United States Government Accountability Office

GAO Report to Congressional Committees

DEFENSE 

ACQUISITIONS 

Role of Lead Systems 

Integrator on Future 

Combat Systems 

Program Poses 

Oversight Challenges 

June 2007 

 

GAO-07-380 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

June 2007

DEFENSE ACQUISITIONS 

Role of Lead Systems Integrator on 

Future Combat Systems Program Poses 

Oversight Challenges 

Highlights of GAO-07-380, a report to 

congressional committees 

The Army’s Future Combat 

Systems (FCS) program features 

multiple new systems linked by a

first-of-a-kind information network. 

The Army contracted with a lead

systems integrator (LSI) for FCS 

that could serve in a more

expansive role than a typical prime 

contractor would. In response to a 

congressional mandate, this report 

addresses (1) why the Army

decided to employ an LSI for the 

FCS program; (2) the nature of the 

LSI’s working relationship with the 

Army; and (3) how FCS contract 

fees, provisions, and incentives

work.

In conducting its work, GAO 

reviewed extensive program 

documentation and held

discussions with key officials at

DOD and throughout the FCS 

program. 

What GAO Recommends

GAO recommends that the

Secretary of Defense take steps to

strengthen oversight of the FCS 

program and assess whether the

experience of the LSI on FCS has 

broader implications for DOD 

acquisition management. DOD 

concurred with GAO’s 

recommendations. 

In 2003, the Army contracted with an LSI for FCS because of the program’s 

ambitious goals and the Army’s belief that it did not have the capacity to 

manage the program. The original timeframe for FCS’s development was a 

shorter time frame than for an individual weapon system program, let alone 

a complex systems-of-systems program with a high number of immature 

technologies at program start. The Army realized that its compartmentalized 

workforce did not lend itself to the kind of crosscutting work that the FCS 

program would demand. The Army workforce also did not have the 

expertise needed to develop the FCS information network or enough people 

to support the program had it been organized into separate program offices. 

In contracting with the Boeing Company as LSI, the Army believed it found a 

management partner who could define and develop FCS and reach across 

the Army’s organizations. Boeing subcontracted with another company, 

Science Applications International Corporation, to assist with its 

responsibilities as LSI. 

The working relationship between the LSI and the Army is complex. The LSI 

is a traditional contractor in terms of developing a product for its customer, 

the Army, but also serves like a partner to the Army in management of the 

FCS program. In its management role, the LSI makes decisions 

collaboratively with the Army. An advantage of this arrangement is that the 

LSI and Army can maintain flexibility when dealing with shifting priorities.

However, that relationship may pose significant risks to the Army’s ability to 

provide oversight over the long term. The Office of the Secretary of Defense

is in a position to provide this oversight but thus far has allowed the Army to 

depart significantly from best practices and the Office’s own policy for 

weapon system acquisitions. For example, the Office of the Secretary of 

Defense has also allowed the Army to use its own cost estimates rather than 

independent—and significantly higher—cost estimates when submitting 

budget requests. The Army’s experience with the LSI on the FCS program 

may provide the Office of the Secretary of Defense insights on broader 

acquisition management issues. 

The Army has structured the FCS contract consistent with its desire to 

incentivize development efforts. The definitized cost-reimbursable research 

and development contract valued at $17.5 billion contains up to a 15 percent 

total fixed/incentive fee, or about $2.3 billion. As with many research and 

development contracts, the FCS contract obligates the contractor to put 

forth its best efforts, but does not assure successful outcomes. Assuming 

that critical design review is completed in 2011, the Army will have paid the 

LSI over 80 percent to cover the contract costs, plus a possible 80 percent of 

its fee or profit. GAO has previously reported that most cost growth in DOD

weapon system programs occurs after critical design review. Therefore, it is 

possible for the LSI to have garnered most of its payouts in costs and fees 

early next decade, even if despite its best efforts, the FCS capability ends up 

falling far short of the Army’s goals. The Army notes that its fee structure is 

intended to encourage good performance early in the program.

www.gao.gov/cgi-bin/getrpt?GAO-07-380.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Paul L. Francis 

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

Letter 1

Results in Brief 2 

Background 4

Army Decision to Use LSI Framed by Scope of Program and 

Workforce Limitations 6 

Close Working Relationship between Army and LSI Increases the 

Burden of Oversight 10 

Contract Provides Incentives for Best Effort but Not Accountability 

for Program Outcomes 18 

Conclusions 26

Recommendations 27

Agency Comments and Our Evaluation 27 

Appendix I Scope and Methodology 31 

Appendix II Overview of FAR Provisions Included in Future 

Combat Systems Lead Systems Integrator Contract 33 

Appendix III Comments from the Department of Defense 35 

Table 

Table 1: Fee events and schedule for FCS contract 22 

Figures 

Figure 1: Key Events in FCS Program’s Acquisition 6 

Figure 2: RDT&E Percentage Increase throughout the Product 

Development Cycle for 29 Programs Completed or in 

Production 23

Page i GAO-07-380 Defense Acquisitions
Abbreviations 

CAS Cost Accounting Standards 

DFARS Defense Federal Acquisition Regulation Supplement 

DOD Department of Defense 

FAR Federal Acquisition Regulation 

FCS Future Combat Systems 

LSI lead systems integrator 

OCI Organizational Conflict of Interest 

PIA Procurement Integrity Act 

SAIC Science Applications International Corporation 

SOSCOE System of Systems Common Operating Environment 

TINA Truth in Negotiations Act 

WMI Warfighter Machine Interface 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 

Page ii GAO-07-380 Defense Acquisitions
United States Government Accountability Office

Washington, DC 20548 

June 6, 2007

Congressional Committees 

With the Future Combat Systems (FCS) program, the Army is embracing a

new warfighting concept by replacing most of its combat systems with a 

family of manned and unmanned vehicles and systems linked by an 

advanced information network. The warfighting concept embodied by FCS 

involves breaking with Army traditions and making unprecedented 

technological leaps. After several decades of developing systems through 

disconnected warfighter communities within the Army, FCS is proposed 

as an integrated, system-of-systems concept rather than having integration

occur after systems are produced. Using this new approach, the Army 

intends to manage trade-offs across individual warfighter communities and 

weapon systems, save cost, and accelerate delivery. Recent estimates 

show that the total investment cost of the FCS program will be at least 

$163 billion and perhaps over $200 billion when complementary programs 

are included.

To achieve its goals for the FCS program, in 2003 the Army decided to 

employ a lead systems integrator (LSI) to assist in defining, developing, 

and integrating FCS. In the past few years, DOD and other agencies have 

applied the LSI concept in a variety of ways. In the case of the FCS 

program, the role of the LSI is not simply that of a traditional prime 

contractor, but also includes some elements of a partner to the 

government in ensuring the design, development and prototype 

implementation of the FCS network and family of systems. The pros and 

cons of LSI arrangements have been the subject of much debate on the

FCS and other programs, such as the Coast Guard’s Deepwater program. 

The Institute for Defense Analyses, the Army Audit Agency, and GAO have 

highlighted potential risks with the LSI approach on the FCS program. In 

light of the scope of the FCS program and its associated cost estimates, as 

well as concerns over the role of the LSI, Congress mandated that GAO 

review and report on the use of an LSI on FCS.1

 Our letter dated March 15, 

2007 satisfied the reporting requirements for that mandate. As agreed with

committee staff, this report addresses the questions from the mandate, 

 1

John Warner National Defense Authorization Act for Fiscal Year 2007, Pub. L. No. 109-364,

§ 115 (2006). 

Page 1 GAO-07-380 Defense Acquisitions
specifically: (1) why the Army decided to employ an LSI for the FCS 

program; (2) the nature of the LSI’s working relationship with the Army; 

and (3) how the contract fees, provisions, and incentives work. 

In conducting our work, we reviewed extensive program documentation 

pertaining to the business arrangement between the Army and LSI. This 

included such items as the program contract and acquisition strategy. In 

addition, we held discussions with key officials at DOD and throughout 

the FCS program, including representatives from the Army, the LSI and 

various subcontractors. We also drew significantly on existing GAO work 

on weapon system acquisitions. We conducted our work from May 2006 

through June 2007 in accordance with generally accepted government 

accountability standards. Further detail about our scope and methodology 

is provided in Appendix I of this report. 

The Army’s decision to contract with a lead systems integrator for the FCS 

program was framed by two factors: (1) the ambitious goals of the FCS 

program and (2) the Army’s capacity to manage it. As envisioned in 2003

when the program started, FCS presented a daunting technical and 

management challenge: the concurrent development of multiple weapon

systems whose capabilities would be dependent on an information 

network also to be developed. All of this was to take place in about 

51⁄2 years—much faster than a single weapon system typically takes. Army 

leaders believed the Army did not have the workforce or flexibility to 

manage development of FCS on its own within desired timelines. The 

Army saw its limitations in meeting this challenge as (1) cultural: difficulty 

in crossing traditional organizational lines, (2) capability: shortage of skills 

in key areas, such as managing the development of a large information 

network, and (3) capacity: insufficient resources to staff, manage, and 

synchronize several separate programs. Thus, they used a contractor— 

a Lead Systems Integrator–with significant program management 

responsibilities to help it define and develop FCS and reach across 

traditional Army mission areas. In May 2003, the Army contracted with the 

Boeing Company to serve as the LSI for the FCS system development and 

demonstration phase. Boeing subcontracted with Science Applications 

International Corporation to assist in performing the LSI functions. 

