[Senate Hearing 110-639]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-639
 
 THE ACQUISITION OF MAJOR WEAPONS SYSTEMS BY THE DEPARTMENT OF DEFENSE

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

                                HEARING

                               before the

                      COMMITTEE ON ARMED SERVICES
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                              JUNE 3, 2008

                               __________

         Printed for the use of the Committee on Armed Services


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                      COMMITTEE ON ARMED SERVICES

                     CARL LEVIN, Michigan, Chairman

EDWARD M. KENNEDY, Massachusetts     JOHN McCAIN, Arizona
ROBERT C. BYRD, West Virginia        JOHN WARNER, Virginia,
JOSEPH I. LIEBERMAN, Connecticut     JAMES M. INHOFE, Oklahoma
JACK REED, Rhode Island              JEFF SESSIONS, Alabama
DANIEL K. AKAKA, Hawaii              SUSAN M. COLLINS, Maine
BILL NELSON, Florida                 SAXBY CHAMBLISS, Georgia
E. BENJAMIN NELSON, Nebraska         LINDSEY O. GRAHAM, South Carolina
EVAN BAYH, Indiana                   ELIZABETH DOLE, North Carolina
HILLARY RODHAM CLINTON, New York     JOHN CORNYN, Texas
MARK L. PRYOR, Arkansas              JOHN THUNE, South Dakota
JIM WEBB, Virginia                   MEL MARTINEZ, Florida
CLAIRE McCASKILL, Missouri           ROGER F. WICKER, Mississippi

                   Richard D. DeBobes, Staff Director

              Michael V. Kostiw, Republican Staff Director

                                  (ii)

  
?



                            C O N T E N T S

                               __________

                    CHRONOLOGICAL LIST OF WITNESSES

 The Acquisition of Major Weapons Systems by the Department of Defense

                              june 3, 2008

                                                                   Page

Young, Hon. John J., Under Secretary of Defense for Acquisition, 
  Technology, and Logistics......................................     9
Schinasi, Katherine V., Managing Director, Acquisition and 
  Sourcing Management, Government Accountability Office..........    20
GAO Report to Congressional Committees on Defense Contracting: 
  Post-Government Employment of Former DOD Officials Needs 
  Greater Transparency...........................................   109

                                 (iii)


 THE ACQUISITION OF MAJOR WEAPONS SYSTEMS BY THE DEPARTMENT OF DEFENSE

                              ----------                              


                         TUESDAY, JUNE 3, 2008

                                       U.S. Senate,
                               Committee on Armed Services,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:35 a.m. in room 
SD-50, Dirksen Senate Office Building, Senator Carl Levin 
(chairman) presiding.
    Committee members present: Senators Levin, Lieberman, Reed, 
Akaka, Pryor, McCaskill, Warner, Collins, Dole, Thune, and 
Martinez.
    Committee staff members present: Richard D. DeBobes, staff 
director; and Leah C. Brewer, nominations and hearings clerk.
    Majority staff members present: Madelyn R. Creedon, 
counsel; Creighton Greene, professional staff member; Michael 
J. Kuiken, professional staff member; Peter K. Levine, general 
counsel; Michael J. McCord, professional staff member; William 
G.P. Monahan, counsel; and William K. Sutey, professional staff 
member.
    Minority staff members present: Michael V. Kostiw, 
Republican staff director; William M. Caniano, professional 
staff member; Gregory T. Kiley, professional staff member; 
David M. Morriss, minority counsel; Christopher J. Paul, 
professional staff member; and Sean G. Stackley, professional 
staff member.
    Staff assistants present: Jessica L. Kingston, Ali Z. 
Pasha, Benjamin L. Rubin, and Breon N. Wells.
    Committee members' assistants present: Jay Maroney, 
assistant to Senator Kennedy; Frederick M. Downey, assistant to 
Senator Lieberman; Elizabeth King, assistant to Senator Reed; 
Bonni Berge, assistant to Senator Akaka; Christopher Caple, 
assistant to Senator Bill Nelson; Jon Davey, assistant to 
Senator Bayh; M. Bradford Foley, assistant to Senator Pryor; 
Gordon I. Peterson, assistant to Senator Webb; Sandra Luff, 
assistant to Senator Warner; Anthony J. Lazarski and Nathan 
Reese, assistants to Senator Inhofe; Lenwood Landrum and Todd 
Stiefler, assistants to Senator Sessions; Mark J. Winter, 
assistant to Senator Collins; Clyde A. Taylor IV, assistant to 
Senator Chambliss; Lindsey Neas, assistant to Senator Dole; 
Jason Van Beek, assistant to Senator Thune; and Erskine W. 
Wells III, assistant to Senator Martinez.

       OPENING STATEMENT OF SENATOR CARL LEVIN, CHAIRMAN

    Chairman Levin. Good morning, everybody. The committee 
meets today to consider the performance of the Department of 
Defense (DOD) major acquisition programs at a time when cost 
growth on these programs has reached crisis proportions. We 
don't have to look very far to find examples. Over the last few 
years, unit costs on the Air Force's largest acquisition 
program have grown by almost 40 percent, costing us an extra 
$37 billion. Over the last 3 years, unit costs on the Army's 
largest program, the Future Combat System (FCS), have grown by 
more than 45 percent, costing us an extra $40 billion. Last 
year, the Navy had to cancel the planned construction of the 
two Littoral Combat Ships (LCSs) after the program cost doubled 
in just 2 years.
    Since the beginning of 2006, nearly half of DOD's 95 
largest acquisition programs have exceeded the so-called Nunn-
McCurdy cost growth standards established by Congress. Overall, 
these 95 Major Defense Acquisition Programs (MDAPs) have 
exceeded their research and development (R&D) budget by an 
average of 40 percent, have seen their acquisition costs grow 
by an average of 26 percent, and experienced an average 
schedule delay of almost 2 years.
    The Government Accountability Office (GAO) tells us that 
cost overruns on these MDAPs now total $295 billion over the 
original program estimates, even though we have cut unit 
quantities and reduced performance expectations on many 
programs in an effort to hold down costs.
    Now, just to put the size of these cost overruns in 
perspective, what would that $295 billion buy? We could buy at 
current prices 2 new aircraft carriers for $10 billion each, 
and 8 Virginia-class submarines for $2.5 billion each, and 500 
V-22 Ospreys for $120 million each, and 500 Joint Strike 
Fighters (JSFs) for $100 million each, and 10,000 mine 
resistant ambush protected vehicles for $1.4 million each, all 
of that, and still have enough money left over to pay for the 
entire $130 billion FCS program.
    These cost overruns happen because of fundamental flaws 
that are built into our acquisition system. We know what those 
flaws are. DOD acquisition programs fail because the Department 
continues to rely on unreasonable cost and schedule estimates, 
establish unrealistic performance expectations, insist on the 
use of immature technologies, and direct costly changes to 
program requirements, production quantities, and funding levels 
in the middle of ongoing programs.
    As Secretary Gates recently acknowledged, we've been 
``adding layer upon layer of cost and complexity onto fewer and 
fewer programs that take longer and longer to build.'' He said, 
``This must come to an end.'' Well, it's been long overdue that 
that come to an end.
    Let me just give you a few examples of how these programs 
have impacted weapons systems. With regard to unrealistic cost 
and schedule estimates, the Navy initially established a goal 
of $220 million and a 2-year construction cycle for the two 
lead ships on the LCS program. These goals were completely 
inconsistent with the Navy's historic experience in building 
new ships and with the complexity of the design required to 
make the program successful. As a result, program costs doubled 
and the Navy started to run out of money long before the ships 
were complete, forcing it to cancel follow-on ships.
    With regard to unrealistic performance expectations, the 
National Polar Orbiting Operational Environmental Satellite 
System was designed to include 14 different environmental 
sensors on 6 different satellites, plus a ground system. Now, 
the system turned out to be so complex and unmanageable that 
the cost doubled, forcing DOD to eliminate one of the planned 
satellites and five of the planned sensors and make several of 
the other sensors less complex. The Department is now trying to 
figure out how to restore some of the capability that will be 
lost as a result of the elimination of the planned sensors.
    With regard to immature technologies, the Army's Warfare 
Information Network-Tactical program entered the System 
Development and Demonstration (SDD) phase with only 3 of its 12 
critical technologies at the appropriate level of maturity. As 
the Army struggled to develop these technologies or to 
substitute alternative technologies that were more ready for 
production, program costs grew by 88 percent and the program 
was delayed by more than 4\1/2\ years.
    With regard to changing program requirements, the Air Force 
has repeatedly restructured its Global Hawk program to add new 
and sometimes unproven technologies. While the new technologies 
have added to the capability of the Global Hawk, the changes 
have led to space, weight, and power constraints that have more 
than doubled production costs and have significantly disrupted 
the program.
    Over the last few years this committee has taken a number 
of steps to try to address these problems. For example, we have 
required senior acquisition officials to certify that cost 
estimates are realistic and technologies are mature before new 
programs are started, we've required that program managers be 
held accountable for meeting measurable performance objectives 
to which they have agreed in writing, and we've tightened the 
so-called Nunn-McCurdy thresholds to prevent DOD from hiding 
underperforming programs.
    The Under Secretary of Defense for Acquisition, Technology, 
and Logistics (AT&L), who will be testifying before us today, 
has carried out our new certification requirements and he has 
used the Nunn-McCurdy process to require the serious 
reexamination of troubled programs. He has also required the 
military departments to establish Configuration Steering Boards 
(CSBs) to prevent unnecessary and costly changes to program 
requirements, which is a constructive step that we propose to 
enact into law in this year's National Defense Authorization 
Act (NDAA).
    However, those efforts have fallen far, far short. No 
matter how well intentioned Secretary Young and other senior 
acquisition officials may be, they remain dependent upon the 
information that is provided to them by contractors and program 
officers. These contractors and program officers have every 
reason to produce overly optimistic cost estimates and 
unrealistic performance expectations because programs that 
promise revolutionary change and project lower costs are more 
likely to be approved and funded by senior administration 
officials and by Congress. In other words, we get the 
information we need to run our programs from people who have a 
vested interest in overpromising.
    In a draft report that will be issued later this month, GAO 
concludes that ``The Department of Defense's inability to 
allocate funding effectively to program is largely driven by 
the acceptance of unrealistic cost estimates and a failure to 
balance needs based on available resources. Development costs 
for major acquisition programs are consistently 
underestimated,'' they said, ``at a program's initiation by 30 
to 40 percent, in large part because the estimates are based on 
limited knowledge and optimistic assumptions about system 
requirements and critical technologies.''
    The consequences of using such optimistic estimates were 
correctly identified by the DOD acquisition performance 
assessment panel 2 years ago. That panel found that using 
``optimistic budget estimates force excessive annual 
reprogramming and budget exercises within the Department, which 
in turn cause program restructuring that drive long-term costs, 
cause schedule growth, and open the door to requirements 
creep.''
    It's going to take a fundamental change in the structure 
and culture of the acquisition system to address that problem. 
For this reason, I believe that we need a Director of 
Independent Cost Assessment in the DOD, with authority and 
responsibility comparable to those of the Director of 
Operational Test and Evaluation (DOT&E) that we established 20 
years ago. This new independent office would review cost 
estimates on all MDAPs and develop its own independent cost 
estimates to ensure that the information, on which so many of 
our program and budget decisions are based, are fair, unbiased, 
and reliable. I plan to offer an amendment to this year's 
defense bill when it comes to the Senate floor to establish 
this office.
    Today the committee will hear from John Young, the Under 
Secretary of Defense for AT&L, who is the top acquisition 
official for DOD, and from Katherine Schinasi, who is GAO's top 
expert on the acquisition system. We look forward to the 
testimony of our witnesses on these important issues. We thank 
both of you for your commitment and your service to improving 
these systems.
    Senator Warner.

                STATEMENT OF SENATOR JOHN WARNER

    Senator Warner. Thank you, Mr. Chairman. I join you in 
welcoming our witnesses today. I thought you laid out a very 
factual and pragmatic assessment of the situation as this 
committee views it.
    Mr. Chairman, I roughly estimate that DOD, over the next 5 
years, has $900 billion with which to inject in the procurement 
system. We simply must make the adjustments that are required 
to obviate what you have recited.
    You and I have been on this committee a long time. I 
remember one very clear chapter when Dave Packard put forward 
the Packard Commission reports and that was to solve all the 
problems. It didn't seem to work. We awakened here one day and 
it was this committee that put a stop to the Boeing tanker 
situation, and it's taken these many years to remedy that and 
hopefully get back on the rails again.
    So I join you, Mr. Chairman. I think the committee, the 
members on our side, are very much in favor of seeing what we 
can do to take positive action to correct the situation.
    I'd like to put in a statement on behalf of Senator McCain 
at this point and amplify my own. Thank you.
    [The prepared statements of Senator McCain and Senator 
Warner follow:]

               Prepared Statement by Senator John McCain

    Mr. Chairman, thank you for calling this important hearing. The 
committee meets to examine the management and oversight of Department 
of Defense (DOD) acquisition programs.
    Defending our Nation against its enemies is the first and most 
fundamental commitment of the Federal Government. Resourcing our 
military to defend this nation requires an appropriate working 
relationship among defense industries, the DOD, and Congress with an 
eye toward faithful and efficient expenditure of every taxpayer dollar 
that is made available for defense procurement.
    However, I believe it is important to recall that President 
Eisenhower warned in 1961 that, ``We must guard against the acquisition 
of unwarranted influence, whether sought or unsought, by the military 
industrial complex. The potential for the disastrous rise of misplaced 
power exists and will persist.''
    Over the last 6 years--since the Air Force-Boeing tanker 
procurement scandal where we learned of the most egregious abuse of 
power from a government acquisition official--this committee has been 
active in its oversight responsibilities and approved the largest 
number of acquisition reform measures since the mid-1980s when a series 
of procurement scandals plagued the Pentagon. If DOD follows these 
laws, they could exercise more discipline in how the Pentagon develops 
and buys new weapon systems.
    Unfortunately, despite these recent reforms drafted by this 
committee and enacted into law, cost overruns for major weapon programs 
are still staggering. We are here today to find out if these policy 
changes have improved the way the DOD buys new weapon systems, and to 
determine whether additional reforms are necessary. According to the 
Government Accountability Office (GAO), none of the weapons programs 
that they assessed this year had proceeded through system development 
and met the ``best practices'' standards for mature technologies, 
stable design, and mature production processes--all prerequisites for 
achieving planned cost, schedule, and performance outcomes. Equally as 
disturbing are the GAO reports that the Department has not used system 
engineering tools--preliminary design reviews and prototyping--to 
demonstrate the maturity of the planned weapon system.
    The need for acquisition reform is paramount. Most civilian and 
uniformed leaders, as well as outside defense experts, believe that 
military spending is going down. A short time ago, the former Chairman 
of the Joint Chiefs, General Peter Pace, showed me a chart called 
``Future Investments? 10-Year Cyclical DOD Outlays.'' It examined 
defense spending since the beginning of the Vietnam War, and the 
results described 10-year cyclical spending cycles.
      
    
    
      
    What is clear from the chart is that investment in weapon 
acquisition programs is now at its highest level in two decades--but is 
at its apex and heading downward. No other organization understands 
this better than the GAO which has authored several reports on defense 
acquisition. GAO has stated that since the mid-1990s, the acquisition 
costs for major weapons programs has increased almost 120 percent and 
that current programs are experiencing, on average, nearly a 2-year 
delay in delivering initial capabilities to the warfighter.
    The Department expects to invest about $900 billion over the next 5 
years on development and procurement and invest nearly $340 billion 
specifically in major defense acquisition programs. Every dollar spent 
inefficiently in acquiring weapon systems is less money we spend on our 
budget priorities--such as the global war on terror. Nearly half of 
DOD's major defense acquisition programs are paying at least 25 percent 
or more per unit than originally expected.
      
    
    
      
    Given this situation, some will simply call for increasing defense 
spending or fixing it to a greater percentage of the Gross National 
Product. I believe, instead, that what our Nation spends on defense 
should be dictated by the threat. So how do we ensure our defense 
budget is adequate and cost-effective? First and foremost, we must stop 
wasteful spending on congressional earmarks. Second, we must maximize 
the value of the defense dollar while providing the maximum protection 
to the taxpayer. A core element of this is to execute a sound 
acquisition strategy that remedies systemic problems at the senior 
management and the program level, which causes alarming increases in 
costs and schedule delays. A sound acquisition strategy will help 
improve accountability in acquisition management and ensure that 
program decisions are consistent with the requirements of the unified 
commands.
    Defense acquisition policy has been a major issue ever since 
President Eisenhower first warned the Nation about the military-
industrial complex. Yet, as Operation Ill Wind in the 1980s and the 
more recent Boeing Tanker scandal show, Eisenhower's admonitions should 
be paramount in our examination today. Despite the lessons of the past, 
the acquisition process continues to produce poor cost-, scheduling-, 
and performance-outcomes--to the detriment of the taxpayer and the 
warfighter.
    In the 109th and 110th Congresses, major acquisition policy issues 
have come up on several multi-billion dollar programs: the Army's 
Future Combat Systems contract conversion; the Navy's Littoral Combat 
Ship (LCS); the Air Force's F-22 Raptor, C-130J contract conversion, 
replacement tanker program, and Combat Search and Rescue helicopter; 
the Marine Corps' Expeditionary Fighting Vehicle (EFV); and one of the 
largest aviation acquisition programs ever, the Marine Corps, Navy, and 
Air Force F-35, Joint Strike Fighter.
    There is much we can do to help ensure taxpayers' dollars are spent 
wisely as we develop, test, and acquire major defense systems. By 
increasing transparency and accountability and maximizing competition, 
broad acquisition reform can deliver the best value to the taxpayer and 
minimize waste, fraud, and abuse. Most importantly, it can help assure 
that the United States maintains the strongest fighting force in the 
world. The Senate Armed Services Committee's efforts, along with the 
help of the GAO and strong oversight of the Office of the DOD Inspector 
General (IG), can improve an acquisition system that is fundamentally 
broken.
    At one time or another, all of the military Services have received 
failing grades in the development and acquisition of weapon systems. 
Where problems have been identified, some of the military Services have 
recognized the need for more discipline and accountability and in some 
cases fired program managers, directors, and service acquisition 
executives. That was the case with the Marine Corps' EFV and the Navy's 
LCS programs. But, when the Services have not held people to the level 
of excellence they espouse in glorified mission statements, there have 
been more systemic problems. Unfortunately, that is the case with the 
Air Force, where protests in competitive acquisition awards are seven 
times more likely to occur than with the other Services.
    The Secretary of Defense (SECDEF), the Deputy Secretary of 
Defense--as the Secretary's Executive Officer--and the Under Secretary 
of Defense for Acquisition must pay more attention to these 
acquisitions, especially when poor decisions are made and procedures 
ignored.
    In the Boeing tanker scandal, actions by a top Air Force 
acquisition official, Darleen Druyun, not only disgraced herself and 
resulted in her conviction on public corruption charges, but also 
disgraced the Air Force, the DOD, and the entire defense establishment. 
I continue to believe that Ms. Druyun was not solely responsible for 
the Air Force's failure. On the contrary, it is the Air Force's 
inability to accept any responsibility for wrongdoing that predicates 
potential failures in the future.
    For example, the DOD IG has recently reported that within a year 
after Darleen Druyun and a Boeing CEO went to jail over the proposed 
Air Force tanker acquisition, a former Air Combat Commander and 4-star 
Air Force general improperly influenced senior Air Force officers to 
steer a high visibility Air Force contract through a non-competitive 
process for the Thunderbirds to a friend and his new company. Clearly, 
the recent Air Force scandal was not the rare example of mismanagement 
and oversight failure we thought it would be.
    No one was held accountable when the Air Force misled Congress 
after being directed by statute to convert a contract for C-130Js from 
a commercial contract to a traditional military contract. Despite this 
legal requirement, the Air Force reported to Congress the contract had 
been converted, even though it had not yet been done. Furthermore, no 
one was held accountable when the DOD IG found that the Air Force 
apparently presented Congress false information on the C-130J multi-
year contract termination costs and the F-22A Program Manager who was 
among those responsible for apparently exaggerating the termination 
costs--is responsible for executing the F-22 multi-year contract today.
    We shall see if anyone will be held accountable when the DOD IG 
completes its ongoing investigation examining how senior Air Force 
officials may have inappropriately solicited new orders for C-17s, 
contrary to the orders of the President and the SECDEF. This occurred 
in spite of clear guidance from the DOD that they did not want 
additional C-17s, because there is no military ``requirement'' for them 
and buying more C-17s is contrary to the Pentagon's current budget 
plan.
    Again, while legislation and policy revisions can help guide 
change, the DOD must begin making better choices that reflect joint 
capability needs and match requirements with resources, or the 
department will continue to experience acquisition failures. This 
Hobson's choice must ensure that the military Services do not continue 
to over promise capabilities and underestimate the costs of developing 
and buying weapon systems.
    Acquisition problems will continue to prevail in DOD until the 
Secretary provides a better foundation for buying the right assets, the 
right way. This requires making tough decisions as to which programs 
should be pursued, and more importantly, not pursued; making sure 
programs are executable; locking in requirements before programs are 
ever started; and making it clear who is responsible for what and 
holding people accountable when responsibilities are not fulfilled. 
Moreover, we must change the culture that leads DOD and the military 
Services to over-compromise on capability and underestimate costs in 
order to sell new programs and capture funding will need to change.
    We must also reverse the trend of Service leaders not understanding 
the complexity of developing systems through adequate oversight and 
holding those accountable for failing to follow acquisition laws and 
regulations. We simply cannot afford further acquisition failures, not 
if we are to maximize the value of the defense dollar and buy the right 
weapon systems for our service men and women.
    Finally, let me recommend to the committee, and ask that it be 
placed into the record, a recent GAO report titled, ``Defense 
Contracting, Post-Government Employment of Former DOD Officials Needs 
Greater Transparency.'' This report recommends additional statutory and 
policy changes in this area and finds significant under-reporting by as 
much as half of the contractors' employment of former DOD officials. 
Time and again, some poor acquisition decisions are made because of a 
lack of transparency at all levels of the acquisition process. The 
report cites recent high-profile cases involving former senior DOD 
officials' violations of post-government employment laws that are worth 
reviewing to understand the breadth of the problem, and demonstrate the 
need for further reform.
    The bottom line is this: DOD must implement acquisition initiatives 
quickly if we are to ensure that warfighter capabilities are delivered 
when needed and as promised. In addition, I call on the Defense 
Secretary, Deputy Secretary, and Under Secretary for Acquisition to 
enforce the acquisition laws and regulations in the department and hold 
people accountable when they do not follow them. When we do this we 
should be able to more effectively and efficiently buy weapon systems 
and we will regain the confidence of the taxpayer and our soldiers, 
sailors, marines, and airmen.
    I look forward to hearing from today's witnesses and receiving an 
update on the execution of and implementation of acquisition policies 
that this committee has carefully drafted and were enacted into law 
over the past 3 years.
    Thank you, Mr. Chairman.
    [The GAO Report to Congressional Committees entitled ``Defense 
Contracting: Post-Government Employment of Former DOD Officials Needs 
Greater Transparency'' dated May 2008 is located at the end of this 
hearing.]
                                 ______
                                 
               Prepared Statement by Senator John Warner

    Mr. Chairman, thank you for calling this hearing to examine the 
management and oversight of Department of Defense (DOD) acquisition 
programs. The topic of our hearing today is of the utmost importance to 
me. I believe that the way we resource the military Services to defend 
our Nation requires an appropriate working relationship among defense 
industries, the DOD, and Congress. But we must always strive to be 
mindful that we are making efficient and effective use of every 
taxpayer dollar that is made available for defense procurement.
    Recall that President Eisenhower warned in 1961 that, ``We must 
guard against the acquisition of unwarranted influence, whether sought 
or unsought, by the military industrial complex. The potential for the 
disastrous rise of misplaced power exists and will persist.''
    I believe that this committee has been very active and attentive in 
its oversight responsibilities over the last several years. In 
particular, since the Air Force-Boeing tanker procurement scandal, this 
committee has approved the largest number of acquisition reform 
measures since the mid-1980s. I believe that if DOD takes these reforms 
seriously and implements the changes required by these laws, it could 
instill more discipline into how the Pentagon develops and buys new 
weapon systems.
    But, I am very concerned that despite our efforts to seek changes 
at the Pentagon that will make defense acquisitions effective and 
efficient for our military Services and for taxpayers, cost and 
schedule outcomes for major weapon programs are not improving. As a 
result, we are here today to find out if our recent policy reforms have 
improved the way the DOD buys new weapon systems, and to determine what 
additional steps and reforms are necessary.
    I would like to mention a few other key areas of concern that are 
relevant to this discussion. Currently, most civilian and uniformed 
leaders, and outside defense experts, believe that military spending, 
which is at its highest point now, is heading down. This is a very 
troubling trend at such a critical time given our national security 
situation and our military Services' needs, and it reinforces the need 
for real and timely acquisition reform.
    In addition, a recent report by the Government Accountability 
Office (GAO) found that none of the weapons programs that they assessed 
this year had proceeded through system development and met the ``best 
practices'' standards for mature technologies, stable design, and 
mature production processes--all prerequisites for achieving planned 
cost, schedule, and performance outcomes. GAO has also stated that 
since the mid-1990s, the acquisition costs for major weapons programs 
have increased almost 120 percent and that current programs are 
experiencing, on average, a nearly 2-year delay in delivering initial 
capabilities to the warfighter. This demonstrates that the DOD 
acquisition process remains inefficient and costly across a wide range 
of programs, and we need to determine what can be done to significantly 
improve this situation.
    Mr. Chairman, defense acquisition policy has been a major issue 
ever since President Eisenhower first warned the Nation about the 
military-industrial complex. Yet, as Operation Ill Wind in the 1980s 
and the more recent Boeing Tanker scandal demonstrate, Eisenhower's 
admonitions should be front and center in our examination today. 
Despite the lessons of the past, the acquisition process continues to 
result in troubling outcomes, to the detriment of the warfighter and 
the taxpayer.
    I believe the need for acquisition reform is paramount, and as DOD 
expects to invest nearly $900 billion over the next 5 years on 
development and procurement, every dollar spent inefficiently and 
ineffectively will limit the funding available for other budget 
priorities. A sound acquisition strategy will help improve 
accountability in acquisition management and will also help ensure that 
decisions made on programs are consistently cross-checked with the 
requirements of the unified commands.
    I look forward to hearing from our witnesses today. Thank you again 
Mr. Chairman for holding this important hearing.

    Chairman Levin. Thank you, Senator Warner.
    Secretary Young, I think we will begin with you. Again, our 
thanks to you.

STATEMENT OF HON. JOHN J. YOUNG, UNDER SECRETARY OF DEFENSE FOR 
             ACQUISITION, TECHNOLOGY, AND LOGISTICS

    Mr. Young. Thank you, Chairman Levin, members of the 
committee.
    Members of the defense acquisition team and I are working 
very hard to improve the cost and schedule performance of 
defense acquisition programs and I welcome the chance to talk 
with you about this. I would ask that my written statement be 
made part of the record and I would like to open with a 
discussion of the key elements necessary for a successful 
program.
    First, people devise and execute programs. The DOD 
procurement budget has experienced 34 percent real growth since 
2001 and the R&D budget has risen 70 percent. The DOD 
acquisition workforce has actually decreased slightly in this 
time period and there has been a cap on management and 
headquarters staff to oversee these programs. Programs cannot 
be successfully executed without adequate, experienced, and 
capable people.
    Indeed, I have recently reviewed several troubled programs 
and one factor was inadequate staffing in the government 
program office.
    Next, I agree with the many assessments that suggest that 
systems should only move to the final stages of development 
when key technologies are appropriately mature. Congress' 
requirement for certification of technology readiness at 
Milestone B is a very helpful decision.
    Third, a weapons program must have reasonable and stable 
requirements and understood certification standards. While many 
factors are involved, there's been a tendency, as you noted, to 
establish requirements which exceed the budget, schedule, and 
maturity of technology. Additionally, the application of 
certification and technical authority standards to programs has 
driven dramatic cost growth and schedule impacts.
    Finally, successful program execution is totally dependent 
upon a stable and adequately funded budget. In most cases we 
should fund major programs through an independent cost 
estimate. Fully funding the initial phases of a program is most 
critical. I've seen many instances where DOD has underfunded 
programs and Congress has cut programs, ensuring cost growth 
and schedule slippage.
    While there are other relevant factors, a summary of all of 
this is: Hope is not a strategy. As my previous comments 
suggest, many of the factors necessary to successfully execute 
programs are not currently in the control of the program 
manager. In the Goldwater-Nichols legislation, Congress was 
amazingly prescient in assigning acquisition responsibility to 
the civilian chain of command working for the President.
    I believe the Defense and Service Acquisition Executives 
(SAEs) are critical positions and these individuals are the key 
to many aspects of improving defense acquisition. SAEs must 
support program managers in their efforts to moderate or adjust 
requirements to get best value for the warfighter and the 
taxpayer, must fight in the military personnel system for 
promotion of program managers, must prioritize jointness and 
interoperability above service equities, and must set high 
standards for program development and execution.
    I'd like to talk briefly about some of the many steps I am 
taking to address these obligations. Program managers must have 
a forum to discuss program execution decisions and requirement 
changes with key stakeholders. CSBs, as you noted, sir, were 
used on programs like F-16 in the past and we are renewing this 
practice in the Defense Department. In hopes of constructing a 
joint, interoperable, executable and properly priced 
development program, we have used Joint Analysis Teams with 
membership that includes all relevant DOD stakeholders to 
mature program plans or review portfolios of programs to avoid 
duplication.
    The Department has often used blue ribbon panels or 
independent reviews to assess problems. I have formalized this 
process into Defense Support Teams which seek to harness 
experienced outside experts to help us solve program execution 
problems and to assess the adequacy of our development plans 
and technologies. These Defense Support Teams also help 
partially offset DOD's inability to hire adequate government 
personnel to manage our programs.
    As the Director of Defense Research and Engineering 
(DDR&E), I began a practice of quick-look technology readiness 
assessments. It is of no value to reach Milestone B and 
determine that we have technology which is immature. Quick-look 
assessments are necessary to drive investments in the 
maturation of technologies in advance of Milestone B.
    Historically, the Defense Department built prototype 
systems. DOD has evolved from this strategy to moving to paper 
competitions for contract awards for final development of 
systems. I rarely believe this is the best strategy. We need to 
build prototypes competitively to demonstrate the validity of 
requirements, to mature technology, to inform our estimates of 
development and procurement costs, and to insist in the 
development of concepts of operation.
    At a more general level, DOD needs to pursue the 
development of prototypes to train our personnel in program 
management and systems engineering, to attract talented 
scientists and engineers to work on defense programs, and to 
inspire a new generation of people to pursue technical 
education.
    Shifting the culture and discipline of the enterprise will 
take time. In a small way, I constantly work towards this goal 
by sending weekly notes across, broadly across, the acquisition 
team highlighting the challenges, problems, and best practices 
which I see. Alternately, I would tell you that I do not think 
we can assure program performance through rules and 
certifications. Indeed, these processes diffuse accountability 
from the fact that responsible and accountable people must 
manage acquisition programs.
    Finally, I'm grateful to the Senate for this chance to 
serve as the Defense Acquisition Executive. My primary 
responsibility is to serve as Milestone Decision Authority for 
major acquisition programs and set these higher standards. 
Recently I have sought to further address many of these issues 
through Acquisition Decision Memorandums (ADMs). In recent 
decision memorandums I have locked program requirements, 
prohibited changes, directed full funding, encouraged program 
managers to pursue trades which could reduce costs, and forced 
jointness. I recognize the need for improvement in the planning 
and execution of the defense acquisition programs and, I'm 
seeking to honor your trust by making necessary changes.
    I'm most grateful for the chance to talk with you today 
about these issues and I look forward to your questions.
    [The prepared statement of Mr. Young follows:]

                Prepared Statement by Hon. John J. Young

                              INTRODUCTION

    Chairman Levin, Senator McCain, and distinguished members of the 
committee, thank you for the opportunity to appear before you today to 
discuss the Department's policies and practices in the acquisition of 
major weapons systems.
                                 vision
    Since I last appeared before this committee for my confirmation 8 
months ago, I have taken a number of actions to implement my vision for 
Acquisition, Technology, and Logistics, which is to drive the 
capability to defeat any adversary on any battlefield. I have focused 
my approach into four strategic thrust areas, each of which has a 
guiding principle, desired outcomes, and specific initiatives with 
metrics or steps against which we can measure progress. These four 
strategic thrust areas are:

         Define Effective and Affordable Tools for the Joint 
        Warfighter
         Responsibly Spend Every Single Tax Dollar
         Take Care of Our People
         Department of Defense (DOD) Transformation Priorities

    In identifying both the problems we face, and the solutions we are 
seeking, I am committed to transparency throughout the acquisition 
process. It is my belief that we need to be clear, concise, and open 
with regard to what the DOD is seeking, and the work it is completing. 
It is our responsibility as stewards of tax dollars to ensure complete 
openness, fairness, and objectivity in the acquisition process. I 
intend that we will be accountable to ensure the success of these 
initiatives.
    I have charged the acquisition team to create an inspired, high-
performing organization where:

         We expect each person must make a difference;
         We seek out new ideas and new ways of doing business;
         We constantly question requirements and how we meet 
        them; and
         We recognize that we are part of a larger neighborhood 
        of stakeholders interested in successful outcomes at reasonable 
        costs.

    We live in an increasingly complex world. Our missions vary widely, 
so we need strategic resilience and depth; and must ensure our Nation 
has response options today and for the future with the appropriate 
capacity and capability to prevail at home and abroad.
    I would like to highlight some specific initiatives that capture 
these philosophies and are fundamental to transforming the acquisition 
process and workforce. They are:
(1) Program Manager Empowerment and Accountability
    Program managers play a critical role in developing and fielding 
weapon systems. I have put in place a comprehensive strategy to address 
improving the performance of program managers. Key to this are program 
manager tenure agreements for Acquisition Category (ACAT) I and II 
programs, which are our largest programs. My expectation is that tenure 
agreements should correspond to a major milestone and last 
approximately 4 years. Another fundamental piece I have established is 
Program Management Agreements--a contract between the program manager 
and the acquisition and requirements/resource officials--to ensure a 
common basis for understanding and accountability; that plans are fully 
resourced and realistically achievable; and that effective transparent 
communication takes place throughout the acquisition process.
(2) Configuration Steering Boards (CSBs)
    I have directed the military departments to establish CSBs. My 
intent is to provide the program manager a forum for socializing 
changes that improve affordability and executability. Boards will be in 
place for every current and future ACAT I program and will review all 
proposed requirement changes, and any proposed significant technical 
configuration changes which potentially could result in cost and 
schedule changes. Boards are empowered to reject any changes, and are 
expected to only approve those where the change is deemed critical, 
funds are identified, and schedule impacts are truly mitigated. For 
example, the Navy decided to terminate the Extended Range Munition 
(ERM) contract after the CSB review because the effort on the ERM 
contract was not meeting the performance needs of the Department. The 
Department is now looking at other alternatives to satisfy the 
requirement. I require every acquisition team member to fully engage 
the Planning, Programming, Budgeting, and Execution (PPBE) process thus 
creating an avenue for program managers to ensure they are funded to 
execute their responsibilities or alternatively descope their programs 
to match reduced budget levels.
(3) Defense Support Teams (DSTs)
    To address the challenge of acquisition execution and assist both 
industry and DOD program managers, I have expanded the use of these 
teams who are made up of outside world-class technical experts to 
address our toughest program technical issues. I expect the teams to 
resolve emergent problems and help the Department successfully execute 
tough programs before problems develop. For example, the Net Enabled 
Command Capability (NECC) program benefitted from a DST that clarified 
the critical coordination points necessary to bring the Defense 
Information Support Agency, the Service acquisition authorities, and 
operational sponsors into a coherent approach balancing military needs, 
technology solutions, and funding requirements. A refocused NECC team 
demonstrated significant progress on developing actionable military 
need definitions and establishing a collaborative environment for 
design and testing of software application modules enabling elements of 
a joint command and control tool set.
(4) Prototyping and Competition
    I have issued policy requiring competitive, technically mature 
prototyping. My intent is to rectify problems of inadequate technology 
maturity and lack of understanding of the critical program development 
path. Prototyping employed at any level--component, subsystem, system--
whatever provides the best value to the taxpayer.
    For example, the Joint Light Tactical Vehicle (JLTV) is currently 
using competitive prototyping. The JLTV program will eventually provide 
our soldiers and marines with a truck that combines the off-road 
mobility of a High Mobility Multi-purpose Wheeled Vehicle with 
protection approaching that of a Mine Resistance Ambush Protected 
vehicle. To do this, the Joint Program Office is having three separate 
teams of contractors compete to make multiple prototypes which will be 
rigorously tested. At the end of this competition, the best of these 
prototypes will proceed on to Systems Demonstration and Development 
having already proven that they have the technical maturity to satisfy 
the requirements in a timely and cost effective manner.
(5) AT&L Notes
    I am writing weekly notes to the acquisition workforce. These notes 
share lessons learned and provide leadership guidance on expected 
procedures, processes and behaviors within the acquisition workforce. 
These notes provide a powerful training tool directly from me.

  COST AND SCHEDULE DELAYS IN MAJOR DEFENSE ACQUISITION PROGRAMS AND 
                             OTHER PROGRAMS

    Let me now address cost overruns and schedule delays in the 
Department's Major Defense Acquisition Programs (MDAPs). First let me 
say that many programs do well in terms of cost and schedule. But for 
those programs that do have cost and schedule growth, the biggest 
drivers are unstable requirements, immature technologies, and funding 
instability.
    I am addressing requirements instability through increased 
partnering with the Joint Staff on requirements and through CSBs. CSBs 
review all proposed requirements changes and any proposed significant 
technical configuration changes which have the potential to result in 
cost and schedule impacts to an MDAP. Such changes will generally be 
rejected, deferring them to future blocks or increments. Changes may 
not be approved unless funds are identified and schedule impacts 
mitigated. CSBs also create a collaborative forum for program managers 
to propose and describe reductions in requirements which can 
significantly lower cost without substantially reducing capability. 
Program managers desperately need these forums to try to improve the 
pace of requirements decisions and match that pace to the pace of 
program execution. The Joint Staff has also asked the programs to come 
back to them, if requirements are driving costs, and discuss if it 
makes sense to change the requirements.
    I also require technical maturity of programs before program 
initiation (Milestone B). Statute requires that Milestone Decision 
Authorities (MDA) certify that the technology in an MDAP is 
demonstrated in a relevant environment for Milestone B (or Key Decision 
Point B for space programs). I must also certify that the program 
demonstrates a high likelihood of accomplishing its intended mission. 
These are 2 of the 10 criteria I certify. Congress' direction that the 
DOD ensure appropriate technical maturity at Milestone B was very 
helpful. I think the additional nine criteria add time and paperwork, 
and these criteria can conflict with making needed progress on 
developing tools for our warfighters.
    Where I have had questions about a program's readiness for program 
initiation, I have used Independent Program Assessments (IPAs), DSTs, 
and other tools to do a thorough assessment of the program and to 
present their findings to me and other members of the Defense 
Acquisition Board (DAB). For example, I directed the creation of a DST 
to assist the Space-Based Infrared System High program in 
rearchitecting the Flight Software System. This became the critical 
path to launch due to architecture problems found late in development. 
The DST team brought an outside expert perspective, enabling the 
contractor team to leverage years of embedded systems development and 
management experience, to assess the viability of the new architecture 
and highly streamlined development process. Currently, the revised 
architecture is proving to meet expectations and the development team 
is meeting critical delivery dates although some minor delays have been 
experienced.
    I give explicit funding and schedule direction to programs at their 
milestone decisions, and ensure those funding directions are 
implemented in the budget process. In addition, I am also focusing a 
great deal of attention on the contractual incentives put in place for 
programs I review to ensure we incentivize improved outcomes and not 
reward poor ones.
    Finally, I have tried to improve discipline in the process by 
citing the governing requirements document in acquisition decision 
memorandums (ADMs), prohibiting any changes to the requirements, and 
directing the program managers to seek adjustments in requirements 
which reduce cost and program risk, and insisting the program manager 
execute within the budget and limit the excessive demands of technical 
authority and derived requirements.
    Taken together I believe these initiatives, along with those I 
discussed earlier will put us on a path towards achieving markedly 
improved acquisition outcomes.

