GAO

United States General Accounting Office

Report to the Chairman, Subcommittee 

on National Security, Veterans Affairs, 

and International Relations, Committee 

on Government Reform, House of 

Representatives

August 2000 DEFENSE 

ACQUISITIONS

Recent F-22 

Production Cost 

Estimates Exceeded 

Congressional 

Limitation

GAO/NSIAD-00-178

Page 1 GAO/NSIAD-00-178 F-22 Aircraft

Contents

Letter 3

Appendixes Appendix I: Objectives, Scope, and Methodology 20

Appendix II: Comments From the Department of Defense 22

Appendix III: GAO Contact and Staff Acknowledgments 28

Tables Table 1: Summary of Contractors’ Production Cost Reduction

Plans 7

Table 2: Production Cost Estimates for the F-22 14
Page 2 GAO/NSIAD-00-178 F-22 Aircraft
Page 3 GAO/NSIAD-00-178 F-22 Aircraft

United States General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-285360 Letr

August 15, 2000

The Honorable Christopher Shays

Chairman, Subcommittee on National Security, 

 Veterans Affairs, and International Relations

Committee on Government Reform

House of Representatives

Dear Mr. Chairman:

The Air Force F-22 Raptor is an air superiority aircraft being developed to 

replace F-15 fighter aircraft. Lockheed Martin Corporation and Pratt & 

Whitney Corporation are the contractors for the airframe and engine, 

respectively. Development, which started in 1991, is scheduled to be 

completed in August 2003. The Air Force plans to enter low-rate initial 

production in December 2000.

Projections of higher production costs have been a source of concern for 

several years. In 1996, because of potential cost increases, the Air Force 

established a team—known as the Joint Estimating Team—to review the 

total estimated cost of the F-22 program. The team concluded that the cost 

of production could grow substantially from the amounts planned, but that 

cost reduction initiatives could be implemented to offset that cost growth. 

The Office of the Under Secretary of Defense for Acquisition, Technology, 

and Logistics generally adopted the team’s recommendations to change 

certain aspects of the program as well as a plan to define and implement 

cost reduction initiatives. F-22 production costs were also discussed in the 

National Defense Authorization Act for Fiscal Year 1998 (P.L. 105-85, 

Nov. 18, 1997). That act limited the total cost of F-22 production but did not 

specify the total number of aircraft to be procured. The most recent 

production costs estimates were completed by the Air Force and the Office 

of the Secretary of Defense in late 1999. The Air Force’s estimate of

$40.8 billion and the Office of the Secretary’s estimate of $48.6 billion both 

considered the potential impact of cost reduction initiatives known as 

production cost reduction plans. The airframe and engine contractors had 

identified about 1,240 of these plans—totaling $21 billion—in participation 

with the Air Force’s F-22 program office. The Under Secretary of Defense 

for Acquisition, Technology, and Logistics reviews the status of the F-22 

program quarterly, including its cost and affordability.
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You asked us to determine the impact these production cost reduction 

plans are projected to have on the program’s production cost estimate. This 

report discusses (1) the status of cost reduction plans, including some 

plans not yet implemented, and Air Force procedures for reporting on the 

plans and (2) a comparison of the 1999 production cost estimates with the 

congressional cost limitation. 

To assess the status of cost reduction plans, we reviewed documentation 

from the contractors and discussed the plans and the Air Force procedures 

for reporting on such plans with contractor and Air Force officials. To 

evaluate a sample of the cost reduction plans, we judgmentally selected 10 

of the plans that were projected to have high dollar values. The estimated 

reductions from these plans were $6.8 billion. Our objectives, scope, and 

methodology are described in appendix I.

Results in Brief About half of the $21.0 billion in cost reductions identified by the F-22 

contractors and program office have not yet been implemented. However, 

the Air Force may not be able to achieve the expected results from some of 

the plans because they are beyond the Air Force’s ability to control. We 

reviewed 10 plans estimated to reduce costs by $6.8 billion. We found that 

cost reductions for four of the plans, which accounted for $5.6 billion in 

potential cost reductions, may not be achievable because they were 

dependent on decisions or later determinations that must be made by the 

Office of the Secretary of Defense or the Congress. For example, one cost 

reduction plan estimated to reduce F-22 production costs by about 

$1.5 billion requires congressional approval for multiyear procurement of 

the F-22. The other six plans we reviewed, which were estimated to reduce 

costs by $1.2 billion may be achievable. Although the Air Force and its 

contractors have procedures to track the status of the production cost 

reduction plans, and the Air Force has reported quarterly to the Under 

Secretary of Defense concerning the total estimated cost of F-22 

production, the Air Force reports have not regularly included a summary of 

the status of production cost reduction plans.

Both Office of the Secretary and Air Force cost estimators projected F-22 

production costs that exceeded the congressional cost limitation of

$39.8 billion in effect at that time. In 1999, after considering the potential of 

all the cost reduction plans, the Air Force estimated F-22 production costs 

at $40.8 billion, and the Office of the Secretary of Defense estimated 

production costs at $48.6 billion. In comparing the cost estimates, we found 

the following:
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• Although both estimates were based on the production of 339 aircraft, 

the two estimating groups did not use the same estimating methods, nor 

did they make the same estimating assumptions.

