Homeland Security: Observations on the Department of Homeland	 
Security's Acquisition Organization and on the Coast Guard's	 
Deepwater Program (08-FEB-07, GAO-07-453T).			 
                                                                 
In January 2003, GAO designated the Department of Homeland	 
Security's (DHS) implementation and transformation as high risk  
because of the size and complexity of the effort and the existing
challenges faced by the components being merged into the	 
department. The success of the effort to integrate numerous	 
agencies and organizations into one cabinet-level department	 
rests in large part on DHS's ability to effectively acquire the  
wide range of goods and services it needs to achieve its mission 
of protecting the nation from terrorism. DHS is undertaking a	 
number of large, complex investments as the federal government	 
increasingly relies on contractors for roles and missions	 
previously performed by government employees. One of the	 
department's largest investments--the Deepwater program, now	 
estimated to cost $24 billion--is the Coast Guard's major effort 
to replace or modernize its aircraft and vessels. Rather than	 
using a traditional acquisition approach, the Coast Guard is	 
using a system integrator to design, construct, deploy, support, 
and integrate the Deepwater assets. In this testimony, the	 
Comptroller General discussed (1) the overarching challenges DHS 
faces in establishing an effective acquisition organization, (2) 
GAO's prior work on Coast Guard and contractor management of the 
Deepwater program, and (3) the status of GAO's ongoing reviews.  
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-453T					        
    ACCNO:   A65707						        
  TITLE:     Homeland Security: Observations on the Department of     
Homeland Security's Acquisition Organization and on the Coast	 
Guard's Deepwater Program					 
     DATE:   02/08/2007 
  SUBJECT:   Accountability					 
	     Agency evaluation					 
	     Contract administration				 
	     Contractors					 
	     Federal agency reorganization			 
	     Federal procurement				 
	     Homeland security					 
	     Investment planning				 
	     Procurement planning				 
	     Procurement practices				 
	     Program evaluation 				 
	     Program management 				 
	     Systems integration				 
	     Technology modernization programs			 
	     Executive agency oversight 			 
	     Policies and procedures				 
	     Coast Guard Deepwater Project			 

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GAO-07-453T

   

     * [1]Summary
     * [2]Challenges to Creating an Integrated Acquisition Function at

          * [3]Management Directive Has Limitations
          * [4]Procurement Organizations are Somewhat Autonomous and Lack D
          * [5]Knowledge-based Acquisition Review Process
          * [6]Systemic Acquisition Challenges

     * [7]Deepwater Program Is Illustrative of Problems Stemming from

          * [8]System Integrator Concept and the Role of Contractors
          * [9]Performance-based Acquisition
          * [10]Assessments of Deepwater Program
          * [11]Program Management
          * [12]Contractor Accountability
          * [13]Cost Control through Competition
          * [14]Status of Recommendations
          * [15]Performance and Design Problems
          * [16]Problems Have Operational Consequences

     * [17]Additional Reviews Ongoing
     * [18]Concluding Observations
     * [19]Contacts and Acknowledgements
     * [20]GAO's Mission
     * [21]Obtaining Copies of GAO Reports and Testimony

          * [22]Order by Mail or Phone

     * [23]To Report Fraud, Waste, and Abuse in Federal Programs
     * [24]Congressional Relations
     * [25]Public Affairs

Testimony

Before the Committee on Oversight and Government Reform, House of
Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:00 a.m. EST
Thursday, February 8, 2007

HOMELAND SECURITY

Observations on the Department of Homeland Security's Acquisition
Organization and on the Coast Guard's Deepwater Program

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

GAO-07-453T

Mr. Chairman and Members of the Committee:

Thank you for inviting me here today to discuss our reviews of the
Department of Homeland Security's (DHS) acquisition organization and the
U.S. Coast Guard's Deepwater program. When it was established in March
2003, DHS faced the challenge of integrating 22 separate federal agencies
and organizations with multiple missions, values, and cultures into one
cabinet-level department.^1 The success of this mammoth task--one of the
biggest mergers ever to take place within the federal government--rests in
large part on DHS's ability to implement the necessary management
structure and processes for effectively acquiring goods and services. A
wide range of contractor-provided products, technologies, and services are
critical to the department's ability to achieve its mission of protecting
the nation from terrorism. For example, DHS has purchased increasingly
sophisticated screening equipment for air passenger security, acquired
technologies to secure the nation's borders, and is upgrading the Coast
Guard's offshore fleet of surface and air assets.

In January 2003, we designated DHS's implementation and transformation as
high risk because of the size and complexity of the effort and the
existing challenges faced by the components being merged into the
department.^2 Although DHS has made some progress transforming its
components into a fully functioning department, this transformation
remains high risk.^3 DHS has yet to implement a corrective action plan
that includes a comprehensive transformation strategy, and its management
systems--including those related to acquisition--are not yet integrated
and wholly operational. DHS's acquisition systems will require continued
attention to help prevent waste and ensure that DHS can allocate its
resources efficiently and effectively.

In fiscal year 2006, DHS reported obligating $15.6 billion in
acquisitions, making it the third largest federal department in spending
taxpayer dollars. DHS is undertaking large, complex investments as the
federal government increasingly relies on contractors for roles and
missions previously performed by government employees. Contractors have an
important role to play in the discharge of the government's
responsibilities, and in some cases the use of contractors can result in
improved economy, efficiency, and effectiveness. At the same time, there
may be occasions when contractors are used to provide certain services
because the government lacks another viable and timely option. In such
cases, the government may actually be paying more than if such services
were provided by federal employees. In this environment of increased
reliance on contractors, sound planning and contract execution are
critical for success. We have previously identified the need to examine
the appropriate role for contractors to be among the challenges in meeting
the nation's defense needs in the 21st century.^4

^1 When the department was established, 22 agencies and organizations were
brought in; Plum Island Animal Disease Center joined DHS afterward as the
23rd.

