Army Medium Trucks: Acquisition Plans Need Safeguards (Chapter Report,
11/19/98, GAO/NSIAD-99-28).

Pursuant to a congressional request, GAO reviewed the Army's Family of
Medium Tactical Vehicles (FMTV) program.

GAO noted that: (1) the Army's plan for implementing its follow-on
production contracts needs to ensure that the government receives trucks
that meet FMTV program quality standards; (2) the current contract
allowed the contractor to produce trucks during testing even though the
trucks were unable to pass testing and demonstrate that they met FMTV
performance and reliability, availability, and maintainability
requirements; (3) these trucks required modifications to achieve
satisfactory performance that caused program delays; (4) recent
government inspection data and quality deficiency reports on trucks in
the field show that the contractor is not consistently producing trucks
within the quality standards set for FMTV trucks; (5) however, because
of incomplete data, the Army does not know overall whether FMTV trucks
are performing adequately in the field; (6) under the follow-on
contracts, full-rate production of new model trucks will be allowed to
start before the trucks pass testing; (7) also, the Army plans to
continue to accept the new models under its sampling inspection method;
(8) this approach, which was followed under the current contract, caused
program delays and uncertainty about the quality of the fielded trucks;
(9) the Army has not instituted safeguards to ensure that the follow-on
contracts do not result in problems similar to those experienced under
the current contract; (10) the Army plans to compete future procurement
of the FMTV trucks with the expectation that program costs can be
reduced; (11) therefore, it has decided to develop a second source to
produce FMTV trucks; (12) the current contractor and second source will
share the annual production; (13) the Army has not performed an analysis
to determine the costs and benefits of this plan or compared it to other
alternatives, including: (a) dividing the program into 5-year production
increments and competing each increment among all qualified contractors;
(b) delaying the development of the second source until funds are
available to support both the current contractor and the second source
without a fielding break; or (c) continuing with the current contractor
for the rest of the program; and (14) GAO's preliminary analysis of the
production quantities that the two contractors could expect to share
from the competition indicates that the Army's plan may not result in
program cost savings.

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

 REPORTNUM:  NSIAD-99-28
     TITLE:  Army Medium Trucks: Acquisition Plans Need Safeguards
      DATE:  11/19/98
   SUBJECT:  Military procurement
             Military cost control
             Weapons systems
             Cost effectiveness analysis
             Department of Defense contractors
             Concurrency
             Military land vehicles
             Operational testing
             Internal controls
IDENTIFIER:  Family of Medium Tactical Vehicles
             
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Cover
================================================================ COVER


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

November 1998

ARMY MEDIUM TRUCKS - ACQUISITION
PLANS NEED SAFEGUARDS

GAO/NSIAD-99-28

Army Medium Tracks

(707286)


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

  FMTV - Family of Medium Tactical Vehicles

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


B-277969

November 19, 1998

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.  This is the first of two reports to respond
to your request, and it addresses the program's future acquisition
plans.  It includes recommendations to the Secretary of Defense
intended to improve program management in the follow-on production
contract and to require the Army to reevaluate its plan for
developing a second source to produce FMTV trucks.  The second report
will address the contractor's delay in delivering acceptable trucks,
the Army's decision to restructure the current production contract,
and the Army's handling of the trucks' corrosion problem. 

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 this 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 and Oversight, National Security, 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


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

The Army is modernizing its fleet of medium tactical vehicles through
the Family of Medium Tactical Vehicles (FMTV) program, which is one
of the Army's largest acquisition programs at a projected cost of
$15.7 billion.  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 fleet of medium trucks.  The FMTV trucks are a
family of 2.5- and 5-ton trucks based on a common truck cab and
chassis. 

In response to a request from Senator Tom Harkin, GAO evaluated the
Army's future acquisition plans for the FMTV program. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

The program is nearing the end of its first production contract.  The
contract was awarded on October 11, 1991, to Stewart & Stevenson
Services, Inc., Houston, Texas.  It was a $1.2-billion, 5-year
fixed-price contract to produce the first 10,843 FMTV trucks. 
Because of funding problems, the fifth year of the contract was
extended over 3 years.  The Army expects the contractor to complete
production under the contract in December 1998. 

The Army plans to continue FMTV production with the current
contractor.  On October 14, 1998, it awarded Stewart & Stevenson a
follow-on production contract--a $1.4-billion, 4-year contract for
6,430 trucks and trailers with an option year for an additional 2,920
trucks and trailers.  It plans to award the contractor a second
follow-on contract for $100 million for an additional 276 trucks. 
Both contracts will be for new FMTV truck models.  While the current
contractor is producing under the follow-on contracts, the Army plans
to develop a second source to produce FMTV trucks. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

The Army's plan for implementing its follow-on production contracts
needs to ensure that the government receives trucks that meet FMTV
program quality standards.  The current contract allowed the
contractor to produce trucks during testing even though the trucks
were unable to pass testing and demonstrate that they met FMTV
performance and reliability, availability, and maintainability
requirements.  These trucks required modifications to achieve
satisfactory performance that caused program delays.  In addition,
the Army relaxed its final acceptance inspection method from a
100-percent inspection to a sampling inspection method without
validating that the contractor's production processes were effective
in ensuring that the trucks met quality standards.  Recent government
inspection data and quality deficiency reports on trucks in the field
show that the contractor is not consistently producing trucks within
the quality standards set for FMTV trucks.  However, because of
incomplete data, the Army does not know overall whether FMTV trucks
are performing adequately in the field.  Under the follow-on
contracts, full-rate production of new model trucks will be allowed
to start before the trucks pass testing.  Also, the Army plans to
continue to accept the new models under its sampling inspection
method.  This approach, which was followed under the current
contract, caused program delays and uncertainty about the quality of
the fielded trucks.  The Army has not instituted safeguards to ensure
that the follow-on contracts do not result in problems similar to
those experienced under the current contract. 

The Army plans to compete future procurement of the FMTV trucks with
the expectation that program costs can be reduced.  Therefore, it has
decided to develop a second source to produce FMTV trucks.  The
current contractor and second source will share the annual
production.  The Army has not performed an analysis to determine the
costs and benefits of this plan or compared it to other alternatives,
including (1) dividing the program into 5-year production increments
and competing each increment among all qualified contractors, (2)
delaying the development of the second source until funds are
available to support both the current contractor and the second
source without a fielding break, or (3) continuing with the current
contractor for the rest of the program.  GAO's preliminary analysis
of the production quantities that the two contractors could expect to
share from the competition indicates that the Army's plan may not
result in program cost savings. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      FMTV PROGRAM NEEDS
      SAFEGUARDS TO PRECLUDE PAST
      PROBLEMS
-------------------------------------------------------- Chapter 0:4.1

Under the current contract, the contractor experienced problems that
adversely impacted the FMTV program.  It took longer than expected to
produce FMTV trucks that could pass testing and demonstrate that they
met FMTV technical and operational requirements.  While this
situation persisted, the contract allowed the contractor to continue
producing trucks even though the trucks did not meet requirements. 
The contractor had to perform varying levels of work to make these
trucks conform to the specifications of those that had passed
testing.  This additional work delayed the production of new trucks. 
During the 9 months it took to make the changes, the contractor had
to stop new truck production for 5 months and was able to produce
only 175 new trucks in the remaining 4 months.  The contract required
the contractor to pay for the changes needed to make the trucks meet
FMTV requirements. 