• The cost estimators did not make the same assumptions about which 

cost reduction plans were already implemented or about the cost 

reductions achievable from plans not yet implemented. Accordingly, the 

cost estimators differed in the amounts of plans they considered 

implemented or not yet implemented. For example, for cost reduction 

plans that were not yet implemented, the Air Force’s estimating group 

allowed $10.2 billion (of the total estimate of $10.8 billion) for potential 

future cost reductions, and estimators from the Office of the Secretary 

allowed $6.1 billion.

• The Office of the Secretary’s estimate of F-22 total production cost 

exceeded the Air Force’s estimate by $7.8 billion, or 19 percent. The 

difference is attributable to the Office’s higher estimates of the cost of 

production ($3.7 billion) and lower estimates of the impact of 

production cost reduction plans not yet implemented ($4.1 billion). The 

Office of the Secretary cost estimates exceeded the congressional cost 

limitation by about $ 8.8 billion. Putting the higher estimate in 

perspective, if the Office of the Secretary estimate is correct and 

additional cost reduction plans are not developed and implemented, we 

estimate that the Air Force would have to buy about 85 fewer F-22 

aircraft than now planned to stay within the congressional cost 

limitation.

• Although Air Force cost estimators projected a total of $40.8 billion in 

production costs, the official Air Force cost position was $39.8 billion, 

the same as the congressional cost limitation. Air Force officials said 

that the Air Force selected the $39.8 billion as its official cost estimate 

because the detailed breakout of the estimate for fiscal years 2001 

through 2005 was about the same as that budgeted for those years. They 

said the difference between the estimate and the budget is primarily 

associated with the estimate for years after 2005. Department of 

Defense officials noted that it will be some time before actual 

production cost trends emerge and before they will know whether the 

Air Force or Office of the Secretary of Defense estimate is more 

realistic.

This report provides recommendations to the Secretary of Defense that 

focus on (1) the need for regular Air Force reports that summarize the 

status of cost reduction plans and (2) reconciling the requirement for F-22s 

with the congressional cost limitation and assessing the implications of 

having to procure fewer F-22s because of potentially higher costs. The 
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Department of Defense, in commenting on a draft of this report, did not 

agree with our first recommendation because it believes that the 

Department has sufficient mechanisms in place to monitor F-22 costs, and 

that additional direction from the Secretary of Defense regarding reporting 

of that information was not warranted. We believe that achievement of the 

cost reduction plans is so critical to completing F-22 production within the 

cost limitation that quarterly reports that include a summary of the status 

of the plans would be important and useful. We modified our first 

recommendation to more specifically state the type of information the 

Department should review each quarter. The Department partially agreed 

with our second recommendation that requirements for F-22s be 

reconciled with the congressional cost limitation, stating that an upcoming 

Quadrennial Defense Review will accomplish such a reconciliation, but 

that it is now premature to make a reconciliation. We believe the 

Department’s upcoming review will be responsive to our recommendation.

Significant F-22 Cost 

Reduction Plans 

Depend on 

Congressional or 

Defense Department 

Action

About half of the $21.0 billion in cost reductions identified by the F-22 

contractors and program office have not yet been implemented. These 

proposed cost reduction plans affect production technology, 

manufacturing techniques, and acquisition practices. We reviewed plans 

estimated to reduce future costs by $6.8 billion. We found that cost 

reductions of $5.6 billion of the $6.8 billion were dependent on decisions or 

future determinations by the Office of the Secretary of Defense or the 

Congress; consequently, the Air Force may not realize all of the cost 

reductions it anticipates. We did not question the validity of plans 

estimated to reduce costs by $1.2 billion. The Air Force and the airframe 

and engine contractors have procedures to track the status of each cost 

reduction plan, but Air Force quarterly reports to the Under Secretary of 

Defense for Acquisition, Technology, and Logistics have not always 

included status information on the plans.

Description of the Cost 

Reduction Plans

In response to recommendations of the Joint Estimating Team, contractors 

and the F-22 program office proposed cost reduction plans to use enhanced 

production technology, improved manufacturing techniques, and revised 

acquisition principles to buy materials. These plans show changes to 

business design, processes, and practices to realize cost reductions. The 

Air Force and contractors’ criteria for determining if a cost reduction plan 

is implemented include whether
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• the contractor has submitted a firm-fixed price proposal that recognizes 

the impact of the cost reduction,

• the impact of the reduction has been reflected in a current contract 

price—either with the prime contractor (Lockheed Martin) or a supplier 

to the prime contractor,

• the contractor has reduced the standard number of hours allocated to a 

specific task,

• the reduction has been negotiated in a forward pricing rate agreement,1

or

• the reduction has been negotiated with a subcontractor or vendor.

Plans are categorized as “to be implemented” if none of the criteria are met.

The contractors estimated the value of the F-22 production cost reduction 

plans at about $21.0 billion. The cost reductions and the 

contractor-reported status of plans are described in table 1. The table is a 

summary of the inventory of cost reduction plans as defined by the 

contractors. However, it does not show a relationship of the total cost 

reductions to the total estimated cost of F-22 production and is not readily 

reconciled with total production cost estimates made by the Air Force and 

the Office of the Secretary. Cost estimators of the Air Force and Office of 

the Secretary used these plans in making cost estimates for F-22 

production; however, they did not always agree on what plans were 

implemented.

