Tactical Aircraft: Impact of F-22 Production Cost Reduction Plans
on Cost Estimates (02-AUG-01, GAO-01-636T).			 
								 
The Air Force started developing the F-22 aircraft in 1991, and  
plans to complete development in September 2003. The Air Force	 
plans to procure 333 production aircraft at a cost currently	 
limited to $37.6 billion by the National Defense Authorization	 
Act for Fiscal Year 1998. The act does not specify the total	 
number of aircraft to be procured. This testimony discusses (1)  
potential cost reduction plans, (2) production cost estimates by 
the Air Force and the Office of the Secretary of Defense, and (3)
the Department of Defense's (DOD) actions to implement		 
recommendations included in GAO's August 2000 report		 
(NSIAD-00-178). GAO found that (1) the F-22 contractors'	 
estimated amount of cost reduction plans total about $26.5	 
billion, (2) both the Air Force and the Office of the Secretary  
of Defense cost estimators projected in late 2000 that F-22	 
production costs would still exceed the $37.6 billion		 
congressional cost limitation if the Air Force were to procure	 
333 F-22s, and (3) DOD plans to reconcile the number of F-22s	 
needed with the amount of the congressional cost limitation on	 
F-22 production as part of the next Quadrennial Defense Review.  
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-636T					        
    ACCNO:   A01487						        
  TITLE:     Tactical Aircraft: Impact of F-22 Production Cost	      
             Reduction Plans on Cost Estimates                                
     DATE:   08/02/2001 
  SUBJECT:   Air Force procurement				 
	     Defense budgets					 
	     Fighter aircraft					 
	     Future budget projections				 
	     Military cost control				 
	     F-22 Aircraft					 
	     F-22 Raptor Aircraft				 

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GAO-01-636T
     
Testimony Before the Subcommittee on National Security, Veterans Affairs,
and International Relations, Committee on Government Reform, House of
Representatives

United States General Accounting Office

GAO For Release on Delivery Expected at 10: 00 a. m., Thursday, August 2,
2001 TACTICAL AIRCRAFT

Impact of F- 22 Production Cost Reduction Plans on Cost Estimates

Statement of Allen Li, Director, Acquisition and Sourcing Management

GAO- 01- 636T

Page 1 GAO- 01- 636T F- 22 Aircraft

Mr. Chairman and Members of the Subcommittee: I am pleased to be here today
to discuss our work regarding the impact of F- 22 cost reduction plans on
cost estimates for F- 22 production.

As you know, the Air Force started developing the F- 22 in 1991, and plans
to complete development in September 2003. The Air Force plans to procure
333 production aircraft at a cost currently limited 1 to $37.6 billion by
the National Defense Authorization Act for Fiscal Year 1998. 2 The act does
not specify the total number of aircraft to be procured.

As requested, we have updated the information we provided to the
Subcommittee last August 3 on the F- 22 production program and have prepared
a report being released today. 4

Today, we will highlight our work concerning (1) potential cost reduction
plans, (2) production cost estimates by the Air Force and the Office of the
Secretary of Defense, and (3) DOD?s actions to implement recommendations
included in our August 2000 report.

In summary, the F- 22 contractors? estimated amount of cost reduction plans
total about $26.5 billion. Plans pertaining to about half of this amount
have been implemented. After considering the cost reduction plans, both Air
Force and the Office of the Secretary cost estimators projected in late 2000
that F- 22 production costs would still exceed the $37.6 billion
congressional cost limitation if the Air Force were to procure

1 The cost limitation, as adjusted, is currently $37. 6 billion for 333
aircraft and does not include $1. 575 billion in fiscal year 2000 funding
associated with six aircraft labeled Production Representative Test Vehicles
that are excluded from the production cost limitation. Those aircraft are
funded mostly with appropriations for Research, Development, Test and
Evaluation as approved by the Congress. The production cost limitation does,
however, include about $200 million for advanced procurement related to
those six aircraft.

2 P. L. 105- 85, Nov. 18, 1997. 3 Defense Acquisitions: Recent F- 22
Production Cost Estimates Exceeded Congressional Limitation (GAO/ NSIAD- 00-
178, Aug. 15, 2000). See Related Products List for additional reports on the
F- 22 program.

4 Tactical Aircraft: Continuing Difficulty Keeping F- 22 Production Costs
Within the Congressional Limitation (GAO- 01- 782, July 16, 2001).