Results in Brief 

The relationship between the Army and the LSI is complex. On the one 

hand, the LSI plays the traditional role of developing a product for its 

customer, the Army, and on the other hand the LSI acts like a partner to 

the Army in ensuring the design, development and prototype 

implementation of the FCS network and family of systems. In forging a 

Page 2 GAO-07-380 Defense Acquisitions
close partner-like relationship with the LSI, the Army sought to gain 

advantages such as maintaining flexibility to deal with shifting priorities. 

The Army saw this as needed because the LSI was to help define the FCS 

solution as well as to develop it. At the same time, this relationship, 

coupled with the vast scope of FCS and the synonymy of the program with 

the future Army, poses risks for the Army’s ability to provide oversight 

over the long term. OSD is in a position to provide this oversight, but thus

far has largely accepted the program and its changes as defined by the 

Army, even though it is at wide variance from the best practices embodied 

in OSD’s own acquisition policies. In 2003, OSD approved the FCS for 

system development and demonstration despite the program’s 

combination of immature technologies and short schedule and then 

declined to follow through on plans to make a better informed decision 

18 months later. OSD has also allowed the Army to use its cost estimates 

rather than OSD’s own independent—and significantly higher—cost 

estimates when submitting budget requests. 

The Army has structured the FCS contract consistent with its desire to 

incentivize development efforts and make it financially rewarding for the

LSI for making such efforts. In general, contracts are limited in that they

cannot guarantee a successful outcome. This is true for the FCS contract,

and specific aspects of the contract could make it even more difficult to tie 

the LSI’s performance to the actual outcomes of the development effort. 

By the time the FCS critical design review is completed in 2011, the Army 

will have paid out over 80 percent of total costs of the LSI contract and the 

LSI will have had the opportunity to earn more than 80 percent of its total

fee. While the Army rationally notes that it is important to use fees to 

encourage good performance early, the experiences of previous weapon 

systems shows that most cost growth occurs after the critical design 

review. The Army shares responsibility with the LSI for making key 

decisions and to some extent the Army’s performance may affect the

performance of the LSI. For example, the Army has to bear responsibility 

for the successful completion of essential complementary programs and 

separate technology development efforts. Accordingly, the Army has to 

make important judgments about what contract outcomes and changes it

is responsible for versus the LSI. As with most cost-reimbursable research 

and development contracts, the LSI is responsible to put forth its best 

efforts on the development of the FCS capability. If, given that effort, the 

FCS capability falls short of needs, the LSI is not responsible and is still 

entitled to have its costs reimbursed and may still earn its full fee. 

We are making several recommendations to the Secretary of Defense, 

including: (1) to reassess OSD’s approach to overseeing the FCS program, 

Page 3 GAO-07-380 Defense Acquisitions
including asserting its own markers for success, particularly in the areas of 

cost, technology maturity, design maturity, and production maturity; and 

(2) to assess whether the experience of the LSI on FCS has broader 

implications for acquisition management, such as the ability of the DOD 

workforce to manage a system-of-systems acquisition. In commenting on 

the draft of this report, DOD concurred with our recommendations. 

However, DOD believes that the business relationship between the Army 

and LSI for the FCS program is typical when compared to other major 

system acquisitions. We maintain our position that the scope and 

complexity of the FCS system-of-systems creates a business relationship 

that is not typical of other weapon system acquisitions. Further, DOD 

believed that the characterization of the requirements definition process in 

the report was inaccurate. We have clarified our characterization of the 

LSI role but maintain our position that the LSI has a significant role in the 

requirements definition and refinement process for the FCS program. 

DOD’s comments are included in their entirety in Appendix III of this 

report. 

In May 2003, the Army and Boeing entered into an “other transaction 

agreement” for the system development and demonstration phase of the 

FCS program. Other transaction agreements are not subject to the Federal 

Acquisition Regulation (FAR) and this gave the Army considerable 

flexibility to negotiate the terms and conditions with Boeing as the LSI. 

The Army’s rationale for using such an agreement was to encourage 

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

and technical relationships to achieve the program goals. Congress raised 

concerns over the use of the agreement for the development of a program 

as large and risky as FCS, and the Secretary of the Army directed that the

other transaction agreement be converted to a FAR-based contract. In 

March 2006, the Army definitized a FAR-based contract with Boeing for 

the remainder of FCS development. Science Applications International 

Corporation (SAIC) has a contract with Boeing to provide assistance in 

performing the LSI functions. All of the work performed from May 2003

through September 2005 is accounted for under the prior other transaction 

agreement, and all work after September 2005 is included under the new 

contract. Appendix II of this report provides a brief discussion of the 

conversion of the FCS contract from an other transaction agreement to a 

FAR-based contract. 

Background 

The LSI as an entity is intended as a single contractor responsible for 

developing and integrating the FCS system of systems within a given 

budget and schedule. Furthermore, the LSI was intended to act throughout 

Page 4 GAO-07-380 Defense Acquisitions
the system development and demonstration phase to optimize the FCS 

capability, maximize competition, ensure interoperability and maintain 

commonality to reduce life-cycle cost. The Army established a number of 

key tenets that it wanted to achieve on the FCS program, in partnership 

with the LSI. They include: 

• create opportunity for best of industry to participate; 

• leverage government technology base to maximum extent; 

• associate ongoing enabling efforts with LSI-led activity; 

• maintain a collaborative environment from design through 

life-cycle; 

• as a minimum, achieve commonality at subsystem/component level; 

• design/plan for technology integration and insertion; 

• maintain and shape the industrial base for the future; 

• retain competition throughout future force acquisition; 

• have appropriate government involvement in procurement 

processes; 

• achieve consistent and continuous definition of requirements; 

• maintain and shape government acquisition community; 

• achieve program affordability—balance performance and 

sustainment; and 

• have a “one team” operating with partnership and teamwork. 

An LSI creates an additional tier in the management structure of the FCS 

program that would not appear in an acquisition program for a major 

individual system. The Army itself does not have a direct contractual 

relationship with the prime-item developers as it would when buying a 

single system, but rather works through the LSI. This additional tier serves 

as a layer of separation between the customer (the Army) and the platform

developers (the tier immediately below the LSI). The Army believes that 

this additional layer is required to bring all of the developers together to a

single point of communication and interaction for the Army. The Army, 

LSI and platform developers are all members of the “one-team” structure 

of the FCS program. 

The current contract between the Army and Boeing continues into fiscal 

year 2015 and the Army intends to begin low-rate initial production in 

2013. The Army intends to start full-rate production in 2016. The Army 

plans to achieve initial operational capability in fiscal year 2015 and full 

operational capability in fiscal year 2017. The Army intends to continue 

FCS procurement through fiscal year 2030, eventually equipping 

15 brigade combat teams—about one-third of the current active force. 

Page 5 GAO-07-380 Defense Acquisitions
Figure 1 shows the schedule of key events for the FCS program. 

Figure 1: Key Events in FCS Program’s Acquisition (in Fiscal Years) 

FCS program’s

start of system

development and

demonstration phase

Restructured

FAR-based

contract

Low-rate initial

production decision

Start of full-rate

production

Critical design

review

End of LSI’s contract;

initial operating capability

Army’s announcement

to restructure FCS program

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

Army’s adjustment

to program

2003 2004 2005 2006 2007 2010 2008 2009 2011 2012 2013 2014 2015 2017 2016

The Army has recently decided to make a number of key changes to the 

FCS program as it was considering funding plans for the fiscal 2008-2013 

period. These changes include eliminating or deferring certain FCS 

systems, increasing quantities of some systems, reducing quantities of 

other systems, reducing annual procurement rates, and delaying key 

program milestone dates. For example, the Army deleted or deferred four 

systems from the FCS system of systems architecture and delayed the 

start of initial FCS production by five months. 

The FCS program’s complexity and aggressive schedule is unprecedented 

for the Army. As we have reported, the program was not near ready for 

starting the system development and demonstration phase when it did, 

primarily because the majority of the needed technologies were immature. 

The Army not only went forward with FCS, it did so with a planned 

schedule less than that of a single new system. The Army determined that 

with its existing acquisition workforce and organizations, it did not have 

the agility, capability, or capacity to manage the program without an LSI to 

assist with certain aspects of program management. In using an LSI, the 

Army also wanted to structure a development contract that would create

incentives for the contractor to succeed and profit in development and to 

increase competition at lower levels in the supplier chain. 

Army Decision to Use 

LSI Framed by Scope 

of Program and 

Workforce Limitations 

Page 6 GAO-07-380 Defense Acquisitions
The sheer scope and complexity of the program was driven by the Army’s 

desire to concurrently develop and field all systems as an integrated unit.

The backbone of this unit is a ubiquitous network through which all 

systems of FCS will operate and communicate—a first-of-a-kind network 

that will also have to be developed. FCS represents a huge technological 

leap in system development and acquisition. Some of the major technical

challenges faced in the program include: 

• The 14 major weapon systems or platforms have to be designed and 

integrated simultaneously and within strict size and weight 

limitations. 

