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[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

       F-22 COST CONTROLS: WILL PRODUCT COST SAVINGS MATERIALIZE?

=======================================================================

                                HEARING

                               before the

                   SUBCOMMITTEE ON NATIONAL SECURITY,
                  VETERANS AFFAIRS, AND INTERNATIONAL
                               RELATIONS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 15, 2000

                               __________

                           Serial No. 106-221

                               __________

       Printed for the use of the Committee on Government Reform

  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform

                              -----------

                   U.S. GOVERNMENT PRINTING OFFICE
72-259                     WASHINGTON : 2001

_______________________________________________________________________
 For sale by the Superintendent of Documents, U.S. Government Printing 
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                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
    Carolina                         ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
HELEN CHENOWETH-HAGE, Idaho              (Independent)
DAVID VITTER, Louisiana

                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
           David A. Kass, Deputy Counsel and Parliamentarian
                    Lisa Smith Arafune, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

Subcommittee on National Security, Veterans Affairs, and International 
                               Relations

                CHRISTOPHER SHAYS, Connecticut, Chairman
MARK E. SOUDER, Indiana              ROD R. BLAGOJEVICH, Illinois
ILEANA ROS-LEHTINEN, Florida         TOM LANTOS, California
JOHN M. McHUGH, New York             ROBERT E. WISE, Jr., West Virginia
JOHN L. MICA, Florida                JOHN F. TIERNEY, Massachusetts
DAVID M. McINTOSH, Indiana           THOMAS H. ALLEN, Maine
MARSHALL ``MARK'' SANFORD, South     EDOLPHUS TOWNS, New York
    Carolina                         BERNARD SANDERS, Vermont 
LEE TERRY, Nebraska                      (Independent)
JUDY BIGGERT, Illinois               JANICE D. SCHAKOWSKY, Illinois
HELEN CHENOWETH-HAGE, Idaho

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
            Lawrence J. Halloran, Staff Director and Counsel
                  J. Vincent Chase, Chief Investigator
                           Jason Chung, Clerk
                    David Rapallo, Minority Counsel

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 15, 2000....................................     1
Statement of:
    Li, Allen, Associate Director, Defense Acquisitions Issues, 
      National Security and International Affairs Division, U.S. 
      General Accounting Office, accompanied by Leonard L. 
      Benson, senior evaluator; and Donald Springman, senior 
      evaluator..................................................     5
    Schneiter, George R., Director, Strategic and Tactical 
      Systems, Office of the Under Secretary of Defense for 
      Acquisition, Technology and Logistics; and Darleen A. 
      Druyun, Principal Deputy Assistant Secretary of the Air 
      Force for Acquisition and Management, accompanied by Joseph 
      T. Kammerer, Deputy Assistant Secretary of the Air Force, 
      Cost and Economics.........................................    44
Letters, statements, etc., submitted for the record by:
    Barr, Hon. Bob, a Representative in Congress from the State 
      of Georgia, prepared statement of..........................    24
    Chenoweth-Hage, Hon. Helen, a Representative in Congress from 
      the State of Idaho, prepared statement of..................    91
    Druyun, Darleen A., Principal Deputy Assistant Secretary of 
      the Air Force for Acquisition and Management, prepared 
      statement of...............................................    55
    Li, Allen, Associate Director, Defense Acquisitions Issues, 
      National Security and International Affairs Division, U.S. 
      General Accounting Office, prepared statement of...........     8
    Schneiter, George R., Director, Strategic and Tactical 
      Systems, Office of the Under Secretary of Defense for 
      Acquisition, Technology and Logistics, prepared statement 
      of.........................................................    46
    Shays, Hon. Christopher, a Representative in Congress from 
      the State of Connecticut, prepared statement of............     3

 
       F-22 COST CONTROLS: WILL PRODUCT COST SAVINGS MATERIALIZE?

                              ----------                              

                        THURSDAY, JUNE 15, 2000

                  House of Representatives,
       Subcommittee on National Security, Veterans 
              Affairs, and International Relations,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2154, Rayburn House Office Building, Hon. Christopher 
Shays (chairman of the subcommittee) presiding.
    Present: Representatives Shays, Barr, Schakowsky, and 
Tierney.
    Staff present: Lawrence J. Halloran, staff director and 
counsel; J. Vincent Chase, chief investigator; Jason M. Chung, 
clerk; Earley Green, minority assistant clerk; and David 
Rapallo, minority counsel.
    Mr. Shays. Good morning. I'd like to call this hearing to 
order and to welcome our witnesses and our guests.
    Last year, the Air Force's F-22 air superiority fighter 
encountered unexpected turbulence when House appropriators 
questioned the ability of the program to stay within 
congressional mandated caps on design and development costs. In 
December, we were assured those expenses were being rigorously 
monitored and successfully controlled.
    But looming over the horizon even then were unacceptably 
high cost projections for the next more expensive phase of the 
program, aircraft production. So we asked the General 
Accounting Office [GAO], to evaluate cost production control 
plans being relied on to meet critical F-22 affordability 
goals. The results of their review indicate the Department of 
Defense [DOD], and the Air Force, and F-22 contractors, have 
made some progress, but have yet to tame the persistent cost 
growth that has long plagued the program.
    GAO finds some planned cost control strategies unlikely to 
yield any real savings. According to DOD, $21 billion in cost 
reductions will be needed to keep F-22 production spending 
below the $37 billion ceiling. To achieve savings on that 
scale, hundreds of cost reduction plans have been formulated by 
F-22 airframe and engineer manufacturers. But assessments of 
the impact of those plans vary widely in both methodology and 
outcome.
    One estimate by the Office of the Secretary of Defense 
concludes the program could exceed congressional production 
cost caps by more than $8 billion. The Air Force estimate 
conforms neatly with the cost cap, assuming almost complete 
success in trimming expenses, while pushing the risk of cost 
growth to the out years.
    While reaching very different conclusions, the two 
estimates appear to share common flaws. Both include 
speculative savings and potential cost shifts. Significant 
savings are assumed for multi-year procurements that may not be 
approved. Additional savings are seen flowing from 
manufacturing efficiencies once the Joint Strike Fighter [JSF], 
begins production.
    But Air Force support for the JSF may be waning. Savings 
attributed to contractor provided maintenance may only defer, 
not avoid, depot costs later in the program. Real savings are 
critical to the success of the Air Force's premier tactical air 
modernization effort. If high end estimates prove true and the 
program is to remain within budget, the total F-22 purchase 
would have to be reduced by 85 planes, nearly one-quarter of 
the planned production run of 339 aircraft. That would endanger 
the military utility and the fiscal viability of the F-22.
    Our goal this morning is clearly understanding how the Air 
Force can achieve, not just plan, the ambitious F-22 production 
cost reduction program. Again, we welcome our witnesses and 
look forward to their testimony.
    [The prepared statement of Hon. Christopher Shays follows:]

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    [GRAPHIC] [TIFF OMITTED] T2259.002
    
    Mr. Shays. We have testimony in our first panel from Mr. 
Allen Li, Associate Director, National Security and 
International Affairs Division, U.S. General Accounting Office, 
accompanied by Leonard Benson and Donald Springman, both senior 
evaluators of the same division of GAO.
    Mr. Li, I'm going to swear you all in and then we're going 
to take your testimony.
    If you would raise your right hands, please. Do you 
solemnly swear or affirm that the testimony you will give 
before this subcommittee will be the truth, the whole truth and 
nothing but the truth?
    [Witnesses sworn.]
    Mr. Shays. Note for the record that all three witnesses 
responded in the affirmative. And Mr. Li, it's very good to 
have you here.

STATEMENT OF ALLEN LI, ASSOCIATE DIRECTOR, DEFENSE ACQUISITIONS 
 ISSUES, NATIONAL SECURITY AND INTERNATIONAL AFFAIRS DIVISION, 
   U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY LEONARD L. 
    BENSON, SENIOR EVALUATOR; AND DONALD SPRINGMAN, SENIOR 
                           EVALUATOR

    Mr. Li. Thank you, sir.
    Mr. Chairman and members of the subcommittee, I am pleased 
to be here today to discuss our ongoing work requested by the 
subcommittee on the impact of production cost reduction plans. 
With me today, as you said, are Leonard Benson and Donald 
Springman.
    As you know, the F-22 is an air superiority aircraft being 
developed to replace the F-15. Development, which started in 
August 1991, is scheduled to be completed by August 2003. The 
Air Force plans to enter low rate initial production in 
December 2000.
    Projections of higher production costs have been a source 
of concern for some time. In 1996, because of potential cost 
increases, the Air Force established the Joint Estimating Team 
[JET], to review the total estimated costs of the F-22 program. 
The JET concluded that the cost of production could grow 
substantially, but that cost reduction initiatives could be 
implemented to offset that cost growth.
    The Congress has also weighed in on F-22 production costs. 
The 1998 National Defense Authorization Act limited the total 
cost of F-22 production. Most recent production cost estimates 
were completed by the Air Force and the Office of the Secretary 
of Defense in 1999. Both groups considered cost reduction 
initiatives, known as production cost reduction plans, in 
coming up with their estimate.
    As you said, to date, hundreds of these plans have been 
identified by the airframe and engine contractors, with 
participation by the F-22 program office. These plans propose 
changes to business design processes and practices. Each plan 
must go through a series of analyses and meet specific criteria 
before it is considered to be implemented. For example, one 
criterion is that the impact of the reduction has been 
reflected in a current contract price by either the prime 
contractor or a supplier to the prime contractor.
    At the subcommittee's request, we are now reviewing these 
production cost reduction plans. We are focusing on determining 
the status of cost reduction plans, including some plans not 
implemented, and comparing the 1999 estimates developed by the 
Air Force and the Office of the Secretary of Defense with the 
congressional cost limitation.
    My statement today presents our preliminary observations. 
We plan to issue our final report later this summer.
    Before I share our observations with you, the magnitude 
represented by these cost reduction plans should be put in 
perspective. A total of $21 billion has been identified to 
date. How big is that? Allocated equally over a planned 
procurement of 339 F-22 aircraft, a $21 billion cost reduction 
equates to about $62 million per copy.
    In fiscal years 1996 through 1998, the Air Force paid an 
average unit cost of $46 million for an F-15. So I need not 
tell you how significant these cost reduction plans are.
    I will make two points today. Point No. 1, implementing all 
cost reductions identified will be challenging. Of the total 
$21 billion identified, half of that amount is currently 
categorized as implemented. Transforming the other half will 
not be easy. Our review of 10 plans not yet implemented, 
indicates that achieving reductions from three of the plans 
would depend on decisions by the Office of the Secretary and/or 
the Congress. Therefore, implementation of these plans is 
beyond the Air Force's ability to control.
    For example, one plan requires the Congress to approve a 
multi-year procurement of the F-22, which the airframe 
contractor estimates will reduce costs by about $1.5 billion. 
The contractor proposes that production be contracted for 5 
years in advance, beginning in 2004. According to the plan, 
because of cost reductions available through long term 
commitments, such as the 5-year contract, the subcontractors 
and the contractor would accept lower prices for the aircraft 
being procured.
    But a multi-year contract must meet specific criteria and 
be approved by the Congress. For example, the item being bought 
must have a stable design and not have excessive technical 
risks. Also, the estimated cost of the system and the estimated 
cost avoidance from the multi-year procurement must be 
realistic.
    The Air Force plans to award a multi-year contract for 
fiscal year 2004 and will need congressional approval for a 
multi-year contract in fiscal year 2003 to support advance 
procurement funding. Since the F-22 development program is not 
scheduled to be over until August 2003, the potential exists 
that the F-22 program will not meet the multi-year procurement 
criteria by 2003.
    Point No. 2. Both Office of the Secretary and Air Force 
cost estimators project that F-22 production costs have 
exceeded the congressional cost limitation. The two estimating 
groups did not use the same estimating methods and did not make 
the same assumptions about which plans were already implemented 
or about the cost reductions that could be achieved. For 
example, for plans not implemented, Air Force's estimating 
group allowed $10.2 billion for potential future cost 
reductions. Estimators from the Office of the Secretary allowed 
$6.1 billion.
    After considering the potential of all the cost reduction 
plans, the Air Force estimated F-22 production costs at $40.8 
billion and the Office of the Secretary at $48.6 billion. Both 
estimates were based on the production of 339 aircraft.
    The Office of the Secretary's estimate exceeded the Air 
Force's by $7.8 billion, or 19 percent. The difference is due 
to the Office's higher estimates of the cost of production and 
lower estimates of the impact of plans not implemented. The 
Office of the Secretary estimate exceeded the congressional 
cost limitation by about $8.8 billion.
    Let me put this estimate in perspective. Assume that the 
Office of the Secretary estimate is correct, and additional 
cost reduction plans are not developed and implemented. If this 
happens, the Air Force would have to buy on the order of about 
85 fewer F-22s to stay within the congressional cost 
limitation. I should note that although Air Force cost 
estimators projected a total of $40.8 billion in production 
costs, the official Air Force cost position is $39.8 billion, 
the same as the congressional cost limitation.
    The Air Force officials said that the Air Force selected 
the lower figure as its official cost estimate because the 
difference between the estimate and the budget is primarily 
associated with the years after 2005. They also said that their 
estimate of $40.8 billion has a 50 percent probability. That 
means that there is as much likelihood for the actual cost to 
be higher as it is to be lower.
    On the other hand, the official Air Force estimate of $39.8 
billion, the one that matches the congressional cost 
limitation, has a confidence level of 33 percent. That means 
that it is twice as likely that the $39.8 billion estimate is 
understated.
    Mr. Chairman, that concludes my statement. We'll be happy 
to respond to any questions you may have at this time.
    [The prepared statement of Mr. Li follows:]

