Testimony before the Subcommittee on 

Airland, Committee on Armed Services, 

U.S. Senate

United States Government Accountability Office

GAO 

For Release on Delivery 

Expected at 2:30 p.m. EST 

Wednesday, March 1, 2006 DEFENSE ACQUISITIONS

Business Case and Business 

Arrangements Key for 

Future Combat System’s 

Success 

Statement of Paul L. Francis, Director, 

Acquisition and Sourcing Management 

GAO-06-478T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-06-478T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Paul L. Francis 

at (202) 512-4841 or francisp@gao.gov. 

Highlights of GAO-06-478T, testimony 

before the Subcommittee on Airland, 

Committee on Armed Services, U.S. 

Senate 

March 1, 2006

DEFENSE ACQUISITIONS 

Business Case and Arrangements Key for 

Future Combat System’s Success 

There are a number of compelling aspects of the FCS program, and it is hard 

to argue with the program’s goals. However, the elements of a sound 

business case for such an acquisition program—firm requirements, mature 

technologies, a knowledge-based acquisition strategy, a realistic cost 

estimate and sufficient funding—are not yet present. FCS began product 

development prematurely in 2003. Since then, the Army has made several 

changes to improve its approach for acquiring FCS. Yet, today, the program 

remains a long way from having the level of knowledge it should have had 

before starting product development. FCS has all the markers for risks that 

would be difficult to accept for any single system, much less a complex, 

multi-system effort. These challenges are even more daunting in the case of 

FCS not only because there are so many of them but because FCS represents 

a new concept of operations that is predicated on technological 

breakthroughs. Thus, technical problems, which accompany immaturity, not 

only pose traditional risks to cost, schedule, and performance; they pose 

risks to the new fighting concepts envisioned by the Army. 

Many decisions can be anticipated that will involve trade-offs the 

Government will make in the program. Facts of life, like technologies not 

working out, reductions in available funds, and changes in performance 

parameters, must be anticipated. It is important, therefore, that the business 

arrangements for carrying out the FCS program—primarily in the nature of 

the development contract and in the lead system integrator (LSI) approach—

preserve the government’s ability to adjust course as dictated by these facts 

of life. At this point, the $8 billion to be spent on the program through fiscal 

year 2006 is a small portion of the $200 billion total. DOD needs to guard 

against letting the buildup in investment limit its decision making flexibility 

as essential knowledge regarding FCS becomes available. As the details of 

the Army’s new FCS contract are worked out and its relationship with the 

LSI evolves, it will be important to ensure that the basis for making 

additional funding commitments is transparent. Accordingly, markers for 

gauging knowledge must be clear, incentives must be aligned with 

demonstrating such knowledge, and provisions must be made for the Army 

to change course if the program progresses differently than planned. 

The Future Combat System (FCS) 

is a networked family of weapons 

and other systems in the forefront 

of efforts by the Army to become a 

lighter, more agile, and more 

capable combat force. When 

considering complementary 

programs, projected investment 

costs for FCS are estimated to be 

on the order of $200 billion. 

FCS’s cost is of concern given that 

developing and producing new 

weapon systems is among the 

largest investments the government 

makes, and FCS adds significantly 

to that total. Over the last five 

years, the Department of Defense 

(DOD) doubled its planned 

investments in such systems from 

$700 billion in 2001 to $1.4 trillion 

in 2006. At the same time, research 

and development costs on new 

weapons continue to grow on the 

order of 30 to 40 percent. 

FCS will be competing for 

significant funds at a time when 

Federal fiscal imbalances are 

exerting great pressures on 

discretionary spending. In the 

absence of more money being 

available, FCS and other programs 

must be executable within 

projected resources. 

Today, I would like to discuss 

(1) the business case needed for 

FCS to be successful and 

(2) related business arrangements 

that support that case. 
Page 1 GAO-06-478T 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss the Department of the Army’s 

Future Combat System (FCS), a networked family of weapons and other 

systems. FCS is in the forefront of efforts to help the Army transform itself 

into a lighter, more agile, and more capable combat force by using a new 

concept of operations, new technologies, and a new information network 

that links whole brigades together. This is a tremendous undertaking that 

will involve a total investment cost on the order of $200 billion. 

