Defense Acquisitions: Missile Defense Acquisition Strategy	 
Generates Results but Delivers Less at a Higher Cost (15-MAR-07, 
GAO-07-387).							 
                                                                 
Over the next 5 years, the Missile Defense Agency (MDA) expects  
to invest $49 billion in the BMD system's development and	 
fielding. MDA's strategy is to field new capabilities in 2-year  
blocks. In January 2006, MDA initiated its second block--Block	 
2006--to protect against attacks from North Korea and the Middle 
East. Congress requires GAO to assess MDA's progress annually.	 
This year's report addresses MDA's progress during fiscal year	 
2006 and follows up on program oversight issues and the current  
status of MDA's quality assurance program. GAO assessed the	 
progress of each element being developed by MDA, examined	 
acquisition laws applicable to major acquisition programs, and	 
reviewed the impact of implemented quality initiatives. 	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-387 					        
    ACCNO:   A66928						        
  TITLE:     Defense Acquisitions: Missile Defense Acquisition	      
Strategy Generates Results but Delivers Less at a Higher Cost	 
     DATE:   03/15/2007 
  SUBJECT:   Defense capabilities				 
	     Defense cost control				 
	     Defense economic analysis				 
	     Defense procurement				 
	     Federal law					 
	     Missiles						 
	     Operational testing				 
	     Performance measures				 
	     Procurement planning				 
	     Strategic planning 				 
	     Testing						 
	     Program goals or objectives			 
	     Corrective action					 
	     MDA Ballistic Missile Defense System		 

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GAO-07-387

   

     * [1]Results in Brief
     * [2]Background
     * [3]BMDS Elements Made Progress, but It Was Less Than Expected a

          * [4]Block 2006 Costs Have Increased, but a Full Accounting Is No

               * [5]Cost Increases Lead to Revised Block 2006 Cost Goal
               * [6]Individual Elements Account for Block 2006 Costs
                 Differently
               * [7]Increasing Costs Are Causing MDA to Reduce Scope of Block
                 20
               * [8]MDA Likely to Defer Additional Work into Future Blocks to
                 Of

          * [9]MDA Able to Achieve Most Test Objectives Despite Some Delays

               * [10]Progress Made on Block 2006 Elements
               * [11]Test Results for Future Block Elements Are Positive

          * [12]Overall BMDS Performance Remains Unverified

     * [13]MDA'S Flexibility Comes at the Cost of Program Transparency

          * [14]Acquisition Laws Promote Program Transparency
          * [15]Benefits of MDA's Flexibility
          * [16]Comparing Actual Work to Budgeted Work Is Difficult

               * [17]Lack of Independent Reviews Contributes to Changing
                 Goals
               * [18]Block Costs Cannot Be Tracked

     * [19]MDA Makes Significant Strides with Quality Improvement Proce
     * [20]Conclusions
     * [21]Recommendations for Executive Action
     * [22]Agency Comments and Our Evaluation
     * [23]Support Contractors Are Key to BMDS Development
     * [24]Most Prime Contractors Did Not Execute All Planned Work with

          * [25]Most Prime Contractors Exceed Their Fiscal Year 2006 Budgets

               * [26]Aegis BMD Contractors End Fiscal Year 2006 Mostly within
                 Cos
               * [27]Aegis BMD SM-3 Contractor Overruns Cost Budget, but Is
                 Ahead
               * [28]ABL Continues to Experience Cost and Schedule Growth
               * [29]Limited Contractor Data Prevented Analysis of C2BMC
                 Contract
               * [30]GMD Contractor Continues to Spend More Money and Time
                 than B
               * [31]KEI Contractor Makes Progress during Fiscal Year 2006
               * [32]Lack of Reporting Limits Knowledge of MKV Contractor's
                 Perfo
               * [33]Sensors' FBX-T Contractor Meets Fiscal Year Cost and
                 Schedul
               * [34]STSS Contractor Performance Declines during the Year
               * [35]THAAD Contractor's Performance Erodes in Fiscal Year
                 2006

     * [36]GAO Contact
     * [37]Acknowledgments
     * [38]GAO's Mission
     * [39]Obtaining Copies of GAO Reports and Testimony

          * [40]Order by Mail or Phone

     * [41]To Report Fraud, Waste, and Abuse in Federal Programs
     * [42]Congressional Relations
     * [43]Public Affairs

Report to Congressional Committees

United States Government Accountability Office

GAO

March 2007

DEFENSE ACQUISITIONS

Missile Defense Acquisition Strategy Generates Results but Delivers Less
at a Higher Cost

GAO-07-387

Contents

Letter 1

Results in Brief 3
Background 6
BMDS Elements Made Progress, but It Was Less Than Expected and It Cost
More than Planned 11
MDA'S Flexibility Comes at the Cost of Program Transparency 26
MDA Makes Significant Strides with Quality Improvement Processes 35
Conclusions 38
Recommendations for Executive Action 39
Agency Comments and Our Evaluation 40
Appendix I Comments from the Department of Defense 44
Appendix II MDA Contracts 48
Support Contractors Are Key to BMDS Development 48
Most Prime Contractors Did Not Execute All Planned Work within Fiscal Year
2006 Cost and Schedule Budgets 50
Appendix III Scope and Methodology 69
Appendix IV GAO Contact and Staff Acknowledgments 71

Tables

Table 1: Description of BMDS Elements 9
Table 2: Block 2006 Cost Goal, as of March 2005 13
Table 3: Block 2006 Cost Goal, as of March 2006 14
Table 4: Development Funding for Assets Fielded in Block 2006 15
Table 5: Block 2006 Delivery Goals 17
Table 6: Prime Contractor Fiscal Year 2006 and Cumulative Cost and
Schedule Performance 19
Table 7: MDA Support Contractor Job Functions 49
Table 8: Program Office Staffing 50
Table 9: BMDS Contractual Instruments 52

Figures

Figure 1: Aegis BMD Weapon System Cost and Schedule Performance 55
Figure 2: Aegis BMD Standard Missile-3 Cost and Schedule Performance 57
Figure 3: ABL Cost and Schedule Performance 58
Figure 4: GMD Cost and Schedule Performance 60
Figure 5: KEI Cost and Schedule Performance 63
Figure 6: BMDS Sensors Cost and Schedule Performance 64
Figure 7: STSS Cost and Schedule Performance 66
Figure 8: THAAD Cost and Schedule Performance 67

Abbreviations

ABL Airborne Laser Aegis
BMD Aegis Ballistic Missile Defense
BC/FC Beam Control/Fire Control
BMDS Ballistic Missile Defense System
C2BMC Command, Control, Battle Management, and Communications CLS
Contractor Logistics Support
CPR Contract Performance Report
DOD Department of Defense
EKV Exoatmospheric Kill Vehicle
EO/IR Electro-Optical/Infrared
FBX-T Forward-Based X-Band--Transportable
FFRDC Federally Funded Research and Development Centers
GMD Ground-based Midcourse Defense
ICBM Intercontinental Ballistic Missile
JNIC Joint National Integration Center
KEI Kinetic Energy Interceptor
MAP MDA Assurance Provisions
MDA Missile Defense Agency
MKV Multiple Kill Vehicle
MRTF Mission Readiness Task Force
PAC-3 Patriot Advanced Capability-3
SM-3 Standard Missile-3
STSS Space Tracking and Surveillance System
THAAD Terminal High Altitude Area Defense
U.S.C. United States Code

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United States Government Accountability Office
Washington, DC 20548

March 15, 2007

Congressional Committees

The concern that nuclear, biological, or chemical weapons are
proliferating has heightened the sense of urgency for our country to
develop a comprehensive missile defense system capable of defending the
United States and its allies against weapons of mass destruction and the
ballistic missiles that could deliver them. The threat from ballistic
missiles is growing with at least 25 countries now possessing or acquiring
sophisticated missile technology. For nearly half a century, the
Department of Defense (DOD) has been funding efforts to develop a system
to detect, track, and defeat ballistic missiles deployed from enemy launch
sites. The current system under development-the Ballistic Missile Defense
System (BMDS)-includes a diverse collection of land-, air-, sea-, and
space-based assets located around the globe and founded on cutting-edge
technology. DOD plans to invest an additional $49 billion in this system,
or about 13 percent of its research and development budget, over the next
5 years.

The Missile Defense Agency (MDA)--the agency charged with developing an
integrated BMDS--is currently developing nine BMDS elements. The elements
are: Airborne Laser (ABL); Aegis Ballistic Missile Defense (Aegis BMD);
BMDS Sensors; Command, Control, Battle Management, and Communications
(C2BMC); Ground-based Midcourse Defense (GMD); Kinetic Energy Interceptors
(KEI); Multiple Kill Vehicles (MKV); Space Tracking and Surveillance
System (STSS); and Terminal High Altitude Area Defense (THAAD).1 MDA has
adopted an evolutionary acquisition approach in which the BMDS will be
fielded in 2-year blocks. The first block, known as Block 2004, ended on
December 31, 2005. The block fielded a limited capability that included
initial versions of GMD; Aegis BMD; Patriot Advanced Capability-3; and
C2BMC elements. This capability is designed to provide limited protection
of the United States from intercontinental ballistic missile attacks out
of North Korea and the Middle East and protection of U.S. forces and
critical assets from short- and medium-range ballistic missiles.

1The BMDS also includes a tenth element, Patriot Advanced Capability-3
(PAC-3), which has been transferred to the Army for production, operation,
and sustainment. This report does not evaluate PAC-3 because its initial
development is complete and it is now being managed by the Army.

The current block, Block 2006-which represents the period of development
for calendar years 2006 and 2007--enhances existing capabilities, provides
additional assets for operational use, and continues development of future
capabilities. MDA submitted its goals for Block 2006 to Congress shortly
after its fiscal year 2006 budget request. The goals quantified the number
of assets that MDA planned to field by the end of the block, defined the
performance that fielded assets were expected to deliver, and identified
the cost of all Block 2006 efforts, including the cost of assets being
fielded and of developmental activities for three elements--ABL, STSS, and
THAAD--that will not be operational until future blocks.2 Fiscal year
testing goals were also established by element program offices, but these
goals were not formally reported to Congress.

The National Defense Authorization Acts for fiscal years 2002 and 2005
mandated that we prepare annual assessments of MDA's ongoing cost,
schedule, testing, and performance progress through fiscal year 2006.3 To
date, we have delivered assessments covering fiscal years 2003, 2004, and
2005 to Congress.4 In this report, we assess the progress MDA made during
fiscal year 2006 against the Block 2006 goals submitted to Congress in
March 2005, as well as the testing goals established by the nine BMDS
elements. We have also followed up on two previously reported issues: (1)
whether the flexibility granted to MDA in acquiring the BMDS has reduced
decision-makers' knowledge of program outcomes, thereby limiting program
oversight and MDA's accountability for the investment being made in
missile defense; and (2) the current status of MDA's quality assurance
program.

2MDA included THAAD as part of its initial Block 2006, but later moved its
cost to Block 2008. According to MDA officials, this action was taken to
more accurately align resources with the capability's delivery time frame.
The agency is also continuing the development of KEI and MKV, but these
efforts are being financed through appropriations received for other
blocks.

3National Defense Authorization Act for Fiscal Year 2002, Pub. L. No.
107-107, S 232(g) (2001); Ronald W. Reagan National Defense Authorization
Act for Fiscal Year 2005, Pub. L. No. 108-375, S 233. Section 224 of the
John Warner National Defense Authorization Act for 2007, Pub. L. No.
109-364 (2006) recently extended the requirement for GAO assessment.

4GAO, Missile Defense: Actions Are Needed to Enhance Testing and
Accountability, [44]GAO-04-409 (Washington, D.C.: Apr. 23, 2004); Defense
Acquisitions: Status of Ballistic Missile Defense Program in 2004,
[45]GAO-05-243 (Washington, D.C.: Mar. 31, 2005); Defense Acquisitions:
Missile Defense Agency Fields Initial Capability but Falls Short of
Original Goals, [46]GAO-06-327 (Washington, D.C.: Mar. 15, 2006).

To address our objectives, we looked at the accomplishments of six BMDS
elements--ABL, Aegis BMD, BMDS Sensors, C2BMC, GMD, and STSS. The report
also includes information on the progress of three elements--KEI, MKV, and
THAAD-being developed during fiscal year 2006 that MDA considers part of
future blocks. Together, these nine elements collectively account for
about 72 percent of MDA's fiscal year 2006 research and development
budget. The remainder of MDA's budget funds activities such as new
technology and system concepts and common support for all elements. To
determine the elements' progress toward Block 2006 goals, we examined
System Element Reviews, test plans and reports, production plans, and
Contract Performance Reports. We also interviewed officials within each
element program office and within MDA functional offices. In assessing
whether a match exists between the missile defense program's flexibility,
and the program's transparency, we examined documents such as those
defining MDA's changes to Block 2006 goals, acquisition laws for major DOD
programs, and BMDS policy directives issued by the Secretary of Defense.
We examined the current status of MDA's quality assurance program by
visiting various contractor facilities and holding discussions with MDA
officials, such as officials in the Office of Quality, Safety, and Mission
Assurance. We performed our work from June 2006 to March 2007 in
accordance with generally accepted government auditing standards.

Results in Brief

In the past year, MDA's elements have done fairly well in meeting their
test objectives, but costs have increased and the scope of the block--in
terms of assets to be fielded and tests to be conducted--have been
reduced. Cost increases, caused by technical problems and greater than
expected Ground-based Midcourse Defense element operation and sustainment
costs led the agency to defer several assets planned for Block 2006 until
future blocks. For example, MDA will field one less ground-based
interceptor and four fewer missiles for the Aegis element during Block
2006. Even though some work for Block 2006 has been deferred, the cost
goal for all block efforts, including work on elements to be fielded in
the future, increased about $1 billion--from $19.3 to $20.3 billion. In
addition, the work of five of the six contractors responsible for Block
2006 elements cost more than expected in fiscal year 2006 as they resolved
technical and integration problems, which will likely cause MDA to defer
more activities until the next block. The full cost of Block 2006 cannot
be determined because work is being deferred from block to block--for
example, the cost of deferred work benefiting Block 2004 is included in
Block 2006 cost--and the elements are inconsistently reporting block cost.
In the area of testing, three of the Block 2006 elements and all elements
considered part of future blocks met their primary test objectives for
fiscal year 2006. ABL and STSS are the only elements that have both test
delays and unmet test objectives. A notable achievement for the Ballistic
Missile Defense program was the Ground-based Midcourse Defense element's
first successful intercept since 2002. For one end-to-end scenario, the
interceptor exceeded test objectives by destroying a target representative
of a real world threat. While this test was an important step in
demonstrating the performance of the missile defense system, it is too
early to assess whether MDA will achieve its overall performance goal for
the Block 2006 fielded configuration. The goal itself has been lowered in
the past year, and MDA's models and simulations have not yet been anchored
by sufficient flight tests to have confidence that predictions of
performance are reliable. Several of the elements continue to experience
technical problems, which could affect the performance of the fielded
system and delay the capabilities anticipated for future blocks.

Because the BMDS has not formally entered the system development and
demonstration phase of the DOD acquisition cycle, it is not yet required
to apply certain acquisition laws triggered by this phase. This
flexibility has several distinct advantages. MDA's decision-making is
agile because the agency is not required to obtain prior approval of the
program's cost, schedule, and performance baseline or of changes to that
baseline. The agency is not required to have its cost estimates
independently verified or to have the program independently assessed at
certain points to see if its acquisition should move forward. Also,
because MDA's assets are considered developmental and are produced in
limited quantities, MDA has not triggered a legal requirement for an
operational test and evaluation prior to fielding. This allows the program
to concurrently test and field assets, resulting in faster deployment.
However, the program's flexibility reduces MDA's accountability for the
resources the agency receives and the results it attains. Because MDA can
field assets before all testing is completed, it has fielded some assets
whose capability is uncertain. MDA can also decide to field fewer assets
than planned and defer other work into a future block to accommodate cost
growth, making it hard to reconcile a block's cost and outcomes with
original goals. Additionally, MDA's development of the BMDS outside of
DOD's acquisition cycle makes it difficult to compare the actual cost of a
delivered asset with its planned cost because there is no applicable unit
cost reporting requirement. Further, research and development funds allow
MDA to incrementally fund the manufacture of operational assets. To the
extent MDA uses this flexibility to spread the funding of end items over 2
or more years, it may "tie the hands" of future Congresses to finish
funding end items started in previous years.

