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F–22 COST CONTROLS: HOW REALISTIC ARE

PRODUCTION COST REDUCTION PLAN ESTIMATES?

HEARING

BEFORE THE

SUBCOMMITTEE ON NATIONAL SECURITY,

VETERANS AFFAIRS AND INTERNATIONAL

RELATIONS

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

AUGUST 2, 2001

Serial No. 107–101

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

(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

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

BOB BARR, Georgia

DAN MILLER, Florida

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

DAVE WELDON, Florida

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

C.L. ‘‘BUTCH’’ OTTER, Idaho

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

HENRY A. WAXMAN, California

TOM LANTOS, California

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

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

JANICE D. SCHAKOWSKY, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

——— ———

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

JAMES C. WILSON, Chief Counsel

ROBERT A. BRIGGS, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON NATIONAL SECURITY, VETERANS AFFAIRS AND INTERNATIONAL

RELATIONS

CHRISTOPHER SHAYS, Connecticut, Chairman

ADAM H. PUTNAM, Florida

BENJAMIN A. GILMAN, New York

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEVEN C. LATOURETTE, Ohio

RON LEWIS, Kentucky

TODD RUSSELL PLATTS, Pennsylvania

DAVE WELDON, Florida

C.L. ‘‘BUTCH’’ OTTER, Idaho

EDWARD L. SCHROCK, Virginia

DENNIS J. KUCINICH, Ohio

BERNARD SANDERS, Vermont

THOMAS H. ALLEN, Maine

TOM LANTOS, California

JOHN F. TIERNEY, Massachusetts

JANICE D. SCHAKOWSKY, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON,California

——— ———

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 August 2, 2001 ............................................................................. 1

Statement of:

Barr, Hon. Bob, a Representative in Congress from the State of Georgia .. 20

Druyun, Darleen A., Principal Deputy Assistant Secretary of the Air

Force, Acquisition and Management, Department of the Air Force, Department of Defense; Dr. George Schneiter, Director of Strategic and

Tactical Systems, Department of the Air Force, Department of Defense;

and Francis P. Summers, Regional Director, Defense Contract Audit

Agency, Department of Defense ................................................................... 37

Li, Allen, Director, Acquisition and Sourcing Management, U.S. General

Accounting Office, accompanied by Robert Murphy, Assistant Director,

Acquisition and Sourcing Management, U.S. General Accounting Office;

and Donald Springman, Senior Analyst, Acquisition and Sourcing Management, U.S. General Accounting Office ................................................... 6

Letters, statements, etc., submitted for the record by:

Barr, Hon. Bob, a Representative in Congress from the State of Georgia,

prepared statement of ................................................................................... 21

Druyun, Darleen A., Principal Deputy Assistant Secretary of the Air

Force, Acquisition and Management, Department of the Air Force, Department of Defense, prepared statement of .............................................. 42

Li, Allen, Director, Acquisition and Sourcing Management, U.S. General

Accounting Office, prepared statement of ................................................... 10

Schneiter, Dr. George, Director of Strategic and Tactical Systems, Department of the Air Force, Department of Defense, prepared statement

of ..................................................................................................................... 73

Shays, Hon. Christopher, a Representative in Congress from the State

of Connecticut, prepared statement of ........................................................ 3

Summers, Francis P., Regional Director, Defense Contract Audit Agency,

Department of Defense, prepared statement of ......................................... 81

(1)

F–22 COST CONTROLS: HOW REALISTIC ARE

PRODUCTION COST REDUCTION PLAN ESTIMATES?

THURSDAY, AUGUST 2, 2001

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 9:30 a.m., in room

2154, Rayburn House Office Building, Hon. Christopher Shays

(chairman of the subcommittee) presiding.

Present: Representatives Shays, Otter, Kucinich and Tierney.

Also present: Representative Barr.

Staff present: Lawrence J. Halloran, staff director and counsel;

Jason M. Chung, clerk; David Rapallo, minority counsel; and

Earley Green, minority assistant clerk.

Mr. SHAYS. A quorum being present, the Subcommittee on National Security, Veterans Affairs and International Relations hearing, entitled, ‘‘F–22 Cost Controls: How Realistic are Production

Cost Reduction Plan Estimates,’’ is hereby called to order.

In less than 2 weeks the Defense Acquisition Board will be asked

to launch production of the F–22 Raptor air superiority fighter as

the Air Force’s premiere tactical aircraft modernization platform

begins to roll off the assembly line. The program faces a critical

question: Can the F–22 hit production cost targets?

The Air Force hopes to purchase 333 production aircraft while staying within the $37.6 billion cost cap set by Congress, but two

Department of Defense DOD estimates put F–22 production costs between $2 billion to $9 billion over the limit. A major factor contributing to the $7 billion disagreement is the value ascribed to

near- and long-term cost-cutting plans. A difference of that magnitude signals significant risk that current cost control strategies

may not be adequate to allow production of the right number of F– 22s at an affordable per-unit price.

This is our third hearing on F–22 production cost reduction plans

[PCRPs]. As in the past, the subcommittee asks the General Accounting Office to analyze DOD estimates and the PCRP evaluation to refine our understanding and increase our confidence in the

scope and validity of the production cost savings effort. Today GAO

reports some savings have been achieved, and more can be anticipated as the airframe and engine production programs mature, but

cost pressures persist, and it is still not at all clear there will be

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enough PCRP savings to keep the F–22 on target, particularly if

higher production estimates prove more accurate.

Since we began following the formulation and implementation of

ambitions PCRP initiatives, total savings needed to address cost

growth has doubled, now totaling $26 billion. F–22 contractors told

GAO half of those cost reductions are already implemented in supply contracts or lean production processes. To varying degrees, cost

estimators credited the program with additional savings identified

but not yet implemented. So-called challenge PCRPs represent

more than $4 billion of hoped-for, but still undefined, savings.

If those savings can be achieved, the Raptor will soar. If gaping

differences over estimating and evaluation methodologies can be

narrowed, the F–22 production cost reduction process could represent a major weapons system acquisition reform. If DOD fully

implemented an earlier GAO recommendation to improve the frequency and consistency of PCRP status reports, they would be far

more effective management tools. And if the Department agreed to

provide GAO and this subcommittee greater access to the data supporting costs and savings estimates, we would all have greater confidence in the adequacy and integrity of the PCRP effort.

We welcome our witnesses this morning, and we look forward to

their testimony on the important issue of tactical aircraft production cost reduction plans.

[The prepared statement of Hon. Christopher Shays follows:]

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Mr. SHAYS. At this time I would like to call on Mr. Kucinich, the

ranking member of the committee.

Mr. KUCINICH. I thank the Chair. It’s an honor to join you this

morning for this hearing and welcome the witnesses.

Over the past 2 years this subcommittee has held several hearings on the increasing costs of developing the F–22 fighter plane.

Our previous inquiries revealed a strong potential for the program

to exceed the budgeted cap established by Congress. It has now become necessary for this committee again to examine the project to

determine whether the Air Force can deliver on its commitment to

execute the F–22 program within the limits Congress prescribed.

A more fundamental and perhaps more important question concerns the Department of Defense’s overall aircraft acquisition strategy. In previous hearings GAO and others raised the problem of

aging aircraft. As aircraft get older, they tend to break more often,

they take longer to inspect and maintain, and they are less available for operations. But the Pentagon’s current plan for acquiring

replacement planes will not reduce the average age of aircraft.

As GAO has pointed out elsewhere, the Pentagon is investing in

extremely expensive programs that will yield very few aircraft. The

F–22 program is a prime example. The original plan was to pur- chase 880 planes for $40 billion. Because of the Pentagon’s inability

to accurately predict costs or meet testing hurdles, however, we

now expect fewer than 333 planes. In fact, GAO will testify today

that the number most likely will decrease by another 85 planes.

Rather than updating our fleet, the F–22 purchase will actually increase the average age of each aircraft.

In addition, past assurances that the Air Force would stay under

the cost caps—despite those past assurances that the Air Force

would stay under the cost caps, it appears they have missed the

mark again. GAO will report that estimates by both the Air Force

and the Secretary of Defense exceed the cost gap, the Air Force by

$2 billion, and the Secretary of Defense by $9 billion.

Why is the Pentagon proceeding on this course if these purchases

result in a fleet that breaks down more and flies less? Shouldn’t

we buy more aircraft that, although less sophisticated, may be

more reliable? Currently defense spending is approaching the average levels of the cold war in the 1970’s, yet the Pentagon is seeking

billions more. Congress deserves reassurance that this money is

going toward a force that is more effective, not less.

Thus, our examination of the problem of cost controls within the

F–22 program necessarily must take place in the context of the

Pentagon’s overall mode of operation and culture. Aging aircraft

are a symptom of systemic issues and needs to be addressed.

Finally, I would like to take this opportunity to thank the Project

on Government Reform and Oversight for the report they are

issuing today regarding this issue. The report further highlights

these problems. It concludes as follows, ‘‘As long as we keep investing in weapons systems that are highly complex and rely on technologies that are not fully proven, we will find ourselves spending

more and more on fewer and fewer weapons that are of questionable relevance.’’

Danielle Brian, the executive director of the Project on Government Oversight, reiterated this observation in a statement she

6

made when releasing the report, ‘‘The F–22 is a continuation of the

flawed weapons-building system that allows overpriced, undertested weapons to dominate our military policy. As long as the Pentagon continues this trend, defense contractors will benefit at the

expense of the military and taxpayers,’’ and I might add our national security.

I thank the Chair for holding this hearing, and I look forward to

the testimony.

Mr. SHAYS. Thank the gentleman for his statement.

At this time I would recognize our panel, Mr. Allen Li, Director,

Acquisition and Sourcing Management, U.S. General Accounting

Office, accompanied by Mr. Robert Murphy, Assistant Director of

Sourcing Management, GAO; and Mr. Donald Springman, Senior

Analyst, Acquisition and Source Management, GAO.

And before I swear you, gentlemen, I would just like to say for

both panels my hope is that we have an honest dialog with no

games, no spin, just straight talk.

At this time I would like to administer the oath, and if you gentlemen would stand.

[Witnesses sworn.]

Mr. SHAYS. Note for the record our witnesses have responded in

the affirmative.

And I also would say before, Mr. Li, you give your testimony, I

don’t know if we have all of the answers, because I’m not sure that

you have all of the data submitted to you by DOD to answer all

of the questions. We don’t feel that we have all of the data, but let’s

give it a try and see what you have got.

STATEMENTS OF ALLEN LI, DIRECTOR, ACQUISITION AND

SOURCING MANAGEMENT, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY ROBERT MURPHY, ASSISTANT DIRECTOR, ACQUISITION AND SOURCING MANAGEMENT, U.S.

GENERAL ACCOUNTING OFFICE; AND DONALD SPRINGMAN,

SENIOR ANALYST, ACQUISITION AND SOURCING MANAGEMENT, U.S. GENERAL ACCOUNTING OFFICE

Mr. LI. Mr. Chairman and members of the subcommittee, I’m

pleased to be here today to summarize our statement on the impact

of cost reduction plans on estimates for producing the F–22.

We were asked by the chairman to update information we provided last year, and have prepared a report being released at today’s hearing.

As you know, the Air Force started developing the F–22 in 1991.

Development is scheduled to be completed by September 2003. The

Air Force plans to procure 333 production aircraft at a cost currently limited to $37.6 billion by the Fiscal Year 1998 Defense Authorization Act. The act does not specify the total number of aircraft to be produced.

Before I summarize our work, allow me to provide some background information with regards to the production of the F–22. In

1997, the Air Force and contractors reported that the production

costs could go up substantially. Since then the contractors and the

Air Force have been developing and implementing plans to reduce

costs by enhancing production technology, improving manufacturing techniques and improving acquisition practices.

7

Cost reduction plans are categorized in three ways: challenge,

not yet implemented, and implemented. Challenge plans are those

that are not yet well defined and are not yet close to achieving future cost reductions. Not yet implemented plans are those that are

better defined and are believed to be sound and possible. Implemented plans are those closest to achieving cost reductions.

I have three main points this morning. Point one, potential cost

reductions identified by contractors have increased, but their actual

impact is yet to be determined. The estimated amount of contractor-identified cost reduction plans added up to $26.5 billion in January 2001. The total consists of about $4.2 billion in the challenge

category, $8.5 billion in cost reductions not yet implemented, and

about $13.7 billion in cost reductions that have been implemented.

It is clear that if the savings from cost reduction plans are to be

achieved, production costs—production contract prices and Air

Force expenditures must be lower than would have been the case

if the planes had not been implemented. However, until contracts

are negotiated, cost estimates will continue to reflect the judgment

of cost estimators about the potential impact of cost reduction

plans.

Because F–22 production is in its early stages, most of the cost

reductions associated with the cost reduction plans have not yet

been achieved. An analysis of some cost reduction plans categorized

as implemented indicates that lower costs can be achieved.

Last year the Air Force asked the Defense Contract Audit Agency [DCAA], to conduct a limited review of some of the plans. DCAA

is responsible for contract audits at DOD. DCAA examined 11 cost

reduction plans totaling $425 million in estimated cost reductions.

DCAA’s report indicated three things. First of all, DCAA did not

take exception to the potential cost reductions for 8 of the 11 plans

it reviewed. Second of all, the agency found potential cost reductions on two others to be based on judgment, not discrete, measurable events. And the third thing that it found, it has found the documentation on one to be lacking.

Mr. Summers of DCAA will testify later and should be able to

provide the subcommittee with further details.

Point No. 2, latest F–22 production cost estimates still exceed the

congressional cost elimination. As we reported to you last year,

both the Air Force and Office of the Secretary cost estimators projected that in late 1999 that productions costs would exceed the

congressional cost limitation.

Air Force cost estimators projected productions costs at $40.8 billion, and those from the Office of the Secretary estimated $48.6 billion. Even though the cost estimates exceeded the cost limitations

in effect at that time, the Secretary of the Air Force maintained

that the actual costs would not exceed the limitation, and established the Air Force’s position on production costs at the $39.8 billion limitation amount.

