially being spent on the development
    phase has already been augmented with an additional FCS modification in
    August 2004 which added approximately $6 billion to the program and
    will probably grow to more than $100 billion when production gets
    underway.\46\ It comes at a time when Boeing has been losing market
    share to Airbus, making its defense business all the more important.
    The year 2003 marked the first time in decades that more than half of
    Boeing's revenues came from defense.\47\
    ---------------------------------------------------------------------------
        \46\ See ``Boeing-SAIC Team gets $14.8 billion Army pact,'' San
    Diego Union-Tribune, December 11, 2003.
        \47\ See ``Boeing Plays Defense; Beset by Airbus and rocked by
    scandal, the aircraft maker turns to a new CEO--and the Pentagon--for
    help,'' by Judy Cresswell, Fortune, April 19, 2004, p. 90.
    ---------------------------------------------------------------------------
        Financially, the importance of FCS to Boeing has been cited by such
    defense experts as Jacques Gansler, Undersecretary of Defense for
    Acquisition, Technology and Logistics in the Clinton administration,
    who recently stated, ``This [FCS] is a big plum, from Boeing's
    perspective.'' \48\ One of the reasons such a Lead System Integrator
    deal can be lucrative is that it does not require a significant amount
    of new capital spending so the return on investment can be quite high.
    George Muellner, president of Phantom Works, Boeing's research and
    development arm, has described the LSI role as being a ``high-margin,
    low-overhead area.'' \49\
    ---------------------------------------------------------------------------
        \48\ See Id.
        \49\ See Id.
    ---------------------------------------------------------------------------
        Far and away, the most important factor to be analyzed in
    determining whether the FCS program was negotiated in Boeing's interest
    at the expense of the government is the OTA signed on December 10,
    2003.\50\
    ---------------------------------------------------------------------------
        \50\ See Agreement Between the Boeing Company and U.S. Army Tank-
    Automotive and Armaments Command Concerning Future Combat Systems
    System Development and Demonstration Phase, Agreement No. DAAE07-03-9-
    F001.
    ---------------------------------------------------------------------------
        While obtaining a copy of a government procurement document is
    generally relatively easy insofar as most are public information,
    Boeing has shown itself to be unusually sensitive in opposing public
    scrutiny of its FCS arrangement with the Army. When the National Legal
    and Policy Center filed a request under the Freedom of Information Act
    for a copy of both the draft and final versions of the FCS OTA, NLPC's
    counsel was informed that Boeing opposed disclosure, even to the point
    of claiming the documents were ``classified.'' To their credit, the
    Army's professional FOIA staff disclosed the requested materials once
    it became apparent that Boeing had no legal grounds to prevent such
    disclosure.
        An analysis of the FCS OTA confirmed what others had already
    suspected--that the FCS OTA negotiated by Boeing lacked many of the
    standard legal protections that accompany major Defense Department
    acquisitions. Because OTAs are not contracts and were originally
    designed to streamline regulatory procedures, many legal terms and
    conditions needed to deter or detect waste, fraud and abuse must be
    individually incorporated into an OTA or they simply will not apply.
        The first round of public controversy addressing the legal
    shortcomings of the FCS OTA began when Reuters ran an article
    disclosing that 2 months before the Army signed the FCS OTA with
    Boeing, a private consulting firm, CommerceBasix, Inc., hired to
    improve the Army acquisition process, recommended that the Army rework
    the draft agreement. Among the consulting firm's findings was that a
    delay of 6 months in the project under the terms of the May 31, 2003,
    draft OTA could result in a $1 billion financial risk to the
    government.\51\
    ---------------------------------------------------------------------------
        \51\ See ``Boeing deal with Army criticized; Consultant cited $1
    billion risk to government,'' Chicago Tribune, February 17, 2004, p. 3.
    ---------------------------------------------------------------------------
        While Army officials were dismissive toward the October 14, 2003,
    consultant's report and signed the OTA on December 10, 2003, the
    subsequent analysis by the Government Accountability Office released on
    April 1, 2004, before the House Armed Services Subcommittee on Tactical
    Air Land Forces not only largely corroborated the consultant's claim
    but even cited the possibility of a multi-billion-dollar cost
    associated with a fairly modest delay.\52\
    ---------------------------------------------------------------------------
        \52\ See Hearing of the Tactical Air Land Forces Subcommittee of
    the House Armed Services Committee on Future Combat Systems and Force
    protection Initiatives, April 1, 2004, Federal News Service transcript,
    p. 8.
    ---------------------------------------------------------------------------
        The Reuters article disclosed that concerns about FCS were not
    limited to the consulting firm:

              ``The size of the agreement sparked concerns not just at
            CommerceBasix but among top Future Combat Systems Program
            officials and defense industry experts as well.
              `This was unheard of,' said one defense industry official,
            who asked not to named. `It raised a lot of alarm bells.' ''
            \53\
    ---------------------------------------------------------------------------
        \53\ See ``Boeing deal with Army criticized; Consultant cited $1
    billion risk to government,'' Chicago Tribune, February 17, 2004, p. 3.

        The Reuters article went on to report that the decision to opt for
    the less formal Other Transaction Agreement instead of a standard
    Defense Department procurement contract ``also raised eyebrows, given a
    spate of ethics scandals at Boeing in recent months.'' \54\
    ---------------------------------------------------------------------------
        \54\ See Id.
    ---------------------------------------------------------------------------
        Anyone able to obtain and review the FCS OTA would have even
    greater reason for raised eyebrows.
        The consultants only had the May 30, 2003, draft OTA on which to
    rely for their October 2003 report. However, a review of that draft
    with the final definitized version signed in December 2003 indicates
    relatively minor changes in terms and conditions. Indeed, the OTA
    itself indicates that the definitization process between the May and
    December versions would deal more with cost issues than business terms
    and conditions.\55\
    ---------------------------------------------------------------------------
        \55\ See Agreement Between the Boeing Company and U.S. Army Tank-
    Automotive and Armaments Command Concerning Future Combat Systems
    System Development and Demonstration Phase, Agreement No. DAAE07-03-9-
    F001, May 30, 2003, draft at pp. 13-14.
    ---------------------------------------------------------------------------
        Perhaps out of sensitivity to the consulting firm's allegation
    about the government's exposure to financial risk, the final version
    did substantially augment ``Article XXXIII--Termination Liability''
    from the relatively Spartan treatment of those issues in the May
    version and some related terms and conditions.
        Ironically, the report on FCS management by the Institute for
    Defense Analyses was critical of the CommerceBasix analysis of the
    legal weakness of the FCS OTA by citing the fact that they did not see
    the final December 2003 agreement:

              ``The CommerceBasix review of a draft Army-Boeing agreement,
            which was critical of the lack of clauses to protect the Army's
            interests, did not address all of the clauses that are in the
            final FCS agreement.'' \56\
    ---------------------------------------------------------------------------
        \56\ See Review of FCS Management Issues, Final Report to Acting
    Secretary of the Army Hon. R. L. Brownlee, Institute for Defense
    Analyses, August 17, 2004, p. ES-3.

        This is somewhat disingenuous since it seems to suggest there was a
    major strengthening of the agreement to protect the Army's interests
    before the December draft was signed. There was not, as any reading of
    the two documents shows. The Army would have been better served had
    there been a listing of all changes made to the May draft to better
    protect the Army's legal interests. Even more helpful would have been a
    complete analysis of the legal effect of the omission of every statute
    which covers standard DOD procurement contracts but which are missing
    from the FCS OTA.
        All too many issues associated with protecting the government's
    interests against waste, fraud, and abuse as well as promoting
    accountability remain.
        Traditionally, resolution of disputes is a critically important
    part of any major agreement. In the case of a high-risk, multi-billion-
    dollar project where the GAO already has assessed ``significant risk,''
    the resolution of disputes is an area that requires clarity as well as
    strong protection of the government's interests. The Contracts Disputes
    Act does not apply to OTAs unless it has been specifically incorporated
    into the agreement. The FCS OTA has no such incorporation of the
    Contract Disputes Act.
        The issue of dispute resolution is addressed in the FCS OTA at
    Article XV--Disputes. While Boeing and the Army anticipate resolving
    disputes through a set of sparsely worded dispute resolution
    procedures, Boeing is also accorded the opportunity to ``bring a claim
    in a court of competent jurisdiction as authorized by 28 USC 1491''
    \57\ if Boeing disagrees with the outcome of the dispute resolution.
    ---------------------------------------------------------------------------
        \57\ See Agreement Between the Boeing Company and U.S. Army Tank-
    Automotive and Armaments Command Concerning Future Combat Systems
    System Development and Demonstration Phase, Agreement No. DAAE07-03-9-
    F001, December 10, 2003, at Article XV (B)(3), p. 53.
    ---------------------------------------------------------------------------
        An apparent shortcoming is the failure to address exactly how the
    government can bring a claim in the event it disagrees with the outcome
    of a dispute resolution. Generally, there is Federal jurisdiction over
    civil actions initiated by the U.S. Government as stated in 28 U.S.C.
    Sec. 1345, ``Except as otherwise provided by an Act of Congress, the
    district courts shall have original jurisdiction of all civil actions,
    suits, or proceedings commenced by the United States, or by any agency
    or officer thereof expressly allowed to sue by Act of Congress.'' The
    Contract Disputes Act represents a way in which Congress has
    ``otherwise provided'' for jurisdiction in that it applies to any
    ``express or implied contract . . . entered into by an executive
    agency. . .'' The Court of Federal Claims has jurisdiction over claims
    brought pursuant to the Contract Disputes Act. However, since the FCS
    OTA is not considered a ``contract,'' a very real issue exists as to
    whether and how the Army could bring a breach of contract suit against
    Boeing. Moreover, the Court of Federal Claims has never ruled on its
    jurisdiction over OTAs.
        Throughout the FCS OTA, problems similar to the issue of dispute
    resolution appear, resulting in both uncertainty as well as legal
    vulnerability for the government's position. The Army had a
    professional, legal and ethical obligation to address every such issue
    so as to protect the government's interest. The guidance provided to
    the Army through the ``Other Transactions'' (OT) Guide for Prototype
    Projects, as revised in August 2002, addresses this obligation clearly:

              ``. . . the Agreements Officer is not precluded from and
            should consider applying the principles or provisions of any
            applicable statute that provides important protections to the
            government, the participants or participants' employees.'' \58\
    ---------------------------------------------------------------------------
        \58\ See ``Other Transactions'' (OT) Guide for Prototype Projects,
    Under Secretary of Defense for Acquisition, Technology and Logistics,
    August 2002, C2.7--Consideration of Protections Provided in Law, p. 24.

        The guide went on to advise that the Agreements Officer may also
    want to consider whether whistleblower protections should be included
    in the agreement, ``especially if the prime awardee is a company that
    typically does business with the DOD.'' \59\
    ---------------------------------------------------------------------------
        \59\ See Id.
    ---------------------------------------------------------------------------
        The guide is consistent in advising the government to take all
    appropriate steps to protect the government's interests in an OTA and
    especially in taking steps to minimize project risk. The linkage of
    risk to the terms and conditions of the OT agreement is also beyond
    dispute:

              ``The risks inherent in the prototype project and the
            capability of the sources expected to compete should be a
            factor in the terms and conditions of the OT agreement.'' \60\
    ---------------------------------------------------------------------------
        \60\ See ``Other Transactions'' (OT) Guide for Prototype Projects,
    Under Secretary of Defense for Acquisition, Technology and Logistics,
    August 2002, C2.1.3.1.5--Risk Assessment, at p. 15.

        While the FCS OTA does incorporate a number of statutory provisions
    as well as Federal Acquisition Regulations, the majority of standard
    procurement laws and a good number of laws promoting accountability are
    conspicuous by their absence. Without providing an exhaustive listing,
    it appears that most of the statutes previously specified in Department
    of Defense Other Transactions: An Analysis of Applicable Laws are not
    applicable to the FCS OTA.
        A review of the FCS OTA found no apparent inclusion of the
    Procurement Integrity Act. This is especially noteworthy given the
    allegations involved in the criminal investigation of Darleen Druyun
    and Boeing. The Procurement Integrity Act \61\ imposes two types of
    obligations on government employees seeking non-government employment
    who have been involved in procurement. First, for government employees
    who have been personally and substantially involved in a procurement
    worth more than $100,000, it sets forth requirements that must be
    followed if the employee inquires about or is contacted by the company
    involved with the procurement. Second, there is a 1-year ban on
    accepting compensation from contractors involved in the procurement.
    There are civil penalties for violations by both the government
    employee and the contractor.\62\
    ---------------------------------------------------------------------------
        \61\ See 41 U.S.C. Sec. 423.
        \62\ See 41 U.S.C. Sec. 423 (c),(d),(e).
    ---------------------------------------------------------------------------
        Additionally, the FCS OTA does not include the Truth in
    Negotiations Act (10 U.S.C. Sec. 2306a). Possible violation of the
    Truth in Negotiations Act may be an issue in the ongoing audit of the
    airborne warning and control (AWAC) contract upgrade involving Darleen
    Druyun.\63\ At issue specifically is whether Boeing overcharged the Air
    Force by ``a significant amount'' on a $1.3 billion contract to upgrade
    NATO surveillance aircraft. The article stated:
    ---------------------------------------------------------------------------
        \63\ See ``Pentagon auditors check Boeing charges; Review part of
    probe of ex-company exec,'' by Tony Capaccio, The Seattle Times, May
    12, 2004, p. E6.

              ``Contractors are required under the Truth in Negotiations
            Act to provide accurate data, which serves as the basis for
            final negotiated prices.'' \64\
    ---------------------------------------------------------------------------
        \64\ See Id.

        Boeing is no stranger to allegations that it has mischarged or
    overcharged the government on Defense Department contracts. In one
    instance, a Boeing subsidiary paid $3.8 million to settle claims
    arising from three Navy contracts in which the subsidiary was said to
    have ``mischarged numerous labor hours or provided inaccurate cost
    information to the government during negotiations for all of the
    contracts.'' \65\ The Justice Department media release on the case
    stated:
    ---------------------------------------------------------------------------
        \65\ See ``Boeing Subsidiary Pays U.S. $3.8 Million to Settle
    Dispute Over Three Navy Contracts,'' U.S. Department of Justice U.S.
    Newswire Release, Dec. 29, 1992.

              ``Under the Truth in Negotiations Act, companies are required
            to disclose to the government pricing and cost information in
            their possession when they negotiate contracts with the
            government.'' \66\
    ---------------------------------------------------------------------------
        \66\ See Id.

        The failure of the FCS OTA to be covered by the Truth in
    Negotiations Act represents yet another legal vulnerability for the
    government in the event that Boeing or any of its partners provide
    inaccurate or padded cost estimates in any negotiation associated with
    the program. There is little doubt that Boeing as a defense contractor
    does not like the idea of being legally required to provide the
    government with accurate cost information under the Truth in
    Negotiations Act. At a roundtable discussion of government contract
    issues during 2001 Boeing Vice President John Judy argued that the
    threshold for coverage of the Truth in Negotiations Act should be
    raised significantly.\67\ Coincidentally, Mr. Judy's name surfaced
    during the Darleen Druyun scandal when the National Legal and Policy
    Center disclosed that he had contracted to purchase Druyun's Virginia
    home while Druyun was still at the Air Force overseeing mult-billion
    dollar business deals with Boeing.
    ---------------------------------------------------------------------------
        \67\ See ``Plotting Our Defense: The Pentagon Wants Reform, but How
    Will It Work?'' Legal Times, March 5, 2001, p. 30.
    ---------------------------------------------------------------------------
        The fact is that Boeing has a long and well-documented record of
    blatantly overcharging the Pentagon on defense contracts. In the 1980's
    Boeing was caught charging the Air Force $748 for a pair of pliers to
    be used to repair KC-135 tanker airplanes. An engineer testified before
    Senator Grassley's Judiciary subcommittee on administrative practice
    and procedure on the subject and stated that he found similar pliers at
    a hardware store for $7.61.\68\
    ---------------------------------------------------------------------------
        \68\ See ``Air Force Victory is Illusory in the Case of $748
    Pliers; Boeing's New Charge Offsets Price Cut,'' The Washington Post,
    March 22, 1985, p. A1.
    ---------------------------------------------------------------------------
        There are no shortages of good examples of the impact that
    deficient agreement language or agreement negotiations can have. A very
    recent example involves--once again--Boeing and the Department of
    Defense. In an April 16, 2004, Washington Post article titled, ``Audit
    Criticizes Another Boeing Deal; Inspector General Says Air Force Didn't
    Negotiate NATO Contract Properly,'' a $1.34 billion contract being
    negotiated by Air Force official Darleen Druyun with her future
    employer Boeing failed to have the proper verification of costs. As a
    result, the parties must sit down and follow the correct procedures to
    ensure that the costs are appropriate. The audit conducted by the
    Department of Defense Office of Inspector General concluded, ``Air
    Force contracting officials awarded the contract modifications without
    knowing whether the $1.3 billion cost was fair and reasonable.'' \69\
    Four days after this article appeared, Darleen Druyun pled guilty in
    the U.S. District Court for the Eastern District of Virginia in
    conjunction with a Federal felony count of conspiracy which arose from
    her employment dealings with Boeing at the same time the contract in
    question was being finalized.\70\
    ---------------------------------------------------------------------------
        \69\ See ``Defense tags Boeing AWACS Deal for criticism; Report:
    Contract was Mishandled,'' by David Bowermaster, The Seattle Times,
    April 16, 2004, p. C1.
        \70\ See ``Ex-Pentagon Official Admits Job Deal; Civilian Got
    Boeing Offer While Overseeing Air-Tanker Contract,'' by Renae Merle and
    Jerry Markon, The Washington Post, April 21, 2004, p. 1.
    ---------------------------------------------------------------------------
        U.S. Attorney Paul McNulty summed up his view of the crime by
    stating:

              ``The only interest should be the public's interest. Darleen
            Druyun placed her personal interest over the interests of the
            Air Force and American taxpayers. Secretly negotiating
            employment with a government contractor, at the same time you
            are overseeing the negotiations of a multi-billion dollar lease
            from that same contractor, strikes at the heart of the
            integrity of the acquisition process.'' \71\
    ---------------------------------------------------------------------------
        \71\ See Statement of U.S. Attorney Paul McNulty, April 20, 2004,
    United States of America v. Darleen Druyun, Criminal No. 04-150-A

        The case just cited raises yet another series of questions
    regarding the lack of integrity in the manner in which Boeing has
    pursued Department of Defense business. The pattern of wrongdoing is
    unmistakable, and there's more. A recent article in The Wall Street
    Journal by Andy Pasztor reported on another pending procurement scandal
    ---------------------------------------------------------------------------
    involving allegations against Boeing:

              ``In St. Louis, [Boeing] faces a civil investigation for
            allegedly using foreign titanium in F-15 fighter jets, certain
            military transport planes and various other Pentagon programs,
            contrary to U.S. law. Investigators previously demanded the
            company pay $20 million to resolve the claims, but Boeing
            balked at a settlement. The investigation has been underway for
            3 years, though it hasn't been reported until now.'' \72\
    ---------------------------------------------------------------------------
        \72\ See ``Pentagon Probes Suppliers' Hiring,'' by Andy Pasztor,
    The Wall Street Journal, January 12, 2004.

        Perhaps if Boeing had the foresight to use an OTA in the case just
    cited, it would not be facing a $20 million fine. The Buy American Act
    (41 U.S.C. Sec. Sec. 10a-10d) does not apply to OTAs unless it has been
    specifically added.
        In yet another very recent (April 23, 2004) news account, the
    serial nature of Boeing's misconduct with DOD procurement was
    underscored:

              ``An internal Air Force memo suggests a broad pattern of
            improprieties by Boeing Co. when it bid on Pentagon contracts,
            contradicting the aerospace giant's assertions that such
            problems were isolated and that it corrected them quickly.''
            \73\
    ---------------------------------------------------------------------------
        \73\ See ``Boeing's Misconduct Is Detailed in Memo,'' by Peter Pae,
    The Los Angeles Times, April 23, 2004.

        The FCS OTA--on its face--raises very serious questions as to
    whether the government's legal and financial interests have been well
    served. There is little doubt that Boeing's interests have been well
    served by receiving the $20 billion plus ``plum deal.'' Even a casual
    reading of the FCS OTA shows considerable financial incentives for
    Boeing, including the earlier cited ``maximum possible opportunity to
    earn fee.'' \74\ Also deserving scrutiny is the questionable $9.8
    million incentive award received by Boeing from the Army for completing
    the agreement by the end of the year.\75\ At a time when Boeing was
    spending millions of dollars on lobbyists in its push for Pentagon
    business, a $9.8 million incentive award for rushing through a
    lucrative deal hardly seems necessary--or wise.
    ---------------------------------------------------------------------------
        \74\ See Agreement Between the Boeing Company and U.S. Army Tank-
    Automotive and Armaments Command Concerning Future Combat Systems
    System Development and Demonstration Phase, Agreement No. DAAE07-03-9-
    F001, at p. 14.
        \75\ See ``Boeing deal with Army criticized; Consultant cited $1
    billion risk to government,'' Chicago Tribune, February 17, 2004, p. 3.
    ---------------------------------------------------------------------------
        But there is a human element that also invites scrutiny. The fact
    that the senior Boeing executive involved in the FCS procurement was
    Michael Sears, the Boeing Chief Financial Officer (CFO) terminated for
    cause in connection with his hiring of Darleen Druyun and also--
    according to Boeing--in the alleged cover-up of his actions, ought to
    be considered a red flag. Indeed, Sears, prior to becoming Boeing CFO,
    was the head of Boeing's Phantom Works, the Boeing research and
    development (R&D) operation that played a key role in winning the FCS
    deal.\76\
    ---------------------------------------------------------------------------
        \76\ See ``Contract Gives Boeing a Lift,'' by Paul Merrion, Crain's
    Chicago Business, May 13, 2002, p. 13.
    ---------------------------------------------------------------------------
        After Boeing took an unexpected $1.1 billion charge in 2003 because
    of losses in its commercial space business, media accounts listed
    Michael Sears as leader of a team of experts looking to examine the
    business cases associated with Boeing's biggest projects. Financial
    Times interviewed Mr. Sears and reported:

              ``Mr. Sears hinted that the business cases made in some of
            Boeing's tenders were not satisfactory, and added that the risk
            management practice of the different business units might not
            be adequate.'' \77\
    ---------------------------------------------------------------------------
        \77\ See ``Boeing Team to Reassess Top Projects,'' Financial Times,
    by Caroline Daniel, September 2, 2003, p. 33.

        Mr. Sears went on to specifically name the Future Combat Systems
    project as one of the Boeing efforts being reviewed.\78\
    ---------------------------------------------------------------------------
        \78\ See Id.
    ---------------------------------------------------------------------------
        Despite the Reuters account documenting concern over the FCS deal
    among both FCS program officers and defense industry experts, not to
    mention the consultant's report detailing the serious legal and
    financial risks with the proposed OTA,\79\ Defense Daily reported:
    ---------------------------------------------------------------------------
        \79\ See ``Boeing deal with Army Criticized; Consultant cited $1
    billion risk to government,'' Chicago Tribune, February 17, 2004, p. 3.

              ``Originally planned to be signed Nov. 26, the Army reached
            agreement on the SDD contract with the LSI [Boeing] in a
            process that went `exceedingly smoothly from my vantage point,'
            Claude Bolton, Assistant Secretary of the Army for Acquisition,
            Logistics, and Technology, said last month.'' \80\
    ---------------------------------------------------------------------------
        \80\ See ``Army and Boeing-SAIC LSI Sign $14.8 Billion SDD Contract
    for Future Combat Systems,'' Defense Daily, December 12, 2003.

        Indeed, Boeing was receiving a nice incentive award to push through
    a multi-billion-dollar agreement for itself. For good measure, the
    agreement had most major statutory and regulatory provisions meant to
    protect against ethical misconduct and other contractor abuses stripped
    out. What was not to like?
                                recommendations
        The Army's largest procurement project has as a Lead System
    Integrator, Boeing, a defense contractor with the demonstrably worst
    record of procurement misconduct of any defense contractor. Boeing was
    penalized for substantial violations of the law in the Lockheed
    proprietary documents case with a $1 billion contract sanction and the
    longest suspension of any major defense contractor. In the tanker case,
    Boeing tried to mislead Congress on the need for tankers with false
    information in an attempt to get funding for a program that was over-
    priced by billions of dollars. Boeing executives have pleaded guilty to
    felonies and Boeing is currently facing numerous criminal
    investigations and civil litigation for its misconduct.
        Instead of increased oversight, Boeing is managing the Army's most
    important procurement project with a legal agreement which meant to
    attract nontraditional suppliers and which minimizes oversight and
    accountability.
        This is a recipe for disaster.
        The broadest recommendations are that Congress should conduct a
    thorough review of the vulnerabilities to the government's position
    because of the use of an OTA and that Congress should intensify its
    oversight of the FCS program.
        The FCS program is high risk because of its ambitious embrace of so
    many new and untested technologies but the failure of the Army to have
    adequate oversight and accountability through the use of an OTA
    represents an even higher risk.
        The best way to assess the major legal vulnerabilities of the
    present FCS OTA would be an independent legal analysis of the ways in
    which the agreement fails to match the legal protections found in
    standard defense procurement contracts. Starting with an assessment of
    the statutes listed in Exhibit B: Applicability of Specific Statutes to
    Other Transaction Agreements, there should be statute by statute
    analysis of the legal benefits of each statute to the government and a
    thorough examination of the language in the OTA to determine what
    benefits are missing and what effect that may have on the government's
    ability to oversee the program and to protect its legal interests.
        Similarly, there should be an independent examination of the
    financial and fee structure of the FCS program. While Lead System
    Integrator positions can be very lucrative for defense contractors and
    this aspect should be closely scrutinized, even closer scrutiny should
    be given to whether Boeing's compensation in the OTA is appropriate
    given the shifting of so much of the financial and legal risk for the
    program to the government as compared with a standard defense
    procurement contract.
        To the degree that the government can modify the existing agreement
    to protect its interests and promote greater accountability, it must do
    so. Whatever objections Boeing may have to such a modification pale
    next to the risk the government is taking in not asserting its right to
    protect its interests.
        Given the poor choice of Boeing as the Lead System Integrator for
    FCS, especially given Boeing's incredibly poor record with respect to
    respecting competitors' proprietary information rights, there is no
    alternative to increased congressional oversight of the FCS program. As
    the GAO has pointed out, the cost associated with the FCS program so
    dominates the Army's investment budget for years to come that any
    failures in this high risk program will make it extremely difficult to
    find any other funds to remedy the problem.
        The most ethically-challenged defense contractor in the country is
    in charge of the most expensive high risk defense program using an
    agreement that minimizes oversight and accountability. If that doesn't
    call for increased congressional oversight, what does?

          [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Senator McCain. Secretary Bolton, I think you deserve the
    opportunity to respond.
        Mr. Bolton. Yes, sir. Thank you very much. This will center
    on why we use an OTA, why we have an LSI, and why we have this
    particular contractor, Boeing.
        Let me first respond to the basic notion of an OTA. All the
    reasons that have already been stated by the other gentlemen
    here are absolutely correct. We have OTAs to attract other
    folks who typically would not go and do business with us, maybe
    to get some new technology that perhaps we would not have
    gotten from other places.
        Senator McCain. But if I could just mention, I have the
    same quote here that Mr. Boehm had. The law written into the
    Defense Authorization Act of 1999 says: ``The conferees are
    especially concerned that such authority not be used to
    circumvent the appropriate management controls in the standard
    acquisition and budgeting process.'' The authority should be
    used in exceptional cases. Is this an exceptional case?
        Mr. Bolton. I believe so.
        Senator McCain. Okay. Please proceed.
        Mr. Bolton. Let me set the stage and then I would like to
    go point by point with Ken there.
        When I arrived here and was briefed on this program, it was
    clear to me this was one of the most complex, ambitious
    programs I had ever seen. In fact, my initial reaction was let
    us not do this because I know for a fact you are not going to
    be able to do it on the time line, which, Mr. Chairman, you may
    recall was 2010. It had already been drug back 2 years to 2010.
    I arrive here in 2002. We have 7\1/2\ years to do a job that
    normally takes 10 to 15 years. I knew that it would be a
    challenge not only from the contracting aspects, but just
    because of all the other things that we do in this normal
    acquisition process, from requirements of resourcing to the
    actual contracting, to the testing, to the fielding, and so
    forth. This was going to be a very difficult task.
        I have done this before, not on this scale, but one thing I
    have noticed time and time again, you cannot do this without a
    very strong team and a very strong team leader. We saw that on
    the Manhattan Project, the Trinity Project. We saw that on the
    space program during the 1960s. Every successful program that
    has been challenged like this has had to have a strong team,
    Government and contractor. You will fail if you try to do it
    any other way.
        Now, I looked at what was going on. DARPA and the Army were
    teamed at the time. DARPA was in the lead. They were setting
    the concept phase. They had started to build a team with four
    different contractor groups. When I came aboard, as I said, the
    time line had been moved to the left. DARPA was in the throes
    of going through a competition to reduce this down to one, all
    spelled out in their OTA as to how that was going to run. They
    selected the current LSI and the LSI approach, by the way.
        We had an option in the Army whether to continue that when
    I picked it up in the current phase. So I went to our folks,
    and I said, here is the challenge we have. We have to continue
    the strong team, in fact, build it. Is it possible to use the
    OTA because the OTA, aside from as Congress has intended, the
    one thing I noted over and over again--and I was the lead for
    the Department of Defense in 1996 to look at OTAs for the use
    of the military departments.
        Senator McCain. Why was the Procurement Integrity Act not
    included?
        Mr. Bolton. The one thing that folks have glanced over,
    what you have there are the clauses that are in.
        Senator McCain. The what, sir?
        Mr. Bolton. The FAR clauses that are not in. TINA, for
    example, is not in--The Truth in Negotiations Act. True, it is
    not there.
        However, let me tell you----
        Senator McCain. Why not?
        Mr. Bolton. Because if I put all of TINA in there, I will
    pay for things that I do not need. Let me tell you what I do
    have in there, sir.
        Senator McCain. Because of Truth in Negotiations Act
    provisions, you would be paying for things you do not need?
        Mr. Bolton. Let me tell you. What I have done, I have
    access to all the books for all the contractors.
        Senator McCain. Does Congress?
        Mr. Bolton. Yes, sir, you do.
        Senator McCain. Does the public?
        Mr. Bolton. Yes, they do, through the normal process as you
    would with any FAR contract.
        Here is what we did. We said, look, you do not have to do
    this, but you, Mr. LSI, and the subcontractors are required to
    submit accurate costs and pricing data to the Government for
    negotiations for this OTA. By the way, I will send in the
    Defense Contract Audit Agency, which they did, and I will
    verify all that before I sign this piece of paper. Oh, by the
    way, I will also have the Defense Management Agency to go there
    to verify this as well as your earned value.
        Senator McCain. Is that certified, sir?
        Mr. Bolton. Those folks certify to the grants officer that
    all the data was accurate and reasonable. The grants officer
    took that information and said, therefore, I can sign on behalf
    of the Government that what we negotiated was fair and
    reasonable.
        Senator McCain. That is certified.
        Mr. Bolton. Yes, sir.
        Senator McCain. Thank you.
        Mr. Bolton. All we have to do is go back and look at the
    data. I had the folks that we in the Department of Defense use,
    not the Army, the Defense Audit Agency, to go in there to do
    that.
        We also have a provision in this agreement spelled out in,
    I think it is, article 13, which is another clause, for the
    U.S. Comptroller General to go in and take a look. He has not
    done that, but he could if he wanted to.
        Senator McCain. Was that information certified by the
    contractor?
        Mr. Bolton. Certified by our folks.
        Senator McCain. Why would the contractor not be required to
    certify it?
        Mr. Bolton. Here is what you get when you do this, and I
    have done this on many contracts. I put TINA in there. You
    floor it down. The contractor goes out there, does his thing,
    and I might go in there and take a look. But I have the
    contractor on a short hook here. If I find out that there is
    defective pricing here, I can get money back. I can legally sue
    him.
        I have the same thing here. If you will read agreement, you
    will see in there I do not have to worry about litigation. I
    unilaterally go in there and I adjust the price and get the
    taxpayers' money back if I find that you have given me the
    wrong price.
        Senator McCain. Well, then would it not apply to every
    acquisition that you do not need TINA?
        Mr. Bolton. That is up to other acquisitions. I am only
    focused on the Future Combat System.
        Senator McCain. The Army Deputy General Counsel for
    Acquisition told the Senate Armed Services committee last week
    he could not think of a single reason why the Procurement
    Integrity Act should not be included in the FCS other
    transaction agreement. We asked him why it did not include the
    Procurement Integrity Authority (PIA) language. He suggested it
    was a decision made by ``higher Army authorities.''
        Why would you not want Procurement Integrity Act provisions
    put in any contract that the Government enters into? There is a
    reason why we passed that law.
        Mr. Bolton. Yes, sir, and we did not put it in per se.
        Senator McCain. Why not put it in per se?
        Mr. Bolton. What we asked them to do--because I wanted
    more.
        Senator McCain. Pardon me?
        Mr. Bolton. I wanted more.
        Senator McCain. Okay.
        Mr. Bolton. Here is what I wanted. I wanted to make sure,
    because ethics is a concern here, a big concern, everybody who
    is on this team can sign a piece of paper and say, hey, look, I
    am not going to share any information with anybody. We did that
    from the first source selection on. We put fire walls up. We
    asked IDA to come in and take a look at that. We had our
    lawyers take a look at it. We looked at the pieces of paper
    people were signing to make sure that you are not going to
    share this information with anybody else.
        We also said we want you to do this for the whole team once
    we are on board. So the contractor, the LSI, has put together a
    consultant. That consultant has put together classes. Folks are
    now finishing up, not just for the LSI but for all of the subs
    to go to this class, learn about integrity, the same thing I go
    through every year and that I certify. That is what I want
    folks to do, and then I track it.
        I think that is what we are trying to do.
        Senator McCain. I think that is what we are trying to do,
    Secretary Bolton. I appreciate your outstanding service to this
    country, but we do have laws in place that were put in that
    were simply there in order to protect the taxpayers.
        Mr. Bolton. Yes, sir.
        Senator McCain. Now, what you are saying is we do not need
    those laws. You can do the job yourself better than enforcing
    laws that were passed by the Congress of the United States to
    preserve the integrity of the taxpayer. You can do a better
    job.
        My point is if you want to come back and say, change the
    procurement laws, Congress, so that I can do a better job than
    these laws are having any beneficial effect, then I would be
    certainly open to it. I know this committee would be and so
    would all of Congress.
        Mr. Bolton. Yes, sir.
        Senator McCain. But to just make a decision on your own
    that laws that were enacted because of previous scandals to try
    to prevent future scandals are being exempted from a huge $100
    billion-and-some contract, you are going to have to give me a
    better reason than the fact that you have great judgment.
        Mr. Bolton. No, sir. It is not my judgment. I am
    responsible. I am the one to blame for everything that goes
    wrong.
        Senator McCain. We have had many in the past who were
    responsible, but the taxpayers still lost billions of dollars.
        Mr. Bolton. Yes, sir.
        Senator McCain. That is why we passed the Procurement
    Integrity Act. That is why we passed the Truth in Negotiations
    Act.
        Mr. Bolton. Yes, sir, and what we have challenged folks to
    do is to take a look at every one. There are roughly in a
    typical FAR type of contract for this type of activity,
    actually for a single program, probably 147 FAR clauses in
    there. I can go through any contract. I have been there. I have
    done this. Yes, we have protected the public, but not from
    costs of that program. I have worked programs where I knew I
    was getting data----
        Senator McCain. Then your argument is we should repeal
    these laws.
        Mr. Bolton. No, sir, not at all. What I am saying is that
    what the OTA allows you to do is to tailor in what you want.
    The articles I am talking about----
        Senator McCain. Even though Congress said it should be an
    exception and used for nontraditional contractors with the
    Defense Department.
        Mr. Bolton. What was not pointed out, although I have not
    gotten what I would like to have in nontraditionals, we do have
    four, not the one that is required by our rules and the
    Department of Defense, but four. Two of them came from the
    original concept phase. One of those is the person who is
    putting together our entire advanced collaborative system. That
    is where we put all of the data so we can work this thing
    across the country. The other is iRobot who is helping us with
    the robotics, the ground----
        Senator McCain. Do you know who it was at Boeing that
    suggested the OTA be used? Mr. Sears.
        Mr. Bolton. I do not know that to be true. I am the guy who
    sat there in the office, contemplating this. He and I never
    talked about OTAs. Never, sir.
        Senator McCain. You never did.
        Mr. Bolton. No, sir.
        Senator McCain. Thank you, Mr. Secretary.
        Mr. Francis, do you have any views on this dialogue here?
        Mr. Francis. Well, Mr. Chairman, I think we have heard some
    discussion about what is and is not in the contract.
        Senator McCain. We are probably going to ask you to define
    that for us. Go ahead.
        Mr. Francis. Right now? [Laughter.]
        We are in the process now of taking a closer look at the
    contract for you, as a matter of fact.
        We do know that there are some standard FAR provisions in
    the OTA, quite a number of them. Where there are not FAR
    provisions, there are negotiated provisions in there. So, for
    example, we know the certified cost and pricing data is not a
    clause that is in the contract. There is a negotiated clause in
    there. We have to take a look at that to see what protections
    that offers. So we are going to do a side-by-side analysis.
        Mr. Bolton says that is certified. I guess that was the one
    question I had. You look at a provision like that. I understand
    there is going to be cost and pricing data. Is it going to be
    certified the way the law would require? Those are some of the
    distinctions I think we have to take a look at.
        Senator McCain. Secretary Bolton, what we would like to do
    is get some questions to you along the lines of what Mr.
    Francis is talking about.
        Look, I appreciate the enormity of the challenge here and
    the importance of modernizing our Army to meet the new
    challenges. We are not interested in holding it up in any way.
    But we do have this obligation to the taxpayer. So what we
    would like to do, for the record, is get questions from Mr.
    Francis and get them to you so we can be exactly sure what
    provisions are in force, and if not the PIA and TINA, then
    others.
        Mr. Bolton. Yes, sir. Let me tell you I really do
    appreciate that. I know the GAO has three folks who are full-
    time on this program. I have always asked everyone--in fact,
    will ask again when we go over it the next look-see outside of
    the Army--if there is anything we need to do to make this
    better, please tell me. I have asked that for the last 2\1/2\
    years of everyone.
        Senator McCain. Thank you.
        Mr. Bolton. It is not for us to use an OTA, FAR, whatever.
    What we are really trying to do is put a capability out there.
        Senator McCain. Dr. Graham, assuming that Secretary Bolton
    is correct--and I do not question him--that it was far better
    in negotiating this contract to use OTA, which obviously was
    not the intent of Congress when the law was passed--but let us
    set that aside--so that certain impediments to getting this
    major modernization of the United States Army into being, does
    that argue that we should change our procurement laws? Could
    IDA look at that for us? [Laughter.]
        Dr. Graham. I think that the simple answer is we were
    really asked to look specifically at this agreement, and as
    Secretary Bolton said----
        Senator McCain. Dr. Graham, do not duck now. You are an
    experienced and talented guy. [Laughter.]
        Do not tell me what you were asked to do. I am asking for
    your opinion on this, and I would appreciate it really.
        Dr. Graham. Well, I think it is worth looking at these
    things, yes.
        Senator McCain. Pardon me?
        Dr. Graham. I think it is worth looking at these things,
    yes.
        Senator McCain. Thank you. It might call for, seriously, a
    look at the procurement law as it exists. Perhaps it is too
    burdensome. Perhaps it does drive up costs, as Secretary Bolton
    states that it might, and that is the last thing we want to do.
    But when there are laws on the books, Mr. Secretary, it seems
    to me that they should be enforced until we change them.
        Well, anyway, you wanted to say something else. Go ahead.
        Mr. Bolton. Yes, sir. It really gets to the whole notion of
    procurement laws and so forth. It is something that has bugged
    me for years.
        I am an acquisition type. So you get stones thrown at you
    all the time. Year in and year out, we are talking about
    streamlining acquisition, whether that is through procurement
    laws or some other. If you do not mind, I would like to put up
    one poster because I think it makes the point that if we do not
    address this--and it is what we are doing on the Future Combat
    System--then we will always--why do I not just put it up here
    on the desk so you can see it.
        [The information referred to follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Bolton. When our current Chief of Staff arrived just
    over a year ago, we got talking about the FCS, what we are
    going to do. I told him this is one of the best team approaches
    I have ever seen. I have started major weapons systems programs
    that are now coming to fruition today, and it took them 22\1/2\
    years to get there. I predicted on the second day of that
    program in 1982 it would take that long. Why? Because all you
    have to do is look at all the other programs. Well, why is it
    that you acquisition guys cannot make this faster?
        So I went to the Chief and I said, if we are going to make
    this work, it is not just me. We have formed a team here in the
    Army that is exceptional in its vision and what it is doing.
        The former Chief of Staff, General Shinseki, would have a
    meeting every month with his flag officers, senior flags in the
    United States, and he had a three-star who was running the task
    force. That three-star's job was to bring everybody together,
    the requirements folks sitting over here, the resources----
        Senator McCain. I got you.
        Mr. Bolton.--folks like me, the operators, and so forth,
    bring them all together to work as a team.
        Why is that important? Because traditionally what we do is
    we write a requirement, throw that over the transom. Someone
    like me is supposed to pick it up and convert that to a
    contract. Then someone is supposed to go test it, not exactly
    my organization, and then field it and then sustain it.
        Senator McCain. I understand.
        Mr. Bolton. What we are trying to do and what we are doing
    in the Army is we are bringing all this together. If you had
    gone down to Fort Monroe Training and Doctrine Command when we
    wrote the requirement for the----
        Senator McCain. To be honest with you, I do not see how the
    Procurement Integrity Act and the TINA have anything to do with
    that chart.
        Mr. Bolton. Sir, your point was how do we help this
    country's citizens be protected, the services get what they
    want, and can we do that through the procurement. All I am
    saying is that if you really want this to happen, you need to
    take a look at everything that happens in this whole process.
        Senator McCain. But again, I do not see how the Procurement
    Integrity Act or the Truth in Negotiations Act in any way would
    impede that process. Maybe you can tell me how.
        Mr. Bolton. No, sir. A point well taken. That applies
    across the entire board.
        Senator McCain. I thank you. Again, I thank you for the
    very difficult tasks that you perform admirably.
        Mr. Boehm, we have not heard from you.
        Mr. Boehm. Well, let me just say that one of the points
    about this was actually made in the Washington Post yesterday.
    There was a story on FCS. I think it was about the hearing and
    so forth. They quoted a professor at George Washington
    University who is a professor of government procurement law. He
    had this to say about OTAs. He said the problem with using OTAs
    is you do not have control mechanisms to work with when things
    go poorly. The reason you do not have them is the mechanisms to
    work with when things go poorly are these statutes that
    Congress passed in response to previous problems when programs
    went poorly. So that is the real risk of throwing out the baby
    with the bath water in this case.
        Also, let me just say this. On some of the clauses that
    were put in, the disputes resolution clause, article 15, there
    are all sorts of things that have the appearance of doing the
    same thing as the statute. But they do not do the same thing as
    the statute. In almost every case, if you take a closer look,
    they leave things out. The Truth in Negotiations Act is
    certainly a big one.
        One of the explanations I have heard by people who defend
    this OTA is you do not need the Procurement Integrity Act
    because, in fact, you have 18 U.S.C. 208 conflict of interest.
    They are two different things. If the conflict of interest
    statutes covered everything in Procurement Integrity, Congress
    would not have needed to pass Procurement Integrity.
        So I think that a close, independent examination item-by-
    item is going to show that many of these things are missing,
    and if something is not done, then a couple years down the road
    when things go wrong, to use the expression of the professor of
    procurement law, we will not have the tools to make it right.
    Even worse, we will not have the tools to prevent it because
    they have been excluded from the agreement.
        Senator McCain. Thank you.
        Mr. Francis, we will send you a specific request to look at
    this side-by-side comparison that we discussed, and I would
    appreciate your help.
        Secretary Bolton, you wanted to say something else.
        Mr. Bolton. It is about tools. I agree. We have not had the
    right tools in the past. You, of course, remember what this is.
    You and I grew up with this.
        Senator McCain. Yes, sir.
        Mr. Bolton. We now have electronic devices that we use.
    When I started in this game about 30 years ago, this is
    basically what we had.
        When it comes to measuring this contract--and I do it for
    all my contracts, FAR, OTAs. It does not matter--I rely upon
    one thing above all else, and it is the earned value management
    system. We lay out with the contractor all the work. This is
    all the subs, all the work, down to the last person, that we
    expect them to do during the year. We also lay in a budget
    schedule and money.
        Once we agree to that, then we track it on a daily basis, a
    weekly basis, and a monthly basis. It gets reported out to the
    company teams on a daily basis, to my PM on a weekly basis, to
    me on a monthly basis, and then it is formally brought into the
    building every quarter. We bring that up to the staffs here on
    a quarterly basis.
        I used to terminate programs, and it gets back to the point
    that was made earlier that we are going to go somewhere down
    the street. I have terminated over 70 programs since I have
    come here. The first thing I look at is the earned value. I do
    not care how big the program is, if you are not performing to
    that earned value for two quarters you come in, the third
    quarter you show cause, and on the fourth one, you are probably
    being terminated. I take that seriously.
        Senator McCain. Thank you.
        Mr. Francis, you have studied the FCS program as closely as
    anybody. In your opinion, was the Army's decision premature in
    moving from concept and technology development into the
    critical SDD phase of the FCS program?
        Mr. Francis. Mr. Chairman, I would say yes, the decision
    was premature. When a program is going to go into the SDD
    phase, you want to have a pretty good understanding of the
    requirements. You want to have mature technologies. You want to
    have a preliminary understanding of the design to put you in a
    position to get a good cost and schedule estimate. As we
    reported, when the FCS went through that milestone in 2003, it
    did not have that level of knowledge. As I look at the program
    today under the restructuring, it still does not have that
    level of knowledge. We are still working requirements;
    technologies are not yet mature; and the preliminary design
    review is a couple years away. So I would say we are still some
    time away yet from being at that point where we would be
    comfortable with the decision.
        Senator McCain. Dr. Graham, the Institute for Defense
    Analyses should look at the entire procurement issue, if you
    all would. I would be glad to send you a letter. We need to
    look at the whole procurement process, and I think your
    institute could probably be of assistance to us, given the
    experience, background, and talent that you have. I know it is
    not exactly in your line of work, but you certainly are
    familiar with this and I would appreciate it. We need to look
    at this whole issue of procurement, not just this specific
    program. I have questions about the C-130J and other programs.
    So we would like to get your help on that.
        Mr. Boehm, thank you for your continued animated
    participation and we appreciate it very much.
        I would like to say a word. I do believe that Boeing went
    through a very wrenching process. They did have people over,
    including former Senator Rudman, to look at the way they did
    business. They have set up a code of ethics, and I think they
    have made some significant efforts to clean up their act here.
    I appreciate their efforts. Perhaps the latest event concerning
    Boeing was the implementation of the code of ethics that they
    had enacted.
        Secretary Bolton, you have a tough job. We are here to
    help, and we want to do everything we can. I have significant
    questions about this program, but I hope you know that we are
    attempting to move this incredible transformation forward as
    quickly as possible with a minimum of difficulty and exercise
    our appropriate oversight responsibilities.
        I thank the panel for being here. This hearing is
    adjourned.
        [Questions for the record with answers supplied follow:]
                   Questions Submitted by Senator John McCain
                                army restructure
        1. Senator McCain. General Cody, we understand that under the
    modularity initiative, the Army is currently increasing the number of
    Active-Duty brigades from 33 to 43, while reducing the number of
    National Guard brigades to 34. In your professional judgment, how will
    the 2005 Quadrennial Defense Review (QDR) affect the force-sizing
    construct and modularity?
        General Cody. While it is too early to predict the outcome of a
    process that will continue for several more months, I believe the QDR
    will result in a force-sizing or force-planning construct that better
    addresses the challenges we are facing today and those we envision over
    the next 20 years. Regarding our creation of the current Army Modular
    Force and its transformation to the future Army Modular Force over the
    next few years, early signs in the QDR process are very positive.
    Creation of the current Army Modular Force is critically important to
    achieving our national objectives in the global war on terror, and
    better aligns today's force organizationally with future organizations.

                  aviation restructure and modernization plan
        2. Senator McCain. Secretary Bolton and General Cody, the new Army
    aviation structure will consist of eight heavy (six active and two
    National Guard), three medium (all active), and two light (all active)
    multi-functional aviation brigades (MFABs). There will also be six
    Aviation Expeditionary Brigades (AEB) in the National Guard. Is the
    cost of the aviation restructure covered by the $14.6 billion made
    available by the termination of Comanche? If not, what is the estimated
    cost for the aviation restructure and what is the Army's plan for
    funding the restructure?
        Mr. Bolton and General Cody. Yes, funding made available by the
    termination of the Comanche program, combined with funding already
    associated with Army aviation programs and the Army Modular Force have
    enabled us to restructure Army aviation. Costs for installation and
    infrastructure requirements created by Aviation restructuring are not
    covered by Comanche funding. These requirements are addressed by the
    Assistant Chief of Staff, Installation Management reprogramming and/or
    supplemental funding requests.

        3. Senator McCain. Secretary Bolton and General Cody, why does the
    Army modernization plan fail to completely modernize the Apache fleet
    to the Longbow configuration, instead of maintaining 117 of the older
    AH-64 A-model Apaches in the National Guard?
        Mr. Bolton and General Cody. The current approved Army strategy
    will convert 284 AH-64 Apache aircraft to AH64D Block III
    configurations beginning in 2010. The intent of the Army is to bring
    all 597 Longbow aircraft up to Block III (which goes beyond the Program
    Objective Memorandum (POM) for fiscal years 2007-2011 and into the
    extended planning period). The Army will continue to review future
    options and funding to address the potential upgrade of the remaining
    117 AH-64As.

        4. Senator McCain. Secretary Bolton and General Cody, what factors
    are led to the decision to slip the Apache block III program 2 years?
    Why can't you use a number of the AH-64 A-model Apaches in the National
    Guard that are not being recapitalized into the D-model Apache?
        Mr. Bolton and General Cody. The Apache fleet strategy outlined in
    the Army Modernization Plan 2005 addresses the critical issue of the
    aging AH-64A model fleet. The delay on Block III was the result of the
    pressing need to address aircraft modifications for combat that is,
    Blue Force Tracking, 701C model engines, Reset, and the program delay
    by 2 years of the Joint Tactical Radio System for the Block III Apache.
    Additionally, the Block III program, if kept on the original schedule,
    would have taken two AH-64D battalions (48 aircraft) out of the war
    fight for induction on the AH-64D Block III production line. In the 2-
    year delay time period, an additional 96 AH-64As, found in the Army
    National Guard and Army Reserves, will be converted to the AH-64D Block
    II configuration.

        5. Senator McCain. Secretary Bolton and General Cody, the AEBs will
    be augmented with light utility helicopters for active Army
    installation support and for State and homeland defense missions. Why
    is it not worth the additional cost to acquire more Black Hawks and
    avoid a separate low-density fleet of helicopters that the Army cannot
    employ in non-permissive environments?
        Mr. Bolton and General Cody. The Army is planning on procuring the
    Light Utility Helicopter (LUH) to replace the aging OH-58A/C and UH-1
    fleets. The OH-58NC and UH-1 aircraft are currently performing non-
    combat missions for the National Guard and table of distribution and
    allowances (TDA) units within the active component. The LUH will be a
    versatile, low cost aircraft capable of performing the missions that
    are currently conducted by the OH-58 and UH-1 aircraft. The procurement
    of the LUH will allow the Army to not only divest itself of aging
    aircraft, but it will also allow for the 00-60 aircraft currently
    conducting missions in TDA units to cascade to the combat units. The
    delta between the procurement and operating and sustainment cost of the
    LUH and the UH-60, as noted in the analysis of alternatives for the
    LUH, supports the acquisition of the LUH.

                                     reset
        6. Senator McCain. General Cody, the Army is spending billions of
    dollars to repair and replace equipment damaged and destroyed in Iraq
    as units rotate back to the U.S. and prepare for their next deployment
    in a process called ``Reset.'' The Army's own ``stress on equipment''
    study suggests that the Army is building up a backlog which in fiscal
    year 2005 alone is $7 billion-$13 billion. How big is the fiscal year
    2005 backlog growing and what steps are you taking to mitigate the
    growth in backlog?
        General Cody. A backlog of requirements for repair is growing
    primarily because equipment is in use and cannot be removed for higher
    level repair. Equipment usage has prevented the Army from removing some
    equipment from theater, such as the vehicles with added armor. Much of
    this equipment will be in need of replacement, overhaul, or
    recapitalization when hostilities end. This includes our prepositioned
    stocks and the equipment units have left behind in theater for use by
    follow on units. In addition, the Army sees the need to recapitalize a
    number of systems, but the equipment is with units that are training to
    return to theater. The exact size of the backlog is difficult to
    determine and its growth will be dependent on the length of future
    operational requirements. The Army estimates it will take 2 years
    following the end of hostilities to fully repair and replace all
    necessary equipment. Two Army initiatives, Lean Manufacturing and
    Public Private Partnerships, help to mitigate the growth in backlog.
    Lean Manufacturing is a process redesign effort that increases the
    efficiency of our maintenance lines. Partnerships between our Army
    depots and the commercial sector enable us to capitalize on the
    strengths of each, which results in reduced costs and improved through
    put.

        7. Senator McCain. General Cody, has the industrial base been able
    to absorb the increase in demand to repair and replace equipment?
        General Cody. For the vast majority of Army systems, the industrial
    base has been able to absorb the increase in demand to repair and
    replace equipment. In some cases, we have purchased from foreign
    suppliers. In other cases, we have made specific investments in Army
    arsenals and depots and hired additional civilian workers to meet large
    demands for cutting armor plate steel for modification kits to improve
    armor protection for unarmored vehicles. We have also been working hard
    to increase private sector production capabilities. In limited cases,
    we will invest in private facilities, purchasing production equipment
    to meet higher demands of sustainment and Army modernization.

                                   modularity
        8. Senator McCain. General Cody, the Army is in the process of
    restructuring its force to better meet current operational
    requirements. The Department recognizes that this will require
    significant resources and has added $25 billion in the fiscal year
    2007-2011 time period to the $13 billion the Army already identified
    for modularity. The Department requested $4.6 billion in the fiscal
    year 2005 supplemental budget request and intends on requesting an
    additional $5 billion in the fiscal year 2006 supplemental request.
    Does the $48 billion represent the full costs for modularity
    anticipated to be funded through regular and supplemental
    appropriations? If not, what is the Army's current cost estimate
    through 2011?
        General Cody. The Army estimates the costs to transform to the Army
    Modular Force at $48 billion. This includes procurement of equipment,
    requisite infrastructure, sustainment, and training. Not included in
    the Army Modular Force cost is an estimated $16 billion in fiscal year
    2006-2011 for the fully burdened personnel costs of the temporary
    30,000 endstrength increase to support both the operational
    requirements for the global war on terror and the Army Modular Force
    transformation. The Army anticipates supplemental or over guidance
    support to fund the end strength increases.
        Of the $48 billion to transform to the Army Modular Force, the Army
    base program will fund $38 billion: a combination of $13 billion
    reprogrammed for fiscal year 2006-2011 and an additional $25 billion
    provided in the President's 2006 budget for fiscal year 2007-2011. The
    Army anticipates that supplementals will fund $10 billion for
    Modularity in fiscal year 2005 and fiscal year 2006.

        9. Senator McCain. General Cody, last year at this time, the Army
    estimated modularity costs to be $28 billion. Why has the estimate
    increased from the original estimate?
        General Cody. The original estimate for the Army Modular Force in
    January 2004 included building 10 new Infantry Brigade Combat Teams
    (BCTs) in the active component and the reorganization of 33 active and
    34 Army National Guard BCTs. Today's estimate accounts for reorganizing
    not only the BCTs but the entire Army to include support brigades,
    theater support structure and Joint Capable Headquarters in the Active,
    Reserve, and Army National Guard. In addition, the Army is actively
    responding to operational requirements and lessons learned in the
    global war on terror.
        Lessons learned from Operation Iraqi Freedom (OIF) and Operation
    Enduring Freedom (OEF) have highlighted shortcomings in communication,
    force protection, intelligence, surveillance, and reconnaissance (ISR),
    and move capabilities. The Army Modular Force redesign that the Army is
    currently executing is designed to address these shortcomings through
    both organizational changes and investment in new equipment
    procurement. We have added and modified equipment in our modular
    designs in real time to support our soldiers in the contemporary
    operating environment. Since January 2004, equipment additions and
    force design changes have been implemented. Some of these changes
    increase costs but many will save lives and increase operational
    effectiveness. Throughout our formations in combat, combat support, and
    combat service support units across the Active, Guard, and Reserve we
    have responded to the needs of the operational environment by hardening
    vehicles, increasing crew served weapons densities, and adding
    communication capabilities.

        10. Senator McCain. General Cody, will the planned level of funding
    be sufficient to man and equip the National Guard brigade combat teams
    to the same standard as the active component?
        General Cody. Yes. The current planned funding will man and equip
    National Guard brigade combat teams to the same standards as their
    active component counterparts.

        11. Senator McCain. General Cody, have you identified your fiscal
    year 2006 modularity requirements and are they included in your fiscal
    year 2006 budget request? If so, what are they? If not, why not? Please
    submit a detailed list of the total fiscal year 2006 and fiscal year
    2007 modularity requirements.
        General Cody. The modularity requirements for fiscal year 2006 are
    $6.5 billion of which $1.5 billion is included in the fiscal year 2006
    budget request. The fiscal year 2006 budget request includes $668
    million in operations and maintenance, $808 million in procurement and
    $24 million in research, development, test and evaluation. The
    remaining $5 billion requirement for investment will be submitted in
    the anticipated fiscal year 2006 supplemental request. In fiscal year
    2007, the modularity requirement is $6.6 billion with approximately
    $5.4 billion for procurement, $700 million for operations and
    maintenance and $500 million for military construction which also
    includes both family housing and barracks construction.

        12. Senator McCain. General Cody, given the high operational tempo
    for Operation Iraqi Freedom and Operation Enduring Freedom, will the
    Army be able to adequately man and equip the new modular brigades,
    including 10 to 15 additional brigade-size units, by 2007 as originally
    intended?
        General Cody. Yes, while there will be some challenges in select
    low density skills, the Army will be able to man and equip the 10 new
    modular units of action as originally intended. The skills which remain
    a challenge are primarily due to the large increase of senior
    noncommissioned positions, which require time to grow. The decision for
    the additional five has not been made.

        13. Senator McCain. General Cody, is the Army planning to do
    additional analysis, modeling, and simulations to determine the
    adequacy and capabilities of the modular units currently being fielded?
        General Cody. Yes. The Army will continue to review the current
    design of the modular brigades and refine the design as necessary based
    on simulations, modeling, and analysis. In addition, the new modular
    designs will be reviewed and adjustments made based on the lessons
    learned in their fielding, training, and employment in combat
    operations in Operation Iraqi Freedom and Operation Enduring Freedom.

        14. Senator McCain. General Cody, what tradeoffs is the Army
    prepared to make to fund modularity should future defense budgets be
    constrained?
        General Cody. The Modular Force is critical to our continued
    success and execution of the global war on terrorism. It is our second
    highest priority overall, after the global war on terror. Our
    aggressive plan to rapidly field increased numbers of combat effective
    units to support subsequent rotations in Operations Enduring Freedom
    and Iraqi Freedom is based on funding commitments from both the
    executive branch and the Office of the Secretary of Defense. Should
    future funding not support our transformation to a modular force, we
    will neither trade-off combat capability of the new formation nor
    essential quality of life programs for our soldiers and their families.
    The first would result in an overall decrease in our fighting ability,
    and the second would jeopardize the health of our All-Volunteer Force.
    Instead, we would make the difficult decision of reducing the number of
    formations in the force to preserve its quality.

        15. Senator McCain. Secretary Bolton and General Cody, the Office
    of the Secretary of Defense (OSD) recently directed the Army to submit
    to the Deputy Secretary a plan that integrates its Future Combat System
    (FCS) and modularity programs. Where is the Army in the development of
    a plan to integrate FCS and modularity programs? If so, what is the
    Army's strategy for integrating the new modular units and their
    equipment now being fielded, and the FCS?
        Mr. Bolton and General Cody. OSD asked the Army to explain the two
    programs and how they work together to help OSD achieve the force
    objectives in the National Military Strategy. That report is due to OSD
    by April 1, 2005. The report will provide a clear and consistent step-
    by-step vision of the Army's transformation to the future with the
    development of organization and doctrine, first in the Modular BCTs
    then added capability with FCS spirals, with the next step being the
    conversion of Modular BCTs to the FCS units of action (UAs). The step-
    by-step conversion of Army Maneuver Brigades to the Future Force shows
    that Modularity, FCS spirals, and FCS UAs are compatible, sequential,
    and necessary.

        16. Senator McCain. Secretary Bolton and General Cody, has the Army
    developed an integrated funding plan to consider requirements and costs
    of FCS, modularity, and equipment reconstitution from ongoing
    operations?
        Mr. Bolton and General Cody. The Army plan addresses the challenge
    of balancing the complexities of funding a war while simultaneously
    sustaining the current force and transforming to the Future Force. The
    Army program provides 10 new modular combat brigades, converts others
    to modular designs, continues the development of FCS, spirals relevant
    technologies into the current force, and sustains aging vehicle fleets.
    Given assumed levels of funding, the Army has built an executable plan.
    At the completion of fiscal year 2011, the Army will have converted 77
    BCTs to the modular design. Given current guidance on available
    funding, there is sufficient funding to develop FCS and reset and
    recapitalize the operating forces. Programmed actions to reset and
    recap will sustain an adequate average fleet age of key combat systems.
    During the Extended Planning Period (EPP), the FCS program is projected
    to begin fielding FCS-equipped BCTs. Given current assumptions and
    plans, the projected FCS requirements ``bow wave'' is $6.5 billion over
    the EPP (fiscal year 2012-2020), which translates to 2 percent of
    requirements not resourced in projected funding. The Army assesses the
    requirements bow wave as manageable financial risk and has sufficient
    trade space in Army research, development, and acquisition programs to
    eliminate the bow wave in future programming cycles. Retaining
    flexibility in planning and a sound and realistic resourcing strategy
    is an imperative for current readiness as well as for successful
    transformation. With the indispensable support of Congress and DOD, the
    Army will continue to adapt its programming to adjust to the urgent
    priorities of supporting a force at war as well as transform for the
    future. The future Army modular force will consist of a balanced array
    of these transforming units and will be poised to meet the demands of
    our National Security and Defense Strategies in the 21st century.

                              future combat system
        17. Senator McCain. Secretary Bolton and General Cody, according to
    budget documentation, the Army has invested roughly $6.0 billion in the
    FCS to date, including $2.7 billion authorized in the National Defense
    Authorization Act for Fiscal Year 2005, and is still debating
    requirements. In the fiscal year 2006 budget, the Army requested $3.4
    billion for the continued development of the FCS and restructured
    program to accelerate capabilities to the current force. Can you tell
    us what capabilities will be fielded in fiscal year 2008 and the scope
    of fielding?
        Mr. Bolton and General Cody. The Army plans to procure limited
    quantities of FCS accelerated capabilities, referred to as Spiral
    Program Manager (PM) UA terminology is now Spin) 1, in the fiscal year
    2008 timeframe. These FCS accelerated capabilities consist of the
    unattended ground sensors, intelligent munitions systems, non-line of
    sight--launch system, the first installment of the FCS Network that
    includes an integrated computer system, system of systems common
    operating environment and partial FCS Battle Command. The Spin (PM UA
    terminology is now Spin) 1 accelerated capabilities will be issued and
    installed on selected current force systems of the Evaluation Brigade
    Combat Team for the test, evaluation, and maturation of these
    technologies. Once the technologies have proven to meet required
    operating capability, the Army intends to field these technologies to
    Brigade Combat Teams starting in fiscal year 2010.

        18. Senator McCain. Secretary Bolton, the Joint Tactical Radio
    System (JTRS) Cluster 1 program has been delayed 20-32 months because
    of technical and security issues. What is the nature of the issues, and
    what is the impact of this delay on the fielding the first spiral 1
    increment?
        Mr. Bolton. The JTRS Cluster 1 delays are primarily related to
    three issues: cost/schedule growth due to technology availability,
    National Security Agency (NSA) security certification/architecture
    requirements, and Size, Weight, and Power (SWaP). These requirements
    have necessitated a redesign of the current hardware baseline (as
    implemented in Cluster 1 Pre-Engineering Development Models (Pre-
    EDMs).) The Cluster 1 program has instituted an aggressive technology
    maturation program to deliver items such as antennas and power
    amplifiers capable of satisfying the broad range of frequencies and
    throughputs which must be supported. In addition, the program is
    working very closely with NSA to identify a cost efficient approach for
    resolving the security issues. The FCS program is working very closely
    with the JTRS Cluster 1 program to minimize any impacts. The FCS
    program has purchased multiple Cluster 1 Pre-EDMs for Core program and
    Spiral (PM UA terminology is now Spin) 1 integration requirements.
    Cluster 1 currently plans on delivering  fully NSA certified EDMs and
    low-rate initial production (LRIPs) in time to support fielding of FCS
    Spiral (PM UA terminology is now Spin) 1. Assuming the Cluster 1 early
    operational assessment and Defense Acquisition Board is successful and
    Cluster 1 is given the authorization to proceed in summer 2005, the
    impact to the FCS core program is negligible. As part of FCS's risk
    mitigation strategy; however, other radio options/alternatives are
    being considered.

        19. Senator McCain. Secretary Bolton and General Cody, the Army is
    working with OSD to develop an independent cost estimate for the FCS
    program. On March 14, 2005, a Bloomberg News report indicated that the
    cost now exceeds $133 billion and that may be for only 15 units of
    action. Have you identified all of the program requirements?
        Mr. Bolton and General Cody. All the current Army requirements for
    FCS that exist in the Joint Requirements Oversight Council Operation
    Requirements Document (ORD) and the Operation and Organization document
    have been identified and flowed down to and are the basis for the FCS
    System of Systems Specifications (SoSS). As a result of this flow down,
    the SoSS contains all of the FCS requirements for the individual
    systems/platforms. Since the SoSS requirements are derived directly
    from the ORD the requirements are directly traceable to specific ORD
    paragraphs. This traceability and the resulting connectivity assures
    that all Army requirements in the ORD and organization and operation
    (O&O) have been covered by the SoSS and that any change in requirements
    can be quickly and easily flowed into the SoSS.

        20. Senator McCain. Secretary Bolton and General Cody, what are the
    cost drivers for the program?
        Mr. Bolton and General Cody. The acquisition cost of the FCS
    program includes both research, development, test and evaluation
    (RDT&E) and procurement. For the FCS program, RDT&E accounts for
    approximately 25 percent of the acquisition cost and procurement: 75
    percent. The cost drivers in RDT&E are Design Engineering (to include
    software development), Systems Engineering and System Test &
    Evaluation. As is typically the case with Army acquisition programs,
    recurring production is the primary cost driver within procurement,
    accounting for approximately 75 percent of total procurement. Within
    recurring production, Manned Ground Vehicles account for approximately
    60 percent, command, control, communications, computers, intelligence,
    surveillance, and reconnaissance (C\4\ISR) 25 percent, and the
    remaining systems (unmanned ground and air vehicles, non-line-of-sight
    (NLOS-LS), and intelligent munitions system (IMS) 15 percent.

        21. Senator McCain. Secretary Bolton and General Cody, do you
    really believe the program is affordable given your end strength,
    modularity, and reset requirements?
        Mr. Bolton and General Cody. The Army has developed an integrated,
    executable plan that provides the means for the Army to transform over
    time, while continuing to provide modernized land forces for success in
    the near-, mid-, and long-term future. The plan addresses and balances
    the complexities of funding a war while simultaneously transforming to
    the Future Force and sustaining the Current Force. The plan provides 10
    new modular maneuver brigades, converts 67 others to modular designs,
    continues development of FCS, spirals relevant technologies into the
    current force, and sustains aging vehicle fleets. Given assumed levels
    of funding, the Army has built an executable plan.

        22. Senator McCain. Secretary Bolton and General Cody, during the
    17 months since the milestone B (MS B) to transition FCS into system
    development and demonstration (SDD), the FCS lead systems integrator
    (LSI), in conjunction with the Training and Doctrine Command (TRADOC),
    has conducted numerous engineering trade studies to mature the FCS
    design concept. Has the Army acted on these trade studies?
        Mr. Bolton and General Cody. Yes, these trade studies have informed
    the Army. This has supported actions with their results incorporated
    into the ORD, System of Systems Specification, O&O and Design Concept.
    There are additional trade studies in progress and as the program
    proceeds, more trade studies will continue to ensure that quality
    program decisions are made and that potential impacts on the  program
    and systems are addressed both from technical and operational points of
    view.

        23. Senator McCain. Secretary Bolton and General Cody, what are the
    outstanding major decisions regarding the survivability and
    deployability of the FCS platform?
        Mr. Bolton and General Cody. PM UA and the LSI briefed a concept
    for each of the eight manned ground vehicles (MGV) to TRADOC leadership
    in November 2004. These concepts are deployable by C-130, but they do
    not satisfy all of the user's requirements. However, emerging results
    from initial force effectiveness analysis reflect that the concepts are
    operationally effective. The outstanding major decisions regarding
    survivability and deployability of manned ground vehicles are tied
    directly to Army leadership approval to proceed with these concepts.
    Concept approval is expected to be received prior to MGV System
    Functional Review in March 2006.

        24. Senator McCain. Secretary Bolton and General Cody, does the
    Army still have a C-130 transportability requirement for FCS? What is
    the impact of a C-130 transportability requirement on FCS
    survivability, lethality, reliability, and maintainability?
        Mr. Bolton and General Cody. Yes, the Army still has a C-130
    transport requirement for the FCS-equipped unit of action (UA). The
    requirement of using a C-130 pushes technology to be smaller and
    lighter in order to meet requirements such as survivability and
    lethality. MGVs are projected to meet reliability and maintainability
    requirements through the FCS program's investment in a robust
    reliability and component maturation program and by integrating
    logistics influences up front and throughout the systems engineering
    process. MGV system-level trades to date have produced a relevant and
    balanced set of capabilities in a C-130 deployable concept
    configuration. As the program progresses through the systems
    engineering process and enters into the design phase, we will continue
    to assess and better understand the impacts. Emerging results from
    recent Force Effectiveness (FE) analysis has indicated that the current
    MGV concepts are operationally effective. Continued FE analysis will
    enable the Army to further assess and improve upon the MGV design
    concepts.

        25. Senator McCain. Secretary Bolton, originally, the FCS program
    identified 31 critical technologies, 25 percent of which are at or
    above technical readiness level (TRL) 6. Now, the restructured program
    identifies 32 critical technologies, of which 24 percent are at or
    above TRL 6. What does that say about program risk?
        Mr. Bolton. When the program began, there were 31 Critical
    Technologies (CTs). Seven (23 percent) of which were at TRL 6. When the
    program subdivided CTs for better clarity there were some pieces that,
    although mature, were not yet tested in an ``FCS'' relevant environment
    and therefore their resulting TRL was lower, however, if one considers
    all of the CTs including the subdivided pieces, there are 54 CTs of
    which 20 (37 percent) are at TRL 6 or higher. From a program risk
    standpoint, only 5 of the CTs have a high (red) risk rating, 19 of the
    CTs have a moderate (amber) risk rating and the remaining have low
    (green) risk rating.

        26. Senator McCain. Secretary Bolton, the ``Network'' is considered
    the highest priority for FCS program development. Two key complementary
    programs for FCS are the Warfighter Information Network-Terrestrial
    (WIN-T) and JTRS, which will provide the ``pipes'' for the network. Why
    exactly is the FCS network so critical to the program?
        Mr. Bolton. The FCS Network satisfies voice, data, and video
    transmission and processing requirements necessary to realize network
    centric operations. This network includes not only the WIN-T and JTRS
    ``pipes,'' but also integrated sensors, vehicular routers, and
    networked Battle Command software providing a ``Network'' of sensors,
    computers, radios, applications, and services to extend the Warfighters
    ability beyond his/her field of view. Using Beyond Line of Sight
    systems (unmanned vehicles, sensors, and munitions) extends the
    warfighters fighting ability beyond today's engagement distances. The
    centerpiece of FCS is the Network.

