Defense Acquisitions: Missile Defense Agency's Flexibility	 
Reduces Transparency of Program Cost (30-APR-07, GAO-07-799T).	 
                                                                 
Over the next 5 years the Missile Defense Agency (MDA) expects to
invest $49 billion in the Ballistic Missile Defense (BMD)	 
system's development and fielding. MDA's strategy is to field new
capabilities in 2-year blocks. In January 2006, MDA initiated its
second block--Block 2006--to protect against attacks from North  
Korea and the Middle East. Congress requires GAO to assess MDA's 
progress annually. GAO's March 2007 report addressed MDA's	 
progress during fiscal year 2006 and followed up on program	 
oversight issues and the current status of MDA's quality	 
assurance program. GAO assessed the progress of each element	 
being developed by MDA, examined acquisition laws applicable to  
major acquisition programs, and reviewed the impact of		 
implemented quality initiatives.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-799T					        
    ACCNO:   A68886						        
  TITLE:     Defense Acquisitions: Missile Defense Agency's	      
Flexibility Reduces Transparency of Program Cost		 
     DATE:   04/30/2007 
  SUBJECT:   Accountability					 
	     Ballistic missiles 				 
	     Defense capabilities				 
	     Defense cost control				 
	     Defense procurement				 
	     Financial analysis 				 
	     Missiles						 
	     Operational testing				 
	     Quality assurance					 
	     Weapons systems					 
	     Program goals or objectives			 
	     Command, Control, Battle Management, and		 
	     Communications System				 
                                                                 
	     MDA Aegis Ballistic Missile Defense		 
	     Program						 
                                                                 
	     MDA Airborne Laser Program 			 
	     MDA Ground-Based Midcourse Defense 		 
	     Program						 
                                                                 
	     MDA Kinetic Energy Interceptor System		 
	     MDA Terminal High Altitude Area Defense		 
	     System						 
                                                                 
	     Patriot PAC-3					 

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GAO-07-799T

                 United States Government Accountability Office

Testimony before the Subcommittee on Defense, Committee on Appropriations,
U.S. House of Representatives

For Release on Delivery
Expected at 1:30 p.m. EDT
Monday, April 30, 2007

DEFENSE ACQUISITIONS

Missile Defense Agency's Flexibility Reduces Transparency of Program Cost

Statement of Paul Francis, Director, Acquisition and Sourcing Management

  GAO-07-799T

DEFENSE ACQUISITIONS

Missile Defense Agency's Flexibility Reduces Transparency of Program Cost

  What GAO Found

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

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

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

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

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

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

                 United States Government Accountability Office

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss the Missile Defense Agency's
(MDA) strategy for acquiring a Ballistic Missile Defense System (BMDS) and
its progress in developing and fielding Block 2006--the second iteration
of BMDS.

MDA's mission is to develop and field an integrated, layered Ballistic
Missile Defense System capable of defending the United States, its
deployed forces, allies, and friends against enemy ballistic missiles
launched from all ranges and during all phases of the missiles' flight. To
carry out its mission, MDA is fielding missile defense capabilities in
2-year increments known as blocks. The first block--Block 2004--fielded a
limited initial capability that included early versions of Ground-Based
Midcourse Defense (GMD); Aegis Ballistic Missile Defense (BMD); Patriot
Advanced Capability-3 (PAC-3); and Command, Control, Battle Management,
and Communications (C2BMC). Each of these components is an element of the
integrated BMDS. During calendar years 2006 and 2007, MDA is focusing
Block 2006 to enhance and field four BMDS elements--GMD, Aegis BMD,
Sensors, and C2BMC. Block 2006 is not only expected to field additional
assets, but it also continues the evolution of Block 2004 by providing
improved GMD interceptors, enhanced Aegis BMD missiles, upgraded Aegis BMD
ships, a Forward-Based X-Band Transportable radar, and enhancements to the
C2BMC software.

The National Defense Authorization Acts for fiscal years 2002 and 2005
mandate that we prepare annual assessments of MDA's ongoing cost,
schedule, testing, and performance progress. We issued our most recent
report on March 15, 2007.^1 My statement today will focus on the issues
covered in that report, specifically:

     o MDA's progress toward developing the Block 2006 configuration of the
       BMDS,
     o the flexibility granted to MDA and its effect on oversight and
       accountability, and
     o the status of MDA's efforts to improve its quality processes.

