Missile Defense: Cost Increases Call for Analysis of How Many New Patriot
Missiles to Buy (Letter Report, 06/29/2000, GAO/NSIAD-00-153).

Pursuant to a congressional request, GAO provided information on the
cost increases in the Patriot Advanced Capability-3 program, focusing
on: (1) how much costs have increased and the reasons for those
increases; (2) whether additional cost increases are expected; (3) what
is being done to control costs; and (4) whether the Army's requirement
will be met by planned missile procurements.

GAO noted that: (1) estimated costs of the Patriot Advanced Capability-3
program increased from about $3.9 billion in 1994 to about $6.9 billion
in March 2000--a 77-percent cost increase; (2) the number of missiles to
be procured decreased from 1,200 to 1,012; (3) missile development costs
accounted for about $775 million of the cost increase, and missile
procurement costs accounted for about $2.2 billion; (4) a major reason
for the development cost increase was that the original cost estimate
did not recognize the level of effort and difficulties associated with
developing and producing a hit-to-kill missile compared with those of
previous missiles; (5) missile procurement costs increased primarily
because the procurement was extended by 7 years; (6) missile procurement
was originally scheduled for the 6-year period from 1997 through 2002;
(7) the current procurement schedule covers the 13-year period from 1998
through 2010; (8) costs are likely to increase further for several
reasons; (a) the Department of Defense (DOD) has already recognized that
contractor costs for missile development could exceed the contractor's
estimate by $26 million; (b) DOD's Director for Operational Test and
Evaluation was concerned about the adequacy of the testing, DOD is
considering additional tests; and (c) DOD officials estimate that costs
could increase between $72 million and $100 million because of risks and
potential schedule delays associated with completing missile
development; (9) DOD has begun to implement a number of program changes
to control costs, and other changes are being studied; (10) other
measures being studied include additional hardware changes and new
contracting strategies; (11) there is a gap between the Army's stated
requirements and DOD's planned missile procurements; (12) the Army
states that 2,200 Patriot Advanced Capability-3 missiles are required to
comply with the national security strategy of winning two nearly
simultaneous major wars; (13) because of its concerns about program
affordability, DOD never planned to buy all 2,200 missiles; (14) it
originally planned to buy 1,200 missiles, and in light of cost
increases, it now plans to procure 1,012; (15) Army officials told GAO
that having fewer than 2,200 missiles would force the Army to defend
forces and critical assets with less capable missiles; and (16) if
further cost increases occur, it could decide to buy fewer missiles,
extend the procurement period, or spend more to maintain the current
plan.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-00-153
     TITLE:  Missile Defense: Cost Increases Call for Analysis of How
	     Many New Patriot Missiles to Buy
      DATE:  06/29/2000
   SUBJECT:  Defense capabilities
	     Military cost control
	     Cost overruns
	     Weapons research and development
	     Missiles
	     Defense procurement
	     Procurement planning
	     Air defense systems
IDENTIFIER:  Patriot Missile Advanced Capability-Three Upgrade

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GAO/NSIAD-00-153

National Security and
International Affairs Division

B-282712

June 29, 2000

The Honorable Jerry Lewis, Chairman
Subcommittee on Defense
Committee on Appropriations
House of Representatives

Dear Mr. Chairman:

The Patriot Advanced Capability-3 program upgrades the existing Patriot air
defense system, which is designed to defend ground combat forces and other
assets against an enemy's tactical ballistic missiles,1 cruise missiles,2
and other threats such as airplanes and helicopters. Because of the
Committee's concerns about cost increases in the Patriot Advanced
Capability-3 program, you asked us to address the following questions:
(1) How much have costs increased and what are the reasons for those
increases? (2) Are additional cost increases expected? (3) What is being
done to control costs? and (4) Will the Army's requirements be met by
planned missile procurements?

The Patriot system has four basic components: (1) a ground-based radar to
detect and track targets and to communicate with the interceptor missile;
(2) an engagement control station to provide command, control, and
communications; (3) a launcher; and (4) interceptor missiles. (See fig.1.)

Source: Department of Defense.

