United States Government Accountability Office

GAO Testimony 

Before the Committee on Oversight 

and Government Reform, 

House of Representatives 

HOMELAND SECURITY

Observations on the 

Department of Homeland 

Security’s Acquisition 

Organization and on the 

Coast Guard’s Deepwater 

Program 

Statement of David M. Walker 

Comptroller General of the United States 

For Release on Delivery

Expected at 10:00 a.m. EST 

Thursday, February 8, 2007 

 

GAO-07-453T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

February 8, 2007

HOMELAND SECURITY

Observations on the Department of 

Homeland Security's Acquisition 

Organization and on the Coast Guard's 

Deepwater Program 

Highlights of GAO-07-453T, a testimony 

before the Committee on Oversight and 

Government Reform, House of 

Representatives 

In January 2003, GAO designated

the Department of Homeland 

Security’s (DHS) implementation

and transformation as high risk 

because of the size and complexity 

of the effort and the existing

challenges faced by the 

components being merged into the 

department. The success of the 

effort to integrate numerous

agencies and organizations into one 

cabinet-level department rests in 

large part on DHS’s ability to 

effectively acquire the wide range

of goods and services it needs to

achieve its mission of protecting

the nation from terrorism. 

DHS is undertaking a number of 

large, complex investments as the

federal government increasingly 

relies on contractors for roles and

missions previously performed by

government employees. One of the 

department’s largest investments—

the Deepwater program, now 

estimated to cost $24 billion—is 

the Coast Guard’s major effort to

replace or modernize its aircraft

and vessels. Rather than using a 

traditional acquisition approach, 

the Coast Guard is using a system 

integrator to design, construct, 

deploy, support, and integrate the

Deepwater assets. 

Today, I would like to discuss (1)

the overarching challenges DHS 

faces in establishing an effective 

acquisition organization, (2) GAO’s 

prior work on Coast Guard and

contractor management of the

Deepwater program, and (3) the 

status of GAO’s ongoing reviews. 

GAO has reported in the past on acquisition management at several 

components of DHS and has assessed the department’s overall acquisition 

management and oversight efforts. A common theme in these reports is 

DHS’s struggle, from the outset, to provide adequate support to its mission 

components in acquiring goods and services and to provide departmentwide 

oversight of its acquisition function. DHS has a stated goal of integrating the 

acquisition function more broadly across the department. GAO has reported 

that this goal has not yet been accomplished and has identified key 

impediments to achieving it. A management directive intended to integrate 

the acquisition line of business did not provide the Chief Procurement 

Officer with the enforcement authority needed in practice, and it does not 

pertain to all component agencies. Also, the procurement organizations 

within the department remained somewhat autonomous, and centralized 

acquisition oversight had not been implemented. While DHS’s review 

process for major investments adopts some best practices, key decisionmaking reviews at certain points are not required. Investments that are not 

reviewed at the appropriate points can face a range of problems—such as

redesign—resulting in significant cost increases and schedule delays. 

The Coast Guard’s Deepwater program illustrates problems that can occur 

when effective program management and contractor oversight are not in 

place. In 2001, GAO described the Deepwater project as “risky” due to the 

unique, untried acquisition strategy for a project of this magnitude within the 

Coast Guard—a system-of-systems approach with the contractor as the 

integrator. In 2004, GAO reported that well into the contract’s second year, 

key components needed to manage the program and oversee the system 

integrator’s performance had not been effectively implemented. For 

example, integrated product teams, comprised of government and 

contractor employees, are the Coast Guard’s primary tool for managing the 

program and overseeing the contractor. GAO found that the teams had not 

been effective due to changing membership, understaffing, insufficient 

training, lack of authority for decision-making, and inadequate 

communication among members. GAO also reported that, despite 

documented problems in schedule, performance, cost control, and contract 

administration throughout the first year of the Deepwater contract, the 

contractor had received a rating of 87 percent, which fell in the “very good” 

range and resulted in an award fee of $4.0 million. GAO’s more recent work 

found that, while the Coast Guard had taken steps to address some of the 

problems, concerns remained about program management and contractor 

oversight. In addition to these overall management issues, there have been 

problems with the design and performance of specific Deepwater assets. 

 

Given the size of DHS and the scope of its acquisitions, GAO is continuing to 

assess the department’s acquisition oversight process and procedures in 

ongoing work. GAO is also currently reviewing the status of the Deepwater 

program’s implementation and contractor oversight. 

www.gao.gov/cgi-bin/getrpt?GAO-07-453T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Steve Caldwell 

at (202) 512-9610 or caldwells@gao.gov or

John Hutton at (202) 512-7773 or

huttonj@gao.gov. 
Mr. Chairman and Members of the Committee: 

Thank you for inviting me here today to discuss our reviews of the 

Department of Homeland Security’s (DHS) acquisition organization and 

the U.S. Coast Guard’s Deepwater program. When it was established in 

March 2003, DHS faced the challenge of integrating 22 separate federal 

agencies and organizations with multiple missions, values, and cultures 

into one cabinet-level department.1

 The success of this mammoth task—

one of the biggest mergers ever to take place within the federal 

government—rests in large part on DHS’s ability to implement the 

necessary management structure and processes for effectively acquiring 

goods and services. A wide range of contractor-provided products, 

technologies, and services are critical to the department’s ability to 

achieve its mission of protecting the nation from terrorism. For example, 

DHS has purchased increasingly sophisticated screening equipment for air 

passenger security, acquired technologies to secure the nation’s borders, 

and is upgrading the Coast Guard’s offshore fleet of surface and air assets. 

