United States General Accounting Office

GAO Report to the Honorable

Tom Harkin, U.S. Senate

November 1998 ARMY MEDIUM

TRUCKS

Acquisition Plans Need

Safeguards

GAO/NSIAD-99-28

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-277969 

November 19, 1998

The Honorable Tom Harkin

United States Senate

Dear Senator Harkin:

As you requested, we reviewed the Army’s Family of Medium Tactical Vehicles (FMTV) program.

This is the first of two reports to respond to your request, and it addresses the program’s future

acquisition plans. It includes recommendations to the Secretary of Defense intended to improve

program management in the follow-on production contract and to require the Army to

reevaluate its plan for developing a second source to produce FMTV trucks. The second report

will address the contractor’s delay in delivering acceptable trucks, the Army’s decision to

restructure the current production contract, and the Army’s handling of the trucks’ corrosion

problem.

We plan no further distribution of this report until 30 days from its issue date unless you

publicly announce its contents earlier. At that time, we will send copies of this report to the

Chairmen and Ranking Minority Members of the Senate Committees on Governmental Affairs,

Armed Services, and Appropriations and of the House Committees on Government Reform and

Oversight, National Security, and Appropriations; the Secretaries of Defense and the Army; and

the Director of the Office of Management and Budget. We will also make copies available to

others on request.

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

report. Major contributors to this report are listed in appendix II.

Sincerely yours,

Louis J. Rodrigues

Director, Defense Acquisitions Issues
Executive Summary

Purpose The Army is modernizing its fleet of medium tactical vehicles through the

Family of Medium Tactical Vehicles (FMTV) program, which is one of the

Army’s largest acquisition programs at a projected cost of $15.7 billion.

From fiscal year 1991 through fiscal year 2022—a 32-year period—the

Army plans to purchase 85,488 FMTV trucks to replace its aging fleet of

medium trucks. The FMTV trucks are a family of 2.5- and 5-ton trucks based

on a common truck cab and chassis.

In response to a request from Senator Tom Harkin, GAO evaluated the

Army’s future acquisition plans for the FMTV program.

Background The program is nearing the end of its first production contract. The

contract was awarded on October 11, 1991, to Stewart & Stevenson

Services, Inc., Houston, Texas. It was a $1.2-billion, 5-year fixed-price

contract to produce the first 10,843 FMTV trucks. Because of funding

problems, the fifth year of the contract was extended over 3 years. The

Army expects the contractor to complete production under the contract in

December 1998.

The Army plans to continue FMTV production with the current contractor.

On October 14, 1998, it awarded Stewart & Stevenson a follow-on

production contract—a $1.4-billion, 4-year contract for 6,430 trucks and

trailers with an option year for an additional 2,920 trucks and trailers. It

plans to award the contractor a second follow-on contract for $100 million

for an additional 276 trucks. Both contracts will be for new FMTV truck

models. While the current contractor is producing under the follow-on

contracts, the Army plans to develop a second source to produce FMTV

trucks.

Results in Brief The Army’s plan for implementing its follow-on production contracts

needs to ensure that the government receives trucks that meet FMTV

program quality standards. The current contract allowed the contractor to

produce trucks during testing even though the trucks were unable to pass

testing and demonstrate that they met FMTV performance and reliability,

availability, and maintainability requirements. These trucks required

modifications to achieve satisfactory performance that caused program

delays. In addition, the Army relaxed its final acceptance inspection

method from a 100-percent inspection to a sampling inspection method

without validating that the contractor’s production processes were

effective in ensuring that the trucks met quality standards. Recent

Page 2 GAO/NSIAD-99-28 Army Medium Tracks
Executive Summary

government inspection data and quality deficiency reports on trucks in the

field show that the contractor is not consistently producing trucks within

the quality standards set for FMTV trucks. However, because of incomplete

data, the Army does not know overall whether FMTV trucks are performing

adequately in the field. Under the follow-on contracts, full-rate production

of new model trucks will be allowed to start before the trucks pass testing.

Also, the Army plans to continue to accept the new models under its

sampling inspection method. This approach, which was followed under

the current contract, caused program delays and uncertainty about the

quality of the fielded trucks. The Army has not instituted safeguards to

ensure that the follow-on contracts do not result in problems similar to

those experienced under the current contract.

The Army plans to compete future procurement of the FMTV trucks with

the expectation that program costs can be reduced. Therefore, it has

decided to develop a second source to produce FMTV trucks. The current

contractor and second source will share the annual production. The Army

has not performed an analysis to determine the costs and benefits of this

plan or compared it to other alternatives, including (1) dividing the

program into 5-year production increments and competing each increment

among all qualified contractors, (2) delaying the development of the

second source until funds are available to support both the current

contractor and the second source without a fielding break, or

(3) continuing with the current contractor for the rest of the program.

GAO’s preliminary analysis of the production quantities that the two

contractors could expect to share from the competition indicates that the

Army’s plan may not result in program cost savings.

Principal Findings

FMTV Program Needs

Safeguards to Preclude

Past Problems

Under the current contract, the contractor experienced problems that

adversely impacted the FMTV program. It took longer than expected to

produce FMTV trucks that could pass testing and demonstrate that they met

FMTV technical and operational requirements. While this situation

persisted, the contract allowed the contractor to continue producing

trucks even though the trucks did not meet requirements. The contractor

had to perform varying levels of work to make these trucks conform to the

specifications of those that had passed testing. This additional work

delayed the production of new trucks. During the 9 months it took to make

Page 3 GAO/NSIAD-99-28 Army Medium Tracks
Executive Summary

the changes, the contractor had to stop new truck production for 5 months

and was able to produce only 175 new trucks in the remaining 4 months.

The contract required the contractor to pay for the changes needed to

make the trucks meet FMTV requirements.

Overall, the contractor has been unable to consistently produce trucks

that met FMTV program quality standards necessary to pass the

government’s final acceptance inspection. Nevertheless, the Army relaxed

its final acceptance inspection method from 100-percent inspections to a

sample inspection method without validating that the contractor’s

production processes were under statistical process control—a method of

determining whether a contractor is consistently producing a product

within the required quality standards. Under the 100-percent inspection

method, one defect caused the lot to be rejected and reinspected until no

defects were found. Under sampling inspections, one major defect or 15

minor defects causes the lot to be rejected, and the lot is usually inspected

only two times, after which the Army accepts the lot if the contractor

provides documentation to show that it has inspected the lot and

corrected all defects. Recent government inspection data indicates that the

contractor’s processes are not consistently producing trucks within the

quality standards set for FMTV trucks. For example, between July 1, 1997,

and June 30, 1998, about 78 percent of the truck lots presented to the

government for final acceptance inspection were rejected on first

inspection.

The Army does not have complete data to show whether the FMTV trucks

are performing adequately in the field. Army officials report that the trucks

are doing well in the field but other data shows that major problems exist.

FMTV trucks have been fielded with major deficiencies such as major fluid

leaks, reversed winch controls, inoperable starters, and windows that

shatter when doors are closed. Lacking more complete data, GAO could not

determine the magnitude of the problem.

Under the follow-on contracts, the contractor will be producing new

model trucks called A1 models. These new trucks will have to pass a new

production qualification test to demonstrate that they meet FMTV

performance and reliability, availability, and maintainability requirements.

