Defense Acquisitions: Future Combat System Risks Underscore the  
Importance of Oversight (27-MAR-07, GAO-07-672T).		 
                                                                 
The Army's Future Combat System (FCS) is a program characterized 
by bold goals and innovative concepts--transformational 	 
capabilities, system-of-systems approach, new technologies, a	 
first-of-a-kind information network, and a total investment cost 
of more than $200 billion. As such, the FCS program is considered
high risk and in need of special oversight and review. Today's	 
testimony is based on work conducted over the past year in	 
response to (1) the National Defense Authorization Act for Fiscal
Year 2006, which requires GAO to report annually on the FCS	 
acquisition; and (2) the John Warner National Defense		 
Authorization Act for Fiscal Year 2007, which requires GAO to	 
report on the role of the lead systems integrator in the Army's  
FCS program. Accordingly, this statement discusses (1) the	 
business case for FCS to be successful and (2) the business	 
arrangements for the FCS program.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-672T					        
    ACCNO:   A67344						        
  TITLE:     Defense Acquisitions: Future Combat System Risks	      
Underscore the Importance of Oversight				 
     DATE:   03/27/2007 
  SUBJECT:   Cost analysis					 
	     Critical technologies				 
	     Defense capabilities				 
	     Defense procurement				 
	     Future budget projections				 
	     Procurement planning				 
	     Program evaluation 				 
	     Reporting requirements				 
	     Research and development				 
	     Risk assessment					 
	     Strategic planning 				 
	     Systems design					 
	     Cost estimates					 
	     Program goals or objectives			 
	     Army Future Combat Systems 			 
	     Army Warfighter Information Network		 
	     DOD Joint Tactical Radio System			 
	     GAO High Risk Series				 

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GAO-07-672T

   

     * [1]Summary
     * [2]Background
     * [3]Status of FCS Business Case

          * [4]Requirements Definition
          * [5]Maturity of Technology
          * [6]Knowledge-Based Acquisition Strategy
          * [7]Program Costs and Funding
          * [8]Actions Recommended in Our March 2007 Report
          * [9]FCS Program Recently Restructured

     * [10]FCS Business Arrangements

          * [11]Army Use of an LSI Framed by Scope of Program and Workforce
          * [12]Close Working Relationship Increases the Burden of Oversight
          * [13]Contract Provides Incentives for Best Effort but Cannot Assu

     * [14]Contacts & StaffAcknowledgments
     * [15]GAO's Mission
     * [16]Obtaining Copies of GAO Reports and Testimony

          * [17]Order by Mail or Phone

     * [18]To Report Fraud, Waste, and Abuse in Federal Programs
     * [19]Congressional Relations
     * [20]Public Affairs

Testimony before theSubcommittee on Air and Land Forces, Committee on
Armed Services, House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:00 a.m. EDT
Tuesday, March 27, 2007

DEFENSE ACQUISITIONS

Future Combat System Risks Underscore the Importance of Oversight

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

GAO-07-672T

Mr. Chairman and Members of the Subcommittee:

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

My statement today is based on the work that we have conducted over the
past year in response to (1) the National Defense Authorization Act for
Fiscal Year 2006, which requires GAO to report annually on the product
development phase of the FCS acquisition;1 and (2) the John Warner
National Defense Authorization Act for Fiscal Year 2007, which requires
GAO to report on the role of the lead systems integrator in the Army's FCS
program.2 Accordingly, I will focus my statement on the business case and
the business arrangements for the FCS program.

Summary

We look at a business case as comprising those elements that are key to
making an acquisition likely to result in a product that performs as
required for the time and money promised. A sound business case includes
firm requirements; mature technologies; an acquisition strategy that
demonstrates design and production maturity; and adequate funding to cover
a realistic cost estimate. When FCS was approved to begin in May 2003, it
was far from having a sound business case, especially given its
unprecedented size and complexity. Specifically, requirements were not
well defined; technologies were very immature; the acquisition strategy
was aggressive and did not allow for demonstrating design and production
maturity until after the production decision; and despite the insufficient
basis for good cost estimates, providing the resources at the estimated
costs was a great challenge. Since then, there have been a number of
improvements in the program. The schedule was doubled to allow for more
demonstrations and to spin capabilities out to the current forces;
requirements are better understood, even to the system level; technologies
have gotten more mature; cost estimates have grown substantially, making
them more realistic. Still, it is 4 years later, and progress should be
expected. The Army, doing well by its own measures, is well behind
business case measures. Requirements are still being defined; technologies
are years away from needed maturity levels; key demonstrations of design
and production will still come after the production decision; and
independent cost estimates are significantly higher than the Army's.

