U.S. GOVERNMENT PRINTING OFFICE

72–259 DTP WASHINGTON : 2001

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

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: (202) 512–1800 Fax: (202) 512–2250

Mail: Stop SSOP, Washington, DC 20402–0001

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BOB BARR, Georgia

DAN MILLER, Florida

ASA HUTCHINSON, Arkansas

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

HELEN CHENOWETH-HAGE, Idaho

DAVID VITTER, Louisiana

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

HAROLD E. FORD, JR., Tennessee

JANICE D. SCHAKOWSKY, Illinois

———

BERNARD SANDERS, Vermont

(Independent)

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

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

DAVID M. MCINTOSH, Indiana

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

HELEN CHENOWETH-HAGE, Idaho

ROD R. BLAGOJEVICH, Illinois

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

JOHN F. TIERNEY, Massachusetts

THOMAS H. ALLEN, Maine

EDOLPHUS TOWNS, New York

BERNARD SANDERS, Vermont

(Independent)

JANICE D. SCHAKOWSKY, Illinois

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

(III)

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

(1)

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.

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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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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.

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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 multiyear 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

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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.

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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 sinVerDate 11-MAY-2000 09:11 May 30, 2001 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 C:\DOCS\72259.TXT HGOVREF1 PsN: HGOVREF1
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cere, 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:]

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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.

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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 Sec- retary 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,

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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?

29

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 con- gressional 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.

30

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——

31

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 reducVerDate 11-MAY-2000 09:11 May 30, 2001 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 C:\DOCS\72259.TXT HGOVREF1 PsN: HGOVREF1
32

tion 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?

33

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 agree- ing 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.

34

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

35

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?

36

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

37

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.

38

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.

39

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

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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.

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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.

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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

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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.

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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

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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

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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.

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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

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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

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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

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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 twothirds 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 selffulfilling 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

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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?

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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.

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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 difVerDate 11-MAY-2000 09:11 May 30, 2001 Jkt 000000 PO 00000 Frm 00086 Fmt 6633 Sfmt 6633 C:\DOCS\72259.TXT HGOVREF1 PsN: HGOVREF1
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ferent 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.

84

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?

85

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 outVerDate 11-MAY-2000 09:11 May 30, 2001 Jkt 000000 PO 00000 Frm 00089 Fmt 6633 Sfmt 6633 C:\DOCS\72259.TXT HGOVREF1 PsN: HGOVREF1
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side 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 ques- tion, 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

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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.

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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 exVerDate 11-MAY-2000 09:11 May 30, 2001 Jkt 000000 PO 00000 Frm 00092 Fmt 6633 Sfmt 6633 C:\DOCS\72259.TXT HGOVREF1 PsN: HGOVREF1
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change 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, ver- sus $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

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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:]

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