^2 GAO, High-Risk Series: An Update, [26]GAO-03-119 (Washington, D.C.:
January 2003).

^3 GAO, High-Risk Series: An Update, [27]GAO-07-310 (Washington, D.C.:
January 2007).

My statement today will focus on the overarching challenges DHS faces in
creating an effective, integrated acquisition organization and will
discuss our prior work on one of the department's most complex
programs--the Coast Guard's Deepwater program. I will also discuss areas
where we have related ongoing work.

This testimony is based on our work on DHS's acquisition organization and
the Deepwater program. That work was conducted in accordance with
generally accepted government auditing standards.

Summary

DHS faces challenges in creating an effective acquisition organization:

           o DHS has a stated goal of integrating the acquisition function
           more broadly across the department. We have reported that this
           goal has not yet been accomplished and have identified key
           impediments to achieving it. A management directive intended to
           integrate the acquisition line of business did not provide the
           Chief Procurement Officer with the enforcement authority needed in
           practice, and it does not pertain to the Coast Guard and Secret
           Service. Also, the procurement organizations within the department
           remained somewhat autonomous, and centralized acquisition
           oversight had not been implemented. While DHS's review process for
           major investments adopts some best practices, key decision- making
           reviews at certain points are not required.

           The Coast Guard's Deepwater program illustrates the type of
           problems that can occur when effective program management and
           contractor oversight are not in place:

           o From the outset, we have expressed concern about the risks
           involved with the Coast Guard's acquisition strategy for the
           Deepwater program. In 2004, we reported that well into the
           contract's second year, key components needed to manage the
           program and oversee the system integrator's performance had not
           been effectively implemented. For example, integrated product
           teams, comprised of government and contractor employees, are the
           Coast Guard's primary tool for managing the program and overseeing
           the contractor. We found that the teams had not been effective due
           to changing membership, understaffing, insufficient training, lack
           of authority for decision-making, and inadequate communication
           among members. We also reported that, despite documented problems
           in schedule, performance, cost control, and contract
           administration throughout the first year of the Deepwater
           contract, the contractor had received a rating of 87 percent,
           which fell in the "very good" range and resulted in an award fee
           of $4.0 million of the maximum $4.6 million.^5 In 2006, we
           reported that the Coast Guard had taken steps to address some of
           the problems we identified.^6 However, the actions had not been
           adequate to resolve continuing concerns about program management
           and contractor oversight. In addition to these overall management
           issues, there have been problems with the design and performance
           of specific Deepwater assets.

           We continue to review DHS's overall acquisition organization and
           the Deepwater program:

           o Clearly, the challenges DHS faces in establishing an effective,
           integrated acquisition organization will take some time to
           resolve. We are continuing to assess DHS's progress, as well as
           examining other aspects of its acquisition function such as its
           use of performance-based acquisitions.

           o Similarly, we continue to review the Deepwater program as it
           moves into the 5^th year of the contract. We recognize that a
           variety of factors have contributed to the problems we have
           identified. In some cases, the Coast Guard has taken actions to
           improve outcomes; in other cases it has either not taken action or
           actions taken to date have not been effective. We are currently
           doing work on Deepwater for the House and Senate Appropriations
           Committees. When we complete our work in several months, we would
           be happy to provide our results to this committee.
			  
			  Challenges to Creating an Integrated Acquisition Function at DHS

           We have reported in the past on acquisition management at several
           components of DHS. We have also assessed the department's overall
           acquisition management efforts. ^7 A common theme in these reports
           is DHS's struggle, from the outset, to provide adequate
           procurement support to its mission components and to provide
           departmentwide oversight of its acquisition function. Of the 22
           components that initially joined DHS from other agencies, only 7
           came with their own procurement support. An eighth office, the
           Office of Procurement Operations, was created anew to provide
           support to a variety of DHS entities--but not until January 2004,
           almost a year after the department was created. DHS has
           established a goal of aligning procurement staffing levels with
           contract spending at its various components by the last quarter of
           fiscal year 2009.

           DHS has set forth a stated goal of integrating the acquisition
           function more broadly across the department. However, the goal has
           not been accomplished. In March 2005, we identified key factors
           impeding accomplishment of the department's objective, including
           limitations of a 2004 management directive and lack of
           departmentwide oversight of component acquisition organizations.
           We also identified potential gaps in the department's
           knowledge-based approach for reviewing its major, complex
           investments. On a related issue, a number of systemic acquisition
           challenges we have identified at the Department of Defense could
           apply equally to DHS.
			  
			  Management Directive Has Limitations

           In October 2004, the Secretary of DHS signed a management
           directive entitled "Acquisition Line of Business Integration and
           Management," the department's principal guidance for leading,
           governing, integrating, and managing the acquisition function. It
           directs managers from each component organization to commit
           resources to training, development, and certification of
           acquisition professionals. It also highlights the Chief
           Procurement Officer's broad authority, including management,
           administration, and oversight of departmentwide acquisition.