                GOVERNMENT ACCOUNTABILITY OFFICE REPORT

    Let me now address our cost and schedule performance that was 
detailed in the Government Accountability Office (GAO) Report 
``Assessments of Selected Weapon Programs.'' This report made headlines 
citing cost growth of $295 billion on 95 Defense programs. It was a 
catchy headline in the newspapers. But having reviewed the report in 
detail, I can only conclude that we and the GAO have some important 
work ahead of us to develop appropriate metrics to evaluate DOD's 
acquisition system. The current report has some significant limitations 
that I will discuss briefly. Has there been cost growth in some DOD 
programs? Yes, and I am not here to condone it. Indeed, I am seeking to 
strictly limit cost growth. Do all programs behave as it is implied in 
the GAO report? Absolutely not. Our acquisition system is not on a 
downward spiral--it is on a path to improvement.
    As I am sure you know, DOD is working to field some of the most 
technologically complex and revolutionary systems to ensure our 
national security, while taking into consideration other aspects, such 
as immediate national security needs, industrial base considerations, 
legislative direction, congressional requirements, and changing 
capability needs. I have yet to see an assessment that takes these 
kinds of factors into account when developing a report card for DOD. I 
believe that it is essential that we, and the GAO, account for these 
issues when assessing the DOD acquisition system to ensure the taxpayer 
and Congress get an accurate picture of the health of our acquisition 
system.
    I do not plan to dissect the report, but I am going to offer a few 
specific comments about the GAO's analytical approach to temper any 
conclusions you might have drawn from their study. I hope to build on 
this, so that we might all move towards sound future analysis on which 
to measure the progress of our acquisition system.
    First, I believe GAO overstates the magnitude of many of the issues 
they raise by making generalizations from limited subsets of data. A 
few poor performers incorrectly drive many of the conclusions that GAO 
makes. Many of these conclusions are not indicative of most programs in 
the portfolio nor of DOD acquisition performance trends.
    Second, the report does not differentiate between cost growth due 
to wise and intentional choices and cost growth from programs that are 
struggling. For example, $18 billion of the cost growth in the GAO's 
2007 Selected Acquisition Report portfolio can be attributed to 
programs with quantity increases. This growth is intentional and 
intelligent decisionmaking, representing deliberate choices to increase 
capability. For instance, we recently purchased more Unmanned Aerial 
Vehicles (UAVs) than originally envisioned because the UAV provides our 
warfighters with unprecedented capability that enhances their 
survivability in Iraq and Afghanistan. Under GAO's methodology, these 
additional UAVs would be counted as cost growth. Similarly, purchasing 
an additional 76 C-130J aircraft counts as $8 billion of cost growth. 
Buying almost 500 additional Advanced Threat Infra-Red Countermeasure 
systems to defend more helicopters from heat seeking missiles counts as 
cost growth too. These are exactly the kinds of things that are helping 
the warfighter in both Iraq and Afghanistan, but are used to bolster 
the perception that the DOD is performing poorly.
    We look forward to working with GAO to select better metrics and 
displays that will portray our incremental performance changes.
GAO High Risk Areas within DOD
    All but one of the Department's High Risk Areas fall under my 
purview. I am committed to aggressively addressing our High Risk Areas 
including:

        (1) Weapons Systems Acquisition;
        (2) Contract Management and Interagency Contracting;
        (3) Supply Chain Management;
        (4) Support Infrastructure Management and Managing Federal Real 
        Property;
        (5) Business Systems Modernization;
        (6) Financial Management; and
        (7) Protection of Technologies Critical to U.S. National 
        Security Interests.

    I am tracking the progress of each High Risk Area goal and 
milestone and receive periodic updates from the respective Department 
leads. We are working closely with both the Office of Management and 
Budget (OMB) and GAO staff on developed plans and progress on 
milestones and metrics to reduce risks in these areas critical to DOD. 
Last month, we met with OMB leaders and GAO auditors to discuss those 
plans and review appropriate metrics in details. These exchanges are 
extremely valuable. Our high level focus and associated initiatives are 
demonstrating tangible progress in the weapon systems, contract 
management, supply chain, and infrastructure areas.

    INVESTMENT PLANNING--DOD'S IMPLEMENTATION OF SECTION 817 OF THE 
        NATIONAL DEFENSE AUTHORIZATION ACT FOR FISCAL YEAR 2008

    Let me now address section 817, which requires a report on the DOD 
strategies for balancing the allocation of funds and other resources 
among MDAPs. In my response to section 817, I will assess the benefits 
of several ongoing initiatives, such as capability portfolio management 
and the incorporation of the benefits of the Concept Decision (CD) 
Pilot Initiative, which was completed in March 2008. Through CSBs, 
Joint Analysis Teams (JATs), and the CD Pilot Initiative, we have 
learned much about bringing the requirements, acquisition, technology 
and programming processes together to determine potential materiel and 
non-materiel solutions for Joint Requirements Oversight Council (JROC) 
approved capability gaps from among a portfolio of choices. As such, I 
am instituting a more rigorous review prior to entering the acquisition 
process, called the Material Development Decision which will replace 
the current Concept Decision point in DODI 5000.2. Additionally, in 
accordance with the National Defense Authorization Act (NDAA) for 
Fiscal Year 2007, we are instituting a requirements manager 
certification course developed in conjunction with the Joint Staff and 
Defense Acquisition University (DAU) to ensure that requirements are 
written with a better understanding of and appreciation for the needs 
of the acquisition process.
    The department continues to identify and incorporate additional 
opportunities for strategic resource balancing and prioritization 
through initiatives such as the ongoing Capability Portfolio Manager 
implementations. As the benefits from these initiatives are recognized, 
we will develop further recommendations for changes in processes and, 
as appropriate, legislative proposals. However, in order to conduct the 
necessary in-depth review of all the data and metrics gathered, we will 
not be ready to submit the report required by section 817 until the 
second quarter of fiscal year 2009, after we have had an opportunity to 
view fourth quarter 2008 and first quarter 2009 outcomes and to assess 
their value added to our ability to make strategic resourcing 
decisions.

  MILESTONE A REQUIREMENTS--DOD IMPLEMENTATION OF SECTION 943 OF THE 
        NATIONAL DEFENSE AUTHORIZATION ACT FOR FISCAL YEAR 2008

    Let me now address section 943, which enacts a new section 2366b of 
title 10 that adds requirements for certification of MDAPs before 
Milestone A, or Key Decision Point A (KDP A) for space programs. This 
approval must be granted prior to entrance into the technology 
development phase of the acquisition lifecycle. We have been actively 
reviewing this legislation in an attempt to establish an implementation 
plan. Based upon that review, and advice from legal counsel, we have 
not yet determined how to make the language actionable. Some examples 
of the issues we are struggling with in section 2366b are:

          1. The use of the term ``system'' to describe a Milestone A 
        technology concept is problematic--there is no ``system'' or 
        ``program'' at Milestone A. Indeed, the DOD needs the 
        flexibility to consider a wide range of prototyping concepts in 
        a post-Milestone A development effort.
          2. Section 941 of the NDAA for Fiscal Year 2008 enacted a new 
        section 118b of title 10. We have not completed implementation 
        of section 118b at this time, and in fact it will be some time 
        before that will happen because of the comprehensive reviews it 
        requires. Therefore, the requirement in the new Milestone A 
        certification that the "system be executed by an entity with a 
        relevant core competency as identified by the Secretary of 
        Defense under section 118b of this title" is premature.
          3. There is ambiguity over the application of the requirement 
        for priority levels assigned by the JROC. Indeed, it is 
        actually essential that post-Milestone A prototyping and 
        development efforts be used to inform the setting of 
        requirements. Excessive requirements are almost always a factor 
        in the high cost and long timelines for DOD development 
        programs. Seeking to grant excessive validity to requirements 
        at Milestone A is exactly the wrong approach to improving DOD 
        development programs.

    We are working with our General Counsel in an effort to resolve our 
concerns and determine how to address Milestone A, or KDP A, approval 
for programs otherwise ready to enter the Technology Development phase. 
We will work closely with the committees to resolve our concerns with 
this new legislative language.
milestone b requirements--dod implementation of section 801 as amended 

 BY SECTION 812 OF NATIONAL DEFENSE AUTHORIZATION ACT FOR FISCAL YEAR 
                                  2008

    Let me now address section 801 as amended by section 812 of the 
NDAA for Fiscal Year 2008, which requires the milestone decision 
authority to receive a business case analysis for an MDAP under 
consideration for Milestone B, or KDP B for space programs, approval 
and to certify on the basis of the analysis that the program is 
affordable, reasonable cost and schedule estimates have been developed, 
and funding is available to execute through the Future Years Defense 
Plan. In February 2008, I enacted policy implementing section 812. This 
policy directs the MDA, without further delegation, to certify the 
program against the components of the business case analysis and the 
remaining provisions as specified in the law before granting Milestone 
B (or KDP B) approval. Although not mandated by statute, the policy 
also requires a similar certification if the program is initiated at 
Milestone C. Indeed, the most literal interpretation of the Milestone C 
certification would appropriately require full funding and effectively 
create a beneficial, stable multi-year procurement. However, the lack 
of multi-year authority prevents the taxpayer from realizing potential 
savings.
    We have been in compliance with the amended Milestone B/KDP B 
requirements. Some aspects of these certifications serve to make the 
acquisition process more robust, but the process adds time and 
paperwork and limits DOD's flexibility. To date, in accordance with the 
amended statute, I have certified four MDAPs for Milestone B decisions 
and one MDAP for a KDP-B decision. The four programs receiving 
Milestone B certifications were the KC-X Tanker Replacement program, 
the Joint Tactical Radio--Airborne, & Maritime/Fixed Station program, 
the Mission Planning System (MPS) Increment IV program, and the Broad 
Area Maritime Surveillance (BAMS) program. The KDP B certification was 
for Global Positioning System IIIA.

NUNN MCCURDY--DOD IMPLEMENTATION OF SECTION 802 OF THE NATIONAL DEFENSE 
                 AUTHORIZATION ACT FOR FISCAL YEAR 2006

    Let me now address section 802, which amended section 2433 of title 
10, U.S.C., by adding specifications for ``significant'' and 
``critical'' cost growth thresholds; and established the requirement 
for unit cost reporting against an original baseline--the baseline 
description established at program initiation for all MDAPs. Prior to 
this change, unit cost reporting was done only against the current 
baseline--which, in practice, once approved, replaced all previous 
versions.
    This change has increased our visibility into unit cost changes 
over time, however, traditionally the Department has used the 
Acquisition Program Baseline (APB) both for congressional tracking and 
for program execution management. The restrictions imposed by section 
802 that limit changes of the current APB to Milestones (or Key 
Decision Points), Low Rate/Full Rate Production, and critical breaches 
have hampered the usefulness of the APB in the Department as a 
management tool. To be clear, I have always been an advocate of 
measuring program results against the original cost baseline.
    The Department has a rigorous, intensive, Department-wide review 
process to assess all programs that have experienced critical Nunn-
McCurdy baseline breaches. This process has provided a comprehensive 
basis of analysis and a review of possible alternatives for me to 
consider before making a decision on whether or not to certify each 
program. I take very seriously the responsibility to keep programs 
within cost and schedule and to restructure or reset programs with 
significant or critical cost growth, such as the unit cost growth 
measured for the Nunn-McCurdy criteria.
    Since the changes to the law were enacted, seven programs have had 
critical Nunn-McCurdy baseline breaches. Of these seven, five had 
critical breaches to both the current and the original baselines. Only 
two programs had a critical breach to the original baseline only--Joint 
Primary Aircraft Training (JPATs) and Joint Air to Surface Missile. All 
seven programs were certified, although in all cases, except JPATS, 
those programs were restructured to increase greatly the probability 
they will remain within cost and schedule.
program manager requirements--dod implementation of section 853 of the 

        NATIONAL DEFENSE AUTHORIZATION ACT FOR FISCAL YEAR 2007

    Let me now address section 853 of the NDAA for Fiscal Year 2007, 
which directs the Department to develop a strategic plan for enhancing 
the role of program managers in developing and carrying out defense 
acquisition programs. The Department has taken steps to empower its 
program managers and to hold them accountable for their performance. As 
a result of our efforts to develop that plan, we developed a series of 
initiatives in the areas of program manager development and incentives, 
knowledge sharing, and stability and support. Those initiatives, 
described below, are in various stages of implementation.
    In the area of ``program manager development and incentives,'' we 
are actively pursuing program manager financial incentives linked to 
those positions that develop our program managers and also to their 
tenure in those positions. These incentives will make the program 
management field more appealing, especially to the civilian workforce. 
In addition, we are increasing our use of just-in-time training. DAU is 
deploying its ``Core Plus'' concept that involves additional position-
specific coursework for program managers in specialty areas. To improve 
the civilian program manager workforce, we are planning to implement a 
single occupational specialty for use across the Department. This will 
allow for more consistent career management of civilian program 
managers and provide better opportunities for them to compete for 
positions in other Services.
    As part of our ``knowledge sharing'' initiatives, we are 
participating in the National Defense Industrial Association's 
Industrial Committee on Program Management (ICPM). Under the auspices 
of the ICPM, we are teaming with industry to develop and expand the use 
of Program Startup Workshops to improve communication and clarify 
expectations up front. Within the Department, we have held Program 
Manager Forums that allow me and my senior staff to interact directly 
with program managers and to get their feedback on issues important to 
them. We have initiatives led by DAU to ensure our program managers 
have access to an array of tools and templates.

                   GANSLER COMMISSION RECOMMENDATIONS

    Finally let me briefly address the Gansler Commission, which was 
established in August 2007 to look at Army Acquisition and Program 
Management in Expeditionary Operations. This initiative was prompted by 
the contracting problems identified largely in Kuwait, but the report 
is not limited to Kuwait or just to the Army. The work of this 
commission provides us a clear way ahead on contracting reform that 
offers detailed analysis and recommendations both large and small. This 
was a totally independent, objective assessment.
    The Commission provided four overarching recommendations, as 
follows:

          (1) Increase the stature, quantity, and career development of 
        military and civilian contracting personnel (especially for 
        expeditionary operations);
          (2) Restructure organization and restore responsibility to 
        facilitate contracting and contract management in expeditionary 
        and CONUS operations;
          (3) Provide training and tools for overall contracting 
        activities in expeditionary operations; and
          (4) Provide legislative, regulatory, and policy assistance to 
        enable contracting effectiveness in expeditionary operations.

    The DOD is addressing improvement in contracting in several ways. 
We have increased the staffing within the Defense Procurement, 
Acquisition Policy, and Strategic Sourcing Directorate that is 
specifically dedicated to Contracting in Expeditionary Operations. This 
team is staffed with contracting personnel who have expeditionary 
deployment experience. In addition, I stood up the Task Force on 
Contracting and Contract Management in Expeditionary Operations to 
address the specific Commission recommendations and to integrate 
activities responding to the Commission's recommendations with the many 
other relevant activities already underway within the DOD. The Task 
Force is guided by senior leaders within the Acquisition, Technology, 
and Logistics organization, including the Deputy Under Secretary 
(Acquisition and Technology), as well as the Director, Defense 
Procurement, Acquisition Policy, and Strategic Sourcing. These senior 
leaders are working closely with key personnel throughout the 
Department. They meet weekly to track progress and monthly with Dr. 
Gansler himself to discuss any points of clarification regarding the 
Commission's recommendations. Progress of the Task Force is of utmost 
importance to me.
    The Task Force actions implement section 849 of the NDAA for Fiscal 
Year 2008, which directed the Secretary of Defense, in consultation 
with the Joint Chiefs of Staff, to evaluate the Commission's 
recommendations to determine the extent to which such recommendations 
are applicable to the other Armed Forces. The evaluation required by 
section 849 is underway, and the report to the congressional committees 
is on schedule for submission within a month.
    With regard to increasing the number of contracting personnel, we 
are conducting a competency assessment for the entire DOD Contracting 
Career Field. The Department is actively assessing and developing its 
position regarding the appropriate numbers of General and Flag 
Officers, and Senior Executive Service authorizations for contracting 
positions. To be clear, it will take time to recruit, hire, train, 
develop, and promote the full range of contracting personnel required 
by DOD.
    The Commission recommended that the Defense Contract Management 
Agency should be responsible for all base, post, camp and station 
contracting, and that it should be resourced to accomplish that 
mission. The Task Force is developing alternative approaches to achieve 
the Commission's goal of enhanced post-award contract management during 
routine times as well as during times of contingency and war. Through 
monthly discussions with Dr. Gansler, we believe he agrees we are on a 
path to achieving the Commission's intent.
    Recently, the Department sent forward legislative proposals to 
implement some of the recommendations of the Gansler Commission that 
require legislation. These proposals include:

         Authority to Acquire Products and Services Produced in 
        a Contingency Theater of Operations Outside the United States
         Exceptions for National Security and Emergency 
        Operations
         Requirement for Use of Express Option for Deciding 
        Protests of Contracts and Task Delivery Orders in Support of 
        Emergency Operations
         Optional Life Insurance Election Opportunity for 
        Certain Federal Civilian Employees
         Expedited Hiring Authority for Defense Acquisition 
        Positions

    I would be happy to discuss further my work in implementing the 
Commission's recommendations and about our legislative proposals. I 
appreciate the committee's support of these legislative changes that 
will greatly improve expeditionary contracting and beyond.

                              PERSPECTIVE

    I would like to add some broader perspective to this more specific 
discussion of acquisition matters. In each of my Senate confirmed 
positions, I have talked with the previous office holders in order to 
try to benefit from their experiences. I believe there are many 
relevant insights in these discussions.
    First, this Nation had the chance to lead all other Nation's on 
some technology efforts because there was available funding to pursue 
innovative, cutting edge ideas--technology push in many cases. Our 
current budget processes and timelines seriously limit our ability to 
pace most nation-states and offer no prospect of pacing aggressive 
terrorist organizations.
    Several of my predecessors highlighted the need for extremely 
capable people. In the past, there was robust exchange of people at all 
career stages between industry and government. Indeed, Jacques Gansler 
was hired from industry based on a phone call from Johnny Foster in 
search of an extremely capable electronics expert. Today, for a host of 
reasons, we have virtually eliminated the exchange of personnel between 
industry and government--to the detriment of the defense research, 
development and procurement program. DARPA is the only organization 
which has managed to successfully maintain a reasonable level of 
industry personnel rotation for the benefit of the DOD and the Nation.
    Indeed, after several years in government, I can tell you that it 
is virtually impossible to hire a mid-career industry person into the 
DOD. There are many, many impediments. However, I believe this 
detrimental situation hinders the ability of the defense acquisition 
team to be maximally effective.
    Further, Congress has enacted greater restrictions on the 
acquisition team members who do choose to serve in the Federal 
Government. I believe the latest set of restrictions governing post 
government employment will seriously discourage the very best and 
brightest from entering the defense acquisition field and serving for 
their full careers. The legislation will certainly make the wall 
between industry and government even higher. Many people in all walks 
of life now pursue two careers. The prospect of devoting years to one 
career of dedicated public service and then confronting severe 
restrictions on one's ability to use those experiences in a second 
career is unfair. While the DOD has some useful opportunities to hire 
retired military and government personnel into acquisition positions, 
the Department needs tools to balance these options with the ability to 
hire industry personnel and non-military personnel into entry, mid, and 
senior career positions to ensure the highest level of creativity, 
alternative thinking and balanced perspectives.
    Current caps on management headquarters and past focused efforts on 
``shoppers'' have seriously harmed the defense acquisition workforce. 
As government employees lived through these times, some of the most 
capable personnel left the government for the lucrative opportunities 
presented by industry. As the DOD's procurement and research and 
development budgets have grown significantly since 2001, there has been 
no linkage to the personnel process or corresponding ability to hire 
government personnel. Indeed, several programs which I have recently 
reviewed that experienced cost and schedule problems cited a shortage 
of program office personnel as one of the contributing factors. I have 
recently asked the AT&L team to consider the use of personnel plans in 
conjunction with new major acquisition programs. However, these efforts 
will still face the constraints of management headquarters caps. The 
situation has driven the DOD to greater use of contractor personnel, a 
solution which has several deficiencies. However, it is necessary to 
have trained people to manage major acquisition programs spending 
significant tax dollars. It is unfair to expect flawless execution 
without adequate manpower.
    One additional impediment to industry personnel joining the DOD is 
the restrictions DOD personnel face regarding participating in the 
stock market. The threshold for defining defense contractors is doing 
$25,000 of business with DOD, and this threshold has not been adjusted 
for over 35 years. This restriction prevents many defense personnel 
from participating in the stock market like the rest of America. The 
DOD has an abundance of rules and processes to prevent an honest 
individual from assisting a single company. However, the low threshold 
prevents DOD appointees from participating in the stock market and 
restricts other members of the acquisition team. All of these issues 
can be carefully and appropriately managed and do not require the 
blanket restrictions and rules which are going to discourage people 
from working for the DOD in defense acquisition.
    The DOD needs to work with Congress on appropriate changes which 
can help DOD retain a highly capable acquisition team, recruit talented 
individuals from all levels of industry, and give the acquisition team 
greater flexibility to deliver technology and products to protect our 
Nation's security.

                              CONCLUSIONS

    In conclusion, I am working extensively with others in the 
Department and our industry partners to improve Defense Acquisition as 
outlined by the numerous initiatives I have described today. We have 
taken a multi-faceted approach to improve both our processes and our 
products. Our goal is to have the best equipment for the warfighter, 
while spending the taxpayer's money wisely. The review boards and teams 
that I have instituted provide an excellent forum for integrating 
technology, and improving affordability and executability. Prototyping 
ensures competition and technological maturity. Analysis, through 
business case development at Milestone Reviews and Nunn-McCurdy 
reviews, creates a framework for cost/schedule/performance tradeoffs. 
Most importantly, our people, from the contract specialist to the 
program manager are becoming more knowledgeable and multi-functional 
through the training and professional development initiatives I have 
implemented.
    In summary, we work in a very dynamic environment, and as such we 
must constantly be balancing stability and flexibility in our 
requirements, resources, and reporting. I believe we have developed a 
solid set of checks and balances that I am confident will support our 
current acquisition posture and keep us on a path to improvement.
    I thank the committee for their time in allowing me to describe my 
vision for improving our acquisition system and some specific 
initiatives we have undertaken to improve program outcomes. I look 
forward to answering your questions.

    Chairman Levin. Thank you very much, Secretary Young.
    Ms. Schinasi?

    STATEMENT OF KATHERINE V. SCHINASI, MANAGING DIRECTOR, 
ACQUISITION AND SOURCING MANAGEMENT, GOVERNMENT ACCOUNTABILITY 
                             OFFICE

    Ms. Schinasi. Thank you, Mr. Chairman, Senator Warner, and 
members of the committee, for inviting me here today to talk 
about DOD's management of its acquisition.
    In preparing for this hearing, I looked at a statement that 
we had delivered in front of this committee a decade ago. The 
title of that statement was ``Defense Acquisition: Improved 
Program Outcomes Are Possible.'' I'm trying hard to hold on to 
that optimism as I come before you today. Part of the reason I 
think I may be able to is some of the things that the Under 
Secretary has talked about.
    But I'm going to start from a different place. I'm going to 
start from a position that says I believe DOD's acquisition 
process has failed in two important ways. First, it's failed 
the warfighter because it's delivering capabilities late and in 
fewer quantities than planned, or both. Many times when 
equipment is delivered to the field, it is not what's needed 
for the current operations. I think you've heard Secretary 
Gates' frustration lately with the Air Force, who continues to 
produce fighter aircraft when really it's unmanned aerial 
vehicles that are needed in current operations. The Army is 
spending billions of dollars that it did not plan to on legacy 
radios because its development efforts for a new radio have 
gotten so bogged down. The Navy is apt to have a net loss in 
its carrier fleet capacity, because it has been delayed in 
developing a new carrier beyond the point where it will have to 
start retiring its current carriers. The Marine Corps will have 
to wait at least 5 years to get half of the quantities of 
expeditionary vehicles that it has planned. The space 
community, after years of trying and failing to develop the 
Space-Based Infrared System-High program, is going to be left 
with a constellation of missile warning satellites that are 
nearing the end of their useful life.
    I believe the acquisition process has also failed the 
taxpayer, as continuing and significant cost overruns mean less 
value for the dollar spent. There are concerns about what is 
known about program costs and, Mr. Chairman, you referred to a 
number of those in your opening statement. But there also needs 
to be concern for what is not known about program costs. The 
change that Congress made in 2005 to Nunn-McCurdy is telling in 
that respect. In the 3 years before the rebaselining was done 
in 2005, DOD reported 12 cost breaches. In the 3 years since 
that change was made, DOD has reported 4 times as many, or 48 
cost breaches.
    In addition to that, the work we have done shows that cost 
growth is not recognized in the Department until after the 
critical design review, and there are many programs that the 
Department currently has in development that have not yet 
reached that point. So there is cost growth coming that we 
don't yet know about.
    In addition to the individual program cost growth, there is 
also the matter of cost growth in the modernization account as 
a whole. The Department estimates its costs over the 6-year 
Future Years Defense Program (FYDP). What we have seen in work 
that we have done for this committee recently, is that that 
period of time does not really give a full picture of the cost 
of the programs overall. In fact, it obfuscates that cost. It 
is always the next year, after the FYDP program, when we see 
that bow wave that we will not be able to continue to support.
    If you look at the period 1992 to 2007, what you see is the 
costs needed to complete DOD's portfolio increased 120 percent, 
but over that time period the funding that was provided to do 
so was only 57 percent. So that bow wave is going to continue.
    But an evaluation cannot just look at the acquisition 
process to see what's gone wrong and what needs to be fixed. 
DOD actually knows pretty well how to buy things, which is what 
the acquisition process does. DOD's policies are sound in that 
regard, some of those put in place because of legislation from 
this committee. The challenge is to figure out why managers and 
decisionmakers don't do what they say they should do.
    But the evaluation must also include the proper focus on 
what to buy, because until that condition is fixed we will 
continue to see dysfunction in the acquisition process. What to 
buy, of course, starts with the requirements process. The 
requirements process is broken. Program requirements are 
established on wants, not needs, and moving from a threat-based 
evaluation to establish the need for new equipment to a 
capabilities-based evaluation I believe has only exacerbated 
this problem. Solutions developed by the military departments 
and approved by the military vice chiefs reflect parochial 
service interests, rather than current and future warfighter 
needs.
    What to buy also includes the resource allocation process 
and the resource allocation process is broken. Resource needs 
are almost an afterthought in requirements decisions. As a 
consequence, DOD has too many programs chasing too few dollars. 
When priorities are not established, the continual battle for 
funding that results creates damaging instability.
    What to buy increasingly relies on a defense industry that 
has shrunk to just a handful of companies. The government has 
increasingly turned to industry to help them find and develop 
almost unbelievably complex technical solutions, without 
ensuring that sufficient in-house capacity exists to manage 
contractor activities. The defense industry is too willing a 
participant in continuing business as usual.
    Finally, I need to say a word about oversight. Oversight 
has not made much of a difference. As much as I would agree 
with many of the policies that the current under secretary and 
his team have put forward, the transitory nature of leadership 
in the Department makes it almost impossible to get lasting 
change. Just as an example, Mr. Young is the seventh individual 
in the under secretary's position in the 15 years that I've 
been working in this area.
    In fulfilling their own oversight role, the Members of 
Congress have their own ideas about authorizing and 
appropriating individual weapons programs. It's the decisions 
on those individual programs that determine whether or not 
policies will work.
    Some believe that more money is the answer, but DOD has 
already tried spending more money. Investment in the weapons 
acquisition programs is now at its highest level in 2 decades 
and the outcomes have only gotten worse. I have one chart that 
I brought with me today that has cost and schedule overruns, 
and you only need to look at that to see the discouraging 
detail.
    Chairman Levin. Do we have copies of that chart in your 
testimony?
    Ms. Schinasi. Yes, I believe you do, yes.
    What we have to do is redefine success. Success should be 
defined as producing needed equipment that can be delivered to 
the warfighter as promised, and at a predictable cost that the 
country can afford. The goal of any changes as we go forward 
should be to create a system in which this is the natural 
outcome.
    The perverse incentives now contained in the requirements, 
funding, acquisition, and oversight processes are there because 
success is currently defined as attracting funding and the way 
to attract funding is to get a program started. The system that 
has arisen as a consequence is one in which all participants 
get just enough so as to maintain the status quo--the military 
departments, the Office of the Secretary, defense companies, 
the press, Congressional sponsors, and even the auditors--who 
have lifetime employment. Negative consequences now accrue only 
to the warfighter and to the taxpayer, who don't really 
participate in the process.
    We have to find a way to establish consequences. Another 
way of saying that is that we have to create a system in which 
we can assign accountability and then make it stick. Advocates 
in the system must be recognized for what they are. Their 
individual needs must be explicitly balanced in the context of 
constrained resources, and as a check independence must exist 
in key functions.
    In some cases, changes to DOD organizations or the 
authority of DOD officials may need to be made. Congress can 
help by reinforcing sound Department policies with laws, and by 
providing or withholding funding as necessary.
    As I said when I started, I'm trying to hold on to the 
optimism contained in our statement from a decade ago. But we 
have to start thinking in terms of the opportunity costs that 
we're facing.
    Mr. Chairman, you made the point in your opening statement 
that the $295 billion that was not planned that we are now 
spending on weapons programs could be used for so many other 
things. They say that if you do what you've always done you'll 
get what you've always gotten. I hope the witness appearing 
before you 10 years from now will have a different and better 
story to tell.
    Thank you for your continued leadership in these matters 
and I look forward to your questions.
    [The prepared statement of Ms. Schinasi follows:]

              Prepared Statement by Katherine V. Schinasi

    Mr. Chairman and members of the committee: I am pleased to be here 
today to discuss the Department of Defense's (DOD) management of its 
major weapon system acquisitions--an area that has been on the 
Government Accountability Office's (GAO) high risk list since 1990. 
Prior to and since that time, Congress and DOD have continually 
explored ways to improve acquisition outcomes without much to show for 
their efforts. DOD's major weapon system programs continue to take 
longer, cost more, and deliver fewer quantities and capabilities than 
originally planned. Current operational demands have highlighted the 
impact of these persistent problems as DOD has been forced to work 
outside of its traditional acquisition process to acquire equipment 
that meet warfighter needs.
    Investment in weapons acquisition programs is now at its highest 
level in two decades. The department expects to invest about $900 
billion (fiscal year 2008 dollars) over the next 5 years on development 
and procurement with more than $335 billion invested specifically in 
major defense acquisition programs. Given the size of this investment, 
poor outcomes in DOD's weapon system programs reverberate across the 
entire Federal government. Every dollar wasted during the development 
and acquisition of weapon systems is money not available for other 
internal and external budget priorities--such as the war on terror and 
mandatory payments to growing entitlement programs.
    My statement today is drawn from our body of work on DOD's 
acquisition, requirements, and funding processes, as well as our annual 
assessment of selected DOD weapon programs. As you requested, I will 
focus on (1) the performance of DOD's major defense acquisition program 
portfolio; (2) the underlying systemic problems that contribute to poor 
cost and schedule outcomes; (3) recent legislative initiatives and DOD 
actions aimed at addressing these problems; and (4) the extent to which 
those initiatives and actions can be expected to improve the future 
performance of DOD's major defense acquisition programs. Our work was 
conducted in May 2008 in accordance with generally accepted government 
auditing standards. Those standards require that we plan and perform 
the audit to obtain sufficient, appropriate evidence to provide a 
reasonable basis for our findings and conclusions based on our audit 
objectives. We believe that the evidence obtained provides a reasonable 
basis for our findings and conclusions based on our audit objectives.

                                SUMMARY

    Since fiscal year 2000, DOD significantly increased the number of 
major defense acquisition programs and its overall investment in them. 
During this same time period, acquisition outcomes have not improved. 
Based on our analysis, total acquisition costs for the fiscal year 2007 
portfolio of major defense acquisition programs increased 26 percent 
and development costs increased by 40 percent from first estimates--
both of which are higher than the corresponding increases in DOD's 
fiscal year 2000 portfolio. In most cases, the programs we assessed 
failed to deliver capabilities when promised--often forcing warfighters 
to spend additional funds on maintaining legacy systems. Our analysis 
shows that current programs are experiencing, on average, a 21-month 
delay in delivering initial capabilities to the warfighter, a 5-month 
increase over fiscal year 2000 programs.
    Several underlying systemic problems at the strategic level and at 
the program level continue to contribute to poor weapon system program 
outcomes. At the strategic level, DOD does not prioritize weapon system 
investments and the department's processes for matching warfighter 
needs with resources are fragmented and broken. Furthermore, the 
requirements and acquisition processes are not agile enough to support 
programs that can meet current operational requirements. At the program 
level, programs are started without knowing what resources will truly 
be needed and are managed with lower levels of product knowledge at 
critical junctures than expected under best practices standards. In the 
absence of such knowledge, managers rely heavily on assumptions about 
system requirements, technology, and design maturity, which are 
consistently too optimistic. This exposes programs to significant and 
unnecessary technology, design, and production risks, and ultimately 
damaging cost growth and schedule delays. DOD officials are rarely held 
accountable for these poor outcomes and the acquisition environment 
does not provide the appropriate incentives for contractors to stay 
within cost and schedule targets, making them a strong enabler of the 
status quo.
    Recent congressionally mandated changes to the DOD acquisition 
system, as well as initiatives being pursued by the department, include 
elements that could improve DOD's overall investment strategy and the 
soundness of the programs it allows to move forward. However, it is 
still too early to determine the impact those changes have had on 
programs. Recognizing the need for more discipline and accountability 
in the acquisition process, Congress enacted legislation that requires 
decision-makers to certify that programs meet specific criteria at key 
decision points early in the acquisition process, and are measured 
against their original baseline estimates for the purpose of assessing 
and reporting unit cost growth.
    Recent legislation also requires DOD to report on its strategies 
for balancing the allocation of funds and other resources among major 
defense acquisition programs and to identify strategies for enhancing 
the role of program managers in carrying out acquisition programs. DOD 
has begun several policy initiatives including a new concept decision 
review initiative, acquisition approaches with shorter and more certain 
delivery timeframes, a requirement for more prototyping early in 
programs, and the establishment of review boards to monitor weapon 
system configuration changes, which are designed to enable key 
department leaders to make informed decisions before a program starts 
and maintain discipline once it begins.
    While legislation and policy revisions can help guide change, DOD 
must begin making better choices that reflect joint capability needs 
and match requirements with resources or the department will continue 
to experience poor acquisition outcomes. DOD and the military Services 
cannot continue to view success through the prism of securing the 
funding needed to start and sustain new programs. Sound programs should 
be the natural outgrowth of a disciplined knowledge-based process. 
DOD's policy emphasizes the importance of a knowledge-based approach, 
but practice does not always follow policy. The transitory nature of 
leadership and the stovepiped process further undermines successful 
reform. Meaningful and lasting reform will not be achieved until the 
right incentives are established and accountability is bolstered at all 
levels of the acquisition process--both within the department and in 
the defense industry. Finally, unless all of the players involved with 
acquisitions--Congress, DOD, and perhaps most importantly, the military 
Services--have unified goals, outcomes are not likely to improve.
dod has too many acquisition programs competing for limited resources, 

         WHILE PROGRAM COSTS AND SCHEDULES CONTINUE TO INCREASE

    DOD's portfolio of major acquisition programs has grown at a pace 
that far exceeds available resources. From 1992 to 2007, the estimated 
acquisition costs needed to complete the major acquisition programs in 
DOD's portfolio increased almost 120 percent, while the funding 
provided for these programs only increased 57 percent, creating a 
fiscal bow wave that may be unsustainable (see fig. 1).
      
    
    
      
    The total acquisition cost of DOD's 2007 portfolio of major 
programs under development or in production has grown by nearly $300 
billion over initial estimates. While DOD is committing substantially 
more investment dollars to develop and procure new weapon systems, our 
analysis shows that the 2007 portfolio is experiencing greater cost 
growth and schedule delays than the fiscal years 2000 and 2005 
portfolios (see table 1).\1\ For example, total acquisition costs for 
programs in DOD's fiscal year 2007 portfolio have increased 26 percent 
from first estimates--compared to a 6-percent increase for programs in 
its fiscal year 2000 portfolio. We found a similar trend for total 
RDT&E costs and unit costs.
---------------------------------------------------------------------------
    \1\ Our analysis in this area reflects comparisons of performance 
for programs meeting DOD's criteria for being a major defense 
acquisition program in fiscal year 2007 and programs meeting the same 
criteria in fiscal years 2005 and 2000. The analysis does not include 
all the same systems in all 3 years.
---------------------------------------------------------------------------
      
    
    
      
    Continued cost growth results in less funding being available for 
other DOD priorities and programs, while continued failure to deliver 
weapon systems on time delays providing critical capabilities to the 
warfighter. Put simply, cost growth reduces DOD's buying power. As 
program costs increase, DOD must request more funding to cover the 
overruns, make trade-offs with existing programs, delay the start of 
new programs, or take funds from other accounts. Delays in providing 
capabilities to the warfighter result in the need to operate costly 
legacy systems longer than expected, find alternatives to fill 
capability gaps, or go without the capability. The warfighter's urgent 
need for the new weapon system is often cited when the case is first 
made for developing and producing the system. However, DOD has already 
missed fielding dates for many programs and many others are behind 
schedule. On average, the current portfolio of programs has experienced 
a 21-month delay in delivering initial operational capability to the 
warfighter, and 14 percent are more than 4 years late.

    FRAGMENTED PROCESSES, UNEXECUTABLE BUSINESS CASES, AND LIMITED 
           ACCOUNTABILITY UNDERLIE POOR ACQUISITION OUTCOMES

    Poor program execution contributes to and flows from shortfalls in 
DOD's requirements and resource allocation processes. Over the past 
several years our work has highlighted a number of underlying systemic 
causes for cost growth and schedule delays both at the strategic and at 
the program level. At the strategic level, DOD's processes for 
identifying warfighter needs, allocating resources, and developing and 
procuring weapon systems--which together define DOD's overall weapon 
system investment strategy--are fragmented and broken. At the program 
level, the military Services propose and DOD approves programs without 
adequate knowledge about requirements and the resources needed to 
successfully execute the program within cost, schedule, and performance 
targets. In addition, DOD officials are rarely held accountable for 
poor decisions or poor program outcomes.
Key Acquisition Support Processes Are Fragmented and Result in Unsound 
        Programs
    DOD largely continues to define warfighting needs and make 
investment decisions on a service-by-service basis, and assess these 
requirements and their funding implications under separate 
decisionmaking processes. While DOD's requirements process provides a 
framework for reviewing and validating needs, it does not adequately 
prioritize those needs and is not agile enough to meet changing 
warfighter demands. A senior Army acquisition official recently 
testified before Congress that because the process can take more than a 
year, it is not suitable for meeting urgent needs related to ongoing 
operations; and a recent study by the Center for Strategic and 
International Studies indicates that the process is unwieldy and 
officials are now trying to find ways to work around it. Ultimately, 
the process produces more demand for new programs than available 
resources can support. This imbalance promotes an unhealthy competition 
for funds that encourages programs to pursue overly ambitious 
capabilities, develop unrealistically low cost estimates and optimistic 
schedules, and to suppress bad news. Similarly, DOD's funding process 
does not produce an accurate picture of the department's future 
resource needs for individual programs--in large part because it allows 
programs to go forward with unreliable cost estimates and lengthy 
development cycles--not a sound basis for allocating resources and 
ensuring program stability. Invariably, DOD and Congress end up 
continually shifting funds to and from programs--undermining well-
performing programs to pay for poorly performing ones.
Initiating Programs with Unexecutable Business Cases Sets Them Up to 
        Fail
    At the program level, the key cause of poor outcomes is the 
consistent lack of disciplined analysis that would provide an 
understanding of what it would take to field a weapon system before 
system development. Our body of work in best practices has found that 
an executable business case is one that provides demonstrated evidence 
that: (1) the identified needs are real and necessary and that they can 
best be met with the chosen concept and (2) the chosen concept can be 
developed and produced within existing resources--including 
technologies, funding, time, and management capacity. Although DOD has 
taken steps to revise its acquisition policies and guidance to reflect 
the benefits of a knowledge-based approach, we have found no evidence 
of widespread adoption of such an approach in the department. Our most 
recent assessment of major weapon systems found that the vast majority 
of programs began development with unexecutable business cases, and did 
not attain, or plan to achieve, adequate levels of knowledge before 
reaching design review and production start--the two key junctures in 
the process following development start (see figure 2).
      