MDA continues to address quality assurance problems that officials in
MDA's Office of Safety and Quality Assurance told us came about when the
government relinquished much of its oversight role during the acquisition
streamlining effort of the 1990s and as the agency rushed to field an
initial missile defense capability in Block 2004. The agency initiated
several mechanisms to improve overall quality control processes and is
progressing well with their implementation. The mechanisms being used to
improve quality assurance processes include the development of a teaming
approach to restore reliability in key suppliers, quality audits,
adjusting award fee plans to encourage contractors to maintain a good
quality assurance program and implement industry best practices, and
continuing to incorporate the agency's key quality provisions into its
prime contracts. Agency officials told us that contractors have responded
to the agency's efforts and are implementing improvements. For example,
the contractor developing the GMD element's exoatmospheric kill vehicle
incorporated equipment into the production process that handles critical
components, reducing the possibility that the components will be dropped
or mishandled by production personnel. MDA's efforts have started to
produce results as test failures have declined and on time deliveries have
increased.

We are recommending that MDA establish firm baselines for those elements
considered far enough along to be in system development and demonstration,
and report against those baselines; propose an approach for those same
elements that provides information consistent with the acquisition laws
that govern baselines and unit cost reporting, independent cost estimates,
and operational test and evaluation; include in blocks only those elements
that will field capabilities during the block period and develop a firm
block baseline that includes the unit cost of its assets; request and use
procurement funds, rather than research, development, test, and evaluation
funds, to acquire fielded assets; and conduct an independent evaluation of
the ABL and KEI elements prior to making a decision on the future of the
programs.

DOD partially concurred with our first three recommendations, but did not
agree to use procurement funds to acquire fielded assets or to conduct an
independent evaluation of the ABL and KEI elements. In partially agreeing,
DOD recognized the need to provide greater program transparency and
committed to providing information consistent with acquisition laws that
govern baselines and unit cost reporting. However, DOD objected to the
element-centric approach recommended, believing that this would detract
from managing the BMDS as a single, integrated system. DOD also stated
that reporting at the BMDS-level in accordance with our third
recommendation would appear to be inconsistent with reporting at the
element level. We continue to believe that all recommended changes are
needed to provide a better balance between MDA's flexibility and BMDS
program transparency. Because DOD awards contracts and requests funding by
individual elements that compose the BMDS, we believe that the element
approach is the best way to achieve increased program transparency.
However, a BMDS-level baseline derived from the capabilities that
individual elements yield is needed to describe and manage a BMDS-wide
capability. We also believe that the use of procurement funds contributes
to program transparency by making clear at the outset the size of the
investment being requested in fielded assets. Finally, we continue to
believe that an independent assessment of the ABL and KEI capabilities can
provide a transparent basis for making decisions on the future of the
programs, but we did revise the recommendation to specify that the
assessment should follow key demonstrations in 2009.

Background

MDA's mission is to develop and field an integrated and layered Ballistic
Missile Defense System to defend the United States, its deployed forces,
allies, and friends against all ranges of enemy ballistic missiles in all
phases of flight. This is challenging, requiring a complex combination of
defensive components--space-based sensors, surveillance and tracking
radars, advanced interceptors, command and control, and reliable
communications--that work together as an integrated system.

A typical hit-to-kill engagement scenario for an intercontinental
ballistic missile (ICBM) would unfold as follows:

           o Infrared sensors aboard early-warning satellites detect the hot
           plume of a missile launch and alert the command authority of a
           possible attack.
           o Upon receiving the alert, land- or sea-based radars are directed
           to track the various objects released from the missile and, if so
           designed, to identify the warhead from among spent rocket motors,
           decoys, and debris.
           o When the trajectory of the missile's warhead has been adequately
           established, an interceptor--consisting of a "kill vehicle"
           mounted atop a booster--is launched to engage the threat. The
           interceptor boosts itself toward a predicted intercept point and
           releases the kill vehicle.
           o The kill vehicle uses its onboard sensors and divert thrusters
           to detect, identify, and steer itself into the warhead. With a
           combined closing speed on the order of 10 kilometers per second
           (22,000 miles per hour), the warhead is destroyed through a
           "hit-to-kill" collision with the kill vehicle above the
           atmosphere.

To develop a system capable of carrying out such an engagement, MDA is
executing an evolutionary acquisition strategy in which the fielding of
missile defense capabilities is organized in 2-year increments known as
blocks. Each block is intended to provide the Ballistic Missile Defense
System with capabilities that will enhance the development and overall
performance of the system. The first block--Block 2004--ended on December
31, 2005, and fielded a limited initial capability that included early
versions of the Ground-based Midcourse Defense; Aegis Ballistic Missile
Defense; Patriot Advanced Capability-3; and the Command, Control, Battle
Management, and Communications element.

During calendar year 2006 and 2007, MDA is focusing its program of work on
the enhancement of four fielded BMDS elements--GMD, Aegis BMD, Sensors,
and C2BMC. The primary contribution of Block 2006 is that it fields
additional assets and continues the evolution of Block 2004 by providing
improved GMD interceptors, enhanced Aegis BMD missiles, upgraded Aegis BMD
ships, a Forward-Based X-Band--Transportable radar, and enhancements to
the C2BMC software.

MDA divides each year's budget request into a request for the current
block and requests for future blocks that have not yet formally begun. For
example, in fiscal year 2006, MDA requested funds for Block 2006 and for
blocks that begin in 2008, 2010, 2012, and 2014. When MDA submitted its
Block 2006 budget to Congress in February 2005, the agency requested
funding for not only the four elements fielding assets during Block 2006,
but also for the continued development of three elements--ABL, STSS, and
THAAD--that will not field assets for operational use until future blocks.
5 According to MDA officials, these elements--which are primarily
developmental elements--were included in the block because the agency
believed that during the block time frame the elements offered some
emergency capability. MDA also requested fiscal year 2006 funds for two
other developmental elements, MKV and KEI. However, MDA did not include
funding for these elements in its Block 2006 budget request because they
provided no capability during the block. Instead, MDA requested funding
for MKV in its fiscal year 2006 request for Advanced Component Development
and Prototypes--a program element that is not tied to any block--and for
KEI in the agency's fiscal year 2006 request for Block 2014. Table 1
provides a brief description of all elements being developed by MDA.

5 Although MDA included THAAD in its Block 2006 program of work when it
submitted its original Block 2006 goals to Congress, it removed THAAD from
the block in March 2006, when it revised its goals. THAAD is now
considered part of Block 2008.

Table 1: Description of BMDS Elements

Element                  Missile defense role                              
Ground-based Midcourse   GMD is a ground-based missile defense system      
Defense                  designed to destroy ICBMs during the midcourse    
                            phase of their flight. Its mission is to protect  
                            the U.S. homeland against ballistic missile       
                            attacks from North Korea and the Middle East. GMD 
                            is part of the initial capability fielded in      
                            2004-2005 with an inventory of 14 emplaced        
                            interceptors. MDA plans to field about 28         
                            additional interceptors in Alaska and California  
                            through 2010.                                     
Aegis Ballistic Missile  Aegis BMD is a ship-based missile defense system  
Defense                  designed to destroy short to intermediate range   
                            ballistic missiles during the midcourse phase of  
                            their flight. Its mission is twofold: to protect  
                            deployed U.S. forces, allies, and friends against 
                            ballistic missile attacks and to serve as a       
                            forward-deployed BMDS sensor, especially in       
                            support of the GMD mission. MDA is planning to    
                            procure 147 Aegis BMD missiles--the Standard      
                            Missile-3--from calendar year 2006 through 2012   
                            and to upgrade 18 ships for the BMD mission by    
                            the end of 2009. MDA also requested funding in    
                            its fiscal year 2008 budget request to make Aegis 
                            BMD capable of defeating targets during the       
                            terminal phase of their flight.                   
Command, Control, Battle C2BMC is the integrating and controlling element  
Management, and          of the BMDS. C2BMC's role is to provide           
Communications           deliberate planning, situational awareness,       
                            sensor management and control of the              
                            Forward-Based X-Band-Transportable (FBX-T) radar, 
                            and network support for fire control and          
                            situational awareness.                            
BMDS Sensors             MDA is developing various stand-alone radars for  
                            fielding. In particular, MDA leveraged the        
                            hardware design for the THAAD radar and modified  
                            existing software to develop the FBX-T. MDA       
                            placed the first FBX-T in Japan to augment        
                            existing BMD surveillance and tracking            
                            capabilities. The program expects to produce 3    
                            more FBX-T radars by the end of Block 2008.       
Airborne Laser           ABL is an air-based missile defense system        
                            designed to destroy all classes of ballistic      
                            missiles during their boost phase of flight. ABL  
                            employs a high-energy chemical laser to rupture a 
                            missile's motor casing, causing the missile to    
                            lose thrust or flight control. MDA plans to       
                            demonstrate proof of concept in a system          
                            demonstration in 2009. An operational ABL         
                            capability may be demonstrated in Block 2016.     
Kinetic Energy           KEI is a land-mobile missile defense system       
Interceptors             designed to destroy medium, intermediate, and     
                            intercontinental ballistic missiles during the    
                            boost phase and all parts of the midcourse phase  
                            of their flight. The agency expects to            
                            demonstrate defensive capability through flight   
                            testing during 2012-2015. This capability could   
                            be expanded to sea-basing in subsequent blocks.   
Space Tracking and       The Block 2006 STSS consists of a constellation   
Surveillance System      of two demonstration satellites. MDA intends to   
                            use these satellites for testing missile warning  
                            and tracking capabilities in the 2007-2009 time   
                            frame. Based on demonstration satellite ground    
                            test results and analysis, MDA has already        
                            determined that it will request funding for a     
                            follow-on STSS constellation.                     
Terminal High Altitude   THAAD is a ground-based missile defense system    
Area Defense             designed to destroy short- and medium-range       
                            ballistic missiles during the late-midcourse and  
                            terminal phases of flight. Its mission is to      
                            defend deployed U.S. forces and population        
                            centers. MDA plans to field a fire unit,          
                            including 24 missiles, in 2009 and a second unit  
                            in 2010.                                          
Multiple Kill Vehicle    The MKV is being designed as an optional payload  
                            for midcourse defense systems for all midcourse   
                            interceptor elements. The concept mitigates the   
                            need to pinpoint the single lethal object in a    
                            threat cluster by using numerous kill vehicles    
                            rather than a single kill vehicle. The current    
                            concept consists of a number of smaller kill      
                            vehicles; but, MDA is developing an alternative   
                            payload concept on a parallel acquisition path to 
                            mitigate risk. The MDA expects initial            
                            capabilities to be available by Block 2014 or     
                            2016.                                             

Sources: MDA (data); GAO (presentation).

Note: The Patriot Advanced Capability-3 system is also part of the BMDS,
but it is not included in the table because management responsibility for
this element has been transferred to the Army.

As part of MDA's planning process, the agency defines overarching goals
for the development and fielding of the current BMDS block. These goals
identify the composition of the block (the elements in development and
those planned for fielding), the type and quantity of assets to be
fielded, the cost associated with element development and fielding
(including operation and sustainment activites), and the performance
expected of fielded assets.6 For example, in March 2005, MDA told Congress
that its Block 2006 program of work would include seven elements--ABL,
Aegis BMD, C2BMC, GMD, Sensors, STSS, and THAAD.7 Further, MDA identified
the cumulative number of assets that Aegis BMD, C2BMC, GMD, and the
Sensors elements would field by the end of the block, and the performance
that those assets would deliver in terms of probability of engagement
success, the land area from which a ballistic missile launch could be
denied, and the land area that could be protected from a ballistic missile
launch. Finally, MDA told Congress that it would try to complete all Block
2006 work for $20.458 billion.

To enable MDA to meet its overarching goals, each element's program office
establishes its own plan for fielding and/or developmental activities. For
example, each program office develops a delivery plan and a test schedule
that contributes to MDA's performance and fielding goals. The programs
also work with their prime contractor to plan the block of work so that it
can be completed within the program's share of MDA's budget.

Since 2002, missile defense has been seen as a national priority and has
been funded at nearly requested levels. However, DOD's Program Budget
Decision in December 2004 called for MDA to plan for a $5 billion
reduction in funding over fiscal years 2006-2011. Future MDA budgets could
be affected by cost growth in federal entitlement programs that are likely
to decrease discretionary spending and by increased DOD expenditures, such
as expenses created by the Iraq conflict.

Last year we reported that MDA strayed from the knowledge-based
acquisition strategy that allows successful developers to deliver, within
budget, a product whose performance has been demonstrated.8 In doing so,
MDA fielded assets before their capability was known and the full cost of
the capability was not transparent to decision makers. We noted that it
was possible for MDA to return to a knowledge-based approach to
development while still fielding capability in blocks, but that corrective
action was needed to put all BMDS elements on a knowledge-based approach.
That is, instead of concurrently developing, testing and fielding the
BMDS, MDA would need to adopt knowledge points at which the program would
determine if it was ready to begin new acquisition activities. These
knowledge points would be consistent with those called out in DOD's
acquisition system policy. To provide a basis for holding MDA accountable
for delivering within estimated resources and to ensure the success of
future MDA development efforts, we recommended that the Secretary of
Defense implement a knowledge-based acquisition strategy for all the BMDS
elements, assess whether the current 2-year block strategy was compatible
with the knowledge-based development strategy, and adopt more transparent
criteria for reporting each element's quantities, cost, and performance.
DOD has not taken any action on the first two recommendations because it
considers MDA's acquisition strategy as knowledge-based and because MDA's
block strategy is compatible with the strategy MDA is implementing.
Neither did DOD agree to take action on our third recommendation to adopt
more transparent criteria for identifying and reporting program changes.
In its comments, DOD responded that MDA is required by statute to report
significant variances in each block's baseline and that these reports
along with quarterly DOD reviews provide an adequate level of program
oversight.

6MDA goals are formally detailed in the agency's budget estimates and in
the MDA documents, BMDS Block Statement of Goals and Baselines, March
2005; and BMDS Block Baselines and Goals, March 2006.

7In March 2006, MDA removed its developmental efforts for the THAAD
element, along with THAAD's budget for fiscal year 2006-2011, from the
agency's Block 2006 goals. THAAD is now considered part of Block 2008 and
its funding is requested as part of each fiscal year's budget request for
Block 2008 efforts.

BMDS Elements Made Progress, but It Was Less Than Expected and It Cost More than
Planned

MDA made progress during fiscal year 2006 in carrying out planned
accomplishments for the block elements, but it will not deliver the value
originally planned for Block 2006. Costs have increased, while the scope
of work has decreased. It is also likely that in addition to fielding
fewer assets other Block 2006 work will be deferred to offset growing
contractor costs. Actual costs cannot be reconciled with original goals
because the goals have been changed, work travels to and from other
blocks, and individual program elements do not account for costs
consistently. In addition, although element program offices achieved most
of their 2006 test objectives, the performance of the BMDS cannot yet be
fully assessed because there have been too few flight tests conducted to
anchor the models and simulations that predict overall system performance.
Several elements continue to experience technical problems which pose
questions about the performance of the fielded system and could delay the
enhancement of future blocks.

8 GAO, Defense Acquisitions: Missile Defense Agency Fields Initial
Capability but Falls Short of Original Goals, [47]GAO-06-327 (Washington,
D.C.: Mar. 15, 2006).

Block 2006 Costs Have Increased, but a Full Accounting Is Not Possible

Block 2006 costs have increased because of technical problems and greater
than expected GMD operations and sustainment costs. In March 2006, shortly
after the formal initiation of Block 2006, increasing costs and other
events prompted MDA to reduce the quantity of assets it intended to field
during the block. Although the agency reduced the scope of Block 2006,
most of the elements' prime contractors reported that work completed
during fiscal year 2006 cost more than planned. Consequently, MDA
officials told us it is likely that other work planned for Block 2006 will
be deferred until Block 2008 to cover fiscal year 2006 overruns.
Furthermore, changing goals, inconsistent reporting of costs by the
individual elements, and MDA's past practice of accounting for the cost of
deferred work prevents a determination of the actual cost of Block 2006.

  Cost Increases Lead to Revised Block 2006 Cost Goal

MDA's cost goal for Block 2006 has increased by approximately $1 billion.
In March 2005, MDA established a goal of $20.458 billion for the
development, fielding, and sustainment of all Block 2006 components.
However by March 2006, it had grown by about $1 billion. Cost increases
were caused by the:

           o addition of previously unknown operations and sustainment
           requirements,
           o realignment of the GMD program to support a successful return to
           flight,
           o realignment of the Aegis BMD program to address technical
           challenges and invest in upgrades to keep pace with the near term
           threat, and
           o preparations for round-the-clock operation of the BMDS when the
           system was put on alert.