So what are the latest projections we analyzed? In estimates

made December 2000 to support the fiscal year 2002 budget request, both the Air Force and the Office of the Secretary cost estimators continued to project that production costs will exceed the

congressional cost limitations. The Air Force cost estimators projected that production costs were likely to exceed the current $37.6

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billion congressional cost limitation by $2 billion. The estimate produced by the Office of the Secretary indicates that costs will likely

exceed the limitations by $9 billion. The $7 billion difference between those two estimates is due to such things as the Office of the

Secretary estimating higher labor costs for subcontractors, as well

as higher costs for the F–22 engines.

Air Force officials advise us that their estimates consider the

same cost reduction means as those by the Office of the Secretary,

but that they reflect differing judgments regarding the viability of

the plans and potential amounts of cost reductions applied.

At this time we cannot advise you on which estimate will prove

to be more accurate, but what if the higher estimate turns out to

be true? If the Office of the Secretary’s higher estimate is correct,

and additional cost reduction plans are not developed and implemented, we project that the Air Force would have to buy about 85

fewer F–22s than the 333 aircraft now planned to stay within the

cost limitation.

My final point. DOD has not completed action on our prior recommendations to reconcile the number of F–22s with the cost limitation and report to the Office of the Secretary on the status of cost

reduction plans. We made two recommendations last year to the

Secretary of Defense, namely that he reconcile the number of F–

22s that need to be procured with the cost limitation and report to

the Congress on the implications of procuring fewer F–22s because

of potentially higher costs. And the second recommendation was to

report to the Under Secretary of Defense on the status of the cost

reduction plans each quarter.

Regarding our first recommendation, DOD partially agreed, stating that affordability of the F–22 would be evaluated during QDR.

More recently, DOD indicated that a review of DOD programs directed by the President must be completed before it can comment

further on this recommendation.

Regarding our second recommendation, we note that in the Air

Force’s March 2001 quarterly review to the Under Secretary, the

information reported included only summary information on the

total estimated cost reductions.

DOD, in commenting on the draft of our report being released

today, indicated the information reported in the last quarterly review in June 2001 contained more detailed information. We have

examined documentation supporting that review and agreed that it

contains more information on cost reduction plans than previous

reviews; however, the information reported is still not consistent

with what we recommended.

Specifically, information was not reported regarding the total

number of cost reduction plans identified, the number implemented, cost reductions realized to date, and any additions or deletions in the plans included in the prior report. Such information

would be useful.

And, Mr. Chairman, your statement with regards to getting more

information is—I am referring to that point. For example, the

quantification of cost reductions realized to date would allow us to

9

identify what the baseline cost estimate is prior to including the

impact of implemented end-cost reduction plans.

Mr. Chairman, that concludes my statement. I would like to answer any questions that you have at this time.

Mr. SHAYS. Thank you.

[The prepared statement of Mr. Li follows:]

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Mr. SHAYS. I would like to recognize that we have Mr. Barr as

the vice chair, and Mr. Tierney, who has sometimes served as the

ranking member of this committee, to help Mr. Kucinich. So you

have four Members who are very interested in the committee.

And at this time I recognize Mr. Barr. You have your time.

STATEMENT OF HON. BOB BARR, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF GEORGIA

Mr. BARR. Thank you very much, Mr. Chairman. I thank you for

allowing me to participate in this important hearing today on the

air superiority fighter that will maintain our superiority and consequently lead directly to our superiority on the battle field well

into the 21st century.

Mr. Chairman, I have a more complete statement that I would

appreciate unanimous consent to insert into the record.

Mr. SHAYS. If I could at this time just take care of that business.

I 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 would ask further unanimous consent that all witnesses be permitted to include their written statement in the record. Without objection, so ordered.

Mr. BARR. Thank you, Mr. Chairman.

Mr. Chairman, during the past year the F–22 Air Force Industry

Team has achieved a number of significant accomplishments,

among them: Completed all production release criteria required for

a low-rate initial production go-ahead. Completed initial measurements of the F–22’s in-flight stealth characteristics. These measurements confirmed that the F–22 is meeting or exceeding its

stealth requirements; demonstrated in-flight fusion of sensor data

from the F–22’s integrated avionics system; completed engine life

testing representing the equivalent to 8 years of operational use;

validated the detection range of the F–22’s radar. These measurements confirmed the radar is capable of detecting targets at greater

than ranges of the F–22’s specification requirements; completed

static strength testing of critical aircraft structure. These tests confirmed the F–22 meets operational strength requirements with a 50

percent safety margin.

Additionally, the team has currently accomplished over 1,250

hours of flight testing during 500 flights since flight tests began.

Mr. Chairman, by any measure the F–22 is on range to be an

outstanding aircraft which exceeds even the very, very high goals

set for it earlier on. The F–22 program has met all calendar year

double 00 LRIP DAB performance criteria. One thing, though, that

concerns me, Mr. Chairman, is congressional action over the last

several years which has eroded because of uncertainty over continuation of the program and size of the program, eroded supplier

confidence.

[The prepared statement of Hon. Bob Barr follows:]

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Mr. BARR. I would like to ask Mr. Li, does superior uncertainty

add to overall production cost?

Mr. LI. I understand that the Air Force has identified that. I

have not looked at that particular issue to verify that was the case.

I would need to talk to the individual subcontractors that were involved and to identify whether or not that was indeed the case. But

I do understand that the Air Force has raised that as an issue, sir.

Mr. BARR. Thank you. I would appreciate that.

Mr. Li, with the majority of the development program now complete, should the remaining effort principally involving testing

move on to the testing phase?

Ms. LI. When we are talking about the engineering, manufacturing and development phase of the program, our position has been

that as of our last report which we issued last March, which was

before some of the progress that you mentioned today, sir, our position has been that a lot of testing still needed to be performed, and

that was the reason why we had made the recommendation that,

because of the uncertainty with regards to how the testing was

going—if it was going to be completed in time, we recommended

not to accelerate production.

However, in direct response to your question, sir, I believe that

the remainder of the time that is associated with the engineering,

manufacturing and development program is indeed for testing, and

I would support that testing being completed.

Mr. BARR. With regard to the significant cost investment that

both the government and Lockheed Martin has had to put into

place at their facility in Marietta, GA, to conduct the assembly,

would moving that assembly to any other location involve substantial cost both to the government and to Lockheed Martin?

Mr. LI. I have not looked at that particular issue. I do understand that discussions have been going on with regards to the possibility of either moving facilities or building. The facility currently

at Martin Marietta that they are utilizing is a government-owned— part of it is a government-owned facility.

Mr. BARR. Would not common sense tell you, though, that if

there has been significant investment at a facility, in this case Air

Force plant No. 7 at the Lockheed Martin facility in Marietta, in

order to get to the point where the aircraft can be assembled there,

and is there being assembled, to pick all of that up and have to invest, make that investment elsewhere would involve necessarily

additional cost; would it not?

Mr. LI. Yes. That is a very good point. That would be one of the

factors that Lockheed and the Air Force would have to consider.

Mr. BARR. Thank you.

Mr. SHAYS. At this time, I would recognize Mr. Kucinich. We are

going to do 5 minutes and then allow a longer time for the second

time if we need it.

Mr. KUCINICH. I thank the Chair.

To Mr. Li. You indicated in your report that the under Secretary

of Defense cost estimate, the Pentagon will be forced to cut 85 more

aircraft. How many airplanes do you expect will be acquired in this

program? About 248.

Mr. LI. The statement that we are making was to try to put a

sense of magnitude as to what would happen if the Office of the

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Secretary’s estimate was proven to be accurate and true. In other

words, in the current cost limitation and the current plans, the Air

Force currently plans to procure 333 aircraft. What we are saying,

sir, was, if the higher estimate was proven to be true, and they

could not develop any additional cost reductions, they would be— in essence—only be able to buy 200 something—85 less. That was

our analysis.

Mr. KUCINICH. How many were originally envisioned?

Mr. LI. Over 700.

Mr. KUCINICH. And some cost estimates were $40 billion for

project development; is that right?

Mr. LI. Yes.

Mr. KUCINICH. What is the current total under the Secretary of

Defense estimate?

Mr. LI. The engineering, manufacturing, development congres- sional cost cap is around $20 billion, and the current production

cost cap is at $37.6.

Mr. KUCINICH. Isn’t it closer to $46 billion plus another $19 bil- lion or so for development equals about $66 billion?

Mr. LI. If you take those new—the other estimates into account.

Mr. Murphy, do you have anything?

Mr. KUCINICH. That is satisfactory actually.

So that the number of planes keep dwindling, and the cost keeps

escalating. Do you have the ability to project out at least those

rates?

Mr. LI. Excuse me?

Mr. KUCINICH. Do you have the ability to project out at these

rates the increase—cost escalating, the means guidelines; have you

tracked the rate of decline for the number of aircraft and the rate

of increase for cost so you estimate where we might be in 2 years

or 3 years according to these trends?

Mr. LI. We have not.

Mr. KUCINICH. You know, can you see something in the future where we have like one plane for, you know, $1 trillion?

Mr. LI. I know, Mr. Augustine has indicated that with his theory,

that soon we will only be able to buy one weapons systems for the

billions of dollars investment. I don’t have that projection, sir.

Mr. KUCINICH. That is what I was wondering. Can you do that

projection?

Mr. LI. I think it would depend upon the particular weapons systems itself.

Mr. KUCINICH. What about the average age of aircraft? Even if

the Air Force procures all of the F–22s it wants as well as all of

the Joint Strike Fighters, for that matter, won’t the current planes

leave our fleet even older, sir?

Mr. LI. Absolutely, sir. We issued a report on this same subject,

on the problem of aging aircrafts, and we did indicate that for the

tactical fleet, using the current plans for modernization, that indeed, that after all is done, the average age of the Air Force fleet

would be higher than what it was before its modernization started.

Mr. KUCINICH. Colonel Riccioni from the Project on Government

Reform and Oversight submitted a report today that criticizes the

Pentagon’s aircraft procurement program. He cites exactly these

kinds of cost and age problems. Essentially he finds, as a fighter

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pilot himself, that the Pentagon is engaged in what he calls a

course of unilateral disarmament.

What do you think? Could you comment on that?

Mr. LI. I wouldn’t go that far. I do think that it is of concern that

individual aircraft programs that we have right now for modernization may not reach those particular goals in terms of allowing DOD

to have the average age of aircraft that it currently enjoys.

Obviously there are a lot of other factors, too, beside that age

that come into play in terms of capabilities, that Mr. Barr was

talking about, the increased capabilities that the F–22, for example, would have. So many other factors would have to be—— Mr. KUCINICH. One final question before we go back. By permitting the reduction of the number of planes, does this actually reward cost overruns and put the burden for overruns on the taxpayers, not the contractors, rewarding inefficiencies, the taxpayers

get less for more money? They are the ones that have to suffer because they are promised X amount of planes and they get far less.

Doesn’t it seem like a game of bait and switch?

Mr. LI. Mr. Kucinich, I think that one of the problems that are

associated with weapons systems is the difficulty to project out and

to do cost estimating in the first place.

Mr. KUCINICH. I understand.

Mr. Chairman, as I go over this material, you know, I’m here on

behalf of people in my district who are taxpayers, and I have to tell

you I feel that people are really being cheated on this. They are

being cheated. They are being ripped off, and the national security

is suffering adversely. And part of these hearings, you know, we go

through these hearings, and I think in order for them to have the

kind of meaning which they are meant to have, I think it’s appropriate for us to call into accounting this rotten system, because it’s

very clear that the contractors are the last ones to lose, and the

taxpayers are the first ones to lose.

Thank you.

Mr. SHAYS. Thank you.

At this time, I recognize Mr. Tierney.

Mr. TIERNEY. Thank you.

Thank you, sir, for joining us. I’m going to ask that we put up

a slide, and maybe you can help me with some calculations.

See if we can get this done before we go down to vote on that.

He is going to give you a written copy of that because if your

eyes are as challenged as mine, on the wall, that won’t help you

too much.

Now, supposedly the congressional cost cap currently stands at $37.6 billion?

Mr. LI. That’s correct.

Mr. TIERNEY. In your report you said that both the Air Force and

the Office of the Secretary came up with estimates that exceed that

cap.

Mr. LI. That is correct.

Mr. TIERNEY. They were $39.6 billion and $46.9 billion; is that

correct?

Mr. LI. That’s correct, sir.

Mr. TIERNEY. On the issue of production cost reduction plans,

PCRPs, my argument is that these savings are somehow not reVerDate 11-MAY-2000 09:26 Oct 02, 2002 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 C:\DOCS\81595.TXT HGOVREF1 PsN: HGOVREF1
29

turned to the government, so they must be compensating for cost

overruns in other areas. I’m trying to determine now how much

those costs have escalated, and that is what this chart is all about.

We asked the staff to help us with some tallying.

First, we can determine how much money is saved through those

so-called PCRPs, the production cost reduction plans. On page 8 of

your report you stated that some PCRPs have been implemented,

and others have not. You provided the amounts for those that are

not yet implemented, which I listed on the chart, at $7.6 million

under the Air Force estimate and $5.3 billion—sorry, $7.6 billion under the Air Force estimate, and $5.3 billion under the OSD; is

that right?

Mr. LI. That’s correct.

Mr. TIERNEY. Your report did not list amounts for PCRPs that

are already implemented, but during a meeting yesterday the staff

asked the Air Force about this. The Air Force said that 87 percent

of the contractors’ projections are already implemented. So, accord- ing to your report, the contractors predicted $13.7 billion in reductions; is that right?

Mr. LI. Yes. When we did our work, we tried to make that breakout of what was the effect of those PCRPs that were already implemented within the cost baseline, and they were unable to do so

when we asked them.

Mr. TIERNEY. So they have $13.7 billion in reductions, and they

say 87 percent of the contractors’ projections are already implemented. This apparently means that the Air Force has already implemented $11.9 billion worth of production cost reduction plans.

Does that generally meet your calculations?

Mr. LI. Yes.

Mr. TIERNEY. So if you add the PCRPs that have already been implemented to those that have not, that comes to around $191⁄2

billion, as the chart indicates. When you add these to the Air Force

estimate, you get about $59.1 billion, right?

Mr. LI. Yes.

