United States Government Accountability Office

Washington, DC 20548 

December 21, 2006 

The Honorable C. W. Bill Young 

Chairman 

The Honorable John P. Murtha 

Ranking Minority Member 

Subcommittee on Defense 

Committee on Appropriations 

House of Representatives 

Subject: Defense Contracting—Questions for the Record 

On September 7, 2006, I testified before the Subcommittee on recent trends in Department of 

Defense (DOD) contracting. Specifically, I testified about practices that undermine DOD’s 

ability to establish sound business arrangements, particularly those involving the selection and 

oversight of DOD’s contractors and their performance. The need for prudence with taxpayer 

funds and long-range fiscal challenges demand that DOD ensure that its funds are spent wisely, 

and that it is buying the right things, the right way. 

The Subcommittee requested that I respond to a number of post-hearing questions relating to 

various issues, including measures that DOD can employ to ensure better contracting 

outcomes. The specific questions and my responses are attached in appendix I. The responses 

are based on previously issued GAO products on DOD acquisitions, all of which were 

conducted in accordance with generally accepted government auditing standards. Because the 

responses are based on prior work, we did not obtain comments from DOD. 

We will make copies of this letter available to others upon request, and it will be available at no 

charge on the GAO Web site at http://www.gao.gov. If you have any questions about this letter 

or need additional information please contact Katherine V. Schinasi at (202) 512-4841 or 

schinasik@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs 

may be found on the last page of this letter. Key contributors to this letter were Carol Dawn 

Petersen, Chris Kunitz, and Bill Woods. 

Sincerely, 

David M. Walker 

Comptroller General 

of the United States 

Attachment

 GAO-07-217R Defense Contracting
Appendix I: GAO Responses to Questions for the Record

Award and Incentive Fees

1. Could you address how these award and incentive fees work, in practical terms? 

When we talk about fees, we are really talking about a government expense and a form of 

profit for contractors. Depending on how a contract is structured, award and incentive fees 

can account for all or a portion of a contractor’s potential fee or profit. Unlike other 

contracts, award- and incentive-fee contracts allow an agency to adjust the amount of fee 

paid to contractors based on the contractors’ performance. In practical terms, an award-fee 

contract sets up a system where the government periodically assesses the contractor’s 

performance in areas such as quality, timeliness, technical ingenuity, and cost-effective 

management. These criteria are generally subjective and can include inputs as well as 

outcomes. Incentive fees, however, are more objective and outcome-based. The contract 

identifies specific cost or delivery targets, and/or performance goals, and the amount of fee 

earned by the contractor is to be directly related to achievement of these goals.

2. Do you believe they are an effective way to create incentives with contractors? In 

other words, do they improve contractor performance? 

Award and incentive fees can be an effective tool if properly designed and effectively 

administered. However, for these fees to be effective, DOD must address the underlying 

problems in its acquisition system and more directly link the fees to the outcomes it wants. 

Because the weapon system programs that result from this system are in many cases 

unexecutable and/or subject to changing “requirements” or funding levels, DOD has been 

unwilling to hold its programs or its contractors accountable for achieving the very 

acquisition outcomes it has identified. As a result, fees are paid even when outcomes do not 

meet expectations. Addressing these broader acquisition issues and strengthening the link 

between fees and acquisition outcomes can increase the accountability of DOD programs for 

fees paid, of contractors for results achieved, and the likelihood that these fees will motivate 

the contractors and be an effective tool for the government. 

3. Do you believe we should discontinue the use of award and incentive fees? 

No, we do not believe they should be discontinued. Award and incentive fees can be useful if 

they are used in the appropriate setting. Each contract type has a use based on the level of 

risk involved. The problem occurs when you proceed into programs without realistic 

requirements and sufficiently mature technologies on which to base realistic cost and 

schedule estimates and attempt to offset that increased risk by offering award fees to 

motivate the contractor to overcome that risk. The important question is: Have you 

adequately defined and established appropriate criteria that enable you to measure 

outcomes? And finally, how do you apply those criteria in determining the level of fee that 

can be justified? We have made several recommendations to this effect, and DOD has 

responded favorably with new guidance to link award fees to acquisition outcomes. 

However, as with other recommendations we have made related to DOD weapon system 

acquisitions, the key will be how this new policy is implemented. 

Page 1 GAO-07-217R Defense Contracting
Acquisition Policy

1. Given that DOD’s acquisition policy seems to embrace practices endorsed by the 

Defense Acquisition Performance Assessment, the Defense Science Board Summer 

Study 2005, and GAO, what is preventing the services from consistently executing 

these policies? 

The services are not consistently executing these policies because DOD is not enforcing a 

knowledge-based approach, discipline is lacking, and business cases do not measure up. This 

is occurring, in part, because there are no consequences for actions that run counter to the 

intent of DOD acquisition polices—officials responsible for approving program starts are no 

longer in their positions by the time the consequences of their actions become evident. The 

department routinely accepts high levels of technology risk at the start of major acquisition 

programs. Mature technologies are pivotal to developing new products. Without mature 

technologies at the outset, a program will almost certainly incur cost and schedule problems. 

However, DOD’s acquisition community moves forward on programs with technologies 

before they are mature and takes on responsibility for technology development and product 

development concurrently. Our work has also shown that DOD allows programs to begin

without establishing a sound business case that matches requirements with technology, 

acquisition strategy, time, and funding. And once these programs begin, their requirements 

and funding change over time. In fact, program managers consider shifting requirements—

which can result in added program complexity and costs—and funding instabilities—which 

occur throughout the program—to be their biggest obstacles to success. Fundamentally, 

DOD will need to reexamine the entirety of its acquisition process and how it is affected by

requirements and funding processes. This includes making significant changes to program 

requirements setting, funding, and execution. 