In an effort to keep costs within the goal, MDA shifted THAAD's future
development costs of $1.13 billion to another block. That is, the agency
moved the cost associated with THAAD's development in fiscal years 2006
through 2011--which in March 2005 was considered a Block 2006 cost--to
Block 2008. This accounting change accommodated the cost increase.
According to MDA's November 2006 Report to Congress, THAAD costs will be
reported as part of Block 2008 costs to better align the agency's
resources with the planned delivery of THAAD fire units in 2008. Tables 2
and 3 compare the Block 2006 cost goal established for the BMDS in March
2005 and March 2006.

Table 2: Block 2006 Cost Goal, as of March 2005

Cost Goal, March 2005 (Dollars in millions)
                                                          FY02-FY11           
                                          FY02-FY11  Operations and     Total 
                     FY02-FY11Development  Fielding     Sustainment BlockCost 
Element                          Costs     Costs           Costs      Goal 
C2BMC                             $386       $24             $33      $443 
Hercules                            72        --              --        72 
Joint Warfighter                   113        --              10       123 
Support                                                                    
Test & Evaluation                  336        --              --       336 
Targets &                          548        --              --       548 
Countermeasures                                                            
THAAD                           1,172a        --              --     1,172 
GMD                             10,847     1,469             565    12,881 
Aegis BMD                        1,087       235              30     1,352 
ABL                              1,095        --              --     1,095 
BMDS Radars                        704       174             248     1,126 
STSS                             1,310        --              --     1,310 
Total                          $17,670    $1,902            $886   $20,458 
Less THAAD funding for fiscal years 2006-2011                       $1,134 
Total Block cost after removal of THAAD's future cost              $19,324 

Source: BMDS Block Statement of Goals and Baselines, March 2005; GAO
(analysis).

aThe development cost of THAAD in fiscal years 2006 through
2011--$1,134--was moved to Block 2008.

Table 3: Block 2006 Cost Goal, as of March 2006

Revised Goal, March 2006 (Dollars in millions)
                                                            FY02-FY11   Total 
                             FY02 -                    Operations and   Block 
                    FY11Development FY02-FY11Fielding     Sustainment    Cost 
Element                    Costs             Costs           Costs    Goal 
C2BMC                       $434               $38            $111    $583 
Hercules                      50                --              --      50 
Joint Warfighter              71                --              31     102 
Support                                                                    
Test &                       219                --              --     219 
Evaluation                                                                 
Targets &                    654                --              --     654 
Countermeasures                                                            
PAC-3                          3                --              --       3 
THAAD                        39a                --              --      39 
GMD                       10,825             1,413           1,574  13,812 
Aegis BMD                    890               300              51   1,241 
ABL                        1,050                --              --   1,050 
BMDS Radars                  602               209             272   1,083 
STSS                       1,494                --              --   1,494 
EO/IR                        10b                --              --      10 
Total                    $16,341            $1,960          $2,039 $20,340 
Cost Goal Established in 2005                                      $19,324 
Difference in 2005 and 2006 Cost Goals                              $1,016 

Source: BMDS Block Statement of Goals and Baselines, March 2006; GAO
(analysis).

aThis amount of funds was requested for THAAD as part of MDA's request for
Block 2006 funding in fiscal years 2003 and 2004.

bDevelopment costs for PAC-3 and Electro-Optical/Infrared (EO/IR) totaling
$13 million were added when MDA revised its Block 2006 cost goal in March
2006. The EO/IR Active Sensors is advanced laser radar technology being
developed for insertion in future kinetic kill vehicles and surveillance
systems. This technology, coupled with passive sensors, is expected to
provide improved discrimination performance.

For the purposes of this report, we have adjusted the March 2005 cost goal
to reflect the deletion of future THAAD cost from Block 2006. This enables
the revised cost goal that excludes THAAD to be compared with the original
cost goal. Had THAAD's cost been removed from MDA's March 2005 cost goal,
Block 2006 would have actually totaled about $19.3 billion. Comparing this
with the March 2006 revised goal of approximately $20.3 billion reveals
the $1 billion increase in estimated Block 2006 costs.

  Individual Elements Account for Block 2006 Costs Differently

The 2-year block structure established by MDA has proven to be a
complicated concept for its BMDS elements to implement. According to
officials, MDA defines its block structure in two types of capabilities:

           o Early Capability-A capability that has completed sufficient
           testing to provide confidence that the capability will perform as
           designed. In addition, operator training is complete and
           logistical support is ready. So far, Aegis BMD, C2BMC, and GMD are
           the only elements that have met these criteria.

           o Full Capability-These capabilities have completed all
           system-level testing and have shown that they meet expectations.
           At this stage, all doctrine, organization, training, material,
           leadership, personnel, and facilities are in place.

According to MDA officials, the early capability is typically fielded
during one block and the full capability is usually attained during the
next or a subsequent block. However, not all elements account for Block
2006 costs in the same manner. For example, table 4 below shows that some
elements included costs that will be incurred to reach full
capability--costs that will be recognized in fiscal year 2009 through
2011--while other elements have not.

Table 4: Development Funding for Assets Fielded in Block 2006

(Dollars in millions)
                    FY02     FY03     FY04     FY05     FY06     FY07   FY08  FY09  FY10 FY11 
C2BMC               $3.7    $26.5    $52.5    $26.8   $133.5   $148.8  $39.4  $2.3  $0.2      
GMD              2,460.1  2,063.0  1,607.1  1,886.8  1,444.3  1,363.7                         
Aegis BMD                             24.4     83.6    271.1    343.6   82.0  57.1  24.8  3.5 
BMDS Radars                  31.5    145.3    207.8    137.2     79.7    0.7                  
Joint                                                                                         
Warfighter                            22.5     48.7                                           
Support                                                                                       
Hercules                              27.0     22.7                                           
Test &               0.7      0.8      2.1      9.8    101.4    103.8                         
Evaluation                                                                                    
Targets &            0.5      3.7     24.8    294.6    325.4      5.3                         
Countermeasures                                                                               
EO/IR                                  9.6                                                    
Total           $2,465.0 $2,125.5 $1,858.4 $2,271.9 $2,404.6 $2,413.7 $127.4 $59.4 $25.0 $3.5 

Source: MDA.

Note: All MDA resources are Research, Development, Test, and Evaluation
funds.

According to agency officials, the cost of all activities needed to
validate the performance of Block 2006 Fielded Configuration elements
should be included as part of the BMDS Block 2006 costs even though these
activities may occur during future blocks. According to officials from
MDA's Systems Engineering and Integration Directorate, the C2BMC and Aegis
BMD programs' cost accounting for Block 2006 are the most accurate because
the programs included the costs to conduct follow-on testing in subsequent
years. Additionally, the officials said that other elements of the BMDS
will conduct similar tests in the years following the actual delivery of
their Block 2006 capabilities; however, the costs were not included as
Block 2006 costs. If each BMDS element were to consistently report block
costs, the planned costs for Block 2006 would be higher than MDA's current
reported costs of $20.34 billion.

  Increasing Costs Are Causing MDA to Reduce Scope of Block 2006

MDA is making some progress toward achieving its revised Block 2006 goals,
but the number of fielded assets and their overall performance will be
less than planned when MDA submitted its Block 2006 goals to Congress in
March 2005. MDA notified Congress that it was revising its Block 2006
Fielded Configuration Baseline in March 2006, shortly after submitting its
fiscal year 2007 budget.

When MDA provided Congress with its quantity goals in March 2005, it
stated those goals cumulatively. That is, MDA added the number of Block
2004 assets that it planned to field by December 31, 2005, to the number
of assets planned for Block 2006. However, in the case of GMD
interceptors, MDA was unable to meet its Block 2004 quantity goals, which,
in effect, caused MDA's Block 2006 goal for interceptors to increase. For
example, MDA planned to field 18 GMD interceptors by December 31, 2005,
and to field an additional 7 interceptors during Block 2006, for a total
of 25 interceptors by the end of Block 2006. But, because it did not meet
its Block 2004 fielding goal--fielding only 10 of the 18 planned
interceptors--MDA could not meet its Block 2006 cumulative goal of 25
without increasing its Block 2006 deliveries. For purposes of this report,
we determined the number of assets that MDA would have to produce to meet
its Block 2006 cumulative quantity goal. Table 5 depicts only those
quantities and shows how they have changed over time.

Table 5: Block 2006 Delivery Goals

BMDS element Original Goal as of March 2005    Goal as of March 2006       
GMD             o Up to 15 interceptors           o Up to 12 interceptors  
                   o Thule Interim Upgrade Early     o Deferred to Block 2008 
                   Warning Radar                                              
Sensors         o 1 additional Forward-Based      o 1 additional           
                   X-Band-Transportable Radar        Forward-Based X-Band-    
                   (FBX-T)                           Transportable Radar      
                                                     (FBX-T)                  
Aegis BMD       o 19 missiles                     o 15 missiles            
SM-3                                                                       
Aegis BMD       o 4 new destroyers; long-range    o 4 new destroyers;      
                   surveillance and tracking only    long-range surveillance  
                   o 8 upgraded destroyers for       and tracking only        
                   the engagement mission            o 7 upgraded destroyers  
                   o 1 new cruiser                   for the engagement       
                                                     mission                  
                                                     o 1 new cruiser          
C2BMC           o 3 suites                        o Suites deferred        

Source: MDA (data); GAO (presentation).

According to MDA, it reduced the number of GMD interceptors in March 2006
for four primary reasons:

           o delays in interceptor deliveries caused by an explosion at a
           chemical plant,
           o a halt in production after several flight test failures and
           pending Mission Readiness Task Force (MRTF) reviews,
           o a MRTF review that redirected some interceptors from fielding to
           testing, and
           o the temporary suspension of fielding interceptors due to
           manufacturing and quality issues associated with the
           exoatomospheric kill vehicle (EKV).

MDA also delayed a partial upgrade to the Thule early warning radar until
a full upgrade can be accomplished. According to a July 11, 2005, DOD
memorandum, the full upgrade of Thule is the most economical option and it
meets DOD's desire to retain a single configuration of upgraded early
warning radars.

Additionally, the delivery of Aegis BMD Standard Missile -3 (SM-3) was
reduced as technical challenges associated with the Divert Attitude
Control System were addressed and as investments in upgrades were made to
keep pace with emerging ballistic missile threats. According to Aegis BMD
officials, the program also revised the upgrade schedule for engagement
destroyers because other priorities prevent the Navy from making one ship
available before the end of the block.

Budget cuts to the C2BMC program also caused MDA to defer the installation
of C2BMC suites at three sites. MDA had planned to install the suites at
U.S. Central Command, European Command, and another site that was to be
determined before the end of the block. However, MDA now plans to place
less expensive Web browsers at these sites.

MDA made progress in fielding additional BMDS assets in 2006 and is
generally on track to meet most of its revised block goals. MDA's delivery
schedules and System Element Review reports show that MDA planned to
accomplish these goals by making the following progress by December 31,
2006: adding 4 Aegis BMD missiles to inventory,9 adding 2 new Aegis BMD
destroyers for long-range surveillance and tracking, upgrading 2 Aegis BMD
destroyers and 2 Aegis BMD cruisers to perform both engagement and
long-range surveillance and tracking, adding 1 new Aegis BMD destroyer and
1 new cruiser with both engagement and long-range surveillance and
tracking capability, completing a number of activities prior to delivering
the FBX-T radar, delivering the hardware for the 3 Web browsers, and
emplacing 8 GMD interceptors. With the exception of the GMD interceptors,
MDA completed all work as planned. The GMD program was only able to
emplace four interceptors by December 2006, rather than the eight planned.
However, program officials told us that the contractor has increased the
number of shifts that it is working and the program believes that with
this change the contractor can accelerate deliveries and emplace as many
as 24 interceptors by the end of the block. However, to do so, the GMD
program will have to more than double its 2007 interceptor emplacement
rate.

  MDA Likely to Defer Additional Work into Future Blocks to Offset Rising Costs

Even though MDA reduced the quantity of assets it planned to deliver
during Block 2006 to free up funds, most of the MDA's prime contractors
overran their fiscal year 2006 budgets. Collectively, the prime
contractors developing elements included in Block 2006 exceeded their
budgets by approximately $478 million, with GMD accounting for about 72
percent of the overrun. Table 6 contains our analysis of prime
contractors' cost and schedule performance in fiscal year 2006 and the
potential overrun or underrun of each contract at completion.10 All
estimates of the contracts' cost at completion are based on the
contractors' performance through fiscal year 2006. Appendix II provides
further details regarding the cost and schedule performance of the prime
contractors for the seven elements shown in table 6.

9MDA also delivered two additional missiles for flight tests, bringing the
total number of missiles delivered during calendar year 2006 to six. Test
missiles are identical to those delivered for operational use.

Table 6: Prime Contractor Fiscal Year 2006 and Cumulative Cost and
Schedule Performance

(Dollars in millions)
                                                       Percent                   
                FY06      FY06 Cumulative Cumulative        of Estimated         
BMDS         Cost  Schedule       Cost   Schedule  Contract Contract          
Element  Variance Variancea   Variance   Variance Completed Underrun/Overrunb 
                                                               Overrun of $112.1 
ABL       ($54.8)   ($26.4)    ($77.9)    ($50.0)       79% to $248.3         
Aegis                                                                         
BMD                                                                           
Weapon                                                      Overrun of $0.1   
System      (6.0)     (0.8)        0.1      (0.8)       81% to $4.7           
Aegis                                                       Underrrun of $1.9 
BMD                                                         to overrun of     
SM-3c       (7.8)       0.7        3.1      (8.9)       82% $2.7              
                                                               Overrun of        
                                                               $1,485.8 to       
GMD       (346.5)      90.2  (1,059.6)    (137.8)       74% $1,853.5          
                                                               Underrun of $44.9 
Sensors       3.8       5.4       20.2       26.6       65% to $26.3          
                                                               Overrun of $567.3 
STSS       (66.8)    (84.1)    (163.7)    (104.4)       42% to $1,378.3       
Total                                             Total                       
for                                               Estimated                   
Block                                             Block                       
2006                                              2006      $2,118.5 to       
Elements ($478.1)  ( $15.0) ($1,277.8)   ($275.3) Overrun   $3,461.2          
KEI           0.6       0.6        3.6      (5.3)        6% N/Ad              
                                                               Overrun of $134.7 
THAADe     (87.9)    (37.9)    (104.2)     (28.0)       81% to $320.2         
Total                                                                         
for                                                                           
Future                                                                        
Block                                                                         
Elements  ($87.3)   ($37.3)   ($100.6)    ($33.3)                             
                                                     Total                       
                                                     Estimated                   
Total                                             Overrun   Overrun of        
for All                                           for All   $2,253.2 to       
Elements ($565.4)   ($52.3) ($1,378.4)   ($308.6) Elements  $3,781.4          

Source: Contract Performance Reports (data); GAO (analysis).

Notes: Negative variances are shown with parentheses around the dollar
amounts. MDA directed that the contractors for the MKV and C2BMC elements
suspend Earned Value reporting during the fiscal year and data for those
contracts is not included above.

10Contractors for C2BMC and MKV were directed to suspend earned value
reporting during fiscal year 2006; therefore, data for these contracts are
not included in the table. See appendix II for more information as to why
reporting was suspended.

aSchedule variance represents the value of planned work that the
contractor has not performed as scheduled.

bContracts may include some work that is not related to Block 2006.

cContractor performance reporting data for the Aegis BMD SM-3 contract was
not available prior to fiscal year 2005. Therefore, cumulative values are
from fiscal year 2005 to the present.

dWe could not estimate the likely outcome of the KEI contract at
completion because a trend cannot be predicted until 15 percent of the
planned work is completed.

eEarned Value data for the THAAD contract is reported under two contract
line item numbers, 1 and 10. We report only the contractor's cost and
schedule performance for contract line item 1 because it represents the
majority of the total work performed under the contract.

As shown in table 6, the Sensors element is the only Block 2006 element
that according to our analysis performed within its fiscal year 2006
budget. The ABL, Aegis BMD, GMD, and STSS programs overran their fiscal
year budgets as a result of technical problems and integration issues
encountered during the year. We could not assess the C2BMC contractor's
cost and schedule performance because MDA suspended Earned Value reporting
during the year as the contractor replanned its Block 2006 program of
work.

