Defense Acquisitions: Improved Business Case Key for Future	 
Combat System's Success (04-APR-06, GAO-06-564T).		 
                                                                 
The Future Combat System (FCS) is a networked family of weapons  
and other systems in the forefront of efforts by the Army to	 
become a lighter, more agile, and more capable combat force. When
considering complementary programs, projected investment costs	 
for FCS are estimated to be on the order of $200 billion. FCS's  
cost is of concern given that developing and producing new weapon
systems is among the largest investments the government makes,	 
and FCS adds significantly to that total. Over the last 5 years, 
the Department of Defense (DOD) doubled its planned investments  
in such systems from $700 billion in 2001 to $1.4 trillion in	 
2006. At the same time, research and development costs on new	 
weapons continue to grow on the order of 30 to 40 percent. FCS	 
will be competing for significant funds at a time when federal	 
fiscal imbalances are exerting great pressures on discretionary  
spending. In the absence of more money being available, FCS and  
other programs must be executable within projected resources.	 
Today, I would like to discuss (1) the business case needed for  
FCS to be successful and (2) our recent recommendations to DOD	 
and matters for congressional consideration regarding the FCS	 
program.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-564T					        
    ACCNO:   A50857						        
  TITLE:     Defense Acquisitions: Improved Business Case Key for     
Future Combat System's Success					 
     DATE:   04/04/2006 
  SUBJECT:   Army procurement					 
	     Defense capabilities				 
	     Military systems analysis				 
	     Policy evaluation					 
	     Procurement planning				 
	     Procurement policy 				 
	     Program evaluation 				 
	     Requirements definition				 
	     Schedule slippages 				 
	     Systems evaluation 				 
	     Technology 					 
	     Weapons research and development			 
	     Weapons systems					 
	     Army Future Combat Systems 			 

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GAO-06-564T

     

     * Summary
     * Background
          * FCS Restructures the Program and Changes Contracting Approac
          * Elements of a Business Case
     * Objectives, Scope, and Methodology
     * Improved Business Case Is Needed for the FCS's Success
          * While Progress Has Been Made, Requirements Still Remain Unce
          * FCS Success Hinges on Numerous Undemonstrated Technologies a
          * FCS Acquisition Strategy Will Demonstrate Design Maturity af
          * FCS's Higher Costs May Result in Funding Challenge
     * Recent FCS Recommendations and Matters for Congressional Con
          * Recommendations to DOD
          * DOD Comments on Our Report and Our Evaluation
          * Matters for Congressional Consideration
     * Contacts and Staff Acknowledgments
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs

                 United States Government Accountability Office

Testimony

GAO

  Before the Subcommittee on Tactical Air and Land Forces, Committee on Armed
                       Services, House of Representatives

For Release on Delivery Expected at 2:00 p.m. EDT Tuesday, April 4, 2006

DEFENSE ACQUISITIONS

         Improved Business Case Key for Future Combat System's Success

Statement of Paul L. Francis, Director, Acquisition and Sourcing
Management

GAO-06-564T

DEFENSE ACQUISITIONS

Improved Business Case Key for Future Combat System's Success

  What GAO Found

There are a number of compelling aspects of the FCS program, and it is
hard to argue with the program's goals. However, the elements of a sound
business case for such an acquisition program--firm requirements, mature
technologies, a knowledge-based acquisition strategy, a realistic cost
estimate, and sufficient funding-are not yet present. FCS began product
development prematurely in 2003. Since then, the Army has made several
changes to improve its approach for acquiring FCS. Yet today, the program
remains a long way from having the level of knowledge it should have had
before starting product development. FCS has all the markers for risks
that would be difficult to accept for any single system, much less a
complex, multiprogram effort. These challenges are even more daunting in
the case of FCS not only because there are so many of them but because FCS
represents a new concept of operations that is predicated on technological
breakthroughs. Thus, technical problems, which accompany immaturity, not
only pose traditional risks to cost, schedule, and performance; they pose
risks to the new fighting concepts envisioned by the Army.

