Army Medium Trucks: Information on Delivery Delays and Corrosion Problems
(Letter Report, 01/13/99, GAO/NSIAD-99-26).

Pursuant to a congressional request, GAO reviewed the Army's Family of
Medium Tactical Vehicles (FMTV) program, focusing on: (1) the causes and
effects of the contractor's delays in delivering acceptable trucks; and
(2) the Army's actions to mitigate corrosion problems on FMTV trucks.

GAO noted that: (1) a combination of factors caused lengthy delays in
delivering FMTV trucks; (2) the Army did not execute a low-risk
acquisition strategy; (3) the contract contained an aggressive schedule
for truck production considering the contractor's inexperience; (4) the
inexperienced contractor had difficulty in both establishing a
production line and producing trucks that could meet qualification and
operational testing requirements; (5) despite the difficulties, the Army
allowed production to continue and increase during testing; (6) as a
result, many trucks were produced that required modification or repair;
(7) because of production problems and competing funding requirements,
the Army decided in 1994 to terminate the final year of the original
5-year FMTV production contract; (8) the Army requested only enough
funding for fiscal year 1996 to terminate the program; (9) Congress, not
wanting a break in the program, provided additional funding for that
year, but not enough to fully fund the production quantities called for
in the contract; (10) the Army and the contractor agreed to extend the
contract and spread the final year's quantities over 3 years; (11) the
Army determined that the first 4,955 trucks produced did not meet the
FMTV's corrosion protection requirements; (12) corrosion was found on
the cabs of trucks less than 3 years old that were still awaiting
modification at the contractor's plant; (13) rather than making the
contractor replace all the 4,955 truck cabs at a cost of $31 million,
the Army accepted the contractor's proposal to repair the corrosion
damage and to provide a 10-year warranty, not to exceed $10 million,
against any future corrosion; (14) the Army also subjected one of the
4,955 trucks to a contract-specified corrosion test; (15) it failed with
corrosion being detected in 60 areas; (16) following these events, the
Army and the contractor agreed on modified production procedures to
address the corrosion problem on subsequently produced trucks; (17)
however, the Army and the contractor ultimately concluded that
galvanized steel cabs may be required to meet the 10-year corrosion
prevention requirement and the contract was modified to require
galvanized steel cabs; (18) the contract's final 3,751 trucks were
produced with galvanized steel cabs; (19) the Army agreed to pay up to
$7 million for the galvanized steel cabs and other corrosion
improvements; and (20) the Army did not test or require the contractor
to provide a corrosion warranty on the 2,491 trucks produced prior to
the switch to galvanized steel cabs.

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

 REPORTNUM:  NSIAD-99-26
     TITLE:  Army Medium Trucks: Information on Delivery Delays and 
             Corrosion Problems
      DATE:  01/13/99
   SUBJECT:  Army procurement
             Department of Defense contractors
             Military land vehicles
             Concurrency
             Schedule slippages
             Contract modifications
             Quality control
             Product evaluation
             Contract oversight
IDENTIFIER:  Family of Medium Tactical Vehicles
             
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Cover
================================================================ COVER


Report to the Honorable
Tom Harkin, U.S.  Senate

January 1999

ARMY MEDIUM TRUCKS - INFORMATION
ON DELIVERY DELAYS AND CORROSION
PROBLEMS

GAO/NSIAD-99-26

Army Medium Trucks

(707380)


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

  DOD -
  FMTV -

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


B-281385

January 13, 1999

The Honorable Tom Harkin
United States Senate

Dear Senator Harkin: 

As you requested, we reviewed the Army's Family of Medium Tactical
Vehicles (FMTV) program.  On November 19, 1998, we reported on the
vehicle's production problems and recommended safeguards needed to
preclude such problems in future contracts.  We also reported on the
Army's plan to develop a second source producer without conducting a
cost and benefit analysis or examining alternatives.  \1

This report responds to your request for historical FMTV program
information.  Specifically, it addresses (1) the causes and effects
of the contractor's delays in delivering acceptable trucks and (2)
the Army's actions to mitigate corrosion problems on FMTV trucks. 


