Background

While several types of aircraft provide aerial refueling services, the  principal effort is currently carried out by the Air Force fleet of 414 KC-135  aircraft. Originally fielded in the 1950s, KC-135 aircraft are considered the  mainstay of the tanker fleet, supporting combat air assets, deployment of  airlift aircraft, and nuclear combat refueling missions. With an average  age of nearly 51 years and more than 16,000 flight hours on each aircraft,  the KC-135s will approach over 80 years of age when the fleet is retired  as projected in the 2040 time frame. In 1981, the Air Force began  supplementing its fleet of KC-135s with the procurement of 60 KC-10s (of  which 59 remain in service today), multi-role aircraft that transport air  cargo and provide refueling. Much larger than the KC-135, the KC-10  provides both boom and hose and drogue refueling capabilities on the  same flight and can conduct transoceanic missions. The KC-10s now  average about 27 years of age with more than 26,000 flight hours on  each, and their service life is expected to end around 2045. The Air Force  has upgraded and modified both fleets in recent years, providing  improved avionics and new engines on the KC-135 along with newer  communication systems to comply with international and federal air traffic  requirements.
In 1996, GAO reported that the aging KC-135s would eventually need to  be replaced. We recommended that DOD consider looking at dual-use  aircraft—which could be used as a tanker or a cargo carrier, depending  on their missions. In 2001, the Air Force reported that the KC-135 fleet  would incur much greater operations and maintenance (O&M) costs  between 2001 and 2040, but that it would be structurally sound to 2040.
Air Force officials stated in 2005 that engine strut fatigue caused by long- term heat exposure and corrosion posed the greatest threat to the KC- 135 fleet and O&M costs were increasing. These costs, nearly $2 billion  in fiscal year 2010, are expected to grow to $6 billion per year by fiscal  year 2018. The 2012 Air Mobility Master Plan also expresses concerns  that advanced adversary threats pose greater risk to the current tanker  fleet and that the KC-135 fleet lacks defensive capabilities required to  operate and succeed against either current or future threats.

		Tanker Replacement History

Plans to begin replacing the KC-135 fleet were first developed in 2001  with Congress authorizing a pilot program to lease 100 Boeing 767  aircraft modified for aerial refueling, subsequently called the KC-767A  aircraft. This leasing deal was ultimately canceled, however, after a DOD  investigation found that a senior Air Force official improperly approved the  leasing deal.
The AOA is an important element of the defense acquisition process. An AOA is an  analytical comparison of the operational effectiveness, suitability, and life-cycle cost (or  total ownership cost, if applicable) of alternatives that satisfy established capability needs.  Defense Acquisition Guidebook, 3.3.1.
29, 2008, the Air Force awarded the first contract of a three-phased  approach, called the KC-45, to a partnership between Northrop Grumman  and the European Aeronautic Defence and Space Company (EADS) to  build four aircraft for testing and then manufacture 175 production aircraft.  Boeing, the competing bidder, filed a protest with the Government  Accountability Office (GAO) protesting the Air Force’s decision. In June  2008, GAO determined that the Air Force had made significant errors,  including not assessing the relative merits of the proposals in accordance  with the evaluation rules and criteria set out in the RFP, which could have  affected the outcome of the competition. As a result, the Office of the  Secretary of Defense (OSD) directed the Air Force in September 2008 to  terminate the contract and conduct a new competition.
On February 24, 2010, the Air Force released a significantly revised KC-X  RFP. One year later, Boeing won the new competition to develop and  build 179 new KC-46s at an estimated cost of $51.7 billion. The  development portion of the contract to design and build 4 test aircraft, and  then bring those aircraft to a final production configuration, is valued at  $4.4 billion. The Air Force plans to exercise two contract options for 19  initial production aircraft that are required, in part, for the contractor to  meet the requirement to produce and deliver 18 aircraft by 2017.  Additional contract options can be exercised to allow for production of the  remaining 156 aircraft through year 2027 at a target rate of 15 aircraft per  year. Separate competitions are planned for later acquisitions, called the  KC-Y and KC-Z phases, to replace the rest of the KC-135 fleet. Figure 1  below depicts a notional schedule of how the Air Force plans to replace  its current KC-135s over the next several decades.
The KC-46 program is planning to turn a Boeing commercial aircraft (the  767-2C) into a militarized KC-46 tanker that is more capable than the KC- 135. Boeing is currently developing the 767-2C, which is based on a  Boeing 767 model airframe modified to include a cargo door, new fuel  tanks and an advanced flight deck display borrowed from the new Boeing  787 aircraft. Militarization of this airframe includes the addition of the  refueling boom, centerline drogue system with wing refueling pods, a  remote air refueling operator station that includes panoramic three- dimensional displays and threat detection and avoidance systems using  advanced software to automatically re-route the aircraft away from  threats. Program officials consider the integration of military hardware and  software on a commercial platform to be the primary technical risk. Figure  2 below shows the intended conversion of the 767-2C into the KC-46  aerial refueling tanker.
The new tanker is also planned to have several capabilities that existing  KC-135s do not have. For example, the KC-46 is expected to be able to  refuel in a variety of night-time settings, including covert (not easily  visible) mode which the KC-135 cannot do. In addition, it is intended to  have countermeasures which protect large aircraft from infrared missile  threats. The KC-46 fleet will also have more aircraft with the capability to  refuel two aircraft at the same time, with the entire fleet able to conduct  this mission, and the ability to carry more cargo, passengers, and medical  patients. Table 1 compares the current capabilities of the KC-135 with the  planned capabilities of the new KC-46 tanker. (More detail on the planned  capabilities is included in appendix II.)