Last month, we made recommendations to the Secretary of Defense to take
several actions, prior to DOD's long-term commitment to the program, to
improve the FCS business case and establish knowledge-based measures to
guide oversight of FCS progress. These recommendations detailed specific
steps DOD should take leading up to a major milestone review of the
program in 2008 when the program is expected to have achieved the level of
knowledge it should have had in 2003. We believe it is at this point the
program should be reviewed as to whether it has established enough of a
solid business case to continue. While DOD concurred with the intent of
our recommendations, it did not agree to limit its commitment to the FCS
program or to do much beyond what it had already planned to do. This
concerns us. As a result, we have also raised to Congress several matters
for consideration to ensure that FCS has a sound business case before
future funding commitments are made. We believe the actions we have
recommended to DOD and the matters for consideration we have presented to
Congress are necessary to improve the prospects for FCS success and to
protect the government's ability to change course if the program does not
progress as the Army plans.

                 United States Government Accountability Office

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss the Department of the Army's
Future Combat System (FCS), a networked family of weapons and other
systems. FCS is in the forefront of efforts to help the Army transform
itself into a lighter, more agile, and more capable combat force by using
a new concept of operations, new technologies, and a new information
network linking whole brigades together. This is a tremendous undertaking
that will involve a total investment cost on the order of $200 billion.

The context within which the FCS investment is being made is important.
Fiscal imbalances faced by the federal government will continue to
constrain discretionary spending. One of the single largest investments
the government makes is the development and production of new weapon
systems. Over the last 5 years, the Department of Defense (DOD) has
doubled its planned investments in new weapon systems from about $700
billion in 2001 to nearly $1.4 trillion in 2006. At the same time,
research and development cost growth on new weapons maintains its
historical level of about 30 to 40 percent. This is the lens that must be
used to look at major new investments, such as FCS, because more money may
not be an option for the future. Rather, the key to getting better
outcomes is to make individual programs more executable.

My statement today is based on our recently issued report about the need
for an improved business case for the FCS. This report responds to the
National Defense Authorization Act for Fiscal Year 2006, which requires
GAO to report annually on the product development phase of the FCS's
acquisition. 1 Recently, we testified before the Senate Armed Services
Committee about the FCS's business case and related business arrangements.
2

Today, I would like to discuss (1) the scope of the business case that we
feel is necessary for the FCS to be successful and (2) our recent
recommendations to DOD and matters for congressional consideration
regarding the FCS program.

1

GAO, Defense Acquisitions: Improved Business Case Is Needed for Future
Combat System's Successful Outcome. GAO-06-367. (Washington, D.C.: Mar.
14, 2006).

2

GAO, Defense Acquisitions: Business Case and Business Arrangements Key for
Future Combat System's Success . GAO-06-478T. (Washington, D.C.: Mar. 1,
2006).

    Page 1 GAO-06-564T

  Summary

The critical role played by U.S. ground combat forces is underscored today
in Operation Iraqi Freedom. That the Army should ensure its forces are
well equipped with the capabilities they will need in the coming years is
unquestioned. Moreover, the top-level goals the Army has set for its
future force seem inarguable: to be as lethal and survivable as the
current force, but significantly more sustainable and mobile. However, the
Army's approach to meeting these needs-embodied in the FCS and its
complementary systems-does raise questions.

On the one hand, the FCS is the result of the Army leadership's taking a
hard look at how it wants its forces to fight in the future. Army
leadership has had the courage to break with tradition on FCS; it would
have likely been much easier to win support for successor vehicles to the
Abrams and Bradley. On the other hand, FCS does not present a good
business case for an acquisition program. It is necessary that a major new
investment like FCS have a compelling, well thought-out concept, but this
alone is not sufficient. FCS began product development prematurely in
2003, and today is a long way from having the level of knowledge it should
have had before committing the high level of resources associated with a
new product development effort. The elements of a sound business case-firm
requirements, mature technologies, a knowledge-based acquisition strategy,
a realistic cost estimate, and sufficient funding-are not yet present. FCS
has all the markers for risks that would be difficult to accept for any
single system. They are even more daunting in the case of FCS, not only
because of their multiplicity, but because FCS represents a new concept of
operations predicated on technological breakthroughs. Thus, technical
problems, which accompany immaturity, not only pose traditional risks to
cost, schedule, and performance, but also pose risks to the new fighting
concepts envisioned by the Army.