Overall, the contractor has been unable to consistently produce
trucks that met FMTV program quality standards necessary to pass the
government's final acceptance inspection.  Nevertheless, the Army
relaxed its final acceptance inspection method from 100-percent
inspections to a sample inspection method without validating that the
contractor's production processes were under statistical process
control--a method of determining whether a contractor is consistently
producing a product within the required quality standards.  Under the
100-percent inspection method, one defect caused the lot to be
rejected and reinspected until no defects were found.  Under sampling
inspections, one major defect or 15 minor defects causes the lot to
be rejected, and the lot is usually inspected only two times, after
which the Army accepts the lot if the contractor provides
documentation to show that it has inspected the lot and corrected all
defects.  Recent government inspection data indicates that the
contractor's processes are not consistently producing trucks within
the quality standards set for FMTV trucks.  For example, between July
1, 1997, and June 30, 1998, about 78 percent of the truck lots
presented to the government for final acceptance inspection were
rejected on first inspection. 

The Army does not have complete data to show whether the FMTV trucks
are performing adequately in the field.  Army officials report that
the trucks are doing well in the field but other data shows that
major problems exist.  FMTV trucks have been fielded with major
deficiencies such as major fluid leaks, reversed winch controls,
inoperable starters, and windows that shatter when doors are closed. 
Lacking more complete data, GAO could not determine the magnitude of
the problem. 

Under the follow-on contracts, the contractor will be producing new
model trucks called A1 models.  These new trucks will have to pass a
new production qualification test to demonstrate that they meet FMTV
performance and reliability, availability, and maintainability
requirements.  According to Army officials, the follow-on contracts
will allow full production to start before the new model trucks pass
testing.  The Army also plans to continue to accept the new models
under its relaxed final acceptance inspection methods.  This approach
is the same as the one followed during the current production
contract, which caused program delays and uncertainty over the
quality of the fielded trucks.  The Army has an opportunity to
mitigate program difficulties by instituting safeguards to ensure
that the new model trucks pass testing before production begins and
that the contractor consistently produces trucks of a high enough
quality to meet FMTV technical and operational requirements. 


      ARMY HAS NOT DETERMINED
      WHETHER ITS SECOND-SOURCE
      PLAN WILL REDUCE PROGRAM
      COSTS
-------------------------------------------------------- Chapter 0:4.2

The Army plans to compete future procurement of the FMTV trucks with
the expectation that program costs can be reduced.  Therefore, it has
decided to develop a second source that will compete with the current
contractor for a share of future FMTV production quantities. 

The Army's plan will initially increase program costs and cause a
fielding break.  It will increase costs because the Army will have to
pay the competing contractors' costs of developing their versions of
FMTV trucks and competing them.  Additionally, the Army will have to
pay the second-source contractor's costs for developing its
production line and bringing it into full production.  The Army also
has reduced the number of trucks the current contractor will produce
during the first 7 months of the follow-on contract.  This will allow
the Army to use some of its fiscal
year 1999 funds to start its second-source development effort.  This
will increase the unit cost of the trucks and will cause at least a
3-month fielding break. 

The Army does not know whether its plan will reduce costs.  It did
not perform an analysis to determine whether the added costs,
including a fielding break, would be offset by cost savings.  Also,
it did not compare the costs and benefits of its plan with those of
other program alternatives, including (1) dividing the program into
5-year production increments and competing each increment among all
qualified contractors, (2) delaying the development of the second
source until funds are available to support both the current
contractor and the second source without a fielding break, or (3)
continuing with the current contractor for the rest of the program. 

GAO performed a preliminary analysis of the production quantities
that the contractors could expect to share from a second-source
competition.  This analysis indicates that the current contractor
will not be able to reduce its costs even if it wins the larger share
of the production quantities.  Also, it will be difficult for the
current contractor to reduce its price to the Army because its FMTV
production plant is dedicated solely to FMTV production and can
support a monthly production level far above the largest production
quantities expected under the second-source competition. 

GAO was unable to estimate the effect the production split would have
on the prices the second-source contractor would give the Army. 
There are several possible scenarios.  For example, if the
second-source contractor is a truck producer and if it could add FMTV
production to a plant that already produces other trucks, it could
share the plant's fixed costs with other contracts.  This would tend
to reduce the fixed costs attributed to the FMTV contracts and lower
the contractor's FMTV truck price. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

To improve management of the FMTV program under the current and
follow-on contracts, GAO recommends that the Secretary of Defense
direct the Secretary of the Army to fund a data collection effort to
determine whether fielded FMTV trucks are performing satisfactorily
and to direct government inspectors at the FMTV truck plant to return
to 100-percent final acceptance inspection of FMTV trucks until the
contractor demonstrates that its production processes are under
statistical process control. 

To provide a safeguard that could prevent the follow-on contracts
from experiencing the same problems that occurred under the current
contract, GAO recommends that the Secretary of Defense direct the
Secretary of the Army to include a clause in the follow-on production
contracts that would delay the start of production until the new FMTV
model trucks demonstrate that they meet FMTV performance and
reliability, availability, and maintainability requirements. 

To ensure that the Army considers all its options before it starts to
develop a second source for the FMTV program, GAO recommends that the
Secretary of Defense direct the Secretary of the Army to delay the
Army's plans for developing a second source to produce FMTV trucks
until the Army completes an analysis that compares the costs and
benefits of its plan with those of other alternatives and to pursue
the alternative that is most beneficial to the government. 


   AGENCY COMMENTS AND GAO'S
   EVALUATION
---------------------------------------------------------- Chapter 0:6

In commenting on a draft of this report, the Department of Defense
said it partially concurred with GAO's recommendations.  It stated
that the Army is currently using, to the maximum extent possible,
data from existing databases such as the Operating and Support
Management Information System and the FMTV weekly fielding site
reports and is considering sample data collection as a fleet
management tool if it is determined to be cost-effective.  Regarding
the final acceptance inspection, the Department said that correcting
quality problems along the production line is more cost-effective
than rejecting lots after they have been presented for acceptance. 
According to the Department, the current sampling program is catching
discrepancies, demonstrating that sampling is working and therefore
100-percent inspection is not warranted.  Also, according to the
Department, the Army (1) will not authorize production on the
follow-on contracts until it is satisfied that the vehicles will
successfully pass production qualification testing and (2) believes
it has proper safeguards in place to preclude the problems
experienced under the current contract.  Finally, it said that the
Army is conducting an FMTV second-source contractor cost and benefit
analysis as directed by the Congress. 