1 Pub. L. No. 109-163 S211

2 Pub. L. No. 109-163 S115

To achieve its goals for the FCS program, in 2003 the Army decided to
employ a lead systems integrator (LSI) to assist in defining, developing,
and integrating the FCS. The Army's decision to employ a lead systems
integrator for the FCS program was framed by two factors: (1) the
ambitious goals of the FCS program and (2) the Army's limited capacity to
manage it. In the case of the FCS, the Army has structured a contract with
Boeing as the LSI to define a partner-like relationship and provide
incentives for performance. Evaluating the use of an LSI on FCS involves
consideration of several interwined factors, such as the system-of-systems
scope and the technical challenges. Our concerns about the executability
of the program aside, the contract provisions and relationship with the
LSI are both consistent with the Army's vision for FCS and candid with
respect to its workforce limitations. On the other hand, the limits and
risks of the contractual arrangements must also be recognized. The Army
has forged a partner-like relationship with the LSI which at the same time
involves the Army more with decisions the LSI makes and involves the LSI
more with decisions the Army makes. When coupled with the scope and
significance of the program, this situation poses risks for the Army's
ability to provide oversight over the long term. The current FCS contract
provides for a relatively high level of compensation for the LSI, over 80
percent of which can be earned by completion of the critical design
review. This is significant because most key demonstrations occur after
this review and, historically, most cost growth also occurs after the
review. Because of the technical and other uncertainties, as a research
and development contract, it is possible for the LSI to perform
satisfactorily and earn its fees even if the FCS is unable to deliver the
required performance.

The foregoing underscores the important role the Office of the Secretary
of Defense (OSD) can play in providing oversight on the FCS program. While
the Army works to manage the program, OSD must work to oversee the
program. To date, OSD has largely accepted the Army's proposals for
approving, planning, and restructuring FCS, even when they run counter to
OSD's own policies and independent assessments. For a program with the
unique arrangements, risks, and significance of the FCS, OSD's role in
overseeing FCS requires more than milestone decisions at the beginning and
end of development, with annual reviews in between. OSD needs to hold the
FCS program accountable to high standards, which are not necessarily the
standards the Army adheres to. The go/no-go decision OSD will hold in 2009
will be important to defining its role in the program. We believe the use
of an LSI on FCS is more significant than a contracting arrangement for a
single program. It breaks new ground in collaborative relationships and
increasing contractor responsibilities. Accordingly, we also believe OSD
should put itself not only in a position to oversee the progress of the
FCS program, but to evaluate the DOD-wide implications of the LSI and
system-of-systems approach to developing weapons.

Background

The FCS concept is designed to be part of the Army's Future Force, which
is intended to transform the Army into a more rapidly deployable and
responsive force--one that differs substantially from the large
division-centric structure of the past. The Army is reorganizing its
current forces into modular brigade combat teams, each of which is
expected to be highly survivable and the most lethal brigade-sized unit
the Army has ever fielded. The Army expects FCS-equipped brigade combat
teams to provide significant warfighting capabilities to DOD's overall
joint military operations.

Fundamentally, the FCS concept is to replace mass with superior
information--that is, to see and hit the enemy first rather than to rely
on heavy armor to withstand a hit. This solution attempts to address a
mismatch that has posed a dilemma to the Army for decades: the Army's
heavy forces had the necessary firepower needed to win but required
extensive support and too much time to deploy while its light forces could
deploy rapidly but lacked firepower. If the Future Force becomes a
reality, then the Army would be better organized, staffed, equipped, and
trained for prompt and sustained land combat, qualities intended to ensure
that the Army would dominate over evolving, sophisticated threats. The
Future Force is to be offensively oriented and will employ revolutionary
concepts of operations, enabled by new technology. The Army envisions a
new way of fighting that depends on networking the force, which involves
linking people, platforms, weapons, and sensors seamlessly together in a
system- of-systems.