The Patriot Advanced Capability-3 program is designed to enhance the Patriot
radar's ability to detect and identify targets and improve its performance
against low-altitude targets; increase system computer capabilities; improve
communications; increase the number of missiles in each launcher; and
incorporate a new hit-to-kill missile designed to physically collide with
and destroy the target.3 These improvements are expected to increase the
area a Patriot system can defend; improve the potential for destroying
higher performance targets; and enhance performance against targets carrying
nuclear, biological, or chemical warheads.

The President's budget submission for fiscal year 2001 contains a
$446-million request for the Patriot Advanced Capability-3 program. Of this
amount, $81 million is for research, development, test, and evaluation, and
$365 million is for procurement.

Estimated costs of the Patriot Advanced Capability-3 program increased from
about $3.9 billion in 1994 (at the beginning of engineering and
manufacturing development)4 to about $6.9 billion in March 2000--a
77-percent cost increase. At the same time, the number of missiles to be
procured decreased from 1,200 to 1,012. Missile development costs accounted
for about $775 million of the cost increase, and missile procurement costs
accounted for about $2.2 billion. A major reason for the development cost
increase was that the original cost estimate did not recognize the level of
effort and difficulty associated with developing and producing a hit-to-kill
missile compared with those of previous missiles. Missile procurement costs
increased primarily because the procurement period was extended by 7 years.
Missile procurement was originally scheduled for the 6-year period from 1997
through 2002; the current procurement schedule covers the 13-year period
from 1998 through 2010.

Costs are likely to increase further for several reasons. First, the
Department of Defense has already recognized that contractor costs for
missile development could exceed the contractor's estimate by $26 million.
Second, because the Department's Director for Operational Test and
Evaluation was concerned about the adequacy of the testing, the Department
is considering additional tests. Costs for the additional test program,
which may involve as many as 12 to 15 tests, have not been estimated, but
the Patriot Project Office roughly estimated four tests could cost an
additional $88 million. Third, Department officials estimate that costs
could increase between $72 million and $100 million because of risks and
potential schedule delays associated with completing missile development.

The Department has begun to implement a number of program changes to control
costs, and other changes are being studied. Initial efforts involving six
missile hardware changes have been implemented or planned. Independent cost
estimators have projected savings of $140 million to
$216 million from these changes and have already factored them into the
current procurement cost estimate. Other measures being studied include
additional hardware changes and new contracting strategies. As of March
2000, the Department had not made a final decision on additional cost
control measures.

There is a gap between the Army's stated requirements and the Department's
planned missile procurements. The Army states that 2,200 Patriot Advanced
Capability-3 missiles are required to comply with the national security
strategy of winning two nearly simultaneous major wars. Because of its
concerns about program affordability, the Department never planned to buy
all 2,200 missiles; it originally planned to buy 1,200 missiles, and in
light of cost increases, it now plans to procure 1,012. Army officials told
us that having fewer than 2,200 missiles would force the Army to defend
forces and critical assets with less capable missiles. The Department could
choose to buy more missiles to close the gap. If further cost increases
occur, it could also decide to buy fewer missiles (thereby widening the
gap), extend the procurement period, or spend more to maintain the current
plan. No detailed analyses have been made of the costs, benefits for
defending U.S. forces and assets, or implications of any of these
alternatives. Without such analyses, decisionmakers in the Department and
the Congress are not in the best position to decide how many missiles to
buy.

This report contains a recommendation that the Secretary of Defense perform
detailed analyses and report to the Congress on the costs, benefits, and
implications of procuring alternative quantities of upgraded Patriot
missiles. The Department generally agreed with our recommendation to provide
needed information to the Congress but did not agree that it is necessary to
do so in a separate report.

The Patriot and the Navy Area ballistic missile defense systems are expected
to provide the lower tier of defense in an overall missile defense strategy,
which includes the Army's Theater High Altitude Area Defense and Navy
Theater Wide systems.5 These latter systems are designed to intercept
targets at much higher altitudes (above the atmosphere) than the Patriot
missile.

Engineering and manufacturing development of the Patriot Advanced
Capability-3 (PAC-3) missile was approved in May 1994. The original schedule
called for initial fielding of the missile in 1998 and missile procurement
through 2002. Several delays have occurred since that time. As of March
2000, initial fielding of the PAC-3 missile was planned for 2001, and
missile procurement was planned through 2010.