    
    
      
    Knowledge gaps are largely the result of a lack of disciplined 
systems engineering analysis prior to beginning system development. 
Systems engineering translates customer needs into specific product 
requirements for which requisite technological, software, engineering, 
and production capabilities can be identified through requirements 
analysis, design, and testing. Early systems engineering provides 
knowledge that enables a developer to identify and resolve gaps before 
product development begins. Because the government often does not 
perform the proper upfront analysis to determine whether its needs can 
be met, significant contract cost increases can occur as the scope of 
the requirements change or become better understood by the government 
and contractor. Not only does DOD not typically conduct disciplined 
systems engineering prior to beginning system development, it has 
allowed new requirements to be added well into the acquisition cycle. 
The acquisition environment encourages launching ambitious product 
developments that embody more technical unknowns and less knowledge 
about the performance and production risks they entail. A new weapon 
system is not likely to be approved unless it promises the best 
capability and appears affordable within forecasted available funding 
levels. We have recently reported on the negative impact that poor 
systems engineering practices have had on several programs such as the 
Global Hawk Unmanned Aircraft System, F-22A, Expeditionary Fighting 
Vehicle, Joint Air-to-Surface Standoff Missile and others.\2\
---------------------------------------------------------------------------
    \2\ GAO, Best Practices: Increased Focus on Requirements and 
Oversight Needed to Improve DOD's Acquisition Environment and Weapon 
System Quality, GAO-08-294 (Washington, DC: Feb. 1, 2008).
---------------------------------------------------------------------------
    With high levels of uncertainty about technologies, design, and 
requirements, program cost estimates and related funding needs are 
often understated, effectively setting programs up for failure. We 
recently assessed the service and independent cost estimates for 20 
major weapon system programs and found that the independent estimate 
was higher in nearly every case, but the difference between the 
estimates was typically not significant. We also found that both 
estimates were too low in most cases, and the knowledge needed to 
develop realistic cost estimates was often lacking. For example, 
program Cost Analysis Requirements Description documents--used to build 
the program cost estimate--are not typically based on demonstrated 
knowledge and therefore provide a shaky foundation for estimating 
costs. Cost estimates have proven to be off by billions of dollars in 
some of the programs we reviewed. For example, the initial Cost 
Analysis Improvement Group estimate for the Expeditionary Fighting 
Vehicle program was about $1.4 billion compared to a service estimate 
of about $1.1 billion, but development costs for the system are now 
expected to be close to $3.6 billion. Estimates this far off the mark 
do not provide the necessary foundation for sufficient funding 
commitments and realistic long-term planning.
    Constraining development cycles would make it easier to more 
accurately estimate costs, and as a result, predict the future funding 
needs and effectively allocate resources. We have consistently 
emphasized the need for DOD's weapon programs to establish shorter 
development cycles. DOD's conventional acquisition process often 
requires as many as 10 or 15 years to get from program start to 
production. Such lengthy cycle times promote program funding 
instability--especially when considering DOD's tendency to change 
requirements and funding as well as frequent changes in leadership. 
Constraining cycle times to 5 or 6 years would force programs to 
conduct more detailed systems engineering analyses, lend itself to 
fully funding programs to completion, and thereby increase the 
likelihood that their requirements can be met within established 
timeframes and available resources. An assessment of DOD's acquisition 
system commissioned by the Deputy Secretary of Defense in 2006 
similarly found that programs should be time-constrained to reduce 
pressure on investment accounts and increase funding stability for all 
programs.
Accountability Suffers When Program Managers Lack the Authority to 
        Shape Programs
    When DOD consistently allows unsound, unexecutable programs to pass 
through the requirements, funding, and acquisition processes, 
accountability suffers. Program managers cannot be held accountable 
when the programs they are handed already have a low probability of 
success. In addition, program managers are not empowered to make go or 
no-go decisions, have little control over funding, cannot veto new 
requirements, and have little authority over staffing. At the same 
time, program managers frequently change during a program's 
development. Our analysis indicates that the average tenure for 
managers on 39 major acquisition programs started since March 2001 was 
about 17 months--less than half the length of the average system 
development cycle time of 37 months. Such frequent turnover makes it 
difficult to hold program managers accountable for the business cases 
that they are entrusted to manage and deliver.
    The government's control over and accountability for decisions is 
complicated by DOD's growing reliance on technical, business, and 
procurement expertise supplied by contractors. This reliance can reach 
a point where the foundation on which decisions are based may be 
largely crafted by individuals who are not employed by the government, 
who are not bound by the same rules governing their conduct, and who 
are not required to disclose whether they have financial or other 
personal interests that conflict with the responsibilities they have 
performing contract tasks for DOD. Further, in systems development, DOD 
typically uses cost-reimbursement contracts, in which DOD generally 
pays the allowable costs incurred for the contractor's best efforts, to 
the extent provided by the contract. This may contribute to an 
acquisition environment that is not conducive for incentivizing 
contractors to follow best practices and keep cost and schedule in 
check.

RECENT CONGRESSIONAL INITIATIVES AND DOD ACTIONS AIM TO PROMOTE A MORE 
           DISCIPLINED, KNOWLEDGE-BASED ACQUISITION APPROACH

    Recognizing the need for more discipline and accountability in the 
acquisition process, Congress recently enacted legislation that, if 
followed, could result in a better chance to spend resources wisely. 
Likewise, DOD has recently begun to develop several initiatives, based 
in part on congressional direction and GAO recommendations that, if 
implemented properly, could also provide a foundation for establishing 
a well balanced investment strategy and sound, knowledge-based business 
cases for individual acquisition programs.
Legislation Could Have a Positive Impact on Acquisition Outcomes
    Over the past 3 years, Congress has enacted legislation that 
requires DOD to take certain actions which, if followed, could instill 
more discipline into the front-end of the acquisition process when key 
knowledge is gained and ultimately improve acquisition outcomes. For 
example, 2006 and 2008 legislation require decisionmakers to certify 
that specific levels of knowledge have been demonstrated at key 
decision points early in the acquisition process before programs can 
enter the technology development phase or the system development phase. 
The 2006 legislation also requires programs to use their original 
baseline estimates--and not only their most recent estimates--when 
reporting unit cost threshold breaches. It also requires an additional 
assessment of the program if certain thresholds are reached. Other key 
legislation requires DOD to report on the department's strategies for 
balancing the allocation of funds and other resources among major 
defense acquisition programs, and to identify strategies for enhancing 
the role of program managers in carrying out acquisition programs. (For 
more detailed description of recent legislation, see appendix I).
Recent DOD Actions Provide Opportunities for Improvement
    DOD has initiated actions aimed at improving investment decisions 
and weapon system acquisition outcomes, based in part on congressional 
direction and GAO recommendations. Each of the initiatives is designed 
to enable more informed decisions by key department leaders well ahead 
of a program's start, decisions that provide a closer match between 
each program's requirements and the department's resources. For 
example:

         DOD is experimenting with a new concept decision 
        review, different acquisition approaches according to expected 
        fielding times, and panels to review weapon system 
        configuration changes that could adversely affect program cost 
        and schedule.
         DOD is also testing portfolio management approaches in 
        selected capability areas to facilitate more strategic choices 
        about how to allocate resources across programs and also 
        testing the use of capital budgeting as a potential means to 
        stabilize program funding.
         In September 2007, the Office of the Under Secretary 
        of Defense for Acquisition, Technology, and Logistics issued a 
        policy memorandum to ensure weapons acquisition programs were 
        able to demonstrate key knowledge elements that could inform 
        future development and budget decisions. This policy directed 
        pending and future programs to include acquisition strategies 
        and funding that provide for contractors to develop technically 
        mature prototypes prior to initiating system development, with 
        the hope of reducing technical risk, validating designs and 
        cost estimates, evaluating manufacturing processes, and 
        refining requirements.
         DOD also plans to implement new practices that reflect 
        past GAO recommendations intended to provide program managers 
        more incentives, support, and stability. The department 
        acknowledges that any actions taken to improve accountability 
        must be based on a foundation whereby program managers can 
        launch and manage programs toward greater performance, rather 
        than focusing on maintaining support and funding for individual 
        programs. DOD acquisition leaders have told us that any 
        improvements to program managers' performance hinge on the 
        success of these departmental initiatives.
         In addition, DOD has taken actions to strengthen the 
        link between award and incentive fees with desired program 
        outcomes, which has the potential to increase the 
        accountability of DOD programs for fees paid and of contractors 
        for results achieved.
          If adopted and implemented properly these actions could 
        provide a foundation for establishing sound, knowledge-based 
        business cases for individual acquisition programs, and the 
        means for executing those programs within established cost, 
        schedule, and performance goals.

   CONCLUDING OBSERVATIONS ON ACHIEVING SUCCESSFUL AND LASTING REFORM

    DOD understands what it needs to do at the strategic and at the 
program level to improve acquisition outcomes. The strategic vision of 
the current Under Secretary of Defense for Acquisition, Technology, and 
Logistics acknowledges the need to create a high-performing, boundary-
less organization--one that seeks out new ideas and new ways of doing 
business and is prepared to question requirements and traditional 
processes. Past efforts have had similar goals, yet we continue to find 
all too often that DOD's investment decisions are service- and program-
centric and that the military Services overpromise capabilities and 
underestimate costs to capture the funding needed to start and sustain 
development programs. This acquisition environment has been 
characterized in many different ways. For example, some have described 
it as a ``conspiracy of hope,'' in which industry is encouraged to 
propose unrealistic cost estimates, optimistic performance, and 
understated technical risks during the proposal process and DOD is 
encouraged to accept these proposals as the foundation for new 
programs. Either way, it is clear that DOD's implied definition of 
success is to attract funds for new programs and to keep funds for 
ongoing programs, no matter what the impact. DOD and the military 
Services cannot continue to view success through this prism. Adding 
pressure to this environment are changes that have occurred within the 
defense supplier base. In 2006, a DOD-commissioned study found that the 
number of fully competent prime contractors competing for programs had 
been reduced from more than 20 in 1985 to only 6. This limits DOD's 
ability to maximize competition to reduce costs and encourage 
innovation.
    More legislation can be enacted and policies can be written, but 
until DOD begins making better choices that reflect joint capability 
needs and matches requirements with resources, the acquisition 
environment will continue to produce poor outcomes. It should not be 
necessary to take extraordinary steps to ensure needed capabilities are 
delivered to the warfighter on time and within costs. Executable 
programs should be the natural outgrowth of a disciplined, knowledge-
based process. While DOD's current policy supports a knowledge-based, 
evolutionary approach to acquiring new weapons, in practice decisions 
made on individual programs often sacrifice knowledge and realism in 
favor of revolutionary solutions. Meaningful and lasting reform will 
not be achieved until DOD changes the acquisition environment and the 
incentives that drive the behavior of DOD decisionmakers, the military 
Services, program managers, and the defense industry. Finally, no real 
reform can be achieved without a true partnership among all these 
players and Congress.
    Mr. Chairman, this concludes my prepared statement. I would be 
happy to answer any questions you may have at this time.

                   CONTACTS AND STAFF ACKNOWLEDGMENTS

    For further information about this statement, please contact 
Katherine V. Schinasi at (202) 512-4841 or [email protected]. Contact 
points for our Offices of Congressional Relations and Public Affairs 
may be found on the last page of this testimony. Individuals who made 
key contributions to this statement include Michael J. Sullivan, 
Director; Ronald E. Schwenn, Assistant Director; Megan Hill; Travis J. 
Masters; Karen Sloan; and Alyssa B. Weir.
      
    
    
      
    
    
      
    
    
      
    
    

    Chairman Levin. Thank you so much and thanks for the work 
of the GAO in this area. We're also hopeful that the story will 
improve instead of getting worse over the years. Even though 
our efforts and your efforts and Secretary Young's efforts have 
not been successful in correcting these problems yet, to the 
extent at least that we want them to be corrected, and they've 
gotten worse in many instances, we just have to keep plugging 
away at it. It's our responsibility and it's, I hope, a 
responsibility which DOD accepts and feels.
    Secretary Young, the GAO reported in March 2006 that DOD 
was paying hundreds of millions of dollars of award and 
incentive fees to contractors without regard to acquisition 
outcomes. The GAO found that most contractors were paid 90 
percent or more of available award and incentive fees even when 
they failed to meet basic cost, schedule, and performance 
requirements.
    We responded by enacting a provision in the NDAA for Fiscal 
Year 2007 which requires DOD to tighten up requirements for 
award and incentive fees and tie those fees more closely to 
acquisition outcomes and contractor performance. Is the 
provision that we enacted in the NDAA for Fiscal Year 2007 
having any effect on the Department's behavior and do you 
believe that this provision succeeds in tying contractor 
profits to acquisition outcomes, or is further action needed?
    Mr. Young. Mr. Chairman, there are so many things I want to 
tell you today. I want to try to be efficient. I believe the 
provision is helpful. As the Navy acquisition executive, I 
issued three memos on the use of profit and incentive fees. As 
the Defense Acquisition Executive, I am constantly pushing to 
tie fees to objective criteria that are on the critical path of 
a program so that we pay taxpayer dollars for results. I am 
against the subjective award of fees based on a bunch of 
viewgraphs and other such things. I have consistently turned 
down or pushed down on base fees that are basically awarded for 
people coming to work. It takes your efforts and my efforts to 
constantly change the culture to more objective awards of fees.
    Chairman Levin. You mentioned, Mr. Secretary, that some of 
the problems in our acquisition system can be attributed to a 
workforce that has been cut over the last 15 years. We 
addressed that, or attempted to address that problem by 
establishing an acquisition workforce development fund to 
provide the resources needed to begin rebuilding DOD's core of 
acquisition professionals. Section 852 of the NDAA for Fiscal 
Year 2008 provided $300 million to be transferred to the fund 
this fiscal year, starting no later than August 1.
    Has the Comptroller supported that change?
    Mr. Young. We are working with the Comptroller to transfer 
those funds. We're working on a fairly thorough plan to execute 
that program. The one thing I would add to that is that I think 
there are hurdles we have to work our way through. The 
personnel system is one of the most dysfunctional systems in 
the government. You could have money, but not billets. You 
could have billets, but not money. Then the hiring process is 
excruciatingly long. All of these have not contributed to 
people with the right talents wanting to come to work for the 
government.
    Chairman Levin. The $300 million, though, to put additional 
people there has not yet been transferred?
    Mr. Young. No, sir.
    Chairman Levin. Will it be transferred no later than August 
1?
    Mr. Young. It is my expectation. The Comptroller 
understands that we have a plan to execute to that, and they 
are working with us.
    Chairman Levin. If it's not going to be transferred, will 
you let this committee know?
    Mr. Young. Yes.
    Chairman Levin. Unrealistic cost and schedule estimates 
have been really at the heart of this problem. DOD's own 
acquisition performance assessment panel concluded in 2006 that 
using optimistic budget estimates forces excessive annual 
reprogramming and budget exercises within the Department, which 
in turn causes program restructuring that drives up long-term 
costs, causes schedule growth, and opens the door to 
requirements creep.
    By the way, before I ask the question on this, let's have 
an 8-minute round for our first round of questions, so our 
staff can alert me when I've hit 8 minutes.
    I want to talk about these optimistic and unrealistic cost 
and scheduling estimates that are almost always based on 
information that comes from contractors, who have a conflict of 
interest obviously. Now, let me ask you this, Ms. Schinasi; 
what is your view of my suggestion that we establish a new 
director of independent cost assessment in the DOD, with 
authorities and responsibilities comparable to those of the 
DOT&E, so that we can attempt to ensure that the information on 
which we base program and budget decisions is objective and 
reliable?
    Ms. Schinasi. Clearly that is something that is needed. In 
our work we have found that neither the program office cost 
estimates nor the independent cost estimates that are currently 
developed by the Cost Analysis Improvement Group (CAIG) come 
anywhere close to what the real costs of the program would be. 
An independent look at that, if the individual also has the 
ability to set policies that say we need to have cost estimates 
that actually are informed by knowledge, I think would help to 
ameliorate the situation that you've described.
    Chairman Levin. That knowledge has to be objective 
information.
    Ms. Schinasi. It does, and most of it has to do, frankly, 
with technologies. What we see is that we promise new programs 
based on technologies, which oftentimes come from industry, and 
we don't really understand what it will take to bring those 
technologies to the field. So cost estimates based on those 
immature technologies are not going to be very reliable.
    Chairman Levin. We're going to bring an amendment to 
establish this new director to the floor and your testimony is 
very helpful in that regard.
    Does DOD have a position yet on this, Secretary Young?
    Mr. Young. I wouldn't say we have a position on this, but I 
would like to comment if I could.
    Chairman Levin. Sure.
    Mr. Young. Contractors don't build the defense budget. It 
starts with programmers. I labored in the Navy as programmers 
programmed an 18,000-ton DDX destroyer to cost about 15 percent 
more than a 9,000-ton DDG destroyer. The program manager should 
have never accepted that as his challenge, and across the board 
I need to get my acquisition team not to accept it.
    In my ADMs, as I mentioned, I am directing the use of 
independent cost estimates, and I give the greatest weight to 
the CAIG's Director, who does do that independent cost estimate 
for the Department at every milestone, at Milestone B.
    Chairman Levin. Would you take a look at the language which 
we're going to submit to you? We've obviously not succeeded, 
despite efforts, good faith efforts, of people like yourself. 
It's a history of failure to keep these costs under control, 
and we have to find ways and keep looking for ways that we can 
do better. We know what the problems are. We've not solved 
these problems. We've had these huge excessive costs, way above 
what were projected. We have the responsibility of trying to 
rein them in, and we're going to continue to see if we can't do 
that through various methods.
    If you would take a look at this particular recommendation 
for a new director of independent cost assessment in the 
Department, in the next week or 2, we'd appreciate it because 
we're hopeful our bill will come to the floor in a couple of 
weeks.
    Three years ago, we attempted to address the problem of 
immature technologies by requiring senior officials to certify 
that critical technologies have reached the required maturity 
level before giving the so-called Milestone B approval. I think 
you've made reference to that already this morning, Secretary 
Young.
    I'd like to ask Ms. Schinasi, though, as to whether or not 
in her judgment the new technological maturity requirement has 
been effectively implemented and enforced? Have you gotten into 
that issue?
    Ms. Schinasi. We haven't looked specifically at the total 
programs that have gone through that process. I am aware of 
some in which the DDR&E has turned back technology readiness 
assessments that were submitted by the programs because they 
were not ready, but there are others that have gone through 
even though the technology readiness assessments did not show 
that the technologies were sufficiently mature. So anecdotally 
I would say that it's been a mixed experience.
    Chairman Levin. Did you want to comment on that, Secretary 
Young?
    Mr. Young. I do, sir. I'd like to know which ones haven't 
gone through. We'll go back and find that out. I had one 
particular program recently, a major program, $1 billion, Net 
Enabled Command Capability, where there was a difference of 
opinion between DDR&E and the program about technology 
readiness. I refused the Milestone B.
    The Department does have needs, though, that have to go 
forward. I granted a Milestone A to go do prototypical work on 
that program, improve their process, to mature their 
technology, let DDR&E review that, the readiness of the 
technology. They'll come back to me later for a Milestone B. So 
I am not seeking to grant Milestone approvals. There are 
certain programs that have unique features, like shipbuilding 
programs, where a radar may not be today at Milestone B 
appropriately technology mature, but the radar's not needed for 
2 or 3 years down the road for ship construction and delivery 
and they have a valid path to get to that appropriate 
technology maturity.
    But in general, consistent with law, we are not approving 
programs without that technology maturity. We need to give this 
process a chance to prove that it's leading to better 
management of acquisition programs.
    Chairman Levin. Ms. Schinasi, would you after this hearing 
is over get together with the Secretary and give him the items 
that you made reference to?
    Ms. Schinasi. Yes.
    Chairman Levin. Thank you.
    Senator Warner.
    Senator Warner. Thank you, Mr. Chairman.
    Perhaps no program in contemporary history here is of 
greater importance to the United States, not only from the 
standpoint of its own need for inventory of a weapon system, 
but some eight or nine other nations that are looking to the 
U.S. to build it, and that's the JSF. Coincidentally, we're 
greeted this morning with a press report which reads as 
follows: ``Lockheed Martin Corp. system for tracking costs and 
schedules has generated useless or suspect data on the F-35 JSF 
ever since the program started in 2001.''
    Mr. Young, I think perhaps you should first address that 
issue. This rattles all across the world.
    Mr. Young. Yes, sir.
    Senator Warner. We've spent a great deal of time on it here 
in this committee. How did this happen?
    Mr. Young. Mr. Chairman, I've looked into the details, some 
level of the details of this. I think the goodness is that the 
Defense Contract Management Agency (DCMA)----
    Senator Warner. What is?
    Mr. Young. The DCMA.
    Senator Warner. No, you said ``the goodness''? I didn't get 
that.
    Chairman Levin. You said ``good news'' or ``goodness''?
    Mr. Young. The goodness is that the DCMA did an audit and 
discovered this issue. I want to make clear there are two 
aspects of this. The DCMA did not address the billing system, 
where valid bills and invoices are turned in and the government 
pays them. There is not a discrepancy in the billing process.
    The discrepancy is taking that billing process and loading 
it into an earned value management system (EVMS) that lets us 
see our performance and predict our progress going forward, 
which is what I think you saw in the report. It says that the 
EVMS does not provide a confident basis for projecting future 
performance of the program.
    Within that, Jim Finley, the Deputy Under Secretary, has 
met with Lockheed and DCMA. They've outlined a corrective 
action plan for the next 12 months. DCMA meets with them every 
2 weeks. Lockheed's agreed to the corrective action plan. 
Furthermore, there are Milestones, 12 Milestones. The first 
one's been met. At each of those Milestones, if Lockheed does 
not meet the corrective action plan we will withhold $10 
million in payments from the corporation.
    So we are working to rectify this situation. It does need 
to be corrected, you are right.
    Senator Warner. Ms. Schinasi, do you have some views on 
this?
    Ms. Schinasi. Yes, Senator. We found in the most recent 
work we've done on the JSF, and we issued that report earlier 
this spring, that the cost estimate was unreliable and we 
recommended that another cost estimate be prepared.
    Senator Warner. I hope both of you recognize the two-fold 
problem here, and that is, the essential need for this aircraft 
in inventories for purposes of our defense structure; and also, 
it's the image of the United States, being the principal 
manager of a major program, and a lot of trust and confidence 
of other nations was given to the United States to run it 
right.
    Do we know why, at this late date in the program, we're 
discovering this deficiency?
    Mr. Young. I'd like to come back to you on the record as to 
whether previous audits didn't uncover this. But the audits in 
general have focused on the billing system, where again we have 
paid properly for the work that's been performed. The changes--
the loading of that information into the EVMS, Lockheed made 
changes in that. They should not have and it undermined our 
confidence of projecting our current and future performance. 
We're going to go fix that for exactly the reasons you said, 
sir. We have to have confidence in this aircraft.
    [The information referred to follows:]

    There were no audits of Lockheed Martin Aero's (then General 
Dynamics) system since the initial validation in 1980. In 1991, General 
Dynamics' Fort Worth, TX, Cost Schedule Control System was called into 
question with the findings of the A-12 Program cancellation. 
Subsequently in 1995, the Department switched to an industry-based 
Earned Value Management System (EVMS), which placed more reliance on 
industry for enforcement. However, based on the results of several 
audits, it was determined in 2004 that industry's stewardship of EVMS 
has been inadequate. Since that time, the Department's response has 
been to create a robust, government-monitored earned value management 
compliance regime, which has been effective in identifying issues 
across industry.

    Senator Warner. Is our program manager accountable for 
this?
    Mr. Young. Yes, the program manager is accountable for it.
    Senator Warner. Well, that's clear. I hope that you address 
that properly.
    Do you have any views on why it took so long to catch it, 
Ms. Schinasi?
    Ms. Schinasi. Senator, I believe that the cost growth in 
the program has been in place from the very beginning. This 
most recent review of the contractor's systems is new, but the 
program, the JSF program, has had many of the same problems 
that we've seen in other programs. The original justification 
was that this would be a plane that would be very low cost to 
operate, which was a great idea when it was conceived. But the 
technologies required to get those low operations and 
maintenance costs were not mature, and I think the program has 
gone forward without getting the knowledge that it needed to 
understand what the true costs would be.
    So many of these cost overruns could have been predicted 
earlier on.
    Senator Warner. Mr. Chairman, I think we should invite 
Lockheed to review this record and provide for the committee 
its perspective on this issue.
    Mr. Young. Mr. Chairman.
    Senator Warner. Yes?
    Mr. Young. Can I comment on this for a moment? There are 
definitely some accuracies in what Ms. Schinasi said. Every 
program has unique details that we need to look at. We're 
applying a bumper sticker of cost growth to everything and we 
need to look at it. Here's one example where I believe the 
requirements have been well managed on JSF. We have a CSB. The 
JSF was prototyped early on.
    My frustration is we did not prototype the right things in 
JSF. So when we went into system design and development, we 
found the short take-off, vertical landing (STOVL) variant, the 
variant for the Marine Corps, was heavy. We had to take an 
extra 18 months to get the weight out of that program. That 18 
months cost us about $7 billion.
    So we can explain how we got from there to here. Now, I 
have reported and have testified that we have some additional 
cost growth on JSF. I can couple that directly to the fact that 
over the last 5 years DOD and Congress have taken over $1 
billion out of the program. If you have a reasonably well 
managed and planned program and you take $1 billion out, it 
probably shouldn't be a surprise that you need that billion 
dollars with some premium back.
    So there were people who bet that the STOVL variant would 
not fly this year. The good news side of this is that variant 
probably is going to fly this week or next week. The software 
is largely done for the first deliverable aircraft. So I would 
appeal that we look at the details of some of these things and 
learn the right lessons going forward.
    Senator Warner. Just out of curiosity, Mr. Young, you're 
well known to this committee and to Congress. You've performed 
your services here in Congress very ably and we were all 
extremely pleased you took this position. Ms. Schinasi, I 
presume you've had an equally distinguished career. Do you ever 
get together before you come here in Congress and square off on 
each other and try and avoid some of these hearings?
    Mr. Young. Actually, I would say there's a good bit of 
common ground between us. We haven't personally done it, but 
members of my team have worked closely with GAO to understand 
the $295 billion overrun and agreed to work more closely going 
forward. So we are doing what you suggest.
    Senator Warner. I would hope that you would share views and 
viewpoints without having to write up all these reports and 
come in to Congress and sort of set it out. That's the way 
government should work. You are the GAO and he's government 
also.
    Ms. Schinasi. Yes, sir, and we try very hard when we make 
recommendations in our individual reports to make sure that we 
consult with DOD, because if we put something out that's not 
doable that doesn't help anyone.
    Senator Warner. Let's touch on just the prototyping, Mr. 
Secretary. When it comes to ships, you simply can't prototype 
an entire ship.
    Mr. Young. Yes, sir.
    Senator Warner. I think we learned some very tragic lessons 
with the LCS program. I think you ought to provide for the 
record what you felt went wrong with that program and what 
steps you've put in place not to have it reoccur.
    Mr. Young. A short comment. You're exactly right. I've 
pushed for the signing of the contracts for the first two DDG-
1000s. I think there is another program that's not talked about 
as much because the development program for DDG-1000 has gone 
very well. You're right, we didn't prototype the ship, but we 
prototyped I think 12 different engineering development models. 
We installed a fire and battle damage control system in an old 
Navy ship and proved it. We had a land-based test site for the 
electric motor. There were a dozen, I believe, development 
models that built our technological maturity, and our 
confidence in designing the whole of the system, which are 
essentially component prototyping efforts necessary for that 
program.
    So largely that development program has gone well, a very 
complicated development program. The remaining tests that 
Congress is rightly asking us to pass is: can you now build 
that ship for the price that you've advertised? We have signed 
contracts for that and we have to prove we can go do that.
    [The information referred to follows:]

    The Navy conducted several reviews of the Littoral Combat Ship 
(LCS) program, including the establishment of a Program Management 
Assist Group to conduct a review of cost growth associated with LCS 1, 
and to review projected costs for LCS 2, LCS 3, and LCS 4. The Navy 
assessment identified the following root causes of cost growth:

         Aggressive cost and schedule goals.
         Pressure to build to schedule was strongly emphasized 
        and generated cost growth.
         The ambitious schedule relied upon concurrent design 
        and construction that was not achieved.
         For LCS 1, the timing of Lockheed-Martin's bid to the 
        finalization of Naval Vessel Rules resulted in underestimated 
        efforts for design and construction by the contractor.
         The competitive environment created disincentive for 
        the contractor to disclose execution challenges to the Navy.

    The Navy has taken the following action for the LCS program to 
address cost growth and prevent recurrence:

         Increased oversight has been assigned to monitor 
        industry performance.
         More realistic schedule objectives have been assigned.
         To address cost growth, resources were reprogrammed 
        from fiscal year 2007 LCS procurement.
         The plan also includes reduced procurement of LCS 
        seaframes in fiscal year 2008 and fiscal year 2009.

    Additionally, overall the Navy has strengthened its acquisition 
policy to improve rapid acquisition in support of the global war on 
terror, to control cost growth, and to monitor contractor performance 
more effectively. The Navy has established a Center of Excellence for 
Earned Value Management (CEVM) to adopt a more centralized approach to 
managing EVM and to improve visibility of the status of all Navy 
acquisition programs. Navy oversight includes acquisition program 
reviews and portfolio reviews of acquisition programs and the supplier 
base. The Navy also is working improvement initiatives in 
accountability, portfolio assessment, and acquisition workforce 
management. To bolster the Navy's acquisition leadership, the Navy 
added a three-star admiral to serve as Principal Deputy Assistant 
Secretary of the Navy for Research, Development, and Acquisition 
(ASN(RDA)), and recently established the position of Principal Civilian 
Deputy Assistant Secretary of the Navy for Research, Development, and 
Acquisition (PCDASN(RDA)). The PCDASN will be responsible to ASN(RDA) 
for all acquisition workforce programs and functions.
    Specifically, on February 26, 2008, the Navy issued guidance 
implementing Navy acquisition governance improvement through a six-gate 
reporting, reviewing and oversight process. Its purpose is to ensure 
early and frequent involvement and collaboration among the leadership 
of the requirements, resources, and acquisition communities. 
Configuration Steering Boards will oversee changes to the requirements 
baselines as well as consider cost and funding availability. In 
addition, the Department of the Navy will implement a systems design 
specification which will provide more clarity to the requirements 
development process and convert and interpret operational 
specifications into affordable design requirements. It is important to 
note that the success of all these initiatives is heavily dependent on 
personnel with the correct training and experience commensurate with 
responsibilities assigned.

    Senator Warner. As we look back in our oversight, I recall 
very specifically that DOD made a decision under the last 
Secretary that he was going to bring in the top industrial 
leaders and their portfolio was to solve these various problems 
on procurement. While the committee had some different views as 
to different types of individuals that might serve as Service 
Secretaries, Rumsfeld's view prevailed: I'm going to bring in 
the top proven executives of industry.
    I guess history is going to have to judge how successful 
they have been in this problem, which they presumably had the 
expertise coming in to solve. Would you not agree with that?
    Mr. Young. I think I'll take the fifth amendment on that 
one. I think it's an important question, but my response is 
really too complex and mixed. I just think that there are 
people, obviously, in industry that can make a difference, but 
there's also people who have expertise outside of industry that 
sometimes can be stronger and have a bigger impact. So it's a 
blend you need, I think, essentially of the industrial 
experience, but also experience in government and the academic 
experience that needs to be put in place.
    I hate to duck a question from a friend like you, but I 
think I'd have to give a more complex answer to that. I do 
agree that Secretary Rumsfeld did put in place this system and 
the people in it. That part of it I surely agree with, and I 
don't think that we've seen the kind of success that was 
promised.
    Senator Warner. Or hoped for.
    I thank the chair.
    Chairman Levin. Thank you, Senator Warner.
    Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman. I think 
this is a very important hearing and I commend you and Senator 
Warner for hosting it.
    Secretary Young, one of the major challenges is reducing 
technical risks in these programs. Sometimes we discover it too 
late and it costs a great deal of money. What is your view with 
respect to investment in science and technology (S&T), 
investment in the defense laboratories to systematically try to 
reduce technical risk as a way of lowering costs? Is that a 
useful option?
    Mr. Young. Absolutely, sir. I've consistently gone on 
record, mostly at Secretary Gates's request, explaining that 
S&T investment has not kept pace with the numbers I mentioned 
earlier, that the procurement account is up I think 34-35 
percent, and the R&D budget is up 70 percent; S&T is not 
comparably up. We need in several areas more robust S&T 
investment.
    To his great credit, Secretary Gates responded to that and 
he's increased and provided real growth in basic research, as 
well as some augmenting incentives in the S&T base for key 
technologies that we think are enablers of the future.
    Then another piece of the process, if we execute 
prototyping we'll need to pull money back in later stages of 
development into the S&T program and invest it in these 
prototypical efforts that again inform us. They develop 
management skills, they inform us on the engineering and 
technology maturity, they inform us of the costs if we decide 
to take it forward into development. I believe that's a 
critical element of what DOD did well in the past, 20 and 30 
years ago, and we need to go back to it.
    Senator Reed. So this is a deliberate, conscious approach 
in order to reconnect the S&T, the defense laboratories, with 
the procurement process?
    Mr. Young. Yes, sir.
    Senator Reed. Very explicit.
    Ms. Schinasi, could you comment on that?
    Ms. Schinasi. Yes, Senator Reed. We've made that 
recommendation in the past. I think what you're seeing is that 
DOD tends to push those leading edge disruptive technologies 
inside of programs, and that's a lot of the reason that we're 
seeing the problems that we're seeing, cost growth and schedule 
delays.
    If in fact they would use the tech base to develop those 
technologies, you can afford to fail in the tech base and 
that's what it takes to do that kind of development.
    Senator Reed. Just a question, Secretary Young. You've made 
the point, and I think Senator Levin's question was right on 
target, about the need for additional resources in contracting, 
oversight, et cetera. First, I think there is a difficult 
tension between our requirements in Iraq today because 
everything we read is of the need for additional contracting 
officers, additional people on the ground, which is basically 
taking away from your potential pool of procurement and 
contracting officers. Is that accurate?
    Mr. Young. I think it's more complicated than that. The 
higher demand issue, as Secretary Gates has testified, is that 
the DCMA in 2000 had 12,550 people, and if you go back to 1990 
they had over 20,000 people. Today we project at the end of the 
year that they'll have 9,899 people. That's for a normal course 
of business. We don't have a normal course of business. We have 
Iraq and Afghanistan and a procurement budget that's up 34 
percent, an R&D budget that's up 70 percent, and the challenge 
of finding people with the skills necessary to come in and 
perform those contracting management and contract oversight 
functions.
    It will take us time to recover from this. It took time to 
get here. But there is no question we are understaffed in these 
areas.
    Senator Reed. I presume there are other areas where the 
maturity level of your existing workforce would be 45-plus 
rather than 35-minus.
    Mr. Young. Yes, sir, you are very correct. We have an older 
and experienced workforce. We really need to do some hiring and 
get some knowledge transfer, and we will have to use other 
tools, such as these defense support teams I mentioned, that 
use people who have retired and are willing to come back and 
help the government to help us go troubleshoot and problem-
solve on programs.
    Senator Reed. Do you have a nominal kind of workforce 
structure with different levels of expertise that is available 
to this committee, so that we can see the matchup between what 
you think is the best and what you have at the moment? Again, 
these are very capable, dedicated, and extraordinarily talented 
people.
    Mr. Young. If I could for the record, I'd give you a longer 
answer, but we are working in the enterprise--it involves 
heavily the Defense Acquisition University (DAU)--to build a 
competency model that will assess the skills we have, the 
skills we need, where some of our gaps are, and help us work 
more deliberate workforce planning going forward.
    [The information referred to follows:]

    Yes, for each of the approximately 126,000 Department of Defense 
acquisition positions, the Department has an acquisition workforce 
structure where the military departments and defense agencies require a 
minimum certification level, by career field (e.g., program management, 
engineering, contracting, et cetera) for each acquisition position: 
Level One - Entry; Level Two - Journeyman; and Level Three - Expert. 
The assigned certification level corresponds to minimum experience, 
education, and training standards. As of March 2008, 54 percent meet or 
exceed position requirements. Members are required to meet the 
certification requirements within 24 months of encumbering an 
acquisition position. The new Acquisition Workforce Development Fund, 
established pursuant to section 852 of the National Defense 
Authorization Act in Fiscal Year 2008 that enacted 10 U.S.C. 1705, will 
be used to increase our training capacity. Additionally, our updated 
competency models and assessments will provide us the ability to 
identify more precisely gaps and target training to priority needs.

    Mr. Young. That's in progress. It's an important tool to be 
used in conjunction with the $300 million fund in the section 
that Chairman Levin referenced.
    Senator Reed. First, Ms. Schinasi, if you want to comment 
on any of these issues, please.
    Ms. Schinasi. If I just may comment on that last point, I 
think the focus lately has been on oversight, which clearly we 
need more oversight, but I think there's a more basic question 
about attracting people to the acquisition workforce. A report 
that was put out by the acquisition advisory panel about a year 
and a half ago now went out and looked at the private sector. 
One of the things that they found was that companies invest 
very large resources in their acquisition workforce because 
they realize how important that workforce is to their case 
getting a profit. In the Department's case, I would say to 
accomplishing a mission.
    This is something we're looking at across the government as 
a whole. You need to pay more attention and raise the 
prominence of the acquisition function in order to be able to 
attract and retain good people.
    Senator Reed. Do you have a comment?
    I have one more question, Mr. Chairman.
    Mr. Young. At some risk, I'd like to comment about that. 
The first thing I said is that people manage and execute 
programs, and that's important and I meant that. At this point 
in time, I mentioned that we have a dysfunctional personnel 
system. I have virtually no hope of hiring a midcareer person 
back into government from industry. 20 years ago, Johnny Foster 
and some of the great people that had this job--I cite in my 
written statement I think one example--Johnny Foster called and 
asked for an expert in electronics technology and he got 
Jacques Gansler on the DDR&E staff, and Jacques Gansler 
eventually became the Under Secretary of Defense for AT&L.
    That can't happen today. Industry people will not come into 
the government because of the restrictions that have been 
placed. At this point in time, I will have increasing trouble 
getting government people to stay in the acquisition workforce 
because of post-employment restrictions. We are at serious risk 
of being able to keep competent people in the government 
acquisition process.
    Senator Reed. Thank you, Mr. Secretary.
    Ms. Schinasi, you made the distinction between threat-based 
programs and capabilities-based. Could you elaborate on, first, 
the difference in your mind, and the consequences to the 
acquisition process?
    Ms. Schinasi. For a number of years in the post-Cold War 
environment, we had a system whereby requirements were 
developed based on what we thought an enemy was likely to be 
able to do. Once we lost that peer competitor, we also lost the 
ability, or we changed our process from going to that peer 
competitor threat-based to one which said capabilities, we need 
to look at the capabilities we need.
    That, some people would argue, opened up the floodgates for 
a wants-driven requirements process as opposed to a needs-
driven requirements process.
    Senator Reed. Is it your recommendation or comment that we 
should return to a threats-based program? Would that help us in 
this endeavor?
    Ms. Schinasi. I think what we're seeing now is the need for 
flexibility in the requirements process. So we would argue that 
what you need to do is bring resources to the requirements 
determination process at an earlier point in time than it is 
right now, because there is no limit to the kind of capability 
that we would want to have.
    Senator Reed. A quick response, Mr. Secretary. My time has 
expired.
    Mr. Young. I think I would agree strongly with her comments 
and go beyond it. One of the cancers on the enterprise right 
now is the competition for resources, and it is fueled by 
setting a threat level, setting a requirements level, and then 
saying, I must have budget resources to deal with that, and the 
competition among the Services for resources.
    It really is one of the underlying problems in this space, 
combined with other factors and that is why I'm constantly in 
favor of Congress' Goldwater-Nichols legislation, because I 
believe that the Service Chiefs do have control of that 
requirements process and it is critical for Congress to 
hopefully continue to understand that you do not want to move 
the acquisition process under the Service Chiefs. What you did 
in Goldwater-Nichols was the right way to handle the business.
    Senator Reed. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Levin. Thank you, Senator Reed.
    Senator Collins.
    Senator Collins. Thank you, Mr. Chairman.
    Secretary Young, your comments on the JSF brought to mind 
the realization that part of the problem with cost growth is 
attributable to the failings of the contractors, part of it is 
attributable to changing requirements and insufficient 
oversight by DOD, but part of it is the failure at times of 
Congress to provide predictable, stable funding.
    I see you're nodding in agreement. I think we have an 
example of that with the DDG-1000 program, where we're seeing 
the House move in the direction of pausing or perhaps 
terminating the DDG-1000 program after the first two ships. The 
Senate, far more wisely in my judgment, fully funded the budget 
request for a third DDG-1000.
    What would be the impact if the House position should 
prevail on the cost of the first two DDG-1000, shipbuilding in 
general, and the industrial base for shipbuilding if the House 
position were to prevail?
    Mr. Young. I think we should assess that in more detail, 
but I am extremely concerned about several aspects of the House 
mark in that deliberation. When we've established a 
manufacturing--these processes take time to put into place and 
then they execute very well over a period of time. To stop the 
DDG-1000 program at two ships would unquestionably add 
substantial costs to that program.
    To restart the DDG-51 program, which is stopped, has been 
stopped for several years, it is difficult for us to properly 
estimate the cost of that. Then the question becomes, do you 
buy more ships after that, because just buying a couple of DDG-
51s will be inordinately expensive and I am confident we cannot 
estimate that. Suppliers will talk to you if you want to buy 
many of things over several years. If you want to buy a few 
things for 1 year, I have no idea what that will cost.
    So the DDG-1000 will go up. I don't know what those DDG-51s 
will cost, but I can offer to get you some information for the 
record. It will destabilize the destroyer industrial base. Then 
it's a requirements issue, as we've discussed today. We have 62 
DDG-51s. The Navy is moving forward because it needs additional 
capability, it believes. The discussions I've had with the 
Navy, they do not seek more DDG-51s; they seek a DDG-51 
possibly with plugs to carry a bigger radar, and that ship will 
quickly approach the cost or exceed the cost of a DDG-1000, so 
we will not be addressing the issues that I think the House has 
tabled.
    We need to look at this combination of requirements, 
stability of the industrial base, and cost to get a better 
solution here.
    Senator Collins. It would be helpful to have your 
information on the cost estimate.
    Are you familiar with the May 7, 2008, letter that the 
Chief of Naval Operations (CNO) sent to Senator Kennedy 
attempting to compare the cost of restarting the DDG-51 line 
versus pursuing continuing with the DDG-1000?
    Mr. Young. I've recently learned of the letter and, based 
on reviewing it, have a number of concerns with the letter that 
was provided to the CNO for his signature. The letter's numbers 
are based on key assumptions and are incorrect in some cases. 
The DDG-51 prices assume continuing DDG-51 procurement, as I 
said. So those prices in that letter mean you would buy more 
DDG-51s. If those were the only ones, they would be more 
expensive, I believe.
    Second, the DDG-51 prices assume that the two ships, in the 
case of the two-ship case, could be awarded to one yard. I have 
no process right now to give two DDG-51s to one yard, as you 
well know, and if I build them between yards that will be 
significantly more expensive.
    It's questionable whether the DDG-51 prices are accurate if 
no DDG-1000 is built in fiscal year 2009, because, to talk more 
technically, this is about overhead absorption and use of the 
business base. If there's no DDG-1000 beyond the first two, 
then those DDG-51s will be more expensive, I believe, than the 
record suggests.
    Then the DDG-1000 prices for the two lead ships, as we 
already discussed, would certainly increase. Operations and 
support costs are reported in DOD's Selected Acquisition 
Reports. The DDG-51 ship costs $10 million more per year to 
operate and I don't think that's correctly reflected in the 
letter.
    But I can expand on this and reply to you if you would 
like.
    [The information referred to follows:]

    There are two cases to consider for acquisition costs. The first 
case maintains the DDG-1000 program of record and begins procuring 
additional DD-51 ships beginning in fiscal year 2009 and continuing for 
a few years. In this case, the costs for one and two additional DD-51 
ships in fiscal year 2009 are provided in the table below. The second 
case stops building DDG-1000 ships after the two lead ships, so there 
would be no fiscal year 2009 DDG-1000 procurement. Instead, one or two 
DD-51 ships would be procured. Again, it is essential to recognize that 
these numbers assume continuing DD-51 procurement. The Navy would 
likely see significant premiums added to the following prices if only 
one or two DD-51s were purchased. The following table summarizes the 
costs for these two acquisition cost cases:


                                            [In billions of dollars]
----------------------------------------------------------------------------------------------------------------
                  Fiscal Year 2009                         DDG-1000             DDG-51              DDG-51
----------------------------------------------------------------------------------------------------------------
Case 1
  Quantity..........................................                  1                  +1                  +2
  Cost..............................................               $2.7               +$2.1               +$3.3
----------------------------------------------------------------------------------------------------------------
Case 2
  Quantity..........................................                 -1                  +1                  +2
  Cost..............................................              -$2.7               +$2.2      +$3.5 to +$3.6
----------------------------------------------------------------------------------------------------------------

    It is important to recognize the following about these cost 
estimates:

         There would not be sufficient funding to procure two 
        additional DD-51 ships in fiscal year 2009 at a cost less than 
        or equal to one DDG-1000 ship.
         A single DD-51 class ship in fiscal year 2009, with no 
        other DD-51 ships to follow, would not support the current 
        surface combatant industrial base, unless DDG-1000 production 
        is continued.
         Direct production hours for one DDG-1000 ship are 
        about 2.5 times that of one additional DD-51 ship. This 
        validates DOD's experience that two to three DD-51 destroyers 
        need to be purchased annually to maintain the two yard surface 
        combatant industrial base.
         Cost increases for the two lead DDG-1000 ships, with 
        no follow ships, are unknown.
         The RDT&E efforts for the DDG-1000 program must 
        continue in order to deliver two complete ships and to support 
        the Dual Band Radar for the CVN 21 program.