According to Army officials, the follow-on contracts will allow full

production to start before the new model trucks pass testing. The Army

also plans to continue to accept the new models under its relaxed final

acceptance inspection methods. This approach is the same as the one

followed during the current production contract, which caused program

Page 4 GAO/NSIAD-99-28 Army Medium Tracks
Executive Summary

delays and uncertainty over the quality of the fielded trucks. The Army has

an opportunity to mitigate program difficulties by instituting safeguards to

ensure that the new model trucks pass testing before production begins

and that the contractor consistently produces trucks of a high enough

quality to meet FMTV technical and operational requirements.

Army Has Not Determined

Whether Its Second-Source

Plan Will Reduce Program

Costs

The Army plans to compete future procurement of the FMTV trucks with

the expectation that program costs can be reduced. Therefore, it has

decided to develop a second source that will compete with the current

contractor for a share of future FMTV production quantities.

The Army’s plan will initially increase program costs and cause a fielding

break. It will increase costs because the Army will have to pay the

competing contractors’ costs of developing their versions of FMTV trucks

and competing them. Additionally, the Army will have to pay the

second-source contractor’s costs for developing its production line and

bringing it into full production. The Army also has reduced the number of

trucks the current contractor will produce during the first 7 months of the

follow-on contract. This will allow the Army to use some of its fiscal

year 1999 funds to start its second-source development effort. This will

increase the unit cost of the trucks and will cause at least a 3-month

fielding break.

The Army does not know whether its plan will reduce costs. It did not

perform an analysis to determine whether the added costs, including a

fielding break, would be offset by cost savings. Also, it did not compare

the costs and benefits of its plan with those of other program alternatives,

including (1) dividing the program into 5-year production increments and

competing each increment among all qualified contractors, (2) delaying

the development of the second source until funds are available to support

both the current contractor and the second source without a fielding

break, or (3) continuing with the current contractor for the rest of the

program.

GAO performed a preliminary analysis of the production quantities that the

contractors could expect to share from a second-source competition. This

analysis indicates that the current contractor will not be able to reduce its

costs even if it wins the larger share of the production quantities. Also, it

will be difficult for the current contractor to reduce its price to the Army

because its FMTV production plant is dedicated solely to FMTV production

Page 5 GAO/NSIAD-99-28 Army Medium Tracks
Executive Summary

and can support a monthly production level far above the largest

production quantities expected under the second-source competition.

GAO was unable to estimate the effect the production split would have on

the prices the second-source contractor would give the Army. There are

several possible scenarios. For example, if the second-source contractor is

a truck producer and if it could add FMTV production to a plant that already

produces other trucks, it could share the plant’s fixed costs with other

contracts. This would tend to reduce the fixed costs attributed to the FMTV

contracts and lower the contractor’s FMTV truck price.

Recommendations To improve management of the FMTV program under the current and

follow-on contracts, GAO recommends that the Secretary of Defense direct

the Secretary of the Army to fund a data collection effort to determine

whether fielded FMTV trucks are performing satisfactorily and to direct

government inspectors at the FMTV truck plant to return to 100-percent

final acceptance inspection of FMTV trucks until the contractor

demonstrates that its production processes are under statistical process

control.

To provide a safeguard that could prevent the follow-on contracts from

experiencing the same problems that occurred under the current contract,

GAO recommends that the Secretary of Defense direct the Secretary of the

Army to include a clause in the follow-on production contracts that would

delay the start of production until the new FMTV model trucks demonstrate

that they meet FMTV performance and reliability, availability, and

maintainability requirements.

To ensure that the Army considers all its options before it starts to develop

a second source for the FMTV program, GAO recommends that the Secretary

of Defense direct the Secretary of the Army to delay the Army’s plans for

developing a second source to produce FMTV trucks until the Army

completes an analysis that compares the costs and benefits of its plan with

those of other alternatives and to pursue the alternative that is most

beneficial to the government.

Agency Comments

and GAO’s Evaluation

In commenting on a draft of this report, the Department of Defense said it

partially concurred with GAO’s recommendations. It stated that the Army is

currently using, to the maximum extent possible, data from existing

databases such as the Operating and Support Management Information

Page 6 GAO/NSIAD-99-28 Army Medium Tracks
Executive Summary

System and the FMTV weekly fielding site reports and is considering sample

data collection as a fleet management tool if it is determined to be

cost-effective. Regarding the final acceptance inspection, the Department

said that correcting quality problems along the production line is more

cost-effective than rejecting lots after they have been presented for

acceptance. According to the Department, the current sampling program is

catching discrepancies, demonstrating that sampling is working and

therefore 100-percent inspection is not warranted. Also, according to the

Department, the Army (1) will not authorize production on the follow-on

contracts until it is satisfied that the vehicles will successfully pass

production qualification testing and (2) believes it has proper safeguards

in place to preclude the problems experienced under the current contract.

Finally, it said that the Army is conducting an FMTV second-source

contractor cost and benefit analysis as directed by the Congress.

The FMTV weekly fielding site reports would not be useful in determining

whether the fielded FMTV trucks are performing satisfactorily because the

site receiving inspections on which these reports are based are performed

before the trucks are issued to the units; that is, before they perform in the

field. Also, as GAO reported, the Operating and Support Management

Information System has not included data on FMTV trucks. While an Army

official responsible for the information system said that some FMTV truck

data will be included in the System when it is updated this year, he did not

expect the data to be extensive.

GAO agrees that building quality into the production process is more

effective than inspecting it in at the end of production. However, as GAO’s

report points out, the sampling program is identifying significant numbers

of discrepancies at the end of the production process. This indicates that

the contractor’s processes are not building quality into the product.

Sampling cannot be relied on until it has been established that the

production processes are under statistical process control. GAO continues

to believe that the production processes need to be brought under this

control to ensure consistently high-quality output before reducing the

100-percent inspection prescribed by the project office.

In its comments, the Department said it has the proper safeguards to

preclude the problems experienced in the current contract but did not

indicate what specific factors it will consider in its decision to authorize

full-rate production. The Army awarded the first follow-on contract on

October 14, 1998. While GAO has not had an opportunity to review the

contract, according to Army officials, the follow-on production contracts

Page 7 GAO/NSIAD-99-28 Army Medium Tracks
Executive Summary

will allow the start of full production before the new model trucks pass

testing. GAO believes that the Army’s interests would be better protected if

the production contract contained a specific requirement that full-rate

production under the follow-on contracts would not start until the FMTV

trucks pass production qualification testing under the testing contract.

The Army’s plan to conduct an FMTV cost and benefit analysis is a step in

the right direction; however, the Army’s analysis will compare the costs

and benefits of only two acquisition approaches—the current FMTV

second-source plan and continuing with the current contractor for the

remainder of the program. Since other alternative acquisition approaches

for the program exist, GAO believes that, as a minimum, the Army should

explore the other alternatives. The Army should select the acquisition

alternative that is the most cost beneficial to the government to continue

the FMTV program.

The Department of Defense’s comments are addressed in the body of the

report where appropriate and are reprinted in their entirety in appendix I.

