    Unmanned Aircraft Systems: Global Hawk Cost Increase Understated
    in Nunn-McCurdy Report (15-DEC-05, GAO-06-222R).

    To provide for oversight of cost growth in DOD major defense
    acquisition programs, Congress passed legislation, commonly
    referred to as Nunn-McCurdy, which requires DOD to notify
    Congress when a program's unit cost growth exceeds (or breaches)
    the latest approved acquisition program baseline by at least 15
    percent. If the cost growth has increased at least 25 percent
    over the baseline, the Secretary of Defense must certify to
    Congress that (1) the program is essential to national security;
    (2) no alternatives exist which will provide equal or greater
    military capability at less cost; (3) new program acquisition or
    procurement unit cost estimates are reasonable; and (4) the
    management structure is adequate to control unit cost. On April
    13, 2005, the Acting Secretary of the Air Force formally notified
    Congress that the procurement unit cost of the Global Hawk had
    increased 18 percent over the baseline estimate. As requested, we
    are in the process of reviewing the acquisition strategies and
    requirements for several unmanned aircraft systems, including the
    Global Hawk. While that work will not be completed for some
    months, we are issuing this correspondence because we have
    developed important information on the accuracy and completeness
    of the Air Force's reporting of the Global Hawk unit cost
    increase that needs attention.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-06-222R
        ACCNO:   A43358
      TITLE:     Unmanned Aircraft Systems: Global Hawk Cost Increase
    Understated in Nunn-McCurdy Report
         DATE:   12/15/2005
      SUBJECT:   Cost analysis
    	     Data integrity
    	     Defense procurement
    	     Procurement planning
    	     Procurement policy
    	     Procurement practices
    	     Reporting requirements
    	     Unmanned aerial vehicles
    	     Global Hawk Unmanned Aerial Vehicle

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    GAO-06-222R

    United States Government Accountability Office

    Washington, DC 20548

    December 15, 2005

    The Honorable John W. Warner Chairman The Honorable Carl Levin Ranking
    Minority Member Committee on Armed Services United States Senate

    Subject: Unmanned Aircraft Systems: Global Hawk Cost Increase Understated
    in Nunn-McCurdy Report

    To provide for oversight of cost growth in DOD major defense acquisition
    programs, Congress passed legislation, commonly referred to as
    Nunn-McCurdy, which requires DOD to notify Congress when a program's unit
    cost growth exceeds (or breaches) the latest approved acquisition program
    baseline by at least 15 percent.1 If the cost growth has increased at
    least 25 percent over the baseline, the Secretary of Defense must certify
    to Congress that (1) the program is essential to national security; (2) no
    alternatives exist which will provide equal or greater military capability
    at less cost; (3) new program acquisition or procurement unit cost
    estimates are reasonable; and (4) the management structure is adequate to
    control unit cost.

    On April 13, 2005, the Acting Secretary of the Air Force formally notified
    Congress that the procurement unit cost of the Global Hawk had increased
    18 percent over the baseline estimate. As you requested, we are in the
    process of reviewing the acquisition strategies and requirements for
    several unmanned aircraft systems,2 including the Global Hawk. While that
    work will not be completed for some months, we are issuing this
    correspondence because we have developed important information on the
    accuracy and completeness of the Air Force's reporting of the Global Hawk
    unit cost increase that needs attention.

    110 U.S.C. 2433 establishes the requirement for unit cost reports. The
    requirement became permanent law in 1982 in Public Law 97-252, section
    1107. Two measures are tracked: procurement unit cost (total funds
    programmed for procurement divided by the total number of fully configured
    items to be procured) and program acquisition unit cost (total cost of
    development, procurement, and system-specific military construction
    divided by the number of fully configured end items to be produced). To
    eliminate the effects of inflation, costs are expressed in constant base
    year dollars.

                                        Summary

    The Air Force's Nunn-McCurdy report to Congress understates the unit cost
    increase in that it does not include $400.6 million in known additional
    procurement costs.3 Including these costs results in procurement unit cost
    growth of 31 percent over the current baseline versus the 18 percent
    reported by the Air Force. In our view, this larger unit cost increase
    should have been reported to Congress with the required certification by
    the Secretary of Defense. The additional costs not included in the Air
    Force's reporting are for the purchase and installation of sensors,
    enhancements to communications equipment and ground stations, parts
    procurement, and other items required to achieve the system's initial,
    full-up capability. Air Force Global Hawk program budget documents
    included these costs before submitting the April 2005 Nunn-McCurdy notice
    to Congress and before the March 2005 publication of the annual Selected
    Acquisition Report.4 However, these costs were removed after the program
    office budget reporting documents were submitted to DOD offices in the
    Pentagon. Office of Secretary of Defense (OSD) officials explained that
    these costs had been recategorized as modifications that have historically
    been excluded from baseline measurements. We believe these costs should
    have been reported since they are needed to achieve the system's required
    capabilities.

    2Rather than referring to unmanned aerial vehicles, we are adopting DOD's
    new parlance of unmanned aircraft systems. DOD recently began changing its
    references to better reflect that the air vehicle itself is part of a
    larger system (e.g. payloads, ground stations, and communication
    equipment) and to reflect the Federal Aviation Administration's
    classification of unmanned vehicles as aircraft.

