Naval Aviation: F/A-18 E/F Acquisition Strategy (Letter Report, 08/18/94,
GAO/NSIAD-94-194).

In May 1992, the Under Secretary of Defense for Acquisition approved the
Navy's request that the F/A-18E/F development be designated as a major
modification of its existing F/A-18C/D, instead of a new program. He
decided that acquisition regulations did not require a Cost and
Operational Effectiveness Analysis for this modification, and he waived
certain live fire testing requirements. The Under Secretary based his
decision on (1) Navy analyses that indicated that the E/F development
was a low to moderate risk and (2) recommendations made by the
Conventional Systems Committee of the Defense Acquisition Board.
Applicable defense acquisition regulations allow management discretion
in these matters for the purpose of minimizing development time and
reducing costs. By treating this as a modification, some steps normally
followed for new acquisitions have been skipped. GAO is not in a
position to conclude whether the decision made thus far will have a
positive or negative effect on the program.

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

 REPORTNUM:  NSIAD-94-194
     TITLE:  Naval Aviation: F/A-18 E/F Acquisition Strategy
      DATE:  08/18/94
   SUBJECT:  Navy procurement
             Research and development
             Naval aircraft
             Aircraft research
             Cost effectiveness analysis
             Advanced weapons systems
             Tactical air forces
             Defense capabilities
             Fighter aircraft
             Sole source procurement
IDENTIFIER:  F/A-18C/D Aircraft
             F/A-18E/F Aircraft
             A/FX Aircraft
             F-22 Aircraft
             A-6E Aircraft
             
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Cover
================================================================ COVER


Report to the Honorable
William V.  Roth, Jr., U.S.  Senate

August 1994

NAVAL AVIATION - F/A-18 E/F
ACQUISITION STRATEGY

GAO/NSIAD-94-194

Naval Aviation


Abbreviations
=============================================================== ABBREV

  CICA - Competition in Contracting Act
  COEA - Cost and Operational Effectiveness Analysis
  DAB - Defense Acquisition Board
  DOD - Department of Defense
  EMD - engineering and manufacturing development
  J&A - justification and approval

Letter
=============================================================== LETTER


B-248882

August 18, 1994

The Honorable William V.  Roth, Jr.
United States Senate

Dear Senator Roth: 

You asked us to examine the Navy's plans for acquiring tactical
aircraft because of concerns that they were duplicative and
unaffordable.  Since your request, some naval aviation programs were
terminated and duplication and costs have been reduced.  Your staff
subsequently asked us to determine whether the Department of
Defense's (DOD) acquisition regulations permitted classification of
the F/A-18E/F program as a major modification rather than a new
program to avoid the more rigorous review, analysis, and
documentation required to justify a new program. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

In pursuing these issues, we found that the Under Secretary of
Defense for Acquisition, on May 12, 1992, approved the Navy's October
1991 request that the F/A-18E/F development be designated as a major
modification of its existing F/A-18C/D, instead of a new program.  He
decided that acquisition regulations did not require a Cost and
Operational Effectiveness Analysis (COEA) for this modification, and
he waived certain live fire testing requirements.  The Under
Secretary based his decisions on (1) Navy analyses that indicated the
E/F development was a low to moderate risk and (2) recommendations
made by the Conventional Systems Committee of the Defense Acquisition
Board (DAB). 

Applicable defense acquisition regulations allow management
discretion in these matters for the purpose of minimizing development
time and reducing costs.  By treating this as a modification, some
steps normally followed for new acquisitions have been skipped.  We
are not in a position to conclude whether the decisions made thus far
will have a positive or negative effect on the program. 


   NEW PROGRAM OR MAJOR
   MODIFICATION
------------------------------------------------------------ Letter :2

The decision to develop the F/A-18E/F was based on the Navy's
determination that it needed an upgraded carrier-based, multi-role
fighter that could perform both air-to-air and air-to-ground
missions.  The Navy concluded that this need could most appropriately
be met by follow-on development of its only existing multi-role
aircraft, the F/A-18C/D. 

The Navy considered the F/A-18E/F development a modification because,
in its estimation, the aircraft would be a logical continuation of an
upgrade strategy begun in 1982 for the Navy's F/A-18 multi-role
strike fighter.  In defending its decision, the Navy stated that 90
percent of E/F avionics would be common to those of the C/D; the
engine would be derived from the C/D; and the E/F would essentially
be a larger, more capable version of the C/D. 

The Navy stressed the commonality of the two aircraft, but there are
significant differences between the two.  The E/F will weigh about 25
percent more and will have a 25-percent larger wing, a 35-percent
larger horizontal tail, a 15-percent larger vertical tail, and a
34-inch fuselage extension.  Weapon stations will increase from 9 to
11, and there will be new engine inlets.  The differences are such
that an existing F/A-18C/D cannot be modified to the E/F
configuration, and the E/F will require a separate production line. 
Some senior DOD officials on the Conventional Systems Committee of
the F/A-18E/F DAB, after noting the differences between the F/A-18E/F
and the F/A-18C/D, expressed the opinion that the F/A-18E/F was a new
start.  However, these officials did not make an issue of this factor
and the consensus of the Board was that the F/A-18E/F was a
modification.  The DAB Chairman and ultimate decisionmaker, after
hearing the arguments presented during the DAB, made the decision to
approve the program as a major modification. 