With the exception of the missile, all PAC-3 components are upgrades to
existing Patriot components. The PAC-3 missile is based on the Extended
Range Interceptor Technology program, in which the Department of Defense
(DOD) explored the feasibility of developing a hit-to-kill missile. Under
this program, the extended range missile was developed in a laboratory
environment, prototype missiles were fabricated, and the missiles
successfully intercepted three of four test targets.

The Ballistic Missile Defense Organization, a DOD agency responsible for
missile defense programs, provides overall management of the PAC-3 program,
including its funding. The Army's Program Executive Office for Air and
Missile Defense and the Patriot Project Office provide day-to-day management
of the program.

Estimated costs of the PAC-3 program increased from about $3.9 billion in
1994, at the beginning of engineering and manufacturing development, to $6.9
billion as of March 2000--a 77-percent increase.6 At the same time, the

number of missiles to be procured decreased from 1,200 to 1,012.7 About $775
million of the cost increase was for missile development, and about $2.2
billion was for missile procurement. These increases resulted from a
significant cost underestimation, development problems, test program delays,
and an extended missile procurement period.

DOD underestimated the costs of developing and producing the PAC-3 missile.
DOD had proven the technical feasibility of a hit-to-kill missile under the
Extended Range Interceptor Technology program. However, converting the
technology to a producible missile that met all tactical requirements and
could be used with the Patriot system was a greater challenge than DOD, the
Army, or the contractor anticipated. The costs were greatly underestimated
because (1) DOD's estimate did not account for the additional level of
effort and difficulty in developing a hit-to-kill missile system; (2) the
Army and the contractor, Lockheed Martin Missile and Fire Control, were
overly optimistic about the development effort; and (3) Army and contractor
officials greatly underestimated software requirements.

Underestimated Effort and Difficulty

Cost estimators in the Office of the Secretary of Defense told us that,
because they had very little experience in estimating costs for hit-to-kill
missile systems, they did not recognize the much greater level of effort and
difficulty associated with developing, testing, and producing a hit-to-kill
missile compared with those of previous missiles. DOD estimators said they
used the best data available. They relied in part on the actual costs
incurred by the Extended Range Interceptor Technology program as the basis
for estimating the PAC-3 cost baseline. They verified the reasonableness of
the estimate using standard cost estimating tools such as cost history and
cost estimating relationships developed for missile systems other than the
hit-to-kill. However, the Extended Range Interceptor Technology cost data
did not consider (1) the cost and effort required to integrate the system
with other Patriot components and (2) the cost of designing and producing a
missile to meet tactical requirements

such as operating in adverse weather conditions, in the presence of enemy
electronic countermeasures,8 and in a nuclear environment.

Overly Optimistic Estimates of the Development Effort

The Army and the contractor were overly optimistic about the effort,
processes, and time required for an effective development program. Missile
contractor officials said that they originally informed the Army that
development would cost about $890 million, but after negotiations, they
agreed to a cost-plus-incentive fee development contract of $515 million.
According to contractor officials, their optimism that development could be
done at the lower price was based on (1) projecting cost reductions and
eliminating management reserves (contingency funds); (2) agreeing with the
Army to eliminate selected tests, some reporting requirements, and many
government standards and specifications; and (3) simplifying the method for
managing the contract.9 However, within about a year, both the Army and the
contractor realized that they had eliminated needed tests and other
risk-reduction measures. As a result, the Army added two additional flight
tests, additional ground tests, and 10 additional months of development time
to the program. Contractor officials estimate that more than $200 million in
effort was added to the contract, an amount that had been included in their
original estimate of $890 million but eliminated during contract
negotiations.

Underestimated Software Development Effort

The cost of developing missile system software was significantly higher than
estimated. DOD and contractor officials told us that they did not anticipate
the amount of software required for the program or the difficulty of
integrating the PAC-3 missile with the Patriot system. An Army official
estimated that software development required twice as much effort as
planned. In addition, DOD's independent estimators noted that software
maintenance activities are now more extensive than previously estimated.

