Defense Acquisitions: Success of Advanced SEAL Delivery System	 
Hinges on Establishing a Sound Contracting Strategy and 	 
Performance Criteria (24-MAY-07, GAO-07-745).			 
                                                                 
The Advanced SEAL Delivery System (ASDS) is a hybrid combatant	 
submersible providing clandestine delivery and extraction of Navy
SEALs and equipment in high-threat environments. The first ASDS  
has had significant performance issues and has cost, to date,	 
over $885 million. In May 2006, Congress requested that GAO	 
review ASDS. This report examines (1) how the Navy managed ASDS  
risks through its contracts and (2) the status of major technical
issues and program restructuring.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-745 					        
    ACCNO:   A69947						        
  TITLE:     Defense Acquisitions: Success of Advanced SEAL Delivery  
System Hinges on Establishing a Sound Contracting Strategy and	 
Performance Criteria						 
     DATE:   05/24/2007 
  SUBJECT:   Accountability					 
	     Contract administration				 
	     Contract oversight 				 
	     Contract performance				 
	     Contracts						 
	     Cost analysis					 
	     Defense cost control				 
	     Defense procurement				 
	     Department of Defense contractors			 
	     Naval procurement					 
	     Operational testing				 
	     Performance management				 
	     Program management 				 
	     Risk management					 
	     Advanced SEAL Delivery System			 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-07-745

   

     * [1]Results in Brief
     * [2]Background
     * [3]Navy Assumed Responsibility for ASDS Problems through Its De

          * [4]Over Time, the Navy Assumed the Cost and Responsibility for
          * [5]Navy's Cost-Reimbursable Contracts Provided Little Incentive
          * [6]Authorizing Work before Reaching Agreement on Key Terms and

     * [7]DOD Evaluating Future Options for Meeting Required Capabilit

          * [8]Additional Procurements Canceled Because of Continuing Relia
          * [9]DOD Expects to Make a Program Decision in mid-2008

     * [10]Conclusions
     * [11]Recommendations
     * [12]Agency Comments and Our Evaluation
     * [13]Scope and Methodology
     * [14]Technology Assumptions Optimistic
     * [15]Initial Cost Projections Harbingers of Difficulties to Come
     * [16]Government and Contractor Management Was Ineffective
     * [17]GAO's Mission
     * [18]Obtaining Copies of GAO Reports and Testimony

          * [19]Order by Mail or Phone

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

Report to the Subcommittee on Emerging Threats and Capabilities, Committee
on Armed Services, U.S. Senate

United States Government Accountability Office

GAO

May 2007

DEFENSE ACQUISITIONS

Success of Advanced SEAL Delivery System Hinges on Establishing a Sound
Contracting Strategy and Performance Criteria

GAO-07-745

Contents

Letter 1

Results in Brief 2
Background 3
Navy Assumed Responsibility for ASDS Problems through Its Decisions and
Contracting Approach 5
DOD Evaluating Future Options for Meeting Required Capabilities 9
Conclusions 13
Recommendations 13
Agency Comments and Our Evaluation 14
Scope and Methodology 15
Appendix I Mismatches in Technology, Resources, and Managerial Capacity
Undermined Key Business Case Assumptions 17
Technology Assumptions Optimistic 17
Initial Cost Projections Harbingers of Difficulties to Come 19
Government and Contractor Management Was Ineffective 19
Appendix II Comments from the Department of Defense 21

Figure

Figure 1: ASDS Delivery Order Arrangements through March 2007 7

Abbreviations

ARAP ASDS Reliability Action Panel
ASDS Advanced SEAL Delivery System
BOA basic ordering agreement
DOD Department of Defense
FAR Federal Acquisition Regulation
JROC Joint Requirements Oversight Council
SOCOM Special Operations Command

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

United States Government Accountability Office
Washington, DC 20548

May 24, 2007

The Honorable Jack Reed
Chairman
The Honorable Elizabeth Dole
Ranking Member
Subcommittee on Emerging Threats and Capabilities
Committee on Armed Services
United States Senate

The Advanced SEAL Delivery System (ASDS), a hybrid combatant submersible,
is one of the U.S. Special Operations Command's (SOCOM) largest
investments. The ASDS is designed for clandestine delivery and extraction
of Navy SEALs and equipment in high-threat environments. In 2006, the
Department of Defense's (DOD) Quadrennial Defense Review Report
revalidated the need for the type of capabilities that ASDS is designed to
provide.

The ASDS has encountered a difficult, long, and costly development since
the initial contract was awarded in 1994. The first ASDS boat did not meet
all technical or performance requirements, yet in 2003 it was accepted by
the Navy for operational use. Since acceptance, ASDS has exhibited
significant reliability and performance issues during test and operation,
and an in-service improvement effort has begun. For the most part, the
Navy has used the same contractor to design and deliver the boat, to
develop corrections to performance and reliability problems, and to
support the boat in the field. Total program costs--including research and
development, procurement, military construction, operations and
maintenance, and military personnel costs--have reached about $885
million.

In May 2006, you requested that GAO review the status and problems facing
the ASDS program. We subsequently agreed to address the issues in two
separate efforts. This report examines how the Navy managed ASDS risks
through its contracts and the status of major technical issues and program
restructuring.

Results in Brief

The Navy accepted the ASDS in an "as is" condition to make the boat
operational, but it has not effectively overseen the contractor's efforts
to maintain, repair, and upgrade the boat, nor has it held the contractor
accountable for results, including the contractor's inability to adhere to
its own estimates of the time and cost to do the work. As problems mounted
during development and new problems arose after acceptance, the Navy
increasingly assumed responsibility for their resolution. Further, the
Navy's choice of contract type provided little incentive to control costs;
it authorized work before reaching agreement on its scope and price; and
it failed to finalize the terms of the work when that was required. While
ASDS officials reported they have attempted over the past 2 years to
address these issues, the results of more recent efforts to incentivize
the contractor's performance are not yet clear.

