Tactical Aircraft: Questions Concerning the F-22A's Business Case
(25-JUL-06, GAO-06-991T).					 
                                                                 
The F-22A--the Air Force's next generation air superiority	 
fighter aircraft--incorporates a low observable (stealth) and	 
highly maneuverable airframe, advanced integrated avionics, and a
new engine capable of sustained supersonic flight without the use
of afterburners. The F-22A acquisition history is a case study in
increased cost and schedule inefficiency. Since the program's	 
inception in 1986, the Air Force has added new requirements, more
than doubled the length of the acquisition schedule, cut purchase
quantities by more than 75 percent, and increased total 	 
acquisition unit costs by more than 100 percent. The F-22A	 
program's significant cost and schedule growth is illustrative of
a number of systemic problems in the Department of Defense's	 
(DOD) major weapon system acquisitions. Currently, DOD is	 
proposing to buy the remaining 60 F-22As under a 3-year contract.
At the Congress's request, GAO was asked for its views on DOD's  
latest plan to restructure the program and on the Air Force's	 
request for authority to enter into a multiyear contract to	 
implement this restructuring.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-991T					        
    ACCNO:   A57443						        
  TITLE:     Tactical Aircraft: Questions Concerning the F-22A's      
Business Case							 
     DATE:   07/25/2006 
  SUBJECT:   Air Force procurement				 
	     Comparative analysis				 
	     Cost analysis					 
	     Cost overruns					 
	     Defense capabilities				 
	     Fighter aircraft					 
	     Investment planning				 
	     Military aircraft					 
	     Military cost control				 
	     Multiyear contracts				 
	     Procurement planning				 
	     Program management 				 
	     Schedule slippages 				 
	     Tactical air forces				 
	     F-15 Aircraft					 
	     F-22 Raptor Aircraft				 
	     Joint Strike Fighter				 

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GAO-06-991T

     

     * Summary
     * Background
     * DOD's Latest Restructuring Is More Expensive and Slows F-22
     * Concerns Whether DOD Satisfies All Multiyear Procurement Cri
          * Substantial Savings Criterion
          * Funds Have Not Been Budgeted
          * Multiyear Contract Quantities Could Be Changed in the Future
     * Other Factors Influence the Practicality of Using Multiyear
          * Order by Mail or Phone

Testimony before the Subcommittee on Airland, Committee on Armed Services,
U.S. Senate

United States Government Accountability Office

GAO

For Release on Delivery Expected at 9:30 a.m. EST

Tuesday, July 25, 2006

TACTICAL AIRCRAFT

Questions Concerning the F-22A's Business Case

Statement of David M. Walker, Comptroller General of the United States

GAO-06-991T

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss the Department of Defense's (DOD)
proposal to buy sixty F-22As under a multiyear contract. As you know, GAO
has recommended that the Air Force prepare a new business case for the
F-22A program to justify the substantial changes planned in the mission
roles and the quantities to be acquired-a recommendation that has yet to
be implemented. Additionally, we share the Congress's concerns over DOD's
wherewithal to acquire the F-22A and other key assets in light of current
and expected resource constraints. Over the past several years, it has
become increasingly clear that DOD must reassess what is affordable and
separate its many wants from its real needs. DOD must make tough
acquisition choices in order for the country to begin to address the large
and growing fiscal imbalance it faces.

My statement today-which is based on our recent report on the F-22A
program1-will highlight our key concerns with moving forward with F-22A
procurement, as DOD proposes. Our work was performed in accordance with
generally accepted government auditing standards.

                                    Summary

Our review indicates that DOD's proposal to add 2 years to the production
period of the remaining F-22A's and to procure the planes under a 3-year
multiyear contract will cost about $1.7 billion more than called for to
procure the last two annual lots as compared to the amount previously
provided in the fiscal year 2006 budget. The primary reasons cited for
this change to the program are industrial base health and the need to
preserve the F-22A production line until production of the Joint Strike
Fighter (JSF) begins. The Air Force has reported to Congress that the
F-22A program meets the criteria set forth in section 2306b of Title 10 of
the U.S. Code for a multiyear contract. We have serious concerns regarding
whether all of the criteria have been satisfied (i.e. substantial savings,
sufficient funding, and stable quantities).