In January 2003, we designated DHS’s implementation and transformation 

as high risk because of the size and complexity of the effort and the 

existing challenges faced by the components being merged into the 

department.2 Although DHS has made some progress transforming its 

components into a fully functioning department, this transformation 

remains high risk.3

 DHS has yet to implement a corrective action plan that

includes a comprehensive transformation strategy, and its management 

systems—including those related to acquisition—are not yet integrated 

and wholly operational. DHS’s acquisition systems will require continued 

attention to help prevent waste and ensure that DHS can allocate its 

resources efficiently and effectively.

In fiscal year 2006, DHS reported obligating $15.6 billion in acquisitions, 

making it the third largest federal department in spending taxpayer 

dollars. DHS is undertaking large, complex investments as the federal 

government increasingly relies on contractors for roles and missions 

previously performed by government employees. Contractors have an 

 1

 When the department was established, 22 agencies and organizations were brought in;

Plum Island Animal Disease Center joined DHS afterward as the 23rd. 

2

 GAO, High-Risk Series: An Update, GAO-03-119 (Washington, D.C.: January 2003). 

3

 GAO, High-Risk Series: An Update, GAO-07-310 (Washington, D.C.: January 2007). 

Page 1 GAO-07-453T 
important role to play in the discharge of the government’s 

responsibilities, and in some cases the use of contractors can result in 

improved economy, efficiency, and effectiveness. At the same time, there 

may be occasions when contractors are used to provide certain services 

because the government lacks another viable and timely option. In such 

cases, the government may actually be paying more than if such services 

were provided by federal employees. In this environment of increased 

reliance on contractors, sound planning and contract execution are critical 

for success. We have previously identified the need to examine the 

appropriate role for contractors to be among the challenges in meeting the 

nation’s defense needs in the 21st century.4

 

My statement today will focus on the overarching challenges DHS faces in 

creating an effective, integrated acquisition organization and will discuss 

our prior work on one of the department’s most complex programs—the 

Coast Guard’s Deepwater program. I will also discuss areas where we 

have related ongoing work. 

This testimony is based on our work on DHS’s acquisition organization 

and the Deepwater program. That work was conducted in accordance with 

generally accepted government auditing standards. 

DHS faces challenges in creating an effective acquisition organization: Summary 

• DHS has a stated goal of integrating the acquisition function more broadly 

across the department. We have reported that this goal has not yet been 

accomplished and have identified key impediments to achieving it. A 

management directive intended to integrate the acquisition line of 

business did not provide the Chief Procurement Officer with the 

enforcement authority needed in practice, and it does not pertain to the 

Coast Guard and Secret Service. Also, the procurement organizations 

within the department remained somewhat autonomous, and centralized 

acquisition oversight had not been implemented. While DHS’s review 

process for major investments adopts some best practices, key decisionmaking reviews at certain points are not required. 

 4

 GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, 

GAO-05-325SP (Washington, D.C.: February 2005). 

Page 2 GAO-07-453T 
The Coast Guard’s Deepwater program illustrates the type of problems 

that can occur when effective program management and contractor 

oversight are not in place: 

• From the outset, we have expressed concern about the risks involved with

the Coast Guard’s acquisition strategy for the Deepwater program. In 2004, 

we reported that well into the contract’s second year, key components 

needed to manage the program and oversee the system integrator’s 

performance had not been effectively implemented. For example, 

integrated product teams, comprised of government and contractor 

employees, are the Coast Guard’s primary tool for managing the program 

and overseeing the contractor. We found that the teams had not been 

effective due to changing membership, understaffing, insufficient training,

lack of authority for decision-making, and inadequate communication 

among members. We also reported that, despite documented problems in 

schedule, performance, cost control, and contract administration 

throughout the first year of the Deepwater contract, the contractor had 

received a rating of 87 percent, which fell in the “very good” range and 

resulted in an award fee of $4.0 million of the maximum $4.6 million.5

 In 

2006, we reported that the Coast Guard had taken steps to address some of 

the problems we identified.6

 However, the actions had not been adequate

to resolve continuing concerns about program management and 

contractor oversight. In addition to these overall management issues, there 

have been problems with the design and performance of specific 

Deepwater assets. 

We continue to review DHS’s overall acquisition organization and the 

Deepwater program: 

• Clearly, the challenges DHS faces in establishing an effective, integrated

acquisition organization will take some time to resolve. We are continuing 

to assess DHS’s progress, as well as examining other aspects of its 

acquisition function such as its use of performance-based acquisitions. 