        27. Senator McCain. Secretary Bolton, is the network platform
    dependent?
        Mr. Bolton and General Cody. The network is not platform dependent,
    it is part of the Army's overall LandWarNet network. FCS is the DOD's
    first step to develop an integrated fighting system rather than
    traditional efforts to develop a program like a radio or a tank.

        28. Senator McCain. Secretary Bolton, are there plans to migrate
    the FCS network to platforms such as the Abrams tank, Apache
    Helicopter, and Bradley fighting vehicle?
        Mr. Bolton. The answer is YES! The Army's Spiral (PM UA terminology
    is now Spin) Out strategy is designed to migrate the FCS network to
    platforms such as Bradley, Abrams, and high mobility multi-purpose
    wheeled vehicles (HMMWVs). The extent of this migration is based on
    priorities and available funding.

                      commercial item procurement strategy
        29. Senator McCain. Secretary Bolton, the FCS program uses
    significant new management practices under the authority of an Other
    Transaction Agreement (OTA)--with commercial-like qualities. Why are
    elements of the FCS program being acquired as commercial items?
        Mr. Bolton. Elements of the FCS program are, in fact, commercial in
    nature, we recognize this in the method used to acquire these elements,
    at least prospectively. Since the FCS program is still in the SDD
    phase, we are not yet in the mode of acquiring production hardware or
    software. It certainly is true that the individual platforms comprised
    in the FCS family of systems are expected to be military, not
    commercial, in nature. However, numerous elements of the FCS system of
    systems either will be commercial in nature or are being developed
    using commercial-like processes and techniques. Examples would include
    individual software modules and protocols; it is also expected that
    some individual hardware platform components and subassemblies will be
    commercial or modified-commercial in nature.
        Under the OTA, authorization is given to acquire SDD requirements,
    which includes demonstration of prototype hardware and software. The
    LSI is allowed to use, in some cases, commercial best practices.
    However, the SDD instrument is not a Federal Acquisition Regulation
    (FAR) Part 12 commercial item acquisition, nor will the procurement
    contract now being planned for the balance of SDD take the form of a
    commercial-item acquisition. The procurement contract will be written
    in compliance with FAR Part 15.

        30. Senator McCain. Secretary Bolton, the FCS program calls for the
    development and fielding of a sophisticated, mobile, ad hoc network;
    software requiring 33 million lines of code; a family of light, highly
    mobile manned vehicles; several varieties of unmanned aerial and ground
    vehicles; advanced munitions; and highly capable sensors within a
    brigade-sized organization of 3,000 to 5,000 soldiers. Where may one
    acquire such items in the FCS program commercially?
        Mr. Bolton One cannot. Again, the contractual vehicle currently in
    place is an Other Transaction Agreement for SDD and not a FAR-based
    commercial contract. The major-item platforms that will constitute the
    FCS family of systems are military, not commercial, in nature and will
    be acquired under a FAR Part 15 contractual instrument.

                          other transaction agreements
        31. Senator McCain. Secretary Bolton, according to a report titled
    Institute for Defense Analyses (IDA) Review of FCS Management, ``[t]he
    Army-Boeing agreement does not anticipate future rounds of competition
    for FCS systems. . . [n]or does it appear that the current agreement
    provides the Army access to technical information sufficient to enable
    future rounds of competition. . .'' a situation that the Government
    would not find itself in if the Army had entered into a FAR Part 15
    contract for FCS. Most acquisition experts believe the value of holding
    such a competition generally produces savings of as much as 25 percent
    on weapons procurement programs. Your decision to enter into an OTA
    limited the Government's ability to conduct a competition and
    essentially guaranteed a sole source contract to Boeing. Exactly why
    did you make the decision to use an OTA, rather than a FAR-type
    contract, as the contract vehicle for FCS when it transitioned to the
    SDD phase, now valued at more than $20 billion? Take me through your
    decisionmaking process here.
        Mr. Bolton. The Army leveraged an existing option from the Defense
    Advanced Research Project Agency (DARPA) Concept and Technology
    Development (CTD) OTA. Under that OTA a best value competitive Source
    Selection was conducted by DARPA with Army participation and the LSI
    was selected. However, bearing in mind that FCS will include 18
    separate platforms plus the network, it remains true that significant
    competition exists at the first and second tier contract level
    including 23 highly competitive source selection best value awards made
    by the LSI for which the Army had review and final approval. These
    awards were made by the LSI without a single protest. The Army made the
    decision to use an OTA instead of a FAR based contract because we
    believed it would provide the flexibility to rapidly deal with
    technology development and continuous schedule requirement changes
    which were expected on this program given the original test,
    development and fielding schedules set by the Army. The OTA, however,
    included a significant number of FAR/DFARS clauses as well as tailored
    FAR clauses which we believe provided the safeguards to protect the
    Army and taxpayers.
        We are acquiring sufficient data to support a competitive
    procurement in the future. Technical data is being loaded into the
    Distributed Product Description (DPD) which is a subset database being
    used as part of the Advanced Collaborative Environment (ACE). The
    primary purpose of the DPD is to provide single source access to
    authoritative technical product data throughout the FCS program's
    lifecycle. DPD ties requirements specifications, modeling and
    simulation, design, and test data together to support the unit of
    action product elements. Data and Software developed under the OTA with
    Boeing, necessary to achieve practical application of deliverable
    items, components and processes shall be delivered to the government.

        32. Senator McCain. Secretary Bolton, Dr. Graham, and Mr. Boehm,
    Other Transaction Agreements have been used for much smaller research
    or prototype projects, especially those in which the DOD is seeking to
    engage nontraditional defense contractors that may be adverse to the
    costs of regulation and red tape associated with government
    procurement. Historically, OTAs required that the non-governmental
    party contribute at least 50 percent of the funding. What are the cost-
    share percentages for the non-governmental parties involved in the FCS
    Agreement?
        Mr. Bolton and General Cody. This Other Transaction Agreement is a
    Section 845 Other Transaction, this OTA is for Prototype development
    and is not based on a cost share relationship (cost sharing is not
    mandatory). Funding is provided by the Army to execute the OTA.
        Dr. Graham. Costs were shared in the initial phases of the FCS
    program, but are not shared in the current SDD phase. The situation is
    as follows:
    CTD Phase I:
        In May 2000, DARPA, in partnership with the Army, awarded cost-
    sharing OTA agreements to four industry teams for the FCS CTD I:

             ``Team Gladiator'': Lockheed Martin and TRW [Agreement
            amount, cost-shared with consortium: $15,461,499; government
            share: $10,000,000]
             TEAM FoCuS Vision Consortium: General Dynamics,
            Raytheon, United Defense, Northrop Grumman and ITT Industries
            [Agreement amount, cost-shared with consortium: $14,000,000;
            government share: $10,000,000]
             SAIC [Agreement amount, cost-shared with consortium:
            $12,830,470; government share: $10,000,000]
             Boeing Co., Phantom Works [Agreement amount, cost-
            shared with consortium: $23,299,998; government share:
            $10,000,000]
    CTD Phase II:
        In March 2002, DARPA and the Army selected, from the four CTD I
    competitors, a merged Boeing-SAIC team to act as the LSI for CTD Phase
    II. This CTD II contract was for $154 million. (The DARPA-Boeing
    agreement was a cost-share arrangement with the DARPA cost being $154
    million and the Boeing share being $86 million.)
        During this competition, the Army announced its intent to include
    an option within the resultant CTD II OTA agreement to permit a sole-
    source award to the winner for follow-on work in the SDD phase.
    System Design and Demonstration:
        In May 2003, after a Milestone B review and OSD authority to enter
    development was granted, the Army awarded a letter contract for System
    Design and Demonstration to Boeing.
        Boeing agreed to act as a Lead Systems Integrator to develop and
    field a family of systems, networked together into a system of systems,
    which is to be the core of a new brigade-sized Army organization called
    an UA. The Agreement arose out of the option contained within the OTA
    agreement awarded by DARPA in 2002 for performance by Boeing within the
    CTD phase of the FCS program.
        The Army awarded a letter contract to Boeing for the SDD on or
    about 30 May 2003; a definitive agreement was finalized in December
    2003. The Army-Boeing Agreement was also awarded as an Other
    Transaction as defined in 10 U.S.C. Sec. 2371 and Section 845 of the
    1994 National Defense Authorization Act (Public Law 103-160), as
    amended (OTA). The total negotiated amount of the agreement between
    fiscal year 2003 and fiscal year 2012 is $14.78 billion.\1\
    ---------------------------------------------------------------------------
        \1\ Article VI, Obligation and Incremental Funding section of the
    Agreement.
    ---------------------------------------------------------------------------
        The Army-Boeing Agreement for SDD is a Cost Plus Fixed/Incentive
    fee-type. The fixed fee is set at 10 percent; the incentive fee is as
    much as an additional 5 percent.
        The Incentive Fee structure is targeted on LSI performance at five
    program milestones: Preliminary Design Review (0.50 percent), Critical
    Design Review (0.50 percent), Initial Production Decision #1 (1.75
    percent), Initial Production Decision #2 (1.75 percent), and System of
    System Integration and Verification (0.50 percent) \2\
    ---------------------------------------------------------------------------
        \2\ Article VII Fee section of the Agreement.
    ---------------------------------------------------------------------------
        Mr. Boehm. The National Legal and Policy Center obtained its copy
    of the Future Combat Systems OTA via Freedom of Information Act Request
    solely to determine whether the agreement contained adequate legal
    protections to deter waste, fraud, and abuse. Our analyses were largely
    limited to legal issues associated with the failure of the OTA to
    include the statutory protections found in standard Department of
    Defense acquisition contracts and did not cover cost issues.

        33. Senator McCain. Secretary Bolton, are the non-governmental
    parties sharing any of the risk or is the risk significantly on the
    government?
        Mr. Bolton. The nongovernmental parties are sharing the development
    risk of the FCS. The LSI concept, which is analogous to having a
    ``general contractor'' for a construction project, allows us to
    delegate overall system-of-systems integration and system development
    selection, and therefore some of the risk, to the LSI. We have
    incentivized this through the use of a fee structure that will reward
    for the efficient integration and delivery of the entire system of
    systems to the Government.

        34. Senator McCain. Mr. Francis, Dr. Graham, and Mr. Boehm, what
    are your thoughts about the risk associated with the FCS program?
        Mr. Francis. FCS is a development of unprecedented complexity for
    the Army. The Army faces significant challenges in setting
    requirements, developing systems, financing development, and managing
    the effort. Even with last year's restructuring of the program, the FCS
    is still at significant risk for not delivering planned capability
    within budgeted resources. This risk stems from the scope of the
    program's technical challenges and the low level of knowledge
    demonstrated at this point. The current schedule allows 9\1/2\ years
    from development start to the production decision. FCS is developing
    multiple interdependent systems and a network within a period of time
    that the DOD typically needs to develop a single advanced system. The
    FCS has demonstrated a level of knowledge far below that suggested by
    best practices or DOD policy. Nearly 2 years after program launch and
    about $4.6 billion invested to date, requirements are not firm and only
    1 of over 50 technologies are mature-activities that should have been
    done before the start of system development and demonstration. If
    everything goes as planned, the program will attain the level of
    knowledge in 2008 that it should have had when it started in 2003. But
    things are not going as planned. Progress in critical areas, such as
    the network, software, and requirements, has been slower than planned.
    Proceeding with such low levels of knowledge makes it likely that FCS
    will encounter more problems late in development, when they are costly
    to correct.
        The relatively immature state of program knowledge at this point
    does not provide a solid basis for making a good cost estimate.
    Independent estimates should provide more information but are not yet
    completed. If the cost estimate for FCS is no more accurate than
    traditional estimates, the impact of cost growth could be dire, given
    the program's magnitude. At this point, the FCS provides a concept that
    has been laid out in some detail, an architecture or framework for
    integrating individual capabilities, and an investment strategy for how
    to acquire those capabilities. It is not yet a good fit as an
    acquisition program. If FCS-like capabilities are to be made acquirable
    for which the Army has made a compelling case, then different
    approaches for FCS warrant consideration because they offer building
    higher levels of knowledge in advance of investment decisions and thus
    lower risk.
        Dr. Graham. It was understood from the beginning of the FCS program
    that its execution would pose unprecedented challenges. The FCS program
    has taken on a number of very ambitious technical challenges in an
    environment of an incompletely defined Operational Concept and
    Operational Requirements document:

             It is technically ambitious (GAO reported 75 percent
            of FCS technologies are currently below TRL 6).\3\
    ---------------------------------------------------------------------------
        \3\ William Graveline, ``GAO Briefing to the FCS Quarterly
    Management Review in West Point, NY,'' 20 April, 2004.
    ---------------------------------------------------------------------------
             It is founded on the development of Joint Operational
            Concepts for interdependent Joint ISR and Joint fires, but the
            Joint network enablers are lacking.
             It entails a high degree of technical integration
            across many components, including complementary systems still
            under development.
             It involves the full spectrum of Army Doctrine,
            Organizations, Training, Leading Development, Material,
            Personnel, and Facilities (DOTLMPF).
             It touches on the future of every branch of the Army.
             And, it remains, even after the current restructuring,
            on an aggressive, schedule driven development path.

        Risk management at the corporate Army level is needed to address
    FCS risk factors that are beyond the control of the FCS program, or are
    of a scale that could force significant course corrections in the
    execution strategy for the program or that could force a rethinking of
    the overall design of the FCS-equipped Unit of Action.
        The Army's restructuring of the FCS program in 2004 represents a
    good example of the kind of corporate review that is needed. It is our
    view that--given the complexity, scale, and uncertainties associated
    with FCS development--such reviews, along with appropriate adjustments,
    should be considered a normal, periodic activity for the FCS program.
    That restructuring provided the program with more time and money, but
    it did not eliminate the fundamental challenges the program will need
    to overcome.
        The IDA study advocated development of a systematic Army corporate
    risk management framework that would institutionalize the kind of risk
    management assessment that was undertaken in the 2004 restructuring of
    FCS, and ensure reassessments are performed periodically as a routine
    element of FCS management. Such a framework would enable the Army's
    senior leadership to take stock of emerging FCS program realities and
    outline contingency ``success'' options for realigning program plans
    and resources. With such a strategic management mechanism in place, the
    corporate Army should be able to view FCS from a strategic perspective.
    Left to its own devices without such a structure, and as outside
    decisions that affect it are made, the FCS program may produce systems
    within its budget that mayor may not provide the best capability for
    the Army as a whole.
        With adequate preparation, adverse developments or external events
    that invalidate current program plans or assumptions need not preclude
    successful FCS outcomes, albeit outcomes that may differ significantly
    from the Army's initial plans. For example, contingency options might
    include deferral of the some platforms (the realignment features some
    of this); other options might entail a relatively greater focus on the
    fielding of incrementally improved networks and essential ISR systems,
    independent of platform developments. Yet other options might entail a
    focus on spiraling out limited FCS network capabilities to current
    units and focused experimentation therein to refine network functional
    requirements, while continuing R&D on elements of the program that
    deserve a longer development timeline. In each case, if managed
    effectively, program outcomes are possible that could substantially
    improve the Army's fielded capability, and hence be viewed as a
    success.
        Examples of Strategic Risks: Adverse developments in any of a
    number of areas could cause a significant setback to the FCS program.
    The IDA study identified several major risks that the Army should
    carefully monitor and address through the proposed strategic risk
    management framework:

             Emerging software cost and schedule growth.
             Uncertainties in the assumed FCS mobile ad hoc
            network's capabilities, including information throughput,
            latency, scalability, and Joint connectivity.
             Uncertainties in the ability of FCS vehicles to
            simultaneously meet weight, lethality, survivability,
            transportability, and maintainability targets.
             External factors, including program cancellations
            (Comanche) and the lack of a framework for developing adequate
            joint operational concepts and architectures.
             New requirements for spiraling out advanced
            capabilities to current forces, including FCS capabilities and
            concepts.
             Army budgets and affordability constraints.
             The demands of the global war on terrorism.

        Two specific examples were provided in the IDA Report to illustrate
    the potential application and value of the proposed corporate Army
    strategic risk management framework:

            Risk Management Scenario 1: Software Cost and Schedule.
            Increasing complexity of software integration, coupled with
            lower than expected LOC/hr productivity, could cause the
            software development cost estimate to rise from $5 billion to
            over $9 billion. Forecast software maintenance costs could grow
            accordingly.

        Software will account for well over half of the FCS development
    costs. There was a considerable range of uncertainty in the initial
    estimates of FCS software costs, and software historically has been a
    source of cost and schedule growth.
        Our preliminary review of the FCS software development effort finds
    leading indicators of significant cost and schedule growth to come. The
    initial program estimate was for a $5 billion cost for software in
    System Design and Development. The comparable OSD Cost Analysis and
    Improvement Group estimate was $8 billion. An IDA update based on the
    program's April 2004 estimate of 15.8 million Effective Software Lines
    of Code (ESLOCs) yields a revised cost estimate approaching $9 billion
    in fiscal year 2004 constant dollars. The historic productivity norms
    for software development indicate programs average about 65 percent the
    level of productivity assumed in the FCS program.
        Historical precedents also indicate that software development
    challenges will only grow as the FCS program progresses. IDA's studies
    of other program development efforts have shown that programs nearly
    always experience software requirements growth; software integration
    always proves to be more difficult than planned; productivity is less
    than projected; the experience and availability of people are below
    assumed levels; and the conversion and reuse of COTS software requires
    more effort than anticipated. Given the massive scope and complexity of
    the FCS development effort, it would be very surprising if these
    historical norms do not hold true here, as well.
        Indeed, at this early stage of the program, FCS is beginning to
    experience software build schedule slips. For example, almost half of
    the work content planned for Build 1 (0.7 million out of 1.6 million
    ESLOCs) of FCS software was recently pushed to Build 2. (Boeing notes
    that SoSCOE build 1 software development is on schedule, and that no
    SoSCOE software was moved between build 1 and build 2.) Even prior to
    the recent restructuring of FCS, the start of Build 3 had been delayed
    from February 2004 until October 2004. These data suggest that the FCS
    program has before it a substantial risk of software cost growth on the
    order of $3 billion to $4 billion over the development phase of the
    program. Such cost growth, accompanied by commensurate schedule delays,
    could require a significant realignment of the FCS development plan,
    even given the recent program realignment.

            Risk Management Scenario 2: Network Performance. Developmental
            and operational tests of the mobile ad hoc network performance,
            including the performance of JTRS radios and the WIN-T network
            development, could reveal that available designs will not
            provide the desired information throughput, scaling, or low
            latency, as well as seamlessly integrate with other networks,
            GIG interfaces, and ISR and joint weapons systems operated
            within the Joint battlespace.

        Many of the FCS technical challenges entail uncertainties in the
    ability to develop relatively mature technologies on a schedule
    commensurate with the FCS development schedule, but the development of
    the FCS network represents a technological challenge for which the
    underlying principles are not well understood. A mobile ad hoc network-
    of-networks has never been demonstrated on the scale envisioned for
    FCS. Predicting the performance of such a network remains an unsolved
    problem in basic research, and there is a significant probability that
    it will not be possible to develop a network of the assumed throughput
    and dependability on the FCS development schedule.
        The central importance of the network to the FCS concept of
    operations and the incomplete understanding of the principles clearly
    make the risks associated with that development strategic in nature--
    risks that the corporate Army must be able to assess and manage. It is
    essential that the progress, trends, and issues are clearly understood
    at each step in the development cycle, and that appropriate contingency
    plans are in place. For example, accepting, at least in the near-term,
    a somewhat more evolutionary approach for integrating Joint ISR,
    command and control, and weaponry, might accommodate an unfavorable
    network development scenario.
        Mr. Boehm. I share the views of Paul L. Francis of the Government
    Accountability Office with respect to the technological and
    programmatic risk of the FCS program. Mr. Francis had previously
    reported to Congress that, ``FCS is at significant risk for not
    delivering required capability within budgeted resources.'' The
    National Legal and Policy Center spent months assessing the legal
    pitfalls for the Department of Defense in using an OTA for the FCS
    program. Our conclusion was that an OTA greatly increased the risk that
    the program would fail to stay within its budget and meet its
    deadlines. OTAs were approved by Congress for much smaller research
    projects and are wholly inappropriate for a multi-billion dollar
    project as ambitious as the FCS program. By exempting defense
    contractors from normal acquisition rules, limiting Defense Department
    oversight, and greatly limiting legal options for the Defense
    Department when difficulties arise, an OTA is arguably the worst way to
    structure such a major undertaking.

        35. Senator McCain. Secretary Bolton, a former Deputy of the FCS
    program at the Defense Advanced Research Projects Agency (DARPA) and
    Army Deputy Director, Future Force Directorate briefed Senate Armed
    Services Committee (SASC) staff last week that the compelling reason to
    use an OTA for FCS was based on a poll taken of the prime vendors of
    the FCS program at the time (i.e., Boeing, Lockheed Martin, TRW,
    General Dynamics, Raytheon, United Defense, Honeywell, Textron,
    Northrop-Grumman, BAE, ITT Industries, and SAIC). Eighty-five percent
    of the respondents of the poll wanted an OTA with commercial-like
    clauses. Is it the Army's position in the development and acquisition
    of major acquisition programs that they poll industry to determine what
    contract vehicle to use to provide the most benefits to industry at a
    disadvantage to the taxpayer?
        Mr. Bolton. For SDD, the Army took no poll. We determined the
    contract vehicle, the OTA, plus certain FAR clauses protect our
    interest.
        A detailed analysis was conducted by the Army FCS Program Office to
    determine the best acquisition strategy and contracting approach in
    order to meet the overall program mission and requirements. This
    analysis is reflected in the approved Program Acquisition Strategy
    Report and Business Decision Document respectively.

                        contract clauses and protections
        36. Senator McCain. Secretary Bolton, the Army Deputy General
    Counsel for Acquisition told the SASC last week that he could not think
    of a single reason why the Procurement Integrity Act (PIA) should not
    be included in the FCS Other Transaction Agreement. As the Acquisition
    Contracting Executive--the Army's top acquisition executive--why did
    you not include the PIA in the FCS pact?
        Mr. Bolton. On April 26, 2005, the Army added FAR clauses
    implementing the Procurement Integrity Act, Cost Accounting Standards,
    and Truth in Negotiations Act to the current OTA. These clauses apply
    to all future actions under the current agreement until the transition
    to a FAR-based contract is complete.

        37. Senator McCain. Secretary Bolton, regarding the FCS OTA, the
    Army's Business Decision Document of March 2003 states: ``Clauses, that
    are typically barriers to the participation of nontraditional defense
    contractors (e.g. Cost Accounting Standards (CAS), Truth In
    Negotiations Act (TINA), intellectual property, audit and accounting
    requirements, etc.) have either been eliminated or significantly
    tailored. . . .'' The FCS contract has many traditional defense
    contractors whose participation in FCS could only be obtained by
    traditional clauses governing cost accounting standards, and audit and
    accountability requirements between the LSI and these major
    contractors. Why did the LSI include traditional FAR contracts with its
    major subcontractors yet the Army did not include these protections in
    a contract with the LSI? Can you think of a reason why CAS, TINA,
    intellectual property, audit and accounting requirements, etc. should
    not apply to the FCS program?
        Mr. Bolton. Defense contractors, to the best of our knowledge, do
    not use OTAs. They use contract mechanisms modeled after FAR for their
    subcontractors.
        The CAS standards are fully covered in the OTA. However, to answer
    the direct question, the primary advantage of not including the FAR-
    based CAS clauses in the OTA was that this action removed a potential
    flow-down requirement that many nontraditional defense contractors find
    onerous. It is for this reason that the OTA requires CAS-compliant
    accounting where a CAS-compliant system already is in place, but
    permits a system based on generally accepted accounting principles
    (GAAP) where a GAAP system is the one in place. This means that a
    potential commercial subcontractor would be able to make use of its
    existing GAAP system, and would not be faced with the duty to convert
    to a CAS-compliant system in order to participate as a subcontractor
    during FCS development and demonstration. There is no ``exclusion of
    cost accountability'' in the OTA per se: the OTA provides for
    government audit of records, and defines cost allowability per the FAR
    and DFARS contract cost principles.
        CAS, Intellectual Property, and Audit and Accounting requirements
    do apply to the current FCS OTA. The Defense Contract Audit Agency
    (DCAA) and Defense Contract Management Agency (DCMA) and the Army
    Grants Officer have full access to the LSI's cost data, as does the
    Army. In regard to the TINA requirement, it was not included because of
    the time and additional cost anticipated to do the TINA sweeps and
    certifications at the prime contractor and at each subcontractor level.
    The Army, however, did conduct a detailed negotiation with full access
    to all contractor/subcontractor cost data necessary to determine the
    contractor's proposal fair and reasonable. Additionally TINA
    certifications are not required for the competitive subcontracts placed
    by the LSI; this would be no different even if the Army had awarded a
    FAR procurement contract rather than an OTA, for the SDD phase.

        38. Senator McCain. Secretary Bolton, two DOD Inspector General
    Audit Reports, one in 1999 and the other in 2002, produced several key
    findings regarding the Department's use of OTAs. It appears that DOD
    has not realized the type of benefits that were the intent of Congress
    when they authorized this legislation for small developmental programs.
    Can you describe why the Army, DOD, and Congress would continue to
    spend critical taxpayers dollars under an OTA that would leave the
    government vulnerable to waste, fraud, and abuse and abuse the
    confidence of the taxpayers that we are spending their money wisely?
    What steps have you taken to try to protect the government and the
    taxpayer in this agreement, in the absence of the traditional contract
    provisions that are not included in the agreement?
        Mr. Bolton. The Army's OTA with the LSI includes a significant
    number of FAR and DFARS clauses which do protect the taxpayer.
    Additionally, a significant number of FAR and DFAR clauses were
    tailored to fit the particular requirements relative to this effort and
    included as Articles under the OTA. Again, DCAA and DCMA and the Army
    grants officer have full access to all cost data contained in the LSI's
    cost proposals. Additionally the independently conducted IDA report
    confirmed that the OTA had included the necessary protections making it
    similar to a FAR contract in regard to the protections afforded to the
    government.

                        ``non-traditional'' contractors
        39. Senator McCain. Secretary Bolton and Mr. Francis, the Army's
    Business Decision Document of March 2003 states that the FCS OTA
    ``continues the use of nontraditional contractors in significant roles
    and provides for innovative business managements or structures that
    would not be feasible or appropriate under a FAR-based contract or
    other Federal procurement.'' Furthermore, it states that the decision
    to use the OTA was based ``on significant participation of non-
    traditional defense contractors . . . and that two nontraditional
    defense contractors, Strategic Perspectives, Inc.(SPI) and Parametric
    Technology Corporation's participation is significant and they will
    continue to play a significant role in the SDD phase.'' But each of
    these contractors is exceedingly small. How does a contractor that has
    one employee, like SPI, play a significant role in FCS contract that is
    valued at nearly $133 billion?
        Mr. Bolton. The Business Decision Document anticipated significant
    participation of non-traditional defense contractors during SDD. To
    date, only a few non-traditional defense subcontractors are in place
    with the LSI but this may increase as additional second and third tier
    subcontracts are awarded. The non-traditional defense subcontractors
    are all performing Engineering and Technical services at various
    levels: 3D Research ($5.7 million), Huntsville, Alabama; Embedded Plus
    Engineering ($0.4 million), Tempe, Arizona; Northrop Mission Systems
    ($121 million), San Diego, California; and TechFinity, Incorporated
    ($0.2 million), Tarzana, California.
        Mr. Francis. The requirements for the use of nontraditional defense
    contractors in prototype projects are found in the National Defense Act
    for Fiscal Year 1994, P.L. 103-160, section 845, as amended
    (subsequently codified at 10 U.S. C. 2371 note). There, the act states:

              The Secretary of Defense shall ensure that no official of an
            agency enters into a transaction (other than a contract, grant
            or cooperative agreement) for a prototype project under the
            authority of this section unless

                      (A) there is at least one nontraditional defense
                    contractor participating to a significant extent in the
                    prototype project; or
                      (B) no nontraditional defense contractor is
                    participating to a significant extent in the prototype
                    project, but at least one of the following
                    circumstances exists:

                              I. At least one third of the total cost of
                            the prototype project is to be paid out of
                            funds provided by parties to the transaction
                            other than the Federal Government.
                              II. The senior procurement executive for the
                            agency . . . determines in writing that
                            exceptional circumstances justify the use of a
                            transaction that provides for innovative
                            business arrangements or structures that would
                            not be feasible or appropriate under a
                            contract.

        Since the act does not define what is meant by participation to a
    ``significant extent'' by a nontraditional defense contractor, DOD
    guidance defines it in terms of the significance of the contribution by
    that contractor, for example as a key participant in the program. The
    guidance states:

            Examples of what might be considered a significant contribution
            include supplying new key technology or products, accomplishing
            a significant amount of the effort, or in some other way
            causing a material reduction in the cost or schedule or
            increase in the performance. \1\
    ---------------------------------------------------------------------------
        \1\ Other Transactions (01) Guide for Prototype Projects, Under
    Secretary of Defense for Acquisition, Technology, and Logistics
    (January 2001), 11.

        The rationale the Army uses for the FCS OTA is based, in part, on
    participation by nontraditional defense contractors. As a result of the
    OTA, two of these nontraditional contractors--Strategic Perspectives,
    Inc. and Parametric Technology Corporation--were carried over from the
    concept and technology development phase of the program to assist the
    LSI with its responsibilities in system development and demonstration.
    The Army considers the expertise that these companies bring to the
    program and the importance of the projects they are working on as the
    significant contribution that justifies use of the OTA.
        According to the Army there are several nontraditional contractors
    working in the program at various levels. However, the bulk of the
    first tier subcontracts have gone to traditional defense contractors.

        40. Senator McCain. Secretary Bolton, what metric are you using to
    define the significant participation of a nontraditional defense
    contractor in the FCS program?
        Mr. Bolton. The Army and the LSI are using the ``Non-Traditional
    Defense Contractor'' definition as contained in the Floyd D. Spence
    National Defense Authorization Act for Fiscal Year 2001, Section 803.
    The Army's Business Decision Document anticipated attracting
    nontraditional defense contractors. Early in the SDD program, the LSI
    has identified and placed subcontracts with four nontraditional defense
    contractors. The expectation was that this would increase as additional
    second and third tier subcontracts were awarded. The nontraditional
    defense subcontractors are all performing Engineering and Technical
    services at various levels: 3D Research ($5.7 million), Huntsville,
    Alabama; Embedded Plus Engineering ($0.4 million), Tempe, Arizona;
    Northrop Mission Systems ($121 million), San Diego, California; and
    TechFinity, Incorporated ($0.2 million), Tarzana, California.

        41. Senator McCain. Mr. Francis and Mr. Boehm, what metric should
    the Army be using?
        Mr. Francis. According to the Army significant participation by the
    non-traditional contractors is determined by the value of the
    contribution they are making to the program, but not necessarily in
    financial terms. This is in accordance with DOD guidance on the use of
    non-traditional contractors in other transactions cited above.
        While GAO has not evaluated this, our previous work \2\ recommended
    to the Secretary of Defense that DOD develop metrics to measure the
    quality and significance of the involvement by non-traditional
    companies, which justifies use of other transactions. DOD has not yet
    done this.
    ---------------------------------------------------------------------------
        \2\ GAO, Acquisition Reform: DOD's Guidance on Using Section 845
    Agreements Could Be Improved, GAO/NSIAD-00-33 (Washington, DC: April
    2000).
    ---------------------------------------------------------------------------
        Mr. Boehm. While determining exactly what metric should be used by
    the Army with respect to defining significant participation of
    nontraditional defense contractors in the FCS program is beyond my area
    of expertise, I believe it is abundantly clear that the FCS failed to
    meet anything remotely close to a reasonable standard. Moreover, Acting
    Secretary of the Army Brownlee appears to agree with his statement in
    the Institute for Defense Analysis Aug. 2004 study when he stated,
    ``One intended benefit of OT authority--attracting nontraditional
    suppliers--has not been realized to date; the initial round of
    subcontracts has gone almost exclusively to traditional defense
    suppliers.'' (see: Review of FCS Management Issues, Final Report to
    Acting Secretary of the Army Hon. R.L. Brownlee, August 17, 2004, p.
    ES-3)

                                ethics programs
        42. Senator McCain. Secretary Bolton, a report, IDA Review of FCS
    Management, is critical of the Army's FCS management approach in that
    it intermixes government and industry personnel within Integrated
    Product Teams and relies heavily on its ``one-team'' partners--Boeing.
    The IDA report states ``[t]he Army needs to look after its own
    interests on the FCS program and not expect industry participants--no
    matter how well intentioned--to act independently of their explicit
    contractual obligations and financial interests. . .the inherent
    tension in the roles of Army participants--teammate vs. customer
    representative, and in the roles of industry representatives--teammate
    vs. representative of corporate management and stockholders.'' Has this
    critical IDA recommendation been implemented? If not, why not?
        Mr. Bolton. The reference of the IDA report left out a portion of
    the quote describing the approach which identifies, ``The Army's
    management approach intermixes government and industry experts within
    Integrated Product Teams (IPTs) and relies heavily on its ``one-team''
    partners and Boeing's management information system for information and
    analyses.'' It goes on to further acknowledge that this approach does
    have advantages. The IDA report suggests additional Army reviews and
    coordination of management assessments leading to possibly establishing
    additional Army offices. We believe the Army's overall concept for FCS
    of using the LSI and one-team approach with the use of IPTs has
    significant advantages as well as disadvantages. Although the Army is
    looking at organizational restructuring in this area, we believe the
    review/management responsibilities given to the Assistant Secretary of
    the Army (Acquisitions, Logistics, and Technology)(ASA (ALT)) and the
    current Army organizational structure is sufficient to help manage the
    program's interface with the LSI and other industry partners.

           impact of terminating/restructuring the existing agreement
        43. Senator McCain. Secretary Bolton, if Congress were to require
    you to terminate the existing agreement and proceed with the program
    under a traditional contract, what impact would that have on your cost
    and schedule?
        Mr. Bolton. If the existing agreement were terminated, the LSI
    would be entitled to those allowable costs associated with any
    administrative closeout activity (but such costs could not be greater
    than current funding obligated to date); and those costs covered by the
    ``termination'' article of the OTA. We would expect to be able to
    overcome most if not all of the costs envisioned by the OTA's
    termination article; however, since under this scenario the ending of
    the OTA would merely represent the passage of the program to a
    successor instrument, rather than a total cessation of work. That is,
    we would try to mitigate all cost and schedule impacts by doing some
    type of conversion of the OTA to a FAR-based contract, understanding
    that this would take an appropriate amount of time to plan, execute,
    and complete.

        44. Senator McCain. Secretary Bolton, what would be the costs in
    dollars and schedule if the Army was directed to include those Federal
    Acquisition Regulation clauses we believe would protect the government?
        Mr. Bolton. We are currently assessing the cost and schedule
    impacts to include the FAR clauses that have been identified with the
    LSI. In the event the Army converts the OTA to a FAR-based contract,
    clauses such as the TINA, PIA, and CAS FAR will initially be included
    in the OTA by modification in less than 30 days, with no additional
    cost to add them.

                           cost accounting standards
        45. Senator McCain. Secretary Bolton, I understand that the Army
    waived the requirement for the application of cost accounting standards
    even though the Army, through the LSI, is contracting with a number of
    traditional government contractors. What are the advantages and
    disadvantages to excluding the clause for cost accountability?
        Mr. Bolton. The CAS are fully covered in the OTA. The primary
    advantage of not including the FAR-based CAS clauses in the OTA was
    that this action removed a potential flow-down requirement that many
    nontraditional defense contractors find onerous. It is for this reason
    that the OTA requires CAS-compliant accounting where a CAS-compliant
    system already is in place, but permits a system based on GAAP where a
    GAAP system is the one in place. This means that a potential commercial
    subcontractor would be able to make use of its existing GAAP system,
    and would not be faced with the duty to convert to a CAS-compliant
    system in order to participate as a subcontractor during FCS
    development and demonstration. There is no ``exclusion of cost
    accountability'' in the OTA per se: the OTA provides for government
    audit of records, and defines cost allow ability per the FAR and DFARS
    contract cost principles.

                                  data rights
        46. Senator McCain. Secretary Bolton, in March 2003, the Army
    approved Boeing's recommendation to assign to it the $1.3 billion
    development effort for the FCS Distributed Management System. There is
    some question regarding the data rights of the software being developed
    in the FCS program. From Army documentation, it appears that Boeing
    owns the FCS software and that the Army owns the rights for unlimited
    use of the software. Boeing is developing the System-of-System Common
    Operating Environment (SOSCOE). It appears that the SOSCOE is new
    software developed only with government funds, yet I understand that
    Boeing owns the software and the Army has unlimited use of this
    software. Is this true? If so, why would the Army give up the ownership
    of software for which the government is funding the development?
        Mr. Bolton. The government data rights and software rights under
    this OTA are essentially the same as we would receive under a FAR-based
    contract, except that the government has more ability to control
    introduction of limited rights data and restricted rights software than
    would be possible in a FAR-based contract.

        47. Senator McCain. Secretary Bolton, if the Army wants to migrate
    the SOSCOE to other platforms, such as Abrams tanks and Bradley
    fighting vehicles, would the SOSCOE be provided to the contractors who
    make these platforms as part of government furnished equipment or would
    a fee have to be paid to Boeing for the use of SOSCOE?
        Mr. Bolton. PM UA will exercise Government Purpose Rights (GPR)
    through a SOSCOE distribution agreement between PM UA and receiving
    government organizations and their contractors. Boeing is not a party
    to this agreement and no fee will be paid to Boeing for license costs
    associated with software to which the government has purchased
    government purpose rights. This distribution can, at PM UA's
    discretion, include source code and the agreement mandates that any
    receiving contractor provide any changes made back to PM UA under GPR
    to ensure interoperability and configuration management. These changes
    are owned by the company making the change, not Boeing, again with the
    Army receiving full GPR.
        Because of the large number of commercial, off-the-shelf (COTS) and
    open source components in SOSCOE, receiving organizations or
    contractors will be given the option of signing a license agreement
    through Boeing that consolidates the individual license requirements of
    the various COTS and open source components. If they choose not to
    exercise this option, they will be required to separately negotiate
    required licenses to ensure that the receiving organization complies
    with the license requirements of all included components.

                                  competition
        48. Senator McCain. Dr. Graham, IDA's August 2004 report states,
    ``At the LSI-level, the OTA agreement laid the groundwork for Boeing to
    continue as the LSI through initial production and into full rate
    production.'' It goes on to say, ``At the subcontractor level, current
    FCS program plans do not position the Army to conduct future
    competitions at the major end-item level. . .'' In your opinion, is it
    prudent for the Army to position itself to depend on an LSI through the
    life cycle of the program?
        Dr. Graham. The Army established a Lead System Integrator (LSI) for
    the FCS program in order to capitalize on industry expertise in
    structuring, integrating, and managing complex development programs. A
    conventional prime contractor develops and builds what it can and
    subcontracts out work that it cannot do in-house. An LSI, on the other
    hand, is a prime contractor that is established primarily for system
    engineering, system integration, system planning, and control of the
    family of systems production.\4\ In general, the LSI concept has worked
    satisfactorily in other contexts, and we have discovered nothing to
    indicate such an approach cannot work for the FCS program.
    ---------------------------------------------------------------------------
        \4\ Acting Under Secretary of Defense (Acquisition, Technology, and
    Logistics) letter report on DOD's use of Lead Systems Integrators, 31
    March 2004. DOD indicates that an LSI is legally equivalent to a prime
    contractor.
    ---------------------------------------------------------------------------
        The Boeing-SAIC team was selected to act as the LSI because of its
    experience in technical management and program integration. Boeing has
    considerable experience in integrating other large complex programs,
    including the NASA International Space Station since 1997, and the
    Missile Defense Agency (MDA) Ground-Based Mid-Course Defense (GMD)
    program since 1998. Both agencies told the IDA review team that Boeing
    is technically very good and is doing an acceptable job in executing
    their programs.
        The decision to partner with an industry LSI creates some special
    new management challenges. The LSI is intended to act as a neutral
    party in assessing program tradeoffs and in offering advice. Thus, in
    theory, the LSI should not have a financial stake in developing and
    building the individual elements of the system; rather, it should
    recruit and oversee the best of industry. In the case of FCS, Boeing
    has a large financial stake in the future of the program, thus creating
    an inherent tension in Boeing's roles and responsibilities.
        Careful management of the government-industry relationships will be
    particularly important in the coming months as key design decisions are
    made on the program. The SDD new program plan calls for major design
    decisions to be made within the next 16 months, decisions that will
    define the contract deliverables and work shares for the remainder of
    SDD. Looking to the future production phase, moreover, there are tens
    of billions of dollars at stake in upcoming decisions regarding the
    composition of FCS units to be fielded beginning in 2014, as well as
    the capabilities that will be assigned to each element of FCS. Industry
    members of the ``One-team'' will face substantial pressures to vie for
    outcomes favorable to their stockholders.
        The flexibility built into the FCS program complicates the
    challenge of reconciling internal competitive pressures with corporate
    Army needs. The DOD customarily has relied on requirements documents to
    serve as the external benchmarks to discipline program development
    activities, but in this case these documents are being revised in
    parallel with ongoing FCS development activities. Thus, although FCS
    has an approved ORD and tentative Key Performance Parameters (KPPs),
    both the ORD, KPP, and even the FCS O&O remain in development in
    parallel with FCS program development.
        The need for the government to balance its priorities against
    corporate pressures is normal in any acquisition program, but these
    challenges are magnified in FCS. The Army needs to develop its own
    corporate perspective on FCS matters so that it can understand and
    manage the internal competitive pressures, while keeping the program
    focused on delivering a coherent set of capabilities for the Unit of
    Action.

        49. Senator McCain. Secretary Bolton, IDA's August 2004 report
    states, ``At the LSI-level, the OTA agreement laid the groundwork for
    Boeing to continue as the LSI through initial production and into full
    rate production.'' It goes on to say, ``At the subcontractor level,
    current FCS program plans do not position the Army to conduct future
    competitions at the major end-item level. . .'' Does the Army intend to
    compete FCS systems or components as the program transitions to
    production?
        Mr. Bolton. Yes. The current FCS Acquisition Strategy anticipates
    using the LSI approach for Initial Production and Fielding of the
    Army's first two unit of action brigades. This is consistent with the
    LSI concept of placing full SoS integration and testing responsibility
    and all logistical support under one defense contractor. Under SDD, the
    LSI will provide prototypes for SoS testing to establish that the
    individual systems work in a SoS environment to meet the required
    performance capabilities. In order to maintain the SoS performance
    capabilities demonstrated and minimize overall program schedule risk,
    initial LRIP requirements will be awarded to the LSI and its one-team
    partners. Follow on production for additional quantities of individual
    FCS platforms is planned to be solicited using full and open
    competition, and the breakout of FCS subsystems or components is
    contemplated as well, as the program transitions to stable production
    designs and full rate production quantities. The Army owns the data
    rights it needs in order to execute full-rate production contracts on a
    competitive basis.

                        future combat system restructure
        50. Senator McCain. Secretary Bolton, both the Government
    Accountability Office and the IDA have issued reports on the FCS
    program. Have the study recommendations influenced the FCS restructure?
        Mr. Bolton. Yes. The GAO has made a number of recommendations many
    of which have had a direct impact on the program transition
    (restructure). The GAO is invited and is an active participant in the
    FCS program reviews. The same can be said for the IDA evaluation,
    although the Army and the program office were already implementing
    several suggestions made by the IDA review prior to completion of the
    GAO report.
                                     ______

                 Questions Submitted by Senator James M. Inhofe
                             future combat systems
        51. Senator Inhofe. Secretary Bolton, given what you know today,
    would you change the approach the Service has embarked on in the
    acquisition of FCS, and is it true that we are already looking at ways
    to spiral some of these advance technologies into the current force?
        Mr. Bolton. At the time we felt the current plan was the best
    available option and we probably would still make that determination.
    The Army included a requirement to Spiral (PM UA terminology is now
    Spin) out available FCS technologies to the Current Force. The Spiral
    (PM UA terminology is now Spin) Outs incrementally add FCS capability
    every 2 years. In the fiscal year 2008 timeframe, the Army plans to
    procure limited quantities of FCS accelerated capabilities, referred to
    as Spiral (PM UA terminology is now Spin) Out 1. These FCS accelerated
    capabilities consist of the unattended ground sensors, intelligent
    munitions systems, non-line of sight-launch system, the first
    installment of the future network capabilities that include an
    integrated computer system, system of systems common operating
    environment and partial FCS Battle Command. The Spiral (PM UA
    terminology is now Spin) Out 1 accelerated capabilities will be issued
    and installed on selected Current Force systems of the Evaluation
    Brigade Combat Team for the test, evaluation, and maturation of these
    technologies.

        52. Senator Inhofe. General Cody, what are some of these spirals,
    and how will they affect our soldiers today and in the near future?
        General Cody. The Army remains committed to developing the future
    capabilities required to wage warfare in the next decade and beyond. As
    operations in Iraq and Afghanistan illustrate, technological and
    training superiority is a critical ingredient to battlefield success
    and must be maintained into the future. The Army will focus development
    efforts on identifying promising FCS technologies and ``spinning''
    these enhanced capabilities into the Current Force, so that soldiers
    continue to have technological overmatch. The definition of a ``Spin''
    is a product or capability set developed through one or more
    integration phases that can be fielded to the Current Force. As
    capabilities are spun into the Current Force, the Current Force will
    inform the Future Force. FCS as a system of systems continues maturing
    technologies to address the challenges of the future operational
    environment for combatant commanders and warfighters.
        The modular BCTs will enjoy the benefit of FCS core systems and
    capabilities along with complementary systems through four planned spin
    outs of technology into the Current Force. Beginning in 2008 and
    continuing through 2014. Spin 1 includes development of the unmanned
    ground system (UGS), IMS, and the NLOS-LS prototypes that will be used
    in the Evaluation Brigade Combat Team (E-BCT) for testing and
    experimentation. Following successful Spin Out capability testing, the
    lead Program Executive Office will be responsible for initiation of
    LRIP. This process will be repeated for Spins 2, 3, and 4. The Army
    plans to Spin FCS technologies at a rate of 6 Brigades per year.
        The operational capabilities brought forward to the Current Force
    by the ``spinning out'' FCS technologies include enhanced intelligence
    surveillance and reconnaissance capabilities utilizing multiple UGS
    variants, and increased lethality and survivability by adding the NLOS-
    LS and IMS. The FCS UGS program consists of tactical and urban sensors:
    Tactical-UGS (TUGS), which includes ISR-UGS and chemical, biological,
    radiological and nuclear (CBRN)-UGS; Urban-UGS (U-UGS), also known as
    Urban Military Operations in Urban Terrain (MOUT) Advanced Sensor
    System these provide soldiers with enhanced situational awareness in
    both urban and open environments. The NLOS-LS consists of a family of
    missiles and a highly deployable, platform-independent container launch
    unit (C/LU) with self-contained tactical fire control electronics and
    software for remote and unmanned operations, linking into the network,
    this provides unprecedented access to networked fires. The IMS is an
    unattended munitions system providing both offensive battlespace
    shaping and defensive force protection capabilities. This system
    provides on-off capabilities which meet the requirements of the
    National Landmine Policy.

        53. Senator Inhofe. General Cody, the FCS program is well into its
    second year of execution. It recently underwent a complete restructure
    to reduce risk and to field a fully-capable unit of action in 2014
    instead of 2010. The fiscal year 2006 budget was reduced significantly
    from what was projected last year. Does this restructure signal
    problems with the program, since the program is only about 5 percent
    along in its maturity?
        General Cody. No, the FCS program was generally performing within
    its cost and schedule performance metrics prior to the restructure. The
    intent of the restructure was twofold. First, it reduced developmental
    risk by allowing more time for technology maturation and the inclusion
    of additional experimentation. More importantly, the restructure
    allowed for the Spiraling (PM UA terminology is now Spin) out of
    selected FCS technologies to the current force. In essence, this will
    bring some of the FCS capabilities to the Army sooner than originally
    planned. The fact that the Army has elected to accelerate some aspects
    of the FCS program is more due to the success of the program than
    problems with it.

        54. Senator Inhofe. General Cody, is the FCS being sacrificed to
    pay for other Army bills?
        General Cody. No. FCS will use evolutionary acquisition to develop,
    field, and upgrade FCS throughout its lifecycle. On July 2, 2004, the
    Army announced plans to accelerate the delivery of selected Future
    Combat Systems to the Current Force. The plan expands the scope of the
    program's SDD phase by adding four discrete ``spin outs'' of
    capabilities at 2-year increments for the Current Forces. Spin Out 1
    will begin fielding in fiscal year 2008 and consist of prototypes
    fielded to the E-BCT for their evaluation and feedback. Following
    successful evaluation, production and fielding of Spin Out 11 will
    commence to Current Force units in 2010. This process will be repeated
    for each successive spiral. By 2014, the Army force structure will
    include one UA equipped with all 18 + 1 FCS core systems and additional
    Modular Units of Action with embedded FCS capability. This is the
    centerpiece of this adjustment: providing the Current Force with FCS
    capability sooner rather than later.

        55. Senator Inhofe. General Cody, what are the benefits to the
    restructure?
        General Cody. The benefits of the restructure are twofold. First,
    it reduces developmental risk by allowing more time for technology
    maturation and the inclusion of additional experimentation. More
    importantly, the restructure allows for the Spiraling (PM UA
    terminology is now Spin) out of selected FCS technologies to the
    current force. In essence, this brings some of the FCS capabilities to
    the Army sooner than originally planned. The fact that the Army has
    elected to accelerate some aspects of the FCS program is more due to
    the success of the program than problems with it.

        56. Senator Inhofe. General Cody, the Army has several fund-
    consuming operations and programs that must compete for your priorities
    under this fiscally-restrained budget request for 2006, those being:
    the Iraq War, the RESET program, restructuring the force for
    modularity, ``ReCap''-ing the current force systems, and the biggest
    weapon system in the Army's budget--the FCS. How do you plan to work
    out these priorities together since we usually get only one chance to
    get things right the first time? How can this committee assist you in
    reaching your goals for fiscal year 2006?
        General Cody. The strategic goal of the Army is to remain relevant
    and ready by providing the Joint Force and all combatant commanders
    with essential capabilities to dominate across the full range of
    current and future military operations. Since the global war on
    terrorism began, the Army has been supported in its efforts through
    supplemental funding. These funds have, and continue to, cover
    operations in Iraq, Afghanistan, and around the world in support of
    global war on terrorism. This support includes resetting our forces
    through recapping and reconstitution. Our agreement with the Office of
    the Secretary of Defense is to fund our Modular Force restructuring
    initiative external to the Army's base budget through fiscal year 2006.
    Our expectation is that support for these high priority operations and
    programs will be external to the Army's base budget in fiscal year 2006
    and will not compete for funds with our Future Combat System program.
    Our Future Combat System program remains a priority within the Army as
    evidenced by our budget submission and our efforts to accelerate future
    force capabilities to our current force.
        This committee can help us reach our goals by continuing to support
    our requests for funding as you have in the past, both budget and
    supplemental. With your continued support and efforts, we will be able
    to man, train, equip, and transform our Army to win the global war on
    terrorism while preparing for future challenges.

        57. Senator Inhofe. General Cody, one possible result of these
    hearings about FCS in both the Senate and the House would be to require
    that the Army restructure the program once again. Congress could
    require the Army to change the existing contracts with Boeing to
    provide more protection for the government and make the contract
    conform to existing FAR contracting requirements. In your opinion what
    affect would such a change have on the program's time-line and more
    importantly, what affect would it have on spirals the Army has
    identified for the current force?
        General Cody. We would try to mitigate all costs impacts and
    schedule impacts by doing some type of conversion of the OTA to a FAR-
    based contract, understanding that this would take an appropriate
    amount of time to complete. The first priority would be to preserve
    program schedule to include Spiral (PM UA terminology is now Spin) out
    schedules while minimizing cost impacts. This approach is viable given
    the facts known today.

                            non-line-of-sight-cannon
        58. Senator Inhofe. Secretary Bolton and General Cody, the Army has
    repeatedly stated that NLOS-C is needed in the same time frame Crusader
    would have been fielded. Congress passed several laws to make sure we
    met the 2008 fielding date. The restructured program does not comply
    with the laws passed. Can you explain why, and what is the new plan?
        Mr. Bolton and General Cody. The Army intends to comply with law
    and provide a ``Crusader-type'' capability to soldiers in 2008. NLOS-C,
    as the lead variant of the FCS MGV program, will be fielded ahead of
    the remainder of FCS systems. The Army will provide a set of
    prototypes--automated, self-propelled, cannons (NLOS-Cs)--to an
    Evaluation Force by 2008. By 2014, this Evaluation Force will be
    complete with fielding the entire unit of action set of FCS equipment
    to include all seven variants of the MGV. This includes replacing the
    prototype NLOS-C with 18 production NLOS-C systems (6 each in 2010,
    2011, and 2012).
        The NLOS-C project is on track to provide this capability. The
    NLOS-C Concept Technology Demonstrator funded by Congress in 2003 has
    fired over 1,000 rounds in testing and demonstrated the viability of
    hybrid-electric propulsion.
        The remainder of the MGV program is also on track. The design team
    has selected the best technical approach for all seven systems and is
    proceeding with SDD. This SDD process is critical to ensure the
    commonality of all MGV systems that will dramatically reduce the
    current logistics and personnel footprint associated with armored
    vehicle formations.

        59. Senator Inhofe. General Cody, there has been some talk about
    restructuring the program in such a way to push the manned combat
    vehicles and other systems even farther to the right by several years.
    If such an action were taken and the systems were separated by several
    years, it would seem to break this ``system-of-systems'' concept. It
    would also jeopardize systems the Army has repeatedly stated that we
    need like NLOS-C. In your personal professional opinion, what would
    this do to FCS?
        General Cody. The program has taken great strides to ensure an
    integrated developmental effort for all eight variants within the
    manned ground vehicle fleet. The results of this effort will yield the
    Army dividends in terms of system of systems capabilities, commonality,
    supportability, reliability and life cycle cost. To separate the NLOS-C
    from the current MGV family of systems program would result in
    significant sub-optimization of the NLOS-C system and also system-of-
    system capability relative to the rest of the MGV fleet. In short, the
    significant benefits gained in system-of-systems capabilities,
    commonality, supportability, reliability and life cycle cost would
    effectively be lost as it would apply to a ``break away'' NLOS-C
    system. In conclusion, the NLOS-C should/must remain integral to the
    MGV family of systems program. The NLOS-C lead the fleet (increment 0)
    prototypes will provide one of the most cost effective means to reduce
    risk on the MGV fleet, and the follow-on NLOS-C pre-production systems
    will serve to begin to prove out the production line for all MGV
    systems. Therefore, the NLOS-C is a critical part of the PCS program
    and as such needs to maintain a well integrated development, production
    and fielding strategy with the other MGV variant systems.

        60. Senator Inhofe. General Cody, would the Army need to come back
    to Congress and request that NLOS-C or other systems be separately
    funded and brought forward?
        General Cody. At this time, the Army does not need to request NLOS-
    C be funded separately and brought forward. The requirements for NLOS-C
    are outlined in the FCS ORD. This ORD clearly identifies NLOS-C as
    supporting an FCS MGV-equipped unit of action.
        Separate funding also raises programmatic issues. Additional money
    would be required to support a separate research, development, test and
    evaluation effort that currently gains efficiencies through the FCS MGV
    program. Separate overhead costs would be required to manage NLOS-C.
    Decoupling FCS also eliminates any commonality benefits with the FCS
    MGV program. For instance, lifecycle costs would increase because NLOS-
    C would be a separate unique vehicle. While it is true that NLOS-C
    could eventually be made common with the rest of FCS, the Army would
    end up funding two development programs and the overhead for two
    production programs. Conversely, attempting to force FCS to align with
    an accelerated NLOS-C schedule would sub-optimize other MGV systems
    within FCS. For example the full design maturity of the command,
    control, communications, computers, Intelligence, surveillance, and
    reconnaissance network would not support an accelerated NLOS-C program.

                            lead systems integrator
        61. Senator Inhofe. Secretary Bolton, it was reported in a February
    11 article by Inside Defense that the Pentagon Acquisition Chief,
    Michael Wynne, stated that ``having a lead systems integrator for the
    Future Combat Systems program has worked out well for the Army.'' The
    FCS program seems to be the most complex acquisition program the Army
    has ever undertaken and probably the most complicated to ever come out
    of the Pentagon. Can you explain to us why you chose to use a lead
    systems integrator for the FCS program?
        Mr. Bolton. The methodology of employing an LSI was selected for
    the FCS program precisely because FCS poses such a highly complex
    system-of-systems engineering development challenge, to include the
    development and integration of 18 major ACAT 1 weapon systems networked
    together to the soldier. Additionally, it requires networked interfaces
    with a large number of defense complementary programs, at a minimum of
    164 defense systems with potentially over 200 systems, many of which
    are still in development. The program also has an extremely challenging
    schedule and a fixed RDT&E program budget. The LSI approach is the best
    choice to accomplish the Army's transformation goals given what we know
    today.

        62. Senator Inhofe. Secretary Bolton, how has the LSI performed to
    date?
        Mr. Bolton. The latest Cost Performance Report (CPR) received on
    March 25, 2005, for the accounting period ending February 24, 2005, the
    SDD OTA is performing to a cost efficiency of 103 percent cost
    performance index (CPI), and a schedule efficiency of 99.2 percent
    schedule performance index (SPI). In layman's terms, this means that
    the contracting team has delivered $1.03 of performance for each dollar
    spent, which means they are under budget, and is very slightly behind
    schedule performing 99.2 percent of the efforts planned to be completed
    to date. From a critical path perspective, the SDD contracting team is
    6 days behind schedule to the next Program Event of System of System
    Functional Review scheduled for August 11, 2006; commonly referred to
    as 6 days of negative schedule float. This information is reflective of
    a recent performance measurement re-baselining of contract activity in
    September 2005.

        63. Senator Inhofe. Secretary Bolton, the Army has the reputation
    for being challenged in managing large complex programs. Several of
    your bigger programs have been cancelled recently due to resource
    management, creeping requirements, and weak execution. The FCS program
    was initiated under a somewhat radical management structure for the
    Defense Department with a lead systems integrator--a contractor team.
    Are you happy with this organizational authority structure?
        Mr. Bolton. Yes.

        64. Senator Inhofe. Secretary Bolton, could you change it if the
    needs changed?
        Mr. Bolton. Yes.

        65. Senator Inhofe. Secretary Bolton, how do you keep fundamental
    government oversight responsibilities with an LSI?
        Mr. Bolton. Fundamentally, the same way that we would discharge our
    oversight responsibilities with a traditional prime contractor, except
    that using an OTA in some ways allows us closer and more routine
    coordination at the working level. The DCMA and DCAA are fully
    integrated in the day-to-day oversight management of the LSI.
    Additionally, the Government Accountability Office (GAO) and
    independent reviewers like the IDA are invited to participate, and have
    been active participants in program management and technical reviews.
    The program conducts formal program milestone reviews with OSD on an
    annual basis, and the government program manager, who is collocated
    with the LSI in St. Louis, Missouri, conducts program reviews on a
    quarterly basis. The LSI program manager conducts a weekly update
    meeting, with government participation. There are also quarterly
    congressional updates, primarily focused on budget, which utilize data
    provided by the LSI's Earned Valued Management (EVM) system. EVM system
    is implemented in the OTA in accordance with the OSD and industry-
    accepted EVM criteria reflected in the DOD adopted ANSI Standard for
    EVM systems. Additionally, the program has instituted a highly
    collaborative process for maintaining the integrity of the Performance
    Measurement Baseline (PMB), with surveillance of the contractors' EVM
    systems, tying the EVM information directly to the budgetary
    requirements, and reporting the program's performance to the Department
    of the Army (DA), OSD, and Congress.

        66. Senator Inhofe. Secretary Bolton, while it is early in the
    program, are you satisfied with its progress?
        Mr. Bolton. Basically yes. The contractor is 3 percent under
    budget, and essentially on schedule (see response to #62). However,
    this assessment must be tempered with the fact that the contract was
    restructuring in September 2005. As a result of this restructure, the
    Performance Measurement Baseline required restructuring as well to
    reflect the restructured technical approach, and a congressional
    reduction of $286 million to the 2005 President's budget. Resulting,
    the work scheduled and work performed was set equal to the actual costs
    as of Boeing's accounting period ending August 2005. The net effect of
    this accepted EVM practice (resulting from a major rebaselining
    activity) is that the historical cost and schedule variances as of
    month ending August 2005 was set to zero. So, cumulative performance to
    date reflects data only back to that transition date of 1 September
    2005.

        67. Senator Inhofe. Secretary Bolton and Mr. Francis, the Army put
    Boeing under an OTA contract for FCS, and also made Boeing and Science
    Application International Corporation (SAIC) the lead systems
    integrators for FCS. In general, these OTAs are not governed by Federal
    acquisition laws and regulations that apply to contracts, grants, or
    cooperative agreements. Your institute conducted a study on the FCS
    management last year to include practices which could impact on the FCS
    program development efforts. Would you please explain why an OTA was
    used for this billion-dollar program?
        Mr. Bolton. The Army leveraged an existing option from the DARPA
    CTD OTA. Under that OTA, a best value competitive source selection was
    conducted by DARPA with Army participation and the current LSI, Boeing,
    was selected. Significant competition exists at the first and second
    tier contract level including 23 highly competitive source selection
    best value awards made by the LSI for which the Army had review and
    final approval. These awards were made by the LSI without a single
    protest. Again, we chose the LSI approach because the FCS UA poses a
    highly complex system-of-systems engineering development challenge,
    representing 18 major Acquisition Category (ACAT) 1 major weapon
    systems networked together to the soldier. Additionally, it requires
    networked interfaces with a large number of defense complementary
    programs at a minimum of 164 defense systems with potentially over 200
    systems, many of which are still in development. The program also has
    an extremely challenging schedule and a fixed RDT&E program budget. An
    OTA gave us the flexibility to use FAR rules and requirements where
    they made sense, while varying from the traditional FAR framework where
    we felt it would have represented a barrier or impediment to successful
    FCS development. This OTA offers flexibilities we thought we needed for
    a program this complex and added certain FAR clauses for protection.
        Mr. Francis. According to DOD's latest Annual Report on Cooperative
    Agreements and Other Transactions, the FCS OTA allows two
    nontraditional defense contractors to transition from the concept and
    technology development phase to the current system design and
    development phase. These contractors provide systems engineering;
    advanced simulation technology; as well as design, development,
    implementation and support of the Advanced Collaborative Environment.
    In addition, DOD reported that the FCS program requires an
    unprecedented level of interaction, cooperation, and collaboration
    between the government, the LSI, and the subcontractors that could not
    otherwise be achieved with a FAR contract. An Army official also noted
    that the OTA was primarily used to maintain focus on the system-of-
    systems integration of the program. The Army has since reconsidered its
    position and has decided that it can carry out the FCS program under a
    FAR contract.

        68. Senator Inhofe. Mr. Francis, do you think we will see more of
    the OTAs and also lead systems integrator management contracts for
    government programs in the future?
        Mr. Francis. Other transactions began as instruments for basic,
    applied and advanced research projects sponsored by the Defense
    Advanced Research Projects Agency. Since then, Congress has steadily
    expanded the legal authority for OTAs so that they may now be used by
    military departments, other agencies, and on a limited basis for
    production. They have served as a contracting instrument for efforts
    with varied sizes and scopes, including a $400,000 research project
    with a university team working to reduce aerospace vehicle system life-
    cycle costs and the $21 billion agreement with Boeing to develop the
    Army's FCS. In short, other transactions are permissible for a larger
    number of government organizations and purposes than when the law was
    first passed. Moreover, for prototype projects, the law does not limit
    the dollar value of the transaction or the complexity of the
    transaction, provided it is a prototype project that is directly
    relevant to weapons or weapon systems proposed to be acquired or
    developed by DOD, or to improvement of weapons or weapon systems in use
    by the Armed Forces. We have not estimated DOD's likelihood of using
    OTAs in the future. However, given the trend of increased use and
    application, it is not improbable that DOD will continue using OTAs for
    future programs.
        With regard to the increased use of LSIs, as defense acquisition
    programs have increased in scope and complexity over the last 30 years,
    prime contractors have increasingly been given more responsibility in
    managing those programs. Sometimes these prime contractors are called
    LSIs and other times they are still called prime contractors.
    Regardless of what they are termed, if acquisitions continue to be as
    complex as recent systems and the acquisition workforce lacks the
    expertise and size to manage these systems, there is a likelihood that
    prime contractors will continue to play an increased program management
    role.

        69. Senator Inhofe. Mr. Francis, what are some other OTA or LSI
    programs that your agency has reviewed? I would appreciate your
    thoughts.
        Mr. Francis. To date, GAO has done work on the Missile Defense
    Agency's Ballistic Missile Defense System (BMDS) program, which is
    under an OTA with Boeing as the lead for the national team developing
    that architecture. In addition, GAO has reviewed the ground-based mid-
    course Defense element of BMDS. Boeing was the LSI for that contract,
    but recently the company was re-designated a prime contractor.
        Three additional programs GAO has reviewed are the Coast Guard's
    Deepwater program, the Navy's DD(X) Destroyer program, and NASA's
    International Space Station program. None of these programs uses an
    OTA. Integrated Coast Guard Systems is the LSI for Deepwater. Although
    Northrop Grumman is not termed a LSI for the DD(X) program, our work
    suggests that Northrop's responsibilities in that program are very
    similar to what are commonly considered LSI responsibilities.
    Similarly, Boeing is actually called a prime contractor for the
    International Space Station, but it has significant program management
    and integration responsibilities.

        70. Senator Inhofe. Mr. Francis, when you testified before the
    House Armed Services Committee last April, you thought the FCS program
    as it was last year was risky and because of that you recommended that
    the Army should add time to the FCS acquisition schedule and to take
    the time to develop and demonstrate the most critical capabilities
    first, such as the FCS network. The Army seems to have listened to you
    and in July of last year, the Army Chief of Staff directed that the FCS
    program be restructured. They added nearly 3 years to the schedule and
    have placed a priority on maturing certain technologies like the
    Network. Another observation you made in that hearing was that ``in
    order to manage the multitude of tasks associated with the FCS
    acquisition, the Army chose the lead system integrator approach to
    capitalize on industry's flexibility.'' Can you give us your assessment
    of whether or not the new, restructured program is more likely to be
    successful now and also give us your assessment of how this LSI program
    management is working out?
        Mr. Francis. In last year's restructuring of the FCS program, the
    Army added more time to the program--a delay of as much as 4 years to
    develop and mature the manned ground vehicles. This was a positive
    step, but probably necessary in that it was highly unlikely that the
    program could support the earlier date from a technical or cost
    standpoint. The restructure also accelerated the development and
    demonstration of the network. Focusing first on the development of the
    network is, again, a good step. However, the restructure did not
    address our primary concern--the lack of a match between the program's
    resources and requirements. For example, the revised schedule still
    depends on immature technologies. Also, the program also added a
    sizable amount of scope to the program--the new spirals to the current
    force and the addition of the previously-deferred systems. This
    additional scope added both technical and cost risk to the program. In
    addition, key areas like defining requirements and developing network
    technologies have progressed more slowly than planned. These factors
    impair making accurate cost and schedule estimates and thus the program
    still retains significant risk for being able to deliver promised
    performance within estimated resources.
        It is too early to know how the FCS LSI program management
    structure is working. Our informal observations are that the FCS LSI
    structure allows for a number of potential efficiencies, but that it
    also carries a number of potential risks. Among the potential
    efficiencies is the LSI's overarching responsibility to know,
    understand, and integrate functions across the various FCS platforms--
    instead of focusing on one ``stovepiped'' platform at a time, as has
    often been the case in the past. This is particularly important in that
    the LSI has the ability to facilitate movement of requirements and make
    trade-offs across platforms. However, the extent of contractor
    responsibility in every aspect of the FCS program management process,
    including responsibility for making numerous cost and technical trade-
    offs and for conducting at least some of the subcontractor source
    selections, is also a potential risk. As an example, many of the LSI
    subcontractor source selections are for major weapons systems that, in
    other circumstance would have been conducted by an Army evaluation
    team, an Army contracting officer and a senior-level Army source
    selection authority. These decisions, including procurement decisions
    for major weapons systems, are now being made by the LSI with Army
    involvement. This level of responsibility, as with other LSI
    responsibilities in the program management process, requires careful
    government oversight to ensure that the Army's interests are adequately
    protected now and in the future. While we understand that the Army has
    a number of oversight processes in place, we have not yet evaluated
    them to know how well they are working.

        71. Senator Inhofe. Dr. Graham, you spent a considerable amount of
    time looking not only at the use of an OTA contract but also at a
    myriad of FCS management issues. Can you explain to us some of the
    safeguards that are built into this program to prevent conflict of
    interests or any unethical program management issues?
        Dr. Graham. Formal ethics programs, whether in the government or
    industry, cannot guarantee that every participant in the FCS program
    will behave appropriately; sound policies, attention to execution, and
    continued vigilance, however, can help to reduce the likelihood of
    future violations while demonstrating an organization's due diligence
    in acting to preclude problems. Army officials, Boeing Headquarters,
    and the FCS LSI organization within Boeing were highly sensitive to the
    need to minimize managerial distraction and potential disruption to the
    FCS program that could result from adverse publicity or legal action
    resulting from ethics and related problems. The IDA review examined
    Boeing's ethics initiatives in some depth, looked briefly into the
    ethics programs in the other companies involved in FCS, and considered
    government workforce ethics issues as well.
        Boeing's ethics program has been in the public eye due to ethics
    violations unrelated to the FCS program. Such violations led to
    Boeing's debarment from the Air Force's EELV program, and to a series
    of rather exhaustive external reviews performed over the last 2 years.
    One, ``The Boeing Company: An Assessment of the Ethics Program,'' was
    performed by the Ethical Leadership Group at the request of the Air
    Force.\5\ Former Senator Warren Rudman performed two additional ethics
    reviews at the request of Boeing.\6\ R. William Ide, a former president
    of the American Bar Association, conducted a third review that focused
    on Boeing's legal department.
    ---------------------------------------------------------------------------
        \5\ Ethical Leadership Group, Wilmette, IL, October 2003.
        \6\ Paul, Weiss, Ritkind, Wharton, and Garrison, LLP, ``A Report to
    the Chairman and Board of Directors of the Boeing Company Concerning
    the Company's Ethics Program and its Rules and Procedures for the
    Treatment of Competitor's Proprietary Information,'' (Washington, DC:
    November 3, 2003) and ``A Report to the Chairman and Board of Directors
    of the Boeing Company Concerning the Company's Policies and Practices
    for the Hiring of Government and Former Government Employees,''
    (Washington, DC: February 26, 2004).
    ---------------------------------------------------------------------------
        These reviews highlighted some common strengths and weaknesses
    within Boeing's approach to corporate ethics. Boeing long had policies
    in place and a strong reputation for ethical behavior, but, following
    significant expansion through several major corporate takeovers in the
    1990s, lapses occurred. The external reviewers found Boeing's ethics
    activities to be under-strength, integrated too closely with the
    business and operating units, too narrowly focused, and not
    sufficiently aggressive in addressing issues. The Ethical Leadership
    Group noted that more than 90 percent of Boeing employees participating
    in their study were aware of the Boeing Ethics Hotline; however, a
    significant percentage of those same employees also felt that
    complaints would not be acted upon thoughtfully, in a timely manner,
    and worse, would subject the complainant to retaliation.
        In response to the recommendations of these reviews, Boeing
    management has taken steps to strengthen needed enforcement mechanisms,
    provide stronger awareness of the company's commitment to ethical
    behavior, and strengthen the mechanisms for reporting and investigating
    potential violations (see Table).
        The FCS program independently embarked on its own ethics training,
    in large measure driven by FCS subcontract management processes. For
    example, Boeing established a Tier 1 subcontracting process in which
    government and Boeing subject matter experts (SMEs) entered a
    physically and electronically ``fire-walled'' arena to evaluate
    multiple subcontract proposals. LSI employees assigned to the
    subcontractor selection process were informed that their employment
    choices within the program could be limited for up to one year from the
    last date on which they handled potential subcontractor proprietary
    information to ensure against any potential conflict of interest at the
    time of subcontractor selection, or into the future.
        Boeing and the Army negotiated a set of additional firewall
    arrangements to permit the flow of contractor proprietary data to and
    from the FCS program to ensure technical coordination and effective
    interoperability with complementary systems.

