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Report to the Ranking Minority Member, Committee on Commerce, Science, 
and Transportation,

U.S. Senate:

United States General Accounting Office:

GAO:

March 2004:

CONTRACT MANAGEMENT:

Coast Guard's Deepwater Program Needs Increased Attention to Management 
and Contractor Oversight:

GAO-04-380:

GAO Highlights:

Highlights of GAO-04-380, a report to the Ranking Minority Member, 
Committee on Commerce, Science, and Transportation, U.S. Senate 

Why GAO Did This Study:

The Coast Guards Deepwater program, the largest acquisition program in 
its history, involves modernizing or replacing ships, aircraft, and 
communications equipment. The Coast Guard awarded the Deepwater 
contract to Integrated Coast Guard Systems (ICGS) in June 2002. The 
Coast Guard estimates the program will cost $17 billion over a 30-year 
period. ICGS is a system integrator, with responsibility for 
identifying and delivering an integrated system of assets to meet the 
Coast Guards missions.

GAO was asked to assess whether the Coast Guard is effectively managing 
the Deepwater program and overseeing the contractor and to assess the 
implications of using the Deepwater contracting model on opportunities 
for competition. 

What GAO Found:

Over a year and a half into the Deepwater contract, the key components 
needed to manage the program and oversee the system integrators 
performance have not been effectively implemented. Integrated product 
teams, the Coast Guards primary tool for overseeing the system 
integrator, have struggled to effectively collaborate and accomplish 
their missions. They have been hampered by changing membership, 
understaffing, insufficient training, and inadequate communication 
among members. In addition, the Coast Guard has not adequately 
addressed the frequent turnover of personnel in the program and the 
transition from existing to Deepwater assets.

The Coast Guards assessment of the system integrators performance in 
the first year of the contract lacked rigor. For example, comments from 
the technical specialist responsible for monitoring the design and 
delivery of ships were not included in the evaluation scores. Further, 
the factors that formed the basis for the award fee determination were 
unsupported by quantifiable metrics. Despite documented problems in 
schedule, performance, cost control, and contract administration, ICGS 
received a rating of 87 percent, resulting in an award fee of $4.0 
million of the maximum $4.6 million annual award fee.

Further, the Coast Guard has not yet begun to measure the system 
integrators performance on the three overarching goals of the 
Deepwater program operational effectiveness, total ownership cost, and 
customer satisfaction. Its original plan of measuring progress on an 
annual basis has slipped, and Coast Guard officials have not projected 
a time frame for when they will be able to hold the contractor 
accountable for progress against these goals. This information will be 
essential to the Coast Guards decision about whether to extend ICGSs 
contract after the first 5 years. 

Competition is critical to controlling costs in the Deepwater program 
and a guiding principle of Department of Homeland Security 
acquisitions. Concerns about the Coast Guards ability to rely on 
competition as a means to control future costs contributed to GAOs 
description of the Deepwater program in 2001 as risky. Three years 
later, the Coast Guard has neither measured the extent of competition 
among suppliers of Deepwater assets nor held the system integrator 
accountable for taking steps to achieve competition. Deepwaters 
acquisition structure is such that the two first-tier subcontractors 
have sole responsibility for determining whether to hold competitions 
for assets or to provide these assets themselves. The Coast Guard has 
taken a hands-off approach to "make or buy" decisions made at the 
subcontractor level. As a result, questions remain about whether the 
government will be able to control costs.

What GAO Recommends:

GAO recommends that the Secretary of Homeland Security direct the 
Commandant of the Coast Guard to take a number of actions to improve 
Deepwater management and contractor oversight. The Department of 
Homeland Security forwarded GAO the Coast Guards written comments on a 
draft of this report. The Coast Guard welcomed GAOs observations and 
concurred with GAOs recommendations.

www.gao.gov/cgi-bin/getrpt?GAO-04-380.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact William T. Woods at (202) 
512-4841 or woodsw@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

Key Components of Management and Oversight Have Not Been Effectively 
Implemented:

Process for Assessing System Integrator's Ongoing Performance Lacked 
Rigor:

Coast Guard Has Not Begun to Measure Contractor Performance against 
Deepwater Program Goals:

Control of Future Costs through Competition Remains a Risk because of 
Weak Oversight of Subcontractor Decisions:

Conclusion:

Recommendations for Executive Action:

Agency Comments:

Scope and Methodology:

Appendix I: Comments from the Coast Guard:

Appendix II: Status of Selected Deepwater Contract Management and 
Oversight Plans:

Tables:

Table 1: Deepwater Program Appropriations:

Table 2: Comments from Coast Guard Management Reports on IPT 
Performance:

Table 3: Breakdown of Coast Guard Obligations to ICGS (Includes Planned 
Subcontracts to First Tier Subcontractors as of September 30, 2003):

Table 4: Breakdown of ICGS Obligations to Lockheed Martin (Planned 
Subcontracts and Second-Tier Obligations as of September 30, 2003):

Table 5: Breakdown of ICGS Obligations to Northrop Grumman (Planned 
Subcontracts and Second-Tier Obligations as of September 30, 2003):

Figure:

Figure 1: Contracting Relationship between Coast Guard, ICGS, and 
Subcontractors:

Abbreviations:

COTR: contracting officer's technical representative:

C4ISR: command, control, communications, computer, intelligence, 
surveillance, and reconnaissance:

DHS: Department of Homeland Security:

FAR: Federal Acquisition Regulation:

GAO: General Accounting Office:

ICGS: Integrated Coast Guard Systems, LLC:

IPT: integrated product team:

TOC: total ownership cost:

VUAV: vertical take-off and landing unmanned aerial vehicle:

United States General Accounting Office:

Washington, DC 20548:

March 9, 2004:

The Honorable Ernest F. Hollings: 
Ranking Minority Member: 
Committee on Commerce, Science, and Transportation: 
United States Senate:

Dear Senator Hollings:

The Coast Guard is undergoing a major transformation through its 
Deepwater program, the largest acquisition project in its history. The 
program involves modernizing or replacing cutters, aircraft, and 
communications equipment used for missions that generally occur beyond 
50 miles from shore. These missions include drug interdiction, alien 
migrant interdiction, search and rescue, overseas port security and 
defense, and offshore inspection of foreign vessels bound for U.S. 
ports. The three goals of the Deepwater program are to maximize 
operational effectiveness, minimize total ownership cost (TOC), and 
satisfy the customer. On March 1, 2003, the Coast Guard became part of 
the Department of Homeland Security (DHS), and the Deepwater program, 
estimated to cost $17 billion over a 30-year period,[Footnote 1] is one 
of the largest acquisitions in the department.

In June 2002, the Coast Guard awarded a contract to Integrated Coast 
Guard Systems, LLC (ICGS) as the system integrator for Deepwater to 
develop and deliver an improved, integrated system of ships, aircraft, 
unmanned aerial vehicles, command, control, communications, computer, 
intelligence, surveillance and reconnaissance (C4ISR), and supporting 
logistics. The contract has a 5-year base period with five additional 
5-year options. ICGS is a business entity jointly owned by Northrop 
Grumman Ship Systems (Northrop Grumman) and Lockheed Martin Corporation 
(Lockheed Martin). Northrop Grumman and Lockheed Martin are the two 
first-tier subcontractors for the Deepwater program. They, in turn, 
provide Deepwater assets or award second-tier subcontracts for the 
assets. Figure 1 depicts the relationship of the various parties 
involved in executing the Deepwater program.

Figure 1: Contracting Relationship between Coast Guard, ICGS, and 
Subcontractors:

[See PDF for image]

[End of figure]

The Deepwater contract is performance-based, meaning that the Coast 
Guard has specified the outcomes it is seeking to achieve and has given 
the system integrator responsibility for identifying and delivering the 
assets needed to achieve these outcomes. In 2001, we described the 
Deepwater project as "risky," due to the unique, untried acquisition 
strategy for a project of this magnitude within the Coast 
Guard.[Footnote 2] We highlighted concerns about the Coast Guard's 
ability to ensure that procedures and personnel would be in place to 
manage and oversee the system integrator and raised concerns about the 
agency's ability to keep costs under control in future program years by 
ensuring adequate competition for Deepwater assets. Now that the 
Deepwater program is underway, you asked us to assess whether the Coast 
Guard is effectively managing the acquisition program and overseeing 
the contractor and to assess the implications of using the Deepwater 
contracting model on opportunities for competition. Specifically, we 
assessed whether the Coast Guard (1) has a structure in place to 
effectively manage the program and oversee the system integrator, (2) 
has established adequate criteria by which to assess and reward the 
system integrator's performance, (3) has the information needed to make 
a decision about extending the contract after the first 5 years, and 
(4) is addressing the role and extent of competition for Deepwater 
assets.

Results in Brief:

More than a year and a half into the Deepwater contract, the key 
components needed to manage the program and oversee the system 
integrator's performance have not been effectively implemented. 
Integrated product teams, comprised of Coast Guard, ICGS, and 
subcontractor employees, are the Coast Guard's primary tool for 
managing the program and overseeing the contractor. However, the 
effectiveness of the teams has been weakened due to changing 
membership, understaffing, insufficient training, lack of authority for 
decision making, and inadequate communication among members. In 
addition, while the Coast Guard has a Deepwater human capital plan in 
place to address turnover, in practice the plan is not being followed 
and vacancies exist for key Deepwater personnel. Finally, although 
delivery of some of the first assets is imminent, the Coast Guard has 
not effectively communicated to its operational personnel decisions on 
how new and old assets will be integrated and how maintenance 
responsibilities will be divided between government and contractor 
personnel. Some of these initial assets have already experienced 
schedule delays.