A full commitment to the Army's strategy for acquiring FCS is not yet
warranted because the Army has not demonstrated sufficient knowledge by
providing the confidence it can deliver a fully capable FCS within
projected costs and time frames. As DOD proceeds with its decisions, it
must preserve its ability to change course on acquiring FCS capabilities
to guard against a situation in which FCS will have to be acquired at any
cost. It must also be able to hold the Army accountable for delivering FCS
within budgeted resources. Last month, we made recommendations to the
Secretary of Defense to take several actions, prior to DOD's long-term
commitment to the program, to improve the FCS business case and establish
knowledge-based measures to guide oversight of FCS progress. These
recommendations detailed specific steps DOD should take leading up to a
major milestone review of the program in 2008, when the program

                                   Background

is expected to have achieved the level of knowledge it should have had in
2003. We believe it is at this point the program should be reviewed as to
whether it has established enough of a solid business case to continue.
While DOD concurred with the intent of our recommendations, it did not
agree to limit its commitment to the FCS program or to do much beyond what
it had already planned to do. This concerns us. As a result, we have also
raised to Congress several matters for consideration to ensure that FCS
has a sound business case before future funding commitments are made. We
believe the actions we have recommended to DOD and the matters for
consideration we have presented are necessary to improve the prospects for
FCS success and to protect the government's ability to change course if
the program does not progress as the Army plans.

The FCS concept is part of a pervasive change to what the Army refers to
as the Future Force. The Army is reorganizing its current forces into
modular brigade combat teams, meaning troops can be deployed on different
rotational cycles as a single team or as a cluster of teams. The Future
Force is designed to transform the Army into a more rapidly deployable and
responsive force and to enable the Army to move away from the large
division-centric structure of the past. Each brigade combat team is
expected to be highly survivable and the most lethal brigade-sized unit
the Army has ever fielded. The Army expects FCS-equipped brigade combat
teams to provide significant warfighting capabilities to DOD's overall
joint military operations. The Army is implementing its transformation
plans at a time when current U.S. ground forces are playing a critical
role in the ongoing conflicts in Iraq and Afghanistan.

The FCS family of weapons includes 18 manned and unmanned ground vehicles,
air vehicles, sensors, and munitions linked by an information network.
These vehicles, weapons, and equipment will constitute the majority of the
equipment needed for a brigade combat team. The Army plans to buy 15
brigades' worth of FCS equipment by 2025. See figure 1 for the various
elements of the FCS program.

Figure 1: FCS's Core Systems

Source: U.S. Army.

If successful, the FCS system-of-systems concept will leverage individual
capabilities of weapons and platforms and will facilitate interoperability
and open system designs. This would be a significant improvement over the
traditional approach of building superior individual weapons that must be
retrofitted and netted together after the fact. This transformation, in
terms of both operations and equipment, is under way with the full
cooperation of the Army warfighter community. In fact, the development and
acquisition of FCS is being accomplished using a uniquely collaborative
relationship among the Army's developers, the participating contractors,
and the warfighter community.

FCS Restructures the Program and Changes Contracting Approach

As a key element of its efforts to transform itself, the Army has
recognized FCS from its outset as the greatest technology and integration
challenge it has ever undertaken. In May 2003, DOD approved the FCS
program to begin the system development and demonstration phase, a
milestone that ideally marks the completion of technology development and
the start of product development. However, FCS's entry into this phase was
premature given the program had failed to satisfy basic tenets of DOD
acquisition policy. We have reported that, as FCS started product
development, it did not have mature technologies or adequately defined
requirements.

Responding to direction from the Army Chief of Staff, the Army announced
in July 2004 its plans to restructure the FCS program. The Army added 4
years to develop and mature the manned ground vehicles, added more
demonstrations and experiments, and established an evaluation unit to
demonstrate FCS capabilities. The restructuring reintroduced 4 systems
that previously had been left unfunded, raising the total number of
FCS-related systems to 18. The restructure also included plans to spin off
mature FCS capabilities as they become available to current force units.
With the restructuring, the FCS program now plans to achieve initial
operational capability in fiscal year 2015 and full operational capability
in fiscal year 2017. FCS low-rate production is expected to start in
fiscal year 2012, and full-rate production in fiscal year 2016. The Army
intends to continue FCS procurement through fiscal year 2025, eventually
equipping 15 brigade combat teams.