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        One particularly sensitive issue is the Boeing system for hiring
    former government employees into the FCS program. The Rudman review
    found that, contrary to Boeing policy, the company did not have
    government advisory letters on file for every former government
    employee. Boeing told IDA that they are beginning to screen the files
    of former government officials within its Integrated Defense Systems
    arm to identify potential conflict of interest issues. This includes
    identifying cases where conflict of interest advisory opinions are
    missing. We understand that Boeing is asking former government
    employees to ensure their personnel file includes a conflict of
    interest opinion. In addition, the IDA team asked whether Boeing had
    copies of disqualification letters that may have been issued to former
    government employees. The FCS program had not requested copies of these
    letters from Boeing, but seemed receptive to the idea.
        We also asked Boeing how it intended to address the Rudman
    recommendation regarding tracking employees that may bring with them
    potential conflict of interest issues. As noted in Table 4, Boeing
    indicated that the program is in the process of creating a personnel
    mechanism for the FCS program that will allow employees with potential
    conflict of interest exposure to be flagged and tracked. This system is
    critically important because the ability to manage the movement of
    people into, out of, and within FCS is critical for maintaining the
    firewall protection of sensitive and proprietary information.
        FCS Tier 1 subcontractors who work with the government on other
    programs have formal systems of business ethics, procurement integrity,
    and information protection (export control, proprietary information,
    etc.). IDA reviewed the formal documentation for their programs, but
    time and resources did not permit a more in-depth assessment. While the
    public eye has been on Boeing in recent months, it would be valuable
    for the Army to also verify that the other subcontractors' programs
    have incorporated pertinent lessons learned from the external reviews
    of Boeing's ethics programs.
        On the government side, the Army has taken specific actions to
    address challenges associated with implementing the ``One-team''
    management approach. The Tank and Automotive Command (TACOM) appears to
    have guidance in place on all the key issues of ethical conduct and
    preservation of procurement integrity that are likely to arise in the
    course of the FCS program.
        The TACOM program has four main thrusts:

             Ethics training covers all TACOM personnel, leaving
            the subject of specific annual training to the discretion of
            the local commands. This year, TACOM is insisting that all
            personnel receive personal instruction with a live instructor
            in a classroom or lecture hall environment. Because of the
            prevalence of two-income families and the possibility that a
            TACOM employee family member might work for a TACOM prime or
            subcontractor, training focuses on conflict of interest issues.
             TACOM lawyers counsel every employee on potential
            conflict of interest issues when they leave government service.
            In addition, the ethics adviser will, upon request, prepare an
            ethics advisory letter identifying areas of potential ethics or
            conflict of interest concern for employees seeking work in the
            private sector. This letter may be obtained any time subsequent
            to leaving the government, so employees who change jobs can
            always go back to TACOM for a letter; however, such letters are
            not mandated by the government. Letters of disqualification are
            also provided when TACOM officials find it necessary to recuse
            themselves from dealing with an acquisition matter while
            concurrently interacting with a potential or current contractor
            regarding employment or other matters.
             The ethics adviser and acquisition staff have
            addressed matters of concern regarding ethical conduct and
            procurement integrity arising out of the ``One-team'' approach
            used in the FCS acquisition. Training is provided to address
            such issues as gifts, ride-sharing, and protection of
            government property, and proprietary and competition-sensitive
            information. It also addresses larger issues of procurement
            integrity and the need for government participants in IPT
            processes to adhere to their specific charters.
             The Grants Officer has provided specific instructions
            to each Grants Officer Representative and Grants Officer
            Technical Representative (approximately comparable to a
            Contracting Officer's Representative and Contracting Officer's
            Technical Representative). These instructions identify actions
            on the part of a government IPT member that could result in a
            constructive change to the LSI OTA agreement. The Grants
            Officer requires each government IPT member he or she appoints
            to complete formal training within a year of appointment.

        The IDA review concluded that Boeing is taking demonstrable steps
    to ``recapture the trust of its customers'' following disclosures of
    its prior ethics violations on matters unrelated to the FCS program.
    IDA did not audit execution at Boeing, and while we have reviewed the
    formal documentation for several of the major FCS subcontractors, their
    programs have not been scrutinized during our review in the same depth
    as have Boeing's. The IDA report therefore recommended some additional
    steps.
                                     ______

                Questions Submitted by Senator Lindsey O. Graham
                                 assault rifles
        72. Senator Graham. Secretary Bolton and General Cody, over the
    past few months, United States Special Operations Command (USSOCOM) has
    selected a new assault rifle system. The process followed by USSOCOM in
    making that selection seems like a model of responsible, efficient, and
    fair acquisition procedures--clearly based on full and open
    competition--beginning with the pre-solicitation notice issued in
    October 2003 and continuing through the contract award announced in
    November 2004. The Army, on the other hand, seems committed to a very
    different process, one that has relied on sole-source contracting with
    a German company, rather than full and open competition, in selecting
    its new assault rifle system. Why has the Army decided in favor of
    sole-sourcing a program of this magnitude and against full and open
    competition?
        Mr. Bolton and General Cody. Senator Graham, the Army is in fact
    pursuing a full and open competition for the Objective Individual
    Combat Weapon Increment 1 (OICW 1) family of weapons. Based on the
    requirements that have emerged from Operation Iraqi Freedom and
    Operation Enduring Freedom, the Army approved an updated OICW 1
    Capabilities Development Document (CDD) on October 19, 2004. The CDD
    calls for a family of weapons that will have high degree of
    commonality, enhanced capabilities, and much higher reliability than
    our current weapons. The family will be comprised of Special Compact,
    Carbine, Designated Marksman, and Light Machine Gun.
        Subsequent to the approval of the CDD, the Program Office issued a
    Sources Sought Notice on November 5, 2004, for the OICW 1 family of
    weapons. The Notice invited contractors to submit a written report on
    their capabilities to meet the Key Performance Parameters for the
    family of weapons as well as provide a video of those capabilities.
    Based on an independent team's review of the numerous submissions, the
    Army has determined that a full and open competition is the best way to
    obtain a Non-Developmental Item (NDI) solution to the CDD's
    requirements. A pre-solicitation notice was issued on March 5, 2005,
    and the Program Office issued a Draft Request for Proposals on April 1,
    2005. After the final Request for Proposals is issued on or about May
    6, 2005, an independent Source Selection Authority and Source Selection
    Evaluation Board will conduct the evaluation process. The winner of
    this competition will be awarded the contract to build this new family
    of weapons.

        73. Senator Inhofe. Secretary Bolton and General Cody, after
    spending more than 10 years and in excess of $30 million on the XM8,
    last year the Army's budget submission included a line-item request for
    $25.9 million for approximately 7,000 XM8 assault rifles. Congress
    declined to appropriate any funds for that program. Now it appears that
    this year the Army is attempting to obtain funding to continue the
    program but has not submitted a line-item budget request; how much does
    the Army plan to spend on the XM8/OICW program in the next year and
    from what account would these funds be appropriated?
        Mr. Bolton and General Cody. Senator Graham, the Army requested
    $25.9 million in the fiscal year 2005 supplemental to accelerate the
    fielding of the OICW 1 kinetic energy sub-component as part of its
    modularity request. The committee marks were House Armed Services
    Committee (HASC) - $25.9 million, Senate Armed Services Committee
    (SASC) - $13 million, House Appropriations Committee--Defense (HAC-D) -
    $25.90 million and the Senate Appropriations Committee-Defense (SAC-D)
    - $13 million. The final budget did not include Army modularity funding
    (including OICW 1) due to higher priority funding requirements. The
    Army maintained the Milestone C decision in fiscal year 2005 and
    planned to start fielding the OICW 1 kinetic energy sub-component in
    fiscal year 2006. The fiscal year 2005 budget supported by the
    President and Congress included $21.8 million for research,
    development, test and evaluation funds to support both the OICW 1
    kinetic energy and OICW II airburst weapon subcomponents, and $500,000
    weapons and tracked combat vehicles (WTCV) funds to support initial
    production of the OICW 1 kinetic energy subcomponent. The fiscal year
    2006 President's budget submission includes $32.5 million in WTCV
    funding for the fielding of the OICW 1 family.

        74. Senator Inhofe. Secretary Bolton and General Cody, given the
    history of this program, why has the Army now decided that U.S.
    companies wanting to compete will be given only 60 days to submit their
    prototypes?
        Mr. Bolton. Senator Graham, based on market research, the weapon
    system maturity cited in the written responses, and the videos of the
    weapons firing from the Sources Sought Notice, multiple contractors
    have completed design work. A complete design and build cycle in small
    arms can be completed in 90-120 days. Therefore, a 60-day response time
    for a NDI solution is appropriate.
                                     ______

               Questions Submitted by Senator Joseph I. Lieberman
            science and technology to support future combat systems
        75. Senator Lieberman. Secretary Bolton, I understand that the
    Army's science and technology request in fiscal year 2006 for combat
    vehicle research programs supporting FCS has been reduced by $60
    million relative to fiscal year 2005 levels and is programmed to
    continue to reduce in future years. Additionally, DARPA's investment in
    research to support FCS will decline from over $100 million in fiscal
    year 2006 to $21 million in fiscal year 2007. Given the fact that these
    science and technology (S&T) programs have successfully transitioned a
    number of technologies into the FCS program and are showing great
    promise to develop new capabilities for future spirals of FCS, why are
    we reducing these S&T investments?
        Mr. Bolton. The reduction in Army S&T funding for combat vehicle
    technology between fiscal year 2005 and fiscal year 2006 reflects the
    scheduled completion of several major technology demonstrations during
    fiscal year 2004 and fiscal year 2005 that were accelerated (with
    additional funding) to meet critical FCS decision timelines. The fiscal
    year 2006 President's budget funding request for advanced combat
    vehicle technologies has returned to its previous level and is
    considered sufficient to support the fielding of FCS in 2014 as
    currently scheduled. The Army maintains a substantial S&T investment
    profile across the Future Years Defense Program to develop and mature
    key enabling technologies foe combat vehicles in areas such as advanced
    lightweight armor, advanced propulsion systems, advanced power
    electronics, and advanced active protection systems. The Army S&T
    program continues collaborations with DARPA to solve tough challenges
    to mature technologies for advanced sensors, communications, UAVs, and
    mobile networks. These technologies will provide additional
    capabilities for FCS beyond threshold capabilities and for other
    systems.

        76. Senator Lieberman. Secretary Bolton, what technological risks,
    in which specific systems, are we taking on by reducing our investments
    in risk-reducing science and technology programs?
        Mr. Bolton. S&T programs have always provided risk reduction
    initiatives for program managers by providing technology options that
    increase their probability of success in fielding a more capable
    product to the warfighter. Reducing S&T investments does result in loss
    of opportunities to define and transition technologies which must be
    balanced within the current resource constrained environment the Army
    finds itself. S&T investment in the fiscal year 2006 President's
    budget, while it is constrained, is robust enough to provide sufficient
    options for Future Force capabilities with acceptable technological
    risk.

    defense advanced research project agency urban area operations research
                           and future combat systems
        77. Senator Lieberman. Secretary Bolton, I understand that DARPA is
    maintaining a significant investment in technologies to support urban
    area operations. Since it is very likely that FCS technologies will be
    operating in urban environments, how is the Army coordinating
    investments in urban area operations with DARPA to ensure that the
    DARPA systems being developed can be integrated with FCS systems?
        Mr. Bolton. The Army is engaged in continuous dialogue with DARPA
    to leverage their investments for applications that may satisfy Army
    problems. This includes our awareness of DARPA's focused investments on
    urban operations technologies. Likewise, DARPA often uses the technical
    expertise of the Army's Research, Development, and Engineering Centers
    and Laboratories to implement and support their technology efforts. The
    Army Deputy Assistant Secretary for Research and Technology and the
    Program Manager for the FCS unit of action regularly meet with the
    Director of DARPA to help shape the content and monitor progress of
    DARPA's technology investments.

        future combat system networking and communications technologies
        78. Senator Lieberman. Secretary Bolton, the key to the FCS systems
    is the network and communications technologies that will provide the
    backbone for future network centric operations. A number of programs
    that are not specifically part of FCS are vital to its future
    operational utility--including JTRS, WIN-T, and the distributed common
    ground system-Army (DCGS-A). What is the status of the development of
    these systems?
        Mr. Bolton. JTRS Cluster 1 is currently in the SDD phase. The
    program has experienced significant cost and schedule growth (due to
    the technology, packaging, and security issues as discussed in item
    18). In order to stabilize the program, the Under Secret of Defense for
    Acquisition, Logistics and Technology, (USD AT&L) has issued a partial
    Stop Work order, which directs the Program Manager to baseline the
    program status via conduct of an Early Operational Assessment (EOA).
    This EOA will be initiated this month (April 2005) at Fort Huachuca,
    using JTRS Cluster 1 Pre-Engineering Development Models (Pre-EDMs). USD
    AT&L has also directed the newly appointed JTRS Joint Program Executive
    Office (JPEA) to conduct an independent assessment of the Cluster 1
    program.
        JTRS Cluster 5 has recently entered the System Design and
    Development phase. It provides radios to support users, including
    Landwarrior, UGS, IMS, UGVs, and UAVs. A System Requirements Review was
    conducted on April 6-7, 2005. Schedule synchronization is ongoing to
    accelerate early deliverables.
        WIN-T is currently in the System Design and Development phase. WIN-
    T completed a System Design Review in January 2005. WIN-T via the Point
    of Presence will provide reach (inter-UA) and reachback (UA to UEx/y)
    capabilities for FCS. WIN-T components may require SWaP reductions in
    order to be used within certain FCS platforms (e.g., Class III/IV UAV).
        DCGS-A acquisition approach was approved last fall by the Army
    Capabilities Review board. DCGS-A Spin Outs 1-3 are complete, providing
    improvements to systems and troops engaged in the global war on
    terrorism. The DCGS-A mobile configuration, enabled through Spin Outs 4
    and 5, will begin fielding in fiscal year 2008 and reach Initial
    Operational Capability in fiscal year 2010.

        79. Senator Lieberman. Secretary Bolton, how are their development
    schedules integrated with the development and deployment plans of FCS?
        Mr. Bolton. JTRS and WIN-T (Point of Presence) are integrated radio
    systems into the PCS program and are therefore fully integrated into
    the PCS system schedule. DCGS-A development and deployment schedules
    have been aligned to provide synergy with Spiral (PM UA terminology is
    now Spin) fieldings. The JTRS Cluster 1 fielding schedule originally
    supported TOC-to-TOC requirements for the Stryker Brigade Combat Teams,
    as well as Aviation Recapitalization requirements. It is being revised
    to more closely align with the PCS Spiral (PM UA terminology is now
    Spin). Out requirements, and will be documented in the Army JTRS
    Migration Strategy, due in May 2005. JTRS Cluster 5, as an integrated
    component within FCS platforms is aligning with PCS program
    requirements. WIN-T fieldings are currently planned to be independent
    of, but initiated prior, to PCS Spiral (PM UA terminology is now Spin)
    1 fielding.

        80. Senator Lieberman. Secretary Bolton, what are you doing to
    ensure that JTRS, WIN-T, and DCGS-A are going to be compatible with
    joint operations (i.e. interoperable with the other Services)?
        Mr. Bolton. The FCS Program Office has established an
    organizational structure that addresses coordination and
    interoperability. Each program Project Office is collocated with the
    FCS sensor and communications teams. Coordination with JTRS, WIN-T, &
    DCGS-A is performed at the engineering staff as well as monthly/
    quarterly director meetings.
        Both JTRS Cluster 1 and ITRS Cluster 5 will only utilize waveforms
    certified by the ITRS program's Joint Test and Evaluation Laboratory
    (ITeL). These waveforms will run on all JTRS Clusters (to include
    Cluster 2 (SOCOM/USMC) and Cluster AMP (U.S. Navy/USAF). The WIN-T
    program, although not a joint Services program, will also run JTeL
    certified waveforms.
        All Services' DCGS development efforts are under a 2003 Defense
    Acquisition Board mandate to adopt the DCGS Integration Backbone to
    enable joint, network-centric support to the warfighter. The Services'
    material developers are cooperating under the guidance of the Under
    Secretary of Defense (Intelligence)-chartered DCGS council and have
    formed a Multi-Service Execution Team. Further, operational experts
    from each of the Services are supporting Joint Forces Command in
    developing the Joint DCGS Concept of Operations.

           force generation, force size, and organizational structure
        81. Senator Lieberman. General Cody, I understand that Army
    analyses and gaming have identified a need for up to 20 brigade combat
    teams to be deployed at any one time as a steady state requirement,
    plus an ability to surge to 40-43 to effectively support the 2004
    National Defense Strategy and the National Military Strategy. What
    effect do you expect the 2005 Quadrennial Defense Review to have on
    Army organizational and force generation concepts?
        General Cody. The congressionally-mandated Quadrennial Defense
    Review (QDR) belongs to the Secretary to Defense (SECDEF) and the Army
    is fully committed to working with the SECDEF in conducting the QDR
    consistent with the priorities established by the President. It is too
    early in the QDR process to talk about specific insights or results.
    The four focus areas for the review, analysis, and discussion among the
    Department's senior leadership could impact Army organizational and
    force generation processes. That being said, we feel the Army modular
    design as the basic building block for the Army is the right way to go.
    Finally, the Army has already taken lessons learned from Operations
    Iraqi Freedom and Enduring Freedom and realigned force structure (less
    artillery and more engineers for example) as well as Active and Reserve
    component rebalancing.

        82. Senator Lieberman. General Cody, is the Army plan for size and
    structure of the force appropriate for the types of operations it has
    been performing if it must do so again in the mid-term? If yes, do you
    think the Army can simply ``scale up'' to meet the mission requirement
    if the contingency is a Pakistan or Iran scale of contingency in size
    and complexity that lasts for several years?
        General Cody. The Army is in the process of transforming and
    reorganizing to meet the types of operations and requirements it
    anticipates supporting in the future. The Army has shown through its
    support of wars in Afghanistan, Iraq, and numerous lesser contingencies
    that it is flexible in its ability to adapt to changing circumstances
    and requirements. In other words, the Army is inherently a ``scalable''
    force able to adapt to the changing global environment. Furthermore the
    Army is incorporating lessons learned from fighting the global war on
    terror as it restructures its force to meet anticipated future
    requirements. The upcoming Quadrennial Defense Review will provide
    additional guidance and insights that will ensure that the Army's
    emerging force structure aligns with the Nation's strategic objectives.

        83. Senator Lieberman. General Cody, it is critical to have a
    rotation base that allows sustained commitments without over-stressing
    the force or severely understaffing the critical training base. Many
    analysts are now questioning whether a ``three-to-one'' rotation base
    is adequate, with some saying ``four-to-one'' or even ``five-to-one''
    is necessary. Your 43 brigade construct together with the Reserve
    component will barely meet a ``three-to-one'' rotation base and expects
    lengthy mobilizations of the Reserve component to do that. I question
    whether the Army's position about a temporary 30,000 end strength
    increase even fills 43 brigades let alone what would be needed for more
    brigades. Does the Army believe this end strength and number of
    brigades maintains a ``three-to-one'' rotation base for a contingency
    requiring 20 plus brigades for 4 or 5 years? If not, what size and
    types of organizations are you studying as possible alternatives? How
    much more end strength would be required?
        General Cody. The temporary 30,000 increase allows the Army to
    continue to transform while it sustains its current level of
    operational commitments. Once our restructuring efforts are completed,
    we will be able to sustain a similar level of global commitment for a
    period of 4 to 5 years. Achieving this capability will require
    continued, predictable access to our Reserve component forces.

        84. Senator Lieberman. General Cody, does the Army program
    adequately support the force size and composition needed now and 10
    years from now? If not, how much more table of allowance is required?
        General Cody. The current program and temporary 30,000 end strength
    increase in our force allows the Army to transform while sustaining
    current operational commitments. Once complete, our restructuring
    efforts will allow us to sustain our operational commitments for
    several years provided we have assured predictable access to Reserve
    component forces. It is uncertain what our force requirements will be
    10 years from now.

                                   modularity
        85. Senator Lieberman. General Cody, the Army's original estimate
    for its addition of 10 brigades to the Active Force and the
    reorganization into modular brigade combat teams was about $28 billion.
    Analysts outside the Army estimate that it will cost $70 billion to $90
    billion. It would appear that currently the Department of Defense has
    only identified $48 billion for that restructure, in the near term
    paying for it through the supplementals, and starting in fiscal year
    2007 and through fiscal year 2011 at $5 billion a year in the base
    budget. How much do believe the Army restructure will cost?
        General Cody. The short term cost to build the Army Modular Force,
    to include 77 BCTs is fairly well defined and has widespread support to
    be resourced through the Army base program and supplemental dollars.
    The Army estimates the costs to transform to a Modular Force at $48
    billion. This includes procurement of equipment, requisite
    infrastructure, sustainment and training. Not included in the Army
    Modular Force cost is an estimated $16 billion in fiscal year 2006-2011
    for the fully burdened personnel costs of the temporary 39,000 end
    strength increase to support both the operational requirements for the
    global war on terror and the Army Modular Force transformation. The
    Army anticipates supplemental or over guidance support to fund the end
    strength increases.
        Of the $48 billion to transform to the Army Modular Force, the Army
    base program will fund $38 billion: a combination of $13 billion
    reprogrammed for fiscal year 2006-2011 and an additional $25 billion
    provided in the President's 2006 budget for fiscal year 2007-2011. Army
    anticipates that supplementals will fund $10 billion for Modularity in
    fiscal year 2005 and fiscal year 2006.
        The Army is committed to provide the Army Modular Force within
    these available resources at the specified temporary endstrength level
    within the timeframe specified by the Army Campaign Plan. However, the
    long-term costs to sustain and operate the Army Modular Force are not
    fully known. Long-term costs will be a function of many known and
    likely unknown, factor current operations in Afghanistan and Iraq and
    future operations worldwide in support of the global war on terror,
    will continue to inform the Army on the long-term costs of the Army
    Modular Force. In addition, pending basing decisions, final unit
    designs and the Quadrennial Defense Review outcomes will all factor
    into the cost of the Army Modular Force.

        86. Senator Lieberman. General Cody, is that cost covered in the
    fiscal year 2005 supplemental and in the base budget? How much will you
    need in a fiscal year 2006 supplemental to meet that requirement? How
    much will you need in supplementals beyond fiscal year 2006? There have
    been reports that you believe you will need supplementals for 2 full
    years after redeployment from Iraq.
        General Cody. Yes, $5 billion of that cost is covered in the fiscal
    year 2005 supplemental for investment items. We have realigned a
    portion of the fiscal year 2006 President's budget to support Army
    Modular forces, and expect to need an additional $5 billion in a fiscal
    year 2006 supplemental for investment items and $3 billion for fully-
    burdened personnel costs. From fiscal year 2007 through fiscal year
    2011, the Army base program will fund the remaining requirements for
    the Army Modular Force. Upon return from operations in Iraq, the Army
    anticipates it will need $4 billion per year from the end of the
    conflict plus 2 years to fully reset its equipment to mission capable
    standards. Our experience in Operation Desert Storm shows us that we
    will need 2 years to reset our units to be ready for the next
    contingency.

        87. Senator Lieberman. General Cody, is $5 billion a year
    sufficient to keep to your desired time schedule?
        General Cody. The Army is committed to provide the Army Modular
    Force within available resources at the specified temporary end
    strength level within the timeframe specified by the Army Campaign
    Plan. The short term cost to build the Army Modular Force is fairly
    well defined and has widespread support to be resourced through the
    Army base program and supplemental dollars. The Army barogram will fund
    $38 billion: a combination of $13 billion reprogrammed for fiscal year
    2006-2011 and an additional $5 billion per year for procurement and
    infrastructure provided in the President's 2006 budget for fiscal year
    2007-2011. The Army anticipates that supplementals will fund $10
    billion for Modularity in fiscal year 2005 and fiscal year 2006.

        88. Senator Lieberman. General Cody, what are the major equipment
    shortages resulting from the reorganization and are those equipment
    shortages covered in the funding requested?
        General Cody. Combat vehicles, tactical wheeled vehicles, battle
    command and communication systems, and ISR systems are the major
    equipment requirements the Army needs to transform to a Modular Force.
    These requirements are included in the Army's estimated $48 billion
    cost to transform to a Modular Force. Of the $48 billion to transform
    to a Modular Force, the Army base program plans fund $38 billion: a
    combination of $13 billion reprogrammed for fiscal year 2006-2011 and
    an additional $25 billion during fiscal year 2007-2011. The Army
    anticipates that supplementals will fund the other $10 billion for
    Modularity in fiscal year 2005-2006.

        89. Senator Lieberman. General Cody, what are the decision criteria
    for determining whether the Active Force will be increased by yet
    another five brigade combat teams to 48 total?
        General Cody. The Army's primary mission is to provide necessary
    forces and capabilities to the combatant commanders in support of the
    National Security and Defense Strategies. On January 30, 2004, the
    Office of the Secretary of Defense approved the Army plan to increase
    force structure by 10 modular brigades by fiscal year 2006 and to defer
    a decision to build 5 additional brigades. In order to make this
    decision, the Army will continue to evaluate the mix of capabilities
    and the number of brigades required to meet future demands.
    Consequently, the Army will build additional brigade combat teams if
    those forces are necessary to meet the combatant commanders' and
    defense strategy needs.

        90. Senator Lieberman. General Cody, how much additional end
    strength will be required and what will be the cost to increase the
    Active Force to 48 brigade combat teams?
        General Cody. Increasing the number of brigade combat teams from 43
    to 48 would add approximately 20,000 soldiers within the Army's combat
    formations and approximately 15 percent to our institutional Army to
    recruit, train, and help sustain the additional soldiers. Proposing the
    exact costs of such a growth to the Army's combat formations would be
    highly speculative at this time. In general, for every 1O,000 soldiers,
    it requires approximately $1 billion for all related pay and
    allowances. However, given the highly variable factors involved in
    determining such costs, further analysis is required to accurately
    scope the nature and the magnitude of such an increase.

        91. Senator Lieberman. General Cody, what additional equipment will
    be required?
        General Cody. The Army is committed to meet the equipment
    requirements to transform to a Modular Force. However, as the Army
    progresses toward the FCS and Future Force, maturing technologies that
    significantly increase combat capabilities will be spiraled into the
    current force. Additionally, the Army will continue to assess its
    posture through lessons learned from the global war on terrorism, Total
    Army Analysis, and Quadrennial Defense Reviews and respond to meet and
    defeat these emerging threats. The Army will continue to respond to the
    operational needs of the combatant commanders. Thus, additional
    equipment, yet to be identified and developed, will be required to
    maintain our battlefield superiority.

        92. Senator Lieberman. General Cody, I've been told the
    Congressional Budget Office (CBO) is finishing a study of Army
    modularity that concludes the end product will provide only a modest
    increase in combat power--on the order of 5 percent. Apparently, this
    is because even though there will be more brigades in a division, the
    number of companies in the brigades will actually be fewer than at
    present. CBO is reported to be skeptical that the reconnaissance,
    surveillance, target acquisition (RSTA) companies do not provide combat
    boots on the ground for security and counterinsurgency in the irregular
    warfare category of scenarios. What is your position on this question?
        General Cody. The Army's new modular formations provide a 30-
    percent increase in active combat power and approximately a 50-percent
    increase in the brigade rotational force pool. Additionally, they
    provide more than just sufficient boots on the ground. They are
    designed to allow the maneuver commander the ability to see first,
    think first, and act first. This is a radical shift from the way we as
    an Army have traditionally measured combat power in the past. Our
    ability to rapidly collect, analyze, and disseminate critical, time-
    sensitive information on the battlefield provides our forces with a
    common operating picture, helping to better focus both our combat power
    and effects where they will have the greatest impact.

        93. Senator Lieberman. General Cody, I'm concerned that the Army is
    adequately considering changes in doctrine and priority for the combat
    support (CS) and combat support service (CSS) units. In On Point: The
    United States Army in Operation Iraqi Freedom, the analysts speculate
    that the tragedy of the 507th maintenance company might be explained by
    ``the 507th is indicative of an Army-wide problem. This view holds that
    some CS and most CSS units are generally not equipped, manned, or
    trained to defend themselves while stationary, let alone when on the
    march, CSS units are generally the last units to field night vision,
    armor plating for flak vests, and other combat gear. They also have
    fewer radios, crew served weapons and far less armor protection than
    their colleagues in combat and CS units.'' I note that many things that
    would fill these shortages in these units are not in the Army's budget,
    but are on the Unfunded Priority List--notably $443 million for small
    arms, including .50 caliber machine guns, that the 507th had only one
    of; $227 million for night vision equipment; and $117 million for
    radios. Now, I would assume that these things would be an absolute
    priority for missions like Iraq. Why are they on the unfinanced
    requirements list instead of in the budget, and what is your plan to
    bring these units to the same level as combat units, in both Active and
    Reserve components?
        General Cody. The Army, with tremendous congressional support, has
    purchased or contracted hundreds of millions of dollars in small arms,
    night vision equipment, and radios to meet the operational demands of
    units in Operations Enduring Freedom and Iraqi Freedom. We have done so
    without regard to type or component of units. The Army has gone to
    great lengths to ensure our units in contact have the appropriate type
    and quantity of equipment necessary to conduct their mission
    effectively and with minimum risk to the soldiers (e.g. rapid fielding
    initiative, interceptor body armor, up-armored HMMWVs, add-on-armor for
    wheeled vehicles, and convoy protection vehicles.) Yet while we are
    fighting the global war on terrorism, we are also transforming the Army
    into a Modular Force that is more joint and expeditionary. This
    transformation is necessary to continue the high operational tempo
    necessary to prevail in this war. The equipment you have identified on
    the Army's Unfunded Priority List would allow us to accelerate our
    transformation to the Modular Force. Our Army Campaign Plan encompasses
    the entire operational Army and will result in units that are more
    capable, lethal, and survivable. Based on our work with the executive
    branch and the Office of the Secretary of Defense, our plan is funded
    through a combination of base funding and a commitment of supplemental
    funding.

                     women in modular brigade combat teams
        94. Senator Lieberman. General Cody, questions are being asked
    about whether the Army's new reorganization into modular brigade combat
    teams complies with the rules regarding women in combat. The
    controversy is whether women assigned to the forward support companies
    in those brigades will be collocated with combat units. The reality of
    the situation is that whether these women are habitually collocated or
    not, their support duties will often take them into close contact with
    those units and the non-linear nature of the battlefield puts them at
    risk. The Secretary of the Army recently concluded that the Army's
    proposed reorganization will not require a change in policy. Some
    groups contend that this is merely a matter of semantics and that the
    reorganization will, in effect, cause women to be collocated with units
    assigned a direct combat mission. What are your views on this
    controversy? Are the current rules too limiting and make it difficult
    for the Army to reorganize into its modular structure?
        General Cody. Forward support companies are not collocated with
    combat units. The function of all soldiers on the current battlefield,
    and this includes soldiers in the medical, maintenance support, fuel
    handling, and chaplaincy fields, engage in duties that may take them
    into close contact with combat units. Additionally, the non-linear
    nature of our current battlefield puts all soldiers, regardless of
    gender, at risk. Our policy is that women will be assigned to all units
    as long as the principal mission does not include engaging in direct
    ground combat. That does not mean women will not be assigned to
    positions that could place them in danger. As is the case today, women
    are assigned to units and positions that may necessitate combat action
    such as defending them or their units from attack. For this reason, all
    soldiers, regardless of gender, are equipped, trained, and prepared to
    defend.

                              aviation restructure
        95. Senator Lieberman. General Cody, is the cost of aviation
    restructure included in the amount requested for modularity?
        General Cody. No. Aviation restructure costs are not included in
    the amount requested for modularity. However, the Army Modular Force
    requires UAV capabilities outside of the aviation structure. The Army
    has accepted risk with this capability and is funding it less than the
    full Army Modular Force requirement. The cost of the Army Modular Force
    UAV capability is included in the amount requested for modularity.

        96. Senator Lieberman. General Cody, is the cost included in the
    $14.6 billion made available by the termination of Comanche?
        General Cody. Yes, funding made available by the termination of the
    Comanche program, combined with funding already associated with Army
    aviation programs and modularity have enabled us to restructure Army
    aviation. Costs for installation and infrastructure requirements
    created by Aviation restructuring are not covered by Comanche funding.
    These requirements are addressed by the Assistant Chief of Staff,
    Installation Management reprogramming and/or supplemental funding
    requests.

        97. Senator Lieberman. General Cody, how much will aviation
    restructure cost and how much is funded in fiscal year 2006 and in the
    out-years?
        General Cody. The Army requested $3.8 billion for Aviation
    modernization in the fiscal year 2006 budget. The remaining $30.2
    billion will be funded in the out-years. These costs includes rearch,
    development, and acquisition of aircraft and aircraft systems such as:
    aircraft survivability equipment, avionics, aviation missiles and
    rockets, and air traffic systems. It also includes operations and
    maintenance for initial and advance flight training.

        98. Senator Lieberman. General Cody, why does the aviation
    modernization plan fail to completely modernize the Apache fleet to the
    Longbow configuration, instead maintaining 117 of the old A model
    Apaches in the National Guard?
        General Cody. The current approved Army strategy will convert 284
    AH-64 Apach aircraft to AH-64D Block III configurations beginning in
    2010. The intent of the Army is to bring all 597 Longbow aircraft up to
    Block III (which goes beyond the Program Objective Memorandum fiscal
    years 2007-2011 and into the extended planning period). The Army will
    continue to review future options and funding to address the potential
    upgrade of the remaining 117 AH-64As.

        99. Senator Lieberman. General Cody, I understand the Army's
    argument that the light utility helicopter is cheaper to acquire and
    cheaper to operate than a Blackhawk, but why is it not worth the
    additional cost to acquire more Blackhawks and avoid a separate low-
    density fleet of helicopters that the Army is not able to employ in a
    hostile air defense environment?
        General Cody. The Army is planning on procuring the LUH to replace
    the aging OH-58A/C and UH-1 fleets. The OH-58A/C and UH-1 aircraft are
    currently performing non-combat mission for the National Guard and TDA
    units within the Active component. The LUH will be a versatile, low
    cost aircraft capable of performing the missions that are currently
    conducted by the OH-58 and UH-1 aircraft. The procurement of the LUH
    will allow the Army to not only divest itself of aging aircraft, but it
    will also allow for the UH-60 aircraft currently conducting missions in
    IDA units to cascade to the combat units. The delta between the
    procurement and operating and sustainment cost of the LUH and the UH-
    60, as noted in the analysis of alternatives for the LUH, supports the
    acquisition of the LUH.

                                     reset
        100. Senator Lieberman. General Cody, the Army is spending billions
    of dollars to repair and replace equipment damaged or destroyed in Iraq
    as units rotate back to the U.S. and prepare for their next deployment
    in a process it calls ``Reset.'' The Army's own ``Stress on Equipment''
    study suggests that the Army is building up a backlog which in fiscal
    year 2005 alone is $7 billion to $13 billion. With equipment usage
    estimated in some cases as 10 times a normal year's usage, the result
    may very well be a force with huge equipment problems for the future.
    Do you believe that the Army is adequately funded to repair and replace
    equipment at a rate that will maintain the Army's combat readiness?
        General Cody. The Army has adequate funding in the President's
    budget and the fiscal year 2005 supplemental request to meet critical
    reset requirements.

        101. Senator Lieberman. General Cody, is the Army requesting
    adequate funding to replace all combat losses or losses of equipment
    deemed to be economically non-repairable?
        General Cody. The Army requested the executable amount of funding
    in the fiscal year 2005 supplemental to replace known losses as of the
    time of submission. Because of supplemental timing considerations,
    losses have occurred since that time, which were not requested. In
    addition, the process of inspecting equipment after an incident to
    determine whether it is repairable is time consuming, so it is likely
    that some losses which occurred prior to the submission were not
    included. The Army has received losses of specific items, such as the
    OH-58D helicopter, which are no longer in production. The replement for
    the OH-58D, the Armed Reconnaissance Helicopter, will not begin
    fielding until fiscal year 2006, and therefore funding for these items
    was not requested either.

        102. Senator Lieberman. General Cody, is the Army requesting
    adequate funding to reconstitute Army pre-positioned equipment stocks?
        General Cody. The Army requested and received funding in fiscal
    year 2005 to execute limited Army prepositioned stocks (APS) reset.
    Fiscal year 2006 executable requirements are being developed and will
    be submitted as part of the fiscal year 2006 supplemental request.
    These requirements are being shaped by ongoing actions in support of
    Operation Iraqi Freedom and the APS strategy which is pending Army
    approval. The Army will continue to refine APS requirements for the out
    years, ensuring that funding requests are adequate and cover all items
    for return to APS and the developing APS strategy.

        103. Senator Lieberman. General Cody, how big is the fiscal year
    2005 backlog and is it growing?
        General Cody. A backlog of requirements for repair is growing
    primarily because equipment is in use and cannot be removed for higher
    level repair. Equipment usage has prevented the Army from removing some
    equipment from theater, such as vehicles with add-on armor. Much of
    this equipment will be in need of replacement, overhaul, or
    recapitalization when hostilities end. This includes our prepositioned
    stocks the equipment units have left behind in theater for use by
    follow on units. In addition, the Army sees the need to recapitalize a
    number of systems, but the equipment is with units that are training to
    return to theater. The exact size of the backlog is difficult to
    determine and its growth will be dependent on the length of future
    operational requirements. The Army estimates it will take 2 years
    following the end of hostilities to fully repair and replace all
    necessary equipment.

                                  end strength
        104. Senator Lieberman. General Cody, the Army is planning for an
    Active-Duty end strength for fiscal year 2006 of 512,400 soldiers, with
    482,400 funded in the defense budget and the rest funded through
    supplemental appropriations. Are you at all concerned that the Army
    will not be able to draw down that number through military to civilian
    conversions and other ``efficiencies'' and that the increase may have
    to be permanent?
        General Cody. Senator Lieberman, the answer to your question is no.
    The National Defense Authorization Act for Fiscal Year 2005 allows for
    an active Army permanent strength of 502,400 and allows for 512,400
    through fiscal year 2009. This flexibility will allow the active Army
    to restructure while supporting the global war on terrorism. The Army
    believes that future operational requirements and the ongoing
    Quadrennial Defense Review will help DOD determine if Service strength
    levels are adequate. Additionally, Army leadership will review Active
    component strength requirements in late 2006 and make any necessary
    recommendations to Office of the Secretary of Defense and Congress.

        105. Senator Lieberman. General Cody, what do you think the
    permanent Active-Duty Army end strength should be to support your
    vision of a restructured Army, and to allow for less reliance on
    Reserve Forces?
        General Cody. The Army needs a temporary increase of at least
    30,000 (512,400) soldiers to transform while supporting the global war
    on terrorism. This figure assumes continued and predictable access to
    Reserve component forces at no more than 1 year deployed every 6 years.
    A permanent Active-Duty end strength will be based upon the defense
    strategy, combatant commanders force requirements, and other factors.
    Provided that the overall force requirements do not increase
    significantly, the Army will rely less on Reserve component forces
    after our current restructuring efforts are completed.

                           mobilization policy--army
        106. Senator Lieberman. General Cody, troops are being mobilized
    for duty in Iraq and Afghanistan under ``Partial Mobilization
    Authority'' (10 U.S.C. 12302a), which authorizes members of the Reserve
    component to be ordered to Active-Duty for not more than 24 consecutive
    months. Although a literal interpretation of this statute would allow
    multiple mobilizations of up to 24 consecutive months each, the
    Department of Defense has, by policy, limited the cumulative time on
    Active-Duty under this authority to 24 months. This limits most members
    of the Guard and Reserves who have served in Iraq to one mobilization,
    as the 12 months ``boots on the ground'' policy plus mobilization,
    train-up, and demobilization consume 16 to 18 months of the 24
    cumulative months allowed under the current DOD policy. Senior Army
    leaders have been quoted as saying DOD needs to change this policy
    because the Army is running out of Reserve members who have enough time
    left on the 24-month mobilization clock to serve another tour. They
    contend that the Army will not have sufficient forces to man the next
    planned troop rotation in Iraq and Afghanistan beginning this fall.
    Deputy Under Secretary of Defense Abell told this committee that the
    Secretary of Defense does not intend to change this policy. What are
    your views on DOD's policy of limiting involuntary mobilization of
    members of the Reserve components to 24 cumulative months?
        General Cody. The Army leadership is in consonance with the DOD
    policy on 24 months cumulative service. At the present time, we believe
    the 24 cumulative months serves the best interest of the Reserve
    component soldiers, their families and employers, and that their
    involuntary contribution to the global war on terrorism should remain
    as limited. With that said, we are planning to employ a force
    generation model to meet ongoing and future global commitments which is
    predicated on early and continued access to our Reserve component
    units. Without assured and predictable access to trained Reserve
    component units, not just individuals, we may have to revisit the
    current mobilization authority and associated policies or consider
    increasing the number of active Army units their deployment lengths and
    or shorter dwell periods between deployments.

        107. Senator Lieberman. General Cody, what would be the impact on
    the next planned troop rotation into Iraq and Afghanistan if the policy
    remains in place?
        General Cody. The Joint Staff, in conjunction with U.S. Central
    Command and the Services, has identified the capabilities required to
    deploy to the next rotations in Iraq and Afghanistan (OIF/OEF 05-07).
    The Army will be able to source its reguired units/capabilities for
    these rotations in accordance with the existing DOD Reserve component
    mobilization policies.

        108. Senator Lieberman. General Cody, what would be the impact on
    the Army's force generation construct for the Reserve Forces?
        General Cody. As the Army refines the Army Force Generation
    (ARFORGEN) concept, the Reserve component presents the greatest
    challenge. The Army accepted risk when it placed the bulk of the combat
    CS and CSS units within its Reserve component force structure. The
    evolving nature of stabilization and re-construction operations has
    created a higher utilization rate for CS/CSS units than anticipated; a
    rate even greater than combat arms units. Because this utilization rate
    varies among unit types and capabilities, it has become a critical
    issue for the RC since it makes resource allocation and management more
    complex and sensitive. Rebalancing of CS/CSS assets within the Reserve
    component is necessary; however, an even greater challenge is creating
    a balanced CS/CSS mix among all three components.
        The Reserve component requires a force generation model that will
    manage their force capabilities in time cycles. To optimize the entire
    force, the major tenets of ARFORGEN must: (1) provide of a set of
    capabilities (Active component/Reserve component mix) based upon cyclic
    readiness across a synchronized time span; (2) assume Presidential
    Reserve call up of 9-month mobilization authority and 6 to 7 months
    operational employment as  steady-state; (3) provide for a surge
    capability when required; (4) provide predictability for soldiers,
    families, employers, and combatant commanders; (5) build rotational
    depth; and (6) achieve flexibility in force management for operational
    and institutional capabilities.
        An ARFORGEN construct based upon these tenets will enable the Army
    to rebalance its Reserve component forces to change types, numbers, and
    size as it modularizes within end strength limitations.

                              future combat system
        109. Senator Lieberman. General Cody, the Army's FCS program was
    recently adjusted to delay the fielding of the manned ground systems by
    4 years to 2014 while adding over $6 billion to the program to
    accelerate the network and certain other technologies for spiraling to
    the current force. Do you believe that you will be able to maintain the
    FCS development schedule given the pressures on the Army budget for
    modularity and reset?
        General Cody. Essentially yes. See responses to #62 and #66.

        110. Senator Lieberman. General Cody, are the costs of the three
    planned technology spirals to the current force and are the costs of
    the experimentation and testing that will be undertaken by the
    experimental brigade combat team included in the FCS program or will
    they be in some other program element in future budget requests?
        General Cody. At this point in time, these costs reside within the
    FCS program. The Army is still determining how these costs will be
    funded in future budget requests.

        111. Senator Lieberman. General Cody, what are the estimated costs
    for the technology spirals and for experimentation and testing between
    now and the initial operational capability of the FCS?
        General Cody. The total estimated RDT&E costs for Spin Outs between
    now and IOC is $1,272 million total year dollars, which includes both
    A-kit and B-kit development for both PCS and associated programs. Of
    the $1,272 million, $595 total year dollars is allocated for
    experimentation and testing.

        112. Senator Lieberman. General Cody, should budget pressures force
    you to make a choice, what are your priorities among modularity, reset,
    and FCS?
        General Cody. The strategic goal of the Army is to remain relevant
    and ready by providing the joint force and combatant commanders with
    essential capabilities to dominate across the full range of current and
    future military operations. Resetting our forces from ongoing military
    operations, the transition to the Army Modular Force, and the Future
    Combat System are all critical components of this goal. If forced by
    budget pressures, we would make a difficult decision as to how best to
    balance select components among these three critical programs by
    assessing the capabilities needed to support the combatant commanders'
    requirements.

                   protections not included in the agreement
        113. Senator Lieberman. Mr. Boehm and Dr. Graham, I would like to
    understand what significant contractual provisions would apply to a
    traditional contract, but do not apply to the FCS program, because of
    the Army's decision to use OTA. Could you give us a description of what
    these provisions are and what protection they would provide to the
    government and the taxpayer?
        Mr. Boehm. It is important to appreciate that the use of an OTA as
    an agreement for a Defense Department acquisition instead of a
    traditional contract has the effect of stripping out virtually all
    major statutory protections for the government which apply to
    traditional contracts. Those protections may then be added to the OTA
    by incorporating the missing statutes or including some version of the
    protections, though typically with weaker language.
        My testimony included a very detailed listing of statutes not
    applicable to OTAs in general and those missing from the FCS OTA
    specifically. Two important statutes missing from the FCS OTA are the
    Program Integrity Act and the Truth in Negotiations Act. The Program
    Integrity Act imposes standards to deter and punish conflicts of
    interest. Given the major ethical problems in this area by Boeing, the
    FCS program's lead system integrator, it is incredible that this
    standard statutory provision was not made applicable to the FCS OTA.
    The Truth in Negotiations Act (TINA) was also not made a part of the
    FCS OTA. This law applies to virtually every standard Defense
    Department acquisition contract. TINA requires defense contractors to
    disclose to the Defense Department accurate price and cost information
    in order to deter overbilling, a problem which has plagued Defense
    Department acquisitions in the past. There is absolutely nothing in the
    public record of the FCS program that even remotely would justify
    giving the FCS defense contractors an exemption from their legal duty
    to provide accurate pricing and cost information.
        Dr. Graham. Congress established OTA for research, development, and
    prototyping activities in order to permit government agencies to more
    readily do business with innovative suppliers outside of the
    traditional defense industrial base. OTA provides flexibility for the
    government and supplier to negotiate tailored agreement (contract)
    forms and clauses (terms and conditions) that are not governed by those
    Federal acquisition laws and regulations that apply to contracts,
    grants, or cooperative agreements.
        The IDA review found that the Army employed OTA authority very
    conservatively, incorporating numerous standard FAR provisions. The top
    half of the accompanying Table summarizes selected provisions dealing
    with such key issues as cancellation, dispute resolution, cost
    management and reporting, change control, and data rights.\7\ This
    agreement makes extensive use of standard government contractual terms
    and-conditions. Some provisions are taken verbatim from the FAR; others
    have been modified after negotiation between the government and Boeing.
    (By contrast, the earlier CTD-phase agreement includes no FAR clauses
    and incorporated none by reference.)
    ---------------------------------------------------------------------------
        \7\ The FCS agreement was shaped through Army-Boeing negotiations.
    Initial Army drafts included over 120 FAR/DFARS clauses. Incorporated
    by reference within the Army-Boeing agreement are 24 FAR clauses and 16
    DFARS clauses. Additionally, a review of the agreement clauses
    themselves shows that local clauses relate to the subject matter of 63
    additional terms and conditions that would be required to be included
    as clauses within a cost reimbursement research and development FAR
    contract. See FCS Other Transaction Agreement, Information Briefing,
    Use of FAR/DFARS Clauses in FCS Other Transaction Agreement for System
    Development and Demonstration, dated 25 April 2003.
    ---------------------------------------------------------------------------
        The form of the Army-Boeing agreement at least in part reflects the
    fact that Boeing Integrated Defense Systems is an experienced defense
    contractor. Unlike the nontraditional or commercial firms that OT
    authority was created to address, Boeing's defense business operations
    are adapted to a FAR-based style of contracting; Boeing management, at
    least in its defense business, apparently considers the FAR framework
    to be a ``best practice.''
        Table 3 also summarizes the flow-down provisions for the Tier 1
    subcontractors. While the OTA gave Boeing the flexibility to adopt
    innovative contractual forms, Boeing officials told the study team that
    they followed government contracting practices because these were well-
    understood by the participants--predominantly large, traditional
    defense contractors. The ``nontraditional'' suppliers are iRobot from
    Burlington, MA ($25.2 million) and Austin Information Systems from
    Austin, TX ($56.6 million). Although there eventually may be others at
    the lower tiers, for now, the $14.78 billion is being shared almost
    entirely by defense industry giants.
        A review of the subcontracts awarded by Boeing and SAIC to Tier 1
    subcontractors shows that those subcontracts largely follow the
    conventions of traditional defense contracts, including format. Boeing
    terms and conditions come from a standard list, are accessible through
    their web site, and are generally of the same scope, complexity, and
    breadth of coverage as the FAR system.\8\
    ---------------------------------------------------------------------------
        \8\ The subcontracts follow the format of FAR 15.204-1. Moreover,
    Boeing uses standard contract terms and conditions, which incorporate
    by reference numerous FAR and DFARS clauses. The subcontracts
    incorporate by reference the FAR and DFARS provisions and clauses
    incorporated by reference within the OTA, and also take account of
    others not included (e.g., FAR 52.246-15 Certificate of Conformance,
    52.247-34 F.O.B. Destination, 52.245-17 Special Tooling).
    ---------------------------------------------------------------------------
        The lower half of the Table identifies some of the provisions that
    provide flexibility for managing the FCS program. The Army-Boeing
    agreement provides additional flexibility through the creation of the
    Integrated Product Team (IPT) structure, the specification definition
    process, and the subcontracting system employed. These features will be
    discussed when we address the execution of the program.

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        114. Senator Lieberman. Secretary Bolton, what steps have you taken
    to try to protect the government and the taxpayer in this agreement, in
    the absence of the traditional contract provisions that are not
    included in the agreement?
        Mr. Bolton. The OTA does include a number of FAR and DFARS clauses;
    the OTA also includes a number of narrative articles which have the
    function of terms and conditions: many of these articles represent
    tailored FAR or DFARS clauses, essentially covering the required
    provisions found in a FAR based contract as applicable in this
    situation. We have, however, approached the LSI about incorporation of
    the PIA, TINA, and CAS FAR clauses into the OTA and believe we can do
    this with minimum impact to schedule, and moderate impact with respect
    to the cost of performance.

        115. Senator Lieberman. Mr. Francis, Dr. Graham, and Mr. Boehm,
    what are your comments on the effectiveness of these steps?
        Mr. Francis. GAO has not yet conducted a thorough analysis of the
    rationale and alternative mechanisms that the Army inserted into the
    OTA in lieu of the traditional FAR protections. While the Army did
    inform GAO that certain provisions, such as the Truth in Negotiations
    Act, were excluded because of time and resource constraints, they did
    not provide an explanation of how they maintained protections that
    those provisions were intended to provide. It is important to note that
    the Army recently decided to convert the agreement to a traditional FAR
    contract.
        Dr. Graham. The Army-Boeing agreement, although based on Other
    Transactions Authority, incorporates numerous standard defense
    contracting clauses, including termination rights, disputes resolution,
    cost accounting, and auditing, that are commonly viewed as protecting
    the government's interests. The IDA review concluded that the Army's
    and Boeing's conservative approach in creating this agreement
    effectively addressed concerns that the use of an agreement based on OT
    authority has created special risks for the FCS program. Our
    recommendations addressed many other challenges to the program that we
    felt posed substantially greater risks to the program than were created
    by the contractual instrument.
        Mr. Boehm. The FCS OTA included very little in the way of legal
    protections for the government in lieu of the statutory protections
    typically found in standard acquisition contracts. The net effect is
    that the ability of the government to have adequate oversight over this
    extremely risky program was neutered. By eliminating requirements for
    accurate pricing, strong standards against conflicts of interest,
    standard legal tools for the government in contract disputes, and a
    host of standard auditing and accounting requirements, a very ambitious
    program was set up for future failure. Several months of analysis by
    NLPC confirmed that OTA language contained in place of the standard
    legal protections found in Defense Department contracts almost all
    provided much weaker protections for the government's interests.

                       role of nontraditional contractors
        116. Mr. Francis, one of the reasons that has been given for using
    OTA on this program is the presence of two non-traditional contractors.
    We have built numerous waivers and exceptions into the traditional
    contracting system over the last decade to address exactly this issue.
    In your view, does the traditional contracting system give the Army the
    flexibility needed to do business with a nontraditional subcontractor
    on a program like this?
        Mr. Francis. While the Army has some flexibility to waive a number
    of FAR requirements on a case-by-case basis, including for
    nontraditional defense contractors under certain circumstances, it is
    difficult to tell if such waivers would be sufficient to lure
    nontraditional defense contractors to do business with the Army. The
    Army's recent decision to execute FCS under a FAR contract suggests it
    believes it can provide the needed flexibility to do business with
    nontraditional firms.

                  impact of terminating the existing agreement
        117. Senator Lieberman. Secretary Bolton, if Congress were to
    require you to terminate the existing agreement and proceed with the
    program under a traditional contract, what impact would that have on
    your cost and schedule?
        Mr. Bolton. If the existing agreement were terminated, the LSI
    would be entitled to those allowable costs associated with any
    administrative closeout activity (but such costs could not be greater
    than current funding obligated to date); and those costs covered by the
    ``termination'' article of the OTA. We would expect to be able to
    overcome most if not all of the costs envisioned by the OTA's
    termination article; however, since under this scenario the ending of
    the OTA would merely represent the passage of the program to a
    successor instrument, rather than a total cessation of work. That is,
    we would try to mitigate all cost and schedule impacts by doing some
    type of conversion of the OTA to a FAR based contract, understanding
    that this would take an appropriate amount of time to plan, execute,
    and complete.

        118. Senator Lieberman. Mr. Francis, Dr. Graham, and Mr. Boehm, if
    Congress were to require Secretary Bolton to terminate the existing
    agreement and proceed with the program under a traditional contract
    potentially impacting the cost and schedule, what are your comments on
    this issue?
        Mr. Francis. The Army recently decided to convert the existing
    agreement to a traditional FAR contract. At this point, it is not yet
    clear how long and costly the conversion process will be.
        Dr. Graham. This issue was not addressed by the IDA study.
        Mr. Boehm. Any costs associated with making the FCS program subject
    to the level of oversight found in standard Defense Department
    acquisition contracts pale next to the costs of continuing such a major
    program with an OTA designed for small research projects which
    minimizes oversight and accountability.
                                     ______

                 Questions Submitted by Senator Daniel K. Akaka
                              high-risk of boeing
        119. Senator Akaka. Secretary Bolton, in recent months, Boeing
    Corporation has been at the center of major business and personal
    scandals. Ms. Darleen Druyun is serving time in a Federal prison and
    former Chief Executive Officer (CEO) Michael Sears will be very soon.
    Additionally, at the request of Mr. Michael Wynne, a special team
    studied additional contracts that Ms. Druyun had been involved with,
    identifying additional programs that would require further study.
    Furthermore, a recent study by the Project on Government Oversight, a
    well-respected watchdog group, determined that Boeing ``committed 50
    acts of misconduct and paid $378.9 million in fines and penalties
    between 1990 and 2003.'' Do you believe that the Army is accepting an
    inordinately high level of risk by using Boeing Corporation as the LSI
    for the FCS, a program that is very complex, has already been modified
    to add $6.4 billion to the cost of the program, and the time line for
    this ``system of systems'' has been extended? If you do not feel that
    this is a ``high risk'' process, what measures do you have in place to
    ensure that it stays on track?
        Mr. Bolton. We have successfully utilized specific conflict of
    interest provisions, ``Firewall'' provisions, to ensure that the LSI
    and the other subcontractors (one-team partners) maintain appropriate
    control of all sensitive data to avoid potential conflicts of interest.
    This risk mitigation action was successfully demonstrated during the
    LSI's source selection process wherein a number of highly competitive
    major subcontracts were evaluated and awarded in a short period of time
    without any industry protest. One letter of concern was received but
    that was withdrawn within 48 hours.

                             future combat systems
        120. Senator Akaka. Secretary Bolton, the FCS was awarded an OTA
    rather than FAR Part 12 contract and Boeing Corporation is the LSI.
    Would it be more efficient and less likely to lend itself to fraud and
    abuse if the Department of Defense used its internal resources, such as
    its own systems integrators, to manage this program?
        Mr. Bolton. By ``internal resources,'' assuming you mean using the
    existing Army Program Management Offices and PEOs. We considered this
    traditional approach but determined that given the aggressive program
    schedule and the complexity of the development and integration of
    essentially 18 ACAT 1 programs tied to a large number of complementary
    programs including Air Force, Navy, USMC and other government agency
    programs, the LSI approach represented the most efficient use of
    resources to accomplish the task.

        121. Senator Akaka. Secretary Bolton, both the GAO and the National
    Legal and Policy Center have indicated that if there are any
    significant production slippages or cost increases for FCS, the Army
    will be hard pressed to allocate funds within the Department of the
    Army because the FCS program ``so dominates the Army's investment
    budget for years to come.'' What processes does the Department of the
    Army have in place to cover any cost overruns that might occur without
    receiving additional funds from Congress?
        Mr. Bolton. The FCS program has implemented an aggressive Cost as
    an Independent Variable (CAIV) process which has several components, to
    include the setting of specific cost targets for each acquisition phase
    of the program. The objective of the CAIV process and an incentive
    arrangement is to prevent cost overruns from occurring. Understanding
    that there are often influences outside the direct control of the
    program that may drive costs over the established targets, the Army is
    prepared to make the difficult decisions required to ensure program
    affordability. These decisions will be made at the appropriate times
    and will be based on analytical assessments. Both this flexibility and
    the willingness to make difficult decisions were demonstrated during
    the recent program restructuring when a number of significant changes
    were made to the program without receiving additional funds from
    Congress.

                         women in combat support units
        122. Senator Akaka. General Cody, it was recently reported in the
    press that the Department of the Army is drafting new language
    pertaining to women in combat support units. Currently the Army's
    policy bars women from combat support units. Under the Army's
    modularity structure, it is my understanding that in order for there to
    be enough soldiers to fill the new structure, this new language may
    allow women to be in Forward Support Companies (FSCs) that are
    collocated with units conducting an assigned direct ground combat
    mission. Please explain how this is in compliance with the current Army
    policy that says mixed-sex units are prohibited from embedding or
    collocating with land combat units.
        General Cody. The Army is not drafting new language pertaining to
    women in combat service support units. The Army's policy does not bar
    women from being assigned to combat support units. Women in the Army
    are assigned in accordance with Army Regulation (AR) 600-13, Army
    Policy for the Assignment of Female Soldiers. This policy implements
    the 1994 Department of Defense Direct Ground Combat Definition and
    Assignment Rule policy memorandum. In January 2005, the Secretary of
    the Army reviewed all personnel policies, with emphasis on the policy
    of how the Army assigns women Soldiers. The new Brigade Combat Team,
    unit of action, which is currently being established as a part of Army
    Transformation, remains consistent with personnel assignment policies.
    As a result of these studies, women may be assigned to units called
    Forward Support Companies (FSCs), which provide supply, maintenance,
    and field feeding support to units performing direct ground combat.
        The FSC is the cornerstone of the distribution-based logistics
    system and has a mission that emphasizes support and maintain as far
    forward as possible. However, the FSC does not have a mission of direct
    ground combat, nor does it have a mission to routinely collocate with
    its supported combined arms battalion. It is organized to meet the
    needs of the combined arms battalion under the assignment of the
    Brigade Support Battalion (BSB). Both the FSC and the task force
    commander must ensure that the FSC is tightly integrated into the task
    force's operations in garrison, in training, and when deployed. The
    current structure of the logistical support for the BCT continues the
    focus of our Force XXI concepts.
        Women comprise 14.5 percent of our Active Force, 23.4 percent of
    our Reserve Force and 12.7 percent of our National Guard; they are also
    representing 10 percent of the force in OEF/OIF. The Army has 9,400
    women in the area of operations. They are performing in an outstanding
    manner given the complexity and ambiguity of a non-linear, insurgent
    driven battlefield. Their performance throughout both OIF and OEF has
    been exemplified by heroics such as one of our airborne officers being
    awarded the Bronze Star with valor device for her command leadership
    during an attack on her military police convoy, to a Civil Affairs
    specialist being awarded a Purple Heart for the injury she suffered
    while defending herself and her comrades in Najaf, Iraq, to a
    specialist who assisted in the capture of General Husam Mohammed Amin
    one night as she stood guard.

                      restructuring future combat systems
        123. Senator Akaka. General Cody, the FCS is well into its second
    year of execution. It recently underwent a restructure to reduce risk
    and to field a fully-capable unit of action in 2014 instead of in 2010.
    The fiscal year 2006 budget was reduced significantly from what was
    projected last year. Does this restructure signal problems with the
    program and what are the benefits of this restructuring?
        General Cody. No, the restructure does not signal problems with the
    program. In fact, the FCS program was generally performing within its
    cost and schedule performance metrics prior to the restructure. The
    benefits of the restructure are twofold. First, it reduces
    developmental risk by allowing more time for technology maturation and
    the inclusion of additional experimentation. More importantly, the
    restructure allows for the Spiraling (PM VA terminology is now Spin)
    out of selected FCS technologies to the current force. In essence, this
    brings some of the FCS capabilities to the Army sooner than originally
    planned. The fact that the Army has elected to accelerate some aspects
    of the FCS program is more due to the success of the program than
    problems with it.

        124. Senator Akaka. General Cody, in your prepared statement for
    this subcommittee, you indicated that ``risk associated with the
    maturation of technologies (of FCS) contributed to the Army's decision
    last summer to restructure the FCS program and extend it by 4 years.''
    Should another restructuring of the FCS program be required, can you
    tell how you plan to ensure proper oversight of the program with Boeing
    Corporation as the LSI?
        General Cody. Government oversight of EVM performance is
    effectively three dimensional. The first dimension consists of
    Integrated Baseline Review (IBR) Process. The second dimension is the
    collaborative analysis process. The third dimension is the use of the
    EVM information by the program, DA, OSD, and congressional staff
    management.
        a. The IBR Process ensures the integrity of the SDD Performance
    Measurement Baseline. The IBR Process began in October 2003 with an in-
    depth review of the IPT schedules, and continued through May 2004
    conducting discussions with 99 LSI Control Account Managers.
    Subsequently, the IBR continued with seven partner IBRs until the
    announcement to restructure the FCS program in July 2004.
        Since the announcement of the program restructure, the program has
    laid in the new Performance Measurement Baseline (PMB) in a phased
    implementation representing the new technical approach. The phased PMB
    implementation will culminate in May 2005 with the laying in of
    planning packages for the entire program through program completion,
    with subsequent detail planning in June 2005 through the Initial
    Program Design Review in June  2006. Detail planning will continue in
    agreement with the rolling wave concept throughout the SDD effort.
        The IBR process will then continue in July 2005, with in-depth
    schedule reviews of the One Team program frameworks and IPTs. The
    program level schedule review will take place in August 2005 to ensure
    full horizontal and vertical integration. The LSI CAM discussions will
    take place in September 2005 to review full cost, schedule, and
    technical integration given due consideration to program risk. The IBR
    process will then focus on the partners in the October through December
    2005 timeframe. The program's IBR process will continue throughout the
    SDD effort as required reviewing future areas of concern to ensure the
    integrity of the PMB is maintained.
        b. Each month, the Program's Earned Value Management Working Group
    (tri-managed and staffed by the Army's PM Office, the LSI, and DCMA)
    collaborative review the earned value cost and schedule data, it's
    resulting variances, and the root causes/corrective actions to the
    variances. This EVM data is aligned to the congressionally directed
    funding ``buckets'' for the program. The EVM data is then consolidated
    into an analysis package that is used to provide EVM information to the
    Program Office's management, DA, OSD, and congressional staff.
        c. The ``oversight process'' cyclically provides the EVM
    information that is a collaboratively analyzed product to (1) the PM
    each month via a face-to-face meeting with the PM's EVM practitioners,
    (2) DA staff via the monthly Senior Army Leadership Acquisition Program
    Review, (3) the Integrating Integrated Product/Process Team (IIPT) each
    month (the IIPT is populated by key DA and OSD principals), (4) OSD
    staff via inclusion of key EVM facts in the Defense Acquisition
    Executive Summary (DABS), and (5) the professional staff of each of the
    four defense oversight committees each quarter.

        [Whereupon, at 11:09 a.m., the subcommittee adjourned.]

    DEPARTMENT OF DEFENSE AUTHORIZATION FOR APPROPRIATIONS FOR FISCAL YEAR
                                      2006

                                  ----------

                            WEDNESDAY, APRIL 6, 2005

                                   U.S. Senate,
                               Subcommittee on Airland,
                                   Committee on Armed Services,
                                                        Washington, DC.

                           TACTICAL AVIATION PROGRAMS

        The subcommittee met, pursuant to notice, at 2:45 p.m. in
    room SR-232A, Russell Senate Office Building, Senator John
    McCain (chairman of the subcommittee) presiding.
        Committee members present: Senators McCain, Chambliss, and
    Lieberman.
        Majority staff members present: Ambrose R. Hock,
    professional staff member; Gregory T. Kiley, professional staff
    member; Thomas L. MacKenzie, professional staff member; and
    Stanley R. O'Connor, Jr., professional staff member.
        Minority staff member present: Creighton Greene,
    professional staff member.
        Staff assistants present: Alison E. Brill, Benjamin L.
    Rubin, and Nicholas W. West.
        Committee members' assistants present: Christopher J. Paul,
    assistant to Senator McCain; Clyde A. Taylor IV, assistant to
    Senator Chambliss; and Frederick M. Downey, assistant to
    Senator Lieberman.