The FMTV weekly fielding site reports would not be useful in
determining whether the fielded FMTV trucks are performing
satisfactorily because the site receiving inspections on which these
reports are based are performed before the trucks are issued to the
units; that is, before they perform in the field.  Also, as GAO
reported, the Operating and Support Management Information System has
not included data on FMTV trucks.  While an Army official responsible
for the information system said that some FMTV truck data will be
included in the System when it is updated this year, he did not
expect the data to be extensive. 

GAO agrees that building quality into the production process is more
effective than inspecting it in at the end of production.  However,
as GAO's report points out, the sampling program is identifying
significant numbers of discrepancies at the end of the production
process.  This indicates that the contractor's processes are not
building quality into the product.  Sampling cannot be relied on
until it has been established that the production processes are under
statistical process control.  GAO continues to believe that the
production processes need to be brought under this control to ensure
consistently high-quality output before reducing the 100-percent
inspection prescribed by the project office. 

In its comments, the Department said it has the proper safeguards to
preclude the problems experienced in the current contract but did not
indicate what specific factors it will consider in its decision to
authorize full-rate production.  The Army awarded the first follow-on
contract on October 14, 1998.  While GAO has not had an opportunity
to review the contract, according to Army officials, the follow-on
production contracts will allow the start of full production before
the new model trucks pass testing.  GAO believes that the Army's
interests would be better protected if the production contract
contained a specific requirement that full-rate production under the
follow-on contracts would not start until the FMTV trucks pass
production qualification testing under the testing contract. 

The Army's plan to conduct an FMTV cost and benefit analysis is a
step in the right direction; however, the Army's analysis will
compare the costs and benefits of only two acquisition
approaches--the current FMTV second-source plan and continuing with
the current contractor for the remainder of the program.  Since other
alternative acquisition approaches for the program exist, GAO
believes that, as a minimum, the Army should explore the other
alternatives.  The Army should select the acquisition alternative
that is the most cost beneficial to the government to continue the
FMTV program. 

The Department of Defense's comments are addressed in the body of the
report where appropriate and are reprinted in their entirety in
appendix I. 


INTRODUCTION
============================================================ Chapter 1

The Army is procuring medium tactical trucks--the 2.5- and 5-ton
payload classes--to replace most of its current fleet.  The truck
replacement effort is known as the Family of Medium Tactical Vehicles
(FMTV) program.  The program is currently nearing the end of its
first full-production contract.  The Army plans to continue
production with the same contractor for new model FMTV trucks.  In
addition, the Army plans to develop a second source to produce FMTV
trucks.  After the second source is selected, the current contractor
and the second source will share annual production. 


   FMTV PROGRAM
---------------------------------------------------------- Chapter 1:1

The FMTV program is one of the Army's largest acquisition programs at
a projected cost of $15.7 billion.  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.  The program consists
of 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 program is nearing the end of its first production contract.  The
contract was awarded on October 11, 1991, to Stewart & Stevenson
Services, Inc., Houston, Texas.  It was a $1.2-billion, 5-year,
fixed-price production contract for the first 10,843 FMTV trucks.  It
did not include the production of the 5-ton fuel tanker and van
variants or the cargo trailers.  These vehicles will be included in
later production contracts.  Because of funding problems, the fifth
year of the contract was extended over 3 years.  The Army expects the
contractor to complete production under this first contract in
December 1998. 


   FUTURE ACQUISITION PLANS
---------------------------------------------------------- Chapter 1:2

The Army plans to continue FMTV production with the current
contractor.  The new contracts will comprise new models, called A1
models, of the FMTV truck variants produced under the original
production contract and FMTV trailers.  The contract award, however,
was delayed until the Army resolved a major problem discovered on
fielded FMTV trucks.  Under certain operating conditions, the FMTV
trucks' transmission flywheel housing can crack and, if undetected,
can lead to a broken drive shaft.  If the drive shaft breaks while
the truck is operating at highway speeds, it can cause an accident. 
The Army decided not to award the follow-on production contract until
this drive train problem was corrected and the correction was
verified through testing.  The Army successfully completed the
testing of proposed correction to the drive train problem and the
Secretary of Defense approved the award of the follow-on production
contract in early October 1998. 

According to a project official, in order to maintain the planned
production schedule while the drive train correction was being
tested, the Army initially decided to separate the follow-on contract
into two contracts--one that would be awarded immediately to produce
new models of FMTV trucks and trailers to support a new production
qualification test, and one that would be awarded after the drive
train correction was verified for full-rate production of the trucks
and trailers.  A separate testing contract would allow the contractor
to start preliminary work on the new design of the new models without
actually starting production until after the drive train problem was
corrected.  Accordingly on June 2, 1998, the Army awarded Stewart &
Stevenson a $9.2-million contract for 15 FMTV trucks and 8 trailers
to support the production qualification test of the new truck models. 
After the drive train testing was successfully completed, the Army,
on October 14, 1998, awarded Stewart & Stevenson a $1.4-billion,
4-year production contract for 6,430 trucks and trailers, with an
option year for an additional 2,920 trucks and trailers. 

The 5-ton fuel tanker and van were not included in the follow-on
contract.  These variants were not produced under the original
production contract and the Army planned to include them in the
follow-on contract.  A project official said that they were not
included in the follow-on contract because they were not as ready for
production as originally thought.  In November 1998, the Army plans
to award the Stewart & Stevenson a second FMTV production contract
for these FMTV variants.  This contract would be for enhancements to
the designs of the 2 trucks, testing of the trucks, and production of
276 FMTV trucks--138 5-ton fuel tankers and 138 5-ton vans--at an
estimated cost of $100 million. 

While the current contractor is producing under the follow-on
contracts, the Army plans to develop a second source to produce FMTV
trucks.  Starting in fiscal year 2003, the Army plans to split FMTV
truck production between the current contractor and a second source
by competing production in 5-year increments.  The winning contractor
for each increment would receive a larger share of production under
that increment.  The Army plans to award the final 5-year production
contract to one contractor in a winner-take-all competition in fiscal
year 2018. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:3

Senator Harkin requested that we evaluate the Army's future
acquisition plans for the FMTV program. 

To evaluate the Army's future FMTV acquisition plans, we interviewed
Defense, Army, and contractor officials and reviewed the November 25,
1997, FMTV update to the FMTV acquisition strategy and plan, which
provided a general description of the Army's future FMTV plans. 
However, we had to rely mainly on oral testimony for this evaluation
because the Army's detailed plans were evolving at the time of our
review and were therefore unavailable in written form.  For example,
at the start of our review, the Army planned to award one follow-on
production contract to the current contractor; now the Army plans to
award three follow-on contracts to the current contractor.  Because
the follow-on production contracts were being negotiated at the time
of our review, we were unable to obtain copies of the contracts. 
Also, the Army had not finalized its detailed second-source plan;
therefore, no written detailed second-source plans were available for
our review.  We interviewed the key project officials involved in
developing the Army's follow-on contracts and second-source plans. 
We evaluated planned production quantities contained in the FMTV
selected acquisition report, dated December 31, 1997, to determine
whether it would be reasonable to expect benefits from splitting
these quantities between two contractors. 