2. What else is needed to ensure that cost, schedule, and performance outcomes for 

new weapons are predictable and achievable when these programs seek approval 

from Congress? 

DOD needs to take additional steps to achieve outcomes on par with best practices. These 

include 

• developing and implementing an acquisition investment strategy; 

• ensuring that individual programs are executable; and 

• clearly delineating responsibilities and holding government employees and contractors 

accountable for achieving desired results. 

While DOD has incorporated into policy a framework that supports a knowledge-based 

acquisition process similar to that used by leading organizations, it must establish stronger 

controls to ensure that decisions on individual programs are informed by demonstrated

knowledge. Moreover, Congressional approval of programs that have not taken these steps 

encourages DOD’s subsequent requests for additional funding. 

Page 2 GAO-07-217R Defense Contracting
3. What are the services doing now to ensure that the technologies in these programs 

are achieving the desired level of maturity before they proceed into system 

development? 

DOD is now required by law to certify to the Congress that technology is demonstrated to a 

specific maturity level before being approved for system development. However, this is a 

recent statutory requirement and it is too early to tell whether this requirement will ensure 

achievement of the desired technology maturity level before programs are authorized to 

proceed into system development. Prior to this new law, some of the criteria upon which this 

certification is based were reflected in DOD policy. However, our prior work showed that 

DOD written polices are not always observed in practice. 

4. GAO believes a sound business case is needed before a weapon system begins 

system development and demonstration yet finds many of the existing weapons’ 

business cases to be broken. What do you consider key elements of a business case 

for starting a development program and how do you ensure these are followed in 

each planned development program? 

The following are the essential elements of a sound business case: 

• A requirement exists that warrants a solution consistent with national security priorities. 

• The developer has the mature technologies and technical knowledge necessary to meet 

the requirement. 

• The developer has a knowledge-based product development plan that will attain high 

levels of design and production maturity at the right times. 

• Reasonable estimates have been developed to execute the product development and 

production plan. 

• Current and future funding will be available to fully resource the product development 

and production plan. 

• The agency has the capacity, either in-house or by contractual arrangement, to manage its 

programs, including ensuring that contractors are subject to appropriate independent 

oversight as to cost, schedule, and quality. 

To ensure that these elements are in place at the individual program level, DOD needs to 

(1) begin programs in the context of an overall funding-constrained, weapon system 

portfolio, and (2) say “no” when individual programs do not measure up. DOD will need the 

support of the Congress to succeed. 

Page 3 GAO-07-217R Defense Contracting
Management of Technological Risk

1. It has often been demonstrated that concurrent technology development and 

production in programs lead to wasted funds and undelivered capability. Do you 

share in this concern? Please elaborate.

I do share in this concern. It is essential that technology be developed separately—and 

before—the development phase of a product or weapon system. This is a best practice that 

results in predictable program outcomes. Our work shows programs that proceed with 

mature technology average about 5 percent cost growth; programs with immature technology 

experience about 35 percent cost growth. Moreover, immature technology delays design and 

production maturity. 

2. Your most recent annual report on DOD weapon systems has many cases in which 

programs are entering production before TRL Level 7 has been reached. Can you 

offer some examples of programs with unnecessary concurrency? 

As we noted in that report (GAO-06-391), allowing technology development to spill over into 

product development puts an extra burden on decision makers and provides a weak 

foundation for making product development estimates. We found that programs that began 

with immature technologies have experienced average research and development cost 

growth of 34.9 percent; programs that began with mature technologies have only experienced 

cost growth of 4.8 percent. Examples of programs with concurrency include the F-22A, the 

Joint Strike Fighter, the Future Combat Systems, the VH-71 Presidential Helicopter, the 

Global Hawk, the CVN-21, the DDG-1000, the Multi-mission Maritime Aircraft, and the 

National Polar-orbiting Operational Environmental Satellite System, among others. 

3. What prevents service acquisition executives from demanding that acquisition 

programs not go forward until technology is mature? 

First, the budgeting process requires that funding for a program is put on the table 2 to 

3 years in advance—this creates pressure to proceed with the program despite how mature 

the technology is. Second, the requirements process tends to settle on ultimate performance, 

which puts pressure on programs to reach for exotic technology. Third, it is easier to say 

“yes” than “no”. There can always be a compelling case made that a particular program is an 

exception; the problem is that there are way too many exceptions. And finally, this is 

occurring, in part, because there are no consequences for actions that run counter to the 

intent of DOD acquisition polices—officials responsible for approving programs are no 

longer in their positions by the time the consequences of their actions become evident. 

4. Should concurrent technology development and system production be an exception 

rather than the rule? 

Definitely. Sequential phasing of technology development and system development is DOD 

policy, best practice, and essential to delivering capability faster to the warfighter and more 

economically to the taxpayer. 

Page 4 GAO-07-217R Defense Contracting
5. What concrete proposals should be put in place to ensure programs are not allowed 

to proceed to production without demonstrated maturity in technology? 

DOD needs to make sure each new program is executable before the development begins, 

and well before production is considered. For example, 

• Science and technology organizations need the resources, authority, and tools to mature 

technology and transition it to acquisition programs. 

• Requirements must be clearly defined and achievable given available resources, including 

beginning product development with mature technologies. Once begun, requirements 

should not change without assessing their potential to disrupt the program and without 

being fully resourced. 

• DOD should say no to programs that do not measure up, including canceling programs 

when appropriate. 

• If a decision is made to proceed with immature technologies, the cost and schedule 

estimates should be increased commensurate with the additional risk. 

In addition, the Congress can help by not funding programs that do not measure up. 

