    [Senate Hearing 109-827]
    [From the U.S. Government Publishing Office]

                                                     S. Hrg. 109-827, Pt. 4

    DEPARTMENT OF DEFENSE AUTHORIZATION FOR APPROPRIATIONS FOR FISCAL YEAR
                                      2007

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

                                    HEARINGS

                                   before the

                          COMMITTEE ON ARMED SERVICES
                              UNITED STATES SENATE

                           ONE HUNDRED NINTH CONGRESS

                                 SECOND SESSION

                                       ON

                                    S. 2766

         TO AUTHORIZE APPROPRIATIONS FOR FISCAL YEAR 2007 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 1, 28; JULY 25, 2006

             Printed for the use of the Committee on Armed Services

                         U.S. GOVERNMENT PRINTING OFFICE

    30-350 PDF                 WASHINGTON DC:  2007
    ---------------------------------------------------------------------
    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) 512-2250 Mail Stop SSOP,
    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

                        Charles S. Abell, 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 Systems Acquisition Strategy
                                 march 1, 2006

                                                                       Page
    Cody, GEN Richard A., USA, Vice Chief of Staff, United States
      Army...........................................................     6
    Bolton, Hon. Claude M., Jr., Assistant Secretary of the Army for
      Acquisition, Logistics, and Technology.........................    18
    Francis, Paul L., Director, Acquisition and Sourcing Management,
      Government Accountability Office...............................    21
    Graham, David R., Deputy Director, Strategy Forces and Resources
      Division, Institute for Defense Analyses.......................    31

                 Air Force and Navy Tactical Aviation Programs
                                 march 28, 2006

    Sullivan, Michael J., Director, Acquisition and Sourcing
      Management Team, United States Government Accountability Office    77
    Marron, Donald B., Acting Director, Congressional Budget Office..    92
    Bolkcom, Christopher, Specialist in National Defense,
      Congressional Research Service.................................    98
    Hoffman, Lt. Gen. Donald J., USAF, Military Deputy, Office of the
      Assistant Secretary of the Air Force for Acquisition...........   103
    Kilcline, RADM Thomas J., Jr., USN, Director, Air Warfare
      Division, United States Navy...................................   130
    Enewold, RADM Steven L., USN, Program Executive Officer, Joint
      Strike Fighter Program.........................................   134

                      F-22A Multiyear Procurement Proposal
                                 july 25, 2006

    Wynne, Hon. Michael E., Secretary of the Air Force...............   407
    Walker, Hon. David M., Comptroller General of the United States..   411
    Finley, Hon. James I., Deputy Under Secretary of Defense for
      Acquisition and Technology.....................................   417
    Newman, David B., Principal Analyst in Defense, Congressional
      Budget Office..................................................   478
    Nelson, J. Richard, Research Staff Member, Operational Evaluation
      Division, Institute for Defense Analyses.......................   482
    Bolkcom, Christopher, Specialist in National Defense,
      Congressional Research Service.................................   485
    Brian, Danielle, Executive Director, Project on Government
      Oversight......................................................   494

                                     (iii)

    DEPARTMENT OF DEFENSE AUTHORIZATION FOR APPROPRIATIONS FOR FISCAL YEAR
                                      2007

                                  ----------

                            WEDNESDAY, MARCH 1, 2006

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

     ARMY TRANSFORMATION AND THE FUTURE COMBAT SYSTEMS ACQUISITION STRATEGY

        The subcommittee met, pursuant to notice, at 2:41 p.m. in
    room SR-232A, Russell Senate Office Building, Senator John
    McCain (chairman of the subcommittee) presiding.
        Committee members present: Senators McCain, Sessions, and
    Lieberman.
        Majority staff members present: Ambrose R. Hock,
    professional staff member; Gregory T. Kiley, professional staff
    member; and Elaine A. McCusker, professional staff member.
        Minority staff member present: Daniel J. Cox, Jr.,
    professional staff member.
        Committee members' assistants present: Christopher J. Paul,
    assistant to Senator McCain; John A. Bonsell, assistant to
    Senator Inhofe; Arch Galloway II, assistant to Senator
    Sessions; Frederick M. Downey, assistant to Senator Lieberman;
    Elizabeth King, assistant to Senator Reed; and William K.
    Sutey, assistant to Senator Bill Nelson.

           OPENING STATEMENT OF SENATOR JOHN McCAIN, CHAIRMAN

        Senator McCain. Good afternoon. The Airland Subcommittee
    meets today to receive testimony on Army Transformation and the
    Future Combat Systems (FCS). The hearing will be conducted in
    two panels. The first panel will testify on the budgetary
    aspects of Army transformation, and will specifically discuss
    Army force structure, Army aviation, and modularity in the
    communications program, complementary to the FCS.
        We welcome Secretary Bolton and General Cody, and we extend
    our profound respect to those who serve--and our thoughts and
    prayers are with their families--who are serving with great
    distinction in our Armed Forces--in the Army, in particular.
        The 2007 Army budget request of $110.4 billion is a 12.7-
    percent increase over fiscal year 2006, authorized in
    appropriated levels of $99.3 billion. This increase is
    reflected primarily in the procurement account. 2007 reflects
    the first year the Army has budgeted for modularity in its base
    budget, instead of supplemental appropriations. Not included in
    the fiscal year 2006 almost $70 billion are of supplemental
    appropriations. Of the $70 billion for the Army in the
    supplemental, $15.2 billion in the procurement account funds
    modularity, force protection and recapitalization, equipment,
    and combat losses. This committee has jurisdiction over all of
    these areas, but, by funding these areas through the
    supplemental budget, has little oversight. This is a concern to
    me and other members of the committee.
        Yesterday, we learned from the press that the Army leaders
    sliced nearly 3 billion from their latest wartime supplemental
    spending request, under last-minute orders from the White
    House, foregoing money needed to upgrade a hard-worn fleet of
    heavy tanks and armored vehicles. The report goes on to say the
    budget-cutting decision is expected to shut down production
    lines, at least temporarily, on the Abrams tank and the Bradley
    fighting vehicle, resulting in long modernization delays for
    the aging platforms, and perhaps thousands of layoffs around
    the country.
        The Army's Abrams tank and Bradley fighting vehicle
    programs have been funded through supplemental budgets for
    their last several years. In some cases, the programs have been
    funded through earmarks to the base and supplemental budget
    requests, and I have opposed those emergency supplemental
    earmarks.
        After last year's Airland Subcommittee hearing on Army
    Transformation and the FCS, Secretary Harvey met with me and
    agreed to convert the FCS other transaction authority contract
    to a more traditional Federal Acquisition Regulation (FAR) Part
    15 contract. I congratulate the Army on that decision, and we
    look forward to receiving an update on the progress of the FCS
    contract conversion.
        FCS remains a particular concern, particularly the use of a
    lead systems integrator (LSI). That's why the FCS LSI is a
    topic of the second panel. Secretary Bolton, thank you for
    sitting on the second panel. You'll be joined by Paul Francis,
    Director of Acquisition and Sourcing Management, Government
    Accountability Office (GAO), and Dr. David Graham, Deputy
    Director, Strategy Forces and Resource Divisions, Institute for
    Defense Analyses (IDA).
        According to the report, IDA Review of FCS Management, Army
    documentation noted that one of the critical reasons to select
    the Boeing/Science Applications International Corporation
    (SAIC) as the LSI was because it would have an integrating
    role, not a producing one in developing FCS, opening up
    potential opportunities for non-LSI companies in FCS
    development.
        Additionally, the IDA report states that 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. The IDA review examined
    Boeing's formal ethics program in depth, looked briefly into
    the ethics programs and the other companies involved in FCS,
    and considered Government workforce ethics issues, as well. The
    report made several recommendations regarding improvement to
    the ethics program and we look forward to hearing how the Army
    has addressed these recommendations.
        I thank everyone for being here today. I look forward to
    your testimony and I want to thank Senator Lieberman for his
    leadership on this subcommittee and for continuing the
    bipartisanship this subcommittee has enjoyed over the past 6
    years.
        Senator Lieberman.

                STATEMENT OF SENATOR JOSEPH I. LIEBERMAN

        Senator Lieberman. Thanks, Mr. Chairman. It is always a
    pleasure to work with you in support of our Nation's military.
        I want to welcome Assistant Secretary Bolton, General Cody,
    Mr. Francis, and Dr. Graham. Thank all of you for not only
    being here, but really, more fundamentally, for your continued
    military and governmental service to our country. We recognize
    the important jobs you undertake to ensure that our Army
    maintains its superiority worldwide.
        The President's budget request for the Army is 12 percent
    higher than last year's. That is good news--very good news.
    Some of that increase is a result of including the cost of the
    Army Modularity Program (AMP) in the base budget rather than in
    the emergency supplemental request. That, too, is good news.
    However, I'm concerned about other potential shortfalls in
    modularity and reset. It appears that the administration's
    fiscal year 2006 supplemental budget request covers only about
    $10.4 billion of the Army's estimated fiscal year 2006 $13.5
    billion requirement for reset, repair, recapitalization, and
    replacement of equipment of units redeploying from Iraq and
    Afghanistan. Also, the Army's estimate of an additional $20
    billion requirement for reset in fiscal years 2007 to 2011
    assumes that units will begin withdrawing in the summer of 2006
    from Iraq, and complete that withdrawal within 2 years. Should
    that assumption prove wrong, the program cost of reset will
    certainly require an increase. At this moment, it's hard to
    say, though we hope it does not prove wrong, whether it will or
    not.
        I remain concerned about the organization, force structure,
    and size of the Army. At this moment in time, the U.S. Army is
    comprised of truly the best and brightest soldiers in its
    history. The Army's service men and women are committed to
    their mission, exhibit courage beyond any normal expectations,
    and demonstrate impressive technological capabilities.
        The quality of our soldiers is not my concern. My concern
    is whether there are enough of them. Common sense dictates that
    we must question the Quadrennial Defense Review's (QDR)
    recommendation that the Army decrease its size at this point in
    time. Right now, there are about 500,000 Active solders in the
    Army, which is down from 800,000 at the end of the Cold War.
    Even though everyone acknowledges that we are now engaged in a
    long war against Islamist terrorism, the QDR suggests that this
    number should decrease to 482,000 by fiscal year 2011 which I
    think any of us will say, by 2011, we'll still be in this long
    war, unfortunately. I know of no instance in our Nation's
    history in which we cut our Army during wartime and I'd like to
    ask about that.
        In order to improve its deployability, the Army has
    proposed an increase in the number of combat brigades. As part
    of its modularity plan, the Army will reorganize from 33
    brigades to 42 brigades. But each of these new brigades
    contains only two maneuver battalions, instead of the
    longstanding standard of three. Under this plan, the Army will
    have more brigades, but fewer maneuver battalions and maneuver
    companies and I'd like to ask some questions about that.
        Finally, at this hearing I would welcome an update on the
    FCS. Last year, this committee was able to protect the FCS from
    potentially damaging legislation. But should supplemental
    budget request levels remain high, that program will
    undoubtedly come under increased funding pressure and we need
    to hear from you and work with you to protect that part of the
    Army's future.
        Mr. Chairman, I'd ask that my full statement be included in
    the record. I look forward to the testimony of the witnesses.
        Senator McCain. Without objection.
               Prepared Statement by Senator Joseph I. Lieberman
        Good afternoon and thank you all for attending. This hearing is an
    opportunity to continue the discussions about the Army's future plans,
    which we began at the full Senate Armed Services Committee hearing on
    February 14. Assistant Secretary Bolton, General Cody, Mr. Francis, and
    Dr. Graham, I want to thank you for coming here today to testify on
    these issues. I appreciate your continued military and, Government
    service, and recognize the important jobs you undertake to ensure that
    our Army maintains its superiority worldwide.
        The President's budget request for the Army is 12 percent higher
    than last year's. That is good news. Some of that increase is a result
    of including the cost of the Army modularity program in the base budget
    rather than in the emergency supplemental requests. I hope this hearing
    addresses any known shortfalls in resources for modularity and reset.
    It appears that the administration's fiscal year 2006 supplemental
    budget request covers only about $10.4 billion of the Army's estimated
    fiscal year 2006 $13.5 billion requirement for reset--the repair,
    recapitalization, and replacement of equipment for units redeploying
    from Iraq and Afghanistan. Also, the Army's estimate of an additional
    $20 billion requirement for reset in fiscal years 2007-2011 assumes
    that units will begin withdrawing from Iraq in the summer of 2006 and
    complete that withdrawal within 2 years.
        I remain concerned about the organization, force structure, and
    size of the Army. At this moment in time, the United States Army is
    comprised of the best and brightest soldiers in its history. The Army's
    service men and women are committed to their mission, exhibit courage
    beyond expectation, and demonstrate impressive technological
    capabilities. The quality of our soldiers is not the problem. The
    problem is that there are not enough of them.
        Common sense dictates that we must question the Quadrennial Defense
    Review's (QDR) recommendation that the Army decrease its size at this
    point in time. Right now, there are about 500,000 Active soldiers in
    the Army, which is down from 800,000 at the end of the Cold War. Even
    though we are engaged in a ``long war,'' the QDR suggests that this
    number should decrease to 482,400 by fiscal year 2011. I know of no
    instance in our Nation's history in which we cut our Army during
    wartime.
        At the very moment when our Nation's strategic challenges are
    expanding in scope to include irregular, catastrophic, and asymmetric
    threats, it is simply not sensible that the Army reduce its end
    strength to the level it was after the fall of the Soviet Union and
    before September 11. In fact, with an increase of 12 percent in the
    Army's budget for next year, it is hard to understand why a portion of
    these additional funds were not targeted towards expanding our ground
    forces.
        In order to improve its deployability, the Army has proposed an
    increase in the number of combat brigades. As part of its modularity
    plan, the Army will reorganize from 33 brigades to 42 brigades. But
    each of these new brigades contains only two maneuver battalions
    instead of the longstanding standard of three battalions. Under this
    plan, the Army will have more brigades, but fewer maneuver battalions
    and maneuver companies. I know that technology can multiply the
    effectiveness of our soldiers, but that improvement only goes so far.
    It is difficult to understand how smaller brigades engaged in irregular
    warfare will have the capability of covering the same territory as the
    previous components or providing commanders with the same tactical
    flexibility. Furthermore, with more brigades, there is a need for
    additional headquarters and overhead. Reputable outside voices have
    raised concerns about the Army's decisions. It is very important that
    we examine whether this reconfiguration is the best way to organize the
    Army's scarce resources.
        Engaging in combat with the enemy is only one of the tasks our
    soldiers must perform today. They must also control populations, repel
    insurgencies, perform humanitarian work, and defeat terrorists. With
    these added responsibilities, it seems sensible to conclude that we
    need more boots on the ground. In this respect, this budget and the QDR
    point us in the wrong direction.
        The transformation of our Army is not only a matter of
    reorganization. More robust education and training will play a vital
    role as the Army prepares for the complex strategic threats outlined in
    the QDR. Our soldiers need sophisticated training that will prepare
    them to think critically in the battlefield now, and even more
    importantly, in the future. A substantial investment in linguistics and
    cultural awareness is a good starting point. But the Army must make an
    ambitious pedagogical commitment that extends beyond these goals. That
    requires more time than ever before, and an Army training and
    educational base that is better than ever. We can't do that if our
    institutional Army is stripped of the numbers and quality of informed
    personnel it needs and if our soldiers are too busy to train and learn.
    Operational efficiency is not enough; the Army must produce soldiers
    who can think analytically.
        An important component of military transformation involves an
    investment in research and forward-thinking scientific innovations. But
    technology is not the whole picture. We also need to think about
    investing in human capital. To a large extent, the irregular threats we
    face in the future will be won on the ground. Our soldiers will be
    making difficult tactical decisions that can change a potentially fatal
    encounter to a strategic success. To train our soldiers adequately for
    these future challenges, the Army must invest in education. We cannot
    do that if we do not have enough soldiers in the Army to support our
    troops in combat. If the Army reduces its size, it becomes much harder
    to focus on important non-combat functions, such as education, which
    will enable the Army to meet its future strategic goals.
        At this hearing, I also welcome an update on Future Combat Systems
    (FCS). Last year this committee was able to protect FCS from
    potentially damaging legislation. But should supplemental budget
    request levels remain high, that program will undoubtedly come under
    increased funding pressure.
        I look forward to learning more about the progress the Army has
    made on FCS and its capabilities. It is my understanding that FCS
    relies on several dozen technologies, all of which contribute to the
    creation of a battle network. I am interested in learning more about
    the technologies that are essential for the development of FCS, and the
    risks associated with them. FCS is at a stage of development in which
    the Army should be able to provide this committee with a precise
    definition of the program. I hope that during this hearing, we will
    hear such a description.
        I look forward to hearing the testimony today, and I hope the
    discussion addresses both the Army's need for technological innovation
    and the structural requirements needed to wage the ``long war'' on
    terrorism.

        Senator McCain. We welcome Secretary Bolton and General
    Cody. As always, your full statement will be made part of the
    record, and we recognize and thank you for coming.
        Mr. Bolton. Mr. Chairman, Senator Lieberman, thank you very
    much for this opportunity. In the interest of time, I'll save
    my remarks----
        Senator McCain. I think you need to pull the microphone a
    little closer, Mr. Secretary. Thank you.
        Mr. Bolton. Thank you for this opportunity, and I'll save
    my remarks for the second panel. Thank you for your support and
    your guidance. I'll turn it over to General Cody, our Vice
    Chief.
        Senator McCain. Thank you.
        General Cody.

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

        General Cody. Mr. Chairman, Senator Lieberman, Senator
    Sessions, thanks for the opportunity to speak to you today
    about our Army, our Army Transformation, and the Army Modular
    Force (AMF).
        A great deal has changed since I testified before you last
    year. I have carefully read your letter inviting me here, and
    I'm eager to answer your questions.
        That said, I'm going to keep my opening remarks rather
    brief, and focus on answering your questions.
        As many of the issues we will discuss today are complex, I
    have brought a few charts to assist in answering your
    questions. With your permission, Mr. Chairman, I would like to
    be able to show these at the appropriate time, things like
    organizational charts, to get to the complexity of the issues,
    so that I can better answer your questions. I've also provided
    some packets with these slides.
        On behalf of our Army's 600,000 soldiers that are on
    Active-Duty today around the world, more than 110,000 of them
    now serving in harm's way in Afghanistan and Iraq. I want to
    thank you for your support in providing our soldiers the
    mission-essential equipment and resources they need to
    prosecute this long war on terrorism.
        Our Army is at war, and it's also an Army in motion. We
    continue to transform, modernize, reset, and realign our global
    force posture while engaged around the world. We're
    aggressively evolving from a division-dependent force that was
    postured to deter and to wage war against traditional 20th-
    century adversaries to a now more modular brigade-centric force
    designed to meet the challenges of both today's and tomorrow's
    asymmetric threats. Restructuring our brigade combat teams
    under Army modularity addresses the irregular warfare and
    counterinsurgency operations that we are now facing in Iraq and
    Afghanistan, as well as the full range of military operations
    we anticipate to be confronted within the future.
        Our modular brigade combat teams are more lethal, mobile,
    survivable, adaptable, sustainable, and ready for joint and
    expeditionary operations for the full range of military
    operations. Our Army modular brigades that we now have in
    combat with the 101st Airborne Division and with the 4th
    Infantry Division are the most versatile units we have ever
    fielded. In addition to their strategic and operational
    deployability, they remain flexible and fully capable of
    irregular warfare and the entire spectrum of military
    operations, to include both civil support and homeland defense
    missions. They will do this through the state-of-the-art
    command and control, as well as technology inserts.
        As we are building the modular brigades for our Active Army
    National Guard and Army Reserve components, our Army is moving
    ahead aggressively with the FCS program, our first major
    modernization program in more than 30 years that, simply put,
    is the most effective way for us to modernize our Army for
    future threats.
        Funding for the FCS program is critical to providing our
    soldiers the means to dominate the future fight. The FCS is not
    only a program of the future in which we will spin out mature
    technologies to our entire Army structure, we are today
    spiraling FCS-like technologies into our formation and
    cascading them across the force to increase the capabilities
    of, and provide greater protection for, our soldiers.
        2007 will be a pivotal year for the Army. Each of our
    Army's major initiatives, the Active component and Reserve
    component rebalance, Army modularity, the Integrated Global
    Positioning and Basing Strategy, Base Realignment and Closure
    (BRAC), operations in Iraq and Afghanistan, the temporary
    growth of 30,000 in the Active Force, and the reset and
    modernization of our equipment, all of those will be fully
    underway and fully integrated in fiscal year 2007.
        With your support, we're executing a fully integrated plan
    to best serve the Nation to deal with the challenges we face
    today, and will continue to confront tomorrow, as well as
    sustain this All-Volunteer Force. I assure you that our
    soldiers, the centerpiece of all that we do, continue to serve
    magnificently.
        I just returned from Kuwait and Iraq. Our soldiers know we
    are waging a long war, and they believe in their mission, the
    Soldier's Creed, and the Warrior Ethos. Their voluntary service
    is proof of their pride in each other and their confidence in
    their leadership and their unwavering patriotism. They are a
    solid green line in defense of this Nation forward.
        Our soldiers understand our Army values, and personify this
    Nation's highest ideals. Our Nation must remain equally
    committed to them by providing the resources they need to
    succeed in their mission. With your continued support, I know
    we will succeed.
        Thank you, again, Mr. Chairman. I look forward to your
    questions.
        [The prepared statement of General Cody follows:]
                 Prepared Statement by GEN Richard A. Cody, USA
        Mr. Chairman, Senator Lieberman, and distinguished members of the
    committee, thank you for this opportunity to speak to you today about
    Army Transformation and the Army Modular Force. On behalf of our
    Secretary, Dr. Francis Harvey, our Chief of Staff, General Pete
    Schoomaker, and the approximately 600,000 soldiers on Active-Duty
    around the world--more than 110,000 of them serving in harm's way in
    Afghanistan and Iraq--let me offer a sincere ``thank you'' for your
    committed investment in our men and women in uniform. Our soldiers
    appreciate the support of this committee, and your tireless work to
    provide them the mission-essential resources to prosecute and win the
    war on terrorism.
        Our Army is an Army in motion. We continue to transform, to
    modernize, and to realign our global force posture to meet current
    demands and future challenges. The Army plan is driving change at an
    unprecedented pace. We are aggressively evolving from a division-
    dependent force postured to deter and to wage war against traditional
    adversaries, to a modular brigade-centric force designed to meet the
    challenges of tomorrow's asymmetric enemy. With your support, we have
    resourced and are executing a fully integrated plan to best serve the
    Nation, to deal with the challenges we face today and will confront
    tomorrow, and to sustain our volunteer soldiers in this time of war. To
    execute The Army plan, we are depending upon continued Congressional
    assistance in several key areas: Expediting those wartime acquisitions
    essential to equipping and protecting our soldiers; maintaining
    investment in emerging technologies to complete conversion to the Army
    Modular Force and execute the Future Combat System (FCS) strategy; and
    sustaining the support of the American people whom we serve.
        To sustain the current mission posture for future commitments, and
    maintain risk at acceptable levels, the Army needs full funding of our
    request in the 2007 President's budget and supplemental funding. This
    supplemental funding is required for combat and contingency operations,
    and reset and replacement of equipment through at least 2 years beyond
    the conclusion of major operations. Prior to September 11, many of our
    units, especially within our Reserve components, were inadequately
    equipped due to years of insufficient modernization investment. To meet
    the needs of the combatant commanders for the global war on terrorism,
    we had to pool personnel, vehicles, and equipment from across the force
    to make some units whole before they deployed.
        Thanks to this committee and the administration, we have received
    unprecedented support to correct previous procurement deficits and
    broaden our operational capabilities to meet the complex challenges of
    the 21st century security environment. In addition, we are increasing
    the quality and the effectiveness of our principal fighting units, the
    Brigade Combat Teams (BCTs), by creating a rotational pool of 70 fully-
    manned, equipped, and trained modular BCTs: 42 in the Active component
    and 28 in the Army National Guard. We will support these BCTs with more
    than 200 Active and Reserve support brigades, organized not just for
    the operational fight, but to provide essential capabilities to support
    civil authorities in homeland defense missions, including consequence
    management and disaster relief.
        To manage the rotation of these forces for the long war, the Army
    has developed a new force generation model to ensure units are at the
    desired state of readiness before they are scheduled to deploy. Our
    goal is to generate a continuous output of fully manned, equipped, and
    trained forces adequate to sustain one operational deployment in 3
    years for the Active component, and one operational deployment in 6
    years for the Reserve component. This model allows the Army to increase
    predictability for soldiers, families, and employers, improve
    availability of forces for combatant commanders, generate a continuous
    supply of 18-19 BCTs and the required support brigades, and surge up to
    an additional 15-19 BCTs in response to crises.
        To support global operations while transforming, we are resetting
    our force quickly and efficiently and providing for the well-being of
    our soldiers and their families. To take advantage of our current
    momentum, we are restoring our returning units to the required
    readiness levels, while simultaneously converting them to the new
    modular design and executing our re-stationing plan for an optimal
    footprint and in accordance with base realignment and closure (BRAC)
    and integrated global presence and basing strategy (IGPBS) decisions.
    We have already reset more than 20 major units. Many of these units
    have already returned to theaters of war in their new configurations.
    We are rebalancing capabilities within our three components to assure
    timely access to the right types of units and soldiers. We have
    determined the types of units and skills that are in greatest demand in
    today's security environment--including infantry, engineer, military
    police, military intelligence, Special Forces, chemical, civil affairs,
    and psychological operations--and have identified over 100,000
    positions to rebalance. We have accomplished more than half of this
    rebalancing and project completion by 2011. To achieve heightened
    readiness for missions at both at home and abroad, the Army's senior
    leadership is committed to fully manning, equipping, and training
    Reserve component forces. This will enable them to both serve as an
    operational force for the Nation and a ready force for State missions.
        Equally important, the Army is moving forward on the FCS, our first
    major modernization program in more than 30 years, that simply put, is
    the most effective way to modernize the Army for the future. Funding
    for the FCS program is critical to provide our soldiers the means to
    dominate the future fight. ``Spin outs'' of FCS advanced capabilities
    will increase the combat power, versatility, and survivability of our
    current formations. The first ``spin out,'' on track for delivery
    beginning in 2008, will introduce unattended ground sensors, non-line-
    of-sight launch systems, the intelligent munitions system, and the
    first generation network to the force. These capabilities will enhance
    soldiers' understanding of their situation in dynamic, battlefield
    conditions. The second and third ``spin outs,'' on track for delivery
    beginning in 2010 and 2012 respectively, will introduce new types of
    unmanned aircraft systems and unmanned ground vehicles for our
    soldiers. These technologies will enable soldiers to employ greater
    numbers of sensors to see and find their enemies first. The fourth
    ``spin out,'' on track for delivery beginning in 2014, will complete
    the Network. When BCTs are fielded with the full complement of FCS
    systems, these units will be able to generate significantly more
    capability. These new capabilities will directly benefit all U.S.
    ground forces, including the Marine Corps and Special Operations Forces
    from all Services.
        Even as we move forward with FCS and our many transformation
    initiatives, the American soldier remains the centerpiece of all that
    we do. The American military experience of the 20th century tells us
    that our soldiers' effectiveness depends upon a national commitment to
    recruit, train, and support them consistent with their service and
    sacrifices. This commitment must be underwritten by consistent
    investment in our recruiting and retention initiatives, in their
    equipment and infrastructure, and in our leader development programs.
    Meeting these goals for our Active and Reserve soldiers sustains the
    quality and effectiveness of our All-Volunteer Force.
        2007 will be a pivotal year for your Army. All of the Army's
    initiatives--Active component/Reserve component rebalance, Army
    modularity, IGPBS, BRAC, Reset/Modernization, +30,000 end strength,
    business transformation and Operations Iraqi Freedom and Enduring
    Freedom--will be fully underway, thoroughly integrated, and moving
    forward. The resources and commitment of this committee will be
    essential to interweave and accelerate each of these components to
    ensure the completion of our total Army transformation. Just as
    important will be the support to our families, communities, and the
    American people--truly, our extended Army family.
        I assure you that our soldiers continue to serve magnificently as
    we enter the fourth year of the war on terrorism. Soldiers know we are
    waging a long war, and they believe in their mission, the Soldier's
    Creed, and the Warrior Ethos. Our soldiers, 150 of whom I had the honor
    to re-enlist in Iraq 2 weeks ago, continue to stay in uniform at
    unprecedented rates. Their voluntary service is proof of their pride in
    each other and their leaders, and of their unwavering patriotism. Like
    the American soldiers of generations past, today's warriors are
    distinguishing themselves with tremendous acts of courage and valor in
    places like Baghdad, Samarra, An Najaf, Fallujah, Tal Afar, Mosul, and
    Khandahar. Our soldiers understand the Army's values and personify our
    Nation's highest ideals, demonstrated most poignantly by their
    willingness to sacrifice all so that others may live in peace and
    freedom. Our Nation must remain equally committed to them by providing
    the resources they need to succeed in their mission. With your
    continued support, I know we will succeed.

        Senator McCain. Thank you, General.
        I guess the first thing I'd like to talk about with you are
    the Guard and Reserve plans. I think you know very well, the
    Governors are in town, unfortunately for you, in time for this
    hearing. They feel very strongly that they are not receiving
    either the funding or the size. The Army, last year, said that
    there would be 43 Active component combat brigades and 34 Army
    National Guard combat brigades that would ensure the Army could
    maintain the 17-brigade force deployed with Active component
    brigades, having 2 years between rotations, and the Army Guard
    combat brigades having 5 years between rotations. For this
    request, the Army has modified its plan to increase the number
    of combat brigades in the Active and Reserve component. The
    Army will increase the Active component force structure to 42
    combat brigades, and increase the Army National Guard Force
    structure to 28 combat brigades. This action represents a
    reduction of one Active component brigade and six Army National
    Guard brigades from previous plans. Is that accurate?
        General Cody. It's accurate, Mr. Chairman, that we have
    changed our plan as we went through the QDR, as well as we
    continued to study the combat service support structure, the
    homeland security/homeland defense requirements, and the growth
    of the Special Operation Forces in the Army. If you remember, 2
    years ago our plan was to build 43 to 48 Active component
    brigades and 22 to 34 Army National Guard brigades. That was
    our intent as we looked at the plan. It was driven based upon a
    steady-state commitment of over 20 brigade combat teams in this
    long war.
        Coming out of the QDR, the analysis that was done was that
    the steady-state requirement for this long war would be 16 to
    18 brigade combat teams. As we continued to flesh out Army
    modularity, we had a shortfall and an imbalance in our combat
    service support. We also were equipment-challenged on the
    heavy-force side, especially in the Army National Guard, with
    the 10 heavy brigades, as well as the 19 heavy brigades in the
    Active Force, the Abrams and Bradley, and it did not appear
    that we would be able to fully equip all 10 of the heavy
    brigades in the Army National Guard.
        When we took all that together and went back through our
    force study analysis--we went through several iterations of
    this--what we decided to do was only grow to 42 Active
    brigades, and that would accommodate the growth in Special
    Operations Forces (SOF), on the Active side, rebalance and only
    build up to 28 fully-resourced, in terms of front-line
    equipment, in the National Guard, as well as fully-manned, and
    take those other brigades that we would have built as brigade
    combat teams, basically two infantry brigades and four heavy
    brigades, and restructure them into things that we needed to
    back up the shortage in combat service support on the Active
    side, but also be able to support homeland security/homeland
    defense.
        So, the total number of brigades in the Army National Guard
    will remain at 106. The makeup of the brigades will be
    different; 28 will be combat brigades, and then 78 will be
    combat support/combat service support, which gives us a better
    balance for the total Army, as well as giving the Governors and
    the Department of Homeland Security a better balance of
    transportation, military police, engineers, and other
    transportation-type units. The end strength will stay the same
    for the Guard. These are just the different formations that
    they'll have.
        Senator McCain. The current end strength of the Guard will
    stay the same. The authorized end strength for the Guard is
    350,000, rather than the present manning level of 333,000. The
    Guard claims that they can recruit to 350,000. So, what we're
    actually doing is saying we are not going to increase the size
    of the Guard any more than what they're presently manned at,
    not what they're authorized. Is that accurate?
        General Cody. I would not say that you're inaccurate, Mr.
    Chairman. Let me say how I see it, and then I'll see if I've
    answered your question.
        Senator McCain. Also, do you think that the Guard is
    accurate in saying they could recruit up to 350,000?
        General Cody. I think the National Guard--and I've talked
    to the adjutant generals (TAGs), and I've talked to the
    Governors, and I've certainly had many meetings with General
    Blum and General Vaughn--I think they'll be successful in
    bringing the Guard strength back up to 350,000 in the next year
    and a half. Remember how we got here.
        Senator McCain. But if we only fund them at 333,000----
        General Cody. We will fund them at whatever level they
    have. We will reprogram our dollars to fund at whatever end
    strength they come in at. This year, they're funded at----
        Senator McCain. That's funny, then why did we----
        General Cody. Sir, we----
        Senator McCain.--coming forward with a budget that puts
    them at 333,000? Go ahead, I'm sorry. Where do you get the
    money? If we're budgeting only for 333,000, if they can recruit
    up to 350,000, where do we get the money?
        General Cody. We'll have to reprogram the dollars. If they
    come in lower than 350,000--they're budgeted for 350,000, in
    2006. In 2007 the program decision memorandum-3 (PDM-3) put it
    at their current strength. The Secretary of Defense, the
    Secretary of the Army, and the President said, if they can make
    350,000, we will reprogram to pay and fully fund not just the
    military pay, but the operational dollars of whatever their end
    strength comes in at.
        Senator McCain. General, it doesn't compute, to me, if we
    have confidence that the Guard could recruit up to a certain
    level, that we would only come forward with a request for a
    lower level, and then say we're going to reprogram. But let me
    just discuss it. I don't want to take--there's a lot of
    questions that both my colleagues have. But we all know that
    the Guard is doing things that they've never done before. Even
    in World War II, they were just fully mobilized and became part
    of the regular Army. Now they're doing things that they've
    never done before, and they're doing it admirably. You'll be
    the first, I'm sure; you've testified to that many times.
    Therefore, we place great reliance on our TAGs and our Guard
    leaders when they tell us what they need and what they think
    they can do. They're not very happy right now. They're
    communicating with us, so, first of all, let me recommend that
    you, or the Chief of Staff of the Army, or the Secretary of
    Defense, somebody get all these guys in Washington and try to
    get some meeting of minds.
        General Cody. Yes, sir.
        Senator McCain. Because we're conflicted by the
    administration proposal versus what our TAGs are telling us.
    So, it would be helpful to us in our process if there was more
    agreement.
        I know there's always a certain amount of tension, but this
    is a unique situation, given what the Guard is being asked to
    do. So, that's a problem for us, and I think you can help solve
    it.
        But I guess the logical question if we're going to
    reprogram the money, if they can reach an end strength of
    350,000, do we have any ideas of what we're going to reprogram?
        General Cody. No, sir. But we have been reprogramming, and
    I know you don't want to hear this, but we have been
    reprogramming since I've been here, resourcing this war. You
    all have been very helpful to us in reprogramming.
        Senator McCain. Okay. I just want to mention one other
    thing. We, in the authorizing side--and I mentioned this to the
    Secretary of Defense in a full committee hearing--know that it
    costs additional money to fund a war in Iraq. We're tired of
    ``emergency supplementals,'' and I would hope that we could
    adopt a policy like the Sense of the Senate Resolution we
    passed last year calling for regular funding for the war to be
    included in budgetary requests. We're going to get more active
    in that effort. We think we deserve the oversight--not
    ``deserve,'' we feel oversight is our responsibility. When
    you're this many years in the war, ``emergency'' really doesn't
    fit the meaning of the word anymore.
        Senator Lieberman.
        Senator Lieberman. Thanks, Mr. Chairman.
        Senator McCain. I'm sure that's above your paygrade, too.
        General Cody. It is, sir. [Laughter.]
        Senator Lieberman. Although you're welcome to reach for it.
    [Laughter.]
        Thanks very much, Mr. Chairman.
        Let me take up a few of the questions that I raised in my
    opening statement. The first is on reset. This is the whole
    challenge of repairing, replacing, and recapitalizing equipment
    coming back from Iraq and Afghanistan. The Army reset
    requirement, as I read it, for fiscal year 2006, is $13.5
    billion, but the supplemental request only is $10.4 billion for
    that purpose. I guess the first question I want to ask is
    whether those are correct figures that I have. Second, if they
    are, how the Army will address that unfunded requirement of a
    pretty urgent need.
        General Cody. You are correct in the figures, $13.477
    billion is what we've put in. I know what came out in the title
    IX supplemental, but I don't know the figure yet coming out of
    the base supplemental. But I'm sure it's not going to be $13.7
    billion. It would be something short of that.
        Most of this is in our depot accounts and our depot
    outlays, and we will reprogram other dollars to keep our
    depots--that we're very proud of, and you've all helped us very
    much--to keep our depots running at the 25 to 27 million
    direct-labor hours that has basically kept his Army running.
        Senator Lieberman. From where will you reprogram?
        General Cody. Probably some of these are operational
    dollars that we can do. Some will be procurement dollars,
    because with some of this, there are three levels of reset.
    Senator, I know that you know them very well, but, just for the
    record, there's replacement, and recap, at the national level
    and then there is the first-level reset at the unit level. Most
    of what we're doing now is national level and replacement.
    We've lost almost two battalions worth of tanks.
        Senator Lieberman. Yup.
        General Cody. We've lost quite a few Stryker vehicles and
    we've lost 106 helicopters in this fight. So those are
    procurement dollars. Then there's also the recap that I think
    we're going to discuss later. We're not resetting the five
    different types of tanks we have right now. When we pull them
    back in, we're not resetting them back to their old standard,
    we're resetting them to the modernized standard of the Abrams
    Integrated Management (AIM) tank and the M1A3 system
    enhancement program (SEP) tank.
        Senator Lieberman. Right.
        General Cody. So there are procurement dollars associated
    with that, above and beyond just the maintenance reset. It is
    very complex, but we'll have to reprogram. We will keep our
    depots running at full throttle as we go through this.
        Senator Lieberman. The need here is real and urgent. Am I
    right to say that?
        General Cody. It is.
        Senator Lieberman. I mean, we've lost equipment. The stuff
    that we haven't lost, thank goodness, has taken some real wear
    and tear in the fight.
        General Cody. We think it's anywhere from 5 to 6 years
    worth of wear and tear on our track fleet and our tactical
    fleet, and probably 5 to 6 years of life on our airframes.
        Senator Lieberman. Okay. I'm sure we'll want to stay close
    to you on this and make sure that you don't feel the pressure
    to reprogram to support the urgent need for reset in a way that
    makes it hard for the Army to operate in other areas. So, we're
    going to keep in touch on that.
        Let me ask you about the numbers that continue to perplex
    me about the size of the Active Army, because I had to go
    around on this with Secretary Harvey at the full committee
    level, and he ended up saying--and I guess it was short term--
    that, because of moving numbers of personnel out of the
    institutional Army, there might actually be an increase in the
    Active Army. But, long term, it's pretty clear it's going down
    and it's not so long, it's 4 or 5 years from now that the aim
    is to go down to 482,000. As I said, I don't know of any time
    when we've been at war--and this war is going to be long--when
    we've done that so, I wanted to ask you to reflect a little bit
    on that, and then I'll ask you a specific question. Do you have
    enough personnel? It's as direct as that.
        General Cody. I think we all know the answer today, that
    it's taken over 600,000 soldiers, Active, Guard, and Reserve,
    on Active-Duty status, to prosecute this global war on terror.
        Senator Lieberman. Right.
        General Cody. That's with a base of a 482.400 Active Force
    and a 300,000 National Guard Force, and about a 200,000 United
    States Army Reserve. We have the authority today, with
    emergency funding, to grow the Army by 30,000.
        Senator Lieberman. Right.
        General Cody. We're continuing to do that. That'll bring us
    up, and that will help us. Army modularity in synchronization
    with rotations of brigades in and out of Iraq, and in and out
    of Afghanistan. I think I testified last year that each time we
    do those rotations, it's larger than the Normandy invasion of
    World War II. We've done it now four times. So with that churn,
    we have to increase the Active Force, because we're
    transforming the force with different skill sets for these new
    brigade combat teams. We have growth in military intelligence
    by 9,000, because irregular war and counterinsurgency
    operations require more of that.
        So, we're growing the Army as fast as we can. I fully
    understand what the Secretary of the Army has testified to. He
    has given me the plan to execute, and that is to take our
    operational force, which started out with the 482,000 end
    strength. Inside the operational force was about 310,000
    soldiers and the rest of it was in the training accounts and
    the institutional Army.
        When we took the Army from 780,000, down to its present
    strength, we also cut the institutional force, we cut other
    things. So, what the Secretary has tasked us to do is to build
    this Army into the AMF, under the directive of the Chief of
    Staff, who started Army modularity. As we do that, we will
    rebalance the Active, Guard, and Reserve properly, but take the
    operational force and grow it to 355,000 inside of that
    482,000. What he testified, I believe, to you, Senator, was
    that he was going to take more out of the institutional Army
    and also decrease the Army's transient trainee, holdee, and
    student account to a certain level. How successful we are in
    2007, 2008, and 2009 in being able to do that will determine
    the end strength of the Army. My personal opinion is, it's
    going to be north of 482,400.
        Senator Lieberman. I appreciate your honesty in saying
    that. It alleviates my concern. So, hang in there, and keep
    fighting for what you need, because you're the people we ask--
    --
        General Cody. Yes.
        Senator Lieberman.--to carry out these missions. You do it
    brilliantly, but we owe it to you to give you enough personnel
    to do it right.
        General Cody. What we don't know--and the Secretary has
    said this is our plan, and this is why it's complex--these new
    brigades we've built are enabling us to restructure our combat
    service support in a different way, because now we only have
    three chassis, versus the 13 different types of brigade combat
    teams we had. We still don't know is what the--because we're
    still half into modularity, but still fighting a war--combat
    service support full structure is really going to look like.
    We've guessed at it. We've modeled it. We're now executing some
    of it. But we think there are about 25,000 in there that we're
    unsure of. That's why I think, in the next 2 or 3 years, we'll
    be able to understand better how we can get to that 355,000
    operational Army that the Secretary and Chief have asked us to
    do, and whether we can get the savings and reroll the spaces
    out of the institutional Army.
        Senator Lieberman. A final quick question before the time
    is up. Last year, we were told that the optimal plan was to
    build 77 combat brigades. So, I wanted to ask why you decided
    to increase the number of noncombat brigades. Why didn't you
    decide to increase the number of noncombat brigades and still
    maintain last year's plan to build the 77 combat brigades? Of
    course, I worry that you're under pressure because of the
    reduced number of Active Army personnel.
        General Cody. Two things. First, because of the irregular
    warfare, we have a growth in the SOF on the Active side of
    about 7,700, and all of us agree that we need to do that, we
    need to grow our SOF, Civil Affairs, and Psychological
    Operations (PSYOPs) because we're really stretching the Reserve
    structure. I think 5 percent of Civil Affairs and PSYOPS was in
    the Active Force, the other 95 percent was in the Reserve
    Force. We're bringing that up to about a 15 to 85 rebalance.
    So, we had to subsume that underneath our end strength figure.
    That's one reason why we came back to only 42 brigades on the
    Active side, because what we want to do is not have 43 flags,
    and have them not fully-manned and fully-equipped. So, whatever
    flags we have, we're going to have fully-manned and fully-
    equipped, which, by the way, wasn't the way it was when we
    started this war.
        On the National Guard side, it came down to, again, this
    rebalancing between the Active component and the Reserve
    component and we were challenged, quite frankly, to be able to
    provide all the equipment on the heavy brigade side. We were
    looking at options with 10 heavy brigades, which was part of
    the plan, of some of those brigades not being fully equipped.
    Then, as we went through our analysis of how much combat
    support we needed for homeland security, lessons learned from
    Hurricane Katrina, as well as what would be more useful to the
    Active component in this long war for rotation base for combat
    service support, we said we had enough heavy brigades in both
    structures. What we needed to do was restructure the combat
    service support.
        Senator Lieberman. Okay, my time is up. Thanks, General.
    Thanks, Secretary. I have a bunch of other questions, which I'd
    like to submit to you and ask your answers in writing.
        Thanks, Mr. Chairman.
        General Cody. Yes, sir. Thank you, Senator.
        Senator McCain. Senator Sessions.
        Senator Sessions. Thank you, Mr. Chairman. You so ably lead
    this committee, and no one's better experienced or prepared to
    lead it, and you have a good partner in Senator Lieberman.
        Senator McCain. Thank you.
        Senator Lieberman. Thank you.
        Senator Sessions. General Cody, I understand that the
    budget that's come out has required the Army to reduce, by as
    much as $3 billion, their reset capability and that this has
    real problems for us as we go forward. It strikes me that one
    of the lessons we learned from the first Gulf War is there's no
    way we can avoid the expense of resetting equipment that's been
    driven hard in harsh environments like the desert area. You say
    that, in fact, as we proceed, it looks like we might be even in
    a point where refurbishment lines would be broken and then have
    to be reconstituted, at greater cost.
        I understand you to say that that's not so, and you won't
    allow that to happen, but isn't it a concern for us? For
    example, the Anniston Army Depot, which does the M1A2 tank
    reset, looks like it would take a $588 million hit, and that
    this could break the line there. Why would we want to fund that
    through grabbing money from some other sources? Why wouldn't we
    continue with the plan that you've started out, to put that in
    the supplemental, since so much of the damage is a result of
    use in hostile environments, and pay for that in that way?
        General Cody. Thank you, Senator, for that question. Your
    figures are accurate. They reflect what I see. Let me give you
    a back-out strategic look first.
        As I've testified, we're not going to reset our tanks back
    to the five different configurations. We're going to modernize,
    as we reset these tanks, to the SEP and the AIM tank, the same
    with the Bradley, ODS, and the A3. Those help us as we start
    cascading the FCS technologies. So, the monies you're talking
    about right now, that we did not get in the fiscal year 2006
    supplemental, reflect about a $1.1 billion shortfall for the
    Abrams line, and about a $1.5 billion shortfall on the Bradley
    line.
        Now, when we submitted that, the Office of the Secretary of
    Defense (OSD), through my comptroller, came back and said,
    ``We're not going to get that much money. This is how much
    we'll be short.'' But they are going to put it in the 2007
    title IX bridge supplemental that's supposed to come out in
    July 2006. If the money comes out in July or August 2006, the
    five tanks that come off the AIM and SEP line will not be
    broken. So, we don't see a slip.
        All this money that we're putting in for 2006 and 2007 is
    to give us five brigade combat teams of tanks and Bradleys;
    three of them for the National Guard, by the way. So, if the
    title IX money is put into the title IX money for 2007, we will
    not see a slip in either the Bradley line or the tank line. If
    that supplemental is slipped and comes in late, then you will
    see a break, and then we will be faced with reprogramming.
        Senator Sessions. So, you'll be focusing then, and
    dependent upon, the next supplemental.
        General Cody. The timing of it.
        Senator Sessions. You would agree--and I think all of us
    have seen it, time and again--but the most efficient, cost-
    effective way to maintain any kind of major resource production
    or reset is to keep it on as steady a pace as possible to avoid
    the ups and downs that require overtime and more people to be
    hired, and then down periods in which you have to lay people
    off or carry people that you wouldn't otherwise have to.
        General Cody. We have gotten better, Senator, over the last
    3 years since I've been running this. We were flowing money to
    our depots 2 months at a time. We've gotten much better,
    through the help of this committee and from Congress, so it's
    been more predictable.
        My hope is--and hope is not a method--that what I've been
    told, that that first tranche of the title IX in 2007 is $50
    billion, and this money that was not in the 2006 would be
    pushed to that, it will come on time, and we'll be okay. What
    we don't need, though, is, in this base 2006, to push this
    money back in at the expense of something else, because we have
    a whole lot of other requirements that will just cause us now
    to unravel. We think as long as that title IX in 2007 comes in
    on time, we'll be okay, and the production line will stay at
    the capacity that we have.
        Senator Sessions. Secretary Bolton, is that consistent with
    your understanding? What are your thoughts about that apparent
    shortfall?
        Mr. Bolton. Senator Sessions, absolutely. My part of this
    is to look at the depots, and see what they require--what
    they're output's going to be, and then look for the sources, if
    they aren't forthcoming. I think General Cody has hit it right
    on the head on the supplemental. We talked about that over the
    last few days. We talked about it again this morning and that's
    why we're urging that we get on with the timing of this. The
    timing is absolutely critical. If we don't get it in the June/
    July timeframe, we're going to have to break the lines. Then,
    as you've already pointed out, once you break the line, it's
    not a matter of ``the money comes, and then the folks come
    right back.'' Some of those folks are not coming back, and now
    you have to go out and replace them and, more importantly, the
    experience that went out the door.
        So, we're pushing very hard this morning--we're looking at
    it. My job now is to take a real hard look at Anniston, what's
    the drop-dead date to keep the pressure on the front office and
    also on the financial part of this, to get the money and make
    sure that someone's not pigeonholing the requirement.
        Senator Sessions. The pig-in-the-poke idea makes me a
    little nervous.
        Mr. Bolton. Yes, sir.
        Senator Sessions. But, beside that point, now let me ask
    General Cody briefly about the extended range of multipurpose
    unmanned aerial vehicles (UAVs) to be available for the Army at
    the tactical level. How are we doing on that? I know there's a
    competing interest out there. Is it critical, in your opinion,
    for the soldiers and their personal safety and ability to be
    effective combat warriors? If so, how are we doing to make sure
    we have that capability available at the brigade level and
    below?
        General Cody. Yes. Senator, the extended range multipurpose
    UAV, now called the Warrior, is an official program. We will
    buy 132 of them. They'll comprise 11 companies, at the tactical
    level. It'll be able to provide moving target indicators
    (MTIs), synthetic aperture radar, as well as electro-optic
    infrared (EOIR) sensors. I've looked at the sensors. They're
    much better than we have on the Apache right now. I mean, it's
    really promising. It'll have a heavy fuel engine, a loiter time
    of plus-20-some-odd hours. We're moving forward. I anticipate
    that we'll have four block zero here at the end of 2006 or
    early 2007. We'll do testing and integration. Right now, it's
    fully-funded and on track, and we are working with the United
    States Air Force, as well as the other Services, in the Joint
    UAV Center of Excellence to work the bigger issue, and that is
    a common ground station for all UAVs, so that as we employ them
    we have the horizontal integration on the joint battlefield.
    So, I'm very, very pleased with the progress, the support we've
    had from Congress, but, more importantly, the support we've had
    from the Joint Staff. The Warrior UAV will be out in the Army
    here as fast as we can get it.
        Senator Sessions. That's good news. Jointness is clearly
    the right way to go, because so much of that technology is
    going to be beneficial and critical for all the Services. If we
    can do more, cheaper and better, there would be, I think, some
    possibility here for UAVs.
        Thank you, Mr. Chairman.
        Senator McCain. Thank you very much.
        General, I hope you'll carry the message back that you need
    to talk to our Guard people and try and get everybody on the
    same page here. Okay?
        General Cody. Mr. Chairman, if I could just say, I've met
    with all the TAGs. I've talked to the Governors. Change is
    hard. By the way, there are a lot of Active-Duty people not
    happy with some of the changes we make. We rebalanced our air
    defense artillery, we've rebalanced Army aviation and taken
    core aviation and pushed it down, we've restructured the
    artillery, we're getting ready to move Fort Knox, the armor
    school, down to the infantry school and make it the maneuver
    center. So, we're going to continue to engage with the National
    Guard, as we also change them.
        I believe that the Secretary of the Army and the Chief of
    Staff of the Army's vision of converting fully manned, fully
    equipped Army National Guard brigades to make them an
    operational force versus a strategic force because of the world
    we live in today is the right way to go. I think, over time,
    this is going to be a much better force. The National Guard has
    served superbly. We've asked a lot of them. What we're trying
    to do now is get them out of their old equipment, get them in
    the right formations, and get them the opportunity to be
    trained up and be as they are today, an equal partner on the
    battlefield with us. I think it's going to be a good thing,
    when it's all said and done.
        But I do have some more work to do with the TAGs and the
    Governors, and I recognize that.
        Senator McCain. Thank you very much, General.
        Secretary, I think you're staying for the next panel.
        Mr. Bolton. Yes, sir, I am.
        Senator McCain. So, we'd ask Mr. Paul Francis, who's the
    Director of Acquisition and Sourcing Management of the GAO, and
    Dr. David Graham, the Deputy Director of Strategy Forces and
    Resources Division, IDA, to come forward.
        Now, Secretary Bolton, do you have an opening comment?
        Mr. Bolton. Yes, Mr. Chairman, I do.
        Senator McCain. All right, please proceed.
        Mr. Bolton. Thank you.

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

        Mr. Bolton. Good afternoon, Mr. Chairman, Senator
    Lieberman, and distinguished members of this subcommittee.
    Thank you for the opportunity to appear before you to discuss
    the FCS acquisition strategy. I respectfully request that my
    written statement be made part of the record of this hearing.
        Senator McCain. Without objection.
        Mr. Bolton. Thank you, sir.
        In addition, on behalf of the Army leadership, members of
    the acquisition and logistics workforce, and our soldiers who
    serve with distinction throughout the world, I express my deep
    appreciation for the wisdom and guidance that you have
    provided. Your steadfast support for this critically important
    program has contributed significantly to our success.
        The FCS is the Army's primary modernization program. It is
    also the materiel centerpiece of our future modular force. FCS
    includes 18 systems, the network, and the soldier--18 plus 1
    plus 1. A significant contribution of FCS is that it will place
    advanced technologies in the hands of our soldiers in what we
    call spin-outs, increasing capabilities and providing greater
    protection to the current modular and fighting forces beginning
    in 2008.
        Mr. Chairman, 2006 is a critical year for the FCS. We have
    two major field experiments scheduled, one in April, another
    one in the fall, the Defense Acquisition Board (DAB) in-
    progress review, which takes place in early May, and the
    interim preliminary design review, in August. All in all, there
    are more than 50 reviews scheduled this year.
        An important factor in program success is our lead systems
    integrator (LSI) management approach. The Army is on schedule
    to fully definitize the letter contract awarded to the Boeing
    Company, in September 2005, to continue the FCS system
    development and demonstration program.
        From my position, we are meeting the FCS challenge. My
    bigger challenge is ensuring that we have the right people and
    experience and expertise not only for the FCS, but for all the
    Army programs. During the next 3 to 5 years, nearly one-half of
    the Army's acquisition and logistics workforce will be
    retirement-eligible. Recruiting, retooling, and reshaping the
    workforce are vital to meeting the future challenges.
        That said, we are addressing these challenges with
    education, the establishment of the Army's life-cycle
    management commands, business transformation initiatives, and
    what I have termed the ``big A, little a'' acquisition process.
    That process begins when a soldier says, ``I want,'' and it
    ends when the soldier says, ``I got.''
        I included a chart that further explains my thinking on
    this, with my written statement.
        That concludes my opening remarks, Mr. Chairman. Again, I
    thank you and the members of this committee for your continuing
    wisdom and guidance and support. I look forward to your
    questions.
        [The prepared statement of Mr. Bolton follows:]
                Prepared Statement by Hon. Claude M. Bolton, Jr.
        Chairman McCain, Senator Lieberman, and distinguished members of
    the Senate Armed Services Committee, I would like to express my
    appreciation at this opportunity to appear before you to discuss the
    status of converting the Future Combat System (FCS) Brigade Combat Team
    (BCT) program's other transaction agreement (OTA) to a Federal
    Acquisition Regulation (FAR) Part 15 contract, its structure, its lead
    systems integrator (LSI) approach, the proposed incentive fee
    structure, the risks and challenges facing the program, and the
    progress being made to address these risks.
        The FCS BCT program is the principal modernization program for the
    Army and it is the materiel centerpiece of the Army's future modular
    force. It is an evolutionary acquisition program consisting of 18
    systems, the network, and the soldier (18+1+1). The FCS BCT is a
    networked family of integrated manned and unmanned systems providing
    mobile-networked command and control capabilities; autonomous robotic
    systems; precision direct and indirect fires; organic sensor platforms;
    and adverse-weather reconnaissance, surveillance, targeting, and
    acquisition. In addition, the FCS BCT program will develop and position
    spin outs of FCS BCT capabilities for procurement and fielding to
    current modular and fighting forces.
        Since the 2004 restructure announcement, the FCS BCT program
    continues to keep pace with its performance objectives and baseline.
    The FCS BCT program completed a Department of Defense (DOD) program
    review in June 2005 and successfully completed its System of Systems
    Functional Review in August 2005. The program's revised acquisition
    program baseline was approved in November 2005. Fort Bliss/White Sands
    Missile Range (WSMR) complex is the selected location for the
    evaluation BCT (EBCT). The program continues to move forward in
    completing all of the platform-based system functional reviews and
    transitioning into design and prototypical development activities.
    Further, the program is leaning forward in preparation for its Defense
    Acquisition Board (DAB) in-progress review scheduled for May 2006. The
    Non-Line of Sight Cannon (NLOS-C) continues to move ahead as the lead
    development vehicle for manned ground vehicles. The Army submitted a
    report to Congress and is moving forward to comply with congressional
    direction by building eight prototype cannon systems with delivery
    starting in calendar year 2008.
        2006 is a critical execution year for the program. It has over 52
    major reviews. It has extensive software and hardware deliveries and
    major field experiments in April 2006 and joint expeditionary force
    exercise JEFX-06, and Experiment 1.1 in the fall 2006. In addition, the
    program will have its interim preliminary design review (IPDR) in
    August 2006. The FCS BCT network is proceeding ahead as planned. For
    over 18 months, the FCS BCT program has acknowledged the risks,
    integration challenges, and synchronization issues associated with
    transport layer for Joint Tactical Radio System (JTRS) and Warfighter
    Information Network-Tactical. The FCS BCT program has worked and
    continues to work closely with the restructuring activities of both key
    transport layer programs to make sure these enablers support the
    integration master schedule of the FCS BCT program. The FCS BCT program
    has detailed risk mitigation plans in place to include the use of
    surrogates and pre-engineering development models (pre-EDMs) to ensure
    form, fit interchangeability, and to preserve the integration phased
    approach for maturing the integrated FCS platforms and common network.
    The Army is focusing hard to get it right on developing a common and
    integrated battle command network. In addition, it is important to note
    that the program has received its first seven JTRS cluster 1 pre-EDM
    radios for integration and experimentation support and use.
        In terms of critical technologies, 18 of the 49 critical
    technologies are rated with a technical readiness level (TRL) of 6. One
    is rated 8. The program is on schedule to have more than 23 rated TRL 6
    by December 2006 and it is on schedule to mature the rest by the
    Preliminary Design Review (PDR) in August 2008. Risk associated with
    the maturation of technologies was one of the contributing factors in
    the Army's decision to restructure the FCS BCT program and extend it by
    4 years. The current program plan significantly reduces the degree of
    concurrency and risk through both the spin out plan and the increased
    development time between milestones B and C. The program's maturity
    approach is consistent with DOD acquisition policy. It is important to
    note that the DOD policy requires the use of alternative technology
    that is mature and can meet the user's needs when the technology is not
    mature enough. The FCS BCT program 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 modular force's
    survivability, intelligence, surveillance, and reconnaissance, and
    joint interdependence.
        The FCS BCT program is a complex undertaking. The Army continues to
    use a LSI management approach for the FCS BCT program. To manage the
    complexity involved, a better approach was needed than having the
    Government operate as the ``integrator.'' Having over 19 independent
    prime contracts (one team partners) would only inhibit interoperability
    and integration. Today's weapon system programs with complex networking
    features require new, integrated, and single-step or common design
    processes that integrate horizontally across the board. Commonality in
    design of systems and subsystems is a new design imperative for complex
    programs. The keys to success are maximizing the use of a one-step
    design process for large scale horizontal integration and having one
    contract, one management baseline, and integrated program management
    and execution.
        In September 2005, the Army awarded a letter contract (referred to
    as an Undefinitized Contractual Action) on a sole-source basis to the
    Boeing Company for continuation of the FCS BCT system development and
    demonstration (SDD) program, which initially began under an OTA signed
    May 2003. The FCS BCT SDD contract was negotiated using FAR Part 15
    procedures and is fully compliant with the uniform contract format and
    all FAR required clauses. The use of the letter contract was essential
    in order to preserve the program's schedule and prevent disruption. As
    required, the contract must be fully definitized within 180 days.
    Currently, the Army is on schedule to fully definitize by the end of
    March 2006. I am aware of the recent Government Accountability Office
    report 06-66, DOD Has Paid Billions in Award and Incentive Fees
    Regardless of Acquisition Outcomes, and its concerns that there is
    little evidence that such incentives improve contractor performance and
    outcomes. I know that the Department is working on policy guidance
    changes. From my position, I believe the proposed fee structure
    arrangement for the FCS BCT SDD contract strikes the right balance
    between contract risks and motivation of contractor performance. The
    fee structure is different than typical contracts of this magnitude, it
    has concrete and measurable performance aimed at critical path
    performance activities.
        While I believe we are meeting the FCS challenge, my bigger
    challenge is ensuring we have the right people and expertise for the
    FCS and indeed all Army programs. Over the next 3 to 5 years, nearly
    half of the Army's acquisition workforce will be retirement eligible.
    Recruiting, retooling, and reshaping the workforce are vital if we are
    to continue meeting the challenges of the Army programs. We are
    addressing that challenge with education, establishment of the Life
    Cycle Management Command's, ``Big A, Little a'' (see attached) and Army
    Business Transformation initiatives. People have made our Army the
    world's best. It is therefore imperative that we appropriately focus on
    the people aspect of our program developments as we go forward into the
    future.
        The Army is fully committed to the FCS BCT program and to ensure
    that the program delivers what is expected and required of this
    program. We appreciate your wisdom, guidance, and strong support as we
    work to ensure that the FCS BCT program accomplishes its goal in
    support of the Army modular force initiative.

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

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

        Mr. Francis. Thank you, Mr. Chairman.
        Mr. Chairman, Senator Lieberman, I'm pleased to be here
    this afternoon to talk about the FCS. FCS will be the
    centerpiece in the Army's plan to transform to a lighter, more
    agile, and capable force.
        I'll summarize my remarks here, and ask that my full
    statement be submitted for the record.
        The context for the FCS investment is important. Fiscal
    imbalances faced by the Government will continue to constrain
    discretionary funding. One of the single largest investments
    that the Government makes is in new weapons. Over the last 5
    years, the Department of Defense (DOD) has doubled its planned
    investments in new weapons from about $700 billion in 2001 to
    nearly $1.4 trillion in 2006. At the same time, development
    cost growth on new weapons maintains its historical level of
    about 30 to 40 percent. This is the lens through which we
    should look at new major investments, such as FCS, because more
    money may not be an option for the future. Rather, the key to
    getting better outcomes is to make individual programs more
    executable.
        My summary will cover two issues: first, the risk FCS
    faces, in terms of a good business case; and, second, the
    business arrangements for the program--namely, the contract and
    the LSI.
        There are a number of compelling aspects of the FCS
    program, and it's hard to argue with the program's goals.
    However, elements of a sound business case--namely, firm
    requirements, mature technologies, a knowledge-based
    acquisition strategy, a realistic cost estimate, and sufficient
    funding, are not yet demonstrably present. Specifically, it'll
    be several years before requirements are firmed up for
    individual systems.
        Technologies are progressing slower than predicted. Using
    the Army's standards, about 90 percent of the FCS technologies
    were to be mature today; the actual number is around 30
    percent. Requirements in technology dominate the acquisition
    strategy, and are going to push demonstration out to later in
    the program. The cost estimate is limited by the low level of
    knowledge available today. Even if accurate, the Army will need
    a substantial increase in budget levels to accommodate FCS
    production.
        The Army has made several changes to improve its approach
    to acquiring FCS. It has lengthened the schedule by 4 years,
    provided for spinning out technologies to the current forces,
    provided for more testing and an experimental unit, made cost
    estimates more realistic, and improved the contract provisions.
    Nevertheless, the program remains a long way from having the
    level of knowledge it should have had before it started product
    development. FCS has all the markers for risk that would be
    difficult to accept for any single system, much less a complex
    multisystem effort.
        These challenges are even more daunting in the case of FCS,
    not only because of their multiplicity, but because FCS
    represents a new concept of operations that is predicated on
    technological breakthroughs. Thus, technical problems which
    accompany immaturity not only pose traditional risks to cost,
    schedule, and performance, they pose risks to the new fighting
    concepts envisioned by the Army. We do not yet know if FCS is
    technically doable.
        As we consider the future of FCS, we must anticipate facts
    of life, like technologies not working out, tighter budgets,
    and changes in performance. It's important, therefore, that the
    business arrangements made for FCS, primarily the development
    contract and the LSI, preserve the Government's ability to
    adjust course as dictated by facts of life.
        The Army is currently negotiating a new FAR-based contract
    that provides more protection against conflict of interest, and
    a better fee structure for the Government. In my opinion,
    though, the risk and the scope of the program will dictate
    progress and cost, not the contract. The contract is not an
    insurance policy, and the Government still bears the burden of
    risk.
        As the details of the Army's new contract are worked out
    and its relationship with the LSI evolves, it'll be important
    to ensure that the basis for making additional funding
    commitments is transparent. Accordingly, markers for gauging
    knowledge must be clear, incentives must be aligned with
    demonstrating knowledge, and alternative courses of action must
    be kept viable. Most importantly, the knowledge must be put to
    use. DOD must keep itself in a position to change course as the
    program progresses.
        There are several opportunities to revisit the FCS business
    case. One is in May 2006, when the Defense Acquisition Board
    reviews the program. However, the new contract will be signed
    by then, so it could limit the board's range of actions. A key
    juncture will fall in 2008, when the preliminary design review
    is held. At that point, there should be sufficient demonstrated
    knowledge for FCS to make an informed go or no-go decision; in
    effect, the real commitment to product development.
        Mr. Chairman and Mr. Lieberman, this concludes my remarks,
    and I'd be glad to answer any questions.
        [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 System
    (FCS), a networked family of weapons and other systems. FCS is in the
    forefront of efforts to help the Army transform itself into a lighter,
    more agile, and more capable combat force by using a new concept of
    operations, new technologies, and a new information network that links
    whole brigades together. This is a tremendous undertaking that will
    involve a total investment cost on the order of $200 billion.
        The context within which the FCS investment is being made is
    important. Fiscal imbalances faced by the Federal Government will
    continue to constrain discretionary spending. One of the single largest
    investments the Government makes is the development and production of
    new weapon systems. Over the last 5 years, the Department of Defense
    (DOD) has doubled its planned investments in new weapon systems from
    about $700 billion in 2001 to nearly $1.4 trillion in 2006. At the same
    time, research and development cost growth on new weapons maintains its
    historical level of about 30 to 40 percent. This is the lens that must
    be used to look at major new investments, such as FCS, because more
    money may not be an option for the future. Rather, the key to getting
    better outcomes is to make individual programs more executable.
        Today, I would like to discuss (1) the business case that is
    necessary for the FCS to be successful and (2) the related business
    arrangements for carrying out the FCS program.
                                    summary
        The critical role played by U.S. ground combat forces is
    underscored today in Operation Iraqi Freedom. That the Army should
    ensure its forces are well equipped with the capabilities they will
    need in the coming years is unquestioned. Moreover, the top-level goals
    the Army has set for its future force seem inarguable: to be as lethal
    and survivable as the current force, but significantly more sustainable
    and mobile. However, the Army's approach to meeting these needs--
    embodied in the FCS and its complementary systems--does raise
    questions.
        On the one hand, the FCS is the result of the Army leadership's
    taking a hard look at how it wants its forces to fight in the future.
    Army leadership has had the courage to break with tradition on FCS; it
    would have likely been much easier to win support for successor
    vehicles to the Abrams and Bradley. On the other hand, FCS does not
    present a good business case for an acquisition program. It is
    necessary that a major new investment like FCS have a compelling, well-
    thought out concept, but this alone is not sufficient. FCS began the
    product development prematurely in 2003, and today is a long way from
    having the level of knowledge it should have had before committing the
    high level of resources associated with a new product development
    effort. The elements of a sound business case--firm requirements,
    mature technologies, a knowledge-based acquisition strategy, a
    realistic cost estimate and sufficient funding--are not yet present.
    FCS has all the markers for risks that would be difficult to accept for
    any single system. They are even more daunting in the case of FCS not
    only because of their multiplicity but because FCS represents a new
    concept of operations that is predicated on technological
    breakthroughs. Thus, technical problems, which accompany immaturity,
    not only pose traditional risks to cost, schedule, and performance;
    they pose risks to the new fighting concepts envisioned by the Army.
        We are still early in the long journey that FCS entails. Many
    decisions lie ahead that will involve trade-offs the Government will
    make. Facts of life, like technologies not working out, reductions in
    available funds, and changes in performance parameters, must be
    anticipated. It is important, therefore, that the business arrangements
    made for FCS, primarily the development contract and the lead system
    integrator approach, preserve the Government's ability to adjust course
    as dictated by facts and circumstances. At this point, the $8 billion
    to be spent on the program through the end of fiscal year 2006 is a
    small portion of the $200 billion total. DOD needs to guard against
    letting the buildup in investment from limiting its decision making
    flexibility as essential knowledge regarding FCS becomes available. As
    the details of the Army's new FCS contract are worked out and its
    relationship with the lead system integrator evolves, it will be
    important to ensure that the basis for making additional funding
    commitments is transparent. Accordingly, markers for gauging knowledge
    must be clear, incentives must be aligned with demonstrating such
    knowledge, and provisions must be made for the Army to change course if
    the program progresses differently than planned.
                                   background
        The FCS concept is part of a pervasive change to what the Army
    refers to as the Future Force. The Army is reorganizing its current
    forces into modular brigade combat teams, meaning troops can be
    deployed on different rotational cycles as a single team or as a
    cluster of teams. The Future Force is designed to transform the Army
    into a more rapidly deployable and responsive force and to enable the
    Army to move away from the large division-centric structure of the
    past. Each brigade combat team is expected to be highly survivable and
    the most lethal brigade-sized unit the Army has ever fielded. The Army
    expects FCS-equipped brigade combat teams to provide significant
    warfighting capabilities to DOD's overall joint military operations.
    The Army is implementing its transformation plans at a time when
    current U.S. ground forces are playing a critical role in the ongoing
    conflicts in Iraq and Afghanistan.
        The FCS family of weapons includes 18 manned and unmanned ground
    vehicles, air vehicles, sensors, and munitions that will be linked by
    an information network. These vehicles, weapons, and equipment will
    comprise the majority of the equipment needed for a brigade combat
    team. The Army plans to buy 15 brigades worth of FCS equipment by 2025.
    Elements of a Business Case
        We have frequently reported on the importance of using a solid,
    executable business case before committing resources to a new product
    development. In its simplest form, this is evidence that (1) the
    warfighter's needs are valid and can best be met with the chosen
    concept, and (2) the chosen concept can be developed and produced
    within existing resources--that is, proven technologies, design
    knowledge, adequate funding, and adequate time to deliver the product
    when needed.
        At the heart of a business case is a knowledge-based approach to
    product development that demonstrates high levels of knowledge before
    significant commitments are made. In essence, knowledge supplants risk
    over time. This building of knowledge can be described as three levels
    or knowledge points that should be attained over the course of a
    program:

             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.
             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 that point of time because it generally
            signifies when 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 and
            the design must demonstrate that it performs as needed through
            realistic system level testing.

        The three knowledge points are related, in that a delay in
    attaining one delays the points that follow. Thus, if the technologies
    needed to meet requirements are not mature, design and production
    maturity will be delayed.
                       objectives, scope, and methodology
        To develop the information on the Future Combat System program's
    progress toward meeting established goals, the contribution of critical
    technologies and complementary systems, and the estimates of cost and
    affordability, we interviewed officials of the Office of the Under
    Secretary of Defense (Acquisition, Technology, and Logistics); the Army
    G-8; the Office of the Under Secretary of Defense (Comptroller); the
    Secretary of Defense's Cost Analysis Improvement Group; the Director of
    Operational Test and Evaluation; 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 Future Combat System (Brigade Combat Team); the
    Future Combat System Lead Systems Integrator; and other contractors. We
    reviewed, among other documents, the Future Combat System's 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 and/
    or reviewed the results of the FCS System of Systems Functional Review,
    In-Process Reviews, Board of Directors Reviews, and multiple system
    demonstrations. 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 conducted the above in response to the National Defense
    Authorization Act for Fiscal Year 2006, which requires GAO to annually
    report on the product development phase of the FCS acquisition. We
    performed our review from June 2005 to March 2006 in accordance with
    generally accepted auditing standards.
             improved business case is needed for the fcs's success
        An improved business case for the FCS program is essential to help
    ensure that the program is successful in the long run. The FCS is
    unusual in that it is developing 18 systems and a network under a
    single program office and lead system integrator in the same amount of
    time that it would take to develop a single system. It also started
    development with less knowledge than called for by best practices and
    DOD policy.
    While Progress Has Been Made, Requirements Still Remain Uncertain
        The Army has made significant progress defining FCS's system of
    systems requirements, particularly when taking into account the
    daunting number of them involved--nearly 11,500 at this level. Yet
    system-level requirements are not yet stabilized and will continue to
    change, postponing the needed match between requirements and resources.
    Now, the Army and its contractors are working to complete the
    definition of system level requirements, and the challenge is in
    determining if those requirements are technically feasible and
    affordable. Army officials say it is almost certain that some FCS
    system-level requirements will have to be modified, reduced, or
    eliminated; the only uncertainty is by how much. We have previously
    reported that unstable requirements can lead to cost, schedule, and
    performance shortfalls. Once the Army gains a better understanding of
    the technical feasibility and affordability of the system-level
    requirements, trade-offs between the developer and the warfighter will
    have to be made, and the ripple effect of such trade-offs on key
    program goals will have to be reassessed. Army officials have told us
    that it will be 2008 before the program reaches the point which it
    should have reached before it started in May 2003 in terms of stable
    requirements.
    FCS Success Hinges on Numerous Undemonstrated Technologies and
            Complementary Programs
        Development of concrete program requirements depends in large part
    on stable, fully mature technologies. Yet, according to the latest
    independent assessment,\1\ the Army has not fully matured any of the
    technologies critical to FCS's success. Some of FCS's critical
    technologies may not reach a high level of maturity until the final
    major phase of acquisition, the start of production. The Army considers
    a lower level of demonstration as acceptable maturity, but even against
    this standard, only about one-third of the technologies are mature. We
    have reported that going forward into product development without
    demonstrating mature technologies increases the risk of cost growth and
    schedule delays throughout the life of the program. The Army is also
    facing challenges with several of the complementary programs considered
    essential for meeting FCS's requirements. Some are experiencing
    technology difficulties, and some have not been fully funded. These
    difficulties underscore the gap between requirements and available
    resources that must be closed if the FCS business case is to be
    executable.
    ---------------------------------------------------------------------------
        \1\ Technology Readiness Assessment Update, Office of the Deputy
    Assistant Secretary of the Army for Research and Technology, April
    2005.
    ---------------------------------------------------------------------------
        Technology readiness levels (TRL) are measures pioneered by the
    National Aeronautics and Space Administration and adopted by DOD to
    determine whether technologies were sufficiently mature to be
    incorporated into a weapon system. Our prior work has found TRLs to be
    a valuable decisionmaking tool because they can presage the likely
    consequences of incorporating a technology at a given level of maturity
    into a product development. The maturity levels range from paper
    studies (level 1), to prototypes tested in a realistic environment
    (level 7), to an actual system proven in mission operations (level 9).
    Successful DOD programs have shown that critical technologies should be
    mature to at least a TRL 7 before the start of product development.
        In the case of the FCS program, the latest independent technology
    assessment shows that none of the critical technologies are at TRL 7,
    and only 18 of the 49 technologies currently rated have demonstrated
    TRL 6, defined as prototype demonstration in a relevant environment.
    None of the critical technologies may reach TRL 7 until the production
    decision in fiscal year 2012, according to Army officials.\2\ Projected
    dates for FCS technologies to reach TRL 6 have slipped significantly
    since the start of the program. In the 2003 technology assessment, 87
    percent of FCS's critical technologies were projected to be mature to a
    TRL 6 by 2005. When the program was looked at again in April 2005, 31
    percent of the technologies were expected to mature to a TRL 6 by 2005,
    and all technologies are not expected to be mature to that level until
    2009.
    ---------------------------------------------------------------------------
        \2\ When the program started seven of 32 technologies were rated at
    TRL 6 and one was at TRL 7.
    ---------------------------------------------------------------------------
    FCS Acquisition Strategy Will Demonstrate Design Maturity After
            Production Begins
        The knowledge deficits for requirements and technologies have
    created enormous challenges for devising an acquisition strategy that
    can demonstrate the maturity of design and production processes.
    Several efforts within the FCS program are facing significant problems
    that may eventually involve reductions in promised capabilities and may
    lead to cost overruns and schedule delays. Even if requirements setting
    and technology maturity proceed without incident, FCS design and
    production maturity will still not be demonstrated until after the
    production decision is made. Production is the most expensive phase in
    which to resolve design or other problems.
        The Army's acquisition strategy for FCS does not reflect a
    knowledge-based approach. Figure 1 shows how the Army's strategy for
    acquiring FCS involves concurrent development, design reviews that
    occur late, and other issues that are out of alignment with the
    knowledge-based approach outlined in DOD policy.

        Ideally, the preliminary design review occurs at or near the start
    of product development. Doing so can help reveal key technical and
    engineering challenges and can help determine if a mismatch exists
    between what the customer wants and what the product developer can
    deliver. An early preliminary design review is intended to help
    stabilize cost, schedule, and performance expectations. The critical
    design review ideally occurs midway into the product development phase.
    The critical design review should confirm that the system design is
    stable enough to build production-representative prototypes for
    testing.
        The FCS acquisition schedule indicates several key issues:

             The program did not have the basic knowledge needed
            for program start in 2003. While the preliminary design review
            normally occurs at or near the start of product development,
            the Army has scheduled it in fiscal year 2008, about 5 years
            after the start of product development.
             Instead of the sequential development of knowledge,
            major elements of the program are being conducted concurrently.
             The critical design review is scheduled in fiscal year
            2010, just 2 years after the scheduled preliminary review and
            the planned start of detailed design. The timing of the design
            reviews is indicative of how late knowledge will be attained in
            the program, assuming all goes according to plan.
             The critical design review is also scheduled just 2
            years before the initial FCS low-rate production decision in
            fiscal year 2012, leaving little time for product demonstration
            and correction of any issues that are identified at that time.

        The FCS program is thus susceptible to late-cycle churn, which
    refers to the additional--and unanticipated--time, money, and effort
    that must be invested to overcome problems discovered late through
    testing.
    FCS's Higher Costs May Result in Funding Challenge
        The total cost for the FCS program, now estimated at $160.7 billion
    (then year dollars), has climbed 76 percent from the Army's first
    estimate. Because uncertainties remain regarding FCS's requirements and
    the Army faces significant challenges in technology and design
    maturity, we believe the Army's latest cost estimate still lacks a firm
    knowledge base. Furthermore, this latest estimate does not include
    complementary programs that are essential for FCS to perform as
    intended, or all of the necessary funding for FCS spin-outs. The Army
    has taken some steps to help manage the growing cost of FCS, including
    establishing cost ceilings or targets for development and production;
    however, program officials told us that setting cost limits may result
    in accepting lower capabilities. As FCS's higher costs are recognized,
    it remains unclear whether the Army will have the ability to fully fund
    the planned annual procurement costs for the FCS current program of
    record. FCS affordability depends on the accuracy of the cost estimate,
    the overall level of development and procurement funding available to
    the Army, and the level of competing demands.
        At the start of product development, FCS program officials
    estimated that the program would require about $20 billion in then-year
    dollars for research, development, testing, and evaluation and about
    $72 billion to procure the FCS systems to equip 15 brigade combat
    teams. At that time, program officials could only derive the cost
    estimate on the basis of what they knew then--requirements were still
    undefined and technologies were immature. The total FCS program is now
    expected to cost $160.7 billion in then-year dollars, a 76-percent
    increase. Table 1 summarizes the growth of the FCS cost estimate.

                 TABLE 1: COMPARISON OF ORIGINAL COST ESTIMATE AND CURRENT COST ESTIMATE FOR FCS PROGRAM
                                           [In billions of then-year dollars]
    ----------------------------------------------------------------------------------------------------------------
                                                                                         Revised
                                                                        Original      estimate (as      Percentage
                                                                        estimate       of 1/2006)        increase
    ----------------------------------------------------------------------------------------------------------------
    Research, development, testing, and evaluation.................           $19.6           $30.5              56
    Procurement....................................................           $71.8          $130.2              81
                                                                    ------------------------------------------------
      Total........................................................           $91.4          $160.7             76
    ----------------------------------------------------------------------------------------------------------------
    Source: Army (data); GAO (analysis and presentation).

        According to the Army, the current cost estimate is more realistic,
    better informed, and based on a more reasonable schedule. It accounts
    for the restructure of the FCS program and its increased scope, the 4-
    year extension to the product development schedule, the reintroduction
    of four systems that had been previously deferred, and the addition of
    a spin-out concept whereby mature FCS capabilities would be provided,
    as they become available, to current Army forces. It also reflects a
    rate of production reduced from an average of 2 brigade combat teams
    per year to an average of 1.5 brigades per year. Instead of completing
    all 15 brigades by 2020, the Army would complete production in 2025.
    This cost estimate has also benefited from progress made in defining
    system of systems requirements.
        Figure 2 compares the funding profiles for the original program and
    for the latest restructured program.

        The current funding profile is lower than the original through
    fiscal year 2013, but is substantially higher than the original after
    fiscal year 2013. It still calls for making substantial investments
    before key knowledge has been demonstrated. Stretching out FCS
    development by 4 years freed up about $9 billion in funding through
    fiscal year 2011 for allocation to other Army initiatives. Originally,
    FCS annual funding was not to exceed $10 billion in any 1 year. Now,
    the cost estimate is expected to exceed $10 billion in each of 9 years.
    While it is a more accurate reflection of program costs than the
    original estimate, the latest estimate is still based on a low level of
    knowledge about whether FCS will work as intended. The cost estimate
    has not been independently validated, as called for by DOD's
    acquisition policy. The Cost Analysis Improvement Group will not
    release its updated independent estimate until spring 2006, after the
    planned Defense Acquisition Board review of the FCS program.
        The latest cost estimate does not include all the costs that will
    be needed to field FCS capabilities. For instance,

             Costs for the 52 essential complementary programs are
            separate, and some of those costs could be substantial. For
            example, the costs of the Joint Tactical Radio System Clusters
            1 and 5 programs were expected to be about $32.6 billion (then-
            year dollars).\3\
    ---------------------------------------------------------------------------
        \3\ The ongoing operational assessment of the Joint Tactical Radio
    System functionality could result in a program restructure, which would
    have an impact on the program's costs.
    ---------------------------------------------------------------------------
             Some complementary programs, such as the Mid-Range
            Munition and Javelin Block II, are currently not funded for
            their full development. These and other unfunded programs would
            have to compete for already tight funding.
             Procurement of the spin-outs from the FCS program to
            current Army forces is not yet entirely funded. Procuring the
            FCS items expected to be spun out to current forces is expected
            to cost about $19 billion, and the needed installation kits may
            add $4 billion. Adding these items brings the total required
            FCS investment to the $200 billion range.

        Through fiscal year 2006, the Army will have budgeted over $8
    billion for FCS development. Through fiscal year 2008, when the
    preliminary design review is held, the amount budgeted for FCS will
    total over $15 billion. By the time the critical design review is held
    in 2010, about $22 billion will have been budgeted. By the time of the
    production decision in 2012, about $27 billion will have been budgeted.
        The affordability of the FCS program depends on several key
    assumptions. First, the program must proceed without exceeding its
    currently projected costs. Second, the Army's annual procurement
    budget--not including funds specifically allocated for the modularity
    initiative--is expected to grow from between $11 billion to $12 billion
    in fiscal year 2006 to at least $20 billion by fiscal year 2011. The
    large annual procurement costs for FCS are expected to begin in fiscal
    year 2012, which is beyond the current Future Years Defense Plan period
    (fiscal years 2006-2011). FCS procurement will represent about 60-70
    percent of Army procurement from fiscal years 2014 to 2022. This
    situation is typically called a funding bow wave.\4\ As it prepares the
    next Defense Plan, the Army will face the challenge of allocating
    sufficient funding to meet the increasing needs for FCS procurement in
    fiscal years 2012 and 2013. If all the needed funding cannot be
    identified, the Army will have to consider reducing the FCS procurement
    rate or delaying or reducing items to be spun out to current Army
    forces. However, reducing the FCS procurement rate would increase the
    FCS unit costs and extend the time needed to deploy FCS-equipped
    brigade combat teams.
    ---------------------------------------------------------------------------
        \4\ The term bow wave is used to describe a requirement for more
    funds just beyond the years covered in the Future Years Defense Plan
    that are subject to funding constraints.
    ---------------------------------------------------------------------------
                           fcs business arrangements
        Given the risks facing the FCS program, the business arrangements
    made for carrying out the program will be critical to protecting the
    Government's interests. To manage the program, the Army is using a lead
    system integrator (LSI), Boeing. As LSI, Boeing carries greater
    responsibilities than a traditional prime contractor. The Army is in
    the process of finalizing a new Federal Acquisition Regulation (FAR)-
    based contract in response to concerns that the previous Other
    Transaction Agreement was not the best match for a program of FCS's
    size and risks. This contract will establish the expectations, scope,
    deliverables, and incentives that will drive the development of the
    FCS.
    Program Management with A Lead System Integrator
        From the outset of the FCS program, the Army has employed a
    management approach that centers on the LSI. The Army did not believe
    it had the resources or flexibility 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, generally, it is a prime contractor with increased
    responsibilities. These responsibilities may include greater
    involvement in requirements development, design and source selection of
    major system and subsystem subcontractors. The Government has used the
    LSI approach on other programs that require system-of-systems
    integration. The FCS program started as a joint Defense Advanced
    Research Projects Agency and Army program in 2000. In 2002, the Army
    competitively selected Boeing as the LSI for the concept technology
    demonstration phase of FCS. The Army's intent is to maintain the LSI
    for the remainder of FCS development.
        Boeing and the Army established a relationship to work in what has
    become known as a ``one-team'' management style with several first tier
    subcontractors to develop, manage, and execute all aspects of the FCS
    program. For example, Boeing's role as LSI extends beyond that of a
    traditional prime contractor and includes some elements of a partner to
    the Government in ensuring the design, development, and prototype
    implementation of the FCS network and family of systems. In this role,
    Boeing is responsible for (1) engineering a system of systems solution,
    (2) competitive selection of industry sources for development of the
    individual systems and subsystems, and (3) integrating and testing
    these systems to satisfy the requirements of the system of systems
    specifications. Boeing is also responsible for the actual development
    of two critical elements of the FCS information network--the System of
    Systems Common Operating Environment and the Warfighter-Machine
    Interface.
        The Army participates in program decisions such as make/buy and
    competitive selection decisions, and it may disapprove any action taken
    under these processes. The decision structure of the program is made up
    of several layers of Integrated Product Teams. These teams are co-
    chaired by Army and LSI representatives. Government personnel
    participate in each of the integrated product teams. This collaborative
    structure is intended to force decision making to the lowest level in
    the program. Decisions can be elevated to the program manager level,
    and ultimately the Army has final decision authority. The teams also
    include representation of the Army user community, whose extensive
    presence in the program is unprecedented.
        The advantages of using an LSI approach on a program like FCS
    include the ability of the contractor to know, understand, and
    integrate functions across the various FCS platforms. Thus, the LSI has
    the ability to facilitate movement of requirements and make trade-offs
    across platforms. This contrasts with past practices of focusing on
    each platform individually. However, the extent of contractor
    responsibility in so many aspects of the FCS program management
    process, including responsibility for making numerous cost and
    technical tradeoffs and for conducting at least some of the
    subcontractor source selections, is also a potential risk. As an
    example, many of the subcontractor source selections are for major
    weapon systems that, in other circumstances, 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.
        Thus far, the Army has been very involved in the management of the
    program and in overseeing the LSI. It is important that as the program
    proceeds, the Army continue to be vigilant about maintaining control of
    the program and that organizational conflicts of interest are avoided,
    such as can arise when the LSI is also a supplier. As discussed in the
    next section, the Army intends the new contract to provide additional
    protection against potential conflicts.
    Contracting Arrangements
        The Army and Boeing entered into a contractual instrument called an
    Other Transaction Agreement (OTA). The purpose of the OTA was to
    encourage innovation and to use its wide latitude in tailoring
    business, organizational, and technical relationships to achieve the
    program goals. The original OTA was modified in May 2003 and fully
    finalized in December 2003 for the Systems Development and
    Demonstration phase of the FCS program. The latest major modification
    to the OTA, to implement the 2004 program restructuring, was finalized
    in March 2005.
        Questions have been raised about the appropriateness of the Army's
    use of an OTA for a program as large and risky as FCS. The Airland
    Subcommittee held a hearing in March 2005 which addressed this among
    other issues. In particular, concern has been raised about the
    protection of the Government's interests under the OTA arrangement and
    the Army's choice to not include standard FAR clauses in the OTA. In
    April 2005, the OTA was modified by the Army to incorporate the
    procurement integrity, Truth in Negotiations, and Cost Accounting
    Standards clauses.
        In April 2005, the Secretary of the Army decided that the Army
    should convert the OTA to a FAR-based contract. A request for proposals
    was issued by the Army on August 15, 2005. An interim letter contract
    was issued on September 23, 2005. The Systems Development and
    Demonstration work through September 2005 will be accounted for under
    the OTA and all future work under the FAR-based contract. Boeing/SAIC
    and all of the FCS subcontractors were to submit a new certifiable
    proposal for the remainder of Systems Development and Demonstration and
    that will be the subject of negotiations with the Army. The Army
    expects the content of the program--its statement of work--will remain
    the same and they do not expect the cost, schedule, and performance of
    the overall Systems Development and Demonstration effort to change
    materially. The target date for completion of the finalized FAR
    contract is March 28, 2006. In the coming months, we will be taking a
    close look at the new contract as part of our continuing work on FCS
    that is now mandated by the National Defense Authorization Act for
    Fiscal Year 2006.
        The FAR-based contract is expected to include standard FAR clauses,
    including the Truth in Negotiations and Cost Accounting Standards
    clauses. The letter contract includes Organizational Conflict of
    Interest clauses whereby Boeing and SAIC can not compete for additional
    FCS subcontracts. Also, other current subcontractors can compete for
    work only if they do not prepare the request for proposals or
    participate in the source selection process.
        The last major revision of the OTA in March 2005 had a total value
    of approximately $21 billion. Through September 2005 the Army and LSI
    estimate that about $3.3 billion will be chargeable to the OTA. The FAR
    based contract will cover all activity after September 2005 and is
    expected to have a value of about $17.4 billion. Both the OTA and the
    FAR-based contract will be cost plus fixed fee contracts with
    additional incentive fees. According to the Army, the fee arrangement
    is designed to address the unique relationship between the Army and the
    LSI and to acknowledge their ``shared destiny'' by providing strategic
    incentives for the LSI to prove out technologies, integrate systems,
    and move the program forward to production, at an affordable cost and
    on schedule. In the OTA, the annual fixed fee was set at 10 percent of
    estimated cost and the incentive fee available was 5 percent.
        The Army plans to change the fee structure for the FCS program in
    the new contract. The request for proposals for the new contract
    proposed a 7-percent fixed fee and an 8-percent incentive fee. The OTA
    established 10 distinct events where LSI performance will be evaluated
    against predetermined performance, cost, and schedule criteria. (Those
    events are expected to be retained in the FAR contract.) One event has
    already occurred--the System of Systems Functional Requirements Review
    was held in August 2005. The next event is called the Capabilities
    Maturity Review and it is expected to occur in June or July 2006. As
    the details are worked out, it is important that the new contract
    encourage meaningful demonstrations of knowledge and to preserve the
    Government's ability to act on knowledge should the program progress
    differently than planned.
        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 Robert L. Ackley, Lily J. Chin, Noah B. Bleicher, Marcus C.
    Ferguson, William R. Graveline, Guisseli Reyes, Michael J. Hesse, John
    P. Swain, Robert S. Swierczek, and Carrie R. Wilson.

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

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

        Dr. Graham. Thank you. It's an honor to be here.
        Let me begin by saying that I think this committee is on to
    a very important set of issues. FCS is one example of an
    emerging class of programs that involve a lot of integration
    across platforms, involve multiple Services, corporations, and
    corporate interests. So, coming to grips with how the
    Department is going to manage those programs is a very
    important challenge before the Department, and the Government
    as a whole.
        Other examples, if you look at the joint tactical radio
    system, theater air and missile defense, command, control,
    communications, computers, intelligence, surveillance, and
    reconnaisance systems, there's a whole range of challenges
    ahead of us that present the same kind of problems that we're
    talking about with FCS today.
        Our study was completed in 2004. It provides a snapshot of
    what we saw in the program at that time. By way of context, I
    have to say that we were asked by the Army to look at the
    challenges that we saw for them to execute the FCS program as
    it went forward. So, our recommendations were aimed
    specifically at the execution of that program. We gave the Army
    18 recommendations, some of which are important in the context
    of today's discussions.
        Because of our approach to this, we were again advising the
    Army on the things that we saw needed to be done to execute the
    program. So, we weren't doing a broader public policy review of
    a lot of these issues; and that, in some cases, has led us to
    make recommendations that are specific to the program, but not
    be germane to the broader issues.
        Now, I've been asked to comment on two things today. One is
    the LSI, the second is the ethics issues relating to FCS.
        The bottom line with respect to the LSI is consistent with
    what Mr. Francis just said. You have a program here where there
    are a lot of very important decisions that remain to be made.
    The Army requires the ability to stand back from the
    competitive interests of the participants in the program and
    make judgments about what is in the best interest of the Army.
    We concluded there's a lot at stake for all of the companies
    that are involved in this program, so there is a need for the
    Army to have its own capability to judge where they are at any
    point in time, and what makes the most sense going forward.
    That was the focus of our recommendations to the Army at that
    time. We said they needed to identify the kinds of decisions
    that would need to be made, and create a process within the
    Army, the corporate Army, for getting those decisions made, and
    then provide that guidance back to the contractors. They
    needed, as Mr. Francis said, an effective risk assessment and
    management process. They needed their own internal mechanisms
    for assessing the status of the program, and options. Finally,
    they needed an independent test capability. So, we were focused
    on strengthening the Army's ability to provide its own
    perspective and views on the program.
        With respect to ethics, we were asked to see if there was
    anything that was going to come back and bite the Army due to
    the business setup that they had. We looked very carefully at
    Boeing and what they had done, in response to the issues with
    the other programs and a little bit at the other contractors.
        Basically, what we found was that Boeing, by the time we
    looked at the program, had undergone three or four pretty in-
    depth independent reviews--Senator Rudman was involved in that,
    among others--and had put together a lot of formal structures,
    to guarantee the integrity of the program. So, what we found
    was that, in terms of the formal structures, they had done a
    lot. Boeing had really bent over backwards to make the case, so
    they could win back the confidence of their customer.
        We did not do an in-depth field survey of how these new
    programs had been implemented. So one of the things we told the
    Army was that they should adopt a policy of ``trust, but
    verify,'' in order to understand how the contractors were
    implementing these programs. Boeing had already agreed with the
    Air Force to institute a set of external oversight activities.
    We recommended that the Army piggyback on those. Boeing had
    also set up a number of--they created a new independent vice
    president and so forth. So we thought the Army should continue
    to monitor those things.
        In addition, as part of the Rudman review, Boeing agreed to
    set up a pretty stringent screening process for new employees
    coming onboard if they had Government background. Our
    recommendation there was that they ought to look
    retrospectively at the people who came into the corporation
    before those provisions were set in place.
        So, that concludes the recommendations that we have made to
    Boeing or to the Army on that program.
        [The prepared statement of Dr. Graham follows:]
                     Prepared Statement by David R. Graham
        IDA findings on the use of the Lead System Integrator program
    structure for the Army's FCS program.\1\
    ---------------------------------------------------------------------------
        \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.
    ---------------------------------------------------------------------------
        I was the study director for the Institute for Defense Analyses's
    (IDA) 2004 review of Future Combat System (FCS) program management. IDA
    performed this review at the request of then-Acting Secretary of the
    Army, Les Brownlee, and the Office of the Under Secretary of Defense
    (Acquisition, Technology, and Logistics).
        The IDA report provides a snapshot of the program in mid-2004, and
    it describes 18 substantial actions we identified as necessary to
    manage the program effectively. Our recommendations included actions to
    address risks associated with the topics of interest for this hearing:
    the Army's employment of a Lead System Integrator (LSI) and the ethical
    programs associated with FCS. I have submitted an extract from our
    report for the record.
                    the army's employment of an lsi for fcs
        Let me begin with three observations on the rationale for employing
    an LSI for managing FCS:

             The Army established a LSI for the FCS program in
            order to capitalize on industry expertise in structuring,
            integrating, and managing complex development programs.
             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.
             In DOD's view, an LSI is legally equivalent to
            employing a prime contractor that is focused primarily on
            system engineering, system integration, system planning, and
            control of the family of systems production.\2\
    ---------------------------------------------------------------------------
        \2\ 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.

        Our overall findings were that the LSI concept has worked
    satisfactorily in other contexts, and we discovered nothing to indicate
    such an approach cannot work for the FCS program.
        At the same time, we found that the Army's use of an LSI for FCS
    involves some significant management challenges.

             The underlying challenge is that the successful
            execution of the FCS program requires ongoing strong,
            independent Army involvement to address design and development
            issues that are fundamental to the Army's future. At the time
            of our review, the operational requirements document and key
            performance parameters were being revised in parallel with FCS
            program development. There were also major technical risks that
            would require downstream adjustments in program plans and
            expectations.
             The Army had the formal processes in place for
            overseeing and engaging on these issues with the FCS program.
            But, we saw potential weaknesses in the execution of the FCS
            management structure.\3\ The FCS employs the ``one-team,''
            which inter-mixes Government and industry experts in integrated
            product teams (IPTs) co-chaired by Government and LSI
            officials, and relies heavily on Boeing's management
            information system for information and analyses. This creates
            inherent tensions 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.
    ---------------------------------------------------------------------------
        \3\ The Army's formal framework includes the UA Board of Directors
    to support FCS execution, assist in building interfaces between FCS and
    other Army acquisition activities, and to protect the Army's corporate
    interests in the FCS program. In 2003, the Army established the TRADOC
    Futures Center. The Futures Center provides an Army focal point for
    defining FCS capability needs and for arbitrating those major
    requirements decisions that have broad Army implications.

                     From the contractor's perspectives, there are
                    tens of billions of dollars at stake in upcoming
                    decisions regarding the composition of FCS units to be
                    fielded, as well as the capabilities that will be
                    assigned to each element of FCS.
                     Boeing LSI personnel also face thorny dilemmas
                    in the ``one team'' construct: 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 the industry.
                    Boeing, however, has a large financial stake in the
                    future of the program.
                     On the Government side, many staff are dual-
                    hatted as IPT members while performing their
                    Governmental responsibilities, including oversight of
                    contractor cost and schedule performance, setting user
                    requirements, conducting operational and live-fire
                    testing, and establishing system architectures.

        Given these internal tensions, we felt the Government faced the
    risk of becoming too heavily reliant on its industry partners. Success
    with the FCS program requires a strong cadre of ``smart buyers'' on the
    Government side, who are looking out for the Army's interests, and are
    equipped to counter-balance corporate incentives in order to keep the
    FCS program focused on delivering an integrated and effective unit of
    action.
        We advocate three actions to strengthen the Army's ability to shape
    the FCS program:

              1. A corporate Army process for identifying and resolving key
            FCS decisions.
              2. An Army institutional capability to develop independent,
            corporate Army perspective on FCS cost, schedule, and
            performance issues. We recommended five specific
            responsibilities for the organization assigned this job:

                      -  Independent assessments of cost, schedule, and
                    performance
                      -  Support for FCS program reviews
                      -  Support for Training and Doctrine Command (TRADOC)
                    quarterly futures reviews
                      -  Assessments of the ``one-team's'' management
                    information systems
                      -  Strategic risk assessments with associated
                    contingency options for FCS to enable the program to
                    continue to adjust as development matures

              3. Army test activities that continue their collaboration in
            support of the Army's FCS development efforts, but in a way
            that ensures their independence.
                                     ethics
        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. My
    comments today will focus on Boeing.
        In the 2 years prior to the IDA review, Boeing had commissioned a
    series of external reviews to address some serious ethical problems
    unrelated to the FCS program. Such violations led to Boeing's debarment
    from the Air Force's Evolved Expendable Launch Vehicle program. One
    review, ``The Boeing Company: An Assessment of the Ethics Program,''
    was performed by the Ethical Leadership Group at the request of the Air
    Force.\4\ Former Senator Warren Rudman performed two additional ethics
    reviews at the request of Boeing.\5\ R. William Ide, a former president
    of the American Bar Association, conducted a third review that focused
    on Boeing's legal department.
    ---------------------------------------------------------------------------
        \4\ Ethical Leadership Group, Wilmette, IL, October 2003.
        \5\ Paul, Weiss, Rifkind, 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 external reviewers found Boeing's ethics activities to be
    understrength, 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 took many 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. (These are detailed in the IDA report.)
        Boeing has, in particular, realigned its corporate structure to
    increase the independence of corporate governance functions, including
    establishing:

                      -  A Senior Vice President (VP) for Internal
                    Governance (reports to CEO and separately to the
                    Board's audit committee)
                      -  An Integrated Defense Systems Compliance Review
                    Board--chaired by the President of Boeing
                      -  Direct reporting lines for all Ethics Advisors to
                    Headquarters VP for Ethics

        With these and other actions, Boeing makes a strong case that they
    are making every effort to ``win back the trust of their customers'';
    IDA did not, however, audit execution at Boeing so we can only report
    on these actions and the formal processes that Boeing has put in place.
        Our report recommended three additional steps for the Army to help
    ensure that ethical issues would not harm the FCS program:

              1. The Army should adopt a policy of ``trust but verify''
            with regard to the ethics programs of the FCS industry
            participants.

                      -  In the case of Boeing, the Army should take
                    advantage of planned future Air Force surveillance
                    activities. As part of an administrative agreement to
                    address Boeing's prior problems, Boeing will hire a
                    special compliance officer, approved by and reporting
                    directly to the Air Force. Boeing also will agree to a
                    follow-up independent audit 30 months after the
                    agreement takes effect.
                      -  The Army also should task the tier 1
                    subcontractors, through Boeing, to assess lessons
                    learned from the Boeing independent reviews and, where
                    relevant, adopt these lessons learned in their own
                    operations.

              2. We recommend that the Army should also require all
            contractors to screen current employees who have Government
            backgrounds for possible FCS conflict of interest exposure.
            Relevant disqualification letters also should be obtained. The
            Rudman report recommended careful screening of future hires.
            Boeing agreed to do this, but we were also concerned about
            risks associated with those already hired before the Rudman
            review.
              3. A comprehensive personnel-tracking program should be
            implemented within FCS to help manage conflict of interest
            exposure for all program participants; it should be geared
            especially toward containment of proprietary information within
            the FCS ``firewall.''