In 2006, Congress mandated that the Secretary of Defense conduct a
milestone review for the FCS program, following the preliminary design
review scheduled for early 2009.3 Congress stated that the review should
include an assessment of (1) whether the requirements are valid and can be
best met with the FCS program, (2) whether the FCS program can be
developed and produced within existing resources, and (3) whether the
program should continue as currently structured, be restructured, or be
terminated. The Congress required the Secretary of Defense to review
specific aspects of the program, including the maturity of critical
technologies, program risks, demonstrations of the FCS concept and
software, and a new cost estimate and affordability assessment and to
submit a report of the findings and conclusions of the review to Congress.

Congressional defense committees have asked GAO on numerous occasions to
report and testify on FCS activities. This statement is based on work
which was conducted between March 2006 and March 2007 and in accordance
with generally accepted government auditing standards.

Status of FCS Business Case

In our March 2007 report,4 we found that despite the investment of $8
billion already made in the FCS program, it still has significantly less
knowledge--and less assurance of success--than required by best practices
or DOD policy. By early 2009, enough knowledge should be available about
the key elements of the FCS business case to make a well-informed decision
on whether and how to proceed with the program. If significant doubts
remain regarding the program's executability, DOD will have to consider
alternatives to proceeding with the program as planned. Central to the
go/no-go decision will be demonstrable soundness of the FCS business case
in the areas of requirements, technology, acquisition strategy, and
finances. Our specific findings in the areas of requirements,
technologies, acquisition strategy, and finances are summarized below.

Requirements Definition

The Army has made considerable progress in defining system-of-systems
level requirements and allocating those requirements to the individual FCS
systems. This progress has necessitated significant trade-offs to
reconcile requirements and technical feasibility. A key example of this
has been the decision to allow a significant increase in manned ground
vehicle weight to meet survivability requirements that in turn has forced
trade-offs in transportability requirements. The feasibility of FCS
requirements still depends on key assumptions about immature technologies,
costs, and other performance characteristics like the reliability of the
network and other systems. As current assumptions in these areas are
replaced with demonstrated performance, more trade-offs are likely. At
this point, the Army has identified about 70 high-level risks to be
resolved to assure the technical feasibility of requirements. A challenge
for the Army in making these trades--which are practical necessities--is
determining the cumulative effect of an individual decision on overall
requirements. For example, a decision to discontinue a munition technology
could result in less lethality, possibly less survivability if our
vehicles have to shoot more than once to defeat an enemy, and less
responsiveness due to the weight added by carrying more ammunition and
fuel.

3John Warner National Defense Authorization Act for Fiscal Year 2007, Pub.
L. No. 109-364 S214 (2006).

4GAO, Defense Acquisitions: Key Decisions to be Made on Future Combat
System, [21]GAO-07-376 (Washington, D.C.: Mar. 15, 2007).

As it proceeds to the preliminary design review and the subsequent
go/no-go milestone, the Army faces considerable challenges in completing
the definition of technically achievable and affordable system-level
requirements, an essential element of a sound business case. The Army will
have to complete definition of all system-level requirements and the
network as well as the preliminary designs for all systems and subsystems.
By the time of the review, it should be able to demonstrate that the FCS
will satisfy key performance parameters and the Army's user community with
a program that is as good as or better than what is available with current
forces. To do this, the Army will have to mitigate FCS technical risks to
significantly lower levels and make demonstrable progress toward meeting
key FCS goals including weight reduction, reliability improvement, and
average unit production cost reduction.