Mr. TIERNEY. So the bottom line is that this amount somehow exceeds the congressional cost cap by $21.5 billion. And my question

is, where did it go?

Mr. LI. The cost to the contractor and to both Lockheed and to

Pratt & Whitney, from your chart it is correct to say that had there

been no PCRPs, it would have come in at this amount, but because

of the cost reductions that both contractors have implemented, we

are able to bring it in closer to the cap.

Mr. TIERNEY. But, I mean, somewhere in that F–22 program,

costs are escalating pretty fast. You are saving at the end, and you

are still spending all of this money. I mean, costs are going up like

wildfire somewhere else?

Mr. LI. That’s correct.

Mr. TIERNEY. So you look at the estimate by the Secretary of Defense, their bottom line is even higher.

Mr. LI. Yes.

Mr. TIERNEY. They say under their analysis it could potentially

be $26 billion. I find it a little hard to believe that somewhere in

a $37 billion program, costs could have escalated by as much as

$26 billion. That appears to be what they are saying.

30

Do you have any idea where in the program costs have gotten

so out of control?

Mr. LI. No. That is one part of the analysis that we did not do.

I think that would probably be a more appropriate question to ask

the Air Force in terms of what happened to those particular costs.

Mr. TIERNEY. I think your efforts have been commendable, but

it seems like you are put in the position of always doing it after

the fact. Every time the program goes over by another billion dollars, you go—point that out, they go out and try to find $1 billion

in efficiencies, but never really address the inefficiencies that seem

to be growing.

So my concern is that they haven’t really been accrually predicting the underlying costs to begin with, and they are not being realistic about how these costs rise over time. That is different than

in compensating them after the fact. So I think if we can presume

the program has already implemented the easiest efficiencies, it

will be the low-hanging fruit, so to speak, what is going to happen

in the future when there are fewer efficiencies to find, but the costs

continue to escalate somewhere else?

Mr. LI. That obviously is a concern. But, I know that with the

cost pressures associated with the program, both Lockheed, Pratt

& Whitney and the Air Force are working hard at trying to come

up with cost reductions that will enable them to meet that cap.

You are right in terms of trying to—in terms of the low-lying

fruit, that they have—it is more challenging, obviously, as the program goes along to find cost reductions.

Mr. TIERNEY. I just close with the fact that the Air Force apparently is deeply committed to the President’s faith-based programs,

but we are losing faith.

Thank you.

Mr. SHAYS. Which cost estimates, Mr. Li, do you consider more

accurate, the Air Force or the Office of the Secretary of Defense?

Mr. LI. As I indicated in my short statement, I think that it is

very difficult to be able to pinpoint which one is more accurate. I

think what I can say is that in terms of program projections that

have been made in the past, the ones that have been the lowest

have been the least accurate, and that in this particular case, OSD

has made a lot of projections that have proven to be closer to the

truth.

That said, I think before I could make an assessment as to which

one is more accurate, I would have to look at more of the individual

details associated with how they did their analysis.

In terms of the Office of the Secretary, I believe that I would

have to go into greater detail into how they made their projections,

how they did their methodology to project those savings.

Mr. SHAYS. Could you explain the production cost discrepancy between the two estimates?

Mr. LI. We found that the differences are primarily—and this is

a big amount of—the biggest chunk was in the estimate of labor

costs associated with the subcontractors. There were costs also associated—of $1.2 billions—associated with engine cost that was a

difference in the estimate; also $1 billion in terms of the production

cost reduction plans, and also $800 million difference in terms of

31

what the Air Force’s plans for—relating to productivity investments.

Mr. SHAYS. What would you say the significance of the production cost estimates discrepancy is? What is the significance? What

should we take from these two different estimates?

Mr. LI. Those are two very respectable cost estimating groups. I

have a lot of respect for both of them. I think obviously people can

disagree, but it also points out to me, Mr. Chairman, that the uncertainty associated with some of them still puts it into question.

As to your initial question as to which one is more accurate, it— there are some differences of opinion there that underlie the fact

that there is uncertainty.

Mr. SHAYS. OK. We have 7 minutes left to vote. Let me just ask

this question.

We are actually going to come back. Let me just ask this last

question and ask you to stay.

What would be gained by providing detailed production cost reduction plans status reports to the Office of the Secretary of Defense, OSD?

Mr. LI. I think it would be very helpful to both the Congress and

obviously to myself if I was asked to continue monitoring this program.

I think that an example would be, the question that Mr. Tierney

just put up there, in terms of he was saying there was no ability

to identify what was the true impact of when they interpreted the

baseline, what is the amount associated with what has already

been implemented, and you—they never identified that. If I had

that number, it would help me. So that is an example.

Mr. SHAYS. OK. What we’ll do is we’ll come back, and we’ll go

back to Mr. Barr if he has more questions. Thank you.

I think we have one vote, a Journal. I have this concern that

there may be a procedural—a motion to adjourn, so we may be a

little longer, but we’ll keep you informed. Thank you.

[Recess.]

Mr. SHAYS. I’ll call this hearing to order.

Mr. Li, I’d like you to explain to me what information you would

like to get that you aren’t getting, and I’d like to explain why

you’re not getting that information. And what is the—first off, is

there some information that you are not getting? Is there some information that you’re not getting from the Department of Defense?

So they are basically saying they won’t—the Department of Defense—and who in particular is saying they will not provide information to you?

Mr. LI. Let me give you some background on that particular set

of circumstances. To respond to your request that we update last

year’s report, what we said before to do was to identify what were

the latest cost estimates from both the Air Force and the Office of

the Secretary. The specific organization that you’re asking me to

identify is the CAIG, C-A-I-G, the Cost Assessment Estimating

Group. And that particular group, we asked them in writing to provide us with some information. They identified to us that information was predecisional and could not be provided at that point in

time, Mr. Chairman. In trying to answer the question that you had

in terms of what the estimates were, I found an alternative source

32

that identified what that top number was. I took that number, and

I went back to the Office of the Secretary, because I wanted to corroborate and to say, is this indeed the number that the Office of

the Secretary had identified? And they confirmed that. So for the

purposes of my work, I was able to complete my work in the report.

Had you asked me to provide additional details on assessing such

things as the accuracy, I would have to start at the point of perhaps doing a greater sample of the PCRPs, something similar to

what the DCAA did in terms of looking at the methodologies involved in each one and the reasonableness of the rates. I would

need greater information from that standpoint, and I did not have

that information to do that.

Mr. SHAYS. Is the information that you requested, was that made

available under the previous administration?

Mr. LI. We did not do this type of work on the F–22, so we did

not—I can’t comment on that.

Mr. SHAYS. And the justification for not providing it being

predecisional is that they were not basically going to acknowledge

that they had come to a conclusion or that—in other words, let me

understand. Is predecisional meaning that there is evaluation,

judgment that had not been made, or was there raw data that you

wanted? Do you see the difference?

Mr. LI. Yes, I wanted the raw data. I did—was not looking for

the decision. It is DOD’s position, however, that the information

that I was requesting was not yet acted on by the highest levels

which would in essence, the Defense Acquisition Board, and that

information was performed at their request for them. And their position was since it had not been acted on, I could not get access to

it.

Mr. SHAYS. And when did they say it would be ‘‘acted on?’’

Mr. LI. They did not identify that.

Mr. SHAYS. So they didn’t say give us 2 weeks?

Mr. LI. I’m sorry. I’d like for Mr. Springman to add something.

Mr. SPRINGMAN. If I might interject.

Mr. SHAYS. Is your mic on, Mr. Springman?

Mr. SPRINGMAN. I believe so.

Mr. SHAYS. Tap the mic just so I have confidence. Thank you.

Mr. SPRINGMAN. They did indicate that after the DAB was completed, that ‘‘the cost estimate remains predecisional until the

DAB’’ are their exact words.

Mr. SHAYS. Until the what?

Mr. SPRINGMAN. Until the Defense Acquisition Board meeting,

the upcoming Defense Acquisition Board.

Mr. SHAYS. Did they say when that board would be meeting?

Mr. SPRINGMAN. At this time the letter back from them was

dated March 28th. At that point I don’t remember what date the

DAB was actually scheduled for, but it is currently scheduled, as

I understand, for——

Mr. SHAYS. So even if you wanted this information today, you

wouldn’t get it; is that what you’re saying?

Mr. LI. That’s correct. The board is not scheduled to meet, as Mr.

Springman said, until August 14th.

Mr. SPRINGMAN. August 14th.

33

Mr. LI. And that would be the earliest time at which they would

provide that information.

Mr. SHAYS. Mr. Kucinich.

Mr. KUCINICH. I would like to review with Mr. Li, if I may, some

questions regarding cost control measures. Can you tell us about

this new category of production cost reduction measures called

challenge measures? What are they exactly?

Mr. LI. Challenge plans are those that are not yet well defined,

and they are different from those that are not yet implemented because of the lack of firm definition. In our report that we’re releasing today, Mr. Kucinich, we actually have a diagram on page 6 that

gives you a pictorial with regards to the progression, and it shows

that—it gives you an example that—for example, if—for a challenge plan currently that is being identified is being characterized

as the potential cost reductions by buying rather than making selected components. While there is a dollar value added to that, it

is not very specific, and I wanted to contrast how each one gets better defined as you go along.

Mr. KUCINICH. I appreciate that. I had the chance to review it,

but I’m wondering if contractors haven’t fully developed their ideas

about these challenge measures, how in the world can they estimate the amount they hope to save by implementing them? In

other words, on page 5 of the report.

Mr. LI. I can’t address specifically and I can’t answer for the

contractor—— Mr. KUCINICH. Well, I just wonder if you go to page 5, where do contractors get that $4.2 billion?

Mr. LI. I did not go into seeing how they estimate it. However,

I do want to add, sir, that both the Air Force and the CAIG did

not consider challenge PCRPs when they did their estimates.

Mr. KUCINICH. Now, the Air Force has argued on occasion that

cost increases are really Congress’ fault. They say contractors suffer from uncertainty about the government’s commitment to the

program and that this causes cost to increase. Specifically they say

contractor prices have gone up, because there has been no production decision. Let me ask you, when the Air Force originally went

to these contractors for estimates, they didn’t have a production decision then, did they?

Mr. LI. No.

Mr. KUCINICH. And they don’t have one now either, do they?

Mr. LI. No.

Mr. KUCINICH. So are things really that different?

Mr. LI. I will ask Mr. Murphy to answer, give you some more

specifics, but this is the same point that Mr. Barr brought up earlier. I think the subcontractor—the Air Force has identified the fact

that the lack of certainty associated with making the production

decision has—that delay has, according to them, caused some concern and perhaps been viewed as a lack of commitment on the part

of the government.

Mr. KUCINICH. So if I may, contractors could argue that they feel

uncertain because a production decision was postponed at the beginning -.

Mr. LI. That’s right.

Mr. KUCINICH [continuing]. Of the year? Have you heard that?

34

Mr. LI. Yes. I have heard that from the Air Force.

Mr. KUCINICH. But as you stated on page 7 of your report, the

estimates you cited in your report were from December of last year.

Isn’t that right?

Mr. LI. That’s correct.

Mr. KUCINICH. So that argument doesn’t explain how these new

estimates increased, does it?

Mr. LI. No, no.

Mr. KUCINICH. Now, even assuming that there’s something to

this contractor uncertainty argument, how does it work in practice?

I mean, 1 year the contractor provides detailed cost estimates to

the Air Force. The next year the contractor says, you know, I’m not

sure about the commitment to this program. So my price just went

up by 50 percent. Now, does the Air Force really accept that kind

of justification when dealing with contractors?

Mr. MURPHY. They have mentioned this several times. I think as

I see it, it is a generalization that they’ve made. If there’s some

data that they have put together that shows how the subcontractors are reacting to the current continued extension of a production

decision, we haven’t seen any data that would support that statement.

Mr. KUCINICH. Mr. Li, just I want to take this in a different direction for a moment. I just want to take this in a different direction for a moment.

You know, I read your report and am grateful for the work of JO

on this, but if you were a Member of Congress, how in the world

would you explain to your constituents why they keep paying more

and getting less?

Mr. LI. This goes back to my point about not being able to do

good cost estimates in the first place. I think that, perhaps, they

were too optimistic in identifying what those iterational costs were.

Mr. Kucinich, I’m also associated with reviewing all of NASA’s programs, and very similar types of issues have come up with regards

to the space station, and a lot of people are saying that—how do

I explain to my constituent it is fact that the program is getting

more expensive and the content is getting less?

Mr. KUCINICH. Well, if I may, though, you know, just to respond

and then to yield back to the Chair, there is a critical difference

here. We accept NASA as an incubator of new technologies and the

price of developing alpha technologies is something that the government has long been ready to absorb. We don’t accept the role

of contractors in propelling costs of any material. We don’t accept

that. And it is not up to them to make that decision, because that

is really done apart from the government. NASA is an internal program, in the sense of some of the cost increases have been anticipated. But for the first time we are beginning to scrutinize some

of these weapons systems, where, you know, the taxpayer isn’t

ready to give the Department of Defense a blank check on anything.

Mr. LI. My parallel was not to try to say that there is some parallel in terms of the mission of either. My only reason for bringing

this up was to say that the issue of cost estimating is very difficult

and other agencies besides DOD are trying to tackle this issue.

35

Mr. KUCINICH. All right. I appreciate the gentleman’s comments.

Mr. Chairman, thank you so much.

Mr. SHAYS. Thank you. Mr. Otter, do you have any questions

you’d like to ask?

Mr. OTTER. I do, Mr. Chairman.

Mr. SHAYS. You’ve got the floor.

Mr. OTTER. Thank you. My apologies to the panel for being late.

It’s been kind of an exciting morning after a long night. It sounds

like I ought to be back in Idaho at the Shorty’s Country Western

Lounge, but unfortunately that isn’t where it was.

You know, as a citizen and as a businessman for years and years

and years, I always heard of these horror stories of cost overruns

in the Defense Department and it was always made a big deal for

one reason or another. If you didn’t like the Defense Department,

you made a big deal out of how inadequate they were at leadership

in managing their own operation. But it seems to me that we continue to kind of aggravate the whole concept. And I guess maybe

our mechanical and out aviation technology is outrunning our technology on accounting, because we haven’t been able to develop a

system that says, this is what our expectations of the costs are, and

this is what they’re going to be.