The Coast Guard has not developed quantifiable metrics or adhered to 
effective procedures for holding the system integrator accountable for 
its ongoing performance. The process by which the Coast Guard assessed 
performance after the first year of the contract lacked rigor. The 
factors on which ICGS was rated lacked objective measures on which to 
assess performance, and the first annual award fee determination was 
based largely on unsupported calculations because the Coast Guard did 
not fully adhere to its award fee process. For example, comments from 
the technical specialist responsible for monitoring the contractor's 
performance in designing and delivering ships were not included in the 
evaluation scores, and it was unclear how numerical scores were 
assigned to the comments made by another Coast Guard performance 
monitor. Despite documented problems in schedule, performance, cost 
control, and contract administration throughout the first year of the 
contract, the program executive officer awarded the system integrator 
an overall rating of 87 percent, which falls in the "very good" range. 
This rating resulted in an award fee of $4.0 million of the maximum 
$4.6 million annual award fee.

The Coast Guard has not begun to measure the system integrator's 
performance on the three overarching goals of the Deepwater program--
maximizing operational effectiveness, minimizing total ownership cost, 
and satisfying the customers. This information is essential for 
determining whether to extend ICGS's contract. In 2001, the Coast Guard 
planned to develop appropriate metrics and to assess the system 
integrator's performance on an annual basis so that, in the fourth year 
of the contract, information would be available to determine whether to 
award the first 5-year option. Coast Guard officials stated that 
because it is early in the Deepwater program and the metrics have not 
yet been finalized, they cannot accurately assess the contractor's 
progress against the three goals. More troubling is that the Coast 
Guard has not projected a time frame for when it will be able to 
measure progress. In addition, the baseline for measuring total 
ownership cost has been fundamentally changed from the original plan. 
At present, the Coast Guard is using as a baseline ICGS's proposed cost 
for Deepwater plus an additional 10 percent, rather than using the 
originally planned baseline of what the total ownership cost would have 
been under a traditional procurement approach.[Footnote 3] The Coast 
Guard is now working with ICGS to develop a contingency strategy in the 
event that the system integrator needs to be replaced after 5 years. 
Coast Guard officials indicated, however, that since ICGS proposed the 
specific assets that comprise the Deepwater program, it is unrealistic 
to believe that the contract could be terminated without revising the 
entire Deepwater acquisition strategy.

Although competition among subcontractors is a key vehicle for 
controlling costs, the Coast Guard has neither measured the extent of 
competition among the suppliers of Deepwater assets nor held the system 
integrator accountable for taking steps to achieve competition. 
Although the competition that resulted in the initial award of this 
contract may be viewed as sufficient for the base period, Deepwater's 
acquisition structure provides little protection against cost growth 
during the option periods. The two first-tier subcontractors, Lockheed 
Martin and Northrop Grumman, have sole responsibility for determining 
whether to hold competitions for Deepwater assets or to provide these 
assets themselves. ICGS has stated that its use of sourcing guidance, 
termed the open business model, guides the subcontractors' decisions 
about whether to "make or buy" the Deepwater assets. However, this 
guidance is a philosophy--not a formal process with clear criteria and 
specific decision points--that encourages, but does not require, 
competition. In some cases, teaming agreements formed with second-tier 
subcontractors during the initial proposal phase of Deepwater have 
carried over as sole-source arrangements. The Coast Guard's hands-off 
approach to make or buy decisions and its failure to assess the extent 
of competition raise questions about whether the government will be 
able to control costs in the Deepwater program.

We are recommending that the Secretary of Homeland Security direct the 
Commandant of the Coast Guard to take actions to (1) improve program 
management, (2) improve contractor accountability, and (3) facilitate 
cost control through competition for Deepwater assets. We received 
written comments on a draft of this report from the Coast Guard, 
forwarded by DHS. The Coast Guard welcomed our observations and, in a 
subsequent e-mail, concurred with the recommendations. The Coast 
Guard's letter is reproduced in appendix I.

Background:

Deepwater is the largest and most complex procurement project in the 
Coast Guard's history. The acquisition is scheduled to occur over a 30-
year period at a projected cost of $17 billion. It includes the 
modernization and replacement of an aging fleet of over 90 cutters and 
200 aircraft used for missions that generally occur beyond 50 miles 
from shore. Deepwater currently accounts for almost one-third of the 
Coast Guard's acquisition staff and one-third of support personnel 
funding.

Rather than using the traditional approach of replacing classes of 
ships or aircraft through a series of individual acquisitions, the 
Coast Guard chose to employ a "system-of-systems" acquisition strategy 
that would replace its aging deepwater assets with a single, integrated 
package of new or modernized assets. The primary objectives of the 
Deepwater program are to maximize operational effectiveness and to 
minimize TOC while satisfying the needs of the customer--the 
operational commanders, aircraft pilots, cutter crews, maintenance 
personnel, and others who will use the assets.

The Deepwater program has been in development for a number of years. 
Between 1998 and 2001, three industry teams competed to identify and 
provide the assets--aircraft, helicopters, cutters, logistics, and 
C4ISR--needed to transform the Coast Guard. In June 2002, the Coast 
Guard awarded a contract to ICGS as the system integrator for 
Deepwater. Under a 5-year base contract with five additional 5-year 
options, ICGS is responsible for designing, constructing, deploying, 
supporting, and integrating the Deepwater assets to meet Coast Guard 
requirements. ICGS, a business entity comprised of a nine-member Board 
of Directors, is jointly owned by Northrop Grumman and Lockheed Martin. 
Northrop Grumman and Lockheed Martin are the two first-tier 
subcontractors for the Deepwater program. They, in turn, provide 
Deepwater assets themselves or award second-tier subcontracts for the 
assets.

In our 2001 report, we identified several areas of risk for Deepwater. 
First, the Coast Guard faced potential risk in the overall management 
and day-to-day administration of the contract. We reported on the major 
challenges in developing and implementing plans for establishing 
effective human capital practices, having key management and oversight 
processes and procedures in place, and tracking data to measure system 
integrator performance. In addition, we, as well as the Office of 
Management and Budget, expressed concerns about the potential lack of 
competition during the program's later years and the reliance on a 
single system integrator for procuring the Deepwater equipment. We also 
reported there was little evidence that the Coast Guard had analyzed 
whether the approach carried any inherent risks for ensuring the best 
value to the government and, if so, what to do about them.

Since fiscal year 2002, Congress has appropriated almost $1.5 billion 
for the Deepwater program (see table 1), and as of September 2003, the 
Coast Guard had obligated $596 million to ICGS and $120.4 million for 
government program management, legacy asset sustainment, and facilities 
design work.

Table 1: Deepwater Program Appropriations:

Dollars in millions.

Fiscal year: 2002; Appropriation: $320.

Fiscal year: 2003; Appropriation: 478.

Fiscal year: 2004; Appropriation: 668.

Total; Appropriation: $1,466.

Source: Coast Guard.

[End of table]

In response to congressional direction to assess the feasibility of 
accelerating the Deepwater program,[Footnote 4] the Coast Guard 
reported in March 2003 that it could accelerate the implementation 
schedule from 20 years to 10 years and that this acceleration would 
provide increased operational capability sooner to support maritime 
homeland security.

On March 1, 2003, the Coast Guard became part of DHS. A December 22, 
2003, acquisition decision memorandum from the DHS Investment Review 
Board's (the Board) acting chairperson to the Coast Guard Commandant 
stated that the Deepwater program has been designated as a level 1 
investment, meaning that it will be reviewed at the highest levels 
within the department.[Footnote 5] Further, because Deepwater 
interoperability within DHS and with the Department of Defense will be 
a major program challenge, the DHS Joint Requirements Council[Footnote 
6] will be kept informed of Deepwater developments. While decisions as 
to specific assets or capabilities have been deferred to the Coast 
Guard acquisition executive, the Board will meet to discuss actual or 
projected changes to the program that affect cost, schedule, or 
performance. Noting that the Coast Guard has proposed accelerating the 
Deepwater program in fiscal year 2005, the Board directed the Coast 
Guard to ensure that risk management planning receives appropriate 
attention, that TOC is kept current, and that cost, schedule, and 
performance are monitored by measuring actual data against the baseline 
and projections to completion.

Key Components of Management and Oversight Have Not Been Effectively 
Implemented:

Complex, performance-based contracts such as Deepwater require 
effective government oversight to ensure that the intended results are 
achieved and that taxpayer dollars are not wasted. Both Coast Guard and 
ICGS officials have acknowledged that an unusually large degree of 
collaboration and partnership between the government and the system 
integrator must be in place for the Deepwater acquisition to be 
successful. However, a year and a half into the program, the key 
management and oversight components needed to make the program 
effective have not been effectively implemented. Integrated product 
teams (IPT) are the Coast Guard's primary tool for managing the program 
and overseeing the contractor, but these teams have struggled to 
collaborate effectively and accomplish their missions. While the Coast 
Guard has a Deepwater human capital plan in place to guide strategic 
planning for turnover among Deepwater personnel, the plan is not being 
followed and vacancies exist in key positions. Further, while it is 
still early in the program, the transition from existing Coast Guard 
assets to the new Deepwater assets has not been effectively 
communicated, a particular concern in light of schedule delays for some 
of the first assets to be delivered. Finally, a number of plans 
integral to the organization and management of the Deepwater program 
were finalized much later than anticipated. Appendix II contains 
additional information on these plans.

IPTs Have Had Difficulty Fulfilling Their Critical Management Function:

IPTs are the Coast Guard's primary tool for managing the Deepwater 
program and overseeing the system integrator. More than 30 of these 
teams, comprised of Coast Guard, ICGS, and subcontractor employees from 
Lockheed Martin and Northrop Grumman, are responsible for overall 
program planning and management, asset integration, and overseeing the 
delivery of specific Deepwater assets. However, the teams have 
struggled to effectively carry out their missions. Our prior work at 
the Department of Defense has shown that effective IPTs have (1) 
expertise to master different facets of product development, (2) 
responsibility for day-to-day decisions and product delivery, (3) key 
members who are either physically collocated or connected through 
virtual means to facilitate team cohesion and the ability to share 
information, and (4) control over their membership, with membership 
changes driven by each team's need for different knowledge.[Footnote 7]

The Deepwater program manager reported IPT performance shortcomings as 
an issue in 14 of the 16 monthly program assessment reports provided to 
us. The following comments, made in Deepwater management reports by 
Coast Guard officials involved on a number of different IPTs, convey 
the difficulties faced by the teams in the first year and a half of the 
program. Though the comments in table 2 are not exhaustive, they 
demonstrate that the Deepwater IPTs have not been effective.