The missile contractor attributed $101 million in cost increases to
first-time manufacturing problems, difficulties in getting the guidance
system to function with the rest of the missile, and seeker10 development
problems. For example, producing the initial missiles took longer than
expected because some sub-systems did not fit together properly, some did
not pass electrical tests the first time, and others did not pass missile
environmental tests.11 In addition, the seeker manufacturer tried to cut
costs by eliminating environmental tests of components and sub-assemblies
and conducting the tests only at the assembly level. However, during early
testing, 75 percent of the seekers failed, and the manufacturer incurred
extra costs to disassemble the seekers, test components and sub-assemblies
to identify faulty ones, and rebuild the seekers.

In addition to the delays caused by developmental problems, delays and a
cancellation in the intercept flight test program extended the development
program and thereby increased development costs. The cost impact of these
delays and cancellation is included in the overall cost but has not been
estimated for each test. However, DOD's cost estimators believe that each
month of development delay costs about $10 million. Details of the test
delays and cancellation are in table 1.

 Type of test            Months of    Reasons for delay/cancellation
                         delay

 Seeker characterization              Target failure and range safety
 flight test             3            concerns due to high winds at the
                                      test range.
                                      Drought conditions at test range,a
 Development test 3      4.5          target failure, and technical
                                      problems with missile seeker.
                                      To avoid a possible test failure
 Development test 4      Canceledb    because successfully intercepting the
                                      target may have required software not
                                      yet in the PAC-3 missile.
                                      Delays in earlier tests and range
 Development test 5      3.5          safety concerns due to high winds at
                                      the test range.
 Development tests 6 and
 7                       2c           Delays in software development.

aMissile flight tests were prohibited for a period due to potential fire
hazards caused by drought conditions at the test range.

bThe test was initially delayed but later canceled with the intention of
incorporating the objectives into other tests.

cCurrent plans call for conducting development test 7 before development
test 6 in July and September 2000, respectively. The net slippage in the two
tests is expected to be 2 months.

Source: Our analysis of DOD data.

According to DOD and contractor officials, the extension of the missile
procurement period by 7 years is the principal reason for the $2.2-billion
increase in the procurement cost estimate. Extending the procurement
schedule while buying the same number or fewer missiles increases program
costs because the fixed costs of production are incurred over a longer
period, missiles may not be produced at the most economical production rate,
and inflation generally causes missile costs to increase in later years.

In 1994, at the beginning of engineering and manufacturing development, DOD
planned to fund the procurement of 1,200 PAC-3 missiles during the
6-year period from 1997 through 2002--an average of 200 missiles per year.
However, according to the fiscal year 2001 budget request, DOD plans to

fund the procurement of 1,012 missiles over the 13-year period from 199812
through 2010--an average of about 37 missiles per year for the first 8 years
and 144 missiles per year for the last 5 years. Table 2 shows the number of
PAC-3 missiles to be procured each year as planned in the original 1994
estimate and in the 2001 budget request.

 Fiscal year Original program 1994  President's budget request
                                    for fiscal year 2001
 1997        90
 1998        215                    20
 1999        240                    0
 2000        250                    32
 2001        250                    40
 2002        155                    28
 2003                               44
 2004                               76
 2005                               52
 2006                               144
 2007                               144
 2008                               144
 2009                               144
 2010                               144
 Total       1,200                  1,012

Source: DOD.

Missile development costs are likely to increase further for several
reasons. First, on the basis of contractor cost data, DOD budget documents
estimate that the price for completing the missile development
(cost-plus-incentive-fee) contract could be about $26 million more than the
current estimate.

Second, additional tests are being considered but have not yet been
budgeted. DOD testing officials believe that as many as 12 to 15 additional
tests may be required because, in light of missile changes and possible test
deferments, current and planned tests would not be adequate to assess the
system's suitability and effectiveness--a requirement for beginning
full-rate production. In response to this concern, Project Office and
Ballistic Missile Defense Organization officials are considering adding four
tests in 2002-04--roughly estimated to cost $88 million. In addition, they
said that up to seven additional tests are already planned for a later phase
but that the costs of these tests are not included in the current estimate.