The Navy proposed developing the F/A-18E/F as a major modification to
its F/A-18 in 1991.  The Under Secretary of Defense for Acquisition,
the F/A-18E/F milestone decision authority, in his May 12, 1992,
Acquisition Decision Memorandum, approved the Navy's request and
authorized entry of the E/F into Engineering and Manufacturing
Development (EMD), subject to the submission of a fully funded
F/A-18E/F program.  Approval included

  a waiver of full live-fire testing;

  a waiver of the COEA requirement;

  a provision restricting the issuance of Navy letter contracts for
     EMD unless the Navy's A-X (later designated the A/FX) COEA,
     evaluating both the F/A-18E/F and the F/A-18C/D as alternatives,
     supported the Under Secretary's decision; and

  a requirement to conduct a DAB milestone IIIA review before
     approval of low rate initial production. 

DOD Instruction 5000.2 states that if a major modification program is
approved, the milestone decision authority will determine which
acquisition phase should be entered.  This decision will be based on
the level of risk, the adequacy of risk management planning, and the
amount of resources to be committed. 

In granting the live-fire testing waiver, the Under Secretary
acknowledged that the Navy was developing a F/A-18E/F live fire-test
plan that would be less rigorous than normally required.  The Deputy
Director, Test and Evaluation, Live-Fire Testing disagreed with the
waiver, stating that extrapolating data from previous tests of the
F/A-18 and applying it to the E/F, as the Navy plans, is risky.  The
waiver is allowed under 10 U.S.C.  2366. 

In June 1992, the DOD Inspector General criticized the Navy for not
preparing a COEA to demonstrate that the F/A-18E/F is the most
cost-effective solution to a recognized military need.  The Office of
the Secretary of Defense countered that the F/A-18E/F would be a
major modification of an existing aircraft and that, according to DOD
regulations, a COEA is not necessarily required.  The Inspector
General subsequently reported that the Navy's A/FX aircraft COEA,
dated November 19, 1992, comparing the F/A-18E/F to both the
F/A-18C/D and the proposed A/FX aircraft, satisfied his earlier
concerns.  This COEA was prepared by the Center for Naval Analysis. 

After the Under Secretary's approval, the Navy did develop a
F/A-18E/F live-fire test plan, and the Center for Naval Analysis
performed a limited F/A-18E/F COEA (dated December 1992) using
information and analysis from the A/FX COEA.  The Fiscal Year 1993
National Defense Authorization Act, Public Law 102-484 section 214,
dated October 23, 1992, required the Navy to develop prototype
aircraft.  According to the F/A-18E/F Deputy Program Manager, the
Navy will use two EMD aircraft for that purpose. 

Navy officials commenting on a draft of this report disagreed with
our characterization of the F/A-18E/F COEA as limited.  They said all
COEAs were limited to some degree.  They said a number of fixed-wing
aircraft were considered including the A/FX, the F/A-18C/D, the F-22,
and the A-6E.  We commented on the limited depth of the Navy's
analysis in an earlier examination\1 of the decision to develop the
F/A-18E/F.  At that time, we reported that DOD's acquisition
regulations required the Navy to consider alternative ways to perform
missions before approving a development effort, such as Air Force
bombers or missiles.  The Navy's analysis did not explore these
alternatives.  In fact the Center for Naval Analysis officials who
prepared the COEA agreed that the E/F COEA was limited. 


--------------------
\1 Naval Aviation:  Consider All Alternatives Before Proceeding With
the F/A-18E/F (GAO/NSIAD-93-144, Aug.  27, 1993). 


   ACQUISITION REGULATIONS ALLOW
   MANAGEMENT DISCRETION
------------------------------------------------------------ Letter :3

DOD Instruction 5000.2 (Defense Acquisition Management Policies and
Procedures) states that a major modification may be brought about by
a change in threat or defense planning guidance, an identified
operational deficiency, or an opportunity to reduce ownership costs. 
Neither DOD Directive 5000.1 (Defense Acquisition Management) nor DOD
Instruction 5000.2 provide specific criteria for determining whether
an acquisition program should be classified as a modification or a
new start.  The regulations do allow the Under Secretary of Defense
for Acquisition to make that determination. 

DOD Directive 5000.1 (Defense Acquisition Management) and DOD
Instruction 5000.2 (Defense Acquisition Management Policies and
Procedures) normally require new programs to be analyzed and reviewed
at various decision milestones and receive Department approval before
proceeding through each successive step of the acquisition cycle. 
Figure 1 depicts DOD's System Acquisition Process. 

   Figure 1:  DOD's System
   Acquisition Process

   (See figure in printed
   edition.)