Role of Contractors 

1. Would you agree that DOD is relying more heavily on contractors to manage and 

deliver weapon systems? 

It is clear that DOD continues to increase its reliance on contractors to provide both products 

and services. DOD’s obligations on service contracts rose from $82.3 billion in fiscal year 

1996 to $141.2 billion in fiscal year 2005. Based on our work looking at various major 

systems, we have observed how DOD is relying on contractors in new ways to manage and 

deliver weapon systems. For example, the Army’s Future Combat Systems is using a lead 

system integrator approach in which the prime contractor has greater than usual 

responsibilities in areas such as requirements definition, system design, and selection of 

major subsystem contractors. This could increase taxpayer risk, especially if the government 

does not provide adequate oversight.

2. What factors are contributing to this increased dependence on contractors? 

A variety of factors have contributed to the increased dependence on contractors. In the case 

of the Future Combat Systems program, for example, the Army chose to use a lead systems 

integrator because it did not believe it had the in-house resources or flexibility to field such a 

complex system in the time required. More generally, spending on service contracting has 

increased in part to compensate for a declining civilian workforce. Increased security 

requirements since September 11 have also led to more contract spending, particularly in 

areas such as guard services. 

Page 5 GAO-07-217R Defense Contracting
3. What risks does it pose to protecting the government’s interests? 

As reliance on contractors has increased, so has the need to ensure that the government’s 

interests are protected. Organizational conflicts of interest present one type of risk to the 

government and these must be identified and managed, which requires careful government 

oversight. When the government is acquiring services, challenges arise when attempting to 

define requirements, establish measurable and performance-based outcomes, and assess 

contractor performance. 

4. Do you think this increased dependence has been a conscious, managed trend, or 

has it more or less happened to us? 

In the area of service acquisitions in particular, which currently exceeds the value of major 

weapon systems, the growth in spending has not been a managed outcome. For example, 

when DOD reduced the size of its civilian workforce in the 1990s, it did so without 

proactively shaping the workforce to ensure that it had the specific skills and competencies

needed to accomplish its mission. DOD has acknowledged that it faces significant workforce 

challenges that, if not effectively addressed, could impair the responsiveness and quality of 

acquisition outcomes. In a recent report, DEFENSE ACQUISITIONS: Tailored Approach 

Needed to Improve Service Acquisition Outcomes, GAO-07-20, Nov. 2006, we recommended 

a number of steps DOD should take to make service acquisitions a managed outcome. 

5. What steps do we need to take to protect the government’s interests (that is, on

behalf of both the warfighter and the taxpayer) in an environment of increasing 

dependence on contractors? 

We are currently reviewing a number of aspects of this issue, including conflict of interest 

laws and ethical conduct standards for contractor employees. In addition, the Congress can 

play an important role through its oversight function in making sure that taxpayer interests 

are protected. On November 17, 2006, we offered a set of issues, based on GAO’s work, for 

consideration for the agenda of the 110th Congress (Suggested Areas for Oversight for the 

110th Congress, GAO-07-235R). The first set suggested targets for near-term oversight, 

including the need to address governmentwide acquisition and contracting issues. In this 

regard, we noted that the work of the government is increasingly being performed by 

contractors and many agencies rely on contractors to carry out their basic missions. At the 

same time, GAO’s list of government high-risk areas includes acquisition and contract 

management issues that collectively expose hundreds of billions of taxpayer dollars to 

potential waste and misuse. Consequently, we suggested that Congress continue to monitor 

agencies’ efforts to address existing problems, while facilitating a re-examination of the rules 

and regulations that govern the government-contractor relationship in an increasingly 

blended workforce. Actions and topics that need continued congressional oversight include: 

• requiring agencies to report on mechanisms in place to ensure that contractors are 

playing appropriate roles and that agencies have retained sufficient workforce capacity to 

monitor contractor cost, quality, and performance, particularly in such critical operations 

as responding to Hurricane Katrina and rebuilding Iraq; 

Page 6 GAO-07-217R Defense Contracting
• assessing agencies’ efforts to ensure that acquisitions are performance- and outcomebased, with appropriate risk-sharing contracts in place. 

• requiring agencies with significant acquisition budgets, such as DOD, to better align 

requirements, budget, and acquisition processes to reconcile the differences between 

wants, needs, affordability, and sustainability, given current and future demands and 

resources; and 

• monitoring the implementation of agency action plans to address the GAO high-risk areas 

related to acquisition and contract management. 

Incremental Funding

1. Is it a good idea to expand the use of incremental funding for major weapon system 

programs? If not, why not? 

GAO has advocated full funding for capital asset acquisitions as a way to increase recognition 

of implied commitments embodied in budgetary decisions as compared to the incremental 

funding approach. That said, I am not aware of any plans by DOD to expand the use of 

incremental funding for major weapon system programs. Nevertheless, in testimony earlier 

this year before the Airland Subcommittee of the Senate Armed Services Committee, I 

expressed concern about an Air Force plan to use incremental funding for a multiyear 

contract for the F-22A program (TACTICAL AIRCRAFT: Questions Concerning the F-22A’s 

Business Case, GAO-06-991T, July 25, 2006). Subsequent to that hearing, the Congress 

authorized multiyear procurement for the F-22A, but expressly prohibited the use of 

incremental funding for the contract. 

 

2. Is it more dangerous to expand the use of incremental funding when the overall 

budget is projected to fall or become more competitive? If so, why? 

Inherent in the concept of incremental funding of a program or project is the expectation that 

additional funds will be available in subsequent years to bring the program or project to 

completion. Declining budgets or increased competition for available resources in 

subsequent years would certainly make it more difficult for that expectation to be realized. 