• At least 46 technologies that are considered critical to achieving 

critical performance capabilities will need to be matured and 

integrated into the system of systems. 

• The development, demonstration, and production of as many as 

170 complementary systems and associated programs must be 

synchronized with FCS content and schedule. This will also involve 

developing about 100 network interfaces so the FCS can be 

interoperable with other Army and joint forces. 

• An estimated 63 million lines of software code, more than 3 times 

the amount being developed for the Joint Strike Fighter program. 

In addition to the complexity of the integration task, the Army also 

outlined an unprecedented timeline for FCS’s development—about 

51⁄2 years—a shorter timeline than typical for a single weapon system 

development. We have pointed out a third source of risk, in addition to 

complexity and schedule, namely that the program started before it was 

ready for system development and demonstration because the majority of 

its critical technologies were immature. Mature technologies are central to

having a sound business case at the start of development. Cognizant of 

these risks, the Army believed it could achieve its goals through use of an

LSI because of the technical expertise and workforce flexibility that a 

private company could bring to the program. In fact, the Army wanted the 

LSI to help it define the FCS solution. 

The Army determined it could not meet the challenges of the FCS scope 

and accelerated schedule with its workforce alone and with traditional 

management approaches. Army leadership saw its workforce as 

stovepiped into organizations having areas of expertise that were not a full

match for what FCS needed and not large enough with the right skills to 

staff several separate program offices. Army leadership did not see its 

Concurrent Development 

and Integration of FCS Is 

Most Complex Acquisition 

Army Has Ever 

Undertaken 

Mismatches between 

Scope and Pace of FCS 

and Capacity of Army 

Workforce 

Page 7 GAO-07-380 Defense Acquisitions
workforce as being well-suited to making the tradeoffs and integration 

that the FCS program demanded. 

As an integrated system of systems, defining requirements and designing 

solutions for FCS would necessitate crossing two sets of organizational 

lines. The first involves the Army’s traditional warfare communities, such

as infantry, armor, artillery, and aviation. In the past, these communities 

developed their own requirements and their own weapon systems. FCS 

program officials noted that the Army had little success integrating such 

separately developed platforms because the individual communities did 

not coordinate their development efforts; specifically, they did not 

interface across communities during development to ensure systems were

being designed to work with each other. A second organizational line 

involves the users, who develop requirements, and the developers, who 

manage the weapon systems. Much of the Army’s previous experience 

with major integration efforts was problematic because of a lack of 

coordination between the developers and the users. Each system was 

developed separately and integrated into the force after the fact. The 

users’ needs to have multiple systems integrated and working together in 

the field were thus not sufficiently considered in the development process. 

The Army believed that an LSI could achieve this more effectively than an 

Army program office because a contractor had greater flexibility to work 

across these lines. 

Capability of the Army’s workforce was also a factor in the decision to use 

an LSI. The Army’s traditional areas of technical expertise, such as in 

armored vehicles like tanks, were not sufficient to address all the needed 

expertise for FCS. FCS performance is controlled to a great extent—

estimated at 95 percent—by software. Current estimates put the amount of 

software needed at 63 million lines—the most ever for a weapon system—

much of which will be needed for the information network that is the heart

of FCS. The Army did not have sufficient skills in software and networks 

to manage this effort. Even with the LSI, the relative thinness of the 

Army’s expertise in these areas is evident in the integrated product teams 

through which the Army and the LSI jointly manage the program. For 

example, according to an LSI program official, there are 28 LSI 

representatives for every Army representative on the team responsible for 

developing the information network. However, according to data provided

by an Army official, on the manned ground vehicles team, where the Army 

has more expertise, there are only about 15 LSI representatives for every 

Page 8 GAO-07-380 Defense Acquisitions
Army representative.

2

 Service contractors separate from the LSI are 

counted among the Army program office representatives. Thus, the actual 

numbers of individuals who work for the Army directly is lower than these 

numbers represent. 

A third factor was workforce capacity. If the FCS platforms were to be 

developed as separate programs, each platform would need its own 

workforce, meaning several separate Army program offices, each with a 

full complement of acquisition and technical staff. The demand for this 

many people would have been a challenge in light of the decline in its 

acquisition workforce throughout the 1990s. DOD estimates put the 

decline of its civilian workforce at 38 percent—much of it in 

acquisitions—from 1989 through 2002. Hence, the Army would not have

the capacity to manage a multi-system effort like FCS with separate 

program offices and likely would have had to turn to contractors to fully 

staff the program offices. 

Other Goals in Using an 

LSI on FCS 

In addition to the complexity and workforce implications of FCS, the 

Army saw an opportunity for the LSI to give its best effort in development 

and to create more competition at lower supplier levels. Army leadership 

involved with setting up the FCS program believed that traditionally, 

contractors made much of their profit in production, not in research and 

development. Thus, the Army reasoned, the contractors are not as 

motivated by research and development as they are by production. Army 

leadership believed that by using an LSI that would not necessarily have to

be retained for production, the Army could get the best effort from the 

contractor during the system development and demonstration phase, 

while at the same time making the effort profitable for the contractor. 

Army leadership also set up the FCS program and contract in such a way 

that it would create more competition and have more influence over the

selection of suppliers below the LSI. Army leadership noted that 

traditionally, once the Army hired a prime contractor, that contractor 

would bring its own supplier chains. The Army was not very involved in

the choice of the suppliers. In FCS, the prime contractor—or LSI—is 

mainly an integrator, and the Army called for the LSI to hold a competition 

for the next tier of contractors. The Army had veto power over these 

 2

These figures exclude staff provided by “one-team” subcontractors on the integrated 

product teams. 

Page 9 GAO-07-380 Defense Acquisitions
selections. In addition, the Army directed that the LSI contract with 

integrators at lower levels in the program and the Army has been involved 

with these selections. These integrators also hold competitions to select 

suppliers for those systems. This strategy kept the first tier of contractors 

(the one-team) from bringing their own supplier chains and pushed 

competition and Army visibility down lower in the supplier chain. It was 

also a means for the Army to ensure commonality of key subsystems 

across FCS platforms. Thus, for example, each of the manned ground 

vehicles would use the same sensors and engines, rather than the past 

practice of each vehicle having its own unique set of subsystems. 

The relationship between the Army and the LSI is complex. On the one 

hand, the LSI plays the traditional role of developing a product for its 

customer, the Army, and on the other hand, the LSI also performs certain 

program management and integration responsibilities for the entire 

program and has a partner-like relationship with the Army. In forging a 

close partner-like relationship with the LSI, the Army sought to gain 

advantages such as maintaining flexibility to deal with shifting priorities. 

At the same time, this relationship, coupled with the vast scope of FCS and 

the synonymy of the program with the future Army, poses risks for the 

Army’s ability to provide independent oversight over the long term. OSD is 

in a position to provide this oversight, but thus far has largely accepted the 

program and its changes as defined by the Army, even though it is at wide 

variance from the best practices embodied in OSD’s own acquisition 

policies. 

For the FCS program, Boeing serves as a traditional supplier, developing 

two software-intensive subsystems for the Army. Specifically, the Boeing 

unit that is serving as LSI is developing the System of Systems Common 

Operating Environment (SOSCOE). Additionally, a separate Boeing unit is

developing the Warfighter Machine Interface (WMI). Both are critical to

the success of FCS and, as noted by one program manager, will affect the 

FCS systems being developed by other contractors. 

Close Working 

Relationship between 

Army and LSI 

Increases the Burden 

of Oversight 

Boeing Is a Key Supplier 

for Critical Software 

As part of the original 2003 other transaction agreement to begin system 

development and demonstration, the LSI was permitted to internally 

develop SOSCOE rather than contracting that work out to a separate 

supplier. This make decision was approved by the Army. Referred to in the 

statement of work as the “information management backbone” for FCS, 

SOSCOE has been likened to a computer operating system like Microsoft 

Windows®. All FCS systems will have to interface with this software to 

Page 10 GAO-07-380 Defense Acquisitions
function as a single, integrated brigade combat team. Ultimately, the

success of the FCS program hinges on the successful development of 

SOSCOE. 

Boeing is also developing WMI. This work was awarded as a separate 

competitive subcontract by Boeing as the LSI to a separate unit within the 

Boeing Company under the original 2003 other transaction agreement. The

software will provide a common interface for the soldiers in the brigade

combat unit to receive information. The goal of this software is to provide 

an integrated presentation of all types of battlefield information. 

Subsequent to the award of WMI, the current FCS contract for system 

development and demonstration was definitized with language that 

provides a process to mitigate potential conflicts of interest on the part of

Boeing or SAIC as LSI. Under the predecessor other transaction 

agreement, an organizational conflict of interest clause required that 

certain safeguards be put in place when either a Boeing or SAIC unit 

wanted to compete for a subcontract. Under the current contract, an 

organizational conflict of interest clause is included that completely 

prohibits either company from competing for any work at any tier for any 

proposed subcontract under the FCS contract. So, although an award was 

made to Boeing under the predecessor other transaction agreement, any 

further awards are prohibited for the duration of the contract.