Maturity of Technology

The Army has made progress in the areas of critical technologies,
complementary programs, and software development, but it will take several
more years to reach the level of maturity needed in 2003. Program
officials report that the number of critical technologies they consider as
mature has doubled in the past year. While this is good progress by any
measure, FCS technologies are far less mature at this point in the program
than they should be, and they still have a long way to go to reach full
maturity. The Army only sees the need to reach a technology readiness
level that requires demonstration of capabilities in a relevant
environment5 by 2011. This does not assure that these capabilities will
actually perform as needed in a realistic environment, as required by best
practices for a sound business case. We also note that last year,
technology maturity levels had been the result of an independent
assessment, while the current levels have been determined by the FCS
program office. The Army has made some difficult decisions to improve the
acquisition strategies for some key complementary programs, such as Joint
Tactical Radio System and Warfighter Information Network-Tactical, but
they still face significant technological and funding hurdles. Finally,
the Army and the LSI are attempting to utilize many software-development
best practices and have delivered the initial increments of software on
schedule. On the other hand, most of the software development effort lies
ahead, and the amount of software code to be written--already an
unprecedented undertaking--continues to grow as the demands of the FCS
design becomes better understood. The Army and the LSI have recognized
several high-risk aspects of that effort and mitigation efforts are
underway.

As it approaches the preliminary design review and the subsequent go/no-go
milestone review, the Army should have made additional progress in
developing technologies and software as well as aligning the development
of complementary programs with the FCS. The Army faces many challenges,
such as demonstrating that critical technologies are mature and having
this maturity independently validated. The Army will need to mitigate the
recognized technical risks and integrate the technologies with other
systems. It will also need to address cost, schedule, and performance
risks related to software and mitigate those risks to acceptable levels.
Finally, the Army must settle on the set of complementary programs that
are essential for FCS success, ensure adequate funding for these systems,
and align their schedules with the FCS schedule.

Knowledge-Based Acquisition Strategy

The FCS acquisition strategy and testing schedule has become more complex
as plans have been made to spin out capabilities to current Army forces.
The strategy acquires knowledge later than called for by best practices
and DOD policy, although the elongated schedule of about 10 years provides
a more realistic assessment of when capabilities can be delivered.
Knowledge deficits for requirements and technologies have created enormous
challenges for devising an acquisition strategy that can demonstrate the
maturity of design and production processes. Even if setting requirements
and maturing technologies proceed without incident, FCS design and
production maturity are not likely to be demonstrated until after the
production decision is made. The critical design review will be held much
later on FCS than other programs, and the Army will not be building
production-representative prototypes to test before production. The first
major test of the network and FCS together with a majority of prototypes
will not take place until 2012. Much of the testing up to the 2013
production decision will involve simulations, technology demonstrations,
experiments, and single-system testing. Only after that point, however,
will substantial testing of the complete brigade combat team and the FCS
concept of operations occur. However, production is the most expensive
phase in which to resolve design or other problems found during testing.
Spin-outs, which are intended to accelerate delivery of FCS capabilities
to the current force, also complicate the acquisition strategy by
absorbing considerable testing resources.

5Technology readiness levels (TRL) are measures pioneered by the National
Aeronautics and Space Administration and adopted by DOD to determine
whether technologies were sufficiently mature to be incorporated into a
weapon system.

As the Army proceeds to the preliminary design review in 2009, it faces a
number of key challenges in the remaining portions of the acquisition
strategy. It must complete requirements definition and technology
maturity. The spin-out capabilities must be demonstrated before committing
to production. System integration must be completed and the Army should be
preparing to have released at least 90 percent of the engineering drawings
by the time of the critical design review, a best practice. Finally, the
program schedule must allocate sufficient time, as needed, to test, fix
and retest throughout the FCS test program. Each FCS system, the
information network, and the FCS concept should be thoroughly tested and
demonstrated before committing to low rate initial production in 2013.