           However, we have reported that the directive may not achieve its
           goal of creating an integrated acquisition organization because it
           creates unclear working relationships between the Chief
           Procurement Officer and heads of DHS's principal components. For
           example, the Chief Procurement Officer and the director of
           Immigration and Customs Enforcement share responsibility for
           recruiting and selecting key acquisition officials, preparing
           performance ratings for the top manager of the contracting office,
           and providing appropriate resources to support procurement
           initiatives. The policy leaves unclear how the responsibilities
           will be implemented or what enforcement authority the Chief
           Procurement Officer has to ensure that initiatives are carried
           out.

           Further, the directive does not apply to the Coast Guard or Secret
           Service, two entities that are required by the Homeland Security
           Act of 2002^8 to be maintained as distinct entities within DHS.
           According to the directive, the Coast Guard and Secret Service are
           exempted by statute. We are not aware of any explicit statutory
           exemption that would prevent the application of this directive.
           Nothing in the document would reasonably appear to threaten the
           status of these entities as distinct entities within the
           department or otherwise impair their ability to perform statutory
           missions. DHS's General Counsel has agreed, telling us that the
           applicability of the directive is a policy, not legal, matter.
           Excluding certain components from complying with management
           directives regarding the acquisition function hampers efforts to
           integrate the acquisition organization. The Coast Guard, for
           example, is one of the largest organizations within DHS.
			  
			  Procurement Organizations are Somewhat Autonomous and Lack
			  Departmentwide Oversight

           We have reported that DHS's principal organizations are, to a
           large extent, still functioning much as they did in pre-merger
           days with regard to acquisition-related functions. Embedded within
           the seven procurement organizations that came to DHS were, for the
           most part, the same contracting staffs that joined the department
           from their former agencies.^9 In addition, the Chief Procurement
           Officer, who is held accountable for departmentwide management and
           oversight of the acquisition function, lacks the enforcement
           authority and has limited resources to ensure compliance with
           acquisition policies and processes. As of August 2006, according
           to DHS officials, only five staff were assigned to departmentwide
           oversight responsibilities. The officials told us that, because
           their small staff faces the competing demands of providing
           departmentwide oversight and providing acquisition support for
           urgent needs at the component level, they have focused their
           efforts on procurement execution rather than oversight. Our prior
           work shows that in a highly functioning acquisition organization,
           the chief procurement officer is in a position to oversee
           compliance by implementing strong oversight mechanisms.^10
           Adequate oversight of acquisition activities across DHS is
           imperative, in light of the department's mission and the problems
           that have been reported by us and inspectors general for some of
           the large components within the department.
			  
			  Knowledge-based Acquisition Review Process

           Some DHS organizations have large, complex, and high-cost
           acquisition programs--such as the Coast Guard's Deepwater
           program--that need to be closely managed. DHS's investment review
           process involves several different levels of review, depending on
           the dollar threshold and risk level of the program. Deepwater, for
           example, has been designated as a level 1 investment, meaning that
           it is subject to review at the highest levels within the
           department. We reported in 2005 that DHS's framework for reviewing
           its major investments adopts several best practices from lessons
           learned from leading commercial companies and successful federal
           programs that, if applied consistently, could refine its ability
           to reduce risk to meet cost and delivery targets.^11 One of these
           best practices is a knowledge-based approach for managers to hold
           reviews at key decision points in order to reduce risk before
           investing resources in the next phase of a program's development.
           For example, DHS's investment review policy encourages program
           managers to demonstrate a product's design with critical design
           reviews prior to a production decision.

           However, we have found that, based on our extensive body of work
           on this knowledge-based approach, additional program reviews could
           be incorporated into the process as internal controls to better
           position DHS to make well-informed decisions on its major, complex
           investments. For example, DHS does not require a review to ensure
           that an investment's design performs as expected before investing
           in a prototype. We also reported that DHS review processes
           permitted low-rate initial production to be well underway before a
           mandatory review gave the go-ahead to proceed to production. A
           review prior to initiating low-rate initial production was not
           mandatory; rather, it was held at the discretion of the Investment
           Review Board (IRB). Our best practices work shows that successful
           investments reduce risk by ensuring that high levels of knowledge
           are achieved at these key points of development. We have found
           that investments that were not reviewed at the appropriate points
           faced problems--such as redesign--that resulted in cost increases
           and schedule delays. It is not clear how the Deepwater acquisition
           has been influenced by the department's investment review process.
           According to a DHS official, an IRB review of the Deepwater
           acquisition program baseline, scheduled for January 2007, was
           postponed.

           In its Performance and Accountability Report for fiscal year 2006,
           DHS stated that it has improved its process for investment reviews
           by providing greater clarity on DHS policies and procedures. It
           acknowledges that developing and maintaining the capability needed
           to achieve DHS missions requires a robust investment program. DHS
           also states that its components are now required to report on the
           status of major investments on a quarterly basis and to submit
           information to ensure that investments are staying within
           established baselines for cost, schedule, and performance. The
           report says that the department will identify and introduce
           acquisition best practices into the investment review process by
           the first quarter of fiscal year 2008.
			  
			  Systemic Acquisition Challenges

           We have identified a series of systemic acquisition challenges for
           complex, developmental systems, based mostly on our reviews of
           Department of Defense programs. In principle, many may apply
           equally to DHS as it moves forward with its major, complex
           investments. Some of these challenges include:

           o Program requirements are often set at unrealistic levels, then
           changed frequently as recognition sets in that they cannot be
           achieved. As a result, too much time passes, threats may change,
           and/or members of the user and acquisition communities may simply
           change their minds. The resulting program instability causes cost
           escalation, schedule delays, fewer quantities, and reduced
           contractor accountability.
           o Program decisions to move into design and production are made
           without adequate standards or knowledge.
           o Contracts, especially service contracts, often do not have
           measures in place at the outset in order to control costs and
           facilitate accountability.
           o Contracts typically do not accurately reflect the complexity of
           projects or appropriately allocate risk between the contractors
           and the taxpayers.
           o The acquisition workforce faces serious challenges (e.g. size,
           skills, knowledge, succession planning).
           o Incentive and award fees are often paid based on contractor
           attitudes and efforts versus positive results, such as cost,
           quality, and schedule.
           o Inadequate government oversight results in little to no
           accountability for recurring and systemic problems.
			  