    The estimated cost to terminate the DDG-1000 program at the third 
ship ranges from $2.5 billion to over $4 billion. These costs include 
increased execution risk on the two lead ships; class services costs 
and integrated data environment costs that were budgeted in future 
years; additional Government Furnished Equipment costs for mission 
systems equipment; class shutdown and closeout costs; cost impacts on 
other Navy shipbuilding programs as a result of cancelling future DDG-
1000 ships; and allowances to recoup lost investments for litigation, 
and for other liabilities that might be claimed by the DDG-1000 program 
contractors.
    As for annual Operating and Support (O&S) costs for the two ship 
classes, the Department reports annual O&S costs to the Congress in the 
Selected Acquisition Record (SAR). The table below shows the annual O&S 
costs from the most recent SAR, reported as of December 2007, but the 
values are adjusted to fiscal year 2005 dollars for comparison. As the 
table shows, there is about a $10 million per year difference between 
the two classes, but this is based on estimates for the DDG-1000 ships 
as compared to several years of operating experience with the DDG-51 
class ships.

                        [In millions of dollars]
------------------------------------------------------------------------
        Fiscal Year 2005               DDG-1000             DDG-51
------------------------------------------------------------------------
Mission Pay & Allowance.........  6.8...............  20.7
Unit Level Consumption..........  10.1..............  11.6
Intermediate Maintenance........  0.7...............  0.7
Depot Maintenance...............  10.0..............  7.0
Contractor Support..............  0.0...............  0.9
Sustaining Support..............  14.2..............  3.0
Indirect........................  4.4...............  12.7
Other...........................  ..................  ..................
------------------------------------------------------------------------
  Total (average annual O&S)....  46.2..............  56.6
------------------------------------------------------------------------

    The operating cost data provided in the CNO letter to Senator 
Kennedy compared the programming information used to construct the 
latest budget, but did not include items not directly budgeted to a 
specific program, for example, indirect support costs.

    Senator Collins. That would be very helpful to me and to 
this committee.
    Two more points on that. It's my understanding that the 
DDG-51 requires a reduction gear that is no longer in 
production and that you would have to start up that line, which 
is very expensive. Is that accurate?
    Mr. Young. I believe that's correct for that and several 
other cases, because again I believe the last DDG-51s were 
bought in fiscal year 2005. I have programs that are in current 
development that experience obsolescence issues. This is a 
program that's been out of production, so there's no question 
we will have multiple obsolete parts issues.
    Senator Collins. Do you believe that the current contract 
strategy for the DDG-1000 has sufficient cost control elements 
to meet the program's objectives?
    Mr. Young. The best thing I can do is what I had a chance 
to state to the chairman, I believe: The DDG-1000 R&D program 
has gone very well. The drawing designs have been produced. The 
technology is matured. We did, I believe in that case the right 
component prototyping to inspire that maturity. We've recently 
successfully negotiated priced contracts with both yards for 
the lead ships.
    We have to go prove we can execute that, and so, in light 
of this hearing, I'm anxious about guaranteeing that 
performance, but I believe every measure has been taken to try 
to ensure that performance and I'm optimistic about it.
    Senator Collins. Finally, the Navy's requirements for at 
least seven DDG-1000 have not changed, have they?
    Mr. Young. I'm not aware. That's obviously a question for 
the Navy. We contemplated some of these issues going forward. 
The very simple version for me is the Navy needs to study 
carefully removing the guns from the DDG-1000s and replacing 
them with missile cells, and then you have the potential for a 
first generation cruiser with modest changes. That was my goal 
in setting up the strategy for DDG-1000, to balance the Navy's 
long-term cruiser requirements with the Marine Corps's fire 
support requirements.
    Senator Collins. Thank you.
    Chairman Levin. Thank you, Senator Collins.
    Senator Lieberman.
    Senator Lieberman. Thanks, Mr. Chairman.
    Secretary Young, Ms. Schinasi, thank you. I was thinking as 
I listened to the testimony, I've been privileged to be on this 
Armed Services Committee of the Senate for 16 years and in that 
time I've developed the highest regard for the Pentagon, for 
our military, in just so many ways. I must say that this area 
of acquisition is the one really unsettling exception.
    When you think of the consequences, I find the report that 
you, Ms. Schinasi and GAO, have issued to be exasperating and 
embarrassing, and ultimately very harmful to our attempts to 
provide for our national security in exactly the strong, and 
appropriately strong, and eloquent terms that the chairman, 
Senator Levin, spoke of in his opening statement. In the work 
of this committee and the various subcommittees, we hear 
constantly of the shortfalls in major systems that our military 
needs down the road.
    We are far from the 313-ship Navy that was the goal and 
we're not closing that gap. We held a hearing in the Airland 
Subcommittee a while back, the Navy and the Air Force talking 
about projected shortfalls of aircraft some years down the road 
which are really troubling.
    I could go on and on. I thought Senator Levin's opening 
statement, in which he basically took that $295 billion, which 
is what GAO reported earlier this year had been the cost growth 
on these programs, and talked about what we could buy with that 
money. It's really a shame.
    So in that spirit, Secretary Young, I wanted to ask you 
this question. I have high regard for you and you've spoken 
here today about memoranda issued and decisions rendered that 
caused persons responsible to act in compliance with 
recommendations and best practice.
    I want to say to you today that I think those people who 
are responsible for acquisition ought to be held accountable, 
and that accountability should include consequences for 
failure, because our military, our national security, is now 
paying the price of the consequences of, in other words, lack 
of real personal accountability?
    Mr. Young. Yes, sir, I'm aware of several. It's not a large 
number, but I'm certainly aware of a handful of instances where 
government and industry program managers were held accountable 
and relieved of their responsibilities for program issues.
    Senator Lieberman. So this is not--this is not just the 
system? I understand the problem with recruiting and retaining 
personnel in this area. But you agree that some of this is just 
a failure to do the job that we expect people to do?
    Mr. Young. I'd be happy to talk to you in this hearing or 
outside. I've had--I could cite for you easily ten programs 
that have come all the way to the Under Secretary level for 
approval that I felt failed to meet the standards that we're 
talking about meeting today and I have directed changes in 
those programs. So I am working with the whole of the 
acquisition team to shift that culture to greater discipline, 
and we have to make progress there.
    Senator Lieberman. But there are some cases in which 
adverse career actions have been taken?
    Mr. Young. Yes, sir.
    Senator Lieberman. What are those kinds of actions? What 
are the adverse--do you know the number on your watch?
    Mr. Young. I could get you some information for the record. 
Off the top of my memory, I know on one particular program a 
flag officer and a program manager who were relieved. On the 
industry side, I've known of both a flag officer and a major 
corporate program leader being relieved. I could probably cite 
for you seven or eight. But I'll get some information to you 
for the record.
    Some of these are a little harder because these are done 
with some grace here, because there are people that make 
mistakes, but they can still contribute in other places.
    [The information referred to follows:]

    The Department is committed to sound program management and holds 
program managers accountable for their program's cost and schedule 
performance. In cases where we experience poor program outcomes and we 
determine the program manager's actions were responsible for those 
outcomes, we will take steps to correct the situation including 
appropriate personnel actions. In general, that means the individual is 
reassigned. Depending on the circumstances, he or she may not be 
recommended for promotion and may be asked to retire. In general, there 
is no public release on the rationale for the removal of a 
servicemember or employee.
    During my tenure as the Under Secretary of Defense for Acquisition, 
Technology, and Logistics, one program executive officer and four 
program managers have been reassigned due to program performance.
    It is incumbent on the acquisition team, and in particular the 
acquisition executives, to monitor program performance closely and to 
take early corrective action when problems arise rather than wait for 
programs to fail. We need to ensure that our program managers have the 
proper education and training and that they are empowered to act in the 
best interest of their program, the warfighter, and the taxpayer. It is 
the acquisition team's responsibility, too, to structure programs so 
that our program managers can succeed. However, it is equally critical 
for the programming and budgeting community to fully fund programs to 
the program manager's estimate. Underfunding which produces bad 
outcomes is not the program manager's fault. Equally, allowing 
requirements officers to change requirements during execution creates 
negative results which again are not totally attributable to the 
program manager.

    Senator Lieberman. I'd like to see that report. Nobody 
wants to be punitive without justification, but the point is 
when you think about the consequences of the failures in 
acquisition then we have to hold people accountable and hope 
that that's part of the message we send that improves the 
process.
    I think it's gotten, in the time I've been here, 
notwithstanding all the efforts of a lot of people, I think the 
problem has gotten worse, not better.
    Mr. Young. Could I address this with a couple of brief 
examples?
    Senator Lieberman. Go right ahead.
    Mr. Young. The one I use frequently is T-45. The Navy 
bought the expected number, I think 221, T-45 aircraft. But 
beyond the control of the program manager, although he should 
have complained and objected, the programming and budgeting 
process bought those planes at ranges from 6 per year, at which 
point they're about $30 million a copy, to 18 a year, at which 
point they're $20 million a copy. Optimal is about 15.
    Had we bought at the optimal rate, we could have bought 
that program and saved $632 million. It is the program 
manager's fault that the taxpayer paid $630 million extra 
dollars for absolutely no more capability. So in my enterprise 
I have a source document where I ask program managers to behave 
in certain ways. One way is exactly as Chairman Levin said: 
Look to save money every day on your program; fight the 
programming process, fight the comptrolling process, and ask 
for economic order quantity.
    To emphasize that, I sent a note on the T-45 example to 
Secretary Gates a month ago. He wrote back and said: Bring me 
some of these examples. I just last week sent him a memo of 
things we can do to buy more efficiently and help avoid that, 
because the source document says what you are saying and what 
GAO is saying; that is, every time I pay more for no more 
capability, I'm essentially denying the warfighters a tool that 
we could have.
    Senator Lieberman. That's the ultimate victim here, the 
warfighter.
    Let me ask you a question, the question on the other side. 
What about a program manager who really does the job, an 
acquisition official who really does the job and saves money? 
Are you able to reward that person?
    Mr. Young. Especially if they're a military person in 
uniform, I have nothing to give them other than end-of-service 
commendations.
    Senator Lieberman. Well, that's something we ought to think 
about.
    Let me go on to one more question briefly, because we've 
seen a lot of progress in the private sector in the reduction 
of waste. The Pentagon I know has tried to embrace some of 
those systems. But the report suggests that it's not just the 
business model and efficiency systems that are being used, but 
how closely the programs are being followed.
    Here I want to get really to the question of organization. 
While a private sector business has a CEO with wide-ranging 
control of programs, as you've touched on briefly a while ago, 
each military department is organized differently. So I want to 
ask you to deal for a moment with these two questions: Is each 
Service organized ideally to manage these programs; and then, 
more broadly, does the senior acquisition official have 
authority equivalent to a CEO in a private business on not only 
the process, but on requirements, costs, and what's required to 
manage the system?
    Mr. Young. I believe--as I stated earlier, I think the SAEs 
are critical functions in the enterprise. I do not believe that 
that responsibility has been adequately exercised to achieve 
jointness and interoperability. They have the authority to 
refuse to sign contracts, and I'll give you an example.
    The Navy and Marine Corps wanted to pursue an LHAR, a new 
amphibious ship, that was basically going to be taking an LHS 
and put two plugs in it and make it ten feet wider and change 
80 percent of the drawings and spend a billion dollars in 
nonrecurring. I stood up and said: Why do we have to do this? 
Is the requirement adequately compelling to spend that money? 
That ended up in discussions with even the Commandant of the 
Marine Corps, but in the end the Commandant agreed that 
requirement should be relooked and we didn't go down that path 
and we saved that money.
    So I give you an example that the SAE does have the 
authority to refuse to sign contracts and call into question 
the requirements. That's the power of them reporting and 
working for the President under Goldwater-Nichols. Have we 
adequately exercised that authority? I think the answer is no.
    Senator Lieberman. Okay. Needless to say, and you know it 
and we all know it, this is real important. So let's work 
together to try to make it better.
    Thank you.
    Chairman Levin. Thank you, Senator Lieberman.
    Senator Thune.
    Senator Thune. Thank you, Mr. Chairman.
    Secretary Young, I have a question that regards a current 
program that's at least in the formative stages that I'd like 
to get your reaction to, how that's progressing, and what can 
be done to keep it on schedule. The Air Force is currently 
undertaking a new major weapons system acquisition program in 
the Next Generation Bomber. As this is a brand new acquisition 
program with an aggressive time line of being fielded by the 
year 2018, what acquisition strategies is the Department 
exercising to successfully field this platform on time without 
significant cost growth?
    Mr. Young. I would think, consistent with what I believe 
the committee would expect of me, I would take this as one of 
my fundamental responsibilities. I cannot afford for the 
Department to embark on a new bomber and not do it accurately. 
So a couple of things would happen. One, I would give the Air 
Force credit; they have laid out a program that includes some 
level of prototyping and the things that I've insisted upon.
    I have independently asked the Defense Science Board team 
to review this program and help advise me on the technology 
maturity, the achievability of the requirements, and those 
factors. Then I've personally gone out last week and looked at 
the potential for this program.
    Through the work of that process, already the Air Force has 
concluded that more money and possibly a little more time is 
required than they initially laid out, and I am determined to 
try to bring and present to Congress an achievable program 
that's properly resourced, properly scheduled, and has 
appropriate technology maturity in it.
    That's the goal. I strongly support the need for the new 
bomber, but I do not intend to put my name on a piece of paper 
that will start a program that is going to be in the next 
hearing a few years from now about how the costs grew on it.
    Senator Thune. One of the issues that's related to that, 
and the GAO report noted that the long development cycles make 
it difficult to estimate cost and funding needs. Some 
development cycles take 10 to 15 years from start to finish. 
The GAO recommended constraining cycles to 5 to 6 years.
    I guess my question is, is that recommendation realistic? 
How can we continue to shorten the development time of these 
very complex programs?
    Mr. Young. I think I believe the chairman has mentioned a 
few times the Defense Acquisition Performance Assessment 
Report, which advocated a tool called time-defined acquisition. 
I think it's a very potentially useful tool, but it's only 
useful if you can define requirements that can be achieved in 
that time period. If you set out and say, I'm going to do 
something in 5 years, but the something you have set out to do 
in terms of requirements can't be done, then it'll just be 
another program that misses its schedule and its budget.
    So I do think we need to look at that. In many of those 
things where you define short windows of time, you will be 
looking for incremental improvements in capability, and that 
may be a reasonable and very affordable strategy for the 
Department. In other places the Department does have 
requirements that go beyond an incremental change and so I 
don't know that I can always demand that a time-defined 
approach be the strategy.
    Senator Thune. The GAO also noted that DOD typically uses 
cost reimbursed contracts, in which the DOD generally pays the 
allowable costs incurred for the contractor's best efforts to 
the extent provided by the contract. It further notes that this 
may contribute to an acquisition environment that's not 
conducive for incentivizing contractors to follow best 
practices and keep costs and schedule in check.
    Would you agree with that statement and, if so, what's 
being done to correct these misdirected incentives?
    Mr. Young. I think we have to--I believe there's work to be 
done in this space. We have to balance risks and costs. Where 
we are seeking to push the state of the art in technology, 
industry will not do this on a fixed-price basis and I'm not 
sure it's reasonable to ask that it be done.
    Other places we possibly could look at a more aggressive 
contract structure that will help keep in check the 
requirements and help us deliver for affordable costs.
    Then there are other places where we've used cost-type 
contracts, that I think have been unfair to the government and 
we need to seek reform in that area. The best example I can 
give you is on the LPD-17 ship, where some significant fraction 
of the welds in that ship were flawed and had to be redone. At 
some point in time, I should expect some reasonable level of 
performance by industry on a cost basis. I shouldn't be able, 
forced, if you will, to pay on behalf of the taxpayer any price 
for any level of deficient performance. That's an area where we 
need to do some work on our contracts.
    Senator Thune. The GAO testimony concluded with the 
statement that in practice DOD's decisions made on individual 
programs often sacrifice knowledge and realism in favor of 
revolutionary solutions. Would you agree with that assessment, 
and if so what are the two or three biggest initiatives that 
you think could correct that problem?
    Mr. Young. I think--if I misunderstood your question, 
please correct me--but I believe the key to that is technology 
readiness. So there are a couple of steps to that. One, I am a 
strong advocate of the acquisition team working with the 
requirements team to try to make sure the initial requirements 
are set in a reasonable place and informed by what technology 
can do.
    Then, to a finer level of detail, you have to do what 
Congress has rightly asked us to do, and that is at the 
milestone points ensure that the technology is appropriately 
mature to move to the next phase of development. So in both 
those cases I think we need to address those issues.
    Senator Thune. Thank you, Mr. Chairman.
    Thank you.
    Chairman Levin. Thank you so much, Senator Thune.
    Senator McCaskill.
    Senator McCaskill. Thank you, Mr. Chairman.
    There are depressing failures in this area of DOD. The 
saddest thing about these failures is that we pass laws and we 
talk about them, and we pass laws and we talk about them, we 
have audits and we have audits, and it just keeps getting 
worse. What do they say, that insanity is to continue doing the 
same thing over and over again and expecting a different 
outcome.
    It seems to me we ought to implode something here. The 
system needs to be really looked at in terms of a crisis of 
leadership. There is--if you look at two broad principles in 
terms of any government program, it's, first, what's the 
definition of success; and second, is there accountability? 
Because people aren't going to change what they're doing if 
they're not held accountable for it.
    We've discussed that briefly in this hearing. But it seems 
to me that the definition of success, and that's part of the 
problem, in acquisitions is to get the money and keep getting 
the money. Well, if the definition of success is to get the 
money and keep getting the money, then we're going to continue 
to have these problems.
    That's what the whole community's about, is getting the 
money and keeping the money. It doesn't--well, I think that's 
what the contracting community's about. I think that that's 
what sometimes the leadership of the various branches is about, 
and certainly it's about what Members of Congress are about 
sometimes, getting the money for their own individual systems 
that they care about, their pet systems based on what 
contractors they have in their States or whatever.
    I want to focus in on turnover. I asked my staff why the 
military branches were not going to be represented today and 
they said, well, two out of the three positions are vacant. Ms. 
Schinasi, how long have you had your job?
    Ms. Schinasi. 30 years.
    Senator McCaskill. How long have you been focusing on this 
area?
    Ms. Schinasi. About 18.
    Senator McCaskill. So for 18 years you have watched these 
problems.
    Secretary Young, how long have you had your job?
    Mr. Young. Which one?
    Senator McCaskill. The one you have now.
    Mr. Young. I was made acting at the end of July. I was 
confirmed by the Senate in November 2007.
    Senator McCaskill. How long did the person serving before 
you have that job?
    Mr. Young. Approximately 2 years.
    Senator McCaskill. Do you know off the top of your head how 
long the average program manager stays in place in your system?
    Mr. Young. I do.
    Senator McCaskill. It's 17 months, correct?
    Mr. Young. That's not correct.
    Senator McCaskill. Well, the GAO audit says it's 17 months.
    Mr. Young. I asked my team yesterday to go through the data 
and identify, and at least for the places where you had data, 
the Army and the Navy, we surveyed program managers who have 
left since 2000 and the average tenure of those program 
managers was 37 months.
    Senator McCaskill. Well, you all need to get together, 
because the audit says that of the 39 systems since 2001 the 
average length of a program manager was 17 months, and that is 
half the life of the development of those systems.
    How do we expect any accountability if you know you're 
going to be gone before the you-know-what hits the fan?
    Mr. Young. I think I will certainly let Ms. Schinasi speak, 
but we have a snapshot in time that says today the current 
average is about 24 months, but that's a snapshot in time. It 
doesn't say how much longer they'll serve, and we are seeking 
to address this very issue with program manager tenure 
agreements that says that--where program managers agree to 
serve for a period of time or to the next nearest milestone.
    So I agree with you about this. If I could, I'd use this 
opportunity to say there's another dimension to this. When I 
was the Navy acquisition executive for 4\1/2\ years, I had I 
think four rotations in the senior requirements officer. The 
requirements officers are a party to this situation. They 
rotate on much more regular intervals. They come in and they 
potentially want to change the requirements, and then I have my 
acquisition program manager trying not to change and to keep 
stability and a requirements officer who just came in from the 
fleet and has the potential to make flag saying you have to 
change, and it creates a lot of tension in the system.
    That's why I believe again the acquisition executives have 
to take care of their program managers who try to manage with 
discipline, because it's not an easy discussion with the flag 
officer requirements person who says: You must change this part 
of the contract.
    Senator McCaskill. Where are these people going when they 
leave?
    Mr. Young. The program managers?
    Senator McCaskill. Yes, or where are the senior acquisition 
people at the Navy and the Air Force, where are they going? 
Where do they go? When they leave these jobs, where are they 
going?
    Mr. Young. Well, I was the Navy acquisition executive and I 
got moved to be the DDR&E, and I got moved to be the Under 
Secretary for AT&L. Others, SAEs, my colleagues that I knew, 
one's at the DAU now, one's in industry. Most people I do 
believe return and work in industry in general, is the vast 
majority.
    Senator McCaskill. So what would it take for us to--and I 
mean the sky's the limit here. What would it take for us to get 
someone like Ms. Schinasi to stay in some of these jobs for a 
decade maybe, something remarkable like 10 years, where they 
could actually manage and be accountable for these programs? Is 
it a matter of money?
    You talked about that you're having trouble getting people 
to come back because we are limiting what they can do when they 
leave. If you could write your wish list, why is it that 
somebody at GAO--I guarantee you she's not getting rich. I 
guarantee you she's not in this job for the money or the fame. 
I'm not implying that people that leave DOD are going for money 
or fame.
    But something is terribly wrong when the Government 
Accountability auditor stays 18 years and the average program 
manager--and we want to quibble about how long--are turning 
over like hotcakes. There is something terribly wrong with this 
system, and there's no way we're ever going to fix it if we 
don't have longevity in these leadership positions.
    Mr. Young. The questions I had were largely about 
politically, presidentially appointed senior leadership 
positions in the acquisition community. If you move levels down 
from that, we have lots of government civilians who just like 
Ms. Schinasi, have been in place for 20 and 30 years. I believe 
Senator Reed asked about this. In fact, my issue is refreshing 
that leadership with people that are about to retire.
    So at the deputy under secretary levels and the next level 
and even in other places, we have a lot of that leadership. In 
general, we have a bias to run programs and oversee portfolios 
of programs with program executive officers (PEOs) who are 
military. In that regard, the acquisition system parallels to 
some extent the military assignment system, where people don't 
serve indefinitely in those jobs. Again, acquisition rotates 
far less frequently. I have PEOs and program managers for at 
least 3 years. Many of the line officer organizations--commands 
of ship rotate on an 18-month to 24-month basis.
    Senator McCaskill. Well, shouldn't we fix that? Shouldn't 
we change it? Obviously it's not working. We have cost 
overruns, we have scheduling. This is a disaster. We're talking 
about hundreds of billions of dollars. Isn't it time for 
someone to stand up and say, this is a crisis and we can no 
longer use this model in terms of the kind of longevity it's 
producing in these critical oversee and accountability 
positions?
    Mr. Young. The issue has multiple dimensions. I believe 
this is one that's reasonably addressed when people are serving 
36 to 40 months. I have program managers serving more than 4 
years. I think we should look at it, but I would urge you that 
more significant factors are rotating the requirements officers 
and letting the requirements officers lean very hard on those 
program managers to change things. Then as I cited in the T-45 
example, it's also programmers and comptrollers giving 
acquisition team members a budget they can't execute, and they 
need the backing to stand up and say: I can't execute that 
budget.
    Senator McCaskill. We'll follow up with you and with you, 
Ms. Schinasi, because I think it's time that we try--and I know 
that the chairman talked about a new position that might be 
outside of the process at this point in terms of the oversight. 
I think that might be a key example.
    I'm new here, but this is sickening. This is unacceptable. 
This would never be tolerated in the private sector. The reason 
it's tolerated here is because we care about our military, we 
want them to have the best, and because, frankly, it's not our 
money. It's taxpayer money.
    I think we need to do something dramatic and different in 
terms of how these processes are working.
    Let me finally address a question about the number of 
contractors. We're down to six. I think all of us that are 
being honest about this know that this is a cross-pollinated 
incestuous deal here, that the contractors and the military--
I'm aware of an incredibly inappropriate incident that occurred 
with the highest ranking of our military in an acquisition 
contract dealing with a PR screen for the Thunderbirds that we 
will go into another day.
    But when we get down to one or two contractors, what should 
we do, Ms. Schinasi? I mean, when we've gone from what, 
something down to six, what do you recommend? How do we create 
more competition if we're down to six, and how do we keep it 
from going to one or two? If we're going to do that, why don't 
we just bite the bullet and say that we have in fact become 
like other countries, where the government controls the 
business of supplying equipment to the government, because 
right now we kind of do; we just don't admit it.
    Ms. Schinasi. I'm going to give you an answer that touches 
on a couple of the issues you've raised, and that is, it would 
be good if we could get more production going because 
production is where contractors look for efficiencies for 
themselves. That's where you can go into a fixed-price 
environment and you can rely on them to do what's in their best 
interests, that's also in the government's best interest.
    One way to do that is to shorten these development cycles, 
and shorter programs will also address the problem that you 
talked about for accountability of program managers. If we only 
need somebody to stay 5 years, we're more apt to get that kind 
of match between what the system wants out of its program 
managers and what the system needs out of the program managers. 
So that would be one part of the answer.
    I think you are right in that we cannot rely on competition 
the way the procurement system has been set up, because the 
bedrock of our procurement system is competition. So we have to 
put more rules in place and we have to legislate more and we 
have to have more oversight. I'm not sure that's the most 
efficient way to do things, but that's where we are left right 
now.
    There are ways to encourage competition if we look at the 
supplier base as a whole. The six companies I talked about are 
the major defense contractors, but there is an industry out 
there that can be created. Congress has looked at different 
ways to do that, the use of other transaction authority, for 
example, or other ways to bring in nontraditional contractors. 
I think some of those initiatives have merit, that we can get 
companies involved in government business that will provide 
some of that incentive and initiative to the ones who are 
already there to do their job better.
    Senator McCaskill. Secretary Young, do you have any 
comments about that?
    Mr. Young. I think I would agree completely with that. I've 
issued--I mentioned that I issue weekly notes to the broad 
acquisition team to try to keep moving the culture forward. At 
least two or three of those notes are aligned with the 
chairman's comments, and your comments. I have asked people to 
stop viewing success as getting more money, growing your 
program office, getting more people. In fact, I view that as a 
failure if you're doing it at the expense of contributing more 
capability. I'd be happy to give you that note for the record.
    [The information referred to follows:]

    See the attached DUSD(AT&L) notes.
      
    
    
      
    
    
      
    
    
      
    Mr. Young. I have issued notes that said we have to have 
more open competition and do it as fairly as possible. I 
created acquisition strategies where a smaller business and a 
larger business were going to go head to head and the large 
business went and bought the smaller business. So I've watched 
an acquisition strategy through competition fall apart. We need 
some serious attention in this space.
    We have another problem where I've seen some of the venture 
capital models work well, like In-Q-Tel for the Central 
Intelligence Agency. I've talked to those companies and those 
companies in general won't come and do business with the 
Pentagon because of the complexities of trying to do business 
with us. So we need to go attack some of those issues.
    All these small companies may not have adequate cost 
accounting systems, but they have technology that our 
warfighter needs. We need to find a way to deal with that.
    Senator McCaskill. Well, the irony is that because we are 
pretending like we have a competitive system, we are putting 
myriad rules and regulations in place to actually compensate 
for the fact that it's not true competition, and it's those 
myriad rules and regulations that are keeping venture 
capitalists out. So it is a circle of failure. This is like--
it's almost surreal, how ridiculous it is.
    I don't have any more time----
    Chairman Levin. Senator, I'm afraid your time is up.
    Senator McCaskill. I'm out of time. Thank you very much.
    Chairman Levin. Thank you, Senator McCaskill.
    Senator Martinez.
    Senator Martinez. Thank you, Mr. Chairman.
    Secretary Young, I want to focus on the issue of 
shipbuilding. I know the CNO has had a goal of a 313-ship Navy. 
We've talked about that a little bit this morning. We also know 
that from time to time in recent years this plan has not been 
meeting the goals that we need in order to see that to 
fruition.
    We've also heard from shipbuilders that they argue that the 
formula for bringing down construction costs has to include 
volume and stability. My question to you is essentially, do you 
believe that the Navy at this point has adequately addressed 
the concerns in the shipbuilding plan which will then enable 
the Navy to get on the road to a 313-ship Navy?
    Mr. Young. Well, I believe the Navy--I have not seen the 
latest iteration--the Navy is building, possibly with modest 
changes, the shipbuilding plan for the program objective fiscal 
year 2010 to fiscal year 2015 budget. Your current plan, as it 
exists in the current President's budget, I believe, provides 
moderate stability. Certainly you wouldn't call it robust, but 
a moderate stability and a path to the 313-ship Navy.
    DDG-1000 is an important piece of that plan. I believe 
trying to regain cost control on the LCS is an important piece 
of that plan for capability reasons as well as some degree of 
industrial base concern.
    Senator Martinez. In your prior job you worked on the LCS 
procurement program. Specifically on that, where are we today 
in your estimation in terms of--I know we have the two 
prototypes and they're about to come out I guess in the next 2 
or 3 months. Once those are sea-tried and a model is selected 
on which to go forward, do you think that the system, the 
procurement system, is ready to go so that we can then proceed 
to the construction of a LCS and get a production line going 
that's going to be successful?
    Mr. Young. A couple of things. One, the LCS was formed 
ahead of Operation Iraqi Freedom, where the Department did 
several thousand--I went to Fifth Fleet and they did several 
thousand boardings in the Gulf. We were boarding small ships 
that could have been a danger with billion dollar DDG-51 
destroyers. We need a smaller, faster ship in our Navy.
    I couldn't be more frustrated than all of you that that 
ship, which we set out based on some commercial designs that we 
were going to make modest changes to, has now grown, more than 
doubled in cost. I would like the Navy to revisit, trying to 
get some cost control of that program. But I believe the 
capability is still needed and I think you will see in the 
POM10 budget the Navy tries--because you can't deny the 
capability--the Navy will try to buy those ships and restore 
that program.
    The cost cap right now is causing a problem. I was asked, 
and I will provide extended comments for the record, but one of 
the fundamental issues is we took a more commercial-like ship 
that we were going to add some systems to and applied a lot of 
Navy technical authority and turned it into a militarized ship. 
We drove that cost growth. I don't even know--it's some mix of 
cost growth and the fact that we made new demands on this ship 
that drove the price of it to a higher level. ``Cost growth'' 
is such a general word applied here.
    [The information referred to follows:]

    Yes. The procurement system is prepared to proceed with further 
production of the Littoral Combat Ship (LCS).
    The Navy has worked diligently with the industry teams to identify 
and evaluate program cost, schedule and technical risk. The Navy has 
taken the following action for the LCS program to address cost growth 
and prevent recurrence of the problems found during production of LCS 1 
and LCS 2, including increased oversight assigned to monitor industry 
performance, and allowing for more realistic schedule objectives.
    An updated acquisition strategy for the fiscal year 2008 and fiscal 
year 2009 procurements was approved by the Under Secretary of Defense 
for Acquisition, Technology, and Logistics. The Navy is seeking to 
award one ship in fiscal year 2008 using the funding appropriated by 
Congress, along with material from one of the ships terminated in 
calendar year 2007. The fiscal year 2009 President's budget requests 
two additional LCS ships.
    The following relates to the incorporation of military 
specifications into the LCS designs.
    In February 2003, the Naval Sea Systems Command and Program 
Executive Officer ships made two joint decisions. The first was to work 
with the American Bureau of Shipping (ABS) to develop a set of design 
standards, or rules that could be applied to non-nuclear naval 
combatant ships. The second was to utilize ABS to class both LCS and 
DDG-1000 using the new rules. ``To class'' means to certify adherence 
to the rules through design approval and construction surveillance.
    In the Preliminary Design Phase Request for Proposal (RFP) issued 
February 28, 2003, the LCS Industry Teams were required to team with 
ABS to aid in producing an acceptable design, and to conduct an early 
assessment of each design to gauge its ability to comply with the 
design rules that were under development at that time.
    The Preliminary Design RFP stated:

          ``It is the Government's intention that the Preliminary 
        Design be evaluated by ABS and judged acceptable at that stage 
        of design. This evaluation will be repeated at the end of Final 
        System Design. It is also Government's intention to have the 
        LCS classed by ABS at delivery. The Government understands that 
        there is currently no complete set of U.S. approved rules 
        applicable to LCS. The Government expects that the U.S. naval 
        ship rules currently under development will be available prior 
        to the award of Final System Design.''

    At that point, the Navy established ship structure design 
requirements under the High Speed Naval Craft (HSNC) Guide and 
communicated this to the teams. The HSNC was freely available, having 
been released the previous year. The Navy also established that other 
Mechanical and Electrical systems would be designed to the Naval Vessel 
Rules (NVR) and communicated that fact. At that early stage of the 
design process, the above dialogue provided sufficient guidance to 
conduct the Preliminary Design phase.
    To provide advance insight into the required rules set, ABS issued 
a Draft Final Rules Matrix for LCS to the Industry Preliminary Design 
teams in October 2003. From January 2004 to May 2004, the Navy worked 
to finalize the first issue of the NVR. This first edition NVR was 
released May 21, 2004, and was immediately provided to the Industry 
Teams by ABS.
    The December 19, 2003 Final System Design (FSD) Phase RFP 
reiterated the requirement for the ships to be delivered in class as a 
naval combatant ship in accordance with the NVR. By the time of FSD 
contract award on May 28, 2004, the Industry Teams were aware of the 
February 3, 2004 draft NVR. It is during the FSD phase that the 
Industry Teams were tasked to fully describe detailed design 
requirements for all aspects of the ship in the course of preparing the 
Shipbuilding Specification. It was expected that the ship designs would 
be further developed during the FSD phase to conform to the design rule 
requirements (i.e., HSNC for Structure and NVR for the remainder of the 
mechanical and electrical systems), which is a normal part of the ship 
design progression.
    Both teams inserted reference to the May 21, 2004 NVR in their 
approved Specified Performance Documents (SPDs), thereby noting the NVR 
among the applicable requirements documents. After accepting the Teams' 
SPDs in final form, they were made contractually effective for the 
succeeding portions of the program.
    These comments clearly represent the Navy's statement and view of 
the circumstances. However, it should be clear that these are ambiguous 
statements which predict the application of undeveloped standards. It 
is inappropriate on the part of the Navy to claim that industry clearly 
and concisely understood the rules and certification requirements which 
would be applied to LCS. The Navy bears a share of responsibility for 
the poor management and execution of the LCS program.