First, the timing of the proposal-near the end of the F-22A's
acquisition-reduces the ability of the program to achieve substantial
savings. Savings are currently estimated to be about $225 million or 2.7
percent of remaining procurement cost if 56 additional aircraft are
purchased-a savings that, in terms of percentage of costs, is far below
historic estimates of savings for other multiyear contracts. Second, the
Air Force is proposing to buy 4 additional aircraft-60 in total--at an
added cost of $674 million in order to save an additional $10 million
under the multiyear contract; however, it has not funded the proposal.
Finally, to satisfy other needs in DOD, F-22A quantities have been
unstable over the last 2 years reducing quantities from 279 aircraft to
179 in the fiscal year 2006 budget and increasing quantities to 183
aircraft in the fiscal year 2007 budget. If quantities continue to
fluctuate downward it could result in additional costs. For example,
according to the Air Force cancellation costs alone could be as much as
$201 million-a sum currently unfunded in the multiyear proposal. This
financial risk, when compared to the savings projected from a multiyear
contract, raises additional questions about the proposal and limits
flexibility for future decision making.

1 GAO, Tactical Aircraft: DOD Should Present a New F-22A Business Case
before Making Further Investments, GAO-06-455R (Washington, D.C.: June 20,
2006).

                                   Background

The F-22A program is illustrative of a number of systemic problems in
DOD's acquisition system. First, the F-22A was approved in an environment
with no clear agreement on enterprise-wide priorities and without due
consideration of current and likely future threats and resource
constraints. Second, the requirements and key program specifications were
not fixed when the program began and have changed over its decades-long
development. Third, key procurement decisions were made without adequate
consideration of technology and other program risks, with costly
consequences. And finally, in this program as in many others, DOD has paid
out significant incentive and award fees to its contractors despite large
cost overruns and schedule delays.

The program has been a case study in cost increases and schedule
inefficiency in major weapon system acquisitions. We have issued numerous
reports over the years on the problems and issues associated with the
F-22A development program. Beginning in 1986 the program was expected to
complete development in 9 years for an estimated cost of $12.6 billion.
After taking 19 years to complete development in December 2005,
development costs were reported at $26.3 billion-109 percent more than
expected. The end result of these inefficiencies in the acquisition
program has been a loss of buying power as the reduced quantity of
aircraft will require a significantly higher unit cost than expected.
Figure 1 shows the changes in procurement quantities over time and
allocates both development and procurement costs to those changing
procurement quantities to show the trend of average total acquisition unit
costs and procurement unit costs.

Figure 1: Changes to Quantities and Costs of F-22As as Program Has Evolved

While the F-22A program has completed development and testing of its
initially planned air-to-air capability, the Air Force now sees a need to
develop more robust air-to-ground attack and intelligence-gathering
capabilities. Therefore, it has started a multibillion dollar development
program for these additional capabilities. These capabilities were not
previously considered a primary role for the F-22A as it was intended to
be primarily an air-to-air fighter to replace the F-15. From the outset
the F-22A was built to counter expected large numbers of new advanced
Soviet fighter aircraft but this threat never materialized. The expanded
air-to-ground attack capability is intended to allow the F-22A to engage a
greater variety of ground targets, such as surface-to-air missile systems,
that have posed a significant threat to U.S. aircraft in recent years.

    DOD's Latest Restructuring Is More Expensive and Slows F-22A Deliveries

Amidst changes to expand F-22A missions and roles, the procurement
quantities and acquisition strategy have also been in flux in recent
years. In December 2004, the Office of the Secretary of Defense (OSD)
reduced planned quantities to a total of 179 F-22A aircraft. At the same
time, it decided to terminate the procurement program at the end of 2008
in order to free up about $10 billion for other priorities. Then, the
fiscal year 2007 budget extended the procurement program 2 years, to 2010.
The department cited the health of the industrial base-the need for
maintaining a fifth generation fighter2 production line-as its rationale
for this added expense and delay. DOD also proposed buying four additional
aircraft and using a 3-year multiyear contract to procure the remaining 60
F-22As to mitigate some of the costs of extending procurement for at least
2 years.