--------------------
\1 Army Medium Trucks:  Acquisition Plans Need Safeguards
(GAO/NSIAD-99-28, Nov.  19, 1998). 


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

A combination of factors caused lengthy delays in delivering FMTV
trucks.  First, the Army did not execute a low-risk acquisition
strategy.  It selected an FMTV contractor that was not experienced in
producing trucks and was no longer affiliated with an experienced
truck producer.  Second, the contract contained an aggressive
schedule for truck production considering the contractor's
inexperience.  The inexperienced contractor had difficulty in both
establishing a production line and producing trucks that could meet
qualification and operational testing requirements.  Despite the
difficulties, the Army allowed production to continue and increase
during testing.  As a result, many trucks were produced that required
modification or repair. 

Because of production problems and competing funding requirements,
the Army decided in 1994 to terminate the final year of the original
5-year FMTV production contract.  The Army requested only enough
funding for fiscal year 1996 to terminate the program.  Congress, not
wanting a break in the program, provided additional funding for that
year, but not enough to fully fund the production quantities called
for in the contract.  As a result, the Army and the contractor agreed
to extend the contract and spread the final year's quantities over 3
years.  The agreement included a repricing of the trucks.  The
project office has not determined the exact cost of the contract
extension but has an estimate that it will add $85 million to the
Army's contract cost.  Also, we estimate that delays in delivering
trucks may cost the Army an additional $22 million to operate and
support older trucks that the FMTV trucks were expected to replace. 

The Army determined that the first 4,955 trucks produced did not meet
the FMTV's corrosion protection requirements.  The contract specified
that the trucks were to be designed to prevent corrosion from
perforating or causing other damage requiring repair or replacement
of parts during the initial 10 years of service.  Corrosion was found
on the cabs of trucks less than 3 years old that were still awaiting
modification at the contractor's plant.  Rather than making the
contractor replace all 4,955 truck cabs at a cost of $31 million, the
Army accepted the contractor's proposal to repair the corrosion
damage and to provide a 10-year warranty, not to exceed $10 million,
against any future corrosion.  This dollar limitation, in effect,
relieved the contractor of a potential $21 million liability. 

The Army also subjected one of the 4,955 trucks to a
contract-specified corrosion test.  It failed with corrosion being
detected in 60 areas.  Following these events, the Army and the
contractor agreed on modified production procedures to address the
corrosion problem on subsequently produced trucks.  The contractor
produced 2,491 trucks under these procedures.  However, the Army and
the contractor ultimately concluded that galvanized steel cabs may be
required to meet the 10-year corrosion prevention requirement and the
contract was modified to require galvanized steel cabs.  The
contract's final 3,751 trucks were produced with galvanized steel
cabs.  The Army agreed to pay up to $7 million for the cabs and other
corrosion improvements.  It did not test or require the contractor to
provide a corrosion warranty on the 2,491 trucks produced prior to
the switch to galvanized steel cabs. 


   BACKGROUND
------------------------------------------------------------ Letter :2

At a projected cost of $15.7 billion, the FMTV program is one of the
Army's largest acquisition programs.  From fiscal year 1991 through
fiscal
year 2022--a 32-year period--the Army plans to purchase 85,488 FMTV
trucks to replace its aging medium truck fleet.  Under the program,
the Army will purchase a family of 2.5- and 5-ton trucks based on a
common truck cab and chassis.  The 2.5-ton trucks, called light
medium tactical vehicles, consist of cargo and van variants and a
2.5-ton trailer.  The 5-ton trucks, called medium tactical vehicles,
consist of seven variants--cargo, long wheel base cargo, dump, fuel
tanker, tractor, van, and wrecker--and a 5-ton trailer. 

The FMTV acquisition strategy has two phases--prototype and
production.  In the prototype phase, three companies were awarded
contracts to develop and produce prototype trucks for evaluation and
testing.  The contracts were awarded on October 21, 1988, and the
prototypes were tested from January to December 1990.  On October 11,
1991, the Army awarded the winning contractor--Stewart & Stevenson
Services, Inc., Houston, Texas--a $1.2 billion, 5-year fixed-price
production contract for the first 10,843 FMTV trucks.  The contract
contained options for additional trucks.  The fifth year of the
contract was subsequently restructured and the contract was extended
2 years.  Stewart & Stevenson completed production under the contract
in November 1998.  The initial production contract does not include
the 5-ton fuel tanker, 5-ton van, and both trailers.  These vehicles
will be included in future production contracts. 