Because of ASDS reliability and performance problems, the boat is only
available for limited operational use. These problems prompted DOD's
decision in April 2006 to cancel purchases of additional boats as well as
to establish a program to improve the in-service ASDS and assess
alternatives to fulfill remaining operational requirements. The results of
these two latter efforts are expected to help DOD determine if ASDS can be
made reliable enough to maintain it as an operational asset and whether an
alternative development program would be preferable. A decision is planned
in mid-2008.

We are making recommendations to the Secretary of Defense to help ensure
that a decision to proceed with ASDS is based upon acceptable cost,
schedule, and performance criteria; that essential design changes are
operationally tested prior to a program decision; and that the future
contract strategy appropriately balances risk and promotes better
accountability.

DOD partially concurred with our first two recommendations and concurred
with the third one. In partially concurring with our first recommendation,
DOD commented that under its new ASDS management plan, program decisions
will be made through management reviews using specified evaluation
criteria and not solely at the completion of the critical systems reviews.
We believe that, to be complete, such criteria must be based on fully
defined scopes of work, and we have clarified the recommendation to
include both the management reviews and the stronger criteria. On the
second recommendation, DOD noted that some design changes may not be
complete by the mid-2008 decision. We have clarified our recommendation to
include testing those design changes essential to demonstrating ASDS
reliability and maintainability.

Background

The special operations forces' ASDS is a battery-powered, dry interior
submersible that is carried to a deployment area by specially configured
688-class submarines. ASDS is intended to provide increased range,
payload, on-station loiter time, endurance, and communication/sensor
capacity over current submersibles. The 65-foot-long, 8-foot-diameter ASDS
is operated by a two-person crew and includes a lock out/lock in diving
chamber.1 SOCOM is the resource sponsor and provides the requirements and
funding, and the Naval Sea Systems Command--the Navy's technical expert
for major undersea systems--is the program manager responsible for
overseeing the prime contractor, Northrop Grumman Corporation. Over the
years, the ASDS acquisition milestone decision authority has resided at
various levels within DOD.

In 1994, the Navy awarded a $70 million cost-plus incentive fee contract2
to Westinghouse Electric Corporation's Oceanic Division in Annapolis,
Maryland, for detailed design, construction, testing, documentation,
refurbishment, and delivery of the first ASDS with the option to build one
or two more systems. In 1996, Northrop Grumman bought this division and
assumed responsibility for the Annapolis division's performance on the
ASDS contract. In December 2005, ASDS program management lead was
reassigned to Northrop Grumman in Newport News, Virginia, which has
greater technical experience in submarines, and Northrop Grumman
Electronic Systems in Annapolis is assisting.

The original program's schedule called for delivery of the first boat in
July 1997. However, numerous technical problems with key subsystems
contributed to performance shortfalls, schedule delays, and cost
increases. In August 2001, the Navy program office took what it called
"conditional" preliminary acceptance of the first boat from Northrop
Grumman under an agreement that all requirements needed for final
acceptance would be completed within 1 year, requirements that the
contractor was unable to accomplish. On June 26, 2003, the Navy elected to
accept the ASDS boat in an "as is" condition, and incorporated additional
waivers, deviations, and engineering change proposals into the contract.
As a result, acceptance of the ASDS boat did not require any additional
actions on the part of the contractor. Further, the Navy did not seek any
consideration from the contractor because Navy officials believed at the
time that the ASDS met virtually all of its requirements. By that time,
the total costs for the ASDS development contract had already increased
from $70 million to more than $340 million.

1A chamber used to treat divers suffering from decompression sickness,
which can be caused by descending below sea level.

2A cost-plus incentive fee contract as a cost-reimbursement contract that
provides for the amount a contractor earns as profit or fee to be adjusted
based on the contractor's ability to meet established cost targets.
Federal Acquisition Regulation (FAR) 16.304.

In October 2003, following the Navy's acceptance of ASDS, the Navy
negotiated and signed a basic ordering agreement (BOA)3 with Northrop
Grumman to provide a range of goods and services to support the ASDS
program. For example, the BOA enabled the Navy to order engineering and
design services; overhaul, repair, and inspection services; logistical
support; and spare parts and materials for a 3-year period. The BOA was
extended an additional year in 2006. To expedite the contracting process,
the BOA established specific labor rates for different types of service,
such as program office, technical, engineering, operations, and quality
support. Through March 2007, the Navy issued 26 delivery orders with an
estimated value of over $84 million. The duration of the current BOA
extends through September 2007, and the Navy anticipates awarding a new
BOA for another 2 years while overall ASDS performance is reevaluated.
Under another BOA, Northrop Grumman is also providing ASDS engineering
services, such as engineering changes and drawing updates, for Portsmouth
Naval Shipyard.

In assessing the ASDS program we drew heavily from our previous work on
best practices in defense acquisitions. This work has shown that both a
sound business case and effective contracting strategy are essential for
success. A sound business case involves firm requirements and mature
technologies, a knowledge-based acquisition strategy, realistic cost and
schedule estimates, and sufficient funding. An effective contracting
strategy involves selecting a contractor with proper expertise, choosing
contracting approaches that effectively balance risk, and effectively
managing and assessing contractor performance; all of which are intended
to promote accountability for outcomes and protect the taxpayers'
interests.