	KC-46 Program Has Established Its Acquisition Strategy

The KC-46 program has established its acquisition strategy for aircraft  development and production, which includes a total cost estimate of  $51.7 billion, aircraft quantities to be procured, key milestone dates, and  test and manufacturing schedules. The KC-46 program is using a fixed- price contract for development, designed to provide a profit incentive for  the contractor to control costs, while limiting government liability for  increased costs over a certain amount. The program has also identified  nine key performance parameters (KPP) critical to enabling the KC-46 to  meet mission requirements, but has not yet fully implemented metrics that  will be used to track the achievement of these KPPs.

		KC-46 Approval of Baseline Cost, Schedule, and Aircraft Quantities

In February 2011, senior defense leaders approved the KC-46 program’s  entry into the acquisition process at the Engineering and Manufacturing  Development (EMD) phase (called Milestone B). Table 2 summarizes  planned quantities, costs, and milestone dates approved at that time.
Defense officials established a total acquisition program baseline cost of  $51.7 billion. The development cost estimate of $7.1 billion includes $5.3  billion for the development contract and $1.8 billion for other costs,  including air crew and maintenance training systems, operational testing,  and program office support. The procurement cost estimate of $40.2  billion is based on projected prices for procuring 175 aircraft in annual  quantities of up to 15 aircraft through fiscal year 2027. At this price,  aircraft would cost almost $230 million on average. Military construction  costs to build hangars, maintenance and supply shops, and other facilities  to house and support the KC-46 fleet are estimated at $4.3 billion.  Following a successful initial production decision, the Air Force plans to  exercise the first two production contract options. After the options are  exercised, Boeing will be required to provide the Air Force with a total of  18 operationally ready aircraft 78 months after development contract  award, which would be by August 2017.planned to continue through 2027, until a total of 179 aircraft are bought.

		Development Contract Includes Features to Control Cost, Schedule, and Performance Risk

In February 2011, the Air Force awarded Boeing a fixed-price contract to  develop, test, and manufacture four KC-46 aircraft. The specific contract  arrangement used by the KC-46 program is a fixed-price incentive (firm  target) (FPIF) contract. Table 3 provides development contract details  and the current contract and government estimates to complete  development.
The contract is designed to provide a profit incentive for the contractor to  control or even reduce costs. It specifies target cost, target price, and  ceiling price amounts, with the latter being the maximum amount that may  be paid to the contractor. The target price is $4.4 billion and the ceiling  price $4.9 billion. The contract specifies a 60/40 incentive ratio for sharing  savings in the event of underruns, or sharing cost in the event of  overruns. The government’s share is 60 percent while Boeing’s is 40  percent. Cost sharing ends when the contract price reaches the $4.9  billion ceiling. Thereafter, provided the Air Force is not responsible for any  of the additional costs associated with the overruns, the contractor would  be responsible for all additional costs associated with the overruns and  would be obligated to perform the contract. If the Air Force is responsible  for any of the cost overruns, they may have to renegotiate the terms and  conditions of the contract with Boeing. The KC-46 program’s current  government estimate to complete development is $5.3 billion, which is  about $900 million more than the contract target price and about $400  million more than the ceiling price. The Air Force believes this additional  $400 million may be necessary to cover schedule risk for the remainder of  development, and if it is, Boeing must pay these costs.
According to program officials, a change in system requirements,  although unlikely, would be a circumstance that could increase the Air  Force’s exposure to additional costs. As stated in a memorandum from  the OSD Office of Cost Assessment and Program Evaluation, the  biggest risk to the KC-46 program is the Department’s ability to minimize  changes to the contract. The memorandum maintains that on the whole,  DOD has demonstrated limited ability to maintain stable requirements and  limit changes to program technical baselines on previous complex  weapon system programs, and that minimizing such change is essential  to the success of the KC-46. In view of these concerns, program officials  state it is very unlikely any requirements will be changed, and to help  ensure this, they have instituted a process to control changes.  Specifically, any engineering or contract changes affecting system  requirements or having the potential to impact program cost, schedule,  and performance baselines must be approved by the Air Force Service  Acquisition Executive in consultation with the Secretary and the Chief of  Staff of the Air Force. Moreover, the contract contains options for the 175  production aircraft, establishing firm, fixed pricing for two initial production  lots and not-to-exceed pricing for subsequent full-rate production lots.  Program officials maintain that this pricing will likely stay intact as long as  the contract is not opened to negotiate modifications.
The KC-46 contract is one of only a few major weapon system programs  in recent years to employ a fixed-price development contract. In the past,  DOD has typically used cost-reimbursement contracts in which the  government pays all allowable incurred costs to the extent prescribed by  the contract. Legislation and defense policy now directs the Milestone  Decision Authority for a major defense acquisition program to select the  contract type for a development program at the time of a decision on  Milestone B that is consistent with the level of program risk for the  program. The Milestone Decision Authority may select either a fixed-price  type contract (including a fixed-price incentive contract); or a cost type  contract. The use of fixed-price contracts, when warranted, limits the  government’s exposure to weapon system cost increases. Defense  officials believe that a fixed-price development contract is appropriate for  this program because KC-46 development is considered to be a relatively  low risk effort to integrate mature military technologies onto a well-defined  commercial derivative aircraft.
In addition to the type of contract used, there are also provisions in the  KC-46 development contract that further limit the government’s liability  and are intended to help manage performance risk. For example, Boeing  has to correct any deficiencies in the KC-46 discovered during the  development program. The correction of deficiencies shall be  accomplished on the four development test aircraft and all production  aircraft, as appropriate, to bring them to the final configuration at no  additional cost to the government. In addition, there is a special contract  provision that requires each aircraft to demonstrate a certain fuel usage  rate before the government accepts the aircraft. If any aircraft burn fuel  above this rate, Boeing is required to propose a corrective action at no  cost to the government. Boeing is not allowed to propose a relaxation of  contract requirements to resolve any fuel usage issues, but if Boeing  cannot meet the required usage rates, there are contract provisions  allowing for a decrease in the amount paid to Boeing.