In our November 1998 report, we found that the Army had not (1)
instituted safeguards to ensure that existing production problems did
not occur in follow-on production contracts and (2) performed a cost
and benefit analysis of its plan to develop a second source for the
trucks or compared its plan with other alternatives.  We recommended
that the Army include safeguards in follow-on production contracts so
that it does not repeat errors and does perform a cost and benefit
analysis of its second source plans before continuing with them. 


   FACTORS CONTRIBUTING TO FMTV
   DELIVERY DELAYS
------------------------------------------------------------ Letter :3

The Army did not execute a low-risk acquisition strategy.  To reduce
the time to develop and field FMTV trucks, the Army streamlined its
acquisition strategy.  Rather than a lengthy development phase, the
Army decided to conduct a prototype competition and use the results
as part of the evaluation of proposals for a production contract. 
The Army believed this strategy would be low-risk partly because the
contractors participating in the prototype competition were
experienced in producing military trucks or affiliated with an
experienced truck producer.  However, the Army did not include
experience or affiliation with an experienced truck producer as a
requirement in the production contract solicitation and subsequently
awarded the FMTV multiyear production contract to a contractor that
was neither experienced in truck production nor affiliated with an
experienced truck producer.  The contractor had been affiliated with
an experienced truck producer during the prototype phase but did not
maintain its affiliation.  Further, the contract contained an
aggressive production schedule that did not take into account the
contractor's inexperience.  The inexperienced contractor had problems
establishing a production line and producing trucks that met testing
requirements.  These problems resulted in substantial delays in
delivering the trucks.  In response to the schedule delays, the Army
and contractor agreed to accelerate truck production during testing
even though the trucks were not meeting test requirements. 


      ARMY DID NOT EXECUTE A
      LOW-RISK ACQUISITION
      STRATEGY
---------------------------------------------------------- Letter :3.1

The Army used a streamlined acquisition strategy to reduce the time
required to develop and field FMTV trucks.  The reduction in time was
to be achieved by combining the demonstration and validation phase\2
and the engineering and manufacturing development phase into a single
prototype competition phase and by conducting concurrent tests.  The
Army believed its streamlined acquisition strategy was achievable and
low risk because (1) FMTV trucks would be designed using
state-of-the-art commercial components that did not push the
manufacturing and production process beyond the current capability of
truck manufacturers, (2) FMTV truck configurations would be
established and subjected to prototype testing prior to the
production contract award, and (3) contractors participating in the
prototype competition either had produced military trucks in the past
or were affiliated with an experienced military truck producer. 

The production contract solicitation did not require the contractor
to be experienced in truck production or affiliated with an
experienced truck producer.  The Army awarded the production contract
to Stewart & Stevenson, which was not experienced in manufacturing
trucks.  Stewart & Stevenson was a distribution and service company
for various products and was experienced in producing gas turbine
generators and aircraft ground support equipment.  Nevertheless, the
production contract called for the delivery of the first FMTV trucks
for testing within 11 months of award and the Army planned to have
enough trucks to fully equip its first unit with FMTV trucks by
October 1993--about 24 months after contract award. 

During the prototype competition phase of the program, Stewart &
Stevenson was affiliated with an experienced military truck producer
(Steyr-Daimler-Puch, AG.  of Austria).  Stewart & Stevenson
subcontracted with Steyr to design and develop FMTV prototypes based
on the design of a truck Steyr produced for the Austrian army.  Steyr
designed and built the FMTV prototypes in Austria, supported the FMTV
prototype testing, and delivered an FMTV technical data package. 
According to a Stewart & Stevenson official, Steyr completed its
subcontract work before Stewart & Stevenson submitted its production
proposal and was not included in the production phase of the program. 