To identify savings that might reduce the cost impact of the restructured
acquisition strategy, the Air Force is proposing a multiyear contract to
buy the remaining F-22A aircraft. The Air Force formulated an estimate for
three annual contracts to compare to a single multiyear contract to buy 56
aircraft. While this comparison can provide a basis for determining
potential savings, the Air Force had not previously planned to buy the
remaining aircraft over 3 years. Instead, the fiscal year 2006 President's
Budget included procurement costs to buy 56 F-22As in two annual lots-29
F-22As in 2007 and 27 F-22As in 2008. Therefore, even utilizing the
multiyear contract authority, the restructuring will add $1.7 billion in
cost to the procurement program and slow deliveries of the final aircraft
when compared to the plan previously provided for in DOD's fiscal year
2006 budget. The final 60 aircraft will each cost 10 percent more on
average (unit procurement costs increase from $166 million per aircraft to
$183 million per aircraft) under the restructured plan, even taking into
account expected savings from the multiyear procurement.

       Concerns Whether DOD Satisfies All Multiyear Procurement Criteria

The Air Force submitted its justification to the Congress on May 16, 2006,
to buy the remaining 56 to 60 F-22A aircraft over a 3-year period with a
multiyear contract. To enter into a multiyear contract for the F-22A, the
Air Force must first obtain specific legislative authorization in both the
annual DOD appropriations act and in an authorization act. If
authorization is obtained from Congress, the Air Force must also meet the
statutory criteria listed in 10 U.S.C. S: 2306b(a) for entering into a
multiyear contract. The justification package the Air Force submitted to
Congress in support of its request for authority to enter into a multiyear
contract for the F-22A concludes that the statutory criteria for multiyear
procurement have been met and that such a multiyear contract would provide
substantial cost savings or avoidance over three annual lot buys. In
reviewing these criteria and the Air Force's position, we have serious
concerns regarding whether all of the criteria have been satisfied (i.e.
substantial savings, sufficient funding and stable quantities). Table 1
lists the six criteria and our observations (we did not assess two of the
criteria).

2 F-22A and F-35 are considered fifth generation fighter aircraft as
compared to the F-15, F-16, F/A-18, and F-117. The primary characteristics
are Very Low Observable (VLO) stealth and information fusion capabilities
that make fifth generation aircraft more survivable and lethal.

Table 1: Observations of F-22A Multiyear Contract Criteria

Multiyear criteria           GAO observations                              
Contract will result in      Substantial savings are not defined in the    
substantial savings          statute, but the 2005 F-22A Independent Cost  
                                Estimate states that between 1982 and 1989    
                                estimates for multiyear savings for proposed  
                                weapon systems averaged 13 percent. The Air   
                                Force justification package shows only 2.7    
                                percent cost avoidance ($225 million) for 56  
                                aircraft.                                     
Reasonable expectation       The Air Force has indicated that its          
agency head will request     multiyear budget is currently under funded by 
funding at required level to $674 million and is seeking authorization to  
avoid contract cancellation  use incremental funding rather than fully     
                                funding each aircraft lot.                    
Minimum need expected to     F-22A quantities have changed in the last 2   
remain substantially         fiscal years to accommodate the need to fund  
unchanged during contract    other annual priorities. Given the potential  
period in terms of           for other priorities in the future-military   
production rates and total   presence overseas, global war on terrorism,   
quantities                   and response to natural disasters-there is a  
                                risk that F-22A quantities would need to be   
                                adjusted again. Quantity reductions could     
                                result in cancellation costs of as much as    
                                $201 million, an amount that is currently     
                                unfunded.                                     
There is stable design, and  The baseline F-22A aircraft design is stable  
technical risks are not      (the proposed multiyear contract is for the   
excessive                    baseline aircraft). While not the subject of  
                                the proposed multiyear contract because it is 
                                a separate effort, the design for adding new  
                                ground attack and ISR capabilities has not    
                                been demonstrated through development or      
                                operational testing and cannot be considered  
                                "stable" at this time.                        
Estimates of contract cost   Not assessed.                                 
and cost avoidance are       
realistic                    
Use of the multiyear         Not assessed.                                 
contract will promote        
national security of the     
United States                

Source: GAO Analysis and 10 U.S.C. 2306b.

Substantial Savings Criterion

To identify potential savings, the Air Force formulated an estimate for
three annual contracts to compare to a single multiyear contract with buys
of 56 and 60 aircraft. Section 2306b of Title 10 of the U.S. Code does not
define what constitutes substantial savings, but the 2005 F-22A
Independent Cost Estimate3 indicates that from 1982 to 1989, DOD proposed
at least 60 multiyear procurement programs for congressional approval,
with estimated savings averaging 13 percent. The Air Force estimates F-22A
multiyear procurement savings to be 2.7 percent if 56 aircraft are
procured, approximately $225 million. The justification package also shows
that an additional $10 million could be saved by buying 60 aircraft as
stated in the fiscal year 2007 President's Budget, but it would require an
additional $674 million not included in the fiscal year 2007 future year
defense plan.