Page 2 GAO- 01- 636T F- 22 Aircraft

333 F- 22s. Air Force estimators projected the cost at $39.6 billion; 5 the
Office of the Secretary estimated $46.6 billion. 6

Since both the Office of the Secretary and the Air Force had projected that
costs would exceed the limitation, we recommended in August 2000 7 that the
Secretary of Defense reconcile the number of F- 22s needed with the amount
of the congressional cost limitation on F- 22 production. DOD officials
agreed but said they would make the judgements as part of the next
Quadrennial Defense Review. We also made a recommendation regarding the
regularity and scope of reporting by the Air Force to the Under Secretary of
Defense for Acquisition, Technology, and Logistics on the status of the cost
reduction plans. While the status of cost reduction plans was a topic in the
last Air Force briefing to the Under Secretary, information reported was
less comprehensive- and thus less useful- than we had recommended.

In 1997, the Air Force and contractors reported that the F- 22 production
cost could grow substantially and that the contractors should develop cost
reductions to offset that cost growth. The Office of the Under Secretary of
Defense for Acquisition, Technology and Logistics agreed. Since then, the
contractors and the Air Force have been developing and implementing plans to
reduce costs by enhancing production technology, improving manufacturing
techniques, and improving acquisition practices.

Cost reduction plans are categorized as ?challenge,? not yet implemented or
implemented. This categorization defines the relative progression of these
plans toward potentially achieving future cost reductions. Challenge plans
are those that are not yet well defined and are not yet close to achieving
future cost reductions. Because these challenge plans are not yet well
defined, neither Air Force nor Office of the Secretary cost estimators
assumed any cost reductions from the challenge plans when

5 Air Force cost estimators projected the costs for 331 aircraft at $38. 5
billion. To arrive at the cost for 333 aircraft that are planned, $1. 1
billion must be added for 2 aircraft approved for fiscal year 1999, making
the projected cost $39.6 billion for 333 aircraft.

6 Briefing documents indicate that Office of the Secretary estimators
projected the costs for 331 aircraft at $45.5 billion. To arrive at the
projected cost for 333 aircraft that are planned, $1.1 billion must be added
for 2 aircraft approved for fiscal year 1999, making the projected cost $46.
6 billion for 333 aircraft.

7 GAO/ NSIAD- 00- 178. Background

Page 3 GAO- 01- 636T F- 22 Aircraft

formulating their estimates. Not yet implemented plans are those that are
better defined and are believed to be sound and possible. However, actions
necessary to make them a reality have not been taken. Implemented plans are
those closest to achieving cost reductions. The Air Force and contractors?
criteria for determining if a cost reduction plan is implemented include
whether

 the contractor has submitted a firm- fixed price proposal that recognizes
the impact of the cost reduction,

 the impact of the reduction has been reflected in a current contract
price- either with the prime contractor or a supplier to the prime
contractor,

 the contractor has reduced the standard number of hours allocated to a
specific task,

 the reduction has been negotiated in a forward pricing rate agreement, or

 the reduction has been negotiated with a subcontractor or vendor. The
current F- 22 production cost limitation that stands at $37.6 billion has
been adjusted to reflect planned acquisition of 333 production aircraft, 6
fewer than included in the cost limitation in effect in 1999. This change
reflects congressional action on the fiscal year 2000 Air Force budget, in
which the Congress approved funding for 6 aircraft using appropriations for
Research, Development, Test and Evaluation. Accordingly, the 6 aircraft and
most costs were eliminated from the production cost limitation and added to
the development cost limitation.

The F- 22 contractors? estimated amount of cost reduction plans added up to
$26.5 billion in January 2001. The total consists of

 About $4.2 billion (16 percent) labeled as a challenge amount;

 About $8.5 billion (32 percent) in cost reductions not yet implemented;
and

 About $13.7 billion (52 percent) in cost reductions that have been
implemented.

In January 1997, the Air Force and contractors had estimated cost reduction
plans totaling $13.1 billion dollars. Thus, the value of these plans has
doubled in a four- year period. Ultimately, if the savings from the cost
reduction plans are to be achieved, production contract prices and Air Force
expenditures must be lower than would have been the case if the plans had
not been implemented. The Air Force and contractors have entered into an
understanding that relates the probable total affordability Potential Cost

Reductions Identified by Contractors Have Increased

Page 4 GAO- 01- 636T F- 22 Aircraft

of F- 22 production to target contract prices for low- rate initial
production. Until contracts are negotiated, cost estimates will continue to
reflect judgements of estimators about the potential impact of cost
reduction plans when implemented.