        Senator McCain. Thank you very much, Dr. Graham.
        On the Rudman report, Rudman said that we should have well-
    known former Pentagon officials who go to work for defense
    contractors, and we put it in the defense authorization bill,
    and then it was removed in conference. Do you think we still
    need that, Dr. Graham?
        Dr. Graham. I think it's important to avoid conflict of
    interest of people coming from Government into industry.
        Senator McCain. Mr. Francis?
        Mr. Francis. I would agree, Mr. Chairman.
        Senator McCain. Secretary Bolton, I'm very concerned,
    obviously, as we all are, about the cost escalation of defense
    procurement. We've talked about it a lot, and we have been
    concerned about the failure to bring costs under control on a
    broad variety of programs. Outside of the F-22, or Joint Strike
    Fighter (JSF) program, this is the biggest single defense
    procurement and the total fixed and incentive fee earned to
    date by the manufacturers under the LTA is $424.1 million. This
    is fixed and incentive fees--fixed fee of $280.7 million and
    incentive fee of $143 million. Meanwhile, the cost of the
    program has gone up 76 percent. What's the rationalization for
    paying incentive fees--as I understand, maximum incentive
    fees--when the cost escalation and the program has been
    delayed? How do you rationalize that?
        Mr. Bolton. Mr. Chairman, I'll break it down into a couple
    of parts here. The cost growth in the program has been driven
    by the Army, not by the contractor.
        Senator McCain. How is that driven by the Army?
        Mr. Bolton. Sir, when we started this program, when the
    Army took the program over and baselined it in 2003, it was a
    program that was aimed at a field date of 2010. In 2004, after
    several months of study by the Army--and in several areas,
    aviation being one, and FCS and others--our leadership made a
    determination that the soldiers on the battlefield deserved the
    best available technology as soon as possible.
        Senator McCain. Something they didn't, I assume, in 2003.
        Mr. Bolton. That is true. That is true. For the FCS, sir.
    We were providing, and have been providing, to the battlefield
    technologies from the technical base and off-the-shelf
    resulting in programs like the rapid equipping, rapid fielding
    initiatives. But our new Chief of Staff at the time said, ``I
    want to take whatever technologies are available and ready out
    of this FCS and put it in the field as soon as possible.'' When
    that decision was made, we restructured the program and wound
    up with four spirals, initially, to take technology that was
    maturing at that time and put it into the field. The first
    spiral starts in 2008. That will look at increased network
    capability, unattended sensors on the battlefield, as well as
    two or three other technologies we believe will be ready and
    can be used by our current forces. As we laid out those
    spirals, which happened on a 2-year center, starting in 2008,
    the program grew.
        We also added 4 more years to take care of the concerns
    that had already been raised by the GAO and others about
    maturing technologies. The Army elected, at that time, to add 4
    more technologies, to come to a total of 18, that we had taken
    out previously, before 2003. So, the program and scope changed.
    When it changed, the cost of that program changed, as well.
        Senator McCain. Was the contract renegotiated?
        Mr. Bolton. At that point, we actually modified the
    contract vehicle that we had. So, we--at that point--and this
    is 2004--went ahead and put in a new baseline. That baseline
    was not approved by OSD, for reasons we can go into later,
    until November 2005. However, in the self-assessment report
    that we delivered to Congress in December--I think it was
    December 2004--we explained how we had restructured, how we,
    the Army, had increased the size of this program, and that we
    would update the costs as soon as we had an official baseline,
    from OSD.
        Senator McCain. When was that cost updated?
        Mr. Bolton. That was updated in November of last year.
        Senator McCain. Whew, boy.
        Mr. Bolton. If I just----
        Senator McCain. This is an interesting scenario.
        Mr. Bolton. Yes, sir.
        Senator McCain. In 2003, we enter into a contract; 2004, we
    decide to change it; 2005, we notify Congress; and, during that
    period of time, the contractor gets maximum incentive fees.
        Mr. Bolton. Yes, sir, because he did exactly what we asked
    him to do.
        Senator McCain. It's stunning.
        Mr. Bolton. If I could use----
        Senator McCain. Stunning.
        Mr. Bolton. It's just----
        Senator McCain. It's quite stunning. You--they ask you--you
    just--there's no such thing as a contract. You just ask them to
    do more things, and then the cost escalates, and then we ask
    them to do some more things, and then the cost escalates.
        Senator Lieberman. We pay more.
        Senator McCain. Yes, and we pay more. So, we give them more
    incentives. How do you--that's the damnedest way of doing
    business I've ever--no private corporate could stay in
    business.
        Mr. Bolton. I reflect back on why we did it. We thought it
    was the right thing to do. We had technologies that were going
    to mature over time. This Chief of Staff did not want to wait
    to have all technologies available at once in 2010. He thought
    soldiers deserved to have the technology when it's available
    and we restructured the program. To me, that's a good premise.
        Senator McCain. Mr. Francis, has the GAO commented on this
    process?
        Mr. Francis. We haven't. We have talked, in general. We
    have a report out now that talks about how awarding incentive
    fees works, or, maybe more appropriately, doesn't work. I think
    in this situation we have reported on FCS, and I do think the
    restructuring was the right thing to do, because the program,
    as approved in May 2003, I don't believe, was executable.
        Senator McCain. But if you structure a contract, don't you
    sign a new contract?
        Mr. Bolton. You actually ``mod'' the contract. That is you
    have a signed contract, and the legal way to hold someone
    accountable is to modify that contract signed by a contracting
    officer. In this case, it was a grants officer.
        Mr. Francis. The contract has to be written in such a way
    that allows for the risk in the program and this program has a
    lot of risk, which the Government bears. I think I'll come back
    to what I had said in my opening remarks, which is, the
    contract itself isn't going to be any better than the program.
    The program should have been in better shape when it started.
    You brought up the corporate example. A corporate example,
    would have had a very tight business case, so that you wouldn't
    have an unpleasant discovery like this. In the contract at the
    time, and in the current one, it would still work that way. If
    the Government were to decide that the program can't be
    executed as planned, it would revise the cost and schedule
    estimate, and the basis for the fee would be reset, and the
    contractor would be judged against the new cost and schedule
    estimate.
        Senator McCain. Would you agree that there was a much lower
    level of scrutiny or accounting because it was originally an
    Office of Technology Assessment (OTA) contract?
        Mr. Francis. Mr. Chairman, I don't know that the contract
    type would have made a difference at that point. I think the
    risks in the program would have overpowered any contract
    instrument.
        Senator McCain. Dr. Graham?
        Dr. Graham. That's been our view at IDA. I was here a year
    ago and said we had told the Army we thought they had
    sufficient visibility of costs and sufficient authority to
    control the contractor under the OTA to execute the program
    effectively. The OTA that was in use at that time, as I said,
    had a lot of FAR-like provisions put into it by the Army. I
    agree wholeheartedly and my colleagues at IDA also agree
    wholeheartedly with Mr. Francis. At that time, we saw that the
    uncertainty in the program, the technological risks, and the
    ability to manage those things was the big challenge to the
    program. We didn't see the OTA itself as the centerpiece of the
    issue.
        Senator McCain. In your report, Dr. Graham, you made
    several observations regarding the LSI. Boeing has a major
    financial stake in the program, receives about one-third of the
    program's fund for its work as the LSI and for developing a
    system of systems common operating environment; thus, creating
    an inherent tension in Boeing's roles and responsibilities. Do
    you think we should be addressing what seems to be a conflict
    of interest?
        Dr. Graham. Again, our approach to the Army was that the
    Army had to be able to develop its own independent views on
    cost, schedule, and performance so that it could be an equal,
    or better, partner in this relationship. That was the solution
    that we recommended a year ago.
        The risk that we saw was that the program was set up under
    what they call a ``one-team'' management structure where you
    had integrated product teams--I don't know, 15 or so of those--
    looking at different aspects of the program. LSI
    representatives would come together with Government
    representatives and a lot of the Government representatives
    were dual-hatted, so they had to come together and work in this
    partnership, while, at the same time, carrying out their
    governmental responsibilities.
        At the time we looked at the program, we were somewhat
    concerned that the Government side may not have the horsepower
    that was needed for them to engage effectively in all cases.
    So, we were a little concerned that this IPT process might
    become dominated by the contractor side, just because of the
    resources that they had to bring to bear on these processes.
        So, that's why our recommendations were aimed toward
    strengthening the Government's ability to engage in that
    process.
        Senator McCain. Mr. Francis? Comment on this LSI issue?
        Mr. Francis. Yes, Mr. Chairman. I think I would agree with
    Dr. Graham that these are definitely concerns, in the
    continuing interest of the LSI. Ideally, you'd want the LSI to
    be financially indifferent to the outcome of the program. In
    this case, Boeing does have a stake in it. You mentioned the
    system of systems, common operating environment. There's
    another element of software they're working on. Plus, they have
    responsibility for systems engineering, which will continue
    into production.
        I will say the contract that's being negotiated right now
    does limit Boeing's future involvement in subcontracts, and
    essentially prevents it. So, that's better. But still, I think,
    short of starting over with a different contracting
    arrangement, from here on in the Army will have to try to
    mitigate the risk with Boeing, versus eliminating it.
        Senator McCain. Secretary Bolton, my understanding is the
    latest cost is $161 billion for the FCS. Is that accurate?
        Mr. Bolton. The contract I'm negotiating right now is $17
    billion. If you include what we will estimate the first units
    of action, 15 of those and then-year dollars, you can get out
    to about 160. If it's in base-year dollars, it's 125.
        Senator McCain. Do you foresee any further cost
    escalations?
        Mr. Bolton. It's hard for me to answer that, because 2 or 3
    years ago when I looked at 2010, I did not anticipate the Army
    wanting to make a change to put technology into the field as
    quickly as we're doing in the spin-outs. So, I don't know what
    the future entails. I do know that if I can stay to the
    baseline that I have right now, we have a good chance of
    keeping the cost where it is today.
        Senator McCain. Do you share that optimism, Mr. Francis?
        Mr. Francis. I'm afraid I don't. I'd like to be optimistic,
    but, in this case, on the FCS, the base of knowledge right now
    for developing an estimate is very low, the schedule is very
    tight, and our analysis shows that a lot of things are going to
    come together late in the program when the burn rate, if you
    will, for the dollars is very high. So, I think it will be very
    difficult for the program to execute within the current
    estimate.
        Senator McCain. Dr. Graham, do you have an opinion?
        Dr. Graham. There are features the networking and so forth,
    that just involve unproven technologies. I think it's very hard
    to even describe what FCS ultimately will look like, much less
    predict the cost of it.
        Senator McCain. Well, that's comforting. [Laughter.]
        Dr. Graham. But, on the other hand, as I said, there are
    several programs in DOD which are driving toward a level of
    integration that is needed to take the next step in military
    capability. There just are tremendous challenges in pulling off
    those programs.
        Mr. Bolton. Mr. Chairman, if I could add----
        Senator McCain. Yes, Mr. Secretary.
        Mr. Bolton.--a little bit to this, because my task is to
    bring the program in once I have the requirement--if I have the
    resources to bring it in--and then to apply every tool we have
    to stay within those resource bounds. I've tried to explain why
    it grew. Not driven by the contractor, but we, the Army, said
    we had to do this.
        Now, if the Secretary and the Chief had said, ``Okay, this
    is it, that's the money you have, now go make it happen.'' We
    have put in--while we don't use the business-case approach--
    that's not the DOD way of doing this type of program--we do
    have, in place of that, a strategy, and acquisition strategies,
    that take all of the things, in terms of requirements and
    readiness for technology and so forth, into account, and, for
    each one of the technologies that we are pursuing, the 8 that
    are now--the 49 that are ready to go now, in terms of level
    six--23 by the end of this year--by the time we get to the
    preliminary design review in 2008, all of them will be at the
    level that the DOD says it has to be for this program to go
    forward--and for each one of those, there is a detailed risk
    mitigation plan and an off-ramp, which means if this technology
    is not ready on that day, I take a technology that already
    exists, that's here. That's how we're going to control this.
    What that means is, if we took all these technologies and,
    boom, we have the FCS, and here's its capability--if we don't
    get all those technologies, I'll take something else in lieu
    of, and it'll be a little less, but it'll still be a whole heck
    of a lot more than what we have today.
        So, my challenge is, once I understand the requirements and
    have the resources to stay within, we're going to do everything
    we can to stay there.
        Senator McCain. I appreciate that very much, Mr. Secretary.
    The problem that we're facing--and I'm a student of history--is
    that sooner, rather than later, we're going to start seeing a
    leveling off of defense spending.
        Mr. Bolton. Yes, sir.
        Senator McCain. There's just too great a deficit. Here we
    are--history shows that we go in these constant----
        Mr. Bolton. Yes, sir.
        Senator McCain.--cycles--so here we are with $2 billion
    destroyers, $14 billion aircraft carriers, a doubling of the
    cost of the FCS to $161 billion. There's going to come a
    terrible collision here and if we don't keep the cost down, it
    may be great technology, but we're not going to be able to buy
    it.
        Mr. Bolton. Mr. Chairman, I agree. I, too, have looked at
    history in this business for at least the last 100 years, and
    I've seen the same cycles. I ask my folks, ``what are we going
    to do if, 2 or 3 years from now, the budget is cut in half? How
    do we prioritize?'' What are we going to do with this program?
    We're already looking at that, expecting, one day, for reasons
    completely outside of this department, that we're going to have
    to live with that.
        Senator McCain. One of the places you could start is not
    paying off incentive bonuses for contracts that fall behind in
    schedule and increase in cost.
        Mr. Bolton. Mr. Chairman, I will do that----
        Senator McCain.--and if you think that it's justified, we
    have a difference of opinion.
        Mr. Bolton. Yes, sir.
        Senator McCain. Go ahead, please.
        Mr. Bolton. We may. What I've tried to explain is that in
    this case, this contractor--actually, the group of
    contractors--did exactly what the Army wanted done. We, the
    Army, changed. The analogy I use--when I build a house and I go
    in there and I say, ``I'm going to pay this much for a four
    bedroom, two-car garage.'' Now my mother-in-law is going to
    come and visit. That's after I've signed the contract. I need
    another room. I need handicap ways of getting in and out.
        Senator McCain. A lot of times, I say, ``Mom, we can't
    afford it.'' [Laughter.]
        Mr. Bolton. Sir, you may be able to get away with that. I
    can't. [Laughter.]
        Senator McCain. Well, I mean----
        Mr. Bolton. But the point I'm trying to drive is that if
    the owner decides to make a change, and the contractor is doing
    exactly what you asked him to do, why do you penalize the
    contractor?
        Senator McCain. If you are a student of history, Mr.
    Secretary, you'll go back and see, in the 1980s, we had fixed-
    cost contracts.
        Mr. Bolton. Yes, sir.
        Senator McCain. We had fixed-cost contracts. We didn't have
    incentive contracts and somehow we got completely away from
    that. For doing their job, I'm not sure that people deserve
    incentives. Again, in the corporate world, you go enter into a
    contract with somebody, and they do the job, and you pay them
    their money. You don't have to have ``incentive contracts,''
    particularly in this case, of 141--or 400--a half a billion
    dollars, total. That's not the way to negotiate contracts.
    That's not the way we used to negotiate contracts. We used to
    say, ``Here's the cost.'' If you renegotiated the cost, fine,
    then you got a new cost. You didn't need an incentive. Are
    there penalties in this contract for failure to perform?
        Mr. Bolton. You don't get the incentive.
        Senator McCain. That's what I thought.
        Mr. Bolton. But let me point out--because it reflects back
    to what the GAO has just recently said--we have no award fee
    with the LSI. There is no award fee.
        Senator McCain. There's just incentive fees.
        Mr. Bolton. The incentive fee, which is a very small
    percentage of all the contracts that are let in DOD--you're not
    going to find a whole lot who have incentive fees.
        Senator McCain. Half a billion dollars this time.
        Mr. Bolton. The reason you don't is because the incentive
    fee has to be extremely objective. In fact, the two that
    they've gotten so far were go/no-go, either you do exactly what
    we say--in that case, it was to definitize the OTA; the other
    was an extremely important part for this program, otherwise who
    could not go forward, and that was the systems of systems
    functional requirements review. Without that, the program
    literally could not go forward. So we put an incentive on that.
    Then, within that, we broke out exactly what the contractor had
    to do.
        So, we can disagree on that. The fixed-price contracts that
    I went through, back in the 1980s, or the cost-plus, back in
    the 1970s, and you go back to the 1950s, you'll find it going
    the other way, and they ran afoul for the same reason that any
    contract would run afoul. As Mr. Francis already has pointed
    out, it is not the contract type that I worry about, it's the
    people actually executing the contract, both on the Government
    side and the contractor, that I worry about. Do they have the
    expertise, training, and experience to do that work?
        Senator McCain. I guess we could extend this discussion for
    a long time, but there are benefits of old age, Mr. Secretary.
    I remember when President Reagan came in, and Secretary of the
    Services gave fixed-cost contracts with penalties associated,
    not incentive contracts that caused us to spend hundreds of
    millions of dollars in addition because they did their job.
        So, we're going to work every way from this side to
    eliminate those kinds of contracts so we can save hundreds of
    millions of dollars, because I'm sure there are defense
    contractors out there who will do the job, and be satisfied
    with being paid, as most corporations in America are, for just
    getting the job done.
        Secretary Lieberman--Senator Lieberman.
        Senator Lieberman. Well, thank you for that nomination.
    [Laughter.]
        Senator McCain. Secretary Lieberman. [Laughter.]
        Senator Lieberman. If you offer it, I might accept it.
    [Laughter.]
        I agree with all the questions and the comments that
    Senator McCain has made. We're in a crisis here, because we are
    asking the military to do more. We're not giving you the
    resources to do it, and there's a definite--taken from here to
    fill this gap. So, as we said in the last panel, we have this
    tremendously urgent need to reset the force coming out of Iraq
    and Afghanistan. So, how are you going to do it? You reach into
    the institutional Army. That begins to affect training and
    education and other aspects of the institutional Army. As I
    said before, I don't think we have enough personnel in the
    Active Army.
        Acquisition is a critical part of this, and somehow we have
    to figure out how to buy you what you need and get it at a
    better price. This is because, otherwise, we're ultimately
    going to compromise our security.
        I have just a couple of questions to add. I want to start,
    Secretary Bolton, with you, about the FCS, and just repeat what
    I said briefly in my opening statement. As you well know, there
    was a run made at this program, a serious run, of altering it
    significantly in the House last year. Chairman Hunter led the
    drive. That's a very significant person to be raising these
    questions. On the Senate side, Senator McCain and I and others
    worked hard to protect the program, because we believe in it.
        Mr. Bolton. Right.
        Senator Lieberman. But you're going to be challenged a lot,
    as you've been today, reasonably, you'll be challenged by those
    who are not as supportive and it's important that your friends
    challenge you, too.
        The GAO has asserted that the FCS does not represent a good
    business case for an acquisition program. In the written
    testimony that Mr. Francis has given us, he said that the
    elements of a sound business case are firm requirements, mature
    technologies, a knowledge-based acquisition strategy, a
    realistic cost estimate, and sufficient funding and he
    concludes that those are not present in the FCS. As he said in
    his oral testimony, FCS has all the markers for risks that
    would be difficult to accept for any single system; they are
    even more daunting in the case of FCS, not only because of
    their multiplicity, but because FCS represents a new concept of
    operations that is predicated on technological breakthroughs.
        So, Mr. Secretary, do you agree with the GAO that the FCS
    program is not based on a solid business case?
        Mr. Bolton. That's difficult for me to answer. As I
    mentioned earlier, DOD does not process programs using a
    business case.
        Senator Lieberman. Yes.
        Mr. Bolton. What the GAO----
        Senator Lieberman. Maybe we should.
        Mr. Bolton. I'll leave that to the Department. I have my
    personal opinions, but I'm not going to speak for the
    Department. So, what we have done----
        Senator McCain. We'd be glad to hear your personal opinion,
    Secretary Bolton.
        Senator Lieberman. Yes, really. [Laughter.]
        Mr. Bolton. I do agree with a lot of what the GAO and what
    the Defense Acquisition Performance Assessment (DAPA) report
    has put out.
        Senator Lieberman. Right.
        Mr. Bolton. But we have a process. In order for me to get
    the program through the building, I follow that process.
        Senator Lieberman. Yes.
        Mr. Bolton. The GAO would like to have a higher level of
    technology maturity--a seven, at least, and probably an eight,
    which is a prototype. The DOD says, ``Six is what you need to
    get through these particular milestones.''
        When I look at that, I can agree with a lot of it, but it
    requires a lot of changes outside of what I call the ``small
    `a' acquisition,'' program management, contracting, so forth.
    In fact, if you look at the DAPA, if I could just go on a
    little bit of a tangent here, where they look for 6 years from
    milestone ``a'' to fielding, it sounds great. But then you must
    realize that everything changes. The threat community has to
    adjust to input from the requirement community, who has to
    speed up their process, the resourcing has to speed up; of
    course, the acquisition needs to speed up, all the testing, if
    you're going to stay within that; and the technology has to be
    at least seven or eight.
        What Mr. Francis talked about, we have already been doing
    for the last 3\1/2\ years. Look at the Stryker. We went from an
    idea to a full combat deployed brigade in 4 years. Not just the
    vehicle, but the entire brigade. We did all the requirements,
    all the resourcing, all the acquisition, all the testing,
    trained the soldiers, and put them over in northern Iraq. Four
    years. The vehicle itself probably takes 15 years, 10 to 15
    years, to do that. If you look at what Mr. Francis said, here
    and also in previous GAO reports, you will find that we
    followed that. We don't use the same terms, but we followed
    that.
        Senator Lieberman. That's a good model, and that's a good
    example. I think as you look to the GAO definition of a sound
    business case--firm requirements, mature technologies,
    knowledge-based acquisition strategy, realistic cost estimates,
    efficient funding--those are standards that----
        Mr. Bolton. Yes, sir.
        Senator Lieberman.--we ought to hold the Pentagon to. If
    it's not operating on a good business case, then it ought to--
    you have a very impressive background that you bring to this
    job, and I'd just urge you to look at it in those terms and
    shake up the system if you have to.
        Mr. Bolton. As a matter of fact, I've already asked my
    chief scientist to go and see what it would take for us to move
    from six to eight. I know that's not what the GAO's looking
    for; the seven would be fine with them. No, eight.
        Senator Lieberman. Yes.
        Mr. Bolton. That's a prototype. It's going to stay in the
    lab, and we're going to prototype this and put it out. On the
    resourcing side and the test side, we've asked the same
    questions, so I can come back to my leadership over this year
    and see what we can do about this.
        There is a caution here. I have not thought through this,
    but I do see it, and I can't get over this hurdle. What I have
    described, and what the GAO has described, this knowledge-based
    acquisition is great, as long as your horizon is 12, 18 months,
    24 max. Why? Because that's what business uses.
        Senator Lieberman. Sure.
        Mr. Bolton. If you get longer than that, you have lost
    market share. You're out of there.
        Senator Lieberman. You've lost more money.
        Mr. Bolton. Yes, sir. We're doing that on the battlefield
    today. What's our problem? We're barely staying ahead of the
    adversary, in terms of technology. What we want to do is be
    able to have technology that gives you some deterrence that's
    more than 18 months long--2 years, 5 years, 10 years. When you
    do that, you have to push technology a little harder than your
    adversary. Now, granted, I have not thought through this, but
    I'm trying to figure out, ``how do I do this and not get into
    the same cycle that business has all the time?''
        Senator Lieberman. Yes.
        Mr. Bolton. I have not been able to solve that.
        Senator Lieberman. Mr. Francis, what's your advice to the
    Secretary, at this point? Because I know you feel that that FCS
    program has been allowed to proceed into systems development
    and demonstration prematurely.
        Mr. Francis. Yes, Senator Lieberman. Our view is that,
    really, right now the FCS is in a technology development phase,
    and I think what Secretary Bolton said about the Stryker is
    apropos. I think that's what mature technology enables you to
    do.
        Senator Lieberman. Right.
        Mr. Francis. You can move that, quickly. In a case like
    FCS, I think when we're talking technology and maturity levels,
    I think where we would part company is, even if we were to
    accept the--a standard of six, if you'll go along with the
    levels here even the DOD policy is to have all your key
    technologies at six when you start, which would have been May
    2003. What we're talking about here is, if everything goes as
    planned, we might be there in 2008. So, my view is, the first 5
    years of the program is dominated by technology development.
    We're going to have to develop the technologies but right now
    the program is approved, and the contract will be for all of
    development, going even beyond the product decision. So, I
    think that's the mismatch. I think the issue it raises is, if
    you want to pursue a solution like this, and you have to invent
    technologies, how would you do it in the current system?
    Because it's very difficult to get big money before you get to
    milestone B. So, programs want to get to milestone B so they
    can get access to the bigger bang. So, there is a structural
    issue there.
        Mr. Bolton. I would just add that it is true that the
    Department looks for level six. But also in that same
    paragraph, unless you have a risk mitigation plan or an off-
    ramp, that's also an option, and that's what the OSD staff will
    look to, and did on this program. That's why they approved us
    with the level of technology we had.
        Senator Lieberman. Let me just ask a final question. We're
    going to keep asking you about the one I just asked, which is
    on the LSI question. In the IDA review of FCD management
    report, it says, ``Army documentation noted that one of the
    critical reasons to select Boeing SAIC as the lead systems
    integrator was because it would have an integrating role, not a
    producing one, in developing FCS. This opens up potential
    opportunities for non-LSI companies and FCS development.''
        As you've said, in the case of the FCS, Boeing now has a
    significant financial stake in the future of the program, which
    does create a tension in Boeing's roles and responsibilities. I
    know you talked earlier, Dr. Graham, about the tension, in a
    sense, between the Pentagon personnel and the LSI. I want you
    to focus for a moment on this other part of the equation. I
    know that in your report you state that the LSI is intended to
    act as a neutral party in assessing program tradeoffs, in
    offering advice. That's 3 years since that report. Has your
    opinion changed regarding the LSI's role in program
    development? Are you worried about a conflict in roles here,
    and the impact it may have on the program?
        Dr. Graham. We are concerned, for all the reasons we've
    just talked about, that if FCS remains a dynamic program, there
    are lots of decisions yet to be made that will shape the
    program. On the corporate side, there are financial interests,
    as well as interests in the outcome or the Government interest.
    The Government needs to have an effective countervailing
    capability to stand above all of this fray and identify what's
    best for the Army----
        Senator Lieberman. Right.
        Dr. Graham.--and then shape the program accordingly. That's
    how we see it.
        Senator Lieberman. Okay. Do you have an opinion on this
    question of the LSI also having a development role in the
    program?
        Dr. Graham. I've thought a lot about that. The real
    dilemma, I think, is that, on the one hand, you want somebody
    who's a neutral party----
        Senator Lieberman. Right.
        Dr. Graham.--on the other hand, you need somebody who is
    big enough and knowledgeable enough and engaged enough in the
    program that they can manage the details. I think that's the
    tradeoff that we saw. I don't think we saw a way of creating an
    LSI that would be pure in this theoretical sense.
        Senator Lieberman. Yes.
        Dr. Graham. So, we saw it as building the capability in the
    Government as--that was the solution that----
        Senator Lieberman. So, you followed the program. Do you
    think the Army has set up enough systems to avoid adverse
    consequences of the dual roles that Boeing is playing?
        Dr. Graham. We were impressed by the Army's engagement when
    they restructured the program. That started to happen as our
    study was coming to conclusion and I don't have any insight as
    to what they've done since then.
        Senator Lieberman. Okay. Mr. Francis, do you have an
    opinion on this question, about the LSI also being involved in
    FCS development?
        Mr. Francis. Yes. I think where I would start is with the
    solution that we're trying to manage. I'm not talking just FCS
    here, but if our process is generating solutions that require
    multiple inventions of new technologies, and the solutions
    outstrip the Service's abilities to integrate and the solution
    also requires significant growth in future budget, I think the
    first question I'd ask is, are we arriving at the right
    solutions? Are these indications that maybe we are thinking too
    grandly? Now, if you agree, then, that the solution is the
    right thing to do, then I think our options are limited, in
    terms of management. If our abilities are outstripped, then you
    end up having to go to something like an LSI and put in the
    safeguards against that.
        Senator Lieberman. In other words, ideally the Army itself
    might have played an LSI role. Is that what you mean?
        Mr. Francis. Yes. In the past, that's what would have been
    done. Of course, the scope of the program would have been much
    smaller.
        Senator Lieberman. Right.
        Mr. Francis. This isn't a fact; I'll raise it as a
    concern--it is, what happens over time? Because I think the
    Army has done a lot of good things to try to safeguard itself
    against that risk. But what happens as the workforce ages over
    time? I worry about people who were once doers, Army people
    who----
        Senator Lieberman. The workforce of the Army.
        Mr. Francis.--who worked for the Army are now overseeing
    and participating on teams and I think they'd be in pretty good
    shape to watch the store, if you will. But, over time, as those
    people retire, we'll have people who were never doers----
        Senator Lieberman. Right.
        Mr. Francis.--now being the overseers. I would worry about
    that equation.
        Senator Lieberman. Yes. Me, too.
        Secretary Bolton, I want to give you the last word. In one
    sense--I don't have the exact words Mr. Francis raised in his
    question, but to ask, based on what we see, whether--and I
    think you'll be asked this, this session--this is too grand a
    program, whether we're reaching beyond our means here.
        Mr. Bolton. Yes, there are those folks who would claim that
    I look at a glass half full, and some of my critics might say
    half empty. I've always just looked at the glass.
        Senator Lieberman. Yes.
        Mr. Bolton. I might be an optimistic realist, but that's
    just the way I am. I believe we can do this. When I came to
    this position, I told the Chief of Staff at that time, and the
    Secretary, ``There is no way you'll ever do this program. With
    the processes that you have in place today, it will not work.''
        Senator Lieberman. Yes.
        Mr. Bolton. When we went to the milestone B meeting, we
    have a model that I use that we put in place that looks at
    probability of success, that looks at all aspects of the
    program, both inside and out, and we had gone from my zero
    percent to, like, 60. But what changed in that year and a half
    was the way we were doing business, as Mr. Francis already
    alluded.
        We chose an LSI because I needed someone to integrate this.
    I then decided that the heart and soul of integration here is
    that middleware, that software. It's kind of like framing a
    house, half of the general contractors who build houses are
    also the framers, because it's important. You can change the
    foundation if you find something late, you can do a lot of
    things, but if that frame is off, everything else does not
    work. So, we told the LSI, ``You're going to do that, and
    you're going to do the weapon interface,'' because that's what
    the crew interfaces with. That's all they do.
        Senator Lieberman. Yes.
        Mr. Bolton. That's all they do.
        Senator Lieberman. So, you don't worry about the conflict
    with them being involved in programming at all.
        Mr. Bolton. I don't worry about the conflict because when I
    get to production--and I'm working on that now, in terms of
    what we're going to do in production--there is no production
    for this LSI. There is no production. The production is done by
    the other 18 contractors.
        Now, we safeguard this. We put a two-star out there. He has
    a staff. They're 24/7 with the LSI. Every quarter, they get
    together with two three-stars, who oversee what they're doing.
    It's a Government meeting, looking at every aspect. There's
    only one person sitting at the table from the LSI, and that's
    the program manager from the LSI side. The two-star then takes
    that direction and goes back to the LSI and says, ``This is
    what we need to do.'' Every quarter, I sit down with the
    Secretary of the Army and all the chief executive officers and
    get the briefing from that team out there to figure out what
    they need to do the job right. Then we have live-in triple
    audit, or the audit folks. We have the House Appropriations
    Committee Survey and Investigations Team. We have the GAO. We
    have our own folks looking at this, day-in and day-out.
        I think we can do this. As I said earlier, to the
    chairman's concern, if you don't perturbate this anymore--and I
    don't mean you, sir--the Army, in terms of the fundamental
    requirements--we can do this. We also have to change a whole
    lot more, in terms of the management we're doing, and also the
    process we're going to go through, tests being one of them. We
    have never done a system-of-systems test like this in the DOD.
        Senator Lieberman. Right.
        Mr. Bolton. So we're trying to figure out how to do that
    and not break this apart and cost us more time and money.
        Senator Lieberman. It's a big plan. The motivations for it
    are excellent. I would just say, based on what we've heard
    today and what I know you're going to hear in both houses this
    year, that in too many programs, as Senator McCain and I have
    both said today, the status quo for acquisitions is not working
    and we're heading toward a real confrontation, or toward--not a
    confrontation, but toward the kind of succession of subtle, but
    ultimately very damaging, decisions to borrow from here to pay
    this bill, and we're not going to have the military we want to
    have. So, as I said before, you bring a great record to your
    position, and I urge you to not hesitate to shake it up. Just
    say, ``The status quo is not working,'' and, in the interest of
    the Army, be willing to do things that are bold and
    unprecedented to make it better.
        In the meantime, thank you all for your testimony. It's
    been very helpful.
        Senator McCain. Sounds to me like you have too many
    generals, Secretary Bolton.
        Thank you very much. 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, last year, the Army asserted that
    43 Active component combat brigades and the 34 Army National Guard
    (ARNG) combat brigades would ensure the Army could maintain a 17
    brigade force deployed with Active component brigades having 2 years
    between rotations and the ARNG combat brigades having 5 years between
    rotations. With the fiscal year 2007 budget request, the Army,
    supported by the Quadrennial Defense Review (QDR), has modified its
    plan to increase the number of combat brigades in the Active and
    Reserve component. The Army will increase the Active component force
    structure to 42 combat brigades and will increase the ARNG force
    structure to 28 combat brigades. This action represents a reduction of
    one Active component combat brigade and six ARNG brigades from previous
    plans. How will fewer combat brigades impact the anticipated ``dwell''
    time in the U.S. between rotations?
        General Cody. Prior to QDR 2006, the Army had developed a plan for
    34 combat brigades and 72 support brigades in the ARNG and 43 combat
    brigades and 75 support brigades in the Active component. This provided
    up to 20 combat brigades for a steady state of operations. Based on
    analysis associated with the 2006 QDR, the Army determined the need to
    be able to supply 18 to 19 combat brigades in a steady state of
    operations and surge another 18 to 19 combat brigades to respond to
    major combat operations. As a result, the Army is restructuring to form
    a rotational pool of 70 brigade combat teams and 211 supporting
    brigades of various types among the three components. The Army's plan
    is to transition to cyclic readiness under the Army force generation
    model. This will place forces on deployment cycles of one rotation
    every 3 years for the Active component and one rotation every 6 years
    for the Reserve component. At endstate, the Army provides a sustained
    deployment posture of modular, trained, ready, cohesive, and rapidly
    deployable and employable Army forces in predictable patterns to meet
    requirements for continuous full-spectrum operations while retaining
    the capability to surge combat power for major combat operations.

        2. Senator McCain. General Cody, do you believe that the QDR has
    taken into consideration the ARNG's State mission, especially homeland
    defense and disaster relief?
        General Cody. Yes sir, I do. While the Department of Defense (DOD)
    does not specifically create unique capabilities to address State-only
    needs, we consider State needs when determining the force mix between
    Active and Reserve components and how Army capabilities are distributed
    across the 54 States and Territories. In years past, we sought to
    ensure that every State had an appropriate amount of several key
    capabilities, including command and control, communications, aviation,
    transportation, medical, and engineering. Since then, Congress has
    authorized the creation of 55 weapons of mass destruction civil support
    teams--one for each State (except California which will host two such
    teams), Territory, and the District of Columbia. More recently, the
    National Guard Bureau has identified 10 key capabilities that each
    State and Territory should maintain: aviation, engineering, civil
    support teams, security, medical, transportation, maintenance,
    logistics, command and control, and communications. For States that do
    not host all of these Army capabilities, the National Guard Bureau
    encourages States to leverage regional capabilities through emergency
    management assistance compacts with neighboring States. Additionally,
    the Army and the National Guard Bureau work together to manage the
    operational deployments of Guard troops for the global war on terror in
    an effort to ensure that each State has at least 50 percent of its
    Guard forces available for State missions and homeland defense.

                               modularity funding
        3. Senator McCain. General Cody, I understand the Army intends to
    maintain the National Guard at its authorized end strength of 350,000.
    However, I understand the fiscal year 2007 budget request funds the
    Guard at an end strength of only 333,000. How does the Army intend to
    make up the funding shortfall and how will that be transmitted to
    Congress?
        General Cody. The Army is committed to funding the ARNG up to the
    350,000 strength level. The Army fully funded the National Guard for
    350,000 in the fiscal year 2006 budget. The Army will recommend
    modifying the fiscal year 2007 budget to address the additional
    personnel and associated training costs required for up to 350,000, and
    is in the process of identifying the sources to meet this commitment.
    In affecting this modification, the Army will follow prescribed
    procedures and congressional notification requirements.

        4. Senator McCain. General Cody, will funding an additional 17,000
    soldiers in the Guard impact the Guard's force structure?
        General Cody. Funding an additional 17,000 soldiers will allow the
    ARNG to restructure its authorized end strength of 350,000 to a force
    structure allowance of 342,000 with a personnel training account of
    8,000. Within its operational force, the ARNG is building toward 28
    brigade combat teams in a total of 106 brigades. The goal is to
    rebalance its operational force structure to meet warfight
    requirements, current operational demands, and potential homeland
    defense missions without decreasing existing end strength or
    capabilities within the individual states. The Army is working
    collaboratively with the Chief of the National Guard Bureau, the
    Director of the ARNG, and the Adjutants General Association of the
    United States Force Structure Committee to optimize these proposed
    force structure changes. The results of this effort will ensure the
    right mix of capabilities across the States and within the 106
    brigades.

        5. Senator McCain. General Cody, the ARNG asserts that there is a
    $318 million shortfall in its equipment accounts for modularity. Is
    this true? If so, will the Army fund this requirement?
        General Cody. National Guard force structure adjustments resulting
    from the 2005 QDR caused a $262 million decrement to National Guard
    equipping accounts in fiscal year 2007. This force structure decision
    is currently being refined by the Army and National Guard leadership in
    consultation with the State Adjutants General. The outcome of this
    decision will determine force structure, equipment requirements, and
    the funding strategy. Given the post-September 11 security environment
    and increased utilization of all components, the Army is committed to
    fully equipping all units--Active, Guard, and Reserve--with priority to
    the ``next deploying'' units and ``State mission equipment''
    requirements.

        6. Senator McCain. Secretary Bolton and General Cody, the fiscal
    year 2007 budget request represents the first year that the Army has
    included modularity in its base budget request. Will the Army continue
    to fund its modularity initiative in the base budget requests?
        Mr. Bolton and General Cody. Yes. The Army has programmed known
    modularity requirements for fiscal years 2007-2011 in the base budget.

        7. Senator McCain. Secretary Bolton and General Cody, 2 years ago
    at this time, the Army estimated modularity costs at $28 billion. Last
    year, the estimate was raised to $48 billion. The Army has stated that
    it required $5 billion per year over the period of fiscal years 2005-
    2011 for its modularity initiative. In last year's Program Budget
    Decision Memorandum 753, the Department increased the Army's top line
    by $5 billion in each of the fiscal years 2007-2011 for modularity to
    be included in the President's budget request. The DOD and the Army
    said they would use fiscal year 2005 and fiscal year 2006 supplemental
    appropriations to cover the fiscal years 2005-2006 requirement. The
    fiscal year 2006 enacted bridge supplemental and supplemental budget
    request included $5 billion. However, the fiscal year 2006 supplemental
    request was expected to include $3 billion in additional funding for
    Abrams tanks and Bradley Fighting Vehicles required for modularity, but
    that request was dropped in the final stages of formulation before it
    was sent to Congress. It appears that the Army is underestimating the
    cost of modularity. What is the cost of modularity over the fiscal
    years 2005-2011 period?
        Mr. Bolton and General Cody. The Army estimates the total cost of
    the modularity initiative at $52.5 billion through fiscal year 2011.
    For fiscal year 2005, the cost was $5 billion, for the current fiscal
    year, 2006, the cost is $6.5 billion. The fiscal year 2007 budget
    request for modularity is $6.6 billion. The remaining years are
    estimated at: fiscal year 2008, $7.6 billion; fiscal year 2009, $9.1
    billion; fiscal year 2010, $9.2 billion; and fiscal year 2011, $8.5
    billion.

        8. Senator McCain. Secretary Bolton and General Cody, the Army has
    estimated that the cost of modularity is $48 billion. Does this include
    Reserve component equipment? If not, how does the Army intend to fund
    these Guard requirements?
        Mr. Bolton and General Cody. Yes, the $48 billion includes Army
    Reserve and ARNG equipment.

        9. Senator McCain. General Cody, the committee understands that the
    Army intends to ``pure fleet'' its Active component heavy modular
    brigades with M1A2 Safety Enhancement Program (SEP) tanks and M2A3
    Bradley Fighting Vehicles and its ARNG heavy brigades with M1A1 AIM
    tanks and M2A2 Bradley ODS vehicles. Are you concerned that the Active
    component and the Reserve component will have a different mix of tanks
    and Bradley Fighting Vehicles? What is the operational impact?
        General Cody. The Army plan is to migrate to a two variant fleet of
    Abrams and Bradley from its current six variants of the Abrams tank and
    four variants of the Bradley Fighting Vehicle. The Active component
    will have both M1A2SEP/M2A3 and M1A1AIM/M2A2ODS heavy brigade combat
    teams and the ARNG will be upgraded from its older M1A1/M2A2 fleet to
    the M1A1AIM/M2A2ODS. Abrams and Bradley fight as a team. The objective
    is to field similar capabilities (i.e., M1A2SEP/M2A3 Bradley and AIM/
    ODS) in vehicles to the same unit. The Abrams tank and the Bradley
    Fighting Vehicle will remain the dominant maneuver systems through
    2050, while complementing the Future Combat Systems (FCS) and overall
    modular force structure. As FCS Units of Action are fielded, M1A2SEP/
    M2A3s will be cascaded and AIM/ODSs will be retired from the fleets.

                                 army aviation
        10. Senator McCain. General Cody, I understand that the Army
    reduced the number of ARNG aviation brigades in order to increase the
    aviation force structure of the Special Operations Command. Can you
    please tell us whether a Guard heavy aviation brigade or a Guard
    aviation expeditionary brigade (AEB) was reduced, the aviation assets
    associated with this brigade, and the rationale for this reduction?
        General Cody. There is a pending decision to convert one ARNG
    combat aviation brigade (expeditionary) (CAB-E) to an ARNG sustainment
    or engineer brigade but it has no relationship with any increase in
    Army Special Operations aviation. The decision to convert one ARNG CAB-
    E was done for several reasons: 1) to better balance combat arms,
    combat support, and combat service support across the ARNG; and 2) to
    ensure the ARNG has seven fully resourced CABs vice eight partially
    resourced CABs (the ARNG will retain the same number of aircraft as
    currently planned). If this decision is implemented, the ARNG could
    expect to lose an aviation support battalion and an attack battalion
    headquarters but will keep the CAB headquarters. All other assets are
    expected to be redistributed to fully resource equipment shortfalls
    across the other seven Reserve component CABs.

        11. Senator McCain. Secretary Bolton, it appears that Army aviation
    faces a dilemma. It needs all its helicopters to meet today's
    operational challenges, yet it also needs to upgrade a good portion of
    the fleet to meet tomorrow's challenges. How will you meet the Army's
    operational and readiness challenges if you have a large proportion of
    your helicopters being upgraded back in the continental U.S.?
        Mr. Bolton. The Army has several ongoing efforts to ensure we meet
    the combatant commander's (COCOM) requirements for Army Aviation
    aircraft. These include preset, reset, recapitalization (RECAP), OH-58D
    SEP, and modernization. Preset is our program to install the latest
    mission equipment packages to prepare our aircraft for combat. Reset is
    our program to restore our aircraft to pre-deployment conditions upon
    return from combat operations. For both of these programs we typically
    induct no greater than 50 percent of a unit's aircraft to ensure our
    aviators have sufficient aircraft for training. RECAP and OH-58D SEP
    are programs to upgrade key components to improve safety and extend the
    life of our platforms. The OH-58D SEP induction rate is contracted for
    2 aircraft per month while our RECAP induction rates are 20 aircraft
    per year for the UH-60A and 3-5 for the CH-47D. Our modernization
    strategy differs depending on the type aircraft. We are modernizing our
    OH-58D and UH-60 fleets with new build Armed Reconnaissance Helicopter
    (ARH) and UH-60M aircraft, negating any requirement to induct existing
    airframes. Our greatest modernization challenge will be in the CH-47
    and AH-64 fleets. In order to modernize these aircraft while
    simultaneously conducting the global war on terrorism, the Army will be
    forced to use a combination of stay behind equipment and cross leveling
    programs to ensure mobilizing and deploying units are properly
    resourced to meet the COCOM's requirements.

        12. Senator McCain. Secretary Bolton and General Cody, the Army has
    over 500 helicopters deployed to Iraq and Afghanistan alone. How many
    helicopters can you afford to pull off line for upgrades and still
    perform your mission?
        Mr. Bolton and General Cody. The Army has several ongoing efforts
    to ensure we meet the COCOM requirements for Army aviation aircraft.
    These include preset, reset, RECAP, OH-58D SEP, and modernization.
    Preset is our program to install the latest mission equipment packages
    to prepare our aircraft for combat. Reset is our program to restore our
    aircraft to pre-deployment conditions upon return from combat
    operations. For both of these programs we typically induct no greater
    than 50 percent of a unit's aircraft to ensure our aviators have
    sufficient aircraft for training. RECAP and OH-58D SEP are programs to
    upgrade key components to improve safety and extend the life of our
    platforms. The OH-58D SEP induction rate is contracted for two aircraft
    per month while our RECAP induction rates are 20 aircraft per year for
    the UH-60A and 3-5 for the CH-47D. Our modernization strategy differs
    depending on the type aircraft. We are modernizing our OH-58D and UH-60
    fleets with new build ARH and UH-60M aircraft, negating any requirement
    to induct existing airframes. Our greatest modernization challenge will
    be in the CH-47 and AH-64 fleets. In order to modernize these aircraft
    while simultaneously conducting the global war on terrorism, the Army
    will be forced to use a combination of stay behind equipment and cross
    leveling programs to ensure mobilizing and deploying units are properly
    resourced to meet the COCOM's requirements.

        13. Senator McCain. Secretary Bolton, when budgets are tight, as
    they often seem to be, it appears that aircraft survivability equipment
    (ASE) does not get the funding it should. Considering the rather
    alarming number of helicopter losses in Afghanistan and Iraq, please
    reassure me that your modernization plan adequately addresses ASE. What
    are the most promising ASE upgrades for existing aircraft?
        Mr. Bolton. Army senior leadership made ASE and force protection a
    top priority for Army aviation and is using funds from the Comanche
    termination and programmed funding to address critical ASE
    requirements. The fiscal year 2007 budget request includes $2 billion
    for aircraft survivability equipment through the Future Years Defense
    Program (FYDP)--more than double what was in fiscal year 2005's FYDP.
    In the immediate aftermath of the November 2003 ``shootdown'' of an
    Army CH-47 Chinook helicopter, the G3 of the Army approved immediately
    upgrading the entire deployed Chinook fleet with an improved Infrared
    (IR) Countermeasure Flare Dispenser (ALE-47). On January 14, 2004, the
    acting Secretary of the Army and Chief of Staff of the Army approved
    accelerating the acquisition of the ``next generation'' ASE system the
    Common Missile Warning System (CMWS). CMWS detects an incoming missile
    and dispenses the appropriate counter measure, removing the ``Man-in-
    the-Loop'' requirement of older ASE systems. Installation of the CMWS
    commenced in November 2004 and continues in theater. The deployed CH-47
    fleet has since been upgraded from the ALE-47 to CMWS. All theater
    aircraft will be CMWS equipped by September 2006. Industry is currently
    at maximum rate production.
        There have been 14 helicopter losses in Iraq and Afghanistan
    attributed to missile/rockets engagements. To counter the IR missile
    threat the Army is aggressively procuring the most advanced systems
    available, beginning with CMWS which is a subcomponent of the Advanced
    Threat Infrared Countermeasures System (ATIRCM). The complete ATIRCM
    consists of two components; CMWS and a laser jam head. The laser jam
    head in conjunction with CMWS will detect an incoming missile and with
    a directed laser defeat that missile by jamming the missile seeker. The
    laser jam head development is in low rate initial production (LRIP) for
    testing, with expected fielding in fiscal year 2010. In addition to
    active countermeasures, passive ASE is also being fielded to include
    engine suppressors and heat shielding of critical components to reduce
    aircraft IR signatures.
        These actions continue to be funded through a combination of Army
    reprogramming, congressionally supported global war on terror
    supplemental funding, and the redistribution of Comanche program
    funding.

        14. Senator McCain. Secretary Bolton, how and why will the ARH and
    Light Utility Helicopter (LUH) be more survivable than the aircraft
    they replace?
        Mr. Bolton. The ARH will replace the OH-58D helicopter. The ARH
    will provide the crew with a greater power margin, better infrared
    missile countermeasures, more survivable crew stations, and more
    crashworthy fuel systems.
        The LUH will replace OH-58A/C, UH-1, and return some UH-60
    helicopters to combat formations. The procurement of a Federal Aviation
    Administration (FAA) certified Commercial/Non-Developmental Item
    solution precludes designing-in additional specific aircraft
    survivability equipment attributes. The LUH operational missions are
    not envisioned to require significant survivability capabilities as the
    LUH is to be employed in non-combat environments. The LUH will
    generally have unrestricted operational freedom. The LUH will initially
    meet the 1989 FAA standards for crashworthy seats and fuel tanks with
    an objective of meeting the 1994 FAA standards.

                                aviation funding
        15. Senator McCain. General Cody, has the Army backed away from its
    commitment to use the $14.6 billion made available by the termination
    of Comanche for the Army aviation restructure?
        General Cody. No, the Army is committed to fixing Army aviation as
    directed by the Chief of Staff. Equally important is the continued
    commitment of Congress to maintain fully resourced aviation programs.
    If either of these two commitments wanes, Army aviation will not be
    able to reach its required modernization in support of the current
    fighting force or integration into the future force.

                            light utility helicopter
        16. Senator McCain. General Cody, I understand that the AEBs will
    be augmented with LUH for Active Army installation support and for
    State and homeland defense missions. I support the notion that we
    should use a helicopter that is cheaper to acquire and less costly to
    operate for Army installation support. However, I question the Army's
    desire to add a low-density, less-capable, and nondeployable helicopter
    in the AEBs. Based on the use of ARNG aircraft in Operation Iraqi
    Freedom (OIF) and Operation Enduring Freedom (OEF) as well as in
    response to natural disasters such as Hurricanes Katrina and Rita, has
    the Army reevaluated its plans to acquire the LUH for ARNG AEBs?
        General Cody. The acquisition objective for the LUH is 322
    aircraft. The LUH acquisition facilitates the rapid retirement of the
    aging UH-1 and OH-58NC fleets. These aircraft are at the very end of
    the useful life spectrum, and the LUH will add increased capability to
    units currently struggling to keep the UH-1 and OR-58NC aircraft
    flying. The LUH will operate worldwide in permissive environments only;
    however, the primary use of the LUH will be within the continental
    United States, Alaska, Hawaii, Europe, and all U.S. territories and
    possessions. The LUH will provide an affordable, modular, and
    standardized single airframe capable of conducting all missions
    currently being done by the UH-1 and OH-58A/C aircraft. After LUH
    fielding, the National Guard will have an increased capability to meet
    its diversified set of missions. The Army supports the Capabilities
    Development Document approved by the Joint Requirements Oversight
    Council (JROC) on 25 April 2005, and looks forward to improving the
    operational effectiveness of the end user.
        If the Army had the LUH during disaster assistance operations such
    as Hurricane Katrina and Hurricane Rita, we would: have a single
    aircraft system designed to perform medical evacuation, personnel
    recovery and rescue, reconnaissance, and command and control; have an
    aircraft capable of 100 percent communication with military and
    civilian emergency services (police, fire, medical, etc.); and have an
    aircraft that was capable of performing the full range of missions in
    support of disaster and humanitarian relief, drug interdiction, and
    homeland security.

        17. Senator McCain. General Cody, 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?
        General Cody. The analysis of alternatives reviewed five potential
    courses of action to replace the aging UH-1 and OH-58C fleets. One of
    the alternatives was to pure fleet the LUH with procurement of new UH-
    60M aircraft. Pursuing the alternative to procure new UH-60M aircraft
    would have led to procurement and operational support costs three to
    four times higher than the commercial/nondevelopmental item options
    that can meet the mission required capabilities.

        18. Senator McCain. Secretary Bolton, I understand that the Army
    reduced the number of ARNG aviation brigades by one so that the Army
    could add a Special Operations Forces aviation element. The aviation
    brigade came from the ARNG. Did this impact the requirement for the
    LUH? If so, how does this affect the unit cost of the LUH?
        Mr. Bolton. The Army is considering the conversion of one ARNG CAB-
    E to an ARNG sustainment or engineer brigade. This decision has nothing
    to do with any increase in Army special operations aviation. A
    reduction in ARNG aviation brigades may or may not result in a
    reduction to the LUH procurement objective. If the ARNG were to reduce
    its requirement for LUHs it would not impact the unit cost of the
    aircraft because the LUH is procured under a firm fixed price contract
    and the Army is not obligated to procure 322 aircraft.

                        armed reconnaissance helicopter
        19. Senator McCain. Secretary Bolton, the Director, Operational
    Test and Evaluation Fiscal Year 2005 Annual Report highlighted the
    aggressive ARH schedule and recommended that the Army begin integration
    testing for mission equipment as early as possible. How is the ARH
    program structured to mitigate risk?
        Mr. Bolton. The building of the System Development and
    Demonstration (SDD) airframes remains the primary program focus and
    these will be involved in early testing efforts. One of these SDD
    airframes, designated as the Mission Equipment Aircraft, is utilized
    for down selection testing of the Target Acquisition Sensor suite. The
    addition of a sixth SDD airframe as an engine prototype aircraft
    further reduces overall conflicts for testing aircraft. Additionally,
    the program uses a software integration laboratory for software
    development and testing prior to integration onto testing aircraft. The
    testing strategy is streamlined to eliminate a separate developmental
    test followed by operational testing. Also, risk review boards between
    the program office and Bell occur regularly to discuss identified
    mitigation steps for integration into the master program schedule.

        20. Senator McCain. Secretary Bolton, the requirement for the ARH
    is for an off-the-shelf helicopter. Isn't this a step backward in terms
    of performance?
        Mr. Bolton. The Bell Helicopter proposal significantly leverages
    aspects of previous Bell commercial helicopter successes. The ARH
    performance requirements are Army directed and improve upon the
    performance capabilities of the currently deployed OH-58D aircraft. The
    selected Bell proposal baseline for the ARH meets or exceeds the Army
    defined threshold performance requirements. Specifically, the
    operational radius, cruise speed, and range estimates demonstrate
    significant off-the-shelf capabilities beyond the current Army
    reconnaissance helicopter.

        21. Senator McCain. Secretary Bolton, I can understand how a
    utility helicopter can capitalize on commercial products, but the ARH
    is a combat helicopter. To be effective and survivable, shouldn't this
    helicopter's performance exceed commercial standards?
        Mr. Bolton. Yes, the military should require the best possible
    performance in all combat aircraft. The Bell proposed baseline for the
    ARH meets or exceeds the Army defined threshold performance
    requirements in the ARH capability development document.

         warfighter information network-terrestrial/joint network node
        22. Senator McCain. Secretary Bolton, the Joint Network Node (JNN)
    is based on commercial off-the-shelf equipment. Concurrent with JNN,
    the Army competitively awarded the Warfighter Information Network-
    Terrestrial communications program to two contractors, one of which
    also builds the JNN. Given that the JNN is commercially-based
    equipment, why wasn't the contract competed when the JNN requirement
    was originally identified?
        Mr. Bolton. The JNN equipment and services were purchased under
    unusual and compelling urgency to meet critical requirements of units
    that were deploying in support of OIF/OEF and purchased using contracts
    already in place. Any other source would have required a new
    contracting effort that would not have met the schedule. Failure to
    provide this equipment and support services on time would have
    significantly impacted the units' ability to support OIF/OEF, thereby
    jeopardizing successful mission accomplishment. For clarification in
    the future, Warfighter Information Network-Tactical (WIN-T) stands for
    WIN-T.

        23. Senator McCain. Secretary Bolton, I understand that the Army
    has completed JNN fielding to units either deployed or deploying to
    Iraq and Afghanistan. Why should the Army continue to field JNN when
    the program has not been operationally tested nor has it been through
    the Joint Capability Integration and Development System (JCIDS)
    process?
        Mr. Bolton. The JNN Network (JNN-N) is vital to a unit's ability to
    communicate in Iraq and Afghanistan. The unit's Mobile Subscriber
    Equipment (MSE) does not provide the connectivity required to operate
    in Iraq and Afghanistan. When a unit receives their JNN-N equipment
    their current signal equipment is replaced and in some cases MSE
    shelters are reconfigured for JNN equipment. Signal soldiers are also
    replaced to facilitate JNN operations. Once a unit converts to JNN we
    cannot remove their JNN equipment or the unit becomes combat
    ineffective with no means to communicate or train.
        The Army Test and Evaluation Command (ATEC) provided a system
    assessment (SA) January 31, 2006. The SA cover letter states:

            ``2. The SA provides an independent assessment of the JNN-N
            capabilities and limitations for the purpose of:

                    (a) improving JNN-N development, integration, and unit
                    training;
                    (b) mitigating risk;
                    (c) preparation for more effective future evaluation.

            3. The SA supports the ATEC position that JNN-N is capable of
            providing the warfighter communications backbone requirements
            in a stability and support operations environment. JNN-N
            requires further testing to properly determine Effectiveness,
            Suitability and Survivability for full spectrum operations.''

        The JNN-N has an initial operational test scheduled in June 2006 to
    address the issues of effectiveness, suitability, and survivability for
    full spectrum operations. The Army is also in the process of making JNN
    a formal program of record and expects a Milestone C/Full Rate
    Production decision (MSC/FRP) fourth quarter fiscal year 2006.
        The JNN-N requirements document (Bridge to Future Network--
    Capabilities Production Document with JNN-N Annex) is currently in JROC
    staffing for approval. The approved document is required prior to the
    MSC/FRP decision in fourth quarter, fiscal year 2006.

        24. Senator McCain. Secretary Bolton, what is the Army's plan to
    complete the required documentation and testing so that JNN can be
    fielded using fiscal year 2006 and fiscal year 2007 requested funding?
        Mr. Bolton. The Army plans to make JNN a program of record in
    fourth quarter, fiscal year 2006. An initial operational test is
    scheduled for June 2006. The JNN-N requirements document (Bridge to
    Future Network-Capabilities Production Document with JNN-N Annex) is
    currently in JROC staffing for approval. All required programmatic
    documentation is currently in various phases of completion to support a
    MSC/FRP decision in fourth quarter, fiscal year 2006. Our plan is to
    obligate the main supplemental dollars as soon as possible after the
    MSC/FRP decision.

                            lead systems integrator
        25. Senator McCain. Dr. Graham, in your report you made several
    observations regarding the Lead Systems Integrator (LSI):

            --  Boeing has the major financial stake in the FCS program and
            will receive about one-third of programmed funds ($4.9 billion)
            for its work as the LSI, and for developing the System-of-
            Systems Common Operating Environment (SoSCOE) for the FCS
            information network, thus creating an inherent tension in
            Boeing's roles and responsibilities;
            --  The Army-Boeing agreement does not anticipate future rounds
            of competition for FCS systems or components as the program
            transitions to production. Nor does it appear that the current
            agreement provides the Army access to technical information
            sufficient to enable future rounds of competition;
            --  The Army should adopt a policy of ``Trust But Verify'' with
            regard to the ethics programs of the FCS industry participants
            and seek to address the kinds of gaps in prior hiring practices
            identified in the review of Boeing ethics practices conducted
            by Senator Warren Rudman by requiring that all contractors
            involved in the FCS program screen current employees who have
            Government backgrounds for possible FCS conflict of interest
            exposure; and
            --  Industry and Government members of the FCS ``One-team''
            will face substantial pressures to vie for outcomes favorable
            to Boeing stockholders.

        Would you agree that there should be DOD policy or regulation that
    provides firm guidance for the use of LSIs in DOD programs?
        Dr. Graham. The Institute for Defense Analyses (IDA) report
    provides a snapshot of the program in mid-2004, and it describes 18
    substantial actions to manage the program effectively. The IDA review
    did not address broader public policy issues, such as the costs and
    benefits of possible changes in policy or regulation with regard to the
    establishment of LSIs. In general, there is not a single optimal
    Government-industry relationship, since each project must take into
    account the scope and complexity of the task, and the capabilities of
    the Government and industry participants.
        However, in the context of FCS, we recommended a number of steps to
    strengthen the Army's independent ability to shape the execution of the
    program. There are inherent tensions when an LSI has a financial stake
    in the future shape and success of a program. In theory, alternative
    Government-industry LSI arrangements could span a spectrum from a
    strictly engineering and advisory activity to an arrangement with
    essentially the same business interests as are involved in a prime
    contract. As the industrial partner's financial interests in the
    outcome of the program grow, it becomes increasingly challenging for
    executives to set aside their corporate interests in advising their
    Government partners. The IDA report emphasized that the Government
    customer is responsible to ensure it has an adequate capability to
    independently assess program objectives and progress in order to ensure
    Government interests are served over the life of the program.
        The FCS management approach intermixes Government and industry
    experts through the ``One-team'' structure of integrated product teams
    (IPTs) co-chaired by Government and LSI officials, and relies heavily
    on Boeing's management information system for information and analyses.
    This results in inherent tensions 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.
        To achieve an effective balance in the roles of Government and
    industry participants in the ``One-team'' management structure, IDA
    recommended that the Army strengthen its institutional capability for
    establishing a corporate Army perspective on FCS cost, schedule, and
    performance issues. A corporate perspective would assist both FCS
    program participants as well as the Army's senior leadership in
    addressing the competing interests within the ``One-team,'' and in
    balancing broader joint and Army-wide programmatic factors, in order to
    keep the FCS program focused on delivering an integrated and effective
    unit of action.

        26. Senator McCain. Dr. Graham, do you think it would be helpful to
    the Department if they received congressional intent on LSIs?
        Dr. Graham. The Army's acquisition strategy for the FCS program
    calls for a significant amount of competition at the level of
    individual systems and technologies within the overall system of
    systems. We have yet to further evaluate the program's execution of
    this issue.
        The IDA study did not examine this question, and it would be
    difficult to respond without specific details about the proposed
    statement of intent. However, the key principle--that the Government is
    responsible for the cost, schedule, and performance of all industrial
    efforts--is well established in law and intent. The execution
    challenges in carrying out the Government's responsibilities require
    judgment and flexibility.

        27. Senator McCain. Secretary Bolton, how does the DOD define a
    LSI?
        Secretary Bolton. Section 805 of the National Defense Authorization
    Act for Fiscal Year 2006 defines ``lead system integrator,'' for the
    purpose of that section, as either with or without system
    responsibility. Specifically, it provides that:

              ``Lead system integrator with system responsibility'' means a
            prime contractor for the development or production of a major
            system if the prime contractor is not expected at the lime of
            award, as determined by the Secretary of Defense for purposes
            of this section, to perform a substantial portion of the work
            on the system and the major subsystems.
              ``Lead system integrator without system responsibility''
            means a contractor under a contract for the procurement of
            services whose primary purpose is to perform acquisition
            functions closely associated with inherently governmental
            functions with regard to the development or production of a
            major system.

        DOD has no other definition of an LSI.

        28. Senator McCain. Secretary Bolton, how does the Army define a
    LSI?
        Mr. Bolton. The Army's LSI management approach was devised to
    tackle today's program complexity and integration challenges. The LSI
    maximizes the use of an integrated, single step design process across
    functions to promote effective and efficient horizontal integration of
    a large scale system-of-systems. The linchpin of the LSI approach is
    integrated program management and execution by the LSI. This is
    affected through one contract and one management baseline. The LSI is
    the focal point for the Government program manager office, not its
    substitute; the Government under this approach does not abrogate its
    responsibility to perform functions that are inherently governmental.

        29. Senator McCain. Secretary Bolton, Mr. Francis, and Dr. Graham,
    has the Army outsourced its program management responsibilities with
    regards to acquisition? Please provide an explanation for your
    response.
        Mr. Bolton. No. The Army is structured in a way that the program
    executive officers (PEOs) and project/product managers (PMs) are
    responsible for managing Army acquisition programs, using Army and
    Defense acquisition policy, guidance, and processes. Their
    responsibilities include providing oversight of a cross-functional team
    of acquisition professionals, including contractors, in order to meet
    program objectives, goals, and overall mission.
        Today's complex weapon system programs necessitate analysis on the
    best management approach. Where warranted, the LSI approach is
    instituted rather than the prime contractor management methodology.
    This approach was devised to tackle today's program complexity and
    integration challenges. If instituted, the LSI's integrated program
    management approach does not replace the Government PM's exercise of
    discretion and authority, but rather, the LSI becomes the focal point
    for the Government PM office, not its substitute.
        Mr. Francis. While the Army has not ``outsourced'' its
    responsibilities on FCS, it has decided to share a large part of those
    responsibilities with the LSIs. LSIs are, in essence, prime contractors
    with increased program management responsibilities. While this is true
    in the case of the FCS program, the Government and the LSI are each
    represented on the program's IPTs. The Government, with few exceptions,
    is expected to be involved in all major program decisions. For example,
    Boeing conducted source selection boards to competitively award major
    subcontracts for key systems and subsystems of the complete FCS. The
    Government provided oversight and final agreement to the awards. In
    addition, the Government also provides this same oversight in the
    selection of lower tier subcontracts.
        Dr. Graham. No. Our review found that the Army remains responsible,
    and that it recognizes and accepts this responsibility. The
    recommendations in the IDA review focused on ways to strengthen the
    Army's execution of these responsibilities.

        30. Senator McCain. Dr. Graham, in your report ``IDA Review of FCS
    Management,'' you stated ``that 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.'' It's been 3 years since the
    report. Are there inherent organizational conflicts of interest
    associated with programs in which the LSI has a financial interest in
    developing and building the individual elements of a system?
        Dr. Graham. This question is addressed in the answer to question
    25.

        31. Senator McCain. Mr. Francis, what is your view regarding the
    role of the LSI in program development?
        Mr. Francis. Although there is no consensus on the definition of
    LSI, in general, an LSI is a prime contractor with increased program
    management responsibilities. These responsibilities have included
    greater involvement in requirements development, design, and source
    selection of major system and subsystem contractors. The Government
    also has used the LSI approach on programs that require system-of-
    systems integration.
        Our observations to date 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 so many
    aspects of the FCS program management process, including responsibility
    for making numerous cost and schedule tradeoffs and for conducting at
    least some of the subcontractor source selections, is also a potential
    risk. As an example, many of the LSI's subcontractor source selections
    are for major weapon systems that, in other circumstances, would have
    been conducted by an Army evaluation team, an Army Contracting Officer,
    and a senior-level Army source selection authority. These decisions,
    including those on the scale of procuring a major weapon system, are
    being made by the LSI with some level of Army involvement. (We have not
    reviewed the Army's oversight of the LSI or how FCS source selections
    have been conducted.) 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.

        32. Senator McCain. Secretary Bolton, has the Army taken any action
    to preclude the LSI from bidding FCS contracts? Has the DOD issued any
    policy in this regard? What is it?
        Mr. Bolton. Yes. The Federal Acquisition Regulation (FAR)-based
    contract awarded September 23, 2005, contains an ``Organizational
    Conflicts of Interest'' clause at H-106 that incorporates FAR subpart
    9.5 ``Organizational and Consultant Conflicts of Interest (OCI).'' This
    clause specifies that the LSI (Boeing and SAIC) is specifically
    prohibited from competing for work at any tier during the course of
    this contract. Additionally, Boeing is contractually required to flow
    down an OCI provision in all subcontracts.

        33. Senator McCain. Secretary Bolton and Dr. Graham, has the Army
    turned Government responsibility over to the LSI?
        Mr. Bolton. No. The Government's PM is ultimately accountable for
    the execution of the FCS acquisition program baseline. The LSI role in
    FCS is principally integration; the Army's LSI management approach was
    devised to tackle today's program complexity and integration
    challenges. The linchpin is integrated program management and execution
    (one design process, one contract, and one performance management
    baseline). The approach promotes effective and efficient large-scale
    systems development and horizontal integration. The LSI provides a
    focal point to enable the overarching responsibilities of the
    Government PM, Army acquisition leadership, and DOD oversight. This
    management approach does not abrogate any inherently governmental
    functions; the LSI is not a substitute for the Government PM office.
        Dr. Graham. No. As noted in answering question 29, the Government
    is legally responsible for program outcomes. The FCS contract gives the
    Government formal control over program cost, schedule, and performance.
    In fact, the IDA report notes that the Army undertook a major
    restructuring of the program in parallel with the IDA review of the FCS
    program.

        34. Senator McCain. Secretary Bolton, Dr. Graham, and Mr. Francis,
    IDA's August 2004 report states, ``At the LSI level, the Office of
    Technology Assessment (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?
        Mr. Bolton. The Army is not dependent upon the LSI for the life
    cycle management of the FCS program. The role of the LSI for low-rate
    initial production (LRIP) and full-rate production will be analyzed
    more in depth as the program proceeds through system operational design
    (SOD). The Army is in the process of developing an enterprise-based
    production strategy or follow-on procurement plan for the program.
        Dr. Graham. Some ongoing role for the LSI is likely to be a
    practical necessity: support of operations, maintenance, and
    evolutionary upgrades of FCS capabilities will be an enormous
    industrial undertaking. The IDA review concluded that the Army might
    benefit from continuing to rely upon an LSI--Boeing or a follow-on
    Services' contractor--for configuration and technical data management
    for the FCS system of systems. In addition, follow on competition for
    production (and associated follow on support) could be run either by
    the Army or by the LSI. IDA did not address the criteria or method for
    reaching such a decision.
        Mr. Francis. It is not prudent for the Army to prematurely position
    itself to depend on an LSI through the life cycle of the program. The
    Army must protect its ability to make choices on the FCS program,
    including the possible choice to discontinue the use of an LSI for the
    later phases of the program. It is also important that the LSI have
    financial indifference--that is, ideally, Boeing should not have a
    stake in the outcome of the program. According to the Army's
    acquisition strategy report, the Army plans to maintain the LSI for all
    FCS development throughout the acquisition and perhaps into the
    procurement phase. The Army feels that competition is not feasible at
    the prime contractor level through the development process, but the
    program intends to foster competition over the life cycle by
    incentivizing competition at the system, subsystem, and component
    levels. However, we do not anticipate that there will be extensive
    competition at the FCS system level, particularly for the manned ground
    vehicles.

        35. Senator McCain. Secretary Bolton, does the Army intend to
    compete FCS systems or components as the program transitions to
    production?
        Mr. Bolton. As in any acquisition, competition will be a key factor
    in deciding how the Army will acquire post-SOD phase requirements.
    Appropriate decisions on future competitions for FCS systems and
    components outside of the SDD phase will be made by Army and DOD
    leadership at identified decision points (post-LRIP) for the program,
    as described in the FCS acquisition strategy report. Risk versus
    schedule and cost will be appropriately weighed at that time to reach
    these programmatic decisions.
        These decision points include procurement of long lead materials,
    initiation of LRIP, and initiation of full rate production.

                                ethics programs
        36. Senator McCain. Secretary Bolton, according to the report,
    ``IDA Review of FCS Management,'' one particularly sensitive issue
    raised by IDA was Boeing's system for hiring former Government
    employees into the FCS program. The Rudman review, authored by former
    Senator Rudman, found that, contrary to Boeing policy, the company did
    not have Government advisory letters on file for every former
    Government employee. According to the IDA report, the FCS program
    office had not requested copies of these letters from Boeing. What is
    the status of this critical IDA recommendation?
        Mr. Bolton. More than 200 actions have been implemented by Boeing
    to strengthen and improve its ethics processes, procedures, and
    personnel. Boeing revised numerous policies and procedures to include
    code of conduct and guidelines for employees. Boeing also improved
    ethics training (new employee orientation and Boeing Leadership Center)
    and hiring and employment practices as follows:

            - Established policies and procedures for former competitor
            employees
            - Set up conflict of interest requirements
            - Procedures for recruiting and hiring of Government employees
            - Set up Office of Internal Governance (Ethics and Business
            Conduct)

                    - Internal audits conducted
                    - Compliance assessment team/compliance review board
                    - Ethics and business conduct committee
                    - External audits conducted
                    - Audit committee

        37. Senator McCain. Secretary Bolton, will you provide this
    subcommittee a written statement from Boeing and the Army that you have
    fully completed this action?
        Mr. Bolton. Yes; the Government has formally requested the advisory
    letters and this subcommittee will be formally notified after the
    copies have been received.

        38. Senator McCain. Secretary Bolton, what formal oversight
    procedures are in place and will they be listed in the formal FAR Part
    15 contract for Government and industry personnel to fully understand?
        Mr. Bolton. Post-employment restrictions are covered by 18 U.S.C.
    207, 41 U.S.C.  423 and FAR Part 3. Specifically, 41 D.S.C.  423
    prohibitions and restrictions are implemented through FAR Part 3, which
    required insertion of FAR 52.203-8 and 52.203-10 in the FCS SDD FAR-
    based contract that places prohibitions and restrictions on certain
    categories of procurement officers when contacted by offerors regarding
    non-Federal employment. The FCS SDD FAR-based contract also includes
    other contract clauses to protect the integrity of the procurement
    process.
        The Program Manager, FCS Brigade Combat Team (PM FCS BCT) maintains
    oversight over Boeing's ethics program by reviewing Boeing's monthly
    ethics issues and metrics report, and Boeing's annual ethics report.
    This information is further reviewed at the monthly IPT tag up meetings
    that include Army leadership. The IPT process is the preferred approach
    for development, review, and oversight of the acquisition process since
    it was adopted by the Secretary of Defense in 1995.
        Additionally, in 2003, the Department of the Air Force and Boeing
    entered into an interim administrative agreement that requires Boeing
    to maintain its ethics and compliance policies, programs, and
    procedures. It also requires the appointment of an independent special
    compliance officer (SCO) who reports directly to the Air Force and to
    the Boeing chief executive officer. The Air Force, through SCO,
    provides oversight to Boeing's ethics and compliance policies,
    programs, and procedures. The Office of Army General Counsel (OGC)
    maintains close coordination with the Air Force Office of General
    Counsel with regard to Boeing's ethics and compliance policies,
    programs, and procedures.

        39. Senator McCain. Secretary Bolton, the IDA report was critical
    of the FCS management structure. The LSI ``one-team'' concept cannot
    guarantee that Government or industry partners in the FCS program will
    behave appropriately to reduce the likelihood of inappropriate behavior
    or violation of law. The IDA recommendation is quite clear: it is
    imperative that the Army 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 Army needs an institutional
    capability to assess and manage competing corporate interests. I
    understand that 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. Has this process
    been accepted by the subcontractors to the FCS contract? Do they feel
    that their proprietary data is being protected?
        Mr. Bolton. Boeing and the Army negotiated a clause at FCS FAR
    contract paragraph H-106(g) that requires Boeing to protect all third
    party proprietary data that it receives in the course of the FCS
    contract performance and to use this data only for the purpose for
    which it was furnished. Boeing is continuing to work the non-
    disclosure, limited access, and all limited transfer agreements with
    its ``one team'' partners to ensure that all such arrangements are
    understood and institutionalized. The primary goal of this effort is to
    protect the ``one team'' partner's proprietary information. The Army
    believes that the measures taken to date will adequately protect
    proprietary data.

        40. Senator McCain. Secretary Bolton, has there been an independent
    review of these additional firewall arrangements? If so, who conducted
    these reviews and what were the results?
        Mr. Bolton. Yes, I understand that the Government Accountability
    Office (GAO) (Audit 120456) and previous audits requested firewall
    data, but to our knowledge did not comment or study them. Results will
    be provided if such reviews are completed.

        41. Senator McCain. Secretary Bolton, have the Army General Counsel
    and Army Inspector General reviewed the firewall agreements?
        Mr. Bolton. The use of firewall as a mitigation strategy to address
    the potential for a conflict of interest based upon impaired
    objectivity was examined not only by IDA, but also by the OGC in their
    investigation of the firewalls. Neither IDA, nor OGC, objected to the
    use of the firewall as a mitigation strategy for potential conflicts
    arising as a result of an OTA. In addition, the firewalls were entered
    into under the concept technology development agreement with Defense
    Advanced Research Projects Agency (DARPA) and their use was coordinated
    with DARPA representatives. This review continues with regard to the
    recently awarded FAR-based contract with Boeing.
        Further, OGC and the U.S. Army Tank Automotive-Armaments Command
    legal counsel supporting PM FCS BCT have reviewed Boeing's FCS Source
    Selection Plan that governs the conduct of the LSI as well as its
    subcontractors on organizational conflicts of interest. They have also
    reviewed provision H-130(g), the Non-Disclosure of Sensitive Government
    Program Information in the FCS FAR contract.

        42. Senator McCain. Secretary Bolton, how often do you review and
    update these agreements?
        Mr. Bolton. The firewall agreements are periodically reviewed and
    updated, especially prior to source selection activities by the
    procurement contracting officer (PCO), Tank and Automotive Command
    (TACOM) counsel, and LSI counsel.

        43. Senator McCain. Secretary Bolton, the IDA report made several
    recommendations regarding the ethics programs associated with the FCS
    program. Specifically, the report recommended that the Army ``adopt a
    policy of `trust but verify' with regard to the ethics programs of the
    FCS industry participants.'' How has the Army implemented this policy?
        Mr. Bolton. Boeing has implemented more than 200 actions to
    strengthen and improve ethical training, processes, reporting, and
    auditing within its corporate structure. Boeing has established an
    Office of Internal Governance to oversee ethics and business conduct.
    Internal and external audits are being conducted. To better monitor, PM
    FCS BCT receives a monthly ethics issues and metrics report and is
    further reviewed in a monthly meeting that includes Army leadership.
    Additionally, Boeing revised numerous policies and procedures to
    include code of conduct and guidelines for employees. Hiring and
    employment practices have also been improved to address former
    competitor employees, conflict of interest requirements, and hire of
    former or retired Government employees.

        44. Senator McCain. Secretary Bolton, the IDA report also said that
    ``[t]he Army should seek to redress the kinds of gaps in prior hiring
    practices identified in the Rudman report by requiring that all
    contractors involved in the program screen current employees who have
    Government backgrounds for possible FCS conflict of interest exposure.
    Relevant disqualification letters also should be obtained.'' Has the
    Army completed this recommendation?
        Mr. Bolton. Boeing's FCS legal office has verified conflict of
    interest reviews in accordance with Boeing policy for all Boeing FCS
    employees and consultants. All newly hired employees and new
    consultants are subject to the existing Boeing policies for conflict
    reviews prior to employment discussions (for current Government
    employees) and prior to assignment (for former Government employees).
        Boeing implemented a firewall tracking system on February 28, 2005,
    which supports implementing and tracking ethics related actions
    recommended by IDA.

    government accountability office report on award fees/criteria for the
                            award of incentive fees
        45. Senator McCain. Secretary Bolton, I understand that the
    original FCS Office of Technology Assessment (OTA) contract included a
    base fee of 10 percent and a potential incentive fee of 5 percent. How
    much of the potential incentive fee was earned by the LSI and what was
    the criteria on which the incentive fee was based?
        Mr. Bolton. Only one incentive fee event was held under the OTA,
    and the entire incentive fee was earned by the LSI for that event. The
    LSI met the established cost, schedule, and performance criteria
    required to earn this incentive fee.

        46. Senator McCain. Secretary Bolton, how much of the criteria were
    event-driven, such as conducting the Systems Functional Review by a
    certain date?
        Mr. Bolton. All of the criteria were event driven.

        47. Senator McCain. Secretary Bolton, how is the LSI incentivizing
    the subcontractors to the FCS contract?
        Mr. Bolton. The LSI uses award fee provisions, tied to cost,
    schedule, and performance, to motivate its ``one team'' partners, with
    the exception of small businesses. The LSI uses cost-plus-fixed-fee
    contracts with its small businesses to simplify the accounting burden
    and guarantee greater fee.

        48. Senator McCain. Secretary Bolton, have all of the contracts
    awarded by the LSI been definitized? If not, why not? What is the
    impact on the program and the contract conversion?
        Mr. Bolton. The LSI continues to award new subcontracts. For the
    major subcontractors, these contractors are performing the same effort
    under the FAR-based contract definitization process as they did under
    the OTA. The requirements or subcontractors' scope of work transferred
    intact from the OTA to the FAR contract. Flow-down of FAR-based changes
    and clauses are ongoing since the Government definitized the SDD
    contract and reached agreement with Boeing on March 28, 2006. Contract
    modifications are ongoing. The program will remain nearly unaffected by
    the ``one team'' partner contract modifications.

        49. Senator McCain. Secretary Bolton, Mr. Francis, and Dr. Graham,
    I understand that the new FCS contract will be a cost plus fixed and
    incentive fee contract. In the undefinitized contract action/FAR Part
    15 Contract, a fixed fee of 7 percent and a potential incentive fee of
    8 percent has been established. In their December 2005 report on award
    and incentive fees, GAO found that the goal of performance incentive
    fees, to motivate contractors to deliver exceptional outcomes, is
    negated by the manner in which the Department awards these fees.
    Contractors are evaluated on criteria not related directly to outcomes
    (such as responsiveness to requests for information), are rewarded for
    all levels of performance--from acceptable to excellent, and are given
    several chances to obtain fees, regardless of actual results. In
    general, what are the criteria for which the LSI will earn incentive
    fees?
        Mr. Bolton. The definitized FAR-based contract has a 7.5-percent
    fixed fee portion and an additional 7.5-percent incentive fee
    arrangement. The fee structure has concrete and measurable performance
    targets oriented at critical program performance, cost, and schedule
    activities. There are nine incentive fee events for the SDD contract.
    The events are designed to incentivize the contractor to prove out
    technologies and systems integration, and to move the program forward
    into readiness for initial production at an affordable cost, and on
    schedule. The LSI will earn the incentive fee by successfully
    completing specific sub-events that contain objectively measurable and
    weighted performance, schedule, life-cycle cost containment plan cost,
    and average unit procurement cost criteria related to each incentive
    fee event.
        Dr. Graham. IDA's review of FCS concluded that the fee structure
    needed to be altered to provide the contractor stronger incentives to
    report on substantive progress.
        By setting firm goalposts for design reviews and other incentive
    award schedule events, the Army could accomplish two critical
    objectives. First, it would set expectations within the Army on the
    need to converge on important FCS design decisions. Second, it would
    provide needed checks on the feasibility of the FCS management concept;
    of program assumptions regarding technologies, costs, and schedules;
    and of the quality of the supporting data and analysis available to
    support major program design decisions.
        We are aware of reports that in restructuring the FCS contract, the
    Army has modified the incentive fees to strengthen reporting
    requirements. Such an action would be an improvement: Linking the
    goalposts for reviews to the program's incentive fee structure will
    allow the Army to clarify expectations regarding needed management data
    and set the standards for the quality of the information and
    assessments supporting each major milestone review.
        Mr. Francis. There are 10 program events outlined in the incentive
    plan in the new contract (one of which was already held under the OTA).
    At each of these events, the contractor will be evaluated on three main
    evaluation areas: performance, cost, and schedule. There will be
    specific dollars associated with each of these areas, so it appears the
    contractor is evaluated on each area independently. In other words,
    even if the contract is over cost and behind schedule at an incentive
    event, the contractor could still earn the fee associated with the
    performance area. Specific performance criteria will be defined in the
    program's integrated master plan and detailed criteria will be
    incorporated into the contract one incentive event prior to each
    scheduled event date. These detailed criteria will be mutually agreed
    upon by the Government and contractor and subject to the disputes
    clause.
        The criteria outlined for the cost and schedule evaluation areas
    are not entirely different from an award fee contract. Specifically, at
    least half of it is subjective and could reward the contractor for
    program inputs, not outcomes. In the cost area for incentive events 2-
    8, there are two main criteria used for evaluation: (1) Management of
    life cycle cost, which involves activities, such as the development and
    delivery of quarterly life cycle cost reports, among others; and (2)
    whether or not the current approved LSI-generated acquisition unit
    program cost estimate is at or below the established glide path. The
    contract does not state how each of these criteria are weighted. For
    events 9 and 10, the acquisition unit program cost glide path is not
    evaluated. Similarly, the two criteria for the schedule area are split
    between inputs and outcomes. On the input side, Boeing will be
    evaluated on its ability to update the integrated master plan and
    integrated master schedule in a timely manner. On the outcomes side,
    Boeing must also successfully meet the completion criteria for the
    event within the threshold listed in the acquisition program baseline,
    or if not listed, within 90 calendar days of the scheduled date in the
    integrated master schedule. Finally, the contract allows rollover of
    the incentive fee. The program manager may decide to rollover any
    unearned incentive fee to subsequent events, or to apply the fee to
    specific program risks or objectives.

        50. Senator McCain. Mr. Francis, in your estimation, does the
    proposed incentive fee structure for the new FCS contract increase
    contractor risk while adequately protecting the financial interest of
    the Government?
        Mr. Francis. At the outset, it should be recognized that,
    regardless of the fee structure, the bulk of the financial risk for the
    FCS contract remains with the Government. The new contract is still a
    ``cost-reimbursement'' contract, which means the Government reimburses
    the contractor for all allowable incurred costs, to the extent
    prescribed in the contract. As we have reported, the risk in the
    program will be governed mainly by technology development, design
    integration, and testing.\1\
    ---------------------------------------------------------------------------
        \1\ GAO, Defense Acquisitions: Improved Business Case Needed for
    FCS's Successful Outcome, GAO-06-367 (Washington, DC: March 14, 2006.)
    ---------------------------------------------------------------------------
        In terms of the balance between risks for the Government and
    rewards for the contractor, the new contract is a slight improvement
    over the original OTA. Under the new contract, more of the contractor's
    fee is tied to performance. The OTA included a 10-percent fixed fee and
    a 5-percent incentive fee; the new contract includes a 7-percent fixed
    fee and an 8-percent incentive fee. However, there are still multiple
    areas of concern. While some of the criteria related to this incentive
    fee appear to be related to interim program events and milestones, half
    of the cost and schedule criteria are still focused on management areas
    or program inputs that are not directly related to the desired
    acquisition outcomes. In addition, because each evaluation area is
    assessed separately for each incentive event, the contractor could
    receive a portion of the available fee if it is performing well
    technically, even if the program is overrunning cost and not meeting
    schedule. The inclusion of a rollover provision could reduce the
    Government's leverage in holding the contractor accountable for its
    performance.

        51. Senator McCain. Secretary Bolton, I understand the FCS contract
    conversion will be completed by the end of March. Will the contract be
    updated for any regulatory changes that occur during the undefinitized
    timeframe before definitization?
        Mr. Bolton. The FAR-based contract was definitized on March 28,
    2006. The contract has been updated due to numerous changes or
    negotiated agreements over the past 6 months. AFAR ``sweep'' was
    conducted 2 weeks prior to definitization to ensure that the latest
    versions of all FAR clauses were reflected in the contract. Future
    regulatory changes will be included routinely as they apply to the FCS
    contract.

        52. Senator McCain. Secretary Bolton, how will the FCS contract
    strengthen oversight and keep costs down?
        Mr. Bolton. The FCS contract will incorporate all of the
    appropriate FAR and Defense Federal Acquisition Regulations Supplement
    (DFARS) clauses and provisions. These include the requirement for truth
    in negotiations, submission of cost and pricing data, procurement
    integrity, and recurring reporting of cost and schedule data.
    Additional contract language provides for Government participation in
    source selection, make/buy decisions and a voice on internal LSI
    decisionmaking bodies. The FAR contract strengthens the FCS integrated
    program management approach; it bolsters the approach of providing a
    focal point to enable the overarching responsibilities of the
    Government PM, Army acquisition leadership, and DOD oversight.

        53. Senator McCain. Mr. Francis and Dr. Graham, will the converted
    FCS strengthen oversight and keep costs down?
        Mr. Francis. The Army's new contract was finalized in March 2006
    and is based on the FAR, which governs acquisition in the Federal
    Government. The new contract incorporates standard FAR clauses
    including those that protect the Government's interests, such as the
    provisions relating to procurement integrity, truth in negotiations,
    and cost accounting standards. Some provisions of the new contract
    represent improvements for the Government, such as the organizational
    conflicts of interest clause, which states that the LSI shall not
    compete for any subcontracts at any tier of the program. This clause
    will be included in subcontracts and flowed down to all tiers. However,
    the revised contract retains a similar oversight structure and should
    have little impact on the likelihood of controlling FCS costs. Cost
    control will be determined by how the Army manages FCS technology,
    design integration, and testing.
        The conversion to a FAR-based contract was appropriate for the FCS
    program and should help to safeguard the Government's interests. In the
    coming months, we will be examining the new contract and its
    implementation to determine if the Government's interests are better
    protected.
        Dr. Graham. The IDA review concluded that there are major
    challenges in executing the FCS program associated with the scope of
    the program, the technical challenges, and the strategic risks cited in
    our report. IDA made 18 recommendations to the Army on the steps to
    address such challenges. We reviewed the then existing contract, and
    concluded that the Army had included adequate contractual provisions.
    Our review concluded that the form of the contract was not a major
    contributor to the program challenges, and we do not believe that the
    change in the form of the contract will, in itself, substantially alter
    the fundamental challenges facing the program.

        54. Senator McCain. Secretary Bolton, does the LSI charge fee on
    fee from its subcontractors, and if so, why?
        Mr. Bolton. The LSI's fixed fee was developed against its costs
    line. Subcontractor fee is treated as costs to the LSI. This practice
    is in accordance with industry-wide accounting practices and Boeing's
    approved disclosure statement. As is customary, and in line with
    industry standard, all prime/LSI contractors charge and receive fee for
    any agreed-to fee from immediate subcontractors. Therefore, ``one
    team'' partner price, which includes the ``one team'' partner fee,
    would be treated as a cost to the program, and therefore part of the
    base for the LSI's fee.

        55. Senator McCain. Mr. Francis, in the GAO report and your
    statement, it is mentioned that award-fee evaluations are generally
    time-based rather than event-based. Please explain what is meant by
    this and why this may not be an effective practice.
        Mr. Francis. On award-fee contracts, DOD personnel (usually members
    of an award-fee evaluation board) conduct periodic evaluations of the
    contractor's performance and recommend the amount of fee to be paid for
    that period. The frequency of evaluation periods can be based on
    specific dates or milestones. For most DOD award-fee contracts in our
    study population, evaluation periods were time- or calendar-based, and
    held generally about every 6 months. Only about 10 percent of DOD
    award-fee contracts in our study population used event-based
    evaluations conducted after the completion of program milestones or
    scheduled for the anticipated completion date for program milestones.
        Time-based award-fee evaluations of contractor performance on
    weapon system development programs that can last a decade or more may
    not generate meaningful information about progress. Adopting event-
    based award-fee evaluations would be a logical extension of DOD's new
    award-fee policy. In its March 2006 policy memo on award fees, DOD
    recognized the benefits of moving toward more outcomes-based award fee
    criteria. To do so, the memo stated that it is imperative that award
    fees be tied to identifiable interim outcomes, discrete events, or
    milestones, as much as possible, and offered as examples milestones
    such as timely completion of preliminary design review, critical design
    review, and successful system demonstration.

        56. Senator McCain. Secretary Bolton, the GAO report found that
    neither award nor incentive fees were effective in helping the
    Department achieve the outcomes it wanted. Isn't this indicative of
    larger problems in the defense acquisition system? What actions are you
    taking, in terms of the QDR or DAPA project, to address those problems?
        Mr. Bolton. Yes, there are issues in the defense acquisition system
    as described in the GAO report that can affect the effectiveness of
    using award or incentive fees. However, proper use of award or
    incentive fee arrangements can be useful in achieving performance
    objectives. The DAPA report recommends creating acquisition strategies
    for each program prior to Milestone A to streamline procurement, reduce
    time-to-market, require formal subcontractor level competition, and tie
    award fees to contractor performance using contractor performance
    assessment reporting system ratings. These recommendations are under
    consideration.

        57. Senator McCain. Mr. Francis, I'm trying to understand the way
    these award fees have been used is helping the Department to get the
    outcomes it wants. First, we sign a cost-plus contract that puts most
    of the risk for these major development programs on the Government.
    Next, we offer the contractor the chance to earn an award fee on top of
    having their costs reimbursed. Then, when a program experiences
    problems and I think it is fair to say they almost always do, the
    contractor can still earn millions of dollars in award fees for helping
    to correct the issues which they are partially responsible for
    creating. Please explain to me how anyone can consider this to be an
    effective way of doing business.
        Mr. Francis. DOD's current award-fee practices are not an effective
    way of doing business. In December 2005, we reported that DOD programs
    have engaged in practices that undermine efforts to motivate contractor
    performance and that do not hold contractors accountable for achieving
    desired acquisition outcomes, such as meeting cost and schedule goals
    and delivering desired capabilities.\2\ These programs frequently paid
    most of the available award fee for what they describe as improved
    contractor performance, regardless of whether acquisition outcomes fell
    far short of DOD's expectations, were satisfactory, or exceeded
    expectations.
    ---------------------------------------------------------------------------
        \2\ GAO, Defense Acquisitions: DOD Has Paid Billions in Award and
    Incentive Fees Regardless of Acquisition Outcomes, GAO-06-66
    (Washington, DC: December 19, 2005).
    ---------------------------------------------------------------------------
        In the case of FCS, we have found that the program is well behind
    where it should be, in that they will be working on pre-development
    activities 5 years after the program was approved for system
    development and demonstration. Yet the LSI has received all of the
    available incentive and award fees that were available thus far.
    Further, the Army has adjusted the program schedule, such as for the
    recently completed System of Systems Functional Review, which was a fee
    event in the FCS contract.
        To address this issue, DOD must structure award and incentive fees
    to ensure that the Government is only paying contractors for meeting or
    exceeding cost, schedule, and performance goals. In March 2006, DOD
    issued a new award fee policy that recognized the benefit of moving
    toward more outcomes-based award fee criteria. To do so, the memo
    stated that it is imperative that award fees be tied to identifiable
    interim outcomes, discrete events, or milestones, as much as possible,
    and offered as examples milestones such as timely completion of
    preliminary design review, critical design review, and successful
    system demonstration. As always, the key will be how DOD implements
    this new policy and ensures that it translates into practice.

        58. Senator McCain. Secretary Bolton, Mr. Francis, and Dr. Graham,
    fixed-price contracts shift the risk to the contractor and incentivize
    the contractor to increase the reliability of the system components.
    What do you think DOD can do to return to more common use of fixed-
    price contracts?
        Mr. Bolton. In accordance with the FAR and current policy, the
    selection of contract type, whether fixed-priced or cost reimbursement,
    involves considering factors such as the type and complexity of the
    requirement, whether adequate price competition is a reasonable
    expectation, and other economic factors such as our ability to analyze
    price and/or cost, the history of the acquisition, and the period of
    performance or length of the production run. These factors along with
    several others contribute to our ability to utilize a fixed-price
    contract for a given requirement and thus shift the risk to the
    contractor. Obviously, there are cost/risk tradeoffs that envelope this
    process which must be considered when deciding upon the best
    acquisition strategy or contract type.
        Mr. Francis. According to the FAR, fixed-price contracts are
    generally the preferred contracting method. However, this preference
    applies in research and development contracting only to the extent that
    ``goals, objectives, specifications, and cost estimates are sufficient
    to permit such a preference.'' The FAR further explains, ``Because the
    absence of precise specifications and difficulties in estimating costs
    with accuracy normally precludes using fixed-price contracting for
    research and development, the use of cost-reimbursement contracts is
    usually appropriate.'' FAR 35.006(e) states that, ``Projects having
    production requirements as a follow-on to research and development
    efforts normally should progress from cost-reimbursement contracts to
    fixed-price contracts as designs become more firmly established, risks
    are reduced, and production tooling, equipment, and processes are
    developed and proven.''
        In general, to attract cooperation from the contractor base to
    compete on fixed-price contracts, DOD would need to ensure that the
    project is well-defined, has a predictable schedule and scope, and has
    low technical risk. As the level of uncertainty in a project increases,
    contractors will be less likely to participate on a fixed price basis.
        Dr. Graham. The fundamental variables in any program are cost,
    schedule, and performance. A good contract is one that brings these
    three variables into alignment to provide a feasible and predictable
    transaction for both the buyer and the seller. Often, the high degree
    of uncertainty in weapon programs makes it impossible to set fixed
    cost, schedule, and performance with enough confidence to define an
    executable transaction. Historically, DOD's attempts to set fixed
    prices in the face of great uncertainty, such as in the development
    phase of major weapon programs, have not contributed to successful
    program outcomes.
        This suggests that the best way for the Government to gain the
    considerable benefits of sound and fair fixed price development
    contracts would be to significantly reduce the uncertainty in the
    likely cost. This could be done in principle by specifying new
    equipment that requires much less ambitious technical advances than has
    recently been the case. On the other hand, if the United State were to
    slow the rate at which it fields new military technology primarily in
    order to reap the financial predictability benefits of lower technical
    risk, there is no assurance that our future adversaries will follow
    suit and slow their advances.

        59. Senator McCain. Secretary Bolton, what are you doing to ensure
    fee determining officers use their training to follow regulation and
    published acquisition guidance when determining award fees?
        Mr. Bolton. The Department of the Army has implemented specific
    regulatory requirements with respect to the role of the fee
    determination official and the necessary training for personnel
    participating in an award fee evaluation board (AFEB). The Army Federal
    Acquisition Regulation Supplement (AFARS) Subpart 5116.4, Incentive
    Contracts, requires that any award fee determining official (AFDO)
    appointed by the principal assistant responsible for contracting or
    authorized contracting officer, be made in writing. The AFARS further
    requires that the AFDO appoint in writing the AFEB and its chairman and
    that the appointment letters clearly outline the responsibilities and
    limitations of the AFEB and its chairman. The AFARS also requires that
    the AFEB consist of contracting and acquisition personnel most
    knowledgeable of the requirements and contractor performance and that
    the AFEB chairman ensure that all AFEB evaluators are sufficiently
    trained in their responsibilities. Finally, the AFARS requires that the
    rationale for the recommended award fee be documented in sufficient
    detail in order to ensure that the integrity of the award fee process
    is preserved.

        60. Senator McCain. Mr. Francis, the GAO report briefly described
    the personnel who generally make up the award-fee boards. I understand
    that program office personnel may be in the best position to offer
    input on the contractor's performance, but since they may have a vested
    interest in presenting the program in its best light, are they the most
    appropriate officials to be recommending how much fee the contractor
    should earn?
        Mr. Francis. Independence is a key factor for ensuring the
    integrity of the award-fee process. Award-fee boards on major weapons
    programs are generally made up of personnel from the program office,
    which, as you point out, may be in the best position to offer input on
    contractor performance. However, our past work \3\ has shown that
    programs are incentivized to suppress bad news--largely due to
    continual funding competition. Moving towards more outcomes-based award
    fee criteria helps to address this issue. Using outcomes-based award-
    fee criteria that reflect cost, schedule, and performance goals would
    provide a more objective and transparent basis for award-fee decisions.
    ---------------------------------------------------------------------------
        \3\ GAO, DOD Acquisition Outcomes: A Case for Change, GAO-06-257T
    (Washington, DC: November 15, 2005).

                   future combat systems contract conversion
        61. Senator McCain. Secretary Bolton, what is the status of the
    conversion of the FCS contract to a FAR part 15 contract?
        Mr. Bolton. A FAR-based letter contract was awarded on September
    23, 2005. This letter contract was definitized by modification PZ0020
    issued on March 28, 2006.

        62. Senator McCain. Secretary Bolton, in the 2006 Defense
    Authorization Law, Congress instructed the Pentagon to report on every
    program that costs at least 50 percent more than initial projections.
    The provision was designed to tie programs to their original cost
    estimates, rather than updated cost and schedule baselines. The
    Pentagon has been allowed to change its baseline without invoking the
    penalty. For example, the FCS program hasn't triggered an official
    breach despite a $161 billion cost estimate that is more than double
    its original baseline estimate. What plans do you have in place to
    ensure your acquisition programs are held to their original baseline
    figures instead of allowing the current practice of rebaselining?
        Mr. Bolton. While the Army's implementation plans for this new
    amendment depend partly on the guidance from the Office of the
    Secretary of Defense, the Army intent is full, timely compliance with
    the law. Oversight of the program baselines will continue through
    milestone decision reviews and program executive officer updates to the
    Army acquisition executive. Deviation reports using the new criteria
    outlined in the amendment will be reported using current processes and
    procedures.
        While this amendment does not prohibit the rebaselining of
    programs, it does hold program managers accountable to the original
    baseline estimate. By keeping the original estimate as a data point in
    selected acquisition reports (SARs), the entire DOD acquisition chain
    is sensitive to the cost growth of the entire program. This is an
    improvement of the current practice of rebaselining which does not
    retain the original baseline estimate in official reports.
        With respect to the FCS program, the $161 billion figure cited in
    the question represents the total acquisition cost in then-year
    dollars, and was reported in the November 2005 SAR. The comparable
    original baseline figure is $92.2 billion, a 75-percent increase. When
    calculated using base-year dollars so that the rate of inflation (which
    is beyond a program manager's control) does not influence the result,
    the overall increase is 54 percent (From November 2005 SAR: SAR
    Development Baseline of $77.8 billion; acquisition program baseline
    objective of $120.15 billion).

        63. Senator McCain. Secretary Bolton, how do you plan to implement
    this new amendment to Nunn-McCurdy specifically as it applies to the
    FCS program?
        Mr. Bolton. In compliance with the new amendment, each SAR must
    reflect the originally established baseline estimate along with the
    estimate deemed to be the original under this amendment. Under this
    amendment, the FCS current baseline would be deemed the original
    baseline estimate. The current FCS acquisition program baseline was
    signed by the Defense Acquisition Executive on November 2, 2005, and
    reported in the November 2005 SAR.
        Oversight of the program baselines will continue through milestone
    decision reviews and program manager updates to the Army Acquisition
    Executive. The Army will not lose sight of the baseline estimate that
    was originally established for the program in 2003.

        64. Senator McCain. Secretary Bolton, the FCS program has been
    rebaselined at least twice in the past 3 years; what does this say
    about the soundness of the business cases that the Army is using to
    justify this system?
        Mr. Bolton. The FCS program has only two baselines (initial and
    current). The reason the baseline changed is that the Army decided to
    accelerate fielding FCS capability to the current force. Based on this
    change in Army's strategy, the FCS funding profile was adjusted and
    deferred systems were added back into the program creating a new
    baseline.
                                     ______

               Questions Submitted by Senator Joseph I. Lieberman
                          impact of brigade reduction
        65. Senator Lieberman. General Cody, the decision to restructure
    the National Guard by reducing the number of brigade combat teams
    (BCTs) apparently also included the elimination of an aviation brigade.
    Does that mean that the Army is reducing from 19 to 18 aviation
    brigades in its force structure?
        General Cody. ARNG restructuring is not reducing the number of
    brigades but converting six BCTs and one CAB-E, to sustainment and
    engineer brigades. Yes, if this decision is implemented the Army will
    reduce from 19 to 18 CABs. However, it will also ensure the seven
    remaining ARNG CABs are fully resourced with personnel and aircraft
    vice eight partially resourced CABs.

        66. Senator Lieberman. General Cody, does that mean that the
    National Guard will lose helicopters as a result of this restructuring?
        General Cody. The number of assigned aircraft will remain the same
    or increase. The ARNG may lose the authorization for some helicopters
    depending on how the decision is implemented; however, the total number
    of aircraft will remain the same or increase.

                                   modularity
        67. Senator Lieberman. Secretary Bolton and General Cody, the
    fiscal year 2007 budget request represents the first year that the Army
    has included modularity in its base budget request. Will the Army
    continue to fund its modularity initiative in the base budget requests?
        Mr. Bolton and General Cody. Yes. The Army will continue to include
    modularity in its base budget requests.

        68. Senator Lieberman. Secretary Bolton and General Cody, 2 years
    ago at this time, the Army estimated modularity costs at $28 billion.
    Last year, the estimate was raised to $48 billion. Do you have a
    revised estimate for modularity costs for fiscal year 2007?
        Mr. Bolton and General Cody. The revised estimate for modularity is
    $52.5 billion. The fiscal year 2007 budget request for modularity is
    $6.6 billion. This amount includes $5.9 billion for equipment
    procurement and $504 million for construction and $196 million for
    operations and maintenance. For fiscal year 2005, the cost was $5.0
    billion, for current year fiscal year 2006, the cost is $6.5 billion.
    The remaining years are estimated at: fiscal year 2008, $7.6 billion;
    fiscal year 2009, $9.1 billion; fiscal year 2010, $9.2 billion; and
    fiscal year 2011, $8.5 billion.

        69. Senator Lieberman. Secretary Bolton and General Cody, the Army
    has estimated that the cost of modularity is $48 billion. Does this
    include Reserve component equipment? If not, how does the Army intend
    to fund these Guard requirements?
        Mr. Bolton and General Cody. Yes, the $48 billion includes Army
    Reserve and ARNG equipment.

        70. Senator Lieberman. Secretary Bolton and General Cody, given the
    high operational tempo for OIF and OEF, has the Army been able to
    adequately man and equip the new modular brigades, including the
    additional nine brigade-size units, by 2007 as originally intended?
        Mr. Bolton and General Cody. The units that the Army sends into
    harm's way are fully manned and equipped to accomplish the range of
    missions assigned to them. The rebalancing the Army is undertaking is
    aimed at reducing stress on the Active and Reserve components, improve
    the responsiveness of the overall force to achieve National Security
    Strategy goals, and improve the readiness and deployability of units.
    These efforts will ultimately ensure predictable deployment cycles for
    Army forces of one rotation every 3 years for the Active component and
    one rotation every 6 years for the Reserve component. The Army will use
    this cyclical force readiness model to generate forces that are fully
    manned and equipped.

                             future combat systems
        71. Senator Lieberman. Secretary Bolton and General Cody, there
    have been many criticisms about the FCS. I believe at least some of the
    criticisms derive from two factors: The Army has had some difficulty
    describing concretely what the FCS is expected to be and how the Army
    intends to fight an FCS-equipped force differently than a force
    equipped with modifications to current systems, and that the program
    rests on very high risk technologies.
        GAO has found that the program does not yet have firm requirements.
    I understand the Army has completed an operational requirement document
    (ORD) that outlines 522 requirements. The GAO has found that the Army
    has a good understanding of what FCS BCTs should be capable of, but not
    enough knowledge of what is needed for each of the 18 individual
    systems. It found that the Army and the LSI will later translate system
    of system requirements into more specific requirements for individual
    systems within FCS. This step is rather late in the usual acquisition
    process. When do you expect to have mature and stable requirements for
    the system of systems and for the individual systems?
        Mr. Bolton and General Cody. The fundamental requirements set forth
    in the FCS ORD have remained relatively unchanged since the first JROC-
    approved ORD in April 2003. Change 2 of the ORD was approved by the
    Army Requirements Oversight Council (AROC) on December 16, 2005, and is
    scheduled for JROC approval on April 27, 2006. This change encompasses
    previously coordinated materiel developer and user agreed-to
    requirements clarifications, addition of the Spin Out Capabilities
    Description Document Annex, mandated change to key performance
    parameter (KPP) 7 incorporating language for force protection and a
    change to KPP 5 to update previously agreed-to maintenance ratios for
    the class IV unmanned aerial vehicle (UAV). The actual number of ORD
    requirements has been reduced from 555 to 544 as a result of this
    maturation activity.
        These ORD requirements were translated into performance
    requirements by the materiel developer. These FCS SoS requirements were
    established and baselined at the SoS functional review (FR) in August
    2005. At SoSFR, this functional baseline, which includes the SoS
    specification, architecture, and a design concept baseline, was placed
    under formal configuration management and control. This signaled the
    formal flow-down of requirements to the system level. Beginning in
    November 2005, a series of system functional reviews (for each of the
    integrated platforms and the network) have been held to establish and
    baseline the system-level requirements. These system level baselines
    were placed under formal configuration management and control.
    Preliminary interface requirements have been established and documented
    in interface requirements documents for complementary programs,
    interface control documents for hardware items and interface
    requirements specifications for software items. These reviews will
    culminate in a SoS-level validation of the requirements baseline at the
    August 2006 In-process Preliminary Design Review. This review signals
    the stability of the requirements baseline to begin the series of
    system-level preliminary design activities and reviews leading up to
    the SoS Preliminary Design Review in fiscal year 2008.
        The requirements maturity and stability will vary given the point
    in time of the development lifecycle for a program. According to
    systems engineering fundamentals, at a systems functional review, the
    technical description (functional baseline) must be approved as the
    governing technical requirements. Further, the functional baseline must
    reflect the requirements that will meet user expectations found in the
    ORD. Draft subsystem specifications should be available. The FCS PM
    confirmed these tenets were met at the SoSFR for the SoS and at the
    system level SFRs for the integrated platforms. The SoS specification,
    prime item development specifications and draft configuration item
    specifications exist and are baselined.
        Requirements maturity and stability will continue to evolve as we
    move forward in the systems engineering (SE) process towards SoS
    preliminary design review (PDR) (fiscal year 2008) and SoS critical
    design review (CDR) (fiscal year 2010)--resulting in an increasing
    level of maturity and stability at each of these milestones in
    accordance with best business practices.

        72. Senator Lieberman. Secretary Bolton and General Cody, what
    process are you using to determine the final requirements for the
    operational doctrine and tactical procedures for the system?
        Mr. Bolton and General Cody. The Army has developed detailed and
    iterative processes to accurately develop requirements, operational
    doctrine, and tactical procedures for the FCS family of systems.
    Focused on the pursuit of full spectrum operational concepts,
    requirements definition is enabled through an iterative evaluation
    process which includes experimentation, testing, analysis, documenting
    the operational doctrine and tactical procedures, retesting, and
    validating. This process develops, evaluates, and refines doctrine,
    organization, training, materiel, and leader development capabilities
    from the future BCT from individual platforms and soldier level through
    each collective echelon level to brigade. The FCS BCT maneuver battle
    lab employs live-virtual-constructive simulations employing a soldier-
    in-the-loop, collaborative, simulated environment, replete with mock-
    ups of the FCS platforms, staff work stations, and surrogates for the
    command and control systems in determining operational doctrine and
    tactical procedures. This rigorous disciplined methodology enables the
    achievement of credible fidelity in complex environments, for the
    operational doctrine and tactical procedures for the FCS BCT at the
    unit, leader, staff, and soldier levels. This top-to-bottom evaluation
    process is enabled by a dedicated evaluation BCT (EBCT) in conjunction
    with the U.S. Army Training and Doctrine Command (TRADOC) Analysis
    Center, the TRADOC proponents, U.S. Air Force, U.S. Marine Corps, and
    allied observers. The EBCT is a consistent, trained group of veteran
    warfighters and sustainers that fight the FCS in various defense
    planning guidance approved scenarios to develop tactics, techniques,
    and procedures, refine platform (system) requirements and doctrine for
    the future force. The source data for the development process comes
    from Army Materiel Systems Analysis Agency, independent threat sources,
    Center for Army Lessons Learned, and current operational environment
    sources to ensure the evaluation process includes both traditional and
    irregular challenges in complex environments. Additionally, Unit of
    Action Maneuver Battle Lab (UAMBL) performs the same mission for spin-
    out technologies for the current force. The UAMBL develops the
    operational concepts for evaluation, provides the soldier-in-the-loop
    to conduct the evaluation; then adjusts the concept, repeats the
    evaluation, develops and refines the tracking and impact prediction
    (TIP) for doctrinal development. Doctrine is being developed to support
    the timely evaluation, experimentation, and training related to
    fielding and sustaining the FCS BCT in support of the future force. To
    date, UAMBL has maintained the development schedule. Additionally,
    UAMBL has produced a manual, which describes implications for TIP of
    the four spin-out 1 systems to support ongoing test and evaluation
    planning. This is the process currently underway to determine the final
    requirements for the operational doctrine and tactical procedures for
    the FCS BCT.