When the Army issued the solicitation for the production contract, it
established a source selection board, which evaluated the proposals
of the three competing contractors.  The Army gave highest
consideration to the technical and cost factors of the proposals. 
Stewart & Stevenson was selected because its proposal offered the
best value for meeting the Army's overall requirements and receives
the highest score for the technical factor and was the lowest cost. 
The board considered the government's previous experience with the
prototype contractors as part of the Army's overall production
readiness evaluation.  This evaluation noted that Stewart & Stevenson
(1) had no prior experience in high volume production of combat or
tactical vehicles, (2) needed to convert European engineering
drawings to U.S.  specifications and standards, and (3) had
unsatisfactory delivery performance on past low dollar purchase
orders. 


--------------------
\2 Now called the program definition and risk reduction phase. 


      CONTRACTOR INEXPERIENCE
      CONTRIBUTED TO DELAYS
---------------------------------------------------------- Letter :3.2

The contractor, which was inexperienced in truck production, had
difficulties in both establishing a production line and producing
trucks that would pass test requirements.  To acquire FMTV truck
production capability, Stewart & Stevenson purchased a plant from an
oil-drilling equipment manufacturer, configured the plant for truck
production, and established a tactical truck division.  According to
Defense officials, Stewart & Stevenson immediately experienced
problems in producing trucks that were capable of meeting FMTV
requirements.  For example, the FMTV data package provided by Steyr
was in German and used metric measurements.  Stewart & Stevenson did
not accurately translate the instructions or convert the
measurements.  Production disruptions occurred when instructions did
not work as intended and when subcontractor parts, produced using
drawings furnished by the contractor, did not fit.  As a result, the
contractor was late in delivering trucks for testing. 

The contract required the contractor to deliver a minimum of 85
trucks by October 1992 for production qualification testing, initial
operational testing, and technical manual verification.  The
contractor delivered its first truck in March 1993 and did not
deliver 85 trucks until March 1994.  As a result, the start of the
production qualification and operational testing was delayed. 


         DELAYS IN PASSING TESTS
-------------------------------------------------------- Letter :3.2.1

The contractor took much longer than expected to deliver trucks
capable of passing production qualification and operational tests. 
Production qualification testing was originally scheduled to be
completed in August 1993; the test was not completed until December
1994.  The test was designed to determine whether the FMTV truck
variants fulfilled the Army's technical performance and reliability,
availability, and maintainability requirements.  The trucks failed
the test because they did not meet reliability and some performance
requirements.  The Army identified over 90 problems that the
contractor was required to correct. 

Initial operational testing was originally scheduled to be completed
in June 1993.  However, because of production problems, the Army did
not begin operational testing until October 1993.  The test was
designed to determine whether and to what degree the FMTV truck
variants could accomplish missions when operated and maintained by
soldiers in the expected operational environment.  The test was
suspended in December 1993 because the trucks did not meet
operational reliability, availability, and maintainability
requirements.  In August 1994, the Army started a second operational
test, but in September 1994, the test was suspended because test
personnel were deployed on a peacekeeping mission in Haiti.  However,
according to Army test assessment officials, the test was about to be
suspended because the trucks were not meeting reliability
requirements. 

In February 1995, the Army started a second production qualification
test of newly produced trucks that incorporated changes to address
problems identified during earlier testing.  Operational testing of
the new trucks began in April 1995.  The Army completed both tests in
June 1995.  The trucks were assessed as having met the FMTV
requirements in both tests.  However, because of difficulties in
producing trucks that passed the tests, the contractor did not
receive approval to begin full-rate production until August 1995, 23
months later than planned, and the first unit was not equipped with
FMTV trucks until January 1996, 2 years and 3 months later than
planned. 


      CONTINUED PRODUCTION
      INCREASED TRUCKS NEEDING
      REPAIR
---------------------------------------------------------- Letter :3.3

According to a project official, the Army believed that increasing
monthly delivery quantities during testing would allow the contractor
to catch up on its scheduled deliveries.  The production contract
allowed the contractor to deliver up to 150 trucks a month until the
testing phase was completed.  The Army modified the contract to
increase the monthly delivery limit to 200 trucks.  Because the
higher monthly delivery limit exceeded the contractor's production
capability, the contractor was able to produce as many trucks as it
could. 