Close Working 

Relationship May Pose 

Risks 

The government’s relationship with a contractor—regardless if it is an LSI 

or a more traditional prime contractor–for a major project like a weapon

system can range from a distant, arms-length relationship to a close, 

partner-like relationship. An arms-length relationship is characterized by 

separation between the government as the customer and the contractor as 

the supplier or developer. In this arrangement, communications between 

the government and the contractor are more likely to be periodic and 

formal. For weapon system programs, these kinds of relationships can 

often be found in situations in which the government can establish 

detailed technical specifications for the weapon system, enabling the 

contractor to design and develop a weapon system to meet the 

specifications without much government involvement. An arms-length 

relationship optimizes the independence of the government by minimizing 

the interaction between its staff and that of the contractor. The downside 

of this type of relationship is that information can flow slowly between the 

two parties, and decision-making can be sequential and untimely. For 

example, if the government were to wait 6 or more months between 

Page 11 GAO-07-380 Defense Acquisitions
program reviews, work done in the interim could go astray from the 

government’s wishes and have to be redone. 

In a partner-like relationship, the government and the contractor work 

together on a continual basis to decide what work is to be done. Over the 

past 10 years, DOD has attempted to employ more partner-like 

arrangements on its programs. For example, in the 1990s, DOD program 

offices began employing integrated product teams, which are 

multidisciplinary teams that have the cross-functional talent from both the 

government and the contractor to make more informed decisions about a 

product’s design, production, and support.3

 In addition, DOD has 

attempted to increase its use of performance-based contracting, in which 

agencies contract for results rather then processes and leave the 

determination of how best to achieve the results to the contractor. DOD 

guidance on performance-based contracting states that a positive 

relationship between the government and the contractor is essential to 

that kind of arrangement. For example, the guidance notes that the 

government and industry should work together as a team to communicate 

expectations, agree on common goals, and identify and address problems 

early on to achieve desirable outcomes. Such a partner-like relationship is

intended to enable more real-time, better informed decisions, reduce 

rework, and provide increased flexibility to adjust to new demands. 

A partner-like relationship can also pose risks for the government. 

Depending on the closeness of the working relationship, the government 

can become increasingly vested in the results of shared decisions and runs 

the risk of being less able to provide oversight compared with an armslength relationship, especially when the government is disadvantaged in 

terms of workforce and skills. In the case of FCS, the partner-like 

relationship between the Army and the LSI breaks new ground and as such 

these risks are present. More specifically, in FCS the Army is more 

involved in the selection of subcontractors than we have seen on other 

programs, which can, over time, make the Army somewhat responsible for 

the LSI’s subcontracting network. On the other hand, the LSI is more 

involved with influencing the requirements, defining the solution, and 

testing that solution than we have seen on other programs. This is not to 

say that the level of involvement or collaboration between the Army and 

 3

GAO, Best Practices: DOD Teaming Practices Not Achieving Potential Results,

GAO-01-510 (Washington, D.C.: April 10, 2001).

Page 12 GAO-07-380 Defense Acquisitions
the LSI is inherently improper, but that it may have unintended 

consequences for oversight over the long term. 

The degree of the Army’s collaboration with the LSI in the FCS program 

and the possible risks this poses can be illustrated in the following areas: 

Requirements. The Army initially established the operational requirements 

for FCS. Based on those requirements, the Army and LSI are 

collaboratively refining the FCS system of systems requirements and 

system-level requirements (or system specifications). This refinement 

process has also resulted in changes and clarifications to the FCS 

operational requirements. The collaboration allows both parties to agree

on and refine requirements that they believe are feasible based on systemof-systems requirements analysis conducted by the LSI and its 

subcontractors. Subsequently, the Army and LSI can reach agreement on 

what requirements are appropriate to achieve the FCS capability within 

cost and schedule goals. For example, the Army and LSI recently 

collaborated on the feasibility of the manned ground vehicle weight 

requirement. As a result of this collaboration, the Army decided to trade 

off the original air transport requirement that FCS manned ground 

vehicles weigh no more than 24 tons because they did not have enough 

armor to meet the survivability requirement. The Army and LSI again 

collaborated with the Army ultimately deciding that the requirement for 

vehicle weight be allowed to grow to as much as 29 tons to provide the 

needed armor. This change was significant, because the FCS vehicles will

now have to be transported by a larger aircraft, the C-17, rather than by 

the C-130 transporter. Part of the reason for the change was that, 

according to program officials, an advanced armor being developed by the 

Army did not prove as effective as expected within desired weight 

parameters. There are several other key technologies that are still 

immature, and to the extent they do not perform as expected,

requirements could continue to be changed to match what is technically 

possible. This could help ensure that FCS development can continue but 

may produce less value in terms of capability for the investment. 

Subcontract Selections. The Army and the LSI collaborate on subcontract 

selection decisions in contracting tiers below the prime contractor level. 

Subcontract selections at these levels have normally been made by the 

contractors without much government involvement. Army officials 

participated in the selection process for the one team subcontracts 

Page 13 GAO-07-380 Defense Acquisitions
awarded by the LSI to build and integrate major platforms.4

 The Army also 

plays a role in the selection of lower tier subcontractors. For example, the 

Army participated in the selection of a subcontractor to build the Active 

Protection System to protect vehicles from rocket propelled grenades. 

This is a fourth-tier subcontractor. Although the Army is involved with the 

selections, the subcontracts are awarded by the LSI or other lower-tier 

contractors, so traditional government bid protest remedies are not 

available to the losing contractors, as with any procurement between 

private entities.5

 To the extent that a subcontractor selected with the 

Army’s involvement underperforms, the Army may bear some 

responsibility for the long term consequences of that performance. 

Test and Evaluation. The LSI has a lead role in developmental testing and 

verification of technical requirements throughout FCS development. For 

the FCS program, testing and evaluation of system prototypes will be 

managed through a combined test organization co-led by the LSI and the 

Army and made of up representatives of the LSI, Army Test and Evaluation

Command and the Army’s FCS program management office. In its role 

co-leading the test organization, the LSI will coordinate and perform a 

number of activities to ensure FCS performance is effectively and 

efficiently achieved. Building and testing prototypes is funded through the 

LSI contract, and the LSI will recommend how many and what type 

prototypes will be fabricated. Typically, the Army test command conducts 

and/or monitors system development tests and conducts operational tests 

of systems to provide an objective, performance-based evaluation of 

system capabilities against expectations in weapons programs. Their 

independent role is an important source of information on how well a 

program is progressing. In the FCS situation, the Army test command is in 

the position of relying on the LSI to plan for and conduct sufficient 

developmental testing—as well as proper corrective actions for identified

issues—which is an important precursor to a successful operational test 

program. This has led to concerns by members of the Army test 

community about their ability to conduct sufficient independent testing, 

 4

The Defense Contract Management Agency is also involved in most FCS subcontractor 

selections. 

5

Traditional government bid protest remedies allow contractors to protest decisions made 

by federal government agencies with regard to contract awards. Under bid protest 

provisions, such disputes can be submitted to the Comptroller General of the United States 

for resolution within 100 days. 

Page 14 GAO-07-380 Defense Acquisitions
while having to work so closely with the LSI. It also raises the question of 

whether the LSI is too involved with testing its own solution. 

Involvement in Production. According to the FCS program manager, the 

Army plans to contract with Boeing during fiscal year 2008 for the initial 

production of FCS capabilities to be spun out to the current forces and for 

the early production of the FCS non-line-of-sight cannon. The current LSI 

development contract for the core FCS systems extends almost 2 years 

beyond the FCS initial production decision. The Army does not expect that 

the initial brigades outfitted by FCS will meet the upper range of its 

requirements, and has made the LSI responsible for planning future FCS 

enhancements in the production phase. The LSI is also responsible for 

defining and maintaining a FCS growth strategy for integrating new 

technologies into brigade combat teams. This role keeps the LSI involved

in the FCS program in the production phase and could make the LSI 

indispensable to the Army. 

FCS Program Can Benefit 

from Stronger OSD 

Oversight 

OSD is in a position to provide the arms-length oversight that can 

counterbalance some of the potential risks associated with the Army’s 

level of involvement with both the FCS program and the LSI. Thus far, 

OSD has not played an active oversight role but rather has allowed FCS to 

proceed according to the Army’s plans. It has passed on opportunities to 

assert its own positions on knowledge-based acquisition and cost 

estimates. In response to a statutory requirement, OSD has committed 

itself to a formal decision review of the program following its preliminary 

design review in 2009. 

In August 2004, the Institute for Defense Analyses expressed concerns that 

the collaborative arrangement between the Army and LSI created an 

inherent tension between the roles of Army participants as both 

teammates and customer representatives. The Institute expressed the 

need for a corporate perspective on the FCS program on behalf of the 

Army, so an independent eye could be put toward cost, schedule and 

performance issues. This may be a difficult principle for the Army to put 

into practice. The FCS program is nearly synonymous with the Army’s 

future forces and necessarily requires the commitment and involvement of

Army leadership. FCS represents the bulk of the Army’s investment 

portfolio. 

