Testimony before the Subcommittee on 

Defense, Committee on Appropriations, 

U.S. House of Representatives 

United States Government Accountability Office

GAO 

For Release on Delivery 

Expected at 1:30 p.m. EDT 

Monday, April 30, 2007 DEFENSE ACQUISITIONS

Missile Defense Agency’s 

Flexibility Reduces 

Transparency of Program 

Cost 

Statement of Paul Francis, Director, 

Acquisition and Sourcing Management 

GAO-07-799T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-07-799T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Paul Francis, 

(202) 512-4841, francisp@gao.gov. 

Highlights of GAO-07-799T, a testimony 

before the Subcommittee on Defense, 

Committee on Appropriations, U.S. House 

of Representatives 

April 30, 2007

DEFENSE ACQUISITIONS 

Missile Defense Agency’s Flexibility 

Reduces Transparency of Program Cost 

During fiscal year 2006, MDA fielded additional assets for the Ballistic 

Missile Defense System (BMDS), enhanced the capability of some assets, 

and realized several noteworthy testing achievements. For example, the 

Ground-based Midcourse Defense (GMD) element successfully conducted its 

first end-to-end test of one engagement scenario, the element’s first 

successful intercept test since 2002. However, MDA will not meet its original 

Block 2006 cost, fielding, or performance goals because the agency has 

revised those goals. In March 2006, MDA: 

• reduced its goal for fielded assets to provide funds for technical 

problems and new and increased operations and sustainment 

requirements; 

• increased its cost goal by about $1 billion—from $19.3 to 

$20.3 billion; and 

• reduced its performance goal commensurate with the reduction of 

assets. 

MDA may also reduce the scope of the block further by deferring other work 

until a future block because four elements incurred about $478 million in 

fiscal year 2006 budget overruns. 

With the possible exception of GMD interceptors, MDA is generally on track 

to meet its revised quantity goals. But the deferral of work, both into and out 

of Block 2006, and inconsistent reporting of costs by some BMDS elements, 

makes the actual cost of Block 2006 difficult to determine. In addition, GAO 

cannot assess whether the block will meet its revised performance goals 

until MDA’s models and simulations are anchored by sufficient flight tests to 

have confidence that predictions of performance are reliable. 

Because MDA has not formally entered the Department of Defense (DOD) 

acquisition cycle, it is not yet required to apply certain laws intended to hold 

major defense acquisition programs accountable for their planned outcomes 

and cost, give decision makers a means to conduct oversight, and ensure 

some level of independent program review. MDA is more agile in its 

decision-making because it does not have to wait for outside reviews or 

obtain higher-level approvals of its goals or changes to those goals. Because 

MDA can revise its baseline, it has the ability to field fewer assets than 

planned, defer work to a future block, and increase planned cost. All of this 

makes it hard to reconcile cost and outcomes against original goals and to 

determine the value of the work accomplished. Also, using research and 

development funds to purchase operational assets allows costs to be spread 

over 2 or more years, which makes costs harder to track and commits future 

budgets. 

MDA continues to identify quality assurance weaknesses, but the agency’s 

corrective measures are beginning to produce results. Quality deficiencies 

are declining as MDA implements corrective actions, such as a teaming 

approach designed to restore the reliability of key suppliers. 

Over the next 5 years the Missile 

Defense Agency (MDA) expects to 

invest $49 billion in the BMD 

system’s development and fielding. 

MDA’s strategy is to field new 

capabilities in 2-year blocks. In 

January 2006, MDA initiated its 

second block—Block 2006—to 

protect against attacks from North 

Korea and the Middle East. 

Congress requires GAO to assess 

MDA’s progress annually. GAO’s 

March 2007 report addressed 

MDA’s progress during fiscal year 

2006 and followed up on program 

oversight issues and the current 

status of MDA’s quality assurance 

program. GAO assessed the 

progress of each element being 

developed by MDA, examined 

acquisition laws applicable to 

major acquisition programs, and 

reviewed the impact of 

implemented quality initiatives. 

What GAO Recommends

GAO continues to encourage DOD 

to act on prior recommendations to 

implement a knowledge-based 

acquisition strategy for all BMDS 

elements and to adopt more 

transparent criteria for reporting 

each element’s quantities, cost, and 

performance. In March 2007, GAO 

recommended that DOD adopt firm 

baselines, use procurement funds 

for operational assets, and adopt 

other measures to better track cost 

and outcomes against goals. DOD 

did not agree to an element-based 

reporting approach, but is 

investigating other ways to provide 

more program transparency. 
Page 1 GAO-07-799T 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss the Missile Defense Agency’s 

(MDA) strategy for acquiring a Ballistic Missile Defense System (BMDS) 

and its progress in developing and fielding Block 2006—the second 

iteration of BMDS. 