The trucks that were produced could not meet FMTV technical and
operational requirements.  By the time the production qualification
and operational tests were successfully completed in June 1995, the
contractor had produced about 3,000 trucks, all needing varying
levels of work to conform to the specifications of those that had
passed testing.  About 1,474 trucks had to be disassembled to their
frames and remanufactured.  This additional work delayed the
production of new trucks during 9 months while the contractor
modified the 3,000 trucks.  The contractor had to stop new production
for 5 months and produced only 175 new trucks during the other 4
months.  The contract required the contractor to pay for the
modifications needed to make the trucks meet FMTV requirements. 


      EXTENSION OF THE PRODUCTION
      CONTRACT
---------------------------------------------------------- Letter :3.4

In 1994, the Army, in response to FMTV production problems and other
competing funding priorities, decided to terminate the final year of
the FMTV production contract.  Accordingly, for fiscal year 1996, the
Army only requested $39.7 million for FMTV termination costs rather
than the $384 million needed to complete the final year of the
contract.  As part of the termination plans, the Army planned to
recompete a new multiyear FMTV production contract in fiscal year
1998. 

The Congress, in reviewing the Army's fiscal year 1996 budget
request, did not support the termination.  The Congress, citing truck
modernization as vital to the Army and the need to avoid a production
break, added $110 million to the Army's request for a total
appropriation of $149.7 million for the program.  Since this was not
enough to fully fund the final year of the contract, the Army and the
contractor agreed to extend the FMTV production contract 2 years,
ending in December 1998.  The agreement increased the price of the
FMTV trucks.  The Army requested additional funding for the remaining
2 years in its fiscal years 1997 and 1998 budget requests.  The
project office has not determined the exact cost of the contract
extension but has an estimate that it will add $85 million to the
Army's contract cost. 


      COST OF THE DELIVERY DELAY
---------------------------------------------------------- Letter :3.5

The Army postponed the delivery dates five times during the contract
to account for the delays.  These delays in delivering and fielding
the trucks caused the Army to incur additional costs to operate and
support its current fleet of older, less reliable trucks.  We
estimate that as of December 31, 1997, the Army may have incurred an
additional $22 million to operate the older trucks that the FMTV
trucks were to replace.  We estimated this potential cost by
subtracting the projected annual cost to operate the new 2.5- and
5-ton FMTV trucks from the annual cost of operating the 2.5- and
5-ton trucks the Army plans to replace.  The scope and methodology
section of this report contains a more detailed discussion of this
calculation. 


   CORROSION PROBLEMS WITH FMTV
   TRUCKS
------------------------------------------------------------ Letter :4

The first 4,955 trucks produced did not meet the FMTV corrosion
protection requirements.  The FMTV production contract specifies that
FMTV trucks be designed so that corrosion will not perforate or cause
other damage requiring repair or replacement of parts during the
initial 10 years of their service lives.  The contract also specifies
the procedures to be used to test the 10-year corrosion protection. 

The FMTV project office first became aware that FMTV trucks had
corrosion problems in late 1995, when a truck was found corroded
through the sheet metal of its cab.  The truck was less than 3 years
old and was among those stored at the plant awaiting modification. 
The contractor and the Army surveyed all of the trucks in storage and
discovered corrosion on other truck cabs.  They determined that the
main causes of the corrosion were inadequate cleaning and painting
procedures by the cab subcontractor, McLaughlin Body Company. 
McLaughlin subsequently improved its procedures at no cost to the
Army.  These improvements would be reflected in trucks produced after
February 28, 1997. 