^1GAO, Defense Acquisitions: Missile Defense Acquisition Strategy  Generates
Results but Delivers  Less at  a Higher  Cost, [1]GAO-07-387  (Washington,
D.C.: Mar. 15, 2007).

  Summary

MDA continues to make progress on missile defense, but costs have grown
and less work is being completed than planned. The fielding of additional
assets and the first end-to-end test of GMD were notable accomplishments
in fiscal year 2006, as was being able to put BMDS on alert status. Yet,
MDA will not meet its original Block 2006 cost, fielding, or performance
goals. MDA will field fewer assets than planned, which will cause a
commensurate decrease in performance. Although scope has been reduced,
costs are expected to increase by about $1 billion. There is no baseline
against which to measure cost. For several reasons, we cannot be precise
about the actual cost of Block 2006. MDA defers work from block to block
and counts the cost of deferred work as a cost of the block in which the
work is performed even though that work benefits the original block. For
example, work deferred from Block 2004 is counted as a cost of Block 2006.
Element program offices report costs inconsistently, with most
underreporting costs. The cost of Block 2006 may change further because
MDA may defer other work from Block 2006 until Block 2008 to cover $478
million in fiscal year 2006 budget overruns experienced by element prime
contractors. We could not assess whether MDA is likely to achieve its
revised performance goal because too few tests have been completed to have
confidence in the models and simulations used to predict performance.
Overall, the block approach has had advantages for fielding capabilities
incrementally, but it has not proven to be a good construct for
reconciling actual cost and performance with the justifications that MDA
submits to support its budget request.

Because the BMDS program has not formally entered system development and
demonstration, application of laws that are designed to facilitate
oversight and accountability of DOD acquisition programs has effectively
been deferred. This gives MDA unique latitude to manage the BMDS.
Specifically, the BMDS cost, schedule, and performance baseline does not
have to be approved by anyone outside MDA. MDA is not yet required to
obtain independent assessments of each configuration's cost or test
results. Unlike other programs, MDA is permitted to use research and
development funds to incrementally fund all activities, including the
purchase and support of operational assets. MDA keeps others informed, but
it does not need their approval. Collectively, this flexibility enables
MDA to be more agile in its decision-making. By the same token, MDA can
revise its own baseline to field fewer assets than planned, defer work to
a future block, and increase planned cost. Over time, it becomes difficult
to reconcile cost and outcomes against original goals and to determine the
value of the work accomplished. Ultimately, Congress may know that it is
getting less than expected for its investment, but it will not necessarily
know the cost of what it did receive or whether it is being asked to again
appropriate funds for work that had been scheduled in a prior block but
could not be completed because its funding was diverted to pay for other
activities. The foregoing does not mean that MDA has acted inconsistently
with the authorities it has been granted. Rather, MDA has the sanctioned
flexibility to manage exactly as it has. It could be argued that without
this flexibility, the initial capability fielded last year and put on
alert would not have been possible. Yet, the question remains as to
whether this degree of flexibility should be retained for a program that
is planning to spend on the order of $10 billion a year for the
foreseeable future.

MDA auditors report that quality deficiencies are declining and on-time
deliveries are improving as corrective measures are implemented. For
example, MDA quality audits show that one key supplier has decreased open
quality issues by 64 percent, reduced test failures by 43 percent, and
increased on-time deliveries by 9 percent. The mechanisms being used to
improve quality assurance processes include the development of a teaming
approach to restore reliability in key suppliers, conducting regular
quality audits, adjusting award fee plans to encourage contractors to
maintain a good quality assurance program and implement industry best
practices, and continuing to incorporate key quality provisions into the
agency's prime contracts.

In our March 2007 report, we recommended that MDA establish firm baselines
for those elements considered far enough along to be in system development
and demonstration, and report against those baselines; propose an approach
for those same elements that provides information consistent with the
acquisition laws that govern baselines and unit cost reporting,
independent cost estimates, and operational test and evaluation; include
in blocks only those elements that will field capabilities during the
block period and develop a firm block baseline that includes the unit cost
of its assets; request and use procurement funds, rather than research,
development, test, and evaluation funds, to acquire fielded assets; and
conduct an independent evaluation of the ABL and KEI elements prior to
making a decision on the future of the programs.