Additionally, the nature of FCS being made up of several programs that are 

large enough to have been individual acquisitions in and of themselves, 

reduces the level of granularity of oversight that may have otherwise been 

Page 15 GAO-07-380 Defense Acquisitions
exercised over those programs. Major defense acquisition programs have 

certain reporting requirements under law that provide information to 

decision-makers about those programs. The programs within FCS are not 

designated separately from FCS, so the reporting requirements for them 

are not the same as if they were separately designated. Since FCS 

generally meets those reporting requirements at the system-of-system 

level, the granularity of reporting on individual systems within FCS is less 

defined. 

OSD can help provide the corporate perspective on FCS through its 

oversight role. To date, OSD has kept informed of the program and 

reviews the program annually. However, it held only one corporate-level 

decision meeting on FCS at which it approved the program to begin 

despite its being at odds with DOD’s own standards for such program 

initiation. Although OSD has remained involved in the program, it has thus 

far largely accepted the program as defined by the Army. Specifically, in 

May 2003, the Under Secretary of Defense (Acquisition, Technology, and 

Logistics) approved the FCS program to begin the system development 

and demonstration phase, referred to as the milestone B decision. It is 

DOD policy for programs to have mature technologies at that point, and 

for programs to be evolutionary in nature—that is, an incremental 

improvement over existing capabilities. FCS was neither, as all of the 

program’s 49 critical technologies6

 were immature and the program was a 

revolutionary departure from existing Army capabilities. Instead, the Army 

is following its own, lower standard for technology maturity—

achievement by the critical design review in 2011—over 7 years later than 

called for by DOD policy. 

Upon making that decision, the Under Secretary recognized the FCS 

program’s immaturity and stated that there would be a milestone B update 

review 18 months later. This was to be a decision-making review for which 

the Under Secretary had listed several action items that the FCS program 

had to complete in order to continue. However, this review never occurred 

and the FCS program continued as originally planned. OSD has not since 

revisited its decision to approve the program. Since that time, program 

 6

Since 2006, a Critical Technology Working-Level Integrated product Team recommended

that the Army remove three critical technologies from its assessment. The team concluded

that these technologies did not conform to DOD’s definition of critical technologies 

because, in its view, the technologies did not constitute a unique or novel application. 

Page 16 GAO-07-380 Defense Acquisitions
costs and schedule have roughly doubled.7

 Accordingly, last year, we 

recommended that OSD hold a decision-level meeting. However, while 

OSD stated that it would have a Defense Acquisition Board review, it 

would not commit to making it a milestone decision review. It had not 

planned another decision meeting until the FCS production decision, 

referred to as milestone C. This would have been too late to have any 

material effect on the course of the program, short of cancellation which 

is extremely rare at that point in a program. Subsequently, Congress 

intervened and required that OSD hold the formal decision meeting, 

currently scheduled for 2009.

8

 DOD has since proposed a serious approach 

to making that decision, which is encouraging from an oversight 

perspective.

Recognition and reporting of cost growth is another area in which OSD 

has deferred to the Army. The Army has recently restructured the FCS 

program to reduce the number of systems and reduce planned production

rates to stay within expected funding levels. This will mark the second 

restructuring of the program in 4 years, which has seen program 

investment costs increase from $77.2 billion in constant 2003 dollars to 

$119.2 billion in 2005 according to Army estimates, and again to at least 

$150.5 billion in 2006 according to an independent cost estimate. The Army 

estimates the cost of the recently restructured program to be slightly 

different than its 2005 estimate. The cost increases that have occurred 

since 2003 have largely been determined by the Army and OSD to be 

changes in scope, a distinction that is important for cost reporting 

purposes. As we have previously reported,9

 DOD has allowed unit cost 

increases associated with quantity reductions or increases in capabilities 

to be excluded from a determination of a Nunn-McCurdy breach.10 DOD 

 7

Program cost comparison is between the original Army cost estimate—$77.2 billion—at 

the start of system development and demonstration in 2003 and the May 2006 independent 

estimate—$150.5-162.7 billion (base year 2003 dollars). 

8

Pub. L. No. 109-364, § 214.

9

GAO, Defense Acquisitions: Information for Congress on Performance of Major 

Programs Can Be More Complete, Timely and Accessible, GAO-05-182 (Washington, D.C.: 

March 28, 2005). 

1010 U.S.C. § 2433 (requires the Secretary concerned to report to Congress when a

program’s acquisition unit cost increases by at least 15 percent over the current baseline 

estimate or increases by over 30 percent over the original baseline estimate and requiring

the Secretary of Defense to carry out an assessment of the program and provide a written 

certification to Congress when a program’s acquisition unit cost increases by at least 

25 percent over the current baseline estimate or increases by 50 percent over the original 

baseline estimate). 

Page 17 GAO-07-380 Defense Acquisitions
refers to these as programmatic adjustments and has concluded that 

nearly all of FCS’ 76 percent cost increase—based solely on Army 

estimates—falls in this category. As a result, the Secretary of Defense has 

not had to carry out an assessment of the program or make a certification 

to Congress. Such an assessment and certification of FCS would have had

value from an oversight perspective.

A recent decision not to use an independent cost estimate may have had a

similar effect on cost reporting. In May 2006, the OSD Cost Analysis 

Improvement Group submitted an independent cost estimate that showed 

its estimate of FCS investment costs to be 24-43 percent higher than the 

Army estimate prepared by the FCS program office. OSD did not adopt 

this estimate. While OSD is not obligated to adopt its independent 

estimates, previous experience has shown these estimates to be more 

accurate than the typically optimistic service estimates and could have

been become an additional factor to consider in a Nunn-McCurdy 

determination. 

The Army has structured the FCS contract consistent with its desire to 

incentivize development efforts and make it financially rewarding for the

LSI for making such efforts. In general, contracts are limited in that they

cannot guarantee a successful outcome. This is true for the FCS contract,

and specific aspects of the contract could make it even more difficult to tie 

the LSI’s performance to the actual outcomes of the development effort. 

Key demonstrations of the actual capabilities of FCS systems will take 

place after the LSI has been able to recoup over 80 percent of its costs and 

had the opportunity to earn most of its fees. The Army shares 

responsibility with the LSI for making some key decisions and to some 

extent the Army’s performance may affect the performance of the LSI. As 

with many cost-reimbursable research and development contracts, the LSI

is responsible to put forth its best effort on the development of the FCS 

capability. If, given that effort, the FCS capability falls short of needs, the 

LSI is not responsible and still it is entitled to have its costs reimbursed 

and may earn its full fee.

The current contract for completing FCS’s system development and 

demonstration phase provides a relatively high level of compensation in 

terms of total dollars, fee, and price of labor. The definitized contract 

between the Army and the LSI is a cost-reimbursable contract that is 

valued at $17.5 billion, comprised of $15.2 billion in cost and up to a 

15-percent fee of $2.3 billion. The remaining costs and fees from the earlier 

Contract Provides 

Incentives for Best 

Effort but Not 

Accountability for 

Program Outcomes 

FCS Contract Provides the 

LSI a High Level of 

Compensation 

Page 18 GAO-07-380 Defense Acquisitions
other transaction agreement were separated from the current FAR-based 

contract that was definitized in March 2006. The current contract period, 

which includes both the remaining work from the other transaction 

agreement and the definitized action, effectively runs from September 

2005 through the first quarter of fiscal year 2015. Under the FCS contract,

the LSI is required to put forth its best efforts to ensure a successful 

system. The Army will reimburse the LSI’s allowable costs and reward the 

contractor with profit in the form of a fixed and an incentive fee for its 

efforts. The fixed fee is paid annually and the incentive fee is earned 

incrementally based on the LSI’s demonstrated achievement of established

performance, cost and schedule criteria that are associated with program 

events. 

The total fee of 15 percent (which includes the potential incentive fees) is 

based on the total value of the contract, as estimated at contract inception. 

However, the benefit to the LSI is very favorable when considering the 

cost of the work the LSI actually performs, versus the amount that it 

subcontracts out to other firms. On FCS, the LSI will actually perform 

about $8.7 billion worth of the work when combining the costs under the 

previous other transaction agreement11 and subsequent FAR-based 

contract. Using that as a base, the potential fee of $2.7 billion roughly 

amounts to a 30 percent profit on the work the LSI actually does itself. 

According to an analysis conducted within the Office of the Secretary of 

Defense, this is a relatively high ratio of profit to value of work performed 

when compared with other large development programs. 

As with most cost reimbursable contracts, the reimbursable costs of the 

prime contractor include its costs and the costs and fees of lower tier 

subcontractors. The prime’s fee is separate from its reimbursable costs. 

For example, if a company is awarded a prime development contract for 

$300 million, that figure includes both costs and fees of the contractor’s 

subcontracts. The prime contractor’s fees are calculated on the 

$300 million cost figure included in the contract, but are not allowed to go

up if the contract costs increase. Accordingly, if the prime contractor then

awards a subcontract for $100 million of costs and pays the subcontractor

a fee of $15 million, the full $115 million paid to the subcontractor is part 

of the $300 million of the prime contractor’s estimated reimbursable costs. 