 

NAVY: DD(X) Destroyer

1. What factors have contributed to driving DD(X) costs up and quantities down? 

DD(X) (now DDG 1000) lead ship procurement costs have increased to $3.3 billion because 

the Navy underestimated the resources that would be required to construct (as well as 

design) a multi-mission ship offering significant new capabilities related to air defense, land 

attack, and undersea warfare. In addition, the Navy did not complete a comprehensive, 

program life cycle cost estimate until March 2005. Prior to this estimate, the Navy relied on

program and contractor estimates and the life cycle cost estimate completed in 1997 for the 

former DD 21 program. 

Page 7 GAO-07-217R Defense Contracting
2. Is this symptomatic of DOD’s requirements, budgeting, and acquisition processes in 

general? 

Yes. Our work has shown that DOD programs often cost more and take longer to develop 

than estimated when program managers are forced to make cost and schedule predictions 

based on unproven technologies. Alternatively, initiating product development with a high

level of knowledge about program technologies can help mitigate such risks. 

As knowledge has grown in the DD(X) program, the Navy has frequently discovered that its 

desired capabilities did not align with the funding it had available. To compensate, the Navy 

has steadily reduced planned ship quantities and land attack capabilities to enable continued 

funding of other technology demonstration efforts on the ship. 

We have also pointed out that the Navy generally does not hold a milestone B, which 

approves entry into the System Development and Demonstration phase, for ship programs 

until it is authorizing ship construction. Other DOD programs are required to complete 

milestone B before entering System Development and Demonstration. Completion of an 

independent cost estimate is tied to the milestone. As a result the Navy invested billions in 

DD(X) research and development without an in-depth analysis of cost. This practice of 

delaying the milestone continues today on such programs as Littoral Combat Ship and 

amphibious assault ship 

(LHA 6). 

3. What are the key risks that could jeopardize delivering the DD(X) on time and 

within cost? 

The Navy’s strategy to continue maturing DD(X) technologies while refining the ship’s design 

and beginning construction of lead ships places the program at significant risk for additional 

cost growth and schedule delays. 

Key development risks include remaining work associated with maturing technologies, 

especially the volume search radar; completing design of the integrated deckhouse; and 

maintaining software release schedules. 

Because the Navy plans to begin construction of the lead DD(X) ships with an incomplete 

understanding of the ship’s critical technologies, design changes may occur that could 

require costly rework throughout the construction phase for the lead ships. 

4. What steps need to be taken on DD(X) to ensure that it is delivered on time and 

within cost? 

The Navy’s cost estimate for DD(X) assessed a 45 percent probability of the lead ship 

delivering at or below a cost of $3.3 billion. Consequently, the Navy may be forced to revisit 

planned capabilities for the ship in the event that its $3.3 billion cost target becomes 

unattainable. Moreover, before construction begins in fiscal year 2008, the Navy should 

ensure that all technologies, such as the volume search radar, have been fully demonstrated. 

Page 8 GAO-07-217R Defense Contracting
NAVY/MARINE CORPS: Expeditionary Fighting Vehicle (EFV)

1. What went wrong on the EFV program after it had such a good start? 

Program difficulties occurred in part because not enough time was allowed to demonstrate 

maturity of the EFV design during the System Development and Demonstration (SDD) phase. 

Best practices and current DOD acquisition policy call for system integration work to be 

conducted before critical design review is held. This review represents the commitment to 

building full-scale SDD prototypes that are representative of the production vehicle. In the 

case of the EFV, however, the SDD critical design review was held before the system 

integration work had been completed. While testing of early prototypes began one year 

before the SDD critical design review, it continued for three more years after the decision to 

begin building the SDD prototypes. Test schedules for demonstrating design maturity proved 

optimistic and success-oriented, and were extended, and major problems were discovered in 

testing of the prototypes. Specifically, the original schedule did not allow adequate time for 

testing, evaluating the results, fixing the problems, and retesting to make certain that 

problems are fixed before moving forward. The SDD schedule of about three years proved 

too short to conduct all necessary planning and to incorporate the results into design 

changes, resulting in schedule delays and cost increases.

2. Could these problems have been avoided? 

Yes. The program was positioned for a good start in that it had mature technologies fairly 

early. Subsequent problems could have been avoided if the program’s System Development 

and Demonstration phase followed DOD policy preferences and best practices as they 

related to design and production maturity. 

3. Was DOD policy in error, or was the program not following policy? 

DOD policy was not in error. In fact, the EFV was following a knowledge-based approach and 

other best practices, which had been incorporated into DOD’s guidelines in 2000 for major 

acquisition and expanded into its May 2003 policy. In addition to having reached a relatively 

high level of technology maturity before starting SDD, the EFV program had earlier adopted 

best practices in its implementation of Integrated Product Teams and had trained its program 

office staff on this acquisition improvement initiative. As noted above, the EFV departed from 

the tenets of DOD acquisition policy and best practices shortly after SDD began, when it 

attempted to do system integration and system demonstration concurrently. 

4. How do strategies that go against sound policy get approved? 

Our work on multiple weapon systems shows that most programs proceed with strategies 

that do not comport with the knowledge-based approach embodied in DOD written policies. 

For example, in our March 2006 assessment of weapon systems, only 10 percent of the 

weapon systems reviewed had begun SDD with mature technologies. There are several 

reasons for this. First, although DOD acquisition policy allows individual programs to tailor 

their own acquisition approaches, it does not include sufficient controls to ensure that key 

aspects of the policy are implemented. Second, programs proceed with optimistic 

Page 9 GAO-07-217R Defense Contracting
assumptions about what they can accomplish for their estimated cost and schedules. Third, 

as weapon system programs proceed through development, the desire to protect the program 

against disruption intensifies. 