			  Deepwater Program Is Illustrative of Problems Stemming from Lack
			  of Effective Program Management and Contractor Oversight

           The Deepwater program is the Coast Guard's major effort to replace
           or modernize its aircraft and vessels. It has been in development
           for a number of years. Between 1998 and 2001, three industry teams
           competed to identify and provide the assets needed to transform
           the Coast Guard. In 2001, we described the Deepwater project as
           "risky" due to the unique, untried acquisition strategy for a
           project of this magnitude within the Coast Guard.^12 Rather than
           using the traditional approach of replacing classes of ships or
           aircraft through a series of individual acquisitions, the Coast
           Guard chose to use a system-of-systems acquisition strategy that
           would replace its deteriorating assets with a single, integrated
           package of aircraft, vessels, and unmanned aerial vehicles, to be
           linked through systems that provide C4ISR,^13 and supporting
           logistics.
			  
			  System Integrator Concept and the Role of Contractors

           In June 2002, the Coast Guard awarded the Deepwater contract to
           Integrated Coast Guard Systems (ICGS). ICGS--a business entity
           jointly owned by Northrop Grumman and Lockheed Martin--is a system
           integrator, responsible for designing, constructing, deploying,
           supporting, and integrating the Deepwater assets to meet Coast
           Guard requirements. The management approach of using a system
           integrator has been used on other government programs that require
           system-of-systems integration, such as the Army's Future Combat
           System, a networked family of weapons and other systems. This type
           of business arrangement gives the contractor extensive involvement
           in requirements development, design, and source selection of major
           system and subsystem subcontractors.

           Government agencies have turned to the system integrator approach
           when they believe they do not have the in-house capability to
           design, develop, and manage complex acquisitions. Giving
           contractors more control and influence over the government's
           acquisitions in a system integrator role creates a potential risk
           that program decisions and products could be influenced by the
           financial interest of the contractor (who is accountable to its
           shareholders), which may not match the primary interest of the
           government--maximizing its return on taxpayer dollars. The system
           integrator arrangement creates an inherent risk, as the contractor
           is given more discretion to make certain program decisions. Along
           with this greater discretion comes the need for more government
           oversight and an even greater need to develop well-defined
           outcomes at the outset.

           The proper role of contractors in providing services to the
           government is currently the topic of some debate. I believe there
           is a need to focus greater attention on what type of functions and
           activities should be contracted out and which ones should not.
           There is also a need to review and reconsider the current
           independence and conflict of interest rules relating to
           contractors. Finally, there is a need to identify the factors that
           prompt the government to use contractors in circumstances where
           the proper choice might be the use of civil servants or military
           personnel. Possible factors could include inadequate force
           structure, outdated or inadequate hiring policies, classification
           and compensation approaches, and inadequate numbers of full-time
           equivalent slots.
			  
			  Performance-based Acquisition

           The Deepwater program has also been designated as a
           performance-based acquisition. When buying services, federal
           agencies are currently required to employ--to the maximum extent
           feasible--this concept, wherein acquisitions are structured around
           the results to be achieved as opposed to the manner in which the
           work is to be performed. That is, the government specifies the
           outcome it requires while leaving the contractor to propose
           decisions about how it will achieve that outcome.
           Performance-based contracts for services are required to include a
           performance work statement; measurable performance standards
           (i.e., in terms of quality, timeliness, quantity, etc.) and the
           method of assessing contractor performance against these
           standards; and performance incentives, where appropriate. If
           performance-based acquisitions are not appropriately planned and
           structured, there is an increased risk that the government may
           receive products or services that are over cost estimates,
           delivered late, and of unacceptable quality.
			  
			  Assessments of Deepwater Program

           In 2001, we reported that the Deepwater project faced risks,
           including the ability to control costs in the contract's later
           years; ensuring that procedures and personnel were in place for
           managing and overseeing the contractor; and minimizing potential
           problems with developing unproven technology.^14 We noted that the
           risks could be mitigated to varying degrees, but not without
           management attention. Our assessment of the Deepwater program in
           2004 found that the Coast Guard had not effectively managed the
           program or overseen the system integrator.^15 We reported last
           year that the Coast Guard had revised its Deepwater implementation
           plan to reflect additional homeland security responsibilities as a
           result of the September 11, 2001, terrorist attacks.^16 The
           revised plan increased overall program costs from the original
           estimate of $17 billion to $24 billion. Overall, the acquisition
           schedule was lengthened by 5 years, with the final assets now
           scheduled for delivery in 2027.

           Our reported concerns in 2004 and in subsequent assessments in
           2005 and 2006 have centered on three main areas: program
           management, contractor accountability, and cost control through
           competition. While we recognize that the Coast Guard has taken
           steps to address our findings and recommendations, aspects of the
           Deepwater program will require continued attention, such as the
           risk involved in the system-of-systems approach with the
           contractor acting as overall integrator. A project of this
           magnitude will likely continue to experience other problems as
           more becomes known.
			  