3A basic ordering agreement (BOA) is a written understanding between a
government entity and a contractor that contains the terms and clauses
applying to future orders; describes the types of supplies and services to
be provided; and contains the methods for providing, issuing, and
delivering future orders. A BOA is not a contract. FAR 16.703. For
example, a BOA differs from a standard contract in that the specific goods
and services to be provided, their cost, and the delivery schedule or
period of performance are not established until an order is issued.

Critical flaws in the Navy's initial business case contributed to ASDS's
acquisition challenges and increased the government's risk. We have
previously reported4 that the capabilities required of the boat
outstripped the contractor's resources in terms of technical knowledge,
time, and money. The Navy's overly optimistic assumptions about the
contractor's ability to readily incorporate existing submersible and
commercial technology into the ASDS resulted in a mismatch between
technologies and needed capabilities and an ill-advised decision to
combine developmental and operational testing. Further information on the
technical, cost, and management issues that undermined the ASDS's initial
business case may be found in appendix I.

Navy Assumed Responsibility for ASDS Problems through Its Decisions and
Contracting Approach

As existing problems mounted during development and new ones arose after
acceptance, the Navy increasingly assumed responsibility for resolving
them. This responsibility required additional time and money over the
targets that had been established by the ASDS development contract. Since
accepting the ASDS in June 2003, SOCOM has continued to invest millions of
dollars to fix both old and new problems. The prime contractor has had
little incentive to control costs given the Navy's choice of certain
cost-reimbursable contract types. Navy officials say they accept more risk
of performance because ASDS relies on new, highly technical subsystems
that are inherently risky. The Navy's risk also increased because it
authorized work before reaching agreement on key contract terms and
conditions and failed to finalize them in a timely manner, indicating a
lack of discipline in the contracting process.

Over Time, the Navy Assumed the Cost and Responsibility for Correcting ASDS
Problems

Resolving the flawed initial business case required additional time and
money, far exceeding the target cost and delivery time frames established
under the ASDS September 1994 development contract. For example, the
development contract was awarded for about $70 million with an expected
delivery date of the first ASDS boat in July 1997. When the contractor
proved unable to meet these time frames, the Navy found itself having to
rebaseline the program in 1998 and 1999, more than doubling the estimated
development cost and extending the delivery schedule by more than 2 years.
Ultimately the development cost almost quintupled.

4GAO, Defense Acquisitions: Advanced SEAL Delivery System Program Needs
Increased Oversight, [23]GAO-03-442 (Washington, D.C.: Mar. 31, 2003).

During the course of ASDS's development, the Navy gradually assumed
responsibility for addressing ASDS's technical problems by awarding
separate contracts to other organizations to develop key components. The
contractor's lack of expertise in key technologies, such as the propeller
and battery, contributed to the Navy's decision to seek outside expertise
to develop alternative solutions. More information on these actions is
provided in appendix I.

The Navy finally accepted the first ASDS boat in June 2003 in an "as is"
condition. Since the June 2003 acceptance, however, SOCOM has continued to
invest millions of dollars to address old and new technical and
reliability issues. Through March 2007, the Navy has issued delivery
orders with an estimated value of about $84 million under the BOA with
Northrop Grumman. Much of the funding has been for efforts to correct
design deficiencies and to improve ASDS's reliability.

Navy's Cost-Reimbursable Contracts Provided Little Incentive to the Contractor
to Control Costs

Arrangements that appropriately share risk, incentivize performance, and
provide for accountability promote successful acquisition outcomes. The
government can choose from a range of contract types available to it that
gives it flexibility to acquire goods and services. The selection of
contract type is generally a matter of risk allocation: fixed-price
contracts place the risks associated with performing the contract on the
contractor; cost-type contracts share the risk between the contractor and
the government. The risk associated with performance shifts between the
parties depending on the type of cost contract selected. In selecting the
contract type, the government must consider the difficulty of providing
the goods and services in the time allocated for contract performance. For
example, when the risks are minimal or can be predicted with an acceptable
degree of certainty, such as when the government and the contractor have
sufficient knowledge of the effort required, then the government uses a
fixed-price contract, and the contractor has full responsibility for the
performance costs and the resulting profit or loss. In contrast, when the
extent of product knowledge is more limited, the government uses a
cost-reimbursable contract; the government assumes more risk and may try
to motivate the contractor's performance by using various incentive or
award fee provisions.

Our review found that nearly all of the $84 million in design,
integration, and reliability improvement work authorized under the Navy's
October 2003 BOA with Northrop Grumman used some form of a
cost-reimbursable contract. About 6 percent were conducted under a
fixed-price type arrangement. Of the first 18 delivery orders issued
through early May 2005, 14 were either cost-plus fixed fee or labor-hour
orders. Cost-plus fixed fee arrangements negotiate the fee at the
inception of the contract and do not vary with the actual costs incurred
by the contractor. Labor-hour contracts provide for direct labor hours at
specified fixed rates that include wages, overhead, general, and
administrative expenses. As profit and other expenses are already included
in the rates charged to the government, the orders provided no profit
incentive for the contractor to control costs or work efficiently.
Correspondingly, our analysis found that the ASDS contractor often
exceeded the initial estimates of the time and cost required to complete
the work: 12 of the 26 delivery orders issued under the BOA exceeded the
initial cost estimates, while the delivery schedule was extended on 20 of
the 26 orders. Figure 1 shows the value of all delivery orders and
subsequent modifications by contract type through March 2007, based on the
year the order was initially issued.