 5

 We recently reported on the Department of Defense’s use of award and incentive fees. 

GAO, Defense Acquisitions: DOD Has Paid Billions in Award and Incentive Fees 

Regardless of Acquisition Outcomes, GAO-06-66 (Washington, D.C.: Dec. 19, 2005).

6

 GAO, Coast Guard: Changes to Deepwater Appear Sound, and Program Management

Has Improved, but Continued Monitoring Is Warranted, GAO-06-546 (Washington, D.C.: 

Apr. 28, 2006). 

Page 3 GAO-07-453T 
• Similarly, we continue to review the Deepwater program as it moves into 

the 5th

 year of the contract. We recognize that a variety of factors have 

contributed to the problems we have identified. In some cases, the Coast

Guard has taken actions to improve outcomes; in other cases it has either 

not taken action or actions taken to date have not been effective. We are 

currently doing work on Deepwater for the House and Senate 

Appropriations Committees. When we complete our work in several 

months, we would be happy to provide our results to this committee. 

We have reported in the past on acquisition management at several 

components of DHS. We have also assessed the department’s overall 

acquisition management efforts. 7

 A common theme in these reports is 

DHS’s struggle, from the outset, to provide adequate procurement support 

to its mission components and to provide departmentwide oversight of its 

acquisition function. Of the 22 components that initially joined DHS from 

other agencies, only 7 came with their own procurement support. An 

eighth office, the Office of Procurement Operations, was created anew to 

provide support to a variety of DHS entities—but not until January 2004, 

almost a year after the department was created. DHS has established a 

goal of aligning procurement staffing levels with contract spending at its 

various components by the last quarter of fiscal year 2009. 

DHS has set forth a stated goal of integrating the acquisition function more 

broadly across the department. However, the goal has not been 

accomplished. In March 2005, we identified key factors impeding 

accomplishment of the department’s objective, including limitations of a 

2004 management directive and lack of departmentwide oversight of 

component acquisition organizations. We also identified potential gaps in 

the department’s knowledge-based approach for reviewing its major, 

complex investments. On a related issue, a number of systemic 

acquisition challenges we have identified at the Department of Defense 

could apply equally to DHS. 

Challenges to 

Creating an Integrated 

Acquisition Function 

at DHS 

 7

 GAO, Contract Management: INS Contracting Weaknesses Need Attention from the 

Department of Homeland Security, GAO-03-799 (Washington, D.C.: July 25, 2003);

Transportation Security Administration: High-Level Attention Needed to Strengthen

Acquisition Function, GAO-04-544 (Washington, D.C.: May 28, 2004); and Homeland

Security: Successes and Challenges in DHS’s Efforts to Create an Effective Acquisition

Organization, GAO-05-179 (Washington, D.C.: Mar. 29, 2005).

Page 4 GAO-07-453T 
In October 2004, the Secretary of DHS signed a management directive 

entitled “Acquisition Line of Business Integration and Management,” the 

department’s principal guidance for leading, governing, integrating, and 

managing the acquisition function. It directs managers from each 

component organization to commit resources to training, development, 

and certification of acquisition professionals. It also highlights the Chief 

Procurement Officer’s broad authority, including management, 

administration, and oversight of departmentwide acquisition.

However, we have reported that the directive may not achieve its goal of 

creating an integrated acquisition organization because it creates unclear 

working relationships between the Chief Procurement Officer and heads 

of DHS’s principal components. For example, the Chief Procurement 

Officer and the director of Immigration and Customs Enforcement share 

responsibility for recruiting and selecting key acquisition officials, 

preparing performance ratings for the top manager of the contracting 

office, and providing appropriate resources to support procurement 

initiatives. The policy leaves unclear how the responsibilities will be 

implemented or what enforcement authority the Chief Procurement 

Officer has to ensure that initiatives are carried out. 

Further, the directive does not apply to the Coast Guard or Secret Service,

two entities that are required by the Homeland Security Act of 20028

 to be 

maintained as distinct entities within DHS. According to the directive, the 

Coast Guard and Secret Service are exempted by statute. We are not 

aware of any explicit statutory exemption that would prevent the 

application of this directive. Nothing in the document would reasonably 

appear to threaten the status of these entities as distinct entities within the 

department or otherwise impair their ability to perform statutory missions. 

DHS’s General Counsel has agreed, telling us that the applicability of the 

directive is a policy, not legal, matter. Excluding certain components from 

complying with management directives regarding the acquisition function 

hampers efforts to integrate the acquisition organization. The Coast Guard, 

for example, is one of the largest organizations within DHS. 

Management Directive Has 

Limitations 

 8

 Pub. L. No. 107-296, §§ 821, 888, 116 Stat. 2135 (2002). 