3F/A-22 Independent Cost Estimate, Institute for Defense Analyses, August
2005.

Funds Have Not Been Budgeted

The proposed multiyear contract for 60 F-22As submitted with the fiscal
year 2007 budget is under funded by about $674 million-funds the Air Force
believes it will need in fiscal years 2008 through 2010 to complete these
buys. Additionally, the Air Force has proposed using incremental funding
to pay for the multiyear contract. Instead of fully funding the buy for
each fiscal year, this proposal plans four funding increments-economic
order quantity, advanced buy, subsystem, and final assembly. Incremental
funding for multiyear procurement is neither permitted by the annual DOD
appropriations act4 nor the multiyear authorizing statute, which requires
that funds only be obligated under a multiyear contract "for procurement
of a complete and usable end item."5 The Air Force is seeking an exception
to these requirements in its request to Congress for statutory
authorization for the multiyear contract. The congressional defense
committees are aware of the concerns with incremental funding, and those
committees that have completed a defense bill have provided full funding
for the initial year of the proposed multiyear contract. However, the
congressional authorization and appropriations processes are ongoing.

Multiyear Contract Quantities Could Be Changed in the Future

OSD has restructured the F-22A acquisition program twice in the last 2
years in order to allocate funds to other priorities. In December 2004,
OSD reduced the program from 279 to 179 F-22As to save $10.5 billion. Then
in December 2005, OSD changed the F-22A program again, adding $1 billion
to extend the production line for 2 years to ensure a fifth generation
fighter aircraft production line would remain in operation in case the JSF
experiences delays or problems. So far we have not seen detailed rationale
concerning the impact to the health of the industrial base. OSD also added
4 aircraft at this time for a total of 183 F-22As. We have also not seen
the threat based justification for buying these additional aircraft at an
estimated cost of $674 million. Given the potential for priorities to
change again in the future to fund the military presence in Iraq and
Afghanistan, fight terrorism around the globe, fund the response to
natural disasters, or for other reasons, there is risk that F-22A
quantities under the proposed multiyear contract would need to be adjusted
again. According to the Air Force's multiyear proposal, if a reduction in
quantity were to happen, it could result in cancellation costs of as much
as $201 million in fiscal year 2007, the first year of the multiyear
contract. The current Air Force acquisition strategy does not fund these
potential cancellation costs. Therefore, the Air Force would have to find
funds from other sources to pay these costs in the event quantities are
reduced. This is therefore a risk that must be weighed in approving a
multiyear contract for the F-22A, particularly at this late stage of its
procurement program as it could limit the flexibility of decision makers
in the future.

4 Section 8008 of the fiscal years 2005 and 2006 Department of Defense
Appropriations Acts (Public Laws 108-287 and 109-148, respectively)
require full funding of units to be procured.

5 10 U.S.C. S: 2306b (i)(4)(A). This restriction was added by section 820
of the Bob Stump National Defense Authorization Act for Fiscal Year 2003
(Public Law 107-314).

 Other Factors Influence the Practicality of Using Multiyear Contracts at This
                           Stage in the F-22A Program

Other circumstances argue against using a multiyear contract. Multiyear
contracts are typically used earlier in an acquisition program when
greater efficiencies in buying materials and subsystems can be achieved
and thereby provide more substantial savings at both the prime contractor
and subcontractor levels. In the case of the F-22A, the multiyear proposal
comes at the end of production. At the same time, the F-22A program plans
to reduce the annual buying rate, providing less opportunity to incur
savings. Previously, the Air Force had planned to purchase 29 and 27
aircraft in fiscal years 2007 and 2008, respectively. The multiyear plan
calls for 20 aircraft a year in 2008, 2009, and 2010-7 to 9 aircraft fewer
in each of the 2 years under the previous plan. Additionally, it appears
the primary purpose for proposing a multiyear contract was to mitigate the
additional cost of extending procurement for an additional 2 years; even
with the proposed multiyear contract, procurement costs will be $1.7
billion higher than costs proposed under the previous program structure.