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    Mr. Shays. I think what we'll do, Mr. Li, is just get rid 
of some housekeeping and go and vote and then come back. Mr. 
Tierney would like to make a statement maybe before we go, 
we'll do that too. But I'd first ask unanimous consent that all 
members of the subcommittee be permitted to place an opening 
statement in the record and that the record remain open for 3 
days for that purpose.
    Without objection, so ordered.
    I ask further unanimous consent that all witnesses be 
permitted to include their written statement in the record, and 
without objection, so ordered.
    Would the gentleman like to make an opening statement 
before we go vote?
    Mr. Tierney. Yes, I would. I thank the Chair, and I 
apologize for my tardiness. I thank the witnesses for being 
here.
    Chairman Shays, I want to thank you for your continuing 
efforts in this series of hearings on the F-22 aircraft 
program. Your leadership in this area obviously is appreciated, 
and I welcome the testimony of our witnesses here concerning 
the status of the F-22 and its costs and the attempt to control 
those costs.
    I'd like to read a few lines from a statement that I 
believe is relevant to today's hearing. The quotation is, the 
broad question raised is whether the Air Force should be more 
realistic in terms of anticipating delays in construction, in 
subcontractor performance and in software development. Looking 
at the record for the past 10 years, it appears that the Air 
Force has consistently underestimated the length of delays and 
the increases in costs.
    At some point, repeated upward adjustments cease to be 
unexpected. At some point, they reveal a strategy that is 
overly optimistic. As with any prioritization analysis, cost 
concerns for the F-22 program must inform the larger questions, 
such as the relevance of the F-22 program in light of the 
ongoing aircraft development programs.
    Mr. Chairman, those are my own remarks that were made as 
part of the opening statement to this subcommittee's December 
7, 1999 hearing on cost controls for the F-22. At that hearing, 
the Air Force responded by assuring us that cost control was a 
critical focus of the F-22 team. The Air Force Deputy Under 
Secretary Darleen Druyun estimated that the Air Force was on 
track to deliver the F-22 within the congressionally mandated 
cost cap of $39.8 billion.
    Today, however, the General Accounting Office reports that 
the Air Force completed a revised production cost estimate 
later the same month as our hearing, last December. Apparently 
that new estimate indicated that production costs would be $1 
billion over budget. Even worse, the GAO also reports that the 
Office of the Secretary of Defense completed its own production 
cost estimate, also last December.
    This estimate predicted that production costs for the F-22 
could exceed congressional cost caps by as much as $8.8 
billion, almost $9 billion over budget.
    Of course, I'm going to have questions later on about these 
two cost estimates and why they could possibly be so different. 
$1 billion compared to almost $9 billion is quite a wide range.
    But I return to my original statement, that the Air Force 
has consistently underestimated cost increases in the F-22 
program. On one hand, I want to commend the Air Force for 
initiating and implementing a wide range of cost reduction 
initiatives. These measures are forward thinking, they leverage 
initial investments today for savings throughout the life of 
the aircraft, and they can be utilized in various forms and 
other manufacturing lines.
    On the other hand, however, I continue to have concerns 
when I hear about these cost saving initiatives. My first 
concern is that they do not address the fundamental problem 
with the Air Force being unable to control costs elsewhere. 
These reforms are new initiatives to streamline processes, to 
develop cheaper technologies and to utilize lean business 
practices. And I wholly endorse those efforts.
    But they are not substitutes for more realistically 
estimating and more aggressively controlling other costs at the 
outset. Let's use an analogy. Suppose you're asked to go to the 
store to buy dinner, and you tell me it's going to cost $50. 
For some reason, the price of chicken keeps going up 
repeatedly. Instead of trying to determine why you're 
constantly underestimating the price of chicken, you go out and 
tell me how you're going to save money on milk. That seems to 
be what's going on here.
    My second concern is that underlying costs are continuing 
to escalate despite cost reduction initiatives. We can gauge 
these increases by the amounts the Air Force is now trying to 
save through reform initiatives. In 1997, the JET team 
estimated that production costs would grow by as much as $13 
billion. In an April 1999 letter to the subcommittee, the 
Deputy Under Secretary of Defense for Acquisition Reform stated 
that contractors were pursuing $16 billion in savings 
initiatives. Now GAO reports that the Air Force is hoping to 
save $21 billion through these initiatives and measures.
    But these savings are not being transferred back to the 
taxpayer, at least as far as we can see. So they must be 
compensating for costs that are increasing elsewhere in the 
program. Every time we hear about a new increased savings 
estimate, we know these savings are paying for a new increased 
cost somewhere else.
    Although I'm happy to listen today to the good news about 
cost saving initiatives and their progress, I sincerely hope 
that the Department of Defense and the Air Force will address 
the more fundamental problems with their inability to 
accurately predict or control the costs of the F-22 program.
    Thank you, Mr. Chairman.
    Mr. Shays. I thank the gentleman.
    We've been joined by Mr. Barr. Mr. Barr, we're going to 
take questions afterwards, but you're a member of the full 
committee and very welcome to participate here. I don't know if 
you'd like to make a statement.
    Mr. Barr. Thank you very much, Mr. Chairman, and I won't 
overstay my welcome. I know we also have a vote on the floor.
    I would like to state for the record that Mr. Shays is an 
outstanding member of the full committee and a standing 
chairman of this subcommittee. He's a very fair man. He asks 
tough questions, I know that, that in every instance they are 
heartfelt, they are sincere, and they are designed to get at 
very, very important information for his constituents, for 
people all across this land. And he is a very, very legitimate 
and appropriate watchdog for those things of which we are 
stewards for the public, and that is the public moneys and so 
forth.
    So I appreciate very much your work in this area, Mr. 
Chairman. I appreciate the courtesy extended to me as the 
representative for the Seventh District of Georgia, in which is 
located the Lockheed Martin plant, which is the final assembly 
point for both the F-22 and the C-130J, two very important long 
term procurement programs involving the Air Force and our other 
services.
    I would like, Mr. Chairman, to ask the courtesy of 
unanimous consent to include my full statement in the record.
    Mr. Shays. Without objection, so ordered.
    [The prepared statement of Hon. Bob Barr follows:]