Table 1: Summary of Contractors’ Production Cost Reduction Plans

1

 A written agreement negotiated between a contractor and the government to make certain 

rates available during a specified period for use in pricing contracts or modifications. These 

rates cover such things as labor and indirect costs.

Then-year dollars in billions

Reason for reduction Implemented To be implemented Total

Improve manufacturing processes and incorporate new technology $2.7 $5.2 $7.9

Improve efficiency and reduce supplier costs 2.0 1.7 3.7

Resolve obsolescence and diminishing sources issues 1.3 0.3 1.6

Improve material procurement strategies 0.7 0.3 1.0

Apply performance-based contracting practices 0.5 0 0.5
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Note: The F-22 program office provided input to the contractors’ plans.

Source: F-22 program office data.

Allocated equally over a planned procurement of 339 F-22 aircraft, a 

$21-billion cost reduction equates to about $62 million per F-22 to be 

produced. This amount of reduction per F-22, if achievable, is significant. 

For example, F-15E aircraft, derivatives of the F-15C that the F-22 is 

planned to replace, were procured in fiscal years 1996-1998 at an average 

unit cost of about $46 million. Although that procurement occurred several 

years ago and the amounts are not fully comparable to the costs that might 

be incurred if they were to be procured today, the comparison shows the 

significance of the planned cost reductions.

Implementation of Some 

Remaining Cost Reduction 

Plans Not Ensured

Achievement of cost reductions of at least $5.6 billion will depend on 

decisions and future determinations of the Office of the Secretary of 

Defense and/or the Congress. Thus, the Air Force cannot control 

implementation of those cost reduction plans. The plans involve cost 

reductions that would result from deferring establishment of a depot-level 

maintenance capability for the F-22, a favorable impact on F-22 costs if the 

Congress approves acquisition of the Joint Strike Fighter, approval of 

multiyear procurement of the F-22, and use of materials from the National 

Defense Stockpile Center for production of F-22s. 

• One plan estimates a cost reduction of about $2.6 billion and proposes 

that all F-22 depot-level maintenance be performed by the contractor 

until at least 2008. Under this proposal, the Air Force would not have to 

develop a capability to perform depot-level maintenance during 

production and would thus save production costs. Before this plan can 

be implemented, the Secretary of the Air Force must determine it 

conforms to 10 U.S.C. 2464 and 10 U.S.C. 2466, both of which affect the 

Air Force’s ability to contract with the private sector for depot-level 

maintenance services. Section 2464 requires the Secretary of Defense to 

identify and maintain a core logistics capability that is owned and 

Defer or avoid government investment in depot maintenance capability 3.0 0.3 3.3

Award production contracts for multiple years 0 1.8 1.8

Manufacture Joint Strike Fighter and F-22 components in the same plants 0 1.2 1.2

Total $10.2 $10.8 $21.0

(Continued From Previous Page)

Then-year dollars in billions

Reason for reduction Implemented To be implemented Total
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operated by the government. A core capability is the equipment, 

personnel, and services needed to repair or maintain weapon systems or 

other military equipment to ensure an effective and timely response to 

mobilization, national defense contingencies, or other emergencies. 

Section 2466 governs the allocation of depot-level maintenance 

workload between the public and private sectors and stipulates that not 

more than 50 percent of the available funds for depot-level maintenance 

in a fiscal year can be used for contracting with the private sector. This 

percentage applies to each military department.

A decision to contract for depot-level maintenance will need to 

consider the requirements of these statutes. Under section 2464, it may 

not be possible to contract for all depot-level maintenance services if 

there is the need to maintain a core logistics capability for the F-22 

within the Air Force. Concerning section 2466, as of March 2000, 

preliminary data indicate that the Air Force would be close to the 

50 percent ceiling through 2004. In addition, Air Force long-term 

contracts for depot maintenance are expected to increase in value and 

the Air Force is implementing initiatives to contract for depot 

maintenance on 64 new or modified systems.2

 As a result of these 

statutory provisions, the potential exists that this proposed cost 

reduction plan might not be implemented.

The plan may only defer costs until after completion of production. The 

plan states that its purpose is to achieve a cost reduction by delaying 

the establishment of government depot capabilities until the system 

matures, which is defined as accumulating 100,000 flying hours in fiscal 

year 2008. It also states that the contractor support concept will be 

implemented to reduce the required depot investment and that most of 

that expense to develop an Air Force capability will be deferred until 

about 2012. The last buy of F-22 production aircraft is scheduled for 

fiscal year 2011. The Air Force would decide at that time whether to 

fund the costs of an Air Force depot-maintenance capability with 

procurement or operation and maintenance appropriations. If these 

costs are deferred until after the F-22 production program is complete, 

they will no longer count against the congressional cost limitation.