    Mr. Young. Is it a more capable ship at the price of $400 
million plus? Yes, it's a more capable ship. Is it as 
affordable to the Navy as it should have been? Absolutely not.
    Senator Martinez. Well, given that, do you think that the 
vision for the LCS can be actually accomplished, given where we 
are today?
    Mr. Young. I think I'd stay with the first--I think the 
vision has to be accomplished. I need a ship that can go 40 or 
50 knots and chase down the small vessels. Our adversaries buy 
ships now that are faster than DDG-51s. DDG-51s really weren't 
intended for the maritime interdiction operation missions. We 
need a ship in this class for the missions our Navy faces in 
today's environment.
    I think this is very consistent with Secretary Gates' 
comments about what are the threats and the missions we will 
have to execute in the next few years. There's a gap in the 
Navy to do this job. Can we now go in and undo some of the 
changes that were done to the LCS to make it more affordable 
for the Nation so we can buy them in quantity for our Navy's 
warfighter?
    Senator Martinez. So give me some confidence that we're on 
the right track to be able to get that done. Because I agree 
with you, we need the ship.
    Is the Navy on track to be able to pull this off? Is the 
acquisition system in place? Once we select the prototype, are 
we ready to go?
    Mr. Young. Are we able to buy the ship that the LCS has 
become? Probably, but it's not as affordable as it should be. 
Has the Navy made enough effort to get costs back out of that 
ship? I think that's not answered yet and I intend to have 
discussions and meetings with the Navy to seek to accomplish 
that goal.
    Senator Martinez. In terms of the overall ship acquisition 
challenges, do you believe that we have reversed or have taken 
the steps necessary to reverse this long-term trend which we've 
seen that has not allowed us to get the ships that the Navy 
needs, just in the overall fleet, not just the LCS?
    Mr. Young. I think, unfortunately, the requirements process 
has driven us to ships that are more expensive because they 
have more capability. You have to look at those factors. I face 
this constantly in the Navy, and that's my job, is to try to 
find that middle ground. There are places where I could buy a 
less capable ship and it would be more affordable and run some 
risk of the threat being able to match that ship.
    So I think the Navy's trying to find that reasonable 
balance. I believe we've restored some degree of stability to 
the Navy shipbuilding program. The program is expensive, more 
expensive than we would like it to be. But it is linked to the 
capabilities that reasonable people have assessed the threat to 
have, particularly when you look at nations that are building 
capable ships out there.
    So I think the Navy's finding that some degree of 
reasonable ground--unfortunately, ships are more expensive. 
They're more expensive--I think, as Ms. Schinasi pointed out, 
we're not buying anything in the quantities we bought them in 
the past. That alone is driving a significant cost into our 
systems across the board, not just ships.
    Senator Martinez. This last question for both you, 
Secretary Young and Ms. Schinasi as well. In the 109th Congress 
this committee passed legislation that was enacted into law 
which requires that the Defense Department give a preference to 
fixed-price contracts for major developmental defense programs. 
Fixed-price contracts shift the risk to the contractor and 
incentivize the contractor to increase the reliability of the 
system components.
    GAO has determined that cost-type contracts cost the 
taxpayer $80 billion in cost overruns in the past decade. So 
what has been the practical effect of this legislation in 
helping the military Services to end the practice of 
overpromising capabilities and underestimate cost of 
development in buying weapons systems?
    Ms. Schinasi. I would say that the contract type should 
reflect the risk associated. So when we have a preference for 
fixed-price contract, what we're saying is let's get some of 
the risk out of the programs that we're trying to develop and 
produce here. There have been experiments in the past with 
fixed-price development contracts that have not worked because 
we have not taken on the more difficult piece of the risk of 
the technology maturity and the other things that are 
associated with all the cost growth that we've been talking 
about this morning.
    A program I would look at now is the JSF, where we are 
going into production and still looking at costs with some 
cost-type contracts, which says that perhaps the cost of the 
program is a little bit greater than we would expect to see 
going into production.
    But again, the contract type has to be put in place 
associated with the risks that the government is undertaking.
    Senator Martinez. Mr. Secretary?
    Mr. Young. I would agree with Ms. Schinasi's comments and 
add to that. One thing I have to ask--I don't have any way 
around--I have to ask your patience with is, you pass 
legislation and it takes time to implement steps in that regard 
and move forward. Then it takes some years to see. I've been 
frustrated with the discussion about that transition. To me 
this isn't a transition business. I have something like 16 
programs seeking Milestone Bs this year and all of those 
programs will execute over the 3 to 8 years beyond the end of 
this administration.
    We need to make those decisions well. We will make those 
decisions well. We have done exactly what she said. I have 
asked the program office and Lockheed to look at fixed-price 
incentive contracts at the right point for these JSF aircraft. 
So we will, with your legislation--and partly because it's just 
the right thing to do--I will continue to push in this space to 
get better terms and conditions for the government, and it will 
take us a couple of years to see the benefits of all those 
activities.
    Senator Martinez. Thank you both very much.
    Chairman Levin. Thank you, Senator Martinez.
    Senator Akaka.
    Senator Akaka. Thank you very much, Mr. Chairman.
    Ms. Schinasi and Secretary Young, in that order, I want to 
welcome you here today to talk to me about the problems that 
have been going on for years. I want to deal with production 
process control and also with best practices. I think there is 
an agreement that achievement of quality and production is 
nearly impossible without process control, and it also makes 
for casting of cost and timelines extremely difficult to do 
accurately.
    One of the many problems we've heard today deals with poor 
business and engineering practices. Specifically, I am most 
concerned that in all cases there was not a single instance 
where all critical production processes were in statistical 
control prior to the beginning of the production phase.
    My question to both of you is, could you please describe 
why this previously identified best practice has failed to be 
enforced? Second, what steps the Department is taking with its 
current programs that are still in the pre-production stage to 
break this trend? We're talking about attacking and breaking 
these trends?
    So these two parts of the question, about describing the 
best practice and also what steps are you taking.
    Ms. Schinasi. Senator, I will defer to the Under Secretary 
on the enforcement piece, but I would like to say, on the 
manufacturing the process control, that is an indicator that we 
use to look at whether or not a system is ready to go into 
production. What we find in many cases is the reason that you 
don't have process controls is because you don't have a stable 
design, and in some cases you don't have stable design because 
you're working with immature technologies.
    So it's a cascading problem that we see in a lot of 
programs. Process controls is one way that you can measure the 
readiness of your manufacturing to go forward. It's not the 
only one. But the thing that I think is most troubling to us is 
that in many cases, even if program offices do not capture that 
metric, they do not capture any metric because they don't--they 
have not seen the importance of getting the manufacturing 
processes ready.
    Senator Akaka. Secretary Young?
    Mr. Young. I would add a comment. This is one of the more 
difficult decision spaces that I face in the business. I'll use 
a couple of examples. JSF will be one. Right now we have 15 
system design and development, the end of the development of 
JSF, aircraft in construction. So we have teams of people that 
are learning, improving the processes to build that aircraft. 
We have signed for two low-rate production contracts for that 
aircraft.
    My choices are to build the SDD aircraft, come to a halt 
and test and design that production process and then start it 
back up. That guarantees me a loss of time and a loss of 
learning and an increased cost to the taxpayer. Or the risk 
issue that's come up many times today, do you take some 
appropriate level of risk and begin the process of fabrication 
and production at low rates and continue to gain maturity in 
the processes?
    I certainly can't disagree with the GAO comment that you'd 
love to have everything. But I believe the everything path will 
cost me more and so I have to take some measured and prudent 
risks, I believe, on the heels of developmental aircraft 
construction to begin to do low rate production, and then seek 
to go to rate production. I believe that in our rate production 
decisions we seek to have much more maturity, if not good 
maturity, in that production process control you've talked 
about.
    Senator Akaka. To both of you, to what degree has the 
current security environment and the wars in Iraq and 
Afghanistan contributed to what you call a sense of operational 
necessity that allows waiving of requirements established in 
recent legislation regarding these practices?
    Mr. Young. Can I comment on that?
    Ms. Schinasi. Yes, please.
    Mr. Young. I had a meeting yesterday that I think 
potentially answers your question, sir. The H-1 upgrade program 
to get new helicopters to the Marine Corps, known as the Y and 
the Z, the H-1Y and the H-1Z. The program manager came to me 
and there are pieces of the AH-1Y that are not ready for test. 
They are in operational test right now, and successful 
operational test would have paved the way for a decision this 
September to buy low-rate production Zs, and then again in 2009 
the issue before you is to buy low-rate production Zs.
    The Marine Corps has a gap and they need these aircraft. So 
they come to me and all the risk comes to me and they say--we 
didn't go--we cancelled operational tests, we're now not going 
to do operational tests until 2010, and still we seek to buy 
and deliver aircraft in 2011, hoping for success. I'm faced 
with the challenge of how do I come talk to you, when you're 
asking me to execute more discipline in the system and 
demonstrate that greater discipline. Yet the best way to do 
this would be stop. If I stop on the Y-Z--on the Z program 
right now, the Marine Corps will not get helicopters in 2011, 
they will be short of helicopters, the costs will 
unquestionably go up, but I could possibly deliver the program 
more confidently, for a known increase in cost. Or I'm faced 
with the alternative, to stay the course and take some 
reasonable measures to demand testing and operational 
assessments and developmental tests that will help build my and 
your confidence, with the idea that I possibly need to go ahead 
and buy the Z aircraft for the Marine Corps's operational need.
    I haven't made that decision yet, but that's a perfect 
example of the kind of decisions, where I'm trying to balance 
the risks and your request to me to execute the program with 
more stability and the warfighter's need today in the theater.
    Ms. Schinasi. I think the Under Secretary was correct 
earlier when he said every program has its own story and it's 
important to recognize the story in every program. But I also 
think it's important to step back and look at what is happening 
across the board. So the question I think that's important from 
the question that you just raised and the example that was just 
given is why are we in this position? Why are we in a place 
where we have to rush, where we have to push through, where all 
of a sudden it's urgent, urgent, urgent, because in many cases 
once we say it's urgent and we move forward, it takes us longer 
to get where we're going anyway.
    Mr. Young. Maybe could I offer another example, because 
here we have great alignment. Another example I dealt with this 
year is the Multi-User Objective System (MUOS). It's a 
replacement for the ultra-high frequency (UHF) satellite. I 
feel like the requirements and budgeting enterprise should have 
recognized the need for that satellite earlier and budgeted for 
it. Instead, we were late to need, and they came to the 
acquisition team and said: We need a replacement for the UHF 
satellites in 60 months. The Department historically had taken 
78 months to build every communications satellite.
    The program office accepted the challenge, said, we'll try 
to do everything we can to meet the 60-month schedule. They are 
going to deliver MUOS in 77 months. So they beat the average by 
1 month. Is this viewed as program office failure? In one sense 
it is, because they never should have agreed to do it in 60 
months.
    Are they the sole responsible party? Absolutely not. The 
programming and requirements community could have recognized 
this need, I think, as Ms. Schinasi said, if I could borrow her 
words, and budgeted for a program that has a reasonable 
probability of succeeding to meet that schedule and budget.
    Senator Akaka. Thank you very much, Mr. Chairman.
    Chairman Levin. Thank you, Senator Akaka.
    Senator McCaskill.
    Senator McCaskill. I have looked at the audits that were 
done by the Defense Contract Audit Agency concerning Lockheed 
cost estimating systems and also the report that was issued in 
November of last year by the DCMA that called Lockheed's 
systems ``deficient to the point where the government is not 
obtaining useful program performance data to manage risks.''
    There is a GAO audit also that was highly critical. This is 
not a new issue. Back in 1998, the president of Lockheed Martin 
said: ``Our current program and functional reviews are not 
capable of providing what we need.''
    I understand there was a meeting in February between the 
Lockheed officials about the cost estimating system problem, 
and obviously this is a big, big problem, because we're talking 
about the JSF. We're talking about almost $1 trillion, and 
we're basing payments on a system that all of our auditing 
agencies and management agencies are saying doesn't work.
    Back in 2005 you withheld 2 percent of your payments to 
Bell Helicopters under a circumstance, frankly, that sounds as 
egregious as this. Are we going to expect and are you planning 
on withholding payment from Lockheed because of the 
deficiencies in their EVMS?
    Mr. Young. Senator, you're obviously well-informed on this. 
One thing I want to distinguish here is to make clear, the 
report addresses the EVMS and not the billing system. So the 
government has valid invoices for the moneys that we have paid 
Lockheed Martin, and I've had this discussion with the CEO. We 
believe the money paid and the billings match. The translation 
by Lockheed Martin of invoicing and billing into an EVMS to 
assess their progress and their projection of future success on 
the program, there were flaws in that practice found in that 
report.
    We met with Lockheed, as you noted. Secretary Finley, the 
Deputy Under Secretary of Defense for AT&L, met with them, 
highlighted the report, and then he and the DCMA outlined a 
plan to address and remedy all these issues. There are 12 
milestones in that plan. The first milestone's been met. The 
other 11 are ahead of us.
    DCMA meets with Lockheed's staff every 2 weeks to address 
progress on this, and we will withhold $10 million for every 
milestone that is not met as we continue to progress, with the 
goal of remedying the Lockheed EVMS within a year.
    Senator McCaskill. So you're going to withhold $10 million 
every time they don't meet one of these. I do want to--that's 
good, and I would love to be kept apprised of that as to how 
much is withheld and what the milestones are and what is being 
reached, because clearly this has been a continuing problem.
    I think the thing as an auditor that concerned me most is 
in the audit they also noted their control environment and 
accounting at Lockheed was inadequate. Well, when an auditor 
cites a control environment the sirens and bells and whistles 
should go off. That means that there is an environment where 
bad, bad things could happen if the controls are not in place 
and if it's a matter of their accounting system.
    So I would specifically like that issue to be addressed if 
possible in a follow-up, as to how they are taking steps 
specifically based on the audit findings about their control 
and accounting.
    Mr. Young. We'll provide you more detail for the record or 
personally, or both, whichever you like.
    [The information referred to follows:]

    Lockheed Martin is making adequate progress against their 
Corrective Action Plan. Twelve withhold milestones have been 
identified. $10 million penalty represents 3 percent of monthly JSF 
billings which is in line with Bell withholds. All four withhold 
milestones have been met on time with none missed.

    Senator McCaskill. Both would be great. Thank you so much.
    Thank you, Mr. Chairman.
    Chairman Levin. Thank you so much, Senator McCaskill, and 
thanks for your energy and commitment in this area. It's 
absolutely invaluable to us.
    I want to pursue a matter that you made reference to 
earlier today, and that's this so-called Thunder Vision 
contract, which has come up many times now. But there's an 
Inspector General (IG) report that was issued in May which 
identified an additional seven contracts on which senior Air 
Force military officers were perceived to have used the powers 
of their position to award contracts to specific companies.
    I'm wondering, Secretary Young, whether or not you're aware 
of that IG report and, if so, what steps you've taken to 
provide accountability where you thought accountability was 
needed.
    Mr. Young. I'm aware of the IG report. It is working in the 
normal disciplinary process, first to the Air Force, and I need 
to see what actions they take. Many aspects of that report 
highlight an issue I've talked about around today, where I 
believe the report cites that the acquisition team members 
sought to have a competition and felt like they needed 
standards against which to compete. The report talks more about 
people outside the acquisition process seeking to exert undue 
influence on that process.
    Those are disciplinary matters that are not within my 
purview, but they exist. They exist in lots of different ways 
and manifest themselves with people who have authority becoming 
frustrated with an acquisition team who is explaining, we need 
to do this in a competitive manner, in an open manner, and 
consistent with the laws and regulations. We run into that 
challenge on a regular basis, Mr. Chairman.
    Chairman Levin. I think that it's clear to us the issue of 
accountability is critically important. This morning Senator 
McCaskill has highlighted it. It's been raised also in your 
testimony, I think, Ms. Schinasi. It's critically important. So 
even though this may not be precisely in your area of 
jurisdiction, would you let this committee know on this 
particular report that the IG has issued in May as to what the 
outcome was relative to accountability?
    Mr. Young. Yes, sir, I'd be happy to.
    [The information referred to follows:]

    The Air Force and Air Combat Command believes they responded 
aggressively to the second report issued on contracts awarded at Nellis 
Air Force Base. The Department of Defense (DOD) Inspector General (IG) 
Report on Air Force Air Combat Command Contracts recommended that the 
Assistant Secretary of the Air Force for Acquisition issue guidance to 
Air Force General Officers, military commanders, and senior executive 
servicemembers within the Air Force that reemphasizes the need to 
eliminate the appearance of conflicts of interest situations in Air 
Force contracting. On March 26, 2008, the Secretary of the Air Force 
and the Air Force Chief of Staff co-issued a memorandum reemphasizing 
to senior Air Force military and civilian personnel the need to 
eliminate the appearance of conflicts of interest situations and 
emphasizing ethical responsibilities while conducting procurements. 
Additional guidance was issued by the Assistant Secretary of the Air 
Force for Acquisition on April 2, 2008, and the Deputy Assistant 
Secretary (Contracting) on April 5, 2008, by memorandum. The Commander 
of Air Combat Command (ACC) distributed the March 26, 2008, memorandum 
to all commanders within ACC.
    As requested by the Commander of ACC, and at the direction of the 
Deputy Assistant Secretary for Contracting, an independent review team 
visited the Nellis Contracting Squadron to review contracts from fiscal 
year 2006-2008 to see if the practices occurring in the period of the 
DOD IG reports, 2003-2005, were ongoing. The independent review team 
concluded that internal controls were still weak.
    As a result of the audits and independent review, the Commander of 
ACC completed many actions and has actions planned for the near future 
to improve internal controls for contracting activities at Nellis Air 
Force Base and throughout ACC. The commander of the Nellis Contracting 
Squadron was relieved from command and has been replaced by an 
experienced and engaged commander who is committed to turning the 
organization around. Additional personnel improvements have been 
started for DOD civilians at the Nellis Contracting Squadron. The 
Nellis Contracting Squadron and all squadrons in ACC have completed 
mandatory training directed by ACC headquarters. Inspection checklists 
throughout ACC Contracting and the Air Force Contracting comprehensive 
checklist have been updated to include checks for the weaknesses 
identified in these reports. During the week of July 8, the Director of 
Installation and Mission Support for ACC, a brigadier general, along 
with a member of the Judge Advocate General's Corps and senior 
contracting officials, will visit Nellis to brief senior leaders of 
host units and tenants units, such as the Air Warfare Center and the 
Thunderbirds, on lessons learned from past contracting failures and 
their responsibilities in the future success of the contracting 
mission. As part of the visit, employees of the contracting squadron 
will receive additional training on ethics and competition requirements 
and reaffirmation of their responsibility to seek assistance when they 
feel pressured to take shortcuts around competition and ethics rules. 
Finally, the Air Force General Counsel is reviewing additional measures 
in broader ethics training.
    However, I think these statements by the Air Force indicate some of 
the fundamental cultural and disciplinary problems in the system. While 
disciplinary actions were implemented for contracting personnel, it is 
not clear to me that appropriate disciplinary measures have been 
applied to the individuals who were outside the acquisition process and 
took actions to improperly influence and pressurize the individuals 
responsible for acquisition and contracting.

    Chairman Levin. If there's no other questions, we will, 
with thanks to our panel, stand adjourned.
    [Questions for the record with answers supplied follow:]

                Questions Submitted by Senator Jack Reed

            REDUCING TECHNICAL RISK IN ACQUISITION PROGRAMS

    1. Senator Reed. Secretary Young, it is well understood that one of 
the problems facing many of our major acquisition programs is the high 
level of technical risk that is not rationalized with limited budgets 
and optimistic delivery schedules. I think that the Department of 
Defense's (DOD) science and technology (S&T) programs can play a bigger 
role in researching fundamental phenomenon and technology design, 
performance, and integration issues to reduce the costs and risk of 
major programs. What do you think is the role of relatively small 
investments in S&T in helping to reduce the large and growing costs of 
the DOD major acquisition programs?
    Mr. Young. Reducing costs of major acquisition programs has been 
one of my specific goals as the Under Secretary. In my previous 
position, as the Director of Defense Research and Engineering (DDR&E), 
I saw the specific role the S&T investment can have in helping to meet 
this goal and I have continued the integration of both the DDR&E and 
Systems Engineers in acquisition programs. In addition, we have 
directed the use of competitive prototyping both before and where 
appropriate after Milestone B. For those systems before Milestone B, 
the S&T community is responsible for the competitive prototyping 
efforts. We believe that by developing prototypes before locking down 
system design and development, we will be able to make tradeoffs 
between requirements, cost, and technological feasibility.
    Finally, we have expanded the application of technology maturity 
assessments for major acquisition programs. All of these things--
prototypes, demonstrations, and technology assessments--come from the 
S&T investments of the DOD should help to control costs by providing 
better information from which decisions can be made.


                          DEFENSE LABORATORIES

    2. Senator Reed. Secretary Young, our network of defense 
laboratories house equipment and expertise which can be better utilized 
by many accounts to help address the problems that are resulting in 
cost and schedule overruns in many acquisition programs. How 
specifically are you tapping into your defense laboratories to address 
acquisition problems?
    Mr. Young. For the most part, the laboratories provide technical 
expertise to evaluate feasibility. In the past few years, the DOD has 
substantially expanded its use of technical experts from DOD labs to 
support the acquisition process. The use of immature technologies is a 
major risk factor for cost and schedule over-runs in Defense 
acquisitions. To minimize the possibility of going forward into System 
Development and Demonstration (SDD) with immature technologies, DOD 
conducts technology readiness assessments for all acquisition programs 
as they approach the Milestone B decision point. Technical experts from 
the DOD laboratories are active participants on the review teams that 
analyze technology maturity to ensure only mature technologies enter 
the SDD phase. In addition, the Department employs defense support 
teams, which often comprise expert technical staff from DOD 
laboratories to assist specific acquisition programs with technical 
problems.

    3. Senator Reed. Secretary Young, what new authorities can this 
committee provide the laboratories to enhance their ability to support 
your efforts at reducing acquisition program problems?
    Mr. Young. The laboratories have sufficient authority within their 
expertise and resources to assist acquisition programs.

                         MANUFACTURING PROGRAMS

    4. Senator Reed. Secretary Young, the Department's Manufacturing 
Technology (MANTECH) programs play a key role in reducing the costs of 
weapons systems and creating innovation in the defense industrial base. 
However, these programs are often underfunded and do not have the 
impact that they possibly could. What role do you think the MANTECH 
program should play in helping to address acquisition issues?
    Mr. Young. The MANTECH program develops and matures key 
manufacturing processes to accelerate technology improvements in the 
acquisition and sustainment of DOD systems and components. In fiscal 
year 2008, the Department established a Defense-wide Manufacturing S&T 
program to focus on cross-cutting manufacturing processes. We are in 
our first year of execution of this program but I believe it will pay 
dividends soon. In addition, the military department's MANTECH program 
investments are critical to affordably equipping the warfighter. As 
such, the MANTECH programs are closely coordinated with military 
department's requirements for achieving affordability goals. The Navy 
MANTECH program is actively participating with the Virginia class 
submarine, CVN, and DDG-1000 programs to achieve shipbuilding 
affordability goals. The Army MANTECH program is developing 
manufacturing processes of critical technologies, such as Focal Plane 
Arrays, where MANTECH investments reduced item costs from $1.6 million 
to $60,000 per large format arrays to enable proliferation of new 
sensor capability on ground platforms. The Air Force MANTECH program 
worked with the F-22 program office to identify new materials and 
manufacturing processes for the F-22 canopy, resulting in an increase 
of canopy life of more than 500 percent with an estimated $450 million 
life cost avoidance for F-22.
    Finally, the MANTECH program, under the guidance of the Joint 
Defense Manufacturing Technology Panel (JDMTP), has worked to develop 
Manufacturing Readiness Levels (MRL), providing a communication 
framework for identifying and managing manufacturing risks through the 
development process.

                 RESOURCES FOR TECHNOLOGICAL MATURATION

    5. Senator Reed. Secretary Young, you have implemented a set of 
procedures to ensure that programs are to use mature technology if they 
are to pass Milestone B decisions. Technologies do not mature without 
resources. Has the Department developed any methodologies that would 
enable estimates of resource requirements and timing of investments in 
research and early stage technology development to ensure adequate 
technological maturation to support the reduction of cost and delivery 
time of major programs?
    Mr. Young. Currently, we do not have an estimate of the resource 
requirements needed in early technology development to ensure adequate 
technology maturation. We do believe, however, that prudent use of both 
Advanced Technology Development and Advanced Component Development and 
Prototype funds (Budget Activities 3 and 4 of major Force Programs 6) 
should give the Department better cost predictability for late-stage 
development activities that contribute to reduction of cost and 
delivery time of major programs. The current DOD-wide S&T budget 
request of $11.4 billion is the second highest request in history, in 
constant year dollars; embedded within this request are funds for a 
number of demonstrations and prototypes.
    Also, my policy for competitive prototyping is intended 
specifically to mature technology, inform requirements and better 
define costs prior to Milestone B. Competitive prototyping should 
effectively identify potential issues associated with immature 
technology and lack of understanding of the critical program 
development path. It is too soon to provide definitive data on how 
earlier prototyping will impact the cost and delivery time of major 
programs, but in general, for those systems before Milestone B, the S&T 
community is responsible for the technology-based competitive 
prototyping. This increased investment should reduce risk. We believe 
that by developing prototypes before locking down system design and 
development, we will be able to make tradeoffs between requirements, 
cost, and technological feasibility.

    6. Senator Reed. Secretary Young, do you have quantitative 
estimates of the S&T investments necessary to mature technologies to 
the point that we can reduce cost and time to deliver systems for any 
existing programs of record?
    Mr. Young. Currently, we don't have refined quantitative estimates 
of the S&T investment necessary to mature technologies to the point 
that can reduce cost and time to deliver systems. We do believe, 
however, that prudent use of both Advanced Technology Development and 
Advanced Component Prototype Development Prototype funds (Budget 
Activities 3 and 4 programs) should give the DOD better cost 
predictability. The current DOD-wide S&T budget request of $11.4 
billion is the second highest request in history, in constant year 
dollars. This investment highlights our belief in S&T as an enabler of 
cost control. In this area of maturing and prototyping technologies for 
weapon systems, it will not be easily possible to provide an annual 
dollar amount or percentage of the budget. What is required is that the 
Services and the DOD accept the requirement and demonstrate the will to 
invest larger amounts of research and development (R&D) funds in the 
early phases of a program. The rush to move immediately to the final 
stage of development with one bidder based on a paper proposal has 
proven to be a formula for risk, cost growth and schedule delays. The 
Joint Lightweight Tactical Vehicle (JLTV) program provides a great 
example. It is not likely that the JLTV program would have successfully 
executed based on selecting one paper proposal for aggressive 
development against unrealistic requirements. However, it was a 
struggle to get the Department to fund three prototype JLTVs.

                 RESOURCES FOR COMPETITIVE PROTOTYPING

    7. Senator Reed. Secretary Young, your initiative to expand efforts 
at competitive prototyping prior to major program initiation will 
naturally lead to increased resource requirements to support these 
activities. Do you expect these increased investments to be made by the 
Department in defense industry only, or will additional resources be 
provided to DOD labs and technical centers as well?
    Mr. Young. As noted in my testimony, my intent in establishing 
policy for competitive prototyping is to rectify problems associated 
with immature technology and lack of understanding of the critical 
program development path. Prototyping at any level--component, 
subsystem, or system--earlier in the milestone development process will 
improve the knowledge associated with estimating development and 
procurement cost. It is too soon to provide definitive data on how 
earlier prototyping will impact the resource level in the DOD labs and 
technical centers. But, in general, we expect increased attention to 
prototyping and competition in our late-stage technology demonstration 
programs to help reduce technical risk, validate designs and 
manufacturing processes, and refine requirements. The DOD needs to 
demonstrate the will to properly fund the initial technology maturation 
and prototyping efforts necessary to succeed in the final phases of 
weapon system development programs. Concurrently, these strategic DOD 
decisions will necessarily require lab and center Directors to address 
the need for more robust and diverse technical, system engineering and 
program management skills within the R&D community to support earlier 
development programs. Ultimately, a shift in a program's total funding 
to enable competitive prototyping through milestone B is expected to 
improve cost efficiencies across the acquisition life.

    8. Senator Reed. Secretary Young, has any estimate been made about 
the increased funding required to support this initiative?
    Mr. Young. No comprehensive estimate has been done. My view is that 
prototyping can and should be accomplished within available resources. 
The purpose is to achieve higher confidence in the technology and 
manufacturing readiness before we initiate major investment in the 
system development. In general, there are many cases where we can 
mature our knowledge, and sensibly avoid the kinds of cost growth we 
have seen that resulted from not prototyping.
    Frankly, the alternative of taking immature, unproven, and untested 
technology into the final phase of system design and development 
without prototyping has proven in several cases to be extremely costly 
for the DOD. I believe it is fair to suggest that only a fraction of 
the funds DOD has paid for SDD phase cost growth could have paid for 
multiple, robust, competitive prototypes.

                       INDUSTRIAL BASE STRATEGIES

    9. Senator Reed. Secretary Young, please describe the processes by 
which the Department assesses the adequacy of the government 
acquisition and industrial base to support current and planned future 
defense acquisitions.
    Mr. Young. The Department periodically conducts analyses/
assessments to identify and evaluate those industrial and technological 
capabilities needed to meet current and future defense requirements. It 
then uses the results of these analyses/assessments to make informed 
budget, technology investment, acquisition, and logistics decisions.
    DOD-wide industrial assessments evaluate and address changes in key 
system, subsystem, component, and/or material providers that supply 
many programs, and affect competition, innovation, and product 
availability.
    DOD components conduct their own assessments when: (1) there is an 
indication that industrial or technological capabilities associated 
with an industrial sector, subsector or commodity important to a single 
DOD component could be lost; or (2) it is necessary to provide 
industrial capabilities information to help make specific programmatic 
decisions. These ``programmatic'' assessments generally are conducted, 
reviewed, and acted upon internally within the DOD components. For 
example, as part of the program acquisition strategy, individual 
program offices conduct industrial assessments in accordance with the 
requirements of title 10, U.S.C., section 2440, as implemented in the 
Defense Acquisition Guidebook (Chapter 2.3. Systems Acquisition: 
Acquisition Strategy). These assessments address DOD investments needed 
to create or enhance required industrial capabilities; the risk of 
industry being unable to provide program design or manufacturing 
capabilities at planned cost and schedule; and issues associated with 
product technology obsolescence, replacement of limited-life items, 
regeneration options for unique manufacturing processes, and conversion 
to performance specifications at the subsystems, component, and spares 
levels.
    These periodic assessments are summarized in the Department's 
Annual Industrial Capabilities Report to Congress, most recently 
completed in March 2008.

    10. Senator Reed. Secretary Young, does this assessment lead to a 
single or a set of industrial base planning documents that the 
Department implements?
    Mr. Young. There is no single set of industrial base planning 
documents that the Department implements. However, the Department's 
Annual Industrial Capabilities Report to Congress (most recently 
completed in March 2008) summarizes for Congress, Department 
acquisition officials, industry, and other stakeholders: (1) new 
departmental industrial capabilities-associated guidance; (2) methods 
and analyses undertaken to identify and address concerns regarding 
technological and industrial capabilities of the national technology 
and industrial base; (3) industrial capabilities-related assessments 
conducted within the Department; and (4) programs designed to sustain 
specific essential technological and industrial capabilities and 
processes.
    Nevertheless, the Department's goal is to integrate and address 
industrial base issues within its existing budget, acquisition, and 
logistics processes to the maximum extent practicable. Written reports 
play a constructive role in identifying and evaluating integrated 
polices and actions, but at best are vehicles that reflect and document 
the analyses necessary to develop stronger policies, make informed 
decisions, and take effective actions. In many cases, these assessments 
cannot be successfully performed and recommendations implemented on a 
centralized basis. Industrial concerns affecting individual programs 
can best be properly and effectively integrated into budgets and 
acquisition decisions only if the responsible acquisition officers 
themselves are conscious of issues that affect their programs, and 
address them within program confines.

    11. Senator Reed. Secretary Young, what authorities, programs, and 
other tools does the Department have at its disposal to shape the 
industrial base to meet its needs?
    Mr. Young. The industrial strategy of the DOD is to rely on market 
forces to the maximum extent practicable to create, shape, and sustain 
those industrial and technological capabilities needed to provide for 
the Nation's defense. The Department will intervene in the marketplace 
only when absolutely necessary to create and/or sustain competition, 
innovation, and/or essential industrial capabilities.
    Having said that, the Department creates market forces--most 
frequently within defense-dominant market segments--through its budget, 
acquisition, and logistics processes. DOD research, development, 
acquisition, and logistics policies, analyses, and decisions guide and 
influence industry in four fundamental ways. First, DOD evaluations and 
assessments of industry segments or specific industry-related issues 
help identify future budgetary and programmatic issues and inform 
policy-making and requirements generation. Second, DOD defense system 
acquisition strategies and decisions shape the technological and 
programmatic focus of industry. Third, the Department incorporates 
industrial base-related policies into its acquisition regulations to 
protect national security, promote competition and innovation, and, in 
certain specific cases, preserve critical defense industrial and 
technological capabilities. Fourth, DOD decisions made on mergers and 
acquisitions involving defense firms directly shape the structure of 
the industry.
    When market forces are insufficient, the Department can use other 
tools to focus industry attention on critical technology development, 
accelerate technology insertion into manufacturing processes, create or 
expand critical production facilities, and direct production capacity 
towards meeting the most urgent warfighter needs. For example, the 
Defense Production Act (DPA) Title III Program strengthens the economic 
and technological competitiveness of the U.S. defense industrial base, 
accelerates the transition of technologies from R&D to affordable 
production and insertion into defense systems, and can reduce U.S. 
dependency on foreign sources of supply for critical materials and 
technologies. The MANTECH program develops and matures key 
manufacturing processes to accelerate technology improvements in the 
acquisition and sustainment of DOD systems and components. In fiscal 
year 2008, Congress added $24 million to the Fiscal Year 2008 Research, 
Development, Testing, and Evaluation (RDT&E) Defense-wide 
appropriations to establish an Industrial Base Innovation Fund (IBIF) 
to develop advanced manufacturing processes and technologies to support 
long-term and short-term needs of the Department. The IBIF is executed 
through the Defense Logistics Agency's MANTECH program.
    Another tool unavailable to the DOD is the Military Critical 
Technologies List (MCTL). As DDR&E, I successfully added funds to this 
program to enhance and update the MCTL process. I believe the MCTL 
determinations should be used for multiple purposes, including to guide 
decisions about critical elements of the U.S. industrial base.
    DOD has the ability to use the DPA, Title 3, to make investments in 
the preservation and creation of unique industrial capability required 
for manufacturing military systems. I believe DOD should significantly 
expand our utilization of, and funding for, the DPA program.
    Finally, the Department has the ability to establish, and has 
established, administratively-imposed (imposed by DOD policy, not 
statute) restrictions within the Defense Federal Acquisition Regulation 
Supplement (DFARS) precluding the use of foreign products for specific 
defense applications when necessary to ensure military readiness.

    12. Senator Reed. Secretary Young, how much do you invest in these 
industrial base planning and shaping activities?
    Mr. Young. Generally, the Department leverages its significant 
market clout through its budget, acquisition (research, development, 
production), and logistics processes to facilitate an industrial base 
that is reliable, cost-effective, and sufficient to meet strategic 
objectives. With respect to the ``interventionist'' programs noted 
earlier, in fiscal year 2008, the DPA Title III program appropriation 
was about $94.8 million and the MANTECH program appropriation was about 
$273.3 million.

    13. Senator Reed. Secretary Young, what new authorities do you feel 
are required by the Department to support efforts in this area?
    Mr. Young. The Department has sufficient authorities to identify, 
evaluate, create, and/or sustain industrial and technological 
capabilities important to defense.
                                 ______
                                 
             Questions Submitted by Senator Daniel K. Akaka

                 OPERATIONAL CAPABILITY DELIVERY DELAY

    14. Senator Akaka. Secretary Young and Ms. Schinasi, according to 
the Government Accountability Office (GAO) findings, the current 
portfolio of programs has experienced a 21-month delay in delivering 
initial operational capability to the warfighter, and a full 14 percent 
of these are more than 4 years late. These delays are unprecedented, 
and represent approximately a 33 percent increase over 2,000 portfolio 
levels. Two of the reasons you have identified as contributing 
significantly to these delays include both request for changes in 
system capability by the DOD and the failure of contractors to meet 
agreed upon timelines. Which of these two factors do you feel pose the 
biggest challenge to on-time program completion, and why?
    Mr. Young. I agree that we can and must do better delivering 
capability on-time and within budget. It is difficult to identify one 
dominant factor in schedule delays. I would list several factors which 
are generally present to varying degrees in every program delay--moving 
immature technology into final development stages, excessively 
optimistic industry proposals, lack of full funding or funding cuts in 
the DOD or congressional budget process, and changes in requirements 
during program execution.
    Thus, to improve program outcomes we must start programs right and 
align expectations among the key stakeholders. We have several such 
initiatives in place. I am instituting a Materiel Development Decision 
(MDD) as the formal entry point into the acquisition process. The MDD 
will assess potential materiel solutions and is mandatory for all 
programs. I am insisting that, with rare exceptions, we conduct a 
robust Technology Development phase that provides for two or more 
competing teams producing prototypes of the system and/or key system 
elements prior to, or through, Milestone B. Prototypes reduce technical 
risk, validate designs and cost estimates, evaluate manufacturing 
processes, and refine requirements. These steps will ensure that when a 
program is initiated at Milestone B it is positioned to develop a 
system or an increment of capability; complete full system integration 
(technology risk reduction having occurred during Technology 
Development); and transition to an affordable and executable 
manufacturing phase. Along with these initiatives, we need to stay 
disciplined in keeping to the requirements we agreed to at the start of 
the program and in holding everyone in the acquisition community 
accountable for doing so.
    We can improve program execution by early dialogue with our 
contractors. We have begun using the Program Startup Workshop soon 
after contract award to align the government and contractor teams' 
understanding of the contract and to ensure they have a shared 
understanding of contract requirements.
    While our industry partners need to improve their schedule 
performance, we in the Department can do our part by starting programs 
right and by working with our industry partners to ensure a shared 
understanding of their responsibilities.
    Ms. Schinasi. Requirements instability and failure to meet agreed 
upon timelines can contribute significantly to delays in delivering 
needed capabilities to the warfighter. Our work has consistently 
emphasized that DOD should require each proposed program to demonstrate 
that the established requirements are achievable within resource 
limitations--that is that the program's business case is executable. 
However, as our most recent Assessment of Selected Weapon Programs 
indicates, DOD continues to allow programs to progress through the 
acquisition process before key knowledge has been attained.\1\ These 
knowledge gaps are largely the result of a lack of disciplined systems 
engineering analysis. Early systems engineering provides knowledge that 
enables a developer to identify and resolve gaps before product 
development begins. Because the government often does not perform the 
proper upfront analysis to determine whether its needs can be met, 
significant contract cost increases can occur as the scope of the 
requirements change or become better understood by the government and 
the contractor. This lack of upfront knowledge can also affect the 
contractor's ability to meet agreed upon timeframes.
---------------------------------------------------------------------------
    \1\ GAO, Defense Acquisitions: Assessments of Selected Weapon 
Programs, GAO-08-467SP (Washington, DC: Mar. 31, 2008).

    15. Senator Akaka. Ms. Schinasi, unrealistic development and 
production timelines have been highlighted as one of the problems that 
plague defense programs right from the start, and lead to inevitable 
delays and cost overruns as the reality of the requirement being sought 
becomes fully clear. In some cases, however, contractors agree to 
timelines they subsequently are unable to meet. In cases involving the 
failure of contractors to meet what you have asserted are often overly 
optimistic timelines, to what extent do you believe that there is 
adequate documentation being kept regarding instances of contractor 
poor performance?
    Ms. Schinasi. Past performance information is critical to enhancing 
contractor accountability and it is essential the government has past 
performance systems in place to help ensure that contractor performance 
is reflected in the award of new contracts. With that said, it is 
questionable whether contracting officials are documenting and 
maintaining contractor performance information in a timely, complete, 
and consistent manner. The House Oversight and Government Reform 
Committee's Subcommittee on Government Management, Organization, and 
Procurement held a hearing in July 2007 in which we testified on issues 
related to the use of contractor past performance information.\2\ The 
hearing raised concerns regarding an apparent disconnect between actual 
contract performance, how performance reviews are calculated, and the 
weight given to past performance in the source selection process. In 
addition, a February 2008 DOD Inspector General report highlighted the 
lack of emphasis across the military Services in accurately and timely 
reporting of past performance and training for past performance 
assessment report preparation.\3\ The report stated that 82 percent of 
past performance assessment reports reviewed did not contain detailed, 
sufficient narratives to establish that ratings were credible and 
justifiable. At the request of the House Oversight and Government 
Reform Committee and the Subcommittee on Government Management, 
Organization, and Procurement, we are currently assessing how 
agencies--including DOD--collect contractor past performance 
information for use in source selection.
---------------------------------------------------------------------------
    \2\ GAO, Federal Contracting: Use of Contractor Performance 
Information, GAO-07-1111T (Washington, DC: Jul. 18, 2007).
    \3\ DOD Inspector General, Contractor Past Performance Information, 
D-2008-057 (Arlington, VA: Feb. 29, 2008).

    16. Senator Akaka. Ms. Schinasi, are contracting officers making 
the best use of available information when issuing contract awards?
    Ms. Schinasi. Although a seemingly simple concept, using past 
performance information in source selection can be complicated in 
practice. GAO bid protest decisions illustrate some of the complexities 
of using past performance information as a predictor of future 
contractor success. A key consideration is whether the performance 
evaluated can reasonably be considered predictive of the offeror's 
performance under the contract being considered for award. For example, 
a June 2008 congressional hearing regarding a $300 million contract the 
U.S. Army awarded to supply ammunition to Afghan security forces raised 
concerns about the nature and extent of past performance information 
that is currently available for contracting officers to use in source 
selection decisions. In this specific case, questions were raised 
regarding the contractor's qualifications and whether DOD exercised due 
diligence in considering all past performance information. A senior 
Army contracting official testified that certain information regarding 
the past performance of this particular contractor, such as several 
previous contracts terminated for cause, was not available to the 
contracting officer since the contracts fell below DOD's dollar 
threshold for collecting past performance information.

                        PROGRAM MANAGER TURNOVER

    17. Senator Akaka. Secretary Young, one of the main problems 
highlighted in the defense acquisition process is frequent turnover of 
program managers, as well as senior acquisition officials. I find it 
interesting that this finding should come to light now, despite the 
decades old practice of DOD rotating its personnel every few years. It 
would seem that for some reason, the impact of program manager turnover 
has been identified as more problematic with the current portfolio of 
weapons programs than in the past. Traditionally, an officer's career 
development was contingent upon seeing multiple assignments covering a 
variety of missions and leadership positions. However, continuous fresh 
faces in a defense acquisition program over the course of its life is a 
liability. Why do you think this finding is especially important today, 
and are there any initiatives within the Services to work with their 
respective personnel offices to come up with a potential solution of 
limiting assignment rotations for their project managers and 
acquisition officers?
    Mr. Young. I am aware of several reports that depict higher 
turnover in program manager assignments than is expected or acceptable. 
These reports are not accurate. The average program manager tenure for 
those who have served and left positions since 2000 is 37 months. 
Again, since 2000, program managers have served in their positions, on 
average, for 37 months. The average tenure for program managers 
departing in the last year was 40 months. Indeed, 23 percent of the 
program managers who completed their tours last year had served more 
than 48 months. However, our review of the current data shows that the 
average expected tenure of program managers today, across all Services, 
is 42 months, based on Program Manager Agreements, assignment plans, 
and program milestone points.
    I would highlight equally relevant concern is the frequent rotation 
of requirements officers. I have personally seen senior requirements 
officers rotate in cycles of 18 months or less. Now requirements 
officers or resource sponsors frequently seek to fundamentally change 
acquisition programs at substantial cost. Indeed, the new substantial 
changes in the DDX program are directly related to unexpected 
requirements changes after years of development and billions of 
expended tax dollars.
    I expect that major system program managers' tours will comply with 
statutory guidelines and current Department policy. Section 1734 of 
Title 10, U.S.C., generally requires the Program Manager and Deputy 
Program Manager of a major defense acquisition program to be assigned 
to their position until completion of the major milestone (e.g., system 
design and development) that occurs closest to four years in their 
position. DOD Instruction 5000.66 provides additional guidance and 
establishes the requirement for a written tenure agreement.
    In May 2007, an Under Secretary of Defese for Acquisition, 
Technology, and Logistics (USD(AT&L)) policy memorandum, ``Program 
Management Tenure and Accountability,'' emphasized the need for program 
managers to have sufficient tenure to achieve expected outcomes and to 
improve both systemic and personal accountability. Signed tenure 
agreements capture that expectation. There are waiver provisions in 
place, but the military departments are aggressive in limiting 
approvals of waiver requests. The Navy reports, for example, that 
nearly two-thirds of their program managers serve until the agreed upon 
tenure is completed.
    In response to section 853 of the National Defense Authorization 
Act (NDAA) for Fiscal Year 2007, we developed a comprehensive strategy 
for enhancing the role of DOD program managers in developing and 
carrying out defense acquisition programs. The strategy addressed a 
number of initiatives to improve program manager empowerment and 
accountability. One of these that we are working to implement is a 
financial incentive for key members of program offices. While the 
details of that incentive program are still being worked out, tenure 
will be one of the key requirements. Our intent is to structure the 
financial incentives in such a way as to encourage highly qualified 
people to compete for positions of increased responsibility and to 
serve long enough to apply their experience for the good of the 
program.
    We have long recognized the need to balance the need for individual 
career development with sufficient tenure to provide for stability and 
accountability. Department policy already calls for longer tour lengths 
for assignments to acquisition positions and our planned financial 
incentive program will further encourage people to stay in their 
positions longer. However, the Department also believes there is value 
in rotating experienced members of the acquisition corps to other 
programs so they transfer lessons learned across the acquisition 
community.
    This, too, is recognized in statute (10 U.S.C. 1734) which 
generally calls for the rotation of those serving in critical 
acquisition positions (both military and civilians) after 5 years.
    The military departments all recognize the need to balance program 
manager tenure with the career development needed to grow future 
acquisition leaders. They are using available flexibilities to tailor 
tenure appropriately based on the program and its point in the life 
cycle. For example, the Army staggers rotations to ensure continuity of 
program goals and responsibilities. At their Project and Product 
Managers level, they attempt to ensure all Program Managers in one 
office do not rotate out of their positions in the same year. In 
addition, civilians who serve as Deputy Program Executive Officers and 
Deputy Program Managers are often in their positions for five or more 
years, providing dedicated continuity of effort.
    We will continue to use assignment policies that look at 
individuals' career development and overall program manning to improve 
the acquisition workforce as a whole and still meet individual program 
objectives.