Table 2: Comments from Coast Guard Management Reports on IPT 
Performance:

June 2002 through Dec. 2002; 
* Teams are still forming but are hindered with unfamiliarity of Web-
based data environment, integrated design and management processes 
immaturity, and geographic separation; 
* Because of aggressiveness of schedule, team development and 
collaboration have been negatively affected; 
* Team is making progress, but most other teams are not yet productive. 
Team leaders are challenged by intense pace of work needed to keep up 
with asset implementation plan.

Jan. 2003 through June 2003; 
* High demands and limited resources inhibit commitment to 
collaboration; 
* Team progress is slowed by ineffective collaboration, resulting in 
missed milestones; 
* Limited collaboration in addressing design and production issues. 
Team has been unable to resolve some comments in a timely fashion.

July 2003 through Dec. 2003; 
* Demands on limited personnel resources have restricted collaboration 
in addressing some items in contract data requirements list in a timely 
fashion for the 123-foot cutter; 
* Team meetings for one asset have been canceled due to workload 
associated with another. Team lead has been vacant for several months, 
requiring the duties to be assumed by the Aviation Technical Director 
and/or Aviation Program Manger. Task order performance has suffered, 
and issues have not been resolved in a timely manner; 
* Team has been unable to resolve some comments in a timely fashion. 
Human resources within the team are taxed due to multi-tasking; 
* There has been a lack of participation by some of the team members. 
Meeting minutes, decisions, and such have not been documented as 
outlined in the IPT charters. Important action items and risk 
mitigation plans are not being consistently addressed, tracked, and 
resolved in a timely manner; 
* Team disconnects have contributed to delay in delivery of Coast Guard 
cutter Matagorda. 

Source: Coast Guard.

[End of table]

Based on our review of program reports, we identified four major issues 
that have impeded the effective performance of the IPTs.

* Lack of timely charters to vest IPTs with authority for decision 
making. Authority for day-to-day decisions--required for program 
success in meeting cost, schedule, and performance objectives--is 
vested in IPTs through charters; yet charters for most of the Deepwater 
IPTs were not developed in a timely manner. In fact, 27 of the 31 IPT 
charters were not approved until after the first year of the contract. 
More than merely a paperwork exercise, sound IPT charters are critical 
because they detail each team's purpose, membership, performance goals, 
authority, responsibility, accountability, and relationships with 
other groups, resources, and schedules. Between June 2002 and June 
2003, 20 delivery task orders,[Footnote 8] authorized for issuance by 
the contracting officer, were executed by IPTs that did not have 
charters in place. Similarly, we found that some sub-IPTs, which 
address specific issues at a subasset or component level, were 
operating on an ad hoc basis without charters. For example, a November 
2002 management report states that sub-IPTs addressed numerous issues 
concerning requirements for the national security cutter, even though 
their charters were not approved until a year later. In addition, two 
other sub-IPTs were not chartered.[Footnote 9]

* Inadequate communication among members. The Coast Guard's Deepwater 
program management plan has identified collocation of IPT members as a 
key program success factor, along with effective communications within 
and among teams. Face-to-face informal communication enhances 
information flow, cohesion, and understanding of other members' roles-
-all of which help foster team unity and performance. Yet only 3 of the 
31 operating IPTs are entirely collocated, meaning that every IPT 
member is in the same building. The IPTs responsible for assets 
frequently have members in multiple locations. For example, the 
logistics process and policy development IPT has members in 6 different 
locations. As noted in table 2, Coast Guard IPT members have raised 
geographic separation as an issue of concern. ICGS developed a Web-
based system for government and contractor employees to regularly 
access and update technical information, training materials, and other 
program information, in part to mitigate the challenges of having team 
members in multiple locations. However, Coast Guard documents indicate 
that the system is not being updated or used effectively by IPTs. In 
fact, the Deepwater program executive officer reported that, while the 
system has great potential, it is a long way from becoming the virtual 
enterprise and collaborative environment required by the contractor's 
statement of work.

* High turnover of IPT membership and understaffing. Most of the 
Deepwater IPTs have experienced membership turnover and staffing 
difficulties, resulting in a loss of team knowledge, overbooked 
schedules, and crisis management. In a few instances, such as the 
national security cutter and maritime patrol aircraft, even the IPT 
leadership has changed. Also, key system integrator officials serving 
on the management IPTs have left the company. Both the Chief Financial 
Officer and the President of ICGS left their positions during the 
latter half of 2003, and an additional six of the nine ICGS Board 
members have changed. In addition, Coast Guard and system integrator 
representatives have also been staffed on multiple IPTs, and, in many 
cases meetings were attended by fewer than 50 percent of IPT members. A 
December 2002 Coast Guard document summarizing various programmatic 
recommendations cited a contractor study that recommended individuals 
be assigned to IPTs on a full-time basis and that they not serve on 
more than two teams. However, as of December 2003, 15 individuals were 
serving on three or more IPTs.

* Insufficient training. The system integrator has had difficulty 
training IPT members in time to ensure that they could effectively 
carry out their duties, and program officials have referred to IPT 
training as deficient. IPT charters state that members must complete 
initial training before beginning team deliberations regarding 
execution of new contracts for Deepwater assets. IPT training is to 
address, among other issues, developing team goals and objectives, key 
processes, use of the Web-based system, and team rules of behavior. 
According to a Coast Guard evaluation report, IPT training was 
implemented late, which has contributed to a lack of effective 
collaboration among team members.

The Coast Guard hired a consultant to survey IPT members concerning 
teams' performance from July 2002 to September 2003. Three surveys 
consisted of questions about mission, team member cooperation, 
performance, communication, and integrated product and process 
development.[Footnote 10] The final report on the survey results 
highlighted the need for improved communications both within and among 
teams. Respondents were also concerned that workloads were too 
high.[Footnote 11]

Human Capital Issues Pose a Challenge:

In our 2001 report,[Footnote 12] we noted that as the Deepwater program 
got off the ground, tough human capital challenges would need to be 
addressed. A critical challenge we raised was the need to recruit and 
train enough staff to manage and oversee the contract. To date, the 
Coast Guard has not funded the number of staff requested by the 
Deepwater program and has not adhered to the processes outlined in its 
human capital plan for addressing turnover of Deepwater officials. 
These staffing shortfalls have contributed to the problems IPT members 
have identified--such as the struggle to keep pace with the workload 
and the difficulties in making decisions due to inconsistent attendance 
at IPT meetings.

Although the Deepwater program has identified the need for a total of 
264 staff in fiscal year 2004, only 224 positions have been funded, and 
only 209 have been assigned to the program. The Coast Guard's fiscal 
year 2004 funding for personnel was increased to $70 million; however, 
the Coast Guard did not request sufficient funds to fill the 40 
positions that the Deepwater program identified as necessary. According 
to Coast Guard officials, $70 million is insufficient to fund their 
fiscal year 2004 personnel plan because they need $67 million of this 
amount just to fund current personnel levels. The assistant commandant 
has imposed a temporary hiring freeze and plans to monitor expenditures 
throughout the year to identify any available funding for additional 
positions. Although we asked, Coast Guard officials did not explain why 
they did not request sufficient funds to adequately staff the program.

In addition, the Coast Guard has not adequately addressed the imminent 
departure of Coast Guard officials from the Deepwater program. Coast 
Guard officials will leave each year due to the normal rotational cycle 
of military members (every 3 to 4 years) and retirements. The Deepwater 
human capital plan sets a goal of a 95 percent or higher "fill rate" 
annually for both military and civilian positions and proposes using a 
"floating" training position that can be filled by replacement 
personnel reporting for duty a year before the departure of the 
military incumbents. This position is meant to ensure that incoming 
personnel receive acquisition training and on-the-job training with 
experienced Deepwater personnel. However, the 2004 request for this 
training position was not funded, nor was funding provided for 
additional new positions identified as critical. In December 2003, the 
Director of Resources and Metrics and the Chief Contracting Officer 
left the Deepwater program, and the program manager is slated to leave 
in March 2004. In addition, by July 1, 2004, five key Coast Guard 
officials who oversee the work of the asset IPTs are scheduled to 
leave. Coast Guard officials told us that they have identified the 
military replacements that will join the program in the summer of 2004.

Transition Planning for New Assets Needs Attention:

Although Deepwater is still in the early stages, assets will start to 
be delivered incrementally to operating units soon. The first Deepwater 
assets--the 123-foot cutter and short range prosecutor[Footnote 13]--
are scheduled to be delivered to operating divisions in 2004. Operating 
units will receive additional ships, aircraft, or C4ISR every year 
thereafter until the Deepwater program ends. However, the Coast Guard 
has not communicated decisions on how the new and old assets are to be 
integrated during the transition and whether Coast Guard or contractor 
personnel--or both--will be responsible for maintenance. Coast Guard 
field personnel, including senior-level operators and naval engineering 
support command officials, told us that they have not received 
information about how they will be able to continue meeting their 
missions using current assets while being trained on the new assets. 
They are also unclear as to whether the system integrator or Coast 
Guard personnel will be responsible for maintenance of the new assets. 
For example, although Deepwater officials have stated that maintenance 
on the new assets will be a joint responsibility, naval engineering 
support command staff had received no instruction on how this joint 
responsibility is to be carried out. Coast Guard officials told us that 
guidance on joint maintenance responsibility has not been completely 
disseminated throughout the Coast Guard, but said that ICGS has 
recently added representatives at the key maintenance and logistics 
sites to coordinate maintenance issues.