Page 8 GAO/NSIAD-99-28 Army Medium Tracks
Page 9 GAO/NSIAD-99-28 Army Medium Tracks
Contents

Executive Summary 2

Chapter 1 

Introduction

12

FMTV Program 12

Future Acquisition Plans 12

Objectives, Scope, and Methodology 14

Chapter 2 

FMTV Program Needs

Safeguards to

Preclude Past

Problems

16

Contract Allowed Production to Continue After the Trucks Failed

Testing

16

Army Relaxed Inspections Despite Poor Acceptance Rates 19

Army Does Not Know the Overall Quality of Fielded FMTV

Trucks

21

Plans for Follow-on Production Would Continue Past Policies 23

Conclusions 24

Recommendations 25

Agency Comments and Our Evaluation 25

Chapter 3 

Army Has Not

Determined Whether

Its Second-Source

Plan Will Reduce

Program Costs

27

Army’s Plans Call for Developing a Second Source for FMTV

Trucks

27

Army’s Plans Will Initially Increase Program Costs and Cause a

Fielding Break

27

It Is Unclear Whether the Army’s Plan Will Reduce Costs 28

Conclusions 31

Recommendation 31

Agency Comments and Our Evaluation 31

Appendixes Appendix I: Comments From the Department of Defense 34

Appendix II: Major Contributors to This Report 37

Table Table 3.1: Projected FMTV Production by Two Contractors in

Years of Competition

30

Figure Figure 2.1: Defects Found During the First Acceptance Inspection

of FMTV Truck Lots Accepted in April and May 1998

21

Abbreviations

FMTV Family of Medium Tactical Vehicles

Page 10 GAO/NSIAD-99-28 Army Medium Tracks
Page 11 GAO/NSIAD-99-28 Army Medium Tracks
Chapter 1 

Introduction

The Army is procuring medium tactical trucks—the 2.5- and 5-ton payload

classes—to replace most of its current fleet. The truck replacement effort

is known as the Family of Medium Tactical Vehicles (FMTV) program. The

program is currently nearing the end of its first full-production contract.

The Army plans to continue production with the same contractor for new

model FMTV trucks. In addition, the Army plans to develop a second source

to produce FMTV trucks. After the second source is selected, the current

contractor and the second source will share annual production.

FMTV Program The FMTV program is one of the Army’s largest acquisition programs at a

projected cost of $15.7 billion. From fiscal year 1991 through fiscal

year 2022—a 32-year period—the Army plans to purchase 85,488 FMTV

trucks to replace its aging medium truck fleet. The program consists of a

family of 2.5- and 5-ton trucks based on a common truck cab and chassis.

The 2.5-ton trucks, called light medium tactical vehicles, consist of cargo

and van variants and a 2.5-ton trailer. The 5-ton trucks, called medium

tactical vehicles, consist of seven variants—cargo, long wheel base cargo,

dump, fuel tanker, tractor, van, and wrecker—and a 5-ton trailer.

The program is nearing the end of its first production contract. The

contract was awarded on October 11, 1991, to Stewart & Stevenson

Services, Inc., Houston, Texas. It was a $1.2-billion, 5-year, fixed-price

production contract for the first 10,843 FMTV trucks. It did not include the

production of the 5-ton fuel tanker and van variants or the cargo trailers.

These vehicles will be included in later production contracts. Because of

funding problems, the fifth year of the contract was extended over 3 years.

The Army expects the contractor to complete production under this first

contract in December 1998.

Future Acquisition

Plans

The Army plans to continue FMTV production with the current contractor.

The new contracts will comprise new models, called A1 models, of the

FMTV truck variants produced under the original production contract and

FMTV trailers. The contract award, however, was delayed until the Army

resolved a major problem discovered on fielded FMTV trucks. Under certain

operating conditions, the FMTV trucks’ transmission flywheel housing can

crack and, if undetected, can lead to a broken drive shaft. If the drive shaft

breaks while the truck is operating at highway speeds, it can cause an

accident. The Army decided not to award the follow-on production

contract until this drive train problem was corrected and the correction

was verified through testing. The Army successfully completed the testing

Page 12 GAO/NSIAD-99-28 Army Medium Tracks
Chapter 1 

Introduction

of proposed correction to the drive train problem and the Secretary of

Defense approved the award of the follow-on production contract in early

October 1998.

According to a project official, in order to maintain the planned

production schedule while the drive train correction was being tested, the

Army initially decided to separate the follow-on contract into two

contracts—one that would be awarded immediately to produce new

models of FMTV trucks and trailers to support a new production

qualification test, and one that would be awarded after the drive train

correction was verified for full-rate production of the trucks and trailers. A

separate testing contract would allow the contractor to start preliminary

work on the new design of the new models without actually starting

production until after the drive train problem was corrected. Accordingly

on June 2, 1998, the Army awarded Stewart & Stevenson a $9.2-million

contract for 15 FMTV trucks and 8 trailers to support the production

qualification test of the new truck models. After the drive train testing was

successfully completed, the Army, on October 14, 1998, awarded Stewart

& Stevenson a $1.4-billion, 4-year production contract for 6,430 trucks and

trailers, with an option year for an additional 2,920 trucks and trailers.

The 5-ton fuel tanker and van were not included in the follow-on contract.

These variants were not produced under the original production contract

and the Army planned to include them in the follow-on contract. A project

official said that they were not included in the follow-on contract because

they were not as ready for production as originally thought. In

November 1998, the Army plans to award the Stewart & Stevenson a

second FMTV production contract for these FMTV variants. This contract

would be for enhancements to the designs of the 2 trucks, testing of the

trucks, and production of 276 FMTV trucks—138 5-ton fuel tankers and 138

5-ton vans—at an estimated cost of $100 million.

While the current contractor is producing under the follow-on contracts,

the Army plans to develop a second source to produce FMTV trucks.

Starting in fiscal year 2003, the Army plans to split FMTV truck production

between the current contractor and a second source by competing

production in 5-year increments. The winning contractor for each

increment would receive a larger share of production under that

increment. The Army plans to award the final 5-year production contract

to one contractor in a winner-take-all competition in fiscal year 2018.

Page 13 GAO/NSIAD-99-28 Army Medium Tracks
Chapter 1 

Introduction

Objectives, Scope,

and Methodology

Senator Harkin requested that we evaluate the Army’s future acquisition

plans for the FMTV program.

To evaluate the Army’s future FMTV acquisition plans, we interviewed

Defense, Army, and contractor officials and reviewed the November 25,

1997, FMTV update to the FMTV acquisition strategy and plan, which

provided a general description of the Army’s future FMTV plans. However,

we had to rely mainly on oral testimony for this evaluation because the

Army’s detailed plans were evolving at the time of our review and were

therefore unavailable in written form. For example, at the start of our

review, the Army planned to award one follow-on production contract to

the current contractor; now the Army plans to award three follow-on

contracts to the current contractor. Because the follow-on production

contracts were being negotiated at the time of our review, we were unable

to obtain copies of the contracts. Also, the Army had not finalized its

detailed second-source plan; therefore, no written detailed second-source

plans were available for our review. We interviewed the key project

officials involved in developing the Army’s follow-on contracts and

second-source plans. We evaluated planned production quantities

contained in the FMTV selected acquisition report, dated December 31,

1997, to determine whether it would be reasonable to expect benefits from

splitting these quantities between two contractors.