           OPENING STATEMENT OF SENATOR JOHN McCAIN, CHAIRMAN

        Senator McCain. Good afternoon. The Senate is presently
    having a vote, and I'm sure that other members of the committee
    will be arriving, but I thought I'd better get the hearing
    started since we have a number of witnesses today.
        Today, the Airland Subcommittee meets to receive testimony
    from two distinguished panels of witnesses on those aviation
    programs which the subcommittee has oversight responsibility.
    I'd like to thank the witnesses for appearing before the
    subcommittee today as we fulfill our oversight function. We
    will draw upon your expertise and insight to gain a better
    understanding of the various challenges and opportunities that
    are before us.
        We'll have two panels in today's hearing. The first panel
    will be comprised of Mr. Bolkcom, Mr. Sullivan, and Mr.
    Schmitz, who will share their views on the current and
    projected operational environment program management and
    acquisition strategy. The second panel will be comprised of the
    Honorable Michael Wynne, the Honorable John Young, Vice Admiral
    Joseph Sestak, Major General Stanley Gorenc, and Brigadier
    General Martin Post, all outstanding leaders within the Defense
    Department, who will address the work they are performing to
    equip the warfighter.
        Tactical aircraft from the Air Force, Navy, and Marine
    Corps have delivered a spectacular performance in Operations
    Enduring Freedom (OEF) and Iraqi Freedom (OIF). The accuracy
    and reliability of our precision-guided weapons instills
    confidence in our ground forces and strikes fear in the hearts
    of our enemies. Where once we considered how many aircraft
    would be required to destroy a target, it's now how many
    targets can be destroyed by a single aircraft. The flexibility
    afforded by advancements in precision-weapons development and
    tactical platforms, platforms that are increasingly more
    capable, reliable, and maintainable, will have profound effects
    on the force structure we field in the future.
        I want to extend our sincere appreciation to the brave men
    and women who have flown these missions, and to all those who
    support them, not only in the field, but also in our systems
    commands, our program offices, our aviation depots, and
    industry.
        We must ensure that we remain vigilant in our efforts to
    maintain our advantage in tactical aviation. To do so requires
    an accurate assessment of our current and projected operating
    environment. There are a number of studies and work in the
    Quadrennial Defense Review (QDR) underway to assist us in this
    effort. It's important that we align our limited resources to
    procure the capabilities that we truly need.
        The F/A-22 has recently completed its initial operational
    test and evaluation. Its operational effectiveness is unmatched
    by any fighter in the world. More work needs to be done to make
    it operationally suitable. The Committee will also be
    interested to hear what the service is doing to correct those
    deficiencies. The Joint Strike Fighter has made progress. The
    subcommittee is also interested in how the Air Force and Marine
    Corps will meet their tactical airlift and aerial refueler
    requirements should termination of the C-130 occur.
    Additionally, the subcommittee views with concern the Air
    Force's plan to retire 49 KC-135E aerial refueler aircraft,
    presupposing the outcome of the mobility capability study and
    analysis alternatives for tanker aircraft.
        Once again, thank you for your service to our country. I
    want to thank Senator Lieberman for his work as the ranking
    member. I want to thank all of our witnesses, and we'll begin
    with Mr. Sullivan.
        [The following information has been inserted for the record
    by Senator McCain:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

      STATEMENT OF MICHAEL J. SULLIVAN, ACQUISITION AND SOURCING
              MANAGEMENT, GOVERNMENT ACCOUNTABILITY OFFICE

        Mr. Sullivan. Thank you, Mr. Chairman.
        I'm pleased to be here today to participate in the
    subcommittee's hearing. I'll give a brief oral statement
    summarizing our recent work on the F/A-22 and Joint Strike
    Fighter programs, and discuss implications for the Department
    of Defense's (DOD) overall acquisition process. I also have a
    written statement that I'd like to submit for the record.
        Senator McCain. Without objection, your entire statement
    will be made part of the record, and that of the other
    witnesses.
        Mr. Sullivan. Thank you, Mr. Chairman.
        Let me begin with the F/A-22 program. Given current
    estimates for development costs, quantities, and missions, the
    F/A-22 program needs a new business case to justify continued
    investment now. Since the program started in 1986, development
    cost has more than doubled, initial operational capability has
    been delayed 10 years, and the aircraft quantities have been
    reduced from 750 to about 180. A new business case should take
    a look at the Air Force's needs right now and reconcile them in
    terms of quantities and capabilities with available resources
    before investment continues.
        In addition, a modernization program has been added to
    provide robust air-to-ground and intelligence-gathering
    capabilities to the F/A-22. DOD estimates the cost of that
    modernization plan at about $11 billion over the next 15 years.
    Recently, Program Budget Decision 753 issued last December
    places that modernization program in doubt. It ends procurement
    after 2008, and many of the advanced capabilities perceived in
    that plan were planned for aircraft that now would not be
    bought under that decision.
        In March, we issued a report to recommend that the DOD
    direct the Air Force to establish a new business case. DOD
    concurred with that recommendation, stating that it would use
    the Quadrennial Defense Review to do so.
        Let me turn to the Joint Strike Fighter (JSF) program. This
    program has been proceeding along a similar path as the F/A-22
    and is now at a crossroads. Increased development costs,
    delays, and reduced quantities have made its original business
    case unexecutable at this point. When the program began,
    development cost was estimated at $25 billion over 12 years, to
    be completed in 2008. Today, it is estimated at nearly $45
    billion over 17 years, to be completed in 2013. This reflects
    an 81-percent cost increase and a 5-year delay in development.
    At the same time, procurement quantities have been reduced by
    more than 535.
        The program has experienced problems with aircraft weight
    that require significant design changes causing cost and
    schedule uncertainty that they are undergoing right now. It may
    take a year or more until adequate knowledge about the design
    and manufacturing of the aircraft can be captured to reduce
    this uncertainty; however, the program is requesting long lead
    funding for production in 2006. This investment is at risk.
        If production begins without adequate knowledge, design
    changes in the future can create further significant cost and
    schedule problems. For example, between 2007 and the end of the
    development program, the program plans to increase production
    spending rates from about $100 million to nearly $1 billion a
    month to invest in production-type tooling facilities and a
    production workforce. This investment should wait until the
    program knows the design is ready to produce, yet the first
    integrated prototype to prove this won't fly until 3 years
    after production begins.
        In our March 15 report, we recommended the program take
    time now to establish a new business case that's based on
    better knowledge about the design and manufacturing needs and
    the resources needed for this aircraft, and adjust its
    acquisition strategy, moving forward, to better align with
    DOD's existing acquisition policy that calls for evolutionary
    knowledge-based product development.
        I'd like to make one final important point about DOD's
    overall acquisition process. It's currently estimated that
    these two programs I've talked about will spend about $75
    billion in development, twice as much as originally planned.
    For that cost, they currently plan to deliver about 1,100 less
    aircraft, and at a slower pace than they had originally
    planned. That reflects a significant loss of buying power for
    DOD, and it has serious implications for how well our
    acquisition process supports the warfighter.
        The problems that these two programs have encountered are
    not atypical. They stem from an acquisition process that allows
    programs to commit funds without enough knowledge about
    requirements, technologies, designs, and manufacturing
    processes at different points in the program, creating
    significant unknowns that result in a cascade of cost overruns
    and schedule delays, usually later in the program. DOD
    recognizes this and rewrote its acquisition policy in 2003;
    however, the policy still lacks discipline controls and
    oversight mechanisms, and is not being consistently
    implemented. More needs to be done to assure the taxpayers a
    reasonable return on their investment. Reestablishing
    businesses cases on these two programs at this time, when
    significant changes have occurred, is a step in that right
    direction.
        Mr. Chairman, that concludes my oral statement. I'd be
    happy to respond to any questions that you or other members of
    the subcommittee may have.
        [The prepared statement of Mr. Sullivan follows:]
                    Prepared Statement for Michael Sullivan
        Mr. Chairman and members of the subcommittee: I am pleased to be
    here today to participate in the Subcommittee's hearing on the status
    of two of the Department of Defense's (DOD) major tactical aircraft
    fighter programs, the F/A-22 Raptor and the F-35, also known as the
    Joint Strike Fighter (JSF).\1\ Both programs are intended to replace
    aging tactical fighter aircraft with highly advanced, stealthy
    aircraft. These two programs represent a potential future investment
    for DOD of about $240 billion to modernize tactical fixed-wing
    aircraft.
    ---------------------------------------------------------------------------
        \1\ The third major program, the FA-18EF, currently in production,
    is not a subject of this testimony.
    ---------------------------------------------------------------------------
        My statement today will highlight key concerns in the F/A-22 and
    JSF programs. Our work has shown that because of the significant
    changes in the F/A-22 development and procurement programs and the key
    investment decisions remaining, a new business case is needed to
    justify aircraft quantities and investments in new capabilities.
    Changes in the JSF program and DOD's intent to begin producing aircraft
    with at least 6 years of development remaining suggest that the JSF
    does not yet have the knowledge to justify future investments. In
    addition to highlighting specific F/A-22 and JSF program issues, I will
    discuss the implications these development programs have on DOD's
    overall investment strategy for modernizing the tactical fixed-wing
    aircraft.
        My statement is primarily based on our recent reports on the F/A-22
    and JSF programs.\2\ We performed the work associated with this
    statement in accordance with generally accepted government auditing
    standards.
    ---------------------------------------------------------------------------
        \2\ GAO, Tactcal Aircraft: Status of the F/A22 and JSF Acquistion
    Programs and Implications for Tactical Aircraft Modernization, GAO-05-
    390T (Washington, DC.: Mar. 3, 2005; GAO, Tactical Airlift: Air Force
    Still Needs Business Case to Support F/A-22 Quantities and Increased
    Capabilities, GAO-05-304 (Washington, DC: Mar. 15, 2005); and GAO
    Tactical Aircraft: Opportunity to Reduce Risks in the Joint Strike
    Fighter Program with Different Acquisition Strategy, GAO-05-271
    (Washington, DC: Mar. 15, 2005).
    ---------------------------------------------------------------------------
                                    summary
        The F/A-22 has been in development for 19 years, and cost increases
    and delays have created affordability concerns that reduced the number
    of aircraft planned for acquisition. A changing world environment and
    threats over this time frame have compelled the Air Force to plan for
    large investments in new capabilities to keep the F/A-22 viable.
    Termination of F/A-22 procurement after fiscal year 2008 has also
    placed modernization plans in doubt. The original business case
    elements--needs and resources--set at the outset of the program are no
    longer valid, and a new business case is needed to justify future
    investments for aircraft quantities and modernization efforts. The F/A-
    22's acquisition approach was not knowledge-based or evolutionary. It
    attempted to develop revolutionary capability in a single step, causing
    significant technology and design uncertainties and, eventually,
    significant cost overruns and schedule delays. Lessons from the F/A-22
    program can be applied to the JSF program to improve on its outcomes.
        While relatively early in its acquisition program, the JSF program
    has experienced design and weight problems that, if not solved, will
    affect aircraft performance. These problems have led to increased
    development and procurement costs and schedule delays so far. In
    addition, the program's customers are still not sure how many aircraft
    they will need. The combination of cost overruns and quantity
    reductions has already diluted DOD's buying power and made the original
    JSF business case unexecutable. Given continuing program uncertainties,
    DOD could use more time right now to gain knowledge before it commits
    to a new business case for its substantial remaining investments. The
    JSF's current acquisition strategy does not embrace evolutionary,
    knowledge-based techniques intended to reduce risks. Key decisions,
    like the planned 2007 production decision, are expected to occur before
    critical knowledge is captured. Time taken now to gain knowledge will
    avoid placing sizable investments in production capabilities at risk to
    expensive changes.
        Taken together, the current status and continuing risk in these two
    programs have broader implications to the DOD tactical fixed-wing
    aircraft modernization program, raising questions as to whether its
    overarching goals are now achievable. Decreases in quantities alone--
    about 30 percent since original plans--raise questions about how well
    the aircraft will complement our tactical air forces in the future.
                                   background
        The F/A-22 aircraft program is acquiring the Air Force's next
    generation, multimission fighter for about $63.8 billion.\3\ The
    continued need for the F/A-22, its increasing costs, and the quantities
    required to perform its mission have been the subject of a continuing
    debate within DOD and Congress. Supporters cite the F/A-22's advanced
    features--stealth, supercruise speed, maneuverability, and integrated
    avionics--as integral to the Air Force's Global Strike initiative and
    for maintaining air superiority over potential future adversaries for
    years to come.\4\ Critics, on the other hand, argue that the Soviet
    threat the F/A-22 was originally designed to counter no longer exists
    and that its remaining budget dollars could better be invested in
    enhancing current air assets and acquiring new and more
    transformational capabilities that will allow it to meet evolving
    threats. The debate continues as a December 2004 budget decision by the
    Office of the Secretary of Defense (OSD) reduced F/A-22 funding and the
    number of aircraft to be acquired. A full-rate production decision is
    expected in early April, but the Air Force already has 98 aircraft on
    contract.\5\
    ---------------------------------------------------------------------------
        \3\ This amount consists of $61.3 billion currently budgeted for
    the basic program and the initial stages of the modernization efforts,
    $1.3 billion for future start-up costs of a separate acquisition
    program for the latter stages of modernization, and $1.2 billion in
    costs to retrofit aircraft with enhanced capabilities and activate
    depot maintenance activities.
        \4\ Global Strike is one of six complementary concepts of
    operations laying out the Air Force's ability to rapidly plan and
    deliver limited-duration and extended attacks against targets.
        \5\ The Defense Acquisition Board met in late March of this year to
    discuss the F/A-22's progress and readiness for full-rate production. A
    final decision by the milestone decision authority is expected in early
    April.
    ---------------------------------------------------------------------------
        The JSF program is DOD's most costly aircraft acquisition program.
    The program's goals are to develop and field more than 2,400 stealthy
    strike fighter aircraft for the Navy, Air Force, and Marine Corps and
    potentially several hundred more aircraft for U.S. allies.
    International participation in the development of this system is a
    vital part of the acquisition strategy. The JSF is intended to provide
    greater capability and to replace DOD's aging fighter and attack
    aircraft. DOD estimates that the total cost to develop and procure its
    fleet of aircraft will reach $245 billion, with total costs to maintain
    and operate the JSF adding another $344 billion over its life cycle.
    Since the program began in November 1996, it has experienced technical
    challenges that have resulted in significant cost increases and
    schedule overruns. During most of 2004, the program worked to
    understand and define current development risks in order to prepare
    more accurate cost and delivery estimates to support development and
    production investment decisions planned over the next 2 years.
        A key to successful acquisition programs is the development of a
    business case that should match requirements with resources--proven
    technologies, sufficient engineering capabilities, time, and funding--
    when undertaking a new product development. First, the user's needs
    must be accurately defined, alternative approaches to satisfying these
    needs must be properly analyzed, and quantities needed for the chosen
    system must be well understood. The developed product must be
    producible at a cost that matches the users' expectations and budgetary
    resources. Finally, the developer must have the resources to design and
    deliver the product with the features that the customer wants and to
    deliver it when it is needed. If the financial, material, and
    intellectual resources to develop the product are not available, a
    program incurs substantial risk in moving forward.
    a new business case is needed to justify continued investment in the f/
                                  a-22 program
        Since its inception in 1986, the F/A-22 aircraft program has
    encountered numerous and continuing management and technical
    challenges. Changing threats, missions, and requirements have severely
    weakened the original business case. Program milestones have slipped
    substantially; development costs have more than doubled; and a
    modernization program was added. The recent budget decision to
    terminate procurement after fiscal year 2008, the prospect of
    additional cuts because of ceilings on program cost, and upcoming
    defense reviews have significant implications for the program's
    viability and the future of modernization efforts.
        In March 2004, we reported that the significant changes in the F/A-
    22's cost, quantity, capabilities, and mission and the persistent
    problems and delays in its development and testing schedules called for
    a new business case to justify the continued need for the F/A-22.\6\ We
    recommended that OSD direct the Air Force to consider alternatives and
    examine the constraints of future defense spending. In subsequent
    testimony, we reiterated this position, stating that competing
    priorities--both internal and external to DOD's budget--require a sound
    and sustainable business case for DOD's acquisition programs based on
    comprehensive needs assessments and a thorough analysis of available
    resources.\7\ In response to our recommendation, DOD stated its routine
    budgeting processes annually addressed business case issues on the F/A-
    22. We disagreed, as we do not think those processes provide the
    breadth or depth of analysis needed to develop a comprehensive new
    business case.
    ---------------------------------------------------------------------------
        \6\ GAO, Tactical Aircraft: Changng Conditions Drive Need for New
    F/A-22 Business Case, GAO-04-391 (Washington, DC: Mar. 15, 2004).
        \7\ GAO, Tactical Aircraft: Status of the F/A-22 and Joint Strike
    Fighter Programs, GAO-04-597T (Washington, DC: Mar. 25, 2004).
    ---------------------------------------------------------------------------
    Problems in the F/A-22 Program Strain Future Viability
        When initiated, the F/A-22 acquisition program planned to complete
    development in 1995, achieve initial operational capability by March
    1996, and ultimately procure 750 aircraft. The Air Force currently
    plans to complete system development in 2005, achieve initial
    operational capability by December 2005, and procure 178 aircraft.
        Amidst concerns about escalating costs and schedule, Congress
    placed cost limitations on both development and production budgets in
    1997,\8\ later removing the development cost cap.\9\ According to the
    Air Force, the current production cost cap is $37.3 billion.
    Affordability concerns have, in part, led to the steady decrease in
    procurement quantities. Two major reviews of defense force structure
    and acquisition plans--the 1993 Bottom-Up Review and the 1997
    Quadrennial Defense Review (QDR)--significantly reduced F/A-22
    quantities. OSD's ``buy to budget'' acquisition strategy essentially
    placed a ceiling on total program costs resulting in reducing
    quantities, and in December 2004, Program Budget Decision 753 reduced
    F/A-22 funding by $10.5 billion, further reducing in all likelihood
    procurement quantities from 275 to 178 aircraft.\10\ The December 2004
    budget decision also ended procurement in fiscal year 2008, instead of
    fiscal year 2011.
    ---------------------------------------------------------------------------
        \8\ Pub. L. No. 105-85 (Nov. 18, 1997), section 217.
        \9\ Pub. L. No. 107-107 (Dec. 28, 2001), section 213.
        \10\ Program Budget Decision 753 nominally reduced the procurement
    quantity to 179 aircraft. Subsequently, the Air Force transferred one
    aircraft to be used as a permanent test bed, reducing the procurement
    quantity to 178. The recent crash of an F/A-22 has reduced planned
    operational aircraft to 177.
    ---------------------------------------------------------------------------
        Decreased procurement quantities, along with increased development
    and production costs and increased costs to modernize and enhance
    capability, have led to rising acquisition unit costs. Figure 1
    illustrates the downward trend in procurement quantities and the upward
    trend in program acquisition unit costs.\11\
    ---------------------------------------------------------------------------
        \11\ Program acquisition unit cost includes funding for
    development, procurement, related military construction, and initial
    modernization divided by total production quantity. It does not include
    later stage modernization costs and certain support costs.
    ---------------------------------------------------------------------------

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        In arguing for reversal of the December 2004 budget decision to
    stop procurement of the F/A-22 in 2008, Air Force officials noted that
    the decision obviates production economies and efficiencies that the
    Air Force expected to achieve through a multiyear procurement contract
    that was to begin in fiscal year 2008. Officials also stated that
    cutting production quantities from the final years of the program
    limits expected savings in annual unit procurement costs. As with many
    DOD acquisitions, Air Force program officials had assumed in future
    budgets that the costs for buying F/A-22s would decrease as a result of
    manufacturing efficiencies, reduced fixed costs, productivity projects,
    and more economical buying quantities. For example, the average unit
    flyaway cost for the F/A-22 in 2003 was about $178 million, while the
    unit flyaway costs for future annual buys were projected before the
    budget decision to decrease to $127 million, $111 million, and $108
    million in fiscal years 2007, 2008, and 2009 respectively.\12\ Now that
    the program will be truncated in 2008, the less expensive aircraft in
    2009 and beyond will not be bought and unit costs are now projected at
    $135 million in 2007 and $149 million in 2008 (increases associated
    with close-out of production).
    ---------------------------------------------------------------------------
        \12\ Average unit flyaway cost includes the costs associated with
    procuring one aircraft, including the airframe, engines, avionics,
    other mission equipment, and certain nonrecurring production costs. It
    does not include ``sunk'' costs for development and test and other
    costs to the whole system, including logistical support and
    construction.
    ---------------------------------------------------------------------------
        The F/A-22 program changes have also resulted in schedule delays
    for completing development testing, operational testing, and,
    consequently, the full-rate production decision. That decision is
    currently expected later this month but could slip again given the
    unsettled environment. One critical input to the decision is the report
    by the Office of the Director of Operational Test and Evaluation to
    Congress and defense leadership on the adequacy and results of the
    recently completed initial operational test and evaluation.\13\ In
    addition, the F/A-22 program must demonstrate it satisfies criteria
    established by the Defense Acquisition Board in November 2004, which
    include delivering a fully resourced plan for follow-on testing to
    correct deficiencies identified in initial operational testing and
    evaluation, achieving design stability of the avionics software,
    demonstrating mature manufacturing processes, and validating technical
    order data.\14\
    ---------------------------------------------------------------------------
        \13\ Statute 10 U.S.C. 2399 provides that a major defense
    acquisition program may not proceed beyond low-rate initial production
    until initial operational test and evaluation is completed and the
    congressional defense committees have received the report of testing
    results from the Director of Operational Test and Evaluation. This
    report is to contain an opinion of test adequacy and whether the test
    results confirm that the system actually tested is operationally
    effective and suitable for combat.
        \14\ The F/A-22 initial operational test and evaluation was
    conducted by the Air Force Operational Test and Evaluation Center from
    April through December 2004 to support the full-rate production
    decision. Its operational test plan was designed to assess the F/A-22's
    combat effectiveness and suitability in an operationally representative
    environment.
    ---------------------------------------------------------------------------
        Final reports detailing the results from initial operational
    testing and evaluation were not available for our review, but Air Force
    test officials told us that testing showed the F/A-22 was
    ``overwhelmingly effective'' as an air superiority fighter and that its
    supporting systems were ``potentially suitable'' pending the correction
    of identified deficiencies. Operational testing of the limited ground
    attack capability in the current design was not conducted but is
    scheduled during follow-on testing planned to start in July 2005.\15\
    Air Force officials believe that test results support approval of full-
    rate production. They also believe that deficiencies identified in
    aircraft reliability and maintainability (including maintaining low
    observable characteristics) and in the integrated diagnostic systems
    are readily correctible and the aircraft should meet the needs of the
    warfighter by the scheduled initial operational capability date in
    December 2005. However, whether the Air Force can accomplish all of
    this by December 2005 remains to be seen.
    ---------------------------------------------------------------------------
        \15\ Air-to-ground attack capabilities are increasingly emphasized
    by the Air Force, and future enhancements are planned for 80 percent of
    the modernized F/A-22s. More robust ground attack and intelligence
    gathering capabilities will be tested in the future as they are
    developed.
    ---------------------------------------------------------------------------
    Future of Modernization Plans in Doubt
        Originally, the F/A-22 was intended to replace the F-15 and achieve
    air-to-air superiority to counter large numbers of advanced Soviet
    fighters in conventional warfare. However, over the 19 years that the
    aircraft has been in development, the projected Cold War threats never
    materialized and new threats emerged, changing tactical fighter
    requirements and operational war plans. The Air Force now plans to
    implement a Global Strike concept of operations by developing a robust
    air-to-ground attack capability to allow the aircraft to counter a
    greater variety of targets, such as surface-to-air missiles systems,
    that pose a significant threat to U.S. aircraft. It also plans to equip
    most of the F/A-22 fleet with improved capabilities to satisfy expanded
    warfighter requirements and to take on new missions, including
    intelligence data gathering and the suppression of enemy air defenses
    and interdiction.
        To implement its Global Strike concept, the Air Force established a
    time-phased modernization program. Table 1 shows how the Air Force
    intended to integrate new capabilities incrementally before the
    December 2004 budget decision reduced quantities by 96 aircraft. At the
    time of our review, officials were still determining the impacts of the
    budget decision on the modernization program content and quantities.

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        In March 2003, OSD's Cost Analysis Improvement Group (CAIG)
    estimated that the Air Force would need $11.7 billion for the planned
    modernization programs through fiscal year 2018.\16\ The Air Force's
    latest estimate includes about $4.1 billion through fiscal year 2011
    for the first two modernization increments (blocks 20 and 30) and about
    $1.3 billion through fiscal year 2011 for the latter two increments
    (block 40). The Air Force will continue to manage blocks 20 and 30 as
    part of the F/A-22 acquisition program. To manage block 40 efforts, OSD
    has directed the Air Force to establish a separate modernization
    program.\17\ Future modernization costs beyond 2011 have not been fully
    definitized and are subject to change. The modernization program
    manager projected annual funding of $700 to $750 million would be
    needed for the currently planned modernization program after 2011.
    ---------------------------------------------------------------------------
        \16\ The OSD CAIG acts as the principal advisory body to the
    milestone decision authority on program cost. The CAIG estimate
    included costs for development, procurement, and retrofit of modernized
    aircraft.
        \17\ In November 2004, the acting Under Secretary of Defense for
    Acquisition, Technology and Logistics directed the Air Force to hold
    separate milestone reviews for the latter stages of the modernization
    program to be consistent with DOD acquisition policy. The Air Force
    plans to manage these efforts as a separate acquisition program.
    ---------------------------------------------------------------------------
        The December 2004 budget decision places much of the modernization
    program in doubt, particularly the latter stages. This is because that
    decision terminated F/A-22 procurement after fiscal year 2008 and many
    of these new and advanced capabilities had been planned for aircraft
    that now will not be bought. Therefore, if the budget cut is sustained,
    the modernization program as currently planned is largely obsolete and
    some funding for advanced capabilities planned to be incorporated after
    fiscal year 2008 could be available for other uses. At the time of our
    review, Air Force officials were still restructuring the modernization
    program in response to the budget decision, including revising the
    desired mix of capabilities and the number of aircraft in each
    configuration. With the reduced quantity, they are considering having
    only two configurations, with the second incorporating some
    enhancements originally planned for the third configuration.
        The budget decision causes a ripple effect on other resource plans
    tied to the modernization. For example, it brings into question the
    need for (1) upgrades to the computer architecture and processors
    estimated to cost between $400 million and $500 million; (2) upgrades
    to government laboratory and test range infrastructure like software
    avionics integration labs, flying test beds, and test ranges estimated
    to cost about $1.8 billion; and (3) changes in other activities
    supporting modernization enhancements in the production line, retrofit
    of aircraft, and establishing depot maintenance support estimated at
    more than $1.6 billion.
    new jsf business case and acquisition strategy is critical for program
                                    success
        Unlike the F/A-22 program, which is near the end of development,
    the JSF program is approaching key investment decisions that will
    greatly influence the efficiency of the remaining funding--over 90
    percent of the $245 billion estimated total program costs--and
    determine the risk DOD is willing to accept. DOD has not been able to
    deliver on its initial promise, and the sizable investment greatly
    raises the stakes to meet future promises. Given continuing program
    uncertainties, DOD could use more time to gain knowledge before it
    commits to a new business case and moves forward. Any new business case
    must be accompanied by an acquisition strategy that adopts an
    evolutionary approach to product development--one that enables
    knowledge-based decisions to maximize the return on remaining dollars--
    as dictated by best practices.
    DOD Needs More Time to Develop a New JSF Business Case
        Increased program costs, delayed schedules, and reduced quantities
    have diluted DOD's buying power and made the original JSF business case
    unexecutable. Program instability at this time makes the development of
    a new and viable business case difficult to prepare. The cost estimate
    to fully develop the JSF has increased by more than 80 percent.
    Development costs were originally estimated at roughly $25 billion. By
    the 2001 system development decision, these costs increased almost $10
    billion, and by 2004, costs increased an additional $10 billion,
    pushing total development cost estimates to nearly $45 billion. Current
    estimates for the program acquisition unit cost are about $100 million,
    a 23 percent increase since 2001. Ongoing OSD cost reviews could result
    in further increases to the estimated program cost. At the same time,
    procurement quantities have been reduced by 535 aircraft and the
    delivery of operational aircraft has been delayed. Figure 2 shows how
    costs, quantities, and schedules have changed since first estimates
    based on data as of January 2005.

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        Ongoing program uncertainties--including uncertainties about the
    aircraft's design and procurement quantities--make it difficult to
    understand what capabilities can be delivered with future investments.
    For example, DOD has been working over the past year to restructure the
    JSF program to accommodate changes in the aircraft's design; until this
    restructuring is completed, it will be difficult to accurately estimate
    program costs. The need for design changes largely resulted from the
    increased weight of the short takeoff and vertical landing variant and
    the impact it was having on key performance parameters. The other JSF
    variants' designs were affected as well. The program plans to have a
    more comprehensive cost estimate in the spring of 2005. However, a
    detailed assessment has not been conducted to determine the impact that
    the restructured program will have on meeting performance
    specifications. Until the detailed design efforts are complete--after
    the critical design review in February 2006--the program will have
    difficulty assessing the impact of the design changes on performance.
    While the program office anticipates that recent design changes will
    allow the aircraft to meet key performance parameters, it will not know
    with certainty if the weight problems have been resolved until after
    the plane is manufactured and weighed in mid-2007.
        Program officials are also examining ways to reduce program
    requirements while keeping cost and schedules constant. Design and
    software teams have found greater complexity and less efficiency as
    they develop the 17 million lines of software needed for the system.
    Program analysis indicated that some aircraft capabilities will have to
    be deferred to stay within cost and schedule constraints. As a result,
    the program office is working with the warfighters to determine what
    capabilities could be deferred to later in the development program or
    to follow-on development efforts while still meeting the warfighter's
    basic needs. It may be some time before DOD knows when and what
    capabilities it will be able to deliver. The content and schedule of
    the planned 7-year, 10,000-hour flight test program is also being
    examined. According to the program office, the test program was already
    considered aggressive, and recent program changes have only increased
    the risks of completing it on time.
        Finally, uncertainty about the number and mix of variants the
    services plan to purchase will also affect JSF's acquisition plans.
    While the Air Force has announced its intention to acquire the short
    takeoff and vertical-landing variant, it has yet to announce when or
    how many it expects to buy or how this purchase will affect the
    quantity of the conventional takeoff and landing variant it plans to
    buy. The number and mix of JSF variants that the Navy and Marine Corps
    intend to purchase--and their related procurement costs--also remain
    undetermined. Foreign partners have expressed intent to buy about 700
    aircraft between 2012 and 2015, but no formal agreements have been
    signed at this time. The 2005 Quadrennial Defense Review--an
    examination of U.S. defense needs--could also affect the procurement
    quantities and schedule. In developing a reliable business case,
    knowing the quantities to be purchased is equally as important as other
    elements. Without knowing types and quantities the program manager
    cannot accurately estimate costs or plan for production.
    Timely Capture of Product Knowledge Needed to Support Future Business
            Decisions
        In recent years, DOD has revised its weapons acquisition policy to
    support an evolutionary, knowledge-based strategy based on best
    practices--key to executing a future business case and making more
    informed business decisions.\18\ With an evolutionary acquisition
    approach, new products are developed in increments based on available
    resources. Design elements that are not currently achievable are
    planned for and managed as separate acquisitions in future generations
    of the product with separate milestones, costs, and schedules. While
    JSF's acquisition strategy calls for initially delivering a small
    number of aircraft with limited capabilities, the program has committed
    to deliver the full capability by the end of system development and
    demonstration in 2013 within an established cost and schedule for a
    single increment, contrary to an evolutionary approach.
    ---------------------------------------------------------------------------
        \18\ DOD Directive 5000.1, The Defense Acquisition System (itt May
    2003); DOD Instruction 5000.2, Operation of the Defense Acquision Sysem
    (May 2003). The directive establishes evolutionary acquisition
    strategies as the preferred approach to satisfying DOD's operational
    needs. The directive also requires program managers to provide
    knowledge about key aspects of a system at key points in the
    acquisition process.
    ---------------------------------------------------------------------------
        In addition, JSF's planned approach will not capture adequate
    knowledge about technologies, design, and manufacturing processes for
    investment decisions at key investment junctures. Our past work has
    shown that to ensure successful program outcomes, a high level of
    demonstrated knowledge must be attained at three key junctures for each
    increment in the program. Table 2 compares best practice and JSF
    knowledge expectations at each critical point.

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        As shown in Table 2, the JSF program will lack critical production
    knowledge when it plans to enter low-rate initial production in 2007.
    The department has included about $152.4 million in its fiscal year
    2006 budget request to begin long lead funding for low-rate initial
    production. This production decision is critical, and the knowledge
    required to be captured by knowledge point 3 in our best practice model
    should be achieved before this critical juncture is reached. If
    production begins without knowledge that the design is mature, critical
    manufacturing processes are under control, and reliability is
    demonstrated, costly changes to the design and manufacturing processes
    can occur, driving up costs and delaying delivery of the needed
    capability to the warfighter. The size of the potential risk is
    illustrated in the production ramp-up and investments planned after
    this decision is made. Between 2007 (the start of low-rate production)
    and 2013 (the scheduled start of full-rate production) DOD plans to buy
    nearly 500 JSF aircraft--20 percent of its planned total buys--at a
    cost of roughly $50 billion. Under the program's preliminary plan, DOD
    expects to increase low-rate production from 5 aircraft a year to 143
    aircraft a year, significantly increasing the financial investment
    after production begins.\19\ Between 2007 and 2009, the program plans
    to increase low-rate production spending from about $100 million a
    month to more than $500 million a month, and before development has
    ended and an integrated aircraft has undergone operational evaluations,
    DOD expects to spend nearly $1 billion a month.
    ---------------------------------------------------------------------------
        \19\ The preliminary plan was what was being considered at the time
    of our review. Since then, in its fiscal year 2006 budget submission,
    DOD has reduced the planned procurement quantities for the U.S. by 38
    aircraft through fiscal year 2011. This includes planned quantities for
    the United Kingdom of 2 aircraft in fiscal year 2009, 4 aircraft in
    fiscal year 2010; 9 aircraft in fiscal year 2011, 9 aircraft in fiscal
    year 2012, and 10 aircraft in fiscal year 2013.
    ---------------------------------------------------------------------------
        To achieve its production rate, the program will invest
    significantly in tooling, facilities, and personnel. According to
    contractor officials, an additional $1.2 billion in tooling alone would
    be needed to ramp up the production rate to 143 aircraft a year. Over
    half of this increase would be needed by 2009--more than 2 years before
    operational flight testing begins. Figure 3 shows the planned
    production ramp up, along with the concurrently planned development
    program for the JSF.

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Following are examples of technology, design, and production
    knowledge that should be but will not be captured when the low-rate
    production decision is scheduled to be made.

             Only one of JSF's eight critical technologies is
            expected to be demonstrated in an operational environment by
            the 2007 production decision.
             Only about 40 percent of the 17 million lines of code
            needed for the system's software will have been released, and
            complex software needed to integrate the advanced mission
            systems is not scheduled for release until about 2010--3 years
            after JSF is scheduled to enter production. Further, most
            structural fatigue testing and radar cross section testing of
            full-up test articles are not planned to be completed until
            2010.
             The program will not demonstrate that critical
            manufacturing processes are in statistical control, and flight
            testing of a fully configured and integrated JSF (with critical
            mission systems and prognostics technologies) is not scheduled
            until 2011.

        Further, because of the risk created by the extreme overlap of
    development and production, the program office plans to place initial
    production orders on a cost reimbursement contract, placing a higher
    cost risk burden on the government than is normal. These contracts
    provide for payment of allowable incurred costs, to the extent
    prescribed in the contract. They are used when uncertainties involved
    in contract performance do not permit costs to be estimated with
    sufficient accuracy to use any type of fixed-price contract and place
    greater cost risk on the buyer--in this case, DOD. In the case of the
    JSF, a fixed-price contract will not be possible until late in the
    development program.
     jsf's substantial funding requirements may be difficult to sustain in
                         the current fiscal environment
        Regardless of likely increases in program costs, the sizable
    continued investment in JSF must be viewed within the context of the
    fiscal imbalance facing the Nation over the next 10 years. The JSF
    program will have to compete with many other large defense programs as
    well as other priorities external to DOD's budget. JSF's acquisition
    strategy assumes an unprecedented $225 billion in funding over the next
    22 years or an average of $10 billion a year (see fig. 4).\20\
    ---------------------------------------------------------------------------
        \20\ This is based on DOD's December 2003 JSF cost estimate.
    ---------------------------------------------------------------------------

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Funding challenges will be even greater if the program fails to
    stay within current cost and schedule estimates. For example, we
    estimate that another 1-year delay in JSF development would cost $4
    billion to $5 billion based on current and expected development
    spending rates. A 10-percent increase in production costs would amount
    to $20 billion.
       implications for the current status of tactical aircraft programs
        Continuing changes and uncertainties in the F/A-22 and JSF programs
    present significant challenges to DOD in achieving its modernization
    plans which attempt to blend many factors within affordability
    constraints. Factors in the decision making process can include
    aircraft age, ownership costs, readiness, force structure, operating
    concepts, competing needs, available funds, defense policy, and
    others.\21\ Today, both F/A-22 and JSF programs include significantly
    fewer aircraft than originally planned--30 percent fewer or over 1,000
    aircraft. Deliveries intended to provide an operational capability have
    also been delayed in both programs, almost 10 years in the case of the
    F/A-22, requiring legacy systems to operate longer than planned. As
    legacy tactical aircraft age and near the end of their useful life,
    they require ever increasing investments to keep them ready and capable
    as the threat evolves--the cost of ownership.
    ---------------------------------------------------------------------------
        \21\ GAO, Tactical Aircraft: Modernizaion Plans Will Not Reduce
    Average Age of Aircraft, GAO-01-163 (Washington, DC: Feb. 9, 2001).
    Today acquisition plans include 3,083 aircraft (F/A-22, FA-18EF, and
    JSF). The Air Force has been discussing buying fewer JSF, which would
    further lower the amount of planned new tactical aircraft.
    ---------------------------------------------------------------------------
        The reduced F/A-22 force size, now fewer than 180 F/A-22 aircraft
    instead of 750 aircraft planned at the start of the program, could
    affect the Air Force's force structure and employment strategy. The Air
    Force still maintains it has a nominal requirement for 381 aircraft to
    meet its new Air and Space Expeditionary Forces--the operational
    mechanism through which the Air Force allocates forces to meet the
    combatant commanders' force rotation requirements--and Global Strike
    concept of operations. The Air Force planned on 10 F/A-22 squadrons to
    support this operational concept. Using the Air Force's normal methods
    for calculating force requirements, only about 110 aircraft of the
    total aircraft procured would be classified as available for combat and
    assignment to operational units \22\--yielding only 4 or 5 typical
    fighter squadrons for assigning across the planned 10 air and space
    expeditionary units. The reduced fleet size may require the Air Force
    to consider the F/A-22 as a low-density/high-demand asset, which would
    require changes in these expected management and employment strategies.
    It also has implications for related resources and plans, including
    military personnel requirements, numbers of operating locations,
    support equipment, spare parts, and logistical support mechanisms.
    ---------------------------------------------------------------------------
        \22\ The remaining aircraft are used for training and development
    activities and to account for aircraft in for maintenance and those
    held in reserve for normal attrition.
    ---------------------------------------------------------------------------
        Other factors will come to play in the 2005 Quadrennial Defense
    Review. OSD has directed the review to include an assessment of joint
    air dominance in future warfare and the contributions provided by all
    tactical aircraft. An announced defense policy goal is to redirect
    investment from areas of conventional warfare, where the United States
    enjoys a strong combat advantage, toward more transformational
    capabilities needed to counter ``irregular'' threats, such as the
    insurgency in Iraq and the ongoing war on terror. DOD is also
    conducting a set of joint capability reviews to ensure acquisition
    decisions are based on providing integrated capabilities rather than
    focused on individual weapons systems. The study results, although
    still months away, could further affect the future of the F/A-22 and
    JSF programs including the F/A-22's modernization plan. In these
    analyses, the new tactical aircraft will also have to compete for
    funding, priority, and mission assignments with operational systems,
    such as the F-15 and F/A-18, and other future systems, such as the
    Joint Unmanned Combat Air Systems.
        The 2005 Quadrennial Defense Review provides an opportunity for DOD
    to assess tactical fixed-wing aircraft modernization plans and weigh
    options for accomplishing its specific as well as overarching tactical
    aircraft goals. It is critical that their investment be well-managed
    and balanced against DOD's other priorities. Through the review, DOD
    can seek answers to overall investment strategy questions:

             What is the role of tactical aircraft in relation to
            other defense capabilities?
             Will planned investments in tactical aircraft allow
            DOD to achieve these capabilities and overall transformational
            goals?
             Where disconnects exist between goals and expected
            investment outcomes, what are the impacts and how will DOD
            compensate to minimize future security and investment risks?

        If DOD fails to answer these questions and continues with its
    current modernization strategy, it will likely arrive in the future
    with needs similar to those that exist today but with fewer options and
    resources to resolve those needs. As DOD evaluates its tactical
    aircraft investment alternatives, knowledge at the program level is
    needed to understand how the F/A-22 and JSF can help achieve overall
    tactical aircraft modernization goals. More specific questions need to
    be answered for these programs including:

             Is the F/A-22 the most cost-effective alternative to
            fill gaps in ground attack and intelligence-gathering
            requirements?
             How many F/A-22s are needed and affordable to carry
            out the aircraft's original mission, air superiority, and new
            ground attack and intelligence gathering missions?
             If requirements for the new F/A-22 capabilities are
            legitimate and not solvable by other means, does the Air Force
            have the resources (mature technologies, design knowledge,
            time, and money) to begin investments in a new development
            program for the F/A-22 enhancements?
             What is the immediate need for JSF aircraft? Delivery
            of its ultimate capability or replacing aging aircraft with an
            initial capability? Does the acquisition plan satisfy this
            need?
             Does the program have the required knowledge about
            needed quantities and capabilities and resources (mature
            technologies, design knowledge, time, and money) to develop a
            reliable business case at this time?
             Does DOD have the right acquisition strategy to
            develop and produce a JSF that will maximize its return on the
            more than $220 billion investment that remains in this program?

        While the JSF program started off with a higher-risk approach by
    starting system development with immature technologies, now is the time
    to implement an evolutionary and knowledge-based acquisition strategy
    to manage the system development phase and stabilize the design before
    making large investments in tooling, labor, and facilities to test and
    manufacture the aircraft. The JSF is relatively early in its system
    development and demonstration phase and has an opportunity to learn
    from the F/A-22 program experience. It must take the time needed now to
    gather knowledge needed to resolve key issues that could ultimately
    result in additional cost increases, delays, and performance problems.
        Our March 2005 reports on the F/A-22 and JSF made recommendations
    to the Secretary of Defense that would require answering some of these
    questions before making significant additional investments. For the F/
    A-22, we recommended that a new business case be made to justify
    investments in new capabilities and the quantities needed to satisfy
    mission requirements. For the JSF, we recommended the establishment of
    an executable program consistent with policy and best practices,
    including an affordable first increment with its own business case, and
    the implementation of a knowledge-based acquisition approach to guide
    future investments and reduce risks.
        Mr. Chairman, this concludes my prepared statement. I would be
    happy to respond to any questions that you or other members of the
    subcommittee may have.
                       contacts and staff acknowledgments
        For future questions about our work on the F/A-22 or JSF, please
    call me or Michael J. Hazard at (202) 512-4841. Other individuals
    making key contributions to this statement include Michael W. Aiken,
    Marvin E. Bonner, Lily J. Chin, Matthew T. Drerup, Bruce D. Fairbairn,
    Steven M. Hunter, Matthew B. Lea, David R. Schilling, and Adam
    Vodraska.

        Senator McCain. Thank you very much.
        Mr. Schmitz, welcome back.

        STATEMENT OF HON. JOSEPH E. SCHMITZ, INSPECTOR GENERAL,
                         DEPARTMENT OF DEFENSE

        Mr. Schmitz. Thank you, Mr. Chairman, Senator Lieberman.
    Thank you for the opportunity to appear today and answer your
    questions regarding our audit report, which is entitled
    ``Contracting for and Performance of the C-130J Aircraft.'' My
    staff has already provided you a copy of the full report.

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        We conducted the audit in response to allegations made to
    the Defense Hotline that the C-130J aircraft does not meet
    contract specifications and, therefore, cannot perform its
    operational mission. Our report addresses the issues in the
    Subcommittee's invitation letter; namely ``whether or not use
    of a commercial acquisition strategy to procure the C-130J was
    justified,'' and ``the C-130J's ability to meet contract
    specifications and perform its operational mission.''
        In summary, we concluded that the Air Force used an
    unjustified commercial item acquisition strategy to acquire the
    C-130J aircraft and fielded aircraft that did not meet contract
    specifications or perform their intended mission. Ultimately,
    the Air Force agreed with all of our recommendations for the
    way forward.
        The primary mission of the C-130J aircraft is to airlift
    and drop troops and equipment into hostile areas. The Air Force
    contracted with Lockheed Martin for 117 C-130J aircraft for the
    Air Force, Marine Corps, and Coast Guard, at a cost of $7.5
    billion, from fiscal year 1995 through fiscal year 2008.
        The Air Force initially contracted with Lockheed Martin for
    two C-130J aircraft, in 1995, through a modification to a 1990
    contract for C-130H aircraft. Our audit found that Lockheed
    Martin promoted the C-130J as a commercial aircraft, and the
    Air Force undertook to buy additional C-130J aircraft as
    commercial items.
        By acquiring the C-130J aircraft as a commercial item using
    Federal Acquisition Regulation Part 12, the Air Force did not
    apply the normal acquisition process, and could only provide
    limited program oversight to the $7.5 billion aircraft program.
    The Director, Operational Test and Evaluation, Department of
    Defense, in his comments to a draft of our audit report,
    pointed out that the only government acquisition decision on
    whether to buy the C-130J aircraft as a commercial item was
    based on force needs and affordability.
        The Air Force commercial item acquisition strategy was
    fundamentally unjustified. The Air Force was unable to provide
    evidence supporting its claim that 95 percent of the features
    were the same between the military and civilian versions of the
    aircraft. The Air Force contracting officer's statement that
    the aircraft evolved from a series of Lockheed Martin
    development--developed produced commercial aircraft
    configurations is contradicted by the fact that the prior
    version of the aircraft, the C-130H, was only used for
    government purposes. Further, at the time of our audit, the Air
    Force acknowledged that no commercial version of the C-130J
    currently existed, and no sales had been made to the public.
    Because the Air Force determined that the C-130J was a
    commercial item, the Air Force relied on the commercial
    contract specifications to meet mission requirements.
        In January 1999, the Air Force became aware that Lockheed
    Martin could not meet the C-130J commercial model
    specification, and agreed to a contractor-initiated three-phase
    upgrade program consisting of upgrades 5.1, 5.2, and 5.3.
    Testing showed that, even with the upgrades, the C-130J
    aircraft was still not compliant with the commercial model
    specifications or, more importantly, operational requirements.
        In October 2002, the Air Force and Lockheed Martin reached
    an agreement that the design would be considered compliant with
    the successful completion of an agreed-upon plan of action.
    Corrections, as agreed upon, are supposed to be completed in
    upgrade 5.4, which, at the time of the audit, was scheduled for
    installation in 2005.
        Air Force testers had identified performance deficiencies
    that degraded C-130J operations after the contractor began
    aircraft delivery. The Test and Evaluation Center had developed
    a testing plan with a two-phased approach. The first phase
    evaluated the airlift capability of the C-130J, and the second
    phase is intended to evaluate other capabilities, including the
    airdrop mission. At the time of our audit, the second phase of
    operational testing was scheduled for late 2005.
        The first phase of testing, in September 2000, showed that
    the C-130J was not effective or suitable in the airlift
    mission. The Air Force stopped the suitability test in August
    2000 because of the extent of the deficiencies identified.
        In November 2001, the Air Force Operational Test and
    Evaluation Center assessed the program's progress towards
    readiness for the second phase of testing. The Air Force
    assessment found that the aircraft was not ready for the second
    phase of testing, and progress in the effectiveness and
    suitability areas was also unsatisfactory.
        In addition, schedule slips, system immaturity, and
    training issues caused the Air Force Operational Test and
    Evaluation Center to reschedule the second-phase operational
    testing from July 2000 to November 2005.
        Based on the test results, the Air Mobility Command
    determined the missions that the C-130J could safely perform,
    and restricted the aircraft from night-vision goggle
    operations, combat search and rescue, visual formation, global
    air-traffic management, and airdrop of paratroopers and
    containers. Also, because the aircraft performed poorly during
    testing, the Air Mobility Command could not release the C-130J
    to perform other essential missions, including heavy-equipment
    airdrop and hostile-environment missions.
        We have one related audit of commercial acquisition
    practices in the Department of Defense. This is the audit of
    commercial contracting practices for procuring Defense systems,
    and it will determine whether procurement officials are
    complying with the Federal acquisition regulations when
    procuring Defense systems or their subcomponents. Specifically,
    we will evaluate the justifications used to determine whether
    major systems or subsystems meet commercial item criteria, and
    evaluate the adequacy of the basis for establishing price
    reasonableness. However, this audit is currently suspended, due
    to audit support for Base Realignment and Closure (BRAC) and
    other operational priorities.
        This concludes my oral statement. I'd be glad to answer any
    questions.
        [The prepared statement of Mr. Schmitz follows:]
                  Prepared Statement by Hon. Joseph E. Schmitz
        Mr. Chairman and members of the Airland Subcommittee: Thank you for
    the opportunity to appear before the subcommittee today and to answer
    your questions regarding our audit report, ``Contracting for and
    Performance of the C-130J Aircraft,'' which my staff previously
    provided to the subcommittee. We conducted the audit in response to
    allegations made to the Defense Hotline that the C-130J aircraft does
    not meet contract specifications and therefore cannot perform its
    operational mission. Our report addresses the issues in the
    subcommittee's invitation letter, namely ``whether or not use of a
    commercial acquisition strategy to procure the C-130J was justified,''
    and ``the C-130J's ability to meet contract specifications and perform
    its operational mission.'' In summary, we concluded that the Air Force
    used an unjustified commercial item acquisition strategy to acquire the
    C-130J aircraft and fielded aircraft that did not meet contract
    specifications or perform their intended mission. Ultimately, the Air
    Force agreed with all our recommendations.
                                c-130j aircraft
        The primary mission of the C-130J aircraft is to airlift and drop
    troops and equipment into hostile areas. The Air Force contracted with
    Lockheed Martin for 117 C-130J aircraft for the Air Force, Marine Corps
    and Coast Guard at a cost of $7.5 billion from fiscal year 1995 through
    fiscal year 2008.
                      commercial item acquisition strategy
        The Air Force initially contracted with Lockheed Martin for two C-
    130J aircraft in 1995 through a modification to a 1990 contract for C-
    130H aircraft. Our audit found that Lockheed Martin promoted the C-130J
    as a commercial aircraft and the Air Force undertook to buy additional
    C-130J aircraft as commercial items. Specifically, Lockheed Martin
    developed and produced the C-130J aircraft using a commercial aircraft
    model performance specification. Lockheed initiated the C-130J upgrade
    and managed the program development, developmental testing, and
    production process. By acquiring the C-130J aircraft as a commercial
    item, using Federal Acquisition Regulation Part 12, ``Acquisition of
    Commercial Items,'' the Air Force did not apply the normal acquisition
    process and could only provide limited program oversight to this $7.5
    billion aircraft program. The Director, Operational Test and
    Evaluation, Department of Defense, in his comments to a draft of our
    audit report, pointed out that the only Government acquisition decision
    on whether to buy the C-130J aircraft as a commercial item was based on
    force needs and affordability.
        The Air Force commercial item acquisition strategy was unjustified.
    The Air Force was unable to provide evidence supporting its claim that
    95 percent of the features were the same between the military and
    civilian versions of the aircraft. In fact, at the time of our audit,
    the Air Force acknowledged that the C-130J included features not
    customarily available in the commercial marketplace including aerial
    delivery (cargo and paratroop), defensive systems, secure voice
    communication, night vision imaging, and satellite communication. The
    Air Force contracting officer statement that the aircraft evolved from
    a series of Lockheed Martin developed/produced commercial aircraft
    configurations is contradicted by the fact that the prior version of
    the aircraft, the C-130H, was only used for government purposes.
    Further, at the time of our audit, the Air Force acknowledged that no
    commercial version of the C-130J (L-100J) currently existed and no
    sales of the L-100J had been made to the public. A website cited by the
    Air Force in its comments response to a draft of our audit report
    showed that the L-100J ``would be a commercial derivative'' of the C-
    130J. Also, the determination that modification (that also considered
    customer requirements) would be minor had no supporting analysis.
    Finally, the Air Force was unable to show that the commercial contract
    specification would meet the operational requirements. Because the Air
    Force determined that the C-130J was a commercial item, the Air Force
    relied on the commercial contract specifications to meet mission
    requirements.
                            contract specifications
        In January 1999, the Air Force became aware that Lockheed Martin
    could not meet the C-130J commercial model specification and agreed to
    a contractor-initiated, three-phase upgrade program, consisting of
    upgrades 5.1, 5.2, and 5.3. Not withstanding, the Air Force continued
    to contract for additional aircraft and exercised options for more
    aircraft before the first aircraft was delivered or tested. The first
    two C-130J aircraft were not delivered until February 1999 and even
    those aircraft were conditionally accepted. Testing showed that even
    with the 5.1, 5.2, and 5.3 upgrades, the C-130J aircraft was still not
    compliant with the commercial model specifications or, more
    importantly, operational requirements. In October 2002, the Air Force
    and Lockheed Martin reached an agreement that the design would be
    considered compliant with the successful completion of an agreed-upon
    action plan. Corrections as agreed upon are supposed to be completed in
    upgrade 5.4, which, at the time of the audit, was scheduled for
    installation in 2005. However, the Air Force commingled the contract
    specification work with out-of-scope work in upgrade 5.4. Since the Air
    Force was procuring the aircraft for the Coast Guard, the Marine Corps,
    and Air Force units, those customers who could not afford the cost of
    the out-of-scope work would not receive the improvements needed to have
    a mission capable aircraft.
        Federal Acquisition Regulation Part 12.208, ``Contract quality
    assurance,'' requires that contracts for commercial items shall rely on
    contractors' existing quality assurance systems as a substitute for
    Government inspection and testing before tender for acceptance. As of
    the time of the audit, the Air Force had conditionally accepted 50 C-
    130J aircraft at a cost of $2.6 billion and the contractor had been
    unable to deliver a specification compliant aircraft.
                       performance of operational mission
        Air Force testers had identified performance deficiencies that
    degraded C-130J operations after the contractor began aircraft
    delivery. The Test and Evaluation Center had developed a testing plan
    with a two phased approach. The first phase evaluated the airlift
    capability for the C-130J and the second phase is intended to evaluate
    other capabilities including the air drop mission. At the time of our
    audit, the second phase of operational testing was scheduled for late
    2005.
        The Air Force Operational Test and Evaluation Center completed the
    first phase testing in September 2000. That testing showed that the C-
    130J was not effective or suitable in the airlift mission. Performance
    deficiencies included inadequate range and payload, immature software,
    lack of an automated planning system, and difficulties in cold weather
    operations. The test also showed that the C-130J was not suitable in
    its current configuration because its integrated diagnostic capability
    was poor, including high built-in-test false alarm rates. The Air Force
    stopped the suitability test in August 2000 because of the extent of
    the deficiencies identified. The report stated that many of the
    deficiencies were programmed to be corrected in upgrade 5.3.
        In November 2001, the Air Force Operational Test and Evaluation
    Center performed an operational assessment of upgrade 5.3 to assess the
    program's progress towards readiness for the second phase of testing.
    The Air Force operational assessment stated that the progress in the
    effectiveness of the C-130J was unsatisfactory. Identified deficiencies
    included defensive system problems, global air traffic management
    compliance, mission planning system deficiencies, and interoperability
    issues with the existing C-130 fleet. The report also mentioned that
    progress in the suitability area was unsatisfactory. Development
    schedule slips, system immaturity, and training issues caused the Air
    Force Operational Test and Evaluation Center to reschedule the second
    phase operational testing from July 2000 to November 2005. Further, the
    deficiencies found in upgrade 5.3 resulted in the C-130J Program Office
    requiring another upgrade.
        Based on the qualification operational and evaluation testing
    results, the Air Mobility command determined the missions that the C-
    130J could safely perform given the known deficiencies. Specifically,
    the Air Mobility Command released the C-130J to perform basic air,
    land, assault, overwater operations, and medical evacuation, but
    restricted the aircraft from performing night vision goggle operations,
    combat search and rescue, visual formation, global air traffic
    management, and air drop of paratroopers and containers. Because the
    aircraft performed poorly during testing, the Air Mobility Command
    could not release the C-130J to perform heavy equipment air drop and
    hostile environment missions. Installation of upgrade 5.4 is supposed
    to resolve those limitations except for heavy equipment air drop.
    Installation of upgrade 6.0, which is scheduled for installation in
    2007, is supposed to allow the C-130J to perform the heavy equipment
    air drop mission.
         recent director of operational test and evaluation assessment
        In the 2004 Director of Operational Test and Evaluation Annual
    report, issued in February 2005, the Director reported that the
    aircraft is not operationally suitable. Demonstrated C-130J
    reliability, maintainability, availability, and logistics
    supportability failed to meet operational requirements and legacy
    standards. Deficiencies were noted with on-aircraft integrated
    diagnostics and fault isolation systems, portable maintenance aids,
    maintenance technical orders, and the availability of spare parts.
    Further, the testing of defensive systems did not demonstrate their
    effectiveness and suitability.
                             related ongoing audits
        We have one related audit of commercial acquisition practices in
    the Department of Defense. The Audit of Commercial Contracting
    Practices for Procuring Defense Systems (Project No. D2004AB-0182) will
    determine whether procurement officials are complying with Federal
    Acquisition Regulation Part 12 ``Acquisition of Commercial Items,'' and
    Part 15, ``Contracting by Negotiation,'' when procuring defense systems
    or their subcomponents. Specifically, we will evaluate the
    justifications used to determine whether major systems or subsystems
    meet commercial item criteria and evaluate the adequacy of the basis
    for establishing price reasonableness. However, this audit is currently
    suspended due to audit support for Base Realignment and Closure and
    other operational priorities.

        Senator McCain. Thank you very much.
        Mr. Bolkcom, welcome.

       STATEMENT OF CHRISTOPHER BOLKCOM, SPECIALIST IN NATIONAL
      DEFENSE, CONGRESSIONAL RESEARCH SERVICE, LIBRARY OF CONGRESS

        Mr. Bolkcom. Thank you, Mr. Chairman.
        Distinguished members of the committee, thank you very much
    for inviting me to speak with you today about DOD tactical
    aviation programs. As requested, this testimony will focus on
    how well the capabilities offered by these programs match DOD's
    most pressing military challenges.
        In short, DOD tactical aviation faces three interrelated
    challenges: relevance, balance, and budget. These three
    challenges will be explored at greater length in my written
    statement, which I've submitted for the record.
        The first challenge is relevance. Observing that DOD
    tactical aviation faces a relevance challenge is, at first
    blush, counterintuitive. After all, our air forces dominate
    state-on-state conflict. Achieving significant military
    objectives against non-state actors, however, including
    terrorists and insurgents, has proven more difficult.
        The terrorist attacks of September 11th graphically
    illustrate that small groups of non-state actors can exploit
    commercially-available technology to conduct destructive
    attacks over great distances. Increasingly, it is recognized
    that, in many cases, combating non-state actors presents
    different, and sometimes greater, challenges than combating a
    conventional military foe.
        Generally speaking, today's Armed Forces were organized,
    trained, and equipped with conventional state-on-state warfare
    in mind. This is true for our air forces. Yet air power can
    offer significant contributions to irregular warfare and
    counterinsurgency. Intelligence-gathering, persistent
    surveillance, aerial insertion of troops, and medical
    evacuation of friendly forces are all potentially valuable
    aviation missions.
        The air-dominance and strike missions at which our tactical
    aircraft excel are, of course, important to counterinsurgency
    and other small wars. These missions, however, don't typically
    require the high performance characteristics found in the F/A-
    22, Joint Strike Fighter, and F/A-18E/F Super Hornet.
        The second challenge is balance. There's a consensus view
    in defense circles that air power is one of our great military
    advantages. Some are increasingly concerned, however, that
    military aviation is too focused on the demands of fighting
    conventional foes, to the detriment of irregular warfare. The
    challenge for U.S. air forces is to reshape themselves to
    increase their relevance in small wars, while maintaining the
    capability to win major conflicts. In other words, a balance
    must be struck.
        Supporters of DOD's current tactical aviation plan say that
    the F/A-22, Joint Strike Fighter, and F/A-18E/F are required
    for state-on-state conflict, despite our preeminence in this
    area. Only these aircraft, they say, can cope with scenarios in
    which adversaries are equipped with their own modern aircraft
    and advanced surface-to-air missiles.
        Supporters argue that the F/A-22, Joint Strike Fighter and
    the Super Hornet can be made more applicable to small wars
    through new concepts of operation, organizational schemes, or
    technology upgrades.
        Those seeking a re-balancing of DOD tactical aviation,
    however, argue that the most stressing scenarios that require
    advanced tactical aviation will be rare. U.S. dominance in
    standoff weapons, airborne warning and control, electronic
    warfare, and other elements of the overall air-power system
    will enable U.S. tactical aircraft to prevail, with fewer
    numbers.
        The third challenge is budget. For more than 20 years, some
    have predicted a train wreck in DOD's tactical aviation budget.
    Observers see too many tactical aircraft chasing too few
    dollars. Budget pressures have already taken their toll. Over
    the past 14 years, the number of tactical aircraft that some
    estimate DOD can afford has dropped by over 30 percent.
    Tactical aviation budgets may be increasingly squeezed by other
    aviation demands, such as purchasing long-range bombers, new
    unmanned aerial vehicles (UAVs), and new helicopters. Perhaps
    the most intense budget competition will come from the need to
    replace our aging tanker fleet.
        Some also believe that the costs of fighting the war on
    terrorism and pending initiatives to increase personnel
    benefits and personnel end strength will exacerbate budget
    pressures and bring the tactical air (TACAIR) train wreck to
    fruition.
        In conclusion, it's noteworthy that in a recent interview
    Navy Secretary Gordon England appears to confirm that DOD
    leaders recognize these challenges to tactical aviation and see
    a need to re-balance the force. Mr. England advocated that DOD
    examine its entire tactical aviation enterprise and search for
    efficiencies and savings.
        One model for this examination, he said, is the recent Navy
    and Marine Corps tactical air integration. By better combining
    Navy and Marine Corps tactical aviation assets, the Department
    was able to reduce purchases of tactical aircraft and save $35
    billion in procurement while maintaining the same combat
    capabilities.
        Mr. Chairman, this concludes my remarks. Thank you, again,
    for the opportunity to appear before you, and I look forward to
    your questions.
        [The prepared statement of Mr. Bolkcom follows:]
                   Prepared Statement by Christopher Bolkcom
        Mr. Chairman, distinguished members of the subcommittee, thank you
    for inviting me to speak to you today about DOD tactical aviation
    programs.
        As requested, this testimony will address the applicability of
    DOD's tactical aviation modernization programs to the full range of
    military challenges facing the United States. I will discuss how the
    capabilities offered by these programs match up against DOD's most
    pressing military challenges. In short, DOD tactical aviation
    modernization faces three interrelated challenges: relevance, balance,
    and budget.
                                   relevance
        Observing that DOD tactical aviation modernization programs face a
    relevance challenge is, at first blush, counterintuitive. By all
    accounts, the U.S. air forces dominate state-on-state conflict. The
    United States has not faced a true peer military competitor since the
    Soviet Union collapsed. Since 1991, U.S. military aircraft have flown
    in excess of 400,000 combat sorties, and lost only 39 aircraft to enemy
    action. Recent conflicts, such as Panama, Libya, Iraq (Desert Storm)
    Bosnia, Kosovo, Afghanistan, and Iraq (Iraqi Freedom) illustrate that
    in a variety of circumstances, U.S. Air Forces have proven very
    effective at achieving classic military objectives against the armed
    forces of other countries. Achieving significant military objectives
    against non-state actors, however, has proven more difficult.\1\
    ---------------------------------------------------------------------------
        \1\ ``Non-state actors'' is an umbrella term that refers to a
    number of armed groups such as political terrorists, narco-traffickers,
    paramilitary insurgents, and even international organized criminal
    organizations. These terms are not mutually exclusive. Paramilitary
    groups can, for example, engage in narco-trafficking, terrorism, and
    crime. Other terms which appear synonymous include ``Military
    Operations Other Than War (MOOTW), and ``irregular warfare.'' Others
    use the term ``small wars.''
    ---------------------------------------------------------------------------
        In the past, combating non-state actors was seen by many to be a
    ``lesser included case.'' Non-state actors appeared to be less
    threatening to national security than the well funded, well organized,
    and much more militarily potent Armed Forces of an enemy nation-state.
    If, for example, the U.S. military was deemed adequate to deter or
    defeat the Soviet military, then it was also deemed adequate to combat
    non-state actors.
        The terrorist attacks of September 11, 2001 graphically illustrate,
    however, that small groups of non-state actors can exploit relatively
    inexpensive and commercially available technology to conduct very
    destructive attacks over great distances. Few observers today consider
    non-state actors to be a ``lesser included case.'' Increasingly it is
    recognized that in many cases, combating non-state actors presents a
    different--and in many cases--a greater set of challenges than
    combating a conventional military foe.
        Military planners have a number of tools at their disposal to
    attempt to find, identify, track, capture, neutralize, or kill
    terrorists, counterinsurgents and other non-state actors. A survey of
    counterinsurgency and anti-terrorism efforts indicates, that in
    general, military aviation plays a prominent role in performing these
    tasks. Airpower has proven very valuable in contemporary (e.g. Iraq,
    Philippines) and historical (e.g. El Salvador) counterinsurgencies. The
    most critical missions, appear to be persistent surveillance and
    reconnaissance, aerial insertion of troops, combat search and rescue,
    medical evacuation, tactical air mobility, and tactical airlift and
    resupply.
        The air dominance and strike missions at which today's tactical
    aircraft excel are also important to counterinsurgency and other non-
    state actor operations. These missions, don't however, typically
    require the high performance characteristics of the combat aircraft
    that DOD is currently developing and beginning to produce. Non-state
    actors do not have resources to effectively challenge even modest Air
    Forces. In some circumstances, aircraft less capable than the F/A-22,
    JSF and F/A-18E/F may even be preferred for strikes against insurgents
    owing to their lower airspeeds.
        In general, the U.S. Armed Forces that are fielded today were
    organized, trained and equipped principally with conventional, state-
    on-state warfare in mind. This is true for DOD's major tactical
    aviation programs. The F/A-22 traces its lineage to the Advanced
    Tactical Fighter program (ATF) which began in the early 1980s. The F/A-
    18E/F program was initiated in 1991 as the Navy's A-12 Naval ATF, and
    F-14 re-manufacturing programs were terminated. The Joint Strike
    Fighter (JSF) program, then called Joint Advanced Strike Technology
    (JAST), began in 1993. Even in a ``post-September 11 environment,''
    those developing these programs still see these aircraft as most
    applicable to conventional warfare. For example, the most recent F/A-22
    Operational Requirements Document (ORD), from the spring of 2004,
    contains no mention of counterinsurgency missions, irregular warfare,
    or capabilities to defeat terrorists.
        One of the primary reasons why the relevance of DOD's tactical
    aviation programs to defeating non-state actors is questioned, is
    because the operational challenges are fundamentally different from
    conventional military challenges. Compared to the armed forces of a
    nation state, non-state actors are relatively easy to defeat in direct
    combat. Non-state actors typically lack the equipment, training and
    discipline that define a military force. Actually engaging in direct
    combat with non-state actors is the core operational challenge. Non-
    state actors typically don't wear uniforms. Indeed, they generally
    strive to integrate themselves into the local civilian population.
    Thus, target identification is very challenging. Non-state actors
    rarely mass into easily recognizable formations. They typically lack
    large infrastructure or obvious logistics processes. Therefore, non-
    state actors present few ``high value'' targets for U.S. forces. This
    challenge has not been lost on DOD leadership. For example Lt. Gen.
    Wooley, Commander of Air Force Special Operations notes:

            For many years, though, there's been a concern that
            intelligence collection capability basically rested in the
            ability to find a tank or an artillery piece hiding in a grove
            of trees. The problem now becomes how to find individuals
            hiding in groups of people. . . This presents a huge problem
            for us.\2\
    ---------------------------------------------------------------------------
        \2\ Lt. Gen. Michael W. Wooley. Commander, Air Force Special
    Operations Command. ``Application of Special Operations Forces in the
    Global War on Terror.'' Air & Space Conference 2004. Washington, DC.
    September 14, 2004.

        The leadership and structure of many non-state organizations are
    opaque. Such organizations might be diffuse and operate over long
    distances. Al Qaeda, for example, often operates through partner
    organizations which might be small and have fluid leadership. One DOD
    leader has said ``When we kill or capture one of these leaders, another
    one steps in and quickly takes their place.'' \3\ Once identified, non-
    state actors are often difficult to engage due to concerns over
    collateral damage. Even conventional state-on-state conflict presents
    collateral damage concerns. When one party is actively trying to shield
    itself behind non-combatants, however, delivering weapons with extreme
    precision and minimum effects takes on increased importance. A recent
    RAND study summed up the operational challenges:
    ---------------------------------------------------------------------------
        \3\ Ibid.

            . . . ferreting out individuals or small groups of terrorists,
            positively identifying them, and engaging them without harming
            nearby civilians is an extremely demanding task. Substantial
            improvements will be needed in several areas before the Air
            Force can be confident of being able to provide this capability
            to combatant commanders.\4\
    ---------------------------------------------------------------------------
        \4\ David Ochmanek. ``Military Operations Against Terrorist Groups
    Abroad.'' RAND. 2003.

        In sum, identifying and characterizing the insurgent or terrorist
    target is a key problem for DOD, and it is difficult for many to see
    how tactical aviation plays a leading role in overcoming this
    challenge. Similar observations can be made for counterinsurgency and
    irregular warfare tasks such as persistent surveillance, stealthy
    insertion of troops, rapid resupply or medical evacuation of friendly
    forces operating in remote and austere areas.
                                    balance
        Senior leaders in DOD appear to appreciate the distinct challenges
    that combating non-state actors present, however, and are taking steps
    to ensure that these challenges are reflected in long-term military
    plans, programs, and policies.
        DOD's 2006 Strategic Planning Guidance found that the U.S. is well
    positioned to deal with a conventional military adversary.
    Increasingly, however, the U.S. may find itself facing non-conventional
    foes, for which it is not well prepared.\5\ Further, it has been
    reported that DOD leadership has instructed regional combatant
    commanders to ``develop and maintain new war plans designed to reduce
    the chance of postwar instability like the situation in Iraq.'' \6\
    Based on these plans, some believe that this year's Quadrennial Defense
    Review (QDR) ``could upend U.S. military procurement plans as Pentagon
    officials shift their focus from waging conventional warfare to
    developing new ways to counter catastrophic, disruptive and irregular
    threats--in a word, terrorism.'' \7\
    ---------------------------------------------------------------------------
        \5\ ``Building Top-Level Capabilities: A Framework for Strategic
    Thinking.'' Briefing to Senior Level Review Group. August 19, 2004.
        \6\ Greg Jaffe and David Cloud. ``Pentagon's New War Planning to
    Stress Postconflict Stability.'' Wall Street Journal. October 25, 2004.
        \7\ Jason Sherman. ``U.S. War on Terror Looms for QDR.'' Defense
    News. October 25, 2004.
    ---------------------------------------------------------------------------
        There is a consensus view in defense circles that airpower is one
    of the United States' great military advantages. Some are increasingly
    concerned, however, that military aviation is focused too much on the
    demands of fighting conventional foes to the detriment of irregular
    warfare, and that ``the challenge for the Air Force is to re-shape its
    forces to increase their relevance in small wars, while maintaining the
    capability to win major conflicts.'' \8\ In other words, a balance must
    be struck.
    ---------------------------------------------------------------------------
        \8\ Thomas McCarthy. National Security for the 21st Century: The
    Air Force and Foreign Internal Defense. School of Advanced Air and
    Space Studies. Air University. Maxwell AFB, AL. June 2004. p.67. And
    Thomas R. Searle. ``Making Airpower Effective against Guerrillas.'' Air
    & Space Power Journal. Fall 2004.
    ---------------------------------------------------------------------------
        Supporters of DOD's current plan for tactical aviation
    modernization say that the F/A-22, JSF and F/A-18E/F are still required
    for state-on-state conflict, despite U.S. preeminence in this area, and
    that new concepts of operation, new organizational schema, or
    technology upgrades may increase these systems' applicability to
    counterinsurgency and irregular warfare challenges. Those who support
    DOD's current tactical aviation modernization plans, could argue that
    fluid threat environments are nothing new. Platforms with long
    development time lines and long operational lives often must be
    modified and used differently than originally intentioned so as to keep
    pace with new threats and military objectives. It is much more
    difficult, to take the opposite approach, they could argue. From their
    perspective, DOD can't develop technologically less sophisticated
    weapons systems to address unconventional threats, and then improve
    these systems in the future if more high tech threats arise.
        While ``low-tech'' insurgents and other non-state actors appear to
    deserve more attention than in the past, the United States shouldn't
    slight its traditional military strengths, tactical aviation supporters
    argue. DOD has evolved from a ``threat based'' to a ``capabilities
    based'' planning framework. Threats can change, but the military
    capabilities we desire, tend to have a longer life-span. We know that
    achieving air dominance is a key military capability we must maintain,
    supporters of DOD's current tactical aviation say, and we must prepare
    to achieve air dominance in the most stressing scenarios; such as a
    potential conflict with China, for example.
        Russian SA-10 and SA-12 surface-to-air missiles (SAM) have been
    operational since the 1980s. These ``double digit'' SAMs are a concern
    for military planners due to their mobility, long range, high altitude,
    advanced missile guidance, and sensitive radars. The Russian SA-20,
    still under development, has been likened to the U.S. Patriot PAC-2
    missile, but with an even longer range, and a radar that is very
    effective in detecting stealthy aircraft. Military planners are
    concerned that a country with only a handful of these SAMs could
    effectively challenge U.S. military air operations by threatening
    aircraft and disrupting operations from great distances.
        A variety of new technologies and military systems could exacerbate
    the ``double digit'' SAM challenge. First, commercial information and
    communications technologies are enabling adversaries to better network
    the elements of their air defense systems. This allows them to disperse
    radars, SAM launchers and other associated platforms throughout the
    battlespace, and to share targeting information among launchers. This,
    in turn, suggests that radars may be used less frequently and for
    shorter periods of time, complicating efforts to avoid or suppress
    them. Second, terminal defenses are being marketed by a number of
    international defense companies. These radar-guided Gatling guns are
    designed to protect ``double digit'' SAMs or other high value air
    defense assets. These systems could prove quite effective in shooting
    down missiles aimed at enemy air defenses. Third, Russia and other
    countries have developed and are selling GPS jammers. Over varying
    distances, these low-watt jammers may degrade the GPS guidance signals
    used by many U.S. precision-guided munitions (PGMs) to augment inertial
    guidance systems, reducing their accuracy.
        If these double digit SAMs are protected by an enemy air force
    equipped with advanced Russian or European combat aircraft, the
    military problem becomes dire, say supporters of DOD tactical aviation.
    According to press reports, a recent Air Force exercise with the Indian
    Air Force, called Cope India, illustrates that pilots from non-North
    Atlantic Treaty Organization (NATO) countries can receive excellent
    training and execute advanced air combat tactics. When flying advanced
    combat aircraft such as the SU-30, such well trained pilots could
    effectively challenge U.S. Air Forces, some say.
        DOD's tactical aviation programs are designed to prevail in
    scenarios where enemies field advanced SAMs, advanced fighter aircraft,
    and associated technologies. Supporters argue that a reduction in U.S.
    tactical aviation would threaten our ability to prevail and could
    jeopardize key U.S. national security goals.
        Most would agree that DOD still requires advanced tactical aircraft
    to deter and fight tomorrow's conventional conflicts. However, many
    argue that the efforts and resources expended to develop and produce
    the F/A-22, JSF, and F/A-18E/F are not balanced with current and
    foreseeable conventional military challenges. The ability to achieve
    air dominance is a key capability that DOD must sustain, but against
    whom? Air dominance was achieved in about 15 minutes over Afghanistan
    and Iraq, some say, and, for the most part, with aircraft designed 30
    years ago (e.g. F-15s, F-16s, AV-8Bs).
        The stressing air dominance scenario described above may require
    some of the aircraft currently being developed by DOD. However, how
    many of these scenarios might realistically emerge in the future? Many
    would agree that a ``Taiwan straits scenario'' could be one such
    challenge, but other examples are very difficult to credibly imagine.
    Those who seek a rebalancing of DOD tactical aviation argue that the
    proliferation of advanced SAMs has not occurred, and will likely not
    occur in the future, at the rate predicted by DOD.
        Despite being on the market for over 20 years, Russia reportedly
    has only managed to sell double digit SAMs to five other countries
    (Bulgaria, China, Czech Republic, Germany, and Greece), three of which
    were Soviet client states at the time of the sale. While these weapons
    are clearly dangerous, they are also expensive, and require extensive
    training to operate effectively, some argue. This has arguably slowed
    the proliferation of these systems, and may also do so in the future.
    Russia failed to sell SA-10 and SA-12 SAMs to Chile, Egypt, Hungary,
    Iran, Kuwait, Serbia, South Korea, Syria, and Turkey. These countries
    have opted instead to purchase either U.S. SAMs, or more modest air
    defense systems. According to one well known missile analyst

            Russia has traditionally played a significant role in world-
            wide SAM export. But Russian SAM sales have taken a nose dive
            since their heyday in the 1970s and 1980s. Particularly
            disappointing has been the very small scale of sales of the
            expensive high altitude systems like the S-300P and S-300V. The
            Russian industries had expected to sell 11 S-300P batteries in
            1996-97, when in fact only about three were sold. Aside from
            these very modest sales to China and Greece, few other sales
            have materialized. Combined with the almost complete collapse
            of Russian defense procurement, the firms developing these
            systems have been on the brink of bankruptcy in recent
            years.\9\
    ---------------------------------------------------------------------------
        \9\ Steven Zaloga. World Missile Briefing. Teal Group. Inc.
    Fairfax, VA. February 2005.