Now, for 30 years when I worked in the private sector, if I were

going to build a potato french fry plant—and my apologies again,

Mr. Chairman, for this constant use of this analogy. But I went out

to many contractors. I went out to the contractors that were going

to pour the concrete and put the beams up who were different contractors, and then of course all the equipment that went through

the plant, so that I could send a potato in one end, and in exactly

22 minutes I had a french fry for McDonald’s coming out the other

end.

Mr. SHAYS. Can we just state for the record that this process

made him a very wealthy man?

Mr. OTTER. I don’t think I could buy one of these airplanes,

though. Anyway, one of the things that generally—about the only

thing that we could accept is when our engineers would come running back in to us and they’d say, Butch, we’ve got a problem here,

and the problem is that we underestimated the cost of the cutter

deck, and so instead of buying seven cutter decks, we really only

have the budget in place to buy five. I go back to Milestone, who

happened to be the company that makes the cutter decks, and I

say, you know, that template that you just made, now you were

prepared to amortize that template over seven cutter decks, but

now you can only do it in five. And they’d say, well, you know

what’s going to have to happen. Each cutter deck has got to go up

in price in order for us to get the amortization that—and the full

economic utility out of the template that we were going to use.

I’m reminded of that only because in the short time I’ve been

here I’ve seen how fickle and how indecisive sometimes those who

benefit from congressional decisions and how tenuous, I think,

their position can be. And I’ll tell you, if—and I’m not laying this

totally to blame for that, but I do know that your unit cost is going

to go up considerably if you’re not going to build very many units.

Henry Ford figured that out 100 years ago. I don’t know why we

can’t figure that out ourselves. But I would just ask you to be as

36

gentle as possible on myself and my colleagues, Mr. Li, and is

sometimes the go, no-go decision period for us of Congress where

we say we’re going to cut the program or not going to cut the program, does that have an obvious effect on the contractors and the

subcontractors, in terms of where they think they’re going to have

to go to get the economic recovery back out of the equipment—the

equipment that they have to build that is uniquely for a specific

piece of defensive equipment, like the F–22?

Mr. LI. I think that I understand the point that you’re making.

Where I come from is I’d like to think that I’m advising the Congress, I’m looking out for the interests of the Congress and the taxpayer, and the issue here is, yes, the contractors have that particular concern, but we as taxpayers should have confidence that whatever we’re being sold that we can afford and can meet the requirements that have been established. Many times the confidence in

both the affordability and in the ability to meet the requirements

have not been established yet, and, therefore, I don’t think it is

prudent to make a financial commitment to something where you

don’t have that confidence.

Mr. OTTER. That I understand, Mr. Li. But I think we ought to

have at least somewhere in all these buildings, some institutional

memory, and that institutional memory should maybe lead us to

believe that in our bid and acquisition process, we say, well, what

if—you know, before this has happened on another piece of equipment, instead of 35, what if we only buy 20, and what if we buy

15, and what if we buy 12, so that we’ve got some sort of a predetermined course of action and an expectation that if in fact we

do decide we can’t buy as many as we thought or for some reason

somebody decides in the Pentagon that this isn’t going to be able

to fulfill and execute the mission that we had hoped it would, and

so we don’t need as many as we thought we did. But it seems to

me that this has gone on for a long, long, long time, and—the cost

overrun, I mean. And there has got to be some core reason for that

to happen, and the only thing—the common denominator that I can

look at is indecision, and many times in indecision, we make a decision. And that inability of us to make a decision or go forward with

a commitment, you know, we want 35, no, we want 20, well, maybe

we’ll take 27, that can cause us a lot of problems. And it just seems

to me that we would prepare the environment for being unsatisfied

by saying, if you don’t go full force with this, if you don’t take the

35 that you said so that we can get a cost unit amortization out

of this equipment that you need to the construction of this piece

of armor, that your cost per unit has got to go up.

Mr. LI. I understand. The only caution I would add, sir, that by

almost acknowledging the fact that you might have reduced quantities reduces the leverage that the government has in terms of trying to get the contractor to sharpen his or her pencil.

Mr. OTTER. I hear that, but is your way working now?

Mr. LI. It’s not my way, sir. It’s the—— Mr. OTTER. Is the way that we’re employing now working?

Mr. LI. I would say no.

Mr. OTTER. OK. Thank you, Mr. Chairman.

Mr. SHAYS. I thank the gentlemen. Bottom line, I have the feeling that you probably will be staying to hear the testimony.

37

Mr. LI. I will.

Mr. SHAYS. And you’ll get your information any way you can get

it, right?

OK. So we may ask you to comment on what you’ve heard. And

at this time we thank this panel and we’ll go to the next.

At this time we would call and ask them to remain standing Ms.

Darleen A. Druyun, Principal Deputy Assistant Secretary of the Air

Force Acquisition and Management Department of Defense; Dr.

George Schneiter, Director of Strategic and Tactical Systems, Department of Defense; Mr. Francis P. Summers, Regional Director of

Defense Contract Audit Agency, Department of Defense. What we’ll

do is we’ll swear you in.

[Witnesses sworn.]

Mr. SHAYS. Note for the record that our witnesses responded in

the affirmative.

And if we could proceed on the basis of how I called you. So Ms.

Druyun, you will go first and then Mr. Schneiter and then Mr.

Summers. We’ll help you in this process. We will have 5 minutes,

and we’ll wait to show it red for you just a little bit and then we’ll

roll it to another 5 minutes. So you have basically 10 minutes at

the very max, each of you. So we’ll go that way. OK?

STATEMENTS OF DARLEEN A. DRUYUN, PRINCIPAL DEPUTY

ASSISTANT SECRETARY OF THE AIR FORCE, ACQUISITION

AND MANAGEMENT, DEPARTMENT OF THE AIR FORCE, DEPARTMENT OF DEFENSE; DR. GEORGE SCHNEITER, DIRECTOR OF STRATEGIC AND TACTICAL SYSTEMS, DEPARTMENT

OF THE AIR FORCE, DEPARTMENT OF DEFENSE; AND

FRANCIS P. SUMMERS, REGIONAL DIRECTOR, DEFENSE

CONTRACT AUDIT AGENCY, DEPARTMENT OF DEFENSE

Mr. DRUYUN. Thank you, Mr. Chairman, and members of the

committee for the opportunity to appear before you to discuss the

Air Force’s F–22 program and the cost controls we’ve implemented

to deliver an affordable program.

I’ve been involved in the program for many years. During that

time congressional caps in production were established, and production cost reduction plans were developed in response to the Air

Force and congressional goal to deliver 339 aircraft within a mandated production program cap. Therefore, I am able to describe the

underlying philosophy of PCRPs that are being implemented to

meet program affordability goals and assess progress in meeting

the original affordability strategy objectives. The F–22 team remains absolutely dedicated to the objective to deliver 339 production aircraft to the war fighter at an affordable cost.

In order to achieve that objective, we continue to define and implement effective cost reduction initiatives. These initiatives have

become known as the F–22 production cost reduction plans to drive

down aircraft costs over the life of the production program. This

will ensure we can deliver the revolutionary F–22 to guarantee air

superiority well into the 21st century.

Today I’d like to discuss the status of our PCRPs and the realism

of our projected savings. I will summarize the historical changes in

production quantities as a key factor affecting average production

unit costs. Next I will describe changes in the production program

38

acquisition strategy mandated by changes in funding, appropriations and delays in the LRIP decision. I will also describe the production cost estimates that were prepared for a scheduled DAB in

December 2000. In addition, I will summarize the elements of accounting for production costs with flyaway cost as the preferred

method to report the production costs.

Finally, the results of PCRPs through Lot 1 will provide evidence

of results to date, and PCRP cost savings and the metric used to

assess progress in meeting program affordability goals, which we’ve

set through the target price commitment curve.

In 1985, at the beginning of the Advanced Tactical Fighter demo

program, the Air Force planned to procure 750 aircraft at a rate

of 72 aircraft per year, between 1992 and 2005. The 1997 QDR established the current F–22 production baseline and represents a 48

percent reduction in production quantity since the start of the F– 22 EMD. The reduced quantity in production rates have been the

dominant factors in increased F–22 production unit costs. Changing a total procurement of 750 aircraft at a rate of 72 aircraft per

year to 339 aircraft at a rate of 36 aircraft per year results in about

a 66 percent increase in the aircraft cost when calculated in base

year 2000 dollars.

Simply stated, the average aircraft cost is higher, because fewer

aircraft are being produced.

When I was before this committee last year, the original LRIP

DAB had slipped from December 1999 to December 2000 in response to constraints established in the fiscal year 2000 Defense

Appropriation Act. As a result, we were planning on the LRIP DAB

for December 2000. The LRIP DAB would authorize full funding of

10 Lot 1 aircraft and advance buy for 16 F–22 aircraft. The LRIP

DAB was delayed pending completion of two exit criteria and all

of those criteria were completed the first week of February.

Because a defense strategic review had been initiated, the new

Secretary of Defense elected to delay the LRIP decision. To avoid

a break in production resulting from a delayed LRIP decision, Congress approved reprogramming the funds necessary to extend the

Lot 1 advance by contract period of performance through September of this year.

Congress and the DOD have worked together to fund the F–22

production. However, the F–22 contractor industrial base, about

1,150 contractors total, have informed us that the greatest threat

to meeting production program affordability goals has been the delayed LRIP decision. This lack of program commitment is perceived

as a serious risk in the procurement of 339 aircraft and the 777

engines required for those airplanes.

Unfortunately, risk in business base and future business computations realistically translates into higher individual lot prices.

An LRIP decision will greatly benefit the program by reaffirming

DOD’s commitment to current and future program execution. The

fiscal year 1998 Defense Authorization Act established a $43 billion

cost cap in the F–22 production program. The Secretary of the Air

Force on an annual basis notifies Congress of adjustments to the

caps for inflation and any changes in law. The current production

cap is $37.6 billion for 333 airplanes. These changes resulted from

the fiscal year 2000 Defense Appropriation Act, which funded the

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six PRTV II aircraft with RDT&E funds, and also due to reductions

in inflation. The inflation adjustments amount to about $3.9 billion.

The cap reduction of $1.5 billion created from the transfer of the

six aircraft from procurement money into R&D money was budget

neutral, but obviously it affected the total production cap, which

today is approximately $37.6 billion.

In preparation for the LRIP DAB, the Air Force and DOD completed production cost estimates in November 2000. The estimate

focused on the annual production funding requirements and total

production program costs. The December 2000 Air Force estimate

for the F–22 production program of 333 aircraft was $2 billion

above the current production cap established by the Congress. The

OSD estimate was approximately $9.1 billion above the current

production cap.

But those estimates indicating a higher probability the program

would exceed the production cost cap, the Air Force developed a revised F–22 acquisition plan to fund additional cost reduction initiatives. The Air Force believes that additional investments in cost reduction will be effective in helping to reduce the total production

program cost for the 333 airplanes. A revised act plan has been formulated by the Air Force and presented to the Office of the Secretary of Defense, which is currently under review by the

SECDEF’s organization. The PCRP program is reducing the

flyaway cost for the F–22 program. The flyaway cost has decreased

the first two airplanes we bought on the Lot 1 was approximately

$318 million a piece. The next six airplanes we bought were approximately $231 million a piece. And the first Lot 1 airplanes

were further reduced to $199 million a piece.

Cost control and affordability are critical focus priorities for the

F–22 team. In June 1996, I think all of you were aware of the fact

that a Joint Estimating Team was established. When the JET presented their findings in 1997, the initial estimate for the F–22 production of 339 aircraft, without benefit of cost reduction initiatives

to really lean out the production line and become efficient, was $61

billion. Leveraging the recommendations made at that time to reduce production costs and lean out the manufacturing line following the principles from the Massachusetts Institute of Technology

published report, the Air Force and contractor teams initiated a

very comprehensive cost reduction program back then. The initial

PCRPs that were established included initiatives in areas of

producibility, process changes, adoption of new manufacturing techniques and implementation of acquisition reform. The results of the

PCRPs are reviewed on a monthly basis by the Service Acquisition

Executive and at least on a quarterly basis with the OSD staff and

the Defense Acquisition Executive.

During the most recent DAE review, the Air Force estimated

total value of PCRPs to be $21.5 billion for the airframe vehicle

and for the engine about $4.8 billion. The F–22 program has built

an efficient management structure to jointly oversee the development and, more importantly, the implementation of these projects.

The management effort includes an online interactive data base for

real-time reporting of the status of these PCRPs, spanning ideas

from the very inception to the actual implementation.

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We agree with the GAO assessment that approximately one-half

of the then-year savings for both the airframe and the engine are

in the production cost baseline, and the remaining PCRPs as they

are actually implemented won’t be incorporated into the future production lots.

The F–22 program does enjoy extensive oversight in evaluating

cost performance and has established a standard methodology to

assess cost performance based on several tenets. The first tenet is

a methodology to establish a baseline and then measure cost reductions to that baseline.

Mr. SHAYS. Let me just interrupt for a second. How much longer

do you think you have?

Ms. DRUYUN. I probably have, sir, about 5 more minutes, and it

really kind of gives you the summary of what was in my detailed

statement for the record.

Mr. SHAYS. Why don’t we let you proceed?

Ms. DRUYUN. Thank you.

The second tenet is to update the estimate annually with the actually cost data from the current and prior production lots, and our

third tenet is to leverage actual cost data as the primary method

to validate the cost estimates. And that process is part of the ongoing Air Force and OSD review of the F–22 program.

The PCRPs for the air vehicle contract that became effective with

Lot 1 totaled about $1.2 billion in savings or cost avoidance. The

cost savings per engine was about $4.8 million per engine in Lot

1. The more significant element of the management process is the

formal procedures used in the evaluation, selection and implementation of cost savings ideas. The process and procedures are documented and a published joint procedure is used by Lockheed Martin, Boeing and the government team, and I can submit that for

the record.