As part of our evaluation of future FMTV acquisition plans, we
evaluated the Army's efforts under the current FMTV production
contract.  We interviewed Defense, Army, and contractor officials and
reviewed various program documents, including the FMTV acquisition
strategy and plan, the current production contract, source selection
evaluations, budget documents, and selected acquisition reports.  We
determined whether the contractor was consistently producing trucks
within the quality standards set by the Army for FMTV trucks by
analyzing the first inspection acceptance rate of lots accepted by
the government between July 1, 1997, and June 30, 1998, and charted
the number and type of defects found in the first inspection of lots
accepted in 2 recent months.  We did not include lots of five trucks
or less in this analysis. 

We did not visit units that received FMTV trucks because the Defense
Office of Inspector General was planning to evaluate FMTV trucks in
the field; the Inspector General's audit was started but has been
suspended because of higher priority congressional request work.  To
provide an indication of the kinds of problems identified on fielded
FMTV trucks, we reviewed selected weekly reports of deficiencies
detected during the FMTV trucks' receiving inspections at the
fielding locations and a summary of quality deficiency reports
received by the FMTV project manager's office as of December 11,
1997.  When an FMTV truck is received in the field, it is inspected
before it is issued to the unit.  The Army does not summarize the
results of these inspections.  At the time of our visit, we selected
and reviewed the most recent receiving inspection reports.  The
reports covered 45 trucks inspected at Fort Bragg, North Carolina,
during 4 weeks in July-August 1997.  Because the reports did not
differentiate between major and minor deficiencies, a government
plant representative office quality specialist reviewed the reports
and indicated which deficiencies were major deficiencies.  The
results of our review cannot be projected to all fielded FMTV trucks
because we were unable to define the universe of reports.  The
official who had the reports said that he did not have all of them. 

Once the trucks are issued to the units, individual soldiers are
supposed to complete a quality deficiency report whenever a problem
is found in their trucks.  We reviewed a summary of 286 quality
deficiency reports received by the project office by December 11,
1997.  However, a project official said that he does not believe that
all the deficiencies on the FMTV trucks are being reported.  Each
report would have to be investigated to determine whether similar
deficiencies were being reported differently and the root cause of
each deficiency.  Such a determination was beyond the scope of our
review. 

Our work was conducted at Defense and Army headquarters, Washington,
D.C.; Defense Contract Management Command headquarters, Fort Belvoir,
Virginia; FMTV project office, U.S.  Army Tank-Automotive and
Armaments Command, Warren, Michigan; Defense Contract Management
Command, Stewart & Stevenson office, Sealy, Texas; and Tactical
Vehicle Systems, Stewart & Stevenson Service, Inc., Sealy, Texas. 

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


FMTV PROGRAM NEEDS SAFEGUARDS TO
PRECLUDE PAST PROBLEMS
============================================================ Chapter 2

The current contract allowed the contractor to continue truck
production even though the trucks were unable to pass testing and
demonstrate that they met FMTV performance and reliability,
availability, and maintainability requirements.  Also, the Army
relaxed its final acceptance inspection method from 100-percent
inspections to a sampling inspection method without validating that
the contractor's production processes were under statistical process
control--a method of determining whether a contractor is consistently
producing a product within the product's quality standards.  Recent
government inspection data indicates that the contractor is still not
consistently producing trucks within the quality standards set for
FMTV trucks. 

The Army does not know whether fielded FMTV trucks are performing
adequately.  It reports that FMTV trucks are doing well in the field
but does not have data to support this assessment.  FMTV trucks with
major deficiencies have been received in the field, but data does not
currently exist to determine the range and magnitude of these
deficiencies. 

According to Army officials, the follow-on contract will allow
production to start before the new model trucks pass testing.  Also,
the Army plans to continue to accept new models under the relaxed
final acceptance inspection method. 


   CONTRACT ALLOWED PRODUCTION TO
   CONTINUE AFTER THE TRUCKS
   FAILED TESTING
---------------------------------------------------------- Chapter 2:1

The contractor took longer than expected to produce FMTV trucks that
could pass production qualification test and operational test and
demonstrate that they met FMTV performance and reliability,
availability, and maintainability requirements.  While this situation
persisted, the contract allowed the contractor to continue producing
trucks that did not meet requirements.  These trucks required
modifications to achieve satisfactory performance.  The modification
effort caused program delays because new production had to be stopped
while the modifications were being made. 


      TRUCKS TOOK LONGER THAN
      EXPECTED TO PASS TESTS
-------------------------------------------------------- Chapter 2:1.1

The current contractor was not an experienced truck producer when the
Army awarded it the FMTV production contract.  The Army selected
Stewart & Stevenson because the truck design it submitted was
evaluated as the best design and its proposed price was the lowest. 
However, Stewart & Stevenson had not developed the FMTV truck design. 
It had subcontracted with an Austrian truck manufacturer,
Steyr-Daimler-Puch, AG., to design and develop the FMTV prototypes
based on a design of a truck Steyr had produced for the Austrian
army.  During the prototype demonstration phase, Steyr also provided
support that led to the selection of Stewart & Stevenson.  Stewart &
Stevenson did not continue its relationship with Steyr into the
production phase of the FMTV program.  It purchased a plant from a
manufacturer of oil-drilling equipment, configured the plant to
develop the FMTV production line, and established its Tactical
Vehicle Systems Division to produce the FMTV trucks. 

The contractor experienced problems in developing its production line
and producing trucks that met FMTV technical and operational
requirements.  The contract required the Army to conduct a production
qualification test and an initial operational test and evaluation to
determine whether the trucks met these requirements.  The production
qualification test was designed to determine whether the FMTV truck
variants fulfilled the Army's technical performance and reliability,
availability, and maintainability requirements and met contract
specifications.  The initial operational test and evaluation was
designed to determine whether and to what degree the FMTV truck
variants could accomplish their missions when operated and maintained
by soldiers in the expected operational environment. 

The Army began the production qualification test in June 1993 and
completed it in December 1994.  The trucks failed the test because
they were unable to meet reliability and some performance
requirements.  The Army identified over 90 problems that the
contractor was required to correct. 

The Army began the operational test in October 1993 but suspended it
in December 1993 because the trucks were not able to meet their
operational reliability, availability, and maintainability
requirements.  The Army began a series of limited user tests in June
1994.  These were unscheduled tests that used operational test
personnel and were designed to help the contractor identify potential
solutions to the trucks' continuing problems.  In August 1994, the
Army started a second operational test with those FMTV truck variants
it thought had a chance of meeting operational requirements.  It
continued the limited user tests with the other variants.  In
September 1994, operational and limited user tests were suspended
because test personnel were deployed on a peacekeeping mission in
Haiti.  According to Army test assessment officials, the trucks were
not meeting reliability requirements at the time the operational test
was suspended. 