 11The other transaction agreement had a total value of $3.3 billion, with costs of $2.9 billion 

and fee of $0.4 billion. For the entire FCS system development and demonstration effort, 

the total contractual value is $20.8 billion, made up of $18.1 billion in cost and $2.7 billion 

in fee. 

Page 19 GAO-07-380 Defense Acquisitions
The prime contractor is entitled to be reimbursed for the full $300 million 

in costs from the government plus be paid any fee it has earned. The result 

of the FCS LSI arrangement is an additional layer of subcontractors and 

associated costs. Thus, the costs and fees of all the prime item developers

and their subcontractors are included in the $15.2 billion in costs 

reimbursable to the LSI under its contract with the Army. The LSI’s 

potential $2.3 billion fee is calculated based on these costs, as with a 

typical prime contract. 

Based on data provided by FCS program officials, the cost of LSI 

personnel is high relative to their government counterparts. The Army is 

paying the average LSI full-time equivalent about 25 percent more than the 

average cost of a federal employee in the senior executive service. These 

costs assume salary, benefits, and other costs of maintaining an employee

on the program. We have recently reported that contractor personnel also 

cost the Missile Defense Agency about 25 percent more than their 

government counterparts.12 However, the comparison data for missile 

defense personnel is based on all program personnel, not just the 

members of the more highly compensated senior executive service. 

Majority of Program Fees 

and Costs Are Available to 

the LSI before FCS 

Systems Demonstrate 

Their Performance 

Under the terms of the FCS contract, the LSI can earn over 80 percent of 

its $2.3 billion fee by the time the program’s critical design review is 

completed in 2011, and roughly 80 percent of contract costs will have been 

paid out by the Army by that point. Yet the actual demonstration of 

individual FCS prototypes and the system-of-systems will take place after 

the design review. Our work on past weapon system programs shows that 

most cost growth—symptomatic of problems—occurs after the critical

design review. 

The fee the LSI can earn under the FCS contract is divided between a fixed 

fee of $1.13 billion that will be paid in annual installments and an incentive 

fee of $1.14 billion that, according to a program official, can be earned on 

an incremental basis as the LSI accomplishes certain performance, cost 

and schedule criteria associated with each of nine key program events. 

Thus, it can earn portions of its incentive fees prior to occurrence of the 

event. Typically, incentive fees for weapon acquisition programs are based 

largely on how well the contractor achieves cost targets, but the LSI is 

 12GAO, Defense Acquisitions: Missile Defense Acquisition Strategy Generates Results but 

Delivers Less at a Higher Cost, GAO-07-387 (Washington, D.C.: March 15, 2007). 

Page 20 GAO-07-380 Defense Acquisitions
eligible to receive a minimum of 50 percent of its available incentive fee 

based on performance criteria, not cost. Additionally, the contract 

provides for rolling over any unearned incentive fees to subsequent events. 

This means that if work under a fee event is delayed, the Army can decide 

to delay the associated fee as well and pay it when the work does get 

done. To the extent that the contractor is responsible for the delay, 

rollover can allow the contractor to get a second chance to recoup 

performance fee that it did not perform well enough to earn according to

criteria at the original event, but it will not recoup the portion of the fee

associated with schedule performance. A high-level program official did 

tell us that the Army plans to allow roll-over at only one program event, if

the LSI does not earn its full fee at that event. Previous GAO work on fees 

highlighted the use of rollover as an indication that the fee structure for 

the program lacks the appropriate incentives, transparency, and 

accountability for an effective pay for performance system.13 The nine fee 

events used to evaluate the performance of the LSI, along with the fixed 

and incentive fees that can be earned are listed in the table below. 

 13GAO, Defense Acquisitions: DOD Wastes Billions of Dollars through Poorly Structured 

Incentives, GAO-06-409T (Washington, D.C.: December 19, 2005).

Page 21 GAO-07-380 Defense Acquisitions
Table 1: Fee events and schedule for FCS contract 

Dollars in millions 

Fiscal 

Year Event 

Incentive 

Fee 

Fixed

Fee

Total

Fee

2005 No Event 3.4 3.4

2006 In-Process Preliminary Design Review 

(Capability Maturity 0) 

101.1 191.7 292.8

2007 No Event 178.0 178.0

2008 Engineering Maturity 1 125.2 168.0 293.2

2009 Preliminary Design Review 

(Capability Maturity 1) 

255.3 160.6 415.9

2010 Engineering Maturity 2 145.3 148.4 293.7

2011 Capability Maturity 2 

(Critical Design Review) 

317.8 129.1 446.9

2012 Engineering Maturity 3 59.8 76.4 136.2

2013 Capability Maturity 3 96.8 51.7 148.5

2014 Engineering Maturity 4 22.6 22.0 44.6

2015 Verification Complete 19.9 4.6 24.5

Totals 1,143.6 1,133.9 2,277.7

Source: U.S. Army data and GAO analysis 

Note: Although the incentive fees are earned incrementally, the above incentive fee values are 

presented with each discreet event they are associated with for clarity of presentation. The above 

values reflect the events which occurred under the current contract, which began in September 2005. 

Thus, the incentive event in FY 2005, which occurred prior to that month, is not included above as it 

was paid under the other transaction agreement. Also, dollar amounts may not add up to totals 

because of rounding. 

To date, the LSI has completed one incentive event under the FAR 

contract and received 100 percent of the available incentive fee for its 

efforts. By the time the Army completes the critical design review in 2011, 

the LSI could earn over 80 percent of its incentive fee and over 80 percent 

of its total fee. The critical design review is important because our work 

has shown that by this point in time, a weapon system’s design should be 

stable enough to release 90 percent of engineering drawings for 

manufacturing. This level of knowledge is demonstrative that the design is

stable and capable of meeting performance requirements. It is the point at

which managers of a program can determine whether or not to build 

production-representative prototypes to demonstrate the actual 

performance of the design. 

We have found that most cost growth on weapon system development 

programs occurs after the critical design review. As shown in figure 2, 

Page 22 GAO-07-380 Defense Acquisitions
historical information on 26 major programs that have completed 

development experienced about 28 percent cost growth, with almost 

20 percent after critical design review.

14

Figure 2: RDT&E Percentage Increase throughout the Product Development Cycle 

for 29 Programs Completed or in Production 

0

5

10

15

20

25

30

0 10 20 30 40 50 60 70 8090 100

0

5

10

15

20

25

30

0 10 20 30 40 50 60 70 80 90 100

Percentage of RDT&E cost increase over development estimate

Source: GAO analysis of DOD data.

Percentage of product development completed

Total increase 28.3%

8.5%

19.7%

Design review

This pattern of cost growth occurs because most programs hold critical 

design review before the design is stable. Subsequent building and testing 

of prototypes has led to the discovery of problems that are costly to fix in 

the late stages of development. We have already reported that the critical

design review for the FCS program will occur before the program has 

attained a sufficient level of knowledge to ensure that technologies are 

mature. Moreover, the Army does not plan to build productionrepresentative prototypes for testing, relying instead on less mature 

prototypes and simulations. This sequence of events sets the stage for 

much discovery about the FCS’s actual performance and potential 

problems after the design review and after most of the fee can be paid to 

the LSI. 

 14For a description of the methodology behind this analysis, please see GAO, Defense 

Acquisitions: Assessments of Selected Weapon Programs, GAO-06-391 (Washington, D.C.: 

March, 31, 2006). 

Page 23 GAO-07-380 Defense Acquisitions
For several reasons, it will be difficult to connect the LSI’s performance on 

the contract with the success of the program. The contract itself, like 

those for other weapon system developments, does not insure the Army 

against an unsuccessful outcome. While the Army can gauge the progress 

under the contract, the LSI is responsible for providing best efforts, not 

successful outcomes. The criteria for fee events are not directly related to

achievement of total program outcomes, and the partner-like involvement 

with the LSI creates a situation in which the Army’s performance can 

affect the LSI’s performance. 

Connecting Contract 

Performance with Program 

Performance Will be 

Difficult 

The FCS contract is a cost-reimbursement research and development 

contract. In this respect, it is no different than most contracts to develop 

weapon systems. Essentially, under a research and development contract,

the contractor, or LSI in the case of FCS, is required to provide its best 

efforts at developing a capability or weapon system to the Army but is not 

responsible for actually producing the capability. Best efforts are 

measured by the inputs the contractor puts toward development of the 

system. Specifically, it must put the resources and processes in place to

demonstrate its best efforts at developing the Army’s desired capability. 

If the weapon systems, individually or collectively, fail to provide that 

capability, the LSI is not responsible as long as it has put forth best effort.

The contract fee events reflect the best effort nature of the LSI’s 

performance and do not require the successful demonstration of specific 

program knowledge or outcomes. For example, the criteria for the most 

recent incentive fee event (which was valued at a total of about 

$100 million) included such items as an updated force effectiveness 

analysis, the update and approval of program technical performance 

measures, and the completion of certain requirements and planning 

products. However, the incentive fee event criteria do not specify what is

expected in terms of the effectiveness analysis results, the current status 

of the technical performance measures, or when and how the

requirements process should be completed. Army program officials point

out that this fee structure is meant to create incentives for the LSI to focus 

on putting processes in place to ensure successful development of the 

system. They also note that in some past programs, contracts had devoted 

inadequate resources to such activities. As noted in previous GAO work15

 15GAO, NASA Procurement: Use of Award Fees for Achieving Program Outcomes Should

Be Improved, GAO-07-58 (Washington, D.C.: January 17, 2007). 