		Key Performance Goals Have Been Identified but Metrics for Measuring Achievement Are Not Yet Fully Implemented

The Air Force has identified nine specific KPPs critical to enabling the  KC-46 to meet its primary mission of providing worldwide, day and night,  adverse weather aerial refueling. Several of these parameters have been  established to address performance characteristics that are limited or  nonexistent in the current tanker fleet. For example, in 2005 only 8 KC- 135 aircraft (1.5 percent) had the capability to receive fuel from another  aerial refueling tanker while airborne. This limited capability can prohibit  the extension of aircraft forces and can result in inefficient use of assets.  By establishing a KPP to allow for the KC-46 fleet to receive fuel from  other tankers, the Air Force hopes to address this shortcoming. Table 4  describes the planned KC-46 KPPs.
Near the end of KC-46 development, a series of independent tests and  evaluations are planned to validate whether the aircraft meets these  KPPs. However, the Air Force still has to fully implement the specific  metrics needed to measure progress against the KPPs. In future reports,  we will include an evaluation of metrics established for each of these  KPPs as well as whether the program is on track to meet them.

	Key Events in Program Schedule Are Concurrent and Technical Challenges Exist

Schedule risk on the KC-46 program is a concern and technical  challenges will need to be overcome. The program has an accelerated  schedule with significant overlap, or concurrency, among the  development, testing, and production of initial aircraft. Also, while  designing a new tanker that uses a modified commercial platform may not  be as technically challenging as an all new weapon system, the program  still faces some technical risks, including three critical technologies that  have not yet been tested in a realistic environment.