    [GRAPHIC] [TIFF OMITTED] T2259.016
    
    [GRAPHIC] [TIFF OMITTED] T2259.017
    
    Mr. Barr. Thank you.
    And I would like to say, Mr. Chairman, that my support of 
the F-22 and my support of your efforts to ensure that it is a 
weapon system that is as cost effective as possible in today's 
environment, I would like to say that it is not born out of the 
fact that the final assembly point for the plane is in my 
district. That certainly is of concern to me as a 
Representative.
    But my support for the F-22 is born out of the simple fact 
that within a very short number of years that could be counted 
on one hand, our Nation's security forces, the men and women 
that we send overseas to support and defend our Nation's 
interests anywhere in the world will be put at risk. And the 
reason they will be put at risk is we will no longer, with the 
current F-15 configuration and the other aircraft that we have, 
be able to guarantee or even be assured of air superiority.
    This is a cold, hard fact of the world. Other nations are 
moving forward with the development of air superiority 
aircraft. The F-15, a magnificent aircraft, can only be 
modified so much. It is reaching the end of its useful life. 
The F-22 is the next generation, the only generation of air 
superiority aircraft we have. It has been and will continue and 
should continue to be very vigorously evaluated, constantly 
evaluated.
    But I am assured, and I believe, Mr. Chairman, very 
sincerely, after talking with administration officials, with 
industry officials, with other Members on both the House and 
the Senate side and with Air Force officials, that this plane 
is and will continue to meet the criteria set down for it, 
which is more rigorous than any other aircraft or weapons 
system in our Nation's history.
    But I do commend you and thank you, Mr. Chairman, for the 
fairness with which you approach this. And hope that and 
anticipate that this very, very vital weapon system will move 
forward.
    Mr. Shays. I thank the gentleman for his very gracious 
comments, and appreciate his presence.
    Mr. Barr. Thank you.
    Mr. Shays. We'll just recess and go vote, and be right 
back. I'm sorry, we have two votes, so it may take us 15 
minutes or so. Thank you.
    [Recess.]
    Mr. Shays. We call this hearing to order.
    And I'll start with some questions, and then we'll go to 
Mr. Tierney and Mr. Barr also probably has questions that he 
might like to ask.
    The chart in your draft on costs that have already been, 
reductions that have already taken place, and those to be 
implemented, I'd like you to walk down each of the chart items 
and just in brief discuss them with me. So you have the floor 
to do that.
    Mr. Li. There are several, in talking about the individual 
and the grouping of production cost reduction plans, what we 
did was we tried to cluster them in areas that people would 
understand. For example, in improving manufacturing processes 
and incorporating new technology, we're talking about 
situations here where the Government and the contractors would 
want to make some investment in their processes and provide up 
front money, so that they could achieve some savings later on.
    Improving the efficiency and reducing supplier costs. In 
the current manufacturing process, many industries are going to 
something called lean manufacturing. In that process, they're 
trying to do time and motion analyses to make sure that they've 
gotten rid of all the inefficiency associated with the 
manufacturing process.
    Another category that they've identified--that's going to 
be for a total $1.6 million--is to resolve some obsolescence 
and diminishing source issues. And this is an interesting 
issue, because one of the initiatives is one in which they want 
to replace the computer, the main part, the CIP, that's going 
to be the primary focal point of bringing in all the 
information. That particular processor is being redesigned, and 
that's what their CIP 2000 computer is all about.
    Another one is improving material procurement strategies. 
And that is also another interesting area, because what they're 
trying to do is to make some efficiencies in the way that they 
acquire material. One of the PCRPs that I reviewed, for 
example, is one in which the different contractors and 
subcontractors would actually be buying the material at the 
same time, and thereby, they would be achieving efficiencies.
    Another one is their application of performance-based 
contracting practices. That is one which is closely aligned to 
some of the definitions of acquisition reform, which I know the 
chairman has talked about many, many times. In this particular 
case, they are envisioning being able to have less of a 
reporting requirement. The contractor would not have to report 
and write reports back to the Air Force as many times as has 
been envisioned in the past.
    To defer and to avoid Government investing in depot 
maintenance, that is a very large area of savings that they 
have projected. That is one in which they have decided not to 
have what they call an organic depot maintenance capability. 
The contractor, in essence, will be doing that.
    And finally, the one that the chairman has mentioned 
himself in terms of the Joint Strike Fighter, there are some 
efficiencies that they envision that combine individual pieces 
and components and the overhead that would be associated with 
one of the winning vendors of the JSF, they are envisioning 
getting some efficiencies from that.
    Mr. Shays. Briefly describe how we get, the Office of the 
Secretary estimates $48 billion and the Air Force estimates 
$40.8 billion in total costs. What contributes to the 
difference there?
    Mr. Li. It's very difficult to be able to explain on a line 
by line basis. The best explanation that I can provide to you, 
Mr. Chairman, is the fact that when they made these estimates--
and these estimates are made by professionals--they made 
different assumptions on different things. For example, some 
people feel that some things would not be achieved, some at not 
the same rate. On return on investment one of the groups 
estimated a higher amount than the other one.
    When all those things are considered, that's how these 
differences come about. And I understand your concern and your 
question, that how can this happen, that there is this 
magnitude. And as Mr. Tierney mentioned, he is also concerned 
about this.
    The best that I can answer that particular question is that 
it's the knowledge that you have with which to make that 
estimate, you have to have good knowledge to do that. In our 
best practices work, we have found that the best commercial 
companies go into production with having a good knowledge of 
how much it's going to cost to build something. And I don't 
believe that we're at that point here. That's what this is 
pointing toward.
    Mr. Shays. Just a simple answer, it's just based on 
different assumptions?
    Mr. Li. That's part of it, sir.
    Mr. Shays. I want you to be more specific.
    Mr. Li. For example, the assumption that the return rate, 
the amount of money that you would invest in a production 
enhancement.
    Mr. Shays. Let me just tell you what I'm wrestling with. 
First off, I think it's difficult to estimate the cost of any 
major undertaking like this. But since we are making the effort 
do that for obvious reasons, I just would like to feel a little 
more comfortable that two bodies that basically should be 
making generally similar assumptions are not. And I would think 
that there must be some major differences in assumptions that 
would account for a difference of 20 percent in the cost of the 
product.
    Mr. Li. Let me give you another example, maybe this will 
help. When they estimated the cost of the avionics, one body, 
the Air Force, estimated and used historical data using the F-
18 as their basis. The Office of the Secretary used a larger 
basis using several aircraft. Perhaps I gave you some detail 
that would help.
    Mr. Shays. Let me ask you this way. Which cost estimate, 
the Air Force or the Secretary of Defense estimate do you 
consider more accurate?
    Mr. Li. Again, this goes back to my initial point. I think 
only time will tell. I don't have that crystal ball that can 
say which one is better.
    However, I can say this. I think the reason why we have 
this disparity of 19 percent between the two, in my personal 
opinion, is because we don't have the basis from which to make 
a good projection right now.
    Mr. Shays. What would give you that basis?
    Mr. Li. What would give me that better basis is if the 
processes were in better control, the statistical processes. I 
was mentioning before about private companies, what do they do 
before they launch into production. They have some processes 
under control, they know they can produce products consistently 
with the quality and the timeliness that they project. I don't 
believe we're at that point.
    Mr. Shays. I'm going to yield the rest of my time to Mr. 
Tierney and I'm going to come back.
    Mr. Tierney. Thank you.
    We are talking about private companies. Who's making these 
things?
    Mr. Li. I was talking about commercial practices, I'm 
sorry. I'm talking about commercial practices like the 777, 
producing a commercial product.
    Mr. Tierney. Can you explain to me why these companies 
don't use those practices? Is it just because they've got an 
open checkbook here?
    Mr. Li. No. In the work that we have done, and we have a 
body of work that we have completed in the past 2 years, in 
trying to talk about what are the best commercial, best 
practices in developing products. We have mentioned things, as 
the ones that I just talked about, which is not going and 
launching a production line before you have full knowledge of 
some of the details.
    The issue that I'm raising is that also, in the work that 
we've done, we've talked about the barriers that DOD has in 
mimicking the same sort of commercial best practices. I'm 
giving DOD credit, they are recently, and they will be 
announcing a change to their procurement practices and their 
guidelines, in which they are going to be trying to alter and 
get better commercial practices within their process.
    Mr. Tierney. And they're just getting to this point now, 
after how long?
    Mr. Li. Well, yes, it does take a long time. But the 
incentives, and Mr. Tierney, you're well aware of this, the 
funding exigencies that occur are not an incentive for programs 
to be identifying problems. They're all competing for funds 
early on, and they're trying to do the best they can to say 
yes, this is a challenge, but we're going to come in at this 
particular price.
    Mr. Tierney. I understand what you're saying. I'm a 
skeptic, I guess, on the whole process. My questions probably 
wouldn't get us much further along, except to say that it's 
beyond my comprehension that you can be 20 percent off and just 
at this date deciding some of your processes are wrong.
    Mr. Li. I think perhaps, sir, that would be a good question 
to ask our witnesses from DOD and Air Force.
    Mr. Tierney. You can bet it would be. We're talking now 
about the fact that you think there's going to be $8.8 billion 
over the congressional cap, right? And you base that on the 
$39.8 billion cap. But we look now that the cap has been 
adjusted to $37.6 billion, so if you base it on that, you're 
really kicking that estimate up to $11 billion over cost.
    Mr. Li. Well, the difficulty in making that comparison, 
sir, is that the $37.6 billion was adjusted because some of the 
aircraft that were in the production phase are now being 
produced in the engineering and manufacturing development 
phase. So that was to compensate for that particular point.
    Mr. Tierney. Really the only question that I hear, and 
you've pretty much answered it as far as you're able to go on 
this, is how can those costs get out of control. So a $40 
billion production thing becomes a $60 billion production 
thing. And I think you've exhausted your analysis of that.
    So I appreciate your comments. I'm frustrated with your 
answer, and I'm mindboggled how we get into this. There's a lot 
of questions you have about just the reason for even building 
this particular weapon. But when you start looking at these 
class configurations and the comparison and everything, it 
gets--and I just make the comment for no other reason than to 
get it off my chest, that here we go again with the national 
missile defense, of building something before we determine 
whether or not it can realistically be built.
    I'll yield back to the chairman.
    Mr. Shays. I think before going to Mr. Barr I just want to 
nail down some really simple stuff that I'm missing here. The 
$10.2 billion represents cost savings that are being 
implemented or will be implemented, in other words, explain to 
me implemented, to be implemented.
    Mr. Li. Of course. In the total of $21 billion, that is 
what the contractor, in conjunction with the SPO, has 
identified as the whole universe of reduction plans.
    Mr. Shays. Right.
    Mr. Li. In that particular universe, when something is 
implemented, there are some criteria that have to be met in 
order to be implemented. If something is already reflected in 
the contract, if something has been submitted in terms of a 
contract, if some prices have already been reduced in getting 
the subcontractor to pay for things, selling things to the 
contractor, those are the criteria that must be met in the 
implemented category.
    The things that are to be implemented----
    Mr. Shays. Before you leave that, implemented doesn't mean 
that it's occurred yet, it just means it's a work in process, 
that they're on a plan to implement this.
    Mr. Li. Yes. Len, can you please?
    Mr. Benson. It could be either. It could be some of the 
plans have actually been implemented, where the cost reductions 
have been reflected in firm fixed price contracts that they've 
got from either the supplier or the prime contractor. So they 
could be actually implemented.
    Mr. Shays. Now, do both the Air Force and DOD accept the 
$10.2 billion figure?
    Mr. Benson. No.
    Mr. Shays. Do they disagree? Whose numbers, these are the 
contractors' numbers. Where does the DOD disagree with these 
numbers on the implemented part, and where does the Air Force 
agree or disagree?
    Mr. Li. We tried to get a definitive description and 
quantity amount of that $10.2 billion. The difficulty is that 
when each one of the estimators came up with their baseline, 
one considered, and one did not consider all of the ones that 
were identified as implemented within their baseline. And I 
know it's very complicated, and I'll ask Len again to explain 
that.
    But the basic issue is that because the baselines, both 
from the Office of the Secretary of Defense and the Air Force, 
were different, they considered a different portion of those 
that were already implemented. Len.
    Mr. Benson. One of them that you talked about earlier is 
the Joint Strike Fighter. For example, on that one, the Office 
of the Secretary of Defense estimate assumed for estimating 
purposes that that was an implemented cost reduction plan. They 
just, one of their assumptions was that that's going to be----
    Mr. Shays. Who did this, the Air Force?
    Mr. Benson. The Office of the Secretary of Defense assumed 
that that was an implemented recommendation.
    Mr. Shays. On what basis could that make that?
    Mr. Benson. I can't speak for them. The Air Force, on the 
other hand, did not----
    Mr. Shays. But under what criteria? I'm going to be willing 
to expose my ignorance more than I usually like to. But I'm 
having trouble first identifying whose chart this is. And is 
the chart that is up there, the reasons for reductions 
implemented, to be implemented, that is the contractor's chart. 
Is that your chart or the contractor's chart? Is it DOD's 
chart, is it the Air Force chart?
    Mr. Li. It's a contractor identified split of all----
    Mr. Shays. Well, why should this be helpful to me? Wouldn't 
I want to see two other charts? Wouldn't I want to see the Air 
Force's version of this chart and DOD's version of this chart?
    Mr. Benson. The Air Force provided this chart to us.
    Mr. Shays. Does the Air Force accept this as the chart?
    Mr. Benson. This was the data the Air Force provided to us 
when we asked for information on cost reduction plans that had 
been implemented and those that remain to be implemented. So we 
had to assume since that was the data the Air Force provided 
that they were----
    Mr. Shays. Is this the chart on which the Air Force bases 
their estimates?
    Mr. Benson. Yes.
    Mr. Shays. OK. So the Air Force accepts this?
    Mr. Benson. Yes.
    Mr. Shays. OK. So I'm going to say this was supplied by the 
contractor, unless I hear differently, and Air Force will speak 
later, I'm going to assume this is the Air Force's acceptance 
of what they think reality is.
    Mr. Li. This particular chart is a summary of a data base 
which is a working data base which the contractor and the Air 
Force work with on a daily basis. And this is like a snapshot 
at the point in time which we asked for a run and we summarized 
it, and we said, this is the current status.
    Mr. Shays. Do you accept the numbers as you see them, the 
$10.2 billion total, as what you think is the most reasonable 
thing to assume has been in fact implemented?
    Mr. Li. We did not look at every single cost reduction 
plan. For the ones we looked at, we thought that they were 
reasonable.
    Mr. Shays. What I'm confused by is under Joint Strike 
Fighter and F-22 components at the same plants, they have down 
zero. They don't think that's been implemented.
    Mr. Li. But, they have utilized that in their cross-
derivation in the ``to be implemented'' and they did accept 
that.
    Mr. Shays. So then this chart doesn't represent what they 
think has been implemented.
    You know, I can ask them that. But I'd like to know if you 
know the answer. Because if you don't know that answer, I'm 
getting uneasy.
    Mr. Benson. Specifically on the Joint Strike Fighter, see, 
we have two columns there. One is called implemented, the other 
is to be implemented.
    Mr. Shays. I see those two differences.
    Mr. Benson. The Air Force originally came up with what they 
considered a baseline estimate. Their baseline estimate was 
about $51 billion. They then did an analysis of the production 
cost reduction plans that had been proposed by the contractors 
and reviewed and analyzed by the Air Force.
    They interpreted those plans that $10.2 billion of those 
plans that had been proposed by the contractor would be a 
reduction to their baseline estimate of $51 billion. That got 
the Air Force's net estimate down to $40.8 billion.
    And that's why I said----
    Mr. Shays. I just want you to explain why I see zero under 
implemented. Manufactured Joint Strike Fighter F-22 components 
in the same plan. I see zero there under implemented. So they 
are not saying it's being implemented, if this is the Air 
Force's version.
    Mr. Li. But they feel that it is a cost reduction plan that 
will be implemented in the future. And they have also----
    Mr. Shays. I understand it's to be implemented in the 
future. It hasn't been implemented now, under this chart. I 
just want to understand whose chart this is. I want someone to 
take ownership of this chart and I want to then go from there. 
I'm just trying to find something to have an anchor on. I'm 
floating all around space right now.
    Mr. Li. I apologize.
    Mr. Shays. Well, so is it your testimony that this 
represents what the Air Force believes to be true, or have they 
modified this chart.
    Mr. Li. They have not modified this chart. This is what 
they're identifying as what is implemented and----
    Mr. Shays. OK, well, when I look at this chart, then, I am 
going to read it that the manufactured Joint Strike Fighter F-
22 components in the same plants have not yet been implemented, 
and that they make the assumption of the 1.2 to be implemented.
    Mr. Li. Correct.
    Mr. Shays. I misunderstood you, then. I thought you said 
they thought it had been implemented.
    Mr. Benson. That was the Office of Secretary of Defense 
that said it had been implemented, not the Air Force.
    Mr. Shays. Except the Office of Secretary of Defense has a 
higher estimate of the cost overruns.
    Well, let's just take to be implemented. Mr. Barr, I'll 
take you in 1 second here. Thank you for your patience.
    There's a difference of the $10.8 billion, a difference of 
$4.1 billion, is that accurate, in your statement, on page 6, 
that you read from? The difference is due to the Office's 
higher estimates of the cost of production, 3.7, and lower 
estimates the impact of the plans. Is this number, $10.8 
billion, why don't you first tell me how I should view the 
$10.8 billion number?
    Mr. Li. The $10.8 billion is that which, within the $21 
billion, is considered to be cost reduction plans that have yet 
to be implemented. When I was talking about the $7.8 billion, 
that was the difference in the estimates, not the production 
cost reduction plans, but the total estimate difference between 
the Air Force and the Office of the Secretary.
    Mr. Shays. Let me ask you this. What's the total cost of 
this project before we do any cost reductions by all the 
various parties?
    Mr. Li. The estimate that we have in the testimony, and 
I'll have to, let me turn to that page if you don't mind, on 
page 10 of my written statement----
    Mr. Shays. Page 10 of your statement, submitted statement 
or read?
    Mr. Li. Submitted statement.
    Mr. Shays. OK.
    Mr. Li. In the submitted statement, we say that the Office 
of the Secretary, before, now, this is what, when I refer as 
the baseline, before considering those production reduction 
plans that have not yet been implemented, the Office of the 
Secretary estimated $54.7 billion. The Air Force estimate was 
$51 billion.
    In subtracting, the Office of the Secretary identified $6.1 
billion of those that were not yet implemented as those that 
they were willing to accept. Therefore----
    Mr. Shays. You're answering a question I don't want to get 
into yet. I just want to first nail down, before the cost 
reductions, the Office of the Secretary, in other words, DOD, 
is looking at $54.7 billion. Correct?
    Mr. Li. If you will allow me to just modify your statement, 
sir, the baseline of $54.7 billion includes those cost 
reduction plans which are already implemented that they agreed 
to.
    Mr. Shays. OK. And that's the $6.1 billion? No, before the 
$6.1 billion?
    Mr. Li. Correct.
    Mr. Shays. OK. And how much of the--and what are they 
agreeing to? What brings that number down to $54.7 billion?
    Mr. Li. They did not identify that specifically in their 
analysis. They have two numbers coming out with their analyses, 
Mr. Chairman. One is the baseline, in which they considered 
those reduction plans that were already implemented. That's one 
number. They don't have a subset that says, this is how much 
I'm going to take that is production cost reduction plan 
related.
    Mr. Shays. It would just be helpful for me to know, because 
then I can see if we're double counting or not double counting.
    Mr. Li. I understand, sir. They don't have that 
information.
    Mr. Shays. But how can we even get to first base if we 
don't have that information?
    Mr. Li. I understand your concern.
    Mr. Shays. Explain the $51 billion.
    Mr. Li. The $51 billion is the Air Force's estimate which 
includes those production cost reduction plans that are 
implemented. That's how much they've allowed. They've built 
that into there.
    Mr. Shays. And are they using--that are already 
implemented?
    Mr. Li. Yes.
    Mr. Shays. Then they're subtracting another $10.2 billion 
that's been implemented as well?
    Mr. Li. The $10.2 billion is the proportion of the $10.8 
billion which is not yet implemented. There is a total of $10.8 
billion----
    Mr. Shays. I understand that. You're going to have another 
$10.8 billion that has to come off that number, correct, the 
$40.8 billion?
    Mr. Li. No. No, sir.
    Mr. Shays. I don't understand.
    Mr. Li. The $51 billion is the baseline. The baseline 
includes their assessment of what reduction plans have already 
been implemented.
    Mr. Shays. Yes, past that.
    Mr. Li. The next thing that you can take off are the 
production reduction plans that have yet to be implemented. 
There's a maximum of $10.8 billion if they accepted everything. 
They accepted $10.2 billion.
    Mr. Shays. I'm looking at your chart on page 10.
    Mr. Li. Yes, sir.
    Mr. Shays. OK. I see $51 billion. I see a reduction of 
$10.2 billion. It happens to match the implemented. Is that a 
coincidence?
    Mr. Li. Yes.
    Mr. Shays. That's just a coincidence? Well, that's helpful. 
So the $10.2 billion here is not the $10.2 here? It's the $10.8 
billion but they don't take it all. You know what? I'm going to 
adjourn this hearing in a second if I don't see some sense 
here. If you guys can't help me, we're adjourning.
    Mr. Tierney, we'll go to your questions.
    Mr. Tierney. Well, let me just try a couple here. 
Essentially what I think we're seeing is the Air Force just 
accepts the manufacturer's numbers, by and large, except for, 
and the projected savings, instead of taking all $10.8 billion, 
they take $10.2 billion. They tank out on the rest and they buy 
whatever the manufacturer puts up there.
    Mr. Li. The thing I would again try to add some more 
detail, we're not just talking about the contractor making 
estimates. The contractor develops these cost reduction plans 
in conjunction with the program office.
    Mr. Tierney. Given the history of this thing, why should I 
have any confidence at all in the Air Force's projections?
    Mr. Li. I don't have an answer for that, sir.
    Mr. Tierney. Well, neither do I.
    The Defense Appropriations bill that we just passed in the 
House is going to eliminate the two separate congressional 
caps, you're aware of that. So we'll no longer have a cap for 
development production, one for development and one for 
production. We're going to have one cap for the whole program. 
So development is over budget. It would look at, once you 
guessed, I guess the most immediate effect then would be to 
allow more of that money to go to development and we're going 
to have less left for production.
    Mr. Li. That's correct.
    Mr. Tierney. We're going to end up short on that end of the 
stick. Do you have any opinion about the capability or the 
ability of the Air Force to accurately predict any future cost 
increase?
    Mr. Li. What I believe, and I think that the commitment, 
and I understand that commitment does not always translate into 
action, but I know that the Air Force and DOD and the 
contractor are very, very much aware of the fiscal constraints 
imposed on this program. As they find cost increases, they do 
go back and diligently try to develop new cost reduction plans.
    Mr. Tierney. Let me speak to that. They're always talking 
about cost controls, the Air Force tells us they have cost 
controls, they're going to keep costs down. Can you identify 
what precise mechanisms the Air Force apparently has to do 
that?