5. What lesson from the EFV experience can be drawn and applied to DOD acquisitions 

in general? 

Using the lens of a knowledge-based business case, the EFV at the start of SDD was sound on 

requirements and technology maturity (knowledge point 1). While design stability was judged 

to be attained at the critical design review (knowledge point 2) immediately after entering 

SDD, it appears that holding critical design review so soon was premature. This particular 

acquisition strategy did not provide the resources (time and money) necessary to 

demonstrate design maturity and production maturity (knowledge point 3). A key lesson 

learned is that while it is necessary to demonstrate one knowledge point before a subsequent 

one can be demonstrated, this alone is not sufficient. Attaining one knowledge point does not 

guarantee the attainment of the next one. Rather, the acquisition strategy for any program 

must adequately provide for the attainment of each knowledge point even in programs, such 

as the EFV, which were in a favorable position at the start of SDD. If the acquisition strategy 

does not adequately provide for the attainment of all knowledge points, the estimates for cost 

and schedule will not have a sound basis. 

NAVY: Cost Growth in Shipbuilding Programs

1. What did the GAO’s work reveal as the major causes of continued overruns in the 

Navy’s shipbuilding program? 

Our February 2005 report (GAO-05-183) on cost growth in shipbuilding programs cited 

unrealistic estimates of costs as a key source of cost growth. Unrealistic estimates in turn led 

to unrealistic budgets and contract prices. Increases in labor hours and material costs were 

common, with low technology maturity at program start and immature design before 

beginning production contributing to these. We also identified deficiencies in cost reporting 

as a problem. 

2. The Navy has pledged over the past year or so to address this problem. Have you 

seen any concrete proposals, and if so, what do you think of them? 

The Navy has cited several actions it has taken to improve cost performance. These include 

using risk analysis in developing cost estimates, budgeting at the Office of the Secretary of 

Defense Cost Analysis Improvement Group estimate, using realistic inflation rates in 

developing cost estimates, withholding fees if the contractor does not provide useable and 

timely cost reports, and introducing more aggressive contract incentives. 

We believe these are positive steps but it remains to be seen whether the Navy will follow 

through with these efforts. For example, while the Navy has said that it will use contract 

incentives in the form of more demanding share lines, lower ceiling prices, and lower 

Page 10 GAO-07-217R Defense Contracting
minimum fees (for cost plus incentive fee contracts), a key issue is whether these policies 

will be sustained over time. 

We also believe that further actions are needed. To reduce the risk of cost growth, the Navy 

needs to insure that technology risk is not carried forward into construction. Technology 

risk, and with it the potential for design changes, needs to be addressed before construction

begins. This has not been the case with the DD(X) program, where key technologies—such 

as the dual band radar—have not been fully demonstrated. 

Moreover, we believe the Navy could better ensure realism of budgets and contracts. We 

believe funding and contracting for a detailed design of the ship should be separated from the 

funding and contracting for construction. A budget request for ship construction would be 

informed by the knowledge gained from the first year or two of detail design. 

3. Should ship programs be put on firm fixed price contracts? 

Use of fixed price contracts is dependent on how much uncertainty exists. It is important to 

reduce uncertainty early in a program so that technology and design risks are not carried 

forward into construction. Following a knowledge-based approach will likely enable followon ships to use fixed price contracts. Use of such contracts would provide the strongest 

incentive for improving cost performance—under a fixed price contract the cost risk of 

performance generally shifts to the contractor. 

4. What specific ideas would you offer to deal with this problem? 

In addition to the suggestions discussed above, we believe the Navy should increase its use of 

cost-performance trade studies—including design-to-cost and cost as an independent 

variable (CAIV) techniques—to identify cost reduction opportunities in its new ship designs 

and position the Navy to achieve “best value” outcomes in its shipbuilding programs. 

Establishing design-to-cost goals early in a program encourages consideration of cost as a 

key design parameter when evaluating other parameters such as schedule, performance, and 

operational capability. Goals can be set in each phase of the shipbuilding acquisition process 

and tracked until desired cost targets have been achieved. In addition, iterative CAIV 

analyses can aid Navy efforts to properly balance cost with performance, design, and system 

requirements in its shipbuilding programs. Such analyses can help the Navy quantify and 

evaluate the degree to which its planned investments will result in increased utility to the 

warfighter and subsequently position the Navy to tailor future ship capabilities in ways that 

maximize value. 

ARMY: Future Combat Systems (FCS) 

1. Was the Army’s decision to begin System Development and Demonstration phase 

with over 75 percent of FCS critical technology elements immature consistent with 

DOD policy? 

The decision to enter the System Development and Demonstration phase with 75 percent of 

Page 11 GAO-07-217R Defense Contracting
technologies immature does not satisfy the basic tenets of DOD policy and best practices. 

DOD policy and best practices are very clear that technologies should be mature before 

system development begins. FCS, in particular, is worrisome because it is now three years 

past the beginning of development, and most of the technologies remain immature by best 

practice standards. 

2. In retrospect, what should have been done to bring the program in line with DOD 

policy and best practices?

The program should not have entered System Development and Demonstration with 

undefined requirements and immature technologies. Rather, it should have remained in the 

science and technology community until the enabling technologies were mature, or 

requirements should have been traded down to match the available technologies. 

3. What are the implications for other acquisition programs—will they adhere to DOD 

policies for awarding System Development and Demonstration contracts for only 

those weapons whose critical technologies have achieved desired maturity levels? 