MDA’s mission is to develop and field an integrated, layered Ballistic 

Missile Defense System capable of defending the United States, its 

deployed forces, allies, and friends against enemy ballistic missiles 

launched from all ranges and during all phases of the missiles’ flight. To 

carry out its mission, MDA is fielding missile defense capabilities in 2-year 

increments known as blocks. The first block—Block 2004—fielded a 

limited initial capability that included early versions of Ground-Based 

Midcourse Defense (GMD); Aegis Ballistic Missile Defense (BMD); Patriot 

Advanced Capability-3 (PAC-3); and Command, Control, Battle 

Management, and Communications (C2BMC). Each of these components 

is an element of the integrated BMDS. During calendar years 2006 and 

2007, MDA is focusing Block 2006 to enhance and field four BMDS 

elements—GMD, Aegis BMD, Sensors, and C2BMC. Block 2006 is not only 

expected to field additional assets, but it also continues the evolution of 

Block 2004 by providing improved GMD interceptors, enhanced Aegis 

BMD missiles, upgraded Aegis BMD ships, a Forward-Based X-Band 

Transportable radar, and enhancements to the C2BMC software. 

The National Defense Authorization Acts for fiscal years 2002 and 2005 

mandate that we prepare annual assessments of MDA’s ongoing cost, 

schedule, testing, and performance progress. We issued our most recent 

report on March 15, 2007.1

 My statement today will focus on the issues 

covered in that report, specifically: 

• MDA’s progress toward developing the Block 2006 configuration of 

the BMDS, 

• the flexibility granted to MDA and its effect on oversight and 

accountability, and 

• the status of MDA’s efforts to improve its quality processes. 

 1

GAO, Defense Acquisitions: Missile Defense Acquisition Strategy Generates Results but 

Delivers Less at a Higher Cost, GAO-07-387 (Washington, D.C.: Mar. 15, 2007). 
Page 2 GAO-07-799T 

MDA continues to make progress on missile defense, but costs have grown 

and less work is being completed than planned. The fielding of additional 

assets and the first end-to-end test of GMD were notable accomplishments 

in fiscal year 2006, as was being able to put BMDS on alert status. Yet, 

MDA will not meet its original Block 2006 cost, fielding, or performance 

goals. MDA will field fewer assets than planned, which will cause a 

commensurate decrease in performance. Although scope has been 

reduced, costs are expected to increase by about $1 billion. There is no 

baseline against which to measure cost. For several reasons, we cannot be 

precise about the actual cost of Block 2006. MDA defers work from block 

to block and counts the cost of deferred work as a cost of the block in 

which the work is performed even though that work benefits the original 

block. For example, work deferred from Block 2004 is counted as a cost of 

Block 2006. Element program offices report costs inconsistently, with 

most underreporting costs. The cost of Block 2006 may change further 

because MDA may defer other work from Block 2006 until Block 2008 to 

cover $478 million in fiscal year 2006 budget overruns experienced by 

element prime contractors. We could not assess whether MDA is likely to 

achieve its revised performance goal because too few tests have been 

completed to have confidence in the models and simulations used to 

predict performance. Overall, the block approach has had advantages for 

fielding capabilities incrementally, but it has not proven to be a good 

construct for reconciling actual cost and performance with the 

justifications that MDA submits to support its budget request. 

Because the BMDS program has not formally entered system development 

and demonstration, application of laws that are designed to facilitate 

oversight and accountability of DOD acquisition programs has effectively 

been deferred. This gives MDA unique latitude to manage the BMDS. 