On January 19, 1996, the Army agreed to accept trucks with cabs
produced before McLaughlin improved its procedures if Stewart &
Stevenson (1) repaired or replaced cabs that showed corrosion, (2)
agreed to a corrosion test of two repaired cabs to verify the
repairs, and (3) agreed to repair or replace the older cabs if
corrosion appeared on them within
5 years.  Pending its approval of the contractor's corrective action
plan, the Army withheld $1,000 or $2,000 per truck, depending on
type.  Both contractor and Army project officials said that the Army
had not accepted these trucks and therefore could have required the
contractor to replace all the cabs on all the trucks already produced
or in various stages of production before McLaughlin improved its
processes--a total of 4,955 trucks.  We estimated that this could
have cost the contractor $31 million.  In addition, the Army and the
contractor subsequently discovered that corrosion had also penetrated
the beds of FMTV cargo trucks stored at the plant.  Under terms
similar to the cab agreement, the Army agreed to accept trucks with
corrosion repairs of their cargo beds. 

The Army later tested the corrosion repairs made on two cabs and
found the repairs unacceptable.  On September 25, 1996, the Army
informed the contractor that it would no longer accept trucks with
repaired cabs.  The contractor offered to provide a 10-year corrosion
protection warranty on the cabs, cargo beds, frame rails, and
crossmembers on all trucks produced through February 28, 1997, if the
Army would continue accepting trucks with corrosion repairs.  Trucks
produced after February 28, 1997, would be produced with cabs
assembled by McLaughlin after it improved its procedures and would
not be covered by the corrosion warranty.  Under the warranty, the
contractor agreed to pay for any repair caused by corrosion
perforation or corrosion damage that requires repair or replacement
of parts.  The warranty limited the contractor's liability for these
repairs to $10 million--$21 million less than the contractor's
estimated $31 million liability for cab replacement. 

On November 13, 1996, the Army agreed to the warranty and again began
accepting trucks with corrosion repairs.  At the same time, the Army
agreed to release to the contractor all funding previously withheld
because of corrosion problems.  The corrosion warranty was in
addition to the contract's warranty provision that covers defects in
materials and workmanship for 18 months or 12,000 miles. 

The Army also ran a contract-specified corrosion test on an FMTV
cargo truck with a cab produced before McLaughlin improved its
procedures--one of the first 4,955 trucks produced under the
contract.  The truck failed the test.  By the end of the test, the
truck was corroded in 60 areas.  Army officials said that since the
Army had specified the material to be used in 20 of the areas, it
agreed to pay for necessary changes in these areas to improve the
FMTV trucks' corrosion protection.  The Army also agreed to pay a
portion of the cost of correcting the corrosion problems in the
remaining 40 areas because the contractor maintained that the test
specified in the contract indicated the effects of 15 years of
corrosion even though the contract only required trucks with 10 years
of corrosion protection.  The Army was unable to disprove the
contractor's claim. 

The Army and the contractor concluded that using galvanized (zinc
coated) steel to produce the cabs may be the only way to meet the
10-year corrosion protection requirement.  They also believed that
galvanization would likely provide more than 10 years of corrosion
protection.  Because the galvanized cab has the potential to protect
against corrosion beyond the contract requirement, the Army agreed to
share the cost of the cabs.  The Army and the contractor modified the
FMTV contract to specify the use of galvanized steel for FMTV cabs
and of other materials to correct the corrosion problems discovered
in the contract-specified corrosion test.  The modifications set a
ceiling of $7 million on the Army's share of costs.  The contractor
produced 3,751 trucks with galvanized cabs under the first production
contract.  Army project officials said that the Army is designing a
new corrosion test to determine the number of years of protection the
new design will provide.  They also said that the corrosion
protection enhancements and the corrosion test of these enhancements
will be included as requirements in future FMTV truck production
contracts. 

The contractor produced 2,491 trucks after McLaughlin improved its
procedures to address corrosion problems found on the first 4,955
trucks and before trucks with galvanized steel cabs were produced. 
These 2,491 trucks have not been tested for corrosion and are not
covered under the agreed upon corrosion warranty covering the first
4,955 trucks produced. 