The restructuring was not the only major modification to the FCS program.
Because of congressional concerns that the Army's contracting approach
incorporated insufficient safeguards to protect the government's
interests, the Army is preparing a new contract that is to be completed
and finalized in late March 2006 and is based on the Federal Acquisition
Regulation, which governs acquisitions within the federal government. The
new contract will incorporate standard Federal Acquisition Regulation
clauses such as those relating to procurement integrity, Truth in
Negotiations, and Cost Accounting Standards. Previously, the lead systems
integrator had been performing FCS work for the Army under a contractual
instrument called an "other transaction agreement" that was not subject to
the Federal Acquisition Regulation. The other transaction agreement gave
the Army considerable flexibility to negotiate the terms and conditions
for contractors involved in FCS development. The Army's purpose for using
such an agreement was to encourage innovation and to use its wide latitude
in tailoring business, organizational, and technical relationships to
achieve the program goals. In April 2005, the Army

Elements of a Business Case

decided to incorporate into its agreement the procurement integrity, Truth
in Negotiations, and Cost Accounting Standards clauses from the
regulation.

After Congress raised questions about the Army using an other transaction
agreement for the development of a program as large and risky as FCS and
about the Army's choice not to include standard Federal Acquisition
Regulation clauses in the agreement, the Secretary of the Army directed
that the other transaction agreement be converted to a Federal Acquisition
Regulation-based contract. All of the work performed under the product
development phase as of September 2005 will be accounted for under the
prior other transaction agreement, and all work after September 2005 will
be performed under the new contract. The Army expects the content of the
program-its statement of work-will remain largely the same, and it does
not expect the cost, schedule, and performance of the overall development
effort to change materially.

We have frequently reported on the importance of using a solid, executable
business case before committing resources to a new product development. In
its simplest form, this is evidence that (1) the warfighter's needs are
valid and can best be met with the chosen concept, and (2) the chosen
concept can be developed and produced within existing resources-that is,
proven technologies, design knowledge, adequate funding, and adequate time
to deliver the product when needed.

At the heart of a business case is a knowledge-based approach to product
development demonstrating high levels of knowledge before significant
commitments are made. In essence, knowledge supplants risk over time. This
building of knowledge can be described as three levels, or knowledge
points, that should be attained over the course of a program:

     o First, at program start, the customer's needs should match the
       developer's available resources-mature technologies, time, and
       funding. An indication of this match is the demonstrated maturity of
       the technologies needed to meet customer needs.
     o Second, about midway through development, the product's design should
       be stable and demonstrate it is capable of meeting performance
       requirements. The critical design review takes place at that point of
       time because it generally signifies when the program is ready to start
       building production-representative prototypes.

                       Objectives, Scope, and Methodology

o  Third, by the time of the production decision, the product must be
shown to be producible within cost, schedule, and quality targets and have
demonstrated its reliability, and the design must demonstrate that it
performs as needed through realistic system-level testing.

The three knowledge points are related in that a delay in attaining one
delays the points that follow. Thus, if the technologies needed to meet
requirements are not mature, then design and production maturity will be
delayed.

To develop the information on the Future Combat System program's progress
toward meeting established goals, the contribution of critical
technologies and complementary systems, and the estimates of cost and
affordability, we interviewed officials of the Office of the Under
Secretary of Defense (Acquisition, Technology, and Logistics); the Army
G-8; the Office of the Under Secretary of Defense (Comptroller); the
Secretary of Defense's Cost Analysis Improvement Group; the Director of
Operational Test and Evaluation; the Assistant Secretary of the Army
(Acquisition, Logistics, and Technology); the Army's Training and Doctrine
Command; Surface Deployment and Distribution Command; the Program Manager
for the Future Combat System (Brigade Combat Team); the Future Combat
System Lead Systems Integrator; and other contractors. We reviewed, among
other documents, the Future Combat System's Operational Requirements
Document, the Acquisition Strategy Report, the Baseline Cost Report, the
Critical Technology Assessment and Technology Risk Mitigation Plans, and
the Integrated Master Schedule. We attended or reviewed the results of the
FCS System-of-Systems Functional Review, In-Process Reviews, Board of
Directors Reviews, and multiple system demonstrations. In our assessment
of the FCS, we used the knowledgebased acquisition practices drawn from
our large body of past work as well as DOD's acquisition policy and the
experiences of other programs. We conducted the above in response to the
National Defense Authorization Act of Fiscal Year 2006, which requires GAO
to annually report on the product development phase of the FCS
acquisition. We performed our review from June 2005 to March 2006 in
accordance with generally accepted government auditing standards.