Because F- 22 production is in its early stages, most of the cost reductions
associated with the cost reduction plans have not yet been achieved. One
analysis of some cost reduction plans categorized as implemented indicates
that lower costs can be achieved. The Air Force in mid- 2000 asked Defense
Contract Audit Agency (DCAA) 8 to conduct a limited, independent review of
some of the plans. DCAA examined eleven cost reduction plans amounting to
$425 million of the total $26.5 billion in estimated cost reductions. DCAA
did not take exception to the potential cost reductions for 8 of the 11
plans reviewed; found potential cost reductions on two others to be based on
judgement, not discrete, measurable events; and found documentation on one
to be lacking.

As we reported to you in August 2000, both the Air Force and Office of the
Secretary cost estimators projected in late 1999 that production costs for
339 aircraft would exceed the congressional cost limitation of $39.8 billion
in effect at that time. The Air Force cost estimators projected production
costs at $40.8 billion, and the Office of the Secretary estimated $48.6
billion for the 339 production aircraft. Even though the cost estimates
exceeded the $39. 8 billion cost limitation in effect at that time, the
Secretary of the Air Force maintained that the actual cost would not exceed
the limitation, and established the Air Force?s position on F- 22 production
cost at the $39.8 billion limitation amount.

In estimates made in December 2000 to support the fiscal year 2002 budget
request, both Air Force and Office of the Secretary cost estimators continue
to project that F- 22 production costs will exceed the congressional cost
limitation. The Air Force cost estimators projected in late 2000 that
production costs were likely to exceed the $37. 6 billion congressional cost
limitation by $2 billion. The cost estimate produced by the Office of the
Secretary indicates that costs will likely exceed the congressional cost
limitation by $9 billion. Air Force officials advised us that their cost
estimates consider the same cost reduction plans as those by the Office of
the Secretary, but that differing judgements regarding the

8 DCAA is responsible for contract audits at DOD. Latest F- 22

Production Cost Estimates Exceed Cost Limitation by Greater Margin

Page 5 GAO- 01- 636T F- 22 Aircraft

viability of the plans and potential amounts of cost reductions are applied.
The Office of the Secretary excluded some cost reduction plans because of
the limited viability and estimated lower savings from some cost reduction
plans. The following table compares the two cost estimates.

Table 1: Comparison of Production Cost Estimates by the Air Force and the
Office of the Secretary and the Impact of Cost Reduction Plans on These
Estimates

Then year dollars in billions Estimate Air Force Office of the

Secretary

Production cost estimate including implemented cost reduction plans $47.2
$51.9 Impact of not yet implemented cost reduction plans ($ 7.6) ($ 5.3)

Total production cost estimate $39.6 $46.6

Source: GAO analysis of Air Force and Office of the Secretary data.

If the Office of the Secretary?s higher estimate is correct and additional
cost reduction plans are not developed and implemented, we project that the
Air Force would have to buy about 85 fewer F- 22s (or about 25 percent) than
the 333 aircraft now planned to stay within the cost limitation. In our
August 2000 report, we made a similar projection.

We recommended in our August 2000 report that the Secretary of Defense
reconcile the number of F- 22s that need to be procured with the cost
limitation and report to the Congress on the implications of procuring fewer
F- 22s because of potentially higher costs. DOD partially agreed, stating
that the affordability of the F- 22 will be evaluated during an upcoming
Quadrennial Defense Review. More recently, DOD indicated that a review of
DOD programs, directed by the President, must be completed before it can
comment further on this recommendation.

Our August report also contained a recommendation that the Air Force report
to the Under Secretary of Defense on the status of the cost reduction plans
each quarter and that quarterly reports include, as a minimum, summary
information such as the total number of cost reduction plans identified, the
number implemented, the total estimated cost reductions, cost reductions
realized to date, and additions and deletions from the plans included in the
prior report. However, in the Air Force?s March 2001 quarterly review to the
Under Secretary, the information reported included only summary information
on the total estimated cost reductions. Actions to Implement

Prior GAO Recommendations

Page 6 GAO- 01- 636T F- 22 Aircraft

DOD, in commenting on our report being released today, indicated the
information reported in the last quarterly review (June 2001) contained more
detailed information. We have examined the June 2001 quarterly review and
agree it contains more information on cost reduction plans than previous
quarterly reviews in terms of total estimated cost reductions. However, the
information reported is still not consistent with what we recommended be
reported in August 2000. Specifically, information was not reported as we
recommended regarding the total number of cost reduction plans identified,
the number implemented, the cost reductions realized to date, and any
additions or deletions from the plans included in the prior report.