As part of our evaluation of future FMTV acquisition plans, we evaluated the

Army’s efforts under the current FMTV production contract. We interviewed

Defense, Army, and contractor officials and reviewed various program

documents, including the FMTV acquisition strategy and plan, the current

production contract, source selection evaluations, budget documents, and

selected acquisition reports. We determined whether the contractor was

consistently producing trucks within the quality standards set by the Army

for FMTV trucks by analyzing the first inspection acceptance rate of lots

accepted by the government between July 1, 1997, and June 30, 1998, and

charted the number and type of defects found in the first inspection of lots

accepted in 2 recent months. We did not include lots of five trucks or less

in this analysis.

We did not visit units that received FMTV trucks because the Defense Office

of Inspector General was planning to evaluate FMTV trucks in the field; the

Inspector General’s audit was started but has been suspended because of

higher priority congressional request work. To provide an indication of the

kinds of problems identified on fielded FMTV trucks, we reviewed selected

weekly reports of deficiencies detected during the FMTV trucks’ receiving

Page 14 GAO/NSIAD-99-28 Army Medium Tracks
Chapter 1 

Introduction

inspections at the fielding locations and a summary of quality deficiency

reports received by the FMTV project manager’s office as of December 11,

1997. When an FMTV truck is received in the field, it is inspected before it is

issued to the unit. The Army does not summarize the results of these

inspections. At the time of our visit, we selected and reviewed the most

recent receiving inspection reports. The reports covered 45 trucks

inspected at Fort Bragg, North Carolina, during 4 weeks in

July-August 1997. Because the reports did not differentiate between major

and minor deficiencies, a government plant representative office quality

specialist reviewed the reports and indicated which deficiencies were

major deficiencies. The results of our review cannot be projected to all

fielded FMTV trucks because we were unable to define the universe of

reports. The official who had the reports said that he did not have all of

them.

Once the trucks are issued to the units, individual soldiers are supposed to

complete a quality deficiency report whenever a problem is found in their

trucks. We reviewed a summary of 286 quality deficiency reports received

by the project office by December 11, 1997. However, a project official

said that he does not believe that all the deficiencies on the FMTV trucks are

being reported. Each report would have to be investigated to determine

whether similar deficiencies were being reported differently and the root

cause of each deficiency. Such a determination was beyond the scope of

our review.

Our work was conducted at Defense and Army headquarters, Washington,

D.C.; Defense Contract Management Command headquarters, Fort Belvoir,

Virginia; FMTV project office, U.S. Army Tank-Automotive and Armaments

Command, Warren, Michigan; Defense Contract Management Command,

Stewart & Stevenson office, Sealy, Texas; and Tactical Vehicle Systems,

Stewart & Stevenson Service, Inc., Sealy, Texas.

We conducted our review between July 1997 and August 1998 in

accordance with generally accepted government auditing standards.

Page 15 GAO/NSIAD-99-28 Army Medium Tracks
Chapter 2 

FMTV Program Needs Safeguards to

Preclude Past Problems

The current contract allowed the contractor to continue truck production

even though the trucks were unable to pass testing and demonstrate that

they met FMTV performance and reliability, availability, and maintainability

requirements. Also, the Army relaxed its final acceptance inspection

method from 100-percent inspections to a sampling inspection method

without validating that the contractor’s production processes were under

statistical process control—a method of determining whether a contractor

is consistently producing a product within the product’s quality standards.

Recent government inspection data indicates that the contractor is still not

consistently producing trucks within the quality standards set for FMTV

trucks.

The Army does not know whether fielded FMTV trucks are performing

adequately. It reports that FMTV trucks are doing well in the field but does

not have data to support this assessment. FMTV trucks with major

deficiencies have been received in the field, but data does not currently

exist to determine the range and magnitude of these deficiencies.

According to Army officials, the follow-on contract will allow production

to start before the new model trucks pass testing. Also, the Army plans to

continue to accept new models under the relaxed final acceptance

inspection method.

Contract Allowed

Production to

Continue After the

Trucks Failed Testing

The contractor took longer than expected to produce FMTV trucks that

could pass production qualification test and operational test and

demonstrate that they met FMTV performance and reliability, availability,

and maintainability requirements. While this situation persisted, the

contract allowed the contractor to continue producing trucks that did not

meet requirements. These trucks required modifications to achieve

satisfactory performance. The modification effort caused program delays

because new production had to be stopped while the modifications were

being made.

Trucks Took Longer Than

Expected to Pass Tests

The current contractor was not an experienced truck producer when the

Army awarded it the FMTV production contract. The Army selected Stewart

& Stevenson because the truck design it submitted was evaluated as the

best design and its proposed price was the lowest. However, Stewart &

Stevenson had not developed the FMTV truck design. It had subcontracted

with an Austrian truck manufacturer, Steyr-Daimler-Puch, AG., to design

and develop the FMTV prototypes based on a design of a truck Steyr had

Page 16 GAO/NSIAD-99-28 Army Medium Tracks
Chapter 2 

FMTV Program Needs Safeguards to

Preclude Past Problems

produced for the Austrian army. During the prototype demonstration

phase, Steyr also provided support that led to the selection of Stewart &

Stevenson. Stewart & Stevenson did not continue its relationship with

Steyr into the production phase of the FMTV program. It purchased a plant

from a manufacturer of oil-drilling equipment, configured the plant to

develop the FMTV production line, and established its Tactical Vehicle

Systems Division to produce the FMTV trucks.

The contractor experienced problems in developing its production line

and producing trucks that met FMTV technical and operational

requirements. The contract required the Army to conduct a production

qualification test and an initial operational test and evaluation to

determine whether the trucks met these requirements. The production

qualification test was designed to determine whether the FMTV truck

variants fulfilled the Army’s technical performance and reliability,

availability, and maintainability requirements and met contract

specifications. The initial operational test and evaluation was designed to

determine whether and to what degree the FMTV truck variants could

accomplish their missions when operated and maintained by soldiers in

the expected operational environment.

The Army began the production qualification test in June 1993 and

completed it in December 1994. The trucks failed the test because they

were unable to meet reliability and some performance requirements. The

Army identified over 90 problems that the contractor was required to

correct.

The Army began the operational test in October 1993 but suspended it in

December 1993 because the trucks were not able to meet their operational

reliability, availability, and maintainability requirements. The Army began

a series of limited user tests in June 1994. These were unscheduled tests

that used operational test personnel and were designed to help the

contractor identify potential solutions to the trucks’ continuing problems.

In August 1994, the Army started a second operational test with those FMTV

truck variants it thought had a chance of meeting operational

requirements. It continued the limited user tests with the other variants. In

September 1994, operational and limited user tests were suspended

because test personnel were deployed on a peacekeeping mission in Haiti.

According to Army test assessment officials, the trucks were not meeting

reliability requirements at the time the operational test was suspended.

Page 17 GAO/NSIAD-99-28 Army Medium Tracks
Chapter 2 

FMTV Program Needs Safeguards to

Preclude Past Problems

In February 1995, the Army started a second production qualification test

with improved and newly produced trucks that incorporated changes to

address problems identified during earlier testing. In April 1995, the Army

started a new operational test with new trucks that also incorporated the

changes. It completed both tests in June 1995. The trucks were assessed as

having met FMTV requirements in both tests.