Programs like FCS underscore the challenge in getting better program outcomes. Despite 

being out of alignment with the knowledge-based approach outlined in DOD policy and 

advocated by best practices, the program was approved to begin the System Development 

and Demonstration phase and funded at high levels. The example of success then becomes 

not programs that follow the intent of the policy, but those that do not and still win approval 

and funding. 

4. What can be done to mitigate risks in FCS, given where it is today?

We have recommended that the Secretary of Defense limit DOD’s commitment to the FCS product 

development phase and eventual production until a sound business case that is consistent with DOD 

acquisition policy and best practices can be clearly demonstrated. Further, we have recommended 

a go/no-go decision be made in 2008 after the preliminary design is done. This would in 

essence be the time that the program is ready for a system development decision, as 

technologies should have reached a basic level of maturity and system level requirements 

should be finalized by this time. In addition, the Army’s fiscal outlook is extremely challenging.

Outside of the Army, competition for production dollars will be great as both the Air Force 

and Navy have significant production programs planned for that time. Outside DOD, there 

will be an increasing squeeze on discretionary funds (weapons are discretionary) from other 

federal sectors.

5. What does the reliance on a lead systems integrator (LSI) say about the Army’s 

ability to manage a program of this magnitude? 

The Army’s reliance on a LSI suggests that the FCS is so ambitious in scope, complexity and 

schedule, that it exceeded the Army’s own ability to effectively manage such a complex 

program. 

 

Page 12 GAO-07-217R Defense Contracting
6. What risks does the use of an LSI pose for protecting the interests of the 

government?

The use of an LSI can pose a risk with respect to organizational conflicts of interest. For 

example, an LSI might favor its own solutions over other competing solutions. Further, if the 

LSI stands to benefit from the continuation of a program into production, it has a financial 

stake in the outcome that could compromise judgment. Over time, the government’s ability to 

oversee and act independently from the LSI could weaken as experienced government 

managers retire and dependence on the LSI increases. 

 

ARMY: Warfighter Information Network-Tactical (WIN-T)

1. Was WIN-T another program that was approved with unrealistic expectations for 

requirements, technology, cost, and schedule? Did the program’s original strategy 

follow DOD policy and best practices?

At the time DOD approved the start of system development in August 2003, only three of 

WIN-T’s 12 critical technologies were close to full maturity. Although DOD policy calls for 

technology maturity by the start of system development, DOD did not require that the other 

nine critical technologies reach a level close to full maturity until the start of low-rate 

production.1

 The technical and program risks of moving forward with immature technologies 

are exacerbated by the significant interrelationships among WIN-T’s critical technologies. For 

example, mobile communications technologies—a critical component of WIN-T’s operational 

concept—rely on antennas and other technologies to achieve their performance objectives, 

and a lag in the development of any of these technologies would result in a lag in the overall 

development of mobile communications. 

With respect to requirements, DOD had approved an operational requirements document for 

WIN-T shortly before the start of system development. However, WIN-T’s interdependencies 

with other programs further heighten the technical challenges and risks associated with the 

program. In particular, at the time WIN-T system development began, the Army’s networking 

requirements for FCS—which WIN-T is expected to heavily support—were not well 

understood. As a result, the networking needs of FCS and the capabilities WIN-T planned to 

deliver to this program were not well synchronized. In addition, WIN-T’s tightly compressed 

schedule assumed nearly flawless execution and did not allow sufficient time for correcting 

problems if they arose. 

2. What steps did the Army have to take to buy JNN? Why was this approach 

necessary?

Rather than undergoing the normal acquisition processes, the Army resorted to extraordinary 

measures outside of the normal requirements, acquisition, and budgeting processes—

including the supplemental budget process—to rapidly acquire and field the Joint Network 

Node-Network (JNN-N). Specifically, instead of initiating a formal acquisition program, the

 1

In mid-2003, the Army developed risk mitigation plans for the nine immature technologies, but a program review sponsored by 

the Army in July 2004 concluded that these plans lacked sufficient detail. 

Page 13 GAO-07-217R Defense Contracting
Army utilized existing contracts, originally established for modifying legacy networking 

systems, to procure JNN-N equipment in approximately 5 months. For example, a purchase 

agreement from the WIN-T program was used to procure satellite trailers; a General Services 

Administration contract was used to arrange training; and existing Army contracts were used 

to procure JNN-N in seven spirals, with each spiral equating to approximately one division’s 

worth of equipment. Supplemental funding totaling $763.6 million for fiscal years 2004 and 

2005 was used to purchase the first seven spirals of JNN-N. Additional supplemental funding 

totaling $818.7 million for fiscal year 2006 is being used to acquire JNN-N lots 8 through 10.2

The Army’s approach for acquiring JNN-N was intended to address an urgent need identified 

during Operation Iraqi Freedom and Operation Enduring Freedom to provide better 

communications capabilities between soldiers fighting out of sight of one another. DOD’s 

processes for approving formal programs are extensive and have not been conducive to rapid 

acquisition.3

 However, these processes exist to ensure that programs are managed and 

overseen, properly funded, and adequately tested prior to fielding. The Army’s decision to

acquire the capability through an approach that was outside these processes did not address 

the legal and policy requirements for managing an acquisition program of this magnitude. In 

particular, JNN-N procurement did not complete initial operational testing before going 

beyond low-rate production, as required by law and DOD policies. 