		Significant Concurrency Poses Risks to KC-46 Development and Production Schedule

The significant amount of concurrency in the KC-46 schedule among  planned development, testing, and production activities are highlighted by  the shaded area in figure 3.
The decision to begin low-rate initial production is scheduled for August  2015, before significant development and testing activities are completed.  While about 6 months of 767-2C flight testing is planned to be conducted  prior to KC-46 flight testing to help prove the aircraft’s design and flying  qualities, only about 60 percent of the dedicated KC-46 development  flight testing is planned to be completed by the start of low-rate initial  production, when the Air Force estimates $1.38 billion will be needed for  seven aircraft. Funding commitments will be required even sooner; DOD  will present the budget request for KC-46 initial production to Congress in  February 2014.
The intent of development flight testing is to demonstrate the maturity of  the design and to discover and fix design and performance problems  while the aircraft is being developed. Beginning production before testing  has successfully demonstrated that the design is mature and that aircraft  will work as intended increases the likelihood of discovering deficiencies  during production, when it is most expensive to correct them. Similarly,  systems already built and fielded may require substantial modifications,  resulting in additional program costs.
The Air Force and Boeing are both concerned about the risks in the KC- 46 development and test schedule. In August 2011, a joint Boeing and Air  Force team completed a detailed review to identify risk associated with  the program’s technology, cost, and schedule. As a result of that review,  the Air Force determined that the schedule, culminating with the delivery  of 18 aircraft by August 2017, contained moderate risk. Other major  areas examined during this review were assessed as low risk.
According to the KC-46 program office, schedule risk stems from four  primary factors:
Flight testing. Completing the flight test program on time will require  efficient, synchronized use of DOD, Air Force, and Federal Aviation  Administration (FAA) test facilities and resources. The KC-46 program  office is concerned that Boeing will not be able to achieve planned  flight test flying hour rates for military certifications and military testing,  currently set at 50 hours per aircraft per month, given the amount of  coordination and synchronization of test resources required. Boeing is  also continuing to evaluate plans for the flight test program due to  concerns it may contribute to program schedule risk. For these and  other reasons, DOD’s Office of the Director, Operational Test and  Evaluation, has determined that the development test program is not  executable as planned.  In-line provisioning. Boeing typically uses one facility as its  commercial aircraft production line and another to install military  modifications on commercial aircraft. However, on the KC-46  program, Boeing will do extra preparatory work—provisioning—at its  commercial facility to accommodate the military modifications planned  at its other facility. This represents an additional requirement to  prepare the aircraft for military modifications while still on the  commercial production line. According to the program office, this  increases the level of risk for accomplishing the work on time.
Federal Aviation Administration certification. According to the  program office, two FAA certifications, one for the commercial 767-2C  aircraft and a supplemental one for the military modifications planned  for the commercial aircraft, are required for the KC-46 before it is  deemed airworthy. Boeing intends to accomplish a portion of both of  these certifications concurrently, rather than one at a time, which is  more typical. According to the program office, if problems arise during  this concurrency, not much time will be left in the schedule for Boeing  to recover.
Software. The program office told us that modifications to commercial  software to separate classified from unclassified information and  enable other military capabilities will increase risk associated with  software development. However, they also stated that they are  focusing on software early in the program to ensure Boeing puts the  proper emphasis on this area and keeps the program schedule on  track.
Boeing has also identified risks in the program’s software development  effort that could delay the program’s schedule or drive increased cost if  realized. Software development growth can occur because of bad  estimates, poor requirements, and poor execution of the software  development plan. If the amount of software being developed grows,  more staff and more time will be needed. There can also be delays in the  integration of hardware and software if software deliveries from suppliers  are late. Late delivery can result in hardware and software not being  integrated in time to support flight testing, which in turn can mean flight  test schedule delays.
A further complication to the KC-46 schedule was Boeing’s January 2012  announcement that it was closing its Wichita, Kansas finishing facility at  the end of 2013. When the contract was awarded, Boeing had planned to  militarize the KC-46 at the Wichita facility. Now, that work will be moving  to the Puget Sound facility in Seattle, Washington to be co-located with  the 767-2C development effort. KC-46 program officials stated that they  are working closely with Boeing to understand the impact of this decision  on the KC-46 program but will hold Boeing to its contractual delivery date  of August 2017.
If the provisions in the current contract remain intact, the government’s  cost liability will be safeguarded should any of the foregoing risks  materialize into problems. However, these provisions cannot prevent  delays in delivering aircraft should problems be discovered late in  development or while production is underway.