Army Did Not Limit

Production Before Testing

Was Completed

The Army did not attempt to limit the number of trucks produced before

production qualification and operational testing was completed. We have

reported on the danger of entering production before adequate operational

testing has been completed many times in the past.1

 Beginning production

before adequate testing leads to program delays when the already

produced systems must be subsequently modified to make them usable.

This danger materialized during the current FMTV contract.

The Army could have limited its risk by keeping deliveries to the minimum

rate needed to complete testing and prove the production line. However,

the contract allowed truck deliveries of up to 150 a month until the trucks

passed testing. Later, the Army modified the contract to increase the

monthly delivery limit to 200 trucks. According to a project official, the

Army believed that increasing monthly delivery quantities would allow the

contractor to catch up on its scheduled deliveries.

Because the higher monthly delivery limit actually exceeded the

contractor’s production capability at that time, the contractor produced as

many trucks as it could. However, the trucks it produced still could not

meet FMTV technical and operational requirements. By the time the

production qualification and operational tests were successfully

completed in June 1995, the contractor had produced about 3,000 deficient

trucks. The contractor had to perform varying levels of work to make the

trucks conform to the specifications of those that had passed testing.

About 1,474 trucks had to be disassembled to their frames and

remanufactured. This additional work on the already produced trucks had

a negative effect on the production of new trucks during the 9 months it

took the contractor to make the changes to the 3,000 trucks. The

contractor had to stop new truck production for 5 months and was able to

produce only 175 new trucks in the remaining 4 months. The contract

required the contractor to pay for the changes needed to make the trucks

meet FMTV requirements.

1

Weapons Acquisition: Better Use of Limited DOD Acquisition Funding Would Reduce Costs

(GAO/NSIAD-97-23, Feb. 13, 1997) and Weapons Acquisition: Low-Rate Initial Production Used to Buy

Weapon Systems Prematurely (GAO/NSIAD-95-18, Nov. 21, 1994).

Page 18 GAO/NSIAD-99-28 Army Medium Tracks
Chapter 2 

FMTV Program Needs Safeguards to

Preclude Past Problems

Army Relaxed

Inspections Despite

Poor Acceptance

Rates

After the FMTV trucks passed the production qualification and operational

tests, the contractor was still unable to consistently produce trucks that

met FMTV program quality standards necessary to pass the government’s

final acceptance inspection. Despite this problem, the Army relaxed its

final acceptance inspection method from 100-percent inspections to a

sample inspection method and generally accepted the trucks after the

contractor made two attempts to remedy defects. The Army did this

without meeting the administrative precondition that the contractor

demonstrate that its production processes were in statistical process

control. The overall effect was to make it easier for FMTV trucks to pass

final acceptance inspection.

Initially, the government’s plant representative at the FMTV production

plant inspected each FMTV truck to determine whether it met the Army’s

quality standards. This 100-percent final acceptance inspection is standard

procedure when a contractor produces a new product. Each lot that the

contractor presented for final acceptance inspection usually consisted of

50 trucks. If one defect was found, the lot was not accepted, and the

trucks were returned to the contractor for inspection and correction of the

defects. The lot was reinspected until no defects were found by

government inspectors.

The plant representative office’s quality letter of instruction required the

100-percent final acceptance inspection to continue until the contractor

demonstrated that its production processes were under statistical process

control. Statistical process control is a standard commercial practice

established by monitoring the production processes to see if they

consistently result in output within the quality standards set for the overall

product. Once a process is producing consistently high-quality output, the

process is considered to be under statistical control.2

 Once all processes

are under statistical process control, the quality letter allows the

government to perform the final acceptance inspections on a sampling

basis.

On April 19, 1996, the project office instructed the plant representative

office to change its FMTV final acceptance inspection to a sampling method.

The FMTV quality assurance representative who issued this instruction said

that the change was made because the summary data provided by the

contractor at monthly management meetings was improving—the

2

Best Practices: Successful Application to Weapon Acquisitions Requires Changes in DOD’s

Environment (GAO/NSIAD-98-56, Feb. 24, 1998).

Page 19 GAO/NSIAD-99-28 Army Medium Tracks
Chapter 2 

FMTV Program Needs Safeguards to

Preclude Past Problems

contractor was finding more defects in its final inspection than the

government.

Under the new inspection method, a sample of 5 trucks from each lot of 50

trucks is inspected. If 1 major defect or 15 minor defects are found, the

entire lot is returned to the contractor, which is required to inspect the

entire lot and correct the defects. The lot is returned to the government,

which draws another five-truck sample. The second time, however, the

government inspects only for the defects found in the first sample. If the

government again finds 1 major defect or 15 minor defects, the lot is

rejected and returned to the contractor, which again inspects and corrects

the defects. The government generally does not make a third final

acceptance inspection. When the contractor provides documentation

showing that it has inspected the lot and corrected the defects, the

government accepts the lot. A Defense plant representative official said

that they have the option to inspect a lot more than two times but does so

only in exceptional circumstances, such as when a lot has had many major

defects.

We could find no evidence that the program office or the plant

representative office had shown that the contractor’s processes were

under statistical process control at the time of the final acceptance

inspection change. A government plant representative official said that the

contractor had a 1-percent acceptance rate—1 percent of the trucks

submitted to the government were acceptable—when the change was

made.

Recent government inspection data indicates that the contractor’s

production processes are still not under statistical process control and not

consistently producing trucks within the quality standards set for FMTV

trucks. Between July 1, 1997, and June 30, 1998, about 78 percent of the

truck lots presented to the government for final acceptance inspection

were rejected on the first inspection. As can be seen in figure 2.1, the

number of major and minor defects found during the first inspection can

vary greatly by lot, even in lots that were accepted in April and May 1998.

For example, the inspectors (1) found no major and 5 minor defects in lot

99, and the lot was accepted on the first inspection; (2) found no major

and 25 minor defects in lot 100, and the lot was rejected because the

inspectors found 15 or more minor defects; and (3) found 5 major and 15

minor defects in lot 101, and the lot was rejected for both the major and

minor defects.

Page 20 GAO/NSIAD-99-28 Army Medium Tracks
Chapter 2 

FMTV Program Needs Safeguards to

Preclude Past Problems

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

Pass fail line for minor defects Minor defects Major defects

78 87 88 89 90 91 92 93 94 95 78D 96 97 99 100 101 102

0

5

10

15

20

25

30

35

Lot number

Defects in sample

Army Does Not Know

the Overall Quality of

Fielded FMTV Trucks

The Army does not know whether fielded FMTV trucks are performing

adequately. Army officials report that the FMTV trucks are doing well in the

field, but the Army does not have adequate data to support this

assessment. FMTV trucks with major deficiencies have been received in the

field, but without more complete data, we cannot determine the

magnitude of the problem.

According to Army officials, FMTV trucks are doing well in the field. They

base this assessment on (1) individual soldiers’ statements that they are

Page 21 GAO/NSIAD-99-28 Army Medium Tracks
Chapter 2 

FMTV Program Needs Safeguards to

Preclude Past Problems

pleased with the trucks and (2) truck performance during comparison

tests. Neither of these is a good measure of the FMTV truck’s field

performance. Testimonial evidence from individual soldiers is not a

reliable way to determine how a new system is performing. The soldiers’

positive statements about the trucks could be explained by the fact that

the FMTV trucks have a modern design compared to the trucks they are

replacing. The comparison test is designed to check on whether the

production trucks still meet the FMTV reliability, availability, and

maintainability requirements. Periodically, the Army randomly selects two

trucks from the production line to run a 10,000-mile reliability, availability,

and maintainability test. The test is not designed to provide a measure of

field performance.