Specifically, the BMDS cost, schedule, and performance baseline does not 

have to be approved by anyone outside MDA. MDA is not yet required to 

obtain independent assessments of each configuration’s cost or test 

results. Unlike other programs, MDA is permitted to use research and 

development funds to incrementally fund all activities, including the 

purchase and support of operational assets. MDA keeps others informed, 

but it does not need their approval. Collectively, this flexibility enables 

MDA to be more agile in its decision-making. By the same token, MDA can 

revise its own baseline to field fewer assets than planned, defer work to a 

future block, and increase planned cost. Over time, it becomes difficult to 

reconcile cost and outcomes against original goals and to determine the 

value of the work accomplished. Ultimately, Congress may know that it is 

getting less than expected for its investment, but it will not necessarily 

know the cost of what it did receive or whether it is being asked to again 

Summary 
Page 3 GAO-07-799T 

appropriate funds for work that had been scheduled in a prior block but 

could not be completed because its funding was diverted to pay for other 

activities. The foregoing does not mean that MDA has acted inconsistently 

with the authorities it has been granted. Rather, MDA has the sanctioned 

flexibility to manage exactly as it has. It could be argued that without this 

flexibility, the initial capability fielded last year and put on alert would not 

have been possible. Yet, the question remains as to whether this degree of 

flexibility should be retained for a program that is planning to spend on 

the order of $10 billion a year for the foreseeable future. 

MDA auditors report that quality deficiencies are declining and on-time 

deliveries are improving as corrective measures are implemented. For 

example, MDA quality audits show that one key supplier has decreased 

open quality issues by 64 percent, reduced test failures by 43 percent, and 

increased on-time deliveries by 9 percent. The mechanisms being used to 

improve quality assurance processes include the development of a teaming 

approach to restore reliability in key suppliers, conducting regular quality 

audits, adjusting award fee plans to encourage contractors to maintain a 

good quality assurance program and implement industry best practices, 

and continuing to incorporate key quality provisions into the agency’s 

prime contracts. 

In our March 2007 report, we recommended that MDA establish firm 

baselines for those elements considered far enough along to be in system 

development and demonstration, and report against those baselines; 

propose an approach for those same elements that provides information 

consistent with the acquisition laws that govern baselines and unit cost 

reporting, independent cost estimates, and operational test and evaluation; 

include in blocks only those elements that will field capabilities during the 

block period and develop a firm block baseline that includes the unit cost 

of its assets; request and use procurement funds, rather than research, 

development, test, and evaluation funds, to acquire fielded assets; and 

conduct an independent evaluation of the ABL and KEI elements prior to 

making a decision on the future of the programs. 

DOD partially concurred with the report’s first three recommendations, 

but did not agree to use procurement funds to acquire fielded assets or to 

conduct an independent evaluation of the ABL and KEI elements. In 

partially agreeing, DOD recognized the need to provide greater program 

transparency and committed to providing information consistent with 

acquisition laws that govern baselines and unit cost reporting. However, 

DOD objected to the element-centric approach recommended, believing 

that this would detract from managing the BMDS as a single, integrated 
Page 4 GAO-07-799T 

system. DOD also stated that reporting at the BMDS-level in accordance 

with our third recommendation would appear to be inconsistent with 

reporting at the element level. We continue to believe that all 

recommended changes are needed to provide a better balance between 

MDA’s flexibility and BMDS program transparency. Because DOD awards 

contracts and requests funding by individual elements that compose the 

BMDS, we believe that the element approach is the best way to achieve 

increased program transparency. However, a BMDS-level baseline derived 

from the capabilities that individual elements yield is needed to describe 

and manage a BMDS-wide capability. We also believe that the use of 

procurement funds contributes to program transparency by making clear 

at the outset the size of the investment being requested in fielded assets. 

Finally, we continue to believe that an independent assessment of the ABL 

and KEI capabilities can provide a transparent basis for making decisions 

on the future of the programs, but we did revise the recommendation to 

specify that the assessment should follow key demonstrations in 2009. 

Missile defense is important because at least 25 countries now possess or 

are acquiring sophisticated missile technology that could be used to attack 

the United States, deployed troops, friends, and allies. MDA’s mission is to 

develop and field an integrated, layered BMDS capable of defending 

against enemy ballistic missiles launched from all ranges and during all 

phases of the missiles’ flight. DOD has spent and continues to spend large 

sums of money to defend against this threat. Since the mid-1980s, about 

$107 billion has been spent, and over the next 5 years, another $49 billion 

is expected to be invested. While the initial set of BMDS assets was fielded 

during 2004-2005, much of the technical and engineering foundation was 

laid by this prior investment. DOD also expects to continue investing in 

missile defense for many more years as the system evolves into one that 

can engage an enemy ballistic missile launched from any range during any 

phase of the missile’s flight. 

To enable MDA to field and enhance a missile defense system quickly, the 

Secretary of Defense, in 2002, directed a new acquisition strategy. The 

Secretary’s strategy included removing the BMDS program from DOD’s 

traditional acquisition process until a mature capability was ready to be 

handed over to a military service for production and operation. Therefore, 

development of the BMDS program is not segmented into concept 

refinement, technology development, and system development and 

demonstration phases, as other major defense acquisition programs are. 