    Mr. Li. To keep costs under control?
    Mr. Tierney. What are they using to keep them down on 
individual projects, make sure they don't increase?
    Mr. Li. As the Air Force's testimony will, that they will 
provide right after me, they do look at this on a monthly 
basis. They look at the production initiatives. However, what 
we found was that at the Office of the Secretary level, they 
are not provided with the detail on these cost reduction 
initiatives. We believe that that is something that they should 
have.
    Mr. Tierney. I mean, I guess what happens is, they find out 
if they have this great analysis after the fact to find out 
that they are not saving money, in fact, they're spending more 
than they think. So they go somewhere else to try to save 
money, instead of looking at where they're consistently falling 
behind. They don't appear to be doing much about that, but they 
go look for a new avenue, like my analogy I used earlier, like 
the chicken price keeps going up, so let's save money on milk.
    Mr. Li. The Air Force acknowledges the fact that some 
production cost reduction plans, when they first identify them 
and they think are promising, if they find that those are not 
achieving the types of savings that could be achieved, they 
will go to another area and develop and look at other areas. 
They acknowledge that.
    Mr. Tierney. Thank you.
    Mr. Shays. Just a brief question, and then we'll go to Ms. 
Schakowsky, and then Mr. Barr.
    Just for my continued edification here, on the chart with 
the $54.7 billion on cost estimate for considering cost 
reductions, and the $51 billion of the Air Force, can I make 
the assumption, or are the numbers coincidental, $10.2 billion, 
that that number, $51 billion, would be $61.2 billion if the 
implemented cost savings, I had not yet taken?
    Mr. Li. Correct, sir.
    Mr. Shays. OK, so we have $61.2 billion.
    Mr. Li. Correct.
    Mr. Shays. Can I make the assumption, with the Office of 
the Secretary, that the $50.7 billion I could add the same 
$10.2 billion to get their higher base?
    Mr. Li. No, you would add the $6.1 billion to the $54.7 
billion.
    Mr. Shays. No, no, you wouldn't.
    Mr. Li. I'm sorry.
    Mr. Shays. I'm going up, I'm not going down. The Air Force 
gross costs before any savings, I'm making the assumption is 
$61.2 billion. The Air Force can tell me differently. And I'm 
subtracting the implemented of $10.2 billion to get at the $51 
billion.
    Mr. Li. Correct.
    Mr. Shays. And I'm taking another $10.2 billion which was 
part of the $10.8 billion to get the $40.8 billion. I am 
looking at the Office of the Secretary and wondering if I can 
make the same assumption that they both agree on the 
implemented at $10.2 billion as bringing their number down to 
$54.7 billion.
    Anybody there answer it?
    Mr. Benson. The answer is no, you cannot make that 
assumption.
    Mr. Shays. OK.
    Mr. Benson. The Office of the Secretary of Defense made 
different assumptions on what had been implemented or not 
implemented.
    Mr. Shays. So is it conceivable that what they say may not 
have been implemented, they would shift over to the 
implemented?
    Mr. Benson. Yes.
    Mr. Shays. OK. What I would like is a chart, I would like a 
chart sometime soon that would describe to me what the 
Secretary's office, how they view this chart of implemented-to 
be implemented, and I would like the same chart for the Air 
Force and the same chart for the contractors, the same basic 
terms. And then I'd just like to see how they differ.
    The Air Force and the contractor, you are making the 
assumption, is the same?
    Mr. Li. Yes.
    Mr. Shays. OK. Ms. Schakowsky. Mr. Barr will follow but 
he'll ask as many questions as he wants. We have no time limit, 
but you're next in line.
    Ms. Schakowsky. I'm a new member here, and I'm trying to 
figure all this out, and have been, I guess, more confused by 
what I've heard so far in trying to at least understand what 
we're trying to get at here. In response to a question you said 
you can't tell us why we should have confidence in the cost 
estimates that have been made and you also said you don't have 
a crystal ball and can't project which of the two estimates 
would be--we're not asking you to have a crystal ball. The 
reason that we come to you is to look at the objective criteria 
and help us figure out what really is accurate.
    I mean, after all, we're talking about billions of dollars 
here. I just came from the floor where we're dealing with the 
housing budget, the Housing and Urban Development Budget. And 
I'm worrying about millions of dollars that are being cut from 
Chicago. And we're talking about discrepancies of billions.
    I'm trying to understand why it is that you can't help us 
to figure out what is more likely to be true.
    Mr. Li. And I certainly would like to do so, and provide 
some advice. What we were trying to do was to identify how 
these estimates were different. When you identify two different 
estimates, it's not necessarily going to lead toward somebody 
having a better estimate than somebody else. Those assumptions 
are projections into the future that may or may not 
materialize.
    Ms. Schakowsky. Yes, that's right, but it's the 
assumptions, isn't it, that we have to look at?
    Mr. Li. Correct. And the assumption on individual things, 
like if I looked at one individual cost reduction initiative, 
if somebody made an estimate, for example, and one of the 
examples that we have was talking about being able to have 
multi-year procurement. There are some savings associated with 
that. $1.5 billion would be achieved through multi-year is what 
their assumption was.
    What we raised to this body was that, don't take that $1.5 
billion to the bank just yet. Because that requires the 
Congress and the Office of the Secretary of Defense to weigh in 
on it. That is the level at which we made our analysis, to 
point out those issues.
    If you take all of those into account, I don't think it's a 
possible situation for me to be able to say, therefore, as a 
result, I think that the Air Force's estimate is better than--
--
    Ms. Schakowsky. Well, one way to do it might be to look at 
what has been implemented in that rather confusing debate on, 
or discussion on implemented and to be implemented. Let me ask 
you this. That chart that we're looking at, what's the date of 
that chart?
    Mr. Li. As of December----
    Mr. Benson. Dated as of July 1999.
    Ms. Schakowsky. OK, as of July 1999, and that gets back to 
your criticism that there has not been timely or as required 
quarterly updating?
    Mr. Li. To the Office of the Secretary of Defense.
    Ms. Schakowsky. To the Office of the Secretary. So is that 
one of the reasons why this whole thing is harder to project?
    Mr. Li. It is. I believe that currently the visibility of 
the production cost reduction plans and I know that the 
chairman is concerned about a good explanation of these, that 
visibility has not been put on until today, I believe. I think 
the discussion of these is healthy. Because the bottom line of 
my testimony is that this is such a large issue in terms of 
amount that we're going to have to achieve that we need to keep 
an eye on this.
    That is the message that I'm trying to provide today, that 
it's a large amount of money, that there are differences and 
yet there are some things that won't occur until a few years. 
Trying to apply that visibility is important.
    Ms. Schakowsky. But when we talk about what concrete data 
we have, we're looking at numbers that will be a year old in 
June, the end of June or July.
    Mr. Li. The Office of the Secretary of Defense and the Air 
Force, in conjunction with the decision that will occur this 
December, are going to be updating these numbers. I believe, 
and again, I'm addressing you and the chairman, I think that a 
request should be made for the Air Force and the Office of the 
Secretary to make sure that they can reconcile the basis on 
which they're making these projections so we don't have this 
discussion again.
    I feel, if I may say, I feel that these are questions that 
should be asked of the Office of the Secretary of Defense and 
the Air Force. I understand, I'm trying to provide you with the 
information. But this is the level of information that I can 
provide to you.
    Ms. Schakowsky. Thank you.
    Mr. Shays. I thank the gentlelady for her question. It 
relates to this bottom line on page 7. And I want to be clear. 
What has the Air Force not been providing since June 1999?
    Mr. Li. They have not provided the detailed description of, 
at the detail level, of the production cost reduction plan. 
They've provided an overall summary of, this is how much we've 
achieved. But they haven't provided information at the level of 
detail to be able to identify for the OSD level which specific 
production plans have been successful and which ones haven't.
    Mr. Shays. And what I am gathering from your report, you 
are merely, and I use merely in a very loose way, describing 
the discrepancies between the Secretary's estimates of 
alternately the program after cost savings are made, and the 
Air Force's. You haven't evaluated whether either are accurate 
or not.
    Mr. Li. Correct. That is a correct statement.
    Mr. Shays. So, I mean, it could be, the Secretary's could 
be on target or off, the Air Force could be on target or off, 
or it could be something even much different than that. You 
haven't tried to ascertain which is more accurate. You just 
tried to disclose to us today that they're different?
    Mr. Li. That's correct, sir.
    Mr. Shays. That's the extent of what I should make?
    Mr. Li. That is correct.
    Mr. Shays. That's amazing. So we're kind of like chasing 
smoke.
    I would say then we have a disagreement on what the total 
cost of the project is by both entities. And a disagreement 
about the total cost savings by each entity.
    Mr. Li. I would not use the word savings, sir. I would use 
the word cost reduction.
    Mr. Shays. Cost reduction, fine.
    Mr. Li. Because they're not savings.
    Mr. Shays. And I'm saying this as someone who is still 
supportive of this program. I'm not here saying we don't need 
the F-22. But I guess my expectation was that you were in a 
sense evaluating the estimates that you were seeing and 
therefore would be able to speak in greater depth. You're 
basically able to say there are differences in cost and there 
are differences in reduction, cost reductions. But you don't 
even, you can't speak to the validity of any of it.
    Mr. Li. Mr. Chairman, our central focus was the production 
cost reduction plans. And to identify for the subcommittee how 
much the extent to which those have been identified. The 
concern was that, the genesis being Mr. Tierney's letter that 
he received from the Air Force that $16 billion were 
identified. We were asked to identify, is it $16 billion, how 
much is there? We identified $21 billion.
    The next question was, well, were those cost reduction 
plans incorporated in their estimates? And that's what we did, 
sir.
    Mr. Shays. Well, to some extent. Because you still can't 
tell me whether the Secretary's account is making the 
assumption that some have been implemented and some haven't 
been, correct? You're not able to dissect the differences. You 
know there's differences, but you haven't been able to clearly 
identify all that.
    Mr. Li. We went to the level that data was available.
    Mr. Shays. OK. And this is, I think, the most shocking 
thing, to me. And I want to know, shouldn't they be providing, 
shouldn't the Air Force be providing quarterly reports to the 
Under Secretary on cost reduction plans?
    Mr. Li. Yes, I think they should.
    Mr. Shays. OK. And the problem we encountered at the last 
hearing was a recognition that the Air Force kept saying they 
were meeting their caps, but we kept changing the caps to meet 
the Air Force. That was my interpretation.
    But I felt like we were finally agreeing to the caps and 
those wouldn't change. But now we have a different kind of 
floating uncertainty here.
    Mr. Barr. You have as much time as you want.
    Mr. Barr. Thank you, Mr. Chairman.
    I think one could probably drive oneself crazy trying to 
find a degree of certainty that is very difficult to find in 
current projection, much less trying to project into the 
future. And I think that Mr. Li and his colleagues have done a 
very good job of trying to bring into focus perhaps not the 
same kind of focus and certainty that we would have if we go to 
the automobile showroom and ask for the price of a particular 
car compared to another car compared to that same car with 
different options. These are things that are currently in 
production, we know exactly how much they cost to be produced, 
to be added on, and the profit margins.
    It is impossible to have that same degree of certainty in 
the development of any weapon systems. And if one looks for 
that, one will be searching, I suppose as Diogenes did, quite 
in vain.
    I don't think that our job here in the Congress is to 
demand absolutely certainty, that we know precisely how much 
each and every plane is going to cost. Our job, though, rather 
is, as Mr. Li says in his draft report at page 4, this is in 
his narrative following this chart, ``Allocated equally over a 
planned procurement of 339 F-22 aircraft, a $21 billion cost 
reduction equates to about $62 million per F-22 produced. This 
amount of reduction per F-22, if achievable, is significant. 
For example, F-15 aircraft, which the F-22 is planned to 
replace, were procured in fiscal years 1996 to 1998 at an 
average unit cost of about $46 million.''
    This places in some appropriate perspective what we're 
dealing with here. We are trying to develop an aircraft that is 
generations ahead of that which we currently use for air 
superiority. And we are trying to do so within reasonable 
strictures of finances. And I think really the job of GAO and 
the job of the Air Force and the Secretary of Defense and our 
job are all the same, and that is to continue to monitor the 
development of these processes as much as possible to make sure 
that the projected cost reductions are in fact implemented, 
that the Air Force continues to search out for new cost 
reductions that can be implemented, that we make sure that they 
do, so that year to year to year, we bring each one of these 
plans more into focus.
    But to demand absolute certainty at this point about 
hypotheticals upon hypotheticals, I think is a little bit 
unfair and gets us off track from what I think ought to be the 
main focus here. And that is, our fighting forces need the F-
22. If they do not have the F-22, they will be at risk. There 
is no aircraft currently in production or even anywhere near 
production that provides the capability that the F-22 does.
    And rather than try and drive ourselves crazy by arguing 
over hypotheticals on hypotheticals, I think what we ought to 
do is take the materials that Mr. Li and his colleagues have 
presented to us here, ask critical questions about them, 
monitor it, demand that as more information comes in, as more 
and more of those hypotheticals become reality, which they 
inevitably will as we move forward with production, that we 
make sure that the feet are held to the fire and that these 
cost savings are in fact implemented.
    But I think there is an awful lot of material here, and 
yes, it can be deceiving, if one, as is easy to do, looks at 
any one of these figures four or five different ways to Sunday. 
But I think GAO, Mr. Chairman, and I presume you would agree, 
is doing a very good job with what they have and is asking the 
questions as the chairman is doing, to continue to ask these 
questions, hold periodic hearings, but not to lose sight of the 
forest for the trees.
    Because there is an awful lot at stake here, Mr. Chairman, 
with the need for this aircraft. Because if we don't, as even 
outside groups have done, they have looked at comparisons 
between the F-22 and fighter foreign aircraft, the MG-29 and 
the SE-27, the projected Eurofighter, the Raphael, and the SU-
35. And the F-15, there's no way that it can compete with those 
aircraft that will be coming on line within the next few years.
    The F-22 can, it will. And I think we ought to, again, Mr. 
Chairman, not lose sight of the goal here. But again, I commend 
you, Mr. Chairman, for having this followup hearing. I hope 
that you will have additional hearings. But I would hope also 
that we would not get so bogged down into trying to have a 
degree of certainty about future hypotheticals that it's 
impossible anywhere that we cutoff our nose to spite our face.
    Thank you, Mr. Chairman.
    Mr. Shays. I thank the gentleman.
    The bottom line is that Congress, DOD, White House all 
agreed that we have a cap of $39.8 billion for the entire 
production of this plane.
    Mr. Li. Not to correct you, Mr. Chairman, but the current 
cap because of inflation and the number of changes is now at 
$37.6 billion for production.
    Mr. Shays. $37.6. So how do I relate to the $40.8 billion 
of the net cost to the Air Force? So am I to assume that we are 
nearly, so we are $3 billion over?
    Mr. Li. Since the basis is different, 339 aircraft was the 
basis on which they made those projections of the $40.8 
billion, you would have to make some adjustments to it to 
equate to the $37.6 billion. So it would not be comparing 
apples with apples if you compare the $37.6 billion with the 
$40.8 billion.
    Mr. Shays. Before we let you go, then, let me compare 
apples to apples. Do I make an assumption, comparing apples to 
apples, that the $40.8 billion is $1 billion over?
    Mr. Li. Yes.
    Mr. Shays. And I make an assumption that the $40.6 billion 
is $8.8 billion over?
    Mr. Li. Correct, sir.
    Mr. Shays. OK. But I also hear your testimony that you 
can't speak with certainty about the validity of either the 
cost, the foundation point of the cost of the aircraft, or you 
can't speak with any comfort level about the validity of the 
cost, reasons for reduction implemented or to be implemented. 
You can't speak on that?
    Mr. Li. Right. I cannot, because the information is not 
available from either the Air Force or the contractor.
    Mr. Shays. So in the end, I'm going to accept as your 
primary contribution now that you are alerting this committee 
to the fact that in either case, the Air Force or the Secretary 
are acknowledging that to date, even with cost reductions, we 
are going to be over the cap level. And that second, between 
them, they have a disagreement of about $7.8 billion?
    Mr. Li. That's correct.
    Mr. Shays. Would you say that that would be a fair thing 
for me to gain from this?
    Mr. Li. Yes, sir.
    Mr. Shays. OK. I feel that there are probably some other 
things that you wish we had discussed and focused on. Is there 
anything, Mr. Benson or Mr. Springman, that you think you need 
to state for the record? I don't want you all to come to me 
later and say, well, you know, by the way, this is a factor as 
well. I think in fairness to the Air Force, who will testify 
later, what else do you think needs to be put on the table that 
they could then be able to respond to? Is there anything else?
    Mr. Li. I think the issue that you're raising, and your 
frustration with our not being able to identify for you the 
discrete portion of what has been implemented and to track 
those is part of that concern that I expressed and that we 
talked about, which is they should be giving that information.
    Mr. Shays. I'm less concerned now, because you made no 
attempt to verify those numbers. Seems like you made an attempt 
to understand them, but you couldn't. But it wasn't like you 
didn't try.
    Mr. Li. Correct, sir.
    Mr. Shays. And can I make an assumption as well that one of 
the most significant findings as well is that you have a hard 
time accepting the fact that the Air Force has not been 
providing quarterly reports since June 1999?
    Mr. Li. That's correct.
    Mr. Shays. And should they be quarterly, or should they be 
even more often than that?
    Mr. Li. No, I think quarterly would be a reasonable time.
    Mr. Shays. Had they been doing that before that time?
    Mr. Li. They had provided some information, but----
    Mr. Shays. But not on a quarterly basis?
    Mr. Li. No.
    Mr. Shays. OK. So we're at a point now where we need to be 
able to do that. Do you think that they have those numbers?
    Mr. Li. Yes.
    Mr. Shays. They just haven't been providing them?
    Mr. Li. Correct.
    Mr. Shays. OK. Mr. Springman, is there anything that you 
want to add?
    Mr. Springman. Sir, I was here to provide an update to the 
development side of the F-22, if you wanted an update to the 
flight test program, if that came up, as an update to when I 
was here in December.
    Mr. Shays. OK, why don't you do that.
    Mr. Springman. OK, sure.
    In December 1999, we testified before your subcommittee 
that we had concerns about the lack of progress in the F-22 
flight test program, mainly because manufacturing problems had 
led to significant delays in the delivery of test aircraft.
    Also in our March 2000 report, we indicated that as much as 
37 to 50 percent of the flight test program might not be 
completed as planned, for three reasons. One was that the 
continued delayed delivery of the flight test aircraft. Two was 
that the completed test aircraft were requiring more 
modifications than expected. And three was that the flight test 
program efficiency was less than planned, meaning they were not 
completing as many test points per flying hour than they had 
planned.
    Since that time, since our March 2000 report, we have not 
seen anything to indicate that this situation has improved. In 
fact, for several reasons, we believe it has worsened.
    First, there continues to be additional delays in the 
delivery of flight test aircraft for testing. As a result, the 
Air Force has now almost 45 fewer flight test months available 
to complete the flight test program, and has lost over 971 
potential flight test hours.
    Second, a problem with cracks in the F-22 canopies halted 
flight testing from May 9th to June 5th, and this problem is 
not yet resolved. Currently, there is only one usable canopy on 
one test aircraft available for use in the flight test program.
    These delays and other factors have resulted in the program 
not currently achieving flight test program goals for the year 
2000. The program is 21 percent behind their flight test hour 
goal and 16 percent behind their flight test point goal for the 
year 2000. And in no month this year has the program achieved 
its goal of flying each available test aircraft over 26 hours 
per month.
    That concludes my update.
    Mr. Shays. Do you have any other information like that? I 
would be pretty unhappy to find that out after you had left.
    Mr. Springman. Sir, I can get you anything you want on 
updates to the flight test program.
    Mr. Shays. Pardon me?
    Mr. Springman. I can get you anything you want on updates 
to the flight test program. I can give you some more 
information.
    Mr. Li. I think in reading the Air Force's statement, I 
think they make reference to all those issues of the canopy.
    Mr. Shays. What risks does a reduced flight test schedule 
pose to active production costs? What's the significance of, 
besides the fact that we're not meeting our goal, what does it 
have ultimately, it's impact on production?
    Mr. Springman. Immediately, it has an impact on EMD costs. 
If you're behind in your flight test program but you still have 
the same planned date of completion for your flight test 
program, and you get to the end and you haven't completed what 
you need to complete in your flight test program and things 
have to be extended, there's more money involved.
    Mr. Shays. Do we wait for the production to make sure that 
we've done all the testing, or do we begin to produce before 
we've done all the testing?
    Mr. Li. The Air Force has chosen a strategy of not one 
phase starting and the next on stopping. In other words, they 
don't go through development, finish development and then go 
into production. There's a concurrency, overlap issue here. The 
low rate initial production decision will be made in December 
and our concern that we have expressed many times before was 
that the operational test and evaluation was not completed by 
the time at which that decision was made.
    Mr. Shays. What other concerns do you have, other than what 
we've read in your report or that you've testified?
    Mr. Li. I think we've expressed our concern over the past 
few years on the accelerated rate in which we're going to go 
into production. That's directly tied in with some of the 
concerns that we expressed today. If you don't have full 
knowledge of how to produce this particular aircraft, we don't 
think it's wise for us to be going into an accelerated rate of 
producing 10 aircraft per year.
    We think that six per year is a more reasonable number. We 
think that number is such that if some changes had to be made, 
because of problems that could come out during OT&E, that the 
changing of whatever has been produced would be lessened. That 
has been our position.
    Mr. Shays. Mr. Benson, is there any other complaint or 
concern that you feel we need to express at this hearing right 
now?
    Mr. Benson. I would just like to say that as we were trying 
to get a comparison of the Air Force and the Office of 
Secretary of Defense estimates to get a better understanding of 
why they did vary by the $7.8 billion, we asked both the Air 
Force and OSD cost estimators about that. They weren't able to 
do that themselves. They did in fact try to get together to 
resolve some of the differences to identify why the estimates 
differed. And because they used different cost estimating 
techniques, they were not able to do that.
    They both advised us that, as part of the current estimate 
they're working on, they have resolved some of those 
differences. So hopefully this December, when they come out 
with their new estimate, they will at least be able to compare 
those and address why they differ.
    Mr. Shays. Thank you very much, gentlemen. It's been very 
enlightening, thank you.
    We'll go to the next panel. Thank you so much.
    I would now call our second panel and ask them to remain 
standing until we swear them in, so you don't have to sit and 
stand. Ms. Darleen A. Druyun is Principal Deputy Assistant 
Secretary of the Air Force, Acquisition and Management, 
Department of Defense, accompanied by Mr. Joseph T. Kammerer, 
Deputy Assistant Secretary of the Air Force, Cost and 
Economics, Department of Defense. And also, we'll hear 
testimony from Dr. George Schneiter, Director of Strategic and 
Tactical Systems, Department of Defense.
    I think Dr. Schneiter, we'll have you go first, and then 
we'll go with the Air Force. Thank you.
    If you would raise your right hands, please.
    [Witnesses sworn.]
    Mr. Shays. Thank you. Note for the record that all three 
witnesses have answered in the affirmative. And I want to 
welcome you all back. I appreciated the testimony we received 
last time, and we look forward to your testimony.
    OK, Dr. Schneiter, I think you're first.