The Army could better support its claims if it collected data on fielded

truck performance using its sample data collection. Sample data collection

is a method of selectively sampling field units to collect field maintenance

and performance information on selected equipment. However, the Army

is not currently collecting this data on FMTV trucks because the project

office would have to fund the data collection effort. A project official said

that the funds for the FMTV program should not be diverted for data

collection because they are limited and are needed to produce additional

trucks.

The U.S. Army Cost and Economic Analysis Center is collecting data on

fielded FMTV truck maintenance through its Operating and Support

Management Information System. This system reports operating and

support costs, parts usage, and maintenance hours by system and is used

to project future operating and support costs for budgeting and other

planning purposes. However, the Center has not included FMTV trucks in its

database because the trucks were only fielded in 1996. A Center official

said that he expects to see some, but not much, data on FMTV trucks by the

end of September 1998, when the database is updated.

During our review, we found indications that the Army has received trucks

in the field with major deficiencies. When an FMTV truck is received in the

field, it is inspected before it is issued to the unit. The Army does not

summarize the results of these inspections. To determine whether the

receiving inspectors were finding problems that could have been found

during the final acceptance inspection, we reviewed the most recent

receiving inspection reports as of the date of our visit. The reports covered

45 trucks inspected at Fort Bragg, North Carolina, during 4 weeks in

July-August 1997. Because the reports did not differentiate between major

Page 22 GAO/NSIAD-99-28 Army Medium Tracks
Chapter 2 

FMTV Program Needs Safeguards to

Preclude Past Problems

and minor deficiencies, a government plant representative office quality

specialist reviewed the reports and indicated which deficiencies were

major deficiencies. The receiving inspectors found deficiencies on every

truck, although not every truck had a major deficiency. They found major

fluid leaks, missing parts, inoperative lights and gauges, and reversed

winch controls.

In addition, once the trucks are issued to the units, individual soldiers are

supposed to complete a quality deficiency report whenever a problem is

found in their truck. As of December 11, 1997, the project office had

received 286 quality deficiency reports. The Army had fielded about 4,500

FMTV trucks by that date. A project official said he does not believe that all

deficiencies have been reported. Some deficiencies were reported more

than once, and some of these were later found to be systemic deficiencies.

For example, a broken drive shaft was reported on only two trucks;

however, the Army has determined that all FMTV trucks have the potential

for developing this problem. Examples of the deficiencies reported include

starters failing, windows shattering when doors are closed, major fluid

leaks, brakes failing, cab lift mechanisms failing, and alternators

overheating.

The contractor warrants FMTV trucks to be free from defects in materials

and workmanship for 18 months or 12,000 miles, whichever occurs first,

from the date the government finally accepts the trucks. Under this

warranty, the contractor pays for the correction of all deficiencies

discovered during the receiving inspection except those that happen in

transit. It also pays for the correction of all deficiencies reported on

quality deficiency reports except those caused by misuse, inadequate

maintenance, or accident. The contractor’s liability under the warranty is

limited to $18 million

Plans for Follow-on

Production Would

Continue Past Policies

Under the follow-on contracts, the contractor will be producing new

model trucks called A1 models. The trucks will be considered new models

because they will have new engines that meet the current Environmental

Protection Agency standards, new data bus systems—the wiring and other

components through which data is transmitted—to enhance

maintainability, antilock braking systems to improve braking, and

galvanized steel cabs and other changes to improve corrosion protection.

These new trucks will have to pass a new production qualification test

consisting of a reliability, availability, and maintainability test of 

Page 23 GAO/NSIAD-99-28 Army Medium Tracks
Chapter 2 

FMTV Program Needs Safeguards to

Preclude Past Problems

20,000 miles per test truck and performance tests to demonstrate that the

new trucks meet FMTV technical requirements.

According to Army officials, the follow-on contracts will allow full-rate

production to start before the new model trucks pass the production

qualification tests. Also, the Army plans to continue the practice of

accepting the new models under its relaxed final acceptance inspection

methods.

Conclusions Because the FMTV program experienced significant problems under the

current production contract, the Army needs to implement safeguards to

ensure that the government receives trucks that meet FMTV program quality

standards under the follow-on production contracts. The current contract

allowed the contractor to continue producing trucks during testing even

though the trucks were unable to pass the tests and demonstrate that they

met FMTV performance and reliability, availability, and maintainability

requirements. These trucks required modifications to achieve satisfactory

performance, and the modification effort caused program delays. In

addition, the Army relaxed its final acceptance inspection methods from

100-percent inspections to a sampling inspection method without

validating the contractor’s production processes. Recent government

inspection data indicates that the contractor’s production processes are

still not consistently producing trucks within the quality standards set for

FMTV trucks.

The Army does not know whether fielded FMTV trucks have quality

problems. It reports that the trucks are doing well in the field, but it does

not collect data needed to support this assessment. There is evidence that

trucks with major deficiencies have been received in the field, but without

more complete data, we cannot determine the magnitude of the problem.

According to Army officials, the follow-on production contracts will allow

the start of full-rate production before the new model trucks pass testing.

The Army also plans to continue using the relaxed final acceptance

inspection procedures to accept the new model trucks. This approach is

the same as the one followed during the current production contract,

which resulted in program delays and uncertainty over the quality of the

fielded trucks. The Army has an opportunity to mitigate future program

difficulties by instituting safeguards to ensure that the new model trucks

pass testing before production and that the contractor consistently

Page 24 GAO/NSIAD-99-28 Army Medium Tracks
Chapter 2 

FMTV Program Needs Safeguards to

Preclude Past Problems

produces trucks that can meet FMTV technical and operational

requirements.

Recommendations To improve management of the FMTV program under the current and

follow-on contracts, we recommend that the Secretary of Defense direct

the Secretary of the Army to fund a data collection effort to determine

whether fielded FMTV trucks are performing satisfactorily and to direct

government inspectors at the FMTV truck plant to return to 100-percent

final acceptance inspection of FMTV trucks until the contractor

demonstrates its production processes are under statistical process

control.

To provide a safeguard on the follow-on contracts that could preclude the

type of problems that occurred under the current contract, we recommend

that the Secretary of Defense direct the Secretary of the Army to include a

clause in the follow-on production contracts that would delay the start of

production until the new FMTV model trucks demonstrate that they meet

FMTV performance and reliability, availability, and maintainability

requirements.

Agency Comments

and Our Evaluation

In commenting on a draft of this report, the Department of Defense said it

partially concurred with our recommendations. It stated that the Army is

currently using, to the maximum extent possible, data from existing

databases such as the Operating and Support Management Information

System and the FMTV weekly fielding site reports and is considering sample

data collection as a fleet management tool if it is determined to be

cost-effective. Regarding the final acceptance inspection, the Department

said that correcting quality problems along the production line is more

cost-effective than rejecting lots after they have been presented for

acceptance. According to the Department, the current sampling program is

catching discrepancies, demonstrating that sampling is working and

therefore 100-percent inspection is not warranted. The Department also

said that the Army will not authorize production on the follow-on

contracts until it is satisfied that the vehicles will successfully pass

production qualification testing. Additionally, the Department believes that

it has the proper safeguards in place to preclude the problems experienced

in the current contract and therefore does not believe that it is necessary

to include a specific requirement in the follow-on contracts to delay the

start of production until the trucks demonstrate they meet requirements.