Figure 1: ASDS Delivery Order Arrangements through March 2007

Navy officials told us that they chose cost-plus fixed fee or labor-hour
orders, in part, because ASDS relied on many new and highly technical
subsystems that were inherently risky. The ASDS contracting officer told
us that the choice of cost-plus fixed fee or labor-hour orders reflected
the perceived risk in the efforts, that is, the technical requirements and
the work that needed to be done were not always well-defined or known in
advance. Navy officials reported, however, that to get the contractor to
more actively manage and be accountable for success, the Navy has
increased the use of award and incentive fee provisions on its cost-type
orders, placing at least some of the contractor's potential fee at risk.
For example, Navy officials noted that two of the three delivery orders
issued in 2006--representing about 80 percent of the value of ASDS work
ordered under new delivery orders during the year--contained award or
incentive fee provisions. While the Navy officials acknowledged that it
was too early to quantify the results of these approaches, preliminary
indications are that the contractor's performance has improved and that
the arrangements are providing sufficient risk sharing and monetary
incentives to motivate contractor performance. Further, the contracting
officer anticipated that the Navy would use more fixed-price arrangements
as more experience is developed with ASDS repair and maintenance
requirements.

Authorizing Work before Reaching Agreement on Key Terms and Conditions Increased
the Navy's Risk

Our analysis also found that the Navy often initiated work using
undefinitized contract actions; that is, before the Navy and contractor
had reached agreement on key terms and conditions of the delivery order,
such as the scope of the work to be performed and the price of that work.
While this approach allows agencies to begin needed work quickly, it also
exposes the government to potentially significant additional costs and
risk. For example, in September 2006 we reported on how DOD addressed
issues raised by the Defense Contract Audit Agency in audits of
Iraq-related contract costs.5 We found that DOD contracting officials were
less likely to remove costs questioned by auditors if the contractor had
already incurred those costs while the contract action was undefinitized.

Our analysis found that 10 of the 26 ASDS delivery orders--accounting for
about 14 percent of the work--were initiated as undefinitized contract
actions. In most cases, the Navy justified the use of this approach by
stating that the work needed to begin immediately to meet urgent
operational requirements. For 7 of these 10 orders, the Navy failed to
definitize the orders within the 180-day time frame required under defense
acquisition regulations, taking instead from 228 to 509 days. In three
cases, the Navy definitized the orders after the work had been completed.

5GAO, Iraq Contract Costs: DOD Consideration of Defense Contract Audit
Agency's Findings, [24]GAO-06-1132 (Washington, D.C.: Sept. 25, 2006).

The delivery order to replace the ASDS's hydraulic reservoir illustrates
the need to clearly define the scope of the work, provide effective
management and oversight, and hold the contractor accountable for
outcomes. The delivery order issued to the contractor on June 10, 2005,
was a $1.0 million cost-plus fixed fee undefinitized contract to replace
the ASDS's hydraulic reservoir. In October 2005, the contractor reported
it would need about $444,000 extra to complete the project. Rather than
provide additional funds, the Navy elected to reduce the scope of the
work, and the order was definitized on March 1, 2006--nearly 9 months
after the work was initially authorized--at a cost of about $937,000. Two
days later, the contractor reported that the projected cost of the work
had almost doubled to more than $1.85 million. In a letter to the
contractor, the Commander, Naval Sea Systems Command, noted that at no
time during negotiations had the contractor identified the potential cost
growth. Nevertheless, as of December 20, 2006, a further modification to
the delivery order increased the estimated cost to $2.8 million and
extended the delivery date by 60 days.

Navy officials acknowledged that the use of undefinitized contract actions
and the failure to definitize them in a timely fashion indicated a lack of
discipline in the contracting process, but noted that officials had taken
a number of actions to address the issues, including taking more time to
define requirements and requiring the contractor to submit more realistic
cost and schedule estimates. Furthermore, the Navy has not issued an
undefinitized contract action since July 2005.

DOD Evaluating Future Options for Meeting Required Capabilities

Continuing reliability problems led to a DOD decision to cancel purchases
of additional ASDS boats, following on an earlier decision to decertify
ASDS for operational test readiness because of considerable performance
and reliability issues that required significant additional resources for
new development, investigations, rework, and design changes. Instead, DOD
directed the establishment of an ASDS improvement program and an
assessment of alternate material solutions to fulfill remaining
operational requirements. The results of both should allow DOD to make an
informed decision as to its future needs by mid-2008.

Additional Procurements Canceled Because of Continuing Reliability Problems

The Navy decertified ASDS from operational test readiness in October 2005,
following a propulsion-related failure during an attempt at follow-on
operational test and evaluation. This failure, however, was among a series
of performance and reliability issues identified over the course of ASDS
development. These performance and reliability problems have required
significant additional resources to support new development,
investigations, re-work, and design changes. Some changes have not been
fully corrected or verified in operational testing. For example, in
December 2003, while transporting ASDS mated to the host submarine, severe
damage occurred to the ASDS tail section--the propeller assembly, the
stator, and the stern planes. The Navy's investigation attributed the
cause to improper maintenance procedures--inadequate assembly by
Portsmouth Naval Shipyard personnel. The propeller assembly and stern
plane designs were improved and maintenance procedures were changed. In
June 2004 testing of repairs, however, the ASDS propeller stator broke off
and damaged the propeller. The investigation found that the stator had
been improperly manufactured by a subcontractor. The tail damage was
repaired by Northrop Grumman at the Navy's expense. During follow-on test
and evaluation in October 2005, ASDS experienced a propulsion system
failure that was attributed to improper assembly/installation of the new
titanium tail.

Because of the investigations of the December 2003 and June 2004 ASDS tail
casualties, the Navy re-evaluated the effects of unsteady hydrodynamic
loads on the boat. Although neither casualty was attributed to this type
of load, the Navy determined that, due to fatigue stresses, the aluminum
tail was not structurally adequate to last the life of the ASDS. The tail
was replaced with a titanium and composite-based tail, but the replacement
has not resolved all the tail assembly design deficiencies. To minimize
the potential for damage to the tail, the Navy has imposed operating
restrictions that limit the speed of the host submarine while transporting
ASDS, which will remain in effect until this issue has been resolved.