Mr. Chairman, that concludes my statement. I will be happy to respond to any
questions you or other Members of the Subcommittee may have.

Contacts and Acknowledgments

For future questions regarding this testimony, please contact Allen Li,
(202) 512- 4841, or Robert Murphy, (937) 258- 7904. Individuals making key
contributions to this testimony include Edward Browning, Arthur Cobb, Marvin
Bonner, C. Todd Brannon, Michael J. Hazard, Don Springman and John Van
Schaik.

Page 7 GAO- 01- 636T F- 22 Aircraft

Tactical Aircraft: Continuing Difficulty Keeping F- 22 Production Costs
Within the Congressional Limitation (GAO- 01- 782, July 16, 2001).

Tactical Aircraft: F- 22 Development and Testing Delays Indicate Need for
Limit on Low- Rate Production (GAO- 01- 310, Mar. 15, 2001).

Supporting Congressional Oversight: Framework for Considering Budgetary
Implications of Selected GAO Work (GAO- 01- 447, Mar. 9, 2001).

Defense Acquisitions: Recent F- 22 Production Cost Estimates Exceeded
Congressional Limitation (GAO/ NSIAD- 00- 178, Aug. 15, 2000).

Defense Acquisitions: Use of Cost Reduction Plans in Estimating F- 22 Total
Production Costs (GAO/ T- NSIAD- 00- 200, June 15, 2000).

Budget Issues: Budgetary Implications of Selected GAO Work for Fiscal Year
2001 (GAO/ OCG- 00- 8, Mar. 31, 2000).

F- 22 Aircraft: Development Cost Goal Achievable If Major Problems Are
Avoided (GAO/ NSIAD- 00- 68, Mar. 14, 2000).

Defense Acquisitions: Progress in Meeting F- 22 Cost and Schedule Goals

(GAO/ T- NSIAD- 00- 58, Dec. 7, 1999).

Fiscal Year 2000 Budget: DOD?s Procurement and RDT& E Programs

(GAO/ NSIAD- 99- 233R, Sept. 23, 1999).

Budget Issues: Budgetary Implications of Selected GAO Work for Fiscal Year
2000 (GAO/ OCG- 99- 26, Apr. 16, 1999).

Defense Acquisitions: Progress of the F- 22 and F/ A- 18E/ F Engineering and
Manufacturing Development Programs (GAO/ T- NSIAD- 99- 113, Mar. 17, 1999).

F- 22 Aircraft: Issues in Achieving Engineering and Manufacturing
Development Goals (GAO/ NSIAD- 99- 55, Mar. 15, 1999).

F- 22 Aircraft: Progress of the Engineering and Manufacturing Development
Program (GAO/ T- NSIAD- 98- 137, Mar. 25, 1998).

F- 22 Aircraft: Progress in Achieving Engineering and Manufacturing
Development Goals (GAO/ NSIAD- 98- 67, Mar. 10, 1998). Related GAO Products

Page 8 GAO- 01- 636T F- 22 Aircraft

Tactical Aircraft: Restructuring of the Air Force F- 22 Fighter Program

(GAO/ NSIAD- 97- 156, June 4, 1997).

Defense Aircraft Investments: Major Program Commitments Based on Optimistic
Budget Projections (GAO/ T- NSIAD- 97- 103, Mar. 5, 1997).

F- 22 Restructuring (GAO/ NSIAD- 97- 100R, Feb. 28, 1997).

Tactical Aircraft: Concurrency in Development and Production of F- 22
Aircraft Should Be Reduced (GAO/ NSIAD- 95- 59, Apr. 19, 1995).

Tactical Aircraft: F- 15 Replacement Issues (GAO/ T- NSIAD- 94- 176, May 5,
1994).

Tactical Aircraft: F- 15 Replacement Is Premature as Currently Planned

(GAO/ NSIAD- 94- 118, Mar. 25, 1994).

(120065)
*** End of document. ***