In addition to analyzing the fiscal year 2006 cost and schedule
performance of elements included in Block 2006, we also analyzed the
performance of elements included in other blocks. Of the elements
reporting Earned Value data, only KEI performed within its budget. THAAD's
integration problems once again caused it to exceed its budget. We were
unable to determine whether the work accomplished by the MKV contractor
cost more than originally planned because Contract Performance Reports
were suspended in February 2006 as the program transitioned from an
advanced technology development program to a system development program.
This transition prompted MKV to establish a new baseline for the program,
which the contractor will not report against until early in fiscal year
2007.

MDA officials told us that MDA is likely to defer some Block 2006 work
activities (other than the delivery of assets) into future blocks in an
effort to operate within the funds programmed for the block. If the agency
reports the cost of deferred work as it has in the past, the cost of Block
2006 will not include all work that benefits the block and the cost of the
future block will be overstated.

The deferral of work, while necessary to offset increased costs,
complicates making a comparison of a block's actual costs with its
original estimate. According to the Statement of Federal Financial
Accounting Standards Number 4, a federal program should report the full
cost of its outputs, which is defined as the total amount of resources
used to produce the output. In March 2006, we reported that the cost of
MDA's Block 2004 program of work was understated because the reported
costs for the block did not include the cost of Block 2004 activities that
were deferred until Block 2006. Conversely, the cost of Block 2006 is
overstated because the deferred activities from Block 2004 do not directly
contribute to the output of Block 2006. Similarly, if MDA decides to defer
Block 2006 activities until Block 2008 as officials in MDA's Office of
Agency Operations told us is likely, the cost of those activities will
likely be captured as part of Block 2008 costs.

MDA Able to Achieve Most Test Objectives Despite Some Delays in Test Schedule

Most BMDS elements achieved their primary calendar year 2006 test
objectives and conducted test activities on schedule. By December 2006-the
midpoint of Block 2006-three of the six Block 2006 elements and all
elements considered part of future blocks--met their 2006 primary test
objectives. Only the ABL, Aegis BMD, and STSS elements were unable to
achieve these objectives.

  Progress Made on Block 2006 Elements

Although the elements encountered test delays, some were able to achieve
noteworthy accomplishments. For example, in its third flight test, the GMD
program exceeded its test objectives by intercepting a target. This
intercept was particularly noteworthy because it was the first successful
intercept attempt for the program since 2002. Also, although the test was
for only one engagement scenario, it was notable because it was GMD's
first end-to-end test.

The GMD program originally planned to conduct four major flight tests,
during fiscal year 2006, two using operational interceptors. However, the
program was only able to conduct three flight tests during the fiscal
year. In one, an operational interceptor was launched against a simulated
target; in a second test, a simulated target was launched to demonstrate
the ability of the Beale radar to provide a weapon system task plan; and
in the other, an interceptor was launched against an actual target. It was
in the third test that--for one end-to-end scenario--the program exceeded
test objectives by destroying a target representative of a real world
threat. The objectives of the fourth test were to be similar to those of
the third test--an interceptor flying-by a target with no expectation of a
hit. However, program officials told us that the success of the earlier
tests caused them to accelerate the objectives of the fourth test by
making it an intercept attempt. The fourth test has not yet taken place
because a delay in the third test caused a similar delay in the fourth
test and because components of the test interceptor are being changed to
ensure that they will function reliably. This test is currently scheduled
no earlier than the third quarter of fiscal year 2007.

Both the C2BMC and Sensors elements conducted all planned test activities
on schedule and were able to meet their 2006 objectives. The C2BMC
software, which enables the system to display real-time target information
collected by BMDS sensors, was tested in several flight tests with the
Aegis BMD and GMD programs and was generally successful. The Sensors
element was also able to complete all tests planned to ensure that the
Forward-Based X-Band-- Transportable (FBX-T) radar will be ready for
operations. The warfighter will determine when the FBX-T will become
operational, but MDA officials told us that this may not occur until the
United States is able to provide the radar's data to Japan.

MDA was unable to successfully execute the 2006 test objectives for the
STSS program. Thermal vacuum testing that was to be conducted after the
first payload was integrated with space vehicle 1 was delayed as a result
of integration problems. According to program officials, testing began in
January 2007 and it was expected to be completed in late February 2007.

Although the Aegis BMD program conducted its planned test activities on
schedule, it was unable to achieve all of its test objectives for 2006.
Since the beginning of Block 2006, the program has conducted one
successful intercept, which tested the new Standard Missile-3 design that
is being fielded for the first time during Block 2006. This new missile
design provides a capability against more difficult threats and has a
longer service life than the missile produced in Block 2004. In December
2006, a second intercept attempt failed because the weapon system
component was incorrectly configured and did not classify the target as a
threat, which prevented the interceptor from launching. Had this test been
successful, it would have been the first time that the pulse mode of the
missile's Solid Divert and Attitude Control System would have been
partially flight tested.

A sixth BMDS element-ABL-experienced delays in its testing schedule and
was also unable to achieve its fiscal year 2006 test objectives. ABL is an
important element because if it works as desired, it will defeat enemy
missiles soon after launch, before decoys are released to confuse other
BMDS elements. Development of the element began in 1996, but MDA has not
yet demonstrated that all of ABL's leading-edge technologies will work.
The ABL program plans to prove critical technologies during a lethality
demonstration. This demonstration is a key knowledge point for ABL because
it is the point at which MDA will decide the program's future. However,
technical problems encountered with the element's Beam Control/Fire
Control component caused the program to experience over a 3-month delay in
its ground test program, which has delayed the planned lethality
demonstration until 2009. In addition, all software problems have not been
completely resolved and, according to ABL's Program Manager, will have to
be corrected before flight testing can begin, which could further delay
the lethality demonstration.

  Test Results for Future Block Elements Are Positive

The KEI element also has a key decision point--a booster flight
test--within the next few years. In preparation for this test, the program
successfully conducted static fire tests and wind tunnel tests in fiscal
year 2006 to better assess booster performance. Upon completion of KEI's
2008 flight test and ABL's 2009 lethalithy demonstration, MDA will compare
the progress of the two programs and decide their futures.

In January 2005, MDA established ABL as the primary boost phase defense
element. At the same time, MDA restructured the KEI program to develop an
upgraded long-range midcourse interceptor and reduced KEI's role in the
boost phase to that of risk mitigation. A KEI official told us that a
proposal is being developed that suggests MDA approach the 2009 decision
as a down select or source selection that would decide whether ABL or KEI
would be the BMDS boost phase capability.

The MKV program accomplished all of its planned activities as scheduled
during fiscal year 2006, which included several successful propulsion
tests. In November 2005, the program tested a preliminary design of MKV's
liquid propellant divert and attitude control system-the steering
mechanism for the carrier and kill vehicles. This test was a precursor to
a successful July 2006 test of the liquid divert and attitude control
system's divert thruster, which was conducted under more realistic
conditions. The program also executed a solid propellant divert and
attitude control system test in December 2005. Results of the December
test, combined with a technology assessment, led program officials to
pursue a low-risk, high-performance liquid fueled divert and attitude
control system. The MKV program will continue to explore other divert and
attitude control system technologies for future use.

The THAAD program achieved its primary fiscal year 2006 test objectives,
although it did experience test delays. The program planned to conduct
five flight tests during fiscal year 2006, but was only able to execute
four. During the program's first two flight tests, program officials
demonstrated the missile's performance, including the operation of the
missile's divert and attitude control system and the control of its kill
vehicle. The third flight test conducted in July 2006 demonstrated THAAD's
ability to successfully locate and intercept a target, a primary 2006 test
objective. The fourth THAAD flight test was declared a "no-test" after the
target malfunctioned shortly after its launch, forcing program officials
to terminate the test. THAAD officials told us that the aborted test will
be deleted from the test schedule and any objectives of the test that have
not been satisfied will be rolled-up into future tests. The program
planned to conduct its fifth (missile only) flight test-to demonstrate the
missile's performance in the low atmosphere-in December 2006. However, due
to reprioritization in test flights, the fifth flight test is now
scheduled for the second quarter of fiscal year 2007. Flight test 6, the
next scheduled flight test, was successfully conducted at the end of
January 2007. It was the first flight test performed at the Pacific
Missile Range.

Overall BMDS Performance Remains Unverified

In March 2005, MDA set performance goals for Block 2006 that included a
numerical goal for the probability of a successful BMDS engagement, a
defined area from which the BMDS would prevent an enemy from launching a
ballistic missile, and a defined area that the BMDS would protect from
ballistic missile attacks.11 In March 2006, MDA altered its Block 2006
performance goals commensurate with reductions in Block 2006 fielded
assets. Although MDA revised its goal downward, insufficient data exists
to assess whether MDA is on track to meet its new goal.

MDA uses the WILMA model to predict overall BMDS performance even though
this model has not been validated or verified by DOD's Operational Test
Agency. According to Operational Test Agency officials, WILMA is a legacy
model that does not have sufficient fidelity for BMDS performance
analysis. MDA officials told us the agency is working to develop an
improved model that can be matured as the system matures.

In addition, the GMD program has not completed sufficient flight testing
to provide a high level of confidence that the BMDS can reliably intercept
ICBMs. In September 2006, the GMD program completed an end-to-end test of
one engagement sequence that the GMD element might carry out. While this
test provided some assurance that the element will work as intended, the
program must test other engagement sequences, which would include other
GMD assets that have not yet participated in an end-to-end flight test.
Additionally, independent test agencies told us that additional flight
tests are needed to have a high level of confidence that GMD can
repeatedly intercept incoming ICBMs. Additional tests are also needed to
demonstrate that the GMD element can use long-range surveillance and
tracking data developed by the Aegis BMD element. In March 2006, we
reported that Aegis BMD was unable to participate in a GMD flight test,
which prevented MDA from exercising Aegis BMD's long-range surveillance
and tracking capability in a manner consistent with an actual defensive
mission. The program office told us that the Aegis BMD is capable of
performing this function and has demonstrated its ability to surveil and
track ICBMs in several exercises. Additionally, Aegis BMD has shown that
it can communicate this data to GMD in real time. However, because of
other testing priorities, GMD has not used this data to prepare a weapon
system task plan in real time. Rather GMD developed the plan in post-test
activities. Officials in the Office of the Director for Operational Test
and Evaluation told us that having GMD prepare the test plan in real time
would provide the data needed to more accurately gauge BMDS performance.

11Specifics of MDA's performance goals are classified and cannot be
presented in this report.

Delayed testing and technical problems may also impact the performance of
the system and the timeliness of future enhancements to the fielded
system. For example, the performance of the new configuration of the Aegis
BMD SM-3 missile is unproven because design changes in the missile's solid
divert and attitude control system and one burn pattern of the third stage
rocket motor, according to program officials, were not flight tested
before they were cut into the production line. MDA is considering a full
flight test of the pulsed solid divert and attitude control system during
the third quarter of fiscal year 2007. The solid divert and attitude
control system is needed to increase the missile's ability to divert into
its designated target and counter more complex threats. The zero
pulse-mode of the missile's third stage rocket motor, which is expected to
provide a capability against a limited set of threat scenarios, will not
be fully tested until fiscal year 2009.

Confidence in the performance of the BMDS is also reduced because the GMD
element continues to struggle with technical issues affecting the
reliability of some GMD interceptors. For example, GMD officials told us
that the element has experienced one anomaly during each of its flight
tests since its first flight test conducted in 1999. This anomaly has not
yet prevented the program from achieving any of its primary test
objectives; but, to date, neither its source nor solution has been clearly
identified or defined. Program officials plan to continue their assessment
of current and future test data to identify the root cause of the problem.

The reliability of emplaced GMD interceptors also remains uncertain
because inadequate mission assurance/quality control procedures may have
allowed less reliable or inappropriate parts to be incorporated into the
manufacturing process. Program officials plan to replace these parts in
the manufacturing process, but not until interceptor 18. The program plans
to begin retrofitting the previous 17 interceptors in fiscal year 2009.
According to GMD officials, the cost of retrofitting the interceptors will
be at least $65.5 million and could be more if replacement of some parts
proves more difficult than initially expected.

The ABL program also experienced a number of technical problems during
fiscal year 2006 that delayed future decisions for the BMDS program. As
previously noted, the program's 2008 lethality demonstration will be
delayed until 2009. The delay is caused by Beam Control/Fire Control
(BC/FC) software, integration, and testing difficulties and unexpected
hardware failures. According to contractor reports, additional software
tests were needed because changes were made to the tested versions, the
software included basic logic errors, and unanticipated problems were
caused by differences in the software development laboratory and ABL
aircraft environments.

MDA'S Flexibility Comes at the Cost of Program Transparency

MDA enjoys a significant amount of flexibility in developing the BMDS, but
it comes at the cost of transparency and accountability. Because the BMDS
program has not formally entered the system development and demonstration
phase of the acquisition cycle, it is not yet required to apply several
important oversight mechanisms contained in certain acquisition laws that,
among other things, provide transparency into program progress and
decisions. This has enabled MDA to be agile in decision making and to
field an initial BMDS capability quickly. On the other hand, MDA operates
with considerable autonomy to change goals and plans, making it difficult
to reconcile outcomes with original expectations and to determine the
actual cost of each block and of individual operational assets.

Acquisition Laws Promote Program Transparency

Past Congresses have established a framework of laws that make major
defense acquisition programs accountable for their planned outcomes and
cost, give decision makers a means to conduct oversight, and ensure some
level of independent program review.12 The threshold application of these
acquisition laws is typically triggered by a program's entry into system
development and demonstration--a phase during which the weapon system is
designed and then demonstrated in tests. The BMDS has not entered into
system development and demonstration because it is being developed outside
DOD's normal acquisition cycle.

To provide accountability, major defense acquisition programs are required
by statute to document program goals in an acquisition program baseline13
that, as implemented by DOD, has been approved by a higher-level DOD
official prior to the program's initiation. The baseline, derived from the
users' best estimates of cost, schedule, and performance requirements,
provides decision makers with the program's total cost for an increment of
work, average unit costs for assets to be delivered, the date that an
initial operational capability will be fielded, and the weapon's intended
performance parameters. The baseline is considered the program's initial
business case-evidence that the concept of the program can be developed
and produced within existing resources. Once approved, major acquisition
programs are required to measure their program against the baseline or to
obtain approval from a higher-level acquisition executive before making
significant changes. Programs are also required to regularly provide
detailed program status information to Congress, including information on
program cost, in Selected Acquisition Reports.14 In addition, Congress has
established a cost monitoring mechanism that requires programs to report
significant increases in unit cost measured from the program baseline.15

12The BMDS program meets the definition of a major defense acquisition
program, which is defined in 10 U.S.C. S 2430 and implemented by DOD in
its 5000 series. A major defense acquisition program is an acquisition
program that is not a highly sensitive classified program and is
designated as a major defense acquisition program or is estimated to
require an eventual total expenditure for research, development, test, and
evaluation of more that $365 million in fiscal year 2000 constant dollars
or, for procurement, of more than $2.190 billion in fiscal year 2000
constant dollars.

1310 U.S.C. S 2435 requires an approved program baseline for major defense
acquisition programs. Although this requirement is not triggered until
entry into system development and demonstration, MDA is subject to a
requirement enacted in section 234(e) of the Fiscal Year 2005 National
Defense Authorization Act (Pub. L. No. 108-375). The provision requires
the Director, MDA, to establish and report annually to Congress a cost,
schedule, and performance baseline for each block configuration being
fielded. Modification to the baseline and variations against the baseline
must also be reported. In a February 2002 memorandum, the Under Secretary
of Defense delegated to the Director, MDA, the full responsibility and
authority for baselining each BMDS capability and configuration.

1410 U.S.C. S 2432.

Other statutes ensure that DOD provides some independent program
verification external to the program. Title 10, United States Code
(U.S.C.), section 2434 prohibits the Secretary of Defense from approving
system development and demonstration, or production and deployment, of a
major defense acquisition program unless an independent estimate of the
program's full life-cycle cost has been considered by the Secretary.16 The
independent verification of a program's cost estimate allows decision
makers to gauge whether the program is executable given other budget
demands and it increases the likelihood that a program can execute its
plan within estimated costs.17 In addition, 10 U.S.C. S 2399 requires
completion of initial operational test and evaluation of a weapon system
before a program can begin full-rate production. The Director of
Operational Test and Evaluation, a DOD office independent of the
acquisition program, not only approves the adequacy of the test plan and
its subsequent evaluation, but also reports to the Secretary of Defense
whether the test and evaluation were adequate and whether the test's
results confirm that the items are effective and suitable for combat.