Instead, MDA initiates one development phase that incorporates all 

acquisition activities and that is known simply as research and 

Background 
Page 5 GAO-07-799T 

development. MDA also has approval to use research and development 

funds, rather than procurement funds, to acquire assets that could be 

made available for operational use. 

To carry out its mission, MDA is fielding missile defense capabilities in 

2-year increments known as blocks. The first block—Block 2004—fielded 

a limited initial capability that included early versions of GMD, Aegis BMD, 

PAC-3, and C2BMC. This was the capability that was put on alert status in 

2006. MDA formally began a second BMDS block on January 1, 2006, that 

will continue through December 31, 2007. This block is expected to 

provide protection against attacks from North Korea and the Middle East. 

During the 2-year block timeframe, MDA is focusing its program of work 

on the enhancement and fielding of additional quantities of the GMD, 

Aegis BMD, and C2BMC elements, as well as fielding a Forward-Based XBand radar that is part of the Sensors element. When MDA defined the 

block in March 2005, shortly after submitting its fiscal year 2006 budget 

request to Congress, it also included three other elements—Airborne Laser 

(ABL), Space Tracking and Surveillance System (STSS), and Terminal 

High Altitude Area Defense (THAAD)—that are primarily developmental in 

nature. According to MDA, these elements were included in the block even 

though they were not expected to be operational until future blocks 

because the elements offered some emergency capability during the block 

timeframe. In March 2006, MDA removed THAAD from Block 2006. 

According to MDA, this action better aligned resources and fielding plans. 

The development of two other elements—Multiple Kill Vehicle (MKV) and 

Kinetic Energy Interceptor (KEI)—also continued in fiscal year 2006, but 

these elements were not considered part of Block 2006 because, according 

to MDA officials, the elements provide no capability—emergency or 

operational—during the block. 

The bulk of the funding that MDA requests for the BMDS each fiscal year 

is for the development, fielding, and sustainment of BMDS elements. For 

example, in fiscal year 2006, funding for the nine BMDS elements 

collectively accounted for 72 percent of MDA’s research and development 

budget. MDA requests funds for each of these elements, with the 

exception of C2BMC and THAAD, under separate budget line items. In 

addition, MDA issues separate contracts for each of the nine elements. 

Prior to beginning each new block, MDA establishes and submits block 

goals to Congress. These goals present the business case for the new 

block. MDA presented its Block 2006 goals to Congress in March 2005, 

shortly after submitting its fiscal year 2006 budget. At that time, MDA told 

Congress that the agency expected to field the following assets: up to 
Page 6 GAO-07-799T 

15 GMD interceptors, an interim upgrade of the Thule Early Warning 

Radar, a Forward-Based X-Band radar, 19 Aegis BMD missiles, 1 new Aegis 

cruiser for the missile defense mission, 4 new Aegis destroyers capable of 

providing long-range surveillance and tracking, and 8 Aegis destroyers 

upgraded for the engagement mission. MDA’s cost goal for the 

development of the six elements that compose the block, the manufacture 

of assets being fielded, and logistical support for fielded assets was 

$19.3 billion.2

 MDA also notified Congress of the Block 2006 performance 

goals established for the BMDS. These goals were composed of numerical 

values for the probability of engagement success, the land area from which 

the BMDS could deny a launch, and the land area that the BMDS could 

defend.3

 Fiscal year testing goals were also established by element 

program offices, but these goals were not formally reported to Congress. 

We examined numerous documents and held discussions with agency 

officials. In determining the elements’ progress toward Block 2006 goals, 

we looked at the accomplishments of six BMDS elements—ABL, Aegis 

BMD, BMDS Sensors, C2BMC, GMD, and STSS—that compose the Block 

2006 configuration. Our work included examining System Element 

Reviews, test plans and reports, production plans, and Contract 

Performance Reports. We also interviewed officials within each element 

program office and within MDA functional offices. In assessing whether 

MDA’s flexibility impacts BMDS oversight and accountability, we 

examined documents such as those defining MDA’s changes to Block 2006 

goals, acquisition laws for major DOD programs, and BMDS policy 

directives issued by the Secretary of Defense. We examined the current 

status of MDA’s quality assurance program by visiting various contractor 

facilities and holding discussions with MDA officials, such as officials in 

the Office of Quality, Safety, and Mission Assurance. We performed our 

work from June 2006 through March 2007 in accordance with generally 

accepted government auditing standards. 