        73. Senator Lieberman. Secretary Bolton and General Cody, a key
    part of the Army plan is to use FCS technologies to modernize the
    current force so that there is not a significant technology gap between
    the FCS-equipped force and the current force. Yet we hear that the
    technologies are untested and high risk. What technologies have you
    selected and does your budget request prioritize those technologies for
    earlier development?
        Mr. Bolton and General Cody. Spiraling of FCS capabilities is
    accomplished through spin-outs. Each spin-out is structured to
    facilitate the insertion of promising and sufficiently mature
    technologies/capabilities to the current force, while allowing the base
    FCS program to focus on meeting threshold capabilities as described in
    the ORD. Knowledge gained through the experimentation, testing, and
    fielding of spin-outs benefits the main FCS program by providing early
    assessments and feedback which inform the continued development of FCS
    threshold capabilities. This approach will also allow the Army to field
    FCS network elements and some individual FCS systems over time, thus
    reducing the risk to the FCS program while simultaneously adding
    capability to the current force. This will culminate in the fielding of
    the FCS Battle Command Network to the current force in the same
    timeframe as the FCS BCT fielding.
        The Army has prioritized, in its Acquisition Strategy Report, and
    has budgeted for spin-out 1. This spin-out will provide enhanced
    warfighter capabilities to the current force in three primary areas. It
    provides enhanced situation awareness, enhanced force protection, and
    enhanced lethality through the use of unattended sensors and munitions
    and an initial FCS communications network backbone for FCS BCT and
    battalion command nets. The lethality and sensor products are Non Line
    of Sight Launch System, Unattended Ground Sensor, and the Intelligent
    Munition System which will satisfy the National Land Mine Policy
    Objectives. The FCS spin-out systems are designed to interface with the
    Army Battle Command System and current force communications networks
    and platforms.
                                     ______

                 Questions Submitted by Senator Daniel K. Akaka
                               schedule slippage
        74. Senator Akaka. Secretary Bolton, in your testimony, you
    asserted that in terms of critical technologies, you have more than 23
    technologies with a technical readiness level (TRL) of 6 and that the
    program is on schedule to mature the rest by the preliminary design
    review in August 2008. While I am glad to hear of your progress, this
    schedule still represents a significant slip in schedule from that
    proposed at the start of the program. What have you done to identify
    the causes for such significant delays in technology maturation and
    what measures have been, or will be, put in place to prevent further
    schedule push backs?
        Mr. Bolton. The FCS program has a structured, time-phased approach
    to technology maturation for critical technologies (CT). The FCS
    program also planned for the integration of these technologies during
    the SDD process specifically for the purpose of properly and
    successfully fielding a revolutionary networked SoS. As part of the
    restructure in 2004, the program was realigned to create integration
    phases wherein segments of FCS capability would be designed, built, and
    evaluated providing risk reduction and knowledge to feed subsequent
    integration phases. The maturation of critical technologies is aligned
    with this time-phased and deliberate approach. To date, this has proven
    an informed and methodical approach to the management and mitigation of
    technical risk while enabling incorporation of rapidly evolving
    technology. FCS CTs were aligned to this phased approach with plans to
    have each demonstrated to a TRL 6 prior to its entry into an
    integration phase. This process is similar to approaches used in the
    commercial sector for software intensive, complex systems.
        Significant changes were made to manage risks associated with
    technology maturation and additional experiments were added to mitigate
    technical risk; the revised FCS program schedule reduces technical
    risk; component maturation projects were added to reduce technical
    risk. The program continues to mature its critical technologies in an
    evolutionary and deliberate approach consistent with DOD acquisition
    policy. The FCS program is appropriately managing risks associated with
    the CTs in order to meet the overall program objectives. The plans for
    maturation of CTs assessed at less than TRL 6 are incorporated in the
    risk management plan (RMP) for each particular CT. These RMPs are
    actively managed and receive senior level review at the PM's risk
    review board, with quarterly events to track the technology maturation.

                                 fee structure
        75. Senator Akaka. Secretary Bolton, in the OTA between the Army
    and LSI finalized in March 2005, the annual fixed fees for contractors
    were set at 10 percent of estimated cost and the incentive fee
    available was 5 percent. The Army intends to change the fee structure
    for the FCS program in the new contract to a proposed 7-percent fixed
    fee and an 8-percent incentive fee. In your testimony you noted that
    the DOD is attempting to address the concerns raised by a recent GAO
    report that found there was little evidence that contractor award fees
    improve performance and outcome. You also stated that, from your
    perspective, the proposed fee structure for the new FCS program
    contract strikes the right balance between contract risks and
    motivation of contractor performance. Can you explain to me how this
    proposed change in fee structure which raised the ceiling on the
    available incentive fee percentage addresses the issues raised by the
    GAO report?
        Mr. Bolton. The change to the FCS incentive fee structure to
    increase the percentage that is allocated to incentive fees is designed
    to increase the LSI's motivation to excel in accomplishing program
    goals. As suggested by the GAO report, the incentive fee arrangement
    has objectively measured critical path performance criteria (major
    program events and activities). This difference eliminates most of the
    subjectivity pitfalls with typical evaluation schemes. The final
    balance struck between the base fee and incentive fee is 7.5 percent
    for each, for a total of 15 percent. The fee criteria are clearly
    described in the fee provision of the contract.

                               boeing restructure
        76. Senator Akaka. Secretary Bolton and General Cody, Mr. Graham
    from IDA has testified before this subcommittee that in response to
    IDA's 2004 review of FCS program management, Boeing has realigned its
    corporate structure to increase the independence of corporate
    governance functions. However, Mr. Graham also noted that IDA did not
    audit the execution of these realignments at Boeing. What, if any,
    controls have been put in place by the Army to ensure that Boeing
    successfully implements the changes to its corporate structure?
        Mr. Bolton and General Cody. The Army relies on two DOD agencies,
    the Defense Contract Audit Agency and Defense Contract Management
    Agency, to provide insight into Boeing's corporate structure, business
    practices, and systems. This oversight ensures that any restructure
    does not violate statutory requirements.

                              realistic estimates
        77. Senator Akaka. Secretary Bolton and General Cody, the Army
    currently estimates that the total expected cost for the FCS program is
    $160.7 billion which represents a 76-percent increase over the original
    estimate of $91.4 billion. According to the Army, this is a more
    realistic cost estimate reflecting the progress made in defining
    systems requirements. How stable is this revised estimate given that,
    although progress has been made, the Army and its contractors are still
    working to complete the definitions of system level requirements?
        Mr. Bolton and General Cody. The fundamental requirements set forth
    in the FCS ORD have remained relatively unchanged since the first JROC
    approved ORD in April 2003. The FCS program is a complex SoS
    developmental effort involving 18 integrated platforms and a common
    network. System or platform level requirements will stabilize prior to
    entering the program's initial preliminary design review at the SoS
    level.
                                     ______

                   Questions Submitted by Senator Bill Nelson
                                fair competition
        78. Senator Bill Nelson. Secretary Bolton, from time to time my
    office will receive complaints or allegations that the FCS program and
    LSI are not small business ``friendly'' or that development and
    selection of subsystem technologies are structured in a way that may,
    in effect, unfairly advantage one company over all others. What
    oversight systems does the Army have in place to ensure that the
    program is meeting requirements in law and regulation regarding
    opportunities for small businesses and promotion of free, fair, and
    open competition?
        Mr. Bolton. From a program oversight perspective, a centralized
    database has been developed and all FCS contractors and suppliers must
    submit their small business performance data semiannually. This
    database allows the Government to track and assess performance data,
    historical data, and supplier profile information in order to ensure
    fair and open competition as well as to ensure maximum small business
    participation is achieved.
        The LSI has established a collaborative and dedicated team, the
    Diversity Advocacy Round Table, to ensure an integrated approach is
    executed among the LSI and large business industrial partners to
    achieve the FCS program small business goals. Their outreach efforts
    include participating in a variety of forums such as: disadvantaged
    business conferences and trade fairs, the National Veterans Small
    Business Conference, National HUB Zone Small Business Conference, and
    the Minority Enterprise Development Week to name a few.
        In addition, the LSI has formed the One Team Council with its first
    tier subcontractors to ensure maximum small business participation is
    achieved. The One Team Council is composed of top Army officials, LSI
    executives, program office personnel, functional proponents, and other
    key personnel. An FCS Web site has also been created. This Web site is
    used by LSI and its partners to post business opportunities, identify
    subcontracting opportunities, as well as promote transparency in the
    process.

        79. Senator Bill Nelson. Mr. Francis, what is the GAO's assessment
    of the FCS program's compliance with law and regulation regarding
    access and opportunities for small businesses?
        Mr. Francis. The contract sets forth the Army's goals for
    subcontracting to small businesses. The Army hopes to award 25.5
    percent of subcontracted dollars to small businesses and states that
    Boeing should endeavor to reach this goal. The contract also allows
    small business subcontractors to request payments more often than the
    standard of every 2 weeks. It also asks that the LSI report
    periodically on its efforts to include small businesses in subcontract
    awards. We have not yet fully analyzed the new FCS contract and its
    execution of these clauses.

        80. Senator Bill Nelson. Mr. Francis, what is the GAO's assessment
    of the FCS program's promotion and execution of free, fair, and open
    competition across objective technologies and subsystems?
        Mr. Francis. The Army's acquisition strategy for the FCS program
    calls for a significant amount of competition at the level of
    individual systems and technologies within the overall system of
    systems. We have yet to further evaluate the program's execution of
    this issue.
                                     ______

      Questions Submitted by Senators John McCain and Joseph I. Lieberman
                          uh-60m black hawk helicopter
        81. Senator McCain and Senator Lieberman. Secretary Bolton, last
    year Congress authorized multiyear procurement authority for the
    acquisition of Black Hawk helicopters. We note that fiscal year 2006
    budget justification documentation indicated that the Army would
    acquire 351 Black Hawks over the fiscal years 2007-2011 time frame.
    Fiscal year 2007 budget justification documentation indicates that the
    Army intends to acquire only 273 Black Hawks over the fiscal years
    2007-2011 time frame. This concerns us. What is the impact of the
    fiscal year 2007 budget request for Black Hawk helicopters on the
    multiyear contract and unit cost of the Black Hawk helicopter?
        Mr. Bolton. The Army will continue to leverage the multiyear
    procurement authority authorized in the fiscal year 2006 budget. A
    joint multiyear multiservice contract has been approved for the
    procurement of UH-60M, MH-60S, and MH-60R aircraft. The annual
    quantities to be procured under this multiyear contract will result in
    the cost avoidance associated with the multiyear buy since the joint
    program maintains a steady business base for Sikorsky Aircraft Company
    during the fiscal years 2007-2011 time frame. While the quantities for
    UH-60M have been reduced as a result of the addition of the upgrade
    program and Army budget cuts, the multiyear contract and the associated
    cost avoidance are still realized with the reduced UH-60M quantities.

        82. Senator McCain and Senator Lieberman. Secretary Bolton, does
    the Army expect to receive additional Black Hawk helicopters as an
    earmark?
        Mr. Bolton. Congress has consistently provided supplemental funding
    for the procurement of Black Hawk aircraft. The Army does not expect to
    receive additional Black Hawk helicopters as an earmark; but the
    aircraft losses due to the warfight could result in future supplemental
    requests for Black Hawk aircraft.

        83. Senator McCain and Senator Lieberman. General Cody, are Black
    Hawk helicopters on the fiscal year 2007 Chief of Staff of the Army's
    unfunded requirements list? If not, why not?
        General Cody. No. The Army is on track to fill its UH-60 shortages
    by fiscal year 2009.

        84. Senator McCain and Senator Lieberman. Secretary Bolton, how
    many Black Hawk helicopters have been lost in OIF and OEF and has the
    Army funded or requested funding for these battle losses?
        Mr. Bolton. There have been a total of 28 battle-related losses. Of
    these 28 aircraft, 27 aircraft have been replaced through congressional
    marks and fiscal years 2004-2006 supplemental funding.

        85. Senator McCain and Senator Lieberman. Secretary Bolton, the
    Director, Operational Test and Evaluation Fiscal Year 2005 Annual
    Report notes that the UH-60 Black Hawk program has technical risks
    include digital interoperability and reliability. Has the Army
    requested funding in the fiscal year 2007 budget request to address
    these technical risks?
        Mr. Bolton. The Army Aviation digital interoperability requirements
    solidified during 2005 and the UH-60M program is funded to address all
    of these requirements to include Blue Force Tracker and The Army
    Tactical Communications System (ATCS). No additional funding is
    requested. The Blue Force Tracker system is in the low rate initial
    production configuration and will be exercised at the initial
    operational test (IOT) which is scheduled for October 2006. The ATCS,
    which consists of two SINCGARS (ARC-201D) radios and two Multi-Mode
    Multi-Band radios (ARC-23I) will be integrated on all full rate
    production aircraft which will be procured in fiscal year 2007 and
    support the fiscal year 2008 first unit equipped. Both configurations
    will comply with interoperability requirements in the JCIDS approved
    ORD. The Black Hawk is following the same interoperability migration
    plan as other Army aviation platforms and will continue to track to
    emerging requirements.
        With respect to reliability, the data from the most recent scoring
    conference indicates that the UH-60M aircraft is well-established on
    the reliability growth curve and will demonstrate compliance with
    requirements during IOT. No additional funding is requested, the
    program is adequately funded to track and also improve reliability
    further. The component data is continuously evaluated to identify high
    priority cost and maintenance issues. Future reliability improvements
    will be included in production as they are identified and qualified. In
    2005, the Defense Acquisition Executive authorized the Army to build
    all new UH-60M vice remanufacturing older UH-60As which will result in
    even further improvements to system reliability metrics.

        86. Senator McCain and Senator Lieberman. Secretary Bolton, the
    committee understands that the Army is procuring ATCS to provide
    alternative communications because of the delay in the Joint Tactical
    Radio System (JTRS) program. We understand that these radios are analog
    and will not be interoperable with ground forces. Will the radios
    procured under this program be interoperable with the current Army
    digital architecture? If not, what is your plan to make ground and
    aviation assets interoperable?
        Mr. Bolton. In response to the JTRS program delay, the Commanding
    General (BG Sinclair), United States Army Aviation Warfighting Center,
    issued a memorandum subject ``Joint Tactical Radio System Interim
    Radios,'' dated 16 May 2005 which defined the aviation requirements
    until JTRS becomes available. The PEO Aviation implementation of the
    requirement was defined in a 1 December 2005 memorandum, subject:
    ``Alternative Communications (Alt Comms) radios to Meet Waveform
    Requirements.'' The ATCS or Alt Comms program was established to meet
    the interim communication requirements due to the delays of the JTRS
    program. ATCS consists of two SINCGARS (ARC-201D) radios and two Multi-
    Mode Multi-Band radios (ARC-231) with digital capability. The Improved
    Data Modem (IDM) currently installed on Army aviation helicopters
    provides interfaces that ensure analog to digital interoperability with
    Army ground forces. The ARC-201D is fully interoperable with the Ground
    SINCGARS. The ARC-231 is fully interoperable with the legacy air
    traffic control system, Havequick (ARC-164), and ground satellite
    communications (SATCOM) terminals (LST-5, PST 5C/D, PRC-148, and PRC-
    117F). In addition, the ARC-231 meets future air traffic control
    requirements (8.33 KHz channel spacing) and provides land mobile radio
    communications allowing interoperability with the police/fire/rescue
    and homeland security communities.
        Army aviation is interoperable with the current Army digital
    architecture and will maintain future interoperability within the DOD
    by adding JTRS and future digital waveforms as they become available.
    Army aviation is committed to ensuring that interoperability is
    maintained with the current and future force.

        [Whereupon, at 4:27 p.m., the subcommittee adjourned.]

    DEPARTMENT OF DEFENSE AUTHORIZATION FOR APPROPRIATIONS FOR FISCAL YEAR
                                      2007

                                  ----------

                            TUESDAY, MARCH 28, 2006

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

                 AIR FORCE AND NAVY TACTICAL AVIATION PROGRAMS

        The subcommittee met, pursuant to notice, at 2:40 p.m. in
    room SR-232A, Russell Senate Office Building, Senator John
    McCain (chairman of the subcommittee) presiding.
        Committee members present: Senators McCain, Inhofe, and
    Chambliss.
        Majority staff members present: Ambrose R. Hock,
    professional staff member; Gregory T. Kiley, professional staff
    member; and Stanley R. O'Connor, Jr., professional staff
    member.
        Minority staff members present: Richard D. DeBobes,
    Democratic staff director; and Creighton Greene, professional
    staff member.
        Staff assistants present: Micah H. Harris and Jessica L.
    Kingston.
        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; 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. The Airland Subcommittee meets today. I
    want to apologize to the witnesses for being late. There are a
    lot of things that are going on in the Senate these days.
        The subcommittee meets today to receive testimony on Air
    Force and Navy tactical aviation programs. The hearing will be
    conducted in two panels. The first will testify on the Air
    Force proposal to incrementally fund the multiyear procurement
    of the F-22 and enter into a multiyear procurement contract for
    60 aircraft beginning in fiscal year 2007. The second panel
    will testify on the Joint Strike Fighter's (JSF) progress
    through the systems development and demonstration phase of the
    program with regard to cost, schedule, and performance.
        The subcommittee is also interested in hearing testimony on
    the proposed termination of the F136 alternate engine program.
    Most of our witnesses will describe how, historically,
    competition results in lower acquisition costs for engines,
    better responsiveness from the contractors, and also better
    readiness for the warfighter. The subcommittee is interested in
    hearing about that issue today.
        I will make the remainder of my statement part of the
    record.
        [The prepared statement of Senator McCain follows:]
                   Prepared Statement by Senator John McCain
        The Airland Subcommittee meets today to receive testimony on Air
    Force and Navy tactical aviation programs. The hearing will be
    conducted in two panels. The first panel will testify on the Air Force
    proposal to incrementally fund the multiyear procurement of the F-22
    and enter into a multiyear procurement contract for 60 aircraft
    beginning in fiscal year 2007.
        The second panel will testify on the Joint Strike Fighter's (JSF)
    progress through the systems development and demonstration phase of the
    program with regard to cost, schedule, and performance. The
    subcommittee is also interested in hearing testimony on the proposed
    termination of the F136 Alternate Engine Program. Most of our witnesses
    will describe how historically competition resulted in lower
    acquisition costs for engines, and better responsiveness from the
    contractors, but most importantly, better readiness for the warfighter.
    The subcommittee is interested in hearing why such benefits are not
    achievable today for the JSF competitive engine environment.
        The F-22 represents the Air Force's top priority for providing the
    military with air dominance and cruise missile defense for the next 20-
    plus years. However, all of this capability comes with a cost, and the
    F-22 must compete with other weapons systems within the defense budget.
    Looking at the Air Force's desire to procure F-22s, JSFs, C-130Js,
    Joint Cargo Aircraft, a replacement tanker for the KC-135, just to name
    a few of the major Air Force procurement programs, one begins to wonder
    how we're going to pay for it all. Now, it appears, the Department has
    come to the same realization by proposing an incremental funding scheme
    for its proposed multiyear procurement of the F-22. With that proposal,
    the Air Force seeks to restructure the procurement profile to 20
    aircraft per year for a 3-year multiyear procurement of 60 aircraft.
        Under current law, the Air Force can't incrementally fund a
    multiyear procurement contract. So, in order for the Air Force to do so
    here, the Air Force needs legislative relief. But, the last time the
    Air Force came to Congress with a proposal to incrementally fund the
    multiyear procurement of aircraft (regarding the C-17 cargo aircraft),
    that proposal was rejected. It is not clear to me why the same result
    should not be obtained here. In this case, the Air Force is initially
    requesting incremental funding to pay for only components of the
    aircraft and, at the same time, excludes funding for cancellation
    liability. Why would Congress agree to this? Under this approach,
    Congress would have to authorize and appropriate more money--more money
    than it originally authorized--to either get completed, fully
    functional aircraft or cancel them. In my mind, the Air Force needs to
    state a case that justifies why Congress would want to hamstring itself
    on the F-22 program in that way. In my view, where the current
    acquisition environment counsels visibility, transparency, and
    simplicity, that justification should be just about overwhelming.
        Although I appreciate that Congress has approved incremental
    funding for other defense programs, such as certain Navy ships, we have
    never authorized incremental funding for aircraft. For instance,
    Congress authorized incremental funding for the LHD-8 amphibious ship
    and CVN-78 nuclear power aircraft carrier because it takes 7 and 9
    years respectively to build these multibillion ships. Aircraft, on the
    other hand--even ones as costly as the F-22--are less expensive than
    Navy ships and they are easier to budget for in full. Budgetary
    constraints can be accommodated by purchasing fewer aircraft in a given
    year rather than by funding only a part of the cost of the aircraft.
        I am also concerned about whether the Air Force's proposal to
    acquire F-22s under a multiyear procurement contract complies with the
    requirements of the Federal multiyear procurement statute: Title 10
    United States Code section 2306b. Among other things, this statute
    provides that: ``The Secretary of Defense may obligate funds for
    procurement of an end item under a multiyear contract for the purchase
    of property only for procurement of a complete and usable end item.''
        I believe the intent of Congress is very clear on this subject:
    full funding within each fiscal year of the multiyear contract.
        Setting the incremental funding scheme aside, the statute also
    requires the Air Force to provide Congress with a Business Case
    Analysis that shows that entering into a multiyear procurement contract
    results in ``substantial savings'' as compared to procurement through a
    series of annual contracts. In this case, the Business Case Analysis
    has not yet been completed. Accordingly, it is premature for Congress
    to consider this proposal until that requirement has been completed and
    fully ventilated in the authorizing committees.
        Among the concerns that will be conveyed today is the fact that the
    Air Force F-22 funding plan does not request appropriations sufficient
    to cover the potential cancellation liability--thus not offering
    sufficient protections for the taxpayer. This sounds all too familiar,
    and there is a record of this similar funding scheme that was proposed
    in the Boeing 767 tanker scandal.
        In his written testimony, Air Force General Hoffman advocates a
    ``back to basics approach in how we do acquisitions.'' While I
    appreciate the sentiment, in my view, I see nothing ``basic'' in the
    Air Force's proposal to acquire F-22 aircraft under a multiyear
    procurement contract. Like other acquisition methodologies that have
    proved so problematic in the past, the Air Force's proposal is opaque
    and Byzantine. To date, the case as to why we should revert to an
    acquisition methodology that actually limits visibility and
    accountability has not been persuasive.
        I expect that some of today's witnesses will convey concern that
    incrementally funding a multiyear procurement contract and underfunding
    cancellation liability on a multibillion dollar procurement program are
    moves in the wrong direction. I look forward to hearing the Air Force's
    response to those concerns today.
        Deferring recognition of the full cost of the F-22 would understate
    the nature of the government's obligations; potentially distorting
    budgetary choices by making the program appear less expensive than it
    is--and certainlly is not a return to the back to basics approach which
    the taxpayer should be guarenteed.
        I want to welcome our witnesses in the first panel . . . Lieutenant
    General Hoffman, Military Deputy, Office of the Assistant Secretary of
    the Air Force for Acquisition; Michael Sullivan, Director, Acquisition
    and Sourcing Management at the Government Accountability Office; Donald
    Marron, Acting Director at the Congressional Budget Office; and
    Christopher Bolkcom, Senior Specialist in National Defense at the
    Congressional Research Service. We greatly appreciate all you giving us
    your time for this very important hearing.
        I want to welcome our witnesses in the second panel . . . Rear
    Admiral Kilcline, Navy Director, Air Warfare; Rear Admiral Enewold,
    Program Executive Officer, Joint Strike Fighter Program; Michael
    Sullivan, Director, Acquisition and Sourcing Management at the
    Government Accountability Office; and Christopher Bolkcom, Senior
    Specialist in National Defense at the Congressional Research Service.
    Again, we greatly appreciate all you giving us your time for this
    hearing.

        Senator Chambliss. Mr. Chairman, I have no opening
    statement. I look forward to hearing our witnesses.
        Senator McCain. Good.
        Our witnesses today, our first panel, are Michael Sullivan,
    who is the Director of the Acquisitions and Sourcing Management
    Team at the United States Government Accountability Office
    (GAO); Donald Marron, who's the acting Director of the
    Congressional Budget Office (CBO), Christopher Bolkcom, who is
    a Senior Specialist in National Defense in the Congressional
    Research Service (CRS); and Lieutenant General Donald Hoffman,
    U.S. Air Force, who is the Military Deputy of the Office of the
    Assistant Secretary of the Air Force for Acquisition.
        Welcome. We'll begin with you, Mr. Sullivan.

      STATEMENT OF MICHAEL J. SULLIVAN, DIRECTOR, ACQUISITION AND
          SOURCING MANAGEMENT TEAM, UNITED STATES GOVERNMENT
                         ACCOUNTABILITY OFFICE

        Mr. Sullivan. Thank you, Mr. Chairman, and members of the
    subcommittee.
        I'm privileged to be here today to discuss the status of
    two of the Department's major tactical aircraft programs, the
    F-22A and the JSF.
        Senator McCain. If you could bring that microphone a little
    closer, so that we can hear you.
        Mr. Sullivan. Okay?
        Senator McCain. I think so. Lift it up. Lift it up just a
    little bit. There you go.
        Mr. Sullivan. Okay.
        Senator McCain. Thank you.
        Mr. Sullivan. Mr. Chairman, these programs represent an
    investment estimated at about $320 billion today; and, in
    fiscal year 2007 alone, the budget request for both will be
    about $8 billion.
        I'll summarize my remarks here and ask that the full
    statement be submitted for the record.
        Any discussion of the significance of the Department's
    investment in these two weapons systems demands that it be
    placed in the larger national context. Current fiscal
    imbalances and competing national needs will continue to
    constrain discretionary spending for years to come, and the
    Department will not be immune to those constraints.
        That said, over the past 5 years the Department of Defense
    (DOD) has doubled planned investments in new weapons systems
    from about $700 billion in 2001 to nearly $1.4 trillion in
    2006. At the same time, development cost on a typical major
    weapons system development continues to be about 30 to 40
    percent. Given the larger context that I describe, this cannot
    continue.
        My testimony today focuses on the current tactical aircraft
    capitalization efforts, the current status of these two
    programs' business cases, and potential options for
    recapitalizing the force moving forward.
        There are still many unanswered questions about whether the
    Department can achieve its goals for modernizing its aging
    tactical air forces. In recent testimony, the Secretary of
    Defense stated that continued U.S. air dominance and
    flexibility depends on a recapitalized force. However, the 2006
    Quadrennial Defense Review (QDR) report did not present a
    detailed investment strategy that measures needs, gaps, and
    affordability for that force.
        Right now, the Department plans to replace legacy aircraft,
    that are in the field today, with about 1,300 fewer new
    aircraft, later than it had originally planned, resulting in
    increasing maintenance costs for those legacy aircraft.
        Regarding the F-22A, the program does not currently have
    what we would call an executable business case, which we define
    as firm requirements, sufficient quantities, mature
    technologies, realistic estimates, and sufficient funding.
        Since development began, in 1986, requirements have been
    added, cost has increased, and quantities have been reduced.
    The current stated need by the Air Force is for 381 aircraft to
    satisfy air-to-air missions, and recently added air-to-ground
    attack and intelligence capabilities. However, due to past cost
    overruns and current budget constraints, the Department can now
    only afford 183 F-22As. This leaves a 198-aircraft gap.
        In addition, the Department's latest proposal for multiyear
    procurement of 60 aircraft over 3 years, beginning in 2008,
    requires almost $2.5 billion in fiscal years 2006 and 2007 to
    frontload that procurement.
        Regarding the JSF, the program's business case still
    includes significant cost and schedule risk that continues to
    jeopardize timely recapitalization efforts. The program plans
    to begin procuring aircraft in 2007, with less than 1 percent
    of the flight test program completed. By the time the fully
    integrated aircraft flies for the very first time, in 2011, the
    program will already have procured 190 aircraft for about $26
    billion. By the time flight test is complete, the program will
    have procured over 420 aircraft for almost $50 billion. Because
    of the risk associated with this strategy, the program plans to
    procure those aircraft using a cost-type contracting
    arrangement.
        Also, because of affordability concerns overall in the
    Department, the Department is proposing termination of a
    competitive engine development program, to save about $1.8
    billion over the next several years.
        Despite these substantial setbacks, we believe the
    Department can reduce risk in its current acquisitions and
    recapitalize the aging force sooner if it changes the way it
    executes its business cases. Before procuring more F-22A
    aircraft, the Air Force and the Secretary of Defense must agree
    on a business case for an appropriate quantity of F-22As that
    both satisfies current needs and is affordable, given today's
    budget realities.
        The JSF program should consider adjusting its business case
    to reduce risk by allowing more time for flight testing prior
    to starting procurement. More testing prior to buying aircraft
    may ultimately allow sooner delivery of greater quantities to
    replace aging aircraft. Requirements for undemonstrated
    technology should be deferred and managed separately.
        Finally, at a broader level, the Department needs more
    discipline and controls in its acquisition process to ensure
    realistic business cases that can be executed more efficiently.
    This may require a new look at policy, and perhaps statute.
        In conclusion, despite the Department's repeated
    declaration that recapitalizing the aging tactical air forces
    is a top priority, it continues to follow an acquisition
    strategy that results in higher costs, lower quantities, and
    late deliveries. This strategy must change, particularly given
    today's fiscal and national security realities.
        Mr. Chairman, that concludes my remarks. I'll be happy to
    try to answer any questions you or the other members may have.
        [The prepared statement of Mr. Sullivan follows:]
                   Prepared Statement by Michael J. Sullivan
        Mr. Chairman and members of the subcommittee: I am pleased to be
    here today to participate in the subcommittee's hearing on the
    Department of Defense's (DOD) tactical air forces, including two of its
    major tactical aircraft fighter programs--the F-22A 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 together represent a significant
    investment--currently estimated at almost $320 billion--for DOD. To
    date nearly $75 billion has been appropriated for these programs, and
    based on current plans, they represent a potential future investment of
    about $245 billion over the next 20 years. In fiscal year 2007 alone,
    the budget request under consideration for these programs represents
    over $8 billion. Given the large potential investment that the F-22A
    and JSF programs represent, decisions based on fact and knowledge about
    needs and resources are key to ensure that sound program investments
    are made.
    ---------------------------------------------------------------------------
        \1\ The third major program, the F/A-18E/F, currently in
    production, is not a subject of this testimony.
    ---------------------------------------------------------------------------
        Any discussion of the significance of DOD's investment in these two
    weapon systems demands that they be placed in the larger context.
    Fiscal imbalances and competing national needs will continue to
    constrain discretionary spending for years to come. Over the past 5
    years, the department has doubled its planned investments in new weapon
    systems from about $700 billion in 2001 to nearly $1.4 trillion in
    2006. At the same time, research and development cost growth on new
    weapons continues to be about 30 to 40 percent. This is how one must
    view major new investments, such as the F-22A and JSF, because more
    money may not be an option for the future. Rather, the key to getting
    better outcomes is to make individual programs more executable.
        We have reported and testified in the past on the disappointing
    outcomes of DOD's acquisitions of tactical aircraft and other major
    weapon systems (see GAO Related Products). DOD's budgeting plans and
    the reality of the costs of its systems have been vastly different.
    Performance--if defined as the capability that actually reaches the
    warfighter--tends to fall short of expectations, as cost increases
    often result in late deliveries of smaller quantities of weapon
    systems. DOD has lost opportunities and buying power in the process.
    Last year, we testified that weaknesses in the F-22A and JSF programs
    raised questions as to whether DOD's overarching tactical aircraft
    recapitalization goals were achievable.\2\
    ---------------------------------------------------------------------------
        \2\ GAO, Tactical Aircraft: F/A-22 and JSF Acquisition Plans and
    Implications for Tactical Aircraft Modernization, GAO-05-519T
    (Washington, DC: Apr. 6, 2005).
    ---------------------------------------------------------------------------
        My testimony today focuses on: (1) the extent to which the current
    F-22A and JSF business cases are executable, (2) the current status of
    DOD's tactical aircraft recapitalization efforts, and (3) potential
    options for recapitalizing the air forces as DOD moves forward with its
    tactical aircraft recapitalization efforts. We performed our work in
    accordance with generally accepted government auditing standards.
                                    summary
        DOD currently does not have an executable business case for buying
    the F-22A. Over the 19 years that the aircraft has been in development,
    the world has changed and the capabilities the Air Force once needed
    and planned for the F-22A no longer satisfy today's needs. The Air
    Force's current stated need is for 381 F-22As to satisfy original air-
    to-air missions and recently added requirements for more robust air-to-
    ground attack and intelligence-gathering capabilities. However, because
    of past cost overruns and current budget constraints, DOD can now
    afford only 183 F-22As. This leaves a 198-aircraft gap between the Air
    Force's stated need and what the acquisition process is able to
    deliver. DOD's business case for the JSF program still includes
    significant cost and schedule risk that continues to jeopardize timely
    recapitalization of the tactical force. We recently reported that DOD
    plans to begin procuring large quantities of aircraft in 2007 with less
    than 1 percent of the flight test program completed.\3\ By 2010, it
    expects to have procured 126 aircraft with only 35 percent of the
    flight test program completed. Concurrently testing and procuring the
    aircraft adds to the program's cost and schedule risks, further
    weakening DOD's buying power and jeopardizing its ability to
    recapitalize its aging tactical air force in a timely and efficient
    manner.
    ---------------------------------------------------------------------------
        \3\ GAO, Joint Strike Fighter: DOD Plans to Enter Production before
    Testing Demonstrates Acceptable Performance, GAO-06-356 (Washington DC:
    March 15, 2006).
    ---------------------------------------------------------------------------
        As there were last year at this time, there are many unanswered
    questions about whether DOD can achieve its overarching goals for
    modernizing its aging tactical air forces. In recent testimony on the
    results of the department's 2006 Quadrennial Defense Review (QDR), the
    Secretary of Defense stated that continued U.S. air dominance depends
    on a recapitalized fleet. However, DOD's 2006 QDR report, issued last
    month, did not present a detailed investment strategy for tactical
    aircraft systems that addressed needs, capability gaps, alternatives,
    and affordability. Lacking a strategy that identifies capability gaps
    and affordable alternatives, DOD cannot reasonably ensure that new
    tactical air capabilities will be delivered to the warfighter within
    cost and schedule targets. Right now, DOD plans to replace legacy
    aircraft with about 1,400 fewer new major tactical systems than it had
    originally planned--almost a one-third reduction in quantities.
    Additionally, delivery of these new systems has lagged far behind
    original plans, increasing operating costs to keep legacy aircraft
    relevant and in the inventory longer than expected and delaying
    delivery of needed capabilities to the warfighter.
        Despite these substantial setbacks, we believe DOD can reduce cost
    risk on its current acquisitions and deliver needed capabilities more
    quickly. This could allow it to recapitalize the aging tactical air
    force sooner and reduce costs to maintain the current inventory. To do
    so, however, DOD must rethink the business cases for the F-22A and JSF
    programs. Before procuring more F-22A aircraft, the Air Force and the
    Office of the Secretary of Defense should agree on a business case for
    the appropriate quantity of F-22A aircraft that: (1) satisfies current
    Air Force needs and (2) is affordable given today's budget realities.
    The JSF acquisition program can reduce cost and schedule risks by
    adopting a new knowledge-based business case. The JSF program should
    delay production and investments in production capability until the
    aircraft design qualities and integrated mission capabilities of the
    fully configured and integrated JSF aircraft variants have been proven
    to work in flight testing. DOD should also develop a knowledge-based
    business case that matches requirements with proven technologies,
    design knowledge, and available funding. Capabilities that demand
    technological advances which are not yet demonstrated should be part of
    future increments that are funded and managed separately once
    demonstrated. With such an approach DOD could enter low-rate production
    sooner and deliver a useful product in sufficient quantities to start
    replacing DOD's aging tactical aircraft force. The F-16 acquisition
    program provides strong precedent for this type of acquisition
    strategy. It began delivering aircraft in 4 years and within predicted
    costs. GAO recommended these actions in a recent JSF report and DOD
    agreed that these were appropriate things to do but it believed its
    current acquisition strategy will allow it to achieve the JSF program
    objectives.
        Finally, at a broader level, DOD needs to apply more discipline and
    controls to establish realistic business cases for acquisition programs
    and then execute them more efficiently. This may require a new look at
    policies and perhaps statute.
                                   background
        Over the past 20 years, DOD has been engaged in an effort to
    modernize its aging tactical aircraft force. The F-22A and JSF, along
    with the F/A-18E/F,\4\ are the central elements of DOD's overall
    recapitalization strategy for its tactical air forces. The F-22A was
    developed to replace the F-15 air superiority aircraft. The continued
    need for the F-22A, the quantities required, and modification costs to
    perform its mission have been the subject of a continuing debate within
    DOD and Congress. Supporters cite its 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.\5\
    Critics argue that the Soviet threat it was originally designed to
    counter no longer exists and that its remaining budget dollars could be
    better invested in enhancing current air assets and acquiring new and
    more transformational capabilities that will allow DOD to meet evolving
    threats. Its fiscal year 2007 request includes $800 million for
    continuing development and modifications for aircraft enhancements such
    as equipping the F-22A with an improved ground attack capability and
    improving aircraft reliability. The request also includes about $2.0
    billion for advance procurement of parts and funding of subassembly
    activities for the initial 20 aircraft of a 60-aircraft multiyear
    procurement.
    ---------------------------------------------------------------------------
        \4\ The F/A-18E/F, which began development in 1992, evolved from
    the F/A-18 aircraft program and has been in production since 1997.
    Currently, the program is producing aircraft under its second multiyear
    contract. Because of the maturity of the F/A-18E/F program, we did not
    review it for this engagement.
        \5\ 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.
    ---------------------------------------------------------------------------
        JSF is a replacement for a substantial number of aging fighter and
    attack aircraft currently in the DOD inventory. For the Air Force, it
    is intended to replace the F-16 and A-10 while complementing the F-22A.
    For the Marine Corps, the JSF is intended to replace the AV-8B and F/A-
    18A/C/D; for the Navy, the JSF is intended to complement the F/A-18E/F.
    DOD estimates that as currently planned, it will cost $257 billion to
    develop and procure about 2,443 aircraft and related support equipment,
    with total costs to maintain and operate JSF aircraft adding $347
    billion over the program's life cycle. After 9 years in development,
    the program plans to deliver its first flight test aircraft later this
    year. The fiscal year 2007 budget request includes $4 billion for
    continuing development and $1.4 billion for the purchase of the first 5
    procurement aircraft, initial spares, and advance procurement for 16
    more aircraft to be purchased in 2008.
        We have frequently reported on the importance of using a sound,
    executable business case before committing resources to a new product
    development. In its simplest form, such a business case is evidence
    that (1) the warfighter's needs are valid and can best be met with the
    chosen concept and quantities, and (2) the chosen concept can be
    developed and produced within existing resources--that is, proven
    technologies, design knowledge, adequate funding, and adequate time to
    deliver the needed product. At the heart of a good business case is a
    knowledge-based strategy to product development that demonstrates high
    levels of knowledge before significant commitments of time and money
    are made.
      f-22a and jsf acquisition business cases still include considerable
                                     risks
        The future of DOD's tactical aircraft recapitalization depends
    largely on the outcomes of the F-22A and JSF programs--which represent
    about $245 billion in investments to be made in the future. Yet
    achieving expected outcomes for both these programs continues to be
    fraught with risk. We have reported that the F-22A's original business
    case is unexecutable and does not reflect changing conditions over
    time. Currently, there is a significant mismatch between the Air
    Force's stated need for F-22A aircraft and the resources the Office of
    the Secretary of Defense (OSD) is willing to commit. The business case
    for the JSF program, which has 90 percent of its investments still in
    the future, significantly overlaps production with development and
    system testing--a strategy that often results in cost and schedule
    increases. Both programs are at critical junctures that require DOD to
    make important business decisions.
    Matching F-22A Requirements and Resources Is Crucial to Future
            Recapitalization Investment Decisions
        According to the Air Force, a minimum of 381 modernized F-22A
    aircraft are needed to satisfy today's national strategic requirements
    \6\--a buy that is roughly half the 750 aircraft originally planned,
    but more than double the 183 aircraft OSD states available funding can
    support. Since the Air Force began developing the F-22A in 1986, the
    business case for the program has changed radically--threats have
    changed, requirements have been added, costs have increased, funds have
    been added, planned quantities have been reduced, and deliveries of the
    aircraft to the warfighter have been delayed. There is a 198-aircraft
    capability gap today. Decisions in the last 2 years have worsened the
    mismatch between Air Force requirements and available resources,
    further weakening the F-22A program's business case. Without a new
    business case, an agreement on an appropriate number of F-22As for our
    national defense, it is uncertain as to whether additional investments
    in the program are advisable.
    ---------------------------------------------------------------------------
        \6\ The Air Force states a need for one squadron of 24 F-22A
    aircraft for each of the 10 Air Expeditionary Forces, the planned
    organization of the Air Force aircraft and personnel for operations and
    deployments. This equates to 240 aircraft. The remaining 141 aircraft
    are needed for training, and attrition, and to allow for periodic depot
    maintenance required for each aircraft. The Air Force states that if
    all 381 aircraft are acquired, the Air Force could retire about 566
    legacy aircraft; if not, several billions of modification dollars will
    be required to extend their structural life to keep them operational.
    ---------------------------------------------------------------------------
        The original business case for the F-22A program was to develop air
    superiority fighters to counter a projected threat of significant
    quantities of advanced Soviet fighters. During the 19-year F-22A
    development program, that threat did not materialize to the degree
    expected. Today, the requirements for the F-22A have evolved to include
    what the Air Force has defined as a more robust ground attack
    capability to destroy expected air defense systems and other ground
    targets and an intelligence-gathering capability. However, the
    currently configured F-22A is not equipped to carry out these roles
    without further investments in its development. The F-22As
    modernization program is currently being planned for three basic
    blocks, or spirals, of increasing capability to be developed and
    delivered over time. Current Air Force estimates of modernization
    costs, from 2007 through 2016, are about $4.3 billion. Additional
    modernization is expected, but the content and costs have not been
    determined or included in the budget.
        OSD has restructured the acquisition program twice in the last 2
    years to free up funds for other priorities. In December 2004, DOD
    reduced the program to 179 F-22As to save about $10.5 billion. This
    decision also terminated procurement in 2008. In December 2005, DOD
    changed the F-22A program again, adding $1 billion to extend production
    for 2 years to ensure a next-generation fighter aircraft production
    line would remain in operation in case JSF experienced delays or
    problems. It also added 4 aircraft for a total planned procurement of
    183 F-22As. As part of the 2005 change, aircraft previously scheduled
    in 2007 will not be fully funded until 2008 or later.
        OSD and the Air Force plan to buy the remaining 60 F-22As in a
    multiyear procurement that would buy 20 aircraft a year for 3 years--
    2008 through 2010. The Air Force plans to fund these aircraft in four
    increments--an economic order quantity to buy things cheaper; advanced
    procurement for titanium and other materials and parts to protect the
    schedule; subassembly; and final assembly. The Air Force plans to
    provide Congress a justification for multiyear procurement in May 2006
    and the fiscal year 2007 President's budget includes funds for
    multiyear procurement. The following table shows the Air Force's plan
    for funding the multiyear procurement. Air Force officials have told us
    that an additional $400 million in funds are needed to complete the
    multiyear procurement and that the accelerated schedule to obtain
    approval and start the effort adds risk to the program, creating more
    weaknesses in the current F-22A business case.

                                  TABLE 1: F-22A PROPOSED MULTIYEAR PROCUREMENT FUNDING
                                                [In millions of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                                                      Fiscal Year
                                             ------------------------------------------------------------    Total
                                                2006      2007      2008      2009      2010      2011
    ----------------------------------------------------------------------------------------------------------------
    Lot 7 Buy
      Economic Order Quantity...............  ........     200.0  ........  ........  ........  ........       200.0
      Advance Procurement...................     569.2  ........  ........  ........  ........  ........       569.2
      Subassembly...........................  ........   1,503.9  ........  ........  ........  ........     1,503.9
      Final Assembly........................  ........  ........   1,362.4  ........  ........  ........     1,362.4
      Other Cost............................  ........      68.1  ........  ........  ........  ........        68.1
                                             -----------------------------------------------------------------------
        Subtotal............................    $569.2  $1,772.0  $1,362.4  ........  ........  ........    $3,703.6
    ----------------------------------------------------------------------------------------------------------------
    Lot 8 Buy
      Advance Procurement...................  ........     277.4  ........  ........  ........  ........       277.4
      Subassembly...........................  ........  ........   1,433.3  ........  ........  ........     1,433.3
      Final Assembly........................  ........  ........  ........   1,342.8  ........  ........     1,342.8
      Other Cost............................  ........  ........      47.4  ........  ........  ........        47.4
                                             -----------------------------------------------------------------------
        Subtotal............................  ........    $277.4  $1,480.7  $1,342.8  ........  ........    $3,100.9
    ----------------------------------------------------------------------------------------------------------------
    Lot 9 Buy
      Advance Procurement...................  ........  ........     366.6  ........  ........  ........       366.6
      Subassembly...........................  ........  ........  ........   1,515.7  ........  ........     1,515.7
      Final Assembly........................  ........  ........  ........  ........   1,694.5  ........     1,694.5
      Other Cost............................  ........  ........  ........      48.3      16.2      12.9        77.4
                                             -----------------------------------------------------------------------
        Subtotal............................  ........  ........    $366.6  $1,564.0  $1,710.7     $12.9    $3,654.2
    ----------------------------------------------------------------------------------------------------------------
          Total.............................    $569.2  $2,049.4  $3,209.7  $2,906.8  $1,710.7     $12.9   $10,458.7
    ----------------------------------------------------------------------------------------------------------------
    Source: DOD data.
    Note: Other cost includes funding for modifications and munitions.

        A 198-aircraft gap between what the Air Force needs and what is
    affordable raises questions about what additional capabilities need to
    be included in the F-22A program. In March 2005, we recommended that
    the Air Force develop a new business case that justified additional
    investments in modernizing the aircraft to include greater ground
    attack and intelligence-gathering capabilities before moving forward.
    DOD responded to our report that business case decisions were handled
    annually in the budget decisions and that the QDR would analyze
    requirements for the F-22A and make program decisions. However, it is
    not clear from the QDR report, issued last month, what analyses were
    conducted to determine the gaps in capability, the alternatives
    considered, the quantities needed, or the costs and benefits of the F-
    22A program. Therefore, questions about the F-22A program remain:

             What capability gaps exist today and will exist in the
            future (air superiority, ground attack, electronic attack,
            intelligence gathering)?
             What alternatives besides the F-22A can meet these
            needs?
             What are the costs and benefits of each alternative?
             How many F-22As are needed?
             What capabilities should be included?

        Until these questions are answered and differences are reconciled,
    further investments in the program--for either the procurement of new
    aircraft or modernization--cannot be justified.
    JSF Business Case Still Contains Cost and Schedule Risks
        The JSF program appears to be on the same path as the F-22A
    program. After being in development for 9 years, the JSF program has
    not produced the first test aircraft, has experienced substantial cost
    growth, has reduced the number of planned aircraft, and has delayed
    delivery of the aircraft to the warfighter. Moreover, the JSF program
    remains committed to a business case that invests heavily in production
    before testing has demonstrated acceptable performance of the aircraft.
    At the same time, the JSF program has contracted to develop and deliver
    the aircraft's full capability in a single-step, 12-year development
    program--a daunting task given the need to incorporate the
    technological advances that, according to DOD, represent a quantum leap
    in capability. The business case is a clear departure from the DOD
    policy preference that calls for adopting an evolutionary approach to
    acquisitions. Furthermore, the length and cost of the remaining
    development are exceedingly difficult to accurately estimate, thereby
    increasing DOD's risks in contracting for production. With this risky
    approach, it is likely that the program will continue to experience
    significant cost and schedule overruns.
        The JSF program expects to begin low-rate initial procurement in
    2007 with less than 1 percent of the flight test program completed and
    no production representative prototypes built for the three JSF
    variants.\7\ Technologies and features critical to JSF's operational
    success, such as a low observable and highly common airframe, advanced
    mission systems, and maintenance prognostics systems, will not have
    been demonstrated in a flight test environment when production begins.
    Other key demonstrations that will have not been either started or only
    in the initial stages before production begins include:
    ---------------------------------------------------------------------------
        \7\ The JSF aircraft design includes three variants: a conventional
    takeoff and landing variant; an aircraft carrier-suitable variant; and
    a short takeoff and vertical landing.

             testing with a fully integrated aircraft--mission
            systems and full software,
             structural and fatigue testing of the airframe, and
             shipboard testing of Navy and Marine Corps aircraft.

        When the first fully integrated and capable development JSF is
    expected to fly in 2011, DOD will already have committed to buy 190
    aircraft at an estimated cost of $26 billion. According to JSF program
    plans, DOD's low-rate initial production quantities will increase from
    5 aircraft a year in 2007 to 133 a year in 2013, when development and
    initial operational testing are completed.\8\ By then, DOD will have
    procured more than double that amount--424 aircraft at an estimated
    cost of about $49 billion, and spending for monthly production
    activities is expected to be about $1 billion, an increase from $100
    million a month when production is scheduled to begin in 2007. Figure 1
    shows the significant overlap in development and testing and the major
    investments in production.
    ---------------------------------------------------------------------------
        \8\ These figures do not include the potential for orders for
    international partners during low-rate initial production. Preliminary
    data indicate that these orders could significantly increase this rate.
    ---------------------------------------------------------------------------

        The overlap in testing and production is the result of a business
    case and acquisition strategy that has proven to be risky in past
    programs like F-22A, Comanche, and B-2A, which far exceeded the cost
    and delivery goals set at the start of their development programs. JSF
    has already increased its cost estimate and delayed deliveries despite
    a lengthy replanning effort that added over $7 billion and 18 months to
    the development program. JSF officials have stated that the
    restructured program has little or no flexibility for future changes or
    unanticipated risks. The program has planned about 8 years to complete
    significant remaining activities of the system development and
    demonstration phase, including:

             fully maturing seven of the eight critical
            technologies;
             completing the designs and releasing the engineering
            drawings for all three variants;
             manufacturing and delivering 15 flight test aircraft
            and 7 ground test articles;
             developing 19 million lines of software code; and
             completing a 7-year, 12,000-hour flight test program.

        The JSF program's latest planned funding profile for development
    and procurement, produced in December 2004 by the JSF program office,
    assumes annual funding rates to hover close to $13 billion between 2012
    and 2022, peaking at $13.8 billion in 2013. If the program fails to
    achieve its current estimated costs, funding challenges could be even
    greater than that. The Office of Secretary of Defense Cost Analysis
    Improvement Group was to update its formal independent cost estimate in
    the spring of 2005. The group now does not expect to formally complete
    its estimate until spring 2006, but its preliminary estimate was
    substantially higher than the program office's. A modest cost increase
    would have dramatic impacts on funding. For example, a 10 percent
    increase in production costs would amount to over $21 billion (see fig.
    2).

        DOD has recently made decisions to reduce near-term funding
    requirements that could cause future JSF costs to increase. It had
    begun to invest in the program to develop an alternative engine for the
    aircraft, but now plans to cancel further investments in order to make
    the remaining funds available for other priorities. According to DOD,
    it believes that there is no cost benefit or savings with an engine
    competition for the JSF and there is low operational risk with going
    solely with a single engine supplier. DOD has already invested $1.2
    billion in funding for this development effort through fiscal year
    2006. By canceling the program, it expects to save $1.8 billion through
    fiscal year 2011. Developing alternative engines is a practice that has
    been used in past fighter aircraft development programs like the F-16
    and F-15 programs. An alternative engine program may help maintain the
    industrial base for fighter engine technology, result in price
    competition in the future for engine acquisition and spare parts,
    instill incentives to develop a more reliable engine, and ensure an
    operational alternative should the current engine develop a problem
    that would ground the entire fleet of JSF aircraft. As result, the JSF
    decision should be supported by a sound business case analysis. To
    date, we have not seen such an analysis.
        Finally, the uncertainties inherent in concurrently developing,
    testing, and producing the JSF aircraft prevent the pricing of initial
    production orders on a fixed price basis. Consequently, the program
    office plans to place initial procurement orders on cost reimbursement
    contracts. These contracts will provide for payment of allowable
    incurred costs, to the extent prescribed in the contract. With cost
    reimbursement contracts a greater cost risk is placed on the buyer--in
    this case, DOD. For the JSF, procurement should start when risk is low
    enough to enter into a fixed price agreement with the contractor based
    on demonstrations of the fully configured aircraft and manufacturing
    processes.
        dod's tactical aircraft recapitalization goals are not being met
        DOD has not been able to achieve its recapitalization goals for its
    tactical aircraft forces. Originally, DOD had planned to buy a total of
    4,500 tactical aircraft to replace the aging legacy force. Today,
    because of delays in the acquisition programs, increased development
    and procurement costs, and affordability pressures, it plans to buy
    almost one-third fewer tactical aircraft (see fig. 3). The delivery of
    these new aircraft has also been delayed past original plans. DOD has
    spent nearly $75 billion on the F-22A and JSF programs since they
    began, but this accounts for only 122 new operational aircraft.

        Because DOD's recapitalization efforts have not materialized as
    planned, many aircraft acquired in the 1980s will have to remain in the
    inventory longer than originally expected, incurring higher investment
    costs to keep them operational. According to DOD officials, these aging
    aircraft are approaching the end of their service lives and are costly
    to maintain at a high readiness level. While Air Force officials assert
    that aircraft readiness rates are steady, they agree that the costs to
    operate and maintain its aircraft over the last decade have risen
    substantially. Regardless, the military utility of the aging aircraft
    is decreasing.
        The funds used to operate, support, and upgrade the current
    inventory of legacy aircraft represent opportunity costs that could be
    used to develop and buy new aircraft. From fiscal years 2006 to 2011,
    DOD plans to spend about $57 billion \9\ for operations and maintenance
    and military personnel for legacy tactical fighter aircraft. Some of
    these funds could be invested in newer aircraft that would be more
    capable and less costly to operate. For example, the Air Force
    Independent Cost Estimate Summary shows that the F-22A will be less
    expensive to operate than the F-15. The F-22A will require fewer
    maintenance personnel for each squadron, and one squadron of F-22As can
    replace two squadrons of F-15. This saves about 780 maintenance
    personnel as well as about $148 million in annual operating and support
    cost according to the independent cost estimate.
    ---------------------------------------------------------------------------
        \9\ Figure includes cost data for F/A-18E/F because it could not be
    broken out from the F-18 costs.
    ---------------------------------------------------------------------------
        Over the same timeframe, DOD also plans to spend an average of $1.5
    billion each year--or $8.8 billion total--to modernize or improve
    legacy tactical fighter aircraft (see fig. 4). Further delays or
    changes in the F-22A or JSF programs could require additional funding
    to keep legacy aircraft in the inventory and relevant to the
    warfighter's needs.

        In testimony last year, we suggested that the QDR would provide an
    opportunity for DOD to assess its tactical aircraft recapitalization
    plans and weigh options for accomplishing its specific and overarching
    goals. In February 2006, the Secretary of Defense testified that
    recapitalization of DOD's tactical aircraft is important to maintain
    America's air dominance. Despite this continued declaration about
    recapitalizing tactical aircraft, DOD's 2006 QDR report did not present
    a detailed investment strategy that addressed needs and gaps,
    identified alternatives, and assessed costs and benefits. With limited
    information contained in the QDR report, many questions are still
    unanswered about the future of DOD's tactical aircraft modernization
    efforts.
     dod has an opportunity to set its tactical aircraft recapitalization
                                efforts on track
        As DOD moves forward with its efforts to recapitalize its tactical
    aircraft force, it has the opportunity to reduce operating costs and
    deliver needed capabilities to the warfighter more quickly. To take
    advantage of this opportunity, however, DOD must fundamentally change
    the way it buys weapon systems. Specifically, the department must
    change how it selects weapon systems to buy, and how it establishes and
    executes the business case. Although the F-22A program has progressed
    further in the acquisition process than the JSF program, both programs
    are at critical decisionmaking junctures, and the time for DOD to
    implement change is now.
        Before additional investments in the F-22A program are made, DOD
    and the Air Force must agree on the aircraft's capabilities and
    quantities and the resources that can be made available to meet these
    requirements. A cost and benefit analysis of F-22A capabilities and
    alternative solutions weighed against current and expected threats is
    needed to determine whether a sound business case for the F-22A is
    possible and whether investing an additional $13.8 billion over the
    next 5 years to procure or modernize these aircraft is justified.
        With more than 90 percent of investment decisions to develop, test,
    and buy JSF aircraft remaining, DOD could implement significant changes
    in its business case before investing further in the JSF program. The
    JSF program should delay production and investments in production
    capability until the aircraft design qualities and integrated mission
    capabilities of the fully configured and integrated JSF aircraft
    variants have been proven to work in flight testing. Also, an
    evolutionary acquisition strategy to limit requirements for the
    aircraft's first increment of capabilities that can be achieved with
    proven technologies and available resources could significantly reduce
    the JSF program's cost and schedule risks. Such a strategy would allow
    the program to begin testing and low-rate production sooner and,
    ultimately, to deliver a useful product in sufficient quantities to the
    warfighter sooner. Once the JSF is delivered, DOD could begin retiring
    its aging and costly tactical aircraft. Capabilities that demand as yet
    undemonstrated technologies would be included as requirements in future
    JSF aircraft increments that would be separately managed. An
    evolutionary, knowledge-based acquisition approach would not only help
    significantly minimize risk and deliver capabilities to the warfighter
    sooner, it would be in line with current DOD policy preferences. \10\
    ---------------------------------------------------------------------------
        \10\ DOD argues that the JSF program is using an evolutionary
    approach because it is developing capabilities in a series of blocks.
    However, the approach is not truly evolutionary, as DOD does not
    consider each block as a separate program--a critical aspect of an
    evolutionary approach. In addition, DOD currently expects to buy 95
    percent of the JSF aircraft in the final block--which delays providing
    useful capabilities to the warfighter.
    ---------------------------------------------------------------------------
        DOD's use of an evolutionary, knowledge-based approach is not
    unprecedented. The F-16 program successfully evolved capabilities over
    the span of 30 years, with an initial F-16 capability delivered to the
    warfighter about 4 years after development started. Figure 5
    illustrates the F-16 incremental development approach.

        The F-16 program provides a good acquisition model for the JSF
    program. For JSF, an evolutionary approach could entail delivering a
    first increment aircraft with at least as much capability as legacy
    aircraft with sufficient quantities to allow DOD to retire its aging
    tactical aircraft sooner and reduce operating inefficiencies. Limiting
    development to 5-year increments or less, as suggested in DOD's
    acquisition policy, would force smaller, more manageable commitments in
    capabilities and make costs and schedules more predictable. Some of the
    more challenging JSF capabilities, such as advanced mission systems or
    prognostics technologies, would be deferred and added to follow-on
    efforts once they are demonstrated in the technology development
    environment--a more conducive environment to maturing and proving new
    technologies. A shorter system development phase would have other
    important benefits. It would allow DOD to align a program manager's
    tenure to the completion of the phase, which would enable program
    managers to be held accountable for decisions. It also would allow DOD
    to use fixed-price-type contracts for production, and thereby reduce
    the government's cost risk.
        Additionally, DOD should do a more comprehensive business case
    analysis of the costs, benefits, and risks before terminating the
    alternative engine effort. A competitive engine program may: (1)
    incentivize contractors' to minimize life cycle costs; (2) improve
    engine reliability and quality in the future; (3) provide operational
    options; and (4) maintain the industrial base.
        At a broader level, DOD needs to make more substantive changes to
    its requirements, funding, and acquisition processes to improve weapon
    system program outcomes. We have recommended these changes in past
    reports and DOD has agreed with them. The January 2006 Defense
    Acquisition Performance Assessment report, based on a study directed by
    the Deputy Secretary of Defense, made some important observations
    regarding DOD acquisitions. The report concluded that the current
    acquisition process is slow, overly complex, and incompatible with
    meeting the needs of DOD in a diverse marketplace. Notably, the report
    confirmed that a successful acquisition process must be based on
    requirements that are relevant, timely, informed by the combatant
    commanders, and supported by mature technologies and resources
    necessary to realize development. The report also pointed out that
    DOD's acquisition process currently operates under a ``conspiracy of
    hope,'' striving to achieve full capability in a single step and
    consistently underestimating what it would cost to attain this
    capability. The report makes a number of key recommendations for
    changing DOD's acquisition process including the following:

             develop a new requirements process that has greater
            combatant commander involvement and is time-phased, fiscally
            informed, and jointly prioritized;
             change the current acquisition policy to ensure a
            time-constrained development program is strictly followed;
             keep program managers from the start of development
            through delivery of the ``Beyond Low-Rate Initial Production
            Report''; and
             move the start of a development program to the point
            in time that a successful preliminary design review is
            completed.

        Our work in weapons acquisition and best practices over the past
    several years has drawn similar conclusions. We have made numerous
    recommendations on DOD's acquisition processes and policy--as well as
    recommendations on specific major weapon system programs--to improve
    cost, schedule, and performance outcomes and to increase accountability
    for investment decisions. In 2000, DOD revised its acquisition policy
    to address some of our recommendations. Specifically, DOD has written
    into its policy an approach that emphasizes the importance of knowledge
    at critical junctures before managers agree to invest more money in the
    next phase of weapon system development. Theoretically, a knowledge-
    based approach results in evolutionary--that is, incremental,
    manageable, predictable--development and uses controls to help managers
    gauge progress in meeting cost, schedule, and performance goals.
    However, DOD policy lacks the controls needed to ensure effective
    implementation of this approach. Furthermore, decision makers have not
    consistently applied the necessary discipline to implement its
    acquisition policy and assign much-needed accountability for decisions
    and outcomes. Some of key elements of acquisition that we believe DOD
    needs to focus on include the following:

             constraining individual program requirements by
            working within available resources and by leveraging systems
            engineering;
             establishing clear business cases for each individual
            investment;
             enabling science and technology organizations to
            shoulder the technology burden;
             ensuring that the workforce is capable of managing
            requirements trades, source selection, and knowledge-based
            acquisition strategies;
             establishing and enforcing controls to ensure
            appropriate knowledge is captured and used at critical
            junctures before moving programs forward and investing more
            money; and
             aligning tenure for program managers that matches the
            program's acquisition time to ensure greater accountability for
            outcomes.

        In conclusion, despite DOD's repeated declaration that
    recapitalizing its aging tactical aircraft fleet is a top priority, the
    department continues to follow an acquisition strategy that
    consistently results in escalating costs that undercut DOD's buying
    power, forces DOD to reduce aircraft purchases, and delays delivering
    needed capabilities to the warfighter. Continuing to follow a strategy
    that results in disappointing outcomes cannot be encouraged--
    particularly given our current fiscal and national security realities.
        Mr. Chairman, this concludes my prepared statement. I will be happy
    to answer any questions you or other members of the subcommittee may
    have.
                              gao related products
        Joint Strike Fighter: DOD Plans to Enter Production before Testing
    Demonstrates Acceptable Performance, GAO-06-356 (Washington DC: March
    15, 2006).
        Defense Acquisitions: Business Case and Business Arrangements Key
    for Future Combat System's Success, GAO-06-478T (Washington DC: March
    1, 2006).
        Defense Acquisitions: DOD Management Approach and Processes Not
    Well-Suited to Support Development of Global Information Grid, GAO-06-
    211, (Washington DC: January 30, 2006).
        Defense Acquisitions: DOD Has Paid Billions in Award and Incentive
    Fees Regardless of Acquisition Outcomes, GAO-06-66, (Washington DC:
    December 19, 2005).
        Unmanned Aircraft Systems: Global Hawk Cost Increase Understated in
    Nunn-McCurdy Report, GAO-06-222R, (Washington DC: December 15, 2005)
        DOD Acquisition Outcomes: A Case for Change, GAO-06-257T,
    (Washington DC: November 15, 2005).
        Defense Acquisitions: Progress and Challenges Facing the DD(X)
    Surface Combatant Program GAO-05-924T. (Washington DC: 07/19/2005).
        Defense Acquisitions: Incentives and Pressures That Drive Problems
    Affecting Satellite and Related Acquisitions. GAO-05-570R. (Washington
    DC: 06/23/2005).
        Defense Acquisitions: Resolving Development Risks in the Army's
    Networked Communications Capabilities is Key Fielding Future Force.
    GAO-05-669 (Washington DC: 06/15/2005).
        Progress of the DD(X) Destroyer Program. GAO-05-752R. (Washington
    DC: 06/14/2005)
        Tactical Aircraft: F/A-22 and JSF Acquisition Plans and
    Implications for Tactical Aircraft Modernization. GAO-05-519T.
    (Washington DC: 04/06/2005).
        Defense Acquisitions: Assessments of Selected Major Weapon
    Programs. GAO-05-301 (Washington DC: 03/31/2005).
        Defense Acquisitions: Future Combat Systems Challenges and
    Prospects for Success. GAO-05-428T. (Washington DC: 03/16/2005).
        Defense Acquisitions: Changes in E-10A Acquisition Strategy Needed
    Before Development Starts. GAO-05-273 (Washington DC: 03/15/2005).
        Defense Acquisitions: Future Combat Systems Challenges and
    Prospects for Success. GAO-05-442T (Washington DC: 03/15/2005).
        Tactical Aircraft: Air Force Still Needs Business Case to Support
    F/A-22 Quantities and Increased Capabilities. GAO-05-304. (Washington
    DC: 03/15/2005).
        Tactical Aircraft: Opportunity to Reduce Risks in the Joint Strike
    Fighter Program with Different Acquisition Strategy. GAO-05-271.
    (Washington DC: 03/15/2005).
        Tactical Aircraft: Status of F/A-22 and JSF Acquisition Programs
    and Implications for Tactical Aircraft Modernization. GAO-05-390T
    (Washington DC: 03/03/2005).
        Defense Acquisitions: Plans Need to Allow Enough Time to
    Demonstrate Capability of First Littoral Combat Ships. GAO-05-255
    (Washington DC: 03/01/2005).
        Defense Acquisitions: Improved Management Practices Could Help
    Minimize Cost Growth in Navy Shipbuilding Programs. GAO-05-183
    (Washington DC: 02/28/2005).
        Unmanned Aerial Vehicles: Changes in Global Hawk's Acquisition
    Strategy Are Needed to Reduce Program Risks. GAO-05-06 (Washington DC:
    11/05/2004).
                                 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, DC 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:
    fraudnet@gao.gov Automated answering system: (800) 424-5454 or (202)
    512-7470.
                            congressional relations
        Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400
    U.S. Government Accountability Office, 441 G Street NW, Room 7125
    Washington, DC 20548
                                 public affairs
        Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-
    4800; U.S. Government Accountability Office; 441 G Street NW, Room
    7149; Washington, DC 20548.

        Senator McCain. Thank you very much, Mr. Sullivan.
        Mr. Marron.

     STATEMENT OF DONALD B. MARRON, ACTING DIRECTOR, CONGRESSIONAL
                             BUDGET OFFICE

        Mr. Marron. All right, thank you, Mr. Chairman, and members
    of the subcommittee. It's a pleasure to be here this afternoon
    to discuss the Air Force's proposed procurement approach for
    the F-22 fighter program.
        To briefly summarize my written testimony, from CBO's
    perspective the key issue with the proposed procurement is the
    degree to which it deviates from the usual budget practice of
    full funding. To quote from the Office of Management and
    Budget's (OMB) Circular A-11, which guides administration
    budget requests, ``Good budgeting requires that appropriations
    for the full costs of asset acquisition be enacted in advance
    to help ensure that all costs and benefits are fully taken into
    account at the time decisions are made to provide resources.''
        This policy of full funding strengthens the budget process,
    because it enables Congress to control spending at the time the
    commitments are made, it increases the likelihood that
    complete, usable assets will be delivered without the need for
    additional funds, it promotes transparency and accountability
    in the budget process, and it makes clear the tradeoffs that
    have to be made among competing priorities.
        The Air Force's proposed procurement approach for the F-22
    program deviates from the policy of full funding. There are
    three related concerns:
        First, the Air Force proposed to fund the program on an
    incremental basis, rather than a fully funded basis. For 2007,
    for example, the Air Force is requesting funds only to purchase
    components and subassemblies for 20 fighters, not the full
    fighters themselves. Next year, the Air Force would request
    funds to assemble those components into complete aircraft.
        This approach reduces the apparent cost of the F-22 program
    this year. The budget request is about $2 billion, rather than
    the roughly $3.5 billion that would be necessary for a
    comparable number of complete fighters. In so doing, it pushes
    funding requirements out into future years. In order to procure
    20 complete fighters, Congress would have to provide additional
    appropriations in the future.
        Second, the Air Force is proposing a multiyear procurement,
    but is not funding all the potential costs of that approach.
    Multiyear procurement can provide significant benefits to the
    Air Force, and, thereby, the taxpayer, if it enables the Air
    Force to purchase the fighters at lower cost. Contractors may
    be willing to offer a lower price for the multiyear commitment,
    because it enables them to plan for more efficient production
    and make productivity-enhancing investments. In return for such
    cost-reducing efforts, however, contractors often require some
    commitment that any costs associated with those efforts will be
    paid if the contract turns out to get canceled.
        When the Air Force enters into a multiyear procurement,
    therefore, the full costs of the first year would include not
    just the cost of the aircraft ordered in that year, but also an
    amount to cover any potential cancellation liabilities. If such
    monies are not appropriated, the contract is not fully funded.
    If the program gets canceled, the Air Force would have to seek
    more funds from Congress, reduce planned F-22 purchases, or cut
    into other approved programs.
        The third concern with the Air Force's proposed procurement
    is that, as just described, it attempts to combine incremental
    funding and multiyear procurement. These procurement approaches
    are not a natural fit, because the logic underlying them is
    inconsistent. Incremental funding makes the most sense if you
    do not intend to make a full commitment to the program, while
    multiyear procurement only makes sense if you want to make an
    extended commitment to the program. Perhaps for that reason,
    the use of incremental funding is currently prohibited for
    multiyear procurements. Indeed, Congress explicitly rejected
    this approach for funding another aircraft, the C-17, some
    years ago, saying, ``This financing scheme runs counter to the
    full-funding principles which guide Federal procurement
    practice, and thereby it creates a future liability for the Air
    Force and Congress.''
        To summarize, then, the Air Force's proposal deviates
    significantly from the principle of full funding when acquiring
    new assets. As a result, this proposal would imply that
    additional funding burdens would fall on future Congresses.
        Thank you, and I would be happy to answer any questions.
        [The prepared statement of Mr. Marron follows:]
                     Prepared Statement by Donald B. Marron
        Mr. Chairman, Senator Lieberman, and members of the subcommittee, I
    am pleased to appear before you today to discuss the Air Force's
    acquisition strategy for the F-22 fighter program. At your request, the
    Congressional Budget Office (CBO) has examined the proposal for a
    multiyear procurement contract for 60 aircraft and has found the
    following:

             The Air Force proposes to pay for the aircraft through
            incremental funding. Under that approach, the Air Force would
            seek appropriations for only part of the cost of each annual
            production lot in the year it was ordered and would request the
            remaining amount in the following year. Thus, the funding
            provided each year would not be sufficient to complete the
            aircraft ordered that year, and the Air Force would have to
            seek additional appropriations in the future to obtain
            functional aircraft.
             The Air Force would commit to the purchase of 20
            aircraft per year for 3 years, with the right to cancel the
            remainder of the order at the end of each year. But it is not
            requesting appropriations sufficient to cover the potential
            cancellation liability. Under that proposal for multiyear
            procurement, the Air Force would have to seek additional
            appropriations in the future even if a decision was made to
            cancel the contract.
             By initially requesting only incremental funding to
            pay for components of the aircraft and by excluding funding for
            the cancellation liability, the Air Force reduces the amount of
            2007 budget authority needed to initiate its proposed
            procurement. By the same token, the approach would also
            increase the amount of future budget authority needed either to
            complete the purchases or to cancel them.
             Current law prohibits the use of incremental funding
            in multiyear procurement contracts. The Air Force has requested
            that legislation exempting the service from that prohibition be
            included in the National Defense Authorization Act for Fiscal
            Year 2007.
             Deferring recognition of the full cost of the assets
            being purchased would understate the nature of the government's
            obligations, potentially distorting budgetary choices by making
            the program appear less expensive than it is, and would
            constrain budgetary flexibility in subsequent years.
                        funding of capital acquisitions
        In general, the Federal budget operates on the principle that
    appropriations for the full costs of acquiring an asset should be
    enacted in advance. In that regard, the Office of Management and
    Budget's Circular A-11, which guides executive branch agencies in the
    preparation of the budget, states:

              Good budgeting requires that appropriations for the full
            costs of asset acquisition be enacted in advance to help ensure
            that all costs and benefits are fully taken into account at the
            time decisions are made to provide resources. Full funding with
            regular appropriations in the budget year also leads to
            tradeoffs within the budget year with spending for other
            capital assets and with spending for purposes other than
            capital assets. Full funding increases the opportunity to use
            performance-based fixed price contracts, allows for more
            efficient work planning and management of the capital project
            (or investment), and increases the accountability for the
            achievement of the baseline goals.\1\
    ---------------------------------------------------------------------------
        \1\ Office of Management and Budget, Preparation and Submission of
    Budget Estimates, Circular A-11 (July 2005), Appendix J, p. 3.

        Upfront funding enables Congress to control spending at the time a
    commitment is made and ensures--or at least increases the likelihood--
    that a complete and usable asset will be delivered without the need to
    provide additional appropriations in future years. Very expensive
    items, however, may be difficult for an agency to budget for if it must
    have an appropriation for the full cost in the first year. In some
    instances, the cost of a single item may exceed an agency's annual
    budget for capital acquisitions. If the cost of an asset represents a
    large portion of its budget, an agency may have to forgo most other
    capital acquisitions for that year or otherwise disrupt other ongoing
    acquisition programs. One solution to that problem would be for the
    administration to request an appropriation in excess of the annual
    amount normally provided to an agency for capital acquisitions. But
    large, temporary increases in budget authority are sometimes difficult
    to accommodate in the budget process, at least for nonemergency
    appropriations.
        Budgetary constraints have sometimes led agencies to seek to defer
    recognition of costs until later years--for example, by using
    incremental funding for capital assets. Congress has approved
    incremental funding requests for some ships for the Navy and the Coast
    Guard, water resources projects of the Army Corps of Engineers,
    construction projects of the Department of Defense (DOD), and space
    exploration projects of the National Aeronautics and Space
    Administration (NASA). Agencies argue that through incremental funding
    authority, they have acquired many useful assets that they could not
    have funded upfront.
        Incremental funding, however, can have several deleterious effects.
    It may limit visibility and accountability because it does not display
    the full cost of decisions at the time they are made. In the
    competition for appropriations, it may tilt the playing field in favor
    of expensive programs that benefit from such a funding arrangement;
    programs may be selected on the basis of their apparent economy--in
    their initial stages--relative to other programs that do not have the
    advantage of such a favorable budgetary treatment. Moreover,
    incrementally funded projects may be started without adequate scrutiny
    or a full understanding of the total cost. Incremental funding may even
    provide a particular incentive to underestimate costs at the outset of
    a project because later cost increases would not have to be
    acknowledged as such but could be incorporated in subsequent funding
    increments.
        In cases in which an acknowledgment of the full cost up front could
    render a program too expensive to consider, both agencies and Congress
    may end up accepting those higher costs at a later date if the only
    alternative is to abandon their previous investment in partially
    completed products. Finally, incremental funding may constrain the
    funding available for other programs in future years as programs that
    were partially funded in previous years continue to consume resources.
                    the air force's plan for acquiring f-22s
        Through the end of fiscal year 2005, the Air Force had ordered 100
    F-22 aircraft. In its budget request for fiscal year 2006, the service
    proposed purchasing 80 more planes--24 in 2006, 29 in 2007, and 27 in
    2008. Congress appropriated $3.7 billion to procure 24 aircraft in
    fiscal year 2006. To date, funds have been appropriated in advance for
    the full cost of all of the aircraft ordered.
        The fiscal year 2007 budget request seeks authority to buy more
    aircraft in total but at a slower rate than envisioned a year ago. The
    Air Force now seeks authority to purchase 60 aircraft at a rate of 20
    aircraft per year over the 2007-2009 period using a multiyear
    procurement approach aimed at mitigating the increase in costs that
    would otherwise result from the reduction in the production rate. Under
    its proposed approach, the Air Force would commit to purchasing all 60
    aircraft, with the option to cancel the contract at the end of each
    fiscal year if funds were not appropriated to continue the contract.
    According to the Air Force, the 60 airplanes would cost about $10.5
    billion in total.
        The Air Force's proposal differs from the practice of full up-front
    funding in two ways: it seeks incremental funding for acquiring capital
    assets, and it provides for a multiyear procurement without funding for
    possible cancellation costs.
                              incremental funding
        The Air Force has requested the authority to budget and to pay for
    each annual production lot incrementally over a 2-year period rather
    than obtaining appropriations for the full cost of those aircraft in
    the year production begins. The Service's approach would reduce the
    amount of budget authority needed in the first year, although it would
    increase the amount needed in subsequent years. The first year's
    funding would cover the cost of producing certain components of the
    first 20 aircraft; the second year's appropriation would pay for the
    cost of assembling them. Specifically, the Air Force has asked for
    appropriations of about $2 billion in 2007 to pay for part of the cost
    of the aircraft whose production would begin in 2007. Under a multiyear
    contract without incremental funding, the Air Force would initially
    need approximately $4 billion to $5 billion to cover its minimum
    liability.\2\
    ---------------------------------------------------------------------------
        \2\ The exact amount would depend on the cost of canceling the
    contract after 2007. On the basis of cancellation liabilities for other
    multiyear programs, that amount could be between 5 percent and 15
    percent of contract costs.
    ---------------------------------------------------------------------------
        In each of the past 4 years, Congress has appropriated around $4
    billion to procure F-22s. A similar appropriation in 2007 would fully
    fund 12 to 20 aircraft under a multiyear contract, depending on the
    amount of the cancellation liability--if such liability was fully
    covered within that amount.
        The Air Force's strategy to incrementally fund production of the F-
    22 would have the effect of deferring appropriations for commitments
    already made. At the time it orders the aircraft for each annual
    production lot, the Air Force would have appropriations sufficient to
    pay only for certain components, such as engines, electronic systems,
    and airframe subassemblies. Appropriations for the cost to assemble
    those components into a usable airplane would be requested in the
    following year.
        Such a process would allow the Air Force to order more aircraft in
    the first year within a given amount of funding by understating the
    government's ultimate costs. Therefore, when Congress allocated budget
    authority to programs in the 2007 DOD appropriations act, the F-22
    program would have an advantage over other programs or activities that
    did not receive that form of funding. In subsequent years, Congress
    could be left with little choice but to provide additional
    appropriations to ensure the delivery of fully assembled, functional
    aircraft. Although more aircraft could be ordered in the first year
    under the incremental funding approach, fewer aircraft could be ordered
    in subsequent years within any given amount of appropriations. Even if
    costs increased relative to the Air Force's current estimate, Congress
    might feel compelled to appropriate funds for aircraft that had already
    begun production to avoid wasting the funds already invested in the
    components.
        The incremental funding approach could restrain the pace of
    aircraft production. Because the Air Force would not have sufficient
    appropriations to pay for the full cost of the aircraft in the first
    year, it would have to closely monitor the contractor's work to ensure
    that the pace of production was maintained at a level that would not
    obligate funds that had not yet been appropriated. Otherwise,
    production might have to be slowed or halted in the later months of the
    year.
        Congress has approved incremental funding for other DOD programs,
    such as Navy ships and some military construction projects. For
    instance, Congress authorized the Navy to incrementally fund the CVN-78
    aircraft carrier and the LHD-8 amphibious ship. But incremental funding
    has rarely been used for aircraft procurement programs. Perhaps because
    aircraft--even ones as costly as the F-22--are less expensive than Navy
    ships, dams and levees constructed by the Army Corps of Engineers, and
    NASA's space station, they are easier to budget for in full.
    Consequently, budgetary constraints can be accommodated by purchasing
    fewer aircraft in a given year rather than by funding only a part of
    the cost of a larger production lot.
     the potential benefits of multiyear contracts in reducing acquisition
                                     costs
        Multiyear procurement is a special contracting method authorized in
    10 U.S.C. 2306b that permits the government to enter into contracts
    covering acquisitions for more than 1 year but not more than 5 years,
    even though the total funds required every year are not appropriated at
    the time the contracts are awarded. As part of such a contract, the
    government commits to purchase all items specified at the time the
    contract is signed, including those to be produced and paid for in
    subsequent years. Before an agency can enter into such a contract, it
    must find that multiyear procurement results in substantial savings in
    comparison with procurement through a series of annual contracts. The
    Air Force has not yet completed its analysis of whether multiyear
    procurement is the most cost-effective strategy for purchasing the F-
    22s.
        Because multiyear procurement allows the contractor to plan for
    more efficient production, such a contract can reduce the cost of an
    acquisition compared with the cost of buying the items through a series
    of annual procurement contracts--unless the government decides to
    cancel the contract partway through it. The savings can come from
    several sources, such as investments in equipment and facilities,
    investments in the contractor's workforce, and orders for component
    parts in economically efficient quantities. For example, given the
    commitment of a multiyear procurement contract, the contractor may
    spend time and money on appropriate training or provide financial
    incentives to retain experienced personnel on the job for the duration
    of the contract to improve productivity. The contractor may also
    acquire special tools, manufacturing equipment, or facilities that
    reduce the time, labor, and materials--and thus the cost--to produce
    the items. The savings in recurring costs may not be great enough in a
    single year to recover the cost of the investments, but if production
    quantities are sufficiently large, the investment costs can be spread
    out over several years of production.
        Similarly, the contractor may also purchase or produce components
    in advance of need--using an arrangement called economic order quantity
    procurement--if doing so offers substantial savings by avoiding
    repeated setup costs.
        Contractors are usually willing to enter into multiyear procurement
    contracts and to spend money up front to reduce production costs
    because the government, in the event of contract cancellation or
    termination, promises to pay for incurred costs that would have been
    recovered over the full term of the contract.
                      budgeting for cancellation liability
        Under a multiyear contract, the government may, at the end of each
    fiscal year, cancel its order for all remaining years of the contract
    if it notifies the contractor that funds are not available to proceed
    for the next fiscal year. Thus, cancellation of a multiyear contract
    occurs between fiscal years if Congress does not provide the additional
    appropriations needed to continue.
        Under a multiyear contract, some nonrecurring costs may be
    allocated to items expected to be produced in future years. Therefore,
    if the contract is canceled, the government may owe the contractor more
    than the amount appropriated for items produced in the years before the
    cancellation. The maximum liability for contract cancellation at the
    end of any given year is usually negotiated up front and included in
    the terms of the contract.\3\
    ---------------------------------------------------------------------------
        \3\ Contract cancellation differs from contract termination. The
    government has the right to end any contract early, when doing so is in
    the government's interest, but must pay the contractor for any
    authorized work performed before it was notified to cease work.
    Contract termination is the act of rescinding orders for items for
    which funds have already been appropriated and on which work has
    already begun. The cost of terminating an annual procurement contract
    early should not exceed the available appropriations because an agency
    should have sufficient appropriations to cover all recurring and
    nonrecurring costs before it initiates an annual procurement contract.
    ---------------------------------------------------------------------------
        DOD sometimes chooses not to request budget authority specifically
    for the cancellation liability because it considers cancellation a
    contingent liability with only a remote probability of happening.\4\
    Although the amount of the government's actual liability depends on how
    the program proceeds, its minimum liability is the sum of the
    production costs for the items ordered in the first year and the
    cancellation costs at the end of that year. Regardless of whether the
    multiyear procurement contract proceeds for the full term or is
    canceled early, the government's initial obligation to the contractor
    will exceed the amount required to pay for items ordered in the first
    year. For example, after the first year of the 3-year contract proposed
    for the F-22, the Air Force could either cancel the remaining 2 years
    of production and pay the costs for cancellation, or it could continue
    production for the second program year and pay for the cost of those
    aircraft. Under the multiyear contract, the Air Force would not have
    the option of forgoing future production lots without paying the
    cancellation charge. Thus, in no case would the government pay only the
    cost of the aircraft produced in the first year. An appropriation that
    covered only the cost for each annual production lot as it was
    manufactured would therefore be insufficient to finance the
    government's minimum obligations under the multiyear contract.
    ---------------------------------------------------------------------------
        \4\ DOD is authorized by 10 U.S.C. 2306b to pay cancellation costs
    from funds originally available for performance of the contract
    concerned, appropriations currently available for procurement of the
    type of property concerned and not otherwise obligated, or funds
    appropriated for cancellation payments.
    ---------------------------------------------------------------------------
        The Air Force indicates that it may be able to pay contract
    cancellation costs with funds appropriated for procuring the F-22,
    which could lead some observers to conclude that there would be
    sufficient funds to pay both the cost of canceling future production
    lots and the cost of procuring the aircraft that had been ordered up to
    that point. In fact, the Air Force would be committing the same
    appropriations for both purposes simultaneously. But with no funds set
    aside specifically for cancellation costs, the Air Force would have to
    terminate orders for some or all of the aircraft that had already
    entered production if a decision was made to cancel subsequent orders.
    Thus, if it canceled the remaining years of the multiyear contract at
    the end of the first year, the government would not only forgo the
    aircraft to be produced in later years but also would not receive all
    of the planes it had ordered in the first year--and the taxpayers'
    investment in those aircraft would be lost. In particular, at the end
    of the first year, the Air Force would have ordered 20 aircraft. If the
    government decided to cancel the contract at that point but had not set
    aside funds specifically for cancellation costs, it would not only
    forgo the 40 aircraft that had not entered production, but, to free up
    funds for cancellation costs, it would have to stop work on some of the
    20 aircraft that had already been ordered.
        Although DOD has requested sufficient appropriations to cover its
    minimum obligations for some multiyear contracts, it has not allocated
    resources for cancellation liabilities for many of them. That failure
    to request funding for cancellation liabilities may distort the
    resource allocation process by understating the cost of decisions made
    for the budget year and may require future Congresses to find the
    resources to pay for decisions made today.
            combining multiyear procurement and incremental funding
        Even though Congress has authorized and appropriated funds for
    capital assets on an incremental basis, CBO is unaware of any instances
    in which Congress has authorized incremental funding of a multiyear
    procurement contract. In fact, Congress recently disapproved such a
    proposal by the Air Force. In its fiscal year 2003 budget request, the
    Air Force proposed to use advance procurement funding--typically used
    to buy components with significantly longer production time than other
    system components--for the multiyear procurement of C-17 cargo
    aircraft. That incremental funding approach would have effectively
    resulted in progress payments on the aircraft rather than full funding
    in the initial year of production.
        In the National Defense Authorization Act for Fiscal Year 2003,
    Congress prohibited that approach proposed for the C-17 by amending the
    statute governing multiyear procurement to allow DOD to obligate funds
    to procure end items only if they were ``complete and usable.''
    Congress also added $586 million to the department's budget request for
    fiscal year 2003 to fully fund the acquisition of 15 C-17 aircraft
    entering production that year. The conference report accompanying the
    Department of Defense Appropriations Act for Fiscal Year 2003
    explicitly disapproved the Air Force's proposed approach: ``This
    financing scheme runs counter to the `full funding' principles which
    guide Federal Government procurement practice, and thereby creates a
    future liability for the Air Force and Congress. For this reason, the
    conferees disapprove the Air Force's C-17 financing proposal.'' For the
    F-22 program, the Air Force has proposed a statutory waiver of the 2003
    authorization law's prohibition against incrementally funding the
    purchase of end items under a multiyear contract.
        Although the Air Force indicates it may be able to pay cancellation
    costs from funds appropriated for the F-22's procurement, combining
    multiyear procurement and incremental funding makes that unlikely. The
    smaller amount appropriated under the incremental funding approach
    would be obligated and spent more rapidly than the full amount. CBO
    estimates that even if orders for aircraft in production were
    terminated, as little as 10 percent of the initial appropriation would
    be available to pay cancellation costs at the end of the initial year
    of incremental funding for each of the three lots. Consequently,
    cancellation might necessitate taking funding from other aircraft
    procurement programs or might require Congress to provide additional
    appropriations to pay those costs.
        Employing an incremental funding strategy in conjunction with a
    multiyear procurement contract introduces the risk that the Air Force
    might pay for aircraft that would not be completed if the contract was
    canceled. At the end of each year of the contract except the last one,
    there would be some aircraft in production that would require
    appropriations to complete. If Congress declined to provide further
    funds to continue the contract in the next fiscal year, the Air Force
    would have to cancel the contract for all subsequent years and
    terminate orders for aircraft that had not been fully funded. If the
    contract was canceled after 2007, the Air Force would not receive any
    completed aircraft. If the contract was canceled after 2008 and no
    additional funds were provided for 2009, the Air Force would receive
    the 20 aircraft ordered in 2007 but would receive only components of
    the aircraft that had been ordered in 2008.
        Incremental funding and multiyear procurement are conceptually
    inconsistent budgetary practices. On the one hand, multiyear
    procurement contracts suggest a firm and substantial commitment on the
    part of the government. The contractor is encouraged to make
    investments promoting efficiency on the basis of the government's
    commitment to purchase multiple annual production lots or to compensate
    the contractor for those investments if it chooses to cancel the
    contract. On the other hand, the amount of budget authority provided
    under an incremental funding arrangement suggests a very limited
    government liability--only for the cost of the components that are
    produced in that year.

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

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

        Mr. Bolkcom. Mr. Chairman, Senator Chambliss, thank you
    very much for inviting me to speak to you today about the F-22
    Raptor. As requested, my testimony will address DOD's proposed
    funding strategy and its plan to proceed with a multiyear
    procurement of 60 aircraft.
        I'd like to make some observations that you'll find treated
    at greater length in my written statement, which I request be
    included in the record.
        Senator McCain. Without objection.
        Mr. Bolkcom. As part of its fiscal year 2007 budget
    request, DOD proposes to add $930 million to the program and to
    incrementally fund F-22 procurement. Aircraft subassemblies
    will be funded in 1 year, and final assembly will be funded in
    the second. A multiyear procurement contract and two economic
    order quantity purchases are key components of this strategy.
    DOD leaders say that this proposal is unorthodox, and it may
    require congressional waivers of statute or standard practice.
        At least three aspects of this proposed strategy may
    present significant issues for DOD and Congress:
        First, if the Air Force is allowed to incrementally fund F-
    22 procurement, future Congresses could be deterred from
    cutting program funds, in fear of taking delivery of 20 half-
    assembled aircraft. DOD may argue that the program is stable
    and mature, which would make budget cuts unlikely. However, the
    authority to appropriate funds, of course, belongs to Congress,
    not to DOD.
        Second, this strategy appears risky, because many questions
    about its feasibility remain. For instance, reducing the annual
    procurement rate could, in Air Force parlance, ``create upward
    cost pressure.'' The savings from the multiyear procurement
    contract and the economic order quantity purchases are intended
    to offset this upward cost pressure, but it is currently
    unclear if they will save enough. Also, the discovery, in 2005,
    of a flaw in some of the titanium components may cast doubt on
    both the F-22's maturity and the Air Force's ability to monitor
    the program.
        The third risk of this strategy is that it may set a
    precedent. DOD argues that this strategy is a one-time
    opportunity to save money and to reduce risk. The F-22 is at
    the end of its production, they argue, and the Air Force will
    not need to ask for incremental funding a second time. But
    today's leaders cannot guarantee that future officials won't
    cite this case as a precedent for some future exception they
    wish Congress to approve.
        It is not clear that the potential benefits of this
    strategy outweigh the risks just described. The primary benefit
    that DOD leaders say the strategy will confer is to close the
    gap between F-22 and JSF production. Air Force Secretary Wynne
    recently testified that, ``it is not in this Nation's interest
    to terminate this fifth-generation fighter until we get access
    to another fifth-generation fighter.'' Being able to
    manufacture advanced fighter aircraft would be useful, Mr.
    Wynne said, if we were to encounter a ``hot engagement.''
        This may sound reasonable, but questions could emerge about
    the value of an F-22 production capability during a crisis.
    Why? Because it takes 3 to 4 years to build and deliver a lot
    of F-22s. If the United States found itself unexpectedly drawn
    into a major conflict, and more Raptors were desired, it
    appears unlikely that a large number could be rapidly built and
    delivered. Even if large numbers of aircraft were rapidly
    produced, pilots and maintenance personnel would need to be
    trained and organized. Tools, supplies, and spare parts would
    likely need to be acquired. The most intense and demanding air
    combat in recent operations has been measured in days and
    weeks, not in months or years.
        A final observation is that under last year's F-22 funding
    plan, production would end in December 2010. At this point, 21
    operationally capable JSFs will have been produced and
    delivered to DOD. The JSF will not have achieved initial
    operational capability (IOC) by this point, but the
    manufacturing lines for the two aircraft clearly overlap by
    approximately 2 years.
        Mr. Chairman, this concludes my remarks. Thanks for the
    opportunity to appear before you. I look forward to your
    questions.
        [The prepared statement of Mr. Bolkcom follows:]
                   Prepared Statement by Christopher Bolkcom
                     proposed f-22a raptor funding strategy
        Mr. Chairman, distinguished members of the subcommittee, thank you
    for inviting me to speak to you today about the F-22A. As you
    requested, my testimony will address the Air Force's proposed new
    funding strategy for the F-22A, and its plan to proceed with a
    multiyear procurement of 60 F-22A aircraft.
                                  introduction
        As part of its fiscal year 2007 budget request, the Department of
    Defense (DOD) has proposed a change in how it plans to fund its
    remaining production of the F-22A Raptor, which in its parlance is
    ``nontraditional, but executable.'' \1\ The new strategy is complex,
    but can be described in a simplified way. DOD proposes to add an
    additional production lot, and to stretch the funding of its final 60
    Raptors over an additional 2-year period (from fiscal year 2008 to
    fiscal year 2010). This incremental funding will reduce the average
    annual rate of procurement, and split the funding of annual production
    over a 2-year period (subassembly activities are funded in the first
    year, those subassemblies then transition to final assembly to create a
    complete aircraft in the second year). The Air Force also desires
    authority to enter into a multiyear procurement (MYP) contract, and a
    reprogramming of fiscal year 2006 funds to execute an economic order
    quantity (EOQ) purchase prior to MYP authority. This revised strategy
    is expected to increase program costs at least $930 million more than
    the program's cost estimate under the fiscal year 2006 plan.\2\
    ---------------------------------------------------------------------------
        \1\ USAF Briefing on F-22A New Funding Strategy and Multiyear
    Procurement. Provided to CRS on March 2, 2006 by SAF LLW.
        \2\ Fiscal year 2006 and fiscal year 2007 Budget Estimates.
    Aircraft Procurement Air Force OPR: SAF/FMB. Volume I. U.S. Air Force.
    ---------------------------------------------------------------------------
        The DOD expects this plan would enable it to purchase four
    additional aircraft (for a total of 183), and extend the F-22A
    production line approximately 1 year, to reduce the gap between F-22A
    and F-35 production. Secretary of the Air Force Michael Wynne has
    testified to the full committee that ``it is not in our Nation's
    interest to terminate this fifth-generation fighter [the F-22A] until
    we get access to another fifth-generation fighter [the JSF].'' Mr.
    Wynne's principal concern was that the United States might get into a
    ``hot engagement'' without either the F-22A or the Joint Strike Fighter
    (JSF) in production.\3\
    ---------------------------------------------------------------------------
        \3\ Hearing of the Senate Armed Services Committee on the National
    Defense Authorization Request for Fiscal Year 2007 and the Future Years
    Defense Program. March 2, 2006.
    ---------------------------------------------------------------------------
        The DOD cannot pursue this new funding strategy without
    congressional approval. Specifically, for this plan to move forward,
    DOD needs Congress to: (1) grant it approval to negotiate an MYP
    contract with Lockheed Martin for the final three production lots, (2)
    grant it the authority to reprogram funds to make an EOQ purchase in
    fiscal year 2006, and (3) approve the plan to incrementally fund the
    last 60 aircraft.
                                 complications
        A number of factors may complicate DOD's ability to secure
    congressional approval of its ``unorthodox plan'' for the F-22A. For
    example, the F-22A program has experienced noteworthy turbulence
    between the fiscal year 2005 and fiscal year 2007 budget requests.
    Total program budget, annual budget requests, total inventory, annual
    procurement rate, and program duration have all changed. These changes
    may engender closer scrutiny than is customary of the underlying
    criteria for MYP authority.
        Considering the changes to the F-22A program that have occurred,
    and changes which are being proposed, some may question the Air Force's
    ability to comply with some provisions of 10 USC 2306b(a), including
    provision (2) ``That the minimum need for the property to be purchased
    is expected to remain substantially unchanged during the contemplated
    contract period in terms of production rate, procurement rate, and
    total quantities.'' and (3) ``That there is a reasonable expectation
    that throughout the contemplated contract period the head of the agency
    will request funding for the contract at the level required to avoid
    contract cancellation.''
        A further complication may be a problem with sections of the F-
    22A's titanium ``forward boom frame'' (a series of load-bearing
    structures within the aircraft's fuselage, located between the engine
    and the wing) which was discovered by the manufacturer in December
    2005. 10 USC 2306b(a)(4) requires that ``There is a stable design for
    the property to be acquired and that the technical risks associated
    with such property are not excessive.'' Air Force officials say that
    the cause of the problem has been identified, and is not expected to
    affect any aircraft built after Lot 5. Air Force officials say that
    ``Neither a redesign nor a retrofit are expected at this time.'' \4\
    However, Air Force officials also note this issue is still being
    evaluated, so making conclusive statements on potential ramifications
    may be premature.\5\ Further, 91 aircraft were potentially affected by
    this problem. Inspecting these aircraft and taking corrective action,
    if any, may require substantial time and effort that was previously
    unforeseen.
    ---------------------------------------------------------------------------
        \4\ ``Bullet Background Paper on F-22A Forward Boom Heat Treatment
    Issue.'' March 16, 2006. U.S. Air Force.
        \5\ Tony Capaccio. ``Lockheed F-22A May Have Flaw Forcing Redesign,
    Rep. Young Says.'' Bloomberg News Service. March 15, 2006.
    ---------------------------------------------------------------------------
        Even if this potential flaw is easily resolved, some may raise
    questions about how this problem was made public. The Air Force briefed
    committee and other congressional staff on the F-22A's proposed funding
    strategy on February 22, 2006 and March 13, 2006, but did not mention
    the potential flaw in either briefing. Yet the potential flaw was
    discovered in December 2005. Were Air Force leaders unaware of this
    potential problem in February and March? Or, on the other hand, were
    Air Force leaders aware of this problem when they briefed congressional
    staff, and chose not to mention it? If so, this may suggest a lack of
    disclosure and transparency on the Air Force's part. Questions may
    remain on whether other problems associated with F-22A manufacture may
    emerge.
        Another complication for the Air Force is the proposed incremental
    funding of F-22A procurement. Section 8008 of the fiscal year 2006
    Defense Appropriations Act (PL 109-148) states that multiyear
    procurement must be based on ``full funding of units to be procured
    through the contract.'' Supporting legislation, such as H.R. 4613 (H.
    Rept. 108-553 of June 18, 2004) make clear that some appropriators find
    incremental funding to be incompatible with MYP contracts: ``the
    committee directs these requirements be met before future multiyear
    production contracts can be entered into: (1) Multiyear contracts must
    follow full funding policies and not be used as vehicles for
    incrementally funding procurement. . .'' Some Members of Congress have
    already expressed concern over the proposed F-22A funding strategy, and
    specifically singled out the incremental funding as objectionable.\6\
    ---------------------------------------------------------------------------
        \6\ Rep. Duncan Hunter. Opening Statement. Hearing of the Senate
    Armed Services Committee on the Defense Authorization Request for
    Fiscal Year 2007 and the Future Years Defense Program. March 2, 2006.
    ---------------------------------------------------------------------------
        Air Force leaders are candid about the unorthodoxy of this
    proposal, and that it may have a difficult time gaining consensus among
    all parties involved in this decision. Air Force leaders describe this
    strategy as a ``one time opportunity'' to save money and to reduce
    risk.
                                     issues
        The issues associated with this proposed funding strategy lend
    themselves to a simple cost benefit calculation: what are the potential
    risks, who is taking the risks, who benefits, and how great are the
    potential benefits? This proposal may present a number of risks
    regarding the full funding principle and the question of ``tying the
    hands of future Congresses.'' For example, incremental funding appears
    to obligate the government to spend money that has not been
    appropriated. If Congress were to cancel the F-22A program under annual
    funding it would have a ``useable end item.'' If it were to terminate
    the F-22A program at the end of a year when the subassembly of an F-22A
    production lot were completed, then the U.S. Government would take
    possession of half-completed aircraft. To get any benefit from these
    incomplete aircraft, the Government would have to spend more money to
    complete manufacture.
        Air Force officials maintain that the chances of the F-22A
    encountering production problems at this stage are remote. Over 100
    aircraft have been manufactured, and the aircraft's design is mature
    and stable. Further, they argue that ``half-finished'' aircraft are not
    useless. They could be broken into piece parts and used to resupply the
    F-22A fleet. This may be true, but it is likely that a cost penalty
    would be incurred by acquiring piece parts in this way. The prime
    contractor is being paid to build an airplane, not supply parts.
    Presumably, some of the cost of building these ``half-finished''
    aircraft would be to cover assembly line overhead, and workers'
    salaries, for example. These costs would be absent from parts purchased
    directly from a supplier.
        Another potential risk is that the potential cost savings from the
    EOQ purchases and MYP contract (if approved) would not suffice to
    offset ``upward cost pressure'' caused by the reduced annual rate of F-
    22A production. Building 20 aircraft per year is appreciably fewer than
    the most efficient rate of production, which is estimated to be 32
    aircraft per year.\7\ The Air Force has not yet calculated how great
    the ``upward cost pressure'' will be. Again, it may be that the Air
    Force will require additional funds in the future to execute this
    proposed funding plan.
    ---------------------------------------------------------------------------
        \7\ Under the previous funding strategy, the Air Force would have
    funded procurement of 29 aircraft in fiscal year 2007 and 27 aircraft
    in fiscal year 2008, closer to the more efficient rate of 32 per year.
    ---------------------------------------------------------------------------
        Some would see a more general risk in setting this precedent. The
    Air Force says that this proposed strategy is a ``one time
    opportunity,'' to reduce risk and to save money. The F-22A production
    line is drawing to a close, they say, and the Air Force won't ask for
    such exceptions again. The F-35 JSF program, however, could potentially
    be delayed further. In that case, and based on the arguments made by
    DOD in support of this funding strategy, DOD could plausibly return to
    Congress in years hence and request more money to extend F-22A
    production to close the widening gap between it and JSF production. If
    the Air Force were successful in securing its requested waivers from
    Congress, the other Services may be motivated to seek similar
    concessions from Congress on their high priority procurement programs.
    If approved, this funding strategy may be cited by future DOD leaders
    as a precedent. Congressman Duncan Hunter, stated that the Air Force is
    ``asking us to approve incremental funding for the F-22A, a precedent
    in and of itself,'' and that he wished to understand ``how we've
    arrived at this very unusual, precedent setting funding strategy.'' \8\
    ---------------------------------------------------------------------------
        \8\ Rep. Duncan Hunter. Opening Statement. OpCit.
    ---------------------------------------------------------------------------
        The Air Force does not have a history of requesting incremental
    funding. This may be its first such request. At one point, requesting
    incremental funding in the Navy was also unusual. Today it has become
    common. For example after the Navy's LHD-6 program received incremental
    funding in fiscal year 1993 and fiscal year 1994, the instances of
    incremental funding in Navy ship building appeared to accelerate. Since
    the mid-1990s, the LHD-8, LHA-6, CVN-21 and DD(X) programs have either
    been incrementally funded, or incremental funding has been proposed. As
    a final example of how the Services cite precedent to justify
    unorthodox requests, in 2001, Navy officials requested the use of
    advance appropriations for Navy ship procurement, noting that this
    funding approach had been used by several Federal agencies other than
    DOD.\9\
    ---------------------------------------------------------------------------
        \9\ CRS Report RL32776. Navy Ship Procurement: Alternative Funding
    Approaches. Ronald O'Rourke.
    ---------------------------------------------------------------------------
        The primary benefit that Air Force leaders say will result from
    this unorthodox plan is that by adding a 9th production lot to the F-
    22A program, the assembly line will remain open for a longer period of
    time. The Air Force says that this will reduce the potential gap
    between the end of F-22A production and the beginning of F-35
    production. DOD believes that, as Air Force Secretary Wynne testified,
    it is in the Nation's interests to maintain a continuous production of
    advanced fighter aircraft in case we encounter a ``hot engagement.''
        This rationale may sound reasonable, but questions persist about
    how beneficial such continuous production may be, and whether these
    potential benefits merit the potential risks involved. The need for
    extending the F-22A production line has already been the subject of
    congressional scrutiny. At a March 1, 2006, hearing of the House Armed
    Services Committee, Chairman Duncan Hunter asked:

              If there was a need to have a fifth-generation fighter
            production line open, why was the decision made last year to
            cut the F-22 production line and then this year reverse that
            decision and extend the production, in both cases producing
            about the same number of aircraft, only now for a billion
            dollars more in program cost? \10\
    ---------------------------------------------------------------------------
        \10\ Rep. Duncan Hunter. Opening Statement. OpCit.

        It is unclear what immediate value keeping the F-22A production
    line open would have in a crisis. If, for example, the United States
    found itself unexpectedly drawn into major conflict and a larger
    inventory of Raptors was desired, it does not appear likely that the
    manufacturer could rapidly produce additional aircraft in large
    numbers. Due to the need to appropriate ``long-lead'' items, such as
    titanium, and to procure in advance other aircraft components, it takes
    3 to 4 years to build a production lot of F-22As from start to
    finish.\11\ Even if large numbers of aircraft were rapidly produced,
    pilots for these aircraft, and maintenance personnel would need to be
    trained and organized. Tools, supplies, and spare parts would likely
    need to be acquired. How long does DOD envision such a ``hot
    engagement'' to last? The most intense and demanding air combat in
    recent operations has been measured in days and weeks, not in months or
    years.
    ---------------------------------------------------------------------------
        \11\ Conversation with SAF/LLW. March 14, 2006.
    ---------------------------------------------------------------------------
        If the F-22A production line were to replace lost capability rather
    than add to fielded capability, it is unclear what scenario DOD
    envisions that would result in such heavy attrition of the Raptor. The
    F-22A has been touted as the only aircraft that can operate in the most
    threatening wartime environments from ``day one.'' Air Force leaders
    have stated that the F-22A will be the aircraft that will ``kick down
    the door,'' by eliminating the most challenging threats and thus enable
    ``persistence'' forces like the F-35 JSF and ``legacy'' forces like the
    F/A-18E/F to operate safely and effectively. If the Air Force is
    concerned that the F-22A could suffer such extensive attrition in a
    near-term conflict (circa 2011), that keeping the production line open
    is a prudent measure, one might ask whether the Air Force has
    overestimated the Raptor's capabilities.
        Air Force leaders assert that they require 381 Raptors not 183.
    Consequently, keeping the production line open longer does not reflect
    a lack of confidence on their part. Instead it simply preserves the
    option of purchasing more aircraft in the future if budgets and
    circumstances permit, which would reduce the gap between the number of
    F-22As the Air Force needs, and the number it can currently afford.
    Although the Air Force has been consistent in recent years in stating
    its requirement for 381 F-22As, it could also be said that DOD must be
    satisfied with the currently planned Raptor inventory, or else it would
    not have cut $10.5 billion from the F-22A budget.
        A final question addresses how effective the proposed F-22A funding
    strategy may be in facilitating the continuous production of DOD's 5th
    generation fighter aircraft. Under last year's plan, F-22A production
    would end in December 2010. According to the JSF Joint Program Office
    (JPO), 21 JSF aircraft are planned for delivery to DOD by that
    date.\12\ These aircraft would enter production in 2008 to make a 2010
    delivery.\13\ Thus, it appears that under the old F-22A funding
    strategy, JSF and F-22A production overlapped by 2 years and that there
    is no break in the production of fifth-generation fighter aircraft.
    ---------------------------------------------------------------------------
        \12\ E-mail from Office of the Secretary of Defense, Legislative
    Affairs. March 13, 2006.
        \13\ Technically, production will begin once advance appropriations
    for long-lead items is obligated. This is expected to occur by the
    second quarter of 2006.
    ---------------------------------------------------------------------------
        Under the new F-22A funding strategy, production would end in
    December 2011. It appears that the only material difference between the
    old and proposed plans, in terms of overlapping with JSF production, is
    that 71 F-35s are expected to be delivered by December 2011; 50 more
    than under the old plan. In terms of schedule, however, the proposed
    funding plan would bring F-22A production 1 year closer to the Marine
    Corps' planed JSF initial operational capability (IOC) in March 2012,
    and the Navy's and Air Force's planned IOC in 2013.
                                   conclusion
        Mr. Chairman, this concludes my remarks on the F-22A. Thank you for
    the opportunity to appear before you and discuss this important issue.
    I look forward to addressing any questions you or the committee may
    have.

        Senator McCain. Thank you very much.
        General Hoffman.