        Those who wish to re-balance DOD tactical aviation also argue that
    the proliferation of, and threat from advanced combat aircraft is also
    overstated. Building, operating, and maintaining a modern air force is
    much more expensive and resource intensive than fielding advanced SAMs.
    Few countries have the resources and national will to develop and
    maintain an air force that could challenge U.S. airpower, they argue.
    Some say that advanced Russian and European aircraft being developed
    and fielded today may compare well to 30-year old U.S. combat aircraft,
    on a one-to-one basis. But aircraft don't fight on a one-to-one basis.
    Instead, they are part of a much larger airpower system. This system is
    composed, for example, of combat, intelligence, surveillance, airborne
    warning and control, aerial refueling, electronic warfare, and mission
    control assets. The importance of well trained pilots and maintenance
    personnel, which take considerable time and resources to create, cannot
    be over emphasized.
        No other country has an airpower system on par with the United
    States, nor is one predicted to emerge. Therefore, some argue, today's
    DOD's tactical aviation programs can be safely reduced in order to free
    up funds to address other military challenges, and thus bring scarce
    resources more into balance. The resources saved from these cuts to DOD
    tactical aviation could be used to invest in systems and personnel more
    applicable to combating terrorists and insurgents, or to conduct
    homeland defense.
                                     budget
        For more than 20 years--since 1993--some observers have predicted a
    ``train wreck'' in DOD's tactical aviation programs. These observers
    see too many aircraft competing for too few dollars. It may be that a
    budgetary train wreck is looming. As the table below suggests, a more
    apt metaphor for the tactical aviation budget to date, may be one of a
    ``slow leak.'' Over the past 14 years, budget pressures have reduced
    the number of aircraft that some estimate DOD can afford by more than
    30 percent.

                                      ESTIMATED NUMBER OF AIRCRAFT TO BE PROCURED i
    ----------------------------------------------------------------------------------------------------------------
                               Fiscal Year                              F/A-22       JSFii     F/A-18E/F     Total
    ----------------------------------------------------------------------------------------------------------------
    1991............................................................         648       2,978       1,000       4,626
    1993............................................................         442       2,978       1,000       4,420
    1997............................................................         339       2,978         548       3,865
    2000............................................................         333       2,866         548       3,859
    2004............................................................         279       2,866     462 iii       3,607
    2006............................................................       179iv       2,443         462       3,084
    ----------------------------------------------------------------------------------------------------------------
    i Estimates by DOD Comptroller, GAO, CBO, CRS.
    ii The United Kingdom plans to buy 150 JSFs. However, budget shortfalls may force the U.K. to reduce purchases.
    iii Figure does not include 90 EA-18G electronic attack aircraft.
    iv If PBD-753 recommendations are approved.

        This ``slow leak'' in tactical aviation funding may continue. Or,
    budgets may hold steady. (Few predict that tactical aviation budgets
    will increase in real terms.) However, other aircraft acquisition
    challenges may continue to erode tactical aviation's budget. Spending
    on Unmanned Aerial Vehicles (UAVs), doubled between 2001 and 2003 ($667
    million to $1.1 billion) and DOD's appetite for these systems continues
    to grow. All the Services wish to recapitalize their helicopter fleets.
    Advocates of long range bombers have been pressuring the Air Force to
    maintain its current inventory of bombers, and to field a replacement
    earlier than the planned date of 2037. Also, as Congress is well aware,
    replacing DOD's aging fleet of long range aerial refueling aircraft
    will be costly. Outgoing Acting Secretary of the Air Force Peter Teets
    recently told reporters that he believed recapitalizing the Air Force's
    aerial refueling aircraft to be the Service's biggest challenge.\10\
    This suggests that tankers could also compete well with fighters in the
    current Quadrennial Defense Review.
    ---------------------------------------------------------------------------
        \10\ Sharon Weinberger. ``Teets Says Tankers Number One Air Force
    Priority.'' Defense Daily. March 24, 2005.
    ---------------------------------------------------------------------------
        Some also believe that previously unanticipated costs associated
    with combating terrorism may mean that the ``tac air train wreck'' has
    fully arrived. CRS estimates that since the September 11 terrorist
    attacks, DOD has received over $201 billion for combat operations,
    occupation, and support for military personnel deployed or supporting
    operations in Iraq and Afghanistan and for enhanced security at
    military installations. If pending supplemental appropriations are
    approved, the figure through fiscal year 2005 will amount to $270
    billion.\11\ Pending DOD and congressional initiatives to increase both
    personnel benefits and personnel ``end strength'' could also increase
    pressure to reduce tactical aviation budgets.
    ---------------------------------------------------------------------------
        \11\ See CRS Report RS21644. The Cost of Operations in Iraq,
    Afghanistan, and Enhanced Security.
    ---------------------------------------------------------------------------
        The act of matching resources (i.e. budget) to objectives in a
    procurement program can be called a ``business case.'' Government
    Accountability Office (GAO), for one, has argued that the F/A-22 lacks
    a business case (GAO-05-304), and that the JSF's business case is
    ``unexecutable'' (GAO-05-271). This assertion suggests to some, at
    least implicitly, that the relevance of these aircraft, as reflected in
    their currently planned procurement quantities, to the current military
    environment, is unclear. Air Force representatives say that they are
    developing a new business case for the F/A-22.
                                   conclusion
        Recent remarks by Navy Secretary, and Deputy Secretary of Defense
    nominee, Gordon England appear to reflect the three challenges to DOD
    tactical aviation programs discussed above, and to suggest one means to
    meet these challenges. In a March 21, 2005 interview, Secretary England
    reportedly advocated that DOD examine its ``whole [tactical aviation]
    enterprise'' and search for efficiencies and savings. He predicted,
    reportedly, that ``the most efficient, effective way to construct our
    air assets'' may be one of the biggest debates in the current
    Quadrennial Defense Review.
        According to reporters, Mr. England recognized that tactical
    aviation programs amount to ``a huge amount of money,'' and noted that
    by better integrating Navy and Marine Corps tactical aviation assets,
    the Department was able to reduce aircraft purchases and save $35
    billion, while maintaining the same combat capabilities. Increased
    efficiencies that might be realized across DOD's tactical air
    enterprise might include better integration, and more common assets, he
    told reporters.\12\
    ---------------------------------------------------------------------------
        \12\ Christopher J. Castelli. ``DEPSECDEF Nominee Sees Potential
    For DOD-Wide TACAIR Integration.'' Inside the Navy. April 4, 2005.
    ---------------------------------------------------------------------------
        Mr. Chairman, this concludes my remarks. Thank you again for the
    opportunity to appear before you. I look forward to any questions you
    may have.

        Senator McCain. Thank you very much, Mr. Bolkcom.
        Just to start out, one of the most spectacular aspects of
    the war in Afghanistan was our capability to illuminate targets
    using special forces personnel on horseback, but the remarkable
    accuracy, pinpoint accuracy, of our weapons delivered both from
    carriers and tactical aircraft, even some launched from the
    United States, does that argue for a high-performance tactical
    aircraft?
        Mr. Bolkcom. Sir, I think that the most relevant resources
    to irregular warfare tend not to be those most high-tech sort
    of platforms. As you mentioned, helicopters special operations
    or forces air-liaison officers equipped with laser range-
    finders and radios can be very valuable. It's difficult to see
    an application, for a 9G supersonic fighter in that sort of
    specific scenario.
        Senator McCain. Mr. Sullivan, you, several times in your
    statement, make the comment that they have to make a new
    business argument. What is that business argument?
        Mr. Sullivan. For?
        Senator McCain. What argument, given the nature of your
    report, of your assessment, what is the new business argument
    that they can make?
        Mr. Sullivan. Well, generally speaking--I'm just basically
    speaking, when we talk about a business case, we're talking
    about as basic as you can get at matching needs with resources.
    So there's a need--right now, we think that, in both programs,
    the Air Force, with the F/A-22, probably more critically right
    now, with the air-to-ground need that they are developing, that
    seems to be not a need that has been really definitized real
    hard yet, that they haven't done a strong analysis of
    alternatives, for example, to make that need concrete. They
    need to understand the need more for the air-to-ground mission
    that they want the F/A--that strike mission they want the
    mission they want the F/A-22 to do.
        Senator McCain. Originally, it was an air-to-air platform.
        Mr. Sullivan. The F/A-22 was an air-dominant fighter, yes.
        Senator McCain. Do you know of any aircraft on the drawing
    board in any country, in the world, that would challenge
    present, existing aircraft fighter aircraft.
        Mr. Sullivan. The F/A-22, in fact, just went through
    initial operational test, did a fine job performing as an air-
    dominance-type fighter. If we start talking about threats, we'd
    probably get into a classified discussion pretty quickly.
        Senator McCain. Classified situation.
        Mr. Sullivan. But the air-to-air mission is important to
    the F/A-22. The air-to-ground mission, we're less clear about.
    I think they need to make that case, and that's part of the
    business case we're talking about.
        Now, on the flip side of that is, when do you need it? How
    many of those do you need? How can that be deployed properly in
    the Air Force's concept of operations? How much money is that
    going to cost? Right now, they're talking about an $11 billion/
    15-year program.
        Senator McCain. One of the problems we always experience is
    that initially we're going to plan on a huge number of
    aircraft, many hundreds. I've seen this forever.
        Mr. Sullivan. On most programs, I agree.
        Senator McCain. Yet then the cost goes up, so we're going
    to reduce the numbers. But then the cost goes up because we're
    reducing numbers. What's the answer to that one?
        Mr. Sullivan. Well, I think perhaps what we do in these two
    reports is focus on the total cost the total investment. To
    develop an aircraft would be development cost in the billions
    of dollars, and then procurement costs. You can look at it two
    ways. You can look at sum cost, which would be like a total
    program--average program cost for aircraft of the F-22, for
    example, is very high. Right now, if they terminate that and
    only build 180 aircraft, for example, if you add up all those
    costs and divide by 180, you get 345 million, or something. The
    flip side of that is that there's a flyaway--the cost of the
    last one coming off the line obviously is----
        Senator McCain. One of the great imponderables in history
    is the actual cost of an aircraft. [Laughter.]
        Mr. Sullivan. Yes, sir.
        Senator McCain. I've never even heard the actual cost of a
    F-4 Phantom, much less--anyway, I thank you.
        Mr. Schmitz, do you know who made the decision to base the
    acquisition of C-130J as a commercial venture?
        Mr. Schmitz. It was a push by Lockheed Martin. There was a
    contracting officer; and, ultimately, the contracting officer
    was being supervised, as we understand, by the same
    contracting----
        Senator McCain. By Ms. Druyun.
        Mr. Schmitz. Yes, sir.
        Senator McCain. Wouldn't that argue for the Air Force to go
    back and reevaluate that contract when they found out that it
    was Ms. Druyun that made the decision to have this as an other
    transaction agreement (OTA), rather than under the normal
    procurement procedures, you would think?
        Mr. Schmitz. Yes, sir.
        Senator McCain. Did the Air Force contracting officer, top
    acquisition executive, properly justify the use of a commercial
    item--have you gotten any cost data from Lockheed Martin,
    actual cost data? I understand that they have not been
    forthcoming with any of it. Is that true? Maybe that's a
    question for the next panel, but----
        Mr. Schmitz. Yes. Let me just check with my audit----
        VOICE: Lockheed Martin is not required to provide any cost
    or pricing data.
        Mr. Schmitz. Did you understand that, Mr. Chairman?
        Senator McCain. They're not required to, so they're not,
    because they have an exemption from Federal Acquisition
    Regulation (FAR) Part 12.
        In 1995, the price for the basic C-130J was $33 million.
    1998, it's now $50 million. 2004, the price is now $67 million.
    Because the Air Force is acquiring these C-130Js using a FAR
    Part 12, a commercial item acquisition strategy, the Air
    Force's established position that it cannot require Lockheed
    Martin to provide certified cost or pricing data. Is that a
    concern, Mr. Schmitz?
        Mr. Schmitz. Well, it is for us, because, without the
    knowledge of Lockheed Martin's prices, costs, profits, or data,
    the Air Force contracting officer is limited in his ability to
    protect the government against overpricing or fraud.
        Senator McCain. Your report concluded that Lockheed Martin
    has been unable to design, develop, or produce a C-130J
    aircraft that meets contract specifications in the 10 years
    since production began. You made several significant
    recommendations to resolve contract deficiencies, ensure what
    repairs to nonoperational aircraft are performed by Lockheed
    Martin in a timely manner. Did Air Force assistant Secretary
    Sambur agree with your recommendations?
        Mr. Schmitz. Initially not. But, by the time we got through
    the process of finalizing our report, we essentially had full
    concurrence in our recommendations from the Air Force.
        Senator McCain. Did Secretary Sambur, as the top Air Force
    acquisition executive, withhold any monies from Lockheed Martin
    to leverage them to fix the C-130J?
        Mr. Schmitz. Not that we're aware of.
        Senator McCain. July 30, 2004, brief to the Senate Armed
    Services Committee, Secretary Sambur concluded the way to
    increase military capability for the C-130J and to motivate
    Lockheed Martin to fix deficiencies was to establish, in 2002,
    a C-130J group-hug Blue Ribbon Panel. As far as you know, did
    the establishment of the C-130J group-hug Blue Ribbon Panel fix
    the C-130J deficiencies?
        Mr. Schmitz. As far as I know, no, sir.
        Senator McCain. As far as your latest evaluation is
    concerned, the C-130J is still not operationally capable?
        Mr. Schmitz. We've heard, in the last 6 months, the Air
    Force has made some improvements. This is only hearsay, but I'm
    told that they made improvements, and there may be some
    operational C-130Js now. Limited operational.
        Senator McCain. Thank you.
        Mr. Bolkcom, thank you for your overview.
        Mr. Bolkcom. Yes, sir.
        Senator McCain. We appreciate it. It's always important to
    view these specific programs in the general overview of the
    strategic challenges. I thank you.
        Senator Lieberman.
        Senator Lieberman. Thanks, Mr. Chairman.
        Mr. Sullivan, I wanted to ask you some questions about your
    report. I mean, to say the obvious, this committee has worked
    very hard--we and our predecessors here over the years--to
    provide the military with the best equipment we can. It's
    doubly, maybe more than that, frustrating for us as we watch
    the cost of the programs escalate, and the number of items
    being reduced, as you've documented very compellingly here,
    with regard to technical aircraft.
        If you had to sum it up in a paragraph, what lessons have
    we learned from the story of the F/A-22, up until this point,
    that, for instance, can be applied to the Joint Strike Fighter
    program?
        Mr. Sullivan. If there's one lesson that you could apply
    right now to the Joint Strike Fighter program, it would be to
    wait until you have a design, an aircraft that has a stable
    design, to do the mission that the requirements call for it to
    do.
        Senator Lieberman. But to wait until it has that stable
    design to do what?
        Mr. Sullivan. To be able to perform the key performance
    parameters for that aircraft, in terms of how far it can fly,
    how fast it can fly, what kind of payload it can deliver, air-
    to-ground mission, air-to-air mission, all of those different
    things. They have a requirements document that lays all of that
    out.
        Senator Lieberman. Yes.
        Mr. Sullivan. They're trying to build an aircraft to meet
    those requirements now. They're having trouble with that, at
    this point.
        Senator Lieberman. Right.
        Mr. Sullivan. If there's one lesson I think they learned
    from the F/A-22, it's to measure twice and cut once, if you
    will.
        Senator Lieberman. Yes.
        Mr. Sullivan. It's to stop right now and try to get an
    engineering-type prototype that they are fairly certain will be
    able to meet at least some of those missions.
        The other thing that they can do is look at their
    acquisition strategy and be more evolutionary, maybe go a block
    approach earlier, where they're not reaching for all of the
    capability that they envision on that aircraft right now. But
    this gets to the business case. Maybe reduce some of those
    capabilities for a first increment of that aircraft, get the
    aircraft built, and put on what they know how to do now. The
    lesson is knowledge. What they should do is build what they
    know how to build at this point.
        Senator Lieberman. Right.
        Who should we hold accountable for the fact that that
    didn't happen with the F/A-22?
        Mr. Sullivan. That's a good question. The Services are
    required to train, organize, and equip the forces, but the
    Department of Defense has an acquisition office that also more
    or less heads up the decisionmaking on those programs. But I
    think, even more than that, if we want to get down to laying
    blame, there's probably a lot of people that you could blame
    for programs getting this far out of balance.
        Senator Lieberman. Is it because we try to consistently add
    more to the program?
        Mr. Sullivan. On the F/A-22, for example, there has been
    classic requirements-creep.
        Senator Lieberman. Right.
        Mr. Sullivan. We try to establish the toughest requirements
    that we can have for the warfighter, so the warfighter is
    dominant in the field, and sometimes they're not very easy to
    get to. So, yes, I'd say we overreach very often on setting
    requirements.
        Senator McCain. Could I ask, is lack of congressional
    oversight one of those factors?
        Mr. Sullivan. We believe that--well, when we look at
    acquisition programs, is, we focus on the Pentagon, more than
    congressional oversight, and the policies that they have for
    their acquisitions. I think there are a lot of rules and laws.
    We're talking about some of these--FAR Part 12 versus FAR Part
    15, for example. These two programs were both FAR Part 15
    programs, which means that statute has been written to put in
    an awful lot of oversight, including cost accounting standards,
    Truth in Negotiation Act (TINA) for cost pricing data,
    Competition in Contracting Act, and all of those things. Both
    of these programs had those. There was a lot of oversight on
    the program, yet they still got out of control. Right.
        Mr. Sullivan. When we look at DOD's--the Pentagon's
    acquisition policies themselves, these are the people that are
    going to manage these programs, and we think the policies lack
    a lot of internal controls that could be put into place. The
    policies are not ever executed very consistently. I just
    believe those policies have been lax.
        Senator Lieberman. Right.
        Mr. Sullivan. There are a lot of contracting issues that go
    along with that as well.
        Senator Lieberman. Yes.
        So those are the lessons you'd draw as we go forward with
    the Joint Strike Fighter. Do you think it's the correct
    decision to terminate procurement in fiscal year 2008, as is
    now proposed, for the F/A-22?
        Mr. Sullivan. That would not be for me or the Government
    Accountability Office (GAO) to answer, but I think that's why,
    when we looked at the program this year with that as part of
    its environment, we decided, if nothing else, the Air Force has
    to at least stop and recalculate, recalibrate, if you will,
    what they're going to do, given that budget decision hanging
    out there right now. They need to come back with a very
    rational decision about how many aircraft they need and how
    they're going to use them.
        Senator Lieberman. So the business case would really be to
    continue the program beyond 2008. Am I right?
        Mr. Sullivan. Yes. If they want to continue right now, as
    it stands, the modernization program that they said they've
    needed to bring a very robust air-to-ground strike capability
    to the F/A-22, under the decision, as it stands right now, it
    will be very difficult to do that, because they will not
    procure any aircraft after 2008. That modernization program was
    to fit those aircraft, past 2008, with those capabilities.
        Senator Lieberman. One last question. In the case of the
    Joint Strike Fighter, you also indicate that there's a need for
    a new business case for both aircraft--for that program, but
    you mentioned that the program's critical design review is not
    going to occur until early in 2006. Shouldn't we have the
    results of that review before the Department decides on aspects
    of a revised Joint Strike Fighter business case?
        Mr. Sullivan. We would say, ideally, that a critical design
    review is a key point in a program where you should come out of
    that review with the knowledge that you have a stable design.
    So, you're right, I think you should wait until a review like
    that is over. But in the case of the Joint Strike Fighter, we
    think that review, as it's scheduled right now, is probably
    happening a little bit too early, because they will be having a
    review that's supported by an aircraft design that's
    overweight. We'd like to see them get that slimmed-down
    version; not necessarily integrated, but perhaps another 6
    months to a year beyond that, when they can fly that first
    prototype. Then we believe they will have a very stable design,
    and it wouldn't take a lot of changes after that, when it gets
    very expensive.
        Senator Lieberman. Thank you.
        Mr. Sullivan. So I'd say somewhere past a year.
        Senator Lieberman. Thanks, Mr. Chairman.
        Senator McCain. Senator Chambliss?
        Senator Chambliss. Mr. Sullivan, you're talking about that
    problem with the Joint Strike Fighter? That was a similar
    problem you had with the F/A-22, relative to weight, initially,
    wasn't it?
        Mr. Sullivan. I believe the F/A-22 did have weight issues.
        Senator Chambliss. Similar problem we had with the F-15,
    wasn't it?
        Mr. Sullivan. Yes, sir.
        Senator Chambliss. Similar problem we had with the F-4,
    wasn't it?
        Mr. Sullivan. Yes, sir.
        Senator Chambliss. In other words, my point is, anytime you
    have a new tactical aircraft to come out, you're going to have
    problems that are consistently appearing on all of the aircraft
    that are not that unusual. We have problems in the design,
    research, and development of basically every airplane, do we
    not?
        Mr. Sullivan. Yes, sir, we do.
        Senator Chambliss. That's the reason we have research and
    development. Your point about the F/A-22 being designed for
    air-to-air, when this airplane was originally conceived, was
    the real threat out there, and that was why we needed this
    follow-on airplane to the F-15, isn't that correct?
        Mr. Sullivan. Yes, sir.
        Senator Chambliss. That changed during the course of the
    last several years to require the Air Force to come back to the
    contractor and say, ``We still want that air-to-air capability,
    but, in addition to that, we want air-to-ground capability,''
    right?
        Mr. Sullivan. Yes, sir.
        Senator Chambliss. That is a major change, isn't that
    correct?
        Mr. Sullivan. Yes, sir. That's a lot of extra additional
    requirements. It will be tough to get.
        Senator Chambliss. Have we ever manufactured a tactical
    fighter where the Air Force said, ``We want you to have air-to-
    air and air-to-ground capability''?
        Mr. Sullivan. I couldn't answer that right now.
        Senator Chambliss. Well, from the standpoint of air
    dominance, we obviously have to be able to knock out the enemy
    on the ground, correct? That was to be one function of this
    air-to-ground availability of the F-22, right?
        Mr. Sullivan. Yes. That's a function they want now, yes.
        Senator Chambliss. If any of them got away, we wanted to
    make sure we had the most superior aircraft in the world to be
    able to knock them out air-to-air. Is that airplane headed in
    that direction now?
        Mr. Sullivan. I think that its air-to-air capability has
    been tested and looks very robust. I could not comment on where
    the Air Force is now with the air-to-ground capabilities.
    They're just beginning that. I think the requirements are still
    not locked down in the modernization program. They're still
    working on coming up with a plan to implement that.
        Senator Chambliss. Okay.
        Mr. Chairman, I assume at some point we're going to have a
    classified hearing where we can talk a little more about the
    specifics of that, so I'll leave that alone for right now.
        Mr. Schmitz, wasn't the commercial contract on the C-130J
    unusual to have for an airplane like that?
        Mr. Schmitz. Yes, sir.
        Senator Chambliss. In fact, it was a pilot testing project
    to have a commercial contract for that airplane.
        Mr. Schmitz. Generally speaking, that was a test. Yes, sir.
        Senator Chambliss. That's the reason you have projects like
    that, to see whether or not it works, from a commercial
    standpoint, correct?
        Mr. Schmitz. Yes, sir.
        Senator Chambliss. As you look back on it, do you think a
    commercial contract for the C-130J is probably the best route
    to go, or should we go the normal contracting route?
        Mr. Schmitz. Well, it certainly doesn't give us the level
    of oversight that a standard system acquisition strategy would
    give us.
        Senator Chambliss. Okay. In your report, you cited some
    significant deficiencies in the airplane, all of which
    deficiencies were addressed by the Air Force. Is that right?
        Mr. Schmitz. In their comments, they addressed them. Yes,
    sir.
        Senator Chambliss. The Air Force totally disagrees with
    your assessment of the airplane. Is that a fair statement?
        Mr. Schmitz. They did, initially, at the time that we
    circulated our report; but we've actually worked with them, in
    terms of coming to an agreed-upon way forward to address the
    deficiencies.
        Senator Chambliss. Yes. In fact, they've addressed each one
    of the four areas where you felt there were deficiencies with
    the airplane.
        Mr. Schmitz. They addressed them in their comments? Or
    they've actually solved?
        Senator Chambliss. No, they've actually addressed them.
        Mr. Schmitz. Yes, this is an ongoing process. I would say
    they are addressing them. Yes, sir.
        Senator Chambliss. Yes. Well, they've addressed them to the
    point to where you pointed out that 50 of the airplanes were
    delivered, and--what was your exact term? They were not
    operationally suitable. Is that the term you used? I just had
    it a minute ago. I apologize.
        Mr. Schmitz. Yes, sir.
        Senator Chambliss. Is that the term you used?
        Mr. Schmitz. Yes, sir.
        Senator Chambliss. The fact of the matter is that the
    airplane is flying in theater today, isn't it?
        Mr. Schmitz. We understand, in the last 6 months, there
    have been some operational missions. Yes, sir.
        Senator Chambliss. Yes. In fact, the Air Force pretty well
    refuted your statement beginning in February 2003, that the
    delivery of these airplanes was not operationally suitable. In
    fact, they said that every one of them was operationally
    suitable under the terms of the commercial contract. Isn't that
    correct?
        Mr. Schmitz. Is that what the Air Force said?
        Senator Chambliss. Yes.
        Mr. Schmitz. Is that what you're asking?
        Senator Chambliss. Yes.
        Mr. Schmitz. I believe that's an accurate description of
    the Air Force's position at the time.
        Senator Chambliss. Okay. I understand what your job is. You
    have a difficult job in trying to assess each one of these
    programs and trying to determine whether or not the Air Force
    is doing exactly what they're supposed to do under the
    contract. After reading your report and looking at the Air
    Force's response to your report, you really didn't find
    anything that the Air Force was either not addressing at that
    point in time of your report or that they have sat down, as you
    said, and been willing to address with you, to get that
    aircraft to the point to where it's capable of flying in
    theater, in combat, today. Is that fair?
        Mr. Schmitz. It is fair to say that they have addressed all
    of the issues we raised. They are addressing them. My
    understanding is, as of today, there are still over a hundred
    deficiencies that they are outstanding, and are still being
    addressed.
        Senator Chambliss. But the plane is flying in combat today,
    is it not, with those deficiencies still being worked on.
        Mr. Schmitz. There have been limited, not all of the
    delivered aircrafts, I believe, are operationally capable. I
    believe that it's been very limited operational success, thus
    far, sir.
        Senator Chambliss. Are you aware of any C-130Js that have
    been sold to other countries, that have been flying in theater
    for the last couple of years?
        Mr. Schmitz. No, sir.
        Senator Chambliss. Okay. Did you ask about those?
        Mr. Schmitz. Yes, sir.
        Senator Chambliss. What were you told?
        Mr. Schmitz. I believe we did ask about them. There are
    no--the British? There--I stand corrected, sir. There is a
    British C-130J.
        Senator Chambliss. Yes, I want to make sure you all
    understand they've been flying in theater for a couple of
    years.
        Mr. Schmitz. Yes, sir.
        Senator Chambliss. Now, Senator McCain's question to you
    relative to these documents, I want to make sure I understand
    this, because I have great sympathy for the fact that
    contractors ought to provide this committee or you with
    whatever documents that they're supposed to give you.
    Withholding documents is a pretty serious charge. But is it my
    understanding that the fact that this is a commercial contract
    exempts the contractor from the requirement of giving you
    certain documents?
        Mr. Schmitz. That's right. We did not ask for them, and so,
    there were none to withhold.
        Senator Chambliss. Again, going back to the issue of
    whether or not this should have been a commercial contract or
    not. Just looking at it from that perspective, Mr. Schmitz,
    getting the various documents that you asked for, was this a
    mistake to go with a commercial contract?
        Mr. Schmitz. Well, it goes back to what you said at the
    beginning, that this was a test case, and I think we've learned
    some very good lessons from this test case. It ultimately comes
    down to a level of oversight that both you, as Congress has,
    and we, are able to exercise as an oversight entity. It's a
    choice. It's a calculated risk. The bottom line in this case is
    that with very limited exceptions, the U.S. Services have not
    gotten an operationally capable aircraft. Yet.
        I would also point out, my staff has reminded me, the
    British operational capabilities are not the same as the U.S.
    specifications. So it is true that there are some British.
        Senator Chambliss. Which might tell us something about our
    requirements, I guess?
        Mr. Schmitz. Yes, sir.
        Senator Chambliss. I don't want to dwell on this too long,
    Mr. Chairman, but let me just close with this question. Is the
    Air Force continuing to work with your office to make sure that
    all the deficiencies which you, as the civilian oversight arm
    of DOD, working with you to do everything possible to make the
    corrections that you have identified?
        Mr. Schmitz. Yes, sir. I would point out that the Air Force
    is using FAR Part 15 for future upgrades, as a result of the
    lessons learned thus far.
        Senator Chambliss. Has there been any pushback from either
    the Air Force or the contractor relative to addressing the
    deficiencies which you have noted?
        Mr. Schmitz. Well, initially there was significant
    pushback, and, as we've worked through things, we've gotten
    them to cooperate with our recommendations.
        Senator Chambliss. Thank you, Mr. Chairman.
        Senator McCain. Thank you. I want to thank the witnesses.
        We'll now move to our next panel, which is the Honorable
    Mike Wynne, Under Secretary of Defense for Acquisition,
    Technology, and Logistics; the Honorable John Young, Assistant
    Secretary of the Navy for Research, Development, and
    Acquisition; Vice Admiral Joseph Sestak, Deputy Chief of Naval
    Operations for Warfare, Requirements, and Programs; Major
    General Stanley Gorenc, Director, Operational Capabilities and
    Requirements, United States Air Force; and Brigadier General
    Martin Post, USMC, Assistant Deputy Commandant for Aviation,
    United States Marine Corps.
        As the witnesses are taking their seats, I would like to
    just make a personal comment to Secretary Wynne. I thank you
    for your service. I appreciate your willingness to stay on in
    your position. We may have had differences from time to time,
    but I think you have always been honest and honorable in your
    attempts to do what's best for the United States and the
    taxpayer, and I thank you, Secretary Wynne.
        Mr. Wynne. Thank you, Mr. Chairman, for those kind remarks.
        Senator McCain. We'll begin with you.

    STATEMENT OF HON. MICHAEL W. WYNNE, UNDER SECRETARY OF DEFENSE
               FOR ACQUISITION, TECHNOLOGY, AND LOGISTICS

        Mr. Wynne. Thank you, Mr. Chairman, members of this
    committee, Senator Lieberman, Senator Chambliss. It's a
    pleasure to be here to address my decision to expand my normal
    oversight role, temporarily, to oversee selected Air Force
    programs beyond the normal category 1D, to category 1C.
        This temporary change, I felt, was necessary, given the
    vacancies in the Air Force and the timing that is required to
    restore the management structure. This action is meant to
    assist the new Acting Air Force Secretary by overseeing and
    providing advice on important Air Force programs during this
    time of transition.
        The result is that I will now be the milestone decision
    authority for at least 21 additional major defense acquisition
    programs that were previously overseen by the Air Force
    acquisition executive. I have, in fact, asked the Air Force to
    provide, by this Saturday, a list of all significant programs
    and the milestone decisions expected in the next 6 months for
    these programs so that I might plan my schedule.
        To a large extent, I plan to rely on the existing reporting
    process, such as the Defense Acquisition Executive Summary
    (DAES) process. In this process, I already review, on a
    quarterly basis, all of the nearly 90 defense acquisition
    programs, both those for which I have been the decision
    authority, as well as those for which the Service acquisition
    executives, and sometimes their subordinates, are normally the
    decision authority. I have always reviewed these programs in
    terms of performance, schedule, cost, funding, tests,
    interoperability, logistics, contracting management, and
    production. The difference now is that I will also be the
    milestone decision authority for the specified 21 programs.
        I also plan to rely on the Air Force Acquisition Corps to
    continue their high-quality efforts on these programs, and to
    provide me with any necessary information for decisions on
    these programs. After all, they are, in fact, one floor above
    me in the building, although that may change as we rearrange
    the Pentagon. I'll look to them, in particular, to provide
    input on technical cost and testing issues. My staff support
    for this oversight will be Dr. Glenn Lamartin and Mr. John
    Landon, who now support me in the management of the major
    programs that I currently oversee, such as the F-22 and the
    small-diameter bomb.
        There is no set timeline for this temporary designation. I
    am working closely with the acting Secretary of the Air Force,
    Michael Dominguez, and the Air Force acquisition workforce. I
    have advised him and the Service leadership that I will not be
    spending their resources without their direct involvement, and
    I plan to return oversight of these 21 programs to the Air
    Force when the Air Force acquisition leadership is properly
    staffed such that it provides adequate checks and balances to
    guarantee the integrity of the system.
        Again, thank you, Mr. Chairman, Senator Lieberman, Senator
    Chambliss, and members of the committee, for the opportunity to
    testify before you. I'd be happy to answer your questions.
        [The prepared statement of Mr. Wynne follows:]
                  Prepared Statement by Hon. Michael W. Wynne
        Mr. Chairman, members of the committee, I am pleased to appear
    before you this afternoon to address my decision to expand my normal
    oversight role temporarily to oversee selected Air Force programs
    beyond the normal Category 1D to the Category 1C.
        This temporary change is necessary given the vacancies in the Air
    Force and the timing to restore the management structure. This action
    is meant to assist the new Acting Air Force Secretary by overseeing and
    providing advice on important Air Force programs during a time of
    transition.
        I will now be the milestone decision authority for at least 21
    Major Defense Acquisition programs that were previously overseen by the
    Air Force Acquisition Executive. I have asked the Air Force to provide,
    by this Saturday, April 9, a list of all significant programs and
    milestone decisions expected in the next 6 months for these programs.
        To a large extent, I plan to rely on the existing reporting
    process, such as the Defense Acquisition Executive Summary (DAES). In
    this process, I already review on a quarterly basis all of the nearly
    90 Major Defense Acquisition Programs--both those for which I have
    always been the decision authority, as well as those for which the
    Service Acquisition Executives are normally the decision authority.
        I have always reviewed these programs in terms of performance,
    schedule, cost, funding, testing, interoperability, logistics,
    contracting, management, and production. The difference is that now I
    will also be the milestone decision authority for these programs.
        I also plan to rely on the Air Force acquisition corps to continue
    their high quality efforts on these programs and to provide me with any
    necessary information for decisions on these programs. After all, they
    are only one floor above me. I will look to them in particular to
    provide input on technical, cost, and testing issues.
        My staff support for this oversight will be Dr. Glenn Lamartin and
    John Landon, who support me in the management of the Air Force Major
    Programs that I currently directly oversee, such as the F/A-22 and the
    Small Diameter Bomb.
        There is no set timeline for this temporary designation. I am
    working closely with Acting Secretary of the Air Force Michael L.
    Dominguez and the Air Force acquisition workforce.
        I have advised him and the Service leadership that I will not be
    spending their resources without their direct involvement, and that I
    plan to return oversight of these 21 programs to the Air Force when the
    Air Force's acquisition leadership is properly staffed such that it
    provides adequate checks and balances to guarantee the integrity of the
    system.
        Again, thank you, Mr. Chairman and members of the subcommittee, for
    the opportunity to testify before you. I would be happy to answer your
    questions.

        Senator McCain. Thank you very much.
        Mr. Young.

     STATEMENT OF HON. JOHN J. YOUNG, JR., ASSISTANT SECRETARY OF
          THE NAVY FOR RESEARCH, DEVELOPMENT, AND ACQUISITION

        Mr. Young. Mr. Chairman, Senator Lieberman, members of the
    committee, it is a great privilege to appear before the
    committee today to discuss the status of Navy and Marine Corps
    aviation programs in the fiscal year 2006 budget request. Mr.
    Chairman, thank you for introducing my colleagues.
        In multiple theaters throughout the world, your Navy and
    Marine Corps team is prosecuting the global war on terror and a
    wide range of operations. From pursuit of hostile forces in
    Iraq and Afghanistan to providing humanitarian relief after the
    tsunami, your Navy and Marine Corps team has executed superbly.
    In each of these operations, naval aviation has provided a
    unique demonstration to the world of the immense capabilities
    of the United States Navy and Marine Corps team.
        This committee and Congress have been instrumental in
    helping the Department attain these results. Building on this
    support, the fiscal year 2006 budget request reflects the
    investments that will most improve our warfighting capability
    by developing and investing in future seabased and
    expeditionary forces for our Navy and Marine Corps.
        The fiscal year 2006 request includes funds for 138
    aircraft, reflecting the continuous successful efforts by the
    Department to increase the number of aircraft we are purchasing
    to modernize our force. Within these efforts, it's also
    important to improve how we buy aircraft and weapons. The
    Congress' steady calls for jointness and discipline in
    acquisition, as well as support of new initiatives has enabled
    the Department of the Navy to make significant progress.
        There are a number of programs and initiatives that merit
    your consideration. In the interest of time, I will only
    highlight a few actions.
        In the urgent category, the Marine Corps and the
    acquisition team acted to install advanced survivability
    equipment on all helicopters going into Iraq with 1 Marine
    Expeditionary Force (MEF) last spring. To achieve greater
    efficiency, the Navy has used multi-year procurements to attain
    savings and stability in procurement accounts. The fiscal year
    2006 request continues multi-year procurements for F/A-18E/F,
    the airframe and the engine; MH-60S helicopter; MH-60S/R Common
    Cockpits; and the E-2C Hawkeye.
        The Department achieved Initial Operating Capability for
    Tactical Tomahawk, awarding the Navy's first weapons multi-year
    contract at a 12-percent savings for up to $1.6 billion and
    2,200 missiles, including innovative measures that reward
    performance and incentivize cost reduction in future missiles
    beyond this contract.
        We successfully awarded the Multi-Mission Maritime Aircraft
    System Development and Demonstration (SDD) contract, leveraging
    the commercial aircraft industry base.
        The F-18E/F Super Hornet continues to transition to the
    fleet, improving survivability and strike capability of the
    carrier airwing.
        The E/A-18G continues development as the Navy's Advanced
    Electronic Attack Aircraft replacement for the E/A-6B . The
    Navy is using the F/A-18E/F multi-year to buy four SDD aircraft
    in fiscal year 2006 and install and integrate the Improved
    Capabilities System-III (ICAP-III) on these aircraft.
        The Marine Corps has taken delivery of 17 KC-130J aircraft
    to date, with four more deliveries scheduled in 2005, and 12
    aircraft are planned for fiscal year 2006. The KC-130J provides
    significant enhancements to the current fleet. Additionally, we
    have continued to ensure the tactical capability of our
    existing KC-130 F, R, and T series by installing night-vision
    kits and upgraded advanced survivability equipment.
        The H-1 Upgrades Development Program is over 90 percent
    complete, with operational evaluation (OPEVAL) beginning this
    summer. We initiated a cost-reduction initiative for Joint
    Standoff Weapon (JSOW) Block II, lowering the cost of that
    weapon by $84,000 and increasing our buy requirements.
        Working jointly, the naval team recommended specific JSF
    design, ground-rule, and requirements changes, which restored
    short take-off and vertical landing (STOVL) aircraft viability
    and also initiated the Independent Review Team to help us.
        The STOVL variant has been reduced in weight by 2,500
    pounds through design optimization. Installed thrust
    improvements, drag improvements, and ground-rule assumptions
    have allowed this plane to meet its key performance parameters
    (KPP).
        Another joint program, the V-22 Osprey, has flown in excess
    of 4,900 hours since resuming flight tests in May. Operational
    Evaluation began on March 28, 2005, and should lead to full
    rate production in 2006.
        Finally, the Navy led an effort that merged the Joint
    Tactical Radio System (JTRS), Clusters 3 and 4, to ensure
    interoperability between the Navy and Air Force on a aircraft-
    based JTRS.
        Mr. Chairman, out of respect for the committee, I will stop
    here, leaving much more to say. We are grateful for the chance
    to offer just a few examples of how the Department is working
    day in and day out supporting sailors and marines in the global
    war on terrorism. Congressional support of these aviation
    programs is vital to achieving these results, and I thank you
    for your consideration of our budget request. We look forward
    to your questions.
        [The joint prepared statement of Mr. Young, Admiral Sestak,
    and General Post follows:]
      Joint Prepared Statement by Hon. John J. Young, Jr.; VADM Joseph A.
               Sestak, Jr., USN; and Brig. Gen. Martin Post, USMC
        Mr. Chairman, distinguished members of the subcommittee, thank you
    for this opportunity to appear before you to discuss the Department of
    the Navy's Fiscal Year 2006 Acquisition and Research, Development,
    Technology, and Evaluation (RDT&E) programs.
        In multiple theaters in the global war on terror today, your Navy
    and Marine Corps Team is involved in a range of operations, from combat
    ashore to Extended Maritime Interdiction Operations (EMIO) at sea. EMIO
    serves as a key maritime component of the global war on terror, and its
    purpose is to deter, delay, and disrupt the movement of terrorists and
    terrorist-related materials at sea. Your team has conducted over 2,200
    boardings in this last year alone, even as it has flown more than 3,000
    sorties while dropping more than 100,000 pounds of ordnance from sea-
    based tactical aircraft in Iraq; and providing nearly 5,000 hours of
    dedicated surveillance in and around Iraq to Coalition Forces.
        At the same time, our Nation took advantage of the immediate global
    access provided by naval forces to bring time-critical assistance to
    tsunami victims in South Asia. By seabasing our relief efforts in
    Operation Unified Assistance, the Abraham Lincoln Carrier Strike Group
    (CSG) and the Bonhomme Richard Expeditionary Strike Group (ESG)--with
    marines from the 15th Marine Expeditionary Unit--delivered more than
    6,000,000 pounds of relief supplies and equipment quickly, and with
    more political acceptance than may have been possible if a larger
    footprint ashore might have been required.
        The fiscal year 2006 budget request maximizes our Nation's return
    on its investment by positioning us to meet today's challenges--from
    peacekeeping/stability operations to global war on terror operations
    and small-scale contingencies--and by transforming the force for future
    challenges.
                     your future navy and marine corps team
        We developed the Sea Power 21 vision in support of our National
    Military Strategy. The objective of Sea Power 21 is to ensure this
    Nation possesses credible combat capability on scene to promote
    regional stability, to deter aggression throughout the world, to assure
    access of joint forces and to fight and win should deterrence fail. Sea
    Power 21 guides the Navy's transformation from a threat-based platform
    centric structure to a capabilities-based, fully integrated force. The
    pillars of Sea Power 21--Sea Strike, Sea Shield, and Sea Base--are
    integrated by FORCEnet, the means by which the power of sensors,
    networks, weapons, warriors, and platforms are harnessed in a networked
    combat force. This networked force will provide the strategic agility
    and persistence necessary to prevail in the continuing global war on
    terror, as well as the speed and overwhelming power to seize the
    initiative and swiftly defeat any regional peer competitor in Major
    Combat Operations (MCO).
        The Navy and Marine Corps Team of the future must be capabilities-
    based and threat-oriented. Through agility and persistence, our Navy
    and Marine Corps Team needs to be poised for the ``close-in knife
    fight'' that is the global war on terror, able to act immediately to a
    fleeting target. The challenge is to simultaneously ``set the
    conditions'' for a MCO while continuing to fight the global war on
    terror, with the understanding that the capabilities required for the
    global war on terror cannot necessarily be assumed to be a lesser-
    included case of an MCO. Our force must be the right mix of
    capabilities that balances persistence and agility with power and speed
    in order to fight the global war on terror while prepared to win a MCO.
    To do so, it must be properly postured in terms of greater operational
    availability from platforms that are much more capable as a
    distributed, networked force. While the fabric of our fighting force
    will still be the power and speed needed to seize the initiative and
    swiftly defeat any regional threat, FORCEnet's pervasive awareness
    (C\4\ISR) will be more important than mass. Because of its access from
    the sea, the Navy and Marine Corps are focusing significant effort and
    analysis in support of joint combat power projection by leveraging the
    maneuver space of the oceans through Seabasing. Seabasing is a national
    capability that will project and sustain naval power and joint forces,
    assuring joint access by leveraging the operational maneuver of
    sovereign, distributed, and fully networked forces operating globally
    from the sea, while accelerating expeditionary deployment and
    employment timelines. The Sea-based Navy will be distributed, netted,
    immediately employable and rapidly deployable, greatly increasing its
    operational availability through innovative concepts such as, for
    example, Sea Swap and the Fleet Response Plan. At the same time,
    innovative transformational platforms under development such as
    Maritime Prepositioning Forces (MPF(F)), Amphibious Assault Ship
    (LHA(R)), and high-speed connectors, will be instrumental to the Sea
    Base.
        To this end, the technological innovations and human-systems
    integration advances in future warships are critical. Our future
    warships will sustain operations in forward areas longer, be able to
    respond more quickly to emerging contingencies, and generate more
    sorties and simultaneous attacks against greater numbers of multiple
    aimpoints and targets with greater effect than our current fleet. The
    future is about the capabilities posture of the fleet. Our analysis is
    unveiling the type and mix of capabilities of the future fleet and has
    moved us away from point solutions towards a range of 260-325 ships
    that meet all warfighting requirements and hedges against the
    uncertainty of alternate futures.
            developing transformational joint seabasing capabilities
        The Naval Power 21 vision defines the capabilities that the 21st
    century Navy and Marine Corps Team will deliver. Our overarching
    transformational operating concept is Sea Basing; a national
    capability, for projecting and sustaining naval power and joint forces
    that assures joint access by leveraging the operational maneuver of
    sovereign, distributed, and networked forces operating globally from
    the sea. Seabasing unifies our capabilities for projecting offensive
    power, defensive power, command and control, mobility and sustainment
    around the world. It will enable commanders to generate high tempo
    operational maneuver by making use of the sea as a means of gaining and
    maintaining advantage.
        Sea Shield is the projection of layered defensive power. It seeks
    maritime superiority to assure access, and to project defense overland.
        Sea Strike is the projection of precise and persistent offensive
    power. It leverages persistence, precision, stealth, and new force
    packaging concepts to increase operational tempo and reach. It includes
    strikes by air, missiles, and maneuver by Marine Air Ground Task Forces
    (MAGTF) supported by sea based air and long-range gunfires.
        Sea Base is the projection of operational independence. It provides
    the Joint Force Commander the ability to exploit Expeditionary Maneuver
    Warfare (EMW), and the capability to retain command and control and
    logistics at mobile, secure locations at sea.
        FORCEnet is the operational construct and architectural framework
    for naval warfare in the joint, information age. It integrates
    warriors, sensors, networks, command and control, platforms and weapons
    into a networked, distributed combat system.
        Sea Trial is the Navy's recently created process for formulating
    and testing innovative operational concepts, most of which harness
    advanced technologies and are often combined with new organizational
    configurations, in pursuit of dramatic improvements in warfighting
    effectiveness. Sea Trial concept development and experimentation (CD&E)
    is being conducted in close coordination with, the Marine Corps combat/
    force development process and reflects a sustained commitment to
    innovation. These efforts tie warfare innovation to the core
    operational challenges facing the future joint force.
        As a means of accelerating our investment in Naval Power 21, we
    employ the Naval Capability Development Process (NCDP) and
    Expeditionary Force Development System (EFDS). The NCDP and EFDS take a
    concepts-to-capabilities approach to direct investment to achieve
    future warfighting wholeness. The NCDP takes a sea-based, offensive
    approach that provides power projection and access with distributed and
    networked forces featuring unmanned and off-board nodes with
    penetrating surveillance via pervasive sensing and displaying that
    rapidly deliver precision effects. The EFDS assesses, analyzes and
    integrates MAGTF warfighting concepts, and requirements in a naval and
    joint context to support the overarching operational concept of Joint
    Seabasing. Both processes are designed to incorporate innovative
    products of Service and Joint CD&E and Science and Technology (S&T)
    efforts.
        The fiscal year 2006 budget request reflects the investments that
    will most improve our warfighting capability by developing and
    investing in future sea based and expeditionary capabilities for the
    Navy and Marine Corps. We will briefly summarize our programs, and
    address transformation of our capability pillars by describing some of
    the key aviation enablers.
    Aviation Programs
        The fiscal year 2006 President's budget request balances continued
    recapitalization in obtaining new capabilities and reducing operating
    costs while simultaneously sustaining the legacy fleet aircraft that
    are performing magnificently in current operations. Taking advantage of
    multi-year procurement (MYP) to achieve significant savings in
    procurement accounts, the Navy has entered numerous MYP contracts that
    will define the future of weapons systems and further investment. The
    Department's fiscal year 2006 budget request continues MYP arrangements
    for the F/A-18E/F (both airframe and engine), the KC-130J, the MH-60S,
    the MH-60S/R Common Cockpit, and the E-2C to maximize the return on our
    investment. Our proposed plan will procure 44 tactical, fixed wing
    aircraft (38 F/A-18E/F aircraft, 4 EA-18G System Development and
    Demonstration assets, and 2 E-2C aircraft), as well as 26 MH-60S, 12
    MH-60R, 9 MV-22, and 10 upgraded UH-1Y/AH-1Z helicopters. This plan
    also continues the development of the F-35, the E-2C Advanced Hawkeye,
    the EA-18G, the Multi-mission Maritime Aircraft (MMA), the Aerial
    Common Sensor (ACS), and the Presidential Helicopter Replacement
    Aircraft (VXX), and initiates development of the Heavy Lift Replacement
    (HLR, CH-53X) aircraft.
                                   sea shield
    Multi-mission Maritime Aircraft (MMA)/P-3C
        The future for the Navy's maritime patrol force includes plans for
    sustainment, modernization, and re-capitalization of the force. Results
    of the P-3 Service Life Assessment Program (SLAP) have revealed the
    need for an aggressive approach to P-3 airframe sustainment. Key
    elements of the sustainment plan are strict management of requirements
    and flight hour use, special structural inspections to keep the
    aircraft safely flying, and increased use of simulators to satisfy
    training requirements. The fiscal year 2006 budget request reflects
    $74.5 million for Special Structural Inspections (SSI) and Special
    Structural Inspections-Kits (SSI-K), which will allow for sustainment
    and continued operation of approximately 166 aircraft. As the
    sustainment plan progresses, the inventory may be further reduced to
    around a number approaching 130 aircraft. The fiscal year 2006 budget
    request also reflects a modernization budget of $51.3 million for
    continued procurement and installation of the USQ-78B acoustic
    processor and for completion of final installations of Anti-Surface
    Warfare Improvement Program (AIP) kits. We are working on plans for
    further mission system modernization to allow us to continue meeting
    combatant command (COCOM) requirements. To recapitalize these critical
    aircraft, the Navy is procuring a MMA. The MMA program entered System
    Development and Demonstration (SDD) phase in May 2004 and awarded a
    contract to the Boeing Corporation for a 737 commercial derivative
    aircraft. The fiscal year 2006 budget requests $964.1 million for
    continuation of MMA SDD. Our comprehensive and balanced approach has
    allowed for re-capitalization of these critical assets.
    MH-60R and MH-60S
        The fiscal year 2006 budget requests $655.5 million in procurement
    and $48.1 million in RDT&E for the replacement of the Light Airborne
    Multi-Purpose System (LAMPS) MK III SH-60B and carrier-based SH-60F
    helicopters with the new configuration designated as MH-60R. The
    procurement quantity was reduced to provide an orderly production ramp.
    A Full Rate Production decision is scheduled during the second quarter
    of fiscal year 2006.
        The fiscal year 2006 budget requests $608.7 million in procurement
    and $78.6 million in RDT&E funds for the MH-60S, which is the Navy's
    primary combat support helicopter designed to support Carrier and
    Expeditionary Strike Groups. It will replace four legacy platforms with
    a newly manufactured H-60 airframe. The MH-60S is currently in the full
    rate 5-year MYP contract with the Army. The Army and Navy intend to
    execute another platform MYP contract commencing in fiscal year 2007.
    Navy's total procurement requirement was increased from 237 to 271 to
    provide a force structure that supports the Navy-approved helicopter
    concept of operations.
    AIM-9X
        The fiscal year 2006 budget requests $37.8 million for 165
    missiles. AIM-9X continues deployment to operational sites after a
    successful Full Rate Production decision last year.
                                   sea strike
    F/A-18E/F
        The F/A-18E/F continues to transition into the fleet, improving the
    survivability and strike capability of the carrier air wing. The Super
    Hornet provides a 40-percent increase in combat radius, 50 percent
    increase in endurance, and 25 percent increase in weapons payload over
    our older Hornets. Over 300 F/A-18E/Fs have been procured through
    fiscal year 2005, on track to complete procurement of the program of
    record 462 aircraft in 2011. The fiscal year 2006 budget requests $2.82
    billion for 38 F/A-18E/F aircraft for the second year of the 5-year MYP
    contract (fiscal year 2005 to 2009). The Super Hornet has used a spiral
    development approach to incorporate new technologies, such as the Joint
    Helmet Mounted Cueing System, Advanced Targeting FLIR, Shared
    Reconnaissance Pod System and Multifunctional Information Distribution
    System data link. The first Low Rate Initial Production Advanced
    Electronically Scanned Antenna Radar system has been delivered to
    Boeing for installation into an F/A-18 and will undergo operational
    testing in 2006.
    F-35 Joint Strike Fighter (JSF)
        Our recapitalization plan includes the JSF, a stealthy, multi-role
    fighter aircraft designed jointly to be an enabler for Naval Power 21.
    The fiscal year 2006 budget request contains $2.4 billion for
    continuation of System Development and Demonstration on the JSF. The
    JSF will enhance the DON's precision strike capability with
    unprecedented stealth, range, sensor fusion, improved radar
    performance, combat identification and electronic attack capabilities
    compared to legacy platforms. The carrier variant (CV) JSF complements
    the F/A-18E/F and EA-18G in providing long-range strike capability and
    much improved persistence over the battlefield. The short takeoff and
    vertical landing (STOVL) JSF combines the multi-role versatility of the
    F/A-18 and the basing flexibility of the AV-8B. The commonality
    designed into the JSF program will reduce acquisition and operating
    costs of Navy and Marine Corps tactical aircraft and allow enhanced
    interoperability with our allies and sister Services.
        The JSF has completed the third year of its development program,
    and the program continues working to translate concept designs to three
    producible variants. Manufacture/assembly of the first flight test
    aircraft conventional takeoff and landing (CTOL) is underway and
    roughly 40 percent complete, with assembly times much less than
    planned. Two thousand engine test hours have been completed through
    mid-January 2005. Detailed design work continues for the CTOL and STOVL
    variants. First flight is scheduled for 2006. The JSF program has
    aggressively addressed the performance issues associated with weight
    and airframe design. The STOVL variant weight has been reduced by 2,500
    lbs. through design optimization. Installed thrust improvements and
    aerodynamic drag reduction as well as requirements tailoring are being
    incorporated to further improve aerodynamic performance. All three
    variants are projected to meet Key Performance Parameter (KPP)
    requirements.
        The JSF program is completing a replan effort that began
    approximately a year ago. The software block plan and test plan are
    being reviewed consistent with the revised schedule and Service needs.
    The fiscal year 2006 budget reflects the revised System Development and
    Demonstration and production schedule.
    V-22
        The MV-22 remains the Marine Corps' number one aviation acquisition
    priority. The Osprey's increased range, speed, payload, and
    survivability will generate transformational tactical and operational
    capabilities. Ospreys will replace the aging Marine fleets of CH-46E
    and CH-53D helicopters beginning in fiscal year 2005, which will
    provide both strategic and tactical flexibility to meet emerging
    threats in the global war on terror. Utilization far above peacetime
    rates, and the physical demands of continuous operations in the harsh
    conditions of Iraq and Afghanistan, are accelerating the deterioration
    and increasing operating costs of the legacy aircraft that the MV-22
    will replace. These factors make a timely fielding of the MV-22
    critical.
        The fiscal year 2006 budget request includes $1.3 billion for nine
    MV-22s, trainer modifications and retrofits and $206.4 million for
    continued development, testing, and evaluation. The V-22 Osprey resumed
    flight-testing in May 2002, and it has flown in excess of 4,900 hours.
    The Commander Operational Test and Evaluation Force (COTF) Letter of
    Observation was completed in February 2005 to support Section 123
    Certification to Congress to allow the program to increase production
    above minimum sustaining rate of 11 aircraft. Operational Evaluation
    began on March 28, 2005, and should lead to Full Rate Production in
    early fiscal year 2006.
    Heavy Lift Replacement Program (HLR, CH-53X)
        The fiscal year 2006 budget requests $272 million RDT&E to begin
    the SDD phase of the HLR program that will replace the aging fleet of
    CH-53E platforms. The Marine Corps' CH-53E continues to demonstrate its
    value as an expeditionary heavy-lift platform, with significant assault
    support contributions in Afghanistan, the Horn of Africa, and Iraq.
    Vertical heavy lift will be critical to successful operations in anti-
    access, area-denial environments globally, enabling force application
    and focused logistics envisioned within the joint operating concepts.
    The CH-53E requires significant design enhancements to meet future
    interoperability requirements, improve survivability, expand range and
    payload performance, improve cargo handling and turn-around
    capabilities, and reduce operations and support costs. An Analysis of
    Alternatives determined that a ``new build'' helicopter would be the
    most cost-effective solution. The Operational Requirements Document
    defining HLR capabilities was approved in December 2004. The HLR will
    replace our aging fleet of CH-53E Super Stallion helicopters to fill
    the vertical heavy lift requirement not resident in any other platform
    that is necessary for force application and focused logistics
    envisioned in Sea Basing and joint operating concepts. With the ability
    to transport 27,000 pounds to distances of 110 nautical miles under
    most environmental conditions, commanders will have the option to
    insert a force equipped with armored combat vehicles or two armored
    High Mobility Multi-Wheeled Vehicles (HMMWVs) per sortie. To sustain
    the force, the HLR will be able to transport three independent loads
    tailored to individual receiving unit requirements and provide the
    critical logistics air connector to facilitate sea-based operations.
    This reliable, cost-effective heavy lift capability will address
    critical challenges in maintainability, reliability, and affordability
    found in present-day operations supporting the global war on terror.
    F/A-18 A/B/C/D
        The fiscal year 2006 budget request contains $422.4 million for the
    continuation of the systems upgrade programs for F/A-18 platform. As
    the F/A-18 program transitions to the F/A-18E/F, the existing inventory
    of over 900 F/A-18A/B/C/Ds will continue to comprise half of the
    Carrier Strike Group until 2012. Included in this request is the
    continued procurement of recently fielded systems such as Joint Helmet
    Mounted Cueing System, Advanced Targeting FLIR, Multi-Function
    Information Distribution System, and Digital Communications System. The
    Marine Corps continues to upgrade 76 Lot 7-11 F/A-18 A and C to Lot 17
    F/A-18C aircraft capability with digital communications and tactical
    data link. The Marine Corps anticipates programmed upgrades to enhance
    the current capabilities of the F/A-18C/D with digital communications,
    tactical data link and tactical reconnaissance systems. This upgrade
    ensures that our F/A-18s remain viable and relevant in support of
    TACAIR Tactical Air Integration and Expeditionary Maneuver Warfare. The
    Marine Corps expects the F/A-18A+ to remain in the active inventory
    until 2015. The Marines are also employing the Litening targeting pod
    on the F/A-18 A+ and D aircraft in OIF. When combined with data link
    hardware, the Litening pod provides real time video to ground forces
    engaged with the enemy. The capabilities of the Litening pod with data
    link are highly effective for Marine Corps expeditionary F/A-18
    operations. The fiscal year 2006 budget request also includes
    procurement of Center Barrel Replacements to extend service life of F/
    A-18 A/C/Ds 7 years to meet fleet inventory requirements until 2022.
    Integrated Defensive Electronic Countermeasures (IDECM)
        The fiscal year 2006 budget reflects $7.6 million in RDT&E to
    continue the development of the IDECM Block III (ALQ-214 w/the ALE-55
    (fiber optic towed decoy)) that will undergo Operational Test and
    Evaluation (OPEVAL) in fiscal year 2006. Additionally, $86.5 million in
    Aircraft Procurement funding is included for the procurement of 55 ALQ-
    214 systems.
    EA-18G
        The E/A-18G continues development as the Navy's replacement for the
    EA-6B Airborne Electronic Attack (AEA) aircraft. The Navy is using the
    F/A-18E/F multi-year contract to buy four Systems Design and
    Development aircraft in fiscal year 2006 to install and integrate
    Northrop Grumman's in-production Improved Capabilities (ICAP)-III
    Airborne Electronic Attack (AEA) system. These aircraft will support
    EA-18G operational testing and allow the department to deliver the next
    generation AEA capability at reduced cost and in the shortest possible
    timeframe. The Marine Corps initiated studies to examine options for
    replacing their electronic attack aircraft.
        The fiscal year 2006 budget request reflects $409 million for
    Systems Design and Development. The Systems Design and Development
    continues on schedule with construction underway of the two development
    aircraft. First flight is scheduled for the fourth quarter of fiscal
    year 2006. A total quantity of 30 systems will be procured in low rate
    initial production (LRIP) with a planned fiscal year 2009 initial
    operational capability (IOC) and fiscal year 2012 final operational
    capability (FOC). The EA-18G will replace carrier-based Navy EA-6B
    aircraft by 2012.
    AH-1Z/UH-1Y
        The H-1 Upgrades Program will remanufacture 180 AH-1W and 100 UH-1N
    helicopters into state-of-the-art AH-1Z and UH-1Y models. The fiscal
    year 2006 budget requests $307.5 million APN funds to procure 10 UH-1Y/
    AH-1Z aircraft and $42.0 million RDT&E funds to complete the H-1
    Upgrades Engineering and Manufacturing Development phase. The
    development program is over 90 percent complete with five aircraft
    being readied for OPEVAL, which will begin this summer. Work on the
    first LRIP lot, awarded to Bell Helicopter in December 2003, is
    progressing well and the second LRIP lot will be awarded by the end of
    March 2005. The program is seeking opportunities to reduce unit cost
    and minimize the negative impact the remanufacture strategy could have
    on ongoing military operations. Regarding the latter point, we
    anticipate that some number of airframes will be newly fabricated
    instead of remanufactured in order to reduce the amount of time
    aircraft would otherwise be out of service. The optimum mix of
    remanufactured and newly fabricated aircraft is being evaluated with
    the results to be reflected in future budget requests.
        The H-1 Upgrade Program is a key modernization effort designed to
    resolve existing safety deficiencies, enhance operational effectiveness
    of both the AH-1W and the UH-1N, and extend the service life of both
    aircraft. The program will provide 100 UH-1Ys and 180 AH-1Zs with
    10,000 hour airframes. Additionally, the commonality gained between the
    AH-1Z and UH-1Y (84 percent) will significantly reduce life-cycle costs
    and logistical footprint, while increasing the maintainability and
    deployability of both aircraft.
    AV-8B
        The fiscal year 2006 budget requests $15.5 million RDT&E funds to
    support development of the Engine Life Management Plan (ELMP)/
    Accelerated Simulated Mission Endurance Testing, Tactical Moving Map
    Display, and Aircraft Handling initiatives. The fiscal year 2006 budget
    also requests $36.6 million procurement funding for Production Line
    Transition efforts, procurement of Open Systems Core Avionics
    Requirement, ELMP upgrades, and the Readiness Management Plan which
    addresses aircraft obsolescence and deficiency issues associated with
    sustaining the AV-8B until JSF transition.
    EA-6B
        The fiscal year 2006 budget request of $120.6 million reflects the
    total budget for wing center section modifications and procurement of
    three Improved Capability (ICAP) III systems. The aging EA-6B has been
    in ever-increasing demand as DOD's only tactical radar jamming aircraft
    that also engages in communications jamming and information operations.
    EA-6B operational tempo has continued at extremely high levels during
    the past year. Safety considerations, due to wing center section and
    outer wing panel fatigue, have reduced aircraft available to the fleet
    from 95 to 85. Aircraft inventory is projected to return to above 95 by
    the end of fiscal year 2005. Program priorities are current readiness
    and successful fleet introduction of the ICAP III selective reactive
    jamming system.
    Precision-Guided Munitions (PGM)
        The U.S Navy weapons programs of the 21st century are evolving to
    address the challenges of a dynamic and unpredictable enemy. New weapon
    systems are planned or have been developed and delivered to the
    combatant commanders to provide new options to engage enemy forces in
    support of the global war on terror. The Navy's fiscal year 2006 budget
    supports PGM programs that continue to allow domination of the maritime
    environment, support in-land operational forces, and enhance the
    overall department strategy to deter and dissuade potential adversaries
    while supporting our allies and friends.
    Joint Direct Attack Munitions (JDAM)
        JDAM has been the Department's weapon of choice for OEF/OIF. In
    October 2004, the U.S. Navy provided an Early Operational
    Capability(EOC) and accelerated deliveries for a 500 lb. JDAM variant
    (GBU-38) for Navy F/A-18 A+/C/D platforms. After approving production
    of this variant, we immediately deployed it in order to meet an urgent
    warfighter need to employ precision munitions with limited collateral
    effects in the congested urban environments of Iraq. The fiscal year
    2006 budget request of $82.6 million procures 3,400 DON JDAM tail kits
    for all variants, thus supporting all current and projected warfighter
    requirements. The fiscal year 2006 budget reduces procurements to 1,500
    kits per year starting in fiscal year 2008; however, the Department
    will closely monitor all JDAM variant requirements and combat
    expenditures in order to make any necessary adjustments.
    Joint Standoff Weapon (JSOW)
        A new variant of the JSOW called JSOW-C was approved for Full Rate
    Production in December 2004. Similar to the new 500 lb. JDAM program,
    this capability is in demand by the warfighter to provide new options
    for precision attack against point targets vulnerable to blast
    fragmentation effects and hardened targets. The new JSOW-C variant
    employs an augmenting charge with a follow-through penetrator bomb for
    hard targets that can also be set to explode both payloads
    simultaneously. This lethal package is coupled with an Imaging Infrared
    Seeker and GPS/INS to provide the standoff precision attack capability
    in demand by the warfighter. The fiscal year 2006 budget fully funds
    JSOW-C production and support. It also shifts funding from production
    of a submunition variant of JSOW to all JSOW-Cs until there is
    resolution of unexploded battlefield ordnance issues that are of
    concern to the Department and our allies. The Navy/contractor JSOW Team
    is dedicated to reducing acquisition costs. Specifically, we are
    expecting to achieve a unit cost reduction of more than 25 percent by
    2006 due to the implementation of lean initiatives, innovative
    processes, and engineering changes.
    Advanced Anti-Radiation Guided Missile (AARGM)
        The fiscal year 2006 budget request continues the development of a
    next generation defense suppression weapon system, the AARGM. AARGM
    ensures continued air dominance and multi-mission flexibility to the F/
    A-18 and EA-18 aircraft across suppression and defeat of enemy air
    defenses, strike, and electronic warfare missions. The Department
    recently entered into international partnership negotiations with our
    North Atlantic Treaty Organization (NATO) partner Italy, and we plan an
    Initial Operating Capability for F/A-18 C/D during fiscal year 2009.
        The Navy is dedicated to developing new means by which the Joint
    warfighter can defeat time critical strike targets in anti-access
    scenarios, address counter-weapons of mass destruction (WMD) missions,
    and improve our ability to fight the global war on terror. Towards that
    end, we are working with the other Services, the Joint Chiefs of Staff,
    and the combatant commanders to begin studies that may afford
    opportunities for the possible development of the next generation of
    affordable weapons. We envision that these weapons may allow us to
    employ long-range standoff weapons in direct attack roles via advanced
    high-speed propulsion and deployment of a variety of lethal packages.
    Tactical Tomahawk (TACTOM)
        The fiscal year 2006 budget supports the Navy's commitment to
    replenish our precision-guided munitions inventories utilizing the
    Navy's first MYP contract for a weapon. TACTOM entered Full Rate
    Production in August 2004. We completed our second and final
    remanufacture program, converting all available older Tomahawk
    airframes to the latest Block III configuration. The Firm Fixed Price
    5-year contract (fiscal years 2004-2008) for TACTOM will save the
    taxpayer 12 percent over annual procurements. TACTOM's advanced design
    and manufacturing processes have cut procurement cost to $729,000 or
    half the cost of a Block III missile and maintenance costs by half of
    the cost of its predecessor. TACTOM provides a more capable missile
    with a 15-year product warranty and a 15-year recertification interval.
    This approach mitigates price growth of follow-on procurements by
    providing incentive for the contractor to manage for obsolescence,
    which will control future price growth on follow procurements.
                                    sea base
    KC-130
        The fiscal year 2006 budget requests $1,093 million for 12 KC-130J
    Hercules aircraft. These aircraft will be procured under an existing
    Air Force multi-year contract. The Marine Corps has taken delivery of
    16 KC-130J aircraft to date, with 5 more deliveries scheduled for
    fiscal year 2005. Twelve aircraft are planned for procurement in fiscal
    year 2006 to bring the total number of KC-130J aircraft to 33. The KC-
    130 fleet once again proved itself as a workhorse during operations in
    Iraq. The KC-130J provides major enhancements to the current fleet of
    KC-130s, extending its range, payload, and refueling capabilities. The
    first KC-130J squadron (12 aircraft) has achieved IOC and will
    immediately be deployed in support of the global war on terror. Bold
    steps in simulator training and joint flight instruction place the KC-
    130J program on the leading edge of the transformation continuum.
    Additionally, we have continued to ensure the tactical capability of
    our existing KC-130 F, R, and T series aircraft by installing night
    vision kits and upgraded aircraft survivability equipment.
    C-40
        The fiscal year 2006 budget requests $10.3 million to support
    delivery of C-40 (Boeing 737-700C) aircraft previously funded. The C-40
    replaces the aging C-9 aircraft providing intra-theater logistics
    support. To date, the Navy has taken delivery of eight C-40s with one
    more on contract. An additional six are planned for procurement in the
    FYDP.
                 command, control and net-centric capabilities
    Joint Tactical Radio System (JTRS)
        We are working with the Air Force to successfully converge
    development of Navy and Air Force versions of JTRS (JTRS-AMF) to
    provide a common acquisition approach. Closely coupled with the JTRS
    Program and building on the initial Multi-functional Information
    Distribution System (MIDS), we have developed a promising joint effort
    with the Air Force that will significantly improve interoperability to
    the cockpit and maintain alignment with our tactical radio transition
    to the JTRS environment. This effort also has four international
    partners who are paying participants in the program.
    E-2C and Advanced Hawkeye (AHE)
        The E-2C AHE is a critical enabler of transformational
    intelligence, surveillance, and reconnaissance, providing a robust
    overland capability against current and future cruise missile-type
    targets. The AHE program will modernize the E-2 platform by replacing
    the current radar and other system components to maintain open ocean
    capability while adding transformational surveillance as well as
    theater air and missile defense capabilities. The fiscal year 2006
    budget requests $249 million to procure two TE-2Cs in the third year of
    a 4-year MYP. This effort will keep the production line viable while
    the AHE, formerly known as the Radar Modernization Program, continues
    spiral development toward an Initial Operational Capability in fiscal
    year 2011. The AHE program continues to execute the SDD program of
    record. Further, OA standards are being integrated into E-2C aircraft
    and AHE program to enhance interoperability with DOD systems.
    Aerial Common Sensor (ACS)/EP-3
        The fiscal year 2006 budget requests $133.6 million of RDT&E for
    joint ACS aircraft development. ACS is an Army Lead program that
    entered the SDD phase in July 2004. The Army awarded a contract to
    Lockheed-Martin for a commercial-derivative Embraer ERJ-145 aircraft.
    ACS replaces the Army's Guardrail and Airborne Reconnaissance Low
    systems as well as the Navy's EP-3E aircraft. It will provide a
    transformational multi-intelligence platform capable of providing
    strike support to the warfighter. The Navy became a fully integrated
    partner in February 2005. The fiscal year 2006 budget requests $55.1
    million to modernize and sustain the EP-3E fleet until ACS IOC of 2012.
    Unmanned Aerial Vehicles (UAV)
        The global war on terror continues to place emphasis on the
    importance of UAVs. The fiscal year 2006 budget request reflects our
    commitment to a focused array of UAVs that will support and enhance
    both surveillance and strike missions with persistent, distributed,
    netted sensors.
        Fire Scout UAV
        The fiscal year 2006 budget requests $77.6 million to continue
    development of the Fire Scout UAV. The Fire Scout is a Vertical Takeoff
    and Landing Tactical UAV (VTUAV) designed to operate from all air-
    capable ships, carry modular mission payloads, and operate using the
    Tactical Control System and Tactical Common Data Link. The Fire Scout
    UAV will provide day/night real time ISR and Targeting as well as
    communication-relay and battlefield management capabilities to support
    core Littoral Combat Ship (LCS) mission areas of ASW, MIW, and ASUW for
    the naval forces. Upgrades will include a four-bladed rotor and
    increased payload capacity. Upgraded Fire Scout capability will be
    fielded with LCS Flt 0.
        The Army has selected the Fire Scout for their Army Future Combat
    System Class IV UAV. Numerous similarities in hardware components,
    testing, logistics, training, software and support requirements, offer
    potential for overall program cost reduction which would clearly
    benefit both the Army and Navy. We expect to sign a memorandum of
    agreement (MOA) with the Army for the acquisition of the Fire Scout
    airframe, and selected subsystems on a single Navy contract. The
    airframes will be subsequently modified to Service specific
    requirements under separate existing Navy and Army contracts. The goal
    is to maximize common support opportunities, eliminate redundant costs,
    maximize common avionics and sensor configuration to promote
    interoperability, and eliminate redundant tests.
        Vertical Unmanned Air Vehicle (VUAV)
        UAVs have played a critical role in recent operations and are also
    a key element of our transformation. The Marine Corps is pursuing the
    replacement of its almost 20-year-old Pioneer UAV system that has flown
    over 6,950 hours in support of OIF highlighting the criticality of
    these systems for our Marine forces. Requirements for VUAV are being
    developed in consonance with Ship to Objective Maneuver concepts from
    Expeditionary Maneuver Warfare, the naval concepts of Sea Basing and
    Seapower 21, and with lessons learned from recent operational
    experience. The fiscal year 2006 budget requests $9.2 million to
    evaluate the Eagle Eye UAV, currently being developed by the United
    States Coast Guard in connection with its Deepwater Program. The
    Department will also continue to evaluate the capabilities of Fire
    Scout for this mission, seeking commonality within the Department.
        Joint Unmanned Combat Air System (JUCAS)
        The fiscal year 2006 budget realigns funding to the Air Force to
    establish a Joint Program Office with Navy representation to advance
    the JUCAS Program. The Department is committed to a JUCAS initiative,
    developed in partnership with the Air Force and Defense Advanced
    Research Projects Agency (DARPA). The Navy and the Air Force have
    defined a common set of science and technology requirements that
    recognize the unique needs of each Service that will form the basis for
    developing air vehicles that will contribute to a joint warfighting
    concept of operation.
                         other significant capabilities
    Presidential Helicopter Replacement Aircraft (VXX)
        The fiscal year 2006 budget requests $936 million RDT&E for SDD
    efforts for the VXX program. The goal of this accelerated program is to
    introduce a new Presidential helicopter by October 2009. The VXX
    program will utilize an evolutionary acquisition approach through a
    two-part incremental development to deliver a safe, survivable and
    capable vertical lift aircraft while providing uninterrupted
    communications with all required agencies. The Department completed a
    Milestone B/C Defense Acquisition Board on January 13, 2005, and on
    January 28, 2005, a contract was awarded to LMSI to proceed into SDD
    and Pilot Production of the first increment aircraft.
    T-45
        The fiscal year 2006 budget requests $239 million for six T-45
    aircraft. The request also includes funding to start Required Avionics
    Modernization Program (RAMP) installations.
           sea trial and sea enterprise in action: operation respond
        In support of the I Marine Expeditionary Force's (I MEF) return to
    Iraq scheduled to begin March 2004, and in support of deployed Marines
    in Afghanistan, the Secretary of the Navy established a formalized
    process and action team, Operation Respond, to rapidly respond to
    technological and materiel requirements generated from deployed
    marines. A senior Navy and Marine Corps Team co-chaired by the
    Assistant Secretary of the Navy (Research, Development, and
    Acquisition) and the Deputy Commandant for Combat Development will
    review and coordinate technical and materiel requirements for deployed
    units and utilize the technical and engineering expertise throughout
    the DON and industry to expedite the best solutions available to
    counter rapidly evolving threats. This process served I MEF well in the
    initial year of deployment to OIF and OEF. The DON is establishing a
    Naval Innovation Lab environment to develop innovative ways to meet
    emerging technology problems within the global war on terror. This
    effort under the Assistant Secretary of the Navy (Research,
    Development, and Acquisition) (ASN (RDA)) will leverage and expand the
    current roles and capabilities of our established requirements
    generation and materiel development and acquisition commands in order
    to better respond to innovative enemy threats.
    Counter-Improvised Explosive Devise (IED) Technology, Equipment and
            Operations
        The Department has reprogrammed over $28.0 million in fiscal years
    2004 and 2005 for the testing, assessment and fielding of technology
    and equipment to counter and exploit the IED threat. Specific focus
    areas include joint, manportable explosive ordnance disposal (EOD) and
    intelligence, surveillance, and reconnaissance robots, IED electronic
    countermeasures, backscatter X-Ray systems, specialized search dogs and
    establishing and maintaining an IED countermeasures group at our Naval
    EOD Technical Division, Indian Head, Maryland. This group is
    responsible for support to the joint, forward-deployed and continental
    United States (CONUS)-based IED exploitation cells, analysis of
    tactical and technical IED threats, development and dissemination of
    EOD threat advisories and EOD tactics, techniques and procedures, and
    provision of technical and training support to EOD operational teams.
    The Marine's IED Working Group coordinates closely with Naval EOD
    Technical Division, the Army's IED Task Force, and the Joint IED Defeat
    Integrated Process Team.
    Intelligence, Surveillance, and Reconnaissance (ISR)
        The Marine Corps is engaged in initiatives to provide enhanced ISR
    capabilities in theater. The Dragon Eye UAV is in full-scale fielding
    and the Marine Corps is working to conduct an Extended User Assessment
    of the Silver Fox UAV system. The Marine Corps is in the process of
    creating requirements for a Tier II UAV system to provide an organic
    UAV to the Infantry Regiment. The I MEF Scan Eagle services lease had
    codified a capability gap at this echelon and the Marine Corps
    Warfighting Lab is coordinating with Marine Corps Combat Development
    Command to find a long-term solution. The Marines have also employed
    aerostat balloon platforms to provide persistent ISR capability.
    Aircraft Survivability Equipment (ASE)
        As a result of Army aviation lessons learned, Navy and Marine Corps
    aviation Staffs undertook a coordinated rapid fielding initiative of
    more than $152 million to upgrade ASE for Marine aviation units,
    preparing to deploy to Iraq in 2004. These efforts focused on ASE to
    counter infrared man-portable missiles and small arms being employed by
    insurgents in more advanced anti-aircraft tactics. As a result of the
    focused efforts by our Navy and Marine Corps aviation maintenance teams
    and hard-working contractors, every Marine Helicopter engaged in OIF II
    is today supporting combat operations with upgraded ASE. All deploying
    aircraft receive the ``V2'' upgrade to the AAR-47 Missile and Laser
    Warning Set and the new ALE-47 Countermeasure Dispensing systems; AH-1W
    aircraft received IR suppressor exhaust modifications to reduce their
    signatures; AH-1W, UH-1N, and KC-130 aircraft have been equipped with
    the more advanced APR-39AV2 radar detection system; CH-53E aircraft
    received interior ballistic armor and new ramp-mounted GAU-21 .50
    caliber machine guns; existing IR jamming systems on the CH-46E and KC-
    130 aircraft were upgraded. CH-46 aircraft received the M-240 7.62
    caliber machine guns, lightweight armor, and lightweight armored
    cockpit seats. Marine Aviation still requires $23 million to complete
    ASE modernization on its assault support aircraft utilized to fight the
    global war on terrorism.
                                    summary
        Our mission remains taking the fight to our enemies. The increasing
    dependence of our world on the seas, coupled with growing uncertainty
    of other nations' ability or desire to ensure access in a future
    conflict, will continue to drive the need for naval forces and the
    capability to project decisive joint power by access through the seas.
    The increased emphasis on the littorals and the global nature of the
    terrorist threat will demand the ability to strike where and when
    required, with the maritime domain serving as the key enabler for U.S.
    military force.
        Accordingly, we will execute the global war on terror while
    transforming for the future fight. We will continue to refine our
    operational concepts and appropriate technology investments to deliver
    the kind of dominant military power from the sea envisioned in Sea
    Power 21. We will continue to pursue the operational concepts for
    seabasing persistent combat power, even as we invest in technology and
    systems to enable naval vessels to deliver decisive, effects-based
    combat power in every tactical and operational dimension. We look
    forward to the future from a strong partnership with Congress that has
    brought the Navy and Marine Corps Team many successes today. We thank
    you for your consideration.