Page 25 GAO/NSIAD-99-28 Army Medium Tracks
Chapter 2 

FMTV Program Needs Safeguards to

Preclude Past Problems

As we point out in this report, the FMTV weekly fielding site reports and

existing databases, such as the Operating and Support Management

Information System, at this time do not contain enough information for the

program office to determine whether the fielded trucks are performing

satisfactorily. The FMTV weekly fielding site reports would not be useful in

determining whether the fielded FMTV trucks are performing satisfactorily

because the site receiving inspections on which the reports are based are

performed before the trucks are issued to the units; that is, before they can

perform in the field. In this report, we used the data from the fielding site

reports to only obtain an indication of whether the trucks were being

received with major defects. Also, the Operating and Support Management

Information System does not include data on FMTV trucks. While an Army

official responsible for the information system said that some FMTV truck

data will be included in the database when it is updated this year, he did

not expect the FMTV data to be extensive. We therefore continue to believe

that the Army needs to conduct sample data collection on the fielded FMTV

trucks to make an adequate assessment of the trucks’ field performance.

We agree that building quality into the production process is more

effective than inspecting it in at the end of production. However, as we

stated in our report, the sampling program is identifying significant

numbers of discrepancies at the end of the process. This indicates that the

contractor’s production processes are not building quality into the

product. Sampling cannot be relied on until it has been established that the

production processes are under statistical process control. Therefore, we

believe that until production processes need to be brought under this

control to ensure consistently high-quality output, before reducing the

100-percent inspection prescribed by the project office.

In its comments, the Department said it has proper safeguards to preclude

the problems experienced in the current contract, but did not indicate

what specific factors it will consider in its decision to authorize full-rate

production. Under the follow-on contracts, the contractor will be

producing FMTV trucks that will be significantly different from the original

trucks. The Army awarded the first follow-on contract on October 14,

1998. We have not had an opportunity to review the contract. However, we

believe the Army’s interests would be better protected if the production

contract contained a specific requirement that full-rate production under

the follow-on contracts would not start until the FMTV trucks pass

production qualification testing under the testing contract.

Page 26 GAO/NSIAD-99-28 Army Medium Tracks
Chapter 3 

Army Has Not Determined Whether Its

Second-Source Plan Will Reduce Program

Costs

The Army plans to compete future procurement of the FMTV trucks with

the expectation that program costs can be reduced. Therefore, it has

decided to develop a second source for the FMTV trucks. However, it has

not performed an analysis to determine the costs and benefits of its plan

or compared its plan with other alternatives, including (1) dividing the

program into 5-year production increments and competing each increment

among all qualified contractors, (2) delaying the development of the

second source until funds are available to support both the current

contractor and the second source without a fielding break, or

(3) continuing with the current contractor for the remainder of the

program. Our preliminary analysis of the production quantities that the

contractors could expect to share from the competition indicates that the

Army’s plan will not result in program cost savings.

Army’s Plans Call for

Developing a Second

Source for FMTV

Trucks

The FMTV acquisition plans call for the Army to develop a second source

for the FMTV truck program. To develop the second source, the Army plans

to award production qualification contracts to at least two contractors in

fiscal year 1998. The contractors, using the existing FMTV performance

specifications and technical data package as a reference, will produce two

or three vehicles and compete them against each other. In fiscal year 2000,

the Army plans to award the winning contractor a 3-year production

contract for up to 800 trucks. Under this contract, the second-source

contractor will produce the same models and variants of the trucks that

the current contractor will be producing under the follow-on production

contract. Starting in fiscal year 2003, the Army plans to compete

subsequent FMTV production in 5-year increments. For each increment, the

current contractor and the second-source contractor will compete to

determine which contractor will receive the larger share of production.

The Army has not determined the actual production split for the

increments. It plans to award the final 5-year contract to one contractor.

Army’s Plans Will

Initially Increase

Program Costs and

Cause a Fielding

Break

Project officials said that developing a second source will initially result in

higher program costs. It will increase costs because the Army will have to

pay the costs incurred by the competing contractors to develop their

versions of FMTV trucks and compete them. Additionally, the Army will

have to pay the second-source contractor’s costs for developing its

production line and bringing it into full production. Project officials did

not provide an estimate of the cost to develop the FMTV second source.

Page 27 GAO/NSIAD-99-28 Army Medium Tracks
Chapter 3 

Army Has Not Determined Whether Its

Second-Source Plan Will Reduce Program

Costs

In its fiscal year 1999 budget request, the Army reduced the planned

quantities the current contractor was to produce during the first 7 months

of the follow-on contract from 422 trucks to 171 trucks—mainly 5-ton

trucks—and 8 trailers. The Army recognized the cost impact of the lower

quantities when it increased by 74 percent—from $142,774 to

$251,101—the estimated average cost of a 5-ton truck. Although the fiscal

year 1999 budget request reflected a reduced buy of 5-ton vehicles,

procurement costs for these vehicles increased by $17.2 million.

Additionally, the change in procurement quantities allowed the Army to

reallocate part of its total fiscal year 1999 program procurement request to

begin the second-source effort. This is another cost associated with

developing the second source.

In addition, the low production quantities during the first 7 months of the

follow-on contract will cause production and fielding breaks. Project

officials said that the FMTV second-source plan precluded fielding breaks,

as the current contractor would continue to produce trucks while the

second source is being developed. However, the Army is planning a

3-month production break between the end of the current contract in

December 1998 and the start of production under the follow-on contract in

April 1999. A project official said that a 3-month production break will

cause a 3-month fielding break. The production break will be caused by

the low number of trucks the Army funded for the first 7 months of the

follow-on production contract. Subsequent to the fiscal year 1999 budget

request, the Army decided to split the follow-on contract into separate

testing and production contracts. This split will further reduce the

production quantities for the first 7 months of the follow-on contract to

156 trucks.

It Is Unclear Whether

the Army’s Plan Will

Reduce Costs

The Army did not compare the cost and benefits of its plan with those of

other program alternatives, including (1) dividing the program into 5-year

production increments and competing each increment among all qualified

contractors, (2) delaying the development of the second source until funds

are available to support both the current contractor and the second source

without a fielding break, or (3) continuing with the current contractor for

the remainder of the program.

A Stewart & Stevenson official said that under the current contract, the

contractor is producing 375 to 400 FMTV trucks a month. He added that the

contractor’s economical production rate is 400 trucks a month; at that rate

Page 28 GAO/NSIAD-99-28 Army Medium Tracks
Chapter 3 

Army Has Not Determined Whether Its

Second-Source Plan Will Reduce Program

Costs

the contractor can avoid a price increase on the trucks.1 If the Army

reduces the monthly production rate, truck prices will increase and

therefore program costs will increase. The same contractor official said

that the contractor’s minimum sustaining rate2

 is 160 trucks a month and

that if the production quantities drop to that number, the Army could

expect a price increase close to 10 percent. The Army’s fiscal year 1999

budget request for the FMTV program shows the contractor’s economical

production rate as 350 trucks a month and the minimum sustaining rate as

150 trucks a month. However, a project official said that the budget rates

were developed when the contract was awarded and that the contractor’s

rates were reasonable and more current.