  STATEMENTS OF GEORGE R. SCHNEITER, DIRECTOR, STRATEGIC AND 
TACTICAL SYSTEMS, OFFICE OF THE UNDER SECRETARY OF DEFENSE FOR 
 ACQUISITION, TECHNOLOGY AND LOGISTICS; AND DARLEEN A. DRUYUN, 
   PRINCIPAL DEPUTY ASSISTANT SECRETARY OF THE AIR FORCE FOR 
ACQUISITION AND MANAGEMENT, ACCOMPANIED BY JOSEPH T. KAMMERER, 
DEPUTY ASSISTANT SECRETARY OF THE AIR FORCE, COST AND ECONOMICS

    Mr. Schneiter. Thank you, Mr. Chairman. I appreciate the 
opportunity to be back to discuss the Department's efforts to 
control and monitor the cost of the F-22 aircraft program, 
particularly with regard to the production cost reduction 
plans.
    As you know, and as has been stated here, the F-22 is a 
technically challenging development program. It has a goal of 
providing a tactical fighter aircraft with unprecedented 
capabilities in the areas of low observability, the ability to 
fly supersonically without afterburner, and advanced avionics 
and sensors. The F-22 is intended to ensure our air forces 
remain dominant in the 21st century.
    Thus far, the program has demonstrated technical progress 
that meets or exceeds the technical performance measures 
established for the program. However, there have been some 
delays in static structural testing, delamination issues with 
composite parts, a professional engineer's strike at the Boeing 
company, and more recently, cracking of aircraft canopies.
    These factors have affected the pace of flight testing at a 
time when a more aggressive flight test tempo was planned. The 
good news is that of these, only the canopy issue remains 
unresolved at this time, and significant progress is being made 
toward a solution for that. Mrs. Druyun will discuss some of 
these more in her statement.
    Despite these slowdowns, the Air Force is continuing to 
aggressively pursue the test program, so they can successfully 
complete the key exit criteria established for the low rate 
initial production decision planned for this December. As the 
GAO witnesses indicated in June 1996, the Air Force established 
an F-22 Joint Estimating Team, called the JET, to produce a 
solid estimate of the cost of completing the F-22 EMD 
production programs. They were later directed to identify cost-
reduction initiatives that would enable the F-22 program to be 
completed within the established funding caps.
    The latter assignment gave rise to the restructuring of the 
program, to a set of cost-reduction initiatives, and to a 
memorandum of agreement between the Air Force and the prime 
contractors designed to motivate them to achieve prices 
consistent with planned F-22 resources. This part of the JET 
plan focused on production affordability for attaining unit 
cost goals jointly agreed.
    A key aspect of this was to use industry and Government 
investments to reduce unit costs. We successfully employed the 
same strategy to lower production costs of the C-17.
    As a result of Defense Acquisition Executive Dr. Gansler's 
review of the F-22 program in December 1998, he approved the 
go-ahead for production of the two-aircraft lot, and reiterated 
the importance of maintaining continued emphasis on executing 
the F-22 program within the congressional cost caps. He 
challenged the Air Force and its contractors to continue 
efforts to reduce costs and directed the Air Force to provide 
him quarterly briefings on development and production cost 
status. We've used these special quarterly reviews to examine 
cost and schedule trends, and to track the program's status.
    The Office of the Secretary of Defense made cost estimates 
in November 1998 and December 1999. These included assessments 
of the effects of the PCRPs, these production cost reduction 
plans. The estimates were broadly prepared in two steps. First, 
the recurring costs incurred to date on the engineering and 
manufacturing development units were used to forecast 
production costs. These actual costs reflect the degree of 
success, or lack thereof, of the PCRPs that have been 
implemented to date.
    Second, a separate estimate was made of savings to be 
expected from the still unimplemented PCRPs. And these were 
combined to give a final production estimate.
    All of the contractor, Air Force, and OSD estimators that 
looked into the effects of the PCRPs agree they will have a 
significant effect on reducing costs, and they are well worth 
undertaking. This is not at issue. There have been and are some 
disagreements about the magnitude of the reductions that will 
be achieved by the PCRPs. The OSD staff generally favored lower 
realization rates and was not willing to take large reductions 
on the basis of PCRPs that had not yet been fully defined.
    There also have been disagreements about what the cost 
experience to date implies for the future, apart from the 
PCRPs. The key disagreements here have had to do with how 
rapidly the cost of purchased materials and subsystems will 
decline from the levels observed in engineering and 
manufacturing development and the first lot of production--
representative test vehicles.
    We continue to employ the best oversight and insight tools 
available to us to ensure the F-22 program will be accomplished 
for an acceptable cost and on an acceptable schedule.
    That completes my remarks, sir.
    [The prepared statement of Mr. Schneiter follows:]