2 Depot Maintenance: Air Force Faces Challenges in Managing to 50-50 Ceiling

(GAO/T-NSIAD-00-112, Mar. 3, 2000).
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• Another cost reduction plan that is dependent on decisions by the 

Congress and the Office of the Secretary estimates that F-22 costs will 

be reduced by about $1.05 billion through lower overhead rates and 

increased buying power, since many of the same contractors and 

subcontractors that are building the F-22 will also build the Joint Strike 

Fighter. The Congress and the Office of the Secretary control the 

schedule and quantity of the Joint Strike Fighter aircraft. Therefore, this 

cost reduction is dependent on decisions being made on a program 

external to the F-22. If the Joint Strike Fighter program is not approved 

or is delayed, then the F-22 production program will not achieve the 

projected cost reductions.

• Another cost reduction plan requires the Congress to approve multiyear 

procurement of the F-22, which the airframe contractor estimates will 

reduce the cost of F-22 production by about $1.5 billion. The contractor 

proposes that F-22 production be contracted for 5 years in advance, 

beginning in 2004. According to the plan, because of cost reductions 

available through long-term commitments such as a 5-year contract, the 

subcontractors and the contractor would accept lower prices for the 

aircraft being procured. Under 10 U.S.C. 2306b, a multiyear contract 

must meet specific criteria and be approved by the Congress before any 

reductions from this type of cost reduction plan can be achieved. The 

criteria that must be met include the following: (1) the multiyear 

contract must result in substantial savings compared to awarding 

annual contracts; (2) the item being bought must have a stable design 

and not have excessive technical risks; and (3) the estimated cost of the 

system and the estimated cost avoidance from the multiyear 

procurement are realistic. The Air Force plans to award a multiyear 

contract for fiscal year 2004 and will need congressional approval for a 

multiyear contract in fiscal year 2003 to support advance procurement 

funding.3

 Since the F-22 development program is not scheduled for 

completion until August 2003, the potential exists that the F-22 program 

will not meet the multiyear procurement criteria by 2003.

• Another cost reduction plan of uncertain status involves obtaining 

titanium sponge from the Defense Logistics Agency’s National Defense 

Stockpile Center at no cost and providing it to the manufacturer instead 

of paying the manufacturer for the raw material. This plan is estimated 

to ultimately reduce the production cost of the F-22 by $458 million. It 

3

 Advance procurement funding is often requested by the Air Force to initiate procurement 

of the long lead-time materials and effort that are necessary to ensure that the delivery 

schedule can be met for aircraft that are to be procured in the next fiscal year.
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assumes that the cost of titanium sponge would be $3.00 per pound if 

purchased by the contractor and that about 30 million pounds would be 

needed. It further assumes that the funds not expended for titanium 

sponge, about $90 million, would be used to invest in additional cost 

reduction plans, and thus reduce the total cost by $458 million. Although 

the plan assumes that $4.00 to $5.00 in cost reductions will be achieved 

for each dollar invested, the contractor and the Air Force have not 

identified the specific projects in which the funds would be invested. 

This plan was not used to reduce estimated production costs by either 

cost estimators from the Office of the Secretary or the Air Force 

because of the uncertainty of congressional approval.

Although this plan might reduce F-22 production costs, the cost to the 

government would not be reduced by that amount. If the National 

Defense Stockpile Center does not give titanium sponge to the F-22 

program, it can sell it to the private sector and create income for its 

own fund. In fiscal year 1999, the Center’s sales of titanium sponge 

averaged $1.94 per pound. Since the Air Force will need about

30 million pounds of titanium sponge for F-22 production, the lost 

revenue to the Center could be about $60 million ($1.94 per pound 

times 30 million pounds). Therefore, what may be a significant cost 

reduction for the F-22 program could result in some lost revenue for the 

Defense Logistics Agency.

Individual Plans Tracked 

but Regular Reporting Not 

Accomplished

The Air Force and airframe and engine contractors have established 

procedures to track the status of the production cost reduction plans. Both 

contractors have developed an information system that records the 

identified cost reduction plans, the expected cost reduction from each of 

them, and their implementation status. The systems and the procedures 

were established to generate, evaluate, and implement cost reduction plans 

as well as to monitor them.

Air Force and airframe contractor representatives meet quarterly to review 

the status of cost reduction plans, while the Air Force and engine 

contractor representatives meet weekly to review the status of proposed 

cost reduction actions. The Air Force monitors the status of the cost 

reduction plans in their information system using the integrated product 

team structure. Through this structure, Air Force and contractor personnel 

serve on teams to manage various functions in aircraft development and 

production. For the F-22, the teams represent areas such as air vehicle, 

engine, and avionics. Among their other responsibilities, these teams also 
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generate, evaluate, implement, and monitor the status of cost reduction 

plans.

The Under Secretary of Defense for Acquisition, Technology, and Logistics 

requested the Air Force to report quarterly on the status of F-22 costs. The 

Air Force reported quarterly, detailing many factors affecting F-22 costs. 

However, even though achieving the planned cost reductions is critical for 

completing F-22 production within the congressional limitation, Air Force 

quarterly reports to the Under Secretary have not included status 

information on cost reduction plans since June 1999. The data are available 

to make detailed or summary reports. For example, the Air Force is able to 

categorize plans as implemented or yet to be implemented and to perform 

specific searches of the contractor’s information system. 