Page 5 GAO-07-453T 
We have reported that DHS’s principal organizations are, to a large extent, 

still functioning much as they did in pre-merger days with regard to 

acquisition-related functions. Embedded within the seven procurement 

organizations that came to DHS were, for the most part, the same 

contracting staffs that joined the department from their former agencies.9

In addition, the Chief Procurement Officer, who is held accountable for 

departmentwide management and oversight of the acquisition function, 

lacks the enforcement authority and has limited resources to ensure 

compliance with acquisition policies and processes. As of August 2006, 

according to DHS officials, only five staff were assigned to 

departmentwide oversight responsibilities. The officials told us that, 

because their small staff faces the competing demands of providing 

departmentwide oversight and providing acquisition support for urgent 

needs at the component level, they have focused their efforts on 

procurement execution rather than oversight. Our prior work shows that 

in a highly functioning acquisition organization, the chief procurement 

officer is in a position to oversee compliance by implementing strong 

oversight mechanisms.10 Adequate oversight of acquisition activities across 

DHS is imperative, in light of the department’s mission and the problems 

that have been reported by us and inspectors general for some of the large 

components within the department. 

Some DHS organizations have large, complex, and high-cost acquisition 

programs—such as the Coast Guard’s Deepwater program—that need to

be closely managed. DHS’s investment review process involves several 

different levels of review, depending on the dollar threshold and risk level

of the program. Deepwater, for example, has been designated as a level 1

investment, meaning that it is subject to review at the highest levels within 

the department. We reported in 2005 that DHS’s framework for reviewing 

its major investments adopts several best practices from lessons learned 

from leading commercial companies and successful federal programs that, 

if applied consistently, could refine its ability to reduce risk to meet cost 

and delivery targets.11 One of these best practices is a knowledge-based 

approach for managers to hold reviews at key decision points in order to 

Procurement 

Organizations are 

Somewhat Autonomous 

and Lack Departmentwide 

Oversight 

Knowledge-based 

Acquisition Review 

Process 

 9 GAO-05-179. 

10 GAO, Best Practices: Taking a Strategic Approach Could Improve DOD’s Acquisition of 

Services, GAO-02-230 (Washington, D.C.: Jan. 18, 2002). 

11 GAO-05-179. 

Page 6 GAO-07-453T 
reduce risk before investing resources in the next phase of a program’s 

development. For example, DHS’s investment review policy encourages 

program managers to demonstrate a product’s design with critical design

reviews prior to a production decision. 

However, we have found that, based on our extensive body of work on this 

knowledge-based approach, additional program reviews could be 

incorporated into the process as internal controls to better position DHS 

to make well-informed decisions on its major, complex investments. For 

example, DHS does not require a review to ensure that an investment’s 

design performs as expected before investing in a prototype. We also 

reported that DHS review processes permitted low-rate initial production

to be well underway before a mandatory review gave the go-ahead to

proceed to production. A review prior to initiating low-rate initial 

production was not mandatory; rather, it was held at the discretion of the 

Investment Review Board (IRB). Our best practices work shows that 

successful investments reduce risk by ensuring that high levels of 

knowledge are achieved at these key points of development. We have 

found that investments that were not reviewed at the appropriate points 

faced problems—such as redesign—that resulted in cost increases and 

schedule delays. It is not clear how the Deepwater acquisition has been 

influenced by the department’s investment review process. According to a 

DHS official, an IRB review of the Deepwater acquisition program 

baseline, scheduled for January 2007, was postponed. 

In its Performance and Accountability Report for fiscal year 2006, DHS 

stated that it has improved its process for investment reviews by providing 

greater clarity on DHS policies and procedures. It acknowledges that 

developing and maintaining the capability needed to achieve DHS missions 

requires a robust investment program. DHS also states that its components 

are now required to report on the status of major investments on a 

quarterly basis and to submit information to ensure that investments are 

staying within established baselines for cost, schedule, and performance. 

The report says that the department will identify and introduce acquisition 

best practices into the investment review process by the first quarter of 

fiscal year 2008. 

We have identified a series of systemic acquisition challenges for complex, 

developmental systems, based mostly on our reviews of Department of 

Defense programs. In principle, many may apply equally to DHS as it 

moves forward with its major, complex investments. Some of these 

challenges include: 

Systemic Acquisition 

Challenges 

Page 7 GAO-07-453T 
• Program requirements are often set at unrealistic levels, then changed 

frequently as recognition sets in that they cannot be achieved. As a result, 

too much time passes, threats may change, and/or members of the user 

and acquisition communities may simply change their minds. The 

resulting program instability causes cost escalation, schedule delays, 

fewer quantities, and reduced contractor accountability. 

• Program decisions to move into design and production are made without 

adequate standards or knowledge. 

• Contracts, especially service contracts, often do not have measures in 

place at the outset in order to control costs and facilitate accountability. 

• Contracts typically do not accurately reflect the complexity of projects or

appropriately allocate risk between the contractors and the taxpayers. 

• The acquisition workforce faces serious challenges (e.g. size, skills, 

knowledge, succession planning). 

• Incentive and award fees are often paid based on contractor attitudes and 

efforts versus positive results, such as cost, quality, and schedule. 

• Inadequate government oversight results in little to no accountability for 

recurring and systemic problems. 

