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

Enclosure

(120498)

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