The overall process is an iterative and a continuous process to go

through all of the projects that are actually being implemented and

then to go through the new ones as they are being recommended

and further details being attached with each one of them. The

Lockheed Martin and Boeing team implemented an on-line data

base to assist in managing the cost savings initiative program. The

management team assesses the status of cost savings that are coming from this and watches these very carefully on a monthly basis.

I personally review them, and the actual teams at the SPO look at

these as frequently as on a weekly basis.

The PCRP management and cost estimating process has been reviewed by the Defense Contract Audit Agency. DCAA reviewed the

methodologies for establishing the cost savings initiatives at Lockheed and the Boeing manufacturing sites. Their written assessments did not take exception with the contractor methodologies in

estimating production savings. The report also identified cases

where additional information was required to substantiate the contractor estimates, and I believe that you should get an update on

that today.

In addition to the DCAA audits, as I said before, I review these

on a monthly basis, and then on a quarterly basis we do review

this with the OSD staff. The process begins with the Air Force and

OSD working integrated product team reviews, which are conVerDate 11-MAY-2000 09:26 Oct 02, 2002 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 C:\DOCS\81595.TXT HGOVREF1 PsN: HGOVREF1
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ducted on a quarterly basis, and the data from those detailed reviews are basically summarized and presented to the defense acquisition executive.

I think a very good way to measure the effectiveness of our production cost reductions is in the target price curve that was put on

contract in the development contract. The target price curve is a

subset of the flyaway costs, and basically it captures all recurring

costs, which includes materiel as well as labor to produce the aircraft. It does not include nonrecurring costs, such as spares or auxiliary mission equipment, for example. The target price curve establishes unit price goals in the LRIP phase of this program.

The goals for PRTV through Lot 4 aircraft are designed to

achieve a rate of cost reduction adequate to achieve the necessary

starting point for cost reduction once we get into high rate production. And I would tell you that if you were to look today at the target price commitment cost performance for the first three lots of

airplanes that we currently have in contract today, you would find

that they are clearly within the 5 percent band that was established back in the 1997 timeframe. In the case of the engines, the

price for PRTV and PRTV II engines met the targets and Lot 1 engines were slightly under the specified TPC. Now, we laid this in

as an incentive. We felt this was very important, and we attached

about $150 million worth of funds associated with achieving that

to really get them on the right point to be able to achieve the average unit flyaway costs.

Through actions such as this, the program maintains an aggressive and flexible management style and a challenging task of meeting the production program affordability goals. I believe that we do

have a well-structured plan that is focused on pursuing cost savings initiatives. We do have I think a very good electronic data

base that has been established that provides real-time monitoring.

I was down Monday at the Fort Worth facility and went through

that data base again to see exactly what the latest status was. And

I would tell you that performance to date for the first three lots is

within the target price band established back in 1997.

Thank you for this opportunity to provide more information on

the results of F–22 affordability initiatives, and I look forward to

responding to your questions.

[The prepared statement of Mrs. Druyun follows:]

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Mr. SHAYS. Thank you. Dr. Schneiter.

Mr. SCHNEITER. Mr. Chairman, members of the committee, thank

you for the opportunity to discuss with you again the Department

of Defense efforts to control and monitor the cost of the F–22 aircraft program, particularly with regard to the PCRPs.

When I was here last year, I indicated that a program as technically challenging as the F–22 brings with it a challenge regarding

cost and schedule performance. I also noted this challenge has been

complicated by the congressional cost caps on the engineering and

manufacturing development and production. Let me first very briefly discuss program progress.

The F–22 program continues to demonstrate technical progress

that meets or exceeds the performance measures established for

the program. Progress in the past year, particularly in flight testing, was impeded by some delays in the delivery of engineering and

manufacturing development aircraft. More recently, however, in

the past 4 months the program has shown a significant increase in

flight testing tempo. We now have five flight test aircraft flying at

Edwards Air Force Base.

Also earlier this year, the program successfully completed the

exit criteria for the low-rate initial production milestone decision,

including demonstration of Block 3.0 avionics software.

However, as Ms. Druyun mentioned, the LRIP decision was postponed to permit the new administration to review the program, and

as you know, the Department has been conducting a comprehensive review of strategy and programs. We’re now ready to conduct

the LRIP review, and the Defense Acquisition Board will meet on

the program later this month.

Ms. Druyun has covered in some detail the PCRP process. I’ll

mention some of the things the Office of Secretary of Defense is

continuing to do regarding cost control on F–22. F–22 cost control

has been a key item for the Department for sometime. Following

the Defense Acquisition Executive’s review of the program in December 1998, he reiterated the importance of seeking to execute the

program within the cost caps and directed quarterly briefings to

him on the development in production cost status. We continue to

use these special quarterly reviews to examine cost and schedule

trends and track program progress.

I described last year that the OSD cost estimates in November

1998, December 1999 included assessments of the effects of the

PCRPs and broadly the estimates were prepared into steps: The recurring costs incurred to date on the engineering and manufacturing development units, including the actual costs which reflect

PCRPs that had been implemented to date, and then a separate estimate on the savings to be expected from the still unimplemented

PCRPs.

I’ll agree the PCRPs will have a significant effect on cost and are

well worth undertaking. This is not an issue. There are disagreements about the magnitude of the reductions to be achieved by the

PCRPs and about what cost experience to date implies for the future apart from the PCRPs. The repeated disagreements have had

to do with how rapidly the cost of purchased materials and subsystems will decline from the levels observed in EMD and in the

first lot of the production representative test vehicles.

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Both we and the Air Force have updated our cost estimates, and

four important events in the past year have influenced these estimates.

First, we have another year of actual costs that have been accrued on the aircraft being built. Second, the low-rate initial production decision was delayed. Third, the contractor’s fiscal year

2001 contract terms were negotiated. And fourth, the Air Force’s

planned cost savings program has been enlarged.

The first three of these increased the expected costs, and the last

was constructed to offset those costs. This year the actual costs

came in somewhat higher than the Air Force expected, and as a

consequence, they raised their aircraft production cost estimate

from $39.6 billion in November 1999 to $42 billion in November

2000.

Let me talk about the differences between the cost estimates between OSD and the Air Force, both of which are now above the

congressionally mandated production cost cap. The difference between the OSD and Air Force estimate, as has been stated here,

is $7.2 billion, and of that, $4.7 billion is the difference due to estimating the basic cost estimating process, which I mentioned includes PCRPs already implemented, and $2.5 billion due to differences in savings expected from PCRPs.

The Department considers F–22 costs very important. The Under

Secretary of Defense for Acquisition, Technology and Logistics and

the Secretary of the Air Force have personally been addressing this

issue as a high priority. The result of their review, as well as our

continuing review will be an input into the upcoming Defense Acquisition Board review. If the outcome of the DAB review is a decision to proceed with low-rate initial production, the Department

will comply with the current statute and send Congress the reasons

for proceeding with F–22 LRIP, the revised production plan for the

F–22, and the revised cost estimate for the remainder of EMD in

production.

Thank you very much.

[The prepared statement of Mr. Schneiter follows:]

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Mr. SHAYS. Thank you, Dr. Schneiter.

Mr. Summers.

Mr. SUMMERS. Mr. Chairman, members of the subcommittee—— Mr. SHAYS. Is your mic on?

Mr. SUMMERS. It’s on.

Mr. SHAYS. Just a little closer, please.

Mr. SUMMERS. All right.

Mr. Chairman, members of the subcommittee, as you requested,

I will describe the audit activities of the Defense Contract Audit

Agency [DCAA], as they relate to the production cost reduction

plans under the F–22 program. I am Francis Summers, Jr., Director of the Central Region of DCAA. The region is comprised of 13

field audit offices, geographically dispersed throughout the central

United States. One of these field offices is located at the Lockheed

Martin Aeronautics Co. Resident Office in Fort Worth, TX. This office is responsible for the audits of the Lockheed Martin Aeronautics Co., the prime contractor on the F–22 program.

Before I begin, I’d like to provide a brief background about

DCAA. DCAA is a separate agency of the Department of Defense

under the direction, authority and control of the Under Secretary

of Defense, Comptroller. The DCAA mission is to perform all necessary contractor audits for DOD and to provide accounting and financial advisory services regarding contracts and subcontracts to

all DOD components responsible for procurement and contract administration.

These services are provided in connection with the negotiation,

administration and settlement of contracts and subcontracts. As

Regional Director, I am responsible for the oversight of all facets

of contract audit operations and related support services of the

Central Region. This responsibility includes the quality of audit

and financial advisory services, technical support services and litigation support.

The F–22 program is performed by Lockheed Martin Aeronautics

Co. at its three major sites, Fort Worth, TX, Marietta, GA and

Palmdale, CA. Boeing Aircraft and Missiles Systems, Puget Sound,

WA is the major subcontractor to Lockheed Martin. The United

Technologies Corp., Pratt-Whitney, military engines division, East

Hartford, CT, provides the engines under a separate contract. Although my direct responsibility involves only the Lockheed Martin

portion of the F–22 program in Fort Worth, my testimony today addresses effort by DCAA at all three contractors as it relates to the

production cost reduction plans [PCRPs].

To date, we have performed discrete evaluations addressing 11

PCRPs, which cover about $425 million in projected savings. The

objective of these evaluations was to determine the reasonableness

of the objective savings by examining the estimating techniques,

assumptions and underlying evidential support. To put our effort

into perspective, we evaluate about 2 percent of the PCRP savings.

Overall, of the $425 million, we were unable to reach a conclusion

on about $71 million because the savings were based on

judgmental contractor estimates without sufficient evidential support. In addition, during our evaluation of the $425 million, the

contractor provided more current information, resulting in a reduction in the estimated savings of about $4 million.

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Our other involvement was significant PCRP cost savings that

occurred in late 1997 during evaluations of various F–22 proposals.

This PCRP related effort primarily involved performing procedures

requested by the Air Force, including verifying that the proposal

reflected the projected PCRP savings previously estimated by the

contractor. In general, we concluded that the contractor was including its estimated PCRP savings and applicable proposals.

As described, our involvement has been fairly limited to date as

we have only evaluated certain aspects of a limited number of

PCRPs.

Mr. Chairman and members of the subcommittee, this concludes

my statement, and I will answer any questions you may have.

Thank you.

[The prepared statement of Mr. Summers follows:]

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Mr. SHAYS. Thank you. At this time, the Chair would recognize

Mr. Barr for 5 minutes, rolled over to 10.

Mr. BARR. Thank you very much, Mr. Chairman. Ms. Druyun, it

is good to see you again. We appreciate you and the other witnesses being here today and I appreciate the chairman allowing me

to sit in as a member of the full committee on this hearing today.

Ms. Druyun, is it not true that there have been no overruns in

the production contract for the F–22 and that these production figures are simply estimates of what it might cost?

Mr. DRUYUN. Yes, sir. That is, I think, very true. The Air Force

believes that we’re still very early in the production program. To

date we have two what we call production representative test vehicle lots on contract. That is a total of 8 airplanes and we have another 10 on contract, which is a total of 18. And then we have a

long lead contract. We’re looking at costs that go out through the

year 2013. If you look at the target price commitment curve that

we set up back in 1997 to really focus in on where we need to be

in the learning curve to be able to achieve delivering 339 airplanes

within the cost cap established by the contractors, I would tell you

for PRTV I and II and for Lot 1 we are within the 5 percent band

and in some cases actually below the commitment curve that was

put on contract. And we also put some very specific incentives in

terms of money to the contractors.

The first set of investments were made by the contractors to try

to bring down the cost of these airplanes, and we further

incentivized a return on those investments if in fact they stayed

within those target price commitment curves. And the first 3 lots

show that we are currently, you know, within that area. I would

tell you for Lot 2 we have our own set of challenges. We’re in the

process of negotiating that, and we’re working very hard with the

primes, as well as with the suppliers to try to bring Lot 2 in within

that 5 percent band as well.

Mr. BARR. Thank you. With regard to the location where the aircraft is assembled, it’s currently assembled at the Lockheed Martin

plant, Air Force Plant No. 7 in Marietta, GA. Given the fact that

there has already been a very substantial, in the hundreds of millions of dollars, investment by Lockheed Martin and certainly by

the government, both directly and indirectly in building that infrastructure to accommodate the final assembly, would it be reasonable to expect that there will be substantial additional costs over

and above what we now see for this aircraft if that production—

if that assembly responsibility were to be picked up and moved to

another plant where they don’t have that infrastructure in place?

Mr. DRUYUN. Yes. I think that’s a very fair statement, sir. In

fact, it was about 2 years ago, perhaps 21⁄2 years ago that we did

actually go in and take a look at what it would cost the program

if we were to move the production facility final assembly to Fort

Worth, and our estimates ran, as I recall, somewhere in the range

of an additional $600 million to $1 billion cost; you know, the penalty that one would incur. But more importantly, it would be terribly disruptive to the program. I think if you were to go today and

look at the Marietta facility, they had made tremendous investments there, and they are building a lean production line, and, you

know, when you look at the training that has gone on with the peoVerDate 11-MAY-2000 09:26 Oct 02, 2002 Jkt 000000 PO 00000 Frm 00089 Fmt 6633 Sfmt 6633 C:\DOCS\81595.TXT HGOVREF1 PsN: HGOVREF1
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ple, if one were to try to make some decisions to change the final

assembly, it would have a very detrimental effect on the program

in terms of our ability to meet schedule and certainly our ability

to meet costs.

Mr. BARR. Thank you. Mr. Chairman, again, I appreciate your allowing me to be a part of this hearing, and I would urge the chairman, who I know is very concerned about costs and is certainly a

good steward of taxpayer money, to keep a continuing eye on these

rumors that we hear and we see from time to time some evidence

of. I think this would have a very, very—the Assistant Deputy Secretary of State has indicated will have very significant effect, both

monetarily and otherwise on the production of this aircraft.

Thank you, Mr. Chairman.

Mr. SHAYS. I thank the gentlemen.

At this time the Chair would recognize Mr. Otter.

He is curious to know if there will be any more potato analogies.

Mr. OTTER. Probably so. And let me apologize in advance for the

possibility of that.

Mr. SHAYS. For the record, this full committee and all future

variants, you will never need to apologize.