By law, appropriations are to be applied only to the objects for which the
appropriations were made except as otherwise provided by law.18 Research
and development appropriations are typically specified by Congress to be
used to pay the expenses of basic and applied scientific research,
development, test, and evaluation. On the other hand, procurement
appropriations are, in general, specified by Congress to be used for the
purchase of weapon systems and equipment, that is, production or
manufacturing. In the 1950s, Congress established a policy that items
being purchased with procurement funds be fully funded in the year that
the item is procured. This policy is meant to prevent a program from
incrementally funding the purchase of operational systems. According to
the Congressional Research Service, "incremental funding fell out of favor
because opponents believed it could make the total procurement costs of
weapons and equipment more difficult for Congress to understand and track,
create a potential for DOD to start procurement of an item without
necessarily stating its total cost to Congress, permit one Congress to
`tie the hands' of future Congresses, and increase weapon procurement
costs by exposing weapons under construction to uneconomic start-up and
stop costs."19

1510 U.S.C. S 2433, known as "Nunn-McCurdy."

16This statute also requires a manpower estimate, which is reviewed by the
office of the Under Secretary of Defense for Personnel and Readiness.

17Section 234(e) of the Fiscal Year 2005 National Defense Authorization
Act requires MDA to consider life-cycle costs. However, MDA is not
required to obtain an independent assessment of life-cycle cost.

1831 U.S.C. S 1301(a).

Congress continues to enact legislation that improves program
transparency. In 2006, Congress added 10 U.S.C. S 2366a, which prohibits
programs from entering system development and demonstration until certain
certifications are made. For example, the decision authority for the
program must certify that the program has a high likelihood of
accomplishing its intended mission and that the program is affordable
considering unit cost, total acquisition cost, and the resources available
during the year's covered by DOD's future years defense program.20

Similar to other government programs, one of the laws affecting MDA
decisions is the Antideficiency Act.21 The fundamental concept of the
Antideficiency Act is to ensure that spending does not exceed appropriated
funds. The act is one of the major laws in which Congress exercises its
constitutional control of the public purse. The fiscal principles
underlying the Antideficiency Act are quite simple. Government officials
may not make payments, or commit the United States to make payments at
some future time, for goods or services unless the available appropriation
is sufficient to cover the cost in full. To ensure that it is always in
compliance with this law, MDA adjusts its goals and defers work as needed
to execute the BMDS within its available budget.

Benefits of MDA's Flexibility

In 2001, DOD conducted extensive missile defense reviews to decide how
best to defend the United States, deployed troops, friends, and allies
from ballistic missile attacks. The studies determined that DOD needed to
find new approaches to acquire and deploy missile defenses. Flexibility
was one of the hallmarks of the new approach that DOD chose to implement.
One flexibility accorded MDA was the authority to develop the BMDS outside
of DOD's normal acquisition cycle, by not formally entering the system
development and demonstration phase. This effectively enabled MDA to defer
application of certain acquisition laws until the agency transfers a fully
developed capability to a military service for production, operation, and
sustainment--the point at which DOD directed that the BMDS program reenter
the acquisition cycle. At that point, basic development and initial
fielding would generally be complete.

19Congressional Research Service, Defense Procurement: Full Funding
Policy--Background, Issues, and Options for Congress (Oct. 20, 2006).

20DOD's Future Years Defense Program is the official DOD document that
summarizes forces and resources associated with programs approved by the
Secretary of Defense.

2131 U.S.C. S 1341.

Because MDA currently does not have to apply many of the oversight
requirements for major defense acquisition programs directed by
acquisition laws, the BMDS program operates with unusual autonomy. In
2002, the Under Secretary of Defense for Acquisition, Technology, and
Logistics delegated to MDA the authority to establish its own baseline and
make changes to that baseline without approval outside of MDA. Because it
has not formally entered system development and demonstration, MDA can
also initiate a block of capability and move forward with its fielding
without an independent cost estimate or an independent test of the
effectiveness and suitability of assets intended for operational use. The
ability to make decisions on its own and proceed without independent
verifications reduces decision timelines, making the BMDS program more
agile than other DOD programs.

MDA's ability to quickly field a missile defense capability is also
enhanced by its ability to field the BMDS before all testing is complete.
MDA considers the assets it has fielded to be developmental assets and not
the result of the production phase of the acquisition cycle. Because MDA
has not advanced the BMDS or its elements into the acquisition cycle, it
is continuing to produce and field assets without completing the
operational test and evaluation normally required by 10 U.S.C. S 2399
before full-rate production. For example, MDA has acquired and emplaced 14
ground-based interceptors for operational use before both developmental
and operational testing is completed. The agency's strategy is to continue
developmental testing while fielding assets and to also incorporate
operational realism into these tests so that the Director of Operational
Test and Evaluation can make an operational assessment of the fielded
assets' capability.

Because all of MDA's funding comes from the Research, Development, Test,
and Evaluation appropriation account, MDA enjoys greater flexibility in
how it can use funds compared to a traditional DOD acquisition program
where funding is typically divided into research, development, and
evaluation, procurement, and operations and maintenance.22 This is
particularly true of an element. For example, a Block 2006 element like
GMD covers a wide range of activities, from research and development on
future enhancements to the fabrication of interceptors for operations. If
the GMD program runs into problems with one activity, it can defer work on
another to cover the cost of the problems. MDA's flexibility to change
goals for each element complements the flexibility in how it uses its
funds.

Comparing Actual Work to Budgeted Work Is Difficult

After a new block of the BMDS has been presented in the budget, MDA can
change the outcomes-in terms of planned delivery of assets and other work
activities-that are expected of the block. While this freedom enables MDA
to operate within its budget, it decouples the activities actually
completed from the activities that were budgeted, making it difficult to
assess the value of what is actually accomplished. For example, between
2003 and mid-2005, MDA changed its Block 2004 delivery goals three times,
progressively decreasing the number of assets planned for the block when
it was initially approved for funding. This trend has continued into Block
2006, with the agency changing its delivery plans once since it presented
its initial Block 2006 goals to Congress. MDA is required to report such
changes only if MDA's Director considers the changes significant.

In addition to deferring the delivery of assets from one block to another,
MDA also has the flexibility to defer other work activities from a current
to a future block. This creates a rolling scope, making it difficult to
keep track of what an individual block is responsible for delivering. For
example, during Block 2004, MDA deferred some planned development,
deployment, characterization, and verification activities until Block 2006
so that it could cover contractor budget overruns. MDA is unable to
determine exactly how much work was deferred. However, according to a
November 2006 report to Congress, MDA found it necessary to defer the work
until Block 2006 to make Block 2004 funding available to implement a new
GMD test strategy following two GMD flight test failures, resolve quality
issues associated with GMD interceptors and its exoatmospheric kill
vehicle, and add an FBX-T radar to the initial deployed capability. Agency
officials are already anticipating the deferral of work from Block 2006
into Block 2008. In fiscal year 2006, the work of five of the six
contractors responsible for elements included in Block 2006 cost more than
expected. Given program funding limits, MDA officials told us that they
will either have to defer work or request additional funds from Congress
during the remaining years of the block. MDA did not increase its fiscal
year 2007 budget request; therefore, it is likely that the agency will
once again have to defer some planned work into the next block.

22Congress has provided MDA authority to use its research, development,
test, and evaluation appropriation for development and fielding of the
BMDS. The most recent authority applies to funds authorized to be
appropriated for fiscal years 2007 and 2008 and appears in section 221 of
the Fiscal Year 2007 National Defense Authorization Act. In expenditure of
these funds, MDA can incrementally fund the BMDS components that it
fields.

Not only do changes in a block's work plan make it difficult to know what
outcomes the program expects to achieve, the changes also have the
potential to impact the BMDS' performance. For example, by decreasing the
number of fielded interceptors, MDA decreases the likelihood that it can
defeat enemy missiles if multiple threats are prevalent because the number
of available interceptors will be limited. In addition, if activities,
such as testing and validation, are not complete when assets are fielded,
the assets may not perform as expected and changes may be needed. This
effect of early fielding was seen in Block 2004 when GMD interceptors were
fielded before testing was complete. Later tests showed that the
interceptors may contain unreliable parts, some of which MDA now plans to
replace.

  Lack of Independent Reviews Contributes to Changing Goals

Although acquisition laws governing major defense acquisition programs as
well as DOD acquisition policy recognize the need for independent program
reviews, few such reviews are part of the BMDS program. This has
contributed to the difficulty in assessing MDA's progress toward expected
outcomes. As described above, major programs are required by law to have
an independent cost estimate (performed by the DOD Cost Analysis
Improvement Group) for entry into system development and demonstration, as
well as production and deployment. According to MDA officials, MDA has so
far obtained an independent assessment of only one BMDS element's
life-cycle cost estimate--Aegis BMD's estimate for Block 2004.23 In our
opinion, without a full independent cost estimate, MDA has established
optimistic block goals that could not be met. This is supported by an MDA
spokesman's statement that the agency's optimism in establishing Block
2004 cost and quantity goals contributed to several goal changes.
According to MDA officials, unlike its action on its Block 2004 cost goal,
MDA did not request an assessment of MDA's Block 2006 goal.

23In October 2004, MDA asked DOD's Cost Analysis Improvement Group to
assess GMD deployment costs included in Missile Defense Plan II. This was
not an estimate of block cost.

Further, DOD policy calls for a milestone decision authority with overall
responsibility for the program that is independent of the program.24
Although the Director reports to the Under Secretary of Defense for
Acquisition, Technology, and Logistics and keeps the Under Secretary and
congressional defense committees informed of MDA decisions, MDA's Director
is authorized to make most program decisions without prior approval from a
higher-level authority. The Under Secretary of Defense delegated this
authority to the Director in a February 2002 memorandum. The Secretary of
Defense also appointed MDA's Director as both the BMDS Program Manager and
its Acquisition Executive (including the authority to serve as milestone
decision authority until an element is transferred out of MDA). As the
Acquisition Executive, the Director was given responsibility for
establishing programmatic policy and conducting all research and
development of the BMDS. This delegation included responsibility for
formulating BMDS acquisition strategy, making program commitments and
terminations, deciding on affordability trade-offs, and baselining the
capability and configuration of blocks and elements.

  Block Costs Cannot Be Tracked

Because MDA can redefine outcomes, the actual cost of a block cannot be
compared with the cost originally estimated. MDA considers the cost of
deferred work--which may be the delayed delivery of assets or other work
activities--as a cost of the block in which the work is performed, even
though the work benefits and was planned for a prior block. Further, MDA
does not track the cost of deferred work from one block to the next and,
therefore, cannot make adjustments that would match the cost with the
block it benefits. For example, in March 2006, we reported that MDA
deferred some Block 2004 work until Block 2006 so that it could use the
funds appropriated for that work to cover unexpected cost increases caused
by such problems as poor quality control procedures and technical problems
during development, testing, and production. MDA officials told us that
additional funds have been, or will be, requested during Block 2006 to
carry out the work. However, the officials could not tell us how much of
the Block 2006 budget is attributable to the deferred work. These actions
caused Block 2004 cost to be understated and Block 2006 cost to be
overstated. In addition, if MDA delays some Block 2006 work until Block
2008, as expected, Block 2006 cost will become more difficult to compare
with its original estimate as the cost of the deferred work will no longer
count against the block. The Director, MDA, determines whether he reports
the cost of work being deferred to future blocks and, so far, has not done
so.

24For major defense acquisition programs, the milestone decision authority
is typically either the Under Secretary of Defense for Acquisition,
Technology and Logistics, or the component acquisition executive. The
establishment of the milestone decision authority and associated milestone
decisions is recognized in laws applicable to DOD's major acquisition
programs. See, e.g. 10 U.S.C. S 2366a.

The planned and actual unit costs of assets being acquired for operational
use are equally hard to determine. Because the BMDS and its elements are a
single major defense acquisition program that has not officially entered
into system development and demonstration, it is not required to provide
the detailed reports to Congress directed by statute.25 While it is
possible to reconstruct planned unit costs from budget documents, the
planned unit cost of some assets--for example, GMD interceptors--is not
easy to determine because the research and development funds used to buy
the interceptors are spread across 3 to 5 budget years. Also, because MDA
is not required to report significant increases in unit cost,26 it is not
easy to determine whether an asset's actual cost has increased
significantly from its expected cost. For example, we were unable to
compare the actual and planned cost of a GMD interceptor. By comparison,
the Navy provides more transparency in reporting on the cost of ships,
some of which are incrementally funded with procurement funds. When a Navy
ship program overruns the cost estimate used to justify the budget, the
Navy identifies the additional funding needed to cover the overruns
separately from other shipbuilding programs.

Using research and development funds to purchase fielded assets further
reduces cost transparency because these dollars are not covered by the
full-funding policy for procurement. Therefore, when the program for a
2-year block is first presented in the budget, Congress is not necessarily
fully aware of the dimensions and cost of that block. Although a
particular block may call for the delivery of a specific number of
interceptors, the full cost of those interceptors may not be contained in
that block. In addition, incremental funding has the potential to "tie the
hands" of future Congresses to finish funding for assets started in prior
years. Otherwise, Congress could run the risk of a production stoppage and
the increased costs associated with restarting the production line.

2510 U.S.C. S 2432, Selected Acquisition Reports. MDA provides a limited
report to Congress under the statute for the BMDS as a whole.

26Because the BMDS or its major elements have not been designated by MDA
as being in system development and demonstration, no acquisition program
baseline is required to be established under 10 U.S.C. S 2435. Thus, there
is no basis for determining unit cost under 10 U.S.C. S 2433
(Nunn-McCurdy), which requires calculation of unit cost from the baseline.
Further, for the same reason, only limited Selected Acquisition Reports to
Congress on program status are generated (10 U.S.C. S 2432(h)) that do not
include unit costs.

MDA Makes Significant Strides with Quality Improvement Processes

During Block 2004, poor quality control procedures that MDA officials
attribute to acquisition streamlining and schedule pressures caused the
missile defense program to experience test failures and slowed production.
MDA has initiated a number of actions to correct its quality control
weaknesses and those actions have been largely successful. Although MDA
continues to identify quality control procedures that need improvement,
the number of deficiencies has declined and contractors are responding to
MDA's improvement efforts. These efforts include a teaming approach
designed to restore the reliability of MDA's suppliers, regular quality
inspections to quickly identify and find resolutions for quality problems,
and award fees with an increased emphasis on quality assurance. In
addition, MDA's attempts to improve quality assurance have attracted the
interest of other government agencies and contractors. MDA is leading
quality improvement conferences and co-sponsoring a Space Quality
Improvement Council.

Officials in MDA's Office of Quality, Safety, and Mission Assurance and in
GMD's Program Office attribute the weaknesses in MDA's quality control
processes to acquisition streamlining and schedule pressures. According to
a former DOD Director of Operational Test and Evaluation, during the early
1990's there was a common goal for DOD management to streamline the
acquisition process to reduce burgeoning costs of new weapons. By
streamlining the process, DOD commissions and task forces hoped to
drastically cut system development and production time and reduce costs by
eliminating management layers, eliminating certain reporting requirements,
using more commercial-off-the-shelf systems and subsystems, reducing
oversight from within as well as from outside DOD, and by eliminating
perceived duplication of testing. In addition to acquisition streamlining,
schedule pressures caused MDA to be less attentive to quality assurance
issues. This was particularly true for the GMD element that was tasked
with completing development and producing assets for operational use
within 2 years of a Presidential directive to begin fielding an initial
missile defense capability. While the GMD program had realized for some
time that its quality controls needed to be strengthened, the program's
accelerated schedule left little time to address quality problems.

MDA has initiated a number of mechanisms to rectify the quality control
weaknesses identified in the BMDS program. For example, as early as 2003,
MDA, in concert with industry partners, Boeing, Lockheed Martin, Raytheon,
and Orbital Sciences began a teaming approach to restore reliability in a
key supplier. In exchange for allowing the supplier to report to a single
customer--MDA--the supplier gave MDA's Office of Quality, Safety, and
Mission Assurance authority to make a critical assessment of the
supplier's processes. This assessment determined that the supplier's
manufacturing processes lacked discipline, its corrective action
procedures were ineffective, its technical data package was inadequate,
and personnel were not properly trained. The supplier responded by hiring
a Quality Assurance Director, five quality assurance professionals, a
training manager, and a scheduler. In addition, the supplier installed an
electronic problem reporting database, formed new boards--such as a
failure review board--established a new configuration management system,
and ensured that manufacturing activity was consistent with contract
requirements. According to MDA, by 2005, these changes began to produce
results. Between March 2004 and September 2005, test failures declined by
43 percent. In addition, open quality control issues decreased by 64
percent between September 2005 and August 2006 and on-time deliveries
increased by 9 percent between March 2005 and August 2006. MDA's teaming
approach was expanded in 2006 to another problem supplier and many
systemic solutions are already underway.