One of the first Deepwater assets to be delivered is the 123-foot 
cutter. The Coast Guard is modifying its 110-foot cutter by adding 13 
feet of deck and hull, a stern ramp, a superstructure, and 
communication equipment. The 123-foot cutter is an example of the 
transition challenges facing the Coast Guard. First, there is confusion 
over which of the cutters will be modified and when. The contract with 
ICGS calls for all 49 cutters to be modified; however, Deepwater 
officials are considering curtailing the modification efforts and 
accelerating the development of the fast response cutter instead. (The 
fast response cutter was originally planned to be delivered in 2018 as 
a replacement for the 123-foot cutter). In addition, the Coast Guard 
identified 22 of the 110-foot cutters that, due to unexpectedly severe 
hull corrosion, required additional inspection and repair separate from 
the Deepwater modification plans. To date, $14.7 million in non-
Deepwater funds has been made available to repair 8 of these cutters. 
Further, Coast Guard officials note that there are 4 cutters in 
operation in the Persian Gulf, which makes them unavailable for 
modification at this time. System integrator and Coast Guard officials 
expressed confusion about the status of the cutter modifications, hull 
repair program, and fast response cutter schedule. For example, ICGS 
officials indicated that they did not know what the Coast Guard plans 
for the 123-foot cutter modification. The Coast Guard is considering 
several options and has not made a final decision on the cutter 
modification effort.

Transitioning the staffing and operations of current Coast Guard assets 
to Deepwater assets may be further complicated by schedule delays. 
Reliable information on the delivery of Deepwater assets is important 
to the planning and budgeting efforts of Coast Guard operators and 
maintenance personnel to ensure that current missions are met and 
existing assets are maintained. Delivery of the first 123-foot cutter 
and short range prosecutor is scheduled for March 2004, slipping from 
the original delivery date of November 2003, and the rescheduled date 
of December 2003. This delay is affecting the schedules for the 
remaining cutters under contract, according to the most recent program 
manager assessment. Program management reports also indicate that 
schedule milestones have slipped for the maritime patrol aircraft. The 
first two aircraft are currently scheduled to be delivered to operating 
divisions in late 2006 or early 2007, compared with the original plan 
of 2005. The IPT is working toward design of the aircraft, even though 
Coast Guard approval to proceed has not been set forth in the form of a 
definitized contract for this asset.[Footnote 14] The target date for 
definitizing the contract is now April 2004.

Process for Assessing System Integrator's Ongoing Performance Lacked 
Rigor:

According to Office of Federal Procurement Policy guidance, a 
performance-based contract such as Deepwater should have measurable 
performance standards and incentives to motivate contractor 
performance. Contractors should be rewarded for good performance based 
on measurement against predetermined performance standards. In general, 
the contractor is to meet the government's performance objectives, at 
appropriate performance quality levels, and be rewarded for outstanding 
work. Further, sound internal controls are important to ensure that 
plans, methods, and procedures are in place to support performance-
based management. Relevant information should be recorded and 
communicated to management and others in a form and a time frame that 
enables them to carry out their responsibilities.[Footnote 15]

The Coast Guard's process and procedures for evaluating the system 
integrator's performance during the first year of the contract lacked 
rigor in terms of applying quantifiable metrics to assess performance, 
gathering input from government performance monitors, and communicating 
with and documenting information for the decision makers. The process 
used to hold the system integrator accountable for results was not 
transparent and, in fact, contained several inconsistencies that raise 
questions as to whether the Coast Guard's decision to give the 
contractor 87 percent of the award fee[Footnote 16] was based on 
accurate information.

Quantifiable Award Fee Metrics Are Still Being Developed:

The Coast Guard measures the system integrator's ongoing performance 
based on periodic assessments using weighted evaluation factors. The 
award fee for the first year of performance of the overall integration 
and management of the Deepwater program was based on an evaluation of 
the following five factors:[Footnote 17]

* overall program management,

* cost monitoring and control,

* quality,

* innovation, and:

* flexibility.

These evaluation factors are further defined in the contract's award 
fee plan. For example, innovation is the "extent to which innovation, 
designs, processes, and concepts have been introduced that result in 
operational performance improvements and/or total ownership cost 
reductions." While there will inevitably be a degree of subjectivity in 
award fee decisions, the Coast Guard lacks quantifiable metrics to make 
an assessment of the contractor's performance. Given the lack of 
specificity of the metrics, it is not clear how they could be used to 
make such an assessment, particularly on a program as complex as 
Deepwater. Coast Guard officials acknowledged that the factors need to 
be better-defined, with supporting metrics that would provide a more 
objective basis for future award fee assessments.

In the meantime, a May 31, 2003, Coast Guard memorandum to ICGS 
indicates that the contractor will be rated based on three factors for 
the second year of performance rather than five. However, the factors 
are vague and undefined: quality, program management, and system 
engineering. Further, supporting metrics to measure these performance 
factors have not been developed.

Information Was Not Gathered and Communicated Accurately:

Under the Deepwater contract's award fee plan[Footnote 18] and the 
program management plan, technical specialists, known as contracting 
officers' technical representatives (COTR), are to provide their 
observations to a program evaluation board comprised of the contracting 
officer, the program manager, and two COTRs. The Deepwater program 
executive officer then makes the final award fee determination based on 
the board's recommendations. The Coast Guard's award fee evaluation of 
the first year of ICGS's performance was based on unsupported 
calculations and relied heavily on subjective considerations. As a 
result, the basis for the final decision to provide the contractor an 
award fee rating of 87 percent, which falls in the "very good" range, 
was not well-supported.[Footnote 19]

For example, while all COTRs submitted comments, the assessment did not 
include numerical and adjectival ratings from all COTRs. Input from the 
COTR responsible for gauging the system integrator's performance for 
all efforts related to the design and delivery of ships was not 
included in the calculation at all. Prior to speaking with us, the COTR 
did not know his input was absent from final performance monitor 
calculations, which resulted in a recommended rating of 82.5 percent. 
Input from two other COTRs was provided for some but not all of the 
five evaluation factors. A fourth COTR provided only adjectival 
ratings, whereas others provided numerical scores. Subsequently, and 
unbeknownst to the COTR, a program evaluation board member calculated a 
numerical score for this COTR's observations. While an adjectival 
rating of "good," for example, could range from a score of 71 to 80, 
the board member scored each of the factors in the midrange. Scoring 
this COTR's adjectival ratings in the low or high end of the range 
would have produced a different outcome. Program evaluation board 
officials were not aware of the inconsistencies in the calculations 
until we informed them.

One program evaluation board member raised concerns that the board's 
subsequent award fee recommendation of 90 percent was too high and that 
the assessment focused disproportionately on the system integrator's 
performance in the last part of the year rather than its performance 
over the entire year. In addition, the program manager's assessment 
stated that "overall program managementneeds substantial 
improvement." Further, Coast Guard management reports throughout the 
first year of the contract cited various schedule, performance, cost 
control, and contract administration problems that required attention. 
Among the assets cited as needing attention were the maritime patrol 
aircraft, the short range prosecutor, the 123-foot cutter, and the 
logistics integration management system. Ultimately, the program 
executive officer awarded the system integrator a rating of 87 percent, 
resulting in an award fee of $4.0 million of the maximum $4.6 million 
annual award fee.

Coast Guard officials told us that they will now assess ICGS's 
performance every 6 months, rather than annually. However, the contract 
has not been modified to reflect either the changes to the evaluation 
factors, discussed previously, or the new assessment period. The first 
6-month assessment was scheduled for completion in December 2003, but 
as of March 2004, Coast Guard officials told us it is currently 
ongoing.

The contractor was eligible for a second award fee of up to $1.5 
million in August 2003 for performance related to the continuous 
improvement of elements common to C4ISR and life cycle and logistics 
engineering for all assets. Coast Guard officials said that they 
awarded the system integrator 79 percent of the maximum award fee; 
however, they did not provide us with supporting documentation of the 
award fee determination process.

Coast Guard Has Not Begun to Measure Contractor Performance against 
Deepwater Program Goals:

The Coast Guard is scheduled to decide on extending ICGS's contract by 
June 2006, 1 year prior to the end of the first 5-year contract term. 
In 2001, the Coast Guard set a goal of developing measures, within a 
year after contract award, to conduct annual assessments of the system 
integrator's progress toward achieving the three overarching goals of 
the Deepwater program: increased operational effectiveness, lower TOC, 
and customer satisfaction. However, the Coast Guard's time frame for 
implementing metrics to gauge progress against these goals has slipped. 
Further, the baseline the Coast Guard is using to assess TOC will not 
provide the government with critical information it needs about the 
efficiencies of using the Deepwater approach. Therefore, the Coast 
Guard is not in a position to begin the decision-making process about 
whether or not to extend the contract past the 5-year base period.

The time frame for the first review of the contractor's performance 
against the Deepwater goals has slipped. It was originally rescheduled 
for 18 months after contract award (December 2003), 6 months later than 
planned. Deepwater officials told us that the performance review is 
currently ongoing and is expected to be completed in March 2004. While 
the Coast Guard has begun to develop models to measure the extent to 
which Deepwater is achieving increased operational effectiveness and 
reduced TOC, a decision has not yet been made as to which specific 
suite of models will be used. The former Deepwater chief contracting 
officer told us he anticipates that the metrics will be in place in 
year 4 of the contract, the same year the decision needs to be made to 
extend the contract. Other officials acknowledged that it is difficult 
to hold the contractor accountable for progress toward the goals this 
early in the program, but could not offer a projection as to when the 
operational effectiveness and TOC results would be forthcoming.

Coast Guard officials noted the large degree of complexity involved in 
attempting to measure the system integrator's progress toward the 
Deepwater goals. In previous work, we found that assessing improvements 
in operational effectiveness and TOC may be difficult because 
performance data may reflect factors that did not result from the 
contractor's actions. Because the Deepwater program includes legacy 
assets, modified assets, and new assets, the line of accountability 
between the government and the system integrator is blurred. It is not 
always clear who is responsible between Coast Guard and ICGS for the 
change in performance or costs of Deepwater assets. Measuring the 123-
foot cutter's performance, for example, is complicated by the fact that 
ICGS is responsible for the new 13 feet of deck and hull and other 
modifications, while the engine and the other 110 feet of the deck and 
hull are the Coast Guard's responsibility.