Page 24 GAO-07-380 Defense Acquisitions
and in NASA contracting guidance for major system acquisitions,16 input 

factors such as those used as criteria for the fee events in FCS are 

valuable, but they do not provide indications of success relative to the 

desired end result of the program. 

Because of its close involvement with the LSI, the Army has to make 

judgments about what contract outcomes and changes it is responsible for 

versus the LSI. The Army has already made judgments like these. When the

FCS program was restructured in 2004, the cost estimate and the program 

schedule increased significantly as the Army changed the scope of the 

program by increasing requirements and adding deferred systems to the 

contract. The Army attributed the changes in cost and schedule to the 

changes in scope and took responsibility for them, absolving the LSI of 

responsibility. Evaluated against the revised cost and schedule estimates, 

the Army awarded the LSI the full incentive fee at the next program 

evaluation event. Such adjustments in the LSI’s contractual responsibilities 

are possible in the future as well because the criteria for each fee event are 

not set until the year the event occurs and payment of fee associated with

each event is done incrementally based on accomplishment of specific 

criteria for each event. This could allow the Army to adjust the fee criteria 

based on the status of the program at the time. Thus, if the LSI and Army 

determine that a certain segment of work due to be completed by the time

of an event cannot be completed, the criteria for assessing that segment 

can be shifted out of that event. This occurred in the most recent program 

event where the scope of work associated with approximately $105,000 in

fee was shifted to the subsequent fee event. The Army and LSI decided this 

was necessary because accomplishment of the criteria associated with 

that fee was better suited for the next fiscal year. 

The Army’s own performance may be a factor in these decisions. For 

example, the Army is responsible for maturing some of the key 

technologies the LSI will need to integrate into the FCS systems. If these 

technologies do not succeed, then the expectations of the LSI may have to

be adjusted accordingly. The decision to increase the weight requirement 

for the manned ground vehicles is illustrative. Part of the reason for the 

decision was the fact that an advanced, lightweight armor the Army was 

developing outside the FCS contract was not performing as expected. 

While the decision affected the vehicle design, the LSI was not responsible 

for development of the armor technology. 

 16NASA, Award Fee Contracting Guide (Washington, D.C.: June 27, 2001). 

Page 25 GAO-07-380 Defense Acquisitions
Evaluating the use of the LSI on FCS involves consideration of several 

intertwined factors. Some, like the best efforts provisions of a costreimbursable research and development contract, are not unique to the 

LSI or to FCS. Other factors differ not so much in nature, but in degree 

from other programs. For example, FCS is not the first system-of-systems 

program DOD has proposed, but it is arguably the most complex. FCS is 

not the first program to proceed with immature technologies, but it has 

more immature technologies than any other program. FCS is not the first 

program to use an LSI, but the extent of the partner-like relationship 

between the Army and the LSI breaks new ground. Collectively, they make 

the LSI arrangement in the FCS context unique.

Conclusions 

We have reported the great costs and risks DOD has accepted by 

committing to FCS investments. We have expressed concern that the FCS 

program moved forward with insufficient knowledge and, therefore, an 

insufficient business case. However, that aside, if one accepts the FCS 

program for what it is and where it is in the development cycle, the Army 

has set up a contractual relationship that is both consistent with its vision 

for FCS and candid with respect to its workforce limitations. The Army 

has been thoughtful about what it is trying to accomplish collaboratively 

with the LSI, and has been working hard to make progress, including 

facing up to difficult tradeoffs. On the other hand, the limits of the 

contractual arrangements must also be recognized. Given the

unprecedented challenge FCS represents, it is unrealistic to expect that 

any contracting approach alone could assure a successful outcome. 

Ultimately, the risks of successful outcomes will be borne by the 

government. The contractual arrangements are not a substitute for having 

the high level of knowledge that a sound business case requires. 

The Army has shown a high tolerance for accepting risk and responsibility 

on this program. In addition to accepting high technical risk, the Army has 

accepted responsibility for lowering the performance of some individual 

systems, deleting some and adding other systems, reducing quantities, and

increasing costs and schedules. The Army has determined the bulk of cost 

and schedule changes since 2003 to be programmatic or scope-related.

This determination has had two effects. First, the changes became the 

responsibility of the Army, entitling the LSI to earn full fee thus far. 

Second, the changes are excluded from a determination of a NunnMcCurdy breach and its reporting and certification requirements. Over 

time, the Army runs the risk of becoming increasingly vested as it makes 

these and other decisions and less able to change course. Yet, the 

government must safeguard its ability to change course in the future as 

demonstrated knowledge replaces projections. 

Page 26 GAO-07-380 Defense Acquisitions
The foregoing underscores the important role of OSD in providing 

oversight on the FCS program and holding the program accountable to its 

own policies. While the Army works to manage the program, it is 

important that OSD hold the program accountable to best practice 

standards embedded in its policies. The go/no-go decision it will hold in 

2009 provides an opportunity for OSD to do so. The use of an LSI on FCS 

also needs to be seen as more significant than a contracting arrangement 

for a single program. At the very least, a proposal to use an LSI approach 

on any new program should be seen as a risk at the outset, not because it

is conceptually flawed, but because it indicates the government may be 

pursuing a solution that it does not have the capacity to manage. Such 

solutions ought not to be accepted as inevitable or unavoidable. Instead, 

they require additional scrutiny before they are approved and increased 

oversight if they are approved. 

We recommend that the Secretary of Defense: 

• reassess OSD’s approach to overseeing the FCS program, including 

asserting its own policy-based markers for progress, particularly in 

the areas of cost, technology maturity, design maturity, and 

production maturity. 

• ensure that there is the best link possible between the fee events in 

the FCS contract and actual FCS demonstrations; 

• review major FCS program changes to ensure that determinations 

for the government to accept changes as being programmatic or 

scope-related in nature are carefully scrutinized; and 

• assess whether the experience of the LSI on FCS has broader 

implications for acquisition management, such as the ability of the 

DOD workforce to manage a system-of-systems acquisition.

DOD concurred with our recommendations. DOD stated that it was 

updating its acquisition policy to address markers for progress in a 

number of areas including cost, technology maturity, design maturity, and 

production maturity. DOD agreed to use a variety of technical assessments 

to inform the Defense Acquisition Board on the FCS program’s progress 

against its policy-based markers. It is important that the Department be as

specific as possible and consistent with its own acquisition policy in 

setting expectations that the FCS program must meet. The Department 

also agreed to review the FCS award fee plan and to continue scrutinizing 

FCS program changes and accurately report against the program baseline. 

DOD noted that the FCS program scope has been expanded to add 

Recommendations 

Agency Comments 

and Our Evaluation 

Page 27 GAO-07-380 Defense Acquisitions
capability and to meet affordability constraints. In our view, some of the 

changes in scope were also made to correct shortcomings in the original 

acquisition strategy. It is important for DOD to be able to make such 

distinctions for reporting purposes. 

In concurring that the Secretary of Defense assess whether the experience

of the LSI on FCS has broader implications for acquisition management, 

DOD stated that its acquisition policy is being updated to better manage 

and control system and system-of-systems acquisitions. In addition to 

exploring how to improve the management of systems-of-systems and 

LSIs, it is important for DOD to look at the more strategic questions such 

as whether and under what circumstances these approaches should be 

taken. For example, are systems-of-systems too large a scope to manage 

and report as a single acquisition program? Is using an LSI preferable to 

getting a better match between the acquisition programs being conceived 

and the acquisition workforce DOD has to manage them? Should DOD be 

looking at reducing the scope of programs, increasing the capability of its 

own workforce, or both to achieve this match? 

DOD also stated that it considers the business relationship for the FCS 

development contract to be typical of a prime contract for a major system

because the FCS contractor performs a substantial portion of the 

development work for the program. As there is no universally accepted 

definition of a LSI, this distinction may be more a matter of opinion than 

fact. In our opinion, the role played by the FCS LSI is not typical of a DOD 

contractor. Two characteristics, in our view, distinguish a LSI from a 

traditional contractor. First, the integrator is managing across what would 

traditionally have been program lines, versus subsystems within a 

program. Second, in so managing, the integrator is acting on behalf of, and 

in the interests of, the government. The Army was specific about needing a 

different, partner-like contracting arrangement like this when it began the 

FCS program. We also note that while the FCS LSI is performing 

substantive work on software systems, its portion of total work is low 

relative to major prime contractors elsewhere in DOD and it is not directly 

involved in the development of any hardware for the FCS system-ofsystems. 