Mr. OTTER. Thank you.

Dr. Schneiter, you said in your statement that initially the challenges that the F–22 brings with it—in fact, your statement is the

F–22 brings with it a challenge regarding cost and scheduling performance. I also noted that this challenge has been complicated by

congressional cost caps on the engineering and manufacturing

phase, now $20.4 billion, and on the production phase, $37.6 billion

of the program.

How did Congress arrive at those caps? Surely it wasn’t congressional people. I mean, it wasn’t the Congressmen and women themselves that said they are going to put these caps on there. They

had to get information from someone to arrive at these caps.

Mr. SCHNEITER. Yes. And I believe those caps were based on the

then current estimates of the program costs for the development.

Mr. OTTER. And who made those at that time, those estimate

costs that the Congress relied upon to set the caps?

Mr. SCHNEITER. I believe the Air Force did. Right?

Mrs. DRUYUN. Yes, that’s correct. That was back in the 1997

timeframe.

Mr. OTTER. That was back in 1997?

Mrs. DRUYUN. Yes.

Mr. OTTER. I understand that.

How does the Department of Defense then arrive at the cost estimates; I mean, solely from the Air Force, or is there an independent body? Is there an independent accounting—is there some kind

of watchdog that says the Air Force may be a little too generous

here or may not be thinking about this and thinking about that?

Mr. SCHNEITER. We do that independently with this group called

Cost Improvement Analysis Group, which we called the CIG in

OSD. They make an estimate. In fact, at certain milestones they

are required, I believe by statute, to make a certain estimate of

what the costs will be, and do that independently.

Mr. OTTER. When these caps were set, was there oversight on

those caps? Did somebody get a chance to look at the Air Force’s

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caps and, say, suggestions for the caps and say, hey, we agree with

these, we disagree with these?

Mr. SCHNEITER. I don’t recall that OSD was asked for suggestions.

Mr. OTTER. Would it be a good idea if they did that?

Mr. SCHNEITER. I think that we would think so, yes.

Mr. OTTER. Would there be some capability, would there be a

way in which all who are going to be looking at this through the

future and working as this team that you talk about to say we can

agree or we disagree with those caps that are set?

Mr. SCHNEITER. I think clearly that would be the case. There is

also the question as to the wisdom of caps, particularly on a development program. And I think the Department is now on record at

this point of requesting relief from the engineering and manufacturing development cap, because we think that at this point it

could serve only to cause us to not do things that we need to in

completion of the development program.

Mr. OTTER. So maybe we need—philosophically we need to go

back and take a look at our beginning points. Is it a good idea to

put on caps or not?

Mr. SCHNEITER. Yes, sir.

Mr. OTTER. What were the reasons that caps were put on in the

first place?

Mr. SCHNEITER. You would have to ask those who put the caps

on, which I believe was Congress.

Mr. OTTER. I see. So—— Mr. SHAYS. Could I just ask the gentleman to yield?

You have the ability and some knowledge to explain what the rationale was. You don’t have to agree with it, but there was rationale, and this gentleman is a new Member, and you could give him

some history as to why. So whether or not you agree with it or not,

aren’t you in a position to explain why the caps are there?

Mr. SCHNEITER. I can give you my views as to—— Mr. SHAYS. There was rationale for it, and the Air Force bought

off on it, and it would be helpful for the record at least for us to

have an understanding of—if you appreciate why they were put

in—and if you——

Mr. SCHNEITER. I would be pleased to do that.

Mr. SHAYS. Could you answer the gentleman’s question there?

Mr. OTTER. Thank you, Mr. Chairman.

Mr. SCHNEITER. My understanding is that Congress’s intent was

basically to arrest growth in costs of the program. The program

had experienced some cost increases in the past, and they wanted

to stop that, and they felt a way to do that would be to put caps

on the engineering and manufacturing development program and

on the production program.

Mr. OTTER. Well, I guess my time is up, Mr. Chairman.

Mr. SHAYS. You have another 5 minutes.

Mr. OTTER. Thank you, Mr. Chairman. I’ll give you another order

of french fries for that.

I’m really interested in this because in the discipline, and I understand that maybe it isn’t fair for me to always use the discipline

that I have become familiar with or that I grew up with, that I

worked with for 30 years in the private sector, but we had kind of

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a cost versus benefit analysis. If we were going to buy one forklift

that could lift 4,000 pounds to load a truck, and maybe we could

get some additional utility out of it by maybe having it perform another function, maybe we would buy one that could lift 6,000

pounds, so that was going to cost a little bit more, so we kind of

had to factor that in.

The process that I go through in thinking about these things is

that we are going to buy a new piece of equipment that will provide

some certain national defense, but it still has to have some kind

of cost versus benefit: We can do this with fewer people, we have

a greater level of service in national security, we can eliminate all

of the F–4s, which is the one I’m most familiar with.

But there was a cost versus benefit analysis, and so from that

we established an expectation of what we were going to get this

piece of equipment for.

Is there a cost versus benefit analysis that the—what kind of

process does the Air Force go through in order to say, we want all

of these F–22s?

Mr. SCHNEITER. Yes, sir, we have such a process. We exercise it

particularly at milestones in the program. For example, when we

start a program, we will do a cost-benefit analysis. We examine alternative ways of doing the job and see which makes the most

sense. Does it make more sense to improve our old aircraft, buy

more of the old aircraft with some updates, or buy a new aircraft?

In the case of the F–22, we decided that for assured air superiority that we needed new aircraft, and we knew it was going to be

more expensive than other aircraft, but we concluded that was

worth what we would pay for it. And as we proceed with the program, we continue to make that assessment.

Mr. OTTER. I understand. And I understand there is mission assessment, and the success of the mission assessment is invisible. I

mean, it is an expectation that you have, but it is going to work

to the degree and to the effectiveness that we thought.

But is there any savings? Are we going to eliminate—for instance, if we eliminated the F–4 and ended up with the whatever

the new aircraft was that replaced the Phantom, and we figure,

well, you know, these have been breaking down. It is an aircraft

technology from 1966, 1968, and here we are 30 years later, and

we finally decommission it. We are going to save a lot of money because we are not going to have to maintain it and maintain parts.

In the cost versus benefit analysis and the deciding caps that are

put on, is there a savings factor figured in?

Mr. SCHNEITER. We assess the costs, do the cost-benefit analysis.

We include in the cost the operating costs of our air fleet. And so

we gain the advantage in buying new aircraft of not having to do

the increasingly expensive maintenance of the old aircraft that we

replace.

And just commenting on the point, I’m sorry that, Mr. Kucinich

isn’t here, but part of what we are doing here with the F–22 is arresting the aging of our air superiority aircraft.

Right now, until we start building the F–22, they get 1 year older

every year. As the F–22 is introduced into the air superiority fleet

and replacing older F–15s, then we will see the average age of the

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fleet start to come down and reach levels which we believe are satisfactory.

Mr. OTTER. How soon after employment then do we expect the

first report of success or fairly—where are the hurdles met? Do we

have a followup, this is what it was going to do? When do we get

the first report saying it is doing what we intended it to do?

Mr. SCHNEITER. Really I think the first report of that sort is

what we call the initial operational test and evaluation. And that

is something, that is where the operational pilots fly the aircraft

in operationally realistic scenarios, and we see how it performs

against its requirements. And we have to complete that process,

that IOT&E process, before we begin full-rate production of the aircraft.

This decision we are facing now is low-rate initial production. It

is the first production. We will, a few years from now, go into fullrate production, and we must precede that by the IOT&E program

on the basis that program, the Director of Operational Testing

Evaluation submits a report to the Secretary of Defense and to the

Congress on the results of that operational testing.

Mr. OTTER. Thank you.

Mr. SCHNEITER. So that is the point whether we know if we have

been successful in providing a good product to the warfighter.

Mrs. DRUYUN. I would also add that for the last 2 years, the test

community has been conducting operational assessments and have

reported on an annual basis, which I think Mr. Schneiter could

talk on, how well it is potentially going to satisfy the requirements.

And basically it has been very favorable reports that have come

forward.

Mr. SCHNEITER. That is true. As I mentioned in my statement,

the aircraft is meeting all of its technical criteria. We have a set

of so-called key performance parameters, acceleration, speed,

stealth, things of that sort, and all of those are being, for the most

part, exceeded by the performance that we have seen in the tactical

assessments so far.

Mr. OTTER. Thank you.

Mr. Chairman, might I ask that those reports that were just referred to be part of the official record of this hearing?

Mr. SHAYS. Without objection, we will do that.

Mr. SCHNEITER. I’m not sure I understand which reports.

Mrs. DRUYUN. Yes. We certainly can submit that.

Mr. OTTER. Thank you.

Mr. SHAYS. Thank you. I appreciate the gentleman’s questions.

I would say besides looking at cost-benefit, we also look at opportunity costs, which is somewhat, I think, Mr. Kucinich’s and Mr.

Tierney’s questions were getting at.

Although there is some limit to what we can spend, if we go

above that, we are going to be taking from other programs within

DOD. Then we say is that opportunity cost worth it?

Let me ask all three of you, does it make sense for Congress to

have caps on this program? Start with you, Mrs. Druyun.

Mrs. DRUYUN. If I could start with development, I think you recognize in development we are 95 percent complete. The phase of

development we are in right now is very detailed testing, and I

have formally recommended, as I believe the Secretary of the Air

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Force and the Chief of Staff, that it is time to remove the cap on

the development portion of this aircraft, because we need to finish

the testing that is required to show very clearly that it will satisfy

the needs of the warfighter as established in the operational requirements document.

When the cost cap was established back in the 1997 timeframe,

at the time the Assistant Secretary in the Air Force for Acquisition

was Mr. Muellner. All of us basically signed on to the cost cap as

being something good to really help keep the focus in on driving

down the cost of this airplane. When that cost cap was established,

we had not laid into the program funds, for example, to do

produceability enhancements to make this airplane more cost-effective.

And so that has been a challenge to us to find some funds within

that cost cap to make those investments. What I have found is that

if you make those investments up front, and you go in and you redesign elements of that airplane, or you spend money to work with

subs to relayout their manufacturing facility, you have a great return on your investment. We had the contractors make an investment of about $170 million up front. I didn’t have the money to pay for it. And I think

that——

Mr. SHAYS. Let me just make this request. Your answers are

very important. I’m going to ask that they be a little shorter, and

I promise you—not that I need promise, but I will give you an opportunity to make any additional points at the end. But I almost

forget what my question is after the question. The response is too

long.

Mrs. DRUYUN. Yes, sir.

Mr. SHAYS. So what I’m hearing you tell me is that cost caps

helped drive down costs, but you’re concerned on the development

side that you are getting to a point where the caps will prevent you

from making some development discoveries that could ultimately

save?

Mrs. DRUYUN. Well, what we need is to have additional funds.

We have testified to this before the Senate Armed Services and

House Armed Services as well as Appropriation Committees. We

need some additional funds and some additional time to finish testing this airplane.

Mr. SHAYS. OK.

Mrs. DRUYUN. I think everyone in OSD is in agreement with us.

With respect to the production cost cap, it served us well, but I

will also tell you that there are some things that have changed

with respect to the timeframe in which that production cost cap

was established. I think it is important for the Congress to periodically go back and see what has changed to ensure that you basically have kind of an equity or an apples and apples with what was

started in 1997 versus what has happened in the last 4-year period, and I think it is important that be looked at.

Mr. SHAYS. What is your answer to the question?

Mr. SCHNEITER. I agree with Mrs. Druyun. The EMD cost cap,

as I mentioned, should be dropped, in our view. That is also the

position of my boss, the Under Secretary for Acquisition Technology

and Logistics.

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With regard to the production cost cap, at this point everyone’s

estimate of what it would take for the program to complete production is above the cost cap. It seems that it has certainly outlived

its usefulness in the present form, unless one wishes to constrain

us in the number of aircraft that we can buy, which is a constraint

at this point that we would prefer not to have.

Mr. SHAYS. Mr. Summers.

Mr. SUMMERS. Yes. Certainly we would favor cost controls. We

think that we bring cost controls to all of the Departments in the

program. We certainly assisted on that. But any comment with

caps with respect to this program I would have to defer to the Air

Force and OSD.

There is also a cost-benefit to what you do, and certainly the Air

Force and OSD would have to evaluate whether or not those cost

controls in the form of caps are impeding in some way their performance. So I have no position on cost caps on this program.

Mr. SHAYS. Now, let me understand, Ms. Druyun. The cost caps

are divided along each way, or it has it an overall cost cap, and

then the Air Froce decides how to allocate within the different

parts?

Mrs. DRUYUN. Today we have two separate cost caps, one for development and one for production, and we basically have formerly

asked that the development one be removed.

Mr. SHAYS. With no limits as to what that would—— Mrs. DRUYUN. We have—I think with—I believe that the Air

Force and the OSD are pretty much in agreement as to what we

believe it will take to get through all of the testing that needs to

be done in this program, and we have laid into our budget approximately an additional $350 million to complete the testing of this

program, which would bring development to an end.

Mr. SHAYS. We had a hearing a year ago, almost a year ago— well, actually a year ago, June 15th. And Mr. Barr asked you,

should we in the Congress have any reason to suspect the F–22

program will not be complete within the current EMD cost caps?

That is—engineering, manufacturing, development cost caps. And

your answer: No, sir.

So I said, should we in the Congress have reason to suspect the

F–22 program will not be completed within the current EMD cost

caps? Your response. No, sir. Our official position with the Air

Force is that this program will be completed, as we see it today,

within the cost caps established by Congress. Then you went on.

You said when you look at the production cost cap initiatives

that we have laid in place, we have—and I would invite you, sir,

next time you are in Marietta, GA, to go look at the electronic data

base that contains all of the data on every single one of these

issues, and it tracks it through the PRTV–1 unit of the Lot 2, and

every single one of these initiatives laid out, explains what the initiative is, who the owner of the initiative is and so.

What has changed? What has changed in the last year?

Mrs. DRUYUN. With respect to development, it basically has been

the issue of some late delivery of aircraft that were needed to successfully get us through the development program. And rather than

reduce the number of test hours required on this program, we feel

it was more important that we spend some extra money to do the

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full testing on this program as opposed to trying to shave off the

number of test months.