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

Background

Missile defense is important because at least 25 countries now possess or
are acquiring sophisticated missile technology that could be used to
attack the United States, deployed troops, friends, and allies. MDA's
mission is to develop and field an integrated, layered BMDS capable of
defending against enemy ballistic missiles launched from all ranges and
during all phases of the missiles' flight. DOD has spent and continues to
spend large sums of money to defend against this threat. Since the
mid-1980s, about $107 billion has been spent, and over the next 5 years,
another $49 billion is expected to be invested. While the initial set of
BMDS assets was fielded during 2004-2005, much of the technical and
engineering foundation was laid by this prior investment. DOD also expects
to continue investing in missile defense for many more years as the system
evolves into one that can engage an enemy ballistic missile launched from
any range during any phase of the missile's flight.

To enable MDA to field and enhance a missile defense system quickly, the
Secretary of Defense, in 2002, directed a new acquisition strategy. The
Secretary's strategy included removing the BMDS program from DOD's
traditional acquisition process until a mature capability was ready to be
handed over to a military service for production and operation. Therefore,
development of the BMDS program is not segmented into concept refinement,
technology development, and system development and demonstration phases,
as other major defense acquisition programs are. Instead, MDA initiates
one development phase that incorporates all acquisition activities and
that is known simply as research and development. MDA also has approval to
use research and development funds, rather than procurement funds, to
acquire assets that could be made available for operational use.

To carry out its mission, MDA is fielding missile defense capabilities in
2-year increments known as blocks. The first block--Block 2004--fielded a
limited initial capability that included early versions of GMD, Aegis BMD,
PAC-3, and C2BMC. This was the capability that was put on alert status in
2006. MDA formally began a second BMDS block on January 1, 2006, that will
continue through December 31, 2007. This block is expected to provide
protection against attacks from North Korea and the Middle East. During
the 2-year block timeframe, MDA is focusing its program of work on the
enhancement and fielding of additional quantities of the GMD, Aegis BMD,
and C2BMC elements, as well as fielding a Forward-Based X-Band radar that
is part of the Sensors element. When MDA defined the block in March 2005,
shortly after submitting its fiscal year 2006 budget request to Congress,
it also included three other elements--Airborne Laser (ABL), Space
Tracking and Surveillance System (STSS), and Terminal High Altitude Area
Defense (THAAD)--that are primarily developmental in nature. According to
MDA, these elements were included in the block even though they were not
expected to be operational until future blocks because the elements
offered some emergency capability during the block timeframe. In March
2006, MDA removed THAAD from Block 2006. According to MDA, this action
better aligned resources and fielding plans. The development of two other
elements--Multiple Kill Vehicle (MKV) and Kinetic Energy Interceptor
(KEI)--also continued in fiscal year 2006, but these elements were not
considered part of Block 2006 because, according to MDA officials, the
elements provide no capability--emergency or operational--during the
block.

The bulk of the funding that MDA requests for the BMDS each fiscal year is
for the development, fielding, and sustainment of BMDS elements. For
example, in fiscal year 2006, funding for the nine BMDS elements
collectively accounted for 72 percent of MDA's research and development
budget. MDA requests funds for each of these elements, with the exception
of C2BMC and THAAD, under separate budget line items. In addition, MDA
issues separate contracts for each of the nine elements.

Prior to beginning each new block, MDA establishes and submits block goals
to Congress. These goals present the business case for the new block. MDA
presented its Block 2006 goals to Congress in March 2005, shortly after
submitting its fiscal year 2006 budget. At that time, MDA told Congress
that the agency expected to field the following assets: up to 15 GMD
interceptors, an interim upgrade of the Thule Early Warning Radar, a
Forward-Based X-Band radar, 19 Aegis BMD missiles, 1 new Aegis cruiser for
the missile defense mission, 4 new Aegis destroyers capable of providing
long-range surveillance and tracking, and 8 Aegis destroyers upgraded for
the engagement mission. MDA's cost goal for the development of the six
elements that compose the block, the manufacture of assets being fielded,
and logistical support for fielded assets was $19.3 billion.^2 MDA also
notified Congress of the Block 2006 performance goals established for the
BMDS. These goals were composed of numerical values for the probability of
engagement success, the land area from which the BMDS could deny a launch,
and the land area that the BMDS could defend.^3 Fiscal year testing goals
were also established by element program offices, but these goals were not
formally reported to Congress.