                     CONFIGURATION STEERING BOARDS

    18. Senator Akaka. Secretary Young, one of the initiatives you have 
described as fundamental to transformation of the acquisition process 
and its workforce is the establishment of Configuration Steering Boards 
(CSB). These boards have the responsibility to critically review any 
proposed changes to system requirements and ensure what few changes are 
allowed, are deemed critical. Was your decision to establish these CSBs 
a direct response to the GAO findings?
    Mr. Young. No. I formed the first CSB in 2002, for the Joint Strike 
Fighter (JSF), during my tenure as the Navy Acquisition Executive. That 
CSB was formed specifically to allow us to manage requirements for a 
joint program with international participation. There were many 
stakeholders and the CSB process proved to be a most effective and 
efficient way to address requirement changes. My experience with the 
successful JSF CSB led me to broaden its application to all ACAT I 
programs.

    19. Senator Akaka. Secretary Young, was the Navy CSB example you 
cited in your prepared testimony an already-established entity under a 
different name, or was it the first in this new initiative?
    Mr. Young. For the Extended Range Munition example I cited the CSB 
was newly established as a result of my July 2007 memorandum.

    20. Senator Akaka. Secretary Young, what is the current status of 
these CSBs within each of the military Services, and how are you going 
to ensure standardization among the Services, given the competition for 
resources that exists within the building?
    Mr. Young. The military departments, along with the Defense 
Information Systems Agency and the Missile Defense Agency, have 
implemented my July 2007 memorandum directing establishment of CSBs for 
all current and future ACAT I programs. Most are adapting the concept 
to or in conjunction with existing forums. To date, the Navy has 
conducted 14 CSBs, the Air Force has conducted 4, and the Army, 1. The 
Services have an active schedule of CSB reviews in the upcoming months.
    Implementation is the responsibility of each component; however, my 
memorandum provided specific guidance on the focus of CSB reviews. We 
are finding that Service implementation is evolving as they gain 
experience with the CSB construct. CSBs review proposed changes to 
requirements that have a cost and schedule impact with a predilection 
to reject them, or defer them to future blocks/increments. Proposed 
changes are to include an assessment of the impacts to performance and 
schedule, a plan to mitigate them, and a funding source. Changes are to 
be coordinated with Joint Staff and military department requirements 
owners before they are considered by the CSB.
    CSBs include senior AT&L and Joint Staff members. I have assigned a 
senior member of my staff as the primary point of contact for CSBs. He 
is tasked to ensure that CSBs meet my expectations and to ensure 
standardization in Component implementation.

                  CONTRACTING OFFICER REPRESENTATIVES

    21. Senator Akaka. Secretary Young, according to an October 2007 
report on Army Acquisition and Program Management in Expeditionary 
Operations, it was found that Contracting Officer Representatives (COR) 
were assigned as an additional duty, requiring no experience. It also 
found that these individuals received little to no training in the 
performance of their contracting-related duties. To what extent is COR 
duty assigned as an additional duty for military personnel, and has 
there been any effort to establish standardized training for this 
mission, given the multi-billion dollar value of some contracts 
overseen?
    Mr. Young. The duties of a COR are generally additional duties for 
military personnel. The Department is working to ensure that trained 
CORs are available for performing surveillance of the Department's 
service contracts. COR management, training, and funding for training 
are being addressed at a strategic level through the development of COR 
certification requirements dictating training and experience levels 
prior to assuming their responsibilities. The Department is working to 
ensure that properly trained and ready CORs are assigned prior to 
contract award. Further, to validate the training and experience leads 
to improved oversight, CORs will be rated based on their duty 
performance on their assigned contracts. The Department has developed a 
preliminary list of common COR functions and responsibilities and an 
initial framework for a DOD standard for COR certification. The 
proposed standard consists of three categories, each based on the 
nature of the work to be performed, size and complexity of the 
requirement, and contract type. Each COR category will map to minimum 
training requirements to ensure personnel performing designated COR 
functions can perform effectively. The proposed standard will allow 
sufficient flexibility for additional training beyond the minimum, if 
deemed appropriate. On December 6, 2006, the Department issued a policy 
memorandum titled ``Designation of Contracting Officer's 
Representatives on Contracts for Services in Support of Department of 
Defense Requirements.'' It states the role of CORs and emphasizes the 
need to have a properly trained COR designated for contracts for 
services in support of the Department's requirements before contract 
performance begins. On July 14, 2008, the Department issued another 
policy memorandum titled ``Management of Contractor Performance under 
Time & Material and Labor Hour Contracts for Services.'' It discusses 
the COR's role in assisting with the technical monitoring or 
administration of these types of contracts, and it requires the 
contracting officer (CO) to designate a properly trained COR in writing 
before contract award. Presently, the Department is staffing another 
policy memorandum that would require the COR to be identified early in 
the acquisition cycle and included in pre-award activities when 
appropriate. Further, it would require the CO to provide the requiring 
activity a list of responsibilities for the COR, and it would oblige 
the requiring activity to provide to the contracting activity with 
nominations for CORs as part of the purchase request package. The 
package must contain: qualifications of the individual; affirmation 
that the COR will be afforded necessary resources (time, supplies, and 
equipment) to perform the designated functions; and affirmation that 
the performance of the designated functions will be addressed as part 
of the COR's duty performance evaluation and that the COR must be 
trained prior to contract award. Finally, the Defense Acquisition 
University has completed development of, and has conducted a pilot test 
of, a new COR training course. This training is in addition to the 
component level training made available to CORs.
                                 ______
                                 
               Questions Submitted by Senator John McCain

                             REVOLVING DOOR

    22. Senator McCain. Secretary Young, the GAO recently issued a 
report called, ``Defense Contracting, Post-Government Employment of 
Former DOD Officials Needs Greater Transparency.'' The DOD fully agreed 
with the findings in the report and concurred with its recommendations. 
Based on recent statutory changes directed by this committee, do you 
think that DOD policies need to be changed or new policies need to be 
put in place (additional reporting requirements, for example) to guard 
against violations of the government's post-employment rules?
    Mr. Young. Section 813 of the John Warner NDAA for Fiscal Year 2007 
directed the establishment of a ``Panel on Contracting Integrity.'' 
Subcommittee #9, Contractor Employee Conflicts of Interest, was formed 
to review, evaluate and provide recommendations in response to recent 
reports by the GAO concerned with defense contracting and conflicts of 
interest. The scope of this subcommittee was expanded to include the 
recently issued report that you referenced, GAO Report 08-485, 
``Defense Contracting, Post Government Employment of Former DOD 
Officials Need Greater Transparency.'' The subcommittee reported to the 
Panel in May that they have begun to review the recommendations, will 
do further research, and will discuss relative value and feasibility of 
the recommendations. The subcommittee is expected to report its 
findings and recommendations at the next Panel meeting in August.
    Personally, I think new policies are not necessary. Indeed, the 
recent legislation in this area is likely to discourage military and 
civilian personnel from entering the defense acquisition field at 
senior levels. Already, the excessive restrictions on stock ownership 
have led many capable private sector experts to reject opportunities to 
work for the DOD. At this point, we have totally destroyed the exchange 
of personnel between industry and the DOD--an exchange which some 
previous USD(AT&L)'s feel was critical to successful program management 
and execution.

    23. Senator McCain. Secretary Young, one recommendation made by the 
GAO was that within a set number of days after contract award, defense 
contractors who are awarded a contract should disclose to the 
contracting officer the names of employees who are certain former DOD 
officials, such as civilian senior executives, high-level military 
officers, or acquisition officials, who worked on the response to the 
solicitation and certify that these employees are in compliance with 
the applicable post-government employment restrictions. Do you agree 
with that recommendation?
    Mr. Young. The DOD generally agrees with the recommendations of the 
GAO. Further evaluation will be conducted by Subcommittee #9, 
Contractor Employee Conflicts of Interest, of the Section 813 Panel on 
Contracting Integrity. In addition, DFARS Case 2008-D007 has been 
initiated to implement section 847 of the NDAA for Fiscal Year 2008 
that requires certain DOD employees and former DOD employees to obtain 
a written legal opinion from a DOD ethics official as to the 
applicability of post employment restrictions prior to accepting 
compensation from a DOD contractor.
    These people have served and returned to the private sector. As 
long as these individuals honor the existing post employment 
restrictions, they should be able to work freely in the private sector. 
The standards and restrictions in the DOD far exceed the restrictions 
and standards applied to other Federal Agencies or Congress.

                         ACQUISITION OVERSIGHT

    24. Senator McCain. Secretary Young and Ms. Schinasi, in 1986, the 
Commission on Defense Management (commonly referred to as the Packard 
Commission) identified structural problems within the DOD, especially 
the absence of a responsible senior official, to oversee the 
acquisition process. The Packard Commission recommended a commercial 
model adopted by successful industrial companies that centralized the 
decisionmaking process and decentralized the execution of defense 
procurement. Since then, do structural problems continue to persist 
within the Department that limit oversight of the acquisition process? 
If so, in what area(s) are they most apparent?
    Mr. Young. The Packard Commission recommended creation of the 
position I currently occupy and comparable positions within the 
military departments to oversee the acquisition process. The changes 
that have been made create clear lines of authority and accountability 
for the operation of our acquisition system. In addition, service 
acquisition executives (SAEs) can and do appoint subordinate officials 
at the appropriate grade to review programs at the lowest level of 
investment. Consequently, I believe we have the necessary management 
infrastructure to ensure comprehensive acquisition process oversight.
    The largest structural problem in the DOD is the lack of control 
and authority provided to program managers in the face of being held 
accountable. Individuals who are not accountable for acquisition 
program execution are allowed to annually change the program budget and 
requirements. The DOD has an adequate oversight structure and process. 
Responsible acquisition officials do not have adequate control and 
authority within the broader Pentagon budgeting and requirements 
structures.
    Ms. Schinasi. Yes. One of the primary structural problems within 
the department that continues to limit oversight of the acquisition 
process is that the three major processes that support acquisitions are 
fragmented and service-centric. To plan, execute, and fund its weapon 
system acquisition programs, DOD relies on three principal 
decisionmaking systems: the Joint Capabilities Integration and 
Development System (JCIDS), which is used to assess gaps in warfighting 
capabilities and recommend solutions to resolve those gaps; the Defense 
Acquisition System, which is used to manage the development and 
procurement of weapon systems and other equipment; and the Planning, 
Programming, Budgeting, and Execution process, which is used to 
allocate resources. In March 2007, we reported that although the 
military Services fight together on the battlefield as a joint force, 
they do not identify warfighting needs and make weapon system 
investment decisions together in an integrated manner.\4\ Although, DOD 
has taken steps to identify warfighting needs through a joint 
requirements process, its service-centric structure and fragmented 
decisionmaking processes do not allow for the same portfolio management 
approach used by successful commercial companies to make investment 
decisions that benefit the organization as a whole. DOD largely 
continues to define warfighting needs and make investment decisions on 
a service-by-service basis, an approach that has contributed to 
duplication in programs and equipment that does not operate effectively 
together. Further, while DOD's JCIDS process provides a framework for 
reviewing and validating the initial requirements, it does not focus on 
the cost and feasibility of acquiring the capabilities to be developed 
and fielded. Instead, these considerations are addressed through 
separate budgeting and acquisition processes. Moreover, although DOD 
policy provides for a series of early reviews--focused on the concept 
refinement and technology development phases of proposed weapon system 
programs--in prior work we found that the reviews are often skipped or 
are not fully implemented.\5\
---------------------------------------------------------------------------
    \4\ GAO, Best Practices: An Integrated Portfolio Management 
Approach to Weapon System? Investments Could Improve DOD's Acquisition 
Outcomes, GAO-07-388 (Washington, DC: Mar. 30, 2007).
    \5\ GAO, Defense Acquisitions: Major Weapon Systems Continue to 
Experience Cost and Schedule Problems under DOD's Revised Policy, GAO-
06-368 (Washington, DC: Apr. 13, 2006).

    25. Senator McCain. Secretary Young and Ms. Schinasi, what issues 
have evolved in the acquisition process not addressed by the Packard 
Commission?
    Mr. Young. As required by section 804 of the John Warner NDAA for 
Fiscal Year 2007, Public Law 109-364, the Department is submitting the 
semi-annual Defense Acquisition Transformation Report which takes into 
account the recommendations made by the following:

          1. The ``Defense Acquisition Performance Assessment (DAPA) 
        Report'' of January 2006
          2. The Defense Science Board 2005 Summer Study: 
        ``Transformation: A Progress Assessment Volume I'' of February 
        2006
          3. The Center for Strategic and International Studies' Phase 
        2 Report, ``Beyond Goldwater-Nichols: U.S. Government and 
        Defense Reform for a New Strategic Era,'' of July 2005
          4. The 2006 Quadrennial Defense Review, issued February 6, 
        2006

    These four studies were commissioned by different authorities and 
intended to serve different purposes within the DOD. However, the 
recommendations from these studies are focused on transforming the 
entire spectrum of the Defense Acquisition System. Our semi-annual 
reporting focuses on three of these studies: the DAPA Report, the 
Defense Science Board Study and the CSIS ``Beyond Goldwater-Nichols'' 
Report. The studies contain a total of 55 major recommendations to 
improve the Defense Acquisition System. Recommendations from the 
studies and DOD Transformation Priorities, along with the AT&L ``Source 
Document,'' provide a strategic blueprint for the future. The source 
document is intended to provide a framework that gives the Defense 
Acquisition System a shared purpose, while shaping our way of being, 
thinking, and working. It is intended to be the basis by which 
individual goals are set, planning is done, decisions are made, and 
actions are taken.
    The report, frequently referred to as the 804 report, highlights 
the progress we are making towards these recommendations as well as 
towards other initiatives supporting AT&L goals and priorities.
    Ms. Schinasi. We believe that the lack of accountability remains 
one of the major impediments in the acquisition process. DOD has found 
it difficult to apply the controls or assign the accountability 
necessary for successful outcomes. There are no consequences for 
actions that run counter to the intent of DOD acquisition policies, in 
part, because officials responsible for approving programs are no 
longer in their positions by the time the consequences of their actions 
become evident. In addition, it is difficult to assign accountability 
to individual program managers because they are often handed programs 
that are unrealistic from the start. Accountability must extend not 
just to those involved in the product development process, but also to 
those involved in the underlying budgeting and requirements processes 
that define problems and find solutions. First, the budgeting process 
requires that funding for a program is put on the table 2 to 3 years in 
advance--this creates pressure to proceed with the program regardless 
of its technological maturity. Next, the requirements process tends to 
settle on ultimate performance, which puts pressure on programs to 
reach for exotic technology. Finally, it is easier to say ``yes'' than 
``no'' to Service and warfighter demands for new requirements and new 
programs. Removing these incentives from the system and instilling 
discipline and accountability will be necessary to get lasting change 
and improved outcomes.

                         MULTI-YEAR PROCUREMENT

    26. Senator McCain. Secretary Young and Ms. Schinasi, the statutory 
criteria for determining whether a major system can be procured under a 
multi-year contract require that a candidate program have associate 
with it realistic cost estimates, substantial savings, and stability in 
terms of funding, requirements, and design. However, the stability and 
saving associated with some programs for which the DOD has sought 
multi-year contracting authority have been questionable. This has 
raised concerns about DOD's management and controls for justifying 
multi-year candidates. When it examined this, the GAO specifically 
cited the Under Secretary of Defense for Acquisition as providing 
sufficient guidance and direction in this regard. In order to improve 
the ability of the Services to enter into multi-year contracts in a 
responsible manner when buying weapons, this committee passed important 
legislation last year that provided guidance to the Services on which 
programs are suitable candidates for multi-year contracting authority. 
Do you believe that the multi-year statute is well understood by the 
SAEs?
    Mr. Young. I believe the SAEs understand the requirements of the 
multi-year statute. To save the taxpayer money and deliver more 
capability to the warfighter, the DOD should be allowed to 
significantly expand the use of multi-year contracts. Additional 
restrictions and criteria on the use of this authority are detrimental 
to efficient program management and are generally resulting in less use 
of multi-year contracts and higher costs to the taxpayer.
    Ms. Schinasi. While we found no evidence that the multi-year 
statute was not understood by the SAEs, our recent review identified 
significant deficiencies in the Department's guidance and 
implementation of multi-year contracting.\6\ Our February 2008 report 
discussed the need to improve DOD's review process to adequately 
capture important information and events, document decisions, and help 
ensure that consistent and reliable determinations are made regarding 
multi-year criteria. We also observed turnover at every level of the 
multi-year justification process--from program offices, through higher 
headquarters, and on to primary action offices in the Office of the 
Secretary of Defense (OSD) which we believe has contributed to 
``knowledge gaps,'' historical recordkeeping deficiencies, and 
differences in interpretation and application of multi-year decision 
criteria. In addition, DOD's supplemental guidance does not adequately 
operationalize the criteria laid out by the multi-year statute by 
amplifying terms such as ``reasonable,'' ``substantial,'' and 
``stable'' and quantifying where possible to provide more objectivity 
and rigor to the multi-year review process. Guidance for the most part 
restates the statutory criteria and establishes formats for submitting 
multi-year procurement budget justification materials, but does not 
provide much elucidation for interpreting and applying the criteria and 
establishing internal evidence standards for demonstrating criteria are 
met. From our review of justification packages and our discussions with 
DOD officials responsible for generating and reviewing multi-year 
justification packages, we determined that reviewers interpret and 
apply criteria differently and that the methods and data used to 
compute contract costs and savings and provide evidence to document 
program stability vary in quality and sophistication. The new guidance 
provided by this committee in the NDAA for Fiscal Year 2008 should 
improve consistency in the multi-year review process and result in the 
Services submitting only those candidates for approval with adequate 
savings potential.
---------------------------------------------------------------------------
    \6\ GAO, Defense Acquisitions: DOD's Practices and Processes for 
Multi-year Procurement Should Be Improved, GAO-08-298 (Washington, DC: 
Feb. 7, 2008).

    27. Senator McCain. Secretary Young and Ms. Schinasi, have you done 
anything to help ensure the Services' compliance with it?
    Mr. Young. The plan to pursue a multi-year procurement strategy for 
a Major Defense Acquisition Program is addressed in its acquisition 
strategy, which is approved by the Under Secretary of Defense for 
Acquisition, Technology, and Logistics on ACAT ID programs. My staff 
participates in budget hearings hosted by the Under Secretary of 
Defense (Comptroller/Chief Financial Officer) to advise on budget 
requests with multi-year justifications.
    Ms. Schinasi. In our February 2008 report, we made four 
recommendations designed to improve the outcomes of DOD's multi-year 
justification reviews and military Service compliance with the 
statutory guidance and to provide lessons learned for future multi-year 
procurements. We recommended that DOD: (1) improve and expand guidance 
provided to military Services to better define multi-year decision 
criteria for major weapon systems and to facilitate more consistent, 
objective, and knowledge-based evaluations of these multi-year 
candidates; (2) establish a process for third party validation of the 
costs and savings data submitted for candidate programs to Congress for 
approval; (3) implement a central database for maintaining historical 
records and for effectively monitoring and tracking major weapon system 
multi-year procurements, to include documenting the specific decisions 
made by stakeholders and their rationales for decisions; and (4) 
conduct after-action assessments of multi-year contracts to provide 
lessons learned for informing and improving future multi-year 
candidates and to ensure DOD is earning a sufficient return on its 
investments in multi-year contracts. DOD generally concurred with these 
recommendations and--in keeping with our quality standards--we will 
follow up periodically with DOD to evaluate its plans for implementing 
our recommendations and any improvements that result from these 
efforts.

    28. Senator McCain. Secretary Young and Ms. Schinasi, what more, if 
anything, have you done to help ensure that the process by which multi-
year candidates are prepared and reviewed is made more disciplined and 
supported by adequate empirical data?
    Mr. Young. As a result of the GAO audit on this subject, the 
Director of Defense Procurement, Acquisition Policy, and Strategic 
Sourcing tasked the military departments to perform a review of their 
multi-year contracts to determine whether the projected savings were 
realized; what impact adjustments related to economic price adjustment 
clauses had on the actual savings; and what changes, if any, are 
required in their use of multi-year contracts. We expect the results of 
this review will help inform more realistic support for budget requests 
that propose multi-year procurements.
    To be clear, when the DOD has firm requirements, the Services 
should be allowed and encouraged to use multi-year contracts at even 
modest levels of savings in order to provide funding and production 
stability.
    Ms. Schinasi. During our review of multi-year procurement, we noted 
the general paucity of records for tracking multi-year candidates, 
documenting decisions, and assessing contract performance. In 
performing our work, we helped officials identify data sources for 
compiling information required to maintain more complete and 
disciplined records. We also made three recommendations designed to 
improve the empirical data available to make decisions and the validity 
of DOD's cost and savings estimates. First, we recommended that DOD 
maintain a central database for collecting historical data and tracking 
multi-year performance. The department is beginning to implement this 
recommendation. A June 20, 2008, memo from the Director of Defense 
Procurement, Acquisition Policy, and Strategic Sourcing tasked each of 
the Services to review multi-year contracts and start gathering data in 
a prescribed format, to include such data as contract price, projected 
savings, profit rates, and adjustments. We also recommended that 
independent third party validations of cost and savings estimates from 
candidate programs would improve the fidelity and completeness in data 
used to justify multi-year contracts. The Department partially 
concurred with our recommendation, stating that such validations are 
done on some programs and that it would consider whether the benefits 
of requiring validation on all programs would warrant the delays and 
costs of validation. Our review found that third party validations are 
rarely done, and we continue to believe that third party reviews would 
be cost-effective and result in more accurate and comprehensive cost 
and savings information critical to congressional and DOD 
decisionmaking on multi-year candidates. Lastly, we recommended DOD 
conduct after-action assessments of multi-year contracts. These 
assessments should provide lessons learned for informing and improving 
future multi-year candidates and empirical data to gauge whether DOD is 
earning sufficient returns on its multi-year contract investments. In 
their initial response to our draft report, DOD partially concurred 
with this recommendation, noting that such assessments may have value 
in some cases, but questioned its worth in all instances. DOD later 
revised its response, indicating that it fully concurred with the 
recommendation and intends to require the Services to complete after-
action assessments.

                                EARMARKS

    29. Senator McCain. Secretary Young and Ms. Schinasi, recently, the 
DOD Inspector General (IG) reviewed the Fiscal Year 2007 Appropriations 
Act Conference Report to, among other things, determine the overall 
impact of earmarks on advancing the primary mission and goals of DOD. 
The DOD IG determined that 70 earmarks totaling over $6.4 billion did 
not fully support the mission and goals of DOD. Please describe how 
congressional earmarks harm a sound acquisition process and deter the 
DOD from buying weapon systems that meet the requirements of the joint 
warfighter.
    Mr. Young. Defense acquisition is a complex process that involves a 
constant reevaluation of priorities, taking into account availability 
of resources. The DOD uses the Planning, Programming, Budgeting, and 
Execution (PPBE) process to establish priorities and allocate 
resources. Within the process, departmental objectives are established 
based on desired capabilities and national military strategy. Limited 
resources are allocated based on these objectives, and programs are 
developed within these parameters according to the needs of the DOD and 
the joint warfighter. The acquisition process results in a DOD program 
to acquire specific equipment, in specific quantities, to address 
specific defense requirements. Earmarks have the effect of diverting 
valuable resources from projects and programs considered necessary by 
the Department, reallocating these limited funds to projects or 
programs that may be considered of lesser or no value to the DOD's 
mission. In addition, it is of utmost importance that the acquisition 
process allow for complete competition in the awarding of contracts for 
R&D, procurement and sustainment of military systems. Earmarks 
generally contain specific language that does not allow for free, open 
competition, which must exist in order to ensure the most efficient use 
of funds.
    Further, the process of trying to get value from these directed 
projects consumes enormous effort on the part of DOD program managers 
and contract officers. Finally, the process is detrimental to the 
culture and values of the acquisition team. After carefully considering 
the needs of the warfighters and working through a complicated and 
difficult DOD budget process to find a project, program managers watch 
an alternate system that earmarks funds for lower priority, non-
competitive projects.
    Ms. Schinasi. Our current work on earmarks does not provide 
insights into how congressional directives impact the requirements of 
the joint warfighter. However, in prior work, we interviewed DOD 
officials who had responsibility for budgeting, financial management, 
and legislative issues regarding congressional directives impact on 
budget and program execution.\7\ DOD officials from the six components 
we interviewed provided a range of views on this topic. Among the views 
we heard were the following:
---------------------------------------------------------------------------
    \7\ GAO, Congressional Directives: Selected Agencies' Processes for 
Responding to Funding Instructions, GAO-08-209 (Washington, DC: Jan. 
31, 2008).

         DOD officials indicated that congressional directives 
        can sometimes place restrictions on the ability to retire some 
        programs and invest in others. These restrictions have an 
        effect on the budget because they require the components to 
        support an activity that was not in their budget.
         Congressional directives could tend to displace 
        ``core'' programs that have been requested through the formal 
        budget submission.
         There has always been a feeling that the billions of 
        dollars of congressional directives must come from somewhere, 
        but it is not possible to determine whether any specific 
        directive resulted in reducing funding for another program.
         Congressional directives are viewed as tasks to be 
        implemented and are opportunities to enhance their mission 
        requirements through additional funding in areas that would not 
        have been priority areas due to budget constraints.

    30. Senator McCain. Secretary Young and Ms. Schinasi, in about as 
aggressive of remarks as I have seen from a Service Chief regarding 
earmarks, here is what the Commandant of the U.S. Coast Guard, Admiral 
Thad Allen, said in a interview to Defense Daily:

          ``[I am] happy with the fiscal year 2009 budget, but, the 
        Coast Guard needs all of the fiscal year 2009 funds. There is 
        no fat, no largess in the fiscal year 2009 request. We need 
        every single penny of it. And to the extent we can have it not 
        diluted by earmarks and get exactly what we ask for. If you 
        don't get the full President's request then you are increasing 
        your risk position for what you are able to do for the country. 
        Or if you have to absorb other commitments in terms of earmarks 
        that divert money from what you are doing. Then you are also 
        increasing risk in what you can do for the country.''

    Do you agree with Admiral Allen's statement? Please explain.
    Mr. Young. I agree with Admiral Allen's statement. Earmarks greatly 
impede the ability of any program or agency to fully and cost-
effectively carry out its duties, and in no agency is this more of a 
problem than in the DOD. Earmarks that reward companies in specific 
Congressional districts as recipients increase risk due to decreased 
competition. Competition for contracts provides incentives for thorough 
research, testing, and cost-reduction, steps which are necessary to 
avoid the problems of cost growth and schedule delays that already 
challenge the Department. Another central problem is that most 
earmarked projects are not included in the original DOD budget, and 
therefore do not usually address specific agency needs. DOD's formal, 
cyclical process called PPBE is used to determine optimal resource 
allocation for the Department. Within PPBE, four overlapping phases 
work to establish organizational priorities, develop new programs and 
enhance existing ones to satisfy these priorities, find cost-effective 
solutions, and forward these funding recommendations as part of the 
President's budget to Congress. Throughout this process, important 
programs and activities often get sacrificed due to sheer lack of 
funds. An organization that must constantly realign resources among its 
own prioritized programs cannot afford to devote time, money, and 
personnel to non-essential activities. For every earmark in a defense 
appropriations bill, there is a Departmental priority that will not 
achieve completion.
    Ms. Schinasi. We have not analyzed the Coast Guard's budget and the 
potential effect of congressional earmarks on the agency's risk 
position. However, officials in other agencies have raised similar 
concerns. For example, in December 2006, we found that the Department 
of Energy (DOE) diverted funds to accommodate earmark.\8\ DOE officials 
indicated that the rising number of biomass earmarks shifted funds away 
from R&D programs causing them to change priorities and terminate some 
cost shared programs.
---------------------------------------------------------------------------
    \8\ GAO, Department of Energy Key Challenges Remain for Developing 
and Deploying Advanced Energy Technologies to Meet Future Needs, GAO-
07-106 (Washington, DC: Dec. 20, 2006).

     ANALYSIS OF ALTERNATIVES AND OPERATIONAL REQUIREMENTS DOCUMENT

    31. Senator McCain. Secretary Young and Ms. Schinasi, during the 
109th Congress, this committee passed legislation that was enacted into 
law which requires that, before the DOD acquires a major defense 
system, among other things, the Department has completed an Analysis of 
Alternatives (AOA), the Vice Chairman of the Joint Chiefs of Staff has 
completed an Operational Requirements Document (ORD)--now called a 
Capabilities Decision Document (CDD)--and the program is affordable 
given the total resources available during the period covered by the 6-
year defense budget in the year the certification is made. What effect 
has this legislation had to improve cost-, scheduling- and performance-
outcomes and better align the requirements, acquisition, and budget 
spheres in a way that will help the Pentagon make more informed, 
powerful investment decisions on weapons programs?
    Mr. Young. Congress has instituted a number of legislative changes 
that are useful in this respect, but there is still considerable work 
to be done by the acquisition community. Many of these changes have 
been in place only a short time, and significant changes will take time 
to be visible across the entire acquisition portfolio.
    Ms. Schinasi. Although we have not done any work directly assessing 
the effect of this legislation on cost, schedule, and performance 
outcomes, we believe that the requirements it establishes have the 
potential to drive more discipline into the early phases of the 
acquisition process. If implemented properly by DOD, we believe that 
the legislative requirements could ultimately result in the attainment 
of higher levels of knowledge about requirements, technologies, costs, 
and schedules before DOD commits to a new development program--a best 
practice that much of our work over the past decade has emphasized. At 
the same time, DOD must also move towards a joint, portfolio management 
approach to weapon system acquisitions--with functionally aligned 
entities that have the requisite responsibility, authority, and control 
over resources--in order to effectively prioritize requirements, make 
informed trade-offs, and achieve a balanced mix of weapon systems that 
are affordable, feasible, and provide the best military value to the 
warfighter.

                   LEASING OF MAJOR WEAPONS PROGRAMS

    32. Senator McCain. Secretary Young and Ms. Schinasi, in the 109th 
Congress, this committee passed legislation that was enacted into law 
which requires that, before acquiring combat vehicles, aircraft, or 
vessels under a lease, the Secretary of Defense certify to Congress 
that leasing these systems is more cost-effective than buying them. 
This legislation was meant to reverse the tendency for the Services 
toward leasing of weapon systems by directing the Department to treat 
leases the same way as a purchase and to ensure a more rigorous, 
disciplined process supported by adequate empirical data for preparing 
and reviewing candidate programs for leases. In your view, has this 
legislation had its desired effect and improved acquisition processes, 
thereby injecting proper oversight to costs and pricing, among other 
things, and ensuring that monstrosities like the Boeing tanker lease do 
not occur again?
    Mr. Young. There have been no major lease proposals subject to the 
provisions of the statute since it was enacted in January 6, 2006.
    Ms. Schinasi. We have not evaluated the effects of the recent 
legislation on DOD's use of equipment leases. However, the legislation 
addressed some of the problems and concerns we previously raised about 
leasing by providing direction to treat leases the same way as 
purchases and to use a more rigorous, disciplined approval process. In 
addition, while we have not taken a position on the overall policy of 
leasing versus purchasing defense equipment, we believe an analysis of 
the costs and benefits should be done on a case-by-case basis, and 
should consider issues in addition to cost, such as the nature of the 
equipment, the criticality of the need, readiness impacts, and 
industrial base issues. Also, to make informed judgments on resource 
allocation, decisionmakers need accurate comparisons of the relative 
long-term effects of acquisition decisions. Before the recent 
legislation was enacted, we noted that leases could obscure those 
comparisons. The military Service was not required to set aside funds 
for the full term of the lease (as it would for a purchase). In 
addition, the lease would likely be paid through the operation and 
maintenance budget and would not have to compete for procurement 
funding with other defense priorities. The recent legislation directs 
that a lease-purchase shall be treated as an acquisition, subject to 
all applicable statutory and regulatory requirements for defense weapon 
systems, and cannot use operation and maintenance funds.

       INAPPROPRIATE LOBBYING BY THE SERVICES FOR WEAPON SYSTEMS

    33. Senator McCain. Secretary Young, against the backdrop of wholly 
inappropriate communications between the Air Force and the Boeing 
Company that facilitated the folly that we now know as the Boeing 
tanker scandal, at the request of this committee, the DOD IG has opened 
an investigation to examine apparently improper communications between 
Air Force officials and Boeing on the C-17 program, in a manner that 
induced the company into putting up millions of its shareholders' 
dollars to keep the production line for spare parts associated with 
that program open. As you of course appreciate, doing so was contrary 
to the administration's commitment to the program of record and could 
compromise other Department-wide acquisition priorities. What are your 
thoughts about the appropriateness of the Air Force's role in 
influencing earmarks then, in the Boeing tanker scandal, and now, in 
lobbying for nearly $4 billion in C-17 aircraft?
    Mr. Young. I am not aware of any such communications, but I do 
discourage such actions. It would be entirely inappropriate to have any 
such communications with a contractor, other than via formal 
contracting actions.

    34. Senator McCain. Secretary Young, as the DOD's top acquisition 
executive and number three official, is this type of Service lobbying 
helpful as you determine priorities across all the Services?
    Mr. Young. I am not aware of any such lobbying efforts, and I do 
not condone efforts to undermine full support for the President's 
budget.

    35. Senator McCain. Secretary Young, what can be done to end this 
practice of blatant and aggressive Service lobbying for huge weapons 
systems, the purchase of which may compromise defense-wide procurement 
priorities?
    Mr. Young. I am not aware of any such lobbying efforts, and I do 
not condone efforts to undermine full support for the President's 
budget.

    36. Senator McCain. Secretary Young, what policies can be 
instituted within DOD to ensure that even into future administrations, 
the same problem will not occur?
    Mr. Young. I do not condone efforts to undermine support of the 
President's budget. As I have stated, I am not aware of the lobbying 
efforts you have described and believe it is inappropriate to comment 
on policy changes while the DOD IG has an ongoing investigation.

      USE OF OTHER TRANSACTION AUTHORITY FOR MAJOR WEAPONS SYSTEMS

    37. Senator McCain. Secretary Young and Ms. Schinasi, in the 109th 
Congress, this committee investigated the Future Combat System (FCS) 
Other Transaction Authority (OTA) and determined that FCS OTA 
negotiated by Boeing and the Army lacked many of the standard legal 
protections that accompany major DOD acquisitions. This committee 
passed legislation that was enacted into law which restricts the DOD 
from buying large weapons systems under a prototype contract which does 
not provide the government with a number of significant protections, 
including cost and pricing data, Truth in Negotiations Act, and 
Procurement Integrity Act protections, among other things. Did this 
legislation significantly improve the Department's oversight and stop 
the growing practice by certain Services to extend OTA to production 
contracts, as was the case with the FCS?
    Mr. Young. The Department implemented a rigorous review and 
approval process to implement section 823 of the NDAA for Fiscal Year 
2006. It includes the requirement for me, as the Under Secretary of 
Defense for Acquisition, Technology, and Logistics, to approve the use 
of Other Transaction Authority for a prototype project that is expected 
to cost the DOD in excess of $100,000,000. This process has ensured 
that the Other Transaction Authority is used only for prototype 
projects.
    Ms. Schinasi. We have not looked at the DOD-wide effect of the 
legislation passed by the committee as described in the Senate report 
accompanying the NDAA for Fiscal Year 2006. That legislation included 
two specific provisions that added to previous legislation on 
contracting approaches; specifically:

          (1) Prohibition of ``other transactions'' in excess of $100 
        million and ensuring that the Procurement Integrity Act (41 
        U.S.C. 423) applies to all such transactions; and
          (2) Requirement for a specific authorization for the purchase 
        of major weapon systems under procedures established for the 
        procurement of commercial items. We have, however, reported in 
        2007 that the Army converted its ``other transaction 
        agreement'' (OTA) with the Lead Systems Integrator (LSI) for 
        the Future Combat System (FCS) program--the Boeing Company--to 
        a Federal Acquisition Regulation (FAR) based contract.\9\ A 
        FAR-based contract provides significant oversight mechanisms 
        for the government customer that are not required under an OTA. 
        These items were included in the FAR contract for FCS SDD as 
        definitized in 2006.
---------------------------------------------------------------------------
    \9\ GAO, Defense Acquisitions: Role of Lead System Integrator on 
Future Combat Systems Program Poses Oversight Challenges. GAO-07-380 
(Washington, DC: Jun. 6, 2007).

                     CHANGES TO ACQUISITION REFORM

    38. Senator McCain. Secretary Young and Ms. Schinasi, what specific 
changes do you recommend in the area of acquisition reform, to ensure 
that we can get the right equipment first and the best equipment at the 
best price for the taxpayer?
    Mr. Young. I have taken a number of actions to implement my vision 
for Acquisition, Technology, and Logistics. My approach is focused into 
four strategic thrust areas, each of which has a guiding principle, 
desired outcomes, and specific initiatives with metrics or steps 
against which we can measure progress. These four strategic thrust 
areas are:

         Define Effective and Affordable Tools for the Joint 
        Warfighter
         Responsibly Spend Every Single Tax Dollar
         Take Care of Our People
         DOD Transformation Priorities

    In identifying both the problems we face, and the solutions we are 
seeking, I am committed to transparency throughout the acquisition 
process. It is my belief that we need to be clear, concise, and open 
with regard to what the DOD is seeking, and the work it is completing.
    As I mentioned in my testimony, it is our responsibility as 
stewards of tax dollars to ensure complete openness, fairness, and 
objectivity in the acquisition process. I intend that we will be 
accountable to ensure the success of these initiatives.
    I have charged the acquisition team to create an inspired, high-
performing organization where:

         We expect each person must make a difference;
         We seek out new ideas and new ways of doing business;
         We constantly question requirements and how we meet them;
         We recognize that we are part of a larger neighborhood of 
        stakeholders interested in successful outcomes at reasonable 
        costs.

    My testimony highlighted specific initiatives that capture these 
philosophies and are fundamental to transforming the acquisition 
process and workforce. They are:
(1) Program Manager Empowerment and Accountability
    Program managers play a critical role in developing and fielding 
weapon systems. I have put in place a comprehensive strategy to address 
improving the performance of program managers.
(2) Configuration Steering Boards
    I have directed the military departments to establish CSBs. My 
intent is to provide the program manager a forum for socializing 
changes that improve affordability and executability. Boards will be in 
place for every current and future ACAT I program and will review all 
proposed requirement changes, and any proposed significant technical 
configuration changes which potentially could result in cost and 
schedule changes. Boards are empowered to reject any changes, and are 
expected to only approve those where the change is deemed critical, 
funds are identified, and schedule impacts are truly mitigated.
(4) Prototyping and Competition
    I have issued policy requiring competitive, technically mature 
prototyping. My intent is to rectify problems of inadequate technology 
maturity and lack of understanding of the critical program development 
path. Prototyping employed at any level--component, subsystem, system--
provides the best value to the taxpayer.
(5) AT&L Notes
    I am writing weekly notes to the acquisition workforce. These notes 
share lessons learned and provide leadership guidance on expected 
procedures, processes and behaviors within the acquisition workforce. 
These notes provide a powerful training tool directly from me.
    Ms. Schinasi. The first step toward improving acquisition outcomes 
is implementing a new DOD-wide investment strategy for weapons systems. 
We have reported that DOD should develop an overarching strategy and 
decisionmaking processes that prioritize programs based on a balanced 
match between customer needs and available department resources--that 
is the dollars, technologies, time, and people needed to achieve these 
capabilities.\10\ We also recommended that capabilities not designated 
as a priority should be set out separately as desirable but not funded 
unless resources were both available and sustainable. This means that 
the decisionmakers responsible for weapon system requirements, funding, 
and acquisition execution must establish an investment strategy in 
concert. Once DOD has prioritized capabilities, it should work 
vigorously to make sure each new program is executable before the 
acquisition begins. More specifically, this means assuring requirements 
for specific weapon systems are clearly defined and achievable given 
available resources, and that all alternatives have been considered. 
DOD should also require all new programs have manageable development 
cycles, realistic cost estimates, and have planned and programmed full 
funding for the entire development cycle. Finally, DOD should pursue an 
evolutionary path toward meeting user needs rather than attempting to 
satisfy all needs in a single step. One way to do this is to limit the 
time available for weapon system development. Constraining development 
cycles would make it easier to more accurately estimate costs, and as a 
result, predict the future funding needs and effectively allocate 
resources. Program managers could also be kept for the entire 
development cycle. It would also force programs to conduct more 
detailed systems engineering analyses, lend itself to fully funding 
programs to completion, and thereby increase the likelihood that their 
requirements can be met within established timeframes and available 
resources.
---------------------------------------------------------------------------
    \10\ GAO, Best Practices: An Integrated Portfolio Management 
Approach to Weapon System Investments Could Improve DOD's Acquisition 
Outcomes, GAO-07-388 (Washington, DC: Mar. 30, 2007); and Best 
Practices: Better Matching of Needs and Resources Will Lend to Better 
Weapon System Outcomes, GAO-01-288 (Washington, DC: Mar. 8, 2001).