In September 2005, the Navy and SOCOM chartered the ASDS Reliability
Action Panel (ARAP)--consisting of technical experts from government and
industry--to conduct an independent assessment of reliability.6 After the
2005 propulsion system failure, the ARAP was asked to assess ASDS's
readiness to resume testing. ARAP's report indicated that there were
numerous examples of unpredicted component reliability problems and
failures resulting from design issues, and recommended not resuming
testing until detailed reviews of mission critical systems were completed.
In November 2005, SOCOM restructured the ASDS program to focus on
improving reliability of the existing boat before investing in additional
boats. The existing boat is currently available only for limited
operational use.

6The charter for the ARAP is to provide an independent assessment of ASDS
reliability and provide recommended ASDS design, process, and procedural
changes to improve reliability or mitigate shortfalls.

In April 2006, DOD canceled plans to procure follow-on ASDS boats and
directed the Navy and SOCOM to (1) establish an ASDS-1 improvement program
to increase the performance of the existing boat to the required level, to
insert technologies to avoid obsolescence, and to complete operational
testing and (2) assess alternate material solutions to fulfill remaining
operational requirements. In May 2006, DOD reported to the congressional
defense committees that the first ASDS would be maintained as an
operational asset, and that an ASDS improvement program was planned
through fiscal year 2008. As currently structured, the ASDS reliability
improvement program includes four elements

           o ASDS Phase 1 and Phase 2 critical systems reviews,

           o technical peer reviews,

           o reliability builds or upgrades, and

           o verification testing.

The results of the Phase 1 critical systems review are due in June 2007
and are expected to include prioritized corrective actions and associated
cost and schedule estimates.7 According to Navy officials, the Phase 1
results are expected to identify critical upgrades to improve reliability
and make ASDS-1 a viable operational asset.8

7The Phase 1 program is intended to address seven systems, including (1)
hydraulics; (2) battery and power distribution; (3) main propulsion and
thruster maneuvering; (4) life support; (5) variable and freeboard
ballast; (6) sensors; and (7) host submarine interface. The Phase 1
program will also address five cross-system technical areas: hydrodynamics
(based on a study of the entire vehicle, across all host platforms);
vibration; naval architecture (weights); electromagnetic compatibility;
and corrosion issues.

At-sea tests to verify that corrections result in improved performance and
reliability are being conducted. In October 2006 ASDS completed a
successful 2-week underway period operating from a host submarine to
verify and test repairs that were made to the propulsion system. In
February and March 2007, following installation of 15 reliability
improvements, including a newly designed hydraulic reservoir and
environmental control unit, ASDS verification testing was conducted. This
testing consisted of nine underways for a total 113 operating hours.
According to SOCOM, there were no failures. Follow-on operational test and
evaluation is scheduled for the second half of fiscal year 2008. It is not
certain, however, the extent to which the upgrades identified by the Phase
1 critical systems review will be incorporated into the ASDS for this
operational test.

DOD Expects to Make a Program Decision in mid-2008

DOD also directed the Navy and SOCOM to conduct an assessment of alternate
material solutions to fulfill remaining operational requirements. An
independent cost and capability trade study is under way for the purpose
of developing models for both the ASDS and a hybrid combatant submersible
to support concept design-level trade studies. A final report is expected
by the end of June 2007. SOCOM has completed a requirements analysis that
identified undersea clandestine maritime mobility gaps for special
operations forces insertion and extraction as well as the conduct of
undersea tasks. According to SOCOM, in February 2007, it submitted a
memorandum on these issues to DOD's Joint Staff for submission to the
Joint Requirements Oversight Council (JROC). Upon JROC approval, the
memorandum is expected to serve in-lieu of an Initial Capabilities
Document for use in the alternate material solutions analysis. This
process is similar to an analysis of alternatives and is expected to
assess a broad range of potential material solutions. The joint Navy-SOCOM
alternate material solutions analysis is expected to be completed by
February 2008.

A program decision is planned in mid-2008, after the ASDS improvement
program and alternate material solutions analysis are completed. According
to SOCOM and Navy officials, the results of the alternate material
solutions analysis, in conjunction with the operational testing of the
changes made in response to the reliability improvement program, should
provide DOD by mid-2008 with sufficient information to make an informed
decision on the direction DOD should take to meet its operational needs.

8The Phase 2 critical systems review is in the planning stage but expected
to be complete in December 2007. Technical Peer reviews are ongoing
throughout the improvement program. One ASDS Reliability build or upgrade
has been completed and two more are planned through 2008.

Conclusions

Had the original business case for ASDS been properly assessed as an
under-resourced, concurrent technology, design, and construction effort
led by an inexperienced contractor, DOD may have adopted an alternative
solution or strategy. Ironically, after having invested about $885 million
in nearly 13 years, DOD may still face this choice. As to lessons learned,
DOD's actions to make the boat operational came at great expense to the
government. Further, DOD's inadequate program and contract management in
essence made the prime contractor's poor performance acceptable. These
actions underscore the need to have a sound business case at the start of
a program, coupled with an acquisition strategy that enables the
government to alter course as early as possible. Instilling more
discipline into the contracting process is a step in the right direction,
but its success hinges on DOD's willingness to hold the contractor
accountable. From this point forward, DOD will be conducting reviews and
testing to guide its decisions on how to proceed with the first ASDS boat.
It is important that DOD be guided by sound criteria and a sound
contracting strategy as it makes these decisions.