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    Mr. Shays. Thank you, Dr. Schneiter.
    Mrs. Druyun.
    Mrs. Druyun. Thank you, sir.
    I have prepared approximately 15 charts which I can get 
through fairly rapidly.
    I thank the chairman and the members of the committee for 
the opportunity to appear at your hearing to discuss the F-22 
program and the cost controls that we have in place to ensure 
we can deliver 339 aircraft within the cost caps established by 
the Congress in September 1997. If we could go to chart No. 3, 
which is entitled, Why Do We Need the F-22, if you look at the 
total threat to American air dominance, it includes advanced 
surface-to-air missiles, fighter aircraft and air-to-air 
missiles.
    If you look at the capabilities of the F-15 today, it is 
unable to operate in an advanced surface-to-air missile 
environment. Clearly, the F-22 provides air dominance over the 
battlefield. It is optimized for the air-to-air environment. 
The F-22 also complements the Joint Strike Fighter, which will 
be optimized for ground attack. It's kind of what we refer to 
as the high-low mix.
    If I could have the next chart and speak to where we are in 
terms of our production costs. Back in 1997, when we concluded 
the Joint Estimate Team, the JET effort, we implemented a 
number of initiatives within the program to ensure that we 
could control production costs. One of the key items that we 
implemented is called the target price commitment curve. And 
this was actually put on contract back in the 1997 timeframe.
    And basically, this target price commitment curve 
established a set of price goals for the production 
representative test vehicles all the way through lot four. It 
started a learning curve and at the end of lot four, we would 
be on a learning curve that would ensure that we would be able 
to deliver 339 airplanes for the caps established by the 
Congress.
    As part of this target price commitment curve, we are 
providing incentives up to $151 million to the contractors 
which will be awarded to those contractors that are making 
investments today and began making these investments back in 
the 1998 timeframe to basically bring down the cost, the actual 
cost, of producing this airplane.
    The next chart lays out the production cost estimate. To 
develop the Air Force cost estimate for the F-22 we made use of 
the Air Force Cost Analysis Improvement Group process. The 
AFCAIG group chairman is responsible for management. This 
process was conducted under the auspices of the Air Force 
financial management organization, which is separate from the 
Air Force acquisition organization.
    In using our AFCAIG process to develop a production cost 
estimate, we estimated the cost of production as part of this 
process of $40.8 billion. This estimate included approximately 
$10.2 billion for the production cost reduction plan and 
approximately $1 billion to cover risks associated with the 
production program.
    Without the $1 billion cost risks, the cost estimate for 
production is $39.8 billion, which is at the congressional cap. 
That cap has since been reduced. It's been reduced because of 
the color of money that was used upon the six PRTV contracts, 
six PRTV aircraft which are on contract. It was also reduced 
because of inflation adjustments. And that cap is roughly $37.6 
billion.
    In establishing the service cost position, I'm going to 
cover in the next chart our rationale as to why we settle on 
$39.8 billion. The service cost position budgets to $39.8 
billion, which at the time was the production cost cap. We have 
a very high degree of confidence that the budget will be met 
within the FYDP. Matter of fact, the greatest uncertainty in 
the estimate is beyond the FYDP.
    The AFCAIG's estimate clearly reinforces the program's 
effort to reduce and control production costs. The two 
production readiness contracts, one was awarded in 1998, the 
other was awarded in December 1999, which we tracked very 
carefully. The 1998 contract for two airplanes, this is our 
pre-production contract, the data indicates that it is actually 
costing less than what we had estimated. And this is good. This 
is the type of behavior we need to see in this program.
    The same is also true for 1999. In fact, if you looked at 
our negotiated settlement position in 1998, the contractor 
projected losing approximately 2 percent. In other words, he 
wasn't going to make any profit. When I look at the cost 
reporting data that we get on that contract today, it shows the 
contractor is probably going to make a profit in the range of 6 
percent. What that basically says is that he is continuing to 
bring down the cost of this program.
    The same thing is also true of PRTV2, which we put on 
contract in December 1999. The cost reporting data is showing 
that the contractor has a potential for making more profit than 
what we originally estimated, which is also good, because he is 
really focusing in on bringing down the cost of these 
airplanes. And these are the types of indicators that we use to 
gauge how well we are doing in terms of tracking costs and 
turning our production cost reduction initiatives into reality.
    The bottom line when you look at the service cost position 
of $39.8 billion is that this represents a reasonable risk to 
manage the program and incentivize cost savings to remain 
within the congressional cap. Clearly, we are managing risk 
just like industry manages risk. And I think that I have to 
stress to you that this is a continuing process. You can never 
take your eye off the goal post. And clearly, we are all 
focused on the goal post and examine these costs on a very, 
very regular basis.
    My next chart, I really refer to what's going on, and it's 
called the lean revolution. The F-22 signed off to the lean 
enterprise process sponsored by both industry and Massachusetts 
Institute of Technology back in the mid-1990's timeframe. And 
just as the auto industry made a revolutionary leap from mass 
production to a lean production, F-22 is leading the way for 
revolutionary change in transforming the defense industrial 
base and in transforming that from one of mass production to 
one of lean production.
    As you will recall, sir, back in the 1980's, our F-15 
production lines produced approximately 130 to 135 aircraft per 
year. And the F-16, 180 a year. What we're looking at today is 
36 airplanes a year when it gets into full rate production. And 
that really forces you to radically change the processes that 
were used in the past that have to be used today and in all 
future weapon systems to ensure that they are affordable.
    This next chart is the same chart that I showed to you back 
in the December 7th, 1999 hearing. These are the summaries of 
the production cost reduction initiatives that we have been 
very aggressively working. I'm expecting the contractors 
proposal in next month. This chart will be outdated and from 
the data that I have seen, I can tell you that this continues 
to grow.
    Looking at the next chart, which lays out the engine 
production cost reduction savings, once again, this is the same 
chart I showed to you, $4.1 billion, contractors proposal 
coming in next month I believe will also show that this is 
continuing to grow.
    I have a couple of examples to use in the next several 
charts. This one example I have is of a what we call a 
producibility improvement example. It's called single pass 
drilling. And this is where we used to have a two step process 
for drilling, first, and there are a lot of holes in this 
airplane, obviously, for a lot of fasteners. Originally, the 
process was we used two separate drilling operations, one for 
drilling and then you'd go back and do the same hole and ream 
it out.
    And this is one of the initiatives, many of the hundreds of 
initiatives that were identified by the contractor, by the 
workers on the floor. They actually brought, we call this the 
dreamer tool. We now have a one pass operation. We no longer 
have to use two separate tools. This effort was an investment 
of $841,000 by the contractor. And the payback is $41.1 
million, basically a 49 to 1 payback.
    My next example is another producibility improvement 
process. And this is something that we have been able to 
introduce into this airplane in the last 18 to 24 month period. 
And this is called the use of commercial parts. The example 
that you see here is an analog to digital conversion unit. It's 
obviously a board that we use in our flight management system. 
We did a commercial prototype with the TRW automotive side of 
industry.
    And this is an example of where these savings are real. 
When we wrote PRTV contract one and two, these are the savings 
that we were able to extract by using commercial grade 
components, getting rid of military grade components like 
circuits, resistors, capacitors, those types of components.
    And one, which is estimated to be in the range of, as you 
can see, over $1 million, we will consider that implemented 
once it is actually put on contract. But the other two are 
actually on contract and are part of our savings.
    When I look at the example of what is to be lean, this is 
on the next chart, this is an example of a printed circuit 
board lean effort that the Sanders Corp. went through for just 
one component. Basically you use a video camera which allows 
them to film the entire process used to build a component.
    And in this case, Sanders was able to use new labor 
standards. They really are more commercial like labor 
standards. And as you can see, in terms of parts travel, they 
went from 2.3 miles down to 320 feet, just tremendous examples 
of how you go and lean out a production line. This is on 
contract, and we're looking at about a $1.6 million savings.
    My next example of lean, and I think this is an important 
one, what we basically see is a common machine part. This is 
done by a contractor in Texas. And we originally were on 
contract with firm fixed price from Lockheed to this particular 
vendor. Lockheed went in there and worked with them to really 
begin to lean out their production line. The contractor came 
back in and basically reopened up his purchase order and gave 
money back to the contractor, because we saved money. This is 
on contract.
    And more importantly, and this is what I refer to as really 
being revolutionary, the contractor was so excited with the 
processes that he has experience, he's put this across his 
whole business base that he does within the Department of 
Defense. These are examples of what has actually occurred.
    I know a question that I am continually asked is, is all of 
this affordable. And the answer is yes. This is the same chart 
that I showed to you. The F-22 is fully funded in our budget as 
is the Joint Strike Fighter is also fully funded in our budget. 
Both of those programs are absolutely essential to the Air 
Force.
    In conclusion, sir, I'd like to say that we clearly are 
managing our risk on this program. We believe that the service 
cost position of $39.8 billion represents a reasonable risk and 
that the processes are laid in place and clearly we track those 
processes. The F-22 is leading the way for transforming the 
defense industrial base from one of being that of mass 
production to lean production.
    And I will look forward, sir, to answering your questions 
as we proceed through the rest of this hearing. Thank you.
    [The prepared statement of Mrs. Druyun follows:]