Third, missile costs are likely to increase because of risks and potential
schedule delays associated with completing missile development.
Specifically:

ï¿½ Ιn February 1999, the contractor recommended establishing a
$40-million management reserve--$30 million for the possibility of a flight
test failure and $10 million for other risks.

ï¿½ In May 1999, a DOD review team also recommended establishing a
$40-million management reserve, noting that the development schedule makes
no provision for a flight test failure, provides no margin for learning or
mistakes, and does not consider test range availability. However, the
reserve was not included in the current estimate.

ï¿½ DOD's Cost Analysis Improvement Group informed DOD decisionmakers in
October 1999 that schedule risk could easily add
$62 million to the cost estimate because (1) significant first-time
integration activities remain to be accomplished (for example, the final
version of the software must be completed and integrated into the missile);
(2) programs in the missile defense area have historically had difficulty in
meeting ambitious flight test schedules; and (3) the schedule does not
account for possible flight test failures.

ï¿½ Risk assessments performed by the Army and the Ballistic Missile Defense
Organization in November 1999 disclosed that completing the missile
development program could cost as much as $72 million to
$100 million more than estimated. The assessments included potential costs
for the remaining technical risks, a flight test failure, multiple launch
attempts, and software development and integration risk.

Fourth, the remaining flight tests will become progressively more
challenging--increasing the possibility of further delays and cost
increases. The first two flight intercept tests were conducted against
low-flying,
non-maneuvering, relatively slow targets. The target for the third intercept
made some maneuvers at a high altitude. However, future flight tests will
add complexity, including cold- and hot-conditioned PAC-3 missiles,13 highly
maneuvering and high-velocity targets, targets protected by electronic
countermeasures, and targets designed to make detection difficult. Officials
from DOD's Cost Analysis Improvement Group, the Office of the Director of
Operational Test and Evaluation, and the Ballistic Missile Defense
Organization acknowledge that future flights are designed to demonstrate
PAC-3's capabilities under more challenging conditions than previously
tested.

In response to our questions regarding potential cost increases, the Patriot
project manager informed us that in the event of a flight test failure, the
Army now has the missile hardware for an additional flight test because a
previous test was canceled. However, he acknowledged that DOD has not
budgeted for the cost of another flight test or for the potential 3- to
6-month delay that could be associated with a flight test failure.

Being Studied

To control development and procurement costs, DOD and contractor officials
have begun to implement various program changes and are examining other
cost-cutting measures. For example, in late 1998 and early 1999, a study
team appointed by the Director of the Ballistic Missile Defense Organization
focused on the causes of cost growth and recommended improvements to control
development costs. Among other things, the team recommended that (1) the
PAC-3 program establish a realistic cost and schedule baseline and (2) the
schedule take into consideration the possibility of a flight test failure.
In response, new cost and schedule baselines were developed, but as
discussed earlier, the schedule revisions did not provide for a flight test
failure. At the same time, another study team appointed by the Director and
the Army recommended that the Army seek multiyear procurement authority14 at
full-rate

production, pursue an innovative contracting strategy,15 and actively seek
foreign military sales. All of these recommendations, which are designed to
lower unit costs of producing the missiles, are still being considered.

In addition, in 1998 and 1999, the Army and the missile contractor
identified six hardware changes that could reduce procurement costs. The six
changes, which are being implemented or planned, include design and
manufacturing modifications such as reducing the number of component parts,
making components easier to assemble, removing redundant parts, and making
some components from less costly material. Independent cost estimators--the
Army's Cost and Economic Analysis Center and DOD's Cost Analysis Improvement
Group--estimated that the potential cost savings from these hardware changes
would range between $140 million and $216 million. The estimators have
already factored these savings into the current program production cost
estimate.