Coast Guard officials said that they are measuring "operational 
performance," such as the number of search and rescue, drug 
interdiction, and migrant interdiction missions carried out by the 
current assets. However, they could not explain how these measures will 
be used to assess ICGS's progress toward improving operational 
effectiveness with Deepwater assets. The officials stated that the 
models they are using to measure operational performance for the 
various Coast Guard missions lack the fidelity to capture whether 
improvements may be due to Coast Guard or contractor actions, the 
capability of specific Deepwater assets, or even outside factors such 
as improved intelligence on drug smugglers. Program officials noted 
that it is difficult to hold the contractor accountable for operational 
effectiveness at this point, before Deepwater assets are delivered.

Establishing a solid baseline against which to measure progress in 
lowering TOC is critical to holding the contractor accountable. 
However, the Coast Guard is using as the baseline ICGS's own projected 
cost of $70.97 billion plus 10 percent (in fiscal year 2002 dollars). 
Therefore, the government will not have the TOC information it needs to 
make a contract extension decision. Measurement of ICGS's cost as 
compared to its own cost proposal will tell the Coast Guard nothing 
about the efficiencies it may be getting using the Deepwater 
performance-based approach. Further, the baseline the Coast Guard is 
using has been significantly changed from that originally envisioned. 
The Deepwater program management plan, approved in December 2003, 
states that the estimated cost to replace individual Coast Guard assets 
under a traditional approach, (i.e., without the ICGS Deepwater "system 
of systems" solution), is to be the "upper limit for TOC" that the 
contractor should not exceed. The officials could not explain why the 
program management plan, which sets forth the overall framework for 
managing Deepwater, contains a different TOC baseline than the one they 
are using.

Further, changes in such variables as fuel costs or cutters' operating 
tempo could result in additional changes being made to the TOC 
baseline. Coast Guard officials explained that proposed changes to the 
baseline would be approved by the program executive officer on a case-
by-case basis. However, the Coast Guard has not developed criteria for 
potential upward or downward adjustments to the baseline.

The Coast Guard has only recently begun to address the contractor's 
progress in meeting the third overall goal of Deepwater, customer 
satisfaction. A January 9, 2004, report indicates that the Coast Guard 
had not yet identified the metrics needed to measure this goal. As a 
start, on January 12, 2004, a survey was sent to 25 senior leaders and 
program managers.

The Coast Guard decided to use the system integrator approach 6 years 
ago. In our previous work,[Footnote 20] we found that given the Coast 
Guard's reliance on a single system integrator for the Deepwater 
program, the agency would be at serious risk if it decides not to 
extend the contract. Because ICGS proposed the specific assets that 
became the Deepwater solution, a decision not to extend the current 
contract would require a new Deepwater acquisition strategy to be 
developed. Exit strategies and other means to deal with potential poor 
performance by the system integrator are important to mitigate these 
program risks. However, the Coast Guard is just beginning an internal 
review of the system integrator's plan to transition out of the program 
in the event such action would be necessary. Further, Deepwater program 
officials indicated that it is not realistic to believe the Coast Guard 
would switch system integrators at this point in the program. They 
stated that they viewed their relationship with the contractor as a 
partnership and are committed to making it work.

Control of Future Costs through Competition Remains a Risk because of 
Weak Oversight of Subcontractor Decisions:

Competition is a key component for controlling costs in the Deepwater 
program and a guiding principle for DHS's major acquisitions. The 
benefits of competition may be viewed as sufficient in the contract's 
early years because, for the initial 5-year contract period, prices 
proposed by ICGS for equipment and software were based on competitions 
held among various subcontractors. However, beyond the first 5-year 
term, the Coast Guard has no way to ensure competition is occurring 
because it does not have mechanisms in place to measure the extent of 
competition or to hold the system integrator accountable for steps 
taken to achieve competition.

The acquisition structure of the Deepwater program is such that the two 
first-tier subcontractors, Lockheed Martin and Northrop Grumman--the 
companies that formed ICGS and that developed the Deepwater solution--
have sole responsibility for determining whether to hold competitions 
for Deepwater assets or to provide these assets themselves. Over 40 
percent of the funds obligated to Lockheed Martin and Northrop Grumman 
have either remained with those companies or been awarded to their 
subsidiaries. Further, the system integrator uses a Lockheed Martin 
sourcing document, termed the open business model, to guide competition 
decisions made by the subcontractors. However, this guidance is a 
philosophy--not a formal process involving specific actions--that 
encourages competition but does not require it. The lack of 
transparency into competition and the government's lack of a mechanism 
to hold the contractor accountable raise questions about whether the 
Coast Guard will be able to control costs.

Coast Guard Lacks Visibility into Subcontractors' Make or Buy 
Decisions:

Neither the Coast Guard nor the system integrator determines how 
suppliers for Deepwater assets are chosen. A Coast Guard official told 
us that the system integrator was hired to make these decisions because 
the agency lacked the expertise to do so. However, Lockheed Martin and 
Northrop Grumman, as the subcontractors, are solely responsible for 
deciding whether to hold competitions for Deepwater assets or provide 
them to the Coast Guard themselves (often referred to as "make or buy" 
decisions).

Moreover, the Coast Guard has no contractual requirements with ICGS 
that provide transparency into significant make or buy decisions. 
Although the Coast Guard has decided to include achieving competition 
as one of the factors to be considered in decisions about extending the 
contract for future option terms, this review will occur after such 
subcontracting decisions are made. The subcontractors are not required 
to notify the Coast Guard prior to making a decision to provide 
Deepwater assets themselves rather than holding a competition. The 
Coast Guard's review of competition included in its award term 
plan[Footnote 21] will not address Lockheed Martin or Northrop Grumman 
decisions--increasingly important in subsequent years--of whether 
significant equipment should be procured from outside sources or built 
in-house.

As of September 30, 2003, the Coast Guard had awarded $596 million in 
orders to the system integrator, ICGS. Table 3 shows that over 98 
percent of this amount was then passed through to the two first-tier 
subcontractors.

Table 3: Breakdown of Coast Guard Obligations to ICGS (Includes Planned 
Subcontracts to First Tier Subcontractors as of September 30, 2003):

Dollars in millions.

ICGS[A]; 
Dollar value: $9; Percentage: 1.5.

Subcontracts to Lockheed Martin; 
Dollar value: $393; Percentage: 65.9.

Subcontracts to Northrop Grumman; 
Dollar value: $194; Percentage: 32.6.

Total; Dollar value: $596; Percentage: 100.

Source: Coast Guard.

[A] Obligations to ICGS consist of general and administrative charges 
exclusively.

[End of table]

To date, the subcontractors managing the acquisition have frequently 
performed the work themselves. Based on their respective work scopes, 
the two companies either issue orders to second-tier subcontractors or 
retain the work for themselves.[Footnote 22] Table 4 shows that, as of 
September 30, 2003, Lockheed Martin planned to retain 42 percent of its 
obligated dollars and to award 58 percent to second-tier 
subcontractors. Most of these second-tier dollars will go to major 
subcontractors, i.e., those with obligations greater than $5 million.

Table 4: Breakdown of ICGS Obligations to Lockheed Martin (Planned 
Subcontracts and Second-Tier Obligations as of September 30, 2003):

Dollars in millions.

Subcontractor: Lockheed Martin in-house work; 
Dollar value: $121; Percentage: 31.

Subcontractor: Subcontracts to Lockheed Martin subsidiaries; 
Dollar value: $42; Percentage: 11.

Other second-tier subcontractors: Major second-tier subcontractors[A]; 
Dollar value: $206; Percentage: 52.

Other second-tier subcontractors: Other suppliers; 
Dollar value: $24; Percentage: 6.

Total; 
Dollar value: $393; Percentage: 100.

Source: Coast Guard.

[A] Lockheed Martin defines major subcontractors as those with 
obligations of more than $5 million.

[End of table]

As shown in table 5, Northrop Grumman planned to retain 51 percent of 
its obligated dollars.

Table 5: Breakdown of ICGS Obligations to Northrop Grumman (Planned 
Subcontracts and Second-Tier Obligations as of September 30, 2003):

Dollars in millions.

Subcontractor: Northrop Grumman in-house work; 
Dollar value: $96; Percentage: 49.

Subcontractor: Subcontracts to Northrop Grumman subsidiaries; 
Dollar value: $3; Percentage: 2.

Subcontractor: Other second-tier subcontractors; 
Dollar value: $95; Percentage: 49.

Total; 
Dollar value: $194; Percentage: 100. 

Source: Coast Guard.

[End of table]

The System Integrator's Open Business Model Does Not Ensure Competition 
Is Considered:

The open business model, meant to guide the supplier sourcing process 
in the Deepwater program, has been characterized by the system 
integrator as a means of ensuring competition for Deepwater assets 
throughout the life of the program, thereby keeping costs under 
control. In October 2003, ICGS issued a policy statement on the open 
business model. The stated business approach of the guidance is to 
encourage second-tier suppliers to remain innovative and competitive by 
directing Lockheed Martin and Northrop Grumman, as the first-tier 
subcontractors, to (1) generally avoid the use of teaming agreements 
with suppliers and prohibit teaming agreements based on guaranteed work 
share,[Footnote 23] (2) defer second-tier supplier decisions as long as 
practicable so that changes in the marketplace can be considered, and 
(3) actively solicit market information and new suppliers. However, 
this guidance is a philosophy--not a formal process involving specific 
decision points--that does not ensure that competition will be 
considered. The December 2003 Deepwater performance measurement plan 
requests that the contractor prepare self-assessments of its efforts to 
promote competition. However, the Coast Guard has no means of obtaining 
insight into the basis for the contractor's self-assessments. Moreover, 
the government still lacks a mechanism to hold the contractor 
accountable for ensuring that competition occurs.