 2

We have adjusted the cost goal reported to Congress to reflect MDA’s removal of the 

THAAD element and its future development cost from Block 2006. 

3

Specifics of the BMDS performance goals are classified and cannot be presented in an 

open forum. 
Page 7 GAO-07-799T 

MDA made progress during fiscal year 2006, but it will not achieve the 

goals it set for itself in March 2005. One year after establishing its Block 

2006 goals, the agency informed Congress that it planned to field fewer 

assets, reduce performance goals, and increase the block’s cost goal. It is 

also likely that in addition to fielding fewer assets, other Block 2006 work 

will be deferred to offset growing contractor costs. MDA is generally on 

track to meet its revised quantity goals, but the performance of the BMDS 

cannot yet be fully assessed because there have been too few flight tests 

conducted to anchor the models and simulations that predict overall 

system performance. Several elements continue to experience technical 

problems that pose questions about the performance of the fielded system 

and could delay the enhancement of future blocks. In addition, the Block 

2006 cost goal cannot be reconciled with actual costs because work 

travels to and from other blocks and individual element program offices 

report costs inconsistently. 

During the first year of Block 2006, MDA continued to improve the BMDS 

by enhancing its performance and fielding additional assets. In addition, 

the BMDS elements achieved some notable test results. For example, the 

GMD element completed its first successful intercept attempt since 2002. 

The test was also notable because it was an end-to-end test of one 

engagement scenario, the first such test that the program has conducted. 

Also, the Aegis BMD element conducted a successful intercept test of its 

more capable Standard Missile-3 design that is being fielded for the first 

time during Block 2006. 

In March 2006, soon after the formal initiation of Block 2006, MDA 

announced that events such as hardware delays, technical challenges, and 

budget cuts were causing the agency to field fewer assets than originally 

expected. MDA’s goal now calls for fielding 3 fewer GMD interceptors; 

deferring the upgrade of the Thule radar until Block 2008, when it can be 

fully upgraded; producing 4 fewer Aegis BMD missiles; upgrading 1 less 

Aegis destroyer for the engagement mission; and delivering 3 C2BMC Web 

browsers rather than the more expensive C2BMC suites. With the 

exception of the GMD interceptors, MDA is on track to deliver the revised 

quantities. The GMD program planned to emplace 8 interceptors during 

calendar year 2006, but was only able to emplace 4. Program officials told 

us that the contractor has increased the number of shifts that it is working 

and that this change will accelerate deliveries. However, to meet its 

quantity goal, the GMD program will have to more than double its 

interceptor emplacement rate in 2007. 

MDA Has Made 

Progress with Block 

2006, but Scope Has 

Been Reduced and 

Costs Have Gone Up 
Page 8 GAO-07-799T 

MDA also reduced the performance expected of Block 2006 

commensurate with the reduction in assets. However, insufficient data are 

available to determine whether MDA is on track to meet the new goal. 

Although the GMD test program has achieved some notable results, 

officials in DOD’s Office of the Director of Operational Test and 

Evaluation told us that the element has not completed sufficient tests to 

provide a high level of confidence that the BMDS can reliably intercept 

intercontinental ballistic missiles. Further testing is needed as well to 

confirm that GMD can use long-range tracking data developed by Aegis 

BMD to prepare—in real time—a weapon system task plan for GMD 

interceptors. 