    STATEMENT OF LT. GEN. DONALD J. HOFFMAN, USAF, MILITARY DEPUTY,
        OFFICE OF THE ASSISTANT SECRETARY OF THE AIR FORCE FOR
                              ACQUISITION

        General Hoffman. Mr. Chairman, thank you for very much for
    the opportunity to be here.
        I'm the Military Deputy for Acquisition. As you're aware,
    we do not have an Assistant Secretary of the Air Force for
    Acquisition, so my boss is Secretary Wynne. The good news is,
    we now have a confirmed Secretary, and he is very savvy in the
    acquisition arena. I have great access to him. So, I really do
    not feel a significant gap with the fact that we are missing an
    assistant secretary. We look forward to sharing the workload
    with him or her, when they do show up. But we do have a good
    relationship between the military deputy, who is precluded from
    a lot of statutory acquisition decisions, and the secretary,
    who now fulfills that role.
        For today's hearing on the F-22, I think there are really
    two issues. One is multiyear, and one is full, versus split,
    funding.
        If you look at the multiyear discussion, I think it boils
    down to the first question is: does this Nation want to go
    forward with 60 additional F-22s? The second question is: do we
    intend to perhaps change our mind in the next 12 or 24 months?
    So, if you answer yes to the first question and no to the
    second question, then multiyear funding is the best value for
    the taxpayers' dollars. We think, with the right negotiating
    strategies and the right permissions from Congress and from the
    Office of the Secretary of Defense (OSD), that we can save the
    taxpayer about $400 to $500 million by doing multiyear versus
    three distinct lots. So, we look forward to making the case of
    why we think we've answered the six criteria for when a
    multiyear is applicable.
        The second question is full funding versus split funding.
    This is really an independent question of whether you're a
    multiyear or whether you have discrete annual buys. As the Air
    Force budget went forward to OSD, this was not part of our
    budget. But as the budget was evolved throughout the
    discussions of the QDR in the immense budget pressures that
    occurred in 2007 and 2008 to fund the global war on terrorism,
    to do hurricane relief, and other budget pressures, the cash
    flow within the program was examined, and it was determined
    that there was sufficient cash flow to continue production as
    we know it, but to get the actual authorization for the money,
    and appropriation of the money, in subsequent years. Hence, the
    construct of the split funding evolved. This is not unusual.
    It's been done before, as some of the witnesses have mentioned,
    with Navy programs, with Corps of Engineers programs, and with
    NASA programs. It's really the first time I think any of us can
    recollect that this has been applied to an Air Force program or
    an aircraft program.
        So, the benefit of incremental funding is it frees up
    resources for other uses in the near-years and you pay it back
    in the out-years. This is not unlike what we did about 8 years
    ago, when all military members were paid on the first of the
    month, as opposed to the last day of the month. There was
    immediately billions of dollars of windfall savings for that
    particular fiscal year. But you can only do that once. Once you
    step across the line, you have to buy the whole thing back, or
    you have to continue that split-funding strategy throughout the
    rest of the life of the program.
        But we look forward to explaining both of these topics with
    you today.
        Thank you.
        [The prepared statement of General Hoffman follows:]
              Prepared Statement by Lt. Gen. Donald Hoffman, USAF
        Mr. Chairman and distinguished members of the committee, thank you
    for the opportunity to appear before you today to discuss Air Force
    acquisition and the modernization and recapitalization plan in the
    fiscal year 2007 President's budget request. Our joint warriors are the
    best in the world. However, they can only be as effective as the tools
    we give them. Within today's fiscal constraints, we must fight the
    global war on terror and protect the homeland while transforming the
    force and maintaining an appropriate level of risk. The Air Force is
    committed to balancing the health of today's force with the
    modernization and recapitalization necessary for the capabilities of
    the future. The Air Force appreciates all the support this committee
    has provided to the warfighter and ongoing operations around the world.
        The Air Force has three priorities: winning the war on terror,
    developing and caring for our airmen, and maintaining, modernizing, and
    recapitalizing our aircraft and equipment to meet the Nation's
    requirements. Our Air Force has been at combat for 15 consecutive
    years--from the initial Operation Desert Shield deployments in 1990 to
    our ongoing operations in Iraq and Afghanistan. We have learned a great
    deal from these operations about our capabilities: Global Strike,
    global intelligence surveillance and reconnaissance (ISR), global
    mobility, and information operations and cyberspace. Based on our
    lessons learned, we must adjust our force structure and recapitalize
    our Air Force to continue to meet our obligations under the U.S.
    National Security Strategy. We are operating the oldest inventory of
    aircraft in our history, while maintaining the intense operations tempo
    (OPTEMPO) required by the global war on terror, humanitarian crises,
    and routine requirements. As part of the Air Force transformation
    roadmap, we need to divest some of our older, less capable, and most
    costly aircraft to free up funding to acquire newer aircraft with
    greater capability, increased availability, and lower maintenance
    requirements/costs.
                                    aircraft
        Our primary fighter modernization and recapitalization program is
    the F-22A Raptor. The F-22A is a 5th generation fighter aircraft that
    delivers joint air dominance to counter persistent and emerging
    national security challenges. Given its vast improvements in every
    aspect--air-to-air, air-to-ground, all-aspect stealth, and an adaptable
    architecture--the F-22A is an insurance policy against future threats
    to joint air dominance and represents a best value capability for the
    American taxpayer. The F-22A is the only fighter in production that
    will defeat evolving threats to joint air dominance in anti-access
    environments over the next 20-30 years. The F-22A is flying today and
    is in full rate production with 63 aircraft delivered and 44 in
    production. Its performance continues to meet or exceed key performance
    parameters and spiral modernization will further enhance its air-to-air
    and air-to-ground target engagement capability.
        In the fiscal year 2007 President's budget (PB), $1.05 billion was
    added to the Future Year Defense Plan (FYDP) for a total of 183
    aircraft. To reduce unit cost, the PB requests multiyear procurement
    authority from Congress to procure the next 60 aircraft (Lots 7-9) and
    requests economic order quantity funding of $200 million to achieve the
    projected Lot 8 and 9 savings. In addition to procuring more F-22s, the
    multiyear procurement strategy will extend the production to fiscal
    year 2012 and allow the Department to keep this fifth-generation
    fighter line ``hot'' in the event there are delays to the Joint Strike
    Fighter (JSF) program.
        The F-35 JSF, also a fifth-generation fighter aircraft, will
    complement the tremendous capabilities of the F-22A. The JSF will
    recapitalize combat capabilities currently provided by the F-16 and A-
    10. Optimized for all-weather performance, JSF will provide affordable
    precision engagement. The JSF program will develop and produce a family
    of affordable, stealthy, multi-role strike fighter aircraft meeting the
    operational needs of the U.S. Air Force, U.S. Navy, U.S. Marine Corps,
    and allies.
        The fiscal year 2007 PB recommends termination of the F136 engine
    development program to provide cost savings of $1.8 billion through
    fiscal year 2011. The Department concluded a single engine supplier
    provides the best balance of risk and cost based upon recent experience
    with engine development for the F-22 and F/A-18E/F which indicates
    sole-source risks were modest and acceptable. The Pratt and Whitney
    F135 engine continues to meet or exceed stringent JSF performance
    requirements.
        The C-17 continues to be a success story for the joint warfighter,
    deploying troops and cargo to Iraq and Afghanistan, as well as numerous
    locations around the world. The Air Force is on schedule for delivery
    of the next 40 aircraft through 2008--for a total of 180. During the
    past year, C-17s flew over 63,000 sorties, bringing the total number of
    Operation Enduring Freedom and Operation Iraqi Freedom missions to over
    109,000. Additionally, the C-17 flew over 100 humanitarian and disaster
    relief missions following Hurricanes Katrina and Rita, as well as the
    October 2005 earthquake in Pakistan. Since September 11, 2001, C-17s
    have over flown projected service life hours by 30 percent
    (approximately 190,000 hours). The C-17, in concert with C-5
    modernization programs, is critical to meeting our U.S. intertheater
    airlift requirements.
        The C-5 fleet is a strategic airlift force multiplier as it enables
    the C-17 to exploit its unique multi-role mission. Born in the 1960s,
    our 112 C-5s have served us well; however, the size and complexity of
    the aircraft have always been a challenge to maintainers. The typical
    C-5 mission capable rate is around 55 percent. To improve the rate, the
    Air Force plans a two-phase technical refresh, the first is the C-5
    Avionics Modernization Program. This program will replace legacy
    equipment with a glass cockpit and updated avionics that allow
    navigation through increasingly restrictive airspace as well as modern
    communications to allow connectivity with the global grid. We are
    installing this modification now and will complete operational testing
    next year. The second phase is the C-5 Reliability Enhancement and Re-
    engining Program. This program will improve reliability by replacing
    over 70 high failure items, to include the engines. With these two
    efforts combined, we expect to raise our wartime mission capable rate
    to at least 75 percent and lower our operating cost significantly,
    allowing our C-5 fleet to continue service for decades to come.
        Today, the current KC-135 fleet of 531 aircraft has an average age
    of 45 years. The KC-135 was developed during the Eisenhower era with
    the primary purpose of refueling the B-52 in support of the Single
    Integrated Operations Plan. The KC-135 role expanded during the Vietnam
    War to support tactical combat and combat support missions. Now, in the
    post-Cold War and global war on terror environment, the KC-135 serves
    as a critical joint force enabler . . . it is key to this Nation's
    ability to project joint power globally. The aircraft's primary role
    still supports tactical combat and combat support missions; however,
    the environment in which it operates and the extent of its mission has
    changed dramatically with the evolution of technology, both that of our
    enemies and ours. This change calls for a tanker with greater
    capabilities.
        The tanker replacement program and fiscal year 2007 budget request
    were based on a notional contract award in fiscal year 2007 with first
    delivery in fiscal year 2010. This program builds upon fiscal year 2005
    and fiscal year 2006 legislation regarding tanker replacement and the
    stated congressional intent to procure 100 aircraft within 10 years.
    Presently, the Air Force tanker recapitalization efforts are on pause
    until the Under Secretary of Defense for Acquisition Technology and
    Logistics (USD (AT&L)) provides the Air Force direction to resume. When
    we receive this direction, we will work with the USD (AT&L) to develop
    the appropriate acquisition strategy and timing. This acquisition
    strategy will take into account the warfighters' requirements, the
    recent KC-135 Recapitalization Analysis of Alternatives, the Mobility
    Capability Study, affordability concerns, and the material condition of
    the KC-135 fleet. We recognize the funding profile will then need to be
    refined to reflect this strategy, particularly in light of the current
    program pause. We remain dedicated to ensuring our warfighters, both
    present and future, continue to have this critical capability.
        To meet continuing intratheater airlift demands, we have a two-
    pronged approach to modernize our C-130s. First, we are striving to
    replace our oldest aircraft with new C-130Js. Second, the remaining C-
    130s are being standardized and modernized via the C-130 Avionics
    Modernization Program and center-wing box replacement programs. C-130s
    have been the workhorse for intratheater airlift during numerous
    contingencies. The new C-130Js have supported global war on terror and
    humanitarian operations since December 2004 and have proven to be a
    force enhancer as they deliver more cargo in a shorter time than older
    C-130s. C-130 modernization, coupled with the wing-box modification,
    reduces operation and sustainment costs and improves combat capability.
        The third strategy for intratheater airlift is direction from the
    Office of the Secretary of Defense to establish an Army/Air Force Joint
    Program Office (JPO) for a future cargo aircraft and light cargo
    aircraft to meet the intratheater airlift capability to reach remote
    areas with small, unimproved runways. The Air Force is working with the
    Army to ensure a joint strategy for this program which is now called
    the Joint Cargo Aircraft (JCA). The Army and Air Force are also
    developing a memorandum of agreement for the JCA program.
        From our heritage to horizon, the Air Force understands that the
    challenges of the 21st century must be met by continued exploitation of
    our Nation's technological leadership and by the ability to respond
    quickly to the demands of a rapidly changing world. Our goal is to
    field today's technology today, not yesterday's technology tomorrow.
    Air Force Smart Operations 21 (AFSO 21) will enact process re-
    engineering throughout the Air Force. Use of commercially-proven
    methodologies such as Lean, Six Sigma, Continuous Process Improvement
    and business process re-engineering can yield not only savings for our
    tight modernization budgets, but also reduce cycle time and provide a
    better product for the warfighter. The acquisition and sustainment
    communities have been actively pursuing process change over the past 2
    years while emphasizing a ``back to the basics'' approach in how we do
    acquisition. We are developing and prototyping flexible management
    methodologies to more effectively allocate resources and oversight
    across the acquisition domain. Additionally, there are ongoing efforts
    to recruit, develop, and retain the right mix of military, civilian,
    and support contractors with the right skill sets to get the job done.
    Given that the acquisition community will continue to operate in an
    environment of constrained resources and high operational activity, we
    are refining our processes to be more responsive to warfighter needs
    and operate more efficiently. Our intent is to bring back stability and
    credibility to our recapitalization and modernization efforts.
        Again, I appreciate the support provided by Congress and look
    forward to working with this committee to best satisfy our warfighter
    needs in the future.

        Senator McCain. Thank you very much, General.
        General Hoffman, current law requires that you enter into a
    multiyear procurement contract, only if doing so results in a
    substantial savings, right?
        General Hoffman. Yes, sir.
        Senator McCain. Has the Air Force completed a business-case
    analysis (BCA) yet?
        General Hoffman. Sir, we are using Institute of Defense
    Analyses (IDA) to do an independent assessment of the BCA. They
    have promised their results in May--I think we'll have an
    earlier peek at those results in April--to make that business
    case for what we think will be about 5 percent, plus or minus a
    percent, of savings.
        Senator McCain. Mr. Sullivan, have you ever heard of
    incremental funding for a weapons system such as this?
        Mr. Sullivan. Only to the extent that I've heard about it
    in some of the Navy shipbuilding where they've done split
    funding and things like that. Ships under construction take
    longer. I don't believe I've ever heard of any multiyear
    procurement funding that was incrementally funded on any
    aircraft program. I know that, for example, the F-18 is a
    multiyear procurement for the procurement of the Es and Fs, and
    that was fully funded.
        Senator McCain. General Hoffman, I am obviously concerned
    about this precedent-setting kind of proposal, particularly in
    light of the cost increases and the technical difficulties
    associated with this new weapons system. I understand that,
    given the enhanced capabilities and new technologies, that some
    of that is, historically, probably not precedented. But now
    you're asking us to approve a proposal that is not in keeping
    with any standard procedures that we have followed in the past.
    Are you asking us to proceed on a basis of trust?
        General Hoffman. Sir, I think we have a good-news story to
    say in the F-22 program on cost, and when we talk about
    production cost, it's a firm, fixed-price, negotiated contract.
    Over the last three lots, we have reduced the flyaway cost of
    the aircraft by 16 percent, 11 percent, and 14 percent, I
    believe are the numbers. So, lot by lot by lot, we are
    negotiating continually lower costs in the cost of the
    platform.
        We think the manufacturing base is stable, and we're ready
    to move forward to a multiyear construct to reap additional
    savings.
        Now, those cost savings that I described there were with a
    production rate of around 23 or 24 aircraft per year. As we
    reduce that rate to 20, obviously costs go up. So, anytime you
    perturbate one variable in the equation, you perturbate other
    variables, as well. So, in the multiyear we're talking about
    20, 20, 20. I'm not talking about trying to negotiate a lower
    cost per aircraft, but we're going to cost avoid the impact of
    that spike by lowering the production rate.
        Senator McCain. So, the cost has gone down, but, now that
    we're lowering the number of aircraft to be procured, the cost
    is going up.
        General Hoffman. Yes, sir. Multiyear will allow us to have
    it go up less than if we did not have multiyear.
        Senator McCain. Mr. Sullivan?
        Mr. Sullivan. Yes, one of the things that we looked at when
    we saw the proposal as it is now--and I know that their
    proposal isn't complete, and it will be completed in May, so we
    haven't seen the final--but if you compare it to what was in
    the fiscal year 2006 President's budget, where they were going
    to buy 4 fewer aircraft, but the funding for the 56 they were
    going to buy, that was going to be $166 million per aircraft.
    Under this new multiyear procurement plan for the final 60
    aircraft, the unit cost would actually be $179 million, so it
    goes up by about 8 percent.
        Now, in the final analysis, that's because, I think what's
    really happening here is, they're trying to extend the program
    for 2 years in order to keep the production line hot for the
    fifth-generation fighters, and then probably the question is,
    is that really what needs to be done? But the multiyear
    procurement is not, by any means, going to reduce costs from
    what the President's budget was a year ago. In some of the
    plans that they're working on now, the more optimistic
    scenarios, it shows only a 5-percent reduction. So, I think
    that's questionable.
        Senator McCain. Mr. Marron? On this issue.
        Mr. Marron. We've seen just the numbers that we got to see
    yesterday--some of the preliminary figures that have been
    provided. Obviously, we haven't seen the full BCA yet. It seems
    that there may be some benefits from doing multiyear
    procurement. There may be some cost reduction that flows from
    that. But, again, as hinted, the figures seem to be somewhere
    in the 5-percent-of-the-total-contract-cost range.
        Senator McCain. General Hoffman, isn't it putting the cart
    before the horse to request this before you've done a BCA?
        General Hoffman. Sir, we could get all our ducks in a row
    and do the BCA, answer all the stability and other questions
    here, and come back next year for a 2-year multiyear, but then
    you don't have the cost avoidance. So, the sooner you do a
    multi-----
        Senator McCain. But how do you know that there's cost
    avoidance if you haven't done an analysis?
        General Hoffman. We are going to do that. That's what IDA
    is doing.
        Senator McCain. But how could you decide it before you've
    done the analysis? You say you are doing it, but you haven't
    done it.
        General Hoffman. We don't have the results of it yet, sir,
    but we do have a rough analysis that shows there are potential
    savings--we think, in the order of 5 percent--by doing a
    multiyear versus three discrete, separate buys.
        Senator McCain. The reason why we have the requirement for
    analysis is so that we do an analysis, not because we have a
    rough analysis. But we require an analysis, and that's by law.
    It's interesting that OMB Circular A-11 states very clearly,
    ``Good budgeting requires that appropriations for the full cost
    of asset acquisition be enacted in advance to help ensure that
    all costs and benefits are fully taken into account at the time
    decisions are made to provide resources. Full funding with
    regular appropriations in the budget year also leads to
    tradeoffs within the budget year with spending for other
    capital assets and with spending for purposes other than
    capital assets,'' which brings to mind we obviously need a new
    tanker--all of us agree with that--for the Air Force. Some
    tradeoffs are going to have to be made at some time. So, if we
    lock in this program, where do we get the money for the new
    tanker?
        General Hoffman. Mr. Chairman, we've already done, I think,
    the bow-wave adjustments for all the programs--CSAR-X and many
    of the other high-ticket items that are in our out-years
    there--Joint Cargo Aircraft and so forth. We included the
    appropriate growth wedges in the Future Years Defense Plan
    (FYDP). Especially on the even years, which would be 2006 and
    2008 are where we level that across. In the odd years, a little
    bit of broken glass, perhaps, accumulates, because the ground
    rules for doing the odd-year one is, we don't submit new
    initiatives, and we don't do anything other than fix what has
    to be fixed in that particular year. These are the OSD rules
    for the 2-year budgeting cycle that we're on. Then, in the even
    years, we go out there and make sure that the FYDP is properly
    balanced and, beyond the FYDP, does not have a growth spike out
    there that is not digestable by what we have as our projected
    share of the total obligation authority. So, we think our game
    plan for F-22, JSF, future tanker replacement, and so forth is
    disgestable within our share of the Total Obligation Authority
    (TOA).
        Senator McCain. I thank the witnesses.
        Senator Chambliss.
        Senator Chambliss [presiding]. Thank you, Mr. Chairman.
        Mr. Bolkcom, you said that this is unusual, there's no
    precedent for the Air Force requesting incremental funding. But
    you would agree, as Mr. Sullivan said, this is quite common in
    the Navy, in the purchase of weapons of systems, is that
    correct?
        Mr. Bolkcom. I agree that it is common in shipbuilding,
    Senator.
        Senator Chambliss. Okay. So, this is not some new animal
    that we are setting sail on here with respect to this.
        General Hoffman, some of your F-22A critics regarding
    incremental funding approach have compared what the Air Force
    is trying to do with F-22A funding this year to what the Air
    Force attempted to do with C-17 in 2003. I understand there are
    some important differences in those cases. Would you care to
    explain why the F-22A funding is not the same as C-17 proposal
    years ago?
        General Hoffman. Yes, Senator.
        I think--and I was not around during the C-17 timeframe--
    but my understanding of what happened there is that we had, in
    the advanced procurement, excessive amounts of what is
    traditionally used for advanced procurement. So, there was
    money in excess of what was needed just for the long-lead
    items. In addition, the contractor, through efficiencies on the
    production line and all that, got ahead of his production
    schedules. The combinations of those events allowed us to start
    actually getting into aircraft assembly prior to the
    authorization for aircraft assembly by Congress. So, we
    basically outran our permissions with the available funding. We
    had the money, but we outran our permissions. So, that's the
    simplistic view I have, as I understand the situation back
    then.
        With the F-22, we're going into this with eyes wide open
    right from the front, with the dialogue to say, ``here's what
    our intentions are with the money, year-by-year.'' We have
    established, and will negotiate with the contractor, very
    specific control mechanisms that do not allow him to outrun the
    permissions that have been established by Congress.
        Senator Chambliss. Anybody else care to comment on that C-
    17 comparison?
        Mr. Bolkcom. Sir, I would just offer that, in their own
    words, the Air Force says, ``This is an unorthodox program,''
    whether it's like the C-17 or not. It is unusual. It is
    contrary to the way they normally do business.
        My research led me to believe that the onus is really on
    the Air Force to present an ironclad case, a really compelling
    case, for why these risks are justified, what potential
    benefits we're going to get.
        Mr. Marron. I'd just like to second that----
        Senator Chambliss. Sure.
        Mr. Marron.--and to say that, at some level, this is a
    burden-of-proof argument, in that the default position is that
    full funding is the way these types of assets ought to be
    acquired. It's required by law that if you do multiyear
    procurement, you can't do incremental funding. So, presumably
    there's a fairly high burden to explain why, in this case, we
    would deviate.
        Senator Chambliss. Part of the argument, as I understand
    it, is that you get to the end of the road on the current
    schedule, with the procurement of the F-22, and there's the
    potential you don't have anything else out there. We're in the
    middle of a war and we have to have a weapon system that does
    what the F-22 does, and potentially does what the JSF does. So,
    I'm inclined to think they've made a pretty good case for that
    assuming your argument's true.
        General Hoffman. Senator, if I could, we don't view
    multiyears as unorthodox at all. That's standard practice for
    any long-term production run. What is unusual this year is
    split funding. That is unusual. It's brought about by the need
    for near-year funding for the DOD that needed, in the numbers
    of billions of dollars, to pay other bills this year. The F-22
    was the program they looked to, because they had those amounts
    of money, and they could, without perturbating the production
    flow, harvest those amounts of money and pay them back in later
    years. Had there been other programs of that magnitude and at
    that stage of their production maturity, I believe the DOD
    would have looked at a couple of other programs, as well.
        Senator Chambliss. Mr. Bolkcom, Mr. Sullivan, and Mr.
    Marron, I heard what General Hoffman said, relative to the fact
    that with a multiyear we're not going to necessarily save any
    money, but we're going to keep the costs from increasing. I
    believe you said there's a possibility of some savings. Would
    you all care to comment on that? Because normally when we think
    of doing a multiyear, there are, in some cases, significant
    savings. Any comment you all have, relative to that?
        Mr. Sullivan. I would say that when we're looking at this
    program, this program is at the end of its production run. In
    fact, in last year's budget, it was to terminate production in
    2008. So, it's not a multiyear procurement that's happening
    near or at the beginning of production where they can really
    ramp up and get some of those efficiencies. So, in that regard,
    this is a little different animal.
        What we did is--I'll go back to what I said earlier to
    Senator McCain--we looked at where the program was before they
    introduced the idea of multiyear procurement, and found that
    they added a billion dollars to the budget in order to carry
    out the 3 years of 20 aircraft each under multiyear
    procurement. So, we see, really, no savings in going in that
    direction.
        In addition to that, I think now that Congress is going to
    receive a package to have to deliberate over, that justifies
    multiyear procurement a lot sooner than it was going to in the
    past, I think that's due in May, and you'll have to deliberate
    over that quickly, I think, in order for them to pull this off.
    So, along with the other issues that come up that Mr. Marron
    discussed, things like tying future Congress' hands, those are
    issues that concern us.
        Senator Chambliss. Yes.
        Mr. Bolkcom. Is 5 percent significant? General Hoffman says
    he believes the IDA analysis would show that the multiyear
    procurement will give us about a 5-percent savings. The last
    time this statute included any hard numbers, it said the
    requirement was for 10 percent. That's been changed, and the
    statute says ``significant savings.'' I guess it really depends
    on if 5 percent is your idea of significant.
        General Hoffman. It's all a matter of scope, 5 percent of
    this program is still $400 to $500 million. So, if we don't
    consider that significant, we don't need to be talking about
    multiyear.
        Senator Chambliss. Buys a lot of body armor.
        Mr. Marron, in your written statement you criticized the
    Air Force and the DOD for not requesting appropriations
    sufficient to cover a potential cancellation liability relative
    to F-22A multiyear procurement program. However, later in your
    statement you mentioned that, in fact, DOD has taken a similar
    approach regarding budgeting for cancellation liability for
    many other multiyear contracts. The fact that DOD does this
    often doesn't necessarily make it right, but it does help us
    see this issue in a different light.
        Mr. Marron and General Hoffman, I'd appreciate your
    thoughts and comments on this particular issue.
        Mr. Marron. Certainly. It's definitely important to
    distinguish the incremental funding issue inside a multiyear
    procurement, which is a unique special case, from the
    nonfunding of the cancellation liability, which, as you point
    out, is increasingly commonplace among military acquisitions.
        On the civilian side, cancellation liabilities are funded
    upfront. There is still full funding. Not so much, in practice,
    on the military side.
        From a perfect budgeting point of view, that's problematic.
    It would be preferable to fully fund all the potential costs up
    front. If you don't fund the cancellation liability, there is a
    chance that you find yourself, at the end of the year, wanting
    to cancel the program, and not having the resources allocated
    to do so, and there will be the need to come back to Congress
    to get additional appropriations, or you'd have to find
    somewhere else to cut.
        So, that is a challenge from the budget process point of
    view, but I agree with you, it is a less-unique, less-new issue
    than we have with incremental funding.
        Senator Chambliss. General Hoffman.
        General Hoffman. Senator, I'd like to be a little more
    precise, perhaps, in the terms here. We use the term
    ``termination liability,'' and that's a liability that's
    carried on many programs in case the Government terminates the
    program before all the funding has transpired. In that case,
    we'd tell the contractor, ``Stop doing what you're doing,'' but
    we'd still owe them for what they've already done. So,
    termination liability covers that, and that's carried within
    the program. As you fully execute a program, that dwindles
    down, then, because you'd have less and less that is unfunded.
    You've covered your hedge, if you will.
        The other term is ``cancellation ceiling,'' and that
    applies only to multiyear contracts. With OSD's permission,
    that can be carried. That contingent liability for us changing
    our mind for future years' business can be carried outside the
    program, with OSD permission.
        So, I think we're blending terms here. There's termination
    liability and there's cancellation ceiling, and the two are
    independent of each other.
        Senator Chambliss. Mr. Marron, in your written statement,
    you comment that, although the Air Force indicates that it may
    be able to pay cancellation costs from funds appropriated for
    the F-22A procurement, combining multiyear procurement and
    incremental funding makes that unlikely. I believe that what
    the Air Force has said is that they will be able to cover any
    termination liability with F-22 funding.
        It may sound like I'm mincing words, but ``cancellation
    liability'' or ``cancellation ceiling'' that we just referred
    to is not the same thing as ``termination liability.''
        My previous question illustrated that, perhaps with most
    multiyear contracts DOD does not fully budget for cancellation
    costs. General Hoffman, in this case, the Air Force does plan
    to cover any termination costs within the current funding for--
    --
        General Hoffman. Termination liability will be covered
    within the program. We have enough for 2007. It will be covered
    by 2008 program objective memorandum (POM) submission to
    continue to cover that in the future years from within the
    program.
        Senator Chambliss. Okay, and the point is that you never
    want to get to the point in the program where you're using a
    line of credit to pay for things.
        Mr. Bolkcom, you discussed the justification for the F-22A
    multiyear contract in your written statement and raised a few
    concerns relative to consistency in the budget request for the
    F-22A, as well as issues related to the forward-aft boom.
    Regarding your first concern, I believe the QDR sustained the
    requirement for continued F-22A production and funding through
    at least 2010, and program budget decision (PBD) 720 enacts
    this plan in the fiscal year 2007 President's budget. Regarding
    your second issue, DOD recognized the maturity of F-22A
    production processes a year ago, in April 2005, when they
    approved the program for full-rate production.
        I know that some have claimed that this forward boom
    titanium heat-treating issue indicates a design stability
    problem. Rather, all the facts we have on this situation
    indicate that the design is completely stable, and instead,
    this is an issue of a contractor, which the prime contractor is
    no longer using, by the way, not following the stated design,
    rather than there being a problem with the design.
        Now, it is clear that this is not a structural-integrity or
    safety-of-flight issue. Does anybody have any disagreement with
    that or wish to comment on that?
        Mr. Bolkcom. If I may, sir, thank you for your question.
        Senator Chambliss. Sure.
        Mr. Bolkcom. The point I was trying to convey in the first
    point is that this plan is quite a turnabout from what we saw
    just last year. PBD 753 cut $10 billion from the program. So, I
    guess you could argue it either way. But I do see some recent
    changes in the direction of the program.
        On the second point, I would not argue that it is a design
    stability issue. I think many things suggest the design is
    stable. My point is, it's premature to say what it is or what
    it isn't, because the Air Force itself has said, ``We're still
    evaluating this problem.'' In fact, they do have to inspect a
    number of airplanes, some of which will require invasive
    evaluations.
        So, my point is that it's a little premature to say what it
    is and what it isn't.
        Senator Chambliss. General Hoffman.
        General Hoffman. Senator, on the requirements side, I think
    we do have stable requirements. On the funding streams, I think
    we have been all over the map here, as we've seen in PBD 753
    and the cuts to it, and the increases we have this year. So
    there's a difference here between whether the requirements are
    going up and down, or whether the funding to support those
    requirements are going up and down. I will acknowledge that our
    support of the program has gone up and down, but I don't think
    the requirements have.
        As far as the boom, this gets confusing. When you hear a
    ``boom,'' people don't know what we're talking about. I think
    we do have some pictures here. I think we may have some to pass
    out. But this is the article we're talking about, right here.
    These two lugs, right here, are the part of the article that's
    in question. When this is put in a furnace to heat treat it,
    the heat treating is designed to rearrange the molecular
    structure of the metal to make it more resistant to crack
    propagation. Whether a crack forms in the first place or not,
    and whether being heat treated or not heat treated properly has
    any impact on the initiation of a crack, we don't know. The
    logic is that if you heat treat it, it'll prevent the
    propagation of a crack. When these irons are put in an oven,
    they're brought up to the proper temperature and stuff, but as
    this form was placed in the oven, it was held in place by some
    supports, and so the heat didn't propagate properly into that
    portion of the forging.
        Just like in the old days of TV dinners, when you left the
    tin foil on a certain part, and you peel the back on a
    different part, you get different heating properties in your
    dinner. The same thing happened here, and the heat didn't get
    all the way into this part. Now, whether or not that has an
    effect on the long-term sustainment of the aircraft, we don't
    know. We have some engineering studies going on right now. We
    don't believe it's a safety issue. We have not restricted the
    aircraft in any way. They're out there flying right now and as
    we open these aircraft up for other maintenance activities that
    we'd have to go into this area, because the wings have to come
    off to get into this particular area, over time, we'll continue
    to study and monitor any issues that may occur with this.
        But right now we believe this certainly is not a stability
    of manufacturing or a design flaw. It's perhaps an application
    of a standard to a particular subvendor.
        Senator Chambliss. Let's include this, ``Frame 2, lower lug
    bore, four sheets'' here to the record.
        [The information referred to follows:]

        Senator Chambliss. General Hoffman, the criteria for a
    multiyear contract are pretty clear and relate to having a
    stable requirement, configuration, and funding; realistic cost
    estimates; preserving the defense industrial base; and saving
    money. Another perhaps more subjective argument that Secretary
    Rumsfeld made in the QDR dealt with preserving a fifth-
    generation fighter production line until the next fifth-
    generation fighter is in stable production. None of us know
    exactly what's going to happen with the JSF program, but it is
    certainly not going to begin delivering any earlier than
    currently planned, which, at this point, is 2010.
        I'm a big supporter of the JSF, but, to me, keeping the F-
    22A line open at least until JSF production is mature and
    stable makes sense and adds some additional rationale for an F-
    22A multiyear, which the formal multiyear criteria does not
    necessarily capture. Would you care to comment on that?
        General Hoffman. I think that argument lends itself to
    continuing production of the F-22. Whether we do it multiyear
    or in three or more discrete buys, I think, is independent of
    the argument about the industrial base and preserving our
    fifth-generation fighter capability. We could do this year by
    year by year and achieve those same objectives. There's more
    stability to the workforce, and there's potential savings to
    the taxpayers if we go the multiyear route.
        Senator Chambliss. Okay, gentlemen, thank you all very
    much. I appreciate your being here.
        We'll ask our second panel to come forward, which I believe
    is a couple of gentlemen we already have sitting here, Mr.
    Sullivan and Mr. Bolkcom. We would also ask Rear Admiral Thomas
    Kilcline and Rear Admiral Steven Enewold.
        Okay, gentlemen. Now that we've solved all the problems
    with the Air Force's tactical air (TACAIR) issues, we'll move
    to the Navy's TACAIR issues. We'll start with again Mr.
    Sullivan, if you kick off any opening statement relative to
    Navy TACAIR, we'll be glad to hear from you.
        Mr. Sullivan. The opening statement I made at the beginning
    of the first panel consumed what I would say on JSF.
        Senator Chambliss. All right. Mr. Bolkcom, anything
    additional from you?
        Mr. Bolkcom. Yes, Senator Chambliss. I have a brief
    statement.
        Senator Chambliss. Sure.
        Mr. Bolkcom. Thank you for inviting me to stay for the
    second panel and discuss the F136 alternate engine program. As
    requested, my testimony will address the program and the
    analysis recommending its termination.
        Again, I request that my more complete written statement be
    included in the record.
        Senator Chambliss. Without objection.
        Mr. Bolkcom. Thank you.
        DOD's fiscal year 2007 budget request proposes to cancel
    the F136 engine, a program initiated by, and consistently
    supported by, Congress. The reason given for this decision is
    that it would save $1.8 billion and entail little operational
    risk. However, Air Force leaders such as Michael Wynne have
    expressed concern over potential industrial-base problems
    resulting from this termination. Also, by terminating the F136,
    DOD may lose an effective tool for promoting accountability and
    cost control in the acquisition process.
        Deputy Secretary of Defense England has written and
    testified that, ``the Department's analysis concluded that a
    second engine source would not yield program cost savings.''
    However, it appears that DOD's cost analysis is incomplete and
    makes a number of assumptions that are open to debate. For
    example, DOD appears to amortize F136 costs over a production
    run of only 3,000 engines, rather than the approximately 8,500
    engines current JSF partners will require. Further, the DOD
    analysis does not consider the potential savings from
    competition during the operation and support of these engines
    over the JSF's 20- to 30-year life. When these variables are
    included, projections of cost savings appear to easily pay for
    the cost of a second JSF engine.
        DOD argues that canceling the alternate engine would incur
    little operational risk. Again, DOD's analysis appears to be
    incomplete and to contain a number of assertions that are open
    to debate.
        First, DOD notes that the JSF's primary engine, the F135,
    and its predecessor, the F119, are operating well, and that the
    F119 has successfully amassed 18,000 test-flight hours. These
    facts, however, do not guarantee that future problems will not
    emerge. Engines that have accumulated millions of operating
    hours still have required upgrades and modifications to address
    performance and reliability issues.
        Second, the DOD analysis does not appear to consider a
    number of factors that will increase risk or the consequences
    of relying on a sole JSF engine type. For example, the JSF will
    be a single-engine aircraft, unlike the twin engine F-22 and F/
    A-18. Also, one of the JSF variants will field a complex and
    new type of short takeoff, vertical landing (STOVL) engine.
        Finally, unlike past experience, the JSF will be DOD's only
    fighter aircraft. If the JSF engine develops a problem, no
    similar aircraft will exist to satisfy the mission.
        Some are concerned that terminating the F136 will lead to a
    weakening of the fighter aircraft engine industrial base. A
    definitive response to this concern is elusive, but, arguably,
    the longer the F135 exists as the sole JSF engine, the more
    difficult it would be for others to enter a competition.
        Another industrial issue is whether terminating the F136
    might hurt JSF export. Pratt & Whitney and General Electric
    (GE) currently compete against each other to supply engines for
    foreign sales of F-15s and F-16s. This competition makes the
    aircraft attractive to potential buyers. Some fear that if the
    JSF can only offer a single engine type, sales may not live up
    to expectations.
        A final issue about terminating the F136 is that, by doing
    so, DOD may weaken its leverage over industry in the
    acquisition process. The last time they succeeded in fostering
    an alternate engine, Air Force leaders say that the resulting
    competition conferred benefits that today's acquisition
    officials would have a difficult time replicating. These
    benefits included fixed-price contracts from the very first
    production lot, engine improvements well in advance of what had
    been promised prior to the competition, and dual sources and
    separate prices for critical parts that allowed the Government
    to reprocure spare parts from sources other than the prime
    contractors.
        Mr. Chairman, Senator Chambliss, this concludes my remarks
    on the F136. Thank you for the opportunity to appear before
    you.
        [The prepared statement of Mr. Bolkcom follows:]
                   Prepared Statement by Christopher Bolkcom
      cancellation of f136 alternate engine for f-35 joint strike fighter
        Mr. Chairman, distinguished members of the subcommittee, thank you
    for inviting me to speak to you today about the F136 Alternative Engine
    Program. As you requested, my testimony will address the F136 program
    and the Air Force's analysis and conclusions recommending its
    termination.
    Introduction
        The Department of Defense's (DOD) fiscal year 2007 budget proposes
    to cancel the F136 alternate engine for the F-35 Joint Strike Fighter
    (JSF), a program which was initiated by Congress in the National
    Defense Authorization Act for Fiscal Year 1996, and which has received
    consistent congressional support since its inception. The reason cited
    for this proposed cancellation was that it would save $1.8 billion over
    the Future Years Defense Plan (FYDP), yet entail little operational
    risk.
        Some DOD leaders, however, have expressed mixed feelings about this
    decision. On February 16, 2006 Secretary of Defense Rumsfeld testified
    that the merits of terminating the F136 were ``clearly debatable.''
    \14\ On March 1, 2006, Air Force Secretary Michael Wynne testified that
    he was worried about the ``downstream effects'' of this decision.\15\
    These statements may suggest that there is a lack of consensus within
    DOD regarding this course of action, or it may simply presage the
    congressional scrutiny to follow.
    ---------------------------------------------------------------------------
        \14\ Michael Bruno. ``House defense appropriators push back on JSF
    engine.'' Aerospace Daily & Defense Report. February 17, 2006.
        \15\ CONGRESSIONAL TRANSCRIPTS. Reuters. Congressional Hearings.
    March 1, 2006. House Armed Services Committee Holds Hearing on Fiscal
    Year 2007 Budget: Air Force.
    ---------------------------------------------------------------------------
    Background
        In fiscal year 1996, defense authorization conferees (H. Rept. 104-
    450, Sec. 213) expressed their concern over a lack of engine
    competition in the JSF program and directed DOD to ensure that the
    program ``provides for adequate engine competition.'' (p.706) \16\ In
    fiscal year 1998, authorization conferees (H. Rept. 105-340, Sec. 213)
    directed DOD to certify that ``the Joint Strike Fighter Program
    contains sufficient funding to carry out an alternate engine
    development program that includes flight qualification of an alternate
    engine in a joint strike fighter airframe.'' (p.33)
    ---------------------------------------------------------------------------
        \16\ At that time, the JSF program was The Joint Advanced Strike
    Technology Program (JAST).
    ---------------------------------------------------------------------------
        Congress' interest in establishing and funding an alternate engine
    to the JSF's primary engine--the Pratt & Whitney (PW) F135--may have
    been informed by what has become known as ``The Great Engine War'' that
    ran from 1984 to 1994. The Great Engine War describes the competition
    between PW and General Electric (GE) to produce engines (the F100 and
    F110 respectively) to power the Air Force's F-16 Falcon and F-15 Eagle
    fighter aircraft. This competition was held annually between 1984 and
    1994 to produce and maintain these engines for the Air Force. After
    1994, PW and GE continued to compete for engine business among foreign
    air forces that operated the F-16 and F-15. At the time, this
    acquisition strategy was unprecedented, and controversial. Many
    extolled the advantages of competition and the benefits it conferred to
    DOD and the taxpayer.
        The Great Engine War's roots extend well before 1984. Most
    observers credit Congress with initiating this competition by providing
    funds in fiscal year 1976 and fiscal year 1979 to develop a new engine
    that might serve to power the Navy's F-14 Tomcat, or the Air Force's F-
    15 and F-16. Ultimately, DOD spent over $376 million to develop the
    F110 to compete with the F100, and $600 million to improve the F100's
    durability and reliability to make it a stronger competitor. Proponents
    believe that the annual competition during the Great Engine War
    produced better engines, on better terms, for less money than would
    purchasing from a single company facing no competition. Recently,
    contrary opinions have emerged, and critics say that ``There is no
    evidence that the F-16 engine competition saved money.''\17\
    ---------------------------------------------------------------------------
        \17\ ``Joint Strike Fighter--Engine Development,'' (JSF Talk-3)
    Talking Points. Pratt & Whitney. February 23, 2006.
    ---------------------------------------------------------------------------
        Some have criticized DOD as being ``penny wise and pound foolish''
    in its proposal to terminate the F136. Critics argue that this decision
    appears driven more by immediate budget pressures on the department
    rather than long term pros and cons of the F136 program. For example,
    Secretary of the Air Force Michael Wynne reportedly said that the idea
    of cancelling the F136 ``came up during the Quadrennial Defense Review
    (QDR), in the course of attempts to identify ways to save costs at the
    Pentagon.'' \18\ Others applaud this decision, and say that single
    source engine production contracts are the norm, not the exception.
    Long-term engine affordabilty, they claim, is best achieved by
    procuring engines through multiyear contracts from a single source.
    ---------------------------------------------------------------------------
        \18\ Richard Mullen. ``Cutting JSF Engine Was Navy Idea: Wynne.''
    Defense Today Instant Update. March 2, 2006.
    ---------------------------------------------------------------------------
        It is not clear if the decision to terminate F136 was based on its
    merits or if it was the result of tradeoffs in a budget cutting
    process. However, the program is clearly handicapped in budget
    considerations by the fact that its benefits won't be realized for a
    decade, while much of its costs are immediate.
    Issues
        As DOD has noted, cancelling the F136 poses questions on
    operational risk and potential cost and savings. Additional issues
    include the potential impact this termination could have on the U.S.
    defense industrial base, and on U.S. relations with key allied
    countries. Finally, eliminating competitive market forces for DOD
    business worth billions of dollars may concern those who wish to reform
    DOD's acquisition system and conform to higher standards of
    accountability.
        This testimony addresses these issues in detail, except the
    potential impact on relations with key allied countries. However, it is
    worth briefly noting that friction currently exists between DOD and
    many foreign partners in the JSF program. Denmark, Italy, the
    Netherlands, Norway, and Turkey have expressed dissatisfaction with the
    quality and quantity of the work their companies have been awarded on
    the F-35.\19\ These countries have threatened to reduce their
    participation in the program, or purchase the Eurofighter Typhoon
    instead of the F-35. The governments of Italy and the United Kingdom
    have both lobbied for F-35 assembly facilities to be established in
    their countries. Canceling the F136 would likely mean a considerable
    loss of revenue for GE's U.K.-based partner, Rolls-Royce. Although
    Rolls-Royce has established business relations with PW, this business
    appears to be far short of the 40 percent partnership Rolls enjoys with
    GE. As the full committee has recently heard, the U.K. has warned that
    it may cancel its participation in the JSF if its concerns are not
    satisfactorily addressed.
    ---------------------------------------------------------------------------
        \19\ ``Norway Signs Industrial Partnership with Eurofighter
    Consortium,'' Defense Daily, Jan. 29, 2003. Joris Janssen Lok,
    ``Frustration Mounts Among JSF Partners,'' Jane's Defense Weekly. Mar.
    24, 2004. Thomas Dodd, ``Danish Companies Consider Quitting JSF
    Programme,'' Jane's Defence Weekly, Jan. 9, 2004. Tom Kingston,
    ``Unsatisfied Italy May Cut JSF Participation,'' Defense News, May
    10,2004. Lale Sariibrahimoglu, ``Turkey may withdraw from JSF
    program,'' Jane's Defence Weekly, Nov. 10, 2004.
    ---------------------------------------------------------------------------
        Operational Risk
        DOD officials argue that terminating the F136 poses little
    operational risk. The decision to pursue an alternate engine for F-14s,
    F-15, and F-16s, they say, came at a time when the Services were
    dissatisfied with the performance of existing engines (TF30 and F100).
    During the ``Great Engine War,'' DOD pursued alternate engines not only
    for cost savings, but to improve engine performance, reliability, and
    to reduce operational risk. DOD argues that these same conditions do
    not exist today.
        In a briefing provided to Congress, \20\ the DOD Office of Program
    Analysis and Evaluation (PA&E) states that the F135 engine produced by
    PW for the F-35 is performing well. The first F135 aircraft engine was
    delivered December 2005. Current F135 testing is ``on track and
    successful,'' PA&E notes, and is 33 percent complete as of February
    2006. Further, PA&E states that the F119 engine that PW produced for
    the F-22A Raptor, which served as the basis of the F135, is also
    performing well. It asserts that the F119 has performed well after
    roughly 18,000 flight hours, PA&E notes, and will achieve 100,000
    flight hours by 2009. This briefing also notes that the F-22A Raptor
    and the F/A-18E/F Super Hornet rely on sole source engine suppliers
    (the PW F119 and GE F414 respectively), implying that the F-35 can
    likewise rely on a single engine manufacturer.
    ---------------------------------------------------------------------------
        \20\ ``JSF Alternate Engine Decision'' Briefing. OSD/PA&E. February
    27, 2006.
    ---------------------------------------------------------------------------
        DOD also argues that industry advances in engine design tools such
    as computational fluid design for airflow prediction, and advanced
    software for prognostic health monitoring, further reduce the risk of
    powering the F-35 with a single type of engine. Presumably, using these
    tools will result in better-made engines that would encounter fewer
    problems during their lives, and will also provide the means of
    predicting or detecting engine problems before they occur. DOD and
    industry witnesses before the full committee have noted that aircraft
    engines are more reliable today than they were in the past. (Some may
    argue that today's engines are more reliable than in the past due to
    the competitive pressures experienced by engine manufacturers in the
    1984-1995 timeframe.) As one yardstick, witnesses have noted that the
    Class A mishap rates for the single-engine F-16 as one example, have
    dropped from 10 per 100,000 hours to 1 per 100,000 hours.
        Others who support DOD's decision to terminate the F136 argue that
    an alternate engine will not help mitigate risk. They say that there
    are no instances in the historical record of a fighter aircraft fleet
    being grounded by an engine defect. Engine problems, they say, are
    typically limited to a specific model, or engine series, or to a
    particular airfield or base.
        A number of observations can be made regarding these arguments.
    First, the comparison between the F-22A and the F/A-18E/F and the F-35
    may not be apt. Both the Raptor and the Super Hornet are equipped with
    two engines. The F-35 will have one engine. A single engine aircraft is
    inherently subject to higher risk than a two-engine aircraft, as the
    consequences of engine problems in the F-35 will be worse than for the
    F-22A or F/A-18E/F. As one simple datum to consider, between fiscal
    year 1990 and fiscal year 2004, the single-engine F-16 suffered 80
    Class A engine-related mishaps for a rate of 1.31 per 100,000 flight
    hours. The twin-engine F-15 suffered 21 engine related Class A engine-
    related mishaps for a rate of .64 per 100,000 flight hours.\21\ Mishap
    statistics must be used cautiously, however, when trying to support
    arguments about aircraft engine reliability. Many different factors
    contribute to military aviation safety and the improvements described
    in previous testimony. Because mishap rates have improved does not
    necessarily mean that improved engine reliability was the cause. Most
    safety experts attribute improvements in mishap rates over the past 30
    years to the implementation of improved safety awareness techniques
    such as Operational Risk Management (ORM). Similarly, it is not clear
    that the F-15's two engines are the primary reason this aircraft has a
    mishap rate one-half that of the F-16. Interviews with safety
    professionals and military pilots, however, indicate a large majority
    believes two engines to be safer than one engine.\22\
    ---------------------------------------------------------------------------
        \21\ Fighter/Attack Aircraft. Engine-Related Class A Mishaps. USAF
    Safety Center. http://afsafety.af.mil/stats/e--stats--2.asp.
        \22\ CRS Report for Congress RL31571. Military Aviation Safety.
    Christopher Bolkcom.
    ---------------------------------------------------------------------------
        Unlike the Raptor and Super Hornet, one of the F-35 variants will
    be powered by an engine capable of vertical/short takeoff and landings
    (VSTOL). The VSTOL engine will be more complex than the conventional
    engines and will be subject to different operational stresses and
    conditions. The AV-8B Harrier, the Marine Corps short takeoff, vertical
    landing (STOVL) fighter aircraft has one of the highest mishap rates of
    all military aircraft. Importantly, unlike most aircraft-types which
    are subject to mishaps most frequently through human error, two-thirds
    of AV-8B's mishaps are related to the aircraft materiel failures.\23\
    Further, the four primary material problems related to AV-8B mishaps
    reportedly are engine, flaps controller, nose wheel steering, and
    ejection system.\24\ It is to be hoped that the VSTOL JSF will improve
    upon the AV-8Bs safety record and engine problems. However, it appears
    optimistic to contend that engines generally, and VSTOL engine in
    particular, do not contribute to safety concerns.
    ---------------------------------------------------------------------------
        \23\ Sandra Ervin. ``Navy Aims to Curtail Aviation Mishaps Caused
    by Crew Error.'' National Defense. October 2000. First annual report of
    the Harrier Review Panel (HaRP). USMC. 30 September 1998 Executive
    Summary. Chaired by Deputy Chief of Staff (Aviation), Lt.Gen. T. Dake.
    Since its introduction the AV-8B has outpaced all aircraft types with
    68 (Now 77) Class A mishaps for a cumulative rate of 12.1 per 100,000
    flight hours. The Class A mishap rate for the first model of the
    Harrier, the AV-8A, was 31.77 mishaps per 100,000 hours.
        \24\ Alan C. Miller and Kevin Sack. ``The Widow Maker.'' Los
    Angeles Times. December 15, 2002.
    ---------------------------------------------------------------------------
        A second point that might be made regarding DOD's risk assessment
    is that the experience with the F119 and F135 engines is still
    relatively modest. By the time the decision was made to divide engine
    production contracts between GE and PW in 1984, the PW F100 engine had
    accumulated 2,000,000 hours of operational service. Even with this
    extensive experience with the engine, over the following 25 years PW
    and the Air Force made numerous improvements to the engine as it
    competed for business with GE. By comparison, the 18,000 hours of
    testing appears to be a modest foundation to make projections of the
    F119's future performance.
        It does not appear that there are any overt performance or
    reliability problems with today's fighter aircraft engines that an
    alternate engine would be required to remedy. However, it may be worth
    noting, that in the future, the JSF will be the only fighter aircraft
    in service. If any engine problems are encountered, the entire fighter
    aircraft fleet may be affected, not just one model of aircraft. In 1984
    when the decision was made to award engine production contracts to both
    contractors, the Air Force, Navy, and Marine Corps flew roughly 11
    different models of combat aircraft.\25\ While DOD was experiencing
    problems with some combat aircraft engines, it also had sufficient
    aircraft diversity that an F-4, for example, might be able to perform a
    mission if an F-14 or F-18 were grounded due to engine problems. DOD
    will not have this diversity in the future, so consequences of
    potential engine problems again appear to be more troubling than in the
    past.
    ---------------------------------------------------------------------------
        \25\ Air Force: A-7D, A-10, F-4, F-15, F-16. Navy: A-6E, A-7E, F-4,
    F-14. Marine Corps: A-4M, A-6E, AV-8C, F-4N, F-18.
    ---------------------------------------------------------------------------
        DOD's statements about grounding aircraft may be incomplete. A
    number of aircraft has been grounded over the past 5 years, including
    the KC-135, C-130, and B-1B, and none of these groundings was for
    engine-related problems. However, aircraft have been grounded for
    engine-related problems. The Marine Corps, for example, grounded 106
    AV-8B Harriers in July 2000 after a faulty engine bearing was cited as
    the cause of a crash.\26\ Further, aircraft groundings whether or not
    for engine-related problems may not occur often because as a matter of
    policy, the Services try not to ground aircraft. If aircraft are
    grounded, a positive action or finding must take place before the
    aircraft return to service. Instead, the Services try to (stand down(
    aircraft when safety is a concern. These stand downs are typically for
    a defined period of time and are either anticipatory, or in response to
    some general concerns. As one example, on March 6, 2006, the commander
    of Naval Air Forces directed a mandatory, half-day safety stand down
    for all naval aviation squadrons and detachments. Although safety stand
    downs for individual wings or squadrons take place more frequently,
    this was the first service-wide stand-down in 4 years.\27\
    ---------------------------------------------------------------------------
        \26\ Mark Oliva. ``Pilots defend Harrier jet.'' Stars and Stripes.
    (Pacific Edition). January 19, 2003.
        \27\ ``CNAF Directs Half-Day Stand-Down.'' Naval Safety Center.
    U.S.Navy. http://www.safetycenter.navy.mil/articles/a-m/CNAF--directs--
    standdown.htm.
    ---------------------------------------------------------------------------
        One issue that pertains to operational risk that has not been
    discussed by DOD is that of reduced fleet readiness due to, for
    example, a lack of spare parts. Two manufacturers would maintain two
    supply chains, and perhaps additional suppliers for critical parts.
    Eliminating one manufacturer could lead to fewer suppliers and
    potentially leave the remaining supply chain more vulnerable to
    disruptions caused by labor disagreements, foreign takeovers, terrorist
    attacks, or natural disasters.
        Finally, it may be noted that DOD statements on the potential risk
    of operating the F-35 with a single engine-type appear to be
    inconsistent, or potentially contradictory. For example, DOD's Office
    of Program Analysis & Evaluation (PA&E) claims that ``Relying on a
    single engine supplier incurs minimum operational risk.'' In the same
    document, PA&E notes that the JSF alternate engine offers ``significant
    benefits'' in readiness, reliability, availability, and protection from
    fleet grounding.\28\ Logic suggests that if a course of action offers
    ``significant benefit,'' the elimination of that course of action would
    elicit a negative or harmful effect. During a March 1, 2006 hearing,
    Secretary of the Air Force Michael Wynne discussed the potential cost
    and risk of having one engine supplier versus two. Secretary Wynne said
    that the decision to terminate the F136 was ``a very tough call because
    it involves the industrial base and involves long-term reliability
    statistics and involves economics.'' In the context of reliability and
    risk, Secretary Wynne continued with the statement that ``I don't like
    to see our industrial base go to a single supplier.'' \29\
    ---------------------------------------------------------------------------
        \28\ ``JSF Alternate Engine Decision'' Briefing. OSD/PA&E. February
    27, 2006.
        \29\ Congressional Transcripts. Reuters. Congressional Hearings.
    March 1, 2006. House Armed Services Committee Holds Hearing on Fiscal
    Year 2007 Budget: Air Force.
    ---------------------------------------------------------------------------
    Cost and Savings \30\
    ---------------------------------------------------------------------------
        \30\ To date, $1.07 billion has been obligated to the F136 program.
    A $2.4 billion contract awarded in August 2005 would have funded the
    program's system development and demonstration phase, slated to run
    until September 2013. DOD estimates that if it cancels the F136 it
    could incur between $50-$70 million in termination costs and an
    increase of approximately $100 million in the F135 program due to the
    need for additional flight test assets. Source: ``Information Paper.''
    Department of Defense. February 27, 2006. Provided to CRS by SAF LLW.
    ---------------------------------------------------------------------------
        Many believe that estimating cost lends itself to quantitative
    analysis more than estimating risk. However, this may not be the case.
    The time lines involved in these estimates are long, the variables are
    numerous, and cost estimating tools are imperfect.\31\ Like any
    quantitative assessment, assumptions made about the variables measured
    can influence significantly the analyses' output. When calculating the
    amount of competition-generated savings required to recoup the costs of
    developing the F136 engine, two variables can sway the analysis
    considerably: the amount of money being amortized over the life of the
    F-35, and the number of engines to be purchased. Additional assumptions
    and assertions can also affect the analysis. Therefore, costs and
    savings estimates by parties on both sides of the F136 debate may be
    matters of some subjectivity.\32\
    ---------------------------------------------------------------------------
        \31\ Military Jet Engine Acquisition: Technology Basics and Cost-
    Estimating Methodology. RAND. Santa Monica, CA. 2002 and Factors
    Affecting the Use of Competition in Weapon System Acquisition. RAND
    (Santa Monica, CA) February 1981. p.53 which noted that ``the existing
    body of analysis has not provided an adequate set of management tools
    for estimating the benefits or the costs of competitive
    reprocurement.''
        \32\ The Navy's F404 engine competition may serve as an example of
    the difficulties involved in estimating cost savings resulting from
    competition. A press account stated that ``Although Navy officials were
    able to identify the direct costs of establishing a second source for
    the F404, they could not estimate the total cost of keeping two
    production lines open. (emphasis added)'' ``Navy Spent At Least $58.6
    Million To Set Up Second F404 Line.'' Aerospace Daily. August 30, 1989.
    ---------------------------------------------------------------------------
        Deputy Secretary of Defense Gordon England has written that ``The
    Department's analysis concluded that a second (engine) source would not
    yield program cost savings.'' \33\ Mr. England has also reiterated this
    position in recent testimony. The analysis that DOD shared with
    Congress and Congressional Research Service (CRS) on JSF alternate
    engine cost issues contained a single chart that depicts the output
    from its analysis, and a number of anecdotes and historical examples
    that DOD maintains support its analysis.
    ---------------------------------------------------------------------------
        \33\ Cover letter. JSF Alternate Engine Decision'' Briefing. OSD/
    PA&E. February 27, 2006.
    ---------------------------------------------------------------------------
        DOD's ``Break Even Analysis'' chart is meant to show the percentage
    of savings required to ``break even'' (i.e. recoup F136 costs) over a
    16-year period in which DOD purchases 3,036 JSF engines. If competition
    in the production of these engines were to result in 25 percent cost
    savings, DOD would recoup the F136 $2.8 billion System Development and
    Demonstration (SDD) costs in fiscal year 2019 when the 2,259th engine
    is purchased. If 20 percent savings occurs, DOD will break even in
    fiscal year 2021. Fifteen percent savings will come close to $2.8
    billion (approximately $2.6 billion) by the end of the production run,
    never fully recouping F136 SDD costs by DOD's calculations. Thus, DOD
    argues that to fund an alternate engine for the F-35, must generate at
    least 15 percent cost savings to justify itself on a cost basis.
        DOD states that this much cost savings is unlikely because of its
    experience during the ``Great Engine War,'' and the competition between
    GE and PW for the Navy's F404 business in the late 1980s, \34\ indicate
    that engine competition generates only ``minimum cost benefit.'' \35\
    Cost benefit is minimized DOD asserts because ``Splitting the buy
    between two competitors can make production and support costs
    increase.'' DOD cites reduced ``learning curve effect,'' decreased
    buying power for each source, and amortizing fixed costs over fewer
    units for each source, as specific cost pressures.\36\
    ---------------------------------------------------------------------------
        \34\ The Navy awarded PW approximately $59 million starting in 1985
    to initiate a competition between it and GE (the incumbent) for
    production of different F404 engine variants for the F/A-18 and other
    Navy aircraft.
        \35\ ``JSF Alternate Engine Decision'' Briefing. OSD/PA&E. February
    27, 2006.
        \36\ Ibid
    ---------------------------------------------------------------------------
        On its ``Break Even Analysis'' chart, DOD expresses these projected
    cost increases as $700 million that is added to the $2.8 billion in SDD
    costs that must be recouped. To recoup the SDD costs and make up for
    this ``loss of learning'' caused by a second competitor, DOD argues
    that 25 percent savings will be required to break even by fiscal year
    2021, and that 20 percent savings generated by competition will almost
    break even by the end of the production run in fiscal year 2026
    (approximately $3.4 billion).
        PW has offered a similar analysis, but using a slightly different
    methodology and different assumptions. PW estimates that the amount of
    money needed to be recouped through competition generated savings is
    $3.5 billion, apparently including the $1.07 billion spent on the F136
    prior to SDD. PW estimates that 4,000 JSF engines will be purchased,
    but amortizes the $3.5 billion over only the engines that GE might win
    in a competition. A 50 percent win rate, or 2,000 engines, is assumed
    for the analysis. By this methodology, GE would have to generate over
    $1.7 million worth of savings per engine to pay for the cost of
    development. It is unreasonable to expect, PW argues, $1.7 million
    worth of savings on a $6 million engine.\37\ During recent testimony
    before the full committee, a PW witness also made the point that engine
    life cycle costs such as component improvement, and mid-life upgrades
    would be doubled if a second engine were to be funded. Any potential
    savings from competition would need to defray these additional costs to
    justify a second engine on a cost basis.
    ---------------------------------------------------------------------------
        \37\ ``Joint Strike Fighter--Engine Development,'' (JSF Talk-3)
    Talking Points. Pratt & Whitney. February 23, 2006.
    ---------------------------------------------------------------------------
        There are a number of observations that can be made regarding DOD's
    cost estimating methodology, and its underlying arguments. Perhaps the
    most important observation is on some of the assumptions made in DOD's
    and PW's analyses. In both analyses it appears that the number of
    engines over which the SDD costs is amortized may be too small, based
    on historical experience. Further, it can be argued that the $3.5
    billion figure cited by both studies as the F136 costs to be amortized,
    is too high. Individually, the assumptions made on the number of
    engines, and the amount of money to be recouped, make competition
    appear to be less cost effective. Together, these assumptions may lead
    to the conclusion that competition is without financial merit in this
    case.
        DOD's estimate of 3,036 JSF engines over which the SDD costs would
    be amortized appears to be too low because many more engines are
    typically purchased than the total number of aircraft. DOD currently
    plans to purchase a total of 2,443 F-35s, and international partners
    plan to purchase 733 for a combined purchase of 3,716 aircraft. Over
    the 20-30 year lifetime of a fighter aircraft, more engines and many
    spare parts will be purchased. DOD recognizes this, so it plans to
    purchase initial spare engines at 15 percent of the fleet for a total
    (366 for DOD, 110 for partners). More engines, however, will be needed.
        A conservative and illustrative planning factor is that a single
    aircraft will require 2.5 engine equivalents (either whole engines, or
    piece parts) over its lifetime.\38\ If this planning factor is applied
    to the JSF program, one can expect a total of 6,474 engines purchased
    for DOD and 8,417 engines total, not including additional potential
    future international sales. PW's figure of 2,000 engines appears to be
    low for similar reasons, but also because competition should decrease
    the cost of both engines, not just the alternate engine. So, SDD costs
    would be recouped by the cumulative cost savings of all engines
    produced, not just those awarded to GE.
    ---------------------------------------------------------------------------
        \38\ Rough estimates of the number of engine equivalents will be
    required per aircraft over its lifetime were provided by PW and GE. One
    set of estimates was calculated by adding the value of initial engine
    spares to the value of forecasted replenishment spares , divided by the
    unit recurring flyaway (URF) cost of the propulsion system. In the case
    of the JSF engines, this equation leads to rough planning factors of
    2.44 engines for the Navy variant, 2.17 for the Air Force variant, and
    2.59 for the Marine Corps variant. Clearly, assumptions on spares will
    affect the analyses results. A planning factor of 1.5 engine
    equivalents, for example, per aircraft will result in a smaller total
    purchase, and a planning factor of 3.0 will result in a larger total
    engine purchase.
    ---------------------------------------------------------------------------
        A key assumption implicit in both DOD's and PW's analysis is that
    SDD costs are only amortized over engine production. PW and GE would
    annually compete to produce the F-35's engines, and also to support the
    engines over the 20-30 year life of the aircraft. A larger fraction of
    an aircraft engine's life cycle cost is attributed to support
    activities than to production. Therefore, it appears that both the DOD
    and the PW analyses ignore a considerable body of potential work over
    which the contractors would compete and potentially generate savings
    which could help defray upfront SDD costs. Air Force officials who
    participated in the ``Great Engine War'' believe that cost savings from
    competition during operations and support (O&S) were considerably
    greater than cost savings from competition during engine
    production.\39\
    ---------------------------------------------------------------------------
        \39\ Telephone interview with Col. James Nelson (Ret.) Former
    Deputy for Propulsion, Aeronautical Systems Division, Air Force Systems
    Command. March 5, 2006.
    ---------------------------------------------------------------------------
        It can be argued that PW's inclusion of $1.07 billion in F136 costs
    to be recouped during competition is inappropriate because these are
    ``sunk costs.'' No decision made today, or next year, will recoup them.
    If DOD were to cancel the F136 program, it could recoup all of the $2.8
    billion awarded for SDD, minus termination liability. Thus, the savings
    from terminating the program can be weighed against the potential costs
    and savings of keeping it. It is noteworthy that DOD does not include
    this $1.07 billion in its cost analysis.
        DOD's assertion that costs to DOD increase by $700 million when it
    funds a second engine producer because of a ``loss of learning''
    appears to be central to DOD's claim that a second manufacturer does
    not save money. Yet, it is unclear how this ``loss of learning'' has
    been quantified, and whether this figure is offset by the competitive
    forces that can increase learning, productivity, and innovation.
    Similarly, DOD's argument that ``splitting the buy between two
    competitors can make production and support costs increase'' has not
    been substantiated in documents provided to Congress.
        To support it's ``Break Even Analysis,'' DOD's states that it
    experienced only ``minimum cost benefit from engine competition,''
    during the Great Engine War. This assertion is at odds with statements
    made earlier by senior Air Force officials. Several sources estimate
    that through competition, the Air Force saved 21 percent ($4 billion of
    an $18.8 billion program) over the 20-year life cycle of the improved
    F100 and F110 engines compared to operating legacy F100 engines over
    the same period of time.\40\ It should be noted that the Air Force's
    estimate of $4 billion in savings does not appear to account for all of
    the F110 development costs.\41\ If these costs are also considered, the
    $4 billion in savings due to competition may be closer to $3.5 billion.
    ---------------------------------------------------------------------------
        \40\ Prepared Statement of Hon. Thomas Cooper. U.S. Congress,
    House, Committee on Armed Services, Air Force Alternative Fighter
    Engine, Hearings before the Subcommittee on Procurement and Military
    Nuclear systems, 98th Cong. 2nd Sess., March 8, 1984. Point Paper on
    Air Force Alternate Fighter Engine (AFE) Competition. Aeronautical
    Systems Division. Directorate of Development and Production, DCS/
    Research, Development and Acquisition. February 18, 1987.
        \41\ Donald L. Pilling. Competition in Defense Procurement.
    Brookings (Washington, DC) 1989. Telephone and e-mail exchanges with GE
    representatives March 22, 2006.
    ---------------------------------------------------------------------------
        Also, the Navy's aborted F404 engine competition may not be the
    best cost analogy to today's potential JSF engine competition, because
    it reportedly was not pursued to save money. Navy spokespersons stated
    that Secretary of the Navy Lehman ``opted to open the second F404 line
    to ensure that an adequate industrial mobilization base existed to meet
    the national defense needs and to promote competition. It was not based
    on projected cost savings.'' \42\ Evaluating the F404 competition is
    complicated because PW reportedly was found guilty of illegally
    obtaining GE's confidential pricing data, and conspiring with Navy
    officials to defraud the Government.\43\ This may have played a more
    significant role in DOD's decision to terminate the competition than
    cost savings estimates.
    ---------------------------------------------------------------------------
        \42\ Statement by Naval Air Systems Command (NAVAIR) August 23,
    1989, as cited in ``Navy Spent At Least $58.6 Million To Set Up Second
    F404 Line.'' Aerospace Daily. August 30, 1989.
        \43\ ``United Technologies Admits ``Ill Wind' Role, Will Pay
    Fine.'' Aviation Week & Space Technology. September 7, 1992.
    ---------------------------------------------------------------------------
    Industrial base
        As noted earlier, DOD officials have expressed concern over the
    potential impact of this proposed termination on the industrial base.
    Further, DOD analyses acknowledge that the F136 alternate engine
    provides ``significant'' industrial base benefits.\44\ Therefore, it is
    reasonable to assume that the decision to terminate the F136 may have
    negative consequences on the industrial base. The debate focuses on how
    significant these negative consequences may be.
    ---------------------------------------------------------------------------
        \44\ ``JSF Alternate Engine Decision'' Briefing. OSD/PA&E. February
    27, 2006.
    ---------------------------------------------------------------------------
        The industrial base issues discussed and debated in hearings and
    other public fora have focused on whether a single supplier of fighter
    aircraft engine will result in costlier engines over time and whether
    reliable access to engines and spare parts might be jeopardized. The
    root of this question is what effect canceling the F136 engine will
    have on GE's ability to continue to compete in the high performance
    fighter aircraft engine business. Currently, the only U.S.
    manufacturers of fighter aircraft engines are PW and GE.
        GE is a dominant player in the large, commercial aircraft engine
    market. By most estimates, GE has captured approximately 50 percent of
    this market. GE's current business in building and supporting high
    thrust, high performance, fighter aircraft engines is more modest.
    Currently, GE builds and maintains engines (F400 series) for the Navy's
    planned inventory of 462 F/A-18E/F Super Hornets. It is expected to
    also build engines for the Navy's planned inventory of 90 EA-18G
    Growlers. GE supports the F110 series of engines for domestic and
    international clients. Finally, GE may be competitive in engine
    competitions for large unmanned aerial vehicles (UAVs).
        It appears that if the F136 were cancelled, GE's fighter aircraft
    design and manufacturing capabilities would not peter out immediately.
    The business outlined above likely is sufficient to maintain GE's
    design teams, engineers, and assembly line workers, and much technology
    and expertise might be extracted from the commercial business lines.
    GE's own experience during the Great Engine War shows that a company on
    the periphery of a business area can ``catch up,'' and beat an
    incumbent in head-to-head competition, even if that incumbent had been
    producing a particular type of engines for a decade.
        If the F136 program were canceled today, and in, say 10 years time,
    DOD requested GE to design and build an alternate to the F135, GE might
    face noteworthy challenges. It already trails PW by 3 years of
    development, for example, and PW's lead would grow with each year GE
    was out of this business. GE's successful competition with PW in the
    Great Engine War was expedited by GE already having an engine (the
    F101) in the same thrust class as the PW F100. GE was developing the
    F101 for the B-1B bomber, and this work gave the F110 program
    considerable leverage.
        GE does not have another engine in the same thrust class (40,000
    lbs.) as the F136, and no other high performance fighter aircraft
    programs after the JSF appear to be in DOD plans. The F110 and F400
    series engines that GE maintains are in a different class than the F136
    and are the focus of maintenance and upgrade efforts, not design
    efforts. The leverage that GE's commercial engine business might offer
    to developing a new 40,000 lb. thrust engine is unclear. Commercial
    engines share some qualities with fighter aircraft engines, but they
    are also very different. Commercial engines do not employ afterburners,
    or thrust vectoring, for example, and they are designed to meet fuel
    efficiency goals, not performance goals like fighter aircraft engines.
        Additional industrial base issues have not yet been widely debated,
    but may also inform decisions on the future of the F136. One issue
    concerns export and competitiveness. The JSF is a centerpiece of the
    Federal Government's fighter aircraft policy. Since the program's
    beginning, the desire to produce a cost-effective, multi-role aircraft
    appears to have been shaped by consideration of what the international
    market would bear.\45\ The F-35 is designed as an export aircraft, and
    one that is hoped to leverage the international success of the F-16
    Falcon (another cost effective, single engine, multi-role fighter) to
    perpetuate U.S. dominance in this market. Foreign participation in the
    JSF program was sought to defray development costs, but also to ``prime
    the pump'' for export.\46\
    ---------------------------------------------------------------------------
        \45\ See for instance John Tirpak. ``World Market Forces Improved
    Military Exports.'' Aviation Week & Space Technology. February 14,
    1994. John Morrocco. ``No JAST Prototypes to Fly Until After 2000.''
    Aviation Week & Space Technology. December 13, 1993, and ``Brits Visit
    JAST to Position for Next Round of Contracts.'' Aerospace Daily. June
    1, 1994.
        \46\ ``Australia, Belgium Enter Joint Strike Fighter Program as EMD
    Partners,'' Inside the Air Force, April 21, 2000.
    ---------------------------------------------------------------------------
        A key question appears to be whether the JSF will achieve the same
    export success with one engine-type as it might with two. Some argue
    that the F-16's export success is directly attributable to having two
    engine types: ``The F-16 became a much more exportable aircraft when GE
    and Pratt were killing each other in the international market. So, if
    you are selling these JSF's and you have one engine . . . that reduces
    the attractiveness to these international customers . . .'' \47\
    Singapore and South Korea have both selected the GE F110 engine to
    power their F-15 Eagles, and Saudi Arabia is giving serious
    consideration to re-engining its F-15s with GE engines. These decisions
    contrast with U.S. Air Force decisions to power its Eagles with PW
    engines. Further, while GE engines power a large fraction of USAF F-16
    Falcons, PW engine sales to international F-16 customers have dominated
    GE sales. This background lends credence to the suggestion that
    competition in engine selection can enhance U.S. fighter aircraft
    export success.
    ---------------------------------------------------------------------------
        \47\ Carlo Munoz. ``Congress, Defense Department Square Off Over
    Second JSF Engine.'' Inside the Air Force. March 3, 2006.
    ---------------------------------------------------------------------------
        Would cancelling the F136 and the attendant competition with the
    F135 adversely affect potential future advances in engine performance,
    reliability, and maintainability? If so, might this be at the expense
    of U.S. competitiveness? Many of those who participated in, or studied
    the ``Great Engine War'' assert that the competition between GE and PW
    made both companies better and ``proved invaluable to future engine
    development.'' \48\
    ---------------------------------------------------------------------------
        \48\ Maj. John Nix and Maj. Riley Shelnutt. ``Behind the Alternate
    Fighter Engine Competition.'' Aerospace America. May 1984.
    ---------------------------------------------------------------------------
        The economic stakes in international fighter engine competition
    appear to be high. U.S. companies face competition from France, Sweden,
    Russia, and a European consortium of companies, and it is argued that
    some of these governments heavily subsidize their aerospace industries.
    Aerospace is an important export for the United States. Despite this
    competition, aerospace has at times provided the U.S. economy with its
    highest trade surplus.\49\ Many observers project that the size of the
    international market for fighter aircraft will remain high for the next
    decade, after which it may peak and then decline.\50\ Thus, the
    importance of maintaining the competitiveness of the U.S. fighter
    aircraft engine industry may grow, if U.S. fighter aircraft
    manufacturers are to ``make hay while the sun shines.''
    ---------------------------------------------------------------------------
        \49\ ``The trade surplus generated by aerospace foreign trade in
    2005 totaled $37 billion. With an $8.4 billion increase in exports and
    $2 billion rise in imports, the industry's trade surplus expanded $6.4
    billion. The aerospace trade balance, before its sharp rise this year
    and last, had fallen $14 billion from its $41 billion peak in 1998 due
    to $12 billion fewer exports and $2 billion more imports. In 2004, the
    latest year of comparative data, the U.S. aerospace industry posted the
    highest trade balance of all industry categories. (emphasis added).''
    2005 Year-End Review and 2006 Forecast--An Analysis. David H. Napier,
    Director, Aerospace Research Center. Aerospace Industries Association.
        \50\ ``Market Overview: Fighter/Attack Aircraft.'' World Military &
    Civil Aircraft Briefing. Teal Group Inc. (Fairfax, VA) February 2006.
    ---------------------------------------------------------------------------
    Acquisition Reform and Accountability
        The final point one can make about the potential termination of the
    F136 pertains to acquisition reform, or (good government). This
    committee has recently held multiple hearings on defense acquisition
    reform, and members have consistently expressed concern about perceived
    shortcomings in the current acquisition system, or a lack of personal
    accountability in acquisition decisions. As this committee has tried to
    determine and correct the root causes of growing weapon system cost
    growth it has heard from witnesses a litany of problems such as funding
    instability, unrealistic requirements, poorly structured contractor
    incentives, too much reliance on lead system integrators, and the
    improper use of commercial contracts to purchase military items.
        In this context, it may be worth noting that the competition during
    the ``Great Engine War'' appears to have conferred a number of benefits
    to government that today's acquisition officials would have a difficult
    time duplicating. For example, prior to the first contract award, the
    Air Force demanded that GE and PW provide 6 years of cost projections
    to include the production of engines, but also the price of support
    equipment, spare engines, technical data and dual sourcing data and
    second sourcing data for operations and support. The contractors were
    held to these cost projections for 6 years: the Air Force let 6 years
    of firm-fixed price, or ``not-to-exceed'' contracts from the first
    production lot. Prior to the ``Great Engine War,'' Government had
    succeeded in negotiating firm-fixed price contracts only after the
    engine had been operating in the field for several years, and
    contractors were not compelled to provide cost projections years into
    the future.\51\
    ---------------------------------------------------------------------------
        \51\ Telephone interview with Col. James Nelson (Ret.) OpCit.
    ---------------------------------------------------------------------------
        By requiring GE and PW to compete for annual production and O&S
    work, DOD may have reaped a number of benefits such as better contract
    terms and conditions, better warranties to assure engine quality,
    consistency, and long-term stability of support.\52\ Further, after
    competition was introduced, the incumbent (PW) offered ``engine
    improvements to the Air Force earlier than the Air Force had been led
    to expect without the competition.'' \53\ To avoid potential
    disruptions in production, and to protect itself against price gouging,
    DOD ``required (each contractor) to provide his plan for providing dual
    sources of critical parts. These separately priced options in the
    proposals would allow the Government to reprocure spare parts from
    sources other than the prime contractors.'' \54\
    ---------------------------------------------------------------------------
        \52\ U.S. Congress, House, Committee on Armed Services, Air Force
    Alternative Fighter Engine, Hearings before the Subcommittee on
    Procurement and Military Nuclear systems, 98th Cong. 2nd Sess., March
    8, 1984.
        \53\ Robert W. Drewes. The Air Force and the Great Engine War. NDU
    Press (Washington, DC) 1987.
        \54\ Prepared Statement of Hon. Thomas Cooper. Air Force
    Alternative Fighter Engine, Hearings OpCit.
    ---------------------------------------------------------------------------
        An often cited study on competition during defense procurement--the
    ``Pilling Study''--notes that ``. . . the benefits of competition do
    not accrue simply by holding a competition'' and ``starting up a second
    source is no guarantee that performance, schedule, or cost problems
    will be eliminated.'' \55\ Competition between manufacturers must be
    effectively managed. It is unclear whether DOD's leadership today would
    be able to exploit the JSF Alternate Engine competition as effectively
    as Air Force leaders orchestrated the Great Engine War in the mid-
    1980s. It appears clear however, that the very large production run of
    JSF engines required to make competition between to producers cost
    effective, is unlikely to be replicated in future aircraft programs.
    ---------------------------------------------------------------------------
        \55\ Donald L. Pilling. Competition in Defense Procurement.
    Brookings (Washington, DC) 1989.
    ---------------------------------------------------------------------------
                                   conclusion
        Mr. Chairman, this concludes my remarks on the F136. Thank you for
    the opportunity to appear before you and discuss this important issue.
    I look forward to addressing any questions you or the committee may
    have.
        Senator Chambliss. Admiral Kilcline.

     STATEMENT OF RADM THOMAS J. KILCLINE, JR., USN, DIRECTOR, AIR
                  WARFARE DIVISION, UNITED STATES NAVY

        Admiral Kilcline. Thank you, Senator Chambliss. It's a
    privilege for me, as a Navy lead on aviation requirements, to
    appear before you today and discuss naval aviation programs in
    the recently submitted 2007 President's budget.
        I request that my written testimony be presented before
    this committee.
        Senator Chambliss. Without objection.
        Admiral Kilcline. In the interest of time, I'd like to ask
    Admiral Enewold if he'd like to talk, as the program manager
    for the JSF, about the JSF.
        [The prepared statement of Admiral Kilcline follows:]
               Prepared Statement by RADM Thomas J. Kilcline, USN
        Mr. Chairman, distinguished members of the subcommittee, thank you
    for this opportunity to appear before you to discuss the Department of
    the Navy's (DON) fiscal year 2007 tactical aviation programs.
        Your naval aviation team continues to play a major role in
    providing credible power to help shape our strategic landscape and in
    prosecuting the global war on terrorism with significant involvement in
    Operations Enduring Freedom (OEF) and Iraqi Freedom (OIF). These
    efforts are reflective of the substantive return on your investment in
    our combat readiness, our people, and our unique maritime warfighting
    capabilities. These investments clearly demonstrate the latest
    technologies in surveillance, command and control and persistent strike
    as our forces operate from sovereign U.S. territory and exploit the
    vast maneuver space provided by the sea.
        The Navy's tactical air (TACAIR) programs are comprised of both
    platforms and weapons in direct support to the Sea Strike, Sea Shield,
    Sea Basing, and ForceNet pillars. The fiscal year 2007 President's
    naval aviation TACAIR budget request balances continued
    recapitalization while simultaneously sustaining the legacy fleet
    aircraft that are performing magnificently in current operations. The
    Department's fiscal year 2007 naval aviation TACAIR budget request
    continues multiyear procurement (MYP) arrangements for the F/A-18E/F
    (both airframe and engine), the E-2C, and MH-60S. Our proposed plan
    will procure 44 tactical, fixed-wing aircraft (30 F/A-18E/F aircraft,
    12 EA-18G low rate initial production (LRIP) aircraft, and 2 E-2C
    aircraft. This plan also continues the development of the Joint Strike
    Fighter (JSF), the E-2D Advanced Hawkeye, and the EA-18G.
        The global war on terrorism, OEF, and OIF continue to demonstrate
    the enormous contributions that naval aviation makes to the
    effectiveness of joint and coalition forces. The naval aviation systems
    we are pursuing in our Naval Power 21 vision will greatly enhance our
    warfighting concepts and capabilities.
        Our recapitalization plan includes the JSF, a stealthy, multi-role
    fighter aircraft designed jointly (domestically and internationally) to
    be an enabler for Naval Power 21. The JSF will enhance 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 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
    DON's fiscal year 2007 naval aviation TACAIR budget request contains
    $2.0 billion research, development, test, and evaluation (RDT&E) for
    continuation of systems development demonstration (SDD) of the JSF and
    $245 million aircraft procurement, Navy for long lead requirements for
    the initial lot of DON LRIP aircraft.
        The JSF has completed its fourth year of SDD, and the program
    continues working to translate concept designs to three producible
    variants. Manufacture and assembly of the first flight test aircraft, a
    conventional takeoff and landing (CTOL) variant, is well underway, with
    assembly times much less than planned and exceptional quality
    demonstrated in fabrication, assembly and mating. Over 4,100 engine
    test hours have been completed through mid-January 2006 and engine
    performance is meeting expectations. Detailed design work continues for
    the CTOL and STOVL variants and first flight (CTOL aircraft) is planned
    later this year. The JSF program has aggressively addressed earlier
    performance issues associated with weight and airframe design. The
    November 2005 actual weight of 7,600 delivered components for the first
    test aircraft was within 1 percent of predicted JSF weight.
        While the first test aircraft lacks some future design changes,
    demonstrated manufacturing processes and outcomes justify high
    confidence in design and weight predictions for all variants due to
    commonality of design, tools and manufacturing methods. The JSF
    acquisition strategy, including software development, continues to
    reflect a spiral acquisition approach. The Air System Critical Design
    Reviews for the STOVL and production CTOL configurations were held this
    February to evaluate design maturity and performance against
    requirements and the overall consensus was that the designs display
    appropriate maturity, but moderate level risks still exist. All three
    variants are projected to meet key performance parameter requirements.
    The JSF program is executing to the approved replan that commenced 2
    years ago.
        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 350 F/A-18E/Fs will be procured through fiscal
    year 2006, and the program is on track to complete procurement of the
    program of record (462 aircraft) in 2011. The fiscal year 2007 naval
    aviation TACAIR budget requests $2.34 billion for 30 F/A-18E/F aircraft
    for the third year of the 5-year MYP contract (fiscal years 2005 to
    2009). The Super Hornet uses a spiral development approach to
    incorporate new technologies, such as the Joint Helmet Mounted Cueing
    System, Advanced Targeting Forward-Looking Infrared Radar (FLIR),
    Shared Reconnaissance Pod System, and Multifunctional Information
    Distribution System data link. The first F/A-18F with the LRIP Advanced
    Electronically Scanned Antenna (AESA) radar system has been delivered
    to the fleet and the AESA radar system will undergo operational testing
    this year to support a full rate production decision in 2007.
        The E/A-18G continues development as the Navy's replacement for the
    EA-6B Airborne Electronic Attack (AEA) aircraft. The EA-18G will
    replace carrier-based Navy EA-6B aircraft by 2012. The fiscal year 2007
    naval aviation TACAIR budget request reflects $372 million for research
    and development and $905 million for the procurement of the first 12
    LRIP aircraft. The Navy is using the F/A-18E/F MYP contract to buy 12
    aircraft in fiscal year 2007. These aircraft will support EA-18G fleet
    replacement squadron stand-up and allow the Department to deliver the
    next generation (AEA) capability at reduced cost and in the shortest
    possible timeframe. The SDD continues on schedule with construction
    well underway of the two development aircraft. First flight continues
    on schedule for the fourth quarter of fiscal year 2006. A total
    quantity of 30 systems will be procured in LRIP with a planned fiscal
    year 2009 initial operational capability (IOC) and fiscal year 2012
    final operational capability.
        The fiscal year 2007 naval aviation TACAIR budget request contains
    $389.7 million for the continuation of the systems upgrade programs for
    the F/A-18A-F platforms. As the F/A-18 program transitions to the F/A-
    18E/F, the existing inventory of over 600 F/A-18A/B/C/Ds will continue
    to comprise half of the strike aircraft assigned to a carrier air wing
    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. These upgrades ensure that
    our F/A-18s remain viable and relevant in support of TACAIR integration
    and expeditionary maneuver warfare. The fiscal year 2007 naval aviation
    TACAIR budget request also includes procurement of Center Barrel
    Replacements to extend the service life of F/A-18A/C/Ds by 7 years to
    meet fleet inventory requirements until 2022.
        The fiscal year 2007 naval aviation TACAIR budget request of $49.0
    million reflects continuing EA-6B upgrades and readiness improvements
    which increase the operational availability of this low density high
    demand aircraft and reduce operating costs. This includes installation
    of four Improved Capability (ICAP) III aircraft systems and four
    Multifunction Information Distribution System kits, which will provide
    dramatically improved emitter identification and location information
    as well as Link-16 connectivity to share the information. It also
    allows for the procurement of three Low Band Transmitters to provide
    new jamming capability as well as replace inadequate quantities of
    aging transmitters, which are in near continuous use in Iraq and
    Afghanistan today in support of our troops on the ground. The naval
    aviation TACAIR budget also provides for Operational Safety Improvement
    Program procurements for avionics and structural equipment. The EA-6B
    has been in ever-increasing demand as DOD's only tactical electronic
    attack aircraft that also engages in communications jamming and
    information operations. Program priorities are current readiness,
    successful first deployments of ICAP III aircraft, which are currently
    at sea with two squadrons, and continued procurement of the Low Band
    Transmitter.
        The E-2D Advanced Hawkeye is a critical enabler of transformational
    intelligence, surveillance, and reconnaissance, providing a robust
    overland capability against current and future cruise missile-type
    targets. The Advanced Hawkeye 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. First flight of
    the E-2D will be in the fourth quarter of fiscal year 2007. The fiscal
    year 2007 naval aviation TACAIR budget requests $204 million to procure
    two E-2Cs in the last year of a 4-year MYP. This effort will keep the
    production line viable while the AHE continues spiral development
    toward an IOC of fiscal year 2011.
                        unmanned aircraft systems (uas)
        The fiscal year 2007 naval aviation TACAIR budget request contains,
    $239 million in RDT&E funding to establish a Navy Unmanned Combat
    Aircraft System (UCAS) program to develop and mature technologies for
    carrier operation of a low-observable unmanned combat air system. The
    2005 Quadrennial Defense Review (QDR) recommended terminating the Joint
    Unmanned Combat Air Systems (J-UCAS) capability demonstration program.
    The QDR allocated limited resources to the DOD's overall joint
    capabilities portfolio to support future military operations by joint
    air forces. PDM-III subsequently cancelled J-UCAS and allocated
    resources to DON to develop and demonstrate technologies for carrier
    operation suitability of a low-observable UCAS with the goal of
    fielding a carrier based persistent intelligence, surveillance, and
    reconnaisance (ISR) capability. Navy UCAS is part of the naval strategy
    for a family of unmanned aircraft systems that will provide persistent
    surveillance, penetrating surveillance, and tactical ISR to support the
    warfighter. The Navy UCAS program will heavily leverage the work,
    accomplishments, and technology of the terminated J-UCAS program.
        Additionally, the Broad Area Maritime Surveillance UAS is integral
    to the Navy's ISR recapitalization strategy and will provide a
    persistent, maritime ISR capability for fleet commander maritime
    dominance, mobility, decision superiority and precision strike support.
    IOC for this platform is scheduled to occur in 2013.
                                    weapons
        The fiscal year 2007 TACAIR budget provides for affordable
    precision-guided weapons programs to support that vision and ensure
    that America is secure at home; sea and air lanes are open for
    peaceful, productive commerce; and the capability developed and
    delivered is large enough, agile enough, and lethal enough to deter
    threats or defeat foes in support of joint and coalition forces.
        The combat proven JSOW family of joint Navy and Air Force air-to-
    ground weapons continues on the highly successful path broadened in
    2005 when the JSOW system hit a milestone of 400 successful combat
    employments; won the highly competitive `Packard-Award' for acquisition
    excellence; and conducted the first and very successful JSOW Block II
    test flight on October 11, 2005. We continue to implement lean
    initiatives, innovative processes, and engineering changes in this
    program that will be leveraged for future enhanced capabilities. The
    fiscal year 2007 naval aviation TACAIR budget requests $125.6 million
    to procure 397 JSOW-Cs, a highly lethal precision weapon that employs
    an Imaging Infrared Seeker, Global Positioning System/Intertial
    Navigation System (GPS/INS), and an augmenting charge with a follow-
    through penetrator bomb for use against hardened targets. Production of
    other JSOW variants remain deferred as we continue to work with the
    Office of the Secretary of Defense and our sister Services to resolve
    unexploded battlefield ordnance issues that are of a concern to the
    Department and our allies.
        The Navy is requesting upgrade of surface-launched Harpoon cruise
    missiles to provide the all-weather, anti-surface warfare capability
    needed to operate with `improved selectivity' in the cluttered
    environment of the littoral battlespace. Under the Harpoon BLK III
    program, we plan on upgrading this very capable system to improve
    selectivity and enhance our standoff operations via integration of a
    two-way data-link for use under stringent rules of engagement. The
    fiscal year 2007 naval aviation TACAIR budget requests $36.3 million in
    RDT&E to develop this capability and $55.5 million in weapons
    procurement in the out years to procure and install 197 weapon upgrade
    kits and associated systems.
    Dual-Mode Direct Attack Weapons
        Based on an urgent needs statement and feedback from the combatant
    commanders in Iraq and Afghanistan directly engaged in the global war
    on terrorism, the Navy determined that improved responsiveness and
    flexibility was required for close air support missions in support of
    Marine and Army ground forces. To address these shortcomings, the
    Department leveraged congressionally-directed funding in the research
    of dual-mode laser-guided weapons and successfully competed laser-
    guided bomb manufacturers to develop and integrate GPS/INS and laser
    guided technologies into a single direct-attack weapon. This capability
    will be integrated on F/A-18A-D and AV-8B aircraft to reduce the number
    of sorties needed to destroy intended targets, while providing the
    warfighter with increased flexibility in adverse weather against time-
    sensitive targets. The fiscal year 2007 naval aviation TACAIR budget
    requests $23 million to modify 2,272 single-mode Laser-Guided Bombs
    (LGB) into Dual-Mode LGB Weapons. Further, with fiscal year 2006
    congressional language, the Navy will also conduct nonrecurring efforts
    and testing of a non-developmental laser kit for the Joint Direct
    Attack Munition.
    Advanced Anti-Radiation Guided Missile (AARGM)
        The fiscal year 2007 naval aviation TACAIR budget requests $97.3
    million for the continuation of the development of the AARGM. AARGM
    upgrades legacy High-Speed Anti-Radiation Missiles and leverages the
    Department's highly successful investment and partnership with the
    European Combatant Commander on the `Quick-Bolt' advanced concept
    technology demonstration program. Further, we are pleased to announce
    that AARGM is now also an international cooperative program as formal
    agreement with the Italian Air Force was signed during the first
    quarter of fiscal year 2006. The AARGM development program is on cost
    and schedule to deliver a supersonic fly-out, multi-spectral targeting
    capability to destroy sophisticated enemy air defenses and time
    sensitive strike targets. The system will also utilize our networks and
    is scheduled to be deployed in fiscal year 2009 on the F/A-18 Hornet
    and Super Hornet, and fiscal year 2010 on the EA-18G Growler. The
    fiscal year 2007 funding request will continue development of an AARGM
    derivative to further expand the target set. This software upgrade to
    AARGM is on track for fleet deployment in fiscal year 2011.
    Advanced Medium-Range Air-to-Air Missile (AMRAAM) AIM-120
        AMRAAM is a Joint Navy/Air Force (Air Force led) advanced, medium
    range missile that counters existing aircraft and cruise missile
    threats having advanced electronic attack capabilities operating at
    high/low altitudes from both beyond visual range and within visual
    range. AMRAAM provides an air-to-air first look, first shot, first kill
    capability working within a networked environment in support of Sea
    Power 21's Theater Air and Missile Defense Mission Area. We plan to
    complete the AIM-120D missile SDD during the next year. The fiscal year
    2007 naval aviation TACAIR budget requests $6.7 million in RDT&E to
    complete development efforts and $98.7 million for production of 150
    all-up rounds and associated hardware to equip our strike fighter
    squadrons.
    Sidewinder AIM-9X Air-to-Air Missile
        The Joint Navy/Air Force (Navy led) Sidewinder missile is the only
    short-range infrared air-to-air missile integrated on U.S. Navy/U.S.
    Air Force strike-fighter aircraft. The AIM-9X is the newest variant in
    the Sidewinder family. This fifth-generation air-to-air weapon
    incorporates high off-bore sight acquisition capability and thrust
    vectoring to achieve superior maneuverability and provides increased
    sensitivity through an imaging infrared focal plane array seeker and
    advanced processing. The fiscal year 2007 naval aviation TACAIR budget
    requests $40.4 million for production of 174 all-up rounds and
    associated hardware to equip our strike fighter squadrons.
                             self protection system
    Integrated Defensive Electronic Countermeasures (IDECM)
        The fiscal year 2007 naval aviation TACAIR budget reflects $5.4
    million in RDT&E for completion of integrated test and evaluation of
    IDECM Block III (ALQ-214 combined with the ALE-55 Fiber Optic Towed
    Decoy) that began in fiscal year 2006. Additionally, $35.2 million in
    aircraft procurement funding is included for the procurement of 16 ALQ-
    214 systems. There is also $18.5 million in ammunition procurement
    funding for 480 ALE-55 decoys, pending a full-rate production decision.
                                    summary
        Mr. Chairman, and distinguished members of this subcommittee, on
    behalf of the men and women of Navy TACAIR, I thank you for your
    commitment, service, and continued support of the Armed Forces as we
    continue to execute the war on terror and continue challenging
    operations in critical areas overseas. Navy TACAIR forces are at a high
    level of combat readiness today and the current plan extends that same
    high level of readiness--balanced with other naval aviation TACAIR
    budget priorities--throughout the 5-year defense plan. Our naval
    aviation TACAIR budget plan makes sound investments and is a firm
    foundation for current and future readiness. Thank you again for this
    opportunity to appear today. I am happy to answer any questions you may
    have.

        Senator Chambliss. Admiral Enewold.

      STATEMENT OF RADM STEVEN L. ENEWOLD, USN, PROGRAM EXECUTIVE
                 OFFICER, JOINT STRIKE FIGHTER PROGRAM

        Admiral Enewold. Good afternoon. Thank you too for allowing
    me to be here, Senator.
        In addition to General Hoffman's written testimony, which
    he submitted for the record, I thought I'd add some amplifying
    comments just to make sure everybody is on the same page.
        As you heard in the prior panel and many times before,
    there's general agreement that there needs to be a
    recapitalization of the strike fighter forces and I think
    there's general agreement that the F-35 could, and will, meet
    those requirements.
        JSF has completed 4\1/2\ years of development out of a 12-
    year development program. We continue to mature the design of
    all three variants, to make them produceable, reliable, and
    lethal as a system. We have completed the manufacture assembly
    of the first test airplane. We fueled it 3 weeks ago without
    leaks, thank goodness. We are currently shaking it, doing
    ground vibration testings, in preparation for first flight
    later this year.
        We also, in February, completed critical design reviews at
    the air system level for the STOVL design, and the conventional
    airplane, and there was unanimity on the engineering side of
    the house that the design meets the maturity requirements to
    complete a critical design review.
        There are still risks. We've identified several that we're
    putting mitigation plans in place to capture and make sure that
    we don't repeat lessons of the past. Where there is general
    disagreement among people is in the overall acquisition
    strategy.
        The Department strongly supports the approved acquisition
    strategy we put in place a year ago, and they agree that the
    OSD policy for risk-managed and knowledged-based acquisition is
    met by our strategy. Others disagree.
        By design, the JSF program is unique in many respects, sir.
    It's a joint tri-level, or three-service program with
    international participation. It has new management approaches
    that I don't think anybody has seen before. We could talk about
    that if you like. We have a strong focus on the life-cycle cost
    of the airplanes, not just the development or production or the
    operating and support costs later on. We have to try to
    accommodate all those. Those unique elements make the program
    more complex and more stable, surprisingly.
        The strategy's built on leveraging the large cost
    efficiencies of high volumes, commonality, and learning in the
    design and test, and use of risk-managed decisionmaking. I've
    reviewed and analyzed many scenarios for changing the
    acquisition strategy. In every scenario, I see some risk of
    increasing cost and operational impacts.
        For the F136, in particular, I wasn't going to rehash the
    hearings from last week, but, in that case, in particular, the
    Department feels that it is low risk, from both a cost and an
    operational perspective, to cancel the F136, starting in fiscal
    year 2007.
        My recommendation: to try to regress the program back into
    a more classical acquisition approach would either slow the
    development, slow the production ramp rates, or delay
    transition to a modern support system. Any of these three would
    dramatically change the business case that we've talked about,
    increase the cost, and generate schedule delays.
        No program has zero risk. The key is to capitalize on the
    benefits of speed and commonality, and avoid the consequences
    of speeding, which we are working at.
        So far, our successes have been mixed. The initial designs
    from 2\1/2\ years ago would not have yielded a design that met
    the STOVL key performance parameters, and probably wouldn't
    have met the key performance parameters for the Carrier-based
    Variant (CV) or Conventional Take off and Landing (CTOL). The
    redesign efforts and costs associated with them were really
    arduous, but successful. We now project all variants to meet
    their key performance parameters aerodynamically.
        On the positive side, I know that no other strategy that
    would produce our first flight-test aircraft for ground test,
    parts, and assembly for 5 more airplanes that are being put
    together right now, 9 ground-test engines in 2 different
    configurations, 2 conventional engines for flight test, 3
    radars, 3 optical missile warning systems, 52 integrated core
    processors, 3 electronic warfare (EW) countermeasure suites, 9
    electronic surveillance measuring units, a whole bunch of
    flightworthy subsystems, 33 man-in-the-loop simulators, 62
    avionics test stations, and 5 million lines of code.
        We'll have issues. But I don't think they'll be the same as
    everybody else. I think we've learned a lot from other
    programs, and we are committed not to re-learn those lessons.
    We should not revert to old business practices and create a
    system where we incur cost increases and schedule delays.
        So, thank you for the opportunity to talk today, and I'm
    hopeful I can answer your questions.
        Senator Chambliss. Admiral, when are the test flights of
    this airplane supposed to begin?
        Admiral Enewold. We are measuring ourself against a 28
    August first flight date. My assessment right now is, we are 2
    months late. So, we're going to fly probably in October this
    year.
        Senator Chambliss. Where does the Navy test its planes?
        Admiral Enewold. Navy tests will be conducted at Patuxent
    River, Maryland, and Air Force tests at Edwards Air Force Base.
        Senator Chambliss. That's right. Now, you mention that
    there are no unusual risks here. I've never known a weapons
    system to go through the development/production stage and get
    to this point without having some problems. So, are you saying
    that sure, you expect there'll be some problems, but you're
    ready to address them?
        Admiral Enewold. We've already taken on a huge challenge in
    the issue we had on weight. We took, in the STOVL variant, in
    particular, about 10 percent of the empty weight of the
    airplane out in the redesign, which I don't think any other
    tactical airplane has ever done. Frankly, the STOVL
    configuration is the most mature of our designs right now. The
    weight continues to stay below where it has to be. So, that's
    the first challenge that we met. It was painful, but we think
    we successfully met that one.
        Senator Chambliss. Mr. Sullivan, you've stated that the JSF
    acquisition program can reduce cost and schedule risks by
    adopting a new knowledge-based business case, and that the JSF
    program should delay production until the aircraft design has
    been proven to work in flight testing. You further state that
    capabilities that demand technological advances which are not
    yet demonstrated should be part of future increments that are
    funded and managed separately, once demonstrated.
        The program office projects the JSF will enter service for
    the Marine Corps in 2012. The Air Force and Navy variants will
    enter service the following year. How long do you propose that
    the program be delayed? Do you believe that the Department's
    current acquisition strategy will allow it to achieve the JSF
    program objectives?
        Mr. Sullivan. The current strategy, we believe, is still
    very high risk for achieving the cost and schedule objectives
    they have. There are a couple of technologies. One of them is
    the prognostics and health maintenance technologies that they
    need on the aircraft, which, in fact, are some of the
    technologies they're using to be able to forecast significant
    total ownership cost savings in the future. There are still
    rather immature technologies, that will be immature for some
    time. It won't be demonstrated, I think, until sometime after
    2010. There are a lot of the mission capabilities, a lot of the
    offboard sensor fusion capabilities that they're going to need,
    to become interoperable and things like that, that have not yet
    been demonstrated, and will take a while to be demonstrated.
        Right now, the first flight that I think the program is
    referring to now is not a production representative aircraft.
    It's an aircraft that was an overweight version. It was a
    version of the aircraft that they were working on when they
    discovered significant weight problems on the aircraft. That
    was, I think, maybe 2 years ago, when, at that time, to the
    program and the Department's credit, they stopped the program
    and solved that weight problem with a lot of very intensive
    design reviews and things. It seems like they have the weight
    under control now. But the aircraft that's going to fly later
    on this year is an overweight aircraft. The first production
    representative-type aircraft that they're going to fly, they
    won't start flying until, I think, 2009--much later than this
    one that's going to fly now. As I said in my oral statement,
    the first really fully integrated JSF, with all the
    capabilities that they plan to procure, will not fly until
    2011. At that time, they plan to have actually purchased
    hundreds of aircraft. So, that's why we think there's risk.
        You've heard of ``break it big early,'' ``fly before you
    buy,'' phrases like that, that people like Norm Augustine have
    talked about. That's what we're talking about with this
    program. This program, I think, still has an opportunity to
    slow down the ramp-up to production and discover what they're
    going to discover during flight tests, and maybe take a little
    more time up front to save time later. Or it can become a
    program that goes down the same kind of road that the B-2
    bomber went down, that we saw happen to the F-22 program, the
    Comanche helicopter, the Crusader, many of these major weapons
    systems that we believe had immature technologies and ramped to
    production before they fully tested.
        Senator Chambliss. So, again, what is the projected delay
    schedule in your recommendation?
        Mr. Sullivan. What we are recommending in the report we
    issued is that they should not spend procurement dollars on the
    JSF until they have tested the aircraft to a point where they
    believe the risk has been reduced to acceptable levels. That's
    something that the Department and the Services can determine.
    But when you're entering into procurement contracts using cost-
    plus arrangements with the contractor for possibly hundreds of
    aircraft, that's a clear sign that there's still significant
    risk to the unit cost of what those aircraft are going to cost.
        So, we should delay sometime at least until the fully-
    integrated production representative prototype should be out
    there flying, at least. They should be starting to close off
    some of the performance envelope a little more than what they
    have planned right now. They have procurement dollars spent in
    2007.
        Senator Chambliss. So, you're suggesting 2009?
        Mr. Sullivan. I'm not in a position right now to be
    specific about that. But I would say that they're too early to
    be spending procurement dollars right now.
        Senator Chambliss. Okay.
        Mr. Sullivan. There should be more flight testing
    completed.
        Senator Chambliss. I stole one of your questions, Mr.
    Chairman.
        Senator McCain. Any more?
        Senator Chambliss. I'd be happy to turn it back to you.
        Senator McCain [presiding]. Thank you very much, Senator
    Chambliss.
        I welcome the witnesses. I apologize, I had to go to the
    floor to make a forgettable statement. [Laughter.]
        Admiral Enewold, going sole source on the engine, has the
    decision been made already?
        Admiral Enewold. The Department has proposed that in the
    budget, yes, sir.
        Senator McCain. How do you keep costs down if there's no
    competition?
        Admiral Enewold. We currently have two or three mechanisms
    for doing that.
        Senator McCain. Do you have a fixed-cost contract?
        Admiral Enewold. We do not have a fixed-price contract yet.
    What we have in the development----
        Senator McCain. Could you get one?
        Admiral Enewold. We intend to get one in the Low Rate
    Initial Production (LRIP) process, probably at LRIP-4 or -5.
        Senator McCain. When would that be?
        Admiral Enewold. In 2011 or so.
        Senator McCain. In other words, they could have a cost-plus
    contract, sole-source, until 2011?
        Admiral Enewold. That's correct. Year-by-year lot.
        Senator McCain. Do you think that's smart?
        Admiral Enewold. I don't see risk to it right now. Here is
    why. The acquisition strategy for the engine, and the airplane,
    for that matter, are both set up to incentivize both cost and
    schedule. So, there are going to be cost and schedule
    incentives in both contracts for delivery of the airplane at
    the targeted cost. Even more than that, in the development----
        Senator McCain. Why not just have a fixed-cost contract,
    Admiral Enewold, if there's no competition?
        Why worry about an incentive contract? Just do what we did
    during the 1980s, and let's just have a fixed cost and say,
    ``You meet that or you pay a penalty.''
        Admiral Enewold. Senator, I believe our experience with
    fixed price has not been good.
        Senator McCain. I think, if you look back in the 1980s,
    they came forward with products and weapons systems that met
    costs and met schedules. We don't anymore. Nine of the 11 major
    weapons systems have been over cost and behind schedule, in the
    case of the Future Combat Systems, it's gone from $90 billion
    to $130 billion. How can you make a case that fixed-cost
    contracts don't work?
        Admiral Enewold. I think our view of it is right now is
    that the price that we pay under a firm fixed price would have
    to include the risk that the contractor would have to assume to
    put a fixed-price contract in place. I don't think that we
    could afford a fixed-priced contract at that price with those
    risk dollars in there.
        Senator McCain. Maybe you could compete for the contract
    and we could find a contractor that could.
        Admiral Enewold. No matter what, even if we kept F136, we
    would not be in a position to compete F136 until about 2011 or
    2012. So, we're going to be in a sole-source environment for
    F135, no matter what, until 2011 or 2012.
        Senator McCain. Mr. Sullivan, Mr. Bolkcom--can we start
    with Mr. Bolkcom, and then we'll go to Mr. Sullivan?
        Mr. Bolkcom. Thank you, Mr. Chairman.
        If I could make only one point about the alternate engine
    program today, it would be that DOD has really shared no
    analysis with Congress justifying its position. They have
    provided a very brief briefing. But after reading it very
    closely, considering the magnitude of this problem, the
    analysis, as they call it, really does not appear to be robust
    and comprehensive. My only point is, if we are to pursue this
    strategy of going sole-source, it would, I think, be prudent to
    be based on a robust analysis.
        Senator McCain. Do you want to respond to that, Admiral
    Enewold?
        Admiral Enewold, may I say, I have the greatest respect for
    you and Admiral Kilcline, and I'm not trying to be in any way
    offensive here. We're trying to, obviously, share the same goal
    that you do and get the best product for the lowest cost. But I
    think you--I hope you can understand, for example, the
    statement by Mr. Bolkcom that we have serious questions.
        Would you like to respond to the statement that there
    really has been no in-depth analysis?
        Admiral Enewold. I guess, first of all, I'd like to say
    that the analysis and decisions were done outside the program.
    They were done as part of the QDR. As the Deputy Secretary said
    last week, they were based on the assessment by he and the Vice
    Chiefs, that, based on the risk they saw in the program, both
    from a cost and operational perspective, they thought it was
    the best course forward for the Department.
        As far as the analysis that was done, and what was
    provided, frankly, I don't know.
        Senator McCain. I thank you, Admiral.
        Admiral Kilcline, did you want to say anything about that?
        Admiral Kilcline. No, sir. I'll leave it at that.
        Senator McCain. Good idea. [Laughter.]
        Mr. Sullivan.
        Mr. Sullivan. I would just like to add that, in fact, the
    Senate Armed Services Committee and Congress have asked us to
    take a look at this and get back to them very quickly. We've
    seen a lot of, I think, the briefing slides and everything that
    has been referred to here. But I think we have a date of
    September 12 where we're going to try to review what analysis
    has been done and determine how substantive that has been, and
    get back to your committee.
        Senator McCain. Good, and I think, Admiral Enewold and
    Admiral Kilcline, you would both agree that usually in the
    production of an aircraft--in an acquisition of a new aircraft,
    almost always the major problem is with the engine, either time
    and schedule for development or problems that arise. Obviously,
    it's the most complicated kind of engineering. Would you agree
    with that, from your experience, Admiral Enewold?
        Admiral Enewold. I would have thought so, until 2 years
    ago. My experience with F135, and as I look back on F119
    development, and even F414 development, I haven't seen that
    recently. So, my feel, from history, is exactly yours, Senator,
    that the engine was something you want to make sure you get
    right, early--break it early, whatever. But that has not been
    my experience on the F135.
        Admiral Kilcline. Senator McCain, from my experience, in
    looking back at the engine--and I'll talk specifically about
    the F404 and F414--the F414 is the E and F engine. When that
    engine was looked at, it came from the core of the F404. We
    found we've had some extraordinary success with that motor, in
    bringing it online. We looked at the F119 as a core, and some
    of the things it had done, realizing that the thousands of
    hours that are on it were indicative of what we thought the
    F135 would do. Then looking at what the F135 had done on
    reliability in the limited testing that had gone on so far,
    part of the decision, I believe, was made on reliability. Would
    this engine be, as you've already mentioned, something we could
    count on as we went forward into the future? I believe, from
    what I've seen in the F404, going to F414, that the technology
    we have today in our core is pretty phenomenal.
        Senator McCain. I certainly take your word. But I'm not
    sure that's sufficient and compelling evidence to abandon the
    fundamental precept that we functioned under, and that was
    ``fly before you buy.'' So, it seems to me we're taking----
        Admiral Enewold. Well, let me make----
        Senator McCain. Go ahead.
        Admiral Enewold.--that ``fly before you buy'' discussion--
        Senator McCain. Sure.
        Admiral Enewold.--because I want to make sure it's
    characterized correctly.
        Specifically on the engine, we're going to fly, this year.
    The engine, unlike the mission systems and other things we've
    talked about, is a production-representative engine. There'll
    be some changes that we make as we learn through the test
    program, but we think the F135 that we're going to fly in the
    test airplane this year is, if not production, very close to
    production representative or production configuration. By the
    time we get to full rate, or even ``reasonable'' rate, we will
    have made what we call a final release, which will be the
    production engine for the airplane. So, we don't see major
    changes over the engine we've already delivered to Fort Worth.
    We envision flying that engine this fall.
        Senator McCain. In your experience, Mr. Sullivan, haven't
    we generally had an alternate engine for most of these major
    aircraft procurements, at least for a period of time?
        Mr. Sullivan. We've had a--yes, there was tremendous
    success--I guess, I kind of go back to the engine wars that
    happened when the F-16, for example, had competition in their
    engines, and had a significant amount of cost savings and risk
    reduction as a result. There are many other examples, as well,
    where competition really has over the--some of the things that
    we're interested in looking at are some of the sustainment
    issues, not just the initial spares that go with buying the
    aircraft, but also the equivalent engines over a 30- or 40-year
    lifetime of an aircraft, and the improvements that can be made
    to reliability and quality if competition is present.
        Senator McCain. Mr. Bolkcom, do you recall how much the
    British are investing in the JSF?
        Mr. Bolkcom. Mr. Chairman, it's a 40-percent partnership
    with GE. I can tell you that.
        Senator McCain. Mr. Sullivan, I think it's $4 billion, or
    something like that?
        Mr. Sullivan. Overall, I think research, development,
    testing, and evaluation (RDT&E)--you might know better than I--
    but it's about, I think, $4 billion.
        Admiral Enewold. The U.K. is a level-one partner. They are
    investing $2.2 billion in direct support of the overall system
    design and development (SDD) program.
        Senator McCain. Having had conversations with our friends
    from the U.K., they are quite disturbed about this decision--
    not only that the decision was made, but, in their stated view
    they were not consulted. That puts at risk at least some of
    that development. I think part of that's understandable. Is
    that your impression, Mr. Sullivan?
        Mr. Sullivan. On their feelings right now? Yes, there's
    been an awful lot in the press, not only with the engine, but
    other things, as well, yes.
        Senator McCain. Senator Chambliss?
        Senator Chambliss. Is there any explanation for why we
    didn't talk to the Brits about this?
        Admiral Enewold. Like I said, sir, it happened as part of
    the QDR, and I didn't have any insight into that, so I don't
    know.
        Senator Chambliss. I don't have anything further, Mr.
    Chairman.
        Mr. Chairman, I just would say this is what is so
    frustrating to me, that we're sitting here and I know these
    guys are experts, and they're doing exactly what they've been
    charged to do. But why we can't sit here today with an airplane
    that's in this developed a stage and look at doing a multiyear,
    where we can save money, is really what's frustrating to me,
    from a policy standpoint. I don't know whether this is a
    program that we can do some of the things that you and I have
    talked about before relative to reforming our procurement
    process, but maybe there is something here we can do.
        Senator McCain. I hope so. We are looking at the whole
    issue with a lot of assistance from our friends at GAO and CBO,
    and we're appreciative that you're here today. Admirals, we're
    appreciative of the job that you're doing. I recognize that
    you're carrying out orders, and you're doing it very well. I
    understand that some of these questions like decisions that
    were made in the QDR are difficult for you to respond to. So,
    we thank you for your good work. I know you'd much rather be at
    sea. But this is the price you pay. [Laughter.]
        Thanks very much. This hearing is adjourned.
        [Questions for the record with answers supplied follow:]
                   Questions Submitted by Senator John McCain
                     definition of ``substantial savings''
        1. Senator McCain. Mr. Bolkcom, General Hoffman testified that the
    Air Force expects its multiyear procurement proposal to be about 5
    percent less expensive than the total anticipated cost of carrying out
    the program through a series of annual contracts. In your opinion, does
    that 5 percent constitute ``substantial savings'' within the meaning of
    10 U.S.C. 2306b section (a)(1)? What is the basis of your opinion?
        Mr. Bolkcom. To address this question in a meaningful way, it must
    be placed in the proper context. The Air Force's proposed acquisition
    plan for the F-22A would add $1.05 billion to the budget and slow down
    the annual production rate, to 20 aircraft per year, which will likely
    lead to additional cost increases. The goal of a multiyear procurement
    (MYP) would be to defray the known and unknown cost increases that the
    Air Force is proposing to the F-22A program. Within this context, it is
    accurate to say that the MYP will not save money. It may avoid
    additional cost increases.
        There may be several reasons why a projected 5-percent savings from
    MYP versus annual procurement may not constitute ``substantial
    savings.'' First, although 10 U.S.C. 2306b section (a)(1) no longer
    requires a 10-percent cost savings, this historic benchmark suggests a
    level of savings that can be achieved, and could be pursued. It can be
    counter-argued that replacing the 10 percent cost criterion with
    ``substantial savings'' corroborates the acceptability of lesser
    savings.
        Second, Congress has expressed dissatisfaction with, and rejected,
    proposed MYP contracts with anticipated savings of 5 percent over
    annual procurement. For example, during negotiations on fiscal year
    1996 supplemental appropriations, House appropriators insisted that an
    MYP contract for 80 C-17 aircraft achieve ``closer to the historical
    average of 10 percent compared with buying the program by lot.''
    Responding to congressional pressure, Department of Defense (DOD) re-
    engaged the C-17 prime contractor and was able to negotiate an MYP
    contract that promised 7-percent savings rather than the 5-percent
    previously projected.
        Third, other MYP contracts for military aircraft have achieved
    greater savings than the 5 percent projected for the F-22A. The two MYP
    contracts that the Navy has used to procure the F/A-18E/F have achieved
    savings of 7.4 percent and 10.95 percent when compared to annual
    procurement. The most recent MYP contract for the C-130J program
    achieved a savings of 10.9 percent over annual procurement. The second
    MYP contract under which 60 C-17s were produced is to have achieved
    savings of 8.7 percent.
        Fourth, projections of MYP savings are not always fully realized.
    For example, in April 2002 when the Marine Corps and Air Force decided
    to jointly procure C-130J aircraft under an MYP contract, the projected
    savings over annual procurement was 13.3 percent. As mentioned above,
    the actual savings is now estimated to be 10.9 percent, 2.4 percent
    less than anticipated. Also, in June 1996, Under Secretary of Defense
    for Acquisition Paul Kaminski estimated that the first C-17 MYP
    contract would result in a total of $1.025 billion in savings. This
    figure, based on a contract value estimated at $14.2 billion would have
    represented roughly 7 percent savings over annual procurement. However,
    the first C-17 MYP contract ultimately cost $19.9 billion, and final
    MYP savings appear to be closer to 4.4 percent over annual procurement.
        Neither the Air Force nor Boeing were able to provide estimated MYP
    savings as a percent of what annual procurement would cost. The Air
    Force estimates that the second C-17 MYP resulted in savings of $1.309
    billion on the $13.8 billion contract. Lacking precise data, CRS
    calculated the 8.7 percent savings using these figures. 8.7 percent is
    likely a rough approximation of actual MYP savings, which could be
    higher or lower than this figure. The 4.4 percent savings was derived
    using the same methodology.