The Deepwater program is the Coast Guard’s major effort to replace or 

modernize its aircraft and vessels. It has been in development for a 

number of years. Between 1998 and 2001, three industry teams competed

to identify and provide the assets needed to transform the Coast Guard. In 

2001, we described the Deepwater project as “risky” due to the unique, 

untried acquisition strategy for a project of this magnitude within the 

Coast Guard.12 Rather than using the traditional approach of replacing 

classes of ships or aircraft through a series of individual acquisitions, the 

Coast Guard chose to use a system-of-systems acquisition strategy that 

would replace its deteriorating assets with a single, integrated package of

aircraft, vessels, and unmanned aerial vehicles, to be linked through 

systems that provide C4ISR,13 and supporting logistics. 

Deepwater Program 

Is Illustrative of 

Problems Stemming 

from Lack of Effective 

Program Management 

and Contractor 

Oversight 

 12 GAO, Coast Guard: Progress Being Made on Deepwater Project, but Risks Remain, 

GAO-01-564 (Washington, D.C.: May 2, 2001). 

13 C4ISR refers to command, control, communications, computer, intelligence, surveillance, 

and reconnaissance. 

Page 8 GAO-07-453T 
In June 2002, the Coast Guard awarded the Deepwater contract to 

Integrated Coast Guard Systems (ICGS). ICGS—a business entity jointly 

owned by Northrop Grumman and Lockheed Martin—is a system 

integrator, responsible for designing, constructing, deploying, supporting, 

and integrating the Deepwater assets to meet Coast Guard requirements. 

The management approach of using a system integrator has been used on 

other government programs that require system-of-systems integration, 

such as the Army’s Future Combat System, a networked family of weapons 

and other systems. This type of business arrangement gives the contractor

extensive involvement in requirements development, design, and source 

selection of major system and subsystem subcontractors. 

Government agencies have turned to the system integrator approach when

they believe they do not have the in-house capability to design, develop, 

and manage complex acquisitions. Giving contractors more control and 

influence over the government’s acquisitions in a system integrator role 

creates a potential risk that program decisions and products could be 

influenced by the financial interest of the contractor (who is accountable

to its shareholders), which may not match the primary interest of the 

government--maximizing its return on taxpayer dollars. The system 

integrator arrangement creates an inherent risk, as the contractor is given 

more discretion to make certain program decisions. Along with this 

greater discretion comes the need for more government oversight and an 

even greater need to develop well-defined outcomes at the outset. 

The proper role of contractors in providing services to the government is 

currently the topic of some debate. I believe there is a need to focus 

greater attention on what type of functions and activities should be 

contracted out and which ones should not. There is also a need to review 

and reconsider the current independence and conflict of interest rules 

relating to contractors. Finally, there is a need to identify the factors that

prompt the government to use contractors in circumstances where the 

proper choice might be the use of civil servants or military personnel. 

Possible factors could include inadequate force structure, outdated or 

inadequate hiring policies, classification and compensation approaches, 

and inadequate numbers of full-time equivalent slots. 

The Deepwater program has also been designated as a performance-based 

acquisition. When buying services, federal agencies are currently required

to employ—to the maximum extent feasible—this concept, wherein 

acquisitions are structured around the results to be achieved as opposed 

to the manner in which the work is to be performed. That is, the 

System Integrator Concept 

and the Role of 

Contractors 

Performance-based 

Acquisition 

Page 9 GAO-07-453T 
government specifies the outcome it requires while leaving the contractor

to propose decisions about how it will achieve that outcome. 

Performance-based contracts for services are required to include a 

performance work statement; measurable performance standards (i.e., in 

terms of quality, timeliness, quantity, etc.) and the method of assessing 

contractor performance against these standards; and performance 

incentives, where appropriate. If performance-based acquisitions are not

appropriately planned and structured, there is an increased risk that the 

government may receive products or services that are over cost estimates, 

delivered late, and of unacceptable quality. 

In 2001, we reported that the Deepwater project faced risks, including the

ability to control costs in the contract’s later years; ensuring that 

procedures and personnel were in place for managing and overseeing the 

contractor; and minimizing potential problems with developing unproven

technology.14 We noted that the risks could be mitigated to varying 

degrees, but not without management attention. Our assessment of the 

Deepwater program in 2004 found that the Coast Guard had not effectively 

managed the program or overseen the system integrator.15 We reported last

year that the Coast Guard had revised its Deepwater implementation plan

to reflect additional homeland security responsibilities as a result of the 

September 11, 2001, terrorist attacks.16 The revised plan increased overall

program costs from the original estimate of $17 billion to $24 billion. 

Overall, the acquisition schedule was lengthened by 5 years, with the final 

assets now scheduled for delivery in 2027. 

Our reported concerns in 2004 and in subsequent assessments in 2005 and 

2006 have centered on three main areas: program management, contractor

accountability, and cost control through competition. While we recognize 

that the Coast Guard has taken steps to address our findings and 

recommendations, aspects of the Deepwater program will require 

continued attention, such as the risk involved in the system-of-systems 

approach with the contractor acting as overall integrator. A project of this 

Assessments of Deepwater 

Program 

 14 GAO-01-564. 

15GAO, Contract Management: Coast Guard’s Deepwater Program Needs Increased

Attention to Management and Contractor Oversight, GAO-04-380 (Washington, D.C.: Mar.