Delayed testing and technical problems may also impact the performance 

of the current and future configurations of the BMDS. For example, the 

performance of the Block 2006 configuration of the Aegis BMD missile is 

unproven because design changes in the missile’s solid attitude and divert 

system and one burn pattern of the third stage rocket motor were not 

flight-tested before they were cut into the production line. The current 

configuration of the GMD interceptor also continues to struggle with an 

anomaly that has occurred in each of the element’s flight tests. The 

anomaly has not yet prevented the program from achieving its primary test 

objectives, but neither its source nor a solution has been clearly identified 

or defined. The reliability of some GMD interceptors remains uncertain as 

well because inadequate mission assurance/quality control procedures 

may have allowed less reliable or inappropriate parts to be incorporated 

into the manufacturing process. Program officials plan to introduce new 

parts into the manufacturing process, but not until interceptor 18. MDA 

also plans to retrofit the previous 17 interceptors, but not until fiscal year 

2009. In addition to the performance problems with elements being 

fielded, the ABL element that is being developed to enhance a future 

BMDS configuration experienced technical problems with its Beam 

Control/Fire Control component. These problems have delayed a lethality 

demonstration that is needed to demonstrate the element’s leading-edge 

technologies. ABL is an important element because if it works as desired, 

it will defeat enemy missiles soon after launch, before decoys are released 

to confuse other BMDS elements. MDA plans to decide in 2009 whether 

ABL or KEI, whose primary boost phase role is to mitigate the risk in the 

ABL program, will become the BMDS boost phase capability. 
Page 9 GAO-07-799T 

While MDA reduced Block 2006 quantity and performance goals, it 

increased the block’s cost goal from about $19.3 billion to approximately 

$20.3 billion.4

 The cost increases were caused by the addition of previously 

unknown operations and sustainment requirements, realignment of the 

GMD program to support a successful return to flight, realignment of the 

Aegis BMD program to address technical challenges and invest in 

upgrades, and preparations for round-the-clock operation of the BMDS. 

Although MDA is expected to operate within its revised budget of 

$20.3 billion, the actual cost of the block cannot be reconciled with the 

cost goal. To stay within its Block 2004 budget, MDA shifted some of that 

block’s work to Block 2006 and is counting it as a cost of Block 2006, 

which overstates Block 2006 cost. In addition, MDA officials told us that it 

is likely that some Block 2006 work will be deferred until Block 2008 to 

cover the $478 million fiscal year 2006 budget overruns experienced by 

five of the six element prime contractors. If MDA reports the cost of 

deferred work as it has in the past, the actual cost of Block 2006 will be 

complicated further. Another factor complicating the reconciliation of 

Block 2006 cost is that the elements report block cost inconsistently. Some 

elements appropriately include costs that the program will incur to reach 

full capability, while others do not.5

Because the BMDS has not formally entered the system development and 

demonstration phase of the acquisition cycle, it is not yet required to apply 

several important oversight mechanisms contained in certain acquisition 

laws that, among other things, provide transparency into program progress 

and decisions. This has enabled MDA to be agile in decision making and 

has facilitated fielding an initial BMDS capability quickly. On the other 

hand, MDA operates with considerable autonomy to change goals and 

plans, making it difficult to reconcile outcomes with original expectations 

and to determine the actual cost of each block and of individual 

operational assets. 

Over the years, a framework of laws has been created that make major 

defense acquisition programs accountable for their planned outcomes and 

cost, give decision makers a means to conduct oversight, and ensure some 

 4

Specific details regarding the cost increase can be found in GAO-07-387.

5

An element has reached full capability if it has completed all system-level testing and has 

shown that it meets expectations. At this state, all doctrine, organization, training, material, 

leadership, personnel, and facilities are in place. 

MDA’s Flexibility 

Makes Oversight and 

Accountability More 

Difficult 
Page 10 GAO-07-799T 

level of independent program review. The application of many of these 

laws is triggered by a program’s entry into system development and 

demonstration. To provide accountability, once major defense programs 

cross this threshold, they are required by statute to document program 

goals in an acquisition program baseline that as implemented by DOD has 

been approved by a higher-level DOD official prior to the program’s 

initiation. The baseline provides decision makers with the program’s best 

estimate of the program’s total cost for an increment of work, average unit 

costs for assets to be delivered, the date that an operational capability will 

be fielded, and the weapon’s intended performance parameters. Once 

approved, major acquisition programs are required to measure their 

program against the baseline, which is the program’s initial business case, 

or obtain the approval of a higher-level acquisition executive before 

making significant changes. Programs are also required to regularly 

provide detailed program status information to Congress, including 

information on cost, in Selected Acquisition Reports. In addition, Congress 

has established a cost-monitoring mechanism that requires programs to 

report significant increases in unit cost measured from the program 

baseline.6

Other statutes provide for independent program verifications and place 

limits on the use of appropriations. For example, 10 U.S.C. § 2434 prohibits 

the Secretary of Defense from approving system development and 

demonstration unless an independent estimate of the program’s life-cycle 

cost has been conducted by the Secretary. In addition, 10 U.S.C. § 

2399 requires completion of initial operational test and evaluation before 

a program can begin full-rate production. These statutes ensure that 

someone external to the program examines the likelihood that the 

program can be executed as planned and will yield a system that is 

effective and suitable for combat. The use of an appropriation is also 

controlled so that it will not be used for a purpose other than the one for 

which it was made, except as otherwise provided by law. Research and 

development appropriations are typically specified by Congress to be used 

to pay the expenses of basic and applied scientific research, development, 

test, and evaluation. On the other hand, procurement appropriations are, 

in general, to be used for production and manufacturing. In the 1950s, 

Congress established a policy that items being purchased with 

procurement funds be fully funded in the year that the item is procured. 