Recommendations

We are making three recommendations. In order to prevent the government
from accepting additional undue risks and expense on ASDS, the Secretary
of Defense should:

           o Establish acceptable cost, schedule, and performance criteria,
           based on fully defined scopes of work, and assess the boat's
           ability to meet these criteria at the Phase 1 and Phase 2 critical
           systems reviews and at the management reviews. If, by the time of
           the program decision in mid-2008, ASDS does not meet acceptable
           cost, schedule, or performance criteria, we recommend that the
           Secretary of Defense discontinue the effort and not proceed with
           further tests.

           o Ensure that, if the review results meet acceptable cost,
           schedule, and performance criteria, the design changes resulting
           from the Phase 1 critical systems review essential for
           demonstrating ASDS reliability and maintainability be incorporated
           in sufficient time to be tested under operational conditions prior
           to the planned mid-2008 decision on how to best meet special
           operations forces' requirements.

           o Require the Navy to include provisions in the ASDS contracting
           strategy chosen when the existing BOA expires that (1)
           appropriately balance risk between the government and the
           contractor through the contract types selected, (2) incentivize
           the contractor's performance and promote accountability for
           achieving desired outcomes by properly structuring the award and
           incentive fees, and (3) provide the kind of management and
           oversight of the program necessary to hold the contractor
           accountable for performance.

Agency Comments and Our Evaluation

DOD partially concurred with our first two recommendations that it
establish acceptable cost, schedule, and performance criteria for ASDS-1;
assess the boat's ability to meet these criteria; and test design changes.
DOD concurred with our third recommendation on the Navy's contracting
strategy to balance risk between the government and contractor; properly
structure award and incentive fees to incentivize contractor performance
and promote accountability; and provide necessary management and oversight
to hold the contractor accountable. DOD's written comments are reprinted
in appendix II.

In partially concurring with our first recommendation, DOD commented that
under its new ASDS management plan, program decisions will be made through
management reviews using specified evaluation criteria and not solely at
the completion of the critical systems reviews. The Navy provided a copy
of its March 6, 2007 management plan for ASDS-1 improvement. This plan
represents a positive step in establishing a structured strategy for the
ASDS-1 improvement program, including defining management
oversight--roles, responsibilities, and authorities--and providing
specific criteria to guide the program's continuation or termination
decisions. However, the criteria may not go far enough. Specifically, the
criteria may not be sufficient for making an informed program
decision--the scope of the proposed ASDS's critical systems upgrades may
not be fully defined and realistic cost and schedule estimates may not be
developed before the ASDS improvement effort is approved to proceed.
Further, the management plan does not address the Phase 2 critical systems
review decision. We have clarified this recommendation to incorporate the
management program reviews and decisions and added language to focus more
directly on the need for fully defined scopes of work. Fully defining the
scopes of work is key to realistic cost and schedule estimates.

DOD partially concurred with our second recommendation, but took issue
with operationally testing all Phase 1 critical systems review design
changes before the planned mid-2008 decision. DOD stated that there are
identified changes that will take more time and that a decision on what
changes to implement will depend on various factors such as time, funding,
and scope. However, it remains unclear the extent to which upgrades that
affect performance will be incorporated and tested prior to the mid-2008
program decision. We modified the wording to require testing essential
design changes prior to a 2008 decision.

DOD also provided technical comments, which we have incorporated as
appropriate.

Scope and Methodology

To assess the ASDS contracting strategy, we reviewed the ASDS acquisition
strategy, program documents, contract documentation, and numerous
historical documents, including the Navy's 1997 Independent Review Team
assessment, the joint Navy/SOCOM 1999 Independent Review Team assessment,
and the ASDS Reliability Action Panel's 2006 report. In our assessment of
ASDS, we drew upon our large body of previous work on best practices for
developing products and developing sound business cases. To determine the
status of major ASDS technical issues and program restructuring, we
examined program status documents and briefings, test results, technical
reports, and various memos and guidance. We did not assess the
appropriateness of accepting the first ASDS boat in an "as is" condition.
In performing our work, we obtained information and interviewed officials
from the U.S. Special Operations Command; the Naval Sea Systems Command's
ASDS program and contracting offices; and the Navy's Operational Test and
Evaluation Force. We conducted our review from July 2006 to April 2007 in
accordance with generally accepted government auditing standards.

We are sending copies of this report to the Secretary of Defense; the
Secretary of the Navy; the Commander, U.S. Special Operations Command; the
Director of the Office of Management and Budget; and interested
congressional committees. We will make copies available to others upon
request. In addition, the report will be made available at no charge on
GAO's Web site at http://www.gao.gov .

If you or your staff have any questions about this report, please contact
me at (202) 512-4841 or by email at [email protected] . Contact points
for our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Contributors to this report include
Catherine Baltzell, David Best, Timothy DiNapoli, David Hand, John Krump,
Mary Quinlan, and Robert Swierczek.

Paul L. Francis
Director
Acquisition and Sourcing Management

Appendix I: Mismatches in Technology, Resources, and
Managerial Capacity Undermined Key Business Case Assumptions

Putting a development program on sound footing from the beginning requires
that the selected technology be capable of meeting the government's
requirements and able to be developed within needed time frames and
available resources. Further, the contractor must have the technical and
managerial capacity to effectively execute the contract, while the
government must be able to provide effective program and management
oversight. On the ASDS program, however, these conditions were not present
at the start of or effectively applied during the development effort,
undermining the ability to successfully design and deliver an operational
ASDS boat.

