Testimony

Before the Subcommittee on National Security,

Veterans Affairs, and International Relations,

Committee on Government Reform, House of

Representatives

United States General Accounting Office

GAO

For Release on Delivery

Expected at 10:00 a.m.,

Thursday, August 2, 2001 TACTICAL AIRCRAFT

Impact of F-22 Production

Cost Reduction Plans on

Cost Estimates

Statement of Allen Li, Director, Acquisition and Sourcing

Management

GAO-01-636T
Page 1 GAO-01-636T F-22 Aircraft

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss our work regarding the impact of

F-22 cost reduction plans on cost estimates for F-22 production.

As you know, the Air Force started developing the F-22 in 1991, and plans

to complete development in September 2003. The Air Force plans to

procure 333 production aircraft at a cost currently limited1 to $37.6 billion

by the National Defense Authorization Act for Fiscal Year 1998.2

 The act

does not specify the total number of aircraft to be procured.

As requested, we have updated the information we provided to the

Subcommittee last August3

 on the F-22 production program and have

prepared a report being released today.4

Today, we will highlight our work concerning (1) potential cost reduction

plans, (2) production cost estimates by the Air Force and the Office of the

Secretary of Defense, and (3) DOD’s actions to implement

recommendations included in our August 2000 report.

In summary, the F-22 contractors’ estimated amount of cost reduction

plans total about $26.5 billion. Plans pertaining to about half of this

amount have been implemented. After considering the cost reduction

plans, both Air Force and the Office of the Secretary cost estimators

projected in late 2000 that F-22 production costs would still exceed the

$37.6 billion congressional cost limitation if the Air Force were to procure

 1

 The cost limitation, as adjusted, is currently $37.6 billion for 333 aircraft and does not

include $1.575 billion in fiscal year 2000 funding associated with six aircraft labeled

Production Representative Test Vehicles that are excluded from the production cost

limitation. Those aircraft are funded mostly with appropriations for Research,

Development, Test and Evaluation as approved by the Congress. The production cost

limitation does, however, include about $200 million for advanced procurement related to

those six aircraft.

2

 P.L. 105-85, Nov. 18, 1997.

3 Defense Acquisitions: Recent F-22 Production Cost Estimates Exceeded Congressional

Limitation (GAO/NSIAD-00-178, Aug. 15, 2000). See Related Products List for additional

reports on the F-22 program.

4 Tactical Aircraft: Continuing Difficulty Keeping F-22 Production Costs Within the

Congressional Limitation (GAO-01-782, July 16, 2001).
Page 2 GAO-01-636T F-22 Aircraft

333 F-22s. Air Force estimators projected the cost at $39.6 billion;5 the

Office of the Secretary estimated $46.6 billion.6

Since both the Office of the Secretary and the Air Force had projected that

costs would exceed the limitation, we recommended in August 20007

 that

the Secretary of Defense reconcile the number of F-22s needed with the

amount of the congressional cost limitation on F-22 production. DOD

officials agreed but said they would make the judgements as part of the

next Quadrennial Defense Review. We also made a recommendation

regarding the regularity and scope of reporting by the Air Force to the

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

the status of the cost reduction plans. While the status of cost reduction

plans was a topic in the last Air Force briefing to the Under Secretary,

information reported was less comprehensive—and thus less useful—than

we had recommended.

In 1997, the Air Force and contractors reported that the F-22 production

cost could grow substantially and that the contractors should develop cost

reductions to offset that cost growth. The Office of the Under Secretary of

Defense for Acquisition, Technology and Logistics agreed. Since then, the

contractors and the Air Force have been developing and implementing

plans to reduce costs by enhancing production technology, improving

manufacturing techniques, and improving acquisition practices.

Cost reduction plans are categorized as “challenge,” not yet implemented

or implemented. This categorization defines the relative progression of

these plans toward potentially achieving future cost reductions. Challenge

plans are those that are not yet well defined and are not yet close to

achieving future cost reductions. Because these challenge plans are not

yet well defined, neither Air Force nor Office of the Secretary cost

estimators assumed any cost reductions from the challenge plans when

 5

 Air Force cost estimators projected the costs for 331 aircraft at $38.5 billion. To arrive at

the cost for 333 aircraft that are planned, $1.1 billion must be added for 2 aircraft approved

for fiscal year 1999, making the projected cost $39.6 billion for 333 aircraft.

6

 Briefing documents indicate that Office of the Secretary estimators projected the costs for

331 aircraft at $45.5 billion. To arrive at the projected cost for 333 aircraft that are planned,

$1.1 billion must be added for 2 aircraft approved for fiscal year 1999, making the projected

cost $46.6 billion for 333 aircraft.

7 GAO/NSIAD-00-178.

Background
Page 3 GAO-01-636T F-22 Aircraft

formulating their estimates. Not yet implemented plans are those that are

better defined and are believed to be sound and possible. However,

actions necessary to make them a reality have not been taken.