        Senator McCain. Thank you very much,
        Admiral Sestak. Thank you.

     STATEMENT OF VADM JOSEPH A. SESTAK, JR., USN, DEPUTY CHIEF OF
        NAVAL OPERATIONS FOR WARFARE, REQUIREMENTS, AND PROGRAMS

        Admiral Sestak. Mr. Chairman, I have no statement, except
    to say I'm standing by for your questions.
        Senator McCain. Thank you.
        General Gorenc.

        STATEMENT OF MAJ. GEN. STANLEY GORENC, USAF, DIRECTOR,
               OPERATIONAL CAPABILITIES AND REQUIREMENTS

        General Gorenc. I, also, have no statement. It's an honor
    for me to be here and provide any information that you need, as
    far as oversight.
        Senator McCain. General Post.

      STATEMENT OF BRIG. GEN. MARTIN POST, USMC, ASSISTANT DEPUTY
                        COMMANDANT FOR AVIATION

        General Post. Sir, I have no statement, and look forward to
    your questions.
        Senator McCain. Well, thank you very much.
        Secretary Wynne, I've been briefed that there are
    alternative aircraft for intra-theater aircraft missions. Has
    an analysis of alternative been completed for intra-theater
    aircraft missions?
        Mr. Wynne. Well, sir, I believe in the mobility capability
    study that's underway, I don't know that there's going to be a
    comprehensive analysis of alternatives for completing that. I
    think the mobility capability study more addresses what's
    available right now. A true analysis of alternatives would have
    considered things that might not be available right now. If
    your question specifically addresses the C-130J, sir, that was
    a decision made in 1996, to proceed, and I'd have to go back
    and examine the record.
        Senator McCain. What's the cost to terminate the C-130J
    program? Do you have an idea of that?
        Mr. Wynne. No, sir, although we're getting pretty good at
    cancellation, with the Crusader and the Comanche. I know that
    there's direct cost for the plant. I can rack up the categories
    for you, but I'd be loathe to negotiate with the contractor
    here in this meeting.
        Senator McCain. Would you, even if it's in a confidential
    manner, communicate at least a round number? Because I think
    that's going to have some effect on the decision on Congress'
    part as to the future of the C-130J.
        I just want to mention, there, I have a memo here from Mr.
    Mike Reed that was sent to Lee Wayne, who, I take it, are in
    Lockheed Martin. ``Wayne, as a result of discussions today with
    the C-130J directors, including the director for contracts, I'm
    instructing you to withhold all requests for data to the SPO or
    anyone else that is considered contractual until requests are
    levied by a contracts letter.'' Have you asked for information
    from Lockheed Martin concerning the C-130J?
        [The information referred to follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Wynne. I have not personally asked them for the
    information, sir.
        Senator McCain. Has the Air Force?
        General Gorenc. No, sir.
        Senator McCain. Well, given the fact that it's escalating
    in cost, shouldn't we display some curiosity?
        Mr. Wynne. Yes, sir. I think the fact of the escalating
    costs is somewhat disturbing, and, of course, the issue before
    us now is so stark, being a binary decision in the President's
    budget 2006, relative to continuation or non-continuation, but
    I believe that the insistence on moving forward FAR Part 15 for
    changes is a good sign.
        Senator McCain. I was just going to mention--Secretary
    Harvey announced yesterday that the Future Combat System (FCS)
    would now fall under FAR 15. I certainly applaud your decision
    to make any further acquisition of C-130Js under those same
    parameters. I met with the Chief Executive Officer (CEO) of
    Lockheed Martin, and I asked him about the pricing data. He
    said he would get back to me. He hasn't bothered to further
    communicate. We may have to ask the Committee to subpoena this
    information, because I think we need to know it, as we
    determine what happened. I don't like to use that, but if
    Lockheed Martin continues to stonewall us, I don't see how we
    can carry out our responsibilities.
        General Gorenc. Yes, sir.
        Senator McCain. General Gorenc, you've had to ground some
    C-130s, right?
        General Gorenc. Yes, sir.
        Senator McCain. Possibly, or probably, there's a scenario
    of the C-130J being canceled. What can we do to ensure the
    capability to provide intra-theater airlift, et cetera?
        General Gorenc. Yes, sir. I think obviously we're going to
    have to look at it very closely. It's a capability that we
    want. It's a capability that we need. As I heard the panel
    before me, just to make sure that everything is straight with
    the rest of those numbers, there are two C-130Js in the
    theater. They are flying missions and have flown missions since
    December.
        Senator McCain. Aren't those missions only in a permissive
    environment?
        General Gorenc. Sir, they are doing exactly the same thing
    that the other C-130s are doing within the area. So they've
    flown well over 413 sorties.
        Senator McCain. Do they have airdrop and troop-drop
    capability?
        General Gorenc. Sir, those are the things that have not
    been asked of the other individuals yet. However, they are
    working to resolve the long and short variance to make sure
    that that is fully tested. As a matter of fact, I have
    indications that tests for the drop for the short aircraft, in
    fact, has been fully completed. The long version should also be
    done very quickly. The Army has come onboard that that is
    perfectly safe and acceptable. They have done 75 of 75 heavy
    drops right now, and that is full and ready to go, and they
    should be released as part of the phase-two report.
        So, the point that was made earlier by Mr. Chambliss with
    regards to how much effort is really being done by the Air
    Force to ensure that all issues are being addressed, I think,
    is very valid. The fact of the matter is that it is being done.
        Senator McCain. Well, it's not exactly a brand-new
    aircraft, and we've gone from 1995, $33 million----
        General Gorenc. Yes, sir.
        Senator McCain. 1998, $50 million; 2004, $67 million. This
    is basically a cargo aircraft--we're getting into one heck of
    an expensive airplane, at $67 million a copy for an aircraft
    that fundamentally is, what, Secretary Wynne, 30, 40 years old?
        Mr. Wynne. Yes, sir, this is a pretty good upgrade, but the
    fundamental design.
        Senator McCain. Doesn't that raise some red flags with you,
    when an aircraft, in 10 years, goes from $33 million to $67
    million, and we're not even privy to the basic information,
    because it's being advertised as a commercial aircraft, and
    there is no commercial market for it. I'm told that Air Gabon
    flies two C-130s. No one really realistically expected it, when
    the decision was made to list this as a ``commercial
    aircraft.''
        Do you know, General, of any commercial enterprise,
    airline, nation, or anybody who is contemplating buying the C-
    130J for commercial purposes?
        General Gorenc. Commercial purposes? Sir, I don't know,
    personally. But I can say right now that you do have the U.K.
    that has 25 that they're flying. You also have Italy that has
    22.
        Senator McCain. I was talking about commercial purposes.
        General Gorenc. Oh, no. Commercial, no. But, sir, may I
    also add that capability-wise--and, again, I'm not an airlifter
    by trade, but I am aware that, for example, 33 percent increase
    in cargo capability, increased speed--it has allowed it, in
    some cases, to, in fact, do, in one day, what a C-130E, for
    example, in the theater, would take two.
        Senator McCain. Well, that's marvelous. What was the cost
    of a C-130E, General? Do you remember?
        General Gorenc. I don't.
        Senator McCain. I can tell you. It was around $5 million to
    $10 million. So it does the work of five, at seven times the
    price. So, we always have to have some kind of balance here. I
    just think the costs have--I've seen testimony before this
    subcommittee that never contemplated that kind of price level.
    We don't have unlimited dollars. We're going to have to make
    tough decisions here, and I, frankly, have great respect for
    Secretary Rumsfeld and those decisionmakers in the Pentagon who
    had to make some very tough decisions here. So, we're trying to
    try to help sort it out, which is part of our responsibility.
        Finally, Secretary Wynne, Congress approved $100 million to
    be dedicated to the KC-135 replacement fund. You provided
    specific and, in my opinion, sound and well-reasoned guidance
    as to how the tanker analysis of alternatives was to be
    conducted. Presumably the use of the money in the KC-135 tanker
    replacement fund will rise from recommendations set forth in
    the analysis of alternatives (AOA). In other words, that money
    will not be used for an approach to recapitalize other
    refueling tankers that's not specifically supported by the AOA.
    Is that correct?
        Mr. Wynne. I understand, for that $100 million, sir, that
    there is specific focus language that surrounds it. What the
    Air Force has done in order to respond to my letter is, in
    fact, to reprogram a sum amount of money to specifically fill
    out the remainder of the AOA. If it would come out differently
    than, perhaps, was expected, I would expect that they would
    have to reprogram some additional funds in order to follow
    those paths.
        Senator McCain. I thank you.
        Senator Lieberman.
        Senator Lieberman. Thanks, Mr. Chairman. Thanks to the
    witnesses for being here this afternoon.
        Secretary Wynne, since our Subcommittee's hearing last
    year, the Air Force has completed initial operating tests and
    evaluation for the F/A-22 aircraft, the Raptor, which showed
    that the aircraft is operationally effective, which, I take it,
    means it basically works as advertised, and potentially
    operationally suitable, meaning that it has not yet met the
    goals for ease of maintenance and support.
        I wanted to ask you whether the test rating of
    ``potentially operational--operationally suitable'' gives you
    concern that the Air Force will be able to meet its goals of
    achieving these significant operating and cost savings.
        Mr. Wynne. In fact, Senator Lieberman, I'm pleased to
    answer that question.
        Senator Lieberman. Please.
        Mr. Wynne. One of my favorite kinds of people is
    maintainers. I think that the testers really should stand in
    for the maintenance people, because they're the only people
    between them and doing the work.
        The ``potentially suitable,'' effectively, was because you
    were going to have to have more people in order to achieve the
    operational readiness rate that was expected.
        Senator Lieberman. Right.
        Mr. Wynne. The Air Force is fully committed to essentially
    fund through the final operational test and evaluation (FOT&E)
    and take another reading during FOT&E, of all of the major
    findings for the maintenance and suitability. So, that makes me
    feel like SRO they'll be far closer. It may still be a
    potential rating, but it will be far closer to what they were
    supposed to achieve in the reliability and spares area.
        Senator Lieberman. Okay, that's encouraging. I'd like to
    keep in touch on that.
        On another aspect of the program, Mr. Secretary, in 1997--
    so you're not accountable here--the Air Force testified to the
    subcommittee that annual operating and support costs of the F/
    A-22 would be roughly 47 percent less than those for the F-15C
    aircraft that the F/A-22 was intended to replace. The Air
    Force, at that time, told Senator Glenn that the 22 would cost
    $56.3 million per year to operate. Do you have any idea what
    the current estimates are, what the costs will be to operate
    the F/A-22?
        Mr. Wynne. Sir, I think the only one I know is the
    effectiveness comparison. There was--actually, in 1992, there
    was an acquisition decision memorandum (ADM) that came out that
    specified that the F-22 should be twice as good as the F-15. We
    did that comparison test, even against the modern F-15, and it
    was far more than twice as good.
        Now, your question is against--again, that's
    effectiveness--your question is to suitability.
        Senator Lieberman. That's right.
        Mr. Wynne. I really have not----
        Senator Lieberman. Twice as good, in some sense, is as
    originally advertised at half the operating cost.
        Mr. Wynne. Yes, it was supposed to be at half the operating
    cost. We have made some improvements in maintenance, but I have
    not calculated the specifics. There is a strange quantification
    that I've been familiar with, which is the number of C-17s it
    takes to carry the squadron overseas. I have to get back to you
    with the specifics on it.
        [The information referred to follows:]

        Prior to the F/A-22 Full Rate Production Milestone in March 2005,
    the Air Force Cost Analyses Agency (AFCAA) updated their comparison of
    F/A-22 and F-15C operating and support (O&S) costs. Based on mid-life
    costs for the F-15C and estimated mid-life cost for the F/A-22, the Air
    Force concluded that the F/A-22 and F-15C O&S costs per flight hour
    were almost equal.

        Senator Lieberman. I'd appreciate that, if you would, and
    that's fine.
        General Post, let me see if I can get you into this one,
    talking about lift. I want to focus on the Marine Corps
    requirements. The Navy and the Marine Corps have decided the
    Department should buy new helicopters to replace the existing
    CH-53E fleet, rather than re-manufacturing the existing
    helicopters. Would this CH-53(X) program meet the Marine Corps
    requirements, as you understand them?
        General Post. Yes, sir, absolutely. The requirements for
    the heavy-lift requirement, HLR, as the program is known, is
    validated by both the Marine Corps and the Joint Requirements
    Oversight Council (JROC) here, in December 2004. Of course,
    there was an AOA done previous to that, that made the
    determination that a new-build was the most cost-effective way
    to go for that program.
        From a requirement standpoint, with the current utilization
    of our CH-53 Echo (CH-53E), the high maintainability cost, as
    far as joint maintenance man-hours per flight hour, and the
    cost per flight hour, of that airplane, and how we're utilizing
    that aircraft, about 30 percent of our force is on the ground
    in Iraq right now, flying about two-and-a-half times the rate
    of normal peacetime utilization. So, when it comes to the
    future as we look downrange, especially for our future
    warfighting concepts, this is a required capability for the
    United States Marine Corps, specifically from a seabasing
    standpoint in the future.
        Senator Lieberman. As far as you know, there are no other
    reasonable alternatives for meeting this requirement than the
    53(X)?
        General Post. No, sir, not that I'm aware of.
        Senator Lieberman. I understand that the Navy is sitting on
    some of the current research-and-development funding for the
    CH-53(X), and has not signed a contract for the fiscal year
    2005 risk-reduction effort. Secretary Young, I wonder if I
    could ask you why the Navy has not signed that contract yet?
        Mr. Young. Senator, I agreed to release $20 million, and
    then I recently, in the last month, agreed to release another
    $30 million for the initial design and assessment of what this
    program will cost. I'm very concerned that the cost be
    reasonable. I understand the requirements are indeed valid, but
    at some point we have to rationalize that against finite budget
    resources. I have not agreed to let the program have full
    green-light approval to proceed until we assess the costs. Over
    the last 6 months, the costs on the program have grown
    substantially. We're going to have to sit down and have a
    serious discussion about requirement versus cost.
        Senator Lieberman. Okay. So you accept the requirement,
    obviously, and that this is the existing alternative to meet
    the requirement. Your hesitation is, at this point, on cost.
    But you have let some of that money go.
        Mr. Young. Yes, sir.
        Senator Lieberman. Okay. We'll keep in touch with you on
    that.
        Secretary Wynne and Secretary Young, I wanted to go back to
    a reference that was made by someone here earlier to a comment
    that Secretary England recently made. Of course, now everything
    Secretary England said takes on added significance, right? He
    was quoted as supporting integration of tactical aviation
    across the Department of the Navy and the Department of the Air
    Force. Obviously, we, here, are familiar with the integration
    efforts that have gone on between the Navy and the Marine
    Corps, which involve additional carrier-wing deployments for
    Marine Corps F-18 squadrons and other changes in force
    deployment that actually did result in reductions in the
    numbers of F/A-18 and the Joint Strike Fighter aircraft that
    the Navy intends to buy.
        I wonder whether either of you, Secretary Wynne or
    Secretary Young, have any view of the pluses or minuses that
    might be associated with integration, the kind of integration
    across the Air Force and Navy that I gather Secretary England
    was referring to?
        Mr. Wynne. I can only say that we are really fostering a
    joint fight. We're fostering an opportunity for the Navy,
    Marine Corps, and the United States Air Force to interact not
    only with themselves, but also with their coalition partners.
    This, frankly, gave rise to an idea that, under restricted
    resources, maybe there's some analysis to be performed, which
    is probably what Secretary England was talking about.
        As a point of fact, I think the initial lay-in for the Navy
    and the Marine Corps was essentially based on the reliability
    statistics that were extant for their current air fleet.
        Senator Lieberman. Right.
        Mr. Wynne. The targets that you spoke about for F-22, they
    have actually taken tougher targets for the Joint Strike
    Fighter reliability, which, in fact, would allow a little bit
    of more consolidation of the fleet, just because you're going
    to improve your operational readiness rate and maintenance. One
    of the larger figures in that consolidation of the United
    States Navy and Marine Corps was, in fact, taking advantage of
    the reliability statistics and the consolidation there.
        We're already starting to think about consolidated training
    of pilots. So this is just, if you will, another extension of
    it. But I have no idea, sir, as to what he has planned. He, of
    course, is prospective, so he can't really plan which we all
    know.
        Senator Lieberman. Sure.
        Mr. Wynne. But we have our ear to the ground and are trying
    to figure it out.
        Senator Lieberman. Okay.
        Secretary Young, what do you think, are there ways to
    achieve the missions more efficiently by the possibilities of
    integration across technical aviation in these two Services?
        Mr. Young. Secretary England is certainly conscious of the
    work that Admiral Sestak's team has done that points to our
    strike capability that the chairman alluded to earlier.
    Secretary England has frequently talked about it. Now, one
    plane strikes multiple targets, which, even going back to the
    Gulf War, wasn't the case.
        Senator Lieberman. Right.
        Mr. Young. We have great precision and multiple-target
    capability. We did exactly what Secretary Wynne said, that is,
    we have improved our maintenance practices to reduce how many
    aircraft are in the pipeline for overhaul. We're trying to move
    them through more quickly. We reduced the number of aircraft
    needed to perform the missions, and better integrated the
    assumptions of Navy and Marine Corps jointly performing those
    missions. I believe the Secretary thinks that could be looked
    at, at a Department level. For the Navy, it paid great
    dividends. It was also testified by the first panel, we saved
    $35 billion through 2020, and cut 497 planes out of the
    program--arguably, planes that would have been hard to fit in
    the budget or created opportunities for us to make other
    investments.
        Senator Lieberman. So there's potential like that, do you
    think, between the Navy and the Air Force?
        Mr. Young. I think there's no reason not to sit down and
    analyze jointly performing the mission.
        Senator Lieberman. Admiral Sestak, I didn't realize that
    you had worked on this. Do you want to get into this at all?
        Admiral Sestak. Yes, sir. What Mr. Young was referring to,
    I think, is that over the past couple of years, Admiral Clark
    has emphasized bringing to the table analysis based upon
    campaigns and modeling, and trying to remove from the table the
    weight and strength of personality. Part of this was, in this
    TACAIR integration, we didn't even know how to go about it. We
    actually had to bring in an outside party. But a lot of it had
    to do with the analysis incumbent upon how to take an adversary
    by force jointly.
        So, what Mr. Young is referring to, I think, is that we are
    in a good stead for this, particularly in this QDR year,
    because, over the past 2 years, the joint staff, under the new
    Joint Capabilities Integration and Development System (JCIDS)
    process, has actually gone about a similar process, called the
    Analytic Agenda, where they have done a number of scenarios,
    watching how the communities, the different communities,
    different air forces, have gone about trying to address the
    threats out there. So you no longer just take an operational
    plan that has been around 5 or 10 years, and it says so many
    aircraft are needed in order to address a threat in a certain
    country, such as North Korea. What you now have is actual
    campaign analysis. So, you can potentially, I think--much as
    you had to take two different cultures, the Marine Corps and
    the Navy and resolve our tactical aircraft integration--have
    something objectively on the table to say, ``Yes, maybe we
    could do it with less.'' I think that's what the Secretary was
    alluding to.
        Senator Lieberman. Thanks.
        General Gorenc, in fairness, you should have an opportunity
    to speak to this, from the Air Force point of view.
        General Gorenc. Yes, sir. I think that that's absolutely
    right. There is, actually, a great opportunity here. In a
    sense, we actually do this in another forum. For example, air-
    to-air missiles, air-to-ground initiatives where we are trying
    to get together much more, and get to some of the commonality
    issues that we want to work. So I think that this would be a
    natural extension. I think it's an idea that has a lot of merit
    and a lot of good opportunity.
        You're right, sir, at this time, during the QDR, to
    initially start bringing up--we do that routinely, truly. It's
    just a matter of changing the organization now, if you're going
    to do that kind of a routine.
        Senator Lieberman. I appreciate the willingness to take a
    look at something that, maybe at an earlier time, would have
    been unheard of. But it's necessary now. So, thank you.
        Thank you, Mr. Chairman.
        Senator McCain. Senator Chambliss.
        Senator Chambliss. Thank you, Mr. Chairman.
        I should have told the other panel this, and I want to make
    sure I tell you folks, that we appreciate the difficult job all
    of you have to do. We get pretty excited over here, because,
    Senator McCain's right, we're running out of money, and we
    appreciate the tough job that the OSD has, relative to budgets.
    But it's particularly tough on your end to try to come up here
    and make arguments, and then have to justify. We want you to
    know how much we appreciate you.
        Secretary Wynne, first of all, we've had several
    conversations with the Pentagon, all the way to Secretary
    Rumsfeld, relative to review of the C-130 proposal in the
    President's budget. I was told by the Secretary that, while he
    hated deadlines, he would put a deadline of April 1 to send an
    amended budget up here. Can you tell me where that stands? I've
    called and I know my staff has, and we haven't gotten an
    answer. Can you update us there?
        Mr. Wynne. No, sir, I can't. I can certainly take it for
    the record.
        [The information referred to follows:]

        The Department is reviewing the decision to cancel the C-130J
    multi-year contract, based on new information regarding contract
    termination costs. I anticipate Secretary Rumsfeld will announce his
    decision soon. The Department will come back with a budget amendment if
    necessary.

        Mr. Wynne. That's really Under Secretary of Defense (USD)
    Comptroller action to update and amend that budget.
        Senator Chambliss. Right.
        Mr. Wynne. I have not seen the action come through.
        Senator Chambliss. Well, if you wouldn't mind doing that,
    we're going to be into the mark-up here before long on the
    authorization bill, and we need to really know what direction
    the Pentagon wants us to go, there.
        Senator McCain. Could I add one comment, along with what
    Senator Chambliss says? If, indeed, there is not, in the
    amended proposal, resumption of C-130J, I think we also need to
    know what the plans are, since there is clearly a need for
    tactical airlift. It seems to me that that--don't you think,
    Senator Chambliss?
        Senator Chambliss. Absolutely.
        Senator McCain. Thank you.
        Senator Chambliss. In fact, that's a question that I had
    down here for Secretary Wynne. If we do shut this down in 2007,
    as proposed, what I'm told is that the only tactical airlift
    remaining in production is a French airbus, A-400M. Is that
    correct?
        Mr. Wynne. I don't know how far that is in production, but,
    yes, that would be the one.
        Senator Chambliss. So, I think that answers your question.
    We'll be buying from the French, Senator, and I'm not sure
    we're prepared to do that.
        General Gorenc, the previous panel addressed several issues
    relative to the capabilities, and lack thereof, regarding the
    C-130J, particularly as it relates to its combat readiness.
    They did indicate that they think the U.K. has been flying C-
    130Js in theater for some time. We know we have two that have
    been over there since December, I believe. Would you tell us a
    little bit about the operation of those airplanes?
        Also, I'm a little surprised that they did not do any more
    investigation of other countries that are flying the 130J. As I
    understand it, the Australians, the Italians, and the Danish
    are also flying those.
        General Gorenc. Yes, sir.
        Senator Chambliss. Would you tell us a little bit about the
    operation of the 130J in theater?
        General Gorenc. Yes, sir. I went back, and I looked at
    their data and their stats. Interestingly enough, they have
    flown there since December 2004, and have accumulated up to
    480-some sorties, 600, 700-some hours. Don't call me on that,
    specifically. But for sure on the sortie counts.
        Surprisingly enough, also, their mission-capable rates were
    actually 92 percent, overall, during this period. Now, the
    problem with that, of course, is, it's a small fleet, so you
    don't want to necessarily use that too much as an indicator.
    But the bottom line is that other aircraft in theater, the Es
    and the Hs, are generating about the 85 percentile area in the
    combat zones; 92 for the J models. The normal fleet, overall,
    of course, when they're not in a combat zone, they tend to be
    in the mid 70s, which is where the J is, also.
        But the bottom line is, as far as mission-capable and what
    they're doing there, they are doing exactly what a normal,
    straight-up C-130 would be doing. They're doing exactly what
    the other individuals have been tasked to do. They're
    performing very well.
        Senator Chambliss. I saw a statement the other day that
    said that our 130Js that are in theater in Iraq today are
    performing missions in 1 day that it takes 130 Es and Hs 2 days
    to perform.
        General Gorenc. Sure.
        Senator Chambliss. Is that a fair statement?
        General Gorenc. That is a fair statement. I have
    confirmation on that also. The funny part about that is, I also
    hear of individuals that go, ``Well, geez, all they're doing is
    taking one tire from one place to another,'' is the logic tree
    of what they're carrying, which, of course, is a statement
    that's interesting to me, unless you're the guy on the other
    end waiting to get the tire so you can get into the convoy to
    get where you need to go. So the point is, everything that they
    are doing there is relatively important. But to get it done
    twice as fast as the normal aircraft is an interesting point.
        Now, here's another aspect, in my view, from having been in
    the area of responsibility (AOR) awhile back; I would rather be
    having these type of aircraft that can go from one location to
    another location without having to air refuel--or, not air
    refuel, but to stop along the way. I mean, you can start
    considering manportable air defense (MANPAD) issues and other
    things that may be problems as you come in and out of airports.
    So, it's another aspect to this whole equation, in the truest
    sense.
        The bottom line is, the guys are in theater; they're doing
    the job, just like the other C-130s, and they're doing it with
    coalition partners, such as the U.K. individuals, who have
    bought aircraft; the Italians, who have bought aircraft;
    Denmark, who just recently bought three, if I'm not mistaken.
    Overall, it's a pretty good story, depending on, of course,
    where you're sitting on it.
        Senator Chambliss. Are there any plans to increase the
    number of 130Js in the Iraqi theater?
        General Gorenc. Sir, I have not heard that. I have not
    heard that from the operations side, at this stage.
        General Post. Sir, if I may add, the Marine Corps has six
    KC-130Js deployed with the 2nd Marine Aircraft Wing in Iraq.
    They've been over there for about 30 days. The numbers we're
    seeing, the mission-capable rates are well over 90 percent, so
    it's performing very well. Of course, our mission for the KC-
    130Js is a little bit different from the Air Force C-130
    mission, but we're very, very pleased with the performance of
    the airplane.
        Senator Chambliss. Yes.
        General Post, going back to Senator McCain's question,
    there, that the Marine Corps has a requirement--I believe it's
    51 KC-130Js, is that correct?
        General Post. Yes, sir.
        Senator Chambliss. Currently, under the proposed budget of
    the President, you would have 33, which would leave you 18
    short of your requirement. How would you fulfill that
    requirement?
        General Post. Sir, we would have to maintain those aircraft
    as a legacy fleet. Our F models are 42-year-old aircraft. Our R
    models are approximately 28 years old. So what we would have to
    do is keep the R-model fleet, obviously, longer than we'd like,
    and maintain those, and probably do some sort of level of
    maintenance to those aircraft to keep them in airworthy
    condition.
        Senator Chambliss. You haven't considered leasing any
    tankers, have you? [Laughter.]
        General Post. No, sir.
        Senator Chambliss. Good. I just wanted to make sure of
    that.
        Senator McCain. What's that?
        Senator Chambliss. They have not considered leasing any
    tankers, Mr. Chairman.
        Senator McCain. Oh, thank you. That's good news.
    [Laughter.]
        Senator Chambliss. Secretary Wynne, I want to go back to
    this cost again because the chairman's correct, we have a money
    problem that we have to deal with. But the 130J, versus the
    older models the 130J is stretched out. Is that correct?
        Mr. Wynne. It has elongated, yes, sir. That's why they have
    this qualification on the short version, then on the longer
    version.
        Senator Chambliss. Okay. The former planes, we were buying
    at the rate, I believe, of 24 a year, and now we're at 12 a
    year. Is that right?
        Mr. Wynne. Sir, I would have to take that and say I believe
    we are, but I do not know, personally.
        Senator Chambliss. Obviously, the more we buy, the cheaper
    they are.
        Mr. Wynne. It is always that way.
        Senator Chambliss. I'm assuming you don't know about any
    contractor discounts relative to the earlier models that might
    have been given.
        Mr. Wynne. I understand that they went through a
    significant investment program. At least they certainly told me
    that. So I would take that as a early-model discount, if that's
    what you mean.
        Senator Chambliss. Okay.
        General Gorenc, what's the opinion of the Air Force
    relative to the operation of the current F/A-22s you're flying?
        General Gorenc. Well, sir, I was recently down at Tyndall,
    and, obviously, everybody who's flying the machine is, number
    one, very impressed with the capabilities. I think that the
    guys down there who are training and getting spun-up to become
    initial operational capability (IOC) up at Langley, of course,
    are very impressed with the aircraft. I think that the
    individuals flying out at Nellis are finding the capabilities
    that were talked about earlier, as far as how they would match
    up against certain fighters, have come to fruition, in the
    sense of the aircraft being exactly everything that was said
    that it was going to be, which is very much a piece of
    machinery that can really handle the job as a weapon system. So
    everything is looking good, as far as the aircraft itself and
    the employment. The issue is getting the modernization portion
    taken care of to make sure that you get the full capability, as
    we were talking about a little bit earlier, with regards to
    air-to-ground and intelligence, surveillance, and
    reconnaissance (ISR) capability.
        Senator Chambliss. We talked with the previous panel about
    the air-to-ground capability that now was being asked of the F/
    A-22. Again, from a tactical-fighter standpoint, it's my
    understanding F/A-22 will fire not once, not twice, but three
    shots once it's inside enemy lines, without being detected.
        General Gorenc. Yes, sir.
        Senator Chambliss. Do we have any other tactical fighter
    that has that capability?
        General Gorenc. Well, sir, let me just say, the bottom line
    on this is, it's very difficult to fly air-to-air against
    somebody if everybody that you're up against is actually better
    than your aircraft. But, obviously, you have the surface-to-air
    missiles and things of that sort that you're going to have to
    go after to, in fact, open up the corridors and give you the
    ability to get through the door and allow some of the other
    coalition partners, and even U.S.-capable legacy jets, to get
    into the target areas. So, the bottom line is the need there
    for an air-to-ground capability that--the sooner the better, as
    far as we would like. It needs to be a full-up kit, because the
    nature of the threats are such that you just never know whether
    you're going to have to shoot an aircraft in the sky or
    somewhere else.
        Senator Chambliss. Secretary Wynne, there's been recent
    testimony characterizing costs of the F/A-22 at a quarter-
    billion dollars. Actually, under the current buy, my
    calculation of the planes that we now have in acquisition is
    $128 million per copy. Is that correct, according to your
    numbers?
        Mr. Wynne. Well, it's one of those things, sir, that the
    cost of an airplane is certainly hard to define and explain,
    but I have heard a range of $128 million to $135 million would
    encompass all of that. Flyaway cost, by my definition, is, kind
    of, the airplane rolling down the runway.
        Senator Chambliss. Again, same old story relative to the
    more we buy, the cheaper they become. Is that fair to say?
        Mr. Wynne. I think there has been some progress in that
    regard, over the lots that we've had recent history with.
        Senator Chambliss. Okay.
        I think that's all I have, Mr. Chairman. Thank you.
        Senator McCain. General Gorenc, let's talk just for a
    second about what the witness from the Congressional Research
    Service talked about, and that's the threat. Now, we can get
    into a very classified discussion in a big hurry, but do you
    accept the premise that the F-22 was originally designed for
    air-to-air combat?
        General Gorenc. Yes, sir, I do.
        Senator McCain. Then we saw the nature of the world
    situation change. We no longer had to worry about new
    generations of ``Soviet'' fighters. Now, what, in your view, is
    the threat or the scenario that would dictate such a high-
    performance fighter--I'm not trying to set you up here.
        General Gorenc. I know.
        Senator McCain. But clearly, in Afghanistan and Iraq, what
    really did the job was airplanes with air-to-ground capability.
    Now, some of them came as far away as from bases in the United
    States; others were the old A-10, around since the 1970s. We've
    tried to retire them three or four times, and then a conflict
    comes up, and the old A-10 does a hell of a job. So, give me
    the argument, in your mind, that dictates, for the $300 million
    airplane, tactical aircraft, given the nature of warfare, the
    way that it's changed since the fall of the Soviet Union.
        General Gorenc. From my standpoint----
        Senator McCain. Because this is what we really have to
    grapple with here. Okay.
        General Gorenc. This is tricky. I mean, it depends on how
    you look at the situation. Personally, I'm not entirely sure
    that Afghanistan or Iraq are truly the example of what you may,
    in fact, encounter in the future. Let's just say that. Let's
    pretend you go with a different scenario and a different threat
    that is viable is a China scenario in a few years. The issue is
    that once--again, and I know I'm speaking to a well-educated
    group, but, for myself----
        Senator McCain. Don't assume that, General. [Laughter.]
        General Gorenc. From my standpoint, what I see is, you have
    double-digit surface-to-air missiles (SAMs) that may be
    protecting certain key target areas that will not allow certain
    aircraft to get within even 50 to 60, 70 miles to take that
    target out. What you need is an aircraft that will allow you to
    go in there and destroy that particular hindrance to your
    ability to do what you want to do in the immediate target area.
    That capability is inherent in the F-22. You're able to get in;
    you're able then to allow other aircraft that may not have the
    stealth, the supercruise, the technology to identify, to get
    through that same corridor and, in fact, start taking out
    aircraft. So it's really a complementary system.
        Now, from my standpoint, when I talk to folks and think
    about it, you go, ``Well, this is strictly a U.S. issue here,
    where you want to make sure that everybody can get into the
    fight,'' so you have your F-22s, your JSFs, and things of that
    sort, and the Navy brotherhood of F-18s. Surely, what we're
    talking about is, as we think about it in coalitions for the
    future, do I want to have other capable aircraft that may not
    have that stealth, that supercruise, to get into that area?
    Actually, I would. I want them on the team. The question is,
    they may not be holding the ball to start the fight with, but I
    want to hand it off and either get my aircraft back into an
    area where they are no longer needed for another contingency
    and allow those other aircraft to stay. But they've opened up
    the door.
        So, it's almost a situation, from my standpoint, that, as I
    think about the case, it's like the SWAT team that's trying to
    get into a house where there is a hostage or someone being held
    up. There is this individual, and you always see him after all
    the negotiation is done and everything's square, whether he
    comes in with this ramrod and maybe one or two of them, and
    they, no lie, knock that door in and say, ``Come on in, let's
    go.'' You see the rest of the guys, kind of, scurrying up and
    doing their thing. That's almost what I see the F-22--is this
    thing that allows you to get through that door and allows you
    to go in and take care of the situation.
        Senator McCain. Look, I accept your scenario, and I think
    more and more of us are thinking about the challenge of an
    emerging China, without assuming that it is an adversarial one,
    but there's no doubt about their superpower status, but does
    your argument then convince us that we need large numbers of F-
    22s? With your scenario of, these are the ones that kick down
    the door, and the rest of the others follow?
        General Gorenc. Sir, that's where I think that the QDR and
    the future studies here that are going to actually be done in a
    very quick fashion are going to prove to very much invaluable.
    The issue is, it really just all depends on what the world
    situation may evolve to. You may find yourself in a situation
    where you have a China and another threat somewhere else.
    Hopefully, that doesn't happen, and we would have been able to
    say, ``Gosh, you know, we overbought.'' But maybe the fact that
    we overbought, in fact, dissuaded or deterred somebody else
    from becoming that second axis of potential problems.
        The point is, I think we'll certainly carry that debate and
    those discussions forward in the Quadrennial Defense Review,
    and I think we're going to get some pretty good analysis out of
    that for those type of scenarios.
        Senator McCain. Yes, but one of our problems is that we're
    making some of these decisions before the QDR is out. Then that
    presents us with some----
        Mr. Wynne. I would say it this way, Senator, that we've
    really put aside sea dominance, because we just presume it in
    our analysis now. We don't yet assume air dominance. Even when
    we were into Baghdad, which we would all recognize now for what
    it was; we were not prepared to commit our front-line fighters
    without first committing our stealth forces. Some 20 years ago,
    we set out to have an all-stealth Air Force. We need to
    continue to pursue that, without a doubt. How we get there and
    what it is comprised of is the issue and the balance that
    you're talking about.
        But, in the future, I predict we're going to have a
    proliferation of these double-digit SAMs that we're talking
    about, because they're far less expensive to produce, if you
    will. What we have to find out and balance is the economics of
    warfare that we're really faced with; and, frankly, try to make
    some of our enemies produce and spend $100, and we spend a
    dollar. We used to be able to do it. We're not as proficient at
    it right now.
        Senator McCain. Well, this discussion needs to be held, not
    only in hearings like these, but on the floor of the Senate and
    various forums around the country, because the counter to the
    comment about the double-digit SAMs is the capability of
    extending our standoff capability so that we don't put pilots
    and aircraft at risk. So we can go back and forth, but some of
    these decisions, I think--and maybe it's our fault for not
    being more engaged in it, but a lot of these discussions, I
    don't think have been held. Maybe now that we're faced with
    some tough decisions, maybe we can do them in a more in-depth
    fashion.
        Senator Lieberman.
        Senator Lieberman. Thanks, Mr. Chairman. I agree with you
    totally.
        I had one more question, and in some ways it moves directly
    off the general subject-matter area, but--the future, which is
    about the Joint Unmanned Combat Air System program. I know that
    Senator Warner has been very interested in this. I believe
    General Jumper has also been very committed to it. It's really
    a next-generation program. Since last year, the Department has
    transferred management of the program from DARPA to the Air
    Force, and removed a billion dollars from the planned budget
    resources for the program over the FYDP. I wonder, Secretary
    Wynne, why the Department has taken those actions and what
    those actions say about the possibility of the program moving
    forward in any reasonable time frame.
        Mr. Wynne. First, let me describe the Joint Unmanned Combat
    Air System and its associated control system as one of the most
    exciting ventures we've started out on, frankly.
        Senator McCain. It particularly excites the pilots, I'm
    sure. [Laughter.]
        Mr. Wynne. Fairly actively analyzed by a lot of folks, and
    great discussion has erupted, as Senator McCain has indicated,
    in his own way.
        Senator Lieberman. He has a way with words, doesn't he?
    [Laughter.]
        Mr. Wynne. In fact, there were some that indicated it would
    have a bad spelling in there with the U in there, but at any
    rate, I think it has, in fact, taken hold, and has found a
    potential place within the construct of manned and unmanned
    mixed fleet.
        That having been said, the Department is making very
    difficult choices in resources. I think last year I talked very
    strongly to Secretary Roche about, what was the appropriate
    time for the Air Force to take charge of the program? We, in
    fact, have actively engaged the Navy. In fact, the Navy is now
    considering as to whether or not we could get a carrier-based
    Joint Unmanned Combat to essentially do fleet overwatch in the
    out years. They are now actively engaged in doing that
    analysis.
        The Air Force senior leadership and the Navy senior
    leadership are trying to decide as to exactly what they want.
    We're hoping we do not have to down-select, but we are, in
    fact, already taking action to essentially slim down the common
    operating system and try to make it simply safety-of-flight and
    an open system that I can add on systems to it.
        So, it is a difficult resource decision. I think it's one
    that you all are contending with, as well. All I can say is, it
    was tough when we looked at it, and it's not going to be any
    easier when you look at it, sir.
        Senator Lieberman. Yes. So you'd say, at this point, the
    Department is still committed to the unmanned program?
        Mr. Wynne. I would say that the Department is looking at it
    very carefully, and I think the question is, just how much can
    we afford?
        Senator Lieberman. Right.
        Secretary Young, just, finally, I was going to ask you what
    role the Navy would play now in this program, since it's being
    transferred to the Air Force, but maybe Secretary Wynne has
    answered. What's the Navy's attitude toward the unmanned combat
    system?
        Mr. Young. Secretary England and the CNO have been adamant
    about the persistent intelligence surveillance and
    reconnaissance role this capability would provide off the
    aircraft carrier. We are very happy with DARPA's management of
    the program, and anxious to see the prototypes perform. We
    would hope the program would continue on a path to deliver that
    demonstrated capability under Air Force management, and that'll
    be our discussion basically with the Air Force. It's to try to
    keep pace and get the demonstrators out there. As Secretary
    Wynne said, when you have that core aircraft and open operating
    system, we can add capabilities to it as we go in a prudent
    manner.
        Senator Lieberman. Okay. Thank you very much.
        Thanks, Mr. Chairman.
        Senator McCain. Senator Chambliss.
        Senator Chambliss. Just one other question, Mr. Chairman.
        Mr. Wynne, the Joint Strike Fighter, which is going to be a
    great airplane, depends, to some extent, upon the R&D, as well
    as the testing being done on the F-22. Is that correct?
        Mr. Wynne. Yes, sir. I believe they have some shared
    systems.
        Senator Chambliss. If you terminate the production of the
    F-22, as proposed in the President's budget, what's going to
    happen to the cost per copy of the Joint Strike Fighter?
        Mr. Wynne. One of their shared systems is the overhead mix
    for the Lockheed Martin Corporation. I would say that they will
    also lose a little bit, in the sense that if some of the
    componentry is shared between the two airplanes, then that
    vendor will obviously lose that volume. I do not have a precise
    figure, sir, but it is another piece of the calculation for
    both of the airplanes in the Marietta facility.
        Senator Chambliss. So, do I understand you to say that the
    cost of the Joint Strike Fighter would increase?
        Mr. Wynne. I would have to say that there would be some
    upward pressure, and I just don't know how much.
        Senator Chambliss. Yes.
        Thank you.
        Senator McCain. Just briefly, Mr. Secretary, we've enjoyed
    this hearing. On the issue of UAVs, or unmanned aircraft, I am
    convinced that one of the greatest challenges we face in the
    war on terror is the protection of our borders, and we're not
    going to be able to do it with people. I think that UAVs are a
    critical item. I've tried to, and will continue to try to, get
    the attention of the Department of Homeland Security, because I
    think they can help in the funding, because there is clearly a
    use for UAVs on our long extended borders, both to south and
    north.
        Mr. Wynne. Senator, that's why Australia is very interested
    in the Global Hawk. Remember, it made that flight over to
    Australia? That really was the intriguing feature. Their
    northern border.
        Senator McCain. So, I would hope we are funding Department
    of Homeland Security extensively, which it should. In my view,
    they need to look at high-tech, as well as people. We're all
    for 2,000 more border patrol, but you're never going to control
    that border without using high-tech equipment, and I would
    argue that we've reached a point of maturity now that UAVs can
    play a tremendously contributory role in trying to control our
    borders.
        Anything more?
        Senator Lieberman. No, thank you.
        Senator McCain. Thank you very much.
        Senator Lieberman. Thank you all very much.
        Senator McCain. This hearing is adjourned.
        [Questions for the record with answers supplied follow:]
                   Questions Submitted by Senator John McCain
                                     f/a-22
        1. Senator McCain. Mr. Bolkcom, you have written extensively on the
    Air Force F/A-22 program. In your opinion, what should be the role and
    mission of the F/A-22, and how many aircraft do you think would enable
    the U.S. to accomplish those missions?
        Mr. Bolkom. The number of Raptors that the Air Force indicates it
    needs has changed over time. Although the current budget appears to
    fund 179 F/A-22s, Air Force leaders have stated they need 381 Raptors.
    An argument may be made, however, that no F/A-22s are required to
    accomplish the roles and missions for which it is designed.
        The Air Force has consistently described the mission for the F/A-
    22, and the F-22 before it, as achieving air dominance, or air
    superiority. Supporters and critics alike appear to agree that this is
    the appropriate mission for the Raptor. On the other hand, the exact
    role that the Air Force says the F/A-22 could play in achieving air
    dominance has changed over time and is the subject of debate. The
    traditional role is to defeat enemy fighter aircraft in air-to-air
    combat. However, the F/A-22 appears to be over-designed to achieve air
    superiority against the fighter aircraft we face today, and are likely
    to face in the near future.
        General Gorenc described the contemporary threat environment in his
    testimony when he noted ``it's very difficult to fly air-to-air against
    somebody if everybody that you're up against is actually burying their
    aircraft.'' U.S. dominance in air-to-air combat is so great, that many
    adversaries would prefer to run or hide than to stand and fight. Since
    1991, the United States has flown in-excess of 400,000 combat sorties,
    and lost only one aircraft to another fighter, according to official
    Department of Defense (DOD) estimates and Congressional Research
    Service (CRS) analysis. Some observers have characterized the need to
    procure any F/A-22s based on this historical record as weak.
        Air Force officials, including Chief of Staff General John Jumper,
    argue that the F/A-22 is needed because future conflicts are not likely
    to resemble the permissive air environments of Afghanistan or Iraq. F/
    A-22 supporters argue that even though it is difficult to envision a
    peer competitor, the Air Force must prepare today for a potential worst
    case scenario in the future because it takes decades to develop and
    field advanced combat aircraft.
        The U.S. success in this combat domain goes well beyond Operations
    Enduring Freedom and Iraqi Freedom. The United States faced little or
    no air-to-air opposition in Libya, Lebanon, Panama, Grenada, Haiti,
    Bosnia, and Kosovo. The United States has faced no air-to-air
    opposition in the hundreds of humanitarian and disaster relief missions
    it has flown, nor in the numerous military operations other than war
    (MOOTW) it has fought in countries like the Somalia, Philippines,
    Colombia, and the Horn of Africa. It appears to many analysts, that the
    future will look much like Afghanistan and Iraq in terms of achieving
    air dominance, and that the potent air threats that General Jumper
    predicts, will be few, if they emerge at all.
        Perhaps because of this reduced air-to-air threat, the Air Force
    has emphasized the F/A-22's potential air-to-ground capabilities,
    especially against advanced Russian Surface-to-Air Missiles (SAMs).
    This appears to be the role for which the F/A-22 has gained the most
    traction. There appears to be a consensus that the combination of these
    SAMs, and an advanced, well equipped and maintained air force, could
    present the most difficult air dominance challenge in the future, and
    might warrant some number of F/A-22s. However, opinions vary on the
    number of F/A-22s required to deal with what many see as the most
    pressing threat--a potential conflict with China over Taiwan.
        The U.S. Navy likely could be the first on the scene to deal with
    such a crisis. The Navy, however, has no plans to acquire the F/A-22.
    Either the Navy believes that it can adequately deal with China's Air
    Force and advanced SAMs with its less sophisticated and less expensive
    aircraft, or it is going to depend on the Air Force to ``kick down the
    door'' for them. It may be useful to know whether the Navy and Marine
    Corps, are prepared for a potential challenge in this area without F/A-
    22 support.

        2. Senator McCain. Major General Gorenc, in previous testimony, Air
    Force Lieutenant General Ronald Keys stated, ``We view the F/A-22 as
    our kick-down-the-door force.'' He said the plane would be uniquely
    able to reach a threat quickly and neutralize it. In an article
    published in ``USAF F/A-22, Air Dominance for the 21st Century'',
    Walter Boyne states that ``The combined capability of the Raptor,
    Nighthawk, and Spirit [B-2] is startling. Small diameter precision
    munitions and a force of only four B-2s and 48 F/A-22s, flying one
    sortie each, will be able to smash 380 targets . . . without ever being
    detected.'' First of all, the Air Force does not have enough low
    density/high demand aircraft such as F-117s, joint surveillance target
    attack radar system, and U-2s for every air expeditionary force (AEF).
    These aircraft support the AEF based on the requirements of the theater
    and contingency. The capability of the F/A-22 and its cost make it a
    prime candidate for the same AEF supporting function. Wouldn't a
    smaller force of 178 aircraft provide the Air Force with the number of
    F/A-22s to ``kick down the door''?
        General Gorenc. An F/A-22 force of 179 aircraft increases
    operational risk, attrition, and time to gain joint air dominance,
    which jeopardizes the Joint Forces Commander's (JFC) ability to ``seize
    the initiative'' and gain access to the battle space. Previous analysis
    determined the requirement for at least 381 F/A-22s--based on
    capability, business case, and sufficiency needed to meet the national
    defense strategy with moderate risk. The Air Force is advocating for
    more Raptors during the Department's ongoing Quadrennial Defense Review
    (QDR) tactical air (TACAIR) analysis of joint air dominance capability
    requirements.

                             joint stand-off weapon
        3. Senator McCain. Major General Gorenc, the Air Force backed out
    of the Navy led joint stand-off weapon (JSOW) program with the
    intention of procuring the extended-range version of the wind corrected
    munitions dispenser (WCMD-ER). Now that WCMD-ER is no longer funded in
    the budget request, will the Air Force reconsider its decision to
    withdraw from the JSOW program?
        General Gorenc. The Air Force does not intend to re-enter the JSOW
    program. Capabilities, costs, and risk assessments in area-attack
    munitions were all considered when the Air Force and Navy jointly
    terminated/deferred their participation in JSOW-B as a standoff
    delivery method for Sensor Fuzed Weapon (SFW). SFW provides unique and
    proven capabilities, and the Air Force is pursuing the continuation of
    WCMD-ER to provide only enough kits to match programmed SFW production.
    Similar analytical considerations support the Air Force's decision to
    terminate JSOW-A. All fiscal and capabilities-based analyses continue
    to support WCMD-ER for the delivery of SFW submunitions over the JSOW-
    B. WCMD-ER continues to be the Air Force's preferred program to provide
    standoff delivery of area-attack munitions.

                                     c-130
        4. Senator McCain. Mr. Bolkcom, costs for center wing box repairs
    of C-130E/H models could be accomplished for $6 million to $9 million
    per aircraft compared to $100 million for a new C-130J. Based on your
    significant experience and writings on aging aircraft issues, would you
    agree that replacing the center wing box on C-130E/H aircraft is an
    appropriate strategy to recapitalize the C-130 fleet compared to the
    more expensive strategy to continue acquiring C-130s?
        Mr. Bolkcom. Repairing or replacing the center wing sections of C-
    130E/H aircraft appears to be a mandatory step to maintain the current
    fleet.
        The Air Force has not requested funding for this modification in
    its $185.6 million fiscal year 2006 budget submission. The center wing
    box has long been recognized as an essential, yet vulnerable part of
    the aircraft in terms of wear and tear. The Air Force encountered
    similar problems with the C-130 center wing box in the late 1960s and
    early 1970s. Increased wear and tear on the C-130 fleet due to recent
    operational demands might have also been anticipated. In 2001, the Navy
    grounded 51 EA-6B Prowler aircraft. These aircraft exhibited high
    degrees of center wing section stress due to extensive combat flying in
    Kosovo, Afghanistan, and Iraq. The Navy grounded 24 more Prowlers in
    2003, when continued high Operations Tempo (OPTEMPO) further stressed
    the fleet's center wing sections.
        As for recapitalizing the fleet, it is not currently clear that
    recapitalization is a necessary step. The first reason that the need to
    recapitalize is unclear, is that current and future airlift
    requirements have not been determined. The QDR and the Air Force's
    Mobility Capabilities Study (MCS) will both contribute to a collective
    understanding of future mobility needs. As DOD reshapes itself to
    better combat non-state as well as state actors, the type and number of
    intra-theater airlift aircraft required could change considerably.
    Until these studies are completed, decisions on the number and type of
    new aircraft to be procured, if any, appear premature.
        The need to recapitalize the C-130 fleet is also unclear because it
    has not yet been demonstrated that newer aircraft will perform this
    mission more cost-effectively than the current fleet. As its aircraft
    age, Air Force leaders have stated that operations and maintenance
    (O&M) costs are increasing. Retiring old aircraft (such as the C-130E)
    and purchasing new aircraft (such as the C-130J) is a better use of
    scarce budget resources, they argue, than continuing to spend money on
    aging aircraft.
        Studies by the Congressional Budget Office (CBO) and the Government
    Accountability Office (GAO) have found, however, that the effects of
    age on aircraft O&M costs are not well known, and that the data
    supporting the Air Force's position were anecdotal. A 1998 RAND report
    on aging aircraft found that there were no effective models to measure
    and estimate the cost impacts of aging factors such as corrosion or
    engine fatigue. Also, using historic cost estimating relationships to
    estimate future costs may not be valid.
        In many cases, it may be more cost effective to maintain an older
    fleet rather than to purchase a new aircraft. The O&M costs of the UH-
    60 Black Hawk and the AH-64 Apache helicopters, for example, have
    stayed relatively constant as the aircraft have aged. The U.S. Navy and
    the CBO estimate that annual O&M costs for military aircraft increase
    by only 1-3 percent for each additional year of age, adjusting for
    inflation. So, if a 10-year old C-130 aircraft costs, for example
    $100,000 to operate and maintain in fiscal year 2006, an 11-year old C-
    130 might cost $103,000 to operate and maintain in the same year.

                              joint strike fighter
        5. Senator McCain. Secretary Young and Major General Gorenc, the
    Joint Strike Fighter (JSF) program is the largest weapons buying
    program ever. As such, it requires extreme caution as DOD commits
    taxpayer funds each year. The program involves three of our Services
    and at least eight foreign countries. We have already expended billions
    of dollars on development costs, yet still do not have a flying
    aircraft. I'm sure I don't have to remind you, a lot of your future
    force rides on getting this program right. One area that is beginning
    to concern me is the potential cost growth simply due to the large
    difference developing between all variants of the aircraft. It seems to
    me that the original goal was to build three variants composed
    principally of a common airframe. So every time I read statements from
    the Pentagon's top weapons tester that say efforts to shed several
    thousand pounds from the short-takeoff-and-landing (STOVL) version have
    resulted in a loss of commonality between the three F-35 variants, I
    get concerned that costs will continue to rise as we begin to build
    three different aircraft, rather than one aircraft with three variants.
    The STOVL version for the Marine Corps and possibly for the Air Force
    looks like it will carry a smaller weapons load out. It may also have
    different air refueling systems if it follows the conventional tanking
    systems of today. The conventional takeoff version, one for the Air
    Force and another for the Navy, will each have a different wing and
    landing gear. Yet reports I hear tell me the Navy version, with its
    larger wing, should have better performance. I also suspect the
    software to run all the systems will be very different in each variant.
    What we have here really begins to look like the development of several
    very different aircraft. I believe serious consideration should be
    given to reduce the development to two variants: one STOVL for both the
    Marine Corps and Air Force, and one conventional version capable of
    carrier and land field operations. They should also all use the same
    air refueling system to enable greater flexibility and commonality with
    our allies. What are your thoughts on moving the JSF program toward
    just two variants?
        Mr. Young and General Gorenc. The current acquisition strategy, for
    three JSF variants, remains the best solution to meet the Services'
    approved operational requirements and need dates. This approach is
    executable and more affordable than revising designs at this advanced
    stage of development. Manufacture and assembly of the first flight test
    article (CTOL) variant) is underway and going well. The STOVL and CTOL
    production designs are nearing completion, and manufacture of the first
    STOVL flight test article begins late this year. Carrier version design
    is underway.
        The warfighters' approved operational requirements cannot be met
    with only two variants because Service mission profiles are too
    diverse. Performance differences across variants result from optimizing
    a given variant for the specific Service mission. For example, the Air
    Force Conventional Takeoff and Landing variant is designed to meet
    higher `g' limits, faster acceleration, and internal gun requirements.
    The Navy's carrier variant needs a larger wing and more rugged landing
    structure to accommodate carrier landing constraints and stresses.
        Commonality across JSF variants remains significant. Avionics,
    mission system software, and the propulsion turbo machinery core are
    the same across all variants, and there's high commonality across many
    of the high cost structural components. All the variants will be built
    on the same production line using flexible manufacturing technology.
    While recent weight-related STOVL design changes somewhat lessened
    commonality, associated increases to projected Unit Recurring Flyaway
    costs are less than 1 percent.

                            air force tanker program
        6. Senator McCain. Secretary Young, whichever future Air Force
    tanker is bought, we all understand it will have to have boom
    capability. The boom system is required to refuel all of our large
    transport and bomber aircraft. We also know that the Navy will always
    require probe and drogue systems. Under the previously proposed 767
    tanker lease program, emails among the Air Force leadership revealed a
    plan to build the first 100 tankers without drogue systems. Were you
    aware of this, and would you expect any future tanker program to
    require drogue systems on all tanker aircraft?
        Mr. Young. I consider it a tremendous joint force multiplier and a
    Navy requirement to ensure any future Air Force tanker program retain
    the capability to perform boom and probe/drogue refueling on the same
    sortie (``Dual'' capability). During discussions involving development
    of tanker requirements supporting the tanker lease program, Navy
    leadership supported the requirement for the next Air Force tanker to
    be ``dual'' capable. As we now move beyond the lease program, we are
    confident that we have communicated our requirements clearly.
        The Joint Requirements Oversight Council-validated Air Refueling
    (AR) Initial Capabilities Document includes language identifying probe/
    drogue, and boom AR on the same sortie as a primary mission.
    Additionally, the Navy and Air Force agree that ``dual'' capability
    (probe/drogue and boom on the same sortie) will be a Key Performance
    Parameter in the KC-135 Replacement Capability Development Document.
    The Navy will closely follow the progress of the Air Force tanker
    program and remain fully engaged in the working groups and document
    reviews this summer and fall.

        [Whereupon, at 4:33 p.m., the subcommittee adjourned.]

    DEPARTMENT OF DEFENSE AUTHORIZATION FOR APPROPRIATIONS FOR FISCAL YEAR
                                      2006

                                  ----------

                            THURSDAY, APRIL 14, 2005

                                   U.S. Senate,
                               Subcommittee on Airland,
                                   Committee on Armed Services,
                                                        Washington, DC.

                        AIR FORCE ACQUISITION OVERSIGHT

        The subcommittee met, pursuant to notice, at 2:35 p.m., in
    room SR-232A, Russell Senate Office Building, Senator John
    McCain (chairman of the subcommittee) presiding.
        Committee members present: Senators McCain, Warner,
    Chambliss, and Lieberman.
        Committee staff member present: Judith A. Ansley, staff
    director.
        Majority staff members present: Regina A. Dubey, research
    assistant; William C. Greenwalt, professional staff member;
    Ambrose R. Hock, professional staff member; and Stanley R.
    O'Connor, Jr., professional staff member.
        Minority staff members present: Creighton Greene,
    professional staff member; and Peter K. Levine, minority
    counsel.
        Staff assistants present: Alison E. Brill and Andrew W.
    Florell.
        Committee members' assistants present: Christopher J. Paul,
    assistant to Senator McCain; John A. Bonsell, assistant to
    Senator Inhofe; Clyde A. Taylor IV, assistant to Senator
    Chambliss; and Frederick M. Downey, assisant to Senator
    Lieberman.

           OPENING STATEMENT OF SENATOR JOHN McCAIN, CHAIRMAN

        Senator McCain. Today the committee meets to examine the
    management and oversight of Air Force acquisition programs. I
    want to welcome our witnesses: the Honorable Paul McNulty,
    United States Attorney for the Eastern District of Virginia;
    the Honorable Joseph Schmitz, Inspector General for the
    Department of Defense; the Honorable Michael Dominguez, Acting
    Secretary of the Air Force; Daniel Gordon, Managing General
    Counsel for Procurement Law at the Government Accountability
    Office (GAO); and Sallie Flavin, Deputy Director, Defense
    Contract Management Agency. We greatly appreciate all of you
    giving your time for this very important hearing.
        Defending our Nation against its enemies is the first and
    fundamental commitment of the Federal Government and Congress
    must have an eye toward the faithful and efficient expenditure
    of every taxpayer dollar. Over the last 3 years we have seen
    the most egregious abuse of power from an acquisition official
    that I have seen. Darleen Druyun's actions not only disgraced
    herself and resulted in her conviction on public corruption
    charges, but also disgraced the Air Force, the Department of
    Defense (DOD), and the entire defense establishment.
        I continue to believe that she is not singly responsible
    for this failure and fervently hope that both Congress and the
    Department can work together to remove any possibility for
    future corruption through major acquisition reform.
        Ms. Druyun also admitted that she had similarly harmed the
    United States on behalf of Boeing on several other major
    defense programs, to include the North Atlantic Treaty
    Organization (NATO), Airborne Warning and Control System
    (AWACS), C-130 aircraft modernization program (AMP), and the C-
    17. How much taxpayers have been fleeced remains to be seen.
        I appreciate all the work that you and your staff have done
    in working to correct these past problems and I look forward to
    the day it is all behind us. Although I appreciate the tenor of
    the Air Force witness statements, what is missing is the Air
    Force's acceptance of any responsibility for wrongdoing, and
    the public denials by senior Air Force officials that anyone
    should be held accountable beyond Ms. Druyun.
        The body of evidence suggests otherwise. We will hear
    testimony today regarding contracting officials who acted
    improperly and possibly unethically and illegally. There is a
    record of e-mails on personal attacks on me, my staff, and
    others who opposed the Boeing 767 deal, Air Force lobbying
    against the Senate Commerce Committee and the Armed Services
    Committee, exaggeration of the extent of corrosion in the KC-
    135 tanker fleet, end runs on the authorizing committees,
    obfuscation, delay, and withholding of tanker acquisition
    documents.
        What is apparent is that the Air Force pulled out all the
    stops to get the Boeing tanker deal done and looked the other
    way when things were done wrongly, improperly. Similarly, this
    was done in the C-130J contract. The Air Force contracting
    officials and their leadership should never have acquired the
    C-130J using a commercial item acquisition strategy. They did
    it and it was done for 10 years.
        But this is not just an Air Force problem. The defense
    acquisition anomalies go beyond the Boeing 767 tanker scandal
    and the C-130J program. Recently, the Army Secretary indicated
    that he would convert the ``other transaction authority,''
    (OTA) agreement, to a Federal Acquisition Regulation (FAR)-
    based contract with provisions typically used to protect
    taxpayers' interests and help prevent fraud, waste, and abuse.
    For whatever reason, these provisions were not included in the
    original OTA.
        We need true acquisition reform and recent contract
    conversions in the Army and the Air Force are only treating the
    symptoms.
        I do have some good news on this note. On April 6, 2005,
    the Airland Subcommittee of the Senate Armed Services Committee
    heard testimony which confirmed that the Air Force acquired the
    C-130J heavy lift aircraft as a ``commercial item.'' In so
    doing, the Air Force bargained away its ability to get cost and
    pricing information that would have assured that it was
    acquiring this aircraft at a fair and reasonable price. As a
    result, the Air Force obtained an aircraft that failed to meet
    contract specifications and was incapable of performing its
    intended mission, at a dramatically higher than expected cost.
    I am happy that Acting Secretary Dominguez and Chief of Staff
    of the Air Force Jumper indicated they shared these concerns
    and they informed me that the Air Force would convert the C-
    130J ``commercial item'' procurement contract to a traditional
    military item procurement contract. I am very pleased that the
    Air Force is going to take this action.
        I would also point out that the Army's agreement to change
    from OTA to the regular procurement procedures is also
    laudatory.
        We need to examine the whole procurement process as it
    works today in the DOD and the recent Air Force scandal is a
    glaring example of management and oversight failure, perhaps
    oversight failure on the part of Congress. Today's hearing will
    help us understand the depth and breadth of the problem and
    demonstrate the need for reform.
        Senator Lieberman.