		KC-46 Will Have Some Risk Stemming from New Technical Content

While a tanker largely based on a commercial platform and subsystems  may not be as technically challenging as developing a wholly new  weapon system like the Joint Strike Fighter, DOD regulations still require  requisite critical technologies to be sufficiently mature prior to starting  system development in order to minimize technology risk down the road.  As required by DOD policy, a technology readiness assessment was  conducted by an independent team of subject matter experts. Overall, the  team reviewed and assessed 36 technologies and determined that three  are new or novel and are needed for the KC-46 tanker to meet  performance and mission capabilities. These three technologies—3- Dimensional Display, Airborne ESTAR, and Threat Correlation  Software—have been demonstrated in a relevant environment in  accordance with DOD and statutory requirements.
Three-Dimensional Display. The display screens at boom operator  stations inside the KC-46 aircraft provide the visual cues needed for  the operator to monitor the aircraft being refueled before and after  contact with the refueling boom or drogue. The images of the aircraft  on the screens are captured by a pair of cameras outside that aircraft  that are meant to replicate the binocular aspect of human vision by  supplying an image from two separate points of view, replicating how  humans see two points of view, one for each eye. The resulting image  separation provides the boom operator with greater fidelity and a  more realistic impression of depth, or a third dimension. Similar  technology has been used on two foreign-operated refueling aircraft  and a representative model in tests with other Boeing tankers.
Airborne ESTAR. This software module is planned to have an  algorithm that allows for automatically re-routing and constructing new  flight paths for the aircraft that are safe, flyable, and avoid potential  threats. The algorithm is new and novel technology, critical to meeting  operational requirements. Airborne ESTAR has been tested in a  simulation that provided data on its performance, interfaces, and  functionality.
Threat Correlation Software. Somewhat similar to Airborne ESTAR,  this new software module serves to correlate tracks from multiple  potential threats and automatically help re-route the tanker’s flight  path to avoid them.
These technologies have not yet been demonstrated in a realistic  environment, a higher level of maturity that is a best practice. We have  previously reported that programs that began development with  technologies demonstrated to this level experienced less cost growth than  programs with less mature technologies. To the extent that alternatives  or workarounds are available for any of the KC-46’s technologies, these  risks would be mitigated.
In addition to the critical technologies identified, the KC-46 program office  identified other integration and technical areas where management will  need to focus efforts to mitigate risk. The program office identified the  following three areas as being among the more significant:
Radar Warning Receiver integration. A radar warning receiver  warns a pilot that a threat aircraft’s radar is tracking the KC-46, but  integrating such a receiver on a large commercial airframe can be  challenging. Integration requires a unique antenna design and certain  provisions for installation to maximize performance. Any late changes  to the location of the receiver’s antennae or software could drive cost  and schedule impacts to the program.
Wing Aerial Refueling Pod instability. Based on lessons learned  from another Boeing refueling aircraft, a new aerial refueling pod  design was introduced for the KC-46 to reduce buffeting, or instability,  of the aircraft’s wing. The new design also made changes to the way  the refueling hose exits the pod, so now there is concern about the  hose not being stable. If the new wing pod design has technical  shortcomings and introduces hose stability issues, this would not  meet program requirements.
Aircraft Weight. The current aircraft weight forecast is near the  aircraft’s weight limit and, historically, weight continues to increase  during a weapon system program development phase. Not achieving  the target weight will make the aircraft unable to carry the required  amount of fuel for its aerial refueling mission.

	With Some Exceptions, the Program’s Development Strategy Generally Adheres to Best Practices, Acquisition Reform Legislation, and DOD Policy

The KC-46 program’s acquisition strategy and business case generally  meet GAO’s knowledge-based acquisition approach and best acquisition  practices, including those in legislation to improve the weapon system  acquisition process. Also, the contents of the program’s requirements  documentation generally comply with DOD guidance. However, the  program did not conform to best practices in a few instances. The  program did not conduct a technology development phase and instead  proceeded directly to the system development phase, and our prior work  has shown that programs proceeding directly to a development phase  typically have more problems. The program also received a waiver from  having to conduct a preliminary design review, considered important to  initially solidifying the aircraft’s design, before beginning development.  Instead, the design review is planned for March 2012, about a year after  the start of development.

		Program Is Generally Implementing Acquisition Best Practices

For the most part, the KC-46 program’s acquisition framework and plans  compare favorably with the standards and requirements in GAO’s best  practices work on weapon system acquisition development. The  program’s Acquisition Strategy establishes the decision points and  acquisition phases planned for the program. It also covers development,  testing, production, and life-cycle support and establishes the  requirements for each phase, and also identifies critical management  events and risks including integration of military hardware and software  on the KC-46 airframe. The program’s Integrated Baseline Review (IBR)resulted in a mutual understanding between the KC-46 program office  and Boeing ensuring all system capabilities are understood and program  requirements are flowed down to the contractor and suppliers. A  comprehensive risk assessment also identified all program risks, and  assigned moderate risk to the program’s development schedule.
The program is also starting to establish a knowledge-based acquisition  approach, in which knowledge of various components of the process is  acquired at key decision points before proceeding. Our best practices  model helps decision makers to be reasonably certain about their  products at critical junctures during development and to make informed  investment decisions. This knowledge-based process can be broken  down into three cumulative knowledge points.
Knowledge point 1: A match must be made between the customer’s  needs and the developer’s available resources—technology,  engineering knowledge, time, and funding—before a program starts.
Knowledge point 2: The product’s design must be stable and must  meet performance requirements before initial manufacturing begins.
Knowledge point 3: The product must be able to be produced within  cost, schedule, and quality targets and demonstrated to be reliable  before production begins.
Figure 4 depicts how the KC-46 program office is incorporating a best  practices approach into its acquisition framework including the planned  dates key events are scheduled and how the plan compares to GAO’s  knowledge-based process for development. As the program progresses,  we will continue to assess its performance against acquisition best  practices, using figure 4 as a template.
Although the program is implementing many acquisition best practices,  the program office did not conduct a technology development phase and  instead proceeded directly to the engineering and manufacturing  development phase. As discussed earlier, the program’s three critical  technologies were assessed as approaching maturity and meeting  internal defense policy, but below the fully mature level in best practices.  Our prior work consistently shows that programs going directly into  development before fully maturing all critical technologies typically incur  additional costs and take longer to complete. Additionally, DOD granted a  waiver to the program from having to conduct a preliminary design  review—a major step initially solidifying the aircraft’s design—before  starting system development. Instead, the program office has plans to  conduct this review over a year after the start of development in March  2012 due to their assessment that integrating KC-46 unique military  requirements onto a commercial aircraft is low to moderate risk. We have  previously reported that holding a preliminary design review prior to  development start can help ensure requirements are well-defined and  feasible. Nonetheless, the program did complete its system functional  review in November 2011 and made no significant changes to program  requirements. The program plans to demonstrate the system’s design is  stable and have 90 percent of KC-46 design drawings released by its  projected July 2013 critical design review.