In February 1995, the Army started a second production qualification
test with improved and newly produced trucks that incorporated
changes to address problems identified during earlier testing.  In
April 1995, the Army started a new operational test with new trucks
that also incorporated the changes.  It completed both tests in June
1995.  The trucks were assessed as having met FMTV requirements in
both tests. 


      ARMY DID NOT LIMIT
      PRODUCTION BEFORE TESTING
      WAS COMPLETED
-------------------------------------------------------- Chapter 2:1.2

The Army did not attempt to limit the number of trucks produced
before production qualification and operational testing was
completed.  We have reported on the danger of entering production
before adequate operational testing has been completed many times in
the past.\1 Beginning production before adequate testing leads to
program delays when the already produced systems must be subsequently
modified to make them usable.  This danger materialized during the
current FMTV contract. 

The Army could have limited its risk by keeping deliveries to the
minimum rate needed to complete testing and prove the production
line.  However, the contract allowed truck deliveries of up to 150 a
month until the trucks passed testing.  Later, the Army modified the
contract to increase the monthly delivery limit to 200 trucks. 
According to a project official, the Army believed that increasing
monthly delivery quantities would allow the contractor to catch up on
its scheduled deliveries. 

Because the higher monthly delivery limit actually exceeded the
contractor's production capability at that time, the contractor
produced as many trucks as it could.  However, the trucks it produced
still 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 deficient trucks.  The contractor had to perform varying
levels of work to make the trucks 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 on the already produced trucks had a negative effect on the
production of new trucks during the 9 months it took the contractor
to make the changes to the 3,000 trucks.  The contractor had to stop
new truck production for 5 months and was able to produce only 175
new trucks in the remaining 4 months.  The contract required the
contractor to pay for the changes needed to make the trucks meet FMTV
requirements. 


--------------------
\1 Weapons Acquisition:  Better Use of Limited DOD Acquisition
Funding Would Reduce Costs (GAO/NSIAD-97-23, Feb.  13, 1997) and
Weapons Acquisition:  Low-Rate Initial Production Used to Buy Weapon
Systems Prematurely (GAO/NSIAD-95-18, Nov.  21, 1994). 


   ARMY RELAXED INSPECTIONS
   DESPITE POOR ACCEPTANCE RATES
---------------------------------------------------------- Chapter 2:2

After the FMTV trucks passed the production qualification and
operational tests, the contractor was still unable to consistently
produce trucks that met FMTV program quality standards necessary to
pass the government's final acceptance inspection.  Despite this
problem, the Army relaxed its final acceptance inspection method from
100-percent inspections to a sample inspection method and generally
accepted the trucks after the contractor made two attempts to remedy
defects.  The Army did this without meeting the administrative
precondition that the contractor demonstrate that its production
processes were in statistical process control.  The overall effect
was to make it easier for FMTV trucks to pass final acceptance
inspection. 

Initially, the government's plant representative at the FMTV
production plant inspected each FMTV truck to determine whether it
met the Army's quality standards.  This 100-percent final acceptance
inspection is standard procedure when a contractor produces a new
product.  Each lot that the contractor presented for final acceptance
inspection usually consisted of 50 trucks.  If one defect was found,
the lot was not accepted, and the trucks were returned to the
contractor for inspection and correction of the defects.  The lot was
reinspected until no defects were found by government inspectors. 

The plant representative office's quality letter of instruction
required the 100-percent final acceptance inspection to continue
until the contractor demonstrated that its production processes were
under statistical process control.  Statistical process control is a
standard commercial practice established by monitoring the production
processes to see if they consistently result in output within the
quality standards set for the overall product.  Once a process is
producing consistently high-quality output, the process is considered
to be under statistical control.\2 Once all processes are under
statistical process control, the quality letter allows the government
to perform the final acceptance inspections on a sampling basis. 

On April 19, 1996, the project office instructed the plant
representative office to change its FMTV final acceptance inspection
to a sampling method.  The FMTV quality assurance representative who
issued this instruction said that the change was made because the
summary data provided by the contractor at monthly management
meetings was improving--the contractor was finding more defects in
its final inspection than the government. 

Under the new inspection method, a sample of 5 trucks from each lot
of 50 trucks is inspected.  If 1 major defect or 15 minor defects are
found, the entire lot is returned to the contractor, which is
required to inspect the entire lot and correct the defects.  The lot
is returned to the government, which draws another five-truck sample. 
The second time, however, the government inspects only for the
defects found in the first sample.  If the government again finds 1
major defect or 15 minor defects, the lot is rejected and returned to
the contractor, which again inspects and corrects the defects.  The
government generally does not make a third final acceptance
inspection.  When the contractor provides documentation showing that
it has inspected the lot and corrected the defects, the government
accepts the lot.  A Defense plant representative official said that
they have the option to inspect a lot more than two times but does so
only in exceptional circumstances, such as when a lot has had many
major defects. 

We could find no evidence that the program office or the plant
representative office had shown that the contractor's processes were
under statistical process control at the time of the final acceptance
inspection change.  A government plant representative official said
that the contractor had a 1-percent acceptance rate--1 percent of the
trucks submitted to the government were acceptable--when the change
was made. 

Recent government inspection data indicates that the contractor's
production processes are still not under statistical process control
and not consistently producing trucks within the quality standards
set for FMTV trucks.  Between July 1, 1997, and June 30, 1998, about
78 percent of the truck lots presented to the government for final
acceptance inspection were rejected on the first inspection.  As can
be seen in figure 2.1, the number of major and minor defects found
during the first inspection can vary greatly by lot, even in lots
that were accepted in April and May 1998.  For example, the
inspectors (1) found no major and 5 minor defects in lot 99, and the
lot was accepted on the first inspection; (2) found no major and 25
minor defects in lot 100, and the lot was rejected because the
inspectors found 15 or more minor defects; and (3) found 5 major and
15 minor defects in lot 101, and the lot was rejected for both the
major and minor defects. 

   Figure 2.1:  Defects Found
   During the First Acceptance
   Inspection of FMTV Truck Lots
   Accepted in April and May 1998

   (See figure in printed
   edition.)


--------------------
\2 Best Practices:  Successful Application to Weapon Acquisitions
Requires Changes in DOD's Environment (GAO/NSIAD-98-56, Feb.  24,
1998). 


   ARMY DOES NOT KNOW THE OVERALL
   QUALITY OF FIELDED FMTV TRUCKS
---------------------------------------------------------- Chapter 2:3

The Army does not know whether fielded FMTV trucks are performing
adequately.  Army officials report that the FMTV trucks are doing
well in the field, but the Army does not have adequate data to
support this assessment.  FMTV trucks with major deficiencies have
been received in the field, but without more complete data, we cannot
determine the magnitude of the problem. 