Technology Assumptions Optimistic

A key to promoting successful acquisition outcomes is matching available
resources with the requirements for the proposed system. Specifically, the
government must match its needs with technology that has been proven to
work in a realistic environment before committing to production. In this
case, the Navy assumed that the conceptual design was technically sound
and that the design would incorporate a large amount of fully developed
submersible or commercially available technology. The Navy's September
1993 acquisition strategy concluded that the low risk of integrating
technologies already in use on existing submarines and submersible
vehicles eliminated the need for an advanced development model or a
demonstration/validation phase with developmental and operational testing.
Further, the Navy determined that by concurrently addressing manufacturing
and test issues during the design process, lengthy redesign periods would
be avoided. Consequently, in September 1994, the Assistant Secretary of
the Navy for Research, Development, and Acquisition (the designated
program decision authority) approved Milestone II (development) and
replaced a sequential test program (development tests, operational tests,
technical evaluations, and operational test and evaluation) with a
consolidated and integrated test program. At the same time, the ASDS
program's Milestone III (production decision) was waived because of the
limited number of procurement quantities.

The Navy's confidence in the maturity of technology also played a large
role in its assessment of proposed designs for the ASDS, and in turn, in
its selection of the contractor. The Navy concluded that the contractor's
conceptual design exceeded various requirements, and, based on its
maturity, the proposed design approach was low risk.1 From the outset, the
Navy's assessments of the contractor's design solution, experience, and
management capabilities proved incorrect. Incorporating commercial off the
shelf components into the ASDS was more challenging than expected. For
example, the contractor had difficulty understanding underwater shock
performance requirements and eventually subcontracted the shock design
efforts to a specialty firm.

During the course of ASDS's development, the Navy gradually assumed
responsibility for addressing ASDS's technical problems by awarding
separate contracts to other organizations to develop key components. The
contractor's lack of expertise in key technologies, such as the propeller
and battery, contributed to the Navy's decision to seek outside expertise
to develop alternative solutions. In turn, the Navy provided these
components to Northrop Grumman as government-furnished equipment,
accepting both the cost and the risk for their performance and paid
Northrop Grumman millions of dollars to integrate the components onto the
ASDS boat. These actions include the following examples:

           o The ASDS program has invested over $26 million since 2000 to
           design, develop, and integrate a new lithium-ion battery to
           replace the inadequate silver-zinc battery provided by the prime
           contractor. In October 2000, the Navy awarded Northrop Grumman a
           $2.1 million contract modification to design, develop, test, and
           incorporate a lithium-ion polymer battery. By September 2003, a
           series of contract modifications had increased the cost of the
           prototype battery effort to $5.9 million and had extended delivery
           until February 28, 2004. The Navy sought other experts to identify
           and test an alternative lithium-ion battery that could be housed
           in the existing ASDS titanium battery bottles. In May 2004, after
           evaluating three proposals, the Navy awarded Yardney Technical
           Products a $9.3 million contract for a complete ASDS shipset
           battery that was delivered in 2005. To date, the Navy has provided
           Northrop Grumman more than $6 million to integrate the lithium ion
           battery.

           o The Navy invested over $1.5 million to redesign the first ASDS
           propeller, which was a major source of noise during testing.
           Rather than task Northrop Grumman to redesign the propeller, the
           Navy awarded a $1.5 million contract in 2002 to Pennsylvania State
           University's Applied Research Laboratory to design and build a new
           composite propeller. Northrop Grumman installed this propeller in
           April 2003 at a cost of about $140,000. Pennsylvania State
           University has since provided two additional propellers at a cost
           of about $576,000.

1In contrast, while noting that the other two competitors had significant
experience in designing, building, and testing submarines, the Navy
identified weaknesses in their proposed designs that would have required
significant government assistance.

Initial Cost Projections Harbingers of Difficulties to Come

Another key to successful acquisition outcomes is to accurately estimate
the resources needed to develop and produce a system. The Navy had
information before awarding the ASDS contract indicating, however, that
the contractor's proposed price might not be realistic. Specifically, the
contract's negotiated price was about 60 percent less than the Navy's
November 1993 cost and operational effectiveness analyses.2 The Navy's
price evaluation team concluded that the contractor's proposed amounts for
ASDS development and production were underestimated and that overruns were
likely. Among the lessons learned cited by two independent review teams in
1997 and 1999 were that the program was underfunded, in part because the
Navy did not give sufficient weight to concerns raised by cost analysts,
and that the contractor "bid to the budget."

Government and Contractor Management Was Ineffective

The government's and contractor's capacity to effectively manage a program
is another key determinant in promoting successful outcomes. The Navy
concluded in 1994 that overall, the contractor's design, management
capabilities, and cost control capabilities were equal to or better than
the two other competitors for the ASDS program and that the contractor had
adequate experience in submersible design, construction, and
certification. This assessment, as well as the government's capacity to
provide effective management and oversight of the ASDS program, soon
proved incorrect.

The Navy's 1997 and the joint Navy/SOCOM 1999 independent review teams
identified weaknesses in the contractor's capacity to effectively address
technical issues and manage the ASDS program. One team noted that the
contractor had considerable difficulty in interpreting the underwater
shock portion of the ASDS performance requirements. The teams attributed
these difficulties, in part, to the contractor's lack of experience in
submarine design, in contrast to the initial business case assumption.
Further, the reviews noted that the Navy's review of the contractor's
design products revealed that substandard design methodology was used,
resulting in unacceptable system design. The review teams also found that
this lack of experience had a detrimental effect on the contractor's
overall ability to understand technical nuances and may have prevented the
contractor from applying appropriate management attention when needed. For
example, the contractor used two different systems for reporting and
managing the program; the contractor's cost reports contained errors; and
its estimates to complete the effort were updated only every 6 months,
resulting in unanticipated and sudden cost increases being reported to the
Navy. Additionally, the contractor constrained its estimates by imposing
"management challenges," which the team concluded were in reality
artificial reductions imposed by the contractor to obscure the
contractor's problems and mislead attempts to analyze its projected costs.