To date, there have been varying degrees of competition for the second-
tier subcontracting relationships Lockheed Martin and Northrop Grumman 
have in place for the design, development, or production of Deepwater 
assets. Lockheed Martin and Northrop Grumman follow their own 
procurement procedures and guidance for determining whether competition 
will occur and selecting the suppliers who will be invited to compete 
for Deepwater assets. The competitions are not "full and open"[Footnote 
24] in the way a typical government procurement would be, nor are they 
required to be. The federal procurement system requires "full and open" 
competition except in cases where certain statutory exceptions are met. 
"Full and open" competition means that all responsible sources are 
permitted to compete.

ICGS officials identified four specific assets for which they believe 
the open business model philosophy was effective: the conversion of 
110-foot to 123-foot cutters, the national security cutter, the 
maritime patrol aircraft, and the vertical take-off and landing 
unmanned aerial vehicle (VUAV). We found that, in some cases, teaming 
agreements were implemented in the proposal phase of Deepwater and were 
carried over when ICGS won the contract. In other cases, some degree of 
competition had occurred.

* In December 1998, Lockheed Martin Corporation, Ingalls Shipbuilding, 
Inc.,[Footnote 25] and Halter-Bollinger Joint Venture, L.L.C entered 
into a teaming agreement that included the 123-foot cutter 
modification. The agreement was established to make the capabilities of 
both Halter and Bollinger available to Lockheed Martin for all phases 
of the Deepwater program. Despite the open business model's prohibition 
of work share agreements, such an agreement is in place between 
Lockheed Martin and Halter-Bollinger. Halter-Bollinger will be 
responsible for the design and construction of all vessels equal to or 
less than 200 feet in overall length, with the exception of the 
national security cutter. For those ships greater than 200 feet and 
less than 241 feet, the company's work share is 25 percent of the total 
effort.

* The national security cutters are being designed and constructed by 
Northrop Grumman. Northrop Grumman awarded a contract to M. Rosenblatt 
& Son, Inc. for the cutters' preliminary design, but Northrop Grumman 
is responsible for the detailed design and construction. Lockheed 
Martin is responsible for the electronics. However, Northrop Grumman 
plans to hold competitions for the long-lead materials--such as the gas 
turbine, bulkhead seals, stern tubes,[Footnote 26] and rudder--for the 
cutters and has solicited pricing proposals from a number of 
subcontractors.

* Prior to the contract award to ICGS, Lockheed Martin solicited 
information from a number of companies for the maritime patrol 
aircraft, evaluating 16 aircraft proposals. In October 2000, Lockheed 
Martin signed a memorandum of understanding with CASA Aircraft USA, 
Inc. to provide an airframe for Deepwater and to help develop and 
market ICGS's Deepwater proposal. After some Coast Guard officials 
expressed concern about the aircraft model that had been selected for 
Deepwater, ICGS was awarded a task order to pay for an evaluation of 
alternative aircraft. As a result of the evaluation, Lockheed Martin 
identified an alternative CASA aircraft to meet the Coast Guard's 
maritime patrol aircraft mission.

* For the VUAV, Lockheed Martin conducted a competition between six 
models. Bell Helicopter, Inc. was initially identified as the solution. 
After ICGS submitted its Deepwater proposal to the Coast Guard, 
Lockheed Martin identified a potential Northrop Grumman product based 
on market research. However, after evaluation of this alternative, 
Lockheed Martin selected one of the Bell products.

Conclusion:

The Coast Guard has embarked on a major transformational effort using 
an acquisition strategy that allows a system integrator to identify the 
Deepwater assets and to manage the acquisition process, with 
subcontractors retaining authority for all make or buy decisions. Such 
a strategy carries inherent risks that must be mitigated by effective 
government oversight of the contractor. The Coast Guard faces a tough 
challenge in holding ICGS accountable for results, while facing the 
daunting prospect of starting over with a new approach should the 
contractor fail. Nevertheless, the integrity of the contractor 
oversight process must be enforced through such mechanisms as effective 
IPTs and a rigorous and transparent award fee determination process.

Further, the Coast Guard must determine how to hold the contractor 
accountable for achieving the basic goals of the Deepwater program in 
order to position itself to make a contract extension decision. While 
there is no question that the success of Deepwater depends on an 
effective partnership between the government and the contractor, the 
Coast Guard must preserve its ability to change course if necessary. 
Solid baselines need to be developed so actual costs and operational 
effectiveness of the Deepwater assets can be accurately measured and 
reported. The current use of the contractor's proposed costs, plus 10 
percent, as the TOC baseline--rather than the estimated cost to replace 
the assets via a traditional procurement approach--is troublesome. 
Further, because the program management plan does not reflect the 
change to the TOC baseline, we question whether this decision was well 
thought-out and in the government's best interest.

In addition to contractor oversight, the Coast Guard has not invested 
the resources needed to ensure that its own personnel are trained and 
staffed in sufficient numbers to carry out their duties. The disconnect 
between the process outlined in the human capital plan for ensuring a 
smooth transition as military personnel rotate out of Deepwater and the 
current situation--where key Deepwater officials are leaving the 
program without a chance to adequately train their replacements--is 
cause for concern as the Deepwater program moves forward. It is unclear 
why the Coast Guard has not devoted adequate attention to human capital 
needs. In addition, although the first Deepwater assets are just 
starting to be delivered, the lack of a solid and well-developed 
transition plan from legacy to Deepwater assets is already causing 
problems, as evidenced by the 123-foot cutter modification 
difficulties. The schedule delays for several of the assets further 
highlight the need for more focus on the transition to Deepwater 
assets.

The concerns we raised in 2001 about the Coast Guard's ability to 
control costs in future years remain valid today. Without a mechanism 
to hold the system integrator accountable for ensuring adequate 
competition, the Coast Guard cannot be sure that competition will be 
used to guard against cost increases that could jeopardize the program. 
This situation is especially risky given the acquisition structure of 
Deepwater, whereby the subcontractors, not the system integrator or the 
Coast Guard, are responsible for determining whether competition will 
occur for Deepwater assets.

Recommendations for Executive Action:

We recommend that the Secretary of Homeland Security direct the 
Commandant of the Coast Guard to take the following three actions to 
address Deepwater program management:

* In collaboration with the system integrator, take the necessary steps 
to make IPTs effective, including:

* training IPT members in a timely manner,

* chartering the sub-IPTs, and:

* making improvements to the electronic information system that would 
result in better information sharing among IPT members who are 
geographically dispersed.

* Follow the procedures outlined in the human capital plan to ensure 
that adequate staffing is in place and turnover among Deepwater 
personnel is proactively addressed.

* As Deepwater assets begin to be delivered to operational units, 
ensure that field operators and maintenance personnel are provided with 
timely information and training on how the transition will occur and 
how maintenance responsibilities are to be divided between system 
integrator and Coast Guard personnel.

Further, we recommend that the Secretary direct the Commandant to take 
the following six actions to improve contractor accountability:

* Develop and adhere to measurable award fee criteria consistent with 
the Office of Federal Procurement Policy's guidance.

* In all future award fee assessments, ensure that the input of COTRs 
is considered and set forth in a more rigorous manner.

* Hold the system integrator accountable in future award fee 
determinations for improving the effectiveness of IPTs.

* Based on the current schedule for delivery of Deepwater assets, 
establish a time frame for when the models and metrics will be in place 
with the appropriate degree of fidelity to be able to measure the 
contractor's progress toward improving operational effectiveness.

* Establish a TOC baseline that can be used to measure whether the 
Deepwater acquisition approach is providing the government with 
increased efficiencies compared to what it would have cost without this 
approach.

* Establish criteria to determine when the TOC baseline should be 
adjusted and ensure that the reasons for any changes are documented.

To facilitate controlling future costs through competition, we also 
recommend that the Secretary direct the Commandant to take the 
following two actions:

* Develop a comprehensive plan for holding the system integrator 
accountable for ensuring an adequate degree of competition among 
second-tier suppliers in future program years. This plan should include 
metrics to measure outcomes and consideration of how these outcomes 
will be taken into account in future award fee decisions.

* For subcontracts over $5 million awarded by ICGS to Lockheed Martin 
and Northrop Grumman, require Lockheed Martin and Northrop Grumman to 
notify the Coast Guard of a decision to perform the work themselves 
rather than contracting it out. The documentation should include an 
evaluation of the alternatives considered.

Agency Comments:

DHS forwarded us the Coast Guard's written comments on a draft of this 
report, which are reproduced in appendix I. The Coast Guard provided us 
with additional technical comments, which we incorporated as 
appropriate. In an e-mail sent subsequent to the written comments, the 
Coast Guard stated that it agreed with our recommendations.

The Coast Guard noted that the agency is learning and evolving as the 
Deepwater program matures and pointed out that many aspects of the 
Deepwater program--working with a system integrator, employing IPTs 
across multiple acquisition domains, and using a performance-based 
strategy for such a long-term undertaking--are new to the Coast Guard. 
The agency agreed that, because the IPT structure is new to the Coast 
Guard, many adjustments must be made to improve the teams' 
effectiveness. The Coast Guard clarified that the IPTs are, for the 
most part, contractor-led and that Coast Guard IPT members provide 
support and oversight. The focus of this report, however, is on the 
government's ability to oversee and manage the contractor. Deepwater 
management documents assert, as we point out in our report, that IPTs 
are the Coast Guard's primary tool for managing and overseeing the 
contractor.