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    Mr. Shays. Thank you very much.
    Why don't I let Mr. Tierney ask questions, I'll go and 
vote, and then I'll come and ask questions. Because we want to 
be done before 1 o'clock, so I'll quickly vote. You have the 
gavel, Mr. Tierney.
    Mr. Tierney. Good afternoon. I apologize for being out of 
the room for most of your testimony, because I had other 
duties. If I'm repetitive at all, I hope you'll bear with me.
    I'm a little unclear as to what the Air Force production 
cost estimate actually is. I thought in your statement, as I 
read it, anyway, it said that the production cost estimate is 
$40.8 billion.
    Mrs. Druyun. The official service cost position for 
production is $39.8 billion. As I explained, sir, while you 
were out, we put together what's called an, we used the Air 
Force cost analysis group to develop the service cost position. 
The group, in doing their analysis and developing an official 
cost estimate for this program, estimated the cost at $40.8 
billion, which included $1 billion of risk in the out years, of 
risk that was unidentified.
    Without that $1 billion for risk, the estimate is $39.8 
billion.
    Mr. Tierney. Can I interrupt you just a second? Can you 
tell me what that $1 billion in risk was for?
    Mrs. Druyun. The $1 billion in risk is basically for the 
kind of unknowns that potentially might occur.
    Mr. Tierney. And wouldn't generally, if you were going to 
do a project like this, wouldn't you try to keep that number at 
least somewhere at 10 percent or around there, the risk number?
    Mrs. Druyun. I think clearly the philosophy that we are 
using and I think have used very successfully in managing this 
development program since the cost cap was put in place is to 
manage risk. And that is the philosophy that we have been 
using.
    If I could give you an example, the EMD cost cap that was 
established by the Congress back in September 1997, the EMD 
cost cap is basically $18.9 billion. We're 85 percent through 
the completion of our development contract. We saw potential, 
as I testified last December, for cost increases. We have very 
aggressively worked what we call development cost reduction 
initiatives, which we have put in place.
    And those development cost initiatives parallel what we are 
doing on the production side of the house. And those 
development cost reduction initiatives today still show that we 
are within the cap. They are working, they are paying off.
    Mr. Tierney. Getting back to my point, you had $1 billion 
in there that you said was a risk factor, but there was no 
identifiable risk at the moment, it was just in there as sort 
of a precautionary measure?
    Mrs. Druyun. It's basically tied beyond FYDP. Within the 
future 5-year defense plan, planning process that we go 
through, if I were to show you the service cost position, you 
would find that we have basically $540 million worth of risk 
built into that program for the first 5 years. Beyond that, 
when the service was developing its cost estimate, there is a 
potential, as there is in every program, for unknown, unknown 
risks, not well defined at this time.
    What I learned a long time ago is that you need to 
basically focus in on managing that risk. And if you were to 
sign off to an additional billion dollars risk, my 31 years of 
experience has clearly shown that it turns into reality, that 
it turns into a self-fulfilling prophecy. Because you take the 
pressure off the contractor.
    And this is like trench warfare in terms of dealing with 
cost. You cannot and we will not take the pressure off the 
contractor. We have to change the way we do business within our 
defense industrial base if we are to survive. And that's why 
the initiatives that we have laid in place, which clearly focus 
in on lean, we're following the example set by the automotive 
industry where they basically reinvented themselves.
    And that is the philosophy that we're using in managing 
this program. And as far as I'm concerned, that philosophy is 
working. It is working in development. As a matter of fact, if 
you would put that one chart up that shows my latest earned 
value data in my development program, what you would see from 
this particular chart, that blue line up there, is that my 
costs are doing better than what I had predicted at this point 
in the program. And my schedule is also doing better than what 
is predicted in this program.
    And it takes just consistent, persistent dedication to keep 
everyone clearly focused on what the issues are and work their 
way through. I don't want an escape mechanism. I don't want an 
escape valve. And that is the philosophy of our Assistant 
Secretary of the Air Force as to how we manage these programs.
    Mr. Tierney. Whose philosophy was it before when the 
billion dollar risk factor was put in?
    Mr. Kammerer. It was basically the Air Force cost analysis 
group, estimating group. They are people that work for me in 
the Air Force cost analysis community.
    We have a chart on risk here that I'd just like to show 
you----
    Mr. Tierney. So it was the same group that put that in 
there. And can you then tell me----
    Mr. Kammerer. It was the same group that put it in there--
--
    Mr. Tierney. You were going to tell me what the basis was 
for them putting it in there. What were they figuring they were 
going to need that billion dollars for?
    Mr. Kammerer. Well, you have to understand the process that 
we go through. But it's a complex cost estimating answer, I'd 
be glad to explain it to you.
    But what we do is, as we're estimating, every component of 
the airplane, we try to estimate what we think is the most that 
this component can go up to and what's the least it could be 
and what's the most likely cost. We put that in for every 
component at a very detailed level. And then we convolute those 
distributions into one distribution that shows what the 
distribution of cost looks like, from high to low.
    Because you know, there is no point estimate really. Cost 
estimates should really be reflected as a range from here to 
there.
    Mr. Tierney. So with the billion dollars in, is that the 
high range?
    Mr. Kammerer. The billion dollars would take you from the 
point of our point estimate, which we estimated at $39.6 
billion, actually a little below the cap, and it would take us 
up to an area where we call our 50-50 estimate, 50 percent of a 
chance it would be below that estimate or 50 percent of a 
chance of being above that.
    Mr. Tierney. For the fudge factor.
    Mr. Kammerer. The chance of, if for example, we ended up at 
that $40.8 billion, the chance of getting from $39.6 billion, 
which we originally estimated, up to the $40.8 billion, is 
about 15 to 17 percent. So it's not a large thing. It's not as 
the GAO testified two-thirds that the estimate's going to be 
exceeded. There's a very small difference between that. I have 
a chart that shows that, and shows you the process.
    This is part of our complex cost estimating business that 
we do.
    Mr. Tierney. I guess what I'm trying to get at, at one 
point you thought it was necessary to put the billion dollars 
in, because there was some likelihood that you could go over on 
some of these components. Now you're telling me that you've 
readjusted because you no longer think you need the billion 
dollars.
    Mr. Kammerer. No, that's not what I'm telling you.
    Mr. Tierney. OK, tell me again.
    Mr. Kammerer. What I'm telling you is that if we wanted the 
estimate to be at the 50-50 estimate, we would call it $40.8 
billion.
    Mr. Tierney. And that's what you did at one point.
    Mr. Kammerer. That's right. That's the estimating process. 
When our AFCAIG met, including the headquarters people from Air 
Force, of which I'm the chairman of that, we decided to leave 
the estimate at the cap because we did not want this to be a 
self-fulfilling prophecy. We did not want to give the 
contractors a chance at another billion dollars. We said, look, 
let's keep the estimate down at the cap, so that we put the 
pressure on the contractors and the pressure on ourselves to 
bring this in at what we originally said we were going to bring 
it in for.
    Mr. Tierney. Thank you. I'm going to yield to Mr. Barr.
    Have you voted yet?
    Mr. Barr. Not yet.
    Mr. Tierney. OK, then we're going to recess for a second 
until Mr. Shays gets back, and we're going to try to run down 
and vote.
    Mr. Barr. Let me just ask you a quick question here. Mrs. 
Druyun, should we in the Congress have any reason to suspect 
the F-22 program will not be completed within the current EMD 
cost caps?
    Mrs. Druyun. No, sir. Our official position within the Air 
Force is that this program will be completed, as we see it 
today, within the cost caps established by the Congress. When 
you look at the production cost reduction initiatives that we 
have laid in place, we have, and I would invite you, sir, next 
time you're in Marietta, GA, to go look at the electronic data 
base that contains all of the data on every single one of these 
initiatives.
    And it tracks it through from PRTV1 until the Lot 12, and 
every single one of those initiatives is laid out. It explains 
what the initiative is, who the owner of the initiative is. It 
is updated, as I understand it, every 2 weeks. And we use that 
as the basis to continually understand where we are in the 
process.
    The other thing I have to emphasize, it's a journey. It's 
called continuous improvement. The contractors, particularly at 
the subcontractor, the vendor level, are actively engaged in 
this. And on a daily basis, as they go through performing their 
work, as they find better ways of building a part, for example, 
that data rises up. It is carefully examined, and if it looks 
like it is something that is doable, it is either, it is laid 
in either as something that is implemented. And if it's 
implemented, it means it's actually on contract. It's actually 
in our baseline today.
    Many of these initiatives today have been implemented on 
PRTV1 and PRTV2, which are on contract. And as I said to you 
earlier, we get cost data, even those with firm fixed price 
contracts, we get cost data to track what is actually 
happening. And what is actually happening are things like, it's 
taking fewer final assembly hours to put these airplanes 
together. So the data is clearly showing that the contractor, 
as we see it today, is clearly exceeding the goals that we set 
out for him in terms of cost reduction for these first two PRTV 
contracts.
    And that's the philosophy that we are using as we go 
through and manage this program.
    Mr. Barr. Thank you, Mrs. Druyun.
    Thank you, Mr. Chairman.
    Mr. Shays. Does the gentleman have other questions?
    Mr. Barr. I'd better go vote.
    Mr. Shays. Any question you want to ask that you want me to 
listen to?
    Mr. Barr. I was glad you were here for that one. Thank you.
    Mr. Shays. OK.
    I'd like to just kind of anchor onto something and then go 
from there. This is from the statement of the draft report of 
the GAO. And both of you have that at your desks, so you can 
look at it there. These are numbers, I think, that you both 
should be pretty familiar with.
    Dr. Schneiter, do you have a copy?
    Mr. Schneiter. If it's the tables, I think we do.
    Mrs. Druyun. We are sharing a copy.
    Mr. Shays. OK, thank you.
    Just so I can anchor down here, with the Air Force, I look 
at the Air Force estimate at $51 billion, and that includes, am 
I correct, the already implemented, which doesn't mean all the 
savings have occurred, but we're looking out at the future cost 
anyway. But the part that's been implemented, that $51 billion 
figure represents the $10.2 subtraction of the implemented, 
which is the chart on page 6 of--it's in the report. There are 
two reports. Maybe you could just rip out those two pages, 
because that's what I'm making reference to.
    I have table two, production cost estimates for the F-22, 
and table one, status of contractors production costs.
    Mr. Kammerer. In each one of those numbers, Mr. Chairman, 
the $51 billion does include implemented PCRPs. However, it 
does not include all of the $10.2 billion. Those $10.2 billion 
were----
    Mr. Shays. How much does it include of it?
    Mr. Kammerer. It includes, and I'll have to give you a 
rough estimate of this, because we don't have an exact 
estimate, but our rough estimate is between $6 billion and $7 
billion.
    Mr. Shays. Of the $10.2 billion?
    Mr. Kammerer. Yes. And the reason it doesn't include it all 
is because as we did our estimate, we evaluated what should be 
in and what should be out.
    Mr. Shays. Let me back up, then, let me go to the status of 
the contractors production cost reduction plan.
    Mr. Kammerer. OK.
    Mr. Shays. I'd like to hear both your opinion of that 
chart, Mr. Schneiter, and then Mrs. Druyun or Mr. Kammerer. Dr. 
Schneiter, what does this chart say to you, this table, rather? 
This is the one with the reasons for reductions implemented, to 
be implemented.
    Mrs. Druyun. If I could answer that, Congressman Shays, 
this is a contractor chart. This is how the contractor has 
captured his estimates of where he is in terms of these 
production cost reduction plans, where they have been 
implemented or where they remain to be implemented.
    We do have a common definition of what we mean by 
implemented, and I know that was a question you asked earlier. 
And what we mean by implemented is, I either have a firm fixed 
price proposal in hand that recognizes the impact of those cost 
reductions, or the contractor has basically reduced the 
standard number of hours allocated to a specific task which 
would correspond to the reductions that he would be signing up 
to, or the reduction has been negotiated in a forward pricing 
rate agreement. These are negotiated for all of our major 
contractors at their particular plants.
    Or the reduction has been negotiated with a subcontractor 
or vendor. Or finally, the impact of the reduction has been 
reflected in a current contract price, either with the prime or 
with its suppliers. That's what we call implemented. If it 
doesn't fall within those categories, then it's in the to be 
implemented column.
    Mr. Shays. So this doesn't represent your--you don't accept 
$10.2 billion, then?
    Mrs. Druyun. No. This is the contractors number. Our 
service cost position had a different number.
    Mr. Shays. What is that number?
    Mr. Kammerer. Well, as I mentioned to you, sir, our best 
estimate of that number, because we started from a baseline, 
and we had to estimate how much was in there, but our best 
estimate of that number is between $6 billion and $7 billion.
    Mr. Shays. If we are between $6 billion and $7 billion, 
well, then how much to be implemented? Where do you estimate 
that number to be?
    Mr. Kammerer. We estimate that number to be $10.2 billion.
    Mr. Shays. OK. How do you get to $21 billion?
    Mr. Kammerer. The $21 billion is the number of $16.9 
billion from the contractor for airframe avionics, Lockheed, 
and the $4 billion added to that to get $21 billion is from the 
engine contractor.
    Mr. Shays. But given your numbers, that doesn't jive.
    Mr. Kammerer. That's right.
    Mr. Shays. So?
    Mr. Kammerer. So we had a different baseline that we 
started from than the contractors.
    Mr. Shays. What was their baseline?
    Mr. Kammerer. What was their baseline?
    Mr. Shays. Yes.
    Mr. Kammerer. I do not know what their baseline was. I know 
that whatever they started at, they predicted that they could 
get $21 billion. We could supply that for the record.
    I'm here basically to defend our Air Force estimate.
    Mr. Shays. OK, let me just say this to you. I understand 
we're not going to answer some questions and this is a work in 
process. But I want to have some confidence that we're not just 
guessing, and that you're not just bringing everything under to 
be under the cap. And we have no way to evaluate. How do we 
evaluate? Trust me? It's like me standing up and saying, trust 
me, I'm a politician. It just doesn't work.
    And frankly, saying trust you, you're in charge of this 
program, I can't do it that way.
    Mr. Kammerer. My point is that the important number to 
start at is the number that the GAO showed in their table two. 
Because these PCRPs have been rolled into the estimate, we're 
saying that $51 billion is what that would be without 
implementing those that have yet to be implemented. And then we 
say, take the $10.2 billion off of that, and that's where we 
get down to our $40.8 billion estimate.
    In other words, everybody starts from the same baseline, 
the OSD people started from the baseline, saying there is a 
certain amount of these PRCPs in their baseline also.
    Mr. Shays. Dr. Schneiter, I'm getting an uncomfort. My 
uncomfort level is that basically, we have different baselines. 
We have a disagreement within the family that you weren't able 
to work out, evidently. And I don't know if either of you are 
right. Tell me, I don't know what is the first question I want 
to ask. I would like you to sort out the disagreement you 
appear to have with the Air Force.
    Mr. Schneiter. Let me comment. First of all, the OSD 
estimate is an independent estimate. We work very closely with 
the Air Force. Our cost estimators are in, I think, close to 
daily contact with them. And we do that to make sure we have a 
common data base, and that we have the same information to go 
on.
    Once that's done, however, we make an independent estimate; 
it's our job to do that. And it may be done using different 
methodology from that of the Air Force. If we did the same 
thing they did, it wouldn't really be independent.
    When we do that, the fact that we do that is part of the 
reason that Mr. Li and others have difficulty comparing the 
two, because they're done in a different way. So it's very hard 
to make such a detailed comparison.
    But the chart that was table 2 of the GAO testimony tells 
the story roughly as it exists at this point. And that is that 
the OSD estimate, setting aside the cost reduction initiatives 
still to be accomplished, or implemented, is somewhat higher 
than the Air Force estimate. If you look at that table, it's 
about $3.7 billion. And that's due to different assumptions 
that are made in terms of how we extrapolate from the data that 
we have collected on actual costs.
    We have a little bit of data at this point from the EMD and 
the PRTVs. What we have to do now is go way out, a decade, 
estimating from that. We have different approaches to doing 
that and different assumptions. And that results in that top-
line difference, the $54.7 billion and the $51 billion. And 
that already takes account of the implemented cost-reduction 
initiatives.
    The second row is the difference in assumptions in terms of 
what will be realized from the cost-reduction initiatives that 
haven't yet been implemented. And that shows up here as about 
$4 billion. And that basically is a judgment call between the 
Air Force and the OSD cost estimators. And we tend to be less 
optimistic than they.
    Those two things combined result in the $7.8 billion 
difference that you see there.
    Mr. Shays. The last thing I would want to suggest is that 
as an independent organization that you would conform your 
numbers to the Air Force. But the fact is that you did it 
independently and you came up with a different number. You had 
the same basic facts and you came up with a different number 
based on different assumptions.
    So how am I to interpret that from your standpoint?
    Mr. Schneiter. I'll tell you how we interpret it. We 
interpret it that there is certainly some risk associated with 
meeting the numbers that are in the budget currently and 
expected in the out years.
    But also, we strongly want to encourage the Air Force 
actions in the program to meet what they say they think they 
can meet. And we won't know until we get successive contracts 
actually negotiated how that's going. If those negotiated 
contracts continue down the line that Mrs. Druyun showed during 
her testimony, then we would in fact end up at the Air Force 
estimate. It's too early at this point to say.
    Mr. Shays. I had a friend who said, I may not be right, but 
I'm never in doubt. You come across as being very convinced 
that you're right. You have a strong sense that you don't have 
much doubt about your numbers.
    But how do you respond to the Secretary's office coming up 
with $7.8 billion more in costs than you do?
    Mrs. Druyun. I think Dr. Schneiter has done a very good job 
of describing what some of those fundamental differences are. 
When you go back to that GAO chart, table two, when you go back 
to the GAO chart, there obviously are big differences with 