The acquisition of JNN-N through extraordinary measures was made necessary, in part, by 

DOD’s decision to acquire a revolutionary WIN-T capability. When the Army opted to pursue 

large technology advances in networking capabilities to support the future force through 

WIN-T, rather than pursuing a more incremental approach, it accepted a gap in providing 

tactical networking capabilities to the warfighter. Moreover, the Army’s optimistic 

acquisition approach for WIN-T created the impression that this capability gap was far 

smaller than it really was. As the Army pursued an advanced WIN-T capability, its existing 

communications equipment became increasingly obsolete and the need for near-term 

improvements became more urgent with the onset of the war in Iraq. If the Army had 

followed DOD’s acquisition policy preferences, which emphasize achieving capabilities in

increments based on mature technologies to get capability into the hands of the user more 

quickly, it might have been able to get needed communications capabilities to the warfighter 

sooner. 

 2

In keeping with its transition from a division-based to a modular brigade-based force, the Army is now procuring JNN-N in

batches of brigade sets. It terms these batches lots, rather than spirals. 

3

The Army explored using special rapid acquisition authority to respond to combat emergencies to formally waive acquisition 

laws and policies for JNN-N, but the dollar limit for use of this authority—$100 million per year for the entire Department of

Defense—was far too low to accommodate the Army’s need for JNN-N. See section 806 of the Bob Stump National Defense 

Authorization Act for Fiscal Year 2003 (P.L. 107-314), as amended by section 811 of the Ronald W. Reagan National Defense 

Authorization Act for Fiscal Year 2005 (P.L. 108-375). 

Page 14 GAO-07-217R Defense Contracting
3. What lessons do the WIN-T and JNN acquisitions have for DOD’s requirements, 

budgeting, and acquisition processes?

While JNN-N’s acquisition was a pragmatic response to an urgent need, the urgency was 

brought about, in part, by the Army’s decision to use a revolutionary, rather than 

evolutionary, approach to acquiring WIN-T. This approach appeared less risky at the time 

because optimistic projections created the impression that the capability gap was narrower 

than it really was. In hindsight, focusing on meeting the needs of the future force at the 

expense of providing capabilities to the current force proved detrimental once operations 

commenced in Iraq. To field capabilities quickly, the Army did not use DOD’s formal 

requirements setting, budgeting, and acquisition processes, and over a billion dollars was 

spent on JNN-N without it being established as a formal program. This is not a good model 

for providing needed capabilities. The WIN-T/JNN-N experience has implications beyond 

these two communications systems. The Army’s experience thus far creates opportunities to 

capture lessons learned and apply them not only to the Army’s two programs but also to 

DOD’s larger ongoing efforts to reform its acquisition processes. We recently recommended 

that the Secretary of Defense examine ways to apply the lessons learned from the Army’s 

experience with the acquisition of WIN-T and JNN-N to ongoing DOD-wide efforts to reform 

its key decision support processes for setting requirements, allocating resources, and 

acquiring weapon systems. DOD concurred with this recommendation. 

4. What challenges are presented by the merging of aspects of the WIN-T and JNN 

programs?

The Army ultimately intends to create a tactical communications network that functions as a 

single tactical backbone. To achieve this, the Army must now reconcile two separate 

acquisition efforts intended to meet one overarching need. Without a sound strategy for 

meeting near- and long-term needs for communications and networking capabilities, 

significant risks remain. Affordability continues to be an overriding concern, particularly as 

the Army and DOD as a whole struggle to meet the needs of current military operations while 

making prudent investments in the future in a difficult fiscal environment. We recently 

recommended that the Secretary of Defense direct the Secretary of the Army to develop a 

sound strategy for transitioning the Army’s tactical communications from JNN-N to WIN-T. 

Such a strategy needs to ensure that requirements for both of these efforts are clearly defined 

and well integrated, that the fielding strategy is executable, and that sufficient funding has 

been committed. DOD concurred with this recommendation and noted that the Office of the 

Secretary of Defense has directed that an approved JNN-N to WIN-T transition strategy be in 

place before acquiring additional JNN-N systems. 

Air Force/NAVY/Marine Corps: Multi-Service F-35 Joint Strike Fighter (JSF)

1. Were JSF technologies mature at the time of the decision to enter System 

Development and Demonstration? 

JSF entered development without its eight critical technologies being mature. Information 

from the program office indicates that maturity has progressed. However, seven 

technologies were not mature at the recent design review and two of the technologies 

Page 15 GAO-07-217R Defense Contracting
needed for mission effectiveness are not expected to be fully mature until 3 years after

production begins. We reported in October 2001 that failure to mature these critical 

technologies could result in increases in the production and long-term ownership costs,

schedule delays, and compromised performance as problems arise in product development. 

2. Is the program ready for a low-rate initial procurement decision in FY 2007? What 

risks does the program face at the time of this decision? 

The JSF program is not well positioned to enter production at this time. At the time of the 

low-rate production decision, only one early prototype will have flown and less than one 

percent of the flight testing will be complete. In addition, none of the three variants will have 

a production-representative aircraft built and in flight testing. The program intends to invest 

$26 billion in initial production before a fully integrated, production-representative aircraft 

will fly in 2011—4 years after the production decision. The cost of discovering design 

problems during production could be significant if testing shows that large, structural 

components of the aircraft require modifications. Furthermore, the length and scope of the 

remaining effort make it difficult to accurately estimate cost and completion schedules. The 

program has about 7 years to complete the remaining activities of the System Development 

and Demonstration phase, such as developing 22 million lines of software code and 

completing a 7-year, 12,000-hour flight test program. By investing heavily in procuring JSF 

aircraft before flight testing proves it will perform as expected, DOD has significantly 

increased its risk of adding more cost and delaying the delivery of critical capabilities to the 

warfighter.

3. What criteria must the program meet to demonstrate readiness for low-rate 

production? 

Key indicators of a program’s readiness for entering production and making significant 

investments in tooling, facilities, and materials include demonstrating that (1) the aircraft’s 

flying qualities function within the parameters of the flight envelope, (2) the aircraft design is 

reliable, or (3) a fully integrated and capable aircraft system can perform as intended. In 

addition to a stable design, production processes must be mature. This point is achieved 

when the program can manufacture the aircraft within cost, schedule, and quality targets. 