9, 2004). 

16 GAO-06-546.

Page 10 GAO-07-453T 
magnitude will likely continue to experience other problems as more 

becomes known. 

In 2004, we reported that more than a year and a half into the Deepwater 

contract, the key components needed to manage the program and oversee 

the system integrator had not been effectively implemented. For example, 

integrated product teams, comprised of government and contractor 

employees, are the Coast Guard’s primary tool for managing the program 

and overseeing the contractor. We found that the teams had not been 

effective due to changing membership, understaffing, insufficient training,

lack of authority for decision making, and inadequate communication 

among members. 

Although some efforts have been made to improve the effectiveness of the 

integrated product teams, we have found that the needed changes are not

yet sufficiently in place. In 2005, we reported that decision making was to 

a large extent stove-piped, and some teams lacked adequate authority to 

make decisions within their realm of responsibility.17 One source of 

difficulty for some team members has been the fact that each of the two 

major subcontractors has used its own management systems and 

processes to manage different segments of the program. We noted that 

decisions on air assets were made by Lockheed Martin, while decisions 

regarding surface assets were made by Northrop Grumman. This approach 

can lessen the likelihood that a system-of-systems outcome will be 

achieved if decisions affecting the entire program are made without the 

full consultation of all parties involved. In 2006, we reported that Coast 

Guard officials believed collaboration among the subcontractors to be 

problematic and that ICGS wielded little influence to compel decisions 

among them. For example, when dealing with proposed design changes to

assets under construction, ICGS submitted the changes as two separate 

proposals from both subcontractors rather than coordinating the separate

proposals into one coherent plan. According to Coast Guard performance 

monitors, this approach complicates the government review of design 

changes because the two proposals often carried overlapping work items, 

thereby forcing the Coast Guard to act as the system integrator in those 

situations. 

Program Management 

 17 GAO, Coast Guard: Progress Being Made on Addressing Legacy Asset Condition Issues 

and Program Management, but Acquisition Challenges Remain, GAO-05-757 

(Washington, D.C.: July 22, 2005). 

Page 11 GAO-07-453T 
In addition, we reported in 2004 that the Coast Guard had not adequately 

communicated to its operational personnel decisions on how new and old

assets would be integrated and how maintenance responsibilities would be 

divided between government and contractor personnel. We also found that 

the Coast Guard had not adequately staffed its program management 

function. Despite some actions taken to more fully staff the Deepwater 

program, we reported that in January 2005 shortfalls remained. While 244 

positions were assigned to the program, only 206 were filled, resulting in a 

16 percent vacancy rate.

In 2004, we found that the Coast Guard had not developed quantifiable 

metrics to hold the system integrator accountable for its ongoing 

performance and that the process by which the Coast Guard assessed 

performance after the first year of the contract lacked rigor. For example, 

the first annual award fee determination was based largely on

unsupported calculations. Despite documented problems in schedule, 

performance, cost control, and contract administration throughout the 

first year, the program executive officer awarded the contractor an overall

rating of 87 percent, which fell in the “very good” range. This rating 

resulted in an award fee of $4.0 million of the maximum of $4.6 million. 

We also reported in 2004 that the Coast Guard had not begun to measure 

the system integrator’s performance on the three overarching goals of the 

Deepwater program—maximizing operational effectiveness, minimizing 

total ownership costs, and satisfying the customers. Coast Guard officials 

told us that metrics for measuring these objectives had not been finalized; 

therefore they could not accurately assess the contractor’s performance 

against the goals. However, at the time, the Coast Guard had no time frame 

in which to accomplish this measurement. 

In 2004, we reported that, although competition among subcontractors 

was a key vehicle for controlling costs, the Coast Guard had neither 

measured the extent of competition among the suppliers of Deepwater 

assets nor held the system integrator accountable for taking steps to 

achieve competition.18 As the two major subcontractors to ICGS, Lockheed 

Martin and Northrop Grumman have sole responsibility for determining 

whether to provide the Deepwater assets themselves or to hold 

Contractor Accountability 

Cost Control through 

Competition 

 18 GAO-04-380. 

Page 12 GAO-07-453T 
competitions—decisions commonly referred to as “make or buy.” We 

noted that the Coast Guard’s hands-off approach to make-or-buy decisions 

and its failure to assess the extent of competition raised questions about 

whether the government would be able to control Deepwater program 

costs. 

Failure to control costs can result in waste of taxpayer dollars. Along with 

my several colleagues in the accountability community, I have developed a 

definition of waste. As we see it, waste involves the taxpayers in the 

aggregate not receiving reasonable value for money in connection with 

any government funded activities due to an inappropriate act or omission

by players with control over or access to government resources (e.g., 

executive, judicial or legislative branch employees, contractors, grantees 

or other recipients). Importantly, waste involves a transgression that is 

less than fraud and abuse and most waste does not involve a violation of

law. Rather, waste relates primarily to mismanagement, inappropriate 

actions, or inadequate oversight. 