                STATEMENT OF SENATOR JOSEPH I. LIEBERMAN

        Senator Lieberman. Thanks, Mr. Chairman. Thanks for not
    only calling this hearing today, but for the decisive role that
    you played in bringing to light this series of financial,
    management, ethical, and ultimately legal failures associated
    with the Air Force tanker lease proposal and other recent
    acquisitions. Your tenacity on this issue may have surprised
    some in the Air Force, but those of us who have worked closely
    with you on other matters know that it was not surprising, but
    it is typical of the dedication that you have shown on matters
    of national interest, and I congratulate you for what you
    uncovered here.
        Today we are going to hear from some of the people who are
    directly involved or represent the Service directly involved.
    Details of the contracts particularly at issue continue to be
    the subject of review. I want to focus here on another
    question, maybe a broader question, which is what we learned
    from this, as you have said in your opening statement, and what
    went wrong in the Air Force acquisition process that made it
    possible for these abuses to occur.
        In this regard, I think it is important to note not only
    that Ms. Druyun has been found guilty of illegal behavior,
    corrupt practices, but also that she was not solely or even
    primarily responsible for many of the significant problems with
    the Air Force tanker lease proposal. For example, it was not
    Ms. Druyun who reversed the findings of the Air Force's 2001
    tanker economic service life study without obtaining new
    information or undertaking a new review. It was not Ms. Druyun
    who resisted conducting a formal analysis of alternatives, as
    the DOD does with other major programs, to determine the best
    approach to meeting the Department's tanker needs.
        It was not Ms. Druyun who failed to develop required system
    engineering documents and testing plans and insisted that
    requirements documents be tailored to the aircraft available
    from a specific contractor. It was not Ms. Druyun who insisted
    on pursuing a leasing approach even when multiple independent
    reviews determined that leasing the aircraft would be between
    $2 billion to $6 billion more expensive than purchasing them.
        These questionable acquisition decisions were all made
    higher up within the Air Force. What I find most troubling is
    that none of these questionable decisions appear to have met
    with any resistance at all from anywhere in the Air Force
    acquisition organization. We have an alphabet soup of
    independent organizations--Office of Management and Budget
    (OMB), Congressional Budget Office (CBO), GAO, Congressional
    Research Service (CRS), Institute for Defense Analyses (IDA),
    National Defense University (NDU), DOD, Inspector General (IG),
    Program Assessment and Evaluation (PA&E)--all of which found
    major problems with the tanker lease proposal. Yet, after
    reviewing thousands of Air Force e-mails, our staffs have yet
    to find a single criticism or concern raised from inside the
    Air Force itself. That raises a profound systemic question,
    which is, what has happened to the acquisition organization of
    the Department of the Air Force? Why is it that this
    acquisition organization failed to raise a single criticism or
    concern about a proposed tanker lease that every independent
    review found to be seriously flawed, and why did that same
    acquisition organization acquiesce in Ms. Druyun's decisions to
    alter specifications and revise contractor evaluations in a
    manner that tainted at least two other major procurements? Has
    the Air Force acquisition organization lost the capacity to
    exercise independent judgment and raise concerns about
    questionable acquisition decisions? I know these are serious
    questions, but the facts in these matters demand that those
    questions be asked.
        Mr. Chairman, we have cut the DOD acquisition workforce by
    half over the last 15 years. These cuts continued even after
    the procurement holiday of the early 1990s came to an end and
    even after the global war on terrorism brought record levels of
    procurement expenditures. We have made these cuts, I am afraid,
    in a haphazard way, without giving consideration to the
    recruitment, training, and career-building needed to ensure the
    ongoing vitality of our acquisition organizations.
        As a result, I am concerned that we may have stopped
    building the kind of strong, experienced senior leaders that we
    need to interact with industry and their own leadership when
    necessary to protect the interests of the DOD and the taxpayers
    of the United States.
        This is not a problem that will be easy to address. It
    obviously could take some period of time to rebuild the
    acquisition expertise for which the Air Force was known a
    decade ago. It will take a commitment to human capital
    planning, both in the Air Force and perhaps in other Services
    as well. Getting it right may require us to re-structure Air
    Force organizations and career paths, but we must get it right
    if we are going to avoid future abuses and ensure that the
    taxpayers' dollars are well spent as we fulfil our
    constitutional responsibility to provide for the common
    defense.
        I look forward to the testimony of our witnesses and again,
    Mr. Chairman, I thank you for your leadership.
        Senator McCain. Thank you.
        Senator Chambliss.
        Senator Chambliss. No opening statement, Mr. Chairman.
    Thank you.
        Senator McCain. Thank you.
        I want to thank the witnesses for appearing here today. Mr.
    McNulty, it is a little unusual to have a witness such as you
    before this committee and I thank you for taking the time from
    your busy schedule to be here. I felt that it would be of
    interest to the committee to know about your activities in
    addressing this issue.
        We have Senator Warner here, the distinguished chairman. I
    am sorry I did not see him. Would you care to make a statement?
        Senator Warner. I would just simply say, Mr. Chairman, I
    want to associate myself with your opening statement and that
    of the ranking member. I think back to a reprogramming action
    that was working its way through Congress. Three committees out
    of the four approved it and it landed on my desk, and I
    consulted with my colleague Senator McCain and we made a joint
    decision that this committee would not go along with that
    reprogramming. As a consequence, the events that took place
    with regard to this contract we all know well and we are here
    today.
        Mr. Chairman, I also draw to the attention of the committee
    a letter that you and others sent to the Secretary of Defense
    in November asking for a review by the Inspector General of all
    these matters. I would hope today that perhaps he could comment
    on the timing of that work that we requested.
        I join in welcoming my friend Mr. McNulty, the United
    States Attorney for the Eastern District of Virginia--a Warner
    appointee, I might add. But he and I have been discussing the
    work that he is doing independently of Congress and it is a
    very valuable inquiry into the overall procurement process.
        I thank the chairman.
        Senator McCain. Your testimony is already tainted, Mr.
    McNulty. [Laughter.]
        Thank you for appearing with us and thank you for the
    effort that you are making in helping us address these
    situations that have arisen. Please proceed.

     STATEMENT OF HON. PAUL J. McNULTY, UNITED STATES ATTORNEY FOR
                    THE EASTERN DISTRICT OF VIRGINIA

        Mr. McNulty. Thank you, Senator. I appreciate this honor to
    be here today to describe what is going on in Eastern Virginia.
    It is especially nice to be here with my home State Senator and
    someone who has been very influential in my opportunity in the
    Eastern District of Virginia.
        I would be remiss if I did not thank this committee for its
    work with regard to procurement fraud and government contract
    fraud and waste. For those of us in law enforcement, you have
    set a standard that has helped us a great deal. It has brought
    issues to the attention of investigators. It has raised the bar
    and kept it high. That kind of atmosphere makes it much easier
    for us in law enforcement to pursue these cases. So thank you
    for the efforts and again for the honor to be here.
        I want to describe very briefly the Eastern District of
    Virginia's Procurement Fraud Working Group. The Procurement
    Fraud Working Group is the result of two realities that have
    come into sharper focus in recent months. The first reality is
    that at this critical time in the life of our country our
    national defense and homeland security resources are especially
    precious, and criminals who cheat must be identified, stopped,
    and punished. Frankly, more procurement means more opportunity
    for fraud. We must ensure that our fighting men and women are
    getting well-made weapons and equipment and that the taxpayers
    are getting their money's worth when government buys goods and
    services. Our recent prosecution of former Air Force official
    Darleen Druyun and former Boeing Chief Financial Officer
    Michael Sears indicated to me, as well as many others, how
    strongly the public feels about this issue.
        The second reality is that Eastern Virginia is home to an
    ever-increasing number of government contractors providing
    highly beneficial goods and services to the Federal Government.
    In addition, many of the government's national security assets
    and contracting offices and agencies are located in Eastern
    Virginia. We are the home of the Pentagon and the Central
    Intelligence Agency (CIA) and the extensive naval interests
    down in the Tidewater region.
        The law enforcement community in this region must do all it
    can to strengthen the integrity of the procurement system. An
    energized and well-coordinated law enforcement effort that
    includes a broad group of investigative agencies is critical.
        For these reasons, we established an initiative to promote
    the early detection, prosecution, and prevention of procurement
    fraud. In partnership with various law enforcement agencies and
    inspector general offices, I have formed the Procurement Fraud
    Working Group. This working group will concentrate on Federal
    law enforcement efforts to combat procurement fraud.
        Now, the focus, Mr. Chairman, is on investigating and
    prosecuting, and by doing that, achieving deterrence. I was
    talking to a friend the other day who is a government
    contractor and he said to me, ``Congratulations on this recent
    prosecution; we have all taken notice of it and have reviewed
    what we are doing.'' This is an area where deterrence really
    does make a difference.
        Procurement fraud is a broad term. It is a broad concept
    and it includes product substitution, defective pricing or
    other irregularities in the pricing and formation of contracts,
    misuse of classified or other sensitive information, labor
    mischarging, accounting fraud, fraud involving foreign military
    sales, bribery, kickbacks, and ethical violations.
        Now, briefly on the Procurement Fraud Working Group. Some
    of the principal players on the working group are the Defense
    Criminal Investigative Service (DCIS), Naval Criminal
    Investigative Service (NCIS), National Reconnaissance Office
    IG, Department of Homeland Security (DHS) IG, Department of
    State and Department of Transportation IGs, and other agencies
    I have listed in my written testimony.
        The working group provides a novel and much needed
    mechanism to encourage and facilitate the sharing of strategic
    information or strategies to prevent and detect procurement
    fraud. Some of the strategies the investigative agencies are
    using, are listed in my testimony as well. I wanted to mention
    two examples.
        NCIS, they are placing investigators, criminal
    investigators, in their contracting offices. They are embedding
    these agents in the contracting offices in order to help
    contracting officials identify fraud more quickly and also to
    train them to do a better job themselves, but to also alert
    investigators to those signs so the investigations can begin
    more quickly. That is a good practice and it is the kind of
    practice that our working group has been able to facilitate
    spreading to other agencies.
        Another strategy is something that the Defense Criminal
    Investigative Service is doing: the enforcement efforts to
    detect ethical violations of conflict of interest by current
    and former agency officials. They call this their Senior
    Official Project and it grew out of the Darleen Druyun
    circumstance. They are looking at those who have held
    significant positions involving contracting and what kind of
    recusals and contracts they handled and where they went after
    they left. That practice is something that other agencies I
    know have already modeled or repeated because they were
    impressed with the proactive nature of that investigative
    tactic.
        Now, also, this working group is assisting in coordinating
    investigations. Some of the members of the working group
    historically have operated independently and without any formal
    means of sharing information relevant to procurement fraud
    enforcement. It is not unusual, for example, for two agencies
    to be pursuing the same target of a procurement fraud
    investigation without each other's knowledge. The working group
    will encourage both the concentration of law enforcement
    resources and, in appropriate cases, the adoption of a task
    force approach to investigate the criminal or civil cases.
        We recently had our first working group meeting. At that
    meeting a number of ongoing investigations were identified and
    agencies that had a similar case spoke up and said, ``Well, let
    us get together and work on that, let us see if we can combine
    our resources, let us compare notes.''
        The working group will meet periodically to facilitate this
    exchange of information and coordination. We will continue to
    expand our membership to maximize the impact we can have on the
    procurement process. As I said, we have already had our first
    meeting. That first meeting went very well. There was an
    enthusiastic response from the agencies and it was very well
    attended. So I am encouraged by the response I received to this
    new initiative.
        So in conclusion, let me say, Mr. Chairman and members of
    this subcommittee, it is our hope that with the increased
    communication among the participating agencies there will be
    greater collaboration in investigating this type of crime and
    there will be increased prosecutions of procurement fraud in
    the Eastern District of Virginia. An energetic and substantial
    attack on this criminal activity will send a strong message of
    deterrence to government officials and the private sector.
        Thank you, Mr. Chairman.
        [The prepared statement of Mr. McNulty follows:]
                     Prepared Statement by Paul J. McNulty
        Mr. Chairman and members of the subcommittee: As the United States
    Attorney for the Eastern District of Virginia, it is my privilege to
    appear before you today to discuss the initiative that my office has
    undertaken to increase the prevention and prosecution of fraud in the
    Federal procurement process. This is obviously an extremely important
    topic, and I commend you, Mr. Chairman, for holding this hearing.
                                i. introduction
        At this critical time in the life of our country, our national
    defense and homeland security resources are especially precious, and
    criminals who cheat the Government must be identified, stopped and
    punished. It is imperative that we take action to detect, prosecute and
    deter those unscrupulous government contractors and corrupt government
    officials whose theft of critically needed resources threaten America's
    safety and defense. We must ensure that our fighting men and women are
    getting well-made weapons and equipment and that the taxpayers are
    getting their money's worth when the Government buys goods and
    services.
        Eastern Virginia is home to a large number of government
    contractors providing highly beneficial goods and services to the
    Federal Government. In addition, many of government's national security
    assets and contracting offices and agencies are located in Eastern
    Virginia. The law enforcement community in this region must do all it
    can to strengthen the integrity of the procurement system. An energized
    and well coordinated law enforcement effort that includes a broad group
    of investigative agencies is critical, especially because the Federal
    Bureau of Investigation (FBI), which traditionally has played a
    significant role in combating procurement fraud, has shifted its
    resources away from this type of white collar crime since the events of
    September 11, 2001.
        For these reasons, I have established a procurement fraud
    initiative to promote the early detection, prosecution, and prevention
    of procurement fraud. In partnership with various Federal law
    enforcement agencies and Inspector General (IG) offices, I have formed
    the Procurement Fraud Working Group. This working group will
    concentrate on Federal law enforcement efforts to combat procurement
    fraud. Through collaboration and exchange of ideas, the working group
    will make law enforcement more effective in defeating, prosecuting and
    deterring procurement fraud.
                                 ii. background
    The Challenge
        Part of the cost of keeping America safe from terror and combating
    threats at home and abroad is increased procurement. Many of the
    Government's contracts are negotiated, signed or processed in Eastern
    Virginia because it is home to large procurement offices, including,
    among others, the Pentagon and Norfolk Naval Base, the largest navy
    base in the world. Moreover, many defense contractors and
    subcontractors are located in Eastern Virginia or have offices here. In
    addition to increasing DOD contracts, these businesses are expanding
    operations to acquire and service contracts from the State Department,
    Department of Homeland Security (DHS), and other Federal agencies. For
    example, the President and Chief Operating Officer of one of DHS's top
    10 contractors recently announced the company's intent to grow 15
    percent each year. With increased procurement, including a rise in the
    outsourcing of particular services, there is also the potential for an
    increase in procurement fraud, which includes product substitution,
    defective pricing or other irregularities in the pricing and formation
    of contracts, misuse of classified or other sensitive information,
    labor mischarging, accounting fraud, fraud involving foreign military
    sales, bribery, kickbacks and ethical violations.
        As the potential for procurement fraud has increased, however, the
    agencies responsible for investigating this crime remain relatively
    small. Defense Department investigative agencies, Inspectors General,
    and the Postal Inspectors are assigned enforcement responsibility for
    large geographical areas but have a limited number of agents. As I
    mentioned earlier, the FBI's comparatively large resources are now
    principally devoted to counter-terrorism efforts. This circumstance
    places a greater burden on the United States Attorney's offices to
    provide leadership and encourage greater law enforcement cooperation.
    The Eastern District of Virginia Track Record
        The Eastern District of Virginia (EDVA) has a proven track record
    of fighting contract fraud.
        Last year alone, our office obtained at least 15 convictions in
    cases involving procurement fraud. Dating back almost 20 years, our
    office played a pivotal role in ``Operation Ill Wind,'' which uncovered
    a major procurement fraud scandal. ``Operation Ill Wind'' resulted in
    about 70 convictions, including the convictions of half a dozen major
    defense contractors, some smaller defense contractors, employees,
    consultants and approximately a dozen Government officials. Most were
    given sentences of incarceration. The highest-ranking Government
    officials were an Assistant Secretary of the Navy, a Deputy Assistant
    Secretary of the Navy and a Deputy Assistant Secretary of the Air
    Force. The defendants paid significant fines, restitution and civil
    settlements. Since ``Operation Ill Wind,'' EDVA has continued to
    prosecute major DOD fraud and corruption cases, including:

             Darleen Druyun: She was a senior Air Force official,
            who obtained jobs with Boeing for her daughter, her daughter's
            fiance, and herself while negotiating contracts with Boeing on
            behalf of the Air Force. Druyun claims to have given Boeing a
            ``parting gift'' by agreeing to a higher price than she
            believed appropriate for Boeing's tanker aircraft. Boeing's
            former Chief Financial Officer, Michael Sears, also pleaded
            guilty for his role in this scandal.
             Robert Lee Neal, Jr., and Francis Delano Jones, Jr.,
            were convicted of extortion, bribery, money laundering and
            other crimes in 2003. Neal and Jones were senior DOD officials
            who used their official positions to obtain bribes, extortion
            payments and gratuities.
             Kevin Hawkins: He accepted over $47,000 in bribes for
            his participation in a scheme to use DOD International Merchant
            Purchase Authority Card (IMPAC) credit cards to make over
            $200,000 in fictitious purchases for the Pentagon.
             Bobby Gilchrist: He received over $200,000 in bribes
            for his participation in a credit card scheme, resulting in
            $400,000 in Government losses.
             The Ebersole dog case, focused on fraudulent
            procurements involving untrained bomb detection dogs used by
            the Internal Revenue Service (IRS), State, Federal Reserve, and
            Federal Emergency Management Agency (FEMA).
             The case against Jeffrey Bochesa, and several others,
            involved $300,000 in gratuities and a $1.33 million fraud
            committed by Bochesa and his company in connection with a
            National Reconnaissance Office subcontract.
             The Dutta case involved more than $800,000 in
            overcharging on United States Agency for International
            Development (USAID) contracts.
             The Photogrammetrics case involved more than $500,000
            of overcharges on major Department of Transportation (DOT) road
            projects in Northern Virginia.
             Northrop Grumman paid $60 million in connection with
            defective pricing on a major DOD contract in Norfolk.
    III. Description of the Initiative
        In an effort to address the problem of procurement fraud, the
    United States Attorney Office (USAO) in EDVA, in partnership with a
    large segment of the Federal law enforcement community, has formed the
    Procurement Fraud Working Group. Some of the principal players on the
    Working Group are the Defense Criminal Investigative Service, Naval
    Criminal Investigative Service, National Reconnaissance Office-IG, DHS-
    IG, Department of State-IG and Department of Transportation-IG.\1\ This
    working group will provide a novel and much needed mechanism to
    encourage and facilitate the sharing of strategies to prevent and
    detect procurement fraud and information associated with targets of
    procurement fraud investigations. Some members of the working group
    historically have operated independently and without any formal means
    of sharing information relevant to procurement fraud enforcement.
    Indeed, it is not unusual, for example, for two agencies to be pursuing
    the same target of a procurement fraud investigation, without the other
    agency's knowledge. The working group will encourage both the
    concentration of law enforcement resources, and, in appropriate cases,
    the adoption of a ``task force'' approach to investigating criminal and
    civil cases.
    ---------------------------------------------------------------------------
        \1\ Notwithstanding its shift in priorities towards counter-
    terrorism, the FBI will participate on the task force in a limited
    capacity. Other agencies that will participate on the working group
    include the National Science Foundation-OIG, Department of Treasury-
    OIG, Coalition Provisional Authority-OIG, IRS, Air Force Office of
    Special Investigations, NASA-OIG, Department of Education-OIG,
    Department of Interior-OIG, General Services Administration-OIG, Army-
    CID, Department of Commerce-OIG, CIA-OIG, and Department of Veterans
    Affairs-OIG, among others.
    ---------------------------------------------------------------------------
        In addition, the working group will assist participant agencies in
    developing new strategies to combat procurement fraud. Some of the
    working group participants already have adopted strategies that we
    believe must be shared. Examples of these strategies include the
    following:

             Collaboration between special agents and prosecutors
            at early stages of procurement fraud investigations to assure
            successful prosecutions and civil recoveries.
             Education of Government contracting officers, program
            managers and other agency personnel on issues relating to the
            detection and prevention of procurement fraud.
             Placement of agency investigators at major procurement
            offices to work with agency employees who are directly involved
            in the negotiation of Government contracts.
             Use of computer data-mining and other programs to
            uncover and detect procurement fraud.
             Enhanced efforts to detect ethics violations and
            conflicts of interest by current and former agency officials.
             Improved training of special agents and auditors to
            assist them in conducting investigations of procurement fraud,
            bribery and conflicts of interest.

        The working group will meet periodically to facilitate exchange of
    information and ideas. The working group also will continue to expand
    its membership to maximize positive impact on the procurement process.
                                 iv. conclusion
        In short, it is our hope that with increased communication among
    the participant agencies, there will be greater collaboration in
    investigative efforts and increased prosecutions of procurement fraud
    in the Eastern District of Virginia. An energetic and substantial
    attack on this criminal activity will send a strong message of
    deterrence to Government officials and the private sector.
        Again, Mr. Chairman, we appreciate your support in this endeavor. I
    would be pleased to answer any questions you may have. Thank you.

        Senator McCain. Thank you very much.
        Mr. Schmitz, welcome back.

        STATEMENT OF HON. JOSEPH E. SCHMITZ, INSPECTOR GENERAL,
                         DEPARTMENT OF DEFENSE

        Mr. Schmitz. Thank you, Mr. Chairman, Senator Lieberman,
    Chairman Warner, Senator Chambliss. Thanks for another
    opportunity within a week to testify before the subcommittee
    and to address your questions regarding Air Force acquisition
    oversight. I will also discuss briefly today our related work
    on commercial contracting practices for defense system
    procurement, which I understand is of concern to the
    subcommittee as well. I would ask that my complete statement be
    introduced.
        Senator McCain. Without objection.
        Mr. Schmitz. On March 29, 2004, we issued a report on the
    acquisition of the Boeing KC-767 Alpha tanker aircraft, in
    which we concluded, among other findings, that at the time, the
    proposed tanker contract, as negotiated, was not a good deal
    for the DOD or for the American taxpayers. It was our judgment
    that the Air Force used a procurement strategy that
    demonstrated neither best business practices nor prudent
    acquisition procedures to provide accountability for the
    expenditure of $23.5 billion for the KC-767 tanker program.
    Therefore, we recommended that the Under Secretary of Defense
    for Acquisition, Technology, and Logistics not proceed with the
    program until he resolved the issues pertaining to the
    procurement strategy, acquisition procedures, and statutory
    requirements.
        The criminal investigative component of the Office of
    Inspector General, known as the Defense Criminal Investigative
    Service (DCIS), has led the investigations of Darleen Druyun,
    the former Principal Deputy Assistant Secretary of the Air
    Force for Acquisition and Management, and Michael Sears, the
    former Boeing Chief Financial Officer, together with the
    Federal Bureau of Investigations (FBI) and the U.S. Attorney.
        Both of these officials have since pled guilty to various
    Federal crimes associated with conflicts of interest. Ms.
    Druyun's admissions implicated several other Air Force
    contracts and we continue to assist the U.S. Attorney for the
    Eastern District of Virginia, to my right, and Department of
    Justice with the criminal and civil litigation aspects of this
    ongoing matter.
        On November 19, 2004, Senate Armed Services Committee
    Chairman Warner, Ranking Member Levin, and Senator McCain
    requested that my office conduct an accountability review of
    the KC-767 Alpha Tanker Program to determine ``what happened,
    who was accountable, and what actions must be taken to prevent
    this situation from happening again.''
        To determine what happened, when, and what individuals were
    in key positions, we developed a time line with an accompanying
    narrative that shows significant events for the tanker lease
    proposal before and after Ms. Druyun ended her employment with
    the Air Force in November 2002. To determine who made or should
    have made decisions on the Tanker Program, we are reviewing
    program documentation, including e-mails, from the Office of
    Secretary of Defense, Department of the Air Force, Office of
    Management and Budget, Congressional Budget Office, and the
    Boeing Company.
        In addition, we have conducted 93 interviews with military
    and civilian officials involved with the Tanker Program. We
    plan to report out by the end of this month. At that time, we
    will include our recommendations.
        In the February 11, 2005, memorandum, Michael Wynne, at the
    time the acting Under Secretary of Defense for Acquisition,
    Technology, and Logistics, referred to us for further review
    eight Air Force contracts which had involved Ms. Druyun. We
    identified two additional contracts for review and, in
    addition, we are reviewing two classified contracts previously
    referred to us by the acting Under Secretary.
        In July 2004 we reported that the Air Force conditionally
    accepted 50 C-130J aircraft at a cost of $2.6 billion even
    though none of the aircraft met commercial contract
    specifications or operational requirements. This was the
    subject of my testimony last week. As a result of our initial
    report, the government fielded C-130J aircraft that could not
    perform the intended mission. That was our finding. This was
    the subject, as I said in my testimony last Wednesday and I
    will not belabor it any further today.
        In April 2004, we reported that Ms. Druyun and other senior
    Air Force managers did not use appropriate contracting
    procedures, as specified in the Federal Acquisition
    Regulations, to determine price reasonableness when they
    negotiated a $1.3 billion NATO AWACS contract with Boeing in
    September of 2002.
        A January 1993 DOD Inspector General report titled
    ``Government Actions Concerning McDonnell Douglas Corporation
    During 1990,'' identified five Air Force officials, including
    Ms. Druyun, as culpable for improper progress payments to
    McDonnell Douglas on the C-17 program. Resulting ``improper
    contracting actions reduced financial risk on the C-17 program
    by $1.6 billion and created the false appearance of program
    success.'' The Air Force subsequently disciplined all of the
    officials identified in my predecessor's report except for Ms.
    Druyun.
        We began an audit of the Air Force source selection process
    for the small diameter bomb in June 2004 in response to a
    referral from our investigators. On November 10, 2004, Lockheed
    Martin filed a protest with the GAO relating to the small
    diameter bomb development and demonstration contract award to
    Boeing, and in a decision issued on February 18, 2005, GAO
    sustained the Lockheed Martin protest. That contract will now
    be recompeted.
        We have two related ongoing audits of Air Force procurement
    practices. However, both audits have been suspended because of
    ongoing base realignment and closure support work and other
    operational priorities. The first audit, when we resume it,
    will evaluate the adequacy of management oversight exercised by
    each Service Acquisition Executive over major acquisition
    programs. The second audit will evaluate commercial contracting
    practices for procuring defense systems and will determine
    whether or not procurement officials have been complying with
    Federal Acquisition Regulations when procuring defense systems
    or other subcomponents.
        This concludes my oral statement. I will be happy to answer
    any questions you may have.
        [The prepared statement of Mr. Schmitz follows:]
                  Prepared Statement by Hon. Joseph E. Schmitz
        Mr. Chairman and members of the Airland Subcommittee: Thank you for
    the opportunity to appear before the committee today and to address
    your questions regarding Air Force acquisition oversight. I will also
    discuss related work on commercial contracting practices for major
    Defense system procurements which I understand is of concern to the
    committee.
         audit of the acquisition of the boeing kc-767a tanker aircraft
        We conducted an audit of the Air Force's planned acquisition of
    Boeing KC-767A Tanker Aircraft, and--based on the audit findings I am
    about to explain--recommended that the Under Secretary of Defense for
    Acquisition, Technology, and Logistics, either:

             proceed with the sole-source acquisition of 100 or
            fewer tanker aircraft, but only after implementing audit
            recommendations to resolve contracting and acquisition issues;
             initiate a new major defense acquisition program based
            on the results of the ongoing analysis of alternatives for
            military tanker aircraft; or
             implement a mix of the first two options.

        Section 8159 of the Department of Defense Appropriations Act for
    Fiscal Year 2002, authorized the Air Force to make payments under a
    multiyear pilot program to lease general purpose Boeing 767 aircraft in
    commercial configuration. Because of concerns over the cost to lease
    100 tanker aircraft, Congress then authorized the Air Force in Section
    135 of the National Defense Authorization Act for Fiscal Year 2004 to
    lease no more than 20 tanker aircraft and purchase no more than 80
    tanker aircraft.
        Using the congressional authority, the Air Force finalized
    negotiations with Boeing in December 2003 to lease 20 KC-767A tanker
    aircraft and procure 80 tanker aircraft using noncompetitive fixed-
    price commercial contracts. Because of revelations by The Boeing
    Company (Boeing) in November 2003 concerning apparent improprieties by
    two of the company's executives, the Deputy Secretary of Defense placed
    the Boeing KC-767A Tanker Program on hold until our review and two
    other studies were completed. On March 29, 2004, we issued Inspector
    General Report No. D-2004-064, ``Acquisition of the Boeing KC-767A
    Tanker Aircraft,'' in which we concluded, among other findings, that at
    the time, the proposed Boeing KC-767A tanker contracts as negotiated
    and the acquisition strategy were not a good deal for the Department of
    Defense (DOD), or for the taxpayers.
    Commercial Item Procurement Strategy
        Strongly encouraged by Air Force management including Ms. Druyun,
    the Air Force contracting officer decided to use a commercial item
    procurement strategy for the sole-source Boeing KC-767A Tanker Program
    with Boeing. However, contrary to the Air Force interpretation, we
    found that a military tanker aircraft is not a commercial item as
    defined in section 403 of title 41, United States Code. The Air Force
    contracting officer, in making the commercial item determination,
    inappropriately determined that modifications of the Boeing 767
    aircraft were of a minor type not customarily available in the
    commercial marketplace. The modifications made to develop the Boeing
    767A tanker aircraft were not minor, were for unique military-specific
    purposes, and cost 65.8 percent of the base commercial aircraft price.
    In addition, the modifications significantly changed the aircraft's
    primary purpose and function from that of transporting people and cargo
    in a civil context to that of a military tanker. Furthermore, there is
    no commercial market to establish reasonable prices by the forces of
    supply and demand. The commercial item procurement strategy also
    required that the Air Force use a fixed-price type contract rather than
    a more appropriate mix of cost and fixed-price incentive type
    contracts. The commercial strategy also exempted Boeing from the
    requirement to submit cost or pricing data (Truth in Negotiations Act
    [section 2306a of title 10, United States Code]), which places the
    Government at high risk for paying excessive prices and profits and
    precludes good fiduciary stewardship and oversight of congressionally
    appropriated DOD funds.
        The Air Force stated that Federal Acquisition Regulation (FAR) Part
    16.202-2 provides that use of a firm-fixed-price contract is suitable
    for acquiring commercial items or for acquiring other supplies or
    services on the basis of reasonably definite functional or detailed
    specifications when the contracting officer can establish fair and
    reasonable prices. Price reasonableness under FAR 16.202-2 can be
    established by a number of different methods including reasonable price
    comparisons with prior purchases of the same or similar supplies or
    services. FAR 16.202-2 permits the use of fixed-price contracts
    notwithstanding performance uncertainties as long as the performance
    uncertainties can be identified and reasonable estimates of their cost
    impact can be made, and the contractor is willing to accept a firm
    fixed price representing assumption of the risks involved.
        We believe that by using fixed-price contracts, the Air Force
    created a high-risk procurement strategy for the development,
    modification, procurement, and logistics support of the Boeing KC-767A
    Tanker Program. As to the Boeing KC-767A Tanker Program, a fixed-price
    commercial contract may be appropriate for the basic Boeing 767-200ER
    aircraft, but a cost or fixed-price incentive contract would be more
    appropriate for the initial Boeing KC-767A tanker aircraft development,
    modification, and logistics support efforts.
        Using the commercial item procurement strategy, the Air Force did
    not have sufficient data to make multi-billion dollar decisions for the
    Boeing KC-767A Tanker Program and could not demonstrate the level of
    accountability needed to conclude that the prices negotiated represent
    a fair expenditure of DOD funds.
    Acquisition Strategy
        The Air Force used Section 8159 of the Department of Defense
    Appropriations Act for Fiscal Year 2002 as its acquisition strategy for
    the Boeing KC-767A tanker aircraft. The focus and goal of using this
    informal acquisition strategy was to expeditiously lease 100 Boeing KC-
    767A tanker aircraft. By not treating the acquisition of the Boeing KC-
    767A tanker aircraft as an acquisition program, the Air Force
    disregarded best business practices, prudent acquisition procedures,
    and compliance with statutory provisions for testing. Without a
    disciplined acquisition strategy, the Air Force cannot assure the
    warfighter that Boeing will deliver KC-767A tanker aircraft that will
    satisfy operational requirements.
        Specifically, the operational requirements document (ORD) for the
    tanker did not require that the first 100 Boeing KC-767A tanker
    aircraft acquired meet requirements in the Mission Needs Statement for
    ``Future Air Refueling Aircraft.'' Instead, the Air Force planned to
    address the requirements through an evolutionary acquisition strategy
    in three spirals. In doing so, the negotiated contract for the first
    100 tanker aircraft did not include the key performance parameter for
    interoperability. By not including the interoperability key performance
    parameter in the negotiated contract, the Air Force may not achieve the
    objectives of the remaining key performance parameters because of their
    dependency on interoperability requirements. In addition to not meeting
    tanker aircraft interoperability requirements, the first 100 tanker
    aircraft would not have met warfighter requirements for:

             refueling multiple aircraft simultaneously;
             conducting secondary missions, such as combined cargo/
            passenger transportation and aeromedical evacuation;
             self-protective measures (including armor protection);
            and
             electromagnetic pulse protection.

        Also, systems engineering requirements were not fully developed.
    Among the systems engineering requirements not fully developed were:

             a performance metric for verifying the satisfaction of
            the 40-year service life requirement while operating 750 hours
            per year;
             inclusion of corrosion prevention and control
            requirements in the system specification; and
             inclusion of ORD requirements for interoperability,
            combat identification, and secure communications in the system
            specification.

        Further, Air Force plans for conducting operational and
    survivability testing of the Boeing KC-767A tanker aircraft did not
    comply with statutory requirements in sections 2366 and 2399 of title
    10, United States Code. The statutes require that systems under
    development may not proceed beyond low-rate initial production,
    normally 10 percent of the total production quantity, before
    operational tests determine the effectiveness and suitability of the
    system (section 2399 of title 10) and survivability testing of the
    system (section 2366 of title 10) are completed. As planned, the
    dedicated operational and survivability testing of the Boeing 767A
    tanker aircraft would not occur until 3 years after the award of the
    contracts for the lease of 20 tanker aircraft and the procurement of 80
    tanker aircraft. The Director, Operational Test and Evaluation has also
    taken the position that the required testing should be accomplished
    before the Air Force proceeds with the full-rate production decision
    for the 80 tanker aircraft.
               boeing kc-767a tanker lease criminal investigation
        The criminal investigative component of the Office of Inspector
    General, known as the Defense Criminal Investigative Service (DCIS),
    has led the investigations of Darleen Druyun, the former Principal
    Deputy Assistant Secretary of the Air Force for Acquisition and
    Management and Michael Sears, the former Boeing Chief Financial
    Officer, both of whom have since pled guilty to Federal crimes
    associated with conflicts of interest. As the result of interviews
    conducted with Ms. Druyun during the course of the investigation, Ms.
    Druyun also admitted to improperly influencing other contracts and
    stated she was not objective while negotiating several Department of
    Defense programs. These admissions implicated the C-17 Multi-Year
    Procurement, a North Atlantic Treaty Organization (NATO) Airborne
    Warning and Control System (AWACS) equitable adjustment, the Small
    Diameter Bomb contract, the C-130 Avionics Modernization Program, and
    the proposed KC-767 tanker lease. Several of these admissions were
    incorporated into Ms. Druyun's supplemental statement of facts and
    resulted in an increase of her sentence guidelines range. We continue
    to assist the U.S. Attorney for the Eastern District of Virginia and
    Department of Justice with the criminal and civil litigation aspects of
    this investigation.
        DOD Office of the Inspector General (OIG) has also led and
    continues to participate in the investigation of the theft of Lockheed
    Martin Corporation proprietary documents relating to the evolved
    expendable launch vehicle (EELV) program by persons who later went to
    work for Boeing and delivered the documents to Boeing managers. Three
    Boeing divisions were suspended from Government contracting for a
    period of time by the Air Force as a result of our EELV investigation.
                  kc-767a tanker program accountability review
    Request from the Senate Armed Services Committee
        On November 19, 2004, Senate Armed Services Committee Chairman
    Warner; Ranking Member Levin; and Senator McCain sent a letter to the
    Secretary of Defense requesting that the DOD IG conduct an
    accountability review of all members of the DOD and the Department of
    the Air Force, both military and civilian, who participated in
    structuring and negotiating the proposed lease contract for the KC-767A
    tanker aircraft program, including the then-Secretary of the Air Force
    and the then-Assistant Secretary of the Air Force (Acquisition).
    Specifically, the accountability review should determine ``what
    happened, who was accountable, and what actions must be taken to
    prevent this situation from happening again.''
        We plan to issue our report by April 30, 2005. At that time, we
    will include recommendations.
       dod oig review of contracts referred by acting under secretary of
               defense for acquisition, technology, and logistics
        In a February 11, 2005, memorandum, Michael Wynne, Acting Under
    Secretary of Defense for Acquisition, Technology and Logistics,
    referred eight Air Force contracts involving actions of Darleen Druyun
    to DOD OIG for review. Mr. Wynne had previously referred to us two
    unidentified classified contracts for review. All of these contracts
    are Air Force contracts that were identified during the course of an
    internal study commissioned by the acting Under Secretary in November
    2004. A selected team led by Sallie Flavin, Deputy Director, Defense
    Contract Management Agency conducted the internal study. This team
    reviewed specific acquisition actions involving Ms. Druyun over the
    course of the time that she was Principal Deputy Assistant Secretary of
    the Air Force for Acquisition and Management. The acquisition actions
    identified for review were source selection decisions, Acquisition
    Strategy Panel (ASP) decisions, revisions to Acquisition Strategy
    Reports during or after ASP approvals, award fee determinations,
    equitable adjustments, actions involving contested payments to
    contractors, contract restructures, contract extensions, and contract
    litigation. Excluded from the study were acquisition actions already
    under review by another Government body.
        Specifically, 407 acquisition actions were reviewed that Ms. Druyun
    had been involved with from 1993 through 2002. These actions included
    approvals of Justification and Approvals for other than full and open
    competition, source selection decisions, negotiation decisions, and
    award fee determinations. As a result of this review, eight actions
    were identified as requiring additional scrutiny. Specifically, these
    eight actions are:

             National Polar-orbiting Operational Environmental
            Satellite System--Conical Microwave Imager Sensor (Contract
            F04701-01-C-0502);
             C-5 Avionics Modernization Program--(Contract F33657-
            98-C-007/006);
             Financial Information Resource System (FIRST)--
            (Contract FA877-01-C0-0020);
             C-22 Replacement Program (C-40)--(Contract F33657-00-
            C-0056);
             60 K Tunner Program;
             KC-135 Programmed Depot Maintenance (Contract F42620-
            98-D-0054);
             F-16 Mission Training Center (Contract F33657-99-D-
            2025); and
             C-40 Lease & Purchase Program (Contract F33657-02-C-
            0017).

        We have identified an additional procurement action on the Joint
    Primary Aircraft Trainer System (J-PATS) program. We are in the process
    of reviewing the detailed documentation obtained by the study team on
    each of the contracts identified. Our auditors are currently
    coordinating with our investigators on the eight contracts because of
    the nature of the issues involved and will be assigning internal
    responsibility for addressing those issues. We are also reviewing
    additional items associated with the C-130J program.
                                c-130j aircraft
        In July 2004, we reported that the Air Force conditionally accepted
    50 C-130J aircraft at a cost of $2.6 billion even though none of the
    aircraft met commercial contract specifications or operational
    requirements. As a result, the Government fielded C-130J aircraft that
    could not perform the intended mission.
        The Air Force initially contracted for two C-130J aircraft in 1995
    through a modification to a 1990 contract for C-130H aircraft. The Air
    Force undertook to buy the C-130J as a commercial item, which limited
    cost oversight by the Government. Further, FAR Part 12.208 ``Contract
    quality assurance'' requires that contracts for commercial items shall
    rely on contractors' existing quality assurance systems as a substitute
    for Government inspection and testing before tender for acceptance. As
    of the time of our audit, the contractor had been unable to deliver a
    specification compliant aircraft.
        The Air Force's commercial justification included, in part, that
    there was a 95 percent commonality between the C-130J and the civilian
    commercial version of the plane and that modifications from the
    commercial version would be minor. The Air Force could not provide
    evidence supporting its claims. In fact, the Air Force acknowledged
    that the C-130J included features not customarily available in the
    commercial marketplace including aerial delivery (cargo and paratroop),
    defensive systems, secure voice communication, night vision imaging,
    and satellite communication. The Air Force also acknowledged at the
    time of the audit that no commercial version (L-100J) of the C-130J
    currently existed and no sales of the L-100J had been made to the
    public. A web site cited by the Air Force in its comments to a draft of
    our report showed that the L-100 J ``would be a commercial derivative''
    of the C-130J.
         nato awacs mid-term modernization program ``global solution''
        In April 2004, we reported that senior level Air Force managers did
    not use appropriate contracting procedures as specified in the Federal
    Acquisition Regulation when they negotiated the NATO AWACS Global
    Solution with the Chief Executive Officer of Boeing Integrated Defense
    Systems in September 2002. The report identified those senior level
    managers as Darleen Druyun, who at the time was Principal Deputy
    Assistant Secretary of the Air Force for Acquisition and Management;
    the Chairman of the NATO Airborne Early Warning and Control Program
    Management Agency Board of Directors); and the NATO Airborne Early
    Warning and Control Program Management Agency General Manager.
    Specifically, Ms. Druyun and other managers did not determine whether
    the $1.32 billion NATO AWACS negotiated price was fair and reasonable
    because they did not use an independent Government cost estimate, did
    not use: (1) an integrated product team to analyze the Boeing proposed
    statement of work, including a technical evaluation of labor hours and
    labor mixes; (2) audit assistance to review direct and indirect labor
    rates; and (3) weighted guidelines to establish reasonable profit and
    share ratios.
                       druyun actions on the c-17 program
        A January 1993 DOD OIG report, ``Government Actions Concerning
    McDonnell Douglas Corporation During 1990,'' identified five Air Force
    officials, including Ms. Druyun, as culpable for improper progress
    payments to McDonnell Douglas on the C-17 program. The report
    recommended that the Secretary of the Air Force take appropriate
    disciplinary action against Ms. Druyun and the others relating to
    actions to implement an Air Force ``plan of action to provide financial
    assistance to [McDonnell Douglas Corporation (MDC)] during August
    through December 1990.'' Resulting ``improper contracting actions
    reduced [MDC] financial risk on the C-17 program by $1.6 billion and
    created the false appearance of [program] success. . . .''
        The Air Force subsequently disciplined four of those officials, but
    exonerated Ms. Druyun. Further review by the Secretary and Deputy
    Secretary of Defense ``concluded that punishment of Mrs. Druyun was not
    appropriate.'' A 1993 letter from Senator Grassley to then Secretary of
    Defense Aspin objected to the purported Air Force exoneration and
    promotion of Druyun ``1 month after the [DOD] Inspector General
    recommended that she be disciplined for improper or illegal behavior,''
    in response to which then Under Secretary of Defense Deutch responded
    to Senator Grassley, ``You may be assured that we would not retain Mrs.
    Druyun in her present position if we felt it would jeopardize the
    integrity of defense acquisition.''
                              small diameter bomb
        We began an audit of the Air Force source selection process for the
    small diameter bomb (SDB) (Project No. D2004CH-0164) in June 2004 in
    response to a DOD OIG investigative referral.
        On November 10, 2004, Lockheed Martin filed a protest with the
    Government Accountability Office (GAO) relating to the SDB System
    Development and Demonstration (SDD) contract award to Boeing (RFP No.
    F08635-03-R-0038).

              In regard to that procurement, Lockheed Martin protests: (i)
            the Air Force's evident intention to reinstate a particular
            scope of work (known as Phase II) to a Boeing contract where
            the scope was removed from the SDB SDD competition under [the
            former Principal Deputy Assistant Secretary of the Air Force
            for Acquisition and Management's corrupt direction], as well
            as; (ii) the underlying award of the SDB contract because it
            now appears that the work scope for the SDD competition was
            defined not by the Agency's legitimate needs but through [the
            former Principal Deputy Assistant Secretary of the Air Force
            for Acquisition and Management's] corrupt dealings with Boeing.

        In a decision issued on February 18, 2005, GAO sustained Lockheed
    Martin's protest because:

              the record showed that Darleen Druyun was involved in the
            decisionmaking process that culminated in changes made to
            evaluation factors--including deletion of specific technical
            requirements. The record further showed that the Air Force
            currently intends to amend Boeing's contract on a sole-source
            basis to add those previously deleted requirements. GAO
            recommended that, rather than making this sole-source addition
            to Boeing's contract, the Air Force conduct a competition for
            those requirements.
                             related ongoing audits
    Audit of Service Acquisition Executives Management Oversight and
            Procurement Authority for Acquisition Programs
        The audit objective will be to determine the adequacy of each
    Service Acquisition Executive's management oversight procurement
    authority over major acquisition programs. Specifically, the audit will
    evaluate the program management and procurement decision process used
    by the Service Acquisition Executives and the Program Executive
    Officers.
    Audit of Commercial Contracting Practices for Procuring Defense Systems
        The overall audit objective will be to determine whether
    procurement officials are complying with Federal Acquisition Regulation
    Part 12, ``Acquisition of Commercial Items,'' and Part 15,
    ``Contracting by Negotiation,'' when procuring defense systems or their
    subcomponents. Specifically, we will evaluate the justifications used
    to determine whether major systems or subsystems meet commercial item
    criteria and evaluate the adequacy of the basis for establishing price
    reasonableness.
        Both audits have been suspended because of audit support for Base
    Relocation and Closure and other operational priorities.

        Senator McCain. Thank you very much.
        Secretary Dominguez, thank you for performing the tasks
    that you do, including the additional tasks as Secretary of the
    Air Force. We thank you for your dedicated service. Thank you
    for appearing today.

    STATEMENT OF HON. MICHAEL L. DOMINGUEZ, ACTING SECRETARY OF THE
                               AIR FORCE

        Mr. Dominguez. Thank you, sir. Mr. Chairman, Senator
    Lieberman, and distinguished members of the committee: Thank
    you for this opportunity to discuss Air Force acquisition and
    ethics.
        I take any breach of integrity and trust seriously. I am
    deeply concerned that Air Force leaders and our acquisition
    officials have lost the confidence of the members of this
    committee. I intend to address these issues forthrightly.
    Unethical behavior by any member of our team is an affront to
    the honest, hard-working members of the Air Force and a breach
    of trust with the American people. We must take all necessary
    steps to avoid abuses of trust, such as those committed by
    Darleen Druyun.
        We are working closely with Michael Wynne, the Under
    Secretary of Defense for Acquisition, Technology, and
    Logistics, to pursue what he called ``aggressive action to
    understand what may have contributed to this situation and how
    to protect against such problems in the future.''
        Air Force leaders are now cooperating fully with 48
    different investigations by 8 different agencies. I welcome
    independent assessments of our acquisition processes and
    procedures and will take quick and appropriate action on their
    recommendations.
        We have not waited for all those to be completed before
    taking corrective measures. We are improving our acquisition
    oversight to guard against this type of abuse. We are
    restructuring decisionmaking authority so that no one person
    exercises consolidated authority without effective oversight.
        In addition, we have adjusted procedures to ensure critical
    acquisition decisions are made in a more collaborative
    environment and every acquisition professional is required to
    complete new ethics training specifically geared to issues
    raised in Ms. Druyun's case. The Air Force has a unique values-
    based ethics program that transcends mere compliance. Our
    training emphasizes our Air Force core values. The conduct of
    our airmen must be consistent with those values whether there
    is an applicable rule or not. Our approach goes beyond the
    consequences of not following the rules and emphasizes the
    broader approach to effective decisionmaking. We want our
    airmen to commit to ethical behavior out of a strong
    understanding of how their conduct relates not only to the law,
    but also to the Air Force culture and the Air Force mission.
        The men and women of our Air Force Acquisition Corps,
    indeed of our entire Air Force, are outstanding professionals,
    committed to the Air Force's core values of integrity, service,
    and excellence. It is sad that Ms. Druyun deviated from this
    path and put personal gain over the needs of the Air Force and
    our country.
        Mr. Chairman, Senator Lieberman, and distinguished members
    of the committee, thank you again for the opportunity to
    discuss Air Force acquisition and our responses to recent
    events. I am committed to restoring the bond of trust and
    confidence we have enjoyed in the past and I look forward to
    your questions.
        [The prepared statement of Mr. Dominguez follows:]
                Prepared Statement by Hon. Michael L. Dominguez
        Mr. Chairman, members of the subcommittee, I appreciate this
    opportunity to discuss the status of Air Force acquisition oversight.
    In the wake of Ms. Darleen Druyun's illegal activities, which were an
    affront to the entire Air Force community, it is important for you to
    know that the Air Force takes this breach of integrity very seriously.
        We are working closely with Michael W. Wynne, the Under Secretary
    of Defense for Acquisition, Technology, and Logistics, to pursue what
    he described as ``aggressive action to understand what may have
    contributed to this situation and how to protect against such problems
    in the future.'' Air Force leaders are currently cooperating fully with
    48 different investigations--many of which we asked for--by 8 different
    agencies. I welcome independent assessments of our acquisition
    processes and procedures and will take quick and appropriate action on
    their recommendations.
                         internal and external reviews
        In December 2003, as the Department of Defense Inspector General
    (DOD IG) investigation of Ms. Druyun was ramping up, the Air Force
    initiated internal investigations on all major contract actions awarded
    to The Boeing Company in which Ms. Druyun participated during the 2
    years leading up to her retirement. We realized it had been a mistake
    for a single person to determine the acquisition strategy, wield the
    source selection authority for major contracts, and conduct the
    management and oversight of contract executions. We were in the process
    of correcting that situation when Ms. Druyun chose to leave Federal
    service.
        As a result of that internal review, the Secretary of the Air Force
    asked the DOD IG to review the contract restructuring on the North
    Atlantic Treaty Organization (NATO) Airborne Warning and Control System
    (AWACS) modernization program. In April 2004, the DOD IG concluded that
    the production and retrofit phase option negotiations did not follow
    correct business and contracting procedures. Based on this finding, in
    January 2005 the Air Force and The Boeing Company completed
    renegotiations for the price for this program.
        Based on admissions in Ms. Druyun's sentencing statement, the Air
    Force expanded its internal review to include her nearly 10-year tenure
    as Principal Deputy Assistant Secretary for Acquisition and Management.
    A special group designated by the Commander of Air Force Materiel
    Command (AFMC) supervised dedicated investigative teams of program
    management, contracting, and legal personnel; reviewed their findings;
    and made final recommendations to the Air Staff. When it became clear
    that the investigation's scope exceeded what could reasonably be
    accomplished without the appearance of conflict of interest, the Air
    Force asked the Office of the Secretary of Defense (OSD) to accomplish
    an unbiased external review.
        The OSD-directed team, led by the DCMA Deputy Director, Ms. Sallie
    Flavin, reviewed 407 contract actions at various locations, including:
    Los Angeles, Vandenberg, Patrick, Peterson, Kirtland, Maxwell, and
    Bolling Air Force Bases; the Aeronautical Systems, Electronic Systems,
    Space and Missile Systems, and Air Armament Centers; and Warner-Robins,
    Ogden, and Oklahoma City Air Logistics Centers. Air Force personnel
    provided materiel support and assistance to this multi-service/agency
    team. The team found a few anomalies: their investigation identified
    eight new contract actions that were subsequently referred to the DOD
    IG. Most of these actions occurred during the last few years of Ms.
    Druyun's tenure; however, one occurred in 1998. We await the final
    reports of the DOD IG investigations, but early indications suggest
    these actions did not involve any criminal activity.
                               additional reviews
        Air Force internal reviews were also completed for the following
    programs: Evolved Expendable Launch Vehicle Program Restructure; Global
    Positioning System Block IIF Single Prime Initiative contract
    modification; and the Wideband Gap Filler source selection. After
    discussions with OSD staff, we are preparing to refer them to the DOD
    IG to review the programs and the Air Force's findings. We are doing
    this to ensure absolute objectivity in the final reviews.
        We are continuing to review contract modifications Ms. Druyun
    negotiated on the C-17 program and the NATO AWACS Mid-Term Engineering
    and Manufacturing Development (EMD) settlement. We completed a
    preliminary review of the negotiations on the C-17 program. With
    respect to NATO AWACS, the Air Force and The Boeing Company have agreed
    to reexamine the $100 million settlement on the EMD contract later this
    year when development efforts come to closure.
        The DOD IG is now investigating specific actions, identified
    through the above reviews, to identify serious problems or abuses.
    Additionally, the DOD IG is performing an audit of Service Acquisition
    Executives' management and oversight procurement authority for
    acquisition programs.
        In the wake of Ms. Druyun's sentencing statement, the Air Force
    received several contract protests from parties that had lost source
    selection competitions to The Boeing Company. These competitions
    included the small diameter bomb (SDB), C-130 Avionics Modernization
    Program (AMP), and two classified programs. To ensure these
    investigations were completely fair and impartial, the Air Force
    encouraged protesting parties on the SDB and AMP source selections to
    protest directly to the Government Accountability Office (GAO). As has
    been well publicized, the protests were upheld in both cases because
    Ms. Druyun admitted to bias toward one bidder. The Air Force intends to
    comply fully with the GAO's rulings and recommendations issued thus
    far, which we believe strike the proper balance between providing what
    the warfighters need and protecting the interests of the taxpayers.
        Finally, a Defense Science Board (DSB) Task Force was established
    to address the adequacy of management and oversight processes for
    acquisition organizations DOD-wide. They are evaluating the systems to
    ensure proper checks and balances exist and determine if acquisition
    simplification could improve efficiency and oversight efficacy. The
    task force has completed their initial investigations, and the Air
    Force eagerly awaits their report.
                                   conclusion
        The Air Force continues to work closely with organizations
    reviewing and investigating acquisition actions Ms. Druyun completed
    while she was the Principal Deputy Assistant Secretary for Acquisition
    and Management. We will review their findings and take appropriate
    actions based on their recommendations, including renegotiating fair
    and reasonable prices as well as recompeting certain contracting
    actions.
        The Air Force started to realign our program executive office
    reporting structure before Ms. Druyun left Federal service; that change
    strengthened the lines of accountability and decentralized program
    execution decisionmaking. Recently, we have refocused our attention on
    values-based ethics training: every acquisition professional is now
    required to complete new ethics training specifically geared to issues
    raised in Ms. Druyun's case.
        Our acquisitions--indeed, everything we do in service to the
    Nation--begin with the expectation of integrity. It is unfortunate that
    Ms. Druyun, in the waning years of her tenure, was corrupted by the
    power given to her and put her own interests before those of the Air
    Force and the Nation. My deepest regret about this incident is how her
    actions stained the reputations of the over 700,000 Active Duty, Guard,
    Reserve, and civilian airmen who are dedicated to Excellence and who
    daily uphold our other two Core Values of Integrity First and Service
    Before Self. The men and women of the Air Force--inside and outside the
    acquisition corps--are outstanding professionals. I appreciate the
    opportunity to be here today on their behalf, and I am committed to
    restoring public confidence in our Air Force and its leadership.
        Thank you again for giving the Air Force the opportunity to discuss
    these recent events.
                                     ______

     Supplement to SASC Testimony Concerning AF Position on C-130 AMP and
                          Small Diameter Bomb Protests
        This submission supplements testimony provided to the Airland
    Subcommittee, Senate Armed Services Committee at the April 14, 2005,
    hearing on the fiscal year 2006 defense budget concerning the Air Force
    position on protests filed with the Government Accountability Office
    (GAO) on the C-130 Avionics Modernization Program (AMP) and Small
    Diameter Bomb (SDB) Program.
        It is significant that the Air Force took the lead in directing the
    protesters to the GAO. All of the protests on these two important
    procurement programs were initially filed with the Air Force as agency-
    level protests. The Air Force declined to decide the protests, instead
    urging the protesters to file with the GAO. The Air Force did so
    because it wanted a full, open, and independent review of the potential
    impact of Ms. Druyun's admitted bias toward Boeing on these
    procurements.
        The source selection decision for the SDB contract challenged in
    the protest was not made by Ms. Druyun, but by another senior
    government official, more than 9 months after Ms. Druyun left the Air
    Force. In addition, Air Force personnel who worked on the SDB source
    selection at issue testified before the GAO that Air Combat Command
    developed the technical requirements for the SDB, not Ms. Druyun.
    Although the GAO decision cites to the fact that at least one
    requirement (specified accuracy) changed as a result of an independent
    analysis Ms. Druyun directed to be performed, the key is that the
    analysis was independent. Ms. Druyun did not specify or pre-determine
    the results of that analysis. Based on these factors, the Air Force
    position during the protests was that Ms. Druyun, having already
    retired from government service over 9 months before the source
    selection decision, did not play a material role in the challenged
    source selection decision and did not improperly influence the SDB
    procurement. Notwithstanding the evidence presented by the Air Force,
    the GAO concluded that Ms. Druyun had participated materially in the
    SDB acquisition. Given Ms. Druyun's participation, the GAO ruled that
    the Air Force failed to demonstrate that the protester was not
    prejudiced by Druyun's admitted bias toward Boeing. The Air Force, by
    letter of April 15, 2005, advised the GAO that it will comply with
    GAO's recommendation for further competition on this program.
        The Air Force position on the C-130 AMP protest was based on
    evidence that the underlying technical evaluations were not tainted by
    Ms. Druyun's bias. Ms. Druyun, as the Source Selection Authority (SSA)
    for the C-130 AMP procurement, clearly did play a material role in the
    award of that contract. As the SSA, she personally selected Boeing over
    other competitors for award. She also signed the source selection
    decision document, ostensibly setting out her reasons for her award
    decision. Unfortunately, as we now know from admissions made in
    connection with her later prosecution and conviction for ethical
    violations, she was biased toward Boeing.
        The Air Force acknowledged that Ms. Druyun's decision to select
    Boeing for the wrong reason--her personal bias--was clearly improper.
    However, the key question posed by the protest was whether that
    acknowledged bias impacted only Ms. Druyun's own decision as the SSA or
    whether she used that bias to improperly influence the evaluations
    conducted by others of the competing proposals. Air Force officials
    serving on the evaluation teams testified that although Ms. Druyun
    certainly raised questions during the course of the competition that
    caused them to make sure their evaluations were accurate and well
    documented, she did not direct the results of those evaluations.
    Rather, the evaluators rated each proposal accurately and honestly
    based on their own assessments of the strengths and weaknesses of those
    proposals. As a result, the evaluators believed that the technical
    ratings of the proposals submitted to Ms. Druyun for decision were
    accurate and that, in the minds of the evaluators, Boeing's proposal
    presented the best overall value for the government. Based on this
    evidence, the Air Force position during the protest was that Ms.
    Druyun's admitted personal bias toward Boeing did not improperly taint
    the underlying proposal evaluations and that, on the strength of those
    evaluations, another, unbiased source selection authority reasonably
    could have selected Boeing to receive award of the C-130 AMP contract.
    Notwithstanding the evidence presented by the Air Force, the GAO ruled
    that the Air Force failed to demonstrate by compelling evidence that
    Druyun's bias in favor of Boeing did not influence the evaluation or
    selection of Boeing.
        The Air Force recognizes the harm caused to these procurements by
    Ms. Druyun. Her illegal conduct did untold damage to the integrity of
    the Air Force procurement process and created literally hundreds of
    millions of dollars in extra costs to the American taxpayer. However,
    her criminal actions are an indictment of her alone. They do not
    reflect the values of the Air Force as a whole or the values of the
    thousands of Air Force procurement professionals who honestly and
    zealously work hard every day to buy the best products and services
    needed to support the Air Force mission. The Air Force remains
    committed to that principle and to restoring congressional faith in the
    integrity of our procurement system.

        Senator McCain. Thank you very much.
        Mr. Gordon, welcome.

       STATEMENT OF DANIEL I. GORDON, MANAGING ASSOCIATE GENERAL
     COUNSEL FOR PROCUREMENT LAW, GOVERNMENT ACCOUNTABILITY OFFICE

        Mr. Gordon. Thank you, sir. Mr. Chairman, Senator
    Lieberman, Senator Chambliss: My name is Dan Gordon. I am the
    head of the bid protest unit at GAO. I am honored to be here at
    your request to testify about two bid protest decisions that
    GAO recently issued sustaining protests filed in connection
    with the admissions of bias in favor of the Boeing Company by
    Darleen Druyun, formerly the Air Force's Principal Deputy
    Assistant Secretary for Acquisition.
        Mr. Chairman, I have a brief statement I would like to make
    orally, but I would ask that my more detailed written testimony
    as well as the two bid protest decisions be entered into the
    record.
        Senator McCain. Without objection.
        Mr. Gordon. As the members of this committee may know,
    GAO's bid protest function is quite different from our
    traditional and more common audit review. Our bid protest
    function hears challenges, usually filed by disappointed
    offerors, pursuant to the Competition in Contracting Act of
    1984, a statute that this committee played a key role in
    developing. Acting as a quasi-judicial forum, GAO produces
    decisions within 100 days of when a protest is filed that
    address whether contracting agencies have violated procurement
    law and regulation in awarding contracts.
        The two protest decisions at issue here involve different
    Air Force programs, the small diameter bomb and the C-130
    avionics modernization program, but the central question
    presented in both cases was the same: whether Darleen Druyun's
    admitted bias tainted the procurement decision at issue. In
    both cases we concluded that it did.
        There was no dispute about Druyun's bias. As part of her
    criminal plea in October of last year, she admitted that she
    had asked Boeing to arrange a job for her daughter and for her
    daughter's boyfriend, and she admitted that she felt indebted
    to Boeing for arranging those jobs. In defending against the
    protests, which were brought to our office by the companies
    that had lost the competitions to Boeing, the Air Force did not
    deny that Druyun was biased. Instead, the Air Force argued that
    Druyun had not played a material role in the decisions at issue
    in the protests.
        After GAO reviewed the documents and convened a multi-day
    hearing in each protest, we found considerable evidence of
    Druyun's participation and influence in the decisionmaking
    process for both of the procurements. For example, in the C-130
    avionics procurement Druyun summoned the evaluators to
    Washington, DC, to discuss the status of their evaluations
    before they had even completed reviewing initial proposals from
    the competing companies. Because of her demanding and
    intimidating manner, one witness at the hearing before us at
    GAO spoke of ``blood on the floor after the meeting.'' That
    meeting was subsequently referred to by one participant as the
    ``15 September massacre.''
        As the very specific examples set out in our bid protest
    decision show, the record we developed demonstrated that
    Darleen Druyun influenced the evaluation from beginning to end.
        In the small diameter bomb procurement as well, Druyun took
    an active part in the decisionmaking process. It is true that
    Dr. Marvin Sambur, who at the time was Druyun's boss, the
    Assistant Secretary of the Air Force for Acquisition, was the
    source selection authority in name. But our review led us to
    conclude that it was Druyun, regardless of formal titles, who
    was de facto the leading acquisition official. To offer just
    one example, although we have a good number set out in our
    decision, the companies competing for the contracts made
    presentations to Darleen Druyun.
        As required by the Competition in Contracting Act, our
    decision sustaining the protests recommended corrective action
    that we think the Air Force should take. The statute gives the
    Air Force 60 days to implement our recommendation or to advise
    us that they will not be following our recommendation and,
    since our decisions were issued in mid to late February, we
    expect to hear from the Air Force within the next 2 weeks.
        Mr. Chairman, that concludes my prepared statement, but I
    would be honored to answer any questions that you or the
    members of the subcommittee may have.
        [The prepared statement of Mr. Gordon follows:]
                     Prepared Statement by Daniel I. Gordon
        Mr. Chairman and members of the subcommittee: Thank you for the
    opportunity to be here today to discuss the bid protest decisions
    recently issued by the Government Accountability Office (GAO) in
    response to protests challenging the actions of the Air Force under two
    programs--the C-130 avionics modernization upgrade (AMP) program and
    the small diameter bomb program. The protests were based on information
    disclosed by Darleen Druyun, formerly the Air Force's Principal Deputy
    Assistant Secretary for Acquisition, in connection with her October
    2004 criminal conviction for violation of the statutory conflict of
    interest provisions codified at 18 U.S. C. Sec. 208(a) (2000).
        The Competition in Contracting Act of 1984 (CICA) provides
    statutory authority for GAO's bid protest function. GAO has issued
    implementing regulations establishing the procedural framework for our
    bid protest forum in Title 4, Part 21, of the Code of Federal
    Regulations. GAO provides an objective, independent, and impartial
    forum for the resolution of disputes concerning the awards of Federal
    contracts. Our procedures provide all interested parties--the
    protester, the awardee and the contracting agency--an opportunity to
    present their positions prior to GAO's resolution of the protest.
        GAO's bid protest decisions differ from the reports GAO issues in
    connection with its program audits and reviews. In this regard, our
    protest decisions do not address broad programmatic issues such as
    whether or not a weapons program is being managed effectively or
    consistent with best practices; instead, our bid protest decisions
    address specific allegations raised by unsuccessful offerors
    challenging particular procurement actions as contrary to procurement
    laws and regulations. Our protest decisions are necessarily limited to
    the record as we developed it, largely shaped by the allegations raised
    by the protesters and the responses but forward by the agency and
    awardee.
        With that background, my testimony today will summarize our two
    recently issued decisions concerning allegations of improper influence
    by Darleen Druyun. Our testimony is based on the public version of our
    decisions. A limited amount of information that is proprietary to the
    protesters, source selection sensitive, or law enforcement sensitive
    has been redacted from these decisions, but none of the redacted
    information is critical to understanding the decisions.
    the protest decision regarding the c-130 avionics modernization program
                                     (amp)
    Background
        As was widely publicized, in October 2004 Darleen Druyun pled
    guilty to violating the conflict of interest provisions of 18 U.S.C.
    Sec. 208(a) based on the fact that she engaged in employment
    negotiations with The Boeing Company while she was negotiating on
    behalf of the Air Force for the lease of 100 Boeing KC 767A tanker
    aircraft. In addition to her employment negotiations, documents
    submitted by Druyun in connection with the criminal proceedings
    establish that, in 2000, Druyun contacted Boeing personnel to request
    that Boeing provide employment for both Druyun's daughter and the
    daughter's boyfriend (who subsequently became Druyun's son-in-law). In
    response to these requests, Boeing created a position for Druyun's
    daughter and hired both her daughter and future son-in-law in the fall
    of 2000. In the documents filed in the criminal proceedings, Druyun
    further states that her decisions in matters affecting Boeing were
    ``influenced by her perceived indebtedness to Boeing for employing her
    future son-in-law and daughter,'' and that with regard to the contract
    awarded in the C-130 AMP procurement, ``an objective selection
    authority may not have selected Boeing.''
        Following Druyun's disclosures in October 2004, agency-level
    protests were filed at the Air Force by the three offerors who
    unsuccessfully competed for the C-130 contract: Lockheed Martin
    Aeronautics Company, L-3 Communications Integrated Systems, (the
    successor-in-interest to Raytheon Company Aircraft Integration
    Systems), and BAE Systems Integrated Defense Solutions, Inc. The
    Assistant Secretary of the Air Force for Acquisition subsequently
    advised each of the protesters that ``the Air Force is of the opinion
    that the protest is more appropriately considered by the Government
    Accountability Office,'' and that ``the Air Force will not decide the
    protest.'' Each of the companies subsequently filed protests with our
    Office maintaining that Druyun's recently disclosed bias in favor of
    Boeing, along with the information previously disclosed to the
    protesters regarding the agency's purported bases for rejecting their
    proposals, demonstrated that their proposals were not evaluated in a
    fair and unbiased manner.
        In response to the protests, the Air Force argued that
    notwithstanding Druyun's acknowledged bias in favor of Boeing, the
    award to Boeing was proper because ``there is no evidence that Mrs.
    Druyun influenced the SSET [source selection evaluation team]'' and
    that, overall, ``the evaluation process was conducted properly and in
    accordance with the evaluation criteria.''
    The Legal Standard
        The Federal Acquisition Regulation (FAR), Sec. 3.101-1, provides
    that:
        Government business shall be conducted in a manner above reproach
    and, except as authorized by statute or regulation, with complete
    impartiality and with preferential treatment for none. Transactions
    relating to the expenditure of public funds require the highest degree
    of public trust and an impeccable standard of conduct. The general rule
    is to avoid strictly any conflict of interest or even the appearance of
    a conflict of interest in Government-contractor relationships.
        Where, as was the case here, the record establishes that a
    procurement official was biased in favor of one offeror, we believe
    that the need to maintain the integrity of the procurement process
    requires that we sustain the protests unless the agency demonstrates
    that the bias did not affect the contract award decision--in legal
    terms, that the bias did not prejudice the protesters.
    GAO's Review of the Record
        As discussed above, the documents supporting Druyun's criminal
    conviction establish that she was biased in favor of Boeing. In
    reviewing the protest allegations, GAO conducted a 3-day hearing on the
    record during which testimony was provided by nine government
    witnesses. The record developed by GAO, including the hearing
    testimony, established the following key points. First, Druyun
    functioned as the lead procurement official throughout this procurement
    and employed a forceful management style. In this particular
    procurement, she left no doubt about who was in control from the
    outset. Before the evaluators had even completed their initial proposal
    review, Druyun requested that they come to Washington, D.C. to discuss
    the ``status'' of their evaluations; this meeting was subsequently
    referred to as the ``15 September massacre.'' From September 15, 2000,
    through the first request for final proposal revisions in February
    2001, Druyun had the evaluators come to Washington five times to brief
    her on the ongoing evaluations; during these briefings, Druyun
    expressly or implicitly directed multiple changes to the evaluators'
    ratings, many of which favored Boeing. In our decision, we identify
    specific examples of Druyun's directions regarding each of the
    offerors' proposals.
        Also, the record shows that following the request for final
    proposal revisions, but before the source selection process was
    complete, the contracting officer sent an e-mail to a recipient list
    that included virtually everyone involved in the source selection
    process, directing that the recipients ``clean up'' and ``delete''
    various portions of the evaluation record. Specifically, this e-mail
    directed the recipients to ``delete any comments where evaluators/
    advisors have suggested ratings,'' explaining that ``[i]f the rating
    doesn't match the suggestion, we have protest fodder.'' The e-mail also
    specifically directed the evaluators to ``[d]elete any derogatory or
    exceedingly glowing comments.''
        The first round of final proposal revisions was submitted on March
    2. On March 9, the contracting officer reopened discussions and
    requested a second round of proposal revisions. At the GAO hearing, the
    contracting officer unambiguously testified that discussions were
    reopened to permit Boeing to ``take care of'' a ``problem'' in its cost
    proposal, explaining that, at that point, Boeing's proposal failed to
    comply with instructions the agency had previously given the offerors.
    No substantive questions were asked of any other offeror during these
    discussions. Nonetheless, during the GAO hearing, agency witnesses
    identified specific aspects of the protesters' final proposals that
    should have been brought to their attention, including aspects of the
    protesters' proposals that appear very similar to the ``problem''
    Boeing was permitted to ``take care of.''
        The second round of final proposal revisions was submitted on March
    19. Thereafter, the source selection evaluation team briefed Druyun on
    the evaluations of final proposals. During this briefing the cost team
    was directed to review their analysis to ``assure its accuracy.'' Upon
    receiving that direction, the cost team reduced Boeing's evaluated
    price and increased Lockheed's evaluated price. Additionally, in a
    subsequent meeting with Druyun, the source selection evaluation team
    described a specific approach to performance that Boeing had proposed
    as one ``which tends to induce problems.'' Druyun directed that this
    description be crossed out of the evaluation record and replaced with
    the words: ``Boeing will work out details post award.''
        Based on the record discussed above, we rejected the Air Force's
    assertion that there was no evidence that Mrs. Druyun influenced the
    source selection evaluation team. Similarly, in light of the failure to
    treat offerors fairly regarding discussions, we rejected the Air
    Force's assertion that the evaluation process had been conducted
    properly. Finally, because the contracting officer directed the
    evaluators to destroy various portions of the evaluation record and the
    agency failed to conduct meaningful discussions with all of the
    offerors, along with the evidence of Druyun's influence throughout the
    source selection process, we could not reasonably determine which of
    the four proposals should have been selected for award. We concluded
    that the record failed to establish that any one of the protesters was
    not prejudiced by the various procurement flaws. Accordingly, we
    sustained the protests.
    Recommendation
        Ordinarily, where our Office finds fundamental flaws in an agency
    procurement, we will recommend that the agency reopen negotiations with
    all competitive range offerors, conduct meaningful discussions, request
    final revised proposals, and evaluate those proposals in a fair and
    unbiased manner. Here, however, the contract was awarded more than 3
    years ago, and performance has been ongoing since that time. In the
    course of developing the protest record, the Air Force reported that
    while recompetition of the installation phase of the contract is
    feasible, recompetition of the entire contract would not be in the best
    interests of the taxpayer or consistent with national security
    concerns.
        Based on the Air Force's acknowledgment that recompetition of the
    installation phase of the contract was feasible, we recommended that
    the agency recompete those requirements. In light of the broader
    concerns raised by the Air Force, we were reluctant to recommend
    recompetition of the entire contract effort. Nonetheless, we had some
    concern that the Air Force's position regarding recompetition of the
    entire effort was forged in the heat of litigation, and may not reflect
    a completely objective review. Accordingly, we recommended that the
    agency conduct and document a thorough analysis of the competing
    concerns and provide that analysis to our Office. In the event the
    agency ultimately determines that the broader concerns preclude
    recompetition of the entire contract effort, we recommended that each
    of the protesters be reimbursed the costs incurred in preparing and
    submitting their proposals. We also recommended that the protesters be
    reimbursed for their costs of filing and pursuing the protests.
             the protest decision regarding the small diameter bomb
        We turn now to the Air Force's award of a contract to Boeing under
    the small diameter bomb program. Lockheed Martin Corporation was the
    only competitor for this effort, and following the October 2004
    disclosure of Druyun's bias, filed a protest alleging that Druyun
    improperly manipulated certain program requirements and the related
    evaluation factors in a manner that favored Boeing.
        In addition to Druyun's feeling of ``indebtedness'' to Boeing due
    to Boeing's employment of her daughter and future son-in-law, the
    record we developed, which included a hearing at GAO during which five
    government witnesses and one Lockheed Martin witness testified,
    established the following key points. The small diameter bomb program
    initially contemplated an evaluation of offerors' capabilities against
    both fixed and moving targets; early in the procurement process (during
    the first few months of 2002), Lockheed Martin was perceived as having
    a ``strength'' with regard to the moving target requirements and Boeing
    was considered ``weak'' in this area; in May 2002, most of the
    requirements associated with moving targets and the associated
    evaluation factors were deleted; thereafter, Boeing was selected for
    award without consideration of its capabilities regarding the deleted
    moving target requirements. At the time our decision was issued, the
    Air Force was in the process of adding the previously deleted
    requirements to Boeing's contract on a sole-source basis.
    The Agency's Position and GAO's Conclusion
        In responding to Lockheed's protest, the Air Force maintained that
    Druyun ``did not play any significant role'' in the decision to change
    the small diameter bomb's technical requirements and, therefore,
    Lockheed was not prejudiced by Druyun's acknowledged bias in favor of
    Boeing.
        Contrary to the agency's assertion, the contemporaneous record
    established that Druyun was significantly involved in the
    decisionmaking process that culminated in the May 2002 changes to the
    technical requirements and deletion of the related evaluation criteria.
    As discussed in our decision, Druyun was the de facto lead acquisition
    official during the period in which the changes were made. In that
    capacity, she received briefings from the competing offerors, directed
    the source selection evaluation team to perform various activities,
    directed an independent technical review of Lockheed Martin's
    technology applicable to moving targets, was directly involved in other
    changes made to the requirements for fixed targets, and contacted
    Raytheon to request that Raytheon communicate with Boeing. Following
    Druyun's contact, Raytheon provided support to Boeing in its efforts to
    meet the small diameter bomb requirements.
        On the basis of our review of the protest record, we rejected the
    Air Force's assertion that Druyun was not materially involved in the
    process culminating in the May 2002 changes to the technical
    requirements.
    The Legal Standard and Conclusion
        As discussed above, the FAR provides that procuring agencies must
    strictly avoid conflicts of interest or even the appearance of
    conflicts in Government-contractor relationships and, where, as here,
    the record establishes that a procurement official was biased in favor
    of one offeror, the need to maintain the integrity of the procurement
    process requires that we sustain the protest unless the agency
    demonstrates that the bias did not prejudice the protester. In light of
    Druyun's acknowledged bias in favor of Boeing and our determination
    that she was materially involved in the decisionmaking process
    culminating in deletion of the moving target requirements, along with
    the fact that Lockeed Martin was perceived as having a ``strength'' and
    that Boeing was ``weak'' regarding the deleted requirements, we
    concluded that the record failed to establish that Druyun's bias did
    not prejudice the protester. Accordingly, we sustained the protest.
    Our Recommendation
        At the time our decision was issued, the Air Force had not yet
    amended Boeing's contract to add the previously deleted requirements
    regarding moving targets. Accordingly, we recommended that the Air
    Force conduct a competitive procurement to meet those requirements.
    Consistent with the provisions of CICA, we also recommended that
    Lockheed Martin be reimbursed its costs of filing and pursuing the
    protest.
        Finally, Lockheed requested that we recommend reimbursement of the
    proposal preparation costs Lockheed incurred in competing for the
    contract awarded to Boeing. As discussed in our decision, we deferred
    ruling on that request, pending the Air Force's review of certain
    concerns regarding potential conflict of interest issues relating to a
    former Brigadier General who, after leaving the Air Force, was involved
    in Lockheed's proposal preparation efforts.
        Mr. Chairman, this concludes our prepared statement. I would be
    happy to respond to any questions regarding our bid protest decisions
    that you or other members of the subcommittee may have.
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        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Senator McCain. Thank you very much.
        Ms. Flavin, welcome.