		KC-46 Program is Incorporating Recent Acquisition Reform Legislation in Development

The Weapon Systems Acquisition Reform Act of 2009 (Reform Act)requires DOD and the military services to place more emphasis on  activities that should occur early in weapon systems development,  including those related to systems engineering and developmental  testing, to establish a solid program foundation when development  begins. To comply with this legislation, the KC-46 program office is  tracking key program events to the relevant section of the Reform Act.  For example, the program office held an independent Technology  Readiness Assessment (TRA) which reviewed 36 technologies, identified  3 as critical technologies, and assessed the maturity of all the  technologies. In addition, the KC-46 program is using a time-defined  acquisition strategy based on cost, schedule, and performance trades  with a 78-month development cycle and is using an incremental strategy  to replace the tanker fleet of KC-135s and KC-10s with the KC-46, and  potentially the KC-Y and KC-Z programs. The Reform Act requires DOD  to periodically review and assess the technology maturity and the risk of  integrating critical technologies of weapon system programs, and requires  officials responsible for acquisition, budget, and cost estimating functions  to develop estimates and raise cost and schedule matters before  performance objectives are established. Appendix III provides a  comparison of the Reform Act requirements and program compliance.

		Key Program Documentation Complies with DOD Policy

The KC-46 key program documentation completed prior to development  start compares favorably with requirements in DOD policy for defining  program capabilities and system requirements as outlined in the Joint  Capabilities Integration and Development System (JCIDS)Appendix IV provides a detailed assessment of this compliance, but some  examples include:   manual.
The ICD defines a capability gap or other deficiency in terms of the functional area, the  relevant range of military operations, and the timeframe. It also describes the evaluation of  Doctrine, Organization, Training, Materiel, Leadership and education, Personnel, and  Facilities (DOTMLPF) approaches.
The CDD is a document that captures the information necessary to develop a proposed  program(s), normally using an evolutionary acquisition strategy. It outlines an affordable  increment of militarily useful, logistically supportable, and technically mature capability.
KPPs, system characteristics that are considered to be critical to  delivering a military capability, and Key System Attributes, lower  priority characteristics which are nevertheless essential for effective  military capability. The KC-46 CDD defines how each KPP will be  addressed in areas including aerial refueling and threats, and how  classified information is to be collected and stored.
The KC-46 System Requirements Document (SRD) discusses the  scope of program requirements and presents the technical  performance required for the replacement tanker. The SRD also  defines how some minimum performance requirements are  mandatory, and how other requirements identified as non-mandatory  are part of the Air Force’s trade space. System requirements  discussed in the KC-46 SRD included aerial refueling, airlift,  information management, and survivability.

	Conclusions

The KC-46 acquisition is a high-priority/high-profile program essential to  ensuring continued delivery of aerial refueling capabilities to future U.S.  military operations. Its fixed-price incentive (firm target) development  contract is designed to limit the government’s liability for increased costs.  Because senior defense officials are encouraging acquisition programs  across the department to adopt similar arrangements, when appropriate,  it will be both illustrative for the policy and important for future programs  to monitor the KC-46’s progress and its degree of success. Some would  argue that a degree of program success has already been demonstrated  because the government’s cost liability, assuming no system  requirements changes, has been capped and the contractor is still  required to provide full performance of the contract. However, even with  these safeguards, it is important to note that 1 year into development, Air  Force and contractor development cost estimates exceed the  development contract amount and significant schedule risks have been  identified. Although the KC-46 program is still in its early stages, similar  cost and schedule pressures have dogged many past and present  defense acquisition programs. With 5 years of development remaining on  an aggressive schedule with substantial concurrency among  development, test, and production activities, prudence and strong  management attention is warranted. Should costs continue to increase, or  schedule or performance measurement lag, there could be increased  pressure to reopen or renegotiate aspects of the contract. This would  probably not be advantageous to the Air Force.

	Recommendations for Executive Action

As one of only a few major acquisition programs to award a fixed-price  incentive (firm target) development contract in recent years, evaluating  performance and identifying lessons learned will be very illustrative and  important to inform decision-makers and help guide and improve future  defense acquisition programs. Therefore, we recommend that the Under  Secretary of Defense for Acquisition, Technology and Logistics closely  monitor the cost, schedule, and performance outcomes of the KC-46  program to identify positive or negative lessons learned.
To help ensure that progress toward achievement of the program’s key  performance parameters can be appropriately measured as development  progresses toward production, we recommend the KC-46 program  manager, as soon as possible, fully implement sound metrics for each  parameter.