The context within which the FCS investment is being made is important. 

Fiscal imbalances faced by the federal government will continue to 

constrain discretionary spending. One of the single largest investments the 

government makes is the development and production of new weapon 

systems. Over the last five years, the Department of Defense (DOD) has 

doubled its planned investments in new weapon systems from about 

$700 billion in 2001 to nearly $1.4 trillion in 2006. At the same time, 

research and development cost growth on new weapons maintains its 

historical level of about 30 to 40 percent. This is the lens that must be used 

to look at major new investments, such as FCS, because more money may 

not be an option for the future. Rather, the key to getting better outcomes 

is to make individual programs more executable. 

Today, I would like to discuss (1) the business case that is necessary for 

the FCS to be successful and (2) the related business arrangements for 

carrying out the FCS program. 

The critical role played by U.S. ground combat forces is underscored today 

in Operation Iraqi Freedom. That the Army should ensure its forces are 

well equipped with the capabilities they will need in the coming years is 

unquestioned. Moreover, the top-level goals the Army has set for its future 

force seem inarguable: to be as lethal and survivable as the current force, 

but significantly more sustainable and mobile. However, the Army’s 

approach to meeting these needs—embodied in the FCS and its 

complementary systems—does raise questions. 

On the one hand, the FCS is the result of the Army leadership’s taking a 

hard look at how it wants its forces to fight in the future. Army leadership 

has had the courage to break with tradition on FCS; it would have likely 

been much easier to win support for successor vehicles to the Abrams and 

Bradley. On the other hand, FCS does not present a good business case for 

an acquisition program. It is necessary that a major new investment like 

Summary 
Page 2 GAO-06-478T 

FCS have a compelling, well-thought out concept, but this alone is not 

sufficient. FCS began the product development prematurely in 2003, and 

today is a long way from having the level of knowledge it should have had 

before committing the high level of resources associated with a new 

product development effort. The elements of a sound business case—firm 

requirements, mature technologies, a knowledge-based acquisition 

strategy, a realistic cost estimate and sufficient funding—are not yet 

present. FCS has all the markers for risks that would be difficult to accept 

for any single system. They are even more daunting in the case of FCS not 

only because of their multiplicity but because FCS represents a new 

concept of operations that is predicated on technological breakthroughs. 

Thus, technical problems, which accompany immaturity, not only pose 

traditional risks to cost, schedule, and performance; they pose risks to the 

new fighting concepts envisioned by the Army. 

We are still early in the long journey that FCS entails. Many decisions lie 

ahead that will involve trade-offs the government will make. Facts of life, 

like technologies not working out, reductions in available funds, and 

changes in performance parameters, must be anticipated. It is important, 

therefore, that the business arrangements made for FCS, primarily the 

development contract and the lead system integrator approach, preserve 

the government’s ability to adjust course as dictated by facts and 

circumstances. At this point, the $8 billion to be spent on the program 

through the end of fiscal year 2006 is a small portion of the $200 billion 

total. DOD needs to guard against letting the buildup in investment from 

limiting its decision making flexibility as essential knowledge regarding 

FCS becomes available. As the details of the Army’s new FCS contract are 

worked out and its relationship with the lead system integrator evolves, it 

will be important to ensure that the basis for making additional funding 

commitments is transparent. Accordingly, markers for gauging knowledge 

must be clear, incentives must be aligned with demonstrating such 

knowledge, and provisions must be made for the Army to change course if 

the program progresses differently than planned. 

The FCS concept is part of a pervasive change to what the Army refers to 

as the Future Force. The Army is reorganizing its current forces into 

modular brigade combat teams, meaning troops can be deployed on 

different rotational cycles as a single team or as a cluster of teams. The 

Future Force is designed to transform the Army into a more rapidly 

deployable and responsive force and to enable the Army to move away 

from the large division-centric structure of the past. Each brigade combat 

team is expected to be highly survivable and the most lethal brigade-sized 

Background 
Page 3 GAO-06-478T 

unit the Army has ever fielded. The Army expects FCS-equipped brigade 

combat teams to provide significant warfighting capabilities to DOD’s 

overall joint military operations. The Army is implementing its 

transformation plans at a time when current U.S. ground forces are playing 

a critical role in the ongoing conflicts in Iraq and Afghanistan. 

