[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; 
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
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.
      
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
      
    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.
      
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
      
    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.
      
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
      
    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. 

[GRAPHIC(S) NOT AVAILBLE IN TIFF FORMAT]
    
    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.
                             gao's mission
    The Government Accountability Office, the audit, evaluation and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the performance 
and accountability of the Federal Government for the American people. 
GAO examines the use of public funds; evaluates Federal programs and 
policies; and provides analyses, recommendations, and other assistance 
to help Congress make informed oversight, policy, and funding 
decisions. GAO's commitment to good government is reflected in its core 
values of accountability, integrity, and reliability.
             obtaining copies of gao reports and testimony
    The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO's Web site (www.gao.gov). Each weekday, GAO posts 
newly released reports, testimony, and correspondence on its Web site. 
To have GAO e-mail you a list of newly posted products every afternoon, 
go to www.gao.gov and select ``Subscribe to Updates.''
Order by Mail or Phone
    The first copy of each printed report is free. Additional copies 
are $2 each. A check or money order should be made out to the 
Superintendent of Documents. GAO also accepts VISA and Mastercard. 
Orders for 100 or more copies mailed to a single address are discounted 
25 percent. Orders should be sent to: U.S. Government Accountability 
Office, 441 G Street NW, Room LM, Washington, D.C. 20548. To order by 
Phone: Voice: (202) 512-6000; TDD: (202) 512-2537; Fax: (202) 512-6061.
         to report fraud, waste, and abuse in federal programs
    Contact: Web site: www.gao.gov/fraudnet/fraudnet.htm, E-mail: 
[email protected], Automated answering system: (800) 424-5454 or (202) 
512-7470.
                        congressional relations
    Gloria Jarmon, Managing Director, [email protected] (202) 512-4400, 
U.S. Government Accountability Office, 441 G Street NW, Room 7125, 
Washington, DC 20548.
                             public affairs
    Susan Becker, Acting Manager, [email protected] (202) 512-4800, U.S. 
Government Accountability Office, 441 G Street NW, Room 7149, 
Washington, DC 20548.
      
    [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.]

                                 