                                   precedent
        2. Senator McCain. Mr. Bolkcom, the Air Force previously argued in
    favor of the KC-767 tanker lease by saying that it was following the
    precedent set by the long term lease of four 737 aircraft. Do you think
    that incrementally funding F-22A production may similarly set a
    precedent that we may come to regret? Please explain.
        Mr. Bolkcom. Whether something is or is not a precedent is subject
    to interpretation. In the case you mention, the Air Force did cite the
    lease of four 737 aircraft as a precedent for leasing 100 KC-767s.
    However, I think it is fair to say that a number in Congress did not
    find this argument persuasive. I know of no other example of Congress
    granting the Air Force permission to incrementally fund aircraft
    procurement. Therefore, many may see incrementally funding the F-22 as
    precedent setting. Congressman Duncan Hunter, for one, has stated in a
    recent House Armed Services Committee hearing that he believed it to be
    precedent setting. I can't say whether you or Congress may come to
    regret setting a precedent for incrementally funding aircraft
    procurement. It is fair to say, however, that once something becomes
    common practice, such as incremental funding for shipbuilding, it
    becomes more difficult to deny such requests.

                            economic order quantity
        3. Senator McCain. Mr. Bolkcom, the Air Force is requesting that
    Congress authorize an economic order quantity (EOQ) procurement before
    it has been determined whether a multiyear procurement will result in
    ``substantial savings'' over a series of annual contracts. What are
    your thoughts regarding this issue?
        Mr. Bolkcom. The reprogramming of funds to make an EOQ purchase
    outside an MYP contract is unconventional, and controversial. This
    proposal's compliance with statute is a matter of debate among
    legislative, Air Force, and DOD counsel. As I mentioned in my verbal
    statement, the Air Force's proposal presents risk. If the EOQ purchase
    is denied, additional risk of production cost increases will be
    incurred. If the EOQ purchase is approved, it is hoped it will mitigate
    the risk of F-22 production costs growing due to a reduction in
    procurement rate. However, an EOQ purchase outside of an MYP could add
    to other factors that might deter some in future Congresses from
    potentially reducing or canceling the F-22 program; essentially ``tying
    their hands.'' This is because a future reduction in funding or a
    cancellation of the program could eliminate the use for which items
    purchased under the EOQ were intended.

                                     f-22a
        4. Senator McCain. Mr. Sullivan, in your opinion, does the F-22A
    possess a ``stable design'' within the meaning of 10 U.S.C. 2306b
    section (a)(4)? Please explain.
        Mr. Sullivan. The baseline F-22A aircraft, designed primarily for
    the air superiority role, has successfully completed development and
    initial operational testing and its design is stable for that
    particular mission. However, the Air Force has stated that to be
    effective in the future a more robust ground attack capability is
    needed for the F-22A. It plans to spend several billion additional
    dollars to add this ground attack capability. A key to the success of
    this effort is the development and integration of a new radar. The Air
    Force expects to take delivery of the first aircraft with the new radar
    in November 2006 but the software needed to provide the robust ground
    attack capability will not be completed until 2010. According to a
    representative of the Director, Operational Test and Evaluation
    (DOT&E), the key to achieving a more robust ground attack capability
    will center on the integration of this new radar. A December 2005
    report issued by the Defense Contract Management Agency stated that
    problems encountered during the test and integration of the new radar
    have added risk to the development program. Until software and
    integration testing in the F-22A have been successfully completed, we
    consider the design unstable creating the potential for significant
    cost overruns and schedule delays.

        5. Senator McCain. Mr. Sullivan, in your opinion, are the
    ``technical risks'' associated with the program ``not excessive''
    within the meaning of 10 U.S.C. 2306b section (a)(4)? Please explain.
        Mr. Sullivan. See the answer to question 4 as technical risk is
    linked to design stability.

        6. Senator McCain. Mr. Sullivan, in your statement you conclude
    that DOD does not have an executable business case for buying the F-
    22A. How do you define this business case?
        Mr. Sullivan. A critical first step to success in acquiring new
    weapons systems is formulating a comprehensive business case that
    justifies the investment decision to begin development. The business
    case should validate warfighter needs and match product requirements to
    available resources, including proven technologies, sufficient
    engineering capabilities, adequate time, and adequate funds. Several
    basic factors are critical to establishing a sound business case for
    undertaking a new product development. First, the users' needs must be
    accurately defined, alternative approaches to satisfying these needs
    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.
        Once established, the business case should be revisited and revised
    as appropriate if the program or external circumstances substantially
    changes. If the financial, material, and intellectual resources to
    develop the product are not available, a program is at substantial risk
    in moving forward.
        The Air Force's business case for the F-22A program is unexecutable
    as planned because there is a significant mismatch between the Air
    Force's stated need for the F-22A aircraft and the resources OSD is
    willing to commit. According to Air Force officials, a minimum of 381
    F-22A aircraft are needed to satisfy today's national security
    requirements yet OSD states it can only afford to buy 183 F-22A
    aircraft. This results in a 198-aircraft gap in capability.
    Additionally, the Air Force now states a need for greater ground attack
    and intelligence-gathering capabilities, not included in the existing
    business case, that will require an extensive modernization program.
    The value of this planned investment in modernization is questionable
    until a new business case resolves the gap between requirements and
    affordability.

        7. Senator McCain. Mr. Sullivan, what are the prerequisites for
    developing and executing a successful business case?
        Mr. Sullivan. See the response to question 6 as it discusses the
    elements of a business case.

        8. Senator McCain. Mr. Sullivan, what concerns do you have with the
    Air Force's incremental funding approach for the F-22A?
        Mr. Sullivan. The Air Force has proposed using incremental funding
    to pay for the multiyear contract. Instead of fully funding the buy for
    each fiscal year, it plans four funding increments--economic order
    quantity, advanced buy, subsystem, and final assembly. Incremental
    funding for multiyear procurement is neither permitted by the annual
    DOD appropriations act,\1\ nor the multiyear authorizing statute which
    requires that funds only be obligated under a multiyear contract ``for
    procurement of a complete and usable end item.'' \2\ However, the Air
    Force is seeking an exception to these requirements in its request to
    Congress for statutory authorization for the multiyear contract. The
    Air Force's proposed F-22A multiyear strategy includes an increment of
    funding in each fiscal year to begin manufacturing subsystems, not
    considered a complete and usable end item. For example, the fiscal year
    2007 budget request includes $1.5 billion for subassemblies. It would
    not be until fiscal year 2008 that the final assembly would be fully
    funded.
    ---------------------------------------------------------------------------
        \1\ Section 8008 of the fiscal years 2005 and 2006 Department of
    Defense Appropriations Acts (Public Laws 108-287 and 109-148,
    respectively) require full funding of units to be procured.
        \2\ 10 U.S.C. Sec. 2306b(i)(4)(A). This restriction was added by
    section 820 of the Bob Stump National Defense Authorization Act for
    Fiscal Year 2003 (Public Law 107-314).

        9. Senator McCain. Mr. Sullivan, do you believe the Air Force's MYP
    proposal for the F-22A meets the criteria as delineated in title 10?
    What concerns do you have in regard to their plan?
        Mr. Sullivan. The Air Force is proposing to buy the remaining 60 F-
    22As over a 3-year period with a multiyear contract and plans to submit
    its justification to Congress on May 15, 2006.\3\ To enter into a
    multiyear contract the Air Force must first meet the statutory criteria
    listed in 10 U.S.C. Sec. 2306b(a). Table 1 shows the six criteria that
    must be satisfied before entering into a multiyear contract and our
    observations on issues that could affect the Air Force's ability to
    satisfy several of the criteria.
    ---------------------------------------------------------------------------
        \3\ The Air Force needs statutory authorization for its proposed
    multiyear contract under 10 U.S.C. Sec. 2306b and the annual DOD
    appropriations act.

     TABLE 1: OBSERVATIONS OF F-22A MULTIYEAR CONTRACT CRITERIA AS OF APRIL
                                      2006
    ------------------------------------------------------------------------
                Multiyear criteria                    GAO observations
    ------------------------------------------------------------------------
    Contract will result in substantial         The Air Force has not
     savings.                                    completed an estimate of
                                                 savings but its preliminary
                                                 indications are a maximum
                                                 of 5 percent savings.
                                                 However, when the unit
                                                 procurement costs for the
                                                 planned multiyear approach
                                                 is compared to how the Air
                                                 Force had previously
                                                 planned to buy the
                                                 remaining aircraft, the
                                                 unit procurement costs
                                                 increase under multiyear.
    Minimum need expected to remain             Quantities have continually
     substantially unchanged during contract     been in a state of flux in
     period in terms of production rates and     the F-22A program including
     total quantities.                           changes in the last two
                                                 budget submissions.
    Reasonable expectation agency head will     The Air Force has indicated
     request funding at required level to        that its multiyear budget
     avoid contract cancellation.                is currently under funded
                                                 by $400 million. Further,
                                                 it is proposing to use
                                                 incremental funding rather
                                                 than fully funding each
                                                 aircraft lot.
    There is stable design, and technical       While the design for the
     risks are not excessive.                    baseline F-22A aircraft,
                                                 designed primarily for an
                                                 air superiority role, is
                                                 stable, the design for the
                                                 ground attack capability to
                                                 be added has not been
                                                 demonstrated and thus
                                                 cannot be considered
                                                 ``stable.''
    Estimates of contract cost and cost         The Air Force has not
     avoidance are realistic.                    completed its analysis of
                                                 contract cost or cost
                                                 avoidance at this time.
    Use of contract will promote national       No observation since the
     security of the United States.              contract vehicle has not
                                                 been determined.
    ------------------------------------------------------------------------
    Source: GAO Analysis and 10 U.S.C. 2306b.

                              incremental funding
        10. Senator McCain. Mr. Marron, under the Air Force's proposed MYP
    and incremental funding approach, what liabilities will go unfunded?
        Mr. Marron. Under a multiyear contract without incremental funding,
    the Air Force would initially need approximately $4 billion to $5
    billion to cover its minimum liability, rather than the $2 billion
    included in the Air Force's budget request. That total liability
    includes about $3.5 billion for the direct acquisition costs and
    between $0.5 billion and $1.5 billion in cancellation liability for the
    contract.
        The Air Force's budget request does not include funding to cover
    its liability if it cancels the multiyear contract after the first
    year. Under the multiyear contract, some nonrecurring costs may be
    allocated to aircraft that would begin production in 2008 and 2009.
    Therefore, if the contract is canceled before completion, the Air Force
    may owe the contractor more than the amount appropriated for items
    produced in the years before the cancellation. The Air Force has not
    requested budget authority to fund those liabilities.
        The Air Force has requested permission to budget and to pay for
    each annual production lot incrementally over a 2-year period rather
    than obtaining appropriations for the full cost of those aircraft in
    the year production begins. For example, funding in the first year
    would cover the cost of producing certain components of the first 20
    aircraft; funding in the second year would pay for the cost of
    assembling them. Thus, the Air Force's request does not cover the full
    costs of the aircraft at the time they are ordered or the time they
    enter production.

        11. Senator McCain. Mr. Marron, from a budgetary standpoint, is it
    responsible to fund only the subassembly of aircraft and require
    Congress to grant additional, future resources in order to procure a
    complete, usable product? Why or why not?
        Mr. Marron. The Air Force's incremental funding strategy may
    distort budgetary choices this year, and compel Congress to provide
    additional appropriations in subsequent years. If the Air Force's
    incremental budgeting approach is approved, when Congress allocates
    budget authority to programs in the 2007 defense appropriations act,
    the F-22 program would have an advantage over other programs or
    activities that did not receive that budgetary treatment. In subsequent
    years, Congress could be left with little choice but to provide
    additional appropriations to ensure the delivery of fully assembled,
    functional aircraft. Although more aircraft could be ordered in the
    first year under the incremental funding approach, fewer aircraft could
    be ordered in subsequent years within any given appropriations amount.
    Even if costs increased relative to the Air Force's current estimate,
    Congress might feel compelled to appropriate funds for aircraft that
    had already begun production to avoid wasting the funds already
    invested in the components.

        12. Senator McCain. Mr. Marron, does this approach restrict the
    ability of Congress to exercise meaningful oversight on the program?
    Why or why not?
        Mr. Marron. The Air Force's incremental funding strategy could
    hamper congressional oversight of the program by distorting budget
    choices this year, and making it necessary to provide additional
    appropriations in subsequent years.

        13. Senator McCain. Mr. Marron, does this approach limit visibility
    and accountability? Why or why not?
        Mr. Marron. Incremental budgeting reduces visibility over the cost
    of the program by deferring the recognition of budget authority to
    subsequent years. For any given lot of aircraft, an increase in cost
    relative to the budget estimate could be obscured by combining that
    cost growth with the cost of the subsequent funding increments. Even if
    it were apparent that costs had increased relative to the Air Force's
    estimate, Congress might feel compelled to appropriate funds for
    aircraft that had already begun production to avoid wasting the funds
    already invested in the components.

        14. Senator McCain. Mr. Marron, under its current proposal how does
    the Air Force fund termination liability and what future action, if
    any, would be required of Congress to terminate the contract?
        Mr. Marron. Contract termination differs from contract
    cancellation. The Government has the right to end any contract early
    when doing so is in the Government's interest, but must pay the
    contractor for any authorized work performed before it was notified to
    cease work. Contract termination is the act of rescinding orders for
    items for which funds have already been appropriated and on which work
    has already begun. The cost of terminating an annual procurement
    contract early should not exceed the available appropriations because
    an agency should have sufficient appropriations to cover all recurring
    and nonrecurring costs before it initiates an annual procurement
    contract.
        Because the Air Force will not have sufficient budget authority to
    pay for the full cost of each plane at the time it enters production,
    there could be an unfunded liability if the Service terminates the
    contract for those planes before funding for the full cost of those
    planes has been provided. If, in the course of building the aircraft,
    the contractor incurs costs that exceed the first increment of funding
    provided for that production lot, and the Air Force terminated the
    contract before it received appropriations for the second increment,
    additional funding would be required to pay those termination costs.
        Contract cancellation--unique to multiyear contracts--is the act of
    rescinding orders for items that were scheduled for production in
    subsequent years of a multiyear procurement contract and for which
    funding has not been provided. The Air Force budget request does not
    included specific amounts for the cancellation liability for the F-22
    procurement contract. Under a multiyear contract, some nonrecurring
    costs may be allocated to items expected to be produced in future
    years. Therefore, if the contract is canceled, the Government may owe
    the contractor more than the amount appropriated for items produced in
    the years before the cancellation. Thus, if the Air Force cancels the
    multiyear contract, additional amounts will be required to pay for that
    unfunded liability.
        In the case of both termination and cancellation, the Air Force
    would have to take funding from other aircraft procurement programs or
    request that Congress provide additional appropriations to pay those
    unfunded liabilities.

        15. Senator McCain. Mr. Marron, what are the pros and cons for
    incremental funding of aircraft and how does it compare to funding
    ships or military construction projects in that manner?
        Mr. Marron. The full costs of acquiring any Federal asset should be
    funded in advance to help ensure that all costs and benefits are fully
    considered at the time decisions are made to provide resources. Upfront
    funding enables Congress to control spending at the time a commitment
    is made and ensures--or at least increases the likelihood--that a
    complete and usable asset will be delivered without the need to provide
    additional appropriations in future years. These principles hold true
    regardless of the type of asset the Government acquires.
        Agencies have resorted to incremental funding because it can be
    difficult to budget for certain very expensive items if it must have an
    appropriation for the full cost in the first year. In some instances,
    the cost of a single item may exceed an agency's annual budget for
    capital acquisitions. If the cost of an asset represents a large
    portion of its budget, an agency may have to forego most other capital
    acquisitions for that year or otherwise disrupt other ongoing
    acquisition programs.
        Incremental funding, however, can have several deleterious effects.
    It may limit visibility and accountability because it obscures the full
    cost of decisions at the time they are made. In the competition for
    appropriations, it may tilt the playing field in favor of expensive
    programs that benefit from such a funding arrangement; programs may be
    selected on the basis of their apparent economy--in their initial
    stages--relative to other programs that do not have the advantage of
    such favorable budgetary treatment. Moreover, incrementally funded
    projects may be started without adequate scrutiny or a full
    understanding of the total cost. Incremental funding may provide an
    incentive to underestimate costs at the outset of a project because
    later cost increases would not have to be acknowledged as such but
    could be incorporated in subsequent funding increments.
        In cases in which an acknowledgment of the full cost upfront could
    render a program too expensive to consider, both agencies and Congress
    may end up accepting those higher costs at a later date if the only
    alternative is to abandon their previous investment in partially
    completed products. Finally, incremental funding may constrain the
    funding available for other programs in future years as programs that
    were partially funded in previous years continue to consume resources.
        Incremental funding has rarely been used for aircraft procurement
    programs. Perhaps because aircraft--even ones as costly as the F-22--
    are less expensive than Navy ships, dams, and levees constructed by the
    Army Corps of Engineers, and NASA's space station, they are easier to
    budget for in full. Consequently, budgetary constraints can be
    accommodated by purchasing fewer aircraft in a given year rather than
    by funding only a part of the cost of a larger production lot.

        16. Senator McCain. Mr. Marron, has there been any instance where
    Congress has authorized and appropriated incremental funding of a
    multiyear procurement?
        Mr. Marron. CBO is not aware of any instance where Congress has
    authorized incremental funding of a multiyear procurement program. In
    fact, Congress recently disapproved such a proposal by the Air Force.
    In its fiscal year 2003 budget request, the Air Force proposed to use
    advance procurement funding--typically used to buy components with
    significantly longer production time than other system components--for
    the multiyear procurement of C-17 cargo aircraft. That incremental
    funding approach would have effectively resulted in progress payments
    on the aircraft rather than full funding in the initial year of
    production.
        In the National Defense Authorization Act for Fiscal Year 2003,
    Congress prohibited that approach proposed for the C-17 by amending the
    statute governing multiyear procurement to allow DOD to obligate funds
    to procure end items only if they were ``complete and usable.''
    Congress also added $586 million to the Department's budget request for
    fiscal year 2003 to fully fund the acquisition of 15 C-17 aircraft
    entering production that year. The conference report accompanying the
    Department of Defense Appropriations Act for Fiscal Year 2003
    explicitly disapproved the Air Force's proposed approach: ``This
    financing scheme runs counter to the 'full funding' principles which
    guide Federal Government procurement practice, and thereby creates a
    future liability for the Air Force and Congress. For this reason, the
    conferees disapprove the Air Force's C-17 financing proposal.''

        17. Senator McCain. Mr. Marron, why would Congress be advised to
    start now?
        Mr. Marron. CBO does not believe that the Air Force has made a
    compelling case for authorizing incremental funding of a multiyear
    procurement contract for the F-22 fighter.
        Incremental funding of any program, including multiyear procurement
    programs, could distort budgetary choices by making a program appear
    less expensive than it is, and would constrain budgetary flexibility in
    subsequent years.
        Incremental funding and multiyear procurement are conceptually
    inconsistent budgetary practices. Multiyear procurement contracts
    suggest a firm and substantial commitment on the part of the
    Government. The contractor is encouraged to make investments promoting
    efficiency on the basis of the Government's commitment to purchase
    multiple annual production lots or to compensate the contractor for
    those investments if it chooses to cancel the contract. In contrast,
    however, the amount of budget authority provided under an incremental
    funding arrangement suggests a very limited Government liability--only
    for the cost of the components that are produced in that year.

        18. Senator McCain. General Hoffman, why is the Air Force pursuing
    an incremental funding strategy for the remaining F-22s?
        General Hoffman. The split funding strategy proposed for F-22
    production represents a win-win solution between competing priorities.
    Fiscal constraints faced by the Department in fiscal year 2007 and
    fiscal year 2008 drove significant budget challenges for the Air Force.
    Taking advantage of the mature F-22 production line, the Department was
    able to stretch procurement funding over 2 years for each production
    lot without impacting aircraft production or delaying deliveries. This
    decision freed over $2.3 billion of funds in fiscal year 2007 and
    approximately $1.0 billion in fiscal year 2008. The funding strategy
    also adds an additional lot of F-22 production, extending America's
    only fifth-generation fighter aircraft production capability 1 year,
    providing added stability to the F-22 supplier base and preserving the
    opportunity to add production lots in the future.

        19. Senator McCain. General Hoffman, why would the Air Force not
    fully fund the purchase of whole aircraft as you have done in the past?
        General Hoffman. The split funding strategy proposed for F-22
    production represents a win-win solution between competing priorities.
    Fiscal constraints faced by the Department in fiscal year 2007 and
    fiscal year 2008 drove significant budget challenges for the Air Force.
    Taking advantage of the mature F-22 production line, the Department was
    able to stretch procurement funding over 2 years for each production
    lot without impacting aircraft production or delaying deliveries. This
    decision freed over $2.3 billion of funds in fiscal year 2007 and
    approximately $1.0 billion in fiscal year 2008. The funding strategy
    also adds an additional lot of F-22 production, extending America's
    only fifth-generation fighter aircraft production capability 1 year,
    providing added stability to the F-22 supplier base and preserving the
    opportunity to add production lots in the future.

        20. Senator McCain. General Hoffman, please explain exactly why
    Congress should authorize an approach to procuring F-22As that Congress
    has never authorized in the past (i.e., incremental funding for a
    multiyear procurement).
        General Hoffman. The Department was faced with a tightly
    constrained fiscal environment in fiscal year 2007. Many priorities
    competed for the constrained funding, including tactical fighter
    aircraft recapitalization, natural disaster relief, and the global war
    on terror. The decision to use split funding for F-22 procurement
    allowed the Department to balance these priorities effectively and to
    ensure that the Nation maintains the capability to manufacture fifth-
    generation tactical fighter aircraft. This decision freed over $2.3
    billion of funds in fiscal year 2007 and approximately $1.0 billion in
    fiscal year 2008. Further, the funding strategy adds an additional lot
    of F-22 production, extending America's only fifth-generation fighter
    aircraft production capability 1 year, providing added stability to the
    F-22 supplier base and preserving the opportunity to add future
    production lots.

        21. Senator McCain. General Hoffman, given the historical
    background for F-22A with regard to technical problems, delays, and
    enormous price increases, why should Congress give deference to this
    new proposal from the Air Force?
        General Hoffman. The F-22 program is delivering high quality,
    operational aircraft per the contractual production schedule and
    aircraft flyaway costs have decreased with each of the last three
    production lots. Over the past 2 years, the F-22 production program has
    made great strides and has matured into a world-class aircraft
    production line. From August 2004 through January 2006, the program
    delivered 37 aircraft, meeting its congressional commitment. In fact,
    during the last 6-month period, the program delivered 14 aircraft,
    proving it could produce at a rate of at least 28 aircraft per year.
    This effort has erased the lag in the delivery schedule and has put F-
    22 production deliveries back on track. Efficiencies in F-22 production
    have resulted in reduced flyaway costs of 16, 11, and 13 percent,
    respectively, in the last three F-22 lots. In December 2005, the Air
    Force stood up its first operational squadron of F-22s. During day-to-
    day training, practice deployments, and operational missions, the F-22
    has proven to be an overwhelmingly effective combination of stealth,
    speed, maneuverability, and integrated avionics. The F-22's ability to
    penetrate denied enemy airspace and execute a multirole mission is
    unmatched in the world.
        The new proposal extends F-22 production by 1 year, extending
    America's only fifth-generation fighter aircraft production capability,
    providing added stability to the fifth-generation supplier base, and
    preserving the opportunity to add future production lots.

        22. Senator McCain. General Hoffman, given the precedent-setting
    incremental funding scheme in this multiyear procurement proposal, one
    would expect the case for this atypical military procurement of F-22
    would need to be overwhelming and the cost-savings significant. What is
    your overwhelming case?
        General Hoffman. The overwhelming case is built on a combination of
    industrial capability and cost savings. The Institute for Defense
    Analyses (IDA) is currently building a business case analysis (BCA) for
    the F0922 multiyear. Preliminary analysis from IDA predicts the F-22
    proposal will save approximately 2.2 percent over lots 7, 8, and 9,
    translating into a savings of over $231 million. Additionally, the
    multiyear procurement will allow the Department to deliver required
    fifth-generation fighter capability efficiently and cost effectively
    (both air vehicle and engine) while providing an industrial base bridge
    to complementary capability in the Joint Strike Fighter (JSF). The
    JSF's reliance on Lockheed Martin's facilities in Palmdale, CA and Fort
    Worth, TX and many vendors common to the F-22, raises concerns about
    sustaining an experienced stealth aircraft industry. For example, BAE,
    Northrop Grumman, and Lockheed Martin in Palmdale, CA, perform work for
    both the F-22 assembled at Lockheed Martin in Marietta, GA, and the JSF
    assembled at Lockheed Martin in Fort Worth, TX, resulting in an
    estimated 1- to 3-percent decrease in the flyaway cost of both weapon
    systems. As such, F-22 production termination before JSF production
    maturity will translate into higher JSF costs. The transition from F-22
    to JSF production requires an integrated approach to keep aircraft
    production open and to control risk and cost of the JSF program and
    reduce operational risk to the combatant commanders. It is imperative
    that the United States maintain production of advanced aircraft to meet
    national defense requirements in an uncertain world. The F-22's
    procurement strategy works toward that end.

        23. Senator McCain. General Hoffman, what evidence, comparable to a
    BCA, can the Air Force give at this time to satisfy the current law
    which requires that entering into a multiyear procurement contract will
    result in substantial savings compared with a procurement through a
    series of annual contracts?
        General Hoffman. IDA is currently building a BCA for the F-22
    multiyear. Preliminary analysis from IDA predicts the F-22 proposal
    will save approximately $233 million (2.2 percent) over lots 7, 8, and
    9. The final BCA results will be delivered to Congress in mid-May.

        24. Senator McCain. General Hoffman, without a completed analysis
    of whether a multiyear procurement of the F-22A will result in
    ``substantial savings'' over a series of annual contracts, on what
    basis should Congress grant authority for an EOQ procurement?
        General Hoffman. Based on an updated opinion from the DOD General
    Counsel, the Air Force will not execute an EOQ procurement until
    multiyear procurement authority is received from Congress. Not funding
    a $100 million EOQ in 2006, however, will decrease the expected savings
    of the multiyear procurement. The Air Force plans to partially mitigate
    the lost savings potential by requesting a $100 million increase to the
    $200 million fiscal year 2007 EOQ for a total fiscal year 2007 EOQ of
    $300 million. The Air Force will submit the final estimate of savings
    to Congress in mid-May once the BCA being prepared by IDA is complete.
    Preliminary data released by IDA on April 14, 2006 estimated savings of
    2.2 percent, still a savings to the taxpayer of over $230 million. This
    compares to the 5 percent number I gave in testimony which was based on
    starting EOQ in fiscal year 2006.

                              f-22a structure flaw
        25. Senator McCain. General Hoffman, a March 15, 2006 Bloomberg
    article reported a structural flaw with regard to a titanium engine
    casing on the F-22A. When did the Air Force learn of this problem?
        General Hoffman. The Air Force learned in December 2005 that F-22
    forward boom frames might have been improperly heat-treated. Upon
    further investigation it became clear that this issue is not the result
    of an improper design, but an issue with one supplier's manufacturing
    process. Subsequently, the Air Force tested improperly heat treated
    forward boom frames and determined that they do not affect safety of
    flight. Consequently, no restrictions have been put on F-22 flight
    operations.
        The heat-treat process enhances the boom frame's structural
    properties by holding the frames at a high temperature long enough to
    achieve the desired grain structure. A section of the forward boom
    frames under investigation may not have been held at this temperature
    long enough to completely achieve the desired grain structure. A series
    of material tests confirm that the atypical grain structure does not
    affect aircraft structural integrity, although, additional tests are
    underway to determine any long-term impact of the affected parts on
    aircraft service life. The Air Force expects the results of these tests
    by the end of May.
        This heat-treat issue potentially affects aircraft 4017 through
    4107 (aircraft through Lot 5 production). The supplier of these frames
    no longer manufactures F-22 forward boom frames, therefore, aircraft
    manufactured after 4107 are not affected by this heat-treat issue.

        26. Senator McCain. General Hoffman, why did the Air Force not
    inform Congress, specifically the Senate Armed Services Committee, of
    this issue prior to the Bloomberg article?
        General Hoffman. This issue was briefed as part of Air Force
    staffer day briefings to all four committees. The House Appropriations
    Committee, Subcommittee on Defense, was briefed on 21 February 2006,
    the House Armed Services Committee was briefed on 24 February 2006, the
    Senate Appropriations Committee, Subcommittee on Defense, was briefed
    on 27 February, and the Senate Armed Services Committee (SASC) was
    briefed on 21 March 2006. The Bloomberg article was dated 16 March
    2006, after the Air Force had begun briefing Congress on this issue.

        27. Senator McCain. General Hoffman, in prior meetings, Air Force
    officials stated that any cost associated with this problem would be
    covered by the contractor. In a subsequent written response, it was
    stated that this problem is not a warranty item and that any cost
    discovered in the future would have to be negotiated with the
    contractor. What is the true story and why is this not a warranty item?
        General Hoffman. It is the Government position that this issue is
    the result of a deficiency in material and workmanship that could not
    have been discovered by reasonable inspection and therefore is
    considered a latent defect. To that end, once the magnitude of the
    problem is understood, the contractor will be responsible to make any
    necessary changes at no additional cost to the Government and negotiate
    a compensation considered fair and reasonable to both parties. There is
    no warranty on the F-22.

                              incomplete planning
        28. Senator McCain. General Hoffman, in your statement you
    highlight a ``back to basics'' approach to how the Air Force does
    acquisition. The current multiyear procurement proposal for F-22A is
    significantly different from last year's plan. It requires numerous
    waivers and exclusions from Congress. It is undetermined whether there
    will be a problem meeting annual termination liability requirements, as
    well as whether the savings from the multiyear procurement contract
    will be sufficient to offset the increased costs by stretching out
    production. This plan sounds like it isn't fully developed. How do you
    respond?
        General Hoffman. In fiscal year 2007 the Department was faced with
    very tough fiscal constraints driven by many competing priorities. The
    fiscal year 2007 President's budget funding plan for the F-22 is
    unique, but it offers the opportunity to fund many of those priorities,
    including natural disaster relief and the war on terrorism, while
    continuing to produce F-22 aircraft without interruption to the
    production flow. It also adds one lot of F-22 aircraft, extending the
    Nation's fifth-generation tactical fighter aircraft manufacturing
    capability. The multiyear procurement request offers the benefit of
    stabilizing the fifth-generation production supplier base and helps
    mitigate the cost increases expected from stretching production and
    decreasing lot quantities. IDA is developing the business case that
    will detail the expected benefits of the multiyear approach. This
    business case will be delivered to Congress by mid-May. Additional
    legislative language will also be required to allow split funding
    within a multiyear procurement. The Air Force is actively engaged with
    Congress to execute the strategy with transparency.

        29. Senator McCain. General Hoffman, will you please provide a copy
    of the BCA once it has been completed?
        General Hoffman. Yes. The preliminary IDA F-22 multiyear
    procurement BCA was forwarded to the SASC on 18 April 2006. The final
    BCA will be delivered to Congress as soon as IDA submits their report
    to the Department in mid-May.

                        joint strike fighter life cycle
        30. Senator McCain. Admiral Enewold, what is the expected life
    cycle in years for the JSF?
        Admiral Enewold. Current DOD force structure planning includes
    procurement of JSFs from fiscal year 2007 until fiscal year 2027. Based
    on expected JSF aircraft service life of 8,000 hours and legacy
    aircraft experience, JSFs could be in service inventories for at least
    40 years.

        31. Senator McCain. Admiral Enewold, how many JSF aircraft do we
    expect to build for the United States, the U.K., and the rest of our
    international allies and friends?
        Admiral Enewold. DOD plans to procure 2,443 JSF aircraft, 1,763 for
    the Air Force, and 680 for the Department of Navy. JSF partners have
    not yet formally committed to production quantities. A minimum of 650
    aircraft is a conservative planning estimate for the U.K. and 7 other
    JSF system development and demonstration phase partners.

        32. Senator McCain. Admiral Enewold, how many total JSF engines
    will be purchased over the life cycle of the program?
        Admiral Enewold. Current planning reflects procurement of
    approximately 3,000 engines, including spares, for the total planned
    DOD quantity of 2,443 aircraft.

                         sole-source engine challenges
        33. Senator McCain. Admiral Enewold, at some point, the JSF will be
    the only fighter aircraft for the military. What would happen if the
    sole supplier of JSF engines encountered unforeseen disruptions in
    either engine production or the ability to support those engines (e.g.,
    labor dispute, terrorism, natural disaster, etc.)?
        Admiral Enewold. Department leadership have concluded that relying
    on a single engine supplier incurs minimal operational risk, and that,
    while there are indeed benefits to having a second engine source, the
    benefits are not commensurate with the increased cost.

        34. Senator McCain. Admiral Enewold, how will you motivate a sole-
    source supplier to control production and support costs, or to spend
    his own money to make performance and other improvements to the engine?
        Admiral Enewold. Several mechanisms for motivating sole-source
    suppliers exist. Contract cost and schedule incentives will be used for
    procurement. For performance based logistics, contractors are
    incentivized to improve the performance and reliability of their
    products to increase ``time on wing.''

        35. Senator McCain. Admiral Enewold, if Congress were to go along
    with the Department's recommendation to terminate the General Electric
    (GE)/Rolls-Royce F136 engine, how would the Department ensure cost
    controls on the Pratt & Whitney engine in the development, production,
    and sustainment phases of the program without competition?
        Admiral Enewold. Cost accounting standards enable the Government to
    track cost elements for the program for completeness. DOD negotiates
    and approves forward pricing rates for labor for each company. Contract
    fee structures are established to incentivize cost and schedule
    performance. Once cost profiles are established, fixed-price and
    multiyear procurement contracts incentivize contractor performance and
    long-term price stability.

        36. Senator McCain. Admiral Enewold, why is there a discrepancy
    between the total number of engines to be purchased and the number that
    was used for determining cancellation of the alternate engine?
        Admiral Enewold. All analyses and business cases make assumptions,
    and I do not have insight into the ones used in the analysis you
    reference. Reliability projections, sparing models, and support
    concepts are key factors that influence the projected procurement
    numbers.

        37. Senator McCain. Admiral Enewold, is there DOD guidance for
    conducting cost analysis that requires the total life cycle cost of the
    system to be considered?
        Admiral Enewold. DOD acquisition policy requires consideration of
    program life cycle cost at major acquisition decision milestones.

        38. Senator McCain. Admiral Enewold, do you believe that if the 20-
    30 year life-cycle costs were included in the DOD analysis, as they
    should have been, the Department might have made a different
    conclusion? Why or why not?
        Admiral Enewold. Further analysis would be required to estimate any
    additional effects for the 20-30 year in-service phase of the life
    cycle. At a minimum, the costs of supporting two turbomachinery
    configurations, including spares inventories, technical manuals, fault
    and failure analyses, and personnel training would need analysis.

        39. Senator McCain. Admiral Enewold, the JSF program manager's
    advisory group (PMAG) met in 1998 and 2002. At both of those meetings
    the recommendation was the same--continue the JSF competitive engine
    program. Why has the DOD made a decision that is contrary to the PMAG's
    recommendations?
        Admiral Enewold. Both PMAGs concluded that it was beneficial to
    continue both engine efforts, but the recommendation specifically
    stated: ``Proceed with the JSF F136 engine program as currently
    planned. This recommendation is made independent of the Services'
    affordability issues which were beyond the scope of the analysis.''
    Department leadership stated that their decision to cancel the F136
    alternate engine program is based on affordability, providing the
    Department the best balance of risk and cost.

        40. Senator McCain. Admiral Enewold, will the JSF program
    experience a Nunn-McCurdy breach this year? If so, why?
        Admiral Enewold. Yes. The major portion of this breach is due to
    historical increases previously reported in the F-35 December 2003
    Selected Acquisition Report (SAR), i.e., 26.2 percent and 21.7 percent
    for Program Acquisition Unit Cost (PAUC) and Average Procurement Unit
    Cost (APUC), respectively, including programmatic changes. Details of
    the breach, which is against the Milestone B baseline, will be provided
    in the Department's December 2005 F-35 SAR, due to Congress in early
    April 2006.

        41. Senator McCain. Admiral Enewold, the DOD says that cancelling
    the GE/Rolls-Royce F136 engine entails little operational risk, but
    former Assistant Secretary of the Navy, John Douglas, in a March 1998
    Defense Daily article said ``The alternate engine for the Joint Strike
    Fighter addresses the single biggest risk issue. . . . I would not
    recommend we go forward without the alternate engine. . . . I want to
    state again unequivocally my support for the alternate engine.'' How do
    you account for the dramatic change within the Department on the JSF
    alternate engine program?
        Admiral Enewold. The F135 is now 8 years more mature in its
    development and is on track to meet the operational requirements for
    JSF. The F119 engine, from which F135 is derived, has successfully
    accumulated thousands of flight hours. Department leadership have
    stated that their decision to cancel the F136 alternate engine program
    is based on affordability, providing the Department the best balance of
    risk and cost.

        42. Senator McCain. Admiral Enewold, why does the Department
    believe that the dynamics that created significant savings in the first
    ``Great Engine War'' no longer apply to the JSF program?
        Admiral Enewold. The JSF Program Office was not involved in the
    Department's decision to cancel the F136 Program, and also was not
    involved in the related supporting analysis. I, therefore, do not have
    insight on details of the Department's analysis. My understanding is
    the Great Engine War resulted from both a desire to develop competition
    and regain the aerodynamic performance of the F-16. Clearly, the second
    motivation does not exist for JSF. Department leadership made it clear
    that their decision considered the benefits of competition balanced
    against affordability and operational risk assessments.

        43. Senator McCain. Admiral Enewold, if the JSF program does not
    meet the key performance parameter (KPP) requirement of
    interoperability, what impact, if any, will this have on the
    warfighter? Please fully explain your response.
        Admiral Enewold. The major reason for not meeting the JSF
    interoperability KPP is complexities of evolving DOD standards and
    application across platforms. If current issues remained unresolved,
    JSF would still have more communications interoperability than any
    existing fighter.
        The JSF interoperability KPP is an end-to-end assessment of the JSF
    design that reflects both (1) projected JSF performance against
    selected standards, which the air system is being designed to, and (2)
    performance against those same standards by a set of systems that
    represent all the external systems the JSF interoperates with. The
    actual measurement of performance is satisfaction of 67 critical
    information exchange requirements (IERs) that comprise the performance
    threshold. The current KPP shortfall primarily results from (1)
    variations across platforms in implementation of the Variable Message
    Format (VMF) tactical data link standards and (2) JSF's inability to
    meet the specified beyond-line-of-sight (BLOS) requirements.
    Approximately half of the 67 critical IERs are associated with VMF
    standards that primarily support air-to-ground operations (e.g., close
    air support). JSF is implementing the latest versions of the three VMF
    standards, and is projected to be 100 percent interoperable with the
    two ground systems that support forward air control (FAC). Legacy
    aircraft and helicopters participating in airborne FAC operations are
    updating to the current standards on differing schedules.
        JSF is the first fighter to integrate satellite communications
    (SATCOM), and legacy fighters successfully operated without it. JSF and
    all other platforms face the fundamental challenge of predicting the
    U.S. ultra-high frequency (UHF) SATCOM migration so we can avoid or
    minimize building to interim standards. Multiple assessments related to
    SATCOM migration are ongoing. The collective DOD JSF stakeholders have
    defined a path forward that aligns JSF planned capability fielding with
    the DOD objective SATCOM architecture. A variety of options exist that
    can mitigate the impact if the objective architecture is delayed. A
    planned operational requirements document change will address this
    issue.

        44. Senator McCain. Mr. Bolkcom, the competition between Pratt &
    Whitney and GE to produce F-15 and F-16 engines for the military lasted
    only 10 years. But the competition to support those aircraft engines
    lasted at least another 20 years. What are the pros and cons of holding
    such a competition for the JSF engine?
        Mr. Bolkcom. If DOD were to structure the engine competition as it
    did during the Great Engine War, the annual contract for which the two
    companies would compete would be to produce and support those engines
    over their lifetimes. If there is competition for engine production,
    then there would logically be competition for engine support work as
    part of a single, annual contract. The two companies also competed
    against each other for many years, in fact they still compete today, to
    sell and support engines to those countries that import the F-16 and F-
    15. This rivalry likely made the F-15 and F-16 more competitive in the
    international marketplace. The great export success the F-16, in
    particular, has achieved has been valuable in funding continued
    improvement of the aircraft, which might then be applied to U.S.
    aircraft.

        45. Senator McCain. Mr. Bolkcom, does competition provide cost-
    savings? Please explain your answer.
        Mr. Bolkcom. Competition during weapon system production can
    provide cost savings over relying on a sole supplier. Competition can
    also lead to more effective weapon systems, more responsiveness from
    the contractors, and better contract terms and conditions for the
    Government. However, competition does not automatically confer these
    benefits. The number of units to be produced must be large enough to
    recoup the initial investment in two producers. Further, the Government
    must plan and actively monitor and manage the competition if it is to
    realize the maximum benefit. In other words, DOD must be a ``smart
    buyer.''

        46. Senator McCain. Mr. Bolkcom, does the use of a sole source
    contractor tend to limit the degree of responsiveness if a problem
    arises? Please explain your answer.
        Mr. Bolkcom. That has been the case in the past. For example, Pratt
    & Whitney was widely excoriated by the Air Force for not satisfactorily
    responding to shortcomings in the F100 engine. But of course, there are
    examples of sole source contractors that are very responsive to their
    DOD customers. I don't believe the issue is one of causality. Relying
    on a sole source supplier does not necessarily lead the supplier to be
    unresponsive. On the other hand, forcing two or more companies to
    compete for business can lead to more responsive suppliers.

        47. Senator McCain. Mr. Bolkcom, how many JSF engines do you think
    will be purchased over the total life of the program and how did you
    come to that conclusion?
        Mr. Bolkcom. Each JSF aircraft is likely to consume 2.5 engines or
    engine equivalents of parts over its lifetime. Representatives of both
    GE and Pratt & Whitney, and many Service members whom I've interviewed
    agree on this planning factor. Considering this ratio of aircraft to
    engines, a conservative estimate of the number of engines to be
    purchased is at least 8,400 engines over the JSF program's lifetime.
    This number does not include the large number of engines that may be
    produced for foreign buyers of the JSF.

        48. Senator McCain. Mr. Bolkcom, why is it important that life
    cycle costs be considered when making a decision of this magnitude?
        Mr. Bolkcom. It can be difficult to think of a multi-million dollar
    aircraft engine as ``cheap.'' But procurement of the engine is cheap
    compared to the cost of supporting and maintaining the engine over its
    lifetime. Operations and support costs range from 50 percent to 70
    percent of the total weapon system life cycle cost. Any analysis of the
    potential cost savings from competition that does not consider the
    engine's operations and support phase is incomplete.

                           joint strike fighter delay
        49. Senator McCain. Mr. Sullivan, in your prepared remarks, you
    state that the JSF program can reduce cost and schedule risks by
    adopting a new, knowledge-based business case, and that the JSF program
    should delay production until the aircraft design has been proven to
    work in flight testing. How long do you propose the JSF program should
    be delayed?
        Mr. Sullivan. A delay should not be based on a particular time but
    on demonstrating certain knowledge has been attained and risks reduced.
    In the case of the JSF, DOD should delay its investment in production
    aircraft until sufficient testing has at least demonstrated the basic
    airframe design of each JSF variant in important parts of the flight
    envelope and limit production quantities until a fully integrated
    aircraft demonstrates through flight testing the required capabilities.
    The program plans to enter production with only 1 percent of its flight
    tests completed and more than 2 years before all three JSF variants
    have completed some flight testing of the aircraft's basic design and 4
    years before a fully configured and integrated aircraft is expected to
    be flight tested. This delay would allow the program time to gain much
    needed knowledge, reducing risks, and providing a greater opportunity
    for a more successful program outcome. The financial risk of moving
    into production for the JSF is significant. DOD plans to increase
    spending from about $100 million a month for production in 2007 to over
    $500 million a month just 2 years later. By the time a fully integrated
    aircraft has flown, DOD will have potentially signed procurement
    contracts for over 190 aircraft valued at $26 billion.
        It is important to note that we are not recommending a delay in
    development. Development work needs to take place to demonstrate that
    the aircraft will work as intended. At this time, the program is less
    than one-half of the way through its development program.

        50. Senator McCain. Mr. Sullivan, do you believe the current
    acquisition strategy of the DOD will allow it to achieve the JSF
    program objectives?
        Mr. Sullivan. We believe there is a high probability that the JSF
    program will not achieve its current cost, schedule, and performance
    objectives. The JSF acquisition strategy currently plans a single-step
    approach to deliver a quantum leap in tactical fighter capability by
    2013 and has already felt the negative cost and schedule impacts from
    executing this approach. The length and scope of the remaining effort
    in the JSF program make it even more difficult to accurately estimate
    cost and delivery schedules. The JSF's approach is a clear departure
    from DOD policy that calls for adopting an evolutionary approach to
    acquisitions. Past single-step programs, such as the F-22A fighter, B-2
    bomber, Crusader artillery vehicle, and Comanche helicopter have
    experienced skyrocketing costs, substantially reduced production
    quantities, or cancellation of the program. The JSF funding profile--
    which requires an average of $11 billion annually for the next 2
    decades--is also at risk to increase if costs continue to grow or
    schedules are further delayed to develop the ultimate JSF capabilities.
        With more than 90 percent of the JSF investment remaining, DOD
    officials have an opportunity to adopt an alternative acquisition
    strategy, such as the one used by the F-16 program, that sequences
    capabilities over time based on proven technologies and design. This
    would reduce risk and deliver aircraft sooner. This alternative
    evolutionary approach is actually the preferred approach in DOD's
    acquisition policy for acquiring new systems for more rapid delivery of
    incremental capabilities to the warfighter. An evolutionary strategy
    would reduce risk and deliver aircraft sooner by allowing the program
    to develop and evolve a product through small, time-phased development
    increments based on proven technologies and design. This approach would
    allow aircraft to be delivered in sequence that could first meet DOD's
    need to recapitalize its aging fleet of aircraft and then evolve
    aircraft to eventually achieve improved capabilities in future system
    development increments. In the case of JSF, capabilities that demand as
    yet undemonstrated technologies, such as advanced mission systems,
    prognostics, and advanced software, would be deferred to future
    aircraft increments as technologies are demonstrated and the resources
    become available. Each subsequent increment would be managed as a
    separate development program.

                                fa-18 challenges
        51. Senator McCain. Admiral Kilcline, what are the current FA-18
    maintenance problems with regard to service life and availability of
    the aircraft?
        Admiral Kilcline. Service life issues fall into three categories:
    cat/trap/landing (CTL), flight hours (FH), and unknowns. CTL
    inspections endeavor to extend CTL limits to 12,300 landings and 2,600
    catapults/traps. These inspections revealed unpredicted support
    structure cracks that resulted in numerous air frame bulletins that
    call for regular inspections. We expect this trend to continue as the
    airframes age.
        FH inspections have extended the airframe life from 6,000 to 8,000
    hours and there is currently a service life assessment program (SLAP)
    study underway to further extend the airframe to 10,000 hours. The
    results of the SLAP study will not be known until December 2007 and
    will be followed by engineering change proposals (ECPs) in late 2008.
        Lastly there are the unknowns best exemplified by inner wing spar
    cracks that are induced by stress corrosion regardless of airframe
    hours. All these parameters are being monitored as closely as possible
    in our effort to maximize airframe usage and availability.

        52. Senator McCain. Admiral Kilcline, what is the projected
    shortfall of FA-18s?
        Admiral Kilcline. The current projections predict a 50-plane F/A-
    18A+/C shortfall in the 2018 timeframe. These projections are
    predicated on legacy Hornets achieving 10,000 flight hours, 12,300
    landings and 2,600 catapults/traps and assumes Program Objective
    Memorandum (POM) 2006 Program of Record (POR) for the JSF.

        53. Senator McCain. Admiral Kilcline, does the projected shortfall
    assume a service life extension to 10,000 flight hours on the FA-18?
        Admiral Kilcline. Yes, the model assumes the F/A-18 will fly to
    10,000 FHs and JSF acquisition will follow the POM 2006 POR.
    Additionally, the two other parameters used in the model are 12,300
    landings and 2,600 catapults/traps for the F/A-18A+/C.

        54. Senator McCain. Admiral Kilcline, what is the current flight
    hour limit of the FA-18 and what is the proposed extension to the
    flight hour limit?
        Admiral Kilcline. F/A-18A+/C aircraft are currently limited to
    8,000 flight hours. Engineering efforts are currently underway to
    determine if the F/A-18A+/C can fly beyond this current limit with the
    desire to achieve a 10,000-flight hour limit.

        55. Senator McCain. Admiral Kilcline, what studies support
    extending the service life of the FA-18 significantly past its design
    limits?
        Admiral Kilcline. The Navy has contracted with Boeing for a SLAP to
    determine potential service life of the F/A-18A-D. This study has been
    broken up into two phases: SLAP I, focusing on ground events,
    incorporates requirements for CTL extensions. This phase is complete,
    and effort is now underway to develop inspection bulletins and ECPs to
    effect repairs for areas identified. SLAP II focused on flight events,
    and assesses the potential to incorporate requirements for FH
    extensions. The study should be complete in December 2007, until then,
    the service life remains 8,000 flight hours.

        56. Senator McCain. Admiral Kilcline, what is the estimated FA-18
    shortfall if the Navy elects not to extend the flight hour limit of the
    FA-18?
        Admiral Kilcline. Current projections indicate a shortfall of 166
    aircraft in 2018 if the service life of the F/A-18A+/C is not extended
    beyond 8,000 flight hours.

        57. Senator McCain. Admiral Kilcline, what effect would a delay of
    1 year for JSF have on the FA-18 projected shortfall?
        Admiral Kilcline. Current projections indicate the 50-plane
    shortfall in F/A-18A+/C aircraft in 2018 would increase by 28, for a
    total shortfall of 78 aircraft.

                                      t-45
        58. Senator McCain. Admiral Kilcline, how many T-45 Goshawks are
    currently in the Navy inventory?
        Admiral Kilcline. As of March 31, 2006, we have 178 T-45 Goshawks
    in naval inventory. To date, 189 aircraft have been delivered, but 11
    have been stricken. The Navy has procured an additional 22 aircraft
    between fiscal year 2004 and fiscal year 2006 which are still in
    production.

        59. Senator McCain. Admiral Kilcline, what is the total number of
    T-45s required by the Navy?
        Admiral Kilcline. The fiscal year 2007 President's budget T-45
    inventory requirement is 223 aircraft (207 for pilot training and 16
    for undergraduate military flight officer (UMFO) training). An
    inventory objective of 223 enables Chief of Naval Air Training (CNATRA)
    to make pilot and UMFO training requirements with the current syllabi
    through 2028. This date can be achieved if the currently defined pilot
    and UMFO training requirements remain constant and the airframe can
    achieve a 21,600 flight hour service life.
        On the Chief Of Naval Operations (CNO) Unfunded Priority List, the
    Navy has requested an additional six T-45 aircraft. These additional
    aircraft provide for an expansion of both the undergraduate pilot and
    UMFO syllabi while maintaining a T-45 service life to 2028.
        The new UMFO training program will use a combination of the T-6
    aircraft, a high fidelity ground based training system and the T-45
    with Virtual Mission Training System (synthetic radar). This
    revolutionary training system will allow the Navy to retire the T-39
    and T-2 aircraft while capitalizing on advances in simulation.
    Additionally, these aircraft will afford CNATRA the opportunity to
    download training flight hours from higher cost per flight hour
    platforms (F/A-18), save Operation and Maintenance, Navy (O&M,N)
    funding in the out years across the naval aviation continuum and help
    conserve life expectancy on F/A-18 aircraft.

                                     cvn-21
        60. Senator McCain. Admiral Kilcline, what is the Navy's current
    cost projection for acquisition of CVN-21 and how was that estimate
    determined?
        Admiral Kilcline. The nonrecurring investment for design and
    development of the CVN 21-class of aircraft carriers is $5.6 billion.
    This is comprised of $3.2 billion in RDT&E (then-year dollars ($TY))
    and $2.4 billion ($TY) in shipbuilding and conversion, Navy (SCN).
    RDT&E funds are being used to develop the technologies needed to meet
    program requirements, while the SCN funding is being used to develop
    the detail design for the entire ship class.
        The total cost to construct the lead ship is $8.1 billion SCN
    ($TY). Navy expects to award the contract for construction of the lead
    ship of the class, CVN 78, in fiscal year 2008. The President's budget
    for fiscal year 2007 split funds CVN 78 between fiscal year 2008 and
    fiscal year 2009.
        CVN 21 projected costs are based on estimates conducted by the Navy
    and Office of the Secretary of Defense (OSD) cost analysis improvement
    group (CAIG) in support of the Milestone B approval decision reached in
    April 2004. The Navy estimate was updated in 2005 supporting the
    President's budget for fiscal year 2006 decision to delay the CVN 21
    program by 1 year.
                                     ______

                 Questions Submitted by Senator Saxby Chambliss
                      forward boom titanium heat-treating
        61. Senator Chambliss. General Hoffman, the Congressional Budget
    Office (CBO) witness, Donald B. Marron, discusses the justification for
    the F-22A multiyear contract in his written statement and raises a few
    concerns relative to consistency in the budget request for the F-22A as
    well as issues related to the forward-aft boom. Regarding the first
    issue, I believe the Quadrennial Defense Review substantiated the
    requirement for continued F-22A production and funding through at least
    2010, and Program Budget Decision (PBD) 720 enacts this plan in the
    fiscal year 2007 President's budget. Regarding, the second issue, DOD
    recognized the maturity of F-22A production processes a year ago in
    April 2005 when they approved the program for full rate production. I
    know that some have claimed that this forward boom titanium heat-
    treating issue indicates a design stability problem. Rather, all the
    facts we have on this situation indicate that the design is completely
    stable. Instead, this is an issue of a contractor--which the prime
    contractor is no longer using--not following the stated design rather
    than there being a problem with the design. It is clear that this is
    not a structural integrity or safety of flight issue. Could you expound
    upon this issue and discuss the extent to which, if any, there are
    safety, design, or performance concerns relative to the forward boom
    titanium heat-treating issue?
        General Hoffman. The Air Force learned in December 2005 that F-22
    forward boom frames might have been improperly heat-treated. Upon
    further investigation, it became clear that this issue was not the
    result of an improper design, but an issue with one supplier's
    manufacturing process. Subsequently, the Air Force tested the
    improperly heat-treated forward boom frames and determined they did not
    affect safety of flight and, consequently, no restrictions have been
    put on F-22 flight operations.
        The heat-treat process enhances the boom frame's structural
    properties by holding the frames at a high temperature long enough to
    achieve the desired grain structure. A section of the forward boom
    frames under investigation may not have been held at this temperature
    long enough to completely achieve the desired grain structure. A series
    of material tests confirm that the atypical grain structure does not
    affect aircraft structural integrity, although, additional tests are
    underway to determine any long-term impact of the affected parts on
    aircraft service life. The Air Force expects the results of these tests
    by the end of May.
        This heat-treat issue potentially affects aircraft 4017 through
    4107 (aircraft through Lot 5 production). The supplier of these frames
    no longer manufactures F-22 forward boom frames, therefore, aircraft
    manufactured after 4107 are not affected by this heat-treat issue.

                            f-18 multiyear contract
        62. Senator Chambliss. Mr. Sullivan, Mr. Bolkcom, General Hoffman,
    and Admiral Kilcline, I think a valid comparison to the F-22A multiyear
    discussion is the F-18 multiyear contract which was first approved in
    fiscal year 2000. The F-18 multiyear decision might pre-date all of us,
    but I understand that the F-18 had a minor technical problem related to
    wing flutter at the time the multiyear contract was being considered.
    Congress determined at that time that, despite this minor technical
    issue, the risk in proceeding with a multiyear contract was small and
    chose to grant multiyear procurement authority to the Navy at that
    time. Can you comment on this issue and whether or not I have stated
    the record correctly?
        Mr. Sullivan. You have stated the issue correctly. The aircraft did
    have a wing flutter problem, and Congress determined that the program
    was ready for multiyear procurement despite the problem. In commenting,
    I would direct you to our answers to questions 4 and 9 above as it
    relates to the F-22A program.
        Mr. Bolkcom. My understanding is that the F/A-18E/F ``wing drop''
    problem was first experienced in March 1996, and led DOD to delay
    fiscal year 1998 funding for the program pending solution of the
    problem. After a number of modifications to the wing's leading edge,
    fiscal year 1998 funding was approved for the procurement of additional
    aircraft in the spring of 1998. However, the F/A-18 MYP decision may
    not be a valid comparison to the proposed F-22A MYP. The defining
    feature of the F-22A proposal appears to be incremental funding, not
    the MYP alone. Reducing the rate of production to 20 aircraft per year
    is another concern, and, as CBO has testified, so is the potential
    shortfall in the contract's cancellation ceiling. I would expect that
    these considerations would weigh more heavily on the minds of
    decisionmakers than the MYP proposal by itself.
        General Hoffman. The Air Force was not involved in the acquisition
    of the F-18. I will defer to the U.S. Navy for the acquisition details.
        Admiral Kilcline. Wing drop, which we assume is what the request or
    is referring to as wing flutter, was resolved prior to the program
    being allowed to proceed to the full-rate production phase. The
    resolution was the addition of a porous wing fold fairing on the upper
    surface of each wing. The wing drop was not an issue in the final GAO
    report, the operational evaluation report, or the Beyond Low-Rate
    Initial Production report. By the time the FA-18E/F multiyear contract
    was awarded, wing drop was not an issue.
                                     ______

               Questions Submitted by Senator Joseph I. Lieberman
                                  f136 funding
        63. Senator Lieberman. General Hoffman, there has been a lot of
    discussion and debate on the F136 alternate engine program. Is this
    program on the Air Force's unfunded priority list?
        General Hoffman. No, the F136 alternate engine program is not on
    the Air Force's unfunded priority list.

                            f-22a engine performance
        64. Senator Lieberman. General Hoffman, the Air Force laid some
    heavy demands for high performance, super cruise, stealth, vectored
    thrust, as well as reliability and maintenance on the F-22A engine. How
    would you characterize the performance of the F-22A propulsion system
    in its testing and early deployment?
        General Hoffman. The F119 program developed the world's most
    advanced tactical fighter engine and this engine entered service with
    unprecedented performance, reliability, and maintainability. The F119
    engine contributed to the F-22 exceeding the KPPs for supercruise and
    acceleration. It has a better introductory in-flight shutdown record
    than legacy F100-PW-100, -220, and -229 engines (F-15/F-16) with only
    one operational in-flight shutdown event in over 17,000 engine flight
    hours. The engine also displayed unprecedented stall-free operations
    during testing and deployment. Four years prior to maturity, the F119
    has a lower shop visit rate (engine removals for maintenance) than
    currently being demonstrated on the F100-PW-100 and -229.

        65. Senator Lieberman. General Hoffman, would you say that the F-
    22A propulsion system has met or exceeded its expectations? Would you
    expect this experience to carry over to the F-35 program?
        General Hoffman. The F119 program developed the world's most
    advanced tactical fighter engine and this engine entered service with
    unprecedented performance, reliability, and maintainability. The F119
    has exceeded both engine related KPPs of supercruise and acceleration
    and is outperforming legacy F-15/F-16 engines in key reliability and
    maintainability metrics. Many F119 manufacturing processes, parts,
    maintenance practices, and lessons learned are being used by the F135
    program. The Air Force anticipates that the success of the F119 program
    will continue with the F135.

                        joint strike fighter engine cost
        66. Senator Lieberman. General Hoffman, the F135 engine for the JSF
    program is a derivative of the F119 engine for the F-22A program.
    Despite the sole-source strategy and the instability of the F-22A
    program, would you please describe the cost history of the F119 engine?
        General Hoffman. The F119 unit price has decreased with each lot
    procurement of F-22s.

                                                [In millions of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                           Quantity                                                   Reduction from
               Quantity (FFP)              (Spares)          Contract             F119 Unit Price     PRTV (Percent)
    ----------------------------------------------------------------------------------------------------------------
       6...............................               PRTV..................  11.442................
      12...............................           4   PRTV 2................  11.420................             0
      20...............................           5   Lot 1.................  10.853................            -5
      26...............................           6   Lot 2.................  10.535................            -8
      42...............................           7   Lot 3.................  10.385................            -9
      44...............................          10   Lot 4.................  9.757.................           -15
      48...............................          10   Lot 5.................  9.174.................           -20
      48...............................          13   Lot 6.................  working proposal......           TBD
    ----------------------------------------------------------------------------------------------------------------

        67. Senator Lieberman. General Hoffman, if this committee grants
    multiyear authority, as proposed in the fiscal year 2007 President's
    budget, what impact, if any, do you anticipate will occur on costs
    associated with the engine?
        General Hoffman. Assuming this question is concerning the F-22
    fiscal year 2007 President's budget proposed multiyear procurement, the
    preliminary BCA from IDA predicts an F119 engine multiyear cost savings
    of 2.7 percent. The final BCA will be delivered to Congress in mid-May
    2006.

                               ea-6b replacement
        68. Senator Lieberman. General Hoffman, the Navy plans to replace
    the EA-6Bs with the E-18G. It is less clear what the Marine Corps
    intends to do to replace the rest of the current EA-6B fleet. The Air
    Force had been planning to develop a stand-off jamming capability for
    the B-52 to help meet its jamming requirements, but this year, the Air
    Force has canceled the program with no replacement envisioned. What
    does the Air Force intend to do to replace the capability represented
    by the rest of the EA-6B fleet?
        General Hoffman. The Air Force is participating in a joint OSD
    study to help determine the best stand-off jamming solution. We are
    approaching this from a systems-of-systems approach to mitigate risk.
    All options are still open.

        69. Senator Lieberman. General Hoffman, are you counting on the
    Navy to buy more E-18G aircraft to meet your needs?
        General Hoffman. No, the Air Force is not counting on the Navy to
    buy more EA-18G aircraft. Even though the EA-18G is a great electronic
    attack platform, it does not meet the Air Force's need for stand-off
    jamming.

                           alternate engine priority
        70. Senator Lieberman. Admiral Kilcline, again there has been a lot
    of discussion and debate on the F136 alternate engine program. Is this
    program on the Navy's priority list?
        Admiral Kilcline. No. The recommendation to remove the F136 engine
    from the 2007 President's budget was an affordability measure made
    possible by the demonstrated reliability of the F119 engine.

        71. Senator Lieberman. Admiral Kilcline, how many aircraft in the
    Navy's fleet have alternate engines?
        Admiral Kilcline. None in the deployable fleet or training
    squadrons. Very few of the Navy's executive and priority cargo jets can
    utilize alternate engines, i.e. UC-35 aircraft (Pratt & Whitney 535 or
    JT15) which is a military equivalent of the commercial Cessna aircraft.

        72. Senator Lieberman. Admiral Kilcline, it is my understanding
    that the Navy operates the world's largest fleet of aircraft (F-18)
    powered by a single engine supplier. Would you please characterize the
    Navy's experience managing a single engine supplier.
        Admiral Kilcline. The following points are provided, based upon the
    F404-GE-400/402 engine (F/A-18A-D power plant) and the F414-GE-400
    engine (F/A-18E/F and EA-18G power plant) production history.

             The F404 engine, produced by GE, was originally a sole
            source, new design, based upon the F110 engine. Industrial base
            concerns and possible cost savings led the Navy to begin
            production of an identical design by a second source, Pratt &
            Whitney. Pratt & Whitney made rapid progress on the second
            source engine. Feeling competitive pressure, GE offered the
            Navy tremendous savings in return for a sole sourcing
            agreement. The Navy terminated Pratt & Whitney participation
            and awarded a sole source agreement to GE for F404 engines.
            This engine is meeting F/A-18A-D performance requirements and
            reliability is currently above goal.
             The GE F414 engine was designed using lessons learned
            from the F404 engine program. From the beginning, GE in concert
            with the airframe manufacturer Boeing, were focused on lowering
            costs. Utilizing multiyear procurement and performance-based
            logistics contracts has allowed the F414 engine to exceed fleet
            performance and reliability goals.

        73. Senator Lieberman. Admiral Enewold, there has been great debate
    on whether an engine has flown in support of the JSF program. I seem to
    recall an engine was flown as part of the JSF demonstrator joint
    advanced strike technology program. Is this in fact correct, and if so,
    was the flight(s) successful? Additionally, would you please clarify
    what engine was flown?
        Admiral Enewold. Yes. During the JSF concept demonstration phase,
    Lockheed Martin flew two JSF concept demonstrator aircraft
    approximately 200 flight test hours over many sorties to demonstrate
    specified objectives for three JSF variants. A derivative of the Pratt
    & Whitney F119 engine powered the demonstrator aircraft.

                     alternate engine cancellation decision
        74. Senator Lieberman. Admiral Enewold, in the decision to cancel
    the JSF alternate engine, what factors, in addition to the immediate
    recovery of $2 billion, were most compelling?
        Admiral Enewold. The JSF Program Office was not involved in the
    Department's decision to cancel the F136 Program, and also was not
    involved in the related supporting analysis. I, therefore, do not have
    insight on details of the Department's analysis. Department leadership
    have stated that their decision to cancel the F136 alternate engine
    program is based on affordability, providing the Department the best
    balance of risk and cost. I believe the assessment of low operational
    risk was the most compelling additional reason to propose the
    cancellation.

        75. Senator Lieberman. Admiral Enewold, does the decision to move
    out with the Pratt & Whitney F135 as the sole engine for your short-
    take-off/vertical-landing (STOVL) airplanes cause you any concern?
        Admiral Enewold. Development concerns with the STOVL are not F135
    (or F136) unique. The integration and performance of fan, structural
    weight, and thermal loading are risks that require balanced technical
    solutions.

                                 f-18 shortfall
        76. Senator Lieberman. Admiral Kilcline, I understand that the Navy
    is projecting a shortfall of F-18 aircraft during the next decade. The
    shortfall could be in the range of 40-50 aircraft short of the number
    required to support the 10 aircraft carrier wings. I also understand
    that this shortfall assumes that you will be able to operate F-18s for
    up to 10,000 flight hours. This raises a couple of concerns. Will the
    Navy be able to maintain its fleet response plan of being able to surge
    five or six carriers within 30 days of notification, followed by
    another carrier within 90 days if you are 40-50 aircraft below
    requirements?
        Admiral Kilcline. I am confident that we will continue to be able
    to support the requirements of the Navy's Fleet Response Plan. Aircraft
    carriers and air wings bring a host of capabilities with them when they
    deploy into theater, not just strike fighters. These include airborne
    early warning, airborne electronic attack, anti-surface unit warfare,
    and combat search and rescue capability. Later arriving air wings may
    not look like the first responders, but the combatant commander will
    have different needs 30 or 90 days into the fight. The sixth or seventh
    air wing to surge will be tailored to what is required in theater.
    Additionally, the projected shortfall will be spread across the entire
    fleet of Navy and Marine Corps Hornets, including those surging, those
    remaining in Reserve, and those in the support units.

        77. Senator Lieberman. Admiral Kilcline, how much risk are we
    exposing ourselves to by assuming that the F-18, which was designed for
    8,000 hours, will be able to fly operationally until it reaches 10,000
    hours?
        Admiral Kilcline. The F/A-18 aircraft was designed for a 6,000-hour
    service life and was extended via service life bulletin 08 to an
    interim 8,000 flight hours based upon early fatigue data. Service life
    extensions of the F/A-18 Hornet are being addressed through the SLAP,
    which analyzes the impact of potential service life extensions and
    identifies hot-spots throughout the aircraft. These areas then require
    recurring inspections and/or aircraft modifications to maintain the
    health of the aircraft beyond current service life. SLAP phase I
    analysis, which focused on ground events (CTL) is complete and
    inspection bulletins and aircraft modification plans are in work. SLAP
    phase II analysis, which addresses the flight hour extension, is
    underway with an estimated completion date of December 2007. As the
    analysis is completed, work will begin on high flight hour inspections
    and aircraft modifications. The goal of SLAP phase II is to extend the
    service life to 10,000 flight hours. The current modeling shortfall is
    based using this flight hour limit.

                              technology transfer
        78. Senator Lieberman. Admiral Enewold, we have been hearing
    concerns expressed by a number of the JSF partner countries about the
    sharing of technology as JSF development proceeds. Is there reason for
    concern on this issue?
        Admiral Enewold. The Department is addressing those concerns with
    the respective partner countries and this committee. The pace of
    technical information disclosure, involvement in operational testing,
    and industrial participation have all been raised during negotiations
    for the JSF Production, Sustainment, and Follow-on Development
    Memorandum of Understanding (MOU). The Department is working for
    resolution by mid-summer 2006 so that each country can begin its MOU
    staffing process.

        79. Senator Lieberman. Admiral Enewold, are you sure that the U.S.
    Government is giving fair review to these requests for transferring
    technology to our partners from within the JSF program?
        Admiral Enewold. The DOD and Department of State devote extensive
    attention to this aspect of the JSF program, and are committed to due
    diligence on all releases.
                                     ______

                 Questions Submitted by Senator Daniel K. Akaka
             joint strike fighter engine cancellation justification
        80. Senator Akaka. Admiral Enewold, as you may remember, during the
    1980s, the DOD received many benefits including lower acquisition of
    engines, better responsiveness from the contractors, but most
    importantly better readiness for the warfighter. It is my understanding
    that it was for these reasons that we funded the F136 for the last 10
    years. Recently, Under Secretary of Defense for Acquisition, Ken Krieg,
    has called for more competition in DOD programs. Given this statement,
    what is the justification for eliminating the F136 from the JSF
    program?
        Admiral Enewold. Department leadership have stated that their
    decision to cancel the F136 alternate engine program is based on
    affordability, providing the Department the best balance of risk and
    cost.

                          joint f-22/jsf vulnerability
        81. Senator Akaka. General Hoffman, if there is such a high degree
    of commonality between the F119 engine in the F-22 and the F135 engine
    in the F-35, why wouldn't both aircraft fleets be at risk if a common
    part becomes faulty and why wouldn't that speak to the benefit of
    having a second engine producer for the F-35?
        General Hoffman. The F135 is a derivative of the F119 engine and is
    modified for the F-35 missions and usage. The turbomachinery is
    approximately 70 percent common with the F119 from a parts and
    manufacturing processes perspective. The engine's compressor shares the
    most common parts with F119. The rest of the turbomachinery has
    commonality through design criteria and manufacturing processes. Based
    on the F119 engine's reliable performance after 18,000 flight hours,
    the Department determined the risks of a single engine supplier are
    modest and acceptable.

        [Whereupon, at 3:58 p.m., the subcommittee adjourned.]

        [Annex 1: Subsequent to the hearing, on May 10, 2006,
    Senator McCain submitted the following additional information
    for the record:]
    [GRAPHIC] [TIFF OMITTED] 30347.001

    [GRAPHIC] [TIFF OMITTED] 30347.002

    [GRAPHIC] [TIFF OMITTED] 30347.003

    [GRAPHIC] [TIFF OMITTED] 30347.004

    [GRAPHIC] [TIFF OMITTED] 30347.005

    [GRAPHIC] [TIFF OMITTED] 30347.006

    [GRAPHIC] [TIFF OMITTED] 30347.007

    [GRAPHIC] [TIFF OMITTED] 30347.008

    [GRAPHIC] [TIFF OMITTED] 30347.009

    [GRAPHIC] [TIFF OMITTED] 30347.010

    [GRAPHIC] [TIFF OMITTED] 30347.011

    [GRAPHIC] [TIFF OMITTED] 30347.012

    [GRAPHIC] [TIFF OMITTED] 30347.013

    [GRAPHIC] [TIFF OMITTED] 30347.014

    [GRAPHIC] [TIFF OMITTED] 30347.015

    [GRAPHIC] [TIFF OMITTED] 30347.016

    [GRAPHIC] [TIFF OMITTED] 30347.017

    [GRAPHIC] [TIFF OMITTED] 30347.018

    [GRAPHIC] [TIFF OMITTED] 30347.019

    [GRAPHIC] [TIFF OMITTED] 30347.020

    [GRAPHIC] [TIFF OMITTED] 30347.021

    [GRAPHIC] [TIFF OMITTED] 30347.022

    [GRAPHIC] [TIFF OMITTED] 30347.023

    [GRAPHIC] [TIFF OMITTED] 30347.024

    [GRAPHIC] [TIFF OMITTED] 30347.025

    [GRAPHIC] [TIFF OMITTED] 30347.026

    [GRAPHIC] [TIFF OMITTED] 30347.027

    [GRAPHIC] [TIFF OMITTED] 30347.028

    [GRAPHIC] [TIFF OMITTED] 30347.029

    [GRAPHIC] [TIFF OMITTED] 30347.030

    [GRAPHIC] [TIFF OMITTED] 30347.031

    [GRAPHIC] [TIFF OMITTED] 30347.032

    [GRAPHIC] [TIFF OMITTED] 30347.033

    [GRAPHIC] [TIFF OMITTED] 30347.034

    [GRAPHIC] [TIFF OMITTED] 30347.035

    [GRAPHIC] [TIFF OMITTED] 30347.036

    [GRAPHIC] [TIFF OMITTED] 30347.037

    [GRAPHIC] [TIFF OMITTED] 30347.038

    [GRAPHIC] [TIFF OMITTED] 30347.039

    [GRAPHIC] [TIFF OMITTED] 30347.040

    [GRAPHIC] [TIFF OMITTED] 30347.041

    [GRAPHIC] [TIFF OMITTED] 30347.042

    [GRAPHIC] [TIFF OMITTED] 30347.043

    [GRAPHIC] [TIFF OMITTED] 30347.044

    [GRAPHIC] [TIFF OMITTED] 30347.045

    [GRAPHIC] [TIFF OMITTED] 30347.046

    [GRAPHIC] [TIFF OMITTED] 30347.047

    [GRAPHIC] [TIFF OMITTED] 30347.048

    [GRAPHIC] [TIFF OMITTED] 30347.049

    [GRAPHIC] [TIFF OMITTED] 30347.050

    [GRAPHIC] [TIFF OMITTED] 30347.051

    [GRAPHIC] [TIFF OMITTED] 30347.052

    [GRAPHIC] [TIFF OMITTED] 30347.053

    [GRAPHIC] [TIFF OMITTED] 30347.054

    [GRAPHIC] [TIFF OMITTED] 30347.055

    [GRAPHIC] [TIFF OMITTED] 30347.056

    [GRAPHIC] [TIFF OMITTED] 30347.057

    [GRAPHIC] [TIFF OMITTED] 30347.058

    [GRAPHIC] [TIFF OMITTED] 30347.059

    [GRAPHIC] [TIFF OMITTED] 30347.060

    [GRAPHIC] [TIFF OMITTED] 30347.061

    [GRAPHIC] [TIFF OMITTED] 30347.062

    [GRAPHIC] [TIFF OMITTED] 30347.063

    [GRAPHIC] [TIFF OMITTED] 30347.064

    [GRAPHIC] [TIFF OMITTED] 30347.065

    [GRAPHIC] [TIFF OMITTED] 30347.066

    [GRAPHIC] [TIFF OMITTED] 30347.067

    [GRAPHIC] [TIFF OMITTED] 30347.068

    [GRAPHIC] [TIFF OMITTED] 30347.069

    [GRAPHIC] [TIFF OMITTED] 30347.070

    [GRAPHIC] [TIFF OMITTED] 30347.071

    [GRAPHIC] [TIFF OMITTED] 30347.072

    [GRAPHIC] [TIFF OMITTED] 30347.073

    [GRAPHIC] [TIFF OMITTED] 30347.074

    [GRAPHIC] [TIFF OMITTED] 30347.075

    [GRAPHIC] [TIFF OMITTED] 30347.076

    [GRAPHIC] [TIFF OMITTED] 30347.077

    [GRAPHIC] [TIFF OMITTED] 30347.078

    [GRAPHIC] [TIFF OMITTED] 30347.079

    [GRAPHIC] [TIFF OMITTED] 30347.080

    [GRAPHIC] [TIFF OMITTED] 30347.081

    [GRAPHIC] [TIFF OMITTED] 30347.082

    [GRAPHIC] [TIFF OMITTED] 30347.083

    [GRAPHIC] [TIFF OMITTED] 30347.084

    [GRAPHIC] [TIFF OMITTED] 30347.085

    [GRAPHIC] [TIFF OMITTED] 30347.086

    [GRAPHIC] [TIFF OMITTED] 30347.087

    [GRAPHIC] [TIFF OMITTED] 30347.088

    [GRAPHIC] [TIFF OMITTED] 30347.089

    [GRAPHIC] [TIFF OMITTED] 30347.090

    [GRAPHIC] [TIFF OMITTED] 30347.091

    [GRAPHIC] [TIFF OMITTED] 30347.092

    [GRAPHIC] [TIFF OMITTED] 30347.093

    [GRAPHIC] [TIFF OMITTED] 30347.094

    [GRAPHIC] [TIFF OMITTED] 30347.095

    [GRAPHIC] [TIFF OMITTED] 30347.096

    [GRAPHIC] [TIFF OMITTED] 30347.097

    [GRAPHIC] [TIFF OMITTED] 30347.098

    [GRAPHIC] [TIFF OMITTED] 30347.099

    [GRAPHIC] [TIFF OMITTED] 30347.100

    [GRAPHIC] [TIFF OMITTED] 30347.101

    [GRAPHIC] [TIFF OMITTED] 30347.102

    [GRAPHIC] [TIFF OMITTED] 30347.103

    [GRAPHIC] [TIFF OMITTED] 30347.104

    [GRAPHIC] [TIFF OMITTED] 30347.105

    [GRAPHIC] [TIFF OMITTED] 30347.106

    [GRAPHIC] [TIFF OMITTED] 30347.107

    [GRAPHIC] [TIFF OMITTED] 30347.108

    [GRAPHIC] [TIFF OMITTED] 30347.109

    [GRAPHIC] [TIFF OMITTED] 30347.110

    [GRAPHIC] [TIFF OMITTED] 30347.111

    [GRAPHIC] [TIFF OMITTED] 30347.112

    [GRAPHIC] [TIFF OMITTED] 30347.113

    [GRAPHIC] [TIFF OMITTED] 30347.114

    [GRAPHIC] [TIFF OMITTED] 30347.115

    [GRAPHIC] [TIFF OMITTED] 30347.116

    [GRAPHIC] [TIFF OMITTED] 30347.117

    [GRAPHIC] [TIFF OMITTED] 30347.118

    [GRAPHIC] [TIFF OMITTED] 30347.119

    [GRAPHIC] [TIFF OMITTED] 30347.120

    [GRAPHIC] [TIFF OMITTED] 30347.121

    [GRAPHIC] [TIFF OMITTED] 30347.122

    [GRAPHIC] [TIFF OMITTED] 30347.123

    [GRAPHIC] [TIFF OMITTED] 30347.124

    [GRAPHIC] [TIFF OMITTED] 30347.125

    [GRAPHIC] [TIFF OMITTED] 30347.126

    [GRAPHIC] [TIFF OMITTED] 30347.127

    [GRAPHIC] [TIFF OMITTED] 30347.128

    [GRAPHIC] [TIFF OMITTED] 30347.129

    [GRAPHIC] [TIFF OMITTED] 30347.130

    [GRAPHIC] [TIFF OMITTED] 30347.131

    [GRAPHIC] [TIFF OMITTED] 30347.132

    [GRAPHIC] [TIFF OMITTED] 30347.133

    [GRAPHIC] [TIFF OMITTED] 30347.134

    [GRAPHIC] [TIFF OMITTED] 30347.135

    [GRAPHIC] [TIFF OMITTED] 30347.136

    [GRAPHIC] [TIFF OMITTED] 30347.137

    [GRAPHIC] [TIFF OMITTED] 30347.138

    [GRAPHIC] [TIFF OMITTED] 30347.139

    [GRAPHIC] [TIFF OMITTED] 30347.140

    [GRAPHIC] [TIFF OMITTED] 30347.141

    [GRAPHIC] [TIFF OMITTED] 30347.142

    [GRAPHIC] [TIFF OMITTED] 30347.143

    [GRAPHIC] [TIFF OMITTED] 30347.144

    [GRAPHIC] [TIFF OMITTED] 30347.145

    [GRAPHIC] [TIFF OMITTED] 30347.146

    [GRAPHIC] [TIFF OMITTED] 30347.147

    [GRAPHIC] [TIFF OMITTED] 30347.148

    [GRAPHIC] [TIFF OMITTED] 30347.149

    [GRAPHIC] [TIFF OMITTED] 30347.150

    [GRAPHIC] [TIFF OMITTED] 30347.151

    [GRAPHIC] [TIFF OMITTED] 30347.152

    [GRAPHIC] [TIFF OMITTED] 30347.153

    [GRAPHIC] [TIFF OMITTED] 30347.154

    [GRAPHIC] [TIFF OMITTED] 30347.155

    [GRAPHIC] [TIFF OMITTED] 30347.156

    [GRAPHIC] [TIFF OMITTED] 30347.157

    [GRAPHIC] [TIFF OMITTED] 30347.158

    [GRAPHIC] [TIFF OMITTED] 30347.159

    [GRAPHIC] [TIFF OMITTED] 30347.160

    [GRAPHIC] [TIFF OMITTED] 30347.161

    [GRAPHIC] [TIFF OMITTED] 30347.162

    [GRAPHIC] [TIFF OMITTED] 30347.163

    [GRAPHIC] [TIFF OMITTED] 30347.164

    [GRAPHIC] [TIFF OMITTED] 30347.165

    [GRAPHIC] [TIFF OMITTED] 30347.166

    [GRAPHIC] [TIFF OMITTED] 30347.167

    [GRAPHIC] [TIFF OMITTED] 30347.168

    [GRAPHIC] [TIFF OMITTED] 30347.169

    [GRAPHIC] [TIFF OMITTED] 30347.170

    [GRAPHIC] [TIFF OMITTED] 30347.171

    [GRAPHIC] [TIFF OMITTED] 30347.172

    [GRAPHIC] [TIFF OMITTED] 30347.173

    [GRAPHIC] [TIFF OMITTED] 30347.174

    [GRAPHIC] [TIFF OMITTED] 30347.175

    [GRAPHIC] [TIFF OMITTED] 30347.176

    [GRAPHIC] [TIFF OMITTED] 30347.177

    [GRAPHIC] [TIFF OMITTED] 30347.178

    [GRAPHIC] [TIFF OMITTED] 30347.179

    [GRAPHIC] [TIFF OMITTED] 30347.180

    [GRAPHIC] [TIFF OMITTED] 30347.181

    [GRAPHIC] [TIFF OMITTED] 30347.182

    [GRAPHIC] [TIFF OMITTED] 30347.183

    [GRAPHIC] [TIFF OMITTED] 30347.184

    [GRAPHIC] [TIFF OMITTED] 30347.185

    [GRAPHIC] [TIFF OMITTED] 30347.186

    [GRAPHIC] [TIFF OMITTED] 30347.187

    [GRAPHIC] [TIFF OMITTED] 30347.188

    [GRAPHIC] [TIFF OMITTED] 30347.189

    [GRAPHIC] [TIFF OMITTED] 30347.190

    [GRAPHIC] [TIFF OMITTED] 30347.191

    [GRAPHIC] [TIFF OMITTED] 30347.192

    [GRAPHIC] [TIFF OMITTED] 30347.193

    [GRAPHIC] [TIFF OMITTED] 30347.194

    [GRAPHIC] [TIFF OMITTED] 30347.195

    [GRAPHIC] [TIFF OMITTED] 30347.196

    [GRAPHIC] [TIFF OMITTED] 30347.197

    [GRAPHIC] [TIFF OMITTED] 30347.198

    [GRAPHIC] [TIFF OMITTED] 30347.199

    [GRAPHIC] [TIFF OMITTED] 30347.200

    [GRAPHIC] [TIFF OMITTED] 30347.201

    [GRAPHIC] [TIFF OMITTED] 30347.202

    [GRAPHIC] [TIFF OMITTED] 30347.203

    [GRAPHIC] [TIFF OMITTED] 30347.204

    [GRAPHIC] [TIFF OMITTED] 30347.205

    [GRAPHIC] [TIFF OMITTED] 30347.206

    [GRAPHIC] [TIFF OMITTED] 30347.207

    [GRAPHIC] [TIFF OMITTED] 30347.208

    [GRAPHIC] [TIFF OMITTED] 30347.209

    [GRAPHIC] [TIFF OMITTED] 30347.210

    [GRAPHIC] [TIFF OMITTED] 30347.211

    [GRAPHIC] [TIFF OMITTED] 30347.212

    [GRAPHIC] [TIFF OMITTED] 30347.213

    [GRAPHIC] [TIFF OMITTED] 30347.214

    [GRAPHIC] [TIFF OMITTED] 30347.215

    [GRAPHIC] [TIFF OMITTED] 30347.216

    [GRAPHIC] [TIFF OMITTED] 30347.217

    [GRAPHIC] [TIFF OMITTED] 30347.218

    [GRAPHIC] [TIFF OMITTED] 30347.219

    [GRAPHIC] [TIFF OMITTED] 30347.220

        [Annex 2: Subsequent to the hearing, on May 26, 2006,
    Senator McCain submitted the following additional information
    for the record:]
    [GRAPHIC] [TIFF OMITTED] 30347.222

    [GRAPHIC] [TIFF OMITTED] 30347.223

    [GRAPHIC] [TIFF OMITTED] 30347.224

    [GRAPHIC] [TIFF OMITTED] 30347.225

    [GRAPHIC] [TIFF OMITTED] 30347.226

    [GRAPHIC] [TIFF OMITTED] 30347.227

    [GRAPHIC] [TIFF OMITTED] 30347.228

    [GRAPHIC] [TIFF OMITTED] 30347.229

    [GRAPHIC] [TIFF OMITTED] 30347.230

    [GRAPHIC] [TIFF OMITTED] 30347.231

    [GRAPHIC] [TIFF OMITTED] 30347.232

    [GRAPHIC] [TIFF OMITTED] 30347.233

    [GRAPHIC] [TIFF OMITTED] 30347.234

    [GRAPHIC] [TIFF OMITTED] 30347.235

    [GRAPHIC] [TIFF OMITTED] 30347.236

    DEPARTMENT OF DEFENSE AUTHORIZATION FOR APPROPRIATIONS FOR FISCAL YEAR
                                      2007

                                  ----------

                             TUESDAY, JULY 25, 2006

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

                      F-22A MULTIYEAR PROCUREMENT PROPOSAL

        The subcommittee met, pursuant to notice, at 9:34 a.m. in
    room SR-222, Russell Senate Office Building, Senator John
    McCain (chairman of the subcommittee) presiding.
        Committee members present: Senators McCain, Warner, Inhofe,
    Chambliss, Bill Nelson, and Dayton.
        Committee staff member present: Charles S. Abell, staff
    director.
        Majority staff members present: Ambrose R. Hock,
    professional staff member; Gregory T. Kiley, professional staff
    member; Stanley R. O'Connor, Jr., professional staff member;
    and Scott W. Stucky, general counsel.
        Minority staff members present: Creighton Greene,
    professional staff member; and Peter K. Levine, minority
    counsel.
        Staff assistants present: Micah H. Harris and Benjamin L.
    Rubin.
        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; Stuart C. Mallory, assistant to Senator Thune;
    Frederick M. Downey, assistant to Senator Lieberman; William K.
    Sutey, assistant to Senator Bill Nelson; and Luke Ballman,
    assistant to Senator Dayton.

           OPENING STATEMENT OF SENATOR JOHN McCAIN, CHAIRMAN

        Senator McCain. Good morning.
        As we all know, and we should have this hearing in the
    context of the fact that there is increased cost for defense--
    projected costs--and, at the same time, there are going to be
    reductions in defense spending which will cause some very
    difficult decisions to be made in the years ahead. I've been
    concerned about multiyear procurement, because it locks in the
    funding for a certain weapons system when we have others which
    obviously have increasing costs. For example, the Army now
    projects $160 billion for its Future Combat Systems (FCS);
    whereas, its original cost was projected to be at $90 billion.
    We have seen, last year, 9 of the 11 major weapons systems
    developed behind schedule, over cost, and yet all received
    incentive bonuses, an incredible and bizarre situation if there
    ever was one.
        So, we meet today to discuss the issue of the multiyear
    procurement for the F-22 aircraft, whether it will result in
    ``substantial savings,'' whether the minimum need of the
    aircraft will be expected to remain substantially unchanged
    during the contract period, and why the Air Force would request
    funding at required levels to avoid contract cancellation. As
    we all know, since its inception, this program has been subject
    to two Nunn-McCurdy violations and has been rebaselined 14
    times to avoid additional breaches. The research and
    development cost growth alone over the original baseline is
    $10.2 billion, which is a 43.7-percent increase over the
    original baseline. There's every reason to think that the $225
    million in supposed savings will be swallowed whole the next
    time this program is rebaselined. So, the substantial savings
    estimate the Air Force is hanging its hat on to justify this is
    difficult to justify.
        I want to emphasize that this program began--I have the
    numbers here someplace--but the numbers that were originally
    intended have dramatically shrunk as the cost per aircraft has
    dramatically increased. It's not unusual for an Air Force
    weapons system, but when we lock in a multiyear procurement
    system, I think it's important to examine the history of this
    particular system. I am certainly not convinced that, given the
    increased costs of all weapons systems, as we are seeing, and
    already projected decreases in defense procurement spending,
    that this multiyear procurement is justified.
        [The prepared statement of Senator McCain follows:]
                   Prepared Statement by Senator John McCain
        Recently, I read an article that described the Army's $160 billion
    bill for its Future Combat Systems. This article noted that ``combined
    with rising manpower costs and combat operations in Iraq and
    Afghanistan that have consumed lives and equipment, the Service stands
    on the edge of a deep, deep hole. Budget shortfalls for the Service
    could exceed $20 billion annually. The Service had a $56 billion
    shortfall in its equipment accounts when combat in Iraq began in
    2003.'' Lieutenant General Melcher, Director of Army Programs,
    reportedly estimates that after 3 years and a series of extraordinary
    supplemental appropriations bills, the Army has not even cut that
    figure in half.
        The Army is not alone when it comes to budget woes. The Navy has
    similar problems in ship construction and the need to recapitalize
    naval aviation.
        For the Air Force, numerous major programs are experiencing
    technical problems, scheduling delays, and severe cost overruns.
    Service needs are rapidly becoming unaffordable. Indeed, the future is
    not rosy when it comes to budget outlays for defense. In fact, we are
    entering a 10-year cycle where reduced budget outlays for defense are
    expected.
        Weapons procurement for all of the Department of Defense (DOD) is
    expected to cost approximately $1.5 trillion between 2006 and 2009,
    with more than half of these expenditures yet to be made. In addition,
    the Senate unanimously voted, 98-0, that the preponderance of funding
    for conflicts in Afghanistan and Iraq will need to be requested through
    the annual budget, rather than emergency supplemental requests. Such a
    change could lead to dynamics in the budget process that are difficult
    to predict.
        In such trying times, one would like to see procurement proposals
    from the Services that make budgetary sense. For such sense, one should
    not look to the Air Force's current F-22 multiyear procurement (MYP)
    proposal.
        What one will find there is deja vu.
        Just as it did on the Boeing tanker lease proposal, the Air Force
    is once again ignoring the law--and engaging in gimmickry to justify
    its request to purchase 60 additional F-22A Raptors under an MYP.
        Entering into a multiyear defense procurement contract is a serious
    matter. It allows the DOD to commit to spending funds that have not yet
    been appropriated. For this reason, before Congress makes such a
    commitment, Congress (at least ostensibly) evaluates seriously the
    risks arising from such a purchase--in this case, risks attendant to
    the multiyear commitment of about $10 billion over 3 years. This is
    because, in approving an MYP, Congress sacrifices budgetary flexibility
    and control over the contract period. For this reason, Congress enacted
    title 10, section 2306b, of the United States Code.
        This statute sets forth, among other things, six criteria, which
    the agency must satisfy before entering into a multiyear contract for
    any given program. These conditions include substantial savings, stable
    requirement, stable funding, stable design, realistic contract cost and
    cost avoidance estimates, and the promotion of national security.
    Basically, these requirements help Congress evaluate the risks involved
    in allowing the DOD to commit itself to performance under a multiyear
    contract, rather than a series of annual contracts, for the purchase of
    a given asset.
        The Air Force and the Office of the Secretary of Defense have not
    established that all the criteria required under the Federal multiyear
    procurement statute have been satisfied. All of the independent experts
    testifying before the subcommittee today, notably the Comptroller
    General of the United States, will state that at least four of the six
    criteria set forth in section 2306b have not been met by the Air Force:

             The proposed multiyear procurement of F-22s will not
            result in ``substantial savings'' over a series of annual
            contracts.
             The minimum need for this aircraft cannot be expected
            to remain substantially unchanged during the contemplated
            contract period.
             There can be no reasonable expectation that the Air
            Force will request funding at required levels to avoid contract
            cancellation.
             There are serious concerns about whether the design of
            the aircraft is in fact stable and that its technical risks are
            excessive.

        Of the Air Force's failed showing in meeting all the criteria, the
    one that concerns me the most is the requirement for the Air Force to
    demonstrate ``substantial savings.'' Several critical points need to be
    addressed.
        First, according to Comptroller General Walker, since its
    inception, this program has been subject to two Nunn-McCurdy violations
    and has been rebaselined 14 times just to avoid additional breaches.
    The research and development cost growth alone (over the original
    baseline) is $10.2 billion (for an increase of 47.3 percent over the
    original baseline). Against this backdrop, there is every reason to
    think that the $225 million in supposed savings will be swallowed whole
    the next time this program is rebaselined. So, the ``substantial
    savings'' estimate the Air Force is hanging its hat on to justify its
    multibillion F-22 MYP proposal is, at best, illusory.
        Similarly, the Institute for Defense Analysis (IDA) savings
    calculation does not account for the $1.7 billion in additional
    procurement dollars needed to implement the Air Force's proposal of
    adding 4 aircraft to the total purchase and slowing the annual
    production rate to 20 aircraft, over a longer schedule. In other words,
    it takes as its starting point the F-22 production profile as given.
    IDA's failure to take into account the $1.7 billion needed to implement
    the Air Force's proposal can be expected to diminish IDA's savings
    number.
        Next, according to a recent Government Accountability Office (GAO)
    report, ``the Air Force's multiyear procurement justification package
    sent to Congress on May 16, 2006, stated that an additional $674
    million is needed to fully fund the multiyear program being proposed.''
    So I ask: Where is the $225 million in savings if we will already be
    $674 million in the hole with this multiyear proposal?
        Also, even if the IDA's savings estimates are true and attainable,
    they don't constitute ``substantial savings'' within the meaning of the
    Federal multiyear procurement statute. IDA's report states that the
    historical average for cost savings is 8 percent. According to recent
    testimony provided by the Congressional Research Service (CRS),
    contract proposals that are deemed to satisfy this requirement have
    historically seen savings of about 10 percent. This multiyear
    procurement proposal purportedly achieves savings at a new, low rate of
    about 2.2 percent. While $225 million is certainly a great deal of
    money, it is not ``substantial savings'' within the meaning of the
    Federal law that this procurement proposal must comply with before it
    can go forward. If we allow this MYP proposal to go forward so far
    below the bar, we will be on the fast track to rendering the
    ``substantial savings'' requirement virtually meaningless.
        Finally, it appears to me that the Air Force has no credibility on
    what true cost savings will be.

             On March 28, 2006, Lieutenant General Hoffman,
            military deputy to the Air Force acquisition executive,
            originally said a multiyear contract would save $500 million.
            But this figure has changed several times and now has been cut
            in half. Furthermore, independent experts now doubt if there
            will be any cost savings in an F-22 multiyear procurement.
             A recent DOD Inspector General investigation found
            that the Air Force apparently presented Congress false
            information on the C-130J multiyear contract termination costs.
            An important fact is the F-22A program manager was among those
            responsible for apparently exaggerating the termination costs--
            the same office that prepared the estimated savings for
            executing the F-22 multiyear contract.
             Last year, Congress authorized and appropriated enough
            money for 24 F-22 aircraft; the Air Force can only afford 22
            aircraft with those funds. Just yesterday, the Air Force
            submitted a reprogramming request regarding Lot 6 of the F-22
            that provides for the purchase of an additional aircraft--going
            from 22 to 23 for fiscal year 2006, when we originally fully
            funded 24 in the fiscal year National Defense Authorization and
            Appropriation Acts. Furthermore, the Senate Armed Services
            Committee has made multiple requests for an explanation of the
            reduced F-22 buy--and no response has been forthcoming. Perhaps
            Secretary Wynne can clear this up today.

        The bottom line is this: allowing the proposed MYP here would
    effectively permit the Air Force to be held unaccountable--to end-run
    good government provisions in Federal law that Congress specifically
    designed to ensure accountability in our Government's contracting
    procedures.
        Can the taxpayer afford to place its trust in the Air Force
    acquisition system when stealthy F-22 aircraft disappear before they
    are built, yet after money has been authorized and appropriated? How we
    buy F-22 is not subject to our unfettered discretion. If we choose to
    buy them under a multiyear contract, we must do so in compliance with
    the law and best budgetary practices. This MYP proposal does neither.
        I would hope that the Air Force will rethink its position and
    collaborate with the committee in developing a procurement approach
    that is both lawful and fiscally sound.