So what has changed? Last year we had expected that we would

have had more aircraft available. Today I now have five aircraft

available. The productivity in our test program has picked up significantly over the last 41⁄2, 5-month period. I have five aircraft

today, and I’m expecting three more aircraft, which will round up

the number of airplanes that I need for testing to be delivered by

the end of December of this year.

In looking at the actual performance to date of those three remaining aircraft expected to be delivered, they are basically within

1 or 2 weeks of their projected delivery date, and that is why we

have basically asked that the cost cap be shifted so that we do not

have to trim back the number of test hours necessary to fully test

out the airplane.

Mr. SHAYS. To be lifted again to what level?

Mrs. DRUYUN. We believe that IOT&E will start around April.

We have funded, or we will fund in our upcoming budget through

the end of July, a start as late as—that for the start of IOT&E,

July 2003. That amounts to about, as I recall, in the neighborhood

of I believe it has around $300, $350 million. If you were to look

in the past at the Air Force estimate for development, as well as

the OSD estimate for development, I think Dr. Schneiter would

confirm that we were always very, very close.

Mr. SCHNEITER. But I would caution that there is still a lot of

testing to do in that period. There may still be unforeseen problems

which we don’t factor into those numbers, and they could take additional time and additional money.

Mr. SHAYS. The thing that concerns me about the cost caps is

that, we were looking at one time at a program that was going to

cost about this much, and we were going to get twice as many

planes, correct, early on? The way that we stayed within the cost

on the program was to cut the number of planes almost in half. Obviously the per-unit costs go up.

But the bottom line to it was that is what we did. We said, OK,

we are going to make less, but we are going to stay within the

costs. In fact, we even increased the cost of the program. We increased the cost of the program and kept reducing the number of

planes.

Now, there is a reason why we had these cost caps. If we didn’t,

the program would have been killed. We weren’t going to, you

know, have an $80 billion program. So I just want to make sure

this isn’t a ruse to have gotten us caught up in the program, and

now we are seeing it unravel, and we are not going to start to see

people say, we need to reduce the cost.

Mrs. DRUYUN. I think if you were to look at the cost schedule

performance data that is reported on a monthly basis, you would

see that development is over 90 percent complete—I think it is

about 95 percent complete—and that the task, the work to go, is

basically in the test arena. We have worked very closely with the

OSD test community to reach agreement on the number of hours

we believe that it will take to complete the test program.

Plus I asked a group of experts outside of the Department of Defense to go in and independently look and come back and make recVerDate 11-MAY-2000 09:26 Oct 02, 2002 Jkt 000000 PO 00000 Frm 00096 Fmt 6633 Sfmt 6633 C:\DOCS\81595.TXT HGOVREF1 PsN: HGOVREF1
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ommendations to us as to how much additional test time was required, and they basically recommended we make some changes. I

have incorporated all of those changes, and we all agreed that a

start date for IOT&E of April 2003 was a moderate risk, but that

we had done everything humanly possible to moderate that risk.

Mr. SHAYS. The bottom line point being what is your bottom line

point, if you could?

Mrs. DRUYUN. My bottom line point is that I think that we have

a very clearly handle on what the estimated costs are to complete

the operational testing required of this airplane that will bring

EMD to an end.

Mr. SHAYS. Now, what we are looking at is two cost estimates, one that is $2 billion over, and one that is $9 billion over.

Mr. DRUYUN. That is on the production side. Yes, sir.

Mr. SHAYS. Right. So are you telling me that on the engineering,

manufacturing we are going to go up? And now which estimate are

you most comfortable with, the $2 billion or the $9 billion?

Mrs. DRUYUN. The cost estimates itself that I have spoken to in

previous hearings was the one that was developed this past fall. I

have very good confidence in our cost estimators. We have seen additional procedures with respect to our subcontractors.

Mr. SHAYS. I mean, the Air Force’s $2 billion?

Mrs. DRUYUN. The Air Force showed back in the November timeframe that we were about $2 billion over the cost cap established

in this program, and our estimators have continued to work with

the OSD estimators and to continue to update their data based on

what they have seen in terms of performance under the production

side of the program.

Mr. SHAYS. How do you respond to Mr. Li basically saying the

more conservative estimates—in other words, the ones that allowed

for the cost—in other words, he is saying it was—the lower estimates were the ones that were not kept; usually the higher estimate always prove to be true? In other words, his implication is

that he is probably more comfortable that it would be closer to the

$9 billion than the $2 billion. How do you respond to that?

Mrs. DRUYUN. In looking at our cost estimate, I believe that we

have done a reasonable job of developing that cost estimate. That

is done within the—a separate group who is independent.

And I firmly believe that when you look at the target price commitment curve that we have on contract—on the contractors’ performance to date, that the estimate that the Air Force has looked

at in the past and as they have continued to update it, I believe

that it is a reasonable estimate.

And you must realize we are on the very front-end part of this

program, and I think it is also difficult to make projections out to

the year 2013. That is why we have focused, and we will continue

to focus, this program on the first five lots, and to bring those first

five lots down that learning curve so that we can have the ability

to deliver 339 aircraft at an affordable price.

Mr. SHAYS. Is there a point at which you would find this plane

is too expensive? Is there any number that you would actually recommend pulling the switch on it?

Mrs. DRUYUN. I have not really considered that. I think that you

have to look very clearly at what the threat is out there. The F–

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15 that we have out there today flying is not able to meet that

threat. And if you would like, we can show you some classified data

that was run on our range recently that I think would clearly make

that point.

Mr. SHAYS. Mr. Otter, do you have some questions?

Mr. OTTER. I really only have one, Mr. Chairman. I thank you

for the opportunity to ask it.

Mrs. Druyun, you said that you have a feel now that we have a

very clear handle on this new figure for the cost of completing the

testing, and I can’t remember and quote verbatim your entire

statement, but you do feel like in order to get us to the end of testing, that you have a very clear firm figure that you believe. And

what was that figure again?

Mrs. DRUYUN. If I could elaborate on that for a moment, sir. We

had a separate red team go out and basically look at what it would

take for us to successfully get through testing of this airplane to

satisfy all of the requirements out there.

And basically they recommended that we slip the start of dedicated IOT&E from December 2002 to April 2003.

I tried to build an additional factor in there when I talked to the

Secretary of the Air Force, and basically what we have done, we

have a 11⁄2 percent cap that was granted by the Congress. That

amounted to $307 million. Slipping the start of dedicated IOT&E,

we have laid in another $250 million. We are laying that into the

budget, and that really gives me about a 3-month pad in case we

are not ready to begin dedicated IOT&E.

It has a moderate risk. The reason why it is at a moderate risk

is because I only have one airplane that is instrumented to be able

to do some of the flight testing that is required to fully open up

the envelope, and that has always been a limitation of this program. We watched that very carefully. But we believe that what we

have laid is basically a reasonable approach to successfully complete developmental operational testing.

Mr. OTTER. So for $557 million, that is the $307 plus the $250,

so for $557 million you feel very comfortable that $557 million is

a clear handle, that is what is going to be required for resolving

the testing?

Mrs. DRUYUN. Based on the data that I have today, yes. I feel

that is a reasonable estimate, and that is what we have laid in to

successfully complete this program. Yes, sir.

Mr. OTTER. And you have gone through the analysis, and you

feel very good about that?

Mrs. DRUYUN. I have gone through the analysis in a fair amount

of detail, and that is why I also called in outside experts who had

many, many years of test experience, including the chief test pilot

out of NASA, to help me take a look at the program.

And more importantly, for the first time we actually have very

detailed test sets and test sheets is basically the term we use that

spells out what the tests are that we need to complete to buildup

and get ready to enter into operational tests and evaluation.

Mr. OTTER. OK. Well, then, let me get to my bottom line, and

just yes or no.

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Mr. SHAYS. We have 5 minutes basically to conclude. If we can

conclude, I’m not going to have you wait for us to get back to vote.

So if the answers could be concise, that would be helpful.

Mr. OTTER. Yes or no is all I would require. Would you accept the $557 million as a cap?

Mrs. DRUYUN. No, sir. We do not believe it is appropriate when

we get into the final testing of this aircraft. We think the cap has

served its purpose, and that is the reason that we want the cap removed.

Mr. OTTER. OK. Thank you.

Thank you, Mr. Shays.

Mr. SCHNEITER. From an OSD point of view, if we may comment,

we feel the same way. I think we are not as sanguine as Mrs.

Druyun with regard to being ready to start IOT&E at that time.

Mr. SHAYS. OK. We have a vote closing in about 8 or 9 minutes,

and I—the clock says 7. I have five questions. If we can get

through them, then we won’t come back.

Bottom line. How confident is the Air Force that the challenged

PCRPs can be achieved, the challenged ones?

Mrs. DRUYUN. If you look at the Air Force cost estimate, we basically gave them zero, because there is—at the time, there was no

specificity attached to them. And as contractors develop specific

projects and programs, and they have about 1.4 billion of specific

projects and programs, we will continue to evaluate them and update our estimate. But our estimate back in November, and I believe even our current estimate, gave them no credit for that.

Mr. SHAYS. The bottom line. You have challenged, not yet implemented and implemented, and implemented obviously are clear.

Not yet implemented and other, but challenged are the most difficult ones, correct?

Mrs. DRUYUN. The challenged, I think the contractors’ description of areas that they have specifically targeted to develop specific

projects to further bring down the cost of the airplane.

Mr. SHAYS. It is hard to get a yes answer from you, you know.

I’ll just have to come back. I’m sorry. We’ll just come back.

[Recess.]

Mr. SHAYS. I now call to hearing to order. I know we are trying

to do our best job, but I just want to say that I did have four questions, but that was in the hope that I didn’t have to come back.

And so there will be a number of other questions.

Would any of the three of you tell me if you ever raised with the

Department or Congress that caps on engineering, manufacturing

and development were not appropriate? Did any of you suggest

that they weren’t appropriate?

You are saying that now. I’m just wondering if you said it earlier.

Mrs. DRUYUN. I have officially, along with, I believe, the Secretary of the Air Force and the Chief, but I have officially at the

hearing back in July recommended that the cost cap established by

the Congress for development on F–22 be removed.

Mr. SHAYS. That is not what I asked. That was last year. I asked

in 1997.

Mrs. DRUYUN. No, that was this year, sir.

Mr. SHAYS. July of this year?

Mrs. DRUYUN. July 2001.

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Mr. SHAYS. But these caps were initiated in 1997, and we all basically agreed to them, and you last year, Mrs. Druyun, said that

we were right on target. I’m just asking if you all ever made it

clear to Congress that you didn’t think caps on the engineering and

testing was not appropriate?

Mr. SCHNEITER. I did not.

Mr. SUMMERS. No, we did not.

I would like to maybe rephrase my previous answer. We don’t

have a position on caps in Defense Contract. We think that is an

Air Force position, so that is not in our charter.

Mr. SHAYS. Mrs. Druyun.

Mrs. DRUYUN. No, I don’t have a recollection of that.

Mr. SHAYS. OK. I mean, that, you know, is probably an interesting point, but not a crucial point.

I would like to go back to the whole issue of—I felt that I was

asking a simple question with the hope of understanding, and obviously this must not be a simple answer.

We have three categories in our reduction plan. We have what

you call challenged, not yet implemented and implemented. Implemented—would you make an answer—and I’ll answer it, because

maybe my answer will be shorter. Implemented means that we

have already taken the cost savings and put it into place. Would

that be accurate?

Mrs. DRUYUN. Yes.

Mr. SHAYS. OK. The not yet implemented, tell me the difference

between not yet implemented and challenged. That would be helpful for me to understand. Is not yet implemented a potential challenged reduction plan, or is it—or—the other way around?

Mrs. DRUYUN. Challenged is basically the contractors’ description, I believe, of future cost reductions that they want to pursue.

They put them into a variety of categories, and as they identify

specific projects, then they move them in to be implemented.

Mr. SHAYS. What would be an example of that?

Mrs. DRUYUN. Well, OK. Let me give you an example. Back in

September——

Mr. SHAYS. Is this of challenged?

Mrs. DRUYUN. This is of challenged, sir.

Mrs. DRUYUN. Back in September 2000, they had identified $4.1

million in challenged PCRPs. Since that time, they have identified

some specific projects. One I will give to you is Lockheed Martin

aeronautics consolidation. The company is, in fact, moving out and

consolidating some of its overhead functions, for example, and they

have attached a dollar amount with that.

And about 2 months ago, I had a cost team from—with representatives from DCMA, Defense Contract Management Agency,

the SPO, and a variety of other folks go out and take a look at that

to see how that was coming along, and indeed it is coming along.

So today that wouldn’t be part of the challenge, it would be moved

into one of the other categories.

Mr. SHAYS. And the other categories would—it wouldn’t be not

yet implemented?

Mrs. DRUYUN. Not implemented means it is defined, but it has

not been laid into the pricing, as I understand it, for Lot 2 or later.

Mr. SHAYS. OK.

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Going back to the issue of the testing and so on. Originally we

were looking at the $350 million, and then there was the number

of $500 million. And Mr. Otter, Congressman Otter, asked could

you stay within that, and you responded that you wouldn’t stay

necessarily within that cap.

Where was the $350 number and the $500, and tell me what you

say ultimately the additional amount is we need to spend.

Mrs. DRUYUN. If you look at the—we had a cap increase of 1.5

percent. It required, as I recall, a certification made by OSD, I believe it was the——

Mr. SHAYS. That is the cost of living?

Mrs. DRUYUN. No, sir.

Mr. SHAYS. No.

Mrs. DRUYUN. There was in the 2001 statute that if the Director

of IOT&E certified if we needed an additional increase in our cap,

that they would grant us up to 11⁄2 percent. The Director of IOT&E

certified that we needed an additional increase in our development

cap, the EMD cap of 11⁄2 percent.

Mr. SHAYS. Of the total program or 11⁄2 percent of the engineering part?

Mrs. DRUYUN. Of the EMD cap.

Mr. SHAYS. Right.

Mrs. DRUYUN. That was $307 million.

Mr. SHAYS. OK.