MDA also continues to carry-out regular contractor quality inspections.
For example, during fiscal year 2006, MDA completed quality audits of 6
contractors and identified a total of 372 deficiencies and observations.27
As of December 2006, the contractors had closed 157 or 42 percent of all
audit findings. These audits are also producing other signs of quality
assurance improvements. For example, after an August 2006 review of
Raytheon's production of the last five GMD exoatmospheric kill vehicles,
MDA auditors reported less variability in Raytheon's production processes,
increasing stability in its statistical process control data, fewer test
problem reports and product waivers, compliance with manufacturing "clean
room" requirements, and a sustained improvement in product quality.
Because of the emphasis placed on the recognition of quality problems,
Raytheon is conducting regular inspections independently of MDA to
identify problems.

27A deficiency is recognized when the contractor fails to comply with a
contractual or internal procedure requirement. On the other hand,
observations are the failure to employ an MDA or industry best practice.

Over the course of 2006, MDA also continued to incorporate MDA Assurance
Provisions (MAP) into its prime contracts. The MAP provides MDA methods to
measure, verify, and validate mission success through the collection of
metrics, risk assessment, technical evaluations, independent assessments,
and reviews. Four BMDS elements-BMDS Sensors, C2BMC,28 KEI, and
THAAD-modified their contracts during 2006 to incorporate the MAP.29 The
remaining five BMDS elements have not yet included the plan on their
contracts because the contract is mostly in compliance with the MAP or
because of the timing and additional costs of adding the requirements.

MDA also encourages better quality assurance programs and contractors'
implementation of best practices through award fee plans. In 2003, three
BMDS elements-BMDS Sensors, KEI, and THAAD-revised their contracts to
include 25 MAP criteria in their award fee plans.30 For example, the BMDS
Sensors element included system quality, reliability, and configuration
control of data products as part of its award fee criteria for its FBX-T
contract.31 Contractors are also bringing their best practices to the
table. For example, in an effort to prevent foreign object debris in
components under assembly, Raytheon and Orbital Sciences have placed all
tools in special tool boxes known as shadow boxes. Raytheon has also
incorporated equipment into the production process that handles critical
components, removing the possibility that the components will be dropped
or mishandled by production personnel.

28The C2BMC element modified its contract by adding a tailored version of
the MAP called the MDA/C2BMC Mission Assurance Implementation Plan. The
Mission Assurance Implementation Plan contains those requirements that are
specifically applicable to the C2BMC element on contract.

29The Joint National Integration Center (JNIC) included elements of MAP as
part of its award fee criteria. However, this contract was not included in
our review and is not considered as a specific BMDS element.

30The THAAD element modified its contract by adding a tailored version of
the MAP called the Mission Assurance Implementation Plan. This plan
contains those requirements that are specifically applicable to the THAAD
element on contract.

31The BMDS Sensors element also added MAP to its Contractor Logistics
Support (CLS) prime contract and award fee plan in May 2006.

Because of its quality assurance efforts, contractors and other government
agencies have called on MDA to lead quality conferences and sponsor an
improvement council. MDA's Office of Quality, Safety, and Mission
Assurance was co-sponsor of a conference on quality in the space and
defense industry and the office's Director has also served as panel
discussion chair at numerous other conferences. The conferences focus on
the safety, reliability, and quality aspects of all industries and
agencies involved in defense and space exploration. MDA is also a
co-sponsor of the Space Quality Improvement Council, a council established
to cooperatively address critical issues in the development, acquisition,
and deployment of national security space systems. Contractors are also
adopting some MDA methods for improving quality assurance. For example,
Raytheon Integrated Defense Systems has adopted the MAP as a performance
standard for all of its defense programs.

Conclusions

In a general sense, our assessment of MDA's progress on missile defense is
similar to that of previous years: accomplishments have been made and
capability has been increased, but costs have grown and the scope of
planned work has been reduced. The fielding of additional assets, the
ability to put BMDS on alert status, and the first end-to-end test of GMD
were notable accomplishments during fiscal year 2006. On the other hand,
it is not easy to answer the question of how well BMDS is progressing
relative to the funds it has received and goals it has set for those
funds.

As with previous years, we have found it difficult to reconcile the
progress made in Block 2006 with the original cost and scope of the
program. The block concept, while a useful construct for harvesting and
fielding capability incrementally, is a muddy construct for
accountability. Although BMDS is managed within a relatively level budget
of about $10 billion a year, the scope of planned work is altered several
times each year. Consequently, work travels from one block to another,
weakening the connection between the actual cost and scope of work done
and the estimated cost and scope of work used to justify budget requests.
Block 2006 is a case in point. Compared with its original budget
justification, it now contains unanticipated work from Block 2004 but has
deferred some of its own planned work to future blocks. Costs for the
THAAD element are no longer being counted in Block 2006 although they were
last year. Some developmental elements that will be fielded in later
blocks, such as KEI and MKV, are not considered part of Block 2006, while
ABL, which is also a developmental element to be fielded in later blocks,
is considered part of Block 2006. Establishing planned and actual costs
for individual assets is also elusive because MDA's development of the
BMDS outside of DOD's acquisition cycle blurs the audit trail. Using
research and development funds--funds that are not covered by the
full-funding policy--contributes to the difficulty in determining some
assets' cost.

None of the foregoing is to suggest that MDA has acted inconsistently with
the authorities it has been granted. Indeed, by virtue of its not having
formally begun system development and demonstration, coupled with its
authority to use research and development funds to manufacture and field
assets, MDA has the sanctioned flexibility to manage exactly as it has. It
could be argued that without this latitude, the initial capability fielded
last year and put on alert this year would not have been possible. Yet,
the question remains as to whether this degree of flexibility should be
retained on a program that will spend about $10 billion a year for the
foreseeable future. It does not seem unreasonable to expect a program of
this magnitude to be held to a higher standard of accountability than
delivering some capability within budgeted funds. In fact, the program is
likely to undergo greater scrutiny as DOD faces increasing pressure to
make funding trade-offs between its investment portfolios, ongoing
military operations, and recapitalization of its current weapon systems.

Within BMDS, key decisions lie ahead for DOD. Perhaps the most significant
decision in the next 2 years will be to determine what investments should
be made in the two boost phase elements--ABL and KEI--under development.
This decision would benefit greatly from good data on actual versus
expected performance, actual versus expected cost, and independent
assessments of both cost and performance.

The recommendations that follow build upon those we made in last year's
report on missile defense. In general, those recommendations called for
the Secretary of Defense to align individual BMDS elements around a
knowledge-based strategy and to determine whether a block approach to
fielding was compatible with such a strategy.

Recommendations for Executive Action

To increase transparency in the missile defense program, we recommend that
the Secretary of Defense:

           o Develop a firm cost, schedule, and performance baseline for
           those elements considered far enough along to be in system
           development and demonstration, and report against that baseline.
           o Propose an approach for those same elements that provides
           information consistent with the acquisition laws that govern
           baselines and unit cost reporting, independent cost estimates, and
           operational test and evaluation for major DOD programs. Such an
           approach could provide necessary information while preserving the
           MDA Director's flexibility to make decisions.
           o Include in blocks only those elements that will field
           capabilities during the block period and develop a firm cost,
           schedule, and performance baseline for that block capability
           including the unit cost of its assets.
           o Request and use procurement funds, rather than research,
           development, test, and evaluation funds, to acquire fielded
           assets.
           o Conduct an independent evaluation of ABL and KEI after key
           demonstrations, now scheduled for 2008 and 2009, to inform
           decisions on the future of the two programs.

Agency Comments and Our Evaluation

DOD's comments on our draft report are reprinted in appendix I. DOD
partially concurred with our first three recommendations and non-concurred
with the last two.

In partially concurring with the first recommendation, DOD recognized the
need for greater program transparency, but objected to implementing an
element-centric approach to reporting, believing that this would detract
from managing the BMDS as a single integrated system. We agree that
management of the BMDS as a single, integrated program should be
preserved. However, since DOD already requests funding and awards
contracts by the individual elements that compose the BMDS, we believe
that establishing a baseline for those elements far enough along to be
considered in system development and demonstration provides the best basis
for transparency of actual performance. This would not change DOD's
approach to managing the BMDS, because merely reporting the cost and
performance of individual elements would not cause each element to become
a major defense acquisition program. DOD stated that MDA intends to modify
its current biennial block approach that is used to define reporting
baselines. In making this change, MDA states that it intends to work with
both Congress and GAO to ensure that its new approach provides useful
information for accountability purposes. At this point, we believe that
the information needed to define a reporting baseline for a block would
best be derived from individual elements. That having been said, a
discourse can be had on whether elements are the only way to achieve the
needed transparency and we welcome the opportunity to work toward
constructive changes.

DOD also partially concurred with our second recommendation that BMDS
elements effectively in system development and demonstration provide
information consistent with the acquisition laws that govern baselines and
unit cost reporting, independent cost estimates, and operational test and
evaluation for major programs. DOD did commit to providing additional
information to Congress to promote accountability, consistency, and
transparency. Nonetheless, DOD remains concerned that having elements,
rather than the BMD system, report according to these laws will have a
fragmenting effect on the development of an integrated system and put more
emphasis on individual programs as though each is a major defense
acquisition program. We believe that greater transparency into the BMDS
program depends on DOD reporting in the same manner that it requests
program funding. This ensures that decision makers can reconcile the
expected cost and performance of assets DOD plans to acquire with actual
cost and performance. We recognize that MDA does provide Congress with
information on cost and testing, but this information is not of the
caliber or consistency called for by acquisition laws.

DOD stated that our third recommendation on reporting at the BMDS-level
appears to be inconsistent with our recommendations on reporting at the
element level. The basis for our third recommendation is that a block,
which is a construct to describe and manage a defined BMDS-wide
capability, must be derived from the capabilities that individual elements
can yield. Except for activities like integrated tests that involve
multiple elements, the cost, schedule, and performance of the individual
assets to be delivered in a block come from the elements. Further, those
elements that are not far enough along to deliver assets or capabilities
within a particular block should not be considered part of that block. We
believe that as MDA works to modify its current biennial block approach,
it needs to be clearer and more consistent about what is and is not
included in a block and that the cost, schedule, and performance of the
specific assets in the block should be derived from the information
already generated by the elements.

DOD did not concur with our recommendation that it request and use
procurement funds to acquire fielded assets. It noted that the flexibility
provided by Research, Development, Test, and Evaluation funding is
necessary to develop and acquire new capabilities quickly that can respond
to new and unexpected ballistic missile threats. We recognize the need to
be able to respond to such threats. However, other DOD programs are also
faced with unexpected threats that must be addressed quickly and have
found ways to do so while acquiring operational assets with procurements
funds. If MDA requires more flexibility than other programs, there should
be a reasonable budgetary accommodation available other than funding the
entire budget with Research, Development, Test, and Evaluation funds. More
needs to be done to get a better balance between flexibility and
transparency. Thus, we continue to believe that decision makers should be
informed of the full cost of assets at the time DOD is asking for approval
to acquire them and that procurement funds are the best way to provide
that transparency.

DOD also did not concur with our fifth recommendation to conduct an
independent evaluation of ABL and KEI to inform the upcoming decisions on
these programs. It believes that MDA's current integrated development and
decision-making approach should continue as planned. We continue to
believe that MDA would benefit from an independent evaluation of both ABL
and KEI. However, we do believe such an evaluation should be based on the
results of the key demonstrations planned for the elements in 2008 and
2009. We have modified our recommendation accordingly.

We are sending copies of this report to the Secretary of Defense and to
the Director, MDA. We will make copies available to others upon request.
In addition, the report will be available at no charge on the GAO Web site
at http://www.gao.gov .

If you, or your staff, have any questions concerning this report, please
contact me at (202) 512-4841. Contact points for our offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. The major contributors are listed in appendix IV.

Paul Francis
Director, Acquisition and Sourcing Management

List of Congressional Committees

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

The Honorable Daniel K. Inouye
Chairman
The Honorable Ted Stevens
Ranking Minority Member
Subcommittee on Defense
Committee on Appropriations
United States Senate

The Honorable Ike Skelton
Chairman
The Honorable Duncan L. Hunter
Ranking Minority Member
Committee on Armed Services
House of Representatives

The Honorable John P. Murtha
Chairman
The Honorable C. W. Bill Young
Ranking Minority Member
Subcommittee on Defense
Committee on Appropriations
House of Representatives

Appendix I: Comments from the Department of Defense

Appendix II: MDA Contracts

Like other government agencies, MDA acquires the supplies and services
needed to fulfill its mission by awarding contracts. Two types of
contracts are prevalent at MDA--contracts for support services and
contracts for hardware. The contractors that support MDA's mission are
commonly known as support contractors, while the contractors that are
responsible for developing elements of the Ballistic Missile Defense
System (BMDS) are called prime contractors.

Support Contractors Are Key to BMDS Development

According to MDA's manpower database, about 8,186 personnel positions--not
counting prime contractors--currently support the missile defense program.
These positions are filled by government civilian and military employees,
contract support employees, employees of federally funded research and
development centers (FFRDC), researchers in university and affiliated
research centers, and a small number of executives on loan from other
organizations. At least 94 percent of the 8,186 positions are paid by MDA
through its research and development appropriation.1 Of this 94 percent,
only about 33 percent, or 2,578 positions, are set aside for government
civilian personnel. Another 57 percent, or 4,368 positions,2 are support
contractors that are supplied by 44 different defense companies. The
remaining 10 percent are positions either being filled, or expected to be
filled, by employees of FFRDCs and university and affiliated research
centers that are on contract or under other types of agreements to perform
missile defense tasks. Table 7 illustrates the job functions that contract
employees carry out.

1A mixture of other organizations pay MDA's other employees. DOD military
personnel accounts pay 260 military personnel assigned to MDA; other DOD
components compensate 182 detailees performing missile defense duties; and
other organizations pay 11 executives on loan to MDA.

2The number of support contract positions within MDA is current as of
November 2006.

Table 7: MDA Support Contractor Job Functions

Illustrative Job Functions                      
Acquisitions/Contracts                          
Administrative/Clerical                         
Business & Financial Management                 
General Engineering (All other engineering)     
Human Resource Management                       
Information Management & Information Technology 
Legislative/Public Affairs                      
Logistics                                       
Quality Assurance                               
Scientific (physics, mathematics, etc.)         
Security and Intelligence                       
Systems Engineering                             
Technical Analysis and Support                  
Testing/Evaluation                              

Source: MDA.

MDA officials explained that the utilization of support contractors is key
to its operation of the BMDS because it allows the agency to obtain
necessary personnel and develop weapon systems more quickly. Additionally,
the officials told us that its approach is consistent with federal
government policy on the use of contractors. MDA officials estimate that
while the average cost of the agency's government employee is about
$140,000 per year, a contract employee costs about $175,000 per year.
Table 8 highlights the staffing levels for each BMDS element.

Table 8: Program Office Staffing

             Government     Support     FFRDC       University and Affiliated 
Element   employeesa contractors employees       Research Center employees 
Aegis BMD        415         367        29                             124 
Airborne         110        81.7       6.5                                 
Laser                                                                      
C2BMC             61          91        36                                 
GMD            316.5       505.5        34                                 
KEI               11          26         0                                 
MKV             15.5          29        11                              15 
Sensors           23          32      24.5                            32.5 
STSS              16           2      86.5                                 
THAAD            263         210         9                                 

Source: MDA (data); GAO (analysis).

Notes: The numbers in this chart do not account for all MDA personnel as
the agency employs these same types of personnel in other areas of its
organization. The table also identifies positions, some of which may be
presently vacant.

aThe numbers shown include both government civilian and military personnel
combined.

Most Prime Contractors Did Not Execute All Planned Work within Fiscal Year 2006
Cost and Schedule Budgets

Prime contractors developing elements of the Ballistic Missile Defense
System (BMDS) typically receive most of the funds MDA requests from
Congress each fiscal year. The efforts of prime contractors may be
obtained through a wide range of contract types. Because MDA is requiring
its prime contractors to perform work that includes enough uncertainty
that the cost of the work cannot be accurately estimated, all of the
agency's prime contracts are cost reimbursement arrangements. Under a cost
reimbursement contract, a contractor is paid for reasonable, allowable,
and allocable costs incurred in performing the work directed by the
government to the extent provided in the contract. The contract includes
an estimate of the work's total cost for the purpose of obligating funds
and establishes a ceiling cost that the contractor may not exceed without
the approval of the contracting officer.