The FCS family of weapons includes 18 manned and unmanned ground 

vehicles, air vehicles, sensors, and munitions that will be linked by an 

information network. These vehicles, weapons, and equipment will 

comprise the majority of the equipment needed for a brigade combat team. 

The Army plans to buy 15 brigades worth of FCS equipment by 2025. 

We have frequently reported on the importance of using a solid, 

executable business case before committing resources to a new product 

development. In its simplest form, this is evidence that (1) the warfighter’s 

needs are valid and can best be met with the chosen concept, and (2) the 

chosen concept can be developed and produced within existing 

resources—that is, proven technologies, design knowledge, adequate 

funding, and adequate time to deliver the product when needed. 

At the heart of a business case is a knowledge-based approach to product 

development that demonstrates high levels of knowledge before 

significant commitments are made. In essence, knowledge supplants risk 

over time. This building of knowledge can be described as three levels or 

knowledge points that should be attained over the course of a program: 

• First, at program start, the customer’s needs should match the developer’s 

available resources—mature technologies, time, and funding. An 

indication of this match is the demonstrated maturity of the technologies 

needed to meet customer needs. 

• Second, about midway through development, the product’s design should 

be stable and demonstrate that it is capable of meeting performance 

requirements. The critical design review is that point of time because it 

generally signifies when the program is ready to start building productionrepresentative prototypes. 

• Third, by the time of the production decision, the product must be shown 

to be producible within cost, schedule, and quality targets and have 

demonstrated its reliability and the design must demonstrate that it 

performs as needed through realistic system level testing. 

Elements of a Business 

Case 
Page 4 GAO-06-478T 

The three knowledge points are related, in that a delay in attaining one 

delays the points that follow. Thus, if the technologies needed to meet 

requirements are not mature, design and production maturity will be 

delayed. 

To develop the information on the Future Combat System program’s 

progress toward meeting established goals, the contribution of critical 

technologies and complementary systems, and the estimates of cost and 

affordability, we interviewed officials of the Office of the Under Secretary 

of Defense (Acquisition, Technology, and Logistics); the Army G-8; the 

Office of the Under Secretary of Defense (Comptroller); the Secretary of 

Defense’s Cost Analysis Improvement Group; the Director of Operational 

Test and Evaluation; the Assistant Secretary of the Army (Acquisition, 

Logistics, and Technology); the Army’s Training and Doctrine Command; 

Surface Deployment and Distribution Command; the Program Manager for 

the Future Combat System (Brigade Combat Team); the Future Combat 

System Lead Systems Integrator; and other contractors. We reviewed, 

among other documents, the Future Combat System’s Operational 

Requirements Document, the Acquisition Strategy Report, the Baseline 

Cost Report, the Critical Technology Assessment and Technology Risk 

Mitigation Plans, and the Integrated Master Schedule. We attended and/or 

reviewed the results of the FCS System of Systems Functional Review, InProcess Reviews, Board of Directors Reviews, and multiple system 

demonstrations. In our assessment of the FCS, we used the knowledgebased acquisition practices drawn from our large body of past work as 

well as DOD’s acquisition policy and the experiences of other programs. 

We conducted the above in response to the National Defense 

Authorization Act of Fiscal Year 2006, which requires GAO to annually 

report on the product development phase of the FCS acquisition. We 

performed our review from June 2005 to March 2006 in accordance with 

generally accepted auditing standards. 

An improved business case for the FCS program is essential to help ensure 

that the program is successful in the long run. The FCS is unusual in that it 

is developing 18 systems and a network under a single program office and 

lead system integrator in the same amount of time that it would take to 

develop a single system. It also started development with less knowledge 

than called for by best practices and DOD policy. 