  Improved Business Case Is Needed for the FCS's Success

The FCS program started its product development phase with inadequate
knowledge in several key areas. After almost 3 years and progress in key
areas, the elements of a sound business case, namely firm requirements,
mature technologies, a knowledge-based acquisition strategy, a realistic
cost estimate, and sufficient funding, are not yet demonstrably present.
Given that, an improved business case for the FCS program is essential to
help ensure the program is successful in the long run. The importance of a
business case is amplified by the fact that the program is developing 18
systems and a network under a single program office and lead system
integrator in the same amount of time it would take to develop a single
system.

While Progress Has Been Made, Requirements Still Remain Uncertain

The Army has made significant progress defining FCS's system-of-systems
requirements, particularly when taking into account the daunting number of
them involved-nearly 11,500 at this level. Yet system-level requirements
are not yet stabilized and will continue to change, postponing the needed
match between requirements and resources. Now the Army and its contractors
are working to complete the definition of system-level requirements, and
the challenge is in determining if those requirements are technically
feasible and affordable. Army officials say it is almost certain some FCS
system-level requirements will have to be modified, reduced, or
eliminated; the only uncertainty is by how much. We have previously
reported unstable requirements can lead to cost, schedule, and performance
shortfalls. Once the Army gains a better understanding of the technical
feasibility and affordability of the system-level requirements, trade-offs
between the developer and the warfighter will have to be made, and the
ripple effect of such trade-offs on key program goals will have to be
reassessed. Army officials have told us it will be 2008 before the program
reaches the point that it should have reached before it started in May
2003 in terms of stable requirements.

FCS Success Hinges on Numerous Undemonstrated Technologies and
Complementary Programs

Development of concrete program requirements depends in large part on
stable, fully mature technologies. Yet, according to the latest
independent assessment, the Army has not fully matured any of the
technologies critical to FCS's success. 3 Some of FCS's critical
technologies may not reach a high level of maturity until the final major
phase of acquisition, the start of production. The Army considers a lower
level of demonstration as acceptable maturity, but even against this
standard, only about one-third of the technologies are mature. We have
reported going forward into product development without demonstrating
mature technologies increases the risk of cost growth and schedule delays
throughout the life of the program. The Army is also facing challenges
with several of the complementary programs considered essential for
meeting FCS's requirements. Some are experiencing technology difficulties,
and some have not been fully funded. These difficulties underscore the gap
between requirements and available resources that must be closed if the
FCS business case is to be executable.

Technology readiness levels (TRL) are measures pioneered by the National
Aeronautics and Space Administration and adopted by DOD to determine
whether technologies are sufficiently mature to be incorporated into a
weapon system. Our prior work has found TRLs to be a valuable
decision-making tool because they can presage the likely consequences of
incorporating a technology at a given level of maturity into a product
development. The maturity levels range from paper studies (level 1), to
prototypes tested in a realistic environment (level 7), to an actual
system proven in mission operations (level 9). Successful DOD programs
have shown critical technologies should be mature to at least a TRL 7
before the start of product development.

3

Office of the Deputy Assistant Secretary of the Army for Research and
Technology, Technology Readiness Assessment Update, April 2005.

Page 9 GAO-06-564T

FCS Acquisition Strategy Will Demonstrate Design Maturity after Production
Begins

          Table 1: Number of FCS Critical Technologies Sorted by TRLs

Critical technology Critical technologyTRL assessment as of April 2003
assessment as of April 2005

                              TRL 7 and higher 1 0

                                   TRL 6 7 18

                             TRL 5 and lower 24 31

                                  Total 32 49

Source: U.S. Army (data); GAO (analysis and presentation).