We examined numerous documents and held discussions with agency officials.
In determining the elements' progress toward Block 2006 goals, we looked
at the accomplishments of six BMDS elements--ABL, Aegis BMD, BMDS Sensors,
C2BMC, GMD, and STSS--that compose the Block 2006 configuration. Our work
included examining System Element Reviews, test plans and reports,
production plans, and Contract Performance Reports. We also interviewed
officials within each element program office and within MDA functional
offices. In assessing whether MDA's flexibility impacts BMDS oversight and
accountability, we examined documents such as those defining MDA's changes
to Block 2006 goals, acquisition laws for major DOD programs, and BMDS
policy directives issued by the Secretary of Defense. We examined the
current status of MDA's quality assurance program by visiting various
contractor facilities and holding discussions with MDA officials, such as
officials in the Office of Quality, Safety, and Mission Assurance. We
performed our work from June 2006 through March 2007 in accordance with
generally accepted government auditing standards.

2We have  adjusted the  cost goal  reported to  Congress to  reflect  MDA's
removal of the THAAD  element and its future  development cost from  Block
2006.

3Specifics of  the BMDS  performance  goals are  classified and  cannot  be
presented in an open forum.

  MDA Has Made Progress with Block 2006, but Scope Has Been Reduced and Costs
  Have Gone Up

MDA made progress during fiscal year 2006, but it will not achieve the
goals it set for itself in March 2005. One year after establishing its
Block 2006 goals, the agency informed Congress that it planned to field
fewer assets, reduce performance goals, and increase the block's cost
goal. It is also likely that in addition to fielding fewer assets, other
Block 2006 work will be deferred to offset growing contractor costs. MDA
is generally on track to meet its revised quantity goals, but the
performance of the BMDS cannot yet be fully assessed because there have
been too few flight tests conducted to anchor the models and simulations
that predict overall system performance. Several elements continue to
experience technical problems that pose questions about the performance of
the fielded system and could delay the enhancement of future blocks. In
addition, the Block 2006 cost goal cannot be reconciled with actual costs
because work travels to and from other blocks and individual element
program offices report costs inconsistently.

During the first year of Block 2006, MDA continued to improve the BMDS by
enhancing its performance and fielding additional assets. In addition, the
BMDS elements achieved some notable test results. For example, the GMD
element completed its first successful intercept attempt since 2002. The
test was also notable because it was an end-to-end test of one engagement
scenario, the first such test that the program has conducted. Also, the
Aegis BMD element conducted a successful intercept test of its more
capable Standard Missile-3 design that is being fielded for the first time
during Block 2006.

In March 2006, soon after the formal initiation of Block 2006, MDA
announced that events such as hardware delays, technical challenges, and
budget cuts were causing the agency to field fewer assets than originally
expected. MDA's goal now calls for fielding 3 fewer GMD interceptors;
deferring the upgrade of the Thule radar until Block 2008, when it can be
fully upgraded; producing 4 fewer Aegis BMD missiles; upgrading 1 less
Aegis destroyer for the engagement mission; and delivering 3 C2BMC Web
browsers rather than the more expensive C2BMC suites. With the exception
of the GMD interceptors, MDA is on track to deliver the revised
quantities. The GMD program planned to emplace 8 interceptors during
calendar year 2006, but was only able to emplace 4. Program officials told
us that the contractor has increased the number of shifts that it is
working and that this change will accelerate deliveries. However, to meet
its quantity goal, the GMD program will have to more than double its
interceptor emplacement rate in 2007.

MDA also reduced the performance expected of Block 2006 commensurate with
the reduction in assets. However, insufficient data are available to
determine whether MDA is on track to meet the new goal. Although the GMD
test program has achieved some notable results, officials in DOD's Office
of the Director of Operational Test and Evaluation told us that the
element has not completed sufficient tests to provide a high level of
confidence that the BMDS can reliably intercept intercontinental ballistic
missiles. Further testing is needed as well to confirm that GMD can use
long-range tracking data developed by Aegis BMD to prepare--in real
time--a weapon system task plan for GMD interceptors.