    3This and other costs are expressed in terms of base year 2000 dollars to
    facilitate unit cost comparisons across years. The total cost expressed in
    then-year, budgeted dollars for items not included in the unit cost report
    is $487.6 million.

    4For the purpose of congressional oversight and decision making, DOD is
    required by law to report to Congress the unit costs for each major
    defense acquisition program. DOD reports this unit cost for both the
    current budget estimate and the most recent acquisition program baseline,
    which describes the cost, quantity, schedule, and performance goals of a
    program. DOD reports these comparisons in a Selected Acquisition Report.
    10 U.S.C. 2432 establishes the requirements for these reports. Another
    statute, 10 U.S.C. 2433, establishes the requirement for unit cost
    reports. If certain program cost increase thresholds are exceeded (known
    as unit cost or Nunn-McCurdy breaches), DOD is required to report to
    Congress and, if applicable, certify the program to Congress.

    We are recommending that the Office of the Secretary of Defense revise the
    Global Hawk Selected Acquisition Report and take the necessary actions to
    comply with the Nunn-McCurdy legislation for reporting and certification.

                          Reasons for Nunn-McCurdy Cost Breach

    The Air Force's April 2005 letter to Congress stated that the 18-percent
    breach was primarily the result of increasing aircraft capacity to
    accommodate requirements for a more sophisticated, integrated imagery and
    signals intelligence sensor suite. This letter refers to the program
    restructuring of the Global Hawk program in 2002 that added a new, larger,
    and more capable aircraft (designated the RQ-4B). Before 2002, the Global
    Hawk program had planned to procure only the smaller version now
    designated the RQ-4A. The Air Force letter explains that the final design
    of the RQ-4B required more extensive changes to the fuselage, tail, and
    landing gear than expected when the new, larger Global Hawk system was
    baselined in 2002. The December 31, 2004, Selected Acquisition Report
    showed the reasons for unit cost increases as:

               o  requirements growth,
               o  increased sensor cost,
               o  deferred aircraft purchases,
               o  increased costs of airframe,
               o  increased support requirements and initial spares, and
               o  increased government costs for acceptance tests, design
               changes, and mission support.

    Additionally, program officials told us that they originally expected
    substantial commonality between the A and B models but, as designs were
    finalized and production started, it was apparent that the B model was
    more different, more complex, and more costly than anticipated.

           Costs Not Included in Global Hawk Nunn-McCurdy Notice to Congress

    Program officials said the unreported costs ($400.6 million) are for items
    needed to bring the RQ-4B to a common configuration and to meet warfighter
    requirements. Such items as signals intelligence sensors and ground
    station enhancements will be retrofitted on aircraft and ground equipment
    after they have left the production line. Development and procurement cost
    increases and schedule slips have resulted in numerous adjustments to
    funding plans that included deferring some items to later in the program
    and reclassifying costs. For example, officials originally planned to
    procure 25 signals intelligence sensors and install them on the aircraft
    production line to meet the warfighter's requirements for fully configured
    multi-intelligence aircraft. These costs were budgeted for last year in
    the aircraft procurement weapon system account and were included in the
    December 2002 acquisition program baseline. Because of cost pressures and
    schedule changes, officials moved the cost for 10 of these sensors-$122.6
    million worth-to a different funding account used to modify aircraft after
    they are delivered. The new plan is to install these 10 sensors in
    aircraft after they have left the production line. Because historical DOD
    practice does not include modifications in the program baseline, funding
    for these sensors and the other modification items were excluded for the
    Nunn-McCurdy reporting purposes.

    OSD officials responsible for the Selected Acquisition Reports told us,
    historically, modification costs have not been included in the
    calculations in these reports to Congress. This is because modification
    costs were typically used to add new capabilities or make changes after a
    fully capable weapon system had been delivered. However, in the case of
    the Global Hawk, the modification costs for the sensors and other items
    were intended to deliver the full initial capability and, in our view,
    should have been included in the unit and total cost reporting to
    Congress. In response to our inquiry, OSD officials recently initiated a
    review of policies and practices to evaluate Global Hawk reporting and
    also to determine whether this issue affects other acquisition programs.
    OSD and Air Force officials said a factor contributing to uncertainty is
    that DOD policies and practices have been increasingly streamlined to
    provide less detailed guidance and may need to be updated to keep pace
    with new business practices such as evolutionary and spiral development.

    As shown in table 1, the impact of adding $400.6 million for modification
    costs would have resulted in a breach of 31 percent over baseline and
    required the Secretary to certify the program to Congress. This additional
    cost would raise the average procurement cost for each aircraft to $74.8
    million compared with $57.0 million estimated in the December 2002
    baseline. We further note that adding modification costs would also result
    in a breach of program acquisition unit cost growth of almost 19 percent
    compared with the 11 percent reported in the Selected Acquisition Report.