Note: The April 2003 assessment was organized into 31 technology areas,
one of which had two different TRL ratings for separate technologies. For
the April 2005 assessment, the original 31 technology areas were
subdivided into 54 individual technologies. Five of the original
technologies are no longer being tracked, leaving a total of 49.

Table 1 shows that in the latest independent FCS technology assessment,
none of the critical technologies are at TRL 7, and only 18 of the 49
technologies currently rated have demonstrated TRL 6, defined as prototype
demonstration in a relevant environment. None of the critical technologies
may reach TRL 7 until the production decision in fiscal year 2012,
according to Army officials. Projected dates for FCS technologies to reach
TRL 6 have slipped significantly since the start of the program. In the
2003 technology assessment, 87 percent of FCS's critical technologies were
projected to be mature to a TRL 6 by 2005. When the program was looked at
again in April 2005, 31 percent of the technologies were expected to
mature to a TRL 6 by 2005, and all technologies are not expected to be
mature to that level until 2009.

The knowledge deficits for requirements and technologies have created
enormous challenges for devising an acquisition strategy that can
demonstrate the maturity of design and production processes. Several
efforts within the FCS program are facing significant problems that may
eventually involve reductions in promised capabilities and may lead to
cost overruns and schedule delays. Even if requirements setting and
technology maturity proceed without incident, FCS design and production
maturity will still not be demonstrated until after the production
decision is made. Production is the most expensive phase in which to
resolve design or other problems.

The Army's acquisition strategy for FCS does not reflect a knowledgebased
approach. Figure 2 shows how the Army's strategy for acquiring FCS
involves concurrent development, design reviews occurring late, and other
issues out of alignment with the knowledge-based approach outlined in DOD
policy.

Figure 2: FCS Acquisition Compared with Commercial Best Practices'
Approach

Source: U.S. Army (data); GAO (analysisand presentation).

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

FCS's Higher Costs May Result in Funding Challenge

The FCS acquisition schedule indicates several key issues:

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

The FCS program is thus susceptible to late-cycle churn, which refers to
the additional-and unanticipated-time, money, and effort that must be
invested to overcome problems discovered late through testing.

The total cost for the FCS program, now estimated at $160.7 billion
(thenyear dollars), has climbed 76 percent from the Army's first estimate.
Because uncertainties remain regarding FCS's requirements and the Army
faces significant challenges in technology and design maturity, we believe
the Army's latest cost estimate still lacks a firm knowledge base.
Furthermore, this latest estimate does not include complementary programs
that are essential for FCS to perform as intended, or the necessary
funding for spin-outs. The Army has taken some steps to help manage the
growing cost of FCS, including establishing cost ceilings or targets for
development and production. However, program officials told us that
setting cost limits may result in accepting lower capabilities. As FCS's
higher costs are recognized, it remains unclear whether the Army will have
the ability to fully fund the planned annual procurement costs for the FCS
current program of record. FCS affordability depends on the accuracy of
the cost estimate, the overall level of development and procurement
funding available to the Army, and the level of competing demands.

At the start of product development, FCS program officials estimated that
the program would require about $20 billion in then-year dollars for
research, development, testing, and evaluation and about $72 billion to
procure the FCS systems to equip 15 brigade combat teams. At that time,
program officials could only derive the cost estimate on the basis of what
they knew then-requirements were still undefined and technologies were
immature. The total FCS program is now expected to cost $160.7 billion in
then-year dollars, a 76 percent increase. Table 2 summarizes the growth of
the FCS cost estimate.

Table 2: Comparison of Original Cost Estimate and Current Cost Estimate
for FCS Program

                       (in billions of then-year dollars)

     Original Revised estimate Percentage estimate (as of 1/2006) increase

Research, development, $19.6 $30.5 56% testing, and evaluation

                          Procurement $71.8 $130.2 81%

                             Total $91.4 $160.7 76%

Source: Army (data); GAO (analysis and presentation).