Objectives, Scope, 

and Methodology 

Improved Business 

Case Is Needed for 

the FCS’s Success 
Page 5 GAO-06-478T 

The Army has made significant progress defining FCS’s system of systems 

requirements, particularly when taking into account the daunting number 

of them involved—nearly 11,500 at this level. Yet system-level 

requirements are not yet stabilized and will continue to change, 

postponing the needed match between requirements and resources. Now, 

the Army and its contractors are working to complete the definition of 

system level requirements, and the challenge is in determining if those 

requirements are technically feasible and affordable. Army officials say it 

is almost certain that some FCS system-level requirements will have to be 

modified, reduced, or eliminated; the only uncertainty is by how much. We 

have previously reported that unstable requirements can lead to cost, 

schedule, and performance shortfalls. Once the Army gains a better 

understanding of the technical feasibility and affordability of the systemlevel requirements, trade-offs between the developer and the warfighter 

will have to be made, and the ripple effect of such trade-offs on key 

program goals will have to be reassessed. Army officials have told us that 

it will be 2008 before the program reaches the point which it should have 

reached before it started in May 2003 in terms of stable requirements. 

Development of concrete program requirements depends in large part on 

stable, fully mature technologies. Yet, according to the latest independent 

assessment1

, the Army has not fully matured any of the technologies 

critical to FCS’s success. Some of FCS’s critical technologies may not 

reach a high level of maturity until the final major phase of acquisition, the 

start of production. The Army considers a lower level of demonstration as 

acceptable maturity, but even against this standard, only about one-third 

of the technologies are mature. We have reported that going forward into 

product development without demonstrating mature technologies 

increases the risk of cost growth and schedule delays throughout the life 

of the program. The Army is also facing challenges with several of the 

complementary programs considered essential for meeting FCS’s 

requirements. Some are experiencing technology difficulties, and some 

have not been fully funded. These difficulties underscore the gap between 

requirements and available resources that must be closed if the FCS 

business case is to be executable. 

 1

Technology Readiness Assessment Update, Office of the Deputy Assistant Secretary of the 

Army for Research and Technology, April 2005 

While Progress Has Been 

Made, Requirements Still 

Remain Uncertain 

FCS Success Hinges on 

Numerous 

Undemonstrated 

Technologies and 

Complementary Programs 
Page 6 GAO-06-478T 

Technology readiness levels (TRL) are measures pioneered by the 

National Aeronautics and Space Administration and adopted by DOD to 

determine whether technologies were sufficiently mature to be 

incorporated into a weapon system. Our prior work has found TRLs to be 

a valuable decision-making tool because they can presage the likely 

consequences of incorporating a technology at a given level of maturity 

into a product development. The maturity levels range from paper studies 

(level 1), to prototypes tested in a realistic environment (level 7), to an 

actual system proven in mission operations (level 9). Successful DOD 

programs have shown that critical technologies should be mature to at 

least a TRL 7 before the start of product development. 

In the case of the FCS program, the latest independent technology 

assessment shows that none of the critical technologies are at TRL 7, and 

only 18 of the 49 technologies currently rated have demonstrated TRL 6, 

defined as prototype demonstration in a relevant environment. None of the 

critical technologies may reach TRL 7 until the production decision in 

fiscal year 2012, according to Army officials.2

 Projected dates for FCS 

technologies to reach TRL 6 have slipped significantly since the start of the 

program. In the 2003 technology assessment, 87 percent of FCS’s critical 

technologies were projected to be mature to a TRL 6 by 2005. When the 

program was looked at again in April 2005, 31 percent of the technologies 

were expected to mature to a TRL 6 by 2005, and all technologies are not 

expected to be mature to that level until 2009. 

The knowledge deficits for requirements and technologies have created 

enormous challenges for devising an acquisition strategy that can 

demonstrate the maturity of design and production processes. Several 

efforts within the FCS program are facing significant problems that may 

eventually involve reductions in promised capabilities and may lead to 

cost overruns and schedule delays. Even if requirements setting and 

technology maturity proceed without incident, FCS design and production 

maturity will still not be demonstrated until after the production decision 

is made. Production is the most expensive phase in which to resolve 

design or other problems. 

 2

When the program started seven of 32 technologies were rated at TRL 6 and one was at 

TRL 7. 

FCS Acquisition Strategy 

Will Demonstrate Design 

Maturity After Production 

Begins 
Page 7 GAO-06-478T 

The Army’s acquisition strategy for FCS does not reflect a knowledgebased approach. Figure 1 shows how the Army’s strategy for acquiring 

FCS involves concurrent development, design reviews that occur late, and 

other issues that are out of alignment with the knowledge-based approach 

outlined in DOD policy. 