Implemented plans are those closest to achieving cost reductions. The Air

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

implemented include whether

• 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 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, or

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

The current F-22 production cost limitation that stands at $37.6 billion has

been adjusted to reflect planned acquisition of 333 production aircraft,

6 fewer than included in the cost limitation in effect in 1999. This change

reflects congressional action on the fiscal year 2000 Air Force budget, in

which the Congress approved funding for 6 aircraft using appropriations

for Research, Development, Test and Evaluation. Accordingly, the

6 aircraft and most costs were eliminated from the production cost

limitation and added to the development cost limitation.

The F-22 contractors’ estimated amount of cost reduction plans added up

to $26.5 billion in January 2001. The total consists of

• About $4.2 billion (16 percent) labeled as a challenge amount;

• About $8.5 billion (32 percent) in cost reductions not yet implemented;

and

• About $13.7 billion (52 percent) in cost reductions that have been

implemented.

In January 1997, the Air Force and contractors had estimated cost

reduction plans totaling $13.1 billion dollars. Thus, the value of these plans

has doubled in a four-year period. Ultimately, if the savings from the cost

reduction plans are to be achieved, production contract prices and Air

Force expenditures must be lower than would have been the case if the

plans had not been implemented. The Air Force and contractors have

entered into an understanding that relates the probable total affordability

Potential Cost

Reductions Identified

by Contractors Have

Increased
Page 4 GAO-01-636T F-22 Aircraft

of F-22 production to target contract prices for low-rate initial production.

Until contracts are negotiated, cost estimates will continue to reflect

judgements of estimators about the potential impact of cost reduction

plans when implemented.

Because F-22 production is in its early stages, most of the cost reductions

associated with the cost reduction plans have not yet been achieved. One

analysis of some cost reduction plans categorized as implemented

indicates that lower costs can be achieved. The Air Force in mid-2000

asked Defense Contract Audit Agency (DCAA)8

 to conduct a limited,

independent review of some of the plans. DCAA examined eleven cost

reduction plans amounting to $425 million of the total $26.5 billion in

estimated cost reductions. DCAA did not take exception to the potential

cost reductions for 8 of the 11 plans reviewed; found potential cost

reductions on two others to be based on judgement, not discrete,

measurable events; and found documentation on one to be lacking.

As we reported to you in August 2000, both the Air Force and Office of the

Secretary cost estimators projected in late 1999 that production costs for

339 aircraft would exceed the congressional cost limitation of $39.8 billion

in effect at that time. The Air Force cost estimators projected production

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

$48.6 billion for the 339 production aircraft. Even though the cost

estimates exceeded the $39.8 billion cost limitation in effect at that time,

the Secretary of the Air Force maintained that the actual cost would not

exceed the limitation, and established the Air Force’s position on F-22

production cost at the $39.8 billion limitation amount.

In estimates made in December 2000 to support the fiscal year 2002 budget

request, both Air Force and Office of the Secretary cost estimators

continue to project that F-22 production costs will exceed the

congressional cost limitation. The Air Force cost estimators projected in

late 2000 that production costs were likely to exceed the $37.6 billion

congressional cost limitation by $2 billion. The cost estimate produced by

the Office of the Secretary indicates that costs will likely exceed the

congressional cost limitation by $9 billion. Air Force officials advised us

that their cost estimates consider the same cost reduction plans as those

by the Office of the Secretary, but that differing judgements regarding the

 8

 DCAA is responsible for contract audits at DOD.

Latest F-22

Production Cost

Estimates Exceed

Cost Limitation by

Greater Margin
Page 5 GAO-01-636T F-22 Aircraft

viability of the plans and potential amounts of cost reductions are applied.

The Office of the Secretary excluded some cost reduction plans because of

the limited viability and estimated lower savings from some cost reduction

plans. The following table compares the two cost estimates.

Table 1: Comparison of Production Cost Estimates by the Air Force and the Office

of the Secretary and the Impact of Cost Reduction Plans on These Estimates

Then year dollars in billions

Estimate Air Force

Office of the

Secretary

Production cost estimate including implemented

cost reduction plans

$47.2 $51.9

Impact of not yet implemented cost reduction

plans

($7.6) ($5.3)

Total production cost estimate $39.6 $46.6

Source: GAO analysis of Air Force and Office of the Secretary data.

If the Office of the Secretary’s higher estimate is correct and additional

cost reduction plans are not developed and implemented, we project that

the Air Force would have to buy about 85 fewer F-22s (or about

25 percent) than the 333 aircraft now planned to stay within the cost

limitation. In our August 2000 report, we made a similar projection.

We recommended in our August 2000 report that the Secretary of Defense

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

limitation and report to the Congress on the implications of procuring

fewer F-22s because of potentially higher costs. DOD partially agreed,

stating that the affordability of the F-22 will be evaluated during an

upcoming Quadrennial Defense Review. More recently, DOD indicated

that a review of DOD programs, directed by the President, must be

completed before it can comment further on this recommendation.