We made 11 recommendations in 2004 in the areas of management and 

oversight, contractor accountability, and cost control through 

competition. In April 2006, we reported that the Coast Guard had 

implemented five of them. Actions had been taken to 

Status of 

Recommendations

• revise the Deepwater human capital plan; 

• develop measurable award fee criteria; 

• implement a more rigorous method of obtaining input from Coast Guard 

monitors on the contractor’s performance; 

• include in the contractor’s performance measures actions taken to 

improve the integrated product teams’ effectiveness; and 

• require the contractor to notify the Coast Guard of subcontracts over $10 

million that were awarded to the two major subcontractors.19

The Coast Guard had begun to address five other recommendations by 

• initiating actions to establish charters and training for integrated product 

teams; 

 19 Our 2004 recommendation was to use a $5 million threshold because Lockheed Martin, 

one of the major subcontractors, uses that amount as the threshold for considering its

suppliers major. The Coast Guard decided to use the $10 million threshold based on the

criteria in the make-or-buy program provisions of the Federal Acquisition Regulation. 

Page 13 GAO-07-453T 
• improving communications with field personnel regarding the transition to 

Deepwater assets; 

• devising a time frame for measuring the contractor’s progress toward 

improving operational effectiveness; 

• establishing criteria to determine when to adjust the project baseline; and

• developing a plan to hold the contractor accountable for ensuring 

adequate competition among suppliers. 

We determined that, based on our work, these recommendations had not 

been fully implemented. 

The Coast Guard disagreed with and declined to implement one of our 

recommendations, to establish a baseline to determine whether the 

system-of-systems acquisition approach is costing the government more 

than the traditional asset replacement approach. While we stand behind 

our original recommendation, the Coast Guard maintains that the cost to

implement this recommendation would be excessive. 

In addition to overall management issues discussed above, there have

been problems with the design and performance of specific Deepwater 

assets. For example, in February 2006, the Coast Guard suspended design 

work on the Fast Response Cutter (FRC) due to design risks such as 

excessive weight and horsepower requirements.20 The FRC was intended 

as a long-term replacement for the legacy 110-foot patrol boats. Coast 

Guard engineers raised concerns about the viability of the FRC design 

(which involved building the FRC’s hull, decks, and bulkheads out of 

composite materials rather than steel) beginning in January 2005. In 

February 2006, the Coast Guard suspended FRC design work after an 

independent design review by third-party consultants demonstrated, 

among other things, that the FRC would be far heavier and less efficient 

than a typical patrol boat of similar length, in part, because it would need 

four engines to meet Coast Guard speed requirements. 

In moving forward with the FRC acquisition, the Coast Guard will end up 

with two classes of FRCs. The first class of FRCs to be built would be 

based on an adapted design from a patrol boat already on the market to 

expedite delivery. The Coast Guard would then pursue development of a 

Performance and Design 

Problems 

 20GAO, Coast Guard: Status of Deepwater Fast Response Cutter Design Efforts, GAO-06-

764 (Washington, D.C.: June 23, 2006). 

Page 14 GAO-07-453T 
follow-on class that would be completely redesigned to address the 

problems in the original FRC design plans. Coast Guard officials now 

estimate that the first FRC delivery will slip to fiscal year 2009, at the 

earliest, rather than 2007 as outlined in the 2005 Revised Deepwater 

Implementation Plan. 

In addition to problems with the FRC design, problems have also been 

discovered with the long-term structural integrity of the National Security 

Cutter’s (NSC) design, which could pose operational and financial impacts 

to the Coast Guard. The Commandant of the Coast Guard recently stated 

that internal reviews by Coast Guard engineers, as well as by independent

analysts have concluded that the NSC as designed will need structural 

reinforcement to meet its expected 30-year service life. In addition, a 

recent report by the DHS Inspector General indicated that the NSC design 

will not achieve a 30-year service life based on an operating profile of 230 

days underway per year in General Atlantic and North Pacific sea 

conditions and added that Coast Guard technical experts believe the 

NSC’s design deficiencies will lead to increased maintenance costs and 

reduced service life.21

In an effort to address the structural deficiencies of the NSC, the 

Commandant has stated that the Coast Guard is taking a two-pronged 

approach. First, the Coast Guard is working with the contractors to 

enhance the structural integrity of hulls three through eight that have not

yet been constructed. Second, after determining that the NSC’s structural 

deficiencies are not related to the safe operation of the vessel in the near 

term, the Coast Guard has decided to address the deficiencies of hulls one 

and two as part of depot-level maintenance, planned for several years after 

they are delivered. The Commandant stated that he decided to delay the 

repairs to the first two NSC hulls in an effort to prevent further cost 

increases or delays in construction and delivery.