The length of the proposed multiyear contract and the lower quantity of
aircraft planned for multiyear are concerns identified in the May 2006 Air
Force business case analysis for F-22A multiyear procurement. For example,
the business case analysis states that the average number of air vehicles
procured under a multiyear contract was 3086-more than five times the
number of aircraft the F-22A program is proposing to buy under its 3-year
contract. The analysis also acknowledges that there is limited opportunity
to obtain additional savings from the previously planned initiatives to
improve the F-22A production efficiency as these savings were obtained
earlier in the acquisition cycle.

In conclusion, the Air Force's decision to extend production for 2 years
for industrial base purposes has increased the length and cost of the
F-22A program. We are not sure what the Air Force's rationale was for
extending production and how it specifically relates to maintaining the
industrial base so as to warrant an increased cost of at least $1.7
billion. At the same time, our nation's large and growing long-term fiscal
imbalance requires the federal government-especially DOD-to begin making
hard choices between its many wants and real needs. In this context, we
continue to believe that the Congress needs to reevaluate a range of
existing federal programs and polices, including the F-22A program, based
on credible current and future threats, current and expected future
national budget levels and priorities, and the warfighter's many true
needs. As it stands, the restructured F-22A program's increased cost to
complete the procurement program-$1.7 billion-will eventually serve to
reduce the Department's options in fulfilling other important national
security priorities. This at a time when the difference between DOD's
program wants and its expected resource levels is growing.

(120581)

6 The Institute for Defense Analysis analyzed the multiyear procurement
programs for the F/18, C-17, C-130J/KC-130, and F-16. Institute for
Defense Analysis, F-22A Multiyear Procurement Business Case Analysis (May
2006).

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Highlights of GAO-06-991T, a testimony before the Subcommittee on Airland,
Committee on Armed Services, U.S. Senate

July 25, 2006

TACTICALAIRCRAFT

Questions Concerning the F-22A's Business Case

The F-22A-the Air Force's next generation air superiority fighter
aircraft-incorporates a low observable (stealth) and highly maneuverable
airframe, advanced integrated avionics, and a new engine capable of
sustained supersonic flight without the use of afterburners. The F-22A
acquisition history is a case study in increased cost and schedule
inefficiency. Since the program's inception in 1986, the Air Force has
added new requirements, more than doubled the length of the acquisition
schedule, cut purchase quantities by more than 75 percent, and increased
total acquisition unit costs by more than 100 percent.

The F-22A program's significant cost and schedule growth is illustrative
of a number of systemic problems in the Department of Defense's (DOD)
major weapon system acquisitions. Currently, DOD is proposing to buy the
remaining 60 F-22As under a 3-year contract. At the request of this
subcommittee, GAO was asked for its views on DOD's latest plan to
restructure the program and on the Air Force's request for authority to
enter into a multiyear contract to implement this restructuring.

Under DOD's latest restructuring of the F-22A program, as reflected in the
fiscal year 2007 President's budget, the program will spread the
production of the remaining 60 aircraft over 3 lots extending the period
of production by 2 years. The Air Force states that this is to avoid a gap
in the production capabilities of the industrial base sector responsible
for the latest generation of tactical fighter aircraft. Stretching out the
production period will result in lower annual production rates and
increased costs to the program of $1.7 billion when compared to the costs
the program would have incurred under the fiscal year 2006 President's
Budget proposal to buy the then-remaining quantity of 56 F-22As in two
annual lots. The restructured F-22A program's increased costs to complete
the production will reduce the Department's options in fulfilling other
important national security priorities.

Having made the decision to extend the program, the Air Force, in an
attempt to reduce some of the costs of the restructured program, is
proposing that Congress authorize its use of a multiyear contract to buy
the remaining aircraft. The Air Force has concluded that it has met the
six statutory criteria required for entering into a multiyear contract.
GAO offers several points for congressional consideration. The Air Force
estimates savings of approximately $225 million, 2.7 percent of remaining
procurement cost for 56 aircraft-a significantly lower estimated savings
percentage than past multiyear procurement program estimates, which
averaged 13 percent. The Air Force wants to buy 4 additional aircraft at a
cost of $674 million to save an additional $10 million, but has not yet
funded this plan. Finally, the statute requires that production rates and
quantities remain substantially unchanged during the contract period as
downward adjustments could impact contract prices and savings. F-22A
quantities have fluctuated recently and further downward adjustments after
signing a multiyear contract could result in cancellation costs as high as
$201 million currently not funded.

Changes in F-22A Procurement Quantities and Effect on Unit Costs
*** End of document. ***