Figure 1: Differences between Best Practices’ Acquisition Approach and FCS Approach 

Ideally, the preliminary design review occurs at or near the start of 

product development. Doing so can help reveal key technical and 

engineering challenges and can help determine if a mismatch exists 
Page 8 GAO-06-478T 

between what the customer wants and what the product developer can 

deliver. An early preliminary design review is intended to help stabilize 

cost, schedule, and performance expectations. The critical design review 

ideally occurs midway into the product development phase. The critical 

design review should confirm that the system design is stable enough to 

build production-representative prototypes for testing. 

The FCS acquisition schedule indicates several key issues: 

• The program did not have the basic knowledge needed for program start 

in 2003. While the preliminary design review normally occurs at or near 

the start of product development, the Army has scheduled it in fiscal year 

2008, about 5 years after the start of product development. 

• Instead of the sequential development of knowledge, major elements of 

the program are being conducted concurrently. 

• The critical design review is scheduled in fiscal year 2010, just 2 years after 

the scheduled preliminary review and the planned start of detailed design. 

The timing of the design reviews is indicative of how late knowledge will 

be attained in the program, assuming all goes according to plan. 

• The critical design review is also scheduled just 2 years before the initial 

FCS low-rate production decision in fiscal year 2012, leaving little time for 

product demonstration and correction of any issues that are identified at 

that time. 

The FCS program is thus susceptible to late-cycle churn, which refers to 

the additional—and unanticipated—time, money, and effort that must be 

invested to overcome problems discovered late through testing. 

The total cost for the FCS program, now estimated at $160.7 billion (then 

year dollars), has climbed 76 percent from the Army’s first estimate. 

Because uncertainties remain regarding FCS’s requirements and the Army 

faces significant challenges in technology and design maturity, we believe 

the Army’s latest cost estimate still lacks a firm knowledge base. 

Furthermore, this latest estimate does not include complementary 

programs that are essential for FCS to perform as intended, or all of the 

necessary funding for FCS spin-outs. The Army has taken some steps to 

help manage the growing cost of FCS, including establishing cost ceilings 

or targets for development and production; however, program officials 

told us that setting cost limits may result in accepting lower capabilities. 

FCS’s Higher Costs May 

Result in Funding 

Challenge 
Page 9 GAO-06-478T 

As FCS’s higher costs are recognized, it remains unclear whether the Army 

will have the ability to fully fund the planned annual procurement costs for 

the FCS current program of record. FCS affordability depends on the 

accuracy of the cost estimate, the overall level of development and 

procurement funding available to the Army, and the level of competing 

demands. 

At the start of product development, FCS program officials estimated that 

the program would require about $20 billion in then-year dollars for 

research, development, testing, and evaluation and about $72 billion to 

procure the FCS systems to equip 15 brigade combat teams. At that time, 

program officials could only derive the cost estimate on the basis of what 

they knew then—requirements were still undefined and technologies were 

immature. The total FCS program is now expected to cost $160.7 billion in 

then-year dollars, a 76 percent increase. Table 1 summarizes the growth of 

the FCS cost estimate. 

Table 1: Comparison of Original Cost Estimate and Current Cost Estimate for FCS 

Program (in billions of then-year dollars) 

Original 

estimate

Revised estimate 

(as of 1/2006) 

Percentage 

increase

Research, development, 

testing, and evaluation $19.6 $30.5 56% 

Procurement $71.8 $130.2 81%

Total $91.4 $160.7 76%

Source: Army (data); GAO (analysis and presentation). 

According to the Army, the current cost estimate is more realistic, better 

informed, and based on a more reasonable schedule. It accounts for the 

restructure of the FCS program and its increased scope, the 4-year 

extension to the product development schedule, the reintroduction of four 

systems that had been previously deferred, and the addition of a spin-out 

concept whereby mature FCS capabilities would be provided, as they 

become available, to current Army forces. It also reflects a rate of 

production reduced from an average of 2 brigade combat teams per year 

to an average of 1.5 brigades per year. Instead of completing all 15 

brigades by 2020, the Army would complete production in 2025. This cost 

estimate has also benefited from progress made in defining system of 

systems requirements. 