	Agency Comments

DOD provided us with written comments on a draft of this report which  are reprinted in appendix V. DOD concurred with our two  recommendations. In written comments, DOD provided additional  information on its plans to manage schedule risk and mature  technologies. We also incorporated technical comments as appropriate.
We are sending copies of this report to appropriate congressional  committees; the Secretary of Defense; the Secretary of the Air Force; and  the Director of the Office of Management and Budget. The report also is  available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff has any questions concerning this report, please  contact me at (202) 512-4841 or sullivanm@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. GAO staff contributing to this report are  listed in appendix VI.

Appendix I: Scope and Methodology

We interviewed officials from the KC-46 program, Air Force, and Office of  the Secretary of Defense (OSD) to obtain their views on progress,  ongoing concerns and actions taken to address them, and future plans to  complete KC-46 development. We also reviewed key program  documentation for compliance with current Department of Defense (DOD)  policy, acquisition reform legislation, and GAO best practices for weapon  system development.
To determine the program’s acquisition strategy, including its contracting  approach, we reviewed briefings by program and contractor officials,  budget documents, the Acquisition Program Baseline (APB), the Selected  Acquisition Report (SAR), monthly activity reports, performance  indicators, risk assessments and other data. We identified changes in  cost and schedule, and obtained officials’ reasons for these changes, and  reviewed the KC-46 acquisition strategy in order to identify the program’s  Key Performance Parameters and what measures the program office has  taken to develop metrics and track contractor performance in these areas.  We also examined the acquisition strategy for aircraft development and  production, but we could not assess the contractor’s manufacturing  processes because the program is only one year into development and it  is too early for this assessment. To assess the development contract  structure, we reviewed and analyzed the factors used to determine the  contract geometry: target cost, target profit, ceiling amount, and profit  adjustment formula for the current contract and also compared this  against current DOD policy for contract geometry, the Federal Acquisition  Regulation, and the Fiscal Year 2007 National Defense Authorization Act.  To determine program costs, we reviewed the OSD Cost Assessment  and Program Evaluation Independent Cost Estimate and the Air Force’s  Service Cost Position, the estimate which is used by the KC-46 program  to plan its expected costs. We reviewed each estimate’s underlying  assumptions including how the estimate was developed and the  confidence level used. We also requested information from the program  office on whether the SCP cost estimate followed guidelines in GAO’s  2009 Cost Estimating Guide.
In order to evaluate the major schedule and technical risks faced by the  program, we reviewed the KC-46 Integrated Master Schedule and  compared it to the program’s APB and SAR in order to identify potential  concurrency in the program’s design reviews, flight testing, and low rate  production. We also asked program officials how they are monitoring  planned schedule events. To identify potential program risks, we  reviewed the program’s Technology Readiness Assessment which  identifies critical technology elements and the plan for maturation of these  technologies. During interviews with program officials we discussed what  actions are currently being taken in the areas of earned value  management and contractor performance in order to identify problems  early in the engineering and manufacturing development phase and ways  they planned to mitigate these risks.
To assess the extent the program is complying with acquisition policy,  legislation, and best practices, we also compared key program  documentation and execution with current DOD policy, GAO best  practices, and recent acquisition reform legislation to determine areas of  compliance and areas for further review as the program continues  forward. We compared the KC-46 Initial Capabilities Document, the  Capability Development Document, and the System Requirements  Document against DOD policy and guidance. We also reviewed program  office documentation pertaining to implementing relevant portions of the  Weapon Systems Acquisition Reform Act of 2009 and compared program  actions back to the legislation to determine whether requirements in the  Reform Act are being incorporated into program decisions. We also  examined and compared program office schedule documentation, such  as the Integrated Baseline Review against GAO’s best practices  acquisition framework to identify areas in which the program office is  utilizing a knowledge-based approach in KC-46 development.
In performing our work, we obtained information or interviewed officials  from Air Mobility Command and the KC-46 program office, Wright- Patterson Air Force Base, OH; Defense Contract Management Agency,  Seattle, WA; and Federal Aviation Administration, Wichita, KS. We also  met with and obtained information from the Office of the Under Secretary  of Defense for Acquisition, Technology, and Logistics, in Washington,  D.C.
We conducted this performance audit from September 2011 to March  2012 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

Appendix II: KC-135 Fleet Capabilities Compared to KC-46 Planned Capabilities for Aerial Refueling

Appendix III: DOD and KC-46 Program Office Implementation of Applicable Sections of the 2009 WSARA