   CONCLUSIONS
------------------------------------------------------------ Letter :5

The Army's decision to award a $1.2-billion FMTV contract to a
company that was not experienced in truck production, did not have
truck production facilities, and was not affiliated with an
experienced producer, was not consistent with its plans for a
low-risk acquisition strategy.  Further, the Army contract contained
an aggressive production schedule, considering an inexperienced
contractor, that further added to the risks.  The combination of
inexperience and an aggressive production schedule were major
contributors to the contractor's production problems and schedule
delays.  The Army changed its plans to terminate the final year of
the 5-year FMTV production contract when the Congress provided
additional funding to continue the program.  Instead of terminating
the final year, the contract was extended 2 additional years with the
original final year's production quantities spread over the 3-year
period.  The contract extension added an estimated $85 million to the
original contract price. 

When the Army found that the first 4,955 trucks produced did not meet
the corrosion protection requirements, the contractor agreed to
repair the corroded trucks, provide a 10-year corrosion warranty on
those trucks, and make changes in its production process and
procedures to correct the corrosion problem.  The contractor produced
2,491 trucks under these new procedures.  However, the Army and the
contractor ultimately concluded that galvanized steel cabs may be
needed to fully meet the truck's 10-year corrosion prevention
requirement.  The contract was subsequently modified to require the
galvanized steel cabs.  The Army did not test or require the
contractor to provide a corrosion warranty on the 2,491 trucks
produced prior to the switch to galvanized steel. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :6

In commenting on a draft of this report, DOD generally agreed that it
identified lessons learned from a historical perspective.  DOD
included with its written comments an enclosure providing additional
contextual information for some of the issues in the report.  In the
enclosure, DOD stated that it believed the acquisition strategy for
the FMTV program has been appropriate.  According to DOD, the
competitive source selection took into account a balance of factors,
including the contractor's assessed production capabilities.  As
noted in the report, we did not find the combination of awarding a
contract with an aggressive production schedule to an inexperienced
truck producer, who had no affiliation with an experienced truck
producer, consistent with a low-risk acquisition strategy. 

In response to the report's statement that production problems and
higher funding priorities contributed to the decision to terminate
the final year of the FMTV contract, DOD noted that the decision was
based on funding demands from higher priority programs.  We agree
that the decision was based on funding priorities; however, as a DOD
official familiar with the decision stated, the FMTV program's
schedule and production problems weakened its ability to compete with
other programs for funds. 

DOD also states that improving corrosion protection on tactical
vehicles is an ongoing, high priority, effort and the contractor
continues to be required to meet corrosion protection requirements. 
Based on the FMTV corrosion problems cited in this report, we agree
that improving corrosion protection should be an ongoing high
priority effort and the contractor should be required to meet the
corrosion protection requirements.  DOD's comments are reprinted in
appendix I. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7

To determine the contractor's delay in delivering acceptable FMTV
trucks, including the Army's decision to restructure the current
contract and the Army's handling of corrosion problems, we
interviewed Defense, Army, and contractor officials and reviewed
various FMTV program documents, including the acquisition strategy
and plan, the production contract, budget documents, selected
acquisition reports, and the production contract's source selection
board evaluation.  For early historical data, we had to rely mainly
on oral testimony because many documents dealing with the early
program were unavailable.  We were able to obtain some of the earlier
documents, mostly those dealing with FMTV truck testing, by reviewing
our workpapers from previous reviews of the program. 

To determine the impact of delays in delivering FMTV trucks, we
calculated additional operating and support costs the Army might have
incurred as of December 31, 1997.  To accomplish this, we first
determined operating tempo for the older M35 2.5-ton and M809 5-ton
trucks.  We selected the M35 and M809 trucks because, according to
project office officials, they were the trucks the FMTV trucks would
be replacing and the trucks the project office used in its update of
the FMTV program baseline cost estimate.  The FMTV project office
provided a 3-year average operating and support cost per mile for the
older trucks and an estimated operating and support costs per mile
for FMTV trucks.  A project office official said that the older truck
average was based on the trucks used in three Army major commands. 
We determined an average operating tempo for each truck using the
operating tempo reported by the same three Army major commands.  This
information was reported by the U.S.  Cost and Economic Analysis
Center in its fiscal year 1996 tactical systems cost report, which
was updated as of October 27, 1997.  We computed monthly operating
and support costs for the older trucks and FMTV trucks using the
operating tempo for the older trucks.  We then computed the
difference between the cost for the older and the FMTV trucks.  This
provided the monthly additional operating and support costs to
operate the older 2.5- and 5-ton trucks. 