Mrs. DRUYUN. As a result of the further analysis that we have

done, and the red team that I mentioned, we have added in or will

be adding into our budget an additional $250 million.

Mr. SHAYS. $557.

Mrs. DRUYUN. Which gives you up to $557 million. And that basically delays the start of dedicated IOT&E from December 2002

until April 2002. But I put enough management reserve in that

number, I could start as late as the end of July, first part of August

and still have enough management reserve to cover that period of

time.

Mr. SHAYS. And how comfortable are you with this number? With

Mr. Otter, you basically said you weren’t going to agree to cap that

at $557. So what does that mean? How do you interpret that?

Mrs. DRUYUN. I thought that you were asking Dr. Schneiter.

Mr. SHAYS. Dr. Schneiter is fine. I was just throwing it out there.

Mr. SCHNEITER. Well, my position is that we still have a lot of

testing to do between now and the spring of 2002, and there may

be additional problems. History would indicate that there likely

will be. I’m not sure. I think in our view, we would not like to see

a cap, for example, at that amount, because it would not leave us

adequate reserve.

Mr. SHAYS. OK. So but would you say that $557 million is a conservative number, or conservative in the sense that you have given

yourself some leeway, or is it kind of at the edge?

Mr. SCHNEITER. I think Mrs. Druyun is saying that her estimate

is that—it is adequate. I would say it is at the edge——

Mr. SHAYS. OK.

Mr. SCHNEITER [continuing]. If I understand your terminology.

Mr. SHAYS. Yeah.

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Mrs. DRUYUN. Yes. It is basically our best estimate with management reserve laid in. Based on the—— Mr. SHAYS. By laid in, in other words you have already included

it, so you haven’t left a reserve in case you have to go up?

Mrs. DRUYUN. I have left some reserve in that number. I have

left about 31⁄2 months of reserve in that number.

Mr. SHAYS. OK.

Mrs. DRUYUN. That is why it is our best estimate, and we think

it is reasonable.

Mr. SHAYS. How confident is the Air Force that the challenged

PCRPs can be achieved?

Mrs. DRUYUN. Well, as I explained to you earlier, sir, when the

service cost Air Force estimate was put together, we gave them

zero credit for the challenged PCRPs.

Mr. SHAYS. So you have no confidence that they can achieve

them?

Mrs. DRUYUN. No. As the projects are specifically identified, we

will evaluate them and see how reasonable they are in terms of

their ability to turn them into reality. And there is cost estimation

that went along with them.

Mr. SHAYS. So I’m trying to translate your answer. The bottom

line is you can’t answer the question because you haven’t yet evaluated them?

Mrs. DRUYUN. No, sir. I tried to explain.

Mr. SHAYS. I know you are trying to explain. I’m just trying to

understand.

Mrs. DRUYUN. Our cost estimate did not give them any credit for

the PCRP.

Mr. SHAYS. That part I understand. You have given them no

credit. So what is the process? What does that mean?

Mrs. DRUYUN. The process is that the contractor will begin to,

and has begun to, identify specific projects that they are going to

pursue that will be included in the challenge, and once they identify those and go through the process of clearly defining them, laying in plans as to how they would execute them, how they would

develop the estimate of what the savings would be associated with

it, we will evaluate them and decide.

Mr. SHAYS. So the answer is you can’t give an answer yet now

because you haven’t yet evaluated them.

Mrs. DRUYUN. That’s correct.

Mr. SHAYS. Why hasn’t DOD fully complied with the GAO recommendation to report cost reduction plan information in the quarterly reviews?

Mr. SCHNEITER. The Air Force does in its quarterly reviews

present the status of the PCRPs.

I think part of the issue between us and the GAO view is the

amount of detail that one needs to go into with regard to that. It

is always done in a summary fashion. In some cases we go into

more detail. At the last one of our reviews, I think something over

300 were actually shown, although certainly not evaluated.

The Under Secretary for Acquisition, Technology and Logistics, I

believe, has a good understanding of the PCRPs. When he visited

the plant in Marietta, he spent some amount of time going through

the process that they used as well as sampling some of those.

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So we believe that we have done that adequately.

Mr. SHAYS. So my question, will further quarterly review include

all of the PCRP information GAO recommended you have? Basically the answer would be that you all have a disagreement as to

whether you are complying or not, and so that would be hard to

answer? I mean, how would you answer that?

Mr. SCHNEITER. Well, there is something over 1,100 PCRPs. I

think it is impractical for us to go through these at each of the

quarterly reviews. We do examine how well they are doing, and

then additionally we have the Cost Analysis Improvement Group

examine these in great detail. They are our cost analysis people,

and so they examine those. They take account of those in their estimate, and they report to the Under Secretary.

Mr. SHAYS. I’m going to let counsel ask a question.

Mr. HALLORAN. Would you at some point agree to provide the

same level of detail twice in a row? The problem, I think, we are

having is to track the progress and interpretation of PC data when

you pick and choose what goes upstairs for review, so it is never

the same twice in a row. We just can’t connect the dots. What

would be wrong with settling on some consistent level of detail

from quarter to quarter?

Mr. SCHNEITER. If that is what the request is, I would have to

consider that and get back to you.

Mr. HALLORAN. That was the request last August.

Mr. SCHNEITER. Then that is failure on our part in understanding exactly what you were after there. I think the important thing

in this is really what the estimate is, and not tracking each and

every PCRP. How well the PCRPs do is less important than what

the overall estimate is, taking account of the PCRPs.

So on the OSD side, we try to not focus just solely on the PCRPs,

because the basic estimate is important, actually more important.

And over time, the PCRPs become part of the basic estimate.

As I explained in my statement, the estimate that we do is made

of two parts, what we now call the basic estimate, which includes

a number of PCRPs, and so that now becomes part of the basic estimating process.

Mr. HALLORAN. I understand.

Mr. SCHNEITER. But the implemented PCRs——

Mr. HALLORAN. But as long as you are operating under the cost

cap on the production side, the PCRP content of the estimate is

very significant, it is the measure of your chance of getting at the

cap—at or near the cap.

Mr. SCHNEITER. It is significant, but so are many other aspects

of the cost estimate.

Mr. SHAYS. Talking in general, we had the concept of cost-benefit

and opportunity cost. What concerns me in my 10 years serving on

the Budget Committee is the issue of opportunity costs. There is

only so many things that we can do. And I basically consider myself a supporter of the F–22. When I say basically, I just want to

know it is not going to cost $80 billion.

I don’t want a fair fight. In other words, I want our men and

women to basically have superior platforms. I want them to be able

to shoot and see the enemy before the enemy sees us.

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I get concerned when I see the 700 number go down—750 number go down to 339, 333, and I get concerned that ultimately a year

from now we may be looking at a continued reduction of the number of platforms, and then obviously the per-unit cost going up, and

that we won’t have significant new costs.

I supported the tax cut. I voted for taking off some of the surplus

so we don’t have this unlimited sum out there, and I’m not unlike

other Members of Congress. The thing that concerns me the most,

and I’ll say this to you, Mrs. Druyun, I find you a difficult witness,

and that is a negative in the one sense for me. But it is a positive,

because I have a feeling that you are difficult with the contractors,

and I like that. So that is a plus. But what starts to happen to me

is when I feel that information isn’t being provided, to GAO in particular, I then start to get nervous.

And we had made requests to the Secretary of Defense for information, and we are basically being told that if decisions haven’t

been made, then it is not available to us. With specific reference—

here is the letter that we sent to Mr. Rumsfeld June 19th. We said,

with specific reference to the F–22 cost controls, it is certainly our

impression that the decision to pursue cost control initiatives has

been made. We conclude the bases for the decision are within the

legitimate oversight reach of the subcommittee. Cost estimate

methodology and the validity of PCRPs are not dependent on any

production milestone being relevant generally to acquisition processes and applicable specifically to the production of 1, 339 or more

in the 700 F–22s.

And our response on that: This is in reply to your letter to—and

this is from Mr. Aldridge. This is in reply to your letter of Secretary Rumsfeld requesting access to the F–22 cost estimate

records provided by the Office of the Secretary of Defense, Cost

Analysis Improvement Group.

Our policy to not allow access to predecisional material continues. This is essential to allowing the Department of Defense

[DOD], to fully debate program funding internally before making

program decisions.

What I’m interested in knowing is the raw data that is involved

is also being denied us. Why would the data be denied us and not

necessarily the decisions or the interpretation of the data?

Mr. SCHNEITER. I’m not sure exactly what you mean by the raw

data. The GAO has had good access to the data from the Air Force.

Mrs. Druyun can speak to that process.

I think some of what has been sought here is not what I would

call raw data, but rather data that has been processed by our cost

analysts, which includes many judgments on their part, and we

don’t like to have all of that be debated publicly while we are in

the process of making internal decisions within the Department.

The Department lawyers perhaps can tell you more about that,

but this is my understanding of why it is that we are as unwilling

as we are in the process of going up to a decision and making a

decision to provide some of that information, much of which in this

case is judgmental. The reason for a lot of the difference between

our estimate and the Air Force estimate on this has to do with the

judgments of the cost analysts in terms of what learning curves are

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going to be, how much the cost will go down as we learn more and

so forth, and that is not raw data.

Mr. SHAYS. The difference between the $2 billion and the $9 billion is within the Department of Defense. I mean, it is not GAO

saying $9 billion and DOD saying $2 billion. It has an internal difference. And don’t you think it is important for Congress to understand in very real terms how we can arrive at two different numbers, especially since both are over the cap? I mean, both are truly

over the cap.

Mr. SCHNEITER. The Department has not yet made a decision as

to what it thinks the cost estimate of the program is in the context

of the current program.

Mr. SHAYS. When will that decision be made?

Mr. SCHNEITER. That decision will be made, I think, within a

month. As I indicated in my statement, we have a congressional— a statutory requirement that if we decided in the Department to

proceed with low-rate initial production, that then we need to send

Congress the reasons for proceeding with low-rate initial production, the revised production plan. And that is revised in the sense

of revised from what we had previously, which we now all agree

will not fit within the cap. So we have to give you a revised production plan, and the revised cost estimate for the reminder of EMD

and production. So by law we need to provide that if we decide to

proceed with low-rate initial production. So the Department will

provide a revised cost estimate.

Mr. SHAYS. In other words, when you say if, the question is

when, not if, correct?

Mr. SCHNEITER. I would not prejudge myself that.

Mr. SHAYS. What would be the alternative, to stop the program?

Mr. SCHNEITER. That is one alternative.

Mr. SHAYS. What, just stay in EMD for a while longer? Just help

me understand. What can I anticipate? In other words, not that

you know what is going to be done, but the options are to basically

begin production, stay in EMD, end EMD or stop the program.

Those will be the three potentials. Are there any other choices?

Mr. SCHNEITER. None come to mind. I think there is a general

expectation that we will proceed. We have put money in the budget

for the next LRIP, but the decision is not made.

Mr. SHAYS. OK. So since you all haven’t determined where that

number between $2 and $9 billion is, but once you determine that,

then all of the data that we have requested is going to be made

available?

Mr. SCHNEITER. I don’t know exactly what all has been requested.

Mr. SHAYS. Fair enough.

Mr. SCHNEITER. I think that more will be made available once

the decision is made. You have a Department position, and I think

that we will have an obligation then to explain the basis for what

our estimate is.

Mr. SHAYS. I would just love to have GAO take the mic and just

enlighten me as to what data we might be looking at. If you can

just lift the mic up and speak while standing.

Mr. LI. Mr. Chairman, the type of data—and I guess I would disagree with Mr. Schneiter. When we issued our draft report, it was

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commented on by DOD, and at that point in time in our draft, in

response to the words that we had, there was a misunderstanding

as to what was the level of detail.

In our final report we clarified our position in terms of summary

data, and a few minutes ago there was some responses about the

number of PCRPs and the detail that was provided. That is not

what I’m looking for.

I’m well aware of the fact that it is a very time-consuming and

labor-intensive thing to do. I’m looking at summary data. I indicated that the summary data that—an example. When you asked

me, that question was providing summary data regarding the dollar impact of those PCRPs that were implemented, and that is the

type of thing that I’m looking for so that I can answer the type of

questions that Mr. Tierney was raising.

I would like to note the fact that in the 60-day letter, which is

a requirement, a statutory requirement, that the agency respond to

the final report, that DOD did acknowledge the fact that I modified

my recommendations, they agreed with those recommendations.

So they did agree with the fact that, yes, I’m going to provide

summary data in a way that you described in the draft report.

Mr. SHAYS. I would just request that you stay in close contact

with the committee in terms of the future analysis of this project,

and, you know, we’ll try to work this out internally. I have never

recommended that we subpoena—at least I don’t recall that this

committee has, but I wouldn’t be hesitant to recommend that information about the F–22 be provided, and if it is not, to subpoena.

And I will be very candid with you. I would have to get the chairman’s approval and the Speaker’s, so that obviously gives you the

opportunity to talk to the Speaker. But I would certainly argue

very strenuously that information about this project be provided so

we have a fair analysis.

I know all of you are very sincere about this project. I think that

you are working overtime to keep it within cost. I don’t have any

doubt about that, and I consider all of you very fine public servants, and we are grateful that you are working for the government.

But these may be just tensions that exist between three different

groups.

But in the end, if information isn’t provided, you have the potential of making enemies out of friends who, you know, would like to

see this project go forward. And I also understand that we are still

dealing with estimates.

So, Ms. Druyun, when you were pretty certain that we weren’t

within costs and comfortable at that a year ago, I realize things

can change, so I am not—I like definitive statements and I like us

to say how well we are able to keep them, so I don’t have complaint

about that. I am just concerned that this may be a $9 billion overrun instead of a $2 billion overrun, and it still may be worth it.

But it would be better that we know it.

I have no questions that I want to ask.

Do you have any? Do any of you want to make a closing comment? Then we can adjourn.

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Mr. SUMMERS. No, sir.

Ms. DRUYUN. No.

Mr. SCHNEITER. No, sir.

Mr. SHAYS. Thank you all very much.

This hearing is adjourned.

[Whereupon, at 12:55 p.m., the subcommittee was adjourned.]

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