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

Figure 3 compares the funding profiles for the original program and for
the latest restructured program.

Figure 3: Comparison of Original Cost Estimate and Current Cost Estimate
for FCS Program between Fiscal Years 2003 and 2026

Dollars in millions16,000

14,000

                                      2005

                                 2007 2009 2011

3

                                       3

                                      2015

                                2017 2019 2021 3

                                      2025

200

                                      201

                                      202

      Year

Original estimate

Current estimate Source: U.S. Army (data); GAO (analysisand presentation).

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

The latest cost estimate does not include all the costs that will be
needed to field FCS capabilities. For instance,

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

Through fiscal year 2006, the Army will have budgeted over $8 billion for
FCS development. Through fiscal year 2008, when the preliminary design
review is held, the amount budgeted for FCS will total over $15 billion.
By the time the critical design review is held in 2010, about $22 billion
will have been budgeted. By the time of the production decision in 2012,
about $27 billion will have been budgeted.

The affordability of the FCS program depends on several key assumptions.
First, the program must proceed without exceeding its currently projected
costs. Second, the Army's annual procurement budget-not including funds
specifically allocated for the modularity initiative-is expected to grow
from about $11 billion in fiscal year 2006 to at least $20 billion by
fiscal year 2011. Even if this optimistic projection comes to pass, FCS
annual procurement costs will dominate the Army procurement funding. If
the Army budget remains at fiscal year 2011 levels, FCS procurement will
represent about 60 to 70 percent of Army procurement from fiscal years
2014 to 2022. With the remainder, the Army will have to address current
force upgrades, including spin-outs from FCS, the procurement of FCS
complementary programs, aviation procurement, trucks, ammunition, and
other equipment. Further, FCS will have to compete for funding with other
Army "big-ticket" items, such as missile defense systems and the future
heavy lift helicopter.

The ongoing operational assessment of the Joint Tactical Radio System
functionality could result in a program restructure, which would have an
impact on the program's costs.

Page 15 GAO-06-564T

Figure 4 compares the projected FCS budget with the funds the Army
projects for its total procurement budget.

    Figure 4: Comparison of FCS Budget with Total Army Procurement Budget

Dollars in billions22

20

18

16

14

12

10

8

6

4

2

      0 2006 2007 2008 2009 2010 2011 2012 20132014 2015 2016 2017 2018 2019
      2020 2021 2022 20232024 2025 Year

FCS

Army Source: U.S. Army (data); GAO (analysisand presentation).

The large annual procurement costs for FCS are expected to begin in fiscal
year 2012, which is beyond the current Future Years Defense Plan period
(fiscal years 2006-2011). This situation is typically called a funding bow
wave. The term "bow wave" is used to describe a requirement for more funds
just beyond the years covered in the current defense plan that are subject
to funding constraints. As it prepares the next defense plan, the Army
will face the challenge of allocating sufficient funding to meet the
increasing needs for FCS procurement in fiscal years 2012 and 2013.
According to an Army official, if all the needed funding cannot be
identified, the Army will consider reducing the FCS procurement rate or
delaying or reducing items to be spun out to current Army forces. However,
reducing the procurement rate would increase the FCS unit costs and extend
the time needed to deploy FCS-equipped brigade combat teams.

  Recent FCS Recommendations and Matters for Congressional Consideration

In our most recent report on the FCS, we made specific recommendations to
the Secretary of Defense, with the intent that DOD limit its commitment to
the FCS until it demonstrates a solid business case. DOD, in its response
to our draft report, concurred with the intent of the recommendations but
did not agree to limit its commitment to the FCS program or to take any
action beyond what it had already planned to do. Consequently, we added
several matters for congressional consideration in order to highlight key
issues and actions that Congress may want to take.

                             Recommendations to DOD

In our March report we made several specific recommendations to the
Secretary of Defense, which are intended to limit DOD's commitment to the
FCS until a sound business case that is consistent with DOD acquisition
policy and best practices can be clearly demonstrated.