Program Costs and Funding

In 2006, we reported that FCS program acquisition costs had increased to
$160.7 billion--76 percent--since the Army's original estimate of $91.4
billion (figures adjusted for inflation). While the Army's current
estimate of $163.7 billion is essentially the same, an independent
estimate from the Office of the Secretary of Defense puts the acquisition
cost of FCS between $203 billion and $234 billion. The comparatively low
level of technology and design knowledge at this point in the program
portends future cost increases. Our work on a broad base of DOD weapon
system programs shows that most developmental cost increases occur after
the critical design review, which will be in 2011 for the FCS. Yet, by
that point in time, the Army will have spent about 80 percent of the FCS's
development funds. Further, the Army has not yet fully estimated the cost
of essential complementary programs and the procurement of spin-out items
to the current force. The Army is cognizant of these resource tensions and
has adopted measures in an attempt to control FCS costs. However, some of
these measures do involve reducing program scope in the form of lower
requirements and capabilities, which will have to be reassessed against
the user's demands. Symptomatic of the continuing resource tension, the
Army recently announced that it was restructuring several aspects of the
FCS program, including reducing the scope of the program and its planned
annual production rates to lower annual funding demands.

I do want to point out the significance of the financial commitments the
Army will make in the next few years. The fiscal year 2008 request
includes $99.6 million in FCS procurement funds. Those funds are to
procure long lead items for production of (1) non-line-of-sight cannon and
other manned ground vehicles, and (2) the initial set of FCS spin-out
kits. The fiscal year 2008 request will also fund plant facilitization to
support FCS production beginning in fiscal year 2009. Procurement funds
rise quickly thereafter, growing from $328.6 million to $1.27 billion to
$6.8 billion in fiscal years 2009, 2011, and 2013, respectively.

By the time of the preliminary design review and the congressionally
mandated go/no-go milestone in 2009, the Army should have more of the
knowledge needed to build a better cost estimate for the FCS program. The
Army should also have more clarity about the level of funding that may be
available to it within the long-term budget projections to fully develop
and procure the FCS program of record. Also, by that time, the Army will
need to have developed an official Army cost position that reconciles the
gap between the Army's estimates and the independent cost estimate. In the
cost estimate, the Army should clearly establish if it includes the
complete set and quantities of FCS equipment needed to meet established
requirements. Based on this estimate, the Army must ensure that adequate
funding exists in its current budget and future years to fully fund the
FCS program of record including the development of the complementary
systems deemed necessary for the FCS as well as to procure the FCS
capabilities planned to be spun out to the current forces.

Actions Recommended in Our March 2007 Report

In our March 2007 report, we noted that it was important that specific
criteria--as quantifiable as possible and consistent with best
practices--be established now to evaluate the sufficiency of program
knowledge. We recommended specific criteria that should be included in the
Secretary of Defense's evaluation of the FCS program as part of the
go/no-go decision following the preliminary design review in 2009. DOD
agreed with this recommendation and noted that the decision will be
informed by a number of critical assessments and analyses, but was
unspecific as to criteria. We agree that while it is necessary that good
information--such as that included in DOD's response--be presented at the
decision, it is also necessary that quantitative criteria that reflect
best practices be used to evaluate the information.

We also noted that in view of the great technical challenges facing the
program, the possibility that FCS may not deliver the right capability
must be acknowledged and anticipated. We therefore recommended that the
Secretary of Defense analyze alternative courses of action DOD can take to
provide the Army with sufficient capabilities, should the FCS be judged as
unlikely to deliver needed capabilities in reasonable time frames and
within expected funding levels. DOD agreed with this recommendation as
well, citing it would rely on ongoing analyses of alternatives. We believe
that it is important to keep in mind that it is not necessary to find a
rival solution to FCS, but rather the next best solution should the
program be judged unable to deliver needed capabilities.

FCS Program Recently Restructured

The Army recently made a number of key changes to FCS to keep program
costs within available funding levels. Core program development and
production costs were reduced by deleting or deferring four of the
original systems, but these savings were offset by adding funding for
spin-outs and ammunition, which had previously not been funded. The
program's cost estimate reflecting the adjustment is now $161.2 billion, a
slight decrease from $163.7 billion that we previously reported.
Highlights include:

           o Four systems deleted or deferred: the Class II and III unmanned
           aerial vehicles, the intelligent munitions system, and the armed
           robotic vehicle. The munitions system will continue outside of
           FCS, while the robotic vehicle will continue in the science and
           technology environment.