Regarding the award fee process, the Coast Guard stated that it has 
taken action to assimilate objective factors into future evaluations 
but expressed concern that our draft report may not have completely 
reflected the rigor that was applied in the first award fee decision. 
The Coast Guard states that "no input from any of the monitors was left 
out of the evaluation process." While we revised our report to state 
that all COTRs submitted comments, the input from the COTR responsible 
for ships was not included in the numerical scores, which were then 
passed on to the fee determining official. Further, the Coast Guard 
said that the score of 87 percent is "much lower than industry 
averages." In our view, however, the relevant consideration in 
determining the award fee amount is not industry averages, but rather 
the purpose an award fee is intended to serve. The rationale for 
offering award fees is to motivate superior effort on specific task and 
delivery orders, assets, or system performance attributes. Of 
importance here, the narrative description in the Deepwater award fee 
plan associated with a score of 87 percent ("very good") is "very 
effective performance, fully responsive to contract requirements . . . 
only minor deficiencies." As we state in our report, program management 
reports throughout the first year of the contract cited various 
schedule, performance, cost control, and contract administration 
problems that required attention.

The Coast Guard agreed that competition is critical to controlling 
costs and indicated that it is planning efforts that will result in 
greater visibility and increased accountability to ensure competitive 
practices are being used to manage costs.

Scope and Methodology:

To determine the steps taken by the Coast Guard to manage the Deepwater 
program and oversee system integrator performance, we examined the 
Deepwater contract, the program management plan, the human capital 
plan, briefings, budget justifications, and monthly and quarterly 
management reports. We analyzed IPT charters, membership lists, survey 
data, and staffing data, and we observed IPT and working group 
meetings. We interviewed various Deepwater program officials 
representing the Coast Guard, the system integrator, and the 
subcontractors, including program and asset-level program managers, 
contracting officers, and ICGS representatives in Arlington, Virginia, 
and Washington, D.C. We visited the First and Seventh Coast Guard 
Districts in Boston, Massachusetts, and Miami, Florida, and interviewed 
operators and systems specialists for Coast Guard cutters, aircraft, 
and helicopters at those locations. We also met with Lockheed Martin 
and Northrop Grumman employees in Avondale, Louisiana, and Moorestown, 
New Jersey. We reviewed our prior reports and testimonies on the 
Deepwater project and integrated product teams.

To assess Coast Guard efforts to establish effective criteria to assess 
and reward the system integrator's performance after the first year of 
the contract, we reviewed the award fee plan, the performance 
incentives plan, the interim and final award fee reports for the first 
year of contract performance, and other management documents. We 
interviewed Coast Guard and ICGS officials. Our analysis of this issue 
was hindered by the Coast Guard's failure to provide us with two 
additional award fee determinations, despite our repeated requests.

To assess whether the Coast Guard has put in place measures to assess 
the contractor's progress in meeting the three overarching goals of 
Deepwater, we reviewed the performance measurement plan, the award term 
plan, and other performance measurement documents. Additionally, we 
interviewed the Deepwater program's Resources and Metrics staff, Coast 
Guard operations personnel, and program managers. We also reviewed our 
prior report on performance-based contracting attributes.

To determine whether the Coast Guard is addressing the role and extent 
of competition for Deepwater assets, we examined ICGS's open business 
model policy statement and excerpts from Lockheed Martin's procurement 
manual and Northrop Grumman's acquisition policy manual. We discussed 
the open business model with officials from the Coast Guard, ICGS, 
Lockheed Martin, and Northrop Grumman. In addition, we reviewed 
financial data, including contract orders and ICGS spreadsheets. The 
Coast Guard provided us with the obligations to ICGS, Lockheed Martin, 
and Northrop Grumman. We did not independently verify the financial 
data.

We performed our work from May 2003 through February 2004 in accordance 
with generally accepted government auditing standards.

We are sending copies of this report to other interested congressional 
committees, the Secretary of Homeland Security, and the Commandant of 
the Coast Guard. We will make copies available to others upon request. 
In addition, the report will be available at no charge on the GAO Web 
site at http://www.gao.gov.

If you or your staff have any questions regarding this report, please 
contact me at (202) 512-4841 or Michele Mackin, Assistant Director, at 
(202) 512-4309. Other major contributors to this report were Penny 
Berrier, Ramona L. Burton, Christopher Galvin, Lucia DeMaio, Gary 
Middleton, and Ralph O. White Jr.

Sincerely yours,

Signed by: 

William T. Woods: 
Director, Acquisition and Sourcing Management:

[End of section]

Appendix I: Comments from the Coast Guard:


U.S. Department of Homeland Security:

United States Coast Guard:

Commandant:

United States Coast Guard:

2100 Second Street, S.W. 
Washington, DC 20593-0001 
Staff Symbol: G-D-1 
Phone: (202) 267-1540 
Fax: (202) 267-4020:

7501:

FEB 13 2004:

Mr. William T. Woods:

U.S. General Accounting Office 
441 G Street, NW 
Washington, DC 20548:

Dear Mr. Woods,

Over the course of the last nine months we have engaged with your staff 
to foster an informed understanding of the complexities of the 
Deepwater Program and to respond to their in-depth analysis and 
inquiries. I have been actively engaged with the effort throughout the 
entire period and am impressed with the scale of your undertaking.

I appreciate the opportunity to respond to the draft report. It is in 
the best interest of the public to work together to provide the best 
possible product, with accurate, relevant information. As you know, the 
Deepwater Program is the largest, and, arguably, the most complex 
performance-based contract in the federal government. Given the 
challenges of a dynamic environment, new responsibilities within the 
Department of Homeland Security, and the flexibilities intentionally 
inherent in this program, we welcome your observations and 
recommendations as an independent review of the program's management 
practices. My staff has already provided your staff with several 
detailed observations, and I wish to review several additional key 
points in the draft report at this time.

The performance of the program's Integrated Product Teams (IPT's) has 
been recognized as an area of challenge by program management and our 
industry team. The IPT structure is new to the Coast Guard, and there 
are many adjustments we need to make to improve their effectiveness. We 
are endeavoring to improve the processes needed for them to attain full 
competency. The first 20 months of the program have provided many 
lessons learned, and we are diligently working to incorporate these as 
well as other best practices identified in other studies and GAO 
reports into our operating procedures. While there has been high 
personnel turnover on the IPT's, each IPT is chartered, each member 
completes a required training syllabus, and each IPT clearly specifies 
performance measures, roles, and responsibilities. I would like to 
clarify the draft report's contention that IPT's do not provide 
oversight of the contractor. The contractor, with a few exceptions, 
leads them. Some IPT Members, namely our domain leads, the KO, and USCG 
lead representative on the IPT's - which is usually the COTR - are in 
place to provide support to the IPT and also serve in an oversight 
role. Considering the scope, magnitude, and innovation involved with 
the Deepwater program's acquisition strategy, it is a credit to the 
diligence, perseverance, and dedication to all involved that the IPT 
structure has matured as much as it has.

The Deepwater program is faced with a large turnover of senior 
personnel this year, due primarily to unplanned retirements of several 
key members. I remain committed to managing the acquisition with the 
right number and mix of qualified personnel. Our Human Capital Plan 
(HCP) serves to guide the management of our personnel system. Although 
the personnel 
funding account did not allow for additional hires in fiscal year 2004, 
efforts have been made to fill some of the turnover gaps by assigning 
civilian personnel to some military billets and bringing on board 
military personnel out of cycle from other assignments in the Coast 
Guard. The process to establish new positions operates on the same 
cycle as the budget process, two years in advance. Due to the 
relatively short advance notice of the retirements, there was 
insufficient time to incorporate these billet needs required by the HCP 
into the budget process prior to fiscal year 2006. The HCP will be 
updated and the necessary training billets budgeted as part of the FY-
06 budget cycle. I think it safe to say that Mr. Walker is correct... 
the crisis of human capital management is a fundamental challenge. We 
do not underestimate that.

One portion of your analysis that warrants additional clarification is 
the evaluation of the program's ability to assess the contractor's 
performance. This is an area where I have focused considerable 
attention and effort. I firmly believe that we are addressing this 
aspect of program management with assiduous rigor, and am concerned 
that the draft report may not completely reflect the rigor that has 
been applied. Five specific areas of performance were evaluated during 
the first award term. The factors were weighted and scored to provide a 
numerical score that formed the basis for the award fee. Both 
adjectival ratings and the numerical score were included in the 
Performance Evaluation Board input. No input from any of the monitors 
was left out of the evaluation process. Strict adherence to Federal 
Acquisition Regulations (FAR) is an overriding principal in all 
accounts.

In particular, I am concerned that the draft report mischaracterizes 
the Award Fee scoring process that has been utilized. The report notes 
that the contractor was awarded an Award Fee score that is defined as 
"very good," and that the Award Fee totaled $4.02 million or 87 percent 
of the maximum available despite documented problems with cost, 
schedule, and performance. This is true, however it must be taken in 
context. I believe that this score is much lower than industry 
averages. I am confident that the Award Fee level was fair and 
represented an accurate assessment of contractor performance. The 
reaction by the industry team to ensure the right people are in place 
focusing on the right issues would appear to validate the nature and 
implications of the score. We have taken the insights of your 
assessment to heart.-objective factors are being assimilated into 
future evaluations.

Particular emphasis has been placed on the ability to measure 
performance within the scope of the program. The Performance 
Measurement Plan, and in particular the Deepwater Balanced Scorecard 
(BSC) Strategy Map, clearly articulate how the perspectives and 
objectives of the program's BSC identify input, process, and output 
measures that provide leading indicators of Operational Effectiveness, 
Total Ownership Cost, and customer satisfaction. This effort has been 
underway since contract award and continues to evolve as the program 
identifies measures and data sources and as the system components 
mature from design to production, fielding, and disposal. The Deepwater 
Program, by adopting the BSC framework, has taken a proactive approach 
to contractor assessment in order to ensure that course corrections and 
adjustments can be made before the Award Term assessment in year four, 
prior to the end of the first term.