        STATEMENT OF SALLIE H. FLAVIN, DEPUTY DIRECTOR, DEFENSE
                       CONTRACT MANAGEMENT AGENCY

        Ms. Flavin. Thank you. Mr. Chairman, members of the Airland
    Subcommittee: I am Sallie Flavin, Deputy Director of the
    Defense Contract Management Agency (DCMA). Thank you for the
    opportunity to appear before you today to talk about the recent
    study chartered by the acting Under Secretary of Defense for
    Acquisition, Technology, and Logistics.
        During the week of November 8, 2004, Michael Wynne, Acting
    Under Secretary of Defense for Acquisition, Technology, and
    Logistics, chartered a multi-service agency team, which he
    asked me to lead, to conduct a review of the Air Force
    acquisition actions involving Ms. Darleen Druyun. This team
    reviewed specific acquisition actions executed during the
    tenure of Ms. Druyun, 1993 to 2002, as the Principal Deputy
    Assistant Secretary of the Air Force for Acquisition and
    Management.
        The objective of the study was to determine if the
    decisions Ms. Druyun executed or influenced were consistent
    with DOD standards of integrity and sound business practices.
    The acquisition actions identified for review were source
    selection decisions, acquisition strategy panel decisions,
    revisions to acquisition strategy panel reports, award fee
    determinations, equitable adjustments, actions involving
    contested payments to contractors, contract restructures,
    contract extensions, and contract litigations.
        The team reviewed 407 actions and approximately 8,000
    documents between 6 December 2004 and 28 January 2005. As a
    result, eight actions were identified where the acquisition
    process appeared irregular or abnormal and where the results
    may not have been in the best interests of the government. We
    called these actions ``anomalies.'' The Acting Under Secretary
    of Defense, Acquisition, Technology, and Logistics, has
    referred these eight actions to the DOD Inspector General for
    further review.
        The ground rules for the Druyun study included the
    following considerations. At the time Mr. Wynne chartered the
    study, some of Ms. Druyun's actions had already been identified
    as problematic. Any such actions already identified and under
    review by other government bodies were excluded from the study.
    The study was to be concluded by late January, early February
    2005. The study was strictly limited in scope to identifying
    actions requiring further review. Accordingly, the results are
    qualified to the extent that they must be reviewed by an
    investigative agency in detail to determine whether an action
    is in fact a problem or whether it is a reasonable action in
    light of further details.
        The study team consisted of 40 people in disciplines of
    contracts, technical, audit, legal counsel, and staff support.
    Representatives from the Navy, the Army, the Defense Contract
    Management Agency, the Defense Contract Audit Agency, the
    General Services Administration were sought for the team.
    Expert level representatives in Grades 13 to 15 were requested
    to ensure that members would be capable of making informed
    judgments based on a relatively small amount of information
    combined with discussions with knowledgeable individuals.
        In order to expedite the study, I decided to send the study
    team members to the Air Force locations where pertinent
    documents were maintained rather than to have the documents
    forwarded to one location. Analysis of the Air Force structure
    indicated there were four primary contracting locations where
    the bulk of the documents would be located. These four
    locations were Wright-Paterson Air Force Base, Los Angeles Air
    Force Base, Warner Robins Air Force Base, and Hanscom Air Force
    Base.
        The field activities soon revealed some acquisition
    documentation was located at sites other than the four
    previously noted. To capture the entire list of actions
    provided by the Air Force, visits were also made to Vandenberg
    Air Force Base, Hill, Peterson, Kirtland, Tinker, Eglin,
    Patrick, Maxwell, Bolling, and the Department of Commerce in
    Maryland.
        The Druyun study team identified eight acquisition actions
    over and above those already under review by other government
    bodies that Ms. Druyun was involved in during the period 1993
    to 2002 where the acquisition process appeared irregular or
    abnormal and where the results may not have been in the best
    interests of the government.
        A list of the anomalies we found are attached to my
    statement. Would you like me to repeat them at this time, sir,
    or do you have that list?
        Senator McCain. I have that, thank you.
        Ms. Flavin. Thank you.
        Although the study results are not conclusive as to
    wrongdoing, there is sufficient concern in each case to warrant
    a recommendation that the anomalies be reviewed further.
        In closing, thank you for the opportunity to appear before
    this committee.
        [The prepared statement of Ms. Flavin follows:]
                     Prepared Statement by Sallie H. Flavin
                                  introduction
        Mr. Chairman, members of the committee, thank you for the
    opportunity to appear before you today to talk about the recent study
    chartered by the acting Under Secretary of Defense for Acquisition,
    Technology, and Logistics. During the week of November 8, 2004, Michael
    Wynne, Acting Under Secretary of Defense for Acquisition, Technology,
    and Logistics, chartered a multi-service/agency team, which he asked me
    to lead and to conduct a review of the Air Force acquisition actions
    involving Ms. Darleen Druyun. This team reviewed specific acquisition
    actions executed during the tenure (1993-2002) of Ms. Druyun as the
    Principal Deputy Assistant Secretary of the Air Force for Acquisitions
    and Management. The objective of the study was to determine if
    decisions Ms. Druyun executed or influenced were consistent with the
    Department of Defense (DOD) standards of integrity and sound business
    practices. The acquisition actions identified for review were source
    selection decisions, Acquisition Strategy Panel (ASP) decisions,
    revisions to Acquisition Strategy Reports during or after ASP
    approvals, award fee determinations, equitable adjustments, actions
    involving contested payments to contractors, contract restructures,
    contract extensions, and contract litigations. The team reviewed 407
    actions and approximately 8,000 documents between December 6, 2004 and
    January 28, 2005. As a result, eight actions were identified where the
    acquisition process appeared irregular or abnormal and where the
    results may not have been in the best interest of the Government. We
    called these actions anomalies. The Acting Under Secretary of Defense
    (Acquisition, Technology, and Logistics) has referred these eight
    actions to the DOD Inspector General for further review and or
    investigation.
                                  methodology
        The ground rules for the Druyun Study included the following
    considerations:

              (1) At the time Mr. Wynne chartered the study, some of Ms.
            Druyun's actions had already been identified as problematic.
            Any such actions already identified and under review by other
            Government bodies were excluded from this study.
              (2) The study was to be concluded by late January/early
            February 2005, although additional time could be requested if
            needed in the interest of quality of information.
              (3) The study was strictly limited in scope to identify
            actions requiring further review. Given the time constraints
            for this initial review, it specifically was not intended as a
            definitive review of an issue or specific contract action.
            Accordingly, the results are qualified to the extent they must
            be reviewed by an investigative agency in detail to determine
            whether an action is, in fact, a true problem or whether it is
            a reasonable action in light of further details.

        To assess the magnitude of the study, I worked with the Air Force
    and the Director of Defense Procurement and Acquisition Policy to
    develop a data call of all acquisition actions that Ms. Druyun played a
    significant role in during the 1993-2002 timeframe. As the data was
    being collected and based on preliminary information from the Air Force
    showing a field of about 250 actions, the study team was established.
    It consisted of 40 people in the disciplines of contracts, technical,
    audit, legal counsel and staff support. Representatives from the Navy,
    the Army, the Defense Contract Audit Agency (DCAA), the General Service
    Administration (GSA), and the Defense Contract Management Agency (DCMA)
    were sought for the team. Expert-level representatives in grades 13-15
    were requested to ensure members would be capable of making informed
    judgments based on a relatively small amount of data, combined with
    discussions with knowledgeable individuals. The final team composition
    included 40 individuals, 23 from DCMA, 7 from the Navy, 4 from the
    Army, 5 from DCAA and 1 from GSA.
        In order to expedite the study, I decided to send study team
    Members to the Air Force locations where pertinent documents were
    maintained, rather than have the documents forwarded to one location.
    Analysis of the Air Force structure indicated there were four primary
    contracting locations where the bulk of the documents would be located.
    Those four locations were: Wright-Patterson Air Force Base (AFB), Los
    Angeles AFB, Robins AFB, and Hanscom AFB. Study team members were
    divided into five units, one for each primary Air Force location and
    one headquarters unit to provide support to the other four. Each
    primary location had a definite product focus (Wright-Patterson--
    Aircraft, Los Angeles--Space and Missiles, Warner Robins--Air
    Logistics, and Hanscom--Electronics). Therefore, unit assignments were
    made as much as possible on the basis of comparable product experience,
    as outlined in the resumes received from team members. Some level of
    product knowledge of the units was expected to make the document
    analysis more efficient and effective.
        Assembling the study team and issuing the data call required
    approximately 1 month. Following that, the week of December 6-10, 2004,
    was used as a general orientation for all team members. Initial
    information briefings were provided, team and sub-team introductions
    were made, and detailed work planning at the sub-team level began. One
    day was devoted to briefings by the Air Force on the Air Force
    acquisition organization. Time was also spent discussing how the Air
    Force conducts source selections in order to acquaint team members with
    any differences between their parent organizations' procedures and
    those of the Air Force. During this week, the team members contacted
    Air Force points of contact at each location to schedule entrance
    briefs, to request applicable documents, and to schedule interviews
    with involved acquisition personnel. The field activities soon revealed
    some acquisition documentation was located at sites other than the four
    previously noted. To capture the entire list of actions provided by the
    Air Force, visits were also made to Vandenberg AFB, Hill AFB, Peterson
    AFB, Kirtland AFB, Tinker AFB, Eglin AFB, Patrick AFB, Maxwell AFB,
    Bolling AFB, and the Department of Commerce in Maryland.
        Upon completion of data collection in the field, each sub-team
    completed documentation of any anomalies. Anomaly summaries from each
    team were reviewed in a plenary session of all sub-teams to ensure
    overall study team concurrence with the subject and content of the
    anomaly. Senior Air Force acquisition officials were advised of the
    anomalies and were offered an opportunity to comment on them. Finally,
    the anomalies were presented to a Blue Ribbon Panel of General Officer
    and Senior Executive Service acquisition officials from the Navy, the
    Army and the DCAA for a final confirmation that they warranted further
    review.
                         actions needing further review
        The Druyun Study Team identified eight acquisition actions (over
    and above those already under review by other Government bodies) that
    Ms. Druyun was involved in during the period 1993-2002 where the
    acquisition process appeared irregular or abnormal and where the
    results may not have been in the best interest of the Government. It is
    important to note the qualifiers in the previous sentence--the process
    ``appeared'' irregular and the results ``may'' not have been in the
    best interest of the Government. These qualifiers are in keeping with
    the charter of this study, which was to review a broad segment of data
    and to identify actions in that field of data which warrant further
    review. This study did not conduct a detailed review of anomalies
    found. For that reason, after a detailed review is conducted, some or
    all of the anomalies reported may subsequently be found to be both
    reasonable and in the Government's best interest. A list of the
    anomalies identified during the study is provided at Enclosure 1.
                                   conclusion
        The Druyun Study Team identified eight new acquisition actions that
    Ms. Druyun was involved in during the period 1993-2002, where the
    acquisition process appeared irregular or abnormal and where the
    results may not have been in the best interest of the Government. In
    closing, thank you for the opportunity to appear before this committee.
    Although the study results are not conclusive as to wrongdoing, there
    is sufficient concern in each case to warrant a recommendation that the
    anomalies be reviewed further.
        The Acting Under Secretary of Defense for Acquisition, Technology,
    and Logistics referred eight anomalies to the Department of Defense
    Inspector General's office for further detailed review and analysis on
    February 8, 2005.

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Senator McCain. Thank you very much.
        [Additional information inserted for the record by Senator
    McCain follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Senator McCain. Mr. Gordon, I am struck by one of the
    conclusions in your report. It says: ``The contracting officer
    directed the evaluators to destroy portions of the evaluation
    record.'' This is concerning the C-130J, right?
        Mr. Gordon. The C-130 avionics modernization program,
    sir.\1\
    ---------------------------------------------------------------------------
        \1\ As was made clear later in the hearing, the contracting
    officer's direction referred to the evaluation record in the avionics
    modernization program.
    ---------------------------------------------------------------------------
        Senator McCain. Could you elaborate on the circumstances of
    that?
        Mr. Gordon. We had the contracting officer as a witness in
    the hearing before us. We learned that she had sent written
    instructions to the evaluators to ``clean up'' the evaluation
    record, to use the phrase she used, but it involved essentially
    deleting and destroying part of the evaluation record, in
    particular things that would be inconsistent with the final
    ratings. We were very troubled by that instruction.
        Senator McCain. Who was that contracting officer?
        Mr. Gordon. I do not have her name, sir. We could get that
    for you.
        Senator McCain. This was a civilian employee?
        Mr. Gordon. She reported to Darleen Druyun.
        Senator McCain. Mr. McNulty, from what you have been able
    to gather in the course of your involvement in these issues, do
    you think that there is a systemic problem here or this is just
    an isolated incident? Or do you not have an opinion?
        Mr. McNulty. Are you referring more specifically to the Air
    Force matters associated with Darleen Druyun or generally in
    procurement fraud? More broadly on procurement fraud?
        Senator McCain. Not confined to one person.
        Mr. McNulty. It is hard to have a sense of whether or not
    the problem is increasing. We are seeing, on an anecdotal
    basis, a wide range of procurement fraud activity, the ethical
    issues that are being described here today, as well as just the
    good old-fashioned false billing and so forth.
        I would also say that the criminal agencies we are working
    with in the working group are reporting a sense of increased
    concern and they are expanding their resources and they are
    doing things to gear up to be more aggressive. That is not very
    precise, but that is my best read on the scope of the problem;
    that there is pressure as well on speed or efficiency in
    procurement because of the circumstances we are in. Some
    special procedures are being followed and that also might make
    us more vulnerable to certain fraud.
        Senator McCain. Mr. Gordon, the 15 September massacre as
    you have described in your statement, that Ms. Druyun called
    the evaluators and made some changes, directed them to make
    changes in their evaluations, and you identified some specific
    examples. Did others in the Air Force know this was going on?
        Mr. Gordon. Yes, Mr. Chairman. In fact, those matters were
    coming up in conversations and in e-mails back and forth
    between her and others. One of the examples I thought might be
    worth mentioning in that regard is at one point the contracting
    officer testified at our hearing that at Darleen Druyun's
    direction there was language crossed out that had described
    Boeing's approach to a particular technical matter as something
    that ``tends to induce problems,'' and at Darleen Druyun's
    direction the contracting officer had those words crossed out
    and replaced with the words ``Boeing will work out details
    post-award.'' Clearly that was a matter known to someone beyond
    Darleen Druyun. She was directing others to do it.
        Senator McCain. In your prepared statement when you said
    ``The Air Force asserted that Ms. Druyun did not influence the
    source selection evaluation team,'' is that statement credible?
        Mr. Gordon. The record did not support the Air Force's
    position.
        Senator McCain. Is that your conclusion, Mr. Schmitz?
        Mr. Schmitz. Sir, that was--I do not have any reason to
    dispute it, sir.
        Senator McCain. Mr. Schmitz, Mr. Dominguez states in his
    testimony: ``Early indications suggest in the accountability
    review in your investigation of the program referred by the
    Defense Contract Management Agency (DCMA) as well as others you
    are looking into suggest that no criminal activity occurred in
    these procurement actions by any Air Force individuals.'' What
    indication did you give Mr. Dominguez or the Air Force that no
    criminal activity occurred in these procurement activities by
    any Air Force individuals?
        Mr. Schmitz. I think what you are asking is how do we prove
    a negative.
        Senator McCain. Yes.
        Mr. Schmitz. We do not typically try to prove a negative,
    Mr. Chairman. I think that what my staff probably conveyed was
    that we did not see any immediate need to open up a criminal
    investigation. We are in fact taking a look at those matters
    right now and we at any point could open up a criminal
    investigation.
        Senator McCain. Mr. Dominguez, in 1995 the price for the
    basic C-130 was $33 million. In 1998, the price had risen to
    $50 million. The 2004 contract price for the C-130J stretch
    aircraft is $67 million, and certain warfighter-specific
    mission aircraft are pushing the price near $100 million.
        Now, at least up until yesterday, it was a commercial item
    acquisition strategy. So we really have no way of getting at
    the cost data of the C-130J, do we, because it is a commercial
    contract and the Lockheed Martin has the right to keep that
    information private? Is that right?
        Mr. Dominguez. For the commercial aspects of the aircraft.
    For any specific mods that are done under the Federal
    Acquisition Regulation Part 15--there are some pieces of it--we
    do have cost and pricing data. But for the core aircraft which
    you are talking about, Senator, you are exactly right.
        Senator McCain. So I guess my question is, how are we
    supposed to examine how this rather dramatic cost increase has
    taken place?
        Mr. Dominguez. Senator, I think I have concluded, as
    General Jumper has concluded, that we are not able to
    appropriately defend the taxpayers' interests here in this
    particular contract structure and so we are going to try and
    change it.
        Senator McCain. Do you think that this committee should
    have that cost and pricing information?
        Mr. Dominguez. Sir, I guess I am not in a position to----
        Senator McCain. That is not a fair question and I
    apologize. But it just is a bit frustrating when we see this
    dramatic cost increase and because of the way the contract was,
    the specifications of the contract, unless we subpoena that
    information, which I guess we will have to have discussions
    with Senator Warner and other members of the committee about,
    we will not know.
        So I think we ought to look at that.
        Mr. Dominguez. Senator, if I might.
        Senator McCain. Yes, go ahead.
        Mr. Dominguez. A minor point. The substance of your concern
    is absolutely on target and I share that concern. It is
    important to note that the J-model aircraft is a much different
    airplane and a much more capable aircraft than the
    predecessors. I think that baseline price is probably the C-
    130H. So there is some escalation associated with its
    capability.
        But again, we cannot dissect that for you and explain that
    to the American people. So the substance of your point is right
    on target.
        Senator McCain. I thank you for making that point. For all
    I know, there may be very legitimate reasons for these
    additional costs, but it is hard for us to exercise our
    oversight responsibilities if we do not have access to the
    information.
        Mr. Gordon, during your investigation on the small diameter
    bomb you interviewed a Lockheed Martin employee and former Air
    Force Brigadier General Bigum, who testified before he retired
    from the Air Force he received a letter regarding post-
    employment restrictions from the Air Force Staff Judge
    Advocate. In the General's testimony he states he was
    subsequently advised by the Staff Judge Advocate, ``not to
    worry about it;'' post-employment restrictions were only put
    into the letter to ``cover their butt;'' and he was advised
    that these provisions on post-employment had no application to
    him.
        Did you find that interesting?
        Mr. Gordon. We did, sir. It was because we were troubled by
    what we heard that one of our recommendations was that the Air
    Force review that matter and report back to us. We are
    awaiting, as I said, their report in that matter.
        Senator McCain. I guess I would like to ask Mr. Schmitz,
    Mr. Gordon, and Ms. Flavin the same question. Do you think that
    this is, from what you have seen, that this is an individual
    problem of one rogue elephant that got a tremendous amount of
    authority, or do you think that there are some systemic
    problems here that need to be addressed? Mr. Schmitz?
        Mr. Schmitz. Sir, there is a March 20, 2005, article in the
    Washington Post by a reporter by the name of Carrie Johnson.
    The title of the article was ``Fraud's Many Helpers.'' I think
    Ms. Johnson hits the nail on the head. In these types of
    situations where you have one individual who is very
    charismatic and very powerful and that person is then held
    accountable, usually what we find out is that charisma sort of
    permeates the entire organization and it in fact does not
    happen by itself. When you take on the one individual and you
    hold that charismatic individual accountable, you end up
    finding that there were a lot of other people that helped along
    the way.
        Senator McCain. Mr. Gordon, Mr. Sambur alleged that he
    asserted his authority. He had seen that she had too much power
    and he had reasserted his authority and responsibilities over
    her as far as acquisition is concerned. Have you seen any
    evidence of that?
        Mr. Gordon. Mr. Chairman, what we saw, as we explained in
    the decision, was that he held authority as source selection
    authority on paper, but that in practice during the very
    specific period we were investigating in early 2002, I believe,
    from February 2002 to May 2002, he was technically on paper the
    source selection authority; Darleen Druyun continued to play an
    important role, sometimes without Dr. Sambur's knowledge.
        Senator McCain. Ms. Flavin, have you in your course of your
    examination seen a systemic problem here?
        Ms. Flavin. What we found when we went out and talked with
    the community, because we did a lot of interviews when we were
    conducting our review, there was virtually no one who did not
    think that Darleen Druyun when she was operating was doing the
    right thing. She had a way about her and she had built a
    persona that represented the best that was for the Air Force.
        I think what that tells us is, even when you see something
    like that, you have to be prepared to apply certain oversight
    milestones, schedules, something, to every once in a while
    check back in, even when you have someone with the reputation
    of a Darleen Druyun, just to make sure what is going on there.
        Nobody expected, thought, or had any idea that she was
    doing the kinds of things that she apparently was doing.
        Senator McCain. But there are like 500 inspectors or
    auditors over there, right?
        Ms. Flavin. Yes, sir.
        Senator McCain. She fooled all 500 of them?
        Mr. McNulty, please.
        Mr. McNulty. Mr. Chairman, this relates to another issue we
    are confronting, that Mr. Schmitz's investigators at the
    Defense Criminal Investigative Services (DCIS) have talked to
    us about. That is, in looking at these conflicts of interest
    and post-employment cases, they have to go back to ethics
    adviser's records because obviously one of the defenses will
    be: I sought advice, I got advice, I was told I could work on
    this contract. We have to have good records to use if we are
    going to actually enforce the law in this area.
        We have found, at least the investigators are finding,
    these records are not the quality that they should be. They are
    not documenting these discussions adequately, and therefore it
    is a point of frustration in trying to nail down whether or not
    someone has acted properly and has followed the rules of the
    game.
        Senator McCain. Well, I do not know if it is your charter.
    I do not know if this is Mr. Schmitz's or Mr. Gordon's or maybe
    this committee's charter. But in the tanker saga, odyssey,
    every time we turned around we saw basically some kind of a
    conflict of interest. Somebody who had worked for the
    corporation was back in the DOD or vice versa, or sometimes two
    or three times had bounced back. They were going to have Rand
    do a study on the tanker issue. We find out that the Air Force
    is paying Rand $25 million a year or something like that. Then
    we had members of the Defense Advisory Board, one of whom had a
    financial relationship with Boeing.
        Every time we turned around, we had great difficulty in
    finding, with the exception, very honestly, of the Inspector
    General and the GAO an objective evaluator of the situation
    that went on. One of the reasons why I think it took us as long
    as it did was because I think we have a problem perhaps that
    President Eisenhower warned us about in his farewell address,
    because there are so many internecine connections here that it
    is hard to get objective and honest evaluations.
        The operational requirements document (ORD) was clearly
    skewed in favor of Boeing, supposedly by objective evaluators.
    We all know that now, particularly as far as refueling
    capability, etcetera.
        So it seems to me that what this committee needs to do is
    look at the whole procurement issue and see if there are
    sufficient safeguards. This C-130J contract has been out there
    for what, 10 years? Ten years ago they decided to let a
    contract to a major defense contractor on the basis that it
    would be a commercial enterprise. I wonder how long it took to
    figure out there was nobody, no airline, that was going to buy
    a C-130 to fly passengers around in. Yet for now more than 10
    years, until yesterday, we have been operating under a
    commercial contract.
        The OTA was--and I quoted. I do not have the exact language
    here, but at the last hearing I quoted exactly what the
    intended purpose of an OTA was, and that was for a small,
    outside, independent contractor that was not familiar with the
    labyrinth of the Pentagon to get a small and specific contract.
    The Future Combat System (FCS) was let for $113 billion cost,
    and what was the effect of it was a lack of accountability for
    the cost and pricing.
        So to conclude my questions, I would, since all witnesses
    have had some experience with this, I would like to hear a
    response, beginning with you, Mr. McNulty.
        Mr. McNulty. Well, I think that you raise very good
    concerns about how we are going to try to more systematically
    get at this. I mentioned in my opening statement about the DCIS
    Senior Official Project, and I think that is certainly one good
    start and it probably will send a good message to those who are
    on the government side of this business, not the contractors
    but on the government side, as to just how there is increased
    scrutiny and with that more attention being paid to who is
    doing what.
        Our case has looked at all the evidence we have to date
    with regard to the Darleen Druyun matter and I think we have
    put out in the public record what we have in terms of criminal
    information. But we are always waiting for or available to work
    with the investigators on anything further. I think we are
    probably making progress in this area because of the attention
    this is getting.
        Senator McCain. Mr. Schmitz.
        Mr. Schmitz. With regard to your comments about conflicts
    of interest, sir, I would just--I share your concerns. What we
    typically have in the Pentagon, in the industrial complex, is a
    lot of potential conflicts and what we try to do is to set up
    firewalls or safeguards, checks and balances, to prevent the
    potential conflicts from becoming actual conflicts.
        What we have proposed--it is not our responsibility as the
    independent IG to set up those safeguards. In fact, we really
    cannot do that ourselves because then we will not be able to
    investigate or audit them. That is a fundamental rule of audit
    independence. But we have been encouraged by the receptivity of
    the Air Force and the DOD to review the safeguards that are in
    place to help prevent the potential conflicts from becoming
    actual conflicts and leading to these type of sagas.
        But no matter how good the structure is, of course, it all
    comes down to individuals having to live within those
    structures. So it is equally important that we work with U.S.
    Attorneys and other folks and when we find people that have
    obviously screwed up we hold them accountable, and we will
    continue to do that as well, sir.
        Senator McCain. Secretary Dominguez. Again, I want to thank
    you for the decision that you and the Chief of Staff of the Air
    Force made yesterday.
        Mr. Dominguez. Thank you, Senator.
        I think we ought not to discount the expertise that we do
    get when we bring accomplished people from industry into the
    government to help us understand. There is some real benefit
    that we get out of that as a Nation.
        Mr. Schmitz is exactly correct in saying that the trick is
    to try and create structures and firewalls that protect the
    government's interests from the potential for conflict of
    interests which is then inherent in that. Clearly there are
    things we can do better. I am excited at the prospect of taking
    the recommendations from these people that are sitting here and
    working with Under Secretary Wynne in trying to do better.
        My personal opinion is that a system with a lot more
    openness, with a requirement to put and document all of the
    different views, when you bring people together to talk about
    decisions to document and record those, record dissenting
    opinions and forward them up, so a much more open process that
    is available to checks and balances, and it is clear about why
    decisions were made is one I think where we can balance these
    two interests, protect ourselves and accomplish what we need to
    do.
        Senator McCain. Thank you very much.
        Mr. Gordon.
        Mr. Gordon. Mr. Chairman, the phenomenon of the revolving
    door can sometimes have benefits for both sides. But it is
    clear from what we saw in this case that there can also be
    risks to the government and to the public interest associated
    with it.
        I would also say that the phenomenon of organizational
    conflicts of interest is a growing one. We have seen it in our
    bid protest work over the last 2 years, in particular
    associated with the consolidation in the defense and
    information technology (IT) industries. It is an issue that
    needs to be faced.
        I do think that the transparency that we are able to get
    through the bid protest process, as well obviously as other
    processes, that transparency is extremely important for
    preserving and protecting the public interest in procurement.
        Senator McCain. Ms. Flavin?
        Ms. Flavin. There were a couple of things the team and I
    came up with when we looked at the situation, not official DOD
    positions by any stretch, but a couple of ideas that we thought
    could help this kind of situation. One of them was to limit the
    tenure within key civilian positions, not necessarily the
    political ones because they already move in and out pretty
    quickly, but your career civilian positions, key positions. To
    stay in one position for 10 years, as Darleen did, can be quite
    dangerous.
        In her case there were a number of instances when Darleen
    moved in and out of various other positions as other people
    left. She would take over as a Project Executive Officer (PEO)
    when they were between PEOs, this kind of thing. That takes
    away from the checks and balances that are currently built into
    the system, and I think a hard look needs to be made at how do
    we keep that from happening, how do we maintain those checks
    and balances even as people come and go from positions?
        Senator McCain. Thank you. I thank the witnesses.
        Senator Lieberman.
        Senator Lieberman. Thanks, Mr. Chairman. Thanks to all the
    witnesses, too.
        Mr. Gordon, I thought parts of your report were actually
    shocking and I suppose from our point of view as
    representatives of the public, infuriating. The general picture
    of Ms. Druyun that one gets from all we have heard is that she
    was a very powerful person, by some accounts, including yours,
    too powerful. Yet, in the C-130 matter you rejected an Air
    Force assertion that there was no evidence that Ms. Druyun
    influenced the source selection evaluation team.
        In the case of the small diameter bomb protest, the
    position of the Air Force--and I am reading from your
    conclusion, your report--was that ''the protester was not
    prejudiced by Ms. Druyun's acknowledged bias in favor of Boeing
    because ``she''--and I quote from the Air Force here--``did not
    play a significant role in the decision to change technical
    requirements.''
        You rejected both of those assertions by the Air Force,
    finding in the latter case, the small diameter bomb case, that
    the record showed that Ms. Druyun was significantly involved in
    the decisionmaking process that culminated in changes to
    technical requirements and the deletion of related evaluation
    criteria.
        You have seen these protests come along. How do you explain
    the position that the Air Force took in defense of these
    decisions?
        Mr. Gordon. Senator Lieberman, I cannot explain why the Air
    Force took the position that it took. You would have to ask the
    Air Force that. I will tell you that our protest process,
    because we do have this quasi-judicial function, was an
    opportunity for us to hear every side. Where we need to hold a
    hearing, as we did here in both of these matters, we hold a
    hearing. Each hearing lasted 2 full days. We were able to hear
    from a good number of Air Force witnesses.
        Their argument certainly got a hearing.
        Senator Lieberman. Right.
        Mr. Gordon. But we concluded that it was simply not
    consistent with the record.
        Senator Lieberman. Were those assertions on behalf of the
    relative lack of involvement by Ms. Druyun made before you by
    superiors or subordinates of hers?
        Mr. Gordon. Both, Senator Lieberman. That is to say, Dr.
    Sambur, for example, told us in the small diameter bomb matter
    that Darleen Druyun was not involved in the change to the
    requirements at issue there, and of course her subordinates as
    well.
        We noted in a footnote--I think it is in that decision, the
    small diameter bomb decision, Senator Lieberman--that we found
    it an inconsistency between the Air Force witnesses telling us
    as a general matter that they were quite sure Darleen Druyun
    was not involved, but then when during the hearing we showed
    them documents--e-mail messages, memoranda--that were from that
    time period, showing that she was involved, they had no
    recollection.
        Senator Lieberman. Well, it obviously raises a lot of
    questions about the testimony, including by Dr. Sambur as her
    immediate superior. It is a sad and really unseemly story.
        I want to go to you, Secretary Dominguez, and I want to say
    clearly that this is the first hearing our subcommittee has
    held on Air Force acquisition since the departure of Secretary
    Roche and Assistant Secretary Sambur. You are now the top-
    ranking official in the Air Force, but I understand that you
    played no role at all in this controversial tanker lease
    proposal; is that correct?
        Mr. Dominguez. That is correct, Senator. I was and still am
    the Assistant Secretary for Manpower and Reserve Affairs.
        Senator Lieberman. Right. That you were not involved in the
    other two matters that Mr. Gordon ruled on?
        Mr. Dominguez. No, Senator, I did not do anything connected
    to acquisition.
        Senator Lieberman. Right. I wanted to say that just to
    clarify your role and to say, nonetheless, that because you are
    here as the Acting Secretary I want to ask you some questions
    more generally. It is whether you would say at this point that
    the leadership of the Air Force is prepared to acknowledge that
    the problems with the tanker lease acquisition and indeed the
    other two went beyond the role that Darleen Druyun may have
    played in the pricing of the acquisition?
        Mr. Dominguez. Senator, I have to acknowledge the work that
    Mr. Schmitz did on it and that we have accepted the findings
    and recommendations of the Inspector General, and I have to say
    that this was not an episode in which we covered ourselves with
    glory and I really hope there are many lessons for us to learn
    and I intend to learn them and to lead the Air Force beyond
    them, and hopefully with your assistance.
        Senator Lieberman. Let me try to clarify a little bit what
    my question was by going back to a nomination hearing last
    fall, when General Gregory S. Martin was asked several
    questions about the Air Force acquisition organization and the
    oversight that it provides. General Martin testified that in
    the 1990s ``not only did we go through a very serious
    restructuring of our forces in drawdown, but we also went
    through a major acquisition reform that took much of the
    oversight, too much of the checks and balances out.''
        General Martin then testified that ``we may have gone too
    far in the pendulum.'' He also testified that, although he had
    served as top uniformed acquisition official in the Air Force,
    he was ``not an expert in contracting'' and ``did not get into
    the business of understanding'' what Darleen Druyun was doing.
        So, Secretary Dominguez, I want to ask whether you agree
    with General Martin on the general point that when the Air
    Force downsized its acquisition organization and took out much
    of the oversight it may have gone too far?
        Mr. Dominguez. Senator, I think we clearly did. I would
    like to point out that this was a government-wide endeavor.
    Commercial business practices were much in vogue, so
    experiments to try to streamline and speed acquisition and just
    do things faster, there were many things going on. So it was
    not us alone.
        A lot of the structure, the rigor, the discipline, the
    checks and balances, did in my view come out of the Department,
    and it looks pretty clearly like we did go too far.
        Senator Lieberman. Ms. Flavin, I understand that your
    career has largely been in acquisitions.
        Ms. Flavin. Yes, sir.
        Senator Lieberman. I wonder, therefore having some history
    of service in the government in that regard, what your reaction
    is to the statements that General Martin made. Did we go too
    far and are we lacking the oversight necessary now in the
    acquisition process?
        Ms. Flavin. Yes, sir, in my opinion we have gone a little
    too far. We have removed some of the checks and balances that I
    think are important. I recall in earlier days there used to be
    some fairly stringent boards we would have to go through for
    different kinds of major acquisition actions. You do not see
    those very often any more and I think they served a very useful
    purpose.
        I would not want to go, return to the good old days of
    yesteryear entirely because it can get carried to an extreme as
    well.
        Senator Lieberman. Right.
        Ms. Flavin. I think we need to find the right balance. But
    I do believe it has probably gone outside the balance area now.
        Senator Lieberman. Would it be your personal conclusion
    that the problem is a lack of an adequate number of personnel
    in acquisition? Is it inadequate training of the personnel?
        Ms. Flavin. That is a really good question, sir. I do
    believe that for a very long time we have not been hiring
    people. It is a different issue than adequate number of people,
    but we have not been hiring people, and what you have is a
    cadre of individuals, fairly small, getting to a small cadre of
    very knowledgeable people, and we are bringing in now some very
    young people who do not have the kind of experience you would
    like to see.
        So there is a dearth of experience up and down the
    acquisition workforce at this stage, yes, sir.
        Senator Lieberman. Well, that is a serious statement.
        Mr. Schmitz, in your work as Inspector General have you
    seen enough to draw any conclusions about whether there are
    systemic deficiencies in the acquisition process that go beyond
    the crimes that Darleen Druyun committed?
        Mr. Schmitz. Sir, I tried to address that question in my
    earlier statement about our reviews and our working with the
    Department to take a look at the internal controls, the checks
    and balances that exist now to avoid potential conflicts
    becoming conflicts. It is a very serious challenge that has
    been exacerbated, frankly, over the last decade or so by the
    shrinkage of the number of defense contractors, major defense
    contractors out there. It has exacerbated a system that has
    been there all along and I think that in the post-Enron era it
    would behoove the Department to focus very, very closely on
    these internal controls that are designed to provide these
    checks and balances that appear to have been lost.
        Senator Lieberman. Both internal checks and balances and
    the ability to effectively negotiate and contract and interact
    with what I presume are fairly sophisticated people working for
    the defense contractors?
        Mr. Schmitz. Yes, sir.
        Senator Lieberman. Secretary Dominguez, will you commit the
    Air Force to work with us to restore the strength of your
    acquisition organization and ensure that you have the kinds of
    checks and balances that you need for future acquisitions?
        Mr. Dominguez. Absolutely, Senator.
        Senator Lieberman. I appreciate it. Let me ask you this
    question. I noted in my opening statement that the Air Force
    long resisted conducting a formal analysis of alternatives, as
    the DOD does with other major programs, to determine the best
    approach to meeting the Department's tanker needs. Last summer
    the Air Force finally agreed to perform this analysis of
    alternatives.
        It was originally due in November, then December, then
    January. The Air Force has now announced that the initial
    analysis of alternatives was inadequate and it needs another 6
    months to complete the job.
        Is the difficulty that the Air Force has had in conducting
    this analysis of alternatives an indication of the complexity
    of this issue and an indication that the Air Force would have
    been well advised to conduct this analysis of alternatives 3
    years ago, before it started down the road on the tanker lease
    arrangement?
        Mr. Dominguez. Sir, I can say that it is a complex issue
    and it does require some careful thought. The analysis that we
    did was subjected to some scrutiny by the independent reviewing
    agencies in the Department, found wanting, so they sent us back
    to go work at it some more, which we are happy to do.
        With respect to what should have gone before, I am really
    not the right one to give you an assessment of that. I can say
    that I am happy we are doing one now. I am confident we will do
    one that stands up to the tests and guides us toward the right
    decision.
        Senator Lieberman. I appreciate that, Secretary Dominguez.
    Then I would ask this question: Would you agree as a matter of
    general policy that in the future the Air Force should conduct
    an analysis of alternatives before initiating an acquisition of
    this complexity, even if it is not required by a strict reading
    of the regulations?
        Mr. Dominguez. Well, I would like to leave ourselves some
    wiggle room to respond to specific situations, because the
    acquisition policies and practices do allow it to be waived.
    But that is a kind of decision that ought to be made carefully
    and in consultation with lots of affected parties.
        Senator Lieberman. Let me try to make it easier for you.
    Would you agree that, based on what you have learned in this
    case, that the burden of proof ought to be on the Air Force if
    it decides to not go ahead with an analysis of alternatives
    (AOA)?
        Mr. Dominguez. Absolutely, absolutely, Senator.
        Senator Lieberman. Thanks.
        Mr. Schmitz, I was troubled by something you said at the
    very end of your statement. You mentioned the ongoing audits
    and you are at some state of development of these two audits,
    which look like they go to me as I read them to some of the
    systemic problems with the acquisition process that we have
    been talking about today, that come out of the lessons learned
    from the tanker lease Druyun case. But then at the bottom, as
    you well know, you say ``Both audits have been suspended
    because of audit support for Base Relocation and Closure (BRAC)
    and other operational priorities.''
        Mr. Schmitz. There are statutory requirements and so, as
    much as we would like to do, we have to satisfy the statutory
    requirements under BRAC.
        Senator Lieberman. So you are statutorily required to
    provide audit staff to the BRAC process?
        Mr. Schmitz. Well, I am not sure if it says that my office
    has to provide it. The Department has to do the work that leads
    up to the Base Realignment and Closure Commission
    recommendations and I have approximately half of my 600
    auditors that are working with the Department to make sure that
    the data going into that process is in fact accurate to allow
    for intelligent decisions.
        Senator Lieberman. It is a real shame that you had to
    suspend these two audits because they are critically important.
    How soon do you think you will be able to get back to them?
        Mr. Schmitz. I think we are planning to restart them this
    summer. Let me see if my deputy has a better--that is when we
    plan to redevote the energy to them. So it is just a temporary
    delay, but we definitely plan on continuing these audits.
        Senator Lieberman. Because there are a lot of members of
    Congress with bases in their districts who would like you not
    to supply adequate staff to the BRAC process. [Laughter.]
        Mr. McNulty, you had an unusual sort of third party
    opportunity to look in on this system and to the extent that
    you are comfortable and appropriate for you to say so. I wonder
    if you drew any conclusions from what you saw beyond the
    specific case about the acquisition process and how it was
    conducted in the Air Force?
        Mr. McNulty. Well, certainly things have been said so far
    about Darleen Druyun and the way in which she operated that we
    saw pretty clearly during our investigation. The level, the
    amount of her independence and influence, the nature of the
    process where you have a career person who stays there with
    that kind of authority and yet other people are coming and
    going over time because they are political appointees or
    whatever and therefore there is an institutional knowledge that
    exists in one person that others do not have. We saw all that
    certainly in the facts that were gathered for the
    investigation.
        We were looking at it from a rather narrow perspective of a
    conflict of interest investigation and therefore, while we saw
    things, they were not particularly relevant to what we were
    doing. I would say overall, Senator, as well in terms of the
    system, ferreting out the fraud and the criminal activity is
    hard work and it takes a lot of time, a lot of paperwork. Some
    of the criminal investigative agencies that are in the center
    of the game here do not always have the auditing capacity.
        So for example, NCIS has to rely upon other auditors to
    come in and work with them. They have some of their own
    capacity, but they have to rely upon auditors from other
    resources within the DOD.
        I think that both personnel and also some technology that
    allows them to do certain things with the information they do
    have or to track information better would make them more
    effective. I know that money is tight everywhere, but certainly
    our investigations in many cases wait while the investigators
    have to get the resources to plow through these documents, just
    as I am sure you see when you conduct congressional
    investigations.
        Senator Lieberman. Just one final question. In your pursuit
    of this case, did you find any shortcomings in the law that
    Congress should look at, in other words with regard to the
    conflict of interest laws particularly?
        Mr. McNulty. Well, on a different kind of ethical issue,
    that is more of the quid pro quo question--has someone taken
    action in exchange for some benefit? The bar is pretty high in
    the law and that goes back to a Supreme Court decision on how
    you enforce that or how you interpret the current gratuities
    type of laws on the books. That is a pretty complicated
    subject.
        Conflict of interest law, that is easier to use. The
    penalties are not very high. So in the case of Darleen Druyun,
    she received a longer sentence because of some false statements
    she made. In the course of her work with the government she was
    debriefed and as a result of her lack of cooperation the judge
    gave her an enhancement, so she got 9 months in prison and then
    9 months of home confinement.
        But Michael Sears got 4 months, which we were actually
    pleased with, given the fact that the maximum sentence under
    the law is 6 months, that is under the sentencing guidelines.
    So I think that we have to keep an eye on the question of
    adequacy of penalty to make sure that deterrence is sufficient.
        Senator Lieberman. I appreciate that answer. Perhaps we in
    Congress should take a look at that as well.
        I thank you all very much. Thanks, Mr. Chairman.
        Senator McCain. Secretary Dominguez, we have been told the
    President's budget came over canceling the C-130J and
    apparently that decision is being reviewed somewhere within the
    Pentagon. Senator Chambliss has been involved in that issue
    more than I am. But I was startled to hear that if the C-130J
    was canceled that would therefore drive up the cost of the F-
    22. Is that true?
        Mr. Dominguez. There are lies, damn lies, and statistics,
    Senator. I think that that is likely to be true, the way the
    system works now, that there is overhead costs that are shared
    across all the products of the manufacturer of these aircraft
    and then when they lose one of their product lines the overhead
    does not shrink proportionately, so that there is a marginal
    effect in the other product lines of this shared overhead.
        It is a cost accounting issue and a distribution issue. I
    have no knowledge about what that price effect is likely to be,
    and it would be negotiable in any case.
        Senator McCain. Lockheed Martin people tell us it could be
    about $383 million would be the termination costs. I am asking
    these questions and I need the answers because we need to mark
    up our legislation and it matters as to what the termination
    costs and what the effect on the F-22.
        Mr. Dominguez. Sure.
        Senator McCain. It seems to me it is just bizarre that if
    we cancel one program therefore it drives up the cost of
    another. If we are negotiating contracts that allow such a
    thing, then we had better go back and look at procurement
    again. This means that we could really never make financial
    sense out of canceling any program, if it is going to drive up
    the costs of other programs, or only give one contract to each
    corporation, which obviously, since we do not have that many--
    but there is something fundamentally wrong that if we cancel
    one program that it drives up the cost of a cargo aircraft and
    the other is a fighter aircraft, and how those two should be
    connected is beyond me.
        I very much want, before we start our markup, which is in
    about 3 weeks, the exact cost penalties associated with
    cancellation of the C-130J and the cost effects that it would
    have on the F-22. I think we need that in the decisionmaking
    process that we are required to do as we mark up our
    subcommittees bill.
        So would you get that for me?
        Mr. Dominguez. Yes, sir. If I could, I have talked to Mr.
    Krieg, who is the Director of Program Analysis and Evaluation,
    and he is doing that assessment right now for the Secretary of
    Defense about the C-130J contract. So he understands very
    clearly that he, through Secretary Rumsfeld, owes you that
    information before you go to markup.
        Senator McCain. Thank you very much, Mr. Secretary.
        Senator Chambliss.
        Senator Chambliss. Thank you, Mr. Chairman. You and I have
    talked about this previously, and it is one of the more
    frustrating parts of dealing with procurement acquisition at
    the DOD. I do not know what the answer to this is, but again
    you and I have talked about once we get through this that we
    need to do some significant oversight into that issue, not
    necessarily the weapons systems themselves, but in the
    procurement and acquisition issue, because there has to be a
    better way to do it. I think it is fairly safe to say that we
    are spending way too much tax money on things that we ought not
    to be spending it on.
        I appreciate your leadership and I concur with Senator
    Lieberman: Were you not as strong, positive, and I could use a
    lot of adjectives in describing your antics.
        Senator Lieberman. Many people have.
        Senator Chambliss. But again, you have had a very positive
    result and I appreciate it.
        I can tell you the answer to that question. The costs of
    the F-22 are going to go up, and it all has to do with that
    industrial base that is located at that one plant where these
    two weapon systems are manufactured. I do not know what the
    cost would be, but I just know it has to be there because of
    the overhead, as the Secretary has said.
        I am sorry that Chairman Warner is not here. It is true he
    nominated Mr. McNulty over there, but I have known him for many
    years and was part of the Judiciary Committee that confirmed
    him last year. I wanted to take some of the credit because he
    has done an outstanding job. If you had not done as good a job
    as you have done, Paul, I might let Warner take all the credit.
        I do not want to beat a dead horse relative to this
    commercial contract issue, Mr. Chairman, and I appreciate the
    fact that the Air Force has come in and we are now operating in
    a different atmosphere relative to that. But some statements
    have been made, particularly in testimony last week by Mr.
    Schmitz, that I think need correcting in the record.
        Mr. Schmitz, you stated in your testimony before this
    committee last week that the predecessor to the C-130J, the C-
    130H, was never used for commercial purposes, is that correct?
        Mr. Schmitz. I do not recall exactly what I said last week,
    but if you are reading from my testimony I will----
        Senator Chambliss. If you do not remember, let me refresh
    your memory, then, and this is from your written statement:
    ``The Air Force contracting officer's statement that the
    aircraft evolved from a series of Lockheed Martin Development-
    produced commercial aircraft configurations is contradicted by
    the fact that the prior version of the aircraft, the C-130H,
    was only used for government purposes.''
        Now, Mr. Schmitz, have you ever heard of the L-100H
    aircraft?
        Mr. Schmitz. No, sir.
        Senator Chambliss. The L-100H aircraft is in fact a
    commercial version of the C-130H which was sold to numerous
    commercial transport companies who have been operating them
    since the 1970s. Southern Air Transport operated 21 L-100H's
    worldwide for decades as a commercial version of the C-130H.
    Linden Air Cargo in Alaska still flies these aircraft today.
        Mr. Schmitz, are you familiar with the fact that in the
    early 1990s that Congress encouraged DOD to pursue commercial
    contracting?
        Mr. Schmitz. Yes, sir.
        Senator Chambliss. In fact this committee, the Senate Armed
    Services Committee, helped pass legislation in 1994 which is
    known as the Federal Acquisition Streamlining Act, which
    expanded government procurement authority for acquisition of
    commercial items. Are you familiar with that?
        Mr. Schmitz. Yes, sir.
        Senator Chambliss. Mr. Schmitz, are you familiar with the
    fact that former Under Secretary for Acquisition and Logistics,
    Paul Kaminski, approved the C-130J program as a ``regulatory
    pilot program'' to explore the use of commercial contracting in
    a September 1995 memorandum?
        Mr. Schmitz. I am not familiar with that exact memorandum,
    sir, but I will take it as true.
        Senator Chambliss. I have a copy of the memorandum here,
    Mr. Chairman, which I would like inserted in the record.
        Senator McCain. Without objection.
        [The information referred to follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Senator Chambliss. Mr. Schmitz, are you aware that this
    memo stated, ``As a regulatory pilot program, the C-130J will
    demonstrate the application of commercial practices''?
        Mr. Schmitz. I was not aware, but I will take it as record.
        Senator Chambliss. Mr. Schmitz, are you aware that the Air
    Force's determination and finding regarding the approval of the
    C-130J program as a commercial item was reviewed for legal
    sufficiency and approved by the Air Force Contract Law Center,
    which is not subordinate to the Secretary of the Air Force-
    Acquisition (SAFAQ) or to Ms. Druyun?
        Mr. Schmitz. I was not familiar, but I will take it as the
    record.
        Senator Chambliss. Well, Mr. Schmitz, my point in making
    this argument is that there was in fact justification for
    approaching the C-130J program as a commercial product based on
    Congressional and DOD direction, previous commercial sales of
    the C-130H, and market research showing a commercial market for
    the C-130J. As I have stated earlier, and I think you and the
    chairman and I are all in agreement on this, we can and should
    ask the question today of whether or not a commercial contract
    was and is appropriate. However, the fact remains that the
    decision at the time was not made on a whim nor was it a
    unilateral push by Lockheed Martin. It was made for some good
    reasons which even this committee endorsed at the time.
        Now, I think it is significant that the DOD announced
    yesterday that they will begin the process of transitioning
    this contract from a commercial to a traditional acquisition
    project, and I think that is the right approach. I think it
    confirms the fact that there are some inherent challenges with
    commercial contracts and that they are probably not the best
    vehicle for large-scale procurements like the C-130J.
        However, the point is that we have learned that through
    this process. Again, were it not for the leadership of the
    chairman that simply would not have happened. As far as I know,
    there has been no malfeasance or illegal behavior regarding
    this program and I would be very surprised if we found any. So
    I think we need to draw a line between saying ``Yes, there is a
    better way to do this and we have learned that during this
    process;'' and saying, ``This is a case of a contractor
    cheating the government or the government being
    irresponsible,'' because there is absolutely no evidence that
    that is the case.
        Now, Mr. Schmitz, you stated in your testimony before this
    committee that you understood based on hearsay that C-130Js may
    currently have an operational role and that there may be some
    operational C-130Js now. You later went on to say that you
    understood that the C-130J had extremely limited operational
    use in theater thus far. Again, is that still your
    understanding of the fact?
        Mr. Schmitz. That is my understanding.
        Senator Chambliss. Well, let me ask you to consider this,
    and this is based on testimony which followed yours last week
    and I assume was available to you had you asked for it. To
    date, C-130Js in Iraq have flown over 400 missions with a
    mission capable rate of 93 percent and have performed all
    assigned missions successfully. C-130Js have transported over
    5,000 passengers, 1,600 tons of material, and flown 1,329
    hours. KC-130Js have flown 789 hours in Iraq with mission
    capable rates in excess of 95 percent. In total, KC-130Js have
    flown 11,000 hours and, according to the Marine Corps, the KC-
    130J performance is superior to the legacy fleet of the KC-
    130s. In addition to the U.S. planes, there are seven C-130Js
    in U.S. Central Command (CENTCOM) being operated by our
    coalition partners.
        Now, I am not sure what your definition of ``extremely
    limited'' is, but very honestly I think that is more than an
    extremely limited use of a weapon system.
        If you have any comment, I want to give you a fair
    opportunity to say anything you wish to about that.
        Mr. Schmitz. If I misspoke in my testimony about the
    commercial use of the C-130H, I will correct the record
    forthwith, and I will retract my use of the adjective
    ``extremely.''
        Senator Chambliss. That is all I have. Thank you.
        Senator McCain. Thank you, Senator Chambliss, and I thank
    you for your involvement in this issue, and I know how
    important it is to you and your constituents. I would just
    point out that the GAO testified the following: ``GAO rejected
    the Air Force's assertion that the evaluation process had been
    conducted properly because: one, the contracting officer
    directed the evaluators to destroy portions of the evaluation
    record; two, the agency failed to have meaningful discussions
    with all of the offerors; and three, the evidence showed
    Druyun's biased influence throughout the source selection
    process,'' which is why the GAO recommended that the Air Force
    recompete the installation phase of the C-130 contract and
    recommended that the Air Force conduct a thorough analysis of
    the possibility of recompeting the entire contract effort.
        So there is evidence that, including destruction of records
    concerning the C-130J, that is very serious allegations made by
    Mr. Gordon.
        Senator Chambliss. Mr. Chairman.
        Senator McCain. Yes.
        Senator Chambliss. Let me correct something there now. What
    you have reference to is not the contract for the procurement
    of the C-130J airplane. What you have reference to is to the
    contract for the--was it avionics?
        Mr. Gordon. Avionics modernization program.
        Senator Chambliss. Avionics modernization package for the
    C-130, that actually Lockheed Martin was not involved in.
    Boeing was the winner of that contract, and that is what you
    have reference to, not what we were talking about in my
    questions to Mr. Schmitz.
        Senator McCain. Okay, maybe we are talking about different
    things.
        I want to thank the witnesses and I appreciate their time
    and effort, and this has been a very helpful hearing for the
    committee. Thank you very much.
        [Questions for the record with answers supplied follow:]
                   Questions Submitted by Senator John McCain
                              boeing tanker lease
        1. Senator McCain. Mr. McNulty, as you of course know, I've been
    actively investigating the Boeing tanker lease proposal for more than 2
    years. During the course of our investigation, the Department of
    Defense's (DOD) production of documents responsive to congressional
    requests has been marked by disruption, prevarication, and delay.
    Despite that we finally have the tanker replacement program on the
    right track and have, consequently, saved taxpayers at least $6
    billion, the DOD's production of documents has been unacceptable. I
    conveyed my concerns directly to White House Counsel Harriet Miers just
    last week. Have you been comfortable with the degree to which the
    Pentagon has been producing documents to you in your investigation?
        Mr. McNulty. Our office has conducted the investigation with the
    assistance of the Defense Criminal Investigative Service (DCIS). All of
    our requests for information and documents from DOD have been directed
    through DCIS, and we have been completely satisfied with their
    responses to our requests.

                                costs of c-130j
        2. Senator McCain. Secretary Dominguez, in 1995, the price for the
    basic C-130J aircraft was $33 million, but by 1998, the price had risen
    to $50 million. The fiscal year 2004 contract price for the C-130J
    Stretch aircraft is $67 million and certain warfighter specific mission
    aircraft are pushing the price near $100 million. Because the Air Force
    is acquiring C-130Js using a Federal Acquisition Regulation, Part 12,
    commercial-item acquisition strategy, the Air Force has established a
    position that it cannot require Lockheed Martin to provide certified
    cost or pricing data. Without the cost and pricing data, we cannot
    verify or discover why the aircraft cost has increased so dramatically.
    Do you have any idea why the costs have risen so much?
        Mr. Dominguez. Using the active C-130H production contract in 1995,
    Lockheed Martin introduced the first two C-130Js to the Air Force at
    the existing, lower, C-130H price of $33.9 million. Several factors
    account for the increase in aircraft unit cost, which currently stands
    at $66.5 million (fixed price for the 2003 to 2008 multi-year
    contract). First, the C-130Js currently on contract feature substantial
    performance improvements not reflected in the initial H-model price,
    including a 40-percent larger cargo compartment. Second, current C-
    130Js include enhancements like a Global Digital Map and the enhanced
    cargo handling system. Third, the production rate has significantly
    decreased--from 30 aircraft per year in 1995, to the present, in which
    the price is based on a production rate of 16 aircraft per year.
    Finally, inflation has also contributed to the price increase.

                     joint primary aircraft trainer system
        3. Senator McCain. Mr. Schmitz, in your statement you identified
    potential problems with the new joint primary aircraft trainer system
    for the Navy and Air Force. I understand Darleen Druyun was involved in
    the acquisition. Do you have any information that may identify that
    Navy acquisition officials also acted improperly in the acquisition of
    this aircraft? If so, please elaborate.
        Mr. Schmitz. The Office of the Inspector General has not performed
    any audit or investigative work that would indicate Navy acquisition
    officials acted improperly in the acquisition of Joint Primary Aircraft
    Trainer System (JPATS) aircraft.
                                     ______

                 Questions Submitted by Senator James M. Inhofe
                              acquisition timeline
        4. Senator Inhofe. Secretary Dominguez and Ms. Flavin, overall, I
    am very concerned about the length of time it takes for our country to
    deploy a new weapon system. Too often it takes so long for a new system
    to go from the cradle of development to the operational field that the
    world has changed dramatically. We see the challenge for which the
    weapon system was originally designed is no longer the threat that it
    was. Or the enemy's application of current technology makes the system
    less lethal than it would have been had the system rolled off the line
    sooner. I know that DOD sees this problem as well, and the Pentagon has
    identified processes to streamline acquisitions. To improve the
    process, Congress has authorized such programs as fast track, spiral
    development, and commercial item purchase. How do we get more fully
    operational weapons systems into the hands of the warfighter in a
    quicker and still cost effective manner, and what do we need to do to
    make this happen?
        Mr. Dominiguez. Everything we do in the Air Force drives toward the
    goal of getting an operationally safe, suitable, and effective product
    of best value to the warfighter in the least amount of time. The Air
    Force has fully embraced the concept of Evolutionary Acquisition that
    the DOD has identified as the preferred approach to satisfying
    operational needs. Evolutionary Acquisition is an acquisition strategy
    that rapidly acquires and sustains a supportable capability for the
    warfighter and incrementally inserts technology or additional
    capability to ultimately meet the warfighter's final requirements. We
    have also emphasized that spiral development is the process to execute
    the Evolutionary Acquisition strategy. Spiral development is the
    preferred process to be used for acquisition programs except in those
    cases where it is possible to field a full capability in a very short
    period of time. Spiral development processes work toward getting a
    ``core capability'' into the warfighter's hands as quickly as possible,
    while continuing development during subsequent increments to add
    capability once the system is fielded. A critical part of the
    development of evolutionary acquisition strategies is the generation of
    approved, time-phased capability needs matched with available
    technology and resources. The Air Force has codified this evolutionary
    acquisition approach in recent updates to Air Force Policy on
    acquisition, requirements development, and test so as to provide the
    best and most current direction available to meet user requirements.
    Additionally, these policies address intelligence integration to ensure
    early, and continuous threat analysis that defines the immediate and
    future environment in which the system will operate.
        In order to make all of this happen, we need to ensure that
    programs can count on the funding and requirements stability to see
    these evolutionary acquisition strategies through to completion.
    Perturbations in funding can cause the best-made plans and acquisition
    strategies to fail because the needed resources were not available when
    needed. We also need to ensure our internal requirements and
    acquisition processes are consistent to facilitate critical and timely
    decisionmaking on all our programs. With your continued support, we
    have great confidence that we will continue to deliver to the
    warfighter what they need when they need it.
        Ms. Flavin. To get more fully operational weapons systems into the
    hands of the warfighter in a quicker and still cost effective manner, I
    recommend we examine how we have implemented spiral development. Spiral
    development offers significant benefits in both time and attention to
    cost issues, but only if it is operated in a highly-disciplined manner
    with full engagement by the government in the technical aspects of the
    effort. Discipline is needed to establish firm, interim baselines and
    resist the temptation to ``tinker with'' or ``improve'' the current
    iteration. It also requires a strong partnership between the requiring
    community and the acquiring community so that the requirer understands
    and agrees with the iterative plan. Technical involvement by the
    government is crucial to success. The government must have the right
    expertise resident in-house to understand where the optimum breakpoints
    are and to ensure those breakpoints are not eroded through ignorance
    during the process.

               commercial item purchase strategy: c-130 purchase
        5. Senator Inhofe. Secretary Dominguez, Mr. Gordon, and Ms. Flavin,
    as a Congress, we authorized that DOD could implement a commercial item
    procurement strategy, which is outside the regular defense procurement
    process. This was the basis of the purchase of the C-130J, though the
    aircraft did not meet commercial contract specifications or operational
    requirements. Now, I believe the findings in the upcoming mobility
    capability study will show that there is a need for more tactical
    airlift. Looking at the stress on tactical airlift since September 11,
    and the recent groundings and restrictions of 90 C-130 Es and Hs, I am
    sure it will be proven that there is a need for additional tactical
    airlift aircraft. However, we need to ensure that DOD follows an
    authorized process in procuring them. Was the C-130J procured
    correctly? If not, what was the best way to handle the purchase of this
    new airlift requirement, one that I believe we need?
        Mr. Dominguez. The Federal Acquisition Streamlining Act (FASA) of
    1994 emphasized using commercial acquisition to deliver weapons systems
    faster  and more cheaply. The Air Force and the Office of the Secretary
    of Defense (OSD) agreed that the C-130J was an  appropriate candidate
    for a commercial acquisition. In September 1995, OSD designated the C-
    130J a pilot program under provisions of FASA, affording the program
    regulatory relief, and the first C-130J 5-year option commercial
    contract was signed. However, when this large, complicated system began
    experiencing difficulty in meeting desired performance parameters in
    uniquely-military missions, the limits of the commercial contract
    became significant. In particular, the commercial contract precludes
    access to the cost and pricing data essential to restoring confidence
    in the program and our management of it.
        Mr. Gordon. The procurement of the C-130J and the question of the
    appropriate way to handle future procurements of tactical airlift
    aircraft go beyond the scope of my testimony, which was limited to
    addressing the decisions issued by the Government Accountability Office
    resolving the bid protests related to the bias of Darleen Druyun, the
    former Air Force Principal Deputy Assistant Secretary for Acquisition.
    Accordingly, I do not have a view to offer on the other matters raised
    in this question.
        Ms. Flavin. I am not comfortable with continuing a commercial
    purchase strategy for the C130J. The earlier decision to use a
    commercial purchase strategy was made during a time when the entire
    government was interested in exploring the limits of that approach.
    Subsequent information leads me to believe it is a flawed approach for
    the C-130J. I would recommend a normal acquisition process that allows
    full identification of technical issues, risks, and costs by both the
    government and the contractor.

                       c-130j procurement reconsideration
        6. Senator Inhofe. Secretary Dominguez, as I have stated, I believe
    we have been quite shortsighted in the cancellation of the C-130J based
    on my earlier comments. I think the Air Force and the DOD is being
    ``penny-wise and pound-foolish,'' with regard to this program.
    Secretary Teets, just prior to his retirement, testified before this
    committee and stated that there would be a review of this cancellation.
    Please give us a status on DOD's review of the C-130J program. When
    will we have a decision and what will be the basis of that decision? If
    we are to re-implement this program, how will it be funded?
        Mr. Dominiguez. Senator Inhofe, thank you for the opportunity to
    update you on the status of DOD's review of the C-130J cancellation.
    The Air Force is working closely with DOD to determine the best course
    of action; meanwhile, we are continuing to support the warfighter's
    requirement with the legacy fleet of combat delivery C-130Es and Hs and
    at least two C-130Js. The 2005 Quadrennial Defense Review will help
    refine combatant commanders' intra-theater airlift requirements and the
    Joint Staff Intra-theater Airlift Study that U.S. Transportation
    Command recently requested, will review contributions from current
    aircraft as well as future, evolving programs. If these studies
    indicate acquisition of more aircraft is necessary, we will make
    programming decisions within fiscal realities.
                 kc-767a tanker contract accountability review
        7. Senator Inhofe. Mr. Schmitz, in your prepared statement you very
    thoroughly discuss the KC-767A tanker program. I agree with the data
    you have presented--that the planned lease and purchase of this
    aircraft was not in the best interest of the American taxpayer. I
    believe it is important to point out that we have to find a way to
    recapitalize our tanker fleet. This low-density, high-demand aircraft
    gives our military global reach capability. However, the contract's
    negotiation--from leasing all 100 aircraft to a mixture of leases and
    purchases to using the commercial item procurement strategy--was a very
    bad idea. I know this committee has requested your office conduct an
    accountability review. From your statement, I understand that this
    review will be issued in a report by April 20, 2005. Specifically, we
    should expect this report to include: 1) what happened, 2) who was
    accountable, and 3) how do we prevent this situation from happening
    again. Looking long term, I believe the most beneficial part of this
    report will be the prevention of such occurrences in the future. I
    would gather that being 2 weeks out, you have pretty much completed
    your investigation and have arrived at your findings, with only the
    report writing still in work. Preliminarily, how can we prevent a
    similar situation in the future?
        Mr. Schmitz. Our ``Management Accountability Review of the Boeing
    KC-767A Tanker Program'' was issued on May 13, 2005. Copies of the
    report have been provided to the Senate Armed Services Committee.
    Attached for the record is Part III of the report, ``What Actions Must
    Be Taken to Preview a Situation Like the Tanker Lease From Happening
    Again?''
        The information follows:

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

            8. Senator Inhofe. Secretary Dominguez, this budget calls for
    drastically cutting the number of F/A-22 aircraft. After the initial
    operational testing and evaluation that was conducted recently, the
    evaluators' report stated that the aircraft was ``overwhelmingly
    effective'' and that the weapon system further ``dominated all
    adversaries, air and surface.'' Because of this cut, we will now have
    to rely longer on the older airframes and capabilities of the F-15 and
    F-16, some of which are approaching 30 years, to meet our mission
    requirements. Even with the Joint Strike Fighter in the pipeline, we
    determined that both weapons platforms were needed in sufficient
    numbers to meet the future threat. If we want to upgrade the F-15s and
    F-16s to approach the capability of the F/A-22 we will then have
    aircraft that cost about as much as the F/A-22 without the full
    capability. The next F/A-22 will cost about $197 million, as I
    understand, now that the initial development costs have been paid for.
    Given your best judgment, please comment on whether the Air Force can
    guarantee air supremacy for the next 30 years without a sufficient
    number of F/A-22s?
        Mr. Dominiguez. The proliferation of modern, ``double-digit''
    surface-to-air missiles ought to be of significant concern to us all,
    as they will threaten the air dominance we have enjoyed for 50 years.
    Without sufficient numbers of F/A-22s, the joint force will incur
    increased operational risk, attrition, and time to gain/maintain air
    and surface dominance. Additionally, the Joint Force Commander's
    ability to ``seize the initiative'' and gain access to the battlespace
    for joint forces will be critically jeopardized in the future. The
    department's ongoing Quadrennial Defense Review analysis on joint air
    dominance capabilities will re-assess future tactical aircraft force
    structure risks and requirements. I am confident we'll make the case
    for continuing production of F/A-22s beyond fiscal year 2008.

                     acquisition process corrective actions
        9. Senator Inhofe. Secretary Dominguez, the various statements
    submitted by this panel to the committee all mention Ms. Darleen Druyun
    and variously discuss the severe impact of her actions on the Air Force
    acquisitions process. I am sure we all agree that her dearth of
    personal integrity and professional ethics will unfortunately cast a
    long and dark shadow over this process for years to come. In your
    statement, you say, ``We realized it had been a mistake for a single
    person to determine the acquisition strategy, wield the source
    selection for major contracts, and conduct the management and oversight
    of contract executions.'' As you look to correct this situation, what
    actions will you be taking, and what kind of oversight will be in place
    to ensure that these newly enacted measures will prevent such an
    occurrence in the future?
        Mr. Dominguez. Actions already taken include the Air Force
    restructuring the contracting and program management decision authority
    accrued to Ms. Druyun's previous position, moving key decisions
    appropriately up to the Service Acquisition Executive (SAE) level while
    at the same time disseminating execution authority out to field
    organizations. The Program Executive Officers (PEO) for all aircraft,
    weapons, and command and control program have been moved to field
    product centers, allowing for program oversight by the SAE (centralized
    control) with execution accomplished by the field organizations
    (decentralized execution). To facilitate oversight, PEOs submit monthly
    reviews on each Acquisition Category (ACAT) program depicting a number
    of program parameters that describe program health. There are also bi-
    annual reviews of key programs with the major command commanders.
        In addition, we have reviewed the draft Defense Science Board's
    recommendations and are already implementing several of their
    recommendations. Completed actions include placing additional emphasis
    on acquisition integrity and directing ethics training of all members
    of the acquisition corps. We also plan to incorporate an ``Ombudsman''
    for all acquisitions so offerors have another avenue to voice any
    concerns. We are revising our source selection procedures so that the
    Source Selection Evaluation Teams will always provide the Source
    Selection Authority (SSA) with a written source selection
    recommendation. Previously, this was an option at the discretion of the
    SSA. We are also removing the ability of the SSA to be the contract
    clearance authority and will be placing that role with an independent
    party separate from the source selection team. As we receive additional
    information from the various reviews, we will continue to analyze the
    recommendations and incorporate those ideas that will improve our
    acquisition system.

        10. Senator Inhofe. Secretary Dominguez, is there any estimate of
    the potential costs or a cost range that the U.S. Government will incur
    as a result of the illegal actions of Ms. Druyun as we look at the
    companies that were not given a fair opportunity to compete for
    contracts?
        Mr. Dominguez. The Air Force presently does not have an estimate of
    the total costs the government will incur as a result of Ms. Druyun's
    admitted bias.

        [Whereupon, at 4:15 p.m., the subcommittee adjourned.]