    Table 1: Global Hawk Procurement Unit Cost (in millions of dollars)

                                          Percent                GAO      Percent
                   Baseline                change Retrofit  estimate      change,
                   estimate      Program reported    costs including    including
                       (Dec estimate(Mar       to      not  retrofit     retrofit
                      2002)        2005) Congress reported     costs        costs
    Procurement $2,904.6     $3,416.1            $400.6  $3,816.7
    Cost
    Quantity          51           51                          51
    Unit cost &    $57.0        $67.0      18%              $74.8          31%
    Change

    Note: Costs expressed in base year 2000 dollars.

    Source: Air Force (data); GAO (analysis).

    The Air Force is in the midst of rebaselining the cost and schedule for
    acquiring the Global Hawk system. The Defense Acquisition Board is
    scheduled to review the new baseline in November 2005. This will be the
    program's fourth baseline since the original baseline at system
    development start in March 2001.

                                      Conclusions

    The Selected Acquisition Reports and unit cost reporting requirements are
    intended to inform Congress of the costs to develop and procure weapon
    systems and should accurately include all costs necessary to deliver the
    full capability stipulated in acquisition and requirements documents that
    support the business case for new weapon system development programs. The
    Global Hawk program does not meet this standard and therefore Congress
    does not have accurate and complete information about this program with
    which to make decisions on current and future budget requests.

                          Recommendations for Executive Action

    We recommend that the Secretary of Defense direct the Under Secretary of
    Defense for Acquisition, Technology, and Logistics to revise the Global
    Hawk report and take the necessary actions to comply with the Nunn-McCurdy
    legislation for reporting and certification.

                                    Agency Comments

    In written comments on a draft of this report, DOD partially concurred
    with our recommendation. DOD agreed that retrofit costs for the 10 signals
    intelligence sensors and one radar sensor were previously in the approved
    baseline and should have been included in the unit cost reporting.
    Including these items would have increased unit costs by 22.5 percent over
    the baseline versus the 18 percent reported to Congress and in the annual
    Selected Acquisition Report. DOD did not agree with us that funding for
    the other remaining modifications was also reportable, maintaining that
    these items meet the historical reporting practice for modifications to
    provide more performance capability than defined in the original approved
    acquisition program baseline. DOD's written comments also said that OSD
    will review the Department's acquisition reporting policies and practices
    and determine what changes, if any, are necessary to keep pace with new
    business practices such as evolutionary acquisition and will provide
    additional guidance to clarify current practices regarding weapon system
    modification and retrofit accounting.

    We continue to believe that Global Hawk unit procurement cost increase
    exceeds the 25-percent threshold established in law. Besides the costs for
    sensors and the radar, we believe other major modification costs
    identified in our report should have been included in unit cost reporting
    because they represent the cost to deliver capability originally agreed to
    in the acquisition program baseline. For example, other items not reported
    by DOD included $108 million in funding for technical solutions needed to
    meet required warfighter capabilities in the operational requirements
    document for communicating with ground forces. Furthermore, we understand
    that the Air Force plans to notify Congress that unit procurement costs
    for the Global Hawk program have increased over the 25-percent threshold
    and will initiate the certification process required by Nunn-McCurdy.
    Finally, we are pleased that DOD plans to review acquisition and
    accounting policies and practices concerning modifications to determine if
    changes are needed. We believe that keeping policy and practice aligned
    will facilitate more accurate tracking and reporting and allow for greater
    oversight for major acquisition program baselines and unit costs over
    time.

                                 Scope and Methodology

    This report is the result of a broader ongoing review of the acquisition
    strategies being applied on Unmanned Aircraft Vehicle programs, including
    Global Hawk, Predator, and Joint Unmanned Combat Air Systems. To examine
    the accuracy and completeness of the Air Force's Nunn-McCurdy report on
    Global Hawk, we obtained budget and programmatic data and compared changes
    in data from prior periods. This comparison showed that modification
    dollars were excluded in calculations used to prepare the final
    Nunn-McCurdy report and the annual Selected Acquisition Report. We
    discussed this analysis with Air Force Global Hawk program officials at
    Wright-Patterson Air Force Base, Ohio. We also discussed our analysis of
    Global Hawk and Nunn-McCurdy reporting and policy with officials of the
    Office of Secretary of Defense, Under Secretary for Acquisition,
    Technology, and Logistics. We discussed Global Hawk requirements with Air
    Combat Command officials at Langley Air Force Base, Virginia. We conducted
    our work from September through November 2005 in accordance with generally
    accepted government auditing standards.

    We are sending copies of this letter to the Honorable Donald H. Rumsfeld,
    Secretary of Defense, and Michael W. Wynne, Secretary of the Air Force. We
    will make copies available to other interested parties upon request. The
    letter is also available at no charge on the GAO Web site at
    http://www.gao.gov.

    Please contact me at (202) 512-4841 if you or your staff have any
    questions. Contact points for our offices of Congressional Relations and
    Public Affairs may be found on the last page of this report. Other major
    contributors to this letter were Mike Hazard, Assistant Director; Bruce
    Fairbairn; Rae Ann Sapp; and Charlie Shivers III.

    Sincerely yours,

    Michael J. Sullivan, Director Acquisition and Sourcing Management

    Enclosure

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    (120498)

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