Delayed testing and technical problems may also impact the performance of
the current and future configurations of the BMDS. For example, the
performance of the Block 2006 configuration of the Aegis BMD missile is
unproven because design changes in the missile's solid attitude and divert
system and one burn pattern of the third stage rocket motor were not
flight-tested before they were cut into the production line. The current
configuration of the GMD interceptor also continues to struggle with an
anomaly that has occurred in each of the element's flight tests. The
anomaly has not yet prevented the program from achieving its primary test
objectives, but neither its source nor a solution has been clearly
identified or defined. The reliability of some GMD interceptors remains
uncertain as well because inadequate mission assurance/quality control
procedures may have allowed less reliable or inappropriate parts to be
incorporated into the manufacturing process. Program officials plan to
introduce new parts into the manufacturing process, but not until
interceptor 18. MDA also plans to retrofit the previous 17 interceptors,
but not until fiscal year 2009. In addition to the performance problems
with elements being fielded, the ABL element that is being developed to
enhance a future BMDS configuration experienced technical problems with
its Beam Control/Fire Control component. These problems have delayed a
lethality demonstration that is needed to demonstrate the element's
leading-edge technologies. ABL is an important element because if it works
as desired, it will defeat enemy missiles soon after launch, before decoys
are released to confuse other BMDS elements. MDA plans to decide in 2009
whether ABL or KEI, whose primary boost phase role is to mitigate the risk
in the ABL program, will become the BMDS boost phase capability.

While MDA reduced Block 2006 quantity and performance goals, it increased
the block's cost goal from about $19.3 billion to approximately $20.3
billion.^4 The cost increases were caused by the addition of previously
unknown operations and sustainment requirements, realignment of the GMD
program to support a successful return to flight, realignment of the Aegis
BMD program to address technical challenges and invest in upgrades, and
preparations for round-the-clock operation of the BMDS. Although MDA is
expected to operate within its revised budget of $20.3 billion, the actual
cost of the block cannot be reconciled with the cost goal. To stay within
its Block 2004 budget, MDA shifted some of that block's work to Block 2006
and is counting it as a cost of Block 2006, which overstates Block 2006
cost. In addition, MDA officials told us that it is likely that some Block
2006 work will be deferred until Block 2008 to cover the $478 million
fiscal year 2006 budget overruns experienced by five of the six element
prime contractors. If MDA reports the cost of deferred work as it has in
the past, the actual cost of Block 2006 will be complicated further.
Another factor complicating the reconciliation of Block 2006 cost is that
the elements report block cost inconsistently. Some elements appropriately
include costs that the program will incur to reach full capability, while
others do not.^5

  MDA's Flexibility Makes Oversight and Accountability More Difficult

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

Over the years, a framework of laws has been created that make major
defense acquisition programs accountable for their planned outcomes and
cost, give decision makers a means to conduct oversight, and ensure some
level of independent program review. The application of many of these laws
is triggered by a program's entry into system development and
demonstration. To provide accountability, once major defense programs
cross this threshold, they are required by statute to document program
goals in an acquisition program baseline that as implemented by DOD has
been approved by a higher-level DOD official prior to the program's
initiation. The baseline provides decision makers with the program's best
estimate of the program's total cost for an increment of work, average
unit costs for assets to be delivered, the date that an operational
capability will be fielded, and the weapon's intended performance
parameters. Once approved, major acquisition programs are required to
measure their program against the baseline, which is the program's initial
business case, or obtain the approval of a higher-level acquisition
executive before making significant changes. Programs are also required to
regularly provide detailed program status information to Congress,
including information on cost, in Selected Acquisition Reports. In
addition, Congress has established a cost-monitoring mechanism that
requires programs to report significant increases in unit cost measured
from the program baseline.^6

4Specific details regarding the cost increase can be found in
[2]GAO-07-387.

5An element has reached full capability if it has completed all
system-level testing and has shown that it meets expectations. At this
state, all doctrine, organization, training, material, leadership,
personnel, and facilities are in place.