Our August report also contained a recommendation that the Air Force

report to the Under Secretary of Defense on the status of the cost

reduction plans each quarter and that quarterly reports include, as a

minimum, summary information such as the total number of cost

reduction plans identified, the number implemented, the total estimated

cost reductions, cost reductions realized to date, and additions and

deletions from the plans included in the prior report. However, in the Air

Force’s March 2001 quarterly review to the Under Secretary, the

information reported included only summary information on the total

estimated cost reductions.

Actions to Implement

Prior GAO

Recommendations
Page 6 GAO-01-636T F-22 Aircraft

DOD, in commenting on our report being released today, indicated the

information reported in the last quarterly review (June 2001) contained

more detailed information. We have examined the June 2001 quarterly

review and agree it contains more information on cost reduction plans

than previous quarterly reviews in terms of total estimated cost

reductions. However, the information reported is still not consistent with

what we recommended be reported in August 2000. Specifically,

information was not reported as we recommended regarding the total

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

cost reductions realized to date, and any additions or deletions from the

plans included in the prior report.

Mr. Chairman, that concludes my statement. I will be happy to respond to

any questions you or other Members of the Subcommittee may have.

Contacts and Acknowledgments

For future questions regarding this testimony, please contact Allen Li,

(202) 512-4841, or Robert Murphy, (937) 258-7904. Individuals making key

contributions to this testimony include Edward Browning, Arthur Cobb,

Marvin Bonner, C. Todd Brannon, Michael J. Hazard, Don Springman and

John Van Schaik.
Page 7 GAO-01-636T F-22 Aircraft

Tactical Aircraft: Continuing Difficulty Keeping F-22 Production Costs

Within the Congressional Limitation (GAO-01-782, July 16, 2001).

Tactical Aircraft: F-22 Development and Testing Delays Indicate Need

for Limit on Low-Rate Production (GAO-01-310, Mar. 15, 2001).

Supporting Congressional Oversight: Framework for Considering

Budgetary Implications of Selected GAO Work (GAO-01-447, Mar. 9, 2001).

Defense Acquisitions: Recent F-22 Production Cost Estimates Exceeded

Congressional Limitation (GAO/NSIAD-00-178, Aug.15, 2000).

Defense Acquisitions: Use of Cost Reduction Plans in Estimating F-22

Total Production Costs (GAO/T-NSIAD-00-200, June 15, 2000).

Budget Issues: Budgetary Implications of Selected GAO Work for Fiscal

Year 2001 (GAO/OCG-00-8, Mar. 31, 2000).

F-22 Aircraft: Development Cost Goal Achievable If Major Problems Are

Avoided (GAO/NSIAD-00-68, Mar. 14, 2000).

Defense Acquisitions: Progress in Meeting F-22 Cost and Schedule Goals

(GAO/T-NSIAD-00-58, Dec. 7, 1999).

Fiscal Year 2000 Budget: DOD’s Procurement and RDT&E Programs

(GAO/NSIAD-99-233R, Sept. 23, 1999).

Budget Issues: Budgetary Implications of Selected GAO Work for Fiscal

Year 2000 (GAO/OCG-99-26, Apr. 16, 1999).

Defense Acquisitions: Progress of the F-22 and F/A-18E/F Engineering

and Manufacturing Development Programs (GAO/T-NSIAD-99-113,

Mar. 17, 1999).

F-22 Aircraft: Issues in Achieving Engineering and Manufacturing

Development Goals (GAO/NSIAD-99-55, Mar. 15, 1999).

F-22 Aircraft: Progress of the Engineering and Manufacturing

Development Program (GAO/T-NSIAD-98-137, Mar. 25, 1998).

F-22 Aircraft: Progress in Achieving Engineering and Manufacturing

Development Goals (GAO/NSIAD-98-67, Mar. 10, 1998).

Related GAO Products
Page 8 GAO-01-636T F-22 Aircraft

Tactical Aircraft: Restructuring of the Air Force F-22 Fighter Program

(GAO/NSIAD-97-156, June 4, 1997).

Defense Aircraft Investments: Major Program Commitments Based on

Optimistic Budget Projections (GAO/T-NSIAD-97-103, Mar. 5, 1997).

F-22 Restructuring (GAO/NSIAD-97-100R, Feb. 28, 1997).

Tactical Aircraft: Concurrency in Development and Production of F-22

Aircraft Should Be Reduced (GAO/NSIAD-95-59, Apr. 19, 1995).

Tactical Aircraft: F-15 Replacement Issues (GAO/T-NSIAD-94-176,

May 5, 1994).

Tactical Aircraft: F-15 Replacement Is Premature as Currently Planned

(GAO/NSIAD-94-118, Mar. 25, 1994).

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