According to Army officials, FMTV trucks are doing well in the field. 
They base this assessment on (1) individual soldiers' statements that
they are pleased with the trucks and (2) truck performance during
comparison tests.  Neither of these is a good measure of the FMTV
truck's field performance.  Testimonial evidence from individual
soldiers is not a reliable way to determine how a new system is
performing.  The soldiers' positive statements about the trucks could
be explained by the fact that the FMTV trucks have a modern design
compared to the trucks they are replacing.  The comparison test is
designed to check on whether the production trucks still meet the
FMTV reliability, availability, and maintainability requirements. 
Periodically, the Army randomly selects two trucks from the
production line to run a 10,000-mile reliability, availability, and
maintainability test.  The test is not designed to provide a measure
of field performance. 

The Army could better support its claims if it collected data on
fielded truck performance using its sample data collection.  Sample
data collection is a method of selectively sampling field units to
collect field maintenance and performance information on selected
equipment.  However, the Army is not currently collecting this data
on FMTV trucks because the project office would have to fund the data
collection effort.  A project official said that the funds for the
FMTV program should not be diverted for data collection because they
are limited and are needed to produce additional trucks. 

The U.S.  Army Cost and Economic Analysis Center is collecting data
on fielded FMTV truck maintenance through its Operating and Support
Management Information System.  This system reports operating and
support costs, parts usage, and maintenance hours by system and is
used to project future operating and support costs for budgeting and
other planning purposes.  However, the Center has not included FMTV
trucks in its database because the trucks were only fielded in 1996. 
A Center official said that he expects to see some, but not much,
data on FMTV trucks by the end of September 1998, when the database
is updated. 

During our review, we found indications that the Army has received
trucks in the field with major deficiencies.  When an FMTV truck is
received in the field, it is inspected before it is issued to the
unit.  The Army does not summarize the results of these inspections. 
To determine whether the receiving inspectors were finding problems
that could have been found during the final acceptance inspection, we
reviewed the most recent receiving inspection reports as of the date
of our visit.  The reports covered 45 trucks inspected at Fort Bragg,
North Carolina, during 4 weeks in July-August 1997.  Because the
reports did not differentiate between major and minor deficiencies, a
government plant representative office quality specialist reviewed
the reports and indicated which deficiencies were major deficiencies. 
The receiving inspectors found deficiencies on every truck, although
not every truck had a major deficiency.  They found major fluid
leaks, missing parts, inoperative lights and gauges, and reversed
winch controls. 

In addition, once the trucks are issued to the units, individual
soldiers are supposed to complete a quality deficiency report
whenever a problem is found in their truck.  As of December 11, 1997,
the project office had received 286 quality deficiency reports.  The
Army had fielded about 4,500 FMTV trucks by that date.  A project
official said he does not believe that all deficiencies have been
reported.  Some deficiencies were reported more than once, and some
of these were later found to be systemic deficiencies.  For example,
a broken drive shaft was reported on only two trucks; however, the
Army has determined that all FMTV trucks have the potential for
developing this problem.  Examples of the deficiencies reported
include starters failing, windows shattering when doors are closed,
major fluid leaks, brakes failing, cab lift mechanisms failing, and
alternators overheating. 

The contractor warrants FMTV trucks to be free from defects in
materials and workmanship for 18 months or 12,000 miles, whichever
occurs first, from the date the government finally accepts the
trucks.  Under this warranty, the contractor pays for the correction
of all deficiencies discovered during the receiving inspection except
those that happen in transit.  It also pays for the correction of all
deficiencies reported on quality deficiency reports except those
caused by misuse, inadequate maintenance, or accident.  The
contractor's liability under the warranty is limited to $18 million


   PLANS FOR FOLLOW-ON PRODUCTION
   WOULD CONTINUE PAST POLICIES
---------------------------------------------------------- Chapter 2:4

Under the follow-on contracts, the contractor will be producing new
model trucks called A1 models.  The trucks will be considered new
models because they will have new engines that meet the current
Environmental Protection Agency standards, new data bus systems--the
wiring and other components through which data is transmitted--to
enhance maintainability, antilock braking systems to improve braking,
and galvanized steel cabs and other changes to improve corrosion
protection.  These new trucks will have to pass a new production
qualification test consisting of a reliability, availability, and
maintainability test of
20,000 miles per test truck and performance tests to demonstrate that
the new trucks meet FMTV technical requirements. 

According to Army officials, the follow-on contracts will allow
full-rate production to start before the new model trucks pass the
production qualification tests.  Also, the Army plans to continue the
practice of accepting the new models under its relaxed final
acceptance inspection methods. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 2:5

Because the FMTV program experienced significant problems under the
current production contract, the Army needs to implement safeguards
to ensure that the government receives trucks that meet FMTV program
quality standards under the follow-on production contracts.  The
current contract allowed the contractor to continue producing trucks
during testing even though the trucks were unable to pass the tests
and demonstrate that they met FMTV performance and reliability,
availability, and maintainability requirements.  These trucks
required modifications to achieve satisfactory performance, and the
modification effort caused program delays.  In addition, the Army
relaxed its final acceptance inspection methods from 100-percent
inspections to a sampling inspection method without validating the
contractor's production processes.  Recent government inspection data
indicates that the contractor's production processes are still not
consistently producing trucks within the quality standards set for
FMTV trucks. 

The Army does not know whether fielded FMTV trucks have quality
problems.  It reports that the trucks are doing well in the field,
but it does not collect data needed to support this assessment. 
There is evidence that trucks with major deficiencies have been
received in the field, but without more complete data, we cannot
determine the magnitude of the problem. 

According to Army officials, the follow-on production contracts will
allow the start of full-rate production before the new model trucks
pass testing.  The Army also plans to continue using the relaxed
final acceptance inspection procedures to accept the new model
trucks.  This approach is the same as the one followed during the
current production contract, which resulted in program delays and
uncertainty over the quality of the fielded trucks.  The Army has an
opportunity to mitigate future program difficulties by instituting
safeguards to ensure that the new model trucks pass testing before
production and that the contractor consistently produces trucks that
can meet FMTV technical and operational requirements. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 2:6

To improve management of the FMTV program under the current and
follow-on contracts, we recommend that the Secretary of Defense
direct the Secretary of the Army to fund a data collection effort to
determine whether fielded FMTV trucks are performing satisfactorily
and to direct government inspectors at the FMTV truck plant to return
to 100-percent final acceptance inspection of FMTV trucks until the
contractor demonstrates its production processes are under
statistical process control. 

To provide a safeguard on the follow-on contracts that could preclude
the type of problems that occurred under the current contract, we
recommend that the Secretary of Defense direct the Secretary of the
Army to include a clause in the follow-on production contracts that
would delay the start of production until the new FMTV model trucks
demonstrate that they meet FMTV performance and reliability,
availability, and maintainability requirements. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 2:7

In commenting on a draft of this report, the Department of Defense
said it partially concurred with our recommendations.  It stated that
the Army is currently using, to the maximum extent possible, data
from existing databases such as the Operating and Support Management
Information System and the FMTV weekly fielding site reports and is
considering sample data collection as a fleet management tool if it
is determined to be cost-effective.  Regarding the final acceptance
inspection, the Department said that correcting quality problems
along the production line is more cost-effective than rejecting lots
after they have been presented for acceptance.  According to the
Department, the current sampling program is catching discrepancies,
demonstrating that sampling is working and therefore 100-percent
inspection is not warranted.  The Department also said that the Army
will not authorize production on the follow-on contracts until it is
satisfied that the vehicles will successfully pass production
qualification testing.  Additionally, the Department believes that it
has the proper safeguards in place to preclude the problems
experienced in the current contract and therefore does not believe
that it is necessary to include a specific requirement in the
follow-on contracts to delay the start of production until the trucks
demonstrate they meet requirements. 