Also, in early 2000 a cost review team appointed by the Director of the
Ballistic Missile Defense Organization concluded that about 500 more
missiles could be bought without an overall program cost increase by
incorporating additional cost reduction actions. These actions include
identifying alternative subcontractors for selected components, streamlining
test processes, using more commercial parts, and selling
PAC-3 missiles to foreign countries. Ballistic Missile Defense Organization
officials informed us that the review results are not complete, are
currently being evaluated for cost accuracy and risk, and are only proposals
that do not represent an official position or a decision to implement.
However, Patriot project officials are devising a plan to implement at least
some of these initiatives. Providing an independent perspective on the cost
review team's findings, officials from the Cost Analysis Improvement Group
and the Army's Cost and Economic Analysis Center told us that savings of the
projected magnitude are extremely doubtful because some savings have already
been included in the current cost estimate and other savings may never be
realized.

DOD officials are also examining several other cost containment measures,
including deferral of the (1) demonstration of the PAC-3 missile's
capability to intercept airplanes and helicopters, (2) incorporation of the
software necessary to operate in the presence of electronic countermeasures,
and (3) demonstration of the missile's capability to operate against
electronic countermeasures. Ballistic Missile Defense Organization and Army
officials informed us that these tasks would be deferred only if necessary
in order for the PAC-3 development effort to stay within approved funding
levels. However, if these tasks are deferred, the PAC-3's effectiveness
would not be tested against all its requirements before September 2001, the
scheduled date for a full-rate production decision.

Procure

There is a gap between the Army's stated requirements and DOD's plans to
procure the missiles. According to Army operations and plans officials,
DOD's planned missile procurement is less than half the number required to
comply with the national military strategy of winning two nearly
simultaneous major wars. No detailed analyses have been conducted, however,
of the costs, benefits, and implications of procuring additional missiles to
close this gap or, if additional cost increases occur, of buying fewer
missiles, extending the procurement period, or spending more to maintain
current procurement levels.

The Army determined in 1993 that 2,200 PAC-3 missiles were required to
support the national military strategy. More recent Army studies, conducted
in 1997 and 1998, showed that 2,400 to 2,600 PAC-3 missiles were needed.
Army operations and plans officials told us that the Army did not change the
official requirement from 2,200 because it wanted to maintain a consistent
requirement. To establish the required number of PAC-3 missiles, the Army
considers (1) the operational objectives of the combatant commands,16 (2)
logistics capabilities, and (3) the residual stock of missiles required at
the conclusion of a war.

Over time, planned procurement has reflected the estimated maximum number of
missiles that could be afforded given PAC-3's planned funding. In fiscal
year 1994, when the system was approved for engineering and manufacturing
development, DOD expressed the intention to buy 1,200 missiles by 2002.
However, as program costs increased, procurement quantities were reduced and
the period of procurement was extended. In the fiscal year 2000 budget, DOD
indicated the intention to buy 560 missiles by 2006; in the 2001 budget, it
announced plans to buy 1,012 missiles by 2010--of which 436 would be
purchased by 2006.

In 1994, the Director of Requirements, Office of the Army Deputy Chief of
Staff for Operations and Plans, stated that procurement of fewer than 2,200
PAC-3 missiles would increase the operational risk to deployed forces. The
Director also stated that the Army would not have an adequate number of
missiles to fight two major theater wars if DOD could afford only 1,100 or
fewer missiles.

In March 2000, Army operations and plans officials told us that procurement
of fewer than 2,200 missiles (1) would degrade the Army's capability to
defend U.S. forces and critical assets and (2) would make the Army rely more
heavily on earlier versions of the Patriot missile that are less effective
against nuclear, biological, or chemical warheads. They also stated that the
extension of the production program forces the Army to rely on less capable
Patriot missiles for longer than planned.

Been Conducted

Neither the Office of the Secretary of Defense nor the Army has done
detailed analyses of the costs, the benefits to the Army's capability to
defend U.S. forces and critical assets, or the implications of alternative
procurement quantities. For example, DOD could choose to buy more missiles
to close the gap between the Army's requirements for 2,200 missiles and
DOD's plan to procure 1,012 missiles. On the other hand, if further cost
increases occur, DOD could also decide to buy fewer missiles (thereby
widening the gap), could extend the procurement period, or could spend more
to maintain the current plan. Spending more on the PAC-3 program, of course,
could be done at the expense of other programs. Without such analyses,
decisionmakers in the Department and the Congress are not in the best
position to decide how many missiles to buy.