Because the program will lack key design and testing knowledge, DOD plans to use cost 

reimbursement contracts for early production aircraft. This type of contract places 

significantly greater cost risk on DOD and the taxpayer. Confidence that investment 

decisions will deliver expected capability within the cost and schedule goals is likely to 

increase when flight testing proves the JSF will work as expected. 

4. When will the first production-representative, fully integrated prototype aircraft be 

demonstrated? How many production aircraft will be on contract by that time? 

Under the current schedule, the first production representative, fully integrated aircraft will 

not begin flight testing until the 2011 timeframe. This occurs 4 years after production has 

begun. At that time, DOD will have committed to buy about 190 aircraft costing $26 billion.

By the time testing is planned to be completed, in 2013, DOD will have procured more than 

double that amount—424 aircraft—at an estimated cost of about $49 billion. 

Page 16 GAO-07-217R Defense Contracting
5. What are the cost implications if that prototype indicates the need for design 

changes at that stage of the program? 

The costs of discovering design changes could be significant if testing shows that large, 

structural components of the aircraft require modifications or mission systems require 

additional development. For example, problems discovered late in the development of the 

F-22A increased a 4-year flight test program to about 8 years and affected the program’s 

ability to conduct operational testing and move into production. In the JSF program, design 

changes needed in one variant could also ripple through the other two variants, reducing 

efficiencies necessary to lower production costs with common parts and manufacturing 

processes for the three variants. Some industry officials have indicated that the cost of design 

changes such as these could be 10 to 1,000 times greater, depending on how far the product 

has progressed into production. 

6. Under a cost-reimbursable production contract, will the government be responsible 

for assuming the risk and cost of any needed design changes? 

Cost reimbursement contracts provide for payment of allowable incurred costs, to the extent 

prescribed by the contract. These contracts are generally used when uncertainties involved in 

contract performance do not permit costs to be estimated with sufficient accuracy to use any 

type of fixed price contract. Under a cost reimbursement contract, the government assumes 

most of the risks of performance—because it agrees to pay the contractor its allowable 

incurred costs to the extent prescribed in the contract. 

Air Force: F-22 Aircraft

1. What fundamental causes led to the F-22’s cost, schedule, and performance 

problems? 

We have reported in the past on the inefficiencies of the F-22 acquisition program that led to 

numerous schedule delays and cost increases. This program provides an excellent example 

of what can happen when a major acquisition program is not guided by the principles of 

evolutionary, knowledge-based acquisition. The F-22 program failed to match requirements 

with resources and make early trade-offs and took on a number of new and unproven 

technologies. As a result, the program failed to capture the appropriate technology, design, 

and manufacturing knowledge of the F-22 aircraft at the right times during the development 

process. This created a challenging and risky acquisition environment that ultimately delayed 

by about 10 years to the warfighter the capabilities expected from this new aircraft. It 

additionally led to rising development costs, affordability issues, and changing requirements 

over the 19 years in development. 

Page 17 GAO-07-217R Defense Contracting
2. Has the F-22 followed DOD policy and best practices? 

No, the F-22 did not follow a best practices approach to its development and procurement. 

As to whether the F-22 followed DOD policy, we have not specifically assessed the F-22 

program’s compliance with DOD policy. However, we reported in 2003 (GAO-04-53) and 2006 

(GAO-06-368) that DOD policy includes a good framework for weapons system development 

and acquisition, but it does not include sufficient controls to ensure key elements of the 

policy are implemented in each phase of a weapons system program. As a result, our 2006 

report found that weapons system development programs continue to experience cost and 

schedule growth. 

3. What concerns do you have over the multiyear procurement proposal for buying 

more F-22s? 

In testimony earlier this year before the Airland Subcommittee of the Senate Armed Services 

Committee, we expressed a number of concerns about an Air Force proposal for multiyear 

procurement of the F-22A (TACTICAL AIRCRAFT: Questions Concerning the F-22’s 

Business Case, GAO-06-991T, July 25, 2006). These concerns related to the savings expected 

to be realized, the use of incremental funding, and the cost risk that could arise if quantities 

to be ordered continued to decline.. Although Congress subsequently authorized multiyear 

procurement of the F-22A, it listed a number of requirements the Air Force would have to 

address related to the concerns we had expressed. In addition, the Congress expressly 

prohibited the use of incremental funding. 

Questions from Representative Kaptur: 

In addition to the questions listed above, the Subcommittee also submitted to GAO and DOD a 

list of eleven supplemental questions for the record from Representative Marcy Kaptur, some of 

which deal with the use of contractors in Iraq. These questions and others touch on an emerging 

issue of critical importance, that is, the increasing role that contractors play in conducting the 

business of government. We appreciate and share the concern underlying the questions. 

Although DOD is in a better position than GAO to provide the information that would be needed 

to respond to each of the eleven questions, we have issued reports regarding the use of private 

security contractors in Iraq and DOD’s use of logistic support contractors, which we believe are 

relevant to the issues raised by Representative Kaptur. The reports are: 

REBUILDING IRAQ: Actions Needed to Improve Use of Private Security Providers, 

GAO-05-737, July 2005. 

MILITARY OPERATIONS: DOD’s Extensive Use of Logistics Support Contracts Requires 

Strengthened Oversight, GAO-04-854, July 2004. 

We would be pleased to provide copies of these reports upon request. They are also available on 

our Web site, http://www.gao.gov. 

 

(120598) 

Page 18 GAO-07-217R Defense Contracting
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