This is meant to prevent a program from incrementally funding the 

 6

10 U.S.C. § 2433, known as Nunn-McCurdy. 
Page 11 GAO-07-799T 

purchase of operational systems. Full funding ensures that the total 

procurement costs of weapons and equipment are known to Congress up 

front and that one Congress does not put the burden on future Congresses 

of deciding whether they should appropriate additional funds or expose 

weapons under construction to uneconomic start-up and stop costs. 

The flexibility to defer application of specific acquisition laws has benefits. 

MDA can make decisions faster than other major acquisition programs 

because it does not have to wait for higher-level approvals or independent 

reviews. MDA’s ability to quickly field a missile defense capability is also 

improved because assets can be fielded before all testing is complete. 

MDA considers the assets it has fielded to be developmental assets and not 

the result of the production phase of the acquisition cycle. Additionally, 

MDA enjoys greater flexibility than other programs in the use of its funds. 

Because MDA uses research and development funds to manufacture 

assets, it is not required to fully fund those assets in the year of their 

purchase. Therefore, as long as its annual budget remains fairly level, 

MDA can request funds to address other needs. 

On the other hand, the flexibilities granted MDA make it more difficult to 

conduct program oversight or to hold MDA accountable for the large 

investment being made in the BMDS program. Block goals can be changed 

by MDA, softening the baseline used to assess progress toward expected 

outcomes. Similarly, because MDA can redefine the work to be completed 

during a block, the actual cost of a block cannot be compared with the 

original cost estimate. MDA considers the cost of deferred work, which 

may be the delayed delivery of assets or other work activities, as a cost of 

the block in which the work is performed even though the work benefits 

or was planned for a prior block. Further, MDA does not track the cost of 

the deferred work and, therefore, cannot make adjustments that would 

match the cost with the block that is benefited. For example, during Block 

2004, MDA deferred some planned development, deployment, 

characterization, and verification activities until Block 2006 so that it 

could cover contractor budget overruns. The costs of the activities are 

now considered part of the cost of Block 2006. Also, although Congress 

provided funding for these activities during Block 2004, MDA used these 

funds for the overruns and will need additional funds during Block 2006 to 

cover their cost. Planned and actual unit costs of fielded assets are equally 

difficult to reconcile. Because MDA is not required to develop an approved 

acquisition program baseline, it is not required to report the expected 
Page 12 GAO-07-799T 

average unit cost of assets. Also, because MDA is not required to report 

significant increases in unit cost,7

 it is not easy to determine whether an 

asset’s actual cost has increased significantly from its expected cost. 

Finally, using research and development funds to purchase fielded assets 

further reduces cost transparency because these dollars are not covered 

by the full-funding policy as are procurement funds. Therefore, when a 

program for a 2-year block is first presented in the budget, Congress is not 

necessarily fully aware of the dimensions and cost of that block. For 

example, although a block may call for the delivery of a specific number of 

interceptors, the full cost of those interceptors is requested over 3 to 

5 years. Calculating unit costs from budget documents is difficult because 

the cost of components that will become fielded assets may be spread 

across 3 to 5 budget years—a consequence of incremental funding. 

During Block 2004, poor quality control procedures caused the missile 

defense program to experience test failures and slowed production. 

MDA has initiated a number of actions to correct quality control 

weaknesses, and the agency reports that these actions have been largely 

successful. Although MDA continues to identify quality assurance 

procedures that need strengthening, recent audits by MDA’s Office of 

Quality, Safety, and Mission Assurance show such improvements as 

increased on-time deliveries, reduced test failures, and sustained 

improvement in product quality. 

MDA has taken a number of steps to improve quality assurance. These 

include developing a teaming approach to restore the reliability of key 

suppliers, conducting regular quality inspections to quickly identify and 

find resolutions for quality problems, adjusting award fee plans to 

encourage contractors to maintain a good quality assurance program and 

encourage industry best practices, as well as placing MDA-developed 

assurance provisions on prime contracts. For example, as early as 2003, 

MDA made a critical assessment of a key supplier’s organization and 

determined that the supplier’s manufacturing processes lacked discipline, 

 7

Because the BMDS or its major elements have not been designated by MDA as being in 

system development and demonstration, no acquisition program baseline is required under 

10 U.S.C. § 2435. Thus there is no basis for determining unit cost under 10 U.S.C. § 2433 

(also known as Nunn-McCurdy), which requires calculation of unit cost from the baseline. 