We analyzed a potential 60-40 percent production quantity split under the

Army’s plan and compared the monthly production quantities each

contractor would receive to the current contractor’s production rates. Our

preliminary analysis indicates that the current contractor will not be able

to reduce its costs even if it wins the larger share of the production

quantities because the larger share will be at or near its minimum

sustaining rate. Although the Army has not determined how it will divide

production between the two contractors, we based our analysis of the

potential split of FMTV production on a 60-40 percent ratio because the

Army has used this ratio for planning purposes.

Table 3.1 shows the total projected annual and monthly production

quantities for the FMTV program and the annual and monthly quantities for

each contractor based on a 60-40 percent ratio.

1

The economical production rate is the number of units that a contractor can economically produce

using one 8-hour shift a day 5 days a week.

2

The minimum sustaining rate is the quantity that will allow the contractor to avoid a production break

while maintaining a responsive vendor and supplier base.

Page 29 GAO/NSIAD-99-28 Army Medium Tracks
Chapter 3 

Army Has Not Determined Whether Its

Second-Source Plan Will Reduce Program

Costs

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

Total production quantity 60-percent production quantity 40-percent production quantity

Fiscal year Yearly Monthly Yearly Monthly Yearly Monthly

2003 4,010 334 2,406 201 1,604 134

2004 3,194 266 1,916 160 1,278 106

2005 3,194 266 1,916 160 1,278 106

2006 3,193 266 1,916 160 1,277 106

2007 3,193 266 1,916 160 1,277 106

2008 3,191 266 1,915 160 1,276 106

2009 3,191 266 1,915 160 1,276 106

2010 3,191 266 1,915 160 1,276 106

2011 3,191 266 1,915 160 1,276 106

2012 3,191 266 1,915 160 1,276 106

2013 3,191 266 1,915 160 1,276 106

2014 3,191 266 1,915 160 1,276 106

2015 3,191 266 1,915 160 1,276 106

2016 3,189 266 1,913 160 1,276 106

2017 3,191 266 1,915 160 1,276 106

2018 3,020 252 a

2019 3,021 252 a

2020 3,020 252 a

2021 3,020 252 a

2022 3,095 258 a

aThe Army plans to award the final 5-year contract to one contractor.

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

Table 3.1 shows that if two contractors compete for planned production

quantities based on a 60-40 percent ratio, the current contractor would

produce, in most years, at or near its monthly minimum sustaining rate of

160 trucks even if it won the larger share of production in all years. It will

be difficult for the current contractor to reduce its price to the Army at

these quantities because its FMTV production plant is dedicated solely to

FMTV production and was built to produce up to a maximum of 525 trucks

per month based on an 8-hour work shift, 5 days a week. When Stewart &

Stevenson won the first production contract, the Army’s acquisition plan

did not contain plans for developing a second source. Stewart &

Stevenson’s fixed costs at its FMTV production plant must be covered by its

FMTV contracts and therefore the fixed costs limit the amount of price

Page 30 GAO/NSIAD-99-28 Army Medium Tracks
Chapter 3 

Army Has Not Determined Whether Its

Second-Source Plan Will Reduce Program

Costs

reduction the contractor can give to the Army. According to a Stewart &

Stevenson official, a monthly rate of 160 trucks would cause about a

10-percent increase in the price of the trucks, not a price reduction.

We were unable to estimate the effect the production split would have on

the prices the second-source contractor would give the Army. The

second-source contractor may be able to optimize its FMTV truck

production at lower rates than the current contractor. There are several

possible scenarios. For example, if the second-source contractor is a truck

producer, and if it could add FMTV truck production to a plant in which it

produces other trucks, it could share the plant’s fixed costs with other

contracts. This would tend to reduce the fixed costs attributed to the FMTV

contracts and lower the second-source contractor’s minimum sustaining

rate, allowing it to lower the FMTV price.

Conclusions To reduce costs, the Army plans to introduce competition into the FMTV

program by developing a second source to produce FMTV trucks. The

current contractor and second source will share the annual production. It

is not clear whether the Army’s plan to split production of FMTV trucks

between two contractors will result in cost savings. The Army has not

performed a cost and benefit analysis to justify its plan. A cost and benefit

analysis could determine whether, for example, the financial benefits of

adding a second source would offset the investment of bringing a second

contractor into full production and could compare the costs and benefits

of the Army’s plan with other alternatives.

Recommendation To ensure that the Army considers all its options before it starts to develop

a second source for the FMTV, we recommend that the Secretary of Defense

direct the Secretary of the Army to delay the Army’s plans for developing a

second source to produce FMTV trucks until the Army completes an

analysis that compares the costs and benefits of its plans with those of

other alternatives and to pursue the alternative that is most beneficial to

the government.

Agency Comments

and Our Evaluation

In commenting on a draft of this report, the Department of Defense

partially concurred with our recommendation. It said that the Army is

conducting an FMTV second-source contractor cost and benefit analysis as

directed by the Congress. The fiscal year 1999 Defense Authorization Act3

3

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

Page 31 GAO/NSIAD-99-28 Army Medium Tracks
Chapter 3 

Army Has Not Determined Whether Its

Second-Source Plan Will Reduce Program

Costs

required the Secretary of the Army to conduct a cost and benefit analysis

prior to contracting with a second source for FMTV trucks. The analysis is

to support certifications by the Secretary of the Army that (1) total FMTV

quantities will be sufficient to enable the prime contractor to maintain a

minimum economic production level; (2) total costs of the procurements

under the second-source plan will be the same or lower than if the Army

proceeds with only one contract; and (3) vehicles produced by both

contractors will have common, interchangeable components.

The Army’s plan to conduct an FMTV cost and benefit analysis is a step in

the right direction; however, according to an Army official, the Army’s

analysis will compare the costs and benefits of only two acquisition

approaches—the current FMTV second-source plan and continuing with the

current contractor for the remainder of the program. Since other

alternative acquisition approaches for the program exist, we believe that,

as a minimum, the Army should explore the other alternatives. The Army

should select the acquisition alternative that is the most cost beneficial to

the government to continue the FMTV program.

Page 32 GAO/NSIAD-99-28 Army Medium Tracks
Page 33 GAO/NSIAD-99-28 Army Medium Tracks
Appendix I 

Comments From the Department of Defense

Page 34 GAO/NSIAD-99-28 Army Medium Tracks
Appendix I 

Comments From the Department of Defense

See pp. 25-26.

See p. 26.

Page 35 GAO/NSIAD-99-28 Army Medium Tracks
Appendix I 

Comments From the Department of Defense

See pp. 31-32.

Page 36 GAO/NSIAD-99-28 Army Medium Tracks
Appendix II 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Robert J. Stolba

Lawrence D. Gaston, Jr.

Kansas City Field

Office

Robert D. Spence

Office of the General

Counsel, Washington,

D.C.

William T. Woods

Margaret L. Armen

(707286) Page 37 GAO/NSIAD-99-28 Army Medium Tracks
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order

made out to the Superintendent of Documents, when

necessary. VISA and MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address

are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100