			  Program Management

           In 2004, we reported that more than a year and a half into the
           Deepwater contract, the key components needed to manage the
           program and oversee the system integrator had not been effectively
           implemented. For example, integrated product teams, comprised of
           government and contractor employees, are the Coast Guard's primary
           tool for managing the program and overseeing the contractor. We
           found that the teams had not been effective due to changing
           membership, understaffing, insufficient training, lack of
           authority for decision making, and inadequate communication among
           members.

           Although some efforts have been made to improve the effectiveness
           of the integrated product teams, we have found that the needed
           changes are not yet sufficiently in place. In 2005, we reported
           that decision making was to a large extent stove-piped, and some
           teams lacked adequate authority to make decisions within their
           realm of responsibility.^17 One source of difficulty for some team
           members has been the fact that each of the two major
           subcontractors has used its own management systems and processes
           to manage different segments of the program. We noted that
           decisions on air assets were made by Lockheed Martin, while
           decisions regarding surface assets were made by Northrop Grumman.
           This approach can lessen the likelihood that a system-of-systems
           outcome will be achieved if decisions affecting the entire program
           are made without the full consultation of all parties involved. In
           2006, we reported that Coast Guard officials believed
           collaboration among the subcontractors to be problematic and that
           ICGS wielded little influence to compel decisions among them. For
           example, when dealing with proposed design changes to assets under
           construction, ICGS submitted the changes as two separate proposals
           from both subcontractors rather than coordinating the separate
           proposals into one coherent plan. According to Coast Guard
           performance monitors, this approach complicates the government
           review of design changes because the two proposals often carried
           overlapping work items, thereby forcing the Coast Guard to act as
           the system integrator in those situations.

           In addition, we reported in 2004 that the Coast Guard had not
           adequately communicated to its operational personnel decisions on
           how new and old assets would be integrated and how maintenance
           responsibilities would be divided between government and
           contractor personnel. We also found that the Coast Guard had not
           adequately staffed its program management function. Despite some
           actions taken to more fully staff the Deepwater program, we
           reported that in January 2005 shortfalls remained. While 244
           positions were assigned to the program, only 206 were filled,
           resulting in a 16 percent vacancy rate.
			  
			  Contractor Accountability

           In 2004, we found that the Coast Guard had not developed
           quantifiable metrics to hold the system integrator accountable for
           its ongoing performance and that the process by which the Coast
           Guard assessed performance after the first year of the contract
           lacked rigor. For example, the first annual award fee
           determination was based largely on unsupported calculations.
           Despite documented problems in schedule, performance, cost
           control, and contract administration throughout the first year,
           the program executive officer awarded the contractor an overall
           rating of 87 percent, which fell in the "very good" range. This
           rating resulted in an award fee of $4.0 million of the maximum of
           $4.6 million.

           We also reported in 2004 that the Coast Guard had not begun to
           measure the system integrator's performance on the three
           overarching goals of the Deepwater program--maximizing operational
           effectiveness, minimizing total ownership costs, and satisfying
           the customers. Coast Guard officials told us that metrics for
           measuring these objectives had not been finalized; therefore they
           could not accurately assess the contractor's performance against
           the goals. However, at the time, the Coast Guard had no time frame
           in which to accomplish this measurement.
			  
			  Cost Control through Competition

           In 2004, we reported that, although competition among
           subcontractors was a key vehicle for controlling costs, the Coast
           Guard had neither measured the extent of competition among the
           suppliers of Deepwater assets nor held the system integrator
           accountable for taking steps to achieve competition.^18 As the two
           major subcontractors to ICGS, Lockheed Martin and Northrop Grumman
           have sole responsibility for determining whether to provide the
           Deepwater assets themselves or to hold competitions--decisions
           commonly referred to as "make or buy." We noted that the Coast
           Guard's hands-off approach to make-or-buy decisions and its
           failure to assess the extent of competition raised questions about
           whether the government would be able to control Deepwater program
           costs.

           Failure to control costs can result in waste of taxpayer dollars.
           Along with my several colleagues in the accountability community,
           I have developed a definition of waste. As we see it, waste
           involves the taxpayers in the aggregate not receiving reasonable
           value for money in connection with any government funded
           activities due to an inappropriate act or omission by players with
           control over or access to government resources (e.g., executive,
           judicial or legislative branch employees, contractors, grantees or
           other recipients). Importantly, waste involves a transgression
           that is less than fraud and abuse and most waste does not involve
           a violation of law. Rather, waste relates primarily to
           mismanagement, inappropriate actions, or inadequate oversight.
			  
			  Status of Recommendations

           We made 11 recommendations in 2004 in the areas of management and
           oversight, contractor accountability, and cost control through
           competition. In April 2006, we reported that the Coast Guard had
           implemented five of them. Actions had been taken to

           o revise the Deepwater human capital plan;
           o develop measurable award fee criteria;
           o implement a more rigorous method of obtaining input from Coast
           Guard monitors on the contractor's performance;
           o include in the contractor's performance measures actions taken
           to improve the integrated product teams' effectiveness; and
           o require the contractor to notify the Coast Guard of subcontracts
           over $10 million that were awarded to the two major
           subcontractors.^19

           The Coast Guard had begun to address five other recommendations by

           o initiating actions to establish charters and training for
           integrated product teams;
           o improving communications with field personnel regarding the
           transition to Deepwater assets;
           o devising a time frame for measuring the contractor's progress
           toward improving operational effectiveness;
           o establishing criteria to determine when to adjust the project
           baseline; and
           o developing a plan to hold the contractor accountable for
           ensuring adequate competition among suppliers.