Recent Office of the 

Secretary and Air 

Force Estimates 

Exceeded the 

Congressional Cost 

Limitation

The Air Force and the Office of the Secretary cost estimating groups both 

based their estimates on production of 339 aircraft, but they did not use the 

same methods to estimate the cost of F-22 production, nor did they use the 

same assumptions about which cost reduction plans were implemented or 

not yet implemented. After considering the potential cost reductions, both 

estimates ($40.8 billion by the Air Force, and $48.6 billion by the Office of 

the Secretary) exceeded the congressional cost limitation of $39.8 billion 

that was in effect at the time the estimates were prepared. However, the Air 

Force used the cost limitation as its cost position.

Differences Between the Air 

Force and the Office of the 

Secretary Estimates

The two groups used different estimating methods, such as different 

assumptions regarding (1) production rates, (2) the impact of breaks in 

production, and (3) which historical data to use. These differences caused 

the Office of the Secretary estimate to be higher than the Air Force 

estimate for the following reasons:

• Air Force cost estimators assumed that the eight production 

representative test vehicles approved for purchase in fiscal years 1999 

and 2000 would generally be produced as two lots of four aircraft each, 

based on the contractors’ delivery schedules. Office of the Secretary 

estimators treated the eight aircraft as a single lot of eight aircraft for 

estimating purposes.

• Office of the Secretary and Air Force cost estimators disagreed on 

whether a break in production on four avionics items occurred. Air 

Force estimators assumed there was a break in production of certain 

items. They assumed that after a break in production, the higher rate of 
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cost improvement normally experienced in manufacturing early units 

would again be experienced after a break in production. Office of the 

Secretary estimators did not assume there was a break in production so, 

according to their analysis, the higher rate of cost improvement would 

not occur on the later units.

• The Air Force and the Office of the Secretary used different historical 

cost data to estimate the cost of the F-22 avionics. For example, the Air 

Force used experience on F/A-18 avionics and the Office of the 

Secretary used experience on multiple systems.

Different Allowances for 

Cost Reduction Plans Yet to 

Be Implemented

The Air Force estimated that costs would be reduced by $10.2 billion as 

additional cost reduction plans are implemented, while the Office of the 

Secretary estimated they would achieve $6.1 billion. Among the reasons for 

the different amounts allowed for additional reductions are that the 

estimators used different baselines from which to calculate a reduction, 

different estimated returns on funds invested to reduce costs, and different 

assumptions on the percent of reductions likely to occur by eliminating 

nonproductive steps. As a result of the differences, the Office of the 

Secretary allowed less for cost reductions than the Air Force. Examples of 

these differences are as follows:

• Office of the Secretary and Air Force estimators agreed on the 

percentage to reduce the estimated cost as a result of awarding 

contracts for 5 years in advance (that is, multiyear procurement), but 

since their baseline estimates against which the percentage was applied 

were different, the amount of the expected reduction was different.

• Some cost reduction actions involve investing funds to bring about 

lower costs; that is, they involve investing in projects to improve 

manufacturing processes or incorporate new technology. Both the Air 

Force and the Office of the Secretary used C-17 cargo aircraft historical 

data to estimate the return on the dollars invested. Because of different 

methodologies to assess the cost reductions applicable to the invested 

dollars, however, the Air Force and the Office of the Secretary differed 

on the cost reductions applicable to the plans. The Air Force assumed 

that the return on an invested dollar would be $11.00, $9.00, or $6.00 

depending on the numbers of aircraft that would be affected by the 

improved process or technology. The Office of the Secretary’s analysis 

calculated the cost reduction based on the amount of dollars that 

remained to be spent on the program. The Office of the Secretary’s 

analysis resulted in a return rate of $4.00 for each dollar invested.
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• Other cost reductions result from improving contractor efficiencies and 

reducing supplier costs. The Air Force used reductions from 9 percent 

to 13.5 percent depending on the planned work location. The Office of 

the Secretary used 5 percent as a general reduction percentage for all 

work locations.

According to Air Force officials, there were some differences because the 

two estimating groups used different assumptions about which plans were 

already implemented. For example, the Office of the Secretary considered 

about $1 billion in reductions associated with the Joint Strike Fighter and 

radar production as implemented. Because the Joint Strike Fighter has not 

been approved for production, the Air Force did not consider that cost 

reduction to have been implemented.

Comparison of Estimates 

With Congressional 

Limitation

As shown in table 2, the Air Force estimate was $40.8 billion after allowing 

for $10.2 billion of additional expected cost reductions that have not been 

implemented. The Office of the Secretary estimate was $48.6 billion after 

allowing $6.1 billion for additional cost reductions that have not been 

implemented. Both of these estimates exceeded the cost limitation of 

$39.8 billion in effect at that time.4

Table 2: Production Cost Estimates for the F-22

Note: Parentheses indicate negative numbers.

Source: Office of the Secretary and Air Force data.

4

 In late 1999, the Air Force adjusted the cost limitation to $37.6 billion and revised the 

number of aircraft to be procured to 333 because 6 aircraft that were part of the production 

program will be procured as part of the development program and thus are now subject to a 

separate cost limitation for F-22 development.