As we point out in this report, the FMTV weekly fielding site reports
and existing databases, such as the Operating and Support Management
Information System, at this time do not contain enough information
for the program office to determine whether the fielded trucks are
performing satisfactorily.  The FMTV weekly fielding site reports
would not be useful in determining whether the fielded FMTV trucks
are performing satisfactorily because the site receiving inspections
on which the reports are based are performed before the trucks are
issued to the units; that is, before they can perform in the field. 
In this report, we used the data from the fielding site reports to
only obtain an indication of whether the trucks were being received
with major defects.  Also, the Operating and Support Management
Information System does not include data on FMTV trucks.  While an
Army official responsible for the information system said that some
FMTV truck data will be included in the database when it is updated
this year, he did not expect the FMTV data to be extensive.  We
therefore continue to believe that the Army needs to conduct sample
data collection on the fielded FMTV trucks to make an adequate
assessment of the trucks' field performance. 

We agree that building quality into the production process is more
effective than inspecting it in at the end of production.  However,
as we stated in our report, the sampling program is identifying
significant numbers of discrepancies at the end of the process.  This
indicates that the contractor's production processes are not building
quality into the product.  Sampling cannot be relied on until it has
been established that the production processes are under statistical
process control.  Therefore, we believe that until production
processes need to be brought under this control to ensure
consistently high-quality output, before reducing the 100-percent
inspection prescribed by the project office. 

In its comments, the Department said it has proper safeguards to
preclude the problems experienced in the current contract, but did
not indicate what specific factors it will consider in its decision
to authorize full-rate production.  Under the follow-on contracts,
the contractor will be producing FMTV trucks that will be
significantly different from the original trucks.  The Army awarded
the first follow-on contract on October 14, 1998.  We have not had an
opportunity to review the contract.  However, we believe the Army's
interests would be better protected if the production contract
contained a specific requirement that full-rate production under the
follow-on contracts would not start until the FMTV trucks pass
production qualification testing under the testing contract. 


ARMY HAS NOT DETERMINED WHETHER
ITS SECOND-SOURCE PLAN WILL REDUCE
PROGRAM COSTS
============================================================ Chapter 3

The Army plans to compete future procurement of the FMTV trucks with
the expectation that program costs can be reduced.  Therefore, it has
decided to develop a second source for the FMTV trucks.  However, it
has not performed an analysis to determine the costs and benefits of
its plan or compared its plan with other alternatives, including (1)
dividing the program into 5-year production increments and competing
each increment among all qualified contractors, (2) delaying the
development of the second source until funds are available to support
both the current contractor and the second source without a fielding
break, or (3) continuing with the current contractor for the
remainder of the program.  Our preliminary analysis of the production
quantities that the contractors could expect to share from the
competition indicates that the Army's plan will not result in program
cost savings. 


   ARMY'S PLANS CALL FOR
   DEVELOPING A SECOND SOURCE FOR
   FMTV TRUCKS
---------------------------------------------------------- Chapter 3:1

The FMTV acquisition plans call for the Army to develop a second
source for the FMTV truck program.  To develop the second source, the
Army plans to award production qualification contracts to at least
two contractors in fiscal year 1998.  The contractors, using the
existing FMTV performance specifications and technical data package
as a reference, will produce two or three vehicles and compete them
against each other.  In fiscal year 2000, the Army plans to award the
winning contractor a 3-year production contract for up to 800 trucks. 
Under this contract, the second-source contractor will produce the
same models and variants of the trucks that the current contractor
will be producing under the follow-on production contract.  Starting
in fiscal year 2003, the Army plans to compete subsequent FMTV
production in 5-year increments.  For each increment, the current
contractor and the second-source contractor will compete to determine
which contractor will receive the larger share of production.  The
Army has not determined the actual production split for the
increments.  It plans to award the final 5-year contract to one
contractor. 


   ARMY'S PLANS WILL INITIALLY
   INCREASE PROGRAM COSTS AND
   CAUSE A FIELDING BREAK
---------------------------------------------------------- Chapter 3:2

Project officials said that developing a second source will initially
result in higher program costs.  It will increase costs because the
Army will have to pay the costs incurred by the competing contractors
to develop their versions of FMTV trucks and compete them. 
Additionally, the Army will have to pay the second-source
contractor's costs for developing its production line and bringing it
into full production.  Project officials did not provide an estimate
of the cost to develop the FMTV second source. 

In its fiscal year 1999 budget request, the Army reduced the planned
quantities the current contractor was to produce during the first 7
months of the follow-on contract from 422 trucks to 171
trucks--mainly 5-ton trucks--and 8 trailers.  The Army recognized the
cost impact of the lower quantities when it increased by 74
percent--from $142,774 to $251,101--the estimated average cost of a
5-ton truck.  Although the fiscal year 1999 budget request reflected
a reduced buy of 5-ton vehicles, procurement costs for these vehicles
increased by $17.2 million.  Additionally, the change in procurement
quantities allowed the Army to reallocate part of its total fiscal
year 1999 program procurement request to begin the second-source
effort.  This is another cost associated with developing the second
source. 

In addition, the low production quantities during the first 7 months
of the follow-on contract will cause production and fielding breaks. 
Project officials said that the FMTV second-source plan precluded
fielding breaks, as the current contractor would continue to produce
trucks while the second source is being developed.  However, the Army
is planning a 3-month production break between the end of the current
contract in December 1998 and the start of production under the
follow-on contract in April 1999.  A project official said that a
3-month production break will cause a 3-month fielding break.  The
production break will be caused by the low number of trucks the Army
funded for the first 7 months of the follow-on production contract. 
Subsequent to the fiscal year 1999 budget request, the Army decided
to split the follow-on contract into separate testing and production
contracts.  This split will further reduce the production quantities
for the first 7 months of the follow-on contract to 156 trucks. 


   IT IS UNCLEAR WHETHER THE
   ARMY'S PLAN WILL REDUCE COSTS
---------------------------------------------------------- Chapter 3:3

The Army did not compare the cost and benefits of its plan with those
of other program alternatives, including (1) dividing the program
into 5-year production increments and competing each increment among
all qualified contractors, (2) delaying the development of the second
source until funds are available to support both the current
contractor and the second source without a fielding break, or (3)
continuing with the current contractor for the remainder of the
program. 