2It should be noted that the other two competing contractors' proposals
were also within the same cost range-well below the government's estimate.

Further, the review teams concluded that lapses in effective management by
both the government and the contractor contributed to the program's
challenges. The teams identified several causes for these lapses,
including

           o a lack of contractor experience in submarine design and
           construction;
           o the government's lack of influence or visibility into problems
           between the contractor and the subcontractors;
           o a focus on technical rather than management aspects of the
           program by both the program office and the contractor;
           o ineffective oversight by the program office and little attention
           to the financial performance of the contractor; and
           o frequent changes in the contractor's project management team.

The Navy program office and Northrop Grumman have taken steps to improve
the program's management. In 2005, the Naval Sea Systems Command
reorganized the program office for a greater emphasis on special
operations programs. In December 2005, Northrop Grumman reassigned the
ASDS program's management lead to its Newport News division, which has
greater management and technical experience in submarines. Northrop
Grumman Newport News is leading the Phase 1 ASDS critical systems review,
and Northrop Grumman Electronic Systems is assisting.

Appendix II: Comments from the Department of Defense

(120525)

GAO's Mission

The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities and to help improve the performance and
accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.

Obtaining Copies of GAO Reports and Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost
is through GAO's Web site ( www.gao.gov ). Each weekday, GAO posts
newly released reports, testimony, and correspondence on its Web site. To
have GAO e-mail you a list of newly posted products every afternoon, go to
www.gao.gov and select "Subscribe to Updates."

Order by Mail or Phone

The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent of
Documents. GAO also accepts VISA and Mastercard. Orders for 100 or more
copies mailed to a single address are discounted 25 percent. Orders should
be sent to:

U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
D.C. 20548

To order by Phone: Voice: (202) 512-6000
TDD: (202) 512-2537
Fax: (202) 512-6061

To Report Fraud, Waste, and Abuse in Federal Programs

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm
E-mail: [email protected]
Automated answering system: (800) 424-5454 or (202) 512-7470

Congressional Relations

Gloria Jarmon, Managing Director, [email protected] (202) 512-4400 U.S.
Government Accountability Office, 441 G Street NW, Room 7125 Washington,
D.C. 20548

Public Affairs

Paul Anderson, Managing Director, [email protected] (202) 512-4800
U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548

www.gao.gov/cgi-bin/getrpt?GAO-07-745 .

To view the full product, including the scope
and methodology, click on the link above.

For more information, contact Paul Francis at (202) 512-4841 or
[email protected].

Highlights of [34]GAO-07-745 , a report to the Subcommittee on Emerging
Threats and Capabilities, Committee on Armed Services, U.S. Senate

May 2007

DEFENSE ACQUISITIONS

Success of Advanced SEAL Delivery System Hinges on Establishing a Sound
Contracting Strategy and Performance Criteria

The Advanced SEAL Delivery System (ASDS) is a hybrid combatant submersible
providing clandestine delivery and extraction of Navy SEALs and equipment
in high-threat environments. The first ASDS has had significant
performance issues and has cost, to date, over $885 million. In May 2006,
you requested that GAO review ASDS. This report examines (1) how the Navy
managed ASDS risks through its contracts and (2) the status of major
technical issues and program restructuring.

[35]What GAO Recommends

GAO is making recommendations to the Secretary of Defense to help ensure
that a decision to proceed with ASDS is based on acceptable cost,
schedule, and performance criteria; that essential design changes are
operationally tested prior to a program decision; and that the future
contract strategy appropriately balances risk and promotes better
accountability. DOD partially concurred with GAO's first two
recommendations and concurred with the third recommendation.

The Navy did not effectively oversee the contracts to maintain, repair,
and upgrade the ASDS and failed to hold the prime contractor accountable
for results. The Navy took responsibility for correcting the boat's
deficiencies while continuing to pay the costs and fees of the prime
contractor under cost reimbursable contracts to execute the corrections.
Before accepting the boat, the Navy went to sources other than the prime
contractor to obtain better designs for the propeller and battery and then
paid the prime contractor to install them. When the Navy accepted the ASDS
in 2003 in an "as is" condition, it relieved the contractor from having to
take any additional actions to correct known problems. Since then, the
U.S. Special Operations Command has continued to invest millions of
dollars to fix existing problems and address new ones in an attempt to
make the boat operational. In making this additional investment, the Navy
entered into contracts with the prime contractor that provided little
incentive to control costs, authorized work before reaching agreement on
the scope and price of the work to be performed, and failed to finalize
the terms of the work within required time frames. Meanwhile, the
contractor's performance continued to be poor, often exceeding initial
estimates for the time and cost required to perform the work. ASDS
officials took actions over the past 2 years to address these issues, but
acknowledge that it is too early to determine the effectiveness of more
recent actions to incentivize the contractor's performance.

Continuing problems with the existing ASDS led to DOD's April 2006
decision to cancel plans to buy additional ASDS boats, establish an
improvement program for the in-service ASDS, and conduct an assessment of
alternative material solutions to fulfill remaining operational
requirements. The problems have seriously degraded the boat's reliability
and performance, and the boat is only available for limited operational
use. The results of these improvement and assessment efforts are expected
to provide DOD the knowledge needed to determine whether ASDS's
reliability can be improved cost-effectively to make ASDS an operational
asset and whether an alternative development program is needed to meet the
remaining operational requirements. A program decision is planned in
mid-2008, after the ASDS improvement program and assessment of alternate
material solutions are completed.

References

Visible links
  23. http://www.gao.gov/cgi-bin/getrpt?GAO-03-442
  24. http://www.gao.gov/cgi-bin/getrpt?GAO-06-1132
  34. http://www.gao.gov/cgi-bin/getrpt?GAO-07-745
*** End of document. ***