Other statutes provide for independent program verifications and place
limits on the use of appropriations. For example, 10 U.S.C. S 2434
prohibits the Secretary of Defense from approving system development and
demonstration unless an independent estimate of the program's life-cycle
cost has been conducted by the Secretary. In addition, 10 U.S.C. S 2399
requires completion of initial operational test and evaluation before a
program can begin full-rate production. These statutes ensure that someone
external to the program examines the likelihood that the program can be
executed as planned and will yield a system that is effective and suitable
for combat. The use of an appropriation is also controlled so that it will
not be used for a purpose other than the one for which it was made, except
as otherwise provided by law. Research and development appropriations are
typically specified by Congress to be used to pay the expenses of basic
and applied scientific research, development, test, and evaluation. On the
other hand, procurement appropriations are, in general, to be used for
production and manufacturing. In the 1950s, Congress established a policy
that items being purchased with procurement funds be fully funded in the
year that the item is procured. This is meant to prevent a program from
incrementally funding the
purchase of operational systems. Full funding ensures that the total
procurement costs of weapons and equipment are known to Congress up front
and that one Congress does not put the burden on future Congresses of
deciding whether they should appropriate additional funds or expose
weapons under construction to uneconomic start-up and stop costs.

6 10 U.S.C. S 2433, known as Nunn-McCurdy.

The flexibility to defer application of specific acquisition laws has
benefits. MDA can make decisions faster than other major acquisition
programs because it does not have to wait for higher-level approvals or
independent reviews. MDA's ability to quickly field a missile defense
capability is also improved because assets can be fielded before all
testing is complete. MDA considers the assets it has fielded to be
developmental assets and not the result of the production phase of the
acquisition cycle. Additionally, MDA enjoys greater flexibility than other
programs in the use of its funds. Because MDA uses research and
development funds to manufacture assets, it is not required to fully fund
those assets in the year of their purchase. Therefore, as long as its
annual budget remains fairly level, MDA can request funds to address other
needs.

On the other hand, the flexibilities granted MDA make it more difficult to
conduct program oversight or to hold MDA accountable for the large
investment being made in the BMDS program. Block goals can be changed by
MDA, softening the baseline used to assess progress toward expected
outcomes. Similarly, because MDA can redefine the work to be completed
during a block, the actual cost of a block cannot be compared with the
original cost estimate. MDA considers the cost of deferred work, which may
be the delayed delivery of assets or other work activities, as a cost of
the block in which the work is performed even though the work benefits or
was planned for a prior block. Further, MDA does not track the cost of the
deferred work and, therefore, cannot make adjustments that would match the
cost with the block that is benefited. For example, during Block 2004, MDA
deferred some planned development, deployment, characterization, and
verification activities until Block 2006 so that it could cover contractor
budget overruns. The costs of the activities are now considered part of
the cost of Block 2006. Also, although Congress provided funding for these
activities during Block 2004, MDA used these funds for the overruns and
will need additional funds during Block 2006 to cover their cost. Planned
and actual unit costs of fielded assets are equally difficult to
reconcile. Because MDA is not required to develop an approved acquisition
program baseline, it is not required to report the expected
average unit cost of assets. Also, because MDA is not required to report
significant increases in unit cost,^7 it is not easy to determine whether
an asset's actual cost has increased significantly from its expected cost.

Finally, using research and development funds to purchase fielded assets
further reduces cost transparency because these dollars are not covered by
the full-funding policy as are procurement funds. Therefore, when a
program for a 2-year block is first presented in the budget, Congress is
not necessarily fully aware of the dimensions and cost of that block. For
example, although a block may call for the delivery of a specific number
of interceptors, the full cost of those interceptors is requested over 3
to 5 years. Calculating unit costs from budget documents is difficult
because the cost of components that will become fielded assets may be
spread across 3 to 5 budget years--a consequence of incremental funding.

  MDA Audits Show Improvement in Quality Processes

During Block 2004, poor quality control procedures caused the missile
defense program to experience test failures and slowed production. MDA has
initiated a number of actions to correct quality control weaknesses, and
the agency reports that these actions have been largely successful.
Although MDA continues to identify quality assurance procedures that need
strengthening, recent audits by MDA's Office of Quality, Safety, and
Mission Assurance show such improvements as increased on-time deliveries,
reduced test failures, and sustained improvement in product quality.