Further, for the same reason, only limited Selected Acquisition Reports to Congress on 

program status are generated [10 U.S.C. § 2432(h)] that do not include unit costs. 

MDA Audits Show 

Improvement in 

Quality Processes 
Page 13 GAO-07-799T 

its corrective action procedures were ineffective, its technical data 

package was inadequate, and personnel were not properly trained. The 

supplier responded by hiring a Quality Assurance Director, five quality 

assurance professionals, a training manager, and a scheduler. In addition, 

the supplier installed an electronic problem-reporting database, formed 

new boards—such as a failure review board—established a new 

configuration management system, and ensured that manufacturing 

activity was consistent with contract requirements. During different time 

periods between March 2004 and August 2006, MDA measured the results 

of the supplier’s efforts and found a 64 percent decrease in open quality 

control issues, a 43 percent decline in test failures, and a 9 percent 

increase in on-time deliveries. MDA expanded its teaming approach in 

2006 to another problem supplier and reports that many systemic solutions 

are already underway. 

During fiscal year 2006, MDA’s audits continued to identify both quality 

control weaknesses and quality control procedures that contractors are 

addressing. During 2006, the agency audited six contractors and identified 

372 deficiencies and observations.8

 As of December 2006, the six 

contractors had collectively closed 157, or 42 percent, of the 372 audit 

findings. MDA also reported other signs of positive results. For example, in 

2006, MDA conducted a follow-on audit of Raytheon, the subcontractor for 

GMD’s exoatmospheric kill vehicle. A 2005 audit of Raytheon had found 

that the subcontractor was not correctly communicating essential kill 

vehicle requirements to suppliers, did not exercise good configuration 

control, and could not build a consistent and reliable product. The 2006 

audit was more positive, reporting less variability in Raytheon’s 

production processes, increasing stability in its statistical process control 

data, fewer test problem reports and product waivers, and sustained 

improvement in product quality. 

In our March 15, 2007, report, we made several recommendations to DOD 

to increase transparency in the missile defense program. These included: 

• Develop a firm cost, schedule, and performance baseline for those 

elements considered far enough along to be in system development 

and demonstration, and report against that baseline. 

 8

Deficiencies are considered more serious and are recognized when contractors do not 

comply with a contractual or internal procedure requirement. On the other hand, 

observations are made when a contractor fails to employ an MDA or industry best practice. 

Actions 

Recommended In Our 

Recent Report 
Page 14 GAO-07-799T 

• Propose an approach for those same elements that provides 

information consistent with the acquisition laws that govern 

baselines and unit cost reporting, independent cost estimates, and 

operational test and evaluation for major DOD programs. Such an 

approach could provide necessary information while preserving the 

MDA Director’s flexibility to make decisions. 

• Include in blocks only those elements that will field capabilities 

during the block period and develop a firm cost, schedule, and 

performance baseline for that block capability, including the unit 

cost of its assets. 

• Request and use procurement funds, rather than research, 

development, test, and evaluation funds, to acquire fielded assets. 

DOD partially agreed with the first three recommendations and recognized 

the need for greater program transparency. It committed to provide 

information consistent with the acquisition laws that govern baselines and 

unit cost reporting, independent cost estimates, and operational test and 

evaluation. DOD did not agree to use elements as a basis for this reporting, 

expressing its concern that an element-centric approach to reporting 

would have a fragmenting effect on the development of an integrated 

system. We respect the need for the MDA Director to make decisions 

across element lines to preserve the integrity of the system of systems. We 

recognize that there are other bases rather than elements for reporting 

purposes. However, we believe it is essential that MDA report in the same 

way that it requests funds. Currently MDA requests funds and contracts by 

element, and at this time, that appears to be the most logical way to report. 

MDA currently intends to modify its current block approach. We believe 

that a management construct like a block is needed to provide the vehicle 

for making system-of-system decisions and to provide for system-wide 

testing. However, at this point, the individual assets to be managed in a 

block—including quantities, cost, and delivery schedules—can only be 

derived from the individual elements. 

Mr. Chairman, this concludes my statement. I would be pleased to respond 

to any questions you or members of the subcommittee may have. 
Page 15 GAO-07-799T 

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

4841 or francisp@gao.gov. Individuals making key contributions to this 

statement include Barbara H. Haynes, Assistant Director; LaTonya D. 

Miller; Michael J. Hesse; Letisha T. Jenkins; Sigrid L. McGinty; Kenneth E. 

Patton; and Steven B. Stern. 

Contacts and Staff 

Acknowledgements 

(120659) 
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