        Senator McCain. Senator Nelson?

                    STATEMENT OF SENATOR BILL NELSON

        Senator Bill Nelson. Thank you, Mr. Chairman. It's a
    privilege for me to fill in as the ranking member today for
    Senator Lieberman.
        We have the situation, as you've stated, that the original
    Air Force proposal was to buy the final 60 F-22 aircraft under
    a 3-year multiyear contract, but using an incremental funding
    approach in structuring that contract. All four defense
    committees have now rejected that proposal. But then, they go
    to the floor, and both defense authorization bills now include
    the approval of the Air Force to enter into the multiyear
    contract. I did not vote to support Senator Chambliss and his
    amendment on the floor when the Senate considered the Defense
    Authorization Act, but the Senate approved Senator Chambliss's
    amendment, 70 to 28. I still have some concerns about it and I
    hope that we're going to talk about it today.
        While the estimate of some $235 million in savings is
    certainly a nontrivial sum of money, it represents a small
    portion of the resources of the Government that it will be
    committing for the next 3 years to the program. So, there are
    some other concerns.
        In this morning's Washington Post, ``A think tank that
    endorsed a 3-year contract for a troubled jet fighter program
    is run by a former military officer with extensive ties to one
    of the program's subcontractors. The Institute for Defense
    Analyses' (IDA) President, Dennis Blair, is a member of the
    board of a subcontractor for the F-22 Raptor. Mr. Blair holds
    options to buy tens of thousands of shares of the company's
    stock, EDO Corporation.''
        It's my understanding that IDA has no policy on conflicts
    of interest by its officers.
        So, we need to dig into this, Mr. Chairman, and I'm looking
    forward to it.
        Senator McCain. Thank you very much.
        Senator Inhofe.
        Senator Inhofe. Thank you, Mr. Chairman, and thank you,
    Secretary Wynne, Secretary Finley, and Mr. Walker.
        Secretary Wynne, I especially appreciate your comments that
    were in your written statement, when you said that our joint
    warriors are the best in the world, but they can only be as
    good as the tools we give them. As I stated last month, my goal
    on this committee in the future is to try to get us in a
    position where our kids--and I don't care if it's on the
    ground, in the air, in the sea--have the best equipment when
    they go out and, keeping in mind that we are the best, we
    should be the best possible stewards of the taxpayers' money.
    But, right now, they don't have the best.
        It's so frustrating to me--I know members of this committee
    are tired of hearing me say this--that over and over and over
    again we have stated that there are some countries who go to
    battle with better equipment than we have. The chairman just
    mentioned the FCS. The reason for the FCS is to try to bring us
    up so that we do have the best.
        Right now, our cannon on the ground is not as good as some
    five other countries are making, including South Africa.
    General Jumper--I've said this several times--when he was a
    two-star, back in 1998, when we had been downgrading the
    military during the 1990s, we dropped our procurement and our
    modernization programs down. At the same time, the Chinese were
    increasing their procurement by 1,000 percent in the same
    decade--General Jumper stood up and had the courage to say that
    the best strike vehicles we had, the F-15 and the F-16, are not
    as good as some that our prospective opponents could have.
        At that time we were talking about the SU-27. It was
    deployed and working. The SU-30 was not yet in the air and
    working, but contracts were being made. The Chinese bought
    several of these.
        I say that because one of the six criterias that we're
    talking about is national defense. We're not debating that. I
    don't think Mr. Walker or any of the rest of them are debating
    that particular criteria as one that is in contention. But the
    bottom line is, we have a desperate need to get this thing
    fielded in the numbers that can give our fighters the best
    opportunities.
        Secretary Wynne, I want to read a quote you had that I
    appreciate very much, ``The F-22's dominant combat capabilities
    will provide the U.S. forces with overwhelming air superiority
    in any scenario, and its robust employment capabilities, both
    air-to-air and air-to-ground, will afford joint combatant
    commanders with options for asymmetric engagement that do not
    exist with legacy fighters.''
        So, we're not debating, today, whether we need it, and
    whether we're going to buy it, it's just the system that we're
    using and what kind of savings we can have. Some of us on this
    panel believe that if it's $225 million or it's $325 million,
    that is something that is substantial. We'll have a chance to
    talk about that in a little more detail. I think the vote on
    the Senate floor of 70 to 28 was in favor of the American
    taxpayer.
        So, the debate is not about design issues, which have
    already been corrected and don't even need to affect the lots
    under consideration in the multiyear. The debate is not about
    previous plans to buy 56 F-22s over 2 years, or 60 aircraft
    over 3 years, utilizing split funding. The Senate Armed
    Services Committee (SASC), the Senate Appropriations Committee,
    the House Armed Services Committee, and the House
    Appropriations Committee all agreed to purchase the F-22 in
    three lots over 3 years. So, we keep talking about this thing.
    It's 56 in 2 years, and that's already settled, as I understand
    it.
        So, the only real question is whether we allow ourselves
    the savings achieved through a multiyear purchase. Again, I
    think that we should.
        But one thing I do want to say, and I respect all my fellow
    Senators, but to bring up this article that comes out the night
    before a hearing in the Washington Post--and it's filled with
    lies--that's one more thing that this is not about. It's not
    about waiting until the day before a hearing and then coming
    out with something as they came out with this morning. The
    article in the Washington Post this morning is nothing but
    smoke and is filled with lies. For example, it states, ``After
    receiving the IDA's endorsement, the Air Force decided to lock
    itself into a new 3-year contract for the jet.'' That's simply
    not true. We know it's not true. Both the Quadrennial Defense
    Review (QDR) and the President's budget recommended the
    multiyear contract. Additionally, it states, ``Largely on the
    strength of IDA's conclusions about future cost savings from
    the multiyear procurement, the Air Force decided to buy 60 more
    planes than the previous contract demanded.'' That's a lie.
    It's four more planes. The Office of the Secretary of Defense
    (OSD) increased the number of planes by four over fiscal year
    2006, as a part of their QDR plan to help the Department
    stabilize the fifth-generation fighter industrial base and
    smooth the transition to the F-35.
        So, I'm sure that there are a lot of people who are
    rejoicing in the fact that some things were leaked to the
    Washington Post so that it allowed them to come out with a
    bunch of lies right before this hearing.
        [The information referred to follows:]

        Senator Inhofe. Thank you, Mr. Chairman.
        Senator McCain. Senator Chambliss.
        Senator Chambliss. Thank you, Mr. Chairman, and thank you
    for holding this hearing. You and I talked about this both on
    the floor during debate, before and after, and I appreciate the
    opportunity to once again talk about the merits of the most
    sophisticated weapons system that we have ever seen
    manufactured anywhere in the world.
        Having been a fan of this weapons system since long before
    any nut or bolt of the F-22 was made in my State, I am now
    enjoying the pleasure of representing the plant in which this
    great weapons system is assembled. We're very proud, at
    Marietta, of the job the folks have done over a long period of
    time, from the stage of initial discussion of this
    sophisticated weapons system to the point now to where we are
    seeing it flown over the skies of Washington, DC, and over any
    number of other areas where we have some sophisticated
    operations going on.
        We've also been through a number of stages. Mr. Chairman,
    you mentioned that there have been problems, and certainly
    there have been with this weapons system. It's because of the
    sophistication of it and because of the assets that have been
    required to be put on this airplane. We had an original idea
    back in the 1980s of what this airplane ought to look like, and
    gradually that goalpost has been moved, and probably for the
    right reason, because we all know that buying additional attack
    aircraft, buying additional bombers, is going to be very
    difficult. Now we have a weapons system that allows us to
    penetrate enemy territory, not to fire once, not to fire twice,
    but to fire three times before the enemy ever knows we're
    there. That's one of the reasons that the pilots that I have
    talked to love this airplane. It's a great flying machine, in
    addition to that. Now, with its added capability of being able
    to carry additional weapons that can penetrate enemy lines and
    save the lives of Americans, it certainly is one of the
    greatest weapons systems that we will ever see in our
    inventory. I look forward to the witnesses talking about that.
        As I said on the floor, I hate to go against my chairman,
    who I respect so much, as well as the chairman of the full
    committee, relative to an amendment that, frankly, the
    contractor was not sure ought to be introduced. I just couldn't
    let this opportunity go by to save a minimum of $235 million
    and secure this asset that is so desperately needed by the Air
    Force, as I fully expect our witnesses to talk about, and to
    give us an asset that will allow us to take out, air-to-air,
    any adversary that is on the horizon.
        So, as we are here today talking about this, I share the
    thoughts of Senator Inhofe. I think it's rather ironic that in
    today's paper we see an article that's critical of this, and it
    talks about this hearing today. I suspect we all know where
    that came from.
        Senator McCain. Where would that be?
        Senator Chambliss. I'll be interested to see what that
    reporter says, because I intend to ask him about it. But,
    obviously, I think staff that doesn't appreciate this contract
    is probably where it came from, Senator. We look forward to
    maybe finding that out.
        Senator McCain. Which staff would you be referring to?
        Senator Chambliss. I have no idea, but I'm going to ask.
        Senator McCain. You just said you have a pretty good idea.
        Senator Chambliss. Yes, sir, I think it came from staff,
    that it was probably leaked to the press.
        Senator McCain. Which staff?
        Senator Chambliss. I have no idea, but I intend to ask,
    Senator, as to where it came from, because, frankly, the
    information in that article is not just incorrect, but it's
    immaterial. It has nothing to do with the weapons system, it
    has nothing to do with the Air Force going through a QDR
    justifying, from a business perspective, the requirements of a
    multiyear contract. I hope that we can find out exactly where
    it came from, Senator, and be assured that I will share with
    you any information I find out about that.
        But I look forward to our witnesses being here this morning
    to talk about not only the weapons system itself, but the fact
    that it does meet all the criteria for a multiyear. Obviously,
    a strong voice coming out of the House and a strong voice out
    of the Senate has indicated that this multiyear is not only
    appropriate, but it's needed, and it does save the taxpayers
    money.
        So, Mr. Chairman, thank you for holding this hearing this
    morning. I look forward to the testimony of the witnesses.
        Senator McCain. Thank you.
        Senator Dayton, do you have----
        Senator Dayton. Nothing, Mr. Chairman, thank you.
        Senator McCain. I welcome the witnesses: Secretary Wynne,
    Comptroller General Walker, and Secretary Finley.
        We'll begin with you, Secretary Wynne.

     STATEMENT OF HON. MICHAEL E. WYNNE, SECRETARY OF THE AIR FORCE

        Secretary Wynne. Thank you very much, Mr. Chairman.
        Mr. Chairman, members of the committee, thank you for the
    opportunity to discuss the F-22 multiyear proposal, as
    contained in the President's budget, currently in review by
    Congress.
        As I testified previously, the budget, as presented,
    represented a series of settlements and proposals to connect
    desires with budget realities. One of the settlements reflected
    the Air Force's desire to preserve a warm fifth-generation
    fighter line, the F-22, until a second fifth-generation fighter
    line, the Joint Strike Fighter (JSF), or F-35, became active.
    We believe this to be a prudent course in this uncertain world.
    We mightily strive to be convincing to extend the F-22 at the
    then-planned rate of 28 aircraft per year. This was rebutted as
    to quantity required, primarily because of the increase in
    warfighting capability that each F-22 brings to the battle
    models. Thus, the quantity that the Department would authorize
    is 183 aircraft. The Air Force goal of bridging was met by
    buying the remaining units at a reduced rate of 20 per year.
    The Air Force appreciated the bridge between fighter lines but
    we lamented the increase in cost per unit that this
    represented. The purpose, then, of this multiyear request is to
    offset a portion of this increase. The Department appreciated
    the reduced rate of production, as it freed up instant
    resources in fiscal year 2007 to apply to higher priorities.
        This led to a second dilemma which was split funding, a
    funding technique that further reduced the 2007 obligations,
    which were again applied elsewhere in the budget.
        As the deliberations continue here in Congress, the funding
    is currently restored to eliminate the concept of split
    funding, which I used in this chart, by the way, when I
    testified before the SASC in November.
        This adjustment, if sustained, will require rephasing of
    the F-22 funding that was in the fiscal year 2007 Program
    Objective Memorandum (POM), during the fiscal year 2008 POM, to
    fully fund the F-22 program to 183 units. This is our plan.
        The bottom line of this discussion is that this is a
    stretch-out of the F-22A in order to attempt to maintain a
    fifth-generation fighter-line availability in a very uncertain
    environment, requesting a multiyear authorization to reduce the
    acquisition cost to the maximum extent possible to offset the
    cost of this slowdown. A side benefit will be to stabilize the
    end of life for this program.
        Multiyear authorizations stem from, number one, a stable
    product. In our back-to-basics approach, we have stabilized the
    configuration of the F-22A. I have inquired, as well, to the
    contractor who verified a stable product. This supports the
    firm fixed-price approach that we have taken.
        Number two, adequate market. The Air Force is fully
    committed to the 60 F-22As in consideration. As I mentioned, we
    actually seek more, but have been told to suppress our
    appetite.
        Seventy-four F-22As have been delivered to Tyndall, in
    Florida; Langley, in Virginia; and Edwards and Nellis Air Force
    Bases across the Air Force, and the first aircraft for the
    fifth base, Elmendorf, is rolling off the assembly line next
    week. The F-22A has performed magnificently during exercise,
    both in and out of the continental United States, dominating
    the current-generation fighters, yet integrating seamlessly
    with groundbased special operations. This underscores our
    excitement and why we desire more.
        Some have said, ``Delay the multiyear buy until next
    year.'' But with 183 as the total program cap, there is,
    frankly, no next year, at 20 per year.
        Adequate funding. We intend to rephase the funding to fully
    fund these 60 aircraft in the fiscal year 2008 submittal.
        Substantial savings. The Air Force seeks to maximize the
    savings, and is incentivized by the need to offset, to the
    maximum extent possible, to stretch out costs.
        At present levels, the estimate for savings ranges around a
    quarter-billion dollars. This is good news, in that on a per-
    unit basis this is, in fact, in the range of the F-18
    multiyear. The Air Force would, of course, like greater
    savings, and will negotiate hard to achieve greater savings
    than this.
        I thank you for your interest in our Air Force and
    appreciate your continued push for us to get the best deal for
    the taxpayer across the board. I stand ready to respond to your
    questions.
        [The prepared statement of Secretary Wynne follows:]
                  Prepared Statement by Hon. Michael W. Wynne
        Mr. Chairman and distinguished members of the committee, thank you
    for the opportunity to appear before you today to reiterate the
    benefits of the F-22A and the multiyear procurement (MYP) strategy. Our
    joint warriors are the best in the world. However, they can only be as
    effective as the tools we give them. Within today's fiscal constraints,
    we must fight the global war on terror and protect the homeland while
    transforming the force and maintaining an appropriate level of risk.
    The Air Force is committed to balancing the health of today's force
    with the modernization and recapitalization necessary for the
    capabilities of the future. The Air Force appreciates all the support
    this committee has provided to the warfighter and the ongoing
    operations around the world.
        Our primary fighter modernization and recapitalization program is
    the F-22A Raptor. The F-22A is operational today and ready for combat.
    The F-22A is a fifth-generation fighter aircraft that delivers joint
    air dominance (JAD) to counter persistent and emerging national
    security challenges. Given its vast improvements in every aspect--
    speed, all-aspect stealth, integrated avionics, maneuverability,
    supercruise, and an adaptable architecture--the F-22A is America's
    insurance policy against future threats to joint air dominance and
    represents a best value capability for the American taxpayer. The F-22A
    is the only aircraft in the world that ensures air dominance and
    operational access for the entire joint force. It guarantees an
    asymmetric advantage the U.S. surface forces have enjoyed for over 50
    years--freedom from attack, freedom to maneuver, freedom to attack.
        Fourth generation fighters (F-15, F/A-18) are able to survive and
    operate against legacy threats, such as SA-3s, SA-6s, but are
    overmatched against newer, currently fielded surface-to-air systems
    such as the SA-10, SA-20, and aircraft such as the F-10, as well as
    potential future threats such as the SA-21. The F-22A can autonomously
    complete the kill chain against all current and projected threats. The
    F-22A delivers unmatched lethality and survivability for gaining and
    maintaining air dominance--the number one, must have requirement to
    successfully conduct joint and coalition operations across the spectrum
    of conflict. The F-22A achieved an 80:1 kill ratio against legacy
    fourth generation fighters in joint exercise Northern Edge 2006 (NE06)
    in Alaska. F-15s and F-18s had an 8:1 ratio. The F-22A joint
    integration and multi-role capability was demonstrated in NE06 as it
    seamlessly integrated with joint Special Operations Forces. In
    addition, F-22A maintenance reliability during NE06 was 97 percent,
    flying 102 of 105 sorties. The F-22A is the only weapons system with
    the unique combination of air, ground, and nontraditional intelligence,
    surveillance, and reconnaissance (ISR) capabilities that enable
    operations across the full spectrum of conflict, including homeland
    defense and irregular and unconventional warfare.
        The F-22A program emerged from early development challenges to
    demonstrate success after success. Based upon the F-22A's demonstrated
    design stability, the Office of the Secretary of Defense (OSD) granted
    approval for the F-22A to enter full rate production in April 2005. In
    December 2005, the F-22A achieved initial operational capability (IOC)
    having successfully completed all developmental testing, and initial
    and follow-on operational test and evaluation. The Air Force
    Operational Test and Evaluation Center report stated, ``F-22 is mission
    capable in the air-to-ground role.'' Currently, there are 74 F-22As
    delivered, operating from 4 Air Force bases (AFBs) to include 34
    combat-coded aircraft at Langley AFB VA. The F-22A on-schedule
    deliveries continue at a rate of approximately two per month. Its
    performance continues to meet or exceed key performance parameters and
    spiral modernization will further enhance its air-to-air and air-to-
    ground target engagement capability.
        To support the Quadrennial Defense Review (QDR) and preparation of
    the fiscal year 2007 President's budget (PB), the Department performed
    a JAD study. The JAD study examined options for varying levels within
    the strike fighter mix. The Department looked at the war scenarios and
    cost implications of buying fewer variants of F-35s, increasing and
    decreasing the number of F-22As, and buying more legacy aircraft at the
    expense of fewer fifth-generation platforms. The results of these
    analyses directed the Air Force to ``restructure the F-22A program and
    extend production through fiscal year 2010 with a multiyear acquisition
    contract to ensure the Department does not have a gap in the fifth-
    generation stealth capabilities.'' As a result, the fiscal year 2007 PB
    added $1.05 billion to the Future Years Defense Plan (FYDP) to procure
    a total of 183 F-22A aircraft and requested congressional authority for
    an MYP for up to 60 F-22A aircraft (20 per year in Lots 7, 8, and 9)
    and a companion MYP for the F119 engines. The Air Force has long
    maintained that 381 Raptors will ultimately be required to meet the
    needs of the warfighter. This number of F-22As provides adequate
    capability to meet national security requirements to defend the
    homeland and support two near-simultaneous major combat operations, or
    their equivalent, with acceptable risk and a sustainable operations
    tempo. However, the QDR analysis reflected the need to address
    competing defense priorities and fiscal realities. As a result, 183 F-
    22As is the current program of record.
        On May 16, 2006, the Air Force submitted the MYP justification
    package to the congressional defense committees. Based on independent
    analysis, the Air Force justification shows that the proposed F-22A MYP
    meets all requirements of subsections (a) (1) through (6) of section
    2306b of title 10, U.S.C., including a substantial savings of
    approximately $225 million. The Air Force has demonstrated readiness to
    enter into the MYP by successfully accelerating production deliveries
    of 37 F-22A aircraft between 2004 and 2006 to return the program to the
    original contract schedule while achieving an overall reduction in the
    unit flyaway costs of over 23 percent over the same time period (Lots
    3-5).
        Recently the Government Accountability Office (GAO) released a
    report that raises questions about whether the proposed F-22A MYP meets
    the six criteria required by 10 U.S.C. 2306b. The GAO expresses
    particular concern over three criteria relating to the existence of
    substantial savings, the expectation of future funding requests as
    required to avoid contract cancellation, and the presence of a stable
    design without excessive technical risks.
        The proposed F-22A MYP meets all three of these criteria:

              1. Substantial savings: An MYP over three production lots
            offsets cost increases resulting from reductions in the
            previously planned annual production rate. Implementation of
            the proposed MYP contract will yield significant cost savings/
            cost avoidance over a series of successive single year
            procurements. The Institute of Defense Analyses' (IDA)
            independent business case analysis (BCA) estimated the cost to
            purchase 60 F-22A aircraft and associated engines in three lots
            under an MYP contract, and the cost to purchase 60 F-22A
            aircraft and associated engines in three annually procured
            lots. The BCA also described the benefit of MYP to the defense
            industrial base, allowing prime contractors to enter into
            longer-term agreements with suppliers, with resulting
            improvements in efficiency, training, and tooling. The Air
            Force and DOD consider the independently verified savings
            estimate of $225 million or $3.75 million per aircraft over 3
            years to be substantial. This cost savings per aircraft is
            comparable to the $3.82 million per aircraft for the F/A-18 E/F
            MYP.
              The Department's decision to extend the F-22A production line
            1 year by adding Lot 9 without substantially increasing the
            total program quantity reduced the previously planned
            quantities of Lots 7 and 8. While this did affect previous
            estimates of the unit cost for Lots 7 and 8, this decision was
            necessary to stabilize the fifth-generation fighter industrial
            base, smooth the transition to F-35 production, and preserve
            future investment options. This decision is unrelated to the
            proposed MYP contract and does not affect compliance with the
            title 10 requirements for substantial savings as compared to
            annual contracts for the same quantities.
              2. Stability of funding requested: The Air Force is committed
            to fully fund and procure all 60 aircraft through the proposed
            MYP. This commitment was reaffirmed by the DOD in the QDR
            decision to continue the F-22A program and emphasizes the
            criticality of the F-22A to overall DOD planning.
              3. Design stability: The development program for the F-22A is
            complete and the design is stable. F-22A IOC was declared on
            December 15, 2005. The F-22A has demonstrated over 14,000
            developmental test, training, and operational flight hours. The
            existence of a separate and ongoing modernization program does
            not affect this demonstrated design stability. Like all weapon
            systems, the F-22A will continue to undergo a modernization
            program as long as it is in the Air Force inventory. MYP has
            been approved under similar circumstances for candidate
            programs with anticipated upgrades, including the F/A-18E/F and
            UH-60 programs. The F-22A has already proven its air-to-ground
            capabilities and as recently as June 2006, the F-22A
            demonstrated a 34 of 34 success rate while dropping precision
            munitions.

        In addition to the criteria above, the proposed F-22A MYP meets the
    remaining three criteria as well:

              4. Stable Requirement: The F-22A requirement has been
            consistently validated and remains a top Air Force priority.
            The F-22A operational requirements document, 304-83-I/II/IIIA,
            dated February 17, 2004, was approved by the Joint Requirements
            Oversight Council and signed by the Chief of Staff of the Air
            Force. The QDR supports restructuring the F-22A program and
            extending production through calendar year 2011 with a
            multiyear acquisition contract to ensure the Department does
            not have a gap in the production of its fifth-generation
            tactical fighter aircraft. The fiscal year 2007 PB documents
            this decision and requests funding to support the planned fleet
            size of 183 aircraft. The F-22A MYP proposes a constant
            production rate of 20 aircraft per year for 3 years. This
            requirement will remain unchanged. Procuring an aircraft with a
            stable requirement under an MYP enables better use of limited
            taxpayer resources.
              5. Realistic Cost Estimate: The Fiscal Year 2005 Defense
            Appropriations Conference Report directed that a federally-
            funded research and development center be tasked to conduct an
            independent cost estimate (ICE) of the F-22A aircraft
            production program to recalibrate F-22A cost models. IDA
            completed the ICE and provided a better understanding of F-22A
            procurement costs. The program's cost estimates have also been
            closely scrutinized by the OSD Cost Analysis Improvement Group
            and the Air Force Cost Analysis Agency. The estimated cost of
            the F-22A MYP and the associated savings were independently
            verified by the DOD chartered IDA BCA study. While most MYP
            estimates are conducted as internal Service estimates, the F-
            22A MYP estimate was independently verified.
              6. Promotes National Security: The F-22A is the Air Force's
            highest priority acquisition program. There is no alternative
            aircraft in production offering comparable capabilities to the
            F-22A. The F-22A is a complex weapon system with over a decade
            of development, and represents the best option to replace
            legacy fighters dedicated to air-to-air, suppression of enemy
            air defenses, destruction of enemy air defenses, and homeland
            defense. With its unmatched combination of stealth, integrated
            avionics, and supercruise, the F-22A is the keystone of the Air
            Force's Global Strike concept of operations. The F-22A's
            dominant combat capabilities will provide U.S. forces with
            overwhelming air superiority in any scenario, and its robust
            employment capabilities (both air-to-air and air-to-ground)
            will afford joint combatant commanders with options for
            asymmetric engagement that do not exist with legacy fighters.
            Procurement of the F-22A through the proposed MYP supports the
            objectives of the National Security Strategy and greatly
            enhances the effectiveness of the joint force.

        The F-22A is ready to defend America's global interests with its
    formidable capabilities and is critical for national security as
    indicated from recent studies. Congressional approval of the proposed
    MYP for the F-22A to begin in Lot 7 is essential not only to achieve
    the substantial savings of $225 million over the next 3 years, but also
    to stabilize America's fifth-generation fighter production supplier
    base to provide a smooth transition to the production of the F-35. I
    look forward to working with this committee to best satisfy our
    warfighter needs in the future.

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

     STATEMENT OF HON. DAVID M. WALKER, COMPTROLLER GENERAL OF THE
                             UNITED STATES

        Mr. Walker. Thank you, Mr. Chairman and members of the
    subcommittee. I appreciate the opportunity to be here today to
    discuss the Department of Defense's (DOD) proposal to buy 60 F-
    22s under a multiyear contract.
        I'll note for the record at the outset, we've already
    contracted to purchase 122, so this is not an issue of whether
    or not we're going to buy F-22As, it's a matter of how many and
    on what basis.
        Our review indicates that DOD's proposal to add 2 years to
    the production period of the remaining F-22As, and to procure
    the planes under a 3-year multiyear contract, will cost the
    taxpayers $1.7 billion more than called for to procure the last
    two annual lots, as compared with the amount previously
    provided in the fiscal 2006 budget.
        The Air Force has reported to Congress that it believes
    that the F-22A program meets the criteria set forth in section
    2306(b) of title 10 of the U.S. Code, for a multiyear contract.
    We have serious concerns regarding whether all the criteria
    have been satisfied; in particular, the substantial savings
    criteria, but also two others.
        First, the timing of the proposal, near the end of the F-
    22A's acquisition period, reduces the ability of the program to
    achieve substantial savings. Savings are currently estimated to
    be about $225 million, or 2.7 percent of the remaining
    procurement cost, if 56 additional aircraft are purchased, a
    savings that, in terms of the percentage of cost, is far below
    historic estimates of savings for other multiyear contracts.
        Second, the Air Force is proposing to buy 4 additional
    aircraft, for 60 in total, at an added cost of $674 million to
    the taxpayers in order to save an additional $10 million under
    the multiyear contract; however, it has not fully funded the
    proposal.
        In addition, to satisfy other needs in DOD, F-22A
    quantities have been unstable for the last 2 years, reducing
    quantities from 279 aircraft to 179 in fiscal year 2006, and
    now proposing to increase quantities to 183 in the fiscal year
    2007 budget. If quantities continue to fluctuate downward, it
    could result in additional cost. For example, according to the
    Air Force, cancellation costs alone could be as much as $201
    million, a sum currently unfunded in the multiyear proposal.
    This does not count additional termination charges that could
    be incurred if there's a premature termination of the contract.
    This financial risk, when compared to the savings projected
    from a multiyear contract, raises additional questions and
    serious concerns about the prudence of a multiyear contract.
        Furthermore, I have no idea where the information came from
    that resulted in the article this morning, and I don't know
    whether or not the assertions in the article are true. However,
    if they are true, there is no question that the independence of
    the study would be highly questionable. Therefore, in my view,
    I think it's important to understand whether or not they are
    true, because, if they are true, I do not believe it's a study
    that either DOD or Congress should rely upon.
        This raises a larger question. What are the independent
    standards that so-called independent think tanks and
    contractors have to meet in order to be able to be deemed to be
    independent? In my view, Mr. Chairman, they should have to meet
    generally accepted governmental auditing standards for
    independent standards or some other generally accepted
    standard, or else we don't know what we're getting for taxpayer
    dollars.
        Candidly, Mr. Chairman, from a broad perspective, the F-22A
    program is illustrative of a number of systemic problems in
    DOD's acquisition system. First, the F-22A was approved in an
    environment with no clear agreement on enterprisewise
    priorities and without adequate consideration of current and
    likely future threats and resource constraints. Second, the
    requirements and key program specifications were not fixed when
    the program began and have changed numerous times over its
    decade-long development. Third, key procurement decisions were
    made without adequate consideration of technology and other
    program risks, with costly consequences. Finally, in this
    program, as, unfortunately, with many others in DOD, there have
    been significant incentive and award-fees paid, as you
    mentioned, despite the fact that we have large cost overruns
    and huge schedule delays. This program, no matter how positive
    the weapon system is--and it is truly impressive--is a case
    study in what's wrong with DOD's acquisition system. One must
    ask who's looking out for the taxpayers.
        In conclusion, the Air Force's decision to extend
    production for 2 years for industrial-based purposes has
    further increased the length and cost of the F-22A program. We
    are not sure what the Air Force's rationale was for extending
    production, and how it specifically relates to maintaining the
    industrial base so as to warrant an increased cost to the
    taxpayer of at least $1.7 billion. At the same time, our
    Nation's large and growing long-term fiscal imbalance requires
    the Federal Government, including DOD, to begin to make hard
    choices between its unlimited wants and its true needs. In this
    context, we continue to believe that Congress needs to
    reevaluate a range of existing Federal programs and policies,
    including the F-22A program, based on current and credible
    future threats, current and expected future national budget
    levels and priorities, and the warfighter's many true needs. As
    it stands now, the restructured F-22A program would increase
    cost if you end up going with this new schedule. The time to
    make tough choices between the DOD's program wants and expected
    resources is now.
        Thank you, Mr. Chairman.
        [The prepared statement of Mr. Walker follows:]
                     Prepared Statement by David M. Walker
        Mr. Chairman and members of the subcommittee: I am pleased to be
    here today to discuss the Department of Defense's (DOD) proposal to buy
    60 F-22As under a multiyear contract. GAO has recommended that the Air
    Force prepare a new business case for the F-22A program to justify the
    substantial changes planned in the mission roles and the quantities to
    be acquired--a recommendation that has yet to be implemented.
    Additionally, we share Congress's concerns over DOD's wherewithal to
    acquire the F-22A and other key assets in light of current and expected
    resource constraints. Over the past several years, it has become
    increasingly clear that DOD must reassess what is affordable and
    separate its many wants from its real needs. DOD must make tough
    acquisition choices in order for the country to begin to address the
    large and growing fiscal imbalance it faces.
        My statement today--which is based on our recent report on the F-
    22A program \1\--will highlight our key concerns with moving forward
    with F-22A procurement, as DOD proposes. Our work was performed in
    accordance with generally accepted Government auditing standards.
    ---------------------------------------------------------------------------
        \1\ GAO, Tactical Aircraft: DOD Should Present a New F-22A Business
    Case before Making Further Investments, GAO-06-455R (Washington, DC:
    June 20, 2006).
    ---------------------------------------------------------------------------
                                    summary
        Our review indicates that DOD's proposal to add 2 years to the
    production period of the remaining F-22As and to procure the planes
    under a 3-year multiyear contract will cost about $1.7 billion more
    than called for to procure the last two annual lots as compared to the
    amount previously provided in the fiscal year 2006 budget. The primary
    reasons cited for this change to the program are industrial base health
    and the need to preserve the F-22A production line until production of
    the Joint Strike Fighter (JSF) begins. The Air Force has reported to
    Congress that the F-22A program meets the criteria set forth in section
    2306b of title 10, U.S.C., for a multiyear contract. We have serious
    concerns regarding whether all of the criteria have been satisfied
    (i.e. substantial savings, sufficient funding, and stable quantities).
        First, the timing of the proposal--near the end of the F-22A's
    acquisition--reduces the ability of the program to achieve substantial
    savings. Savings are currently estimated to be about $225 million or
    2.7 percent of remaining procurement cost if 56 additional aircraft are
    purchased--a savings that, in terms of percentage of costs, is far
    below historic estimates of savings for other multiyear contracts.
    Second, the Air Force is proposing to buy 4 additional aircraft--60 in
    total--at an added cost of $674 million in order to save an additional
    $10 million under the multiyear contract; however, it has not funded
    the proposal. Finally, to satisfy other needs in DOD, F-22A quantities
    have been unstable over the last 2 years reducing quantities from 279
    aircraft to 179 in the fiscal year 2006 budget and increasing
    quantities to 183 aircraft in the fiscal year 2007 budget. If
    quantities continue to fluctuate downward it could result in additional
    costs. For example, according to the Air Force, cancellation costs
    alone could be as much as $201 million--a sum currently unfunded in the
    multiyear proposal. This financial risk, when compared to the savings
    projected from a multiyear contract, raises additional questions about
    the proposal and limits flexibility for future decisionmaking.
                                   background
        The F-22A program is illustrative of a number of systemic problems
    in DOD's acquisition system. First, the F-22A was approved in an
    environment with no clear agreement on enterprise-wide priorities and
    without due consideration of current and likely future threats and
    resource constraints. Second, the requirements and key program
    specifications were not fixed when the program began and have changed
    over its decades-long development. Third, key procurement decisions
    were made without adequate consideration of technology and other
    program risks, with costly consequences. Finally, in this program as in
    many others, DOD has paid out significant incentive and award fees to
    its contractors despite large cost overruns and schedule delays.
        The program has been a case study in cost increases and schedule
    inefficiency in major weapon system acquisitions. We have issued
    numerous reports over the years on the problems and issues associated
    with the F-22A development program. Beginning in 1986 the program was
    expected to complete development in 9 years for an estimated cost of
    $12.6 billion. After taking 19 years to complete development in
    December 2005, development costs were reported at $26.3 billion--109
    percent more than expected. The end result of these inefficiencies in
    the acquisition program has been a loss of buying power as the reduced
    quantity of aircraft will require a significantly higher unit cost than
    expected. Figure 1 shows the changes in procurement quantities over
    time and allocates both development and procurement costs to those
    changing procurement quantities to show the trend of average total
    acquisition unit costs and procurement unit costs.

        While the F-22A program has completed development and testing of
    its initially planned air-to-air capability, the Air Force now sees a
    need to develop more robust air-to-ground attack and intelligence-
    gathering capabilities. Therefore, it has started a multibillion dollar
    development program for these additional capabilities. These
    capabilities were not previously considered a primary role for the F-
    22A as it was intended to be primarily an air-to-air fighter to replace
    the F-15. From the outset the F-22A was built to counter expected large
    numbers of new advanced Soviet fighter aircraft but this threat never
    materialized. The expanded air-to-ground attack capability is intended
    to allow the F-22A to engage a greater variety of ground targets, such
    as surface-to-air missile systems, that have posed a significant threat
    to U.S. aircraft in recent years.
    dod's latest restructuring is more expensive and slows f-22a deliveries
        Amidst changes to expand F-22A missions and roles, the procurement
    quantities and acquisition strategy have also been in flux in recent
    years. In December 2004, the Office of the Secretary of Defense (OSD)
    reduced planned quantities to a total of 179 F-22A aircraft. At the
    same time, it decided to terminate the procurement program at the end
    of 2008 in order to free up about $10 billion for other priorities.
    Then, the fiscal year 2007 budget extended the procurement program 2
    years, to 2010. The department cited the health of the industrial
    base--the need for maintaining a fifth-generation fighter \2\
    production line--as its rationale for this added expense and delay. DOD
    also proposed buying 4 additional aircraft and using a 3-year multiyear
    contract to procure the remaining 60 F-22As to mitigate some of the
    costs of extending procurement for at least 2 years.
    ---------------------------------------------------------------------------
        \2\ F-22A and F-35 are considered fifth-generation fighter aircraft
    as compared to the F-15, F16, F/A-18, and F-117. The primary
    characteristics are Very Low Observable (VLO) stealth and information
    fusion capabilities that make fifth-generation aircraft more survivable
    and lethal.
    ---------------------------------------------------------------------------
        To identify savings that might reduce the cost impact of the
    restructured acquisition strategy, the Air Force is proposing a
    multiyear contract to buy the remaining F-22A aircraft. The Air Force
    formulated an estimate for three annual contracts to compare to a
    single multiyear contract to buy 56 aircraft. While this comparison can
    provide a basis for determining potential savings, the Air Force had
    not previously planned to buy the remaining aircraft over 3 years.
    Instead, the fiscal year 2006 President's budget included procurement
    costs to buy 56 F-22As in two annual lots--29 F-22As in 2007 and 27 F-
    22As in 2008. Therefore, even utilizing the multiyear contract
    authority, the restructuring will add $1.7 billion in cost to the
    procurement program and slow deliveries of the final aircraft when
    compared to the plan previously provided for in DOD's fiscal year 2006
    budget. The final 60 aircraft will each cost 10 percent more on average
    (unit procurement costs increase from $166 million per aircraft to $183
    million per aircraft) under the restructured plan, even taking into
    account expected savings from the multiyear procurement.
       concerns whether dod satisfies all multiyear procurement criteria
        The Air Force submitted its justification to Congress on May 16,
    2006, to buy the remaining 56 to 60 F-22A aircraft over a 3-year period
    with a multiyear contract. To enter into a multiyear contract for the
    F-22A, the Air Force must first obtain specific legislative
    authorization in both the annual DOD appropriations act and in an
    authorization act. If authorization is obtained from Congress, the Air
    Force must also meet the statutory criteria listed in 10 U.S.C.
    Sec. 2306b(a) for entering into a multiyear contract. The justification
    package the Air Force submitted to Congress in support of its request
    for authority to enter into a multiyear contract for the F-22A
    concludes that the statutory criteria for multiyear procurement have
    been met and that such a multiyear contract would provide substantial
    cost savings or avoidance over three annual lot buys. In reviewing
    these criteria and the Air Force's position, we have serious concerns
    regarding whether all of the criteria have been satisfied (i.e.
    substantial savings, sufficient funding, and stable quantities). Table
    1 lists the six criteria and our observations (we did not assess two of
    the criteria).

           TABLE 1: OBSERVATIONS OF F-22A MULTIYEAR CONTRACT CRITERIA
    ------------------------------------------------------------------------
                Multiyear criteria                    GAO observations
    ------------------------------------------------------------------------
    Contract will result in substantial         Substantial savings are not
     savings..                                   defined in the statute, but
                                                 the 2005 F-22A Independent
                                                 Cost Estimate states that
                                                 between 1982 and 1989
                                                 estimates for multiyear
                                                 savings for proposed weapon
                                                 systems averaged 13
                                                 percent. The Air Force
                                                 justification package shows
                                                 only 2.7 percent cost
                                                 avoidance ($225 million)
                                                 for 56 aircraft.
    Reasonable expectation agency head will     The Air Force has indicated
     request funding at required level to        that its multiyear budget
     avoid contract cancellation.                is currently underfunded by
                                                 $674 million and is seeking
                                                 authorization to use
                                                 incremental funding rather
                                                 than fully funding each
                                                 aircraft lot.
    Minimum need expected to remain             F-22A quantities have
     substantially unchanged during contract     changed in the last 2
     period in terms of production rates and     fiscal years to accommodate
     total quantities.                           the need to fund other
                                                 annual priorities. Given
                                                 the potential for other
                                                 priorities in the future--
                                                 military presence overseas,
                                                 global war on terrorism,
                                                 and response to natural
                                                 disasters--there is a risk
                                                 that F-22A quantities would
                                                 need to be adjusted again.
                                                 Quantity reductions could
                                                 result in cancellation
                                                 costs of as much as $201
                                                 million, an amount that is
                                                 currently unfunded.
    There is stable design, and technical       The baseline F-22A aircraft
     risks are not excessive.                    design is stable (the
                                                 proposed multiyear contract
                                                 is for the baseline
                                                 aircraft). While not the
                                                 subject of the proposed
                                                 multiyear contract because
                                                 it is a separate effort,
                                                 the design for adding new
                                                 ground attack and ISR
                                                 capabilities has not been
                                                 demonstrated through
                                                 development or operational
                                                 testing and cannot be
                                                 considered ``stable'' at
                                                 this time.
    Estimates of contract cost and cost         Not assessed.
     avoidance are realistic.
    Use of the multiyear contract will promote  Not assessed.
     national security of the United States.
    ------------------------------------------------------------------------
    Source: GAO Analysis and 10 U.S.C. 2306b.

    Substantial Savings Criterion
        To identify potential savings, the Air Force formulated an estimate
    for three annual contracts to compare to a single multiyear contract
    with buys of 56 and 60 aircraft. Section 2306b of title 10 of the U.S.
    Code does not define what constitutes substantial savings, but the 2005
    F-22A Independent Cost Estimate \3\ indicates that from 1982 to 1989,
    DOD proposed at least 60 multiyear procurement programs for
    congressional approval, with estimated savings averaging 13 percent.
    The Air Force estimates F-22A multiyear procurement savings to be 2.7
    percent if 56 aircraft are procured, approximately $225 million. The
    justification package also shows that an additional $10 million could
    be saved by buying 60 aircraft as stated in the fiscal year 2007
    President's budget, but it would require an additional $674 million not
    included in the fiscal year 2007 future year defense plan.
    ---------------------------------------------------------------------------
        \3\ F/A-22 Independent Cost Estimate, Institute for Defense
    Analyses, August 2005.
    ---------------------------------------------------------------------------
    Funds Have Not Been Budgeted
        The proposed multiyear contract for 60 F-22As submitted with the
    fiscal year 2007 budget is underfunded by about $674 million--funds the
    Air Force believes it will need in fiscal years 2008 through 2010 to
    complete these buys. Additionally, the Air Force has proposed using
    incremental funding to pay for the multiyear contract. Instead of fully
    funding the buy for each fiscal year, this proposal plans four funding
    increments--economic order quantity, advanced buy, subsystem, and final
    assembly. Incremental funding for multiyear procurement is neither
    permitted by the annual DOD appropriations act \4\ nor the multiyear
    authorizing statute, which requires that funds only be obligated under
    a multiyear contract ``for procurement of a complete and usable end
    item.'' \5\ The Air Force is seeking an exception to these requirements
    in its request to Congress for statutory authorization for the
    multiyear contract. The congressional defense committees are aware of
    the concerns with incremental funding, and those committees that have
    completed a defense bill have provided full funding for the initial
    year of the proposed multiyear contract. However, the congressional
    authorization and appropriations processes are ongoing.
    ---------------------------------------------------------------------------
        \4\ Section 8008 of the fiscal years 2005 and 2006 Department of
    Defense Appropriations Acts (Public Laws 108-287 and 109-148,
    respectively) require full funding of units to be procured.
        \5\ 10 U.S.C. Sec. 2306b(i)(4)(A). This restriction was added by
    section 820 of the Bob Stump National Defense Authorization Act for
    Fiscal Year 2003 (Public Law 107-314).
    ---------------------------------------------------------------------------
    Multiyear Contract Quantities Could Be Changed in the Future
        OSD has restructured the F-22A acquisition program twice in the
    last 2 years in order to allocate funds to other priorities. In
    December 2004, OSD reduced the program from 279 to 179 F-22As to save
    $10.5 billion. Then in December 2005, OSD changed the F-22A program
    again, adding $1 billion to extend the production line for 2 years to
    ensure a fifth-generation fighter aircraft production line would remain
    in operation in case the JSF experiences delays or problems. So far we
    have not seen detailed rationale concerning the impact to the health of
    the industrial base. OSD also added 4 aircraft at this time for a total
    of 183 F-22As. We have also not seen the threat based justification for
    buying these additional aircraft at an estimated cost of $674 million.
    Given the potential for priorities to change again in the future to
    fund the military presence in Iraq and Afghanistan, fight terrorism
    around the globe, fund the response to natural disasters, or for other
    reasons, there is risk that F-22A quantities under the proposed
    multiyear contract would need to be adjusted again. According to the
    Air Force's multiyear proposal, if a reduction in quantity were to
    happen, it could result in cancellation costs of as much as $201
    million in fiscal year 2007, the first year of the multiyear contract.
    The current Air Force acquisition strategy does not fund these
    potential cancellation costs. Therefore, the Air Force would have to
    find funds from other sources to pay these costs in the event
    quantities are reduced. This is therefore a risk that must be weighed
    in approving a multiyear contract for the F-22A, particularly at this
    late stage of its procurement program as it could limit the flexibility
    of decisionmakers in the future.
     other factors influence the practicality of using multiyear contracts
                       at this stage in the f22a program
        Other circumstances argue against using a multiyear contract.
    Multiyear contracts are typically used earlier in an acquisition
    program when greater efficiencies in buying materials and subsystems
    can be achieved and thereby provide more substantial savings at both
    the prime contractor and subcontractor levels. In the case of the F-
    22A, the multiyear proposal comes at the end of production. At the same
    time, the F-22A program plans to reduce the annual buying rate,
    providing less opportunity to incur savings. Previously, the Air Force
    had planned to purchase 29 and 27 aircraft in fiscal years 2007 and
    2008, respectively. The multiyear plan calls for 20 aircraft a year in
    2008, 2009, and 2010--7 to 9 aircraft fewer in each of the 2 years
    under the previous plan. Additionally, it appears the primary purpose
    for proposing a multiyear contract was to mitigate the additional cost
    of extending procurement for an additional 2 years; even with the
    proposed multiyear contract, procurement costs will be $1.7 billion
    higher than costs proposed under the previous program structure.
        The length of the proposed multiyear contract and the lower
    quantity of aircraft planned for multiyear are concerns identified in
    the May 2006 Air Force business case analysis for F-22A multiyear
    procurement. For example, the business case analysis states that the
    average number of air vehicles procured under a multiyear contract was
    308 \6\--more than five times the number of aircraft the F-22A program
    is proposing to buy under its 3-year contract. The analysis also
    acknowledges that there is limited opportunity to obtain additional
    savings from the previously planned initiatives to improve the F-22A
    production efficiency as these savings were obtained earlier in the
    acquisition cycle.
    ---------------------------------------------------------------------------
        \6\ The Institute for Defense Analysis analyzed the multiyear
    procurement programs for the F/18, C-17, C-130J/KC-130, and F-16.
    Institute for Defense Analysis, F-22A Multiyear Procurement Business
    Case Analysis (May 2006).
    ---------------------------------------------------------------------------
        In conclusion, the Air Force's decision to extend production for 2
    years for industrial base purposes has increased the length and cost of
    the F-22A program. We are not sure what the Air Force's rationale was
    for extending production and how it specifically relates to maintaining
    the industrial base so as to warrant an increased cost of at least $1.7
    billion. At the same time, our Nation's large and growing long-term
    fiscal imbalance requires the Federal Government--especially DOD--to
    begin making hard choices between its many wants and real needs. In
    this context, we continue to believe that Congress needs to reevaluate
    a range of existing Federal programs and policies, including the F-22A
    program, based on credible current and future threats, current and
    expected future national budget levels and priorities, and the
    warfighter's many true needs. As it stands, the restructured F-22A
    program's increased cost to complete the procurement program--$1.7
    billion--will eventually serve to reduce the Department's options in
    fulfilling other important national security priorities. This at a time
    when the difference between DOD's program wants and its expected
    resource levels is growing.

        Senator McCain. Thank you.
        Secretary Finley, welcome.

     STATEMENT OF HON. JAMES I. FINLEY, DEPUTY UNDER SECRETARY OF
                 DEFENSE FOR ACQUISITION AND TECHNOLOGY

        Mr. Finley. Thank you.
        Good morning, Chairman McCain and members of the
    subcommittee. I am pleased to come before you today to talk
    about the multiyear procurement of the F-22 Raptor.
        Copies of my written testimony have been provided. My
    opening oral statement will address some of the key points from
    that testimony.
        I am pleased that Congress has raised the focus on
    acquisition excellence. I am fully committed to acquisition
    excellence and the restoration of the confidence in our
    leadership and our acquisition systems. I pledge to work with
    you and Congress as stewards of our taxpayer dollars to provide
    our warfighters the capability needed to perform their mission
    with a decisive advantage.
        Multiyear procurement is an acquisition strategy that
    supports that goal. Multiyear procurement will allow the DOD to
    be better buyers and save taxpayer's money while providing the
    tools to protect our national security. Multiyear procurement
    has saved the taxpayer an estimated $5 billion over the past 7
    years. The President's budget provided for this acquisition
    strategy for the F-22 aircraft.
        Title 10 of the United States Code, section 2306(b),
    subparagraph (A) sets forth six criteria to be satisfied to
    authorize multiyear procurement. In my judgment, the multiyear
    procurement acquisition strategy for F-22 and its F-119 engine
    satisfies those criteria, summarized as follows: substantial
    savings, stable requirement, stable funding, stable design,
    realistic cost estimates, and national security.
        I based my judgment that these six criteria are satisfied
    on the business case analysis conducted by IDA, as well as
    listening and learning about the various perspectives of the F-
    22 multiyear procurement during numerous meetings, including
    ones in Congress, OSD, and the Air Force.
        The business case analysis by IDA provides for comparison
    of a multiyear procurement to a single-year procurement
    strategy of the F-22 for three production lots over a 3-year
    period. The business case analysis estimated savings of $225
    million, approximately $3.7 million per aircraft, based on 60
    aircraft. I consider these estimated savings of $225 million
    and $3.7 million per aircraft substantial. I believe there's
    opportunity for more savings. I view the estimate from the
    business case analysis as a starting point to further improve
    the benefits of the multiyear procurement for the F-22. I have
    initiated ideas and will press for additional savings in the F-
    22 multiyear procurement acquisition strategy.
        The Secretary of the Air Force, the Honorable Michael
    Wynne, has made the commitment to request funding for the
    multiyear procurement at the level required to avoid contract
    cancellation. I support Secretary Wynne's commitment.
        I think we all believe the F-22 is a superior aircraft that
    is needed for our national security. The F-22 is in full-rate
    production and is ready for combat. It is the world's only
    fifth-generation fighter, and provides a unique combination of
    warfighting capabilities that are critical to the United
    States.
        In summary, multiyear procurement for F-22 is a good
    acquisition strategy to provide us the opportunity to save $225
    million for the taxpayer. We will press for more savings. I
    believe we should strive to save every penny possible, and
    multiyear procurement provides us that acquisition strategy for
    buying these F-22 aircraft.
        I reinforce my pledge to work together with you, Mr.
    Chairman and Congress, in an open and transparent manner on
    multiyear procurement, as well as acquisition excellence.
        Mr. Chairman, subcommittee members, thank you for the
    opportunity to come here today. I stand ready to answer your
    questions. May God continue to bless America.
        [The prepared statement of Mr. Finley follows:]
                     Prepared Statement by James I. Finley
        Chairman McCain, Senator Lieberman, and members of the
    subcommittee: I am pleased to come before you today to talk about
    multiyear procurement (MYP) of the F-22 Raptor.
        MYP is a valuable acquisition strategy by which the Department of
    Defense (DOD) can buy weapon systems more efficiently and provide
    benefits to the taxpayer. MYP also enables broader planning and control
    for labor and the associated resource needs. MYP has been successfully
    utilized for a variety of weapon systems.
        In my judgment the F-22 and its F119 engine MYP acquisition
    strategies meet each of the six statutory criteria established by 10
    U.S.C. 2306b(a), which are summarized as follows:
        Criterion 1: The first criterion is that the 3-year MYP will result
    in substantial savings when compared to three, single year procurements
    (SYP).
        Response 1: The Institute for Defense Analyses (IDA) conducted a
    Business Case Analysis (BCA) of an MYP vs. SYP acquisition strategy.
    The basis for the BCA was the President's fiscal year 2007 budget
    (PB07). IDA utilized its integrated aircraft cost model that was used
    for the 2005 F-22 Independent Estimate for the F-22. The model was
    updated to reflect recent production cost, negotiated Forward Pricing
    Rate Agreement wage rates and inflation rates that correspond to the
    Bureau of Labor Statistics. Production rates of 20 aircraft per year
    were utilized in the model.
        The savings of MYP vs. SYP is estimated to be $225 million ($3.7
    million per aircraft). This is for both the air vehicle and F-119
    engines. This savings is considered substantial in terms of absolute
    savings and therefore, criterion 1 is considered to be satisfied.
        Criterion 2: The second criterion is that the minimum need is
    expected to remain substantially unchanged in terms of production rate,
    procurement rate, and total quantities, providing for stability of the
    requirement.
        Response 2: The PB07 MYP provides for a production rate of 20
    aircraft per year for 3 years. This reflects a steady production rate
    that will enable stable procurement planning for a total quantity buy
    of 60 aircraft. In addition, the MYP supports the Quadrennial Defense
    Review (QDR) and sets forth a balanced portfolio of tactical aircraft
    assets as described in the Joint Air Dominance (JAD) Study, performed
    to support the QDR.
        One of the QDR recommendations was to support the tactical aircraft
    industrial base by stretching out F-22 production until we gain
    confidence in Joint Strike Fighter (JSF) production, in order to
    maintain an active production capacity and sustain aircraft vendors and
    suppliers until we ramp up JSF production. The MYP strategy achieves
    that recommendation. The JAD Study showed that a balanced force
    structure mix of fifth-generation fighters, with legacy F/A18-E/Fs, F-
    15Es, and conventionally armed bombers, best met our requirements.
    Buying fifth-generation tactical aircraft assets (F-22 and JSF), for
    both the Air Force and the Navy, optimized capability, affordability,
    and mitigated risk better than other options. Therefore, criterion 2 is
    considered to be satisfied.
        Criterion 3: The third criterion is that there is a reasonable
    expectation that, throughout the contemplated contract period, the head
    of the agency will request funding for the contract at the level
    required to avoid contract cancellation.
        Response 3: The Secretary of the Air Force, the Honorable Michael
    Wynne, in his May 16, 2006, letter addressed to the chairman of the
    Senate Armed Services Committee, said that the Air Force intends to
    fund and procure 60 aircraft to the level to avoid contract
    cancellation costs. I support Secretary Wynne's commitment. If an MYP
    of the F-22 is approved by Congress, the Department expects that
    sufficient funding will be requested to avoid contract cancellation,
    and therefore criterion 3 is considered to be satisfied.
        Criterion 4: The fourth criterion requires a stable design for the
    F-22 and that the technical risks associated with such property are not
    excessive.
        Response 4: The F-22 has significant production maturity,
    consisting of two pre-production and six production lots prior to the
    first MYP. The aircraft design and manufacturing processes have been
    proven and are considered stable. The F-22 successfully completed
    initial operational test and evaluation (IOT&E), which was focused on
    the air superiority mission. The first phase of follow-on operational
    test and evaluation, which was focused on air-to-ground mission testing
    using the Joint Direct Attack Munition (JDAM) has also been completed.
    The Department is working on modernization improvements to the F-22.
    Examples of modernization changes are software, electronics,
    processors, and subsystem components to address parts obsolescence.
    Such changes are not unusual during multiyear procurements. Therefore,
    criterion 4 is considered satisfied.
        Criterion 5: The fifth criterion for MYP require that the estimates
    of both the cost of the contract and the anticipated cost avoidance
    through the use of a multiyear contract are realistic.
        Response 5: The BCA from IDA provided an independent analysis of
    the F-22 MYP. The basis of the BCA was derived from an extensive
    independent estimate of F-22 acquisition costs for Congress in August
    2005. Both the BCA and independent estimate are considered realistic,
    and therefore criterion 5 is considered satisfied.
        Criterion 6: The sixth criterion for MYP is that the use of such a
    contract will promote the national security of the United States.
        Response 6: The F-22 is in full rate production, flying today, and
    is ready for combat. It is the world's first fifth-generation fighter--
    an aircraft with superior survivability, lethality, and
    maintainability. It provides a unique combination of warfighting
    capabilities that are critical to ensure United States air dominance
    and promote the national security of the United States. Therefore,
    criterion 6 is considered satisfied.
        In closing, Mr. Chairman, thank you for the opportunity to provide
    my views concerning the F-22 MYP. I am fully committed to working
    together with you and Congress to address the F-22 MYP and provide
    responsible stewardship of taxpayer resources. I am ready to answer any
    questions you and the members of the subcommittee may have.

        Senator McCain. Thank you very much, sir.
        Secretary Wynne, yesterday you submitted to the SASC a
    reprogramming request seeking to buy a 23rd F-22 Raptor. Is
    that correct?
        Secretary Wynne. Yes, we did, Senator.
        [The information referred to follows:]

        Senator McCain. That brings the total for Lot 6 from 22 to
    23 for fiscal year 2006, is that correct?
        Secretary Wynne. That is correct.
        Senator McCain. Congress originally fully funded 24 in the
    National Defense Authorization and Appropriations Acts for
    Fiscal Year 2006. What's wrong with the math there, Secretary
    Wynne?
        Secretary Wynne. The quantity of aircraft and the funding
    did not match up to the PBD-753 impact, sir, which reduced
    dramatically the quantity of units that I was able to buy, and
    caused all of my suppliers to, in fact, reprice some of their
    costs. So, we did, in fact, accurately predict to the Senate
    and to the House that we thought that the resulting funding
    would only get 22 aircraft. In fact, we were correct.
        The 23rd aircraft, we find, as a result of the next change,
    which was out of advanced procurement that has now been reduced
    from 29 airplanes to 20, in fact, left over enough funds that
    we felt like those funds could better be applied to buying
    additional aircraft capability for our warfighter.
        Senator McCain. Let me get this straight. The defense
    appropriations and authorization committees plucked a number
    out of the air and said that this is enough for 24 aircraft,
    and, indeed, it was only enough for 22. Is that correct?
        Secretary Wynne. Sir, when the program decisions were made,
    it did not go back and adjust the figures that the President's
    budget submitted to you. But we did try to advise that this
    would only buy 22 aircraft instead of the 24 that were
    stipulated in the budget. That advice was essentially not taken
    into account.
        Senator McCain. The President's budget was 24, Secretary
    Wynne.
        Secretary Wynne. Yes sir, it was.
        Senator McCain. So what happened? The President's budget
    called for 24. We were operating under the assumption that that
    would fund 24 aircraft. In fact, we only funded 22.
        Secretary Wynne. What happened was PBD-753 truncated the
    program, as Mr. Walker said. I think this program has been
    faced, since its inception, fiscal realities that have
    stretched it out, that have caused cost increases, dominantly
    as a result of other priorities coming in and encroaching upon
    it. It has, in fact, I think, done a superior job of completing
    the initial operational test and evaluation (IOT&E) and now
    entering production, and actually proving itself to be worth
    all of the concerns and the commitments that have been made
    across the board to get this ready for our warfighters.
        Senator McCain. After 19 years, the quantities have gone
    from 750 to 648 to 442 to 440 to 342 to 341 to 278 to 181 to
    183. So you wonder why there's some skepticism at least on the
    part of some of us on this committee, Mr. Secretary?
        Secretary Wynne. No, sir, I have no doubt that this is a
    source of skepticism. In fact, as Mr. Walker pointed out, this
    is not a very good way to enter into an acquisition program
    from its inception in 1991, to promise, if you will, a little
    bit more, in fact, a lot more than you ever intend to buy. I do
    think that there was a substantive look at what capabilities
    were forecast, and maybe some discounting going on. Now that
    the warfighter realizes what capabilities this aircraft brings,
    not only do they want a little bit more, pushing against the
    secretariat, but I think they may have stabilized the program
    at a different number.
        Senator McCain. Was the request for multiyear procurement
    of the F-22 in the Future Years Defense Program (FYDP)?
        Secretary Wynne. The request came about in the QDR.
        Senator McCain. Yes. My question was, was it in the FYDP?
        Secretary Wynne. I don't believe it was fully accounted for
    in the out-year program of the FYDP.
        Senator McCain. Was it accounted for at all?
        Secretary Wynne. There were, I believe, 20, 20, and 16 that
    were in the FYDP.
        Senator McCain. Was the multiyear procurement in the FYDP?
        Secretary Wynne. It was recommended in the QDR, sir.
        Senator McCain. I, again, asked you whether it was in the
    FYDP. I understand that it was in the QDR.
        Secretary Wynne. Then, sir, you also know that it was not
    in the FYDP.
        Senator McCain. Have you ever heard, in all your
    involvement, of a request of this nature for a multiyear
    defense procurement that was not in the FYDP?
        Secretary Wynne. I have not heard of one that wasn't in the
    President's budget, and this one was in the President's budget.
    The FYDP----
        Senator McCain. Again, I really would like an answer to the
    question. My question was, have you ever heard of a request for
    a multiyear procurement that was not in the FYDP? Now, I mean,
    that's a pretty straightforward question, Mr. Secretary. I
    don't mean to be combative here, but I think I deserve a
    straightforward answer.
        Secretary Wynne. Sir, you do. I do not know, in my history,
    of one that was. This is out-of-cycle, definitely.
        Senator McCain. Thank you very much.
        Let's talk about this $1.7 billion additional cost here.
    Mr. Walker, explain that a bit more, would you, please? Because
    we are touting $225 million savings, and yet there appears to
    be an addition of $1.7 billion here.
        Mr. Walker. Mr. Chairman, it depends upon what you use as
    the baseline. You can make numbers do a lot of different
    things, depending upon what the baseline is. The baseline for
    the $1.7 billion is, if you look at the 2006 budget with regard
    to the quantities that the DOD had proposed to buy--namely,
    56--and the period of time that they proposed to buy it over,
    then when you compare that to what they're proposing to buy
    now, which is 4 more, over 2-plus years additional time, then,
    when you look at total cost, this is $1.7 billion more than
    they expected. Of that $1.7 billion, about $0.7 billion is for
    the four additional aircraft, and about $1 billion is because
    we're stretching this out. This program, depending upon how you
    want to calculate it, is anywhere from 2 to 15 years late, and
    now we're making it later.
        Senator McCain. Mr. Secretary, do you want to respond to
    that?
        Secretary Wynne. Yes, sir, very easily. The first thing you
    have to decide is whether you want a fifth-generation fighter
    to span and be available to you and to the President of the
    United States in case of a contingency. Once you determine that
    that is, in fact, something that you do want to do, then you
    have to determine how to best do it. The Department figured the
    best way to do it was, in fact, not to change the total
    quantity and cap the program at 183, but to satisfy the Air
    Force's desire to make sure that the President had available to
    him a fifth-generation fighter line. They agreed to stretch the
    program out--20, 20, and 20. I would say to you, sir, that
    David is right, in the sense that this program has not been
    treated well, due to Government decisions, and many of the cost
    increases that you have talked about were, in fact, due to
    Government decisions, although the contractor has had a share.
        Senator McCain. Mr. Secretary, before you can procure an
    aircraft under a multiyear contract, you must make various
    showings under the Federal procurement statutes, and,
    particularly, you must make six showings under various
    provisions of the law. Can you state that all of those
    requirements have been met?
        Secretary Wynne. Sir, the one I lack, really, is the
    authorization from Congress, because the fact is that all the
    rest have to be satisfied prior to entry into a multiyear, and
    we intend to satisfy every one of those statutory restrictions
    prior to entry into a multiyear.
        Senator McCain. Have they been satisfied yet?
        Secretary Wynne. They are underway of being satisfied, but,
    sir, as you point out, until I essentially submit the
    President's budget in fiscal year 2008, I don't meet one of
    them, which is the full funding criterion, but I do intend to
    meet that prior to entry into the multiyear contract.
        Senator McCain. I understand there were six criteria. How
    many of them have you met, and how many haven't you met?
        Secretary Wynne. From what I can gather, there's a national
    security requirement. We have met that. There is that you're
    going to intend to buy the quantity. I have met that. The
    stability of design, we believe we have come to a configuration
    that we can contract for. I have met that. The substantial
    savings rests on the models that IDA has provided, and we
    believe those savings are, in fact, in the area of other
    multiyears, so I believe we have met that. So, sir, I believe
    we have met five out of the six, the sixth being the funding
    stability--funding, which I intend to meet in the fiscal year
    2008 POM.
        Senator McCain. Mr. Walker, do you believe that they've met
    the stable-design requirement?
        Mr. Walker. Just the design requirement? Is that what
    you're saying, Mr. Chairman?
        Senator McCain. The overall standard.
        Mr. Walker. Oh, the overall standard.
        Senator McCain. Yes.
        Mr. Walker. The overall standards. We have concerns about
    three.
        Number one, substantial savings. Unfortunately, Mr.
    Chairman and the other members, that's not clearly defined.
    What is ``substantial''? Obviously $225 million is a lot of
    money, to us, as individuals. In the scheme of things, it's 2.7
    percent of the projected procurement cost involved here, which
    is much, much less than historically has been the case.
    Historically, when you do multiyear contracts, it's typically
    at least 10-percent-plus savings, as compared to single-year
    contracts.
        Number two, when you look at the risk associated with
    entering into a multiyear contract, that has to be adequately
    considered, because, as you properly pointed out, this is
    binding the Government to be able to purchase a larger
    quantity, and there are termination costs as well as
    cancellation fees that are associated if we don't go through.
        With regard to whether it's adequately funded, that's
    already been addressed by the Secretary. He intends to request
    funding, but a request doesn't mean that you'll get the
    funding.
        Number three, the other concern that we have here is, as
    you properly pointed out, the Air Force is one Service. This is
    one platform within one Service. The Air Force has challenges
    with regard to JSF and other platforms. Furthermore, the DOD
    has huge challenges with regard to FCS and many other
    platforms; and so, even if the Air Force ends up requesting,
    it's unclear as to whether or not, in the aggregate, it'll be
    available.
        Then, last, with regard to the need remaining the same and
    the quantities remaining the same, I mean, the real question
    is, why do we need four more? What is the comprehensive threat
    and risk that causes the need for four more? Even if you want
    to go with a multiyear procurement, that's about $700 million
    just by itself.
        Second, given the budget pressures and the ripple effect,
    are we certain that we're going to be able to come up with the
    money to fund all of these? History has not had a very positive
    track record in that regard.
        Senator McCain. Secretary Finley, as a DOD directive said,
    the acquisition and procurement of DOD weapons and weapons
    systems should be consistent with all applicable domestic laws,
    and, further, ``an attorney authorized to conduct such legal
    reviews in the Department shall conduct a legal review of the
    intended acquisition of weapons and weapons systems.'' When you
    signed the July 13 letter, did you follow DOD's own directive?
        Mr. Finley. Yes, sir.
        Senator McCain. You did get legal review?
        Mr. Finley. I did have legal review of my reply to you,
    sir, yes.
        Senator McCain. From who?
        Mr. Finley. From Doug Larsen and the legal staff there in
    Acquisition, Technology, and Logistics (AT&L).
        Senator McCain. Mr. Secretary, on the stable funding issue,
    again, what is your response to Mr. Walker's statement?
        Secretary Wynne. Sir, I have already committed, and intend
    to follow through on submitting enough money to avoid a
    cancellation ceiling over the course of this contract. I
    believe that is the requirement. I will, at the end, prior to
    the multiyear, offer that as part of the fiscal year 2008 POM.
        Senator McCain. We continue to tout the $225 million
    savings, but isn't it true that cancellation liability for this
    program is $201 million for the first year?
        Secretary Wynne. Only for the first year, sir. We have
    already committed to buy, fully, 56. Mr. Walker has brought up
    the other four, which were necessary to fill out seven
    squadrons, which gave us the total military utility and the
    right command structure to really integrate this into the
    warfight around the world. I think it was a necessary add. I
    would subscribe that there was a military need for it.
        Senator McCain. So, you obtained a waiver that allows you
    not to fund the cancellation liability.
        Secretary Wynne. We have, in fact, as many programs do,
    obtained a waiver for that cancellation, which is, if there is
    not a military need for the weapons system, it would be
    questionable and risky, but, since there is, and it's proven,
    and it's a proven commodity that will add to our system,
    because it's a bridge over to the JSF and it's clear that we do
    not want to leave America without a fifth-generation fighter
    line, I believe, sir, that that risk is minimal.
        Senator McCain. What do you do in order to get a waiver?
    What's the process?
        Secretary Wynne. You request, of the AT&L, and AT&L advises
    the Office of Management and Budget (OMB). OMB assesses the
    risk based on the inputs from the military departments, as well
    as from the AT&L folks, and makes the determination.
        Senator McCain. Are you confident there will be no
    additional cost overruns associated with this system?
        Secretary Wynne. What I am confident of, sir, is that we
    are entering into a firm fixed-price contract for this
    multiyear, and, under the terms of a firm fixed-price contract,
    all cost growth is associated with the contractor. I am very
    confident, because we've reduced the cost of the F-22 by 35
    percent from Lot 1 to Lot 5. We see that we continue to have
    good progress on the total cost recognized by the contractor
    and the Government on Lot 6. We believe we have a very firm
    handle on what savings we can get out of Lots 7, 8, and 9, and
    the contractor agrees.
        Senator McCain. So, you're answer is you are confident
    there will be no additional cost overruns.
        Secretary Wynne. I am, to date, sir.
        Senator McCain. That's not a very comforting answer, to be
    confident ``to date.''
        Mr. Walker, it's my understanding the Air Force has
    provided Lockheed Martin with 89.5 percent of the award fee for
    the F-22 engineering, manufacturing, development phase, or
    about $838 million. What's your reaction to that, Mr. Walker?
        Mr. Walker. Mr. Chairman, one of the problems that exists
    with regard to the acquisition system in the DOD is that we are
    paying billions of dollars in incentive and award fees in
    circumstances where there are significant cost overruns and
    significant schedule delays. This is just one example of a
    systemic problem.
        Evidently, we have a difficult time in government defining
    performance. It means positive outcomes. Effort is important,
    attitude is important, but outcome is what it's all about.
        Senator McCain. Senator Nelson?
        Secretary Wynne. Sir, if I could break in and correct the
    record, it's the OSD Comptroller that actually approves the--in
    consultation with OMB and the rest of the secretariat. I
    apologize for missing that.
        Senator McCain. Thank you, Mr. Secretary.
        Senator Nelson.
        Senator Bill Nelson. Thank you, Mr. Chairman.
        Mr. Chairman, I know both of these men personally. They are
    good men. I've known their families, and they are good
    families. We have two diametrically opposed positions here that
    we need to sort out.
        Now, it seems to me that the essential question is that if
    this outside committee came up with the idea that you can save
    something like $225 million over this multiyear contract, how
    can they determine, and how can you, Mr. Secretary, determine
    that if you don't have a price that you've already determined
    for the airplane in this 2006 contract for the F-22
    procurement?
        Secretary Wynne. The way you do that, Senator, is that you
    actually construct two budgets, and you almost have two
    negotiations with the contractor. The contractor does not know
    which you're going to enter into until the multiyear savings
    are, in fact, achievable, based on predictions and projections.
        You are right about one thing, it is all an estimate. Even
    the models, as validated by some really smart people, are all
    estimates. Because the proof of the pudding is in, actually,
    the settlement of the negotiations. So, the way you do this is
    you actually construct two proposals and you suggest two
    outcomes, and you must then compare those two outcomes prior to
    entry into a multiyear. That's the way you secure yourself, if
    you will, in some reasonable expectation of achieving your
    goal.
        Senator Bill Nelson. Mr. Walker?
        Mr. Walker. It is based on an estimate. As I said before,
    the primary support for entering into a multiyear contract, as
    it relates to substantial savings, was this IDA study and, if
    the assertions are true in the article this morning, that study
    cannot be viewed as independent and should not be relied upon.
        Candidly, I have tremendous respect for Secretary Wynne,
    tremendous respect for all my colleagues here on the panel. But
    there are a couple of very fundamental differences. Number one,
    I'm independent of the Air Force and the DOD. Number two, I'm
    looking at a broader perspective of DOD overall and the United
    States budget overall. Those are two fundamental differences.
    Reasonable people can, and will, differ.
        I think part of the problem here is, there's a difference
    between what people want and what we need and what we can
    afford and what we can sustain. As the chairman said before, we
    only have so much money. The question is, what are we going to
    spend it on? Is it going to be true needs, or is it going to be
    wants?
        Senator Bill Nelson. Mr. Secretary, we would not have to do
    as much estimating if we knew about the 2006 aircraft cost. In
    most programs the contract would have been signed sometime
    during the middle of the fiscal year, not during the last
    quarter of the fiscal year. Isn't that the case?
        [The information referred to follows:]

        Most contracts are awarded during the first and second quarters of
    a new fiscal year. The fact that Lot 6 is scheduled to award in
    September 2006, however, is unavoidable. Due to unique circumstances
    during the previous Lot 5 negotiations, the Air Force awarded the
    contract several months late, on November 1, 2005. This delayed the
    start of Lot 6 negotiations. Both the contractor and the Air Force made
    changes to the process to accelerate Lot 6 negotiations. As such, Lot 6
    negotiations are currently on schedule and are expected to conclude by
    September 30, 2006.

        Secretary Wynne. Sir, I'd like to start this process by
    defending a really fine American, a former admiral, Dennis
    Blair.
        Senator Bill Nelson. Okay, and let's get to that in a
    minute.
        Secretary Wynne. I'd like to make sure, sir, that we all
    know that I googled up, this morning, all of the relevant facts
    in the article that Mr. Walker is referring to.
        Senator Bill Nelson. I didn't ask you that question.
        Secretary Wynne. Sir, I believe that all of it is a part of
    the public record, with the exception of those that have been
    talked to by Senator Inhofe, which were, in fact, false. The
    Air Force did not rely on the IDA report to make a commitment
    to enter this multiyear. The Air Force does rely on the
    intelligence of the people within IDA to do it. EDO is a fine
    supplier to every military service--Air Force, Navy, Marines,
    and Army--as well as international. They are about $655 million
    worth of sales.
        I would agree with Mr. Walker on one point, and that is
    that the absence of a conflict-of-interest rule is interesting,
    and maybe there should be some generic thing. But I would say
    that to impugn the study and to impugn this great American is
    wrong. To say that we can't rely on it means that we are
    fearful of the outcome of the analysis.
        Now to your question----
        Senator Bill Nelson. No, now let me just stop you.
    Obviously, you feel very strongly about that. I want to get
    into that, and I did not stop you, but that wasn't my question.
    My question had nothing to do with this IDA study. My question
    is, isn't it normal that you go about, in a contract, in most
    programs, that would have been signed sometime during the
    middle of the fiscal year, not until the end of the fiscal
    year?
        Secretary Wynne. Actually, we're very proud of them. I
    think they will, in fact, finish by the end of this fiscal
    year, and there is no rush by a Government agent who thinks
    that he is not getting the best deal for the Government. We try
    very hard not to put any pressure on the contract's
    representative. However, I can tell you, the current status is
    they are less than 1 percent apart in their offers and
    counteroffers. They feel like they will drive a settlement
    within 30 days, and it will, in fact, be closed up before the
    end of the fiscal year--something that didn't happen, by the
    way, early on.
        I would say that, to your point about: Would you like more
    facts? Yes, sir, I would like more facts. In fact, I will have
    those facts available to me when I negotiate finally, the
    multiyear contract. That's the real nut--having those facts
    available to you as you enter that negotiation.
        Senator Bill Nelson. Mr. Secretary, you're my friend.
    That's not the question I asked you. I asked you----
        Senator McCain. Mr. Secretary, could I caution you that
    we're having difficulty getting direct answers from you, sir,
    and the time of all the members is valuable, as is yours. So, I
    would caution you again to try to give a direct answer to the
    questions posed by the members. It would be very helpful to us.
        Secretary Wynne. Thank you, sir.
        Senator McCain. Thank you.
        Senator Bill Nelson. Mr. Secretary, I asked you a very
    direct, simple question that doesn't have anything to do on
    your two lengthy previous answers. The question is, in most of
    the programs, the contract would have been signed sometime
    during the middle of the fiscal year, not toward the end of the
    fiscal year, is that correct?
        Secretary Wynne. Sir, I cannot certify to that. I don't
    know.
        Senator Bill Nelson. You see, we are in the situation of
    trying to judge between two good men with diametrically opposed
    positions. We are trying to judge on what is the right,
    accurate figure and how can you determine the cost for a
    multiyear procurement if you don't know what the cost is in the
    existing current year? Can you help us?
        Secretary Wynne. The estimates actually--and the schedule
    adherence that Lockheed Martin has done through Lots 1 through
    5, in fact, closing in on Lot 5, gives me pretty good
    confidence that I could probably predict the cost of Lot 6. So,
    sir, could your staff, who are analysts, and I think they
    could, in fact, offer some appreciation for what the costs are
    going to be.
        Of course, the difficulty is really what is the cost of a
    multiyear, relative to the cost of an annual buy and where do
    you achieve that? That's where I would say most of the larger
    cost savings that are attributed to multiyear buys are for 4 or
    5 years, and most of the savings are, in fact, achieved in the
    4th or 5th year. Having only 3 years to do a multiyear is, in
    fact, somewhat constraining, because you just can't introduce
    the manufacturing and get the quantity buy that you could buy
    otherwise.
        So, I agree with your point that it is a very difficult
    thing working from estimates, but that's, many times, the way
    it works.
        Senator Bill Nelson. I just come to the table asking the
    common sense country-boy question, how does this outside group
    estimate savings if we don't know what the price is, because
    there hasn't been an agreement on price in this particular
    year?
        Let me ask you, Secretary Finley, I understand that the
    contractor was able to achieve--oh, you've already asked that,
    Mr. Chairman, about the incentive fee.
        Secretary Wynne, during operational testing, the testing
    community identified a number of deficiencies in operational
    suitability. I note, in your prepared statement, that the F-22
    was able to achieve a departure reliability, during a recent
    exercise, of 97 percent--in other words, flying 102 of 105
    sorties. Is that a good measure of how hard the ground crews
    had to work to keep the aircraft flying this high-intensity
    operating period?
        Secretary Wynne. Sir, I have the greatest respect for the
    Air Force maintainers who are working on this and all of our
    other fighter aircraft. I would tell you that I asked, in
    IOT&E, that they treat the maintainers as customers, and that
    they write up every deficiency as a maintenance corrective
    action. In fact, I think we have benefited from the maintainers
    feeling like customers. In fact, even today I read in the Air
    Force Times some letters from some maintainers who were
    appreciative of the ease of maintenance on the F-22. I don't
    think we've achieved what we can achieve on that program yet
    and I know that we have worked very hard to make sure that the
    suitability rating that we get is on a constantly improving
    rate.
        Senator Bill Nelson. What effect do you think entering in a
    multiyear contract for the remaining F-22 aircraft is going to
    have on your ability to correct these operational suitability
    deficiencies?
        Secretary Wynne. Many of the changes that we've put in are,
    in fact, to redo the technical manuals, redo the support
    equipment, and make sure the diagnostic test equipment is okay.
    I would say stabilizing the design, which is one of the
    requirements of a multiyear, really will assist my maintenance
    people in coming to closure with what they can do on that
    airplane.
        Senator Bill Nelson. Mr. Secretary, Congress has used
    incremental funding in certain cases to buy large capital
    ships. I don't think we've used this approach to buy aircraft.
    All four of the congressional defense committees have spoken on
    this matter, and they've rejected this incremental funding,
    even though, when it went, as I said earlier, before the full
    Senate, the Senate adopted Senator Chambliss's amendment. Does
    having full funding for the F-22 in fiscal year 2007 change
    anything about the way in which you would propose to structure
    a multiyear contract for the F-22?
        Secretary Wynne. No, sir, it actually would not. The second
    buy was as if you were doing a piece-part buy. I think it would
    make it more complex for the contracting officer as time went
    on, to schedule these two advance procurements that would
    result from split funding. I would tell you that entering into
    a multiyear on a preferred basis that has been restored by both
    the Senate and the House is a much more worthwhile enterprise.
    The complexity of the contract would be the issue.
        Senator McCain. Senator Nelson, thank you.
        I note the presence of the distinguished chairman of the
    full committee. I wonder if he has any comments or questions he
    would like to make at this time.
        Senator Warner. I intend to join you. First, I commend you,
    Senator McCain. You have my full support in conducting this
    hearing. It's an important one--important from a number of
    standpoints. I've been on this committee 28 years, and I cannot
    recall when a decision of this import was carefully reviewed by
    a subcommittee and then endorsed by the full committee, and
    then to encounter, on the floor consideration of the bill, a
    reversal as a consequence of an extraordinary lobby campaign,
    which, frankly, I was just unaware of. That's history.
        But we're also faced with an ever-changing world and an
    ever-changing set of parameters by which each year we try and
    make determinations in regard to priorities within our budget,
    and the effect of this measure now, we'd just put a lockdown
    for a number of years on the Department of the Air Force in a
    certain category of its spending; thereby, perhaps, precluding
    some options to solve serious problems in other platforms, such
    as your tankers, your 130s. I just think it's not going to work
    in the best interest of the Department.
        Further, this committee and this country is solidly behind
    the JSF and somehow I feel that the impact of this decision
    could, in some ways, affect that very valuable program.
        I suppose the Air Force --as a participant in JSF, still
    represents its support, but there are certain signs that cause
    me an uneasiness. We have to go ahead with that program,
    subject to technical solutions that have to be achieved. We've
    made a bold decision to keep the two engines, which I think was
    a correct one. Certainly since the time that two-engine
    decision was made here in the committee room, certain tests and
    evaluation of both models have indicated there's considerable
    uncertainty in those two engines.
        I just mention that because this question cannot be looked
    in isolation from other factors, such as the other programs of
    the Air Force and its planes, JSF, and other considerations.
        So, Mr. Chairman, I hope we gain a perspective from this
    hearing that we can take to Congress.
        Senator McCain. Thank you very much.
        Senator Inhofe.
        Senator Inhofe. Okay, Mr. Chairman, thank you very much.
        Mr. Chairman, on the floor at this moment we have Jerome
    Holmes, who's the President's nominee for the Tenth Circuit. He
    was my recommendation to the President, and so I have to get
    any shot I have done right here. I won't be around for another
    round of questions. By the way, it's going to be one of the
    better nominees that we've had a chance to consider.
        I think we're veering away from the question--the questions
    that really need to be answered. There were six criteria,
    initially. I studied those six criteria, and I commend you, Mr.
    Walker, it's my understanding that we're down now to the three
    that would be--and correct me if I'm wrong--substantial
    savings, stability of funding, and stability of requirement.
    First of all, on the substantial savings, some time ago, they
    said, ``If you go to multiyear, it should be something in the
    neighborhood of 10 percent.'' However, I applaud the witnesses,
    and also those of us at the table, for not bringing that up
    now, because that was only 1 year, some 15 years ago. But then
    the press, and the very irresponsible press, like the
    Washington Post this morning, I'm sure will bring that up in
    the future.
        So, we have the substantial savings, in terms of
    definition. What is it, in our minds, that we consider to be
    substantial? I really believe that there are two of the six
    criteria that should not be up to either an outside panel or
    even the Secretaries, because that's what we are elected to do.
    Those two criteria are national security, which is not on the
    table now, so we won't talk about that. In my opening
    statement, I already talked about the pride I had in General
    Jumper in bringing up the fact that we had this great need in
    our strike fighting arsenal. The other one is substantial
    savings, because we're the ones who are answerable to the
    taxpayers. I've looked at this and I believe that this is
    something that is substantial, and I feel strongly about it.
        But I'd only ask you, Secretary Finley, do you think the
    estimated IDA cost savings are realistic? Do you think there's
    ability to save even more than the $225 million? Now, I've
    heard $225 million, then $230, $250, and up to $325 million. I
    have a great respect for your background, Secretary Finley, and
    would like to have your comments as to how optimistic you feel
    about these savings, and anything upward from this.
        Mr. Finley. Thank you, Senator Inhofe.
        I believe the numbers are achievable. I believe the numbers
    are estimates. I believe we have a starting point from which to
    only improve. I've discussed with the Air Force to use the $225
    million as a starting point. One, let's be sure we have a $225
    million that is achievable, and we'd build from that. As we
    have discussed here this morning, the $225 million is an
    estimate. We do not have definitized contracts, so you do not
    have a basis from which to start. But, as an estimate, I
    believe the numbers are realistic.
        Senator Inhofe. Maybe conservative?
        Mr. Finley. Conservative, I have read the IDA report. I
    have found areas in the IDA report where I feel there are
    opportunities for improvement. I believe the decision to use
    IDA on this report goes back to the congressional direction to
    use the Federally Funded Research and Development Center
    (FFRDC) IDA as the independent cost analyst on the F-22, back
    in 2005. I believe the use of IDA at this stage was also very
    instrumental on the basis of their performance in the
    independent cost estimate on the F-22 back in 2005.
        In previous discussions on the Hill in preparing for this
    hearing, it was requested of me to talk to the Cost Analysis
    Improvement Group (CAIG) at DOD. I did that. I talked to them
    directly as to where was the CAIG on this process of doing an
    independent cost estimate. The answer to that was that
    typically the CAIG does not do cost reviews beyond milestone C.
    They are focused and they have their plate full of issues and
    areas to investigate that are pre-milestone C, if not milestone
    C.
        But they related to me their utmost confidence that IDA
    was, in fact, the right FFRDC to go use. They had the right
    people, with the modeling that was used for the previous
    independent cost estimate. They updated that cost estimate for
    this particular round in the business case analysis, based on
    the actuals, based on the inputs from the contractor, to
    reflect pricing.
        Senator Inhofe. Yes, Secretary Finley, and I appreciate
    that very much. There's one other thing. You've made a
    statement to get the exact wording in your written statement.
    Apparently it wasn't there. When you said, ``We've saved $5
    billion over the last 7 years by using multiyear contracts,''
    is that what you said?
        Mr. Finley. Yes, sir.
        Senator Inhofe. Would you like to elaborate on that at all?
        Mr. Finley. I think there have been numbers of programs
    that have used multiyear procurement, going back to the F-16,
    going back to the F-15. I might be wrong on the F-15. I
    apologize for that. But I do believe the F-16 had multiyear
    procurement on it. So, my staff organized for me the number on
    that and the details on that. I can certainly take the question
    for the record, and I can get back to you.
        [The information referred to follows:]

        Over the last 7 years, the Department of Defense has saved
    approximately $7 billion. The multiyear procurement programs which
    resulted in $7 billion savings are shown in the table below:
    Multiyear Contract Programs
        Apache Airframe MYP I & II
        Apache Aircraft Block II
        Black Hawk/Sea Hawk--Airframe MYP I & II
        Javelin
        Longbow Hellfire
        LW 155 Howitzer
        Family of Medium Tactical Vehicles (FMTV)
        A1 MYP I& II
        M1 Tank MYP I & II
        F/A-18E/F Airframe MYP I & II
        F/A-18E/F Engine
        E-2C Airframe/Engine MYP I & II
        DDG-51 MYP I & II
        Virginia Class Submarine
        Tactical Tomahawk
        Common Cockpit
        C-17 Airframe MYP I & II
        C-17 Engines MYP I & II
        C130J/KC130J Airframe

        Senator Inhofe. Okay, that's fine. That's fine. I have
    heard the same thing, and I agree. I just was glad you said
    that. It was not in your written statement.
        Now, in stability of requirement or, more specifically,
    would you say, does the minimum need for F-22s remain
    substantially unchanged during the contract period, in terms of
    production and total qualities? Mr. Walker accurately points
    out that the number of F-22s has continually decreased since we
    first planned on procuring 750 in 1986. 1986 happened to be the
    first year that I was serving over in the House side at that
    time, and I remember this program first being talked about at
    that time. Then we had the C-17, we had the B-1, and the B-2.
    I've never found a program that wasn't decreased. I think you
    start off with what is almost a wish-list level, and then when
    you see the complexities, the problems, and the competition for
    other platforms, it drops down. So, I've seen the same thing
    that we're looking at today in the F-22 in all the other
    systems. I think right now, in retrospect, if we look back at
    the C-17s, one of the higher figures would have served us much
    better, Mr. Chairman, than the number of C-17s we have today,
    because we could not have anticipated the needs that we have.
        Now, the Air Force still has an official requirement of
    381. Both the QDR and the Joint Air-Dominance Study support the
    absolute minimum need of 183. The independent Whitney, Bradley
    & Brown study recently performed also substantiates a minimum
    of 183, and in some scenarios recommends 240.
        Secretary Wynne and Secretary Finley, in turn, ask this
    panel; do you think the proposed F-22 multiyear meets the
    stability of requirements set forth by title 10 specifically?
    That's one of the three that's in question.
        Secretary Wynne. Yes, sir, I do. It is absolutely necessary
    to fill out 7 squadrons, even at the reduced rate of 18 per
    squadron, which is the minimum we would ever like to see. It
    does, therefore, afford us, the management team, and the
    warfighting team access to ranges across America, and will
    become a deployable force as a result.
        I think, as I mentioned in my testimony, we would have
    loved to consider any additional units, but that appetite was
    told to be suppressed. We then argued for stretching this
    program so that we had an active fifth-generation fighter line
    available to you and to the President in case of uncertain
    futures, because we wanted to make sure we had a fifth-
    generation fighter line for when another fifth-generation
    fighter line came on, I can certify to you, sir, 183 is our
    absolute minimum.
        Senator Inhofe. I see. Secretary Finley, any comments?
        Mr. Finley. In terms of requirement stability, I've looked
    at this from the standpoint of--we are under a fixed price, in
    terms of production. We've had good solid years of production
    performance on this aircraft. In fact, they've had a recovery
    back to the contract schedule here, it's my understanding, in
    the last several months. There is a modernization element to
    the program, which I believe it is excellent for any major
    program like this to have a modernization element to it. My
    information has indicated that there may be concerns about the
    next generation of radar that would be integrated into the F-
    22. I have a fair amount of radar background. Clearly, the
    engineering integration of these systems, in this complexity,
    certainly has risk. But the management of that risk--my notes
    indicate that on the F-15, for example, we've done four
    advanced radar integrations; on the F-16, we've done five
    advanced radar integrations; on the F-18, we're doing another
    new advanced radar integration; and I believe in the case of
    the F-22, the advanced radar integration will essentially be
    completed prior to the start of this multiyear procurement.
        Senator Inhofe. All right, Secretary Finley, thank you.
        The final one is stable funding. The Government
    Accountability Office (GAO) states that the Air Force is
    currently underfunding this proposed 20-20-20 multiyear by $674
    million. So, I'd ask you, Secretary Wynne, can you explain the
    shortfall, and anything further that you haven't already said,
    and whether this still exists under the current Air Force
    plans? Just to be sure that we're all clear on this point, can
    you confirm that the Air Force has committed to funding the F-
    22 multiyear?
        Secretary Wynne. I can start there, sir, and tell you that
    the Air Force is fully committed to funding the multiyear. I
    think the point of confusion came about as a result of the out-
    of-cycle nature of this multiyear authorization request. We
    have to correct, if you will, the FYDP, as Senator McCain
    pointed out earlier, and we are committed to do that as we
    approach a multiyear contract.
        Senator Inhofe. All right.
        Secretary Finley, I'd ask you, very specifically, is OSD
    committed to funding this F-22 multiyear at a required level to
    avoid contract cancellation?
        Mr. Finley. Yes, sir.
        Senator Inhofe. All right.
        Finally, the last thing, you made some comments--I was very
    glad you did, even though you went a little beyond the question
    that Senator Nelson had asked, Secretary Wynne, but a man's
    integrity, a man who I've heard nothing but good things about
    for a number of years, was impugned this morning on the eve of
    this hearing. I'd ask you, Secretary Finley, do you know Dennis
    Blair? Secretary Wynne's already made some comments.
        Mr. Finley. No, sir, I do not know Dennis Blair. I have met
    him on two courtesy visits, subsequent to my confirmation
    hearing, in terms of my contacts to meet FFRDC leadership.
        Senator Inhofe. All right. Secretary Wynne, is there
    anything further you want to say about this man that perhaps
    you didn't have time to say?
        Secretary Wynne. This man was a combatant commander of our
    Armed Forces. I think he's a man of utmost integrity. I would
    say that, as Mr. Walker pointed out, I think it should be taken
    up a little bit that there should be some conflict-of-interest
    regulations there. I do not think that there was any impact to
    the study, and I don't think there was any impact to the
    analysis, although you, sir, will be able to cover that in the
    second panel.
        Senator Inhofe. Yes, but I'll be dealing with our
    nomination to the Tenth Circuit during the second panel.
        Mr. Walker, do you know this gentleman?
        Mr. Walker. I may have met him. Let me be clear, I did not
    mention any names for the record, nor would I mention any names
    for the record. To me, this is not a personal issue. I have no
    reason to question Admiral Blair's integrity.
        My point is very specific. You need to have standards for
    independence.
        Senator Inhofe. Yes, I understand that. You made that clear
    in your comments.
        Mr. Walker. These don't meet them.
        Senator Inhofe. I was referring to what the Washington Post
    reporter said, not what you said.
        Mr. Walker. Right, thank you, sir.
        Senator Inhofe. Thank you, Mr. Chairman.
        Senator McCain. Senator Dayton.
        Senator Dayton. Thank you, Mr. Chairman.
        Senator McCain. I'd remind my colleagues we have a vote at
    11:45 and we have another panel to go. Thank you.
        Senator Dayton.
        Senator Dayton. Thank you, Mr. Chairman.
        Referring to that article, I've never met Admiral Blair.
    I've never heard the name until today, so I start with no view,
    one way or the other. But I will say that I have served in
    appointed and elected public office for almost 30 years now in
    various positions. I have my own financial holdings that affect
    decisions, and I have spent a lot of time on these issues,
    personally, as State auditor of Minnesota, as one of five
    members on a State Board of Investment that made decisions of
    over $30 billion of pension fund investments. So, I've spent a
    lot of time looking at these questions.
        Mr. Blair, himself, quoting the article, said he was
    heavily involved in the preparation of the report endorsing the
    multiyear procurement as the chairman of an internal review
    committee that approved its final form. It says that Admiral
    Blair holds options to buy tens of thousands of shares of EDO
    stock, which closed yesterday at $22.63 a share. That means
    every 10,000 of that stock option is worth almost $230,000.
    Take that multiple by whatever the number of the tens of
    thousands of shares.
        Secretary Wynne, were you aware of this financial holding
    of Admiral Blair, prior to reading this story this morning?
        Secretary Wynne. No, sir. I went straight to Google and
    Googled it up. I found it to be part of the public record. You
    go to EDO Corporation, and you go to board of directors, you go
    to the 10-K, it's pretty much all there. It took 5 minutes to
    find all the facts.
        Senator Dayton. If I spent my life Googling everything that
    I was not aware of after it came to light, I would never see
    the light. [Laughter.]
        Secretary Finley, were you aware, prior to this morning?
        Mr. Finley. No, sir.
        Senator Dayton. All right. I find Admiral Blair says he
    chose not to recuse himself because his link to EDO was not of
    sufficient ``scale,'' to require it. IDA has no policy on
    conflicts of interest by its officers, Blair added. ``We
    evaluate each one as it comes,'' he explains, saying that he
    makes any recusal decisions himself.
        I will say that my view is that the extent of this
    financial holding, in its dollar amount, is most certainly what
    I would say is of a scale that would obligate someone
    ethically, if not legally, to make that disclosure. Again, I go
    back, and I realize this is governed by Federal laws and
    regulations, but in Minnesota, the law is, I think, a good one,
    both legally and ethically. It's not holding a financial
    interest that presents a conflict of interest that is against
    the law; it's not disclosing it. You can't have somebody, in my
    opinion, who is representing himself or his firm as independent
    and coming to independent judgments on these issues, who has
    financial holding of that scale. I mean, it's just
    fundamentally contradictory and if it doesn't involve the
    integrity of that individual, it should, because of that
    individual's concern about both the appearance and the fact of
    that lack of independence and that conflict of interest, and
    the failure to affirmatively disclose it to decisionmakers.
        I guess I just want to be clear, Mr. Walker, that I
    understand, there is no Federal law or regulation that impinges
    upon such a requirement.
        Mr. Walker. I'm not aware of any, and I think that there
    should be some requirement. You should have clear requirements
    for both individual and institutional independence as it
    relates to studies that are referred to as independent studies.
    I think it's not just the issue of the financial interest, it's
    also the fact that the individual involved--and I don't want to
    put names on the record--the individual involved was on the
    board of directors of a subcontractor that could benefit from
    this. That, by itself, under at least auditing standards--and I
    know you were the State auditor; I'm the Comptroller General of
    the United States--is a per se independence violation.
        Senator Dayton. Mr. Walker, you said earlier in your
    testimony that this whole project and the funding of it is a
    case study in what's wrong with DOD's acquisition system. I
    guess I would like to suggest that this failure of having such
    a requirement of disclosure is integral to the problems in that
    acquisition process. Would you concur with that or not?
        Mr. Walker. I would recommend that there be some
    requirement that standards exist either to piggyback on
    generally accepted governmental auditing standards, the
    independent requirement there, or another generally accepted
    set of standards. I think that's necessary. I am sure there
    have probably been other situations that have occurred and
    others that could occur in the future if we don't deal with it.
        Senator Dayton. Would it be appropriate for GAO to make
    such specific recommendations to Congress?
        Mr. Walker. You can consider us as having made a
    recommendation, and I'll be happy to provide something for the
    record if you want more specifics.
        Senator Dayton. I would ask if you would submit, please,
    your views on what should comprise such a disclosure
    requirement.
        Mr. Walker. I will do so, Senator.
        [The information referred to follows:]

        This follows up on the discussion during the July 25 hearing on the
    F-22A multiyear procurement proposal concerning whether Federally
    Funded Research and Development Centers (FFRDCs) have the requisite
    standards of independence and proper conflict of interest safeguards
    when performing their work. Though concerns have been expressed that
    FFRDCs are not governed by conflict of interest rules, they are in fact
    governed by some requirements in this area. Specifically, the Federal
    Acquisition Regulation (FAR) states that an FFRDC ``is required to
    conduct its business in a manner befitting its special relationship
    with the Government, to operate in the public interest with objectivity
    and independence, to be free from organizational conflicts of interest,
    and to have full disclosure of its affairs to the sponsoring agency.''
    (FAR, 48 C.F.R. section 35.017(a)(2).) The Department of Defense (DOD)
    prohibits funding an FFRDC ``if a member of its board of directors or
    trustees simultaneously serves on the board of directors or trustees of
    a profit-making company under contract to DOD, unless the FFRDC has a
    DOD-approved conflict of interest policy for its members.'' (Defense
    FAR Supplement, 48 C.F.R. section 235.017(a)(2).) If there is a need
    for additional guidance regarding the requirement in the FAR and
    Defense Federal Acquisition Regulations Supplement that FFRDCs operate
    with objectivity and independence, it might be useful to consider the
    Generally Accepted Government Auditing Standards applicable to auditors
    and audit organizations which requires them to ``maintain independence
    so that opinions, conclusions, judgments, and recommendations will be
    impartial and will be viewed as impartial by knowledgeable third
    parties. Auditors should avoid situations that could lead reasonable
    third parties with knowledge of the relevant facts and circumstances to
    conclude that the auditors are not able to maintain independence and,
    thus, are not capable of exercising objective and impartial judgment on
    all issues associated with conducting and reporting on the work.''
    (GAO-03-673G Government Auditing Standards, paragraph 3.04).

        Senator Dayton. With due respect, Secretary Wynne, your
    comment that the absence of a conflict-of-interest requirement
    is interesting, I will say my own view is the absence of a
    conflict-of-interest requirement is appalling. I would urge
    both of you, in your respective capacities, also to look at
    what should be a requirement of every contractor and every
    individual to meet the kind of standard that gives the American
    taxpayer confidence that these dollars are being spent wisely
    in the public interest and not for any self-interest.
        I have more questions, Mr. Chairman, but I realize that
    we're short of time. I'll pass until later.
        Senator McCain. Secretary Wynne, did you want to say
    something else?
        Secretary Wynne. I just wanted to say that the Senator is
    exactly right. I was surprised, myself, because, for all that
    we have been through, for all that Senator McCain drew out of
    our entire system, it was surprising to me.
        Senator Warner. I would just simply say as one who's been
    an observer of these issues and conflicts all the way from my
    time in the Pentagon to this moment, this is extremely serious.
    I've had the privilege of knowing Admiral Blair through the
    years, particularly when he was a senior officer in the Navy.
    I've met him subsequently. I mean, persons who have had the
    opportunities that he has been given by our country to rise to
    four-star rank and have the responsibilities that he did, you
    just assume that intuitively they have their own set of moral
    standards. This is extremely disturbing. I really think it
    taints the validity of the entire report, such that the report
    no longer can be considered as an argument for the proponents
    of this multiyear.
        Senator McCain. Senator Chambliss.
        Senator Chambliss. Thank you, Mr. Chairman.
        Secretary Wynne, the statute for a multiyear has six
    different requirements. In your letter to both the authorizing
    and the appropriations committees dated May 16, 2006, you
    outlined the significance of all six, and the justification of
    all six. Is that correct?
        Secretary Wynne. Yes, sir.
        Senator Chambliss. Do you still stand by the contents of
    that letter and the justification for the multiyear?
        Secretary Wynne. Yes, sir, I do.
        Senator Chambliss. There was also a follow-up letter
    dated--I just noticed it doesn't have a date on it, but it's in
    response to Senator McCain's letter dated July 7, 2006, so I
    assume it was within a day or two after that--from Kenneth J.
    Krieg to Senator McCain, again referencing your letter as the
    justification for complying with the six steps. Are you
    familiar with that letter? Would you agree that the contents of
    that letter are correct?
        Secretary Wynne. I'm less familiar with that letter, but I
    do agree that the contents of the letter sound correct.
        Senator Chambliss. Okay. Following your letter dated May
    16, 2006, did Mr. Walker or anybody from GAO ever call you and
    say, ``Hey, Mr. Secretary, I've seen your letter. We have some
    problems with what you're saying there''? Did anybody from GAO
    ever talk to you about this?
        Secretary Wynne. No, sir.
        Senator Chambliss. Okay.
        Mr. Chairman, I'd like to ask unanimous consent to enter
    those two letters in the record, please.
        Senator McCain. Without objection.
        [The information referred to follows:]

        Senator Chambliss. Mr. Secretary, again, Senator McCain
    asked you about the FYDP. I believe this multiyear contract was
    included in the 2007 FYDP, as well as the 2007 POM, is that not
    correct?
        Secretary Wynne. What I recall, sir, is it was definitely
    in the 2007 POM. I just don't remember if we adjusted the FYDP.
        Senator Chambliss. Okay.
        Mr. Walker, you have raised, as one of your questions here
    today, the fact that the termination costs of the multiyear
    contract are not budgeted in the current budget, is that
    correct?
        Mr. Walker. That's correct, as well as that they represent
    a risk that one has to consider.
        Senator Chambliss. What is the purpose of a multiyear
    contract?
        Mr. Walker. Part of the purpose of a multiyear contract is
    to save money, as compared to otherwise being able to purchase
    on annual increments.
        Senator Chambliss. Do you expect both parties to live up to
    that contract when you sign it?
        Mr. Walker. If it's a firm fixed-price contract,
    absolutely, we do.
        Senator Chambliss. That's what this is supposed to be, is
    that not right?
        Mr. Walker. That's correct, although, as has been noted for
    the record, it's based upon estimates because negotiations
    haven't taken place.
        Senator Chambliss. Why would you fund the fact that we're
    going to break this contract in a budget where you are entering
    into a contract to save money? Why does that make sense, or is
    that a quirk that the Government has, once again?
        Mr. Walker. Because the history has shown that the Pentagon
    wants way more than it can afford, and that we have, from time
    to time, had to change our mind when the budget crunch hits.
    There are many differences between wants, needs, affordability,
    and sustainability, not just within the Air Force budget but
    also within the Pentagon budget.
        Senator Chambliss. Have all of those instances that you
    have referenced been funded in the budget at the time the
    multiyear was entered into?
        Mr. Walker. Senator, I'd have to check. I can't answer but
    I will check and provide something for the record.
        [The information referred to follows:]

        Not all programs with multiyear procurement (MYP) contracts fund
    termination costs in the budget. Defense Federal Acquisition
    Regulations Supplement MYP regulations state that if an MYP has
    estimated cancellation costs of more than $100 million and is not going
    to fund those costs in the budget, the head of the agency must report
    to Congress: (1) planned cancellation ceiling amounts; (2) the extent
    to which these amounts are not funded in the budget; and (3) an
    assessment of the financial risk associated without funding these
    costs. Three of the MYP contracts referenced in the Institute for
    Defense Analysis study included cancellation ceiling clauses and
    estimated termination costs. At least one of those, the F-18 MYP, fully
    funded all of its cancellation costs. Historically, we found programs
    that funded these costs and some that did not. The M1 tank program is
    an example of a major weapon acquisition which did not fund
    cancellation costs during MYP. On the other hand, the Blackhawk
    helicopter and the Maverick missile acquisitions both fully funded the
    liability.