Finally, the Department noted that the role of the FCS prime contractor in

requirements determination is not correctly framed in our draft report and 

that we confuse operational requirements with design specifications. We 

have characterized the LSI’s role in this report as requirements refinement, 

rather than requirements definition. The requirements work being led by 

the FCS LSI is intended to complete the definition of the system-ofPage 28 GAO-07-380 Defense Acquisitions
systems requirements and the system-level requirements. Two aspects of 

this role are, in our view, distinctive. First is the fact that because FCS is a 

system-of-systems, the functions performed are one level higher than they

would have been for a typical single-system program. Thus, while the 

Army determines the operational requirements for the FCS brigade 

combat team the LSI is heavily involved with its subcontractors and the 

Army in setting the requirements for individual systems. On single system 

programs, the Army would have set the requirements for the individual 

system. Second, the FCS solution is being formed concurrent with the 

development of individual technologies and the design of systems. Thus, 

as the limitations of technology and design are discovered, the LSI works 

with the Army to change or refine the requirements to conform to these 

limitations. While this process is not atypical of weapon system 

acquisitions, the vast scope and large technical leaps sought in the FCS 

program requires greater involvement by the LSI in the refinement 

process. 

DOD’s comments are reprinted in Appendix III. DOD also provided 

technical comments, which were addressed throughout the report as 

appropriate.

We are sending copies of this report to the Secretary of Defense; the 

Secretary of the Army; and the Director, Office of Management and 

Budget. Copies will also be made available to others on request. In 

addition, the report will be available at no charge on the GAO Web site at 

http://www.gao.gov. 

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

concerning this report. Contact points for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. 

Other contributors to this report were Assistant Director William R. 

Graveline, Noah B. Bleicher, Lily J. Chin, Brendan S. Culley, Michael D. 

O’Neill, Kenneth E. Patton, and Thomas P. Twambly. 

Paul L. Francis 

Director 

Acquisition and Sourcing Management 

Page 29 GAO-07-380 Defense Acquisitions
List of Committees 

The Honorable Carl Levin 

Chairman 

The Honorable John McCain 

Ranking Member 

Committee on Armed Services 

United States Senate 

The Honorable Daniel K. Inouye 

Chairman 

The Honorable Ted Stevens 

Ranking Member 

Subcommittee on Defense 

Committee on Appropriations 

United States Senate 

The Honorable Ike Skelton 

Chairman 

The Honorable Duncan L. Hunter 

Ranking Member 

Committee on Armed Services 

House of Representatives 

The Honorable John P. Murtha, Jr. 

Chairman 

The Honorable C. W. (Bill) Young 

Ranking Member 

Subcommittee on Defense 

Committee on Appropriations 

House of Representatives 

Page 30 GAO-07-380 Defense Acquisitions
Appendix I: Scope and Methodology Appendix I: Scope and Methodology 

To identify factors that led to the Army’s decision to use an LSI for the 

FCS program and to determine the work performed by the LSI, we 

performed the following: 

• We obtained and analyzed the program documents including the 

FCS system development and demonstration contract, statement of 

work, Army FCS acquisition strategy report, and FCS operational 

requirements document to gain an understanding of the terms and 

conditions of LSI responsibilities, the structure and processes of the 

program, and goals of the Army. We reviewed FCS subcontracts to 

understand the nature of the FCS one team and to ascertain how 

Federal Acquisition Regulation clauses were flowed down after FCS 

contract conversion. We reviewed Army audits, Defense Contract 

Management Agency and Defense Contract Audit Agency reports, as 

well as GAO reports and testimonies. 

• We reviewed Army and DOD guidance as well as the Federal 

Acquisition Regulation to understand government contracting 

standards and procedures used for the acquisition of major weapon 

systems. 

• We interviewed FCS program officials from the Tank-Automotive 

and Armaments Command, DOD’s Office of Acquisitions, 

Technology, and Logistics, Defense Contract Audit Agency, and 

Defense Contract Management Agency to gain insight into why the 

Army chose and LSI business arrangement, how it is performing, 

and potential concerns for the future. 

• We interviewed one team partner officials from 12 of the major 

platform development offices to receive feedback from those

implementing the program decisions made by the LSI. These 

discussions focused on differences, benefits, and drawbacks of the 

LSI business approach when compared to more traditional, prime 

contractor arrangements. As many of these firms have extensive 

experience in defense contracting, we spoke about alternatives that 

the Army could have used for the FCS procurement. Finally, these 

discussions allow us to gain insight into the implementation and 

impact of the other transaction agreement to FAR contract 

conversion.

Page 31 GAO-07-380 Defense Acquisitions
Appendix I: Scope and Methodology 

To evaluate the implications of the Army’s relationship with the LSI, we 

performed the following: 

• We reviewed and collected information from the acquisition 

strategy report, statement of work, the FAR-based contract, 

documents related to source selection decisions, the integrated 

master schedule and documents related to the in-process 

preliminary design review, and the operational requirements 

document to identify the roles and responsibilities of the Army and 

LSI. 

• We interviewed key Army and LSI program managers, who were 

responsible for the overall FCS program, the Army and LSI leaders 

of the major integrated product development teams and met with 

selected officials from the first tier of major subcontractors to 

assess communication and decision making within the program. 

To evaluate the Army’s criteria for assessing the LSI’s performance, we 

conducted the following: 

• We reviewed the financial terms of the contract, the criteria for 

assessing the LSI’s performance at program incentive events 

contained in the contract and integrated master plan and conducted 

quantitative analyses of the contract’s fixed and incentive fees; 

• We reviewed the LSI’s presentations for the Army’s assessment and 

also interviewed Army officials, who were responsible for reviewing 

the LSI’s performance. To evaluate the program’s financial reporting 

systems, we interviewed officials from the Defense Contract 

Management Agency and Defense Contract Audit Agency. 

To accomplish our work, we visited and interviewed officials from the 

Army Tank and Automotive Command, Warren, Mich.; Army integrated 

product team leaders in Huntsville, Ala., Hazelwood, Mo., Fort Picatinny,

N.J.; LSI officials, in Hazelwood, Mo. and Huntington Beach, Calif. In 

addition, we interviewed 12 one team partners across the United States. 

We also interviewed officials from the Defense Contract Management 

Agency, Defense Contract Audit Agency and the Office of the Secretary of

Defense’s Cost Analysis Improvement Group. 

We conducted our review between May 2006 and June 2007 in accordance 

with generally accepted government accounting standards. 

Page 32 GAO-07-380 Defense Acquisitions
Appendix II: Overview of FAR Provisions

Included in Future Combat Systems Lead Appendix II: Overview of F Systems Integrator Contract AR Provisions 

Included in Future Combat Systems Lead 

Systems Integrator Contract 

The Federal Acquisition Regulation (FAR) provides uniform policies and 

procedures for acquisitions by federal government executive agencies. 

Depending on the type of contract entered into, different FAR clauses and 

provisions are used to protect the government’s interests and define the 

terms of the agreement. Likewise, contracting officers structure a contract

appropriately depending on the products or services being procured. A 

multitude of FAR provisions and agency FAR supplement provisions give 

contracting officers a wide range of options to tailor government contracts 

to meet the specific agency needs. While many FAR clauses are required to 

be incorporated in all contracts of a particular type, other provisions are 

only required to be included as applicable. 

The Army’s original FCS Other Transaction Agreement was converted into 

a FAR-based cost-reimbursable research and development contract in 

2006. According to the Army, the new FCS contract includes the FAR and 

Defense Federal Acquisition Regulation Supplement (DFARS) 

requirements appropriate for this type of procurement. While GAO 

confirmed the Army’s analysis of the FAR-based contractual provisions, it 

did not conduct an independent detailed examination of every applicable 

clause in the contract. However, GAO did confirm the inclusion of several 

FAR requirements that address areas of key concern. 

• Cost Accounting Standards (CAS) – Two FAR part 12 provisions 

pertaining to the use and administration of CAS have been included 

in the FCS contract. 

• Procurement Integrity Act (PIA) – The FCS contract includes the 

two FAR clauses required to address PIA concerns. 

• Truth in Negotiations Act (TINA) – TINA standards for cost and 

pricing data are addressed in three FAR part 12 provisions. 

Additional information regarding exceptions and requirements for 

cost and pricing data are included separately in the FCS contract. 

• Organizational Conflict of Interest (OCI) – Although the 

predecessor other transaction agreement contained an OCI clause 

that required certain safeguards be put into place if and when

Boeing and SAIC competed for subcontracts, it did not preclude 

them from such competitions. The FCS FAR contract includes an 

OCI provision that precludes the Boeing/SAIC LSI team from 

competing for any FCS subcontract awards. Though FCS 

subcontractors may compete for additional FCS subcontracts, the 

OCI provision in the FCS contract requires that steps be taken to 

Page 33 GAO-07-380 Defense Acquisitions
Appendix II: Overview of FAR Provisions

Included in Future Combat Systems Lead 

Systems Integrator Contract

ensure an absence of any organizational conflicts of interest during 

subcontractor selection activities. Additionally, this clause provides 

instruction on how proprietary information should be protected. 

Page 34 GAO-07-380 Defense Acquisitions
Appendix III: Comments from the Department Appendix III: Comments from the of Defense 

Department of Defense 

Page 35 GAO-07-380 Defense Acquisitions
Appendix III: Comments from the Department 

of Defense 

Page 36 GAO-07-380 Defense Acquisitions
Appendix III: Comments from the Department 

of Defense 

(120555) Page 37 GAO-07-380 Defense Acquisitions
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