Many of the cost reimbursement contracts awarded by MDA include an award
fee. Cost plus award fee contracts provide for a fee consisting of a base
amount, which may be zero, that is fixed at the inception of the contract
and an award amount, based upon a subjective evaluation by the government,
that is meant to encourage exceptional performance. The amount of the
award fee is determined by the government's assessment of the contractor's
performance compared to criteria stated in the contract. This evaluation
is conducted at stated intervals during performance, so that the
contractor can be periodically informed of the quality of its performance
and, if necessary, areas in which improvement are required.

Two of the cost reimbursement contracts shown in table 9--MKV and
C2BMC--differ somewhat from other elements' cost reimbursement contracts.
The MKV prime contract is an indefinite delivery/indefinite quantity
cost-reimbursement arrangement. This type of contract allows the
government to direct work through a series of task orders. Such a contract
does not procure or specify a firm quantity of services (other than a
minimum or maximum quantity). This contracting approach permits MDA to
order services as they are needed after requirements materialize and
provides the government with flexibility because the tasks can be aligned
commensurate with available funding. Since the MKV element is relatively
new to the BMDS, its funding is less predictable than other elements' and
the ability to decrease or increase funding on the contract each year is
important to effectively manage the program.

The C2BMC element operates under an Other Transaction Agreement that is
not subject to many procurement laws and regulations. However, even though
an Other Transaction Agreement is not required to include all of the
standard terms and conditions meant to safeguard the government, the C2BMC
agreement was written to include similar clauses and provisions. We found
no evidence at this time that the C2BMC agreement does not adequately
protect MDA's interests. MDA chose the Other Transaction Agreement to
facilitate a collaborative relationship between industry, government,
federally funded research and development centers, and university research
centers. Contract officials told us that a contract awarded under the
Federal Acquisition Regulation is normally regarded as an arms-length
transaction in which the government gives the contractor a task that the
contractor performs autonomously. While an important purpose of an Other
Transaction Agreement is to broaden DOD's technology and industrial base
by allowing the development and use of instruments that reduce barriers to
participation in defense research by commercial firms that traditionally
have not done business with the government, the agreements' value in
encouraging more collaborative environments is also recognized. Table 9
outlines the contractual instruments that MDA uses to procure the services
of its prime contractors.

Table 9: BMDS Contractual Instruments

(Dollars in   
millions)     
                                                                        Contract 
                               Prime                                      Budget 
                               contractor Subcontractors                 Base as 
                                                                              of 
                               % work                      Period of   September 
Element       Contract type performeda % work performed performance      2006 
Airborne      Cost Plus     Boeing     Northrop         Nov. 1996-     $3,369 
Laser         Award                    Grummanb         Dec. 2008             
                 Fee/Incentive                                                   
                 Fee                      Lockheed Martinb                       
                               35%        65%                                    
Aegis BMD     Cost Plus     Lockheed   Computer         Oct. 2003-      $699c 
Weapon System Award Fee     Martin     Sciences         Dec. 2006             
                               82%        18%                                    
Aegis BMD-    Cost Plus     Raytheon   Alliant          Aug. 2003-       $413 
SM-3          Award                    Techsystems      Dec. 2007             
                 Fee/Incentive                                                   
                 Fee                      Boeing                                 
                                                                                 
                                          Aerojet                                
                               58%        42%                                    
BMDS          Cost Plus     Raytheon   Tec Masters,     Apr. 2003-       $822 
Sensors-FBX-T Award Fee                Inc.             Mar. 2009             
                                                                                 
                                          Hewlett-Packard                        
                                          Co.                                    
                                                                                 
                                          Burtek, Inc.                           
                                                                                 
                                          Remmele                                
                                          Engineering,                           
                                          Inc.                                   
                                                                                 
                                          Gichner Systems                        
                                          Group, Inc.                            
                               65%        35%                                    
C2BMC         Other         Lockheed   Raytheon         Jan. 2005-      $311d 
                 Transaction   Martin                      Dec. 2007             
                 Agreement                Boeing                                 
                 (Part 4)                                                        
                                          General Dynamics                       
                                                                                 
                                          Northrop-Grumman                       
                                                                                 
                                          Sparta                                 
                               35%        65%                                    
GMD           Cost Plus     Boeing     Raytheon         Jan. 2001-    $12,322 
                 Award Fee                                 Dec. 2008             
                                          Lockheed Martin                        
                                                                                 
                                          Orbital Sciences                       
                                                                                 
                                          Northrop Grumman                       
                                                                                 
                                          Bechtel                                
                                                                                 
                                          Teledyne Brown                         
                                          Engineering                            
                               30%        70%                                    
KEI           Cost Plus     Northrop   Raytheon         Dec. 2003-     $4,081 
                 Award Fee     Grumman                     Oct. 2014             
                               41%e       59%e                                   
MKV           Indefinite    Lockheed   BAE              Task Order      $123f 
                 Delivery/     Martin                      4- Oct.               
                 Indefinite    Space      Pratt-Whitney    2005- Jul.            
                 Quantity      Systems    Rocketdyne       2007                  
                               Company                                           
                                          L-3              Task Order            
                                          Communications/  5- Jun.               
                                                           2006- Sep.            
                                          Coleman          2007                  
                                          Aerospace                              
                               62%        38%                                    
THAAD         Cost Plus     Lockheed   Raytheon         Aug. 2000-    $4,255g 
                 Award Fee     Martin                      Sep. 2009             
                                          Boeing                                 
                                                                                 
                                          Rocketdyne                             
                                                                                 
                                          BAE Systems                            
                                                                                 
                                          Honeywell                              
                                                                                 
                                          Aerojet                                
                                                                                 
                                          Hamilton                               
                                          Sundstrand                             
                               44%        56%                                    
STSS          Cost Plus     Northrop   Raytheon         Apr. 2002-    $1, 528 
                 Award Fee/    Grumman                     Sep. 2008             
                 Fixed Fee                Spectrum Astro                         
                               50%        50%                                    

Source: MDA (data); GAO (analysis).

Note: The contract budget base column does not include any contract's
negotiated award fee.

aPercentages represent MDA's best estimates of how work is split between
the prime contractor and its subcontractors.

bNorthrop Grumman and Lockheed Martin are part of a contractor team with
Boeing.

c$584 million of Aegis BMD Weapon System funding is provided by the United
States, while $115 million is provided by foreign military sales to Japan.

dThe value shown is for Part IV only.

eThe prime-subcontractor work split reflects 2006 work content, not total
contract work content.

fThe budget for the MKV contract represents the negotiated cost of the
contract without fee. According to MDA officials, this is equivalent to
the contract budget base as of September 30, 2006.

gThe THAAD contract budget baseline includes contract line item 1 only.

Most Prime Contractors Exceed Their Fiscal Year 2006 Budgets

Excluding the C2BMC and MKV elements, MDA budgeted approximately $3
billion for its prime contractors to execute planned work during fiscal
year 2006.3 To determine if these contractors are executing the work
planned within the funds and time budgeted, each BMDS program office
requires its prime contractor to provide monthly reports detailing cost
and schedule performance. In these reports, which are known as Contract
Performance Reports, the prime contractor makes comparisons that inform
the program as to whether the contractor is completing work at the cost
budgeted and whether the work scheduled is being completed on time.4 If
the contractor does not use all funds budgeted or completes more work than
planned, the report shows positive cost and/or schedule variances.
Similarly, if the contractor uses more money than planned or cannot
complete all of the work scheduled, the report shows negative cost and/or
schedule variances. A contractor can also have mixed performance. That is,
the contractor may spend more money than planned (a negative cost
variance) but complete more work than scheduled (a positive schedule
variance). Using data from Contract Performance Reports, a program manager
can assess trends in cost and schedule performance, information that is
useful because trends tend to persist. Studies have shown that once a
contract is 15 percent complete, performance metrics are indicative of the
contract's final outcome.

We used contract performance report data to assess the fiscal year 2006
cost and schedule performance of prime contractors for seven of the nine
BMDS elements being developed by MDA. When possible, we also predicted the
likely cost of each prime contract at completion. Our predictions of final
contract cost are based on the assumption that the contractor will
continue to perform in the future as it has in the past. An assessment of
each element is provided below.

  Aegis BMD Contractors End Fiscal Year 2006 Mostly within Cost and on Schedule

The Aegis BMD program has awarded a prime contract for each of its two
major components--the Aegis BMD Weapon System and the Standard Missile-3.
During fiscal year 2006, the work of both prime contractors cost a little
more than expected, but only the weapon system contractor was slightly
behind schedule.

3Contractors for C2BMC and MKV were directed to suspend earned value
reporting during fiscal year 2006; therefore, data for these contracts are
not included.

4In March 2005, DOD directed that CPRs be named Contract Performance
Reports. Formerly, CPRs were known as Cost Performance Reports.

Even though the weapon system contractor was unable to perform fiscal year
2006 work at the planned cost, its cumulative cost performance remains
positive because of good performance in prior years. At year's end, the
weapon system contract had a cumulative favorable cost variance of $0.1
million, but an unfavorable cumulative schedule variance of $0.8 million.
As shown in figure 1, the contractor's cost and schedule performance
fluctuated significantly throughout the year.

Figure 1: Aegis BMD Weapon System Cost and Schedule Performance

Note: A cumulative variance reflects the additive effect of the
contractor's prior years' cost and schedule performance and the current
year's performance.

The decline in the Aegis BMD Weapon System contractor's cost performance
began shortly after the contractor adjusted its cost and schedule baseline
in September 2005. At that time, the contractor corrected its baseline to
account for a December 2004 DOD budget cut.5 However, it did not make
adjustments to the baseline to incorporate new work that the government
directed. This caused the contractor's cost performance to decline
significantly because although the cost of the new effort was being
reported, the baseline included no budget for the work. Recognizing that
the contract baseline still needed to be replanned, the Director issued
approval to restructure the program and rebaseline the contract in
December 2005. To accommodate the work added to the contract, MDA and the
contractor realigned software deliveries for Block 2006. The contractor
completed the rebaselining effort in April 2006, and since then the
contractor has performed within budgeted cost and schedule. Based on the
contractor's fiscal year 2006 cost performance, we estimate that at
completion the contract may cost from $0.1 to $4.7 million more than
anticipated.

5A performance measurement baseline identifies and defines tasks,
designates and assigns organizational responsibilities for each task,
schedules the work tasks in accordance with established targets, and
allocates budget to the scheduled work.

  Aegis BMD SM-3 Contractor Overruns Cost Budget, but Is Ahead of Schedule

For fiscal year 2006, the Standard Missile-3 contractor incurred an
unfavorable cost variance of $7.8 million and a favorable schedule
variance of $0.7 million. Even though the contractor was unable to
complete fiscal year 2006 work within the funds budgeted, it ended the
year with a cumulative positive cost variance of $3.1 million. The
cumulative positive cost variance was the result of the contractor
performing 2005 work at $10.9 million less than budgeted. In addition,
although the contractor performed work ahead of schedule in fiscal year
2006, it was unable to overcome a negative schedule variance of $9.6
million created in 2005 caused by delayed hardware deliveries and delayed
test events. The contractor ended fiscal year 2006 with a cumulative $8.9
million negative schedule variance. Figure 2 shows cumulative variances at
the beginning of fiscal year 2006 year along with a depiction of the
contractor's cost and schedule performance throughout the fiscal year.

Figure 2: Aegis BMD Standard Missile-3 Cost and Schedule Performance

Note: A cumulative variance reflects the additive effect of the
contractor's prior years' cost and schedule performance and the current
year's performance.

The unfavorable cost variance for fiscal year 2006 was caused by
performance issues associated with the third stage rocket motor, the
kinetic warhead and the missile's guidance system. In addition, production
costs associated with the Solid Divert and Attitude Control System were
higher than anticipated. If the contractor continues to perform as it did
in fiscal year 2006, we estimate that at completion the contract could
cost from $1.9 million less than expected to $2.7 million more than
expected.

  ABL Continues to Experience Cost and Schedule Growth

Our analysis of ABL's Contract Performance Reports indicates that the
prime contractor's cost and schedule performance continued to decline
during fiscal year 2006. The contractor overran its fiscal year 2006
budget by $54.8 million and did not perform $26.4 million of work on
schedule. By September 2006, this resulted in an unfavorable cumulative
cost variance of $77.9 million and an unfavorable cumulative schedule
variance of $50 million. Figure 3 shows the decline in cost and schedule
performance for the ABL prime contractor throughout fiscal year 2006.

Figure 3: ABL Cost and Schedule Performance

Note: A cumulative variance reflects the additive effect of the
contractor's prior years' cost and schedule performance and the current
year's performance.

During the fiscal year, the ABL contractor needed additional time and
money to solve technical challenges associated with the element's Beam
Control/Fire Control component. Software, integration, and testing
difficulties caused significant delays with the component. Software
problems were caused by the incorporation of numerous changes, basic logic
errors, and differences between the environment of the software
development laboratory and the environment aboard the aircraft.
Integration and testing of the complex system and hardware failures also
contributed to the delays. Together, according to ABL's program manager,
these problems caused the contractor to experience about a 3 1/2 month
schedule delay that in turn delays the program's lethality demonstration
from 2008 to 2009. Also, if the contractor's cost performance continues to
decline as it did in fiscal year 2006, we estimate that at completion the
contract could overrun its budget by about $112.1 million to $248.3
million.

  Limited Contractor Data Prevented Analysis of C2BMC Contractor Performance

We were unable to fully evaluate the contractor's performance for the
C2BMC program because the contractor did not report all data required to
conduct earned value analysis for 7 months of the fiscal year. During
fiscal year 2006, the C2MBC contractor ended the Block 2004 increment or
Part 3 of its Other Transaction Agreement and began work on its Block 2006
program of work, referred to as Part 4 of the agreement. The contractor
completed its Block 2004 program of work (Part 3) in December 2005 and was
awarded the Block 2006 increment (Part 4) on December 28, 2005. However,
budget cuts prompted the program to reduce the C2BMC enhancements planned
for Block 2006 and revise its agreement with the contractor. Shortly
after, the program received additional funds which led to a re-negotiation
of the Part 4 agreement. The new scope of work included enhancements that
could not be completed within available funding. In March 2006, the
program began to replan its Block 2006 increment of work (Part 4) and
suspended earned value management reporting. During the replan, which
occurred throughout most of fiscal year 2006, the contractor reported only
actual cost data in lieu of comparing actual costs to budgeted cost. The
cost of the revised agreement on the Block 2006 increment of work was
negotiated in October 2006.

  GMD Contractor Continues to Spend More Money and Time than Budgeted

The GMD prime contractor's cost performance continued to decline during
fiscal year 2006, but its fiscal year schedule performance improved. By
September 2006, the cumulative cost of all work completed was $1.06
billion more than expected and in fiscal year 2006 alone, work cost about
$347 million more than budgeted. The contractor was able to complete $90.2
million of fiscal year 2006 work ahead of schedule; but the cumulative
schedule variance continued to be negative at $137.8 million. Figure 4
depicts the cost and schedule performance for the GMD contractor during
fiscal year 2006. Based on its fiscal year 2006 performance, the GMD
contractor could overrun the total budgeted cost of the contract by about
$1.5 to $1.9 billion.

Figure 4: GMD Cost and Schedule Performance

Note: A cumulative variance reflects the additive effect of the
contractor's prior years' cost and schedule performance and the current
year's performance.

The GMD program recently finished rebaselining its contract to reflect a
significant program realignment to reduce program risk and to execute the
program within available funding. While the new baseline was being
implemented, earned value metrics, according to program officials, were
significantly distorted because progress was measured against a plan of
work that the program was no longer following. The contractor is in the
process of developing a new contract baseline that incorporates the
program's new scope, schedule, and budget. By the end of September 2006,
phase one of the new baseline covering fiscal year 2006-2007 efforts had
been implemented and validated through Integrated Baseline Reviews of the
prime contractor and its major subcontractors.6 Implementation of the
phase 2 baseline covering the remaining contract effort was completed in
October 2006 with the final integrated baseline reviews of the prime and
major subcontractors completed by mid-December 2006.

Based on the data provided by the contractor during fiscal year 2006,
technical and quality issues with the exoatmospheric kill vehicle (EKV)
are the leading contributors to cost overruns and schedule slips for the
GMD program. In fiscal year 2006, EKV related work cost $135.2 million
more than budgeted. Quality problems identified after faulty parts had
been incorporated into components required rework and forced the
subcontractor to increase screening tests to identify defective parts.