Then-year dollars in billions

Description Office of the Secretary estimate Air Force estimate Difference

Cost estimate after considering cost reductions $54.7 $51.0 $3.7

Allowance for cost reductions that have not been implemented (6.1) (10.2) 4.1

Net cost estimate $48.6 $40.8 $7.8
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Consequently, as a result of the differences in estimating techniques and 

allowances for the cost reduction plans, the Office of the Secretary 

estimated the cost of the F-22 production program at about $7.8 billion

(19 percent) higher than the Air Force. Officials from the Office of the 

Secretary said they consider the 19 percent difference significant; however, 

they said that it will be some time before actual production cost trends 

emerge and before they will know whether the Air Force or Office of the 

Secretary of Defense estimate is more realistic. We agree that the 

difference is significant. If the Office of the Secretary estimate is correct 

and additional cost reduction plans are not developed and implemented, 

we calculated5

 that the Air Force would have to buy about 85 fewer aircraft 

than are now planned to stay within the congressional cost limitation of 

$39.8 billion. A cost estimator of the Office of the Secretary said the 

number of aircraft that would be unaffordable would be between 75 and 90, 

depending in part on decisions about the production rate that would apply.

Air Force Selected Cost 

Limitation as Its Official 

Cost Position

Although the Air Force cost estimate was $40.8 billion, senior Air Force 

officials set the official cost position at the congressional cost limitation of 

$39.8 billion. According to Air Force officials, the Air Force would normally 

select an estimated cost that would provide an equal chance that the 

estimate was either higher or lower than the actual cost of the program. 

For the F-22 production cost estimate, that amount was $40.8 billion, which 

included about $1.2 billion for risk uncertainties. The Air Force, however, 

used $39.8 billion (the congressional cost limitation amount) as its cost 

position, which, according to Air Force calculations, was twice as likely to 

be below the actual cost than above it. The Air Force said it selected the 

$39.8 billion as its cost position because the detailed breakout of the 

estimate by fiscal year was equal to or less than what the Air Force 

budgeted for fiscal years 2001 through 2005, and the estimate for the years 

beyond 2005 was more uncertain; that is, the further in the future the 

estimate is for, the less likely it is to be accurate. Therefore, rather than 

select an estimate that exceeds the cost limitation, the Air Force selected 

an estimate equal to the cost limitation.

Conclusions Our review of the airframe contractor’s most significant cost reduction 

plans indicates that the Air Force may not be able to achieve the expected 

5

 The calculation is described under the caption Objectives, Scope, and Methodology.
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results because they are beyond the Air Force’s ability to control. This is 

because some planned cost reductions require decisions or later 

determinations by the Office of the Secretary or the Congress.

While the status of individual cost reductions is tracked by contractors and 

the Air Force’s program office, the Air Force has not regularly reported to 

the Under Secretary of Defense on the status of these plans so their overall 

progress and their impact on the estimated cost of F-22 production can be 

assessed. We believe achievement of the estimated cost reductions 

embodied in the plans is so critical to completing F-22 production within 

the congressional cost limitation that quarterly reporting of summary 

information would be important and useful. Regular reporting on the status 

would provide a picture of how many cost reduction plans are being 

considered at that point in time, how many are implemented, their potential 

value, how many have resulted in actual cost reductions, and what those 

cost reductions are. Over time, a trend of progress in moving from plans to 

actual cost reductions should emerge and successful initiatives—beneficial 

“lessons learned” to other acquisition programs—would be highlighted.

After incorporating potential cost reductions, both the Office of the 

Secretary and the Air Force produced cost estimates for the F-22 

production program that exceeded the congressionally mandated cost 

limitation in effect at the time the estimates were made. The Air Force 

estimate exceeded the limitation by about $1.0 billion, while the Office of 

the Secretary estimate exceeded the limitation by $8.8 billion. If the Office 

of the Secretary estimate is correct and additional cost reduction plans are 

not developed and implemented, the Air Force would have to buy about 85 

fewer aircraft than now planned to stay within the congressional cost 

limitation. In addition, based on the uncertainties associated with some of 

the plans, the Air Force and the Office of the Secretary estimates could rise 

even more above the congressional cost limitation if the decisions by the 

Congress and the Office of the Secretary do not coincide with the decisions 

assumed in the cost reduction plans.

Recommendations To enhance the visibility of the Air Force’s plans to reduce production 

costs, we recommend that the Secretary of Defense direct the Air Force to 

report to the Under Secretary of Defense for Acquisition, Technology, and 

Logistics on the status of the production cost reduction plans each quarter. 

For each contractor, this report should include, as a minimum, summary 

information such as the total number of cost reduction plans identified, the 

number implemented, the total estimated reductions, and the reductions 
B-285360

Page 17 GAO/NSIAD-00-178 F-22 Aircraft

realized to date. The report should also highlight major changes, such as 

additions or deletions from the list of plans, from the previous report.

Since both Office of the Secretary and the Air Force cost estimators 

projected that the F-22 production costs would exceed the congressionally 

imposed cost limitation and the possibility exists that these cost estimates 

could increase further if some cost reductions do not materialize, we 

further recommend that the Secretary of Defense reconcile the number of 

F-22s that need to be procured with the congressional cost limitation and 

report to the Congress on the implications of procuring fewer F-22s 

because of potentially higher costs.