I firmly agree with the report's conclusion that competition is 
critical to controlling costs. We strive to maintain alignment with the 
President's Management Agenda, the Department of Homeland Security's 
acquisition principles, and the Coast Guard's business plan. The 
Department's Joint Requirements Council has been briefed on the 
program, and we anticipate close interactions in the future. The Open 
Business Model, initially a Lockheed Martin 
philosophy, is now official ICGS policy. It has been approved by the 
ICGS Board of Directors and is applicable to all Deepwater 
transactions. To enforce these regulations, ICGS has appointed a 
Competition Advocate and Ombudsman tasked to draft implementation 
procedures for regular reporting to ICGS. Also, we are planning visits 
by the ICGS Competition Advocate to our industry partners to examine 
Make/Buy decisions and competition practices. The report should reflect 
that the Open Business Model has ensured competition as a cost control 
tool. ICGS selected the CASA airframe over its Lockheed Martin 
competition as the solution for the Maritime Patrol Aircraft, and the 
Bell VUAV over its Northrop Grumman competitor. Since contract award, 
ICGS has held three Industry Days-resulting in 479 interviews with 
potential contractors and 90 follow-ups.

In the near future, the program will put additional processes in place 
to ensure competitive practices are being used to manage costs more 
aggressively. An annual independent third-party review of ICGS 
transactions will be conducted. The Vice Commandant of the Coast Guard 
(the Agency Acquisition Executive) will review any major subcontract 
awarded to Lockheed Martin or Northrop Grumman. Additionally, a review 
of competition will be included in the Award Term Evaluation. These 
efforts will result in added vigilance, greater visibility, and 
increased accountability. Together, these measures will improve our 
ability to control costs in the future.

The Integrated Deepwater System program entails not only organizational 
change and a new approach to acquisition, but technological change that 
forces both public and private sectors to be more adept at executing a 
program of incredible scope, duration, and complexity. The Coast Guard 
has never worked with a systems integrator on this scale before. We 
have not employed IPT's across multiple acquisition domains, nor have 
we employed a performance-based strategy for such a long-term 
undertaking. But we are learning and evolving as the program matures. 
We have incorporated recommendations made by previous reviews of the 
program by both GAO and the Department of Transportation's Inspector 
General. We appreciate the opportunity to share our lessons learned, 
successes, and growing pains in an open environment as we continue to 
embrace the tenets of a successful learning organization.

Thank you for your detailed analysis and observations. I look forward 
to continued positive dialog with you and your staff as we work to 
improve the management of the Deepwater program during the coming 
years. You have our commitment to engage in continuous improvement.

Sincerely,

Signed by: 

P. M. STILLMAN:

Rear Admiral, U. S. Coast Guard:

[End of section]

Appendix II: Status of Selected Deepwater Contract Management and 
Oversight Plans:

Plan: Award fee plan; 
Purpose: Establishes criteria and procedures used to evaluate 
Integrated Coast Guard Systems' (ICGS) management performance, and to 
determine the amount of award fee earned; 
Planned completion date: Contract award, June 2002; 
Approved: June 2002; 
Scheduled life of plan: Updated annually[A].

Plan: Program management plan; 
Purpose: Provides the management framework, organizational structure, 
schedule, activities/events, tasking, and process guidelines required 
to implement phase 2 of the program; 
includes additional plans as noted below; 
Planned completion date: December 2002; 
Approved: December 2003; 
Scheduled life of plan: Dynamic document, periodically updated.

Plan: Contract management support plan; 
Purpose: Details responsibilities and processes to implement the 
contract; 
Planned completion date: December 2002; 
Approved: December 2003; 
Scheduled life of plan: [Empty].

Plan: Financial management plan; 
Purpose: Describes activities and processes to ensure funding is 
available to execute the program; 
Planned completion date: December 2002; 
Approved: December 2003; 
Scheduled life of plan: [Empty].

Plan: Risk management plan; 
Purpose: Establishes structure and method for identifying and managing 
risks, and developing and selecting options to mitigate risks; 
Planned completion date: "Soon after contract award"; 
Approved: December 2003; 
Scheduled life of plan: [Empty].

Plan: Performance measurement plan; 
Purpose: Links the program budget to performance and provides strategic 
focus linking performance measures to program mission, vision, and 
guiding principles; 
Planned completion date: December 2002; 
Approved: December 2003; 
Scheduled life of plan: Updated on a semiannual basis.

Plan: Quality assurance plan; 
Purpose: Outlines the processes and procedures used to implement the 
program's quality assurance process; 
Planned completion date: 90 days after contract award (September 2002); 
Approved: September 2002; 
Scheduled life of plan: [Empty].

Plan: Performance incentives plan; 
Purpose: Establishes a team to evaluate ICGS's efforts to exceed 
performance standards set by the contract and performance measurement 
plan; 
Planned completion date: Not applicable; 
Approved: March 2003; 
Scheduled life of plan: Remains in effect until terminated, changed, or 
amended.

Plan: Award term plan; 
Purpose: Establishes criteria for contract term incentives, and 
evaluation process and periods; 
Planned completion date: June 2002; 
Approved: December 2003; 
Scheduled life of plan: Duration of contract, with procedures for 
changes. 

Source: GAO analysis of Deepwater documents.

[A] An updated award fee plan was not available as of December 31, 
2003.

[End of table]

[End of section]

FOOTNOTES

[1] The Deepwater assets are expected to be delivered within 20 years, 
and the contractor is to be retained an additional 10 years to continue 
implementing the program. 

[2] Coast Guard: Progress Being Made on Deepwater Project, but Risks 
Remain, GAO-01-564 (Washington, D.C.: May 2, 2001).

[3] Total ownership cost is the sum of all costs associated with the 
research, development, procurement, personnel, training, operation, 
logistical support, and disposal of the entire Deepwater system.

[4] Homeland Security Act of 2002, Pub. L. No. 107-296, sec.888(i), 116 
Stat. 2135, 2250 (2002).

[5] The Investment Review Board was established to provide visibility, 
oversight, and accountability for significant, high-cost investments. 
It conducts systematic reviews of investment proposals and approves key 
decisions. 

[6] The DHS Joint Requirements Council will conduct program reviews 
annually and prior to key decision points to oversee the requirements 
generation process, validate mission needs statements, review cross-
functional needs and requirements, and make programmatic 
recommendations to the Board.

[7] Best Practices: DOD Teaming Practices Not Achieving Potential 
Results, GAO-01-510 (Washington, D.C.: Apr. 10, 2001). The Department 
of Defense has used IPTs on major programs such as the Advanced 
Amphibious Assault Vehicle program, a high-speed amphibious armored 
personnel carrier.

[8] Delivery task orders are orders for supplies or services placed 
against an existing contract. In the context of the Deepwater contract, 
these would be orders placed by the Coast Guard with ICGS for the 
delivery of specific assets or for other work. 

[9] These were for Deepwater's integrated logistics system and C4ISR.

[10] Integrated product and process development is a management 
technique that integrates all essential acquisition activities through 
the use of multidisciplinary teams to optimize the design, 
manufacturing, and supportability processes. One of the key integrated 
product and process development tenets is that IPTs facilitate meeting 
cost and performance objectives. 

[11] Due to concerns about low response rates, an analysis was done 
only on those IPTs with response rates greater than 30 percent. Only 14 
of the 27 teams contacted as part of the latest survey, conducted in 
September 2003, had a response rate that allowed their results to be 
analyzed.

[12] GAO-01-564.

[13] The short range prosecutor is a new rigid-hull inflatable small-
boat being introduced for the Deepwater cutters. This boat is 7.7 
meters long, may carry up to 10 personnel and 150 pounds of cargo, and 
may travel at speeds up to 33 knots. Each modernized 123-foot cutter 
and the fast response cutter will carry one short range prosecutor. The 
national security cutter and the offshore patrol cutter will also be 
able to carry the short range prosecutor. 

[14] The Federal Acquisition Regulation (FAR) states that a contract is 
to be definitized within 180 days after the date of the letter contract 
or before completion of 40 percent of the work to be performed, 
whichever occurs first. FAR 16.603-2(c). 

[15] A Guide to Best Practices for Performance-Based Service 
Contracting, Office of Federal Procurement Policy, Office of Management 
and Budget, Executive Office of the President, Final Edition, October 
1998, and Internal Control: Standards for Internal Control in the 
Federal Government (GAO/AIMD-00-21.3.1), U.S. General Accounting 
Office, November 1999.

[16] An award fee is an amount a contractor may earn, either in whole 
or in part, based on the contracting agency's judgmental evaluation of 
the contractor's performance against established criteria (FAR 16.404, 
16.405-2).

[17] In a document provided to a congressional committee entitled "DHS 
Procurement Policy Impacts on Deepwater," the Coast Guard stated that 
"the annual award fee is based on the accomplishments of the small 
business subcontracting plan." However, Coast Guard officials 
subsequently confirmed that small business subcontracting is not an 
award fee evaluation factor.

[18] Coast Guard contract number DTCG23-02-C-2DW001, section J, 
attachment J-14, Award fee plan, awarded June 25, 2002, amended 
November 8, 2002. The plan indicates that changes to the award fee plan 
will be made through a bilateral contract modification.

[19] An adjectival rating of "very good" ranged from a score of 81 to 
90.

[20] GAO-01-564.

[21] The Deepwater award term plan establishes the criteria for 
awarding contract options and the evaluation process and periods. 

[22] ICGS's limited liability company agreement articulates each 
member's work scope. Lockheed Martin "shall be responsible for program 
management; systems design; C4ISR assets and capabilities; aviation 
assets; and logistics assets and capabilities" Northrop Grumman 
(Ingalls) shall be responsible for program management and logistics for 
surface assets" 

[23] Teaming agreements are defined in FAR 9.601 as an arrangement 
between two or more companies to form a partnership or joint venture to 
act as a potential prime contractor or a potential prime contractor 
agrees with one or more companies to have them act as its 
subcontractor. Under guaranteed work shares, a subcontractor is 
guaranteed a certain percentage of the work.

[24] 10 U.S.C. sec. 2302(3)(D); 41 U.S.C. sec. 403(b). 

[25] Ingalls Shipbuilding, Inc. was subsequently acquired by Northrop 
Grumman.

[26] A stern tube is a tube through which the tail shaft passes to the 
propeller. 

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