           We determined that, based on our work, these recommendations had
           not been fully implemented.

           The Coast Guard disagreed with and declined to implement one of
           our recommendations, to establish a baseline to determine whether
           the system-of-systems acquisition approach is costing the
           government more than the traditional asset replacement approach.
           While we stand behind our original recommendation, the Coast Guard
           maintains that the cost to implement this recommendation would be
           excessive.
			  
			  Performance and Design Problems

           In addition to overall management issues discussed above, there
           have been problems with the design and performance of specific
           Deepwater assets. For example, in February 2006, the Coast Guard
           suspended design work on the Fast Response Cutter (FRC) due to
           design risks such as excessive weight and horsepower
           requirements.^20 The FRC was intended as a long-term replacement
           for the legacy 110-foot patrol boats. Coast Guard engineers raised
           concerns about the viability of the FRC design (which involved
           building the FRC's hull, decks, and bulkheads out of composite
           materials rather than steel) beginning in January 2005. In
           February 2006, the Coast Guard suspended FRC design work after an
           independent design review by third-party consultants demonstrated,
           among other things, that the FRC would be far heavier and less
           efficient than a typical patrol boat of similar length, in part,
           because it would need four engines to meet Coast Guard speed
           requirements.

           In moving forward with the FRC acquisition, the Coast Guard will
           end up with two classes of FRCs. The first class of FRCs to be
           built would be based on an adapted design from a patrol boat
           already on the market to expedite delivery. The Coast Guard would
           then pursue development of a follow-on class that would be
           completely redesigned to address the problems in the original FRC
           design plans. Coast Guard officials now estimate that the first
           FRC delivery will slip to fiscal year 2009, at the earliest,
           rather than 2007 as outlined in the 2005 Revised Deepwater
           Implementation Plan.

           In addition to problems with the FRC design, problems have also
           been discovered with the long-term structural integrity of the
           National Security Cutter's (NSC) design, which could pose
           operational and financial impacts to the Coast Guard. The
           Commandant of the Coast Guard recently stated that internal
           reviews by Coast Guard engineers, as well as by independent
           analysts have concluded that the NSC as designed will need
           structural reinforcement to meet its expected 30-year service
           life. In addition, a recent report by the DHS Inspector General
           indicated that the NSC design will not achieve a 30-year service
           life based on an operating profile of 230 days underway per year
           in General Atlantic and North Pacific sea conditions and added
           that Coast Guard technical experts believe the NSC's design
           deficiencies will lead to increased maintenance costs and reduced
           service life.^21

           In an effort to address the structural deficiencies of the NSC,
           the Commandant has stated that the Coast Guard is taking a
           two-pronged approach. First, the Coast Guard is working with the
           contractors to enhance the structural integrity of hulls three
           through eight that have not yet been constructed. Second, after
           determining that the NSC's structural deficiencies are not related
           to the safe operation of the vessel in the near term, the Coast
           Guard has decided to address the deficiencies of hulls one and two
           as part of depot-level maintenance, planned for several years
           after they are delivered. The Commandant stated that he decided to
           delay the repairs to the first two NSC hulls in an effort to
           prevent further cost increases or delays in construction and
           delivery.

           Further, the Deepwater program's conversion of the legacy 110-foot
           patrol boats to 123-foot patrol boats has also encountered
           performance problems. The Coast Guard had originally intended to
           convert all 49 of its 110-foot patrol boats into 123-foot patrol
           boats in order to increase the patrol boats' annual operational
           hours. This conversion program was also intended to add additional
           capability to the patrol boats, such as enhanced and improved
           C4ISR capabilities, as well as stern launch and recovery
           capability for a small boat. However, the converted 123-foot
           patrol boats began to display deck cracking and hull buckling and
           developed shaft alignment problems, and the Coast Guard elected to
           stop the conversion process at eight hulls upon determining that
           the converted patrol boats would not meet their expanded post-9/11
           operational requirements.
			  
			  Problems Have Operational Consequences

           The design and performance problems illustrated above have clear
           operational consequences for the Coast Guard. In the case of the
           123-foot patrol boats, the hull performance problems cited above
           led the Coast Guard to suspend all normal operations of the eight
           converted normal 123-foot patrol boats effective November 30,
           2006. The Commandant of the Coast Guard has stated that having
           reliable, safe cutters is "paramount" to executing its missions,
           such as search and rescue and migrant interdiction.^22 The Coast
           Guard is exploring options to address operational gaps resulting
           from the suspension of the 123-foot patrol boat operations.

           In regard to the suspension of FRC design work, as of our June
           2006 report, Coast Guard officials had not yet determined how
           changes in the design and delivery date for the FRC would affect
           the operations of the overall system-of-systems approach. However,
           because the delivery of Deepwater assets are interdependent within
           this acquisition approach, schedule slippages and uncertainties
           associated with potential changes in the design and capabilities
           of the new assets have increased the risks that the Coast Guard
           may not meet its expanded homeland security performance
           requirements within given budget parameters and milestone dates.
			  
			  Additional Reviews Ongoing

           Given the size of DHS and the scope of its acquisitions, we are
           continuing to assess the department's acquisition oversight
           process and procedures in ongoing work. For example, we are
           currently reviewing DHS's use of contractors to provide management
           and professional services, including the roles they are performing
           and how their performance is overseen. In addition, the conference
           report to the Department of Homeland Security Appropriations Act
           for Fiscal Year 2007^23 directed DHS's Chief Procurement Officer
           to develop a procurement oversight plan, identifying necessary
           oversight resources and how improvements in the department's
           performance of its procurement functions will be achieved. We have
           been directed to review the plan and provide our observations to
           congressional committees. We are also reviewing the department's
           use of performance-based acquisitions.