Figure 2 compares the funding profiles for the original program and for the 

latest restructured program. 
Page 10 GAO-06-478T 

Figure 2: Comparison of Original Cost Estimate and Current Cost Estimate for FCS 

Program between Fiscal Years 2003 and 2026 (in millions of then-year dollars) 

The current funding profile is lower than the original through fiscal year 

2013, but is substantially higher than the original after fiscal year 2013. It 

still calls for making substantial investments before key knowledge has 

been demonstrated. Stretching out FCS development by 4 years freed up 

about $9 billion in funding through fiscal year 2011 for allocation to other 

Army initiatives. Originally, FCS annual funding was not to exceed $10 

billion in any one year. Now, the cost estimate is expected to exceed $10 

billion in each of 9 years. While it is a more accurate reflection of program 

costs than the original estimate, the latest estimate is still based on a low 

level of knowledge about whether FCS will work as intended. The cost 

estimate has not been independently validated, as called for by DOD’s 

acquisition policy. The Cost Analysis Improvement Group will not release 

its updated independent estimate until spring 2006, after the planned 

Defense Acquisition Board review of the FCS program. 

The latest cost estimate does not include all the costs that will be needed 

to field FCS capabilities. For instance, 

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

202

2025

3

201

2015

2017

2019

2021

3

200

2005

2007

2009

2011

3

Dollars in millions

Source: U.S. Army.

Year

Original estimate

Current estimate
Page 11 GAO-06-478T 

• Costs for the 52 essential complementary programs are separate, and 

some of those costs could be substantial. For example, the costs of the 

Joint Tactical Radio System Clusters 1 and 5 programs were expected to 

be about $32.6 billion (then-year dollars).3

• Some complementary programs, such as the Mid-Range Munition and 

Javelin Block II, are currently not funded for their full development. These 

and other unfunded programs would have to compete for already tight 

funding. 

• Procurement of the spin-outs from the FCS program to current Army 

forces is not yet entirely funded. Procuring the FCS items expected to be 

spun out to current forces is expected to cost about $19 billion, and the 

needed installation kits may add $4 billion. Adding these items brings the 

total required FCS investment to the $200 billion range. 

Through fiscal year 2006, the Army will have budgeted over $8 billion for 

FCS development. Through fiscal year 2008, when the preliminary design 

review is held, the amount budgeted for FCS will total over $15 billion. By 

the time the critical design review is held in 2010, about $22 billion will 

have been budgeted. By the time of the production decision in 2012, about 

$27 billion will have been budgeted. 

The affordability of the FCS program depends on several key assumptions. 

First, the program must proceed without exceeding its currently projected 

costs. Second, the Army’s annual procurement budget—not including 

funds specifically allocated for the modularity initiative—is expected to 

grow from between $11 billion to $12 billion in fiscal year 2006 to at least 

$20 billion by fiscal year 2011. The large annual procurement costs for FCS 

are expected to begin in fiscal year 2012, which is beyond the current 

Future Years Defense Plan period (fiscal years 2006-2011). FCS 

procurement will represent about 60-70 percent of Army procurement 

from fiscal years 2014 to 2022. This situation is typically called a funding 

bow wave.4

 As it prepares the next Defense Plan, the Army will face the 

challenge of allocating sufficient funding to meet the increasing needs for 

FCS procurement in fiscal years 2012 and 2013. If all the needed funding 

 3

The ongoing operational assessment of the Joint Tactical Radio System functionality could 

result in a program restructure, which would have an impact on the program’s costs. 

4

The term bow wave is used to describe a requirement for more funds just beyond the years 

covered in the Future Years Defense Plan that are subject to funding constraints. 
Page 12 GAO-06-478T 

cannot be identified, the Army will have to consider reducing the FCS 

procurement rate or delaying or reducing items to be spun out to current 

Army forces. However, reducing the FCS procurement rate would increase 

the FCS unit costs and extend the time needed to deploy FCS-equipped 

brigade combat teams. 