Specifically, we recommended that the Secretary of Defense lay the
groundwork for the Army's development of a sound FCS business case by
tasking the spring 2006 Defense Acquisition Board to do the following:

     o Revaluate the FCS business case-including requirements, technologies,
       complementary programs, acquisition strategy, cost, and funding
       availability-in light of its own acquisition policies.
     o If the business case for FCS is found not to be executable, determine
       whether investments in FCS design- and production-related activities
       should be curbed until system-level requirements are firm and
       technologies are mature.
     o If the deficiencies in the FCS business case are judged to be
       recoverable, establish the incremental markers that are needed to
       demonstrate that FCS is proceeding on a knowledge-based approach and
       to hold the Army accountable, through periodic reporting or other
       means, for achieving those markers.

We also recommended that the Secretary of Defense reassess the FCS cost
estimate and funding availability based on the independent cost estimate
and any program changes to improve its business case.

Finally, we recommended that the Secretary of Defense establish a
milestone review by the Defense Acquisition Board following the Army's
preliminary design review scheduled for 2008. This should be a go/no-go
review of the FCS program that is based on (1) the program's ability to

DOD Comments on Our Report and Our Evaluation

demonstrate whether it is meeting the knowledge markers outlined above at
times consistent with DOD policy and best practices and (2) whether the
funds can still be made available to afford its costs.

DOD concurred with the intent of our recommendations but did not agree to
limit its commitment to the FCS program or to take any action beyond what
it had already planned to do. DOD stated it is committed to the Army's
transformation, and that effort, in particular the FCS program, requires a
disciplined, yet agile, acquisition construct. DOD's response to our draft
report did not specifically address our findings on the FCS program's lack
of a sound business case. DOD added that the Defense Acquisition Executive
has determined that the FCS program is based on a viable acquisition
strategy and that it would reevaluate the FCS acquisition strategy and
reassess FCS cost estimates and funding in the spring 2006 Defense
Acquisition Board review. DOD also noted a Defense Acquisition Board
review would be held for the time frame (2008) of the FCS preliminary
design review, but it refrained from committing to making a milestone
decision review.

Regarding a commitment to a milestone review in 2008, we noted that the
FCS was allowed to proceed into Systems Development and Demonstration
prematurely, while DOD had directed a full milestone review update be held
in November 2004. However, the review has not yet occurred, and it now
appears it will not occur. Thus, there is no commitment by DOD to review
the FCS business case (including all elements in addition to the
acquisition strategy), culminating in a go/no-go decision in 2008 based on
the preliminary design review. The increased responsibility of making a
declarative decision adds a higher level of discipline and accountability
than a review implies. We maintain our position that such a decision is
warranted.

Matters for Congressional Consideration

Based on DOD's response to our report, it did not appear that DOD planned
to assess the FCS business case against best practices or its own
policies. Nor did DOD agree to hold a go/no-go milestone review in 2008
based on the preliminary design review. Congress will likely be asked to
approve fiscal years 2008 and 2009 funding requests before the FCS
business case is adequately demonstrated. In light of DOD's response,
Congress should consider directing the Secretary of Defense to:

     o report on the results of the May 2006 Defense Acquisition Board's
       review of the FCS program business case in the areas of requirements,
       technologies, acquisition strategy, cost, and funding, and
     o direct DOD to conduct and report the results of a milestone review in
       2008, following the preliminary design review, that will be a go/no-go
       review of the FCS program based on its demonstration of a sound
       business case.

Congress should also consider restricting annual appropriations for fiscal
years 2008 and 2009 for the FCS program until definitive progress in
establishing a sound business case is demonstrated in terms of firm
requirements, mature technologies, a knowledge-based acquisition strategy,
a realistic cost estimate, and sufficient funding. Most important, the
Army must provide sufficient evidence FCS will work.

Mr. Chairman, this concludes my prepared statement. I would be happy to
answer any questions you or members of the subcommittee may have.

For future questions about this statement, please contact me at (202) 512-

  Contacts and Staff

4841. Individuals making key contributions to this statement include

Acknowledgments Robert L. Ackley, Noah B. Bleicher, Lily J. Chin, Randolfo
E. DeLeon, Marcus C. Ferguson, William R. Graveline, Michael J. Hesse,
Guisseli Reyes, John P. Swain, and Carrie R. Wilson.

    (120535)

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