           We will also continue to review Deepwater implementation and
           contract oversight. We are currently reviewing aspects of the
           Deepwater program for the House and Senate Appropriations
           Committees' Subcommittees on Homeland Security.^24 Our objectives
           are to review (1) the status of the development and delivery of
           the major aviation and maritime assets that comprise the Coast
           Guard's Deepwater program; (2) the history of the contract,
           design, fielding, and grounding of the converted 123-foot patrol
           boats and operational adjustments the Coast Guard making to
           account for the removal from service of the 123-foot patrol boats;
           and (3) the status of the Coast Guard's implementation of our 2004
           recommendations on Deepwater contract management for improving
           Deepwater program management, holding the prime contractor
           accountable for meeting key program goals, and facilitating cost
           control through competition. We will share our results with those
           committees in April of this year.
			  
			  Concluding Observations

           Due to the complexity of its organization, DHS is likely to
           continue to face challenges in unifying the acquisition functions
           of its components and overseeing their acquisitions--particularly
           those involving large and complex investments. Although the Coast
           Guard has taken actions to improve its management of the Deepwater
           program and oversight of the system integrator, problems continue
           to emerge as the program is implemented. DHS and the Coast Guard
           face the challenge of effectively managing this program to obtain
           desired outcomes while making decisions that are in the best
           interest of the taxpayer. Given its experience with Deepwater, the
           department would be wise to apply lessons learned to its other
           major, complex acquisitions, particularly those involving a system
           integrator.

^4 GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, [34]GAO-05-325SP (Washington, D.C.: February 2005).

^5 We recently reported on the Department of Defense's use of award and
incentive fees. GAO, Defense Acquisitions: DOD Has Paid Billions in Award
and Incentive Fees Regardless of Acquisition Outcomes, GAO-06-66
(Washington, D.C.: Dec. 19, 2005).

^6 GAO, Coast Guard: Changes to Deepwater Appear Sound, and Program
Management Has Improved, but Continued Monitoring Is Warranted,
[35]GAO-06-546 (Washington, D.C.: Apr. 28, 2006).

^7 GAO, Contract Management: INS Contracting Weaknesses Need Attention
from the Department of Homeland Security, [36]GAO-03-799 (Washington,
D.C.: July 25, 2003); Transportation Security Administration: High-Level
Attention Needed to Strengthen Acquisition Function, [37]GAO-04-544
(Washington, D.C.: May 28, 2004); and Homeland Security: Successes and
Challenges in DHS's Efforts to Create an Effective Acquisition
Organization, [38]GAO-05-179 (Washington, D.C.: Mar. 29, 2005).

^8 Pub. L. No. 107-296, SS 821, 888, 116 Stat. 2135 (2002).

^9 [39]GAO-05-179 .

^10 GAO, Best Practices: Taking a Strategic Approach Could Improve DOD's
Acquisition of Services, [40]GAO-02-230 (Washington, D.C.: Jan. 18, 2002).

^11 [41]GAO-05-179 .

^12 GAO, Coast Guard: Progress Being Made on Deepwater Project, but Risks
Remain, [42]GAO-01-564 (Washington, D.C.: May 2, 2001).

^13 C4ISR refers to command, control, communications, computer,
intelligence, surveillance, and reconnaissance.

^14 [43]GAO-01-564 .

^15GAO, Contract Management: Coast Guard's Deepwater Program Needs
Increased Attention to Management and Contractor Oversight, [44]GAO-04-380
(Washington, D.C.: Mar. 9, 2004).

^16 [45]GAO-06-546.

^17 GAO, Coast Guard: Progress Being Made on Addressing Legacy Asset
Condition Issues and Program Management, but Acquisition Challenges
Remain, [46]GAO-05-757 (Washington, D.C.: July 22, 2005).

^18 [47]GAO-04-380 .

^19 Our 2004 recommendation was to use a $5 million threshold because
Lockheed Martin, one of the major subcontractors, uses that amount as the
threshold for considering its suppliers major. The Coast Guard decided to
use the $10 million threshold based on the criteria in the make-or-buy
program provisions of the Federal Acquisition Regulation.

^20GAO, Coast Guard: Status of Deepwater Fast Response Cutter Design
Efforts, GAO-06-764 (Washington, D.C.: June 23, 2006).

^21 Department of Homeland Security, Office of Inspector General,
Acquisition of the National Security Cutter, U.S. Coast Guard, OIG-07-23
(Washington, D.C.: Jan. 23, 2007).

^22 Coast Guard Suspends Converted Patrol Boat Operations, November 30,
2006, U.S. Coast Guard, Office of Public Affairs.

^23 H.R. Conf. Rep. No. 109-699, at 118 (2006).

^24 This work is based on Conference Committee Report language (H.R. Conf.
Rep. No. 109-699, at 118 (2006)) incorporating GAO reporting provisions
contained in a House Appropriations Committee Report (H.R. Rep. No.
109-476, at 15 (2006)).

           Mr. Chairman, that concludes my statement. I would be happy to
           respond to any questions you or other Members of the Committee may
           have at this time.
			  
			  Contacts and Acknowledgements

           For information about this testimony, contact Steve Caldwell at
           (202) 512-9610 or John Hutton at (202) 512-7773. Other individuals
           making key contributions to this testimony include Michele Mackin,
           Christopher Conrad, and Adam Couvillion.
			  