Given the risks facing the FCS program, the business arrangements made 

for carrying out the program will be critical to protecting the government’s 

interests. To manage the program, the Army is using a lead system 

integrator (LSI), Boeing. As LSI, Boeing carries greater responsibilities 

than a traditional prime contractor. The Army is in the process of finalizing 

a new Federal Acquisition Regulation (FAR)-based contract in response to 

concerns that the previous Other Transaction Agreement was not the best 

match for a program of FCS’s size and risks. This contract will establish 

the expectations, scope, deliverables, and incentives that will drive the 

development of the FCS. 

From the outset of the FCS program, the Army has employed a 

management approach that centers on the LSI. The Army did not believe it 

had the resources or flexibility to field a program as complex as FCS 

under the aggressive timeline established by the then-Army Chief of Staff. 

Although there is no complete consensus on the definition of LSI, 

generally, it is a prime contractor with increased responsibilities. These 

responsibilities may include greater involvement in requirements 

development, design and source selection of major system and subsystem 

subcontractors. The government has used the LSI approach on other 

programs that require system-of-systems integration. The FCS program 

started as a joint Defense Advanced Research Projects Agency and Army 

program in 2000. In 2002, the Army competitively selected Boeing as the 

LSI for the concept technology demonstration phase of FCS. The Army’s 

intent is to maintain the LSI for the remainder of FCS development. 

Boeing and the Army established a relationship to work in what has 

become known as a “one-team” management style with several first tier 

subcontractors to develop, manage, and execute all aspects of the FCS 

program. For example, Boeing’s role as LSI extends beyond that of a 

traditional prime contractor and includes some elements of a partner to 

the government in ensuring the design, development, and prototype 

implementation of the FCS network and family of systems. In this role, 

Boeing is responsible for (1) engineering a system of systems solution, (2) 

competitive selection of industry sources for development of the 

FCS Business 

Arrangements 

Program Management with 

A Lead System Integrator 
Page 13 GAO-06-478T 

individual systems and subsystems, and (3) integrating and testing these 

systems to satisfy the requirements of the system of systems 

specifications. Boeing is also responsible for the actual development of 

two critical elements of the FCS information network—the System of 

Systems Common Operating Environment and the Warfighter-Machine 

Interface. 

The Army participates in program decisions such as make/buy and 

competitive selection decisions, and it may disapprove any action taken 

under these processes. The decision structure of the program is made up 

of several layers of Integrated Product Teams. These teams are co-chaired 

by Army and LSI representatives. Government personnel participate in 

each of the integrated product teams. This collaborative structure is 

intended to force decision making to the lowest level in the program. 

Decisions can be elevated to the program manager level, and ultimately 

the Army has final decision authority. The teams also include 

representation of the Army user community, whose extensive presence in 

the program is unprecedented. 

The advantages of using an LSI approach on a program like FCS include 

the ability of the contractor to know, understand, and integrate functions 

across the various FCS platforms. Thus, the LSI has the ability to facilitate 

movement of requirements and make trade-offs across platforms. This 

contrasts with past practices of focusing on each platform individually. 

However, the extent of contractor responsibility in so many aspects of the 

FCS program management process, including responsibility for making 

numerous cost and technical tradeoffs and for conducting at least some of 

the subcontractor source selections, is also a potential risk. As an 

example, many of the subcontractor source selections are for major 

weapon systems that, in other circumstances, would have been conducted 

by an Army evaluation team, an Army Contracting Officer and a seniorlevel Army source selection authority. These decisions, including 

procurement decisions for major weapons systems, are now being made 

by the LSI with Army involvement. This level of responsibility, as with 

other LSI responsibilities in the program management process, requires 

careful government oversight to ensure that the Army’s interests are 

adequately protected now and in the future. 

Thus far, the Army has been very involved in the management of the 

program and in overseeing the LSI. It is important that as the program 

proceeds, the Army continue to be vigilant about maintaining control of 

the program and that organizational conflicts of interest are avoided, such 

as can arise when the LSI is also a supplier. As discussed in the next 
Page 14 GAO-06-478T 

section, the Army intends the new contract to provide additional 

protection against potential conflicts. 

The Army and Boeing entered into a contractual instrument called an 

Other Transaction Agreement (OTA). The purpose of the OTA was to 

encourage innovation and to use its wide latitude in tailoring business, 

organizational, and technical relationships to achieve the program goals. 