           o Quantity changes: Class I unmanned aerial vehicle quantities
           will be cut in half. Quantities of non-line-of-sight launch
           systems and precision attack missiles were also reduced. The Army
           will buy eight additional Class IV unmanned aerial vehicles for
           each brigade combat team.

           o Production rate reduction: Annual FCS production will be reduced
           from 1.5 to 1 brigade combat team. This change will extend FCS
           production by about 5 years to 2030.

           o Consolidation of spin-outs: Spin-outs will be reduced from four
           to three and the content of the spin-outs have changed. The Army
           has now funded procurement of the spin-outs that had previously
           been unfunded.

           o Schedule extension: Initial FCS production has been delayed 5
           months to February 2013 and initial and full operational
           capabilities dates have been delayed 6 months to June 2015 and
           June 2017, respectively.

According to Army officials, the Army's initial assessment found little
difference between 14 and 18 systems on the capabilities of the FCS
brigade combat team. When the program was approved in 2003, it also had 14
systems. In 2004, when it was restructured, 4 systems were added back in,
bringing the total to 18, plus the network. It is not clear how the
overall performance of the system can be insensitive to the changes in the
composition of the FCS systems. Similarly, we do not yet have an
understanding on why FCS production costs have not increased because of
the lower production rates and consequent additional years of production.
Generally, slowing down the production rate increases costs as the fixed
costs of production facilities must be incurred for more years.

FCS Business Arrangements

To achieve the Army's goals for the FCS program, in 2003 the Army decided
to employ a lead systems integrator (LSI) to assist in defining,
developing, and integrating FCS. In the past few years, DOD and other
agencies have applied the LSI concept in a variety of ways. In the case of
the FCS program, the LSI shares program management responsibilities with
the Army, including defining the FCS solution (refining requirements),
selecting and managing subcontractors, and managing testing. Evaluating
the use of the LSI on FCS involves consideration of several intertwined
factors, which collectively make the LSI arrangement in the FCS context
unique. Some, like the best efforts nature of a cost reimbursable research
and development contract, are not unique to the LSI or to FCS. Other
factors differ not so much in nature, but in degree from other programs.
For example, FCS is not the first system-of-systems program DOD has
proposed, but it is arguably the most complex. FCS is not the first
program to proceed with immature technologies, but it has more immature
technologies than other programs. FCS is not the first program to employ
an LSI, but the extent of the partner-like relationship between the Army
and the LSI breaks new ground.

Army Use of an LSI Framed by Scope of Program and Workforce Limitations

The Army's decision to employ a lead systems integrator for the FCS
program was framed by two factors: (1) the ambitious goals of the FCS
program and (2) the Army's capacity to manage it. As envisioned in 2003
when the program started, FCS presented a daunting technical and
management challenge: the concurrent development of multiple weapon
systems whose capabilities would be dependent on an information network
also to be developed. All of this was to take place in about 5 1/2
years--much faster than a single weapon system typically takes. Army
leaders believed the Army did not have the workforce or flexibility to
manage development of FCS on its own within desired timelines. The Army
saw its limitations in meeting this challenge as (1) cultural: difficulty
in crossing traditional organizational lines; (2) capability: shortage of
skills in key areas, such as managing the development of a large
information network; and (3) capacity: insufficient resources to staff,
manage, and synchronize several separate programs. In addition to the
complexity and workforce implications of FCS, the Army saw an opportunity
with an LSI to create more incentives for a contractor to give its best
effort in development and to create more competition at lower supplier
levels. Thus, they employed a contractor--a lead systems integrator-with
significant program management responsibilities to help it define and
develop FCS and reach across traditional Army mission areas. In May 2003,
the Army hired the Boeing Corporation to serve as the LSI for the FCS
system development and demonstration phase. Boeing subcontracted with
Science Applications International Corporation, another defense
contractor, to assist in performing the LSI functions.