                         FIXED-PRICE CONTRACTS

    39. Senator McCain. Secretary Young and Ms. Schinasi, in the 109th 
Congress, this committee passed legislation that was enacted into law 
which requires that DOD gives a preference to fixed-price contracts for 
major developmental defense programs. Fixed-price contracts shift the 
risk to the contractor and incentivizes the contractor to increase the 
reliability of the system components. GAO determined that cost-type 
contracts cost the taxpayer $80 billion in cost overruns over the past 
decade. What has been the practical effect of this legislation in 
helping the military Services to not continue the practice to over-
promise capabilities and under-estimate costs of developing and buying 
weapon systems?
    Mr. Young. Section 818 of the John Warner NDAA for Fiscal Year 2007 
requires the Milestone Decision Authority (MDA) to select the contract 
type for a development program at the time that Milestone B is approved 
and to make a written determination if the MDA authorizes the use of a 
cost type contract. The required determination has been made for each 
program for which a cost type contract has been authorized since the 
enactment of this requirement. In each case, the facts have justified 
the use of a cost type contract because there have been uncertainties 
involved in contract performance that did not permit costs to be 
estimated with sufficient accuracy to permit use of a fixed price 
contract, and the circumstances justified proceeding with Milestone B 
approval before the program risk could be reduced.
    Ms. Schinasi. We have not assessed the practical impact of this 
legislation on DOD's choice of contract types for major defense 
acquisition programs. DOD awards cost reimbursement type contracts for 
the development of major weapon systems because of the risk and 
uncertainty involved with its programs. Because the government often 
does not perform the necessary systems engineering analysis before a 
contract is signed to determine whether a match exists between 
requirements and available resources, significant contract cost 
increases can occur as the scope of the requirements change or become 
better understood by the government and contractor. The legislation 
addressed this issue by stating that DOD's decisions to use cost-
reimbursable contracts for weapon system development cannot be driven 
by its failure to meet other statutory requirements designed to put 
programs on solid footing at their start. In other words, DOD can not 
use contract type to manage risks that could be avoided through better 
management of its acquisition system. Examples of these requirements 
include certifying that: the technology in the program has been 
demonstrated in a relevant environment; the program demonstrates a high 
likelihood of accomplishing its intended mission; the program is 
affordable when considering the per unit cost and the total acquisition 
cost in the context of the total resources available during the period 
covered by the Future Years Defense Program (FYDP) submitted during the 
fiscal year in which the certification is made; and the DOD has 
completed an AOA with respect to the program. As a result, the 
legislation has the potential to improve the way DOD does business 
because it ties contracting strategy to the development of sound 
executable business cases.

                       REALISTIC BUDGET ESTIMATES

    40. Senator McCain. Secretary Young and Ms. Schinasi, there is a 
lot of pressure on the military Services to gain funding for a weapons 
program. According to GAO, to gain funding, often a program manager 
will drastically under-estimate the cost of a program. Then once in the 
FYDP, the true costs begin to emerge. What causes a program manager to 
go to these extremes and how can DOD avoid that in the future?
    Mr. Young. I fundamentally disagree with the implication that our 
program managers intentionally or deliberately underestimate costs. 
Rather, underestimating results from a lack understanding of what is 
needed to satisfy warfighter requirements, exercise requirements, a 
lack of technology maturity, weakness in software development and what 
is needed to fully integrate and test the system, all combined with 
schedules and budgets that are too optimistic. Frankly, in many cases, 
the program manager tells the enterprise what a program will cost and 
then the defense enterprise budgets significantly less money and asks 
the program manager to deliver the full result on schedule. There are 
entirely too many programmer and comptroller decisions to underfund a 
program. A classic example is the DDX program, where initial budget, 
provided DDX procurement costs at levels about 20 percent greater than 
DDG-51s in order to buy a destroyer with twice the displacement tonnage 
and significantly more technology.
    Thus, to improve program outcomes we must ``start programs right.'' 
I have instituted a Materiel Development Decision (MDD) as the formal 
entry point into the acquisition process. The MDD will assess potential 
materiel solutions and is mandatory for all programs. I am insisting 
that, with rare exceptions, we conduct robust a Technology Development 
phase that provides for two or more competing teams producing 
prototypes of the system and/or key system elements prior to, or 
through, Milestone B. Prototypes reduce technical risk, validate 
designs and cost estimates, evaluate manufacturing processes, and 
refine requirements. These steps will ensure that with program 
initiation at Milestone B the program is positioned to develop a system 
or an increment of capability; complete full system integration 
(technology risk reduction having occurred during Technology 
Development), and develop an affordable and executable manufacturing 
process. The improvement in program definition resulting from 
``starting programs right'' will result in more realistic cost 
estimates.
    I am also holding the acquisition team, including program managers, 
accountable for program performance. For program managers, there is a 
renewed emphasis on tenure agreements so that program managers will 
remain with their programs longer. Signed Program Management Agreements 
(PMAs) establish a ``contract'' between a program manager and the 
enterprise setting expectations for cost, schedule, and performance 
against the Acquisition Program Baseline. The PMA must be 
reaccomplished if conditions change. Overarching CSBs review 
requirements changes and technical configuration changes that have the 
potential to increase costs or delay schedules.
    This combination of better definition at the start of the program 
and holding the acquisition team accountable will provide for more 
realistic cost estimates and improve program outcomes.
    Ms. Schinasi. Inaccurate cost estimates are often the result of 
limited knowledge and optimistic assumptions about requirements and 
technologies. The acquisition environment encourages launching programs 
that embody more technical unknowns and less knowledge about the 
performance and production risks they entail. In the absence of 
knowledge, cost estimators must rely heavily on assumptions about 
system requirements, technology, and design maturity as well as the 
time and funding needed. In addition, a new weapon system is encouraged 
to possess performance features that significantly distinguish it from 
other systems and promises the best capability. A new program will not 
be approved unless its costs fall within forecasts of available funds 
and, therefore, look affordable. Because cost and schedule estimates 
are comparatively soft at the time, successfully competing for funds 
encourages the program's estimates to be squeezed into the funds 
available. This practice often leads to programs being initiated 
without adequate funding. Further, as programs progress and costs 
increase, DOD often makes unplanned and inefficient funding 
adjustments, such as moving money between programs, deferring work and 
associated costs into the future, or reducing procurement quantities. 
Ultimately, such reactive practices obscure true program costs and 
contribute to the instability of many programs and poor acquisition 
outcomes.
    In a recently issued report we made recommendations that we believe 
would help DOD avoid these cost estimating and funding problems in the 
future.\11\ Specifically we recommended that the Secretary of Defense 
take the following actions:
---------------------------------------------------------------------------
    \11\ GAO, Defense Acquisitions: A Knowledge-Based Funding Approach 
Could Improve Major Weapon System Program Outcomes, GAO-08-619 
(Washington, DC:Jul. 2, 2008).

         Develop and implement a strategy to bring the 
        department's current portfolio into balance by aligning the 
        number of programs and the cost and schedule of those programs 
        with available resources. In developing and implementing a 
        strategy, the department should determine ways to prioritize 
        needs and identify whether the budget and the FYDP should be 
        increased to more accurately reflect the actual costs of 
        current programs or whether the portfolio of current programs 
        should be reduced and lower-priority programs terminated to 
        match available resources.
         Require that all new programs have manageable 
        development cycles, realistic cost estimates, and have planned 
        and programmed full funding for the entire development cycle.
         Require all cost estimates submitted for funding a 
        program at milestone decisions to be reported as a range of 
        likely costs and reflect the associated levels of risk and 
        uncertainty. At Milestone A, require estimates that allow for a 
        wide range of likely costs. At Milestone B, require estimates 
        that, based on knowledge gained, are more precise.

                          PASS-THROUGH CHARGES

    41. Senator McCain. Secretary Young and Ms. Schinasi, in the 109th 
Congress, this committee passed legislation that was enacted into law 
which requires that DOD prescribe regulations prohibiting excessive 
pass-through fees on defense contracts and subcontracts. I understand 
that DOD is requiring a contract clause in all eligible contracts, 
which allows it to recoup contractor payments that contracting officers 
determine to be excessive. Has this worked?
    Mr. Young. To implement section 852 of the NDAA of Fiscal Year 
2007, on April 26, 2007, we published an interim rule changing the 
DFARS. However, this first interim rule resulted in significant public 
comment in response to the rule. Consequently, we made significant 
changes to the first interim rule, and we issued a second revised 
interim rule on May 13, 2008. As a result, there has not been adequate 
time since the issuance of the second interim rule to assess the impact 
of this legislation.
    Ms. Schinasi. At this point, it is too early to determine the 
effectiveness of DOD's efforts to prohibit excessive pass-through 
charges. In May 2008, DOD issued a second interim rule that includes a 
solicitation provision and a contract clause requiring offerors and 
contractors to identify the percentage of work that will be 
subcontracted and, when subcontract costs will exceed 70 percent of the 
total cost, to provide information on indirect costs and profit and 
value added with regard to the subcontract work. While this provision 
and the clause are currently in place, we have not examined their 
effectiveness. In addition, DOD has yet to develop implementing 
guidance for contracting officers that addresses the rule or 
recommendations from our January 2008 report, which include taking 
contract risk into account when assessing value added.\12\ Further, 
while the regulation allows contracting officers to recoup charges that 
they determine to be excessive, it does not specify the roles of the 
Defense Contract Audit Agency (DCAA) and the Defense Contract 
Management Agency (DCMA)--organizations that play a key role in 
assessing cost information. Officials from both of these agencies 
indicated that they would play a role in implementing this regulation 
and in assisting contracting officers in determining whether costs are 
excessive, but have not fully considered the extent or the resources 
needed to do so. DOD procurement policy officials have told us that, in 
accordance with the recommendations in our January 2008 report, they 
will develop implementing guidance and emphasize that contracting 
officers need to include contract risk in conducting their contractor 
value added assessments, document the results, and obtain assistance 
from DCAA and DCMA as appropriate.
---------------------------------------------------------------------------
    \12\ GAO, Defense Contracting: Contract Risk in a Key Factor in 
Assessing Excessive Pass-Through Charges, GAO-08-269 (Washington, DC: 
Jan. 25, 2008).

    42. Senator McCain. Secretary Young and Ms. Schinasi, I understand 
that the DOD is also requiring detailed information from contractors on 
their value-added when subcontracting costs reach 70 percent or more of 
total contract cost. However, the GAO has reported that the DOD rule on 
this issue needs improvement and specifically, more guidance to ensure 
effective implementation and consistent application of cost and pricing 
tools to mitigate excessive costs. What is DOD doing to address this 
critical issue to provide greater insight into DOD's supply chain and 
costs--information companies say they use to mitigate costs?
    Mr. Young. As a result of numerous public and government comments 
received, we revised the initial interim rule on Excessive Pass-Through 
Charges that we had added to the DFARS on April 26, 2007. We issued the 
revised DFARS interim rule on May 13, 2008. Once the final DFARS rule 
is in place, the Department intends to issue extensive guidance in our 
Procedures Guidance and Instructions (PGI) to ensure a clear 
understanding of the new DFARS rule on Excessive Pass-Through Charges.
    Ms. Schinasi. Historically, DOD has lacked insight into its supply 
chain and subcontractor costs, raising questions about the value added 
when multiple layers of contractors perform the work. DOD contracting 
officials generally apply tools in Federal and DOD acquisition 
regulations to assess contractor value added. However, as we stated in 
our January 2008 report, the extent to which these tools are applied 
depends on the contract risk--that is, whether the contract was 
competed and whether the type of contract required the government to 
pay a fixed-price or costs incurred by the contractor. Under DOD's 
interim rule, prime contractors are required to inform a contracting 
officer of the value added that they are providing when subcontract 
costs exceed 70 percent of the total contract value. While the rule may 
enhance insight into contractor value added under these circumstances, 
it alone will not address DOD's challenges in obtaining insight into 
its supply chain and costs. Successfully identifying and preventing 
excessive pass-through charges requires DOD to obtain insight into 
their supply chain and incorporate contract risk into the assessment of 
contractor value added.

                        AWARD AND INCENTIVE FEES

    43. Senator McCain. Secretary Young and Ms. Schinasi, in the 109th 
Congress, this committee passed legislation that was enacted into law 
which ensures award and incentive fees in military contracts reward 
only outstanding performance by linking them to excellent acquisition 
outcomes and are used appropriately as an incentive for excellent 
performance. This legislation limits taxpayers' exposure in defense 
contracts. The GAO reported that the DOD's use of neither award nor 
incentive fees was effective in helping the Department achieve the 
outcomes it desired. Has the statute and following DOD regulations 
improved this situation and reversed what the GAO referred to DOD's use 
of award and incentive fees as a waste of taxpayers' dollars?
    Mr. Young. The Department initially revised award fee policies in 
response to the GAO report in a memorandum signed out by the Under 
Secretary of Defense (AT&L) on March 29, 2006. Also, in response to 
section 814 of the John Warner NDAA for Fiscal Year 2007, two 
additional memoranda, signed by the Director, Defense Procurement and 
Acquisition Policy (DPAP) on April 24, 2007, were issued focusing on 
both award fee and incentive fee contracts and effective for all 
solicitations issued on August 1, 2007, and thereafter. Since most 
contracts based on this latest policy have only recently been awarded, 
it is too early to gauge effectiveness. Nonetheless, I remain strongly 
committed to ensuring the Department's use of award and incentive fee 
contracts is properly incentivizing contractor performance.
    Ms. Schinasi. DOD has taken actions to strengthen the link between 
award and incentive fees and desired program outcomes, which could 
increase the accountability of DOD programs for fees paid and of 
contractors for results achieved. DOD is collecting data that could be 
used to evaluate the effectiveness of DOD's actions, but we have not 
yet conducted any follow up analysis. In response to congressional 
actions and GAO recommendations, the Director, DPAP issued a memo in 
April 2007 that required each military department and defense agency to 
collect information on the amount of award fees and performance 
incentives available and paid as well as the contractor's cost and 
schedule performance for all contracts with a value of greater than $50 
million.\13\ This information is to be reported to the Director, DPAP, 
and used by the military Services and defense agencies to ensure that 
the fees paid are commensurate with performance. The policy stated that 
this data collection was supposed to occur semi-annually starting with 
the 6 month period ending June 30, 2007.
---------------------------------------------------------------------------
    \13\ GAO, Defense Acquisitions: DOD Has Paid Billions in Award and 
Incentive Fees Regardless of Acquisition Outcomes, GAO-06-66 
(Washington, DC: Dec. 19, 2005).

                          RESISTANCE TO CHANGE

    44. Senator McCain. Secretary Young, the problems of cost growth 
and delays in getting new weapons into warfighters' hands seem to be 
persistent despite the efforts of DOD and Congress to fix them. We have 
given the Department more money and that has not worked; DOD has 
changed acquisition policies to reflect best practices and that has not 
worked; commissions and panels have been chartered; and yet nothing 
changes. Why are these issues so immune to change?
    Mr. Young. I think things can and have changed. But those changes 
will take some time to be visible in the macro level cost performance 
of the entire acquisition portfolio. I focus a tremendous amount of 
attention on ensuring we have things ``right'' before we start a major 
program. Congress has instituted a number of certifications that are 
useful in this respect, but those have been in place less than 3 years 
and therefore applied to roughly 10 percent of the Major Defense 
Acquisition Program (MDAP) portfolio.
    I require each MDAP to have a CSB to review all proposed changes to 
a program with the intent to ensure requirement ``creep'' is minimized, 
cost growth is understood and addressed proactively, and trade-offs are 
considered at senior levels to preserve cost and schedule objectives. 
These trade-offs are expected to include reducing capability if 
necessary. However, committing to always reduce content or requirements 
in each and every program that experiences cost or schedule growth 
doesn't consider the strategic or performance impacts that are 
essential to the warfighter and national security. We have to be smart 
and balanced in our approach and manage program-by-program, while 
considering impacts across the DOD enterprise.
    I also seek to ensure we have the right kinds of contractual 
mechanisms to incentivize industry to control costs, and avoid 
rewarding poor cost performance with unreasonable profit margins. I 
want industry to clearly understand the difference between good and 
poor performance.
    We also have to realize that some cost increases in programs are a 
result of valid reasons. Some cost increases in programs are due to 
choices to increase quantities or content for legitimate reasons. We 
need to recognize that program estimates are subject to a variety of 
factors that are impossible to control in the long run. Assumptions 
about labor rates, productivity and materials costs are some factors 
that can significantly affect an estimate. We try to base our estimates 
on the best available data at the time, but usually cost estimates are 
developed many years before a system is actually produced. In addition 
to the program office estimate, I ensure that an independent cost 
estimate is also done prior to program initiation.
    Some cost and schedule growth should be avoidable with good 
management and oversight and it is those issues that I attempt to 
address with the policies that I have put forth and am enforcing.
    Finally, it is important to note that many, many programs are 
successfully executed. The media and congressional attention is focused 
on the much smaller set of programs which do indeed have cost growth 
and delays that we must take action to avoid.

    45. Senator McCain. Secretary Young, what makes your efforts to 
address them different than all those efforts in the past?
    Mr. Young. My efforts are different than historical efforts because 
I am personally enforcing policies that:

         1. Ensure tenure agreements and program management agreements 
        exist to improve accountability.
         2. Ensure CSBs are used to review and approve or reject 
        requirement changes that may increase costs or schedules.
         3. Ensure that Defense Support Teams are used to accurately 
        assess technical risks and resolve technical and management 
        challenges.
         4. Ensure competitive prototyping is used to reduce cost and 
        schedule risk during development.
         5. Ensure technology readiness assessments are performed and 
        that no technology moves forward before it is ready to do so.
         6. Ensure that the independent cost estimates are fully 
        considered during any MDAP's milestone review and that 
        realistic cost estimates and schedule projections are adopted.
         7. Ensure that programs consider cutting content prior to 
        realizing cost or schedule growth and impacting other 
        acquisition programs.

    It will take time to show the impact of my commitment to enforce 
these policies, but I believe that lasting change starts with good 
common-sense policies that are measurable, enforceable, and widely 
accepted as good policy. I believe my policies are embraced as good 
ideas by the acquisition community and Congress. My actions will be 
consistent with these policies, and I believe that future leaders will 
be held accountable for their decisions according to these policies.

    46. Senator McCain. Secretary Young, during your career, you have 
seen things from the industry perspective, congressional perspective, 
military Service perspective, and now the Department's perspective. 
What needs to change to get the incentives for each of those groups 
aligned to get better outcomes on individual programs?
    Mr. Young. I agree that alignment among stakeholders in the domains 
you mention, as well as with resource and requirements stakeholders, is 
necessary for better outcomes on individual programs. Gaining that 
alignment for each program is one of the key challenges of my current 
position. My approach is continuous involvement of all domains as 
programs are conceived, developed, tested, fielded and sustained. One 
of the domains may be leading the definition of the program at a 
particular stage, as does the requirements domain early in program 
definition; but even in that example industry, resources and 
acquisition domains must be represented. When a program transitions to 
the development and production phases, I ensure the other domains 
remain involved to maintain the alignment achieved during the 
requirements phase. My bottom line for stakeholder alignment on 
performance, cost and schedule is continuous involvement--no domain 
ever totally ``owns'' a program during its life-cycle--all domains must 
be continuously involved and all aspects of the program must be totally 
transparent to, and understood by, key stakeholders in each of the 
domains.
    At the macro level, I see a need for several changes. The hardest 
change is to change the culture. I believe the competition for funds 
among the Services is a cancer on the defense enterprise. This 
competition encourages overstating requirements and excessive inventory 
objectives. This competition leads to underfunded development programs 
and low rate procurement programs--partially driven by a desire to 
compete for more resources within the Pentagon, at the White House, and 
with Congress. I offer as evidence the Service Unfunded Requirements 
(UFR) lists. These cultural behaviors need to change.
    The Services budget, allocate and execute the vast majority of DOD 
funds. I have repeatedly found that joint programs struggle to gain 
adequate manpower, budget, and support. Alternately, the Services have 
many Service-unique programs that could be joint. For example, each 
Service is buying or developing their own unique satellite 
communications terminal. In many areas, these Service-unique systems, 
which are not interoperable, create operational problems for combatant 
commanders (COCOMs). As the Department moves to greater reliance on 
network systems and shared intelligence, surveillance and 
reconnaissance, these issues grow even more complicated and problematic 
for the COCOMs. Thus, another change required is greater corporate 
activism and direction in the formulation of program requirements and 
budgets. OSD leadership must drive and fund jointness and 
interoperability.
    A related issue is derived requirements applied by military 
technical certification authorities. The application of technical 
authority standards to the VH-71 Presidential helicopter led to a 
significant and costly redesign of what was planned as a modified 
commercial helicopter. There are very few mechanisms that question 
whether the application of technical authority results in costly 
excessive margins or good value for the taxpayer. We need to review and 
pragmatically change the Services' implementation of technical 
authority.
    Another needed change is greater funding stability. Program 
managers are held accountable for successful execution and blamed for 
cost growth. However, program managers have almost no control over 
their budgets. The programming and budgeting offices in the Services 
and OSD make final decisions on program budgets. End game cuts, trims, 
taxes, balancing and other reductions become fact of life adjustments 
to a program manager's budget. A program manager's budget is generally 
linked to a signed contract. When the budget is adjusted by the 
``system,'' the program manager has to replan his work and schedule and 
potentially renegotiate the contract. As many people know, changing 
your house plans during construction is expensive--this is equally true 
in defense acquisition.
    Similarly, we must stop changing requirements. As we speak, the 
Navy is reconsidering a DDX requirement that has been validated for 
over 10 years and led to the expenditure of over $8 billion. We need 
greater discipline in requirements, and we should avoid letting the 
rotation of requirements officers lead to churn in requirements, and 
thus program execution plans.
    In addition to the cultural and process changes, there are a number 
of changes we are making in the actual management and execution of DOD 
programs. For example, I am insisting that, with rare exceptions, we 
conduct a robust Technology Development phase that provides for two or 
more competing teams producing prototypes of the system and/or key 
system elements prior to, or through, Milestone B. Prototypes reduce 
technical risk, validate designs and cost estimates, evaluate 
manufacturing processes, and refine requirements. These steps will 
ensure that with program initiation at Milestone B the program is 
positioned to develop a system or an increment of capability; complete 
full system integration (technology risk reduction having occurred 
during Technology Development), and develop an affordable and 
executable manufacturing process.
    I have directed the establishment of Configuration Steering Boards 
to address program changes with the potential to drive cost increases 
and schedule delays. Proposed requirement changes are coordinated with 
key program stakeholders throughout the program's life. I also require 
technical maturity of programs before program initiation (Milestone B). 
Where I have questions about a program's readiness for program 
initiation, I use Independent Program Assessments, Defense Support 
Teams, and other tools to do a thorough assessment of the program and 
to present their findings to me and other members of the Defense 
Acquisition Board. I also give explicit funding and schedule direction 
to programs at their milestone decisions, and ensure those funding 
directions are implemented in the budget process. In addition, I am 
focusing a great deal of attention on the contractual incentives put in 
place for programs I review to ensure we incentivize improved outcomes 
and not reward poor ones.
    The Department is engaging with industry continuously. That 
dialogue occurs not only on a program-by-program basis where industry 
holds a contract, but also via industrial associations that involve 
many contractors. For example, we participate in the National Defense 
Industrial Association's Industrial Committee on Program Management 
(ICPM). The ICPM is working with us on topics of interest to both 
industry and government, for example the use of new Program Startup 
Workshops and improved application of Earned Value Management Systems. 
Forums like this also help align interests of the various domains.

                   INSTITUTIONALIZING BEST PRACTICES

    47. Senator McCain. Secretary Young, with a new administration 
taking office next year, you may or may not find yourself in your 
current position. What actions are you taking to ensure your 
initiatives take hold and endure potential leadership changes?
    Mr. Young. I have undertaken a number of initiatives to implement 
my vision for Acquisition, Technology, and Logistics. Two of these 
initiatives, which are fundamental to transforming the acquisition 
process, are CSB and Competitive Prototyping. Using the authorities of 
the Office of the Under Secretary of Defense, I have directed the 
establishment of Departmental policy for CSBs and Competitive 
Prototyping.
    Concerning CSBs, my intent is to provide the program manager a 
forum for socializing changes that improve both affordability and 
executability. Boards will be in place for every current and future 
ACAT I program and will review all proposed requirement changes and any 
proposed significant, technical configuration changes which could 
result in cost and schedule changes. These boards are empowered to 
reject any changes, and expected to only approve changes deemed 
critical, in which funds are identified and schedule impacts are truly 
mitigated.
    Also, I have issued policy requiring competitive, technically 
mature prototyping. My intent is to rectify problems of inadequate 
technology maturity as well as a lack of understanding of critical 
program development paths. Prototyping employed at any level-component, 
subsystem, system-whatever provides the best value to the taxpayer.
    It is my intent that these polices be institutionalized in the 
forthcoming update to DOD Instruction 5000.2. As importantly, I have 
written weekly AT&L notes to the broadest possible acquisition team 
audience. These notes convey my principles and lessons, seeking to 
change the acquisition community culture and develop better practices. 
These efforts to influence the broadest possible audience in the 
acquisition community represent critical efforts to produce lasting, 
enduring improvements.

    48. Senator McCain. Secretary Young, given the problems that DOD 
has had ensuring that sound policy translates into practice, what do we 
need to do to support you on this?
    Mr. Young. I believe we have the necessary authority and the 
management ability to translate those policies into effective day-to-
day business practice and improved acquisition outcomes. However, 
funding instability detracts from our ability to achieve those 
outcomes. While we are doing all we can to ensure that program costs 
are accurately estimated and fully funded, we would appreciate your 
support in eliminating funding instability as an issue that inevitably 
contributes to increased costs and extended cycle times.

                            STRATEGIC VISION

    49. Senator McCain. Secretary Young, in your Acquisition, 
Technology, and Logistics strategic goals implementation plan, you 
stated that DOD needs to accurately price programs and insist that the 
program's schedule and budget reflect this realistic pricing. How do 
you plan to accomplish this?
    Mr. Young. Strategic Thrust 2 of my Strategic Goals Implementation 
Plan describes how I intend for the Department to responsibly spend 
every single tax dollar. We must ensure that every program reflects 
realistic costs and schedules. To do this, we must adhere to proven 
practices and institute new promising ones. It has been the 
Department's policy to fund programs at the Cost Analysis Improvement 
Group's (CAIG) estimate. Over the years, this has proven to be the most 
accurate prediction of actual costs. We will continue this policy. To 
ensure that the cost estimates and programs deliver expected 
capabilities in a timely manner, I am supporting and monitoring a 
number of initiatives, including the following:

         Competitive Prototyping: Successful competitive prototyping 
        will inform us on the realism of requirements, mature 
        technology before final development phases, and significantly 
        improve our cost estimates.
         Technology Readiness Assessments (TRA): TRAs will ensure 
        technology is appropriately mature at each sequential phase of 
        development and ensure the Department budgets adequate funds 
        for necessary technology maturation.
         Incentive Policies: Careful, aggressive use of profit and 
        incentives are critical to the program manager's efforts to 
        achieve cost control and disciplined behavior by industry.
         Enhanced Acquisition Decision Memorandum (ADM): I am signing 
        ADMs which specify the requirements document and its date and 
        prohibit changes to program requirements. The ADMs also require 
        full program funding.
         CSBs: CSBs will review requirements and technical 
        configuration changes, which have the potential to result in 
        significant increases to program cost and schedule.
         Concept Decision (CD): CD is designed to develop DOD policy 
        and procedures that will synchronize affordable, risk-informed, 
        strategic investment decisions to ensure that priority joint 
        warfighter needs are addressed. It will result in portfolio-
        based investment decisions that enable predictable acquisition 
        performance that is responsive to warfighter needs.
         Life Cycle Management (LCM): By integrating LCM principles 
        into the acquisition and sustainment processes, we will 
        increase system readiness while lowering total life cycle 
        costs.

    50. Senator McCain. Secretary Young, who will be responsible for 
developing these cost estimates and program baselines?
    Mr. Young. The Department has an established process for developing 
cost estimates and program baselines. The responsibility is shared 
among offices from the requirements, programming, budgeting, 
acquisition, and other appropriate functional communities. Depending on 
the size of the program, this is done at either the component or OSD 
level. Each Service has one or more independent cost estimating offices 
which operate independent of the program offices. After the cost 
estimates and program baselines are developed, they must be approved. 
Again, depending on the size of the program, they may be approved by 
the SAE, or, if the program is an Acquisition Category (ACAT) ID 
program, they must be approved by me. For ACAT ID programs, my policy 
is to ensure the program is funded at the level estimated by the CAIG. 
This estimate, over the years, has consistently been the most accurate. 
I will not approve cost estimates and program baselines unless I am 
convinced they reflect accurate pricing and scheduling, and that they 
recognize the technical risks involved.

    51. Senator McCain. Secretary Young, you added that DOD would then 
hold itself accountable for delivering to the schedules and budgets 
established. What does it mean to hold people or programs accountable 
for delivering these results?
    Mr. Young. I am insisting that program managers build coherent 
acquisition programs with manageable risk. These programs must then be 
fully funded to the program manager or an independent cost estimate. 
Finally, the requirements for the program cannot change. If these 
criteria are met, I will have a basis for holding program manager's 
fully accountable and taking management or disciplinary action for poor 
performance.
    Program Manager Empowerment and Accountability is a piece of the 
strategy I am putting into place which captures this philosophy. 
Program managers play a critical role in developing and fielding the 
weapon systems. I have put into place a comprehensive strategy to 
address improving the performance of program managers. Key to this is 
program manager tenure agreements for ACAT I and II programs, our 
largest programs. My expectation is that tenure agreements should 
correspond to a major milestone, and last approximately 4 years.
    Also, I think we have to make improvement in the education and 
training of our program managers. Our current acquisition program 
execution is deficient, and some responsibility for this must be 
attributed to our education and training programs.
    Another fundamental piece I have established is Program Management 
Agreements--a contract between the program manager and the acquisition 
and requirements/resource officials--to ensure a common basis for 
understanding and accountability. This ensures that plans are fully 
resourced and realistically achievable and that effective transparent 
communication takes place throughout the acquisition process.

                      PROTOTYPING AND COMPETITION

    52. Senator McCain. Secretary Young, you recently signed out a memo 
calling for the increased use of prototyping and competition prior to 
starting a development program to gain more knowledge about costs and 
technical risks. What is your intent and how would you like to see this 
implemented?
    Mr. Young. My intent is to understand the technical risks inherent 
in a system development effort through physical demonstrations that 
help us reduce risk prior to initiating new programs. Competing teams 
producing prototypes of key system elements will not only reduce 
technical risk but also validate designs and cost estimates, evaluate 
manufacturing processes, and refine requirements. In total, this 
approach will also reduce time to fielding. Further, this approach can 
help the DOD make source selection decisions based on hardware and 
performance instead of thousands of pages of paper. This policy will be 
implemented in the technology development phase for emerging 
acquisition programs, and it will be included in the next publication 
of DOD Instruction 5000.2.

    53. Senator McCain. Secretary Young, do you expect programs to fund 
full-up prototypes by competing contractors (fly-off)?
    Mr. Young. Prototypes may be full-up systems or subsystems 
depending upon the technical risks that need to be assessed. I expect 
programs to fully fund the prototype activities that will be defined in 
the technology development strategy for the program.

    54. Senator McCain. Secretary Young, how does the approach outlined 
in your memo differ from that used on the JSF and F-22 programs--both 
of which held fly-offs but still experienced billions in cost growth 
and years in schedule delays?
    Mr. Young. Both the F-22 and F-35 JSF programs held thorough, 
competitive prototyping phases that captured many of the key elements 
identified in my September 19, 2007, memorandum. In both cases, the 
prototypes provided valuable information that reduced program risk, 
validated key technical concepts, and reduced costs.
    The simple answer to this question is that the program manager must 
carefully and wisely choose to prototype the right components to reduce 
risk and provide confidence in production. The JSF prototypes did not 
incorporate any production representative structure, even if only in 
selected areas. As the prototypes were transitioned to a production 
design, the short takeoff and vertical landing (STOVL) variant was 
overweight. This fact is the dominant reason for JSF development cost 
growth. I am less familiar with the prototype phase of F-22. However, 
F-22 cost grew because of the highly integrated avionics architecture 
and the demanding manufacturing process. I believe it is likely that a 
detailed review of the history would reveal that the F-22 prototypes 
failed to adequately focus prototype development effort on these key 
issues.
    The F-35 JSF held an almost 5-year Concept Development Phase (CDP). 
During CDP, the 2 competing teams built 4 prototypes, and achieved 700 
test points apiece. The CDP enabled the program to better understand 
many of the risks involved in designing a family of common aircraft 
that would satisfy the requirements for three U.S. Services and eight 
international partners. While the JSF program experienced cost growth 
and schedule delays, the JSF prototype efforts almost certainly helped 
avoid cost growth and schedule slips in other areas of the JSF program.
    F-35 cost growth and schedule delay are mainly attributed to the 
weight issues surrounding the design of the STOVL variant. The program 
was extended during the SDD phase to make sure the design could meet 
the rigorous requirements necessary to operate in the STOVL's 
expeditionary role. Additional cost growth in the unit cost of the 
aircraft is primarily the result of a reduced Department of the Navy 
procurement objective, the rising cost of specialty metals, and 
increased labor and overhead rates; all of which would have affected 
the program regardless of the prototyping and competition phase.
    The F-22 also conducted a thorough competition with two competitors 
developing two prototype aircraft. The F-22 CDP was valuable in 
validating the 5th generation capabilities in the areas of propulsion, 
aircraft handling, and stealth. Much of the program cost growth 
experienced by the F-22 program is attributed to technology challenges 
associated with design complexities. These complexities led to numerous 
restructures, caused funding instability and extended the Engineering 
and Manufacturing Development phase to 14 years. In addition, 
procurement quantities decreased due to changing national defense 
strategies, the evolution of the less costly F-35 aircraft to 
complement the capabilities of the F-22, and requirements to fund other 
Department priorities.

    55. Senator McCain. Secretary Young, what lessons learned did you 
draw from those programs?
    Mr. Young. The key lesson learned is that competitive prototyping 
is an effective component for acquisition excellence and is only part 
of a tool kit that includes stable requirements, mature technology, 
manufacturing and integration levels, funding stability, upfront 
integrated planning baselines, and CSBs.

           SHIFT MORE RISK AND RESPONSIBILITY TO CONTRACTORS

    56. Senator McCain. Secretary Young, we have recent examples, such 
as the Expeditionary Fighting Vehicle and Advanced SEAL Delivery 
System, in which the contractor delivered an item that failed to 
perform. In both cases, the government accepted full responsibility and 
gave the contractor a do-over. What causes the Department to make those 
types of decisions?
    Mr. Young. Decisions to significantly restructure, terminate, or 
continue troubled acquisition programs are complex. We have found the 
principal drivers for troubled programs are unstable requirements, 
immature technologies, and funding instability. Additionally, we are 
focusing a great deal of attention on contractual incentives--and 
ensuring we incentivize improved outcomes, with demonstrated 
performance, and not reward poor outcomes. I am an extreme advocate for 
back-end loading fees in contracts, that is, reserving a very 
significant portion of the contract fee until the final stages of 
development and product delivery when it is clear and measurable that 
the warfighter and taxpayer received value for the Nation's investment. 
As stewards of tax dollars, our responsibility for acquisition 
decisions must ensure complete openness, fairness, and objectivity. We 
in the acquisition enterprise are accountable for those decisions to 
deliver successful outcomes at reasonable costs.
    The decision related to the Expeditionary Fighting Vehicle 
acquisition was based on detailed assessments which determined the 
capability required was critical, the reliability performance 
shortfalls were correctable, and the replanned program was the most 
cost-effective means to deliver the required capability.
    The Advanced SEAL Delivery System (ASDS) program was cancelled 
based on numerous subsystem reliability issues identified by operator 
use. U.S. Special Operations Command has employed a reliability 
improvement program in order to field and deploy the ASDS-1 unit 
produced. The Department continues to evaluate ways to address the 
capability gap that now exists.
    Many of these cases come down to a very difficult, straightforward 
determination. The Department and the taxpayer have invested millions 
of dollars to get to the initial item delivery which has problems. If 
the requirement for the capability remains valid, then the DOD must 
decide whether to start over with a new competition or invest 
additional dollars to correct the deficiencies. Starting over means a 
new development program which likely requires the Nation to spend twice 
to develop the required capability. Further, while there is some value 
in terminating the failed effort, the industry team that failed to 
perform would have a very substantial competitive and cost advantage in 
any new competition. These are difficult issues to weigh and judge in 
seeking to recover from program failures to perform. One of my 
fundamental goals is to structure programs initially with a higher 
probability of success, using technology readiness assessments, 
prototyping, CSBs, realistic requirements, and full funding. This is 
critical to our efforts to avoid ever having to make difficult 
decisions on failed programs.

    57. Senator McCain. Secretary Young, what can we do to shift 
appropriate risk back on the contractors?
    Mr. Young. The fundamental lesson that we have learned is that we 
must have stable requirements to hold contractors accountable for 
performance. It starts with having a clear understanding of what 
available technology can accomplish before we invest in the development 
of a new system. We can use competitive prototyping to anchor our 
predictions of performance with physical demonstrations of capability. 
This requires financing multiple approaches to develop a materiel 
solution, and while the benefits from a long-term perspective justify 
this investment, there are affordability pressures on programs in the 
near term that make it difficult to execute. After prototype 
demonstrations have reduced risk for the program, it is essential that 
contract requirements remain stable. I have implemented CSBs to provide 
oversight over the evolution of system designs during development and 
testing which carefully evaluate the introduction of changes to 
contract requirements. It is also important to focus the attention of 
contractors on the program objectives. I favor the use of measurable 
performance incentives whereby in order to earn fee, the contractor 
must deliver product that demonstrates the required capability. Taken 
together, along with support of Congress to maintain funding stability 
for well managed programs, these actions will have the effect of 
reducing opportunities for increasing contract costs while rewarding 
contractors who deliver what was promised.
    In general, Industry will price risk into their contracts and 
proposals. In more instances, the price of this risk is unaffordable 
and poses the risk of the DOD overpaying for a particular program. The 
key is for the government to recognize and understand risk and build 
appropriate program plans, acquisition strategies, and execution 
schedules to deal affordably with risk.