The original OTA was modified in May 2003 and fully finalized in 

December 2003 for the Systems Development and Demonstration phase of 

the FCS program. The latest major modification to the OTA, to implement 

the 2004 program restructuring, was finalized in March 2005. 

As you know, questions have been raised about the appropriateness of the 

Army’s use of an OTA for a program as large and risky as FCS. The Airland 

Subcommittee held a hearing in March 2005 which addressed this among 

other issues. In particular, concern has been raised about the protection of 

the government’s interests under the OTA arrangement and the Army’s 

choice to not include standard FAR clauses in the OTA. In April 2005, the 

OTA was modified by the Army to incorporate the procurement integrity, 

Truth in Negotiations, and Cost Accounting Standards clauses. 

In April 2005, the Secretary of the Army decided that the Army should 

convert the OTA to a FAR-based contract. A request for proposals was 

issued by the Army on August 15, 2005. An interim letter contract was 

issued on September 23, 2005. The Systems Development and 

Demonstration work through September 2005 will be accounted for under 

the OTA and all future work under the FAR-based contract. Boeing/SAIC 

and all of the FCS subcontractors were to submit a new certifiable 

proposal for the remainder of Systems Development and Demonstration 

and that will be the subject of negotiations with the Army. The Army 

expects the content of the program—its statement of work—will remain 

the same and they do not expect the cost, schedule, and performance of 

the overall Systems Development and Demonstration effort to change 

materially. The target date for completion of the finalized FAR contract is 

March 28, 2006. In the coming months, we will be taking a close look at the 

new contract as part of our continuing work on FCS that is now mandated 

by the Defense Authorization Act for Fiscal Year 2006. 

The FAR-based contract is expected to include standard FAR clauses, 

including the Truth in Negotiations and Cost Accounting Standards 

clauses. The letter contract includes Organizational Conflict of Interest 

clauses whereby Boeing and SAIC can not compete for additional FCS 

Contracting Arrangements 
Page 15 GAO-06-478T 

subcontracts. Also, other current subcontractors can compete for work 

only if they do not prepare the request for proposals or participate in the 

source selection process. 

The last major revision of the OTA in March 2005 had a total value of 

approximately $21 billion. Through September 2005 the Army and LSI 

estimate that about $3.3 billion will be chargeable to the OTA. The FAR 

based contract will cover all activity after September 2005 and is expected 

to have a value of about $17.4 billion. Both the OTA and the FAR-based 

contract will be cost plus fixed fee contracts with additional incentive 

fees. According to the Army, the fee arrangement is designed to address 

the unique relationship between the Army and the LSI and to acknowledge 

their “shared destiny” by providing strategic incentives for the LSI to prove 

out technologies, integrate systems, and move the program forward to 

production, at an affordable cost and on schedule. In the OTA, the annual 

fixed fee was set at 10 percent of estimated cost and the incentive fee 

available was 5 percent. 

The Army plans to change the fee structure for the FCS program in the 

new contract. The request for proposals for the new contract proposed a 7 

percent fixed fee and an 8 percent incentive fee. The OTA established 10 

distinct events where LSI performance will be evaluated against predetermined performance, cost, and schedule criteria. (Those events are 

expected to be retained in the FAR contract.) One event has already 

occurred—the System of Systems Functional Requirements Review was 

held in August 2005. The next event is called the Capabilities Maturity 

Review and it is expected to occur in June or July 2006. As the details are 

worked out, it is important that the new contract encourage meaningful 

demonstrations of knowledge and to preserve the government’s ability to 

act on knowledge should the program progress differently than planned. 

Mr. Chairman, this concludes my prepared statement. I would be happy to 

answer any questions that you or members of the Subcommittee may have. 

For future questions about this statement, please contact me at (202) 512-

4841. Individuals making key contributions to this statement include 

Robert L. Ackley, Lily J. Chin, Noah B. Bleicher, Marcus C. Ferguson, 

William R. Graveline, Guisseli Reyes, Michael J. Hesse, John P. Swain, 

Robert S. Swierczek, and Carrie R. Wilson. 

Contacts and Staff 

Acknowledgements 

(120523) 
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