Agency Comments and 

Our Evaluation

In written comments on a draft of this report, the Department of Defense 

disagreed with one recommendation and partially agreed with the other 

recommendation. The Department noted that the report provides a 

credible description of the historical cost estimating differences between 

the Office of the Secretary and the Air Force. However, the Department 

said that the report did not recognize the degree of detail to which the 

Office of the Secretary of Defense is already tracking the cost status of the 

F-22. With regard to our first recommendation that the Air Force report on 

the status of production cost reduction plans, the Department indicated 

that it has continually emphasized cost control on the F-22 program and 

since the imposition of the congressional cost limitation, has required the 

Air Force to provide quarterly briefings on production costs. The 

Department indicated that the quarterly reviews are structured to track the 

progress of key cost reduction plans when significant new data is available. 

The Department stated that it considers reporting on each production cost 

reduction plan unnecessary and did not believe additional direction from 

the Secretary of Defense regarding reporting of cost reduction plans was 

warranted. As a result of the Department’s comments, we modified the 

recommendation in the final report to make it clear that the information 

that should be reported is summary information and not detailed 

information about each cost reduction plan. We recommend that the Air 

Force’s quarterly report, which is already required to be submitted to the 

Under Secretary of Defense, include information such as the total number 

of cost reduction plans identified, the number implemented, the total 

estimated reductions, and the reductions realized to date. We also indicate 

that the information provided should highlight major changes, such as 

additions and deletions from the past list of plans, from the previous report. 

We believe that achievement of the cost reduction plans is so critical to 

completing F-22 production within the cost limitation that quarterly reports 
B-285360

Page 18 GAO/NSIAD-00-178 F-22 Aircraft

that include a summary of the status of the plans would be important and 

useful. 

The Department partially agreed with our recommendation to reconcile the 

number of F-22s that need to be procured within the congressional cost 

limitation and report to the Congress on the implications of procuring 

fewer F-22s. The Department stated that it was premature for the Secretary 

of Defense to reconcile the number of F-22s with the congressional cost 

limitation. However, the Department also noted that the Quadrennial 

Defense Review planned for next year will examine the force structure 

requirements to execute national security policy objectives and will 

address the quantity of F-22s that can be procured within the cost 

limitation, and the results will be made available to the Congress. We 

believe the Department’s upcoming review will be responsive to our 

recommendation.

The Department’s comments are reproduced in appendix II. The 

Department also suggested additional technical changes, which we 

incorporated in the report where appropriate. 

We are sending copies of this report to Senator John W. Warner, Chairman, 

and Senator Carl Levin, Ranking Minority Member, Senate Committee on 

Armed Services; Senator Ted Stevens, Chairman, and Senator Daniel K. 

Inouye, Ranking Minority Member, Subcommittee on Defense, Senate 

Committee on Appropriations; Representative Floyd D. Spence, Chairman, 

and Representative Ike Skelton, Ranking Minority Member, House 

Committee on Armed Services; Representative Jerry Lewis, Chairman, and 

Representative John P. Murtha, Ranking Minority Member, Subcommittee 

on Defense, House Committee on Appropriations; and Representative Rod 

Blagojevich, Ranking Minority Member, Subcommittee on National 

Security, Veterans Affairs, and International Relations, House Committee 

on Government Reform. We are also sending copies of this report to the 

Honorable William Cohen, Secretary of Defense; the Honorable F. Whitten 

Peters, Secretary of the Air Force; and the Honorable Jacob Lew, Director, 

Office of Management and Budget. Copies will also be made available to 

others on request.
B-285360

Page 19 GAO/NSIAD-00-178 F-22 Aircraft

Please contact me at (202) 512-4841 if you or your staff have any questions 

concerning this report. Additional points of contact and key contributors to 

this report are listed in appendix III. 

Sincerely yours,

Allen Li

Associate Director

Defense Acquisitions Issues
Page 20 GAO/NSIAD-00-178 F-22 Aircraft

Appendix I

Objectives, Scope, and Methodology ApApenednxidexiIs

Our overall objective was to determine the impact production cost 

reduction plans are projected to have on F-22 production cost estimates. 

Specifically, we (1) reviewed the status of cost reduction plans, evaluated 

some plans, and reviewed the Air Force reporting on the status of the plans 

and (2) compared the 1999 production cost estimates by the Office of the 

Secretary of Defense and the Air Force with the congressional cost 

limitation.

To assess the status of cost reduction plans, we reviewed the specific 

contractor cost reduction plans to determine the basis for the reductions 

expected to be achieved and whether the reduction was implemented or 

yet to be implemented. We reviewed the documentation from the 

contractors and discussed the plans and the Air Force procedures for 

reporting on such plans with contractor and Air Force officials. We also 

reviewed federal acquisition regulations and relevant laws. To evaluate a 

sample of the cost reduction plans, we judgmentally selected 10 of the 

plans that were projected to have high dollar values. The estimated 

reductions from these plans were $6.8 billion.

To compare the recent F-22 production cost estimates of the Air Force and 

the Office of the Secretary of Defense with the congressional cost 

limitation and to determine the amount of cost reductions considered in 

those estimates, we reviewed the Joint Estimating Team’s report and 

various Air Force briefings. We discussed the estimates with officials in the 

Office of the Secretary of Defense and the Air Force’s F-22 program office 

to determine why they differed. We compared the two estimates, including 

the baseline estimate, the estimated reductions from reduction plans, and 

the net estimates. We obtained a description of the reasons for the 

variances between the two estimates. We also discussed the estimates and 

the cost limitation with Air Force and Office of the Secretary of Defense 

officials. 