Close Working Relationship Increases the Burden of Oversight

The relationship between the Army and the LSI is complicated. On the one
hand, the LSI plays the traditional role of developing a product for its
customer, the Army, and on the other hand the LSI acts like a partner to
the Army in ensuring the design, development, and prototype implementation
of the FCS network and family of systems. In forging a partner-like
relationship with the LSI, the Army sought to gain managerial advantages
such as maintaining flexibility to deal with shifting priorities. A
partner-like relationship also poses long-term risks for the government.
Depending on the closeness of the working relationship, the government's
ability to provide oversight can be reduced compared with an arms-length
relationship; more specifically, the government can become increasingly
vested in the results of shared decisions and runs the risk of being less
able to provide oversight compared with an arms-length relationship,
especially when the government is disadvantaged in terms of workforce and
skills. In the case of FCS, these risks are present. The Army is more
involved in the selection of subcontractors than we have seen on other
programs, involvement that can, over time, make the Army somewhat
responsible for the LSI's subcontracting network. On the other hand, the
LSI is more involved with influencing the requirements, defining the
solution, and testing that solution than we have seen on other programs.
This is not to say that the level of involvement or collaboration between
the Army and the LSI is inherently improper, but that it may have
unintended consequences over the long term.

OSD is in a position to provide this oversight, but thus far has largely
accepted the program and its changes as defined by the Army, even when
they are at wide variance from the best practices embodied in OSD's own
acquisition policies. In 2003, OSD approved the FCS for system development
and demonstration prematurely despite the program's combination of
immature technologies and short schedule and then declined to follow
through on plans to make a better informed decision 18 months later. OSD
has allowed the Army to use its cost estimates rather than OSD's own
independent--and significantly higher--cost estimates and has agreed with
the Army's determination that the bulk of cost increases since 2003 are
the result of scope changes and thus do not trigger congressional
reporting requirements. In the fiscal year 2007 National Defense
Authorization Act, Congress mandated that DOD hold a formal go/no-go
decision meeting on the FCS in 2009. DOD has since proposed a serious
approach to making that decision, a step that is encouraging from an
oversight perspective.

Contract Provides Incentives for Best Effort but Cannot Assure Success

The Army has structured the FCS contract consistent with its desire to
incentivize development efforts and make it financially rewarding for the
LSI to make such efforts. In that regard, the FCS contract pays well.
According to an independent estimate from the Office of the Secretary of
Defense, the fee payable to the LSI is relatively high based on the value
of work it actually performs, and its average employee assigned to the
program costs more than a federal executive. The business arrangement
between the Army and LSI has been converted from an other transaction
agreement to a Federal Acquisition Regulation-based contract. Yet, there
remain substantive risks on whether the contract can result in a
successful program outcome. As with many cost-reimbursable research and
development contracts, the contractor is responsible for putting forth its
best effort to ensure a successful FCS. However, if that system fails to
meet expectations or requirements despite that effort, the LSI is not
responsible.

The Army provides incentive payments through nine program events called
out in the current contract, for which the LSI must demonstrate progress
in setting up and implementing various program processes. By the time the
FCS critical design review is completed in 2011, the Army will have paid
out over 80 percent of the costs of the LSI contract and the LSI will have
had the opportunity to earn more than 80 percent of its total fee. While
the Army rationally notes that it is important to use fees to encourage
good performance early, the experiences of previous weapon systems shows
that most cost growth occurs after the critical design review. Key
demonstrations of the actual capabilities of FCS systems will take place
after this point. The Army shares responsibility with the LSI for making
key decisions and to some extent the Army's performance affects the
performance of the LSI. For example, some of the technologies critical to
the FCS are being developed by the Army, not the LSI. If the technologies
do not perform as planned, the LSI may not be responsible for the
consequent trade-offs in performance. Furthermore, the Army is responsible
for all program changes and therefore can adjust its expectations of the
LSI according to those changes and the LSI may still earn its full fee.

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

Contacts & Staff Acknowledgments

For future questions about this statement, please contact me at (202)
512-4841 or [email protected] . Individuals making key contributions to
this statement include William R. Graveline, William C. Allbritton, Noah
B. Bleicher, Lily J. Chin, Brendan S. Culley, Marcus C. Ferguson, Michael
D. O'Neill, Kenneth E. Patton, Thomas P. Twambly, Adam Vodraska, and
Carrie R. Wilson.