Cost growth has been a continuing problem for the PAC-3 program since it
entered engineering and manufacturing development in 1994. The cost growth
has, in turn, raised program affordability concerns and has led DOD to
reduce the number of missiles to be procured and extend the procurement
period, despite the expected degradation of defense capability this would
cause.

We expect affordability concerns to become even more prominent for several
reasons. First, the Army has a clear interest in closing the gap between its
stated requirement for 2,200 missiles and DOD's planned procurement of 1,012
missiles. Second, DOD has postponed difficult funding decisions in the short
term by deferring most procurement until 2006-10; as a result, the
affordability of procuring larger quantities of PAC-3 missiles is likely to
become an even greater issue as 2006 approaches. Third, because additional
cost increases are likely, higher funding levels would be needed just to
maintain procurement at the planned level. Without detailed analyses of the
costs, benefits, and implications of procuring alternative quantities of
missiles, decisionmakers in DOD and the Congress do not have the necessary
information to make a sound decision on how many PAC-3 missiles to buy.

To help determine how many upgraded Patriot missiles to buy, we recommend
that the Secretary of Defense perform detailed analyses and report to the
Congress on the expected costs, benefits, and implications of the currently
planned and alternative procurement levels. These analyses should, at a
minimum, examine expected impacts of (1) buying more missiles, (2) buying
fewer missiles to address increased costs, or (3) buying the same number of
missiles but extending the procurement period or increasing funding to
address increased costs. They should also examine the potential degradation
in defense capability resulting from any gaps between alternative
procurement levels and the Army's stated requirements.

In its written comments on a draft of this report, DOD generally agreed that
it should provide the Congress with the information necessary to determine
the appropriate level of PAC-3 program funding. DOD did not agree that the
Secretary should provide a separate report.

DOD stated that the President's budget request and its supporting materials
represent the Department's position regarding the most appropriate level of
funding for the PAC-3 program; and that it provides supplemental program
cost, schedule, and performance information to the Congress in a selected
acquisition report at least once annually. DOD also said that it will
provide supplemental information about various program alternatives as
requested by the congressional defense committees. DOD stated its belief
that with these actions it already fulfills the spirit and substance of the
recommendation.

We do not believe that the information DOD cited above would satisfy the
intent of our recommendation. Past budget requests and selected acquisition
reports do not provide needed information. For example, the fiscal year 2000
budget request and the December 1998 selected acquisition report showed a
planned procurement of 560 PAC-3 missiles--a 53-percent reduction from the
previous budget requests and selected acquisition reports. However, no
information was provided in the documents to address the impact on military
capabilities caused by the reduction in the number of missiles to be
procured, the trade-offs made in arriving at the lower procurement level, or
the benefits that could be derived from additional funding. Similarly, the
fiscal year 2001 budget request and the 1999 selected acquisition report
again showed a change in planned procurement--this time an increase in the
number of missiles to be procured to 1,012--but did not discuss the impacts
of that change. Moreover, neither the budget requests nor the selected
acquisition reports have addressed the impact on military capabilities
caused by (1) procuring substantially fewer missiles than the Army says it
requires to comply with the national security strategy and (2) procuring and
fielding most of the missiles at a much later time than planned. The
original schedule showed procuring 1,200 missiles by 2002 versus current
plans to procure 1,012 missiles by 2010, with only 120 missiles to be
procured by 2002.

Although DOD could provide supplemental information as requested by the
congressional defense committees, producing a separate report would give
greater assurance that DOD would provide a timely, complete report to the
Congress addressing the cost, benefits, and implications of procuring
alternative quantities of PAC-3 missiles.

We have modified our recommendation to further explain the kind of detailed
analyses and information that we feel would be useful to decisionmakers. DOD
also provided technical comments that we incorporated where appropriate.

To address the Chairman's questions, we reviewed DOD, Army, and Ballistic
Missile Defense Organization cost estimates and independent, DOD, and
contractor cost reviews and assessments. We also discussed cost, schedule,
risk, and requirements issues with knowledgeable officials from the Patriot
Project Office, the Army, the Ballistic Missile Defense Organization, the
Office of the Secretary of Defense, the contractor, and user and test
communities.