Further, the Deepwater program’s conversion of the legacy 110-foot patrol 

boats to 123-foot patrol boats has also encountered performance 

problems. The Coast Guard had originally intended to convert all 49 of its 

110-foot patrol boats into 123-foot patrol boats in order to increase the 

patrol boats’ annual operational hours. This conversion program was also 

intended to add additional capability to the patrol boats, such as enhanced 

 21 Department of Homeland Security, Office of Inspector General, Acquisition of the 

National Security Cutter, U.S. Coast Guard, OIG-07-23 (Washington, D.C.: Jan. 23, 2007). 

Page 15 GAO-07-453T 
and improved C4ISR capabilities, as well as stern launch and recovery 

capability for a small boat. However, the converted 123-foot patrol boats 

began to display deck cracking and hull buckling and developed shaft 

alignment problems, and the Coast Guard elected to stop the conversion 

process at eight hulls upon determining that the converted patrol boats 

would not meet their expanded post-9/11 operational requirements. 

The design and performance problems illustrated above have clear 

operational consequences for the Coast Guard. In the case of the 123-foot

patrol boats, the hull performance problems cited above led the Coast 

Guard to suspend all normal operations of the eight converted normal 123-

foot patrol boats effective November 30, 2006. The Commandant of the 

Coast Guard has stated that having reliable, safe cutters is “paramount” to 

executing its missions, such as search and rescue and migrant

interdiction.22 The Coast Guard is exploring options to address operational 

gaps resulting from the suspension of the 123-foot patrol boat operations. 

In regard to the suspension of FRC design work, as of our June 2006 

report, Coast Guard officials had not yet determined how changes in the 

design and delivery date for the FRC would affect the operations of the 

overall system-of-systems approach. However, because the delivery of 

Deepwater assets are interdependent within this acquisition approach, 

schedule slippages and uncertainties associated with potential changes in

the design and capabilities of the new assets have increased the risks that 

the Coast Guard may not meet its expanded homeland security 

performance requirements within given budget parameters and milestone 

dates. 

Given the size of DHS and the scope of its acquisitions, we are continuing

to assess the department’s acquisition oversight process and procedures in 

ongoing work. For example, we are currently reviewing DHS’s use of 

contractors to provide management and professional services, including 

the roles they are performing and how their performance is overseen. In

addition, the conference report to the Department of Homeland Security 

Appropriations Act for Fiscal Year 200723 directed DHS’s Chief 

Problems Have 

Operational Consequences 

Additional Reviews 

Ongoing 

 22 Coast Guard Suspends Converted Patrol Boat Operations, November 30, 2006, U.S. 

Coast Guard, Office of Public Affairs. 

23 H.R. Conf. Rep. No. 109-699, at 118 (2006). 

Page 16 GAO-07-453T 
Procurement Officer to develop a procurement oversight plan, identifying

necessary oversight resources and how improvements in the department’s 

performance of its procurement functions will be achieved. We have been 

directed to review the plan and provide our observations to congressional 

committees. We are also reviewing the department’s use of performancebased acquisitions. 

We will also continue to review Deepwater implementation and contract 

oversight. We are currently reviewing aspects of the Deepwater program 

for the House and Senate Appropriations Committees’ Subcommittees on

Homeland Security.24 Our objectives are to review (1) the status of the 

development and delivery of the major aviation and maritime assets that 

comprise the Coast Guard’s Deepwater program; (2) the history of the 

contract, design, fielding, and grounding of the converted 123-foot patrol 

boats and operational adjustments the Coast Guard making to account for 

the removal from service of the 123-foot patrol boats; and (3) the status of 

the Coast Guard’s implementation of our 2004 recommendations on 

Deepwater contract management for improving Deepwater program 

management, holding the prime contractor accountable for meeting key 

program goals, and facilitating cost control through competition. We will 

share our results with those committees in April of this year.

Due to the complexity of its organization, DHS is likely to continue to face

challenges in unifying the acquisition functions of its components and 

overseeing their acquisitions—particularly those involving large and 

complex investments. Although the Coast Guard has taken actions to 

improve its management of the Deepwater program and oversight of the 

system integrator, problems continue to emerge as the program is 

implemented. DHS and the Coast Guard face the challenge of effectively 

managing this program to obtain desired outcomes while making decisions 

that are in the best interest of the taxpayer. Given its experience with 

Deepwater, the department would be wise to apply lessons learned to its

other major, complex acquisitions, particularly those involving a system 

integrator. 

Concluding 

Observations 

 24 This work is based on Conference Committee Report language (H.R. Conf. Rep. No. 109-

699, at 118 (2006)) incorporating GAO reporting provisions contained in a House 

Appropriations Committee Report (H.R. Rep. No. 109-476, at 15 (2006)).

Page 17 GAO-07-453T 
Mr. Chairman, that concludes my statement. I would be happy to respond

to any questions you or other Members of the Committee may have at this

time. 

For information about this testimony, contact Steve Caldwell at (202) 512-

9610 or John Hutton at (202) 512-7773. Other individuals making key 

contributions to this testimony include Michele Mackin, Christopher 

Conrad, and Adam Couvillion. 

Page 18 GAO-07-453T 

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