	Requirement

Requires Director, Defense Research & Engineering  (DDR&E) to periodically review and assess the technology  maturity and integration risk of critical technologies of  Major Defense Acquisition Programs (MDAP). Requires  DDR&E to develop knowledge-based standards to  measure technology maturity and integration risk.
The Secretary of Defense shall ensure consideration of  trade-offs among cost, schedule, and performance  objectives as part of the process for developing  requirements for DOD acquisition programs. DOD officials  responsible for acquisition, budget, and cost estimating  functions shall provide appropriate opportunity to develop  estimates and raise cost and schedule matters before  performance objectives are established. The process for  developing requirements is structured to enable  incremental, evolutionary, or spiral acquisition  approaches.
Requires DOD to implement recommendations to ensure  competition at the MDAP contract and subcontract level.  Highlights several measures to ensure competition, where  cost-effective.
Requires the acquisition strategy for each MDAP provide  for competitive prototypes before Milestone B approval,  unless the milestone decision authority (MDA) for that  MDAP waives such requirement. Allows the MDA to waive  the requirement only on the basis that: (1) the cost of  producing competitive prototypes exceeds the expected  life-cycle benefits of producing the prototypes; or (2) but  for such waiver, DOD would be unable to meet critical  national security objectives.

	Title III: Additional Acquisition Provisions Section 302: Earned Value Management

Modifies the 2009 National Defense Authorization Act,  Section 887, requires report to Congress on  implementation of Earned Valued Management (EVM) in  DOD.
Requirement  Requires reports on growth in operating and support  (O&S) costs and requires review of weaknesses in  operations affecting the reliability of financial information  for MDAPs.

Appendix IV: KC-46 Program Compliance with Key Requirements Documents

Appendix V: Comment from the Department of Defense

Appendix VI: GAO Contacts and Acknowledgments

	GAO Contact

	Acknowledgments

In addition to the contact name above, the following staff members made  key contributions to this report: Bruce Fairbairn, Assistant Director; Keith  Hudson; John Krump; Mary Jo Lewnard; Don Springman; Roxanna Sun;  and Robert Swierczek.

Summary:
Why GAO Did This Study

Aerial refueling is essential to global U.S. military operations. The backbone of the nations tanker forcesthe KC-135 Stratotankeris over 50 years old on average with age-related problems and increasing support costs that could ground the fleet. Given this, the Air Force has initiated the $51.7 billion KC-46 program to start replacing the current fleet. Plans are to produce 18 tankers by 2017 and 179 aircraft through 2027. Other follow-on procurements are anticipated to replace all KC-135s.
The National Defense Authorization Act for Fiscal Year 2012 requires GAO to annually review the KC-46 program through 2017. This report addresses (1) the programs acquisition strategy, including its contracting approach; (2) the major schedule and technical risks; and (3) the extent the programs acquisition strategy and documentation comply with policy, legislation, and best practices. To address these areas, GAO reviewed key documents on the programs contract and cost baseline. GAO discussed the major schedule and technical risks with program office officials and examined an independent technology readiness assessment. GAO also assessed the acquisition plan and required documentation to determine compliance with acquisition legislation, policy, and best practices.

What GAO Found

The KC-46 program has established its acquisition strategy for development and production, including total cost, procurement quantities, and key milestone dates. The program is using a $4.4 billion fixed-price incentive (firm target) development contract that provides contractor incentives to control costs and limits the governments liability for increased costs over a certain amount. While estimated development costs are currently $900 million higher than the February 2011 contract award amount, the governments share of these extra costs is limited to about $500 million. The program has identified key performance parameters, but has not yet fully implemented the metrics for tracking their achievement.
There is broad agreement that KC-46 schedule risk is a concern. In GAOs assessment, significant concurrency, or overlap, among development and production activities add risk to the program. The Air Force and contractor have assessed overall schedule risk as moderate, citing concerns about software and the ability to complete development flight testing on time. Further, the DODs chief testing official finds the testing schedule not executable as currently planned. While designing a new tanker using a modified commercial platform is not as technically challenging as a more revolutionary weapon system, the program still faces some technical risks, including technologies that have not yet been demonstrated during flight.
The KC-46 programs acquisition strategy provides a good framework for meeting GAOs knowledge-based best practices, and generally adheres to defense policy guidance and recent acquisition reform legislation. DOD waived the requirement for a preliminary design review before the program began system development and demonstration, but this design review is planned for March 2012. Although the programs three critical technologies have not yet achieved the level of maturity indicated in best practices, they have reached a level of maturity consistent with DOD policy. Given that the KC-46 is one of only a few major programs in recent years to use a fixed-price incentive contract and the importance of tanker replacement to national security, rigorous monitoring of the programs progress will be essential.

What GAO Recommends

GAO recommends DOD leadership monitor the progress and outcomes of this contract to provide lessons learned for future acquisition programs, and the program fully implement metrics to track achievement of key performance parameters. DOD fully concurred.