We obtained information on the extent of cost growth and assessed the
underlying reasons by comparing the original cost estimate with the current
estimate. We identified the reasons for cost growth by reviewing DOD and
contractor cost estimates; reviewing independent cost group reports,
contract files, and contractor reports; and obtaining the views of key
officials from these organizations.

To determine whether additional cost increases are expected and whether
budgeted amounts are sufficient, we evaluated current cost estimates and
compared them with current budget estimates. We analyzed the PAC-3 cost
estimates prepared by contractor, Army, and independent estimators and
obtained their views on the potential for additional cost growth.

To evaluate the impact of actions taken or planned to reduce costs, we
obtained detailed descriptions of planned cost reduction and cost
containment measures. We also obtained DOD studies and evaluations of the
proposed measures. We discussed these measures with DOD and contractor
officials to determine the validity of the measures and the projected costs
and savings from their implementation.

We compared planned procurement quantities with the requirements defined by
the Army by obtaining and analyzing the Army's methodology for determining
requirements and discussing it with pertinent officials. We also obtained
and analyzed missile quantity studies prepared by DOD and discussed these
studies with pertinent officials. We discussed quantity shortfalls with the
Army user community to identify their impact.

We conducted our work from May 1999 through April 2000 in accordance with
generally accepted government auditing standards.

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
its issue date. At that time, we will send copies to other interested
congressional committees; the Honorable William Cohen, Secretary of Defense;
the Honorable Louis Caldera, Secretary of the Army; and the Honorable Jacob
Lew, Director, Office of Management and Budget. Copies will also be made to
others on request.

Please contact me at (202) 512-4841 if you or your staff have any questions.
Major contributors to this report were Bob Levin, Wayne Gilliam, and
Terry Wyatt.

Sincerely yours,

Allen Li
Associate Director
Defense Acquisitions Issues

Comments From the Department of Defense

(707422)
  

1. Tactical ballistic missiles have ranges varying from 6 to 1,240 miles.

2. A cruise missile is an unmanned, armed aircraft that can be launched from
another aircraft, ship, submarine, or ground-based launcher to attack ships
or ground-based targets.

3. This hit-to-kill method of destroying targets is considered more
effective than previous methods. The earlier versions of the Patriot missile
destroyed their targets by detonating near the target and propelling metal
fragments toward it.

4. Engineering and manufacturing development is the phase before production
and is intended to translate the system concept into a producible system
that meets requirements.

5. Ballistic Missile Defense: Improvements Needed in Navy Area Acquisition
Planning (GAO/NSIAD-98-34 , Nov. 14, 1997).

6. The estimate excludes the costs for Extended Range Interceptor Technology
efforts and for operating the system after deployment. Costs in this report
are expressed in then-year dollars (adjusted for expected inflation).

7. Planned PAC-3 upgraded fire units also decreased from 54 to 36, making
another
$172 million available for missile procurement. The PAC-3 fire unit has
three main components: the ground radar set, the engagement control station,
and eight missile launchers.

8. Countermeasures refer to the enemy's use of devices and techniques to
impair the ballistic missile defense system's operational effectiveness.

9. An integrated product team approach was used. It was expected to reduce
costs by fostering more extensive government-contractor interaction on
management issues rather than relying on governmental review after decisions
had already been made.

10. A seeker is an on-board system that acquires the target and provides
guidance accuracy.

11. Environmental tests subject components or sub-assemblies to temperature
extremes, vibration, and shock.

12. Initial production was funded with the fiscal year 1998 appropriation,
but actual production did not begin until fiscal year 2000.

13. Missiles that are subjected to extremely cold temperatures (-25ï¿½ F.) and
extremely hot temperatures (131ï¿½ F.) before firing.

14. Multiyear procurement is a method for acquiring up to 5 years'
requirements with a single contract. This method usually provides cost
savings through more efficient subcontracting and component and material
purchases.

15. The proposed contracting strategy--fixed-price incentive with successive
targets--uses potential savings and an award fee to provide the contractor
with incentives to reduce production costs.

16. Combatant commands are responsible for operational control of military
forces in specific regions of the world.
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