We determined what the congressional cost limitation was at the time these 

cost estimating groups prepared their estimates and compared it with the 

two estimates.

To calculate the number of F-22s that could not be procured within the cost 

limitation if the higher cost estimate of the Office of the Secretary were 

realistic, we considered that the cost limitation was 18.2 percent lower than 

the cost estimate by the Office of the Secretary, and that the later aircraft to 

be procured would generally be those with the lowest cost. We determined 
Appendix I

Objectives, Scope, and Methodology

Page 21 GAO/NSIAD-00-178 F-22 Aircraft

the number of aircraft, beginning with those planned to be procured last, 

that could not be procured if funding were 18.2 percent short. 

In performing our work, we obtained information and interviewed officials 

from the Cost Analysis Improvement Group, Office of the Secretary of 

Defense, Washington, D.C.; the Air Force Cost Analysis Agency, 

Washington, D.C.; the F-22 System Program Office, Wright-Patterson Air 

Force Base, Ohio; the Defense National Stockpile Center, Fort Belvoir, 

Virginia; Lockheed Martin Aeronautical Systems, Marietta, Georgia; 

Lockheed Martin Tactical Aircraft Systems, Fort Worth, Texas; and RAND 

Corporation, Washington, D.C.

We requested comments on a draft of this report from the Department of 

Defense. We obtained comments from the Director, Strategic and Tactical 

Systems, Office of the Under Secretary of Defense for Acquisition, 

Technology, and Logistics. Those comments are reproduced in appendix II. 

The Director also suggested additional technical changes, which we 

incorporated in this report where appropriate.

We performed our work from November 1999 through June 2000 in 

accordance with general accepted government auditing standards.
Page 22 GAO/NSIAD-00-178 F-22 Aircraft

Appendix II

Comments From the Department of Defense ApendxiI

Note: GAO’s comments 

supplementing those in the 

report text appear at the 

end of this appendix

See comment 1.

See comment 2.

See comment 3.

See comment 4.
Appendix II

Comments From the Department of Defense

Page 23 GAO/NSIAD-00-178 F-22 Aircraft

See comment 5.
Appendix II

Comments From the Department of Defense

Page 24 GAO/NSIAD-00-178 F-22 Aircraft

See comment 4.
Appendix II

Comments From the Department of Defense

Page 25 GAO/NSIAD-00-178 F-22 Aircraft

See comment 5.
Appendix II

Comments From the Department of Defense

Page 26 GAO/NSIAD-00-178 F-22 Aircraft

The following are GAO comments on the Department of Defense’s letter 

dated July 17, 2000.

GAO Comments 1. We included additional information in the report about the cost data 

available to the Under Secretary of Defense to assess the status of the 

F-22 program.

2. An objective of this report was to compare the 1999 Air Force and 

Office of the Secretary cost estimates with the congressional cost 

limitation. Our objectives did not include an assessment of the validity 

of the factors used by the Air Force or Office of the Secretary to arrive 

at their cost estimates. Our report did not intend to determine whether 

the Air Force or Office of the Secretary used the more appropriate 

factors.

3. We have included in the report as appropriate the Department’s 

statement that it will be some time before they know which cost 

estimate is more realistic.

4. We revised the report to include additional information regarding the 

data presented to the Under Secretary during the quarterly reviews. We 

note that the Air Force last provided summary information to the Under 

Secretary of Defense regarding production cost reduction plan data 

during the quarterly review in June 1999. According to the Air Force, 

similar information was provided as backup, but apparently not 

briefed, in September 1999. Since successful implementation of 

production cost reduction plans is critical to the Air Force’s ability to 

keep the cost of F-22 production within the congressional limitation, 

and the summary data such as we recommended have not been 

provided on a regular basis to the Under Secretary, we continue to 

recommend that the data be reported quarterly.

5. We recommended in our draft report that the Secretary of Defense 

reconcile the number of F-22s that need to be procured within the 

congressional cost limitation and report to the Congress on the 

implications of procuring fewer F-22s because of potentially higher 

costs. The Department of Defense said it was premature for the 

Secretary of Defense to reconcile the number of F-22s that need to be 

procured. The Department, however, partially agreed with this 

recommendation and stated that it plans to do a review next year to 

evaluate force structure needs, which will include addressing the 
Appendix II

Comments From the Department of Defense

Page 27 GAO/NSIAD-00-178 F-22 Aircraft

affordability of the F-22. The review will evaluate cost trends on the 

F-22 and should provide a better understanding of the number of F-22s 

that can be bought within the cost limitation. The planned review by the 

Office of the Secretary of Defense should be responsive to our 

recommendation.
Page 28 GAO/NSIAD-00-178 F-22 Aircraft

Appendix III

GAO Contact and Staff Acknowledgments ApendxiI

GAO Contact Robert D. Murphy (937) 258-7904

Acknowledgments In addition to the name above, Mark Abraham, Leonard L. Benson, 

Christopher T. Brannon, Edward R. Browning, and John Van Schaik made 

significant contributions to this report.

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