        Senator Chambliss. All right. I'd venture to say none of
    them have.
        Let's look at your letter of June 20, which was about a
    month after the letter that I asked Secretary Wynne about that
    went to the authorizing and appropriations committees where he
    detailed the requirements of the multiyear and the
    substantiation of those requirements. In fact, you reference
    that letter in your letter, I believe. Were you familiar with
    that letter before you sent your letter of June 20, 2006?
        Mr. Walker. Do you mean Secretary Wynne's letter? Is that
    what you mean, sir?
        Senator Chambliss. No, I'm talking about your letter to
    Bill Young dated June 20. Were you familiar with Secretary
    Wynne's letter dated May 16?
        Mr. Walker. My staff was. They brought it to my attention.
        Senator Chambliss. Why did you not call the Secretary's
    office and say, ``We have some problems with this, and let's
    discuss this. Give me further substantiation for the issues
    that we think are still outstanding''?
        Mr. Walker. Several things, Senator. First, we work for
    Congress, not for the executive branch. Second, if I made a
    call every time something came out of the Pentagon or anyplace
    else in Government where we have a disagreement, I'd be on the
    phone 100 percent of the time.
        Senator Chambliss. Yes. Senator McCain and I agree that we
    have a flawed procurement system, but we also have a flawed
    internal system. There's no reason for you not being able to do
    that. If you're going to be responsible to Congress, you should
    do that.
        Mr. Walker. Senator, with all due respect, there's no
    question that the Pentagon and the Air Force understands that
    we've had a longstanding concern with regard to the F-22A. This
    is not news.
        Senator Chambliss. Well, we've never been to this point
    before, have we? We've never been to the point of a multiyear
    before.
        Mr. Walker. That's correct, Senator, not to my knowledge.
        Senator Chambliss. Now, let's take your letter dated June
    20. You cite three issues in that letter. The first issue is
    savings. In there you say that, instead of saving $225 million,
    or about 2.7 percent, this contract is actually going to cost
    the taxpayer money. Now, in the trial of a lawsuit, what we do
    when we secure an opinion is we have the expert base that
    opinion on facts in evidence. Now, the facts in evidence here,
    Mr. Walker, are that originally we were going to buy 27
    airplanes in this fiscal year, is that correct? Excuse me, the
    next fiscal year, the first year of this multiyear.
        Mr. Walker. I believe that's correct, Senator.
        Senator Chambliss. All right. Now, sometime back the latter
    part of last year, before the President's budget was submitted
    in January--I don't know the exact date, but let's assume it
    was December 2005--a decision was made by the Air Force and by
    the President to request a multiyear of 20 airplanes for each
    of the next 3 years and extend this program out for 3 years.
    Would you agree with that?
        Mr. Walker. It was part of the budget request, the most
    recent budget request, I believe, if I'm not mistaken.
        Senator Chambliss. The budget request that was submitted to
    the Hill in January 2006. Isn't that right, Mr. Walker?
        Mr. Walker. I don't know the exact date that it was
    submitted, but my understanding was it was the 2007 budget
    request.
        Senator Chambliss. Okay. Well, the law says it has to be
    submitted in January, so we'll take that as one fact. In that
    budget, there was a requirement that we have 20 airplanes
    rather than 29 airplanes in the 2007 budget. That fact was
    again substantiated and approved by both authorizing committees
    in the House and the Senate and ultimately, at about the time
    of your letter of June 20, by the Appropriations Committee on
    the House side. I don't know the exact date of that
    appropriation, but certainly before your follow-up letter of
    July 6, where you again reference the same issue of this
    multiyear costing the taxpayer money. What you did, Mr. Walker,
    was, you said that there is a savings issue based upon facts
    that are not in evidence, because your question regarding
    savings relates to a prior decision to request 29 airplanes in
    a fiscal year when everybody in the world had already requested
    and approved 20 airplanes in that fiscal year, is that not
    correct?
        Mr. Walker. I don't recall when they approved it. I stand
    by what I said, Senator. I said that--and the numbers are
    clear, and they're factbased--the fiscal year 2006 budget
    versus what's on the table now, which includes multiyear, but
    not solely multiyear; it also includes adding four aircraft and
    extending things out at least 2 years. This is $1.7 billion
    more than last year. Just look at the multiyear; it's an
    estimated savings of $225 million without considering
    termination charges, without considering any other risk. I
    stand by that. That's factbased.
        Senator Chambliss. Mr. Walker, you've spent a lot of time
    here today talking about budget savings and budget crunches and
    why we can't afford this and why we can't afford that. Did you
    ever think about the fact that we may not have been able to
    afford 29 airplanes this year?
        Mr. Walker. We have been saying for years, Senator, that
    the difference between wants, needs, affordability, and
    sustainability is great, and it's greater today than it was a
    year ago.
        Senator Chambliss. Mr. Walker, I would just say I'm a
    little bit embarrassed that, as a representative of the
    Government, you would come in here and say that there are not
    savings to the taxpayer in this multiyear contract, there are
    actually costs to the taxpayer in this contract because we are
    now buying 20 airplanes, as the President requested, as this
    committee approved, and as the House Armed Services Committee
    approved. I mean, that's just based on facts that are not in
    evidence, and it truly is embarrassing.
        Mr. Walker. Senator, we're saving an estimated $225
    million, which I've said for the record, if the estimates are
    correct, without considering termination charges, without
    considering the other risk associated with entering into a
    multiyear. So, if you look at the multiyear, standing alone, I
    stand by what I said.
        Senator Chambliss. Second, let's look at your issue
    relative to funding. You talk about the fact that this airplane
    is underfunded by $674 million. There was an issue relative to
    incremental funding. That was originally proposed. It was
    rejected. You've already talked about that. Everybody agrees
    with that. We have incrementally funded ships, but we've never
    incrementally funded an aircraft. A decision was made by this
    committee, as well as by the House Armed Services Committee, in
    the authorizing process, not to have incremental funding. That
    was approved in advance by both committees, in advance of your
    letter dated June 20, 2006, and yet you still talked about
    incremental funding in your letter of June 20, 2006. Why do you
    do that?
        Mr. Walker. Senator, it was an issue that we had raised
    before. If it had already been settled, then I wouldn't have
    included it, had I known that at the time.
        Senator, there's a very fluid environment up here, there
    are many things that happen that are in public view, and there
    are many things that happen that aren't in public view, and I
    can't be aware of everything.
        Senator Chambliss. Did anybody on your staff check the mark
    coming out of Senator McCain's committee to see whether or not
    incremental funding was included for this aircraft?
        Mr. Walker. They may have, Senator, but they didn't bring
    it my attention, if they did.
        Senator Chambliss. Third issue you raise is design
    stability. We've already had testimony here today--Senator
    Nelson asked the question to Secretary Wynne--about the most
    recent exercise that was done, where this plane has a 97-
    percent rating. Granted, it's had design problems from day one
    because of the sophistication of the aircraft, but now it's
    flying at a 97-percent rate. You don't mention any particular
    design stability issues in here, other than there have been
    problems in the past, and, therefore, under your rationale
    here, we would never satisfy design stability. Certainly, 97
    percent ought to, but the way I read this, you would never have
    design stability.
        Let me just ask you about stability in other programs, like
    the F/A-18. Would you not admit that, even though we had a
    multiyear on that, that there were actual design stability
    problems with the F/A-18?
        Mr. Walker. There were issues there and, by the way,
    Senator, I did not mention design stability today. I mean,
    there's no question that with regard to the base design, we
    have stability. There's no question. The only issue that you
    might have, and I didn't raise it today, was, it originally was
    an F-22, now it's an F-22A, and obviously there are issues with
    regard to ground attack. But I don't think that's relevant to
    the multiyear that we're talking about today.
        Senator Chambliss. All right, let's talk about significant
    savings. $225 million is the estimated savings, and that has
    not been refuted here today. Mr. Finley and Secretary Wynne
    have told you how they have calculated that. Do you have any
    problems with how that has been calculated, or is that a fair
    estimate, in your opinion?
        Mr. Walker. I have concerns about the IDA study, for the
    reasons that I said before and, to the extent that this is
    based upon that study, I have concerns.
        Here's my concern about substantial savings, Senator. $225
    million, in absolute terms, is a lot of money. But I do not
    believe you should just look at it in absolute terms. I think
    you also should look at it in relative terms, and I think you
    also need to look at it with regard to the risk associated with
    that $225 million. I've already heard that people are now
    making an argument for a similar action for the V-22, and the
    basis they're giving for substantial savings is because their
    estimate is more than the F-22 savings. We need to have some
    standards, I would respectfully suggest. You need to have some
    standards in order to be comfortable that you are consistently
    making that determination, although, as the elected officials,
    you're the ones that have the right to make it, no matter what
    it is.
        Senator Chambliss. I'm just looking at a list of previous
    multiyear contracts, some of which are still in effect, some of
    which have already been completed, where we've saved $51
    million on the F-414 engine. We saved $127 million on the C-17A
    engine. We saved $92 million on the C-17 engine in another
    multiyear. We saved $173 million on the KC-130J multiyear for
    the Marine Corps and $246 million on an F-16 multiyear.
        Senator McCain. Senator Chambliss, you're going to have to
    truncate a little bit here. You've been 15 minutes, so far.
        Senator Chambliss. I'm sorry, Mr. Chairman. I promise, I'm
    close to the end.
        What about all those multiyears? Should they not have been
    entered into?
        Mr. Walker. The question I would ask you, Senator, is, what
    percentage of the estimated production cost did that represent?
    I think you'll find out it was a lot higher than this. Believe
    me I understand this. I used to live in Marietta, so I'm very
    familiar with the----
        Senator Chambliss. Let's talk about that. The F-414 engine
    was 2.8 percent. The C-17 multiyear fiscal year 1997 to 2003
    was 5 percent. There's another one here that is 5.7 percent. I
    don't know. All I would say is, significant savings of $225
    million in south Georgia is a lot of money, and my taxpayers
    and my constituents appreciate any amount of money we can save,
    especially when it comes to $225 million.
        That's all I have, Mr. Chairman.
        Senator McCain. Thank you, Senator Chambliss.
        Just very briefly, Secretary Wynne, did you ask IDA to
    analyze the effects of F-22 procurement on the JSF production
    line? I don't believe you did. I think that's important.
        Secretary Wynne. I don't think so, Senator.
        Senator McCain. I think that's an important factor.
    Because, as Mr. Walker said, and I said in my opening
    statement, everyone knows that we are facing a serious, serious
    crunch on procurement because of the costs of the war, and
    decreasing defense spending. I notice that the Senate and House
    Appropriations Committees have cut money from defense
    appropriations. Whether they should or not, they have. I really
    believe that we should base this decision in the entire context
    of our defense procurement practices.
        So, I thank the witnesses. I'd be glad to hear your
    responses, Secretary Wynne, Mr. Walker, or Secretary Finley.
        Secretary Wynne. Senator, I've always appreciated your
    point of inquiry and, in this case, I think the needs of the
    airmen to make sure we give them the right weaponry will be
    best met here by doing this. I can appreciate the concerns.
        Senator McCain. But, unfortunately, those choices cannot be
    made in a vacuum.
        Mr. Walker or Secretary Finley, do you have any concluding
    comments?
        Mr. Walker. I would just say, Senator, that you're correct
    that the crunch is coming. While obviously we want to look
    every way that we can to save money--and $225 million is a lot
    of money, in my view--at the same point in time, we need
    flexibility, because we don't know how bad the crunch is going
    to be and there is a ripple effect with regard to other
    platforms, both within the Air Force as well as within DOD,
    and, frankly, outside the DOD.
        Senator McCain. Secretary Finley, would you like to make
    any closing comment?
        Mr. Finley. I'd like to thank you, Mr. Chairman, for your
    time and thank the subcommittee for their questions. I do
    believe the multiyear procurement, based on the information
    I've seen so far, is the right thing to do for F-22, sir. I
    completely pledge to work with this committee and with you, Mr.
    Chairman, on acquisition excellence as we move forward.
        Thank you.
        Senator McCain. Thank you very much.
        We'll ask the second panel, which is David Newman, the
    principal analyst in defense in the Congressional Budget Office
    (CBO); J. Richard Nelson, who's a research staff member with
    the Operational Evaluation Division of IDA; Christopher
    Bolkcom, who's a specialist in national defense in the
    Congressional Research Service (CRS); and Danielle Brian, who's
    the executive director for the Project on Government Oversight
    (POGO).
        Senator Chambliss. Mr. Chairman?
        Senator McCain. Yes, sir.
        Senator Chambliss. I would ask unanimous consent that Mr.
    Walker's letters dated June 20, 2006, and July 6, 2006, be
    entered in the record, along with the table of previous
    multiyears.
        Senator McCain. Without objection.
        [The information referred to follows:]

        Senator McCain. Welcome, to the witnesses.
        Mr. Newman, we'll begin with you, sir.
        I apologize for keeping you waiting. It's obviously been a
    spirited discussion.

      STATEMENT OF DAVID B. NEWMAN, PRINCIPAL ANALYST IN DEFENSE,
                      CONGRESSIONAL BUDGET OFFICE

        Mr. Newman. Mr. Chairman and members of the subcommittee,
    I'm pleased to appear before you today to discuss the multiyear
    procurement proposal for the F-22 program.
        The additional material provided by the Air Force in May
    leads me to the following three observations. First, the
    estimated savings from that contract are smaller, in percentage
    terms, than from other multiyear procurement programs. Second,
    in dollars, the savings are about the same as the unfunded
    cancellation liability the Air Force would incur when it signs
    the F-22 contract. Third, Congress should consider those
    factors and the uncertainty of the estimated savings when
    determining whether to grant multiyear procurement authority.
        The estimated savings of just over 2 percent are smaller
    than savings estimated for other multiyear procurement
    contracts, which have ranged from 5 percent to 11 percent.
    Because the F-22 is more expensive than other fighters, the Air
    Force has already taken advantage of most potential cost-
    reduction initiatives. There just aren't that many
    opportunities left for additional cost reductions at this point
    and because the Air Force will also buy fewer planes than were
    procured in other multiyear contracts, the opportunities for
    additional savings from this contract are limited.
        While it no longer includes incremental funding, the Air
    Force's budget strategy for the contract is still a cause for
    concern. That strategy currently includes an unfunded
    cancellation ceiling estimated at $200 million in the first
    year of the contract. Although that liability has been
    described as a contingent liability, it is not. In fact, it is
    part of the Air Force's minimum liability under the contract.
        The Government may cancel the multiyear contract at the end
    of any fiscal year if funds aren't available to proceed in the
    next year. But, because some nonrecurring costs may be spread
    over items that have yet to be produced, the Government could
    owe the contractor more than had been appropriated up to the
    point where the contract was canceled.
        The Air Force would obligate the Government for the full
    cost of all 60 planes--that's over $10 billion--when it signs
    the contract. However, because it can cancel the contract at
    the end of the first year or the second year, the Government's
    minimum liability will be the sum of the production costs for
    the items already ordered and the cancellation cost for the end
    of that year. An appropriation that covered only the cost for
    each annual production lot as it was manufactured would be
    insufficient to finance that minimum obligation.
        CBO concludes that an unfunded cancellation ceiling is not
    good budget practice. It distorts the resource allocation
    process by understating the costs and decisions made for the
    budget year, and may require future Congresses to find the
    resources to pay for decisions made today.
        Ultimately, Congress must weigh the potential for savings
    against the risk, that additional funds that have to be
    provided if the contract is canceled. It must also consider
    that by authorizing DOD to make an upfront commitment to
    purchase additional aircraft in subsequent years, it will
    reduce budget flexibility in those years as today's commitments
    consume resources and make them unavailable for tomorrow's
    requirements.
        When considering whether to grant multiyear procurement
    authority, it is important to note that estimates from such
    contracts are inherently uncertain. The savings are based on
    the estimates of the cost of a multiyear procurement contract,
    versus annual contracts. Because DOD pursues only one or the
    other, but not both, there are no actual data for a comparison
    of cost to determine if savings are, in fact, realized. Also,
    some parts of the cost models that are used in estimates are
    inexact, so savings could be significantly different from
    estimates.
        Congress will have to judge whether the estimated savings
    for the F-22 program, accounting for the inherent uncertainty,
    are enough to compensate for the risk that additional
    appropriations will be necessary if the contract is canceled,
    and for the loss of budget flexibility that Congress will face.
        That concludes my remarks, gentlemen. I look forward to
    your questions.
        [The prepared statement of Mr. Newman follows:]
                     Prepared Statement by David B. Newman
        Mr. Chairman, Senator Lieberman, and members of the subcommittee, I
    am pleased to appear before you today to discuss the Air Force's
    acquisition strategy for the F-22 fighter program. At your request, the
    Congressional Budget Office (CBO) has examined the proposal for a
    multiyear procurement contract for 60 aircraft, focusing specifically
    on the additional material that the Air Force submitted to Congress
    after the Airland Subcommittee's hearing on this matter on March 28,
    2006.
        When the Air Force proposed a multiyear procurement contract for 60
    F-22As in February as part of the President's budget request for fiscal
    year 2007, it had not completed the analysis required by the statute
    that authorizes multiyear procurement (10 U.S.C. 2306b) to determine
    whether such a contract would result in ``substantial savings''
    compared with the cost of procuring the aircraft through a series of
    annual contracts. At the request of the Department of Defense (DOD),
    the Institute for Defense Analyses (IDA) completed that analysis in
    May, in which it determined that procuring those aircraft through a
    multiyear contract could save $235 million, or about 2.2 percent, of
    the estimated $10.8 billion cost of procuring those aircraft through
    three annual contracts.1,2
    ---------------------------------------------------------------------------
        \1\ The cost of procuring the aircraft includes the costs of
    separate contracts for the air vehicles and the engines, as well as
    support expenses and other costs.
        \2\ In the budget justification documents submitted in May, the Air
    Force indicated that the amount of funding it intended to request for
    the F-22A program in the Future Years Defense Program for the 2007-2011
    period would be sufficient to purchase only 56 aircraft and that an
    additional $674 million would be required to purchase all 60 planes
    envisioned in its multiyear procurement proposal. If that additional
    funding was not available, IDA estimated that the Air Force could save
    $225 million by procuring 56 aircraft through a multiyear procurement
    contract.
    ---------------------------------------------------------------------------
        After reviewing the material provided by the Air Force, I offer the
    following observations:

             The estimated savings from procuring the 60 F-22As
            through a multiyear contract are smaller in percentage terms
            than the savings estimated for other aircraft procurement
            programs.
             The Air Force does not intend to set aside funds to
            cover potential cancellation costs for the multiyear contract.
            It also has not requested funding to cover the full cost of the
            60 aircraft that it will commit to buy when it signs the
            contract. Thus, if the requested funding is provided, the funds
            available to the Air Force for the F-22A procurement contract
            will be less than the government's minimum liability.
             The savings from procuring F-22As through a multiyear
            contract could differ from the amounts estimated because of the
            uncertainty inherent in such estimates.

              comparison with other multiyear procurement programs
        The estimated savings from a multiyear procurement contract for F-
    22As are relatively small--as a percentage of contract costs--compared
    with the savings estimated for other multiyear procurement contracts
    for aircraft programs. For example, the Navy estimated that the
    multiyear contract to procure 210 F/A-18 E/F/G fighter/attack aircraft
    over the 2005-2009 period would save 11 percent compared with a series
    of annual contracts for those aircraft. In pursuing a multiyear
    contract to procure 80 C-17A intertheater transport aircraft over the
    1997-2003 period, the Air Force anticipated savings of 5 percent in
    comparison with the cost of a series of annual contracts. Estimates of
    savings from multiyear contracts for other aircraft procurement
    programs, such as those for the C-130 cargo aircraft, the F-16 fighter,
    and the UH-60 helicopter, were between 5 percent and 11 percent.
        The savings that could accrue from a multiyear procurement for the
    F-22A are lower than estimates for other programs for two reasons.
    First, the Air Force has already undertaken many cost-reduction
    initiatives prior to proposing the multiyear contract for the F-22A. A
    substantial portion of the savings that the military Services expect to
    realize from multiyear procurement contracts is derived from
    investments in equipment, facilities, materials, and techniques that
    improve the efficiency and reduce the cost of production processes.
    However, because the F-22A has turned out to be much more expensive
    than other fighter aircraft--procuring 182 aircraft will cost an
    average of $185 million per plane--the Air Force has already funded
    many cost-reduction initiatives during the development and initial
    production phases in an effort to hold down total costs.\3\ As a
    result, few such initiatives remain to be funded as part of the
    proposed multiyear contract, reducing the savings available from that
    acquisition strategy.
    ---------------------------------------------------------------------------
        \3\ The average procurement cost for each annual production lot has
    declined over time as the production process becomes more efficient.
    The Air Force will pay an average of $157 million per plane for the 24
    aircraft it ordered this fiscal year. However, the average procurement
    cost of aircraft ordered in the next three production lots is expected
    to increase to about $175 million because the Air Force will procure
    those planes at a slower, less cost-effective rate of 20 aircraft each
    year.
    ---------------------------------------------------------------------------
        A second explanation for the lower estimated savings is that the
    Air Force would buy fewer planes under the proposed multiyear contract
    for the F-22A than were procured under other aircraft programs. The
    Navy plans to purchase a total of 432 F/A-18 E/F/G aircraft by the time
    it completes a second multiyear procurement contract for those aircraft
    in 2009. The Air Force purchased 1,830 F-16 fighters under three
    sequential multiyear contracts over the 1982-1993 period. It also will
    acquire a total of 140 C-17 aircraft by the time it completes the
    second multiyear contract for that program next year. Because
    relatively few F-22A fighters remain to be procured under current
    plans--the Air Force has already ordered 122 of the 182 aircraft it
    intends to buy--the opportunity for savings is limited.
                      budgeting for multiyear procurement
        CBO's testimony before this subcommittee in March focused on two
    issues regarding the Air Force's acquisition strategy for the F-22A--
    incremental funding and unfunded cancellation liability. The Air Force
    had requested the authority to budget and pay for each annual
    production lot incrementally over a 2-year period rather than obtaining
    appropriations for the full cost of those aircraft in the year
    production was to begin. That plan would have reduced the amount of
    budget authority needed in the first year, although it would have
    increased the amount needed in subsequent years. Incremental funding
    might constrain the funding available for other programs in future
    years as programs that were partially funded in previous years continue
    to require the appropriation of budgetary resources. Because it does
    not display the full cost of decisions at the time they are made,
    incremental funding might also limit transparency and accountability
    and tilt the playing field in favor of expensive programs that benefit
    from such a funding arrangement. Because the Committees on Armed
    Services and Appropriations in both Houses disapprove of using
    incremental funding for the F-22A, the Air Force has indicated that it
    will submit a proposal to fully fund each annual lot of aircraft before
    that lot enters production.\4\
    ---------------------------------------------------------------------------
        \4\ The committee reports accompanying the defense authorization
    and appropriation bills for 2007 indicate that funding will be provided
    for the full cost of the aircraft before they are ordered.
    ---------------------------------------------------------------------------
        Under a multiyear contract, the Government may, at the end of each
    fiscal year, cancel its order for all remaining years of the contract
    if it notifies the contractor that funds are not available to proceed
    for the next fiscal year. Thus, cancellation of a multiyear contract
    occurs between fiscal years if Congress does not provide the additional
    appropriations needed to continue. In such a contract, some
    nonrecurring costs may be allocated to items expected to be produced in
    future years. Therefore, if the contract is canceled, the Government
    may owe the contractor more than the amount appropriated for items
    produced in the years before the cancellation. The maximum liability
    for cancellation at the end of any given year is usually negotiated
    upfront and included in the terms of the contract.\5\
    ---------------------------------------------------------------------------
        \5\ The maximum cancellation liability is known as the cancellation
    ceiling. Contract cancellation differs from contract termination. The
    Government has the right to end any contract early, when doing so is in
    the Government's interest, but must pay the contractor for any
    authorized work performed before it was notified to cease work.
    Contract termination is the act of rescinding orders for items for
    which funds have already been appropriated and on which work has
    already begun. The cost of terminating an annual procurement contract
    early should not exceed the available appropriations because an agency
    should have sufficient appropriations to cover all recurring and
    nonrecurring costs before it initiates an annual procurement contract.
    ---------------------------------------------------------------------------
        In the budget justification material that the Air Force submitted
    in May, it estimated that the multiyear contract for the F-22A could
    include a cancellation ceiling of approximately $200 million in the
    first year of the contract--approximately the same as the estimated
    savings from using such a contract. The Air Force does not intend to
    dedicate budget authority for that liability at the time it is
    incurred.
        DOD does not request budget authority specifically for cancellation
    liability because it considers cancellation a contingent liability with
    only a remote probability of happening.\6\ Although the amount of the
    Government's actual liability depends on how the program proceeds, its
    minimum liability is the sum of the production costs for the items
    ordered in the first year and the cancellation costs at the end of that
    year. Regardless of whether the multiyear procurement contract proceeds
    for the full term or is canceled early, the Government's initial
    obligation to the contractor will exceed the amount required to pay for
    the items ordered in the first year. For example, after the first year
    of the 3-year contract proposed for the F-22A, the Air Force could
    either cancel the remaining 2 years of production and pay the costs for
    cancellation, or it could continue production for the second year and
    pay for the cost of those aircraft. Under the multiyear contract, the
    Air Force would not have the option of forgoing future production lots
    without paying the cancellation charge. Thus, in no case would the
    government pay only the cost of the aircraft produced in the first
    year. An appropriation that covered only the cost for each annual
    production lot as it was manufactured would therefore be insufficient
    to finance the Government's minimum obligation under the multiyear
    contract.
    ---------------------------------------------------------------------------
        \6\ DOD is authorized by 10 U.S.C. 2306b to pay cancellation costs
    from funds originally available for the performance of the contract,
    appropriations currently available to procure the type of property at
    issue (in this case, other aircraft) and not otherwise obligated, or
    funds appropriated for cancellation payments.
    ---------------------------------------------------------------------------
        The Air Force indicates that it may be able to pay contract
    cancellation costs with funds appropriated for procuring the F-22A,
    which suggests that there would be sufficient funds to pay both the
    cost of canceling future production lots and the cost of procuring the
    aircraft that had been ordered up to that point. However, if that were
    the case, the Air Force would be committing the same appropriations for
    both purposes simultaneously. But with no funds set aside specifically
    for cancellation costs, the Air Force would have to terminate orders
    for some of the aircraft that had already entered production if a
    decision was made to cancel subsequent orders. Thus, if it canceled the
    remaining years of the multiyear contract at the end of the first year,
    the Government not only would forego the aircraft to be produced in
    later years but also would not receive some of the planes it had
    ordered in the first year--and the taxpayers' investment in those
    aircraft would be lost. In particular, if the Government decided to
    cancel the contract at the end of the first year but had not set aside
    funds specifically for cancellation costs, it would not only forego the
    40 aircraft that had not entered production, but, to free up funds for
    cancellation costs, also have to stop work on some of the 20 aircraft
    that had already been ordered. Alternatively, the Air Force could
    divert funds appropriated to procure a different aircraft to pay the
    cost of canceling the contract for the F-22A. However, to make such
    funds available to pay cancellation costs, the Air Force would have to
    buy fewer of that other aircraft.
        DOD's failure to request funding for cancellation liability may
    distort the resource allocation process by understating the cost of
    decisions made for the budget year and may require future Congresses to
    find the resources to pay for decisions made today.
                              issues for congress
        Neither the estimated savings nor the cancellation liability is
    large relative to the cost of the Air Force's proposed multiyear
    contract to procure the remaining F-22A aircraft. Congress must weigh
    the potential for savings against the risk that additional funds will
    have to be provided if the contract is canceled. It must also consider
    that, by authorizing DOD to commit to additional purchases in
    subsequent years, it will reduce budgetary flexibility in those years,
    as past commitments make resources unavailable for other requirements.
        When considering those risks and benefits, it is important to note
    that estimates of savings from such contracts are inherently uncertain.
    The savings that might be realized from a multiyear procurement
    strategy are based on estimates of the costs of the two alternate
    approaches--multiyear procurement and annual contracts--made at the
    time the multiyear contract is proposed. Because DOD pursues only one
    of those approaches, there are no actual data for a comparison of the
    costs to determine if savings are realized. In this particular case,
    some of the cost-estimating relationships that IDA used to calculate
    the savings associated with several aircraft components are not strong.
    The savings could be significantly different from what has been
    estimated.
        The statute authorizing multiyear procurement contracts requires
    that such contracts result in ``substantial savings'' but does not
    quantify in either dollars or percentage terms a threshold for meeting
    that requirement. Therefore, Congress will have to judge whether the
    estimated savings for the F-22A program are sufficient to compensate
    for the risk that additional appropriations will be necessary if the
    contract is canceled and for the loss of budgetary flexibility that it
    will face.

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

        STATEMENT OF J. RICHARD NELSON, RESEARCH STAFF MEMBER,
    OPERATIONAL EVALUATION DIVISION, INSTITUTE FOR DEFENSE ANALYSES

        Dr. Nelson. Thank you, Mr. Chairman and members of the
    subcommittee. I'm happy to be here to testify on this issue.
        I need to begin by setting the record straight, because I
    was there. There is considerable confusion because of this
    morning's newspaper article about two studies at IDA. We were
    sponsored to do an independent cost estimate for the F/A-22 in
    September 2004, completed that study in August 2005, and
    delivered it to Congress. It was a congressionally-mandated
    study. Our sponsor was the Under Secretary of Defense for
    Acquisition, Technology, and Logistics (USD(AT&L)), who
    directed the task. I directed the work. It seemed logical to
    our sponsor that we continue with an examination of the F-22
    multiyear business case analysis. Again, USD(AT&L) was the
    sponsor and directed the task and, again, I, at IDA, directed
    the work.
        Admiral Blair attended reviews of the F-22 independent cost
    estimate, which we completed in August 2005. He was not
    chairman of the review. General Larry Welch chaired a high-
    level review panel, and our sponsor, AT&L, chaired a working-
    group level that included members of organizations in OSD, the
    Air Force, the contractors, and Defense Contract Audit Agency
    (DCAA) and Defense Contract Management Agency (DCMA).
        Senator McCain. So, let me get this straight. You were
    tasked to do an independent analysis, and it was staffed by Air
    Force personnel and Pentagon personnel. Thank you.
        Dr. Nelson. For the independent cost estimate, we were
    tasked by USD(AT&L).
        Senator McCain. Fine. So, you included in the studies the
    Air Force personnel and Pentagon personnel.
        Dr. Nelson. Yes, as reviewers.
        Senator McCain. Thank you. Then I hope you----
        Dr. Nelson.--at the working level----
        Senator McCain.--don't call it independent. It's fine with
    me, but just don't call it independent.
        Dr. Nelson. We did the work. We did the data collection.
        Senator McCain. I'm sure you did.
        Dr. Nelson. We did the information collection. We did the
    analysis. We did the documentation. We did the report. It was
    an independent and objective piece of work. Admiral Blair did
    not attend the final reviews for this work. No officer of IDA
    attended the reviews of the F-22 multiyear procurement (MYP)
    business case analysis (BCA). So, Admiral----
        Senator McCain. Dr. Nelson, I asked you to come here to
    testify on the issue of the F-22 multiyear procurement
    proposal, and I would like to have that testimony, if we could
    have that, Doctor. I have not raised the issue of Admiral
    Blair, and I don't intend to. But I do intend to have your
    testimony on this issue, or you can be excused. Now, which do
    you prefer?
        Dr. Nelson. Yes, sir. I will now do that.
        I will now proceed with my testimony.
        Senator McCain. Thank you very much, Doctor.
        Dr. Nelson. IDA's work was based on paper P-4116, copies of
    which have been provided extensively to the committee.
        In January 2006, IDA was asked by the USD(AT&L) to conduct
    a BCA for a possible F-22A MYP. IDA's task was to estimate the
    cost savings to the Government of pursuing a multiyear
    procurement contract for the three final planned lots of the F-
    22A program, and a multiyear procurement contract was to be
    compared to three single-year procurement contracts. The study
    team collected existing F-22 data. We updated the work from the
    independent cost estimate. We added considerable data on the
    basis of further deliveries of aircraft from Marietta and
    further component deliveries by the contractors and
    subcontractors to Marietta.
        That model then was used, in terms of looking at a
    constrained and unconstrained budget for four scenarios, as
    outlined in Table 1 of this testimony. So, we looked at a
    scenario comparison of single-year versus multiyear for an
    unconstrained, and single-year versus multiyear for a
    constrained budget. This was for, in the unconstrained
    scenario, the 20/20/20 Air Force program; and, in the
    constrained scenario, 20 in Lot 7, 20 in Lot 8, and X in Lot 9,
    depending upon how much of the constrained budget was available
    for the purchase of aircraft in Lot 9.
        The results are shown in Table 2, in which we provide the
    budgets, the savings, and the average unit flyaway and average
    unit procurement costs for those airplanes.
        The balance of my testimony is further description of the
    analytical approach and the detailed results of our work--
    again, documented in P-4116.
        Our bottom line for what we were asked to do: the
    unconstrained savings--$235 million, and the constrained
    savings--$225 million. If you prefer to buy additional
    airplanes with the savings, you can buy 2 more airplanes, so
    that the unconstrained budget gets you 60, the constrained
    budget gets you 58.
        That is my testimony.
        [The prepared statement of Dr. Nelson follows:]
                  Prepared Statement by Dr. J. Richard Nelson
        Mr. Chairman and members of the subcommittee, I am pleased to come
    before you today to discuss IDA's work regarding the recently completed
    F-22A Multiyear Procurement (MYP) Business Case Analysis (BCA).\1\
    ---------------------------------------------------------------------------
        \1\ IDA Paper P-4116, ``F-22A Multiyear Procurement Business Case
    Analysis,'' For Official Use Only, May 2006.
    ---------------------------------------------------------------------------
        My testimony today will be based on IDA Paper P-4116, copies of
    which have been provided previously.
                          task objective and approach
        In January 2006, the Institute for Defense Analyses (IDA) was asked
    by the Office of the Under Secretary of Defense Acquisition Technology
    and Logistics to conduct a Business Case Analysis for a possible F-22A
    Multiyear Procurement. IDA's task was to estimate the cost savings to
    the Government of pursuing an MYP contract for the three final planned
    lots of the F-22A program. An MYP contract was compared to three
    Single-Year Procurement (SYP) contracts.
        The study team first updated IDA's existing F-22 cost model. This
    model, which IDA developed for its 2005 Independent Cost Estimate (ICE)
    for the F/A-22,\2\ was updated to reflect recent production experience
    and other new information. We then used the updated cost model to
    analyze the procurement strategies under constrained and unconstrained
    budgets under four scenarios, as outlined in Table 1. All scenarios
    involved the purchase of aircraft in the last three lots of production,
    Lots 7, 8, and 9.
    ---------------------------------------------------------------------------
        \2\ IDA Paper P-4029, ``F/A-22 Independent Cost Estimate,'' For
    Official Use Only, August 2005.

                                          TABLE 1. SCENARIOS ADDRESSED IN STUDY
    ----------------------------------------------------------------------------------------------------------------
                                                                     Lot Number (Number of
                   Scenario                        SYP/MYP                   Units)            Budget Constrained?
    ----------------------------------------------------------------------------------------------------------------
    1....................................  SYP....................  7 (20), 8 (20), 9 (20).  No
    2....................................  MYP....................  7 (20), 8 (20), 9 (20).  No
    3....................................  SYP....................  7 (20), 8 (20), 9 (16).  Yes
    4a...................................  MYP....................  7 (20), 8 (20), 9 (16).  Yes
    4b...................................  MYP....................  7 (20), 8 (20), 9 (18).  Yes
    ----------------------------------------------------------------------------------------------------------------

        For Scenarios 1 and 2, the unconstrained cases, IDA estimated the
    costs of building 60 aircraft over the three lots regardless of whether
    the Defense Department's current budgetary limits on the F-22A program
    would permit the Air Force to do so. Comparing these two scenarios is
    the best way to examine the impact of MYP on the purchase of 60
    aircraft. For Scenarios 3 and 4, the constrained cases, IDA estimated
    the costs of the three-lot buy under budgetary limits established in
    the President's budget for fiscal year 2007 (PB07). For Scenario 4b,
    IDA applied the MYP savings in 4a towards procuring additional aircraft
    in Lot 9. Scenarios 3, 4a, and 4b assume funding flows are adequate to
    support the lot sequence 20, 20, and x--where x is the incremental
    number of units in Lot 9 afforded under the cumulative PB07 budget
    authority. Note that the constraint we imposed is the total funding in
    PB07 for Lots 7, 8, and 9, and not its year-to-year funding levels. In
    Scenarios 3, 4a, and 4b the year-to-year funding levels would have to
    be shifted (within the PB07 total) to fully fund the SYP and the MYP.
        IDA used data provided by F-22A contractors and Government offices
    to estimate MYP savings. These data included information from previous
    F-22 MYP studies and recent MYP experience with other aircraft
    programs. In analyzing these data we took into account differences
    between the currently proposed F-22A MYP and MYP programs in the
    historical database. For example, our estimate recognizes that the F-22
    MYP would include fewer lots and aircraft units than previous fighter
    aircraft MYPs. IDA also had in-depth discussions with suppliers who
    were expected to be a source of savings under the MYP strategy. From
    these data and analyses, IDA developed percentage reductions in the
    cost elements in the model that would benefit from cost savings in an
    MYP. The sum of these reductions constitute our estimate of the savings
    provided by the MYP. The cost estimating approach we used was otherwise
    identical to that used for IDA's F/A-22 ICE, copies of which were
    provided to Congress in August 2005.
                               summary of results
        IDA estimated the savings with MYP to be 2.2 percent of procurement
    costs. We estimated the savings for the air vehicle contract (Lockheed
    Martin Aeronautics and Boeing) to be 2.6 percent for both the
    constrained and unconstrained cases. Savings for the engine contract
    (Pratt & Whitney) were estimated to be 2.7 percent, also for both
    cases. The percentage savings on total procurement are lower than on
    contract costs because substantial portions of the procurement budget
    would not be part of the multiyear contracts.
        Table 2 summarizes the BCA results. In the unconstrained total
    budget cases, Scenarios 1 and 2, MYP results in the maximum savings
    since the maximum number of aircraft are procured. The $235 million in
    savings represent 2.2 percent of procurement cost for Lots 7-9.
    Constraining the buy to the total budget of record reduces the number
    of aircraft by 4 to 56 in the SYP Scenario 3. At 56 units (three lots
    of 20, 20, and 16 aircraft), the MYP strategy reduces the cost by the
    same 2.2 percent, but for a lower total savings of $225 million. If the
    $225 million in savings were applied instead towards additional
    aircraft, the Air Force would be able to buy 2 more units for a total
    of 58.
        The addition of two aircraft using $225 million in MYP savings may
    seem optimistic. Note, however, that IDA's cost modeling approach takes
    into account fixed as well as variable costs, so the $225 million has
    to cover only the variable portion of aircraft costs. The fixed portion
    must be paid regardless of lot quantity.

                        TABLE 2. MYP BCA RESULTS SUMMARY
                       [Then-year in millions of dollars]
    ------------------------------------------------------------------------
                                       Scenario 1-  Scenario 3-  Scenario 3-
                                            2            4a           4b
    ------------------------------------------------------------------------
    SYP Budget (Scenarios 1 and 3)...      $10,863      $10,438      $10,438
    MYP Budget (Scenarios 2, 4a, and        10,628       10,213       10,423
     4b).............................
                                      --------------------------------------
    MYP under/(over) SYP.............          235          225           15
                                      ======================================
    Savings Percentage of Procurement          2.2          2.2          N/A
    Constrained to Budget............           No          Yes          Yes

    AUFC of Lots 7-9 Aircraft (SYP/      $158/$154    $162/$158    $162/$156
     MYP)............................
    AUPC of Lots 7-9 Aircraft (SYP/      $181/$177    $186/$182    $186/$180
     MYP)............................
    Aircraft in Lots 7-9 (SYP/MYP)...        60/60        56/56        56/58

    Total Quantity, including                  182          178          180
     Production, Production
     Representative Test Vehicles,
     and Replacement Test Aircraft...
    ------------------------------------------------------------------------

        That completes my description of IDA's work on the F-22A MYP BCA.
    We provided this information to our sponsor to inform the Defense
    Department's decision process. We were not asked for, nor did we
    provide, a recommendation on the decision itself. Our role was to
    estimate the cost savings with MYP.
        Mr. Chairman and members of the subcommittee, thank you for your
    attention. I am available for comments and questions.

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

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

        Mr. Bolkcom. Thank you, sir.
        Chairman McCain, Senator Nelson, and distinguished members,
    thanks for inviting me to speak with you today about the F-22.
    As requested, I'll focus today on the criteria for multiyear
    procurement and the business case for such a strategy.
        When it grants multiyear authority, Congress allows DOD to
    commit the Federal Government to spend funds that have not yet
    been appropriated. In return, DOD agrees to meet certain
    multiyear criteria to ensure that the benefits of multiyear
    authority outweigh the risks.
        The proposed F-22 multiyear raises four potential oversight
    issues for Congress.
        First, the estimated F-22 multiyear savings appear to be
    low compared to other multiyears. IDA finds that the potential
    F-22 multiyear savings of $225 million is about half the amount
    saved in other multiyears that they studied. When this savings
    is expressed as a percentage, the F-22 multiyear savings of 2.2
    percent is about a quarter of the 8 percent saved in the other
    multiyears. Various GAO, CBO, and RAND studies corroborate
    these comparisons.
        Second, it is not certain that the savings estimate is
    realistic. The margin of error in multiyear savings estimates
    is considerable. It's well documented that many multiyears
    never demonstrate the savings promised prior to contract award.
    In this case, the different estimates by the Air Force, OSD,
    and IDA on the cost of the F-22 program may make savings
    projections more difficult. Although IDA's expertise in cost
    estimating is widely recognized, its analysis may, for example,
    overstate avionics multiyear savings.
        Third, Air Force leaders promise stable funding and stable
    requirements over the proposed contracts. Recent fluctuations
    in F-22 funding requests, however, show that the Air Force
    can't always budget as it likes. Also, the request to
    incrementally fund F-22 procurements suggests that the Air
    Force doesn't have sufficient funds to implement its
    modernization plans by conventional means. Several factors
    could make future funding less stable. One such factor is the
    decreased use of emergency supplemental funding for Iraq and
    Afghanistan, which could force difficult and unforeseen choices
    in the Air Force modernization plans.
        Fourth, many indicators suggest that the F-22 design is
    stable. Testing is complete, 74 aircraft have been delivered,
    and the aircraft has been declared operational. Existing
    technical problems may or may not reflect on design stability,
    but they could add to unforeseen costs. GAO and IDA agree that
    the F-22's modernization program carries technical risks that
    could lead to program cost growth.
        Air Force leaders tout the IDA study as a business case
    that supports F-22 multiyear. However, CRS couldn't find any
    endorsement in the study. IDA was not tasked to study the
    multiyear criteria for funding stability, requirements
    stability, or design stability that would be required to make a
    judgment on the pros and cons of the multiyear. Also, IDA was
    not asked to address congressional concerns about extending the
    F-22 production line or the potential impact on the JSF. IDA
    was asked only to estimate the multiyear cost savings, and it
    did not judge whether these potential savings are substantial.
        IDA was not asked to study the complete range of F-22
    procurement alternatives. In every scenario studied, IDA
    assumed a 3-year procurement. A 2-year contract for 30 aircraft
    per year, as one example, might save up to $1.8 billion, but
    IDA was not asked to study this alternative.
        Mr. Chairman, I'll conclude by observing that the law
    requires that to qualify for multiyear, the F-22 must be
    procured at the minimum economic rate. Conflicting information
    has been provided on whether building 20 aircraft per year
    satisfies this requirement. If it is found that producing 20
    aircraft per year is below the minimum economic rate, the F-
    22's procurement plan would violate statutory requirements, and
    IDA's cost estimates would not be applicable.
        Mr. Chairman, this concludes my remarks. I appreciate the
    opportunity to appear before you.
        [The prepared statement of Mr. Bolkcom follows:]
                   Prepared Statement by Christopher Bolkcom
        Mr. Chairman and distinguished members of the subcommittee, thank
    you for inviting me to speak with you today about the proposed
    multiyear procurement (MYP) of the F-22A. As you requested, my
    testimony will address whether the F-22A meets the MYP criteria in 10
    U.S.C. Sec. 2306b, and the F-22 business case analysis, which the Air
    Force argues supports a 3-year, 60-aircraft MYP.
        At the outset, it is important to note that the F-22 MYP proposal
    was presented to Congress this year as part of a larger package of
    proposed changes to the F-22 program. Other proposed changes include
    adding four additional aircraft to the planned total purchase, adding a
    production lot to the procurement plan, and slowing production to an
    annual rate of 20 aircraft per year over a longer schedule. Although
    Air Force arguments in favor of the proposed F-22 MYP sometimes
    implicitly assume that these other proposed changes will be
    implemented, the approval of these proposed changes is not yet certain,
    as Congress has not yet completed action on the fiscal year 2007
    budget.
                       10 u.s.c. Sec. 2306b myp criteria
        10 U.S.C. Sec. 2306b contains a number of provisions governing MYP
    contract authority. Perhaps the most relevant for today's hearing is
    2306b subparagraph (i)(B) Defense Acquisitions Specifically Authorized
    by Law, which states that ``the proposed multiyear contract provides
    for production at not less than minimum economic rates given existing
    tooling and facilities.'' The Air Force proposes a 3-year F-22 MYP of
    20 aircraft per year. The prime contractor has provided conflicting
    information on whether this rate of production satisfies subparagraph
    (i)(B).
        On July 19, 2006, Lockheed Martin reported that the F-22's minimum
    economic rate of production is 24 aircraft per year, which means that
    the MYP of 20 aircraft per year would apparently not comply with the
    statutory requirement.\1\ Upon further review, however, Lockheed Martin
    representatives changed their position, and reported on July 20, 2006
    that the F-22's minimum economic rate of production is ``18-20''
    aircraft per year.\2\ It may be interesting to note that congressional
    staff met with DOD officials on July 19, 2006 and expressed concern
    that the proposed F-22 MYP might not meet the minimum economic rate of
    production requirement.
    ---------------------------------------------------------------------------
        \1\ E-mail communication between Lockheed Martin Co. and CRS July
    19, 2006.
        \2\ E-mail communication between Lockheed Martin Co. and CRS July
    20, 2006.
    ---------------------------------------------------------------------------
        10 U.S.C. Sec. 2306b also contains six criteria for granting
    multiyear procurement authority for a major weapon systems. These
    subparagraphs pertain to:

             (a)(1) substantial savings
             (a)(2) stable requirement
             (a)(3) stable funding
             (a)(4) stable design
             (a)(5) realistic contract cost and cost savings
            estimates
             (a)(6) promoting national security.

        These general criteria are designed to help Congress evaluate the
    risks involved in allowing DOD to commit the Federal Government to
    spend funds that have not yet been appropriated. In the past, Congress
    has on occasion approved MYP, only to find that programs did not always
    exhibit the stability, nor deliver the savings, which were promised.
        For example, RAND noted that despite award of MYP authority, the B-
    1B program experienced ``technical and performance difficulties that
    have added to the cost of the program.'' Compared to KC-10 and F-16
    MYPs, ``the B-1B program showed greater signs of instability at the
    time of its MYP than did the other two procurements . . . assessments
    at the time, however, did not flag these uncertainties.'' \3\ The C-
    130J is a more recent example of an MYP that experienced, for example,
    requirements instability, funding instability, controversy over the
    contract type, and specific contract clauses such as cancellation
    liability.
    ---------------------------------------------------------------------------
        \3\ Analysis of Air Force Aircraft Multiyear Procurements with
    Implications for the B-2. (R-3990-DR&E) RAND. 1991.
    ---------------------------------------------------------------------------
    Substantial Savings
        MYP savings are typically estimated by comparing the cost to
    procure the same number of weapons systems under a series of single
    year procurement (SYP) contracts to the cost of an MYP contract over
    the same time period. When compared to past statutory requirements (10
    percent savings), or to recent experience, some may not consider the
    projected F-22 MYP savings of 2.2 percent over three SYP contracts to
    be ``substantial'' as required under 10 U.S.C. Sec. 2306b.\4\
    ---------------------------------------------------------------------------
        \4\ Some, but not all of these observations were shared with the
    Subcommittee at the March 28, 2006, hearing on Air Force and Navy
    tactical aviation programs in review of the National Defense
    Authorization Request for Fiscal Year 2007 and the Future Years Defense
    Program.
    ---------------------------------------------------------------------------
        In its F-22 MYP Business Case Analysis (BCA), the Institute for
    Defense Analyses (IDA) compared the proposed F-22 MYP to 13 other MYP
    contracts. IDA found that the projected F-22 MYP savings compared
    unfavorably to these other case studies. The F-22's projected MYP
    savings of 2.2 percent is approximately one quarter the average
    estimated savings (8.0 percent) of these other MYP contracts.
        Expanding the survey beyond IDA's data set reveals additional MYP
    contracts in which savings were estimated to be significantly greater
    than 2.2 percent. These additional MYP contracts are shown in the table
    below.

                  ESTIMATED MYP SAVINGS OF HISTORICAL PROGRAMS
    ------------------------------------------------------------------------
                                                           Estimated Savings
                           Program                             (percent)
    ------------------------------------------------------------------------
    Javelin Anti Tank Guided Weapon......................               14.3
    Medium Tactical Vehicle Replacement..................                7.4
    CH-60 Helicopter.....................................                5.5
    DDG-51...............................................                  9
    GPS Satellite........................................                 13
    DSP I Satellite......................................                5.7
    DMSP Satellite.......................................               19.2
    DSCS II Satellite....................................                 18
    Titan IV Expendable Launch Vehicle...................               15.1
    DSP II Satellite.....................................               27.8
    DMSP Satellite.......................................               18.1
    ------------------------------------------------------------------------
    Sources: An Overview of Acquisition Reform Cost Savings Estimates. RAND.
      2001. Table 6.1, p. 111. Analysis of Air Force Aircraft Multiyear
      Procurements with Implications for the B-2. RAND. 1991. p. 10.

        Similarly, a Congressional Budget Office (CBO) working paper
    estimates DOD saved an average of 11.7 percent in current dollars
    through MYP production contracts from 1982-1987.\5\
    ---------------------------------------------------------------------------
        \5\ ``Alternative Strategies for Increasing Multiyear
    Procurement.'' Staff Working Paper. Congressional Budget Office. July
    1986. Table 3, p. 17.
    ---------------------------------------------------------------------------
        Responding to figures such as these, Air Force leaders have stated
    that the percentage savings is only one factor to consider when
    granting MYP authority. The absolute figure of dollars saved is also
    important, they argue. In terms of absolute savings, the IDA study
    found that the F-22's projected MYP savings of $225 million is roughly
    half the average $470 million in savings of the 13 MYP contracts it
    studied.
        It can also be noted that IDA's savings calculation takes as its
    starting point an F-22 production profile that incorporates the Air
    Force's proposals for adding four aircraft to the planned total
    purchase and for slowing the annual production rate to 20 aircraft per
    year over a longer schedule. Taking these two changes as a given in the
    MYP cost-savings calculation does not take account for the $1.8 billion
    in additional procurement funding requirements associated with
    implementing these two changes. It therefore appears that the cost
    savings of the F-22 MYP are almost certainly smaller than the $1.8
    billion in additional funding associated with adding four aircraft and
    slowing the annual production rate. Conversely, the $1.8 billion in
    additional funding needed to implement these two changes may be more
    reason to seek offsetting savings through an MYP. It is possible,
    however, that greater savings could be achieved in the F-22 program
    without implementing an MYP by simply keeping production at 30 aircraft
    per year for 2 years.
    Realistic Cost Avoidance Estimates
        Another potential issue is whether the IDA study's estimate of MYP
    cost avoidance (regardless of the study's apparent analytical rigor)
    meets 10 U.S.C. Sec. 2306b's requirement for realist cost avoidance
    estimates. In assessing whether IDA's cost-savings estimate is
    realistic, one point to consider is that there is disagreement among
    IDA, the Air Force, and the Office of the Secretary of Defense (OSD)
    regarding the overall cost of the F-22 program. Skeptics could ask
    whether, in a situation where disagreement exists about the overall
    cost of program, it is possible to realistically estimate savings that
    might result from changing the program in some way.
        Another factor in assessing whether IDA's estimated savings are
    realistic, is the track record of previous MYPs. Some MYP contracts do
    not appear to have achieved the cost savings that were
    ``realistically'' forecast prior to the granting of MYP authority.
    IDA's own report, for example, notes that

            Studies analyzing the actual execution of MYPs have shown mixed
            results. For example, a previous IDA study could not find any
            evidence of cost savings for the first F-16 MYP, despite the
            7.7 percent savings shown in the pre-MYP estimates reported
            here. A similar result was found for the Army's H-60 helicopter
            program.

        The Government Accountability Office (GAO) analysis corroborates
    IDA's findings, and casts doubt on the accuracy of before-the-fact MYP
    cost estimates. In an assessment of the fiscal year 1984 DOD budget
    request, for example, GAO found that the funds requested for four MYP
    programs initiated in fiscal year 1982 and fiscal year 1983 exceeded
    the negotiated or proposed contract amounts by $197 million.\6\ RAND
    notes that ``circumstances can easily create a bias in estimates of
    cost reduction that favor MYP contracting.'' \7\ The IDA study
    recognizes this potential bias and contains a similar caveat.
    ---------------------------------------------------------------------------
        \6\ Analysis of Fiscal Year 1984 Budget Requests for Approved
    Multiyear Procurements. (GAO/NSIAD-83-57). General Accounting Office.
    September 30, 1983.
        \7\ RAND. (R-3990-DR&E) opcit. p. vi
    ---------------------------------------------------------------------------
    Stable Funding
        Funding stability is another criterion in 10 U.S.C. Sec. 2306b for
    multiyear procurement. If a weapon system candidate for MYP has a
    history of unstable funding, it may suggest ``an unstable requirement,
    a relatively low funding priority, or wavering support, thus rendering
    the system inappropriate for multiyear contracting.''\8\
    ---------------------------------------------------------------------------
        \8\ F-22 Multiyear Procurement Business Case Analysis (BCA).
    Institute for Defense Analyses. May 2006. p.10.
    ---------------------------------------------------------------------------
        A review of recent F-22 funding profiles, as depicted in the table
    and chart below, raises questions as to whether the Raptor's funding
    has been stable enough to warrant an MYP commitment. The three lines in
    the chart represent the Air Force's annual budget requests and Future
    Years Defense Plan (FYDP) funding projections for the F-22 in fiscal
    year 2005 (President's budget, or PB05) fiscal year 2006 (PB06), and
    fiscal year 2007 (PB07).

                                                [In millions of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                                                   Fiscal Year
                   PB                ----------------------------------------------------------------------   Total
                                        2005      2006      2007      2008      2009      2010      2011
    ----------------------------------------------------------------------------------------------------------------
    07..............................     3,552     3,144     1,503     2,934     2,919     1,724       261    28,493
    06..............................     3,548     3,186     3,811     4,175       113        56       257    27,601
    05..............................     3,633     3,571     3,817     3,716     3,569  5,601 to              36,343
                                                                                        complete
    ----------------------------------------------------------------------------------------------------------------
    Source: Department of the Air Force. Exhibit P-40, Budget Item Justification, Aircraft Procurement, Air Force,
      Budget Activity 01, Combat Aircraft. Various years.

        A budget that does not contain sufficient funds to pay for planned
    expenditures, or protect against unplanned contingencies, can raise
    questions concerning future funding stability. The Air Force's request
    to incrementally fund F-22 procurement over the proposed MYP may be
    viewed as an indication that procurement funds are limited. The Air
    Force has no precedent of incrementally funding aircraft procurement.
    Incremental funding is viewed by Congress as unorthodox and an
    exception to the full funding rule. Why, it might be asked, would the
    Air Force request incremental funding of F-22 procurement if it
    believed it had sufficient budget authority to fully fund F-22
    procurement? Also, GAO reports the current Air Force request underfunds
    the F-22 program through the FYDP by $647 million.\9\ CBO similarly
    expresses concern that the Air Force ``is not requesting appropriations
    sufficient to cover the potential cancellation liability. Under the
    proposal for multiyear procurement, the Air Force would have to seek
    additional appropriations in the future even if a decision was made to
    cancel the contract.'' \10\
    ---------------------------------------------------------------------------
        \9\ ``Tactical Aircraft: DOD Should Present a New F-22A Business
    Case before Making Further Investments.'' (GAO-06-455R). Government
    Accountability Office. June 20, 2006
        \10\ Statement of Donald Marron, Acting Director Statement before
    the Senate Armed Services, Airland Subcommittee. March 28, 2006.
    ---------------------------------------------------------------------------
        The Air Force and other F-22 supporters argue that the Raptor has
    been for many years the Service's top acquisition priority, and that
    the Service is fully committed to funding the program. Few observers if
    any appear to doubt the Air Force's commitment to the F-22 program. The
    Air Force, however, does not have complete control over its budget. The
    actions of other Government actors, especially in what may be a
    budgetary environment of increased turbulence, may create risks for a
    plan to commit now to procuring certain numbers of F-22s in future
    years.
        Weapon procurement for all of DOD is expected to cost approximately
    $1.4 trillion between 2006 and 2009, with more than half of these
    expenditures yet to be made.\11\ In addition, it is possible that in
    the near future the preponderance of funding for conflicts in
    Afghanistan and Iraq will need to be requested through the annual
    budget, rather than emergency supplementals. Such a change could lead
    to dynamics in the budget process that are difficult to predict.
    ---------------------------------------------------------------------------
        \11\ Leslie Wayne. ``Pentagon Struggles with Cost Overruns and
    Delays.'' New York Times. July 11, 2006.
    ---------------------------------------------------------------------------
                               stable requirement
        The number of F-22s to be purchased has fluctuated considerably
    over time. Originally conceived of as a 750-aircraft program, DOD's
    first selected acquisition report that included the F-22 (December 31,
    1991), reported a 648-aircraft procurement plan. Over time, the number
    of F-22s that could be purchased under budget limits was reduced to
    442, 440, 342, 341, 278, 279, 181, and 185 (including aircraft built
    with research, development, test, and evaluation (RDT&E) funds). The
    Air Force called its attempts to purchase as many F-22s as possible
    under budget limits a ``buy-to-budget'' plan. Some criticized this
    approach as being inconsistent with DOD's more traditional
    requirements-driven weapon system acquisition strategy.
        Since 2002, Air Force leaders have consistently stated that they
    require 381 F-22s. Further, Air Force officials point out that this
    requirement has been validated by DOD.
        The Air Force's stated rationale for the 381 figure has not been
    consistent. At times Air Force officials have argued that this figure
    is required to field one 24-aircraft F-22 squadron in each of the
    Service's 10 aerospace expeditionary forces (AEFs). Other times, the
    Air Force has argued that 381 was the minimum number required to
    address emerging ``near-peer'' competitors. At still other times, Air
    Force leaders argued for the F-22, based on their perception of the
    Raptor's potential contribution to the ``global war on terrorism.''
    Specific F-22 missions Air Force leaders described include conducting
    cruise missile defense over the United States, and flying close air
    support (CAS) missions for small, dispersed U.S. ground forces fighting
    terrorists or insurgents.
        It is also important to note that although DOD may support the 381-
    aircraft goal for the F-22 in theory, DOD has cut the F-22 program by
    $10.5 billion. This reduction has made the 381 requirement difficult to
    achieve.
    Stable Design
        Another MYP criterion in 10 U.S.C. Sec. 2306b is for the program to
    have demonstrated a stable design. F-22 supporters argue that flight
    testing is complete, the aircraft is operational, and 75 Raptors have
    been delivered to the Air Force. These factors, they argue, demonstrate
    that the F-22 design is stable. Critics argue that technical issues
    have emerged since late 2005 that create the possibility of additional
    changes to the F-22 design or production process. The cited technical
    challenges include the following:

              (1) Structures Retrofit Program (SRP). As service life
            deficiencies were identified during engineering, manufacturing,
            and development (EMD), corrections were incorporated into the
            production line. The SRP will retrofit those aircraft delivered
            prior to the incorporation of all corrective actions into the
            F-22 production process. Work will begin as early as January
            2007 and is scheduled to conclude in 2010.
              (2) Forward Boom Heat-Treat Issue. In December 2005, the Air
            Force was notified that some titanium forward boom frames were
            not properly heat-treated. This improper heat treatment creates
            the potential for anomalous material properties (e.g. extensive
            cracking) in 91 aircraft. The Air Force asserts that this is
            not a safety of flight issue. The contractor responsible
            reportedly has stated that ``the root cause has yet to be
            determined.'' \12\
    ---------------------------------------------------------------------------
        \12\ Laura Colarusso. ``Contractors Blamed for F-22A Faults.''
    Defense News. June 26, 2006.
    ---------------------------------------------------------------------------
              (3) Canopy Actuator. On April 10, 2006, an F-22 pilot was
            trapped by a canopy that would not open. A fleet-wide
            inspection identified 42 potentially faulty actuators. A 30-day
            repetitive mechanical inspection has been implemented to ensure
            proper operation of the actuators. The Air Force plans to
            replace all potentially faulty actuators by February 2007.
              (4) Air Recharge System. The Air Recharge System (ARS)
            experienced three problems: leakage, auto-ignition failures,
            and a rupture during flight. The ARS replenishes the Stored
            Energy System after engine start. Air Force officials say that
            fixes to these problems have been initiated.
              (5) Nose Landing Gear. On May 11, 2006, an F-22 experienced
            an uncommanded nose landing gear retraction and the nose of the
            aircraft fell to the ground, landing on the main weapons bay
            doors. A similar incident occurred on March 18, 2003. The
            technical solution preventing uncommanded nose gear retractions
            has been incorporated into the production process and is being
            fielded throughout the fleet. The findings of a safety
            investigation board are pending.

        GAO and others have expressed concern that the Air Force's plan to
    integrate a new, multi-mode, air-to-ground-capable Agile,
    Electronically Steered Array (AESA) radar into the F-22 could present
    unforeseen and significant technical challenges. Although GAO agrees
    with the Air Force that the design for the baseline F-22A aircraft,
    designed primarily for an air superiority role, is stable. GAO states
    that ``the ground attack capability to be added has not been
    demonstrated and thus cannot be considered `stable.' '' \13\
    ---------------------------------------------------------------------------
        \13\ GAO-06-455R op cit.
    ---------------------------------------------------------------------------
        In its August 2005 independent cost estimate (ICE), IDA appeared to
    concur with the GAO position:

            We think there is little threat to design stability from
            problems that might be found in the last states of the EMD
            program. However, the extensive modernization program now in
            its initial states could affect the future production air
            vehicle configuration such that favorable downward cost trends
            evident in current data are disturbed.\14\
    ---------------------------------------------------------------------------
        \14\ F/A-22 Independent Cost Estimate. Institute for Defense
    Analyses. August 2005. p. 15.

        The Air Force does not share GAO's and IDA's concern. It asserts
    that modernizing the F-22 radar is no more challenging than, for
    example, retrofitting existing F/A-18/E/F Super Hornets with new AESA
    radars.
                      ida f-22 myp business case analysis
        As requested, CRS studied the IDA ``F-22 Business Case Analysis''
    to critically assess its task objectives, approach, and results.
    Study Approach
        The IDA study appears at first inspection to be a logically
    designed and thorough estimate of potential cost avoidance from MYP
    contracting. Observations can be made, however, about some of the study
    assumptions or methodologies that could bring into question the
    accuracy of the savings estimate. For example, IDA estimated that for
    the avionics subcontractor to achieve a 5-percent cost savings, the MYP
    contract would have to be in place by August 2, 2006. If the contract
    is delayed past that point, IDA estimated that the savings would fall
    to 4 percent. Due to the uncertainty of this event, IDA split the
    difference, and counted 4.5 percent savings in its estimate.
        The Air Force reports that the MYP contract award is currently
    scheduled for May 2007, and sees ``no possible means to accelerate MYP
    contract award to August 2006.'' \15\ Even if this contract award could
    be accelerated, fiscal year 2007 advance procurement funding cannot be
    obligated prior to the signature of the fiscal year 2007 appropriations
    and authorization acts. A Congressional Research Service (CRS) review
    of defense authorization and appropriations bills from 1970 to the
    present indicates that authorizations have been signed into law by
    August 1 only three times. No appropriations bills during this time
    period were signed into law by August 1. Based on this historical
    experience, the chance of completing the fiscal year 2007 defense
    authorization and appropriations process by August 2, 2006 appears to
    be remote. Thus, MYP avionics savings are expected to be 4 percent (at
    best) per IDA's calculation, not 4.5 percent.
    ---------------------------------------------------------------------------
        \15\ Fact Sheet. July 11, 2006. Provided to CRS by SAF/LLW.
    ---------------------------------------------------------------------------
        Other witnesses may find additional assumptions or methodologies in
    the IDA study that they believe weaken or strengthen the estimate of
    2.2 percent MYP cost avoidance. Scrutinizing and critiquing IDA's cost
    estimate of F-22 MYP cost avoidance, however, may have only marginal
    value in assessing the pros and cons of granting the Air Force MYP
    authority to purchase 60 aircraft over 3 years.
    Task Objectives
        It may be that the IDA study's task objectives limit the value of
    its findings for assessing the pros and cons of F-22 MYP. The fiscal
    year 2006 Defense Appropriations conference report directed DOD to
    perform a comprehensive assessment of alternatives for the continued
    acquisition of the F-22. Specifically:

            The report should consider, but not be limited to, the
            following: analyses of the advantages of a multiyear
            procurement program, of extending the F/A-22 procurement
            profile, and of the effects of F/A-22 procurement on the Joint
            Strike Fighter production line.\16\
    ---------------------------------------------------------------------------
        \16\ H.R. 2863 (H. Rept. 109-359), p. 314.

        The IDA study notes that its task was to ``estimate the cost
    savings to the Government of pursuing an MYP contract for the three
    planned lots of the F-22A. (Emphasis added).'' Thus, IDA did not
    analyze the advantages of extending the F-22 procurement profile.
    Instead, it considered extending the procurement profile as a
    given.\17\
    ---------------------------------------------------------------------------
        \17\ It may be important to note that IDA began the BCA in January
    2006. This date is before the official submission of the fiscal year
    2007 DOD budget request that proposed modifications to the F-22
    production and funding profile. The Air Force tasked IDA to conduct
    this BCA prior to the congressional defense committee hearings on this
    request, and thus with no knowledge of what action the committees might
    take.
    ---------------------------------------------------------------------------
        Air Force representatives report that slowing down F-22 production
    to 20 aircraft per year will ``create upward cost pressure'' that would
    be mitigated, in part, by the savings realized with multiyear
    procurement.\18\ The increased costs associated with producing 60 F-22s
    over 3 years is at least $1.8 billion.\19\ A robust BCA, and one that
    would completely fulfill the congressional tasking might have, for
    example, compared the pros and cons of a 60-aircraft, 3-year MYP to a
    60-aircraft, 2-year MYP. All things being equal, a 2-year MYP would be
    expected to save less money than a 3-year MYP. However, by procuring
    aircraft over 2 years at the more economic rate of 30 per year, the Air
    Force may avoid much of $1.8 billion in cost growth, which would be
    much greater than the $225 million projected to be saved through MYP.
    ---------------------------------------------------------------------------
        \18\ CRS meeting with SAF/AQPS and F-22 Program Office. March 8,
    2006.
        \19\ The Air Force's fiscal year 2007 plan to procure 60 aircraft
    over 3 years of production is $1.134 billion more than the fiscal year
    2006 plan to fully fund 56 aircraft over two additional years of
    production. $674 million more is required to fully fund the plan,
    bringing the cost increase to $1.8 billion.
    ---------------------------------------------------------------------------
        The Air Force did not task IDA to analyze the effects of F-22
    procurement on the Joint Strike Fighter (JSF) production line. The two
    programs are closely associated, and greater clarity of how changes to
    one program may affect the other would appear to be valuable. Air Force
    and DOD leaders assert that extending the F-22 production line is a
    prudent hedge against any potential delay in the JSF program. Since
    these aircraft compete for limited budget authority, however, extending
    the F-22 production line arguably could contribute to delay in the JSF
    program. If extending the F-22 line did push some JSF production
    further into the future, the added costs of this delay would offset the
    perceived advantages of extending the F-22 production line. Such an
    analysis would be useful in informing congressional decisions about
    whether to extend the F-22 production line and how to fund it.
    Results
        Although Air Force leaders tout the IDA study as a business case
    for their plan to procure 60 F-22s over 3 years via an MYP contract,
    the IDA study does not validate or endorse the MYP strategy. IDA was
    not asked to examine the MYP criteria pertaining to funding stability,
    requirements stability, or design stability. Nor was IDA asked to
    address congressional concerns about extending the F-22 procurement
    profile, or the potential impact on JSF. IDA provides an MYP cost
    saving estimate, but does not judge whether these potential savings are
    substantial and whether they satisfy statutory requirements.
        Many observations in the IDA study do not appear to be particularly
    favorable to the Air Force's argument for MYP. For example, IDA
    estimates MYP cost avoidance at approximately half of what the Air
    Force testified the MYP cost savings would be.\20\ As mentioned earlier
    in this testimony, IDA found that the estimated F-22 MYP savings, both
    as a percentage of SYP and in absolute terms, compared unfavorably to
    13 other MYP contracts.
    ---------------------------------------------------------------------------
        \20\ On March 28, 2006, LtGen Donald Hoffman testified to the
    Senate Armed Services Committee Airland Subcommittee that he believed
    the IDA study would show an MYP would save ``about 5 percent--plus or
    minus 1 percent'' over SYP.
    ---------------------------------------------------------------------------
        The IDA study makes observations about the F-22 MYP that appear to
    be at odds with Air Force statements, or could be perceived as
    detrimental to Air Force arguments that the F-22 meets 10 U.S.C.
    Sec. 2306b MYP criteria. For example, F-22 supporters describe the F-22
    MYP proposal as an orthodox funding strategy.\21\ However, IDA notes
    that elements of this proposal are unorthodox. The F-22 MYP's ``shorter
    contractual period of performance . . . translates into a more
    abbreviated investment horizon than is typical in a multiyear
    procurement.'' \22\ Further, the IDA study notes:
    ---------------------------------------------------------------------------
        \21\ On March 28, 2006, Lt. Gen. Donald Hoffman testified to the
    Senate Armed Services Committee Airland Subcommittee that ``we don't
    view multiyear as unorthodox at all. That's standard practice for any
    long-term production run.''
        \22\ IDA BCA. op cit. p.15

            Given a 3-year period of performance, the amount of time
            available to recoup investments in longer-term projects is
            limited. In fact, during our review, some suppliers indicated
            that components with long lead times in excess of 12 months
            essentially decrease the 3-year investment horizon down to just
            2 years in certain cases. In summary, each of these
            considerations reduces the potential of multiyear savings for
            the F-22A program over conventional multiyear scenarios.\23\
    ---------------------------------------------------------------------------
        \23\ Ibid. p. 16.

        The criteria in 10 U.S.C. Sec. 2306b are intended to ensure that a
    program is stable before entering into an extended contractual
    commitment. Air Force leaders disagree with critics' arguments that the
    F-22 program does not meet this stability requirement. The IDA study
    recognizes, however, that ``The F-22A program has undergone significant
    change since IDA completed its F/A-22 ICE in August 2005.'' \24\ Some
    may interpret the ``significant change'' that IDA observes to be an
    antonym for the stability that 10 U.S.C. Sec. 2306b requires.
    ---------------------------------------------------------------------------
        \24\ Ibid. p. 4.
    ---------------------------------------------------------------------------
        IDA makes observations on F-22 production that may not ``make the
    case'' for MYP. These observations could be interpreted as supporting
    the Air Force position that production is stable, or as supporting the
    GAO position that ``The F-22 entered production without ensuring
    production processes were in control.'' \25\ For example, IDA notes
    that ``Whereas deliveries were 6 to 9 months late, they are now on the
    order of 1 to 2 months late.'' \26\ The Air Force may wish to use this
    observation to highlight the improvement in delivery schedule. Others
    could note, however, that F-22 deliveries are still late, suggesting
    ongoing problems in the production process.
    ---------------------------------------------------------------------------
        \25\ Defense Acquisitions: Assessments of Selected Major Weapon
    Programs. (GAO-05-301) Government Accountability Office. March 31,
    2005. p. 63.
        \26\ IDA BCA. op cit. p. 4.
    ---------------------------------------------------------------------------
        Another issue concerns weight growth which, all else held equal, is
    generally detrimental to aircraft performance. IDA notes that
    ``airframe weight has increased over 500 lbs. between aircraft numbers
    4028 (Lot 2) and 4041 (Lot 3), while the weight has increased by less
    than 150 lbs. between 4041 (Lot 3) and 4108 (Lot 6).'' \27\ One could
    infer from this finding that improvements are being made to the
    production process. On the other hand, although weight growth may have
    slowed, it still continues, and the weight growth is cumulative. The
    150 lbs. that production added to the airframe during Lot 3 production,
    for example, is on top of the 500 lbs. that were added to the airframe
    earlier. Later aircraft are 650 lbs. heavier than earlier-built
    aircraft.
    ---------------------------------------------------------------------------
        \27\ Ibid. p. 7.
    ---------------------------------------------------------------------------
        Mr. Chairman, this concludes my remarks. I appreciate the
    opportunity to appear before you, and look forward to any questions you
    or the other subcommittee members may have. Thank you.

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

      STATEMENT OF DANIELLE BRIAN, EXECUTIVE DIRECTOR, PROJECT ON
                          GOVERNMENT OVERSIGHT

        Ms. Brian. Thank you, Chairman McCain and distinguished
    members of the committee. Thank you for inviting me today.
        In addition to testifying on behalf of POGO, I'm also
    testifying on behalf of Taxpayers for Common Sense. I have the
    pleasure of serving on their board of directors.
        If you will bear with me for a moment, I would like to draw
    on some recent history. I sat before your committee, nearly a
    decade ago, during the defense industry's mergermania,
    testifying against the then-proposed plan for the Government to
    reimburse defense contractors for reorganization costs incurred
    during the merger. Industry representatives on one panel
    promised future savings on weapons systems that would be
    produced by the newly streamlined defense industry. I, along
    with the GAO, warned the committee that talk is cheap. It's
    easy to promise future savings, but much harder to deliver. The
    committee concluded, at that time, that it'll keep a close
    watch and make sure those promised savings for the taxpayer
    would be realized. If you haven't noticed, our weapons systems
    prices have not been going down during that time.
        Today, we are again hearing of promised future savings.
    This time, fortunately, you're presented with a more easily
    quantifiable assessment as to whether those promised savings
    might ever become reality. It makes good sense before Congress
    commits to buying a major weapons system over many years,
    giving up annual consideration and oversight of the program in
    the process, that Congress makes sure the program is stable and
    mature. Section 2306(b) of title 10 for multiyear procurement
    is a sensible law, and Congress should adhere to its
    requirements.
        In a report that POGO is releasing today, which I ask to be
    included in the record and is now available on our Web site.
        Senator McCain. Without objection, it will be inserted
    after your written statement.
        Ms. Brian. Thank you. We detailed the six legal
    requirements, and, one by one, demonstrate how each of the
    independent congressional analysts and other independent
    analysts tasked with evaluating the F-22A for multiyear
    procurement status concluded, to varying degrees, that not all
    the requirements have been met. Interestingly, according to an
    internal briefing that we have obtained, even the Air Force
    questioned whether it could get away with claiming the program
    had met two of the requirements, noting they would still
    require waivers for the unfunded termination costs and lack of
    full funding, and that they were waiting for the IDA analysis
    on cost savings. That is also an attachment in our report. I'd
    just like to point out that this seems to counter Secretary
    Wynne's statement that the Air Force did not rely on the IDA
    analysis to conclude there were cost savings, because they have
    it as a yellow, pending the IDA analysis.
        For substantial savings, the Air Force and IDA claim there
    will be a 2.5-percent savings throughout the multiyear
    procurement, which, by the way, does not impress me as
    substantial. But the reality is that even after taking into
    account the four additional aircraft purchased through this
    plan, we will still be spending $1 billion more because of the
    inefficiencies created by stretching out production over 3
    years. According to the GAO, unit costs will also increase by
    $17 million per plane. None of this sounds like savings at all,
    let alone substantial savings.
        Stable requirements. Over the years, the number of
    requested F-22 aircraft has plummeted from 750 in 1986 to the
    most recent plan of only 183, clearly demonstrating the lack of
    stability and production rate requirements, in large part
    because the cost per aircraft has tripled.
        Stable funding. The current FYDP does not fully fund the F-
    22. In fact, the program is being underfunded by $674 million,
    according to the Air Force.
        Design stability. In addition to the new untested
    modernization plan, there are ongoing technical problems with
    the existing systems. The Pentagon recently completed a follow-
    on independent test and evaluation on the existing systems, and
    it is also an attachment in our report, from this internal Air
    Force memo. They actually found 75 unresolved deficiencies
    through this follow-on independent test and evaluation system--
    evaluation, which just finished this last December.
        So, new problems that have cropped up include faulty
    cockpit actuators, which trapped a pilot in the jet just this
    April. The pilot had to be rescued from the cockpit with
    chainsaws. Then there's the uncommanded nose landing gear
    retractions, which recently caused an aircraft to fall on its
    main weapons bay doors, literally falling on its face, and
    concerns about the heat treatment of the booms, which may cause
    structural cracking and has been reported by Defense News as
    costing perhaps as much as $1 billion to fix. These and other
    problems point to a system that is not yet mature and is in
    need of continuous congressional oversight. A multiyear
    procurement plan will only tie Congress's hands, and not allow
    for adequate oversight.
        Realistic cost estimates. The Air Force has a history of
    not providing accurate cost estimates, and there's little
    reason to believe that it will be any more accurate for this
    round of procurement. Five years ago, the House Government
    Reform Subcommittee on National Security was frustrated in
    getting accurate F-22 program cost estimates from the Air
    Force. The subcommittee asked the GAO to look at those
    estimates. What the GAO found was a $7 billion variance between
    the Air Force's cost estimates and those made by OSD's CAIG,
    the organization that was discussed in the first panel that
    evidently is no longer doing analysis of these cost estimates.
        At the time, Chairman Chris Shays wrote to House Armed
    Services Chairman Hunter, ``As you proceed with your
    deliberations on the pace and scope of the F-22A program,
    please be advised we can have little confidence in the accuracy
    of production cost estimates, and less confidence in the
    legitimacy of projected production cost estimates, based on
    those estimates.''
        In November 2005, the DCAA actually did their own analysis
    internally, and found that there is moderate to high risk in
    the cost estimate development for the F-22, finding about $141
    million in unsupported, inaccurate, or defective data in Air
    Force cost estimates. This DCAA analysis is also attached to
    our report.
        Given all the evidence that the F-22A program is not ripe
    for multiyear procurement, why did the Senate vote in favor of
    it? In a brazen example of the military industrial complex at
    work, Lockheed Martin e-mailed the Chambliss amendment
    proposing F-22 multiyear procurement status to an undisclosed
    list of Senate offices before the amendment had even been
    introduced by the Senator. Attached to that e-mail was an
    analysis selectively touting the findings of IDA, claiming
    ``IDA found the F-22A meets all title 10 entrance criteria for
    a multiyear contract.''
        That claim in the Lockheed e-mail appears to be based on a
    misreading of the IDA report. IDA limited its analysis to only
    one requirement, that there be cost savings; however, IDA
    attached to their report two unattributed documents at the end
    of their report which assert the F-22 meets all six
    requirements. Because the author of these documents is not
    clearly identified, the wrong impression appears to have been
    reached that these were IDA's conclusions. In fact, however,
    these were Pentagon exhibits for the fiscal year 2007
    President's budget, and not independent analysis by IDA.
        Senator Chambliss, you don't have to investigate the
    committee staff to find out who was working with the Washington
    Post. POGO was the source of that information, and you will
    find, in POGO's report, extensive documentation that proves the
    conflict of interest of IDA's president.
        I would submit that the appearance of conflict of interest
    is not just the substantial personal financial interest, but
    also his fiduciary responsibility to the organization where he
    sits on the board, EDO, in the continued funding of the F-22A.
    This raises reasonable questions about the independence of
    IDA's analysis. I'm glad to hear that both Chairman Warner and
    Comptroller General Walker agree.
        It is important to understand that I am in no way
    suggesting that Admiral Blair has violated any laws or any
    regulations. What we discovered is that while FFRDCs such as
    IDA have enjoyed the credibility of being regarded as an arm of
    the Government, the laws treat them purely as contractors. As a
    result, conflict-of-interest laws that apply to Government
    employees do not apply to the employees of these FFRDCs. There
    is a disconnect between the perception that FFRDCs have to
    comply with conflict-of-interest laws and the reality. I agree
    that this problem is worth Congress's further attention.
        In conclusion, it is clear that independent congressional
    analysts have significant concerns with accepting the F-22
    program as a candidate for multiyear procurement. Based on
    POGO's research, we do not believe the F-22 meets the
    requirements, and recommend that Congress remove the language
    authorizing the multiyear procurement until such time that the
    program meets those requirements. We also recommend that
    Congress establish a definition of ``substantial savings'' of
    being at least 10 percent.
        Furthermore, POGO recommends that Congress consider
    applying conflict-of-interest rules to FFRDCs.
        Thank you, again, for inviting me to testify today.
        [The prepared statement of Ms. Brian follows:]
                      Prepared Statement by Danielle Brian
        Senators McCain and Lieberman, thank you for inviting me today. I
    am the Executive Director of the Project On Government Oversight
    (POGO), an independent nonprofit organization that investigates
    corruption and other misconduct in order to achieve a more accountable
    Federal Government. Since our founding 25 years ago, we have been
    working to prevent wasteful defense spending, which often comes from
    buying weapons that don't work or that we don't need. I am also
    testifying on behalf of Taxpayers for Common Sense, a national non-
    partisan budget watchdog. I have the pleasure of serving on their board
    of directors.
        If you will bear with me for a moment, I would like to draw on some
    recent history. I sat before your committee in April 1997, during the
    defense industry's merger-mania, testifying against the then-proposed
    plan for the Government to reimburse defense contractors for
    reorganization costs incurred during a merger. Industry representatives
    on one panel promised future savings on weapons systems that would be
    produced by the newly-streamlined defense industry. I, along with the
    Government Accountability Office (GAO) analyst David Cooper, warned the
    Senate Armed Services Committee that talk is cheap--it is easy to
    promise future savings, but much harder to deliver. The committee
    concluded that it would keep a close watch and make sure that those
    promised savings for the taxpayer would be realized. If you haven't
    noticed, our weapons systems prices have not been going down. We've
    gone from having 400 of our frontline fighter, the F-15, to only a
    possible 183 of the F-22A at more than 10 times the cost of the F-15.
    This phenomenon has been described by one aircraft designer as
    unilateral disarmament.
        Today we are again hearing of promised future savings. This time,
    fortunately, you are presented with a more easily-quantifiable
    assessment as to whether those promised savings might ever become
    reality. Section 2306b of title 10 of the U.S. Code requires that six
    basic legal conditions be met before entering into a multiyear
    procurement contract. These legal conditions are: (1) the contract will
    result in substantial savings, (2) the requirements will remain stable,
    (3) there is stable funding, (4) there is a stable design and technical
    risks are low, (5) there are realistic cost estimates, and (6) the use
    of this contract will promote national security.
        It makes good sense, before Congress commits to buying a major
    weapons system over many years--giving up annual consideration and
    oversight of the program in the process--that Congress makes sure the
    program is stable and mature. Section 2306b of title 10 is a sensible
    law and Congress should adhere to its requirements.
        In a report POGO is releasing today--which I ask to be included in
    the record--we detail the six legal requirements and, one by one,
    demonstrate how each of the independent congressional analysts tasked
    with evaluating the F-22A for multiyear procurement (MYP) status
    concluded to varying degrees that not all of the requirements have been
    met. The Congressional Research Service (CRS) Institute for Defense
    Analyses (IDA), GAO, Congressional Budget Office (CBO), and Defense
    Contract Audit Agency all provide evidence that the F-22A program is
    not yet ripe for this type of financing scheme. Interestingly,
    according to an internal briefing we have obtained, even the Air Force
    questioned whether it could get away with claiming the program had met
    two of the requirements, noting they would still require waivers for
    the unfunded termination costs and the lack of full funding, and they
    were waiting for the IDA analysis on cost savings.
        I would like to discuss how the F-22A program does not meet the six
    legal requirements for multiyear procurement as set out by title 10.
    Substantial Savings
        The Air Force claims there will be a 2.5-percent savings through
    the multiyear procurement, which by the way, does not impress me as
    substantial. But, the reality is that even after taking into account
    the four additional aircraft purchased through this plan, we will be
    spending $1 billion more because of the inefficiencies created by
    stretching out production over 3 years. According to the GAO, unit
    costs will also increase by $17 million per plane. None of this sounds
    like savings at all, let alone substantial savings.
    Stable Requirements
        Over the years, the number of requested F-22 aircraft has plummeted
    from 750 in 1986 to the most recent plan of only 183--clearly
    demonstrating the lack of stability in production rate requirements--in
    large part because the cost per aircraft has tripled.
    Stable Funding
        The current Future Years Defense Plan (FYDP) does not fully fund
    the F-22A. In fact, the program is being underfunded by $674 million,
    according to the Air Force.
    Design Stability
        Attached to my testimony is the Air Force plan to fund its
    modernization of the F-22A through 2010. The plan primarily addresses
    the new radar system, which is not even scheduled to be received by the
    Air Force until November of this year, and the software is not
    scheduled to be completed until 2010. This radar system is considered
    integral to the F-22A's ground-attack and intelligence gathering
    capabilities. According to the GAO, the Air Force ``is planning
    additional modernization efforts for more of these capabilities in the
    future, but the cost, content, and timing have not yet been
    determined.'' Remember, these systems still have not been tested.
        In addition to the new, untested systems there are ongoing
    technical problems with the existing systems. The Pentagon recently
    completed a follow-on independent test and evaluation on the existing
    systems, and found 75 unresolved deficiencies. New problems that have
    cropped up include faulty cockpit actuators--which trapped a pilot in
    the jet just this April--the pilot had to be rescued from his cockpit
    with chainsaws. Then there is the uncommanded nose landing gear
    retractions, which recently caused an aircraft to fall on its main
    weapons bay doors--literally falling on its face; and concerns about
    the heat treatment of the booms, which may cause structural cracking,
    and has been reported by Defense News as costing nearly $1 billion to
    fix. These and other problems all point to a system that is not mature
    and is in need of rigorous congressional oversight. A multiyear
    procurement plan would only tie Congress' hands and not allow for such
    oversight.
    Realistic Cost Estimates
        The Air Force has a history of not providing accurate cost
    estimates, and there is little reason to believe that it will be any
    more accurate for this round of procurement. For instance, 5 years ago,
    the House Government Reform Subcommittee on National Security was
    frustrated in getting accurate F-22A program cost estimates from the
    Air Force. The subcommittee had tasked the GAO with reviewing the F-22A
    program's cost reduction plans. What the GAO found was a $7 billion
    variance between the Air Force's cost estimates and those made by the
    Office of the Secretary of Defense's Cost Analysis Improvement Group.
    On August 20, 2001, Subcommittee Chairman Chris Shays wrote to House
    Armed Services Committee Chairman Duncan Hunter that, ``. . . as you
    proceed with your deliberations on the pace and scope of the F-22A
    program, please be advised we can have little confidence in the
    accuracy of production cost estimates and less confidence in the
    legitimacy of projected production cost savings based on those
    estimates.'' (I ask that this letter be included in the record.)
        In November 2005, the Defense Contract Audit Agency stated that
    there is ``moderate to high risk . . . [in] cost estimate development''
    for the F-22A program, as they found $141 million in unsupported,
    inaccurate, or defective data in Air Force cost estimates.
        Another more recent incident fuels POGO's doubts about the accuracy
    of the F-22A cost estimates. You may recall the debate in the Senate
    last spring over whether or not to support Secretary Rumsfeld's
    decision to cancel the C130J cargo plane. Although the contract clearly
    stated that cancellation costs would be $383 million, some of the very
    same people handling this F-22A procurement plan circulated to the
    Senate wildly-inflated and unsupported claims that the C-130J's
    cancellation costs would be nearly $1.8 billion. Based on that
    information, the Senate decided to go ahead and continue the contract.
    Last month, the Department of Defense (DOD) Inspector General concluded
    that those claims were false and based on potentially faulty data--and
    caused a $1.5 billion exaggeration. To my knowledge, no one has been
    held accountable for misleading Congress, but there are probably many
    people who know they successfully pulled the wool over the Senate's
    eyes. POGO's concern is that some of the folks handling the F-22A
    procurement are not above wild exaggerations to ensure that their
    program is approved.
    National Security Interests
        At the end of the day, perhaps the most important question
    remains--why are we continuing to fund a Cold War-era weapon that was
    designed to counter the next-generation Soviet fighters that were never
    constructed? In fact, the GAO stated in its June 2006 letter to House
    Appropriations Subcommittee on Defense Chairman C.W. Bill Young that,
    ``Based on our review, in our opinion, the DOD has not demonstrated the
    need or value for making further investments in the F-22A program.''
    While the final requirement of the law--that it promotes the national
    security of the United States--is a matter of judgment and is not
    quantifiable, the ballooning costs of this aircraft render it
    impossible to meet the Air Force's own stated requirements for 381 F-
    22As ``in order to meet the needs of the warfighter.'' If it is too
    expensive to buy enough planes to meet our national security needs,
    this certainly challenges the assumption that the final requirement has
    been met.
        Given all of the evidence that the F-22A program is not ripe for
    multiyear procurement, why did the Senate vote in favor of it? In a
    brazen example of the Military-Industrial Complex at work, Lockheed
    Martin e-mailed the Chambliss amendment proposing F-22A multiyear
    procurement status to an undisclosed list of Senate offices before the
    amendment had even been introduced by the Senator. Attached to that e-
    mail was an analysis selectively touting the findings of IDA, claiming
    ``IDA found the F-22A meets all title 10 entrance criteria for a
    multiyear contract.'' That claim in the Lockheed e-mail appears to be
    based on a misreading of the IDA report. IDA limited its analysis to
    only one requirement--that there be cost savings. However, IDA attached
    two unattributed documents at the end of its report which assert the F-
    22A meets all six requirements. Because the author of these documents
    is not clearly identified, the wrong impression appears to have been
    reached that they were IDA's conclusions. In fact, however, these are
    Pentagon exhibits for the fiscal year 2007 President's budget and not
    independent analyses by IDA.
        POGO's investigators began exploring how IDA could have found
    evidence to support a multiyear procurement, even though they
    acknowledged ``this form of contracting bears significant risks.'' What
    we found shocked us, as well as former high-level employees of IDA. The
    current President of IDA, Admiral Dennis C. Blair, also sits on the
    board of an F-22A subcontractor named EDO Corporation, as well as
    another defense contractor. He and his family own 1,787 shares of stock
    and 30,000 stock options in EDO, according to documents EDO submitted
    to the Securities and Exchange Commission. These shares and stock
    options are currently worth well over half a million dollars, should he
    choose to exercise those options. EDO has received contracts for almost
    $90 million from Lockheed Martin for supplying the advanced medium-
    range, air-to-air missile vertical ejection launcher for the F-22A.
        While Admiral Blair was not an author of the IDA report, we
    understand that because of IDA standard operating procedures, he likely
    would have reviewed this report before it was made available to the
    Government. We do not know if Admiral Blair recused himself, or in any
    way affected the outcome of the IDA report. I would submit, however,
    that there is an appearance of a conflict-of-interest--given his
    substantial personal financial interest and his fiduciary
    responsibility to EDO--in the continued funding of the F-22A. This
    raises reasonable questions about the independence of IDA's analysis.
        It is important that you understand I am in no way suggesting that
    Admiral Blair has violated any laws or regulations. What we have
    discovered though, is that while federally-funded research and
    development centers (FFRDCs) such as IDA have enjoyed the credibility
    of being regarded as an arm of the Government, the laws treat them
    purely as contractors. As a result, conflict-of-interest laws that
    apply to Government employees do not apply to the employees of FFRDCs.
    There is a disconnect between the perception that FFRDCs have to comply
    with conflict-of-interest laws and the reality. This problem is worth
    Congress' further attention.
        When initially asked to testify today, I was also asked to address
    the proposal to purchase the F-22A's F119 engines through multiyear
    procurement. In short, why should Congress commit to buying a part of
    the aircraft for several years, when the commitment to buying the
    entire aircraft is uncertain? The jury is still out on future buys of
    the F-22A, and there is the risk that the engines will just stack up in
    a warehouse with nowhere to go.
        In conclusion, it is clear that independent congressional analysts
    have significant concerns with accepting the F-22A program as a
    candidate for multiyear procurement. Based on its own research, POGO
    does not believe the F-22A program meets multiyear procurement
    requirements, and recommends that Congress remove the language
    authorizing the multiyear procurement until such time that the program
    meets those requirements.
        Furthermore, POGO recommends that Congress consider applying
    conflict-of-interest rules to FFRDCs.
        Thank you again for inviting me to testify today.

        [The report referred to follows:]
        [GRAPHIC] [TIFF OMITTED] 30350.001

        [GRAPHIC] [TIFF OMITTED] 30350.002

        [GRAPHIC] [TIFF OMITTED] 30350.003

        [GRAPHIC] [TIFF OMITTED] 30350.004

        [GRAPHIC] [TIFF OMITTED] 30350.005

        [GRAPHIC] [TIFF OMITTED] 30350.006

        [GRAPHIC] [TIFF OMITTED] 30350.007

        [GRAPHIC] [TIFF OMITTED] 30350.008

        [GRAPHIC] [TIFF OMITTED] 30350.009

        [GRAPHIC] [TIFF OMITTED] 30350.010

        [GRAPHIC] [TIFF OMITTED] 30350.011

        [GRAPHIC] [TIFF OMITTED] 30350.012

        [GRAPHIC] [TIFF OMITTED] 30350.013

        [GRAPHIC] [TIFF OMITTED] 30350.014

        [GRAPHIC] [TIFF OMITTED] 30350.015

        [GRAPHIC] [TIFF OMITTED] 30350.016

        [GRAPHIC] [TIFF OMITTED] 30350.017

        [GRAPHIC] [TIFF OMITTED] 30350.018

        [GRAPHIC] [TIFF OMITTED] 30350.019

        [GRAPHIC] [TIFF OMITTED] 30350.020

        [GRAPHIC] [TIFF OMITTED] 30350.021

        [GRAPHIC] [TIFF OMITTED] 30350.022

        [GRAPHIC] [TIFF OMITTED] 30350.023

        [GRAPHIC] [TIFF OMITTED] 30350.024

        [GRAPHIC] [TIFF OMITTED] 30350.025

        [GRAPHIC] [TIFF OMITTED] 30350.026

        [GRAPHIC] [TIFF OMITTED] 30350.027

        [GRAPHIC] [TIFF OMITTED] 30350.028

        [GRAPHIC] [TIFF OMITTED] 30350.029

        [GRAPHIC] [TIFF OMITTED] 30350.030

        [GRAPHIC] [TIFF OMITTED] 30350.031

        [GRAPHIC] [TIFF OMITTED] 30350.032

        [GRAPHIC] [TIFF OMITTED] 30350.033

        [GRAPHIC] [TIFF OMITTED] 30350.034

        [GRAPHIC] [TIFF OMITTED] 30350.035

        [GRAPHIC] [TIFF OMITTED] 30350.036

        [GRAPHIC] [TIFF OMITTED] 30350.037

        [GRAPHIC] [TIFF OMITTED] 30350.038

        [GRAPHIC] [TIFF OMITTED] 30350.039

        [GRAPHIC] [TIFF OMITTED] 30350.040

        [GRAPHIC] [TIFF OMITTED] 30350.041

        [GRAPHIC] [TIFF OMITTED] 30350.042

        [GRAPHIC] [TIFF OMITTED] 30350.043

        [GRAPHIC] [TIFF OMITTED] 30350.044

        [GRAPHIC] [TIFF OMITTED] 30350.045

        [GRAPHIC] [TIFF OMITTED] 30350.046

        [GRAPHIC] [TIFF OMITTED] 30350.047

        [GRAPHIC] [TIFF OMITTED] 30350.048

        [GRAPHIC] [TIFF OMITTED] 30350.049

        [GRAPHIC] [TIFF OMITTED] 30350.050

        [GRAPHIC] [TIFF OMITTED] 30350.051

        [GRAPHIC] [TIFF OMITTED] 30350.052

        [GRAPHIC] [TIFF OMITTED] 30350.053

        [GRAPHIC] [TIFF OMITTED] 30350.054

        [GRAPHIC] [TIFF OMITTED] 30350.055

        [GRAPHIC] [TIFF OMITTED] 30350.056

        [GRAPHIC] [TIFF OMITTED] 30350.057

        [GRAPHIC] [TIFF OMITTED] 30350.058

        [GRAPHIC] [TIFF OMITTED] 30350.059

        [GRAPHIC] [TIFF OMITTED] 30350.060

        [GRAPHIC] [TIFF OMITTED] 30350.061

        [GRAPHIC] [TIFF OMITTED] 30350.062

        [GRAPHIC] [TIFF OMITTED] 30350.063

        [GRAPHIC] [TIFF OMITTED] 30350.064

        [GRAPHIC] [TIFF OMITTED] 30350.065

        [GRAPHIC] [TIFF OMITTED] 30350.066

        [GRAPHIC] [TIFF OMITTED] 30350.067

        [GRAPHIC] [TIFF OMITTED] 30350.068

        [GRAPHIC] [TIFF OMITTED] 30350.069

        [GRAPHIC] [TIFF OMITTED] 30350.070

        [GRAPHIC] [TIFF OMITTED] 30350.071

        [GRAPHIC] [TIFF OMITTED] 30350.072

        [GRAPHIC] [TIFF OMITTED] 30350.073

        [GRAPHIC] [TIFF OMITTED] 30350.074

        [GRAPHIC] [TIFF OMITTED] 30350.075

        [GRAPHIC] [TIFF OMITTED] 30350.076

        [GRAPHIC] [TIFF OMITTED] 30350.077

        [GRAPHIC] [TIFF OMITTED] 30350.078

        [GRAPHIC] [TIFF OMITTED] 30350.079

        [GRAPHIC] [TIFF OMITTED] 30350.080

        [GRAPHIC] [TIFF OMITTED] 30350.081

        [GRAPHIC] [TIFF OMITTED] 30350.082

        [GRAPHIC] [TIFF OMITTED] 30350.083

        [GRAPHIC] [TIFF OMITTED] 30350.084

        [GRAPHIC] [TIFF OMITTED] 30350.085

        [GRAPHIC] [TIFF OMITTED] 30350.086

        [GRAPHIC] [TIFF OMITTED] 30350.087

        [GRAPHIC] [TIFF OMITTED] 30350.088

        [GRAPHIC] [TIFF OMITTED] 30350.089

        [GRAPHIC] [TIFF OMITTED] 30350.090

        [GRAPHIC] [TIFF OMITTED] 30350.091

        [GRAPHIC] [TIFF OMITTED] 30350.092

        [GRAPHIC] [TIFF OMITTED] 30350.093

        [GRAPHIC] [TIFF OMITTED] 30350.094

        [GRAPHIC] [TIFF OMITTED] 30350.095

        [GRAPHIC] [TIFF OMITTED] 30350.096

        [GRAPHIC] [TIFF OMITTED] 30350.097

        [GRAPHIC] [TIFF OMITTED] 30350.098

        [GRAPHIC] [TIFF OMITTED] 30350.099

        [GRAPHIC] [TIFF OMITTED] 30350.100

        [GRAPHIC] [TIFF OMITTED] 30350.101

        [GRAPHIC] [TIFF OMITTED] 30350.102

        [GRAPHIC] [TIFF OMITTED] 30350.103

        [GRAPHIC] [TIFF OMITTED] 30350.104

        [GRAPHIC] [TIFF OMITTED] 30350.105

        [GRAPHIC] [TIFF OMITTED] 30350.106

        [GRAPHIC] [TIFF OMITTED] 30350.107

        [GRAPHIC] [TIFF OMITTED] 30350.108

        [GRAPHIC] [TIFF OMITTED] 30350.109

        [GRAPHIC] [TIFF OMITTED] 30350.110

        [GRAPHIC] [TIFF OMITTED] 30350.111

        [GRAPHIC] [TIFF OMITTED] 30350.112

        [GRAPHIC] [TIFF OMITTED] 30350.113

        [GRAPHIC] [TIFF OMITTED] 30350.114

        [GRAPHIC] [TIFF OMITTED] 30350.115

        [GRAPHIC] [TIFF OMITTED] 30350.116

        [GRAPHIC] [TIFF OMITTED] 30350.117

        [GRAPHIC] [TIFF OMITTED] 30350.118

        [GRAPHIC] [TIFF OMITTED] 30350.119

        [GRAPHIC] [TIFF OMITTED] 30350.120

        [GRAPHIC] [TIFF OMITTED] 30350.121

        [GRAPHIC] [TIFF OMITTED] 30350.122

        [GRAPHIC] [TIFF OMITTED] 30350.123

        [GRAPHIC] [TIFF OMITTED] 30350.124

        [GRAPHIC] [TIFF OMITTED] 30350.125

        [GRAPHIC] [TIFF OMITTED] 30350.126

        [GRAPHIC] [TIFF OMITTED] 30350.127

        [GRAPHIC] [TIFF OMITTED] 30350.128

        [GRAPHIC] [TIFF OMITTED] 30350.129

        [GRAPHIC] [TIFF OMITTED] 30350.130

        [GRAPHIC] [TIFF OMITTED] 30350.131

        [GRAPHIC] [TIFF OMITTED] 30350.132

        [GRAPHIC] [TIFF OMITTED] 30350.133

        [GRAPHIC] [TIFF OMITTED] 30350.134

        [GRAPHIC] [TIFF OMITTED] 30350.135

        [GRAPHIC] [TIFF OMITTED] 30350.136

        [GRAPHIC] [TIFF OMITTED] 30350.137

        [GRAPHIC] [TIFF OMITTED] 30350.138

        [GRAPHIC] [TIFF OMITTED] 30350.139

        [GRAPHIC] [TIFF OMITTED] 30350.140

        [GRAPHIC] [TIFF OMITTED] 30350.141

        [GRAPHIC] [TIFF OMITTED] 30350.142

        [GRAPHIC] [TIFF OMITTED] 30350.143

        [GRAPHIC] [TIFF OMITTED] 30350.144

        [GRAPHIC] [TIFF OMITTED] 30350.145

        [GRAPHIC] [TIFF OMITTED] 30350.146

        [GRAPHIC] [TIFF OMITTED] 30350.147

        [GRAPHIC] [TIFF OMITTED] 30350.148

        [GRAPHIC] [TIFF OMITTED] 30350.149

        [GRAPHIC] [TIFF OMITTED] 30350.150

        [GRAPHIC] [TIFF OMITTED] 30350.151

        [GRAPHIC] [TIFF OMITTED] 30350.152

        [GRAPHIC] [TIFF OMITTED] 30350.153

        [GRAPHIC] [TIFF OMITTED] 30350.154

        [GRAPHIC] [TIFF OMITTED] 30350.155

        [GRAPHIC] [TIFF OMITTED] 30350.156

        [GRAPHIC] [TIFF OMITTED] 30350.157

        [GRAPHIC] [TIFF OMITTED] 30350.158

        [GRAPHIC] [TIFF OMITTED] 30350.159

        [GRAPHIC] [TIFF OMITTED] 30350.160

        [GRAPHIC] [TIFF OMITTED] 30350.161

        [GRAPHIC] [TIFF OMITTED] 30350.162

        [GRAPHIC] [TIFF OMITTED] 30350.163

        [GRAPHIC] [TIFF OMITTED] 30350.164

        [GRAPHIC] [TIFF OMITTED] 30350.165

        [GRAPHIC] [TIFF OMITTED] 30350.166

        [GRAPHIC] [TIFF OMITTED] 30350.167

        [GRAPHIC] [TIFF OMITTED] 30350.168

        [GRAPHIC] [TIFF OMITTED] 30350.169

        [GRAPHIC] [TIFF OMITTED] 30350.170

        [GRAPHIC] [TIFF OMITTED] 30350.171

        [GRAPHIC] [TIFF OMITTED] 30350.172

        [GRAPHIC] [TIFF OMITTED] 30350.173

        [GRAPHIC] [TIFF OMITTED] 30350.174

        [GRAPHIC] [TIFF OMITTED] 30350.175

        [GRAPHIC] [TIFF OMITTED] 30350.176

        [GRAPHIC] [TIFF OMITTED] 30350.177

        [GRAPHIC] [TIFF OMITTED] 30350.178

        [GRAPHIC] [TIFF OMITTED] 30350.179

        [GRAPHIC] [TIFF OMITTED] 30350.180

        [GRAPHIC] [TIFF OMITTED] 30350.181

        [GRAPHIC] [TIFF OMITTED] 30350.182

        Senator McCain. Thank you, Ms. Brian.
        Dr. Nelson, given the issue that's been raised today, we'll
    keep the record open so that Admiral Blair, whose name I did
    not mention--and the issue I did not mention--but, since it has
    been brought up, we'll keep the record open for a letter from
    Admiral Blair to explain these issues that have been raised. In
    retrospect, I understand and appreciate your defense of him.
        [The information referred to follows:]

        Dr. Nelson. Thank you, Mr. Chairman. For the record, we
    will do that, and provide the chronology that I read
    previously.
        [The information referred to follows:]

        Senator McCain. Thank you very much.
        Dr. Nelson, do you find it interesting that the Comptroller
    General of the United States and his staff, the CBO, the CRS,
    and literally every outside organization disagrees with your
    conclusions that a multiyear procurement is good for America
    and good for the budgetary process? Do you find it interesting
    that all of these organizations, which are truly independent,
    are in disagreement with your conclusions?
        Dr. Nelson. Sir, we do not make recommendations, we do not
    endorse, we do not make decisions. In my statement, I have a
    final----
        Senator McCain. Excuse me, that they disagree with your
    analysis. Let me put it that way.
        Dr. Nelson. Okay. Analysts can disagree. Certainly, again,
    if we're confining ourself to the findings with regard to the
    savings, we found $225 million in a constrained budget, $235
    million in an unconstrained budget, and we stand by our
    numbers. We did the analysis. We provide information, analyses,
    and data to our sponsors. Our sponsors make the decisions and
    that's what our role was in this task.
        I would like to say one thing about the point brought up
    concerning the appendices, the exhibits in our study.
    Everything in our study is ours. We developed the appendices in
    order to provide perspective to our sponsor with regard to what
    the exhibits would look like with our numbers embedded in them
    that might be submitted by the Air Force. That was it.
        Senator McCain. Thank you. Is it your opinion that it would
    have been more helpful if this analysis had included the impact
    on the JSF on this procurement? I know you were not asked to do
    that, but----
        Dr. Nelson. Right.
        Senator McCain.--do you feel that that would be, in your
    experience, something that we should take into consideration?
        Dr. Nelson. In terms of the impact on industrial base and
    understanding the full impact across programs, across plant
    sites, across common activities that are provided by suppliers
    and contractors to both the F-22 and the JSF, yes, that would
    be interesting. The Air Force Cost Analysis Agency did do work
    on that, and that is what is included in the Air Force
    exhibits.
        Senator McCain. Mr. Bolkcom and Mr. Newman, in your
    respective experience, have you ever seen a request sent to
    Congress in which authorization for a multiyear procurement
    proposal is being sought before a current budget request or a
    FYDP have been submitted?
        Mr. Newman?
        Mr. Newman. Not in my experience, no, Senator.
        Senator McCain. Mr. Bolkcom?
        Mr. Bolkcom. Not in 6 years, Mr. Chairman.
        Senator McCain. Interesting.
        Senator Dayton? We have a vote that's started.
        Senator Dayton. I recognize that, Mr. Chairman. For that
    reason, I won't pursue questions, except I will wait, as the
    chairman said, Dr. Nelson, for the response. I do want to just
    ask for a reconciliation of what your comments were with the
    statement in the Washington Post article, since it is now a
    public document, public record, that Admiral Blair, ``said he
    was heavily involved in the preparation of the report endorsing
    the multiyear procurement.'' He's quoted as saying, ``As the
    chairman of an annual review committee that approved its final
    form, I'm on the top of that process.'' If that's out of
    context or a misquote or a misstatement, I think it's important
    that he correct such for the public record.
        Dr. Nelson. Absolutely.
        Senator Dayton. Ms. Brian, I'd just like to say I would
    like to work with you, and we need to proceed quickly if we're
    going to include it in one of the bills going through this
    year, but to get a requirement that would put these contractors
    under the same requirements for conflict of interest and
    disclosure as Federal employees. So, if you could work with my
    office on that, I'd appreciate it.
        Ms. Brian. I look forward to working with you Senator.
        Senator Dayton. Thank you.
        Thank you, Mr. Chairman.
        Senator McCain. Could I just point out again, I think
    before this committee or anyone reaches any conclusions, we
    should hear directly from Admiral Blair, and that's why we're
    keeping the record open on this issue.
        Senator Chambliss.
        Senator Chambliss. Are you intending to come back after the
    vote, Mr. Chairman? Because, if not--if you don't have any more
    questions, I will be quick.
        Senator McCain. Okay, sure. Yes, I wasn't going to come
    back. I think we have more than one vote.
        Senator Chambliss. Okay. Let me just ask a couple of
    questions of Mr. Newman. First of all, who is your customer, as
    an agent of CBO, Mr. Newman?
        Mr. Newman. Congress is, sir.
        Senator Chambliss. Okay. Well, let me just compliment CBO
    for making the effort to contact Congress relative to some
    questions that you had regarding this multiyear program. Unlike
    GAO, CBO submitted a list of questions to the Air Force, dated
    July 18, 2006. You got answers to those, and that's what you
    base your opinion on. You have budget issues, and I appreciate
    that.
        To Mr. Bolkcom, who is the customer of CRS?
        Mr. Bolkcom. Congress, sir.
        Senator Chambliss. Again, let me compliment CRS, because,
    unlike GAO, whose customer is also Congress, CRS submitted
    questions on 11 July to the Air Force, and they were legitimate
    questions. They have been responded to by the Air Force, and
    they make up a part of your opinion here.
        So, I just think it's important that everybody know and
    understand that even though Congress may be the customer, that
    our folks should make a thorough investigation. Obviously you
    two did and I appreciate that, even though I may disagree with
    some of your conclusions.
        [On July 31, Mr. Walker provided the following
    information:]

        Senator Chambliss. Lastly, Mr. Nelson, as a part of your
    submission relative to Admiral Blair--I don't want you to go
    into an explanation of the question of the folks from the
    Pentagon and the way they participated and the work--you said
    that you did the work--and would you just give us a written
    explanation of what you mean by that, as a part of submitting
    your answers to this committee?
        Dr. Nelson. Yes, sir.
        [The information referred to follows:]

        The estimate of MYP savings is IDA's independent estimate. There
    were no direct influences on the results by the Department of Defense.
    IDA's basic model for conducting tasks is:

             The sponsor frames the question and helps to provide access
            to needed factual information.
             IDA provides the answer.
             The sponsor decides what use to make of IDA's analysis and
            recommendations.