MDA has taken a number of steps to improve quality assurance. These
include developing a teaming approach to restore the reliability of key
suppliers, conducting regular quality inspections to quickly identify and
find resolutions for quality problems, adjusting award fee plans to
encourage contractors to maintain a good quality assurance program and
encourage industry best practices, as well as placing MDA-developed
assurance provisions on prime contracts. For example, as early as 2003,
MDA made a critical assessment of a key supplier's organization and
determined that the supplier's manufacturing processes lacked discipline,
its corrective action procedures were ineffective, its technical data
package was inadequate, and personnel were not properly trained. The
supplier responded by hiring a Quality Assurance Director, five quality
assurance professionals, a training manager, and a scheduler. In addition,
the supplier installed an electronic problem-reporting database, formed
new boards--such as a failure review board--established a new
configuration management system, and ensured that manufacturing activity
was consistent with contract requirements. During different time periods
between March 2004 and August 2006, MDA measured the results of the
supplier's efforts and found a 64 percent decrease in open quality control
issues, a 43 percent decline in test failures, and a 9 percent increase in
on-time deliveries. MDA expanded its teaming approach in 2006 to another
problem supplier and reports that many systemic solutions are already
underway.

7Because the BMDS or its major elements have not been designated by MDA as
being in system development and demonstration, no acquisition program
baseline is required under 10 U.S.C. S 2435. Thus there is no basis for
determining unit cost under 10 U.S.C. S 2433 (also known as Nunn-McCurdy),
which requires calculation of unit cost from the baseline. Further, for
the same reason, only limited Selected Acquisition Reports to Congress on
program status are generated [10 U.S.C. S 2432(h)] that do not include
unit costs.

During fiscal year 2006, MDA's audits continued to identify both quality
control weaknesses and quality control procedures that contractors are
addressing. During 2006, the agency audited six contractors and identified
372 deficiencies and observations.^8 As of December 2006, the six
contractors had collectively closed 157, or 42 percent, of the 372 audit
findings. MDA also reported other signs of positive results. For example,
in 2006, MDA conducted a follow-on audit of Raytheon, the subcontractor
for GMD's exoatmospheric kill vehicle. A 2005 audit of Raytheon had found
that the subcontractor was not correctly communicating essential kill
vehicle requirements to suppliers, did not exercise good configuration
control, and could not build a consistent and reliable product. The 2006
audit was more positive, reporting less variability in Raytheon's
production processes, increasing stability in its statistical process
control data, fewer test problem reports and product waivers, and
sustained improvement in product quality.

  Actions Recommended In Our Recent Report

In our March 15, 2007, report, we made several recommendations to DOD
to increase transparency in the missile defense program. These included:

o Develop a firm cost, schedule, and performance baseline for those
elements considered  far enough  along  to be  in system  development  and
demonstration, and report against that baseline.

8 Deficiencies are considered more serious and are recognized when
contractors do not comply with a contractual or internal procedure
requirement. On the other hand, observations are made when a contractor
fails to employ an MDA or industry best practice.

     o Propose an approach for those same elements that provides information
       consistent with the acquisition laws that govern baselines and unit
       cost reporting, independent cost estimates, and operational test and
       evaluation for major DOD programs. Such an approach could provide
       necessary information while preserving the MDA Director's flexibility
       to make decisions.
     o Include in blocks only those elements that will field capabilities
       during the block period and develop a firm cost, schedule, and
       performance baseline for that block capability, including the unit
       cost of its assets.
     o Request and use procurement funds, rather than research, development,
       test, and evaluation funds, to acquire fielded assets.

DOD partially agreed with the first three recommendations and recognized
the need for greater program transparency. It committed to provide
information consistent with the acquisition laws that govern baselines and
unit cost reporting, independent cost estimates, and operational test and
evaluation. DOD did not agree to use elements as a basis for this
reporting, expressing its concern that an element-centric approach to
reporting would have a fragmenting effect on the development of an
integrated system. We respect the need for the MDA Director to make
decisions across element lines to preserve the integrity of the system of
systems. We recognize that there are other bases rather than elements for
reporting purposes. However, we believe it is essential that MDA report in
the same way that it requests funds. Currently MDA requests funds and
contracts by element, and at this time, that appears to be the most
logical way to report. MDA currently intends to modify its current block
approach. We believe that a management construct like a block is needed to
provide the vehicle for making system-of-system decisions and to provide
for system-wide testing. However, at this point, the individual assets to
be managed in a block--including quantities, cost, and delivery
schedules--can only be derived from the individual elements.

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

Contacts and Staff Acknowledgements

For future questions about this statement, please contact me at (202) 512-
4841 or [email protected]. Individuals making key contributions to this
statement include Barbara H. Haynes, Assistant Director;
LaTonya D. Miller; Michael J. Hesse; Letisha T. Jenkins; Sigrid L.
McGinty; Kenneth E. Patton; and Steven B. Stern.

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