Note:  When the Under Secretary approved the F/A-18E/F development as
a major modificaiton, he approved entry into phase II of the
acquisition cycle or the engineering and manufacturing development
phase. 

As shown in figure 1, milestone 0 requires a determination that an
identified mission need warrants study of alternatives.  Approval is
obtained to conduct studies that define and evaluate the feasibility
of alternative concepts to satisfy mission needs and to develop cost,
schedule, and performance objectives.  Milestone I requires a
determination that a new acquisition is warranted.  If approved,
program cost, schedule, and performance objectives are established;
design characteristics and expected system concepts are explored; and
critical technologies and processes are evaluated.  Milestone II
requires a determination that continuation of development, testing,
and preparation for production is warranted.  If approved, the
program enters EMD, to develop a stable, producible, and
cost-effective design; validate manufacturing processes; and test and
evaluate system capabilities.  Milestone III requires a determination
that the program warrants a commitment to build, deploy, and support
the system.  If approved, the program enters production.  A stable,
efficient production and support base is established; weapons and
equipment are produced; follow-on testing is conducted; and
performance and quality are monitored. 

The cumulative amount of review, analysis, and documentation for any
acquisition program increases as the program progresses through
acquisition decision milestones.  When the Under Secretary approved
E/F development as a major modification, he approved entry into phase
II of the acquisition cycle or the EMD phase.  By doing this, he
authorized bypassing acquisition phases 0 and I.  If the E/F had been
treated as a new start with development starting at milestone 0,
there would have been additional documentation requirements and
milestone reviews.  For instance, milestone 0 approval would have
required a new Mission Needs Statement identifying a mission need
that cannot be met by existing systems.  The statement must be
supported by a validated threat assessment.  The Navy did not prepare
a Mission Needs Statement for the E/F.  It relied upon the assessment
that justified the original F/A-18 in the mid-1970s.  Milestone I
approval would have required either provisions for competitive
prototyping or an exception obtained. 

Before a system can enter phase III and be deployed, certain
additional analyses may be required.  The system should include the
following: 

  A System Threat Assessment Report that documents the military
     department's threat assessment justifying the system. 

  A Test and Evaluation Master Plan that lists the critical
     development and operational test objectives and outlines the
     testing and evaluation approach and methodology. 

  A COEA, that compares the cost-effectiveness of alternatives.  At
     milestone III, Production Approval, the analysis may be only an
     update of a previous analysis. 


   DEVELOPMENT CONTRACT AWARDED TO
   MCDONNELL DOUGLAS AIRCRAFT
   COMPANY
------------------------------------------------------------ Letter :4

On July 20, 1992, the Navy awarded the McDonnell Douglas Aircraft
Company a sole-source contract to develop the F/A-18E/F.  We
determined that the Navy complied with requirements of the
Competition in Contracting Act (CICA).  CICA generally requires
agencies to use full and open competition for procurements.  However,
it recognizes an exception to this requirement when an agency
reasonably determines that only one type of property or service is
available to satisfy its needs from only one responsible source. 
This decision involves the determination that the expected cost to
develop another source could not be recovered through competition or
that an unacceptable delay in fulfilling agency needs would occur. 

With regard to the costs needed to develop another source for the
aircraft, the Navy's justification and approval (J&A) document,
required by CICA to support the sole-source award, states that
McDonnell has been the sole designer, developer, weapon system
integrator, and producer of the F/A-18 for over 15 years.  As a
result, McDonnell owns much of the technical data needed to develop
any F/A-18 derivative.  The J&A document stated that McDonnell has an
established supplier base and composite material and manufacturing
processes that are not expected to change substantially for the E/F. 
On this basis, the J&A document concluded that the additional cost to
develop another source to the level necessary to provide an upgrade
of the F/A-18 aircraft would be prohibitive and could not be
recovered through competition. 

The Navy's J&A document also concluded that the time needed to
develop a second source would result in an undue delay in meeting
established milestones.  At the time the determination was made, the
aircraft the F/A-18E/F was intended to replace were expected to start
reaching the end of their fatigue lives in the mid-1990s.  The J&A
document states that it would be time-consuming to acquire the full
F/A-18 technical disclosure package and estimates that the time
needed to develop a second source would result in an unacceptable
delay of at least 2 years. 


---------------------------------------------------------- Letter :4.1

Our review was conducted in accordance with generally accepted
government auditing standards.  We did not obtain written agency
comments, but we did obtain oral comments on a draft of this report
from Defense and Navy officials.  Their views were incorporated where
appropriate. 

We are sending copies of this report to the Secretaries of Defense
and the Navy.  We will also make copies available to other interested
parties upon request. 

If you or your staff have any questions concerning this report,
please contact me at (202) 512-3504.  Major contributors to this
report were
Jess T.  Ford, William C.  Meredith, Jerry W.  Clark, and Anthony J. 
DeFrank. 

Sincerely yours,

Richard Davis
Director, National Security
Analysis