To determine the delay in delivering FMTV trucks to the government
and the number of vehicles involved, we first identified the number
of 2.5- and 5-ton FMTV trucks accepted by the government on a monthly
basis from material receiving and shipping report data provided by
the Defense Finance and Accounting Service.  We compared the original
FMTV delivery schedules to actual delivery dates to compute the
number of each type of truck that was delayed and the duration of the
delay. 

To compute the total additional operating and support costs that may
have been incurred by the Army, we multiplied the delay in months by
the number of FMTV trucks delivered late.  We then multiplied that
product by the monthly additional operating and support costs for the
older trucks.  This gave us an estimate of the additional costs that
the Army might have incurred as of December 31, 1997, because of
delayed FMTV truck deliveries. 

We did not independently verify the accuracy of material receiving
and shipping report data obtained from the Defense Finance and
Accounting Service; however, we corroborated its accuracy with
another database that used the same original source documentation. 
The Defense Finance and Accounting Service also relies on its
database to make payments to the contractor for delivered vehicles. 
We also did not verify the accuracy of operating and support cost
factors and operating tempo for the older 2.5- and 5-ton trucks and
FMTV trucks provided by the U.S.  Army Cost and Economic Analysis
Center.  This data is part of the operating and support management
information system managed by the U.S.  Army Cost and Economic
Analysis Center and is the Army's source of historical operating and
support cost information for more than 400 systems deployed in
tactical units. 

We based our estimate of the potential cost of replacing all of the
cabs on trucks covered by the corrosion warranty on an Army estimate. 
The Army estimated that it would cost $18.5 million to replace all of
the cabs on trucks covered by the warranty.  However, it bases its
estimate on 2,864 trucks that it thought would be covered, not 4,955
trucks that actually are covered by the warranty.  The Army used a
replacement cost of $8,000 per air drop cab and $6,000 per standard
cab to develop its estimate.  We were not able to determine the
number of air drop and standard trucks in the 2,091 trucks not
included in the Army's estimate.  To produce a conservative estimate
of the potential total cost to replace all the cabs, we multiplied
the standard cab cost of $6,000 per truck by 2,091 trucks to increase
the Army's estimate by $12.5 million to $31 million. 

We performed our work at Defense and Army Headquarters, Washington,
D.C.; Defense Contract Management Command Headquarters, Fort Belvoir,
Virginia; Medium Tactical Vehicle Project Office, U.S.  Army
Tank-automotive and Armaments Command, Warren, Michigan; U.S.  Army
Cost and Economic Analysis Center, Arlington, Virginia; Defense
Contract Management Command--Stewart & Stevenson Office, Sealy,
Texas; Tactical Vehicle Systems, Stewart & Stevenson Services, Inc.,
Sealy, Texas; and Defense Finance and Accounting Service, Columbus,
Ohio. 

We conducted our review between July 1997 and November 1998 in
accordance with generally accepted government auditing standards. 



---------------------------------------------------------- Letter :7.1

We plan no further distribution of this report until 30 days from its
issue date, unless you publicly announce its contents earlier.  At
that time, we will send copies of the report to the Chairmen and
Ranking Minority Members of the Senate Committees on Governmental
Affairs, Armed Services, and Appropriations and of the House
Committees on Government Reform, Armed Services, and Appropriations;
the Secretaries of Defense and the Army; and the Director of the
Office of Management and Budget.  We will also make copies available
to others on request. 

Please contact me on (202) 512-4841 if you or your staff have any
questions concerning this report.  Major contributors to this report
are listed in appendix II. 

Sincerely yours,

Louis J.  Rodrigues
Director, Defense Acquisitions Issues




(See figure in printed edition.)Appendix I
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
============================================================== Letter 



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Robert J.  Stolba
Lawrence D.  Gaston, Jr. 

KANSAS CITY FIELD OFFICE

Robert D.  Spence

OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C. 

William T.  Woods
Stephanie J.  May


*** End of document. ***