A Stewart & Stevenson official said that under the current contract,
the contractor is producing 375 to 400 FMTV trucks a month.  He added
that the contractor's economical production rate is 400 trucks a
month; at that rate the contractor can avoid a price increase on the
trucks.\1 If the Army reduces the monthly production rate, truck
prices will increase and therefore program costs will increase.  The
same contractor official said that the contractor's minimum
sustaining rate\2 is 160 trucks a month and that if the production
quantities drop to that number, the Army could expect a price
increase close to 10 percent.  The Army's fiscal year 1999 budget
request for the FMTV program shows the contractor's economical
production rate as 350 trucks a month and the minimum sustaining rate
as 150 trucks a month.  However, a project official said that the
budget rates were developed when the contract was awarded and that
the contractor's rates were reasonable and more current. 

We analyzed a potential 60-40 percent production quantity split under
the Army's plan and compared the monthly production quantities each
contractor would receive to the current contractor's production
rates.  Our preliminary analysis indicates that the current
contractor will not be able to reduce its costs even if it wins the
larger share of the production quantities because the larger share
will be at or near its minimum sustaining rate.  Although the Army
has not determined how it will divide production between the two
contractors, we based our analysis of the potential split of FMTV
production on a 60-40 percent ratio because the Army has used this
ratio for planning purposes. 

Table 3.1 shows the total projected annual and monthly production
quantities for the FMTV program and the annual and monthly quantities
for each contractor based on a 60-40 percent ratio. 



                                    Table 3.1
                     
                         Projected FMTV Production by Two
                       Contractors in Years of Competition

        Total production       60-percent production     40-percent production
            quantity                  quantity                  quantity
    ------------------------  ------------------------  ------------------------
Fi
sc
al
ye
ar       Yearly      Monthly       Yearly      Monthly       Yearly      Monthly
--  -----------  -----------  -----------  -----------  -----------  -----------
20        4,010          334        2,406          201        1,604          134
 03
20        3,194          266        1,916          160        1,278          106
 04
20        3,194          266        1,916          160        1,278          106
 05
20        3,193          266        1,916          160        1,277          106
 06
20        3,193          266        1,916          160        1,277          106
 07
20        3,191          266        1,915          160        1,276          106
 08
20        3,191          266        1,915          160        1,276          106
 09
20        3,191          266        1,915          160        1,276          106
 10
20        3,191          266        1,915          160        1,276          106
 11
20        3,191          266        1,915          160        1,276          106
 12
20        3,191          266        1,915          160        1,276          106
 13
20        3,191          266        1,915          160        1,276          106
 14
20        3,191          266        1,915          160        1,276          106
 15
20        3,189          266        1,913          160        1,276          106
 16
20        3,191          266        1,915          160        1,276          106
 17
20        3,020          252           \a
 18
20        3,021          252           \a
 19
20        3,020          252           \a
 20
20        3,020          252           \a
 21
20        3,095          258           \a
 22
--------------------------------------------------------------------------------
\a The Army plans to award the final 5-year contract to one
contractor. 

Source:  FMTV Selected Acquisition Report, December 31, 1997. 

Table 3.1 shows that if two contractors compete for planned
production quantities based on a 60-40 percent ratio, the current
contractor would produce, in most years, at or near its monthly
minimum sustaining rate of 160 trucks even if it won the larger share
of production in all years.  It will be difficult for the current
contractor to reduce its price to the Army at these quantities
because its FMTV production plant is dedicated solely to FMTV
production and was built to produce up to a maximum of 525 trucks per
month based on an 8-hour work shift, 5 days a week.  When Stewart &
Stevenson won the first production contract, the Army's acquisition
plan did not contain plans for developing a second source.  Stewart &
Stevenson's fixed costs at its FMTV production plant must be covered
by its FMTV contracts and therefore the fixed costs limit the amount
of price reduction the contractor can give to the Army.  According to
a Stewart & Stevenson official, a monthly rate of 160 trucks would
cause about a 10-percent increase in the price of the trucks, not a
price reduction. 

We were unable to estimate the effect the production split would have
on the prices the second-source contractor would give the Army.  The
second-source contractor may be able to optimize its FMTV truck
production at lower rates than the current contractor.  There are
several possible scenarios.  For example, if the second-source
contractor is a truck producer, and if it could add FMTV truck
production to a plant in which it produces other trucks, it could
share the plant's fixed costs with other contracts.  This would tend
to reduce the fixed costs attributed to the FMTV contracts and lower
the second-source contractor's minimum sustaining rate, allowing it
to lower the FMTV price. 


--------------------
\1 The economical production rate is the number of units that a
contractor can economically produce using one 8-hour shift a day 5
days a week. 

\2 The minimum sustaining rate is the quantity that will allow the
contractor to avoid a production break while maintaining a responsive
vendor and supplier base. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 3:4

To reduce costs, the Army plans to introduce competition into the
FMTV program by developing a second source to produce FMTV trucks. 
The current contractor and second source will share the annual
production.  It is not clear whether the Army's plan to split
production of FMTV trucks between two contractors will result in cost
savings.  The Army has not performed a cost and benefit analysis to
justify its plan.  A cost and benefit analysis could determine
whether, for example, the financial benefits of adding a second
source would offset the investment of bringing a second contractor
into full production and could compare the costs and benefits of the
Army's plan with other alternatives. 


   RECOMMENDATION
---------------------------------------------------------- Chapter 3:5

To ensure that the Army considers all its options before it starts to
develop a second source for the FMTV, we recommend that the Secretary
of Defense direct the Secretary of the Army to delay the Army's plans
for developing a second source to produce FMTV trucks until the Army
completes an analysis that compares the costs and benefits of its
plans with those of other alternatives and to pursue the alternative
that is most beneficial to the government. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 3:6

In commenting on a draft of this report, the Department of Defense
partially concurred with our recommendation.  It said that the Army
is conducting an FMTV second-source contractor cost and benefit
analysis as directed by the Congress.  The fiscal year 1999 Defense
Authorization Act\3 required the Secretary of the Army to conduct a
cost and benefit analysis prior to contracting with a second source
for FMTV trucks.  The analysis is to support certifications by the
Secretary of the Army that (1) total FMTV quantities will be
sufficient to enable the prime contractor to maintain a minimum
economic production level; (2) total costs of the procurements under
the second-source plan will be the same or lower than if the Army
proceeds with only one contract; and (3) vehicles produced by both
contractors will have common, interchangeable components. 

The Army's plan to conduct an FMTV cost and benefit analysis is a
step in the right direction; however, according to an Army official,
the Army's analysis will compare the costs and benefits of only two
acquisition approaches--the current FMTV second-source plan and
continuing with the current contractor for the remainder of the
program.  Since other alternative acquisition approaches for the
program exist, we believe that, as a minimum, the Army should explore
the other alternatives.  The Army should select the acquisition
alternative that is the most cost beneficial to the government to
continue the FMTV program. 



(See figure in printed edition.)Appendix I

--------------------
\3 P.L.  105-261 sec.  112, Oct.  17, 1998. 


COMMENTS FROM THE DEPARTMENT OF
DEFENSE
============================================================ Chapter 3



(See figure in printed edition.)



(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
Margaret L.  Armen


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