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Highlights of [49]GAO-07-453T , a testimony before the Committee on
Oversight and Government Reform, House of Representatives

February 8, 2007

HOMELAND SECURITY

Observations on the Department of Homeland Security's Acquisition
Organization and on the Coast Guard's Deepwater Program

In January 2003, GAO designated the Department of Homeland Security's
(DHS) implementation and transformation as high risk because of the size
and complexity of the effort and the existing challenges faced by the
components being merged into the department. The success of the effort to
integrate numerous agencies and organizations into one cabinet-level
department rests in large part on DHS's ability to effectively acquire the
wide range of goods and services it needs to achieve its mission of
protecting the nation from terrorism.

DHS is undertaking a number of large, complex investments as the federal
government increasingly relies on contractors for roles and missions
previously performed by government employees. One of the department's
largest investments--the Deepwater program, now estimated to cost $24
billion--is the Coast Guard's major effort to replace or modernize its
aircraft and vessels. Rather than using a traditional acquisition
approach, the Coast Guard is using a system integrator to design,
construct, deploy, support, and integrate the Deepwater assets.

Today, I would like to discuss (1) the overarching challenges DHS faces in
establishing an effective acquisition organization, (2) GAO's prior work
on Coast Guard and contractor management of the Deepwater program, and (3)
the status of GAO's ongoing reviews.

GAO has reported in the past on acquisition management at several
components of DHS and has assessed the department's overall acquisition
management and oversight efforts. A common theme in these reports is DHS's
struggle, from the outset, to provide adequate support to its mission
components in acquiring goods and services and to provide departmentwide
oversight of its acquisition function. DHS has a stated goal of
integrating the acquisition function more broadly across the department.
GAO has reported that this goal has not yet been accomplished and has
identified key impediments to achieving it. A management directive
intended to integrate the acquisition line of business did not provide the
Chief Procurement Officer with the enforcement authority needed in
practice, and it does not pertain to all component agencies. Also, the
procurement organizations within the department remained somewhat
autonomous, and centralized acquisition oversight had not been
implemented. While DHS's review process for major investments adopts some
best practices, key decision-making reviews at certain points are not
required. Investments that are not reviewed at the appropriate points can
face a range of problems--such as redesign--resulting in significant cost
increases and schedule delays.

The Coast Guard's Deepwater program illustrates problems that can occur
when effective program management and contractor oversight are not in
place. In 2001, GAO described the Deepwater project as "risky" due to the
unique, untried acquisition strategy for a project of this magnitude
within the Coast Guard--a system-of-systems approach with the contractor
as the integrator. In 2004, GAO reported that well into the contract's
second year, key components needed to manage the program and oversee the
system integrator's performance had not been effectively implemented. For
example, integrated product teams, comprised of government and contractor
employees, are the Coast Guard's primary tool for managing the program and
overseeing the contractor. GAO found that the teams had not been effective
due to changing membership, understaffing, insufficient training, lack of
authority for decision-making, and inadequate communication among members.
GAO also reported that, despite documented problems in schedule,
performance, cost control, and contract administration throughout the
first year of the Deepwater contract, the contractor had received a rating
of 87 percent, which fell in the "very good" range and resulted in an
award fee of $4.0 million. GAO's more recent work found that, while the
Coast Guard had taken steps to address some of the problems, concerns
remained about program management and contractor oversight. In addition to
these overall management issues, there have been problems with the design
and performance of specific Deepwater assets.

Given the size of DHS and the scope of its acquisitions, GAO is continuing
to assess the department's acquisition oversight process and procedures in
ongoing work. GAO is also currently reviewing the status of the Deepwater
program's implementation and contractor oversight.

References

Visible links
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-03-119
  27. http://www.gao.gov/cgi-bin/getrpt?GAO-07-310
  28. http://www.gao.gov/
  29. http://www.gao.gov/
  30. http://www.gao.gov/fraudnet/fraudnet.htm
  31. file:///home/webmaster/infomgt/d07453t.htm#mailto:[email protected]
  32. file:///home/webmaster/infomgt/d07453t.htm#mailto:[email protected]
  33. file:///home/webmaster/infomgt/d07453t.htm#mailto:[email protected]
  34. http://www.gao.gov/cgi-bin/getrpt?GAO-05-325SP
  35. http://www.gao.gov/cgi-bin/getrpt?GAO-06-546
  36. http://www.gao.gov/cgi-bin/getrpt?GAO-03-799
  37. http://www.gao.gov/cgi-bin/getrpt?GAO-04-544
  38. http://www.gao.gov/cgi-bin/getrpt?GAO-05-179
  39. http://www.gao.gov/cgi-bin/getrpt?GAO-05-179
  40. http://www.gao.gov/cgi-bin/getrpt?GAO-02-240
  41. http://www.gao.gov/cgi-bin/getrpt?GAO-05-179
  42. http://www.gao.gov/cgi-bin/getrpt?GAO-01-564
  43. http://www.gao.gov/cgi-bin/getrpt?GAO-01-564
  44. http://www.gao.gov/cgi-bin/getrpt?GAO-04-380
  45. http://www.gao.gov/cgi-bin/getrpt?GAO-06-546
  46. http://www.gao.gov/cgi-bin/getrpt?GAO-05-757
  47. http://www.gao.gov/cgi-bin/getrpt?GAO-04-380
  48. http://www.gao.gov/cgi-bin/getrpt?GAO-07-453T
  49. http://www.gao.gov/cgi-bin/getrpt?GAO-07-453T
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