respect to the issue of not implemented PCRP savings.
    And I guess I would like to go back to my chart four and 
remind you what we set in place in 1997 and where we are today 
with respect to what we set in place in 1997.
    Mr. Shays. That chart doesn't have any numbers to it.
    Mrs. Druyun. No, but I can certainly----
    Mr. Shays. It's basically meaningless to me without 
numbers.
    Mrs. Druyun. I can certainly fill that in for you. When we 
set out our numbers back in 1997 for PRTV, what is now PRTV1, 
PRTV2, and we're getting ready now to receive the lot 1 
proposal, the fact remains for PRTV1 and I'm looking at, I 
believe it's an average flyaway cost of about $310 million a 
copy, this is part of our learning curve and this is basically 
what we have laid out here as a learning curve that we need to 
achieve to ensure we can deliver airplanes at the $39.8 billion 
cap.
    So we put that on contract 3 years later, and as you can 
see from what I'm basically showing you, what we put on 
contract, our data today, PRTV2 is about 25 percent complete. 
When we put that on contract, we basically thought the 
contractor would make no profit, as I said earlier. Today our 
cost reporting data which I get on this contract shows that we 
expect he will make some profit upwards to the range of about 6 
percent.
    We put PRTV2 on contract back in December 1999, 
approximately 6 months ago. And our cost reporting data shows 
that the actuals that we are seeing on that contract today are 
better than what we had expected.
    And so, this is how we build confidence. We laid this out 3 
years ago. The first two efforts that are on contract are firm 
fixed price. And we were able to put on contract and establish 
a learning curve and we're coming down that learning curve. The 
lot 1 proposal is due next month, and I expect in December when 
we have finally negotiated that effort and we're ready to put 
it on contract, which will be our low rate initial production, 
I am very confident----
    Mr. Shays. Can I ask, how is this responsive to my 
question, though? I'm hearing you, but I don't understand how 
it responds to my question.
    Mrs. Druyun. Our confidence, my confidence, comes from the 
fact that we brought PRTV1 and PRTV2 in on the Air Force 
estimate, and in on the target prices that we established 3 
years ago. We also have a very extensive electronic data base 
that tracks every one of the production cost reduction 
initiatives. And we are able to status exactly where we are, 
whether they have been implemented and to continue to track 
them through.
    And that is the philosophy that we use in this program. We 
identify it when it goes on contract. We track it and we 
continue to update our cost estimate to ensure that it is going 
to yield the savings that we basically feel are necessary to 
keep this program within the ceiling price established by the 
Congress.
    Mr. Shays. In 1997, you came in with $13 billion potential 
cost overruns. In 1999, you had $16 billion, and now we're 
looking at $21 billion. The trend line is up. Why shouldn't I 
not conclude that we're losing ground?
    Mrs. Druyun. These are cost reduction initiatives.
    Mr. Shays. Right. But there's a reason why you need to do 
cost reduction initiatives.
    Mrs. Druyun. It's called continuous improvement.
    Mr. Shays. No. You are making these improvements because 
you have overrun costs. Let me just make sure we're not playing 
a game here. I want you to find ways to save money. But don't 
come and tell me that the program is going to cost more and 
more and more and then you have to make cost reductions and 
that's a sign that we're making progress. That's idiotic.
    Mrs. Druyun. Sir, if you were to go back to the original 
ceiling that was established in law, you would find that there 
have been a number of adjustments to that ceiling. One of them 
is for inflation. Inflation that's used in preparing our budget 
estimates continues to decrease. That's why that cost cap is 
basically decreased.
    Mr. Shays. The cost cap is decreased?
    Mrs. Druyun. Well, the cost cap originally was $43.4 
billion for production.
    Mr. Shays. For the same number of planes?
    Mrs. Druyun. Yes, sir. And today that cost cap, with 333 
airplanes, remember 6 were funded in EMD, so we shifted it to 
EMD per congressional direction. That cost cap was----
    Mr. Shays. We didn't shift costs to the outer years so they 
don't show up?
    Mrs. Druyun. No, sir. Absolutely not.
    Mr. Shays. OK. So your response to me is that you're happy 
that we've brought the cap from $43 billion to $39.8, is that 
your point?
    Mrs. Druyun. No, sir.
    Mr. Shays. I want to make sure ultimately I get my question 
answered. You have a keen way of making sure I know what you 
want me to know. And I have never not allowed a witness not to 
have that opportunity.
    But what I do want to know is, we were looking at costs of 
$13 billion in 1997, cost reductions to $16 billion to $21 
billion. Are you saying of the $21 billion, $3 billion of it or 
$4 billion of it was to get the cap lower?
    Mrs. Druyun. No, sir. It is to ensure that we stay within 
the cap.
    Mr. Shays. And the reason why we have to make these cost 
reductions is the program is becoming more expensive than we 
anticipated. Therefore we had to make these cost reductions.
    Mrs. Druyun. No, I would not characterize it as the program 
becoming more expensive. Part of the phenomena that we see here 
is called inflation.
    Mr. Shays. No, the $21 billion, then let's just deal with 
the $21 billion. That $21 billion is a description of what?
    Mrs. Druyun. The $21 billion is a description of the cost 
reduction initiatives that the contractor has identified today 
and is actively pursuing----
    Mr. Shays. In order to stay within the caps, correct?
    Mrs. Druyun. In order to stay within the caps or come below 
the caps.
    Mr. Shays. OK, fair enough. Let's find the areas where we 
agree and then we'll find the areas we disagree.
    But the bottom line is that the program was looking more 
expensive and we had to find more ways to cut costs to stay 
within the caps. I believe that the Air Force should be 
congratulated anywhere we can make cost reductions. And the 
contractor. And I want you to rejoice in those areas.
    Given that I'm not an opponent of this program, though I 
will become on if I find that ultimately we are underestimating 
costs that we can trip our way into a big program and then 
later on, when someone else is taking your place, they'll say, 
well, I didn't make those estimates and they were wrong, and a 
lot of good that will do the country.
    I'm even willing, and I was going to say this in the 
beginning, I'm even willing to say this program should be, we 
should have this program if it costs $45 billion. In other 
words, I'm open to that view. Because I think it is an 
important program.
    But what I'm not open to is some kind of sense that we have 
this cap that we're going to stay under. What it looks like on 
the outside looking in is that the Air Force wants this program 
so much that it is going to find every way to tell the 
committee that they're going to meet the cap, and yet even 
within DOD, we have the Secretary's office saying, you know, we 
may not meet the cap.
    And so I think you can understand from my position that I 
could come to that conclusion. I want you to tell me how you're 
proud of this program and all the cost savings that you're 
going to make and I don't belittle that. But I wanted an answer 
to the question. And the question was, when we first were 
looking at this program, we didn't expect that we had to make 
these $13 billion worth of costs, or maybe we thought we had to 
make some of it. Then it looked to $16 billion, another $3 
billion, and now we're looking at another $5 billion in just 1 
year.
    And the $16 billion to $21 billion I don't think is related 
to our reducing the cap, it's to stay within the cap. Isn't 
that correct?
    Mrs. Druyun. No, sir. The reasons why the cost reduction 
increases continue to, that we've identified, continue to 
increase, so that we can stay within the cap, and the cap 
continues to come down. The cap today is $37.6 billion.
    Mr. Shays. Now, isn't the $39 billion to $37 billion in 
part because we're going to do six less planes?
    Mrs. Druyun. Yes, but----
    Mr. Shays. OK, wait, let me just interrupt you a second. 
When I see that happen, then I begin to doubt other things 
you're saying. I mean, that's unfair. We're making less planes, 
so obviously the costs are going to come down. Right?
    Mrs. Druyun. Yes, however, if I can answer the rest of the 
question, part of that is inflation. $600 million of that is 
inflation. That's the part that I have to continue to offset. 
The inflation rate that basically is used is in the 
neighborhood of about 1.1 percent.
    Mr. Shays. Well, let me ask you this.
    Mrs. Druyun. The real inflation that we see in this program 
is about 3 percent. When you look at the cost of people----
    Mr. Shays. I'll try to follow you here, and we're going to 
finish in 10 minutes. What I'm trying to logically follow is 
that when you mention inflation, then I will make an assumption 
that we're going to have to even make more than $21 billion of 
savings?
    Mrs. Druyun. If inflation continues to come down, the 
indices that we use----
    Mr. Shays. Down or up?
    Mrs. Druyun. If inflation indices continue to go down, I 
obviously will be forced to work even harder to find offsets 
because in reality----
    Mr. Shays. Is that realistic? I mean, I just want us to be 
realistic?
    Mrs. Druyun. Is it realistic? Well, as far as I'm 
concerned, it's reality that we have to deal with.
    Mr. Shays. No, no, but reality may not be realistic. In 
other words, your ability to deal with that may not be 
realistic. Reality may just, I mean, why wouldn't we make an 
assumption right now that the program, over the course of it 
is, we're going to have this much inflation and this is what 
it's going to cost us?
    Mrs. Druyun. But the inflation, sir, if you look back in 
the history of how inflation is done over the last 20 years, 
you would find it goes up and down. What we have seen for the 
last several years is that the inflation number has been going 
down. And remember, we're estimating through 2011.
    Mr. Shays. Let me just take that point. I thought you were 
telling me inflation was going up and that you had to make 
further cost reductions.
    Mrs. Druyun. No, no. The inflation factor that I have to 
use in doing our cost estimate has been going down. It's gone 
like from 1.5 percent down to about 1.2 percent.
    Mr. Shays. When you say you have to, in other words, that's 
what you're required in law to do?
    Mrs. Druyun. Yes, those are the rates that are set that we 
use.
    Mr. Shays. Right. I'm asking a different question. I'm 
asking a logical question that the rates you have to use may be 
different than reality.
    Mrs. Druyun. Yes, they are.
    Mr. Shays. And what is really bothering the hell out of me 
is that when I'm talking about inflation, you want to talk 
about the inflation rate that you have to meet. I want to just 
talk about inflation. Inflation costs go up. And I want to 
know, I just even want to know if the $39 billion is a real, 
$39.8 billion, is or was a realistic number. And I just want to 
know that. And that's the question I asked you.
    So is it logical that costs are going to keep going up 
every year? And the answer would logically be yes, right?
    Mrs. Druyun. Sir, let me just answer it this way. The $39.8 
billion estimate, which is our official service cost position 
that we have put together, I believe is realistic today. Now, 
will that be realistic if inflation were to go down to a half a 
percent and I still had to continue, contractors still continue 
paying in the neighborhood of 3 percent when you get into the 
out years? There's a point in time when it does become next to 
impossible to be able to offset it.
    Mr. Shays. Who sets that inflation rate?
    Mrs. Druyun. That inflation rate is basically set by the 
Office of Management and Budget.
    Mr. Shays. And that's the so-called allowable inflation 
rate that you were given?
    Mrs. Druyun. Yes.
    Mr. Shays. As opposed to the reality of what inflation 
really is?
    Mrs. Druyun. Yes, that's correct. And the problem is in the 
area, it's not materiel cost. The problem is in the area of 
people cost. There's a very short market of people out there. 
There's a shortage of people and contractors are paying higher 
rates than 1 percent.
    Mr. Shays. I understand that. I understand that you have 
inflation on people and you have increased costs for fuel. You 
have a lot of reasons why the costs may go up. And if the costs 
went up to $45 billion, there could be very logical reasons why 
the costs could.
    The question is, is it logical, and that's what I'm trying 
to see, is it logical that we will be able to stay under the 
caps. You are giving us a story that we'll be able to stay 
under the caps. But even as we have this dialog, I get less 
comfortable that you'll be able to.
    Mrs. Druyun. With the current cap that was established, 
that we have today which is $37.6 billion, it translates close 
to what was the $39.8 billion. The $39.8 billion, as you 
recall, went down because of inflation and the rest was because 
airplanes were moved into the development side rather than the 
production side. Today, we believe that's a realistic cap and 
that we can live within it and deliver 339 airplanes.
    But the big challenge in the future is obviously for us 
inflation.
    Mr. Shays. What I would like you to ask you to do is be 
able to give us a more accurate number. I'd like to understand 
your base. I'd like to understand, Dr. Schneiter, your base. 
And then we'll convene in a month. Let me ask you, how long 
will it take us to come back and do this? I would like to nail 
down what numbers you use as your base, Dr. Schneiter, what 
numbers you use as your base.
    And I'd also like to understand what numbers of the $21 
billion, I'd like to know what numbers you use and what numbers 
you use as already being implemented. Meaning, the very 
helpful, Mrs. Druyun, your helpful explanation of your number 
of firm fixed prices and your contract prices and so on, what 
is implemented and what is to be implemented. And I'd also like 
if we could have numbers on this.
    I don't think we're going to resolve all my questions, but 
what we'll do is we'll come back in a month's time and we'll 
try to sort it out. And I'm not asking, Dr. Schneiter and Mrs. 
Druyun, that you all conform your numbers, because you both are 
going to give us different assumptions. So that's not what I'm 
asking. But I'm interested in knowing that.
    And I would love to just ask you, would you just respond, 
Mrs. Druyun, to the GAO's concern that you're not giving the 
cost estimates in your reports to the Secretary? Is that 
something that I should be concerned about or not?
    Mr. Schneiter. I can comment on that. I think OSD has been 
well informed in terms of the status of these. As I indicated 
earlier, at the working level, we certainly do that on an 
almost daily basis. What gets reported in the quarterly 
meetings to Dr. Gansler depends in large part on what's changed 
since the last report. I think we probably have not focused on 
these much in the last couple of meetings, because really 
nothing had changed from what we saw before.
    Mr. Shays. Is it an unfair request for me to ask you that 
these be done on a quarterly basis? Then it becomes a more 
public document, correct?
    Mr. Schneiter. I don't think it becomes a more public 
document. Those are internal reports to Dr. Gansler.
    Mr. Shays. Well, it becomes a document, I would ask you to 
do that. It becomes a document that more information is in one 
document that we can then turn to, and it helps us do 
evaluation. Is there any reason not to expect that, Mrs. 
Druyun?
    Mrs. Druyun. There is no reason why we cannot officially 
give a report to Dr. Gansler. But I would also like to supply 
for the record, sir, all of the meetings that have occurred 
between the OSD staff and the Air Force staff looking at these 
production cost initiatives. I don't think the GAO has quite 
captured the amount of exchange and the amount of examination 
that has gone on and continues to go on, literally on a monthly 
basis.
    Mr. Shays. I think that you would agree that when they come 
in from the outside, though, it's a little harder to track a 
daily conversation on what transpires, and it's helpful to have 
periodic reports that they can then have, you know, grab onto. 
And I would think that's something that obviously this 
committee would be interested in as well.
    Mrs. Druyun. Certainly.
    Mr. Shays. Let me do this. Let me--I'm not adjourning this 
hearing, we will conclude it, and we will call another hearing, 
working it out with your schedules in a month or so, give or 
take, where we can go over these numbers in more depth. And I 
would just say that our committee will try to write a specific 
request of the things that would be helpful so there will be no 
misunderstanding. And we'll try to get that to you in the next 
few days.
    Mr. Kammerer. Just one point that I want to add, Mr. 
Chairman. If you take a look at the numbers with the 
implemented----
    Mr. Shays. Which one am I looking at?
    Mr. Kammerer. That's table two of the GAO report on page 
10. If you take a look at the numbers at the top line there, 
between $54.7 billion and $51 billion, the difference of $3.7 
billion on a base of $54.7 billion or $51 billion is a very, is 
well within cost estimating differences. In other words, that's 
a 7 percent difference. And that is a number between us and the 
OSD that is well within cost estimating uncertainty. You cannot 
do much better than that.
    Mr. Shays. Right. It would just be interesting to know 
where your differences are.
    Mr. Kammerer. I can explain pretty much where the 
differences are. I'll plan to do that the next time we testify.
    Mr. Shays. We're not going to do it in the next 3 minutes.
    But is the confidence level, this is something that counsel 
is asking me, what should be the confidence level; 7 percent, 
10 percent, 5 percent?
    Mr. Kammerer. Well, if you're within plus or minus 10 
percent, usually cost estimators say if you're within plus or 
minus 10 percent, that's a pretty good number.
    Mr. Shays. So if this project costs us $44 billion in the 
end, versus $39 billion or $40 billion, then----
    Mr. Kammerer. Yes, sir. Now, there are some good reasons 
why estimates should vary more than that. For example, if we 
were both in agreement on the production cost reduction 
programs [PRCPs], if that was within 7 percent, then that whole 
estimate would be within 7 percent.
    Mr. Shays. Mr. Kammerer, I am more comfortable with your 
comment, believe it or not, than you may realize, because 
that's more reality for me. But what that says is that the $39 
billion figure, it puts it in some perspective. And it does 
put, Mrs. Druyun, your extraordinary confidence that you're 
within this cap, it gives me a different perspective as well.
    I've never known us though, I've never known us to usually 
underestimate costs, though. That's what makes me concerned.
    Mr. Tierney, what we're going to do is we're going to come 
back, because we have to vacate this room at 1, and we're going 
to have a hearing in about a month to go over the numbers in 
more detail. We'll invite your staff to also help us in the 
letter drafting.
    Is there any comment that any of you want to make before we 
get on our way?
    Mrs. Druyun. We look forward to having a follow-on session. 
I would suggest perhaps if we had a pre-session with your 
staff, it could be very helpful to understand the differences 
in baselines.
    Mr. Shays. I think we'll need to do that, yes, I agree.
    Thank you very much. Let me ask you, have there not been 
communications with my staff on these issues? Your people have 
sat down with our people, right? This would not be the first 
time?
    Mrs. Druyun. No, we have sat down before. But I think we 
know what your issues are, I think we can really zero in on 
them.
    Mr. Shays. I just wanted the record to not make an 
indication that part of the problem is that we haven't been 
sitting down with each other. So I just want to make sure of 
that. We're happy to do that, and I think it's a good 
suggestion.
    I thank all of you for coming, and we'll be back.
    [Whereupon, at 12:55, the hearing was recessed, to 
reconvene at the call of the Chair.]
    [The prepared statement of Hon. Helen Chenoweth-Hage 
follows:]

[GRAPHIC] [TIFF OMITTED] T2259.045

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