        That is how we proceeded in this instance. A cost analysis,
    including our study of the F-22A MYP, cannot be done in a factual
    vacuum. We needed to know the specific facts of the task; for example,
    the number of units still to be purchased of various F-22A systems and
    subsystems, the inflation factors to be used, the annual quantities
    planned, and the funding available, along with many other items. These
    facts were largely in the hands of the sponsor, the Air Force and the
    F-22A primes and subcontractors. Accordingly, we had extensive
    conversations with, and received information from, all of these
    organizations.

        Senator Chambliss. Thank you, Mr. Chairman.
        Senator McCain. Thank you.
        Senator Chambliss, I totally agree with you and other
    members, allegations have been made. Before we reach any
    conclusion about that, we should get full and complete
    information, including a response from Admiral Blair, who had a
    record of very honorable service to this country.
        Senator Chambliss. Let me make one other comment, Mr.
    Chairman.
        Senator McCain. Sure.
        Senator Chambliss. I spoke earlier, and I should not have
    said what I said. Based on the information I have, I apologize
    for any comment relative to suggesting that staff was the
    source of that newspaper article. I appreciate Ms. Brian's
    comments about where it came from.
        Senator McCain. Well, I've never trusted the staff either.
    [Laughter.]
        Thank you very much.
        We will adjourn the hearing. Thank you very much.
        [Questions for the record with answers supplied follow:]
                   Questions Submitted by Senator John McCain
                     continuous fifth-generation production
        1. Senator McCain. Secretary Wynne and Mr. Finley, will you please
    explain why the F-22A production line needs to be extended given
    Lockheed Martin is building F-22A and Joint Strike Fighter (JSF) in
    different locations and not on the same production line?
        Secretary Wynne. There are both operational and industrial base
    benefits of minimizing or eliminating the gap between F-22A Raptor and
    F-35 Lightning II production. From an operational perspective,
    extending F-22A production provides America with an active fifth-
    generation fighter production line producing roughly two combat-coded
    aircraft each month to meet national security requirements in a very
    uncertain global environment. From an industrial base perspective, the
    F-22A and F-35 share production facilities in several locations across
    the United States to include some major facilities like Fort Worth,
    Texas (Lockheed Martin); Hartford, Connecticut (Pratt & Whitney); and
    Baltimore, Maryland (Northrup Grumman). Since the two aircraft employ
    very similar technologies, they have many common suppliers at every
    tier that are affected by cuts to either program. The proposed
    multiyear contract for 60 F-22As spanning three lots provides necessary
    stability for this essential supplier base during a critical period
    prior to the start of F-35 low-rate initial production (LRIP).
        Mr. Finley. The decision to extend F-22A production was made to
    maintain a viable fifth-generation production line, smooth the
    transition to JSF production, and preserve future investment options,
    components for the F-22 and JSF are built at locations throughout the
    country by a large and similar supplier base, enabling a smooth
    transition in each of the different final assembly locations.

                             requirement stability
        2. Senator McCain. Secretary Wynne and Mr. Finley, after 19 years
    and several reductions in quantity, from 750, to 648, to 442, to 440,
    to 342, to 341, to 278, to 279, to 181, to 185, to 183 aircraft, and
    changes in quantities in both of the last two budget submissions, how
    can the Office of the Secretary of Defense (OSD) and the Air Force
    assure us that there will be no more reductions?
        Secretary Wynne. I have learned there are no guarantees, but every
    indication is that 183 units of the F-22A narrowly support the 7
    squadrons we believe is the minimum necessary to support the Air
    Expeditionary Force construct. On the other hand, the Department of
    Defense (DOD) analysis of the fifth-generation tactical fighter
    capability sees 183 units as sufficient to bridge from the F-22A to the
    F-35 production. We believe that this unit quantity will be unchanged,
    unless the F-35 production slips and opens a gap in the availability of
    a fifth-generation warm line. The F-35 program looks to be on track,
    and therefore the likelihood of a gap minimal.
        Mr. Finley. The 183 F-22 aircraft reflected in the President's
    fiscal year 2007 budget are based on the Joint Air Dominance Study
    performed to support the Quadrennial Defense Review (QDR). It reflects
    a balance between military requirements and fiscal reality. If Congress
    approves the multiyear procurement (MYP), the Secretary of the Air
    Force has committed to fully funding procurement of these aircraft
    within the Air Force budget. If the balance between military
    requirements and fiscal reality changes, then the quantities may be
    adjusted upward or, if the MYP is not approved, downward.

                           date for end of production
        3. Senator McCain. Secretary Wynne and Mr. Finley, the cited
    purpose for changing the strategy was to extend production to 2010.
    Yet, the appropriators have approved fully funding the first year of
    the MYP in 2007, thereby taking away the need for incremental funding
    in fiscal year 2007. If Congress fully funds each year of the proposed
    multiyear contract it would mean the primary purpose would not be met
    as production would be completed in 2009. Does this mean you would buy
    more F-22As after this point to extend the production out to 2010 or
    would you then truncate the program in 2009?
        Secretary Wynne. Under the original split-funded, MYP strategy
    presented in the fiscal year 2007 President's budget (PB), Lot 9
    funding would have been split between fiscal year 2009 and fiscal year
    2010. Since the DOD and the Air Force have abandoned the split funding
    approach in accordance with the defense committees' decisions, Lot 9
    would now be fully funded in fiscal year 2009. Delivery of the last Lot
    9 aircraft, however, is expected in December 2011 under either a split
    funding or a full funding approach, at which point the production line
    is planned to close, absent any additional orders beyond 183 aircraft.
    The Air Force requirement remains 381 aircraft, however the Air Force
    has not requested funds for more than 183 at this time. The actual
    production line activities were only extended 1 year by adding a Lot 9
    regardless of funding strategy.
        Mr. Finley. The Secretary of the Air Force committed to fully
    funding the MYP of F-22 aircraft. This means the last planned lot of
    aircraft, Lot 9, would be procured in fiscal year 2009 resulting in
    production line shutdown in fiscal year 2012 (December 2011). Whether
    fully funded or split funded, the strategy added 1 year to F-22
    production.

        4. Senator McCain. Secretary Wynne and Mr. Finley, will you please
    explain how proposing an MYP now at the end of the program with a
    decreasing rate of production makes good business sense?
        Secretary Wynne. Saving taxpayers dollars and providing program
    stability to reduce risk in an acquisition program makes good business
    sense at any stage of production. In the specific case of the F-22A
    Raptor, however, there is an added business-related benefit of
    providing the stability offered through multiyear contracting for all
    common suppliers of both the F-22A Raptor and the F-35 Lightning II at
    a critical period prior to the start of F-35 LRIP. The QDR specifically
    addresses this key benefit.
        Mr. Finley. MYP is a good business strategy that saves the
    taxpayer's money. In this case, we believe we can save at least $225
    million on procurement of the last 60 aircraft.

                               funding stability
        5. Senator McCain. Secretary Wynne and Mr. Finley, don't the
    considerable technical and modernization challenges represent a threat
    to funding stability?
        Secretary Wynne. The Air Force is committed to fully fund and
    procure all 60 F-22A aircraft through the proposed MYP. There are
    currently no technical issues that affect either design or MYP funding
    stability. The ongoing modernization program is separate from
    procurement and does not impact the stability of funding for the
    proposed MYP. As with any modernization program, candidate capabilities
    must complete rigorous developmental and operational testing prior to
    incorporation into production. In the specific case of the F-22A, the
    risk associated with the ongoing modernization program is further
    mitigated by the fact that major hardware and wiring associated with
    the planned modernization program are incorporated by Lot 6, which will
    set the engineering baseline for all proposed MYP lots (Lots 7-9).
        Mr. Finley. Funding stability as addressed in 10 U.S.C. 2306b(a)(3)
    requires a reasonable expectation that throughout the contemplated
    contract period the head of the agency will request funding for the
    contract at the level required to avoid contract cancellation.
    Secretary Wynne, in his letter of May 16, 2006, addressed to the
    chairman of the Senate Committee on Armed Services, stated that the Air
    Force intends to fund and procure 60 aircraft through the proposed MYP.
    If MYP of the F-22 is approved by Congress, the Department expects that
    sufficient funding will be requested to avoid contract cancellation and
    fully fund the procurement. There are no known technical or
    modernization issues which will impact the cost of the production
    aircraft which will be procured from Lockheed Martin under a firm-fixed
    price contract.

                                design stability
        6. Senator McCain. Secretary Wynne and Mr. Finley, why shouldn't
    the F-22's very challenging modernization program be considered as part
    of the MYP debate on design stability?
        Secretary Wynne. The development program for the F-22A is complete
    and the design is stable. The DOD approved full rate production in
    March 2005 after an extensive design stability review, and the initial
    operational capability (IOC) was declared on 15 December 2005. The F-
    22A has demonstrated over 14,000 developmental tests, training, and
    operational flight hours. The existence of a separate and ongoing
    modernization program is not unique to the F-22A, nor is it any more or
    less challenging than modernization efforts on other major systems.
    Additionally, the ongoing modernization program does not affect the F-
    22A's demonstrated design stability. Like all major weapon systems, the
    F-22A will continue to undergo a modernization program as long as it is
    in the Air Force inventory. MYP has been approved under similar
    circumstances for candidate programs with similar anticipated upgrades,
    including the F/A-18E/F and UH-60 programs. The F-22A has proven its
    air-to-air and air-to-ground capabilities, and as recently as June
    2006, the F-22A demonstrated a 34 of 34 success rate while dropping
    precision munitions. The F-22A design is stable.
        Mr. Finley. 10 U.S.C. 2306b(a)(4) requires that the design be
    stable and that the technical risks are not excessive. The F-22
    successfully completed initial operational test and evaluation (IOT&E)
    and follow-on operational test and evaluation (FOT&E). FOT&E focused on
    verification of corrections to deficiencies identified in IOT&E and
    air-to-ground mission testing using the Joint Direct Attack Munition
    (JDAM). The successful completion of FOT&E, and the production
    readiness assessment performed to support the full rate production
    decision, indicated that the F-22 design is stable. Changes from lot to
    lot during the MYP are not expected to result in any significant
    structural changes to the aircraft or substantial changes to its F119
    engines. F-22 modernization work is being carried out under separate
    research and development contracts. The systems coming from the
    modernization program will be retrofitted into production aircraft
    after they have gone through developmental and operational testing.
    Performing modernization while the MYP is ongoing is consistent with
    other MYPs. For example, the F/A-18E/F, which is in its second MYP, is
    concurrently developing and procuring a new radar, an advanced mission
    computer and displays, a new infrared detection system, and a new
    reconnaissance pod. The F-22 is in operational use and has demonstrated
    over 21,000 total flight hours. IOC was declared in December 2005, an
    operational squadron has been established at Langley Air Force Base
    (AFB), Virginia, and 12 aircraft recently deployed to Alaska,
    completing a joint exercise.

                          future years defense program
        7. Senator McCain. Secretary Wynne and Mr. Finley, why would
    Congress want to authorize an MYP that is not fully funded under a
    current Future Years Defense Program (FYDP)?
        Secretary Wynne. The fiscal year 2007 budget, as presented,
    represented a series of settlements and proposals to connect
    requirements with budget realities. This MYP plan was requested in the
    original February 2006 submission of the fiscal year 2007 PB with a
    commitment to provide the full MYP estimate by May 2006. While this
    could be considered an ``out-of-cycle'' request, the Air Force is
    committed to fully funding the multiyear and will resolve the shortfall
    identified in the May 2006 MYP estimate within the fiscal year 2008 PB
    cycle prior to contract award.
        Mr. Finley. The President's fiscal year 2007 budget proposed a
    unique split funding strategy which has been rejected by Congress.
    Marks by the four defense committees indicate that full funding will be
    directed for procurement of 20 Lot 7 aircraft in fiscal year 2007. The
    Secretary of the Air Force in his May 16, 2006, letter addressed to the
    chairman of the Senate Committee on Armed Services, stated that the Air
    Force intends to fund and procure 60 aircraft through the proposed MYP.
    If an MYP of the F-22 is approved by Congress, the Department expects
    that sufficient funding will be requested to avoid contract
    cancellation as required by 10 U.S.C. 2306b(a)(3).

        8. Senator McCain. Secretary Wynne and Mr. Finley, why should
    Congress grant the Air Force special or preferential treatment in this
    regard?
        Secretary Wynne. The Air Force is not requesting special or
    preferential treatment. If the F-22A MYP is authorized by law, the
    Secretary of Defense will execute the proper certification prior to
    contract award that the FYDP fully funds the support costs associated
    with the F-22A multiyear program, once those costs are fully
    established through contract negotiations, as is required for any MYP
    by subparagraph (A) of paragraph (1) of subsection (i) of section 2306b
    of title 10.
        Secretary Wynne. The Department is not requesting special or
    preferential treatment. The President's fiscal year 2007 budget
    requested MYP authority for the F-22 because it makes good business
    sense. We have the opportunity to save the taxpayers $3.7 million or
    more on each of the 60 aircraft we plan to buy, for a savings of at
    least $225 million.

                              potential start date
        9. Senator McCain. Secretary Wynne and Mr. Finley, isn't it correct
    that even if Congress authorizes the current MYP proposal now, the Air
    Force will not--indeed cannot--enter into the contract until sometime
    after February 2007, when a new budget request and FYDP come out?
    Please explain.
        Secretary Wynne. The Air Force will not award the proposed
    multiyear contract before February 2007. Assuming Congress authorizes
    the F-22A MYP, the Air Force plans to award the F-22A MYP contract in
    May 2007. This date takes into account contractor proposal submissions
    by November 2006 negotiations scheduled for April 2007, and all
    required notifications and certifications to include the requirement at
    10 U.S.C. 2306b(i) for the Secretary of Defense to certify the MYP
    program is fully funded and meets the conditions established by law.
    The certification will occur after the February 2007 submission of a
    new PB and after the completion of MYP contract negotiations.
        Mr. Finley. The Air Force will not award the proposed multiyear
    contract before February 2007. Assuming Congress authorizes the F-22
    MYP, the Air Force plans to award the contract in May 2007. This date
    takes into account contractor proposal submissions by November 2006,
    completion of the negotiations in April 2007, and completion of all
    required notifications and certifications. This includes the 10 U.S.C.
    2306b(i) requirement that the Secretary of Defense certify that the MYP
    is fully funded and meets the conditions established by law. The
    certification will occur after the February 2007 submission of the
    fiscal year 2008 PB.

        10. Senator McCain. Secretary Wynne and Mr. Finley, wouldn't it be
    reasonable to just sign a single year procurement contract now for the
    F-22 and then come back next year, when the multiyear contract is fully
    funded under a new budget request and FYDP? Please explain.
        Secretary Wynne. The proposed 3-year MYP strategy results in
    substantial savings of $225 million over Lots 7, 8, and 9. These
    savings, generated largely from the economic order quantity purchase in
    the first year, would not be achieved if the MYP were reduced to only 2
    years.
        Mr. Finley. No, the MYP would only be for 2 years, foregoing
    savings to the taxpayers which would result from the 3-year MYP
    proposed in the President's fiscal year 2007 budget. The opportunity to
    save at least $225 million makes this worthwhile.

                               analyses conducted
        11. Senator McCain. Secretary Wynne and Mr. Finley, what
    independent analyses did the Air Force conduct that led to the
    conclusion that $225 million and 2.2 percent were ``substantial'' for
    purposes of the statute?
        Secretary Wynne. The OSD contracted with the Institute for Defense
    Analyses (IDA) to complete a Business Case Analysis (BCA) for the F-22A
    MYP. The Air Force agrees with the scope and source of the savings
    identified in the BCA. The analysis concludes that the MYP program will
    result in a cost avoidance of $225 million, or a minimum of $3.75
    million per aircraft, compared to annual contracts for Lots 7, 8, and
    9. These costs savings equate to the opportunity to fund nearly two
    additional aircraft and are comparable to previously approved fighter
    MYP contracts such as the F/A-18E/F program, which saved $3.8 million
    per aircraft.
        Mr. Finley. The Air Force reviewed the independent BCA performed
    for the DOD by IDA of the F-22 MYP. The Air Force agreed with the scope
    and source of the savings identified by IDA. The analysis concluded
    that the MYP would result in a cost savings of $225 million, or a
    minimum of $3.75 million per aircraft, compared to annual contracts for
    Lots 7, 8, and 9. These cost savings are comparable to previously
    approved fighter MYP contracts, such as the F/A-18E/F program which
    saved $3.8 million per aircraft, and are considered substantial.

        12. Senator McCain. Secretary Wynne and Mr. Finley, what analysis
    did OSD conduct that led to the conclusion that $225 million and 2.2
    percent were ``substantial'' for purposes of the statute?
        Secretary Wynne. The OSD contracted with the IDA to complete a BCA
    for the F-22A MYP. OSD concurs with the analysis and the Air Force
    determination that the savings satisfy the MYP criteria for
    ``substantial savings'' on both a total, $225 million, and per
    aircraft, $3.75 million, basis. The 2.2 percent figure is based upon
    the entire procurement budget for the F-22A program and is not
    representative of the savings attributable to the MYP contract. The
    correct percentages are 2.6 percent savings for the air vehicle and 2.7
    percent savings for the engines.
        Mr. Finley. The definition of substantial savings is a matter of
    judgment since 10 U.S.C. 2306b(a)(1) does not define ``substantial
    savings.'' It is our judgment that the use of an MYP contract for the
    acquisition of 60 F-22s over 3 years will result in substantial savings
    when compared to a series of annual contracts. While the number of
    aircraft lots in the proposed F-22 MYP is small compared to previous
    MYPs, the estimated savings of $3.7 million per aircraft are comparable
    to previously approved fighter aircraft MYPs on a per aircraft basis.

        13. Senator McCain. Secretary Wynne and Mr. Finley, what was the
    basis for the Air Force's conclusion that these numbers constitute
    ``substantial'' savings for purposes of the statute?
        Secretary Wynne. While there is no legal definition of
    ``substantial savings,'' the Air Force has determined that a total
    savings of $225 million over 60 aircraft and 3 years, or $3.75 million
    savings per aircraft, is substantial. These costs savings equate to the
    opportunity to fund nearly two additional aircraft and are comparable
    to previously approved fighter MYP contracts such as the F/A-18E/F
    program, which saved $3.8 million per aircraft.
        Mr. Finley. The definition of substantial savings is a matter of
    judgment. We agree that the use of an MYP contract for the acquisition
    of 60 F-22s over 3 years will result in substantial savings when
    compared to a series of annual contracts. While the number of aircraft
    lots in the proposed F-22 MYP is small compared to previous MYPs, the
    estimated savings of $3.7 million per aircraft are comparable to
    previously approved fighter aircraft MYPs on a per aircraft basis.

                 limits of institute for defense analyses study
        14. Senator McCain. Secretary Wynne and Mr. Finley, by how much
    does the IDA's failure to take into account the $1.7 billion needed to
    implement the Air Force's proposal diminish IDA's savings number?
        Secretary Wynne. The IDA did not fail to take into account any
    costs. The Air Force does not need an additional $1.7 billion to
    implement the proposed MYP strategy. The shortfall to procuring the
    entire 60 F-22As referenced by the Air Force and IDA will be included
    in the fiscal year 2008 PB request. IDA conducted a BCA, based on the
    fiscal year 2007 PB, to determine whether savings could be generated
    through an MYP contract as compared to annual contracts for Lots 7-9 as
    is required by 10 U.S.C. 2306b(a)(1). The BCA concluded that an MYP
    contract would save $3.75 million per aircraft for a total savings of
    $225 million. Prior decisions made by the Air Force do not diminish
    these savings at all.
        Mr. Finley. The IDA did not fail to take into account any costs in
    conducting the F-22 MYP BCA. The Air Force does not need an additional
    $1.7 billion to implement the MYP strategy. The shortfall associated
    with the entire 60 F-22s, referred to by the Air Force and IDA, is $674
    million. The Secretary of the Air Force has committed to inclusion of
    these funds in the Air Force budget submission, and the funds will be
    included in the President's fiscal year 2008 budget request. IDA
    conducted the BCA, based on the President's fiscal year 2007 budget, to
    determine whether savings could be generated through an MYP contract as
    compared to annual contracts for Lots 7, 8, and 9, as is required by 10
    U.S.C. 2306b(a)(1).

        15. Senator McCain. Secretary Wynne and Mr. Finley, isn't it true
    that the taxpayer would see greater savings without implementing the
    MYP by simply keeping production at 30 aircraft per year for 2 years?
    Please explain.
        Secretary Wynne. The fiscal year 2007 PB extended the F-22A
    production program 1 year with the addition of Lot 9 and the reduction
    in production rate, for a total of 183 aircraft. This decision was
    critical to maintain a fifth-generation fighter supplier base and to
    ease the transition from F-22A to F-35 production. This decision was
    made by the Department to optimize capability and affordability, and
    mitigate risk better than other options. The Air Force has not
    investigated the option to produce 30 aircraft per year for 2 years and
    cannot speak to the cost implications of such a strategy on the F-22A
    or the F-35. Although the F-22A production facilities can support
    higher rates of production, current tooling will support no more than
    the current rate of 24 aircraft per year. Additional investments in
    tooling would be required to increase the current production rate to 30
    aircraft per year. It is also unknown whether the lead times to procure
    this required tooling would support 30 aircraft per year beginning as
    soon as Lot 7.
        Mr. Finley. No, taxpayer savings need to have a basis for realism.
    Procurement of 30 aircraft in fiscal year 2007 and fiscal year 2008
    would have required investment in new tooling and procurement of 30
    aircraft each year would have been unaffordable in the overall context
    of the DOD budget. This strategy would have resulted in an F-22
    procurement funding requirement of approximately $4.5 billion each
    year, followed by an abrupt production line shutdown with completion of
    Lot 8. The President's fiscal year 2007 budget reflects a decision to
    extend the fifth-generation fighter industrial base, smooth the
    transition to F-35 production, and preserve future investment options.

        16. Senator McCain. Secretary Wynne and Mr. Finley, why didn't IDA
    analyze this alternative?
        Secretary Wynne. The fiscal year 2007 PB extended the F-22A
    production program 1 year with the addition of Lot 9 and the reduction
    in production rate, for a total of 183 aircraft. This decision was
    critical to maintain a fifth-generation fighter supplier base and to
    ease the transition from F-22A to F-35 production. This decision was
    made by the Department to optimize capability and affordability, and
    mitigate risk better than other options. OSD contracted with IDA to
    conduct a BCA for the F-22A MYP strategy proposed in the fiscal year
    2007 PB, which is to purchase 60 aircraft and a companion multiyear
    contract to procure engines for the Air Force for Lots 7, 8, and 9. The
    IDA BCA was an independent estimate that complies with the requirement
    of 10 U.S.C. 2306b(a)(1) to establish that the use of an MYP contract
    will result in substantial savings over the total anticipated costs of
    carrying out the same program through annual contracts. The OSD did not
    contract with IDA to develop alternative procurement strategies for the
    F-22A program.
        Mr. Finley. The Department did not ask IDA to examine the
    alternative of buying 30 aircraft in Lots 7 and 8 or other alternatives
    than that reflected in the President's fiscal year 2007 budget. IDA was
    asked to utilize the aircraft cost model which they developed for the
    independent cost estimate for F/A-22. Consistent with 10 U.S.C. 2306b,
    they assessed the cost for sequential lots of 20 aircraft each and a
    multiyear buy for these same quantities of aircraft, as well as other
    work relevant to the Department's plans for MYP of the F-22.

        17. Senator McCain. Secretary Wynne and Mr. Finley, IDA only
    focused on comparing three single-year procurements versus the Air
    Force's MYP strategy. Why didn't OSD direct IDA to conduct a more
    comprehensive BCA, which specifically looks at other acquisition
    strategies?
        Secretary Wynne. The QDR and related studies already considered
    alternative approaches and established the need to extend F-22A
    production by 1 year and pursue an MYP. This decision was critical to
    maintain a fifth-generation fighter supplier base and to ease the
    transition from F-22A to F-35 production. Once the decision to add a
    Lot 9 was made, the IDA BCA was intended only to provide an independent
    estimate that complies with the requirements of 10 U.S.C. 2306b(a) to
    include determining whether the use of an MYP contract will result in
    substantial savings over the total anticipated cost of carrying out the
    same program through annual contracts.
        Mr. Finley. The Department and the Air Force considered the IDA BCA
    consistent with the acquisition strategy identified as part of the
    President's fiscal year 2007 budget. Additional analysis was considered
    unnecessary.

        18. Senator McCain. Secretary Wynne and Mr. Finley, who formulated
    the scope of what the Department wanted IDA to analyze, and when?
        Secretary Wynne. OSD, in concert with the Air Force, established
    the scope of the BCA to fulfill the requirements outlined in 10 U.S.C.,
    section 2306b, regarding MYP contracts. The IDA task order for the MYP
    BCA was awarded in January 2006.
        Mr. Finley. The DOD staff worked with the Air Force staff in
    December 2005 and January 2006 in defining the scope of the work to be
    performed by the IDA in the BCA.

        19. Senator McCain. Secretary Wynne and Mr. Finley, even if
    Congress authorizes the current MYP proposal now, the Air Force will
    not enter into the contract until sometime after February 2007, when a
    new budget request and FYDP come out. In his interview with staff, Mr.
    Finley observed that, in the ordinary course, it is reasonable to
    expect that various costs will accrue in the interim between now and
    then. Does IDA's analysis take into account those interim costs? As to
    a plan to obtain authorization now but enter into the contract sometime
    next year, is IDA's analysis accurate? Please explain.
        Secretary Wynne. I was not present during the interview with Mr.
    Finley, so I cannot speak to the various costs that were discussed.
    However, IDA's analysis does take into account all relevant costs
    associated with the proposed MYP, including fiscal year 2006 advance
    procurement and fiscal year 2007 aircraft procurement funds. The MYP
    contract award date currently planned for May 2007 does not impact the
    projected savings for the MYP as outlined in IDA's BCA.
        Mr. Finley. The interim costs you referred to are the normal long-
    lead costs associated with aircraft procurement, whether multiyear or
    single year. These costs are covered within the fiscal year 2006
    advanced procurement funding already placed on contract with Lockheed
    Martin and Pratt & Whitney for Lot 7. These costs were taken into
    account by IDA in performance of the MYP BCA, and the projected savings
    will not be affected if the MYP is awarded after February 2007,
    provided there is no interruption to production before contract award.

        20. Senator McCain. Secretary Wynne and Mr. Finley, by what amount
    will the savings estimated by IDA be reduced if the Air Force is not
    able to enter into the MYP contract until February 2007?
        Secretary Wynne. The MYP contract award date currently planned for
    May 2007 does not impact the projected savings for the MYP. The Air
    Force plans to award the fiscal year 2007 advance procurement-economic
    order quantity (AP-EOQ) contract in January 2007. In accordance with 10
    U.S.C. 2306b(l)(1)(B)(ii), the Air Force will notify the congressional
    defense committees at least 30 days in advance of the award of that AP-
    EOQ contract. All other notifications and certifications required by 10
    U.S.C. 2306b (g), (i), and (l) prior to the award of a multiyear
    contract will be submitted to the defense committees at least 30 days
    prior to the planned May 2007 multiyear contract award.
        Mr. Finley. The date of MYP contract award does not affect the MYP
    cost savings projected by the IDA, provided the contract is awarded
    prior to interruption of the production cycle.

                               funding stability
        21. Senator McCain. Secretary Wynne and Mr. Finley, recently
    Secretary Wynne submitted to the Senate Armed Services Committee a
    reprogramming request seeking to buy a 23rd F-22 Raptor--bringing the
    total for Lot 6 from 22 to 23 for fiscal year 2006. Congress originally
    fully funded 24 in the fiscal year 2006 National Defense Authorization
    and Appropriations Acts. Shouldn't a request for additional funds
    describe the cost overruns that have led to a purchase amount less than
    estimated? Why have the costs overrun yet again?
        Secretary Wynne. The reduction from 24 to 22 aircraft in Lot 6 was
    not the result of a cost overrun. The difference was due to a delayed
    understanding of the full impacts of a DOD Program Budget Decision
    (PBD) issued in December 2005, just 2-3 weeks prior to submission of
    the fiscal year 2006 PB. This PBD deleted F-22A Lots 9-11 and removed
    $10.5 billion. A program cut of that magnitude not only affected the
    lots that were cancelled, but also impacted the unit price curves and
    quantities of Lots 6, 7, and 8 since these lots became the last three
    in the production program. Despite much effort, those impacts could not
    be accurately estimated in the short 2-3 week period between the PBD
    publication and the DOD database lock. By March 2005, the Air Force
    completed a new service cost position (SCP) that incorporated adjusted
    unit price curves for Lots 6-8. The Air Force presented this revised
    estimate to the Defense Acquisition Board (DAB) for full rate
    production. DOD subsequently submitted an out-of-cycle selected
    acquisition report (SAR) to Congress in September 2005. In both the
    Executive Summary and the Total Program Cost and Quantity sections of
    that submission, the Department accurately reported the Air Force SCP
    prediction that the fiscal year 2006 PB would not be sufficient to
    purchase the authorized quantities of F-22A.
        Mr. Finley. The reduction from 24 to 22 aircraft in Lot 6 was not
    the result of a cost overrun. The difference was due to the impacts of
    the Department's decision issued in December 2005, to reduce the F-22
    procurement budget by $10.5 billion, and reduce procurement to 179
    aircraft. This decision was made only a few weeks prior to submission
    of the President's fiscal year 2006 budget. This decision deleted F-22
    Lots 9-11. A program cut of that magnitude not only affected the
    procurement lots that were cancelled, but also impacted the unit price
    curves and quantities of Lots 6, 7, and 8 since these procurement lots
    became the last three in the production program. Those impacts could
    not be accurately estimated in the brief time available for submission
    of the budget database. The Air Force subsequently completed a new SCP
    that incorporated adjusted unit price curves for Lots 6-8 and presented
    their revised estimate to the DAB for consideration of full rate
    production approval. In September 2005, the Department subsequently
    submitted an out-of-cycle SAR to Congress which reported the Air Force
    SCP and predicted that the President's fiscal year 2006 budget would
    not be sufficient to purchase the authorized quantities of aircraft.

        22. Senator McCain. Secretary Wynne and Mr. Finley, in the face of
    this change in procurement objective, and previous others, how can you
    say that funding for this program is sufficiently stable for the Air
    Force to now enter into a multiyear contract for the procurement of
    more?
        Secretary Wynne. The proposed F-22A MYP meets the 10 U.S.C. 2306b
    multiyear criteria referred to as ``stable funding.'' It requires a
    ``reasonable expectation that throughout the contemplated contract
    period the head of the agency will request funding for the contract at
    the level required to avoid contract cancellation.'' Both the Air Force
    and the DOD have clearly and repeatedly expressed, in writing and in
    testimony presented before Congress, a commitment to request funding
    for the full 60 aircraft multiyear contract. This ``reasonable
    expectation'' is further supported by the recently completed QDR and
    related studies on future tactical aircraft requirements that clearly
    indicate a requirement for not less than 183 F-22s.
        Mr. Finley. The statutory requirement for funding stability, 10
    U.S.C. 2306b(a)(3), requires a reasonable expectation that throughout
    the contemplated contract period the head of the agency will request
    funding for the contract at the level required to avoid contract
    cancellation. The Secretary of the Air Force in his May 16, 2006,
    letter addressed to the chairman of the Senate Committee on Armed
    Services, stated that the Air Force intends to fund and procure 60
    aircraft through the proposed MYP. If an MYP of the F-22 is approved by
    Congress, the Department expects that sufficient funding will be
    requested to avoid contract cancellation.

                      definition of minimum economic rate
        23. Senator McCain. Secretary Wynne and Mr. Finley, among the
    requirements that have to be satisfied before the Air Force can enter
    into this MYP contract is that ``[t]he proposed multiyear contract
    provides for production at not less than minimum economic rates given
    the existing tooling and facilities.'' Isn't it true that only by
    calculating production rate on the basis of ``a shift-and-a-half plus
    minimal overtime'' (which is how Lockheed Martin defines economic rate
    of production) can Lockheed Martin assure the Government that it is
    procuring the F-22s at a ``minimum economic rate''?
        Secretary Wynne. While the Air Force is unaware of any formal
    definition for ``minimum economic rate,'' there are many variables that
    could affect an analysis to determine (within existing facilities and
    tooling across multiple production locations) a production rate below
    which efficiencies are lost at an increasing and unacceptable rate. The
    contractor's analysis of a ``minimum economic rate'' at 18-20 F-22As
    per year included an average labor utilization across all F-22A
    production locations of around one full-time shift. The mid-fuselage
    station at the Fort Worth production line, however, was predicted to
    operate at around one-and-a-half full-time shifts. Recent unit cost
    analyses completed by the Air Force also indicated that quantities
    below 18-20 aircraft per year would experience a steeper loss of
    efficiencies than quantities at or above 18-20 per year. The Air Force
    will ensure the contractor's proposed labor utilization at each
    production location is reasonable during contract negotiations and that
    the facts support the requirements of 10 U.S.C. 2306b regarding the
    ``minimum economic rate.''
        Mr. Finley. It is correct that Lockheed defines ``economic rate of
    production'' based on a shift and a half plus minimal overtime. This is
    a different criterion than ``minimum economic rate.'' There is no
    quantifiable, legal definition of ``minimum economic rate'' in 10
    U.S.C. 2306b. However, 10 U.S.C. 2306b subsection i(1)(B), indicates a
    connection between minimum economic rate and existing tooling and
    facilities. Therefore, we define ``minimum economic rate'' as the
    production rate below which gaps in the production line will result,
    and existing tooling and facilities would be underutilized, resulting
    in production inefficiencies. Based on this criterion, and information
    provided by Lockheed Martin, the minimum economic production rate for
    the F-22 production line is 18-20 aircraft per year, as noted in the
    Under Secretary of Defense for Acquisition, Technology, and Logistics'
    (USD(AT&L)) letter of July 24, 2006.

        24. Senator McCain. Secretary Wynne and Mr. Finley, isn't the
    metric that is typically used ``1-8-5,'' that is, one-shift on an 8-
    hour day, 5 days a week?
        Secretary Wynne. The Air Force is not aware of a ``typical'' metric
    to determine the ``minimum economic rate,'' however, the contractor's
    analysis of a ``minimum economic rate'' for F-22A at the current
    facilities and tooling capacity did include an average labor
    utilization across all F-22A production locations of around one full-
    time shift.
        Mr. Finley. Different industries manage their production work
    according to their specific requirements, metrics, workload, and other
    unique factors. We are not familiar with the typical use of the ``1-8-
    5'' metric.

        25. Senator McCain. Secretary Wynne and Mr. Finley, doesn't the
    Government's complete reliance on the contractor to not only provide
    the number but also the definition of ``minimum economic rate'' render
    this requirement facile? Please explain.
        Secretary Wynne. The Air Force is unaware of any formal definition
    for ``minimum economic rate'' and has not adopted a contractor's
    definition. Recent unit cost analyses completed by the Air Force
    indicated that quantities below 18-20 aircraft per year would
    experience a steeper loss of efficiencies than quantities at or above
    18-20 per year. While the contractor did conduct its own analysis based
    at least in part upon labor utilization, the Air Force analysis used
    historical data and unit cost models.
        Mr. Finley. No. To the contrary, the Government did not completely
    rely on the contractor. As I noted in my response to question 23, there
    is no firm, quantifiable legal definition of ``minimum economic rate.''
    We define ``minimum economic rate'' as the production rate below which
    gaps in the production line will result, and existing tooling and
    facilities would be underutilized, resulting in production
    inefficiencies.

        26. Senator McCain. Secretary Wynne and Mr. Finley, the
    Congressional Research Service (CRS) has pointed out that the IDA model
    assumed a 5-percent savings for the avionics portion of the MYP that is
    unlikely to be achieved. Doesn't this suggest that there could be other
    flaws in this estimate? Please explain.
        Secretary Wynne. The Air Force believes the IDA estimate of
    savings, while conservative, is thorough, objective, and complete. The
    CRS conducted a thorough and iterative review of IDA's cost estimating
    methodologies, assumptions, and analysis. The question raised by the
    CRS represents a difference of opinion over a judgment made by IDA to
    assume a 4.5-percent savings (not 5 percent as indicated in the
    question) instead of 4 percent for the electronic warfare portion of
    the avionics savings estimate based upon an assumption about when the
    contract for the economic order quantity procurement could be
    completed. Incidentally, the subcontractor in question predicted much
    higher savings than IDA's analysts accepted. This 0.5 percent
    difference of opinion between IDA and the CRS on a portion of one
    subsystem is the only substantive allegation of a flaw in IDA's
    estimate that the Air Force is aware of despite intense scrutiny from
    well-qualified experts supporting congressional decisionmaking on the
    F-22A MYP. The Air Force believes this should give Congress more
    confidence, not less, in the independent estimate upon which the Air
    Force's F-22A MYP request is based.
        Mr. Finley. There is no flaw in the IDA MYP cost estimate. The IDA
    estimate for avionics savings was 13.7 percent. This represents a
    build-up of savings estimates for each of the individual avionics
    subsystem suppliers. For one of the suppliers, IDA estimated that the
    savings would be 5 percent based on the expected initiation of MYP long
    lead purchases by early August 2006, but due to the risk associated
    with the schedule, IDA used savings of 4.5 percent for this supplier in
    their avionics savings estimate. The purchase of MYP long lead items
    did not occur, therefore the savings expected from that supplier were
    reduced to 4 percent. This resulted in an overall cost savings decrease
    for avionics from 3.7 percent to 3.6 percent, and a total cost savings
    decrease of $1.4 million. There are no other cost savings in IDA's
    analyses that were affected by the scheduled early August 2006 purchase
    of MYP long lead items.

                                   award fees
        27. Senator McCain. Secretary Wynne and Mr. Finley, what award fees
    has the Air Force provided the Lockheed Martin Corporation for the F-
    22A engineering and manufacturing development (EMD) phase?
        Secretary Wynne. The Air Force provided Lockheed Martin $850
    million in award fees over the 15-year EMD phase. However, the
    production contracts within the F-22A production program, to include
    the proposed MYP contract, are firm-fixed price contracts and, as such,
    the total profit will be settled prior to contract award during
    negotiations.
        Mr. Finley. The Air Force provided Lockheed Martin $850 million in
    award fees over the 15-year EMD phase of the F-22 program.

        28. Senator McCain. Secretary Wynne and Mr. Finley, were these
    award fees too much considering all the problems associated with this
    phase of the program? Please explain.
        Secretary Wynne. The absolute dollar value of F-22 award fees ($850
    million) is relatively small (5 percent) in terms of the total EMD
    effort. Award fee is typically used for cost reimbursable development
    contracts that are inherently complex and do not lend themselves to
    exclusively objective measurements required for incentive fee
    contracts. The contractor's performance was evaluated using defined
    objective and subjective criteria that were tied to specific program
    objectives. However, the production contracts within the F-22A
    production program, to include the proposed MYP contract, are firm-
    fixed price contracts and, as such, the total profit will be settled
    prior to contract award during negotiations.
        Mr. Finley. No, the award fees approved by the Air Force do not
    appear to be excessive. The $850 million in award fees paid to the
    contractor represent 5 percent of the total EMD phase cost. However, I
    intend to review Air Force (as well as other Services) award fee
    determinations in light of the Department's emphasis on setting award
    fees against actual performance. As noted in my oral statement, I am
    fully committed to acquisition excellence and the restoration of
    confidence in our leadership for acquisition systems. If appropriate, I
    will take firm action to improve the process to assure the Government
    is getting the best value for our investments and that contractors are
    treated fairly, but firmly.

                                  legal review
        29. Senator McCain. Secretary Wynne and Mr. Finley, when did the
    DOD conduct, pursuant to DOD Directive 5000.1, a legal review of the F-
    22A MYP proposal to determine that it is consistent with all applicable
    domestic laws, including but not limited to the requirements of title
    10 U.S.C. section 2306b?
        Secretary Wynne. The legal and regulatory review of the F-22A MYP
    was conducted pursuant to DOD Directive 5000.1, prior to my submission
    of the MYP justification package to Congress on May 16, 2006.
        Mr. Finley. The Air Force General Counsel conducted a legal and
    regulatory review of the F-22 MYP proposal for the Secretary of the Air
    Force prior to Air Force submission of the MYP justification to
    Congress on May 16, 2006. I requested a legal review by the
    Department's Deputy General Counsel (Acquisition and Logistics), after
    concerns were raised by Congress. As a result of the Deputy General
    Counsel's review, we concurred with the Secretary of the Air Force's
    determination that the F-22 MYP satisfies the statutory criteria.

        30. Senator McCain. Secretary Wynne and Mr. Finley, who was the
    individual, by name, title, and office, who conducted this review?
        Secretary Wynne. My legal staff conducted the review. Daniel Ramos,
    Principal Deputy General Counsel, provided the Air Force's legal
    coordination of the multiyear package submitted to Congress based on
    advice received from Ty Hughes, Deputy General Counsel (Acquisition)
    and his staff.
        Mr. Finley. At my request, the Department's legal review of whether
    the F-22 MYP satisfied the 10 U.S.C. 2306b criteria was conducted by
    Douglas Larsen, Deputy General Counsel (Acquisition and Logistics)
    (DGC(A&L)).

        31. Senator McCain. Secretary Wynne and Mr. Finley, was this
    person(s) authorized to conduct this review? If so, when and by whom?
        Secretary Wynne. Yes, Mr. Ramos, Mr. Hughes, and the Office of the
    Air Force General Counsel staff are authorized to conduct this review
    under DODD 5000.1, paragraph E1.1.15, Legal Compliance, and as directed
    by SAFO 111.5.
        Mr. Finley. Yes, I requested DGC(A&L) conduct the legal review. I
    discussed the results with Mr. Krieg, USD(AT&L), before submission of
    my July 14, 2006, letter to Senator McCain.

                                   ida study
        32. Senator McCain. Dr. Nelson, IDA recently released a report
    comparing the costs associated with a 3-year MYP plan with three
    single-year procurement contracts for the F-22A. This report was the
    basis for Senator Chambliss' amendment which reinstated the MYP. Did
    you conclude that $225 million and 2.2 percent cost avoidance
    constituted ``substantial savings'' within the meaning of the Federal
    MYP statute?
        Dr. Nelson. IDA did not make a judgment on whether the $225 million
    cost savings/avoidance (2.2 percent) met the statutory requirement of
    ``substantial savings.'' Our task was to estimate the magnitude of the
    cost savings/cost avoidance provided by an F-22 MYP, not to judge
    whether savings of the estimated amount are sufficient to meet the
    statutory requirement for ``substantial savings.''

        33. Senator McCain. Dr. Nelson, did IDA find that cost avoidance
    under the current MYP is about half of what the Air Force originally
    estimated?
        Dr. Nelson. The IDA estimate is about one-half of what the Air
    Force was seeking, based on congressional testimony by Lieutenant
    General Hoffman (SAF/AQ) on 28 March 2006.

        34. Senator McCain. Dr. Nelson, did IDA find that the F-22 MYP
    savings compared unfavorably to 13 other MYP contracts?
        Dr. Nelson. The IDA report presented data on estimated MYP cost
    savings/avoidance for other relevant aircraft and engine contracts. In
    percentage terms, IDA's estimated cost savings/avoidance for the F-22A
    MYP is lower than all but one of the examples. In dollar terms, IDA's
    estimated cost savings/avoidance for the F-22A is $225 million.

                             statutory requirements
        35. Senator McCain. Dr. Nelson, did IDA study the proposed MYP's
    ability to meet statutory requirements for design stability?
        Dr. Nelson. IDA did not offer a judgment about whether any of the
    statutory requirements, including design stability, are met. That was
    not a part of our work. A clarification is needed with respect to
    Appendices B and C of our report. The DOD is required to provide
    exhibits supporting any request for an MYP. Our sponsor in the OSD
    asked IDA to provide draft exhibits that embedded IDA's cost savings/
    avoidance estimates with other budget material developed by the Air
    Force. We also included factual material we had collected bearing on
    the other criteria. The exhibits are in appendices and not in the main
    report because they were intended for the sponsor's use but did not
    constitute part of the main body of our work.

        36. Senator McCain. Dr. Nelson, did IDA study the proposed MYP's
    ability to meet statutory requirements for funding stability?
        Dr. Nelson. IDA did not study the proposed MYP's ability to meet
    statutory requirements for funding stability. That was not a part of
    our tasking from the DOD.

        37. Senator McCain. Dr. Nelson, did IDA study the proposed MYP's
    ability to meet statutory requirements for requirements stability?
        Dr. Nelson. IDA did not study the proposed MYP's ability to meet
    statutory requirements for requirements stability. That was not a part
    of our tasking from the DOD.

        38. Senator McCain. Dr. Nelson, did IDA study the proposed MYP's
    ability to meet statutory requirements for contributing to national
    security?
        Dr. Nelson. IDA did not study the proposed MYP's ability to meet
    the statutory requirements for contributing to national security. That
    was not a part of our tasking from the DOD. We provided materials we
    had collected during our work and included those materials in the
    Appendices.

        39. Senator McCain. Dr. Nelson, did the IDA business case study,
    commissioned by DOD, conclude that the F-22 meets all six conditions
    for an MYP contained in 10 U.S.C. 2306b?
        Dr. Nelson. IDA did not address whether the F-22A meets all six
    conditions for an MYP as contained in 10 U.S.C. 2306b. That was not a
    part of our tasking from the DOD.

        40. Senator McCain. Dr. Nelson, did the IDA report document that
    the F-22 meets all required MYP criteria to include substantial savings
    and design stability?
        Dr. Nelson. IDA did not address whether the F-22A met the criteria.
    That was not a part of our tasking from the DOD. We estimated the cost
    savings/avoidance that an F-22A MYP would provide.

                                  endorsement
        41. Senator McCain. Dr. Nelson, is it fair to say that IDA's study
    is not a business case that endorses the proposed MYP, but is instead a
    cost savings estimate? Please explain.
        Dr. Nelson. IDA did not endorse the F-22A MYP. We took ``business
    case'' to refer to cost savings/cost avoidance, which is what we
    addressed.

                                avionics savings
        42. Senator McCain. Dr. Nelson, the IDA study notes that to get 5
    percent savings on avionics, the MYP contract must be in place by
    August 2. But, as CRS points out, your estimate includes a 4.5-percent
    avionics savings even though you say that the savings will drop to 4
    percent after August 2. Don't you agree that 4 percent savings is a
    more accurate estimate? Please explain. Does the IDA analysis include
    any other generous assumptions like this one?
        Dr. Nelson. The point raised by the CRS concerns only one avionics
    supplier. The 4.5-percent estimate was not based on a generous
    assumption, but was a contingent estimate that reflected the
    information available at the time. The relevant sentence from IDA's
    report is: ``The current estimate (AA06) is a savings of 5 percent if
    the MYP is in place by August 2, 2006. If that deadline is not met, the
    estimate falls to 4 percent.'' CRS misinterpreted ``MYP in place'' as
    meaning the awarding of the MYP contract, which would have been
    impossible by August 2 since congressional approval of the MYP would
    not be possible until enactment of the fiscal year 2007 Defense
    Authorization Bill. The 5-percent value assumed that the go-ahead to
    order MYP long lead items would be given by August 2. During March and
    April when the analysis was being done, it was not clear whether this
    assumption would prove to be valid. Therefore IDA split the difference
    between the 4-percent and 5-percent estimates. In response to the issue
    raised by CRS, we recalculated the cost savings with a 4-percent
    savings for the relevant supplier. The cost savings percentage for the
    total avionics system decreases from 3.7 percent to 3.6 percent and
    total cost savings decrease by $1.4 million. There are no other cost
    savings in IDA's analyses that are affected by an August deadline to
    order MYP long lead items.
                                     ______

                 Questions Submitted by Senator Saxby Chambliss
                        minimum economic production rate
        43. Senator Chambliss. Secretary Wynne, there has been some
    confusion, which CRS elaborates on in their written statement,
    regarding what the minimum economic production rate is for the F-22.
    Would you please explain the concept of the ``minimum economic
    production rate,'' the reason for the confusion, and what is the actual
    minimum economic production rate for the F-22 program?
        Secretary Wynne. The Air Force is unaware of any formal definition
    for ``minimum economic rate''. Confusion can arise from this absence of
    a formal definition as well as from the many variables that could
    affect any analysis to determine (within existing facilities and
    tooling across multiple production locations) a production rate below
    which efficiencies are lost at an increasing and unacceptable rate.
        Recent unit cost analyses completed by the Air Force indicated that
    quantities below 18-20 aircraft per year would experience a steeper
    loss of efficiencies than quantities at or above 18-20 per year.

                             cancellation liability
        44. Senator Chambliss. Secretary Wynne, would you please respond to
    claims by Congressional Budget Office (CBO) that the Air Force ``is not
    requesting appropriations sufficient to cover the potential
    cancellation liability'' and that, under the proposed multiyear, ``the
    Air Force would have to seek additional appropriations in the future
    even if a decision was made to cancel the contract''?
        Secretary Wynne. Cancellation ceiling is a contingent liability
    that only becomes an actual liability if the contract is cancelled. The
    CBO opinion that cancellation ceiling should be considered a certain
    liability of the Government upon contract award depends upon an
    assumption that the contract will be cancelled. In fact, the opposite
    assumption is expressly made by the act of awarding a multiyear
    contract that obligates the Government to more than just the first
    program year. For that very reason, subsection (f) of 10 U.S.C. 2306b
    provides three separate options for funding cancellation costs; only
    one of which is to fund those costs as part of the funds available for
    contract performance. As a result, the DOD Financial Management
    Regulation permits unfunded cancellation ceilings subject to the
    approval of the Under Secretary of Defense (Comptroller). F-22A MYP
    cancellation ceiling amounts are highest early in the contract when
    cancellation is the least likely and cover only non-recurring costs. In
    the event the F-22A MYP is cancelled at the end of a program year, the
    Air Force will not seek a supplemental appropriation as suggested by
    CBO. The Air Force will source unobligated procurement funding within
    the F-22A program and, if necessary, request reprogramming approval to
    use currently available aircraft procurement funds to pay the actual
    cancellation charge, once known, consistent with paragraph (2) of
    subsection (f) of section 3206b of title 10.

        45. Senator Chambliss. Secretary Wynne, I understand that DOD has
    recently approved a waiver allowing the Air Force to have an ``unfunded
    cancellation ceiling'' for the F-22. Would you please explain what this
    means and whether or not this is uncommon or unprecedented for major
    weapon system programs like the F-22?
        Secretary Wynne. The Under Secretary of Defense (Comptroller)
    approved the F-22A unfunded cancellation ceiling on July 21, 2006
    consistent with subsection (f) of 10 U.S.C. 2306b and the requirements
    of the DOD Financial Management Regulation. This means funds will not
    be tied up unnecessarily to cover the unlikely contingency of contract
    cancellation. Unfunded cancellation ceilings are not unprecedented for
    major weapon system programs. In the event of contract cancellation,
    the Air Force will request necessary reprogramming approval to use
    currently available aircraft procurement funds to pay the actual
    cancellation charge, once known, consistent with paragraph (2) of
    subsection (f) of section 3206b of title 10.

                              production schedules
        46. Senator Chambliss. Secretary Wynne, would you please elaborate
    on the rationale for extending F-22 production for 2 years--as the QDR
    recommended--in order to preserve the defense industrial base and
    provide a bridge to JSF production?
        Secretary Wynne. IOC of the F-35 JSF is currently scheduled to
    occur in 2013. Extending F-22A production maintains the Nation's
    defense industrial base and ensures viability of a fifth-generation
    fighter production line. Critical resources, experienced workforces,
    supplier confidence, and learning curves would be maintained reducing
    risk and future production costs.

        47. Senator Chambliss. Secretary Wynne, would you please comment on
    the current schedule of the F-22 program and how actual deliveries
    compare to the contractual delivery schedule?
        Secretary Wynne. The Air Force's F-22A schedule recovery efforts,
    started in August 2004, were successful. During the recovery period,
    the Air Force met all three congressional commitments to bring
    deliveries back to the original contractual delivery schedule.
    Deliveries now conform to the contract schedule and, as of July 2006,
    76 aircraft have been delivered. This accomplishment is indicative of
    the F-22A's production program maturity and design stability.

                                     weight
        48. Senator Chambliss. Secretary Wynne, CRS raises concerns
    relative to increasing weight of the F-22 program. Are there any
    current issues relative to increased or increasing weight for the F-22?
        Secretary Wynne. There are no current issues related to weight on
    the F-22A. The F-22A does not have an explicit weight specification.
    All F-22A aircraft go through extensive acceptance test procedures
    against an aeronautical performance specification, and the F-22A
    continues to be the most maneuverable fighter aircraft flying today.
    While F-22A weight has increased slightly from lot to lot, depending on
    minor configuration differences, the Air Force manages the overall
    program to ensure the aircraft continues to meet and exceed both the
    performance specifications and warfighter needs.

                             nunn-mccurdy breaches
        49. Senator Chambliss. Secretary Wynne, I understand the F-22 has
    had two Nunn-McCurdy breaches over the course of the program. Would you
    please explain those breaches and why they are or are not relevant to
    the current MYP request?
        Secretary Wynne. The F-22A had two Nunn-McCurdy unit cost breaches
    during the now completed development phase of the program. The first
    breach occurred in 1993 after the OSD Bottom-Up Review on Tactical
    Aircraft, which resulted in a quantity decrease from 648 aircraft to
    442. The second breach was in 2001 and resulted in a $5.4-billion
    increase to the program and a decrease in the quantity from 341 to 305
    total aircraft during the LRIP DAB. Since initiation of production, the
    costs have decreased steadily resulting in a 35-percent reduction in
    unit flyaway costs per aircraft from Lot 1 to Lot 5. The F-22A entered
    full rate production in 2005 and continues to successfully deliver
    combat-ready Raptors on schedule.

                      number procured in fiscal year 2006
        50. Senator Chambliss. Secretary Wynne, would you please clarify
    why the Air Force is only able to procure 22 F-22s in fiscal year 2006
    even though the fiscal year 2006 budget supposedly funded 24 F-22s?
        Secretary Wynne. Just prior to the February 2005 fiscal year 2006
    PB submission to Congress, a PBD truncated the F-22A program at Lot 8
    (fiscal year 2008) and cut $10.5 billion. The cut impacted F-22A unit
    price curves and Lots 6, 7, and 8 quantities. Full impacts could not be
    accurately estimated prior to the fiscal year 2006 PB submission, but a
    revised estimate was presented to the DAB in March 2005 for full rate
    production. The Air Force estimated that only 22 F-22As could be
    procured in Lot 6 as a result of the cut. The DOD subsequently
    submitted an out-of-cycle SAR to Congress in September 2005. In both
    the Executive Summary and the Total Program Cost and Quantity sections
    of that submission, the Department accurately reported the Air Force's
    estimate that the fiscal year 2006 PB would not be sufficient to
    purchase the authorized quantities of F-22A.

                                cost predictions
        51. Senator Chambliss. Secretary Wynne, would you please comment on
    the supposed variance of $7 billion in the cost of the F-22 program
    between the Air Force and DOD Cost Analysis Improvement Groups,
    according to a 2001 Government Accountability Office (GAO) study?
        Secretary Wynne. Air Force and the OSD cost estimates are
    intentionally independent and can vary substantially based upon
    different assumptions and cost modeling parameters. Independent Air
    Force and OSD estimates are an important tool for Defense acquisition
    decisionmakers to consider all perspectives. Both the Air Force and OSD
    cost estimate positions are presented to the DAB for consideration in
    major acquisition decisions. The Department's decisionmaking processes
    at that time in the program's history started the F-22A production
    program on a path that resulted in a production unit cost reduction of
    35 percent from Lot 1 to the current Lot 5.

                                  budget cycle
        52. Senator Chambliss. Secretary Wynne, what part of the multiyear
    request was proposed in the FYDP covered by the original fiscal year
    2007 PB and what part of the multiyear request do you consider to be
    submitted out of cycle?
        Secretary Wynne. The fiscal year 2007 F-22A budget, presented in
    February 2006, represented the Air Force's MYP plan for the F-22A over
    the FYDP. A series of settlements and proposals to connect requirements
    with budget realities significantly compressed the F-22A MYP strategy
    timeline beginning in December 2005. The F-22A MYP plan, presented in
    the fiscal year 2007 PB, documented a Department commitment to provide
    to Congress the updated MYP funding estimate by May 2006. Delivery of
    the full F-22A MYP BCA after the submittal of the initial fiscal year
    2007 PB can be considered out-of-cycle. While some confusion resulted
    from the out-of-cycle nature of this multiyear authorization request,
    the proposed MYP meets all requirements of title 10 and the Air Force
    remains committed to fully funding the multiyear.

        53. Senator Chambliss. Secretary Wynne, is funding for the F-22 MYP
    in the current FYDP?
        Secretary Wynne. As documented by both the IDA report and the Air
    Force's 16 May 2006 MYP exhibit submission, the current F-22A MYP is
    fully funded to buy 56 of the total 60 aircraft requested. The
    Department will address any potential funding shortfalls to ensure the
    acquisition of 60 aircraft in the fiscal year 2008 PB prior to contract
    award.

                         multiyear procurement criteria
        54. Senator Chambliss. Secretary Wynne, you stated that the Air
    Force meets five of the six criteria right now, and the last to be met
    is ``funding stability'' (e.g. the requirement for funding requests
    sufficient to avoid contract cancellation). However, you later stated
    that the Air Force is committed to meeting this same requirement. Would
    you please clarify whether the Air Force does or does not meet all six
    title 10 criteria required for entering into an MYP?
        Secretary Wynne. The F-22A MYP proposed by the Air Force meets all
    six criteria required by 10 U.S.C. 2306b(a). The title 10 MYP criteria
    referred to as ``stable funding'' requires a ``reasonable expectation
    that throughout the contemplated contract period the head of the agency
    will request funding for the contract at the level required to avoid
    contract cancellation.'' Both the Air Force and the DOD have clearly
    and repeatedly expressed, in writing and in testimony presented before
    Congress, a commitment to request funding for the full 60-aircraft,
    multiyear contract.

                                 contract type
        55. Senator Chambliss. Secretary Wynne, would you please explain
    the relevance of the EMD contract award fees to the Air Force's MYP?
        Secretary Wynne. EMD contract award fees are not relevant to F-22A
    production or the proposed MYP. The EMD contract is complete, and
    production contracts are firm-fixed price and do not include an award
    fee.

        56. Senator Chambliss. Secretary Wynne, what type of contract will
    be used for the multiyear and what are the implications for the
    likelihood of a cost overrun?
        Secretary Wynne. The Air Force will enter into a firm-fixed price
    contract for the F-22A MYP. This eliminates cost growth risk to the
    Government by putting maximum responsibility on the contractor to
    control cost and schedule. Once the MYP contract is negotiated and
    awarded, the Air Force will not pay more than the terms and conditions
    of the contract permit for all 60 aircraft despite erroneous
    suggestions made by some that the MYP contract could experience cost
    overruns.

        57. Senator Chambliss. Secretary Wynne, how are cost overruns in
    the F-22 development program related to the proposed multiyear program
    and compliance with the 10 U.S.C. 2306b criteria?
        Secretary Wynne. The F-22A MYP proposal is fully compliant with the
    criteria of 10 U.S.C. 2306b. Past cost challenges in the completed
    cost-plus-award-fee development contract are not relevant to the F-22A
    production contracts or the proposed MYP for 60 production aircraft. F-
    22A production contracts, to include the proposed MYP contract are
    firm-fixed price. By definition, the Government does not bear the risk
    of cost overruns on firm-fixed price contracts. Just like the previous
    8 production lot contracts prior to the start of the proposed MYP, once
    the MYP contract is negotiated and awarded, the Government will not pay
    more than the firm-fixed price negotiated for all 60 aircraft. F-22A
    unit flyaway costs have decreased by 35 percent from Lot 1 to the
    current Lot 5 and production deliveries are on schedule.

                                relation to f-18
        58. Senator Chambliss. Secretary Wynne, compared to the amount of
    data used to compute the cost savings estimate for the first F-18 MYP,
    how much cost data went into estimating the cost savings for the F-22
    MYP?
        Secretary Wynne. The F-22A cost savings estimate used historical
    data from nine EMD aircraft and six production lots (PRTV I, PRTV II,
    Lots 1 to 4). When the first F/A-18E/F MYP was presented to Congress,
    contracts had been signed for 3 production lots with deliveries
    accepted on fewer than 12 LRIP aircraft. In both cases, the cost
    savings were compared to other recent MYP programs and assessed to be
    realistic.

                      title 10 u.s.c., 2306b certification
        59. Senator Chambliss. Mr. Finley, generally speaking, is there a
    statutory requirement for DOD or the head of an agency to formally
    certify that multiyear contracts meet the criteria outlined in title 10
    U.S.C., 2306b, paragraph (a)? If so, when must that certification be
    provided?
        Mr. Finley. Subsection (a) of 10 U.S.C. 2306b requires that the
    head of an agency find each of six elements relating to the multiyear
    contract. Although it is customary in DOD to make written findings,
    subsection (a) does not require a certification. In regard to the
    proposed F-22 multiyear contracts, the Secretary of the Air Force, as
    the head of the agency responsible for the contracts, set forth his
    findings regarding each of the six elements in his letter of May 16,
    2006, to the chairman of the Senate Armed Services Committee.

        60. Senator Chambliss. Mr. Finley, regarding the statutory
    certification requirement outlined in title 10 U.S.C., 2306b, paragraph
    (i)(1)(A), when is this certification required?
        Mr. Finley. After the multiyear contracts have been specifically
    authorized by law, subsection (i)(1)(A) requires that the Secretary of
    Defense certify to Congress that the current FYDP fully funds the
    support costs associated with the multiyear program.

        61. Senator Chambliss. Mr. Finley, when will the Secretary of
    Defense forward the certification required by this subsection?
        Mr. Finley. The Department will make the appropriate certification
    to Congress after the F-22 MYP has been authorized by Congress, and
    before award of the multiyear contracts.

                               additional savings
        62. Senator Chambliss. Mr. Finley, the IDA study talked about the
    possibility for more savings than their minimum estimate of $225
    million in savings. Would you please discuss the possible source and
    likelihood of these additional savings?
        Mr. Finley. The potential for additional savings, beyond the $225
    million estimated by IDA, will be resolved after contract negotiations
    with Lockheed Martin and Pratt & Whitney for the MYP contracts. We
    believe that there is real value to the contractors and their suppliers
    in having the assurance that the Government will be purchasing 20
    aircraft per year for 3 years.

                                   ida's role
        63. Senator Chambliss. Mr. Finley, what role did IDA play in the
    DOD decision to request authority for a 3-year MYP of 60 F-22 aircraft
    in the President's fiscal year 2007 budget?
        Mr. Finley. IDA did not have any role in the Department's decision
    to request MYP authority for the F-22.

                         concerns discovered in testing
        64. Senator Chambliss. Mr. Finley, do the suitability concerns
    discovered during operational testing of the F-22 impact the stable
    design condition referenced in subsection (a)(4) of 10 U.S.C. 2306b?
        Mr. Finley. No.

                           previous multiyear savings
        65. Senator Chambliss. Mr. Finley, how much has DOD saved using
    multiyear contracts over the last 7 years?
        Mr. Finley. We have saved approximately $7 billion.

        66. Senator Chambliss. Mr. Finley, what are the programs that
    resulted in these savings?
        Mr. Finley. The MYP programs which resulted in $7 billion savings
    are shown in the table below:
    Multiyear Contract Programs
            Apache Airframe MYP I & II
            Apache Aircraft Block II
            Black Hawk/Sea Hawk--Airframe MYP I & II Javelin
            Longbow Hellfire
            LW 155 Howitzer
            Family of Medium Tactical Vehicles (FMTV)
            A1 MYP I & II
            M1 Tank MYP I & II
            F/A-18E/F Airframe MYP I & II
            F/A-18E/F Engine
            E-2C Airframe/Engine MYP I & II
            DDG-51 MYP I & II
            Virginia Class Submarine
            Tactical Tomahawk
            Common Cockpit
            C-17 Airframe MYP I & II
            C-17 Engines MYP I & II
            C 130J/KC 130J Airframe

                                dated gao report
        67. Senator Chambliss. Mr. Walker, regarding your June 20 report,
    table 1 on page 4 of that report indicates in two separate places that
    ``The Air Force has not completed its analysis of contract cost or cost
    avoidance at this time.'' The IDA MYP BCA was delivered to GAO on May
    16. Would you please explain why your report--which was released 1
    month later--indicates that the analysis of cost savings has not been
    completed?
        Mr. Walker. GAO did not receive a copy of the IDA BCA until June 7,
    2006; however, on May 19, 2006 we did receive a copy of Air Force
    Secretary Michael Wynne's F-22A multiyear justification package that
    was sent to Congress on May 16, 2006. Although the GAO report does not
    make specific reference to the IDA BCA, it does reference the Air Force
    justification package that was based on the IDA BCA. GAO usually does
    not reference every piece of evidence it obtains during an engagement.
    Nevertheless, our June 20 report discussed the estimated 2.7-percent
    savings of $225 million reported to Congress by the Secretary and
    included in the IDA report. Therefore, we did consider the IDA analysis
    in preparing our report. Finally, table 1 in the report was marked as
    showing information as of April 2006 when we completed our field audit
    work.

                            contradictory statements
        68. Senator Chambliss. Mr. Walker, on page 2 of your July 6 letter
    to the chairmen and ranking members of the congressional defense
    committees, you state that your ``recommendation was not to delay the
    F-22 program'' but ``that the Department and Congress not fund any more
    investment in the program.'' However, on page 7 of your June 20 report,
    in the subsection titled ``Recommendations'' you write, ``we recommend
    that Secretary of Defense delay further investments in F-22A
    procurement and modernization until it completes a comprehensive BCA--
    ''[emphasis added]. It would seem that delaying F-22 procurement
    funding would necessarily result in a delay to the F-22 program. Would
    you please explain these two apparently contradictory statements?
        Mr. Walker. The Air Force and OSD have been aware of GAO's concerns
    about the need for a new business case on the F-22 for some time. Over
    the past few years GAO has consistently recommended DOD needs to
    develop a new business case to justify future investments in the
    program. OSD and the Air Force had continued to have a significant
    difference in requirements for the F-22A (183 aircraft versus 381
    aircraft) and our recommendation was not intended to further slow the
    F-22A program but to get a consistent and fact-based identification of
    the need for whether and to what extent DOD believed the Department as
    a whole versus the Air Force alone believed there was a need for
    additional F-22As beyond those for which appropriations had already
    been made. We were of the opinion that OSD and the Air Force could and
    should resolve their difference without significant expenditures of
    time. On August 17, 2006, subsequent to the issuance of our June 20
    report, OSD told GAO that the Department (OSD) and the Air Force
    understand that 183 aircraft are operationally valid and the program of
    record. Nevertheless, OSD has stated it will continue to assess the
    joint air dominance scenario checking the sensitivity of its
    assumptions. OSD has a new study ongoing called Joint Air Dominance II.
        Under the multiyear proposal, the Air Force has added 2 years to
    aircraft procurement beyond DOD's plan last year which terminated
    procurement in 2008. Now procurement ends in 2010. We believe this will
    increase the risk that quantities will change again before the final
    procurement in 2010.

                       joint air dominance study briefing
        69. Senator Chambliss. Mr. Walker, in your June 20 report, on page
    2 you state, ``We have asked OSD to provide us access to the Joint Air
    Dominance Study, but it has not yet done so.'' I understand that GAO
    received a briefing from DOD on the Joint Air Dominance Study on June
    20, the day your report was released. According to DOD's point of
    contact for this GAO report, GAO never requested a briefing on the
    Joint Air Dominance Study during the course of writing the report. The
    Joint Air Dominance Study was conducted as part of the 2005 QDR and
    outlines DOD's BCA and current plan for tactical air modernization and
    investment. When did GAO request a briefing on the Joint Air Dominance
    Study through their designated DOD point of contact for this F-22
    report?
        Mr. Walker. In conducting our review of the F-22A program, we held
    several discussions with Air Force and OSD officials; however, none of
    the officials we interviewed told us about the Joint Air Dominance
    Study. For example, in an August 2005 meeting with Department
    officials, the Joint Air Dominance Study was not mentioned in response
    to our questions about ongoing efforts to analyze the F-22 or other
    tactical aircraft programs. We did not learn of the study until June 8,
    2006 when DOD cited it in its response to our draft F-22A report, If
    DOD wanted GAO to know of the study and its results, it should have
    come forward with it earlier.
        Importantly, GAO has recommended that DOD conduct a new business
    case for the last few years so DOD was well aware of our concerns with
    the F-22A program. At our request for access to the Joint Air Dominance
    Study, OSD officials briefed eight powerpoint briefing charts that
    summarized the Joint Air Dominance Study to GAO on June 20. These
    charts were top level assumptions and outcomes lacking any of the
    information that showed detailed analysis and support. GAO was
    committed to deliver the final report to its congressional requester by
    a specific date and made a decision to undertake additional analysis of
    the Joint Air Dominance Study in future work in the tactical aircraft
    area once we obtain full access to the study and supporting analysis.
    We have requested the full study under our ongoing tactical aircraft
    work, but as of September 5, 2006, we had not been provided access.
    Program analysis and evaluation officials stated that assumptions used
    in the Joint Air Dominance Study would be further analyzed during 2006,
    which we understand is ongoing now, to determine their sensitivity to
    change. This implies that study outcomes could change if assumptions
    are found to be sensitive to change.

        70. Senator Chambliss. Mr. Walker, when was that briefing received?
        Mr. Walker. As stated in question 69, we received a summary level
    briefing on June 20, 2006. OSD showed us eight pages at a very high
    level summary without significant detail. A more comprehensive review
    of the full OSD study is necessary.

        71. Senator Chambliss. Mr. Walker, who at GAO received the
    briefing?
        Mr. Walker. The Acquisition Sourcing Management Assistant Director
    responsible for the F-22A engagement and reporting received the
    briefing.

                   reason for reduction in quantity of f-22s
        72. Senator Chambliss. Mr. Walker, in your written statement you
    comment, ``After taking 19 years to complete development in December
    2005, development costs [for the F-22 program] were reported at $26.3
    billion--109 percent more than expected. The end result of these
    inefficiencies in the acquisition program has been a loss of buying
    power as the reduced quantity of aircraft will require a significantly
    higher unit cost than expected.''
        DOD started out planning to buy 750 F-22 Raptors. In 1991, DOD led
    a Major Aircraft Review and reduced that number to 648. This number was
    then cut to 442 in the 1994 OSD Bottom-Up Review, then 339 in OSD's
    1997 QDR. Is it correct that each one of these reductions in quantity
    was driven by a DOD decision to spend money on other priorities, rather
    than any technical, schedule, or production issues with the F-22?
        Mr. Walker. We have reported in several reviews of the F-22A
    development and procurement programs that program inefficiency in
    progressing to a predicted cost and schedule lead to numerous schedule
    delays and cost increases. For example, the Air Force stated in 1988
    that it needed 750 aircraft and that it could replace the F-15 fighters
    with the F-22A at a unit procurement cost of about $69 million. It also
    estimated it could complete development and deliver an IOC with new F-
    22As by 1996. For many reasons, including the Air Force's failure to
    capture the appropriate technology, design, and manufacturing knowledge
    of the F-22A aircraft at the right times, the program encountered
    substantial development problems. The end result was about a 10-year
    extension in development that delayed delivery of the IOC to the
    warfighter to December 2005 and at an increased unit procurement cost
    today of about $183 million--165 percent higher than established at the
    start of the program. The Air Force's failure to capture critical
    knowledge leading to delays, rising costs, changing needs, and other
    factors have all contributed to the current situation and have resulted
    in F-22As costing much more than planned. Given the significantly
    greater demands on the budget today and the higher cost of an F-22A,
    DOD can no longer afford to buy as many aircraft to replace the F-15s
    and has lost substantial buying power. Unfortunately, the F-22A's
    significant cost increases and schedule delays with resulting adverse
    impacts on quantities and value are illustrative of many serious and
    longstanding systemic problems within DOD's overall acquisition system.

        73. Senator Chambliss. Mr. Walker, is it correct that DOD's
    decision in December 2004 to procure 179 F-22s instead of 277 F-22s was
    based on PBD 753 which likewise reflected DOD's decision to spend money
    on other programs rather than any technical, schedule, or production
    issues with the F-22 program?
        Mr. Walker. PBD 753, dated December 23, 2004, reduced F-22A
    procurement by $10.5 billion and ended procurement in fiscal year 2008.
    It also included actions to several other DOD programs but it did not
    provide detailed information as to why DOD made these changes to the F-
    22A or other programs. We were told that this PBD was the result of
    high level executive decisions within the Department and it would be
    best for those executives themselves to provide the precise basis for
    their actions.

                                current funding
        74. Senator Chambliss. Mr. Walker, is it correct that each of the
    four congressional defense committees have added approximately $1.4
    billion to the fiscal year 2007 PB request to fully fund procurement of
    20 F-22s in fiscal year 2007?
        Mr. Walker. The congressional defense committees have fully funded
    20 F-22As for fiscal year 2007. However, at the time of our June 20
    report the Senate Appropriations Committee had not approved a bill to
    fully fund these aircraft and the Senate was still debating the
    proposed F-22A MYP proposal in the National Defense Authorization Act.

        75. Senator Chambliss. Mr. Walker, in the July 25 hearing, DOD and
    the Air Force committed to fully funding the F-22 MYP program. Given a
    funding profile to procure 20 F-22s per year in fiscal year 2007-2009,
    is it correct that, according to the IDA F-22 MYP BCA, the proposed MYP
    strategy will save an estimated $235 million over 3 separate 1-year
    contracts for 20 aircraft?
        Mr. Walker. As stated in my testimony on July 25, 2006, the Air
    Force estimated savings from a multiyear contract would be $225 million
    for 56 aircraft and $235 million for 60 aircraft. These savings
    estimates were based on a BCA conducted by IDA.
        The additional $10 million in savings for 60 aircraft will,
    however, require an additional investment of $674 million to purchase
    such aircraft, which currently is not now included in the Air Force
    budget for F-22A.

                                ida independence
        76. Senator Chambliss. Dr. Nelson, in your opinion, is there any
    evidence that anyone at IDA, including Admiral Blair, was swayed in any
    way regarding their involvement in the F-22 MYP BCA due to outside
    interests?
        Dr. Nelson. There is absolutely no evidence that anyone at IDA,
    including Admiral Blair, was swayed in any way or influenced the
    results in any way, due to outside interests.

        77. Senator Chambliss. Dr. Nelson, did any DOD personnel
    participate in developing the IDA F-22 MYP BCA?
        Dr. Nelson. No. The estimate of MYP savings is IDA's independent
    estimate. There were no direct influences on the results by the DOD.
    IDA's basic model for conducting tasks is:

             The sponsor frames the question and helps provide access to
            needed factual information.
             IDA provides the answer.
             The sponsor decides what use to make of IDA's analysis and
            recommendations.

        That is how we proceeded in this instance. A cost analysis,
    including our study of the F-22A MYP, cannot be done in a factual
    vacuum. We needed to know the specific facts of the task; for example,
    the number of units still to be purchased of various F-22A systems and
    subsystems, the inflation factors to be used, the annual quantities
    planned and the funding available, along with many other items. These
    facts were largely in the hands of the sponsor, the Air Force and the
    F-22A primes and subcontractors. Accordingly, we had extensive
    conversations with, and received information from, all of these
    organizations.

                             cancellation liability
        78. Senator Chambliss. Mr. Newman, you comment in your written
    statement that ``The Air Force does not intend to set aside funds to
    cover potential cancellation costs for the multiyear contract.'' The
    Secretary of the Air Force discussed this issue earlier and DOD has
    approved a cancellation ceiling waiver for the F-22 program. Also, in
    his prepared statement for the Senate Armed Services Committee Airland
    Subcommittee hearing on March 28, 2006, Dr. Donald Marron, Acting
    Director of CBO, stated ``DOD sometimes chooses not to request budget
    authority specifically for the cancellation liability because it
    considers cancellation a contingent liability with only a remote
    probability of happening.'' Is it correct that DOD, on occasion,
    carries cancellation costs outside the program budget?
        Mr. Newman. DOD does not dedicate sufficient funding to cover
    cancellation liability associated with MYP contracts. Instead it plans
    to use funds that are appropriated for procuring the item that would be
    acquired through the multiyear contract, or for procuring similar
    items--other aircraft in the case of the F-22A MYP contract. In some
    instances, DOD might seek additional appropriations to pay cancellation
    costs if the contract were canceled before completion.
        When DOD says that it intends to carry cancellation costs outside
    of the program budget, it means that it intends to use funds that
    Congress appropriated for procuring other assets to pay cancellation
    costs. However, treating such funds as if they were available both for
    procuring those items and for paying cancellation costs for a multiyear
    contract for another program effectively commits those funds for two
    purposes simultaneously.
        Regardless of whether an MYP contract for the F-22A proceeds for
    the full term or is canceled early, the Government's initial obligation
    to the contractor will exceed the amount required to pay for the items
    ordered in the first year. For example, after the first year of the 3-
    year contract proposed for the F-22A, the Air Force could either cancel
    the remaining 2 years of production and pay the costs for cancellation,
    or it could continue production for the second year and pay for the
    cost of those aircraft. Under the multiyear contract, the Air Force
    would not have the option of foregoing future production lots without
    paying the cancellation charge. Thus, in no case would the Government
    pay only the cost of the aircraft produced in the first year. An
    appropriation that covered only the cost for the first annual
    production lot would therefore be insufficient to finance the
    Government's minimum obligation under the multiyear contract at the
    time that contract is signed. Although funds have been appropriated to
    procure other items, the funding available to the Air Force will be
    less than its total obligations.
        DOD's failure to request funding for cancellation liability
    associated with any MYP contract may distort the resource allocation
    process by understating the cost of decisions made for the budget year
    and may require future Congresses to find the resources to pay for
    decisions made today.

                           range of possible savings
        79. Senator Chambliss. Mr. Newman, you state in your written
    statement that ``The savings from procuring F-22As through a multiyear
    contract could differ from the amounts estimated because of the
    uncertainty inherent in such estimates.'' Is it true that the actual
    savings could be either higher or lower than the estimated savings?
        Mr. Newman. Yes. Because the Air Force will enter either an MYP
    contract or a series of annual contracts, but not both, it will not be
    possible to determine savings--if any--from a multiyear contract.
    However, post hoc estimates of savings will almost certainly differ
    from the amount that the IDA estimated in May. Savings could be either
    higher or lower than that estimate. IDA did not provide any information
    on the uncertainly in their estimate, so CBO does not know whether it
    is more, less, or equally likely that the estimated savings will be too
    high or too low.

                          positive vs. negative change
        80. Senator Chambliss. Mr. Bolkcom, on page 11 of your written
    statement, you quote from page 4 of the IDA MYP BCA saying, ``the F-22A
    program has undergone significant change since IDA completed its F/A-22
    independent cost estimate in August 2005'' and indicate that some may
    infer that these ``significant changes'' raise design stability
    concerns for the F-22 program. However, the ``changes'' IDA refers in
    this section of the report--validation by the QDR, a full rate
    production decision, a proposed MYP contract, and an IOC declaration in
    December 2005--are all completely positive. Given this fact, would you
    please explain your comment on page 11 of your written statement that
    ``some may interpret the `significant change' that IDA observes to be
    an antonym for the stability that 10 U.S.C. 2306b requires''?
        Mr. Bolkcom. The significant changes you reference are clearly
    positive, and I mention the F-22 IOC and the QDR elsewhere in my
    testimony. However, the IDA report follows these positive developments
    you mention with a discussion of the F-22 delivery schedule and
    aircraft weight-gain trends. IDA presents its findings in an entirely
    positive way. In the interest of balance, I point out on page 11 of my
    written statement that these schedule and weight gain trends do not
    appear to be entirely a ``good news'' story. Implicit in IDA's
    observations is that delivery of F-22s is still behind schedule, and
    that weight gain continues. As a point of clarification, let me also
    mention that I did not mean to say that design stability was
    questionable, but that program stability could be viewed as
    questionable. The noteworthy changes between fiscal year 2006 and
    fiscal year 2007 in the F-22 budget, production schedule, and total
    inventory are other examples of recent changes that appear to
    potentially impact the program's stability.

                             business case analyses
        81. Senator Chambliss. Secretary Wynne, Mr. Walker, Mr. Newman, and
    Mr. Bolkcom, is an independent (external to DOD) BCA required for
    multiyear contracts?
        Secretary Wynne. No, an independent (external to DOD) BCA is not
    required for multiyear contracts. Most MYP estimates of savings are
    conducted as internal Service estimates, but the F-22A MYP cost savings
    were independently verified. Additionally, the F-22A program's costs
    have been closely scrutinized by both the OSD Cost Analysis Improvement
    Group and the Air Force Cost Analysis Agency.
        Mr. Walker. No, there is no legal requirement in 10 U.S.C. 2306b or
    elsewhere for an independent BCA in order for DOD to enter into a
    multiyear contract. However, in some cases it would be prudent to do
    so.
        Mr. Newman. The statute that authorizes MYP contracts, 10 U.S.C.
    2306b, does not require an independent BCA for multiyear contracts. In
    the conference report (House Report 109-359) accompanying the DOD,
    Emergency Supplemental Appropriations to Address Hurricanes in the Gulf
    of Mexico, and Pandemic Influenza Act, 2006 (P.L. 109-148), Congress
    required the Secretary of Defense to provide an analysis of
    alternatives for procurement of the F-22A, to include an analysis of an
    MYP contract for those aircraft. However, Congress did not specify that
    the analyses be performed by an organization outside the DOD.
        Mr. Bolkcom. Sir, DOD must provide evidence that the proposed
    multiyear contract will meet the statutory requirements. I do not
    believe an external assessment is required by statute.

        82. Senator Chambliss. Secretary Wynne, Mr. Walker, Mr. Newman, and
    Mr. Bolkcom, at the March 28, 2006 Senate Armed Services Committee
    Airland Subcommittee hearing, what was the percentage savings estimate
    for the savings under a 3-year multiyear contract for the F-22,
    according to the Air Force witness Lieutenant General Hoffman?
        Secretary Wynne. At the March 28, 2006 hearing, Lieutenant General
    Hoffman testified that based on rough analysis, potential savings under
    a 3-year multiyear contract were about 5 percent, plus or minus 1
    percent. This corresponds to savings of roughly $400-$500 million
    compared to contracting for three 1-year lots. As stated in testimony,
    these figures were an approximate calculation, and they were based upon
    the best information available at the time from the assumptions made in
    the initial fiscal year 2007 PB submission. Lieutenant General Hoffman
    further testified that the results of an independent BCA being
    performed by IDA would be delivered in May 2006. The IDA study results
    formed the basis of the full F-22A MYP justification package submitted
    to Congress in May 2006 as promised by the documentation provided with
    the initial fiscal year 2007 PB submission.
        Mr. Walker. The following represents General Hoffman's prior
    statements per the transcript of the hearing:

              General Hoffman. ``We think, with the right negotiating
            strategies and the right permissions from Congress and from
            OSD, that we can save the taxpayer about $400 million to $500
            million by doing multiyear versus three distinct lots.''
              ``Sir, we are using IDA to do an independent assessment of
            the BCA. They have promised their results in May. I think we'll
            have an earlier peek at those results in April to make that
            business case for what we think will be about 5 percent--plus
            or minus 1 percent--of savings.''

        Mr. Newman. Lieutenant General Hoffman stated that the Air Force
    was awaiting the results of the BCA, but that he thought that a
    multiyear contract for the F-22A would cost approximately 5 percent
    less than a series of annual contracts for those aircraft.
        Mr. Bolkcom. Sir, according to the hearing transcript, Lieutenant
    General Hoffman testified that he believed the IDA study would show an
    MYP would save ``about 5 percent--plus or minus 1 percent'' over single
    year procurement.

        83. Senator Chambliss. Secretary Wynne, Mr. Walker, Mr. Newman, and
    Mr. Bolkcom, what is the percentage savings estimate according to the
    IDA MYP BCA?
        Secretary Wynne. The IDA study states the F-22A MYP savings is 2.6
    percent for the air vehicle and 2.7 percent for the engines when
    compared to costs for annual production contracts. This corresponds to
    savings of at least $225 million. When the dollar savings are compared
    to the entire procurement budget for the F-22A program, the potential
    savings is 2.2 percent. These savings calculations were also provided
    to Congress by the Air Force on 16 May 2006 as soon as the IDA study
    was completed.
        Mr. Walker. It is 2.7 percent for both airframe and engine based on
    a 3-year multiyear contract with annual buys of 20, 20, and 16
    airframes and 40, 40, and 32 engines respectively in fiscal years 2008,
    2009, and 2010. See pages C-8 and C-10 in the IDA analysis.
        Mr. Newman. The IDA estimated that a multiyear contract for the F-
    22 could cost 2.6 percent less than a series of annual contracts for
    those aircraft.
        Mr. Bolkcom. The IDA study provides a number of different
    estimates. It estimates that MYP savings for the air vehicle contract
    are 2.6 percent. MYP savings for the F-22 engine contract are estimated
    at 2.7 percent. MYP savings of total procurement costs are estimated at
    2.2 percent. This last, and most inclusive savings estimate, is smaller
    than the potential air vehicle and engine savings because substantial
    portions of the procurement budget would be part of the multiyear
    contract.

                               f/a-18e/f comments
        84. Senator Chambliss. Ms. Brian, your organization has said in
    relation to the F/A-18E/F Navy fighter-bomber that it was ``a version
    of the F/A-18 with such limited extra capabilities compared to the C/D
    version of the same plane that it is having difficulty justifying the
    extra cost. The E/F version has suffered from unacceptable flight
    characteristics requiring makeshift fixes.'' Would you please comment
    on current performance and status, to include the existence of current
    and prior MYP contracts, of the F-18E/F program?
        Ms. Brian. The statement of the Project on Government Oversight
    (POGO) quoted in this question was made in 1998. At the time we were
    referencing the GAO report number GAO/NSIAD-96-98 titled, ``F/A-18 Will
    Provide Marginal Operational Improvement at High Cost.'' During that
    period, there were three additional GAO reports raising the same
    concerns: ``Consider All Alternatives Before Proceeding With the F/A-
    18E/F'' GAO/NSIAD-93-144, ``F/A-18E/F Acquisition Strategy'' GAO/NSIAD-
    94-194, and ``F/A-18 Aircraft Does Not Meet All Criteria for Multiyear
    Procurement'' GAO/NSIAD-00-158. Because of this constructive criticism,
    it appears these flaws have been corrected. The F/A-18 has received two
    MYP approvals. When compared to a normal annual procurement, the two
    multiyear contracts achieved a savings of 7.4 percent and 10.9 percent.
    As a result, POGO has not further investigated the F/A-18, nor have we
    commented on that aircraft in nearly a decade.

                             unattributed documents
        85. Senator Chambliss. Ms. Brian, you comment in your written
    statement, that ``IDA attached two unattributed documents at the end of
    its report which assert the F-22A meets all six requirements.'' You go
    on to say that--although Lockheed claims they were IDA's conclusions--
    in fact these were Pentagon exhibits for the fiscal year 2007 PB and
    not independent analyses by IDA. According to the IDA witness at the
    hearing, who wrote the two ``unattributed documents'' in question?
        Ms. Brian. We understand those documents to be Pentagon budget
    exhibits that accompanied its MYP budget. For information regarding the
    testimony of other witnesses, we refer you to their testimony.

                      dissemination of protected document
        86. Senator Chambliss. Ms. Brian, you stated earlier that the POGO
    was the source of the information in the July 25, 2006 Washington Post
    article outlining Admiral Blair's alleged role in the IDA MYP study.
    That article also quoted from Secretary Wynne's written statement
    prepared for the July 25 hearing and embargoed by the committee until
    9:30 a.m. on July 25, 2006. Did any employee or representative of POGO
    provide a copy of or convey any content from Mr. Wynne's written
    statement to the Washington Post, or to any other person? If so, who
    provided the employee or representative of the POGO with a copy of Mr.
    Wynne's written statement? To the best of your knowledge, how did that
    individual obtain a copy of Mr. Wynne's written statement?
        Ms. Brian. On principle, POGO cannot confirm or deny dealings with
    any alleged source. Accordingly, we must respectfully decline to answer
    this question. POGO is an independent nonpartisan organization that has
    many sources of information, and whose investigations have, over its
    25-year history, helped to save American taxpayers more than $80
    billion. We have been able to do so by, among other things, keeping
    confidential the identity of sources of information inside and outside
    the Government. If we were not to do so, we would place good-government
    seekers at risk, and render nearly impossible our ability to satisfy
    our good government mission.

        87. Senator Chambliss. Ms. Brian, are you aware of anyone else
    providing a copy of or conveying content from Mr. Wynne's written
    statement to the Washington Post? If so, who? To the best of your
    knowledge, how did that individual obtain a copy of Mr. Wynne's written
    statement?
        Ms. Brian. POGO must again respectfully decline to answer this
    question. Questions regarding Washington Post sources should be
    directed to the Washington Post.

        88. Senator Chambliss. Ms. Brian, did anyone provide (by any means)
    an employee or representative of the POGO with any portion of Secretary
    Wynne's written statement? If so, who provided it?
        Ms. Brian. POGO must again respectfully decline to answer this
    question in accordance with the reasons stated in the answer to
    question number 86.

                            washington post article
        89. Senator Chambliss. Ms. Brian, relative to the July 25
    Washington Post article titled ``Leader Of Panel That Endorsed Jet
    Program Has Ties To Contractor'': Did any person in or associated with
    any congressional office supply you with any facts or information which
    you then supplied to the Washington Post which were incorporated into
    this article? If so, which person associated with which office supplied
    the facts or information?
        Ms. Brian. POGO must again respectfully decline to answer this
    question in accordance with the reasons stated in the answer to
    question number 86.

        90. Senator Chambliss. Ms. Brian, would you please describe, in
    detail, the extent of your interaction with any congressional office
    relative to supplying the Washington Post with information relative to
    this article?
        Ms. Brian. POGO must again respectfully decline to answer this
    question in accordance with the reasons stated in the answer to
    question number 86.

        91. Senator Chambliss. Ms. Brian, did any person in or associated
    with any congressional office suggest, encourage, or otherwise
    facilitate your supplying of facts or information to the Washington
    Post with respect to this article? If so, please describe this in
    detail.
        Ms. Brian. POGO must again respectfully decline to answer this
    question in accordance with the reasons stated in the answer to
    question number 86.
                                     ______

               Questions Submitted by Senator Joseph I. Lieberman
                           combatant commanders' view
        92. Senator Lieberman. Secretary Wynne, the F-22 Raptor is now
    operational in two squadrons and has deployed for training several
    times. It is largely out of the test environment and deploying in
    contingent and operational environments. What are your combat
    commanders telling you about its capability and performance?
        Secretary Wynne. To date, the F-22A Raptor was used in support of
    one operational mission and one training exercise. In January 2006, F-
    22As supported Operation Noble Eagle flying presidential combat air
    patrol (CAP) missions. In June 2006, F-22As deployed to Alaska for the
    Alaskan Command (ALCOM) sponsored Exercise Northern Edge 2006 (NE 06).
    Initial feedback from ALCOM and U.S. Northern Command (USNORTHCOM) was
    positive. NE 06 operations review identified that the F-22A aircraft
    provided increased access to high threat environments, prevented
    adversary penetration of friendly CAPs, allowed engagement of adversary
    aircraft sooner and from greater distances, and provided enhanced
    battle space awareness to all air participants.

        93. Senator Lieberman. Secretary Wynne, would your combat
    commanders like to have more Raptors or are they happy with the
    performance of the legacy aircraft currently available?
        Secretary Wynne. My commanders have told me they need 381 Raptors.
    They also tell me that we need to sustain and in many cases enhance the
    remaining legacy fleet.
        I'd say they are comfortable with the present performance of legacy
    aircraft, but airmen know full well if they stay still, other
    enterprising airmen will overtake them. The current investment plan for
    our legacy fleet and Raptor moves us forward and keeps the combat
    capability edge which is important to our continued success.

        94. Senator Lieberman. Secretary Wynne, what are the performance
    shortfalls with the legacy aircraft?
        Secretary Wynne. The term ``performance shortfall'' would indicate
    that there may be something wrong with our legacy aircraft. We look at
    legacy aircraft as simply not having the same capabilities as our
    fifth-generation fighters. Legacy platforms do not provide us the
    capability to engage an enemy anti-access environment effectively.
    Since the introduction of our legacy aircraft, the quantity and quality
    of adversary air defense systems have improved while the improvements
    to legacy aircraft have been unable to fully compensate. Legacy
    aircraft lack low observability to penetrate enemy air defenses with
    low risk of detection and high probability of detecting and destroying
    targets. Legacy aircraft depend upon suppression or destruction of
    enemy air defenses so they can maneuver in enemy territory to support
    our ground forces and destroy targets. From a homeland defense
    perspective, legacy platforms do not have the engagement range, speed,
    and adversary detection capabilities of the F-22A. Additionally, legacy
    aircraft present sustainment problems inherent with any aging aircraft
    approaching the end of its design service life: increased depot
    requirements, diminishing parts availability, and obsolescence. Lastly,
    legacy aircraft do not fill the capability gaps and shortfalls required
    to execute the National Military Strategy.

                      f-22a comparison to possible enemies
        95. Senator Lieberman. Secretary Wynne, if North Korea were to move
    against its neighbors with hostile intent, would it be fair to say that
    the only fighter in the U.S. inventory capable of effective combat
    operations in their airspace without significant operational support
    from other types of aircraft would be the F-22A Raptor? Would that also
    be true for Iran?
        Secretary Wynne. The F-22A's unique combination of stealth, speed,
    maneuverability, and integrated avionics makes it the only fighter that
    possesses the ability to penetrate an anti-access adversary, like North
    Korea or Iran, without significant operational support from other types
    of aircraft. The F-22A takes advantage of emerging technologies and is
    a lethal, survivable, and flexible military platform capable of air-to-
    air and air-to-ground combat operations while negating airborne and
    ground based air defense systems.

                             current vs. dated data
        96. Senator Lieberman. Mr. Walker, isn't it true that the recent
    GAO analysis compares the per plane cost in the fiscal year 2006 budget
    to the per plane cost under the multiyear in the recently released GAO
    report on the aircraft program?
        Mr. Walker. Yes, specifically the reports states:

              ``Savings--The Air Force stated in its May 16, 2006,
            multiyear justification package that cost avoidance would
            approximate $225 million or about 2.7 percent. This is based on
            comparing 3 annual contracts to a single multiyear contract to
            buy 56 aircraft. The document also identifies a need for an
            additional $674 million to fully fund a 60 aircraft multiyear
            contract as was proposed in the fiscal year 2007 PB. While
            building an estimate for three separate annual contracts
            provides a basis to compare to a multiyear approach, it is not
            how the Air Force had previously planned to buy the aircraft
            remaining in the F-22A program. The fiscal year 2006 PB
            included procurement costs to buy the remaining 56 F-22As in
            two lots--29 F-22As in 2007 and 27 F-22As in 2008. If the unit
            procurement costs of this previous plan are compared to the
            planned MYP unit costs for 60 aircraft as proposed in the
            fiscal year 2007 PB, the unit costs increase by 10 percent. In
            other words, the unit procurement costs increase from $166
            million per aircraft to $183 million per aircraft for the
            proposed multiyear contract.''

        97. Senator Lieberman. Mr. Walker, what logic would be used to
    assess the program based on old budget data?
        Mr. Walker. The fiscal year 2006 budget was based on decisions made
    by the department's leadership. Comparing trends over time and changes
    from year to year are common methods used to show how programs change--
    cost, schedule, performance, budget, and other factors can all be
    analyzed using this methodology. Such an approach provides insight into
    how a program is progressing and identifies changes and key factors
    that cause change from year to year. These are important facts to know
    and understand when evaluating a program, especially one that has been
    in development for 20 years. We also believe this is important
    information that can aid decisionmakers in DOD and Congress. However,
    in the final analysis DOD and Congress can choose to use this
    information or ignore it.

        98. Senator Lieberman. Mr. Walker, it is my belief that any
    analysis should use relevant benchmarks for comparison. What would your
    assessment say if the debate were framed, as it should be, comparing
    the fiscal year 2007 cost per plane with and without multiyear savings?
        Mr. Walker. The Air Force, based on an assessment by IDA, estimated
    savings for an F-22A multiyear contract standing alone would be between
    $225 million and $235 million depending upon whether they buy 56 or 60
    aircraft, respectively. However, purchasing four additional aircraft
    would cost the taxpayers $674 million and impose further funding risk
    to the Department. We would also point out that the savings estimates
    from multiyear contracts, while substantial in total dollar amount, are
    a relatively low percentage of savings when compared to many other
    multiyear programs, as was reported in the IDA MYP BCA for F-22A as
    well as in the IDA F/A-22 independent cost estimate. We would note that
    historically estimated savings are not always achieved in multiyear
    contracts. We would then have to place this in the broader perspective
    of overall affordability and risk. DOD faces extreme pressure on its
    budget, which we believe will likely worsen in the future. While DOD
    states a need to stretch the F-22A program as a part of the multiyear
    proposal in order to protect the industrial base, an analysis that
    compares this new strategy to the previous one in the fiscal year 2006
    PB shows this increased cost to the taxpayers anywhere from $1.05
    billion to $1.7 billion depending upon the quantity of aircraft
    purchased. An additional factor to be considered in making the decision
    is that multiyear can reduce the flexibility of Congress and DOD to
    move the funds to various other programs in the future.

                             determining real needs
        99. Senator Lieberman. Mr. Walker, in your testimony you stated
    that the DOD must begin to make ``hard choices between its many wants
    and real needs.'' Who is the determiner of ``real needs'' for our
    Nation's military?
        Mr. Walker. ``Real needs'' should be determined based on a
    comprehensive analysis of current and credible future threats involving
    all key players within the executive, both military and civilian, and
    legislative branches. The executive branch ultimately makes specific
    proposals and Congress has to decide whether or not to fund their
    proposals with input from knowledgeable parties. The process is framed
    and guided by law and policy. There are many different players in this
    process and, as we have seen in the past, disagreements arise from time
    to time among the participants as to specific programs. Disagreements
    occur between and among Congress, OSD, and the military sendees. These
    get resolved in different ways. However, what I am concerned with is
    the ability of DOD to meet its needs in the environment of the 21st
    century where many competing demands will be placed upon the limited
    financial resources of the U.S. Government. DOD already faces extreme
    budget pressures to buy the systems it wants at the same time it tries
    to fund a global war on terrorism. Other national priorities such as
    homeland security and disaster recovery costs also compete for
    available resources. Further, DOD continues to experience 30- to 40-
    percent cost growth in many of its weapon system development efforts
    and within the last 5 years its planned investments have gone from $700
    billion to nearly $1.4 trillion for new systems. For these reasons I
    believe DOD needs to make hard decisions now that separate it's many
    wants from ``real needs'' based on realistic approved resource levels
    for today and tomorrow. DOD also needs to improve its basic business
    practices to more efficiently and cost effectively develop and buy
    needed equipment.

        100. Senator Lieberman. Mr. Walker, if the warfighting
    organizations are not the determiners, then who should we trust to
    decide what our military truly needs?
        Mr. Walker. See response to question 99.

                                  myp criteria
        101. Senator Lieberman. Dr. Nelson, it is my understanding that IDA
    came to the conclusion during its analysis of the F-22A MYP that it
    meets the six criteria necessary: substantial savings, stability of
    requirement, stability of funding, stable design, realistic cost
    estimates, and national security to support continued MYP. Would you
    please take a few moments to further discuss these criteria and the
    conclusions that you reached during your analysis?
        Dr. Nelson. IDA did not make a judgment on whether the F-22A MYP
    met the six statutory criteria. That was not a part of our tasking from
    DOD. Our conclusion was that $225 million is a reasonable estimate of
    the cost savings/avoidance that would be expected by an MYP for the F-
    22A. As stated in my responses to previous questions for the record, we
    provided factual material regarding the other criteria, but they were
    not the focus of our task and we did not conclude in our report that
    the criteria had been met.

                     definition of ``substantial savings''
        102. Senator Lieberman. Ms. Brian, you state in your testimony that
    the 2.5 percent savings of the multiyear F-22 contract, which amounts
    to at least $225 million, ``does not impress you as substantial.'' What
    is a ``substantial'' savings, by definition in the statute?
        Ms. Brian. IDA's suggested potential savings of $225 million from
    the proposed F-22A MYP contract is dwarfed by the $1.05 billion cost
    created by the contract and the additional $674 identified by the Air
    Force to fully fund this plan. This brings the total program cost to a
    staggering $1.724 billion according to a letter sent to Chairman Bill
    Young from the GAO on June 20, 2006. These savings are also
    considerably low in comparison to other DOD procurement programs. Past
    DOD aircraft procurement programs have achieved much more substantial
    savings in comparison to the F/A-22's 2.5-percent savings predictions.
    In the fiscal year 1996 supplemental, the House of Representatives
    pressured DOD to restructure the MYP contract for 80 C-17s to come
    closer to the historical savings of 10 percent. DOD was able to
    negotiate with the prime contractor and thus the MYP of the C-17
    resulted in a savings of 7 percent. More recently, the MYP of the C-
    130J resulted in a savings of 10.9 percent and the second MYP for 60 C-
    17s resulted in a savings of 8.7 percent. In the past, substantial
    savings has been statutorily defined as 10 percent. Recently, the GAO
    has stated ``According to the CBO, substantial savings was defined in
    the past as at least 10 percent; however, the current law does not
    define substantial.''

        103. Senator Lieberman. Ms. Brian, as an organization that claims
    to represent taxpayers, how can you justify your conclusion that a
    savings of $225 million is not substantial?
        Ms. Brian. The above answer explains why the proposed F-22A MYP is
    an anti-taxpayer measure. Even if IDA's promised $225 million in
    savings is realized, it is offset four-fold by the ballooning costs
    associated with the inefficiencies created by stretching out the
    production line. In addition, given the history of cost overruns that
    the F/A-22 program has faced since its inception in 1986, we believe
    that the promised savings will be swallowed up by cost growth during
    the life of the contract. The F/A-22 has faced a program cost increase
    of $10.2 billion so far--an increase of approximately 47.3 percent.
    With this history, it is hard to believe that there will be no
    additional cost overruns over the next 3 years.

                                 f-22 relevance
        104. Senator Lieberman. Ms. Brian, you also state in your testimony
    that the F-22 is a ``Cold War-era weapon'' that has questionable
    national security value today. What fighters should the United States
    use if we are faced with the task of entering an armed conflict with
    North Korea or Iran?
        Ms. Brian. POGO's fundamental position on the F/A-22 is that it has
    become so exorbitantly expensive that it is forcing us into unilateral
    disarmament. Originally, the F-22 fleet was projected at approximately
    650 aircraft. Because of the cost inflation, that number has shrunk to
    183 F/A-22s. Historically, air battles have been won by overpowering
    the enemy with a combination of technical and numerical superiority.
    Currently, North Korea is in possession of approximately 525 Attack/
    Fighters and Iran possesses 283. A majority of the Iranian fleet sits
    in disrepair and many of their aircraft are inoperable. The United
    States currently maintains and utilizes thousands of more advanced
    Attack/Fighter aircraft both in a ready status and currently deployed
    and in worldwide operations. In fact, the current push by Lockheed-
    Martin to sell F/A-22s abroad would, in fact, undermine the United
    States' ability to maintain air superiority, as we have seen that
    today's allies become tomorrow's enemies.

                              relevant comparisons
        105. Senator Lieberman. Mr. Bolkcom, you have included some MYP
    saving estimates of historical programs in your testimony, however, I
    might argue that the comparison should look at similar weapons systems
    and/or other tactical aircraft to more accurately assess MYP savings/
    cost avoidance. It is my understanding that the F-18E/F MYP, for
    example, saved approximately $3.15 million per aircraft ($700 million
    divided by 222 aircraft) and, the F-22 MYP proposal would save $3.8
    million--$5.5 million per aircraft ($231 million--$330 million divided
    by 60 aircraft). This tells me that there are other tactical aircraft
    programs that have been approved for MYP and that these procurements--
    the F-18E/F specifically--were determined to provide significant
    savings for the Government. Have you looked at the F-18E/F MYP or other
    tactical aircraft programs? If not, why not? If so, what did you find?
        Mr. Bolkcom. Sir, I did look at other tactical aircraft programs.
    My research found cost savings estimates for two different F/A-18E/F
    multiyear contracts. The F/A-18E/F MYP I contract, for 222 aircraft, is
    estimated to have saved 7.4 percent. MYP II, for 210 aircraft--
    including EF-18G models--is estimated to have saved 10.95 percent. Both
    of these cost savings estimates are considerably higher than the
    estimated 2.2 percent savings from MYP in the case of the F-22. As you
    correctly point out, the estimated savings per aircraft for the F/A-
    18E/F MYP I is closer to the estimated savings per aircraft for F-22
    MYP. However, I believe that F/A-18E/F MYP I is estimated to have saved
    $850 million, which, divided by 222 aircraft is approximately $3.8
    million per aircraft, not $3.15 million per aircraft. Further, as I
    also testified, the IDA study also appears to overstate some portion of
    the potential MYP savings for F-22 avionics, which would reduce the
    overall estimated savings. So, the per-aircraft comparison of MYP
    savings estimates for the F/A-18E/F MYP may not be as close as some
    believe. If the F/A-18E/F MYP is to be viewed as the standard of
    comparison for the F-22 MYP, it may be worth noting that the second F/
    A-18E/F MYP is estimated to have saved $5 million per aircraft.
        Because the statute governing MYP no longer provides a quantitative
    requirement for savings, everyone involved is struggling to determine
    what dollar figure or percent constitutes ``substantial'' savings.
    Other witnesses and I have compared the estimated savings of the
    proposed F-22 MYP to other MYPs in an attempt to provide context.
    However, this context may not be complete. As I mentioned earlier, the
    decision whether or not to award MYP authority is the result of an
    implicit or at least not explicit risk-benefit analysis. The estimated
    savings is the benefit side of a risk-benefit analysis. If one were to
    estimate that the risks of a particular MYP were low--for example,
    adequate cancellation liability funding, adequate design stability,
    adequate funding stability--then the benefit required, the savings
    required, to off-set this risk would be lower than the benefit required
    to offset the risk for MYPs that were more risky. So, for example, if
    the F/A-18E/F MYP you mention appeared to be in the same approximate
    risk-class as the proposed F-22 MYP, then the comparison may be apt.

                             current vs. dated data
        106. Senator Lieberman. Mr. Walker, you have stated that procuring
    the remaining 60 F-22s under a 3-year multiyear contract would cost the
    taxpayer $1.7 billion more than that called for to procure the last 2
    annual lots previously provided in the fiscal year 2006 budget. It
    seems irrelevant to me to use the fiscal year 2006 budget as the basis
    for this debate. The debate should focus, as CRS has testified, on
    comparing the cost to procure the same number of weapons systems under
    a series of single year procurement contracts to the costs of an MYP
    over that same period of time. Does history not show that using
    multiyear contracts/authority does provide savings to the Government?
        Mr. Walker. I stated that purchasing another four F-22As, further
    lengthening the procurement timeframe and entering into a multiyear
    contract as a package, which is what is being proposed by the DOD,
    would cost the taxpayers about $1.7 billion more than the DOD's
    baseline fiscal year 2006 proposal for the F-22A. I also stated that
    the multiyear contract standing alone would save an estimated $225 to
    $235 million depending on how many units are purchased. The additional
    $10 million in savings for 60 aircraft will, however, require an
    additional investment of $674 million to purchase such aircraft, which
    currently is not now included in the Air Force budget for F-22A.
        History shows that multiyear contracts provide savings most of the
    time. However, in some cases it is difficult to prove savings were
    accrued and other times savings are not achieved. Savings are dependent
    on the unique factors of each multiyear case and can include the timing
    of the contract, the number of units being acquired, etc. So each case
    must be evaluated based on its own unique and specific details. For the
    F-22A, the proposed use of a multiyear contract is occurring at the end
    of the program for the final production quantities at a time when the
    production line is winding down--a strategy not conducive to saving
    money. Additionally, it is only planned for 60 units over 3 years while
    an average multiyear buy quantity is over 300 units over a longer
    period according to data in the IDA BCA for F-22A. Finally, because
    this buy is at the end of the F-22A program there is little to no
    opportunity to gain savings from improved production efficiencies.

        [Whereupon, at 11:58 a.m., the subcommittee adjourned.]