                 UNDERSTANDING THE ACQUISITION PROCESS

    58. Senator McCain. Secretary Young, the cost of the VH-71 program 
has now grown from around $6 billion to over $11 billion. The 
contractor, Lockheed Martin, claims that the Navy changed its 
requirements, while the Navy claims that it did not understand the 
technical challenges. What does it say about the acquisition process 
when the Navy can sign a multibillion dollar contract with a company 
who does not understand the requirements of the system it is supposed 
to build and the government does not know enough to say the 
contractor's proposal won't work?
    Mr. Young. On VH-71, the Department purposely accepted more cost 
and schedule risk than is normal. The post-September 11 security 
environment drove an urgent need to replace legacy VH-3D/VH-60N with a 
safer, more reliable and more survivable presidential transport 
helicopter. To help meet the high risk schedule the program executed a 
short risk reduction period with potential vendors vice entering a 
technology development phase. A more thorough technology development 
phase prior to entering the SDD phase would have helped ensure complete 
flow down of the government's performance-based specification into the 
contractor's proposed configuration. It would have allowed the 
government to fully define the technical scope of this highly 
concurrent Increment 1 and Increment 2 VH-71 program and to develop 
more accurate cost and schedule baselines.
    Increment 1 was to address the immediate need of providing the 
President with safe, reliable and survivable transportation. Increment 
2 was to address the full set of requirements capable of performing 
both administrative and contingency missions. While the technical 
baseline for Increment 2 should have been fully defined at contract 
award, the urgency was of a sufficient concern that a programmatic 
decision was made to proceed forward with Increment 1. Although the 
program's cost and schedule have increased significantly, the 
Department believes that had it known at the beginning of the program 
what it knows now the cost would have been very close to current 
projections.
    A performance-based contract was competitively awarded in January 
2005 to Lockheed Martin Systems Integration-Owego (LMSI-O). Slow 
progress in requirements and technical definition of the performance 
contract (not requirements changes), design completion, and lack of 
coordination of the proposed design between LMSI-O and their 
subcontractors adversely affected an already high risk schedule. Solid 
systems engineering processes were not adhered to in this program as it 
made compromises in order to keep schedule, which compounded the 
problem. Concurrency in the Increment 1 and Increment 2 development, 
and a larger amount of Increment 2 redesign than was originally 
planned, caused further schedule delays and cost increases.
    With this factual history as background, I would offer a few 
additional summary comments. First, the initial White House 
requirements have not changed. However, there are classified aspects of 
this program. In my reviews, there seems to have been some confusion 
between the Navy and industry on Appendices F and G related to 
structural and performance requirements for the VH-71 and how industry 
was to consider these requirements in their proposal. Some members of 
the government feel industry exploited this confusion to argue that 
performance requirements were tradeable, thus choosing not to flow down 
all requirements and produce a more realistic estimate of workload and 
cost. This confusion should not have existed or occurred because the 
White House requirements were firm and never changed. It is unclear 
whether this confusion had a real impact on underestimation of program 
cost or this confusion is a convenient explanation for a dramatic 
underestimation of the VH-71 program cost.
    There have been changes in the ``derived requirements'' relative to 
initial assumptions. The White House assumed it would be a 
straightforward process to integrate new communications and safety 
equipment on an existing commercial helicopter. Industry may have 
legitimately believed that this was the government objective. However, 
the Naval Air Systems Command (NAVAIR), which has technical authority 
for selected military aviation systems including the Presidential 
helicopter, imposed derived requirements for the VH-71 to improve 
safety and reliability. NAVAIR required changes in the helicopter fuel 
system, structure, tail design and other areas to meet their 
airworthiness certification requirements. These changes have led to 
substantial redesign of the proposed commercial helicopter and 
significant additional cost. Industry may reasonably perceive these as 
changed requirements. In early discussions about the program, I did not 
perceive or understand the Navy would demand so many design changes in 
the commercial helicopter, such as dictating the number of bolts 
attaching the transmission to the airframe. I think a full 
understanding and recognition of these derived requirements should have 
called into question the initial industry and government cost 
estimates.
    I believe that all of these issues could have been better 
understood. An existing EH-101 will not meet the White House range and 
payload requirements. Adding several thousand pounds of weight to the 
EH-101, even with a new engine, further guarantees that the helicopter 
will not meet range and payload requirements. In reviewing the VH-71 
program, I asked for a comparison to the CH-53 redesign effort. Indeed, 
the CH-53 effort will require about $5 billion of new design and test 
work--a number comparable to the new estimate for VH-71 Increment 2 
development. The initial estimate of $800 million for Increment 2 
development was clearly incorrect. The stringent requirements and the 
application of government certification requirements and standards have 
driven substantial cost growth on VH-71 over the original estimates. 
While risk and urgency can account for some of the growth, it is clear 
that misunderstandings on the requirements and failed assumptions about 
the use of a commercial helicopter airframe were significant 
contributors. Even in light of all of these issues, I believe errors 
were made in planning and pricing the VH-71 program which should not 
have been made.
    Despite initial difficulties with regard to what was necessary to 
fulfill program requirements, the Program Office, LMSI-O and its major 
subcontractors now understand and agree on contract requirements. A 
restructured program has been proposed which meets the White House 
military requirements on a schedule with better understood risk.

    59. Senator McCain. Secretary Young, is DOD fulfilling its 
fiduciary responsibilities when it enters into long-term, cost-plus 
contracts for development when it knows so little about what it intends 
to develop and build?
    Mr. Young. I agree that DOD is responsible for ensuring that every 
taxpayer dollar is spent in the most efficient and effective manner in 
providing for the Nation's defense. Consistent with that objective, the 
contract vehicles we employ should be consistent with our assessment of 
overall program risk. When we determine that the program is so complex 
and technically challenging that it would not be practical to reduce 
program risk to a level consistent with the use of a fixed price 
contract vehicle, we should choose a cost type contract because we 
believe that approach is the one most likely to provide the greatest 
benefit to national defense and the taxpayer. These decisions must be 
made on a contract-by-contract basis and with a full appreciation of 
our fiduciary responsibility.
    I would agree that the Department should avoid entering contracts 
with excessive, unknown risks. The Department must spend more in the 
early phases of program development, including investing in competitive 
prototypes or component level technology demonstrations. The Department 
must also complete Quick Look Technology Readiness Assessments to guide 
program planning and investment in the early stages. Even with these 
tools, industry will conservatively price risk into contracts if the 
department insists on fixed price contracts. This strategy runs the 
risk of DOD significantly overpaying for development programs. With 
proper planning, risk reduction and management, I believe the taxpayer 
gets the lowest price and the best product by using cost type contracts 
when the requirements are demanding and the level of risk is 
substantial. In other situations, DOD may be able to consider fixed 
price incentive fee contracts for development programs.

                             ACCOUNTABILITY

    60. Senator McCain. Secretary Young, Congress has expressed its 
intent to have the Missile Defense program follow the same rules as 
other major programs, i.e. accountability for cost increases, full 
funding with procurement dollars, and budgeting from the right pots of 
money--Procurement; Research, Development, Testing, and Evaluation; 
Military Construction; Operations and Maintenance; etc. Are you in 
support of this?
    Mr. Young. For the Ballistic Missile Defense program, I support the 
implementation of program oversight and processes that contribute to 
efficient execution. I intend to ensure that a rigorous Ballistic 
Missile Defense System baseline agreement with defined cost, schedule 
and performance parameters be fully implemented to allow continuous 
evaluation of program execution and accountability for changes to 
program plans. Consistent with the NDAA for Fiscal Year 2008, MDA was 
authorized to use incremental procurement authority for fiscal years 
2009 and 2010. The Department will assess the impact of full versus 
incremental funding applied to MDA procurement actions beyond fiscal 
year 2010, and will formulate direction. The Missile Defense Executive 
Board initiated activity to develop a Ballistic Missile Defense System 
Life Cycle Management Process to assess Missile Defense Agency 
requirements, development, procurement and transition plans. Future 
budget submissions will include appropriate requests, to the extent 
possible, for the different types of funding to include: Procurement, 
Research Development Test and Evaluation, Military Construction, and 
Operations and Maintenance.

                         ACQUISITION WORKFORCE

    61. Senator McCain. Secretary Young, there is a debate over whether 
the acquisition workforce is sufficient in terms of skill mix and 
quantity. What is your view?
    Mr. Young. I'm well aware of the debate. At the highest level, I do 
not believe the acquisition workforce is adequately manned, and I 
believe there are a number of areas where we need more robust and 
comprehensive skills. There is not an all-or-nothing answer. I am 
working to adjust skill mixes and to build up numbers where that is the 
right thing to do. To ensure our defense acquisition workforce is 
sufficient in terms of skill mix and quantity, we deployed several 
initiatives under my AT&L strategic thrust, ``Take Care of Our 
People.'' Two primary initiatives are Competency Management and Human 
Capital Strategic Planning. The Competency Management initiative is 
taking a hard look at critical acquisition occupations such as Program 
Management, Cost Estimating, Financial Management, Contracting, Systems 
Engineering Management, Testing and Evaluation, and Logistics. We will 
learn about existing skill mixes and gaps. The Human Capital Strategic 
Planning initiative addresses the gaps between the mix and size needed 
and in place; a report to Congress is in process. We will use the DOD 
Acquisition Workforce Development Fund (10 U.S.C. 1705) to address both 
skill and quantity gaps through recruiting and hiring; training and 
development; and recognition/retention initiatives.

    62. Senator McCain. Secretary Young, are we relying too much on 
contractors to perform work the government used to perform?
    Mr. Young. Consistent with applicable laws and regulations defining 
inherently governmental functions, the DOD identifies opportunities 
where competitive sourcing of contractor support allows DOD to 
concentrate its manpower on distinctly military activities. The 
department recognizes the extent to which our use of contractors has 
grown. I am concerned that we may not have the right balance between 
government personnel and contractors.

    63. Senator McCain. Secretary Young, does the government have the 
systems engineering talent needed to execute the policies you 
enumerated in your recent memo on prototyping?
    Mr. Young. The promulgation of DOD's competitive prototyping policy 
does indeed place additional emphasis on systems engineers during early 
phases of the acquisition lifecycle. We are addressing this critical 
need through several initiatives as part of our Human Capital Strategic 
Plan. First, we are working to leverage Section 852 (the DOD 
Acquisition Workforce Development Fund) of the NDAA for Fiscal Year 
2008 to recruit, train, and retain systems engineers. Second, we are in 
the process of conducting a top-to-bottom assessment of our systems 
engineering workforce to identify the number of systems engineers 
needed and the specific skills they require. Third, we continue to 
enhance our systems engineering guidance, tools, and education and 
training certification courses to assist the workforce in implementing 
new policies such as competitive prototyping, integrated developmental 
and operational test, and preliminary design reviews. Finally, as I 
mentioned in my prototyping policy memorandum, our intent is that the 
demand for earlier knowledge and reduction of risk provide the 
incentive to further develop and enhance the systems engineering skills 
in our current workforce. System engineering talent is vital for 
program success, and we are actively working to ensure we meet and 
sustain our acquisition workforce needs.

                       IMPROVING PROGRAM OUTCOMES

    64. Senator McCain. Ms. Schinasi, in your written statement you 
note that GAO designated DOD weapon system acquisitions as a high risk 
area in 1990, and that programs continue to experience poor cost, 
schedule, and performance outcomes. Your statement identifies problems 
at the strategic level and at the program level that you believe 
continue to contribute to these poor outcomes. At the strategic level, 
what is needed to improve program outcomes?
    Ms. Schinasi. We recently recommended that the Secretary of Defense 
develop and implement a strategy to bring the department's current 
portfolio into balance by aligning the number of programs and the cost 
and schedule of those programs with available resources.\14\ In 
developing and implementing a strategy, the department should determine 
ways to prioritize needs and identify whether the budget and the FYDP 
should be increased to more accurately reflect the actual costs of 
current programs or whether the portfolio of current programs should be 
reduced and lower-priority programs terminated to match available 
resources. We have also recommended in the past that the Secretary of 
Defense implement an enterprise-wide portfolio management approach to 
making weapon system investments that integrates the assessment and 
determination of warfighting needs with available resources and cuts 
across the Services by functional or capability area.\15\ To ensure the 
success of such an approach, the Secretary should establish a single 
point of accountability at the department level with the authority, 
responsibility, and tools to ensure that portfolio management for 
weapon system investments is effectively implemented across the 
department. In addition, the Secretary should ensure that the following 
commercial best practices are incorporated:
---------------------------------------------------------------------------
    \14\ GAO, Defense Acquisitions: A Knowledge-Based Funding Approach 
Could Improve Major Weapon System Program Outcomes, GAO-08-619 
(Washington, DC: Jul. 2, 2008).
    \15\ GAO, Best Practices: An Integrated Portfolio Management 
Approach to Weapon System Investments Could Improve DOD's Acquisition 
Outcomes, GAO-07-388 (Washington, DC: Mar. 30, 2007).

         implement a review process in which needs and 
        resources are integrated early and in which resources are 
        committed incrementally based on the achievement of specific 
        levels of knowledge at established decision points;
         prioritize programs based on the relative costs, 
        benefits, and risks of each investment to ensure a balanced 
        portfolio;
         require increasingly precise cost, schedule, and 
        performance information for each alternative that meets 
        specified levels of confidence and allowable deviations at each 
        decision point leading up to the start of product development;
         establish portfolio managers who are empowered to 
        prioritize needs, make early go/no-go decisions about 
        alternative solutions, and allocate resources within fiscal 
        constraints; and
         hold officials at all levels accountable for achieving 
        and maintaining a balanced, joint portfolio of weapon system 
        investments that meet the needs of the warfighter within 
        resource constraints.

    65. Senator McCain. Ms. Schinasi, at the program level, what is 
needed to increase the likelihood of program success?
    Ms. Schinasi. To increase the likelihood of program success, DOD 
must ensure that appropriate knowledge is captured and used at critical 
junctures to make decisions about moving a program forward and 
investing more money. While DOD has incorporated into policy a 
framework that supports a knowledge-based acquisition process similar 
to that used by leading organizations, it must establish stronger 
controls to ensure that decisions on individual programs are informed 
by demonstrated knowledge. Moreover, congressional approval of programs 
that have not taken these steps encourages DOD's subsequent requests 
for additional funding.
    A path can be laid out to make decisions that will lead to better 
program choices and better outcomes. Much of this is known and has been 
recommended by one study or another. GAO itself has issued hundreds of 
reports. The key recommendations we have made have been focused on the 
product development process:

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

    66. Senator McCain. Ms. Schinasi, what changes in the acquisition 
environment need to be made to ensure program success?
    Ms. Schinasi. DOD is not enforcing a knowledge-based approach, 
discipline is lacking, and business cases do not measure up. This is 
occurring, in part, because there are no consequences for actions that 
run counter to the intent of DOD acquisition polices--officials 
responsible for approving program starts are no longer in their 
positions by the time the consequences of their actions become evident. 
The department routinely accepts high levels of technology risk at the 
start of major acquisition programs. Mature technologies are pivotal to 
developing new products. Without mature technologies at the outset, a 
program will almost certainly incur cost and schedule problems. 
However, DOD's acquisition community moves forward on programs with 
technologies before they are mature and takes on responsibility for 
technology development and product development concurrently. Our work 
has also shown that DOD allows programs to begin without establishing a 
sound business case that matches requirements with technology, 
acquisition strategy, time, and funding. And once these programs begin, 
their requirements and funding change over time. In fact, program 
managers consider shifting requirements--which can result in added 
program complexity and costs--and funding instabilities--which occur 
throughout the program--to be their biggest obstacles to success. 
Fundamentally, DOD will need to reexamine the entirety of its 
acquisition process and how it is affected by requirements and funding 
processes. This includes making significant changes to program 
requirements setting, funding, and execution; as well as to the 
incentives that drive the behavior of DOD decisionmakers, the military 
Services, program managers, and the defense industry. Finally, no real 
reform can be achieved without a true partnership among all these 
players and Congress.

    67. Senator McCain. Ms. Schinasi, GAO cites tenure or turnover 
issues for both program managers and senior DOD leaders as impediments 
to better program outcomes and lasting reform. What recommendations 
would GAO make to alleviate this issue?
    Ms. Schinasi. We have made several recommendations related to the 
issue of management tenure as it relates to weapon system development 
programs. For example, in our November 2005 report on program managers, 
we recommended that DOD develop and implement a process to instill and 
sustain accountability for successful program outcomes.\16\ In 
developing this process, we note that, in part, DOD should consider 
matching program manager tenure with delivery of a product or for 
system design and demonstration, and tailoring career paths and 
performance management systems to incentivize longer tenures. We have 
also noted that if DOD limited development cycle times to between 5 and 
7 years it would be possible to extend the tenure for a single program 
manager to the entire product development phase-providing the manager a 
more realistic responsibility but with more accountability.
---------------------------------------------------------------------------
    \16\ GAO, Best Practices: Better Support of Weapon System Program 
Managers Needed to Improve Outcomes, GAO-06-110 (Washington, DC: Nov. 
30, 2005).
---------------------------------------------------------------------------
    In 1998, the Under Secretary of Defense for Acquisition, 
Technology, and Logistics stated that the department's objective must 
and will be to achieve acquisition cycle times no longer than 5 to 7 
years.
    In 2000, we testified that we had identified a 5-year limit for 
weapon system development programs--which reflected both commercial 
practices and DOD guidance. DOD's acquisition policy, revised in 2003, 
suggests that system development should be limited to a manageable 
timeframe--about 5 years.\17\ An assessment of DOD's acquisition system 
commissioned by the Deputy Secretary of Defense in 2006 similarly 
recommended that programs should be time-constrained with development 
cycles no longer than 6 years from Milestone A to low-rate initial 
production.\18\
---------------------------------------------------------------------------
    \17\ GAO, Defense Acquisitions: Employing Best Practices Can Shape 
Better Weapon System Decisions, GAO/T-NSIAD-00-137 (Washington, DC: 
Apr. 26, 2000).
    \18\ Assessment Panel of the Defense Acquisition Performance 
Assessment Project for the Deputy Secretary of Defense, Defense 
Acquisition Performance Assessment Report (Jan. 2006).

    68. Senator McCain. Ms. Schinasi, GAO describes cost growth as 
reduced buying power and lost opportunity costs for DOD. What are the 
implications of continued cost and schedule problems?
    Ms. Schinasi. Cost and schedule problems for DOD programs have 
implications both within the department and for the Federal Government 
as a whole. Within DOD, continued cost growth results in less funding 
being available for other DOD priorities and programs, while continued 
failure to deliver weapon systems on time delays providing critical 
capabilities to the warfighter. As program costs increase, DOD must 
request more funding to cover the overruns, make trade-offs with 
existing programs, delay the start of new programs, or take funds from 
other accounts. Delays in providing capabilities to the warfighter 
result in the need to operate costly legacy systems longer than 
expected, find alternatives to fill capability gaps, or go without the 
capability. In a broader sense, poor outcomes in DOD's weapon system 
programs reverberate across the entire Federal Government because of 
the sheer size of the investment in these programs. Every dollar wasted 
during the development and acquisition of weapon systems is money not 
available for other internal and external budget priorities--such as 
the war on terror and mandatory payments to growing entitlement 
programs.

    69. Senator McCain. Ms. Schinasi, does GAO feel that DOD's recent 
flurry of initiatives takes acquisition change to needed levels? If so, 
what steps does DOD need to take to reinforce these initiatives and 
translate them into practice?
    Ms. Schinasi. DOD's recent initiatives appear to have some promise, 
but we have found that practices do not always follow promise. DOD must 
ensure that programs follow the new policies and that people are held 
accountable for their compliance with them as well. Many of DOD's 
recent initiatives are contained in policy memos signed by the current 
Under Secretary of Defense for Acquisition, Technology, and Logistics 
and are not guaranteed to survive the transition to the next 
administration. DOD is taking a positive first step by revising its 
overall acquisition policy, referred to as the DOD 5000 series, to 
include many of these initiatives. Preliminary indications are that the 
revised policy will establish more controls and metrics by which to 
assess program progress. In order to get better outcomes, DOD will need 
to avoid service- and program-centric investment decisions that allow 
the military Services to overpromise capabilities and, underestimate 
costs and enforce the controls in its revised policy. For its part, 
Congress should support DOD's efforts to instill discipline and 
accountability into its acquisition process, while continuing to 
monitor the department's efforts through vigorous oversight.

    70. Senator McCain. Ms. Schinasi, what additional guidance and 
steps are needed to bolster DOD's recent initiatives?
    Ms. Schinasi. DOD's recent initiatives indicate that in large part 
the department knows what needs to be done to improve acquisitions. 
However, we have found that the department does not apply the controls 
or assign the accountability necessary to achieve successful outcomes. 
To strengthen accountability, DOD must also clearly delineate 
responsibilities among those who have a role in deciding what to buy as 
well as those who have role in executing, revising, and terminating 
programs. At the program level once a program begins, DOD will need to: 
(1) match program manager tenure with development or the delivery of a 
product; (2) tailor career paths and performance management systems to 
incentivize longer tenures; (3) strengthen training and career paths as 
needed to ensure program managers have the right qualifications to run 
the programs they are assigned to; (4) empower program managers to 
execute their programs, including an examination of whether and how 
much additional authority can be provided over funding, staffing, and 
approving requirements proposed after the start of a program; and (5) 
develop and provide automated tools to enhance management and oversight 
as well as to reduce the time required to prepare status information. 
In addition, rewards and incentives must be altered so that success can 
be viewed as delivering needed capability at the right price and the 
right time, rather than attracting and retaining support for numerous 
new and ongoing programs.

    71. Senator McCain. Ms. Schinasi, do you believe there are 
sufficient controls embedded in DOD's policy and processes to ensure a 
knowledge-based decision process is followed?
    Ms. Schinasi. Twice in the last 5 years, we have reported that 
DOD's acquisition process did not contain sufficient controls to ensure 
a knowledge-based approach is followed. We reported in November 2003 
that DOD's leaders had taken noteworthy steps by incorporating into the 
policy a framework that supports a knowledge-based, evolutionary 
acquisition process, similar to one used by leading commercial 
companies to get successful outcomes.\19\ This framework was an 
important and significant step. However, we noted that while DOD's 
policy included some controls that leading companies use to capture 
knowledge at the start of a program, additional controls were needed to 
ensure that decisions made throughout product development are informed 
by demonstrated knowledge. In April 2006, we reported again that DOD's 
revised acquisition policy lacked sufficient controls and noted that 
acquisition officials were not effectively implementing the policy's 
knowledge-based process.\20\
---------------------------------------------------------------------------
    \19\ GAO, Defense Acquisitions: DOD's Revised Policy Emphasizes 
Best Practices, but More Controls are Needed, GAO-04-53 (Washington, 
DC: Nov. 10, 2003).
    \20\ GAO, Defense Acquisitions: Major Weapon Systems Continue to 
Experience Cost and Schedule Problems under DOD's Revised Policy, GAO-
06-368 (Washington, DC: Apr. 13, 2006).

    72. Senator McCain. Ms. Schinasi, what additional controls are 
needed in place to ensure the intent of the policy (evolutionary and 
knowledge-based process) is carried out?
    Ms. Schinasi. DOD must instill discipline and accountability into 
the acquisition process and ensure that practice follows policy. DOD 
must demand that appropriate knowledge is captured and used at critical 
junctures to make decisions about moving a program forward and 
investing more money. Our 2003 assessment of DOD's revised acquisition 
policy found that it included some of the controls that leading 
companies use to capture knowledge at the start of a program--such as 
holding decision reviews--but additional controls were needed. We 
recommended that the Secretary of Defense require program officials to 
demonstrate that they have captured knowledge at three key points--
program start, design review for transitioning from system integration 
to system demonstration, and production commitment--as a condition for 
investing resources. In our subsequent 2006 report, we noted that, at a 
minimum, those controls should require program officials to demonstrate 
that they have achieved a level of knowledge that meets or exceeds the 
following criteria at each respective decision point:
Program start (Milestone B): Start of product development
         Demonstrate technologies to high readiness levels
         Ensure that requirements for the product are informed 
        by the systems engineering process
         Establish cost and schedule estimates for product on 
        the basis of knowledge from preliminary design using system 
        engineering tools
         Conduct decision review for program start
Design readiness review: Beginning of system demonstration
         Complete 90 percent of design drawings
         Complete subsystem and system design reviews
         Demonstrate with prototype that design meets 
        requirements
         Obtain stakeholders' concurrence that drawings are 
        complete and producible
         Complete the failure modes and effects analysis
         Identify key system characteristics
         Identify critical manufacturing processes
         Establish reliability targets and growth plan on the 
        basis of demonstrated reliability rates of components and 
        subsystems
         Conduct decision review to enter system demonstration
Production commitment (Milestone C): Initiation of low-rate Production
         Demonstrate manufacturing processes
         Build production-representative prototypes
         Test production-representative prototypes to achieve 
        reliability goal
         Test production-representative prototypes to 
        demonstrate product in operational environment
         Collect statistical process control data
         Demonstrate that critical processes are capable and in 
        statistical control
         Conduct decision review to begin production

    Over the past several years, Congress has taken legislative action 
to establish controls that we believe have the potential to instill 
more discipline into the front-end of the acquisition process and 
ultimately improve program outcomes. For example, the NDAA for Fiscal 
Year 2006 requires that before a major defense program can receive 
approval to start system development, the MDA must certify that the 
program meets specified criteria, such as:

         the technology in the program has been demonstrated in 
        a relevant environment;
         the program is affordable when considering DOD's 
        ability to accomplish the program's mission using alternative 
        systems and the per unit and total acquisition costs in the 
        context of the FYDP;
         reasonable cost and schedule estimates have been 
        developed for system development and production; and
         appropriate market research has been conducted prior 
        to technology development to reduce duplication of existing 
        technology and products.

                          COST TRACKING SYSTEM

    73. Senator McCain. Secretary Young, you dispute the GAO's finding 
that our acquisition system is broken--and you have testified that ``it 
is on a path to improvement''--however, in the press today we are 
learning that the Pentagon has found ``significant concerns . . . 
regarding [Lockheed Martin's] ability to mitigate emerging costs and 
schedule issues in a timely manner . . . this undisciplined approach to 
program . . . diminishes the purchasing power of the Department.'' How 
can you suggest that DOD's acquisition process is not broken--and that 
DOD fully understands the costs for developing and buying weapon 
systems?
    Mr. Young. The specific example you cite deals with a single 
contractor and its compliance with standard Earned Value Management 
procedures. This system is one tool we use in program management, and 
this case is not, in my view, indicative of a systemic problem 
associated with the acquisition system. I take this matter very 
seriously and as I testified, there is a corrective action plan in 
place, Lockheed has agreed to it and met three of the milestones 
already. There are substantial financial incentives associated with 
meeting the milestones. One specific instance among thousands of 
programs, thousands of contracts and hundreds of companies does not 
constitute a broken acquisition system. The media and Congress have 
failed to focus any attention on the vast number of successfully 
executed and managed DOD acquisition programs which deliver 
extraordinary capability and develop world class technology.

    74. Senator McCain. Ms. Schinasi, what is the impact of this failed 
cost tracking system?
    Ms. Schinasi. We recently reported that the current JSF program 
cost estimate is not reliable; in part because it is based on the prime 
contractor's earned value management data and other information which 
has been found to be inaccurate and misleading.\21\ The immediate 
impact of this unreliable estimate is that Congress and DOD management 
do not have an accurate picture of JSF current cost and schedule 
performance and future funding requirements. In our report, we 
recommended specific improvements needed to prepare a new estimate that 
is comprehensive, accurate, well-documented, and credible.
---------------------------------------------------------------------------
    \21\ GAO, Joint Strike Fighter: Recent Decisions by DOD Add to 
Program Risks, GAO-08-388 (Washington, DC: Mar. 11, 2008).
---------------------------------------------------------------------------
    JSF program officials told us that they use Lockheed Martin earned 
value management data in creating their estimate of JSF development 
costs. The Defense Contract Management Agency (DCMA) identified this 
data as being of very poor quality, calling into question the accuracy 
of any estimate based on these data. In November 2007, DCMA issued a 
report saying that Lockheed Martin's tracking of cost and schedule 
information at its aerospace unit in Fort Worth, TX--where the JSF 
program is managed--is deficient to the point where the government is 
not obtaining useful program performance data to manage risks. Among 
other problem areas, DCMA found that Lockheed Martin had not clearly 
defined roles and responsibilities, and was using management reserve 
funds to alter its own and subcontractor performance levels and cost 
overruns. DCMA officials who conducted the review at Lockheed Martin 
told us that the poor quality of the data invalidated key performance 
metrics regarding cost and schedule, as well as the contractor's 
estimate of the cost to complete the contract. In 2005, the Naval Air 
Systems Command (NAVAIR) raised similar concerns about Lockheed 
Martin's earned value system. NAVAIR officials told us that most 
deficiencies identified in the DCMA report have the effect of 
underreporting costs, and that the official program cost estimates will 
increase if the deficiencies are corrected.

    75. Senator McCain. Ms. Schinasi, isn't it true that this failure 
to adequately track costs has reduced DOD's flexibility by causing it 
to cut two developmental test JSFs?
    Ms. Schinasi. Cutting two development test aircraft, especially one 
of the carrier variants for testing mission systems and ship 
suitability, reduces DOD's flexibility in completing development 
testing on time to support the start of operational testing and the 
subsequent full-rate production decision. The decision to cut two test 
aircraft was part of the Mid-Course Risk Reduction Plan--a risky and 
controversial plan put in place to replenish management reserves. 
Specifically, the plan reduces development test aircraft and test 
flights, and accelerates the reduction of the contractor's development 
workforce in order to restore management reserves to the level 
considered prudent to complete the development contract as planned and 
within the current cost estimate. The test community and others within 
DOD believe the plan puts the development flight program at 
considerable risk and trades known cost risk today for unknown cost and 
schedule risk in the future. The number of development flight tests had 
already been reduced twice before the Mid-Course Risk Reduction plan. 
Over the last 2 years, test flights have been reduced by more than 
1,800 flights or 26 percent.

    76. Senator McCain. Ms. Schinasi, what impact could this setback in 
testing have on the entire program?
    Ms. Schinasi. The program had originally planned to conduct 
development flight tests using 15 aircraft. The recent decision to 
reduce test aircraft to 13 (including a non-production representative 
prototype), cut back the number of flights, and change how some 
capabilities are tested will stress resources, compress time to 
complete testing, and increase the number of development test efforts 
that will overlap with the planned start of operational testing in 
October 2012. Test officials are concerned that capacity will be too 
constrained to meet schedules and adequately test and demonstrate 
aircraft in time to support operational testing and the full-rate 
production decision in October 2013. The full extent of changes and 
impacts from a revised test verification strategy are still evolving. 
Program officials reported that if test assets become too constrained, 
production aircraft may eventually be used to complete development 
testing. This would reduce the number of operational assets and delay 
training pilots.
                                 ______
                                 
              Questions Submitted by Senator Susan Collins

                   PROCUREMENT OF LPD-17 CLASS SHIPS

    77. Senator Collins. Secretary Young, the committee recently 
approved the President's budget request to fund the third of seven 
planned DDG-1000 Zumwalt class destroyers in fiscal year 2009. The 
House, however, failed to approve the budget request for the DDG-1000 
shipbuilding program and would leave only $400 million of a $2.5 
billion budget request for surface combatant ship procurement in fiscal 
year 2009. This would amount to only a small down payment for a delayed 
third DDG-1000 in fiscal year 2010 or a down payment toward the 
procurement of unplanned DDG-51 class ships in fiscal year 2010. The 
House approach would mean that no destroyer of any kind would be 
procured or contracted for construction in fiscal year 2009 from either 
surface combatant shipbuilder and would basically eliminate surface 
combatant shipbuilding to procure an additional LPD-17 class ship for 
which funds were not requested in the President's budget. Can you 
please comment on the likely impact on shipbuilding acquisition costs, 
program continuity, as well as industrial base stability, workforce 
retention, and cost efficient production at our surface combatant 
shipyards, if Congress fails to fund the procurement of the third DDG-
1000 this year?
    Mr. Young. The failure to fully fund the third DDG-1000 ship in 
fiscal year 2009 would pose risk to the surface combatant shipbuilding 
industrial base, would pose risk to the overall shipbuilding plan, and 
would inject additional cost. Direct production hours for one DDG-1000 
ship are about 2.5 times that of one DDG-51 restart ship. This 
validates DOD's experience that two to three DDG-51 destroyers need to 
be purchased annually to sustain the production workload base for two 
surface combatant shipyards. Current estimates project that two DDG-51 
ships would cost more per year than one DDG-1000 follow ship. The cost 
per year for modified DDG-51 ships would be even higher. Several ship 
and vendor base issues including equipment obsolescence, main reduction 
gears, configuration change issues, and re-start of production lines 
would need to be resolved in order to award and construct additional 
DDG-51 class ships in the following years. If the DDG-1000 program is 
truncated after only two ships, the costs for the two DDG-1000 lead 
ships would increase by $2-4 billion according to Navy estimates, and 
program shutdown costs would have to be funded. It also is important to 
recognize that the research, development, testing, and evaluation 
efforts for the DDG-1000 program must continue in order to deliver two 
complete lead ships and to support the Dual Band Radar for the CVN 21 
program. With a gap year in fiscal year 2009, as the House plan would 
insert, industrial base stability, workforce retention, and cost 
efficiency would suffer at the surface combatant shipyards regardless 
of whether the Navy continues DDG-1000 production in fiscal year 2010 
or restarts DDG-51 production in fiscal year 2010.

    78. Senator Collins. Secretary Young, does the DOD support 
congressional funding of an additional LPD-17 class ship at the expense 
of surface combatant shipbuilding procurement in fiscal year 2009?
    Mr. Young. No. The Department's position is reflected in the 
President's budget fiscal year 2009 submission. It represents the 
Department's funding requirements after balancing needs across all 
product lines.
                                 ______
                                 
             Questions Submitted by Senator Saxby Chambliss

             TAX INCREASE PREVENTION AND RECONCILIATION ACT

    79. Senator Chambliss. Secretary Young, your office recently 
submitted a letter to Congress outlining impacts on the DOD of 
implementing Section 511 of the Tax Increase Prevention and 
Reconciliation Act (TIPRA) of 2005. I understand that complying with 
TIPRA will require DOD to modify the Defense Financial Accounting 
System, increase personnel requirements, and pay an additional $17 
billion to DOD contractors over the next 5 years. I understand that the 
intent of this law is to crack down on government contractors who do 
not pay their taxes, but I am wondering if there will not be some 
unintended consequences. Although the cost to DOD is $17 billion over 5 
years, I understand the reduction in the tax gap is miniscule compared 
to this, and also that DOD also gets no savings but is only burdened 
with the cost. What do you think the impact to DOD will be if this 
requirement is not repealed?
    Mr. Young. The Department is concerned that the withhold will limit 
the number of companies willing to enter into the government market. As 
a result, it will reduce competition and our access to new 
technologies. Also, it would significantly restrict the available cash 
of tax-compliant companies that would otherwise be used to develop new 
technologies. In addition, the withhold will apply to payments made by 
third parties such as those made to banks under the government 
commercial credit card program. The banks processing payments under 
this commercial credit card program have already informed the 
government that they do not intend to implement the section 511 
withholds on behalf of the government. Therefore, the Department will 
lose its ability to use the commercial purchase card and other third 
party payment mechanisms and will have to bring these small purchase 
functions back in-house. This will exacerbate the Department's current 
procurement personnel staffing shortages by the additional workload 
that would result from the alternate use of purchase orders or other 
paper intensive processes.

    80. Senator Chambliss. Secretary Young, where do you envision the 
money coming from to pay the additional costs since it is doubtful 
Congress will be appropriating more money specifically for this?
    Mr. Young. The additional costs associated with changing DOD 
financial management systems and processes will be borne by either the 
Defense Finance and Accounting Service (DFAS) or the military 
departments and other defense agencies (ODAs), depending on the 
systems. Since DFAS is a working capital fund organization, it would 
make the necessary changes to the systems it owns or controls and 
increase the costs to its customers. The cost to modify the systems 
owned or controlled by the military departments and ODAs would come 
from appropriated funds. In addition, commercial vendors are expected 
to pass on the incremental cost of goods and services due to added cost 
for commercial vendors to modify their systems and processes. These 
costs will also be passed on to the military departments and ODAs.

    81. Senator Chambliss. Secretary Young, will there be an impact on 
force readiness due to the extra funds that will have to be expended to 
comply with this law?
    Mr. Young. Yes. The cost to the contractors to comply with this law 
will be passed to the government through increased costs of systems, 
spares, supplies and services purchased by the Department. Without 
additional funds to offset either these increases or the additional 
costs the Department will have to bear to implement this additional 
withholding requirement, the Department will have fewer funds to 
support our warfighters.

    82. Senator Chambliss. Secretary Young, while the 3 percent 
withholding requirement does not go into effect until 2011, when does 
the DOD expect to change its regulations and financial management 
systems to become compliant with TIPRA?
    Mr. Young. The Internal Revenue Service (IRS) is developing 
implementing regulations to establish the process for section 511 
withholds. Once the IRS issues the implementing regulations, the 
requirements will be known, and DOD can begin modifying its regulations 
and financial management systems. If DOD can begin these modifications 
in fiscal year 2009, we would expect to have them completed in time to 
be in compliance when section 511 goes into effect on January 1, 2011.

    83. Senator Chambliss. Secretary Young, how do you expect TIPRA to 
affect future contracts as well as small businesses that are pursuing 
military contracts?
    Mr. Young. The Department is concerned the withhold will limit the 
number of companies willing to enter into the government market, 
thereby reducing competition and access to new technologies. We believe 
many small businesses will no longer do business with the government 
due to the potential cash flow problems created by TIPRA of 2005.

               MILITARY HOUSING PRIVATIZATION INITIATIVE

    84. Senator Chambliss. Secretary Young, your responsibilities as 
Under Secretary for Acquisition, Technology, and Logistics include 
oversight of installation and environmental issues within DOD. Over the 
past year I have been heavily involved with an issue relating to DOD's 
military housing privatization initiative (MHPI) which falls within 
this area. To be honest, we have four extremely successful housing 
privatization projects in the State of Georgia. However, we have a 
disaster at Moody Air Force Base. The Air Force has four projects known 
as the American Eagle projects at four different Air Force bases. Work 
has ceased at all these projects and they are years behind schedule 
and, collectively, hundreds of millions of dollars in debt. 
Specifically at Moody Air Force Base, approximately $9 million has been 
owed to around 30 subcontractors for over a year and at least one of 
these subcontractors has lost both his hope and his business as a 
result of this failed project.
    As I have looked at this, I believe there is enough blame to go 
around and that everyone involved, the bondholders, the project owner, 
but also the Government, made mistakes here that should not have been 
made, could have been avoided, and need to be prevented in the future.
    Senator Mark Pryor and I included legislation in this year's NDAA 
to increase DOD's oversight process in this area and require closer 
attention to the way these projects are designed, executed, and 
requiring the Services to more closely oversee the projects so that 
problems are detected and corrected early on.
    It greatly concerns me that, in the case of the project at Moody, 
there was not a single government person on site monitoring the 
project, that the government representative on site had essentially no 
authority, and that after being aware of problems with the Moody 
project for several years, that the Air Force either did not have the 
necessary mechanisms or did not use the mechanisms they had to either 
correct the problem or replace the project owner in a timely fashion. 
And obviously it concerns me greatly that we are almost 4 years into 
this project and that we have essentially no houses built, are millions 
of dollars in debt, and that there are small businesses suffering as a 
result. Above all, I'm concerned that there are thousands of airmen 
moving to Moody Air Force Base and that they may not have a place to 
live. Are you aware of this issue, and what is your assessment?
    Mr. Young. Since the MHPI was enacted in the NDAA for Fiscal Year 
1996, the military Services have awarded 87 housing privatization 
projects. Over 174,000 housing units have been privatized and more than 
130,000 previously inadequate units will be revitalized during the 
initial 10 years of the program. DOD's $2 billion contribution has 
generated $24 billion in upfront private sector housing construction.
    One developer, American Eagle, currently owns five projects and is 
performing poorly. American Eagle is comprised of Carabetta Enterprises 
and the Shaw Group. In November 2007, American Eagle sold its Navy 
Northwest, WA, project to Forest City Enterprises, Inc., who assumed 
the role of general partner. American Eagle is the general partner in 
one Army project at Fort Leonard Wood, MO, which is stable and in the 
process of being sold to another developer. This project sale is 
expected to close in June 2008. American Eagle owns four Air Force 
projects at Hanscom Air Force Base, MA; Patrick Air Force Base, FL; 
Little Rock Air Force Base, AR; and Moody Air Force Base, GA. At the 
four Air Force installations, American Eagle is behind its construction 
schedule, behind in paying subcontractors, and in default under private 
and Air Force project documents. The bondholders have stopped funding 
construction draws while the projects are sold to another developer. 
Execution of the purchase and sale agreement for the Air Force projects 
is expected in fall 2008.
    The Air Force did monitor and was aware of the Moody project 
deficiencies and reported them to the project owner and bondholders as 
early as 2005. Since the Government was not a party to the private 
sector contract between the Moody project owner and its contractors, 
the government had no authority to intervene in those contracts. The 
Air Force sent cure notices to the project owner in August 2007 and 
continued to work closely with the bondholders regarding the project 
owner's deficiencies. The Moody project was put into receivership in 
late summer 2007, and all action on the project requires the court's 
approval. The Air Force continues to work the project owners and the 
bondholders for a consensual sale of the Moody project to a new owner 
by the fall 2008. As part of the consensual sale, Air Force is working 
with the prospective project owners to properly size the project to 
meet future Air Force housing needs and ensure adequate housing is 
available for the military families moving to the installation.
    The current MHPI authorities provide a creative and effective 
solution to addressing the shortage of quality family rental housing 
for servicemembers and their families. The proposed MHPI authority 
amendments contained in Section 2803 of S. 3001 would impose 
undesirable and unnecessary additional government oversight and 
reporting on MHPI projects, contrary to the privatization model and the 
legislative intent of the original authorizing language. Under the 
original MHPI, private sector developers and lenders develop, maintain, 
and operate the privatized housing and resolve issues when they arise. 
Market forces drive contractor performance and the primary enforcement 
mechanism is the ability of the military members to choose where to 
live. If a housing project fails to meet performance expectations 
lenders have the option, with the approval of the Services, to replace 
the owner with a more viable entity. The American Eagle problems have 
been unfortunate, but the MHPI has enabled the military Services to 
revitalize their housing significantly faster than they would have 
under traditional military construction.

    85. Senator Chambliss. Secretary Young, can you give me your 
assurances that you will review DOD's policies in this area to ensure 
yourself that DOD has the proper oversight policies in place to protect 
the Government's interests and ensure that our soldiers, sailors, 
airmen, and marines receive the quality housing they deserve in a 
timely manner through housing privatization initiative projects such as 
these?
    Mr. Young. The MHPI is key to the Department's efforts to ensure 
that servicemembers and their families have access to high quality, 
safe, secure, and affordable housing. The Department continually 
reviews its policies regarding military housing privatization, to 
ensure that the Department maintains an effective oversight program for 
MHPI project performance. Current Department policy includes detailed 
upward reporting by the military Services, completion of a biannual 
program evaluation plan (PEP report), and mandatory project reviews and 
approvals by the Office of the Deputy Under Secretary of Defense for 
Installations and Environment. In addition, the Department's quarterly 
reports and biannual PEP reports are submitted to the congressional 
defense committees for ongoing congressional oversight. The 
difficulties with American Eagle projects were identified as early as 
the MHPI PEP Report #10, which was submitted to Congress on March 30, 
2006. The Department is willing to work with the congressional defense 
committees to improve these areas of our oversight.
                                 ______
                                 
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    [Whereupon, at 11:41 a.m., the committee adjourned.]

                                 
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