(120632)

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Highlights of [30]GAO-07-672T , a testimony before the Subcommittee on Air
and Land Forces, Committee on Armed Services, House of Representatives

March 2007

DEFENSE ACQUISITIONS

Future Combat System Risks Underscore the Importance of Oversight

The Army's Future Combat System (FCS) is a program characterized by bold
goals and innovative concepts--transformational capabilities,
system-of-systems approach, new technologies, a first-of-a-kind
information network, and a total investment cost of more than $200
billion. As such, the FCS program is considered high risk and in need of
special oversight and review.

Today's testimony is based on work conducted over the past year in
response to (1) the National Defense Authorization Act for Fiscal Year
2006, which requires GAO to report annually on the FCS acquisition; and
(2) the John Warner National Defense Authorization Act for Fiscal Year
2007, which requires GAO to report on the role of the lead systems
integrator in the Army's FCS program. Accordingly, this statement
discusses (1) the business case for FCS to be successful and (2) the
business arrangements for the FCS program.

[31]What GAO Recommends

GAO has recently recommended that the Secretary of Defense (1) establish
specific criteria for evaluating the FCS program at a key 2009 decision
and (2) analyze alternative courses of action in the event FCS is unlikely
to deliver needed capabilities. DOD concurred with GAO's recommendations.

The Army has far less knowledge about FCS and its potential for success
than is needed to fulfill the basic elements of a business case. Those
elements are not new to the Army, nor to the Department of Defense (DOD),
which addresses such criteria in its weapon system acquisition policy. The
Army has made improvements to the program, such as lengthening time frames
for demonstrating capabilities and for providing capabilities to current
forces. While the Army has also made progress, what it still lacks in
knowledge raises doubts about the soundness of the FCS business case. The
Army has yet to fully define FCS requirements; FCS technologies that
should have been matured in 2003, when the program started, are still
immature; key testing to demonstrate FCS performance will not be completed
and maturity of design and product will not be demonstrated until after
production starts in 2013; and an independent cost estimate from the
Office of the Secretary of Defense is between $203 billion and $234
billion, a far higher figure than the Army's cost estimate.

To achieve its goals for the FCS program, the Army decided to employ a
lead systems integrator (LSI) to assist in defining, developing, and
integrating the FCS. This decision reflected the fact that not only were
FCS goals ambitious, but also that the Army had limited capacity to manage
the undertaking. Boeing Corporation is the LSI. Its relationship with the
Army on FCS breaks new ground for collaboration between the government and
a contractor. The close working relationship has advantages and
disadvantages. An advantage is that such a relationship allows flexibility
in responding to shifting priorities. A disadvantage is an increase in
risks to the Army's ability to provide oversight over the long term. The
contract itself is structured in such a way as to enable the LSI to be
paid over 80 percent of its costs and fees by completion of the critical
design review in 2011--a point after which programs typically experience
most of their cost growth. This is consistent with the Army's desire to
provide incentives for the development effort. On the other hand, this
contract, as with many cost-reimbursable research and development
contracts, makes the contractor responsible for providing its best
efforts, but does not assure a successful FCS.

The foregoing underscores the important role of the Office of the
Secretary of Defense in providing oversight on the FCS program. To date,
the Office of the Secretary of Defense has largely accepted the Army's
approach to FCS, even though it runs counter to DOD's policy for weapon
system acquisition. GAO believes the Office of the Secretary of Defense
needs to hold the FCS program accountable to high standards at the
congressionally directed decision in 2009 on whether to proceed with FCS.
Financial commitments to production will grow rapidly after that point.
The Office of the Secretary of Defense should also be mindful of the
department-wide implications of the future use of LSIs as well as the
system-of-systems approach to developing weapon acquisitions.

References

Visible links
  21. http://www.gao.gov/cgi-bin/getrpt?GAO-07-376
  30. http://www.gao.gov/cgi-bin/getrpt?GAO-07-672T
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