Development issues with two boosters being developed to carry the
exoatmospheric kill vehicles into space also increased costs during fiscal
year 2006.7 The element's Orbital Boost Vehicle experienced cost growth
totaling $15.0 million while the Boost Vehicle+ booster experienced growth
of $74.1 million. The Orbital Boost Vehicle's cost grew as the need for
more program management, systems engineering, and production support was
required to work an extended delivery schedule. The Boost Vehicle+
contractor incurred additional costs as a result of its efforts to
redesign the booster's motors. For example, the contractor spent
additional time preparing drawings and providing technical oversight of
suppliers.

The contractor also experienced cost growth as it readied the Sea-based
X-Band radar for deployment. Maintenance, repair, and certification
problems cost more than expected. In addition to making changes that an
independent review team suggested were needed before the radar was made
operational, the contractor had to repair an unexpected ballast leak
requiring the installation of hydraulic valves and other engineering
changes.

6An Integrated Baseline Review (IBR) is the program manager's review of a
contractor's performance measurement baseline. The review is conducted by
the program manager and the manager's technical staff. It verifies the
technical content of the baseline and ensures that contractor personnel
understand and have been adequately trained to collect earned value
management data. The review also verifies the accuracy of the related
budget and schedules, ensures that risks have been properly identified,
assesses the contractor's ability to implement earned value management
properly, and determines if the work identified by the contractor meets
the program's objectives.

7The GMD program has initiated two booster development efforts to mitigate
development and production risks. The Orbital Sciences Corporation is
developing and producing one booster design, while Lockheed Martin is
developing and producing a booster with a different design.

GMD's cumulative negative schedule variance is primarily caused by a
subcontractor needing more time than planned to manufacture exoatmospheric
kill vehicles. In addition, the prime contractor delayed planned tests
because test interceptors were being produced at a slower rate. According
to program officials, variances improved during fiscal year 2006 as the
subcontractor delivered components on schedule.

  KEI Contractor Makes Progress during Fiscal Year 2006

In July 2005, the KEI program modified its prime contract to require that
the KEI element be capable of intercepting enemy missiles in the midcourse
of their flight. Consequently, the program is rebaselining its prime
contract to better align its cost and schedule objectives with the new
work content. During fiscal year 2006, the contractor's work cost
approximately $0.6 million less than expected and the contractor completed
about $0.6 million of work ahead of schedule. Cumulatively, the
contractor's cost performance has been positive, with all work to date
being performed for $3.6 million less than budgeted. However, by year's
end, the cumulative schedule variance was a negative $5.3 million. We
cannot estimate whether the total contract can be completed within
budgeted cost because the contract is only 6 percent complete and trends
cannot be developed until at least 15 percent of the contract is
completed. Figure 5 highlights the contractor's performance during fiscal
year 2006.

Figure 5: KEI Cost and Schedule Performance

Note: A cumulative variance reflects the additive effect of the
contractor's prior years' cost and schedule performance and the current
year's performance.

The KEI prime contractor was able to perform within its budgeted costs
during fiscal year 2006 as a result of its efficient use of test
resources. Although the contractor improved its negative schedule variance
over the course of the year, its cumulative schedule variance remains
unfavorable because requirements changes have delayed the development of
the element's design and of manufacturing processes. Schedule delays
caused the program to postpone its element-level System Design Review
originally scheduled for July 2007. However, the contractor asserts that
there is no impact to the booster flight test currently scheduled for
fiscal year 2008.

  Lack of Reporting Limits Knowledge of MKV Contractor's Performance

Our analysis of the performance of the contractor developing the MKV
element was limited because MDA suspended contract performance reporting
in February 2006 as the program transitioned from an advanced technology
development program to a system development program. The transition
prompted MKV to establish a new contract baseline. Although the contractor
could begin reporting after the baseline is in place, it is not issuing
Contract Performance Reports until an Integrated Baseline Review is
completed. Until that time, the contractor is measuring its progress
against an integrated master schedule.

  Sensors' FBX-T Contractor Meets Fiscal Year Cost and Schedule Objectives

As of September 2006, the Sensor's contractor had underrun its fiscal year
2006 budget by $3.8 million and it was ahead in completing $5.4 million of
scheduled work. Considering prior years performance, the contractor is
performing under budget with a favorable cumulative cost variance of $20.2
million and ahead of schedule with a favorable cumulative schedule
variance of $26.6 million. Judging from the contractor's cost and schedule
performance in fiscal year 2006, we estimate that at the contract's
completion, the contractor will underrun the budgeted cost of the contract
by between $26.3 million and $44.9 million. Figure 6 shows the favorable
trend in FBX-T 2006 performance.

Figure 6: BMDS Sensors Cost and Schedule Performance

Note: A cumulative variance reflects the additive effect of the
contractor's prior years' cost and schedule performance and the current
year's performance.

According to program officials, the cumulative favorable cost variance is
driven by reduced cost in radar hardware and manufacturing created by
machine process improvements and staffing efficiencies. The favorable
cumulative schedule variance primarily results from a positive $17 million
cumulative schedule variance brought forward from fiscal year 2005 that
was created when the contractor began manufacturing radars 2 through 4
ahead of schedule.

  STSS Contractor Performance Declines during the Year

The STSS contractor's cost and schedule performance continued to degrade
during fiscal year 2006. During the fiscal year, the contractor overran
budgeted costs by about $66.8 million and was unable to complete $84.1
million of work as scheduled. Combining the contractor's performance
during fiscal year 2006 with its performance in prior years, the contract
has a cumulative unfavorable cost variance of approximately $163.7 million
and a cumulative negative schedule variance of $104.4 million.8 If the
contractor's performance continues to decline, the contract could exceed
its budgeted cost at completion by $567.3 million to $1.4 billion. Figure
7 depicts the cumulative cost and schedule performance of the STSS prime
contractor.

8A portion of the unfavorable cost and schedule variance is related to
work that does not contribute to the Block 2006 effort.

Figure 7: STSS Cost and Schedule Performance

Note: A cumulative variance reflects the additive effect of the
contractor's prior years' cost and schedule performance and the current
year's performance.

Quality issues at the payload subcontractor and technical difficulties
encountered by the prime contractor during payload integration and testing
contributed to the STSS element's cumulative unfavorable cost and schedule
variances. The first satellite's payload experienced hardware failures
when tested in a vacuum and at cold temperatures, slowing integration with
the first satellite. Integration issues were also discovered as the
payload was tested at successively higher levels of integration. According
to program officials, the prime contractor tightened its inspection and
oversight of the subcontractor responsible for integrating and testing the
satellite payloads. Also, a re-education effort was undertaken to ensure
that all personnel on the program knew and understood program
instructions. Although the prime contractor continued to experience
negative variances during the fiscal year, it should be noted that the
subcontractor's performance with respect to the second payload improved as
the result of these added steps. However, the degradation of the prime
contractor's performance offset the improved performance of the
subcontractor.

  THAAD Contractor's Performance Erodes in Fiscal Year 2006

During fiscal year 2006, the THAAD contractor expended more money and time
than budgeted to accomplish planned work. During fiscal year 2006, the
contractor incurred a negative cost variance of $87.9 million, which
boosted the cumulative negative cost variance to $104.2 million.
Similarly, the contractor did not complete $37.9 million of work scheduled
for fiscal year 2006 on time. However, because the contractor completed
prior years' work ahead of schedule, the cumulative negative schedule
variance was $28 million. Based on fiscal year performance, we estimate
that at completion the contract could exceed its budgeted cost by between
$134.7 million and $320.2 million.

Figure 8: THAAD Cost and Schedule Performance

Note: A cumulative variance reflects the additive effect of the
contractor's prior years' cost and schedule performance and the current
year's performance.

The THAAD prime contractor's negative cost variance for the fiscal year
can be attributed to the increased cost of missile manufacturing,
re-designs, and rework, as well as launcher hardware design, integration
difficulties, and software problems. However, the contractor is performing
well in regard to the radar portion of the contract, which is offsetting a
portion of the negative cost variance.

The program's negative schedule variance is largely driven by the missile,
the launcher, and systems tests. The negative missile variance is mainly
caused by problems with the Divert Attitude Control System and delays in
activation of a test facility.

Appendix III: Scope and Methodology

To examine the progress MDA made in fiscal year 2006 toward its Block 2006
goals, we examined the efforts of individual programs, such as the GMD
program, that are developing BMDS elements under the management of MDA.
The elements included in our review collectively accounted for 72 percent
of MDA's fiscal year 2006 research and development budget request. We
evaluated each element's progress in fiscal year 2006 toward Block 2006
schedule, testing, performance, and cost goals. In making this comparison,
we examined System Element Reviews, test and production schedules, test
reports, and MDA briefing charts. We developed data collection
instruments, which were submitted to MDA and each element program office,
to gather detailed information on completed program activities including
tests, prime contracts, and estimates of element performance. In addition,
we visited an operational site at Vandenberg Air Force Base, California;
and we visited MDA contractor facilities including Orbital Sciences
Corporation in Chandler, Arizona; Raytheon in Tucson, Arizona; and
Lockheed Martin in Sunnyvale, California. To understand performance
issues, we talked with officials from MDA's System's Engineering and
Integration Directorate. We also discussed fiscal year 2006 progress and
performance with officials in MDA's Agency Operations Office, each element
program office, as well as the office of DOD's Director, Operational Test
and Evaluation, DOD's office of Program Analysis and Evaluation, and DOD's
Operational Test Agency. To assess each element's progress toward its cost
goals, we reviewed Contract Performance Reports and, when available, the
Defense Contract Management Agency's analyses of these reports. We also
interviewed officials from the Defense Contract Management Agency. We
applied established earned value management techniques to data captured in
Contract Performance Reports to determine trends and used established
earned value management formulas to project the likely costs of prime
contracts at completion. We reviewed each element's prime contract and
also examined fiscal year 2006 award fee plans and award fee letters.

In assessing MDA's flexibility, transparency, and accountability, we
interviewed officials from the Office of the Under Secretary of Defense's
Office for Acquisition, Technology, and Logistics. We also examined
Government Auditing Standards, a Congressional Research Service report,
U.S. Code Title 10, DOD acquisition system policy, and the Statement of
Federal Financial Accounting Standards Number 4.

To determine the progress MDA has made in ensuring quality, we talked with
officials from MDA's Office of Safety, Quality, and Mission Assurance. We
also held discussions with MDA's Office of Agency Operations, and
discussed quality issues at contractor facilities including Orbital
Sciences Corporation in Chandler, Arizona; Raytheon in Tucson, Arizona;
and Lockheed Martin in Sunnyvale, California.

To ensure that MDA-generated data used in our assessment are reliable, we
evaluated the agency's management control processes. We discussed these
processes with MDA senior management. In addition, we confirmed the
accuracy of MDA-generated data with multiple sources within MDA and, when
possible, with independent experts. To assess the validity and reliability
of prime contractors' earned value management systems and reports, we
interviewed officials and analyzed audit reports prepared by the Defense
Contract Audit Agency. Finally, we assessed MDA's internal accounting and
administrative management controls by reviewing MDA's Federal Manager's
Financial Integrity Report for Fiscal Years 2003, 2004, 2005, and 2006.

Our work was performed primarily at MDA headquarters in Arlington,
Virginia. At this location, we met with officials from the Aegis Ballistic
Missile Defense Program Office; Airborne Laser Program Office; Command,
Control, Battle Management, and Communications Program Office; Multiple
Kill Vehicle Program Office; MDA's Agency Operations Office; MDA's Office
of Quality, Safety, and Mission Assurance; DOD's office of the Director,
Operational Test and Evaluation; DOD's office of Program Analysis and
Evaluation; and the Office of the Under Secretary of Defense for
Acquisition, Technology and Logistics. We held a teleconference with
officials from DOD's Operational Test Agency, also in Arlington, Virginia.
In addition, we met with officials in Huntsville, Alabama, including
officials from the Ground-based Midcourse Defense Program Office, the
Terminal High Altitude Area Defense Project Office, the Kinetic Energy
Interceptors Program Office, and the Defense Contract Management Agency.

We conducted our review from June 2006 through March 2007 in accordance
with generally accepted government auditing standards.

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact

Paul Francis (202) 512-4841 or [email protected]

Acknowledgments

In addition to the individual named above, Barbara Haynes, Assistant
Director; LaTonya Miller; Ivy Hubler; Steven Stern; Meredith Allen; Sigrid
McGinty; Tony Beckham; and Adam Vodraska made key contributions to this
report.

(120552)

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Highlights of [57]GAO-07-387 , a report to congressional committees

March 2007

DEFENSE ACQUISITIONS

Missile Defense Acquisition Strategy Generates Results but Delivers Less
at a Higher Cost

Over the next 5 years, the Missile Defense Agency (MDA) expects to invest
$49 billion in the BMD system's development and fielding. MDA's strategy
is to field new capabilities in 2-year blocks. In January 2006, MDA
initiated its second block--Block 2006--to protect against attacks from
North Korea and the Middle East.

Congress requires GAO to assess MDA's progress annually. This year's
report addresses MDA's progress during fiscal year 2006 and follows up on
program oversight issues and the current status of MDA's quality assurance
program. GAO assessed the progress of each element being developed by MDA,
examined acquisition laws applicable to major acquisition programs, and
reviewed the impact of implemented quality initiatives.

                                                      [58]What GAO Recommends

GAO continues to encourage DOD to act on prior recommendations to
implement a knowledge-based acquisition strategy for all BMDS elements and
to adopt more transparent criteria for reporting each element's
quantities, cost, and performance. In this report, GAO recommends that DOD
adopt firm baselines, use procurement funds for operational assets, and
adopt other measures to better track cost and outcomes against goals. DOD
did not agree to an element-based reporting approach but is investigating
other ways to provide more program transparency.

During fiscal year 2006, MDA fielded additional assets for the Ballistic
Missile Defense System (BMDS), enhanced the capability of some assets, and
realized several noteworthy testing achievements. For example, the
Ground-based Midcourse Defense (GMD) element successfully conducted its
first end-to-end test of one engagement scenario, the element's first
successful intercept test since 2002. However, MDA will not meet its
original Block 2006 cost, fielding, or performance goals because the
agency has revised those goals. In March 2006, MDA:

           o reduced its goal for fielded assets to provide funds for
           technical problems and new and increased operations and
           sustainment requirements;
           o increased its cost goal by about $1 billion--from $19.3 to $20.3
           billion; and
           o reduced its performance goal commensurate with the reduction of
           assets.

MDA may also reduce the scope of the block further by deferring other work
until a future block because four elements incurred about $478 million in
fiscal year 2006 budget overruns.

With the possible exception of GMD interceptors, MDA is generally on track
to meet its revised quantity goals. But the deferral of work, both into
and out of Block 2006, and inconsistent reporting of costs by some BMDS
elements, makes the actual cost of Block 2006 difficult to determine. In
addition, GAO cannot assess whether the block will meet its revised
performance goals until MDA's models and simulations are anchored by
sufficient flight tests to have confidence that predictions of performance
are reliable.

Because MDA has not entered the Department of Defense (DOD) acquisition
cycle, it is not yet required to apply certain laws intended to hold major
defense acquisition programs accountable for their planned outcomes and
cost, give decision makers a means to conduct oversight, and ensure some
level of independent program review. MDA is more agile in its
decision-making because it does not have to wait for outside reviews or
obtain higher-level approvals of its goals or changes to those goals.
Because MDA can revise its baseline, it has the ability to field fewer
assets than planned, defer work to a future block, and increase planned
cost. All of this makes it hard to reconcile cost and outcomes against
original goals and to determine the value of the work accomplished. Also,
using research and development funds to purchase operational assets allows
costs to be spread over 2 or more years, which makes costs harder to track
and commits future budgets.

MDA continues to identify quality assurance weaknesses, but the agency's
corrective measures are beginning to produce results. Quality deficiencies
are declining as MDA implements corrective actions, such as a teaming
approach, designed to restore the reliability of key suppliers.

References

Visible links
  44. http://www.gao.gov/cgi-bin/getrpt?GAO-04-409
  45. http://www.gao.gov/cgi-bin/getrpt?GAO-05-243
  46. http://www.gao.gov/cgi-bin/getrpt?GAO-06-327
  47. http://www.gao.gov/cgi-bin/getrpt?GAO-06-327
  57. file:///home/webmaster/infomgt/d07387.htm#http://www.gao.gov/cgi-bin/getrpt?GAO-07-387
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